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Monetary Policy and the Management of the Public Debt HEARINGS BEFORE THE SUBCOMMITTEE ON GENERAL CREDIT CONTROL AND DEBT MANAGEMENT OF THE JOINT COMMITTEE ON THE ECONOMIC REPORT CONGRESS OF THE UNITED STATES EIGHTY-SECOND CONGRESS SECOND SESSION PURSUANT TO Section 5 (A) of Public Law 304 (79th Congress) M A R C H 10,11,12,13,14,17,18,19,20,21,24,25,26,27, 28, A N D 31, 1952 P r i n t e d f o r the use of the J o i n t Committee on the Economic Report UNITED STATES GOVERNMENT PRINTING OFFICE 97308 WASHINGTON : 1952 J O I N T COMMITTEE ON T H E ECONOMIC REPORT (Created pursuant to sec. 5 ( a ) of Public L a w 304, 7 9 t h Cong.> J O S E P H C. O ' M A H O N E Y , Wyoming, Chairman E D W A R D J. H A R T , New Jersey, Vice Chairman. J O H N S P A R K M A N , Alabama W R I G H T P A T M A N , Texas P A U L H . D O U G L A S , Illinois R I C H A R D B O L L I N G , Missouri W I L L I A M B E N T O N , Connecticut C L I N T O N D, M c K I N N O N , California R O B E R T A. T A F T , Ohio J E S S E P . W O L C O T T , Michigan R A L P H E. F L A N D E R S , Vermont C H R I S T I A N A. H E R T E R , Massachusetts A R T H U R V. W A T K I N S , Utah J. C A L E B BOGGS, Delaware , GROVER W . ENSLEY, Staff Director JOHN W . LEHMAN,, Clerk SUBCOMMITTEE ON GENERAL CREDIT CONTROL A N D D E B T M A N A G E M E N T W R I G H T P A T M A N , Texas, Chairman P A U L H . DOUGLAS, Illinois R I C H A R D B O L L I N G , Missouri R A L P H E. F L A N D E R S , Vermont J E S S E P. W O L C O T T , M i c h i g a n HENRY C. MURPHY, Economist II to the Subcommittee CONTENTS Statement o f : Page Appleby, Paul, dean of the Maxwell School of Citizenship and Public Affairs of Syracuse University 573 Bell, James Washington, chairman, Department of Economics, Northwestern University (submitted) 911 Blough, Roy, member, Council of Economic Advisers 248 Brown, Edward Eagle, chairman, board of directors of the F i r s t National Bank of Chicago 565 Bryan, Malcolm, president, Federal Reserve Bank of Atlanta 407 Cook, H. Earl, member Board of Directors, Federal Deposit Insurance Corporation, accompanied by E. H. Cramer and L. L. Robertson, of the Federal E'eposit Insurance Corporation 868 Cumberland, W. W., Ladenburg, Thalmann & Co., New York City (submitted) 922 Economists' National Committee on Monetary Policy, New York, a submitted statement by 63 members 940 Fennelly, John F., Investment Bankers Association of America, accompanied by Robert Craft, vice president, Guaranty Trust Co. of New York 344 Folsom, Marion B., Chairman, Board of Trustees, Committee for Economic Development 291 Harris, Seymour E., professor of economics, Harvard U n i v e r s i t y — 355,380 324 Hemingway, W. L., American Bankers Association Kemmerer, Donald L., professor of American economic history, University of Illinois (submitted) 926 Keyserling, Leon H., chairman, Council of Economic Advisers 143, 154, 185, 269 Lanston, Aubrey G., president, accompanied by Leroy M. Piser, vice president i n charge of research, Aubrey G. Lanston & Co., Inc 389 Martin, W i l l i a m McC., Jr., Chairman, Board of Governors of the Federal Reserve System 73,99 Pollock, D r . James K., professor of political science and chairman of the department of political science, University of Michigan 584 Powell, Oliver S., Chairman, National Committee, Voluntary Credit Restraint Program, and member of the Board of Governors, of the Federal Reserve System, accompanied by George B. Vest, Robert C. Masters, Charles H. Schmidt, and Harold L. Cheadle 463 Preston, Howard H., professor of money and banking, University of Washington (submitted) 928 Robinson, Leland Rex, professor of political economy, New York University (submitted) 932 Ruml, Beardsley . 552 Shanks, Carrol M., president of Prudential Insurance Co. of America, and chairman, committee on inflation control of the American L i f e Convention and the Life Insurance Association of America 442 Snyder, John W., Secretary of the Treasury, accompanied by members of the Treasury staff , 7, 45 Sonne, H . Christian, chairman, hoard of trustees, National Planning Association 843 Spahr, Walter E., professor of economics, New York University (submitted) 935 Sproul, Allan, president, Federal Reserve Bank of New York 506 Thomson, J. Cameron, chairman, Committee on Monetary, Fiscal and Debt Policy, Committee for Economic Development 296 Trant, James B., dean, College of Commerce, and professor of money and banking, Louisiana State University (submitted) 939 Wiggins, A. L . M., chairman, board of directors, Atlantic Coast Line Railroad Co.. and associated railroad companies 219, 235 iii IV CONTENTS Pa t Panel discussions: « H o w should our monetary and debt management policy be determined ?747 Participants: Bach, G. L., professor of economics, Carnegie I n s t i t u t e of Technology 748 Goldenweiser, E. A., member, I n s t i t u t e f o r Advanced Study, Princeton University 761 Stein, Harold, staff director, Committee on Public A' ministrat i o n Cases 757 Viner, Jacob, professor of economics Princeton University 754 Wilmerding, Lucius, J r 752 The role of business, labor and agriculture i n the determination of monetary and debt management policy 799 Participants: Baker, John A., legislative secretary, N a t i o n a l Farmers Union 807 Chamber of Commerce of the United States (submitted) 801 K l i n e , A l l a n B., president, American F a r m Bureau Federation 809 Lincoln, M u r r a y D., president, F a r m Bureau Insurance Cos., Columbus, Ohio _ 812 Montgomery, Donald E., director of Washington office, International Union, U A W - C I O 817 Newsom, Herschel D., master, the National Grange 823 Shishkin, Boris, economist, American Federation of Labor 827 Voorhis, Jerry, secretary, Cooperative League of the United States of America 831 The role of the banking system i n a dynamic economy 597 Participants: Fleming, Robert V., president and chairman of the board, the Riggs N a t i o n a l Bank, Washington, D. C 598 Lindow, Wesley, vice president, I r v i n g T r u s t Co., New Y o r k City 629 Reiersou, Roy L., vice president, Bankers T r u s t Co., New Y o r k City 633, 637 Tapp, Jesse W., executive vice president, Bank of America, San Francisco, Calif 626 Woodward, Donald B., second vice president, the M u t u a l L i f e Insurance Co. of New Y o r k 602 W h a t Should Our Monetary and Debt Management Policy Be? 685 Participants: Ellis, H o w a r d S., professor of economics, University of California 686 Friedman, M i l t o n , professor of economics, University of Chicago 688 Mikesell, Raymond F., professor of economics, University of Virginia 711 Samuelson, Paul, professor of economics, Massachusetts I n stitute of Technology 691 Whittlesey, C. R., professor of finance and economics, University of Pennsylvania 698 Supplementary statements: Bryan, Malcolm, president, Federal Reserve B a n k of A t l a n t a 432 Friedman, M i l t o n , University of Chicago 743 Keyserling, Leon H., chairman, Council of Economic Advisers 276 Mikesell, Raymond F., University of V i r g i n i a 746 A d d i t i o n a l i n f o r m a t i o n furnished f o r the record: Behavior of Deposits P r i o r to Suspension i n a Selected Group of Banks 877 CONTENTS A d d i t i o n a l i n f o r m a t i o n furnished f o r the reeord—Continued Correspondence on debt management and monetary policy between the Federal Reserve System and the Treasury, and the Federal Reserve System and the President, d u r i n g the period f r o m the outbreak i n Korea (June 25, 1950) t o the Treasury-Federal Reserve accord (March 4, 1951) Correspondence w i t h the Comptroller General concerning governmental agencies not audited by the General Accounting Office and the reasons therefor Dormant account balances i n national banks a t close of business on December 31, 1951 E d i t o r i a l i n the New Y o r k J o u r i a l of Commerce concerning the testimony of Prof. Seymour H a r r i s , Professor H a r r i s ' answer thereto, and a rejoinder Effect of changes i n interest rates on the cost of servicing the public debt Excerpt f r o m book by Carter Glass, entitled " A n Adventure i n Constructive Finance" (1927) Federal Reserve System preparation of answers to questionnaire Financial responsibilities of member banks on account of membership i n the Federal Reserve System I m p a c t of voluntary credit restraint program on demand f o r and supply of credit Legal status of the Board of Governors of the Federal Reserve System and of the Federal Reserve Banks Lending, Inc., F i f t h D i s t r i c t Commercial Banking Voluntary Credit Restraint Committee, report of Letter f r o m Chairman M a r t i n on miscellaneous legal points arising d u r i n g the hearings Letter f r o m L i b r a r y of Congress, to Joint Committee, relative to Federal Agencies having independent sources of income Letter f r o m Preston Delano, to Congressman Patman, relative to affiliation between banks i n Texas Letter received f r o m A l l a n Sproul on the independence of the Federal Reserve System Letter to Congressman Patman f r o m Carrol M. Shanks, regarding removal of Secretary of Treasury f r o m the Federal Reserve B o a r d Letter to Congressman Patman, f r o m National Association of Manufacturers, regarding appearance at hearing Letter to Senator Maybank, f r o m Walter P. Reuther, CIO, relative to panel discussion on mortgage financing conducted by Senate Banking and Currency Committee, on February 6, 1952 Memorandum f r o m the President, regarding the need f o r credit restrictions, February 26, 1951 Miscellaneous m a t e r i a l requested of the Board of Governors of the Federal Reserve System Monetary Management, by E. A. Goldenweiser, excerpt f r o m "Open M o u t h " Rule Ends i n United States Bonds, article f r o m New Y o r k Times Payments to the Treasury by Federal Reserve banks Remarks of A l l a n Sproul, president, Federal Reserve Bank of New York, at Seventy-fifth Annual Convention of American Bankers Association, San Francisco, Calif., November 2, 1949 Remarks of A l l a n Sproul, president, Federal Reserve Bank of New York, before F o r t y - f i f t h Annual Meeting of L i f e Insurance Association of America, New York City, December 12, 1951 Report of the f o u r member committee (Chas. E. Wilson, chairman), appointed on February 26,1951, and reporting on May 17, 1951 Reserve Bank reserve requirements and Federal Reserve credit Schedule of hearings (announced before opening) Treasury Department, preparation of answers to questionnaire V 942 986 866 990 52 59 140 983 484 477 614 909 61 861 983 482 800 822 125 966 796 398 116 543 506 128 106 3 70 M O N E T A K Y POLICY A N D T H E M A N A G E M E N T OF T H E P U B L I C DEBT M O N D A Y , M A R C H 10, 1952 CONGRESS OF T H E U N I T E D STATES, S U B C O M M I T T E E ON G E N E R A L C R E D I T CONTROL A N D D E B T M A N A G E M E N T OF T H E J O I N T C O M M I T T E E O N T H E E C O N O M I C REPORT, "Washington,, D. C. The subcommittee met, pursuant to notice, at 10:05 a. m., in room 318 Senate Office Building, Representative W r i g h t Patman (chairman of the subcommittee) presiding. Present: Representative Patman, Senators Douglas, Flanders; Representatives Boiling and Wolcott. Also present: Grover W . Ensley, staff director; Henry C. Murphy, economist for the subcommittee; and John W . Lehman, clerk to the f u l l committee. Representative P A T M A N . The committee w i l l please come to order. The Joint Committee on the Economic Report was created by the Employment Act of 1946. I t s primary purpose, and the one which has given i t its name, is to study the Economic Report of the President, and report to the Congress on its implications and its significance in terms of desirable congressional action. The committee also has authority directly or through subcommittees to make such inquiries into economic matters and to prepare such reports as i t believes w i l l be helpful to the Congress and to the public, generally. I t is not a legislative committee and has no authority to bring in bills i n either House. The Subcommittee on General Credit Control and Debt Management was appointed by Senator Joseph C. O'Mahoney, of Wyoming, chairman of the f u l l committee, last spring, for the purpose of conducting a general inquiry into monetary policy and debt management. The members of the committee, i n addition to the chairman, are Senators Paul H . Douglas, of Illinois, and Ralph E. Flanders, of Vermont, and Representatives Richard Boiling, of Missouri, and Jesse P. Wolcott, of Michigan. As most of you are aware, a similar subcommittee was appointed by Senator O'Mahoney i n the spring of 1949 under the chairmanship of Senator Douglas. The membership of that committee was identical w i t h the membership of the present subcommittee except that Representative Buchanan, who has since passed away, has been replaced by Representative Boiling. The subcommittee, under the chairmanship of Senator Douglas, divided its attention about equally between fiscal policy, meaning l 2 MONETARY POLICY AND M A N A G E M E N T OF P U B L I C DEBT 2" primarily bugetary policy, and monetary policy. The present subcommittee, on the other hand, w i l l devote its attention entirely to monetary and debt management policy. The more than 2 years which have elapsed since the hearings and the report of the earlier subcommittee have been packed w i t h significant events. A t that time the country was just emerging f r o m a business recession, and Korea was merely an unfamiliar name on a map. Since that time, the international situation has greatly worsened, and Federal expenditures have been greatly increased by the necessity for strengthening our defenses. I n the meantime, the country has passed through a serious period of inflation, spurred by the buying wave which followed the outbreak of hostilities i n Korea. For about a year now we have had a precarious l u l l i n inflationary price rises. National production is at a high level, and the same is true, w i t h a few notable exceptions, of the level of employment. Despite the high level of defense expenditures the people as a whole are enjoying as high a standard of l i v i n g as they have had at any time i n the history of our country, but we cannot be complacent. On the one hand, there are serious indications of continuing inflationary dangers while, on the other, some people see signs of a coming recession. Clearly, i t is time to give the situation another look, both w i t h respect to the proper steps which should be taken i n the field of monetary and debt management policy under present and possible future conditions and w i t h respect to the extent to which our agencies are properly set up to handle the task which the Congress has delegated to them. I t is i n this spirit and w i t h an open mind as to the r i g h t answers to all of the questions before us that the subcommittee has approached its task. As the first step i n its investigation the subcommittee addressed a series of questions to the top Government officials concerned w i t h these tasks, and to a large number of persons i n the private economy. The answers to these questions have been published i n a document entitled "Monetary Policy and the Management of the Public Debt; Their Role i n Achieving Price Stability and High-Level Employment," which was released to the press a week ago last Friday. I should like again to express my thanks and those of the other members of the subcommittee to the large number of persons whose labors have made this document possible. I t has placed before us i n a much clearer manner than ever before a statement of the areas of agreement and disagreement among the Treasury Department, the Federal Reserve System, and the Council of Economic Advisers, w i t h carefully reasoned statements supporti n g their respective views. I n arriving at these statements, the agencies have, i n my opinion, tended to move somewhat closer together. This is all to the good. The subcommittee has always emphasized i n its dealings w i t h each of the agencies that i t sought as a first choice to obtain an agreed statement of their views, but to the extent that this was not compatible w i t h the sincerely held convictions of the responsible agency heads, i t desired to obtain reasoned statements of the nature and extent of their disagreements. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 3" The subcommittee has never sought and does not now seek to reopen old wounds. A week ago I furnished to the press a tentative schedule covering 3 weeks of hearings. This schedule, which I shall insert i n the record at the close of these remarks, was arranged w i t h a view to permitting the presentation of all important points of view on the principal issues before the subcommittee. I recognize, however, that setting up any schedule of this kind involves many questions of judgment and, as I said, i n my press release a week ago I have invited the other members of the subcommittee to suggest any additional witnesses whom they may desire, and have said that I would be glad to make arrangements for their appearance, extending the duration of the hearings, i f necessary, for this purpose. I n addition, I should like to invite any other person who desires to be heard to make application to the subcommittee, and we w i l l arrange, i f possible, a personal presentation of views or for the submission of briefs. The hearings which we are starting today ought to be exceptionally f r u i t f u l because the preliminary spade work which has already been accomplished. Each of the official witnesses and many of the private ones have prepared or participated i n the preparation of the answers included i n our compendium. Their carefully thought out points of view have already been presented at length and they have had an opportunity to read and study the points of view of others. This w i l l make i t possible for each witness not only to greatly shorten his statement but i t w i l l permit him to direct i t to the important points on which he finds himself i n disagreement w i t h other witnesses who have contributed to the symposium. I t w i l l also be of great assistance to the members of the subcommittee i n directing their questions to significant points of difference i n the various views which have been set before them. The first chapter of the symposium, which we released last week, is devoted to the replies of the Secretary of the Treasury, M r . Snyder. These replies state the position of the Treasury Department on the principal issues of interest to the subcommittee i n a clear and incisive manner, and provide a most appropriate background for xthe testimony of our first witness, M r . John W . Snyder, Secretary of the Treasury. (The schedule previously referred to is as follows:) CONGRESS OF T H E U N I T E D STATES JOINT C O M M I T T E E ON T H E ECONOMIC REPORT CHAIRMAN- W R I G H T P A T M A N OF T H E SUBCOMMITTEE ON GENERAL CREDIT CONTROL A N D DEBT M A N A G E M E N T ANNOUNCES T E N T A T I V E SCHEDULE OF HEARINGS Representative W r i g h t Patman, of Texas, chairman of the Subcommittee on General Credit Control and Debt Management of the Joint Committee on the Economic Report, today announced a tentative schedule of witnesses f o r the hearings of the subcommittee which w i l l begin on Monday, March 10, and are expected to r u n f o r about 3 weeks. Chairman Patman said that he had asked the other members of the subcommittee—Senators Paul H . Douglas, of Illinois, and Ralph E. Flanders, of Vermont, and Representatives Richard Boiling, of Missouri, and Jesse P. Wolcott, of Michigan—to suggest any additional witnesses whom they might desire and 4 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 4" t h a t he would be glad to make arrangements f o r their appearance, extending the duration of the hearings i f necessary f o r t h i s purpose. The schedule announced by Chairman Patman, together w i t h suggested topics of discussion f o r each of the round tables to be held i n connection w i t h the hearings, f o l l o w : First week Monday, March 10: John W. Snyder, Secretary of the Treasury. Tuesday: March 1 1: W i l l i a m McC. M a r t i n , Jr., Chairman, Board of Governors, Federal Reserve System. Wednesday, March 12: Leon Keyserling, Chairman, Council of Economic Advisers. Roy Blough, Member, Council of Economic Advisers. F r i d a y , March 14: A. L . M. Wiggins, chairman, board of directors, A t l a n t i c Coast Line Railroad Co. ( f o r m e r l y Under Secretary of the Treasury). Preston Delano: Comptroller of the Currency. Maple T. H a r l , Chairman, Board of Directors, Federal Deposit Insurance Corporation. Second week Monday, March 17: M a r i o n B. Folsom and J. Cameron Thomson, Committee f o r Economic Development. W . L . Hemingway, American Bankers Association. 3ohn F. Fennelly, Investment Bankers Association. Tuesday, March 18: Seymour H a r r i s , H a r v a r d University. Aubrey G. Lanston, Aubrey G. Lanston & Co., United States Government security dealers. Wednesday, M a r c h 19: Malcolm Bryan, President, Federal Reserve Bank, Atlanta. Oliver S. Powell, Member, Board of Governors, Federal Reserve System. C a r r o l M. Shanks, L i f e Insurance Association of America and American L i f e Convention. Thursday, March 20: Beardsley Ruml, New York City. A l l a n Sproul, President, Federal Reserve Bank, New York. E. E. Brown, chairman, board of directors, F i r s t National Bank of Chicago. F r i d a y , March 21: P a u l Appleby, Syracuse University. Third week Monday, March 2 4 : Panel discussion, The Role of the Banking System i n a Dynamic Economy: Robert Fleming, Riggs National Bank, Washington, D. C. Wesley Lindow, I r v i n g Trust Co., New York. Roy Reierson, Bankers T r u s t Co., New York. Jesse W. Tapp, Bank of America, San Francisco. Tuesday, March 25: Panel discussion, W h a t Should Our Monetary and DebtManagement Policy Be?: M i l t o n Friedman, University of Chicago. Raymond Mikesell, University of Virginia. Paul Samuelson, Massachusetts I n s t i t u t e of Technology. C. R. Whittlesey, University of Pennsylvania. Wednesday, March 26: Panel discussion, H o w should our monetary and debtmanagement policy be determined?: G. L . Bach, Carnegie I n s t i t u t e of Technology, Pittsburgh. E. A. Goldenweiser, I n s t i t u t e f o r Advanced Study, Princeton. James K . Pollock, University of Michigan. Jacob Viner, Princeton University. Thursday, March 27: Panel discussion, The role of business, labor, and agriculture i n the determination of monetary and debt-management p o l i c y : (Representatives of American F a r m Bureau Federation, American Federation of Labor, Congress of I n d u s t r i a l Organizations, National Association of Manufacturers, The N a t i o n a l Farmers Union, The National Grange, United States Chamber of Commerce). MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 5" F r i d a y , March 2 8 : H . Christian Sonne: National Planning Association. Panel discussion on the role of the banking system in a dynamic economy (Monday, March 24) Participants.—Robert Fleming, Riggs National Rank, Washington, D. C.; Wesley Lindow, I r v i n g T r u s t Co., New Y o r k ; Roy Reierson, Bankers T r u s t Co., New Y o r k ; Jesse W . Tapp, Bank of America, San Francisco. Suggested topics for discussion.— 1. W h a t should be the role of the private financial community i n the formulat i o n of monetary policy? To w h a t extent does this role reflect its status as a special interest group and to w h a t extent does i t reflect its status as the repository of specialized skills and i n f o r m a t i o n valuable to the general interest? 2. W h a t is the responsibility of banking institutions f o r the economic development of their communities? Should banks, as a long-term proposition, be more venturesome i n undertaking lending risks? Has a lack of venturesomeness on the p a r t of banks contributed to the growth of Government-lending agencies? H o w does this apply to the special problems and inflationary hazards of the present defense period? 3. H o w successful has the voluntary credit-restraint program been? W h a t should be its role over a longer-term period? Has the treatment accorded State and local governments been more rigorous t h a n t h a t accorded private business firms? 4. To w h a t extent do time deposits represent a stable f o r m of savings? Demand depoits? Is i t desirable to encourage the holding of savings i n these forms? Under w h a t conditions? Panel discussion on What should our monetary and debt management policy bet (Tuesday, March 25) Participants.—Milton Friedman, University of Chicago; Raymond Mikesell, University of V i r g i n i a ; P a u l Samuelson, Massachusetts I n s t i t u t e of Technology; C. R. Whittlesey, University of Pennsylvania. Suggested topics for discussion.— 1. H o w much reliance should be placed on ( a ) direct controls, (b) selective credit controls, (c) general monetary (i. e., " t i g h t money") policies i n combating inflation? Under present circumstances? Under other circumstances? 2. I s a tight-money policy compatible w i t h m a x i m u m production and employment? 3. H o w desirable is a stable Government bond market? Now? Under conditions closer to t o t a l war? I n a peacetime inflation? 4. W h a t kinds of securities should the Treasury issue? Now? Under other circumstances? 5. W h a t is the proper relationship between monetary and fiscal policy? Panel discussion on how should our monetary and debt-management policy be determined? (Wednesday, March 26) Participants.—G. L . Bach, Carnegie I n s t i t u t e of Technology, P i t t s b u r g h ; E. A. Goldenweiser, I n s t i t u t e for Advanced Study, Princeton; James K . Pollock, University of Michigan; Jacob Viner, Princeton University. Suggested topics for discussion.— 1. W h a t should be the role of the private financial community i n the formulation of monetary policy? W h a t are the implications i n this respect of the private ownership of the stock of the Federal Reserve banks? 2. I s the division of a u t h o r i t y over monetary policy between the B o a r d of Governors and the Open Market Committee desirable? I f not, how should i t be resolved? 3. Should the monetary a u t h o r i t y be vested i n one man or a board? W h a t is its proper relationship to the Treasury, the President, Congress? 4. W h a t should be the role of the monetary authority i n the determination of debt-management policy? Panel discussion on the role of business, labor, and agriculture in the determination of monetary and debt-management policy (Thursday, March 27) Participants.—Representatives of American F a r m Bureau Federation, American Federation of Labor, Congress of I n d u s t r i a l Organizations, National Association of Manufacturers, The National Farmers Union, The National Grange, United States Chamber of Commerce. 6 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 6" Suggested topics for discussion.— 1. W h a t are the special interests of business, labor, and agriculture i n monetarypolicy? H o w should each be represented i n its formulation (except as they are represented i n ordinary course i n the formulation of Government policy generally) ? 2. Should i n d i v i d u a l members of the Board of Governors or i ndividual directors of the Federal Reserve banks represent special interest ^croups? I f so, should the interested groups participate i n their selection? 3. W h a t monetary and debt management policy is most i n the interests of business? Of labor? Of agriculture? Now? Under other conditions? (This schedule is reproduced exactly as given to the press for release on March 3, 1952. There were minor changes i n the course of the hearings as indicated by the day-to-day record.) Representative P A T M « \ N . Before hearing from Mr. Snyder, I would like to ask i f other members of the subcommittee would like to make statements. Senator Douglas, would you like to make a statement? Senator D O U G L A S . I think, perhaps, Senator Flanders should have the right to lead off. Representative P A T M A N . Senator Flanders? Senator F L A N D E R S . Mr. Chairman, these very important hearings should attract the interest and demand the earnest consideration of all officials and institutions, public and private, which are concerned w i t h inflation, i n general, and the amount and value of our monev and credit supply, i n particular. As a minority member of this committee, I would like to bring my tribute to the careful and able staff work which has preceded the hearings. Comprehensive and incisive questionnaires were prepared i n order to throw light on all significant aspects of general credit controls and debt management. This groundwork has resulted in the 1,300-page volumes of the compendium Monetary Policy and the Management of the Public Debt. The staff has also been largely responsible for making arrangements for these hearings in which various opinions may be further developed and examined by the committee. Following up this excellent staff work, i t is proper to call public attention to the time, effort, and thought that have been given by those who have replied to the questionnaires sent out. I t is clear that Government agencies, business groups, and individual economists have prepared their answers with great care. The high quality of these answers on monetary and banking theory, as well as on practical-policy proposals, has been gratifying. The compendium of these views provides a valuable reference to those of us concerned w i t h immediate policy questions, and i t also w i l l , no doubt, long serve as an important source of material for all those who study these general problems. We may also hope that those who have labored to provide the committee w i t h information have also reaped some benefit themselves from the process of thinking through the issues involved, and of formulati n g their answers. We are now entering upon the more direct work of the subcommittee i n hearings, examination, and attempting to reconcile the views of witnesses. W i t h the careful work that has been done and the high quality of the responses received, I am sure that we can continue this undertaking i n an objective and unbiased manner. Our aim is to have a thorough M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 7" exploration of all the important aspects of the problems that are before us, and I am confident that this can be accomplished. Representative P A T M A N . Mr. Boiling? Representative B O L L I N G . N O comment, M r . Chairman. Representative P A T M A N . Senator Douglas? Senator DOUGLAS. I want to join Senator Flanders i n congratulating the chairman and the staff for the very excellent job which they have done in preparing these two volumes of background material on monetary policy and debt management. Whatever differences of opinion may develop during the course of the hearings, I think Congressman Patman and Dr. Murphy are to be thanked for the fairness and comprehensiveness of their inquiry. I think that these two volumes are the best discussion that we have of the issues involved. I t has been very helpful to have the frank statement by the Treasury and by the Federal Reserve and by the representatives of various shadings of opinion; and I would say that i f nothing more happened, that the subcommittee has already justified its existence. I want to join Senator Flanders i n the hope that this w i l l be an inquiry for truth and for public policy. I n the course of that inquiry, it is inevitable that differences of opinion w i l l develop, but I hope that we may be objective, and that we w i l l credit each other with the best of motives. Representative P A T M A N . Thank you, Senator Douglas. Mr. Wolcott? Representative WOLCOTT. I have no statement. Representative P A T M A N . M r . Snyder, we would like to hear f r o m you at this time. We appreciate your coming, and we shall look forward to hearing your testimony. STATEMENT OF HON. JOHN W. SNYDER, SECRETARY OF THE TREASURY, ACCOMPANIED BY MEMBERS OF THE TREASURY STAFF Secretary SNYDER. Thank you, Mr. Chairman. I have a prepared statement, Mr. Chairman, which, with your permission and that of the subcommittee, I would like to read into the record. Mr. Chairman and gentlemen, the hearings which are beginning this morning represent the culmination of a number of months of intensive study and preparation of replies to the questions raised by your subcommittee. Anyone who has worked on this complex project cannot help but be impressed w i t h the scope and searching nature of the questions which were asked. I n our already heavy work schedules i t was not easy to find the time to set down the pros and cons of the many issues presented for generalized discussion i n the questionnaire. I n view of the importance of the study, however, we felt that time must be found; and I am very glad that we were able to give f u l l and considered replies to all of the questions submitted to us. I believe that everyone who reads the written replies received by the subcommittee w i l l feel, as I do, that the body of material which you have assembled w i l l be of great value i n the field of debt management and monetary policy for many years to come. Not one point of view, but many points of view—I am almost tempted to say, a l l MONETARY POLICY AND M A N A G E M E N T OF PUBLIC DEBT 8" points of view—seem to have been elicited by the subcommittee i n the written answers to the various questionnaires which were sent out. A policy record, i n the most fundamental sense, is not only a record of decisions made and actions taken—it is a record of appraisals, of conclusions, and of judgments. Those who replied to the subcommittee's questionnaires, it seems to me, have attempted to be f u l l y responsive i n this fundamental sense. I want to say here, M r . Chairman, that I do hope that these 1,300 pages w i l l be read w i t h a great deal of care, and carefully digested by all people who are charged with any part of the preparation of the studies and the formulation of decisions i n connection w i t h debt management and monetary policies. I want to add my words to those of your colleagues who have addressed their remarks previously to the complimentary appreciation of what has gone ahead i n laying the groundwork for these hearings. I think that we could well say that this has been the most carefully and most studiously prepared hearing on this subject that we have experienced. I am extremely hopeful that out of this fine foundation w i l l grow discussions and studies that w i l l be extremely helpful i n the great problems we have i n the future. I n our own case, we found i n replying to the questionnaire that i t was often difficult to reconstruct past events i n the context of the times when they took place. I n our swiftly moving economy circumstances are always changing, and our views as to appropriate actions and policies must change w i t h the-%i. TT would be little purpose i n t r y i n g to reconstruct the background of important actions i n the past unless the details gave us added ability to plan our future course wisely. This is true, I believe, w i t h respect to the subjects which w i l l be covered i n the present hearings. I n answering the questionnaire submitted earlier by the subcommittee, therefore, I have gone into considerable detail as to the reasons why the Treasury took certain actions at certain times; what wre hoped to accomplish by them and what—viewed retrospectively—we did accomplish. I t w i l l be of particular value, 1 feel, for the public to become better acquainted w i t h the nature of the responsibilities w i t h which the various agencies have been charged by the Congress—and the relation of practical policies to the fulfillment of these responsibilities. This represents, i n my view, a most important part of the study which the subcommittee is undertaking. I should like to take a few minutes, therefore, to comment briefly on the nine general economic objectives which the Treasury Department seeks to further through the use of the powers which have been given to i t by the Congress. These objectives, which are described more f u l l y i n the answer to question 2, are as follows: 1. T o maintain confidence i n the credit of the United States Government. This is the basic objective of all Treasury policies; and, at the present time, i t is the cornerstone of the financial soundness of this country, and a vital factor i n the defense effort of the entire free world. I n the broadest sense, safeguarding the credit of the Government depends upon our ability as a Nation to keep our freeenterprise economy healthy and growing, and to use our governmental instruments wisely i n promoting this end. MONETARY POLICY AND M A N A G E M E N T OF PUBLIC DEBT 9" 2. To promote revenue and expenditure programs which operate within the framework of a Federal budget policy appropriate to economic conditions. Through action of Congress and by executive decisions, the budget is subject to constant change; and i t is of the utmost importance that revenue and expenditure programs be kept appropriate to changing economic circumstances. The Treasury and the Bureau of the Budget work closely w i t h the President and with the Congress to further this end. 3. To give continuing attention to greater efficiency and lower costs of governmental operations. I consider this objective a continuing obligation, not only of the Treasury Department but of every department and agency of the Government. Both w i t h i n the department and i n association w i t h other branches of the Government, the Treasury carries on continuing programs aimed at providing maximum service on the part of the Government at the lowest possible cost to the taxpayers. 4. To direct our debt management programs toward (a) countering any pronounced inflationary or deflationary pressures (b) providing securities to meet the current needs of various investor groups, and (c) maintaining a sound market for United States Government securities. Success i n achieving these specific objectives of debt management is essential to the maintenance of confidence i n the credit of the United States Government. Many of the questions sent to us by the subcommittee related to problems and actions i n the area of debt management. The Treasury has attempted to give the fullest possible replies to these questions; and I am hopeful that the hearings w i l l provide a forum i n which these fundamental matters of national financial policy can be thoroughly explored. 5. To use debt policy cooperatively w i t h monetary-credit policy to contribute toward healthy economic growth and reasonable stability i n the value of the dollar. The importance of this objective, I feel, is self-evident. I t is a primary goal of both Treasury and Federal Reserve policy, and an important part of public economic policy i n general, as expressed i n the Employment A c t of 1946. I n addition to these five economic objectives of Treasury policy, there are other objectives which we keep constantly i n mind. These are: 6. To conduct the day-to-day financial operations of the Treasury so as to avoid disruptive effects i n the money market and to complement other economic programs. 7. To hold down the interest cost of the public debt to the extent that this is consistent w i t h the foregoing objectives. 8. To assist i n shaping and coordinating the foreign financial policy of the United States. 9. To manage the gold and silver reserves of the country i n a manner consistent w i t h our other domestic and foreign policy objectives. 10 M O N E T A R Y POLICY AND M A N A G E M E N T OF PUBLIC DEBT 10" Each one of these specific objectives is important i n itself; and, generally, a number of them must be considered together in framing a practical program which w i l l further our basic goals of maintaining the confidence of the public i n the debt obligations of the Government and promoting the economic well-being of the Nation. The present hearings, I feel, w i l l provide an excellent opportunity for furthering public understanding of the responsibilities and policy objectives which I have just summarized. They are discussed at greater length—and i n relation to many different situations—in the answers to the questionnaire. I t is my further hope that the subcommittee w i l l give careful consideration to the possibilities which I have brought forward i n the answer to question 10, relating to the creation of a top-level advisory group to the President on broad questions of monetary and fiscal policy. I n that question, i t was suggested that a small consultative and discussion group be created within the Government. This group might consist of the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System, the Director of the Budget, the Chairman of the Council of Economic Advisers to the President, and the Chairman of the Securities and Exchange Commission. From time to time, the heads of other agencies (both permanent and special agencies) might be added to the group, as various problems arise. This group would serve two major purposes. First, by regular and periodic meeting and discussion among the heads of the agencies having to do with fiscal and monetary policies, differences of opinion would become less likely to develop. A group of this nature would do much to achieve accord before discord arises. Second, the means would be provided for informal discussions w i t h the President on broad questions of monetary and fiscal policy. The advisory group could report to the President—preferably on an informal and confidential basis—as often as desired. I t is my present intention to recommend to the President that he consider the creation of a national council along the lines which I havejust described, w i t h advisory authority i n the area of monetary and fiscal policy. Prior to doing so, however, I should like to obtain the views of the subcommittee as to the advisability—the pros and cons— of such a step. I am looking forward with great interest, therefore, to the discussion of this matter in the hearings, and to your own deliberations with regard to it. The question of a national council which would act as an advisory group w i t h respect to monetary and fiscal policy brings up another matter which I hope the subcommittee w i l l find time to consider f r o m all angles. I n question 9 of the questionnaire sent to me, a discussion of the relationship between the President and the Federal Reserve System was called for. I n answering this question, I indicated my opinion that i t was desirable for the Federal Reserve System to retain its independent status. I expressed further, however, my strong feeling that i t is natural, proper, and desirable for the President to seek to settle disputes by having all of the interested parties sit around a table to discuss their differences, i n the interests of coordination. This, i t seems to me, represents the essence of independence—that the President and the Board should have both the right and the duty to discuss the problems with each other, on the basis of a free interchange of views. MONETARY POLICY AND M A N A G E M E N T OF P U B L I C DEBT 11" The Joint Committee on the Economic Eeport is i n a very good position to help obtain the k i n d of cooperation and cohesiveness of policy which we need to emphasize constantly i n all branches of Government. This is because the committee has the responsibility f o r looking at the economic problems involved f r o m every point of view. Y o u are not concerned solely w i t h revenues, for example, or w i t h expenditures, or w i t h appropriations; rather i t is your unique function among the committees of Congress to appraise the whole complex of measures and programs having a significant influence on the economic well-being of the country. Because of our appreciation of this fact, we have given special attention to the questions requesting general views. E i g h t now, however, we are faced w i t h a practical financing problem which must be worked out i n the immediate future; and I should like to discuss w i t h you briefly how a problem of this sort, i n practice, ties i n w i t h the more general considerations which govern Treasury policy. On the basis of the estimates i n the President's budget, as much as $10 billion of the defense program may have to be financed by additional borrowing from the public before the end of the present calendar year. The budget is, of course, subject to revision as the year progresses, and particularly as we see how the expenditure program shapes up. Whatever the final figures t u r n out to be, however, the amounts which we shall have to borrow w i l l be substantial. Earlier i n this statement, I noted that the general goals of our debt management programs are (a) countering any pronounced inflationary or deflationary pressures, (6) providing securities to meet the current needs of various investor groups, and (c) maintaining a sound market for United States Government securities. These objectives are the guides which we use i n arriving at policies which are appropriate to current economic conditions. The difficulties of this procedure in practice, however, and the many balanced judgments which are involved, could not be better illustrated than by our present situation. As I have stated, we may have to borrow as much as $10 billion in new money from the public before the end of this calendar year; and i t is generally agreed that these funds should be obtained to the greatest extent possible outside of the commercial banking system. From this point forward, however, we must proceed on the basis of a careful analysis of the many conflicting factors i n the immediate outlook. There is no single, simple approach which w i l l solve the entire problem for us. To begin with, we must be constantly watchful w i t h respect to the development of inflationary or deflationary tendencies. There appears to be a lull, at present, i n inflationary pressures; but i t would be imprudent to give less than f u l l weight to the inflationary implications of our large defense program and of the deficit financing operations which w i l l have to be undertaken i n connection w i t h it. For some time to come, defense production w i l l draw heavily on our physical resources; and the existence of a significant deficit w i l l add to the supply of funds available for spending or saving. I n the second place, we must take account of the fact that our present borrowing program w i l l have to be geared to a set of circumstances which are unlike those experienced in connection w i t h any previous large-scale borrowing operations. I n contrast to the W o r l d W a r I I 97308—52 2 12 M O N E T A R Y POLICY AND M A N A G E M E N T OF PUBLIC DEBT 12" situation, for example, a large sector of industry and trade is engaged i n substantially normal operations; including operations—such as capital expenditure programs—which draw on investment funds. When we found i t necessary to borrow large sums of money early i n W o r l d W a r I I , moreover, the Government's debt was much smaller than i t is now, both i n absolute terms and i n relation to the size of the economy. Today, our Government debt accounts for almost half of all the debt obligations i n the country, public and private; including—in addition to Federal securities—bonds of State and local governments, obligations of private corporations, mortgages, bank loans, consumer installment paper, et cetera. Public debt obligations represent an important part of • the assets of our financial institutions, of numerous business corporations, and of millions of individuals and families throughout the Nation. Against this background, the practical meaning of the broad objectives of debt management which I outlined earlier becomes clear. I t is evident that we must use great care to maintain an atmosphere which w i l l be favorable not only to the purchase of new Government securities, but to the retention of current holdings—and particularly, of course, the holdings of nonbank investors. To maintain investor confidence, inflationary or deflationary tendencies must be countered, and sound conditions must be maintained i n the market for United States Government securities. To sell the greatest possible amount of securities outside of the commercial banking system, issues must be provided which w i l l meet investor needs. Each one of the general requirements of a sound debt management program, therefore, is seen to have direct application to our present problem. I n order to formulate a program suited to the current situation, the Treasury—as i t has done i n connection w i t h each important financing operation i n the past—has been making extensive analyses of the money and investment markets; i t has been discussing the problems on a continuing basis w i t h representatives of the Federal Reserve System ; and i t has been conducting a series of informal conferences and discussions—in which the Federal Reserve participates—with representatives of leading investor and financial groups and others during recent weeks. While I have found general agreement, as I noted earlier, on the need for securing the necessary amounts from nonbank investors, there is a wide divergence of views on how we ought to go about securing the funds; and there are differences of opinion, also, as to measures which should be taken outside the area of debt management to maintain stability i n the price structure and i n the economy generally. These differences of opinion are to be expected.. The problems involved are extremely complex; they are all inter-related; and they all touch on major aspects of public economic policy affecting wide areas of the economy. When we review all of these facts i n the Treasury, and evaluate them i n terms of the problem at hand, the situation seems to us to add up to these conclusions: I t is essential for the well-being of the country that the Treasury and the Federal Reserve continue to work i n the closest cooperation. Both agencies are i n wholehearted agreement on this matter. There is no substitute for working together on the important problems which we M O N E T A R Y POLICY AND M A N A G E M E N T OF P U B L I C DEBT 13" shall have to solve jointly if the fundamental strength and productive power of the American Economy are to be maintained. I feel that an advisory council of the sort which I have discussed w i t h the committee today would be of help in broadening the scope of cooperation. The spirit of cooperative effort, however, is the essence of the matter. The prospect of substantial deficit financing, i n the period immediately ahead underscores the importance of the broad economic objectives of the Treasury, and particularly of debt management policy. The Treasury has succeeded during the postwar period i n reducing the proportion of the public debt held by the commercial banking system from 42 percent at the peak of W o r l d War I I financing to 33 percent at the present time. Is has succeeded in maintaining savings bond ownership not only at the wartime peak, but at a figure which is now close to $58 billion—$9 billion higher than the amount held at the close of W o r l d W a r I I financing. Our deficit financing program must conserve these gains—and i t must add to them. For these reasons, the Treasury places great emphasis on the need for prudence with respect to policies which affect the Federal debt. As the subcommittee's questionnaires brought out so clearly, a governmental agency does not operate i n the field of abstract theory; f u l l account must be given at all times to the practical implications of the policies and programs undertaken. The opportunity which the present hearings w i l l provide for a discussion of measures appropriate to our present situation w i l l , I am convinced, make a most important contribution to public understanding of the problems now confronting us. Representative P A T M A N . Thank you, M r . Secretary. Senator Douglas, would you like to ask any questions ? Senator DOUGLAS. Thank you, M r . Chairman. Secretary Snyder, may I ask you what you think the policy of the Federal Reserve System should be in the event of a large refunding of Government securities or the issuance of a new set of Government securities ? Do you think that the Federal Reserve Board should be committed to buy a sufficient quantity of those securities so that the price may be maintained at the interest rates charged, and so that a general feeling of confidence may be given so that the issue may be subscribed ? Secretary SNYDER. Senator, I think that is a matter that w i l l have to be worked out between the Treasury and the Federal Reserve Board as the situations arise. I have found that the Board and the Open Market Committee have been very cooperative i n our recent issues and our refundings, and I think that we have worked out a fine cooperative atmosphere, and I think that is a matter that we w i l l have to continue to work out. Senator DOUGLAS. M r . Secretary, I want to point out that my question to you was perfectly courteous. I t was a question of what you thought the policy should be, and your answer, in effect constitutes refusal to answer the question. I want to know whether you think that i t is a function of the Federal Reserve Board to purchase a sufficient quantity of Government securities i n the event of a refunding of or a new issuance of securities so that the issue may go off successfully and be sold to the public at the interest rate charged; and what you, in effect said was, " W e w i l l work that out. I am not going to reply to the question." 14 M O N E T A R Y POLICY AND M A N A G E M E N T OF P U B L I C DEBT 14" Now, w i t h all kindness I do not think that is treating a congressional committee, which is t r y i n g to be fair w i t h you, as a party Secretary SNYDER. Senator, I have no question as to your courtesy,, and I d i d not raise any such question intentionally. Senator DOUGLAS. May I ask you what you think the policy of the Federal Reserve Board should be under those conditions ? Secretary SNYDER. I think that the policy of the Reserve Board should be one of cooperation w i t h the Treasury. Senator DOUGLAS. A n d should the cooperation consist i n purchasi n g a sufficient number of securities, i n the open market so that you. can sell the securities at the interest rates which you decide upon ? Secretary SNYDER. I tried to answer that very positively, sir. Senator DOUGLAS. I could not understand the answer at all, and I would like to have the answer of the Secretary read back. Representative P A T M A N . The reporter w i l l read the Secretary's answer. (The Secretary's answer was read.) Senator DOUGLAS. Would you like to add anything ? Secretary SNYDER. I would like to state, Senator, as each situation: arises that w i l l have to be a matter that w i l l be worked out in the light of conditions at the time. Senator DOUGLAS. Y O U do not wish to make a statement of general policy for the benefit of this congressional committee ? Secretary SNYDER. Not as to the Federal Reserve policies. Senator DOUGLAS. What do you think, then Secretary SNYDER. Other than that, as I have stated, I think it is; one of close cooperation. Senator DOUGLAS. Then you would not carry on any conversations, w i t h the Federal Reserve Board should a question such as I have described arise? Secretary SNYDER. That is not my answer, Senator. I f you w i l l reread it, you w i l l see that I said i t is a matter i n which we w i l l haveto cooperate most closely, and i t w i l l involve carrying on conversations, of course. Senator DOUGLAS. W h a t do you think you w i l l say to the Federal Reserve Board when you have these conversations ? Secretary SNYDER. That depends on the circumstances under which, we are holding the conferences and the problems that face us. Senator DOUGLAS. This is what congressional committees frequently^ face from administrative officials when we are t r y i n g to work outpolicy. We are kept f r o m the real point of view of the administrative officials, and i t becomes almost impossible for us to arrive at anjr conclusion. I am very disappointed, M r . Secretary, i n your reply. Do you think that the Federal Reserve Board should purchase Government securities or should not purchase Government securities i n the circumstances I have outlined ? Secretary SNYDER. The Federal Reserve's policy has been to conduct their Open Market Committee operations i n support of the Treasury's financing operations and, therefore Senator DOUGLAS. Y O U mean to buy a sufficient quantity ? Secretary SNYDER. I think they should continue their policy of supporting the proper financing of Government operations. Senator DOUGLAS. Does that mean they should, i f necessary, buy am unlimited quantity of Government securities ? M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT s 15" Secretary SNYDER. I t w i l l have to be bottomed on conditions at the time those decisions are made. Senator DOUGLAS. I S not the best protection for security issues the general prosperity of the country, a balanced budget, protection against the danger of future inflation, and a satisfactory interest rate ? I f those conditions are met, to what degree is i t necessary for aritficial support to be given by the Federal Reserve System ? Secretary SNYDER. A S the Senator knows, I have advocated balanced budgets ever since my opening statement when I became Secretary of the Treasury, and I still feel that we should maintain balanced budgets to the greatest possible extent. Senator DOUGLAS. I f those conditions are met why is :t necessary for the Federal Reserve Board to purchase any securities? W h y couldn't the bond issue be met by the general investment market? Secretary SNYDER. Well, i n general, I think that you have stated a very proper reason for believing that there would be no occasion, but we would have to look at conditions that have occurred i n the past, and also have to measure what might develop i n the future as to j u s t what would be the circumstances at any given time under any given condition of the market or of the amount of financing that the Government has to maintain, whether i t be refunding or whether i t be new issues. As to the using of the interest rate alone, that is a matter that has caused a great deal of debate and discussion, and one which we have tried to meet i n our answers to the subcommittee's queries. We have to measure very carefully the decisions that w i l l be made as to interest rates. Senator DOUGLAS. Well, certainly, i n times past the Treasury has asked the Federal Reserve Board to stand ready to purchase Government bonds i f there were not enough private subscriptions; is that true? Secretary SNYDER. The Federal Reserve has offered to do that, and been requested Senator DOUGLAS. Has not the Treasury requested that i t do that? Secretary SNYDER. I was just finishing my answer. Senator DOUGLAS. I beg your pardon. Secretary SNYDER. I said they have offered to do that, and the Treasury has requested them to do that; that is correct. Senator DOUGLAS. The Treasury has asked them to do that? Secretary SNYDER. Asked them to support the financing. Senator DOUGLAS. What would you say to the contention that you are asking the Federal Reserve Board to do that which i f practiced by a private underwriter w i t h regard to private issuances, would render h i m liable to prosecution under the securities and exchange statute by the Securities and Exchange Commission for pegging the market? Secretary SNYDER. I am sure the Federal Reserve Board got their legal opinion on that before they undertook it. Senator DOUGLAS. The Securities and Exchange Commission, i n order to strike at one of the evils of private underwriting, provides that the issuing house should not without due notice create an artifical market by guaranteeing to support the price of securities by purchases. Now, has not the policy i n the past sometimes been i n effect to urge the Government to do that which is a penal offense for private underwriters to do ? MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 16" Secretary SNYDER. I am quite certain that when the Federal Reserve adopted such a procedure that they carefully weighed the public welfare. Senator DOUGLAS. There is no penalty against the Federal Reserve Board's supporting the market without publicly proclaiming that i t is doing so. I t is not statutorily a criminal offense. B u t what I am t r y i n g to get at is this: Just as we are t r y i n g to create natural conditions i n the stock market where issues can sell on their merits without artificial support should we not w i t h respect to the Government securities market, depend on the general condition of the country, the soundness of the Federal budget, the protection against the danger of future inflation, and a realistic interest rate rather than upon artificial support through the purchase of bonds by the Federal Reserve to maintain bond prices? Secretary SNYDER. I think that we have had to measure this each time. O f course, as you know, Senator, there was only 1 year i n which there was any net Federal Reserve support of the Government bond market i n the postwar period up u n t i l the time of Korea; that is beside the point as to your question, but i t is interesting to note that net purchases have not been generally the case all the way through the postwar period. Senator DOUGLAS. I t was true 1 year. Secretary SNYDER. I n 1 year; that is correct, sir. (The following was submitted for the record:) T h i s m a t t e r is discussed i n detail i n the answer to question 17 of the questionnaire submitted to the Secretary of the Treasury by the subcommittee. The f o l l o w i n g table provides statistical information relating to the discussion : Net purchases or net sales of Government "bonds by the Federal Reserve, Jan. 1, 1946, to June SO, 1950, inclusive Billion Jan. 1 to Dec. 31, 1946, net sales $0.2 Jan. 1 to Nov. 12, 1947, net sales C) Nov. 13 to Dec. 15, 1948, net purchases 10.4 Dec. 16 to Dec. 31,1949, net sales 1 3.9 Jan. 1 to June 30, 1950, net sales . 1.6 1 Less than $5.0 million. Senator DOUGLAS. I t was true after Korea ? Secretary SNYDER. That is correct. I think we have to measure carefully the broad public interest, and I am sure that is what the Federal Reserve Board and the Open Market Committee take into consideration i n carrying out their obligations. Senator DOUGLAS. There is a fundamental issue involved here, namely, whether you w i l l provide so-called natural markets for Government securities or the degree to which you w i l l provide artificial markets for Government securities. Perhaps, I am using question-begging words i n referring to the purchase of the Federal Reserve as an artificial device, but the question is the degree to which the Government w i l l maintain its own bond market or td the degree to which i t w i l l allow the bond market to be settled by natural forces i n the private field. Secretary SNYDER. Well, i t boils down to the meeting of a practical situation, I think, Senator, as long as Senator DOUGLAS. When you face a practical situation without any general philosophy you are apt to come to great difficulties; and what M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 17" we are t r y i n g to do here, i f this inquiry has any merit—and i f i t does not have merit we should close i t out immediately, M r . Chairman Secretary S N Y D E R . Well, the question is Senator DOUGLAS (continuing). I s to see i f we can t r y to work out general principles for meeting these concrete situations which lie ahead. Secretary S N Y D E R . The question then arises as to whether or not we should have an open-market operation. Senator DOUGLAS. N O , that is not the question. I t is the degree Secretary SNYDER. I think so. Senator DOUGLAS (continuing). To which the Federal Reserve System should be committed to enable a Treasury issue to be successf u l or the degree to which a Treasury issue should be allowed to take its own chances in the public bond market or the private bond market. Secretary S N Y D E R . I think we have to consider the public interest involved. W i t h the large financings that we have to conduct i n these days, w i t h the debt the size it is, there must be some assurance mutually agreed on between the Federal Reserve and the Treasury that these operations w i l l be carried out w i t h assurance as to the stability of the Federal Government bond market. ' Senator D O U G L A S . I n other words, the Federal Reserve System should be w i l l i n g and agree to purchase a sufficient number of securities so that the issue can be sold ? Secretary S N Y D E R . I think that is a matter that w i l l have to be carefully weighed. Senator DOUGLAS. Who is to determine the interest rate ? Secretary S N Y D E R . Well, that matter is always discussed very caref u l l y , sir. Senator D O U G L A S . Who is to make the final decision on i t ? Secretary S N Y D E R . There is only one place that i t can finally be made by law, and that is i n the Treasury Department. Senator D O U G L A S . When the Treasury makes the decision, therefore, is the Federal Reserve Board supposed to purchase a sufficient number of bonds so that the issue can be a success at the interest rates determined by the Treasury? Secretary S N Y D E R . I think we can work out cooperation. Senator DOUGLAS. Cooperation is a beautiful word, but i t is like an overcoat, i t covers quite a range of reality. Secretary S N Y D E R . I t has to do that, sir. I n these days we have to face realities as well as theories. Senator D O U G L A S . M r . Secretary, when the Federal Reserve Open Market Committee buys Federal securities, what happens ? How does i t pay for these Government securities ? Secretary S N Y D E R . Well, of course, i t pays for i t out of the funds that i t creates. Senator D O U G L A S . Y O U mean i t pays for them by check ? Secretary S N Y D E R . I beg pardon? Senator D O U G L A S . Y O U mean i t pays for them by check? Secretary S N Y D E R . Or by giving credits, which is the same thing. Senator D O U G L A S . When i t pays for them by check, these checks go into the hands of the banks ? Secretary S N Y D E R . I t goes to the credit of the bank; yes, sir. Senator D O U G L A S . A n d the banks do what with the checks? 18 M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 18" Secretary SNYDER. Y O U are just talking about tlie mechanics of it, are you ? Senator DOUGLAS. That is right. . Secretary SNYDER. When the Federal Reserve buys securities from the banks, why, i t is Senator DOUGLAS. Let us take the situation when Federal Reserve buys f r o m the banks or private security dealers. Secretary SNYDER. When i t buys from a bank, of course, i t w i l l issue a check or give i t direct credit on the books of one of the Federal Reserve banks. I n either event that increases the deposit of the seller of the securities. Senator DOUGLAS. A n d of the member bank, is that not true ? Secretary SNYDER. W e l l then, of course, they increase the deposits. Senator DOUGLAS. Yes; the deposits. When these checks are presented by the banks either directly or the banks' acquiring these checks f r o m the private security dealers, they are deposited by the banks, are they not, i n their accounts w i t h the Federal Reserve? Secretary SNYDER. Yes; the deposits w i t h the Federal Reserve banks are member-bank reserves. Senator DOUGLAS. I understand. They, therefore, increase the deposits which the member banks have w i t h the Federal Reserve; is that not true? Secretary SNYDER. Yes. Senator DOUGLAS. That is right. A n d it, therefore, increases the reserves which the member banks have; is that not true ? Secretary SNYDER. That is correct. Senator DOUGLAS. The reserve requirements presently i n effect are 14, 20, and 24 percent, respectively, for the country, reserve city, and central reserve city banks. On the average, I believe the reserve requirement is 16 percent, and that is for each dollar of short-time deposits there must be roughly a 16-percent reserve. That leads me to this question: When the reserves of the member banks increase, what happens to the lending capacity of the member banks? Secretary SNYDER. I n general, i t is increased, of course. Senator DOUGLAS. A n d approximately i n what ratio? Secretary SNYDER. I do not know just what that ratio is Senator DOUGLAS. I t is approximately 6 to 1, at least theoretically. Secretary SNYDER. Generally, i t is considered somewhere around 5 to 1. What i t is precisely I do not know. Senator DOUGLAS. Well, the Federal Reserve says 6 to 1. The reserve ratio of 14 percent for the banks i n the smaller cities, 20 percent is the next group of cities, and 24 i n the largest cities Secretary SNYDER. 5 to 1 or 6 to 1. Senator DOUGLAS. The Federal Reserve says 6 to 1. So that the increase of the reserves of the member banks i n the Federal Reserve System increases their lending capacity i n a sixfold ratio to that of their increase i n reserves is that not true? Secretary SNYDER. Something i n that area. Senator DOUGLAS. Yes. Now, then, banks; do the banks like to keep earning capacity idle? Secretary SNYDER. Well, they would be accused of poor banking i f they did. M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 19" Senator DOUGLAS. That is right. Therefore, they w i l l want to lend, assuming the risks are sound, up to the l i m i t of their lending capacity, is that not true ? Secretary SNYDER. They, generally speaking, do t h a t ; that is their policy, Senator DOUGLAS. That is, except when you have a period of depression. Secretary SNYDER. That is the policy of good banking management ; yes. Senator DOUGLAS. Except when you have a period of depression? Secretary SNYDER. Yes. Senator DOUGLAS. Therefore, the increase of reserves w i l l probably be accompanied by a parallel increase i n bank loans, i n a ratio up to 5 or 6 times that of the increasing reserves, is that not true ? Secretary SNYDER. I t sometimes works out that way. Senator DOUGLAS. I f we have a period of comparatively f u l l employment, such as we have now w i t h unemployment at roughly 3 percent, and unemployment chiefly i n localized areas such as Detroit, New York, and certain other regions, w i l l this increase i n loans cause substantially more goods to be produced? W i l l i t put idle labor to work w i t h idle resources producing commodities which otherwise would not be produced ? Secretary SNYDER. W o u l d an increase i n bank credit accomplish that? Senator DOUGLAS. Yes. Secretary SNYDER. Well, i t might aid i n i t ; yes. Senator DOUGLAS. I mean i f you have comparatively f u l l employment, i n which virtually everyone has a job. Do you think you would effect any substantial reduction i n unemployment below the 3.3 percent which we are supposed to have now ? Secretary SNYDER. Well, then we get into the realities of the question. Now when we are talking about Senator DOUGLAS. Yes. Secretary SNYDER. The answer to your statement theoretically would be that any expansion of credit under conditions of f u l l employment and f u l l utilization of manufacturing capacity would only tend to oversupply the market. Senator DOUGLAS. Over-supply what market ? Secretary SNYDER. The credit market. Senator DOUGLAS. That is a vague phrase. M y question was whether you thought there would be any significant increase i n physical production because of a further expansion of bank loans when you have substantially f u l l employment. Secretary SNYDER. Yes; that is what I was addressing myself to. Senator DOUGLAS. D O you think there would be any significant increase i n physical production? Secretary SNYDER. I think that i t all depends on whether you want credit to flow to increase production, and that is why I said we get into the realities of whether or not i t is a question of supplying credit. Senator DOUGLAS. W i t h unemployment down to 3 . 3 percent, do you think you can drive i t down much further than that by an expansion i n bank loans? M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT 20" Secretary SNYDER. The question that we are really faced with, though, r i g h t now, Senator*—I am w i l l i n g to answer all your theoretical questions. Senator DOUGLAS. These are not theoretical questions, M r . Secretary. Secretary SNYDER. Well, i t turns out that way from a practical standpoint. Senator DOUGLAS. These are extremely broad and important questions. Secretary SNYDER. I t turns out to be a theory against practice, because i f i n this defense program bank credit had been completely shut off, then the question would come up as to who would supply the credit to these expanding operations for the defense program. Senator DOUGLAS. M r . Secretary, I am not proposing to shut off bank credit. I am merely saying i f the Federal Reserve is asked to buy large quantities of Government securities i n the open market, does i t not create added bank reserves i n the Federal Reserve System, and the answer to that has been " Y e s " ; isn't that correct? Secretary SNYDER. That is correct. Senator DOUGLAS. The next question was, w i t h added bank reserves i n the Federal Reserve System, does not this lead, too, to increased bank loans, and the answer to that was "Yes." The t h i r d question was do these increased bank loans i n a period of comparatively f u l l employment lead to an increase i n production or do they lead to an increase i n prices ? That is what I am coming to. Secretary SNYDER. Well, they could well lead to an increase in prices. Senator DOUGLAS. That is the point. Now, w i l l they not lead to an increase i n prices when the only unemployment which exists is seasonal and transitional, plus a few isolated pockets which cannot be removed by the expansion of bank credit ? Secretary SNYDER. Well, the question, of course, that is raised then is how to prevent that expansion of bank credit. We get into the problem of what could or could not prevent the expansion of bank credit. Senator DOUGLAS. M r . Secretary, is i t not true that the expansion of bank loans i n a period of comparatively f u l l employment w i l l furnish the economy—public and private—with more monetary purchasing power, which w i l l then be used for the purchase of commodities and for labor ? Secretary SNYDER. That is certainly true, and we have encouraged every possible way of holding back the expansion of inflationary bank credit. Senator DOUGLAS. Just a minute. I think you are pursuing contradictory aims, that is the point. The expansion of bank credit w i l l furnish to private persons and to some degree the Government, added monetary purchasing power which they w i l l use to bid for goods and services but virtually all the labor is employed so that in effect, you w i l l have more purchasing power to" buy the existing stock of goods and services. W i l l not that inevitably force prices up ? Secretary SNYDER. That is correct. Senator DOUGLAS. Well, that is inflation, is i t not? Secretary SNYDER. That is a definition of it. Senator DOUGLAS. That is right. M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 21" Here is the point: I n order to maintain the price of the bonds, you ask the Federal Reserve System to purchase large quantities of Government securities; but the purchase of these large quantities leads to inflation, by adding to the reserves, and hence the lending capacity of banks. JNOW, then, you stated that one of your purposes was to prevent inflation. How much weight do you give to the prevention of inflation as compared to the maintenance of a bond market at a low interest rate? When these two principles come i n conflict, which is to have precedence? Secretary SNYDER. Well, the question, of course, then comes into sharp focus as to whether interest rates are going to hold back the seeking of bank credit by users of bank credit. Senator DOUGLAS. Just a minute. Economists have frequently tried to emphasize the control of credit on the demand side by the interest rate. I want to assure you that that is not my point. I am not saying that an increase i n the interest rate w i l l appreciably decrease the private demand for capital. What I am asking is: Should i t not be a function of Government to prevent the supply of bank credit from expanding more rapidly than the quantity of physical production, because i f the quantity of bank credit does expand more rapidly than the quantity of physical production the inevitable result, as you have admitted, is an increase i n prices. Secretary SNYDER. Well, the problem then arises as to directing available bank credit into the noninflationary areas. Senator DOUGLAS. What are those ? Secretary SNYDER. A n d that Senator DOUGLAS. What are those ? Secretary SNYDER. Well, that would be for the normal supply of neded capital for the operation of necessary business; and for, of necessity, i n these conditions, the supply of credit to carry on the defense program. Senator DOUGLAS. Have you ever thought of the fact that possibly the total supply of bank credit should not be increased or at any rate should not be increased more rapidly than the volume of production? How can you expect to pour additional credit into the economy and yet prevent that credit from spilling over i n the form of an increase in prices in a period of f u l l employment? Secretary SNYDER. Well, i n order to prevent it, we had to put controls in, because unless you control the production i n nondefense areas—then you are going to have created a situation demanding additional credit. But i f you could control production and let the wages and the raw materials flow into the production of materials needed for defense requirements—if you could thus balance the demand and requirement for the use of labor and raw materials between the defense and the liondefense programs, we could hold total credit down to a certain level. Senator DOUGLAS. M r . Secretary, i f you force the Federal Reserve System to purchase additional large quantities of Government bonds, thus expanding bank reserves, thus expanding credit, the task of t r y i n g to prevent prices from increasing, after all this is done, i t w i l l be just as futile as when I fill this glass of water and keep pouring i t in, and 22 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 22" then t r y to mop up the overflow with a pocket handkerchief. W h y not get at the source and t r y to prevent the undue expansion of the total quantities of bank credit itself ? Secretary SNYDER. We would like to accomplish that, Senator, as much as you would, of course. Senator DOUGLAS. I f you force the Federal Market Committee to purchase unlimited quantities of Government bonds, far from stabilizing the price level, you are inflating the price level. Secretary SNYDER. H O W would you prevent the undue expansion of bank credit ? How would you meet the credit needs of the defense program when Congress has not put i n the necessary control measures? Senator DOUGLAS. Oh, I voted for those control measures. Secretary SNYDER. Just a minute, we are talking generally. Senator DOUGLAS. I voted for those control measures, and I think they have a limited degree of aid, but to depend solely upon direct controls to restrain prices when you are inflating the money supply is to my mind foolish—forgive me for saying so—and i f anybody has more glasses of water, I w i l l demonstrate again. Secretary SNYDER. We w i l l accept the—— Senator DOUGLAS. Just pouring i n credit, pouring i n more credit and then to say put i n direct controls Secretary SNYDER. Senator, we w i l l accept the demonstration; you are spoiling one of your reports there. Senator DOUGLAS. I t is just utterly foolish. W h y not stop pouring ? Secretary SNYDER. Well, I wish you would, because you are spoiling one of those fine reports there. [Laughter.] Senator DOUGLAS. I wish you would stop pouring credit or t r y i n g to force the Federal Reserve System to pour credit into the banking system; where the damage is far greater by pouring the credit than i n pouring the water. Secretary SNYDER. There is no question about that, Senator; and i t is a problem that we have to face very seriously; you know that. I am no more an inflationist than you are. Senator DOUGLAS. Y O U say you want to keep interest rates down, but you also want to prevent inflation. Which is better, a stable interest rate but expanding bank loans and rising prices or a stable price level even though i t may mean a rising interest rate? Secretary SNYDER. Well, Senator, as I have said many times, I have no doctrinaire views on holding interest rates generally over a long period of time at any one point. We have demonstrated that during the postwar period when the Treasury cooperated w i t h the Federal Reserve i n permitting interest rates to rise i n the shortterm securities market, because we felt that was the proper thing to do. For a f u r t h e r discussion of this point, reference can be made to the answer to question 17 beginning on page 50 and the answer to question 28 beginning on page 103 of p a r t I of the subcommittee's document containing the replies to questionnaires submitted by the subcommittee. Senator DOUGLAS. But here is my point: I think we have established i t pretty clearly that i f the Federal Reserve is forced to buy unlimited quantities of Government securities or large quantities of Government securities, the inevitable effect in a period of comparatively f u l l M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 23" employment such as we have now, with only 3.3 percent unemployed, is to inflate the money supply, and drive up prices. This i n turn, increases the cost of Government services, eats into the income of those with fixed incomes and creates all the havoc of inflation. I s that not a rather poor policy ? Secretary S N Y D E R . Well, let us take a look at the whole picture. Since the end of World War I I financing, actually the bank-owned public debt has declined by over t h i r t y billions of dollars. The point is we have not been Senator DOUGLAS. 1 9 4 5 and 1946—that period was a very fortunate year, because the high war tax rates were i n effect, and military exenditures had tapered off, and i f we were to get into a discussion of udgetary policy, we would get into further issues, but I understood our chairman to say we were not going to discuss budgetary policy, so I am not going to pursue that subject any further. Secretary S N Y D E R . I am not t r y i n g to get into budgetary policy; I am just t r y i n g to point out, though, that i t is not a matter of continually forcing the Federal Reserve to buy over the long run. Senator D O U G L A S . I helped conduct hearings parallel to these 2y 2 years ago, and the testimony was perfectly clear, supported by sufficient documents that were introduced, to indicate that the Treasury has generally insisted i n the past that the Federal Reserve System purchase Government bonds i n order to support the market, and did so until the famous accord of A p r i l , agreed upon in March, but dated, I believe, early i n A p r i l 1951. Now, some of us are a little fearful that this accord may be discontinued or i f cooperation is obtained that i t may be by the Federal Reserve agreeing to the policies of the Treasury. Now, I believe, we have a right to be fearful about that, M r . Secretary. Secretary S N Y D E R . A n d the Treasury has a right to be hopeful Senator D O U G L A S . Y O U mean hopeful that there w i l l be inflation? Secretary S N Y D E R . That we w i l l have accord. We do not have quite as much suspicion about an accord as you do. Senator D O U G L A S . A n d that the Federal Reserve w i l l purchase unlimited supplies of Government bonds ? Secretary S N Y D E R . N O , that we w i l l have cooperation and the Federal Reserve and the Treasury in the fashion Senator D O U G L A S . Does that accord, i n your mind, carry w i t h i t the idea that there w i l l be large purchases by the Federal Reserve ? Secretary S N Y D E R . I t carries with i t the idea that the Federal Reserve and the Treasury are going to sit down and work things out together to the best interests of the public. Senator D O U G L A S . Well, I do not know what to say that would reply to an answer like that. I suppose I ought to send bouquets to you both i n the hope that you have a happy meeting. Secretary S N Y D E R . I hope you w i l l share w i t h me the hope that you w i l l do that. [Laughter.] Senator D O U G L A S . Are you worried about inflatiou? Secretary S N Y D E R . Yes, sir; I have been continually. Senator D O U G L A S . Yet the purchase of large quantities of bonds by the Federal Reserve System leads to inflation, does i t not? Secretary S N Y D E R . I t contributes i n a degree. E M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 24" Senator DOUGLAS. Therefore, I should think you would be very fearful and be afraid that the Federal Reserve System might buy large quantities of these bonds. Secretary SNYDER. We have the practical problem of managing the debt, Senator. Senator DOUGLAS. Which takes precedence, the management of the debt or the maintenance of a stable price level? Secretary SNYDER. I think that they are interrelated. Senator DOUGLAS. But when they conflict which do you think is the more important? Secretary SNYDER. Y O U have to measure the conditions of the moment when you are making the decision—that is not a decision you make for all time. Senator DOUGLAS. That is, you might at certain times conclude that the management of the debt was more important than the maintenance of stable prices assuming the two are i n conflict? Secretary SNYDER. A t times I think that you w i l l find that i t might be. Senator DOUGLAS. I n a nonwar period? Secretary SNYDER. I d i d not say that. That is why I pointed out i n times such as we are faced w i t h now Senator DOUGLAS. D u r i n g a nonwar period, do you think the management of the debt is more important than the maintenance of a stable price level ? Secretary SNYDFR. I think that was the type of problem faced by the Employment A c t of 1946. Senator DOUGLAS. The Employment Act does not solve that problem. Secretary SNYDER. I know i t does not solve it. I t points up to us the real problem of meeting both inflationary and deflationary pressures, and put the problem right up to Congress and to the Treasury and to all of the Government. Senator DOUGLAS. A n d the way the Treasury solved i t is to look the issue squarely i n the face and say, " W e won't solve i t " ? Secretary SNYDER. I w i l l not project how we are going to handle all these issues i n the future. I certainly could not, Senator, not i n open session, unfortunately. Senator DOUGLAS. Then, since I am foreclosed f r o m discussing the future, is i t possible for me to discuss the past? Secretary SNYDER. That is right. Senator DOUGLAS. D i d not the purchase of securities, Government securities, by the Federal Reserve System after Korea, give rise to an increase i n (a) i n the reserves of member banks i n the Federal Reserve System, (h) increased loans by the member banks to private industry and individuals and (c) an increase i n the price level? Secretary SNYDER. I think we cover that i n answer 17 of the questionnaire. I w i l l be glad to prepare another Senator DOUGLAS. Would you reply to i t i n hearings? Secretary SNYDER. I would be glad to read that into the hearing, yes. Senator DOUGLAS. Answer 17 is quite an answer. I t extends over some pages. Secretary SNYDER. Yes, sir. M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 25" Senator D O U G L A S . I would like to ask you very briefly, did not the purchase of Government securities by the Federal Reserve System after Korea result i n an increase in bank reserves i n the Federal Reserve System ? Secretary S N Y D E R . I w i l l be glad to read this into the record. Senator DOUGLAS. M r . Chairman, I suggest that this is not an appropriate answer on the part of the Secretary. Secretary S N Y D E R . I want to suggest to the Senator that I have the responsibility to manage the debt, and I am going to be very careful how I answer each question. I want the best good to come out of these meetings. I am the person responsible for final decisions i n the management of the debt, except i n those cases i n which the issuance of securities is subject to the approval of the President. I must be extremely careful of everything I say Senator D O U G L A S . I am asking you about the past. Secretary S N Y D E R . Yes, s i r ; 1 want to give you exactly what happened i n the past. I don't want to rely on memory. Senator D O U G L A S . May I say for the record, the answer to question 17 began on page 50, and i t concludes on page 74. I s i t the intention of the Secretary to read 24 pages into the record, each page of which consists of approximately a thousand words ? Secretary S N Y D E R . Well, I w i l l add this sentence, substitute this f o r that. Of course, 17 is part of the record anyway and is available to the committee, but I would like to say here that at the start of the Korean invasion on June 25, 1950, the Federal Reserve System was selling bonds, continuing that policy which had been adopted i n November 1949, making bonds readily available as prices were marked down., F r o m November 1 9 4 9 , to June 2 1 , 1 9 5 0 , the Federal Reserve holdings of bonds declined approximately $ 1 , 9 0 0 , 0 0 0 , 0 0 0 . Senator D O U G L A S . Holdings of the Federal Reserve declined? Secretary S N Y D E R . Yes, sir. Ssnator D O U G L A S . F r o m June 1 9 5 0 ? Secretary S N Y D E R . F r o m November 1 9 4 9 , to June 2 1 , 1 9 5 0 . Senator D O U G L A S . Oh, well I am speaking of the period immediately after Korea, namely, f r o m J u l y 1 , 1 9 5 0 , on. Secretary S N Y D E R . Oh, Senator D O U G L A S . I S i t not true that after Korea the holdings of the Federal Reserve System of Government bonds increased f r o m 18.2 billions on June 28, 1950, to 22.2 billions on March 7, 1951, or an increase of 4 billions? These figures are found i n the report of the Federal Reserve Bulletin f o r May 1951, page 515, and i n the same, document, page 527, the figures on all bank loans are given. These loans increased f r o m 5 2 billions on June 3 0 , 1 9 5 0 , to 6 2 billions on February 28, 1951, and 63 billions on March 28, or an increase i n that time of 11 billions. That is, d u r i n g the 8-month period wheix there was an increase of $4 billion i n securities held by the Federal Reserve System, there was an increase of $11 billion or roughly 21 percent i n bank loans. D u r i n g the same period we also had an increase of 16.6 percent i n wholesale prices. Now was not the increase i n bank loans one of the reasons which permitted the increase i n wholesale prices to take place? Secretary S N Y D E R . I t could have been one o f the many reasons.. M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT 26" Senator DOUGLAS. Well, was i t not an important reason; i n fact, the important reason? Secretary SNYDER. Well, I would not say i t was the important reason. Senator DOUGLAS. What other important reason could there be? Here you have bank credit increasing by 21 percent, wholesale prices increasing between 16 and 17 percent. The inference seems to me obvious. When you increase the quantity of money i n relationship to goods, the price level rises. Secretary SNYDER. There was a general rushing i n to buy by the consumer. Senator DOUGLAS. Yes; but they could not have made these speculative purchases had they not been able to get the bank loans, and the bank loans would not have been obtained unless bank reserves had been expanded through the purchase of additional securities by the Reserve System. I t was the purchase by the Reserve System of the securities which made bank credit available for speculative purchasing. Secretary SNYDER. There was a tremendous amount of stored-up savings i n the business world that had no effect Senator DOUGLAS. These are not by any means all stored-up savings. These are loans, which made up the added monetary purchasing power. Secretary SNYDER. Loans were only a part of the picture. That is why I say that was not the whole matter. Senator DOUGLAS. I S i t not interesting that you have an increase i n the quantity of bank credit at about the same ratio as the increase i n the price level 9 Incidentally you w i l l find that the increase i n physical production and i n velocity roughly balanced each other at about 8 or 9 percent apiece. You can therefore throw those out. I t is the increase i n the quantity of money and credit that primarily caused the increase i n prices. Secretary SNYDER. I t was, of course, recognized that efforts must be made to curtail credit expansion. Senator DOUGLAS. B u t during this entire time the Federal Reserve System, under encouragement from the Treasury, was purchasing enormous quantities of Government securities. Secretary SNYDER. Well, the total holdings of the Federal Reserve i n Government securities today are not much different from what they were—they are really lower than at the end of the war finance period. Senator DOUGLAS. I am not speaking about the war. I am taking this critical post-Korea period, and I am pointing out that i n that period the Reserve purchased roughly $4 billion net of Government securities, building up member bank reserves. These increased member bank reserves i n t u r n permitted member banks to increase loans, which they d i d i n the total of $10 billion, that is up to March 1,1951. This would be an increase i n the quantity of credit of 19 percent w i t h prices increasing by about 17 percent during the same period. A n d when you increase the quantity of money i n relationship to goods, you increase the price level. Secretary SNYDER. Well, of course, Senator, i t is interesting to note that since the accord Senator DOUGLAS. Well, since the accord, quite right. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 27" Secretary SNYDER. B u t loans have gone up just the same since the accord—credit has not been cut off—and prices have leveled off. Tha£ is the point I was making. The statistics w h i ch support this statement are as f o l l o w s : Federal Reserve holdings of Government securities went up $1.6 b i l l i o n between February 28 and December 26,1951, and commercial bank loans went u p $4.8 billion. B u t wholesale prices went down d u r i n g this period—over 3 percent as measured by the Department of Labor's all-commodity wholesale prices index (900 commodities) and 15 percent f o r the 28 commodities included i n the Department of Labor's basic commodity index. Wholesale prices were, i n fact, beginning to show a tendency to level off at the time the accord was reached. The f o l l o w i n g tables give the figures i n d e t a i l : T A B L E 1. Federal Reserve holdings of Government bank loans securities and commercial [In billions of dollars] Feb. 28, 1951 Dec. 26, 1951 21.9 53.5 Federal Reserve holdings Loans of all commercial banks TABLE Increase 23.5 58.3 2.—Department of Labor index of all commodity wholesale 1.6 4.8 prices [1926=100] Week ended— Month 176. 8 1951—January February 178. 1 March 178. 7 April 180. 0 May 180. 9 182. 3 June July 183. 4 August 183. 3 September 183. 0 October 183. 5 November 183. 4 183. 9 December 183. 9 1951—Jan. 2 Jan. 9 Jan. 16 Jan. 23 Jan. 30 Feb. 6 Feb. 13 Feb. 20 Feb. 27 Mar. 6 M a r . 13 M a r . 20 M a r . 27 180. 1 183. 6 184. 0 183.6 182. 9 181. 7 179.4 178. 0 177. 6 178. 1 178. 3 177. 8 NOTE.—The weekly index covers a much smaller number of commodities (115) than the monthly index <900); it is used primarily to indicate the trend of price changes in the interim periods between the publication of the monthly figures. TABLE 3.—Department of Labor index for 28 basic [August 1939=100] Week ended— End of month 370.4 1951—Jan. 31 381. 7 Feb. 28 M a r . 30 385. 5 Apr. 30 389. 5 M a y 31 388. 7 388. 9 June 29 July 31 389. 7 Aug. 31 389. 2 Sept. 28 387.9 Oct. 31 385. 7 N o v . 30 379. 6 378. 4 Dec. 28 378. 4 97308—52——3 commodities 28 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 28" Senator DOUGLAS. Well, now just a minute. They had some idle reserves, that is the answer to that. They had unused reserves upon which they could expand. Secretary SNYDER. B u t the fact that the Fed. was not buying Government bonds did not stop Senator DOUGLAS. But the past purchases, particularly i n the winter, gave the banks reserves which they did not immediately use but which they could utilize i n the subsequent period. Secretary SNYDER. Well, we would have to analyze to see what those reserve holdings were. (The material subsequently submitted is as follows:) The table t h a t follows shows excess reserves of member banks weekly for t h e year f o l l o w i n g the outbreak of hostilities i n Korea. The figures fluctuated from, week to week, but there was no significant upward trend as a result of t h e expansion of the Federal Reserve portfolio d u r i n g the period. Member bank excess reserves [In millions of dollars] 1950 June 28 July 5 J u l y 12 J u l y 19 July 26 Aug. 2 Aug. 9 Aug. 16 Aug. 23 Aug. 30 Sept. 6 Sept. 13 Sept. 20 Sept. 27 Oct. 4 Oct. 11 Oct. 18 Oct. 25 Nov. 1 Nov. 8 Nov. 15 Nov. 22 Nov. 29 Dec. 6 Dec. 13 Dec. 20 Dec. 27 Excess Reserves 526 791 904 630 830 842 831 685 756 518 864 931 353 862 778 960 1,250 687 727 719 1,010 538 679 949 1,100 866 759 1951 Tan. 3 Jan. 10 Jan. 17 Jan. 24. Jan. 31 Feb. 7_. Feb. 14. Feb. 21. Feb. 28. Mar. 7_. Mar. 14 Mar. 21 Mar. 28 Apr. 4 Apr. 11 Apr. 18 Apr. 2;")_ May 2 May 9 May 16 May 23 May 30 Tune 6 Tune 13 Juno 20 June 27 Excess Reserves 1,191 1, 111 969 650 937 826 741 577 700 716 1, 042 577 488 646 987 1,116 694 456 563 766 291 306 863 1,070 840 538 Senator DOUGLAS. We could easily work that out by getting the figures on excess reserves by periods. I think that would show that the banks laid up for themselves reserves which they did not immediately use but which were available not only for the expansion i n credit between J u l y 1950 and A p r i l 1951, but after A p r i l as well. The only conclusion I can draw is that the Federal Reserve under Treasury stimulus was a big contributor to inflation during this period. Secretary SNYDER. Well, there are many other factors besides that. This is discussed i n question 17 of the questionnaire—page 69 of volume I . Senator DOUGLAS. I t was the chief contributor. Secretary SNYDER. I doubt it. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 29" Senator DOUGLAS. I n other words, according to you, the primary factor, the primary cause of inflation, is not the ratio between the total quantity between money and credit on the one hand, and total quantity of goods on the other, but some other element or elements ? Secretary SNYDER. I said I doubted that the Federal Reserve purchase of Government bonds was the important contributor to inflation, and I do say it. Senator DOUGLAS. M r . Secretary, the purchase of these Government bonds increased member bank reserves by $4 billion. That would theoretically enable them to loan out from $20 billion to $24 billion more of credit, and you said that was their tendency, being unwilling t o leave idle lending capacity. They actually increased their loans by $10 billion during the same period, increasing from 52 to 62 billions, an increase of 19 percent. They have expanded total loans $6 billion more since then, or have expanded the total quantity of credit by $16 billion, an increase of about 30 percent since Korea. Now how can you avoid the conclusion that i t was the purchase o f Government bonds during this period which was a primary factor that led to inflation, or that i t was the main cause ? Secretary SNYDER. I don't consider i t the main cause. Senator DOUGLAS. What would be the main cause then i f this is not ? Secretary SNYDER. I think the general attitude, the scare buying. Senator DOUGLAS. B u t the scare buying was financed by credit. Secretary SNYDER. B u t not entirely by credit created this way, not by a long shot. Senator DOUGLAS. B u t partially by this. Secretary SNYDER. Well, partially, I am w i l l i n g to admit partially, but i t was not the important cause. This matter was discussed i n the answer to question 17 of the questionnaire submitted to the Secretary of the Treasury by the subcommittee, as f o l l o w s : ' The p r i m a r y cause of the inflationary situation, throughout the entire postw a r period, was an unprecedented demand for goods by business and consumers generally. Before Korea, individuals bought goods to f u l f i l l the stored-up demands which had resulted f r o m the shortages of W o r l d W a r I I ; and industry replaced and expanded plant and equipment i n order to meet c i v i l i a n peacetime needs. A f t e r Korea, individuals and businesses, remembering the shortages o f W o r l d W a r I I , bought goods i n anticipation of shortages i n the defense p e r i o d ; and requirements f o r materials and goods were also stepped up sharply i n order to meet the expanded m i l i t a r y needs of the period. Some of these purchases were financed by an expansion of bank credit—but not a l l of them, by any means. Bank credit, for example, accounted for only about one-tenth of the 1950 financial needs of business corporations." Senator DOUGLAS., I n other words, i t was not an important cause of inflation. Secretary SNYDER. I said not the important. Please don't let's get my words mixed up, Senator. I have a hard enough time w i t h them as i t is. Senator DOUGLAS. I have some trouble, too. Secretary SNYDER. I t was a partial cause, but when you had to measure what the other side of the picture would have been. Now how would you have prevented the banks from going to the Federal to sell their bonds? Would you have risked letting the price of the bonds go to the bottom ? Senator DOUGLAS. Then you say i n order to maintain the price of the bonds the Federal Reserve should have purchased ? M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 30" Secretary S N Y D E R . N O , I am just asking you how would you have prevented it. Senator D O U G L A S . I am asking you, M r . Secretary. Secretary SNYDER., Y O U seem to be bringing up the point. I said I don't t h i n k i t caused i t , but we have to have the other side of it. Could you have prevented—by any measure that you took—the creation of a considerable amount of credit, and might not other steps that might have been taken by the Federal Reserve and the Treasury been somewhat more disruptive than what was done ? Senator D O U G L A S . Well, when the Federal Reserve ceased purchasing unlimited quantity of bonds, I believe you and others said that this policy would occasion a great f a l l i n the price of the bonds. Secretary S N Y D E R . N O , sir, I don't think you w i l l find I ever made such a statement. Senator D O U G L A S . You were fearful of i t , were you not ? Secretary S N Y D E R . I don't think you w i l l find I ever made that statement, because prudence would tell me, as Secretary of the Treasury, who was responsible for debt management, not to make such statements. Senator D O U G L A S . What is all the shooting about then ? Secretary S N Y D E R . Well, I don't know. Senator D O U G L A S . Well, I don't know either at this point. Secretary S N Y D E R . Y O U are holding the guns, I am not. Senator D O U G L A S . I f you didn't think there was any danger of the price of bonds f a l l i n g disastrously, then why should the Federal Reserve System be compelled to purchase them ? Secretary SNYDER., I would be very interested i n t r y i n g to find wherever I made such a statement, because prudence would tell me not to go out scaring people about the United States bond market. Senator DOUGLAS. Well, i f you did not make such a statement, certain other highly placed men i n the Government d i d make it. Secretary S N Y D E R . O f course, I don't control the voice of the Government. Senator D O U G L A S . Well, then you think that i t is not necessary for the Federal Reserve Board to purchase the bonds i n order to maintain the price Secretary S N Y D E R . I don't think I ever made that statement, either. Senator DOUGLAS. Then what have you said, or has this been an exercise i n t r y i n g to conceal your meaning from congressional committees? Secretary S N Y D E R . N O , i t certainly has not been, but there has been such free conversation about what I have or haven't said, I think Senator D O U G L A S . D O you think i t necessary for the Federal Reserve Board during this 8-month period following Korea to have purchased large quantities of Government bonds i n order to maintain their price? Secretary S N Y D E R . The Federal Reserve open market committee had to meet their responsibilities i n assisting the Treasury to maintain the Government's financial operations. Senator DOUGLAS. Answer yes or no. Do you think they should have purchased these bonds during the period ? Secretary S N Y D E R . I think the operation was necessary. Senator D O U G L A S . Y O U believe that i t was necessary ? Secretary S N Y D E R . Yes, sir. M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 31" Senator DOUGLAS. Even though i t occasioned this inflation ? Secretary S N Y D E R . I did not say i t occasioned the inflation. I again want to be sure that I did not admit that, sir. I t may have had a partial effect on it, yes, sir, but then we had to measure the partial effect on the other circumstances. Senator DOUGLAS. The effect i t had on inflation according to you was not as bad as the beneficial effect of maintaining the price of Government bonds. Secretary S N Y D E R . Of not only the Government bonds, but the whole stability of the financial system. Senator DOUGLAS. Has the United States come to such a pass that its securities need artificial support? Again I ask, are not the product i v i t y of the country, the degree of financial soundness of the country r and some adjustment of interest rates sufficient to provide a market for Government bonds without "pegging" the market through Federal Reserve purchases? Secretary SNYDER. I just want to recall what happened after W o r l d War I . We have got to consider that. Senator DOUGLAS. I believe we have heard of that. Secretary S N Y D E R . I think we have heard it, too. I certainly have* Senator D O U G L A S . Mr. Secretary, are the bonds that you issue now the same as were issued during the first world war ? Secretary S N Y D E R . N O , they have all been liquidated. Senator DOUGLAS. N O W , Mr. Secretary Secretary S N Y D E R . Y O U asked a question. I am going to have to reply. Senator D O U G L A S . Y O U reply as the State Department commonly replies. Now, Mr. Secretary, what about the differences i n the types of savings bonds which are issued now—Series E, F , and G as compared to then ? Are those redeemable ? Secretary S N Y D E R . Yes, they are redeemable. Senator D O U G L A S . Can be cashed i n at any time ? Secretary S N Y D E R . Yes, sir, at any time after they have been held a stated minimum period. Senator D O U G L A S . A t any time? Secretary S N Y D E R . That is correct. Senator D O U G L A S . A n d at what price? Secretary S N Y D E R . There may be some notice period. Senator D O U G L A S . A t what price? Secretary S N Y D E R . A t a stated price. Senator D O U G L A S . A t par, isn't that true? Secretary S N Y D E R . A t a stated price on the back of the bond. Senator D O U G L A S . A t par. Secretary S N Y D E R . Well, that is not exactly correct. Senator D O U G L A S . I s i t not 99 44/100 percent correct? Secretary S N Y D E R . I would have to look on the back of the bond and see how old i t was and so on. Senator D O U G L A S . A S a general rule are they redeemable at par or are they not redeemable at par ? Secretary S N Y D E R . A t maturity they are redeemable at par. Senator DOUGLAS. Were the bonds i n W o r l d War I redeemable at par? Secretary S N Y D E R . A t maturity they were. 32 M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 32" Senator DOUGLAS. Were they redeemable by the Government at par? Secretary SNYDER. A t maturity, yes. Senator DOUGLAS. What about the terms of maturity ? What about the difference i n time ? Secretary SNYDER. We had not developed the savings-bond plan i n World War I . Senator DOUGLAS. Precisely so. I n other words, the length of mat u r i t y was a long, long time. Secretary SNYDER. B u t we are not talking about savings bonds. We are talking about the whole Government security market. Senator DOUGLAS. Well, that is an important element. Secretary SNYDER. Yes; very important. Senator DOUGLAS. One argument which was commonly used as a justification for supporting the bond market was that you do not want bonds to f a l l to 82. There is no prospect that E, F , and G bonds would f a l l to 82, since they have short-time maturities which would come due quickly and would be redeemable at par at those times. Secretary SNYDER. I was not referring to the savings bonds. Senator DOUGLAS. What were you referring to ? Secretary SNYDER. T O the whole Government financing picture when we were talking about where bond prices might go. Senator DOUGLAS. What were the other elements i n this picture? Secretary SNYDER. The savings bonds don't enter into this Federal Reserve matter that we are talking about because the Federal doesn't buy savings bonds. I t is the other securities of the Government. Senator DOUGLAS. Suppose the Federal Reserve had not bought the securities; what would have happened ? Secretary SNYDER. That is what I brought up. Senator DOUGLAS. What would have happened ? Secretary SNYDER. I don't know. Senator DOUGLAS. When the Federal Eeserve stopped buying unlimited amounts of securities i n A p r i l , did anything catastropic happen? Secretary SNYDER. Of course, a long march of time had taken place between the beginning of Korea and when the Senator DOUGLAS. D i d anything catastropic happen when the Reserve stopped buying Government bonds ? Secretary SNYDER. N O ; i t has worked out very well. Senator DOUGLAS. Y O U hope i t w i l l continue, do you not ? Secretary SNYDER. I hope i t continues to work well. Senator DOUGLAS. Y O U hope that the Federal Reserve System w i l l not be committed to purchase bonds i n unlimited quantities i n order to support the Government bond market ? Secretary SNYDER. I hope that conditions w i l l permit t h a t ; yes, sir. Senator DOUGLAS. That is a consummation devoutly to be desired. Now, I am more interested i n the future than i n the past, but on pages 72 and 73 of your reply you make very serious charges against the Federal Reserve System. You imply that on three occasions the Federal Reserve System broke f a i t h w i t h you. That is the implication which I drew f r o m your statement. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 33" First, on page 72, i f you w i l l consult your reply, i n speaking of the summer of 1950,1 read: The terms of the issue were approved by the President; and the Chairman of the Board of Governors assured the Treasury of the f u l l cooperation of the System i n the refunding operation. On the first t r a d i n g day after the announcement of the new issue was made, the Federal Reserve permitted the market to go off sharply, notwithstanding the fact t h a t the issue had been proposed by the Federal Reserve and the Chairman of the Board of Governors had assured the Treasury of the System's f u l l cooperation. T h a t is equivalent, I think, to a charge of Secretary SNYDER. I w i l l just ask the staff to read into the record, i f I may, the report. I am not t r y i n g to change any figures. Representative PATMAN/We w i l l identify the person who is doing the reading, M r . Secretary. Secretary SNYDER. Assistant Secretary Overby. M r . OVERBY. M r . Chairman, may we introduce into the record this statement: H o u r l y quotations on United States Government securities and W o r l d Bank bonds—we are not talking about W o r l d Bank bonds here—for November 24, 1950. Senator DOUGLAS. J u s t a minute; are we speaking of the same t h i n g ? M r . OVERBY. T h a t was the first trading day after the announcement. Do you wish me to read this, M r . Chairman ? Senator DOUGLAS. Yes; I would appreciate it. Representative P A T M A N . GO r i g h t ahead. M r . OVERBY. There are quite a few issues, sir. Secretary SNYDER. Show i t to the Senator so he can see the nature of it. Representative P A T M A N . Suppose you let Senator Douglas see it. (The document above referred to is as follows:) Hourly quotations on U. S. Government securities and World Bank bonds,1 Nov. 24, 1950 Previous close Treasury bonds: 1 Yi% 1950 2 2%% 1951-54 2% September 1951-53 3% 1951-55 2H% 1951-53 2% 1951-55 2 2H% 1952-54 2 2% June 1952-54 8 2 H % 1952-55 2.. 2% December 1952-54 2 2% 1953-55 2 H % 1954-56 1955-60 2 H % 1956-58 2 2 H % 1956-59 2 294% 1956-59 294% 1958-63.... 2H% June 1959-622 R 2 2H% December 1959-62 R._ 2 H % 1960-65 2h% 1962-672 R 2 H % 9163-68 2 R 2H% June 1964-69 2 R 2H% December 1964-69 2 R . 2 H % 1965-70 2 R 2H% 1966-71 2 R . . . 2H% June 1967-72 2 R 2H% September 1967-72 2 . . . . 2H% December 1967-72 2 R__ Certificates of indebtedness m% 1/1/512 Treasury notes: 1H% series B 7/1/512 1 H % series C 7/1/51 K 1H% series D 7/1/51 K 1 U % series E 8/1/51 2— 1H% series A 10/1/512. 1H% series F2 10/15/512 1 H % H/l/51 134% 3/15/54 2 1 W o 3/15/55 2 Treasury bills: 11/30/50 2.... 12/7/50 2 12/18/50 2.... 10 0.25% 100.29 100.12 101.16 101.06 100.15 101.05 100.20 100.31 100.25 102.05 103.25 107.02 103.25 102.26 108.17 110.15 100.23 100.22 113.01 102.27 102.04 101.20 101.14 101.10 101.09 100.26 104.05 100.26 100.04 1.10% 100.03 1.45% 1.45% 1.45% 1.46% 1.48% 1.49% 1.49% 99.07 99.15 99.06 99.14 Bid Ask 1.37%-1.18% 1.37%-l. 18% 1.37%-l. 20% 11 10:30 101.07 100.19 100.30 (+i) (+D 100.19 (-1) 104.00 (-D (-1) (-3) (-4) (-1) (-D (-2) (-2) (-1) (-1) (-1) (-1) (-1) (-1; (-1) (-5) 107.00 103.20 102.20 103.19 102.19 100.18 100.18 101.18 101.08 101.07 103.29 (-8) 100.02 (-D (-D 99.04 99.10 102.23 102.00 101.16 101.11 101.06 101.05 100.25 303.26 100.25 (-1) (-1) (-1) (-1) (-1, (-2) (-6) (-7) (-1) (-1) (-5) (-4) (-1) (-4) (-4) (-4) (-3) (-4) (-4) (-1) (-11) (-D 100.02 (-3) (-5) 1.03 100.02 (+HO (+i) 100.24 102.04 103.24 107.01 103.22 102.22 108.16 110.14 100.21 100.20 113.00 102.26 102.03 101.19 101.13 101.09 101.08 100.02 "i66:i2+(+Hi) 100.02 (+K64) 3 100. 12 (+D * 101.06 (+D 101.04 100.18 • 100.29 100.23 102.03 (-D 100.18 + ( - % 4 ) (-2) 100.24 (-1) 100.18 108.14 110.12 108.12 110.10 100.17 100.16 112.27 102.21 101.31 101.15 100.17 112.30 103.21 102.22 108.12 110.10 100.18 100.17 112.27 102.24 102.01 101.17 101.11 101.07 101.05 100.24 103.25 100.24 100.18 100.17 102.23 102.00 101.16 101.11 101.06 101.10 101.05 101.04 100.24 103.22 100.24 103.25 (~4) (-5) 9.11 (-4) (-4) 99.04 99.12 (-D -2) -1) -2) -2) -4) -5) -5) -5) -5) -6) (-3) (-3) (-?) 100.01 100.01 100.01 100.02 100.28 100.12 101.16 101.06 100.15 101.04 100.18 100.29 100.24 102.03 103.23 106.28 103.21 102.21 100.01 (-4) (-5) 3:15 (close) 2:15 12 100.02 100.03 ~m~i2+l+H4) CO (-2) (-3) 99.05 99.12 (-2) (-3) 12/21/50 12/28/50 2 1/4/51 a 1/11/51 * 1/18/51 2... 1/25/51» 2/1/51 2 2/8/51 2/15/51 2 2/23/51 2 World Bank bond: 3% 7/15/72 2... Federal land bank bonds: 2^% 2/1/53-55 2 l%% 10/1/55-57 2 1.37%-l. 229 1.37%-l. 249 1.38%-1.26°/ 1.38%-1.28<? 1.38%-l. 30*? 1.38%-1.30<L 1.39%-l. 31% 1.39%-l. 32% 1.39%-l. 32% 1.39%-l. 35% 102.14 100.16 98.14 1 Quotations with percent signs represent yields. All other quotations are prices, and the figures shown after the decimal points represent thirty-seconds of a point. minusfiguresrepresent net changes from close on previous day. 2 Taxable bonds. 3 Unchanged. R—Restricted bonds. Source: Office of the Fiscal Assistant Secretary. O Plus and hj O K 9 & 0 1 E Q O H td Hi CO Oi MONETARY POLICY AND M A N A G E M E N T OF P U B L I C D E B T 36" Senator D O U G L A S . Y O U are trying to establish the fact that the market fell sharply, I take it. M r . O V E R B Y . The market declined on that day, sir. Senator D O U G L A S . Which would you take as the best security—2%'s ? M r . O V E R B Y . I t was a 5-year offering, i f I remember the circumstances. Senator D O U G L A S . Would the 2 % ' S be air right? M r . O V E R B Y . Yes, sir; the 2y2's of 1956-58 give an indication of what happened i n the market generally. They were 103.25 at the close of the preceding trading day. Senator DOUGLAS. Suppose I take the 2%'s, 103.22 at 10 o'clock; at 10:30, 103.20; 11 o'clock, 103.19; 103.21 at the end of the day. That was a f a l l of four thirty-seconds, one-eighth of a point during the day. Would you say that was catastrophic? Secretary S N Y D E R . I don't think I said i t was catastrophic. Senator D O U G L A S . I n other words, that the Federal Reserve should not have permitted the market to f a l l by one-eighth of a point? Mr. O V E R B Y . On a short-term issue, that is of some consequence. Senator D O U G L A S . What you are saying in effect, therefore, since the Federal Reserve System acted improperly i n allowing a f a l l of oneeighth, they should not have allowed a f a l l at all. I think four-thirtyseconds is rather small. Now did you have an agreement w i t h the Chairman of the Federal Reserve Board that the Federal would purchase an unlimited quantity of bonds at the interest rates that you were issuing sufficient to maintain the price at the initial figure, 103.25 ? Mr. T I C K T O N . 103.25. Senator DOUGLAS. D i d the Chairman of the Federal Reserve Board pledge himself to purchase such a quantity as to maintain prices at the interest rates charged? Secretary S N Y D E R . I stand on the statement i n 17 that we were assured of cooperation. Senator DOUGLAS. Well, "cooperation" is a very vague word. That is one of the troubles here. You use the term "cooperation," but you may mean dictation. Secretary S N Y D E R . I don't consider i t dictation. There has never been any evidence of the Treasury since Senator D O U G L A S . D i d you understand the Chairman of the Federal Reserve Board to pledge that he would see that the Open Market Committee bought such a number of bonds as would maintain fixed prices at the interest rates at which you were issuing these ? Secretary S N Y D E R . Senator, you agreed w i t h me that i t would be a very fine thing i f we could continue the accord, and that is what I am going to t r y to do. I w i l l stand on this answer, and I am not going to expand. Senator D O U G L A S . Y O U wrote the statement. Secretary S N Y D E R . A n d I am going to stand on it. Senator D O U G L A S . What you say is that the Federal Reserve broke faith. Secretary S N Y D E R . I won't expand on that question, sir. I think i t is answered. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 37" Senator DOUGLAS. NOW on page 73 you refer to a conference between the Chairman, Board of Governors, the President and yourself i n January 1951. You say: A t this meeting the three of us—the President, the Chairman, and I—agreed t h a t market stability was desirable, and the Chairman again assured the President t h a t he need not be concerned about the 2^-percent long-term rates on Government securities. D i d the Chairman of the Federal Reserve Board on that occasion make a pledge that the Federal Reserve Board would buy an unlimited quantity of Government securities so that the interest rate need not rise above 2% percent and so that the price of Government securities wrould be maintained? Secretary SNYDER. I w i l l stand on the statement made i n the answer to the question there. Senator DOUGLAS. What is that, that the Chairman made such a pledge ? Secretary SNYDER. The words are there, sir. I w i l l stand on what is there. Senator DOUGLAS. "Need not be concerned." What do those words mean ? Secretary SNYDER. Well, what they mean is just what I have said right here, that "the Chairman again assured the President that he need not be concerned about the 2%-percent long-term rate on Government securities." Senator DOUGLAS. D i d you understand that to mean that he agreed that the Federal Reserve System would purchase an unlimited quant i t y of bonds so as to maintain the price ? Secretary SNYDER. I understood i t to be just what i t said here, and I stand on that statement. Senator DOUGLAS. Talleyrand said that words were used to conceal thought. I have always thought that words should be used to express thought, and i t is the lack of this quality which I find unsatisfactory i n your testimony throughout. Secretary SNYDER. I have the responsibility of t r y i n g to continue to manage the debt, and I am going to t r y to do that, sir. We are gett i n g along fine w i t h the Federal Reserve Board, and I want that to continue. Senator DOUGLAS. A r e you getting along fine w i t h an organization which already you have accused twice of practicing bad faith? Secretary SNYDER. Y O U are putting the interpretation i n there. Senator DOUGLAS. Let me go ahead and read this: I t was against this background that I made a speech on January 18, 1951, before the New York B o a r d of Trade, announcing this policy. The market strengthened f o l l o w i n g this speech. Then some officials of the Federal Reserve System began to differ publicly w i t h the policy. T h i s created f u r t h e r uncertainties i n the Government security market. A t about this time, also—on Janua r y 29—the Open M a r k e t Committee f u r t h e r reduced its buying price f o r V i c t o r y loan 2 ^ ' s — w h i c h was the most significant of the long-term Treasury issues— and so forth. Representative BOLLING. Would you yield there ? Senator DOUGLAS. Yes, sir. