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82-2
14
E19m

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)

MARCH 10, 11, 12, 13, 14, 17, 18, 19, 20, 21, 24, 25, 26, 27,
28, AND 31, 1952

Printed for the use of the Joint Committee on the Economic Report

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)

MARCH 10, 11, 12, 13, 14, 17, 18, 19, 20, 21, 24, 25, 26, 27,
28, AND 31, 1952

Printed for the use of the Joint Committee on the Economic Report

GARY OF THE
MAY 22 1532
UNIVERSITY OF ILLINOIS

UNITED STATES
GOVERNMENT PRINTING OFFICE
97308

WASHINGTON : 1952

JOINT COMMITTEE ON THE ECONOMIC REPORT
(Created pursuant to sec. 5 ( a ) of Public Law 304, 79th Cong. )
JOSEPH C. O'MAHONEY, Wyoming, Chairman
EDWARD J. HART, New Jersey, Vice Chairman
JOHN SPARKMAN, Alabama
WRIGHT PATMAN, Texas
RICHARD BOLLING, Missouri
PAUL H. DOUGLAS, Illinois
WILLIAM BENTON, Connecticut
CLINTON D. MCKINNON, California
JESSE P. WOLCOTT, Michigan
ROBERT A. TAFT, Ohio
CHRISTIAN A. HERTER, Massachusetts
RALPH E. FLANDERS, Vermont
ARTHUR V. WATKINS , Utah
J. CALEB BOGGS, Delaware
GROVER W. ENSLEY, Staff Director
JOHN W. LEHMAN, Clerk

SUBCOMMITTEE ON GENERAL CREDIT CONTROL AND DEBT MANAGEMENT
WRIGHT PATMAN, Texas, Chairman
RICHARD BOLLING, Missouri
PAUL H. DOUGLAS, Illinois
JESSE P. WOLCOTT, Michigan
RALPH E. FLANDERS, Vermont
HENRY C. MURPHY, Economist to the Subcommittee

II

…

1
- e1

82-2
CONTENTS
E19m

Page
Statement of:
Appleby, Paul, dean of the Maxwell School of Citizenship and Public
573
Affairs of Syracuse UniversityBell, James Washington, chairman, Department of Economics,
911
Northwestern University ( submitted ).
248
Blough, Roy, member, Council of Economic Advisers .
Brown, Edward Eagle, chairman, board of directors of the First
565
National Bank of Chicago__.
407
Bryan, Malcolm, president, Federal Reserve Bank of Atlanta.
Cook, H. Earl, member Board of Directors , Federal Deposit Insurance
Corporation, accompanied by E. H. Cramer and L. L. Robertson,
868
of the Federal Deposit Insurance Corporation_
Cumberland , W. W., Ladenburg, Thalmann & Co., New York City
922
(submitted ).
Economists' National Committee on Monetary Policy, New York, a
940
submitted statement by 63 members__
Fennelly, John F., Investment Bankers Association of America, accompanied by Robert Craft, vice president, Guaranty Trust Co.
344
of New York___
Folsom, Marion B. , Chairman, Board of Trustees, Committee for Eco291
nomic Development ‒‒‒‒
355, 380
Harris, Seymour E. , professor of economics, Harvard University324
Hemingway, W. L., American Bankers Association.
Kemmerer, Donald L. , professor of American economic history,
926
University of Illinois ( submitted )
143 .
Keyserling, Leon H., chairman, Council of Economic Advisers_
154, 185, 269
Lanston, Aubrey G. , president, accompanied by Leroy M. Piser, vice
389
president in charge of research, Aubrey G. Lanston & Co., Inc ‒‒‒‒
Martin, William McC. , Jr., Chairman, Board of Governors of the
73,99
Federal Reserve System_.
Pollock, Dr. James K., professor of political science and chairman of
584
the department of political science, University of Michigan__.
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.
463
Masters, Charles H. Schmidt, and Harold L. Cheadle__
Preston, Howard H., professor of money and banking, University of
928
Washington ( submitted ) ____
Robinson, Leland Rex, professor of political economy, New York Uni932
versity ( submitted )
552
Ruml, Beardsley__
Shanks, Carrol M., president of Prudential Insurance Co. of America,
and chairman, committee on inflation control of the American Life
442
Convention and the Life Insurance Association of America.
Snyder, John W. , Secretary of the Treasury, accompanied by mem7, 45
bers of the Treasury staff
Sonne, H. Christian, chairman, board of trustees, National Planning
Association _- _843
Spahr, Walter E., professor of economics, New York University ( sub935
mitted) --506
Sproul, Allan, president, Federal Reserve Bank of New York
Thomson, J. Cameron, chairman , Committee on Monetary, Fiscal and
296
Debt Policy, Committee for Economic Development_.
Trant, James B., dean, College of Commerce, and professor of money
939
and banking, Louisiana State University (submitted )
Wiggins, A. L. M., chairman, board of directors , Atlantic Coast Line
219, 235
Railroad Co., and associated railroad companies..
III

IV

CONTENTS

Page
Panel discussions :
747
How should our monetary and debt management policy be determined ?_
Participants :
Bach, G. L., professor of economics, Carnegie Institute of
Technology748
Goldenweiser, E. A. , member, Institute for Advanced Study,
761
Princeton University --Stein, Harold, staff director, Committee on Public Administra757
tion Cases___
754
Viner, Jacob, professor of economics, Princeton University .
752
Wilmerding, Lucius, Jr__
The role of business, labor and agriculture in the determination of
799
monetary and debt management policyParticipants :
Baker, John A. , legislative secretary, National Farmers
807
Union__.
801
Chamber of Commerce of the United States (submitted ).
Kline, Allan B., president, American Farm Bureau Federation____
809
Lincoln, Murray D. , president, Farm Bureau Insurance Cos. ,
812
Columbus, Ohio..
Montgomery, Donald E., director of Washington office, Inter817
national Union, UAW-CIO823
Newsom, Herschel D. , master, the National Grange_
827
Shishkin, Boris , economist, American Federation of Labor .
Voorhis, Jerry, secretary, Cooperative League of the United
States of America-831
597
The role of the banking system in a dynamic economyParticipants :
Fleming, Robert V., president and chairman of the board,
598
the Riggs National Bank, Washington, D. C___.
Lindow, Wesley, vice president, Irving Trust Co., New York
629
City-Reierson, Roy L., vice president, Bankers Trust Co. , New
633, 637
York CityTapp, Jesse W., executive vice president, Bank of America,
626
San Francisco, Calif‒‒‒‒‒‒
Woodward, Donald B. , second vice president, the Mutual Life
Insurance Co. of New York...
602
685
What Should Our Monetary and Debt Management Policy Be ?---Participants :
Ellis, Howard S. , professor of economics, University of Cali686
fornia____.
Friedman, Milton, professor of economics, University of Chi688
cago
Mikesell, Raymond F., professor of economics, University of
711
Virginia ---Samuelson, Paul, professor of economics, Massachusetts In691
stitute of Technology-Whittlesey, C. R. , professor of finance and economics , Uni698
versity of Pennsylvania ..
Supplementary statements :
432
Bryan, Malcolm, president, Federal Reserve Bank of Atlanta_.
743
Friedman, Milton, University of Chicago ‒‒‒‒‒
276
Keyserling, Leon H., chairman, Council of Economic Advisers.
746
Mikesell, Raymond F., University of Virginia..
Additional information furnished for the record :
Behavior of Deposits Prior to Suspension in a Selected Group of
877
Banks

CONTENTS
Additional information furnished for the record- Continued
Correspondence on debt management and monetary policy between
the Federal Reserve System and the Treasury, and the Federal Reserve System and the President, during the period from the outbreak
in Korea ( June 25, 1950 ) to the Treasury-Federal Reserve accord
(March 4, 1951 ) .
Correspondence with the Comptroller General concerning governmental agencies not audited by the General Accounting Office and
the reasons therefor_ -_Dormant account balances in national banks at close of business on
December 31 , 1951 ---Editorial in the New York Jourial of Commerce concerning the testimony of Prof. Seymour Harris, Professor Harris' answer thereto ,
and a rejoinder_____
Effect of changes in interest rates on the cost of servicing the public
debt
Excerpt from book by Carter Glass, entitled "An Adventure in Constructive Finance" ( 1927 ) .
Federal Reserve System preparation of answers to questionnaire___
Financial responsibilities of member banks on account of membership
in the Federal Reserve System-Impact of voluntary credit restraint program on demand for and
supply of credit__.
Legal status of the Board of Governors of the Federal Reserve System
and of the Federal Reserve Banks_
Lending, Inc., Fifth District Commercial Banking Voluntary Credit
Restraint Committee, report of
Letter from Chairman Martin on miscellaneous legal points arising
during the hearings .
Letter from Library of Congress , to Joint Committee, relative to Federal Agencies having independent sources of incomeLetter from Preston Delano, to Congressman Patman , relative to affiliation between banks in Texas____
Letter received from Allan Sproul on the independence of the Federal
Reserve System__.
Letter to Congressman Patman from Carrol M. Shanks, regarding
removal of Secretary of Treasury from the Federal Reserve Board___
Letter to Congressman Patman, from National Association of Manufacturers, regarding appearance at hearing .
Letter to Senator Maybank, from Walter P. Reuther, CIO, relative
to panel discussion on mortgage financing conducted by Senate
Banking and Currency Committee, on February 6, 1952Memorandum from the President, regarding the need for credit restrictions, February 26, 1951- .
Miscellaneous material requested of the Board of Governors of the
Federal Reserve System_.
Monetary Management, by E. A. Goldenweiser, excerpt from.
"Open Mouth" Rule Ends in United States Bonds, article from New
York Times____
Payments to the Treasury by Federal Reserve banks_
Remarks of Allan 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 Allan Sproul, president, Federal Reserve Bank of New
York, before Forty-fifth Annual Meeting of Life Insurance Association of America, New York City, December 12, 1951__
Report of the four 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
Page

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

MONETARY POLICY AND THE MANAGEMENT OF THE

PUBLIC DEBT

MONDAY , MARCH 10, 1952
CONGRESS OF THE UNITED STATES ,
SUBCOMMITTEE ON GENERAL CREDIT CONTROL
AND DEBT MANAGEMENT OF THE
JOINT COMMITTEE ON THE ECONOMIC REPORT,
Washington, D. C.
The subcommittee met, pursuant to notice, at 10:05 a. m. , in room
318 Senate Office Building, Representative Wright Patman ( chairman
of the subcommittee ) presiding .
Present : Representative Patman, Senators Douglas, Flanders ; Representatives Bolling and Wolcott.
Also present : Grover W. Ensley, staff director ; Henry C. Murphy,
economist for the subcommittee ; and John W. Lehman, clerk to the
full committee.
Representative PATMAN . The committee will please come to order .
The Joint Committee on the Economic Report was created by the
Employment Act of 1946. Its primary purpose, and the one which
has given it 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 it believes will be helpful to the Congress and to the public,
generally. It is not a legislative committee and has no authority to
bring in bills in either House.
The Subcommittee on General Credit Control and Debt Management was appointed by Senator Joseph C. O'Mahoney, of Wyoming,
chairman of the full committee, last spring, for the purpose of conducting a general inquiry into monetary policy and debt management.
The members of the committee, in addition to the chairman , are Senators Paul H. Douglas, of Illinois, and Ralph E. Flanders, of Vermont,
and Representatives Richard Bolling, of Missouri, and Jesse P. Wolcott, of Michigan .
As most of you are aware, a similar subcommittee was appointed by
Senator O'Mahoney in the spring of 1949 under the chairmanship of
Senator Douglas. The membership of that committee was identical
with the membership of the present subcommittee except that Representative Buchanan, who has since passed away, has been replaced
by Representative Bolling.
The subcommittee , under the chairmanship of Senator Douglas,
divided its attention about equally between fiscal policy, meaning
1

2

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

primarily bugetary policy, and monetary policy. The present subcommittee, on the other hand , will 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 with significant events. At that time the country was just emerging from 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.
In the meantime, the country has passed through a serious period
of inflation, spurred by the buying wave which followed the outbreak
of hostilities in Korea. For about a year now we have had a precarious lull in inflationary price rises. National production is at a high
level, and the same is true, with 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 living as they have had at any time
in 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, it is time to give the situation another look,
both with respect to the proper steps which should be taken in the
field of monetary and debt management policy under present and
possible future conditions and with respect to the extent to which our
agencies are properly set up to handle the task which the Congress
has delegated to them.
It is in this spirit and with an open mind as to the right answers
to all of the questions before us that the subcommittee has approached
its task.
As the first step in its investigation the subcommittee addressed a
series of questions to the top Government officials concerned with
these tasks, and to a large number of persons in the private economy.
The answers to these questions have been published in a document
entitled "Monetary Policy and the Management of the Public Debt ;
Their Role in 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.
It has placed before us in 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, with carefully reasoned statements supporting their respective views.
In arriving at these statements, the agencies have, in my opinion,
tended to move somewhat closer together. This is all to the good.
The subcommittee has always emphasized in its dealings with each
of the agencies that it sought as a first choice to obtain an agreed
statement of their views, but to the extent that this was not compatible
with the sincerely held convictions of the responsible agency heads, it
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 in the record
at the close of these remarks, was arranged with 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, in 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, if necessary, for this purpose.
In addition, I should like to invite any other person who desires
to be heard to make application to the subcommittee, and we will
arrange, if possible, a personal presentation of views or for the submission of briefs.
The hearings which we are starting today ought to be exceptionally
fruitful 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 in the preparation of the
answers included in 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 will make it possible for each witness not only to greatly shorten
his statement but it will permit him to direct it to the important points
on which he finds himself in disagreement with other witnesses who
have contributed to the symposium.
It will also be of great assistance to the members of the subcommittee in directing their questions to significant points of difference in
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 , Mr. Snyder.
These replies state the position of the Treasury Department on the
principal issues of interest to the subcommittee in a clear and incisive
manner, and provide a most appropriate background for the testimony of our first witness, Mr. John W. Snyder, Secretary of the
Treasury.
( The schedule previously referred to is as follows :)
CONGRESS OF THE UNITED STATES
JOINT COMMITTEE ON THE ECONOMIC REPORT
CHAIRMAN WRIGHT PATMAN OF THE SUBCOMMITTEE ON GENERAL CREDIT CONTROL AND
DEBT MANAGEMENT ANNOUNCES TENTATIVE SCHEDULE OF HEARINGS
Representative Wright 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 for the
hearings of the subcommittee which will begin on Monday, March 10, and are
expected to run for 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 Bolling, of Missouri, and Jesse P. Wolcott,
of Michigan-to suggest any additional witnesses whom they might desire and

4

1

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

that he would be glad to make arrangements for their appearance, extending
the duration of the hearings if necessary for this purpose.
The schedule announced by Chairman Patman, together with suggested topics
of discussion for each of the round tables to be held in connection with the
hearings, follow :
First week
Monday, March 10 : John W. Snyder, Secretary of the Treasury.
Tuesday : March 11 : William McC. Martin , 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.
Friday, March 14 :
A. L. M. Wiggins, chairman, board of directors, Atlantic Coast Line Railroad Co. (formerly Under Secretary of the Treasury ) .
Preston Delano : Comptroller of the Currency.
Maple T. Harl, Chairman , Board of Directors, Federal Deposit Insurance
Corporation.
Second week
Monday, March 17 :
Marion B. Folsom and J. Cameron Thomson, Committee for Economic
Development.
W. L. Hemingway, American Bankers Association .
John F. Fennelly, Investment Bankers Association.
Tuesday, March 18 :
Seymour Harris, Harvard University.
Aubrey G. Lanston, Aubrey G. Lanston & Co., United States Government
security dealers.
Wednesday, March 19 :
Malcolm Bryan, President, Federal Reserve Bank, Atlanta.
Oliver S. Powell , Member, Board of Governors, Federal Reserve System.
Carrol M. Shanks, Life Insurance Association of America and American
Life Convention.
Thursday, March 20 :
Beardsley Ruml, New York City.
Allan Sproul, President, Federal Reserve Bank, New York.
E. E. Brown, chairman, board of directors, First National Bank of Chicago.
Friday, March 21 : Paul Appleby, Syracuse University.
Third week
Monday, March 24 : Panel discussion, The Role of the Banking System in a
Dynamic Economy :
Robert Fleming, Riggs National Bank, Washington, D. C.
Wesley Lindow, Irving Trust Co. , New York.
Roy Reierson, Bankers Trust Co. , New York.
Jesse W. Tapp, Bank of America, San Francisco.
Tuesday, March 25 : Panel discussion, What Should Our Monetary and DebtManagement Policy Be?:
Milton Friedman, University of Chicago.
Raymond Mikesell, University of Virginia.
Paul Samuelson, Massachusetts Institute of Technology.
C. R. Whittlesey, University of Pennsylvania.
Wednesday, March 26 : Panel discussion, How should our monetary and debtmanagement policy be determined ?:
G. L. Bach, Carnegie Institute of Technology, Pittsburgh.
E. A. Goldenweiser, Institute for 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 in the determination of monetary and debt-management policy : ( Representatives of American Farm Bureau Federation, American Federation of
Labor, Congress of Industrial Organizations, National Association of Manufacturers, The National Farmers Union, The National Grange, United States
Chamber of Commerce) .

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

5

Friday, March 28 : 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 Bank, Washington, D. C.;
Wesley Lindow, Irving Trust Co. , New York ; Roy Reierson, Bankers Trust Co.,
New York ; Jesse W. Tapp, Bank of America, San Francisco.
Suggested topics for discussion.-1. What should be the role of the private financial community in the formulation of monetary policy ? To what extent does this role reflect its status as a
special interest group and to what extent does it reflect its status as the repository of specialized skills and information valuable to the general interest ?
2. What is the responsibility of banking institutions for the economic development of their communities ? Should banks, as a long-term proposition, be more
venturesome in undertaking lending risks ? Has a lack of venturesomeness on
the part of banks contributed to the growth of Government-lending agencies ?
How does this apply to the special problems and inflationary hazards of the
present defense period ?
3. How successful has the voluntary credit-restraint program been ? What
should be its role over a longer-term period ? Has the treatment accorded State
and local governments been more rigorous than that accorded private business
firms ?
4. To what extent do time deposits represent a stable form of savings ? Demand depoits ? Is it desirable to encourage the holding of savings in these forms ?
Under what conditions ?
Panel discussion on What should our monetary and debt management policy be?
(Tuesday, March 25 )
Participants.-Milton Friedman, University of Chicago ; Raymond Mikesell,
University of Virginia ; Paul Samuelson, Massachusetts Institute of Technology ;
C. R. Whittlesey, University of Pennsylvania.
Suggested topics for discussion.1. How much reliance should be placed on ( a ) direct controls, ( b ) selective
credit controls, ( c ) general monetary ( i. e., "tight money" ) policies in combating
inflation ? Under present circumstances ? Under other circumstances ?
2. Is a tight-money policy compatible with maximum production and employment ?
3. How desirable is a stable Government bond market? Now? Under conditions closer to total war? In a peacetime inflation ?
4. What kinds of securities should the Treasury issue ? Now ? Under other
circumstances ?
5. What 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 Institute of Technology, Pittsburgh ; E. A.
Goldenweiser, Institute for Advanced Study, Princeton ; James K. Pollock, University of Michigan ; Jacob Viner, Princeton University.
Suggested topics for discussion.1. What should be the role of the private financial community in the formulation of monetary policy ? What are the implications in this respect of the private
ownership of the stock of the Federal Reserve banks ?
2. Is the division of authority over monetary policy between the Board of Governors and the Open Market Committee desirable ? If not, how should it be resolved ?
3. Should the monetary authority be vested in one man or a board ? What is
its proper relationship to the Treasury, the President, Congress ?
4. What should be the role of the monetary authority in 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 Farm Bureau Federation, American Federation of Labor, Congress of Industrial Organizations, National Association of Manufacturers, The National Farmers Union, The National Grange,
United States Chamber of Commerce.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT
Suggested topics for discussion.1. What are the special interests of business, labor, and agriculture in monetary
policy ? How should each be represented in its formulation (except as they are
represented in ordinary course in the formulation of Government policy generally ) ?
2. Should individual members of the Board of Governors or individual directors of the Federal Reserve banks represent special interest groups ? If so,
should the interested groups participate in their selection ?
3. What monetary and debt management policy is most in 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 in the course of the
hearings as indicated by the day-to-day record. )
Representative PATMAN. Before hearing from Mr. Snyder, I would
like to ask if other members of the subcommittee would like to make
statements . Senator Douglas, would you like to make a statement ?
Senator DOUGLAS . I think, perhaps, Senator Flanders should have
the right to lead off.
Representative PATMAN. Senator Flanders ?
Senator FLANDERS . 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 with
inflation, in general, and the amount and value of our money and credit
supply, in 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
in 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, it 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. It 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 with immediate policy questions , and it also will,
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 with information have also reaped some benefit themselves from
the process of thinking through the issues involved , and of formulating their answers .
We are now entering upon the more direct work of the subcommittee in hearings, examination, and attempting to reconcile the views
of witnesses.
With the careful work that has been done and the high quality of the
responses received, I am sure that we can continue this undertaking
in an objective and unbiased manner. Our aim is to have a thorough

MONETARY POLICY AND MANAGEMENT OF PUBLIC 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 PATMAN. Mr. Bolling ?
Representative BOLLING. No comment, Mr. Chairman .
Representative PATMAN. Senator Douglas ?
Senator DOUGLAS . I want to join Senator Flanders in 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 . It 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
if nothing more happened , that the subcommittee has already justified
its existence.
I want to join Senator Flanders in the hope that this will be an inquiry for truth and for public policy. In the course of that inquiry,
it is inevitable that differences of opinion will develop, but I hope that
we may be objective , and that we will credit each other with the best
of motives.
Representative PATMAN. Thank you, Senator Douglas .
Mr. Wolcott ?
Representative WOLCOTT. I have no statement.
Representative PATMAN. Mr. Snyder, we would like to hear from
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 with the scope and searching nature of
the questions which were asked. In our already heavy work schedules
it was not easy to find the time to set down the pros and cons of the
many issues presented for generalized discussion in the questionnaire .
In 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 full and
considered replies to all of the questions submitted to us.
I believe that everyone who reads the written replies received by
the subcommittee will feel, as I do, that the body of material which
you have assembled will be of great value in 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, all

8

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

points of view-seem to have been elicited by the subcommittee in
the written answers to the various questionnaires which were sent
out. A policy record, in 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 fully
responsive in this fundamental sense.
I want to say here, Mr. Chairman, that I do hope that these 1,300
pages will be read with 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 in connection with 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 in 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
will grow discussions and studies that will be extremely helpful in the
great problems we have in the future.
In our own case, we found in replying to the questionnaire that it
was often difficult to reconstruct past events in the context of the
times when they took place. In our swiftly moving economy circumstances are always changing, and our views as to appropriate actions
and policies must change with them. The would be little purpose
in trying to reconstruct the background of important actions in the
past unless the details gave us added ability to plan our future course
wisely. This is true, I believe, with respect to the subjects which
will be covered in the present hearings. In 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 we hoped to accomplish by them
and what- viewed retrospectively- we did accomplish.
It will be of particular value, I feel , for the public to become better
acquainted with the nature of the responsibilities with which the
various agencies have been charged by the Congress-and the relation
of practical policies to the fulfillment of these responsibilities . This
represents, in 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 it by the Congress. These
objectives, which are described more fully in the answer to question 2,
are as follows :
1. To maintain confidence in the credit of the United States
Government.

This is the basic objective of all Treasury policies ; and , at the
present time, it is the cornerstone of the financial soundness of this
country, and a vital factor in the defense effort of the entire free
world.
In the broadest sense, safeguarding the credit of the Govcrnment depends upon our ability as a Nation to keep our freeenterprise economy healthy and growing, and to use our governmental
instruments wisely in promoting this end.

MONETARY POLICY AND MANAGEMENT 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 it 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 with 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 within the department and in association with
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 in achieving these specific objectives of debt management is
essential to the maintenance of confidence in the credit of the United
States Government. Many of the questions sent to us by the subcommittee related to problems and actions in 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 will provide a
forum in which these fundamental matters of national financial
policy can be thoroughly explored.
5. To use debt policy cooperatively with monetary - credit
policy to contribute toward healthy economic growth and reasonable stability in the value of the dollar .
The importance of this objective , I feel , is self- evident . It is a
primary goal of both Treasury and Federal Reserve policy, and an
important part of public economic policy in general, as expressed in
the Employment Act of 1946.
In addition to these five economic objectives of Treasury policy,
there are other objectives which we keep constantly in mind. These
are :

1

6. To conduct the day-to -day financial operations of the Treasury so as to avoid disruptive effects in 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 with the foregoing objectives.
8. To assist in shaping and coordinating the foreign financial
policy of the United States.
9. To manage the gold and silver reserves of the country in a
manner consistent with our other domestic and foreign policy
objectives.

10

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Each one of these specific objectives is important in itself ; and,
generally, a number of them must be considered together in framing
practical program which will further our basic goals of maintaining
the confidence of the public in the debt obligations of the Government
and promoting the economic well-being of the Nation.
The present hearings, I feel , will 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 in relation to many different situations-in the
answers to the questionnaire .
It is my further hope that the subcommittee will give careful consideration to the possibilities which I have brought forward in 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. In that question, it 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 with 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 .
It is my present intention to recommend to the President that he
consider the creation of a national council along the lines which I have
just described , with advisory authority in 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 with respect to monetary and fiscal policy brings up another
matter which I hope the subcommittee will find time to consider from
· all angles. In question 9 of the questionnaire sent to me, a discussion .
of the relationship between the President and the Federal Reserve
System was called for. In answering this question, I indicated my
opinion that it was desirable for the Federal Reserve System to retain
its independent status. I expressed further, however, my strong
feeling that it 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, in the interests of coordination .
This, it 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 MANAGEMENT OF PUBLIC DEBT

11

The Joint Committee on the Economic Report is in a very good
position to help obtain the kind of cooperation and cohesiveness of
policy which we need to emphasize constantly in all branches of Government. This is because the committee has the responsibility for
looking at the economic problems involved from every point of view.
You are not concerned solely with revenues, for example, or with expenditures, or with appropriations ; rather it 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. Right now, however, we are faced with a practical financing problem which must be
worked out in the immediate future ; and I should like to discuss with
you briefly how a problem of this sort, in practice, ties in with the
more general considerations which govern Treasury policy.
On the basis of the estimates in 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 turn out to be, however, the
amounts which we shall have to borrow will be substantial.
Earlier in this statement, I noted that the general goals of our debt
management programs are (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. These objectives
are the guides which we use in 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 it 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 in the immediate outlook. There is no single, simple approach
which will solve the entire problem for us.
To begin with, we must be constantly watchful with respect to the
development of inflationary or deflationary tendencies. There appears
to be a lull, at present, in inflationary pressures ; but it would be imprudent to give less than full weight to the inflationary implications
of our large defense program and of the deficit financing operations
which will have to be undertaken in connection with it. For some
time to come, defense production will draw heavily on our physical
resources ; and the existence of a significant deficit will add to the
supply of funds available for spending or saving.
In the second place, we must take account of the fact that our present
borrowing program will have to be geared to a set of circumstances
which are unlike those experienced in connection with any previcus
large - scale borrowing operations . In contrast to the World War II

97308-52-2

12

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

situation, for example, a large sector of industry and trade is engaged
in substantially normal operations ; including operations such as
capital expenditure programs-which draw on investment funds.
When we found it necessary to borrow large sums of money early
in World War II, moreover, the Government's debt was much smaller
than it is now, both in absolute terms and in relation to the size of the
economy. Today, our Government debt accounts for almost half of all
the debt obligations in 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. It
is evident that we must use great care to maintain an atmosphere
which will 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 in 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 will 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.
In order to formulate a program suited to the current situation , the
Treasury—as it has done in connection with each important financing
operation in the past-has been making extensive analyses of the
money and investment markets ; it has been discussing the problems
on a continuing basis with representatives of the Federal Reserve System ; and it 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 in the price structure and in 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.

1

When we review all of these facts in the Treasury, and evaluate them
in terms of the problem at hand , the situation seems to us to add up
to these conclusions :
It is essential for the well -being of the country that the Treasury and
the Federal Reserve continue to work in the closest cooperation . Both
agencies are in wholehearted agreement on this matter. There is no
substitute for working together on the important problems which we

MONETARY POLICY AND MANAGEMENT OF PUBLIC 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 with 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 in 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 in reducing the
proportion of the public debt held by the commercial banking system
from 42 percent at the peak of World War II 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 World War II financing. Our deficit financing program must conserve these gains-and it 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 in the field of abstract theory ; full
account must be given at all times to the practical implications of the
policies and programs undertaken . The opportunity which the present hearings will provide for a discussion of measures appropriate to
our present situation will , I am convinced , make a most important contribution to public understanding of the problems now confronting us.
Representative PATMAN. Thank you , Mr. Secretary.
Senator Douglas, would you like to ask any questions ?
Senator DOUGLAS . Thank you, Mr. 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 will 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 in 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 will have to continue
to work out.
Senator DOUGLAS. Mr. Secretary, I want to point out that my question to you was perfectly courteous. It 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 it is a function of the Federal Reserve Board to purchase a sufficient quantity of Government
securities in 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, "We
will work that out. I am not going to reply to the question . "

14

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Now, with all kindness I do not think that is treating a congressional committee, which is trying to be fair with you, as a partySecretary SNYDER. Senator, I have no question as to your courtesy,
and I did 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 with the Treasury.
Senator DOUGLAS . And should the cooperation consist in purchasing a sufficient number of securities in 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 PATMAN. The reporter will 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 will have to be a matter that will be worked out in the
light of conditions at the time.
Senator DOUGLAS . You 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, thenSecretary 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
with the Federal Reserve Board should a question such as I have described arise ?
Secretary SNYDER. That is not my answer, Senator. If you will
reread it, you will see that I said it is a matter in which we will have
to cooperate most closely, and it will involve carrying on conversations, of course.
Senator DOUGLAS. What do you think you will 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 trying to work out
policy. We are kept from the real point of view of the administrative officials, and it becomes almost impossible for us to arrive at any
conclusion. I am very disappointed , Mr. Secretary, in your reply.
Do you think that the Federal Reserve Board should purchase Government securities or should not purchase Government securities in
the circumstances I have outlined ?
Secretary SNYDER. The Federal Reserve's policy has been to conduct
their Open Market Committee operations in support of the Treasury's
financing operations and, thereforeSenator DOUGLAS . You 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, if necessary, buy an
unlimited quantity of Government securities ?

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

15

Secretary SNYDER. It will have to be bottomed on conditions at the
time those decisions are made.
♥
Senator DOUGLAS . Is 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 ?
If those.conditions are met, to what degree is it necessary for aritficial support to be given by the Federal Reserve System ?
Secretary SNYDER. As 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. If those conditions are met, why is it necessary
for the Federal Reserve Board to purchase any securities ? Why
couldn't the bond issue be met by the general investment market ?
Secretary SNYDER. Well, in 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 in the past,
and also have to measure what might develop in the future as to just
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 it be refunding or whether it 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 in our answers to the subcommittee's queries. We
have to measure very carefully the decisions that will be made as to
interest rates.
Senator DOUGLAS. Well, certainly, in times past the Treasury has
asked the Federal Reserve Board to stand ready to purchase Government bonds if there were not enough private subscriptions ; is that
true ?
Secretary SNYDER. The Federal Reserve has offered to do that , and
been requestedSenator DOUGLAS. Has not the Treasury requested that it 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 if practiced
by a private underwriter with regard to private issuances , would
render him 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 , in
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 in the past sometimes been in effect to urge
the Government to do that which is a penal offense for private underwriters to do ?

16

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

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 it is
doing so. It is not statutorily a criminal offense. But what I am
trying to get at is this : Just as we are trying to create natural conditions in the stock market where issues can sell on their merits without artificial support should we not with 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. Of course, as you know, Senator, there was only 1 year in which
there was any net Federal Reserve support of the Government bond
market in the postwar period up until the time of Korea ; that is beside
the point as to your question, but it is interesting to note that net purchases have not been generally the case all the way through the postwar period.
Senator DOUGLAS. It was true 1 year.
Secretary SNYDER. In 1 year ; that is correct, sir.
(The following was submitted for the record :)
This matter is discussed in detail in the answer to question 17 of the questionnaire submitted to the Secretary of the Treasury by the subcommittee. The
following 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 30 , 1950, inclusive
Billion
Jan. 1 to Dec. 31 , 1946, net sales .
$0.2
Jan. 1 to Nov. 12, 1947, net sales__.
(¹)
10.4
Nov. 13 to Dec. 15, 1948, net purchases3.9
Dec. 16 to Dec. 31, 1949, net sales_.
1.6
Jan. 1 to June 30, 1950, net sales__
1 Less than $ 50 million.
Senator DOUGLAS . It 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 in carrying out their obligations.
Senator DOUGLAS. There is a fundamental issue involved here,
namely, whether you will provide so-called natural markets for Government securities or the degree to which you will provide artificial
markets for Government securities.
Perhaps, I am using question-begging words in referring to the
purchase of the Federal Reserve as an artificial device, but the question
is the degree to which the Government will maintain its own bond
market or to the degree to which it will allow the bond market to be
settled by natural forces in the private field .
Secretary SNYDER. Well, it boils down to the meeting of a practical
situation, I think, Senator, as long asSenator DOUGLAS. When you face a practical situation without any
general philosophy you are apt to come to great difficulties ; and what

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

17

we are trying to do here, if this inquiry has any merit-and if it does
not have merit we should close it out immediately, Mr. ChairmanSecretary SNYDER. Well, the question isSenator DOUGLAS ( continuing) . Is to see if we can try to work out
general principles for meeting these concrete situations which lie
ahead.
Secretary SNYDER. The question then arises as to whether or not
we should have an open-market operation.
Senator DOUGLAS . No, that is not the question . It is the degreeSecretary SNYDER. I think so .
Senator DOUGLAS ( continuing ) . To which the Federal Reserve
System should be committed to enable a Treasury issue to be successful 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 SNYDER. I think we have to consider the public interest
involved. With the large financings that we have to conduct in these
days, with the debt the size it is, there must be some assurance mutually
agreed on between the Federal Reserve and the Treasury that these
operations will be carried out with assurance as to the stability of the
Federal Government bond market.
Senator DOUGLAS. In other words, the Federal Reserve System
should be willing and agree to purchase a sufficient number of securities so that the issue can be sold?
Secretary SNYDER. I think that is a matter that will have to be carefully weighed.
Senator DOUGLAS . Who is to determine the interest rate ?
Secretary SNYDER. Well, that matter is always discussed very carefully, sir.
Senator DOUGLAS . Who is to make the final decision on it ?
Secretary SNYDER. There is only one place that it can finally be
made by law, and that is in the Treasury Department.
Senator DOUGLAS . 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 SNYDER. I think we can work out cooperation.
Senator DOUGLAS. Cooperation is a beautiful word, but it is like an
overcoat, it covers quite a range of reality.
Secretary SNYDER. It has to do that, sir. In these days we have to
face realities as well as theories.
Senator DOUGLAS. Mr. Secretary, when the Federal Reserve Open
Market Committee buys Federal securities , what happens ? How does
it pay for these Government securities ?
Secretary SNYDER. Well, of course, it pays for it out of the funds
that it creates.
Senator DOUGLAS. You mean it pays for them by check ?
Secretary SNYDER. I beg pardon ?
Senator DOUGLAS. You mean it pays for them by check ?
Secretary SNYDER. Or by giving credits, which is the same thing.
Senator DOUGLAS . When it pays for them by check, these checks go
into the hands of the banks ?
Secretary SNYDER. It goes to the credit of the bank ; yes, sir.
Senator DOUGLAS . And the banks do what with the checks ?

