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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.




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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




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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.




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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

0
(+D * 101. 6

(+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)

C
O

(-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. 2 9
2
1.37%-l. 2 9
4
1.38%-1.26°/
13 %12 <
.8 -.8?
1.38%-l. 3*
0?
1.38%-1.30<L
1.39%-l. 3 %
1
1.39%-l. 3 %
2
1.39%-l. 3 %
2
1.39%-l. 3 %
5
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

Percent

343
272

+6.1
+5.9

652

+37

+6.0

448
362

406
334

-42
—28

-9.4
-7.7

810

Total

+21
+16

615

Total
Redemptions including accrued interest:
January.
February

364
288

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
Dec. 31,
1949

General average

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

Marketable:
Treasury bills
Certificates of indebtedness.
ISiotes
Bonds.
Nonmarketable
Average for public issues
Special issues

Feb. 29,
1952

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




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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?




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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




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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




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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 ?




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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


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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.



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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




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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.




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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




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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




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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.




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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

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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

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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.




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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



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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.




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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




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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



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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.




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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




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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




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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




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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-




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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.

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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




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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.




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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 ^




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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.




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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




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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.




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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.




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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




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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




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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




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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.




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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




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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




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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



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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 ?




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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




M N T R POLICY A D M N G M N O PUBLIC D B .182
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N AAE ET F
ET
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-




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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

M N T R POLICY A D M N G M N O PUBLIC D B .186
O EA Y
N AAE ET F
ET
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

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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.

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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.




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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.




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.

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.




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.

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

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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

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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 ?




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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




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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.




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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.




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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

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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-




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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




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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

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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 .




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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,




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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-




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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-




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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




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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.




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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 a v e d e f i c i t financing b y
$5 or; $6 b i l l i o n .
M r . BLOUGH. S u p p o s e t h e d e f i c i t s h o u l d a m o u n t t o as m u c h as
$ 1 4 % b i l l i o n , w h i c h i s t h e figure i n t h e b u d g e t . I d o n ' t k n o w h o w
m u c h i t w i l l b e ; t h a t is p r e t t y f a r ahead t o l o o k . T h e b u d g e t has
t o l o o k f a r ahead.
Suppose the deficit amounted to $ 1 4 ^ billion.
A b o u t $ 4 ^ to $5
b i l l i o n i s r e c e i v e d b y t h e t r u s t f u n d s i n excess o f t h e p a y m e n t s f r o m
the trust funds.
T h a t l e a v e s r o u g h l y $10 b i l l i o n .
I f Congress accepted the President's r e c o m m e n d a t i o n f o r a n increase i n t a x e s o f $5 b i l l i o n , t h a t w o u l d l e a v e $5 b i l l i o n t o be b o r r o w e d
i n the open market.
S e n a t o r DOUGLAS. W h y n o t c u t e x p e n d i t u r e s b y $5 b i l l i o n ?
M r . BLOUGH. I f C o n g r e s s d e c i d e s t h a t c a n s a f e l y be d o n e , I w o u l d
n o t object.
S e n a t o r DOUGLAS. W h a t I v e r y f r a n k l y o b j e c t t o i n t h e r e p o r t
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 is t h a t i t d i d n o t i n d i c a t e t h e
need f o r c u t t i n g expenditures.
I k n o w i t is d i f f i c u l t f o r one b r a n c h
o f t h e executive t o c r i t i c i z e t h e actions o f a n o t h e r b r a n c h o f t h e execut i v e , a n d so I c a n q u i t e w e l l u n d e r s t a n d t h e d i f f i c u l t p o s i t i o n i n w h i c h
the C o u n c i l was placed.
B u t i f y o u o f f e r e d a d v i c e t o C o n g r e s s as w e l l as t o t h e E x e c u t i v e ,
w h i c h I u n d e r s t o o d M r . K e y s e r l i n g s a i d h e r e g a r d e d as a p r o p e r
f u n c t i o n o f t h e C o u n c i l , w e w o u l d l i k e t o have, y o u o f f e r a d v i c e t o
us w i t h t h a t same d e g r e e o f f r a n k n e s s w h i c h y o u u n d o u b t e d l y e x h i b i t
to the Executive.
E e p r e s e n t a t i v e WOLCOTT. W i l l y o u p u t i n t h e r e c o r d l a n g u a g e
w h i c h I c a n u n d e r s t a n d as t o y o u r r e c o m m e n d a t i o n s ?
M r . BLOUGH. W e c a n t r y a g a i n , i f y o u w i s h , C o n g r e s s m a n W o l c o t t ,
b u t I t h i n k i f y o u w i l l examine the answers I have g i v e n t o y o u r
q u e s t i o n s d u r i n g t h e l a s t f e w m i n u t e s , y o u w i l l find t h a t I h a v e g i v e n
a l i s t o f measures w h i c h , i f adequately f o l l o w e d t h r o u g h , w o u l d b r i n g
t h i s i n f l a t i o n a r y pressure u n d e r adequate control.
S e n a t o r DOUGLAS. I S t h i s a c r u e l q u e s t i o n ? I n y o u r c a p a