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 38" Representative BOLLING. M r . Secretary, when was the accord reached? Secretary SNYDER. March 4,1951. Representative BOLLING. I gather that the accord received a great deal of publicity as the basis of its being an elimination of friction. I t would be my impression that your desire would now be to maintain the good relations that had been obtained by the accord ? Secretary SNYDER. I t certainly is my desire and my intent. Representative BOLLING. A n d the purpose of the answer to these questions was to relate the history as you saw i t ? Secretary SNYDER. That is correct. Representative BOLLING. Thank you. Secretary SNYDER. The history as the facts were according to our records. Senator DOUGLAS. I would like to point out that I am merely aski n g questions on statements that the (Secretary has made to the committee which, by implication, charge bad f a i t h on the part of the Federal Resevre System. Secretary SNYDER. I stated the facts. You are putting i n the implication. Senator DOUGLAS. Bad faith, at any rate, previous to the accord. Secretary SNYDER. I stated the facts. You are putting i n the implication, sir. Senator DOUGLAS. I want to know whether there was a definite pledge by the Chairman of the Federal Reserve Board i n both of these cases to buy unlimited quantities of Government bonds i n order to maintain prices at the interest rates which you decided upon. That is the issue. I f there was such a pledge, and i f i t was not later honored, then the Chairman may have been acting i n bad faith, but there was not such accord, then I don't think these statements should be made. O f course there is also always a question as to the degree to which the Chairman can commit the Board itself. You raised this issue, M r . Secretary, and we are simply t r y i n g to find out the facts. Secretary SNYDER. I simply related the facts as requested by the questionnaire, and there they are. I am not going to expand on them, w i t h the permission of the chairman. Senator DOUGLAS. I ask for a ruling by the Chair. Representative P A T M A N . What is your question that you stated is not answered properly, Senator Douglas? Senator DOUGLAS. I asked whether the Secretary asserted that the Chairman of the Federal Reserve Board had promised to purchase an unlimited quantity of bonds i n the open market i n order to maintain prices at the interest rates fixed by the Treasury on those securities. Representative P A T M A N . Obviously the session w i l l last into the afternoon. I would like for you to pass that over for the present and continue your interrogation. Senator DOUGLAS. The t h i r d question involves the point that is i n the t h i r d paragraph on page 73: About this t i m e a series of conferences was held between t h e Treasury, t h e Chairman of the Board of Governors, the chairmen of the t w o banking committees i n Congress, and the chairman of the Joint Committee on the Economic Report. I t was generally agreed between the parties involved t h a t there should be no change i n the existing situation i n the Government security market, and no congressional hearings held on differences between the Treasury and the Fed- MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 39" e r a l Reserve, f o r a short period w h i l e I was i n the hospital recuperating f r o m a n eye operation. Shortly after these meetings, however a change i n the Federal Reserve a t t i tude began to be apparent; and the Chairman of the Board informed the Treasury that, as of February 19, the Federal Reserve was no longer w i l l i n g to m a i n t a i n the existing situation i n the Government security market. Now that is an implication that the Federal Reserve went back upon the promise, went back upon a general agreement that there would be no change i n the governmental bond market. Secretary SNYDER. I have answered i t i n I T . Senator DOUGLAS. D i d the Chairman of the Federal Reserve Board i n the conferences which were held agree that the Reserve Board would purchase an unlimited quantity of Government bonds i n order to maintain prices at the interest rates charged by the Treasury ? Secretary SNYDER. I stand on the answer that is Senator DOUGLAS. That is a refusal to answer. Secretary SNYDER. I have answered i t i n the question. Senator DOUGLAS. N O ; you haven't. Secretary SNYDER. I am going to stand on the answer that is i n the question. Senator DOUGLAS. I interpret that as a refusal to answer, as I interpret the reply to the other questions. • Now, M r . Secretary, may I ask you about this advisory council which you suggest. You would have that advisory credit council composed of the Secretary of the Treasury, the Chairman of the Federal Reserve Board, Director of the Budget, the Chairman of the Council of Economic Advisers, and the Chairman of the Securities and Exchange Commission. Aside from the Chairman of the Federal Reserve Board, how many of these would be Presidential appointees? Secretary SNYDER. A l l of them. Senator DOUGLAS. A l l of them would be Presidential appointees. O f course, the Chairman of the Federal Reserve might himself be a Presidential appointee. Secretary SNYDER. I included him. I said all of them were. Senator DOUGLAS. But the majority of the members of the Board of the Federal Reserve System probably would tend not to be Presidential appointees, or might not be ? Secretary SNYDER. Well, all the members of the Board are Presidential appointees. I t may not be the incumbent. Senator DOUGLAS. Not the incumbent President? Secretary SNYDER. Maybe not by the incumbent President. Senator DOUGLAS. That is the point. Secretary SNYDER. That is right. Senator DOUGLAS. NOW suppose this advisory council decided that the Federal Reserve Board should purchase an unlimited quantity of Government securities i n order to maintain prices at the interest rates charged, and the Chairman of the Federal Reserve Board d i d not agree w i t h this. To what degree would the opinion of the advisory council be controlling? I believe you used the term "authoritative advice." Secretary SNYDER. Of course there is no one outside of the Federal Reserve Board that can force them to take any action. The Federal Reserve Board was set up by Congress and they make their finai determination. M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 40" , Now i t seems to me i t would be extremely valuable f o r everybody to sit around the table and talk about the problems that each one represents, the responsibility that each one represents, so that there would be a f u l l understanding of the problems that are faced by each, and that the decisions then would be made i n the face of the responsibilities of each. Senator DOUGLAS. I t might be an opportunity to twist the arm of the Federal Reserve System, too, might i t not? Secretary SNYDER. Certainly the Treasury gets its arm twisted enough, and I would be glad to pass i t around a little. Senator DOUGLAS. I do not want to have i t understood that I am necessarily opposing such a monetary council. B u t i t has great danger i n the f o r m now suggested. Secretary SNYDER. I think honestly, Senator, i t would be a very good thing. Senator DOUGLAS. B u t I do want to point out some of the issues involved, and I am curious by what is meant by your phrase, "This would have advisory authority." Secretary SNYDER. That is right. Senator DOUGLAS. I can understand its offering advice, but I do not quite understand the meaning of the phrase "advisory authority." W h a t do you mean by advisory authority ? Secretary SNYDER. Well, that term is used, "advisory authority" because that is the scope i n which i t would be used. Just offer advice about the various segments of the economy. Senator DOUGLAS. Well, then, why not strike the word "authority" f r o m your statement and simply say "offer advice" ? Secretary SNYDER. That is all right. Senator DOUGLAS. That is, you do not wish to have this body have any iron-clad authority. Secretary SNYDER. I t was not intended that i t should have. I t s only function would be advisory; each agency would still have aut h o r i t y over its own operation. Senator DOUGLAS. Suppose there is a clear conflict w i t h the rest of the Presidential appointees w r anting the Federal Reserve System to buy an unlimited quantity of bonds at fixed prices and given interest rates; and suppose that the Chairman of the Federal Reserve Board demurred; should he be a good fellow and cooperate and go along even though i n his judgment that w i l l mean inflation, or should he be lacking i n cooperation i n order to preserve the solvency of the count r y ? Cooperation is a mystic phrase. Secretary SNYDER. Well, I am sure that the Federal Reserve Board would react the same as all the other agencies. Senator DOUGLAS. Y O U mean that the Board would cooperate and agree to do what the rest wanted them to do ? Secretary SNYDER. I d i d not say that, sir. I said they would have to operate w i t h i n the scope of their own responsibility, but the decisions that they might make certainly might give some weight to the problems that are discussed around the table. Certainly that would fit w i t h i n the scope of the limits of their decisions. You could make a decision one way or another many times, but i f you have certain facts, i t may lead you to a sounder decision than i f you made i t without all of those facts. M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT 41" Senator DOUGLAS. I S this an attempt to create at this juncture a climate of opinion which w i l l make i t psychologically impossible f o r the Chairman of the Reserve System to purchase unlimited quantities Secretary SNYDER. Y O U are putting that thought i n my mind. I d i d not have i t i n there at the time I made this suggestion. I doubt i f I would use i t i f i t did occur to me. Representative P A T M A N . Senator Douglas, I have been determined to restrain myself and not interrupt at all, but I would like to suggest that you consider that this is comparable to the advisory group set up by the private commercial banks, is i t not, Secretary SnydeH Secretary SNYDER. Well, there are advisory groups all over the place i n addition to the Federal Advisory Council. The Commerce Department has an advisory group, the State Department has an advisory group, the Treasury has half a dozen advisory groups—or more. There is the National Advisory Council on International Monetary and Financial Problems. There are many groups of this nature, and they are extremely helpf u l i n sitting down and talking over the various problems. I t gives an opportunity i n an informal fashion to discuss things rather than have them brought up bilaterally or otherwise. Senator DOUGLAS. That finishes my questions, M r . Chairman. I want to thank you for the courtesy of permitting me to ask them, and to compliment you upon the fairness with which you have conducted the hearing. Representative P A T M A N . The question you have brought up, i f i t is all right w i t h you, the Chair w i l l wait u n t i l this afternoon to make a ruling upon. Senator DOUGLAS. Certainly. Representative P A T M A N . M r . Boiling? Representative B O L L I N G . M r . Secretary, I would like to have you keep i n mind that I was not a member of the former committee considering similar subjects. A r e there any substantial differences between Government bonds and other bonds ? Secretary SNYDER. I n what fashion? Of course, one of them has the f u l l credit of the Government behind i t and other bonds are limited to the resources of the organization, the instrument issuing them. Representative B O L L I N G . There is at least that one difference. Secretary SNYDER. Well, that is a very big difference, of course. Representative B O L L I N G . What, i n your judgment, would be the effect on the economy i f there should be a substantial f a l l i n g off of Government bonds ? Secretary SNYDER. That is a question I would like to answer i n executive session, because I am the one and only person that is responsible for the final decisions on debt management, except that the President must approve all offerings of issues having maturities over 1 year. To discuss things of that sort i n an open session—I cannot measure what the effect might be. Representative B O L L I N G . M r . Chairman, there may be a number of questions I w i l l want to ask i f not i n executive session, then for the committee to address a letter on further expansion of certain points. Secretary SNYDER. I think, M r . Chairman, you must bear i n mind that I do have that responsibility. 42 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT Representative P A T M A N . I assume the Secretary w i l l be glad to answer any questions written and sent t o him by correspondence. Secretary S N Y D E R . I do not want to withhold any information from the committee, but I do have to restrain myself i n answering questions that i n my judgment might have some effect on the general operation of debt management, because i t must be remembered I cannot possibly detach myself as an individual f r o m being Secretary of the Treasury. I cannot give personal opinions that would not be translated into the thinking of the Secretary of the Treasury, as much as I might t r y to do so. Representative B O L L I N G . M r . Chairman, I am very anxious to avoid putting the Secretary i n that position, and the other method w i l l be perfectly satisfactory to me. I would like to pursue this problem that Senator Douglas raised. I t may f a l l i n the same category as my first question, of the future. I am entering into this hearing w i t h a completely open mind, and I am interested i n the future, not particularly i n the past. I would like to make some assumptions so that this w i l l be theoretical. Let us assume that the Congress enacts legislation which w i l l provide for a substantial deficit. I assume also there is only one way i n which the Treasury can raise the money to take care of that deficit. I t w i l l have to borrow i t from some source. Secretary S N Y D E R . That is correct. Representative B O L L I N G . Granted the deficit, and the necessity of raising the money, what are the alternatives confronting the Treasury as to the question that Senator Douglas has raised ? D o you have any alternatives aside from those mentioned i n the relies to your questionnaire i n which you can borrow money without aving inflationary impact ? Is there any alternative except those of support through Federal Reserve activity to the bond market dropping off ? Secretary S N Y D E R . D O you mean outside of congressional action? Representative B O L L I N G . Yes, sir. Secretary S N Y D E R . Well, I think we have to carefully judge each one of the instances on the basis of the facts when i t comes to a refunding operation, or when i t comes to an offering of new money financing. I think we have got to measure i t against the whole economy at the time that that operation is undertaken, because i t changes from month to month. The last 6 months have seen a considerable change i n the general situation i n the economy. Representative B O L L I N G . What I am t r y i n g to get at is what are some of those factors you have to take into consideration aside f r o m those that have already been discussed. Secretary S N Y D E R . We have to take into consideration the supply of funds at the time—whether the normal investment groups have surplus cash on hand that is seeking investments. We have to consider the approach to attracting as much nonbank investment as we can. We have got to measure all of those. We have got to consider t r y i n g to attract savings. We have got to give all of those considerations very careful study i n order to t r y to meet the situation of keeping as much of this financing out of the bank area as we can. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 43" Representative B O L L I N G . Then suppose you i n your consideration i n this theoretical case discover that i n your judgment a very substant i a l amount of the borrowing is going to have to be borrowing through the banks, commercial banks and otherwise, what alternatives then do you face ? What alternatives do yon have ? You have the two that I see, obviously, of letting the bond market take its course in a free market, and you have the other one of support through Federal Reserve activities. Are there any other alternatives ? Secretary SNYDER. None. Representative B O L L I N G . I n other words, just the free market on the one hand, and a free market influenced by the Federal Reserve activities on the other hand. Those are the only two. Secretary S N Y D E R . Y O U mean assisted by the Federal Reserve, you mean i n their orderly market operations ? Representative B O L L I N G . Yes. That is all I wanted on that particular subject. M r . Secretary, you say i n your answer to question 34 on page 118, about a t h i r d of the way down the page: Holdings of series E savings bonds amounted to 34% billion on December 31, 1951. and I think somewhere else i t is indicated that that is about the highest level of series E holdings. I have before me a breadown of the cash sales and redemptions i n those bonds through that period and through 1951. There are obviously, I think, each month more redemptions than there are sales. I assume that the fact that this is the highest point, December 31,1951, is based on the very substantial amount of interest that accrued through that year. Secretary SNYDER. Well, actually the amount of cash investment i n savings bonds is as high today as i t was at the end of the war period after all of the stimulation of the war selling of savings bonds. The actual total of cash invested i n the bonds today, in the E bonds, is over $1 billion more than i t was at the end of the war. That is without the interest consideration, so the actual totals have been maintained and increased by over $1 billion since the end of the war. Analysis of series E savings bonds outstanding to show amount of cash investment and accrued discount [In millions of dollars] Month Year 1945 1946 1947 1948 1949 1950 1951 1952 Cash investment 29,455 29,298 29, 570 30,219 31.152 31.153 30,656 30,653 August December do do do_. do do.... February Accrued discount 449 964 1,427 1,970 2,614 3,340 4,072 4,373 Amount outstanding 29,905 30,263 30,997 32,188 33,766 34,493 34,727 34,826 NOTE.—May not add to total amount outstanding due to rounding. Representative B O L L I N G . M r . Secretary, I am curious as to your opinion—and this again may f a l l into the other area—I am getting the 97308—52 4 M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 44" impression from the origin of A bonds i n 1935 and their modification to E bonds of a later date, that the desire was to make E bonds sufficiently attractive to small uninformed investors so that i t would be easy for people to have confidence and buy them. That that was done because i t was assumed that this class of borrowing was actually deflationary rather than inflationary. Secretary SNYDER. I n 1941 when we were entering upon defense financing prior to W o r l d War I I , the E bond was designed to help drain off the surplus earning power of the public as we began to draw more of the materials and labor out of production for peacetime domestic consumption and put i t into defense and war production. I t had a dual purpose during the war of helping to finance the war deficit, and also as a very material assistance i n controlling inflationary trends. Representative B O L L I N G . This is one method of financing a deficit that is actually somewhat deflationary. Secretary SNYDER. That is what ? Representative B O L L I N G . Somewhat deflationary. Secretary SNYDER. A n anti-inflationary method, certainly. Representative B O L L I N G . M r . Secretary, I am curious for your opinion, i f you care to give i t — i f not i n open session, then otherwise—as to the relative position of an E bond today as compared with an E bond at the date of its inception i n relation to interest, and so on. I gather that i t was intended to have a favorable position. I wonder whether i t now does have a favorable position. Secretary SNYDER. Y O U mean competitive position ? Representative B O L L I N G . Yes. Secretary SNYDER. Well, I think that there were many things that entered into the original design of the E bond. We have always got to consider carefully the competitive position of the E bond; we can't get i t too competitive because we have got to have the support of all investment groups i n supporting the distribution and the sale of it. That is correct, but we have certainly got to consider carefully at all time the attractiveness of the bond to the purchaser i n every fashion— i n its liquidity and its ease of purchase, its ease of liquidation and the general confidence of the people i n the instrument itself. Representative B O L L I N G . I haven't added up these monthly figures that I have, but they indicate a very substantial redemption over purchase for the year 1951. Secretary SNYDER. Well, by January and February of this year that trend had changed quite a bit i n the E bonds. Representative B O L L I N G . I don't have the figures for E alone for January and February. Secretary SNYDER. I n the F's and G's i t d i d not hold true, but in the E bonds, sales were up i n January and February combined by 6 percent over the same 2 months of 1951, and redemptions were down by 9 percent over the same 2 months, so there was a change i n the trend there. M O N E T A R Y POLICY AND MANAGEMENT OF P U B L I C DEBT 45" T h e f o l l o w i n g t a b l e s h o w s sales a n d r e d e m p t i o n s o f s e r i e s E b o n d s i n J a n u a r y . a n d F e b r u a r y o f 1951 a n d J a n u a r y a n d F e b r u a r y o f 1 9 5 2 : Series E bonds [In millions of dollars] Change 1951 1952 Amount Sales: January February Total Redemptions including accrued interest: January. February Total Percent 343 272 364 288 +21 +16 +6.1 +5.9 615 652 +37 +6.0 448 362 406 334 -42 —28 -9.4 -7.7 810 740 -70 -8.6 Representative B O L L I N G . D O you feel that the change i n the trend is significant enough to indicate that as they are now is perfectly satisfactory or that the rather surprising net redemption in 1951 may require action further than has been taken already? Secretary S N Y D E R . That gets into the area that I would be glad to discuss in executive session, as to what we might or might not do w i t h the savings bond. I t is not a matter that we can discuss at this time because that might indicate an action that would have some effect on our markets. Representative B O L L I N G . I would want to follow that up i n another fashion. Representative P A T M A N . Mr. Wolcott? Representative W O L C O T T . Should we continue this afternoon ? Representative P A T M A N . Would 2:30 be satisfactory, Mr. Secretary ? Secretary S N Y D E R . A n y time you say, Mr. Chairman. Representative P A T M A N . The committee w i l l recess until 2:30. (Whereupon, at 12:15 p. m., the subcommittee recessed to reconvene at 2: 30 p. m. of the same day.) A F T E R N O O N SESSION Representative P A T M A N . The committee w i l l come to order. Mr. Wolcott, of Michigan, would you like to ask any questions? STATEMENT OF HON. JOHN W. SNYDER—Resumed Representative W O L C O T T . Very simple ones. Mr. Secretary, I think we all recognize deficit financing as a fundamental cause of inflation. Why is it ? Secretary S N Y D E R . I beg your pardon ? M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 46" Representative WOLOOTT. W h y does deficit financing cause inflation ? Secretary SNYDER. Well, the fact is that i t puts additional spending into the economy that is not compensated by drawing off a similar sum i n revenues and, therefore, we have an unbalanced budget, and there is more poured into the economy than is withdrawn f r o m it. Representative WOLCOTT. I S i t not also due to the fact that the debt may be monetized ? Secretary SNYDER. I beg your pardon? Representative WOLCOTT. I S i t also due to the fact that the debt may be monetized ? Secretary SNYDER. There is also danger of monetization of the debt i n deficit financing when you have to resort to bank financing of the new money needs. Representative WOLCOTT. I n the thirties the Congress and the administration collaborated in an effort to bring about inflation, and I think we were reasonably successful in creating inflation. We found i t advisable to continue inflation throughout the war as an easy means, of financing the war. Now, you w i l l recall that i n the thirties, somewhere, we changed the theory of the Federal Reserve Act i n respect to the flexibility of currency when we tied the volume of currency to debt. I t used to be that the Federal Reserve would create currency as i t was needed by business, and the needs of business were reflected largely by the commercial paper which was i n the banks. I s not that substantially correct? Secretary SNYDER. I think that is correct; yes, sir. Representative WOLCOTT. Then, as a means of pumping some more money i n our economic life line, we told the banks that they could put up evidences of Government debt as well as commercial paper, thereby divorcing the size or the amount of the currency from business needs. What I am leading up to is that we have accepted as a matter o f policy that we must keep our debt and the value of our money wedded. I n your discussions w i t h the Federal Reserve or w i t h anyone elser has any thought been given to the possibility of removing the influence which deficit financing has on the value of our money by sterilizing any part of our gold holdings or our bank-held Government debt beyond which the debt i n gold cannot be monetized ? Secretary SNYDER. I would like to prepare a reply to that one, M r . Congressman, please. Representative WOLCOTT. Just by way of foundation for the reply y i t is not as simple as this, but we have about 28 billion of currency now outstanding. Secretary SNYDER. That is correct. Representative WOLCOTT. Theoretically i f we wanted to put a ceiling on the amount of currency which could be issued at, we w i l l say,, 30 billion, w i t h 25 percent of gold and 75 percent of debt—you do not have to answer i t now, but this is just a background for your statement—could we provide that not more than a quarter of that or 7.5 b i l lion i n gold, and more than three quarters of it, or 22% billion o f debt—that would put a ceiling of 30 billion theoretically on the amount which could be issued? I t seems to me that this committee should be giving some thought to removing the influence which deficit financing, and the debt, have upon the value of our currency. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 47" Then, there are other things which we did i n the thirties to cause inflation. We reduced the gold reserve behind Federal Eeserve notes from 40 to 25 percent; we reduced the reserve of deposit liability from 35 percent to 25 percent; yet when the House in the Eightieth Congress restored those reserves to their respective 35 and 40 percent, somebody influenced the Senate against taking any action on it. Has the administration's opinion changed any i n that respect since then, do you know ? Secretary SNYDER. May I study that question and prepare a reply ? Representative W O L C O T T . I should like to be told that I was not stating the truth, but there are those i n the Congress who have been so unkind as to say i t was the studied policy of the administration— t o create inflation, and that i t is now the studied policy of the administration to maintain inflation. Otherwise i t would recommend an about-face i n the things which we once did to create inflation, among w7hich are the two that I have mentioned, and three or four other things which we did in the thirties and have continued since then to •create and maintain cheap money. Would i t not be well for this committee to give some consideration to a reversal of those processes by which we depreciated the value of the dollar? Secretary SNYDER. I w i l l include that i n my comments on the first two questions, M r . Congressman. (The material referred to is as follows:) The questions Representative Wolcott asked related p r i m a r i l y to Federal Reserve functions. Chairman M a r t i n of the Board of Governors was asked substantially the same questions when he appeared as a witness before the subcommittee and agreed to prepare an answer to submit to the subcommittee. Such a n answer has been prepared and I concur i n i t . I should like, therefore, to have i t inserted at this point i n answer to the questions which Representative Wolcott asked me. "The Federal Reserve Act as amended i n 1945 requires that each Federal Reserve bank hold reserves i n gold certificates equal to 25 percent against its Fede r a l Reserve notes i n circulation and against its deposits. I n the case of Federal Reserve notes, the l a w also requires that each Reserve bank shall pledge w i t h the Federal Reserve agent of its district collateral equal to 100 percent of the amount o f such notes i n circulation. Such collateral may consist of gold certificates, paper originating i n commerce, agriculture, and industry—that is, so-called eligible paper—or direct obligations of the United States Government. " P r i o r to 1945, the required reserve percentages were 40 percent of gold certificate reserves against Federal Reserve notes and 35 percent of gold certificates o r l a w f u l money against deposits. The main reason for the lowering was t h a t the gold reserve ratio had fallen significantly d u r i n g W o r l d W a r I I as a result particularly of the very large expansion of Federal Reserve notes i n circulation because of w a r t i m e demands f o r currency. This increased volume of money has remained i n circulation since the war. "The use of Government securities as collateral f o r Federal Reserve notes was authorized on a temporary basis by the Glass-Steagall Act of 1932 and was periodically renewed, and the authority was made permanent i n 1945. This provision was necessitated by the large-scale w i t h d r a w a l of currency f r o m bank deposits i n the early years of the depression, by the then reduced volume of eligible private paper i n Reserve bank portfolios, and by the desirability of Federal Reserve purchases of Government securities i n order to prevent the development of t i g h t money conditions during the depression. " I t would appear undesirable at this time to change either the legal reserve requirement regarding gold certificates or the legal collateral requirement regarding United States Government security holdings of the Federal Reserve banks. The legal provision permitting the Reserve banks to use Government securities as collateral f o r notes is necessary under present conditions, since the volume of commercial, agricultural, and i n d u s t r i a l paper now held by these banks would be inadequate for the purpose. Also, the provisions of law regarding the MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 48" reserve requirements of the Reserve banks are important i n enabling flexibility i n monetary management to meet changing conditions. "These legal provisions are not inflationary per se. Federal Reserve credit is not created j u s t because the basis for such creation is available. I t i s the duty of the Federal Reserve System to see t h a t Reserve bank credit is adjusted to the needs of the economy. Changes i n the volume of such credit outstanding are now determined mainly by actions of the Federal Reserve System i n accommodating the credit needs of consumers, commerce, agriculture, industry, and State and local governments, as w e l l as the Federal Government. Such actions are taken only after a careful review of the economic and financial situation i n the country at the time and after a f u l l consideration of their inflationary and deflationary implications. " A n automatic check on the expansion of Federal Reserve bank credit, such as would be imposed by an increase i n the r a t i o of gold certificates required against Federal Reserve notes and deposits would not be desirable. I t was i n p a r t to prevent a r b i t r a r y and mechanical limitations on the volume of bank credit and money, resulting f r o m too r i g i d a relationship between the credit and money supply and gold, that the Federal Reserve System was i n i t i a l l y established." Representative W O L C O T T . YOU, perhaps, w i l l recognize that this is a fetish w i t h me. Secretary SNYDER. I beg your pardon ? Representative W O L C O T T . Y O U will, perhaps, recognize that this is one of my fetishes. Secretary SNYDER. I did not hear what you said. Representative W O L C O T T . I say, you w i l l realize that this is one o f my fetishes. Secretary SNYDER. Yes; but they are appropriate questions, as all are from the committee, and we would like to give a careful, studied reply to them. Representative W O L C O T T . Y O U mentioned in your statement that pressures were not quite as great as they had been—this is on page 5— and you say that there appears to be a l u l l at the present i n inflationary pressures, and you go on to say, of course, that i t is merely a lull,, indicating that we are on some sort of a plateau, a little below where we were a few months ago. What effect has "the accord," which you and the Federal Reserve reached, and the action which was taken by the Federal Reserve i n not supporting the Government-bond market and increasing the rediscount rates to 1% from i y 2 , and the issue by the Treasury of your 2%, which could not be monetized, what would you say—what influence have those things had upon easing the situation? Secretary SNYDER. Well, the raising of the rediscount rate had taken place prior to the accord. That took place i n August. Representative W O L C O T T . I guess that is right. Secretary SNYDER. Yes. Well, there has been, of course, a leveling off of inflationary pressures i n recent months. The cost index on a number of items has gone down, the pressure of large inventories has had some effect and has been i n some evidence as a depressant; the soft-goods area has had a depressing experience. I would say that we have been experiencing a l u l l i n inflationary pressures, and I think that we all give due weight to the accord for being one of the many factors that brought about this situation. O f course, the production capacity of the Nation had a great deal to do w i t h i t , too, i n being able to rise to the demands and supply much of the requirements, even under the increased volume of income. M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 49" I think that we can sum i t up by saying that the monetary steps that were taken were a part of the broad influence that brought about the situation we are experiencing now. I do feel that we must caref u l l y keep i n mind that as a result of defense spending inflation may become a trend again. Representative WOLCOTT. Would you care to comment upon what effect the reduction i n the value of the dollar of 46.15 percent i n the last 10 years has had upon the savings bond market? Secretary SNYDER. Well, on the E bond market over the whole postwar period, I do not think that the consideration of any change i n the purchasing value of the dollar had any particular effect. U p to Korea savings bond purchases were well maintained. There was some increase i n redemptions along w i t h increased withdrawals f r o m other types of savings i n the heavy goods buying experience that we had following Korea. I t has tapered off i n recent months, however. Representative WOLCOTT. When you say i t has tapered off, you mean the • Secretary SNYDER. The redemptions. Representative WOLCOTT. The redemptions ? Secretary SNYDER. A n d sales. Representative WOLCOTT. Since Korea ? Secretary SNYDER. The relationship between sales and redemptions has improved i n recent months. Representative WOLCOTT. What I am leading up to, since Korea the value of the dollar has dropped from 59 cents or 60 cents, somewhere along there, to its present 52.85. That has been the situation since Korea. I t has dropped down 6 points since Korea. Has that any effect upon your savings bond market? Secretary SNYDER. May I have you repeat the question? I just could not hear it. Representative WOLCOTT. What effect has the drop of 6 percent i n the value of our currency since Korea had upon your savings bond market? Secretary SNYDER. Well, the indication I gave this morning was that for January and February, the most recent months for which we have a record the sales had gone up percentagewise over the same months for last year, and the redemptions had decreased over the same period. So i t appears a corrective trend is being experienced. Representative Wolcott. There is not any question, is there, but what inflation has affected the market for Government bonds, especially i n the field of savings bonds ? Now, what incentive, excepting through stabilization of our economy, can we use to create a better atmosphere in which bonds can be marketed, except to increase the interest rates slightly ? Secretary SNYDER. M r . Chairman, may I ask the subcommittee, you and the subcommittee, this privilege—that anything that has to do w i t h future actions i n reference to securities of the United States Government—I be permitted to answer i n w r i t i n g for executive consideration ? Representative WOLCOTT. That is perfectly agreeable to me. Secretary SNYDER. Yes. Representative P A T M A N . That w i l l be all right. Secretary SNYDER. Thank you, sir. M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT 50" Representative WOLCOTT. We talk about these things so freely that I guess we do not respect your position i n that field. Secretary SNYDER. Unfortunately, as I said this morning, I just cannot detach myself from being Secretary of the Treasury, and as much as I would like to talk freely on my own sometimes, why Representative P A T M A N . That w i l l be eminently satisfactory, M r . Secretary. I have some questions along that same line, but I w i l l withhold them as you suggest. Secretary SNYDER. Thank you. Representative WOLCOTT. Would you recommend, as the President has, that we give the Federal Reserve additional power to increase reserves, reserve requirements? Secretary SNYDER. I believe that in answers 35 and 36 I addressed myself to that problem. I w i l l be glad to call attention to that answer. I t has already been submitted. Representative WOLCOTT. The problem seems to be that the Federal Reserve Board at the present time has been unable to agree upon the amount of authority which they are going to ask us for. I wondered, when the President i n the economic message asked for additional reserve authority, whether he and the Federal Reserve Board had come to some understanding in respect to the authority which they would ask for, how much they would ask for. Secretary SNYDER. I am not i n a position to answTer that. Representative WOLCOTT. Last year when we brought i t up i t was suggested that probably they would not have too much trouble i n getting a little more authority to have some more reserves, and my memory is that we could not get the Board to agree on how much they should ask for, and so no action was taken. Have there been any discussions i n respect to the restoration of these gold reserves that I mentioned behind the deposit liabilities issued by the Federal Reserve? Secretary SNYDER. That looks like an easy question to answer, but I would like to do i t i n writing. I say I would like to answer that one i n writing. Unfortunately, M r . Congressman, too many times when I have said that we have had, or have not had, discussions the remarks have been interpreted as meaning we have some plans. That is the reason why I am making that request. Representative WOLCOTT. Well, we are all against inflation; are we not? Secretary SNYDER. We can agree on that. Representative WOLCOTT. N O W , speaking for myself, and I w i l l not ask you for an answer to affirm my position, i t seems to me that i f we are against inflation, having created inflation legislatively i n the 1930's, the Congress could stop the inflation i f i t did an about-face and restored the powers and authority and the standards and guides that were i n existence i n legislation i n the 1930's before we changed them. Secretary SNYDER. Well, I think we would have to measure i t very carefully against conditions at that time and conditions today, and the problems facing us at both times before we could make a complete acceptance of the theory of reversal. Representative WOLCOTT. D O you think that we have got to accept inflation as a matter of permanent governmental policy ? M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT 51" Secretary SNYDER. I certainly hope not. We had up until last June an over-all balanced budget situation f o r 5 years, as you know—in fact, receipts exceeded expenditures by nearly $8 billion i n that period. I would be very hopeful that we can return to a balanced-budget situation as quickly as possible. Representative WOLCOTT. Thank you, M r . Secretary. I think that is all I have, M r . Chairman. Representative P A T M A N . M r . Secretary, I would like to ask you a few questions. I have two written out here that I think I w i l l read to you first. About a year ago prices suddenly stopped advancing. Since then they have declined slightly, at least at wholesale. Some of the pricecontrol people and some of the monetary people have taken pretty complete credit for this. Others think that i t was principally a natural reaction f r o m the post-Korean buying spree. What do you think about it? Secretary SNYDER. First, and most important i n my mind, was a leveling off i n consumer and business demand after the early rush to buy goods and stock large inventories after the outbreak of hostilities i n Korea. Largely, this was the result of a rapid increase in the output of consumer and other civilian goods before defense demands had created a shortage of materials—thereby easing the fear that there would be shortages such as prevailed i n W o r l d War I I . Coupled w i t h this has been an array of measures designed to alleviate particular areas of inflationary pressures. We have had priorities and allocations of scarce and strategic materials; Government production loan guaranties and loans to increase production for national defense needs; selective restrictions on credit i n areas such as consumer credit and realestate credit; the voluntary credit-restraint program; and price and wage controls—all of which have made an important contribution to the over-all problem of inflation control. Representative P A T M A N . Y O U have said that you favored some flexibility i n interest rates as an instrument f o r influencing inflationary and deflationary forces. Do you believe at the present level of interest rates on marketable securities that i t is suited to present conditions? W i l l you distinguish i n your answer between short-term and long-term rates? Secretary SNYDER. The present situation is one i n which we are experiencing a lull—inflationary and deflationary forces seem to be about i n balance. I n this situation, stability i n interest rates seems appropriate—in both the short- and long-term area. Representative P A T M A N . I asked you the next question i n w r i t i n g and you have submitted the answer. I t was, Could you present a table for the record,showing the change i n interest rates since the end of 1949 and tell us briefly what i t shows. Secretary SNYDER. We would like to put the answer into the record, the answer that I have supplied. Representative P A T M A N . Y O U gave me a letter on that, and without objection we w i l l insert that i n the record at this point. I t is quite interesting. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 52" (The document referred to follows:) EFFECT OF C H A N G E S I N INTEREST RATES ON T H E COST OF SERVICING T H E P U B L I C DEBT GENERAL STATEMENT OF T H E PROBLEM Interest costs are affected by four elements: (1) Changes i n the t o t a l amount of the debt; (2) the nature of the debt i n which changes occur; (3) changes i n composition of the debt resulting f r o m refunding operations; and (4) changes i n interest rates. There are five different classes of debt which must be considered in dealing w i t h interest costs: (1) Short-term marketable debt which currently is responsive to changes i n interest rates (e. g., Treasury bills and certificates of indebtedness) ; (2) longer-term marketable debt which reflects changes i n interest rates as the debt matures and is refunded; (3) nonmarketable debt w h i c h has been affected by changes i n rates, such as Treasury savings notes; (4) nonmarketable debt, the rates on w h i c h have not yet been affected by changes i n interest rates on other debt, such as United States Savings bonds; (5) special issues for t r u s t accounts which are affected by the over-all average rate of interest, viz., the Old-Age and Survivors Insurance Trust F u n d and the Unemployment T r u s t F u n d ; and (6) special issues which are not affected by changes i n the average interest rate, such as the National Service L i f e Insurance Fund. Increases or decreases i n interest rates affect interest costs to the Treasury on different types of debt i n different ways, and at different times. For instance, the interest costs on short-term marketable debt is more quickly affected by changes i n interest rates than the interest cost on long-term marketable securities, the nonmarketable debt, and the special obligations which are issued to trust funds and Government investment accounts. Changes i n interest rates I n Treasury bills are reflected more currently since they are rolled over every 91 days, but even here there is some overlapping of the effects of interest rate changes as between fiscal years. The amount of change i n interest costs as a result of increased or decreased interest rates cannot be determined merely by comparing total interest payments i n one fiscal year w i t h t h a t of another. One of the reasons for this is t h a t t h e fuU effect of a change i n the interest rate on actual expenditures is not reflected i n expenditures u n t i l the fiscal year following the one i n w h i c h the change i n the rate has occurred. This is generally true i n the case of securities which have a year or more to run. As an illustration, the interest on a 1-year certificate of indebtedness issued i n August of one fiscal year would not be payable u n t i l August of the following year. The same sort of situation occurs w i t h respect to securities, the interest on which is payable semiannually. For instance, a note or bond dated i n the first half of a fiscal year would carry only one 6-month interest coupon payable i n t h a t fiscal year, and a bond or note issued i n the second h a l f of a fiscal year would not have any interest coupons payable d u r i n g t h a t fiscal year. CHANGES IN INTEREST RATES D u r i n g the period f r o m December 31, 1949, to February 29, 1952, the interest rates on 90-day Treasury bills fluctuated between 1,076 percent and 1,883 percent. The latest issue i n December of 1949 was sold to yield 1.087 percent on a n annual basis, as compared w i t h a rate of 1.563 percent for the latest issue i n February of 1952, an increase of 0.476 percent. I f this increase i n rate should be applied to the t o t a l amount of 91-day Treasury bills outstanding on February 29,1952, the increase i n the annual interest cost on this segment of the debt would be $74 million. 1 The interest rate on an 11%-month certificate of indebtedness dated M a r c h 1, 1952, was 1% percent, as compared w i t h a 1-year rate of i y 8 percent i n December o f 1949, an increase of % percent. On the t o t a l amount of certificates of indebtedness outstanding on February 29, 1952 ($29 b i l l i o n ) , this would result i n an increase i n the annual interest cost of $218 million. On A p r i l 1,1951, as p a r t of the Treasury-Federal Reserve accord, the Treasury issued $13,574 m i l l i o n of 2% percent of nonmarketable bonds i n exchange f o r an equal amount of 2 y 2 percent marketable bonds of 1967-72. A n increase of V* per1 Does not include the t a x anticipation bills. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 53" cent i n the interest rate on this amount of bonds would amount to $34 m i l l i o n on annual basis. However, these bonds are exchangeable f o r 1 y2 percent 5-year marketable notes. Therefore, the effect of these exchange operations on interest costs w i l l vary f r o m year to year and w i l l be governed to a large extent by subsequent exchanges of the 2% percent nonmarketable bonds f o r the i y 2 percent marketable notes. The figures as of February 29, 1952, i n connection w i t h this exchange operation are as f o l l o w s : NOTE.—On February 29, 1952, the Federal Reserve System owned $22,528,000,000 of -Government securities, the annual interest on which amounts to $439,000,000. Since Federal Reserve banks r e t u r n to the Treasury 90 percent of their net earnings, a considerable portion of their interest earnings comes back to the Treasury. The net earnings paid to the Treasury for the calendar year 1951 amounted to $255,000,000. Amount outstanding 2% percent bonds llA peicent notes.. Total 2H percent bonds exchanged (annual interest). $12,034,000,000 1.540,000,000 13,574,000,000 Increase in annual interest cost. On March 1, 1952, the Treasury issued $922 m i l l i o n of 7-year taxable bonds carrying an interest coupon of 2% percent. I n December of 1949, the market yield <on a 7-year taxable bond was approximately 1% percent. A n increase of seveneighths of 1 percent on $922 m i l l i o n of securities would involve an increased annual interest cost of $8 million. Except for the above-mentioned bond the Treasury has not issued any marketable securities w i t h maturities of over 5 years since December of 1949. The market yields, however, on the long-term restricted Treasury bonds of December 15, 1967-72 increased f r o m 2.24 percent on December 31, 1949, to 2.72 percent on February 29, 1952, indicating t h a t long-term financing i n this area would have to be done at an increase of about one-half of 1 percent per annum. W h i l e the rate increases i n the long-term area have not yet been reflected i n Treasury interest payments, unless interest rates decline i n the meantime the effects w i l l be f e l t when m a t u r i n g issues are refunded and i n any long-term financing which may be conducted i n the present emergency. Increases i n interest rates appear to have affected the sale and redemption of Treasury savings notes, which are used to a large extent by corporations and others for the purpose of accumulating t a x reserves. I f these securities are to be kept attractive for investors, the interest r e t u r n must be kept i n line generally w i t h short-term market rates. Consequently, the interest rate on savings notes must be responsive to changes i n market yields, although there may be a time lag before a l l outstanding savings notes reflect such changes i n yields. The 3-year rate on Treasury savings notes was increased on May 15,1951, f r o m 1.40 percent per annum to 1.88 percent. This increased rate on savings notes has not yet been f u l l y reflected i n interest payments. Of $8,044 m i l l i o n of these notes outstanding on February 29, 1952, $2,039 m i l l i o n represents the older, lower rate notes. The average interest rate on the notes outstanding is currently 1.758 percent compared w i t h 1.360 percent on December 31, 1949, an increase of .398 percent. This represents an increase of $32 m i l l i o n i n the annual interest charge on savings notes, based upon the present amount outstanding. There are two other large areas of the public debt where material changes i n interest rates have not taken place. These are ( a ) the United States savings bonds, and (&) the special issues to t r u s t funds (e. g. Old-Age Survivors T r u s t F u n d and State Unemployment T r u s t F u n d ) . Sales of United States Savings bonds have held up remarkably well, particul a r l y among the smaller savers. The amount of outstanding Series E bonds (including interest accruals) on February 29, 1952, was $34,903 million, as compared w i t h $33,754 m i l l i o n on December 31, 1949. There are now approximately 7 m i l l i o n persons buying savings bonds regularly on payroll savings plans as compared w i t h 4y 2 m i l l i o n a couple of years ago. The number of $25, $50, and $100 denominations sold was $34,900,000 i n the first 7 months of the fiscal year 1950 and about the same number i n the comparable period of the fiscal year 1951. 54 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 54" Sales of these denominations increased to $40,500,000 i n the first 7 months of t h e fiscal year 1952. Present l a w l i m i t s the interest rate on such bonds to 3 percent per annum, compounded semiannually. Series E bonds now yield 2.9 percent, compounded semiannually, i f held to 10-year m a t u r i t y , so there is l i t t l e leeway f o r an increase i n the rate of interest which can be paid on these bonds under existing l a w . Series F and G bonds yield 2.53 percent and 2 y 2 percent, respectively, i f held to 12-year m a t u r i t y . There is another large segment of public debt on w h i c h the impact of higher interest rates has been only p a r t i a l l y reflected i n Treasury interest payments. They are the special obligations issued to trust funds. There are over $36 billion of such special obligations outstanding. The interest rates on obligations issued to two of these t r u s t funds (i. e., Old-Age Survivors T r u s t F u n d and Unemployment T r u s t Fund, amounting to over $20% b i l l i o n ) are, by l a w , based upon the average interest rate on the t o t a l outstanding public debt, except when the average rate is not a multiple of % of 1 percent, the interest rate on the special securities is fixed at the next lower multiple of % percent. A t the present time $20,775,000,000 of special obligations are held for account of the Old-Age and Unemployment T r u s t Funds, on which the average interest rate is 2.135 percent as compared w i t h $16,399,000,000 of special issues held for such funds i n December of 1949, a t an average rate of 2% percent. However, i t should be pointed out t h a t although the rate on special obligations currently being issued to these t r u s t funds is 2^4 percent, over $19 b i l l i o n of the special securities now held by the funds were issued when the average rate on the public debt was somewhat lower, and bear a rate of 2% percent. A t the end of this fiscal year a l l of the special securities held w i l l have to be reissued on the basis of the average rate on the public debt at t h a t time, which probably w i l l result i n a 2% rate on a l l o f the Old-Age and Unemployment T r u s t Fund obligations. A n increase of % of 1 percent on the special securities held for these funds would increase the annual interest charge by $26 million. Thus, i n considering the additional cost of servicing the public debt as a result of increases i n interest rates, care must be exercised i n appraising the long-run effects not only on the marketable debt as i t is refunded, but also on other categories. AVERAGE INTEREST RATES The amount of outstanding public debt, by classes and issues, and the rates of interest paid on the different issues, are published i n the D a i l y Statement o f the United States Treasury, as of the last day of each month. Copies of such statements as of December 31, 1949, and February 29, 1952, are attached. The average rates as of December 31, 1949, and February 29, 1952, are set f o r t h on the following page: Average interest rates Type of securities Marketable: Treasury bills Certificates of indebtedness. ISiotes Bonds. Nonmarketable Average for public issues Special issues General average Dec. 31, 1949 Feb. 29, 1952 Percent 1.090 1.219 1.375 2.316 2.581 2.145 2.617 Percent 1.683 1.875 1.561 2.322 2.638 2.261 2.608 2.208 2.310 W h i l e the foregoing figures are of interest as an indication of the changes i n average rates borne by interest-bearing securities outstanding now as compared w i t h December 31, 1949, they do not reveal the u l t i m a t e effect of the changes on t o t a l costs to the Treasury. LONG-TERM PROJECTION OF INTEREST COSTS As has previously been mentioned, i t w i l l take some time before the higher rates are i n f i l t r a t e d throughout the different segments of the public debt. N o t MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 55" only w i l l the increases i n rates be f e l t as m a t u r i n g issues are refunded but they w i l l also be reflected i n increases i n the costs of financing the budget deficits created by the defense mobilization program. I n the general statement I made before the Subcommittee on Monetary, Credit, and Fiscal Policies of the J o i n t Committee on the Economic Report, on December 2,1949,1 said t h a t — "Even a relatively small increase i n the average interest rate on the debt w o u l d add a substantial amount to the t o t a l annual interest cost. I t is estimated h a t the interest on the debt w i l l amount to $5.7 b i l l i o n i n the calendar year 1949. About $l 1 / 4 b i l l i o n would be added to this amount i f the average interest rate were one-half of 1 percent higher." No one can accurately predict the movement of interest rates i n f u t u r e years. There is a possibility that rates w i l l f u r t h e r increase and at the same time i t must be recognized t h a t economic conditions i n the f u t u r e could produce lower interest rates. Likewise, i t cannot be determined now w h a t changes w i l l take place i n the f u t u r e i n the composition of the public debt. A t the present time the t o t a l amount of interest-bearing debt outstanding, f o r the purpose of computing an average interest rate, is about $258 billion. The average interest r a t e has increased f r o m 2.208 percent on December 81, 1949, t o 2.310 percent as of February 29,1952. I f this increase of 0.102 percent should be applied to the t o t a l amount of interest-bearing debt outstanding at the present time, mentioned above, the increase i n the computed annual interest change w o u l d be about $262,815,000. I f the over-all average rate should eventually be increased by one-fourth of 1 percent, the increase i n the annual interest charge would amount to about $645,000,000, and i f the over-all rate should be increased by one-half of 1 percent, the increase i n the annual interest charge would be about $1,290,000,000. On the other hand i f i n the f u t u r e the average interest rate should decline by one-tenth of 1 percent (based upon a $258 b i l l i o n interest-bearing debt), the reduction i n the annual interest charge would be about $258 m i l l i o n ; a reduction of one-fourth of 1 percent i n the average rate would result i n the annual interest charge being reduced $645,000,000; and a reduction of one-half of 1 percent would result i n decreasing the annual interest charge by $1,290,000,000. Representative P A T M A N . Y O U stated i n reply to the questions that have heretofore been submitted to you, M r . Secretary, that you favor an independent Federal Reserve Board. I wish you would enlarge on that by stating independent of whom and independent of what ? Secretary SNYDER. Well, I considered my statement to be that I preferred to see the Federal Reserve Board remain an independent agency due to my high regard for the purposes f o r which i t was created, and for the important influence that i t can have, and does have, on o]ir whole fiscal operation and monetary operation. The Federal Reserve Board has a most important function to fulfil, and I would like to have i t preserved i n the framework i n which i t was created. However, i n these times, w i t h our radidly developing economy, which has grown to the size that i t has, and when our national debt has grown to the size that i t has, Federal Reserve actions must be appraised i n the light of these different circumstances. The Federal Reserve has undertaken, at the direction of the President, on several occasions to take over certain functions, such as regulation X i n the real-estate field, and two or three other functions that have pretty well tied i t into Executive direction. These actions were certainly w i t h congressional sanction, and so i t becomes apparent that the Congress realizes that this absolute independence must be temperate at times—in light of existing conditions—to meet the tremendous problem of t r y i n g to maintain the well-being of our over-all economy. B u t you asked independent of whom and of what? I n a general way, I do not think that the Federal Reserve should take any direction or dictation f r o m anyone. B u t I think many times, of necessity, to carry out the functions as given to them, and the responsibilities as M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 56" given to them—by Congress—that the Federal Reserve certainly must measure carefully the conditions and the times and the problems facing the Nation at the time they make decisions. Now, i f that is an influence that somewhat tempers their absolute independence of action, then I think i t must be tempered to that extent. B u t so far as not having any dictation or direction, that is thetype of independence that I said I would like to see preserved. Representative P A T M A N . I n the beginning of your answer you stated that ycu would like to see it kept w i t h i n the framework i n which i t was created. I understood you to say that, M r . Secretary. Secretary SNYDER. That was right. Representative P A T M A N . That being true, as the act was created* the Secretary of the Treasury was Chairman of the Board and the Comptroller of the Currency was on the Board and then, of course, and for many years afterwards the public debt was not very large, and i t was not too important that these two officials be on the Board* probably, to carry out an independent administrative job. B u t do you believe that this law should be changed now and restored to the framework of its original creation by restoring the Secretary of the Treasury as Chairman of the Board, and placing on the Board the Comptroller of the Currency? Secretary SNYDER. Well, 1 meant when I said "created," I meant created and developed, of course. Now, as to whether or not the Comptroller or the Secretary of the Treasury should be on that Board or not is a matter for careful deliberation. A t times i t would appear that there would be a very good advantage i n having one or the other—I do not know whether i t is» necessary to have them both or not, or whether i t is necessary to have either or not. I n the discussion of how we should answer the questionnaire, we discussed that matter freely. I have not suggested, however, i n answer to your questionnaire,, that such legislation be considered—that the Secretary be put back on the Board. As a matter of fact, I specifically said, as I study i t today, that I do not see the necessity for any legislation at this time to give the Treasury more authority over the Federal Reserve Board—I think that we are going to work this out w i t h i n each agency's own responsibility. Representative P A T M A N . Being more specific, you are opposed to the executive having any direct power to direct the Federal Reserve Board to do anything, and you are also opposed to the commercial banks, on the other side, having any direct power to direct the Federal Reserve Board to do anything. Your views, I assume, are that the original act contemplated t h a t the public interest should be looked after first, and that neither the President nor the commercial banks would absolutely control the Board. Secretary SNYDER. Yes, sir. I feel that way, and that was the thought that prompted the recommendation that would bring about a better chance for consultation and discussion, so that the whole situation at any one particular time could be freely discussed on an advisory capacity basis, advising as to facts and other relevant considerations, rather than having any legislative action. Representative P A T M A N . That is the reason you suggested the coordinating agency that you suggested, I believe, on page M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 57" Secretary SNYDER. Well, I did not call i t coordinating Representative P A T M A N . I called i t that. Secretary SNYDER. Yes. Representative P A T M A N . I mean something along that line to get the people around the table to coordinate their views and get consideration. Secretary SNYDER. I call i t advisory. Representative P A T M A N . A n advisory committee. Secretary SNYDER. Yes. Representative P A T M A N . Does i t not compare i n many ways w i t h the advisory group that is set up by the commercial banks ? Secretary SNYDER. Well, i t does because they have no coordinating authority, as I understand it. Representative P A T M A N . What I mean is that Secretary SNYDER. But they have an advisory capacity. Representative P A T M A N (continuing). They have an advisory committee, as they should have, to get their views over to this, what you might call a, supreme court of finance. On the other hand, the Government, as you suggest, should have some way—the people who are interested and the heads of these different departments and, particularly, the Secretary of the Treasury should have some way—of getting his voice heard and getting his views considered, although he would not have the power to direct that they be carried out. Secretary SNYDER. Well, wf, have found that such advisory groups have been extremely beneficial to the Treasury i n its operations and in its responsibilities. We have found that such discussions, i n many of which we sit side by side w i t h Federal Reserve representatives, are very beneficial and helpful. Representative P A T M A N . I agree w i t h you that the Executive should not have the power to direct the Federal Reserve Board or the Federal Reserve banks to make loans or anything like that; that is way beyond anything that I would even dream of. I do not think that that power should even be thought of, to give any Executive that power. B u t what I am wondering about is whether or not the public interest is paramont at all times i n view of the present set-up, and I expect to t r y to get some light on that as we go along i n these hearings. I know at first when the Comptroller of the Currency, selected by the President, and the Secretary of the Treasury, i n the Cabinet selected by the President, when they were on that Board there was no question but what the public interest was represented through those two members of the Board, at least; I am not saying that the others d i d not represent the public interest, too. I n other words, they were appointed by somebody who was elected by the people and accountable to the people. Whatever was done by that Board then the people could charge to the administration i n power and vote for or against i t by reason of what the Board did, just like i n foreign affairs w i t h the State Department, but i f you get the Federal Reserve Board so independent that there is no way to charge the administration i n power w i t h what is done by that Board, whether i t is very beneficial or very devastating, there is no way for the people to charge the Administration i n power; do you not think that that should be given consideration, M r . Secretary ? M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 58" Secretary S N Y D E R . I would be very happy i f this subcommittee during the course of its hearings would test out that thought among all the various groups. Personally, there are certain angles that I can see that would be advantageous, because the Secretary of the Treasury's tenure of office as a member would certainly be limited—I mean his tenure of membership on the Board would be limited—to his actual tenure in office as Secretary of the Treasury, and would not be prolonged beyond his active duties i n connection with the operation of the Treasury, in which capacity he has the responsibility for debt management; and, therefore, i t could be advantageous. There are some areas which might indicate that i t would not have advantage, but personally I have not any strong feelings one way or the other, and I would be very pleased to see what would be developed in these hearings on that subject as to others' views as to whether or not such a c o m ^ w o u l d be helpful. I can see, as I have said, many areas i n which i t could be of advantage. There are others where the general feeling might be i t would be just as well not to have the Secretary tied in too closely to the necessary decisions and operations of the Federal Reserve Board. Representative P A T M A N . Of course, I refer to consideration of policy matters only. I am not even harboring any thought that the Executive or the Secretary of the Treasury should ever be allowed to direct the Board to make loans or anything like that or any Federal Reserve bank Secretary S N Y D E R . Well, that was the area in which I had my reservation for him to be a full-fledged member of the Board with f u l l Board responsibilities. You have touched on the very area i n which I had questions. Representative P A T M A N . I recall, from reading about the Federal Reserve Act, that Senator Glass was insisting all the time that i t should not be run by the banks, and President Wilson was the same way; and I recall reading something in Senator Glass' book about it, about a conference, I guess. I assume that you read about that conference at the White House—in which President Wilson suggested i t would be just the same as letting the railroads select the Interstate Commerce Commission to set the rates as to let the bankers run the Federal Reserve Board and have control over their policies. You recall that, I assume? Secretary S N Y D E R . Yes, I recall that. Representative P A T M A N . I n other words, everything i n the writing of that law was i n the direction of preventing the banks from having control over the Federal Reserve System. Do you agree to that ? You do, do you not ? Secretary S N Y D E R . I think that is very appropriate. Representative P A T M A N . Yes. A t the same time there was not anything in there to indicate that it was desired by those pushing the legislation that they wanted the President to have the power to direct the Board to do certain things. Secretary S N Y D E R . I am quite sure that that is the legislative history. Representative P A T M A N . That is right. I just wondered i f we have not gotten away from that too far. Now, at first the terms of the members of the Board were much shorter than they are now, and at first I believe the longest term went up to 10 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 59" years, did it not, 10 years, and then later on i t was extended to 12 years, and then later on i t was extended to 14 years ? Secretary SNYDER. That is the present, 14. Representative P A T M A N . NOW, when the President appoints a member of the Board for 14 years, of course, he has no further control of that member. He is not supposed to have, and I am not advocating that he should have or that I want him to have. I want the members to be free and independent to use their own best judgment according to the facts as presented at the particular time. But a Board composed of members for 14 years, and no one on there that is under obligation to anyone who was elected by the people, as the Executive is elected by the people, I just wonder i f that has gotten too far away and becoming too independent? What do you think about that? Secretary SNYDER. Well, there could be rather broad implications there; it could get too far away. My recollection is, however, that the Secretary, when he was an ex officio member, was a f u l l member of the Board with all responsibilities and not just a policy-making member. I think that is true. Representative P A T M A N . I did not get that last. Secretary SYYDER. When I did not quite agree with putting the Secretary of the Treasury back into the position that he was originally as a member of the Board, it is because I think he was a f u l l ex officio member with f u l l responsibilities. Representative P A T M A N . There is no question about that; he was Chairman under the law. Secretary SNYDER. Yes. Representative P A T M A N . He was Chairman of the Board. Secretary SNYDER. Yes. The original Federal Reserve Act provided th$t— A Federal Reserve Board is hereby created w h i c h shall consist of seven members, including the Secretary of the Treasury and the Comptroller of the Currency, who shall be members ex officio, and five members appointed by the President of the United States, by and w i t h the advice and consent of the Senate. * * * Of the five persons thus appointed, one shall be designated by the President as governor and one as vice governor of the Federal Reserve Board. The governor of the Federal Reserve Board, subject to its supervision, shall be the active executive officer. * * * The Secretary of the Treasury shall be ex officio Chairman of the Federal Reserve Board. Representative P A T M A N . And he, of course, did have f u l l responsibilities. Secretary SNYDER. I feel that so far as policy-making in the areas in which fiscal and monetary operations are concerned, it might well be considered by your group as to whether or not i t would be beneficial to give him that position. I would be glad to hear comment on that. Representative P A T M A N . Anywray, we w i l l give it. consideration. Without objection, I w i l l insert in the record at this point the statement in Senator Glass' book that I referred to a while ago. (The statement referred to is as follows:) The Honorable Carter Glass, of Virginia, had a l o t to do w i t h the passage of the Federal Reserve Act. I n his book, A n Adventure i n Constructive Finance, published i n 1927, describing a discussion of t h i s very question by President Woodrow W i l s o n w i t h an important group of bankers at the W h i t e House, i t is stated on page 116: " W h e n they had ended their arguments, M r . Wilson * * * said q u i e t l y : ' W i l l one of you gentlemen tell me i n w h a t civilized country of the earth there are important government boards of control on which private interests are 97308—52 5 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 60" represented?' There was p a i n f u l silence f o r the longest single moment I ever spent; and before i t was broken M r . Wilson f u r t h e r i n q u i r e d : ' W h i c h of you gentlemen thinks the railroads should select members of the Interstate Commerce Commission ?' There could be no convincing reply to either question, so the discussion turned to other points of the currency b i l l ; and, notwithstanding a desperate effort was made i n the Senate to give the banks m i n o r i t y representat i o n on the Reserve Board, the proposition did not prevail." Representative P A T M A N . I wanted to ask you about the Research Department in the Treasury Department as compared to the Research Department in the Federal Reserve. Now, over the years I have been impressed—whether i t is true or not I do not know, and I am not in a position to say—that the research staffs in the different divisions or offices of the Treasury—I would not say they had gone down in ability; they have not, I am sure, and I am also sure that you have able, just as able, people there as you ever had i n the world—but the number of people helping them and the amount of money available for that purpose seems to me to have been less and less. Is that correct or not ? Secretary SNYDER. I t is true, and i t has been over our very strong protests, because we have asked that we be given funds to bring i n new people constantly and keep our organization in f u l l operation for the tremendous responsibilities that we have; but for some reason or other Congress has seen fit to curtail those funds. Representative P A T M A N . But Congress has not curtailed the Federal Reserve. Of course, Congress has not Secretary SNYDER. Of course, Congress has no appropriation function over the Federal Reserve. Representative P A T M A N . That is, i t has not assumed it so far. Secretary SNYDER. I beg pardon ? Representative P A T M A N . I t has not assumed that power so far. Secretary SNYDER. Well, I w i l l pass that one, but I am talking about the Treasury, and I am hopeful that out of this w i l l grow some support to help us with appropriations, to help us build up our technical staff. I think we have an excellent one, but we need to have funds to build i t up to a size that will meet all the problems of the time; and I am very hopeful that this subcommittee will, in their wisdom, after they have studied this, see fit to help us out in that regard. Representative P A T M A N . Well, I am personally right now committing myself to you on that problem. I am strongly in favor of that because I think that your divisions have been weakened somewhat by the lack of sufficient money to keep the necessary personnel. On the other hand, there is the Federal Reserve System which is not a competing agency—I am not claiming i t is a competing agency— but it has unlimited funds at its disposal; that is, they own about $20 billion in bonds. Are those all Government bonds ? Secretary SNYDER. Total holdings of Government securities are nearly $23 billion. Representative P A T M A N . $23 billion in Government securities. Now, the interest on those Government bonds, of course, creates a considerable sum, and under present policies and practices they use that money as they see fit, and under existing law they are not even required to put any part of their earnings in the form of surplus back into the Treasury, but I understand what has been done customarily in the recent pastn-— MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT Secretary SNYDER. 61" W e have had a w o r k i n g arrangement t h a t after they deducted Representative PATMAN. I beg your pardon ? Secretary SNYDER. We have had an arrangement with them for the past several years where a certain percentage is returned. Representative P A T M A N . You mean about 90 percent? That used to be the law. Secretary SNYDER. About 90 percent after certain adjustments. Representative P A T M A N . That is right. But now these deductions, that means that they can spend any amount of money for research or anything else, and that is, of course, permissible under existing law and rules as distinguished from the Treasury that must come to Congress for their appropriation. Do you know of any other independent agency of Congress like that that does not come to Congress for their appropriations annually? Secretary SNYDER. The only one that occurs to me quickly would be the F D I C , I am not specifically Representative P A T M A N . I think the Comptroller of the Currency i n some respect, too. Secretary SNYDER. Yes, in some respect. Representative P A T M A N . But outside of that there are 2 5 to 5 0 i n a comparable situation that must come back to Congress for appropriations, and I think I w i l l put the list in the record at this point. (The list referred to is as follows:) T H E L I B R A R Y OF CONGRESS, LEGISLATIVE REFERENCE SERVICE, A M E R I C A N L A W SECTION, Washington 25, D. C., March 6,1952. To: Joint Committee on the Economic Report, Subcommittee on General Credit Control and Debt Management. ( A t t e n t i o n : M r . H e n r y C. Murphy.) Subject: Federal Agencies H a v i n g Independent Sources of Income. I n response to your letter of February 20,1952, we submit herewith a represent e e list of Federal agencies w h i c h have independent sources of income, classified to show whether (a) such income is available f o r expenditure by the*agency w i t h o u t congressional authorization or appropriation, (&) i t may be spent by the agency only w i t h the annual authorization of Congress, or (c) i t must be turned i n to the Treasury and the expenditures of the agency paid by moneys appropriated by Congress. The following agencies collect certain moneys which they are permitted to use i n accordance w i t h law w i t h o u t special congressional authorization or appropriation : Comptroller of the Currency: Assessments f o r bank examinations (12 U. S. C. 481, 482). Assessments against insolvent banks for expenses of liquidation (12 U. S. C. 196). Reimbursement by Federal Reserve banks f o r expenses of note issue and redemption (12 U. S. C. 420). Federal Deposit Insurance Corporation: Premiums f o r deposit insurance (12 U. S. C. 1817). Interest on investments (12 U. S. C. 1823). Federal Reserve B o a r d : Assessments against Federal Reserve banks f o r expenses of Boards (12 U. S. C. 243). Home Loan Bank B o a r d : Assessments f o r examination of financial institutions (24 C. F. R. 123.20,12 U. S. C. 1439a). Department of A g r i c u l t u r e : Charges f o r inspection and certification of certain f a r m products and license fees (7 U. S. C. 55,499c, 585). Federal Security Agency: Federal Credit Union fees (12 U. S. C. 1756). Fees f o r examination of sea food ( 2 1 U . S. O. 372a). MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 62" General Services A d m i n i s t r a t i o n : Fees f o r testing commodities (41 U. S. C. 219). The following agencies are, to a large extent, supported from revenues of the enterprises operated or supervised by them, or f r o m the property they administer, but they must obtain special authorization to use moneys i n their hands f o r designated purposes, or i n some cases, f o r any purposes: Federal Crop Insurance Corporation (7 U. S. C. 1508, 1516, Public L a w 135, 82d China Trade A c t Corporation fees (15 U. S. C. 157). Office of A l i e n Property (Public L a w 188, 82d Cong.). Commodity Credit Corporation (15 U. S. C. 712a, Public L a w 135, 82d Cong.). Export-Import Bank of Washington (15 U. S. C. 712a, Public L a w 111, 82d Cong.). Federal Crop Insurance Corporation (7 U. S. C. 1508, 1516, Public L a w 135\ 82d Cong.). Federal F a r m Mortgage Corporation (15 U. S. C. 712a, Public L a w 135, S2d Cong.). Federal Intermediate Credit Banks (Public L a w 135, 82d Cong.). Federal National Mortgage Association (Public L a w 137, 82d Cong.). Federal Prison Industries, Inc. (Public L a w 188, 82d Cong.). Federal Savings and Loan Insurance Corporation (15 U. S. C. 712a, Public L a w 137, 82d Cong.). Home Owners Loan Corporation (15 U. S. C. 712a, Public L a w 137, 82d Cong.). I n l a n d Waterways Corporation (Public L a w 137, 82d Cong.). Panama Canal Company (Public L a w 203, 82d Cong.). Production Credit Corporations (Public L a w 135, 82d Cong.). Public Housing A d m i n i s t r a t i o n (Public L a w 137, 82d Cong.). Federal Crop Insurance Corporation (7 U. S. C. 1508, 1516, Public L a w 135, 82d Cong.). V i r g i n Islands Corporation (Public L a w 136, 82d Cong.). Tennessee Valley A u t h o r i t y (16 U. S. C. 831h-2). The f o l l o w i n g agencies collect certain moneys which are covered into the Treasury and w h i c h can be w i t h d r a w n only upon appropriation by Congress: Attorney General: Aliens and immigrants. Various receipts (8 U. S. C. 115,133,155 ( c ) ) . Department of A g r i c u l t u r e : F a r m Credit Administration—assessments for examination and supervision deposited i n special f u n d i n Treasury w h i c h is authorized to be appropriated f o r those purposes (12 U. S. C. 832). Forest Service receipts (16 U. S. C. 580e). Inspection fees, etc. (7 U. S. C. 78, 149, 161a, 395, 415d, 499n, 511e). R u r a l Electrification Administration—proceeds of loans, i n certain circumstances (7 U. S. C. 903f). Department of Commerce: China Trade A c t Corporation fees (15 U. S. C. 15>7). Service and publications, fees and charges (5 U. S. C. 276). National Bureau of Standards, fees f o r tests, etc. (15 U. S. C. 276). Patent Office fees (35 U. S. C. 79). Department of I n t e r i o r : Electricity—sales f r o m various power projects (16 U. S. C. 825s, 825s-l, 832j, 833i). Geological Survey—sale of publications (43 U. S. C. 41). Grazing fees (43 U. S. C. 315i). Federal Power Commission: Water power license fees and charges (16 U. S. O. 810). Federal Security A d m i n i s t r a t o r : Food inspection fees (21 U. S. C. 24a, 46a). Post Office D e p a r t m e n t : Postal revenues (31 U. S. C. 495; 39 U. S. C. 786, cf. 39 U. S. C. 794a). Securities and Exchange Commission: Fees f o r registration of securities, nat i o n a l securities exchanges and qualification of t r u s t indentures (15 U. S. C. 77f, 77ggg, 78ee). A complete l i s t of agencies which receive independent income could be made only after a detailed examination of the entire United States Code, w h i c h cannot be accomplished i n the l i m i t e d time available. Accordingly, the above l i s t does MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 63" not purport to be comprehensive, either w i t h respect to the agencies w h i c h receive moneys f r o m outside sources or w i t h respect to sources of revenue of the agencies listed. MARY LOUISE RAMSEY, American Law Section. Representative P A T M A N . I t occurs to me maybe we should give consideration to the question as to whether or not an agency like the Federal Reserve can be an agency of Congress and not come to Congress for its money. A l l other agencies do. I mean all other agencies do except two or three which you mentioned, which are the exceptions, and I think maybe our subcommittee should give some consideration to that. Who audits the Treasury, Mr. Snyder, the General Accounting Office? Secretary SNYDER. GAO, the Comptroller General. Representative P A T M A N . The Comptroller General? Who audits the Federal Reserve System ? Secretary SNYDER. I do not know. Representative P A T M A N . I will get that from them. The Comptroller General was provided for under the Norris Act. Secretary SNYDER. Mr. Lindsay Warren. Representative P A T M A N . I t was 15 years appointment, where a person could not succeed himself; and he is free and independent, footlose and fancy-free. Secretary SNYDER. He is accountable only to Congress. Representative P A T M A N . That is right. Representative WOLCOTT. Mr. Patman, w i l l you yield a moment? Representative P A T M A N . Yes. Representative WOLCOTT. I S the Comptroller of the Currency a part of the Treasury ? Secretary SNYDER. The Comptroller of the Currency is under the general framework of the Treasury operation, yes. Representative WOLCOTT. I n the framework, but he is independent of Treasury domination ? Secretary SNYDER. He is a Presidential appointment and, as you recall, I appeared before Congress in 1950 in connection with Reorganization Plan No. 1—and in support of Reorganization Plan No. 26—recommending that the Comptroller be permitted to retain all of the functions vested in him by statute. (The Comptroller of the Currency, who is an official of the Treasury Department and is in charge of the supervision of national banks, and the Comptroller General, who is responsible only to Congress and its Government assistants, are different persons.) Representative P A T M A N . I would like now to ask a question about the Federal Reserve bank's supporting the Government bonds. Do you consider that there is a free market in the sale and purchase of Government securities, Mr. Secretary ? Secretary SNYDER. I think i t must be recognized that there is a special situation existing in the Government security market. The Federal Reserve System uses open-market operations in Government securities for credit-control purposes. As long as open-market operations involve billions of dollars of transactions a year, we cannot M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 64" consider that the market for Government securities is an entirely free one. Representative P A T M A N . I n the ordinary sense of the word, like a commodity that is sold at the wholesale centers, you know, of bringing the best price where there is a demand at a certain price for a certain commodity, that is a free market as I consider it, where i t is offered freely and bought freely, and the market is fixed by the demand of purchasers principally. Do you have that kind of a free market i n the Secretary SNYDER. No; I do not consider so. Also the Open Market Committee has realized that with a tremendous debt and with the financing that has to be done, you could not allow a small segment of that financing to upset the whole market and, therefore, the Open Market Committee has taken care of that kind of a situation. I t is a little different from where you have a stock offering or a private bond offering. Whether that was a success or failure would be important, of course, to those interested, but i t may not be of vital importance to the economy as a whole. And as I said a few minutes ago, I think that when i t comes to complete freedom, i f you are speaking of i t i n terms of absolute freedom— no restraint one way or the other—that there is a limitation to that freedom by the very law permitting the Federal Reserve to conduct open market operations i n Government securities. Representative P A T M A N . And to that extent i t would not be perfectly free, of course. I say, to that extent. Secretary SNYDER. Yes. Representative P A T M A N . The bond market, I noticed, after i t had commenced to slide, went down to about 96, and i t has not fallen below that. Maybe I am mistaken, but I just noticed i t occasionally. Has i t fallen below, have the prices fallen below, 96, for long-term bonds? Secretary SNYDER. On one occasion, one issue went to 952%2. Representative P A T M A N . Well, there must be some support there or i t would slide on certain occasions much lower, would i t not, Mr. Secretary ? Secretary SNYDER. Well, I think that the Open Market Committee has been interested in maintaining an Representative P A T M A N . A n orderly market around 96? Secretary SNYDER. I do not know what range of fluctuations is, but there has been an orderly market with only very minor Federal Reserve operations since last April. Representative P A T M A N . Suppose they wanted to maintain a market at 100 percent, and assuming that, as Senator Douglas explained, that i t would be highly inflationary, that is, the banks could sell the bonds to the Federal Reserve Bank and have reserves of a million dollars and would then have reserves with which to extend credit amounting to some $6 million; that is all conceded. But is there not some way, some alternative action that can be taken? Can't you have the Reserve requirements changed by the Congress in a way to offset that and still maintain the bonds at 100 cents on the dollar ? Secretary SNYDER. Well, that I would not like to answer. Representative P A T M A N . What would you offer as a suggestion to consider in the way of a law for Congress to pass respecting reserves that would be helpful in preventing that kind of inflation? M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT 65" Secretary SNYDER. Well, since that is invading another agency's responsibility, I would not like to come out with an answer. Representative P A T M A N . That is all right. I w i l l not insist on i t at this time at all. I wanted to ask you about some E bonds, but I w i l l defer to your suggestion and put it in writing. Secretary SNYDER. We w i l l be glad to try to answer whatever questions are put to us. Representative P A T M A N . W i l l you tell us briefly what weight you believe should be given to increases in the interest costs on the public debt in determining our monetary policy ? Secretary SNYDER. I think we have to always measure very carefully what the corresponding advantages would be measured against the other problems that must be faced. I certainly do not have any fixed opinion; I just do not have any desire to fix a rate and let that be the one rate for all time. I think that we have to look at it under the conditions and circumstances of periods in which we are operating. Representative P A T M A N . Under existing law, Federal Reserve banks buy bonds only i n the open market, do they not? Except, I believe, back during the war there was a law enacted which permitted the Treasury to sell directly to the Federal Reserve banks obligations, short-term obligations, up to a certain amount. Secretary SNYDER. Five billion dollars. Representative P A T M A N . Five billion dollars? Secretary SNYDER. That is correct. Representative P A T M A N . That authority expires this year? Secretary SNYDER. We are asking for an extension. Representative P A T M A N . Y O U are asking for the extension ? Secretary SNYDER. That has only been used in temporary shortterm periods of a few days at a time, and never for any extended periods. I t has permitted us to take care of a slight operational deficiency in balances. Representative P A T M A N . And only for short-term obligations? Secretary SNYDER. Only for a very limited time. Representative P A T M A N . Senator Flanders has returned, and I w i l l ask him i f he has any questions. Senator FLANDERS. Mr. Chairman, I come into this thing fresh because I was absent all day. I did, however, read the Secretary's formal document on the train, and was much interested in his constructive suggestion for sort of a conference group on monetary and debt management policy. One question has been i n my mind for some time past, and that has been—let me first say, Secretary, that I am one of those who places very much more trust i n monetary and fiscal policies for controlling inflation than I do i n direct controls of prices and rationing or particularly of price without rationing. Now, however, I have wondered some as to whether there were limitations on monetary control that would apply, for instance, at a time immediately after the outbreak of the war in Korea, at which time there was universal business and popular sentiment that the thing to do was to buy because the expectation was that prices were going up. Now, I have wondered whether in a broad spread movement of that sort, based on extraordinary happenings, whether monetary controls 66 M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 66" alone would not have to be so drastic in order to control such a situation that they would be almost destructive. I t is not like the day-to-day, month-to-month control of small movements by appropriate means, but you meet an emergency, and the question that comes to me is whether that emergency could be controlled by purely monetary means without creating a monetary crisis. Now, you are not responsible for monetary policies specifically in the sense that we feel that the Federal Eeserve System is, so I should ask that question primarily of the Federal Eeserve Board folks. But let us have a preliminary try-out with you, i f you don't mind speaking on it. Secretary S N Y D E R . Well, of course, I would prefer for the Federal Eeserve to address themselves to that subject. But I do have grave reservations i n my own mind, as do you, Senator, that in a situation where there is a sudden upheaval of buying or rushing in to do financing of various sorts due to an act such as the outbreak of aggression in Korea—which left us for a considerable time, and even yet, doubtful as to where i t is going and what its f u l l impact might be—I think that to try to control a situation of that sort entirely by monetaiy regulations and procedures could well lead to disastrous results. This is because of the fact that i n a spirited buying spree of that sort, controlled largely by the belief that there will be a scarcity of articles, price really is no restraining influence at all—purchasers would pay almost any price to get control of large quantities of articles or commodities. To try to control such a situation by monetary measures alone could well upset the operations that have to be going on in the economy regardless of that impulse of scare-buying, and I do feel that we have to take a very careful view of ever attempting to use strictly monetary measures to control such an occasion—such a condition. Senator F L A N D E R S . A S I said, Mr. Chairman, I am asking that question as one who is convinced of the usefulness of the monetary control, and have placed prime dependence upon it, but I think still we should be concerned with the dangers or difficulties involved in it. Thank you, Mr. Secretary. Secretary SNYDER. Yes. Eepresentative P A T M A N . I want to ask you a question or two about the voluntary credit restraint program. Are you on that Board ? I do not believe you are on the committee. Secretary S N Y D E R . N O , sir. Eepresentative P A T M A N . I t h i n k t h a t is around the Federal Eeserve Board. Governor Powell, I t h i n k , is i n charge of that. Secretary S N Y D E R . That is correct. Eepresentative P A T M A N . I assume we w i l l have Mr. Martin here tomorrow and he can tell us about that. You come in contact with that program ? Secretary S N Y D E R . Yes. I have been very enthusiastic about it, a very enthusiastic supporter of the program, and I think that in the two instances where we have had a voluntary credit restraint program—back i n 1948 and again recently—I think that i t has had a degree, an important degree, of influence on the restraint of bank credit. ^ Eepresentative P A T M A N . Would you like to ask any further questions, Senator Douglas? M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT 67" Senator DOUGLAS. N O . Eepresentative P A T M A N . Mr. Wolcott? Representative WOLCOTT. That last answer you made, Mr. Secretary, inspires some discussion ,and I do not know whether we want to go into i t right now, but do you think that the regulation W or regulation X has been a deterrent to increases in the volume and velocity of credit, or has i t acted merely to cut down the demand for goods in the lines in which they operate ? Secretary SNYDER. I would have to give you a studied reply on that one. I would be glad to try to prepare something. Eepresentative WOLCOTT. I think I can go along with the idea that i t cut down on the demand for goods. Secretary SNYDER. The reply I made was to the voluntary creditcontrol program. Eepresentative WOLCOTT. The voluntary credit? Secretary SNYDER. Yes, sir. Representative WOLCOTT. I beg your pardon? Secretary SNYDER. That was the reply I made to it. Eepresentative WOLCOTT. I did not catch the fact that you were talking about voluntary control. Secretary SNYDER. Yes. They asked about Mr. Powell's operation in the Federal Eeserve on the voluntary credit control program, and that was what I was addressing my reply to. Representative WOLCOTT. A l l right. Eepresentative P A T M A N . Senator Flanders, do you have any more questions ? Senator FLANDERS. NO, thank you. Eepresentative P A T M A N . Dr. Murphy, do you have any questions ? Mr. M U R P H Y . I would just like to ask several questions, Mr. Secretary. They may sound a trifle pedantic, but I think they may serve to clear up one of the matters that was discussed this morning. First, the total amount of debt that has to be placed is determined, is i t not, principally by the receipts and expenditures of the Government ? I t is a matter over which you have very little control. Secretary SNYDER. I t is entirely controlled by that. Mr. M U R P H Y . A n d all debt, of course, must be held by someone. You desire under present circumstances that as little of the debt should be held by banks as possible. Secretary SNYDER. We have supported such an idea, both in practice and in theory; we have attempted to try to get the debt into nonbank hands to the greatest extent possible. Mr. M U R P H Y . And since the whole debt must be financed, this is primarily a matter of maximizing holdings by nonbank investors. Now, this leads to the question of the means or techniques by which nonbank holdings of Government securities can be maximized. Is i t always possible to sell additional amounts of Government securities simply by letting the market, as we w i l l say, seek its own level, or do you feel that under some circumstances maintaining a reasonably stable market w i l l permit you to sell more securities to nonbank investors and have them more firmly placed than you could by simply having Federal Eeserve withdraw from the market and letting the market seek its own level ? Secretary SNYDER. Well, as I stated a while ago, Doctor, with the large debt operations that we have to work with—the financing of 68 M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 68" refundings and of new money operations—it is vitally important that each issue be successful. Mr. M U R P H Y . And can the success of these issues i n itself be a means i n the long immediate run for placing more rather than less securities with nonbank investors? Secretary SNYDER. I think i t could. Mr. M U R P H Y . By building up their confidence in the securities? Secretary SNYDER. I think i t would. I t would give people confidence, whereas a very small issue could affect the whole debt i f i t were badly received. Mr. M U R P H Y . The only point I wanted to t r y to bring out, Mr. Secretary, was that the Federal support of a particular Treasury operation, by preserving confidence in the market, might be a way— and i f properly handled would be a way—of maximizing nonbank holdings rather than the reverse. Secretary SNYDER. I think so. Mr. M U R P H Y . That is all. Representative P A T M A N . I w i l l ask Dr. Grover W . Ensley, the staff director of the f u l l committee, i f he would like to ask any questions. Mr. E N S L E Y . Just one, Mr. Secretary. I have been very much impressed with the answers to the subcommittee's questionnaire by the Treasury, as well as the representatives of the Federal Reserve System. I know that you personally spent many hours on this assignment. There must have been a tremendous amount of staff work going into this job. I think i t would be interesting for the record to show the process, the method, that you used, as well as the Federal Reserve Board, in the preparation of these answers in such a short time and so elaborately. Undoubtedly you called i n outside consultants, and we would like to know who they were, how did they work, and how did you evolve this excellent monograph in response to the subcommittee's questions so quickly. Would you prepare a memorandum on this for our printed record ? Secretary SNYDER. We w i l l be pleased to do that because, as I stated i n my opening remarks, we took this study very seriously, and we applied a great deal of time to the answers. For your information, I personally spent many, many hours with the study group over the period of preparation of answers, and we have conscientiously applied every possible source of information that we could gather. We have brought in a great number of outside consultants; we brought i n groups to talk with us on it, and I think i t would be very constructive to show the procedure that we followed in trying to arrive at the replies to the questions that were submitted to us. We w i l l be glad to do that. Senator DOUGLAS. Mr. Patman, i n view of the questions of Dr. Murphy, I would like to be privileged, i f I might, to ask some questions. Representative P A T M A N . Certainly, Senator. Senator DOUGLAS. A S we all know, last A p r i l the Reserve Board adopted the so-called policy of flexible support of the Governmentbond market, rather than absolute or rigid support. Has that policy of flexible support resulted in making i t difficult for the Treasury to refund its issues, nonbank holdings Secretary SNYDER. I n the period Senator DOUGLAS (continuing). Since A p r i l of 1 9 5 1 ? M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 69" Secretary SNYDER. We have been able to in the climate in which we have worked Senator DOUGLAS. That was done with only flexible support and with a net decrease i n the total volume of Government securities held by the Reserve. Secretary SNYDER. Well, the Reserve holdings are a little higher than a year ago. T h e p e r t i n e n t figures on F e d e r a l Reserve holdings of Government securities r e f e r r e d t o are the f o l l o w i n g : . Million Feb. 28, 1951 M a r . 6,1952 $21,881 22,514 Senator DOUGLAS. B u t the last figure Secretary SNYDER. I t does not make any difference. Senator DOUGLAS. The last figures I saw were $ 3 0 0 million lower than Secretary SNYDER. I n June of 1951, yes. Senator DOUGLAS. Well, i f refunding operations since the accord were carried out successfully without any large degree of support from the Federal Reserve, what reason do you have for thinking they could not be carried out successfully prior to the accord without any appreciable degree of support ? Secretary SNYDER. I f we could do all of our operations by back sighting. Senator, I think maybe we would be all right. I f you are faced with a proposition at a certain time, there are certain unknowns—it falls on you to make a decision, and i f we were always able to look backward to make a decision Senator DOUGLAS. Does this mean that on the basis of hindsight you believe that the Treasury and Reserve policy from Korea until March* was wrong ? Secretary SNYDER. N O . Senator DOUGLAS. A n d f r o m date of the accord on i t was correct? Secretary SNYDER. I made no such statements, Senator. Let us stick to what I said. Senator DOUGLAS. Let us go back to the point. I f this worked successfully in a period of large refunding, that is, i f the Federal Reserve, buying comparatively small quantities of Government bonds did not interfere with the large refunding operation of the Treasury, why could not the same policy have worked before A p r i l when your refundings, I think, were not nearly as great as they were later? Why was it necessary to load the member banks up with $4 billion worth of Reserve dollars? Secretary SNYDER. I hope that we can avoid any situation like that in the future. Representative P A T M A N . A n y other questions ? Senator DOUGLAS. The question was not directed to the future but directed to the past. I was trying to keep off the future lest I interfere with the confidential nature of the operations which we may have to carry on, but I thought i f the future was barred to us i t was at least permissable to analyze the past. Secretary SNYDER. Well, we are speculating and not analyzing when we say wouldn't certain things happen i f certain things did happen. We might say today is a nice, pretty day, so, therefore, wasn't 2 weeks ago a pretty day. I just can't go on that theory. We MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 70" have to go back to the conditions which we faced at the time, Senator, when we made certain decisions. Senator D O U G L A S . I remember that the refunding problems of the Treasury were not as great in '50 as they were in '51, isn't that true? Secretary SNYDER. They were serious. Senator DOUGLAS. But not as great. You had this terrific volume of refundiixgs in '51 Which I believe you did not have in '50, isn't that correct ? Secretary SNYDER. We had a heavy volume in both years. Senator DOUGLAS. And yet in a more severe situation in ' 5 1 than we had in '50 the operation was carried on very successfully without the Federal Reserve buying an appreciable quantity of Government bonds. I n fact from June on they actually made net sales of Government bonds, diminishing the volume of securities held by the System. The question naturally comes i f the problem was debtwise less severe i n 1950, why was it necessary for the Eeserve to purchase $4 billion worth of bonds and create billions of reserves upon which a $16 billion credit expansion was ultimately based, with an increase of 16 percent i n the wholesale price level and an increase now of 10 percent in the cost of living and an increase in cost to the Federal Government of some $10 billion a year ? Secretary SNYDER. We are very pleased with our present relationship with the Treasury, Senator. Senator DOUGLAS. W i t h the Federal Eeserve ? Secretary SNYDER. I mean with the Federal Eeserve. We are also pleased with our relationship with the Treasury and with this subcommittee. Senator DOUGLAS. Since the future and the past are both closed to us, we can find out nothing about either. I would like to know of what the present consists. Eepresentative P A T M A N . Mr. Secretary, we appreciate your attendance and we w i l l feel free to call on you in the future. And of course i n our requests we w i l l make it subject to your convenience as much as possible. We appreciate your coming here today and giving us the benefit of your views and the answers to the questions that have been asked you. Thank you very kindly, Mr. Snyder. (The information previously requested by Mr. Ensley follows:) PREPARATION OF ANSWERS TO QUESTIONNAIRE Submitted by the Subcommittee on General Credit Control and Debt Management of the Joint Committee on the Economic Report E a r l y i n August 1951, the subcommittee submitted a list of questions coveri n g a wide range of matters relating to the management of the public debt and monetary, credit, and fiscal policy, both i n this country and abroad. I n the course of extensive discussions d u r i n g August and September this list was revised somewhat and some new questions were added which the Treasury staff thought would help to give a well-rounded presentation of its point of view on t h e underlying problems. These suggested additions were welcomed by the staff of the subcommittee. I f e l t that the fullest possible answers should be given to each of the questions, w i t h the objective of providing the subcommittee w i t h adequate basic materials upon which to undertake the comprehensive study w h i c h had been assigned to i t . W i t h this i n mind, I made i t clear to Treasury officials that I was prepared to spend as much time as was necessary i n the months ahead to shape the answers MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 71" into final form. Furthermore, I instructed the General Counsel to act as official contact w i t h this congressional subcommittee i n the same manner as he is t h e contact w i t h other committees of Congress. I instructed the Director of t h e Technical Staff, the Fiscal Assistant Secretary, and the General Counsel to detach f r o m other duties, insofar as possible, such members of their staffs as were necessary to prepare material f o r the answers to the questionnaire, and t o assemble a group of consulting experts, both economic and legal, who could b o t h help us prepare answers to the questions and provide varying points of view w i t h respect to how the questions might be answered. The f o l l o w i n g consultants were contacted and were brought to the T r e a s u r y f r o m time to time between mid-August and late December : M r . Wesley Lindow, vice president and economist, I r v i n g T r u s t Co., New Y o r k , N. Y. D r . G. Lee Bach, director of i n d u s t r i a l administration, Carnegie I n s t i t u t e o f Technology, Pittsburgh, Pa. D r . Douglas Anderson Hayes, professor of business administration, U n i v e r s t i y of Michigan, A n n Arbor, Mich. M r . Miroslav K r i z , foreign research division, Federal Reserve Bank of New Y o r k , New York, N. Y. D r . Paul W . McCracken, professor of business administration, University o f Michigan, A n n Arbor, Mich. D r . Marcus Nadler, Graduate School of Business Administration, New Y o r k University, New York, N. Y. M r . Joseph J. O'Connell, Jr., Chapman, Bryson, Walsh & O'Connell, Washington, D. C. D r . Roland I . Robinson, professor of banking, the School of Commerce, N o r t h western University, Evanston, 111. Judge Samuel I . Rosenman, New York, N. Y. D r . Lawrence H . Seltzer, professor of economics, Wayne University, D e t r o i t , Mich. D r . Henry C. Wallich, Department of Economics, Yale University, New Haven, Conn. These men have had a wide range of experience i n matters relating to debt management, monetary, credit, and fiscal policy. One was a former General Counsel of the Treasury, two were former Assistant Directors of the Treasury's Technical Staff, two were former members of the Research Staff of the Board of Governors of the Federal Reserve System, one was a former member and another a current member of the research staff of the Federal Reserve Bank of New York, one was a former member of the research staff of the Federal Reserve Bank of Minneapolis, and one was former counsel to the President of the United States. I n the aggregate, they represented great technical a b i l i t y and various points of view. They provided us w i t h a great deal of help—both i n Washington and at their home locations—and contributed many useful ideas and suggestions, many of which were worked into the final answers. A number of the questions dealt directly w i t h general material on the subject of public debt management and monetary, credit and fiscal policy, and d r a f t s of the answers to these questions were prepared i n i t i a l l y by the consulting experts. I n many cases, t w o or more answers were prepared i n order to obtain a variety of ideas. Answers to some of the other questions, particularly those relating exclusively to Treasury operations and techniques, were prepared by officials dealing w i t h these matters most closely. I met frequently i n my office and i n the Treasury conference room w i t h the Treasury people and the consultants preparing the answers. Meetings generally r a n f r o m 1 to 2 hours, and there were about 25 of them during the course o f the project. Each question was taken up on several occasions; drafts of answers were discussed t h o r o u g h l y ; competing points of views were analyzed; a n d agreed-upon presentations were then developed, sometimes by Treasury staff members and sometimes by our consultants. A f t e r each answer had reached a semifinal stage, i t was circulated to a l l members of the Treasury staff concerned for comment and was mailed to each consultant at his home location, where he went over i t and submitted suggestions or alternative wordings for particular paragraphs or sentences. I t was also sent to a number of outside people who had a great deal of experience i n t h e debt management and fiscal-monetary field. Among these were the following, t w o of whom were former Under Secretaries of the Treasury: 72 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 72" M r . D a n i e l W . Bell, president, American Security & T r u s t Co., Washington, D . C. D r . H a r o l d Stonier, executive manager, American Bankers Association, New Y o r k , N. Y. M r . A . L . M . Wiggins, chairman of boards of t h e A t l a n t i c Coast L i n e Railroads and the Louisville & Nashville Railroad, H a r t s v i l l e , S. C. The suggestion made by a l l people reviewing the d r a f t answers were gone over by members of the Treasury's technical staff, who acted as the final coordinating group to revise the answers and incorporate the necessary adjustments. T h i s procedure continued d u r i n g the last p a r t of August, September, October, and November. Late i n November, I attended a N A T O conference i n Rome; and the staff airmailed to me a set of revised answers to a l l questions w h i c h had been prepared up to t h a t time. On m y r e t u r n t r i p I spent many hours aboard ship going over each answer carefully, making suggestions and changes where I f e l t i t necessary. A t this point, copies of our answers were sent to the Council of Economic Advisers and to the Board of Governors of the Federal Reserve System f o r t h e i r comment. Suggestions f r o m these agencies were taken u p by the staff i n January and worked into the answers wherever possible. D u r i n g January and i n early February, I spent many hours w i t h Treasury staff people, going over the answers i n final form. The materials were carefully checked both i n final d r a f t and i n galley proof and page p r o o f ; and, where necessary, records were brought together and special files established to completely document the answers to some of the questions. Representative P A T M A N . The committee w i l l stand adjourned until 10 o'clock tomorrow at the same place. (Whereupon, at 3: 50 p. m., the committee adjourned, to reconvene at 10 a. m., Thursday, March 11,1952.) MONETABY POLICY AND THE MANAGEMENT OF THE PUBLIC DEBT TUESDAY, MARCH 11, 1952 CONGRESS OF T H E U N I T E D STATES, S U B C O M M I T T E E O N G E N E R A L C R E D I T CONTROL, A N D D E B T M A N A G E M E N T OF T H E J O I N T C O M M I T T E E ON T H E E C O N O M I C REPORT, Washington, D. C. The subcommittee met, pursuant to recess, at 10 a. m., in room 318, Senate Office Building, Representative Wright Patman (chairman of the subcommittee) presiding. Present: Representative Patman; Senators Douglas and Flanders; Representatives Bolling and Wolcott. Also present: Grover W. Ensley, staff director; Henry Murphy, economist for the subcommittee; and John W. Lehman, clerk to the f u l l committee. Representative P A T M A N . The committee w i l l please come to order. Senator Flanders, did you have a statement to make ? Senator F L A N D E R S . N O ; I just wish to suggest that this present occasion reminds me of a passage in the Scriptures of the parable of the man out of whom seven devils were cast, leaving his interior swept and garnished, whereupon seven other devils saw the opportunity and moved in. We had one group yesterday and have another group today and I thought, perhaps, that that passage i n the Scriptures might be appropriate. [Laughter.] Representative P A T M A N . Y O U are calling them all devils ? Senator F L A N D E R S . Well, they are guilty until they are proved innocent. [Laughter.] Representative P A T M A N . We have with us diis morning Mr. Martin, Chairman of the Board of Governors of the Federal Reserve System. You have a prepared statement, I believe, Mr. Martin? STATEMENT OF WILLIAM McC. MARTIN, JR., CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. M A R T I N . I have, Mr. Chairman. Representative P A T M A N . Would you like to present your prepared statement before yielding to questions? Mr. M A R T I N . I f i t is agreeable to you, Mr. Chairman, I would. Representative P A T M A N . I t would be satisfactory to us. Mr. M A R T I N . Mr. Chairman and members of the committee, i n coming before you today I should like to express what I know has 73 74 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 74" been i n the minds of all of us in the Federal Reserve System i n preparing the answers to your questionnaire. We have welcomed this opportunity to put down on paper our concepts of what our function is i n the governmental structure and in the economy. You give us a heavy load of homework and we have all profited by it. I know that for me it has been more than a refresher course—it has been a liberal education in what I prefer to call reserve banking, rather than central banking operations. The task of preparing answers to the comprehensive and searching questions lir^ been formidable and I w i l l not pretend that 1 ippr,ached it without some reluctance. Now that the task is clone i ** 1 esults are published I realize how worth while has been t) «ie Aid effort expended not only by those of us in the System but uy the many others to whom you addressed questionnaires. Irrespective of the conclusions you may reach as a committee, you have assembled a body of information that I think will prove to be invaluable for a long time to all who are interested in the special problems of general credit control and debt management. Beyond that, however, we have all genuinely welcomed this inquiry. The Federal Reserve System is a servant of the Congress and, through you, of the people of the United States. You created it, you can abolish or change it. Our task is to carry out your will and it is our duty to lay before you all the facts at our command for which you ask and to give you our best judgment on these important matters. We are glad of the opportunity to make any contribution we can to the improvement of this reserve banking mechanism. Like all human institutions, it is not perfect or infallible. I n the nearly four decades of its existence, the System has undoubtedly made mistakes. I t has also learned from experience. One of the fundamental purposes of the Federal Reserve Act is to protect the value of the dollar. Yet that value today in terms of purchasing power is less than half of what it was when the System was founded. I n this span of years the country has engaged in two World Wars and is now in the throes of what might be called an undeclared war. With the vast economic changes brought about by military and security needs, monetary policy by itself cannot maintain economic stability and preserve unchanged the purchasing power of the dollar. Even aside from these disturbances, i t is probably fair to say that monetary policy has not always been as timely or as effective as i t could have been. Your first concern, I take it, is to look at the record of the past principally for the light it can throw on the road ahead. We are trying to look forward, as you are. I n his first inaugural address as President, Woodrow Wilson included a statement, part of which is inscribed in the lobby of the Federal Reserve Building: W e shall deal w i t h our economic system— he said— as i t is and as i t may be modified, not as i t might be i f we had a clean sheet of paper to w r i t e upon; and step by step we shall make i t what i t should be, i n the s p i r i t of those who question their own wisdom and seek counsel and knowledge, not shaUow self-satisfaction or the excitment of excursions whither they cannot tell. I am sure i t is the purpose of this inquiry, as i t is of all of us, to appraise judicially this reserve banking mechanism and to do whatever appears wise so that i t may render the best possible public service. MONETARY POLICY AND M A N A G E M E N T OF PUBLIC DEBT 75" The Federal Reserve System and the Federal Reserve banks sometimes are referred to as bankers' banks, but that describes only a part of their functions. The various services which the Reserve banks perform for the banking community, such as supplying currency, transferring funds, and collecting checks, have proved to be an essential element in keeping the mechanics of modern-day commercial banking in step with the financial needs of a growing and changing private enterprise economy. The overriding purpose of this Reserve System is to serve the interests of the general public in business, industry, labor, agriculture, and all walks of life. As I understand the intent of this inquiry and of these hearings, i t is to explore how that interest of the public can best be served in the area of general credit control and debt management on which the activities of the Federal Reserve System have so important a bearing. The approach to this broad subject by the members of this committee and of the Banking and Currency Committees and those of use to whom you entrust the duty of carrying out your wishes must be in the spirit to which President Wilson referred. We must always question our own wisdom and seek counsel and knowledge. Considering that money is one of the most controversial of all subjects, i t is rather remarkable that the replies elicited by your questionaire reveal so little fundamental divergence. Honest judgments may differ as to whether the Reserve System, for example, has done its job well or poorly. There are bound to be differences of opinion concerning the structure and internal operations of the System but essentially I find very little difference in all the replies on fundamentals. There is a general recognition of the need for a mechanism of this kind to perform substantially the functions and to render the services that this System now furnishes. I f the Congress were to do away with the present system some other way would have to be found to perform its function and to play its role in the economy. Basically, the job of the Federal Reserve System is that of monetary management—to increase the money supply and make it more easily available when there is evidence of weakness in the economy and to reduce the volume of money and make it less easily available when indications show that there is excessive expansion. I n other words, it is the business of monetary management to contribute to the broad objectives of steady economic progress which is the ultimate goal of all national policy. The instruments by which these broad purposes of monetary management are achieved are dealt with in detail in the answers to your questionnaire. How and when and why these instruments have been used is likewise set forth at some length. You w i l l have to judge how wisely or unwisely they have been used in the revealing light of hindsight. You have to judge whether these instruments can be improved, or others provided. We have called attention to some of the various problems for which, perhaps, better answers can be found but we are not, as you may have noted, recommending any broad or sweeping changes. The test that, I have no doubt, you will apply is whether the public interest is well served. I think that, generally speaking, it has been well served by the System. The System is a unique concept, an ingenious merging of public and private interests in a characteristically democratic institution. The 97308—52 6 76 M O N E T A R Y POLICY AND M A N A G E M E N T OF P U B L I C DEBT 76" doctrine of the separation of powers, as Mr. Justice Brandeis once pointed out, was adopted "not to promote efficiency but to preclude the exercise of arbitrary power." The purpose was "not to avoid friction, but by means of the inevitable friction incident to the distribution of the Government powers among three departments, to save the people from autocracy." Doubtless this reserve banking mechanism could be more efficiently devised or differently organized in the governmental structure but i t would be at the cost, I think, of something far more important. I n any case, such an institution w i l l in the last analysis render good or bad public service depending upon the abilities of the human beings engaged in its operation rather than upon its organizational form and structure. And by the same token, the resolution of difficult problems and of conflicts of opinion must come out of the minds of men and not from the forms in which they chance to be organized. I have sought to indicate in a general way the attitude with which we have approached this important inquiry into the public's business as discharged by the Federal Reserve System. We have looked at this System, not as i f we had a clean sheet of paper to write upon, but in the light of the concepts on which i t was based and its performance over the years. We have tried to be honest with you and honest with ourselves. Certainly we have nothing to withhold or conceal. The record is an open book. We have sought to make clear that monetary policy cannot, by itself, achieve stable economic progress but that i t is an indispensable means to that end. I t must go hand in hand with fiscal policy and debt management. We have tried also to spell out as plainly as we can the meaning of the accord which we reached with the Treasury last March, in which you are naturally interested. Its achievement illustrates the point which I mentioned before that the solution of difficult problems and the reconciliation of differing viewpoints depends upon the ability of men to come to a meeting of minds in the best interest of the public rather than upon the forms of institutional organization. That accord was not a transitory or empty gesture. I t is a reality under which debt management and monetary policy are moving together toward the same objectives with mutual understanding and meeting of minds. May I add that I concur fully i n your chairman's confident prediction that the fundamental issues with which the committee is concerned " w i l l be found vastly too complex to permit of facile generalization." I think i t may prove useful to the members of the committee for me to present a summary which I have prepared of our replies to your questionnaire. This summary presents, first, the major points of reserve banking philosophy developed i n the answers, second, some of the more important positions taken on the issues raised, and, third, several general points as to changes i n banking structure and as to foreign monetary organization and experience. Each reply submitted undertakes to deal with the question asked on its own merits and to provide a direct, objective, and comprehensive answer. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT RESERVE B A N K I N G 77 PHILOSOPHY The following views are expressed with respect to the role of credit and monetary policy and the organization within the Government for such policy. 1. Flexible credit and monetary policy, together with flexible debt management policy and an adequate fiscal program, is essential to economic stability. 2. The established relationship of the Federal Reserve Board of Governors to other branches of the Government is consistent with and adequate for the function which the Reserve System performs. 3. The status of the Board as an independent establishment of the Government is sound on the basis of accepted principles of democratic governmental organization, regardless of any theoretical question as to the branch of the Government in which i t falls. 4. Changes in money market conditions and in interest rates reflect the interplay of basic forces of supply and demand for short- and longterm credit. Supply is made up of new individual and corporate savings, accumulated cash balances offered for investment, repayments on ast loans, and credit expansion by the commercial banking system. Edemands from business enterprises, farmers, consumers, State, local, and foreign governments, and the Federal Government form the major components of credit demand. 5. Credit and monetary policy operates primarily through its effects on the availability and supply of credit; i t cuts out of the market or brings into i t fringe credit demands. 6. I n this process, credit and monetary policy affects, but does not determine, interest rates i n the market. Interest rates are prices which perfom vital economic functions and they should be responsive to basic supply and demand conditions. I n a rich, high savings economy with well integrated financial markets, significant changes in the availability of credit, and hence in the volume of spending, need be accompanied by only small changes in the cost of money. 7. On balance, the System, through its support of Government secur i t y prices, accentuated postwar inflationary pressures. 8. I n early postwar years, the System favored and defended a support program as a part of transitional adjustment and sought other means of restraining inflationary credit expansion. This policy took account of the need for time to develop a debt-management program that would lodge a greater proportion of the public debt permanently in the hands ox nonbank investors. As time passed and the System s support policy led to increasing monetization of the public debt, the Federal Reserve became more and more concerned about the contribution of its operations to inflationary pressures. 9. More flexible credit and monetary policies, applied through the discount and open market mechanism within the framework of an orderly Government securities market, have demonstrated their effectiveness since they were undertaken in March of 1951. 10. I n addition to measures affecting credit generally, flexible credit and monetary policy includes the use, i n occasion, of selective credit regulations—relating to stock market, consumer, and real estate credit—as well as voluntary measures. M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 78" 11. Credit and monetary policy cannot be fully effective without public understanding and support. The System strives to keep the public fully informed on all credit and monetary developments. MAJOR POSITIONS Of the specific positions brought out in the answers to different questions, the following avp the mor«; important: 1. The F -i- ral P>oard is subject Qie Employment Act of 1946. K ; r 1 j intp? i j i , the congressional directive stated in this act implies a goal of monetary stability and needs no modification. 