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Secretary SNYDER. You are just talking about the mechanics of it,
are you ?
Senator DOUGLAS . That is right.
Secretary SNYDER. When the Federal Reserve buys securities from
the banks, why, it is
Senator DOUGLAS . Let us take the situation when Federal Reserve
buys from the banks or private security dealers.
Secretary SNYDER. When it buys from a bank, of course, it will issue
a check or give it direct credit on the books of one of the Federal Reserve banks. In either event that increases the deposit of the seller of
the securities.
Senator DOUGLAS . And of the member bank, is that not true ?
Secretary SNYDER. Well 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
from the private security dealers, they are deposited by the banks, are
they not, in their accounts with the Federal Reserve ?
Secretary SNYDER. Yes ; the deposits with the Federal Reserve
banks are member-bank reserves.
Senator DOUGLAS . I understand. They, therefore, increase the deposits which the member banks have with the Federal Reserve ; is that
not true ?
Secretary SNYDER. Yes.
Senator DOUGLAS. That is right.
And 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 in 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. In general, it is increased , of course.
Senator DOUGLAS. And approximately in what ratio ?
Secretary SNYDER. I do not know just what that ratio isSenator DOUGLAS. It is approximately 6 to 1 , at least theoretically.
Secretary SNYDER. Generally, it is considered somewhere around
5 to 1. What it 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 in the smaller cities, 20 percent
is the next group of cities, and 24 in the largest citiesSecretary 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 in the Federal Reserve
System increases their lending capacity in a sixfold ratio to that of
their increase in reserves is that not true ?
Secretary SNYDER. Something in 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 if
they did.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

19

Senator DOUGLAS. That is right. Therefore, they will want to lend,
assuming the risks are sound, up to the limit of their lending capacity,
is that not true ?
Secretary SNYDER. They, generally speaking, do that ; 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 will probably
be accompanied by a parallel increase in bank loans, in a ratio up to
5 or 6 times that of the increasing reserves, is that not true ?
Secretary SNYDER. It sometimes works out that way.
Senator DOUGLAS. If we have a period of comparatively full employment, such as we have now with unemployment at roughly 3
percent, and unemployment chiefly in localized areas such as Detroit,
New York, and certain other regions, will this increase in loans cause
substantially more goods to be produced ? Will it put idle labor to
work with idle resources producing commodities which otherwise
would not be produced ?
Secretary SNYDER. Would an increase in bank credit accomplish
that ?
Senator DOUGLAS . Yes.
Secretary SNYDER. Well , it might aid in it ; yes.
Senator DOUGLAS. I mean if you have comparatively full employment, in which virtually everyone has a job. Do you think you would
effect any substantial reduction in 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 full employment and full 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 . My question was whether
you thought there would be any significant increase in physical production because of a further expansion of bank loans when you have
substantially full employment.
Secretary SNYDER. Yes ; that is what I was addressing myself to.
Senator DOUGLAS. Do you think there would be any significant
increase in physical production ?
Secretary SNYDER. I think that it 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 it is a question of supplying credit.
Senator DOUGLAS. With unemployment down to 3.3 percent, do you
think you can drive it down much further than that by an expansion
in bank loans ?

20

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Secretary SNYDER. The question that we are really faced with,
though, right now, Senator-I am willing to answer all your theoretical questions .
Senator DOUGLAS. These are not theoretical questions, Mr. Secretary.
Secretary SNYDER. Well, it turns out that way from a practical
standpoint.
Senator DOUGLAS . These are extremely broad and important
questions.
Secretary SNYDER. It turns out to be a theory against practice, because if in 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 . Mr. Secretary, I am not proposing to shut off
bank credit. I am merely saying if the Federal Reserve is asked to
buy large quantities of Government securities in the open market, does
it not create added bank reserves in the Federal Reserve System, and
the answer to that has been "Yes" ; isn't that correct ?
Secretary SNYDER. That is correct.
Senator DOUGLAS . The next question was, with added bank reserves
in the Federal Reserve System, does not this lead, too, to increased
bank loans, and the answer to that was "Yes."
The third question was do these increased bank loans in a period
of comparatively full employment lead to an increase in production
or do they lead to an increase in 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, will they not lead to an
increase in 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. Mr. Secretary, is it not true that the expansion
of bank loans in a period of comparatively full employment will furnish the economy-public and private-with more monetary purchasing power, which will 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 will
furnish to private persons and to some degree the Government, added
monetary purchasing power which they will use to bid for goods and
services but virtually all the labor is employed so that in effect, you
will have more purchasing power to buy the existing stock of goods
and services. Will not that inevitably force prices up ?
Secretary SNYDER. That is correct.
Senator DOUGLAS . Well, that is inflation, is it not ?
Secretary SNYDER. That is a definition of it.
Senator DOUGLAS . That is right.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

21

Here is the point : In 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.
Now, 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 in 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 in the interest rate will appreciably decrease the private demand for capital.
What I am asking is : Should it not be a function of Government to
prevent the supply of bank credit from expanding more rapidly than
the quantity of physical production , because if 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 in
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. And thatSenator 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, in 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 in the form of an increase in
prices in a period of full employment ?
Secretary SNYDER. Well , in order to prevent it, we had to put controls in, because unless you control the production in nondefense
areas then you are going to have created a situation demanding additional credit. But if 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 nondefense programs, we could hold total credit down to a
certain level.
Senator DOUGLAS . Mr. Secretary, if you force the Federal Reserve
System to purchase additional large quantities of Government bonds,
thus expanding bank reserves, thus expanding credit, the task of trying
to prevent prices from increasing, after all this is done, it will be just
as futile as when I fill this glass of water and keep pouring it in, and

22

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

then try to mop up the overflow with a pocket handkerchief. Why
not get at the source and try 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 . If 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. How 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 in 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 if anybody has
more glasses of water, I will demonstrate again.
Secretary SNYDER. We will accept the
Senator DOUGLAS . Just pouring in credit, pouring in more credit
and then to say put in direct controlsSecretary SNYDER. Senator, we will accept the demonstration ; you
are spoiling one of your reports there.
Senator DOUGLAS. It is just utterly foolish . Why 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 trying
to force the Federal Reserve System to pour credit into the banking
system ; where the damage is far greater by pouring the credit than
in pouring the water.
Secretary SNYDER. There is no question about that, Senator ; and it
is a problem that we have to face very seriously ; you know that . I
am no more an inflationist than you are.
Senator DOUGLAS . You 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 it 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 with the
Federal Reserve in permitting interest rates to rise in the shortterm securities market, because we felt that was the proper thing to
do.
For a further 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 part 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
it pretty clearly that if 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 full

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

23

employment such as we have now, with only 3.3 percent unemployed,
is to inflate the money supply, and drive up prices. This in turn,
increases the cost of Government services, eats into the income of
those with fixed incomes and creates all the havoc of inflation . Is that
not a rather poor policy ?
Secretary SNYDER. Well , let us take a look at the whole picture.
Since the end of World War II financing, actually the bank-owned
public debt has declined by over thirty billions of dollars. The point
is we have not been
Senator DOUGLAS . 1945 and 1946-that period was a very fortunate
year, because the high war tax rates were in effect, and military expenditures had tapered off, and if we were to get into a discussion of
budgetary 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 SNYDER. I am not trying to get into budgetary policy ;
I am just trying to point out, though, that it is not a matter of continually forcing the Federal Reserve to buy over the long run.
Senator DOUGLAS. I helped conduct hearings parallel to these 21/2
years ago, and the testimony was perfectly clear, supported by sufficient documents that were introduced, to indicate that the Treasury
has generally insisted in the past that the Federal Reserve System
purchase Government bonds in order to support the market, and did
so until the famous accord of April , agreed upon in March , but dated ,
I believe, early in April 1951 .
Now, some of us are a little fearful that this accord may be discontinued or if cooperation is obtained that it 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, Mr. Secretary.
Secretary SNYDER. And the Treasury has a right to be hopeful—
Senator DOUGLAS . You mean hopeful that there will be inflation ?
Secretary SNYDER. That we will have accord. We do not have quite
as much suspicion about an accord as you do.
Senator DOUGLAS . And that the Federal Reserve will purchase unlimited supplies of Government bonds ?
Secretary SNYDER. No , that we will have cooperation and the Fed.
eral Reserve and the Treasury in the fashionSenator DOUGLAS . Does that accord , in your mind, carry with it the
idea that there will be large purchases by the Federal Reserve ?
Secretary SNYDER. It carries with it 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 DOUGLAS . 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 in the hope that you have a happy meeting.
Secretary SNYDER. I hope you will share with me the hope that
you will do that. [ Laughter.]
Senator DOUGLAS. Are you worried about inflation ?
Secretary SNYDER. Yes, sir ; I have been continually.
Senator DOUGLAS. Yet the purchase of large quantities of bonds
by the Federal Reserve System leads to inflation, does it not ?
Secretary SNYDER. It contributes in a degree.

24

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

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. You 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 in conflict ?
Secretary SNYDER. At times I think that you will find that it might
be.
Senator DOUGLAS. In a nonwar period ?
Secretary SNYDER. I did not say that. That is why I pointed out.
in times such as we are faced with now———
Senator DOUGLAS. During a nonwar period, do you think the management of the debt is more important than the maintenance of a stable
price level ?
Secretary SNYDER. I think that was the type of problem faced by
the Employment Act of 1946.
Senator DOUGLAS . The Employment Act does not solve that
problem.
Secretary SNYDER. I know it does not solve it. It 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. And the way the Treasury solved it is to look the
issue squarely in the face and say, "We won't solve it " ?
Secretary SNYDER. I will not project how we are going to handle
all these issues in the future. I certainly could not, Senator, not in
open session, unfortunately.
Senator DOUGLAS . Then, since I am foreclosed from discussing the
future, is it possible for me to discuss the past ?
Secretary SNYDER. That is right.
Senator DOUGLAS. Did not the purchase of securities, Government
securities, by the Federal Reserve System after Korea, give rise to an
increase in (a) in the reserves of member banks in the Federal Reserve System, ( b ) increased loans by the member banks to private industry and individuals and (c) an increase in the price level ?
Secretary SNYDER. I think we cover that in answer 17 of the questionnaire . I will be glad to prepare anotherSenator DOUGLAS . Would you reply to it in hearings ?
Secretary SNYDER. I would be glad to read that into the hearing,
yes.
Senator DOUGLAS . Answer 17 is quite an answer. It extends over
some pages .
Secretary SNYDER. Yes, sir.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

25

Senator DOUGLAS. I would like to ask you very briefly, did not the
purchase of Government securities by the Federal Reserve System
after Korea result in an increase in bank reserves in the Federal Reserve System ?
Secretary SNYDER. I will be glad to read this into the record.
Senator DOUGLAS . Mr. Chairman , I suggest that this is not an appropriate answer on the part of the Secretary.
Secretary SNYDER. 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 in the management of the debt, except
in those cases in which the issuance of securities is subject to the
approval of the President. I must be extremely careful of everything
I say
Senator DOUGLAS . I am asking you about the past.
Secretary SNYDER. Yes, sir ; I want to give you exactly what happened in the past. I don't want to rely on memory.
Senator DOUGLAS . May I say for the record , the answer to question
17 began on page 50, and it concludes on page 74. Is it the intention
of the Secretary to read 24 pages into the record, each page of which
consists of approximately a thousand words ?
Secretary SNYDER . Well, I will add this sentence, substitute this for
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 in November
1949, making bonds readily available as prices were marked down.
From November 1949, to June 21 , 1950 , the Federal Reserve holdings.
of bonds declined approximately $1,900,000,000.
Senator DOUGLAS. Holdings of the Federal Reserve declined ?
Secretary SNYDER. Yes , sir.
Senator DOUGLAS . From June 1950 ?
Secretary SNYDER. From November 1949 , to June 21 , 1950 .
Senator DOUGLAS . Oh, well I am speaking of the period immediately
after Korea , namely, from July 1, 1950 , on .
Secretary SNYDER. Oh ,
Senator DOUGLAS. Is it not true that after Korea the holdings of the
Federal Reserve System of Government bonds increased from 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 in the report of the
Federal Reserve Bulletin for May 1951, page 515 , and in the same
document, page 527 , the figures on all bank loans are given.
These loans increased from 52 billions on June 30, 1950, to 62 billions
on February 28 , 1951 , and 63 billions on March 28, or an increase in
that time of 11 billions. That is, during the 8-month period when
there was an increase of $4 billion in securities held by the Federal
Reserve System, there was an increase of $ 11 billion or roughly 21
percent in bank loans. During the same period we also had an increase
of 16.6 percent in wholesale prices.
Now was not the increase in bank loans one of the reasons which
permitted the increase in wholesale prices to take place ?
Secretary SNYDER. It could have been one of the many reasons.

26

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Senator DOUGLAS . Well, was it not an important reason ; in fact,
the important reason ?
Secretary SNYDER. Well , I would not say it 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 in relationship to
goods, the price level rises.
Secretary SNYDER. There was a general rushing in 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. It 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 in the business world that had no effectSenator 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. Is it not interesting that you have an increase
in the quantity of bank credit at about the same ratio as the increase
in the price level ? Incidentally you will find that the increase in
physical production and in velocity roughly balanced each other at
about 8 or 9 percent apiece. You can therefore throw those out.
It is the increase in the quantity of money and credit that primarily
caused the increase in prices.
Secretary SNYDER. It was, of course, recognized that efforts must
be made to curtail credit expansion.
Senator DOUGLAS. But 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
in 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 in that
period the Reserve purchased roughly $4 billion net of Government
securities, building up member bank reserves. These increased member bank reserves in turn permitted member banks to increase loans,
which they did in the total of $10 billion, that is up to March 1 , 1951 .
This would be an increase in the quantity of credit of 19 percent with
prices increasing by about 17 percent during the same period . And
when you increase the quantity of money in relationship to goods, you
increase the price level.
Secretary SNYDER. Well , of course, Senator, it is interesting to
note that since the accordSenator DOUGLAS . Well, since the accord, quite right.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

27

Secretary SNYDER. But loans have gone up just the same since the
accord- credit has not been cut off-and prices have leveled off. That
is the point I was making.
The statistics which support this statement are as follows :
Federal Reserve holdings of Government securities went up $1.6 billion between February 28 and December 26, 1951, and commercial bank loans went up
$4.8 billion. But wholesale prices went down during this period-over 3 percent
as measured by the Department of Labor's all-commodity wholesale prices index
(900 commodities ) and 15 percent for the 28 commodities included in the Department of Labor's basic commodity index. Wholesale prices were, in fact,
beginning to show a tendency to level off at the time the accord was reached.
The following tables give the figures in detail :
TABLE 1. Federal Reserve holdings of Government securities and commercial
bank loans
[In billions of dollars]
Feb. 28, 1951 | Dec. 26, 1951

21.9
53.5

Federal Reserve holdings ...
Loans of all commercial banks ..

23.5
58.3

Increase
1.6
4.8

TABLE 2.-Department of Labor index of all commodity wholesale prices
[1926= 100]
Month
Week ended180. 1
1951- Jan . 2_.
176. 8 1951 - January.
178. 1
Jan. 9.
183. 6
February
178. 7
Jan. 16___.
March_
184. 0
180. 0
Jan. 23.
183. 6
April
Jan. 30
180. 9
182.9
May.
182. 3
June_
Feb. 6
181. 7
Feb. 13 .
183. 4
179. 4
July
183. 3
Feb. 20__.
178. 0
August .
183. 0
177. 6
Feb. 27
September.
Mar. 6__
183. 5
178. 1
October
November.
Mar. 13...
183. 4
178. 3
December .
183.9
177. 8
Mar. 20___ .
183.9
Mar. 27.
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 commodities

[August 1939-100]
Week ended1951-Jan. 2____
Jan. 9 .
Jan. 16
Jan. 23
Jan. 30.
Feb. 6Feb. 13 .
Feb. 20 .
Feb. 27.
Mar. 6 .
Mar. 13 ...
Mar. 20
Mar. 27 .

97308-52-3

End ofmonth
370. 4 | 1951—Jan. 31___.
Feb. 28_
381. 7
Mar. 30
385.5
389.5
Apr. 30
388.7
May 31
388.9
June 29
389.7
July 31.
389. 2
Aug. 31.
387.9
Sept. 28 .
385. 7
Oct. 31
379. 6
Nov. 30
378. 4
Dec. 28
378. 4

388. 6
386.9
378.9
372. 0
359. 7
342.9
326.9
323. 2
328.9
326.9
327.6
327. 3

28

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

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. But the fact that the Fed. was not buying Government bonds did not stopSenator DOUGLAS. But the past purchases, particularly in the winter,
gave the banks reserves which they did not immediately use but which
they could utilize in 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 that follows shows excess reserves of member banks weekly for the
year following the outbreak of hostilities in Korea. The figures fluctuated from
week to week, but there was no significant upward trend as a result of the
expansion of the Federal Reserve portfolio during the period.

Member bank excess reserves

1950
June 28.
July 5_____ .
July 12
.
July 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___

[ In millions of dollars ]
Excess
Reserves
1951
526 Jan. 3 .
791 Jan. 10 ‒‒‒‒‒
904 Jan. 17____.
630 Jan. 24.
830 Jan. 31 .
842 Feb. 7-831 Feb. 14____.
685 Feb. 21.
756 Feb. 28518 Mar. 7 ---864 Mar. 14____.
931 Mar. 21.
353 Mar. 28.
862 Apr. 4
778 Apr. 11.
960 Apr. 18____.
1, 250 Apr. 25__.
687 May 2
727 May 9 .
719 May 16.
1,010 May 23538 May 30 .
679 June 6_.
949 June 13.
1, 100 June 20
866 June 27
759

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 in credit
between July 1950 and April 1951 , but after April 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 in question 17 of the questionnaire- page 69 of
volume I.
Senator DOUGLAS . It was the chief contributor .
Secretary SNYDER. I doubt it.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

29

Senator DOUGLAS. In 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 . Mr. 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
to 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 it was the purchase of
Government bonds during this period which was a primary factor
that led to inflation, or that it was the main cause ?
Secretary SNYDER. I don't consider it the main cause.
Senator DOUGLAS. What would be the main cause then if this is not ?
Secretary SNYDER. I think the general attitude, the scare buying.
Senator DOUGLAS. But the scare buying was financed by credit .
Secretary SNYDER. But not entirely by credit created this way, not
by a long shot.
Senator DOUGLAS . But partially by this.
Secretary SNYDER. Well, partially, I am willing to admit partially,
but it was not the important cause.
This matter was discussed in the answer to question 17 of the questionnaire
submitted to the Secretary of the Treasury by the subcommittee, as follows :
" The primary cause of the inflationary situation, throughout the entire postwar period, was an unprecedented demand for goods by business and consumers
generally. Before Korea, individuals bought goods to fulfill the stored-up demands which had resulted from the shortages of World War II ; and industry
replaced and expanded plant and equipment in order to meet civilian peacetime
needs. After Korea, individuals and businesses, remembering the shortages of
World War II, bought goods in anticipation of shortages in the defense period ;
and requirements for materials and goods were also stepped up sharply in
order to meet the expanded military needs of the period. Some of these purchases
were financed by an expansion of bank credit--but not all 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. In other words, it 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 with them
as it is.
Senator DOUGLAS . I have some trouble, too.
Secretary SNYDER. It 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 in order to maintain the price of
the bonds the Federal Reserve should have purchased ?

30

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Secretary SNYDER. No, I am just asking you how would you have
prevented it.
Senator DOUGLAS. I am asking you, Mr. Secretary .
Secretary SNYDER. You seem to be bringing up the point. I said I
don't think it caused it, 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 DOUGLAS . Well, when the Federal Reserve ceased purchasing unlimited quantity of bonds , I believe you and others said that this
policy would occasion a great fall in the price of the bonds.
Secretary SNYDER. No, sir, I don't think you will find I ever made
such a statement.
Senator DOUGLAS. You were fearful of it, were you not ?
Secretary SNYDER. I don't think you will 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 DOUGLAS . What is all the shooting about then?
Secretary SNYDER. Well, I don't know.
Senator DOUGLAS. Well , I don't know either at this point.
Secretary SNYDER. You are holding the guns, I am not.
Senator DOUGLAS. If you didn't think there was any danger of the
price of bonds falling disastrously, then why should the Federal Reserve System be compelled to purchase them ?
Secretary SNYDER. I would be very interested in trying 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, if you did not make such a statement, certain other highly placed men in the Government did make it.
Secretary SNYDER. Of course, I don't control the voice of the Government.
Senator DOUGLAS . Well, then you think that it is not necessary for
the Federal Reserve Board to purchase the bonds in order to maintain
the priceSecretary SNYDER. I don't think I ever made that statement, either.
Senator DOUGLAS. Then what have you said, or has this been an
exercise in trying to conceal your meaning from congressional committees ?
Secretary SNYDER. No, it certainly has not been, but there has been
such free conversation about what I have or haven't said, I thinkSenator DOUGLAS. Do you think it necessary for the Federal Reserve Board during this 8-month period following Korea to have purchased large quantities of Government bonds in order to maintain
their price ?
Secretary SNYDER. The Federal Reserve open market committee
had to meet their responsibilities in 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 SNYDER. I think the operation was necessary.
Senator DOUGLAS . You believe that it was necessary?
Secretary SNYDER. Yes , sir.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

31

Senator DOUGLAS . Even though it occasioned this inflation ?
Secretary SNYDER. I did not say it occasioned the inflation . I again
want to be sure that I did not admit that, sir. It 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 it had on inflation according to you
was not as bad as the beneficial effect of maintaining the price of Government bonds.
Secretary SNYDER. 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 productivity of the country, the degree of financial soundness of the country,
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 World
War I. We have got to consider that.
Senator DOUGLAS . I believe we have heard of that.
Secretary SNYDER. I think we have heard it, too . I certainly have.
Senator DOUGLAS. Mr. Secretary, are the bonds that you issue now
the same as were issued during the first world war ?
Secretary SNYDER. No , they have all been liquidated .
Senator DOUGLAS . Now, Mr. SecretarySecretary SNYDER. You asked a question. I am going to have to
reply.
Senator DOUGLAS . You reply as the State Department commonly replies. Now, Mr. Secretary, what about the differences in the types
of savings bonds which are issued now- Series E, F, and G as compared to then ? Are those redeemable ?
Secretary SNYDER. Yes, they are redeemable.
Senator DOUGLAS . Can be cashed in at any time ?
Secretary SNYDER. Yes, sir, at any time after they have been held a
stated minimum period.
Senator DOUGLAS . At any time ?
Secretary SNYDER. That is correct.
Senator DOUGLAS. And at what price ?
Secretary SNYDER. There may be some notice period.
Senator DOUGLAS. At what price ?
Secretary SNYDER. At a stated price.
Senator DOUGLAS. At par, isn't that true ?
Secretary SNYDER. At a stated price on the back of the bond.
Senator DOUGLAS . At par.
Secretary SNYDER. Well, that is not exactly correct.
Senator DOUGLAS . Is it not 99 44/100 percent correct ?
Secretary SNYDER. I would have to look on the back of the bond and
see how old it was and so on.
Senator DOUGLAS . As a general rule are they redeemable at par or
are they not redeemable at par ?
Secretary SNYDER. At maturity they are redeemable at par.
Senator DOUGLAS . Were the bonds in World War I redeemable at
par?
Secretary SNYDER. At maturity they were.

32

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Senator DOUGLAS. Were they redeemable by the Government at
par?
Secretary SNYDER. At maturity, yes.
Senator DOUGLAS. What about the terms of maturity ? What about
the difference in time ?
Secretary SNYDER. We had not developed the savings-bond plan in
World War I.
Senator DOUGLAS . Precisely so. In other words, the length of maturity was a long, long time.
Secretary SNYDER. But 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 fall to 82. There is no prospect that E, F, and G bonds would
fall 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. To the whole Government financing picture
when we were talking about where bond prices might go .
Senator DOUGLAS. What were the other elements in 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. It 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 Reserve stopped buying unlimited amounts of securities in April, 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 . Did anything catastropic happen when the Reserve stopped buying Government bonds ?
Secretary SNYDER. No ; it has worked out very well.
Senator DOUGLAS. You hope it will continue, do you not ?
Secretary SNYDER. I hope it continues to work well.
Senator DOUGLAS. You hope that the Federal Reserve System will
not be committed to purchase bonds in unlimited quantities in order
to support the Government bond market ?
Secretary SNYDER. I hope that conditions will permit that ; yes, sir.
Senator DOUGLAS . That is a consummation devoutly to be desired .
Now, I am more interested in the future than in 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 faith with you. That is the implication
which I drew from your statement.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

33

First, on page 72, if you will consult your reply, in speaking of the
summer of 1950, I read :
The terms of the issue were approved by the President ; and the Chairman of the
Board of Governors assured the Treasury of the full cooperation of the System
in the refunding operation.
On the first trading day after the announcement of the new issue was made,
the Federal Reserve permitted the market to go off sharply, notwithstanding the
fact that 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 full
cooperation.
That is equivalent , I think, to a charge ofSecretary SNYDER. I will just ask the staff to read into the record , if I
may, the report. I am not trying to change any figures.
Representative PATMAN. We will identify the person who is doing
the reading, Mr. Secretary.
Secretary SNYDER. Assistant Secretary Overby.
Mr. OVERBY. Mr. Chairman , may we introduce into the record this
statement : Hourly quotations on United States Government securities
and World Bank bonds-we are not talking about World Bank bonds
here - for November 24, 1950 .
Senator DOUGLAS. Just a minute ; are we speaking of the same thing ?
Mr. OVERBY. That was the first trading day after the announcement. Do you wish me to read this, Mr. Chairman ?
Senator DOUGLAS . Yes ; I would appreciate it .
Representative PATMAN. Go right ahead.
Mr. OVERBY. There are quite a few issues, sir.
Secretary SNYDER. Show it to the Senator so he can see the nature
of it.
Representative PATMAN . Suppose you let Senator Douglas see it.
(The document above referred to is as follows :)

:
bonds
Treasury
2%950
1112
0.25
%
1951-54%
234
100.29
2%
1951-53
S2eptember
100.
12
13951-55
%
16
101.
.%951-53
1214
101.06
12%
2951-55
15
100.
2.%
212
1952-54
101.05
June
22%
1952-54
20
100.
2%952-55
1214
100.31
December
22%
1952-54
100.25
1953-552%
102.05
.%954-56
1214
103.25
.%955-60
1278
107.02
2_
122
%956-58
103.25
2%956-59
1214
102.26
1956-59
%
.234
108.17
.%958-63
1234
110.
15
1959-622
R.
24
June
%
23
100.
24
D.ecember
.%
2R
1959-62
100.
22
1234
%960-65__
113.
01
R.
1212
%962-672
102.27
R.
9212
%163-682
04
102.
212
J.une
2R%
1964-69
101.
20
D.ecember
%
1964-692
.22
R
14
101.
R22
.
1965-70
2%
101.
10
R.
212
1966-712
%
101.09
2R%
212
J.une
1967-72
26
100.
212
September
2%
1967-72
104.
05
212
D.ecember
.%
2R
1967-72
100.26
Certificates
indebtedness
:of
2.%/1/51
1118
:
notes
Treasury
s/1/51
%
7114
2.B
eries
1.45
%
s/1/51
%
7114
2.C
eries
%
1.45
14
s/1/51
7%
2D
eries
%
1.45
s/1/51
%
eries
8114
2.E
%
1.46
%0/1/51
114
eries
1sA
%
1.48
2
sF
%eries
1114
0/15/51 2
%
1.49
114
11/1/51
2.%
1.49
%
32138
%/15/54
99.07
2%
3/15/55
112
99.15
Bid
Treasury
:
bills
Ask
2
1.37
-1.18
%
11/30/50
%1.18
-1.37
2
12/7/50
%1.20
-1.37
2
12/18/50

+)( 1

99.14

1.10
100.03
%

103.24
107.01
103.22
102.22
108.16
14
110.
100.21
100.20
113.00
102.26
102.03
101.19
101.13
101.09
101.08
104.00

1
-)(99.06

)(-5

1)
)-1
∙1)

)-1
1)
)
-3
4)
1)
-2
)
2)

100.
19
(4
6+
)100.30 )( 1

101.07

100.04

close
Previous
10

)
-1

100.
(124
)6+
)(+1

99.04
99.10

100.02

)( 5
-

-1
)
-1
)
)
-1
)
-2
)
-5
-6
)
)(1
)
-1
)(2
)(-2
)
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)
-1
101.18 -2
)
)
-1
101.
08
)
-2
101.07 -2
)
)(-8
103.
29

19
100.
100.24
102.04
107.00
103.20
20
102.

100.03

10:30

)99.03
(3

18
100.
18
100.
102.23
102.00
16
101.
101.11
101.06
101.05
25
100.
103.26
100.25
100.02

19
103.
19
102.

100.02

11

)4
5)

)
-4
)(-4
)(-3
)(-4
)
-4
)(-11
)(-1

)-7
)
-1
)(-5
)(-4

)( 1
)(-1
-1
)
-1
,
)2

)(+1

100.12
+
)( 64

100.
24
103.22
24
100.
100.01

101.10

17
100.
112.30

108.
14
110.
12

100.29
102.03

100.02

12

)-4
)
-5

1
)101.04
(100.
364
(+
)18
(-2)
(-364
23
)100.
)2
1)
2)
6)
)
-7
)
-3
)
-3
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-3
4)
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-4
4)
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-4
)
-4
)
-2
)
15
)(-2

) 64
(+
)+( 1

99.11

)(+1
()-1
100.18 )(-2
)(2
)(-364
)(2
)(-1
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-6
)
7)
12
108.
)
-5
110.10 5)
100.17 6)
100.
16
6)
112.27
102.
21
101.31 5)
101.15 5)
)
-4
101.05 -5
)
)101.04 5)
-4
)
-2
)(-15
(-2)
100.01

100.02

1

Hourly
¹Nov.
bonds
Bank
World
and
securities
Government
S.
U.
on
quotations
,1
24
950

-4
)99.04
)99.12
-4

100.01

103.25

100.18
100.
17
23
102.
102.00
101.
16
101.
11
101.06

103.21
102.
21

24
100.

100.02
12
1+
)3(00.
64
101.06

2:15

)(-1
3) 64
(+
18
100.
(-2)
)(-1
-2
)
)
-1
)
-2
)
-4
)
-5
)
-5
)
-5
)
-5
-5
)
)
-6
4)
)
-4
)
-4
)
-3
)
-4
)
-5
)
-2
)-( 12

)99.05
(2
3
)99.12
(-

100.
02
100..28
100.
12
101.16
101.06
15
100.
101.04
100.29
24
100.
102.03
103.23
106.28
103.21
102.22
108.
12
110.
10
100.18
100.
17
112.
27
102.24
102.
01
101.17
11
101.
101.07
101.05
24
100.
103.25
24
100.
100.01

)(2
(-3)

)3
(-3
)
3)
3)
4)
)
12
(-2)

)(-1
(-64
+
18
3)100.
-2)
)
-1
)2

)(-1

c3:15
)(lose

34
MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

ÎÎ

.2Taxable
bonds
.3Unchanged
bonds
R.Restricted

2
12/21/50
2
0
12/28/5
2 51
1/4/
21/11/51
2
1/18/51
2
1/25/51
2 1
2/1/5
22/8/51
2 51
2/15/
2 /51
2/23
7/15/72
:3%
2_
World
bond
Bank
:land
bonds
bank
Federal
21/52%3-55
214
2.1/5%5-57
0
134

.of
Secretary
Assistant
Fiscal
the
OSource
: ffice

-1.22
%
1.37
-1.24
%
1.37
-1.26
1.38
%
%
-1.28
1.38
%1.30
-1.38
1.38
-1.30
%
-1.39
%1.319
%1.32
-1.39
-1.32
1.39
%
1.39
-1.35
%
14
102.
100.16
14
98.

.day
on
previous
close
from
changes
net
represent
figures
minus

and
lus
P.of
oint
psrepresent
athe
econds
points
decimal
after
shown
figures
nd
aprices
,are
quotations
other
ll
.Asigns
yields
represent
percent
with
Q-thirty
1 uotations

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

35

36

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Senator DOUGLAS. You are trying to establish the fact that the
market fell sharply, I take it.
Mr. OVERBY. The market declined on that day, sir.
Senator DOUGLAS . Which would you take as the best security-21
2's ?
/
Mr. OVERBY. It was a 5-year offering, if I remember the circumstances.
Senator DOUGLAS. Would the 22's be all right ?
Mr. OVERBY. Yes, sir ; the 21
/
2's of 1956-58 give an indication of what
happened in the market generally. They were 103.25 at the close of
the preceding trading day.
Senator DOUGLAS. Suppose I take the 21/2'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 fall of four thirty- seconds, one-eighth of a point during the day.
Would you say that was catastrophic ?
Secretary SNYDER. I don't think I said it was catastrophic.
Senator DOUGLAS. In other words, that the Federal Reserve should
not have permitted the market to fall by one-eighth of a point ?
Mr. OVERBY. On a short-term issue, that is of some consequence .
Senator DOUGLAS. What you are saying in effect, therefore, since the
Federal Reserve System acted improperly in allowing a fall of oneeighth, they should not have allowed a fall at all. I think four- thirtyseconds is rather small.
Now did you have an agreement with 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. TICKTON. 103.25 .
Senator DOUGLAS. Did the Chairman of the Federal Reserve Board
pledge himself to purchase such a quantity as to maintain prices at
the interest rates charged ?
Secretary SNYDER. I stand on the statement in 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 SNYDER. I don't consider it dictation. There has never
been any evidence of the Treasury sinceSenator DOUGLAS. Did 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 SNYDER. Senator, you agreed with me that it would be a
very fine thing if we could continue the accord, and that is what I am
going to try to do. I will stand on this answer, and I am not going
to expand.
Senator DOUGLAS . You wrote the statement.
Secretary SNYDER. And I am going to stand on it .
Senator DOUGLAS. What you say is that the Federal Reserve broke
faith.
Secretary SNYDER. I won't expand on that question, sir. I think
it 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 in
January 1951. You say :
At this meeting the three of us-the President, the Chairman, and I-agreed
that market stability was desirable, and the Chairman again assured the President that he need not be concerned about the 2 -percent long-term rates on
Government securities.
Did 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 22 percent and so that the price of Government securities would be maintained ?
Secretary SNYDER. I will stand on the statement made in 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 will 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 2½ -percent long-term rate on Government securities . "
Senator DOUGLAS. Did you understand that to mean that he agreed
that the Federal Reserve System would purchase an unlimited quantity of bonds so as to maintain the price ?
Secretary SNYDER. I understood it to be just what it 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 it is the lack of this quality which I find unsatisfactory in your testimony throughout.
Secretary SNYDER. I have the responsibility of trying to continue to
manage the debt, and I am going to try to do that, sir. We are getting along fine with the Federal Reserve Board , and I want that to
continue .
Senator DOUGLAS. Are you getting along fine with an organization
which already you have accused twice of practicing bad faith ?
Secretary SNYDER. You are putting the interpretation in there.
Senator DOUGLAS . Let me go ahead and read this :
It was against this background that I made a speech on January 18, 1951 ,
before the New York Board of Trade, announcing this policy. The market
strengthened following this speech. Then some officials of the Federal Reserve
System began to differ publicly with the policy. This created further uncertainties in the Government security market. At about this time, also-on January 29 the Open Market Committee further reduced its buying price for Victory
loan 22's-which was the most significant of the long-term Treasury issuesand so forth .
Representative BOLLING. Would you yield there ?
Senator DOUGLAS . Yes, sir.

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Representative BOLLING. Mr. 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.
It would be my impression that your desire would now be to maintain the good relations that had been obtained by the accord ?
Secretary SNYDER. It certainly is my desire and my intent.
Representative BOLLING. And the purpose of the answer to these
questions was to relate the history as you saw it ?
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 asking questions on statements that the Secretary has made to the committee which, by implication , charge bad faith on the part of the Federal Resevre System.
Secretary SNYDER. I stated the facts. You are putting in the
implication.
Senator DOUGLAS . Bad faith, at any rate, previous to the accord.
Secretary SNYDER. I stated the facts. You are putting in the implication, sir.
Senator DOUGLAS . I want to know whether there was a definite
pledge by the Chairman of the Federal Reserve Board in both of
these cases to buy unlimited quantities of Government bonds in order
to maintain prices at the interest rates which you decided upon . That
is the issue.
If there was such a pledge, and if it was not later honored, then the
Chairman may have been acting in bad faith, but there was not
such accord, then I don't think these statements should be made.
Of course there is also always a question as to the degree to which
the Chairman can commit the Board itself. You raised this issue, Mr.
Secretary, and we are simply trying 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,
with the permission of the chairman .
Senator DOUGLAS. I ask for a ruling by the Chair.
Representative PATMAN. 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 in the open market in order to maintain
prices at the interest rates fixed by the Treasury on those securities.
Representative PATMAN. Obviously the session will last into the
afternoon. I would like for you to pass that over for the present and
continue your interrogation.
Senator DOUGLAS. The third question involves the point that is in
the third paragraph on page 73 :
About this time a series of conferences was held between the Treasury, the
Chairman of the Board of Governors, the chairmen of the two banking committees in Congress, and the chairman of the Joint Committee on the Economic
Report. It was generally agreed between the parties involved that there should
be no change in the existing situation in 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

eral Reserve, for a short period while I was in the hospital recuperating from
an eye operation.
Shortly after these meetings, however a change in the Federal Reserve attitude began to be apparent ; and the Chairman of the Board informed the Treasury
that, as of February 19, the Federal Reserve was no longer willing to maintain
the existing situation in 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 in the governmental bond market.
Secretary SNYDER. I have answered it in 17.
Senator DOUGLAS. Did the Chairman of the Federal Reserve Board
in the conferences which were held agree that the Reserve Board
would purchase an unlimited quantity of Government bonds in order
to maintain prices at the interest rates charged by the Treasury ?
Secretary SNYDER. I stand on the answer that isSenator DOUGLAS. That is a refusal to answer.
Secretary SNYDER. I have answered it in the question .
Senator DOUGLAS. No ; you haven't.
Secretary SNYDER. I am going to stand on the answer that is in the
question.
Senator DOUGLAS . I interpret that as a refusal to answer, as I interpret the reply to the other questions.
Now, Mr. 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. All of them.
Senator DOUGLAS . All of them would be Presidential appointees.
Of 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. It 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 in order to maintain prices at the interest
rates charged, and the Chairman of the Federal Reserve Board did
not agree with 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 final
determination.

40

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Now it seems to me it would be extremely valuable for 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 full understanding of the problems that are faced by each, and
that the decisions then would be made in the face of the responsibilities
of each.
Senator DOUGLAS . It might be an opportunity to twist the arm of
the Federal Reserve System, too, might it not?
Secretary SNYDER. Certainly the Treasury gets its arm twisted
enough, and I would be glad to pass it around a little.
Senator DOUGLAS. I do not want to have it understood that I am
necessarily opposing such a monetary council. But it has great danger
in the form now suggested.
Secretary SNYDER. I think honestly, Senator, it would be a very
good thing.
Senator DOUGLAS. But 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."
What do you mean by advisory authority ?
Secretary SNYDER. Well, that term is used, "advisory authority"
because that is the scope in which it would be used. Just offer advice
about the various segments of the economy.
Senator DOUGLAS. Well, then, why not strike the word " authority"
from 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. It was not intended that it should have. Its
only function would be advisory ; each agency would still have authority over its own operation.
Senator DOUGLAS. Suppose there is a clear conflict with the rest of
the Presidential appointees wanting 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 in his judgment that will mean inflation, or should he be
lacking in cooperation in order to preserve the solvency of the country ? 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. You mean that the Board would cooperate and
agree to do what the rest wanted them to do?
Secretary SNYDER. I did not say that, sir. I said they would have
to operate within 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 within the scope of the limits of their decisions.
You could make a decision one way or another many times, but if
you have certain facts, it may lead you to a sounder decision than if
you made it without all of those facts.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

41

Senator DOUGLAS . Is this an attempt to create at this juncture a
climate of opinion which will make it psychologically impossible for
the Chairman of the Reserve System to purchase unlimited quantitiesSecretary SNYDER. You are putting that thought in my mind. I
did not have it in there at the time I made this suggestion. I doubt
if I would use it if it did occur to me.
Representative PATMAN. 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 it not, Secretary Snyder ?
Secretary SNYDER. Well, there are advisory groups all over the
place in 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 helpful in sitting down and talking over the various problems. It gives
an opportunity in an informal fashion to discuss things rather than
have them brought up bilaterally or otherwise.
Senator DOUGLAS. That finishes my questions, Mr. 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 PATMAN. The question you have brought up , if it is
all right with you, the Chair will wait until this afternoon to make a
ruling upon .
Senator DOUGLAS . Certainly.
Representative PATMAN. Mr. Bolling ?
Representative BOLLING. Mr. Secretary, I would like to have you
keep in mind that I was not a member of the former committee considering similar subjects. Are there any substantial differences between Government bonds and other bonds ?
Secretary SNYDER. In what fashion ? Of course, one of them has
the full credit of the Government behind it and other bonds are limited
to the resources of the organization , the instrument issuing them.
Representative BOLLING. There is at least that one difference.
Secretary SNYDER. Well, that is a very big difference , of course.
Representative BOLLING. What, in your judgment, would be the
effect on the economy if there should be a substantial falling off of
Government bonds ?
Secretary SNYDER. That is a question I would like to answer in
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 in an open session-I cannot
measure what the effect might be.
Representative BOLLING. Mr. Chairman, there may be a number of
questions I will want to ask if not in executive session, then for the
committee to address a letter on further expansion of certain points.
Secretary SNYDER. I think, Mr. Chairman, you must bear in mind
that I do have that responsibility.

42

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Representative PATMAN. I assume the Secretary will be glad to
answer any questions written and sent to him by correspondence.
Secretary SNYDER. I do not want to withhold any information from
the committee, but I do have to restrain myself in answering questions
that in my judgment might have some effect on the general operation
of debt management, because it must be remembered I cannot possibly detach myself as an individual from 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 try
to do so .
Representative BOLLING. Mr. Chairman, I am very anxious to avoid
putting the Secretary in that position, and the other method will be
perfectly satisfactory to me. I would like to pursue this problem that
Senator Douglas raised. It may fall in the same category as my first
question, of the future.
I am entering into this hearing with a completely open mind, and
I am interested in the future , not particularly in the past. I would
like to make some assumptions so that this will be theoretical .
Let us assume that the Congress enacts legislation which will provide for a substantial deficit . I assume also there is only one way in
which the Treasury can raise the money to take care of that deficit.
It will have to borrow it from some source.
Secretary SNYDER. That is correct.
Representative BOLLING. 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 ?
Do you have any alternatives aside from those mentioned in the replies to your questionnaire in which you can borrow money without
having inflationary impact ? Is there any alternative except those of
support through Federal Reserve activity to the bond market
dropping off ?
Secretary SNYDER. Do you mean outside of congressional action ?
Representative BOLLING. Yes , sir.
Secretary SNYDER. Well, I think we have to carefully judge each
one of the instances on the basis of the facts when it comes to a refunding operation, or when it comes to an offering of new money
financing. I think we have got to measure it against the whole
economy at the time that that operation is undertaken, because it
changes from month to month . The last 6 months have seen a considerable change in the general situation in the economy.
Representative BOLLING. What I am trying to get at is what are
some of those factors you have to take into consideration aside from
those that have already been discussed.
Secretary SNYDER. 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 trying to attract savings.
We have got to give all of those considerations very careful study
in order to try 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 BOLLING. Then suppose you in your consideration
in this theoretical case discover that in your judgment a very substantial 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 you 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 BOLLING. In 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 SNYDER. You mean assisted by the Federal Reserve, you
mean in their orderly market operations ?
Representative BOLLING. Yes. That is all I wanted on that particular subject .
Mr. Secretary, you say in your answer to question 34 on page 118 ,
about a third of the way down the page :
Holdings of series E savings bonds amounted to 344 billion on December 31,
1951.
and I think somewhere else it 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 in
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 in
savings bonds is as high today as it 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 in the bonds today, in the E bonds, is over
$1 billion more than it 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

August..
December..
_do..
_do_
..do.
.__ do_.
.__do__
February .

29,455
29, 298
29, 570
30, 219
31, 152
31, 153
30, 656
30, 653

Accrued
discount
449
964
1,427
1,970
2, 614
3, 340
4, 072
4, 173

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 BOLLING. Mr. Secretary, I am curious as to your
opinion—and this again may fall into the other area-I am getting the
97308-52-4

44

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

impression from the origin of A bonds in 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 it would be
easy for people to have confidence and buy them. That that was
done because it was assumed that this class of borrowing was actually
deflationary rather than inflationary.
Secretary SNYDER. In 1941 when we were entering upon defense
financing prior to World War II, 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 it into defense and war production. It
had a dual purpose during the war of helping to finance the war
deficit, and also as a very material assistance in controlling inflationary trends.
Representative BOLLING. This is one method of financing a deficit
that is actually somewhat deflationary.
Secretary SNYDER. That is what ?
Representative BOLLING. Somewhat deflationary.
Secretary SNYDER. An anti-inflationary method, certainly.
Representative BOLLING . Mr. Secretary, I am curious for your
opinion, if you care to give it- if not in 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 in relation to interest, and
so on. I gather that it was intended to have a favorable position . I
wonder whether it now does have a favorable position.
Secretary SNYDER. You mean competitive position ?
Representative BOLLING. 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 it too competitive because we have got to have the support
of all investment groups in 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 in every fashionin its liquidity and its ease of purchase, its ease of liquidation and the
general confidence of the people in the instrument itself.
Representative BOLLING. 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 in the E bonds.
Representative BOLLING. I don't have the figures for E alone for
January and February.
Secretary SNYDER. In the F's and G's it did not hold true, but in
the E bonds, sales were up in 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 in the trend
there.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

45

The following table shows sales and redemptions of series E bonds in January
and February of 1951 and January and February of 1952 :
Series E bonds
[In millions of dollars]
Change

1951

1952
Amount Percent

Sales:
January..
February
Total...
Redemptions including accrued interest:
January
February
Total....

343
272
615

364
288

+21
+16

652

+37

+6.1
+5.9
+6.0

448
362

406
334

-42
-28

-9.4
-7.7

810

740

-70

-8.6

Representative BOLLING. Do you feel that the change in 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 SNYDER. That gets into the area that I would be glad to
discuss in executive session, as to what we might or might not do with
the savings bond. It 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 BOLLING. I would want to follow that up in another
fashion.
Representative PATMAN. Mr. Wolcott ?
Representative WOLCOTT. Should we continue this afternoon ?
Representative PATMAN. Would 2:30 be satisfactory, Mr. Secretary ?
Secretary SNYDER. Any time you say, Mr. Chairman .
Representative PATMAN. The committee will recess until 2:30 .
(Whereupon, at 12 : 15 p. m. , the subcommittee recessed to reconvene
at 2 : 30 p. m. of the same day. )

AFTERNOON SESSION
Representative PATMAN. The committee will come to order.
Mr. Wolcott, of Michigan , would you like to ask any questions ?
STATEMENT OF HON. JOHN W. SNYDER- Resumed
Representative WOLCOTT. Very simple ones.
Mr. Secretary, I think we all recognize deficit financing as a fundamental cause of inflation . Why is it?
Secretary SNYDER. I beg your pardon ?

46

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Representative WOLCOTT. Why does deficit financing cause inflation ?
Secretary SNYDER. Well, the fact is that it puts additional spending into the economy that is not compensated by drawing off a similar
sum in revenues and, therefore, we have an unbalanced budget, and
there is more poured into the economy than is withdrawn from it.
Representative WOLCOTT. Is it not also due to the fact that the debt
may be monetized ?
Secretary SNYDER. I beg your pardon ?
Representative WOLCOTT. Is it also due to the fact that the debt may
be monetized ?
Secretary SNYDER. There is also danger of monetization of the debt
in deficit financing when you have to resort to bank financing of the
new money needs.
Representative WOLCOTT. In 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
it advisable to continue inflation throughout the war as an easy means
of financing the war.
Now, you will recall that in the thirties, somewhere , we changed the
theory of the Federal Reserve Act in respect to the flexibility of currency when we tied the volume of currency to debt. It used to be that
the Federal Reserve would create currency as it was needed by business, and the needs of business were reflected largely by the commercial paper which was in the banks. Is not that substantially correct ?
Secretary SNYDER. I think that is correct ; yes , sir .
Representative WOLCOTT. Then, as a means of pumping some more
money in 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 of
policy that we must keep our debt and the value of our money wedded.
In your discussions with the Federal Reserve or with anyone else,
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 in gold cannot be monetized ?
Secretary SNYDER. I would like to prepare a reply to that one, Mr.
Congressman, please.
Representative WOLCOTT. Just by way of foundation for the reply,
it is not as simple as this, but we have about 28 billion of currency
now outstanding.
Secretary SNYDER. That is correct.
Representative WOLCOTT. Theoretically if we wanted to put a ceiling on the amount of currency which could be issued at, we will say,
30 billion, with 25 percent of gold and 75 percent of debt-you do not
have to answer it now, but this is just a background for your statement —could we provide that not more than a quarter of that or 7.5 billion in gold, and more than three quarters of it, or 2212 billion of
debt-that would put a ceiling of 30 billion theoretically on the amount
which could be issued ? It 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 in the thirties to cause inflation. We reduced the gold reserve behind Federal Reserve 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 in that respect since
then, do you know ?
Secretary SNYDER. May I study that question and prepare a reply ?
Representative WOLCOTT. I should like to be told that I was not
stating the truth, but there are those in the Congress who have been
so unkind as to say it was the studied policy of the administrationto create inflation, and that it is now the studied policy of the administration to maintain inflation . Otherwise it would recommend an
about-face in the things which we once did to create inflation, among
which 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 it 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 will include that in my comments on the first
two questions, Mr. Congressman.
(The material referred to is as follows :)
The questions Representative Wolcott asked related primarily to Federal Reserve functions . Chairman Martin 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
an answer has been prepared and I concur in it. I should like, therefore, to have
it inserted at this point in answer to the questions which Representative Wolcott
asked me.
"The Federal Reserve Act as amended in 1945 requires that each Federal Reserve bank hold reserves in gold certificates equal to 25 percent against its Federal Reserve notes in circulation and against its deposits. In the case of Federal
Reserve notes, the law also requires that each Reserve bank shall pledge with the
Federal Reserve agent of its district collateral equal to 100 percent of the amount
of such notes in circulation. Such collateral may consist of gold certificates ,
paper originating in commerce, agriculture, and industry- that is, so-called
eligible paper-or direct obligations of the United States Government.
"Prior to 1945, the required reserve percentages were 40 percent of gold certifi
cate reserves against Federal Reserve notes and 35 percent of gold certificates
or lawful money against deposits . The main reason for the lowering was that the
gold reserve ratio had fallen significantly during World War II as a result particularly of the very large expansion of Federal Reserve notes in circulation because of wartime demands for currency. This increased volume of money has
remained in 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 1932 and was periodically renewed, and the authority was made permanent in 1945. This provision was necessitated by the large-scale withdrawal of currency from bank
deposits in the early years of the depression, by the then reduced volume of
eligible private paper in Reserve bank portfolios, and by the desirability of Federal Reserve purchases of Government securities in order to prevent the development of tight money conditions during the depression.
"It 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 for notes is necessary under present conditions, since the
volume of commercial, agricultural, and industrial paper now held by these banks
would be inadequate for the purpose. Also, the provisions of law regarding the

48

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

reserve requirements of the Reserve banks are important in enabling flexibility
in monetary management to meet changing conditions.
"These legal provisions are not inflationary per se. Federal Reserve credit is
not created just because the basis for such creation is available. It is the duty
of the Federal Reserve System to see that Reserve bank credit is adjusted to
the needs of the economy. Changes in the volume of such credit outstanding
are now determined mainly by actions of the Federal Reserve System in accommodating the credit needs of consumers, commerce, agriculture, industry, and
State and local governments, as well as the Federal Government. Such actions
are taken only after a careful review of the economic and financial situation in
the country at the time and after a full consideration of their inflationary and
deflationary implications .
"An automatic check on the expansion of Federal Reserve bank credit, such
as would be imposed by an increase in the ratio of gold certificates required
against Federal Reserve notes and deposits would not be desirable. It was in
part to prevent arbitrary and mechanical limitations on the volume of bank
credit and money, resulting from too rigid a relationship between the credit and
money supply and gold, that the Federal Reserve System was initially established."
Representative WOLCOTT. You, perhaps , will recognize that this is
a fetish with me.
Secretary SNYDER. I beg your pardon ?
Representative WOLCOTT. You will, perhaps, recognize that this is
one of my fetishes .
Secretary SNYDER. I did not hear what you said.
Representative WOLCOTT. I say, you will realize that this is one of
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 WOLCOTT. You 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 lull at the present in inflationary
pressures, and you go on to say, of course, that it 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 in
not supporting the Government-bond market and increasing the rediscount rates to 134 from 112, and the issue by the Treasury of your
234 , 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
That took place in August.
taken place prior to the accord.
Representative WOLCOTT. I guess that is right.
Secretary SNYDER. Yes.
Well, there has been, of course, a leveling off of inflationary pressures in 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 in some evidence as a depressant ; the soft-goods area
has had a depressing experience.
I would say that we have been
experiencing a lull in 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 .
Of course, the production capacity of the Nation had a great deal
to do with it, too, in being able to rise to the demands and supply
much of the requirements, even under the increased volume of income.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

49

I think that we can sum it 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 carefully keep in 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 in the value of the dollar of 46.15 percent in 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 in
the purchasing value of the dollar had any particular effect. Up to
Korea savings bond purchases were well maintained . There was
some increase in redemptions along with increased withdrawals from
other types of savings in the heavy goods buying experience that we
had following Korea . It has tapered off in recent months, however.
Representative WOLCOTT. When you say it has tapered off, you
mean the
Secretary SNYDER. The redemptions.
Representative WOLCOTT. The redemptions ?
Secretary SNYDER. And sales .
Representative WOLCOTT. Since Korea ?
Secretary SNYDER. The relationship between sales and redemptions
has improved in 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. It 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 in
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 it 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 in 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. Mr. Chairman, may I ask the subcommittee, you
and the subcommittee, this privilege-that anything that has to do
with future actions in reference to securities of the United States Government-I be permitted to answer in writing for executive consideration ?
Representative WOLCOTT. That is perfectly agreeable to me .
Secretary SNYDER. Yes .
Representative PATMAN. That will be all right.
Secretary SNYDER. Thank you, sir.

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Representative WOLCOTT. We talk about these things so freely that
I guess we do not respect your position in 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, whyRepresentative PATMAN. That will be eminently satisfactory, Mr.
Secretary. I have some questions along that same line, but I will
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 will be glad to call attention to that answer. It 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 in 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 in a position to answer that.
Representative WOLCOTT. Last year when we brought it up it was
suggested that probably they would not have too much trouble in
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 in 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 it in writing. I say I would like to answer that one
in writing. Unfortunately, Mr. 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. Now, speaking for myself, and I will not
ask you for an answer to affirm my position, it seems to me that if we
are against inflation, having created inflation legislatively in the
1930's, the Congress could stop the inflation if it did an about-face
and restored the powers and authority and the standards and guides
that were in existence in legislation in the 1930's before we changed
them .
Secretary SNYDER. Well, I think we would have to measure it 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. Do you think that we have got to accept
inflation as a matter of permanent governmental policy ?

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

51

Secretary SNYDER. I certainly hope not. We had up until last June
an over-all balanced budget situation for 5 years, as you know-in fact,
receipts exceeded expenditures by nearly $8 billion in that period. Í
would be very hopeful that we can return to a balanced -budget situation as quickly as possible.
Representative WOLCOTT. Thank you , Mr. Secretary. I think that
is all I have, Mr. Chairman.
Representative PATMAN. Mr. Secretary, I would like to ask you a
few questions. I have two written out here that I think I will 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 it was principally a natural reaction from the post -Korean buying spree. What do you think
about it ?
Secretary SNYDER. First, and most important in my mind, was a
leveling off in consumer and business demand after the early rush to
buy goods and stock large inventories after the outbreak of hostilities
in 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 in World War II. Coupled
with 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 in 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 PATMAN. You have said that you favored some flexibility in interest rates as an instrument for influencing inflationary
and deflationary forces. Do you believe at the present level of interest
rates on marketable securities that it is suited to present conditions ?
Will you distinguish in your answer between short-term and long-term
rates ?
Secretary SNYDER. The present situation is one in which we are experiencing a lull- inflationary and deflationary forces seem to be about
in balance. In this situation, stability in interest rates seems appropriate- in both the short- and long-term area.
Representative PATMAN. I asked you the next question in writing
and you have submitted the answer. It was, Could you present a
table for the record showing the change in interest rates since the end
of 1949 and tell us briefly what it shows.
Secretary SNYDER. We would like to put the answer into the record, the answer that I have supplied.
Representative PATMAN. You gave me a letter on that, and without objection we will insert that in the record at this point. It is
quite interesting.

52

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

(The document referred to follows :)
EFFECT OF CHANGES IN INTEREST RATES ON THE COST OF SERVICING THE PUBLIC
DEBT
GENERAL STATEMENT OF THE PROBLEM
Interest costs are affected by four elements : ( 1 ) Changes in the total amount
of the debt ; ( 2 ) the nature of the debt in which changes occur ; ( 3 ) changes in
composition of the debt resulting from refunding operations ; and ( 4 ) changes in
interest rates.
There are five different classes of debt which must be considered in dealing
with interest costs : ( 1 ) Short-term marketable debt which currently is responsive to changes in interest rates (e. g., Treasury bills and certificates of indebtedness ) ; (2 ) longer-term marketable debt which reflects changes in interest rates
as the debt matures and is refunded ; (3) nonmarketable debt which has been
affected by changes in rates, such as Treasury savings notes ; ( 4) nonmarketable
debt, the rates on which have not yet been affected by changes in interest rates
on other debt, such as United States Savings bonds ; ( 5 ) special issues for trust
accounts which are affected by the over-all average rate of interest, viz., the
Old-Age and Survivors Insurance Trust Fund and the Unemployment Trust
Fund ; and (6 ) special issues which are not affected by changes in the average
interest rate, such as the National Service Life Insurance Fund.
Increases or decreases in interest rates affect interest costs to the Treasury
on different types of debt in different ways, and at different times. For instance,
the interest costs on short-term marketable debt is more quickly affected by
changes in 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 in interest rates
in 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 in interest costs as a result of increased or decreased
interest rates cannot be determined merely by comparing total interest payments in one fiscal year with that of another. One of the reasons for this is that
the full effect of a change in the interest rate on actual expenditures is not
reflected in expenditures until the fiscal year following the one in which the
change in the rate has occurred . This is generally true in 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 in August of one fiscal year would not be payable until August of the following year. The same sort of situation occurs
with respect to securities, the interest on which is payable semiannually. For
instance, a note or bond dated in the first half of a fiscal year would carry only
one 6-month interest coupon payable in that fiscal year, and a bond or note
issued in the second half of a fiscal year would not have any interest coupons
payable during that fiscal year.
CHANGES IN INTEREST RATES
During the period from 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 in December of 1949 was sold to yield 1.087 percent on
an annual basis, as compared with a rate of 1.563 percent for the latest issue
in February of 1952 , an increase of 0.476 percent. If this increase in rate should
be applied to the total amount of 91-day Treasury bills outstanding on February
29, 1952, the increase in the annual interest cost on this segment of the debt would
be $74 million.¹
The interest rate on an 112-month certificate of indebtedness dated March 1,
1952, was 1 % percent, as compared with a 1-year rate of 1 % percent in December
of 1949, an increase of 34 percent. On the total amount of certificates of indebtedness outstanding on February 29, 1952 ($29 billion ) , this would result in an
increase in the annual interest cost of $218 million .
On April 1, 1951, as part of the Treasury-Federal Reserve accord, the Treasury
issued $13,574 million of 24 percent of nonmarketable bonds in exchange for an
equal amount of 22 percent marketable bonds of 1967-72 . An increase of 14 per-

1 Does not include the tax anticipation bills.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

53

cent in the interest rate on this amount of bonds would amount to $34 million on
an annual basis. However, these bonds are exchangeable for 1½ percent 5-year
marketable notes. Therefore, the effect of these exchange operations on interest
-costs will vary from year to year and will be governed to a large extent by subsequent exchanges of the 24 percent nonmarketable bonds for the 12 percent
marketable notes. The figures as of February 29, 1952, in connection with this
exchange operation are as follows :
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 return 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
234 percent bonds.
1½ percent notes..
Total...
212 percent bonds exchanged (annual interest) .
Increase in annual interest cost-

Annual
interest

$12, 034, 000, 000
1. 540, 000, 000

$331, 000, 000
23, 000, 000

13, 574, 000, 000

354, 000, 000
339, OCO, 000
15, 000, 000

On March 1 , 1952 , the Treasury issued $922 million of 7-year taxable bonds
carrying an interest coupon of 2 % percent. In December of 1949, the market yield
on a 7-year taxable bond was approximately 12 percent. An increase of seveneighths of 1 percent on $922 million 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 with 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 from 2.24 percent on December 31, 1949, to 2.72
percent on February 29, 1952, indicating that long-term financing in this area
would have to be done at an increase of about one-half of 1 percent per annum.
While the rate increases in the long-term area have not yet been reflected in
Treasury interest payments, unless interest rates decline in the meantime the
effects will be felt when maturing issues are refunded and in any long-term
financing which may be conducted in the present emergency.
Increases in 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 tax reserves. If these securities are to
be kept attractive for investors, the interest return must be kept in line generally
with short-term market rates. Consequently, the interest rate on savings notes
must be responsive to changes in market yields, although there may be a time lag
before all outstanding savings notes reflect such changes in yields.
The 3-year rate on Treasury savings notes was increased on May 15, 1951, from
1.40 percent per annum to 1.88 percent. This increased rate on savings notes has
not yet been fully reflected in interest payments . Of $8,044 million of these notes
outstanding on February 29, 1952, $2,039 million represents the older, lower rate
notes. The average interest rate on the notes outstanding is currently 1.758
percent compared with 1.360 percent on December 31, 1949, an increase of .398
percent. This represents an increase of $32 million in 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 in
interest rates have not taken place. These are (a ) the United States savings
bonds, and ( b ) the special issues to trust funds (e. g. Old-Age Survivors Trust
Fund and State Unemployment Trust Fund ).
Sales of United States Savings bonds have held up remarkably well, particularly among the smaller savers. The amount of outstanding Series E bonds
(including interest accruals ) on February 29, 1952, was $34,903 million, as compared with $33,754 million on December 31, 1949. There are now approximately
7 million persons buying savings bonds regularly on payroll savings plans as
compared with 42 million a couple of years ago. The number of $25, $50, and
$100 denominations sold was $34,900,000 in the first 7 months of the fiscal year
1950 and about the same number in the comparable period of the fiscal year 1951 .