2. Existing Congressional directives to the Federal Eeserve System afford a broad workable guide for policies and operations. 3. The status of the Board as an independent establishment of the Government, subject to the direction and scrutiny of the Congress,, should be preserved. Budgetary discretion is essential to maintain the basic character of the Reserve System. 4. No legislation is required with respect to the organizational relationship between the Treasury and the Federal Reserve or the Executive and the Federal Reserve. 5. Advantages of the existing regional status and organization of the 12 Federal Reserve banks far outweigh disadvantages. 6. Considering the functions in Government of the Federal Reserve Board, a board type of organization may be preferable to a single governor type. The weight of advantage may lie, however, with a smaller size board—say, five men. 7. No substantial gain in efficiency of Federal Reserve decisionmaking would be likely from centralizing the authority for all credit instruments in one body, the Board or the Federal Open Market Committee. 8. Member bank borrowing at the Federal Reserve should be the principal means of obtaining additional bank reserves. Discount rate changes and open market operations should be the main instruments through which credit and monetary policies are adapted to changing conditions in the economy. This means increased use of the discount mechanism, increased importance of discount rates in comparision with credit policy experience of the past decade, and reliance on open market operations to reinforce discount policy. 9. The present organization for the execution of open-market operations is designed to protect the public interest. The Federal Open Market Committee is constantly studying this organization with a view to making adaptations which w i l l improve it. 10. Open-market operations should be conducted impersonally without resort to moral suasion. 11. Only in exceptional circumstances should use be made of authority to change reserve requirements, which is a blunt and inflexible instrument. 12. The existing structure of reserve requirements could be modernized in some respects for purposes of more efficient and equitable administration. Also, standard legal reserve requirements could be applied to all banks without raising the question of the dual banking system, the preservation of which the Board favors. This is not an urgent problem at the present time, however. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 79" 13. Extension of selective credit regulation to areas other than stock market, consumer, and real-estate credit is not feasible. Further experience with regulation in both the consumer and the real-estate •credit areas is needed to determine their role on a long-run basis. 14. W i t h effectiveness of discount policy and open-market operations reestablished, disadvantages of supplementary reserve proposals outweigh advantages. 15. Direct control or rationing of bank credit by the Federal Reserve or any Government agency should ;jot be resorted to except in an extreme emergency. Several general points i n the replies are of interest. These include: N 1. Generally speaking, the banking system has kept pace with both the growing and changing credit needs of the different segments of the economy. Today business, agriculture, and consumers are more adequately supplied with banking services of various kinds than they were 25 years ago. 2. Commercial banks are meeting short- and intermediate-term credit needs of smal businesses reasonably satisfactorily. Provision of special long-term credit assistance in this area, such as would be authorized by bills introduced in recent years, namely, Government guarantee of loans made by private financing institutions or the establishment of special investment companies, would be untimely in an inflationary period. 3. Foreign experience with central banking and monetary policy does not yield lessons that are directly applicable to the United States. The following foreign developments are nevertheless suggestive: (a) I t has been widely recognized, at least in the countries of the free world, that the central bank sliould have a large measure of independence within the governmental structure. (b) I n a number of foreign countries, postwar credit policy was first operated mainly through selective regulations, but subsequently such regulations have been supplemented or replaced by measures of general credit policy, such as reserve requirements and discount-rate changes. T h a t finishes m y prepared statement, M r . Chairman. Representative P A T M A N . Senator Flanders, would you like to ask some questions ? Senator FLANDERS. Yes. Mr. Martin, on page 2 of your remarks you state: f One of the fundamental purposes of the Federal Reserve A c t is to protect the value of the dollar. Now, is that specifically stated in the original legislation setting up the Federal Reserve System? Mr. M A R T I N . N O , sir. I t is not explicitly stated in the legislation, but it is inherent in the entire legislative history of the act and in the surrounding circumstances. Senator FLANDERS. Has i t ever been i n legislation, early or late, specifically stated as a fundamental purpose? Mr. M A R T I N . I do not think i t has ever been stated explicitly i n legislation. Senator J?LANDERS. What you are saying then, is that it is implicit, and that i f i t is not taken into account the Federal Reserve Act cannot MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 80" be satisfactorily administered in the explicit purposes for which i t was set up? Mr. M A R T I N . That is correct. Senator FLANDERS. On the same page 2 , down toward the end of the central paragraph, I see what you have stated more than once in the course of your two documents here, that— Monetary policy by itself cannot m a i n t a i n economic stability and preserve unchanged the purchasing power of the dollar. I asked Secretary Snyder yesterday whether in such extreme cases as a general conviction on the part of both the business interests and the consumers of the country that prices were going to rise which, therefore, generated a broad-spread purchasing program, whether monetary policy alone could have kept it in control. I spoke, of course, as a specific example, of the buying wave which succeeded the openingof the troubles in Korea. Do you think monetary policy alone could have kept that under control? Mr. M A R T I N . N O , sir; I do not think monetary policy alone could have, but I do think that monetary policy was an indispensable part of any program of control. I think that we tend sometimes to exaggerate the role of monetary policy and at other times to underestimate the role of monetary policy. I think it can substantially lessen a buying wrave such as occurred in the post-Korean period by gradually reducing the available supply of money. Now, that takes some time. There are psychological factors that enter into it, and i f the push is very heavy, it takes a little time before you bring the push to a halt. Senator FLANDERS. Looking back on that period in retrospect you certainly would have, I take it, applied monetary measures quite definitely and quite strongly. Do I get from what you have said that you would not have expected them to be immediately and totally effective? Mr. M A R T I N . I do not think any one policy could have been immediately or totally effective. I think that when you get into a period of semihysteria, such as followed after Korea, that about all you can do is use all the weapons in your arsenal to check the inflationary pressures; that is why we had selective credit controls, along with the monetary controls, and why we engaged in all the other activities of Government, including the voluntary credit restraint program. Senator FLANDERS. Yet you feel that those other things were applied early enough or were they applied a little bit later than they should have been? Mr. M A R T I N . Well, in retrospect Senator FLANDERS. Ideally? Mr. M A R T I N . Ideally, I think, they were applied later than they should have been, but that is hindsight, and Senator FLANDERS. Yes. Mr. M A R T I N (continuing). I would say definitely in retrospect I think that we could have all of us in every endeavor acted a little bit more wisely i f we had been prompter in seeing the dangers that lay ahead. However, we also had to recognize that we had a changing situation which could, for example, have developed into a Dunkirk in Korea, to MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 81" take the extreme case, and that we did not want to do anything that would hamper unduly the mobilization effort which was just coming into being. I t was an extremely difficult period to pass judgment on. Senator FLANDERS. A r e you i m p l y i n g f r o m t h a t t h a t i f we had been drastic w i t h monetary policy we m i g h t have done more damage t h a n good to the situation—that is, i f we had shut off the supply o f new money and new credit so drastically t h a t the wave of b u y i n g was checked? W o u l d we have done damage t o the productive activity of the country? Mr. M A R T I N . I think i t is possible that we might have, and that was one of the considerations for not acting too drastically at the time. Senator FLANDERS. Going back just a moment to the point that a fundamental purpose is protecting the value of the dollar, has that ever been expressed in any legislative directives that have been given to the Federal Reserve Board ? Mr. M A R T I N . I really do not know. I t is implicit in the Employment Act of 1946, but there again i t is not a direct statement. Senator FLANDERS. That Employment Act, as I remember it, does not mention the Federal Reserve System directly. M r . M A R T I N . NO, s i r . Senator FLANDERS. B u t as a branch of the Government i t implies that that must be taken into account ? Mr. M A R T I N . And I am accepting the Employment Act of 1946 as national policy and being applicable to the Federal Reserve System. Senator FLANDERS. Yes. Again on page 6 of your statement i n the second f u l l paragraph you say: We have sought to make clear that monetary policy cannot, by itself, achieve stable economic progress but that i t is an indispensable means to t h a t end. Y o u say that monetary policy cannot by itself do the job of maint a i n i n g the purchasing power of the dollar, so t h a t your position seems to be clear on t h a t i n this document. Mr. MARTIN. That is correct, sir. Senator FLANDERS. I n your summary of your replies on page 3 you speak of a need f o r more flexible credit and monetary policies applied t h r o u g h the discount and open market mechanism w i t h i n the framew o r k of an orderly Government securities m a r k e t ; and at a later p o i n t you speak of the increased importance of discount rates i n comparison w i t h credit policy experience of the past decade, and reliance on open market operations. D o I understand f r o m t h a t t h a t the Reserve System is g i v i n g renewed emphasis to the discount function and t h a t i t has had some measure of success i n r e v i v i n g t h a t p a r t of the Reserve bank operations, or is t h a t a hope, a purpose, or is i t something t h a t is actually under way ? Mr. M A R T I N . N O , that is something that we think is actually under way under the accord that we have with the Treasury. We have been operating extremely satisfactorily, and relations have been steadily improving between the staff of the Treasury and the staff of the Federal Reserve Board. Under the accord we endeavored to free the market without letting i t become a disorderly market, and to permit the short-term rate that had been previously more or less pegged to adjust around the discount rate, which had been previously increased to 1% percent. That was a part of the understanding. A t one point M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 82" near the end of this current year we had discounts get up to nearly a billion dollar level for the first time in a long time. Now, that was a temporary situation. Right now we are worried because some borrowing by the banks through the discount operation, we fear, is for excess profits tax purposes and we do not want that to happen. But we are seeing the gradual restoration of more normal market conditions instead of a market that for a long time was pretty stagnant and entirely dependent on the peg. Senator FLANDERS. What type of collateral is involved in this expanded rediscount market operation ? Mr. M A R T I N . Almost entirely Government securities. Senator FLANDERS. There has been no particular increase in the discount of commercial paper ? Mr. M A R T I N . There has been very little discounting of commercial paper or other types of loans with the Federal Reserve,banks; most borrowings from the Federal Reserve banks have been on Government securities as collateral. We used to have quite a few bankers' acceptances. I would like to see the bankers' acceptances market redeveloped, but it has been practically dormant for some time. I hope it w i l l come back into being. Senator FLANDERS. Just one other group of elementary questions for the sake of having them in the record. I t seems really silly to ask them, but I am going to ask them just the same. When the Treasury sells bonds to the bank, that increases or decreases the available money supply? Mr. M A R T I N . That increases the available money supply. Senator FLANDERS. A l l right. When the Treasury retires bonds held by the banks that decreases the money supply ? Mr. M A R T I N . Decreases. Senator FLANDERS. When the Federal Reserve System buys Government bonds from the banks, what does that do to the money supply ? Mr. M A R T I N . That increases the reserves of the member banks which, in turn, increases the money supply i f they lend the money. Senator FLANDERS. SO when the Government buys, that is, retires its bonds i t decreases the money supply. When the Federal Reserve bank buys bonds from the commercial banks i t increases the basis for credit, and so tends to increase the money supply. Mr. M A R T I N . I t is a creative process. Senator FLANDERS. Yes. And the reverse, of course, is true, when the banks sell, when the Reserve System sells bonds. I just put that into the record because i t seemed to be a little bit mysterious that the Government selling should do the opposite thing from the Federal Reserve banks' selling in its effect on the money supply, so I just wanted that stated in the record. M r . MARTIN. Yes. Senator FLANDERS. That Representative P A T M A N . Representative B O L L I N G . is all, Mr. Chairman. Mr. Boiling? Mr. Martin, yesterday in the colloquy between Senator Douglas and Secretary Snyder, after describing the activities of the Federal Reserve in the post-Korean period, and then putting into the record what happened in the expansion of credit, MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 83" Senator Douglas said, in speaking of the inflationary impact of the increase of the money supply: Well, was i t not an important reason and the important reason, the increase, the support efforts of the Federal Reserve on the inflationary situation? I would like to discuss that in the light of your own statement and in the light of some figures taken from the chart in part I , which includes your reply, the chart which begins on page 216, and details in brief form the actions of the Federal Reserve System since its inception, and i n relation to some figures that have to do with the consumer's price index over two periods of years. I believe my figures are correct, but they could easily be corrected i f they are not. I n this chart you indicate that in a period 1942 to 1945 the Federal Reserve increased its holding of Government securities by $22 billion, bills $12.8 billion, certificates $8.4 billion, and notes $1.3 billion. You say that bond holdings decreased $500 million. I am not i n a position to use exactly comparable figures, and, therefore, the comparison may not be completely fair, but I note that the monthly average of consumer's prices for 1943—I do not have the 1942 figure—was 123.T, and for 1945 128.6, an increase of 4.9 in a period roughly the same period when the Federal Reserve increased its holdings of Government securities by 22 points. Then, in the period from January 1946 to August 1950, again from your chart it appears that the Federal Reserve reduced its holdings by a net of 5.9 billion. I n that same period from 1945 to June, I have, of 1950, the consumer's price index went from 128.6 to 170.2, which is a rise of about 42. I am sure my point is clear, i t appears on the surface that during a period when large increases of Federal holdings existed that the consumer price index moved much more slowly than i t did in a period where the exact reverse process was taking place in the holdings by the Federal Reserve; they were reducing them, and yet the inflation, as indicated by consumer prices—that may not be tne fairest way— was going at a greater rapidity. Mr. M A R T I N . Well, you have just illustrated the difficulty of attributing to any one factor the shifts in prices. Now, since the Treasury-Federal accord there has been an increase in the volume of bank credit of a substantial amount. There would have been, in my judgment, a whole lot larger increase in that bank credit i f i t had not been for the Treasury-Federal accord, and we did not add reserves to the market during that period. Nevertheless, you have got to take care of the needs of essential financing. Now, the period you are talking about is a difficult one because i t was a period of war and postwar readjustment. During the war, we created a lot of money and we sold a lot of Government securities to the public. Prices were held down by rationing, allocations, price controls, and voluntary savings by the people to help win the war. A t the end of the war, the economy was extremely liquid. Because of the large volume of monetary resources created to finance the war, we had a condition of suppressed inflation. Then, when we removed wartime controls, inflationary forces took effect. After the immediate postwar transition inflation, we had still more inflation, and further M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 84" credit and monetary expansion contributed to the additional price advances. There is no way of blinking at that record. While i t might be good tactics for me to say that there was no war or postwar inflation at all and that the Government including the Treasury and the Federal handled everything perfectly—I am not saying that. I f you w i l l notice in my statement, we at the Federal assume some of the responsibility. I think the Treasury and the Federal have a mutual responsibility for dealing with the inflation problem. And I want to say that no man has labored harder than has Secretary Snyder to meet the postwar inflation problem through fiscal action involvinghigher taxes. Another aspect of the problem, and i t has many aspects, is that of debt management policy. We had to deal with the debt structure as i t was at the end of the war; we didn't have a clean sheet of paper, to go back to my earlier illustration. There were many suggestions for revising the schedules and maturities of Government securities and for shifting the debt held by the banks to nonbank investors. I t was a very complex financing situation. No one has labored harder to improve that situation than Secretary Snyder. A n d I want to add that when I first went into the Treasury I had a whole lot of ideas about how I would change the thing overnight; I revised my ideas when I saw the difficulties that were there. A t one point, the Federal Eeserve Board advocated, and I personally rather subscribed to, the idea of a supplementary reserve requirement for banks to be held in short-term Government securities. Because we had a balanced budget, even a budget surplus, and were trying to find some way of redistributing the undigested debt in the economy while restraining monetization of the debt at the same time, the supplementary reserve appeared quite a reasonable way to approach it. Now, recently I have veered away from the idea of such a supplementary reserve requirement. I have done this because, as we approach a deficit I do not want i t to appear that the Federal and the Treasury are using a supplementary reserve device as a method of compelling the banks to finance the deficit. I believe that we ought to finance this deficit i n a noninflationary way by attracting the savings of nonbank investors into Government securities. The Treasury and the Federal are now working persistently on the steps necessary to accomplish this. Representative B O L L I N G . I n line with that statement and the statement in your formal presentation, and your replies to Senator Flanders, I gather that i t would be safe to say that you do not agree with: an excerpt from a statement which appears in the hearings of the January 1951 Economic Report held by the joint committee from the statement by a group of economists entitled "The Failure of the Present Monetary Policy." The statement I have in mind, having reference to the immediate post-Korean period, is: "Indeed, prices would probably be today a little above their level in May i f the Federal Reserve System had kept its holdings of Government securities unchanged instead of adding to them by 3.5 billion dollars." Mr. M A R T I N . That is a judgment; I personally would not completely concur i n that judgment. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 85" Eepresentative BOLLING. SO that, i n effect, i n your mind, monetary policies are a very important aspect of the whole problem, not the important factor. Mr. M A R T I N . That is right. Eepresentative BOLLING. I n the question of timing, I know i t must be extremely difficult to make a generalization in reply to this kind of a question, but how long ordinarily would i t be necessary for an action in the monetary field to have an effect? I am speaking specifically to point 9 on page 3, where you say: More flexible credit and monetary policy applied to the discount and open market mechanism w i t h i n the framework of an orderly Government securities market have demonstrated their effectiveness since they were undertaken i n March of 1951. I would like you to answer the general question in the light of that. Mr. M A R T I N . I do not think you can give a categorical answer to that, but I would say, on the basis of the record, that whatever you attribute the forces to, i t did not take very long at that time before there was some evidence. I am not one who claims for the Treasury-Federal accord all of the credit for restraining inflation since A p r i l 1951. But I do think that i t was certainly one of the important factors because i t made people stop, look, and listen all across the country as they saw the market forces once again come into play. Now, as regards time measurement, i f you are a real enthusiast for monetary policy, you might say that the mortgage market dropped out of bed within X weeks. However, I do not think that you can measure effects so precisely i n the kind of dynamic economy that we have today. Eepresentative BOLLING. What are the other factors involved in your opinion, in this effect, not in detail, but in general ? Mr. M A R T I N . Well, let us take the Treasury-Federal accord as an example. There is a limit to a buying binge in the sense that you reach a point where people have pretty well become overinventoried and overstocked. There is a diminution of enthusiasm for storing up for shortages. Then, there are subsidiary programs such as the impact of higher taxes, the increasing effectiveness of our selective credit controls, materials allocations, and our voluntary credit restraint program which came into effect about that time and attempted to postpone the financing of certain deferrable activities. I claim for the Treasury-Federal Eeserve accord only that i t was the spark which ignited a lot of powder that had been accumulating around that period and, therefore, was one of the elements along with fiscal action, selective controls, and other measures, as well as the constant awareness and alertness of public psychology to the programs we were facing. I t was one of the elements that contributed to resolving the difficulty that we were then in in the business expansion field without undermining the drive to make progress on necessary defense work. Eepresentative BOLLING. Mr. Martin, you probably are aware that I was not a member of the subcommittee which Senator Douglas chaired on monetary credit and fiscal policies. A l l other members of 86 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 86" this committee were, and this may not be an appropriate question. you do not wish to answer it, i t is all right with me. On page 2 of this report there is stated: If I t is the w i l l of Congress t h a t the p r i m a r y power and responsibility for regulating the supply, availability, and cost of credit, i n general, shall be vested i n the duly constituted authority of the Federal Reserve System, and the Treasu r y actions relative to money, credit and transactions i n the Federal debt shall be made consistent w i t h the.policies of the Federal Reserve. Just as the words say, i t appears to indicate that the policy of the Executive could be, in effect, i f that were carried into execution, made subordinate to that of the Federal Reserve, and I would like to have your thinking on that particular recommendation. Mr. M A R T I N . Well, the difficulty I find in the recommendation is that I have never been able to resolve in my own mind the line between debt management and monetary and credit control policies. I do not think you should subordinate the Treasury to the Federal Reserve or the Federal to the Terasury. I think that they have both got to be equals in approaching this problem from their respective responsibilities, one in debt management and the other in credit and monetary control; you have got to have a merging of the thinking with respect to both to achieve a worth-while result. The nature of the problems that we are discussing here is not such that judgments on them can be precise. Their solution requires some experimentation, some probing, some accommodation of views. No one can be sufficiently arrogant intellectually to think that he can give an exact answer to any of them. I t reminds me a little bit of when I was working in the foreign field, and I had a fellow for 5 years that would come to me and say: "Well, now, we have the problem of the British-held sterling balances, and we are going to have a meeting on Friday afternoon and settle that." We have been meeting on this problem now for 5 years, and it is still a problem that is going to continue to be with us for a long time. I think you can only make progress over time on a complex and difficult problem. I think we are making progress on our credit and monetary and debt management problems at the present time. The Treasury and the Federal are w o r k i n g very h a r d today t o accommodate the legitimate interests of both f o r the benefit of the people. Constructive public policy i n the financial field is something t h a t can come only f r o m long, torturous, persistent, humble study. Representative BOLLING. One other thing, Mr. Martin: The Secretary of the Treasury yesterday in his statement suggested an advisory council. I would like to have your comment on that. Mr. M A R T I N . N O ; I did not comment on that, but I have read the Secretary's statement. Knowing Secretary Snyder, I appreciate the spirit in which the suggestion is offered. I t is one of desiring to get beforehand as much information, intelligence, and judgment as possible on very difficult problems. But I have to confess to some uneasiness as T subject tne proposal to analysis. I t is difficult enough, as i t is, with the New York Federal Reserve Bank as the operator or agent for the Open Market Committee, and an open market committee of 12 men, and the Treasury with its staff, to sit down and resolve some of these problems. M O N E T A R Y POLICY AND M A N A G E M E N T OF P U B L I C DEBT 87" Now, we are always glad to have advice from anyone and everyone, but at some point the power of decision must be encountered and be effective. I take it that his proposal is for a nonstatutory body on a semi-informal basis, although i t is not worded quite that way. I would call your attention to the fact that the Federal Reserve has a judicial function to perform. We have been called the supreme court of finance and I do not want to over stress that. But i t is the judicial judgment of the Federal Reserve with respect to its particular province which warrants our independence, and which has been in the thinking of all foreign governments in modern economics and of our own Government from the beginning of the System's existence. To maintain this position of judicial judgment is the problem in political science of the relationship of the central bank to the Treasury. I express my reservations about the advisory council quite respectfully because I know the spirit in which Secretary Snyder has presented this proposal. He has an honest desire to solve the problem. I would not want to see this council confined to just debt management and monetary and credit control. I t ought to be quite considerably broader than that, and we ought to be very careful that the advisory function does not merge with the power of decision. Otherwise we w i l l not be more effective in our operations but less effective, because it is difficult enough today to arrive at some of these decisions. Representative B O L L I N G . Putting i t another way, do you feel that in the present state of affairs in the present state of statutes, that i t is possible that the problems which you and the Treasury confront, in effect together, to be solved without changes in statute, changes in relationship, changes in organization ? M r . MARTIN. I do, sir. Representative B O L L I N G . That is all. Representative P A T M A N . Senator Douglas? Senator DOUGLAS. Mr. Martin, my first question, in a sense, w i l l cover ground that Senator Flanders referred to. I merely want to bring it up in order that we may have a factual basis on which we may proceed. When the Open Market Committee buys Government bonds, how are these bonds paid for ? Mr. M A R T I N . They are paid for by a check, by deposit. Senator DOUGLAS. Y O U mean that the banks, the Federal Reserve banks, create credit Mr. M A R T I N . That is right, sir. Senator DOUGLAS (continuing). W i t h which they buy Government bonds from private parties. Mr. M A R T I N . That is right, sir. Senator DOUGLAS. What happens to these checks which the Federal draws from a created credit account? What happens to those checks? Mr. M A R T I N . They go into the reserve account. Senator DOUGLAS. Yes; that is the second step. What is the first step ? They are given to the holders of securities; is that true ? Mr. M A R T I N . That is right. Senator DOUGLAS. Then they are presented through member banks to the Federal Reserve System; is that not true ? Mr. M A R T I N . That is right. Senator DOUGLAS. When they are deposited in the Federal Reserve System, how are they set up as a credit ? 88 M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 88" Mr. M A R T I N . T O the reserve account of the bank, of the depositing bank. . # Senator D O U G L A S . Does this increase the lending capacity of the banks ? Mr. M A R T I N . Under our present fractional reserve system by about a 6-to-l ratio. Senator D O U G L A S . The average reserve is Mr. M A R T I N . Assuming they lend all the money, I think they can, on that basis. Senator D O U G L A S . S O that i f the Federal Reserve buys a million dollars worth of bonds that w i l l increase the maximum lending capacity of the members banks by $6,000,000 ? Mr. M A R T I N . Assuming that the demands for the credit are there. Senator D O U G L A S . I know. But is the lending capacity available. . M r . MARTIN. Yes. Senator D O U G L A S . N O W , do banks like to keep idle assets ? Mr. M A R T I N . They do not. Senator D O U G L A S . Therefore, i f they have this lending capacity, does not this added lending capacity make them more ready to make loans than they otherwise would be? Mr. M A R T I N . I n a period of active credit demand, no doubt about it. Senator D O U G L A S . SO that the purchase of Government bonds by the Federal Reserve System tends to lead to increased loans by member banks to private business; is that not true? Mr. M V R T I N . Correct. Senator DOUGLAS. I f there is not a commensurate increase in physical production, what then happens to the price level ? Mr. M A R T I N . The price level tends to rise, sir. Senator D O U G L A S . Therefore, the purchase of these bonds by the Federal Reserve System tends to have an inflationary effect? Mr. M A R T I N . There is no doubt of it. Senator D O U G L A S . Yes. Now, then, i f you look back on the period after Korea, was the urchase of $4 billion, approximately, of securities by the Federal SReserve System disassociated from the increase i n bank loans of ap- proximately $10 billion in that same period? Mr. M A R T I N . I t was not disassociated. Senator D O U G L A S . But was i t not a cause? Mr. M A R T I N . Not the only cause, sir. Senator D O U G L A S . Well, was i t not a partial cause ? Mr. M A R T I N . I t was a partial cause; yes, sir. Senator D O U G L A S . That is, when the member banks had more reserves in the Federal Reserve System, that permitted them to make more loans, and they did make more loans. Mr. M A R T I N . That is right. Senator D O U G L A S . And the ratio immediately was nearly three-toone. Furthermore, did i t not create excess reserves so that they had a margin upon which they could expand loans from A p r i l 1951 on? Mr. M A R T I N . N O doubt about it. Senator D O U G L A S . SO that part of the increase in loans since A p r i l 1951 was due to the purchase of securities by the Reserve System prior to A p r i l 1951 ? Mr. M A R T I N . Part of i t was, but part of that credit, we think, was needed to help readjust to a defense economy and to sustain the econ M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT 89" omy. Since that time there has been no appreciable rise in the price level. Senator DOUGLAS. But there was an increase in prices, of course, between June 30,1950, and March 1951. Mr. M A R T I N . That is correct, sir. Senator DOUGLAS. The increase i n wholesale prices was approximately 17 percent. The increase in bank loans was approximately 19 percent. Do you think there was some connection between the increase of 19 percent in bank loans and the increase of 17 percent in wholesale prices? Mr. M A R T I N . I think there was some connection, but I would not say that was the only Senator DOUGLAS. The coincidence is very close; is it not ? Mr. M A R T I N . Y O U have to beware of statistical coincidences when you are interpreting a general economic development. Senator DOUGLAS. I just wanted to point out that we started upon a basis of logic, and this logic led you to the conclusion that an increase i n Federal Reserve purchases of bonds would lead to an increase in bank loans, and that this in turn would lead to an increase in prices. Now, we turn from logic to history, and history seems to bear out logic, so that i t is not merely a coincidence; i t seems to be the working of a law in fact. Mr. M A R T I N . Well, there is nothing i i f my statement, Senator, that would contradict the general thesis that general monetary expansion has some influence on price developments; the contrary is, in fact, stated. Senator DOUGLAS. But here is a case of a lack of monetary control being practiced by the Reserve. Mr. M A R T I N . Also the converse is true. Senator DOUGLAS. A complete lack of monetary control, the complete flooding of the market with bank loans, with the result that prices go up. I f you bring in the question of the velocity of the circulation of money, which I thought probably would be your next defense, I would like to counter and say that the increase in velocity and the increase of physical production approximately balanced each other, so i f we use an equation of four terms and not merely two, we w i l l find that the relationship still applies. Mr. M A R T I N . N O ; I was not going to counter with velocity because I find velocity very difficult to handle. Senator DOUGLAS. Well, the increase of velocity and the increase of physical production were roughly 8 percent, and may offset each other, roughly. Allowing those to balance each other you have an increase of 19 percent in bank credit and an increase of 17 percent i n wholesale prices and you have said that an increase in bank credit, other things being equal, results in an increase in wholesale prices, so why did not the increase i n bank credit during this period cause the increase i n prices ? Mr. M A R T I N . Well, I think that is perhaps too facile a generalization. Senator DOUGLAS. Well, I submit that i t is an historical truth. Now, before I ask the next question, I want to say that you are a very fine public servant and an extremely tactful man, Mr. Martin. I marvel at the way you tread on eggshells. I say this very sincerely. MONETARY POLICY AND M A N A G E M E N T OF P U B L I C D E B T 90" Now, do you think that the policy of the Federal Reserve i n making these purchases during this time was completely voluntarily, was i t a completely voluntary decision ? Mr. M A R T I N . Senator, I am not going to make any comment on anything except from the time I went to the Reserve Board. I was a subordinate in the Treasury prior to that time. Senator D O U G L A S . Y O U were on the other side of the fence then. Mr. M A R T I N . I can say to you—well, I would not make any assertions one way or the other except that I have complete confidence i n Secretary of the Treasury Snyder. I have never worked with a more open-minded, intelligent man who wants to do the right thing at all times. He has made mistakes, I have made plenty of mistakes. I would just like to Senator D O U G L A S . Mistakes can be very educational providing we recognize them so that they do not occur again, and that is my sole purpose in bringing out this history, both for clarification of the past and also possibly as a prophylactic against future aberrations. Mr. M A R T I N . Let me say unequivocally, since i t has been put i n this framework, that since I have been in the Federal Reserve there has been—I w i l l not say a hundred percent agreement on everything that has been done—that would be going too far, but I would say there has been complete harmony of decision, and no dictation by the Treasury to the Federal Reserve. % Senator D O U G L A S . N O W , then, you say you would only comment Eersonally on what has happened since you left the Treasury and ecame Chairman of the Federal Reserve Board. Would you submit for the record the documents of protest drawn up (a) by the Open Market Committee, (&) by the Federal Reserve Board itself, which were submitted to the President and to the Secretary of the Treasury in the winter of 1950-51 ? Mr. M A R T I N . Well, I think that raises the question of public policy, whether the minutes of the Federal Senator D O U G L A S . These are not minutes. These are letters of protest or letters of statements of position of the Federal Reserve Board and the Open Market Committee. Mr. M A R T I N . I do not think that the records w i l l add anything to the Senator D O U G L A S . May the committee be the judge of that? Mr. M A R T I N . I w i l l be very glad to have the committee be the judge of that i f they would take a look at it Senator DOUGLAS. Well, I am going to ask that the witness be requested to submit for the record and for the inspection of the press the documents which the Federal Reserve Board and its Open Market Committee prepared in the winter of 1950-51, so that the f u l l record of those transactions may now be made available to the public. Mr. M A R T I N . Mr. Chairman, I would question a little bit the propriety of that as a matter of public policy. I would be perfectly willing to have you, Mr. Chairman, or your committee or anyone you designate, take a look at any records we have, and make a determination on what you want to do, but I think there is a very serious problem of public policy involved. Representative P A T M A N . Y O U think it is a matter that should be passed on or considered in executive session i f at all? Mr. M A R T I N . I would so state. M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT 91" Senator DOUGLAS. Mr. Chairman, I do not wish to argue this point at length. I want to point out that at pages 72 and 78 of the report, the Secretary of the Treasury accused the Chairman of the Federal Reserve Board, by implication, of bad faith on no less than three separate occasions during this period. I would also like to point out that this was the period in which the Federal Reserve Board was purchasing large quantities of Government bonds with what seems to me to have been the clear effect of feeding inflation. Finally the Board decided it could not stand the policy any longer; it made protests ancl these protests ultimately led to the triumph of the Federal Reserve point of view. This is all a vital public matter. I do not know why it should be hidden from the public gaze. I have always felt as you have stated, that popular support is needed for these measures, and in order to have popular support, popular understanding is necessary, as well; and I have never felt that the Federal Reserve System was a private institution which could keep its documents from public analysis. Representative B O L L I N G . Mr. Chairman, i f the Chair intends to rule on that at this time, I would like to be heard. I f you intend to postpone it I would not. Representative P A T M A N . I would like to hear you, Mr. Bolling. Representative B O L L I N G . I think involved in this is a very fundamental matter of public policy. I am not particularly aware of what the documents might contain, but i t seems to me very clear that, pari icularly in the last few years, there has been a tendency on the part of Congress to infringe on the lower-level processes of decision-making in the executive branch, and I personally think i t is a constitutional question, as well as a question of the advisability from a public policy point of view. I would feel very strongly that this should be approached deliberately, certainly with an initial examination on the part of the committee prior to making the f u l l jump from privacy to publicity. Senator DOUGLAS. May I reply to my good friend and colleague, Congressman Boiling, that I had always understood that the Federal Reserve prided itself on being the agency of the Congress rather than the agency of the executive, and that this has been affirmed again and again by the Federal Reserve System. Congress is not asking i n this case to have executive papers turned over to it. I am making the request that our agent—and I hope this does not sound too tough— our creature—file with us vital papers affecting fundamental matters of public policy. Representative B O L L I N G . The Senator would agree, however—excuse me. Senator DOUGLAS. Yes. Representative B O L L I N G . The Senator would agree, howTever, i f this particular approach is taken that inevitably i t w i l l probably be at least apparent that the Treasury w i l l be compelled to present its side of the question or the public will not be served on the basis of information. Senator DOUGLAS. Well, I w i l l make no such request upon the Treasury that they produce the papers; but I do think i t is proper for the Federal Reserve to produce the papers. W i t h regard to the 97308—52 7 92 M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 92" three questions which I had asked Secretary Snyder yesterday, and which he did not wish to answer, I told the chairman privately, and I said publicly, I am perfectly willing to abide by his ruling without appealing from that ruling. But very grave charges were made by the Secretary of the Treasury against the previous Federal Reserve Board, and i t seems to me that since the Federal Reserve System is the creature of the Congress, that i t is quite proper for Congress to ask for the papers, and I renew my request. Representative P A T M A N . I wonder i f i t would be satisfactory—you are willing for the papers to be examined by members of this committee? Senator DOUGLAS. N O , I would like to have them made a part of the record so that Representative P A T M A N . May I finish? Senator D O U G L A S . I beg your pardon. Representative P A T M A N . I wonder i f i t would be possible for Senator Douglas and Mr. Bolling to examine the documents first, and after they have examined the documents and i f they insist upon it, why, then we w i l l decide the question. Mr. M A R T I N . Might I suggest, Mr. Chairman, that we might prepare a summary of the pertinent comments on this that your committee might take a look at and determine what they are. The problem of charges which the Senator raises is not going to be answered by anything in our records. Representative P A T M A N . Well, he will see that for himself when he sees the documents. Senator DOUGLAS. May I say that I do not think that Congressman Bolling and I should examine the documents. I f they are examined they should be examined by the committee as a whole, certainly not by two members of the same political party. Representative P A T M A N . Well, yes, you nave an objection there. Representative W O L C O T T . I will be glad to serve. Senator DOUGLAS. I must again respectfully suggest that the Federal Reserve is the creature of Congress; that we are merely asking that our agent furnish us with information upon this matter. A knowledge of the past is vital for the decisions of the future. Representative W O L C O T T . Senator, would you yield ? Representative P A T M A N . Yes, Mr. Wolcott. Representative W O L C O T T . I think all of us who have had a year of law recognize the distinction between a servant and an agent, and I notice that the Chairman of the Federal Reserve System recognizes that the Federal Reserve System is the servant of the Congres, and we are supposed to have a little more domination over a servant than we would have over an agent. Mr. M A R T I N . That is correct. Representative P A T M A N . Had you finished, Senator Wolcott ? Representative W O L O O T T . I thank you for the promotion. Representative P A T M A N . Senator Flanders wanted to be heard, and I wanted to make sure that you were through. Representative W O L C O T T . I just wanted to say seriously that the Federal Reserve was set up as the agent of the Congress, which was given the constitutional obligation, and they operate as a statutory agent of the legislative body, which was given the constitutional obligation to coin money and regulate the value of it. M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT 93" Now, I think that this committee, and I think the Congress, in line with Senator Douglas' suggestion, has a right to determine any matter which involves its agent with respect to monetary policy, and I was going to suggest later in the day, perhaps, this is as good an opportunity as any—that perhaps for background we should have Mr. Eccles here. I notice that he is not on the list. Apparently he has not been invited to testify, and it probably was an oversight, but may I request now that Mr. Eccles be invited to appear ? Representative P A T M A N . Certainly, and he w i l l be invited. Senator Douglas? Senator DOUGLAS. May I suggest that Thomas B. McCabe, the former Chairman of the Federal Reserve Board, be invited also? Representative P A T M A N . He w i l l be invited. Had you finished, Mr. Wolcott? Representative WOLCOTT. Yes. Representative P A T M A N . Senator Flanders ? Senator FLANDERS. On this question, I would agree that we are well within our responsibilities in asking for these documents. I think we would not be discharging our responsibilities i f we asked to, i f we required that they be made public without looking at them. We should look at them first and then we decide whether or not i t is within the public interest to make them public. Representative P A T M A N . The committee is only a small committee and I think all five members can very well serve in examining the documents, and I wonder i f you are willing to make them available to the whole committee in executive session, Mr. Martin. Mr. M A R T I N . I w i l l make them available in executive session. I meant what I said about the open record. Representative P A T M A N . I wish you would elaborate on that statement, please. Mr. M A R T I N . I said I meant what I said in my statement about our records being open. Now I question very much the wisdom as a matter of public policy of making the minutes of the Federal Reserve System public, so that hereafter we would have to write all minutes i n terms of a public document. I think that is poor public policy. Representative P A T M A N . Well, of course the committee can pass on the question of whether or not they should be made public, but I think under the law you are required to make a lot of information public, are you not, even the votes ? Mr. M A R T I N . Our policy decisions in the open market committee are published annually and made available to you, Mr. Chairman. Representative P A T M A N . There are rather full and complete records there, are there not ? Mr. M A R T I N . That is right. Representative P A T M A N . . Even to how any particular member voted. Mr. M A R T I N . That is correct, on policy questions. Representative P A T M A N . Mr. Wolcott, wTould you like to ask some questions? Oh, excuse me, Senator, had you completed your questioning? Senator DOUGLAS. I had not quite finished. Suppose the Federal Reserve System were to become a branch of the Treasury, what effect on its credit policy would be likely in a period of f u l l employment? M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 94" Mr. M A R T I N . Y O U caivt determine that, Senator, because i t depends on the Secretary of the Treasury. The Secretary of the Treasury is just as interested as the Federal. I can certainly speak for the present Secretary in that he is just as interested in restraining inflation. Senator DOUGLAS. Are not a l l the pressures i n the direction of inflation, t h a t is, the movement of costs and the movement of wages ? M r . M A R T I N . Pressures on inflation are very great always. Senator DOUGLAS. A n d aren't there certain advantages i n a period of f u l l employment i n h a v i n g the banking mechanism of the c o u n t r y ' somewhat insulated f r o m inflationary pressures? I am not asking f o r complete insulation, but somewhat insulated. M r . MARTIN. I t h i n k i t is very desirable to have i t . Senator DOUGLAS. And a good deal of weather stripping, so to speak, might be very helpful in restraining inflation; isn't that true ? Mr. M A R T I N . I think that is the concept of the founders of the Federal Reserve System, and on examining i t carefully again in preparing for this committee, I think they showed real wisdom in setting i t up the way they did. Senator DOUGLAS. Would you favor having the Secretary of the Treasury a member of the Board of the Federal Reserve System ? Mr. M A R T I N . That is a difficult question, Senator. I have flirted with the idea that we would have in the open market committee theactive consultation with the Secretary of the Treasury which I think is essential to a satisfactory solution of common problems. Now at the present time we have it. We have daily and almost persistent consultation, but there is no actual provision whereby the Secretary of the Treasury or the Board come together except by sufferance. Now a lot of the people i n the System and a lot of the proponents of independence get terribly upset at the thought of having the Secretary of the Treasury on the Board as he was at the start, with the Comptroller of the Currency. M y feeling about it revolves around the question of the vote, the question as to whether the Secretary of the Treasury would be chairman of the open-market committee i f he were a member of the committee and his office would be such that in the normal way you would expect him to be chairman; is he to be chairman with 1 vote against 12 votes, which in a sense puts the Secretary of the Treasury in a rather bad relationship to the committee ? Nevertheless, we certainly wanted a voice and consultation in all of these problems. Now, as the chairman of the open-market committee at the present time when we have a 3- or 4-hour session of the committee, I go back to the Secretary of the Treasury and try to tell him, when we have arrived at a point of decision, what the thinking of the committee is. 1 would really be very happy i f I did not have to tell him what transpired but could actually have had him present during the time the discussion was going on. Now, I realize the dangers of that. Senator Glass said that, with a strong man in the office of the Secretary of the Treasury, he would exert influence and therefore would distort the judicial process of an independent Federal Reserve System. I don't get too excited about that argument. You will appreciate, I know, that I am discussing this with you very honestly and openly. I am not recommending that there be a change at the present time M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT 95" because there are a lot of very sincere people opposed to it, and I have talked to them from coast to coast. I have explored this idea with a great many people. Particularly under the present atmosphere you get the reaction that this is just a device to put the Secretary of the Treasury in control of the Federal Reserve Board. Now, I think that public servants at some point have to stand up and be counted. I f I am not strong enough to hold my own with the Secretary of the Treasury, then I am not entitled to the job I occupy. And i f the legal position is such that the open-market committee has control, there is a very real question whether i t would not be wise to have the Secretary of the Treasury a part of the deliberations. I know pretty well the background of this suggestion, and I recognize the dangers of i t also. I want to emphasize again that I am not recommending at the present time that it be adopted. But I think your committee could render a very worth-while service by sincerely studying that problem from all angles. We now have the New York bank, the Treasury, and the Board of Governors in a situation where constant, daily, persistent study of these questions is required, and yet i t is all done on an informal basis. Senator DOUGLAS. What would you say to the proposal advanced by some that the term of service of members of the Federal Reserve Board be reduced from 14 to 6 years ? Mr. M A R T I N . Well, I would prefer that. Senator DOUGLAS. Y O U would prefer it? Mr. M A R T I N . I would prefer i t ; yes, sir. Senator DOUGLAS. That would make the Board of course the much more under the control of the president. Mr. M A R T I N . I question that. I would like to see the term as we say in our answers here, reduced to 6 years with ability to take another term. Senator DOUGLAS. W i t h a seven-man board that would mean one man would be retiring each year so that the President in the course of 4 years would appoint the majority of the Board. And furthermore, the prospect that a man would be coming up for reappointment shortly might make him more amenable than i f he knew that he had a 14-year tenure. For instance, the 14-year tenure has applied to the New York Court of Appeals and has resulted in the court being almost completely independent. I t is one of the finest courts in the country. Now i f they felt that they were coming up for renomination every 6 years, might that not make the members of the Board much more amenable to what the President wanted ? Would i t not tend to make the Board an executive agency rather than a congressional agency? Mr. M A R T I N . Well, I question that. I think that the type of man that we should have appointed to the Federal Reserve Board would be satisfied with a 6-year term, and I don't think he would change his approach. Senator DOUGLAS. You believe the members of the Board would always be strong, vigorous characters who can stand out against executive pressure and therefore you need not provide them with any protection ? Mr. M A R T I N . Well, I think the 6 years would be some protection, Senator. You make i t 14 and you have a tendency sometimes for— very few people serve 14 years. M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT 96" Senator DOUGLAS. But the knowledge that they can serve 1 4 years gives the members a good deal of independence. One final question. You speak of the equal status which you believe both the Federal Reserve and the Treasury should possess. What happens when you come to a question such as this: Should the market on Government bonds be supported at par? The Treasury insists that the market should be supported at par. You feel that i t should not. Under those conditions what happens to equality of status? What happens to the blessed word "cooperation" about which we have heard so much? Mr. M A R T I N . There is nothing i n the law which compels us to support bonds at the present time. Senator DOUGLAS. That is true, but suppose the Treasury pushes you to do so and you do not wish to do so. Then what should happen ? Mr. M A R T I N . Y OU have got to have a meeting of the minds. Senator DOUGLAS. That is highly desirable, but frequently in life that is not possible. Suppose what continues is a conflict of the minds, which is what prevailed as you well know for year after year after year prior to your coming to the Board. Mr. M A R T I N . Well, i t would be Senator DOUGLAS. And the issue was settled almost every time until early 1951 by the Board yielding. Now when there is a conflict between the two, which should be prevalent ? Mr. M A R T I N . I think that you have got to adjust a conflict between the two. For the Federal to take the law into its own hands and just automatically let a Treasury financing fail would, I think, be a mistake. I t would be an irresponsible action. Now let me explore that a little bit. The Open Market Committee developed, sort of grew like Topsy. The first committee was set up informally in 1923. The Banking Act of 1935 gave us our present set-up with participation by the presidents of the Reserve banks with the Board in an open-market committee. I n 1937 with a lot of pressure on the market, the Federal, for the first time, supported Government security prices in the market on an orderly market basis. Our relationship with the Treasury through the war period—and I am not going to say whether I think the war was financed the right way or the wrong way, but through the war period—resulted in the establishment of the peg. That kind of market operation continued until last March. Now today in pricing a new Treasury issue, the Federal is in the position of underwriter. During the period of the offering the Federal tries to see to i t that the Treasury's issue is successful, because one of the primary purposes Senator DOUGLAS. And therefore i t should support the market i n order to make i t successful ? Mr. M A R T I N . I t stabilizes the market just the way any underwriter does. Senator DOUGLAS. I asked Secretary Snyder the question yesterday. This practice by private issuing houses would subject them to criminal penalty. Representative P A T M A N . He did not use the word "support." He used the word "stabilize." Mr. M A R T I N . SO far as I know, I haven't checked on S E C regulations recently, but I believe they permit a stabilizing operation during MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 97" a period of an offering. W h e n the offering is over, the Federal is under no compulsion whatever to support the market. I t s only responsibility t o the public is that of m a i n t a i n i n g an orderly market. Senator DOUGLAS. The question of letting a Federal bond issue f a i l completely is not in the sphere of controversy. The issue is between a policy of rigid support which the Treasury forced the Federal Reserve to adopt up until March of 1951, versus a policy of flexible support which you have followed since then. Suppose the Treasury insists on rigid support, you still hold out for flexible support. Whose judgment should prevail? Mr. M A R T I N . A l l I can say at the moment is we would sit around the table and hammer it out. Senator DOUGLAS. Well, suppose you still have a conflict of wills and time presses and you have to make a decision. You are up against the gun of time. Mr. M A R T I N . A S I said earlier, Senator, I sincerely think that this is a problem that is not decided just in that way. I think that there has to be some give and take i n it, and I don't think that an entirely one-way decision would resolve the problem. Senator DOUGLAS. Well, I may point out that in the midst of this terrific struggle of last year when it was not certain whether the w i l l of the Treasury or the will of the Federal Reserve prevailed, in company with Senators Flanders, Fulbright, Gillette, Tobey, and Thye, I introduced a resolution, Senate Joint Resolution 45, making effective the recommendation which our previous subcommittee on monetary policy had made, namely: T h a t notwithstanding any other provisions, the p r i m a r y power and responsibiUty for regulating the supply, availability, and cost of credit i n general shall remain vested i n the duly constituted a u t h o r i t y of the Federal Reserve System and the policies and actions of the Secretary of the Treasury relative to money, credit, and transactions affecting the Federal debt shall be made consistent w i t h the policies of such Federal Reserve authorities. That was introduced on March 6,1951. Now I do not wish to give too much credit to this resolution, but I have heard that i t was very helpful to the Federal Reserve, enabling i t to assert its independence and to reach an accord with the Treasury. Mr. M A R T I N . Well, I can't say anything on that, Senator, other than that the accord that was worked out was hammered out over a period of weeks of hard work. Senator DOUGLAS. I t sometimes helps, however, to have a little legislative protection, and I notice the Federal Reserve flies to Congress when i t wTants protection and then tries to push Congress off and disavow any relationship when it wants to follow its own course. That is human, I suppose, and you are most certainly human. Mr. M A R T I N . Well, as Mr. Wolcott says, we are the servant of Congress. Senator DOUGLAS. NOW two more questions and then I w i l l be finished. Would you object to an audit of your books by the General Accounting Auditing Office? Mr. M A R T I N . Yes; I would. Senator DOUGLAS. Why do you object to that? Every other governmental agency is audited by the General Accounting Auditing Office. You are the only agency so far as I know which audits itself. Mr. M A R T I N . Well, I think that budgetary control is an essential 98 M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 98" part of the independent judgment required for the operation that we are engaged in. I think that to preserve the public-private character of the Reserve System i t is better for us to retain the auditing procedure in our own hands. Senator DOUGLAS. I S it safe to have any group audit its own accounts? Mr. M A R T I N . Well, I think that you have got a point there, and I can say to you that we have had our auditing procedures reviewed by outside accountants. Senator DOUGLAS. When was this ? Mr. M A R T I N . Price, Waterhouse reviewed our auditing procedures a couple of years ago, and Arthur Anderson & Co. is going to audit us within the next few months. Senator DOUGLAS. After this question was raised by Representative Patman. Mr. M A R T I N . After this question was raised by Congressman Patman. And I want to say, as we say in the answer to our question, that our auditing procedures and our budgetary procedures are laid out in the answers to these questions. We had been audited periodically by the auditors of the individual reserve banks coming in on rotation. Senator DOUGLAS. A n d who names the presidents of the reserve banks ? Mr. M A R T I N . They are named by the Board of Directors, subject to the approval of the Board of Governors. Senator DOUGLAS. S O that the auditors of the Federal Reserve banks whose presidents are selected by you have been coming in and auditing your books. Mr. M A R T I N . Well, I don't think that is the best procedure. I don't think, however, that there is the slightest indication that the audits were improper or unsatisfactory. Senator DOUGLAS. I want to make the record clear that I am not charging that. Mr. M A R T I N . A l l right. Senator DOUGLAS. But I do want to suggest this seems to be an extraordinary procedure. We have in Lindsay Warren, the Comptroller General, one of the great public servants of all time, incorruptible, experienced, fair-minded, able. Now what objection is there to having him audit your books ? Mr. M A R T I N . Well, I think i t would be better i f we were audited by private auditors just on the independence thesis that you so ably espoused. Senator DOUGLAS. Y O U can't be a public institution at one time and then a private institution some other time. When you want public protection you are a public institution. When you want special privilege you are private institution. Now you must be consistent on this matter. You cannot blow hot and cold in alternate sentences and in answer to divergent questions in the questionnaire. Mr. M A R T I N . Well, we are a hybrid institution. Senator DOUGLAS. And therefore when i t pleases you you are a private organization, and when i t pleases you, you are a public organ ization. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 99" Mr. M A R T I N . I think that is an oversimplification. Senator DOUGLAS. That is all. Representative P A T M A N . Mr. Wolcott, i t is nearly 12. I wonder i f it would suit you to commence your questioning in the afternoon session. Representative WOLCOTT. Perfectly all right. Representative P A T M A N . W i l l it be satisfactory for you to come back in the afternoon, Mr. Martin ? Mr. M A R T I N . Whatever time you say, Mr. Chairman. Representative P A T M A N . Would 2 : 8 0 be all right ? Mr. M A R T I N . 2: 30 would be fine. Representative P A T M A N . The committee will stand recessed until 2: 30 this afternoon. (Whereupon, at 11:45 a. in., a recess was taken, to reconvene at 2: 30 p. m. of the same day.) (The confidential correspondence referred to during this session appears on pp. 942-966.) AFTERNOON SESSION Representative P A T M A N . The committee will come to order. Mr. Wolcott, you may proceed. STATEMENT OF WILLIAM McC. MARTIN, JR.—Resumed Representative WOLCOTT. Mr. Martin, in the Treasury's answTer to the question, and yours also, I think, you cover this question of the accord agreement. The history leading up to i t indicates that there was some disagreement between the Treasury and the Federal Reserve previous to that with respect to policy, and the accord you entered into was supposed to be a solution of those problems. Was that on a permanent or a temporary basis? I mean by that, the three or four major things which you agreed upon, were they to be in perpetuity or were they just temporary ? Mr. M A R T I N . The answer to that, Mr. Wolcott, is that the original understanding on some of the items was to last through the end of the calendar year. Since the end of the calendar year we have continued to work just the same as if our agreement was in perpetuity. I n order to answer you specifically I have to say that some of the points in the original accord expired on the 31st of this year, but they have since been renewed by implicit and explicit action. Representative WOLCOTT. Well, in respect to discount rates—this is in answer to question No. 18 by the Secretary of the Treasury, and I quote from that answer: I t is expected that during the remainder of the year— which, I assume, would be 1951; is that right, 1951 ? Mr. M A R T I N . That is right. Representative WOLCOTT (continuing) : The Federal Reserve discount rate, i n the absence of compelling circumstances not then foreseen, would remain at 1% percent and that the Federal Reserve would operate to assure a satisfactory volume of exchanges i n the refunding of m a t u r i n g Treasury issues. Have you any agreement with the Treasury that that discount rate would be continued? M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 100" Mr. M A R T I N . N O agreement with respect to that, sir. However, t o allay any suspicion that may creep into speculators' minds, there is no intention at the moment of the Federal Reserve to change the rediscount rate. Representative W O L C O T T . I guess t h a t answers m y next question as. to whether you have given any consideration t o the manipulation o f the discount rate t o prevent inflation. Mr. MARTIN. I am sorry, I did not get that. Representative WOLCOTT. I say, I guess that answers m y next question, which w o u l d be whether you have given any consideration t o the manipulation of the discount rate to prevent inflation. Mr. M A R T I N . Well, we are giving that consideration constantly because we now have the market, the play of the market, against which to gage things, and we are watching the lending trend very carefully,, and working very closely with the Treasury to determine what the most appropriate steps are from here on out. Representative W O L C O T T . I t h i n k we are i n agreement t h a t inflationary pressures are not quite as great as they were a few months ago? Mr. MARTIN. That is right? Representative W O L C O T T . of your indirect controls? DO you attribute t h a t at a l l to the use Mr. M A R T I N . Y O U mean to selective Representative W O L C O T T . N O , not selective controls. better clear this up. M r . MARTIN. I Maybe we had see. Representative W O L C O T T . The use of the orthodox controls which the Federal Reserve has traditionally had to stabilize our economy we refer to here in Congress as the indirect controls, that is, reserve requirements, rediscount rates, open market operation, and things of that character. M r . M A R T T N . Yes, sir. I attribute a p a r t of the slowing u p of inflation to the unpegging of the market t h a t occurred at the t i m e o f the accord. I do not attribute a l l of the l u l l to that, but a p a r t of i t . Representative W O L C O T T . Could you attribute some of i t , perhaps, to the fact that you had previously increased the rediscount rates f r o m a low of 1 percent i n three steps up to 1 % percent? Mr. M A R T I N . Yes, sir; I would say that played a part. I would say that the increase in reserve requirements at the start of last year played a part. Representative W O L C O T T . What influence did the issues of 2%, 29year bonds, which could not be monetized have ? Did that have an influence on the market, on inflation ? Mr. M A R T I N . Yes. I think that was a very successful operation that removed a large overhang in the long-term market. Representative WOLCOTT. D O you t h i n k Mr. M A R T I N . Pardon me, but I was just going to say that we succeeded in placing about 8 billion of those with investors, and an additional 5 billion were in the Federal Reserve portfolio, so you removed the direct overhang to the long-term market to the tune of about $13 billion. Representative W O L C O T T . D O you t h i n k t h a t the economy had a r i g h t to suppose t h a t because you had done those things t h a t the Government was g o i n g to f i r m up its monetary policy and t h a t , perhaps, M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT 101" helped somewhat ? I n other words, that we were, perhaps, about at the peak of the inflation, as inflation was caused by cheap money policies, that the Government, perhaps, from then on might be expected to firm up our economy and use these indirect controls to stabilize the economy ? Mr. M A R T I N . Yes, I clo. I think that the mere effect of the Treasury and the Federal Reserve getting together on a program for a minimum monetization of the debt and for financing the Government's requirements, was one of the most salutary things that came out of the accord. Representative WOLCOTT. I f the application of a little of that would help, why would not a little larger dose do the major job? I do not mean necessarily by increasing discount rates alone; I mean the utilization of all of the indirect controls you have over the volume of credit—why can we not stabilize our economy through the use of indirect controls ? Mr. M A R T I N . Because the country has a mobilization program, we have to make certain that a large amount of credit flows into defense output and also make certain that the financing of the whole program goes forward satisfactorily. We are living in a time of considerable unrest and differing points of view among people, and I think Representative WOLCOTT. Would you think that inflation causes unrest? Mr. M A R T I N . Inflation is one of the factors in unrest, but at the moment there is no necessity for any further measures to restrain inflation. Inflation, I think, is asleep at the moment. Representative WOLCOTT. I n view of the fact that we are about to give consideration to a continuance of DPA, you might want to qualify that a little bit i n the revision of your remarks. [Laughter.] Mr. M A R T I N . That does not mean that the pressures could not break out again at any time. Representative WOLCOTT. Getting a little, perhaps, ridiculous, to bring out the point, what would happen i f you raised the rediscount rate to 7 percent, with the usury rates in most of the States east of the Mississippi 7 or 8 percent ? Mr. M A R T I N . I t might have a considerable psychological impact, and there just would not be any sizeable amount of borrowing through discounts. Representative WOLCOTT. What would happen i f there were any borrowing? Mr. M A R T I N . There would not be many loans; there would be a reluctance on the part of banks to get reserves through the discountrate process. Representative WOLCOTT. The banks would not be loaning anything; the banks would not be loaning anything, would they? Mr. M A R T I N . Well, the banks, i f they had reserves, would be lending. Representative WOLCOTT. Yes. Mr. M A R T I N . Unless they needed additional reserves. Representative WOLCOTT. But i f you control^ the rate of interest through the manipulation of rediscount rates, you control the money market pretty much, do you not? M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 102" Mr. M A R T I N . N O ; we influence but do not control the market. We are the marginal buyer and seller in the market, but the market is determined by the interplay of the forces of supply and demand. Representative W O L C O T T . Then, what effect has an increase in the rediscount rate on inflation ? Mr. M A R T I N . I t has the effect of making i t more expensive to borrow when there is a need for the borrowing. Representative W O L C O T T . SO that, at least, is an indication of a firmer policy on the part of the Federal Reserve and, perhaps, the administration ? Mr. M A R T I N . That is right; and in our judgment it is not necessary to have a firmer policy at the present time. Representative W O L C O T T . N O W , the President, i n his economic message, asked for, in your behalf as I understand it, authority to increase reserves, and in reading your statement there is an implication, i f you do not say so outright, that you do not want any further authority or you do not think it is necessary or advisable, something like that. Mr. M A R T I N . A t the present time, we do not, Mr. Wolcott. I cannot see what an increase in reserve requirements would do at the present time except to put additional pressure on the Government securities market. Representative W O L C O T T . H O W would you go about stabilizing under these conditions of credit inflation were you not compelled to give consideration to debt management ? Mr. M A R T I N . Well, you would be compelled to give consideration to debt management. Representative W O L C O T T . Just say that we have no debt, that is, the debt is not an influence, something that does not have to be considered, similar, perhaps, to the credit inflation of 1929. How would you go about preventing credit inflation? Mr. M A R T I N . When there is no debt at all ? Representative W O L C O T T . We w i l l just assume that. You do not have to take into consideration debt management. Mr. M A R T I N . Y O U would go about i t in exactly the same way. Representative W O L C O T T . What way ? Mr. M A R T I N . Y O U would increase the discount rate, reenf orce i t with restrictive open market operations, and see what the market forces would do to the supply and demand for money. Representative W O L C O T T . I t might raise the reserve requirements, might i t not? Mr. M A R T I N . Y O U might raise reserve requirements at that point, assuming statutory authority, and without any Government debt there would be no pressure on the Government securities market. Representative W O L C O T T . Y O U surely would not continue supporting the Government bond market under those circumstances ? Mr. M A R T I N . That is right. Representative W O L C O T T . Would you, perhaps, recommend to the Congress that they restore the gold reserve behind the Federal Reserve notes from 25 percent to the earlier 40 percent, and behind the deposit liability from 25 to 35 percent? Mr. M A R T I N . I would not see any necessity for that at the present Representative W O L C O T T . I am just assuming a condition which Mr. M A R T I N . Oh, under those conditions? M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 103" Representative WOLCOTT. Yes. What I am trying to find out when 1 get all through is what influence debt management has upon the powers which would ordinarily be exercised by the Federal Reserve to stabilize our economy. So you would use all of these methods, these indirect methods, would you not? Mr. M A R T I N . That is correct. Representative WOLCOTT. And you probably would recommend to the Congress that they restore to the 40 and 85 percent, respectively, the reserve behind—the gold reserve behind—deposit liability and Federal Reserve notes. Mr. M A R T I N . Under your hypothesis I might request an increase in reserve requirements, but that would depend on a number of circumstances. Representative WOLCOTT. Yes. You are not going to ask for a restoration of gold reserves of 40 percent ? M r . MARTIN. NO, sir. Representative WOLCOTT. Y O U are not going to ask for any increase in reserve requirements, Federal Reserve d Mr. M A R T I N . Not at this time, sir. Representative WOLCOTT. Does that mean that because of the influence which debt management has on the value of the money that solong as we have a high national debt we must accept inflation as a matter of Government policy ? Mr. M A R T I N . NO, sir; because we have—we have succeeded in restraining inflation at the moment; we have a large debt. I t means that it is essentia] Representative WOLCOTT. We have got inflation. Mr. M A R T I N . What is that ( Representative WOLCOTT. We have got inflation. Mr. M A R T I N . Well, we have had Representative WOLCOTT. The value of the dollar has been going down constantly, i t has been going down 6 or 7 percent since Korea, and setting an all-time low now of 52.85. I t was 59, was it not, at the time of Korea ? Mr. M A R T I N . I doirt have the figures on that—that is substantially correct. The purchasing power of the consumer's dollar has declined about 10 percent since Korea. Representative WOLCOTT. What can be done, what can we do, to prevent any further drop i Must we accept as a matter of policy continuing inflation ? Mr. M A R T I N . I see no reason to. Representative WOLCOTT. What can we do about it? Mr. M A R T I N . Well, we have got to do everything we can to get our budget in balance. Representative WOLCOTT. What is that? That is what we are here for. Mr. M A R T I N . We want to get our budget in balance as nearly as we can, and if Ave are running a deficit we want to finance that deficit out of the genuine savings of the people until such time as we can balance the budget at a later date. Representative WOLCOTT. Well, the balancing of the budget is not alone a solution, is it ( We balanced the budget last year, and when M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 104" the dollar was depreciating 6 percent there must have been some other things that we have got to do besides balance the budget. Mr. M A R T I N . Would you repeat that, Mr. Wolcott? Representative WOLCOTT. I said the balancing of the budget would not alone correct inflation, because wre balanced the budget last year. Mr. M A R T I N . We have to pursue an active restrictive monetary policy; that is also indespensible. Representative WOLCOTT. A n active restrictive monetary policy? Mr. M A R T I N . A restrictive monetary policy; yes sir. Representative WOLCOTT. What are you doing to restrict i t now ? Mr. M A R T I N . A t the present time? Well, we have reduced our holdings of Government securities. Recently, by and large, monetary policy has been pretty neutral; the money stream has kept just about steady. Representative WOLCOTT. I t has not been restricted to the point where i t has had any influence on inflation. Mr. M A R T I N . Well, I beg to differ with you there. I t seems to me that our studies show that Representative W O L C O T T . H O W can you differ with me when the dollar has been depreciating in value constantly almost proportionately as we indulge in deficit financing? Mr. M A R T I N . May I ask Mr. Young to answer this question? Representative WOLCOTT. Certainly. Mr. Y O U N G . The big increase in prices following Korea was i n the 8 months immediately thereafter. Subsequent to that sensitive prices and wholesale prices receded somewhat and leveled off, and the rate of increase i n consumer's prices also leveled off gradually. I n February there was a decline i n consumer prices and since December there has been a further decline in wholesale prices. Representative WOLCOTT. Mr. Wilson tells us that we have got to continue price controls and we have got to continue these other controls because of the impact which defense spending is going to have upon the value of our currency sometime in the future. He has been telling that to us since the middle of last year when, I think, he said that we were going to meet the impact i n the summer sometime, and then we were going to meet i t in October, and then we were going to meet i t in January, and then we were going to meet i t sometime this spring, sometime this summer, and I think his last statement is that we are probably going to meet i t sometime in October, 1952; so the only reason why we have got to continue these direct controls is because of the possibility that some time in the future deficit financing, due to our defense effort, is going to make prices higher. Mr. M A R T I N . That is substantially correct, Mr. Wolcott. Representative W O L C O T T . Then, can we assume that the use of the indirect controls that you have has caused this leveling-off process? Mr. M A R T I N . One of the important factors in causing the leveling-off process; yes, sir. Representative WOLCOTT. Were i t not for debt management—gett i n g back to that hypothesis, were it not for debt management, would you recommend that ,we continue or not continue the practice of inflating the debt against the Federal Reserve notes, or would you think we might safetly go back to the law in the thirties when we had to put up commercial pai>er in addition to those? M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 105" Mr. M A R T I N . I n postwar years, there has been quite a increase in bank holdings of commercial paper, but I should not think that i t would be Representative WOLCOTT. We did not have then, and Mr. M A R T I N . But we had a large volume of excess reserves in the banks during most of the thirties. Representative WOLCOTT. A S I understand the original purpose of the Federal Reserve System i t was to provide a flexible currency to meet the demands of business, from time to time. You could put i t out or you could contract it, and there was an affiliation between the amount of commercial paper which you had and the volume of money which you issued, and that was the original intention, was i t not? Mr. M A R T I N . Yes. That was the way they thought i t would work. Representative WOLCOTT. The volume of the needs of business for cash would be determined by the amount of commercial paper; that was the guide, was it not ? Mr. M A R T I N . Yes, I would say that that is what they thought. The original Federal Reserve Act was to correct an inelastic currency, and to mobilize bank reserves. Representative WOLCOTT. N O W , to lick a depression in the thirties we abandoned that idea, did we not? We substituted debt for commercial paper ? Mr. M A R T I N . That is correct. To lick depression and create excess the Federal Reserve bought securities in the open market and also lowered discount rates. Representative WOLCOTT. A n d we so wedded our debt to the value o f our currency i n the abandonment of the idea that the Federal Reserve which was set up to meet the business demand w i t h respect to money, that the value of our currency is dependent largely or is influenced largely by the debt. Mr. M A R T I N . That happened during the war. One of our principal problems today is the value of public debt; that is right. Representative WOLCOTT. Have we got to continue to have our currency depreciate proportionately as our debt goes up, or is there not some way that we can correct that situation and remove that influence ? Otherwise, it seems to me, we are sunk. We will have deficits this year ranging anywhere from 10 to 14 billion; we w i l l have them next year from 14 to 20 billion, perhaps. We are entering another deficit financing era which we are told might be carried on for 10 years. I f the value of the dollar lias shrunk 6 percent in the last 18 months, it might shrink 12 percent in the next 3 years, and we w i l l then have a 40-cent dollar. Now, it seems to me that this committee, and you and the Treasury, with all the help we can get, ought to find a solution to it. I t is not too simple, but does i t not occur to you that we might have some studies looking to the discovery of a method of sterilization of some part of the debt, bank-held debt, and some part of gold, above which gold and the bank-held Government debt could not be monetized, and thereby remove the pressure, the influence, which deficit financing has on the value of the money? Mr. M A R T I N . The important thing is to eliminate the deficit. I think we should have such studies, and I w i l l be glad to have a paper prepared for you on how we can go about it. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 106" Representative W O L C O T T . I wish you would, because for a couple of years I have had this hare-brained idea in my head that somehow, sometime or other, we were going to find a solution to that problem, and when we found a solution to that problem we probably could stabilize our curency and stabilize our economy. Frankly, I cannot take very seriously the use of direct controls until that basic reason for inflation is solved. I t has been said here, and I think we all agree, that when you put on direct price controls or direct consumer credit controls you almost automatically put into operation the machinery for the creation of just enough more credit to offset all the deflationary influences that accompany the application of direct price controls and consumer credit controls. I f I may use an example of what I mean—this is my own opinion and I do not ask you to agree with me on it, but I wish you would have i t in mind i n preparing this paper—to me the selective application of consumer credit controls has no more influence upon inflation than to rest your hand lightly upon a child's toy balloon with the expectation that you were going to prevent its inflation. You have got to cut the air off at the source. Now, the source, to me, is the Federal Reserve System. Mr. M A R T I N . Well, I w i l l give you a paper on that. I agree that selective controls, like consumer credit controls, are supplementary to restrictive discounts and open-market operations and not a substitute for them. (Supplementary statement by Mr. Martin follows:) RESERVE B A N K RESERVE REQUIREMENTS A N D FEDERAL RESERVE CREDIT The Federal Reserve Act as amended in 1945 requires t h a t each Federal Reserve bank hold reserves i n gold certificates equal to 25 percent against i t s Federal Reserve notes i n circulation and against its deposits. I n the case of Federal Reserve notes, the law also requires that each Reserve bank shall pledge w i t h the Federal Reserve agent of its district collateral equal to 100 percent of the amount of such notes i n circulation. Such collateral may consist of gold certificates; paper originating i n commerce, agriculture, and i n d u s t r y — t h a t is, so-called eligible paper—or direct obligations of the United States Government. P r i o r to 1045 the required reserve percentages were 40 percent of gold certificate reserves against Federal Reserve notes and 35 percent of gold certificates or l a w f u l money against deposits. The main reason for the lowering was that the gold reserve r a t i o had fallen significantly during W o r l d W a r I I as a result p a r t i c u l a r l y of the very large expansion of Federal Reserve notes i n circulation because of w a r t i m e demands for currency. This increased volume of money lias remained i n circulation since the war. The use of Government securities as collateral for Federal Reserve notes was authorized on a temporary basis by the Glass-Steagall Act of 1982 and was periodically renewed, and the a u t h o r i t y was made permanent i n 1945. T h i s provision was necessitated by the large-scale w i t h d r a w a l of currency f r o m bank deposits i n the early years of the depression, by the then reduced volume of eligible private paper i n Reserve bank portfolios, and by the desirability of Federal Reserve purchases of Government securities i n order to prevent the development of t i g h t money conditions during the depression. I t would appear undesirable at this time to change either the legal reserve requirement regarding gold 'certificates or the legal collateral requirement regarding United States Government, security holdings of the Federal Reserve banks. The legal provision permitting the Reserve banks to use Government securities as collateral f o r notes is necessary under present conditions, since the volume of commercial, agricultural, and i n d u s t r i a l paper now held by these banks would be inadequate f o r the purpose. Also, the provisions of law regardi n g the reserve requirements of the Reserve banks are important i n enabling flexibility i n monetary management to meet changing conditions. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 107" These legal provisions are not inflationary p?r se. Federal Reserve credit is not created just because the basis for such creation is available. I t is the duty of the Federal Reserve System to see t h a t Reserve bank credit is adjusted to the needs of the economy. Changes i n the volume of such credit outstanding are now determined mainly by actions of the Federal Reserve System i n accommodating the credit needs of consumers, commerce, agriculture, industry, and State and local governments, as w e l l as the Federal Government. Such actions are taken only after a careful review of the economic and financial situation i n the country at the time and after a f u l l consideration of their inflationary and deflationary implications. A n automatic check on the expansion of Federal Reserve bank credit, such as would be imposed by an increase i n the ratio of gold certificates required against Federal Reserve notes and deposits, would not be desirable. I t was i n p a r t to prevent a r b i t r a r y and mechanical limitations on the volume of bank credit and money, resulting f r o m too r i g i d a relationship between the credit and money supply and gold, that the Federal Reserve System was i n i t i a l l y established. Eepresentative W O L C O T T . I think that would be in keeping with the original purpose of the Federal Eeserve A c t ; and you commented on the original purpose when, on page 212 of volume I in your answers, you quote the then chairman of the Committee on Banking and Currency, whom I assume to be Senator Glass, as follows: Senate b i l l 2639 is intended to establish an a u x i l i a r y system of banking upon principles w e l l understood and approved by the banking community i n its broad essentials, and which, i t is confidently believed, w i l l tend to stabilize commerce and finance, to prevent f u t u r e panics, and place the Nation upon an era of enduring prosperity. That, I think, very briefly sets out the reasons whv the Congress set up a Federal Eeserve System. Then, you recognize that in your annual report for 1923, in which you say the problem " i n good administration under the Federal Eeserve System is not only that of limiting the field of uses of Federal Eeserye credit to productive purposes but also of limiting the volume of credit within the field of its appropriate uses to such amount as may be economically justified; that is, justified by commensurate increase in the Nation's aggregate productivity"—that is what you say on page 212. Eepresentative P A T M A N . Mr. Wolcott, w i l l you yield for what I believe to be a correction ? Eepresentative WOLCOTT. Yes. Eepresentative P A T M A N . I t says here the report to the Senate in 1913. I believe that Senator Eobert Owen was chairman of the Senate Banking and Currency Committee at that time. Eepresentative W O L C O T T . I was not sure; I think, perhaps you are right. Eepresentative P A T M A N . And Senator Glass was then the chairman of the House Committee on Banking and Currency. Eepresentative W O L C O T T . That is right. This would be Senator EobertOwen. Eepresentative P A T M A N . That is right. Eepresentative W O L C O T T . I did not want to take any credit from Senator Owen with respect to the co-sponsorsliip of the Federal Eeserve Act. Then, again in the 1945 bank report which you quoted, you said : I t is the Board's belief that the implicit predominant purpose of Federal Reserve policy is to contribute, insofar as the limitations of monetary and credit 97308—52 8 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 108" policy permit, to an economic environment favorable to the highest possible degree of sustained production and employment. T r a d i t i o n a l l y this over-all policy has been followed by easing credit conditions when deflationary factors prevailed and, conversely, by restrictive measures when inflationary forces threatened. Now, i t seems to me that i f you had the independent status that we intended you should have when Congress set up the act, i f you were allowed to exercise it, i f you were allowed to do the job that we set you up to do, not to manage the debt, that is, but to stabilize our economy— recognized as recently as 1945 as your purpose and objective—the Federal Reserve, with the powers it now has, could have prevented this inflation. I t can likewise prevent further inflation, and I think that we in this committee have got to determine what deficiencies there are in the act, but we have not run onto any so far. You say you do not need any statutory authority to raise reserve requirements. They have been as high as 7 percent, have they not, under existing law? Mr. M A R T I N . The reserve requirements? Representative WOLCOTT. I mean the rediscount rate, pardon me. Were they not as high as and up to 7 percent in 1929 when the Board belatedly approved the applications of the banks for an increase in rediscount rates? Mr. M A R T I N . I t was up that high during part of 1920 and 1921; the rate reached 6 percent in the fall of 1929. Representative WOLCOTT. I t was up to 6 percent ? Mr. M A R T I N . That is right. Representative WOLCOTT. NOW, the Board can initiate those increases, can they not? Mr. M A R T I N . That is right, but the initiative ordinarily is taken by a Federal Reserve bank. Representative WOLCOTT. SO this situation is similar but somewhat different from that which confronted us in the credit inflation of 1929. A t that time the Board had to wait for action to be takem initially by the Federal Reserve banks, did they not? Now, the Board itself can initiate changes in rediscount rates. Once they were as high as 7 percent; since then we have inflated the currency, pumped more blood into the economic stream, as much as we can get into the veins of the body meanwhile putting rediscount rates down to an all-time low of 1 percent. Now, i t seems to me that i f we could find the golden mean between those two extremes with, perhaps, the utilization of a few of your other powers that we could stabilize and still carry the debt. I remember on the administration level shortly after World War I I we were told that i t should be our objective to stabilize at about an 80-cent dollar, and i f we did we could carry the debt and do all the other things we had to do. A t the same time we encouraged production to get productivity and stability. I still think that we can do that i f we recognize that the real cause of inflation is that we have wedded our debt to our money so closely that increases in the debt, which are going to be inevitable for the next 8 or 10 years, are going to be reflected i n proportionate decreases in the value of our currency. I f we find that answer, then I think the Federal Reserve Board can come in here and recommend what it has to have in the way of legislation. I f you have to have more authority to raise reserves, and you come in and make a case out for it, I do not think they are going to quibble too much M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 109" about that. You do not now need any statutory authority to raise the rediscount rates. You do not now need any more statutory authority i n respect to open-market operations, or do you ? M r . MARTIN. NO, sir. Representative WOLCOTT. I am sure that the Congress—the House, at least, next year—would be willing to restore the gold reserve requirements to where they were before we reduced them to lick the depression ; i t was done i n the Eightieth Congress. The Eightieth Congress—there is nothing political i n this at a l l — I am just taking pride in the fact that i n the Eightieth Congress we had 2 years of balanced budgets, and took the initiative i n stabilizing our economy. I think i f the Senate had to do i t over again they would have considered the bills which were passed by the House in keeping w i t h our policy, and not have been so susceptible to administration pressures that inflation be continued for political expediency beyond the time when i t was necessary to help finance the war. That is our problem. How are we going to find out what the Federal Reserve Board is going to do from now to prevent further depreciation in the value of the dollar short of divorcing debt from money ? Mr. M A R T I N . The Board is going to devote its best efforts to prevent the depreciation of the dollar. Representative W O L C O T T . That is a good answer. That is the best that I know of that you can give under the circumstances; but i t is not the answer that I think you would give i f you were at liberty to manipulate or to utilize these indirect controls, as I think you would, were it not for the influence which the administration, concerned with debt management, brings to you in respect to policy. That is why I started out to ask you about this accord. There is nothing permanent about i t ; you can change it, you are not bound by it. You can state to the Treasury, "Here now, from now on we are going out and stabilize this economy." Mr. M A R T I N . Well, we have got to have fiscal policy, debt management, and monetary policy working closely together to achieve that stabilization you are seeking. Representative W O L C O T T . Y O U have it under this present situation, yes; but you would not have it, that is, i t would not have the same degree of influence i f you divorced your debt from your money. Do you know what the discount rate from the Bank of England is? Mr. MARTIN. I t is, I t h i n k Representative W O L C O T T . I know what i t was yesterday. What is it now ? Mr. M A R T I N . T W O and a half to f o u r — I percent. I t was raised today to 4 percent. Representative W O L C O T T . Raised today, was it? M r . MARTIN. Yes, sir. Representative W O L C O T T . T O 4 percent? M r . MARTIN. Yes. Representative W O L C O T T . That compares with our 1 I think I have taken all the time that I should, M r . Chairman. Representative P A T M A N . Mr. Martin, in your testimony are you expressing your own views or the views of the Federal Reserve Board? M r . M A R T I N . I n the testimony I have handed you, Mr. Chairman, I am expressing views that are concurred in by the Board of Governors? M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT 110" Representative P A T M A N . By the Board of Governors? Mr. M A R T I N . That is correct. Representative P A T M A N . Mention was made this morning about commercial banks selling Government bonds to the Federal Reserve Banks through the Open Market Committee, I assume, and thereby accumulating reserves that can be expanded six times which is, of course, inflationary, highly inflationary. Do you know of any remedy that could be enacted by the Congress that would permit you to support the Government bond market and the bonds at a hundred percent and, at the same time, prevent commercial banks from having that privilege of adding to their reserves ? Mr. M A R T I N . Well, I presume the banks could be compelled to hold Government securities. Representative P A T M A N . That is what I am talking about. M r . MARTIN. I see. Representative P A T M A N . I n other words, freeze them in the banks for that purpose. Mr. M A R T I N . That could be done; I think it would be most unwise. Representative P A T M A N . Of course, i t is a drastic remedy, but any control is a drastic remedy, whether i t is a direct or indirect control or anything else, i t is a drastic remedy to be resorted to only in case of emergency, but it could be done that way could it not, Mr. Martin ? Mr. M A R T I N . I t could be done; yes, sir. We could also order banks to stop lending. Representative P A T M A N . Y O U could do most anything in that direction to stop the inflationary trend that Senator Douglas has talked about ? Mr. M A R T I N . That is right. Representative P A T M A N . Or the effects caused from it. I want to ask you about the voluntary restraints, the voluntary credit restraint program. I believe the official name of it is the voluntary credit restraint program. The Federal Reserve Board is represented oil that committee. Mr. M A R T I N . That is right, sir. Representative P A T M A N . I believe Mr. Powell, a member of your organization, is on the Board, and is head of the committee t Mr. M A R T I N . That is correct, sir. Representative P A T M A N . I notice that the other members of that committee are representatives of commercial banks and insurance companies and investment bankers; they are the people who are involved i n this. Does i t occur to you that the Government should be better represented on that Board ? I do not mean to say that Governor Powell would not represent the Government interest and the people's interest, but i t seems to be pretty dominaritly composed of people who are selfishly interested. Mr. M A R T I N . Well, those are the people who would be selfishly interested in undertaking the lending or the underwriting. They are sacrificing profits by foregoing their financing opportunities. Representative P A T M A N . I t is up to them. You think that is a good policy to pursue ? Mr. M A R T I N . I think that the voluntary credit restraint program has succeeded in organizing the managerial resources of the banking and business community to look for the longer-range prom lnsu^ti ur the shorter-range profit. MONETARY POLICY AND M A N A G E M E N T OF P U B L I C D E B T 111" Representative P A T M A N . Y O U would not recommend that other people connected with the Government be on that Board ? Mr. M A R T I N . N O , sir; I do not think it would work as a voluntary program in that way. I would be very much interested to have Governor Powell answer that question also when he testifies before your committee. Representative P A T M A N . Taking your reasoning, would that not apply to regulation W ? Why not give the people a voluntary restraint credit program? Mr. M A R T I N . We have endeavored to consult regularly with the trade on regulation W. Representative P A T M A N . I know, but you are not just consulting here; you are giving them—you make i t voluntary. They are doing it themselves. Why do you not let the people affected by regulation W do the same thing ? Mr. M A R T I N . Well, think of how many people there are affected by regulation W. Representative P A T M A N . The number is not the important thing; i t is the principle involved. Mr. M A R T I N . H O W would you devise the administrative procedure other than consulting with the trade groups ? Representative P A T M A N . Well, they have trade groups, all of them, I know. Mr. M A R T I N . We try to consult with all of them on regulation W. While I am not particularly keen on regulations W and X , I consider them necessary at a time like this, because we have got to use all the weapons in our arsenal to restrain inflation. The reason I am not more sympathetic with them is that they impinge on so many individuals and so many businesses, and intervene in so much of the life of the people. Representative P A T M A N . The ones affected by Regulation W have another selfish interest, too. I t would have the tendency to restrain the abuse of credit; that is, they want to get their money back when they sell their goods. They,do not want to give such terms so that payments will be unlikely, and they want to demand a substantial amount in cash. They wish a substantial amount in cash or its equivalent. Mr. M A R T I N . That is right. So our interest in regulation W is i n the over-all money supply and not in the trade practice aspect of it. Representative P A T M A N . I t is just an interest in the over-all money supply? Well, is not your interest in the voluntary restraint committee, too, in the over-all money supply ? Mr. M A R T I N . I n the over-all supply of credit, plus a desire to see some of the demand for financing postponed until a later time when that demand may be needed considerably more. For instance, take a museum, or something like that. Some people may seek to finance such items under present high employment conditions. They could be financed much better a few years from now when we have less employment and less need for conserving our resources than we have at the moment. Representative P A T M A N . H O W much has the credit increased under regulation W in the past calendar year ? Mr. M A R T I N . Have you got that figure now ? M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 112" Mr. Y O U N G . About $ 5 0 million, I believe. Mr. M A R T I N . About $ 5 0 million. Representative P A T M A N . H O W much has i t increased i n credit through the banks and insurance companies and investment bankers, all of them, that are involved i n the restraint committee program? Mr. M A R T I N . D O you mean, how much has been deferred as a result of that Representative P A T M A N . N O , not as a result, but how much has happened anyway? Now, this $50 million, that increase happened notwithstanding the controls and what has happened with the other— give me a comparable figure. Have the banks increased many billions of dollars i n the past year ? Mr. M A R T I N . A large part of that is for defense work. That is true, but a large part of i t is for defense. Representative P A T M A N . Well, part of this $ 5 0 million would be for defense work, too. You know, they have to have automobiles to travel back and forth. Mr. M A R T I N . About $ 4 . 1 billion, Mr. Chairman. Representative P A T M A N . Y O U mean the commercial banks ? Mr. M A R T I N . Commercial banks; that is right, sir. Mr. Y O U N G . Business loans of commercial banks. Representative P A T M A N . Business loans? What other loans? Would there not be any increase Mr. Y O U N G . Real estate loans $ 1 billion. Representative P A T M A N . $ 1 billion? Mr. Y O U N G . A l l other about $800 million. Representative P A T M A N . About $ 7 billion ? M r . Y O U N G . For total loans of commercial banks; that is correct. Representative P A T M A N . N O W , you are giving some people a lot of power here who are not connected with the Government; they are not directly responsible to the people or to anybody elected by the people and you are giving them the right to say who w i l l get credit and who w i l l not get credit. Do you not think somebody who is more directly connected with the Government should be on that Board in view of those circumstances and the facts ? Mr. M A R T I N . We have a Federal Reserve representative at each meeting, Mr. Chairman. Representative P A T M A N . Well, of course, that is a little b i t — I do not know at these meetings—if there is a conflict of interest between the banks and the Government, which side would the Federal Reserve Board representative take ? Mr. M A R T I N . The Federal Reserve representative would naturally take what he conceives to be the interest of the defense program and the Government. Representative P A T M A N . I n a case of conflict of interest where i t was just a question of deciding which side he would take, the one that he would take would be on the side of national defense, i f there is a defense issue. Mr. M A R T I N . That is r i g h t ; and i t is very difficult to determine whether some of these are defense or not. Representative P A T M A N . That is r i g h t ; unless you know the facts in any particular case. Mr. M A R T I N . That is correct. M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 113" Representative P A T M A N . And I thoroughly agree with you. Now, on regulation X , why could you not administer it the same w7ay through a volntary committee, just like the voluntary restraint committee here, rather than have the compulsory process that you have ? Mr. M A R T I N . Mr. Young tells me there has been a supplementary voluntary program in connection with real estate credit. Representative P A T M A N . Supplementary program? I t is not set up by law, is it ? Mr. Y O U N G . I t is under the voluntary credit restraint program. Representative P A T M A N . I see. I t is under the Defense Production Act? Mr. Y O U N G . T O deal with certain areas not covered by regulation X . Representative P A T M A N . Y O U could set it up for regulation W that way, could you not ? Mr. Y O U N G . The lenders subject to regulation W have considered themselves and been considered by the voluntary credit restraint program, as outside of that program since they were otherwise covered. There were discussions with the sales finance industry, I believe, at one time as to whether or not they cared to come into the volunteer credit restraint program, and they thought that they would prefer to remain out, although they circulated among lenders copies of the voluntary credit restraint program statements of principles. Representative P A T M A N . That does not sound like what I have been hearing. Do you mean to say that they were given an opportunity of joining in on a voluntary basis? Mr. Y O U N G . Not as a substitute for regulation W. Representative P A T M A N . Oh, you are going to have regulation W , too? Well, I do not blame them; I would not want a double-barreled thing. Mr. Y O U N G . T O give them a chance to Representative P A T M A N . But they were not offered the same opportunity that the bankers were offered ? Mr. Y O U N G . They were not offered the same opportunity, but the consumer installment credit field has special features. Representative P A T M A N . Well, would you be willing to offer them that opportunity ? Mr. M A R T I N . I would have to study it considerably more, Mr. Chairman. Representative P A T M A N . H O W many people do you have trying to enforce regulation W, I mean in the way of policing it ? Mr. M A R T I N . I would say not over 1 5 0 for the whole country. Representative P A T M A N . I get complaints that they are going to people's homes and calling people out, interrogating them, about buying something on the installment plan. Mr. M A R T I N . Well, we have had Representaitve P A T M A N . D O you have people doing that? Mr. M A R T I N . We have had lots of complaints of that. We have tried to minimize that type of enforcement. I think they are exaggerated, but i t is not a happy lot to be the policeman at anything these days. Representative P A T M A N . I know, but it is rather ironical that you should chase somebody down to their own home and call them out to ask them about a wheelbarrow that they bought on the installment plan. You let the bankers have a credit of millions of dollars a year without restraint. M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 114" Mr. M A R T I N . The banks as well as all other lenders are subject to regulation W and regulation X . I know of only one case where someone has complained because he was questioned at his home. Naturally, we have been doing our best to enforce the regulations. I do not like any better than you do having Federal Reserve people going to people's homes. Representative P A T M A N . D O you not think we could well afford to do without regulation W for the next year on a trial run basis? Mr. M A R T I N . Unless we get more flexibility than we now have with it, I question how much serviceability there is in it. Representative P A T M A N . Y O U mean a shorter term i n which to pay than 18 months on automobiles and trucks? Mr. M A R T I N . N O . I mean the flexibility for us to tighten i t i f we felt that conditions warranted it. A t the moment we would not make any material change in the regulation i f we had f u l l authority. Representative P A T M A N . But you would like to have the power so that in the event you needed it, you would have it there ? Mr. M A R T I N . That is correct. Representative P A T M A N . On fighting inflation, I guess the best way on earth is to induce people to invest in E bonds or to keep their savings intact and not spend them; is that right? Mr. M A R T I N . That would be very desirable. Representative P A T M A N . That is the best way. Well, what is the amount of the demand deposits in commercial banks now, do you know, approximately ? Mr. M A R T I N . About a hundred billion. Representative P A T M A N . I f there is some way of inducing the people not to give checks on their deposits and to keep them intact, i t would be a very constructive move to fight inflation, would i t not ? Mr. M A R T I N . I t would. Representative P A T M A N . What do you think about restoring the privilege we have taken away from the commercial banks of paying interest on demand deposits. You know, that was a rather arbitrary action on the part of Congress but i t was done a few years ago. Suppose Congress were to restore that privilege of letting banks pay interest on demand deposits, and they were to commence paying interest, would that not have a tendency to retard inflation ? Mr. M A R T I N . I f they retained the deposits, yes. Representative P A T M A N . Well, do you think it would be an inducement? Do you not think it would be an inducement i f they got paid for it? Mr. M A R T I N . I t would be some inducement; yes, sir. Representative P A T M A N . According to the amount they were paid. Mr. M A R T I N . I t would be progressively more of an inducement the more they were paid. Representative P A T M A N . Well, this E bond campaign is a good thing, and they pay a pretty small rate, and that keeps a lot of the savings from going into the channels of trade and distribution, does it not? Mr. M A R T I N . I t does. Representative P A T M A N . This would work in the same way, except that i t would be on their actual deposits. Would you recommend any change in that law, Mr. Martin ? M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T 115" Mr. M A R T I N . Not without considerably more study than I have been able to give it up to this moment, Mr. Chairman. Representative P A T M A N . Y O U would want to study this some more ? Mr. M A R T I N . I would want to study i t some more. Representative P A T M A N . But you admit i t would be a fine weapon to fight inflation ? Mr. M A R T I N . I t would be a weapon to fight inflation. Representative P A T M A N . Well, its usefulness would depend on the amount that the banks would pay, would i t not ? Mr. M A R T I N . That is correct, but i t would also introduce a major new factor in the money market. Representative P A T M A N . And the ability of the banks to pay a sufficient amount, to make i t sufficiently attractive, to induce people to keep their deposits there and not spend them. Mr. M A R T I N . They can shift their demand deposits now into time deposits or over into savings banks. Representative P A T M A N . They get nearly as much there as they do on the E bonds. Mr. M A R T I N . That is correct. Representative P A T M A N . But that requires a change. Was that law to make it unlawful for banks to pay interest on demand deposits, was that considered as permanent legislation at the time it passed? I do not recall just the debate in question. Mr. M A R T I N . I am afraid I do not know, Mr. Chairman. Mr. Y O U N G . I am not familiar with that, Mr. Chairman. Representative P A T M A N . My recollection is rather indistinct, but I thought Mr. Y O U N G . I t was an amendment to the act. Representative P A T M A N . But I believe i t was more of a temporary device. Mr. Y O U N G . I believe not, sir. Representative P A T M A N . I think i t was passed in 1 9 3 5 . Mr. Y O U N G . I t was in the Banking Act of 1 9 3 5 for insured banks and i n the Banking Act of 1933 for member banks. Representative P A T M A N . And the best of my recollection is that there was not a great deal of discussion about i t on either floor, and was it not put in in conference ? Mr. Y O U N G . I think the feeling about it, Mr. Chairman, was that the practice of paying interest on demand deposits had been a factor i n the twenties operating to result in the deterioration of the quality of our banking. Representative P A T M A N . I recall that, sir. Mr. Y O U N G . I t got rather competitive in that period. Representative P A T M A N . That was a persuasive argument. Mr. Y O U N G . And i t was a factor in the crisis of 1930 to 1933. Representative P A T M A N . Would that argument be equally persuasive now i n view of the fact that deposits are insured up to $10,000? Mr. Y O U N G . I t is not so persuasive now, but i t would have to be given careful consideration. Representative P A T M A N . Anyway, you are not recommending i t and you are not deciding against i t ? You are going to consider i t ? M r . MARTIN. Yes. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 116" Representative P A T M A N . The Federal Reserve bank earnings now are practically all from Government bonds, Government securities, are they not, Mr. Martin? Mr. M A R T I N . That is correct, sir. Representative P A T M A N . I t was contemplated i n the original act that a certain amount would be paid to the Treasury over and above expenses ; I believe they it a franchise tax, do they not ? Mr. M A R T I N . That is right, sir. Representative P A T M A N . And 90 percent—and then the law was amended two or three time; first i t said after a surplus of a certain amount had been accumulated, then i t was amended again to increase the amount of the surplus, but finally the banks commenced to pay into the Treasury 90 percent. When was the law changed to repeal that provision? Mr. M A R T I N . The law was never actually changed, Mr. Chairman. Both committees in the House and Senate were informed of the practice that was going to be used. I would personally bo glad to see the law formally changed or see a franchise tax restored. Representative P A T M A N . Y O U say the law was not changed? I think you are mistaken there, Mr. Martin. M r . MARTIN. A m I ? Representative P A T M A N . I think the law was changed. I n other words, the 90 percent provision was repealed. Mr. YOUNG. That was repealed. The 90 percent that is now i n operationRepresentative P A T M A N . The what? Mr. YOUNG. The 90 percent payment that is now in operation is by an agreement between the Treasury and the Representative P A T M A N . I did not ask you about that, Mr. Young. I am going to get to that. Mr. YOUNG. Y O U are correct; i t was repealed by the Banking Act of 1933. Representative P A T M A N . The original law was that after the payment of the expenses and after the accumulation of a certain amount i n the reserve fund of each bank, the remainder—90 percent of the remainder—would go over to the Treasury as a franchise tax. Now, i n some way that law got repealed. I do not know how. I have not looked into the history of it. I just know i t was repealed, but the question I am asking you is, When was that repealed ? Mr. M A R T I N . We w i l l get you the data and put i t in the record, M r . Chairman. That is some more homework I w i l l have to do. Representative P A T M A N . And any discussion that you find in either House about it, I would like to have my attention called to that, too, i f you please. Mr. M A R T I N . Right, sir. (The supplementary statement by Chairman Martin follows:) P A Y M E N T S TO TREASURY BY FEDERAL RESERVE B A N K S F R A N C H I S E T A X O N FEDERAL RESERVE B A N K S I n section 7 of the original Federal Reserve Act, i t was provided t h a t a l l earnings, a f t e r necessary expense and dividends, should be paid to the United States as a franchise tax, except t h a t one-half of such net earnings should be p a i d into the Federal Reserve bank surplus u n t i l i t amounted to 40 percent of its paid-in c a p i t a l stock. I n 1919, this provision was amended to provide t h a t the net MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 117" earnings after expenses and dividends should be paid into the surplus f u n d u n t i l i t amounted to 100 percent of the bank's subscribed capital stock, and that therea f t e r only 10 percent should be paid i n t o the surplus fund. I n other words, the l a w required that, after accumulation of the prescribed surplus, 90 percent of net earnings of the Reserve banks be p a i d to the United States as a franchise t a x ; and t h i s situation continued u n t i l 1933. The Banking A c t of 1933 eliminated the requirement f o r the payment of a franchise tax but, at the same time, required the Federal Reserve banks to subscribe $139,000,000 f o r Federal Deposit Insurance Corporation capital Stock, an amount equal to one-half of their surplus on January 1, 1933. The b i l l w h i c h became the Banking A c t of 1933, as reported i n both Houses of Congress and as passed by the Senate, contained the provision eliminating payment of the f r a n chise tax by the Federal Reserve banks. However, when the b i l l was under consideration by the House, this provision f o r the elimination of the t a x was stricken f r o m the bill. The conference committee, however, followed the Senate version i n this respect and restored the provision. The reports of the B a n k i n g and Currency Committees on the Banking A c t of 1933 do not show reasons w h y the franchise t a x was being eliminated. However, when the b i l l was presented to the House the chairman of the House committee stated, w i t h respect to the subscription of $150,000,000 by the Treasury f o r stock i n the Federal Deposit Insurance Corporation, t h a t — " T h i s f u n d covers the larger p a r t of sums that have been paid into the Treasu r y by the 12 Federal Reserve banks i n lieu of a franchise tax. Approximately $150,000,000 is t o be subscribed by the Federal Reserve banks, the plan requiring t h a t each Federal Reserve bank subscribe f o r the capital stock of the Deposit Insurance Corporation i n an amount equal to one-half of its surplus" (Congressional Record, vol. 77, pt. 4, p. 3836). D u r i n g debates i n 1932 on an earlier d r a f t of a similar bill, Senator Glass had stated his reasons f o r a proposal to eliminate the franchise tax. When the 1933 b i l l came before the House of Representatives, Representatives Patman and Keller expressed their opposition to the proposal. Excerpts f r o m the statements by Senator Glass and Representatives Patman and Keller are attached. SUBSCRIPTION TO C A P I T A L STOCK OF T H E FEDERAL DEPOSIT I N S U R A N C E CORPORATION The Banking A c t of 1933 creating the Federal Deposit Insurance Corporation required t h a t each Federal Reserve bank subscribe to non-dividend-paying stock of the Corporation i n an amount equal to one-half of the Reserve bank's surplus on January 1,1933. When the proposal f o r cancellation of the Federal Deposit Insurance Corporat i o n stock was under consideration, the Board recommended, and the legislation provided, t h a t the amount received by the Corporation f r o m the Federal Reserve banks f o r such stock be paid to the Treasury rather t h a n returned to the Reserve banks. This was done i n October 1947. P A Y M E N T OF INTEREST ON FEDERAL RESERVE NOTES I n A p r i l 1947 the Board of Governors announced t h a t i t had decided to invoke the authority granted to i t under section 16 of the Federal Reserve A c t to levy an interest charge on Federal Reserve notes issued by the Federal Reserve banks. The purpose of t h i s interest charge was to pay to the Treasury approximately 90 percent of the net earnings of the Federal Reserve banks f o r t h a t year. Such payments have been continued f o r succeeding years. The statement pointed out t h a t a t the end of 1946 the surplus of each Federal Reserve bank was equal to its subscribed capital and t h a t under this policy the Board w o u l d be able to accomplish the same results as were accomplished by the payment of a franchise tax. P r i o r to the adoption of the policy the proposal was discussed by Chairman Eccles w i t h Representatives of Congress and w i t h the Secretary of the Treasury. I n particular, the matter was the subject f o r discussion between Representative Patman and Chairman Eccles a t the hearings March 4, 1947, before the Committee on B a n k i n g and Currency on H . R. 2233 (p. 29). D I S T R I B U T I O N OF FEDERAL RESERVE B A N K N E T PROFITS, W I T H TO P A Y M E N T S TO T H E TREASURY SPECIAL REFERENCE F r o m earnings of the Federal Reserve banks since organization through 1951 the Treasury has received $1,175,000,000 as franchise tax, contribution f o r the MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 118" purchase of stock i n the Federal Deposit Insurance Corporation, and interest on« Federal Reserve notes. Net profits of the Federal Reserve banks since organization has been disposed of as f o l l o w s : T o t a l payments to Treasury $1,175,000,000 Franchise tax F D I C stock Interest on Federal Reserve notes : 194 7 1948 1949 1950 195 1 149,000,000 139,000, 000 $75, 000, 000 167,000,000 193,000,000 197,000,000 255, 000,000 887,000,000* Dividends to member banks P a i d U. S. Treasury f r o m earnings on funds received f r o m the Treasury f o r the purpose of making w o r k i n g capital loans t o industry (sec. 13b loans) Net transfers to— Reserves f o r contingencies Surplus (sec. 7) Net profits since organization 306,000,000 2,000,000 106,000,000 538,000,000 2,127,000, 000 ATTACHMENTS Excerpts from statement by Representative Patman (Congressional Record, t?oL 77, pt. P. S8fi2) D u r i n g debates i n 1933 on the bill, Representative Patman, i n commenting upon this proposed amendment, stated: " T h e money [ f o r the Federal Deposit Insurance Corporation] is coming f r o m three sources; namely, $150,000,000 f r o m the Treasury of the United States. $150,000,000 f r o m the surplus f u n d of the Federal Reserve banks, which, as a matter of right, should be i n the Treasury of the United States today. T h a t money does not belong to the Federal Reserve banks. I t belongs to the U n i t e d States Treasury. I t never has belonged to those banks. I t never was intended t h a t those banks should get t h a t money. Therefore, of the $450,000,000 appropriated, $300,000,000 of i t represents the people's money, coming f r o m the Treasu r y of the United states. The other one-third w i l l come f r o m the depositors, one-half of 1 percent being assessed against the deposits of the banks. "Surplus fund of Federal Reserve banks.