54

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Sales of these denominations increased to $40,500,000 in the first 7 months of the
fiscal year 1952.
Present law limits the interest rate on such bonds to 3 percent per annum,
compounded semiannually. Series E bonds now yield 2.9 percent, compounded
semiannually, if held to 10-year maturity , so there is little leeway for an increase
in the rate of interest which can be paid on these bonds under existing law.
Series F and G bonds yield 2.53 percent and 22 percent, respectively, if held
to 12-year maturity.
There is another large segment of public debt on which the impact of higher
interest rates has been only partially reflected in 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 trust funds (i. e. , Old-Age Survivors Trust Fund and
Unemployment Trust Fund, amounting to over $20 billion ) are, by law, based
upon the average interest rate on the total 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. At the present
time $20,775,000,000 of special obligations are held for account of the Old-Age
and Unemployment Trust Funds, on which the average interest rate is 2.135
percent as compared with $16,399,000,000 of special issues held for such funds in
December of 1949, at an average rate of 2 % percent. However, it should be
pointed out that although the rate on special obligations currently being issued to
these trust funds is 24 percent, over $19 billion 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. At the end of this fiscal year all of the
special securities held will have to be reissued on the basis of the average rate on
the public debt at that time, which probably will result in a 24 rate on all of
the Old-Age and Unemployment Trust Fund obligations. An increase of % of 1
percent on the special securities held for these funds would increase the annual
interést charge by $26 million. Thus, in considering the additional cost of servicing the public debt as a result of increases in interest rates, care must be
exercised in appraising the long-run effects not only on the marketable debt
as it 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 in the Daily Statement of
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 forth on
the following page :

Average interest rates
Type of securities

Marketable:
Treasury bills .
Certificates of indebtedness.
Notes..
Bonds..
Nonmarketable.
Average for public issues ...
Special issues...
General average… -

Dec. 31,
1949

Feb. 29,
1952

Percent
1.090
1.219
1.375
2.316
2.581
2.145
2.617

Percent
1.683
1.875
1.561
2.322
2.638
2.261
2.608
2.310

2.208

While the foregoing figures are of interest as an indication of the changes in
average rates borne by interest-bearing securities outstanding now as compared
with December 31, 1949, they do not reveal the ultimate effect of the changes
on total costs to the Treasury.
LONG-TERM PROJECTION OF INTEREST COSTS
As has previously been mentioned , it will take some time before the higher
rates are infiltrated throughout the different segments of the public debt. Not

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

55

only will the increases in rates be felt as maturing issues are refunded but they
will also be reflected in increases in the costs of financing the budget deficits
created by the defense mobilization program. In the general statement I made
before the Subcommittee on Monetary, Credit, and Fiscal Policies of the Joint
Committee on the Economic Report, on December 2, 1949, I said that—
"Even a relatively small increase in the average interest rate on the debt would
add a substantial amount to the total annual interest cost. It is estimated hat
the interest on the debt will amount to $5.7 billion in the calendar year 1949.
About $ 1
billion would be added to this amount if the average interest rate
were one-half of 1 percent higher."
No one can accurately predict the movement of interest rates in future years.
There is a possibility that rates will further increase and at the same time it
must be recognized that economic conditions in the future could produce lower
interest rates. Likewise , it cannot be determined now what changes will take
place in the future in the composition of the public debt.
At the present time the total amount of interest-bearing debt outstanding, for
the purpose of computing an average interest rate, is about $258 billion. The
average interest rate has increased from 2.208 percent on December 31 , 1949, to
2.310 percent as of February 29, 1952. If this increase of 0.102 percent should be
applied to the total amount of interest-bearing debt outstanding at the present
time, mentioned above, the increase in the computed annual interest change would
be about $262,815,000. If the over-all average rate should eventually be increased
by one-fourth of 1 percent, the increase in the annual interest charge would
amount to about $ 645,000,000, and if the over-all rate should be increased by
one-half of 1 percent, the increase in the annual interest charge would be about
$1,290,000,000. On the other hand if in the future the average interest rate should
decline by one-tenth of 1 percent (based upon a $258 billion interest-bearing debt ) ,
the reduction in the annual interest charge would be about $258 million ; a
reduction of one-fourth of 1 percent in the average rate would result in the
annual interest charge being reduced $ 645,000,000 ; and a reduction of one-half
of 1 percent would result in decreasing the annual interest charge by $1,290,000,000.
Representative PATMAN. You stated in reply to the questions that
have heretofore been submitted to you, Mr. 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 for which it was
created, and for the important influence that it can have, and does
have, on our whole fiscal operation and monetary operation.
The Federal Reserve Board has a most important function to fulfil ,
and I would like to have it preserved in the framework in which it
was created. However, in these times, with our radidly developing
economy, which has grown to the size that it has , and when our
national debt has grown to the size that it has, Federal Reserve actions
must be appraised in 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 in the real-estate field, and two or three other functions
that have pretty well tied it into Executive direction. These actions
were certainly with congressional sanction, and so it 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 trying to maintain the well-being of our over-all
economy .
But you asked independent of whom and of what ? In a general
way, I do not think that the Federal Reserve should take any direction
or dictation from anyone. But I think many times, of necessity, to
carry out the functions as given to them, and the responsibilities as

56

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

given to them- by Congress-that the Federal Reserve certainly mustmeasure carefully the conditions and the times and the problems facing the Nation at the time they make decisions.
Now, if that is an influence that somewhat tempers their absolute
independence of action, then I think it must be tempered to that
extent. But so far as not having any dictation or direction , that is the
type of independence that I said I would like to see preserved .
Representative PATMAN. In the beginning of your answer you
stated that you would like to see it kept within the framework in
which it was created . I understood you to say that, Mr. Secretary.
Secretary SNYDER. That was right.
Representative PATMAN. 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 it was not too important that these two officials be on the Board,
probably, to carry out an independent administrative job. But 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 , I 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. At times it would appear that there would be a very good
advantage in having one or the other- I do not know whether it is
necessary to have them both or not, or whether it is necessary to have
either or not. In the discussion of how we should answer the questionnaire, we discussed that matter freely.
I have not suggested , however, in 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 it
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 within each
agency's own responsibility.
Representative PATMAN. 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 that
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 PATMAN . That is the reason you suggested the coordinating agency that you suggested , I believe, on page-

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

57

Secretary SNYDER. Well, I did not call it coordinating
Representative PATMAN . I called it that.
Secretary SNYDER . Yes .
Representative PATMAN. I mean something along that line to get
the people around the table to coordinate their views and get consideration.
Secretary SNYDER. I call it advisory.
Representative PATMAN. An advisory committee.
Secretary SNYDER . Yes .
Representative PATMAN. Does it not compare in many ways with
the advisory group that is set up by the commercial banks ?
Secretary SNYDER. Well, it does because they have no coordinating
authority, as I understand it.
Representative PATMAN. What I mean is that
Secretary SNYDER. But they have an advisory capacity.
Representative PATMAN (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, we have found that such advisory groups
have been extremely beneficial to the Treasury in its operations and
in its responsibilities .
We have found that such discussions, in many of which we sit
side by side with Federal Reserve representatives, are very beneficial
and helpful.
Representative PATMAN. I agree with 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. But
what I am wondering about is whether or not the public interest is
paramont at all times in view of the present set-up, and I expect
to try to get some light on that as we go along in these hearings.
I know at first when the Comptroller of the Currency, selected by
the President, and the Secretary of the Treasury, in 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
did not represent the public interest, too . In 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 in power and vote for or against it by
reason of what the Board did, just like in foreign affairs with the
State Department, but if you get the Federal Reserve Board so independent that there is no way to charge the administration in power
with what is done by that Board , whether it is very beneficial or very
devastating, there is no way for the people to charge the Administration in power ; do you not think that that should be given consideration, Mr. Secretary ?

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Secretary SNYDER. I would be very happy if 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 in connection with the operation
of the Treasury, in which capacity he has the responsibility for debt
management ; and, therefore, it could be advantageous.
There are some areas which might indicate that it 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 course would be helpful.
I can see, as I have said, many areas in which it could be of advantage. There are others where the general feeling might be it 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 PATMAN. 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 bankSecretary SNYDER. Well, that was the area in which I had my reservation for him to be a full-fledged member of the Board with full
Board responsibilities. You have touched on the very area in which
I had questions.
Representative PATMAN. I recall, from reading about the Federal
Reserve Act, that Senator Glass was insisting all the time that it
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 it
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 SNYDER. Yes, I recall that.
Representative PATMAN. In other words, everything in the writing
of that law was in 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 SNYDER. I think that is very appropriate .
Representative PATMAN. Yes. At 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 SNYDER. I am quite sure that that is the legislative
history.
Representative PATMAN. That is right.
I just wondered if 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 it was extended to 12
years, and then later on it was extended to 14 years ?
Secretary SNYDER. That is the present, 14.
Representative PATMAN. 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 if 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 full member of the Board with all responsibilities and not just a policy-making member. I think that is true.
Representative PATMAN. 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 full ex officio
member with full responsibilities.
Representative PATMAN. There is no question about that ; he was
Chairman under the law.
Secretary SNYDER. Yes .
Representative PATMAN. He was Chairman of the Board.
Secretary SNYDER. Yes . The original Federal Reserve Act provided thatA Federal Reserve Board is hereby created which 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 with 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 PATMAN. And he, of course, did have full 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 it would be beneficial
to give him that position . I would be glad to hear comment on that.
Representative PATMAN. Anyway, we will give it consideration .
Without objection , I will 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 lot to do with the passage of
the Federal Reserve Act. In his book, An Adventure in Constructive Finance,
published in 1927, describing a discussion of this very question by President
Woodrow Wilson with an important group of bankers at the White House,
it is stated on page 116 :
said quietly :
"When they had ended their arguments, Mr. Wilson
'Will one of you gentlemen tell me in what civilized country of the earth there
are important government boards of control on which private interests are
97308-52-5

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

represented ?' There was painful silence for the longest single moment I ever
spent ; and before it was broken Mr. Wilson further inquired : 'Which 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 bill ; and, notwithstanding
a desperate effort was made in the Senate to give the banks minority representation on the Reserve Board , the proposition did not prevail."
Representative PATMAN. 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 it 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
in 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. It is true, and it has been over our very strong
protests, because we have asked that we be given funds to bring in
new people constantly and keep our organization in full operation
for the tremendous responsibilities that we have ; but for some reason
or other Congress has seen fit to curtail those funds .
Representative PATMAN. But Congress has not curtailed the Federal Reserve. Of course, Congress has notSecretary SNYDER. Of course, Congress has no appropriation function over the Federal Reserve.
Representative PATMAN. That is, it has not assumed it so far.
Secretary SNYDER. I beg pardon ?
Representative PATMAN. It has not assumed that power so far.
Secretary SNYDER. Well , I will pass that one, but I am talking about
the Treasury, and I am hopeful that out of this will 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 it 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 PATMAN. 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 it is a competing agencybut 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 PATMAN. $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 past-

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

61

Secretary SNYDER. We have had a working arrangement that after
they deductedRepresentative 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 PATMAN. You mean about 90 percent ? That used
to be the law.
Secretary SNYDER. About 90 percent after certain adjustments.
Representative PATMAN. 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 FDIC , I am not specificallyRepresentative PATMAN. I think the Comptroller of the Currency
in some respect, too .
Secretary SNYDER. Yes, in some respect.
Representative PATMAN. But outside of that there are 25 to 50 in
a comparable situation that must come back to Congress for appropriations, and I think I will put the list in the record at this point .
( The list referred to is as follows :)
THE LIBRARY OF CONGRESS,
LEGISLATIVE REFERENCE SERVICE,
AMERICAN LAW SECTION,
Washington 25, D. C., March 6, 1952.
To : Joint Committee on the Economic Report, Subcommittee on General Credit
Control and Debt Management.
(Attention : Mr. Henry C. Murphy. )
Subject : Federal Agencies Having Independent Sources of Income.
In response to your letter of February 20, 1952 , we submit herewith a representive list of Federal agencies which have independent sources of income, classified to show whether ( a ) such income is available for expenditure by the agency
without congressional authorization or appropriation , ( b ) it may be spent by
the agency only with the annual authorization of Congress, or (c ) it must be
turned in 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
in accordance with law without special congressional authorization or appropriation :
Comptroller of the Currency :
Assessments for 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 for expenses of note issue and
redemption ( 12 U. S. C. 420 ) .
Federal Deposit Insurance Corporation :
Premiums for deposit insurance ( 12 U. S. C. 1817 ) .
Interest on investments (12 U. S. C. 1823 ) .
Federal Reserve Board : Assessments against Federal Reserve banks for expenses
of Boards ( 12 U. S. C. 243 ).
Home Loan Bank Board : Assessments for examination of financial institutions
(24 C. F. R. 123.20, 12 U. S. C. 1439a ) .
Department of Agriculture : Charges for inspection and certification of certain
farm products and license fees (7 U. S. C. 55, 499c, 585 ) .
Federal Security Agency :
Federal Credit Union fees ( 12 U. S. C. 1756 ) .
Fees for examination of sea food ( 21 U. S. C. 372a ) .

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

General Services Administration : Fees for 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 from the property they administer ,
but they must obtain special authorization to use moneys in their hands for
designated purposes, or in some cases, for any purposes :
Federal Crop Insurance Corporation (7 U. S. C. 1508, 1516, Public Law 135, 82d
China Trade Act Corporation fees ( 15 U. S. C. 157) .
Office of Alien Property (Public Law 188, 82d Cong. ) .
Commodity Credit Corporation ( 15 U. S. C. 712a, Public Law 135 , 82d Cong. ) .
Export-Import Bank of Washington ( 15 U. S. C. 712a, Public Law 111, 82d Cong.) .
Federal Crop Insurance Corporation ( 7 U. S. C. 1508, 1516, Public Law 135, 82d
Cong. ) .
Federal Farm Mortgage Corporation (15 U. S. C. 712a, Public Law 135 , 82d
Cong. ) .
Federal Intermediate Credit Banks (Public Law 135, 82d Cong. ) .
Federal National Mortgage Association (Public Law 137 , 82d Cong. ) .
Federal Prison Industries, Inc. ( Public Law 188, 82d Cong. ) .
Federal Savings and Loan Insurance Corporation ( 15 U. S. C. 712a, Public Law
137, 82d Cong. ) .
Home Owners Loan Corporation ( 15 U. S. C. 712a , Public Law 137, 82d Cong. ) .
Inland Waterways Corporation ( Public Law 137 , 82d Cong. ) .
Panama Canal Company (Public Law 203, 82d Cong. ) .
Production Credit Corporations (Public Law 135, 82d Cong. ) .
Public Housing Administration (Public Law 137, 82d Cong. ) .
Federal Crop Insurance Corporation (7 U. S. C. 1508, 1516, Public Law 135, 82d
Cong.) .
Virgin Islands Corporation (Public Law 136, 82d Cong. ) .
Tennessee Valley Authority ( 16 U. S. C. 831h-2 ) .
The following agencies collect certain moneys which are covered into the
Treasury and which can be withdrawn only upon appropriation by Congress :
Attorney General :
Aliens and immigrants.
Various receipts ( 8 U. S. C. 115, 133, 155 ( c ) ) .
Department of Agriculture :
Farm Credit Administration- assessments for examination and supervision
deposited in special fund in Treasury which is authorized to be appropriated for 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) .
Rural Electrification Administration-proceeds of loans, in certain circumstances (7 U. S. C. 903f) .
Department of Commerce :
China Trade Act Corporation fees ( 15 U. S. C. 157) .
Service and publications, fees and charges (5 U. S. C. 276 ) .
National Bureau of Standards, fees for tests, etc. (15 U. S. C. 276) .
Patent Office fees (35 U, S. C. 79 ) .
Department of Interior :
Electricity-sales from various power projects ( 16 U. S. C. 825s, 825s-1,
832j , 8331 ) .
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. C.
810) .
Federal Security Administrator : Food inspection fees ( 21 U. S. C. 24a , 46a ) .
Post Office Department : Postal revenues (31 U. S. C. 495 ; 39 U. S. C. 786, cf.
39 U. S. C. 794a ) .
Securities and Exchange Commission : Fees for registration of securities , national securities exchanges and qualification of trust indentures (15 U. S. C.
77f, 77ggg, 78ee) .
A complete list of agencies which receive independent income could be made
only after a detailed examination of the entire United States Code, which cannot
be accomplished in the limited time available. Accordingly, the above list does

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

63

not purport to be comprehensive, either with respect to the agencies which receive moneys from outside sources or with respect to sources of revenue of the
agencies listed.
MARY LOUISE RAMSEY,
American Law Section.
Representative PATMAN. It 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. All 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 PATMAN. The Comptroller General ? Who audits
the Federal Reserve System ?
Secretary SNYDER. I do not know.
Representative PATMAN. I will get that from them .
The Comptroller General was provided for under the Norris Act.
Secretary SNYDER. Mr. Lindsay Warren.
Representative PATMAN. It 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 PATMAN. That is right .
Representative WOLCOTT. Mr. Patman , will you yield a moment ?
Representative PATMAN. Yes.
Representative WOLCOTT. Is 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. In 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 PATMAN. 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 it 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

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

consider that the market for Government securities is an entirely free
one.
Representative PATMAN. In 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 it 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 in
theSecretary 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. It 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 it may not be of vital importance to
the economy as a whole.
And as I said a few minutes ago, I think that when it comes to complete freedom, if you are speaking of it in terms of absolute freedomno 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 in Government securities.
Representative PATMAN. And to that extent it would not be perfectly
free, of course. I say, to that extent.
Secretary SNYDER . Yes.
Representative PATMAN. The bond market, I noticed , after it had
commenced to slide, went down to about 96, and it has not fallen below
that . Maybe I am mistaken, but I just noticed it occasionally. Has it
fallen below, have the prices fallen below, 96, for long-term bonds ?
Secretary SNYDER. On one occasion, one issue went to 95232.
Representative PATMAN. Well, there must be some support there or
it would slide on certain occasions much lower , would it not, Mr.
Secretary ?
Secretary SNYDER. Well, I think that the Open Market Committee
has been interested in maintaining anRepresentative PATMAN. An 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 PATMAN. Suppose they wanted to maintain a market
at 100 percent, and assuming that, as Senator Douglas explained, that
it 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 PATMAN. 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?

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

65

Secretary SNYDER. Well , since that is invading another agency's
responsibility, I would not like to come out with an answer.
Representative PATMAN. That is all right. I will not insist on it at
this time at all.
I wanted to ask you about some E bonds, but I will defer to your
suggestion and put it in writing.
Secretary SNYDER. We will be glad to try to answer whatever questions are put to us.
Representative PATMAN. Will 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 PATMAN. Under existing law, Federal Reserve banks
buy bonds only in 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 PATMAN . Five billion dollars ?
Secretary SNYDER. That is correct.
Representative PATMAN. That authority expires this year ?
Secretary SNYDER. We are asking for an extension .
Representative PATMAN. You 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. It has permitted us to take care of a slight operational deficiency in balances.
Representative PATMAN. And only for short-term obligations ?
Secretary SNYDER. Only for a very limited time.
Representative PATMAN. Senator Flanders has returned , and I will
ask him if 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 in 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 in monetary and fiscal policies for controlling
inflation than I do in 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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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

alone would not have to be so drastic in order to control such a situation that they would be almost destructive.
It 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 Reserve System is, so I should
ask that question primarily of the Federal Reserve Board folks. But
let us have a preliminary try-out with you, if you don't mind speaking
on it.
Secretary SNYDER. Well , of course , I would prefer for the Federal
Reserve to address themselves to that subject. But I do have grave
reservations in 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 it is going and what its full impact might be-I think
that to try to control a situation of that sort entirely by monetary
regulations and procedures could well lead to disastrous results. This
is because of the fact that in 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 FLANDERS . As 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.
Representative PATMAN. 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 SNYDER. No, sir.
Representative PATMAN. I think that is around the Federal Reserve
Board. Governor Powell, I think, is in charge of that.
Secretary SNYDER. That is correct.
Representative PATMAN. I assume we will have Mr. Martin here
tomorrow and he can tell us about that.
You come in contact with that program ?
Secretary SNYDER. 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 in 1948 and again recently-I think that it has had a
degree, an important degree, of influence on the restraint of bank
credit.
Representative PATMAN. Would you like to ask any further questions , Senator Douglas ?

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

67

Senator DOUGLAS. No.
Representative PATMAN. 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 it 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 it 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.
Representative WOLCOTT. I think I can go along with the idea that
it cut down on the demand for goods.
Secretary SNYDER. The reply I made was to the voluntary creditcontrol program .
Representative WOLCOTT. The voluntary credit ?
Secretary SNYDER. Yes, sir.
Representative WOLCOTT. I beg your pardon ?
Secretary SNYDER. That was the reply I made to it.
Representative 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 Reserve on the voluntary credit control program , and
that was what I was addressing my reply to.
Representative WOLCOTT. All right.
Representative PATMAN . Senator Flanders, do you have any more
questions ?
Senator FLANDERS . No, thank you.
Representative PATMAN. Dr. Murphy, do you have any questions ?
Mr. MURPHY. 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 it not, principally by the receipts and expenditures of the Government ? It is a matter over which you have very little control.
Secretary SNYDER. It is entirely controlled by that.
Mr. MURPHY. And 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. MURPHY. 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 it
always possible to sell additional amounts of Government securities
simply by letting the market , as we will say, seek its own level, or do
you feel that under some circumstances maintaining a reasonably
stable market will permit you to sell more securities to nonbank investors and have them more firmly placed than you could by simply
having Federal Reserve 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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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

refundings and of new money operations—it is vitally important that
each issue be successful.
Mr. MURPHY. And can the success of these issues in itself be a means
in the long immediate run for placing more rather than less securities
with nonbank investors ?
Secretary SNYDER. I think it could.
Mr. MURPHY. By building up their confidence in the securities ?
Secretary SNYDER. I think it would. It would give people confidence, whereas a very small issue could affect the whole debt if it were
badly received .
Mr. MURPHY. The only point I wanted to try 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 if properly handled would be a way of maximizing nonbank
holdings rather than the reverse.
Secretary SNYDER. I think so.
Mr. MURPHY. That is all.
Representative PATMAN. I will ask Dr. Grover W. Ensley, the staff
director of the full committee, if he would like to ask any questions.
Mr. ENSLEY. 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 it 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 in 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
Would you prepare a
to the subcommittee's questions so quickly.
memorandum on this for our printed record ?
Secretary SNYDER. We will be pleased to do that because, as I stated
in 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 in
groups to talk with us on it, and I think it 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 will be glad
to do that.
Senator DOUGLAS . Mr. Patman, in view of the questions of Dr.
Murphy, I would like to be privileged, if I might, to ask some
questions.
Representative PATMAN. Certainly, Senator.
Senator DOUGLAS. As we all know, last April 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 it difficult for the Treasury to
refund its issues, nonbank holdingsSecretary SNYDER. In the periodSenator DOUGLAS (continuing) . Since April of 1951 ?

MONETARY POLICY AND MANAGEMENT OF PUBLIC 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 in the total volume of Government securities held
by the Reserve.
Secretary SNYDER. Well , the Reserve holdings are a little higher than
a year ago.
The pertinent figures on Federal Reserve holdings of Government securities
referred to are the following :
Million
$21, 881
Feb. 28, 1951 .
22, 514
Mar. 6, 1952___.
Senator DOUGLAS . But the last figureSecretary SNYDER. It does not make any difference .
Senator DOUGLAS. The last figures I saw were $ 300 million lower
thanSecretary SNYDER. In June of 1951 , yes.
Senator DOUGLAS . Well, if 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. If we could do all of our operations by back
sighting, Senator, I think maybe we would be all right. If you are
faced with a proposition at a certain time, there are certain unknowns- it falls on you to make a decision, and if we were always
able to look backward to make a decisionSenator 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. No.
Senator DOUGLAS. And from date of the accord on it was correct ?
Let us
Secretary SNYDER. I made no such statements, Senator.
stick to what I said.
Senator DOUGLAS. Let us go back to the point. If this worked successfully in a period of large refunding, that is, if 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 April 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 PATMAN. Any 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 if the future was barred to us it 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 if 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

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

have to go back to the conditions which we faced at the time , Senator,
when we made certain decisions.
Senator DOUGLAS. 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
refundings 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 '51 than we
had in '50 the operation was carried on very successfully without the
Federal Reserve buying an appreciable quantity of Government bonds.
In 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 if the problem was debtwise less severe
in 1950, why was it necessary for the Reserve 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
in 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 . With the Federal Reserve ?
Secretary SNYDER. I mean with the Federal Reserve. 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.
Representative PATMAN. Mr. Secretary, we appreciate your attendance and we will feel free to call on you in the future. And of course
in our requests we will 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
Early in August 1951 , the subcommittee submitted a list of questions covering a wide range of matters relating to the management of the public debt and
monetary, credit, and fiscal policy, both in this country and abroad. In the
course of extensive discussions during 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
the underlying problems. These suggested additions were welcomed by the
staff of the subcommittee. I felt that the fullest possible answers should be
given to each of the questions, with the objective of providing the subcommittee
with adequate basic materials upon which to undertake the comprehensive study
which had been assigned to it.
With this in mind, I made it clear to Treasury officials that I was prepared to
spend as much time as was necessary in 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 with this congressional subcommittee in the same manner as he is the
contact with other committees of Congress. I instructed the Director of the
Technical Staff, the Fiscal Assistant Secretary, and the General Counsel to detach.
from other duties, insofar as possible, such members of their staffs as were
necessary to prepare material for the answers to the questionnaire, and to
assemble a group of consulting experts, both economic and legal, who could both
help us prepare answers to the questions and provide varying points of view with
respect to how the questions might be answered.
The following consultants were contacted and were brought to the Treasury
from time to time between mid-August and late December :
Mr. Wesley Lindow, vice president and economist, Irving Trust Co. , New York,
N. Y.
Dr. G. Lee Bach, director of industrial administration , Carnegie Institute of
Technology, Pittsburgh, Pa .
Dr. Douglas Anderson Hayes, professor of business administration , Universtiy
of Michigan, Ann Arbor, Mich.
Mr. Miroslav Kriz, foreign research division , Federal Reserve Bank of New York,
New York, N. Y.
Dr. Paul W. McCracken, professor of business administration , University of
Michigan, Ann Arbor, Mich.
Dr. Marcus Nadler, Graduate School of Business Administration, New York
University, New York, N. Y.
Mr. Joseph J. O'Connell, Jr., Chapman , Bryson, Walsh & O'Connell, Washington,
D. C.
Dr. Roland I. Robinson, professor of banking, the School of Commerce, Northwestern University, Evanston , Ill .
Judge Samuel I. Rosenman, New York, N. Y.
Dr. Lawrence H. Seltzer, professor of economics, Wayne University, Detroit,
Mich.
Dr. Henry C. Wallich, Department of Economics, Yale University, New Haven,
Conn.
These men have had a wide range of experience in 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. In the aggregate, they represented great technical ability and various
points of view. They provided us with a great deal of help- both in 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 with general material on the subject
of public debt management and monetary, credit and fiscal policy, and drafts
of the answers to these questions were prepared initially by the consulting
experts. In many cases, two or more answers were prepared in 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 with these matters most closely.
I met frequently in my office and in the Treasury conference room with the
Treasury people and the consultants preparing the answers . Meetings generally
ran from 1 to 2 hours, and there were about 25 of them during the course of
the project. Each question was taken up on several occasions ; drafts of answers
were discussed thoroughly ; competing points of views were analyzed ; and
agreed-upon presentations were then developed, sometimes by Treasury staff
members and sometimes by our consultants .
After each answer had reached a semifinal stage, it was circulated to all
members of the Treasury staff concerned for comment and was mailed to each
consultant at his home location , where he went over it and submitted suggestions
or alternative wordings for particular paragraphs or sentences . It was also
sent to a number of outside people who had a great deal of experience in the
debt management and fiscal-monetary field . Among these were the following,
two of whom were former Under Secretaries of the Treasury :

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Mr. Daniel W. Bell, president, American Security & Trust Co. , Washington, D. C.
Dr. Harold Stonier, executive manager, American Bankers Association, New
York, N. Y.
Mr. A. L. M. Wiggins, chairman of boards of the Atlantic Coast Line Railroads
and the Louisville & Nashville Railroad , Hartsville, S. C.
The suggestion made by all people reviewing the draft 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.
This procedure continued during the last part of August, September, October,
and November. Late in November, I attended a NATO conference in Rome ;
and the staff airmailed to me a set of revised answers to all questions which had
been prepared up to that time. On my return trip I spent many hours aboard
ship going over each answer carefully, making suggestions and changes where
I felt it necessary .
At 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 for their
comment. Suggestions from these agencies were taken up by the staff in January
and worked into the answers wherever possible.
During January and in early February, I spent many hours with Treasury
staff people, going over the answers in final form . The materials were carefully
checked both in final draft and in galley proof and page proof ; and, where necessary, records were brought together and special files established to completely
document the answers to some of the questions.
Representative PATMAN. The committee will 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. )

MONETARY POLICY AND THE MANAGEMENT OF THE
PUBLIC DEBT

TUESDAY , MARCH 11 , 1952
CONGRESS OF THE UNITED STATES,
SUBCOMMITTEE ON GENERAL CREDIT CONTROL,
AND DEBT MANAGEMENT OF THE
JOINT COMMITTEE ON THE ECONOMIC 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
full committee.
Representative PATMAN. The committee will please come to order.
Senator Flanders, did you have a statement to make ?
Senator FLANDERS . No ; 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 in the Scriptures might be appropriate. [Laughter. ]
Representative PATMAN. You are calling them all devils ?
Senator FLANDERS. Well, they are guilty until they are proved innocent. [ Laughter. ]
Representative PATMAN. We have with us this 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. MARTIN. I have, Mr. Chairman .
Representative PATMAN. Would you like to present your prepared
statement before yielding to questions ?
Mr. MARTIN. If it is agreeable to you, Mr. Chairman, I would.
Representative PATMAN. It would be satisfactory to us.
1
Mr. MARTIN. Mr. Chairman and members of the committee, in
coming before you today I should like to express what I know has
73

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

been in the minds of all of us in the Federal Reserve System in preparing the answers to your questionnaire. We have welcomed this
opportunity to put down on paper our concepts of what our function
is in 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 has been formidable and I
will not pretend that I approached it without some reluctance . Now
that the task is done and the results are published I realize how worth
while has been the time and effort expended not only by those of us
in the System but by 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. In the nearly four
decades of its existence, the System has undoubtedly made mistakes.
It 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 years
of what it was when the System was founded . In this span of
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, it is probably fair to say that monetary policy has not always
been as timely or as effective as it 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. In his first inaugural address
as President, Woodrow Wilson included a statement, part of which
is inscribed in the lobby of the Federal Reserve Building :
We shall deal with our economic systemhe saidas it is and as it may be modified, not as it might be if we had a clean sheet of
paper to write upon ; and step by step we shall make it what it should be, in the
spirit of those who question their own wisdom and seek counsel and knowledge,
not shallow self-satisfaction or the excitment of excursions whither they cannot
tell.
I am sure it is the purpose of this inquiry, as it is of all of us, to
appraise judicially this reserve banking mechanism and to do whatever appears wise so that it may render the best possible public service.

MONETARY POLICY AND MANAGEMENT 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, it 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, it 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. If 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. In 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 will 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

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

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 it would be at the cost, I think, of something far more
important. In any case, such an institution will 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 if we had a clean sheet of paper to write upon, but
in the light of the concepts on which it 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 it is an indispensable
means to that end. It 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. It 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 in your chairman's confident prediction that the fundamental issues with which the committee is concerned "will be found vastly too complex to permit of facile generalization."
I think it 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 in the answers, second, some of the more important positions taken on the issues raised , and, third, several general
points as to changes in 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

77

RESERVE BANKING 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 it 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
past loans, and credit expansion by the commercial banking system.
Demands 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 ; it cuts out of the market or
brings into it fringe credit demands.
6. In this process, credit and monetary policy affects, but does not
determine, interest rates in the market. Interest rates are prices which
perfom vital economic functions and they should be responsive to basic
supply and demand conditions. In 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 security prices, accentuated postwar inflationary pressures.
8. In 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 of 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. In addition to measures affecting credit generally, flexible credit
and monetary policy includes the use, in occasion, of selective credit
regulations relating to stock market, consumer, and real estate
credit-as well as voluntary measures.

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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 are the more important :
1. The Federal Reserve Board is subject to the Employment Act of
1946. Fairly interpreted , the congressional directive stated in this act
implies a goal of monetary stability and needs no modification.
2. Existing Congressional directives to the Federal Reserve 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 will 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.

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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. With 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 not be resorted to except in
an extreme emergency.
Several general points in the replies are of interest. These include :
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 ) It has been widely recognized , at least in the countries of the
free world, that the central bank should have a large measure of independence within the governmental structure .
(b ) In 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.
That finishes my prepared statement, Mr. Chairman .
Representative PATMAN. Senator Flanders , would you like to ask
some questions ?
Senator FLANDERS . Yes. Mr. Martin, on page 2 of your remarks you
state :
One of the fundamental purposes of the Federal Reserve Act is to protect
the value of the dollar.

Now, is that specifically stated in the original legislation setting
up the Federal Reserve System ?
Mr. MARTIN. No , sir. It 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 it ever been in legislation, early or late,
specifically stated as a fundamental purpose ?
Mr. MARTIN . I do not think it has ever been stated explicitly in
legislation.
Senator FLANDERS. What you are saying then, is that it is implicit,
and that if it is not taken into account the Federal Reserve Act cannot

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

be satisfactorily administered in the explicit purposes for which it
was set up ?
Mr. MARTIN. 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 maintain 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 opening of the troubles in Korea .
Do you think monetary policy alone could have kept that under
control ?
Mr. MARTIN. No, 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 wave 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 if 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. MARTIN. 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. MARTIN. Well, in retrospectSenator FLANDERS . Ideally ?
Mr. MARTIN. Ideally, I think, they were applied later than they
should have been, but that is hindsight, andSenator FLANDERS . Yes.
Mr. MARTIN ( 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 if 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. It was an extremely difficult period to pass judgment on.
Senator FLANDERS . Are you implying from that that if we had
been drastic with monetary policy we might have done more damage
than good to the situation -that is, if we had shut off the supply of
new money and new credit so drastically that the wave of buying was
checked ? Would we have done damage to the productive activity
of the country ?
Mr. MARTIN. I think it 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. MARTIN. I really do not know. It is implicit in the Employment Act of 1946, but there again it is not a direct statement.
Senator FLANDERS . That Employment Act, as I remember it, does
not mention the Federal Reserve System directly.
Mr. MARTIN. No , sir.
Senator FLANDERS . But as a branch of the Government it implies
that that must be taken into account ?
Mr. MARTIN. 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 in the second full paragraph
you say :
We have sought to make clear that monetary policy cannot, by itself, achieve
stable economic progress but that it is an indispensable means to that end.
You say that monetary policy cannot by itself do the job of maintaining the purchasing power of the dollar, so that your position seems
to be clear on that in this document.
Mr. MARTIN. That is correct, sir.
Senator FLANDERS. In your summary of your replies on page 3 you
speak of a need for more flexible credit and monetary policies applied
through the discount and open market mechanism within the framework of an orderly Government securities market ; and at a later point
you speak of the increased importance of discount rates in comparison
with credit policy experience of the past decade, and reliance on open
market operations. Do I understand from that that the Reserve
System is giving renewed emphasis to the discount function and that
it has had some measure of success in reviving that part of the Reserve
bank operations, or is that a hope, a purpose, or is it something that is
actually under way ?
Mr. MARTIN. No, 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 it 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 134 percent. That was a part of the understanding. At one point

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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. MARTIN . Almost entirely Government securities.
Senator FLANDERS. There has been no particular increase in the discount of commercial paper ?
Mr. MARTIN . 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 will come back into being.
Senator FLANDERS . Just one other group of elementary questions
for the sake of having them in the record. It 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. MARTIN. That increases the available money supply.
Senator FLANDERS . All right.
When the Treasury retires bonds held by the banks that decreases
the money supply ?
Mr. MARTIN . Decreases .
Senator FLANDERS. When the Federal Reserve System buys Government bonds from the banks, what does that do to the money supply ?
Mr. MARTIN. That increases the reserves of the member banks which,
in turn, increases the money supply if they lend the money.
Senator FLANDERS . So when the Government buys, that is, retires its
bonds it decreases the money supply. When the Federal Reserve bank
buys bonds from the commercial banks it increases the basis for credit,
and so tends to increase the money supply.
Mr. MARTIN. It 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 it 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 .
Mr. MARTIN . Yes.
Senator FLANDERS . That is all, Mr. Chairman.
Representative PATMAN. Mr. Bolling ?
Representative BOLLING. 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 it 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 in 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 if they are not.
In 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 in 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 123.7, 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. In 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, it 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 it 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 the fairest waywas going at a greater rapidity.
Mr. MARTIN. 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 if it 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 it
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.
At 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

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credit and monetary expansion contributed to the additional price
advances.
There is no way of blinking at that record . While it 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.
If you will 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 involving
higher taxes.
Another aspect of the problem , and it has many aspects, is that of
debt management policy. We had to deal with the debt structure as
it 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 . It was a
very complex financing situation. No one has labored harder to
improve that situation than Secretary Snyder. And 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.
At one point, the Federal Reserve 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 it 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 in 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 BOLLING. In line with that statement and the statement in your formal presentation, and your replies to Senator Flanders, I gather that it 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 if the Federal
Reserve System had kept its holdings of Government securities unchanged instead of adding to them by 3.5 billion dollars."
Mr. MARTIN. That is a judgment ; I personally would not completely concur in that judgment .