—Now, let me t e l l you about this surplus f u n d of the Federal Reserve banks. When those banks were organized, they were not intended as profit-making institutions. I t was stated they were going to use the credit of this Nation, and for the purpose of compensating the people for the use of t h a t credit, when they paid their operating expenses a n d 6-percent dividends on the amount of capital invested by the member banks the remainder would go into the Treasury as a franchise tax. As conclusive evidence, i f a member bank should f a i l or should w i t h d r a w f r o m this System, t h a t member bank would only get its capital stock back. I t does not get back a p a r t of t h a t surplus, because that surplus does not belong to the member bank. I t belongs to the Treasury of the United States. "Evidence of intent.—The l a w provides t h a t i n the event a Federal Reservebank becomes insolvent and i t is necessary to liquidate that bank a f t e r the expenses of the bank are paid, the surplus goes into the Treasury of the United States. I f the theory of the gentleman f r o m Alabama, M r . Steagall, is correct,, t h a t surplus should go back to the member banks t h a t subscribed to the capital stock i n t h a t particular Federal Reserve bank. I t is w r i t t e n into the l a w f r o m beginning to end, t h a t as to those banks using the credit of our Nation i n t h e manner they are, the excess profits they make shall be paid into the Treasury o f the United States. Now you come along i n section 3 of this b i l l and attempt t a change the entire policy of our Government i n t h a t regard. You attempt to d i v e r t f r o m the Treasury of the U n i t e d States back to the Federal Reserve banks t h a t surplus, when there was w r i t t e n i n t o the l a w language t h a t said i t should go Intothe Treasury of the United States. Now you come here and claim you are going MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT 119" to use that money as an insurance premium to insure bank deposits f o r private banks, and t h a t i t is necessary to do i t i n the interest of the general welfare. Yes; I say i t is al\ r i g h t to do i t i n the interest of the general welfare, but do not restrict i t to j u s t 6,000 banks. Give a l l banks an opportunity to come in. and when this b i l l is subject to amendment under the 5-minute rule, I expect to offer t w o amendments i n particular. "One is to strike out section 3 which changes the policy of this Government i n regard t o the excess earnings of the Federal Reserve banks. * * * " Excerpts from statement by Senator Glass (Congressional Record, vol. 75, pt. 9, pp. 9885-9886) D u r i n g debates i n 1932 on an earlier d r a f t of the bill, Senator Glass, i n commenting upon this proposed amendment, stated: " Section 4 of the b i l l relates to the distribution of earnings. Although the Federal Government has never expended a dollar i n the maintenance of the Federal Reserve System and does not own one dollar of proprietary interest, i t has collected i n excess of $150,000,000 f r o m the earnings of the Federal Reserve banks upon the pretense that i t was a franchise tax for privileges granted. Senators w i l l find upon examination that the 12 Federal Reserve banks do, w i t h o u t charge, a fiscal business f o r the United States Government t h a t 20 times over compensates the Government f o r any privilege the Federal Reserve banks may have * * .** * * The Federal Reserve banks do a fiscal business f o r the United States Government t h a t has never been paid for. The Government has not floated a loan since the beginning of the W o r l d W a r t h a t i t has not done i t through the agencies and instrumentalities of the Federal Reserve Banking System. " W e propose now a different distribution of the earnings of the System. We propose to pay the member banks 6 percent cumulative dividends on their stock, as always has been done. Then we propose to transfer f u t u r e earnings of the banks to surplus account. We propose to recapture f r o m the Federal Treasury $125,000,000 of the $150,000,000 and odd t h a t has been paid into the Treasury, a n d pass i t to the credit of a revolving f u n d f o r prompt liquidation of failed banks. * * • * * * * * * * «* * * I n o t t i e r W ords, we propose to take $125,000,000 f r o m the Federal Treasury, which we conceive to be a recapture of a part of a larger amount paid into the Treasury to w h i c h i t was not entitled. Then we propose to take onequarter [subsequently changed to one-half 1 of the existing surplus of the Federal Reserve banks themselves and apply i t to this f u n d ; but hereafter the f u t u r e earnings of the Federal Reserve banks w i l l go to the surplus fund of the Federal Reserve banks and none to the Government. ,, Excerpts from statement by Representative Keller (Congressional Record, vol. 77, pt. 4, pp. 3918, 3914) D u r i n g debates i n 1933 on the bill, Representative Keller, i n commenting upon t h i s proposed amendment, stated: " T h i s b i l l is i n most regards a splendid bill. I t represents a vast amount of labor on the p a r t of the committee. B u t f o r a l l their thought and care somehow a section has found its way i n t o this b i l l t h a t would n u l l i f y most of its benefits. I refer to section 3, which seeks to t u r n over to this privately owned bankers' banking system f o r a l l time to come every penny of the franchise tax which has existed f r o m the start. * * * * * * * " A previous Congress, as representatives o f our people, saw fit to give a small group of our citizens the power to issue money. F o r t h a t privilege i t exacted a small tax. T h a t small group has paid itself a generous profit on t h a t privilege i n the past, and i t now comes to the representatives of a sovereign power and asks t h a t i t be given all the profit. * * * * * * * "Now, what does this section 3 mean? I t means this and nothing less, t h a t i f section 3 becomes the law we forever give up a l l claims to any r e t u r n to the Government whatever. I f section 3 had been i n the original law, we would not have received the $149,000,000 which we have received, but the Federal Reserve System would have added that amount to the present $279,000,000 surplus, or $428,000,000 would belong to this purely private banking system, MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.120 "Therefore, i f we keep section 3 i n this bill, i t means the people w i l l never receive another penny f r o m this private banking system f o r the tremendously valuable franchise w h i ch i t holds. A n y man who votes to r e t a i n i t i n the b i l l votes to take f r o m the people a l l the hundreds of millions of money w h i c h w i l l come to them i f this section is l e f t out of this b i l l . " Representative P A T M A N . Anyway, notwithstanding the repeal of that 90-percent provision, you have agreed voluntarily to pay—the Federal Reserve banks, each bank—into the Treasury that 90 percent just as though the law were effective at this time, and you are doing that now ? Mr. M A R T I N . That is right. Representative P A T M A N . The point I am getting to now is with respect to a Federal Reserve bank. Who determines the expenses of that bank; who determines what they can legally spend that money for and what it cannot be spent for, and the purposes for wWch it can be used ? Who determines that at each bank ? Mr. M A R T I N . Each Reserve bank has a board of directors. Representative P A T M A N . And they determine it ? Mr. M A R T I N . They determine it. We have some budgetary procedures which are listed in the answers to the questionnaire, but I think they are rather a distinguished group of directors who have had a good deal of business experience, and who pass on it. Representative P A T M A N . Yes; I am sure they all are fine people. But, now, who supervises that; after they pass on it, who looks over i t ? Mr. M A R T I N . The Board of Governors, sir. Representative P A T M A N . The Board of Governors looks over it? Mr. M A R T I N . That is correct, sir. Representative P A T M A N . And what policy do they have concerning the expenditure of these funds ? Do you lay down any rules that you can spend it for this purpose but you cannot spend for that purpose, and do you have any do's and don'ts in it ? Mr. M A R T I N . We have a very careful budget review on a business Representative P A T M A N . D O you have a copy of that that I could see? Mr. M A R T I N . I n the answer to the questions we have listed Representative P A T M A N . I have seen that. You need not furnish anything that is already furnished or has already been furnished, in answer to the questions. Mr. M A R T I N . Well, we tried to cover our procedures thoroughly. Representative P A T M A N . I was given information here a while back that the Federal Reserve banks have gotten into the policy and habit of even calling conferences, inviting people from a distance and paying their way and their hotel bills and paying for the meetings. Have you run into anything like that? Mr. M A R T I N . All the expenses of the Reserve banks are accounted for by major functions in the statement of expenses already submitted. They are all accounted for. Representative P A T M A N . Y O U mean where something like that would be itemized; i t would be identified ? Mr. M A R T I N . I t is my understanding it would be included under the appropriate functional classification. Representative P A T M A N . My attention has been called to the statements being gotten out by these banks, one in particular—and it hap- M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT . 121 pened to be the Dallas, Tex., bank; I will name it so that others will not be involved—that is on the fringe of or border of propaganda, pure propaganda, to influence legislation or the action of the Congress. Do you know anything about that ? Mr. M A R T I N . N O , sir; I do not know the particular reference. Representative P A T M A N . Well, who would pass on the legality of such an expenditure as that? Suppose they do get out a booklet there or something of that order, and they distribute it at their own expense, who would pass on whether or not that was a legal expenditure ? Mr. M A R T I N . The board of directors of the bank. Representative P A T M A N . Of that bank? Mr. M A R T I N . Operating under budget approvals from the Board of Governors here in Washington. * Representative P A T M A N . Who audits that bank ? Mr. M A R T I N . A S stated in the reply to the questionnaire, each Federal Reserve bank is audited by a resident auditor, an officer of the bank, appointed by the board of directors, who is responsible directly to the directors. I n addition, each Federal Reserve bank is examined at least once a year by the Federal Reserve Board through its staff of examiners. Representative P A T M A N . And the Federal Reserve Board—wb^ does the Federal Reserve Board get? Mr. M A R T I N . Who audits the Federal Reserve Board ? Representative P A T M A N . Yes. Mr. M A R T I N . Well, we are about to have a noted private firm audit our accounts. Representative P A T M A N . Who selected this private firm ? Mr. M A R T I N . I t was selected by the Board of Governors. Representative P A T M A N . Well, since you are a servant of the Congress, why did you not ask the Congress to suggest someone to audit the Federal Reserve Board and the Federal Reserve Bank? Mr. M A R T I N . Because, Mr. Chairman, budgetary control of our operations, of our budget, is fundamental in our concept of the independent status of the System. I f you want to nationalize the System, why, the surest way to do it is through control of the budget. I f we are not handling our budgetary expenses properly, why, the Banking and Currency Committee, your committee, any other committee, can see listed our expenses and what they are for and why we expended the money, and we are subject to your comments on it. But just let me mention one thing, the voluntary restraint program as one example. How in the world could we have embarked upon that program unless we had known in advance that we were going to encounter a period of excitement and expansion of credit? We had to have budgetary discretion to organize and set up that program, which was provided for under the Defense Production Act as a means of working toward the preservation of the purchasing power of the dollar. Representative P A T M A N . Y O U mean by that that you must have a large amount of money at your disposal, and you do not know how much it will take. Mr. M A R T I N . We make a very careful estimate. We follow a budget procedure all the way through, but the discretion as to whether we should exceed the budget or not, we think, is a fundamental prerogative of an effective Reserve banking system. MONETARY POLICY AND M A N A G E M E N T OF P U B L I C D E B T.122 Representative P A T M A N . I notice you said that you are under the direction and scrutiny of Congress. Mr. M A R T I N . That is correct. Representative P A T M A N . N O W , of course, normally an agency of Congress is required to submit to an examination by the General Accounting Office, and I noticed this morning in your answers to Senator Douglas' questions you oppose that. You do not believe that is a good thing to do, to have your 12 banks and the Board audited by the General Accounting Office. Mr. M A R T I N . Because I think that would be a step toward nationalization of the System. Representative P A T M A N . Nationalization of the System ? Well, is it not pretty well natiortJilized now, Mr. Martin? On every issue of money that belongs to the Government, the Bureau of Printing and Engraving prints the money. Mr. M A R T I N . I do not believe it is today, Mr. Chairman. I think that it maintains a balance between the public and the private status. I think that is the concept on which it was founded and the way it should be maintained. Representative P A T M A N . Y O U do not mean to say that the small amount of stock that the banks hold, 6 percent of their capital, 3 percent paid up, I believe it is—6 percent capital and 3 percent paid—that is not enough to where you would say that the banks own the Federal Reserve System, do you? Mr. M A R T I N . N O , sir; I would not say that. I think that the Federal Reserve banks are quasi-public institutions, and I think that this stock ownership is a means of providing for member-bank participation. I t is a part of the democratic process to provide for participation by the member banks in determining who some of the directors of the Reserve banks will be. While I do not think it is a vital thing, it seems to me that the advantages of retaining that ownership for the purpose of obtaining this participation on a democratic basis in the individual Federal Reserve banks more than outweighs any disadvantages. Representative P A T M A N . I t is more of a token subscription, is it not ? Mr. M A R T I N . I t is more of a token; yes, sir. Representative P A T M A N . I t does not really amount to anything so far as Mr. M A R T I N . I t does not amount to a great deal in terms of stockholders' control, but it does give them a participation and interest in the System that I think they would not have without it. Representative P A T M A N . What is the business done by the banks in a year ? Does it run into two or three hundred billion or a trillion dollars a year ? Mr. M A R T I N . The collection of checks, I would not have any way Representative P A T M A N . Let us see, it was not two trillion dollars last year, was it ? Mr. Y O U N G . I t could have been. Representative P A T M A N . T W O trillion dollars? Mr. Y O U N G . Largely, in collections of checks. Representative P A T M A N . That is in clearing checks? Mr. Y O U N G . I n clearing checks. M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT . 123 Representative P A T M A N . In-transactions—two trillion dollars; that is two thousand billion dollars. I cannot comprehend that much money, but certainly Mr. M A R T I N . There is a lot of service rendered. Representative P A T M A N . Yes; a lot of service rendered; I know there is. Concerning the scrutiny of Congress, normally the Congress appropriates money for its agencies. How would you feel about turning in all of your funds to the Treasury, like dozens of other agencies do now, and getting a direct appropriation from Congress each year ? Mr. M A R T I N . Well, I would think that our status as an independent agency had been severely challenged by such a process. Representative P A T M A N . Why would it? That would just be under the scrutiny of Congress, and you say you are under the scrutiny of Congress. Mr. M A R T I N . We are under the scrutiny of Congress, but we retain budgetary discretion. Now, the Congress can take it away from us. Representative P A T M A N . But you are not under it in an effective way. Now, under parliamentary rules and procedures it is easy to say that you are under the scrutiny of Congress, but you are not inconvenienced by it if they have no power to control the purse strings of your agency. I t is a rather cumbersome procedure to pass specific laws controlling an agency, so you are not under much restraint or inconvenience at all. Of course, I do not mean inconvenience just to inconvenience you, but I mean to quickly pass upon policies, and even major policies. Mr. M A R T I N . The Board's funds are not appropriated funds. They come through assessments on the Reserve banks, and that is part of the mechanics of the Reserve System. Representative P A T M A N . From which banks, the Federal Reserve? Mr. M A R T I N . The Federal Reserve banks. Representative P A T M A N . Well, the Federal Reserve banks use Government money, do they not f Mr. M A R T I N . Not for their expenses. Representative P A T M A N . I mean that is what they deal in with Government money. They deal in credit of the Nation, do they not ? Mr. M A R T I N . They deal Representative P A T M A N . That is their stock in trade. Without that they would not have anything, would they? Mr. M A R T I N . NO. They are the service mechanism for the banking machinery of the country, and as such the concept was that the System would have an independent status to perform that service. And I think that budgetary discretion is vital to it. Representative P A T M A N . And you would be opposed to any change in the law whereby you would deposit your funds in the Treasury like other departments, like other agencies do, and have to come to Congress for your funds? M r . MARTIN. I do, sir. Representative P A T M A N . Y O U would be opposed to that? Mr. M A R T I N . I would be opposed to it. Representative P A T M A N . Mr. Bolling, did you want to ask some questions ? 97308—52 9 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.124 Eepresentative BOLLING. Yes, Mr. Chairman; I have some more. Mr. Martin, the President's Economic Report transmitted in January recommended that Congress provide power for the Board of Governors of the Federal Reserve System to impose additional bank reserve requirements. Are you familiar with the nature of the proposed weapons that are suggested by that proposal of the President ? Mr. M A R T I N . Well, I do not know what weapons were proposed,. Mr. Boiling, because Representative BOLLING. They were not proposed specifically, and I am trying to find out whether you know what specifically was in the President's mind when he made the suggestion. M r . M A R T I N . NO, s i r ; I do not. Representative BOLLING. I gather from your statement that you do not feel that at this time such additional Mr. M A R T I N . That is correct. Representative BOLLING. Y O U think that there should be consideration given by this committee to making them available, not with the idea that they would be used now, but that they might be necessary in the future? Mr. M A R T I N . Well, I think we would always like to have stand-by authority, and I think it would be very desirable for your committee to review the whole reserve situation. But at the moment I do not think we need it, and I would hesitate to request authority when we do not need it. Representative BOLLING. D O I gather from that that you do not foresee the possibility of needing it ? Mr. M A R T I N . At the moment I do not foresee the possibility of it. Representative BOLLING. On the 26th of February 1951, the President, in a memorandum requested of the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve,, the Director of the Defense Mobilization, and the Chairman of the Council of Economic Advisers to study ways and means to provide the necessary restraints on private credit expansion and, at the same time, to make it possible to maintain stability in the market for Government securities. He also said : W h i l e this study is under way, I hope t h a t no attempt w i l l be made to changethe interest rate pattern, so that stability i n the Government security market w i l l be maintained. When this memorandum from the President was released on the 26th of February, Mr. Wilson expressed the hope that a report could be made by the four agency heads to the President within 10 daysor 2 weeks. I f my memory serves me correctly, the accord between the Federal Reserve and the Treasury was in March ? Mr. M A R T I N . March 4. Representative BOLLING. I n this report that Mr. Wilson had expressed the hope would be made to the President within 10 days or 2 weeks, was filed on May 11. I n reaching their accord in early March of 1951, did the Treasury and the Board consult with the Director of Defense Mobilization and the Chairman of the Council of Economic Advisers prior to the announcement of that accord ? MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 125 Mr. M A R T I N . I do not think we formally consulted with them with respect to the terms of the accord. Mr. Wilson was informed of the progress that was being made, and Mr. Keyserling was informed that the accord was being made and the general essence of the accord was discussed with them. I do not know that we can truthfully say that they actively participated in the formulation of the accord, but they were consulted about it. Representative B O L L I N G . Mr. Chairman, I would like unanimous consent to print in the record r\t this point the memorandum from the President to the four agencies, together with the report of the four agencies, submitted to the President on May 11. Representative P A T M A N . Without objection it will be done. (The documents referred to follow:) The President met this morning (February 26,1951) w i t h the f o l l o w i n g : M r . Thomas McCabe, Chairman, Board of Governors, Federal Reserve System M r . Charles Wilson, Director, Office of Defense Mobilization M r . E d w a r d Foley, Under Secretary of the Treasury M r . Charles Murphy, special counsel to the President The Council of Economic Advisers, M r . Leon H . Keyserling, C h a i r m a n ; M r . John D. Clark and M r . Roy Blough M r . W i l l i a m McChesney M a r t i n , Assistant Secretary of the Treasury M r . A l l a n Sproul, Vice Chairman, Federal Reserve Open M a r k e t Committee M r . H a r r y A . McDonald, Chairman, Securities and Exchange Commission. The President read the attached memorandum to the group and there was a general discussion of the subject covered by the memorandum. The President d i d not ask any of those present for any commitments on the subjects under |discussion, but expressed the hope t h a t they would go ahead speedily w i t h the study requested. M r . Wilson expressed the hope that a report could be made to the President w i t h i n 10 days or 2 weeks. Memorandum f o r : The Secretary of the Treasury, The Chairman of the Board of Governors of the Federal Reserve System, The Director of Defense Mobilization, The Chairman of Council of Economic Advisers. I have been much concerned w i t h the problem of reconciling t w o objectives: F i r s t , the need to m a i n t a i n stability i n the Government security market and f u l l confidence i n the public credit of the United States, and second, the need to res t r a i n private credit expansion at this time. H o w to reconcile these two objectives is an important facet of the complex problem of controlling inflation d u r i n g a defense emergency which requires the f u l l use of our economic resources. I t would be relatively simple to restrain private credit i f t h a t were our only objective, or to maintain stability i n the Government security market i f t h a t were our only objective. B u t i n the current situation, both objectives must be achieved w i t h i n the framework of a complete and consistent economic program. We must m a i n t a i n a stable market f o r the very large financing operations of the Government. A t the same time, we must maintain flexible methods of dealing w i t h private credit i n order to fight inflation. We must impose restraints upon nonessential private lending and investment. A t the same time, we must maintain the lending and credit facilities which are necessary t o expand the industrial base f o r a constant build-up of our t o t a l economic strength. Instead of fighting inflation by the t r a d i t i o n a l method of directing controls t o w a r d reduci n g the over-all level of employment and productive activity, a defense emergency imposes the harder task of fighting inflation w h i l e striving t o expand both employment and production above w h a t would be regarded as m a x i m u m levels i n normal peacetime. W h a t we do about private credit expansion and about the Government securities market is, of course, only a part of the problem that confronts us. A successf u l program f o r achieving production growth and economic stability i n these c r i t i c a l times must be based upon much broader considerations. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.126 W e must make a unified, consistent, and comprehensive attack upon our economic problems a l l along the line. Our program must include, i n proper proportion, production expansion policy, manpower policy, t a x policy, credit policy, debt management and monetary policy, and a wide range of direct and indirect controls over materials, prices, and wages. A l l of these policies are necessary; each of them must be used i n harmony w i t h the r e s t ; none must be used i n ways t h a t n u l l i f y others. We have been s t r i v i n g i n this emergency to develop such a unified program i n the public interest. Much progress has already been made, both on the product i o n f r o n t and on the antiinflation f r o n t . Many peacetime activities of Government, including the activities of lending and financing agencies, have been pruned down. Cut-backs of c i v i l i a n supplies and allocations of essential materials* have been successfully undertaken. I m p o r t a n t expansion programs f o r basic mater i a l s and productive capacity needed i n the defense effort have been gotten underway. Price and wage controls have been initiated. Restraints on consumer and real estate credit have been applied. Large t a x increases have been enacted, and additional t a x proposals are now pending. I n a l l these fields f u r t h e r action is being planned and w i l l be taken as needed. One outstanding problem which has thus f a r not been solved to our complete satisfaction is t h a t of reconciling the policies concerning public-debt management and private credit control. Considering the difficulty of this problem, we should not be discourged because an ideal solution has not yet been fund. The essence of this problem is to reconcile t w o important objectives, neither of w h i c h can be sacrificed. On the one hand, we must m a i n t a i n stability i n the Government security market and confidence i n the public credit of the United States. This is important a t a l l times. I t is imperative now. We shall have to refinance the billions of dollars of Government securities w h i c h w i l l come due later this year. We shall have to borrow billions of dollars to finance the defense effort d u r i n g the second h a l f of this calendar year, even assuming the early enactment of large additional taxes, because of the seasonal nature of t a x receipts which concentrate collections i n the first h a l f of the year, and because of the inevitable lag between the imposition of new taxes and their collection by the Treasury. Such huge financial operations can be carried out successfully only i f there is f u l l confidence i n the public credit of the United States based upon a stable securities market. On the other hand, we must curb the expansion of private loans, not only by the banking system but also by financial institutions of a l l types, w h i c h would add to inflationary pressures. This type of inflationary pressure must be stopped, to the greatest extent consistent w i t h the defense effort and the achievement of its production goals. The maintenance of stability i n the Government securities market necessarily l i m i t s substantially the extent to which changes i n the interest rate can be used i n an attempt to curb private credit expansion. Because of this fact, much of the discussion of this problem has centered around the question of which is to be sacrificed—stability i n the Government securities market or control of private credit expansion. I am firmly convinced t h a t t h i s is an erroneous statement of the problem. We need not sacrifice either. Changing the interest rate is only one of several methods to be considered f o r curbing credit expansion. Through careful consideration of a much wider range of methods, I believe we can achieve a sound reconciliation i n the national interest between maintaining stability and confidence i n public credit operations and restraining expansion of inflationary private credit. We have effective agencies f o r considering this problem and a r r i v i n g at a proper solution. Over the years, a number of important steps have been taken t o w a r d developi n g effective machinery f o r consistent and comprehensive national economic policies. One of the earliest steps i n this century was the establishment of the Federal Reserve System before W o r l d W a r I . A t t h a t time, under f a r simpler conditions t h a n those now confronting us, the Federal Reserve System was regarded as the main and central organ for economic stabilization. A f t e r W o r l d W a r I I , i n a much more complex economic situation and a much more complex framework of governmental activities affecting the economy, the Council of Economic Advisers was established by the Congress under the Employment A c t o f 1946 to advise the President and help prepare reports to the Congress concerning how a l l m a j o r economic policies might be combined to promote our economic strength and health. S t i l l more recently, i n the current defense emergency, the Office of Defense Mobilization has been established to coordinate MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 127 and direct operations i n the mobilization effort. I n addition, some of the established departments, such as the Treasury Department, have always performed economic functions which go beyond specialized problems and affect the whole economy. Consequently, I am requesting the Secretary of the Treasury, the Chairman of the Federal Reserve Board, the Director of Defense Mobilization, and the Chairman of the Council of Economic Advisers to study ways and means t o provide the necessary restraint on private credit expansion and at the same time to make i t possible to maintain stability i n the market f o r Government securities. W h i l e this study is underway, I hope that no attempt w i l l be made to change the interest rate pattern, so t h a t stability i n the Government security market w i l l be maintained. Among other things, I ask t h a t you consider specifically the desirability of measures: (1) to l i m i t private lending through voluntary actions by private groups, through Government-sponsored voluntary actions such as was done i n a narrow field by the Capital Issues Committee of W o r l d W a r I , and through direct "Government controls; and (2) to provide the Federal Reserve System w i t h powers to impose additional reserve-requirements on banks. Under the first heading, I am sure that you are aware of the efforts t h a t are already underway by the American Bankers Association, the Investment Bankers Association, and the l i f e insurance association. I want you to consider the desirability of this or other kinds of private voluntary action i n bringing about restraint on the p a r t of lenders and borrowers. I should like you to consider al^O the establishment of a committee similar to the Capital Issues Committee of W o r l d W a r I , but operating i n a broader area. The objectives of such a Committee would be to prevail upon borrowers to reduce their spending and to c u r t a i l their borrowing, and to prevail upon lenders to l i m i t their lending. The activities of this committee could be correlated w i t h those of the defense agencies under M r . Wilson w i t h the objective of curtailing unnecessary uses of essential materials. Furthermore, I should l i k e you to consider the necessity and feasibility of using the powers provided i n the Emergency Banking Act of 1933 to c u r t a i l lending by member banks of the Federal Reserve System. These powers are vested i n the Secretary of the Treasury subject to my approval. The Secretary could by regulation delegate the administration of this program to the 12 Federal Reserve Banks, each to act i n its own Federal Reserve D i s t r i c t under some flexible procedure. The program could be extended to institutions other than member banks, i f desired, by using the powers provided by the T r a d i n g w i t h the Enemy Act. Under the second heading, you w i l l recall the recommendation I made to the Congress a number of times i n recent years to provide additional authority for the Federal Reserve System to establish bank reserve requirements. I should like you to consider the desirability of making t h a t or another recommendation w i t h the same general purpose at the present time. You are a l l aware of the importance of this problem, and the need f o r an early resolution. I should like your study to proceed as rapidly as possible i n order t h a t I may receive your recommendations at a very early date. I am asking the Director of Defense Mobilization to arrange f o r calling t h i s group together a t mutually convenient times. A t the same time that we are working to solve this problem of maintaining the stability of the Government securities market and restraining private credit expansion, we shall, of course, continue vigorously to review Government lending and loan guarantee operations. .Since the middle of last year, we have taken a series of steps to c u r t a i l such operations and l i m i t them to amounts needed i n this defense period. I am directing the agencies concerned to report to me by March 15 on the nature and extent of their current lending and loan guarantee activities, so t h a t these operations may again be reviewed as p a r t of our over-all anti-inflationary program. E X E C U T I V E O F F I C E OF T H E P R E S I D E N T , O F F I C E OF D E F E N S E M O B I L I Z A T I O N , Washington, The May 17,1951. PRESIDENT, The White House, Washington, D. G. : Referring to your memorandum of February 26, 1951, addressed to the Secretary of the Treasury, Chairman of the Board of Governors of the Federal Reserve System, the Director of the Office of Defense Mobilization, D E A R M R . PRESIDENT MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.128 and the Chairman of the Council of Economic Advisers, asking us to study ways and means to provide necessary restraint on private credit expansion and a t the same t i m e make i t possible to m a i n t a i n stability i n the market f o r Government securities, I am enclosing herewith a signed report of this committee. I have been acting as chairman of the committee, and the report speaks f o r itself. Sincerely yours, CHARLES E . R E P O R T OF T H E F O U R - M E M B E R C O M M I T T E E A P P O I N T E D F E B R U A R Y WILSON. 26,1051 INTRODUCTION The President's memorandum of February 28, 1951, to the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System, the Director of Defense Mobilization, and the Chairman of the Council of Economic Advisers stated: " I am requesting the Secretary of the T r e a s u r y , „ the Chairman of the Federal Reserve Board, the Director of Defense Mobilization, and the Chairman of the Council of Economic Advisers to study ways and means to provide the necessary restraint on private credit expansion and a t the same t i m e to make i t possible to m a i n t a i n stability i n the market f o r Government securities. ,, The present problem of restraining the expansion of credit must be attacked under conditions differing vastly f r o m those of any other inflationary period i n the Nation's history. To a large degree the problem is fashioned by the cont i n u i n g influence of the tremendous accumulation of public debt d u r i n g W o r l d W a r I I , and by the imminent task not only of refunding the large portion of t h a t debt w h i c h matures i n the near f u t u r e but also of undertaking new financing. Conditions i n the market for Government securities become, therefore, a compelling consideration. W i t h i n this framework, nonetheless, restraints must be exerted on over-all credit expansion, p a r t i c u l a r l y f o r nondefense purposes, i n order to keep combined Government and private demands w i t h i n the bounds of available supplies of goods and services and yet not interfere w i t h the m a x i m u m possible expansion of output i n v i t a l lines. W e submit to you i n the present report ( I ) a brief review of current problems of credit control, as they have emerged i n the postwar period and as we face them i n connection w i t h the national defense e f f o r t ; ( I I ) a review of the accomplishments i n these fields since your memorandum of February 26; ( I I I ) a summary of credit controls available under permanent, expiring, and proposed legislation; and ( I Y ) our conclusions and recommendations w i t h respect to f u r t h e r needed actions. I . C U R R E N T P R O B L E M S OF CREDIT CONTROL D u r i n g W o r l d W a r I I , because of the large Government deficits, banks and other financial institutions and many other investors bought large quantities of Government securities. I n the postwar period, Federal Reserve use of t r a d i t i o n a l instruments to restrain credit was conditioned by the objective of m a i n t a i n i n g a market f o r these securities without a substantial and general increase i n interest rates. T h i s latter objective l i m i t e d the effective use of open market operations f o r purposes of counteracting inflation. The possible restrictive effect of increases i n reserve requirements was also l i m i t e d by the large holdings of Government securities by banks and other institutions. General credit control again became a matter of national concern when new inflationary pressures developed after the i n i t i a t i o n of the expanded defense program. Various measures were adopted by the Federal Reserve and other Government agencies i n this period to restrain credit expansion. Nevertheless, the needs of public debt management, the large available supply of l i q u i d assets, and the increased accent upon f u l l employment and production, continued to l i m i t the Federal Reserve System's pursuit of a more effective policy of credit limitation. The period since the outbreak i n Korea has been characterized by anticipation on the p a r t of consumers and business concerns of the effects of the expanded national security program. This anticipatory buying was financed i n a variety of ways. Credit expansion was one of the available means which financed the enhanced demand, and the support policy was one of the factors which facilitated credit expansion. Commercial banks and other financial institutions were i n a favorable position to extend credit, since they could always sell Government MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 129 securities and the Federal Reserve System stood ready to make purchases whenever other investors were not ready to buy at prevailing prices. W h i l e any feasible Federal Reserve policy could not have prevented individuals and business concerns f r o m financing their purchases, a stronger policy of credit restraint -could have made i t more difficult and would have reduced the t o t a l amount. P a r t of the credit extended, of course, was necessary, and as a result the American economy today is better stocked and better tooled for tackling a large defense production program t h a n i t was at the time of the Korean outbreak. The fact that some credit extension serves a highly useful purpose i n the defense effort, while other is less useful or even h a r m f u l under present circumstances, makes i t desirable to use credit controls as selectively as possible. W h i l e selective credit controls, such as consumer credit, real-estate credit, and credit f o r securities markets, have a continued usefulness i n the mobilization period, general credit curtailment, or a general rise i n interest rates, does not have so selective an impact i n relation to defense priorities. General credit cont r o l is, however, essential to reinforce the effectiveness of the voluntary and other efforts of restraint. The objective of a discriminating credit policy is f u r t h e r aided by Government agencies through loan guarantees, tax amortization, and direct financial a i d to defense-related activities. Supplemented by such programs, general credit controls are an effective instrument i n the program of mobilization and stabilization. They must, of course, be reconciled w i t h the Government's requirements f o r refunding and new financing. Credit policy w i l l be modified i n character and intensity as the mobilization effort passes through various stages. We are now s h i f t i n g f r o m the preparatory to the production phase of the defense effort. I n the preparatory stage, private credit expanded while Government budgets showed a surplus. Expenditures f o r the defense programs have now commenced to increase substantially and as long as these expenditures are not financed on a pay-as-we-go basis the Treasu r y w i l l be faced w i t h the need f o r deficit financing i n addition to large refunding operations. There is at the same time no certainty t h a t private demand f o r investment and credit w i l l subside. A t the peak of defense production direct controls of materials may c u r t a i l private credit demands. B u t physical controls are s t i l l i n the developmental stage and their f u l l effect cannot be foreseen. We are facing therefore a period i n w h i c h we have to deal w i t h both the problem of Federal financing and the need f o r controlling private credit expansion. The large existing inventories and the fluctuations i n the public's appraisal of the seriousness of the international situation may create a temporary relaxation i n the demand f o r credit. Such a relaxation, however, may be of short duration only, and the slightest darkening of international relations may set i n motion another wave of buying. Even i f requirements of national security should remain high f o r a considerable time, we hope that an increase i n t o t a l output may, after a few years, permit a relaxation or modification of physical controls. We would then enter another stage, s t i l l f u l l y w i t h i n the period of mobilization, d u r i n g w h i c h some expansion i n the production of consumer goods and i n private investment might lead to a renewed growth i n demand f o r private credit. I n t h a t event, our chief reliance must be on fiscal, monetary, and credit policy. II. ACCOMPLISHMENTS There has been a substantial record of accomplishment since the President appointed this Committee on February 26, 1951. On March 4, the Treasury and the Federal Reserve System announced t h a t they had reached " f u l l accord w i t h respect to debt management and policies t o be pursued which would affect the successful financing of the Government's requirements and, at the same time, would minimize monetization of the public debt". On March 4, the Treasury announced the offering of a new investment series of 2% percent long-term nonmarketable bonds i n exchange f o r the outstanding 2y 2 percent marketable bonds of June 15 and December 15, 1967-72. Subsequently, during the time allowed investors f o r the exchange, more t h a n $13.5 billion of the outstanding amount of $19.7 b i l l i o n of 2% percent marketables were offered i n exchange f o r the new nonmarketables; Of the t o t a l exchange, $5.6 b i l l i o n were owned by the Federal Reserve Banks and Government investment accounts, and of these approximately 20 percent was acquired i n the few weeks p r i o r to the Treasury's announcement and d u r i n g the period i n w h i c h exchange was permitted. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.130 Since M a r c h 5, prices of outstanding Government securities have been perm i t t e d to decline, a number of the issues f a l l i n g below par. A n important result of t h i s action has been the effect i n the markets f o r mortgages and new capital issues. I t is s t i l l too early to appraise conclusively the effectiveness of this measure. I t may be noted that, beginning i n A p r i l , the rate of expansion i n bank loans began to slacken. B u t t h i s change may also reflect seasonal factors i n the demand f o r credit, the softening of consumer demand t h a t became apparent i n t h a t month, and voluntary credit restraints then undertaken, as w e l l as the decline of security prices. I t appears t h a t new commitments by insurance companies and savings banks to purchase mortgages have been reduced. Some plans f o r new securities to be issued have been w i t h d r a w n or postponed and others have had to be revised, although the t o t a l volume of new issues has continued very large. The new tone i n the market may have an important effect upon many new offerings t h a t were, or might otherwise have been, contemplated. 4. On March 9, a program f o r voluntary credit restraint was instituted by the Board of Governors of the Federal Reserve System, pursuant to section 708 of the Defense Production A c t of 1950, after consultation w i t h the Office of the Attorney General and w i t h the Federal Trade Commission. This program i s now i n f u l l operation and includes major financial institutions throughout the Nation. The program has set up a national committee as w e l l as regional committees covering a l l sections of the country. The national committee has issued three bulletins, the first dealing w i t h means of restraining inventory financing, the second w i t h the principles to be followed i n financing capital expansion programs and the t h i r d w i t h State and local government financing. These bulletins, together w i t h the statement of principles of the program, have been distributed to a l l financing institutions participating i n the program to provide a common guide f o r combating i n f l a t i o n a r y loan expansion i n their respective fields. Other bulletins, as may be appropriate and helpful, w i l l be issued f r o m time to time. Meanwhile financing institutions are requesting the regional committees f o r opinions as to the desirability under present conditions of loans i n debatable classes. These opinions are being relayed to a l l committees to insure u n i f o r m policy Nation-wide. W h i l e there has not yet been time to b u i l d up a body of statistical informat i o n to enable the committee to analyze thoroughly the effects of the program, there are indications t h a t the i n i t i a t i o n of the program has had a salutary effect on the trend of credit. Endorsements of t h e program and pledges of wholehearted cooperation have been received f r o m many representative industry groups. Under these circumstances, those connected w i t h the program are most encouraged, and i t is the committee's view t h a t the authorization f o r this unique cooperative effort as one means of restraining the f u r t h e r expansion of private credit should be continued. On March 12, the Director of Defense Mobilization appointed five task forces f r o m among the personnel of the Treasury, B o a r d of Governors of the Federal Reserve System, the Council of Economic Advisers, and the Office of Defense Mobilization to implement the j o i n t studies of these agencies undertaken i n response to the President's memorandum. On March 23, the Director of Defense Mobilization wrote the Secretary of Commerce, r e f e r r i n g to the President's memorandum of February 26, 1951, and suggested t h a t the Business Advisory Council of the Department of Commerce undertake a program to complement the voluntary credit restraint program. The implication of the letter was that efforts of lending institutions to l i m i t credit expansion w o u l d be more effective i f borrowers exercised restraint i n t h e i r requests f o r financing. As a result, the business advisory council has undertaken a continuing Nation-wide program to b r i n g to the attention of lenders and borrowers the fact t h a t the success of the voluntary credit restraint program rests equally on both of them. On May 7, the Director of Defense Mobilization wrote the Governors of a l l States, the mayors of a l l major cities and financial officers of principal counties and other political subdivisions. He requested that a l l State and municipal projects, w h i c h necessitated borrowing and which were postponable, be postponed. I n particular, he asked t h a t every proposed borrowing by a State or municipality of $1 m i l l i o n or over, before being consummated, receive the approval of one of the regional committees appointed under the voluntary credit restraint program. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT III—CREDIT CONTROLS A V A I L A B L E U N D E R P E R M A N E N T L E G I S L A T I O N , L E G I S L A T I O N A N D PROPOSED L E G I S L A T I O N . 131 EXPIRING The following summary indicates the more important actions f o r credit restraint that can be taken under existing legislation, t h a t can be employed i f expiring legislation (notably the Defense Production Act of 1950) is extended, and that could be initiated i f new legislation were passed i n conformance w i t h the recommendation made by the committee. Such a classification clarifies the problem and indicates the responsibilities of the several branches and agencies of the Government i n implementing a program designed to achieve credit restraint and stability i n the market f o r Government securities. 1. Permanent legislation (a) The Federal Reserve System has power to change rediscount rates. (&) The Open Market Committee of the Federal Reserve System has the authority to conduct open-market operations i n Government securities and such transactions can be undertaken w i t h a view to stabilizing the market f o r such securities and tightening or relaxing credit conditions. (c) E x i s t i n g legislation would permit the Board of Governors of the Federal Reserve System to raise reserve requirements of central reserve city banks very slightly above existing levels. (d) Under existing legislation the Board of Governors can amend regulations T and U so as to raise margin requirements f o r listed securities to 100 percent, and restrict w i t h d r a w a l s and substitutions of securities i n margin accounts. (e) Section 5 of the T r a d i n g w i t h the Enemy Act of 1917, as amended, and section 4 of the Emergency Banking Act of 1933 authorize the President, by Executive order, to regulate and l i m i t the issuance of credit. While these powers should not be exercised except i n an extraordinary emergency, the statutory authority appears to be sufficient. 2. Expiring legislation (a) Section 708 of the Defense Production A c t of 1950 provides the legislative basis f o r the present voluntary credit restraint program. (&) Regulation X of the Board of Governors of the Federal Reserve System, which governs the extension of real estate construction credit, stems f r o m aut h o r i t y granted the President under section 602 of the Defense Production A c t of 1950; he i n t u r n is permitted to utilize the services of the Federal Reserve System i n this connection. Present authority would permit the Board of Governors to restrict the use of real estate construction credit substantially more than has already been done. Should the proposed change i n the act be enacted ( H . R. 3871 and S. 1397, 82d Cong. 1st sess., sec. 106) i t would be possible to restrain the use of real estate credit i n the purchase of existing structures. (c) Section 601 of the Defense Production A c t of 1950 authorizes the Board of Governors of the Federal Reserve System to exercise consumer credit controls i n accordance w i t h Executive Order 8843 (August 9, 1941). Regulation W of the Board of Governors restricts the use of consumer c r e d i t ; the use of such credit could be tightened substantially beyond the degree currently permitted. 8. Proposed legislation (a) As noted above, section 106 of H . R. 3871 and S. 1397 would permit restrictions on the use of real estate credit i n connection w i t h the purchase of existing structures (&) Section 611 of H . R. 3871 and S. 1397 would permit the President, whenever he determines t h a t speculative trading on boards of trade causes or threatens to cause unwarranted changes i n the price of any commodity, to prescribe rules governing the margin to be required w i t h respect to speculative purchases or sales f o r f u t u r e delivery. The provisions of section 21 of the Securities and Exchange Act of 1934 are made applicable i n administering and enforcing this provision. (c) Reserve requirements of commercial banks have been raised v i r t u a l l y to the l i m i t s of existing authority. I t is recommended that, as an emergency measure, legislation be sought to empower the Reserve authorities for a l i m i t e d period to impose additional reserve requirements, either increasing the authorized percentages or i n some other appropriate way t h a t w i l l have a m i n i m u m adverse effect on the Government security market. The refunding and new issue operations of the Treasury i n the last h a l f of this calendar year alone amount t o i n the neighborhood of $50 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.132 billion. Under these circumstances, i t is imperative t h a t any additional requirements f o r bank reserves imposed by the Federal Reserve should be such t h a t they do not have a disruptive effect on the market f o r Government securities. I n v i e w of the emergency such requirements should apply to a l l insured banks. The feasibility of p e r m i t t i n g nonmember insured banks to hold the a d d i t i o n a l reserves i n balances w i t h their correspondents should be explored. The task force on supplementary reserve requirements has considered various plans f o r reenforcing existing bank reserve requirements and has reported that t w o plans offer the greatest promise, namely; (1) The loan-expansion reserve plan and (2) the p r i m a r y (securities feature) reserve plan, which provides f o r additional required reserves and gives a bank, under conditions to be prescribed by regulation, the option of holding the additional reserves i n the f o r m of cash, or Government securities. The provisions of these plans may be summarized as f o l l o w s : Loan-expansion reserves.—Every insured bank receiving demand deposits, other t h a n a m u t u a l savings bank, would be required to maintain additional reserves equal to a percentage, to be prescribed by the Board of Governors o f the Federal Reserve System, of t h a t p a r t of its loans and investments i n excess of a certain prescribed base. I n computing loans and investments, a l l assets of the bank would be included except (1) cash, (2) balances due f r o m banks, (3) direct obligations of the United States, and (4) such special types of assets as the Board might prescribe f r o m time to time. Primary reserves and Government securities.—Either i n substitution f o r o r i n addition to the requirement discussed above, an insured bank receiving demand deposits, other than a m u t u a l savings bank, might be required to m a i n t a i n additional reserves- equal to a l i m i t e d percentage of its demand deposits, i n addition t o the deposit balances now required. S,uch percentages could be different w i t h respect to banks i n central reserve cities, reserve cities, or elsewhere. I n lieu of such a deposit balance, a bank under certain conditions, could count Government securities either at an amount equal t o the dollar amount of the deposit balance w h i c h the securities replace or a t some lesser figure. F o r example, the Board m i g h t prescribe that, f o r reserve purposes, $1.50, or $2 o r $2.50 i n securities m i g h t be equivalent t o $1 of cash. W i t h i n a few days the Board of Governors w i l l ask the Congress to consider definitive legislation providing f o r supplementary requirements. IV. CONCLUSIONS A N D RECOMMENDATIONS Conclusions The measures thus f a r adopted make up the beginning of a n effective program of credit restraint. There is, however, no assurance t h a t these measures w i l l prove sufficient to deal w i t h the inflationary situation t h a t may be anticipated as the national security program expands. A d d i t i o n a l measures are needed t o contribute to the anti-inflationary program and a t the same time m a i n t a i n stability i n the market f o r Government securities. I n general, the additional measures which should be taken a r e : The extension and reinforcement of the voluntary credit restraint program, whose w o r k t h i s committee wholeheartedly endorses; the enactment of legislation, t o permit continuation and some broadening of selective credit controls; an emergency increase i n the a u t h o r i t y of the Board of Governors t o require, i n case of need, supplementary reserves f o r a l l insured banks. W i t h a view to the possibility t h a t a l l other anti-inflationary measures f a i l , or that needed powers may not be obtained i n time, plans should be readied f o r the imposition of mandatory l i m i t s on total credits extended by banks and other financial institutions (excepting essential loans) i f , i n an extraordinary emergency, such controls should become necessary. Recommendations 1. T h a t section 708 of the Defense Production Act of 1950, which provides the legislative basis f o r the voluntary credit restraint program, be extended. 2. T h a t close liaison be maintained between the Office of Defense Mobilization and the Voluntary Credit Restraint Committee. The Voluntary Credit Restraint Committee cannot exercise the most informed judgment regarding lending poUcy unless i t is guided by up-to-date criteria of the s h i f t i n g requirements of t h e defense program. 3. T h a t the cooperation of such bodies as the Council of State Governors and the United States Conference of Mayors be enlisted by the Voluntary Credit MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 133 R e t r a i n t Committee to help postpone issues of State and municipal securities to finance deferable expenditures. 4. T h a t the appropriate Government agency consider whether financing institun W in luded i n the voluntar inft ^ ° ° y c r e d i t restraint program, be included 5. T h a t Government loan and loan guarantee agencies should f o l l o w policies consistent w i t h those of comparable private lending institutions as set f o r t h i n the statement of principles of the national voluntary credit restraint program. I f the policies of the t w o groups of lenders are not coordinated the voluntary program m i g h t be undermined. T h i s subject is more f u l l y treated i n the f o r t h coming report of the Director of the Budget, the Director of Defense Mobilization, and the Chairman of the Council of Economic Advisers on the policies of Government lending agencies that was requested by the President to complement the w o r k of the present committee. 6. T h a t section 601 of the Defense Production A c t of 1950, w h i c h provides a u t h o r i t y f o r regulation W of the Board of Governors restricting the use of consumer credit, be extended. 7. T h a t section 602 of the Defense Production A c t of 1950, w h i c h furnishes the legislative basis f o r regulation X of the Board of Governors regulating the extension of real-estate construction credit, be extended and t h a t the proposed Change i n the act (sec. 106, H . R. 3871 and S. 1397, 82d Cong., 1st sess.), w h i c h would make i t possible to restrain the use of real-estate credit i n the purchase of existing structures, be enacted. 8. T h a t section 611 of H . R. 3871 and S. 1397 be enacted, w h i c h w o u l d p e r m i t the President, whenever he determines t h a t speculative t r a d i n g on boards of trade causes or threatens to cause unwarranted changes i n the price of any commodity, to prescribe rules governing the margin to be required w i t h respect to speculative purchases or sales f o r f u t u r e delivery. 9. The committee recommended t h a t the Congress be urged to act promptly and favorably on the proposals f o r emergency additional bank-reserve requirements, when these are advanced by the Board of Governors of the Federal Reserve System. 10. T h a t mandatory control of credit be imposed only i f the problem to be solved is most serious, and only after a demonstration t h a t more moderate measures are too slow i n their impact, or too uncertain i n operation, or are otherwise inadequate. W h i l e we do not propose the imposition of such mandatory controls a t this time, detailed plans f o r their imposition, i n the unfortunate event they become necessary, should be prepared. 11. We have pointed out i n this report t h a t credit controls must play an important role i n a program of economic stabilization t h a t is i n accord w i t h the necessities of the defense program and the Government's financial requirements. W e wish to point out w i t h equal emphasis t h a t neither selective nor general credit controls can, i n themselves, assure such economic stabilization. Economic stabilization requires, first and most importantly, a pay-as-we-go t a x program. A n y f a i l u r e i n this respect aggravates immeasurably the problems of economic stabilization. Even w i t h adequate fiscal and credit policies there s t i l l remain inflationary pressures d u r i n g the expansion of the security program. D u r i n g t h a t period, therefore, direct controls, such as allocations and price and wage controls, are essential. Only i n a rounded program i n w h i c h each control measure contributes its share can we accomplish the purposes of mobilization and stabilization. C. E . The Director WILSON, of Defense Mobilization, JOHN W . The Secretary WM. The Chairman MCC. of the LEON H. Treasury. MARTIN, of the Board of Governors of the Federal Reserve The Chairman Chairman. SNYDER, Jr., System. KEYSERLING, of the Council of Economic Advisers. Eepresentative B O L L I N G . The report, which came out on the 17th of May, and was transmitted by a letter from Mr. Wilson and was signed by Mr. Wilson, Mr. Snyder, yourself, and Mr. Keyserling, included this statement: W i t h i n a few days the Board of Governors w i l l ask the Congress to consider definitive legislation providing f o r supplementary requirements. M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C D E B T.134 That deals with reserves. I t is pretty obvious that your view has changed substantially since that time. Mr. M A R T I N . Mr. Boiling, the best made plans of mice and men "gang aft agley." Representative B O I L I N G . Would you, in view of that "gang aft agley" discuss what are the major differences in your mind between the economic conditions now and those of last May ? Mr. M A R T I N . I think that right now there are a number of soft spots in the economy. Starting last April or May, textiles, shoes, and several other industrial lines, including output of consumer durables, were beginning to slow down, and over the summer a number of other lines began to slow down. So far activity in these areas has not revived significantly. Department-store sales are currently running lower than they were a year ago. I t is too early to tell what the spring situation is going to be, but so far there has been no sign of any marked upturn in depart? ment-store sales. When I say that it does not mean that we are not watching very carefully for the possibility of an upsurge. But there has been quite a shift in the economic climate and in general economic activity, apart from the defense activity, since last April or May. . You must also remember that during that period we had W and X amended by Congress in July, and to put it bluntly, it is quite possible that, if we had asked for special authority to impose additional reserve requirements at that time, we might not have gotten it. Representative B O L L I N G . Then, that comes back to the thing that concerns me. There is inevitably a lag even in an issue such as this, in which there seems to be relatively little controversy. I t would seem to me that if inflation is only asleep, and therefore not dead, and perfectly capable of awakening again, that considering the recognizable legislative lag between the request for the new tool and its granting, and remembering back to the very brief period which brought on a very substantial inflation in the post-Korean period, I am a little concerned at the idea that there is going to be no concrete proposal from anybody on this other tool, the supplementary reserve requirements. I do not know how to assess exactly the legislative lag that exists, but it certainly is a matter of several months, and it is conceivable that considerable damage could be done in a very short period. Mr. M A R T I N . M Y best judgment on that is that we do not need the authority at this time. We still have two points in our existing reserve requirement authority with respect to central reserve cities. I would not see any point in increasing those requirements because I think that would just put pressure on the market for public debt. I agree with Mr. Wolcott that it would be nice if we did not have the present large public debt, but we have it, and we have got to handle it. I think that, with a Government securities market that is now relatively free of any interference by the Federal Reserve, and which is on the whole becoming stronger, and has more vitality than it has had for some time, there is every reason to believe that the weapons we have are adequate to deal with prospective situations. I would like, of course, to get flexibility restored in regulations W and X , granted that they are not too impressive credit control weapons—and Mr. Chairman, I certainly would agree with you that regulations W and X are not loaded with dynamite as far as credit control is con- M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T . 135 cerned. But I do feel that in a period like this we need to have such weapons in our arsenal. However, I would question very much whether we ought to get involved at this time in the use of a loan expansion reserve plan, which would be an administrative headache, or in the use of some other type of supplementary reserve plan. On the other hand, this might be a good time to review whether reserve requirements ought to be made uniform for all banks. There are a number of studies that would be desirable on this question. So far as the immediate problem is concerned, however, there is serious question as to whether any additional reserve requirement authority is the course to pursue. Representative B O L L I N G . Mr. Martin, if inflationary pressure started pushing prices up could you conceive of a situation where it might be desirable for the Federal Reserve, in addition to not supporting the Government bond market, actually selling part of its $22 billion in holdings of Government bonds in order to restrict reserves ? Mr. M A R T I N . I think that is a situation—you can conceive of a lot of situations, but I would not want to comment on a hypothesis of that sort. I thing that the Federal Reserve certainly intends to be only the marginal supplier or the marginal buyer in the market, and we want to maintain an orderly market for Government securities. I do not want to engage in a hypothetical discussion. Representative B O L L I N G . I see. That is all right with me. ; Mr. Martin, we had some discussion yesterday with Secretary Snyder on the question of E bonds and their competitive position, and so on. I wonder if you would care to make any comments on the situation with regard to saving bonds ? Mr. M A R T I N . N O , Mr. Boiling, I would not. I t seems to me that any comments on interest rates on savings bonds or specific issues ought to be in executive session, and I certainly would not want to be in the position of commenting on the Treasury's present problem, which they are struggling day and night to resolve. Representative B O L L I N G . I sympathize with your position on that. Mr. Chairman, I would like for us to pursue that through questions and letters so that we can have it as part of our own consideration. Representative P A T M A N . Y O U mean Representative B O L L I N G . For the committee to send certain questions to Mr. Martin. Representative P A T M A N . Certainly. Representative B O L L I N G . I S that satisfactory? Mr. M A R T I N . Yes; that is perfectly satisfactory. Representative P A T M A N . The fact that I asked you certain questions does not mean that I am advocating the things that I mentioned. Mr. M A R T I N . I understand. Representative P A T M A N . Mr. Martin, I am learning a lot. Mr. M A R T I N . I can assure you I am, too, Mr. Chairman. Representative P A T M A N . I do not know much myself, but these four gentlemen on the committee with me know a lot, and I am learning a lot from them, and the staff members here. I am not just pulling something out of the hat when I mention about the appropriations through Congress. I desire to invite your attention to the fact that there are a number of agencies now supported from revenues of the enterprises operated or supervised by them or M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C D E B T.136 from property they administer, but they must obtain special authorization to use moneys in their hands for designated purposes or in some cases for any purpose whatsoever. I refer to the Federal Housing Administration, the Home Loan Bank Board, the Office of Alien Property, the Commodity Credit Corporation, the Export-Import Bank of Washington, the Federal Crop Insurance Corp., the Federal Farm Mortgage Corp., the Federal Intermediate Credit Banks, the Federal National Mortgage Association, the Federal Prison Industries, Inc., the Federal Savings & Loan Insurance Corp., the Home Owners Loan Corporation, the Inland Waterways Corp., the Panama Canal Co., the production credit corporations, Public Housing Administration, the Reconstruction Finance Corp., the Virgin Islands Corp., the Tennessee Valley Authority, The following agencies collect certain moneys which are covered into the Treasury. That is what I asked you about a while ago—which are covered into the Treasury, and which can be withdrawn only on appropriations by Congress. The Attorney General, fees of aliens and immigrants, various receipts of the Department of Agriculture, including the Farm Credit Administration, the Forest Service receipts, inspection fees, Rural Electrification Administration; the Department of Commerce, including the China Trade Act Corp. fees, service and publications, fees and charges, National Bureau of Standards, fees for tests, and so forth, the Patent Office fees; the Department of Interior, electricity, sales from various power projects, the Geological Survey, sale of publications, grazing fees; the Federal Power Commission, water power lieense fees and charges; the Federal Security Administrator, including food inspection fees; the Post Office Department, postal revenues; and the Securities and Exchange Commission fees for registration of securities, national securities exchanges and qualification of trust indentures. I read these off, Mr. Martin, to let you know that it was not something new that I was proposing, but something that has been in effect a long time concerning other agencies, some of them not as important, I do not claim, as your own agency, but some, of course, rather important themselves, like the Post Office Department, for instance. Mr. M A R T I N . I understand that thoroughly. I would just like to make the comment that I have the greatest respect for all those agencies that you listed. One of them I had the privilege to head for a 3-year period, but I feel definitely, and I would like to have this in the record, that the Federal Reserve is in different category, and that its independence is something entirely different from any of those agencies; that it has a unique status and a unique place in our economy, and that as such, budgetary control is a vital element in preserving that position. That is essentially my thinking, and I just wanted you to have it. Representative P A T M A N . Of course, i f it were necessary to sell all your bonds and you did not have any income, why, you would naturally expect an appropiration from Congress, would you not? Mr. M A R T I N . N O , we would have to find some other source of income. You might be interested to know that the Open Market Committee really got its start by the need for several of the Reserve banks for earnings; the need for earnings is why they wanted to make some investments. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 137 Representative P A T M A N . Well, that is what reminded me of it, and not the reverse of it. Dr. Murphy, would you like to ask any questions ? Mr. M U R P H Y . I have three questions, Mr. Chairman. First, there has been a great deal of discussion during the past 2 days of the amount of United States securities which Federal has purchased for the purpose of supporting the Government bond market, and I think it should be placed in the record what has been the net change in the Government security portfolio of the Federal Reserve banks from the end of the war to the present time. I t is my understanding that during that period the portfolio has •decreased rather than increased in total amount; is that correct ? Mr. M A R T I N . I think that is correct. We will put the exact figure in the record. Mr. M U R P H Y . Would you insert it in the record, Mr. Chairman? Mr. M A R T I N . Certainly, we would be delighted to. (The information referred to follows:) A t the end of 1945, following the Victory Loan drive, the Federal Reserve held $24.3 billion of Government securities and at the end of February 1952 holdings were $22.5 billion. The net decline over the entire period of $1.8 billion reflected a reduction i n the period January 1946 through June 1959 of $6 billion and an expansion of $4.2 b i l l i o n f r o m J u l y 1950 through February 1952. The decline i n the period prior to the Korean outbreak reflected i n p a r t the Treasury's program of using both large excess cash balances and current cash surpluses f o r retirement of publicly held debt. This program, which totaled about $31 billion, was focused largely on securities held by banks, including the Reserve banks. Changes i n the Federal Reserve portfolio of Government securities need to be related to the other factors affecting bank reserves i n order to be adequately evaluated. Over the f u l l period January 1946 through February 1952, commerc i a l banks were supplied w i t h over $5 billion of new reserves f r o m factors outside the direct control of the Federal Reserve, such as a net gold inflow and a reduction i n Treasury cash holdings and Treasury deposits at the Reserve banks. Since the Federal Reserve reduced its holdings on balance by only $1.8 billion •over this period, i t did not f u l l y offset the effect of these changes and t o t a l member bank reserves expanded nearly $4 billion. This increase i n reserve balances made possible an expansion i n t o t a l bank deposits of about $13 billion, including a decrease i n Treasury deposits at commercial banks of $22 b i l l i o n and an increase i n privately held deposits of $35 billion. Mr. M U R P H Y . Second, the subcommittee of 2 years ago, under the chairmanship of Senator Douglas, included in its report the following statement: We believe that to restore the free domestic convertibility of money into gold coin or gold bullion at this time would m i l i t a t e against rather than promote the purposes of the Employment Act, and we recommend t h a t no step i n this direct i o n be taken. * * * What would be your reaction to this subcommittee including a statement to the same effect in its report ? Mr. M A R T I N . I concur in that statement. Mr. M U R P H Y . Finally, Mr. Martin, in the questions which we submitted to you we did not include any questions on public-debt instruments, because we did not want to burden you unnecessarily; but, would you care to comment on the pros and cons of the advisability of issuing a bond, the repayment of which would be guaranteed in terms of purchasing power? Mr. M A R T I N . I would comment that there are administrative difficulties in the issuance of such a bond, but I am sure you know them MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.138 better than I do, Dr. Murphy, and I question very much whether it could be worked out on a satisfactory basis. Mr. M U R P H Y . That is all, Mr. Chairman. Representative P A T M A N . Dr. Ensley ? Mr. ENSLEY. Mr. Chairman, Mr. Bolling a short time ago inserted in the record a memorandum from the President last February designating this special committee—I believe the so-called Wilson committee Mr. M A R T I N . Correct. Mr. ENSLEY. He also inserted the May 17th report of that committee. I n the light of the experience of that committee do you have any suggestions or recommendations with respect to the possibility of future committees of that type set up specially to look into a special problem ? Mr. M A R T I N . Oh, I think they can be very helpful when set up to look into a special problem. Mr. ENSLEY. That is all I have, sir. Representative WOLOOTT. Mr. Patman, may I ask a question? Representative P A T M A N . Mr. Wolcott. Representative WOLCOTT. I n view of Mr. Murphy's question about the gold, I was a member of that committee, and I had some doubts as to the advisability of putting that into that report without some explanatory language, because so many people were of the opinion that the restoration of the gold standard, some sort of gold standard, might be advisable, and I think, in consequence of my criticism of it at that time, the words "at this time" were put in. I t originally read: We believe t h a t to restore the free domestic convertibility of money i n t o gold coin or gold bullion would m i l i t a t e against— And it was my suggestion that that language "at this time" be put in, reserving the right to suggest later on that we have some studies as to the desirability of restoring the gold standard. That was 2 years and a half ago. I wonder if the same situation prevails now that prevailed at that time? Mr. M A R T I N . Well, my judgment would be that it does. I think that as long as we have Russia a hostile power, and the world in the general upset condition that it is, that we are operating on the right basis today. Representative WOLOOTT. Going on further, we say in that report: We also recommend a thorough congressional review of existing legislation relating to the power to change the price of gold w i t h a view to repealing any legislation t h a t might be so construed as to permit a change i n the price of gold by other than congressional action. Now, that apparently had in mind the Gold Reserve Act which gave the President * Mr. M A R T I N . Of 1934—the 1934 act. Representative WOLCOTT. Yes; which gave the President the authority to further devalue gold. I understand that that authority has expired, has it not? Mr. M A R T I N . That is correct. Representative WOLCOTT. Is there any other power or authority that you know of that that language might apply to now ? Mr. M A R T I N . I do not think so, but I would have to check it to be absolutely certain. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 139 Representative W O L C O T T . I think, Mr. Murphy, that perhaps we might have that answer before we recognize that there might be some authority somewhere outside of Congress to furthef devalue gold. (The material referred to above is as follows:) A U T H O R I T Y T O C H A N G E T H E P R I C E OF G O L D The President was authorized to change the wefght of the gold dollar by section 43 of the so-called Thomas amendment of May 12, 1933, as amended by section 12 of the Gold Reserve Act of 1934. That authority of the President, however, was i n effect only f o r a temporary period and terminated on June 30, 1943. Under sections 8 and 9 of the Gold Reserve Act of 1934, the Secretary of the Treasury has a u t h o r i t y to purchase and sell gold at home or abroad " a t such rates and upon such terms and conditions as he may deem most advantageous to the public interest." I n addition, the Secretary is authorized by section 10 of the Gold Reserve Act, w i t h the approval of the President, " t o deal i n gold" f o r the account of the stabilization f u n d established by t h a t section. These powers of the Secretary, however, are effectively l i m i t e d by provisions of the Bretton Woods Agreements Act of 1945 and the Articles of Agreement of the International Monetary Fund. The Articles of Agreement of the Fund, which the United States has accepted under the Bretton Woods Agreements Act, provide t h a t no member of the f u n d shall buy gold at more, or sell gold at less, than par value, plus or minus a margin or charge which the f u n d is authorized to prescribe and which has been set at one-fourth of 1 percent. Thus the United States, as a member country, may not purchase gold at a price greater, or sell gold at a price less, t h a n par value i n relation to the dollar, plus or minus the prescribed margin. Moreover, the par value of the dollar cannot be changed w i t h o u t the consent of Congress, since section 5 of the B r e t t o n Woods Agreements Act provides that "neither the President nor any person or agency shall on behalf of the United States * * * propose or agree to any change i n the par value of the United States dollar" unless such action is authorized by Congress. Under section 14 ( a ) of the Federal Reserve Act, the Federal Reserve banks are authorized to deal i n gold at home or abroad. However, the a u t h o r i t y of the Reserve banks to purchase and sell gold under this section must also be read i n connection w i t h the provisions of the Articles of Agreement of the International Monetary F u n d and the B r e t t o n Woods Agreements Act mentioned above, as well as the provisions of the Gold Reserve Act of 1934. A f u r t h e r discussion of the a u t h o r i t y of the Secretary of the Treasury to deal i n gold is contained i n the answer given by the Secretary of the Treasury i n reply to question D - 1 2 of the questionnaire submitted to h i m by the Subcommittee on General Credit Control and Debt Management of the Joint Committee oh the Economic Report. Representative W O L C O T T . Has any discussion been had on the desirability of this country's initiating an international monetary conference which would be particiapted in by the four countries looking to the possible restoration of the gold standard ? Mr. M A R T I N . I do not know of any, sir. I think the International Monetary Fund Representative W O L C O T T . I should have said outside the International Monetary Fund, because I think that—my own thinking and my own thought is—that the study should be made outside of the fund, because the restoration of the gold standard would, of course, contemplate the dissolution of the International Fund. [Laughter.] (Mr. Murphy is a member of the staff of the International Monetary Fund.) You do not know of any conference ? Mr. M A R T I N . N O , I do not know of any, sir. Representative WOLCOTT. All right. Thank you. Representative P A T M A N . Any other questions? Mr. Martin, we appreciate the very fine and comprehensive statement that you have given us this morning, and we especially appreci97308—52 10 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.140 ate your forthright answers to our questions. We will probably ask you to meet with us in executive session sometime at your convenience and go over the documents that were discussed at the morning session, and any further questions we desire to ask you in writing, I assume that you will be willing to answer ? Mr. M A R T I N . I would be very glad to answer them. Representative P A T M A N . I S there anything else? Mr. M A R T I N . Might I say one thing? Representative P A T M A N . Yes, sir. Mr. M A R T I N . Mr. Chairman, I would like to say that we have had the finest cooperation from Dr. Murphy with our staff, and that it has been a real pleasure for the Board to work on these problems. Representative P A T M A N . We are glad to hear that, Mr. Martin. Thank you very much. Mr. M U R P H Y . Thank you very much. (Supplementary statement filed by Mr. Martin is as follows:) The Secretary of the Treasury was asked to prepare and insert a t the end of his remarks a statement f o r the record indicating the process whereby the answers to the questionnaire were compiled, w i t h particular reference to the use of outside consultants. I t was stated t h a t a similar record w o u l d be obtained f r o m the Federal Reserve. I n view of this the following statement is submitted: P R O C E D U R E A N D O U T S I D E C O N S U L T A N T S U S E D I N P R E P A R I N G R E P L I E S TO T H E Q U E S T I O N N A I R E S OF T H E S U B C O M M I T T E E A D D R E S S E D TO T H E C H A I R M A N OF T H E B O A R D OF G O V E R N O R S A N D T H E C H A I R M A N OF T H E F E D E R A L O P E N MARKET C O M M I T T E E OF T H E F E D E R A L R E S E R V E S Y S T E M The answers to these questions were prepared by the Board's regular staff. This was considered the most appropriate procedure i n order t h a t the m a t e r i a l submitted might be based on experience and background developed w i t h i n the system. Outside specialists served on a consultative basis to criticize the d r a f t s of replies prepared by the staff and to discuss general subjects and specific answers selected by the Chairman, other Board members, or the staff. T h i s procedure f o r using regular staff i n preparing replies to 61 questions coveri n g the scope and detail of those submitted by the subcommittee presented a task •of great magnitude, even though adjustments were made i n the regular workload of the staff members involved. As a consequence the time required f o r completing the answers was much longer t h a n originally scheduled, staff members devoted a great deal of overtime over a period of 3 to 4 months to preparing replies, and a considerable amount of regular w o r k was given less attention or .postponed. Responsibility f o r organization of the w o r k on answers, the c r i t i c a l review of them, and their revision was given to the Director of the Division of Research ;and Statistics. H i s i n t e r n a l advisory group was the senior s t a f f ; those who were snost active on this assignment were the Assistant to the Chairman, the Assistant to the Board, the Economic Adviser to the Board, the Secretary of the ^Board, the General Counsel, and the Directors of the Divisions of I n t e r n a t i o n a l :Finance, Examinations, Bank Operations, and Selective Credit Regulation. The senior staff group was relied on to select members of the staff to prepare d r a f t replies to i n d i v i d u a l questions, to consult w i t h staff members on problems raised tby answers, to prepare replies to key questions, and to review answers generally. W o r k on answers to i n d i v i d u a l questions—their preparation and revision— involved a substantial proportion of the time of more t h a n 30 other staff members throughout the organization who were selected on the basis of their specialty and the subject m a t e r i a l covered by the question. I n this manner the B o a r d drew on its complete resources of professional, technical, clerical, and stenographic staff not only i n the Division of Research and Statistics but also i n the Office of the Secretary, the Legal Division, and the Divisions of Bank Operations, I n t e r n a t i o n a l Finance, Examinations, and Selective Credit Controls. W h i l e t h i s spreading of the w o r k increased the problems of organizing the flow of w o r k and of reviewing and integrating the replies, the procedure was necessary i n order %o ^prepare the answers along w i t h other duties. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 141 Replies were developed through a process of d r a f t , review, and redraft. The first d r a f t of a l l answers was largely completed by the end of October, the second d r a f t by late November, and the t h i r d d r a f t by December 21. The first d r a f t was prepared w i t h a m i n i m u m of group consultation and the complete d r a f t was circulated t o a l l authors f o r comment . The second and t h i r d d r a f t s were reviewed largely by the senior staff. For most questions the revision of t h e t h i r d d r a f t was submitted to the subcommittee to be set i n type and was proofed and checked through the page proof stage. Preparation of the replies to some questions required modification of the above procedures, especially A-3, J3-27, and the open market questions. Quest i o n E - 2 7 was prepared i n cooperation w i t h the Federal Reserve banks and the banks supplied a p a r t of the material presented i n the reply and reviewed the •draft reply. The staff of the New Y o r k bank collaborated i n preparing the reply to the open market questions and reviewed the policy record presented i n t h e reply to A-3. The chairman and the other members of the Board were continually reviewing t h e replies as they were prepared, devoted many meetings to the replies, and made many suggestions. The Chairman was i n constant contact w i t h his senior staff discussing points raised by the answers and making decisions on content. A group of 10 outside experts was appointed for consultation on the replies. These experts included some who had had extensive experience w i t h i n the System and others w i t h o u t such experience but w i t h recognized standing i n the fields of money and credit and of Government structure and finance. These consultants commented by m a i l on both the first and the second drafts. T h e i r m a i n contributions, however, were made at a 3-day round-the-table discussion w i t h the staff focused on subjects and questions selected by the staff and the Board. These meetings were held November 30 and December 1 and 2. The •consultants were Robert deP. Calkins, E. A. Goldenweiser, Chester M o r r i l l , Carl E. P a r r y , Herbert V. Prochnow, R. J. Saulnier, Theodore W . Schultz, W a l t e r W . Stewart, Jacob Viner, and L . Wilmerding, J r . The Board's expenditures f o r t h e i r services totaled $6,655. Eepresentative P A T M A N . We will stand in recess until tomorrow morning at 10 o'clock, when we will meet in the committee room of the House Banking and Currency Committee. (Whereupon, at 4:20 p. m., the subcommittee recessed to reconvene at 10 a. m., Wednesday, March 12,1952 in room 1301, New House Office Buiding.) MONETAKY POLICY AND THE MANAGEMENT OE THE PUBLIC DEBT WEDNESDAY, M A R C H 12, 1952 CONGRESS OF T H E U N I T E D STATES, SUBCOMMITTEE O N G E N E R A L CREDIT CONTROL A N D D E B T M A N A G E M E N T OF T H E J O I N T C O M M I T T E E O N T H E E C O N O M I C REPORT, Washington, D. C. The subcommittee met, pursuant to recess, at 10:05 a. m., in room 1301, New House Office Building, Representative Wright Patman (chairman of the subcommittee) presiding. Present: Representative Patman, Senator Douglas, Representatives Boiling and Wolcott. Also present: Grover W . Ensley, staff director; Henry Murphy, economist for the subcommittee; and John W. Lehman, clerk to the full committee. Representative P A T M A N . The committee will please come to order. I t was suggested at the meeting yesterdav afternoon that Mr. McCabe and Mr. Eccles be invited to appear before this committee. Each one of these gentlemen has been invited, but each one has reserved a decision in the matter. However, if they want to appear and testify, time will be arranged for their appearance. The time suggested to them was satisfactory, so the invitations have been extended. This morning we have with us Mr. Keyserling and Mr. Blough, members of the Council of Economic Advisers representing the Council of Econmic Advisers, before our committee. Mr. Keyserling, are you ready to proceed ? Mr. K E Y S E R L I N G . Yes, Mr. Chairman. Representative P A T M A N . W i l l you suggest as to how you would like to proceed? Would you like to first make a statement or what would be your pleasure? STATEMENT OF LEON H. KEYSERLING, CHAIRMAN, COUNCIL OE ECONOMIC ADVISERS Mr. K E Y S E R L I N G . Mr. Chairman, I have a prepared statement, in accord with the customary procedure, which is available for the committee and for others interested in it. I would much prefer rather than reading the statement in full to try to summarize the statement, but since summarizing the statement is a little more difficult than reading it, I would like to have a chance to summarize it and then have the questions come after the summary, because the mingling of my effort 143 M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C D E B T.144 to summarize it with questions at the same time might not gain the advantage of time that would be gained by summarizing it rather than reading it. Representative P A T M A N . That will be satisfactory and we will respect your wishes, so you may proceed, Mr. Keyserling. Mr. K E Y S E R L I N G . Mr. Chairman and members of the committee, I welcome this opportunity to discuss before you the role of monetary policy and the management of the public debt in achieving price stability and high-level employment. By high-level employment, we must mean the fairly consistent expansion of employment opportunity, because our labor force grows greatly from year to year. And since our technology is dynamic, our productive power tends to increase more rapidly than employment. With manpower and technology both advancing, our economy must expand in order to be stable. I t cannot be stable by standing still. I n addition to a stable and growing economy, we must make sure that our resources are being devoted to necessary purposes, and these change with the times. For example, if we now had a stable and growing economy without any defense program, we would be living in a fool's paradise. Monetary policy and debt management are not ends in themselves. They are specific instruments which can be used wisely only in the context of the functioning of the economy as a whole, the objectives to which we now adhere as a nation, and the relative urgency and priority of problems arising in our economy under the threatening current of world conditions. Consequently, I believe that I can be most helpful to the committee, not by commencing with a technical discussion of monetary and debt management problems, but rather by outlining first what seem to me the most salient features in the current and foreseeable economic situation under a national policy of building our defenses, and then in this perspective evaluating the practical range and nature of relevant monetary and debt management policies. For example, the size and pace of the defense program, its effect upon the disposition and utilization of our economic resources, and the specific character of the problems it imposes upon the whole economy, are vitally important starting points for a consideration of specific economic measures, including monetary and debt management policies. These considerations seem to me doubly valid because much of the traditional theory about monetary policy, sometimes recited out of context, found its original roots in the minds of philosophers rather than practicing economists. These men sought to describe a static and perfectly consistent economic system, which probably never existed in the world of reality, and which in any event has little relevance to the dynamic American economy of today and to the entirely novel and rapidly moving problems with which we must now deal. One of the reasons why monetary officials in recent years have not pursued some of these theories relentlessly to their logical results has been, not that others prevented them from doing so, but rather that they themselves have shrunk from the appalling practical consequences of such action. This may explain why the differences in viewpoint concerning monetary policy and debt management, expressed by those charged with practical problems and public responsibility, have not been so great as MONETARY POLICY AND M A N A G E M E N T OF PUBLIC DEBT . 145 the differences expressed by some commentators in search of sensation and by some theorists not challenged by the duty to act. So far as I have been able to observe, the differences between what a responsible Treasury official and a responsible Federal Reserve official would actually do under current conditions, if either had complete authority to do as he pleased, are small differences contrasted with their magnification by those who are not sobered by imminent and vital responsibilities to perform. The evidence already brought before this committee that the Secretary of the Treasury and the Chairman of the Federal Reserve Board, and their associates, have sought to reach working agreements, is not hard to explain. This development has not resulted from compulsion either by the Congress or by the President. I t has resulted from the compulsion of economic reality, based upon looking frankly at conditions both at home and abroad. Economic conditions at home do not leave a very wide range of election in monetary and debt management policy. While there may still be some shadings of emphasis, the underlying situation and the limitations which it imposes upon novel experimentation or wide deviation from a fairly well-established course make it only natural that men in positions of active responsibility should be anxious and able to reconcile their views. And conditions abroad make it apparent to all men of good will that the American people and their public officials must do their best to pull together in a common cause. I can find nothing suspicious or surreptitious in the fact that the Secretary of the Treasury and the Chairman of the Federal Reserve Board are trying, and it is to be hoped successfully trying, to harmonize their views. All that this proves to me is that Mr. Snyder and Mr. Martin, and their associates, are sensible, hard-headed, experienced, and patriotic men. I shall endeavor, if it please the committee, to commence with a general description of the economic problems now confronting this Nation in the course of a defense effort novel both in character and purpose. I believe that only in this perspective can the more specialized problems of monetary policy and debt management be intelligently depicted or intelligently solved. Some of the fuss and fury stirred up in these specialized areas has resulted from looking at a few trees without surveying the forest. I do so because it is my view that a great mistake lias been made in looking at monetary and fiscal policy within a narrow framework rather than trying to fit it into our economy today, its dynamic problems and its world responsibilities, and I think if we start from that point of vantage we not only get a better perspective but come nearer to realizing the limitation upon monetary and management policy and what it can and cannot do. Proposition No. 1 is that our transcendently important economic problem today is how much of our productive power and economic resources should be allocated to national defense. Obviously, the size and pace of the defense program most importantly affects the degree of inflationary pressures, the fiscal situation of the Government, and the entire range of economic policies worthy of serious attention. M O N E T A R Y POLICY AND M A N A G E M E N T OF PUBLIC DEBT.146 By national defense, I mean the whole range of programs which reflect our undertakings to enlarge the mutual security of the free world. Consistent with a position that I have always taken, I voice no opinion as to how large or how fast these undertakings should be from the viewpoint of national security. I may have views o,n this as a citizen, but in my role as chairman of the Council of Economic Advisers I have nothing to offer which can compete with the superior judgment of those in our defense and international agencies, subject to the ultimate judgment of the President and the Congress. But I feel compelled to raise my voice as an economist in the public service when I witness the growth of a strong, if not predominant, sentiment that our security program as a whole must be drastically reduced in order to maintain a strong economy. The clear facts since the original Korean aggression, and the weight of judgment now as to the economic outlook, simply do not support the proposition that we must slash the security program to protect our economy. The primary test of whether a security program of given size and pace, in a long period of partial mobilization, is weakening or impairing our general economic strength, cannot be determined by looking only at the dollar value of the security program, nor by looking only at the deficit in the Federal budget, even though these be important considerations. The primary test of the impact of the security program upon our general economic strength involves these three paramount questions, and these three alone in my judgment: 1. Is the security program, through its drain upon our resources, leaving or threatening to leave our business system with inadequate resources or incentives to safeguard and advance that productive power which is the ultimate source of our economic strength? 2. Is the security program imposing such strain or deprivation upon consumers as to weaken the strength or morale of our people— 155 million strong? 3. Is the security program, by its very nature, incompatible with the protection of the Nation against further inflation, assuming that we do not want to resort, during a long period of partial mobilization, to a scope or intensity of controls which in the long run might impair our productive power or corrode our basic freedoms? My views are so well known on the subject that, from the economic point of view, the security program is not imposing that kind of strain on our economy, that I will summarize very briefly on these three points. First, it cannot be argued that the prospective or present size of the security program is unduly impairing our productive strength, when at a uniform price level we had in 1951 by far the highest level of investment in plant and equipment, which is at the heart of our productive strength, and in business investment generally, that we have ever had in our history, and where as a matter of fact the main question validly raised then was not whether business had the funds, the incentives, the manpower to invest adequately in productive equipment, but rather whether in view of the inflationary dangers the level of over-all business investment was too high and ought to be further curbed. Second, from the viewpoint of consumer supplies, the year 1951 was only slightly lower than 1950, in fact by some measurements it MONETARY POLICY AND M A N A G E M E N T OF PUBLIC DEBT . 147 was higher, and in any event it was higher than in any other year in our history, and here again the main operating force at the present time upon the level of consumer supplies is not restrictions imposing deprivations on the people, but their unwillingness in many areas even to buy at the level of available supplies. I n the third place, we come to the question of whether the program is of a size which makes the stabilization of prices impractical without excessive controls. The record on that indicates that over the past year we have had a very unusual record of price stability for a high level economy. Wholesale prices have trended somewhat downward; retail prices moved up slightly for a large part of the year, but their trend has been downward in the most recent period. As we look forward to the remainder of the year 1952 and beyond, it is a curious paradox that some of those who a year or so ago were extremely doubtful about the capacity of our productive resources to support the demands of the security program are now exhibiting trepidation lest even with the security program we run into a recession due to the inability of the economy to maintain demand for that part of our productive resources which are not employed in the security program. I do not believe that this trepidation is justified, for reasons which it would not be germane to develop at length here. Nonetheless, the trepidation at least underscores the point that there is a growing recognition that the security program can be borne by the economy without excessive strain. I would be the last person imaginable to take the unsound position that the security program should be maintained at now contemplated levels, or raised above these levels, in order to maintain high-level production and employment. That is manifestly not an appropriate function |or a security program. I am firmly convinced that our economy now has or must find the ways to maintain stability and growth, if and when the world situation permits a vast reduction in the security program. The only point I am making here is that, while wTe should by all means reduce the security program when the best informed appraisal of the world situation dictates that course, we do not need and should not dare to do so before that time on general economic grounds. The question of the necessary size of the security program should not be confused with the question of efficiency and the weeding out of waste in its execution. Every sensible person will agree that it would be a net gain, if ways could be found to get the same amount of security for less money. I hope that such ways can be found, and I commend every effort toward that end. But I believe that only confusion and danger to this country can result from failing to distinguish between trying to get necessary security as economically as feasible, and trying to cut security below necessary levels on the ground that we do not have the economic strength to do the job without embarrassment or impairment of our economy. Since we have the resources of manpower, materials, and business and institutional skills to carry forward the security program, we cannot say that we do not have the means tofinanceit. I t would be somewhat better, in my judgment, to pay for a security program at the now contemplated level entirely out of taxation rather than partly by borrowing. But, even if it isfinancedpartly by borrowing, the Con- M O N E T A R Y POLICY AND M A N A G E M E N T OF P U B L I C DEBT.148 gress will need to weigh whether the amount of borrowing involved could threaten the Nation to the extent that it would be threatened by a deficiency in national security. I have dwelt upon this point at some length, because I believe that it is the greatest economic issue which we face as a Nation, and one alongside of which other economic issues pale into relative insignificance. I t seems to me that those who do not give top priority to this question cannot find the right answer on other questions of economic policy. We have reasonable grounds for believing that, if we are strong enough to resist and deter the Communist menace, the American economy will continue its timeless progress toward new productive achievements and even greater strength. But if, through mistaken economic analysis concerning the capacity of our economy, we should fall down on this top job, then no other policies could save us from dangers beyond description. Proposition No. 2 is that, with a large security burden, economic policy must concentrate above all upon the expansion of production. And here I would summarize briefly, what I think is my known view that, while we must to a degree use controls to help allocate our resources so that we can do the security program more effectively, they are no substitute for and are not of equivalent value in the American economy to the expansion of production. We can outproduce the Russians; we cannot hope to outcontrol them, and I think that particularly for a long period of partial mobilization we must be very careful not to resort to controls to a degree which, while they might accomplish the purpose of allocating resources or restricting inflation, would at the same time dim the edge of the most important of all our great nonsecret weapons, the capacity to produce; and that capacity to produce, as I shall indicate, could be seriously and indiscriminately impaired by the use of controls along lines which, while they might have been relevant to the simple problem of using all-out weapons to fight the traditional kinds of inflation or deflation, are not so relevant to the particular problems of this kind of new and difficult mobilization effort. The facts speak for themselves. Not only in World War I I when we had a slack use of our resources at the beginning of the war, but even since 1950 when we had a situation of many a tight use of our resources at the beginning of the mobilization effort, we have nonetheless expanded over-all production about apace with the defense program, and for that reason, which is the most fundamental of all economic reasons getting beyond any type of specialized analysis, for that basic reason alone we have thus far carried the security program with an advancement of our investment and productive tools and equipment which is the real source of our strength, and without serious impairment of our civilian economy or our civilian morale. Proposition No. 3 is that the expansion of production must be responsive to the priorities of national needs. We cannot do everything at once. And in my ardent advocacy of production I do not claim that we do not have to sacrifice some things, or that we can, rich as we are, do everything at the same time. This means that balance must be maintained in the utilization of our resources. Balance in the utilization of our resources means very simply that in this kind of mobilization effort some things must be expanded at the same time that other things are contracted. MONETARY POLICY AND M A N A G E M E N T OF PUBLIC DEBT . 149 We must expand the production of steel facilities, contract the production of automobiles. We must expand the production of weapons, ^contract the production of houses, and so on all up and down the line; and, in seeking to arrive at a wise composite of resource use in that dual process of expansion and contraction, we must rely largely upon selective devices directed to those particular ends and cannot rely to the degree that in a classical fight against an all-out inflation or a classical fight against an all-out depression we could adopt on a broad scale measures of a contracting character or measures of an expanding •character. We have to ask ourselves, in adopting measures of a general character to contract or to expand the economy, would they contract first the things that we want to contract, or would they contract first the very things that we must of necessity expand rapidly if we want to l>uild up the productive strength and the wise composition of our total strength, which, at least according to my analysis, is at the heart of this whole problem. Proposition No. 4 follows naturally from the third, the task of curbing inflation in a defense economy must be reconciled with the need at one and the same time for expansion in some areas and for contraction in others. We are not fighting basically a war against inflation. We are not ^fighting basically a war against a depression. We are fighting primarily a new kind of limited international engagement, and the tasks •and problems of that kind of situation are different either from the tasks of 1932 which called for an all-out use of antideflationary weapons, or the tasks of some of the kinds of all-out inflations which liave occurred in some countries at some periods of time. Proposition No. 5 is that the nature of our current and foreseeable economic tasks is too complicated for extreme or major reliance on any one type of economic measure. This applies to monetary policy as well as to other policies. As indicated above, the complicated and unique character of the current defense program requires a combination of efforts, some designed to expand parts of the economy rapidly, and others designed to contract other parts of the economy with similar rapidity (insofar as the increase in over-all production does not in itself take care of the necessary expansion of the security program). Theoretically, one might argue that one type of economic policy might be predominantly relied upon in the current situation to prompt .all of the necessary and varied adjustments in resource use. For example, it might be argued theoretically that, since tax reductions are stimulating and tax increases repressive, a complex tax scheme could be worked out on paper which would provide sufficient inducements for expansion wTherever needed and sufficient restraints for contraction wherever needed. But the effort to formulate and apply such a complicated and refined tax system would deprive the tax system of one of its main virtues—namely, that it is rather generalized—and would make taxation more complicated and cumbersome, more detailed and personalized, than the most extreme kind of price and wage control. Similarly, one could work out theoretically on paper a price-control policy, or a credit-control policy, or a policy governing the allocation of materials, so comprehensive and so discriminating as to accom MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.150 plish by that one device alone all of the objectives for the economy which must now be sought. But the utilization of any one device to this extent would break down of its own weight, and would result in a system of controls far more harsh, rigid, and excessive than the moderate utilization of a variety of weapons in mild proportion. These comments are applicable to general monetary policy. I am heartily in accord with the moderate utilization of monetary policy to exercise some general restraining influence in an inflationary period. But intrinsic limitations upon its utility lead to major reliance upon a variety of other measures. Representative P A T M A N . Mr. Keyserling, since you have elaborated on all these points rather fully, don't you think that you could go through them and just bring out the points and then yield for questions? Probably a lot of it could be brought out through the questioning. Mr. KEYSERLING. Yes; I can certainly do that. The first point I make is that monetary policy is hardly adjusted under present circumstances to the expansionary phases of the task, and that is vitally important in building up our strength. Second, insofar as it is adjusted to the contracting phases, it is commonly recognized by various authorities with whom I agree and whom I cite here, that for general monetary policy to be pushed far enough to produce a general contraction of the economy and thus to have a pronounced enect upon prices or upon investment, it would have to be pushed far enough to result in a general contraction of employment and production. And I set forth in my prepared statement various statements from various sources to that effect, and that in that way by producing a general contraction of production and employment, we would far outweigh the benefits which might be derived, particularly becatise, as I have said, the contraction would not be selective and for reasons which I could give would be more likely to occur first in those areas which we are seeking affirmately to expand, and last in those speculative and relatively nonessential areas which other more selective measures can more quickly contract. The next point I make is that there is general agreement among the authorities that monetary policy directed toward variations in the money supply and changes in interest rates and through the composite of those factors to effect the level of investment would by common agreement among the authorities have to be under current circumstances rather narrow, and that there may be real questions whether if so narrow they would produce such limited adjustments in interest rates and in other sectors of lending as to make it very questionable as to whether much would be accomplished, except a general upward push in interest rates, and as to wThether that is desirable from the viewpoint of long-range trends, I suppose the committee's judgment is as good as mine. Now I have summarized several pages. Proposition No. 6 is that the current and foreseeable economic situation calls for an admixture of economic tools, without excessive reliance upon anyone. Now let me read there a statement from Dr. Goldenweiser in Harper's magazine for April 1951: F i r s t , we must bend every effort to increase production by greater exertion, greater efficiency, longer hours, fewer leisure people, less of the gracious things MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 151 of l i f e * * *. Second, we must economize—make sure t h a t no money is spent unnecessarily * * *. T h i r d , as large a share of the necessary expenditures as possibfe' must be met by taxation * * *. F o u r t h , the Government must borrow w h a t has to be borrowed (insofar as possible) i n such a way as to tap income t h a t would otherwise be spent by the person receiving i t * * *. F i f t h , the Government should borrow f r o m the banks only the unavoidable minimum * * Sixth, over-all restraint should be exercised over loans by banks to businesses and individuals * * *. F i n a l l y * * * price and wage controls—to hold the line u n t i l the other measures become effective—are h i g h l y desirable. The foregoing seems to me to set forth admirably, and in proper order, the rounded elements in a program for stability and growth. Further, I would like to stress the extent to which most of those who have been challenged by the responsibilities of practical action, and particularly by the responsibilities of public office, find themselves in essential agreement in this matter—although there will always be some shadings of emphasis. Then proposition No. 7, which is my final one, Mr. Chairman, and which I would like to read. Proposition No. 7 is that basic economic policies which affect the whole Nation should seek harmony, and that under ouj: system the most powerful force toward this harmony is men of good will working cooperatively together. With this force present, neither new machinery nor new legislative definitions of authority seems essential. Above all, there is widespread agreement that those agencies of public authority which vitally affect the national economy should try to reconcile their actions, because pulling in opposite directions is manifestly hurtful regardless of which side is "on the side of the angels." There will always, of course, be differences of opinion on policy issues. But neither sober and reflective businessmen nor anybody else would want various important agencies of public power, each vitally affecting the economy, to pursue conflicting policies of a fundamental character for an enduring length of time. Nothing could be more inefficient, more uneconomical, more demoralizing to our business system, or more conducive to the undermining of the people's confidence in public authority, and I think the people must have confidence not in only one public authority but in all public authorities. Senator D O U G L A S . I S this irrespective of their performance ? Mr. K E Y S E R L I N G . NO, sir; not irrespective of their performance. That is not the point I am making, but no one agency has a monopoly on correct performance at all times. I t is true that different agencies of public power have different accents of responsibility, and different prime objectives and functions. But no one of them can believe that its perspective or its point of emphasis is transcendently important, to the exclusion of all others. The very fact that in our democracy there are at the national level so many agencies of public power, makes it essential that a. process of reconciliation and harmonization move constantly forward. I t has always been this way; and it will always be this way. The possibility of some fundamental collision of policy between two agencies of public power which fundamentally affect the national economy is by no means limited to the case of the Treasury and the Federal Reserve Board. Other agencies of public power are now undertaking functions quite as vital to the economy as a whole, and MONETARY POLICY AND M A N A G E M E N T OF PUBLIC D E B T.152 quite as important to the lives and fortunes of the individual. For example, it would be hard to imagine a more far-reaching authority than that of allocating scarce materials throughout the economy, which carries with it the very power of life or death over substantial segments of our business system. The relationship between monetary policy andfiscalpolicy is indeed important; but no one can prove that it is of a very different category of importance from the relationship between price policy and wage policy, or tax policy and spending and lending policy, or defense policy and policies affecting industrial and civilian supplies. The Congress has consistently and increasingly recognized that all of these policies are vital, that no one of them is supreme, and that constantly improved machinery should be sought both in the legislative and the executive branch for evaluating these policies as a whole and their relationship to one another. The Joint Committee on the Economic Report and the Council of Economic Advisers are both statutory examples of this recognition. The advent of the defense program has intensified the search, both by the people and their Government, for basic mutuality of purpose and basic consistency of effort among the various instruments of public power affecting the whole economy and its very security. Whenever there might be a fundamental collision of policy between any two or more agencies of public power which fundamentally affect the national economy, manifestly the solution does not lie in arid debate as to how independent one or the other is or should be, or in proposals to subordinate one to the other by legislative fiat. I f by independence one means that men of integrity should look for the right answers and express their views vigorously without suppression or recrimination, that, of course, is desirable. Nor would I undertake to enter upon discussion of the question turning upon the fact that the Congress has established the Federal Reserve Board in a different relationship to the Government from that applying to the executivedepartments. This is a matter of congressional policy. But in no event can any realistic concept of independence mean that there is no relationship or interdependence among the policies and problems dealt with by the various important agencies of public power importantly affecting the national economy. Consequently, they must all try to work together on problems which affect them all. I n the final analysis, in the event of collision, all agencies of public power must recognize the ultimate and decisive authority of the Congress; and all must recognize that the Presidential office under our traditions and experience has always had the legitimate function of lending its influence toward harmonizing the executory or administrative aspects of national economic policy. But the genius of our system resides not so much in reliance upon command as in relianceupon voluntary accommodation through hard work, fair purposes, and mutual respect. Surely the Council of Economic Advisers, which finds its life in a statute the essence of which is cooperation, cannot bring itself to believe that cooperation is not the best method in dealings between any important organs of public power. From the peculiar vantage point of the Council of Economic Advisers, it has seemed to me that the Treasury and the Federal Reserve Board, as well as other agencies, have worked harder and with a finer spirit than the general public realizes to join hands in the national MONETARY POLICY AND M A N A G E M E N T OF PUBLIC DEBT . 153 interest in these trying times. For example, those not involved in the process hardly realize how thoroughly the reports to the Congress under the Employment Act of 1946 are made the subject of full discussion, interchange of views, and a wise spirit of give and take among all of the agencies concerned with national economic policy. I have always found the Treasury and the Federal Reserve Board independent in the sense of being sturdy and vigorous in the assertion of their views; but I have never found any of them independent in the sense of being remote or unapproachable, provincial or narrowminded, or overzealous in the control of its own domain. The result of this process of cooperation has not been perfect. But it has produced over the years, I believe, a more intelligent and harmonious approach to the problems of our national economy than would have been possible under any other approach. Based upon my observation of the relationships now in effect, I do not see the need for additional formal machinery, or for new legislative efforts to redefine relationships or relative responsibilities. I believe instead that we must continue to work together, seeking to improve our tools of economic analysis, to achieve even greater objectivity, and to enlarge the popular understanding of what we are trying to do. These things depend upon men, and not upon laws. I think the men with whom I have worked measure up to the task, and that is what is most important. At the same time, if it should be deemed desirable to follow the suggestion recently made by the Secretary of the Treasury, to the effect that the Treasury, the Federal Reserve Board, the Council of Economic Advisers, and certain other agencies recognize more explicitly through some new cooperative unit their mutual interests, and if the Federal Reserve Board should feel likewise, such a proposal would certainly meet with the hearty support of the Council of Economic Advisers. I n summary, I think we are in an economic situation different from any we have faced before, that it calls for a composite of measures to* use our resources wisely, bringing on rapid expansion in some areas and contraction in others. That consequently most of the classical approaches designed to deal theoretically with the over-all contraction of the economy to avoid inflation or its over-all expansion to avoid depression are not. highly relevant to the current situation. That consequently wThat we must rely more upon is selective devices to achieve differing results and different trends in different areas of the economy. That consequently we should refrain from using excessively abrupt and generalized weapons which would accomplish some useful purposes which in the main would be outweighed by the use of the blunt weapon on a broad scale. That broadly speaking the trends over the past long period of time toward lower interest rates and a more abundant credit generally speaking are associated with, though by no means entirely responsible for, the great growth in our productive capacity, and broadly speaking the more generous sharing of its benefits both on the business side and on the consumer side. Consequently I think that the range of policy called for in these times is first an intense and active stimulation of our productive genius MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.154 which I do not think has gone anywhere far enough, and which both on the economic side and on the moral side can stimulate and hold together the American people as nothing else can. Second, the moderate use of controls so as not to interfere with that productive genius, and the use of those controls in a composite pattern which has proved moderately successful over the past year, moderately successful during World War I I , although I think tax policy was then too lax, and with that, Mr. Chairman, I would be very glad to answer any questions that the committee may have in mind. (The prepared statement submitted by Mr. Keyserling in its entirety is as follows:) T E S T I M O N Y OF L E O N H . K E Y S E R L I N G , C H A I R M A N , C O U N C I L OF E C O N O M I C A D V I S E R S , B E F O R E S U B C O M M I T T E E O N G E N E R A L C R E D I T C O N T R O L A N D D E B T M A N A G E M E N T OF T H E J O I N T C O M M I T T E E O N T H E E C O N O M I C R E P O R T , W E D N E S D A Y , M A R C H 1 2 , 1951*2 M r . Chairman and members of the committee: I welcome this opportunity to discuss before you the role of monetary policy and the management of the public debt i n achieving price stability and high-level employment. B y highlevel employment, we must mean the f a i r l y consistent expansion of employment opportunity, because our labor force grows greatly f r o m year to year. A n d since our technology is dynamic, our productive power tends to increase more r a p i d l y t h a n employment. W i t h manpower and technology both advancing, our economy must expand i n order to be stable. I t cannot be stable by standing still. I n addit i o n to a stable and growing economy, we must make sure that our resources are being devoted to necessary purposes, and these change w i t h the times. F o r example, i f we now had a stable and growing economy w i t h o u t any defense program, we would be l i v i n g i n a fool's paradise. Monetary policy and debt management are not ends i n themselves. They are specific instruments w h i c h can be used wisely only i n the context of the functioning of the economy as a whole, the objectives to w h i c h we now adhere as a Nation, and the relative urgency and p r i o r i t y of problems arising i n our economy under the threatening current of w o r l d conditions. Consequently, I believe t h a t I can be most helpful to the committee, not by commencing w i t h a technical discussion of monetary and debt-management problems, b u t rather by outlining first w h a t seem to me the most salient features i n the current and foreseeable economic situation under a national policy of building our defenses, and then i n t h i s perspective evaluating the practical range and nature of relevant monetary and debt-management policies. For example, the size and pace of the defense program, its effect upon the disposition and u t i l i z a t i o n of our economic resources, and the specific character of the problems i t imposes upon the whole economy, are v i t a l l y important s t a r t i n g points for a consideration of specific economic measures, including monetary and debt-management policies. These considerations seem to me doubly v a l i d because much of the t r a d i t i o n a l theory about monetary policy, sometimes recited out of context, found its o r i g i n a l roots i n the minds of philosophers rather t h a n practicing economists. These men sought to describe a static and perfectly consistent economic system, w h i c h probably never existed i n the w o r l d of reality, and w h i c h i n any event has l i t t l e relevance to the dynamic American economy of today and to the entirely novel and rapidly moving problems w i t h which we must now deal. One of the reasons w h y monetary officials i n recent years have not pursued some of these theories relentlessly to their logical results has been, not t h a t others prevented them f r o m doing so, but rather t h a t they themselves have shrunk f r o m the appalling pract i c a l consequences of such action. T h i s may explain w h y the differences i n viewpoint concerning monetary policy and debt management, expressed by those charged w i t h practical problems and public responsibility, have not been so great as the differences expressed by some commentators i n search of sensation and by some theorists not challenged by the duty to act. So f a r as I have been able to observe, the differences between w h a t a responsible Treasury official and a responsible Federal Reserve official would actually do under current conditions, i f either had complete authority to do as he pleased, are small differences contrasted w i t h t h e i r magnification by those who are not sobered by imminent and v i t a l responsibilities to perform. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 155 The evidence already brought before this committee that the Secretary of the Treasury and the Chairman of the Federal Reserve Board and their associates have sought to reach w o r k i n g agreements is not hard to explain. This development has not resulted f r o m compulsion, either by the Congress or by the President. I t has resulted f r o m the compulsion of economic reality, based upon looking f r a n k l y at conditions both at home and abroad. Economic conditions at home do not leave a very wide range of election i n monetary and debt management policy. AVhile there may s t i l l be some shadings of emphasis, the underlying situation and the limitations which i t imposes upon novel experimentation or wide deviation f r o m a f a i r l y well-established course make i t only n a t u r a l t h a t men i n positions of active responsibility should be anxious and able to reconcile their views. A n d conditions abroad make i t apparent to a l l men of good w i l l that the American people and their public officials must do their best to p u l l together i n a common cause. I can find nothing suspicious or surreptitious i n the fact t h a t the Secretary of the Treasury and the Chairman of the Federal Reserve Board are t r y i n g — and i t is to be hoped successfully t r y i n g — t o harmonize their views. A l l t h a t this proves to me is t h a t Mr. Snyder and M r . M a r t i n and their associates are sensible, hard-headed, experienced, and patriotic men. I shall endeavor, i f i t please the committee, to commence w i t h a general description of the economic problems now confronting this Nation i n the course of a defense effort novel both in character and purpose. I believe that only i n this perspective can the more specialized problems of monetary policy and debt management be intelligently depicted or intelligently solved. Some of the fuss and f u r y stirred up i n these specialized areas has resulted f r o m looking at a few trees w i t h o u t surveying the forest. Proposition No. 1 is t h a t our transcendently important economic problem today is how much of our productive power and economic resources should be allocated to national defense. Obviously, the size and pace of the defense program most importantly affect the degree of inflationary pressures, the fiscal situation of the Government, and the entire range of economic policies worthy of serious attention. By national defense I mean the whole range of programs w h i c h reflect our undertakings to enlarge the m u t u a l security of the free world. Consistent w i t h a position t h a t I have always taken, I voice no opinion as to how large or how fast these undertakings should be f r o m the viewpoint of national security. I may have views on this as a citizen, but i n my role as Chairman of the Council of Economic Advisers I have nothing to offer which can compete w i t h the superior judgment of those i n our defense and international agencies, subject to the ultimate judgment of the President and the Congress. B u t I feel compelled to raise my voice as an economist i n the public service when I witness the growth of a strong, i f not predominant, sentiment t h a t our security program as a whole must be drastically reduced i n order to m a i n t a i n a strong economy. The clear facts since the original Korean aggression, and the weight of judgment now as to the economic outlook, simply do not support the proposition that we must slash the security program to protect our economy. The p r i m a r y test of whether a security program of given size and pace i n a long period of p a r t i a l mobilization is weakening or impairing our general economic strength cannot be determined by looking only at the dollar value of the security program nor by looking only at the deficit i n the Federal budget, even though these be important considerations. The p r i m a r y test of the impact of the security program upon our general economic strength involves these three paramount questions: (1) Is the security program, through its drain upon our resources, leaving or threatening to leave our business system w i t h inadequate resources or incentives to safeguard and advance that productive power which is the ultimate source of our economic strength ? (2) Is the security program imposing such strain or deprivation upon consumers as to weaken the strength or morale of our people—155 m i l l i o n strong ? (3) I s the security program, by its very nature, incompatible w i t h the protection of the N a t i o n against f u r t h e r inflation, assuming t h a t we do not want to resort d u r i n g a long period of p a r t i a l mobilization to a scope or intensity of controls which in the long r u n might impair our productive power or corrode our basic freedoms ? 97308—52 11 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.156 B y none of these three paramount tests can respectable evidence be adduced t h a t the now contemplated security program is excessive f r o m the viewpoint of the economist, i f i t is not excessive f r o m the viewpoint of its p r i m a r y purpose to make us as secure as we can reasonably hope to be i n a threatening and uncertain world. I t can hardly be argued that the security program is i n process of impairing our basic productive strength. I n 1951 gross private domestic investment was at an annual rate of approximately $59 billion, contrasted w i t h about $52% b i l l i o n i n 1950 and about $47% b i l l i o n i n the previous peak year 1948. A l l comparisons are i n terms of 1951 prices. Investment i n producers' durable equipment, which is at the heart of our productive strength, was above $27% b i l l i o n i n 1951, contrasted w i t h about $24% billion i n 1950, and about $23 billion i n the previous peak year 1948. The growth of our productive strength has been even more impressive when measured by facilities and supplies i n certain key areas, such as steel, aluminum, and electric power. I n fact, the pertinent issue w i t h respect to private capital formation i n 1951 was not whether business had available the materials, the manpower, the funds, and the incentives to b u i l d adequately our productive strength, but rather whether capital formation was proceeding at a higher level than desirable. Nor can i t be argued t h a t the security program is i n process of reducing consumer supplies below satisfactory levels. W i t h the possible exception of 1950, the year 1951 witnessed the highest level of consumer supplies on record. A f e w things, such as housing and automobiles, were produced at a somewhat lower level t h a n i n 1950, but at a much higher level than i n any year before W o r l d War II. Similarly, i t cannot be said t h a t the size or pace of the security program is inconsistent w i t h the maintenance of economic stability. The past year has almost established a new record for general price stability. Wholesale prices have tended slightly downward since March 1951. Retail prices during the past year have moved very moderately upward, but have begun to t u r n downward i n recent weeks. T h i s stability has not been achieved under an anti-inflationary program w h i c h most informed persons would call excessively severe. On the contrary, i t has been achieved under policies of taxes, credit controls, and direct controls w h i c h have been somewhat milder and looser than most experts thought necessary—and the major explanation of this has been our enormous productive power and the general amplitude of supplies. As we look f o r w a r d to the remainder of the year 1952 and beyond, i t is a curious paradox t h a t some of those who a year or so ago were extremely doubtf u l about the capacity of our productive resources to support the demands of the security program are now exhibiting trepidation lest even w i t h the security program we r u n into a recession due to the inability of the economy to maintain deman 1 for that p a r t of our productive resources which are not employed i n the security program. I do not believe that this trepidation is justified, f o r reasons which i t would not be germane to develop at length here. Nonetheless, the trepidation a t least underscores the point t h a t there is a growing recognition t h a t the securiy program can be borne by the economy w i t h o u t excessive strain. I would be the last person imaginable to take the unsound position t h a t the security program should be maintained at now contemplated levels, or raised above these levels, i n order to maintain high-level production and employment. T h a t is manifestly not an appropriate function f o r a security program. I am firmly convinced t h a t our economy now has or must find the ways to m a i n t a i n stability and growth, i f and when the w o r l d situation permits a vast reduction i n the security program. The only point I am making here is t h a t while we should by a l l means reduce the security program when the best informed appraisal of the w o r l d situation dictates t h a t course, we do not need and should not dare to do so before that time on general economic grounds. The question of the necessary size of the security program should not be confused w i t h the question of efficiency and the weeding out of waste i n its execution. Every sensible person w i l l agree that i t would be a net gain, i f ways could be found to get the same amount of security for less money. I hope t h a t such ways can be found, and I commend every effort toward t h a t end. B u t I believe t h a t only confusion and danger to this country can result f r o m f a i l i n g to distinguish between t r y i n g to get necessary security as economically as feasible, and t r y i n g to cut security below necessary levels on the ground that we do not have the economic strength to do the job. Since we have the resources of manpower, materials, and business and instit u t i o n a l skills to carry f o r w a r d the security program, we cannot say that we do MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 157 not have the means to finance i t . I t would be somewhat better, i n my judgment, to pay f o r a security program at the now contemplated level entirely out of taxat i o n rather t h a n p a r t l y by borrowing. B u t even i f i t is financed p a r t l y by borrowing, the Congress w i l l need to weigh whether the amount of borrowing involved could threaten the Nation to the extent t h a t i t would be threatened by a deficiency i n national security. I have dwelt upon this point at some length, because I believe t h a t i t is the greatest economic issue which we face as a nation, and one alongside of which other economic issues pale into relative insignificance. I t seems to me t h a t those who do not give top p r i o r i t y to this question, cannot find the r i g h t answer on other questions of economic policy. We have reasonable grounds for believing that, i f we are strong enough to resist and deter the Communist menace, the American economy w i l l continue its timeless progress t o w a r d new productive achievements and even greater strength. B u t i f , through mistaken economic analysis concerning the capacity of our economy, we should f a l l down on this top job, then no other policies could save us f r o m dangers beyond description. Proposition No. 2 is that, w i t h a large security burden, economic policy must concentrate above a l l upon the expansion of production. When any nation assumes a large defense burden, there are only t w o m a j o r ways of carrying i t . One way is to expand t o t a l output, so t h a t defense needs can be served w i t h o u t subtracting too much f r o m other economic needs. The second way is to use economic controls to divert productive resources away f r o m other purposes and t o w a r d defense purposes. Even i n a nation as strong and productive as the United States, both of these methods must be used for the t i m e being. B u t i t is clearly i n our interest, particularly i n a long period of p a r t i a l mobilization, to accomplish as much of the deiense program as possible through the expansion of production, rather than through drawing down upon other elements i n our national economic strength. This is the basic philosophy of the current mobilization program. The soundness of this philosophy is conclusively demonstrated by a l l experience. D u r i n g W o r l d W a r I I at its peak, we allocated to defense purposes annually almost as much resources as the t o t a l product of our economy d u r i n g the year before the w a r started. B u t we so expanded total output that we were able to do this w i t h o u t a damaging curtailment of civilian supplies, and while carrying f o r w a r d many i n d u s t r i a l expansion programs to provide the sinews f o r the w a r effort. F u r t h e r , when the w a r was over, we found that the expansion of our productive facilities could be translated into peacetime goods and services w i t h o u t serious or prolonged economic dislocation. Since the Korean outbreak, although our then existing productive resources were more f u l l y utilized i n mid-1950 than i n 1939, we nonetheless have relied predominantly upon our genius f o r s t i l l f u r t h e r productive expansion to carry the additional burden. Since mid-1950, our expansion of t o t a l output has roughly kept pace w i t h the expanding defense program, and consequently the defense program has not resulted i n impairment of our i n d u s t r i a l or civilian strength. We have used controls to facilitate an orderly transition, and to deal w i t h specific shortages. B u t fortunately, we have not fallen into the error of substituting the philosophy of allout controls f o r the philosophy of all-out production. I t is by doing the job i n the American way t h a t we have kept our economy so strong, and i n fact made i t stronger. Our greatest reserve strength s t i l l lies i n our capacity f u r t h e r to increase production. The ceiling of our productive a b i l i t y has no paore been reached i n 1952 than i n 1950 or i n 1948. W i t h o u t appreciably lengthening the workweek, and w i t h o u t applying the forced pressures of a f u l l - w a r economy, we have ample resources to increase t o t a l production by at least 5 percent per annum over the next few years. I f additional pressure should require us to do so, we could f o r at least a few years almost double the annual rate of productive increase. I t i s this which, more than a l l else i n material things, gives us our true measure o f superiority over the Russian system. Insofar as we need to fight inflation through the imposition of controls and restraints, indirect or direct, we must do so i n ways t h a t do not seriously m i l i t a t e against the achievement of our productive potential. This has a most important bearing upon the nature of controls t h a t we can afford to use, and upon t h e extent to which we can afford to use them. Those who would employ w i t h o u t reservation the classical measures of "fighting inflation," seem not to have taken into account the imperative necessity f o r fighting inflation i n ways t h a t do n o t repress the general rate of productive advance which is the surest w a y to keep our economy strong throughout an enduring defense period. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.158 Proposition No. 3 is t h a t the expansion of production must be responsive to the priorities of national needs. We cannot do everything at once. This means t h a t balance must be maintained i n the u t i l i z a t i o n of our resources. Great though our productive resources are, we cannot afford to do everything a t once. W h i l e some lines of production must be rapidly expanded, others must be contracted. F o r example, i n order to build more airplanes, we must f o r a time build less automobiles. I n order to build more plants to produce steel, we must for a time build less houses than we otherwise would. F u r t h e r , expansion and contraction i n various areas must achieve sufficient consistency to avoid excessive economic dislocation and to f u l f i l l the defense program itself. For example, i f the expansion of machine tool facilities were not sufficiently coordinated w i t h the defense program, bottlenecks would m u l t i p l y i n the execut i o n of the defense program. I f defense expansion and civilian contraction were not harmonized, either the manpower and the materials for the defense program would be lacking, or excessive and premature disutilization of manpower and materials would occur. The most important decisions of a defense period, both private and public, involve this concurrent expansion i n some areas and contraction i n other areas. Hence the economic policies to be used must be f a r more refined and selective t h a n i f the simple purpose were to produce a general expansion or contraction ©f the economy as a whole. We are not fighting p r i m a r i l y an inflation or a depression; we are fighting p r i m a r i l y a limited international struggle. It follows t h a t the classical economic theories directed toward producing general stimulation or general contraction throughout the whole economy, i. e., the t r a d i t i o n a l "anti-inflationary" or "antideflationary" policies, are not suitable f o r universal or broadside application to the current problems of the defense economy. Proposition No. 4 is that the task of curbing inflation i n a defense economy must be reconciled w i t h the need at one and the same time f o r expansion i n some areas and f o r contraction i n others. The essence of controlling inflation is to prevent available funds, c o u p k d w i t h the desire to spend them, f r o m exceeding by great amounts the available goods and services for which these funds would be used. When the simple purpose is to expand general buying power to facilitate recovery f r o m a depression, or to contract t o t a l buying power i n order to cut down the demand f o r goods and services of a l l kinds, i t is relatively easy to apply the classical set of "anti-inflationary" or "antideflationary" weapons. B u t i n the current situation, i t is necessary to couple some types of expansion w i t h some types of contraction, and consequently to expand some types of investment and other buying w h i l e contracting others. Therefore, efforts to influence spending must be conformed to the pattern of resource use which the defense program demands. I t follows that measures to contract spending power and employment and production i n some areas, no less than measures to produce expansion i n other areas, must be sufficiently selective and discriminating to expedite the defense program, to b u i l d up the industrial mobilization base, to expand some other areas of production, and at the same time to exercise necessary restraints i n s t i l l other areas. A l l this must be borne clearly i n mind as one reviews available economic tools, not i n terms of how they were talked about by some classical economists who never attempted to use them and who never imagined the current situation, but rather i n terms of how these tools may now be applied by practical people i n the face of tasks confronting the Nation quite different i n character f r o m any i n the past. Proposition No. 5 is t h a t the nature of our current and foreseeable economic tasks is too complicated f o r extreme or major reliance on any one type of economic measure. This applies to monetary policy as w e l l as to other policies. As indicated above, the complicated and unique character of the current defense program requires a combination of efforts, some designed to expand parts of the economy rapidly, and others designed to contract other parts of the economy w i t h similar r a p i d i t y (insofar as the increase i n over-all production does not i n itself take care of the necessary expansion of the security p r o g r a m ) . Theoretically, one m i g h t argue that any one type of economic policy might be predominantly relied upon i n the current situation to prompt a l l of the necessary and varied adjustments i n resource use. For example, i t might be argued theor e t i c a l l y that, since tax reductions are stimulating and t a x increases repressive, a complex t a x scheme could be worked out w h i c h provides sufficient inducements l o r expansion wherever needed and sufficient restraints f o r contraction wherever needed. B u t the effort to formulate and apply such a complicated and refined MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 159 t a x system would deprive the tax system of one of its main virtues—namely, that i t is rather generalized—and would make taxation more complicated and cumbersome, more detailed and personalized, than the most extreme k i n d of price and wage control. Similarly, one could w o r k out theoretically a pricecontrol policy, or a credit-control policy, or a policy governing the allocation of materials, so comprehensive and so discriminating as to accomplish by t h a t one device alone a l l of the objectives for the economy w h i c h must now be sought. B u t the utilization of any one device to this extent would break down of its own weight, and would result i n a system of controls f a r more harsh, rigid, and excessive than the moderate utilization of a variety of weapons i n m i l d proportion. These comments are applicable to general monetary policy. I am heartily i n accord w i t h the moderate utilization of monetary policy to exercise some general restraining influence i n an inflationary period. B u t intrinsic limitations upon its u t i l i t y lead to major reliance upon a variety of other measures. Clearly, monetary policy is hardly the device for stimulating the rapid expansion i n some areas of the economy which is now desirable. General monetary policy is a suitable device, w i t h i n appropriate limits, f o r imposing some necessary restraints upon the economy. B u t i f most of the restraint is to be highly selective, as I t h i n k i t must be under current conditions for reasons wiiich I have already given, general monetary policy cannot do very much of the job. A n d i f monetary policy were to be exercised f o r the purpose of putting brakes upon the rate of activity of the economy as a whole, i t could hardly be pushed f a r enough to do this under current conditions w i t h o u t reducing substantially the over-all level of production and employment—which would cut directly across the v i t a l objective of u t i l i z i n g our resources f u l l y and expanding our over-all productive strength. I n this connection the i n a b i l i t y to place great reliance upon general monetary policy has been f u l l y recognized by those who are regarded as outstanding exponents of its appropriate use geared to the time i n which i t is used. Thus i n a statement before the Joint Committee on the Economic Report on May 12, 1948, Mr. A l l a n Sproul, president of the Federal Reserve Bank of New York, had this to say: " A general monetary control, i f used drastically enough, works through a restriction of production. The steps i n the process are restriction of money supply, rise of interest rates, contraction of employment and production, contraction of income. I know of no monetary device which would enable us to avoid these consequences. * * * I n order to get the effect our critics suggest, would mean t h a t our action would have to be drastic enough to lower the money income of a large segment of the consuming public. To accomplish this by over-all monetary or credit action would mean a serious decline i n production and employment. Such action could only be justified i f we were faced w i t h a runaway inflation due solely or p r i m a r i l y to monetary causes. T h a t is not our present situation and t h a t cannot be the r i g h t policy now.' , I t is hard, indeed, to find i n the current situation any reason for departing f r o m the principles w h i c h M r . Sproul set f o r t h so cogently i n May 1948. The immediate inflationary trends now are certainly not as pronounced as they were i n May 1948, and the need not to reduce substantially the total of production and employment is certainly greater now than i t was at that time. S t i l l more important is this consideration: Even i f i t were to be conceded t h a t the over-all reduction i n production and employment were not too high a price to pay for the drastic use of general monetary policy, i t does not appear t h a t this reduction would concentrate i n those areas where the economy can best afford such a reduction under current conditions. On the contrary, analysis indicates t h a t such a policy would be first reflected i n the reduction of production and employment i n those very areas where the f u r t h e r expansion of facilities and output is most critically needed, and would appear last, i f at all, i n those highly speculative and nonessential areas where more selective and pointed measures can be effective quickly. * Recently, before the f o r t y - f i f t h annual meeting of the L i f e Insurance Associat i o n of America on December 12,1951, M r . Sproul had this to say: " A l l that should be claimed f o r general credit controls, i n my opinion, is t h a t combined w i t h other measures working i n the same direction, such as fiscal policy, debt management, and, i n extraordinary circumstances, direct controls, they can contribute to anti-inflationary and anti-deflationary forces. * * * I t seems to me that the same circumstances which are responsible for the problems of coordinating debt management and credit policy contribute to the effectiveness of m i l d general credit policies, and that we can have an expanding economy w i t h o u t t h r o w i n g too much of the gasoline of easy credit on the fires of active business." MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.160 I t is my belief t h a t the limitations now placed upon the u t i l i z a t i o n of general monetary policy, by the imperative need f o r expanding over-all production, and by the need f o r being highly selective i n imposing restraints upon particular segments of the economy, are perhaps more important than other reasons advanced f o r the very moderate utilization of general monetary policy. These other reasons include the size of the national debt, its c a r r y i n g costs, and i t s profound influence upon the country's financial structure. For example, D r . E. A. Goldenweiser, a first-rate theoretical economist w i t h great practical experience w i t h i n the Federal Reserve System, i n the American Economic Review i n June 1947, recognized the undesirability of substantial increases i n the long-term interest rate, saying: "Not only would such a rise increase the cost of borrowing to the Government a t the time of refunding, but i t would make inroads on the capital values of securities acquired by institutions and individuals i n support of the w a r effort. The Government is determined not to repeat the experience after the F i r s t W o r l d W a r when Government securities went down to the 80's. One reason, among others, f o r this determination is the size of the debt and its dominant position i n the country's financial structure." I feel that, i f the security program is to be carried f o r w a r d and not dangerously reduced, the economic and fiscal outlook make these comments of D r . Goldenweiser i n 1947 at least as pertinent today. The Federal surplus of 1947 has been replaced by a deficit, which w i l l increase for a time. The problems of Treasury financing w i l l be larger, not smaller, than i n 1947. I t should also be taken into consideration t h a t extreme changes i n the interest rates on long-term Government obligations are out of the question under current conditions, and that very small variations might not achieve the stated purpose of n a r r o w i n g the gap between these interest rates and interest rates on other types of obligations. I n testifying before the Joint Committee on the Economic Report on November 22, 1949, M r . M a r r i n e r Eccles had this to say: " I n a f a l l i n g bond market, w i t h general credit demand strong, rates on other securities and loans would tend to rise at least proportionately as much. Under these conditions, can i t be expected that insurance companies or savings and loan associations or other i n s t i t u t i o n a l investors would act materially differently w i t h the yield on Governments at 3 percent than they do now at 2% percent? "Loans or investment, other t h a n Government securities, would have as much, i f not more, relative attractiveness to lenders and investors. Few, i f any, borrowers would be priced out of the market f o r funds by rate increases of the size contemplated. * * * " A n y moderate rise i n long-term interest rates would not, i n itself, reduce significantly the demand f o r money. Investing institutions, w h i c h are now switching f r o m long-term Government bonds to private credit forms, would s t i l l be motivated to do so by a continuing margin of r e t u r n between the t w o kinds o f investment." The Congress has had occasion to observe i n recent months t h a t the effort to increase the interest rate on long-term Government obligations has been accompanied by efforts to move up other interest rates. A n outstanding recent example has been i n the field of housing, where ironically the argument was advanced, not t h a t interest rates should be raised to repress credit expansion, but rather t h a t interest rates should be raised to enlarge the volume of housing loans. While my m i n d is not wedded inflexibly to any particular level of interest rates i n general, and while some flexibility i n the general interest structure may be desirable, care should certainly be taken not to jeopardize the maintenance of a generally low interest rate structure by departures f r o m i t which— w h i l e small at first—might gain dangerous momentum. When one considers the p a i n f u l process by w h i c h the interest rate structure as a whole has been brought f a r below the levels obtaining prior to the great depression, plus the indisputable evidence that this trend has been a major contributory factor i n the great and sustained productive expansion of the economy and the more equitable sharing of its benefits among a wider range of business firms and consumers, the case against r i s k i n g a reversal of t h a t trend is strong indeed. None of the foregoing should be interpreted as an expression of disagreement at t h i s time w i t h the accord reached between the Treasury and the Federal Reserve B o a r d last March, involving some experimentation w i t h flexibility i n interest rate policy. To be sure, I am s t i l l prone to reserve judgment, depending upon the f u r t h e r unfolding of events, as to whether this m i l d modification i n policy has MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 161 been demonstrably beneficial. I t has had some desirable and some undesirable results, and the net balance is f a r f r o m clear. B u t the m a i n point I now desire to make is t h a t the accord of March 1951, as I understand i t , is consistent w i t h a view held by the Treasury and the Federal Reserve Board, i n which the other distinguished authorities whom I have cited seem to join. This view i n essence is t h a t variations i n monetary policy and interest rate policy must be kept w i t h i n very narrow l i m i t s indeed under current conditions. A n d consequently, monetary policy can be no more t h a n one m i l d tool among many i n the quest f o r economic stability and g r o w t h w i t h i n a high-defense environment. I do not dissent f r o m w h a t has been done. However, I do m a i n t a i n that the relative economic stability during the past year has been due not to one device, but instead to a wide variety of factors—productive growth, higher taxes, general abundance of consumer supplies, high voluntary savings, selective as well as general credit restraints, price and wage stabilization, and the movement of the defense build-up at a somewhat slower pace than had been estimated a year ago. B y the same token, I cannot accept the viewpoint that the m a i n key to f u t u r e economic stability consists i n pushing monetary manipulation as f a r as i t seemingly would be pushed by those who regard i t as a panacea and not simply as one useful device among many. I t is a device which cannot be relied upon heavily, without bringing i n its t r a i n undesirable consequences of a certain character f a r outweighing any speculative and thus f a r unproved benefits w h i c h might follow. Proposition No. 6 is t h a t the current and foreseeable economic situation calls f o r an admixture of economic tools, w i t h o u t excessive reliance upon any one. I t has become common practice f o r some overexuberant proponents of a particular economic policy to ascribe to i t alone the entire, or major credit f o r some desirable result which has been achieved. This they do by setting i n j u x t a position the u t i l i z a t i o n of this policy and the desirable result. Those who are strong f o r price controls can point to the coincidence of price controls and a stable price level a t times; those who are against price controls can point to periods where prices remained stable w i t h o u t price controls, and other periods when prices moved u p w a r d even w i t h price controls. Those who claim that the money supply is the all-controlling factor can point to periods when an increase i n the money supply was accompanied by an expansion of credit and by price i n f l a t i o n ; but those who believe to the contrary can point to periods when prices rose rapidly while the money supply was contracting. Most of these demonstrations are rather spurious, because coincidence is not the same as cause and effect, and because at any given time there are many forces at work i n the economy and no single one can be designated as being all-prevailing or decisive i n i t s influence. The most responsible weight of opinion seems to me to be t h a t economic stab i l i t y and growth depend upon a variety of measures used i n moderation, w i t h out excessive zeal i n the application of any one. A well-balanced perspective on this point appears i n an article by D r . E. A. Goldenweiser, i n Harper's magazine for A p r i l 1951. D r . Goldenweiser had this to s a y : " F i r s t , we must bend every effort to increase production by greater exertion, greater efficiency, longer hours, fewer leisure people, less of the gracious things of l i f e * * *. Second, we must economize—make sure that no money is spent unnecessarily. * * * T h i r d , as large a share of the necessary expenditures as possible must be met by taxation. * * * Fourth, the Government must borrow w h a t has to be borrowed (insofar as possible) i n such a w a y as to tap income t h a t would otherwise be spent by the person receiving it. * * * F i f t h , the Government should borrow f r o m the banks only the unavoidable minimum. * * * Sixth, over-all restraint should be exercised over loans by banks to businesses and individuals. * * * F i n a l l y * * * price and wage controls—to hold the line u n t i l the other measures become effective—are highly desirable." The foregoing seems to me to set f o r t h admirably, and i n proper order, the rounded elements i n a program f o r stability and growth. Further, I would l i k e to stress the extent to which most of those who have been challenged by the responsibilities of practical action, and p a r t i c u l a r l y by the responsibilities of public office, find themselves i n essential agreement i n this matter—although there w i l l always be some shadings of emphasis. The economist who has to maintain only a theoretical position, or to w r i t e his name imperishably ( i n his belief) into the literature of his profession, may mistake the shadings f o r the essence and magnify the differences of view. B u t MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.162 i n a l l m y dealings w i t h responsible public officials, i n the Treasury, the Federal Reserve Board, and elsewhere, I have continuously been impressed by the amount of agreement on fundamentals. The Council of Economic Advisers undertakes long and searching consultat i o n w i t h the whole range of those concerned w i t h economic policy, both private and public, at least twice a year i n the development of our semiannual published reports. To be sure, some differences of viewpoint arise. B u t i n the overwhelming m a j o r i t y of cases, these prove susceptible to accommodation, on the part of men who after a l l are looking at the same facts and who share the objective of a stable and growing American economy. Proposition No. 7 is t h a t basic economic policies which affect the whole Nation should seek harmony, and that under our system the most powerful force t o w a r d this harmony is men of good w i l l w o r k i n g cooperatively together. W i t h this force present, neither new machinery nor new legislative definitions of authority seems essential. Above all, there is widespread agreement t h a t those agencies of public aut h o r i t y w h i c h v i t a l l y affect the national economy should t r y to reconcile their actions, because p u l l i n g i n opposite directions is manifestly h u r t f u l regardless of which side is "on the side of the angels." There w i l l always, of course, be differences of opinion on policy issues. B u t neither sober and reflective businessmen nor anybody else would w a n t various important agencies of public power, each v i t a l l y affecting the economy, to pursue conflicting policies of a fundamental character for an enduring length of time. Nothing could be more inefficient, more uneconomical, more demoralizing to our business system, or more conducive to the undermining of the people's confidence i n public authority. I t is t r u e that different agencies of public power have different accents of responsibility and different prime objectives and functions. B u t no one of them can believe t h a t its perspective or its point of emphasis is transcendently important to the exclusion of a l l others. The very f a c t that i n our democracy there are at the national level so many agencies of public power makes i t essential t h a t a process of reconciliation and harmonization move constantly f o r w a r d . I t has always been this w a y ; and i t w i l l always be this way. The possibility of some fundamental collision of policy between t w o agencies of public power which fundamentally affect the national economy is by no means l i m i t e d to the case of the Treasury and the Federal Reserve Board. Other agencies of public power are now undertaking functions quite as v i t a l to the economy as a whole, and quite as important to the lives and fortunes of the individual. For example, i t would be hard to imagine a more far-reaching authori t y than that of allocating scarce materials throughout the economy, w h i c h carries w i t h i t the very power of l i f e or death over substantial segments of our business system. The relationship between monetary policy and fiscal policy is indeed important, but no one can prove that i t is of a very different category of importance f r o m the relationship between price policy and wage policy or t a x policy and spending and lending policy or defense policy and policies affecting i n d u s t r i a l and c i v i l i a n supplies. The Congress has consistently and increasingly recognized t h a t a l l of these policies are vital, t h a t no one of them is supreme, and that constantly improved machinery should be sought, both i n the legislative and the executive branch, f o r evaluating these policies as a whole and their relationship to one another. The Joint Committee on the Economic Report and the Council of Economic Advisers are both statutory examples of this recognition. The advent of the defense program has intensified the search, both by the people and their Government, f o r basic m u t u a l i t y of purpose and basic consistency of effort among the various instruments of public power affecting the whole economy and its very security. Whenever there might be a fundamental collision of policy between any t w o or more agencies of public power which fundamentally affect the national economy, manifestly the solution does not lie i n a r i d debate as to how "independent" one or the other is or should be or i n proposals to subordinate one to the other by legislative fiat. I f by "independence" one means t h a t men of integrity should look for the r i g h t answers and express their views vigorously w i t h o u t suppression or recrimination, that, of course, is desirable. Nor would I undertake to enter upon discussion of the question t u r n i n g upon the fact t h a t the Congress has established the Federal Reserve Board i n a different relationship to the Government f r o m t h a t applying to the executive departments. This is a matter of congressional policy. B u t i n no event can any realistic concept of "independence" mean that there is no relationship or interdependence among the policies and problems dealt w i t h by the various important agencies of public power impor- MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 163 t a n t l y affecting the national economy. Consequently, they must a l l t r y to work together on problems which affect them all. I n the final analysis, i n the event of collision, a l l agencies of public power must recognize the ultimate and decisive authority of the Congress; and a l l must recognize t h a t the Presidential office has always had the legitimate function of lending its influence toward harmonizing the executory or administrative aspects o f national economic policy. B u t the genius of our system resides not so much i n reliance upon command as i n reliance upon voluntary accommodation through h a r d work, f a i r purposes, and m u t u a l respect. Surely the Council of Economic Advisers, which finds its l i f e i n a statute the essence of which is cooperation, cannot bring itself to believe that cooperation is not the best method i n dealings between any important organs of public power. F r o m the peculiar vantage point of the Council of Economic Advisers, i t has seemed to me that t h e Treasury and the Federal Reserve Board, as well as other agencies, have worked harder and w i t h a finer spirit than the general public realizes to j o i n hands i n the national interest i n these t r y i n g times. For example, those not involved i n the process hardly realize how thoroughly the reports to the Congress under the Employment Act of 1946 are made the subject of f u l l discussion, interchange of views, and a wise s p i r i t of give and take among a l l of the agencies concerned w i t h national economic policy. I have always found the Treasury and the Federal Reserve Board "independent" i n the sense of being sturdy and vigorous i n the assertion of their views; but I have never found any of them "independent" i n the sense of being remote or unapproachable, provincial or narrow-minded, or overzealous i n the control of its own domain. The result of this process of cooperation has not been perfect. B u t i t has produced over the years, I believe, a more intelligent and harmonious approach to the problems of our national economy than wTould have been possible under any other approach. Based upon my observation of the relationships now i n effect, I do not see the need for additional f o r m a l machinery, or for new legislative efforts to redefine relationships or relative responsibilities. I believe instead that we must continue to work together, seeking to improve our tools of economic analysis, to achieve even greater objectivity, and to enlarge the popular understanding of what* we are t r y i n g to do. These things depend upon men, and not upon laws. I t h i n k the men w i t h whom I have worked measure up to the task, and that is what is most important. A t the same time, i f i t should be deemed desirable to follow the suggestion recently made by the Secretary of the Treasury, to the effect that the Treasury, the Federal Reserve Board, the Council of Economic Advisers, and certain other agencies recognize more explicitly through some new cooperative u n i t their mutual interests, and i f the Federal Reserve Board should feel likewise, such a proposal would certainly meet w i t h the hearty support of the Council of Economic Advisers. Eepresentative P A T M A N . Senator Douglas, would you like to ask ' some questions ? Senator DOUGLAS. First, let me thank you, Mr. Keyserling, for your statement. May I ask if it is a function of the Council of Economic Advisers to offer current advice on economic developments to the President? M r . KEYSERLING. Y e s , sir. Senator D O U G L A S . D O you understand i t to be a function of the Council of Economic Advisers also to offer current advice to the Congress ? Mr. K E Y S E R L I N G . Yes, sir. I would like, if there is any question about that, to state briefly why I think so. Senator D O U G L A S . N O ; that is not necessary at all. Now did you watch the situation currently from the 1st of July 1950, until the 1st of March 1951? Mr. K E Y S E R L I N G . I have tried to. Senator D O U G L A S . Y O U kept in touch with currentfigures? Mr. KEYSERLING. Y e s , sir. M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T.164 Senator D O U G L A S . Month by month, week by week, and in some cases day by day. And therefore you were continuously apprised of what was happening. Were you aware that the Federal Reserve Board through its open market committee was purchasing large quantities of Government securities during this period? Mr. K E Y S E R L I N G . I would be inclined to think that one would be aware of that, and I was aware of it. Senator D O U G L A S . Were you? M r . KEYSERLING. Y e s . Senator D O U G L A S . Y O U were aware of it? M r . KEYSERLING. Yes. Senator D O U G L A S . Were you aware of the fact that during these 8 months the Federal Reserve, depending on the precise termination date, purchased from $3% to $4 billion of Government securities ? M r . KEYSERLING. Y e s , sir. Senator D O U G L A S . Were you aware of the fact that bank reserves in the Federal Reserve System were rising during this period ? M r . KEYSERLING. Y e s , sir. Senator D O U G L A S . Rising by not quite as much as the purchases of bonds, but by substantially as much. Did you think there was a connection between the purchase of Government bonds by the Federal Reserve System and the rise in bank reserves ? M r . KEYSERLING. Y e s , sir. Senator D O U G L A S . An immediate and direct connection ? Mr. K E Y S E R L I N G . That is a question of degree, but I would be willing to answer it by saying there is a substantial and important connection. Senator D O U G L A S . And a direct connection ? Mr. K E Y S E R L I N G . And direct connection. Senator D O U G L A S . The Federal Reserve Board testified yesterday that the purchase of Government bonds is paid for by checks which, moving through the banking system, are deposited in the Federal Reserve System and automatically become reserves of the member banks. Mr. K E Y S E R L I N G . I agree with that. Senator D O U G L A S . Did you notice that bank loans were increasing? Mr. K E Y S E R L I N G . Yes; bank loans were increasing. Senator D O U G L A S . Bank loans increased during the period of 8 months by ten billions of dollars, or an increase of approximately 18 percent. Did you notice that ? M r . KEYSERLING. Y e s , sir. Senator D O U G L A S . Did you think there was a connection between the increase in bank loans and the increase in bank reserves? Mr. K E Y S E R L I N G . By no means the probable direct and substantial connection that there was with respect to the earlier parts of what you recited, Senator. Senator D O U G L A S . I S it not true that an increase in bank reserves makes possible an increase in bank loans due to the fractional reserve system? Mr. K E Y S E R L I N G . I think I would approach it from the other end and look at the volume of investment that took place. Senator D O U G L A S . I am not speaking of investment banking. I am not speaking of savings. I am speaking of bank loans, that is, of created credit. Of course, the fundamental distinction in banking is M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT . 165 between the investment of savings through the investment machinery and the creation of bank credit in the commercial banking system. Mr. KEYSERLING. Senator, let me begin by saying as a coloration to my whole discussion, that at points where we differ, either of us may be right, and let's proceed from there. Now let me answer your last question, if I may. I have used the word "investment" in a somewhat different sense from what you have used it. I have used the word "investment" to express the use of funds to command materials, money, and human effort in the production of facilities, plant equipment, and housing, and other things of that kind, and I think that the point at which monev exercises an inflationary impact upon the economy is when it begins to command goods and services. I n other words, you and I can exchange loans ad infinitum, and more and more loans, so long as we do not do anything with them. Senator DOUGLAS. What do you understand the difference between commercial banking and investment banking to be ? Mr. KEYSERLING. May I answer the other question and then come back to that ? I want to carry through with the idea. Senator DOUGLAS. There seems to me to be a connection between the increase in bank reserves in the Federal Reserve System and the increase in bank loans. I am referring to the Federal Reserve Bulletin for May 1951, on page 527. I n the second column it is marked "Loans." whereas the third, fourth, and fifth columns are "Investments," so I am not speaking about loans and investments. I am speaking of loans. Mr. KEYSERLING. Senator, I am not at all sure there will be any disagreement if I can carry through on the one idea I am trying to express here. Senator DOUGLAS. Did you see any connection between the increase in bank reserves in the Federal Reserve System and the increase in short-term bank loans ? Mr. K E Y S E R L I N G . I was trying to discuss, Senator, how much connection I saw. A question like that cannot be answered "yes" or "no." There is some connection between any two coincident events of a large character in the economy. What I am trying to say is that in looking at the question of investment Senator DOUGLAS. I am not speaking of investment. I am speaking of loans, commercial loans. Mr. KEYSERLING. But the loans have no effect upon the economy until they are translated into some kind of overt economic action. Senator DOUGLAS. Let me ask you this: Is it not true that in the case of commercial loans what happens is that the loan is made first and it is made in the form of a credit which is set up to the account of the borrowers so that the loan creates the deposit, whereas in investment banking the savings are made out of the current incomes of individuals and corporations and are then deposited in financial institutions, which then act as middlemen to distribute these sums to the places where the investments are made ? I n the case of the investments, therefore, the saving creates the deposit, the deposit creates the loan or investment, whereas in the case of commercial banking the credit is created by the bank when the amount of the loan is deposited to the account of the borrower and the borrower draws upon. M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT.166 I n the case of commercial banking, therefore, the creation of this new credit constitutes an addition to the total money supply, whereas in the case of the investment banking what we have is a diversion of existing income for the purposes of investment and saving rather than for consumption. Now, isn't that distinction a valid distinction ? Mr. K E Y S E R U N G . Yes, sir, it is a valid distinction, but I think the distinction I am making is also a valid distinction, and let me carry i t through to indicate its significance to this general point. The general point I am making is that you can start at either end of this road and the end I start at is this: That ultimately the impact on an economy occurs when manpower, materials, and economic act i v i t y are generated to command resources. I n other words, i f you and I lend loans Senator DOUGLAS. We did not have much unemployment i n 1 9 5 0 , So that there was not much possibility of putting idle people to work on idle resources. Mr. KEYSERLTNG. I did not say that. Let me carry this forward. You and I , Senator, to simplify this thing, possibly oversimplify it, can lend money back and forth to each other, or a bank and individual or two kinds of banks can lend money back and forth to each other, and the volume of loans increases by that. I t is* only at the point where the loan is used for a dynamic economic function that it exercises a strain on the economy. Now, the point I am making is that, looking at the volume of investment, using investment in the broad sense of how our business system was commanding resources of manpower and materials and plant and equipment, which is what exerts the inflationary strain, during the period that you refer to—and here I come to the part of it that is directly relevent to your question—I do not see as clearly as you do that the variation in bank reserves or the variations in the factors that you mentioned were the controlling or even the major factors in the actual level of capital formation which took place. I think that, under the conditions obtaining between the middle of 1950 and early 1951, the amplitude of business resources was such of all kinds, depreciation reserves, accrued profits, capacity to borrow that they would have maintained under any set of circumstances except changes so drastic in the economy that they would have knocked it for a loop, and I think the level of business outlays between 1950 and 1951 was conditioned primarily by availability of manpower, by the prospect of big markets, particularly in view of a new and growing defense program, by the general capital position of these businesses resulting from many accrued years of prosperity with unusually high profits even after taxes. I n other words, the part at which I must respectfully depart from you, Senator, is the extent to which you ascribe functionings in the economy to a particular limited set of events. Now, I am perfectly willing to admit that that played some part, but I happen to think that that particular development played a relatively very small part in the level of business investment ' Senator DOUGLAS. Wait a minute; I am speaking of loans—let that be understood—commercial loans. Do you think that the increase in the reserves played a very small part in the increase in loans, the increase in reserves being around $ 3 ^ M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T . 167 billion, the increase in loans during the same period was around $10 billion. Do you say that the increase in reserves played a very small part in the increase in loans ? Mr. K E Y S E R L I N G . I think that is true within any variant that any responsible public official would have wanted to apply if he had had absolute power to contract that volume of loans. New, I am perfectly willing to admit Senator D O U G L A S . Did not the increase in reserves make possible an increase in loans ? Mr. K E Y S E R L I N G . I t made possible an increase in loans, but Senator DOUGLAS. And is it not true that on the whole each added dollar of reserves makes possible increased loans of $6 ? Mr. K E Y S E R L I N G . I think you could get different computations as to whether it is $6 or $5, but broadly speaking there is a connection. Senator DOUGLAS. Required reserves of the class C banks were 1 4 percent, of the class B banks 20 percent, of the class A banks 24 percent. They were up virtually to their maximum. Class A could have gone up to 26, but it was 24. The general average is approximately 16 percent, a little over 16, so that you have a potential multiplier—arid 1 want to put that word '"potential" in—a potential multiplier of 6; isn't that true? Mr. K E Y S E R L I N G . Yes, but I think Senator DOUGLAS. I f that is true, an increase of $3 billion in reserve would have made possible an increase of about $18 billion in loans. Now, a $10 billion increase did occur. Is it your contention there was little connection between the increase in reserves and the increase in loans? Mr. K E Y S E R L I N G . I t is my contention that if the Federal Reserve Board had been following at that time the policy which—I think this is the easiest way I can describe it: I f the Federal Reserve Board had been following at that time the policy which they are following now as described by them before this committee and reflecting the "accord," if that policy had then been in effect rather than the policy which was then in effect, it is my contention that the ultimate level of business investment, of capital formation, of economic activity in that sector of the economy, would during that period have been, under all the conditions playing upon it, approximately the same. Now, that is all I am trying to say, and I think that is important. Senator DOUGLAS. I appreciate your reply, which I think is somewhat elliptical to the question which I asked. My question is: Was there any connection or appreciable connection between the increase in reserves of banks in the Federal Reserve System and the expansion of commercial loans which they made to private business ? Mr. K E Y S E R L I N G . Why, Senator, on the line of questioning which asks if there is any connection, I am perfectly willing to agree that there is a connection. Senator D O U G L A S . D O you think there is an appreciable connection ? Mr. K E Y S E R U N G . Y O U move from "any" to "appreciable" to "great'* to "prevalent." Senator DOUGLAS. One step at a time. Mr. K E Y S E R L I N G . Yes, but that one step at a time involves some leaps. M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT.168 Senator DOUGLAS. DO you think there is any appreciable connection between the increase in reserves and the increase in loans by banks ? Mr. K E Y S E R L I N G . Yes, there is some connection. Senator DOUGLAS. A n appreciable connection ? Mr. K E Y S E R L I N G . Well, Senator, I think I have made myself clear on that. You are more adept than I am in synonyms, but no two synonyms mean the exact same thing. Senator DOUGLAS. Y O U are more adept than I am. I feel I am moving in a semantic wilderness. Mr. K E Y S E R L I N G . NO, sir; I think that the basic issue in the period under discussion is whether, in view of the complexion of the national job that we had to do at that time, the level of capital formation was too high or too low or misdirected. That is the ultimate result of these various beginnings of economic policies. Now, what I am saying is this: First, that I don't believe that the composition would have been very different during that period i f there had pertained during that period the policy which you think represents an improvement over the policy then pertaining. Senator DOUGLAS. For the moment I haven't come out with conclusions at all. I am merely trying to establish a chain of causation, and then when we reach conclusions that is something else. At the moment I am simply asking you a very simple question: Do you think there was an appreciable connection between the increase of $31/2 billion in bank reserves in the Federal Reserve, and the increase of $10 billion in the loans made by banks to private borrowers ? Mr. K E Y S E R L I N G . Well, Senator, I am willing to go along with you on accepting the word "appreciable." I do think that while your questioning precedes your conclusions, your questioning is moving inexorably toward your conclusions. Senator DOUGLAS. I f truth leads us there, let us not shy away. Now, I agree with you in this statement that there is an appreciable connection because 1 would like to point out that according to the Federal Reserve bulletin for May, page 515, which I would like to have checked, final column, the excess reserves of member banks as of June 28,1950, was said to be $526 million. That is, on the basis of the reserves which the member banks had at the end of June, there was only $526 million above that required for their existing outstanding quantity of loans. Therefore, if used up, every dollar of this excess reserve—and you never can use up all your reserves—they would only have been able to have expanded loans by about $3 billions. As a matter of fact, you can't use up every dollar. You have to have some margins. Probably they could not have expanded their loans more than a billion to a billion and a half. But the Federal Reserve Board purchased large quantities of Government bonds, hence built up the reserves of the member banks, and hence increased the lending capacity of banks. And, as a matter of fact, if you trace this relationship the banks approximately kept their loans "in pace with the reserves which they built up, because by February 28, 1951, excess reserves amounted to only $700 million, so that they had obviously loaned up to the capacity of the reserves which had been created for them, and it seems to me that the conclusion is perfectly clear that the increase in loans could M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T . 169 not have occurred to any appreciable degree had there not been this purchase of Government securities by the Federal Reserve. Is there anything wrong with that line of reasoning? Mr. K E Y S E R L I N G . I am here to be questioned and not to ask questions. I realize that. Senator D O U G L A S . I S it not true, then—if you don't wish to comment—that the increased loans were made possible virtually entirely by the increase in bank reserve which in turn, as you have testified, was made possible by the purchase of securities by the Federal Reserve System ? Mr. K E Y S E R L I N G . There is a connection between the two, but I would then want to raise the question of how much less the policy of increasing bank reserves would have had to be in order to result actually in an appreciably lower level of loans. Now, you yourself say, Senator, that the level of loans did not push up to the maximum at all times of the possibility. All I am saying is that under the conditions then pertaining in the economy, I cannot see how the variant in policy which you suggest, insofar as I get it, would have resulted actually in a lower level of capital formation during that particular period. Senator D O U G L A S . Wait a minute. Did the increased bank reserves account for the major portion, or at least make possible the major portion of the bank loans? Mr. K E Y S E R L I N G . Yes; that is the way our system works. Senator D O U G L A S . Good. I t has taken a long time to develop that fact. Now, then, when you increase the quantity of bank loans, other things being equal, what happens to the price level ? And here we are dealing not with investment, not with the diversion of an already existing national monetary income into one direction rather than another, but with the creation of monetary purchasing power by the banking system itself, namely, through the making of a loan and the crediting of that loan as a deposit. Because it is true, though the commercial bankers sometimes deny this fact, that the commercial banks are manufacturing agencies. They manufacture bank credit, which they sell. Representative P A T M A N . Senator Douglas, I think that is generally admitted now. A few years ago it was not admitted, but I think Mr. Eccles impressed that point so strongly that it is now generally accepted. Senator D O U G L A S . N O W , what is the effect of an increase in the quantity of bank credit, other things being equal, upon the price level ? Mr. K E Y S E R L I N G . Senator, the whole point I am making turns upon your phrase "other things being equal." Senator D O U G L A S . One step*at a time. Mr. K E Y S E R L I N G . But other things were not equal then and other things are not equal now. Senator DOUGLAS. Let us take one thing at a time. You just take the questions that I ask. Other things being equal, what is the effect of an increase in the quantity of money upon prices ? Mr. K E Y S E R L I N G . But, Senator Senator D O U G L A S . Yes or no. Mr. K E Y S E R L I N G . I am engaging in an economic discussion, not an inquisition. I can't answer that yes or no. M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT.170 Senator DOUGLAS. All right; if there is anything inquisitorial, I will strike this. Mr. K E Y S E R L I N G . I can't answer a question like that yes or no. Senator DOUGLAS. I S this an unfair question? You are the Chairman of the Council of Economic Advisers, the most important economic position in the country. I am asking you a very basic economic question which every student in the introductory course in economics is supposed to know, and which every Congressman ought to know. What is the effect, other things being equal, of an increase in quantity of bank credit upon prices ? Mr. K E Y S E R L I N G . Senator, I said at the beginning of my statement, and I again say—and I think this is relevant to your question— that the examination of this problem in terms of an assumption, even for purposes of discussion, that other things are equal is the probing of this problem in just that kind of tight little logical symmetrical nondynamic world of theoretical economists which does not cover the problems that we have to deal with. Senator DOUGLAS. But we are both subject to the laws of logic, and one of the laws of logic is the method of one step at a time. Now I am asking you a very simple question. I hope you won't decline to answer it. Other things being equal, what is the effect of an increase in the quantity of active bank credit upon prices ? Mr. K E Y S E R L I N G . Other things being equal, the effect is to increase prices. Senator DOUGLAS. Well, now, why didn't you come to that before? I t is perfectly simple. Suppose you have $20 here representing the quantity of money, and this package of cigarettes representing the quantity of goods— then you add another $20 to the existing $20, the price which was $20 before is now $40, isn't that true, each being offered for the other? Isn't that true? Mr. KEYSERLING. That is, of course, true, Senator. Senator DOUGLAS. Well, then, that is a very simple relationship, but it is highly important to get it established. Now, then, other things being equal, what would be the effect of an increase in the quantity of bank credit during the period in question ? Mr. KEYSERLING. Senator, I should like to point out with reference to the rules of logic, that it is also the rule of logic that anybody can set up a logical system which is not necessarily correct. Anybody can take a hypothesis and proceed step by step by deductions from it to certain conclusions, and that is what you are doing now. I disagree with your conclusions. Senator DOUGLAS. I am taking an historical analogy, moving forward both by event and by logic—if there is anything wrong with my farts or my logic, I want to have it pointed out. H*re we have this increase of $10 billion in bank loans. How much was the increase in wholesale prices during this period? Mr. KEYSERLING. Senator, there was a substantial increase in wholesale Senator DOUGLAS. D O you accept the index of the Bureau of Labor S'j^tistics? Mr. KEYSERLING. Yes, of course. M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T . 171 Senator D O U G L A S . I believe that shows an increase of between 1 6 and 17 percent during the period in question. The increase in bank loans of $10 billion amounted to an increase of 18 percent in the volume of bank loans. Do you think the percentage increase in the quantity of bank loans had any relationship to the percentage increase in prices ? Mr. K E Y S E R L I N G . Well, now, we are back again to any relationship. Senator DOUGLAS. D O you think it had any relationship ? Mr. K E Y S E R L I N G . I t had some relationship. Let me say this: that I can take a chart showing trends in prices in bank loans, in the money supply, and all the factors to which you refer, a chart running from 1946 to 1951, and if one is simply trying to prove a thesis, you can take different points in time on that chart where you can prove by your line of logic directly contrary thesis because you have a complicated economy in which you have a different juxtaposition of events, an(J if you want to, you can say because prices rose so much in this period and something else happened, there is that cause and effect, but there are other periods of time in the past 5 years where you had a rising price level with a decreasing money supply. Senator DOUGLAS. Mr. Keyserling, you have said that there was a logical connection between the increase in quantity of bank loans and increase in the price level. Now, I point out that historically also these two were associated. I thought you were going to say that there were other factors operating during this period which negatived the increase in bank loans so that bank loans were not a cause. Mr. K E Y S E R L I N G . N O ; I was going to say Senator D O U G L A S . I want to play fair with you. I want to suggest to you, do you want to name any of these other factors ? Mr. K E Y S E R L I N G . I was going to say there are other factors operating to w^hich I would ascribe the main casual effect upon the rising prices during that period. Senator D O U G L A S . The main causes were not the increase in bank loans. Mr. K E Y S E R L I N G . Well, now, there again you have moved a step because I don't think that the increase in bank loans was exactly correlated with these differentiations in reserve policies. Senator DOUGLAS. N O W , wait a minute. You have just said that the increase in bank loans was caused by the increase in reserves. Mr. K E Y S E R L I N G . Well, I first say there was a relationship, and then an appreciable relationship, but I never said was caused by— Senator DOUGLAS. Then you said a very direct relationship. Mr. K E Y S E R L I N G . You see, you start with a relationship, then you move to an appreciable relationship, then to a direct relationship, then to cause. Senator DOUGLAS. I thought you were under way finally. I f you wish to retrace your steps Representative B O L L I N G . Could I interrupt ? Mr. K E Y S E R L I N G . I think there is a great difference. Representative B O L L I N G . Mr. Keyserling, are there any other ways by which banks can create reserves ? I gather that during 1950-51 the banks created reserves by selling their bonds to the Federal Reserve. Suppose it had been profitable 97308—52—12 MONETARY POLICY AND M A N A G E M E N T OF P U B L I C D E B T.172 for them to make loans, couldn't they have acquired revenue by selling bonds on the open market ? Mr. K E Y S E R L I N G . G O ahead, Senator, don't let me interrupt you. Representative B O L L I N G . The question was addressed to you. Is there only one way in which commercial banks can create reserves when they are confronting a very favorable market for loans? Mr. K E Y S E R L I N G . I don't think so. Representative B O L L I N G . What are some of the others ? Mr. K E Y S E R L I N G . I think the one you mentioned is one way. Representative B O L L I N G . They can do that regardless of whether the bonds were at par or otherwise ? Mr. K E Y S E R L I N G . Well, there are differing degrees of opinion as to with what facility they could do it under these varying circumstances, but I think they could do it. Representative B O L L I N G . That is all, Sejiator. Thank you. Senator D O U G L A S . D O I understand you to say that you think there is no appreciable connection between the proportionate increase in the quantity of bank loans Mr. K E Y S E R L I N G . I agreed with you, Senator, that there was an appreciable connection if you do not find the difference between some connection and appreciable connection too appreciable. Senator DOUGLAS. Are you saying there was no causal connection between the increase in bank loans and the increase in prices ? Mr. K E Y S E R L I N G . Well, if there is some connection there is some causal connection. Senator DOUGLAS. Are you saying there was a causal connection between the increase in bank loans and the increase in prices ? Mr. K E Y S E R L I N G . Some causal connection. Senator D O U G L A S . And then the increase in bank loans was a cause for the increase in prices? Mr. K E Y S E R L I N G . One of the causes. Senator D O U G L A S . An appreciable cause? Mr. K E Y S E R L I N G . Senator, despite what you say, I am not interested in dialectics. I am interested in trying to convey to you what I am saying here as best I can and trying to answer your questions, because, as I said before Senator D O U G L A S . Please credit me with the same desire. M r . KEYSERLING. Y e s , sir. Senator D O U G L A S . I am trying to find out—you are the supreme economic adviser to the Government—whether you think there was an appreciable connection during this crucial period between the increase in bank loans and the increase in prices which quantitatively happened to be identical and for which you say there is a logical connection as well. Mr. K E Y S E R L I N G . Well, first as to the point that they were quantitatively identical, I would say that that is a nonconclusive coincidence because there were many other periods within recent economic history where they were not only quantitatively identical but were moving in opposite directions. Senator D O U G L A S . May I point out in this case the actual quantitative relationship is in harmony with the logical relationship and not contrary to it. Mr. K E Y S E R L I N G . I f you want to assume, Senator, that you start with a theory that A causes B, and then at times M O N E T A R Y POLICY AND M A N A G E M E N T OF P U B L I C DEBT . 173 Senator DOUGLAS. Y O U agree to that theory. Mr. KEYSERLING. May I conclude this % Senator DOUGLAS. Surely. Mr. KEYSERLING. I f you want to start with the theory that A causes B, and then say that at points where an empirical observation that A causes B it is in harmony, but at point of empirical observation where A does not cause B, where A happens and B does not happen, they are not in harmony, of course you are correct. But the point I am making is that if we look at the period over the past 5 or 6 years, there are so many periods where this harmony did not exist that one cannot subscribe, at least as I look at it, to the conclusion that this is the main conditioning factor within the range of our economy on price trends under current conditions or on the level of capital formation. Now, what I am really trying to develop, Senator—and I think that at least part of this you will agree with—that what we want to look at ultimately is what is happening in the economy. Senator DOUGLAS. I notice that in that economy during this period there was a 17 percent increase in wholesale prices, an increase of 8 percent in the cost of living, which has since gone up to 10, an increase in the cost of identical services to the Government of around $8 to $10 billion, and an impairment of the standard of life of those living on fixed incomes, so that that is a great thing that was happening. I will change the word "great." That was a very powerful force operating to the detriment of great groups in the community. Mr. KEYSERLING. Senator, I think—let me try to illustrate the point I am bringing before the committee, in this way—that if today, with the variation in monetary policy which has taken place, if today, A, you had no price control, and, B, the economy were hit by an event comparable to what happened when the Chinese invaded North Korea, with a $23 billion annual rate of personal savings, with the position which business is now in, with the material situations as it now exists, I believe—and, of course, this is a belief because that is not happening now, but it illustrates my point—that if now the economy were hit by a situation comparable to that Chinese situation, that you could very, very easily and probably would have a sharp upward spurt in prices, in inventory accumulation, in hoarding, in consumer buying, and that you would have it under the existing policy as well as under the one which then pertained. Now, that is the basic point I am making, and I do not desire to dissent from your proposition that all these things have a relationship. I am simply saykig that these other economic factors are quite as important in the situation as the one to which you attach particular attention, and that consequently in looking at all of them together, we can't look at this one device and say this is the way to do it, and we can't accept this as the answer and say we have to push this as far as we can without considering alternative ways or other necessary ways of stabilizing prices, and without weighing some of the collateral consequences of trying to do it in this particular way. Senator DOUGLAS. Are youfinished? M r . KEYSERLING. Y e s , sir. Senator DOUGLAS. Let me say that in order to show that I do not totally disregard other factors, as to matters of record, that the index M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT.174 of physical production, although it is not completely satisfactoryy increased, as I remember, in this period by about 8 to 10 percent. Let me also indicate that the velocity of circulation of credit increased by about 8 to 10 percent during this period. Of course, themoney supply is affected by the velocity of credit as well as by the total amount of credit, and if the quantity times the velocity, the product of the two, increases in proportion to the increase in physical production, the price level is static. But if it increases in a greater proportion than the increase in production, the price level tends to rise. What we had during this period was the fact that the increase in velocity roughly counterbalanced the increase in productivity, andr therefore, the same amount of money turning over more rapidly wasoffset by the increased quantities of goods at the same price level, but we increased the total active amount of commercial loans by 18 percent, and prices rose by 17 percent, precisely as we would expect under the well-known quantity theory of money formula. I am not saying that this was the sole cause; nobody says that was the sole cause in the tempestuous stream of events over this era. I am quite well aware that the scare buying that took place af^er Korea was a situation where everybody said they were not going to do any excessive buying, or any hoarding, but rushed out to get the goods before some other hoarder got there. I do not deny that there was a drawing down of savings accounts, and that this would naturally drive up the prices of automobiles and durable consumer goods. We did have a drawing down of savings and a distortion of prices. What I want to point out is that the Federal Reserve System added to this difficulty by permitting, and indeed stimulating, the creation of $10 billion of additional credit, so that far from introducing a stabilizing factor into this situation they introduced a further unstabi^ lizing factor in increasing the total money supply. Now, I have been in favor of selective controls. I favored the stronger selective controls on consumer credit that Congress adopted, and fought and bled and died for that on the floor of the Senate, as Congressman Patman and Congressman Bolling did on the floor of the House. Representative P A T M A N . There were certain types I was opposed to, regulation W, particularly. Senator DOUGLAS. I favored the restriction on loans for housing, in the way of selective controls. I am not saying that we should regret selective controls, but I am saying that it is reckless to rely on selective controls exclusively when you have the central banking mechanism of the country inflating the mony supply. That is my statement. Now, let me ask you a question. As you watched matters during this period did you call to the attention of the President, the Secretary of the Treasury, or any group of administrative officials that you believed that there was a connection between the purchase of Government bonds by the Federal Reserve System and the rise in the price level? Mr. K E Y S E R L I N G . I do not recall having called that particular fact to Senator DOUGLAS. That is, you do not recall it ? Mr. KEYSERLING. I do not recall it. M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T . 175 Senator D O U G L A S . Did you offer any advice as to whether the policy <of the Federal Reserve System in purchasing these bonds should be continued or discontinued ? Mr. K E Y S E R L I N G . There were various discussions of that, Senator. I believe that those discussions took more crystallized form a little later on. Senator DOUGLAS. Well, I am speaking of the 8-month period from July 1950 to the 1st of March 1951. Mr. K E Y S E R L I N G . I was not affirmatively responsible at any time for the advice Senator DOUGLAS. Did you offer any advice ? Mr. K E Y S E R L I N G . That is what I am intending to say. I was not at any time affirmatively responsible for advice which led to this change in policy. Does that answer your question? Senator D O U G L A S . N O ; it does not. Did you call attention to the President or any executive officer that prices were rising, that the credit supply was increasing, that reserves were rising, that Federal purchases of bonds were increasing, and there was a connection between these events ? Mr. K E Y S E R L I N G . All of those things we called to his attention and tried to be worked out. Senator D O U G L A S . Y O U pointed out that there was a connection? Mr. K E Y S E R L I N G . But not in the point of emphasis that you make because, frankly, my interpretation does not square with yours as to the relative weight to be attached to the various factors. Senator D O U G L A S . Well, you admit there was a connection? Mr. K E Y S E R L I N G . All—they are all interconnected, but I did not advise that this factor was as important as you, quite properly, I mean—these are matters of judgment—seem to think it was, because I did not think, and still do not think, that that was as important as you think. I did not place as much stress on it as you place on it. Senator DOUGLAS. Did you advise a discontinuance of policy of the Federal in purchasing unlimited quantities of bonds during this time? Mr. K E Y S E R L I N G . I think I answered that question by saying that 1 was not affirmatively responsible for advising the change in policy reflected in the March accord. Senator D O U G L A S . That answers the second question on the so-called accord which I had not come to. Did you advise the continuance or the discontinuance of the policy during the period July 1,1950, to March 1,1951 ? Mr. K E Y S E R L I N G . I can only answer that by saying that, as I think back now to what my views were then, that if it had been left to me I would not have advised discontinuance of the policy, and I hope that answers your question adequately. Senator D O U G L A S . I n other words, that you were in favor of the continuance of the previous policy ? Mr. K E Y S E R L I N G . I think that would be too strong a statement, Senator. Senator DOUGLAS. Or were you neutral on the subject? Mr. K E Y S E R L I N G . I would say that I am neutral on the subject in the sense that I believe that that particular variation does not have the economic significance which you attach to it and, consequently, since it produces M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T.176 Senator D O U G L A S . That is, you did not regard it as important? Mr. K E Y S E R L I N G . I do not regard it as of centra] significance within* the range of the type of action that either the Federal Reserve Board or the Treasury would be willing to take if either had an absolutely free hand. I n other words, I do not believe that, within the range of what the Federal Reserve Board would do, that this particular policy, in view of all of the factors playing on the economy, is of central or general significance. Senator D O U G L A S . Did you make any reports to the President or TX> any other high administrative official on this matter during this period ? Mr. K E Y S E R L I N G . Senator, I believe that I can stand on the proposition that Senator D O U G L A S . Did you or did you not make any reports to the President? Mr. K E Y S E R L I N G . The only reason I cannot answer that is because^ since we talked with the President orally on an indefinite number of occasions, and so forth, it is hard to separate them out, but I think I have answered your question fully when I say that if it had been left to me I would not during this period have recommended thi& change in policy. Now, I want to make it equally clear that that does not mean that I now say that the change was undesirable; that it may not have produced good results. I think it has produced some good results. I think it has produced some bad results, and I would not be prepared yet to make a judgment on its net effect. Senator DOUGLAS. I n other words, everything that exists at a given time is all right? M r . KEYSERLING. O h , no. Senator D O U G L A S . I t was all right for the Federal Reserve Board to purchase the bonds and all right for the Federal Reserve Board to discontinue buying them ? Mr. K E Y S E R L I N G . I did not say that at all. Senator, you asked me, in effect, what my view was at that time, and I think I answered that fully when I said if it had been left to me I would not have made a recommendation for that change, which is another way of saying that I do not believe that the need Senator D O U G L A S . Y O U did not think this policy did any real damage? Mr. K E Y S E R L I N G . What is that? Senator D O U G L A S . Y O U did not think this policy of purchasing unlimited quantities of Government bonds during this period did any real damage ? Mr. K E Y S E R L I N G . I do not think 011 balance that it is clear that it did damage, and I do not think you have let me explain why I do not think it is clear that it has not done damage. Senator D O U G L A S . I would be delighted to have you do that. Mr. K E Y S E R L I N G . There are two reasons why I do not think it clear that it has done damage, and here, Senator, is where I have a somewhat different approach from you to the analysis of these problems. Before I reach a final conclusion as to whether an economic policy has done damage, I want to look at what I call the end results in the economy. I n my judgment, the end results in the economy are the level and distribution of the production of its resources. I n other M O N E T A R Y POLICY AND M A N A G E M E N T OF P U B L I C DEBT . 177 words, here we are producing, we are making certain goods and services and business skills and judgments available for defense, certain ones available for consumption, certain ones available for investment—and I am using "investment" in the broad general sense of the business build-up. Now, the first thing I would want to look at in that period to which you refer is to look at what was happening to those three components and ask these questions: I n view of the fact that we have limited resources at full employment, were consumers getting too many goods? Was business getting too much capital formation ? Was the defense program moving too fast or too slow ? Now, let me take the business side of it first because that is the one on which you are mostly concentrating. My view is that it is not clear that all types of capital formation at that time were too high. I think there were many types of capital formation going forward, which, from the viewpoint of our productive strength, from the viewpoint of the additional burden of the defense program, had to be carried forward. I am glad they were carried forward as fast as they were. I wish some of them had been carried forward faster. Consequently, I would not, with ease, recommend or indulge in a general restrictive policy until I knew or felt or thought that that restrictive policy would begin to operate upon the kinds of activities which were nonessential before commencing to operate upon those which seemed to me to be at the very heart of the mobilization effort. Senator DOUGLAS. Mr. Keyserling, would it be impolite if I interjected something in here? M r . KEYSERLING. N O , s i r . Senator DOUGLAS. I want to make it clear that I am not saying that the Federal Reserve System should have sold Federal bonds. I am not saying it should have diminished reserves. The question is merely whether they should have expanded them. I am not advocating a policy of restriction, but I am asking whether they should have expanded the money supply more rapidly than the index of production. Mr. KEYSERLING. I think the difference, Senator, between saying they should not have expanded them and saying they should have restricted them still gets to the point that I assume you feel if they had not expanded them there would have been a lower level of capital formation, because if they would have been the same level of capital formation, my point is that so far as the functioning economy is concerned your strains and pressures would have been the same. Senator DOUGLAS. Where did this capital formation come from, Mr. Keyserling? Mr. KEYSERLING. I t came from the effort of labor, from the directing skill of business, and from the availability of financial and physical resources to do jobs which, in terms of the mobilization program, businessmen thought it would be profitable or patriotic or both to do. Senator DOUGLAS. May I ask you this: How did the increase in bank loans make possible all these desirable results ? Mr. KEYSERLING. I t does not alone make them possible. Senator DOUGLAS. Well, that is the issue, whether it was necessary to increase bank loans as much as they did expand in order to put more labor to use, to get greater skill for management, and so forth. MONETARY POLICY AND M A N A G E M E N T OF P U B L I C D E B T.178 How did this increase in loans do that when there was virtually full employment at the time ? Mr. K E Y S E R L I N G . Senator, the question I have raised is different and, I think, very important. The point I have made is that—may I resort for just a second to this tool of logic? Senator D O U G L A S . Surely. Mr. K E Y S E R L I N G . Proposition A : I t must be assumed from the point of view of your line of discourse that if the expansion of the kind of credit that you are talking about had been less, not by a restrictive policy but by not letting it expand, it must be assumed that there would have been a lower level of the end result which commands our resources, namely, construction, building, employment, and so forth and so on. Senator D O U G L A S . These things do not come out of the air, Mr. Keyserling. How was it that this increase in loans made possible the increase in production, the increase in savings, the increase in investment, and so on ? Mr. K E Y S E R L I N G . I am not, through my own fault—I have not made myself clear, Senator. I am saying that if the varying policy which you suggest, if the varying policy which you suggest had not appreciably changed the level of capital formation, of investment and of employment in specific lines of economic activity, if it had not substantially changed those levels, its ultimate effect upon the economy and upon the price level would have been nugatory because it is the spending of funds for business activities, whether by business or consumers, that puts the pressure on prices. To state it another way, if there had been other factors at play in the economy which would have resulted in an equal level of capital formation, of investment and in business activity, with or without this variant you suggest, then I cannot ascribe much importance to the variant. Now, that happens to be what I think. I t may be wrong, but I do not think that the variant that you suggest would have much changed the level at the end of what would have happened in the economy during that period to employment, to investment, to capital formation. The I raise a second questions which seems to be Senator D O U G L A S . Let us take this first one, and I want to make it clear. Is it your contention that it was necessary in order to get this expansion in production that bank loans should be increased by $10 billion? Mr. K E Y S E R L I N G . N O ; my contention is that if the expansion of bank loans was not necessary to that purpose, and if that expansion in production would have taken place anyway, it is that expansion w^hich exerts the impact upon the economy; that is the point I am making. Senator D O U G L A S . These double negatives are very hard to follow. Is it your statement then that it was the increase in production which required the increased bank loans ? Mr. K E Y S E R L I N G . N O . I t is my statement that what increased the strain upon the economy is what the functioning business system did. I n other words, if you have a shortage of steel, and you undertake a steel expansion program which puts an increasing demand upon steel to build steel plants, that is what exerts the pressure. Now, if you say that that would have taken place equally without the expansion of the bank loans, then I say that the expansion of the M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT . 179 bank loans is not what made it take place, which is the very point I have been trying to develop; and that since it did take place, that is what put the pressure on the economy, and this is equally true of other areas of business activities. Senator DOUGLAS. I take it what you are saying is that it was the demand for production in specific lines which created the demand for added bank credit which, in turn, may have driven prices up. I am not trying to misrepresent your position, I am trying to find out what it is. Mr. KEYSERLING. I incline toward the view that it is more—I do not want to say better or more fruitful—it is more the way I approach it than the way you approach it. Either way may be right. I start approaching it from the other end and moving backward; you start approaching it—— Senator DOUGLAS. Y O U approach it from the standpoint of the demand for bank funds, I think, and you seem to say that— I do not want to misrepresent your position, but that position if pushed to its ultimate conclusion, is that if the demands are made upon the banking system for more bank funds, it is the function of the banking system to respond by creating the funds, otherwise it would check the expansion potential. That makes the banking system a purely passive instrument, adapting itself to changes in the demands for loan capital. Mr. KEYSERLING. I do think, Senator, that under the general economic conditions prevailing at that time, and prevailing now, while the banking system is not entirely passive, it is appreciably more passive than your position indicates. I n other words, I do think that, with the general outlook as it was mid-1950, with the prospect dangling before the country of a vastly expanding defense program, with businessmen's energies being directed toward the servicing of that program and the realizing of the market opportunity, which actually or speculatively it would create, then in the nature of our economic system and, I think, this gets back to the question that Congressman Bolling asked, ways would have been found to service that dynamic desire of business to increase production; and if you believe that that level of productive increase was too high or that level of capital formation was too high, then I would suggest that the ways which could have been found quickly to curb it would have resided more outside of this particular technique than within this particular technique; if, on the other hand, one is not prepared to say that the level of investment and capital formation and productive build-up was too great during that period, then I do not think that the net result was bad; and if one is prepared to say that it would have been the same whether or not we had this expansion of bank credit, then I say that under that particular hypothesis the expansion of bank credit did not have much to do with the end result, and that it is the end result which conditioned the economy and the strain on resources and the price level. Senator DOUGLAS. Mr. Keyserling, an increase in investment in the narrow sense, and the increase of production in the larger sense, as I see it, could be accounted for by one or all of three factors: (a) A diminution in the amount of unemployment so that men otherwise idle will be*put to work on resources otherwise not occupied with intended productivity. M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C DEBT.180 On the 1st of July 1950, 5.2 percent of the labor force was unemployed; on the 1st of March 1951, 3.4 percent were unemployed, a decrease of 1.8 percent. Let us say there was a 2 percent greater utilization of the labor force. (b) The second factor that would operate would be a more effective utilization of an existing stock of capital and labor which might also be used; but (c) this refers not to the general index of production but to investment—you could have a decrease in the amounts consumed and an increase in the amounts invested by a temporary diminution of the standard of life of the American people. Now, it is precisely this which, I think, also occurred during this period of which, I am very frank to say, I cannot think the Council of Economic Advisers or the administration did pay proper attention to. During this period we had an increase in wholesale prices of IT percent, an increase in the cost of living of 8 percent. This meant that those living on annuities and fixed incomes had their purchasing power diminished proportionately; it also meant that those receiving interest in fixed money terms had their incomes reduced proportionately ; it meant that salaried workers, whose incomes move very sluggishly in response to changes in the cost of living, had their real incomes reduced almost proportionately. I t meant that the unskilled workers, who tend to be unorganized, had their real incomes reduced, and that the organized workers, while protecting themselves better during this period than in previous periods, lost ground during the intervening time. Now what I think happened, therefore, was that through this policy the real standard of life of large segments of the American people was decreased, and these gains were transferred to speculators in the community who, out of the abundance of their funds, could invest some of them, yes, and also spend some in night clubs and in Florida, I think that we had a great blow inflicted upon large groups of the American people. • Because the chain of causation was difficult to follow, the connection between the purchase of the bonds by the Federal Reserve at the beginning of the process, and the increase in the cost of living at the end was not seen by the people, and apparently was not seen by the pilots on the ship. I am saying that though the soundings were being taken, the depth of the channel presumably being known, the location of the ship being plotted, nevertheless the ship in this respect was allowed to run on the ground. Mr. KEYSERLING. Senator, there is a lot in what you said there so that I would like to call your further attention to some aspects of it. Senator DOUGLAS. Certainly. Mr. KEYSERLING. The first comment I will make explains why I am a little skeptical of these juxtapositions in point of time. From what you just said—and I am sure you do not intend it that way, it is just that your statement was not qualified enough—do you mean to contend that the general consequence of a rising price level in the American economy at all times is to either reduce the standard of living or to shift the availability of resources to the people in the direction of what you call the few speculators as against the many ?• Would you state that ? M O N E T A R Y POLICY A N D M A N A G E M E N T OF P U B L I C DEBT . 