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85

Representative BOLLING. So that, in effect, in your mind, monetary
policies are a very important aspect of the whole problem, not the
important factor.
Mr. MARTIN. That is right.
Representative BOLLING. In the question of timing, I know it must
be extremely difficult to make a generalization in reply to this kind
of a question, but how long ordinarily would it 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 within the framework of an orderly Government securities
market have demonstrated their effectiveness since they were undertaken in
March of 1951 .
I would like you to answer the general question in the light of that.
Mr. MARTIN. 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 , it 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 April 1951. But I do think that
it was certainly one of the important factors because it 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, if 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 in the kind of dynamic economy that we have
today.
Representative BOLLING. What are the other factors involved in your
opinion, in this effect, not in detail, but in general ?
Mr. MARTIN. 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 Reserve accord only that it 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. It 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.
Representative 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. All other members of

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this committee were, and this may not be an appropriate question .
you do not wish to answer it, it is all right with me.
On page 2 of this report there is stated :

If

It is the will of Congress that the primary power and responsibility for
regulating the supply, availability, and cost of credit, in general, shall be vested.
in the duly constituted authority of the Federal Reserve System, and the Treasury actions relative to money, credit and transactions in the Federal debt shall
be made consistent with the policies of the Federal Reserve.
Just as the words say, it appears to indicate that the policy of the
Executive could be, in effect, if 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. MARTIN. 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.
It 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 working very hard today to
accommodate the legitimate interests of both for the benefit of the
people. Constructive public policy in the financial field is something
that can come only from 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. MARTIN. No ; 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. It 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 I subject the proposal to analysis. It is difficult enough,
as it 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 .

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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 it 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 overstress that. But it 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. It 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
will not be more effective in our operations but less effective, because
it is difficult enough today to arrive at some of these decisions.
Representative BOLLING. Putting it another way, do you feel that
in the present state of affairs in the present state of statutes, that it
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 ?
Mr. MARTIN. I do , sir.
Representative BOLLING. That is all.
Representative PATMAN. Senator Douglas ?
Senator DOUGLAS . Mr. Martin, my first question, in a sense, will
cover ground that Senator Flanders referred to . Í 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. MARTIN. They are paid for by a check, by deposit.
Senator DOUGLAS . You mean that the banks , the Federal Reserve
banks, create creditMr. MARTIN. That is right, sir.
Senator DOUGLAS (continuing ) . With which they buy Government
bonds from private parties.
Mr. MARTIN. 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. MARTIN. 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. MARTIN. That is right .
Senator DOUGLAS. Then they are presented through member banks
to the Federal Reserve System ; is that not true ?
Mr. MARTIN. 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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Mr. MARTIN. To the reserve account of the bank, of the depositing
bank.
Senator DOUGLAS. Does this increase the lending capacity of the
banks ?
Mr. MARTIN. Under our present fractional reserve system by about
a 6-to-1 ratio.
Senator DOUGLAS. The average reserve is—
Mr. MARTIN. Assuming they lend all the money, I think they can ,
on that basis.
Senator DOUGLAS. So that if the Federal Reserve buys a million dollars worth of bonds that will increase the maximum lending capacity
of the members banks by $6,000,000 ?
Mr. MARTIN. Assuming that the demands for the credit are there.
Senator DOUGLAS . I know. But is the lending capacity available.
Mr. MARTIN. Yes.
Senator DOUGLAS. Now, do banks like to keep idle assets ?
Mr. MARTIN. They do not.
Senator DOUGLAS . Therefore, if they have this lending capacity, does
not this added lending capacity make them more ready to make loans
than they otherwise would be?
Mr. MARTIN. In a period of active credit demand, no doubt about it.
Senator DOUGLAS . 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. MARTIN. Correct.
Senator DOUGLAS. If there is not a commensurate increase in physical production, what then happens to the price level ?
Mr. MARTIN. The price level tends to rise, sir.
Senator DOUGLAS . Therefore, the purchase of these bonds by the
Federal Reserve System tends to have an inflationary effect ?
Mr. MARTIN. There is no doubt of it.
Senator DOUGLAS . Yes.
Now, then, if you look back on the period after Korea, was the
purchase of $4 billion, approximately, of securities by the Federal
Reserve System disassociated from the increase in bank loans of approximately $ 10 billion in that same period ?
Mr. MARTIN. It was not disassociated .
Senator DOUGLAS. But was it not a cause ?
Mr. MARTIN . Not the only cause, sir.
Senator DOUGLAS. Well, was it not a partial cause ?
Mr. MARTIN. It was a partial cause ; yes, sir.
Senator DOUGLAS. 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. MARTIN. That is right.
Senator DOUGLAS. And the ratio immediately was nearly three-toone. Furthermore, did it not create excess reserves so that they had
a margin upon which they could expand loans from April 1951 on ?
Mr. MARTIN . No doubt about it.
Senator DOUGLAS . So that part of the increase in loans since April
1951 was due to the purchase of securities by the Reserve System
prior to April 1951 ?
Mr. MARTIN. Part of it 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. MARTIN. That is correct, sir .
Senator DOUGLAS. The increase in 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. MARTIN. I think there was some connection , but I would not
say that was the onlySenator DOUGLAS . The coincidence is very close ; is it not ?
Mr. MARTIN. You 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
in 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 it is not merely a coincidence ; it seems to be the working
of a law in fact .
'Mr. MARTIN. Well, there is nothing in 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. MARTIN . 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. If 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 if we use an equation of four terms and not merely two, we will
find that the relationship still applies.
Mr. MARTIN. No ; 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 in
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 in bank credit during this period cause the
increase in prices ?
Mr. MARTIN. Well , I think that is perhaps too facile a generalization.
Senator DOUGLAS . Well , I submit that it 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.

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Now, do you think that the policy of the Federal Reserve in making
these purchases during this time was completely voluntarily, was it a
completely voluntary decision ?
Mr. MARTIN. 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 DOUGLAS . You were on the other side of the fence then.
Mr. MARTIN. I can say to you- well, I would not make any assertions one way or the other except that I have complete confidence in
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 DOUGLAS . 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. MARTIN. Let me say unequivocally, since it has been put in this
framework, that since I have been in the Federal Reserve there has
been-I will 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 DOUGLAS. Now, then, you say you would only comment
personally on what has happened since you left the Treasury and
became Chairman of the Federal Reserve Board . Would you submit for the record the documents of protest drawn up ( a) by the Open
Market Committee, ( b ) 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. MARTIN. Well , I think that raises the question of public policy,
whether the minutes of the FederalSenator DOUGLAS . 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. MARTIN. I do not think that the records will add anything to
the
Senator DOUGLAS . May the committee be the judge of that ?
Mr. MARTIN. I will be very glad to have the committee be the judge
of that if they would take a look at itSenator 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 full record
of those transactions may now be made available to the public.
Mr. MARTIN. 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 PATMAN. You think it is a matter that should be
passed on or considered in executive session if at all ?
Mr. MARTIN . I would so state.

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91

Senator DOUGLAS . Mr. Chairman, I do not wish to argue this point
at length. I want to point out that at pages 72 and 73 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 and 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 BOLLING. Mr. Chairman, if the Chair intends to rule
on that at this time, I would like to be heard. If you intend to postpone it I would not.
Representative PATMAN. I would like to hear you, Mr. Bolling.
Representative BOLLING. 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 it seems to me very clear that, particularly 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 it 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 full jump from privacy to
publicity.
Senator DOUGLAS. May I reply to my good friend and colleague,
Congressman Bolling, 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 in 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 toughour creature-file with us vital papers affecting fundamental matters
of public policy.
Representative BOLLING . The Senator would agree, however -excuse me.
Senator DOUGLAS . Yes .
Representative BOLLING. The Senator would agree, however, if this
particular approach is taken that inevitably it will probably be at
least apparent that the Treasury will 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 will make no such request upon the
Treasury that they produce the papers ; but I do think it is proper
for the Federal Reserve to produce the papers. With regard to the
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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

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 it seems to me that since the Federal Reserve System is
the creature of the Congress, that it is quite proper for Congress to ask
for the papers, and I renew my request.
Representative PATMAN. I wonder if it would be satisfactory-you
are willing for the papers to be examined by members of this committee ?
Senator DOUGLAS . No, I would like to have them made a part of the
record so that
Representative PATMAN. May I finish ?
Senator DOUGLAS . I beg your pardon.
Representative PATMAN. I wonder if it would be possible for Senator Douglas and Mr. Bolling to examine the documents first, and
after they have examined the documents and if they insist upon it,
why, then we will decide the question .
Mr. MARTIN. 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 PATMAN. 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. If they are examined
they should be examined by the committee as a whole, certainly not
by two members of the same political party.
Representative PATMAN. Well , yes, you have an objection there.
Representative WOLCOTT. 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. Å knowledge ofthe past is vital for the decisions of the future.
Representative WOLCOTT. Senator, would you yield ?
Representative PATMAN. Yes, Mr. Wolcott.
Representative WOLCOTT. 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. MARTIN . That is correct.
Representative PATMAN. Had you finished , Senator Wolcott ?
Representative WOLCOTT. I thank you for the promotion.
Representative PATMAN. Senator Flanders wanted to be heard , and
I wanted to make sure that you were through.
Representative WOLCOTT. 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.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

93

Now, I think that this committee, and I think the Congress, in line
with Senator Douglas ' suggestion, has a right to determine any matter
which involves its agent with respect to monetary policy, and I was
going to suggest later in the day, perhaps, this is as good an opportunity as any—that perhaps for background we should have Mr. Eccles
here. I notice that he is not on the list. Apparently he has not been
invited to testify, and it probably was an oversight, but may I request
now that Mr. Eccles be invited to appear ?
Representative PATMAN. Certainly, and he will 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 PATMAN. He will be invited.
Had you finished , Mr. Wolcott ?
Representative WOLCOTT. Yes.
Representative PATMAN. 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 if we asked to, if we
required that they be made public without looking at them. We should
look at them first and then we decide whether or not it is within the
public interest to make them public.
Representative PATMAN. The committee is only a small committee
and I think all five members can very well serve in examining the
documents, and I wonder if you are willing to make them available to
the whole committee in executive session , Mr. Martin.
Mr. MARTIN. I will make them available in executive session. I
meant what I said about the open record.
Representative PATMAN. I wish you would elaborate on that statement, please.
Mr. MARTIN. 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 in terms
of a public document. I think that is poor public policy.
Representative PATMAN. 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. MARTIN. Our policy decisions in the open market committee are
published annually and made available to you, Mr. Chairman.
Representative PATMAN. There are rather full and complete records
there, are there not ?
Mr. MARTIN. That is right.
Representative PATMAN. Even to how any particular member
voted.
Mr. MARTIN. That is correct, on policy questions.
Representative PATMAN. Mr. Wolcott, would 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 full employment ?

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Mr. MARTIN. You can't determine that, Senator, because it 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 all the pressures in the direction of inflation, that is, the movement of costs and the movement of wages ?
Mr. MARTIN. Pressures on inflation are very great always.
Senator DOUGLAS . And aren't there certain advantages in a period
of full employment in having the banking mechanism of the country
somewhat insulated from inflationary pressures ? I am not asking
for complete insulation, but somewhat insulated.
Mr. MARTIN. I think it is very desirable to have it.
Senator DOUGLAS. And a good deal of weather stripping, so to speak,
might be very helpful in restraining inflation ; isn't that true ?
Mr. MARTIN. I think that is the concept of the founders of the Federal Reserve System , and on examining it carefully again in preparing for this committee, I think they showed real wisdom in setting it
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. MARTIN. That is a difficult question , Senator. I have flirted
with the idea that we would have in the open market committee the
active 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 in 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.
My 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 if 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.
I would really be very happy if 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

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

95

because there are a lot of very sincere people opposed to it, and I
have talked to them from coast to coast. I have explored this idea
with a great many people. Particularly under the present atmosphere
you get the reaction that this is just a device to put the Secretary of
the Treasury in control of the Federal Reserve Board.
Now, I think that public servants at some point have to stand up
and be counted . If 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 if the legal position is such that the open-market committee has
control, there is a very real question whether it 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 it 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
it 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. MARTIN. Well, I would prefer that .
Senator DOUGLAS . You would prefer it ?
Mr. MARTIN . I would prefer it ; yes , sir.
Senator DOUGLAS. That would make the Board of course the much
more under the control of the president.
Mr. MARTIN. 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 . With 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 if 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. It is one of the finest
courts in the country.
Now if 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 it not tend to make
the Board an executive agency rather than a congressional agency ?
Mr. MARTIN. 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. MARTIN. Well, I think the 6 years would be some protection ,
Senator. You make it 14 and you have a tendency sometimes forvery few people serve 14 years.

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Senator DOUGLAS. But the knowledge that they can serve 14 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 it 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. MARTIN. There is nothing in 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. MARTIN. You 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. MARTIN. Well, it 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. MARTIN. 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. It 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. In 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 it that the Treasury's issue is successful, because one of the primary purposes
Senator DOUGLAS. And therefore it should support the market in
order to make it successful ?
Mr. MARTIN . It 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 PATMAN. He did not use the word " support." He
used the word "stabilize. "
Mr. MARTIN. So far as I know, I haven't checked on SEC regulations recently, but I believe they permit a stabilizing operation during

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

97

a period of an offering. When the offering is over, the Federal is
under no compulsion whatever to support the market. Its only responsibility to the public is that of maintaining an orderly market .
Senator DOUGLAS. The question of letting a Federal bond issue fail
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. MARTIN. All 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. MARTIN. As 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 in 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 will
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 :
That notwithstanding any other provisions, the primary power and responsibility for regulating the supply, availability , and cost of credit in general shall
remain vested in the duly constituted authority 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 with
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 it was very
helpful to the Federal Reserve, enabling it to assert its independence
and to reach an accord with the Treasury.
Mr. MARTIN . 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 . It sometimes helps, however, to have a little
legislative protection , and I notice the Federal Reserve flies to Congress when it wants 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. MARTIN. Well, as Mr. Wolcott says, we are the servant of
Congress .
Senator DOUGLAS. Now two more questions and then I will be finished. Would you object to an audit of your books by the General
Accounting Auditing Office ?
Mr. MARTIN. 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. MARTIN. 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 it is better for us to retain the auditing procedure in our own hands.
Senator DOUGLAS . Is it safe to have any group audit its own
accounts ?
Mr. MARTIN . 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. MARTIN . 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. MARTIN. 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 . And who names the presidents of the reserve
banks ?
Mr. MARTIN. They are named by the Board of Directors, subject
to the approval of the Board of Governors.
Senator DOUGLAS. So that the auditors of the Federal Reserve banks
whose presidents are selected by you have been coming in and auditing
your books.
Mr. MARTIN. 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. MARTIN. All right.
Senator DOUGLAS. But I do want to suggest this seems to be an
We have in Lindsay Warren , the Compextraordinary procedure.
troller General, one of the great public servants of all time, incorruptNow what objection is there
ible, experienced , fair-minded , able.
to having him audit your books ?
Mr. MARTIN. Well, I think it would be better if we were audited
by private auditors just on the independence thesis that you so ably
espoused .
Senator DOUGLAS. You 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. MARTIN. Well, we are a hybrid institution .
Senator DOUGLAS. And therefore when it pleases you you are a priv
ate organization, and when it pleases you , you are a public organ
ization.

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99

Mr. MARTIN. I think that is an oversimplification .
Senator DOUGLAS . That is all.
Representative PATMAN. Mr. Wolcott , it is nearly 12. I wonder if
it would suit you to commence your questioning in the afternoon
session.
Representative WOLCOTT. Perfectly all right.
Representative PATMAN. Will it be satisfactory for you to come
back in the afternoon , Mr. Martin ?
Mr. MARTIN . Whatever time you say, Mr. Chairman .
Representative PATMAN . Would 2 : 30 be all right ?
Mr. MARTIN . 2:30 would be fine.
Representative PATMAN. The committee will stand recessed until
2:30 this afternoon .
(Whereupon, at 11:45 a . m. , a recess was taken, to reconvene at
2:30 p.m. ofthe same day. )
(The confidential correspondence referred to during this session
appears on pp . 942-966 . )
AFTERNOON SESSION
Representative PATMAN. 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 answer to
the question, and yours also, I think, you cover this question of the
accord agreement. The history leading up to it 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. MARTIN. 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.
In 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 :
It is expected that during the remainder of the yearwhich, I assume, would be 1951 ; is that right, 1951 ?
Mr. MARTIN. That is right.
Representative WOLCOTT ( continuing ) :
The Federal Reserve discount rate, in the absence of compelling circumstances
not then foreseen, would remain at 14 percent and that the Federal Reserve
would operate to assure a satisfactory volume of exchanges in the refunding of
maturing Treasury issues.
Have you any agreement with the Treasury that that discount rate
would be continued ?

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Mr. MARTIN. No agreement with respect to that, sir. However, to
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 WOLCOTT. I guess that answers my next question as
to whether you have given any consideration to the manipulation of
the discount rate to prevent inflation .
'Mr. MARTIN. I am sorry, I did not get that.
Representative WOLCOTT. I say, I guess that answers my next question, which would be whether you have given any consideration to
the manipulation of the discount rate to prevent inflation .
Mr. MARTIN. 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 WOLCOTT. I think we are in agreement that inflationary pressures are not quite as great as they were a few months ago ?
Mr. MARTIN. That is right ?
Representative WOLCOTT. Do you attribute that at all to the use
of your indirect controls ?
Mr. MARTIN. You mean to selective
Representative WOLCOTT. No, not selective controls . Maybe we had
better clear this up.
Mr. MARTIN. I see.
Representative WOLCOTT. 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 .
Mr. MARTIN . Yes, sir. I attribute a part of the slowing up of inflation to the unpegging of the market that occurred at the time of
the accord . I do not attribute all of the lull to that, but a part of it.
Representative WOLCOTT. Could you attribute some of it, perhaps,
to the fact that you had previously increased the rediscount rates from
a low of 1 percent in three steps up to 134 percent ?
Mr. MARTIN. 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 WOLCOTT. What influence did the issues of 234 , 29year bonds, which could not be monetized have ? Did that have an
influence on the market, on inflation?
Mr. MARTIN. Yes. I think that was a very successful operation
that removed a large overhang in the long-term market.
Representative WOLCOTT. Do you think
Mr. MARTIN. 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 WOLCOTT. Do you think that the economy had a
right to suppose that because you had done those things that the Government was going to firm up its monetary policy and that, perhaps,

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101

helped somewhat ? In 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. MARTIN . Yes, I do . 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. If 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. MARTIN. 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. MARTIN. 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. In 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 in the revision of your remarks . [ Laughter. ]
Mr. MARTIN. 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 if 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. MARTIN. It might have a considerable psychological impact,
and there just would not be any sizeable amount of borrowing through
discounts.
Representative WOLCOTT. What would happen if there were any
borrowing ?
Mr. MARTIN. 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. MARTIN. Well , the banks, if they had reserves, would be lending.
Representative WOLCOTT. Yes.
Mr. MARTIN. Unless they needed additional reserves.
Representative WOLCOTT. But if you control the rate of interest
through the manipulation of rediscount rates, you control the money
market pretty much, do you not ?

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Mr. MARTIN . No ; 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 WOLCOTT. Then, what effect has an increase in the
rediscount rate on inflation ?
Mr. MARTIN. It has the effect of making it more expensive to borrow
when there is a need for the borrowing.
Representative WOLCOTT. So that, at least, is an indication of a
firmer policy on the part of the Federal Reserve and, perhaps , the
administration ?
Mr. MARTIN. That is right ; and in our judgment it is not necessary
to have a firmer policy at the present time.
Representative WOLCOTT. Now, the President, in 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 , if 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. MARTIN. At 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 WOLCOTT. How would you go about stabilizing under
these conditions of credit inflation were you not compelled to give
consideration to debt management ?
Mr. MARTIN. Well, you would be compelled to give consideration to
debt management.
Representative WOLCOTT. 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. MARTIN. When there is no debt at all ?
Representative WOLCOTT. We will just assume that. You do not
have to take into consideration debt management.
Mr. MARTIN. You would go about it in exactly the same way.
Representative WOLCOTT. What way?
Mr. MARTIN. You would increase the discount rate, reenforce it with
restrictive open market operations, and see what the market forces
would do to the supply and demand for money.
Representative WOLCOTT. It might raise the reserve requirements,
might it not ?
Mr. MARTIN. You 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 WOLCOTT. You surely would not continue supporting
the Government bond market under those circumstances ?
Mr. MARTIN. That is right.
Representative WOLCOTT. 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. MARTIN. I Would not see any necessity for that at the presentRepresentative WOLCOTT. I am just assuming a condition whichMr. MARTIN. Oh, under those conditions ?

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103

Representative WOLCOTT. Yes. What I am trying to find out when
I 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. MARTIN. That is correct.
Representative WOLCOTT. And you probably would recommend to
the Congress that they restore to the 40 and 35 percent, respectively,
the reserve behind-the gold reserve behind-deposit liability and
Federal Reserve notes .
Mr. MARTIN . 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 ?
Mr. MARTIN. No , sir.
Representative WOLCOTT. You are not going to ask for any increase in reserve requirements, Federal Reserve?
Mr. MARTIN. 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 so
long as we have a high national debt we must accept inflation as a
matter of Government policy ?
Mr. MARTIN. No, sir ; because we have-we have succeeded in restraining inflation at the moment ; we have a large debt. It means
that it is essentialRepresentative WOLCOTT. We have got inflation .
Mr. MARTIN . What is that ?
Representative WOLCOTT. We have got inflation .
Mr. MARTIN. Well, we have hadRepresentative WOLCOTT. The value of the dollar has been going
down constantly, it has been going down 6 or 7 percent since Korea,
and setting an all-time low now of 52.85 . It was 59, was it not, at the
time of Korea ?
Mr. MARTIN. I don't 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 ? Must we accept as a matter of policy continuing inflation ?
Mr. MARTIN . I see no reason to .
Representative WOLCOTT. What can we do about it ?
Mr. MARTIN. 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. MARTIN. We want to get our budget in balance as nearly as
we can, and if we 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

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the dollar was depreciating 6 percent there must have been some other
things that we have got to do besides balance the budget.
Mr. MARTIN. Would you repeat that, Mr. Wolcott ?
Representative WOLCOTT. I said the balancing of the budget would
not alone correct inflation, because we balanced the budget last year.
Mr. MARTIN. We have to pursue an active restrictive monetary
policy ; that is also indespensible.
Representative WOLCOTT. An active restrictive monetary policy ?
Mr. MARTIN. A restrictive monetary policy ; yes sir.
Representative WOLCOTT. What are you doing to restrict it now ?
Mr. MARTIN. At 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. It has not been restricted to the point
where it has had any influence on inflation.
Mr. MARTIN. Well, I beg to differ with you there. It seems to me
that our studies show thatRepresentative WOLCOTT. How can you differ with me when the
dollar has been depreciating in value constantly almost proportionately as we indulge in deficit financing ?
Mr. MARTIN. May I ask Mr. Young to answer this question ?
Representative WOLCOTT. Certainly.
Mr. YOUNG. The big increase in prices following Korea was in the
8 months immediately thereafter. Subsequent to that sensitive prices
and wholesale prices receded somewhat and leveled off, and the rate
of increase in consumer's prices also leveled off gradually. In February there was a decline in 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 in the summer sometime,
and then we were going to meet it in October, and then we were going
to meet it in January, and then we were going to meet it sometime this
spring, sometime this summer, and I think his last statement is that
we are probably going to meet it 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. MARTIN. That is substantially correct, Mr. Wolcott.
Representative WOLCOTT. Then, can we assume that the use of the indirect controls that you have has caused this leveling- off process ?
Mr. MARTIN. One of the important factors in causing the leveling- off
process ; yes, sir.
Representative WOLCOTT. Were it not for debt management-getting 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 paper in addition to those ?

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105

Mr. MARTIN. In postwar years, there has been quite a increase in
bank holdings of commercial paper, but I should not think that it
would be
Representative WOLCOTT. We did not have then, and—
Mr. MARTIN . But we had a large volume of excess reserves in the
banks during most of the thirties.
Representative WOLCOTT. As I understand the original purpose of
the Federal Reserve System it was to provide a flexible currency
to meet the demands of business , from time to time. You could put
it 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 it not ?
Mr. MARTIN. Yes. That was the way they thought it 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. MARTIN. 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. Now, to lick a depression in the thirties we
abandoned that idea , did we not ? We substituted debt for commercial paper ?
Mr. MARTIN. 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. And we so wedded our debt to the value
of our currency in the abandonment of the idea that the Federal Reserve which was set up to meet the business demand with respect to
money, that the value of our currency is dependent largely or is
influenced largely by the debt.
Mr. MARTIN. 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 will 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.
If the value of the dollar has shrunk 6 percent in the last 18 months,
it might shrink 12 percent in the next 3 years , and we will 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 . It is not
too simple, but does it 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. MARTIN. The important thing is to eliminate the deficit . I
think we should have such studies, and I will be glad to have a paper
prepared for you on how we can go about it.

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Representative WOLCOTT. 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. It 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.
If 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 it in mind in 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. MARTIN. Well, I will 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 BANK RESERVE REQUIREMENTS AND FEDERAL RESERVE CREDIT
The Federal Reserve Act as amended in 1945 requires that each Federal
Reserve bank hold reserves in gold certificates equal to 25 percent against its
Federal Reserve notes in circulation and against its deposits. In the case of
Federal Reserve notes, the law also requires that each Reserve bank shall pledge
with the Federal Reserve agent of its district collateral equal to 100 percent
of the amount of such notes in circulation . Such collateral may consist of gold
certificates ; paper originating in commerce, agriculture, and industry-that is,
so-called eligible paper-or direct obligations of the United States Government.
Prior to 1945 the required reserve percentages were 40 percent of gold certificate reserves against Federal Reserve notes and 35 percent of gold certificates
or lawful money against deposits . The main reason for the lowering was that
the gold reserve ratio had fallen significantly during World War II as a result
particularly of the very large expansion of Federal Reserve notes in circulation
because of wartime demands for currency. This increased volume of money
has remained in 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 1932 and was
periodically renewed, and the authority was made permanent in 1945. This
provision was necessitated by the large-scale withdrawal of currency from
bank deposits in the early years of the depression, by the then reduced volume
of eligible private paper in Reserve bank portfolios, and by the desirability of
Federal Reserve purchases of Government securities in order to prevent the
development of tight money conditions during the depression.
It 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 for notes is necessary under present conditions, since
the volume of commercial, agricultural, and industrial paper now held by these
banks would be inadequate for the purpose . Also, the provisions of law regarding the reserve requirements of the Reserve banks are important in enabling
flexibility in monetary management to meet changing conditions.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

107

These legal provisions are not inflationary per se. Federal Reserve credit is
not created just because the basis for such creation is available. It is the duty
of the Federal Reserve System to see that Reserve bank credit is adjusted to
the needs of the economy. Changes in the volume of such credit outstanding
are now determined mainly by actions of the Federal Reserve System in accommodating the credit needs of consumers, commerce, agriculture, industry, and
State and local governments, as well as the Federal Government. Such actions
are taken only after a careful review of the economic and financial situation
in the country at the time and after a full consideration of their inflationary
and deflationary implications.
An automatic check on the expansion of Federal Reserve bank credit, such
as would be imposed by an increase in the ratio of gold certificates required
against Federal Reserve notes and deposits, would not be desirable. It was in
part to prevent arbitrary and mechanical limitations on the volume of bank
credit and money, resulting from too rigid a relationship between the credit
and money supply and gold, that the Federal Reserve System was initially
established.
Representative WOLCOTT. I think that would be in keeping with the
original purpose of the Federal Reserve Act ; 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 bill 2639 is intended to establish an auxiliary system of banking upon
principles well understood and approved by the banking community in its broad
essentials, and which, it is confidently believed, will tend to stabilize commerce
and finance, to prevent future panics, and place the Nation upon an era of enduring prosperity.
That, I think, very briefly sets out the reasons why the Congress set
up a Federal Reserve System.
Then, you recognize that in your annual report for 1923 , in which
you say the problem "in good administration under the Federal Reserve System is not only that of limiting the field of uses of Federal
Reserve 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 .
Representative PATMAN. Mr. Wolcott , will you yield for what I
believe to be a correction ?
Representative WOLCOTT. Yes.
Representative PATMAN. It says here the report to the Senate in
1913. I believe that Senator Robert Owen was chairman of the Senate
Banking and Currency Committee at that time.
Representative WOLCOTT. I was not sure ; I think, perhaps you are
right.
Representative PATMAN. And Senator Glass was then the chairman
of the House Committee on Banking and Currency.
Representative WOLCOTT. That is right. This would be Senator
Robert Owen.
Representative PATMAN. That is right.
Representative WOLCOTT. I did not want to take any credit from
Senator Owen with respect to the co- sponsorship of the Federal Reserve Act.
Then, again in the 1945 bank report which yoù quoted , you said :
It 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

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

policy permit, to an economic environment favorable to the highest possible degree
of sustained production and employment. Traditionally 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, it seems to me that if you had the independent status that we
intended you should have when Congress set up the act, if you were
allowed to exercise it, if 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 economyrecognized as recently as 1945 as your purpose and objective-the
Federal Reserve, with the powers it now has, could have prevented this
inflation. It 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 statut
ory authority to raise reserve requirements . They have been as high as 7 percent , have they not , under
existing law?
Mr. MARTIN. 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. MARTIN. It was up that high during part of 1920 and 1921 ; the
rate reached 6 percent in the fall of 1929.
Representative WOLCOTT. It was up to 6 percent ?
Mr. MARTIN. That is right.
Representative WOLCOTT. Now, the Board can initiate those increases, can they not ?
Mr. MARTIN. 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. At that time the Board had to wait for action to be taken.
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, it seems to me that if 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 II we were
told that it should be our objective to stabilize at about an 80 -cent
dollar, and if we did we could carry the debt and do all the other
things we had to do. At the same time we encouraged production to
get productivity and stability. I still think that we can do that if 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 in
proportionate decreases in the value of our currency. If 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 . If 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

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

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
in respect to open-market operations , or do you?
Mr. 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 ; it was done in the Eightieth Congress. The Eightieth Congress -there is nothing political in this at all-I am just taking pride
in the fact that in the Eightieth Congress we had 2 years of balanced
budgets, and took the initiative in stabilizing our economy. I think
if the Senate had to do it over again they would have considered the
bills which were passed by the House in keeping with our policy, and
not have been so susceptible to administration pressures that inflation
be continued for political expediency beyond the time when it 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. MARTIN. The Board is going to devote its best efforts to prevent
the depreciation of the dollar.
Representative WOLCOTT. That is a good answer. That is the best
that I know of that you can give under the circumstances ; but it is not
the answer that I think you would give if 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 it ; 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. MARTIN. Well , we have got to have fiscal policy , debt management, and monetary policy working closely together to achieve that
stabilization you are seeking.
Representative WOLCOTT. You have it under this present situation ,
yes ; but you would not have it, that is, it would not have the same
degree of influence if you divorced your debt from your money.
Do you know what the discount rate from the Bank of England is ?
Mr. MARTIN . It is, I thinkWhat
Representative WOLCOTT. I know what it was yesterday.
is it now?
Mr. MARTIN. Two and a half to four-4 percent. It was raised
today to 4 percent.
Representative WOLCOTT. Raised today, was it ?
Mr. MARTIN . Yes, sir.
Representative WOLCOTT. To 4 percent ?
Mr. MARTIN . Yes.
Representative WOLCOTT. That compares with our 134.
I think I have taken all the time that I should, Mr. Chairman.
Representative PATMAN. Mr. Martin, in your testimony are you
expressing your own views or the views of the Federal Reserve Board ?
Mr. MARTIN. In the testimony I have handed you , Mr. Chairman ,
I am expressing views that are concurred in by the Board of Governors ?

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Representative PATMAN. By the Board of Governors ?
Mr. MARTIN. That is correct.
Representative PATMAN. 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. MARTIN. Well, I presume the banks could be compelled to hold
Government securities.
Representative PATMAN. That is what I am talking about .
Mr. MARTIN . I see.
Representative PATMAN. In other words, freeze them in the banks
for that purpose .
Mr. MARTIN. That could be done ; I think it would be most unwise .
Representative PATMAN. Of course, it is a drastic remedy, but any
control is a drastic remedy, whether it is a direct or indirect control
or anything else, it 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. MARTIN. It could be done ; yes, sir . We could also order banks
to stop lending.
Representative PATMAN. You could do most anything in that direction to stop the inflationary trend that Senator Douglas has talked
about ?
Mr. MARTIN. That is right.
Representative PATMAN. 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 on that committee.
Mr. MARTIN. That is right , sir .
Representative PATMAN . I believe Mr. Powell, a member of your
organization , is on the Board, and is head of the committee ?
Mr. MARTIN . That is correct, sir.
Representative PATMAN. 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
in this. Does it 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 it seems to be pretty dominantly composed of people who
are selfishly interested .
Mr. MARTIN. 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 PATMAN. It is up to them. You think that is a good
policy to pursue ?
Mr. MARTIN. 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 profit instead of
the shorter-range profit .

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111

Representative PATMAN. You would not recommend that other people connected with the Government be on that Board ?
Mr. MARTIN. No , 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 PATMAN. Taking your reasoning, would that not
apply to regulation W? Why not give the people a voluntary restraint
credit program ?
Mr. MARTIN. We have endeavored to consult regularly with the
trade on regulation W.
Representative PATMAN. I know, but you are not just consulting
here ; you are giving them-you make it voluntary. They are doing
it themselves. Why do you not let the people affected by regulation
W do the same thing ?
Mr. MARTIN. Well , think of how many people there are affected by
regulation W.
Representative PATMAN. The number is not the important thing ;
it is the principle involved.
Mr. MARTIN. How would you devise the administrative procedure
other than consulting with the trade groups ?
Representative PATMAN. Well , they have trade groups , all of them ,
I know.
Mr. MARTIN . 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 PATMAN. The ones affected by Regulation W have
another selfish interest, too . It 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. MARTIN. That is right. So our interest in regulation W is in
the over-all money supply and not in the trade practice aspect of it.
Representative PATMAN. It 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. MARTIN. In 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 PATMAN. How much has the credit increased under
regulation W in the past calendar year ?
Mr. MARTIN. Have you got that figure now?