181 Senator DOUGLAS. That must be accompanied by an increase in production ; and even then it will result in a decrease in the standard of living of those with fixed incomes or relatively fixed incomes. Mr. KEYSERLING. Yes, but that is a separate question which goes Senator DOUGLAS. Well, it is part of it, and the classes which I detailed are quite large in number. I f you take old people, retired people, if you will take recipients of interest, if you take salaried workers, if you take unskilled workers, if you take large sections of the organized workers, you get the majority of the American people, and there is a transfer of incomes from these people to speculators who purchase commodities at lower prices which they can later hold for higher prices, so that there is a great internal shift in the distribution of incomes, even though you may have this 5-percent increase in the total level of production. I am willing to say, possibly, that you did get a 2-percent increase in production through inflation by a decrease in the unemployed. I am willing, possibly, to admit that. I would say that was purchased at a terrific price, at a great diminution of the cost of living of the vast majority of Americans. Without being self-righteous—and it is very easy for a senator to be selfrighteous—I have not felt that the Council was sufficiently concerned with this problem of inflation and the evil consequences thereof, and that you look at times on an increase in the price level with the same kindly eye that you look upon the increase in the index of production, whereas the two are very different things. Mr. KEYSERLING. Senator, since you made one remark there recently just now, which is personalized, although in no sense personal, I am sure, I think that the Council of Economic Advisers has been very much concerned about inflationary trends, and I think that we have, rightly or wrongly, been in the forefront of those advocating a range of affirmative measures to contain inflation. Senator DOUGLAS. Y O U have in everything except the essential steps. You advocated specific controls but no control over the general supply of money. Mr. KEYSERLING. Senator, that gets back to the question of our not agreeing as to what is the essential factor. Senator DOUGLAS. I t should have been. Mr. KEYSERLING. Let me point out that various points of time in the past 6 years can be selected where, if one simply looks at the juxtaposition of events, you can make quite as conclusive a case that this was not the central factor as if you select this particular period of time to show that it was. Now, getting back to the question of the stabilization of prices, we are very much concerned about the rising price level, and we have nt no time looked at it with an acquiescent eye. As a matter of fact, rightly or wrongly, we proposed rather drastic measures as far back as 1946. Senator DOUGLAS. What did you propose from 1950 to 1951 ? Mr. KEYSERLING. From 1 9 5 0 to 1 9 5 1 ? Senator DOUGLAS/ Yes. Mr. KEYSERLING. We proposed higher taxation; we proposed selective MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.182 S e n a t o r DOUGLAS. I n w h i c h I s u p p o r t e d y o u . I t h i n k I w a s one o f n i n e m e m b e r s o f t h e Senate w h o v o t e d f o r h i g h e r taxes o n a c r u c i a l r o l l call. M r . KEYSERLING. I h o p e w e c a n keep y o u w i t h us o n t h a t , S e n a t o r . S e n a t o r DOUGLAS. I c o n g r a t u l a t e y o u o n b e i n g r i g h t o n t h a t p o i n t . [Laughter.] M r . KEYSERLING. A n d w e p r o p o s e d p r i c e a n d w a g e s t a b i l i z a t i o n . . S e n a t o r DOUGLAS. O f i n d i v i d u a l i t e m s ; t h a t is, p r i c e c o n t r o l o n i n d i v i d u a l items. M r . KEYSERLING. A S d i s t i n g u i s h e d f r o m w h a t ? S e n a t o r DOUGLAS. W e l l , t a k i n g i n d i v i d u a l i t e m s , f i x i n g p r i c e c e i l i n g s on i n d i v i d u a l items. M r . KEYSERLING. I f t h a t is w h a t y o u m e a n b y p r i c e c o n t r o l , yes. S e n a t o r DOUGLAS. Y e s , c e r t a i n l y . M r . KEYSERLING. Yes. S e n a t o r DOUGLAS. B u t y o u d i d n o t p r o p o s e p l a c i n g a n y r e s t r i c t i o n u p o n the t o t a l q u a n t i t y of money. M r . K E Y S E R L I N G . S e n a t o r , I t h i n k y o u h a v e f a i r l y well e s t a b l i s h e d t h e f a c t t h a t I d o n o t ascribe t o t h a t f a c t o r t h e degree o f i m p o r t a n c e t h a t y o u do. S e n a t o r DOUGLAS. I a m a f r a i d I h a v e absorbed t o o m u c h o f t h e t i m e o f t h e c o m m i t t e e , a n d C o n g r e s s m a n B o i l i n g w a n t s t o ask a question. R e p r e s e n t a t i v e BOLLING. M y m e m o r y m a y n o t serve m e , b u t m y i m p r e s s i o n w a s t h a t t h e f i r s t request t h a t came f r o m t h e a d m i n i s t r a t i o n t o t h e Congress, a f t e r K o r e a , d e a l t l a r g e l y i n t h e f i e l d o f c r e d i t , o f a l l k i n d s ; am I not correct i n t h a t memory, t h a t i t included proposals f o r c r e d i t c o n t r o l s t h a t w e r e b i t t e r l y c o m p l a i n e d a b o u t as c o m p l e t e l y controlling the credit of the country ? M r . KEYSERLING. W e l l n o w , C o n g r e s s m a n , l e t m e say t h i s — a n d I k n o w t h a t y o u w i l l j o i n w i t h m e i n i t , a n d so w i l l S e n a t o r D o u g l a s — I t h i n k he a n d I are g o i n g t o agree o n t h e f i r s t t h i n g t o d a y — y o u k n o w some p o e t said, " E a r t h bears n o b a l s a m f o r m i s t a k e s . " I a m n o t here t o c l a i m either t h a t I never m a d e mistakes or t h a t t h e a d m i n i s t r a t i o n never made mistakes or t h a t t h e Congress never m a d e m i s t a k e s , a n d I d o n o t w a n t t o go i n t o a r e v i e w o f w h o m a d e the most mistakes the fastest; b u t the Congressman is generally corr e c t , t h a t l o n g b e f o r e w e g o t i n t o t h e area i n t h i s n e w s i t u a t i o n o f direct controls, we emphasized the importance o f certain k i n d s o f general controls, not only higher taxation. I t was not o n l y h i g h e r t a x a t i o n , b u t w e also r e c o m m e n d e d , a n d I t h i n k I h a v e been d e l i n q u e n t , S e n a t o r , i n n o t m e n t i o n i n g t h i s sooner, because I d o n o t t h i n k t h a t t h e d i f f e r e n c e b e t w e e n us is as g r e a t as w o u l d seem t o be, w e w e r e n o t a p a t h e t i c t o t h e v a l u e o f some g e n e r a l r e s t r a i n t u p o n t h e m o n e t a r y s t r e a m a n d u p o n l e n d i n g t h r o u g h these g e n e r a l devices. S e n a t o r DOUGLAS. T h e n t h e r e was a c o n n e c t i o n , a f t e r a l l , b e t w e e n them? M r . KEYSERLING. W h a t is t h a t ? S e n a t o r DOUGLAS. T h e n y o u d i d t h i n k t h e r e was a c o n n e c t i o n a f t e r a l l between the t o t a l q u a n t i t y of money a n d the price level ? M r . KEYSERLING. W h y , o f course, t h e r e is a c o n n e c t i o n . S e n a t o r DOUGLAS. W e l l , n o w w e see i t a n d n o w w e d o n ' t . M r . KEYSERLING. I n e v e r s a i d t h e r e was n o c o n n e c t i o n . I h a v e n o t said there was no connection, Senator. B u t we proposed various re- MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 183 serve p l a n s d i r e c t e d t o w a r d r e c o n c i l i n g t h i s k i n d o f g e n e r a l r e s t r a i n t w i t h c e r t a i n o t h e r o b j e c t i v e s o f n a t i o n a l p o l i c y a n d o f n a t i o n a l need, w h i c h seemed t o us e q u a l l y i m p o r t a n t . T h e basic d i f f i c u l t y I h a v e w i t h t h e p r o p o s i t i o n as y o u state i t , S e n a t o r , is, f i r s t , i t w o u l d seem t o m e t h a t y o u ascribe t o t h i s p a r t i c u l a r device a r e l a t i v e l y g r e a t e r w e i g h t t h a n I d o , a n d t h a t I p l a c e m o r e r e l i a n c e o n a w i d e r a n g e o f devices i n p r o p o r t i o n . Second, t h a t y o u d o n o t w e i g h a t a l l t h e f a c t t h a t e v e r y p a r t i c u l a r economic t o o l has p o i n t s o f d i s a d v a n t a g e as w e l l as p o i n t s o f a d v a n t a g e . I n o t h e r w o r d s , t a x a t i o n has p o i n t s o f a d v a n t a g e ; i t c l e a r l y h a s p o i n t s o f d i s a d v a n t a g e . I t is repressive o f i n i t i a t i v e , w h i c h is a l w a y s a b a d t h i n g p e r se. P r i c e c o n t r o l has p o i n t s o f a d v a n t a g e a n d p o i n t s o f d i s a d v a n t a g e ; selective c r e d i t c o n t r o l s h a v e , as t h e c h a i r m a n v e r y q u i c k l y p o i n t e d o u t , a d v a n t a g e s a n d d i s a d v a n t a g e s , a n d q u i t e c o r r e c t l y s o ; a n d so has t h i s g e n e r a l measure. N o w , t h e o n l y t h i n g I a m s a y i n g is, l e t us t a k e each o f these measures a n d n o t get e x u b e r a n t a b o u t a n y one o f t h e m ; l e t us w e i g h t h e a d v a n t a g e s a n d d i s a d v a n t a g e s o f each o f t h e m ; l e t us r e c o g n i z e t h a t w i t h respect t o a n y o f t h e m t h e a d v a n t a g e s a t a p a r t i c u l a r p o i n t o f t i m e m a y o u t w e i g h t h e d i s a d v a n t a g e s o r v i c e versa, a n d l e t us t r y t o b u i l d a b l e n d e d p r o g r a m w h i c h uses each i n j u s t p r o p o r t i o n , b u t does n o t t r y t o c l a i m — b e c a u s e I t h i n k i t is c l a i m i n g t o o m u c h — t h a t a n y one o f t h e m is t h e c e n t r a l c o n d i t i o n i n g f a c t o r o r t h e c e n t r a l s a l v a t i o n factor. R e p r e s e n t a t i v e PATMAN. M a y I i n t e r r u p t t h e r e f o r j u s t a m o m e n t ? T h i s d i s c u s s i o n has been o n a v e r y h i g h p l a n e — i n f a c t , I c o n s i d e r i t a very h i g h intellectual a n d professional plane. I personally have e n j o y e d i t v e r y m u c h , a n d a m g l a d t h a t t h e d i s c u s s i o n w e n t o n as i t d i d . W e do n o t w a n t t o r e t a r d i t ; w e w a n t # t o encourage i t . W e m u s t h e a r M r . B l o u g h t o o , a n d w e c a n n o t do i t t h i s m o r n i n g , I have conferred w i t h M r . W o l c o t t a n d M r . B o l l i n g , b u t I have not c o n f e r r e d w i t h S e n a t o r D o u g l a s because he has been b u s y a s k i n g t h e questions, b u t w e w o u l d l i k e t o h a v e a m e e t i n g t o m o r o w m o r n i n g here i n t h i s r o o m a n d c o n t i n u e t h i s d i s c u s s i o n a n d h a v e t h e same t w o witnesses b e f o r e us. I f w e d o n o t g e t t h r o u g h t o m o r r o w m o r n i n g w e w i l l c o n t i n u e i t i n t h e a f t e r n o o n . W i l l t h a t be s a t i s f a c t o r y t o y o u ? S e n a t o r DOUGLAS. O h , p e r f e c t l y . M a y I t h a n k the c h a i r m a n f o r the complete i m p a r t i a l i t y and c o u r t e s y w i t h w h i c h he has c o n d u c t e d these h e a r i n g s a n d i n p e r m i t t i n g me t o ask c e r t a i n l y m o r e t h a n m y a r i t h m e t i c a l share o f questions. T h e r e is j u s t one f i n a l t h i n g . R e p r e s e n t a t i v e PATMAN. I t has been v e r y i n t e r e s t i n g a n d e n l i g h t e n i n g t o me. S e n a t o r DOUGLAS. I h a v e j u s t one f i n a l q u e s t i o n , a n d I p r o m i s e t h i s w i l l be t h e end. W h a t are t h e d i s a d v a n t a g e s o f a flexible s y s t e m o f s u p p o r t , s u c h as has been a d o p t e d since l a s t A p r i l ? W h a t h a v e been the disadvantages? I f there are grave disadvantages, perhaps, i t s h o u l d n o t h a v e been a d o p t e d since A p r i l o f 1951, a n d , p e r h a p s , i f t h e r e h a v e n o t been d i s a d v a n t a g e s , t h e q u e s t i o n w i l l come, m i g h t i t n o t h a v e been d e s i r a b l e t o h a v e a d o p t e d t h i s s y s t e m b e f o r e A p r i l o f 1951? M r . KEYSERLING. S h o u l d I a t t e m p t t o a n s w e r t h a t n o w o r s h o u l d I cogitate u p o n t h a t u n t i l t o m o r r o w ? R e p r e s e n t a t i v e PATMAN. Suppose we w a i t u n t i l t o m o r r o w . MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.184 M r . KEYSERLING. I c a n d o i t n o w , b u t I w i l l b e g l a d t o w a i t u n t i l tomorrow. E e p r e s e n t a t i v e PATMAN. T h e r e is a n a m e n d m e n t u p o n t h e F l o o r s o o n a f t e r 12 o ' c l o c k , a n d i t i n v o l v e s t h e S m a l l D e f e n s e P l a n t s C o r poration. M r . KEYSERLING. M r . C h a i r m a n , m a y I m a k e j u s t o n e c o m m e n t ? I w a n t t o m a k e i t p e r f e c t l y clear t o t h e m e m b e r s o f t h e press a n d o t h e r s here t h a t i n s a y i n g t h e r e have been advantages a n d disadvantages i n t h i s I have n o t said t h a t t h i s p a r t i c u l a r step was undesirable. I j u s t w a n t a c a r e f u l a p p r a i s a l a n d a n a l y s i s o f i t a n d , as a m a t t e r o f f a c t , I d o n o t t h i n k w e h a v e h a d e n o u g h e x p e r i e n c e w i t h i t t o be s u r e , b u t I w o u l d like an o p p o r t u n i t y t o m o r r o w to appraise the advantages a n d d i s a d v a n t a g e s ; b u t I d o n o t w a n t t o be m i s u n d e r s t o o d t o h a v e said t h a t I a m a t t h i s p o i n t c o n d e m n i n g t h a t e x p e r i m e n t a l e f f o r t t o see t h e consequences o f a s o m e w h a t d i f f e r e n t p o l i c y f r o m t h e o n e w h i c h pertained before. E e p r e s e n t a t i v e P A T M A N . J u s t a m o m e n t , i f y o u please. S i n c e w e d i d n o t get t o D r . B l o u g h , his p r e p a r e d statement w h i c h has been d i s t r i b u t e d w i l l n o t be released n o w ; i t w i l l n o t be released u n t i l he testifies t o m o r r o w . W i t h o u t o b j e c t i o n w e w i l l s t a n d i n recess u n t i l t o m o r r o w m o r n i n g i n t h i s r o o m i n o p e n session a t 10 o ' c l o c k . ( W h e r e u p o n , a t 1 1 : 50 a. m . , t h e j o i n t c o m m i t t e e recessed t o r e c o n v e n e T h u r s d a y , M a r c h 1 3 , 1 9 5 2 , a t 10 a. m . ) MONETAKY POLICY AND THE MANAGEMENT OF THE PUBLIC DEBT THURSDAY, M A R C H 13, 1952 CONGRESS OF T H E U N I T E D STATES, SUBCOMMITTEE ON G E N E R A L C R E D I T C O N T R O L A N D D E B T M A N A G E M E N T OF T H E J O I N T COMMITTEE ON T H E ECONOMIC REPORT, *Washington,, D. C. T h e s u b c o m m i t t e e m e t , p u r s u a n t t o recess, a t 1 0 : 1 5 o ' c l o c k a. m . , i n r o o m 1301, N e w H o u s e Office B u i l d i n g , R e p r e s e n t a t i v e W r i g h t P a t m a n ( c h a i r m a n of the subcommittee) presiding. Present: Representative P a t m a n (chairman of the subcommittee), Senators Douglas and Flanders, and Representative B o i l i n g . A l s o p r e s e n t : G r o v e r W . E n s l e y , staff d i r e c t o r ; H e n r y M u r p h y , economist f o r the subcommittee; a n d J o h n W . L e h m a n , c l e r k t o the f u l l committee. R e p r e s e n t a t i v e PATMAN. T h e c o m m i t t e e w i l l please come t o o r d e r . M r . K e y s e r l i n g , I w o u l d l i k e t o ask y o u a f e w questions. Y o u m e n t i o n e d y e s t e r d a y t h e e x p a n s i o n o f i n d u s t r y i n 1951, d e s c r i b i n g i t as t h e y e a r o f t h e g r e a t e s t e x p a n s i o n i n h i s t o r y , I believe. STATEMENT OF LEON H. KEYSERLING, CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS—Resumed M r . KEYSERLING. Yes, sir. R e p r e s e n t a t i v e PATMAN. I s n ' t i t a f a c t t h a t a l a r g e p a r t o f t h e m o n e y o r t h e c a p i t a l used f o r e x p a n s i o n i n 1951 was f r o m r e t a i n e d earnings and depreciation? M r . KEYSERLING. Y e s ; a g o o d p a r t o f i t was, M r . C h a i r m a n . As a m a t t e r o f f a c t t h a t has been a p h e n o m e n o n o f t h e w h o l e p o s t - W o r l d W a r I I p e r i o d n o t o n l y i n 1951 b u t i n 1948 w h i c h was a n o t h e r y e a r o f h e a v y business i n v e s t m e n t . T h e p o r t i o n o f i n v e s t m e n t w h i c h was c a r r i e d b y r e t a i n e d e a r n i n g s as a g a i n s t b o r r o w i n g w a s h i g h e r t h a n i n p r e - W o r l d W a r I I p e r i o d s o f r a p i d i n d u s t r i a l expansion. R e p r e s e n t a t i v e PATMAN. O u r c o m m i t t e e m a d e a n i n v e s t i g a t i o n o f t h a t . T o t h e best o f m y r e c o l l e c t i o n a b o u t t h r e e - f o u r t h s o f t h e c a p i t a l e x p e n d i t u r e s came f r o m r e t a i n e d e a r n i n g s a n d d e p r e c i a t i o n a n d obsolescence d e d u c t i o n s . I s n ' t t h a t e n o u g h t o cause some c o n c e r n , M r . Keyserling ? M r . KEYSERLING. T h e C o u n c i l o f E c o n o m i c A d v i s e r s , i n i t s v a r i o u s r e p o r t s c o m m e n t i n g o n t h e i n t e r r e l a t i o n s h i p a m o n g business i n v e s t ment and the price and profit structure and the picture on borrow- 185 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.186 i n g , h a d occasion, I believe f i r s t i n 1948 t o p o i n t o u t t h e t h o u g h t t h a t possibly too large a p o r t i o n of the f u n d s f o r investment were w h a t we m i g h t call financing c u r r e n t l y out of the price structure. T h a t w a s one o f t h e reasons w h y w e t h o u g h t i n 1948, as I r e c a l l , that a somewhat lower price structure and a somewhat lower level of g e n e r a l p r o f i t s a f t e r taxes w o u l d h a v e been c o n s i s t e n t w i t h s u p p o r t i n g a n adequate l e v e l o f business i n v e s t m e n t . E e p r e s e n t a t i v e PATMAN. I n o t h e r w o r d s , w h e n e v e r y o u g e t y o u r c a p i t a l f r o m t h e p r i c e s t r u c t u r e , y o u are c o m p e l l i n g t h e c o n s u m e r s t o p a y y o u r cost o f e x p a n s i o n i n t h e p r i c e s t h a t t h e y p a y f o r p r o d u c t s . T h a t is c o r r e c t , i s n ' t i t ? A n d one w i t n e s s r e f e r r e d t o i t b e f o r e a c o m m i t t e e t h a t I was o n some c o u p l e o f y e a r s ago as costless c a p i t a l , a n d I t h o u g h t i t was a g o o d p h r a s e t h a t expressed e x a c t l y w h a t i t is, costless c a p i t a l . I n o t h e r w o r d s , concerns t h a t are b i g e n o u g h i n t h e p a r t i c u l a r field i n w h i c h t h e y are e n g a g e d t o raise p r i c e s a t w i l l c a n get t h e i r c a p i t a l b y i n c r e a s i n g t h e i r p r i c e s , a n d i n t h a t w a y i t becomes costless c a p i t a l . A n d t h e r e a s o n I a m c o n c e r n e d a b o u t i t is t h a t I d o n o t see h o w a s m a l l independent m e r c h a n t or a s m a l l m a n u f a c t u r e r can possibly h a v e a n e q u a l b r e a k o r a n e q u a l i t y o f o p p o r t u n i t y , w^e w i l l say, i n a n e c o n o m y w h i c h p e r m i t s h i s b i g c o m p e t i t o r across t h e s t r e e t t o g e t h i s m o n e y t h r o u g h a n increase i n p r i c e s , a n d t h e r e b y get costless capital to r u n his operation, when the small independent must go to the market and b o r r o w his money and pay the g o i n g rate of interest o n i t . D o e s n ' t i t occur t o y o u t h a t t h e r e is p o s s i b l y a p r o b l e m t h e r e t h a t s h o u l d receive some a t t e n t i o n ? M r . KEYSERLING. Y e s , t h e r e is a p r o b l e m t h e r e , M r . C h a i r m a n a n d m e m b e r s o f t h e c o m m i t t e e , a n d I h a v e a p r o b l e m here. O n the one h a n d I d o n ' t w a n t t o t a l k t o o m u c h . S o m e o f t h e p a p e r s h a v e s a i d I t a l k t o o m u c h . M a y b e I do. E e p r e s e n t a t i v e PATMAN. T h e c o m m i t t e e is n o t c o m p l a i n i n g . M r . KEYSERLING. G o o d . I n t h e v e r y n a t u r e o f t h i n g s , t h e k i n d o f questions w h i c h y o u are a s k i n g , a n d p r o p e r l y , r e q u i r e c o n s i d e r a b l y analytical attention. I w o u l d like to make a few remarks about the p o i n t y o u raise. t I n t h e f i r s t p l a c e , as I l o o k a t t h e e c o n o m y , I l o o k first a t w h a t I c a l l t h e u l t i m a t e e c o n o m i c consequences. T h e u l t i m a t e e c o n o m i c consequences t h a t a n y e c o n o m y is e n g a g e d i n is t h e p r o d u c t i o n o f goods a n d services a n d t h e a l l o c a t i o n o f resources. Consequently, t a x policy, price policy, credit policy, and other policies are m e r e l y i n s t r u m e n t s ; t h e u l t i m a t e o b j e c t i v e w h i c h w e seek i s — u n d e r a f r e e s y s t e m as w e u n d e r s t a n d i t — t h e m a x i m i z a t i o n o f o u r t e c h n o l o g y a n d o u r m a n p o w e r t o w a r d e x p a n d i n g p r o d u c t i o n accomp a n i e d b y s t a b i l i t y , a l t h o u g h t h a t does n o t m e a n a s t a t i c e c o n o m y . I t means a stable r a t e o f p r o g r e s s such as o u r t e c h n o l o g y c a n a c c o m p l i s h , r a t h e r t h a n f i t s a n d s t a r t s o r booms a n d busts. A n d w e l o o k a t t h e p r o b l e m o f t h e a l l o c a t i o n o f resources, w h i c h means h o w m u c h o f o u r resources are a t a p a r t i c u l a r t i m e g o i n g i n t o business i n v e s t m e n t , c a p i t a l f o r m a t i o n , h o w m u c h is g o i n g i n t o u l t i m a t e c o n s u m p t i o n , h o w m u c h is g o i n g i n t o G o v e r n m e n t p r o g r a m s , f r o m t h e v i e w p o i n t o f h o w w e l l a l l o c a t i o n o f resources a c c o m p l i s h e s t w o purposes. F i r s t , a c t a b l e a n d g r o w i n g e c o n o m y ; a n d , - s e c o n d , certain other n a t i o n a l objectives w h i c h we m u s t serve." MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 187 F o r e x a m p l e , t h e d e f e n s e p r o g r a m does n o t a d d t o a s t a b l e a n d g r o w i n g economy. T h a t is n o t w h y i t is u n d e r t a k e n . I t is one o f t h e burdens we must carry. O n t h e o t h e r h a n d , i n t h e q u e s t i o n o f business i n v e s t m e n t a n d i m m e d i a t e e n j o i n m e n t o f goods a n d services, y o u h a v e t o m a i n t a i n a b a l a n c e . I t seems t o m e t h a t i s t h e c e n t r a l p r o b l e m o f o u r e c o n o m y , because i f i n v e s t m e n t m o v e s t o o f a s t r e l a t i v e t o c o n s u m p t i o n y o u c a n get w h a t some people c a l l o v e r p r o d u c t i o n , a n d w h a t others c a l l u n d e r consumption. I d o n ' t care m u c h about t h e terms, a n d y o u have a n investment boom f o l l o w e d b y a decline. O n t h e other h a n d , i t is possible i n a n economy t o get overconsumpt i o n , w h i c h m e a n s i n t h e final a n a l y s i s t h a t y o u a r e l i v i n g t o o r i c h l y i n the present and not t h i n k i n g enough about b u i l d i n g u p y o u r p l a n t and equipment. N o w , w h a t I look at u l t i m a t e l y i n an economy at any t i m e is w h e t h e r t h o s e r e l a t i v e a c t i v i t i e s seem t o b e b e a r i n g a h e a l t h y r e l a t i o n s h i p t o one another. W h e n y o u come over t o t h e question o f m o n e y flows, w h e t h e r y o u a r e t a l k i n g a b o u t i t i n t e r m s o f i n c o m e w i t h i n the economy—and tax policy and credit policy and price policy a n d wage p o l i c y a l l have i m p a c t u p o n those m o n e y flows—I don't l o o k a t i t f r o m t h e v i e w p o i n t o f t h e m o n e y flows as a t h i n g i n t h e m selves, b u t r a t h e r h o w t h e y seem t o c o n t r i b u t e t o t h e w i s e a n d i n t e l l i g e n t s u p p o r t o f t h e i n t e l l i g e n t use o f o u r resources. N o w , t h e basic q u e s t i o n I w o u l d ask w i t h respect t o t h e q u e s t i o n y o u h a v e r a i s e d i s , first, h a v e w e been g e t t i n g o v e r t h e l a s t f e w y e a r s a sensible a l l o c a t i o n o f resources between business i n v e s t m e n t a n d u l t i mate consumption. A n d , second, h a v e w e b e e n g e t t i n g i t t h r o u g h a series o f t o o l s w h i c h are w i t h i n t h e l i m i t s o f o u r f r e e system t h e best w a y o f g e t t i n g i t , o r w o u l d o t h e r w a y s seem s o m e w h a t b e t t e r , o r does g e t t i n g i t i n t h a t w a y h a v e c e r t a i n c o u n t e r b a l a n c i n g d e f e c t s t o set o f f t h e b e n e f i t s achieved ? N o w , o n t h e first p a r t o f t h e q u e s t i o n , I i n c l i n e t o w a r d t h e v i e w i n g e n e r a l a n d o v e r - a l l , a l t h o u g h t h e r e h a v e b e e n some excesses, t h a t p a r t i c u l a r l y since t h e a d v e n t o f t h e K o r e a n o u t b r e a k w e h a v e n o t b e e n o v e r d e v e l o p i n g o u r p r o d u c t i v e f a c i l i t i e s as a g a i n s t i m m e d i a t e c o n s u m p t i o n , because I t h i n k t h a t i n t h e l o n g r u n t h a t i s t h e w a y t o b u i l d the k i n d of s t r e n g t h t h a t we need t o c a r r y this k i n d of security b u r d e n , and I t h i n k we are g o i n g to have t o c a r r y i t f o r a l o n g , l o n g time. T h e r e f o r e , I w o u l d n o t be p r e p a r e d n o w t o s u p p o r t t h e thesis w h i c h I supported i n other periods of prosperity: that we r a n the risk of h a v i n g o v e r i n v e s t m e n t a t t h e expense o f u n d e r c o n s u m p t i o n . I n f a c t , f r a n k l y I i n c l i n e t o w a r d t h e v i e w — a n d some o f m y f r i e n d s have t h o u g h t t h a t I have l e f t t h e m on t h i s — t h a t over the past year o r t w o a n d o n i n t o t h e n e x t y e a r o r t w o w e h a v e been e n j o y i n g a n d a r e g o i n g t o e n j o y a s o m e w h a t h i g h e r l e v e l o f c o n s u m p t i o n t h a n seems t o me consistent w i t h t h e w o r l d responsibilities t h a t we face, a n d t h e p a r t o f o u r resources t h a t w e o u g h t t o devote t o c a r r y i n g those responsibilities. N o w , w h e n y o u c o m e t o t h e q u e s t i o n t h a t y o u h a v e r a i s e d as t o w h e t h e r t h e m e t h o d b y w h i c h business i n v e s t m e n t has been financed— namely, p a r t l y out of borrowing, p a r t l y out of the price structure, 97308—52 13 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.188 p a r t l y o u t o f a c c u m u l a t e d reserves, a n d p a r t l y o u t o f p r o f i t s — w h e t h e r t h e p o s t - W o r l d W a r I I t r e n d o f f i n a n c i n g a l a r g e r p a r t o f business i n v e s t m e n t o u t o f sources w h i c h f i n a n c e d a s m a l l e r p a r t b e f o r e W o r l d W a r I I is d e s i r a b l e o r u n d e s i r a b l e , I w o u l d n o t h a v e a n y p o s i t i v e j u d g m e n t on t h a t . A n d , even i f I h a d a positive j u d g m e n t , i t m i g h t be w r o n g . I t h i n k i t requires a lot more analytical observation. A s I say, t h e C o u n c i l i n c l i n e d t o w a r d t h e v i e w at least b e f o r e t h e defense emergency t h a t too large a share was being financed out of the c u r r e n t p r i c e s t r u c t u r e a n d o u t o f c u r r e n t prices, a n d t h a t t h e effect o f t h a t p r i o r t o t h e K o r e a n emergency was c o m m e n c i n g t o face us w i t h t h e problem of whether at t h a t h i g h price level relative to the consumer d e m a n d i n t h e e c o n o m y w e w e r e g o i n g t o r u n i n t o one o f t h e m o r e o r less t r a d i t i o n a l p e r i o d s o f o v e r p r o d u c t i o n o r p o s s i b l y m o r e a p p r o »riately s t a t e d u n d e r c o n s u m p t i o n . T h a t w a s o u r v i e w p r i o r t o t h e Korean emergency. N o w , w h e n y o u get i n t o the K o r e a n emergency, i t changes the situat i o n a b i t because t h e w h o l e q u e s t i o n o f t h e b a l a n c e b e t w e e n i n v e s t m e n t and productive equipment and current consumption shifts, f o r the reasons I h a v e g i v e n . S o , I a m n o t so s u r e n o w as I w a s t h e n — f r a n k l y , as I w a s i n 1 9 4 8 — t h a t t h i s is a n u n h e a l t h y t e n d e n c y . I s t i l l i n c l i n e t o w a r d t h e v i e w t a k i n g into account all the factors, i n c l u d i n g the factor o f m a i n t a i n i n g a c l e a r r o a d f o r s m a l l business as w e l l as f o r l a r g e , t a k i n g i n t o a c c o u n t t h a t w e m u s t t h i n k o f t h e f u t u r e as w e l l as t h e p r e s e n t , t h a t I w o u l d l i k e t o see s o m e w h a t m o r e o f t h e f i n a n c i n g o f b u s i n e s s i n v e s t m e n t o u t o f b o r r o w i n g m a d e a v a i l a b l e on t e r m s t h a t c a n be s u p p o r t e d n o t o n l y b y t h e l a r g e concerns b u t b y the small, r a t h e r t h a n f i n a n c i n g too l a r g e a p a r t o f n e w b u s i n e s s needs o u t o f p r i c e i n c r e a s e s a n d a n a d m i n i s t e r e d p r i c e system based o n w h a t the traffic w i l l bear. T h a t is a l o n g answer. E e p r e s e n t a t i v e PATMAN. T h a t is a l l r i g h t , I t h i n k i t is a g o o d a n s w e r , a n d I c a n see o n t h e s i d e o f j u s t i f i c a t i o n t h a t i t i s p o s s i b l e t h a t t h e c o n c e r n s w o u l d n o t be a b l e t o r a i s e t h e c a p i t a l n e c e s s a r y t o h a v e t h e p r o d u c t i o n t h a t is n e e d e d f o r o u r e c o n o m y , u n l e s s w e p e r m i t t e d s o m e t h i n g l i k e t h a t . T h a t i s t o be c o n s i d e r e d t o o . A l t h o u g h i t is i n t h e d i r e c t i o n o f c o n c e n t r a t i o n o f i n d u s t r i a l p o w e r , a n d i n the direction of monopoly eventually; yet i n an emergency, i f y o u cannot get capital otherwise f o r the purposes o f i n d u s t r i a l e x p a n s i o n , possibly i t is justified. I d o n ' t k n o w . I a m seeking t h e answer. B u t n o r m a l l y , u n d e r n o r m a l conditions a n d n o r m a l times, m y horseb a c k o p i n i o n , is t h a t i t is a v e r y d a n g e r o u s t h i n g t o p e r m i t . I t h i n k we should look carefully into it. N o w , I a m a n x i o u s t o h a v e t h i s discussion c o n t i n u e d a b o u t these G o v e r n m e n t bonds. Yesterday Senator D o u g l a s was asking y o u about the good things about pegging the m a r k e t and the bad things about p e g g i n g the m a r k e t . I f Senator D o u g l a s is ready t o continue o n t h a t , I w i l l yield to him. S e n a t o r DOUGLAS. F i r s t , l e t m e s a y , M r . C h a i r m a n , t h a t I t h i n k I t o o k m u c h m o r e t h a n m y a r i t h m e t i c a l share o f the t i m e yesterday. Eepresentative PATMAN. I was g o i n g t o y i e l d t o M r . B o l l i n g , b u t he said he h a d to go t o a committee m a f e w minutes. A n d i t w o u l d be a l l r i g h t , a l t h o u g h I realize t h a t i t is p r o b a b l y M r . B o i l i n g ' s t i m e , f o r y o u t o go ahead. ? MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 189 W e are a l l v e r y m u c h i n t e r e s t e d i n t h e questions t h a t y o u ask a n d the discussion i n general, a n d we are c e r t a i n l y g l a d f o r y o u to cont i n u e , a n d we are d e l i g h t e d t o listen t o you. S e n a t o r DOUGLAS. A t t h e e n d o f t h e session y e s t e r d a y , I a s k e d M r . K e y s e r l i n g i f h e w o u l d s t a t e w h a t h e r e g a r d e d as t h e d i s a d v a n t a g e s o f t h e so-called accord reached a p p r o x i m a t e l y a year ago between the F e d e r a l Eeserve a n d the Treasury. T h a t a c c o r d , as w e a l l k n o w , i n s t e a d o f p r o v i d i n g f o r t h e F e d e r a l Eeserve b u y i n g an u n l i m i t e d q u a n t i t y of Government bonds in order t o m a i n t a i n t h e p r i c e a t a fixed p r i c e o f s l i g h t l y a b o v e p a r , i t p r o v i d e d f o r only l i m i t e d support of the Government bond market, w i t h the u n d e r s t a n d i n g that, i f this required the price of Government bonds t o f a l l o f f s l i g h t l y , t h e n t h a t r i s k s h o u l d be t a k e n . N o w , t h a t was done a n d the t o t a l q u a n t i t y of G o v e r n m e n t bonds h e l d b y t h e F e d . i s n o w s l i g h t l y less t h a n w h a t i t w a s a y e a r a g o . T h e G o v e r n m e n t bonds have n o t f a l l e n off v e r y a p p r e c i a b l y . They h a v e f a l l e n , I b e l i e v e , t o s o m e w h e r e i n t h e 97 ? s. T h e T r e a s u r y i n c r e a s e d t h e i n t e r e s t r a t e o f l o n g - t i m e r e f u n d i n g f r o m 2 y 2 t o 2%. T h e p r i c e l e v e l h a s b e e n r e l a t i v e l y s t a b l e w T i t h some decrease i n w h o l e s a l e p r i c e s , t h o u g h t h e cost o f l i v i n g t o c o n s u m e r s h a s g o n e u p a f e w p o i n t s d u e t o t h e p r i o r i n c r e a s e i n w h o l e s a l e p r i c e s a n d as t h e s e g o o d s h a v e m o v e d d o w n s t r e a m b e e n r e f l e c t e d i n h i g h e r costs t o t h e consumer. I n o t h e r w o r d s , w e h a d a r e v e r s a l o f t h e p o l i c y w h i c h h a d been a d o p t e d b e f o r e . T h i s r e v e r s a l o f p o l i c y h a s n o t been a c c o m p a n i e d b y a n y catastrophic r e d u c t i o n i n the price o f G o v e r n m e n t bonds. I t has been a c c o m p a n i e d b y a d i m i n u t i o n o r b y a recession o f t h e i n c r e a s e i n t h e p r i c e l e v e l , a n d i t h a s also b e e n a c c o m p a n i e d , as y o u w e l l k n o w , b y great i n d u s t r i a l expansion. N o w , i n v i e w o f these a p p a r e n t l y o b v i o u s advantages, I w o n d e r e d i f y o u w o u l d be w i l l i n g t o s t a t e f o r t h e r e c o r d w h a t y o u r e g a r d as t h e d i s a d v a n t a g e s o f t h e flexible s u p p o r t p o l i c y . M r . KEYSERLING. W e l l , i n o r d e r t o d o t h a t , a g a i n I t h i n k I w o u l d l i k e t o ask t h e c o m m i t t e e f o r t h e p r i v i l e g e t o m a k e a r a t h e r systematic a n a l y s i s o f t h i s p r o b l e m , because I t h i n k i t f a l l s i n t o n u m e r o u s p a r t s . O f course, I w o u l d l i k e t o a n s w e r questions a t a n y t i m e i n t h a t analysis, b u t i t is r a t h e r a c o m p l i c a t e d question. E e p r e s e n t a t i v e P A T M A N . I assume; t h a t w i l l be s a t i s f a c t o r y S e n a t o r . S e n a t o r DOUGLAS. C e r t a i n l y . I w i l l t r y n o t t o be c a p t i o u s b y i n t e r r u p t i o n s , a n d a n y q u e s t i o n s t h a t I r a i s e w i l l be f o r c l a r i f i c a t i o n . M r . KEYSERLING. I w i l l t r y t o d o a b e t t e r j o b o n t h e a n s w e r s t h a n I d i d yesterday, Senator. S e n a t o r DOUGLAS. Y O U d i d a l l r i g h t . M r . KEYSERLING. F i r s t o f a l l , I w a n t t o c l a r i f y t h e p o s i t i o n w h i c h I y e s t e r d a y t o o k . I w a n t t o m a k e a d i f f e r e n t i a t i o n based o n one o f t h e questions w h i c h Senator D o u g l a s asked me. Senator D o u g l a s asked m e w h e t h e r p r i o r t o t h e accord I h a d reco m m e n d e d , o r t h e C o u n c i l h a d r e c o m m e n d e d , a c h a n g e i n t h e p o l i c y as c o m m o n l y u n d e r s t o o d before the accord. I stated t h a t I h a d m a d e n o such recommendation, a n d I stated t h a t i f the decision h a d been i n m y hands I w o u l d n o t have made the change. I w a n t t o m a k e t w o t h i n g s c l e a r i n c o n n e c t i o n w i t h t h a t , because i t has been subject t o some m i s i n t e r p r e t a t i o n i n t h e press, i n a d v e r t e n t l y . I n t h e first p l a c e , t h a t s t a t e m e n t o n m y p a r t y e s t e r d a y , a n d r e p e a t e d MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.190 today, was n o t h i n g new. T h e Council of Economic Advisers twice a year publishes reports e m b o d y i n g its views on the economic situation a n d w h a t policies a n d w h a t changes i n policies s h o u l d at p a r t i c u l a r t i m e s be c o n s i d e r e d b y t h e P r e s i d e n t a n d t h e Congress. N o w , i t is a m a t t e r o f r e c o r d t h a t i n t h e J a n u a r y 1951 R e p o r t o f t h e Council of Economic Advisers, 2 months, approximately, before the a c c o r d , w e d i d n o t r e c o m m e n d t h a t c h a n g e , so t h a t w h a t I s a i d y e s t e r d a y a n d w h a t I said t o d a y is s i m p l y r e p e a t i n g t h e f a c t , t h e k n o w n f a c t , t h a t the C o u n c i l o f E c o n o m i c A d v i s e r s was n o t a m o n g those advoc a t i n g t h i s change. S e n a t o r DOUGLAS. M r . K e y s e r l i n g , w o u l d i t b e u n f a i r o f m e t o a s k another question ? M r . KEYSERLING. N O q u e s t i o n i s e v e r u n f a i r . S e n a t o r DOUGLAS. W e l l , t h e y s o m e t i m e s a r e . W o u l d y o u b e w i l l i n g t o state w h e t h e r y o u f a v o r e d t h e c o n t i n u a t i o n o f t h e p o l i c y w h i c h t h e F e d e r a l Reserve t h e n followed, b u y i n g an u n l i m i t e d q u a n t i t y of bonds i n o r d e r t o m a i n t a i n the p r i c e at the interest rates t h e n c h a r g e d ? M r . KEYSERLING. I f i t does n o t seem a d i s t i n c t i o n w i t h o u t a d i f f e r ence o r t h e s p l i t t i n g o f a h a i r , I t h i n k t h e r e i s a d i f f e r e n c e b e t w e e n n o t a d v o c a t i n g at a p a r t i c u l a r t i m e a basic c h a n g e i n p o l i c y a n d f e e l i n g necessarily t h a t t h e t h e n p e r t a i n i n g p o l i c y is essential t o be maintained. T h e d i f f e r e n c e i s t h a t m y g e n e r a l v i e w i s t h a t i n a n e c o n o m y as c o m p l e x as o u r s t h e w e i g h t s h o u l d b e o n t h e s i d e o f d o i n g w h a t h a s b e e n d o n e , u n l e s s a m o d e r a t e l y s t r o n g case c a n be m a d e f o r m a k i n g a c h a n g e . T h e r e f o r e , I w o u l d n o t w a n t t o s a y t h a t , because w e h a d n o t r e c o m m e n d e d t h i s p a r t i c u l a r c h a n g e , w e h a d o u r h e a r t s o r m i n d s set a g a i n s t i t ; t h a t w e b e l i e v e d i t w o u l d be d a n g e r o u s t o m a k e i t . I w o u l d s a y , r a t h e r , t h a t w e d i d n o t r e c o m m e n d i t because, o n t h e c o m p l e x i o n of t h e s i t u a t i o n as w e t h e n a n a l y z e d i t , w e d i d n o t r e g a r d i t as o f c e n t r a l i m p o r t a n c e . W e r e g a r d e d o t h e r t h i n g s as o f m o r e i m p o r t a n c e , a n d w e c o n c e n t r a t e d o u r fire o n w h a t w e t h o u g h t w e r e the important things. N o w , I t h i n k I can illustrate that a little f u r t h e r by f u r t h e r clarification. I t h i n k t h a t p o s i t i o n is e n t i r e l y consistent w i t h w h a t I s a i d y e s t e r d a y at t h e e n d o f th% discussion a n d w h i c h w a s n o t c o m p l e t e l y understood i n a l l quarters. The fact that I d i d not and that the Council d i d not before this a c c o r d a f f i r m a t i v e l y r e c o m m e n d i t s h o u l d n o t be i n t e r p r e t e d t o m e a n t h a t I a m n o w t a k i n g the position t h a t the accord was undesirable; a n d t h a t d i s t i n c t i o n , I t h i n k , i s so c l e a r t h a t i t n e e d s n o f u r t h e r elaboration. I n the first place, i t was s o m e t h i n g new, a n d s o m e t h i n g n e w w i l l a l w a y s h a v e d i f f e r i n g o p i n i o n s p r i o r t o i t s t e s t i n g as t o w h a t i t s c o n sequences a r e g o i n g t o be. A t n o t i m e subsequent t o t h e accord h a v e I expressed a v i e w chall e n g i n g on over-all balance the f a c t t h a t u p t o n o w I a m w i l l i n g t o concede t h a t t h e F e d e r a l Reserve B o a r d a n d t h e T r e a s u r y , i n w o r k i n g o u t t h i s accord, n o t o n l y d i d w h a t t h e y t h o u g h t w a s best, b u t I a m n o t p r e p a r e d t o say t h a t w h a t t h e y d i d w a s w r o n g . O n the question o f w h e t h e r w h a t t h e y d i d was r i g h t , I s i m p l y say t h a t the p e r i o d w h i c h has elapsed between t h e n a n d n o w is n o t conclusive o n t h a t p o i n t , a n d I w i l l come t o t h a t f u r t h e r i n t h e course o f some o f t h e o t h e r t h i n g s I h a v e t o say. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 191 S e n a t o r DOUGLAS. Y O U a r e g o i n g t o l i s t some o f t h e d i s a d v a n t a g e s w h i c h affect M r . KEYSERLING. I a m c o m i n g t o t h a t , S e n a t o r . I j u s t w a n t t o m a k e m y p o s i t i o n c l e a r : t h a t m y p o s i t i o n n o w o n t h e accord is t h a t I a m not prepared to challenge w h a t the Treasury or the Federal Reserve B o a r d d i d ; a n d , i f I w e r e p r e p a r e d m o r a l l y t o challenge i t , I w o u l d do it. I f I have a n y defect, i t is m y w i l l i n g n e s s t o state w h a t I t h i n k , a n d I a m n o t b o u n d b y a n y e d i c t f r o m a n y b o d y as t o f o l l o w i n g a n y p a r t i c u l a r l i n e . I a m n o t n o w , a n d I n e v e r h a v e been. B r o a d l y s p e a k i n g , I h o p e t h e c o m m i t t e e w i l l assume t h a t t h e v i e w s w h i c h I have expressed p r i v a t e l y — a n d I t h i n k I a m e n t i t l e d t o express v i e w s p r i v a t e l y t o t h e P r e s i d e n t — a r e i n accord w i t h t h e v i e w s w h i c h have appeared i n o u r p u b l i s h e d reports. T h a t is t h e w a y I h a v e a l w a y s b e e n , a n d a t t h e t i m e w h e n I c a n ' t be t h a t w a y I w o n ' t b e h e r e . T h e r e m a y b e o t h e r r e a s o n s w h y I w o n ' t be h e r e . N o w , c o m i n g t o the question t h a t Senator D o u g l a s has raised about m y attitude t o w a r d the advantages and disadvantages, I h a d not i n tended yesterday t o compress t h a t w i t h i n the l i m i t s o f an analysis o f t h e advantages a n d disadvantages o f t h i s p a r t i c u l a r accord. A l t h o u g h I do n o t w a n t to duck, I w i l l get i n t o i t , b u t I d i d n o t feel t h a t I c o u l d discuss t h a t question i n fairness t o m y s e l f w i t h o u t p o i n t i n g o u t t h a t t h e b a s i c issue I h a v e r a i s e d i s n o t w i t h r e s p e c t t o t h e advantages a n d d i s a d v a n t a g e s o f t h i s m i l d change w h i c h has been t r i e d f o r a short t i m e , b u t r a t h e r t h e question o f h o w effective t h i s p a r t i c u l a r device o f m o n e t a r y p o l i c y can be i n seeking t h e objectives sought f o r i t , w h a t i t can do, w h a t i t can't do, w h a t its l i m i t a t i o n s are, w h a t i t s d a n g e r s are. A n d m o s t i m p o r t a n t l y , n o t t h a t i t s h o u l d n o t be u s e d a m o n g o t h e r t h i n g s , b u t t h a t I believe t h a t i n t h e c u r r e n t s i t u a t i o n i t is one o f he r e l a t i v e l y m o d e r a t e a n d r e l a t i v e l y m i n o r t h i n g s w h i c h m a y be u s e d a m o n g m a n y d e a l i n g w i t h the subject b o t h of stability a n d g r o w t h . T h e second p o i n t I w a n t t o m a k e i n a g e n e r a l w a y , a n d t h e n I w i l l g e t d o w n t o specifics, i s t h a t w e c a n n o t i n q u e s t i o n i n g , i n a n a l y z i n g t h e e f f e c t o f a p o l i c y — w e h a v e t o b e a r t h e s e t h i n g s i n m i n d : first, i t s objective. I t a k e i t t h a t t h e s t a t e d o b j e c t i v e o f t h i s p a r t i c u l a r p o l i c y as e x p r e s s e d b y S e n a t o r D o u g l a s — a n d l e t m e see i f I g e t i t c o r r e c t l y — i s t o c o n t r a c t t h e base, i f n o t t o c o n t r a c t t o h o l d l e v e l , t o h o l d l e v e l r a t h e r t h a n to permit the expansion of S e n a t o r DOUGLAS. A S a m a t t e r o f f a c t , I h a v e b e e n t r y i n g t o k e e p m y o w n views somewhat out of this. I d i d not t h i n k t h a t we were e x a m i n i n g m y views. I a m not saying t h a t we should contract the economy. I d i d n o t say t h a t t h e F e d e r a l Reserve s h o u l d sell G o v e r n m e n t bonds a n d reduce the money supply. I m e r e l y questioned w h e t h e r the F e d e r a l Reserve s h o u l d have exp a n d e d t h e m o n e y s u p p l y f r o m J u n e 1950 t o M a r c h 1 9 5 1 as m u c h as it did. I d o n ' t believe i t should have, a n d I w o u l d l i k e t o p o i n t out t h a t w h e n t h e a c c o r d t h e n w e n t i n t o effect, t h e u n l i m i t e d p u r c h a s e o f G o v e r n m e n t b o n d s s t o p p e d a n d n o c a t a s t r o p i c consequences seem t o h a v e been i n c u r r e d . ^ I w a n t t o say i t is n o t m y v i e w t h a t y o u s h o u l d enforce contract i o n , a r e d u c t i o n i n prices, a n d create u n e m p l o y m e n t . T h a t is n o t m y contention at all. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.192 I t is n a t u r a l t h a t w e s h o u l d n o t e x p a n d m o n e y s u p p l y f a s t e r t h a n the index o f physical p r o d u c t i o n , t a k i n g i n t o account t h e velocity o f c r e d i t , a n d t h e a i m is t h a t so f a r as p o s s i b l e w e s h o u l d h a v e a s t a b l e p r i c e l e v e l so t h a t s a v i n g s c a n p r o c e e d w i t h i n a s t a b l e p r i c e l e v e l a n d n o t o u t o f t h e i n f l a t e d p r o f i t s c o m i n g f r o m p r i c e increases. M r . KEYSERLING. S e n a t o r , I t h i n k t h a t i f I h a d c o m p l e t e d t h e u n d u l y l o n g sentence u p o n w h i c h I h a d s t a r t e d i t w o u l d h a v e b e c o m e c l e a r t h a t I w a s g o i n g t o s t a t e t h e p r o p o s i t i o n as y o u s t a t e d i t , b u t b e t h a t as i t m a y — a n d I d o n o t w a n t t o i n t r u d e y o u r v i e w s i n t o m y d i s c u s s i o n o f m y v i e w s , so l e t m e t r y t o r e s t a t e i t i n g e n e r a l t e r m s . T h e argument advanced f o r the u t i l i z a t i o n of this p a r t i c u l a r policy u n d e r d i s c u s s i o n seems t o m e t o r u n as f o l l o w s : T h a t b y r e p r e s s i n g , whether by preventing the expansion or by c u t t i n g back, the availa b i l i t y o f a base f o r l o a n s , t h a t w i l l h a v e a n effect u p o n t h e v o l u m e o f l o a n s ; t h a t t h e v o l u m e o f loans, i n t u r n , has a n effect u p o n t h e p r i c e l e v e l ; t h a t i t is a desirable o b j e c t i v e t o h o l d the p r i c e level, o r at least t o p r e v e n t i t f r o m m o v i n g f o r w a r d i n r a p i d inflation. A n d t h a t consequently t h i s p o l i c y u n d e r discussion is a basic device f o r s t a b i l i z i n g prices. M o r e specifically, i n the p a r t i c u l a r p e r i o d between the m i d d l e o f 1950 a n d t h e a c c o r d o f M a r c h 1951, t h a t i f t h i s d e v i c e h a d b e e n u s e d , p r e s u m a b l y i n a b o u t t h e c o m b i n a t i o n t h a t i t was used since t h e n o r i n some m o r e e x t r e m e c o m b i n a t i o n , i t w o u l d have stabilized prices, o r conversely, t h a t the m a i n reason f o r t h e p r i c e increase between t h e m i d d l e o f 1950 o r l a t e 1950 a n d M a r c h 1 9 5 1 w a s t h e f a i l u r e t o use t h i s p a r t i c u l a r d e v i c e f o r these p a r t i c u l a r reasons. N o w , I t h i n k b r o a d l y speaking, t h a t is a b o u t t h e p o s i t i o n o f those w h o a d v o c a t e t h i s p o l i c y a n d i t s e x t e n s i v e use. N o w , I s a y i n c o n n e c t i o n w i t h t h a t t h e f o l l o w i n g c o n s i d e r a t i o n s h a v e t o be t a k e n i n t o a c c o u n t : F i r s t , does t h e a d v o c a t e d p o l i c y a c c o m p l i s h t h e o b j e c t i v e sought ? N o w , t h a t i n i t s e l f i s a d i f f i c u l t q u e s t i o n , because w e h a v e a c o m plex economy w i t h m a n y factors operating. I do n o t w a n t to take the time of the committee w i t h the examination of a chart w h i c h shows t h a t unless we resort t o i n d e p e n d e n t analysis p e r i o d s c a n be s h o w n w h e r e y o u h a v e h a d converse m o v e m e n t s o f prices a n d e x p a n s i o n o f c r e d i t o r p r i c e s a n d e x p a n s i o n o f b a n k r e s e r v e s , a n d so f o r t h a n d so o n . B u t I w i l l say t h a t y o u have periods w h e n d i f f e r e n t conclusions are i n d i c a t e d , i f y o u t a k e these d i f f e r e n t f a c t o r s . S o y o u h a v e t o r e s o r t t o i n d e p e n d e n t a n d a d d i t i o n a l a n a l y s i s besides t h e m e r e j u x t a p o s i t i o n o f t w o e v e n t s t o p r o v e o r d r a w a j u d g m e n t a b o u t cause a n d e f f e c t . T h e r e f o r e , i t is a d i f f i c u l t p r o b l e m . B u t t h e r e a r e o t h e r p r o b l e m s besides. T h e o t h e r p r o b l e m s a r e t h e s e , a n d I w i l l state t h e p r o b l e m s a n d t h e n come b a c k t o t h e f a c t u a l analysis o f them. T h e other problems are these: F i r s t , even i f i t is a d m i t t e d t h a t a p a r t i c u l a r economic p o l i c y w i l l a c c o m p l i s h , a n d does a c c o m p l i s h , t h e s t a t e d o b j e c t i v e , a n d e v e n i f i t i s a d m i t t e d t h a t t h e s t a t e d o b j e c t i v e is s o u n d , y o u h a v e t h e q u e s t i o n o f w h e t h e r i t g e n e r a t e o t h e r consequences w h i c h m a y n o t be so desirable. I w a n t t o a d d r e s s some a t t e n t i o n t o t h a t , b u t first I w a n t t o g i v e s o m e s p e c i f i c e x a m p l e s o f t h a t i n t h e field o f e c o n o m i c p o l i c y , w h i c h I d i d i n m y opening statement. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 193 C e r t a i n l y , since t a x a t i o n is repressive, y o u c o u l d c o m p l e t e l y r e s t r a i n a n i n f l a t i o n , o r a t least I t h i n k y o u c o u l d , b y m a k i n g t a x e s so h e a v y t h a t people just d i d not have enough money to force u p the price o f a v a i l a b l e s u p p l i e s , so t h a t i f o n e w e r e l o o k i n g s i m p l y a t cause a n d e f f e c t i n a s i t u a t i o n w h e r e t h e cause a n d effect is, I t h i n k , as c l e a r as i n t h i s case, a n d i f o n e w e r e l o o k i n g s o l e l y a t t h e o b j e c t i v e o f r e s t r a i n i n g p r i c e rises, one c o u l d say, W h y go t h r o u g h a l l t h i s b o t h e r o f a n i n f i n i t e c o m p l e x i o n o f e c o n o m i c p o l i c i e s w h i c h n e e d t o be r e c o n c i l e d and understood by the public? W h y n o t j u s t slap o n enough taxes t o do it. W e l l , t h e f a i r l y o b v i o u s a n s w e r , i t seems t o m e , i s t h a t y o u h a v e t o a s k t h e q u e s t i o n w h a t o t h e r consequences w o u l d r e s u l t , a n d w h a t a r e the other objectives of economic policy. T h e o t h e r consequences o r r e s u l t w o u l d be t h a t t h e t a x e s a t t h a t p o i n t , a l t h o u g h T a m n o t p r e p a r e d t o say at e x a c t l y w h a t p o i n t , w o u l d b e c o m e so r e p r e s s i v e t h a t t h e y w o u l d n o t o n l y h o l d d o w n p r i c e s , t h e y would hold down initiative, they would hoid down public support, they w o u l d h o l d d o w n the g r o w t h of production, they w o u l d h o l d d o w n t h e s u p p o r t o f t h e p e o p l e f o r t h e G o v e r n m e n t p o l i c i e s as a w h o l e , w h i c h is absolutely basic. N o w , I do not w a n t to make this tedious b y g i v i n g other examples, b u t I c o u l d take almost any single element i n economic p o l i c y . T a k e p r i c e c o n t r o l . I f y o u w a n t t o stop p r i c e rises, w h y n o t h a v e a p r i c e - c o n t r o l l a w w h i c h i s so t o u g h a n d w h i c h h a s so m a n y e n f o r c e m e n t agencies t h a t i t j u s t says p r i c e s c a n ' t i n c r e a s e . I t h i n k t h a t i s technically feasible. I t h i n k i f a l l t h e resources o f t h e G o v e r n m e n t w h i c h are b e i n g p u t i n t o a v a r i e t y of economic p r o g r a m s were p u t solely i n t o price control, y o u could hold the price level t h a t way, but you w o u l d have other consequences. I n t h e first p l a c e , I d o n o t b e l i e v e t h a t a n a b s o l u t e l y f r o z e n p r i c e s y s t e m is consistent w i t h those a d j u s t m e n t s w i t h i n o u r economy o n t h e p r o d u c t i o n side a n d o n t h e resource side t h a t we m u s t r e t a i n , unless w e are p r e p a r e d to accompany price c o n t r o l b y the k i n d o f absolute c o n t r o l o f m a n p o w e r a n d m a t e r i a l s a n d o t h e r t h i n g s , w h i c h is a completely c o n t r o l l e d system, w h i c h I a m against. I n o t h e r w o r d s , y o u h a v e t o a l l o w some fluidity i n t h e p r i c e s t r u c t u r e so y o u c a n ' t use p r i c e c o n t r o l e x c e s s i v e l y because i t h a s a t t e n d a n t consequences w h i c h o u t w e i g h i t s b e n e f i t w h e n y o u g e t t o a c e r t a i n p o i n t . S o y o u h a v e t o c o n s i d e r n o t o n l y w h e t h e r p o l i c y A assures r e s u l t A , b u t w h a t p o l i c y A does w i t h r e s p e c t t o r e s u l t B , r e s u l t C , a n d result D i f i t is p u s h e d f a r e n o u g h t o a c c o m p l i s h r e s u l t A . That is t h e second p o i n t . T h e t h i r d p o i n t I m a k e is t h a t i n a d d i t i o n to a l l o f t h a t a f t e r d e f i n i n g w h a t y o u are t r y i n g to do, y o u have to consider n o t o n l y whether the policy w i l l accomplish y o u r result, but whether i n view o f i t s c o l l a t e r a l consequences t h e r e a r e o t h e r w a y s o f a c c o m p l i s h i n g t h e r e s u l t , a t l e a s t as t o p o i n t o f e m p h a s i s , w h i c h seem t o g i v e m o r e hope or m o r e p r o m i s e based o n experience a n d a n a l y s i s — a n d w e m u s t use b o t h — i n v i e w o f t h e w h o l e s i t u a t i o n . N o w , the only m a i n p o i n t that I a m m a k i n g about this p a r t i c u l a r phase o f m o n e t a r y p o l i c y is t h a t I ask t h e c o m m i t t e e t o l o o k a t a l l o f t h o s e phases o f t h e p r o b l e m . MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.194 I f , a f t e r l o o k i n g at a l l o f those phases o f t h e p r o b l e m , i t comes u p w i t h a c l e a r a n d c r y s t a l finding, A , t h a t t h e p r i c e s t a b i l i z a t i o n bet w e e n F e b r u a r y of last year a n d n o w is m a i n l y a t t r i b u t a b l e t o t h i s p o l i c y ; B , that the policy i f continued for that purpose and pushed m u c h f u r t h e r — a n d I t h i n k i t w o u l d n e e d t o be t o a c h i e v e t h e s a m e p u r p o s e u n d e r a d i f f e r e n t set o f f a c t s — h a s n o c o l l a t e r a l e f f e c t m e a s u r e d a g a i n s t o t h e r p o l i c i e s , t h e n I w o u l d say t a k e t h i s p o l i c y a n d g o to t o w n w i t h it. B u t , o n t h e o t h e r h a n d , i f i t is s h o w n y o u need a m i x t u r e o r v a r i e t y o f policies o n t h i s s i t u a t i o n , a n d i f y o u t r y t o ascribe a w e i g h t t o t h e m o n t h e basis o f analysis, t h e n I t h i n k t h e c o m m i t t e e o u g h t t o consider that. W i t h that foundation, m y general approach, w h i c h I t h i n k cannot be as c o n f i n i n g as a s i m p l e v i g o r o u s d e m o n s t r a t i o n o f a p a r t i c u l a r p o l i c y m o v i n g f r o m A to B t o C—because there are o t h e r policies at p l a y a n d o t h e r objectives at p l a y — l e t us l o o k at i t m o r e specifically. F i r s t o f a l l , w h a t are t h e objectives o f economic p o l i c y t h a t w e are t r y i n g t o accomplish ? I s t i l l f e e l , first o f a l l , t h a t m o s t i m p o r t a n t f o r a p e r i o d o f p a r t i a l m o b i l i z a t i o n over an e n d u r i n g p e r i o d of t i m e where we are a l l o c a t i n g 18 t o 25 p e r c e n t o f o u r n a t i o n a l p r o d u c t t o a n o n e c o n o m i c p u r p o s e , to a w a s t e f u l economic purpose, to a w a s t e f u l purpose i n terms o f economics, a l t h o u g h w e m u s t do i t f o r reasons o f n a t i o n a l s e c u r i t y , b u t i t is n o t e c o n o m i c a l l y p r o d u c t i v e , i t is a t r u e b u r d e n u p o n t h e e c o n o m y , as d i s t i n g u i s h e d f r o m a b u r d e n s i m p l y m e a s u r e d b y d o l l a r s o r b y p r i c e changes, the defense p r o g r a m is a t r u e b u r d e n u p o n t h e e c o n o m y , i t i s m o s t i m p o r t a n t t o r e a l i z e as t o t h e d e f e n s e p r o g r a m t h a t i n t h e final a n a l y s i s i t c a n b e s u p p o r t e d o u t o f n o t h i n g b u t p r o duction. O n l y p r o d u c t i o n can support guns and tanks and airplanes a n d t h e o t h e r t h i n g s w e have t o do. S e n a t o r DOUGLAS. W o u l d y o u r e s e n t a n i n t e r r u p t i o n ? M r . KEYSERLING. NO, sir. S e n a t o r DOUGLAS. D i d I u n d e r s t a n d y o u t o s a y t h a t p r i c e c h a n g e s were not a b u r d e n on the economy ? M r . KEYSERLING. N O ; I d i d n o t s a y t h a t . I s a i d t h a t i n t h e final analysis t h e b u r d e n o f t h e defense p r o g r a m o n t h e economy is p r i m a r i l y t h e resources i t d i v e r t s f r o m o t h e r purposes. S e n a t o r DOUGLAS. Y O U d i d n o t m e n t i o n p r i c e c h a n g e s ? M r . KEYSERLING. I t h i n k I m a d e some r e f e r e n c e t o i t , s i m p l y t o indicate that I would S e n a t o r DOUGLAS. Y O U say a n o v e r - a l l i n c r e a s e i n p r i c e s i s a b u r d e n o n the economy ? M r . KEYSERLING. S o m e t i m e s i t i s a n d s o m e t i m e s i t i s n o t , b u t I w a n t t o d i s c u s s t h a t i n some d e t a i l , S e n a t o r . I t h i n k s o m e t i m e s i t is a n d sometimes i t is n o t . T h a t is j u s t t h e p o i n t I w a n t t o m a k e . N o w , therefore, i n the c o m p l e x i o n of the economic policies t h a t w e use a t t h i s t i m e , w e m u s t p l a c e h e a v y w e i g h t o n t h i s p r o d u c t i v e factor. N o w , l e t u s set a g a i n s t t h i s p r o d u c t i v e f a c t o r t h e t h e o r y o f t h i s p a r t i c u u l a r t y p e o f m o n e t a r y c o n t r o l as I u n d e r s t a n d i t , a n d n o t o n l y as I u n d e r s t a n d i t , b u t i f I h a v e n o t m i s q u o t e d some o f t h e p e o p l e , s u c h as G o l d e n w e i s e r a n d S p r o u l a n d o t h e r s , w h o s e v i e w s I set f o r t h i n m y statement, I w o u l d t h i n k there is r a t h e r c o m m o n consent o n this point. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 195 T h e general t h e o r y o f t h i s p a r t i c u l a r device is t h a t t h r o u g h , I d o n ' t l i k e t o s a y c o n t r a c t i n g , because t h e S e n a t o r says h e do$s n o t w a n t t o c o n t r a c t , h e w a n t s t o r e s t r a i n , b u t l e t us say t h r o u g h p l a c i n g c e r t a i n r e s t r a i n t s o n t h e m o n e y s u p p l y y o u u l t i m a t e l y b r i n g a b o u t less p r e s sure o n prices. H o w e v e r , i t seems t o m e t h a t t h e a u t h o r i t i e s a r e i n r e l a t i v e a g r e e m e n t t h a t i n order t o b r i n g about t h a t pressure o n prices, I m e a n a d o w n w a r d pressure or a r e s t r a i n i n g pressure— S e n a t o r DOUGLAS. A g a i n I w a n t t o p r o t e s t . I a m n o t s a y i n g t h a t t h e p r i c e level s h o u l d necessarily f a l l . M y p o i n t is s i m p l y t h a t w e should t r y to prevent i t f r o m rising appreciably; that the stability of t h e p r i c e level s h o u l d be t h e goal. M r . KEYSERLING. I w o u l d a g r e e w i t h t h a t , a l t h o u g h I a m n o t q u i t e s u r e t h a t s o m e aspects o f t h e p r i c e s t r u c t u r e d o n o t n e e d t o f a l l i f w e a r e g o i n g t o g e t some h a r m o n i o u s S e n a t o r DOUGLAS. I a m s p e a k i n g o f t h e g e n e r a l p r i c e l e v e l . M r . KEYSERLING. T h e g e n e r a l p r i c e l e v e l . A n y h o w , w h e t h e r y o u speak o f i t i n terms o f p r e v e n t i n g i t f r o m r i s i n g or f r o m r e s t r a i n i n g i t , t h e g e n e r a l t h e o r y n o n e t h e l e s s i s , as I u n d e s t a n d i t a n d as t h e a u t h o r i t i e s seem t o c o n c u r , t h a t f o r t h i s p a r t i c u l a r d e v i c e t o be u s e d t o w a r d t h a t p u r p o s e , i t h a s t o be p u s h e d t o t h e e x t e n t w h e r e i t r e s u l t s i n a general decline i n p r o d u c t i o n and employment. S e n a t o r DOUGLAS. I m u s t p r o t e s t t h a t y o u m i g h t h a v e p i c k e d o u t q u o t a t i o n s f r o m M r . S p r o u l a n d D r . G o l d e n w e i s e r t o t h i s effect, b u t c e r t a i n l y t h a t is n o t m y p o s i t i o n n o r is i t I t h i n k a g e n e r a l p o s i t i o n o f t h e advocates o f m e r e l y l i m i t i n g t h e purchase o f G o v e r n m e n t b o n d s b y t h e F e d e r a l Reserve. I w a n t t o m a k e i t clear t h a t those are n o t m y positions a n d I do n o t believe t h e y represent f a i r l y or i n any representative f a s h i o n the p o i n t o f v i e w o f t h o s e w h o seek t o s t a b i l i z e t h e g e n e r a l p r i c e l e v e l t h r o u g h credit and monetary control. M r . KEYSERLING. L e t ' s i l l u s t r a t e t h a t b y a t e s t , S e n a t o r . Could t h e pressures u p o n t h e p r i c e level i n t h e p e r i o d between t h e m i d d l e o f 1950 a n d M a r c h 1951, t h e p e r i o d t o w h i c h y o u c o r r e c t l y d i r e c t a t t e n t i o n , c o u l d t h e pressures u p o n p r i c e levels d u r i n g t h a t p e r i o d have been r e s t r a i n e d m o r e t h a n t h e y w e r e r e s t r a i n e d w i t h o u t r e d u c i n g e i t h e r t h e level o f c o n s u m p t i o n , t h e l e v e l o f business i n v e s t m e n t , t h e level of employment, the level of expansion i n p l a n t a n d facilities, a n d so f o r t h ? S e n a t o r DOUGLAS. A r e y o u g o i n g t o a r g u e t h a t q u e s t i o n o r m e r e l y raise i t ? M r . KEYERSLING. I t w o u l d b e r a t h e r n o v e l t o m e because I h a v e n ' t observed i t i n the commentators' S e n a t o r DOUGLAS. A r e y o u s a y i n g t h a t a s t a b l e g e n e r a l p r i c e l e v e l w o u l d r e s t r a i n c o n s u m p t i o n , w o u l d r e s u l t i n u n e m p l o y m e n t , a n d so f o r t h ? I w o u l d be m u c h i n t e r e s t e d i f t h a t is y o u r p o i n t o f v i e w . M r . KEYSERLING. N O ; t h a t i s n o t w h a t I a m a r g u i n g . I t h i n k a stable p r i c e l e v e l is consistent w i t h t h a t , b u t I say t h a t u n d e r t h e expansion of consumption and investment and inventory accumulat i o n , i n o t h e r w o r d s t h e r a p i d l y e x p a n d i n g use o f r e s o u r c e s w h i c h a c t u a l l y t o o k p l a c e d u r i n g t h a t p e r i o d , I d o n o t see h o w p r i c e i n c r e a s e s c o u l d h a v e b e e n p r e v e n t e d w i t h o u t r e s t r a i n i n g some o f t h o s e r e s o u r c e uses. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.196 S e n a t o r DOUGLAS. L e t m e a s k y o u t h i s f u r t h e r q u e s t i o n . T o t h e degree t h a t these a d d e d purchases w e r e m a d e b y d r a w i n g o n s a v i n g s , t h a t c o u l d h a v e proceeded outside o f t h e c o m m e r c i a l b a n k i n g system. T h e q u e s t i o n i s as t o w h e t h e r w e s h o u l d h a v e a d d e d t o t h e s e o t h e r f a c t o r s t h i s increase o f $10 b i l l i o n i n c o m m e r c i a l loans. W o u l d t h e i n c r e a s e i n p r i c e s h a v e b e e n as g r e a t i f t h e i s s u a n c e o f b a n k loans h a d been m o r e r e s t r a i n e d , o n t h e p r e s u m p t i o n t h a t t h e i s s u a n c e o f b a n k l o a n s w o u l d h a v e been m o r e r e s t r a i n e d i f t h e r e s e r v e s h a d n o t m o u n t e d a n d t h e reserves w o u l d n o t h a v e m o u n t e d i f t h e F e d eral Reserve System h a d n o t purchased the bonds ? I a m n o t c o n t e n d i n g t h a t g e n e r a l flow 6 f m o n e y s o l e l y d e t e r m i n e s i n d i v i d u a l prices. I a m n o t r u l i n g o u t t h e possibility o f d r a w i n g on accumulated savings. I a m m e r e l y s a y i n g t h a t t h e t o t a l s u p p l y o f b a n k l o a n s does a f f e c t the general level o f prices, a n d t h a t w h e n y o u e x p a n d b a n k loans, t h a t has a n effect o n t h e g e n e r a l p r i c e level i f i t is n o t a c c o m p a n i e d b y a c o r r e s p o n d i n g increase i n p h y s i c a l p r o d u c t i o n . M r . KEYSERLING. S e n a t o r , i n t h e p e r i o d u n d e r r e v i e w , m y d e p a r t u r e f r o m y o u i s n o t as g r e a t as y o u t h i n k i t i s , b u t i t i s i m p o r t a n t i n o n e v i t a l respect. I am not a r g u i n g that the general expansion of credit or the general expansion of bank loans under the conditions p r e v a i l i n g d u r i n g t h a t p e r i o d d i d n o t h a v e a n y effect u p o n prices. W h a t I a m s a y i n g is t h a t • the o n l y w a y a restraint u p o n t h a t factor could have h a d an apprecia b l e r e s u l t u p o n t h e p r i c e l e v e l w o u l d be i f i t w e r e c a r r i e d f a r e n o u g h t o r e s t r a i n t h e d e m a n d o f t h e people* f o r t h e a c q u i s i t i o n o f r e s o u r c e s . S e n a t o r DOUGLAS. L e t m e ask y o u t h i s q u e s t i o n M r . KEYSERLING. L e t m e i l l u s t r a t e t h a t a l i t t l e b i t . L e t ' s i l l u s t r a t e t h a t i n v a r i o u s areas. S u p p o s e — n o t s u p p o s e because i t a c t u a l l y h a p p e n e d . I n t h e p e r i o d b e t w e e n N o v e m b e r 1950, a n d e a r l y 1951, p e o p l e i n t h e N e w Y o r k a r e a f e l t t h a t because t h e y h a d h e a r d t h a t t h e r e w a s g o i n g t o b e — a n d t h i s is n o t a l i m i t e d i l l u s t r a t i o n ; i t c a n be g e n e r a l i z e d i n t o a l o t o f w h a t was h a p p e n i n g — f e l t t h a t i n the v i e w o f t h i s Chinese i n t e r vention and the thought that it m i g h t result i n this or that or the other t h i n g , a n d t h e i r v i v i d recollection o f past shortages, t h e y flooded t h e d e p a r t m e n t s t o r e s a n d s t a r t e d b u y i n g m o r e p i l l o w cases a n d m o r e b e d sheets, a n d t h a t o n a b r o a d scale w a s a n i m p o r t a n t f a c t o r i n t h e p a r t i c u l a r k i n d o f price inflation spurt w h i c h occurred at t h a t time. N o w i n t h e absence o f p r i c e c o n t r o l , I s a y t h a t i n t h e s h o r t r u n — a n d I a m t a l k i n g here m o s t l y about s h o r t - r u n consequences—whether t h o s e p e o p l e r a n i n t o b u y t h o s e p i l l o w cases b y d r a w i n g d o w n u p o n t h e i r s a v i n g s , o r w h e t h e r t h e y r a n i n t o b u y t h e m b y s a v i n g less, o r w h e t h e r t h e y r a n i n t o b u y t h e m because o f a n e x p a n s i o n o f c r e d i t , i s n o t t h e p r i m e f a c t o r i n t h e p r i c e increases i n those areas a t those t i m e s . T h e y w e r e t r y i n g t o b u y m o r e p i l l o w cases. N o w a l l I a m s a y i n g is t h a t i f y o u t r y t o trace t h r o u g h h o w a cont r a c t i o n i n the general m o n e t a r y s u p p l y t h r o u g h t h i s device w o u l d i m p a c t u p o n t h o s e sources o f i n f l a t i o n , a l l I a m s a y i n g i s t h a t f o r i t t o d o t h a t — a n d I d o n o t d e n y t h a t t h e r e is a c o n n e c t i o n a n d t h a t i t could do t h a t — y o u w o u l d have to push it f a r enough to accomplish c e r t a i n o t h e r t h i n g s at t h e same t i m e , a n d t h a t o n n e t balance t h e y w o u l d h a v e been undesirable i n t h a t p e r i o d . MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 197 S e n a t o r DOUGLAS. M r . K e y s e r l i n g , I a m n o t b l a m i n g y o u f o r t h i s because I k n o w I i n t e r j e c t e d i n y o u r a r g u m e n t once o r t w i c e , b u t t h e o r i g i n a l q u e s t i o n w a s d i r e c t e d t o t h e p e r i o d since t h e a c c o r d . W h a t b a d results i n y o u r o p i n i o n has t h a t accord h a d ? W h a t disa d v a n t a g e s h a v e o c c u r r e d as t h e r e s u l t o f i t ? I w o n d e r i f y o u w o u l d be w i l l i n g t o t u r n y o u r a t t e n t i o n t o t h i s p e r i o d subsequent t o A p r i l 1951 a p e r i o d o f a l m o s t a y e a r u n d e r w h i c h we have operated w i t h t h i s accord. T h a t was the question t h a t I hoped y o u w o u l d answer yesterday. M r . KEYSERLING. Y e s , s i r ; b u t t h e r e i s a d i r e c t c o n n e c t i o n b e t w e e n the two. S e n a t o r DOUGLAS. T i m e i s s o m e w h a t l i m i t e d , a n d h a l f a n h o u r h a s passed since y o u s t a r t e d t h e discussion. Y o u have n o t yet come t o i t . I s a y i t i s n o t e n t i r e l y y o u r f a u l t because I h a v e t w i c e i n t e r r u p t e d , b u t i f we c o u l d at least declare a truce f o r the t i m e b e i n g on t h e p e r i o d p r i o r t o t h e a c c o r d , w o u l d y o u be w i l l i n g t o m o v e t o t h e p e r i o d since t h e a c c o r d ? M r . KEYSERLING. Y e s , s i r ; b u t l e t u s c o n s i d e r t h i s , S e n a t o r , a n d I w a n t t o say t h a t I h o p e y o u w i l l n o t t a k e e x c e p t i o n t o t h i s . F r a n k l y I t h i n k — a n d t h i s is consistent w i t h t h e w h o l e a r g u m e n t I a m m a k i n g — t h a t one o f the disadvantages o f the accord—and, I w a n t to emphasize again t h a t I a m n o t saying on net balance i t was u n d e s i r a b l e — i s t h e e x t e n t t o w h i c h o n a N a t i o n - w i d e basis p e o p l e h a v e c l a i m e d f o r i t m o r e t h a n i t has accomplished. N o w I t h i n k t h a t i s a v e r y i m p o r t a n t issue o f e c o n o m i c p o l i c y , a n d y o u c a n ' t s e p a r a t e t h a t f r o m t h e c l a i m t h a t t h e absence o f t h e a c c o r d b e f o r e F e b r u a r y w a s responsible f o r t h e p r i c e increases b e f o r e February. S e n a t o r DOUGLAS. E e m e m b e r t h i s i s p o l i t i c a l l y M r . KEYSERLING. NO, s i r ; I a m n o t t a l k i n g p o l i t i c a l l y . S e n a t o r DOUGLAS. I w a n t t o use i t as a n i l l u s t r a t i o n . W e always r u n i n t o t h i s q u e s t i o n w h e n a n y c h a r a c t e r comes u p f o r a p p r a i s a l . W e m a y s a y , " W e l l , h e i s n o t as g o o d as h e is c r a c k e d u p t o b e , " b u t t h a t is n o t m y question. W h a t p o s i t i v e f a u l t s are there i n the m a n a n d w h a t are t h e p o s i t i v e f a u l t s i n t h i s accord ? T h a t is t h e question 1 a m asking. M r . KEYSERLING. S e n a t o r , i f y o u a r e w i l l i n g t o say t h a t t h e a c c o r d h a s n o t been S e n a t o r DOUGLAS. O h , n o , n o , n o t a t a l l . I a m m e r e l y s a y i n g I w a n t t o k n o w w h a t are the positive f a u l t s o f the accord, w h a t e v i l You consequences o r b a d consequences h a v e f o l l o w e d i n i t s w a k e . said i t h a d advantages a n d i t h a d disadvantages. W e l l , n o w I w a n t t o hear the disadvantages. I have yet to hear any disadvantages. M r . KEYSERLING. S e n a t o r , I d o n o t w a n t t o be i n a n y r e s p e c t c a p t i o u s a b o u t t h i s , b u t I c a n n o t a v o i d t h e consequence o f t h i s o b s e r v a t i o n : T h a t i f I have r h e u m a t i s m and a doctor tells me t h a t d r i n k i n g a glass o f w a t e r w i l l cure m e o f t h a t r h e u m a t i s m , a n d I d r i n k a glass o f w a t e r , a n d l a t e r I f e e l b e t t e r , I d o n o t t h i n k t h a t t h e sole q u e s t i o n i s w h e t h e r t h e glass o f w a t e r d i d me a n y h a r m . T h e r e is also t h e q u e s t i o n o f w h e t h e r t h a t d o c t o r s h o u l d be a l l o w e d t o g o a r o u n d t h e c o u n t r y s a y i n g t h a t d r i n k i n g a glass o f w a t e r is a cure f o r r h e u m a t i s m , a n d I t h i n k t h a t t h a t is a n essential p a r t o f t h i s discussion. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.198 S e n a t o r DOUGLAS. W a i t a m i n u t e , y o u s a i d t h a t t h e a c c o r d h a d advantages a n d disadvantages. M r . KEYSERLING. I t h i n k o n e o f t h e d i s a d v a n t a g e s S e n a t o r DOUGLAS. W h a t a r e t h e d i s a d v a n t a g e s ? M r . KEYSERLING. I t h i n k o n e o f t h e d i s a d v a n t a g e s — a n d I w i l l c o m e t o o t h e r s — i s t h a t i t has l e d people t o say o n t h e basis o f a j u x t a p o s i t i o n o f e v e n t s w h i c h a r e n o t cause a n d e f f e c t , t h a t t h i s p o l i c y i s t h e c e n t r a l core of price stability i n this k i n d of m o b i l i z a t i o n period. N o w t h a t h a s v e r y i m p o r t a n t consequences, because i t h a s a b e a r i n g u p o n t h e extent t o w h i c h w e r e l y u p o n t a x p o l i c y , i t has a b e a r i n g u p o n t h e e x t e n t t o w h i c h we r e l y u p o n p r i c e a n d wage controls, i t has a b e a r i n g u p o n t h e e x t e n t t o w h i c h w e r e l y u p o n select c o n t r o l s , a n d t h e r e f o r e i t has a b e a r i n g oil t h e w h o l e t h i n g . S o I say a g a i n t h a t t h e q u e s t i o n o f w h e t h e r o r n o t t h e a c c o r d h a s l e d some p e o p l e t o o v e r a p p r a i s e its significance has a d i r e c t b e a r i n g u p o n t h e v a l u e o f t h e accord. S e n a t o r DOUGLAS. A r e t h e r e a n y p o s i t i v e d i s a d v a n t a g e s ? M r . KEYSERLING. C o m i n g t o t h e p o s i t i v e d i s a d v a n t a g e s , I w o u l d l i k e to a m p l i f y i t a l i t t l e b i t b y saying t h a t I have never said basically t h a t this p a r t i c u l a r accord h a d demonstrated positive disadvantages, b u t t h a t to c a r r y t h e accord to t h e p o i n t where i t w o u l d have t o be c a r r i e d t o o p e r a t e as a m a j o r s t a b i l i z i n g f a c t o r , i t w o u l d h a v e p r o f o u n d disadvantages. S e n a t o r DOUGLAS. H a s i t h a d a n y d i s a d v a n t a g e s t o d a t e ? M r . KEYSERLING. W e l l , i t h a s h a d t h e one I m e n t i o n e d , w h i c h I t h i n k is significant. S e n a t o r DOUGLAS. A s i d e f r o m t h a t ? M r . KEYSERLING. I t h i n k t h a t i t e x e r c i s e d some u n s t a b i l i z i n g a n d u n c e r t a i n influences. S e n a t o r DOUGLAS. I n w h a t r e s p e c t ? M r . KEYSERLING. W e l l , I t h i n k i t c a u s e d i n t e r e s t r a t e s t o m o v e upward. S e n a t o r DOUGLAS. I t h i n k t h a t i s t r u e . T h e interest r a t e has risen f r o m %y 2 t o 2% p e r c e n t o n G o v e r n m e n t s , a n d t h e r e h a s b e e n a n u p w a r d m o v e m e n t i n interest rates generally. D o y o u r e g a r d t h i s increase o f i n t e r e s t r a t e s as s u f f i c i e n t l y s e r i o u s so t h a t t h e a c c o r d s h o u l d b e discontinued ? M r . KEYSERLING. N O ; I h a v e a t n o t i m e t a k e n t h e p o s i t i o n t h a t t h e a c c o r d s h o u l d be d i s c o n t i n u e d . S e n a t o r DOUGLAS. T O w h a t e x t e n t w o u l d t h e p o l i c y h a v e t o b e c a r r i e d t o h a v e o t h e r i n j u r i o u s effects besides a r i s e i n t h e i n t e r e s t rates ? M r . KEYSERLING. S e n a t o r , I w o u l d first h a v e t o d i s c u s s t h e q u e s t i o n t o w h a t e x t e n t i t w o u l d h a v e t o be c a r r i e d t o h a v e b e n e f i c i a l e f f e c t s , because t h e b a s i c p o i n t I a m m a k i n g S e n a t o r DOUGLAS. T h e n , d o y o u t h i n k i t h a s h a d a n y b e n e f i c i a l effects? M r . KEYSERLING. I d o n o t t h i n k t h a t i t h a s p r o v a b l e a n d s u b s t a n t i a l b e n e f i c i a l e f f e c t e x c e p t t h a t o t h e r t h i n g s b e i n g e q u a l , t o use a p h r a s e w h i c h y o u used yesterday, Senator, other t h i n g s b e i n g equal, I t h i n k i t is v e r y m u c h better f o r t h e T r e a s u r y a n d t h e F e d e r a l Reserve B o a r d t o be a p p e a r i n g t o t h e p u b l i c i n t h e l i g h t o f r e c o n c i l i n g t h e i r v i e w s t h a n t o be i n conflict. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 199 S e n a t o r DOUGLAS. I n o t h e r w o r d s , t h e a d v a n t a g e s h a v e b e e n p s y c h o l o g i c a l r a t h e r t h a n economic. M r . KEYSERLING. W e l l , I d o n o t t h i n k t h e r e i s a n y c l e a r l i n e b e t w e e n t h e t w o . I w o u l d say t h a t t h a t is p e r f e c t l y l o g i c a l w i t h m y g e n e r a l p o s i t i o n , because s i n c e I s a y t h a t these m i l d e r v a r i a t i o n s i n t h i s p a r t i c u l a r p o l i c y do n o t h a v e v e r y m u c h effect o n t h e economy, I w o u l d m u c h r a t h e r n o t see t h e F e d e r a l R e s e r v e B o a r d a n d t h e T r e a s u r y fighting a b o u t a n issue w h i c h seems t o m e n o t so i m p o r t a n t as m a n y o t h e r e c o n o m i c issues w i t h w h i c h w e n o w h a v e t o d e a l . S e n a t o r DOUGLAS. O n b a l a n c e h a v e t h e b e n e f i c i a l effects b e e n less t h a n the disadvantages i n policy ? M r . KEYSERLING. I w o u l d be i n c l i n e d t o s a y t h a t u p t o t h e p r e s e n t t i m e t h e b e n e f i c i a l effects h a v e o u t w e i g h e d t h e d e t r i m e n t a l effects. S e n a t o r DOUGLAS. T h a t i s , t h e h a r m o n y b e t w e e n t h e F e d e r a l R e serve B o a r d a n d t h e T r e a s u r y has been m o r e i m p o r t a n t t h a n t h e r i s e i n interest rates ? M r . KEYSERLING. U p t o t h e p r e s e n t t i m e I w o u l d say o n b a l a n c e t h a t t h a t w o u l d be m y view. S e n a t o r DOUGLAS. S u p p o s e y o u c o u l d h a v e o b t a i n e d h a r m o n y b y t h e F e d e r a l R e s e r v e B o a r d a d o p t i n g t h e p o l i c y o f t h e T r e a s u r y so t h a t y o u w o u l d have h a d h a r m o n y w i t h the diametrically opposite policy. N o w , i n t h a t event y o u w o u l d have h a d h a r m o n y plus stability i n i n t e r e s t r a t e s , a n d so, t h e r e f o r e , a c c o r d i n g t o y o u r r e a s o n i n g , i t w o u l d h a v e been s t i l l m o r e b e n e f i c i a l , w o u l d i t n o t , because y o u w o u l d h a v e added to the l o w e r interest rates the advantage o f h a r m o n y . M r . KEYSERLING. I a m n o t s a y i n g S e n a t o r DOUGLAS. B y t h e m e t h o d o f l o g i c t h a t seems t o f o l l o w . You say t h a t t h e d i s a d v a n t a g e o f t h e r e c o r d is t h a t i t has raised i n t e r e s t rates, a n d I g r a n t y o u t h a t . I t h i n k t h a t s h o u l d be g r a n t e d . It increased interest rates s l i g h t l y . T h a t is a disadvantage. B u t y o u t h i n k t h a t is o u t w e i g h e d b y t h e h a r m o n y between the F e d e r a l Reserve B o a r d a n d t h e T r e a s u r y . N o w , i f the accord h a d n o t been concluded, i f t h e Reserve h a d c o n t i n u e d i t s p r e v i o u s p o l i c y o f b u y i n g u n l i m i t e d q u a n t i t i e s o f G o v e r n m e n t bonds, l e t us g r a n t t h a t t h e interest rate w o u l d p r o b a b l y r e m a i n l o w e r , a n d y o u w o u l d also h a v e h a d h a r m o n y ; so I w o u l d t h i n k y o u m i g h t a r g u e t h a t i n s t e a d o f o f f s e t t i n g o n e a g a i n s t t h e o t h e r , t h e t w o w o u l d be a d d e d a n d w o u l d r e i n f o r c e each other. T h e o n l y conclusion I can d r a w f r o m y o u r statement is t h a t i t w o u l d h a v e been s t i l l b e t t e r i f t h e a c c o r d h a d n o t b e e n r e a c h e d . M r . KEYSERLING. I h a v e n o t s a i d t h a t , a n d I d i d n o t t h i n k S e n a t o r DOUGLAS. I t f o l l o w s i m p l i c i t l y f r o m t h e c o n t e n t s o f y o u r argument. M r . KEYSERLING. N O ; y o u d r a w t h a t c o n c l u s i o n o n l y b e c a u s e — I t h i n k there are c e r t a i n l i m i t s o n l o g i c i n t h i s s i t u a t i o n , too, f o r reasons t h a t I gave yesterday. Y o u can f o l l o w logic w i t h i n a n a r r o w f r a m e w o r k w h i c h precludes f r o m consideration a l o t of things t h a t o u g h t t o be i n t h a t f r a m e w o r k b e f o r e y o u s t a r t u s i n g l o g i c . L o g i c i s s i m p l y a tool. S e n a t o r DOUGLAS. W o u l d i t n o t h a v e b e e n b e t t e r n o t t o h a v e h a d t h e accord ? M r . KEYSTERLING. S e n a t o r , I h a v e s a i d o n b a l a n c e l o o k i n g a t i t n o w , t h a t I t h i n k t h e a c c o r d h a s h a d some n e t b e n e f i t s . MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.200 S e n a t o r DOUGLAS. S i m p l y because t h e T r e a s u r y finally g a v e i n ? M r . KEYSERLING. I d i d n o t s a y s i m p l y because o f t h a t . S e n a t o r DOUGLAS. Y O U s a i d t h e h a r m o n y o u t w e i g h e d t h e r a i s e i n t h e interest rate. T h e h a r m o n y was p r o d u c e d b y one side y i e l d i n g t o t h e o t h e r . U p t o M a r c h i t h a d been t h e R e s e r v e w h i c h h a d y i e l d e d t o the Treasury. Subsequent to M a r c h i t was the T r e a s u r y w h i c h yielded t o t h e F e d e r a l Reserve. M r . KEYSERLING. S e n a t o r , m y b a s i c p o s i t i o n i s t h a t i f o n e l o o k s o n l y a t t h e c h a n g e s w h i c h h a v e t h u s f a r been m a d e , m y a n a l y s i s i s t h a t t h e i r effect u p o n t h e e c o n o m y h a s n o t b e e n l a r g e . N o w o b v i o u s l y y o u disagree w i t h t h a t . W e have been over t h a t ground. Y o u t h i n k t h a t i t h a d a p r o f o u n d effect u p o n t h e p r i c e l e v e l between the m i d d l e of 1950—I mean not h a v i n g t h a t accord—bet w e e n t h e m i d d l e o f 1950 a n d F e b r u a r y o f 1951. I d o n o t t h i n k so. Y o u t h i n k i t has h a d a p r o f o u n d effect u p o n t h e p r i c e l e v e l b e t w e e n M a r c h o f last year a n d now. I d o n o t t h i n k so. N o w w e c a n g o o v e r t h a t o n a m o r e f a c t u a l basis. B u t t h e m a i n p o i n t I a m m a k i n g is t h a t , s i n c e I d o n o t t h i n k t h a t t h e m i l d p e r m u t a t i o n between the situation before the accord a n d the s i t u a t i o n a f t e r t h e a c c o r d has h a d t h i s p r o f o u n d effect u p o n t h e e c o n o m y , t h e n I t h i n k t h e r e is r o o m f o r s a y i n g t h a t o n e o f t h e m a j o r c o n c e r n s h e r e u p t o t h i s p o i n t is w h e t h e r t w o agencies o f G o v e r n m e n t , o f p u b l i c p o w e r , i f you do not w a n t to call i t Government, concerned w i t h the policy w h i c h u p t o t h i s p o i n t a n d w i t h i n t h e s e l i m i t s does n o t seem t o m e t o h a v e h a d a n y g r e a t effect one w a y o r t h e o t h e r , s t a n d b e f o r e t h e p e o p l e i n t r y i n g t i m e s as a b l e o r u n a b l e t o r e c o n c i l e t h e i r d i f f e r e n c e s . A n d I a m g l a d t h e y have reconciled t h e i r differences, a n d I t h i n k i t is a net f a c t o r o f a f a v o r a b l e f a c t o r . S e n a t o r DOUGLAS. M a y I i n t e r r u p t ? D o I u n d e r s t a n d y o u r posit i o n t h a t the l i m i t e d purchase versus u n l i m i t e d purchase o f G o v e r n m e n t b o n d s has v e r y l i t t l e effect o n t h e g e n e r a l p r i c e level? M r . KEYSERLING. I t d e p e n d s o n t h e q u a n t i t y o f p u r c h a s e a n d t h e t i m e o f p u r c h a s e a n d t h e t e r m s o f p u r c h a s e a n d w h a t else i s h a p p e n i n g in the economy at the time. S e n a t o r DOUGLAS. I a m r e f e r r i n g t o o n e p e r i o d i n w h i c h t h e R e s e r v e p u r c h a s e d $ 3 % b i l l i o n o f G o v e r n m e n t b o n d s f r o m J u n e 1950 t o M a r c h 1951. A s I u n d e r s t a n d i t i n y o u r j u d g m e n t t h a t d i d n o t h a v e m u c h effect o n p r i c e level. M r . KEYSERLING. T h a t i s m y j u d g m e n t . S e n a t o r DOUGLAS. A n d f r o m t h e p e r i o d A p r i l 1 9 5 1 t o M a r c h 1 9 5 2 t h e F e d e r a l Reserve B o a r d has n o t purchased a d d i t i o n a l q u a n t i t i e s o f G o v e r n m e n t bonds, i n f a c t i t has s l i g h t l y d i m i n i s h e d its h o l d i n g s . D o y o u say t h a t has n o t h a d a s t e a d y i n g effect o n p r i c e s , t h a t t h e r e is no i n d i c a t i o n t h a t t h e increase i n prices d u r i n g t h e p r e v i o u s p e r i o d , a n d the r e l a t i v e s t a b i l i t y o f prices d u r i n g t h e l a t t e r p e r i o d h a v e been t i e d to the b o n d purchase p o l i c y o f the Reserve? M r . KEYSERLING. I t h i n k t h a t i n b o t h p e r i o d s i t h a s h a d s o m e v e r y s l i g h t effect. S e n a t o r DOUGLAS. B u t n o t a p p r e c i a b l e ? M r . KEYSERLING. T a k i n g t h i s l a s t p e r i o d first, I t h i n k t h a t t h e b a s i c r e a s o n s f o r p r i c e s t a b i l i t y s i n c e M a r c h 1951, I w o u l d p l a c e t h e m i n this order S e n a t o r DOUGLAS. I a m t r y i n g — w e l l , I w i l l l e t y o u c o m p l e t e y o u r statement. I do not w a n t to i n t e r r u p t . MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 2 0 1 M r . KEYSERLING. I w o u l d s a y t h a t s i n c e M a r c h 1 9 5 1 t h e b a s i c r e a s o n s f o r p r i c e s t a b i l i t y h a v e been t h e f o l l o w i n g . F i r s t , while there was a n i n f l a t i o n a r y s p u r t caused l a r g e l y b y i n v e n t o r y a c c u m u l a t i o n a n d b y r a p i d l y a d v a n c i n g consumer b u y i n g a f t e r the Chinese intervention S e n a t o r DOUGLAS. A r e w e s p e a k i n g o f t h e p e r i o d J u l y 1950 t o M a r c h 1951 n o w ? M r . KEYSERLING. I a m s p e a k i n g o f t h e p e r i o d f r o m M a r c h 1 9 5 1 u n t i l the current time. S e n a t o r DOUGLAS. W h i c h i s a p e r i o d o f c o m p a r a t i v e p r i c e s t a b i l i t y . M r . KEYSERLING. Y e s , s i r ; a n d I w a s s t a r t i n g t o s a y t h a t w h i l e t h e r e h a d been t h i s i n f l a t i o n a r y s p u r t a f t e r t h e Chinese i n t e r v e n t i o n , nonetheless i t is m y v i e w n o t o n l y n o w b u t was m y r e c o r d e d v i e w g o i n g b a c k t o t h e first K o r e a n a s s a u l t a n d t o t h e s e c o n d , t h a t i n t h e l o n g p u l l o v e r t h e n e x t f e w y e a r s as o f f r o m t h e n t h e b a s i c size o f t h e d e f e n s e p r o g r a m a n d i t s basic pace i n a p e r i o d o f p a r t i a l m o b i l i z a t i o n , r e l a t e d t o t h e t h e n productive power of our economy, the supplies then available i n our economy, a n d the likelihood of productive expansion over the n e x t y e a r a n d a h a l f , wTas s u c h t h a t i n t h e l o n g r u n t h e i n f l a t i o n a r y p r e s s u r e s t r a i n o f t h e d e f e n s e p r o g r a m w o u l d n o t be g r e a t . N o w t h a t i s w 7 hat h a s h a p p e n e d a n d t h a t i s t h e m a i n f a c t o r . You a r e a s k i n g w h y p r i c e s h a v e b e e n s t a b i l i z e d since M a r c h o f 1951. S e n a t o r DOUGLAS. N o w w o u l d i t be i m p r o p e r f o r m e t o a s k , w h e t h e r t h e s t a b i l i t y o f p r i c e s h a s o r h a s n o t been a i d e d t h e n b y t h e c e s s a t i o n o f purchase o f bonds b y the F e d e r a l Eeserve ? M r . KEYSERLING. I t h a s b e e n a i d e d , b u t i f I w e r e t o l i s t t h e e i g h t reasons w h i c h I w o u l d ascribe f o r p r i c e s t a b i l i t y , I w o u l d l i s t t h a t seventh or eighth, not first. S e n a t o r DOUGLAS. T h e n I t a k e i t y o u r p o s i t i o n i s t h a t c h a n g e s i n t h e m o n e y s u p p l y i n these last t w o p e r i o d s at least have h a d v e r y l i t t l e e f f e c t u p o n t h e p r i c e l e v e l , t h a t i s f r o m J u l y 1950 t o M a r c h 1951, a p e r i o d o f a d v a n c i n g p r i c e s w h e n one p o l i c y w a s f o l l o w e d , l e a d i n g t o a n e x p a n d e d m o n e y s u p p l y t h a t i s , a n d t h e p e r i o d A p r i l 1 9 5 1 - M a r c h 1952 w h e n prices have r e m a i n e d r e l a t i v e l y stable a n d F e d e r a l Eeserve h o l d i n g s o f securities have r e m a i n e d r e l a t i v e l y stable ? M r . KEYSERLING. I f I w e r e l i s t i n g t h e e i g h t r e a s o n s f o r r a p i d p r i c e i n c r e a s e s b e t w e e n t h e K o r e a n a g g r e s s i o n a n d F e b r u a r y o f 1951, a n d t h e reasons f o r t h e r e l a t i v e p r i c e s t a b i l i t y between F e b r u a r y 1951 a n d t h e c u r r e n t t i m e , i f I w e r e l i s t i n g t h e s i x r e a s o n s o r t h e e i g h t reasons f o r t h a t , I w o u l d l i s t t h i s p a r t i c u l a r reason i n the degree t h a t t h a t p o l i c y w a s u s e d as a b o u t s e v e n t h o r e i g h t h , a n d n o t as first. S e n a t o r DOUGLAS. T h e issue i s v e r y c l e a r l y j o i n e d t h e n . E e p r e s e n t a t i v e P A T M A N . W o u l d y o u i n d i c a t e w h a t t h e seven o r e i g h t are? M r . KEYSERLING. I w o u l d s a y first t h e b a s i c r e l a t i o n s h i p b e t w e e n o u r p r o d u c t i v e c a p a c i t y a n d t h e d e m a n d s u p o n o u r resources. S e n a t o r DOUGLAS. M a y I i n t e r j e c t t h e r e . T h e i n d e x o f u n e m p l o y m e n t w a s 5.2 p e r c e n t t h e 1st o f J u l y 1950, a n d i t f e l l t o 3.4 p e r c e n t i n F e b r u a r y 1951, o r a decrease o f 1.8 p e r c e n t , so t h a t t h e r e w a s a t r a n s fer of idle labor. ^ I t i s a t p r e s e n t I b e l i e v e 3.4 p e r c e n t , f o r F e b r u a r y 1952, so t h a t i t h a s since r e m a i n e d constant. N o w I g r a n t t h a t possibly a price increase d i d p l a y a l a r g e f a c t o r i n t h e r e d u c t i o n o f u n e m p l o y m e n t b y 1.8 p e r c e n t . MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.202 M y p o i n t i s t h i s : T h a t t h e i n c r e a s e i n p r o d u c t i o n w a s a b o u t 10 p e r c e n t a n d t h a t t h e r e f o r e t h e g r e a t e r u t i l i z a t i o n o f i d l e r e s o u r c e s accounts f o r o n l y a s m a l l f r a c t i o n o f t h e increase i n p h y s i c a l p r o d u c t i o n . M r . KEYSERLING. NO ; I d i d n o t s a y t h a t t h e g r e a t e r u t i l i z a t i o n o f i d l e resources w a s t h e m a i n f a c t o r i n t h e increase i n t o t a l p r o d u c t i o n . I t h i n k p a r t o f t h e increase i n t o t a l p r o d u c t i o n has been d u e t o i n creased p r o d u c t i v i t y . S e n a t o r DOUGLAS. W h y w a s t h e i n c r e a s e i n p r o d u c t i v i t y d e p e n d e n t u p o n t h e increase- i n t h e m o n e y s u p p l y ? T h a t i s , c o u l d n o t t h e i n creased p r o d u c t i v i t y have o c c u r r e d w i t h o u t such a l a r g e o r r a p i d expansion of the money supply ? I t h i n k t h a t w e n e e d t o be w a r y o f a s s u m i n g t h a t because p r o d u c t i v i t y increases, i t i n c r e a s e s because o f g o v e r n m e n t a l p o l i c y . N o w t h e t r u t h o f t h e m a t t e r i s t h e r e h a s been t h i s l o n g t i m e o f i n crease i n p o r d u c t i v i t y a t t h e r a t e o f 3 p e r c e n t a y e a r m o r e o r less i r respective of Government policy. G o v e r n m e n t p o l i c y m a y d a m p e n i t d o w n , o r m a y accelerate i t s o m e w h a t , b u t t h e l o n g - t i m e t r e n d proceeds i n R e p u b l i c a n a d m i n i s t r a t i o n s , as w e l l as i n D e m o c r a t i c a d m i n i s t r a t i o n s a n d so o n , a n d I t h i n k f r e q u e n t l y t h e r e i s a n e r r o r i n a s s u m i n g t h a t because p r o d u c t i v i t y has a d v a n c e d , i t is due t o g o v e r n m e n t a l p o l i c y . S o m e t i m e s i t i s l i k e t h e fly o n t h e a x l e o f t h e c h a r i o t w h e e l i n t h e R o m a n c h a r i o t race w h o at t h e end o f t h e race g o t d o w n off t h e w h e e l a n d said, "See w h a t a l o n g distance I have traveled." M r . KEYSERLING. W e l l n o w , S e n a t o r , I d i d n o t say t h a t t h e i n c r e a s e i n p r o d u c t i v i t y was due to Government policy, although I t h i n k t h a t has been a f a c t o r i n i t , a n d I d i d n o t say t h a t t h e increase i n p r o d u c t i v i t y was due t o t h e increase i n t h e m o n e y s u p p l y . I s i m p l y s t a r t e d t o e n u m e r a t e t h e reasons w h y I t h i n k t h e r e h a s been r e l a t i v e p r i c e s t a b i l i t y f r o m M a r c h 1951 u n t i l t h e c u r r e n t t i m e , a n d I do t h i n k t h a t the first and most i m p o r t a n t of those reasons—and I was just parenthetically stating w h y the increased p r o d u c t i o n h a d t a k e n p l a c e — i s t h a t i n M a r c h 1951 t h e g e n e r a l l e v e l o f p r o d u c t i o n h a d been raised v e r y f a r above w h a t i t was at t h e t i m e o f the Korean outbreak. T h e r e h a d been e x p a n s i o n i n basic p r o d u c t i v e c a p a c i t y , t h e r e h a d been expansion o f various other k i n d s o f o u t p u t , a n d i f y o u w a n t t h e f i g u r e i n u n i f o r m prices o f t h e changes i n t h e gross n a t i o n a l product d u r i n g that period, I w i l l read them. S e n a t o r DOUGLAS. I h a v e t h e m h e r e . I w o u l d p r e f e r n o t t o u s e g r o s s n a t i o n a l p r o d u c t because t h e r e a r e a l l k i n d s o f i n a d e q u a c i e s i n t h a t figure. I prefer to take the index of physical production. L e t t h e r e c o r d show there was a n increase i n t h e F e d e r a l Reserve i n d e x o f i n d u s t r i a l p r o d u c t i o n f r o m 200 i n J u n e , 198 i n J u l y t o 2 1 £ i n M a r c h 1951, o r a n i n c r e a s e o f a b o u t 10 p e r c e n t , b u t n e a r l y a l l o f this occurred i n the single m o n t h of A u g u s t — w h e n there was a j u m p of a p p r o x i m a t e l y 6 percent. M r . KEYSERLING. W e l l , a n y h o w I w o u l d s a y t h e f i r s t a n d f o r e m o s t f a c t o r i n t h e p r i c e s t a b i l i t y o v e r t h e p a s t 12 m o n t h s h a s b e e n t h e i n crease i n p r o d u c t i o n , m e a s u r i n g t h e p r o d u c t i v e l e v e l d u r i n g t h a t p e r i o d w i t h the p r o d u c t i v e level at t h e outset o f t h e K o r e a n trouble. I n other w o r d s , I do ascribe t o t h e r e a l i z a t i o n o f o u r p r o d u c t i v e capacity a very, very i m p o r t a n t role i n preventing or a v o i d i n g price inflation. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 203 N o w a second f a c t o r , t h e f a c t o r o f second i m p o r t a n c e w h i c h i n a sense r e l a t e s t o t h e f i r s t , because p r o d u c t i o n m u s t be m e a s u r e d a g a i n s t u t i l i z a t i o n o f resources, t h e f a c t i s — a n d I say t h i s n o t c r i t i c a l l y b u t d e s c r i p t i v e l y — t h a t t h e a c t u a l pace o f t h e t a k e o f t h e defense p r o g r a m , as w e a l l k n o w , h a s i n a c t u a l i t y b e e n s l o w e r t h a n w a s c o n t e m p l a t e d b y t h e business c o m m u n i t y a n d b y t h e G o v e r n m e n t w h e n estim a t e s o f t h e e c o n o m i c o u t l o o k w e r e m a d e i n l a t e 1950 o r i n e a r l y 1951, so t h a t y o u h a v e h a d t w o c o m p l e m e n t a r y a n d i n t e r d e p e n d e n t f a c tors playing. F i r s t , a g r e a t increase i n t o t a l p r o d u c t i o n , a n d a p a r t i c u l a r l y l a r g e increase i n t h e s t r a t e g i c areas o f shortage, w h i c h h a d a g o o d d e a l t o do w i t h the inflation. • S e c o n d , a n d a t t h e same t i m e , a p a c i n g o f t h e d e f e n s e p r o g r a m s t a k e u p o n the economy c o n s i d e r a b l y slower t h a n h a d been c o n t e m p l a t e d . I a m not saying t h a t c r i t i c a l l y or i n terms o f praise. T h a t depends a n d I d o t h i n k t h a t t h e . first a n d m o s t i m p o r t a n t o f those reaNow i t has been a f a c t o r i n t h e economy. Those are t w o factors. let's m o v e o n to a t h i r d f a c t o r . I t h i n k a t h i r d f a c t o r h a s been t h e e x c e l l e n t j u d g m e n t d i s p l a y e d b y t h e Congress i n r a i s i n g taxes. N o w , the f a c t t h a t t h e Congress has n o t been w i l l i n g t o raise taxes s t i l l f u r t h e r h a s t e n d e d t o o b s c u r e t h e f a c t t h a t n e v e r b e f o r e i n peacet i m e h i s t o r y d i d a C o n g r e s s d o so r e a l i s t i c a n d f o r t h r i g h t a j o b i n i n c r e a s i n g t a x e s as m u c h as i t d i d b e t w e e n t h e o r i g i n a l K o r e a n o u t break u p to the present time. I t h i n k o n a c o m p a r a b l e basis a n d a l l o w i n g f o r t h e differences i n the circumstances, t h a t they d i d a m u c h m o r e commendable j o b t h i s t i m e t h a n i n W o r l d W a r I I . N o w , I t h i n k t h a t is an immensely i m p o r t a n t f a c t o r i n t h e effect u p o n p r i c e s t r u c t u r e . W e have imposed a very heavy additional tax burden upon the A m e r i c a n business c o m m u n i t y a n d u p o n t h e A m e r i c a n people. That i s f a c t o r N o . 3. I t h i n k f a c t o r N o . 4 — a n d w h e n I g e t b e l o w 3, I a m n o t as c l e a r as t o t h e o r d e r o f t h e i m p o r t a n c e , I m e a n w h e t h e r i t i s 4 , 5, 6, o r 6, 5, 4 . L e t u s say a n o t h e r f a c t o r i n t h e f o u r t h c a t e g o r y i s t h e l e v e l o f s a v i n g . N o w , o f course y o u m a y say t h a t t h e l e v e l o f s a v i n g is affected b y t h e s e o t h e r steps w h i c h a r e t a k e n , a n d t h e r e y o u g e t i n t o a c i r c u l a r p r o c e s s as t o w h e t h e r p r i c e c o n t r o l p r o m o t e d s a v i n g s b y m a k i n g t h e people feel t h a t they were not g o i n g to have to buy against price increases, o r o n t h e o t h e r h a n d t h a t s a v i n g s m a d e p r i c e c o n t r o l e f f e c t i v e because i f t h e p e o p l e h a d t r i e d t o s p e n d m o r e p r i c e c o n t r o l c o u l d n o t h a v e been e f f e c t i v e . I t h i n k i t i s i n t e r r e l a t e d , a n d I w o u l d n o t w a n t t o c l a i m excessive partisanship t o w a r d the relative weight of the t w o factors. B u t a n y w a y , p a r t l y due t o the abundance of supplies, p a r t l y due t o t h e r e s t o c k i n g w h i c h t o o k p l a c e i n t h e e n d o f 1951, p a r t l y d u e , w h e t h e r d e s i r a b l y o r u n d e s i r a b l y t h e r e h a s b e e n a sense o f d e c r e a s i n g u r g e n c y a b o u t t h e pace o f t h e defense p r o g r a m — a n d I state t h a t m e r e l y obj e c t i v e l y because I d o n o t w a n t t o be i m p l i e d as c r i t i c i z i n g i t o n e w a y or a n o t h e r — a n y w a y , p a r t l y due to a l l those factors t h e A m e r i c a n people h a v e o v e r t h e past y e a r been s a v i n g at a f a n t a s t i c a l l y h i g h r a t e . I w o n ' t s a y a b n o r m a l l y , because I d o n o t k n o w w h a t n o r m s a r e i n this k i n d of time, b u t a n y w a y fantastically h i g h b y past measure97308—52 14 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.204 ments, a n d I w o u l d ascribe t o t h a t a v e r y i m p o r t a n t influence u p o n price structure. N e x t , I t h i n k t h a t p r i c e a n d w a g e controls at least i n a s h o r t p e r i o d o f t i m e h a v e h a d a v e r y i m p o r t a n t e f f e c t o n i t , bscause w h i l e I a g r e e w i t h those p e o p l e w h o say t h a t i t is n o t t h e m o s t basic r e m e d y , a n d w h i l e I agree t h a t i t cannot i n t h e l o n g r u n c o n t a i n prices, i f t h e other conditions are not favorable, yet I t h i n k t h a t t h e statement t h a t p r i c e a n d w a g e s t a b i l i z a t i o n f o r a p e r i o d o f t i m e deals s i m p l y w i t h t h e effects a n d n o t t h e causes i s a n u n d e r s t a t e m e n t . I t h i n k t h a t i n the dynamics of the w a y collective b a r g a i n i n g works, the w a y price policy works, t h a t y o u get a push u p o n prices not only f r o m t h e d e m a n d s i d e b u t a l s o f r o m t h e cost side. I t h i n k , f o r example, t a k i n g a current example, t h a t i f y o u were t o h a v e excessive w a g e i n c r e a s e s — I d o n o t w a n t t o g e t i n t o t h e q u e s t i o n o f w h a t w o u l d be excessive, because a g e n c i e s o f G o v e r n m e n t a r e n o w w r e s t l i n g w i t h t h a t p r o b l e m , b u t t h e i l l u s t r a t i o n serves a n y w a y — i f y o u w e r e t o h a v e excessive w a g e i n c r e a s e s i n t h e s t e e l i n d u s t r y , I t h i n k under current conditions that could give a very i m p o r t a n t fillu p to the inflationary trend. A n d g e t t i n g b a c k t o t h e r e l a t i o n s h i p b e t w e e n t h a t a n d these o t h e r p o l i c i e s , I h a r d l y see j u s t h o w m o n e t a r y p o l i c y w i t h i n d o a b l e r a n g e s could have any direct and quick impact u p o n t h a t urgent situation a r i s i n g i n t h e steel i n d u s t r y . S o I w o u l d p u t p r i c e a n d w a g e s t a b i l i z a t i o n a t l e a s t f o r a t i m e as a n i m p o r t a n t c o n t r i b u t i n g f a c t o r i n t h e fifth o r s i x t h c a t e g o r y . T h e n I t h i n k t h e a l l o c a t i o n of m a t e r i a l s is e x t r e m e l y i m p o r t a n t . I t h i n k w h e t h e r scarce m a t e r i a l s a r e w i s e l y o r f o o l i s h l y a l l o c a t e d a m o n g v a r i o u s c l a i m a n t s , t h e p a c i n g o f t h a t , h o w w e l l i t is figured o u t , h o w i t is done, t h a t has a v e r y i m p o r t a n t effect u p o n t h e p r i c e s t r u c t u r e b o t h i n d i r e c t e c o n o m i c t e r m s a n d u p o n t h e sense w h i c h i t p r o d u c e s i n t h e business c o m m u n i t y e i t h e r t h a t t h e y are g o i n g t o be i n great trouble or not i n great trouble, depending p a r t l y on h o w i n t e l l i g e n t l y t h a t j o b is done. N o w somewhere w i t h i n t h a t range at t h a t p o i n t I w o u l d p u t the e f f e c t u p o n t h e g e n e r a l p r i c e s t r u c t u r e , u n d e r these t i m e s , o f t h e p e r m u t a t i o n i n m o n e t a r y p o l i c y o f t h e size a n d c h a r a c t e r w h i c h h a v e b e e n u n d e r t a k e n a n d w h i c h i t seems t o m e e i t h e r t h e F e d e r a l R e s e r v e B o a r d o r t h e T r e a s u r y w o u l d be w i l l i n g t o u n d e r t a k e i n v i e w o f a l l t h e c i r cumstances n o w p r e v a i l i n g . T h a t is about w h e r e I w o u l d place i t . N o w I a m p e r f e c t l y w i l l i n g t o concede t h a t i t h a s some e f f e c t , a n d I a m p e r f e c t l y w i l l i n g t o concede t h a t i f t h a t p a r t i c u l a r d e v i c e w e r e p u s h e d f a r e n o u g h , j u s t as i f t a x e s w e r e p u s h e d — b y " f a r e n o u g h " I m e a n t o o f a r — j u s t as i f t a x e s w e r e p u s h e d t o o f a r o r p r i c e c o n t r o l t o o f a r , i t c o u l d h a v e a c o m p e l l i n g effect. B u t t h e n I m o v e over t o say t h a t w i t h i n t h e r a n g e o f t h a t p o l i c y as i t h a s b e e n o p e r a t i n g , I w o u l d e n u m e r a t e i t as o n e o f t h e f a c t o r s but certainly not the controlling factor. S e n a t o r DOUGLAS. Y O U w o u l d p u t i t a l m o s t a t t h e b o t t o m . M r . KEYSERLING. I w o u l d n o t r a n g e i t as h i g h as t h e o t h e r s t h a t I have mentioned. S e n a t o r DOUGLAS. Y O U h a v e s a i d y o u w o u l d p u t i t a t t h e v e r y b o t t o m o f a l l these f a c t o r s . M r . KEYSERLING. W e l l , I c o u l d m e n t i o n s o m e o t h e r s t h a t I w o u l d p u t even lower. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 2 0 5 S e n a t o r DOUGLAS. Y O U m e n t i o n e d s i x o r s e v e n t h a t a r e h i g h e r . W h a t w o u l d be l o w e r ? M r . KEYSERLING. W e l l , I t h i n k t h a t u n d e r t h e c u r r e n t s i t u a t i o n e x h o r t a t i o n s t o p e o p l e n o t t o a s k f o r h i g h e r w a g e s o r t o be w i s e i n t h e i r price policy, I would put that lower. S e n a t o r DOUGLAS. I w o u l d a g r e e w i t h y o u o n t h a t p o i n t . M r . C h a i r m a n , t h e w i t n e s s has t a k e n some t i m e i n r e p l y i n g t o m y questions. I t h i n k I should n o w fade out. Representative PATMAN. M r . B o i l i n g ? R e p r e s e n t a t i v e BOLLING. M r . K e y s e r l i n g , t h e f i r s t q u e s t i o n t h a t I h a v e is o n e t o w h i c h I a m v e r y a n x i o u s t o g e t a f u l l a n s w e r , b u t I a m a w a r e t h a t t h e q u e s t i o n m a y be a l e n g t h y one. B u t I w a n t a r a t h e r l o n g answer a n d I a m a w a r e t h a t i t w i l l take y o u back over some t e r r i t o r y t h a t y o u have already covered. I raised the question w i t h M r . M a r t i n the other day, t h a t between 1942 a n d 1945 t h e F e d e r a l R e s e r v e i n c r e a s e d i t s h o l d i n g s o f G o v e r n m e n t s e c u r i t i e s b y $22,000,000,000, a n d t h e c o n s u m e r p r i c e i n d e x moved up four-plus points. D u r i n g t h e p e r i o d b e t w e e n 1946 a n d 1950 t h e r e w a s a n e t i n c r e a s e i n t h e F e d e r a l R e s e r v e h o l d i n g s o f a b o u t $5.9 b i l l i o n , a n d t h e c o n s u m e r p r i c e i n d e x m o v e d u p 40-plus. N o w the periods o f t i m e are n o t exactly comparable a n d I made no effort to make t h e m exactly comparable. I a m a w a r e t h a t y o u h a v e a l r e a d y d i s c u s s e d some o f these t h i n g s , b u t I w o u l d l i k e t o get f o r m y o w n m i n d y o u r ideas o f t h e differences between the t w o situations. W h a t were the factors t h a t m a i n t a i n e d comparative stability i n t h e 1942-45 p e r i o d , a n d w h a t were t h e f a c t o r s t h a t m a d e prices raise so f a s t i n t h e o t h e r p e r i o d ? M r . KEYSERLING. W e l l , I w i l l t r y t o a n s w e r t h a t as b r i e f l y as I c a n , b u t t h e most i m p o r t a n t p a r t o f m y response is t h i s : t h a t the f a c t s w h i c h y o u have cited s h o w i n g at various times an inverse t r e n d i n these d i f f e r e n t elements is a f a c t u a l i l l u s t r a t i o n o f w h a t I w a s s t a t i n g generally. I f i n d t h a t some b u s i n e s s e c o n o m i s t s , l a b o r e c o n o m i s t s , a n d o t h e r s h a v e s l i p p e d i n t o t h e h a b i t o f s t a r t i n g w i t h a t h e s i s a n d t h e n i t does n o t require very great intellectual ingenuity to take a long-term chart i n a complex economy a n d p i c k o u t periods w h e r e A caused B , a n d w h e r e A w a s t h e sole cause o f B . I j u s t d o n ' t believe t h a t . I believe t h a t t h a t is a l m o s t n e v e r t r u e . A n d the o n l y concern I have about the attempted correlation between t h e m o n e t a r y p o l i c y b e t w e e n t h e m i d d l e o f 1950 a n d M a r c h 1951, a n d t h e a t t e m p t e d c o r r e l a t i o n between M a r c h 1951 a n d t h e c u r r e n t t i m e , i n j u x t a p o s i t i o n t o t h e p r i c e s t r u c t u r e , is t h a t i t is a n o v e r s i m p l i f i c a tion, I d o n o t say t h a t i t has no v a l i d i t y . I d o n o t say t h a t i t w a s n o t one f a c t o r , b u t t h e r e are m a n y o t h e r f a c t o r s . N o w , the c i t a t i o n w h i c h the Congressman has given s i m p l y gives factual illustrations of points in time where very different things happened u n d e r a different complex o f factors. N o w , y o u asked w h a t w e r e t h e reasons f o r t h a t . I do n o t w a n t t o bore the committee w i t h a discussion o f t h e w h o l e economic t r e n d o f W o r l d W a r I I o r even o f t h e 1946-47 p e r i o d , b u t I w o u l d say s i m p l y t h a t i n W o r l d W a r I I i t w a s d e m o n s t r a t e d t h a t MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.206 e v e n w i t h t h e a l l o t m e n t o f 50 p e r c e n t o f o u r r e s o u r c e s , a p p r o x i m a t e l y , t o w a r p r o d u c t i o n as c o n t r a s t e d w i t h a 2 0 - p e r c e n t r a n g e n o w , m e a n i n g a greater s t r a i n u p o n the economy, t h a t even w i t h t h a t a n d even w i t h a tax policy w h i c h i n that time I t h i n k took an inadequate amount o f excess p u r c h a s i n g p o w e r o u t o f t h e e c o n o m y as a g a i n s t b o r r o w i n g , a n d e v e n w i t h financing o f a b o u t h a l f o f t h e w a r e f f o r t t h r o u g h b o r r o w i n g , even w i t h a l l those t h i n g s w h i c h were m u c h m o r e e x t r e m e t h a n a n y t h i n g w e h a v e h a d i n r e c e n t t i m e s , n o n e t h e l e s s , as y o u p o i n t out, there was achieved f o r a l o n g p e r i o d of t i m e quite a large degree o f p r i c e s t a b i l i t y , w h i c h seems t o m e t o i n d i c a t e a t l e a s t — a n d I d o n o t w a n t t o p r o v e t o o m u c h f o r i t — t h a t w e c a n n o t s i n g l e o u t as t h e d e t e r m i n i n g factor i n price stability a factor w h i c h was not present at t h a t t i m e because a t t h a t t i m e t h e F e d e r a l R e s e r v e B o a r d d i d s u p p o r t t h e G o v e r n m e n t b o n d m a r k e t a n d at t h a t t i m e i t d i d f o l l o w t h e p o l i c y o f t a k i n g u p t h e s e o b l i g a t i o n s as t h e y o c c u r r e d . N o w , I do not mean by t h a t — a n d I w a n t to take a moderate position o n t h a t — t h a t a n even better j o b m i g h t n o t h a v e been d u r i n g W o r l d W a r I I i f a s o m e w h a t m o r e flexible p o l i c y s i m i l a r t o t h e o n e n o w i n effect between the F e d e r a l Reserve B o a r d a n d t h e T r e a s u r y h a d t h e n maintained. M a y b e t h a t w o u l d h a v e been s t i l l better. I a m n o t arbitrary on that. I s i m p l y s a y t h a t i t i s o n e f a c t o r i n t h e p i c t u r e a n d does n o t seem o n a n a l y s i s t o be t h e m a j o r f a c t o r w i t h i n t h e r a n g e o f w h a t i s d o a b l e i n t h a t area n o w . N o w , I also t h i n k t h a t d u r i n g t h a t p e r i o d o f W o r l d W a r I I w e w o u l d h a v e been b e t t e r a d v i s e d t o h a v e c o l l e c t e d s o m e w h a t m o r e i n t a x e s , a l t h o u g h I d o n o t b e l i e v e y o u c a n be o n a p a y - a s - y o u - g o b a s i s i n a t o t a l w a r , because w e d i d , t h r o u g h n o t d o i n g t h a t , g i v e t h e p e o p l e the impression, i n c l u d i n g our w o r k i n g groups, t h a t they were increasi n g t h e i r r e a l i n c o m e s because t h e y w e r e g e t t i n g m o r e w a g e s a t a s t a b l e p r i c e level, b u t the o n l y reason t h e y were r e g i s t e r i n g t h a t g a i n w a s because t h e y w e r e n o t a l l o w e d t o s p e n d t h e m o n e y . I f t h e y hsTd t r i e d t o s p e n d t h e m o n e y , t h e i n c r e a s e d p r o d u c t i o n o f c i v i l i a n goods was n o t u n d e r n e a t h i t , and, consequently, w h e n t h e y d i d t r y to spend the money after the w a r , that, a m o n g other t h i n g s , f o r c e d u p t h e p r i c e o f those goods. S o I t h i n k i t w a s i n t h a t sense a s u p p r e s s e d i n f l a t i o n , a n d I w o n ' t s a y i t w a s a s u b t e r f u g e , because o n b a l a n c e I d o n ' t k n o w — y o u c e r t a i n l y c o u l d n o t h a v e financed t h e w h o l e w a r o u t o f t a x a t i o n , a n d m a y b e the r i g h t balance was struck, b u t i f t h a t was the r i g h t balance w e h a d t o p a y t h e cost f o r i t i n p o s t w a r i n f l a t i o n . N o w , w h e t h e r t h e cost i n p o s t w a r i n f l a t i o n w a s o n n e t b a l a n c e a g r e a t e r cost t o o u r economy t h a n t h e cost o f a d i f f e r e n t s y s t e m o f t a x a t i o n d u r i n g the w a r , I don't t h i n k any m a n can answer. I t h i n k i t takes a n a w i u l l o t o f analysis. I t is a t e r r i b l y d i f f i c u l t q u e s t i o n . So m u c h f o r the W o r l d W a r I I period. N o w , c o m i n g over to t h e o t h e r p e r i o d t h a t y o u r e f e r to, Congressman, the 1946-47 p e r i o d , there were a lot of factors operating then. I t h i n k personally t h a t the direct controls were demolished somew h a t too r a p i d l y i n t h a t period. I t h i n k the backlog of d e m a n d f o r a tremendous accumulated n a t u r e o f war-created shortages was a n immensely important factor. W e had practically f u l l employment at h i g h and g r o w i n g wage levels. W e h a d a l a r g e a c c u m u l a t i o n o f savings, a n d a l l o f t h o s e MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 207 t h i n g s i n combination forced the price level u p r a p i d l y d u r i n g t h a t period. I f we h a d w a n t e d to h o l d t h e p r i c e level reasonably stable d u r i n g t h a t period, I t h i n k we w o u l d have had to defer the demolition of price and wage stabilization, and I t h i n k we w o u l d have h a d to have a higher tax program. B u t there again that brings me to the other point t h a t Senator D o u g l a s raised about price t r e n d s a n d gives me a n o p p o r t u n i t y t o discuss t h e t h i r d phase o f t h e m a i n p o i n t I made. A s y o u recall, I said three things. I said first t h a t i n w e i g h i n g a p a r t i c u l a r p o l i c y d e v i c e , o n e h a s t o a s k first w i l l i t a c c o m p l i s h t h e o b j e c t i v e c l a i m e d f o r i t , n a m e l y , i n t h i s instance, h o w m u c h effect w i l l i t have u p o n price stability. Second, i f i t w i l l accomplish t h a t objective, w h a t are its collateral consequences a n d w h a t a r e a l t e r n a t i v e m e t h o d s o f a c c o m p l i s h i n g t h a t objective. B u t t h i r d , a n d p e r h a p s m o s t i m p o r t a n t o f all, is t h e q u e s t i o n : I s t h a t o b j e c t i v e t h e sole o r t h e p r e d o m i n a n t o b j e c t i v e i n t h e e c o n o m y ? N o w , l e t us a p p l y t h a t t o t h e q u e s t i o n o f p r i c e s . T h e r e i s a g r e a t i n c l i n a t i o n t o t h e v i e w t h a t p r i c e s t a b i l i t y is o u r p r i m a r y e c o n o m i c objective. I do not attribute t h a t to you, Senator. S e n a t o r DOUGLAS. I w o u l d say t h a t i t is a p r i m e o b j e c t i v e . Yes, I w o u l d be v e r y g l a d t o say t h a t . M r . KEYSERLING. I t h i n k i t is o n e v e r y i m p o r t a n t o b j e c t i v e . S e n a t o r DOUGLAS. I w o u l d s a y i t i s a p r i m a r y o b j e c t i v e . M r . KEYSERLING. I w o u l d a g r e e t h a t i t i s a p r i m e o b j e c t i v e , b u t I w i l l say t h a t i n t h e o p e r a t i o n s o f t h e A m e r i c a n economy, p a r t i c u l a r l y w h e n since n o e l e c t i o n o n o u r p a r t w e h a v e h a d these g r e a t s h i f t s i n t h e p r o b l e m w i t h w h i c h we have h a d t o deal, I do not k n o w j u s t h o w o n e c o u l d equate w h a t degree o f p r i c e s t a b i l i t y w o u l d be consistent u n d e r o u r system w i t h t h e other t h i n g s w e have h a d to do at t h e same time. I n o t h e r w o r d s , l e t u s l o o k a t t h e s i t u a t i o n g o i n g b a c k t o 1950. I n 1949 w e r a n i n t o a recession. S o m e p e o p l e t h o u g h t t h a t w a s g o i n g t o b e q u i t e s e r i o u s , o t h e r s d i d n o t t h i n k so. I n o t h e r w o r d s , i t w a s t h e first i m p o r t a n t p o s t w a r t e s t i n g o f t h e s t a b i l i t y o f o u r e c o n o m y . I n 1950 w e s t a r t e d r e c o v e r i n g f r o m t h a t recession, a n d t h e r e w a s s o m e a m b i v a l e n c e i n t h e s i t u a t i o n t h e n . I n t h e m i d d l e o f 1950 w e g o t a different burden. N o w f r a n k l y I do n o t t h i n k economists, i n c l u d i n g ourselves o r others, have r e a l l y m o v e d on to an adequate analysis of at j u s t w h a t p o i n t price t r e n d s equate w i t h o t h e r objectives. I n other w o r d s , t o w h a t e x t e n t w o u l d t h e p r o d u c t i v e c h a n g e s b e t w e e n 1950 a n d 1952 h a v e been t h e same i f w e h a d h a d absolute p r i c e c o n t r o l . M y i n c l i n a t i o n is t o t h i n k t h a t o n balance, t h r o u g h n o t h a v i n g absolute p r i c e c o n t r o l , t h e p r o d u c t i v e advantages o u t w e i g h e d t h e somew h a t lesser s t a b i l i t y . I c a n n o t p r o v e i t b u t t h a t is m y i n c l i n a t i o n . S e c o n d , t h e r e n e e d s t o be f u r t h e r a n a l y s i s o f t h e r e l a t i o n s h i p between the changes i n t h e general p r i c e level a n d h o w those changes affect resources a n d incomes t h r o u g h o u t t h e economy. I w o u l d say t h a t i f i t c o u l d be s h o w n — t h i s i s a t h e o r e t i c a l p i c t u r e t o i l l u s t r a t e t h e point, M r . C h a i r m a n a n d members of the committee—that a change i n t h e p r i c e level w a s accompanied b y a n a p p o r t i o n m e n t o f resources t h r o u g h o u t t h e c o u n t r y w h i c h a p p o r t i o n e d t o each g r o u p e x a c t l y t h e MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.208 same a d d i t i o n a l n u m b e r o f d o l l a r s , m a n i f e s t l y y o u w o u l d b e w o r k i n g w i t h m o r e c h i p s b u t y o u w o u l d be b a c k w h e r e y o u s t a r t e d f r o m . T h e r e f o r e changes i n prices either u p w a r d o r d o w n w a r d affect t h e e c o n o m y a d v e r s e l y i n one o f t w o w a y s . E i t h e r t h e y p r o d u c e a c e r t a i n r e d i s t r i b u t i o n o f resources w h i c h i n t h e l o n g r u n a f f e c t s e c o n o m i c s t a b i l i t y , because t h i n g s g e t o u t o f balance, o r t h e y produce a social r e d i s t r i b u t i o n o f benefits w h i c h w e as a n a t i o n d o n o t t h i n k i s c o n s i s t e n t w i t h f a i r n e s s o r j u s t i c e , a n d t h e y m a y do a c o m p l e x i o n o f those t w o t h i n g s . B u t i t does n o t f o l l o w f r o m t h a t a u t o m a t i c a l l y t h a t a g e n e r a l l y r i s i n g p r i c e l e v e l i n t h e U n i t e d S t a t e s a l w a y s p r o d u c e s t h e changes* i n an undesirable direction. I w o u l d be p r e p a r e d t o say t h a t r a p i d u p w a r d s p u r t s o f prices at p a r t i c u l a r t i m e s d o p r o d u c e these consequences i n a n u n d e s i r a b l e d i r e c t i o n , a n d I , o f c o u r s e , a m n o t a r g u i n g against but rather f o r a f i r m stabilization program, and a rounded stabilization program. B u t I d o n o t t h i n k t h a t p r i c e is t h e o n l y t h i n g t h a t w e can l o o k a t i n the economy i n d e t e r m i n i n g economic policy. A n d consequently when y o u prove t h a t a monetary policy i f pushed f a r enough w o u l d h o l d the price l i n e — a n d I t h i n k i t would, any policy i f pushed f a r e n o u g h w o u l d — y o u h a v e t o e x a m i n e w h a t t h e consequences o f p u s h i n g t h e p o l i c y t h a t f a r w o u l d be n o t o n l y u p o n p r i c e s b u t u p o n p r o d u c t i o n , u p o n t h e a l l o c a t i o n o f p r o d u c t i v e resources, w h i c h is v i t a l l y i m p o r t a n t i n t h i s defense p e r i o d . A n d t h e m a i n p o i n t I m a d e o n t h i s m o n e t a r y issue i s t h a t i f i t w e r e pushed f a r enough, actually to h o l d the price line, not to h o l d i t now, because I t h i n k m a n y t h i n g s a r e h o l d i n g i t n o w , b u t i f i t w e r e a c t u a l l y pushed f a r enough a c t u a l l y to h o l d the price line, n o t t o h o l d i t now,, s i o n a n d M a r c h 1951, i f i t a l o n e w e r e r e l i e d u p o n o r a l m o s t e n t i r e l y relied upon, i f i t were pushed f a r enough absolutely to h o l d the price l i n e , i t w o u l d h a v e t o be p u s h e d so f a r t h a t i n i t s consequences u p o n , t h e n a t i o n a l d e b t , u p o n t h e financing t h e r e o f , u p o n c h a n g e s i n i n t e r e s t r a t e s , u p o n p r o d u c t i v e i n c e n t i v e s a n d u p o n t h e a l l o c a t i o n o f resources,, then it w o u l d produce lots of other things that nobody w o u l d w a n t t o countenance. A n d t h a t i s t h e essence, C o n g r e s s m a n , o f m y w h o l e p o s i t i o n h e r e . R e p r e s e n t a t i v e BOLLING. M r . K e y s e r l i n g , o u r m i l i t a r y b u i l d - u p p r o g r a m places its m a j o r emphasis n o t j u s t o n t h e p r o d u c t i o n o f h a r d w a r e but on the p r o d u c t i o n of productive facilities and the development o f p r o d u c t i o n facilities. W e c o u l d have used t w o techniques i n achievi n g that. O n e w o u l d o b v i o u s l y h a v e been d i r e c t G o v e r n m e n t c o n s t r u c t i o n , t h e o t h e r w a s t h e o n e w e chose, p r i v a t e e x p a n s i o n , w i t h v a r i o u s a i d s a n d assistances. W h e r e c o u l d t h a t p r i v a t e e x p a n s i o n c o m e f r o m i n c r e d i t t e r m s o t h e r t h a n t h r o u g h an increase i n c r e d i t a v a i l a b l e ? M r . KEYSERLING. I t h i n k t h a t t h e r e w o u l d h a v e t o be some i n c r e a s e i n c r e d i t a v a i l a b l e t o p r o d u c e so r a p i d a n e x p a n s i o n as h a s o c c u r r e d . R e p r e s e n t a t i v e BOLLING. T h i s is t h e q u e s t i o n t h a t I a m n o t a t a l l clear on. Y o u have said several times t h a t t h e d i v e r s i o n o f p r o d u c t i v e c a p a c i t y f o r m i l i t a r y d e f e n s e p u r p o s e s i s i n a sense c o m p l e t e l y n e g a t i v e f r o m an economic p o i n t of view. I s there a difference i n the negativeness between the p r o d u c t i o n o f h a r d w a r e a n d t h e c r e a t i o n o f n e w p r o d u c t i o n t h a t does n o t p r o d u c e h a r d w a r e f o r some t i m e ? D o I m a k e t h a t clear ? MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 209 M r . KEYSERLING. Y e s , t h e r e , i s a b i g d i f f e r e n c e a n d t h e r e i s a l s o a d i f f e r e n c e b e t w e e n t h e p r o d u c t i o n o f e n d fighting w e a p o n s a n d t h e p r o d u c t i o n o f f a c i l i t i e s f o r t h e i r p r o d u c t i o n . L e t us t a k e b o t h o f those points. F i r s t o f a l l , w h e n I s a i d t h a t a m i l i t a r y p r o g r a m w h i l e necessary o n g r o u n d s o f n a t i o n a l s e c u r i t y does n o t a d d t o o u r e c o n o m i c s t r e n g t h o r o u r p r o d u c t i v e f a c i l i t i e s , I w a s r e f e r r i n g t o fighting w e a p o n s . I was n o t r e f e r r i n g t o t h a t p a r t o f w h a t is sometimes c a l l e d t h e s e c u r i t y b u i l d - u p w h i c h consists i n t h e p r o d u c t i o n o f p r o d u c t i v e f a c i l i t i e s , because m o s t o f t h o s e p r o d u c t i v e f a c i l i t i e s , as w e l e a r n e d a f t e r W o r l d W a r I I , c a n be s u b s t a n t i a l l y t r a n s f o r m e d t o t h e p r o d u c t i o n o f c i v i l i a n g o o d s . N o w t h a t i s t h e first p a r t o f t h e q u e s t i o n . I n other words, I w o u l d not a p p l y the comment that the m i l i t a r y b u i l d - u p i s n o t e c o n o m i c a n d i n a n e c o n o m i c sense w a s t e f u l , a l t h o u g h i t i s n e c e s s a r y o n g r o u n d s o f s e c u r i t y , I w T ould n o t a p p l y t h a t t o t h e e x p a n s i o n o f a steel p l a n t e v e n t h o u g h t h e e x p a n d e d o u t p u t o f t h a t p l a n t f o r t h e t i m e b e i n g goes i n t o t h e i n c r e a s e d p r o d u c t i o n o f m i l i t a r y e n d i t e m s , u n l e s s o n e s a i d t h a t t h a t w o u l d be a n e t loss a f t e r t h e d e f e n s e p r o g r a m because w e w o u l d t h e n h a v e a d i s u t i l i z a t i o n o f t h o s e f a c i l i t i e s . I t h i n k as a n a t i o n w e h a v e g o t t o find w a y s t o use t h o s e f a c i l i t i e s a n d can. A s a m a t t e r o f f a c t , I d o n o t t h i n k t h a t i n a n y o f t h e i m p o r t a n t areas o f t h e e x p a n s i o n o f p r o d u c t i v e f a c i l i t i e s t h e e x p a n s i o n has m o v e d m u c h i f a t a l l above t h e c o r r e l a t e d f a c t o r w i t h w h a t t h e need i n t h a t area w o u l d be a n y w a y w i t h i n a f e w y e a r s i f w e a r e g o i n g t o h a v e a h i g h level e m p l o y m e n t w i t h a g r o w i n g labor force a n d i m p r o v e d technology. N o w c o m i n g t o t h e s e c o n d q u e s t i o n as I u n d e r s t a n d i t , o f c o u r s e t h e i n f l a t i o n s t r a i n o f t h e e x p a n s i o n o f these p r o d u c t i v e f a c i l i t i e s i s m o s t l y w h i l e t h e y a r e b e i n g b u i l t , because w T hile t h e y a r e b e i n g b u i l t t h e y a r e n o t e v e n a d d i n g t o t h e flow o f g o o d s , so t h a t t h e b a l a n c e i s e n t i r e l y n e g a t i v e d u r i n g t h e t i m e t h e y are b e i n g b u i l t , b u t t h a t is t r u e o f a n y b u i l d i n g effort. W h e r e y o u are b u i l d i n g a p r o d u c t i v e tool, y o u h a v e n ' t g o t i t u n t i l y o u b u i l d i t . T h a t i s t r u e o f a fighting w e a p o n , a n d y o u h a v e t o s t r i k e a balance, a n d t h a t is w h y I t h i n k the p r o b l e m o f a l l o c a t i o n o f r e s o u r c e use i s t h e c e n t r a l q u e s t i o n o f t h i s w h o l e m o b i l i z a t i o n p r o g r a m , the central question. H o w m u c h o f y o u r resources are y o u g o i n g t o p u t i n t o fighting w e a p o n s as a g a i n s t p l a n t b u i l d - u p , p l a n t b u i l d - u p as a g a i n s t c i v i l i a n supplies, h o w l o n g i t takes t o get t h e p l a n t before y o u get t h e benefits o f i t , a n d so f o r t h , a n d so o n ? A n d i t i s j u s t because I t h i n k t h a t t h a t i s t h e c e n t r a l q u e s t i o n t h a t I h a v e r a i s e d these q u e s t i o n s as t o w h e t h e r g e n e r a l m o n e t a r y p o l i c y i s t h e k i n d o f w e a p o n w h i c h addresses i t s e l f t o these a d j u s t m e n t problems. N o w , a g a i n I a m f o r c e d t o s a y — I a m n o t s a y i n g d o n ' t use t h i s weapon, b u t I a m s a y i n g — w h e n you look at the n a t u r e of the problems, your problem of expanding production, your problem of getting this a l l o c a t i o n o f resources, y o u r p r o b l e m o f p r i o r i t i e s — a f t e r a l l , a defense m o b i l i z a t i o n is a p r o b l e m o f n a t i o n a l decisions o n w h i c h t h i n g s y o u w a n t t o d o first w h e n y o u c a n ' t d o e v e r y t h i n g — a n d so f o r t h , a n d so o n , i f I l i s t those p r o b l e m s a n d t h e n l i s t e d t h e r a n g e o f weapons t o d e a l w i t h t h e m , I w o u l d n o t p u t t h i s p a r t i c u l a r w e a p o n near t h e t o p be- MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.210 cause o f i t s g e n e r a l i z e d c h a r a c t e r a n d i t s c o r o l l a r y consequences i f i t is pushed too far. N o w , t h a t does n o t m e a n i t s h o u l d n o t b e u s e d a t a l l a n y m o r e t h a n i t means t h a t t h e o t h e r w e a p o n s s h o u l d n o t be used a t a l l . I t h i n k t h e y s h o u l d be used i n blend. T h e C o u n c i l o f E c o n o m i c A d v i s e r s f r o m the v e r y b e g i n n i n g has n o t been an opponent b u t an advocate of general credit a n d m o n e t a r y restraints. W e h a v e p r o p o s e d v a r i o u s i n c r e a s e s i n reserves t o w a r d t h a t e n d as o n e w a y o f t r y i n g t o r e c o n c i l e t h a t p r o b l e m w i t h t h e p r o b l e m o f t h e m a n a g e m e n t o f t h e n a t i o n a l d e b t , a n d , as I h e r e a g a i n s a y a n d w a n t t o e m p h a s i z e , I w o u l d n o t as o f t h i s t i m e l i s t m y s e l f , f o r w h a t e v e r i t i s w o r t h , as b e i n g o p p o s e d t o t h e a c c o r d t h a t w a s r e a c h e d , a n d I w o u l d n o t l i s t m y s e l f as s a y i n g t h a t o n n e t b a l a n c e as o f n o w i t s benefits have n o t o u t w e i g h e d its disadvantages. I t h i n k i t s benefits have s l i g h t l y o u t w e i g h e d its disadvantages. ^ I a m a f r a i d o f i t m o s t l y because o f t h e excessive t h i n g s c l a i m e d f o r i t . R e p r e s e n t a t i v e BOLLING. I n t h e l a s t p a r t o f y o u r s t a t e m e n t t w o t h i n g s came u p t h a t I w a n t to pursue a little. Y o u speak o f t h e gene r a l i z e d c h a r a c t e r o f t h e effect o f m o n e t a r y p o l i c y . W o u l d y o u expand on what you mean by that ? M r . KEYSERLING. I m e a n t h a t i t does n o t o p e r a t e t o p r o d u c e t h e s e l e c t i v e k i n d o f e x p a n s i o n a n d c o n t r a c t i o n w h i c h i s so i m p o r t a n t t o a defense m o b i l i z a t i o n . I n o t h e r w o r d s , y o u see w e h a v e g o t t o d i s t i n g u i s h v a r i o u s s i t u a t i o n s . A large b o d y o f economic p o l i c y a n d a large b o d y o f the t h i n k i n g about economic policy grew u p d u r i n g times w h e n y o u were t h i n k i n g o f (a) dealing w i t h a general depression or (b) dealing w i t h a general i n f l a t i o n , a n d t h e n t h e p o l i c y v e r y s i m p l y r a n as f o l l o w s : I f y o u are i n a g e n e r a l l y depressionary s i t u a t i o n , let's l i f t prices, l i f t the money supply, l i f t the general level of demand—let's l i f t e v e r y t h i n g and get out of this trough. N o w i n t h e t y p i c a l i n f l a t i o n a r y s i t u a t i o n — a n d b y t h e t y p i c a l .inflationary s i t u a t i o n I do n o t m e a n one t h a t w e h a v e h a d t y p i c a l l y . I t h i n k i t is m o r e a stereotype t h a n a n y t h i n g a c t u a l l y t h a t h a s h a p p e n e d . T h a t i s r e g a r d e d as t h e c o n v e r s e o f t h e s i t u a t i o n I h a v e described. W e have too m u c h of everything. W e are r i s i n g too fast. Let's cut everything down. Y o u decrease t h e m o n e y s u p p l y . You try t o p u s h t h e p r i c e l e v e l d o w n w a r d , a n d so f o r t h a n d so o n . N o w , t h e p o i n t I a m m a k i n g is t h a t t h e Jrind o f l o n g - t e r m p a r t i a l d e f e n s e m o b i l i z a t i o n w h i c h w e a r e n o w c o n f r o n t i n g does n o t f i t i n t o e i t h e r o f those t w o categories. I t presents us w i t h e n t i r e l y n o v e l k i n d o f p r o b l e m s , a n d t h e n o v e l t y o f t h e p r o b l e m arises f r o m t h e f a c t t h a t m a n i f e s t l y w e are u n d e r t a k i n g a t one a n d t h e same t i m e a r a p i d e x p a n s i o n o f some v e r y i m p o r t a n t t h i n g s , a n d t o s u p p o r t i t , a r a p i d contraction of other very i m p o r t a n t things. W e must r a p i d l y e x p a n d m i l i t a r y weapons, we must r a p i d l y e x p a n d t h e i n d u s t r i a l m o b i l i z a t i o n base t o i n c r e a s e o u r t o t a l s t r e n g t h , a n d w e m u s t c o r r e s p o n d i n g l y c o n t r a c t i n s o f a r as w e h a v e n ' t g o t t h e r e sources t o d o b o t h , h o u s i n g , a u t o m o b i l e s , a n d o t h e r t h i n g s . T h e r e f o r e I say t h a t a g e n e r a l p o l i c y w h i c h was p r o p e r l y conceived t o p r o d u c e a n d be effective t h r o u g h a general c o n t r a c t i o n o f economic a c t i v i t y f i n d i n g its w a y q u i c k l y i n t o a l l t h e crevices o f t h e MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 211 e c o n o m y c a n n o t be u s e d v e r y v i g o r o u s l y a n d v e r y f a r - r e a c h i n g l y i n this k i n d of situation. I t c a n be u s e d t o e x e r c i s e s o m e d a m p e n i n g e f f e c t , a n d I a m n o t • against that. B u t i t c a n n o t b e u s e d as s t r o n g l y as a d v o c a t e d b y t h o s e w h o p r o p o s e d i t i n a n e n t i r e l y d i f f e r e n t f r a m e w o r k because w e h a v e n ' t got the p r o b l e m ' t h a t they were t h i n k i n g of w h e n they developed over the years t h a t particular branch of theory. T h a t is w h a t I m e a n w h e n I say i t is a generalized weapon. R e p r e s e n t a t i v e BOLLING. Y O U m e n t i o n e d p r e v i o u s l y t h e q u e s t i o n o f s u p p l e m e n t a l reserves. D o y o u h a v e s o m e s p e c i f i c s u g g e s t i o n s o n t h a t at this time ? M r . KEYSERLING. I d o n o t h a v e s p e c i f i c s u g g e s t i o n s a t t h i s t i m e , p a r t l y because I r e a l l y h a v e n ' t g o t t e n v e r y m u c h i n t o t h e t e c h n i q u e s o f t h e r e l a t i v e m e r i t s o f t h e d i f f e r e n t t y p e s o f reserves. W e h a v e f r o m t i m e t o t i m e advocated a u t h o r i t y i n t h e F e d e r a l Reserve t o increase b a n k reserves. I u n d e r s t a n d t h a t t h e c u r r e n t p o s i t i o n o f t h e Reserve B o a r d is t h a t t h e y d o n o t w a n t t h a t a u t h o r i t y a t t h i s t i m e because t h e y d o n o t f e e l t h u t t h e y s h o u l d use i t a t t h i s t i m e . A n d I d o n o t h a v e a n y s p e c i f i c reserve p l a n n o w t o advocate. R e p r e s e n t a t i v e BOLLING. I r a i s e d t h i s q u e s t i o n w i t h M r . M a r t i n t h e o t h e r d a y . I n v i e w o f t h e i n e v i t a b l e legislative lag, a n d t h e possib i l i t y o f o u r n e e d i n g a n a d d i t i o n a l t o o l i n t h i s field, i s i t p s y c h o l o g i c a l reasons t h a t m a k e i t u n w i s e t o ask f o r t h e t o o l at t h i s t i m e ? M r . KEYSERLING. I d o n o t i n t e n d t o s a y t h a t i t w o u l d b e u n w i s e t o ask f o r i t a t t h i s t i m e . I s i m p l y say t h a t i t is m y u n d e r s t a n d i n g t h a t t h e o p e r a t i n g agency feels t h a t w a y a n d t h a t I h a v e n o specific p l a n to offer. I w o u l d be p r e p a r e d t o s a y i n r e s p o n s e t o y o u r g e n e r a l q u e s t i o n t h a t i t has a l w a y s been m y g e n e r a l v i e w — a n d I t h i n k t h e v i e w o f t h e C o u n c i l — t h a t i n t h i s k i n d o f fluid s i t u a t i o n i t i s v e r y b a d t o t r y e v e r y f e w weeks or even every f e w m o n t h s t o revise y o u r k i t o f tools t o w h a t t h e o u t l o o k looks l i k e f o r t h e n e x t f e w weeks. A n d i t w o u l d be t h e p a r t o f w i s d o m f o r a d i s c r e t i o n a r y a g e n c y l i k e t h e F e d e r a l Reserve B o a r d t o have a w i d e a m p l i t u d e of tools t h a t i t could rather quickly d r a w upon i n view of the legislation lag. R e p r e s e n t a t i v e BOLLING. S e n a t o r F l a n d e r s . S e n a t o r FLANDERS. M r . K e y s e r l i n g , w o u l d y o u t h i n k i t a n o v e r s i m p l i f i c a t i o n t o s a y t h a t i n t h e absence o f d i r e c t c o n t r o l s , p r i c e s r e spond to the relationship between the money supply and the production ? M r . KEYSERLING. O h , d e f i n i t e l y t h e y d o , p a r t i c u l a r l y i f b y " m o n e y s u p p l y " y o u mean not the static volume of money but its turn-over a n d so f o r t h a n d so o n . S e n a t o r FLANDERS. Y e s ; i t i s t h e a v a i l a b i l i t y o f t h e m o n e y s u p p l y ? M r . KEYSERLING. O h , yes, d e f i n i t e l y . S e n a t o r FLANDERS. NOW w o u l d y o u also s a y t h a t p r i c e - a n d - w a g e controls are effective p r i m a r i l y i n the short r u n , or do y o u feel t h e y c a n be e f f e c t i v e i n t h e l o n g r u n o v e r p e r i o d s i n w h i c h t h e r e l a t i o n ship between t h e m o n e y s u p p l y a n d p r o d u c t i o n is l e a d i n g t o w a r d inflation ? M r . KEYSERLING. I t h i n k t h a t t h e q u e s t i o n o f w h a t i s i n t h e s h o r t r u n a n d w h a t is i n t h e l o n g r u n , Senator, w o u l d be d i f f e r e n t l y d e f i n e d MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.212 b y d i f f e r e n t p e o p l e . I m e a n some p e o p l e w o u l d s a y t h a t 2 y e a r s i s i n t h e s h o r t r u n , o t h e r s w o u l d s a y 3 a n d o t h e r s 1. Senator FLANDERS. What would you say ? M r . KEYSERLING. I w o u l d n o t b e as s u r e as s o m e p e o p l e a r e , b u t I w o u l d say t h i s : T h a t i t has been m y v i e w f r o m t h e b e g i n n i n g t h a t i f w e are emb a r k e d u p o n m a n y years of p a r t i a l mobilization, t a k i n g i n t o account the economic problems and the psychological problems a n d the probl e m s o f p u b l i c consents, t h a t I w o u l d go l i g h t i n t h e l o n g r u n o n p r i c e and-wage controls, and t r y to w o r k t o w a r d a productive situation w h e r e w i t h i n a reasonable short p e r i o d o f t i m e t h e y c o u l d be t a k e n off. T h a t is m y general p o s i t i o n . Senator F L A N D E R S . N O W , in giving your low rating to monetary controls, are you giving a low rating to the effect of money supply in this balance between money and goods ? M r . KEYSERLING. NO ; because i n t h e f i r s t p l a c e , i n g i v i n g t h i s l o w r a t i n g to m o n e y s u p p l y , Senator, I w a n t to restate s o m e t h i n g t h a t I t h i n k I s a i d w h e n y o u were n o t here. I a m g i v i n g a low r a t i n g only w i t h i n an assumption that the monet a r y a u t h o r i t i e s , f o r r e a s o n s t h a t seem t o m e i m p o r t a n t , c o u l d n o t p u s h m o n e t a r y controls to t h e i r logical or extreme conclusion. I n other words, i f the monetary authorities were w i l l i n g to produce e x t r e m e changes i n interest rates, i n the a v a i l a b i l i t y o f c r e d i t a n d i n t h e money supply, I would certainly not then give a low rating i n terms o f i t s effect u p o n t h e p r i c e s t r u c t u r e . I t h i n k i f y o u pushed i t f a r enough, y o u could b r i n g the price structure downward through that method probably more quickly than i n any other way. S e n a t o r FLANDERS. NOW, w o u l d y o u s a y t h a t t h e r e w a s a n y d i f f e r e n c e i n t h a t r e l a t i o n , t h a t is, t h a t p u s h i n g i t t o t h e e x t r e m e is d a n g e r o u s ; i n t h a t r e s p e c t does t h e m o n e y s u p p l y d i f f e r f r o m a n y o f t h e o t h e r factors that you have mentioned? I s n ' t a n y t o o l p u s h e d t o its extreme dangerous ? M r . KEYSERLING. I a g r e e w i t h t h a t . Senator F L A N D E R S . Y O U see, I am trying to find out why you put the money supply so low when i t is apparently a prime factor in the equation. M r . KEYSERLING. W e l l , first o f a l l I w o u l d s a y t h a t I g a v e s p e c i f i c i l l u s t r a t i o n s i n d i f f e r e n t areas o f e c o n o m i c p o l i c y w h e r e t a x p o l i c y a n d price p o l i c y were equally susceptible t o d i s a b i l i t y i f pushed too f a r . N o w , i n m y r a t i n g I simply said t h i s : I s a i d t h a t I t h o u g h t — a n d t h i s i s a m a t t e r o f j u d g m e n t — t h a t as a p p l y i n g p a r t i c u l a r l y t o t h e p e r i o d between M a r c h 1951 a n d n o w — a n d I have been t a l k i n g n o t about t h e a p p l i c a t i o n o f m o n e t a r y t h e o r y i n t h a t c o n n e c t i o n b u t a b o u t t h e a p p l i c a t i o n o f t h e specific c h a n g e t h a t was made, w h i c h was a m i n o r c h a n g e — I said t h a t on m y evaluat i o n t h a t t h a t m i n o r c h a n g e , I t h o u g h t , h a d h a d less i n f l u e n c e u p o n p r i c e s t a b i l i t y d u r i n g t h i s p e r i o d t h a n s u c h t h i n g s as t h e d i r e c t c o n t r o l s , the increases i n taxes w h i c h h a v e t a k e n place, t h e f u n d a m e n t a l increase i n p r o d u c t i o n w h i c h has t a k e n place, t h e a l l o c a t i o n o f m a terials i n accord w i t h certain criteria, and I t h i n k I mentioned the others. S e n a t o r FLANDERS. L e t u s g o b a c k t o a n o t h e r p e r i o d . W o u l d y o u f e e l t h a t i n t h e p e r i o d a f t e r J u n e 1950 t h a t t h e m o n e y s u p p l y f a c t o r MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 2 1 3 w a s s a t i s f a c t o r i l y h a n d l e d , t h a t is, t h a t n o t u s i n g i t w a s t h e t h i n g to do ? M r . KEYSERLING. I t h i n k I s a i d t o S e n a t o r D o u g l a s t h a t l o o k i n g b a c k w a r d I was n o t p r e p a r e d to stand on the g r o u n d t h a t i t w o u l d h a v e been undesirable t o h a v e m a d e t h i s c h a n g e represented b y t h e a c c o r d s o m e w h a t sooner. I n other words, I a m not t a k i n g the position that the accord w a s m a d e precisely a t t h e r i g h t t i m e , t h a t i f i t h a d been m a d e sooner i t m i g h t not have made its c o n t r i b u t i o n to stability. I a m simply t a k i n g the position—let's put it this w a y — t h a t i f the a c c o r d h a d b e e n m a d e i n t h e m i d d l e o f 1950 r a t h e r t h a n i n M a r c h 1951, I s t i l l t h i n k , a l t h o u g h I c a n n o t p r o v e , t h a t m u c h o r m o s t o f t h e price i n f l a t i o n w h i c h t o o k place between the Chinese i n t e r v e n t i o n a n d F e b r u a r y 1 9 5 1 w o u l d h a v e o c c u r r e d a n y w a y , because o f t h e o t h e r p o w e r f u l factors at w o r k . S e n a t o r FLANDERS. I may s a y t h a t i n q u e s t i o n i n g I t h i n k , o r p e r haps I made a statement instead of questioning, both M r . M a r t i n a n d S e c r e t a r y S n y d e r r a i s e d t h e q u e s t i o n as t o w h e t h e r m o n e t a r y c o n t r o l alone sufficient t o have stopped the p r i c e rise w o u l d n o t h a v e been destructive. I believe t h a t a n endeavor t o completely negative t h e p r i c e rise b y m o n e t a r y c o n t r o l s a l o n e w o u l d h a v e been d e s t r u c t i v e . T o t h a t e x t e n t , i f t h a t i s y o u r p o s i t i o n — a n d I t h i n k i t i s — I find m y s e l f a g r e e i n g w i t h y o u , b u t I cannot agree w i t h t h e l o w p o s i t i o n y o u have g i v e n t h e m o n e t a r y p o l i c y i n t h i s series. I j u d g e t h a t o f t h e t h i n g s y o u have g i v e n t h a t y o u rate o n l y exh o r t a t i o n l o w e r , a n d t h a t i s l o w i n d e e d . I t seems t o m e y o u c a n n o t g i v e so l o w a p o s i t i o n t o o n e o f t w o p r i m a r y f a c t o r s . M r . KEYSERLING. W e l l , S e n a t o r , y o u m a y be r i g h t o n t h a t , b u t i f I s o u g h t t o m o v e t h e m a r o u n d a n d t o p u t one o f t h e o t h e r s a t t h e b o t t o m , t a k e f o r e x a m p l e t a x p o l i c y , I w o u l d find i t v e r y h a r d t o p u t t h a t at the bottom. A n d i n t h e s h o r t - r u n s i t u a t i o n , f r a n k l y I w o u l d find i t v e r y h a r d t o p u t p r i c e a n d w a g e s t a b i l i z a t i o n a t t h e b o t t o m because I t h i n k i n t h i s t h e s h o r t - r u n s i t u a t i o n , t h a t i t is v e r y i m p o r t a n t . S e n a t o r FLANDERS. O n t a x p o l i c y , f o r i n s t a n c e , I t a k e i t t h a t y o u feel t h a t increased t a x a t i o n necessarily a n d u n i v e r s a l l y is a n t i inflationary ? M r . KEYSERLING. NO, s i r , n o t a t a l l . S e n a t o r FLANDERS. I j u s t w a n t t o see y o u p u l l t h a t d o w n j u s t a l i t t l e . M r . KEYSERLING. W e i l , I a m g l a d y o u a r e h e l p i n g m e d o t h a t . S e n a t o r FLANDERS. I S t h a t y o u r p o s i t i o n ? M r . KEYSERLING. NO ; t h a t i s n o t m y p o s i t i o n a t a l l . I s a y t h e t a x p o l i c y , as w e l l as o t h e r e c o n o m i c p o l i c i e s , i l l u s t r a t e t h e p o i n t t h a t t h e y h a v e c o m p e t i n g effects, a n d t h a t some o f t h e effects a r e g o o d a n d some a r e b a d . I n s o f a r as t a x a t i o n i s g e n e r a l l v r e p r e s s i v e , i t a l w a y s h a s t o t h a t e x t e n t a c o m p e t i n g b a d effect. T h e r e are c e r t a i n t h i n g s y o u d o n o t w a n t t o repress. Y o u d o n o t w a n t t o repress r e w a r d f o r e f f o r t , b u t o n balance y o u h a v e t o d o some o f it. N o w / l t h i n k , n o t g e t t i n g t o the p o i n t o f w h e t h e r i t is a n a r b i t r a r y figure o f 20 p e r c e n t , 19 o r 21, t a x a t i o n c a n r e a c h t h e p o i n t w h e r e i t s r e p r e s s i v e effects f a r o u t w e i g h i t s b e n e f i c i a l effects, a n d I t h i n k i t c a n r e a c h t h e p o i n t w h e r e o n n e t b a l a n c e i t m a y be i n f l a t i o n a r y . MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.214 S e n a t o r FLANDERS. W o u l d y o u c o n s i d e r t h a t t h e r e a r e a n y o f i t s effects w h i c h i m m e d i a t e l y a f f e c t p r i c e s u n f a v o r a b l y ? T a k e excise taxes, f o r instance, d o y o u consider i t i n f l a t i o n a r y w h e n a f u r coat has a d d e d t o i t t h e p r i c e o f t h e excise t a x ? M r . KEYSERLING. NO, I d o n o t . S e n a t o r FLANDERS. O r w h e n g a s o l i n e h a s a d d e d t o i t t h e p r i c e o f a n increased excise t a x ? M r . KEYSERLING. I find t h e g a s o l i n e q u e s t i o n a l i t t l e h a r d e r because I r e g a r d a f u r c o a t as a l u x u r y a n d I d o n o t k n o w w h e t h e r g a s o l i n e i s a l u x u r y o r n o t i n o u r e c o n o m y . C l e a r l y , i n o n e sense i t i s n o t , b u t c l e a r l y t h e e x t e n t o f i t s use i s i n v o l v e d . S e n a t o r FLANDERS. NOW, I a m l e d i n t o a l i t t l e b y w a y b y t h i s l a s t r e m a r k . I f y o u c o n s i d e r i n f l a t i o n a r y o n l y p r i c e r i s e s i n necessities, t h e n w h y should the S t a b i l i z a t i o n A d m i n i s t r a t i o n cover the w h o l e w a t e r f r o n t o f l u x u r i e s , necessities, a n d e v e r y o t h e r b l o o m i n g t h i n g t h e r e is? D o n ' t y o u find y o u r s e l f a t o d d s w i t h t h e m i n t h a t i f y o u t h i n k t h a t i n f l a t i o n r e l a t e s p r i m a r i l y t o necessities ? M r . KEYSERLING. W e l l , i n t h e first p l a c e , S e n a t o r , t r y i n g h a r d n o t t o quibble, I do n o t t h i n k I said t h a t I never r e g a r d e d p r i c e rises i n l u x u r i e s as p o t e n t i a l l y i n f l a t i o n a r y . I t h i n k p r i c e r i s e s i n l u x u r i e s c o u l d be i n f l a t i o n a r y , a n d t h e r e f o r e I d i d n o t s a y c a t e g o r i c a l l y t h a t I w o u l d n e v e r t r y t o r e s t r a i n p r i c e increases o n l u x u r i e s . I d i d t r y t o convey the general impression t h a t t h e restraint o f p r i c e i n c r e a s e s o n l u x u r i e s , s u c h as f u r c o a t s , seems t o m e less i m p o r t a n t b y f a r t h a n t h e r e s t r a i n t o f p r i c e i n c r e a s e s o n necessities. N o w , I g o one s t e p f u r t h e r t h a n t h a t a n d s a y t h a t I w o u l d i n c l i n e h e a v i l y t o w a r d t h e v i e w t h a t i n a l o n g - r a n g e defense m o b i l i z a t i o n t h e effort involved, the complexity involved, the general spirit involved i n t r y i n g t o p r i c e - c o n t r o l a l l l u x u r i e s f a r o u t w e i g h s t h e benefits. N o w , I w a n t to f a i r about that, a n d y o u realize the position I a m in. T h a t is m y general position. I w o u l d n o t w a n t t h a t t o be i n t e r p r e t e d as a j u d g m e n t o n a n y p a r t i c u l a r p r i c e a c t i o n b e i n g t a k e n b y O P S , because t h e y a r e a n o p e r a t i n g agency a n d t h e y are closer t o i t t h a n I am. B u t m y g e n e r a l view^ i s — a n d I h a v e e x p r e s s e d i t m a n y t i m e s — t h a t f o r a p a r t i a l m o b i l i z a t i o n o f l o n g d u r a t i o n , price controls should be selective r a t h e r t h a n c o v e r i n g t h e w h o l e economy. A n d I h a v e never followed the argument f o r this k i n d of situation that i f you control a n y t h i n g y o u have to control everything. S s n a t o r FLANDERS. I h a v e a n u m b e r o f o t h e r q u e s t i o n s I c o u l d a s k , s i r , b u t I do n o t t h i n k t h e y are o f g r e a t i m p o r t a n c e . I presume t h a t y o u have a l r e a d y e x p l o r e d — I have n o t been here a l l t h e t i m e — t h e a p p a r e n t s p e a k i n g w i t h t w o voices i n y o u r section B , f o r m u l a t i o n o f fiscal a n d m o n e t a r y p o l i c y , p a g e s 849 a n d 850 ( c o m mittee p r i n t entitled "Monetary Policy and the Management of the P u b l i c D e b t " ) . P a g e 849 a t t h e e n d o f t h e t h i r d p a r a g r a p h f r o m t h e top: Nevertheless, we do not question the desirability of making monetary policy chiefly the responsibility of an authority having some degree of independence f r o m a l l Government departments and agencies engaged i n borrowing or lending. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 215 W h i l e at t h e e n d o f t h e t h i r d p a r a g r a p h o n t h e n e x t page there is t h i s sentence: The President, as Chief Executive and head of the executive branch, is the only one person i n the Government i n whom this power of policy coordination can be lodged. N o w d o y o u see a n y c o n f l i c t b e t w e e n t h o s e t w o s t a t e m e n t s ? M r . KEYSERLKSTG. S e n a t o r , I d o n o t see a c o n f l i c t b e t w e e n t h e t w o statements, b u t I do not t h i n k t h a t t h e t w o statements p r o v i d e a n answer to the question or to the problem. I d o n o t t h i n k t h e r e is a c o n f l i c t b e t w e e n s a y i n g t h a t t h e Congress i n i t s j u d g m e n t m a y set u p o n e a g e n c y d i r e c t l y w i t h i n t h e e x e c u t i v e s t r u c t u r e , as f o r e x a m p l e t h e T r e a s u r y , a n d t h a t t h e C o n g r e s s i n i t s j u d g m e n t m a y set u p a n o t h e r a g e n c y s u c h as t h e F e d e r a l R e s e r v e B o a r d o u t s i d e t h e e x e c u t i v e s t r u c t u r e , w h i c h i s t h e first s t a t e m e n t , a n d s a y i n g t h a t w h e n t h e C o n g r e s s does t h a t , n o n e t h e l e s s , p a r t i c u l a r l y i n t i m e s o f u r g e n c y t h e P r e s i d e n t as t h e c h i e f c o o r d i n a t i n g e x e c u t i v e offic e r m u s t t r y t o l e n d t h e i n f l u e n c e o f h i s office, u s i n g t h a t w o r d i n t h e p r o p e r sense, t o d e a l w i t h t h e p r o b l e m o f c o o r d i n a t i o n a m o n g t h o s e agencies, since t h e y b o t h p r o f o u n d l y affect t h e economy. A n d I t h i n k t h e C o n g r e s s a t t i m e s h a s r e c o g n i z e d t h a t , because t h e C o n g r e s s a t t i m e s , h a v i n g set u p e x e c u t i v e d e p a r t m e n t s a n d h a v i n g set u p the F e d e r a l Reserve B o a r d , has i n c e r t a i n statutes g i v e n c e r t a i n f u n c t i o n s i n p a r t t o a n e x e c u t i v e officer u n d e r t h e P r e s i d e n t a n d i n p a r t to the F e d e r a l Reserve B o a r d . F o r example, the power to deal w i t h the problem of housing shortages i n t h i s , c u r r e n t s i t u a t i o n h a s b e e n g i v e n b y t h e C o n g r e s s i n p a r t t o t h e F e d e r a l Reserve B o a r d — a n d I say t h i s n o t c r i t i c a l l y — i n p a r t to the H o u s i n g and H o m e Finance A dm i ni s t r a t o r , i n part to M r . Wilson. N o w c l e a r l y i n t h a t d e c i s i o n t h e C o n g r e s s h a s r e c o g n i z e d , (a) t h a t i t w a n t s t o use a l l o f these f a c i l i t i e s , a n d (b) t h a t t h e r e i s a r e l a t i o n s h i p a m o n g t h e m . A n d once t h a t i s d o n e , i t n e c e s s a r i l y does i m p o s e u p o n t h e P r e s i d e n t some degree o f r e s p o n s i b i l i t y o f c o o r d i n a t i o n . So I t h i n k the t w o answers are consistent. N o w , l e t m e g e t t o t h e p a r t o f m y c o m m e n t t h a t says t h a t t h e y d i d n o t answer t h e p r o b l e m . I d o n o t t h i n k t h a t t h e p r o b l e m o f h o w one r e c o n c i l e s q u a s i - i n d e p e n d e n t agencies, i n d e p e n d e n t agencies—the t e r m " i n d e p e n d e n t agencies" o f course has been used i n a l o t o f d i f f e r e n t w a y s . T h e r e are a l o t o f agencies t h a t are c a l l e d i n d e p e n d e n t agencies t h a t a r e w i t h i n t h e e x e c u t i v e s t r u c t u r e . I d o n o t t h i n k — o f c o u r s e t h a t i s a p o l i t i c a l science q u e s t i o n r a t h e r t h a n a n economic q u e s t i o n — t h a t question has been c o m p l e t e l y resolved, p a r t i c u l a r l y f o r an emergency period of this k i n d . S e n a t o r FLANDERS. I n o t e d i n t h e q u e s t i o n i n g o f b o t h M r . S n y d e r a n d M r . M a r t i n t h a t those g e n t l e m e n steered off f r o m a n y clear exp r e s s i o n o f p r i n c i p l e s u c h as a s k i n g t h e C o n g r e s s t o d e c i d e o r a n y b o d y else t o d e c i d e w h i c h w a s p a r a m o u n t , t h e s t a b i l i t y o f t h e p r i c e s o f G o v e r n m e n t securities or the s t a b i l i t y o f the d o l l a r , a n d a p p a r e n t l y i t figured o u t as n e a r as I c o u l d m a k e o u t , t o t h i s s t a t e m e n t . T h a t given the Secretary of the Treasury of the particular characteristics a n d the experience a n d ability, a n d g i v e n a b o a r d repre- MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.216 sented i n a c h a i r m a n of the p a r t i c u l a r person o r characteristics a n d experience a n d a b i l i t y , w e m i g h t be assured t h a t t h e r e w o u l d be n o trouble. T h a t seemed t o be t h e r e s u l t w h i c h b o t h o f t h o s e t w o g e n t l e m e n a s k e d u s t o a c c e p t as t h e s o l u t i o n c e r t a i n l y t o t h e p r e s e n t s i t u a t i o n a n d presumably f o r all f u t u r e situations. D o y o u t h i n k t h a t is a good solution ? M r . KEYSERLING. S e n a t o r , I t h i n k t h a t i n t h e c u r r e n t s i t u a t i o n — t h e o n l y w a y I c a n s t a t e w h e t h e r I t h i n k i t i s a g o o d s o l u t i o n i s t o use a t e c h n i q u e w h i c h I t r i e d o n s o m e t h i n g else. I f I w e r e m a k i n g t h e d e c i s i o n n o w , S e n a t o r , I w o u l d l e a v e i t a b o u t as i t is. I w o u l d l e a v e i t a b o u t as i t i s a n d r e l y u p o n t h e T r e a s u r y a n d t h e F e d e r a l Reserve B o a r d t o continue t o w o r k t h i s t h i n g out. T h a t is t h e i m p o r t o f m y p r e p a r e d s t a t e m e n t , t h a t t h a t seems t o m e t o b e t h e most p r u d e n t of solutions available at the current time. N o w , o n t h e l o n g - r a n g e q u e s t i o n w h i c h , as, I s a y , i s o n e o f t h e p o l i t i c a l science o r o f t h e s t r u c t u r e o f t h e o r g a n i z a t i o n o f p u b l i c p o w e r , t h a t is m o r e difficult. O n e o f t h e r e a s o n s t h a t i t i s m o r e d i f f i c u l t i s t h a t , as I s a i d i n m y statement, i n m y prepared statement, the argument f o r independence m a y be b a s e d — a n d l e t m e s a y I a m n o t a p p l y i n g t h i s p a r t i c u l a r l y t o t h e F e d e r a l R e s e r v e B o a r d , because I w i l l g e t i n a s i t u a t i o n h e r e w h e r e t h i s g e n e r a l d i s c u s s i o n w i l l seem t o b e m y v i e w . I w a n t t o . state c a t e g o r i c a l l y t h a t i n t h e c u r r e n t s i t u a t i o n m y v i e w w o u l d be t h a t t h e m o s t p r u d e n t c o u r s e w o u l d b e t o l e t t h i n g s g o as t h e y a r e . N o w , t a l k i n g a b o u t t h e s u b j e c t o f i n d e p e n d e n c e n o t as r e l a t e d p a r t i c u l a r l y t o t h e F e d e r a l Reserve B o a r d b u t m o r e g e n e r a l l y , i t rests u p o n a v a r i e t y o f g r o u n d s w h i c h I t h i n k i t is w o r t h s a y i n g s o m e t h i n g about. O n e g r o u n d o n w h i c h i t rests is t h a t i f a n agency is vested w i t h very i m p o r t a n t functions v i t a l l y affecting the whole economy, i t should be f r e e o f p o l i t i c a l i n f l u e n c e . I h a v e n e v e r b e e n a b l e t o see w h e r e t h a t a r g u m e n t a p p l i e s m o r e t o one agency t h a n t o m a n y o t h e r agencies t h a t I c o u l d n a m e w h i c h m o s t assuredly p r o f o u n d l y affect t h e w h o l e economy a n d I believe t h a t t h e a r g u m e n t t h a t b o d i e s e x e r c i s i n g p o w e r f u l p u b l i c f u n c t i o n s s h o u l d be free either of the Congress or of the President o n t h a t p a r t i c u l a r g r o u n d f a l l s d o w n u n d e r o u r system. I h a v e n o t been able t o d i f f e r e n t i a t e between one p o w e r a n d a n o t h e r . I t h i n k t h a t t h e r e is n o p o w e r m o r e v i t a l t h a n t h e question o f o u r n a t i o n a l d e f e n s e o r u n d e r t h e c u r r e n t s i t u a t i o n , as I p o i n t e d o u t y e s t e r d a y , t h e a l l o c a t i o n o f scarce m a t e r i a l s w h i c h a f f e c t s t h e v e r y l i f e a n d death of businessmen or of a l l industries, o r the question o f w h a t k i n d o f prices y o u make h u n d r e d s o f thousands of businessmen charge o r w h a t k i n d o f wages y o u m a k e m i l l i o n s o f w o r k e r s accept. T h o s e a r e also e n o r m o u s l y i m p o r t a n t p o w e r s o v e r t h e e c o n o m y , a n d t h e y are e q u a l l y susceptible t o i m p r o p e r pressures. A n d i f y o u a r e going to make the argument on that g r o u n d that a particular f u n c t i o n s h o u l d be i n d e p e n d e n t , i t j u s t seems t o g o t o t h e w h o l e q u e s t i o n o f t h e p h i l o s o p h y o f o u r s y s t e m , so I c a n n o t f o l l o w t h a t a r g u m e n t v e r y much. T h e n y o u c o m e t o t h e a r g u m e n t o f w h e t h e r as a m a t t e r o f p r a c t i c a l f a c t y o u c a n h a v e one i m p o r t a n t economic f u n c t i o n f r e e - w h e e l i n g i n t i m e s l i k e these as a g a i n s t o t h e r s . MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.222 T h e r e i t is m y g e n e r a l v i e w — a n d I t h i n k i m p l i c i t i n t h e E m p l o y m e n t A c t and i n the concept o f the Council of E c o n o m i c A d v i s e r s — t h a t a n e f f o r t h a s t o b e m a d e t o r e c o n c i l e these p o l i c i e s , c e r t a i n l y t h e policies o f t h e T r e a s u r y a n d o f the F e d e r a l Reserve B o a r d need t o be r e c o n c i l e d , u s i n g t h a t t e r m i n i t s j u s t sense o f t r y i n g t o a r r i v e a t a h a r m o n i o u s s o l u t i o n o f a p r o b l e m o n w h i c h b o t h are v i t a l l y affected. I g e t b a c k t o m y i n i t i a l p o i n t t h a t f o r t h a t process o f r e c o n c i l i a t i o n I as a n o b s e r v e r w o u l d say w i t h t h e p r e s e n t s i t u a t i o n t a k i n g i n t o account all the factors they can move f u r t h e r i n t h a t direction by t r y i n g to w o r k together t h a n by having a new legislative definition of their respective functions. S e n a t o r FLANDERS. T h a n k y o u . I w o u l d l i k e , M r . C h a i r m a n , j u s t t o m a k e a b r i e f c o m m e n t a r y o n t h i s w i t h o u t a s k i n g f u r t h e r questions. F r o m the testimony of D r . K e y s e r l i n g and the testimony of others a n d f r o m m y o w n t h i n k i n g o n t h e s u b j e c t , i t seems t o m e t h a t t h e t w o t h i n g s t h a t are p r i m a r y are t h e m o n e y s u p p l y a n d the p r o d u c t i o n . I see t h e l i m i t a t i o n s i n u s i n g m o n e y s u p p l y , t h e m o n e t a r y p o l i c y as t h e sole a g e n t o f s t a b i l i z a t i o n because i t i s v e r y l i a b l e t o a f f e c t t h e p r o d u c t i o n adversely i f carried to its extreme limits, but I w o u l d s t i l l m a k e i t p r i m a r y , of equal importance w i t h production. I w o u l d say t h a t s a v i n g s was a n element i n m o n e t a r y p o l i c y . I w o u l d say t h a t t a x a t i o n , t h e t a k i n g aw^ay o f t h e a v a i l a b l e m o n e y s u p p l y , is a n element o f m o n e t a r y p o l i c y , a n d I w o u l d f i n d m o n e t a r y p o l i c y a c o e q u a l w i t h p r o d u c t i o n a t t h e t o p o f t h i s l i s t . T h a t is j u s t s i m p l y a statement of m y position. M r . KEYSERLING. M r . C h a i r m a n , m i g h t I j u s t m a k e o n e b r i e f c o m ment. T h a t the definition of monetary policy by Senator Flanders, w7ith w h i c h I do n o t disagree p a r t i c u l a r l y , was n o t t h e one I used i n placing i t lower on the list. I n other words, i f y o u embraced taxation a n d savings w i t h i n t h a t scope, I w o u l d c e r t a i n l y b r i n g i t t o t h e t o p o f t h e l i s t a n d S e n a t o r FLANDERS. W o u l d r e d u c e t h e m o n e y s u p p l y a v a i l a b l e f o r the purchase of goods ? M r . KEYSERLING. O h , y e s ; t a x a t i o n r e d u c e s t h e m o n e y s u p p l y , a n d w h e n I placed this m o n e t a r y supply at the b o t t o m of of the list, clearly I was not i n c l u d i n g taxation. I was t a l k i n g m o r e to the p a r t i c u l a r t y p e o f m o n e t a r y devise w h i c h h a d been m o s t l y discussed here d u r i n g t h e 3 days. B u t i f y o u say t h a t t h e m o n e y s u p p l y means t h e a v a i l a b l e s p e n d i n g f u n d s , a n d t h e t a x a t i o n is one i m p o r t a n t m e t h o d o f r e d u c i n g i t , t h e n I w o u l d agree w i t h y o u , a n d u n d e r t h a t d e f i n i t i o n p u t i t a t t h e t o p o f the list. S e n a t o r FLANDERS. L e t us c o m p r o m i s e , i f w e c a n , b y m o v i n g i t u p t h r e e o r f o u r spaces o n y o u r l i s t , e v e n i n i t s n a r r o w sense, b u t I d o not w a n t to push t h a t matter too far. R e p r e s e n t a t i v e BOLLING. M r . M u r p h y , d o y o u h a v e a n y q u e s t i o n s ? M r . M U R P H Y . I j u s t w a n t t o ask one q u e s t i o n , M r . K e y s e r l i n g . T h e D o u g l a s c o m m i t t e e i n i t s r e p o r t 2 years ago i n c l u d e d a statem e n t t h a t i t believed i t w o u l d m i l i t a t e against the purposes of the E m p l o y m e n t A c t rather than w o r k i n favor of them i f the U n i t e d States s h o u l d r e t u r n at t h i s t i m e t o a free domestic c o n v e r t i b i l i t y o f i t s currency i n t o either g o l d coin or g o l d bullion. W h a t w o u l d be y o u r r e a c t i o n t o a r e a f f i r m a t i o n o f t h a t p o s i t i o n i n the report of this committee ? MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.218 M r . KEYSERLING. W e l l , i n t h e first p l a c e , I d o n o t l i k e t h e s t a t e m e n t t h a t a r e t u r n to the free convertibility—the g o l d standard, isn't t h a t w h a t y o u are r e f e r r i n g t o ? M r . MURPHY. T h a t is correct. M r . KEYSERLING. I d o n o t l i k e t h e s t a t e m e n t s e t t i n g t h a t i n j u x t a p o s i t i o n t o t h e E m p l o y m e n t A c t , because t h e s t a t e m e n t o f t h e E m p l o y m e n t A c t i s so b r o a d t h a t i t i s r e a l l y a s t a t e m e n t o f o b j e c t i v e s f o r a stable a n d g r o w i n g economy, a n d I do not l i k e i t said t h a t i t is the E m p l o y m e n t A c t w h i c h stands i n the w a y of this. I w o u l d p u t i t o n a b r o a d e r g r o u n d a n d say t h a t i t w o u l d be i n accord w i t h m y j u d g m e n t t h a t a r e t u r n to t h a t at t h i s t i m e w o u l d be inconsistent w i t h the interests of the A m e r i c a n economy, t a k i n g i n t o account its stability, its g r o w t h , its monetary and debt management p r o b l e m s , its c u r r e n t defense p r o b l e m s , t a k i n g t h e m a l l i n t o account. I n o t h e r w o r d s , t a k i n g i n t o a c c o u n t o u r i n t e r e s t s as a n a t i o n , I w o u l d n o t be i n f a v o r n o w o f a r e t u r n t o t h e g o l d s t a n d a r d . M r . MURPHY. T h e p a r t i c u l a r phrase i n the D o u g l a s r e p o r t w h i c h I w a s g r o p i n g f o r i s as f o l l o w s : We believe t h a t to restore the free domestic convertibility of money i n gold coin or gold bullion at this time would m i l i t a t e against rather than promote the purposes of the Employment Act, and we recommend t h a t no action i n t h i s direction be taken. Y o u agree w i t h t h e conclusion b u t y o u w o u l d place i t o n a b r o a d e r ground than the E m p l o y m e n t A c t ? M r . KEYSERLING. Y e s . M r , MURPHY. T h a t is all. R e p r e s e n t a t i v e BOLLING. M r . K e y s e r l i n g , t h a n k y o u v e r y m u c h i n b e h a l f o f t h e c o m m i t t e e . T h e c o m m i t t e e i s n o w i n recess u n t i l t o m o r r o w a t 10. ( W h e r e u p o n , a t 1 2 : 2 0 p . m . , t h e s u b c o m m i t t e e recessed t o r e c o n v e n e a t 10 a. m . , F r i d a y , M a r c h 1 4 , 1 9 5 2 . ) MONETARY POLICY AND THE MANAGEMENT OF THEJ PUBLIC DEBT F R I D A Y , M A R C H 14, 1952 CONGRESS o r T H E U N I T E D S T A T E S , S U B C O M M I T T E E ON G E N E R A L CREDIT CONTROL A N D D E B T M A N A G E M E N T OF T H E J O I N T C O M M I T T E E ON T H E E C O N O M I C REPORT, Washington, D. C. T h e s u b c o m m i t t e e m e t , p u r s u a n t t o recess, a t 1 0 : 1 0 o ' c l o c k a. m . , i n r o o m 1301, N e w H o u s e Office B u i l d i n g , R e p r e s e n t a t i v e W r i g h t P a t m a n ( c h a i r m a n of the subcommittee) presiding. v * Present: Representative P a t m a n ( c h a i r m a n of the subcommittee), Senator D o u g l a s ; and Representatives B o l l i n g and W o l c o t t . A l s o present: G r o v e r W . Ensley, staff d i r e c t o r ; H e n r y M u r p h y , economist f o r the subcommittee; a n d J o h n W . L e h m a n , clerk t o t h e f u l l committee. R e p r e s e n t a t i v e PATMAN. T h e c o m m i t t e e w i l l please come t o o r d e r . M r . W i g g i n s , w e are d e l i g h t e d t o h a v e y o u as a w i t n e s s t h i s m o r n ing. I t happens t h a t I have k n o w n M r . W i g g i n s f o r a n u m b e r o f y e a r s , a n d I d o n o t k n o w o f a m o r e v e r s a t i l e business a n d i n d u s t r i a l leader i n the U n i t e d States t h a n A . L . M . W i g g i n s . I have h a d the pleasure a n d the p r i v i l e g e of v i s i t i n g w i t h h i m i n his home t o w n a n d i n his home State, a n d I k n o w something about his m a n y fine c i v i c a n d p a t r i o t i c c o n n e c t i o n s , a n d t h e w o n d e r f u l w o r k h e has done as j u s t a g o o d A m e r i c a n c i t i z e n , a n d I p e r s o n a l l y v a l u e h i s v i e w s h i g h l y , a n d I a m g l a d t h a t he has f a v o r e d us w i t h h i s p r e s ence here. N o t o n l y has he been a l e a d e r a m o n g t h e s m a l l - b u s i n e s s g r o u p s o f d i f f e r e n t t y p e s , b u t he is a l e a d e r a m o n g t h e b a n k i n g g r o u p as w e l l . I n f a c t , he w a s a p a s t p r e s i d e n t o f t h e A m e r i c a n B a n k e r s A s s o c i a t i o n , w h i c h i t s e l f is q u i t e a n h o n o r , as w e a l l k n o w . M r . W i g g i n s , do y o u h a v e a p r e p a r e d s t a t e m e n t ? STATEMENT 0E A. L. M. WIGGINS M r . WIGGINS. M r . C h a i r m a n , I h a v e a p r e p a r e d s t a t e m e n t , a n d w i t h t h e p e r m i s s i o n o f t h e c o m m i t t e e I w o u l d l i k e t o file t h i s s t a t e m e n t a n d t h e n m o r e o r less s u m m a r i z e i n f o r m a l l y some o f t h e p o i n t s t h a t I h a v e u n d e r t a k e n t o m a k e i n m o r e d e t a i l i n t h e s t a t e m e n t , i f t h a t w o u l d be satisfactory. R e p r e s e n t a t i v e PATMAN. T h a t w i l l be s a t i s f a c t o r y . Y o u m a y p r o ceed. 219 97308—52 15 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.220 I f y o n d o n o t m i n d , I w i l l g e t s o m e o n e t o r e a d t h e first t w o p a r a g r a p h s f o r y o u , o r y o u c a n r e a d t h e m . I w a n t t h e c o m m i t t e e t o know~ s o m e t h i n g about y o u r connections. Suppose y o u go ahead a n d r e a d them, i f you will. M r . WIGGINS. M V n a m e i s A . L . M . W i g g i n s , o f H a r t s v i l l e , S . CL I a m c h a i r m a n o f the boards o f directors of the A t l a n t i c Coast L i n e R a i l r o a d Co., t h e L o u i s v i l l e & N a s h v i l l e R a i l r o a d Co., a n d several s m a l l e r associated r a i l r o a d s . I a m also c h a i r m a n o f t h e b o a r d o f d i r e c t o r s o f t h e B a n k o f H a r t s v i l l e , H a r t s v i l l e , S. C . , c a p i t a l s t o c k $100,000, a n d p r e s i d e n t o f a s m a l l n o n b a n k i n g t r u s t c o m p a n y . F o r t h e l a r g e r p a r t o f m y business career I h a v e been a d i r e c t o r a n d m a n a g e r o f a n u m b e r o f small-business i n s t i t u t i o n s engaged i n finance, m e r c h a n d i s i n g , a g r i c u l t u r e , a n d m a n u f a c t u r i n g , a n d newspaper publishing. F r o m J a n u a r y 1947 t o J u l y 1948 I w a s U n d e r S e c r e t a r y o f t h e Treasury. I n t h i s c a p a c i t y , o n e o f m y d u t i e s w a s t o assist t h e Secretary of the Treasury i n the management of the public debt andr i n p a r t i c u l a r , t o m a i n t a i n l i a i s o n w i t h t h e B o a r d o f G o v e r n o r s of* t h e F e d e r a l Reserve System, a n d other representatives o f t h e openirfarket committee. S e n a t o r DOUGLAS. Y O U h a d a n i n t e r e s t i n g t i m e , M r . W i g g i n s . M r . WIGGINS. Q u i t e i n t e r e s t i n g , s i r . Representative PATMAN. A l l r i g h t , y o u m a y proceed i f y o u desire. I f y o u w i s h t o y i e l d f o r questions, t h a t w i l l be s a t i s f a c t o r y . M r . WIGGINS. M y d i s c u s s i o n , g e n t l e m e n , i s m o r e o f t h e p r a c t i c a l a p p r o a c h , based o n t h e experience t h a t I have indicated. T h e q u e s t i o n n a i r e s a n d t h e answers t h a t were sent o u t a n d received, i n m y opinion, constitute the most valuable collection of t h i n k i n g i n t h e field o f m o n e y , i n m o n e y m a n a g e m e n t , p r o b l e m s o f d e b t m a n a g e m e n t , a n d other collateral questions t h a t I have f o u n d anywhere. I h a v e r e a d t h e e n t i r e 1,300 p a g e s o f t h i s r e p o r t since i t w a s p u b l i s h e d a b o u t — s i n c e I g o t a c o p y a b o u t 10 d a y s a g o , a n d i t i s v e r y instructive and illuminating, and I congratulate the committee on t h e character o f t h e questions. I w i s h t o c o n f i n e m y d i s c u s s i o n t o t h r e e areas, a n d o n e o f t h e m , M r . C h a i r m a n , i s a r e l a t i v e l y s m a l l one, a n d I m i g h t d i s p o s e o f t h a t first, w h i c h w o u l d be i n i n v e r s e o r d e r t o t h e s t a t e m e n t . T h e q u e s t i o n has been raised about t h e o w n e r s h i p o f stock i n t h e F e d e r a l R e s e r v e b a n k s . I t h i n k i t m i g h t be w e l l i f I d i s p o s e d o f t h a t first, a n d t h e n t h e o t h e r t w o a r e r e l a t e d a n d a r e r e a l l y m o r e important. T h e q u e s t i o n h a s b e e n r a i s e d as t o w h e t h e r o r n o t t h e s t o c k o f t h e F e d e r a l R e s e r v e b a n k s s h o u l d be o w n e d b y t h e G o v e r n m e n t i n s t e a d o f b y t h e m e m b e r b a n k s . I n m y o p i n i o n i t s h o u l d n o t be o w n e d b y the Government. T h e F e d e r a l Reserve banks represent a c o m b i n a t i o n o f Governm e n t a n d p r i v a t e business u n d e r w h i c h t h e c o n t r o l is vested i n t h e Government. B u t i t is t h r o u g h t h e o w n e r s h i p o f t h e stock b y t h e b a n k s t h a t t h e Reserve S y s t e m m o b i l i z e s t h e services o f a b l e i n d i v i d u a l s as d i r e c t o r s . These men represent p r i v a t e enterprise a n d represent t h e p u b l i c , a n d w h i l e t h e c o n t r o l is vested i n t h e B o a r d o f G o v e r n o r s a l m o s t e n t i r e l y , a t t h e same t i m e these d i r e c t o r s b r i n g t h e v i e w p o i n t o f business, i n d u s t r y , a n d a g r i c u l t u r e a n d b a n k i n g t o t h e officers o f t h e i r b a n k s . I t h i n k t h a t i t i s h i g h l y i m p o r t a n t f o r MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 2 2 1 t h e R e s e r v e b a n k s t o m a i n t a i n close t o u c h w i t h c o n d i t i o n s p r e v a i l i n g i n t h e i r respective d i s t r i c t s , a n d t h i s is t h e o n l y official r e l a t i o n s h i p o f t h e F e d e r a l Reserve S y s t e m w i t h business, a g r i c u l t u r e , a n d industry. T h e m e m b e r s elect, i t is t r u e , p a r t o f t h e b o a r d , t h e B o a r d o f G o v ernors appoint p a r t of the board, and i f the Government owned the s t o c k t h e r e w o u l d be n o p a r t i c u l a r b a s i s o n w h i c h m e m b e r b a n k s w o u l d select m e n t o s e r v e o n t h e b o a r d s o f t h e s e r e s p e c t i v e b a n k s . I n f a c t , I t h i n k t h e r e l a t i o n s h i p s h o u l d be e n c o u r a g e d r a t h e r t h a n discouraged, a n d I have been able to f i n d no sound reason f o r t h e G o v e r n m e n t t o acquire t h e stock i n the F e d e r a l Reserve banks unless t h e u l t i m a t e objective is t o destroy t h e independence o f t h e S y s t e m and make i t merely a Government bureau. N o w , t h a t is a l l the comment, M r . C h a i r m a n , t h a t I h a d on t h a t particular point. R e p r e s e n t a t i v e s PATMAN. I w a n t t o ask y o u one o r t w o questions on that point, M r . Wiggins. D o y o u consider t h e F e d e r a l Reserve S y s t e m is a p u b l i c i n s t i tution ? M r . WIGGINS. SO f a r as t h e — y e s ; i t i s a p u b l i c i n s t i t u t i o n . R e p r e s e n t a t i v e PATMAN. A p u b l i c i n s t i t u t i o n ? Y o u do n o t cons i d e r t h e a m o u n t o f s t o c k o w n e d b y t h e c o m m e r c i a l b a n k s as s u f f i c i e n t to give them control of the institution ? M r . WIGGINS. T h e s t o c k o w n e r s h i p , i n m y o p i n i o n , h a s n o t h i n g to do w i t h the control. I t is a p e c u l i a r t y p e o f stock t h a t earns o n l y 6 percent. T h e owners o f the stock have no interest i n the earnings o f t h e b a n k b e y o n d t h e 6 percent d i v i d e n d t h e y get. Representative PATMAN. A n d t h e y have o n l y p a i d i n 3 percent. M r . WIGGINS. W e l l , t h e y g e t 6 p e r c e n t o n t h e a m o u n t p a i d i n . Representative PATMAN. Yes, t h e y get 6 percent. M r . WIGGINS. S i x p e r c e n t o n t h e a m o u n t p a i d i n . T h e y h a v e p a i d i n o n l y h a l f o f t h e p a r a m o u n t o f t h e stock. Representative PATMAN. I n other countries o f the w o r l d , do y o u k n o w o f another c o u n t r y w h e r e the c e n t r a l b a n k is n o t o w n e d b y t h e government ? M r . WIGGINS. A t t h e m o m e n t , I d o n o t . Representative PATMAN. I t h i n k the f a c t is, M r . W i g g i n s , t h a t i n a l l countries the central b a n k is owned b y the government, a n d i n t h i s country I do n o t consider t h a t the commercial banks o w n t h e F e d e r a l R e s e r v e b a n k i n g s y s t e m because t h e y h a v e t h a t t o k e n a m o u n t o f s t o c k , w h i c h i s so s m a l l a n d i n s i g n i f i c a n t c o m p a r e d t o t h e b u s i n e s s d o n e b y these i n s t i t u t i o n s ; y o u a g r e e w i t h t h a t , d o y o u n o t ? M r . WIGGINS. T h a t i s r i g h t . R e p r e s e n t a t i v e PATMAN. I t is t o o s m a l l t o consider t h a t t h e y w o u l d have any supervisory p o w e r b y reason o f the o w n e r s h i p o f t h a t smalL a m o u n t o f stock w h i c h gives t h e m a 6 percent d i v i d e n d each year ? M r . WIGGINS. T h a t i s c o r r e c t , s i r . Representative PATMAN. Yes. T h a t is a l l o n t h a t p a r t i c u l a r quest i o n I w o u l d l i k e t o ask. I b e l i e v e y o u s a i d t h a t c o v e r e d y o u r d i s cussion of t h a t ? M r . WIGGINS. Yes. S e n a t o r DOUGLAS. M a y I ask a q u e s t i o n ? Representative PATMAN. Yes. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.222 S e n a t o r DOUGLAS. T h e r e h a s b e e n s o m e i n f o r m a t i o n f r o m N e w Y o r k t h a t m a n y o f t h e p r i v a t e b a n k e r s w o u l d l i k e t o assert a c l a i m t o t h e r e s i d u a l earnings o f the F e d e r a l Reserve System. W h a t is y o u r feeli n g on that ? M r . WIGGINS. I t h i n k t h e r e s i d u a l e a r n i n g s b e l o n g t o t h e F e d e r a l Reserve B a n k s ; i t is p a r t o f t h e i r c a p i t a l s t r u c t u r e , a n d s h o u l d be o w n e d b y t h e banks, the F e d e r a l Reserve banks, I mean, a n d t h a t t h e m e m b e r b a n k s , t h e s t o c k h o l d e r s , s h o u l d hawe n o i n t e r e s t i n t h o s e r e s i d - * ual earnings. S e n a t o r DOUGLAS. W e l l , a t p r e s e n t , as I u n d e r s t a n d i t , b y a d e c i s i o n c»f t h e F e d e r a l R e s e r v e t h e y h a v e v o l u n t a r i l y t u r n e d o v e r 90 p e r c e n t o f the net earnings to the Government. N o w , t h e r e h a v e been some g r o u p s i n N e w Y o r k s a y i n g t h a t s i n c e t h e p r i v a t e b a n k e r s o w n , as as t h e y s a y , t h e F e d e r a l R e s e r v e b a n k , t h e y s h o u l d r e c e i v e t h e s e n e t e a r n i n g s , w h i c h r u n u p t o a r o u n d $200 m i l l i o n a y e a r . I n y o u r j u d g m e n t , s h o u l d those go t o t h e p r i v a t e banks o r s h o u l d those earni n g s c o n t i n u e , as n o w , t o g o t o t h e G o v e r n m e n t o f t h e U n i t e d S t a t e s ? M r . WIGGINS. I t h i n k u n q u e s t i o n a b l y t h e y s h o u l d r e m a i n i n t h e F e d e r a l Reserve banks f o r disposition either t o the G o v r e n m e n t or t o be a d d e d t o s u r p l u s , as t h e y m a y see f i t . S e n a t o r DOUGLAS. Y O U w o u l d s a y t h a t t h e d e c i s i o n as t o t h e s e m a t ters s h o u l d be l e f t t o t h e B o a r d o f G o v e r n o r s o f t h e F e d e r a l Reserve System ? M r . WIGGINS. I t r a i s e s a q u e s t i o n as t o w h e t h e r t h e a m o u n t s p a i d b y t h e F e d e r a l R e s e r v e b a n k s t o t h e T r e a s u r y s h o u l d be fixed b y s o m e s t a t u t o r y p r o v i s i o n or not. I have sometimes t h o u g h t t h a t the p a r t i c u l a r vehicle used b y t h e F e d e r a l Reserve w a s o p e n t o some question. I t h i n k i t c o u l d be d o n e b y s t a t u t o r y e n a c t m e n t i f C o n g r e s s d i s a g r e e d w i t h t h e policies f o l l o w e d b y t h e F e d e r a l Reserve. S e n a t o r DOUGLAS. S u p p o s e t h e F e d e r a l R e s e r v e B o a r d w e r e t o d i s t r i b u t e these e a r n i n g s t o t h e o w n e r s o f t h e stock i n t h e t h e F e d e r a l R e s e r v e b a n k s , a n d t u r n these e a r n i n g s b a c k t o t h e p r i v a t e b a n k s rather t h a n to the Government, w o u l d y o u feel t h a t t h a t was a wise policy ? M r . WIGGINS. I d o n o t . S e n a t o r DOUGLAS. Y O U t h i n k i t m i g h t be a d v i s a b l e f o r C o n g r e s s t o t r y t o p r e v e n t t h a t p o l i c y f r o m b e i n g c a r r i e d i n t o effect, b y s t a t u t o r y enactment ? M r . WIGGINS. S e n a t o r , I a m n o t c e r t a i n , b u t m y r e c o l l e c t i o n i s t h a t the l a w n o w provides a l i m i t a t i o n of the d i v i d e n d to 6 percent. R e p r e s e n t a t i v e P A T M A N . I t i s c u m u l a t i v e b u t m a x i m u m ; a n d sect i o n 16 o f t h e F e d e r a l R e s e r v e A c t p r o v i d e s a m e a n s f o r l e v y i n g a f r a n c h i s e t a x f o r t h e F e d e r a l G o v e r n m e n t a n d I t h i n k i t is necessary t h a t t h a t be done. I do n o t t h i n k a n y o n e s h o u l d contest t h a t r i g h t because, a f t e r a l l , i t i s t h e c r e d i t o f t h e N a t i o n t h a t i s b e i n g u s e d b y these banks. T h e s m a l l a m o u n t o f stock t h a t has been i n v e s t e d w o u l d n o t s u p p o r t t h e h u g e c r e d i t s t r u c t u r e o f t h e 12 F e d e r a l R e s e r v e b a n k s . I t w o u l d be j u s t n o t h i n g ; i t w o u l d j u s t b e a f l y s p e c k . I t w o u l d n o t b e a n y t h i n g , a n d so I d o n o t see h o w a n y p e r s o n w h o i s f a m i l i a r w i t h t h e situation w o u l d contend t h a t — h o w m u c h do they have invested n o w , a b o u t $200 m i l l i o n , t h e c o m m e r c i a l b a n k s ? M r . WIGGINS. I d o n o t h a v e t h e figures; I c a n l o o k i t u p . MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 223 E e p r e s e n t a t i v e P A T M A N . I t i s a r o u n d $200 m i l l i o n , a n d t h a t w o u l d mean i f they were entitled to t h a t money they w o u l d get a h u n d r e d percent dividend every year using the Government's credit. ( T h e p a i d - i n c a p i t a l o f t h e 12 F e d e r a l E e s e r v e b a n k s t o t a l e d $ 2 3 7 m i l l i o n o n D e c e m b e r 31, 1951.) S e n a t o r DOUGLAS. M y q u e s t i o n i s t h i s : I s t h e r e a n y t h i n g i n t h e statutes w h i c h w o u l d f o r b i d the B o a r d o f Governors o f the F e d e r a l Reserve System f r o m d i s t r i b u t i n g the earnings to t h e owners o f t h e st@ck r a t h e r t h a n t u r n i n g t h e e a r n i n g s o v e r t o t h e G o v e r n m e n t ? R e p r e s e n t a t i v e PATMAN. I t h i n k t h a t is a g o o d q u e s t i o n t o l o o k i n t o . M r . WIGGINS. I t i s m y u n d e r s t a n d i n g t h a t t h e l a w p r o v i d e s a l i m i t a t i o n o f 6 p e r c e n t ; I w o u l d n o t be p o s i t i v e . ( A letter f r o m C h a i r m a n M a r t i n covering this p o i n t appears on p . 910.) Representative PATMAN. A l l r i g h t , y o u m a y proceed, M r . W i g g i n s . M r . WIGGINS. I n o r d e r t o c o n s e r v e t h e t i m e o f t h e c o m m i t t e e , I d i r e c t t h e r e m a i n i n g statement t o a n area t h a t h a s . t w o angles: one is t h e p r o b l e m s o f r e s t r a i n i n g i n f l a t i o n a n d , i n p a r t i c u l a r , t h e use o f t h e m a c h i n e r y o f the F e d e r a l Reserve System, i n c l u d i n g open m a r k e t o p e r a t i o n s f o r t h e c o n t r o l o f c r e d i t ; a n d t h e second one is t h e operat i o n of the F e d e r a l Reserve System a n d the T r e a s u r y D e p a r t m e n t a n d o t h e r G o v e r n m e n t d e p a r t m e n t s a n d a g e n c i e s i n t h e fields i n w h i c h t h e y have a c o m m o n interest, a n d I w i l l t r e a t b o t h o f those a l o n g t o g e t h e r because t h e y a r e c l o s e l y r e l a t e d . I n m y s t a t e m e n t I h a v e g i v e n figures s h o w i n g w h a t h a p p e n e d t o t h e deposit structure, debt structure, a n d the ownership o f .Governm e n t securities b y c o m m e r c i a l banks d u r i n g t h e w a r period. Those figures a r e f a m i l i a r t o t h e m e m b e r s o f t h e c o m m i t t e e , a n d I w i l l n o t repeat them. T h o s e figures i n d i c a t e , h o w e v e r , c e r t a i n f a c t s o r r e f l e c t c e r t a i n situations t h a t are significant, h i g h l y significant, a n d I w i l l list a few. One, t h a t the t o t a l o f the Federal Government debt increased t o an a m o u n t d u r i n g t h e w a r p e r i o d t h a t exceeded a l l o t h e r debt, p u b l i c a n d p r i v a t e ; t w o , t h a t i n o r d e r to s e l l s u c c e s s f u l l y G o v e r n m e n t s e c u r i ties d u r i n g the w a r period, a r i g i d interest rate structure was maintained by agreement between the Treasury D e p a r t m e n t a n d the Fede r a l Reserve System, a n d t h i s rate structure was m a i n t a i n e d u n t i l t h e m i d d l e o f 1847. T h i r d , t h a t about o n e - t h i r d o f the increase i n t h e p u b l i c debt resulti n g f r o m d e f i c i t financing f o u n d i t s w a y i n t o t h e c o m m e r c i a l b a n k s , thereby m u l t i p l y i n g the money deposit supply, and t h i s added, of course, t o t h e i n f l a t i o n a r y developments t h a t were, i n p a r t , t h e r e s u l t o f the w a r conditions. F o u r t h , t h a t the purchasing value of the dollar has declined i n l a r g e m e a s u r e d u r i n g t h e w a r p e r i o d , b e t w e e n J a n u a r y 1, 1940, a n d t h e l a s t d a t e I h a v e , J a n u a r y 1, 1951, a b o u t 45 p e r c e n t ; a n d five, t h a t a t t h e e n d o f 1945, G o v e r n m e n t s e c u r i t i e s c o n s t i t u t e d 57 p e r c e n t o f t h e assets o f a l l b a n k s ; a n d , s i x , as a r e s u l t o f t h e s u p p o r t o f t h e G o v e r n m e n t i n financing t h e w a r a n d t h e s c a r c i t y o f o t h e r d e s i r a b l e investments, m a n y investment institutions f o u n d their position at the e n d o f the w a r overbalanced i n investments i n G o v e r n m e n t securities, MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.224 a n u n b a l a n c e d p o r t f o l i o , a n d s e v e n t h , t h a t as a r e s u l t o f t h e c a m p a i g n s f o r t h e sale o f bonds, t h e o w n e r s h i p o f t h e p u b l i c d e b t became w i d e l y distributed w i t h the result that a substantial m a j o r i t y of A m e r i c a n f a m i l i e s b e c a m e o w n e r s o f G o v e r n m e n t s e c u r i t i e s , m a n y f o r t h e first time. These facts indicate t h a t f o l l o w i n g t h a t p e r i o d there w o u l d , of necessity, be considerable a d j u s t m e n t i n t h e i n v e s t m e n t p o s i t i o n o f m a n y institutions, i n c l u d i n g banks and of individuals. A n o t h e r f a c t o r , o f course, w a s t h e vast a c c u m u l a t i o n o f l i q u i d -wealth on the p a r t of individuals t h r o u g h o u t the cotmtry. T h a t has b e e n e s t i m a t e d a t t h e p r e s e n t t i m e as some $200 b i l l i o n , a n d , o f c o u r s e , t h i s l i q u i d w e a l t h is a l w a y s a f a c t o r i n a n y o f o u r c o n s i d e r a t i o n s because i f i t s h o u l d b e c o m e d i s l o d g e d a n d m o v e i n t o t h e s p e n d i n g s t r e a m i t c o u l d h a v e a t r e m e n d o u s e f f e c t o n o u r e c o n o m y . I t is t h e r e , and. i t i s a q u e s t i o n o f h o w — w h e t h e r i t i s g o i n g t o s t a y t h e r e o r w h e t h e r some s u b s t a n t i a l p a r t s m a y become d i s l o d g e d t h r o u g h v a r i o u s conditions. I t is a g a i n s t t h a t b a c k g r o u n d o f t h e b u i l d - u p i n G o v e r n m e n t d e b t , d e f i c i t financing, a n d a l l o f t h e o t h e r f a c t o r s t h a t I h a v e m e n t i o n e d , a n d m a n y others, t h a t the F e d e r a l Reserve System has h a d to p e r f o r m its difficult f u n c t i o n s i n p r o v i d i n g stability i n the financial system, a n d also t h a t those f a c t o r s w e r e o f a n i n f l a t i o n a r y n a t u r e , e i t h e r actual or potential. N o w , at t h e end o f W o r l d W a r I I there was general fear t h a t we w e r e g o i n g i n t o a p e r i o d o f recession, a n d m a n y a c t i o n s w e r e t a k e n t o p r e v e n t t h a t . T h e w a r t i m e p a t t e r n o f interest rates was m a i n t a i n e d u n t i l t h e m i d d l e o f 1947 a n d a t t h a t t i m e i t w a s f e l t o n t h e p a r t o f t h e T r e a s u r y a n d the F e d e r a l Reserve t h a t the t i m e h a d come t o relieve our economy o f t h i s strait-jacket o f interest rates a n d b e g i n t o m o v e t o w a r d some f r e e d o m i n t h e m a r k e t . N o w , i t happened at t h a t t i m e t h a t the F e d e r a l Reserve was m a i n t a i n i n g a r i g i d b u y i n g rate of three-eighths of 1 percent on bills, and t h e T r e a s u r y D e p a r t m e n t was selling certificates at the coupon r a t e o f % , 1-year certificates. T h e y began t o m o v e t o raise those rates, a n d s t e p b y s t e p t h e y w e r e r a i s e d d u r i n g t h e s u m m e r o f 1947. S e n a t o r DOUGLAS. Y O U a r e r e f e r r i n g t o t h e s h o r t - t i m e r a t e s ? M r . WIGGINS. T h e s h o r t - t i m e r a t e s . T h a t p r o g r a m c o n t i n u e d d u r i n g t h e s u m m e r a n d f a l l o f 1947, a n d i t encouraged banks and other investors to b u y short-term securities because o f t h e h i g h e r r a t e s , a n d t h e h o p e w a s t h a t i t w o u l d t a k e some o f t h e pressure off o f t h e d e m a n d f o r t h e l o n g - t e r m bonds w h i c h w e r e t h e n s e l l i n g a t a b o u t 104 f o r t h e 1 9 6 7 - 7 2 , o r a y i e l d o f a b o u t 2^4 percent. However, the demand f o r the long-term bonds continued; there w a s a n absence o f i n v e s t m e n t i n t h e l o n g - t e r m i n v e s t m e n t field a t t h a t t i m e , a n d so i t s e e m e d t h a t t h e s t a g e w a s set f o r r e a l l y a " b u l l " m a r k e t t h a t m i g h t p u t the interest rate d o w n to 2 percent. I s p e a k o f t h a t w i t h s o m e c o n f i d e n c e because I w a s s i t t i n g i n t h e middle of it there i n the Terasury, and participated i n the policy discussions i n t h e T r e a s u r y a n d w i t h t h e F e d e r a l Reserve a t t h a t time. U n f o r t u n a t e l y , a t t h a t t i m e t h e F e d e r a l Reserve System d i d n o t o w n a n y l o n g - t e r m G o v e r n m e n t b o n d s — s u b s t a n t i a l l y none. B u t t h e Treasury i n its various investments, h a d a substantial amount o f MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 2 2 5 l o n g - t e r m G o v e r n m e n t b o n d s , a n d so, b y a g r e e m e n t , a n d w i t h f u l l u n d e r s t a n d i n g a n d w i t h a common purpose between the Federal Reserve and the Treasury Department, the Treasury made available to t h e O p e n M a r k e t C o m m i t t e e l o n g - t e r m m a r k e t bonds w h i c h they sold f r o m day to d a y i n an effort to meet the d e m a n d a n d to prevent a f u r t h e r d e c l i n e i n t h e r a t e as b e i n g d e s i r a b l e i n t h e p u b l i c i n t e r e s t . I e m p h a s i z e t h a t s o m e w h a t , M r . C h a i r m a n , because t h e f e e l i n g , t h e t h i n k i n g , seems t o be a b r o a d t h a t t h e T r e a s u r y h a s a l w a y s o p p o s e d a n y increase i n t h e interest rates, a n d here was a p e r i o d i n w h i c h t h e Treasu r y v e r y p o s i t i v e l y n o t o n l y f a v o r e d a n increase i n interest rates b u t t o o k v i g o r o u s a c t i o n t o p u t t h e r a t e s u p . I t w a s n o t so m u c h a m a t t e r o f p u t t i n g t h e r a t e s u p as k e e p i n g t h e p r i c e s o f G o v e r n m e n t b o n d s f r o m g o i n g t h r o u g h t h e r o o f . A n d so w e s a t t h e r e i n t h e T r e a s u r y , a n d f r o m day to day made available to the Open M a r k e t Committee t h e s e l o n g - t e r m G o v e r n m e n t s a n d some d a y s t h e y w o u l d s e l l a h u n d r e d m i l l i o n d o l l a r s o f i t , w h i c h is a l o t o f m o n e y i n H a r t s v i l l e , S. C . ; a n d i t a m a z e d m e t o see h o w t h e m a r k e t a b s o r b e d t h e s e t r e m e n d o u s a m o u n t s o f l o n g - t e r m G o v e r n m e n t b o n d s w i t h so l i t t l e e f f e c t o n t h e i n t e r e s t rate or the price. W e sold d u r i n g t h a t p e r i o d a b i l l i o n a n d a h a l f d o l l a r s o f these l o n g - t e r m bonds, a n d s t i l l the pressure was there. # S e n a t o r DOUGLAS. D i d t h e F e d e r a l R e s e r v e b u y a n y o f t h e s e f o r itself? M r . WIGGINS. NO, s i r ; t h e y s o l d t h e m f o r t h e a c c o u n t o f t h e T r e a s u r y on the market. S e n a t o r DOUGLAS. A n d d i d n o t b u y a n y f o r t h e m s e l v e s ? M r . WIGGINS. NO, sir. N o w , at the end of t h a t period we found, after consultation w i t h investors, t h a t there was still an unsatisfied demand f o r l o n g - t e r m b o n d s . I t seemed t o m e t h a t t h e y t h o u g h t t h a t t h e G o v e r n m e n t w o u l d n e v e r w a n t t o b o r r o w a n y m o r e m o n e y o r n o b o d y else, so i n a g r e e m e n t w i t h the F e d e r a l Reserve, a n d w o r k i n g i t out, b o t h o n a staff level a n d p o l i c y level, t h e T r e a s u r y issued a n 18-year, percent nonmarketable issue. T h e y s o l d a b o u t a b i l l i o n d o l l a r s w o r t h , a n d t h a t m o p p e d u p a l l t h e loose m o n e y a r o u n d i n t h e i n v e s t m e n t m a r k e t s . A s a p r o o f o f t h a t , w i t h i n weeks t h e i n v e s t o r s w h o needed t o a d j u s t t h e i r p o r t f o l i o s l o o k e d a r o u n d t o sell some l o n g - t e r m G o v e r n m e n t s t h a t t h e y o w n e d , a n d f o u n d t h a t there was no money available i n the investment ma r ke t a n d , as a r e s u l t , t h e p r i c e — t h e p r e s s u r e o n t h e o t h e r s i d e q u i c k l y d e v e l oped. T h e F e d e r a l Reserve d u r i n g t h a t later p e r i o d b o u g h t bonds because o f t h e t r e m e n d o u s o f f e r i n g s i n t h e i n v e s t m e n t m a r k e t o f l o n g t e r m G o v e r n m e n t b o n d s , a n d t h e c u r i o u s t h i n g t o m e w a s t h a t some o f t h o s e w h o h a d b o u g h t t h e b o n d s a f e w w e e k s b e f o r e a t 104, w i t h t h e A yifcld, w i t h i n a p e r i o d o f a f e w m o n t h s w e r e s e l l i n g t h e b o n d s a t 102 o n d o w n t o 100 a n d a f r a c t i o n , a n d t a k i n g a loss o n i t . B u t t h a t is w h a t h a p p e n e d ; a n d i t was d u r i n g t h a t p e r i o d t h a t t h e F e d e r a l Reserve bought a great deal of the l o n g - t e r m bonds at increased intere s t r a t e s t h a t finally g o t u p t o 2.48, w h i c h w a s j u s t — k e p t t h e b o n d s j u s t s l i g h t l y above p a r , 100*4, I believe. T h i s shows h o w q u i c k l y a s i t u a t i o n c a n r e v e r s e i t s e l f ; a n d I h a v e o f t e n w o n d e r e d i f w e d i d yLOt oversupply the m a r k e t w i t h Government bonds i n our efforts to b r i n g t h e p r i c e s d o w n , a n d c h o k e d i t t o o m u c h , because t h e s i t u a t i o n r e v e r s e d i t s e l f so q u i c k l y . T h e F e d e r a l c a m e i n , i n o r d e r t o p r o v i d e a n o r d e r l y m a r k e t , and b o u g h t a great m a n y bonds. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.226 N o w , t h e y c o n t i n u e d to reduce t h e i r b u y i n g p r i c e s l o w l y , a n d t h e n o n t h e f a m o u s D e c e m b e r 24, 1947, t h e b a n k e r s h a v i n g a c c u s e d t h e m o f g i v i n g t h e m a v e r y poor C h r i s t m a s present, the F e d e r a l Reserve r e d u c e d i t s b u y i n g r a t e t o j u s t a l i t t l e a b o v e p a r , r e s u l t i n g ^ o f course,, i n a s u b s t a n t i a l loss t o m a n y i n v e s t o r s w h o h a d b o u g h t t h o s e b o n d s a t a premium. A n o t h e r i n t e r e s t i n g f a c t o r i s t h a t b e t w e e n t h e m i d d l e o f 1947 a n d t h e m i d d l e o f 1948, w h e n a l l o f t h i s m o v e m e n t o f r a t e s t o o k p l a c e , i n w h i c h t h e T r e a s u r y a n d the F e d e r a l Reserve were seeking t o get t o w h a t w e c a l l e d a t t h a t t i m e a b r e a t h i n g m a r k e t as a g a i n s t t h e o l d r i g i d m a r k e t , b u t n o t a n a b s o l u t e l y f r e e m a r k e t , because y o u c o u l d n o t g o f r o m o n e t o t h e o t h e r t o o q u i c k l y — t h e r e h a d t o be a n i n t e r m e d i a t e s t e p — d u r i n g a l l t h i s period, a n d i n spite of a l l of the purchases o f l o n g - t i m e b o n d s b y t h e F e d e r a l , b e t w e e n J u n e 30, 1947, a n d J u n e 3 0 , 1948, i n s p i t e o f a l l t h e s e t r a n s a c t i o n s , t h e o w n e r s h i p o f F e d e r a l securities b y t h e F e d e r a l Reserve S y s t e m a c t u a l l y declined a h a l f billion dollars. W e hear m u c h about the great purchases b y t h e F e d e r a l Reserve o f long-term bonds d u r i n g that period. W e do n o t hear m u c h about the fact t h a t actually i t was a b u y i n g and selling p r o g r a m i n w h i c h the •net result was a r e d u c t i o n of F e d e r a l Reserve h o l d i n g s o f G o v e r n m e n t securities d u r i n g t h a t period. W h a t h a p p e n e d d u r i n g t h a t p e r i o d was t h a t t h e h o l d i n g s b y comm e r c i a l b a n k s d e c l i n e d 5,400,000,000, t h e h o l d i n g s o f i n s u r a n c e c o m panies declined a b i l l i o n eight, the h o l d i n g s of savings bonds b y ind i v i d u a l s w e n t u p a b i l l i o n six, the h o l d i n g s b y t r u s t f u n d s w e n t u p $3 b i l l i o n , a n d t h e t o t a l d e b t d e c l i n e d 6 b i l l i o n . I w o u l d like to make this observation: T h a t not only d i d this b i g reversal i n the m a r k e t take place w i t h i n a f e w weeks' t i m e , a n d was u n a n t i c i p a t e d b o t h b y the F e d e r a l Reserve a n d the T r e a s u r y , I t h i n k I a m safe i n saying, a n d a l l o f t h i s c h u r n i n g a r o u n d i n an effort t o get t o a b r e a t h i n g m a r k e t , w h i c h w e a c c o m p l i s h e d t o some e x t e n t — t o a considerable e x t e n t — p a r t i c u l a r l y i n the s h o r t - t e r m field—the situat i o n changed a g a i n b y 1949; and, whereas, m o s t o f t h e efforts o f t h a t p e r i o d were directed b o t h b y the F e d e r a l Reserve a n d the T r e a s u r y t o r e s t r i c t i v e o b j e c t i v e s , a n t i - i n f l a t i o n a r y o b j e c t i v e s , b y 1949 t h e s i t u a t i o n h a d changed a g a i n t o t h e p o i n t t h a t t h e F e d e r a l Reserve, i n i t s m o n e y m a r k e t m a n a g e m e n t a n d c r e d i t c o n t r o l f o u n d i t necessary t o t a k e steps o f a n e x p a n s i v e n a t u r e . F o r instance, t h e y reduced t h e stock m a r g i n requirements f r o m . 75 t o 50 p e r c e n t , i n s t a l l m e n t c r e d i t t e r m s w e r e l i b e r a l i z e d , a n d t h e r e serve r e q u i r e m e n t s o f b a n k s w e r e r e d u c e d d u r i n g t h a t p e r i o d b y 4 percentage p o i n t s o n d e m a n d deposits, a n d 2 % percent on t i m e deposits. T h a t , o f c o u r s e , w a s d u r i n g a p e r i o d i n w h i c h i t l o o k e d as i f w e m i g h t be g o i n g i n t o a recession, a n d was done f o r t h a t p u r p o s e , a n d p r o p e r l y done. So, I come b a c k t o t h e p r o p o s i t i o n t h a t action, r e a c t i o n — t o t a k e a n a c t i o n , y o u d o n o t k n o w j u s t w h a t r e a c t i o n is g o i n g t o h a p p e n . S o m e t i m e s i t is a g r e a t d e a l m o r e t h a n y o u h a v e a n t i c i p a t e d , a n d sometimes i t is n o t at a l l w h a t y o u anticipate. B u t i n any event I w o u l d like t o m a k e the p o i n t t h a t d u r i n g t h a t period there was the highest degree o f c o o p e r a t i o n between the F e d e r a l Reserve a n d t h e T r e a s u r y ; t h e i r o b j e c t i v e s w e r e l a r g e l y t h e same. T h e o n l y d i f f e r e n c e s t h a t a r o s e , f r a n k l y , were t h a t the Federal t h o u g h t we should move faster, w i t h MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 227 m o r e s h o c k e f f e c t o f these v a r i o u s m o v e s , a n d t h e T r e a s u r y D e p a r t ment thought that i n an operation of that magnitude, w i t h the wides p r e a d o w n e r s h i p o f t h e d e b t , t h a t t h e p r o p e r p o l i c y w o u l d be t o m o v e T h a t is t h e o n l y d i f step b y step a n d s l o w l y m a k e the t r a n s i t i o n . f e r e n c e o f v i e w p o i n t . B o t h h a d t h e same u l t i m a t e o b j e c t i v e . N o w , c o m i n g b a c k t o t h e c h a n g e s t a k i n g p l a c e i n 1947 a n d 1948, the important factor—one highly important factor—in that period was t h a t w e h a d a b u d g e t s u r p l u s o f 2 years. S e n a t o r DOUGLAS. Y O U w e r e f o r t u n a t e i n b e i n g i n t h e T r e a s u r y d u r i n g a p e r i o d w h e n t h e w a r t i m e t a x rates h a d n o t yet been g r e a t l y r e d u c e d , a n d w h e n expenses h a d f a l l e n o f f . M r . WIGGINS. T h a t i s c o r r e c t , s i r . S e n a t o r DOUGLAS. I t w a s o n l y a c c i d e n t a l t h a t t h i s h a p p e n e d d u r i n g the p e r i o d o f t h e E i g h t i e t h Congress. [Laughter.] M r . WIGGINS. A t a n y r a t e , t h e e f f e c t o f a b u d g e t s u r p l u s a t t h a t time was t e r r i b l y i m p o r t a n t i n all of the monetary and debt managem e n t operations t h a t w e n t on. N o w , g e n t l e m e n , I c o m e t o t h i s o b s e r v a t i o n , w h i c h I h o p e w i l l be accepted i n t h e same s p i r i t i n w h i c h I g i v e i t : t h a t m a n y o f t h e d i f ficulties of the Treasury D e p a r t m e n t i n its debt management, and of the F e d e r a l Reserve System i n m o n e t a r y c o n t r o l a n d credit r e s t r a i n t stem f r o m the actions o f Congress. T h e p r i n c i p a l d i f f i c u l t y i s t h e fiscal s i t u a t i o n t h a t i s c r e a t e d w h e n Congress a p p r o p r i a t e s f o r expenditure amounts o f money substant i a l l y greater t h a n i t p r o v i d e s taxes t o cover. I f Congress were suff i c i e n t l y i n t e r e s t e d i n i n f l a t i o n as a p r i m a r y o b j e c t i v e S e n a t o r DOUGLAS. I n r e s t r a i n i n g i n f l a t i o n . M r . WIGGINS. H O W i s t h a t ? S e n a t o r DOUGLAS. I n r e s t r a i n i n g i n f l a t i o n . M r . WIGGINS. I n r e s t r a i n i n g i n f l a t i o n , i t w o u l d u n d e r i n f l a t i o n a r y c o n d i t i o n s p r o v i d e a b u d g e t surplus instead o f a deficit. I r e c o g n i z e a l l o f t h e d i f f i c u l t i e s i n v o l v e d , o f course, b u t I a m s t a t i n g a principle. I t is a n a x i o m t h a t u n d e r i n f l a t i o n a r y conditions e x p e n d i t u r e s s h o u l d be k e p t a t a m i n i m u m . H o w e v e r , m a n y a p p r o p r i a t i o n s , l a w s , a n d policies of G o v e r n m e n t are o f a definitely i n f l a t i o n a r y character. T o i l l u s t r a t e , a n d I a m sure I a m n o t e m b a r r a s s i n g the Senator S e n a t o r DOUGLAS. I a m t u r n i n g m y eyes d o w n i n p r o p e r m o d e s t y . M r . WIGGINS. T O i l l u s t r a t e , w e h a v e b u t t o r e c a l l t h e h i s t o r i c e f f o r t o f Senator D o u g l a s to e l i m i n a t e or reduce m a n y of the a p p r o p r i a t i o n s u n d e r t h e r i v e r s a n d h a r b o r s b i l l i n 1950 f o r p r o j e c t s o f l i t t l e o r n o real value, a n d the f a i l u r e o f the Senate t o respond to his sound a r g u ments for a reduction i n the appropriations. S e n a t o r DOUGLAS. M r . W i g g i n s , I w a n t t o t h a n k y o u f o r t h i s c o m p l i m e n t , b u t I also w a n t t o s a y t h a t w h i l e t h e C o n g r e s s i s f r e q u e n t l y a t f a u l t i n t h e m a t t e r o f these a p p r o p r i a t i o n s , I do n o t t h i n k y o u s h o u l d absolve the executive b r a n c h f r o m i t s share o f r e s p o n s i b i l i t y . T h i s f r e q u e n t l y , i s e v e n g r e a t e r because w h e n e v e r a n y p r o p o s a l i s made to reduce an a p p r o p r i a t i o n the p r o p e r a d m i n i s t r a t i v e official i m m e d i a t e l y declares t h a t w e are p l u n g i n g a k n i f e i n t o t h e o p e r a t i o n s o f G o v e r n m e n t , a n d t h e w h o l e w e i g h t o f t h e executive d e p a r t m e n t is t h r o w n against anyone w h o tries to make the cut. T h e officials o f t h e d e p a r t m e n t o r agency i n question w i l l c a l l y o u u p on the telephone and remonstrate w i t h you, and then i n about an MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.228 h o u r y o u b e g i n to get telephone calls f r o m people i n y o u r o w n State, a n d t h e i n f e r e n c e t h a t I d r a w f r o m a l l t h i s is t h a t t h e d e p a r t m e n t s have t h e i r groups of outside friends w i t h w h o m they get i n touch, a n d t h e h e a t is t u r n e d o n y o u . T h e n , i f y o u r e f f o r t t o m a k e a r e d u c t i o n seems t o be r e a c h i n g s e r i o u s p r o p o r t i o n s , t h e P r e s i d e n t a l w a y s rushes t o t h e a i r waves a n d declares t h a t a f o u l b l o w is b e i n g s t r u c k either at the security of the country or the welfare of the people of t h e U n i t e d States, a n d t h e c r y is t a k e n u p b y t h e a d m i n i s t r a t i v e b u g l e m e n , w h o p r o c e e d t o p o u r o n t h e i r r e p o r t s f r o m d o w n t o w n , a n d issue press statements. T h e r e s u l t is t h a t y o u face n o t m e r e l y t h e p o l i t i c a l i n t e r e s t s o f y o u r colleagues, b u t y o u also face t h e mass p o w e r o f t h e e x e c u t i v e agencies o f t h e G o v e r n m e n t . I n t h i s present s i t u a t i o n , w h e n t h e P r e s i d e n t has s u b m i t t e d a b u d g e t w h i c h , o n the a d m i n i s t r a t i v e side, calls f o r a deficit of M y 2 b i l l i o n , w i t h no remonstrance f r o m the Counc i l o f E c o n o m i c A d v i s e r s — n o r e m o n s t r a n c e t h a t has been p u b l i s h e d , a t l e a s t , a n d I see M r . K e y s e r l i n g a n d M r . B l o u g h i n t h e r o o m — a n d w h e n a n y p r o p o s a l comes t o c u t a specific a p p r o p r i a t i o n , i t i s p r o m p t l y labeled b y the Secretary o f Defense, the Secretary o f State, o r t h e C a b i n e t o f f i c i a l i n v o l v e d , as t a m p e r i n g w i t h t h e s e c u r i t y o f t h e N a t i o n ; t h e y assert t h a t n o t a d o l l a r c a n be c u t f r o m t h e d e f e n s e a p p r o p r i a t i o n , not a dollar f r o m foreign aid, and we w i l l hear t h e s a m e p i t e o u s s o n g w h e n e v e r each a n d e v e r y i t e m i s t a k e n u p . W h i l e I can w e l l u n d e r s t a n d the desire o f a f o r m e r A s s i s t a n t Secr e t a r y o f t h e T r e a s u r y , w h o h a s s u f f e r e d a t t h e h a n d s o f C o n g r e s s , to get i n a polite d i g at the Congress—and we certainly have our f a u l t s — s t i l l , i n a l l j u s t i c e , I t h i n k , h a v i n g l e v e l e d y o u r g u n s a t us, n o w t h a t y o u are a p r i v a t e citizen y o u should t u r n t h e m i n the d i r e c t i o n o f t h e T r e a s u r y i t s e l f , 1600 P e n n s y l v a n i a A v e n u e , a n d t h e o l d S t a t e , W a r a n d N a v y B u i l d i n g , w h e r e t h e E x e c u t i v e Offices o f t h e P r e s i d e n t a r e n o w located. So, a f t e r t h i s barrage u p o n o u r p o s i t i o n o n C a p i t o l H i l l , w i l l y o u a l s o l e v e l y o u r a r t i l l e r y fire o n P e n n s y l v a n i a A v e n u e ? M r . WIGGINS. S e n a t o r , I a m n o t a t t e m p t i n g t o s a y w h y t h e s e t h i n g s h a p p e n ; I a m s t a t i n g t h e m as a c t u a l f a c t s t h a t a d d t o t h e d i f f i c u l t y o f the monetary authority. S e n a t o r DOUGLAS. T h a t i s t r u e ; b u t b e h i n d t h e r e l u c t a n c e o f C o n gress t o c u t is t h e o p p o s i t i o n o f t h e a d m i n i s t r a t i o n t o w a r d cuts. Representative PATMAN. I f I a m a n y j u d g e of t h e t e m p e r o f C o n gress n o w , i t w i l l come m o r e n e a r l y t o b a l a n c i n g t h e b u d g e t t h i s y e a r t h a n i t h a s i n 10 y e a r s . S e n a t o r DOUGLAS. A n d t h e n l i s t e n t o t h e c r i e s f r o m d o w n t o w n . R e p r e s e n t a t i v e PATMAN. W e l l , t h e r e are a l o t o f cries t h a t w i l l be ignored. M r . WIGGINS. H o w e v e r , I t h i n k , g e n t l e m e n , w e m i g h t o b s e r v e t h a t t h e e x e c u t i v e d e p a r t m e n t s s p e n d n o m o n e y t h a t C o n g r e s s does n o t appropriate. I t h i n k t h a t is a f a i r statement. I t also m i g h t be p o i n t e d o u t t h a t l a w s a n d G o v e r n m e n t p o l i c i e s t h a t t i e the s u p p o r t o f a g r i c u l t u r a l prices t o changes i n t h e prices o f i n d u s t r i a l p r o d u c t s , o n t h e one h a n d a n d , o n t h e o t h e r , e s c a l a t e i n d u s t r i a l h o u r l y wages o n t h e basis o f t h e increase i n t h e cost o f l i v i n g , t h a t t h i s c o m b i n a t i o n constitutes a system o f b u i l t - i n i n f l a t i o n t h a t results i n progressive deterioration i n the p u r c h a s i n g power o f the dollar. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 229 I a m n o t q u e s t i o n i n g t h e a d v i s a b i l i t y o f e i t h e r o f these. I a m s t a t i n g t h a t they do have an inflationary impact. I t is also t r u e t h a t a d m i n i s t r a t i v e agencies o f G o v e r n m e n t , p a r t i c u l a r l y i n t h e l e n d i n g a n d g u a r a n t e e i n g field, f r e q u e n t l y f o l l o w p o l i cies a n d p r o g r a m s t h a t a d d t o i n f l a t i o n a r y p r e s s u r e s . S e n a t o r DOUGLAS. W o u l d y o u excuse a s l a n g c o m m e n t ? "Now you're talking." M r . WIGGINS. T h e s e f a c t s a d d u p t o t h e i n s i s t e n t a n d c o n t i n u o u s need f o r a c o o r d i n a t i o n of t h e policies o f t h e Congress a n d o f t h e a d m i n i s t r a t i v e a g e n c i e s i f a n a n t i - i n f l a t i o n a r y p o l i c y i s t o be e f f e c t i v e . T h e y a l s o b r i n g o u t t h e p o i n t , a n d I a m r e a d i n g t h i s , because I w a n t t o be e x a c t , I a m a f r a i d I w i l l g e t o f f t h e b e a m i f I a d l i b — t h e y also b r i n g o u t t h e p o i n t t h a t t h e p r o b l e m s o f r e s t r a i n i n g i n flation are i n v o l v e d i n t h e actions o f G o v e r n m e n t o n m a n y f r o n t s a n d t h a t w h i l e , a t t h e same t i m e , e f f o r t s are b e i n g m a d e b y t h e m o n e t a r y a u t h o r i t i e s t o r e s t r a i n i n f l a t i o n a r y pressures, o t h e r actions b y G o v e r n m e n t are d i r e c t l y i n f l a t i o n a r y a n d m a k e difficult, i f n o t i m p o s s i b l e , t h e success o f t h e e f f o r t s o f t h e m o n e t a r y a u t h o r i t i e s i n t h e l i m i t e d areas i n w h i c h t h e y o p e r a t e . I h a v e m a d e t h e o b s e r v a t i o n here t h a t t h e basic d i f f i c u l t y i n comb a t i n g i n f l a t i o n is t h a t i n a c t u a l p r a c t i c e m o s t people w h o say t h e y are opposed to inflation, a c t u a l l y embrace p r o g r a m s f o r personal p r o f i t or benefit t h a t are h i g h l y i n f l a t i o n a r y ; a n d m y t h e o r y is t h a t a d a m c a n n o t be b u i l t t h a t w i l l s u c c e s s f u l l y r e s t r a i n t h e f o r c e s o f i n f l a t i o n i f sections o f i t are m i s s i n g , n o m o r e t h a n a d a m w i l l h o l d b a c k t h e w a t e r o f a r i v e r i f t h e d a m is f u l l o f holes. M a n y p e o p l e c o n s i d e r t h e d e v i c e o f r a i s i n g i n t e r e s t r a t e s as t h e p r i n c i p a l m e a n s f o r c o n t r o l l i n g i n f l a t i o n , t h e p r i n c i p a l e f f e c t i v e device. S u c h a p r o p o s a l is painless t o m o s t people, a n d p r o f i t a b l e t o m a n y , a n d w h i l e t h i s i s a m o s t d e s i r a b l e d e v i c e as a p a r t o f a n o v e r a l l p r o g r a m , i t w i l l n o t do t h e j o b alone, a n d i n m y o p i n i o n , i t is h i g h l y overrated. I t h e n have a discussion here o f t h e effect o f increases i n shortt e r m a n d l o n g - t e r m rates. I t h i n k m o s t o f these f a c t a r e w e l l reco g n i z e d , n a m e l y , t h a t i n c r e a s e s o r decreases i n s h o r t - t e r m r a t e s d a n o t r e s t r a i n the b o r r o w e r , a n d being t o the benefit o f the lender, d o n o t deter the lender f r o m m a k i n g loans. T h e p r i n c i p a l v a l u e i n t h e s h o r t - t e r m field a f f e c t i n g b a n k s p r i m a r i l y , is t h e l a c k o f f u n d s t o l e n d , a n d t h a t is t h e p o i n t a t w h i c h t h e o p e n - m a r k e t o p e r a t i o n s o f t h e F e d e r a l Eeserve are m o s t effective. H o w e v e r , t h e r e is a l i m i t a t i o n there d u e t o t h e f a c t t h a t t h e comm e r c i a l b a n k s o w n , as o f D e c e m b e r 31, 1951, a l a r g e a m o u n t o f s h o r t - t e r m G o v e r n m e n t s t h a t a r e r u n n i n g o f f w i t h i n a y e a r , $33,000,000,000 w o r t h , so t h a t i n c r e a s e s o r decreases i n i n t e r e s t r a t e s , t h e b u y i n g a n d selling o f short-terms, is n o t m u c h o f a deterrent to a b a n k t h a t has b i l l s c o m i n g due every week. , I t can m e r e l y collect i t s m o n e y w h e n t h e b i l l s come due a n d n o t b u y a n y m o r e a n d , o f course, a s m a l l increase i n t h e s h o r t - t e r m r a t e does n o t a f f e c t t h e p r i c e o f t h a t s e c u r i t y so m u c h as i t does i n t h e l o n g - t e r m field. N o w , i n t h e l o n g - t e r m field t h e e f f e c t i s d i f f e r e n t because a r e l a t i v e l y s m a l l increase i n t h e r a t e has a s u b s t a n t i a l effect i n t h e p r i c e , j u s t as i n t h e 1947—48 c h a n g e s i n r a t e s o f o n e - q u a r t e r r e s u l t e d i n a decrease i n t h e p r i c e o f n e a r l y $ 4 o n t h e h u n d r e d . So, I w o u l d say, MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.230 t h a t a rise i n rates a n d a r e d u c t i o n i n price on l o n g - t e r m securities does a f f e c t t h e l e n d e r w h o m u s t t a k e t h e loss i f h e sells h i s b o n d s t o g e t m o n e y t o m a k e l o a n s f o r some o t h e r p u r p o s e , a n d i f h e m u s t lose $3 o r $4 o n t h e h u n d r e d t o do t h a t , t h a t is a d e t e r r e n t t o h i s s e l l i n g those bonds. I t is n o t m u c h of a deterrent to the b o r r o w e r , a n d b e i n g a b o r r o w e r m y s e l f I speak w i t h some p e r s o n a l k n o w l e d g e , w h e r e y o u need t h e m o n e y f o r a n essential purpose, p a r t i c u l a r l y f o r a defense purpose, y o u m u s t h a v e t h e m o n e y , i f the rates are a q u a r t e r h i g h e r y o u p a y t h e q u a r t e r h i g h e r , a n d I must a d m i t t h a t y o u getrgome satisfaction i n k n o w i n g t h a t t h a t c o m e s o f t as u n e x p e n s e , o f w h i c h U n c l e S a m a b s o r b s 5 2 p e r c e n t , w h i c h some 1 ! a t s o f t e n s t h e b l o w , b u t i t i s n o t t o o s e r i o u s a d e t e r r e n t t o t h e b o r r o w e r as i t is t o t h e l e n d e r . S e n a t o r DOUGLAS. W h a t a b o u t t h e b o r r o w e r o f l o n g - t e r m c a p i t a l f u n d s f o r p r i v a t e investment ? A rise i n the interest r a t e there w i l l d i m i n i s h the quantity of capital demand, w i l l i t not, on the p a r t of i n d u s t r i a l companies ? M r . WIGGINS. I t h i n k u n q u e s t i o n a b l y t h a t i s t r u e , S e n a t o r , i n t h e case w h e r e t h e r e i s a d i s c r e t i o n a r y s i t u a t i o n i n w h i c h y o u a r e p l a n n i n g a 20- o r 4 0 - y e a r p r o g r a m , as t o w h e t h e r y o u d o i t n o w o r w h e t h e r y o u d o i t later. I t h i n k t h e difference i n interest rates, p a r t i c u l a r l y w i t h public utilities t h a t have a n a r r o w m a r g i n , that they w i l l adjust their p r o g r a m s ^ d e p e n d i n g o n t h e cost o f t h e m o n e y . S e n a t o r DOUGLAS. T h a t i s r i g h t . M r , WIGGINS. NOW, I m e n t i o n e d t h a t t h e d i s c o u n t r a t e o f t h e F e d eral Reserve was a v e r y effective i n s t r u m e n t i n the earlier years w h e n w e h a d a s m a l l e r d e b t , a n d i t i s a u s e f u l i n s t r u m e n t , b u t n o t as effect i v e as i t f o r m e r l y w a s , p a r t i c u l a r l y w h i l e t h e b a n k s o w n s u c h a l a r g e amount o f short-term governments. T h e question has been raised a b o u t reserve r e q u i r e m e n t s o f m e m ber banks. O f course, i n c r e a s i n g reserve r e q u i r e m e n t s reduces t h e capacity o f t h e b a n k to lend, a n d t h a t is t h e nerve center o f m a k i n g l o a n s because i t a f f e c t s t h e a v a i l a b i l i t y o f f u n d s . T h e present reserve t e c h n i q u e , h o w e v e r , creates a g r e a t m a n y i n equities ; i t is a somewhat b r u t a l m e t h o d , a n ax m e t h o d , a n d i n spite o f a r a t e classification based o n t w o t y p e s o f deposits a n d d i f f e r e n t sizes o f c i t i e s , i n o r d e r t o t r y t o r e d u c e t h e i n e q u i t i e s , i t i s h i g h l y quest i o n a b l e w h e t h e r t h e p r e s e n t c l a s s i f i c a t i o n base i s s u i t a b l e f o r t h e p r e s e n t b a n k i n g system. I d o u b t i t v e r y seriously. M a n y s t u d i e s h a v e b e e n m a d e as t o t h e d e s i r a b i l i t y o f c h a n g i n g t h e base f o r r e s e r v e r e q u i r e m e n t s , a n d o n e s u g g e s t i o n h a s b e e n m a d e t h a t i t be d o n e e n t i r e l y o n a c l a s s i f i c a t i o n o f d e p o s i t s . T h a t p l a n w o u l d a l s o h a v e s o m e i n e q u i t i e s , as a n y p l a n o f r e s e r v e r e q u i r e m e n t s w o u l d h a v e , b u t i t m i g h t b e h i g h l y e f f e c t i v e i n t h e use o f r e s e r v e r e q u i r e m e n t s as a n i n s t r u m e n t o f c r e d i t c o n t r o l . I t h i n k i f a n y c h a n g e i s m a d e i n t h e base o f r e s e r v e r e q u i r e m e n t s i t requires a great deal o f f u r t h e r study, a n d any change, o f course, s h o u l d be m a d e a t a p e r i o d o f r e l a t i v e ' m o n e t a r y ease, so as n o t t o d i s t u r b the financial situation too much. N o w , t h e o b j e c t i o n s t h a t I h a v e f o u n d a m o n g b a n k s t o t h e use o f t h a t device—to t h e F e d e r a l Reserve u s i n g i t , one objection is t h a t w h e n t h e F e d e r a l Reserve increases reserve r e q u i r e m e n t s , i n effect, i t m e r e l y m e a n s t r a n s f e r r i n g e a r n i n g assets f r o m t h e m e m b e r b a n k s t o t h e F e d e r a l R e s e r v e , because i f a b a n k h a s t o p a r t w i t h s o m e o f i t s MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 231 G o v e r n m e n t s e c u r i t i e s t o g e t thfe c a s h f o r t h e a d d i t i o n a l r e s e r v e s , a n d t h e n t h e F e d e r a l Reserve takes t h e cash a n d p u t s i t i n G o v e r n m e n t securities t h e n e t effect is t h a t i t t r a n s f e r s t h e e a r n i n g s f r o m t h e member b a n k t o t h a t extent. I t h a s b e e n s u g g e s t e d t h a t these excess r e s e r v e r e q u i r e m e n t s m i g h t be r e q u i r e d i n t h e f o r m o f G o v e r n m e n t s e c u r i t i e s . I d o n o t t h i n k t h a t p r o p o s i t i o n h a s t o o m u c h m e r i t because i t m e r e l y w o u l d m a k e t h e b a n k , i n s o m e cases, a n u n w i l l i n g o w n e r o f a c e r t a i n t y p e o f G o v e r n m e n t s e c u r i t y t h a t w o u l d be u s e d f o r t h a t p a r t i c u l a r purpose. I t w o u l d , i n p a r t , overcome t h e o b j e c t i o n t h a t these excess r e s e r v e r e q u i r e m e n t s d e p l e t e t h e e a r n i n g s o f t h e b a n k . A n o t h e r device has been suggested t h a t reserve r e q u i r e m e n t s above a s a f e t y l e v e l — a n d I t h i n k b a n k i n g t h o u g h t g e n e r a l l y is t h a t reserves are f o r t w o purposes, one, a s a f e t y f a c t o r ; a n d t h e o t h e r a device f o r controlling the credit and the money supply i n the markets—the other s u g g e s t i o n w a s t h a t o n r e q u i r e d reserves above t h e s a f e t y level, t h e F e d e r a l R e s e r v e p a y i n t e r e s t t o t h e m e m b e r b a n k s so a t t o o v e r c o m e t h e o b j e c t i o n o f t r a n s f e r r i n g e a r n i n g assets b y i n c r e a s i n g r e s e r v e r e quirements. I w o u l d l i k e t o p o i n t o u t , h o w e v e r , t h a t t h e use o f r e s e r v e r e q u i r e m e n t s w i t h b a n k s as a v e h i c l e o f c r e d i t c o n t r o l — i t a p p l i e s o n l y to b a n k s — d o e s n o t d i r e c t l y a f f e c t o t h e r l e n d e r s w h o , i n m a n y cases, a r e c o m p e t i n g w i t h t h e b a n k s i n m a k i n g l o a n s . I t is a n a r m t h a t r e s t r a i n s just the banks, a n d only s l i g h t l y indirectly restrains their competitors w h o a r e o u t , i n m a n y cases, f o r 1 : h e s a m e t y p e o f l o a n s t h a t t h e b a n k s are making. S e n a t o r DOUGLAS. Y O U m e a n b u i l d i n g a n d l o a n a s s o c i a t i o n s , a n d insurance companies ? M r . WIGGINS. Y e s , sir. N o w , t o m o v e o n a n d t o b r o a d e n t h e base a l i t t l e b i t , I r a i s e t h e q u e s t i o n o f t h e m a j o r g o v e r n m e n t a l p o l i c y , as e x p r e s s e d i n t h e E m p l o y m e n t A c t o f 1946, q u e s t i o n s a b o u t w h i c h w e r e a s k e d i n m a n y o f the questionnaires. T h a t act, o f course, is specifically d i r e c t e d a t employment. I t also p r o v i d e s t h a t a n o b j e c t i v e o f t h e p o l i c y s h a l l be m a x i m u m p r o d u c t i o n a n d p u r c h a s i n g power, a n d a l l o f this done " i n a m a n n e r calculated to foster a n d promote free competitive enterprise and the general welfare." N o w , w h i l e t h e e m p h a s i s is o n e m p l o y m e n t , r e c o g n i t i o n is g i v e n t o the m a x i m u m purchasing power. I t h i n k t h e inference o f most people is t h a t i t means r e a l p u r c h a s i n g p o w e r a n d n o t d o l l a r p u r c h a s i n g p o w e r ; a n d I p e r s o n a l l y t h i n k i t is t e r r i b l y u n f o r t u n a t e t h a t i n t h e w o r d i n g o f t h a t a c t i t does n o t c o n t a i n a s p e c i f i c s t a t e m e n t o f o b j e c t i v e of national policy to maintain long-run monetary stability. F r a n k l y , I do n o t t h i n k t h a t the recent h i s t o r y of the legislative a n d administrative departments of Government yields convincing evid e n c e t h a t t h e g u i d i n g p o l i c y h a s been one o f m a i n t a i n i n g l o n g - r u n monetary stability. I have tremendous respect f o r the A m e r i c a n d o l l a r , f o r the i n t e g r i t y o f i t , a n d c o n s i d e r t h e d e p r e c i a t i o n a n d d i s c o u n t o f t h a t d o l l a r as a t h r e a t to our n a t i o n a l w e l f a r e a n d the w e l f a r e o f the rest o f the w o r l d . T h r o u g h o u t h i s t o r y , d i s a s t e r s i n v a r y i n g degrees h a v e a l w a y s , a l m o s t a l w a y s , f o l l o w e d p e r i o d s o f serious i n f l a t i o n . MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.232 I n spite of t h a t statement, I t h i n k we m u s t recognize t h a t under the necessity o f W o r l d W a r I I t h e G o v e r n m e n t h a d t o b o r r o w vast sums o f m o n e y ; t h a t there was need f o r quick expansion o f m i l i t a r y f a c i l i t i e s a n d p r o d u c t i o n , a n d t h a t these r e q u i r e d a s u b s t a n t i a l e x p a n sion of the m o n e t a r y Supply. T h e r e was no other w a y t o do it. N o w , i n r e s t r o s p e c t i t a p p e a r s t o some t h a t t h e m o n e y s u p p l y w a s i n c r e a s e d t o o m u c h a n d , o f c o u r s e , i f w e h a d financed m o r e o f t h e w a r f r o m n o n b a n k b o r r o w i n g we w o u l d have increased the m o n e t a r y s u p p l y less, b u t t h e q u e s t i o n w e a r e d e a l i n g w i t h n o w i s t h e m o n e t a r y s u p p l y ^as i t e x i s t s , a n d w h e t h e r i t i s t o o g r e a t o r t o o l i t t l e o r a b o u t t h e r i g h t -amount. Some t h i n k i t is too great. O n t h e o t h e r h a n d , i n t e r m s o f t h e vast o u t l a y s f o r t h e defense ^ e f f o r t t h a t a r e b e i n g m a d e a n d a r e i n c o n t e m p l a t i o n w e m a y find t h a t t h e m o n e y s u p p l y i s n o t t o o g r e a t , a n d w e m a y find i t n e c e s s a r y f r o m t i m e t o t i m e e v e n t o e x p a n d i t some. M y o w n views are t h a t t h e economic p o l i c y u n d e r present c o n d i t i o n s s h o u l d be d i r e c t e d against i n f l a t i o n t h r o u g h a p p r o p r i a t e a c t i o n b y G o v e r n m e n t o n every f r o n t , i n c l u d i n g Congress a n d the a d m i n i s t r a t i v e d e p a r t m e n t s w h i l e , a t t h e s a m e t i m e , a v o i d i n g as m u c h as p o s i s b l e a c t i o n s t h a t w i l l h a v e s e r i o u s a d v e r s e effects i n o t h e r areas, a n d a v o i d i n g , so f a r as p o s s i b l e , r i g i d i t i e s i n t h e o p e r a t i o n o f t h e p r i v a t e enterprise system. Selective c o n t r o l s a n d a l l o c a t i o n o f m a t e r i a l s a p p e a r t o be essential i n s u c h a p r o g r a m , b u t t h e a p p l i c a t i o n o f s u c h c o n t r o l s s h o u l d be s u b j e c t t o a d m i n i s t r a t i v e flexibility so t h a t t h e y m a y b e a d j u s t e d , d r o p p e d , o r i n c r e a s e d as t h e needs o f t h e s i t u a t i o n d e v e l o p . I t w o u l d be a m i s t a k e t o p l a c e e n t i r e r e l i a n c e o r t o o m u c h r e l i a n c e o n t h e use o f i n t e r e s t r a t e s t h r o u g h m o n e t a r y m a n a g e m e n t t o c o n t r o l i n f l a t i o n . T h e need is t o d e a l w i t h t h e p r o b l e m o n e v e r y f r o n t u n d e r a consistent a n d coordinated p o l i c y o f Congress a n d t h e executive departments. S e n a t o r DOUGLAS. M r . W i g g i n s , I d o n o t w a n t t o t a k e u p t o o m u c h t i m e , b u t I w o u l d l i k e t o m a k e i t c l e a r t h a t t h o s e o f us w h o b e l i e v e i n t h e e s s e n t i a l n e e d f o r m o n e t a r y m a n a g e m e n t d o n o t so m u c h e m p h a s i z e t h e i n t e r e s t r a t e as t h e s u p p l y o f b a n k c r e d i t . I n o t h e r w o r d s , w e a i m to get price stability t h r o u g h the maintenance of the supply o f money and credit i n relationship to the volume of production rather t h a n d e p e n d i n g u p o n changes i n t h e interest rate. I m e n t i o n t h i s because I t h i n k t h e a d v o c a t e s o f m o n e t a r y m a n a g e m e n t h a v e i n s o m e cases s t a t e d t h e i r case b a d l y i n m e r e l y e m p h a s i z i n g t h e i n t e r e s t r a t e , a n d because t h i s h a s b e e n u s e d as s o r t o f a w h i p p i n g boy by the opponents of w h a t I w o u l d term anti-inflationary monetary management. M r . WIGGINS. O f c o u r s e , S e n a t o r , t h e p r a c t i c a l e f f e c t i s t h a t t h e F e d e r a l Reserve, i f i t refuses t o b u y G o v e r n m e n t securities a n d t h e r e b y s u p p l i e s t h e b a n k s w i t h increased m o n e y , increased reserves, t h e effect is b o u n d t o be t h a t t h e p r i c e w i l l g o d o w n a n d t h e i n t e r e s t r a t e w i l l go up. S e n a t o r DOUGLAS. Y e s , t h a t m a y a n d p r o b a b l y w i l l b e a n e f f e c t . T h e c o u n t r y w i l l t h e n h a v e t o choose w h e t h e r i t p r e f e r s a s t a b l e p r i c e level even t h o u g h t h a t m a y m e a n r i s i n g interest rates o r w h e t h e r i t wishes stable interest rates even t h o u g h t h a t entails r i s i n g prices, a n d t h a t i s r e a l l y o n e o f t h e f u n d a m e n t a l issues a t s t a k e . M r . WIGGINS. Yes. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 2 3 3 S e n a t o r DOUGLAS. I a m v e r y g l a d y o u b r i n g i t o u t . M r . WIGGINS. NOW, i n t h i s c o n n e c t i o n I t h i n k w e m u s t c o n s i d e r as a n i m p o r t a n t f a c t o r a s o m e w h a t u n p r e d i c t a b l e t h i n g t h a t I l i k e t o call h u m a n behavior. Officials o f the F e d e r a l Eeserve f r e q u e n t l y r e f e r t o t h e p s y c h o l o g i c a l effect o f a n a c t i o n t a k e n r a t h e r t h a n t h e a c t u a l e c o n o m i c o r m o n e t a r y e f f e c t , a n d i t i s a n i m p o r t a n t f a c t o r , as we all know, particularly i n a country like this, where we have such Yast r e s o u r c e s , a l o n g w i t h a g r e a t d e g r e e o f f r e e d o m t o use t h o s e r e s o u r c e s p r e t t y m u c h as w e w a n t . I w o u l d l i k e t o g i v e one i l l u s t r a t i o n t h a t h i s i m p r e s s e d m e , n a m e l y , t h a t a t t h e b e g i n n i n g o f 1 9 5 1 I t h i n k a l l o f us g e n e r a l l y a g r e e d t h a t i n f l a t i o n a r y p r e s s u r e s w o u l d l i k e l y b e r a t h e r s t r o n g i n 1951, a n d i t •did n o t develop t o t h e e x t e n t t h a t m o s t people a n t i c i p a t e d , a n d one o f the most i m p o r t a n t factors, i n m y j u d g m e n t , was a curious phenome n o n t h a t d e v e l o p e d b e t w e e n t h e first a n d s e c o n d q u a r t e r s o f 1951, i n w h i c h people shifted f r o m spending to saving. I note t h a t whereas t h e disposable personal i n c o m e between those t w o q u a r t e r s w e n t u p , at an a n n u a l rate of 5 b i l l i o n , personal savings increased between t h o s e t w o q u a r t e r s a t a n a n n u a l r a t e o f 11.6 b i l l i o n . I m e n t i o n t h a t because, so f a r as I k n o w , i t w a s a n u n p r e d i c t a b l e h u m a n b e h a v i o r t h a t f e w , i f a n y , a n t i c i p a t e d , so t h a t t h i s f a c t o r o f h o w p e o p l e r e a c t t o g i v e n t h i n g s i s s t i l l a n u n k n o w n field t o t h e h u m a n m i n d , a n d so, i n t h e l i g h t o f t h e f a c t t h a t a v a s t m a j o r i t y o f A m e r i c a n f a m i l i e s o w n G o v e r n m e n t securities, w h e n w e deal w i t h the price a n d interest r a t e o n G o v e r n m e n t securities w e are d e a l i n g w i t h a f a c t o r i n w h i c h t h e p o s s i b l e a c t i o n o f l a r g e n u m b e r s o f p e o p l e needs t o be -considered. I d e v e l o p e d a s t r o n g r e s p e c t f o r t h e size o f t h e n a t i o n a l d e b t w h e n I was i n the Treasury, its p r o p o r t i o n t o a l l debt and its widespread o w n e r s h i p , a n d a l l t h e f a c t o r s i n v o l v e d . T o m e , i t is a n a t o m i c b o m b , c h a i n r e a c t i o n , i n t h e m i n d s o f t h e p e o p l e . I d o n o t t h i n k i t i s necess a r i l y one t h a t i s g o i n g t o e x p l o d e i n o u r f a c e , I w a n t t o b e q u i c k t o s a y t h a t ; I t h i n k i t c a n be h a n d l e d s u c c e s s f u l l y a n d s a t i s f a c t o r i l y , a n d I t h i n k i t c a n be r a i s e d t o a m u c h l a r g e r a m o u n t u n d e r w a r n e c e s s i t y w i t h p e r f e c t a b i l i t y o n t h e p a r t o f t h i s c o u n t r y t o service i t . B u t , a f t e r a l l , t h e p u b l i c debt is based o n t h e confidence o f t h e p e o p l e i n i t , w h i c h is one f a c t o r ; a n d , s e c o n d , t h e p r o d u c t i v e c a p a c i t y o f t h i s c o u n t r y t o service i t , a n d t h e r e is l i t t l e question about t h e latter, a n d we m u s t , b y a l l means, preserve t h e f o r m e r . H o w e v e r , a n y d i s t u r b a n c e t o t h a t confidence is a m a t t e r o f serious concern and, again, I hope the M e m b e r s o f Congress w i l l n o t m i s i n t e r p r e t m e a n d m y m o t i v e w h e n I say t h a t m a n y i n d i v i d u a l o w n e r s o f G o v e r n m e n t securities a n d p o t e n t i a l buyers are concerned over t h e vast e x p e n d i t u r e s o f G o v e r n m e n t , some o f w h i c h t h e y consider u n necessary o r e v e n w a s t e f u l a n d , p a r t i c u l a r l y , w h e n , i n s p i t e o f h e a v y t a x e s G o v e r n m e n t e x p e n d i t u r e s p r o m i s e t o exceed G o v e r n m e n t revenues. Others l o o k w i t h concern on the decline i n the value o f the longt e r m s e c u r i t i e s b e l o w p a r . I m i g h t s a y t h a t i n 1947, 1 9 4 8 , n e i t h e r the F e d e r a l Eeserve n o r the T r e a s u r y t h o u g h t i n terms of l o n g - t e r m securities g o i n g b e l o w p a r . T h a t has been a l a t e r d e v e l o p m e n t , a n d these i n d i v i d u a l s w h o are concerned somewhat w i t h the decline o f $3 f r o m a h u n d r e d t o 97, t h e y a r e a l w a y s c o n c e r n e d w i t h h o w m u c h MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.234 m o r e decline m a y t a k e place t h r o u g h t h e decision of the m o n e t a r y a u t h o r i t i e s as t o t h e p r i c e o f t h o s e s e c u r i t i e s . I t h i n k , h o w e v e r , t h e r e is m o r e c o n c e r n a b o u t t h e d e t e r i o r a t i o n i n the p u r c h a s i n g value of t h e i r savings bonds a n d savings accounts i n b a n k s a n d l i f e - i n s u r a n c e p o l i c i e s t h a n w i t h t h e $3 d r o p i n t h e p r i c e o f l o n g - t e r m G o v e r n m e n t bonds. I emphasize, M r . C h a i r m a n , t h a t a l l o f t h e s e f a c t o r s e n t e r i n t o t h e r e a c t i o n s o f h u m a n b e i n g s as t o w h a t t h e y m i g h t do, a n d we m u s t consider at a l l times n o t o n l y t h e e c o n o m i c a n d financial effects o f a c t i o n s t a k e n i n d e b t m a n a g e m e n t and monetary management but what the Human behavior that w i l l result f r o m t h a t m i g h t develop. I w o u l d l i k e t o a d d a g a i n t h a t I f o u n d t h e h i g h e s t d e g r e e o f coo p e r a t i o n between the F e d e r a l Reserve a n d t h e T r e a s u r y w h i l e I was there, a n d I m i g h t say t h e finest sort o f d e v o t i o n o n t h e p a r t o f t h e F e d e r a l Reserve officials t o t h e i r p u b l i c duties, a n d a s p i r i t o f p u b l i c s e r v i c e o n t h e p a r t o f b o t h t h a t w h e n these p r o b l e m s arose i n w h i c h t h e r e w e r e differences o f v i e w p o i n t s , t h a t t h e s p i r i t o f w h a t is t h e best t h i n g i n t h e p u b l i c i n t e r e s t t o be d o n e u n d e r t h e c i r c u m s t a n c e s was the catalyst t h a t u s u a l l y resolved those differences. N o w , t h e r e a r e some p e o p l e t h a t t h i n k t h a t i n t h e e x e r c i s e o f d i s cretionary administrative policy of national importance there should n o t be a n y difference between t o p officials, b u t i f t h e y occur t h e r e o u g h t t o be some s u p r e m e a u t h o r i t y o f l a w o r t h e C h i e f E x e c u t i v e s h o u l d d i c t a t e w h a t t h e a n s w e r is, t h e p o l i c y t o be f o l l o w e d . I t h i n k i t is h i g h l y i m p o r t a n t w i t h i n t h e executive d e p a r t m e n t s o f G o v e r n m e n t f o r t h e r e t o be t h a t d e g r e e o f c o o r d i n a t i o n o f p o l i c y , a n d so I s u p p o r t t h e p r o p o s a l t h a t a n a d v i s o r y c o u n c i l be set u p b y E x e c u t i v e a c t i o n , n o t b y l a w — i t is n o t needed b y l a w — a n d I m i g h t say t h a t i n 1947 a n d 1948 a t t i m e s t h e r e w e r e i n f o r m a l g r o u p s set u p t o d e a l w i t h c e r t a i n areas o f c r e d i t a n d m o n e y , a n d i t w a s f o u n d t o be a usef u l agency. T h e p u r p o s e o f t h i s a d v i s o r y g r o u p w o u l d be t o e x c h a n g e i n f o r m a t i o n and views f o r coordinating administrative policy. A n d w h i l e I t h i n k i t w o u l d be d e s i r a b l e f o r t h e C h a i r m a n o f t h e B o a r d of Governors or his representative to sit w i t h this g r o u p , I d o n o t believe t h a t he o r t h e F e d e r a l Reserve B o a r d s h o u l d i n a n y degree be b o u n d b y a n y decisions reached b y such a d m i n i s t r a t i v e a d v i s o r y group. O n the other h a n d , the B o a r d o f Governors should g i v e tremendousw e i g h t t o a n y decisions or conclusions reached b y such a n a d m i n i s t r a t i v e p o l i c y g r o u p , because i t i s a s s u m e d t h a t t h a t g r o u p r e p r e sents t h e c o m b i n e d j u d g m e n t o f t o p a d m i n i s t r a t i v e o f f i c i a l s as t o t h e p r o p e r p o l i c i e s t o be f o l l o w e d . H o w e v e r , t h e F e d e r a l Reserve S y s t e m has specific s t a t u t o r y d u t i e s t h a t i n v o l v e s e m ij u d i c i a l d e c i s i o n s t h a t a r e b a s e d n o t o n l y o n t a n g i b l e f a c t o r s b u t i n t a n g i b l e s , a n d i n m y o p i n i o n t h e y c o u l d n o t conscient i o u s l y discharge t h e i r duties i f b o u n d b y the dictates of the executive department of Government. A n d w h i l e I t h i n k i t is h i g h l y desirable f o r t h e C h i e f E x e c u t i v e t o coordinate policies w i t h i n the executive departments, I t h i n k i t w o u l d be h i g h l y i m p r o p e r f o r h i m t o d i c t a t e a c t i o n s t o be t a k e n b y s u c h s e m i j u d i c i a l b o d i e s , f o r e x a m p l e , as t h e F e d e r a l R e s e r v e S y s t e m o r t h e Interstate Commerce Commission, Securities and Exchange C o m m i s sion, or s i m i l a r bodies. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 235 H e should communicate his views d i r e c t l y or t h r o u g h such a coordin a t i n g a d v i s o r y g r o u p w i t h i n the executive d e p a r t m e n t t o the F e d e r a l R e s e r v e S y s t e m , a n d t h e y s h o u l d be a w a r e a t a l l t i m e s o f t h e f a c t o r s i n v o l v e d i n a d m i n i s t r a t i v e decisions. B u t t o s u b o r d i n a t e a s e m i j u d i c i a l a n d a n i n d e p e n d e n t b o d y set u p b y Congress to t h e directives o f the C h i e f E x e c u t i v e , i n m y o p i n i o n w o u l d d e s t r o y t h e e f f e c t i v e n e s s o f s u c h agencies. A s I h a v e i n d i cated, u s u a l l y the differences between the F e d e r a l Reserve a n d t h e T r e a s u r y are resolved. I n the f i r s t place t h e r e are n o t too m a n y , a n d most o f those t h a t t u r n u p are resolved, a n d i t is o n l y occasionally t h a t a serious d i f f e r e n c e develops. A n d i n m y opinion, i n spite of the f a c t t h a t an a u t h o r i t a r i a n set-up w o u l d g e t t h e r e s u l t s d e f i n i t e a n d d i r e c t l y , t h a t i t w o u l d be t o o h i g h a p r i c e t o p a y t o lose a l l o f t h e b e n e f i t s o f o u r b a s i c p r i n c i p l e s o f c h e c k s a n d b a l a n c e s a m o n g t h i n k i n g m e n i n t r y i n g t o find a n s w e r s f o r d i f f i c u l t p r o b l e m s i n s u c h fields as m o n e t a r y m a n a g e m e n t a n d d e b t management. A n d I s h o u l d also l i k e t o m a k e t h i s p o i n t , g e n t l e m e n : T h a t w e s h o u l d recognize t h a t no m a n a n d no g r o u p o f m e n d e a l i n g w i t h t h e various problems of our public debt a n d monetary system are omniscient. T o o m a n y factors are i n v o l v e d , n o t o n l y economic a n d financial b u t i n the realm of possibilities of h u m a n behavior f o r any one m a n or a n y g r o u p t o k n o w a l l the answers. A n d I t h i n k i t w o u l d be a c a t a s t r o p h e i f w e w e r e t o m a k e t h e F e d e r a l Reserve System m e r e l y an a d m i n i s t r a t i v e agency o f t h e executive department of this Government. H o w e v e r , I w o u l d l i k e t o r a i s e t h i s r e d f l a g — I d o n ' t l i k e t o use t h e w o r d s " r e d flag"—but t h i s w a r n i n g t h a t t h e h i s t o r y o f c e n t r a l b a n k i n g , as w a s b r o u g h t o u t e a r l i e r b y t h e c h a i r m a n , i s t h a t c e n t r a l b a n k i n g cannot get too f a r a w a y f r o m the policies of G o v e r n m e n t too l o n g ; and that w h i l e central banks historically have w o n battles against the Government, they have always lost the w a r . T h a t i s h i s t o r y a n d t h a t is t h e c o n d i t i o n t h r o u g h o u t t h e r e s t o f t h e w o r l d . N o w , gentlemen, I have a s u m m a r y here, b u t I t h i n k t h a t I h a v e c o v e r e d t h e field, a n d i n t h e i n t e r e s t o f t i m e Representative PATMAN. W e l l , we w i l l insert the w h o l e statement i n the record, M r . W i g g i n s . M r . WIGGINS. T h a n k y o u v e r y m u c h . ( T h e p r e p a r e d statement s u b m i t t e d b y M r . W i g g i n s reads, i n f u l l , as f o l l o w s : ) S T A T E M E N T OF A . L . M . W I G G I N S B E F O R E T H E S U B C O M M I T T E E O N G E N E R A L C R E D I T C O N T R O L A N D D E B T M A N A G E M E N T OF T H E J O I N T C O M M I T T E E O N T H E E C O N O M I C REPORT M y name is A. L. M. Wiggins, of Hartsville, S. C. I am chairman of the boards of directors of the Atlantic Coast Line Railroad Co., the Louisville & Nashville Railroad Co., and several smaller associated railroads. I am also chairman of the board of directors of the Baflk of H a r t s ville, Hartsville, S. C., capital stock $100,000, and president of a small nonbanking trust company. For the larger p a r t of my business career I have been a director and manager of a number of small-business institutions engaged i n finance, merchandising, agriculture, and manufacturing. F r o m January 1947 to July 1948 I was Under Secretary of the Treasury. I n this capacity, one of my duties was to assist the Secretary of the Treasury i n the management of the public debt, and, i n par97308—52 16 M O N E T A R Y POLICY AND M A N A G E M E N T OF PUBLIC DEBT.236 t i c u l a r , to m a i n t a i n liaison w i t h the B o a r d of Governors of the Federal Reserve System and other reppresentatives of the open-market committee. I n the interest of conserving time my statement w i l l be l i m i t e d largely t o three areas of questions raised by this committee. I n this connection I w i s h to congratulate this committee and its staff on the p r e p a r a t i o n of the comprehensive and searching questionnaires w h i c h were sent to governmental agencies, economists, and financial institutions and t h e i r representatives. The replies constitute a w e a l t h of financial l i t e r a t u r e , objective reporting, keen analysis, f r a n k opinions, and constructive suggestions i n the field of finance, money, banking, debt management, and fiscal affairs. The three areas w h i c h I w i s h to discuss a r e : (1) The problems of r e s t r a i n i n g inflation, and, i n p a r t i c u l a r , the use of t h e machinery of the Federal Reserve System, i n c l u d i n g open-market operations, f o r control of credit. (2) The operations of the Federal Reserve System and the Treasury Department and other Government departments and agencies i n fields i n w h i c h they have a common interest. (3) The question of ownership of the stock of the Federal Reserve banks. A b r i e f review of certain f a c t u a l background is necessary as a basis f o r discussion of items (1) and (2) : D u r i n g the 6-year w a r period f r o m the end of 1939 to the end of 1945, money i n c i r c u l a t i o n quadrupled f r o m $6 b i l l i o n to $26 billion. D u r i n g the same period, bank deposits increased f r o m $56 b i l l i o n to $121 billion, or a t o t a l increase i n money supply f r o m $63 b i l l i o n to $148 billion. D u r i n g t h i s period the ownership of Government securities by the banking system, including F e d e r a l Reserve banks, increased $97 billion. D u r i n g the six calendar years 1940-45, inclusive, the gross public debt increased $231 billion, or five times. D u r i n g the same 6-year period, expenditures of the Government exceeded receipts i n the conventional budget by the amount of $210 billion. I n the calendar 5-year postwar period, 1946-50, inclusive, Government debt was reduced $22 billion, largely through the use of excess cash balances f r o m the V i c t o r y loan i n 1945 and the use of a net budget surplus of $1 b i l l i o n d u r i n g t h i s period. D u r i n g the same period, as a result of debt reduction and the use of t r u s t funds, the debt was managed so as to reduce the holdings of Government securities by commercial banks and the Federal Reserve banks by nearly $32 billion. Certain significant facts should be observed: (1) T o t a l Federal Government debt increased to an amount t h a t exceeded the t o t a l of a l l other debt, m u n i c i p a l and private. (2) I n order successfully to sell Government securities d u r i n g the w a r period, a r i g i d interest-rate structure was maintained by agreement between the Treasu r y Department and the Federal Reserve System and this rate s t r u c t u r e was maintained u n t i l the middle of 1947. (3) About one-third of the increase i n the public debt resulting f r o m deficit financing f o u n d i t s w a y into the commercial banks, thereby »multiplying-the deposit-money supply. T h i s added substantially to i n f l a t i o n a r y developments t h a t were, i n part, a result of w a r conditions. (4) The purchasing value of the dollar i n terms of the cost of l i v i n g declined between J a n u a r y 1,1940, and January 1,1951, by 45 percent. (5) A t the end of 1945, Government securities constituted 57 percent of the t o t a l assets of a l l banks. (6) As a result of t h e i r support of the Government i n financing the w a r a n d the scarcity of other desirable investments, many investment i n s t i t u t i o n s f o u n d t h e i r position on December 31, 1945, overbalanced w i t h investments i n Government securities. (7) I n response to campaigns f o r the sale of bonds, the ownership of the public debt was w i d e l y distributed, w i t h the result t h a t a substantial m a j o r i t y of A m e r i c a n f a m i l i e s became owners of Government securities, many f o r the first time. I t is clearly evident f r o m the above facts t h a t at the end of W o r l d W a r I I there was need f o r a substantial readjustment of the investment position of many investors, p a r t i c u l a r l y i n s t i t u t i o n a l . W h e n and as opportunities were presented f o r a better diversification of investments and f o r securing a better rate of r e t u r n , they f o u n d i t necessary to sell Government securities. W i t h commercial banks holding nearly $91 b i l l i o n of U n i t e d States Government securities on December 31, 1945, of w h i c h a substantial proportion was i n short-term maturities, they h a d abundant resources w h i c h any one bank could convert i n t o M O N E T A R Y POLICY AND M A N A G E M E N T OF PUBLIC DEBT . 237 reserves through the sale of the securities or by p e r m i t t i n g them to r u n off as t h e y f e l l due. A n o t h e r development of the w a r period^was the large accumulation of personal savings, a substantial p a r t of w h i c h consisted of l i q u i d assets. I t is estimated t h a t at the present t i m e l i q u i d assets owned by individuals, of w h i c h a substant i a l p a r t is represented by Government securities, aggregate a t o t a l of some $200 billion. These savings may be dislodged and find their w a y into the spend-, i n g stream. I t is against this background, of w h i c h I have mentioned only a f e w factors, t h a t the Federal Reserve System has had to p e r f o r m its difficult functions of p r o v i d i n g s t a b i l i t y i n the financial system. Practically every f a c t o r i n the s i t u a t i o n contributed to inflationary pressures, actual or potential. F o l l o w i n g the cessation of W o r l d W a r I I , there was general apprehension throughout the country of a postwar recession. D u e to p r o m p t measures taken by Government, a recession d i d not materialize, b u t our economy p r o m p t l y moved intO/increased production and employment. D u r i n g this t r a n s i t i o n period, however, i t was f e l t t h a t the w a r t i m e p a t t e r n of interest rates should be maintained so as to avoid any disturbance t h a t m i g h t hinder the t r a n s i t i o n f r o m a w a r t i m e to a peacetime economy. B y the middle of 1947, our economic machine was f o r g i n g ahead, inflationary pressures had developed, and, i n the absence of a demand f o r loans by business and industry, investors were reaching f o r Gove r n m e n t securities a t higher prices and at declining rates. I w i s h to discuss some of the actions of the Treasury Department i n debt management i n w h i c h I h a d a small p a r t , as w e l l as actions taken by the Federal Reserve System i n monetary and credit control i n t h a t period. A s a result of numerous conferences between Treasury and Federal Reserve officials i n the second quarter of 1947, there was agreement t h a t the time h a d a r r i v e d f o r the removal of the w a r t i m e rigidities of the fixed p a t t e r n of interest rates t h a t had been maintained f o r Government securities. As a result of t h i s understanding and common objective, the Federal Reserve discontinued its policy o f a fixed buying r a t e of three-eighths of 1 percent on Treasury b i l l s and the Treasury Department, i n i t s r e f u n d i n g operations, began gradually to. raise the r a t e on 1-year certificates f r o m seven-eighths of 1 percent. T h i s program cont i n u e d d u r i n g the summer and f a l l of 1947 and encouraged banks and other investors to purchase short-term securities at the better rates r a t h e r t h a n reach f o r the longer bonds a t p r e m i u m prices w h i c h netted a r e t u r n a t t h a t time of a b o u t 2.25 percent. Simultaneously, a program was being carried out to relieve the pressure of investment funds on the long-term bond market. A t t h a t time, the Federal Reserve System owned practically no long-term Government l)onds and, therefore, i n i t s open-market operations was unable to supply the m a r k e t w i t h t h a t type of investment. The Treasury Department, however, held large amounts of long-term bonds i n various investment accounts. A f t e r consultations and discussions, both at a staff level and at a policy level, between the Treasury and the Federal Reserve and i n f u l l agreement, the Treasury Dep a r t m e n t , through the open-market committee of the Federal Reserve, sold large amounts of long-term Government bonds so as to fill the demand and t o prevent a f u r t h e r decline i n the long-term interest rate. D u r i n g t h i s period, the Treasury sold $1.5 b i l l i o n of long-term bonds. However, the amount was not adequate to satisfy the demand nor to increase the market y i e l d on such secur i t i e s . Thereupon, the Treasury Department, a f t e r consultation w i t h the Fede r a l Reserve and w i t h f u l l agreement on the p a r t of both, sold a nonmarketable 18-year issue i n the amount of $1 billion. The purpose of this sale was to mop u p any remaining investment funds t h a t were exerting u p w a r d pressure on the m a r k e t . The entire program was anti-inflationary. I n a m a t t e r of weeks the s i t u a t i o n reversed itself. Other desirable forms of investment became available to investors at better yields t h a n long-term Governments and investors finding themselves bare of funds began unloading longt e r m Governments on the Federal Reserve i n substantial amounts. I t was a curious phenomenon t h a t many investors who were eager buyers of long-term Governments on a 2 1 / 4-percent yield basis should so quickly become eager sellers at a higher interest rate and at some loss. The Federal Reserve moved p r o m p t l y to stabilize the s i t u a t i o n and f o u n d i t necessary to make large purchases of long-term Governments. I t was d u r i n g this l a t t e r period of 1947 t h a t the Federal Reserve, i n consultation w i t h the Treasury, began to reduce its buying prices s l i g h t l y and, on December 24, 1947, made a substantial reduction i n the price i t was w i l l i n g to pay f o r long-term Government bonds. I t was thought t h a t this somewhat drastic reduction m i g h t serve* to stabilize the m a r k e t a t the new MONETARY POLICY AND M A N A G E M E N T OF PUBLIC DEBT.238 level. Such d i d not prove to be the case. Under the needs of many investment i n s t i t u t i o n s to obtain funds f o r other investments and out of the fears t h a t h a d been generated by the reduction of the prices at w h i c h the Federal Reserve w a s w i l l i n g to buy long-term Government securities t h a t f u r t h e r price reductions m i g h t be ahead, a large volume of long-term Governments was sold by investors and purchased by the Federal Reserve. I n the meantime, the rate on short-term Governments continued to rise as a result of the coordinated policies of the Federal Reserve i n its open-market operations and of the Treasury Department i n i t s debt management p r o g r a m . A t the increasing rates on short-term securities, investors other t h a n the Federal Reserve were large buyers. The result was t h a t between the middle of 194T and the middle of 1948, the Federal Reserve purchased large amounts of Government bonds t h r o y g h its open-market operations, but at the same time, reduced, i t s holdings of bills, notes, and certificates w i t h the net result t h a t its t o t a l holdings of a l l Government securities actually declined d u r i n g the period by h a l f a b i l l i o n dollars. D u r i n g the same period the holdings of Government securities by c o m m e r c i a l banks declined $5,400,000,000, the holdings by insurance companies declined. $1,800,000,000, savings bonds held by i n d i v i d u a l s increased $1,600,000,000 and holdings of U n i t e d States Government agencies and t r u s t funds increased $3,000,000,000 and the t o t a l gross debt of the Government declined $6,000,000,000. I t is interesting to observe t h a t whereas the p r i n c i p a l monetary and debt management policies i n 1947 and 1948 were restrictive and designed to be anti-inflat i o n a r y i n effect, we find t h a t i n 1949 the Federal Reserve f o u n d i t necessary to* take steps of an expansible nature. Stock-market m a r g i n requirements were reduced f r o m 75 to 50 percent, consumer installment credit was liberalized and reserve requirements of banks were reduced d u r i n g a period of several months* i n 1949 by 4 percentage points on demand deposits and 2% percentage points on time deposits. I t was d u r i n g this period t h a t there was some evidence of a business recession. I t might be questioned whether or not the nature, themethods and the extent of the restrictive measures taken i n 1947 and 1948 may have contributed to the necessity f o r contra actions i n 1949. A t this point I w o u l d l i k e to emphasize the h i g h degree of cooperation between the Treasury and the Federal Reserve System d u r i n g 1947-4:8 i n a common object i v e to remove the r i g i d i t i e s of the w a r t i m e p a t t e r n of interest rates and t o b r i n g about some degree of freedom i n the money markets. N a t u r a l l y there were some differences of opinion between the Treasury and the Federal Reserve as to details of the various moves t h a t were required to accomplish this objective, the p r i n cipal difference being t h a t the Federal Reserve, on the whole, thought i t desirable to increase interest rates faster and w i t h a more shocking effect on the m a r k e t , psychologically as w e l l as actual, while the T r e a s u r y position generally was t h a t i n an operation of such magnitude and i n v o l v i n g a -Government debt structuret h a t represented more t h a n h a l f of a l l the debt outstanding i n the U n i t e d States, the reduction i n the m a r k e t value of Government securities t h r o u g h Government action should be made slowly, step by step, and adjusted to conditions as they m i g h t develop d u r i n g the program. I believe i t is generally a d m i t t e d i n the financial w o r l d t h a t the s h i f t i n 1947-48 f r o m the r i g i d i t y of the w a r t i m e p a t t e r n of short-term interest rates to w h a t we called at t h a t t i m e a " b r e a t h i n g m a r k e t " was accomplished w i t h a m i n i m u m of adverse repercussions. I t should also be pointed out t h a t the program of increasing long-term interest rates d u r i n g t h a t period through the sale to the m a r k e t of long-term Government bonds was possible only because the Treasury Department had i n its investment accounts large amounts of such bonds w h i c h i t t u r n e d over to the Open M a r k e t Committee f o r sale. H e r e was evidence of the h i g h degree of cooperation between the t w o agencies f o r a common objective. I t should be kept i n m i n d t h a t an i m p o r t a n t factor i n the situation d u r i n g , this period was a budget surplus i n the fiscal years 1947 and 1948 aggregating $9 billion. T h i s surplus served not only to reduce the debt, b u t its use i n ext i n g u i s h i n g bank-held Government securities served also to reduce i n f l a t i o n a r y credit pressures by reducing bank reserves. A budget surplus simplifies the problem of r e s t r a i n i n g i n f l a t i o n a r y credit, whereas a substantial budget deficit multiplies i n f l a t i o n a r y credit pressures. M a n y of the difficulties of the Treasury i n debt management and of the Federal Reserve System i n monetary control and credit r e s t r a i n t stem f r o m the actions of Congress. The p r i n c i p a l difficulty is the fiscal situation t h a t i t created w h e n Congress appropriates f o r expenditure amounts of money substantially greatert h a n i t provides taxes to cover. I f Congress were sufficiently interested i n re- MONETARY POLICY AND M A N A G E M E N T OF PUBLIC DEBT . 239 s t r a i n i n g inflation, i t would, under i n f l a t i o n a r y conditions, provide a budget s u r p l u s instead of a deficit. I t is an axiom t h a t under i n f l a t i o n a r y conditions expenditures should be kept to a m i n i m u m . However, many appropriations, l a w s , and policies of Government are of a definitely i n f l a t i o n a r y character. To I l l u s t r a t e , we have but to recall the historic effort of Senator Douglas to eliminate or reduce many of the appropriations under the rivers and harbors b i l l i n 1950 f o r projects of l i t t l e or no real value and the f a i l u r e of the Senate t o respond to his sound arguments f o r a reduction i n t h a t appropriation. Also, i t m i g h t be pointed out t h a t the laws and governmental policies t h a t tie t h e support of a g r i c u l t u r a l prices to changes i n the prices of i n d u s t r i a l products on the one hand, and on the other escalate i n d u s t r i a l hourly wages on a basis of t h e increase i n the cost of l i v i n g — t h i s combination constitutes a system of builti n i n f l a t i o n t h a t results i n progresive deterioration i n the purchasing power of the dollar. I t is also t r u e t h a t agencies of Government, p a r t i c u l a r l y i n the lending or guaranteeing field, frequently f o l l o w policies and programs t h a t add to inflat i o n a r y pressures. Thes£ facts add up to the insistent and continuous need f o r a coordination o f the policies of Congress and of the a d m i n i s t r a t i v e agencies i f an a n t i - i n f l a t i o n a r y .policy is to be effective. They also b r i n g out the point t h a t the problems of restraining i n f l a t i o n are involved i n the actions of Government on many f r o n t s and t h a t while, at* t h e :same time, efforts are being made by the monetary authorities to r e s t r a i n i n tflationary pressures, other actions by Government are directly i n f l a t i o n a r y and m a k e difficult, i f not impossible, the success of the efforts of the monetary authorities i n the l i m i t e d areas i n w h i c h they operate. The basic difficulty i n a v e r t i n g or combating i n f l a t i o n is t h a t w h i l e people .generally are opposed to i n f l a t i o n i n theory, i n actual practice many embrace programs f o r personal profit or benefit t h a t are highly inflationary. A dam cannot be b u i l t t h a t successfully w i l l r e s t r a i n the forees of i n f l a t i o n I f sections of i t are missing, no more than a dam w i l l hold back the water of a r i v e r i f t h e dam is f u l l of holes. M a n y people consider the device of raising interest rates as the p r i n c i p a l means f o r controlling inflation. Such a proposal is painless to most people and profitable to many. W h i l e this is a desirable device as p a r t of an over-all prog r a m , i t w i l l not do the job alone and, i n my opinion, is highly overrated. Small increases i n short-term interest rates have some value psychologically but actually produce l i t t l e credit restraint. The short-term borrower, i f funds are required f o r a necessary purpose, is not deterred by a small increase i n rate. The short-term lender is not deterred but may be encouraged to make loans when M s r a t e of r e t u r n is increased. The real deterrent to the short-term lender is t h e lack of funds to lend v and i t is i n t h i s area t h a t open-market operations of t h e Federal Reserve System are most effective. One difficulty i n c u r t a i l i n g such f u n d s is t h a t a bank w i t h large holdings of short-term Government securities m a y secure reserves by a l l o w i n g its securities to r u n off at m a t u r i t y . As of t h e most recent date f o r w h i c h figures are available, December 31, 1951, shortt e r m Government, securities held by banks, other t h a n the Federal Reserve, amounted to $33 billion. A small increase i n the interest rate on such securities has l i t t l e effect on the decline i n price and such decline may be more t h a n offset by the higher r a t e obtainable f r o m a loan. So long as the commercial banking system owns such a substantial amount of short-term Government secur i t i e s , the effectiveness o f a slightly increased short-term interest rate w i l l not Ibe too i m p o r t a n t i n reducing the acquisition of reserves by banks. On the other hand, a s m a l l increase i n the interest rate on long-term Governments reduces prices substantially and is a deterrent to the sale of such securities ibecause of the loss involved. I t is more effective i n r e s t r a i n i n g the lender, w h o m u s t take a loss i n the sale of his bonds t h a n i t is on the borrower who needs t h e funds, p a r t i c u l a r l y under present t a x laws where the larger p a r t of the increased interest cost to the borrower is absorbed by the Government t h r o u g h reduction i n the taxpayers' taxable income. The discount r a t e set by the Federal Reserve was an effective i n s t r u m e n t of •credit control i n the earlier years of the system. W h i l e i t has a n i m p o r t a n t place i n present-day operations, i t has l i m i t e d effectiveness so long as the banks o w n large amounts of short-term Government securities. Reserve requirements of member banks of the Federal Reserve System cons t i t u t e an effective brake on bank lending. Increasing reserve requirements reduces t h e capacity of a bank t o make loans. However, the reserve technique creates many inequities and is a somewhat b r u t a l method o f securing results. MONETARY POLICY AND M A N A G E M E N T OF PUBLIC DEBT.240 I n spite of a r a t e classification based on a combination of t w o classes of deposits and on different types of cities, w h i c h device attempts to eliminate some of the inequities, i t is h i g h l y questionable whether the present classification base is suitable f o r today's banking conditions. Studies have been made over a period of years of the desirability of measuring bank reserves entirely by classifications of deposits. Such a plan w o u l d also have w i t h i n i t some inequities, b u t m i g h t be h i g h l y effective i n the use of reserve requirements as a n i n s t r u m e n t of c r e d i t control. I f any change is made i n the base on w h i c h reserves are required, i t should be c a r e f u l l y designed and should be i n s t i t u t e d i n a period of relative* monetary ease. The objection o f banks to reserve requirements t h a t are higher t h a n may be needed f o r safety are t h a t such reserves are nonearning assets of the banks b u t are earning assets of the Federal Reserve System. A n increase i n reserve requirements merely transfers earning assets f r o m the member banks t o t h e Federal Reserve. I t has been suggested t h a t reserve requirements be changed so t h a t only p a r t of these reserves w o u l d be required i n cash and p a r t i n c e r t a i n types of shortt e r m Government securities on w h i c h the o w n i n g banks w o u l d receive the interest. T h i s proposal is of d o u b t f u l m e r i t . I n effect, i t w o u l d force some banks to become u n w i l l i n g holders of a p a r t i c u l a r type of Government securities. A n o t h e r suggestion has been made t h a t w h e n reserve requirements are above certain percentages of deposits t h a t the Federal Reserve banks should be required to pay interest to the member banks on the excess reserves required. I t should be noted t h a t the use of reserve requirements as a vehicle of c r e d i t control, applies only to banks and does not directly affect other lenders—some o f w h o m compete w i t h banks i n m a k i n g loans. A n y discussion of the problems of dealing w i t h i n f l a t i o n raises the question of over-all m a j o r policy under the directive of the Employment A c t of 1946. W h i l e this act specifically provides f o r a n a t i o n a l policy as to employment by creating and m a i n t a i n i n g "conditions under w h i c h there w i l l be afforded u s e f u l employment opportunities, i n c l u d i n g self-employment f o r those able, w i l l i n g , a n d seeking to w o r k and to promote m a x i m u m employment," i t also states as an objective of the policy to promote m a x i m u m "production a n d purchasing: power," and a l l of t h i s to be done " i n a manner calculated to foster and p r o m o t e f r e e competitive enterprise and the general welfare.'