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Mr. YOUNG. About $50 million , I believe.
Mr. MARTIN . About $50 million.
Representative PATMAN. How much has it increased in credit
through the banks and insurance companies and investment bankers,
all of them, that are involved in the restraint committee program ?
Mr. MARTIN. Do you mean, how much has been deferred as a result
of thatRepresentative PATMAN. No, 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 othergive me a comparable figure. Have the banks increased many billions
of dollars in the past year ?
Mr. MARTIN. A large part of that is for defense work. That is
true, but a large part of it is for defense.
Representative PATMAN. Well, part of this $50 million would be
for defense work, too. You know, they have to have automobiles
to travel back and forth.
Mr. MARTIN. About $4.1 billion, Mr. Chairman.
Representative PATMAN. You mean the commercial banks ?
Mr. MARTIN. Commercial banks ; that is right, sir.
Mr. YOUNG. Business loans of commercial banks.
What other loans ?
Representative PATMAN. Business loans ?
Would there not be any increaseMr. YOUNG. Real estate loans $1 billion.
Representative PATMAN. $1 billion ?
Mr. YOUNG. All other about $800 million .
Representative PATMAN. About $7 billion ?
Mr. YOUNG. For total loans of commercial banks ; that is correct .
Representative PATMAN. Now, 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 will get credit and who
will 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. MARTIN. We have a Federal Reserve representative at each
meeting, Mr. Chairman.
Representative PATMAN. Well , of course, that is a little bit-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. MARTIN. The Federal Reserve representative would naturally
take what he conceives to be the interest of the defense program and
the Government.
Representative PATMAN. In a case of conflict of interest where it
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, if there
is a defense issue.
Mr. MARTIN. That is right ; and it is very difficult to determine
whether some of these are defense or not.
Representative PATMAN. That is right ; unless you know the facts
in any particular case.
Mr. MARTIN . That is correct.

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113

Representative PATMAN. And I thoroughly agree with you . Now,
on regulation X, why could you not administer it the same way
through a volntary committee, just like the voluntary restraint committee here, rather than have the compulsory process that you have ?
Mr. MARTIN. Mr. Young tells me there has been a supplementary
voluntary program in connection with real estate credit.
Representative PATMAN. Supplementary program ? It is not set up
by law, is it ?
Mr. YOUNG. It is under the voluntary credit restraint program.
Representative PATMAN. I see . It is under the Defense Production
Act ?
Mr. YOUNG. To deal with certain areas not covered by regulation X.
Representative PATMAN. You could set it up for regulation W that
way, could you not ?
Mr. YOUNG. 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 PATMAN. 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. YOUNG. Not as a substitute for regulation W.
Representative PATMAN. Oh, you are going to have regulation W,
too ? Well, I do not blame them; I would not want a double-barreled
thing.
Mr. YOUNG. To give them a chance to
Representative PATMAN. But they were not offered the same opportunity that the bankers were offered ?
Mr. YOUNG. They were not offered the same opportunity, but the
consumer installment credit field has special features.
Representative PATMAN. Well , would you be willing to offer them
that opportunity?
Mr. MARTIN. I would have to study it considerably more, Mr.
Chairman.
Representative PATMAN. How many people do you have trying to
enforce regulation W, I mean in the way of policing it ?
Mr. MARTIN . I would say not over 150 for the whole country.
Representative PATMAN. 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. MARTIN. Well , we have hadRepresentaitve PATMAN. Do you have people doing that ?
Mr. MARTIN. We have had lots of complaints of that. We have tried
to minimize that type of enforcement. I think they are exaggerated,
but it is not a happy lot to be the policeman at anything these days.
Representative PATMAN. 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.

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Mr. MARTIN. 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 PATMAN. Do you not think we could well afford to do
without regulation W for the next year on a trial run basis ?
Mr. MARTIN. Unless we get more flexibility than we now have with
it, I question how much serviceability there is in it.
Representative PATMAN. You mean a shorter term in which to pay
than 18 months on automobiles and trucks ?
Mr. MARTIN. No. I mean the flexibility for us to tighten it if we
felt that conditions warranted it. At the moment we would not make
any material change in the regulation if we had full authority.
Representative PATMAN. But you would like to have the power so
that in the event you needed it, you would have it there ?
Mr. MARTIN . That is correct.
Representative PATMAN. 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. MARTIN. That would be very desirable.
Representative PATMAN. That is the best way.
Well , what is the amount of the demand deposits in commercial
banks now, do you know, approximately ?
Mr. MARTIN. About a hundred billion .
Representative PATMAN. If there is some way of inducing the people not to give checks on their deposits and to keep them intact, it
would be a very constructive move to fight inflation, would it not ?
Mr. MARTIN. It would.
Representative PATMAN. 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 it 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. MARTIN. If they retained the deposits, yes.
Representative PATMAN. Well, do you think it would be an inducement ? Do you not think it would be an inducement if they got paid
for it ?
Mr. MARTIN. It would be some inducement ; yes, sir.
Representative PATMAN. According to the amount they were paid .
Mr. MARTIN. It would be progressively more of an inducement the
more they were paid.
Representative PATMAN. 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. MARTIN . It does.
Representative PATMAN. This would work in the same way, except
that it would be on their actual deposits.
Would you recommend any change in that law, Mr. Martin ?

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

115

Mr. MARTIN. Not without considerably more study than I have been
able to give it up to this moment, Mr. Chairman .
Representative PATMAN. You would want to study this some more ?
Mr. MARTIN. I would want to study it some more.
Representative PATMAN. But you admit it would be a fine weapon to
fight inflation ?
Mr. MARTIN. It would be a weapon to fight inflation.
Representative PATMAN. Well , its usefulness would depend on the
amount that the banks would pay, would it not ?
Mr. MARTIN. That is correct, but it would also introduce a major
new factor in the money market.
Representative PATMAN . And the ability of the banks to pay a
sufficient amount, to make it sufficiently attractive, to induce people
to keep their deposits there and not spend them.
Mr. MARTIN. They can shift their demand deposits now into time
deposits or over into savings banks.
Representative PATMAN. They get nearly as much there as they
do on the E bonds.
Mr. MARTIN. That is correct .
Representative PATMAN. 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. MARTIN. I am afraid I do not know, Mr. Chairman.
Mr. YOUNG. I am not familiar with that, Mr. Chairman.
Representative PATMAN. My recollection is rather indistinct , but I
thoughtMr. YOUNG. It was an amendment to the act.
Representative PATMAN. But I believe it was more of a temporary
device.
Mr. YOUNG. I believe not, sir.
Representative PATMAN. I think it was passed in 1935.
Mr. YOUNG. It was in the Banking Act of 1935 for insured banks
and in the Banking Act of 1933 for member banks.
Representative PATMAN. And the best of my recollection is that
there was not a great deal of discussion about it on either floor, and
was it not put in in conference ?
Mr. YOUNG. I think the feeling about it, Mr. Chairman, was that
the practice of paying interest on demand deposits had been a factor
in the twenties operating to result in the deterioration of the quality
of our banking.
Representative PATMAN. I recall that, sir.
Mr. YOUNG. It got rather competitive in that period .
Representative PATMAN. That was a persuasive argument.
Mr. YOUNG. And it was a factor in the crisis of 1930 to 1933 .
Representative PATMAN. Would that argument be equally persuasive now in view of the fact that deposits are insured up to
$10,000 ?
Mr. YOUNG. It is not so persuasive now, but it would have to be
given careful consideration.
Representative PATMAN. Anyway, you are not recommending it
and you are not deciding against it ? You are going to consider it ?
Mr. MARTIN. Yes.

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Representative PATMAN. The Federal Reserve bank earnings now
are practically all from Government bonds, Government securities,
are they not, Mr. Martin ?
Mr. MARTIN. That is correct, sir.
Representative PATMAN. It was contemplated in the original act that
a certain amount would be paid to the Treasury over and above expenses ; I believe they call it a franchise tax, do they not ?
Mr. MARTIN. That is right, sir.
Representative PATMAN. And90 percent and then the law was
amended two or three time ; first it said after a surplus of a certain
amount had been accumulated, then it 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. MARTIN. 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 be glad to see the
law formally changed or see a franchise tax restored .
Representative PATMAN. You say the law was not changed ? I
think you are mistaken there, Mr. Martin.
M
'r. MARTIN . Am I ?
Representative PATMAN. I think the law was changed . In other
words, the 90 percent provision was repealed .
Mr. YOUNG. That was repealed . The 90 percent that is now in
operationRepresentative PATMAN. The what?
Mr. YOUNG. The 90 percent payment that is now in operation is by
an agreement between the Treasury and the
Representative PATMAN. I did not ask you about that, Mr. Young.
I am going to get to that.
Mr. YOUNG. You are correct ; it was repealed by the Banking Act
of 1933 .
Representative PATMAN . The original law was that after the payment of the expenses and after the accumulation of a certain amount
in the reserve fund of each bank, the remainder-90 percent of the
remainder- would go over to the Treasury as a franchise tax. Now, in
some way that law got repealed.
I do not know how.
I have not
looked into the history of it. I just know it was repealed, but the
question I am asking you is, When was that repealed ?
Mr. MARTIN. We will get you the data and put it in the record,
Mr. Chairman . That is some more homework I will have to do.
Representative PATMAN. And any discussion that you find in either
House about it, I would like to have my attention called to that, too, if
you
please.
ay
Mr. MARTIN. Right, sir.
(The supplementary statement by Chairman Martin follows :)
PAYMENTS TO TREASURY BY FEDERAL RESERVE BANKS
FRANCHISE TAX ON FEDERAL RESERVE BANKS
In section 7 of the original Federal Reserve Act, it was provided that all earnings, after necessary expense and dividends, should be paid to the United States
as a franchise tax, except that one-half of such net earnings should be paid into
the Federal Reserve bank surplus until it amounted to 40 percent of its paid-in
capital stock. In 1919 , this provision was amended to provide that the net

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

117

earnings after expenses and dividends should be paid into the surplus fund until
it amounted to 100 percent of the bank's subscribed capital stock, and that thereafter only 10 percent should be paid into the surplus fund. In other words, the
law required that, after accumulation of the prescribed surplus, 90 percent of
net earnings of the Reserve banks be paid to the United States as a franchise
tax ; and this situation continued until 1933.
The Banking Act of 1933 eliminated the requirement for the payment of a
franchise tax but, at the same time, required the Federal Reserve banks to subscribe $139,000,000 for Federal Deposit Insurance Corporation capital stock, an
amount equal to one-half of their surplus on January 1, 1933. The bill which
became the Banking Act of 1933, as reported in both Houses of Congress and as
passed by the Senate, contained the provision eliminating payment of the franchise tax by the Federal Reserve banks. However, when the bill was under consideration by the House, this provision for the elimination of the tax was stricken
from the bill. The conference committee, however, followed the Senate version
in this respect and restored the provision.
The reports of the Banking and Currency Committees on the Banking Act of
1933 do not show reasons why the franchise tax was being eliminated . However, when the bill was presented to the House the chairman of the House committee stated, with respect to the subscription of $ 150,000,000 by the Treasury
for stock in the Federal Deposit Insurance Corporation, that"This fund covers the larger part of sums that have been paid into the Treasury by the 12 Federal Reserve banks in lieu of a franchise tax. Approximately
$150,000,000 is to be subscribed by the Federal Reserve banks, the plan requiring
that each Federal Reserve bank subscribe for the capital stock of the Deposit
Insurance Corporation in an amount equal to one-half of its surplus" (Congressional Record, vol. 77, pt. 4, p. 3836 ) .
During debates in 1932 on an earlier draft of a similar bill, Senator Glass had
stated his reasons for a proposal to eliminate the franchise tax. When the 1933
bill came before the House of Representatives, Representatives Patman and
Keller expressed their opposition to the proposal. Excerpts from the statements
by Senator Glass and Representatives Patman and Keller are attached.
SUBSCRIPTION TO CAPITAL STOCK OF THE FEDERAL DEPOSIT INSURANCE CORPORATION
The Banking Act of 1933 creating the Federal Deposit Insurance Corporation
required that each Federal Reserve bank subscribe to non-dividend-paying stock
of the Corporation in an amount equal to one-half of the Reserve bank's surplus
on January 1 , 1933.
When the proposal for cancellation of the Federal Deposit Insurance Corporation stock was under consideration, the Board recommended, and the legislation
provided, that the amount received by the Corporation from the Federal Reserve
banks for such stock be paid to the Treasury rather than returned to the Reserve
banks . This was done in October 1947.
PAYMENT OF INTEREST ON FEDERAL RESERVE NOTES
In April 1947 the Board of Governors announced that it had decided to invoke the authority granted to it under section 16 of the Federal Reserve Act to
levy an interest charge on Federal Reserve notes issued by the Federal Reserve
banks. The purpose of this interest charge was to pay to the Treasury approximately 90 percent of the net earnings of the Federal Reserve banks for that
Such payments have been continued for succeeding years. The statement pointed out that at the end of 1946 the surplus of each Federal Reserve
bank was equal to its subscribed capital and that under this policy the Board
would be able to accomplish the same results as were accomplished by the payment of a franchise tax.
Prior to the adoption of the policy the proposal was discussed by Chairman
Eccles with Representatives of Congress and with the Secretary of the Treasury.
In particular, the matter was the subject for discussion between Representative
Patman and Chairman Eccles at the hearings March 4, 1947, before the Committee on Banking and Currency on H. R. 2233 ( p. 29 ) .
DISTRIBUTION OF FEDERAL RESERVE BANK NET PROFITS, WITH SPECIAL REFERENCE
TO PAYMENTS TO THE TREASURY
From earnings of the Federal Reserve banks since organization through 1951
the Treasury has received $ 1,175,000,000 as franchise tax, contribution for the

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

purchase of stock in 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 follows :
$1, 175, 000, 000
Total payments to Treasury.

Franchise tax
FDIC stock___ .
Interest on Federal Reserve notes :
1947___
1948.
1949_
1950
1951

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_ .
Paid U. S. Treasury from earnings on funds received from the
Treasury for the purpose of making working capital loans to
industry (sec. 13b loans )
Net transfers toReserves for 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, vol.
77, pt. 4, p. 3842)
During debates in 1933 on the bill , Representative Patman, in commenting upon
this proposed amendment, stated :
"The money [ for the Federal Deposit Insurance Corporation ] is coming from
three sources ; namely, $150,000,000 from the Treasury of the United States ,
$150,000,000 from the surplus fund of the Federal Reserve banks , which, as a
matter of right, should be in the Treasury of the United States today. That
money does not belong to the Federal Reserve banks. It belongs to the United
States Treasury. It never has belonged to those banks. It never was intended
that those banks should get that money. Therefore, of the $450,000,000 appropriated, $300,000,000 of it represents the people's money, coming from the Treasury of the United States. The other one-third will come from the depositors ,
one-half of 1 percent being assessed against the deposits of the banks.
"Surplus fund of Federal Reserve banks.-Now, let me tell you about this
surplus fund of the Federal Reserve banks. When those banks were organized,
they were not intended as profit-making institutions. It was stated they were
going to use the credit of this Nation, and for the purpose of compensating the
people for the use of that credit, when they paid their operating expenses and
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, if a member bank should fail or should withdraw from this System, that
member bank would only get its capital stock back. It does not get back a part
of that surplus, because that surplus does not belong to the member bank. It
belongs to the Treasury of the United States.
"Evidence of intent. The law provides that in the event a Federal Reserve
bank becomes insolvent and it is necessary to liquidate that bank after the
expenses of the bank are paid, the surplus goes into the Treasury of the United
States. If the theory of the gentleman from Alabama, Mr. Steagall, is correct,
that surplus should go back to the member banks that subscribed to the capital
stock in that particular Federal Reserve bank. It is written into the law from
beginning to end, that as to those banks using the credit of our Nation in the
manner they are, the excess profits they make shall be paid into the Treasury of
the United States. Now you come along in section 3 of this bill and attempt to
change the entire policy of our Government in that regard. You attempt to divert
from the Treasury of the United States back to the Federal Reserve banks that
surplus, when there was written into the law language that said it should go into
the 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 for private
banks, and that it is necessary to do it in the interest of the general welfare.
Yes ; I say it is all right to do it in the interest of the general welfare, but do not
restrict it to just 6,000 banks . Give all banks an opportunity to come in , and
when this bill is subject to amendment under the 5-minute rule, I expect to offer
two amendments in particular.
"One is to strike out section 3 which changes the policy of this Government in
regard to the excess earnings of the Federal Reserve banks. * *
Excerpts from statement by Senator Glass (Congressional Record, vol. 75, pt . 9,
pp. 9885-9886)
During debates in 1932 on an earlier draft of the bill, Senator Glass, in commenting upon this proposed amendment, stated :
"Section 4 of the bill relates to the distribution of earnings. Although the
Federal Government has never expended a dollar in the maintenance of the
Federal Reserve System and does not own one dollar of proprietary interest, it
has collected in excess of $150,000,000 from the earnings of the Federal Reserve
banks upon the pretense that it was a franchise tax for privileges granted. Senators will find upon examination that the 12 Federal Reserve banks do, without
charge, a fiscal business for the United States Government that 20 times over
compensates the Government for any privilege the Federal Reserve banks may
have
16* * * The Federal Reserve banks do a fiscal business for the United States
Government that has never been paid for. The Government has not floated a loan
since the beginning of the World War that it has not done it through the agencies
and instrumentalities of the Federal Reserve Banking System.
"We 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 future earnings of the
banks to surplus account. We propose to recapture from the Federal Treasury
$125,000,000 of the $150,000,000 and odd that has been paid into the Treasury,
and pass it to the credit of a revolving fund for prompt liquidation of failed
banks. * *
*
*
*
*
66* * *
In other words, we propose to take $125,000,000 from the Federal
Treasury, which we conceive to be a recapture of a part of a larger amount paid
into the Treasury to which it was not entitled. Then we propose to take onequarter [ subsequently changed to one-half ] of the existing surplus of the Federal Reserve banks themselves and apply it to this fund ; but hereafter the future
earnings of the Federal Reserve banks will 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. 3913, 3914 )
During debates in 1933 on the bill, Representative Keller, in commenting upon
this proposed amendment, stated :
"This bill is in most regards a splendid bill. It represents a vast amount of
labor on the part of the committee. But for all their thought and care somehow
a section has found its way into this bill that would nullify most of its benefits. I refer to section 3, which seeks to turn over to this privately owned bankers' banking system for all time to come every penny of the franchise tax which
has existed from the start.
"A previous Congress, as representatives of our people, saw fit to give a small
group of our citizens the power to issue money. For that privilege it exacted
a small tax. That small group has paid itself a generous profit on that privilege
in the past, and it now comes to the representatives of a sovereign power and asks
that it be given all the profit.
"Now, what does this section 3 mean? It means this and nothing less, that if
section 3 becomes the law we forever give up all claims to any return to the
Government whatever. If section 3 had been in 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.

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

"Therefore, if we keep section 3 in this bill, it means the people will never receive another penny from this private banking system for the tremendously
valuable franchise which it holds. Any man who votes to retain it in the bill
votes to take from the people all the hundreds of millions of money which will
come to them if this section is left out of this bill."
Representative PATMAN. 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. MARTIN . That is right.
Representative PATMAN. 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 which it
can be used ? Who determines that at each bank ?
Mr. MARTIN. Each Reserve bank has a board of directors .
Representative PATMAN. And they determine it ?
Mr. MARTIN . 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 PATMAN. Yes ; I am sure they all are fine people.
But, now, who supervises that ; after they pass on it, who looks over it ?
Mr. MARTIN. The Board of Governors, sir.
Representative PATMAN . The Board of Governors looks over it ?
Mr. MARTIN . That is correct, sir.
Representative PATMAN. 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. MARTIN . We have a very careful budget review on a
businessRepresentative PATMAN. Do you have a copy of that that I could
see ?
Mr. MARTIN. In the answer to the questions we have listedRepresentative PATMAN. I have seen that. You need not furnish
anything that is already furnished or has already been furnished, in
answer to the questions.
Mr. MARTIN . Well, we tried to cover our procedures thoroughly.
Representative PATMAN. 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. MARTIN. 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 PATMAN. You mean where something like that would
be itemized ; it would be identified ?
Mr. MARTIN. It is my understanding it would be included under
the appropriate functional classification.
Representative PATMAN. My attention has been called to the statements being gotten out by these banks, one in particular-and it hap-

MONETARY POLICY AND MANAGEMENT OF PUBLIC 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. MARTIN. No , sir ; I do not know the particular reference.
Representative PATMAN. 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. MARTIN . The board of directors of the bank.
Representative PATMAN . Of that bank?
Mr. MARTIN. Operating under budget approvals from the Board
of Governors here in Washington .
Representative PATMAN. Who audits that bank ?
Mr. MARTIN. As 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. In addition, each Federal Reserve bank is examined
at least once a year by the Federal Reserve Board through its staff of
examiners.
Representative PATMAN. And the Federal Reserve Board- whe
does the Federal Reserve Board get ?
Mr. MARTIN . Who audits the Federal Reserve Board ?
Representative PATMAN. Yes.
Mr. MARTIN . Well, we are about to have a noted private firm audit
our accounts.
Representative PATMAN. Who selected this private firm ?
Mr. MARTIN. It was selected by the Board of Governors.
Representative PATMAN. 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. MARTIN. Because, Mr. Chairman, budgetary control of our
operations, of our budget, is fundamental in our concept of the
independent status of the System. If you want to nationalize the
System , why, the surest way to do it is through control of the budget .
If 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
How in the world could we have embarked upon that
example .
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 PATMAN. You 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. MARTIN . 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.

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Representative PATMAN. I notice you said that you are under the
direction and scrutiny of Congress .
Mr. MARTIN. That is correct.
Representative PATMAN. Now, 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. MARTIN . Because I think that would be a step toward nationalization of the System .
Representative PATMAN. Nationalization of the System ? Well, is it
not pretty well nationalized now, Mr. Martin ? On every issue of
money that belongs to the Government, the Bureau of Printing and
Engraving prints the money.
Mr. MARTIN. 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 PATMAN . You 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. MARTIN . No , 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. It 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 PATMAN. It is more of a token subscription , is it not ?
Mr. MARTIN. It is more of a token ; yes, sir.

Representative PATMAN. It does not really amount to anything so
far as
Mr. MARTIN. It 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 PATMAN. 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. MARTIN. The collection of checks, I would not have any way
Representative PATMAN. Let us see, it was not two trillion dollars
last year, was it ?
Mr. YOUNG. It could have been.
Representative PATMAN . Two trillion dollars ?
Mr. YOUNG. Largely, in collections of checks.
Representative PATMAN. That is in clearing checks ?
Mr. YOUNG. In clearing checks.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

123

Representative PATMAN. In transactions-two trillion dollars ; that
is two thousand billion dollars. I cannot comprehend that much
money, but certainly
Mr. MARTIN. There is a lot of service rendered.
Representative PATMAN. 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. MARTIN. Well, I would think that our status as an independent
agency had been severely challenged by such a process.
Representative PATMAN. Why would it ? That would just be under
the scrutiny of Congress, and you say you are under the scrutiny of
Congress.
Mr. MARTIN. We are under the scrutiny of Congress, but we retain
budgetary discretion. Now, the Congress can take it away from us.
Representative PATMAN. 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. It 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. MARTIN. 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 PATMAN. From which banks, the Federal Reserve ?
Mr. MARTIN. The Federal Reserve banks .
Representative PATMAN. Well, the Federal Reserve banks use
Government money, do they not ?
Mr. MARTIN. Not for their expenses.
Representative PATMAN. I mean that is what they deal in with
Government money. They deal in credit of the Nation, do they not ?
Mr. MARTIN. They deal
Representative PATMAN. That is their stock in trade. Without that
they would not have anything, would they?
Mr. MARTIN. 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 PATMAN. 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 ?
Mr. MARTIN. I do, sir.
Representative PATMAN. You would be opposed to that ?
Mr. MARTIN. I would be opposed to it.
Representative PATMAN. Mr. Bolling , did you want to ask some
questions ?
97308-52-9

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Representative 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. MARTIN. Well , I do not know what weapons were proposed,
Mr. Bolling, becauseRepresentative 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 .
Mr. MARTIN. No , sir ; I do not.
Representative BOLLING . I gather from your statement that you
do not feel that at this time such additionalMr. MARTIN . That is correct.
Representative BOLLING. You 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. MARTIN . 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. Do I gather from that that you do not
foresee the possibility of needing it ?
Mr. MARTIN. 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 :
While this study is under way, I hope that no attempt will be made to change
the interest rate pattern, so that stability in the Government security market
will 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 days
or 2 weeks. If my memory serves me correctly, the accord between
the Federal Reserve and the Treasury was in March ?
Mr. MARTIN . March 4.
Representative BOLLING . In this report that Mr. Wilson had ex-.
pressed the hope would be made to the President within 10 days or
2 weeks, was filed on May 11.
In 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. MARTIN. 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 BOLLING. Mr. Chairman , I would like unanimous
consent to print in the record at 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 PATMAN. Without objection it will be done.
(The documents referred to follow :)
The President met this morning (February 26, 1951 ) with the following :
Mr. Thomas McCabe, Chairman, Board of Governors , Federal Reserve System
Mr. Charles Wilson, Director, Office of Defense Mobilization
Mr. Edward Foley, Under Secretary of the Treasury
Mr. Charles Murphy, special counsel to the President
The Council of Economic Advisers, Mr. Leon H. Keyserling, Chairman ; Mr. John
D. Clark and Mr. Roy Blough
Mr. William McChesney Martin, Assistant Secretary of the Treasury
Mr. Allan Sproul , Vice Chairman , Federal Reserve Open Market Committee
Mr. Harry 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
did not ask any of those present for any commitments on the subjects under
discussion, but expressed the hope that they would go ahead speedily with the
study requested.
Mr. Wilson expressed the hope that a report could be made to the President
within 10 days or 2 weeks.
Memorandum for : 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 with the problem of reconciling two objectives :
First, the need to maintain stability in the Government security market and full
confidence in the public credit of the United States, and second, the need to restrain private credit expansion at this time. How to reconcile these two objectives is an important facet of the complex problem of controlling inflation during
a defense emergency which requires the full use of our economic resources.
It would be relatively simple to restrain private credit if that were our only
objective, or to maintain stability in the Government security market if that were
our only objective. But in the current situation , both objectives must be achieved
within the framework of a complete and consistent economic program .
We must maintain a stable market for the very large financing operations
of the Government. At the same time, we must maintain flexible methods of
dealing with private credit in order to fight inflation. We must impose restraints
upon nonessential private lending and investment. At the same time, we must
maintain the lending and credit facilities which are necessary to expand the
industrial base for a constant build-up of our total economic strength. Instead
of fighting inflation by the traditional method of directing controls toward reducing the over-all level of employment and productive activity, a defense emergency
imposes the harder task of fighting inflation while striving to expand both
employment and production above what would be regarded as maximum levels
in normal peacetime.
What we do about private credit expansion and about the Government securities market is, of course, only a part of the problem that confronts us.
ful program for achieving production growth and economic stability in these
critical times must be based upon much broader considerations.

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

We must make a unified, consistent, and comprehensive attack upon our
economic problems all along the line. Our program must include, in proper proportion, production expansion policy, manpower policy, tax policy, credit policy,
debt management and monetary policy, and a wide range of direct and indirect
controls over materials, prices, and wages. All of these policies are necessary ;
each of them must be used in harmony with the rest ; none must be used in ways
that nullify others.
We have been striving in this emergency to develop such a unified program
in the public interest. Much progress has already been made, both on the production front and on the antiinflation front. Many peacetime activities of Government, including the activities of lending and financing agencies, have been pruned
down. Cut-backs of civilian supplies and allocations of essential materials have
been successfully undertaken. Important expansion programs for basic materials and productive capacity needed in 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 tax increases have been enacted, and
additional tax proposals are now pending. In all these fields further action is
being planned and will be taken as needed.
One outstanding problem which has thus far not been solved to our complete
satisfaction is that 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 two important objectives, neither of which can be
sacrificed .
On the one hand, we must maintain stability in the Government security market and confidence in the public credit of the United States. This is important
at all times. It is imperative now. We shall have to refinance the billions of
dollars of Government securities which will come due later this year. We shall
have to borrow billions of dollars to finance the defense effort during the second
half of this calendar year, even assuming the early enactment of large additional
taxes, because of the seasonal nature of tax receipts which concentrate collections in the first half 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 if there is full confidence
in 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 all types, which would
add to inflationary pressures. This type of inflationary pressure must be
stopped, to the greatest extent consistent with the defense effort and the achievement of its production goals.
The maintenance of stability in the Government securities market necessarily
limits substantially the extent to which changes in the interest rate can be used
in 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 in the Government securities market or control of private
credit expansion . I am firmly convinced that this 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 for
curbing credit expansion. Through careful consideration of a much wider
range of methods, I believe we can achieve a sound reconciliation in the national
interest between maintaining stability and confidence in public credit operations
and restraining expansion of inflationary private credit.
We have effective agencies for considering this problem and arriving at a
proper solution .
Over the years, a number of important steps have been taken toward developing effective machinery for consistent and comprehensive national economic
policies. One of the earliest steps in this century was the establishment of the
Federal Reserve System before World War I. At that time, under far simpler
conditions than those now confronting us, the Federal Reserve System was regarded as the main and central organ for economic stabilization. After World
War II, in 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 Act
of 1946 to advise the President and help prepare reports to the Congress concerning how all major economic policies might be combined to promote our economic strength and health. Still more recently, in 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 in the mobilization effort. In 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 to
provide the necessary restraint on private credit expansion and at the same
time to make it possible to maintain stability in the market for Government
securities. While this study is underway, I hope that no attempt will be made
to change the interest rate pattern, so that stability in the Government security
market will be maintained.
Among other things, I ask that you consider specifically the desirability of
measures : ( 1 ) to limit private lending through voluntary actions by private
groups, through Government-sponsored voluntary actions such as was done in a
narrow field by the Capital Issues Committee of World War I, and through direct
Government controls ; and (2 ) to provide the Federal Reserve System with
powers to impose additional reserve requirements on banks.
Under the first heading, I am sure that you are aware of the efforts that are
already underway by the American Bankers Association , the Investment Bankers Association , and the life insurance association. I want you to consider the
desirability of this or other kinds of private voluntary action in bringing about
restraint on the part of lenders and borrowers.
I should like you to consider also the establishment of a committee similar
to the Capital Issues Committee of World War I, but operating in a broader area.
The objectives of such a Committee would be to prevail upon borrowers to reduce
their spending and to curtail their borrowing, and to prevail upon lenders to
limit their lending. The activities of this committee could be correlated with
those of the defense agencies under Mr. Wilson with the objective of curtailing
unnecessary uses of essential materials.
Furthermore, I should like you to consider the necessity and feasibility of
using the powers provided in the Emergency Banking Act of 1933 to curtail
lending by member banks of the Federal Reserve System. These powers are
vested in 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 in its own Federal Reserve District under
some flexible procedure. The program could be extended to institutions other
than member banks, if desired, by using the powers provided by the Trading
with the Enemy Act.
Under the second heading, you will recall the recommendation I made to
the Congress a number of times in 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 that or another recommendation with the same general purpose at the present time.
You are all aware of the importance of this problem, and the need for an
early resolution . I should like your study to proceed as rapidly as possible in
order that I may receive your recommendations at a very early date.
asking the Director of Defense Mobilization to arrange for calling this group
together at mutually convenient times.
At 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 curtail such operations and limit them to amounts
needed in 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 that these operations may again be reviewed as part of
our over-all anti-inflationary program.

EXECUTIVE OFFICE OF THE PRESIDENT,
OFFICE OF DEFENSE MOBILIZATION,
Washington, May 17, 1951.

The PRESIDENT,
The White House, Washington, D. C.
DEAR MR. PRESIDENT : 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,

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

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 at the
same time make it possible to maintain stability in the market for 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 for
itself.
Sincerely yours,
CHARLES E. WILSON.
REPORT OF THE FOUR-MEMBER COMMITTEE APPOINTED FEBRUARY 26, 1951
INTRODUCTION
The President's memorandum of February 26, 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 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 to provide the necessary restraint on private credit expansion and at
the same time to make it possible to maintain stability in the market for Government securities."
The present problem of restraining the expansion of credit must be attacked
under conditions differing vastly from those of any other inflationary period
in the Nation's history. To a large degree the problem is fashioned by the continuing influence of the tremendous accumulation of public debt during World
War II, and by the imminent task not only of refunding the large portion of
that debt which matures in the near future but also of undertaking new financing.
Conditions in the market for Government , securities become, therefore, a compelling consideration . Within this framework, nonetheless, restraints must be
exerted on over-all credit expansion , particularly for nondefense purposes, in
order to keep combined Government and private demands within the bounds of
available supplies of goods and services and yet not interfere with the maximum
possible expansion of output in vital lines .
We submit to you in the present report ( I ) a brief review of current problems
of credit control, as they have emerged in the postwar period and as we face
them in connection with the national defense effort ; ( II ) a review of the accomplishments in these fields since your memorandum of February 26 ; ( III ) a
summary of credit controls available under permanent , expiring, and proposed
legislation ; and ( IV ) our conclusions and recommendations with respect to
further needed actions.
I. CURRENT PROBLEMS OF CREDIT CONTROL
During World War II, because of the large Government deficits, banks and
other financial institutions and many other investors bought large quantities of
Government securities. In the postwar period , Federal Reserve use of traditional
instruments to restrain credit was conditioned by the objective of maintaining
a market for these securities without a substantial and general increase in
interest rates. This latter objective limited the effective use of open market
operations for purposes of counteracting inflation . The possible restrictive effect
of increases in reserve requirements was also limited 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 initiation of the expanded defense
program. Various measures were adopted by the Federal Reserve and other
Government agencies in this period to restrain credit expansion . Nevertheless,
the needs of public debt management, the large available supply of liquid assets ,
and the increased accent upon full employment and production, continued to
limit the Federal Reserve System's pursuit of a more effective policy of credit
limitation .
The period since the outbreak in Korea has been characterized by anticipation
on the part of consumers and business concerns of the effects of the expanded
national security program. This anticipatory buying was financed in 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 in a
favorable position to extend credit, since they could always sell Government

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securities and the Federal Reserve System stood ready to make purchases whenever other investors were not ready to buy at prevailing prices. While any
feasible Federal Reserve policy could not have prevented individuals and business concerns from financing their purchases, a stronger policy of credit restraint
could have made it more difficult and would have reduced the total amount.
Part 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 than it was at the time of the Korean outbreak.
The fact that some credit extension serves a highly useful purpose in the defense effort, while other is less useful or even harmful under present circumstances, makes it desirable to use credit controls as selectively as possible.
While selective credit controls , such as consumer credit, real-estate credit, and
credit for securities markets, have a continued usefulness in the mobilization
period, general credit curtailment, or a general rise in interest rates , does not
have so selective an impact in relation to defense priorities. General credit control is, however, essential to reinforce the effectiveness of the voluntary and
other efforts of restraint. The objective of a discriminating credit policy is
further aided by Government agencies through loan guarantees, tax amortization, and direct financial aid to defense-related activities. Supplemented by
such programs , general credit controls are an effective instrument in the program of mobilization and stabilization . They must, of course, be reconciled with
the Government's requirements for refunding and new financing.
Credit policy will be modified in character and intensity as the mobilization
effort passes through various stages. We are now shifting from the preparatory
to the production phase of the defense effort. In the preparatory stage, private
credit expanded while Government budgets showed a surplus. Expenditures for
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 Treasury will be faced with the need for deficit financing in addition to large refunding operations . There is at the same time no certainty that private demand
for investment and credit will subside. At the peak of defense production direct
controls of materials may curtail private credit demands. But physical controls are still in the developmental stage and their full effect cannot be foreseen.
We are facing therefore a period in which we have to deal with both the problem
of Federal financing and the need for controlling private credit expansion .
The large existing inventories and the fluctuations in the public's appraisal
of the seriousness of the international situation may create a temporary relaxation in the demand for credit. Such a relaxation , however, may be of short
duration only, and the slightest darkening of international relations may set
in motion another wave of buying.
Even if requirements of national security should remain high for a considerable time, we hope that an increase in total output may, after a few years,
permit a relaxation or modification of physical controls . We would then enter
another stage, still fully within the period of mobilization, during which some
expansion in the production of consumer goods and in private investment might
lead to a renewed growth in demand for private credit. In that 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 that
they had reached "full accord with respect to debt management and policies
to 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 24 percent long-term nonmarketable bonds in exchange for the outstanding
22 percent marketable bonds of June 15 and December 15, 1967-72. Subsequently, during the time allowed investors for the exchange, more than $13.5
billion of the outstanding amount of $19.7 billion of 22 percent marketables
were offered in exchange for the new nonmarketables. Of the total exchange,
$5.6 billion were owned by the Federal Reserve Banks and Government investment accounts, and of these approximately 20 percent was acquired in the
few weeks prior to the Treasury's announcement and during the period in which
exchange was permitted.

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Since March 5, prices of outstanding Government securities have been permitted to decline, a number of the issues falling below par. An important
result of this action has been the effect in the markets for mortgages and new
capital issues.
It is still too early to appraise conclusively the effectiveness of this measure.
It may be noted that, beginning in April, the rate of expansion in bank loans
began to slacken. But this change may also reflect seasonal factors in the
demand for credit, the softening of consumer demand that became apparent
in that month, and voluntary credit restraints then undertaken, as well as the
decline of security prices. It appears that new commitments by insurance
companies and savings banks to purchase mortgages have been reduced. Some
plans for new securities to be issued have been withdrawn or postponed and
others have had to be revised, although the total volume of new issues has
continued very large. The new tone in the market may have an important
effect upon many new offerings that were, or might otherwise have been, contemplated.
4. On March 9, a program for voluntary credit restraint was instituted by the
Board of Governors of the Federal Reserve System, pursuant to section 708 of
the Defense Production Act of 1950, after consultation with the Office of the
Attorney General and with the Federal Trade Commission. This program is
now in full operation and includes major financial institutions throughout the
Nation. The program has set up a national committee as well as regional committees covering all sections of the country.
The national committee has issued three bulletins, the first dealing with
means of restraining inventory financing, the second with the principles to be followed in financing capital expansion programs and the third with State and local
government financing. These bulletins, together with the statement of principles of the program, have been distributed to all financing institutions participating in the program to provide a common guide for combating inflationary
loan expansion in their respective fields. Other bulletins, as may be appropriate
and helpful, will be issued from time to time. Meanwhile financing institutions
are requesting the regional committees for opinions as to the desirability under
present conditions of loans in debatable classes. These opinions are being
relayed to all committees to insure uniform policy Nation-wide.
While there has not yet been time to build up a body of statistical information to enable the committee to analyze thoroughly the effects of the program,
there are indications that the initiation of the program has had a salutary effect
on the trend of credit.
Endorsements of the program and pledges of wholehearted cooperation have
been received from many representative industry groups. Under these circumstances, those connected with the program are most encouraged, and it is the
committee's view that the authorization for this unique cooperative effort as
one means of restraining the further expansion of private credit should be
continued .
On March 12, the Director of Defense Mobilization appointed five task forces.
from among the personnel of the Treasury, Board of Governors of the Federal
Reserve System, the Council of Economic Advisers, and the Office of Defense
Mobilization to implement the joint studies of these agencies undertaken in
response to the President's memorandum .
On March 23, the Director of Defense Mobilization wrote the Secretary of
Commerce, referring to the President's memorandum of February 26, 1951, and
suggested that 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 limit
credit expansion would be more effective if borrowers exercised restraint in their
requests for financing. As a result, the business advisory council has undertaken
a continuing Nation-wide program to bring to the attention of lenders and borrowers the fact that 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 all
States, the mayors of all major cities and financial officers of principal counties
and other political subdivisions. He requested that all State and municipal
projects, which necessitated borrowing and which were postponable, be postponed. In particular, he asked that every proposed borrowing by a State or
municipality of $1 million or over, before being consummated, receive the approval of one of the regional committees appointed under the voluntary credit
restraint program.

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III- -CREDIT CONTROLS AVAILABLE UNDER PERMANENT LEGISLATION , EXPIRING
LEGISLATION AND PROPOSED LEGISLATION
The following summary indicates the more important actions for credit
restraint that can be taken under existing legislation, that can be employed if
expiring legislation (notably the Defense Production Act of 1950) is extended,
and that could be initiated if new legislation were passed in conformance with
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 in implementing a program designed to achieve credit restraint and stability in the market for Government securities .
1. Permanent legislation
(a ) The Federal Reserve System has power to change rediscount rates.
(b) The Open Market Committee of the Federal Reserve System has the
authority to conduct open-market operations in Government securities and such
transactions can be undertaken with a view to stabilizing the market for such
securities and tightening or relaxing credit conditions.
(c) Existing 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 for listed securities to 100 percent,
and restrict withdrawals and substitutions of securities in margin accounts.
(e) Section 5 of the Trading with 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 limit the issuance of credit. While these powers
should not be exercised except in an extraordinary emergency, the statutory
authority appears to be sufficient.
2. Expiring legislation
(a) Section 708 of the Defense Production Act of 1950 provides the legislative
basis for the present voluntary credit restraint program.
(b) Regulation X of the Board of Governors of the Federal Reserve System,
which governs the extension of real estate construction credit, stems from authority granted the President under section 602 of the Defense Production Act
of 1950 ; he in turn is permitted to utilize the services of the Federal Reserve
System in 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 in the act be enacted
(H. R. 3871 and S. 1397, 82d Cong. 1st sess., sec. 106 ) it would be possible to restrain the use of real estate credit in the purchase of existing structures.
(c) Section 601 of the Defense Production Act of 1950 authorizes the Board of
Governors of the Federal Reserve System to exercise consumer credit controls
in accordance with Executive Order 8843 (August 9, 1941 ) . Regulation W of
the Board of Governors restricts the use of consumer credit ; the use of such
credit could be tightened substantially beyond the degree currently permitted .
3. 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 in connection with the purchase of
existing structures.
(b) Section 611 of H. R. 3871 and S. 1397 would permit the President, whenever he determines that speculative trading on boards of trade causes or threatens
to cause unwarranted changes in the price of any commodity, to prescribe rules
governing the margin to be required with respect to speculative purchases or
sales for future delivery. The provisions of section 21 of the Securities and
Exchange Act of 1934 are made applicable in administering and enforcing this
provision.
(c) Reserve requirements of commercial banks have been raised virtually to
the limits of existing authority.
It is recommended that, as an emergency measure, legislation be sought to
empower the Reserve authorities for a limited period to impose additional reserve requirements, either increasing the authorized percentages or in some other
appropriate way that will have a minimum adverse effect on the Government
security market. The refunding and new issue operations of the Treasury in
the last half of this calendar year alone amount to in the neighborhood of $50

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billion. Under these circumstances, it is imperative that any additional requirements for bank reserves imposed by the Federal Reserve should be such
that they do not have a disruptive effect on the market for Government securities.
In view of the emergency such requirements should apply to all insured banks.
The feasibility of permitting nonmember insured banks to hold the additional
reserves in balances with their correspondents should be explored .
The task force on supplementary reserve requirements has considered various
plans for reenforcing existing bank reserve requirements and has reported that.
two plans offer the greatest promise, namely ; ( 1 ) The loan-expansion reserve
plan and (2 ) the primary (securities feature ) reserve plan, which provides for.
additional required reserves and gives a bank, under conditions to be prescribed
by regulation, the option of holding the additional reserves in the form of cash
or Government securities.
The provisions of these plans may be summarized as follows :
Loan-expansion reserves. -Every insured bank receiving demand deposits,
other than a mutual savings bank, would be required to maintain additional
reserves equal to a percentage, to be prescribed by the Board of Governors of
the Federal Reserve System, of that part of its loans and investments in excess
of a certain prescribed base.
In computing loans and investments, all assets of the bank would be included
except ( 1 ) cash, ( 2 ) balances due from banks, (3 ) direct obligations of the
United States , and (4 ) such special types of assets as the Board might prescribe
from time to time.
Primary reserves and Government securities.-Either in substitution for or
in addition to the requirement discussed above, an insured bank receiving demand
deposits, other than a mutual savings bank, might be required to maintain additional reserves equal to a limited percentage of its demand deposits, in addition
to the deposit balances now required .
Such percentages could be different with respect to banks in central reserve
cities, reserve cities , or elsewhere.
In lieu of such a deposit balance, a bank under certain conditions, could count
Government securities either at an amount equal to the dollar amount of the
deposit balance which the securities replace or at some lesser figure . For
example, the Board might prescribe that, for reserve purposes, $1.50, or $2 or
$2.50 in securities might be equivalent to $1 of cash.
Within a few days the Board of Governors will ask the Congress to consider
definitive legislation providing for supplementary requirements.

IV. CONCLUSIONS AND RECOMMENDATIONS
Conclusions
The measures thus far adopted make up the beginning of an effective program
of credit restraint. There is, however, no assurance that these measures will
prove sufficient to deal with the inflationary situation that may be anticipated
as the national security program expands. Additional measures are needed to
contribute to the anti-inflationary program and at the same time maintain
stability in the market for Government securities.
In general, the additional measures which should be taken are : The extension and reinforcement of the voluntary credit restraint program, whose work
this committee wholeheartedly endorses ; the enactment of legislation to permit
continuation and some broadening of selective credit controls ; an emergency
increase in the authority of the Board of Governors to require, in case of need,
supplementary reserves for all insured banks. With a view to the possibility that
all other anti-inflationary measures fail, or that needed powers may not be
obtained in time, plans should be readied for the imposition of mandatory limits
on total credits extended by banks and other financial institutions (excepting
essential loans ) if, in an extraordinary emergency, such controls should become
necessary.
Recommendations
1. That section 708 of the Defense Production Act of 1950, which provides the
legislative basis for the voluntary credit restraint program, be extended.
2. That 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 policy
unless it is guided by up-to-date criteria of the shifting requirements of the
defense program .
3. That the cooperation of such bodies as the Council of State Governors and
the United States Conference of Mayors be enlisted by the Voluntary Credit

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133

Retraint Committee to help postpone issues of State and municipal securities
to finance deferable expenditures.
4. That the appropriate Government agency consider whether financing institutions, not now included in the voluntary credit restraint program, be included
in it.
5. That Government loan and loan guarantee agencies should follow policies
consistent with those of comparable private lending institutions as set forth
in the statement of principles of the national voluntary credit restraint program,
If the policies of the two groups of lenders are not coordinated the voluntary
program might be undermined . This subject is more fully treated in the forthcoming 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
work of the present committee.
6. That section 601 of the Defense Production Act of 1950, which provides
authority for regulation W of the Board of Governors restricting the use of
consumer credit, be extended.
7. That section 602 of the Defense Production Act of 1950, which furnishes
the legislative basis for regulation X of the Board of Governors regulating the
extension of real-estate construction credit, be extended and that the proposed
change in the act (sec. 106, H. R. 3871 and S. 1397, 82d Cong., 1st sess. ) , which
would make it possible to restrain the use of real-estate credit in the purchase
of existing structures, be enacted.
8. That section 611 of H. R. 3871 and S. 1397 be enacted, which would permit
the President, whenever he determines that speculative trading on boards of
trade causes or threatens to cause unwarranted changes in the price of any commodity, to prescribe rules governing the margin to be required with respect to
speculative purchases or sales for future delivery.
9. The committee recommended that the Congress be urged to act promptly
and favorably on the proposals for emergency additional bank-reserve requirements, when these are advanced by the Board of Governors of the Federal
Reserve System .
10. That mandatory control of credit be imposed only if the problem to be
solved is most serious, and only after a demonstration that more moderate measures are too slow in their impact, or too uncertain in operation, or are otherwise
inadequate. While we do not propose the imposition of such mandatory controls
at this time, detailed plans for their imposition, in the unfortunate event they
become necessary, should be prepared.
11. We have pointed out in this report that credit controls must play an important role in a program of economic stabilization that is in accord with the
necessities of the defense program and the Government's financial requirements.
We wish to point out with equal emphasis that neither selective nor general credit
controls can, in themselves, assure such economic stabilization . Economic stabilization requires, first and most importantly, a pay-as-we-go tax program. Any
failure in this respect aggravates immeasurably the problems of economic stabilization. Even with adequate fiscal and credit policies there still remain inflationary pressures during the expansion of the security program. During that
period, therefore, direct controls , such as allocations and price and wage controls,
are essential. Only in a rounded program in which each control measure contributes its share can we accomplish the purposes of mobilization and stabilization.
C. E. WILSON,
The Director of Defense Mobilization , Chairman.
JOHN W. SNYDER ,
The Secretary of the Treasury.
Wм. MCC. MARTIN, Jr. ,
The Chairman of the Board of Governors of the Federal Reserve System.
LEON H. KEYSERLING ,
The Chairman of the Council of Economic Advisers.
Representative BOLLING. 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 :
Within a few days the Board of Governors will ask the Congress to consider
definitive legislation providing for supplementary requirements.

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That deals with reserves. It is pretty obvious that your view has
changed substantially since that time.
Mr. MARTIN. Mr. Bolling, the best made plans of mice and men
"gang aft agley."
Representative BOLLING. 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. MARTIN. 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. It 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 department-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 BOLLING. 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 . It 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. MARTIN. My 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-

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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 ex4
pansion 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 BOLLING. 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. MARTIN. 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 BOLLING. 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. MARTIN. No , Mr. Bolling, I would not. It 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 BOLLING. 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 PATMAN. You meanRepresentative BOLLING. For the committee to send certain questions to Mr. Martin.
Representative PATMAN. Certainly.
Representative BOLLING. Is that satisfactory ?
Mr. MARTIN. Yes ; that is perfectly satisfactory .
Representative PATMAN. The fact that I asked you certain questions
does not mean that I am advocating the things that I mentioned .
Mr. MARTIN. I understand .
Representative PATMAN. Mr. Martin, I am learning a lot .
Mr. MARTIN . I can assure you I am, too , Mr. Chairman.
Representative PATMAN. 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

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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 license 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. MARTIN. 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 PATMAN. Of course, if 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. MARTIN . No , 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.

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Representative PATMAN. Well, that is what reminded me of it , and
not the reverse of it.
Dr. Murphy, would you like to ask any questions ?
Mr. MURPHY. 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.
It is my understanding that during that period the portfolio has
decreased rather than increased in total amount ; is that correct ?
Mr. MARTIN . I think that is correct. We will put the exact figure
in the record.
Mr. MURPHY. Would you insert it in the record , Mr. Chairman ?
Mr. MARTIN. Certainly, we would be delighted to .
(The information referred to follows :)
At 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 in the period January 1946 through June 1950 of $6 billion and an
expansion of $4.2 billion from July 1950 through February 1952. The decline in
the period prior to the Korean outbreak reflected in part the Treasury's program
of using both large excess cash balances and current cash surpluses for 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 in the Federal Reserve portfolio of Government securities need to
be related to the other factors affecting bank reserves in order to be adequately
evaluated. Over the full period January 1946 through February 1952, commercial banks were supplied with over $5 billion of new reserves from factors outside the direct control of the Federal Reserve, such as a net gold inflow and a
reduction in 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 , it did not fully offset the effect of these changes and total
member bank reserves expanded nearly $4 billion. This increase in reserve
balances made possible an expansion in total bank deposits of about $ 13 billion,
including a decrease in Treasury deposits at commercial banks of $22 billion and
an increase in privately held deposits of $35 billion.
Mr. MURPHY. 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 militate against rather than promote the
purposes of the Employment Act, and we recommend that no step in this direc*
tion be taken.
*

*

What would be your reaction to this subcommittee including a
statement to the same effect in its report ?
Mr. MARTIN. I concur in that statement.
Mr. MURPHY. 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. MARTIN. I would comment that there are administrative difficulties in the issuance of such a bond, but I am sure you know them

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better than I do, Dr. Murphy, and I question very much whether it
could be worked out on a satisfactory basis.
Mr. MURPHY. That is all, Mr. Chairman.
Representative PATMAN. 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. MARTIN. Correct.
Mr. ENSLEY. He also inserted the May 17th report of that committee. In 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. MARTIN. 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 WOLCOTT. Mr. Patman, may I ask a question ?
Representative PATMAN. Mr. Wolcott.
Representative WOLCOTT. In 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. It originally read :
We believe that to restore the free domestic convertibility of money into gold
coin or gold bullion would militate againstAnd 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. MARTIN. 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 WOLCOTT. 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 with a view to repealing any
legislation that might be so construed as to permit a change in the price of
gold by other than congressional action .
Now, that apparently had in mind the Gold Reserve Act which gave
the PresidentMr. MARTIN . 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. MARTIN. That is correct.
Representative WOLCOTT. Is there any other power or authority
that you know of that that language might apply to now?
Mr. MARTIN. I do not think so, but I would have to check it to be
absolutely certain.

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139

Representative WOLCOTT. 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 further devalue gold .
(The material referred to above is as follows :)
AUTHORITY TO CHANGE THE PRICE OF GOLD
The President was authorized to change the weight 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 in effect only for 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 authority to purchase and sell gold at home or abroad "at such
rates and upon such terms and conditions as he may deem most advantageous
to the public interest." In addition , the Secretary is authorized by section 10
of the Gold Reserve Act , with the approval of the President, "to deal in gold"
for the account of the stabilization fund established by that section. These
powers of the Secretary, however, are effectively limited 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 that no member of the fund
shall buy gold at more , or sell gold at less , than par value, plus or minus a margin
or charge which the fund 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 , than par value in
relation to the dollar, plus or minus the prescribed margin. Moreover, the par
value of the dollar cannot be changed without the consent of Congress, since
section 5 of the Bretton 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 in 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 in gold at home or abroad. However, the authority of the
Reserve banks to purchase and sell gold under this section must also be read
in connection with the provisions of the Articles of Agreement of the International Monetary Fund and the Bretton Woods Agreements Act mentioned above,
as well as the provisions of the Gold Reserve Act of 1934.
A further discussion of the authority of the Secretary of the Treasury to deal
in gold is contained in the answer given by the Secretary of the Treasury in
reply to question D-12 of the questionnaire submitted to him by the Subcommittee on General Credit Control and Debt Management of the Joint Committee
on the Economic Report.
Representative WOLCOTT. 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. MARTIN. I do not know of any, sir. I think the International
Monetary FundRepresentative WOLCOTT. 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. MARTIN. No , I do not know of any, sir.
Representative WOLCOTT. All right. Thank you.
Representative PATMAN. 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

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

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. MARTIN. I would be very glad to answer them.
Representative PATMAN. Is there anything else ?
Mr. MARTIN. Might I say one thing?
Representative PATMAN. Yes , sir.
Mr. MARTIN. 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 PATMAN. We are glad to hear that, Mr. Martin .
Thank you very much.
Mr. MURPHY. Thank you very much.
(Supplementary statement filed by Mr. Martin is as follows :)
The Secretary of the Treasury was asked to prepare and insert at the end of
his remarks a statement for the record indicating the process whereby the
answers to the questionnaire were compiled, with particular reference to the use
of outside consultants . It was stated that a similar record would be obtained
from the Federal Reserve. In view of this the following statement is submitted :
PROCEDURE AND OUTSIDE CONSULTANTS USED IN PREPARING REPLIES TO THE
QUESTIONNAIRES OF THE SUBCOMMITTEE ADDRESSED TO THE CHAIRMAN OF THE
BOARD OF GOVERNORS AND THE CHAIRMAN OF THE FEDERAL OPEN MARKET
COMMITTEE OF THE FEDERAL RESERVE SYSTEM
The answers to these questions were prepared by the Board's regular
staff. This was considered the most appropriate procedure in order that the
material submitted might be based on experience and background developed
within the system . Outside specialists served on a consultative basis to criticize
the drafts of replies prepared by the staff and to discuss general subjects and
specific answers selected by the Chairman, other Board members, or the staff.
"This procedure for using regular staff in preparing replies to 61 questions covering the scope and detail of those submitted by the subcommittee presented a task
of great magnitude, even though adjustments were made in the regular workload of the staff members involved . As a consequence the time required for
completing the answers was much longer than 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 work was given less attention or
postponed.
Responsibility for organization of the work on answers, the critical review of
them, and their revision was given to the Director of the Division of Research
and Statistics. His internal advisory group was the senior staff ; those who were
most 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 International
Finance, Examinations, Bank Operations, and Selective Credit Regulation. The
senior staff group was relied on to select members of the staff to prepare draft
replies to individual questions, to consult with staff members on problems raised
by answers, to prepare replies to key questions, and to review answers generally.
Work on answers to individual questions—their preparation and revisioninvolved a substantial proportion of the time of more than 30 other staff members
throughout the organization who were selected on the basis of their specialty
and the subject material covered by the question. In this manner the Board
drew on its complete resources of professional, technical, clerical, and stenographic staff not only in the Division of Research and Statistics but also in the
Office of the Secretary, the Legal Division , and the Divisions of Bank Operations,
International Finance, Examinations, and Selective Credit Controls. While this
spreading of the work increased the problems of organizing the flow of work and
of reviewing and integrating the replies, the procedure was necessary in order
to prepare the answers along with other duties .

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141

Replies were developed through a process of draft, review, and redraft. The
first draft of all answers was largely completed by the end of October, the second draft by late November, and the third draft by December 21. The first
draft was prepared with a minimum of group consultation and the complete
draft was circulated to all authors for comment . The second and third drafts
were reviewed largely by the senior staff. For most questions the revision of
the third draft was submitted to the subcommittee to be set in 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, E-27, and the open market questions. Question E-27 was prepared in cooperation with the Federal Reserve banks and the
banks supplied a part of the material presented in the reply and reviewed the
draft reply. The staff of the New York bank collaborated in preparing the reply
to the open market questions and reviewed the policy record presented in the
reply to A-3.
The chairman and the other members of the Board were continually reviewing
the replies as they were prepared, devoted many meetings to the replies, and
made many suggestions. The Chairman was in constant contact with 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 within the System and others without such experience but with recognized standing in the
fields of money and credit and of Government structure and finance. These
consultants commented by mail on both the first and the second drafts. Their
main contributions , however, were made at a 3-day round-the-table discussion
with 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 Morrill, Carl
E. Parry, Herbert V. Prochnow, R. J. Saulnier, Theodore W. Schultz, Walter W.
Stewart, Jacob Viner, and L. Wilmerding, Jr. The Board's expenditures for
their services totaled $6,655 .
Representative PATMAN. 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 . )

MONETARY POLICY AND THE MANAGEMENT OF THE
PUBLIC DEBT

WEDNESDAY, MARCH 12, 1952
CONGRESS OF THE UNITED STATES ,
SUBCOMMITTEE ON GENERAL CREDIT CONTROL
AND DEBT MANAGEMENT OF THE
JOINT COMMITTEE ON THE ECONOMIC 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
Bolling 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 PATMAN. The committee will please come to order.
It was suggested at the meeting yesterday 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. KEYSERLING. Yes, Mr. Chairman.
Representative PATMAN. Will 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 OF
ECONOMIC ADVISERS

Mr. KEYSERLING . 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

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

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 PATMAN. That will be satisfactory and we will respect your wishes, so you may proceed , Mr. Keyserling.
Mr. KEYSERLING. 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. It
cannot be stable by standing still. In 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 MANAGEMENT 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 . It 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 has 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 .

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

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 on this as a citizen,
but in my role as chairman of the Council of Economic Advisers I
have nothing to offer which can compete with the superior judgment
of those in our defense and international agencies, subject to the ultimate judgment of the President and the Congress.
But I feel compelled to raise my voice as an economist in the public
service when I witness the growth of a strong, if not predominant,
sentiment that our security program as a whole must be drastically
reduced in order to maintain a strong economy. The clear facts since
the original Korean aggression, and the weight of judgment now as to
the economic outlook, simply do not support the proposition that we
must slash the security program to protect our economy.
The primary test of whether a security program of given size and
pace, in a long period of partial mobilization, is weakening or impairing our general economic strength, cannot be determined by looking
only at the dollar value of the security program, nor by looking only at
the deficit in the Federal budget, even though these be important considerations. The primary test of the impact of the security program
upon our general economic strength involves these three paramount
questions, and these three alone in my judgment :
1. Is the security program, through its drain upon our resources ,
leaving or threatening to leave our business system with inadequate
resources or incentives to safeguard and advance that productive
power which is the ultimate source of our economic strength ?
2. Is the security program imposing such strain or deprivation
upon consumers as to weaken the strength or morale of our people—
155 million strong ?
3. Is the security program, by its very nature, incompatible with
the protection of the Nation against further inflation, assuming that
we do not want to resort, during a long period of partial mobilization,
to a scope or intensity of controls which in the long run might impair
our productive power or corrode our basic freedoms ?
My views are so well known on the subject that, from the economic
point of view, the security program is not imposing that kind of strain
on our economy, that I will summarize very briefly on these three
points.
First, it cannot be argued that the prospective or present size of the
security program is unduly impairing our productive strength , when
at a uniform price level we had in 1951 by far the highest level of
investment in plant and equipment, which is at the heart of our productive strength, and in business investment generally, that we have
ever had in our history, and where as a matter of fact the main question validly raised then was not whether business had the funds, the
incentives, the manpower to invest adequately in productive equipment, but rather whether in view of the inflationary dangers the level
of over-all business investment was too high and ought to be further
curbed.
Second, from the viewpoint of consumer supplies, the year 1951
was only slightly lower than 1950, in fact by some measurements it

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

147

was higher, and in any event it was higher than in any other year in
our history, and here again the main operating force at the present
time upon the level of consumer supplies is not restrictions imposing
deprivations on the people, but their unwillingness in many areas
even to buy at the level of available supplies .
In 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 for 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
we 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 to finance it. It 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 is financed partly by borrowing, the Con-

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

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 . It 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 II 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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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
build 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
have 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 wherever 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

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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 PATMAN. 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 effect 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 because, 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 whether 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 :
First, 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 life *
Second, we must economize-make sure that no money is
spent unnecessarily * * *. Third , as large a share of the necessary expenditures as possible must be met by taxation
* *. Fourth, the Government
must borrow what has to be borrowed (insofar as possible ) in such a way as to
*
tap income that would otherwise be spent by the person receiving it
Fifth, the Government should borrow from the banks only the unavoidable
minimum * * * . Sixth, over-all restraint should be exercised over loans by
* * Finally * * * price and
banks to businesses and individuals
wage controls-to hold the line until the other measures become effective—are
highly 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 our 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 DOUGLAS. Is this irrespective of their performance ?
Mr. KEYSERLING. 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.
It 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
reconcilitation and harmonization move constantly forward. It 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

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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 and fiscal policy 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. If 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 executive
departments. 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.
In the final analysis, in the event of collision, all agencies of publicpower 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 reliance
upon 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 .
In 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 consequentlly 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 what 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

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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 II, 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 :)
TESTIMONY OF LEON H. KEYSERLING, CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS,
BEFORE SUBCOMMITTEE ON GENERAL CREDIT CONTROL AND DEBT MANAGEMENT OF
THE JOINT COMMITTEE ON THE ECONOMIC REPORT, WEDNESDAY, MARCH 12, 1952
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 highlevel 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. It cannot be stable by standing still. In 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 prac- .
tical 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 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.

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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. It 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 tryingand 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.
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 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 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 on 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 :
(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 ?
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By none of these three paramount tests can respectable evidence be adduced
that the now contemplated security program is excessive from the viewpoint of
the economist, if it is not excessive from the viewpoint of its primary purpose to
make us as secure as we can reasonably hope to be in a threatening and uncertain
world.
It can hardly be argued that the security program is in process of impairing
our basic productive strength. In 1951 gross private domestic investment was
at an annual rate of approximately $59 billion, contrasted with about $52½
billion in 1950 and about $472 billion in the previous peak year 1948. All comparisons are in terms of 1951 prices. Investment in producers' durable equipment, which is at the heart of our productive strength, was above $272 billion
in 1951 , contrasted with about $24 billion in 1950, and about $23 billion in the
previous peak year 1948. The growth of our productive strength has been even
more impressive when measured by facilities and supplies in certain key areas,
such as steel , aluminum , and electric power. In fact, the pertinent issue with
respect to private capital formation in 1951 was not whether business had available the materials, the manpower, the funds, and the incentives to build adequately our productive strength, but rather whether capital formation was proceeding at a higher level than desirable.
Nor can it be argued that the security program is in process of reducing consumer supplies below satisfactory levels. With the possible exception of 1950,
the year 1951 witnessed the highest level of consumer supplies on record.
few things, such as housing and automobiles, were produced at a somewhat lower
level than in 1950, but at a much higher level than in any year before World
War II.
Similarly, it cannot be said that the size or pace of the security program is
inconsistent with 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 turn downward in
recent weeks. This stability has not been achieved under an anti-inflationary
program which most informed persons would call excessively severe. On the
contrary, it has been achieved under policies of taxes, credit controls, and direct
controls which 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 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
securiy 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 for 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 we
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.
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

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not have the means to finance it. It 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 is financed partly by borrowing, the Congress 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. It 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.
When any nation assumes a large defense burden, there are only two major
ways of carrying it. One way is to expand total output, so that defense needs
can be served without subtracting too much from other economic needs. The second way is to use economic controls to divert productive resources away from
other purposes and toward defense purposes. Even in a nation as strong and
productive as the United States, both of these methods must be used for the time.
being. But it is clearly in our interest, particularly in a long period of partial
mobilization, to accomplish as much of the defense program as possible through
the expansion of production, rather than through drawing down upon other
elements in our national economic strength. This is the basic philosophy of the
current mobilization program.
The soundness of this philosophy is conclusively demonstrated by all experíDuring World War II at its peak, we allocated to defense purposes annually almost as much resources as the total product of our economy during
the year before the war started . But we so expanded total output that we were
able to do this without a damaging curtailment of civilian supplies, and while
carrying forward many industrial expansion programs to provide the sinews for
the war effort. Further, when the war was over, we found that the expansion
of our productive facilities could be translated into peacetime goods and services:
without serious or prolonged economic dislocation. Since the Korean outbreak,.
although our then existing productive resources were more fully utilized in
mid-1950 than in 1939, we nonetheless have relied predominantly upon our genius:
for still further productive expansion to carry the additional burden. Since
mid-1950, our expansion of total output has roughly kept pace with the expanding:
defense program, and consequently the defense program has not resulted in impairment of our industrial or civilian strength. We have used controls to
facilitate an orderly transition, and to deal with specific shortages. But fortunately, we have not fallen into the error of substituting the philosophy of allout controls for the philosophy of all-out production. It is by doing the job in the
American way that we have kept our economy so strong, and in fact made it
stronger.
Our greatest reserve strength still lies in our capacity further to increase
production. The ceiling of our productive ability has no more been reached in
1952 than in 1950 or in 1948. Without appreciably lengthening the workweek,
and without applying the forced pressures of a full-war economy, we have ample
resources to increase total production by at least 5 percent per annum over the
next few years . If additional pressure should require us to do so, we could for
at least a few years almost double the annual rate of productive increase. It is:
this which, more than all else in material things, gives us our true measure of
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 in ways that do not seriously militate .
against the achievement of our productive potential. This has a most important
bearing upon the nature of controls that we can afford to use, and upon the
extent to which we can afford to use them. Those who would employ without
reservation the classical measures of "fighting inflation," seem not to have taken:
into account the imperative necessity for fighting inflation in ways that do not
repress the general rate of productive advance which is the surest way to keep
our economy strong throughout an enduring defense period.