* Emphasis i n t h i s policy directive is on employment, but recognition is given to the need f o r m a i n t a i n i n g m a x i m u m purchasing power. A l t h o u g h the inference is t h a t w h a t is meant i s r e a l purchasing power, w h i c h requires relative s t a b i l i t y of the dollar. I t h i n k i t i s u n f o r t u n a t e t h a t the w o r d i n g of this act does not contain a more specific statement of n a t i o n a l policy to m a i n t a i n long-run monetary s t a b i l i t y . A n examination of legislative and a d m i n i s t r a t i v e history of the Federal Government f o r the past few years does not y i e l d convincing evidence t h a t the g u i d i n g policy has been one of m a i n t a i n i n g long-run monetary s t a b i l i t y . I have tremendous respect f o r the American dollar as one of the most i m p o r t a n t single factors i n the w o r l d today. The i n t e g r i t y of the dollar must be preserved. A n y depreciation or discount of t h a t dollar i s a t h r e a t to o u r o w n n a t i o n a l w e l f a r e and the w e l f a r e of the rest of the world. T h r o u g h o u t h i s t o r y , disasters i n v a r y i n g degrees have almost always followed periods of serious inflation. However, there can be l i t t l e doubt t h a t under the necessity of the Government b o r r o w i n g vast sums to finance W o r l d W a r I I and the need f o r quick expansion o f m i l i t a r y f a c i l i t i e s and production, t h a t a substantial increase i n the m o n e t a r y supply was required. I t may now appear i n retrospect t h a t the money supply d u r i n g the w a r period was increased to a greater degree t h a n was desirable. I f i t had been possible to place a larger p r o p o r t i o n of the public debt i n t h e hands of nonbank holders and less i n the banking system, there w o u l d have been less increase i n the monetary supply. The question now is whether or not the money supply is too great i n t e r m s o f t h e needs of the present defense effort. A t times, t h i s appears to be the case, but, on the other hand, i n terms of t h e ^ s t outlays t h a t are being made a n d are i n contemplation, we may find t h a t the money supply is not too great. I n the meantime, we have the practical problem of r e s t r a i n i n g i n f l a t i o n a r y pressures a n d dealing w i t h the money supply as i t now exists. Credit needs f o r the defense effort must be filled while, at the same time, i t is highly desirable t h a t i n f l a t i o n be restrained. M y own views are t h a t economic policy under present conditions should be directed against i n f l a t i o n t h r o u g h appropriate action by the Government on every f r o n t , w h i l e at the same t i m e avoiding as much as possible actions t h a t MONETARY POLICY AND M A N A G E M E N T OF PUBLIC DEBT . 241 w i l l have serious adverse effects i n other areas and avoiding so f a r as possible r i g i d i t i e s i n the operation of the p r i v a t e enterprise system. Selective controls a n d allocation of materials appear to be essential i n such a program, but t h e application of such controls should be subject to a d m i n i s t r a t i v e flexibility sot h a t they m a y be adjusted, dropped or increased as the needs of the s i t u a t i o n develop. I t w o u l d be a mistake to place entire reliance or too much reliance on the use of interest rates t h r o u g h monetary management to control inflation. The need is to deal w i t h this problem on the broad f r o n t under a consistent and coordinated policy of Congress and the executive department of Government. To deal w i t h t h i s problem on the monetary f r o n t alone is to ignore the many areas of i n f l a t i o n a r y pressures other t h a n i n the field of credit and monetary supply. I n t h i s connection, there is an intangible factor somewhat unpredictable t h a t w e m i g h t call human behavior. The officials of the Federal Reserve System frequently r e f e r to the effect of actions w h i c h are taken as psychological r a t h e r t h a n economic. T h i s f a c t o r is one of tremendous i m p o r t i n a country i n which, people have such vast resources along w i t h a large degree of freedom to use these resources as they desire. As an i l l u s t r a t i o n , there was general agreement among economists at the beginn i n g of 1951 t h a t i n f l a t i o n a r y pressures throughout the year w o u l d be strong. Such d i d not develop to the extent anticipated. Almost no one anticipated the abrupt change t h a t took place between the first quarter of 1951 and the second quarter i n the s h i f t f r o m spending to saving on the p a r t of individuals. Disposable personal income increased between these t w o quarters at a n a n n u a l r a t e of $5 billion, yet personal savings increased at the rate of $11.6 b i l l i o n . Personal savings more t h a n doubled between these t w o quarters both i n dollars a n d i n percent of disposable income. The sudden s h i f t f r o m spending to s a v i n g on the p a r t of the people d i d much to cool off the pressure on prices of consumer goods. I n dealing w i t h the public debt and changes i n prices of Government securities* w e should keep i n m i n d the fact t h a t a substantial m a j o r i t y of the A m e r i c a n people owns Government securities and reacts to developments t h a t affect the value of such securities, even though the savings bonds held by most individuals are insulated against price decline. I have a tremendous respect f o r the size o f the n a t i o n a l debt, i t s proportion to a l l debt and its widespread ownership. The ownership of t h a t debt is based on the confidence of the owners i n the Government. A n y disturbance to t h a t confidence is a m a t t e r of serious concern. F a i r l y , I t h i n k i t m i g h t be said t h a t many i n d i v i d u a l owners of Government securities and potential buyers are concerned over the vast expenditures of Government, some of w h i c h they consider unnecessary or even wasteful, and p a r t i c u l a r l y when,, i n spite of heavy taxes, Government expenditures promise to exceed revenues. Others look w i t h concern at the decline i n the value of the long-term securities below par. Many of them do not understand economic theory, b u t do understand the f a c t t h a t whereas they p a i d $100 f o r a long-term Government bond, i t is now w o r t h only $97, and are concerned w i t h the possibility of a much f u r t h e r decline i n prices. They also have concern over the deterioration i n the purchasing value of their dollar investments made i n recent years, whether i n savings bonds, bank savings accounts, or l i f e insurance. I n a free country i n w h i c h we have universal a n d quick communications, we must deal w i t h the f a c t o r of h u m a n behavior and public reactions to current events. A l l of these considerations have a bearing on the sale of Government securities, p a r t i c u l a r l y to individuals. W h i l e i n the Treasury, i n 1947-48, I came to have tremendous respect f o r the officials of the Federal Reserve System and t h e i r devotion to public service. I n dealing w i t h i n t r i c a t e problems of monetary control and debt managements about which, at times, there were different viewpoints and different evaluations of the effect of proposed actions, there was always evidence of a desire, f u l l Y shared by the officers of the Treasury Department, to resolve such differences i n the interest of the general welfare. The s p i r i t of public service was the catalyst i n the-presence of w h i c h a l l discussions of policies and-measures were considered. There are those who believe t h a t i n the exercise of discretionary a d m i n i s t r a t i v e policy of n a t i o n a l importance, there should be no differences of views among t o p officials and i f they occur, a supreme a u t h o r i t y of l a w or the C h i e f Executive should dictate the policy to be followed. Generally speaking, i t is of highest importance t h a t even though differences of opinion are to be expected among t h i n k i n g men, effective results i n c a r r y i n g out a policy cannot be achieved MONETARY POLICY AND M A N A G E M E N T OF PUBLIC DEBT.242 i n the executive department of Government unless there is a coordination of effort among the various departments and agencies under a common policy. F o r this reason, I support the proposal t h a t an advisory council be set up, by executive action, headed by the Secretary of the Treasury, and including the various executive agencies of Government dealing w i t h credit and money, f o r the purpose of exchanging i n f o r m a t i o n and views and f o r coordinating admini s t r a t i v e policy. W h i l e i t w o u l d be proper and desirable f o r the C h a i r m a n of t h e B o a r d of Governors of the Federal Reserve System or his representative to be a member of this group, he should not necessarily be bound by any policy decision reached by the group. The B o a r d of Governors of the FederalJEleserve System should give tremendous weight to any conclusions reached by such a policy • g r o u p because i t is assumed t h a t any decisions reached w i l l represent the combined judgment of top a d m i n i s t r a t i v e officials as to proper policies to be followed i n fiscal, monetary and credit affairs. However, the Federal Reserve System has specific statutory duties t h a t involve semi j u d i c i a l decisions t h a t are based not only on tangible factors but intangibles and they could not conscientiously discharge t h e i r duties i f bound by the dictates of the executive department of Government. I t is proper and desirable f o r the Chief Executive to coordinate the activities of Government t h a t are under his direction under a common policy but, i n m y opinion, w o u l d be h i g h l y improper f o r h i m to dictate actions to be taken hy such semijudicial, independent bodies as the Federal Reserve System, the I n t e r s t a t e Commerce Commission, the Securities and Exchange Commission or other s i m i l a r bodies. I t h i n k t h a t he has the r i g h t and duty, however, to communicate his views to such agencies and t h a t these views should be received w i t h respect and careful consideration. However, to subordinate semijudicial a n d independent bodies set up by the Congress to the directives of the Chief Executive w o u l d destroy the effective value of such agencies. Recognizing the differences of viewpoint on desirable action may arise between the T r e a s u r y Department and the Federal Reserve, a pcoper question is how such differences may be resolved. Fact No. 1 is t h a t the differences are f e w . The second f a c t is t h a t almost w i t h o u t exception such differences are reconciled. T h i s is done t h r o u g h discussion and agreement and sometimes through compromise, but always i n a s p i r i t of t r y i n g to find the r i g h t answer i n the n a t i o n a l interest. I t is my firm conviction t h a t such a method of dealing w i t h common problems between an agency of Congress and an executive department is of the essence of democratic government. I n some cases, the results are not as definite nor as effective as they w o u l d be w i t h an a u t h o r i t a t i v e set-up under w h i c h one m i g h t be subordinated to the other or both directed by a supreme a u t h o r i t y . However, i n my humble opinion, this is a cheap price to pay f o r the preservation of the basic principle of checks and balances i n a democratic government. W e should recognize t h a t no man and no group of men dealing w i t h the vast problems of our public debt and our monetary system are omniscient. Too m a n y factors are involved, not only economic and financial, but i n the r e a l m of the probabilities of human behavior f o r any one man or group of men to k n o w a l l of the r i g h t answers. I t w o u l d be a catastrophe to weaken or destroy the independence of the JTederal Reserve System as a semijudicial body by m a k i n g i t merely an admini s t r a t i v e agency subordinate to the Treasury Department or subject to direction by the Chief Executive. On the other hand, the officials of the Federal Reserve System should give every consideration to the problems of the Treasury Department, the difficulties of managing the huge public debt and m a j o r governmental policies. I t is m y understanding t h a t such is the present policy of the Federal Reserte System. I t m i g h t be pointed out t h a t the history of central banking throughout the w o r l d is tragic evidence t h a t such institutions lose t h e i r independence i f their actions are inconsistent w i t h m a j o r governmental policies. Central banks w i n battles against government but governments always w i n the war. Summarizing: (1) The needs f o r financing W o r l d W a r I I and the m u l t i p l i c a t i o n of product i v e facilities to c a r r y on the w a r resulted i n a huge increase i n the public debt and i n the money supply. (2) W h i l e the larger p a r t of such increase was necessary there remains a question as to whether or not such money supply is more t h a n is desirable f o r •a peacetime economy. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 243 (3) The result of the increased Government debt and increased money supply was to depreciate the purchasing value of the dollar—another name f o r inflation. (4) The results of the sale of large amounts of Government securities w e r e : (a) to create an unbalanced investment situation on the p a r t of many institutions t h a t required a later liquidation of p a r t of such securities; (&) to fill t h e banking system w i t h a large volume of short-term Government securities which made funds available to any bank not only through sale but also by allowing such securities to r u n off as they f a l l due; and (c) to make the vast m a j o r i t y o f the people of this country holders of Government securities either through direct ownership or indirectly by institutions. (5) The policies of Congress have been, on the whole, inflationary not only dtffiiag the period of W o r l d W a r I I but since. Congress, under the Constitution,, is charged w i t h the responsibility f o r regulating the value of money. I t has t h e powers to perform this function and should be held responsible for substantial changes i n the purchasing value of the dollar. I t should be recognized t h a t Congress, over a period of time, represents the w i l l of the people. (6) The public generally, while opposing inflation i n principle, actually desire a certain amount of inflation as i t may affect their p a r t i c u l a r interests. I t is but n a t u r a l t h a t the f a r m e r should w a n t higher prices for f a r m products, the workingman higher wages for his services, the businessman higher profits, a n d the lenders higher interest rates. A l l of these objectives are inflationary except to the extent that higher interest rates are contra-inflationary. (7) Congressional inflationary actions i n the presence of the large monetary supply and the huge Government debt have added to the difficulties of the Treasu r y Department i n debt management and, i n particular, have multiplied, t h e difficulties of the Federal Reserve System i n i t s money market management directed toward restraining credit. (8) Under certain conditions, there is conflict between monetary control a n d debt management. The almost continuous necessity for refunding m a t u r i n g obligations and the frequent need for borrowing money i n the management of t h e debt require a considerable degree of monetary stability for successful accomplishment. Proper monetary management at times necessarily requires actions t h a t disturb the money markets. The objectives of proper debt management to preserve confidence i n the public debt and permit its orderly handling are essent i a l to the national welfare. On the other hand, monetary management that seeks to adjust the credit situation to changing needs and changing conditions is also highly desirable i n the public interest. Decisions i n both fields are highly complex a n d are based not only on known financial and economic factors but o n the uncertainties of the future, including the factor of human behavior. No m a n or group of men can, w i t h precision, correctly evaluate a l l of the factors involved i n debt management and monetary management. (9) W i t h the widespread ownership of the public debt among individuals, t h e attitudes of people t o w a r d the Government debt constitute an important consideration of the possible public reactions to actions taken. Serious reductions i n the prices of Government securities are disturbing to many people. (10) The basic consideration in monetary management and debt management is t h a t so f a r as possible they should be consistent w i t h each other i n spite of the fact ttrat they have different p r i m a r y objectives. A high degree otf close-cooperat i o n and coordination is necessary between the two i n the interest of both. The greatest care should be exercised t h a t : (a) Actions i n one field should not seriously disturb operations i n the other field; (&) that careful consideration should be given to the long-run adverse effect of actions taken to accomplish immediate desirable objectives; and (c) i n view of the intricacies of the problems involved i n debt management and monetary management and the necessity f o r the exercise of judgment t h a t is based not only on known factors but unknown factors and w i t h changes i n conditions beyond the control of monetary authorities, t h a t there should be no mandate or directive by l a w t h a t would r e s t r i c t the necessary freedom of actions f o r proper debt management and monetary management. (11) TJaa close w o r k i n g tog#ther by the Treasury Department a$d the Federal Reserve System has resulted i n a high degree of cooperation i n which differences have been minimized. I t is i n the interest of both t h a t actions of one should not be contrary t o the objectives of the other. W h i l e a d m i t t i n g t h a t t h i n k i n g men w i l l not always agree on every specific action to be taken i n the field of monetary control and debt management, i t is f a r more important i n terms of our democratic system of checks and balances that the freedom to disagree be MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.244 preserved rather than to destroy the independence of either the Treasury or the Federal Reserve System i n w o r k i n g out problems common to both. Neither should the Federal Reserve System become subordinate to the executive department of Government nor should i t be allowed to take over the functions of t h a t department. The t h i r d item i n my discussion is on the question of ownership of stock i n the Federal Reserve banks. The stock i n these banks is now held by the member banks. This stock carries a fixed dividend and the stockholders have no interest i n any earnings of the banks i n excess of the amount required to pay the dividend. The question has been raised as to whether or not i n view of the fact that the Federal Reserve is controlled by the Government, the Government should also own the stock of the Federal Reserve banks. I can see no reason why the ownership of the stock by the Government would provide any governmental control not now exercised or available. The only advantage to the Government i n such ownership would be to receive the dividend on the investment of the Government to acquire this stock. The difference i n the dividend and the cost of the money w i t h w h i c h to buy the stock is not of sufficieiit amount to have an important bearing on the question. I f the Government owned the stock of the Reserve banks, the implications would be t h a t the Reserve System was merely an executive agency of the Government, such as the RFC f o r instance, and subject to Executive direction. The Federal Reserve banks represent a combination of Government and private business under which control is vested i n the Government. I t is through the ownership of the stock of the Reserve banks by member banks t h a t the Reserve system mobilizes the services of able individuals as directors of the regional banks. These men represent the private-enterprise system and the public. Although the powers of the directors of the Federal Reserve banks are limited and although the control of the policies of the banks is vested i n the Board of Governors, at the same time these directors bring a viewpoint of banking, industry, agriculture, and business to the officers of their respective banks t h a t is valuable to the Reserve banks i n maintaining close touch w i t h conditions prevailing i n their respective districts. The Federal System has no other direct official relationship w i t h business, commerce, and agriculture except through the boards of directors of the various Reserve banks. Such relationships constitute a highly desirable feature of the Federal Reserve System. Member-bank ownership of the stock i n the Reserve banks not only gives the banks an opportunity to vote i n the election of six of the nine directors of each bank, but affords a relationship i n which bankers have a direct interest i n the functioning of the Reserve System. To divest the member banks f r o m this stock ownership would result i n losing a valuable asset of support to the System a n d an interest on the p a r t of banks and other businessmen i n the System's operations. The operations of the Federal Reserve 'System are so intimately related to commerce and i n d u s t r y and the operations of the chartered banking system t h a t i t is highly desirable i n the national interest t h a t such relationships be oncouraged rather than discouraged. A basic concept of the Federal Reserve System is to serve the local needs of every area of the Nation by diffusing operations through regional and branches of regional banks. I f the participation of public representatives as Reserve bank directors elected by the banks were eliminated, we would then have only a concentrated bureaucratic direction of the System by the Board of Governors. Such would not be i n the public interest. I can find no sound reason for the Government to acquire the stock of the Federal Reserve banks unless the objective is to destroy the independence of the System and make of i t merely a Government bureau. E e p r e s e n t a t i v e PATMAN. I w i l l state t h a t y o u h a v e g i v e n t h e best reason f o r the continuance o f the token o w n e r s h i p b y t h e commercial banks o f the F e d e r a l Reserve System t h a t I have h e a r d given, the m o s t logical reason f o r i t . M r . WIGGINS. T h a n k y o u v e r y m u c h , s i r . T h e r e is some m o r e d e t a i l i n m y statement, M r . C h a i r m a n , t h a n I gave. R e p r e s e n t a t i v e PATMAN. M r . W o l c o t t ? Senator Douglas? S e n a t o r DOUGLAS. I w a n t t o c o m p l i m e n t t h e w i t n e s s o n h i s e x t r a o r d i n a r y able statement. I t is i n d e e d one o f t h e ablest statements w h i c h I have ever h e a r d o n the subject. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 2 4 5 M r . WIGGINS. T h a n k y o u v e r y m u c h , s i r . Representative PATMAN. M r . B o i l i n g ? R e p r e s e n t a t i v e BOLLING. NO q u e s t i o n s , M r . C h a i r m a n . R e p r e s e n t a t i v e PATMAN. I w i l l ask t w o o r t h r e e questions o f M r . Wiggins. Y o u know, the Comptroller General i n the General Accounting Office u s u a l l y a u d i t s a n d has c o n t r o l o f t h e a u d i t i n g a n d g e n e r a l sup e r v i s i o n o f t h e b o o k k e e p i n g o f p u b l i c agencies. D o y o u b e l i e v e t h a t t h e G e n e r a l A c c o u n t i n g Office s h o u l d b e g i v e n t h e p o w e r t o a u d i t t h e books o f t h e F e d e r a l Reserve System a n d the F e d e r a l Reserve B o a r d ? M r . WIGGINS. M r . C h a i r m a n , I c a n see n o p a r t i c u l a r o b j e c t i v e e x cept t o g i v e a n o t h e r agency some m o r e w o r k , a n d t h e y w o u l d p r o b a b l y w a n t another a p p r o p r i a t i o n t o do it. T h e F e d e r a l Reserve has a n effective i n t e r n a l a u d i t , a n d I do n o t k n o w w h a t w o u l d be accomp l i s h e d b y i t o r w h a t t h e d e s i r a b l e o b j e c t i v e is. R e p r e s e n t a t i v e P A T M A N . I t costs as m u c h m o n e y t o h a v e a p r i v a t e a u d i t as i t w o u l d f o r t h e G o v e r n m e n t a u d i t o r . M r . WIGGINS. I r e a l l y a m n o t f a m i l i a r w i t h t h e t y p e o f a u d i t s t h a t t h e F e d e r a l Reserve m a k e except t h a t I k n o w t h e y do h a v e a v e r y elaborate system of a u d i t of their own. Representative PATMAN. T h e question i n v o l v e d here is t h e y a u d i t t h e i r o w n books, w h e t h e r o r n o t t h a t is a g o o d p o l i c y . M r . WIGGINS. I a m s t r o n g f o r a n i n t e r n a l a u d i t r e g a r d l e s s o f w h e t h e r y o u h & v e a n o t h e r a u d i t o r o r n o t . I t h i n k i t i s t h e m o s t effect i v e m e a n s o f c o n t r o l l i n g a b u s i n e s s , w i t h a u n i t o f t h e same b u s i n e s s , a n i n d e p e n d e n t g r o u p c h a r g e d w i t h t h e same r e s p o n s i b i l i t i e s t h a t some other auditors would perform. Representative PATMAN. A n o t h e r question on a n n u a l a p p r o p r i a t i o n s . M o s t o f t h e agencies o f t h e G o v e r n m e n t a n d p u b l i c b o d i e s depend u p o n Congress f o r a n n u a l a p p r o p r i a t i o n s . I n t h a t w a y t h e y are under the direction and scrutiny of w h a t you m i g h t call their master, t h e Congress. W o u l d y o u be i n f a v o r o f t h e F e d e r a l R e s e r v e S y s t e m t u r n i n g i n a l l o f i t s receipts l i k e m o s t o f t h e o t h e r agencies do, a n d r e c e i v i n g m o n e y f o r t h e i r s u p p o r t a n d salaries, maintenance, a n d o p e r a t i o n f r o m a b u d g e t l i k e o t h e r agencies are r e q u i r e d t o do ? M r . WIGGINS. F r a n k l y , I w o u l d n o t w a n t t o r u n t h a t b u s i n e s s i f i t h a d t o be d o n e t h a t w a y . I t h i n k t h a t t h e t y p e o f o p e r a t i o n s o f a h u g e b a n k i n g system, t h a t the m e n at the head o f i t s h o u l d be g i v e n t h e authority to r u n i t w i t h o u t requiring an appropriation of Cong r e s s f o r t h e i r d e t a i l e d expenses a n d costs. I d o n o t k n o w h o w y o u w o u l d c o v e r t h e losses t h a t t h e y m i g h t t a k e o n G o v e r n m e n t s e c u r i t i e s . I t w o u l d be a n e x p e n s e o f t h e o p e r a t i o n . T h a t c e r t a i n l y c o u l d n o t be c o v e r e d b y s t a t u t e , I m e a n b y a n y p a r t i c u l a r appropriation. I t h i n k they ought to have the freedom t h a t they n o w have, M r . C h a i r m a n . R e p r e s e n t a t i v e P A T M A N . O f c o u r s e , so f a r as i n d e p e n d e n c e is c o n c e r n e d , M r . W i g g i n s , t h e S u p r e m e C o u r t receives i t s a n n u a l a p p r o p r i a t i o n s f r o m Congress. I t i s a c o o r d i n a t e b r a n c h o f o u r G o v e r n m e n t , a n d i t i s j u s t as i n d e p e n d e n t , I b e l i e v e , as a n y p a r t o f o u r G o v e r n m e n t c a n p o s s i b l y be, a n d t h e y c e r t a i n l y h a v e n o t f o u n d i t t o b e a n y h a n d i c a p , a n d i t seems t o b e a p a r t o f o u r t r a d i t i o n a l system, b u t t h e q u e s t i o n is w h e t h e r o r n o t w e s h o u l d m a k e a n e x c e p t i o n i n t h i s case. T a k e t h e e x e c u t i v e b r a n c h MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.246 o f t h e G o v e r n m e n t . I t is dependent u p o n Congress f o r e v e r y d o l l a r u n d e r t h e i r c o n t r o l a n d every d o l l a r t h a t t h e y spend. M r . WIGGINS. T h a t i s t r u e . R e p r e s e n t a t i v e P A T M A N . SO t h e a r g u m e n t t h a t i t d e s t r o y s t h e i n dependence o f the agency I believe is somewhat weakened b y t h e experience of the executive a n d the j u d i c i a l branches of our Government. M r . WIGGINS. T h e F e d e r a l R e s e r v e S y s t e m , h o w e v e r , i s a n i n c o m e p F o d u c i n g o p e r a t i n g business, a n d I t h i n k is e n t i r e l y d i f f e r e n t f r o m s u c h o p e r a t i o n s as t h e c o u r t s , w h e r e i t i s a m a t t e r o f e x p e n s e . T h e C o n g r e s s does f i x t h e s a l a r i e s o f t h e m e m b e r s o f t h e B o a r d o f G o v e r n o r s , w h i c h I t h i n k i s p r o p e r , b u t i t does n o t f i x t h e s a l a r i e s o f t h e presidents o f the F e d e r a l Reserve banks, a n d I t h i n k m a n y Congressmen m i g h t t h i n k w h e n y o u came t o a p p r o p r i a t i n g a n a m o u n t t h a t w o u l d be necessary t o e m p l o y t h e t y p e o f a b i l i t y t h a t is r e q u i r e d , f o r t h e p r e s i d e n t o f a b a n k , t h a t t h e s a l a r y w o u l d be t o o h i g h . I a m a f r a i d t h a t Congress w o u l d n o t a p p r o p r i a t e adequately to get the t y p e of personnel t h a t we n o w have i n the Federal Reserve S y s t e m r a n d i n m y o p i n i o n i t needs t h e best m e n t h a t c a n be f o u n d . Representative PATMAN. W i t h o u t a r g u i n g the question - w i t h you,. M r . W i g g i n s , Congress has been r a t h e r l i b e r a l w i t h t h e S u p r e m e C o u r t f o r instance. T h e y receive r a t h e r l i b e r a l salaries a n d allowances and. r e t i r e m e n t benefits, a n d i f y o u a d d i t a l l u p , I suspect i t w o u l d a m o u n t t o a b o u t as m u c h as t h e p r e s i d e n t s o f t h e r e s p e c t i v e F e d e r a l Reserveb a n k s receive. M r . W I G G I N S . I t h i n k t h e S u p r e m e C o u r t , M r . C h a i r m a n , i s a holy o f h o l i e s t h a t w e r e g a r d w i t h s u c h h i g h f a v o r t h a t w e o u g h t n o t to* compare this b a n k i n g system w i t h the Supreme Court. I t m i g h t be* c o m p a r e d w i t h s o m e t h i n g else. R e p r e s e n t a t i v e P A T M A N . A n d so f a r as i t s s t a t u s as a r e v e n u e - b e a r i n g a g e n c y is c o n c e r n e d , w e s h o u l d k e e p i n m i n d , t o o , t h a t a l l i t s r e v e nues are b y reason o f its h o l d i n g s o f U n i t e d States G o v e r n m e n t securities. M r . WIGGINS. A n d t h e n o t e - i s s u i n g p r i v i l e g e . Representative PATMAN. Y e s ; u s i n g the c r e d i t o f t h e c o u n t r y . If yoji want to p u t the Supreme Court i n a comparable situation, y o n c a n j u s t t u r n over $20 b i l l i o n w o r t h o f G o v e r n m e n t b o n d s a n d s a y , " A l l t h e i n t e r e s t o n t h a t m o n e y y o u c a n use t o r u n t h e j u d i c i a l s y s t e m , ' r a n d then p u t the rest o f i t back i n t o t h e T r e a s u r y . M r . WIGGINS. M y o p i n i o n , M r . C h a i r m a n , i s t h a t i f t h e C o n g r e s s is n o t satisfied w i t h t h e w a y the F e d e r a l Reserve S y s t e m is r u n , t h e n they m i g h t take over the functions of a p p r o p r i a t i n g and requiringt h e r e c e i p t s t o be b r o u g h t i n t o t h e T r e a s u r y , b u t t h e p r a c t i c a l f a c t s a r e t h a t y o u n e e d as p r e s i d e n t s o f some o f y o u r F e d e r a l R e s e r v e b a n k s the ablest f i n a n c i a l brains i n A m e r i c a ; a n d y o u have g o t i t , i n m y opinion. Y o u are c o m p e t i n g w i t h the presidents of banks t h a t p a y salaries t h a t are v e r y h i g h i n t e r m s o f t h e s a l a r y t h a t a C o n g r e s s m a n gets. S e n a t o r DOUGLAS. T h e r e w e c o m e t o a p o i n t , n a m e l y , t h a t t h e s a l a r i e s o f members o f t h e F e d e r a l Reserve B o a r d are a p p r e c i a b l y b e l o w t h e salaries of t h e presidents o f t h e F e d e r a l Reserve banks, a l t h o u g h t h e p o s i t i o n o f t h e F e d e r a l Reserve B o a r d is r e a l l y m u c h m o r e i m p o r t a n t i n f r a m i n g general p o l i c y t h a n t h e o p e r a t i n g heads o f t h e b a n k s . MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 247 W o u l d y o u f a v o r i n c r e a s i n g t h e salaries o f t h e F e d e r a l Reserve Board? M r . WIGGINS. I c e r t a i n l y w o u l d . I t h i n k i t is a shame t h a t those m e n receive t h e salaries t h e y get w h e n t h e y occupy a p o s i t i o n o f such i m p o r t a n c e i n o u r w h o l e economy, w h e n y o u have to d r a w f r o m a source o f t h e k i n d o f m e n y o u w a n t , m e n w h o receive salaries several t i m e s as g r e a t . I d o n o t t h i n k t h a t i n s o m e cases y o u w i l l g e t t h a t t y p e o f m a n w i t h s a l a r y a l o n e . I n s o m e cases y o u h a v e t h a t t y p e o f m a n a l r e a d y o n t h e F e d e r a l R e s e r v e B o a r d w h e r e t h e s a l a r y i s less i m p o r t a n t t o h i m t h a n a sense o f s e r v i n g t h e G o v e r n m e n t . S e n a t o r DOUGLAS. Y O U a r e a w a r e o f w h a t h a p p e n e d w h e n s o m e o f us t r i e d t o increase the salaries o f members o f the F e d e r a l Reserve B o a r d f r o p i $15,000 u p , I b e l i e v e , t o $22,500. T h e r e c o r d is p e r f e c t l y clear t h a t the F e d e r a l D e p o s i t I n s u r a n c e C o r p o r a t i o n w i t h a l l its influence injected itself i n the situation a n d :said, " Y o u c a n ' t i n c r e a s e t h e s a l a r i e s o f t h e F e d e r a l R e s e r v e B o a r d u n l e s s y o u i n c r e a s e o u r s . W e a r e as i m p o r t a n t as t h e y a r e . " A n d I a m s o r r y t o say t h a t a l a r g e p r o p o r t i o n o f y o u r f e l l o w b a n k e r s w e n t a l o n g w i t h t h e F e d e r a l D e p o s i t I n s u r a n c e C o r p o r a t i o n , because m y file^are f u l l of telegrams f r o m the bankers of m y State protesting -against a n increase i n t h e salaries o f members o f t h e F e d e r a l Reserve Board. N o w I h o p e t h a t y o u c a n use y o u r i n f l u e n c e w i t h y o u r f e l l o w members o f the A m e r i c a n B a n k e r s Association on t h i s question. M r . WIGGINS. W e l l , t h e q u e s t i o n o f c o m p a r a t i v e s a l a r i e s i s a l w a y s raised w h e n y o u change anybody's salary. I t is a t o u g h p r o b l e m i n business, o f course, w i t h y o u r o w n personnel. S e n a t o r DOUGLAS. I w a s g r e a t l y d i s a p p o i n t e d i n t h e a t t i t u d e o f t h e Federal Deposit Insurance Corporation. Representative PATMAN. M r . W i g g i n s , w e t h a n k y o u v e r y k i n d l y sir. M r . WIGGINS. T h a n k y o u , g e n t l e m e n . Representative PATMAN. M r . W i g g i n s , w i l l y o u come back j u s t a m o m e n t please. I f d r g o t t o c a l l o n D r . M u r p h y a n d D r . E n s l e y a n d .ask i f t h e y w a n t e d t o a s k a n y q u e s t i o n s . M r . ENSLEY. I h a v e n o q u e s t i o n s . Representative PATMAN. D r . M u r p h y ? M r . MURPHY. I h a v e o n l y one question. The Douglas report 2 j e a r s ago s a i d : W e believe that to restore the free domestic convertibility of money into gold -coin or gold bullion at this time would m i l i t a t e against rather than promote the purposes of the Employment Act, and we recommend t h a t no action i n this direction be taken. W h a t w o u l d be y o u r r e a c t i o n i f t h i s c o m m i t t e e r e i t e r a t e d t h a t s t a t e m e n t o r some v a r i a t i o n o f i t i n i t s r e p o r t ? W o u l d you comment o n that, M r . Wiggins? M r . WIGGINS. W o u l d y o u m i n d r e a d i n g t h e h e a r t o f t h a t ? I d i d n o t •quite h e a r y o u , M r . M u r p h y . M r . MURPHY ( r e a d i n g ) : We believe t h a t to restore the free domestic convertibility of money into gold •coin or gold bullion at this time would militate against rather than promote the purposes of the Employment Act, and we recommend t h a t no action i n this direct i o n be taken. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.248 T h a t w a s stated i n t h e D o u g l a s r e p o r t 2 years ago. T h e q u e s t i o n is, D o y o u t h i n k i t w o u l d be a c o n s t r u c t i v e t h i n g f o r t h i s c o m m i t t e e i n its report to reaffirm that position ? M r . WIGGINS. T h e r e a r e a n u m b e r o f p e o p l e w h o t o y w i t h t h e i d e a o f m a k i n g g o l d convertible to cure m a n y of o u r economic ills. I a m a s h a m e d t o a d m i t t h a t I w r o t e a t r e a t i s e o n g o l d a b o u t 30 years, a g o a n d I h o p e i t w i l l n e v e r be r e a d o r d i s c o v e r e d , because w h a t I s a i d a t t h a t t i m e i s so f o o l i s h t o d a y t h a t I a m a s h a m e d t o a d m i t t h a t I wrote it. I n m y o p i n i o n i f t h e r e is a n y s u b s t a n t i a l d e m a n d o r a d v o c a c y o f m a k i n g g o l d f r e e l y c o n v e r t i b l e , I t h i n k i t m i g h t be w e l l f o r t h e c o m m i t t e e t o e x p r e s s i t s e l f s o m e w h a t a l o n g t h e s a m e l i n e s as i t f o r m e r l y expressed itself. I personally t h i n k t h a t m a k i n g g o l d f r e e l y convertible w o u l d only result i n transferring the h i d i n g of the g o l d i n t h e g r o u n d at F o r t K n o x t o h i d i n g i t u n d e r the mattresses a n d i n t h e socks o v e r t h e c o u n t r y . I t h i n k i f y o u r e a l l y w a n t t o deflate, Senator—wye were t a l k i n g a b o u t d e f l a t i n g — i f y o u w o u l d announce on a certain day t h a t anybody can go to a n y b a n k i n the c o u n t r y and get a l l the g o l d they w a n t , I believe i n 3 hours w h y the gold supply w o u l d disappear. S o m e p e o p l e d o n o t agree w i t h t h a t , b u t I have asked some o f t h e advocates o f c o n v e r t i b i l i t y o f g o l d w h a t they w o u l d do i f t h e y h a d the r i g h t to convert their money into gold, and I t h i n k u n i f o r m l y everyone has said, " W e l l , I w o u l d get a l l I c o u l d get a n d I w o u l d p u t i t a w a y i n a good, safe place." I do n o t go a l o n g w i t h any proposition at the present t i m e u n d e r the present w o r l d conditions to make our g o l d s u p p l y convertible freely. S e n a t o r DOUGLAS. Y O U d o n o t a g r e e w i t h t h e a p p a r e n t m e a n i n g , , therefore, of an eminent candidate f o r the Presidency w h o declared t h a t he w a n t e d a s o l i d A m e r i c a n d o l l a r w i t h a m o d e r n g o l d s t a n d a r d s E e p r e s e n t a t i v e P A T M A N . I t h i n k y o u w o u l d h a v e t o d e f i n e w h a t is-meant by a "modern gold standard." S e n a t o r DOUGLAS. S t r i k e m y q u e r y f r o m t h e r e c o r d . R e p r e s e n t a t i v e PATMAN. NO, no. W e l l , thank you very k i n d l y , M r . Wiggins. D r . B l o u g h , w e a r e g l a d t o h a v e y o u as o u r w i t n e s s . a prepared statement? Do you have STATEMENT OF ROY BLOUGH, MEMBER, COUNCIL OF ECONOMIC? ADVISERS M r . BLOUGH. M r . C h a i r m a n , t h e o p p o r t u n i t y w h i c h t h e c o m m i t t e e gave the C o u n c i l t o respond t o the committee's questionnaire has g i v e n me plenty of o p p o r t u n i t y to explain m y views on the subject u n d e r consideration. T h e r e is one p o i n t , however, I t h i n k o n a r a t h e r c e n t r a l p r o b l e m , t h a t m a y n o t s t a n d o u t as c l e a r l y as m i g h t be w i s h e d . I have prepared a statement on t h a t point. I f i t meets w i t h y o u r a p p r o v a l , I w o u l d l i k e t o have t h a t statement appear i n the record, a n d to have the committee's indulgence f o r m e to summarize very briefly the points involved, after which I shall b e h a p p y t o address m y s e l f t o w h a t e v e r questions the c o m m i t t e e mayw i s h t o ask m e . MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 2 4 9 R e p r e s e n t a t i v e P A T M A N . W i t h o u t o b j e c t i o n , t h a t w i l l be s a t i s factory, M r . Blough. ( T h e p r e p a r e d s t a t e m e n t s u b m i t t e d b y M r . B l o u g h i s as f o l l o w s : ) T H E D I L E M M A OF M A N A G I N G A L A R G E P U B L I C D E B T I N A PERIOD OF I N F L A T I O N The hundreds of pages devoted by individuals and agencies to answering the questions submitted by your committee testify to the many facets t h a t m a r k the relationship between monetary policy and the management of the public debt. I t is obvious that I can deal w i t h oply a small segment. There would seem to be three general kinds of problems involved i n this subject of the relationship between monetary policy and the management of the Federal debt. A t the center is the economic problem of how to manage a very large Federal debt w i t h the least h a r m f u l influence on the economy. T h i s economic problem comprises several problems that are more specific, among them, how to manage the Federal debt w i t h o u t contributing to inflation, how to manage the Federal debt w i t h o u t contributing to deflation and depression, and how to manage the Federal debt without causing a monetary crisis. A second k i n d of problem might be designated the problem of policy, or more specifically, the problem of choosing among desirable objectives. There are many desirable objectives for the Nation, among them being the promotion of the defense program, the expansion of production and productive capacity, the maintenance of a relatively stable price level, the achievement of a f a i r d i s t r i bution of income and wealth, the promotion of individual freedom, and the advancement of the economic security of our citizens. To some extent, these objectives can be advanced simultaneously. Often, however, i t is necessary t o choose among them—to weigh the advantages of a l i t t l e more of one against the disadvantage of a l i t t l e less of another. A rapid s h i f t f r o m a civilian economy t o a mobilization economy, for example, might have been difficult to achieve w i t h out some increase i n prices. The t h i r d k i n d of problem may be designated the organizational problem. This is the problem of how to allocate the powers of Government i n such a manner t h a t the economic methods used and the policy decisions made w i l l to the greatest extent possible promote the national interest. The problem to which I wish to direct my remarks is the first of these three, namely, the economic problem of how the public debt can be managed w i t h the least h a r m f u l and most beneficial results for the economy. More specifically, I wish to deal w i t h the problem of managing the Federal debt w i t h o u t contribu t i n g to inflation. PROBLEMS PRESENTED B Y A LARGE P U B L I C DEBT The Federal debt, which on December 31, 1951, totaled $259.5 billion, is one o f the most important economic facts of our time. This Federal debt is 45 percent of the total net debt, public and private, outstanding i n the United States today. The largest debt owed by any other governmental agency is $3.2 billion of gross debt owed by the city of New York. The largest debt of any business organization to come to my attention is $3.6 billion. D u r i n g the year 1952, i t w i l l probably be necessary for the Federal Government to refinance over $35 b i l l i o n of the Federal debt i n addition to the $15.6 billion of Treasury bills which are turned over four times a year. The Secretary of the Treasury has indicated that because of the Federal deficit, i t may be necessary, i n addition, to borrow f r o m the public as much as $10 billion i n new funds during the calendar year 1952. The magnitudes of these operations are so much vaster than those involved i n private financing, and the Federal Government is so different f r o m a private business, t h a t there is no reason to believe that a l l the rules applicable to private financing can or should be applied to Federal debt management. The Federal debt is a stubborn fact that has a bearing on all economic policies. We cannot get r i d of the debt, at least not in our lifetimes, so we must learn to live w i t h it. A basic fact i n considering problems of monetary policy and debt management is that every dollar of the Federal debt at a l l times must be held by someone. The amount of the debt may be reduced by increasing revenues or reducing expenditures, but the remaining debt is going to be held i n some fashion whether by i n d i v i d u a l investors, corporate investors, commercial banks, or Federal Reserve banks. MONETARY POLICY AND M A N A G E M E N T OF PUBLIC DEBT.250 Under most economic conditions, a large public debt presents no problem f o r monetary p o l i c y ; indeed, under some conditions, the debt can serve as a useful tool. Under the f o l l o w i n g circumstances, however, a difficult problem arises i n using monetary policy to stabilize the economy while managing the public d e b t : (1) W h e n there are substantial issues m a t u r i n g c u r r e n t l y t h a t require refunding, or when a d d i t i o n a l borrowing is necessary because revenues are insufficient to cover expenditures; and (2) when demand f o r goods and services has pushed employment and production to so high a level t h a t any additions to demand w i l l n o t result i n greater p r o d u c t i o n but w i l l give rise to i n f l a t i o n a r y pressure; and (3) w h e n the combined t o t a l of demands f o r loanable funds by Government and p r i v a t e borrowers is i n excess of the supply of loanable funds available f r o m the v o l u n t a r y savings of individuals and corporations. Conditions of this character have existed d u r i n g much of the t i m e since the K o r e a n attack i n June 1950. They exist i n the m a i n today and they promise to become accentuated over the next 12 months or so because of the large Federal deficit w h i c h we shall soon be i n c u r r i n g . I t is w e l l to bear i n m i n d t h a t i t is the r e l a t i o n of spending ( i n c l u d i n g consumer spending, business spending, and Government spending) f o r goods and services to the supply of goods and services which is the biggest factor determ i n i n g prices. A l l k i n d s of financial transactions, i n c l u d i n g the increase i n the money supply (of w h i c h a minor f r a c t i o n is currency and the m a j o r f r a c t i o n is bank deposits) affect prices only as they result i n a an increase or decrease i n spending or a decrease or increase i n the supply of goods and services. F o r example, the effect on prices of an increase i n bank reserves cannot be accurately forecast either as to amount or as to time. The result depends on many other economic steps. The results can be more readily forecast i n a period of i n f l a t i o n t h a n i n one of deflation, when there may be no f u r t h e r steps at all, a t least not f o r months or years, but even i n a period of i n f l a t i o n the t i m i n g and amount of the consequences are uncertain. I n a l l discussions of the effect of monetary and debt transactions, i t is necessary to f o l l o w t h r o u g h to the effects on actual spending and on the actual supply of goods and services. The economic dilemma t h a t is presented when the demands f o r loanable funds exceed the supply i n a period of f u l l employment is suggestive of the p a r l o r game of musical chairs, i n w h i c h there are less chairs t h a n people. I n musical chairs, there w o u l d be no game i f the number of people and the number of chairs were the same, but i n the s i t u a t i o n j u s t described regarding the Fede r a l debt, the number of players and the number of chairs must i n some manner be made the same. The problem is how to restore e q u i l i b r i u m between the supply and demand of loanable funds w h i l e m a i n t a i n i n g price s t a b i l i t y i n m a x i m u m degree. E i t h e r an e q u i l i b r i u m must be achieved between the supply of loanable funds and the demand f o r loanable funds, or some k i n d of r a t i o n i n g of loanable funds w i l l have to be carried on by action of either the lenders or the Government. I N C R E A S I N G T H E S U P P L Y OF L O A N A B L E FUNDS To achieve an e q u i l i b r i u m between the supply of loanable funds and the demand f o r loanable funds, i t is obviously necessary either to increase the supply or decrease the demand. The supply of loanable funds can be increased by persons and corporations increasing t h e i r savings. Since the spending of the loan is offset by reduction i n spending by the saver of the money, the result is not inflationary. Another method of increasing the supply of loanable f u n d s is f o r persons and corporations to loan funds w h i c h they f o r m e r l y held idle. I n this way, the velocity of c i r c u l a t i o n is increased and spending is increased; the result is inflationary. The lending power of banks can be increased by enlargi n g commercial bank reserves t h r o u g h an inflow of gold, rediscounting w i t h Federal Reserve banks, or the purchase of Government securities by Federal Reserve banks. The lending power conferred by bank reserves can be increased by reducing reserve requirements. Lending power can be decreased, o f course, i n the reverse ways by r a i s i n g reserve requirements, by a n outflow of gold, by p a y i n g off rediscounts, and by the sale of securities by Federal Reserve banks. There are conditions under w h i c h an expansion i n the supply of loanable funds is not inflationary. As j u s t mentioned, i f savings are being simultaneously increased, an increase i n spending g r o w i n g out of increased loans w i l l not create a d d i t i o n a l i n f l a t i o n a r y pressures. Moreover, to the extent t h a t the economy is g r o w i n g w i t h respect t o the physical volume of production or trade, a larger supply of money is required to c a r r y on the increased volume of business at the existing price level. Expansion i n the supply of money or increase i n the velocity M O N E T A R Y P O L I C Y A N D M A N A G E M E N T OF P U B L I C D E B T . 251 o f i t s use t h a t is not i n excess of such a d d i t i o n a l needs does n o t increase i n f l a t i o n a r y pressures. Otherwise, however, i f a n increase i n l e n d i n g power is a c t u a l l y f o l l o w e d by a n increase i n loans a n d i f t h i s , i n t u r n , is f o l l o w e d by an increase i n spending by consumers or businesses f o r goods a n d services, i n f l a t i o n a r y pressures a r e added t o t h e economy. W h e t h e r price increases w i l l a c t u a l l y r e s u l t depends on w h a t measures are t a k e n t o h o l d d o w n spending elsewhere i n t h e economy t h r o u g h such measures as taxes, r a t i o n i n g , p r i o r i t i e s , a n d allocations, a n d so on. T h e f a c t t h a t i n f l a t i o n a r y pressures are increased a t one p o i n t o r f r o m one cause, therefore, does n o t mean t h a t a c t u a l i n f l a t i o n m u s t result. H o w e v e r , i t is clear t h a t b r i n g i n g about a n e q u i l i b r i u m between the demand a n d the supply of loanable f u n d s by i n c r e a s i n g t h e supply of loanable f u n d s t h r o u g h t h e expansion of b a n k reserves is l i k e l y t o a d d to i n f l a t i o n a r y pressure a n d t h e r e b y t o m a k e the p r o b l e m of p r e v e n t i n g i n f l a t i o n more d i f f i c u l t to solve. I t is f o r these reasons, of course, t h a t stress is placed on the d e s i r a b l i t y o f a v o i d i n g t h e i n d e f i n i t e expansion of t h e holdings of Government securities b y t h e F e d e r a l Reserve banks. B u t Government spending financed b y selling secur i t i e s t o the p u b l i c i n exchange f o r i d l e f u n d s also is i n f l a t i o n a r y . T h e hope of a c h i e v i n g a n e q u i l i b r i u m between t h e supply of a n d d e m a n d f o r loanable f u n d s t h r o u g h a n increase i n the supply of f u n d s lies i n the increase i n r e a l savings. T o increase r e a l savings is, of course, easier s a i d t h a n done. EFFECTS OF A R I S I N G I N T E R E S T R A T E T h e second m e t h o d of b r i n g i n g e q u i l i b r i u m between the supply a n d d e m a n d of loanable f u n d s is to decrease t h e d e m a n d f o r such funds. One w a y t o do t h i s i s t o p e r m i t the i n t e r e s t r a t e t o rise. T h e chief w a y i n w h i c h p e r m i t t i n g t h e i n t e r e s t r a t e t o rise b r i n g s a b o u t e q u i l i b r i u m between t h e supply of a n d d e m a n d f o r loanable f u n d s is by causing some prospective b o r r o w e r s t o d r o p o u t because of the increase i n t h e cost of t h e loans t o them. C l e a r l y , as t h e cost becomes higher a n d h i g h e r , m o r e a n d more b o r r o w e r s w i l l find t h e expense of b o r r o w i n g too great f o r t h e m t o undertake. M a n y persons have t a k e n t h e p o s i t i o n t h a t the p r o b l e m of the p u b l i c debt is solved w h e n the F e d e r a l Reserve System ceases t o b u y Government securities. I n f a c t , however, t h i s is o n l y the b e g i n n i n g of the problem. I t is a l l v e r y w e l l t o say t h a t the F e d e r a l Reserve m u s t not b u y t h e securities, b u t t h e s t u b b o r n f a c t is t h a t i t is absolutely necessary t h a t someone buy them. H o w is t h i s to be done w h e n there is a bigger demand t h a n supply f o r loanable f u n d s ? Presumably, t h e F e d e r a l G o v e r n m e n t can, i f i t w i l l , o u t b i d other b o r r o w e r s of f u n d s w h o do n o t have the same i m p e r a t i v e necessity t o b o r r o w , by o f f e r i n g h i g h enough i n t e r e s t rates. C l e a r l y , i f o n l y the i n t e r e s t r a t e is t o be used to c u t d o w n the p r i v a t e demand f o r loans, t h e F e d e r a l G o v e r n m e n t cannot stop s h o r t of outb i d d i n g other b o r r o w e r s . T h i s m i g h t be a serious m a t t e r , since the highest m a r g i n a l r a t e w h i c h the T r e a s u r y h a d t o p a y on the last d o l l a r i t b o r r o w e d w o u l d t e n d to set t h e r a t e p a t t e r n f o r the w h o l e of the F e d e r a l debt, w h i c h , as previously noted, is n e a r l y as l a r g e as a l l t h e p r i v a t e debt p u t together. Thus, t h e i n t e r e s t r a t e p a i d on t h i s tremendous v o l u m e of debt obligations w o u l d t e n d t o be d e t e r m i n e d by h o w r a p i d l y a rise i n t h e r a t e of interest d r o v e other borr o w e r s out of t h e m a r k e t or discouraged lenders f r o m l o a n i n g t o t h e other borrowers. I f t h i s course is to be f o l l o w e d , i t becomes v e r y i m p o r t a n t to k n o w w h e t h e r t h e F e d e r a l Government w i l l have to b i d v e r y h i g h to refinance i t s loans a n d to b o r r o w w h a t new money i t w i l l need. I do not k n o w h o w h i g h t h e i n t e r e s t r a t e w o u l d need t o go, b u t several f a c t o r s m a y be indicated. A rise i n i n t e r e s t rates m a y a f f e c t the m a r k e t f o r loanable f u n d s by a f f e c t i n g the supply a n d b y a f f e c t i n g t h e demand. A s p r e v i o u s l y indicated, o n l y increases i n the s u p p l y of f u n d s t h a t r e s u l t f r o m increased s a v i n g a v o i d being i n f l a t i o n a r y . I t is not g e n e r a l l y believed by economists t h a t moderate increases i n rates of i n t e r e s t have a subs t a n t i a l s t i m u l a t i n g effect on t h e level of saving. T h e r e are forces w o r k i n g i n b o t h directions t h a t t e n d t o offset each o t h e r . T h e second effect of r i s i n g rates of i n t e r e s t is on the demand f o r loans. T h i s is a v e r y c r u c i a l question, since i f the d e m a n d f o r loans is v e r y elastic i n relat i o n t o i n t e r e s t changes, a s m a l l rise i n i n t e r e s t rates m a y suffice t o restore e q u i l i b r i u m between t h e supply a n d d e m a n d of loanable f u n d s , w h i l e i f the d e m a n d is v e r y inelastic, a v e r y large rise i n i n t e r e s t rates m i g h t be necessary t o reduce d e m a n d sufficiently t o b r i n g about a n e q u i l i b r i u m . W h e n d e m a n d f o r loanable f u n d s is decreased b y a n increase i n t h e r a t e of i n t e r e s t , i t is of course 97308—52 17 M O N E T A R Y POLICY AND M A N A G E M E N T OF PUBLIC DEBT.252 i m p o r t a n t t h a t t h i s decrease not be i n those sectors t h a t are v i t a l f o r the pro^ m o t i o n of the defense effort. W e cannot approach the present s i t u a t i o n as a n o r m a l one i n w h i c h only t r a d i t i o n a l economic techniques w i l l be sufficient to meet the problem. The expansion and diversion required by the defense program, the tremendous volume o f p r i v a t e c a p i t a l f o r m a t i o n , and the heavy anticipated Federal deficit combine tomake t h i s a special s i t u a t i o n w h i c h may call f o r special measures. I t may be u s e f u l to r u n over briefly the different demands f o r loans. As previously stressed, Government loans cannot be reduced a t a l l by debt managem e n t ; somehow or other, Government must get the money and, unless other measures are to be used to prevent the m a r k e t f r o m being e n t i r e l y "free," t h e Government must be prepared to outbid the interest rates t h a t other borrowers w o u l d pay. The demand f o r speculative loans w o u l d be very slow to drop out, because the interest cost is a very small element among the factors d e t e r m i n i n g speculative purchases. The demand f o r loans to c a r r y inventories w o u l d also be very slow to decrease as interest rates rose, because again the r a t e of interest is a very s m a l l p a r t of t o t a l cost, especially when the risks of the operation are considered p a r t of the cost. The demand f o r loans to finance the purchase and p r o d u c t i o n of machinery, tools, and equipment w o u l d be r e l a t i v e l y slow torespond, because again interest is a small proportion of cost f o r items of equipment w h i c h are w r i t t e n off or depreciated at a relatively f a s t r a t e of speed. The demand f o r loans to finance i n d u s t r i a l and commercial construction w o u l d presumably be reduced to a greater extent, since the interest rate is a r e l a t i v e l y i m p o r t a n t factor i n determining the p r o f i t a b i l i t y of the operation. T h i s is t r u e also of residential construction, since the amount of rents t h a t home owners can pay is dependent on their wages and other income, and as interest rates rose, demand w o u l d f a l l off. I t should be pointed out, however, t h a t w i t h respect to the present s i t u a t i o n the l i m i t s on the amount of construction ( i n d u s t r i a l , commercial, and residential) have been set i n recent months not by the aggregatedemand of borrowers but by the supply of scarce materials. Even at h i g h e r interest rates the demand of borrowers w o u l d l i k e l y have continued sufficiently great t o t a k e u p a l l of the available supplies of materials. I t is not clear h o w long t h i s w i l l continue. On the basis of the above analysis, there is good reason to conclude t h a t i t m i g h t very possibly happen t h a t an increase i n interest rates of a moderatecharacter w o u l d have a n insufficient effect i n reducing the p r i v a t e demand f o r loans. I n t h a t case, the Federal Government w o u l d be obliged t o face t h e prospect of o u t b i d d i n g p r i v a t e demand f o r loans w i t h even higher rates o f interest. I t may be urged t h a t although an increase i n the r a t e of interest w o u l d haverelatively l i t t l e effect i n reducing the demands of borrowers f o r loanable funds, the lenders w o u l d r a t i o n their supplies of funds i n such a w a y t h a t the Government would receive w h a t i t required. The argument has been made t h a t a n i m p o r t a n t reason w h y insurance companies, f o r example, have been loaningmoney i n the p r i v a t e m a r k e t instead of to the Federal Government is t h a t the companies have c e r t a i n contracts w h i c h they must f u l f i l l , and t h a t the rate o f interest offered by the Government is not enough to satisfy the needs of the companies i n f u l f i l l i n g these contracts. I t has been argued t h a t a small increase i n the rate of interest on Government securities would make them attractivet o the insurance companies, w h i c h under those circumstances w o u l d be w i l l i n g to buy f r o m the Government instead of loaning money i n the p r i v a t e m a r k e t . Likewise, i t has been said t h a t banks have certain earnings expectations, a n d t h a t when these are satisfied, the banks w i l l be w i l l i n g to lend to the Government instead of lending the funds to private borrowers. W h i l e i t may be granted t h a t there is a short lag while the appetites of lendersare t e m p o r a r i l y satisfied by an increase i n the rate of interest, i t is not h u m a n n a t u r e f o r this satiation of appetite to continue. As a m a t t e r of fact, the rates of interest w h i c h some observers said last w i n t e r w o u l d be satisfactory f o r insurance companies are being said now not to be satisfactory. A n increase i n interest stimulates the appetite instead of satisfying i t . I f private borrowers are w i l l i n g to pay more f o r their loans, I can see no reason to expect t h a t p r i v a t e lenders w i l l not take advantage of the higher interest rates and f o r c e the Federal Government to keep raising its b i d i n order to place its securities* i n the hands of p r i v a t e holders. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT DISADVANTAGES OF L A R G E I N C R E A S E S I N INTEREST . 253 RATES The point may be made t h a t there should be no objection to the Federal Government increasing its interest rate bids as high as may be necessary to outbid enough of the private borrowers to assure that the Federal debt w i l l be held w i t h o u t inflationary consequences. Can this view be accepted? I f the interest rate necessary f o r the Federal Government to outbid p r i v a t e borrowers were a permanent equilibrium interest rate, there might be l i t t l e objection to the Federal Government engaging i n such competitive bidding. B u t this means t h a t we would expect the country for a long time to come to be i n an inflationary situation. We would expect the rate of demand f o r loanable funds to be so much i n excess of the supply of saving that the cutting off of demand f o r construction and f o r machinery, tools, and equipment f o r the longer r u n w o u l d be desirable. There are countries where this is, indeed, the outlook, and where a rising interest rate is a recognition that capital investment must be slowed down regardless of the desirability of industrial expansion, simply because the rate of saving is too small. B u t this is not the outlook i n the United States. This Nation has a tremendous capacity f o r saving. I t does not have the capital shortages that a war-ravaged Europe or an underdeveloped Asia, A f r i c a , or South America may have. Already financial writers are professing to see deflationary dangers ahead after 1, 2, or 3 years. Over the longer run, i n my opinion, t h i s is a high-saving economy and a low-interest-rate economy. T h a t is, savings w i l l be made i n large volume, i n my opinion, and to keep them invested i n r e a l capital, as they must be i f unemployment and depression are not to threaten us, the interest rate t h a t is paid f o r the use of savings w i l l have to be to a relatively low one. I f this be the case, the problem is not one of seeking a long-term equilibrium rate of interest but of achieving a short-term equilibrium (which i n the absence of other action might require a high rate of interest) followed by a long-term equilibrium which would require a low rate of interest. B u t why is this situation a matter of any concern ? W h y not have high interest rates now and low interest rates when we need them? The difficulty is t h a t interest rates i n the past have not adjusted downward w i t h sufficient r a p i d i t y to meet the changing needs. T h a t adjustment requires a process of reeducat i o n to a lower interest rate standard. The average yield of Aaa corporate bonds i n 1932 was higher than i n 1929. I t took a long time after 1932 for interest rates to f a l l substantially, and positive action on the p a r t of the Government was involved. Do we w a n t to educate lenders to a high interest r a t e only to have to go through another slow process of reeducation to lower rates? Of course, the Government could engage i n direct lending a t such a time and thus break the interest rate structure. B u t most of us, I am sure, would like to minimize such activities by Government. We shall be much surer of havi n g the needed lower interest rates when they are required for a healthy economy i f they do not rise too high d u r i n g the intervening period. Ajiother reason f o r avoiding high-interest rates is t h a t the continually r i s i n g interest rate which might be necessary f o r the Government to outbid the market m i g h t result i n placing actually less securities i n the hands of the public than i f a lower interest rate had been maintained. This might happen f o r two reasons. F i r s t , the declining value of Government securities might cause investors to avoid investing i n Government securities for the future, because of the capital losses suffered i n the past and present. Second, investors might reason that an increase i n the rate of interest would be followed by s t i l l f u r t h e r increases and t h a t therefore they might as w e l l w a i t u n t i l later before buying any intermediate or long-term securities. Relatively l i t t l e is known about the probable behavior of Government security holders under various possible circumstances. The situation is not one, however, i n which bold experimentation can be lightly undertaken. W i t h about half of the t o t a l debt of the Nation i n the f o r m of Federal securities,, the development of a disorganized market could be a major disruptive force. The action which then might be required by the Federal Reserve to restore financial order might involve larger purchases of Government securities than a flexible support program to maintain stability. I t is not convincing to argue t h a t market supports were discontinued and t h a t the fear of security m a r k e t disorganization proved to be a bogey. Support was not discontinued, and was handled w i t h great care and skill. Moreover, the more difficult financing problems have not yet been faced. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.254 Another result of higher interest rates would be, of course, t h a t the cost of servicing the public debt would rise. No one w i l l question the undesirability of unnecessarily increasing the tax burden on the public. On the other hand, no one w i l l question t h a t i f the only way to maintain stability is through a higher rate of interest on the Federal debt, i t would be f a r cheaper f o r the country to pay the higher taxes than to experience the inflation. But; i n view of the uncertain effects of rising interest rates and the possibility that other methods can be used to prevent inflation, i t is understandable t h a t a substantial increase i n the interest rate is not to be viewed w t i h complacency. I t should also be mentioned t h a t much of American financial strength rests on a foundation of the values of Federal securities. The substantial declines i n the values of those securities t h a t would accompany substantial increases i n interest rates might have very repressing effects on types of financial and business operations necessary f o r the sound functioning of the economy especially i n the defense mobilization period. O T H E R M E T H O D S OF R E S T R A I N I N G P R I V A T E D E M A N D FOR L O A N S I w a n t to make i t clear that I do not defend any particular level of interest rates as being the correct level. I t may be, moreover, t h a t under the circumstances we face, the equilibrium level w i l l not involve much i f any increase i n interest rates. B u t for the reasons mentioned, large increases i n interest rates w o u l d have undesirable effects, and i t is necessary accordingly to review other possible ways of reducing the demand f o r loanable funds and of inducing lenders t o prefer Government securities to private loans. The problem i n short is one of finding ways to reduce private loans i n order t h a t the Government's debt may be held w i t h o u t undesirable increases i n the rate of interest and w i t h o u t an inflationary expansion of credit. The**e is no easy comprehensive way of achieving this result, but there are a number of different methods which, when combined, may add up to a considerable total. Allocations and cut-backs i n materials available f o r civilian use, restrictions on commercial construction, and other methods of reducing activity operate to cut down the need for borrowing. Specific credit controls by reducing the amount loaned and speeding up repayments operate to cut down the demand f o r loanable funds w i t h respect to purchases of consumer durable goods and of houses. W i l l ingness of banks and other institutions to lend has been diminished through voluntary credit-restraint programs t h a t b r i n g the social and moral pressure of the whole industry to bear on its i n d i v i d u a l members. Price controls reduce the desire to engage i n speculative transactions and help to hold down the requirements for w o r k i n g capital. I n the actual management of the public debt, i t should not be assumed t h a t any one of the methods of achieving an equilibrium between the supply and demand of loanable funds must be or should be followed to the exclusion of the others. I n practice, i t may be found necessary and desirable t o make some use of a l l of the methods, and possible to do so w i t h o u t inflationary pressures resulting. The policy of supporting the market for Government securities t h a t seems to me best suited f o r the uncertain type of situation we face is the flexible policy of the type which I understand is being followed by the Federal Reserve System. This k i n d of support keeps large holders f r o m readily monetizing their holdings; i t does not preclude active support of the market when this seems necessary or desirable; i t helps prevent the kinds of fluctuations i n Government security prices t h a t would make difficult the sale of f u t u r e issues; and i t should prevent seriously h u r t f u l market confusion and economic disruption. I n closing, I would like to repeat t h a t monetary policy and debt management are by no means a l l there is to the problem of economic stabilization or i t s solution. The inflationary problem is one of holding down t o t a l spending, not simply that relatively small part which is financed by increases i n debt, public and private. A well-balanced stabilization program using a l l the other measures at the disposal of the Government should go along w i t h a monetary and debt management policy t h a t itself should be to the largest practicable extent noninfiationary, despite the handicap placed upon i t by t h a t basic inflationary influence, too l i t t l e revenue to match expenditures. M r . BLOUGH. T h e p r o b l e m w i t h w h i c h m y s t a t e m e n t i s c o n c e r n e d is t h e d i l e m m a f o r p o l i c y t h a t arises i n a c e r t a i n c o m b i n a t i o n o f c i r cumstances. T h e circumstances a r e : MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 255 1. A n e c o n o m y e x p e r i e n c i n g f u l l e m p l o y m e n t o r u n d e r i n f l a t i o n a r y pressures. 2. A l a r g e F e d e r a l d e b t . 3. A c o n s i d e r a b l e v o l u m e o f r e f i n a n c i n g o r , w h a t i s w o r s e , n e w b o r r o w i n g t o be u n d e r t a k e n . 4. A n excess o f d e m a n d s f o r l o a n a b l e f u n d s o v e r t h e s u p p l y o f l o a n able f u n d s available f r o m t h e v o l u n t a r y s a v i n g o f i n d i v i d u a l s a n d corporations. N o w u n d e r those circumstances we have a s i t u a t i o n m u c h l i k e t h e p a r l o r game of musical chairs i n w h i c h there are m o r e players t h a n there are chairs. T h e r e is m o r e d e m a n d f o r loanable f u n d s t h a n t h e r e is s u p p l y f r o m t h e v o l u n t a r y savings o f i n d i v i d u a l s a n d corporations. T h e d i f f e r e n c e is t h i s : T h a t i n m u s i c a l c h a i r s t h e r e w o u l d be n o game unless t h e r e were m o r e p l a y e r s t h a n chairs, w h i l e i n m o n e t a r y policy and debt management, the number of chairs and players m u s t be m a d e equal b y some m e t h o d . T h e c e n t r a l r e q u i r e m e n t i n a n y s o l u t i o n t o t h i s p r o b l e m is t h a t a l l o f t h e F e d e r a l d e b t m u s t be h e l d b y s o m e o n e a t a l l t i m e s , w h e t h e r b y i n d i v i d u a l investors, c o r p o r a t e investors, i n s t i t u t i o n a l investors,, commercial banks, o r F e d e r a l Reserve banks. T h a t is a v e r y v i t a l necessity i n a n y t h i n k i n g about t h i s subject. One method f o r achieving the e q u i l i b r i u m between the supply a n d d e m a n d o f l o a n a b l e f u n d s is t o increase t h e s u p p l y . A n y m e t h o d o f increasing the supply of loanable funds, assuming a strong demand f o r f u n d s , increases i n f l a t i o n a r y pressures unless i t is a c c o m p a n i e d b y an addition to saving t h r o u g h contraction of spending. T h i s increase is greatest o f course w h e n n e w m o n e y t h a t is b a n k deposits, is c r e a t e d t o increase t h e s u p p l y . T h i s is t h e reason f o r concern about the purchase o f G o v e r n m e n t securities b y t h e F e d e r a l Reserve S y s t e m , since t h i s m a y a d d t o t h e reserves o f t h e b a n k i n g system a n d p e r m i t t h e expansion o f b a n k deposits a n d the money s u p p l y b y several t i m e s t h e a m o u n t o f t h e increase i n reserves. Since I am very deeply concerned w i t h the problem of inflation, I believe i t is i m p o r t a n t t o a v o i d t h e e x p a n s i o n o f t h e s u p p l y o f l o a n a b l e f u n d s as m u c h as p o s s i b l e c o n s i s t e n t w i t h a h i g h l e v e l o f p r o d u c t i o n , b u t I w o u l d l i k e t o stress t h e p o i n t t h a t t o s a y t h a t t h e F e d e r a l Reserve s h o u l d n o t b u y G o v e r n m e n t securities is no s o l u t i o n t o the p r o b l e m , b u t o n l y a w a y o f r a i s i n g t h e p r o b l e m , because someone m u s t h o l d the securities. T h e second m e t h o d o f b r i n g i n g a b o u t a n e q u i l i b r i u m b e t w e e n t h e s u p p l y a n d d e m a n d o f l o a n a b l e f u n d s is t o a l l o w i n t e r e s t rates t o rise. I t m a y be p r e s u m e d t h a t a t s o m e p o i n t a n i n c r e a s e i n t h e r a t e s o f i n t e r e s t w i l l cause e n o u g h d e m a n d f o r l o a n a b l e f u n d s t o d r o p o u t so t h a t t h e s e c u r i t i e s o f t h e G o v e r n m e n t c a n be p l a c e d w i t h o u t r e q u i r i n g a n expansion o f loanable f u n d s t h r o u g h t h e increase i n b a n k reserves o r o t h e r w i s e . T h e r e are t w o m a j o r questions here. O n e question concerns h o w h i g h the interest rate w o u l d have to go i n order to cut d o w n t h e p r i v a t e d e m a n d f o r loanable f u n d s b y a sufficient a m o u n t t o p r o d u c e a n equilibrium. I explain i n m y statement w h y I am rather skeptical about t h e effectiveness a m o d e r a t e increase i n i n t e r e s t rates w o u l d h a v e i n reducing the private demand f o r loanable funds. MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.256 T h e second m a j o r q u e s t i o n is w h a t h a r m a h i g h i n t e r e s t r a t e w o u l d d o . These m a t t e r s are discussed i n t h e statement, a n d I w i l l s i m p l y refer to t hem i n the summary. A t h i r d method of b r i n g i n g about an equilibrium i n the supply a n d d e m a n d o f loanable f u n d s is t o reduce t h e i r d e m a n d i n o t h e r w a y s t h a n t h r o u g h h i g h e r interest rates. T h e allocations a n d restrictions i n connection w i t h the shortages o f m a t e r i a l imposed on c i v i l i a n production, especially investment, when combined w i t h price control may cut d o w n the demand f o r l o a n s t o a n i m p o r t a n t degree. P r i c e c o n t r o l itself, i f effective, reduces t h e desire f o r speculative a c t i v i t y a n d the need f o r large w o r k i n g capital. V o l u n t a r y creditr e s t r a i n t p r o g r a m s b r i n g - t h e m o r a l pressure o f t h e w h o l e i n d u s t r y t o bear o n i n d i v i d u a l bankers a n d other lenders i n h o l d i n g d o w n t h e i r loans. A n d there are no doubt other methods of achieving this result. I n p r a c t i c e i t seems l i k e l y t h a t a l l t h r e e o f these m e t h o d s w i l l b e used t o b r i n g about the e q u i l i b r i u m o f s u p p l y a n d demand. Some expansion i n the b a n k loans a n d money s u p p l y can take place w i t h o u t a c t u a l i n f l a t i o n a r y results. M o r e o v e r , t o t h e extent t h a t i n f l a t i o n a r y pressures m a y develop because o f t h e d i f f i c u l t i e s o f financing a large deficit i n completely n o n i n f l a t i o n a r y w a y s , i t i s p o s s i b l e t o use t h e v a r i o u s o t h e r e l e m e n t s i n a general stabilization p r o g r a m to prevent inflation f r o m actually occurring. T h e m o s t h e l p f u l step, w h i c h w o u l d n o t solve t h e p r o b l e m b u t w o u l d b e v e r y h e l p f u l , w o u l d o f c o u r s e be t o e l i m i n a t e t h e d e f i c i t a n d to achieve a b u d g e t surplus. M r . C h a i r m a n , t h a t is t h e end o f t h e s u m m a r y o f t h e statement w h i c h I h a v e filed w i t h t h e c o m m i t t e e , a n d i n o r d e r t o e x p e d i t e t h e w o r k o f t h e committee, I a m r e a d y f o r a n y questions t h a t y o u m a y w i s h t o ask. Representative PATMAN. M r . W o l c o t t , w o u l d y o u l i k e t o ask a n y questions ? R e p r e s e n t a t i v e WOLCOTT. NO, t h a n k y o u . Representative PATMAN. Senator D o u g l a s ? S e n a t o r DOUGLAS. N o t a t t h e m o m e n t . R e p r e s e n t a t i v e PATMAN. M r . B o i l i n g ? R e p r e s e n t a t i v e BOLLING. M r . B l o u g h , I w o u l d l i k e t o g e t c l e a r i n m y o w n m i n d w h a t w o u l d happen i f the Treasury faced a substantial r e f i n a n c i n g o r n e w issue i f a p e r c e n t a g e o f t h a t issue f o u n d n o m a r k e t whatsoever. M r . BLOUGH. W h a t h a s a l w a y s h a p p e n e d i n t h e p a s t u n d e r t h o s e circumstances is t h a t t h e F e d e r a l Reserve S y s t e m has come t o t h e r e s c u e a n d h a s t a k e n u p t h e p a r t o f t h e issue w h i c h f o u n d n o p l a c e m e n t a n y w h e r e else. R e p r e s e n t a t i v e BOLLING. W h a t I w o u l d b e i n t e r e s t e d i n i s w h a t y o u feel c o u l d h a p p e n i f t h e F e d e r a l Reserve refused t o m o v e i n a n d t a k e u p t h a t p a r t o f t h e issue. M r . BLOUGH. T h a t w o u l d d e p e n d o n t h e C o n g r e s s . M y o w n j u d g m e n t w o u l d b e t h a t i n a n a g g r a v a t e d case t h e i n d e p e n d e n t F e d e r a l R e s e r v e S y s t e m m i g h t v e r y s h o r t l y t h e r e a f t e r lose i t s i n d e p e n d e n c e t h r o u g h adverse congressional reaction. R e p r e s e n t a t i v e BOLLING. Y O U a r r i v e a t t h a t c o n c l u s i o n v e r y r a p i d l y b u t w h a t I a m t r y i n g t o d o is t o clear i n m y m i n d t h e d i l e m m a t h a t MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT . 2 5 7 w o u l d b e f a c e d . I t i s e n t i r e l y a t h e o r e t i c a l q u e s t i o n because, as I u n d e r s t a n d i t , i t has never happened, b u t w h a t w o u l d the alternat i v e be? M r . BLOUGH. T O a n s w e r y o u r q u e s t i o n I w o u l d l i k e t o r e f e r t o t h e d e v e l o p m e n t s b e t w e e n J u n e o f 1950 a n d M a r c h o f 1951. W h i l e I c o u l d a p p r o a c h y o u r q u e s t i o n w i t h o u t d o i n g so, I b e l i e v e i t m a y b e h e l p f u l t o d e a l w i t h t h a t p e r i o d , s i n c e t h e same g e n e r a l p r o b l e m i s i n v o l v e d , a l t h o u g h o f course t h a t is n o t t h e q u e s t i o n y o u asked. E e p r e s e n t a t i v e P A T M A N . I t w a s g o i n g t o be a s k e d a n y w a y . Dr. M u r p h y e x p e c t e d t o a s k y o u t h a t q u e s t i o n , so y o u m a y g o a h e a d . ^ M r . BLOUGH. I t i s t h e s a m e p o i n t , o n e d i f f e r e n c e b e i n g t h a t a t t h a t t i m e there was no n e w f i n a n c i n g g o i n g on. T h e r e was, h o w e v e r , a considerable amount of refinancing, w i t h a weekly t u r n - o v e r o f bills, o f s o m e t h i n g i n the n e i g h b o r h o o d o f $1 b i l l i o n a week, a n d c e r t a i n o t h e r r e f i n a n c i n g . W e h a d a b a l a n c e d b u d g e t , so t h e s i t u a t i o n w a s i n t h a t r e s p e c t easier t h a n i t w i l l l i k e l y be l a t e r o n . O n the other hand, people were i n the g r i p of a v e r y p o w e r f u l u r g e t o b u y t h i n g s . I c a n ' t stress t h a t p o i n t t o o m u c h ; t h e r e w a s a f e a r t h a t w e were g o i n g i n t o a n a l l - o u t w a r , a n d a w i d e s p r e a d desire t o b u y t h i n g s b e f o r e s u p p l i e s b e c a m e s h o r t a n d p r i c e s rose. I n d i v i d u a l s a n d businesses b o u g h t i n a d v a n c e f o r l a t e r use, h o a r d i n g i n s o m e cases. Businesses stepped u p p r o d u c t i o n a n d s o u g h t t o increase t h e i r i n v e n tories. T h e r e was r e a l l y a v e r y tremendous pressure t o b u y t h i n g s a n d to get the f u n d s w i t h w h i c h t o buy. N o w h o w c o u l d businesses a n d p e o p l e g e t f u n d s w i t h w h i c h t o b u y t h i n g s u n d e r t h e s e c i r c u m s t a n c e s ? W e l l , i n t h e first p l a c e m a n y o f t h e m h a d t h e i r o w n f u n d s . T h e y h a d c u r r e n c y a n d b a n k accounts w h i c h t h e y c o u l d d r a w on. T h e economy was v e r y l i q u i d . T h e velocity o f c i r c u l a t i o n increased substantially d u r i n g t h i s period. T h a t increase i n v e l o c i t y m i g h t h a v e been c o n s i d e r a b l y g r e a t e r t h a n i t w a s i f f u n d s c o u l d n o t h a v e been s e c u r e d b y b o r rowing. I n t h e second p l a c e , i t w a s p o s s i b l e t o b o r r o w f r o m t h e b a n k s , t h u s a d d i n g t o spendable f u n d s t h r o u g h increasing the s u p p l y o f money. I t i s a t t h i s p o i n t t h a t F e d e r a l R e s e r v e a c t i o n becomes i m p o r t a n t . Suppose t h a t the F e d e r a l Reserve h a d d u r i n g t h a t p e r i o d refused t o b u y a n y securiites f r o m t h e banks. W h a t m i g h t have h a p p e n e d ? I w o u l d l i k e t o use a r a t h e r h o m e l y i l l u s t r a t i o n w h i c h I h o p e w i l l c l a r i f y r a t h e r t h a n obscure m y p o i n t . Suppose a thousand people u r g e n t l y desired to go f r o m W a s h i n g t o n t o B a l t i m o r e . T h i s represents the p o w e r f u l effort to b u y goods, w h i c h I have mentioned. T h e r e are several roads t o B a l t i m o r e . O n e of t h e r o a d s t h a t enables p e o p l e t o g o t o B a l t i m o r e — t o s p e n d i n b u y i n g g o o d s — i s t h e a c t i o n o f t h e F e d e r a l R e s e r v e i n b u y i n g G o v e r n m e n t securities. T h i s gives people spendable f u n d s a n d at t h e same t i m e enlarges b a n k reserves, t h u s i n c r e a s i n g t h e l e n d i n g p o w e r o f t h e b a n k s . W e m i g h t say w e l l , w e w i l l stop t h a t r o a d t o B a l t i m o r e . B u t t h a t does n o t n e c e s s a r i l y m e a n t h a t t h e t h o u s a n d p e o p l e a r e n o t g o i n g t o g e t t o B a l t i m o r e , because, i n t h e second p l a c e , t h e r e w o u l d b e t h e p o s s i b i l i t y t h a t t h e banks, i f t h e y w a n t e d t o increase loans, w o u l d disc o u n t t h e i r p a p e r w i t h t h e F e d e r a l Reserve, t h a t is, b o r r o w f r o m t h e F e d e r a l Reserve. S e n a t o r DOUGLAS. S h o r t - t e r m G o v e r n m e n t b o n d s ? MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT.258 M r . BLOUGH. I a m t h i n k i n g o f a n y o f t h o s e k i n d s o f assets w h i c h t h e F e d e r a l Eeserve w i l l take f o r rediscount. I a m n o t at t h i s t i m e t h i n k i n g a b o u t s h o r t - t e r m G o v e r n m e n t s e c u r i t i e s b u t o f a n y assets of the b a n k o n w h i c h the F e d e r a l Reserve b a n k w i l l l e n d its money, t h e r e b y i n c r e a s i n g b a n k reserves a n d e x p a n d i n g t h e l e n d i n g p o w e r o f the banks. B u t t h e F e d e r a l E e s e r v e does n o t h a v e t o d i s c o u n t t h i s p a p e r , as I u n d e r s t a n d i t . I t c o u l d e i t h e r say n o t o t h e m e m b e r b a n k o r r a i s e t h e d i s c o u n t r a t e t o a p r o h i b i t i v e l e v e l . W h i l e t h a t i s q u i t e p o s s i b l e so f a r as a b s t r a c t e c o n o m i c s is c o n c e r n e d , w e m u s t n o t f o r g e t t h a t i n s e t t i n g u p the mechanism of rediscounting Congress indicated t h a t the p u r p o s e w a s t o a c c o m m o d a t e t h e needs o f c o m m e r c e a n d b u s i n e s s . S e n a t o r DOUGLAS. Y e s , b u t D r . B l o u g h , I w a n t t o p o i n t o u t t h a t t h i s m i g h t a p p l y i n t h e case o f c o m m e r c i a l p a p e r b u t t h e F e d e r a l E e s e r v e w a s c e r t a i n l y n o t set u p i n o r d e r t o p r o v i d e a d u m p i n g g r o u n d f o r s h o r t - t e r m G o v e r n m e n t securities. C a r t e r Glass w a s v e r y s p e c i f i c o n t h a t p o i n t i n t h e debates. M r . BLOUGH. I h a v e n o t s a i d a n y t h i n g a b o u t s h o r t - t e r m G o v e r n m e n t securities, Senator. S e n a t o r DOUGLAS. A S a m a t t e r o f f a c t i s n ' t i t t r u e f r o m t h e t e s t i m o n y t h a t M r . M a r t i n gave I t h i n k , t h a t t h e increase i n discounts b y t n e F e d e r a l Eeserve h a d been discounts o f s h o r t - t e r m G o v e r n m e n t s , n o t c o m m e r c i a l paper. I believe he said t h a t d i s c o u n t i n g o f commerc i a l p a p e r h a d f a l l e n i n t o disuse m o r e t h a n he w o u l d l i k e . M r . BLOUGH. T h a t as a m a t t e r o f f a c t I t h i n k i s c o r r e c t , b u t I b e l i e v e most o f t h e banks h o l d adequate s h o r t - t e r m c o m m e r c i a l paper i f t h e y w a n t e d t o use i t as b a c k i n g f o r t h e i r d i s c o u n t s , so t h a t t h e r e c e r t a i n l y is t h i s p o s s i b i l i t y . B u t w h e t h e r o r n o t t h e basis f o r t h e d i s c o u n t is t h e s h o r t - t e r m p a p e r o r t h e s h o r t - t e r m G o v e r n m e n t s e c u r i t y , m y p o i n t is t h i s : That t h e loaHs w i i i c h w e r e b e i n g d e m a n d e d a t t h a t t i m e w e r e b u s i n e s s l o a n s and t h a t under the statute, an i m p o r t a n t f u n c t i o n of the F e d e r a l E e s e r v e is t o a c c o m m o d a t e c o m m e r c e a n d business. I a m s i m p l y s u g g e s t i n g t h e h e a v y pressures f r o m t h e business c o m m u n i t y t h a t w o u l d be b r o u g h t t o bear u p o n t h e F e d e r a l Eeserve i f i t r e f u s e d t o a c c o m m o d a t e commerce a n d business b y d i s c o u n t i n g p a p e r presented to i t b y member banks. B u t suppose t h e F e d e r a l Eeserve was a d a m a n t a n d r e f u s e d t o discount the paper. W e l l , there is s t i l l another r o a d t o B a l t i m o r e , t o continue the illustration. T h e b a n k s w e r e h o l d i n g t h e n , as t h e y a r e n o w , l a r g e q u a n t i t i e s o f s h o r t - t e r m G o v e r n m e n t securities, some o f w h i c h were m a t u r i n g almost continuously. T h e banks could have a l l o w e d these s h o r t - t e r m s e c u r i t i e s t o r u n o f f , d e m a n d i n g c a s h i n s t e a d o f r e s u b s c r i b i n g , t h e r e b y i n c r e a s i n g t h e a m o u n t o f t h e i r cash. N o w t h a t i n i t s e l f w o u l d n o t increase t h e i r reserves, t o be sure, b u t i t w o u l d i n c r e a s e t h e c a s h assets o f t h e o w n e r s o f t h e s e c u r i t i e s . S e n a t o r DOUGLAS. H O W w o u l d t h e T r e a s u r y p a y f o r t h e s e s h o r t t e r m securities ? M r . BLOUGH. T h e T r e a s u r y w o u l d i n t h a t case b e o b l i g e d t o g e t the f u n d s wherever i t could get them. S e n a t o r DOUGLAS. W h e r e w o u l d i t g e t t h e m ? M r . BLOUGH. I t c o u l d g e t t h e m f r o m o n e o f t w o sources. I t c o u l d a t t e m p t i n this p e r i o d of tremendous pressure o n the p a r t o f a l l bor- monetary policy and management of public debt . 259 rowers f o r funds, to o u t b i d the m a r k e t f o r t h e m a n d thereby get the f u n d s a n d p a y t h e m t o t h e holders o f t h e m a t u r i n g securities. Senator D O U G L A S . I t would raise the interest rate ? Mr. B L O U G H . Whatever interest rate was necessary and under those circumstances I suggest the interest rate might have been very high. Or the Federal Reserve might take the short terms off the Treasury's hands, in which case the Federal Reserve would be again adding to the reserves of the member banks. Suppose the Federal Reserve refused to take any of the short-term securities? So far as I know this has never happened, but suppose i t did happen. Then, at last, all of the roads to Baltimore have been closed except the one road of using the funds that people already have, with greater velocity. There is no way the Federal Reserve or anyone else can stop that. N o w , perhaps the existing f u n d s at the h i g h e r velocity w o u l d meet t h e n e e d f o r s p e n d i n g p o w e r , i n w h i c h case, p e r h a p s , t h e r e w o u l d b e n o p r o b l e m . B u t t o c a r r y m y i l l u s t r a t i o n t o t h e e n d , i t seems t o m e v e r y l i k e l y t h a t o n t h i s r o a d , w h i c h m i g h t be m u c h t o o n a r r o w , t h e t h o u s a n d p e o p l e c o u l d b e c o m e so i n v o l v e d i n t r y i n g t o g e t a h e a d o f e a c h o t h e r as t o cause a r i o t . I n o t h e r w o r d s , i f t h e F e d e r a l R e s e r v e h a d been a d a m a n t a t a l l p o i n t s , i t m a y w e l l be t h a t a m a j o r financial a n d m o n e t a r y crisis w o u l d have arisen. A n d if a major financial a n d m o n e t a r y c r i s i s arose u n d e r t h o s e c i r c u m s t a n c e s , e i t h e r t h e F e d e r a l R e s e r v e w o u l d c o m e t o t h e rescue a n d s t r a i g h t e n t h i n g s o u t a g a i n as b e s t i t c o u l d a t t h a t l a t e d a t e , o r , t o repeat m y earlier t h o u g h t , I wonder h o w l o n g the independence o f t h e F e d e r a l Reserve S y s t e m w o u l d be p e r m i t t e d t o c o n t i n u e b y t h e C o n g r e s s o f t h e U n i t e d S t a t e s . T h i s does n o t m e a n t h a t F e d e r a l Reserve o p e n - m a r k e t o p e r a t i o n s c a n n o t be used w i t h considerable effect, o r t h a t t h e e a r l i e r a d o p t i o n o f t h e a c c o r d w o u l d h a v e m a d e no difference i n the i n f l a t i o n a r y movement. M y p o i n t is t h a t shutt i n g off expansions i n t h e s u p p l y a n d v e l o c i t y o f m o n e y is n o t a n easy o r s i m p l e m a t t e r . T h e same g e n e r a l l i n e o f r e a s o n i n g c a n be a p p l i e d t o t h e k i n d o f s i t u a t i o n w h i c h w e m i g h t e x p e c t t o f a c e i n t h e f u t u r e , b u t w i t h seve r a l changes i n t h e circumstances. O n t h e one h a n d , w e p r o b a b l y w o u l d not have t h a t tremendous pressure f o r f u n d s t o s u p p o r t spendi n g t h a t w e h a d d u r i n g t h e m o n t h s f r o m J u l y 1950 t o M a r c h 1951. I c e r t a i n l y hope t h a t we do n o t enter a p e r i o d of t h a t k i n d again. I f w e d o n o t , t h a t w i l l b e a c h a n g e o n t h e g o o d side. T h e s i t u a t i o n w o u l d be m o r e o r d e r l y a n d m o r e capable o f b e i n g h a n d l e d . On the other hand, of course, a large deficit is anticipated. I f that deficit is realized, the problem on the financing side w i l l be much bigger than it was in 1950. I do not t h i n k the d i r e possibilities t h a t I have mentioned are a t a l l l i k e l y t o occur, b u t t o be l o g i c a l l y c o m p l e t e w e m u s t consider t h e m . R e p r e s e n t a t i v e BOLLING. A S a m a t t e r o f f a c t i n t h i s case a l l r o a d s d o n o t lead t o B a l t i m o r e . T h e y lead t o t h e F e d e r a l Reserve. M r . BLOUGH. A l l b u t one, a n d t h a t i s t h e r o a d o f i n c r e a s i n g t h e v e l o c i t y o f c i r c u l a t i o n . I d o n o t t h i n k t h a t r o a d s h o u l d be u n d e r e s t i m a t e d i n a n e c o n o m y as l i q u i d aS o u r e c o n o m y i s w i t h i t s t r e m e n d o u s v o l u m e o f c u r r e n c y a n d b a n k deposits, a n d the large amounts o f near moneys t h a t are available. I do not t h i n k we should underesti- m o n e t a r y p o l i c y a n d m a n a g e m e n t o f p u b l i c d e b t.260 m a t e t h e effects o f increases i n v e l o c i t y t h a t m i g h t o c c u r u n d e r t h e pressure o f tremendous desire f o r increased funds. R e p r e s e n t a t i v e BOLLING. M r . C h a i r m a n , I h a v e a n o t h e r q u e s t i o n w h i c h stems f r o m t h a t , b u t since t h i s is a w h o l e i n i t s e l f , i f a n y o f t h e o t h e r m e m b e r s h a d q u e s t i o n s o n t h i s , I w o u l d l i k e t o see t h e m have the o p p o r t u n i t y to present t h e m at this time. R e p r e s e n t a t i v e PATMAN. A n y comments ? R e p r e s e n t a t i v e WOLCOTT. I h a v e a g e n e r a l q u e s t i o n . I d o n o t k n o w whether they w a n t to answer i t offhand or not, b u t I f o u n d myself t h e d a y b e f o r e y e s t e r d a y a t a loss i n w h a t I t h i n k S e n a t o r D o u g l a s c h a r a c t e r i z e d as a s e m a n t i c w i l d e r n e s s . I a m j u s t a p l a i n unadulterated M e m b e r of Congress here w i t h o u t t o o m u c h k n o w l e d g e o f economics, a n d m o s t o f t h e people's repres e n t a t i v e s a r e n o t e d u c a t e d i n e c o n o m i c s a n d financial m a t t e r s . I w o u l d hesitate t o go back t o m y people a n d t r y t o e x p l a i n t o t h e m t h e r e c o m m e n d a t i o n s o f t h e C o u n c i l o f E c o n o m i c A d v i s e r s as t o j u s t w h a t we can do to stop inflation. N o w can somebody, either y o u or M r . K e y s e r l i n g or somebody representing the Council, i n very brief understandable language give the r e c o m m e n d a t i o n s o f t h e C o u n c i l o f E c o n o m i c A d v i s e r s as t o w h a t m u s t b e d o n e t o p r e v e n t f u r t h e r i n f l a t i o n , r e c o g n i z i n g I t h i n k as w e a l l do t h a t we do have inflation. M r . BLOUGH. C o n g r e s s m a n , I w o u l d be g l a d t o t r y . T h e s e c o m m e n t s r e p r e s e n t m y p e r s o n a l views, b u t I believe t h e y are also t h e views of the Council. W e l o o k u p o n i n f l a t i o n as a p r o b l e m o f s p e n d i n g a g a i n s t s u p p l y , spending being G o v e r n m e n t spending, consumer s p e n d i n g a n d business s p e n d i n g f o r g o o d s a n d services, i n c l u d i n g b u i l d i n g u p i n v e n t o r i e s , b u y i n g n e w e q u i p m e n t a n d n e w c o n s t r u c t i o n , a n d so o n . W h e n t h e s p e n d i n g i s i n excess o f t h e R e p r e s e n t a t i v e WOLCOTT. W a i t j u s t a m i n u t e . L e t ' s n o t g o i n t o t h a t a n y f u r t h e r . I t h i n k w e a l l r e c o g n i z e t h a t as t h e p r o b l e m . Y o u h a v e s t a t e d i n y o u r l a s t p a r a g r a p h as f o l l o w s : I n closing, I would like to repeat that monetary policy and debt management are by no means a l l there is to the problem of economic stabilization or i t s solution. The inflationary problem is one of holding down t o t a l spending, not simply t h a t relatively small part which is financed by increases i n debt, public and private. A well-balanced stabilization program using a l l the other measures a t the disposal of the Government should go along w i t h a monetary and debtmanagement policy that itself should be to the largest practicable extent noninflationary, despite the handicap placed upon i t by t h a t basic inflationary influence, too l i t t l e revenue to match expenditures. T h a t t o m e is a s t a t e m e n t o f o u r p r o b l e m . N o w I w a n t to k n o w w h a t t h e C o u n c i l suggests as a r e m e d y , as a s o l u t i o n t o t h e p r o b l e m . M r . BLOUGH. I see I s t a r t e d m y a n s w e r a t t o o b a s i c a l e v e l . R e p r e s e n t a t i v e WOLCOTT. I S i t m o r e t a x e s , i s i t less s p e n d i n g , a n d i n w h a t fields c a n t h e r e b e less s p e n d i n g a n d h o w c a n w e i n c r e a s e t a x e s , i f t h a t is t h e p o s i t i o n ? I w o u l d l i k e t o h a v e y o u p u t one, t w o , t h r e e i n s i m p l e t e r m s y o u r r e c o m m e n d a t i o n s as t o w h a t w e m i g h t r e c o m m e n d t o t h e C o n g r e s s , w h a t w e s h o u l d d o h e r e as a m a t t e r o f a d m i n i s t r a t i o n t h a t w i l l s o l v e this problem. M r . BLOUGH. I t h i n k y o u w i l l find, C o n g r e s s m a n W o l c o t t , t h a t t h e v i e w s o f t h e C o u n c i l h a v e been e x p r e s s e d i n t h e r e v i e w s o f 6 - m o n t h periods, and they involve the f o l l o w i n g points i n the program. First, monetary policy and management of public debt . 261 t h e r e is spending. O b v i o u s l y G o v e r n m e n t s p e n d i n g is v e r y l a r g e l y t h e genesis o f t h e p r o b l e m a t t h e p r e s e n t t i m e . R e p r e s e n t a t i v e WOLCOTT. W h y s h o u l d i t be? P l e a s e e x p l a i n h o w G o v e r n m e n t s p e n d i n g affects t h e v a l u e o f m o n e y ? M r . BLOUGH. A l l t h e d i f f e r e n t k i n d s o f s p e n d i n g p u t t o g e t h e r — i f t h e t o t a l i s i n excess o f t h e s u p p l y o f g o o d s w h e n p e o p l e a r e f u l l y e m p l o y e d , t h e d e m a n d b e i n g i n excess o f t h e s u p p l y d r i v e s p r i c e s u p . R e p r e s e n t a t i v e WOLCOTT. A g a i n , c a n w e h a v e a n a n s w e r t o t h e q u e s t i o n as t o w h y s p e n d i n g o n t h e p a r t o f t h e G o v e r n m e n t o r w h y d e f i c i t financing r e s u l t s i n i n f l a t i o n ? M r . BLOUGH. I t h i n k t h a t w h a t h a p p e n s i s t h i s . Suppose you h a d a f u l l y e m p l o y e d e c o n o m y w i t h t h e G o v e r n m e n t s p e n d i n g $40,000,- 000,000. T h e n w i t h t h e G o v e r n m e n t s p e n d i n g $40 b i l l i o n , a n d w i t h business spending and consumer s p e n d i n g — a l l the spending added together is t a k i n g a l l o f t h e goods a n d services w h i c h a l l o f t h e people are p r o d u c i n g w o r k i n g at a h i g h level of employment and a h i g h level o f p l a n t operations. N o w suppose t h a t the G o v e r n m e n t u n d e r t a k e s a n a d d i t i o n a l p r o g r a m , t h a t i n v o l v e s , l e t us say $20 b i l l i o n a d d i t i o n a l s p e n d i n g . This $20 b i l l i o n i s u s e d t o b u y g o o d s a n d s e r v i c e s o f v a r i o u s k i n d s . I t is used t o p a y m i l i t a r y personnel, to b u y tanks, planes, f o o d , c l o t h i n g , b u i l d m i l i t a r y bases, a n d so f o r t h . T h a t $20 b i l l i o n i s a d d e d t o t h e s p e n d i n g t h a t i s a l r e a d y t a k i n g p l a c e b y t h e G o v e r n m e n t a n d business a n d consumers. B u t t h e r e is n o increase o r v e r y l i t t l e increase i n t h e s u p p l y o f goods t o meet t h i s i n c r e a s e i n d e m a n d o f $20 b i l l i o n o n t h e p a r t o f t h e G o v e r n m e n t . U n l e s s some w a y is f o u n d e i t h e r t o increase t h e s u p p l y o f goods w i t h o u t a l s o i n c r e a s i n g c o n s u m e r a n d b u s i n e s s s p e n d i n g o r t o decrease s u c h spending, w e w i l l i n e v i t a b l y get a n i n f l a t i o n a r y pressure. R e p r e s e n t a t i v e WOLCOTT. T h a t i s f u n d a m e n t a l . N o w w h a t d o y o u s u g g e s t is t h e r e m e d y ? M r . BLOUGH. S i n c e i n c r e a s e d e x p e n d i t u r e s g i v e r i s e t o t h e p r o b l e m , i f i t w e r e p o s s i b l e t o r e d u c e e x p e n d i t u r e s , as I s a i d b e f o r e R e p r e s e n t a t i v e WOLCOTT. W h a t does t h e C o u n c i l r e c o m m e n d b y w a y o f r e d u c i n g expenses ? I n w h a t field d o w e r e d u c e expenses ? S e n a t o r D o u g l a s h a s s a i d e v e r y t i m e w e t r y t o c u t expenses, f r o m t h e W h i t e H o u s e d o w n w e h a v e a b a r r a g e o f p r o t e s t s , so t h a t a p p a r e n t l y i s n o t t h e p r a c t i c a l s o l u t i o n so l o n g as w e a r e g o i n g t o b e f a c e d w i t h executive o p p o s i t i o n , t h a t p r o b a b l y is n o t t h e p r a c t i c a l w a y o f solving this problem. M r . BLOUGH. T h e r e h a s b e e n a g o o d d e a l o f r e d u c t i o n o f n o n d e f e n s e e x p e n d i t u r e i n t h e p a s t 2 o r 3 y e a r s . I t i s p o s s i b l e t h e r e c o u l d be m o r e . T h e v e r y l a r g e p a r t o f t h i s p r o b l e m , h o w e v e r , is i n the m i l i t a r y side. R e p r e s e n t a t i v e WOLCOTT. Y O U s a y i t i s p o s s i b l e . W h a t c a n y o u r e c o m m e n d i n t h a t field t o u s ? M r . BLOUGH. I a m n o t q u a l i f i e d t o m a k e r e c o m m e n d a t i o n s i n t h e m i l i t a r y field. I a m s u r e y o u w i l l find p l e n t y o f p e o p l e w h o w i l l r e c o m m e n d specific p o i n t s t o cut. R e p r e s e n t a t i v e WOLCOTT. P e o p l e i n G o v e r n m e n t ? M r . BLOUGH. S o m e p e o p l e i n G o v e r n m e n t b u t n o d o u b t m o s t l y people outside of Government. T h e b u d g e t p r o c e s s , C o n g r e s s m a n W o l c o t t , as y o u k n o w c u t s d o w n t h e request f o r a p p r o p r i a t i o n s a n d expenditures b y m a n y b i l l i o n s o f m o n e t a r y p o l i c y a n d m a n a g e m e n t o f p u b l i c d e b t.262 d o l l a r s b e f o r e t h e s e p r o g r a m s e v e r g e t t o t h e C o n g r e s s , so t h a t a l l o f the w o r k w h i c h has gone before t o cut d o w n a n d h o l d d o w n expendit u r e s n e v e r i s o b s e r v e d b y t h e g e n e r a l p u b l i c , w h i c h sees o n l y t h e figure t h a t is presented t o Congress, a n d w h i c h a l w a y s looks l a r g e r i n t o t a l t h a n anyone w o u l d wish. R e p r e s e n t a t i v e WOLCOTT. I t i s g e t t i n g l a r g e r a n d l a r g e r a l l t h e t i m e . M r . BLOUGH. T h e o n l y figures t h a t a r e g e t t i n g l a r g e r a n d l a r g e r a r e t h e m i l i t a r y e x p e n d i t u r e figures. E v e n t h e m i l i t a r y a p p r o p r i a t i o n r e q u e s t figures a r e l o w e r t h i s y e a r t h a n t h e y w e r e l a s t y e a r . R e p r e s e n t a t i v e WOLCOTT. B u t s t i l l w e h a v e i n f l a t i o n . M r . BLOUGH. W e h a v e i n f l a t i o n because R e p r e s e n t a t i v e WOLCOTT. W e a r e r a i s i n g m o r e m o n e y t h a n w e e v e r raised before. M r . BLOUGH. B u t w e a r e n o t r a i s i n g e n o u g h t o m e e t R e p r e s e n t a t i v e WOLCOTT. I S t h a t y o u r p o i n t , y o u h a v e g o t t o r a i s e m o r e b y taxes ? I n other words, have w e g o t t o continue t h r o u g h o u t t h e n e x t 8 o r 10 y e a r s t o s i p h o n o f f i n f l a t i o n t h r o u g h t a x a t i o n , a n d i f so w h e r e d o w e r e a c h t h e s a t u r a t i o n p o i n t ? M r . BLOUGH. M y p o i n t i s t h a t t h e s o u r c e o f t h e p r o b l e m i s i n m i l i t a r y expenditures, a n d t h e a m o u n t o f those expenditures is d e t e r m i n e d t o an o v e r w h e l m i n g extent b y forces p r e t t y m u c h outside o u r control. R e p r e s e n t a t i v e WOLCOTT. T h a t c o n t e m p l a t e s a c o n t i n u a n c e o f d e b t M r . BLOUGH. N o t n e c e s s a r i l y , s i r . H i g h e r t a x e s c a n p r e v e n t a n increase i n d e b t a n d also reduce i n f l a t i o n a r y pressures. I n o r d e r t o c u t d o w n p r i v a t e d e m a n d , t h e m o s t p o s i t i v e w a y is o f course t o t a k e f u n d s out of the p r i v a t e economy t h r o u g h taxation. T h i s has t h e a d v a n t a g e s t h a t i t p a y s t h e cost d i r e c t l y , i m m e d i a t e l y t h r o u g h t a x e s , does n o t a d d t o t h e d e b t , a n d does n o t g i v e r i s e t o s o m e o f t h e p r o b l e m s w e h a v e been t a l k i n g about. I t cuts d o w n o n p r i v a t e spending, a n d t h a t is the n a t u r a l a n d n o r m a l w a y f o r c u t t i n g d o w n i n f l a t i o n a r y pressures g r o w i n g o u t o f g o v e r n m e n t a l spending. I t has been t h e accepted w a y used i n the U n i t e d States t h r o u g h o u t our history. R e p r e s e n t a t i v e WOLCOTT. NOW a t w h a t p o i n t i n t h i s t a x s t r u c t u r e d o w e a r r i v e a t t h e floor o f d i m i n i s h i n g r e t u r n s d u e t o a d i s c o u r a g e m e n t o f p r o d u c t i o n e x p a n s i o n t o keep pace w i t h o u r e x p a n d i n g economy? T h a t is t h e p r o b l e m a n d t h e t h i n g t h a t has b o t h e r e d me. I f i n d u s t r y , individuals, agriculture have to get their capital out of earnings, h o w m u c h o f t h e i r earnings can we take before we destroy the c a p i t a l s t r u c t u r e w h i c h is t h e f o u n d a t i o n t h a t has b u i l t t h i s p r o d u c t i o n exp a n s i o n , w h i c h w e a l l agree is necessary t o keep pace w i t h &n ever e x p a n d i n g economy ? M r . BLOUGH. Y O U a s k f o r t h e p o i n t o f d i m i n i s h i n g r e t u r n s f o r t h e t a x s y s t e m as a w h o l e . I d o n ' t k n o w t h e a n s w e r t o t h a t . R e p r e s e n t a t i v e WOLCOTT. I t h i n k y o u s h o u l d f i n d t h e a n s w e r . U n less w e j u s t g i v e e n c o u r a g e m e n t t o a l o t o f t h e p l a t i t u d e s i n r e s p e c t t o the d e s i r a b i l i t y o f s i p h o n i n g off t h i s i n f l a t i o n t h r o u g h t a x a t i o n , I t h i n k w e h a d b e t t e r find o u t b e f o r e w e g o a n y f u r t h e r as t o w h e t h e r w e perhaps have n o t reached the p o i n t n o w where we are d i s c o u r a g i n g p r o d u c t i o n e x p a n s i o n t o k e e p p a c e w i t h o u r e x p a n d i n g e c o n o m y , because i f w e h a v e done t h a t t h e n , o f course, a n y increases t h a t w e h a v e legislated i n taxes last year a n d i n t h e f u t u r e u n d e r y o u r recom- monetary policy and management of public debt . 263 mendation might be inflationary, by prohibiting us from producing sufficiently to meet the demand occasioned by the increase in savings and purchasing power. Mr. B L O U G H . Congressman Wolcott, perhaps I might have been better advised to say what I think we do know about tax limits rather than to start out by saying that I don't know what the specific point is. Representative-WOLCOTT. I w a n t t o get a w a y f r o m t h a t idea. I t h i n k the Council of Economic Advisers should p u t i n a very orderly m a n n e r a n d v e r y s i m p l e t e r m s t h e i r r e c o m m e n d a t i o n s as t o w h a t t h e Congress, w h a t t h e F e d e r a l Reserve, w h a t t h e T r e a s u r y a n d a l l t h e rest o f t h e m , s h o u l d do t o p r e v e n t i n f l a t i o n . I t h i n k t h a t is w h a t w e are here f o r . M r . BLOUGH. I w o u l d l i k e t o f o l l o w u p o n t h e p o i n t a b o u t t h e l i m i t o f taxes. I s a i d I d o n o t k n o w w h e r e t h a t l i m i t is, b u t I i n t e n d e d t o g o o n i m m e d i a t e l y t o say t h a t t h e r e is n o evidence t h a t I c a n observe at the present t i m e t h a t d u r i n g this p e r i o d of very large Government s p e n d i n g w e have reached o r i n a n y w a y closely a p p r o a c h e d t h e l i m i t w i t h r e g a r d t o the b u r d e n o f taxes i n general. T h e r e are t w o k i n d s o f p r o b l e m s . O n e is t h e d i s t r i b u t i o n o f t h e b u r d e n , t h e o t h e r is t h e t o t a l b u r d e n . N e i t h e r t h e d i s t r i b u t i o n n o r t h e t o t a l b u r d e n seems a t t h e p r e s e n t t i m e t o be i n t e r f e r i n g w i t h t h e a c c u m u l a t i o n o f l a r g e a m o u n t s o f f u n d s b y businesses, t h e r e i n v e s t m e n t o f t h o s e f u n d s i n businesses,, a n d a very h i g h level of i n d u s t r i a l g r o w t h and expansion. T h e signsare n o t there t h a t taxes are i n t e r f e r i n g w i t h the g r o w t h o f t h e economy. Now, certainly we must have i n m i n d the danger that they m i g h t interfere w i t h the g r o w t h of the economy, and I a m n o t saying t h a t i f t h e e x p e n d i t u r e s w e r e t o be g r e a t l y r e d u c e d t h e p r e s e n t l e v e l o f taxes w o u l d n o t i n t e r f e r e w i t h t h e g r o w t h o f the economy. Representative W O L C O T T . D O you think we are getting enough production now to meet nondef ense demands and the military demands % M r . BLOUGH. T h e i n c r e a s e i n p r o d u c t i o n i s n o t b e i n g l i m i t e d b y t h e w i l l i n g n e s s o r f i n a n c i a l a b i l i t y o f business t o e x p a n d . T h e r e a r e a l w a y s e x c e p t i o n s , o f course. I n t h e s o f t - g o o d s i n d u s t r i e s t h e r e c o u l d be s o m e w h a t g r e a t e r p r o duction i f consumer spending were higher. I n the hard-goods indust r i e s m a t e r i a l s also a r e a i l i m p o r t a n t f a c t o r l i m i t i n g p r o d u c t i o n . In t h e defense i n d u s t r i e s t h e r e c o u l d be a s o m e w h a t l a r g e r a n d m o r e r a p i d increase o f p r o d u c t i o n i f p l a n t s a n d f a c i l i t i e s were m o r e q u i c k l y a v a i l able. T h e y h a v e t o be c o n s t r u c t e d . T h e r e are some i m p o r t a n t shortages. R e p r e s e n t a t i v e WOLCOTT. Y O U h a v e g o t f a c i l i t i e s i n t h e a u t o m o t i v e i n d u s t r y t o p r o d u c e a t least 40 percent m o r e t h a n t h e y are p r o d u c i n g now. Y o u have a v e r y serious u n e m p l o y m e n t s i t u a t i o n i n D e t r o i t a n d i n some o t h e r areas i n t h e U n i t e d States. W e can't convince any of the members o f the C I O or the A F L o u t i n D e t r o i t t h a t s o m e t h i n g serious is n o t h a p p e n i n g t o t h e m . M r . BLOUGH. C o n g r e s s m a n W o l c o t t , u n t i l w e h a v e r e a c h e d t h e p o i n t w h e r e w e h a v e a n adequate s u p p l y o f these m a t e r i a l s , w e w i l l h a v e t o s h u t d o w n somewhere. I n o t h e r w o r d s , t h i s is a process o f diverting Representative W O L C O T T . N O W you bring up the availability of materials. We are told repeatedly that the big bottleneck is in cop- m o n e t a r y p o l i c y a n d m a n a g e m e n t o f p u b l i c d e b t.264 p e r a n d t h e r e i s n ' t a n y p a r t i c u l a r s h o r t a g e o f sheet a n d w r o u g h t steeL W a r e h o u s e s a r e so f u l l o f i t t h a t t h e y h a v e d i f f i c u l t y finding p l a c e s t o store it. M r . BLOUGH. I t seems t o h a v e b e e n d i s c o v e r e d o n l y i n t h e l a s t c o u p l e o f weeks, a n d o n l y i n some specific items. R e p r e s e n t a t i v e WOLCOTT. I t w a s d i s c o v e r e d b y m e l a s t f a l l . A T o l e d o warehouseman came t o m e a n d said, " W e d o n ' t k n o w where w e a r e g o i n g t o p u t a n o t h e r t o n o f steel. W e c a n ' t d i s p o s e o f i t . " T h e r e a r e a l o t o f steel w a r e h o u s e m e n o u t t h e r e w h o a r e finding i t d i f f i c u l t t o w a r e h o u s e t h i s steel. T h e y w o u l d l i k e t o m o v e i t i n t o i n d u s t r y , and the men employed i n i n d u s t r y w o u l d l i k e to have this steel m o v i n g i n t o i n d u s t r y , b u t t h a t is a n e n t i r e l y d i f f e r e n t s i t u a t i o n . I t i s a l i t t l e o u t s i d e t h e scope o f o u r d i s c u s s i o n h e r e , p e r h a p s , b u t y o u h a v e n ' t come u p w i t h a suggestion yet. W h a t is t h e one phase o f y o u r p r o g r a m t h a t y o u w o u l d recommend to stop inflation? M r . BLOUGH. I h a v e a l r e a d y t a l k e d a b o u t t w o m e t h o d s t h a t a r e involved i n inflation. R e p r e s e n t a t i v e WOLCOTT. T a x a t i o n ? M r . BLOUGH. T h a t , o f c o u r s e , i s a v e r y f u n d a m e n t a l m e t h o d , a n d s o m e p e o p l e t h i n k i t w o u l d be e n o u g h a l l b y i t s e l f . W e have recommended credit restraints; both the general control o f c r e d i t a n d s p e c i f i c m e t h o d s o f r e s t r i c t i n g t h e use o f c r e d i t i n p u r c h a s i n g d u r a b l e g o o d s a n d n e w houses a n d i n s t o c k m a r k e t o p e r a t i o n . R e p r e s e n t a t i v e WOLCOTT. A S t o d i s c o u n t i n g , t h e F e d e r a l R e s e r v e h a s a l l t h e a u t h o r i t y i t needs i n t h a t field, a n d t h e y h a v e n o t b e e n a b l e t o agree y e t o n r e c o m m e n d a t i o n s w i t h respect t o i n c r e a s i n g b a n k reserves. A s a m a t t e r o f f a c t , I t h i n k M r . M a r t i n i n d i c a t e d t h a t increased reserve a u t h o r i t y p r o b a b l y w o u l d n o t be advisable. I k n o w here a f e w m o n t h s ago w h e n w e asked h i m about t h e reserve s i t u a t i o n , w h e t h e r t h e y needed a n y a d d i t i o n a l legislation, t h e y c o u l d n o t a g r e e as t o t h e a d v i s a b i l i t y o f i t o r h o w m u c h , so i t seems as t h o u g h somebody has abandoned t h e idea o f s h u t t i n g off c r e d i t b y e i t h e r a r r a n g i n g rediscount rates, reserve requirements, a n d y e t t h e y a l l a d m i t t h a t t h e p r e s s u r e s o n i n f l a t i o n h a v e b e e n lessened b y t h e a c t i o n s t a k e n i n firming u p o u r m o n e y p o l i c y . A n d I t h i n k i t is q u i t e g e n e r a l l y agreed t h a t i f w e do n o t do somet h i n g t o firm u p t h e d o l l a r h e r e , p r e t t y s o o n i t i s g o i n g t o h a v e a n e f f e c t u p o n t h e w o r l d e c o n o m y , a n d I m i g h t Say, t o b e a l i t t l e d r a m a t i c a b o u t i t , t h i s w o r l d h a s n o h o p e o f peace u n l e s s t h e A m e r i c a n d o l l a r i s firmed u p p r e t t y q u i c k l y . M r . BLOUGH. L l e t m e p r o c e e d w i t h t h e l i s t t h a t y o u h a v e a s k e d f o r . F i r m i n g u p t h e A m e r i c a n d o l l a r is s t o p p i n g inflation, t h a t is all. O n e o f t h e m e t h o d s o f c r e d i t c o n t r o l is t h e increase i n reserve requirements. T h e C o u n c i l has f a v o r e d a n increase i n reserve requirements. A n o t h e r m e t h o d is t h e a l l o c a t i o n o f m a t e r i a l s t o those needs w h i c h are most important. S u c h allocation is desirable n o t o n l y f o r p r o m o t i n g t h e defense e f f o r t a n d f o r b u i l d i n g u p t h e p r o d u c t i v e p o w e r o f t h e e c o n o m y b u t i t is d e s i r a b l e also t o p r e v e n t t h e p r e s s u r e o f c o m p e t i n g d e m a n d s i n t h e m a r k e t s b y businesses t r y i n g t o g e t t h e s e m a t e r i a l s a n d b i d d i n g the prices w a y up. So allocation a n d p r i o r i t i e s is a n i m p o r t a n t a n t i - i n f l a t i o n a r y m e t h o d . A n o t h e r m e t h o d o f r e s t r a i n i n g i n f l a t i o n , o f course, is t h e d i r e c t cont r o l s , p r i c e c o n t r o l a n d w a g e controls, w h i c h were p u t i n t o effect a monetary policy and management of public debt . 265 y e a r ago t h i s last J a n u a r y , a n d w h i c h were, I t h i n k t h e t u r n i n g p o i n t i n this inflationary movement. R e p r e s e n t a t i v e WOLCOTT. Y O U s a y t h a t t h e F e d e r a l R e s e r v e takes t h e a t t i t u d e t h a t bonds issued o u g h t n o l o n g e r be m o n e t i z e d , increased i t s rediscount rates, a n d discovery t h a t t o s u p p o r t t h e G o v e r n m e n t b o n d m a r k e t a b o v e p a r w a s i n f l a t i o n a r y , so t h e y d i s c o n t i n u e d that. T h e y m a i n t a i n e d t h a t t h a t w a s t h e cause, b u t y o u f e l l o w s i n g o v e r n m e n t , i f y o u c a n ' t g e t t o g e t h e r o n t h e causes o f i n f l a t i o n , h o w d o w e i n Congress expect t o solve the p r o b l e m ? M r BLOUGH. I d o n ' t t h i n k t h e r e i s a n y i n c o n s i s t e n c y . R e p r e s e n t a t i v e WOLCOTT. W e h a v e h a d t h i s c o n t r o v e r s y b e t w e e n t h e W h i t e H o u s e a n d t h e T r e a s u r y o n one side, a n d t h e F e d e r a l R e s e r v e o n t h e o t h e r , as l o n g a g o as t h e D o u g l a s c o m m i t t e e m e t . W e g o t together, I thought, i n a p r e t t y good way. A s a m a t t e r o f f a c t , Senator D o u g l a s surprises me. W h e n he first came i n t o t h e Senate here I h a d some p r e t t y c r a z y ideas, I f i n d n o w , a b o u t w h a t h i s p o l i c i e s m i g h t be. S e n a t o r DOUGLAS. Y O U a r e b e c o m i n g a b e t t e r D e m o c r a t e v e r y d a y . R e p r e s e n t a t i v e WOLCOTT. W e a r e g e t t i n g so close t o g e t h e r t h a t I a m either b e c o m i n g a better D e m o c r a t o r y o u are becoming a better Republican. A n y w a y , w e f o u n d o u r s e l v e s so c l o s e l y t o g e t h e r i n t h a t r e p o r t t h a t i n s t e a d o f f i l i n g a m i n o r i t y r e p o r t I j u s t dissented t o some m i n o r technicalities i n a f e w footnotes. Y e t w e r e c o g n i z e d t h i s same p r o b l e m 2 y 2 years ago. W e t h o u g h t t h a t b y c r a c k i n g s o m e h e a d s t o g e t h e r w e m i g h t be a b l e t o gejb somew h e r e , a n d I d o t h i n k w e h a d some e x e c u t i v e sessions b e t w e e n t h e T r e a s u r y a n d F e d e r a l Reserve, a n d t w o years a f t e r w a r d t h e y m e t t h e i r accord. I w o u l d like to t h i n k t h a t the accord machinery was started at t h a t time. T w o years a f t e r w a r d they m e t i n t h i s "accord." W h a t f u r t h e r s h o u l d be done i n a d d i t i o n t o t h a t a c c o r d t o s t a b i l i z e o u r e c o n o m y , stabilize our money? M r . BLOUGH. M a y I c l e a n u p o n e o r t w o loose e n d s t h a t h a v e g o t t e n a w a y i n the previous discussion? I said I t h o u g h t i t was t h e i m p o s i t i o n o f t h e wage a n d p r i c e cont r o l s i n J a n u a r y o f 1951 t h a t was t h e t u r n i n g p o i n t . B e f o r e t h a t t i m e t h e r e was a tremendous p s y c h o l o g i c a l c h u r n i n g , a mass m o v e m e n t o f d e m a n d f o r goods. P e o p l e h a d been t a l k i n g a b o u t p r i c e a n d w a g e c o n t r o l s . T h e r e w a s a n e x p e c t a t i o n t h a t t h e y w o u l d be p u t on. P r i c e s w e r e b e i n g p u s h e d u p , n o t o n l y because o f d e m a n d a n d s u p p l y f a c t o r s , b u t i n o r d e r t o g e t a h e a d o f w h a t e v e r t h e c o n t r o l w o u l d be. W a g e s h a d b e e n p u s h e d u p a l s o f o r t h e s a m e reasons. T h e r e w a s a f e v e r i n the air. T h e p r i c e a n d wage freeze d i d , I t h i n k , p u t a psychological freeze o n the p u b l i c m i n d . I t was t h e n discovered t h a t i n v e n t o r i e s h a d been b u i l t u p v e r y r a p i d l y , t h a t w a r s h o r t a g e s w e r e n o t g o i n g t o b e f e l t as s o o n as h a d been a n t i c i p a t e d , a n d t h a t instead o f shortages t h e r e w e r e p l e n t y o f t h i n g s t o be b o u g h t . T h e F e d e r a l R e s e r v e a c t i o n , w h i c h c a m e a b o u t t h e same t i m e , u n s e t t l e d t h e i n v e s t m e n t side o f t h e m a r k e t , a n d I t h i n k all of i t worked together t o w a r d quieting down the inflationary movement. m o n e t a r y p o l i c y a n d m a n a g e m e n t o f p u b l i c d e b t.266 I n m y o p i n i o n , the t u r n i n g p o i n t i n t h i s m o v e m e n t was t h e freeze o f prices a n d wages i n J a n u a r y , b u t I do n o t t h i n k t h a t v i e w is i n consistent w i t h recognizing a measure o f benefit f r o m t h e action w h i c h t o o k place a l i t t l e later o n b y the F e d e r a l Eeserve. E e p r e s e n t a t i v e WOLCOTT. I d o n o t w a n t t o t a k e a n y m o r e o f t h e t i m e of the committee, b u t I do w i s h t h a t I could have an answer t o m y questions. T h i s c o m m i t t e e is t r y i n g t o w o r k v e r y closely w i t h t h e C o u n c i l o f E c o n o m i c A d v i s e r s . M a k e some d e f i n i t e s u g g e s t i o n s as t o w h a t w e m i g h t r e c o m m e n d to the Congress i n o u r r e p o r t b y w a y o f a p r o g r a m w h i c h w i l l stop t h i s inflation. I f y o u do not, the value o f the d o l l a r h a y i n g a l r e a d y d r o p p e d 6 p e r c e n t i n t h e l a s t 18 m o n t h s , w i t h t h e i m p a c t o n defense s p e n d i n g c o m i n g u p sometime i n the n e x t couple o f years, we can anticipate over the n e x t 3 years a f u r t h e r d r o p i n t h e v a l u e o f t h e d o l l a r o f a b o u t 12 p e r c e n t , b r i n g i n g t h e v a l u e o f t h e d o l l a r d o w n t o 40 cents. T h a t is t h e p r o b l e m w e are c o n f r o n t e d w i t h here a n d we have t o f i n d a s o l u t i o n t o i t . I t h i n k y o u o w e i t t o us members w h o are n o t ecoonmists w h o f i n d i t r a t h e r difficult t o u n d e r s t a n d w h a t y o u are t a l k i n g about, to p u t i n very simple terms w h a t we can do to stop inflation. M r . BLOUGH. M a y I s a y t h a t I d o n o t s h a r e a l a r m i s t e x p e c t a t i o n s a b o u t f u r t h e r rises i n prices. I t seems t o m e o u r a d j u s t m e n t t o t h e m i l i t a r y p r o g r a m i s f a i r l y nearly completed. I do n o t a n t i c i p a t e t h e k i n d o f increases y o u h a v e suggested. E e p r e s e n t a t i v e WOLCOTT. E i g h t t h e r e , d o y o u t h i n k t h a t i n t h e n e x t 2 or 3 years t h a t we are n o t g o i n g to have any more i n f l a t i o n a r y pressure t h a n we are h a v i n g at the present t i m e ? M r . BLOUGH. I d i d n o t say Eepresentative WOLCOTT. that. What was the import of your remark ? M r . BLOUGH. T h e i m p o r t o f m y r e m a r k s w a s t h a t m y h o p e , m y e x p e c t a t i o n is t h a t we w i l l n o t have serious i n f l a t i o n a r y pressure. E e p r e s e n t a t i v e WOLCOTT. W h a t i s y o u r o p i n i o n ? M r . BLOUGH. M y o p i n i o n i s — o f c o u r s e n o one k n o w s w h a t i s g o i n g t o h a p p e n — w e w i l l n o t h a v e n e a r l y as s t r o n g i n f l a t i o n a r y p r e s s u r e s o v e r t h e n e x t 2 y e a r s as w e h a v e h a d i n t h e l a s t 2 , a s s u m i n g n o international flare-up. E e p r e s e n t a t i v e WOLCOTT. A r e t h e p r e s s u r e s g o i n g t o b e g r e a t e r o r less t h a n t h e y a r e a t t h e p r e s e n t t i m e ? M r . BLOUGH. A t t h e p r e s e n t t i m e w e a r e i n a r a t h e r — t h e w o r d " l u l l " h a s b e e n used. I h a v e u s e d i t m y s e l f . T h e r e is a s i d e w a r d m o v e m e n t i n business. I a m s o m e w h a t d i s t u r b e d a b o u t t h e i m p a c t o f the deficit w h i c h w i l l begin to show u p i n new b o r r o w i n g before very long. E e p r e s e n t a t i v e WOLCOTT. T h a t i s w h a t I h a d i n m i n d . I f we continue this policy t y i n g the value of our money to debt, we m i g h t expect w e w i l l h a v e t o i n d u l g e i n d e f i c i t financing b e t w e e n $ 1 0 a n d $20 b i l l i o n i n t h e n e x t 3 y e a r s , w i t h t h e i n f l u e n c e d e f i c i t financing h a s h a d o n t h e d o l l a r , t h e n h o w can we avoid f u r t h e r depreciation i n the value o f the dollar ? M r . BLOUGH. I n t h e r e l a t i o n t o t h e t o t a l b u d g e t , t h o s e a m o u n t s w i l l n o t be n e a r l y as l a r g e as t h e y m a y seem i n a b s o l u t e t e r m s . B u t t h e C o u n c i l has i n d i c a t e d the d e s i r a b i l i t y o f h i g h e r taxes. monetary policy and management of public debt . 267 E e p r e s e n t a t i v e WOLCOTT. Y o u r e c o m m e n d t h a t w e r a i s e t a x e s b y $10 b i l l i o n ? M r . BLOUGH. NO. I f I r e c a l l c o r r e c t l y , w e r e c o m m e n d e d t h a t t a x e s be r a i s e d b y a b o u t $5 b i l l i o n a t t h i s t i m e . T h e r e c a n b e s o m e n o n i n f l a tionary borrowing. E e p r e s e n t a t i v e WOLCOTT. Y O U w o u l d s t i l l h
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