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Proposition No. 3 is that the expansion of production must be responsive to the
priorities of national needs. We cannot do everything at once. This means that
balance must be maintained in the utilization of our resources .
Great though our productive resources are, we cannot afford to do everything at once. While some lines of production must be rapidly expanded, others
must be contracted. For example, in order to build more airplanes, we must
for a time build less automobiles . In order to build more plants to produce
steel, we must for a time build less houses than we otherwise would. Further,
expansion and contraction in various areas must achieve sufficient consistency
to avoid excessive economic dislocation and to fulfill the defense program itself.
For example, if the expansion of machine tool facilities were not sufficiently coordinated with the defense program, bottlenecks would multiply in the execution of the defense program . If 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 in some areas and contraction in other areas.
Hence the economic policies to be used must be far more refined and selective
than if the simple purpose were to produce a general expansion or contraction
of the economy as a whole. We are not fighting primarily an inflation or a
depression ; we are fighting primarily a limited international struggle. It
follows that the classical economic theories directed toward producing general
stimulation or general contraction throughout the whole economy, i. e., the
traditional "anti-inflationary" or "antideflationary" policies, are not suitable
for universal or broadside application to the current problems of the defense
economy.
Proposition No. 4 is that 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.
The essence of controlling inflation is to prevent available funds, coupled
with the desire to spend them, from 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 from a depression , or to contract total buying power in order to cut down the demand for
goods and services of all kinds , it is relatively easy to apply the classical set of
"anti-inflationary" or "antideflationary" weapons. But in the current situation ,
it is necessary to couple some types of expansion with some types of contraction,
and consequently to expand some types of investment and other buying while
contracting others. Therefore, efforts to influence spending must be conformed
to the pattern of resource use which the defense program demands.
It follows that measures to contract spending power and employment and
production in some areas, no less than measures to produce expansion in other
areas, must be sufficiently selective and discriminating to expedite the defense
program, to build up the industrial mobilization base, to expand some other
areas of production , and at the same time to exercise necessary restraints in
still other areas. All this must be borne clearly in mind as one reviews available economic tools, not in 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 in terms of how these tools may now be applied
by practical people in the face of tasks confronting the Nation quite different
in character from any in the past.
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 any 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 which provides sufficient inducements
for expansion wherever needed and sufficient restraints for contraction wherever
needed. But the effort to formulate and apply such a complicated and refined

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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 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 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. Clearly, monetary
policy is hardly the device for stimulating the rapid expansion in some areas of
the economy which is now desirable. General monetary policy is a suitable
device, within appropriate limits, for imposing some necessary restraints upon
the economy. But if most of the restraint is to be highly selective , as I think it
must be under current conditions for reasons which I have already given, general
monetary policy cannot do very much of the job. And if monetary policy were
to be exercised for the purpose of putting brakes upon the rate of activity of the
economy as a whole, it could hardly be pushed far enough to do this under current
conditions without reducing substantially the over-all level of production and
employment--which would cut directly across the vital objective of utilizing our
resources fully and expanding our over-all productive strength.
In this connection the inability to place great reliance upon general monetary
policy has been fully recognized by those who are regarded as outstanding
exponents of its appropriate use geared to the time in which it is used.
Thus in a statement before the Joint Committee on the Economic Report on
May 12 , 1948, Mr. Allan Sproul, president of the Federal Reserve Bank of New
York, had this to say :
"A general monetary control, if used drastically enough, works through a
restriction of production. The steps in 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 . * *
In order to get the effect our critics suggest,
would mean that 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 in production and employment. Such action could only be justified if we were faced with a runaway
inflation due solely or primarily to monetary causes. That is not our present
situation and that cannot be the right policy now."
It is hard, indeed, to find in the current situation any reason for departing
from the principles which Mr. Sproul set forth so cogently in May 1948. The
immediate inflationary trends now are certainly not as pronounced as they were
in May 1948, and the need not to reduce substantially the total of production and
employment is certainly greater now than it was at that time.
Still more important is this consideration : Even if it were to be conceded that
the over-all reduction in production and employment were not too high a price
to pay for the drastic use of general monetary policy, it does not appear that
this reduction would concentrate in those areas where the economy can best
afford such a reduction under current conditions. On the contrary, analysis
indicates that such a policy would be first reflected in the reduction of production
and employment in those very areas where the further expansion of facilities
and output is most critically needed , and would appear last, if at all, in those
highly speculative and nonessential areas where more selective and pointed
measures can be effective quickly.
Recently, before the forty-fifth annual meeting of the Life Insurance Association of America on December 12, 1951, Mr. Sproul had this to say :
"All that should be claimed for general credit controls, in my opinion , is that
combined with other measures working in the same direction , such as fiscal
policy, debt management, and, in extraordinary circumstances, direct controls ,
they can contribute to anti-inflationary and anti-deflationary forces. * * * It
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 mild general credit policies , and that we can have an expanding economy
without throwing too much of the gasoline of easy credit on the fires of active
business."

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It is my belief that the limitations now placed upon the utilization of general
monetary policy, by the imperative need for expanding over-all production, and
by the need for being highly selective in imposing restraints upon particular
segments of the economy, are perhaps more important than other reasons advanced for the very moderate utilization of general monetary policy. These
other reasons include the size of the national debt, its carrying costs, and its
profound influence upon the country's financial structure.
For example, Dr. E. A. Goldenweiser, a first-rate theoretical economist with
great practical experience within the Federal Reserve System, in the American
Economic Review in June 1947 , recognized the undesirability of substantial increases in the long-term interest rate, saying :
"Not only would such a rise increase the cost of borrowing to the Government
at the time of refunding, but it would make inroads on the capital values of
securities acquired by institutions and individuals in support of the war effort.
The Government is determined not to repeat the experience after the First World
War when Government securities went down to the 80's. One reason, among
others, for this determination is the size of the debt and its dominant position
in the country's financial structure."
I feel that, if the security program is to be carried forward and not dangerously reduced, the economic and fiscal outlook make these comments of Dr. Goldenweiser in 1947 at least as pertinent today. The Federal surplus of 1947 has
been replaced by a deficit, which will increase for a time. The problems of
Treasury financing will be larger, not smaller, than in 1947.
It should also be taken into consideration that extreme changes in 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 narrowing the gap between these interest rates and interest rates
on other types of obligations.
In testifying before the Joint Committee on the Economic Report on November
22, 1949, Mr. Marriner Eccles had this to say :
"In a falling bond market, with general credit demand strong, rates on other
securities and loans would tend to rise at least proportionately as much. Under
these conditions, can it be expected that insurance companies or savings and loan
associations or other institutional investors would act materially differently with
the yield on Governments at 3 percent than they do now at 22 percent?
"Loans or investment, other than Government securities, would have as much,
if not more, relative attractiveness to lenders and investors . Few, if any, borrowers would be priced out of the market for funds by rate increases of the size
contemplated . * * *
"Any moderate rise in long-term interest rates would not, in itself, reduce
significantly the demand for money. Investing institutions, which are now
switching from long-term Government bonds to private credit forms, would still
be motivated to do so by a continuing margin of return between the two kinds
of investment."
The Congress has had occasion to observe in recent months that the effort to
increase the interest rate on long-term Government obligations has been accompanied by efforts to move up other interest rates. An outstanding recent
example has been in the field of housing, where ironically the argument was advanced, not that interest rates should be raised to repress credit expansion, but
rather that interest rates should be raised to enlarge the volume of housing
loans. While my mind is not wedded inflexibly to any particular level of interest rates in general, and while some flexibility in 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 from it whichwhile small at first-might gain dangerous momentum. When one considers the
painful process by which the interest rate structure as a whole has been brought
far below the levels obtaining prior to the great depression, plus the indisputable
evidence that this trend has been a major contributory factor in 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 risking a reversal of that trend is strong indeed.
None of the foregoing should be interpreted as an expression of disagreement at
this time with the accord reached between the Treasury and the Federal Reserve
Board last March , involving some experimentation with flexibility in interest rate
policy. To be sure, I am still prone to reserve judgment, depending upon the
further unfolding of events, as to whether this mild modification in policy has

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161

been demonstrably beneficial . It has had some desirable and some undesirable
results, and the net balance is far from clear. But the main point I now desire to
make is that the accord of March 1951 , as I understand it, is consistent with a
view held by the Treasury and the Federal Reserve Board, in which the other distinguished authorities whom I have cited seem to join. This view in essence is
that variations in monetary policy and interest rate policy must be kept within
very narrow limits indeed under current conditions. And consequently, monetary
policy can be no more than one mild tool among many in the quest for economic
stability and growth within a high-defense environment.
I do not dissent from what has been done. However, I do maintain 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. By the same token, I cannot accept the viewpoint that the main key to
future economic stability consists in pushing monetary manipulation as far as
it seemingly would be pushed by those who regard it as a panacea and not simply
as one useful device among many. It is a device which cannot be relied upon
heavily, without bringing in its train undesirable consequences of a certain character far outweighing any speculative and thus far unproved benefits which
might follow.
Proposition No. 6 is that the current and foreseeable economic situation calls
for an admixture of economic tools , without excessive reliance upon any one.
It has become common practice for some overexuberant proponents of a
particular economic policy to ascribe to it alone the entire or major credit for
some desirable result which has been achieved . This they do by setting in juxtaposition the utilization of this policy and the desirable result. Those who are
strong for price controls can point to the coincidence of price controls and a
stable price level at times ; those who are against price controls can point to
periods where prices remained stable without price controls, and other periods
when prices moved upward even with price controls. Those who claim that the
money supply is the all-controlling factor can point to periods when an increase
in the money supply was accompanied by an expansion of credit and by price
inflation ; 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 in the economy
and no single one can be designated as being all-prevailing or decisive in its
influence.
The most responsible weight of opinion seems to me to be that economic stability and growth depend upon a variety of measures used in moderation , without excessive zeal in the application of any one. A well-balanced perspective on
this point appears in an article by Dr. E. A. Goldenweiser, in Harper's magazine
for April 1951. Dr. Goldenweiser had this to say :
"First, we must bend every effort to increase production by greater exertion,
greater efficiency , longer hours, fewer leisure people, less of the gracious things
of life * * *. Second, we must economize- make sure that no money is
spent unnecessarily. * * * Third, as large a share of the necessary expendi* Fourth, the Government
tures as possible must be met by taxation. *
must borrow what has to be borrowed ( insofar as possible ) in such a way as to
tap income that would otherwise be spent by the person receiving it .
* *
Fifth, the Government should borrow from the banks only the unavoidable
minimum . * * * Sixth, over-all restraint should be exercised over loans by
banks to businesses and individuals. * * * Finally * * * price and
wage controls-to hold the line until the other measures become effective-are
highly 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.
The economist who has to maintain only a theoretical position, or to write
his name imperishably ( in his belief ) into the literature of his profession, may
mistake the shadings for the essence and magnify the differences of view. But

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in all my dealings with responsible public officials, in 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 consultation with the whole range of those concerned with economic policy, both private
and public, at least twice a year in the development of our semiannual published
reports. To be sure, some differences of viewpoint arise. But in the overwhelming majority of cases, these prove susceptible to accommodation, on the
part of men who after all are looking at the same facts and who share the objective of a stable and growing American economy.
Proposition No. 7 is that basic economic policies which affect the whole Nation
should seek harmony, and that under our 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. It 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. It 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 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 and fiscal policy 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. If 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 executive departments. 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 impor-

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tantly affecting the national economy. Consequently, they must all try to work
together on problems which affect them all.
In 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 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 reliance upon 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 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 narrow-minded, 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.
Representative PATMAN. 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 ?
Mr. KEYSERLING . Yes , sir.
Senator DOUGLAS . Do you understand it to be a function of the
Council of Economic Advisers also to offer current advice to the
Congress ?
Mr. KEYSERLING . Yes, sir. I would like, if there is any question
about that, to state briefly why I think so.
Senator DOUGLAS. No ; 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. KEYSERLING. I have tried to.
Senator DOUGLAS. You kept in touch with current figures ?
Mr. KEYSERLING . Yes , sir.

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Senator DOUGLAS. 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. KEYSERLING. I would be inclined to think that one would be
aware of that, and I was aware of it.
Senator DOUGLAS. Were you ?
Mr. KEYSERLING . Yes.
Senator DOUGLAS . You were aware of it ?
Mr. KEYSERLING. Yes.
Senator DOUGLAS . Were you aware of the fact that during these 8
months the Federal Reserve, depending on the precise termination
date, purchased from $312 to $4 billion of Government securities ?
Mr. KEYSERLING . Yes , sir.
Senator DOUGLAS. Were you aware of the fact that bank reserves in
the Federal Reserve System were rising during this period ?
Mr. KEYSERLING. Yes, sir.
Senator DOUGLAS . 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 ?
Mr. KEYSERLING. Yes, sir.
Senator DOUGLAS . An immediate and direct connection ?
Mr. KEYSERLING. That is a question of degree, but I would be willing
to answer it by saying there is a substantial and important connection.
Senator DOUGLAS . And a direct connection ?
Mr. KEYSERLING . And direct connection .
Senator DOUGLAS . 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. KEYSERLING. I agree with that.
Senator DOUGLAS. Did you notice that bank loans were increasing ?
Mr. KEYSERLING. Yes ; bank loans were increasing.
Senator DOUGLAS. 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 ?
Mr. KEYSERLING. Yes, sir.
Senator DOUGLAS. Did you think there was a connection between the
increase in bank loans and the increase in bank reserves ?
Mr. KEYSERLING. By no means the probable direct and substantial
connection that there was with respect to the earlier parts of what you
recited, Senator.
Senator DOUGLAS . Is it not true that an increase in bank reserves
makes possible an increase in bank loans due to the fractional reserve
system ?
Mr. KEYSERLING. I think I would approach it from the other end
and look at the volume of investment that took place.
Senator DOUGLAS. 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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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 money exercises an inflationary impact upon the economy is when it begins to command
goods and services.
In 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 . 7 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. In 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. KEYSERLING. 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 investmentSenator 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 ?
In 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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In 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. KEYSERLING. Yes, sir, it is a valid distinction, but I think the
distinction I am making is also a valid distinction, and let me carry
it 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 activity are generated to command resources. In other words, if you
and I lend loansSenator DOUGLAS. We did not have much unemployment in 1950 .
So that there was not much possibility of putting idle people to work
on idle resources.

-

Mr. KEYSERLING. 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. It 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.
In 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 investmentSenator 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 $31/2

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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. KEYSERLING. 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 . Now, I am perfectly
willing to admitSenator DOUGLAS . Did not the increase in reserves make possible
an increase in loans ?
Mr. KEYSERLING. It made possible an increase in loans, butSenator DOUGLAS . And is it not true that on the whole each added
dollar of reserves makes possible increased loans of $6 ?
Mr. KEYSERLING. 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 14
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- and
I want to put that word "potential" in-a potential multiplier of 6 ;
isn't that true ?
Mr. KEYSERLING. Yes, but I thinkSenator DOUGLAS. If 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. KEYSERLING. It 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 : If 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. KEYSERLING. 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 DOUGLAS . Do you think there is an appreciable connection ?
Mr. KEYSERLING. You move from "any" to " appreciable" to "great"
to "prevalent. "
Senator DOUGLAS . One step at a time.
Mr. KEYSERLING. 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. KEYSERLING . Yes, there is some connection.
Senator DOUGLAS. An appreciable connection ?
Mr. KEYSERLING. 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. You are more adept than I am. I feel I am moving in a semantic wilderness.
Mr. KEYSERLING. 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 if
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 $312 billion in bank reserves in the Federal Reserve, and the increase of $10 billion in the loans made by banks to private borrowers ?
Mr. KEYSERLING. 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. If truth leads us there, let us not shy away.
Now, I agree with you in this statement that there is an appreciable
connection because I 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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169

not have occurred to any appreciable degree had there not been this
purchase of Government securities by the Federal Reserve . Is there
anything wrong with that line of reasoning?
Mr. KEYSERLING . I am here to be questioned and not to ask questions. I realize that.
Senator DOUGLAS. Is 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. KEYSERLING . 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 DOUGLAS . 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. KEYSERLING. Yes ; that is the way our system works.
Senator DOUGLAS . Good. It 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 PATMAN. 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 DOUGLAS . Now, what is the effect of an increase in the
quantity of bank credit, other things being equal, upon the price level ?
Mr. KEYSERLING. Senator, the whole point I am making turns upon
your phrase "other things being equal. "
Senator DOUGLAS . One step at a time .
Mr. KEYSERLING. 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. KEYSERLING. But, Senator
Senator DOUGLAS . Yes or no .
Mr. KEYSERLING . 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. KEYSERLING . I can't answer a question like that yes or no.
Senator DOUGLAS. Is 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. KEYSERLING. Senator, I said at the beginning of my statement, and I again say-and I think this is relevant to your questionthat 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. KEYSERLING. Other things being equal, the effect is to increase
prices.
Senator DOUGLAS . Well, now, why didn't you come to that before ?
It is perfectly simple.
Suppose you have $20 here representing the quantity of money,
and this package of cigarettes representing the quantity of goodsthen 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
facts or my logic, I want to have it pointed out.
Here 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 wholesaleSenator DOUGLAS . Do you accept the index of the Bureau of Labor
Statistics ?
Mr. KEYSERLING. Yes, of course.

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171

Senator DOUGLAS . I believe that shows an increase of between 16
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. KEYSERLING . Well, now, we are back again to any relationship.
Senator DOUGLAS . Do you think it had any relationship ?
Mr. KEYSERLING . It 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, and 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. KEYSERLING . No ; I was going to saySenator DOUGLAS . I want to play fair with you. I want to suggest
you want to name any of these other factors ?
to you , do you
Mr. KEYSERLING. I was going to say there are other factors operating to which I would ascribe the main casual effect upon the rising
prices during that period.
Senator DOUGLAS. The main causes were not the increase in bank
loans.
Mr. KEYSERLING. 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. Now, wait a minute. You have just said that
the increase in bank loans was caused by the increase in reserves.
Mr. KEYSERLING. Well, I first say there was a relationship, and then
an appreciable relationship , but I never said was caused bySenator DOUGLAS. Then you said a very direct relationship .
Mr. KEYSERLING. 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. If you
wish to retrace your stepsRepresentative BOLLING. Could I interrupt ?
Mr. KEYSERLING. I think there is a great difference .
Representative BOLLING. 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
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for them to make loans , couldn't they have acquired revenue by selling
bonds on the open market ?
Mr. KEYSERLING. Go ahead, Senator, don't let me interrupt you.
Is
Representative BOLLING . The question was addressed to you.
there only one way in which commercial banks can create reserves
when they are confronting a very favorable market for loans ?
Mr. KEYSERLING . I don't think so .
Representative BOLLING. What are some of the others ?
Mr. KEYSERLING. I think the one you mentioned is one way.
Representative BOLLING. They can do that regardless of whether the
bonds were at par or otherwise ?
Mr. KEYSERLING. 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 BOLLING. That is all, Senator. Thank you.
Senator DOUGLAS. Do I understand you to say that you think there
is no appreciable connection between the proportionate increase in the
quantity of bank loans▬▬
Mr. KEYSERLING. 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. KEYSERLING . 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. KEYSERLING. Some causal connection.
Senator DOUGLAS. And then the increase in bank loans was a cause
for the increase in prices ?
Mr. KEYSERLING. One of the causes .
Senator DOUGLAS . An appreciable cause ?
Mr. KEYSERLING . 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 beforeSenator DOUGLAS . Please credit me with the same desire.
Mr. KEYSERLING . Yes , sir.
Senator DOUGLAS . 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. KEYSERLING . 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 DOUGLAS. May I point out in this case the actual quantitative relationship is in harmony with the logical relationship and
not contrary to it.
Mr. KEYSERLING. If you want to assume, Senator, that you start
with a theory that A causes B, and then at times-

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Senator DOUGLAS . You agree to that theory.
Mr. KEYSERLING. May I conclude this ?
Senator DOUGLAS . Surely .
Mr. KEYSERLING. If 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 saying 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 you finished?
Mr. KEYSERLING . Yes , 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 satisfactory,
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, the
money 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, and,
therefore, the same amount of money turning over more rapidly was
offset 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 after
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 unstabilizing 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 PATMAN. 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. KEYSERLING . I do not recall having called that particular fact
toSenator DOUGLAS . That is, you do not recall it ?
Mr. KEYSERLING. I do not recall it.

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Senator DOUGLAS. 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. KEYSERLING . 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. KEYSERLING. I was not affirmatively responsible at any time for
the adviceSenator DOUGLAS. Did you offer any advice ?
Mr. KEYSERLING . 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 DOUGLAS . No ; 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. KEYSERLING. All of those things we called to his attention and
tried to be worked out.
Senator DOUGLAS . You pointed out that there was a connection ?
Mr. KEYSERLING . 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 DOUGLAS . Well, you admit there was a connection ?
Mr. KEYSERLING. 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. KEYSERLING. I think I answered that question by saying that
I was not affirmatively responsible for advising the change in policy
reflected in the March accord.
Senator DOUGLAS . 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. KEYSERLING. 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 DOUGLAS . In other words, that you were in favor of the
continuance of the previous policy ?
Mr. KEYSERLING . I think that would be too strong a statement ,
Senator.
Senator DOUGLAS . Or were you neutral on the subject ?
Mr. KEYSERLING. 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 DOUGLAS . That is, you did not regard it as important ?
Mr. KEYSERLING. I do not regard it as of central 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. In 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 DOUGLAS. Did you make any reports to the President or to
any other high administrative official on this matter during this

period ?
Mr. KEYSERLING. Senator, I believe that I can stand on the proposition thatSenator DOUGLAS . Did you or did you not make any reports to the
President ?
Mr. KEYSERLING. 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 this
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. In other words , everything that exists at a given
time is all right ?
Mr. KEYSERLING. Oh, no.
Senator DOUGLAS. It 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. KEYSERLING. 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 needSenator DOUGLAS . You did not think this policy did any real damage?
Mr. KEYSERLING. What is that ?
Senator DOUGLAS . You did not think this policy of purchasing
unlimited quantities of Government bonds during this period did any
real damage ?
Mr. KEYSERLING . I do not think on 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 DOUGLAS . I would be delighted to have you do that.
Mr. KEYSERLING. 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. In my judgment, the end results in the economy are the
level and distribution of the production of its resources. In 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 : In 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 ?
Mr. KEYSERLING . No, sir.
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. It 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 . It 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.

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How did this increase in loans do that when there was virtually full
employment at the time ?
Mr. KEYSERLING. 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 DOUGLAS . Surely.
Mr. KEYSERLING. Proposition A : It 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 DOUGLAS . 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. KEYSERLING. 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. It 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 beSenator DOUGLAS . 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. KEYSERLING. No ; 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 which
exerts the impact upon the economy ; that is the point I am making.
Senator DOUGLAS . 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. KEYSERLING. No. It is my statement that what increased the
strain upon the economy is what the functioning business system did .
In 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 itSenator DOUGLAS . You 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. In 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
hat the net result was bad ; and if one is prepared to say that it would
ve been the same whether or not we had this expansion of bank
it , then I say that under that particular hypothesis the expansion
k credit did not have much to do with the end result, and that it
nd result which conditioned the economy and the strain on
and the price level .
DOUGLAS. Mr. Keyserling, an increase in investment in the
and the increase of production in the larger sense, as I
e accounted for by one or all of three factors : (a ) A
he amount of unemployment so that men otherwise
to work on resources otherwise not occupied with
ity.

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

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 17
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 .
It 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 goesSenator DOUGLAS. Well , it is part of it, and the classes which I detailed are quite large in number. If 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. You 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 . It 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
at 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 1950 to 1951 ?
Senator DOUGLAS . Yes.
Mr. KEYSERLING. We proposed higher taxation ;
selective-

we proposed

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Senator DOUGLAS. In which I supported you. I think I was one of
nine members of the Senate who voted for higher taxes on a crucial
roll call.
Mr. KEYSERLING. I hope we can keep you with us on that, Senator .
Senator DOUGLAS. I congratulate you on being right on that point..
[ Laughter. ]
Mr. KEYSERLING. And we proposed price and wage stabilization .
Senator DOUGLAS. Of individual items ; that is, price control on
individual items .
Mr. KEYSERLING. As distinguished from what ?
Senator DOUGLAS . Well , taking individual items, fixing price ceilings on individual items.
Mr. KEYSERLING . If that is what you mean by price control, yes .
Senator DOUGLAS . Yes, certainly .
Mr. KEYSERLING . Yes .
Senator DOUGLAS. But you did not propose placing any restriction upon the total quantity of money.
Mr. KEYSERLING. Senator, I think you have fairly well established
the fact that I do not ascribe to that factor the degree of importance
that you do.
Senator DOUGLAS . I am afraid I have absorbed too much of the
time of the committee, and Congressman Bolling wants to ask a question.
Representative BOLLING. My memory may not serve me, but my impression was that the first request that came from the administration
to the Congress , after Korea , dealt largely in the field of credit , of all
kinds ; am I not correct in that memory, that it included proposals
for credit controls that were bitterly complained about as completely
controlling the credit of the country?
Mr. KEYSERLING. Well now, Congressman , let me say this-and I
know that you will join with me in it, and so will Senator DouglasI think he and I are going to agree on the first thing today-you know
some poet said, "Earth bears no balsam for mistakes."
I am not here to claim either that I never made mistakes or that
the administration never made mistakes or that the Congress never
made mistakes, and I do not want to go into a review of who made
the most mistakes the fastest ; but the Congressman is generally correct, that long before we got into the area in this new situation of
direct controls, we emphasized the importance of certain kinds of
general controls, not only higher taxation . It was not only higher
taxation, but we also recommended , and I think I have been delinquent , Senator, in not mentioning this sooner, because I do not think
that the difference between us is as great as would seem to be, we
were not apathetic to the value of some general restraint upon the
monetary stream and upon lending through these general devices.
Senator DOUGLAS . Then there was a connection, after all, between
them ?
Mr. KEYSERLING . What is that ?
Senator DOUGLAS. Then you did think there was a connection after
all between the total quantity of money and the price level ?
Mr. KEYSERLING. Why, of course , there is a connection .
Senator DOUGLAS. Well, now we see it and now we don't.
Mr. KEYSERLING. I never said there was no connection . I have not
said there was no connection , Senator.

But we proposed various re-

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

183

serve plans directed toward reconciling this kind of general restraint
with certain other objectives of national policy and of national need ,
which seemed to us equally important.
The basic difficulty I have with the proposition as you state it,
Senator, is, first, it would seem to me that you ascribe to this particular
device a relatively greater weight than I do, and that I place more
reliance on a wide range of devices in proportion .
Second, that you do not weigh at all the fact that every particular
economic tool has points of disadvantage as well as points of advantage. In other words, taxation has points of advantage ; it clearly
has points of disadvantage. It is repressive of initiative , which is
always a bad thing per se.
Price control has points of advantage and points of disadvantage ;
selective credit controls have, as the chairman very quickly pointed
out, advantages and disadvantages, and quite correctly so ; and so has
this general measure.
Now, the only thing I am saying is, let us take each of these measures and not get exuberant about any one of them ; let us weigh the
advantages and disadvantages of each of them ; let us recognize that
with respect to any of them the advantages at a particular point of
time may outweigh the disadvantages or vice versa, and let us try to
build a blended program which uses each in just proportion , but does
not try to claim-because I think it is claiming too much that any
one of them is the central conditioning factor or the central salvation
factor.
Representative PATMAN. May I interrupt there for just a moment ?
This discussion has been on a very high plane- in fact, I consider it
a very high intellectual and professional plane . I personally have
enjoyed it very much, and am glad that the discussion went on as it
did. We do not want to retard it ; we want to encourage it.
We must hear Mr. Blough too , and we cannot do it this morning.
I have conferred with Mr. Wolcott and Mr. Bolling, but I have not
conferred with Senator Douglas because he has been busy asking the
questions, but we would like to have a meeting tomorow morning here
in this room and continue this discussion and have the same two
witnesses before us . If we do not get through tomorrow morning we
will continue it in the afternoon. Will that be satisfactory to you?
Senator DOUGLAS. Oh, perfectly.
May I thank the chairman for the complete impartiality and
courtesy with which he has conducted these hearings and in permitting me to ask certainly more than my arithmetical share of questions.
There is just one final thing.
Representative PATMAN. It has been very interesting and enlightening to me.
Senator DOUGLAS. I have just one final question, and I promise this
will be the end. What are the disadvantages of a flexible system of
support, such as has been adopted since last April ? What have been
the disadvantages ? If there are grave disadvantages, perhaps , it
should not have been adopted since April of 1951, and, perhaps, if
there have not been disadvantages, the question will come, might it not
have been desirable to have adopted this system before April of 1951 ?
Mr. KEYSERLING. Should I attempt to answer that now or should I
cogitate upon that until tomorrow ?
Representative PATMAN. Suppose we wait until tomorrow.

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Mr. KEYSERLING. I can do it now, but I will be glad to wait until
tomorrow.
Representative PATMAN. There is an amendment up on the Floor
soon after 12 o'clock, and it involves the Small Defense Plants Corporation.
Mr. KEYSERLING. Mr. Chairman, may I make just one comment ? I
want to make it perfectly clear to the members of the press and others
here that in saying there have been advantages and disadvantages in
this I have not said that this particular step was undesirable. I just
want a careful appraisal and analysis of it and, as a matter of fact, I
do not think we have had enough experience with it to be sure, but
I would like an opportunity tomorrow to appraise the advantages and
disadvantages ; but I do not want to be misunderstood to have said
that I am at this point condemning that experimental effort to see
the consequences of a somewhat different policy from the one which
pertained before.
Representative PATMAN. Just a moment, if you please. Since we
did not get to Dr. Blough, his prepared statement which has been
distributed will not be released now; it will not be released until he
testifies tomorrow.
Without objection we will stand in recess until tomorrow morning
in this room in open session at 10 o'clock.
(Whereupon, at 11:50 a . m. , the joint committee recessed to reconvene Thursday, March 13, 1952, at 10 a. m. )

MONETARY POLICY AND THE MANAGEMENT OF THE
PUBLIC DEBT

THURSDAY, MARCH 13, 1952
CONGRESS OF THE UNITED STATES,
SUBCOMMITTEE ON

GENERAL CREDIT CONTROL AND DEBT MANAGEMENT OF THE
JOINT COMMITTEE ON THE ECONOMIC REPORT,
Washington, D. C.
The subcommittee met, pursuant to recess, at 10:15 o'clock a. m.,
in room 1301 , New House Office Building, Representative Wright
Patman ( chairman of the subcommittee ) presiding.
Present : Representative Patman ( chairman of the subcommittee ) ,
Senators Douglas and Flanders, and Representative Bolling.
Also present : Grover W. Ensley , staff director ; Henry Murphy,
economist for the subcommittee ; and John W. Lehman, clerk to the
full committee.
Representative PATMAN. The committee will please come to order.
Mr. Keyserling, I would like to ask you a few questions. You mentioned yesterday the expansion of industry in 1951 , describing it as
the year of the greatest expansion in history , I believe.
STATEMENT OF LEON H. KEYSERLING, CHAIRMAN, COUNCIL OF
ECONOMIC ADVISERS- Resumed
Mr. KEYSERLING . Yes , sir.
Representative PATMAN. Isn't it a fact that a large part of the
money or the capital used for expansion in 1951 was from retained
earnings and depreciation ?
Mr. KEYSERLING . Yes ; a good part of it was, Mr. Chairman . As
a matter of fact that has been a phenomenon of the whole post- World
War II period not only in 1951 but in 1948 which was another year
of heavy business investment.
The portion of investment which was carried by retained earnings
as against borrowing was higher than in pre-World War II periods
of rapid industrial expansion.
Representative PATMAN. Our committee made an investigation of
that. To the best of my recollection about three- fourths of the capital
expenditures came from retained earnings and depreciation and obsolescence deductions . Isn't that enough to cause some concern , Mr.
Keyserling ?
Mr. KEYSERLING. The Council of Economic Advisers, in its various
reports commenting on the interrelationship among business investment and the price and profit structure and the picture on borrow185

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

!
ing, had occasion, I believe first in 1948 to point out the thought that
possibly too large a portion of the funds for investment were what we
might call financing currently out of the price structure.
That was one of the reasons why we thought in 1948, as I recall,
that a somewhat lower price structure and a somewhat lower level of
general profits after taxes would have been consistent with supporting an adequate level of business investment.
Representative PATMAN. In other words, whenever you get your
capital from the price structure, you are compelling the consumers
to pay your cost of expansion in the prices that they pay for products.
That is correct, isn't it ?
And one witness referred to it before a committee that I was on
some couple of years ago as costless capital, and I thought it was a
good phrase that expressed exactly what it is, costless capital.
In other words, concerns that are big enough in the particular field
in which they are engaged to raise prices at will can get their capital
by increasing their prices, and in that way it becomes costless capital.
And the reason I am concerned about it is that I do not see how
a small independent merchant or a small manufacturer can possibly
have an equal break or an equality of opportunity, we will say, in
an economy which permits his big competitor across the street to get
his money through an increase in prices, and thereby get costless
capital to run his operation, when the small independent must go
to the market and borrow his money and pay the going rate of interest on it . Doesn't it occur to you that there is possibly a problem
there that should receive some attention ?
Mr. KEYSERLING. Yes, there is a problem there, Mr. Chairman and
members of the committee, and I have a problem here. On the
one hand I don't want to talk too much. Some of the papers have
said I talk too much. Maybe I do .
Representative PATMAN. The committee is not complaining.
Mr. KEYSERLING. Good. In the very nature of things, the kind of
questions which you are asking, and properly, require considerably
analytical attention. I would like to make a few remarks about the
point you raise.

L

In the first place, as I look at the economy, I look first at what
I call the ultimate economic consequences . The ultimate economic
consequences that any economy is engaged in is the production of
goods and services and the allocation of resources.
Consequently, tax policy, price policy, credit policy, and other policies are merely instruments ; the ultimate objective which we seek is—
under a free system as we understand it-the maximization of our
technology and our manpower toward expanding production accompanied by stability, although that does not mean a static economy. It
means a stable rate of progress such as our technology can accomplish ,
rather than fits and starts or booms and busts.
And we look at the problem of the allocation of resources , which
means how much of our resources are at a particular time going into
business investment , capital formation, how much is going into ultimate consumption , how much is going into Government programs,
from the viewpoint of how well allocation of resources accomplishes
two purposes. First, a stable and growing economy ; and, second,
certain other national objectives which we must serve .

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

187

For example, the defense program does not add to a stable and growing economy. That is not why it is undertaken . It is one of the
burdens we must carry.
On the other hand, in the question of business investment and immediate enjoinment of goods and services, you have to maintain a
balance. It seems to me that is the central problem of our economy,
because if investment moves too fast relative to consumption you can
get what some people call overproduction, and what others call underconsumption. I don't care much about the terms, and you have an
investment boom followed by a decline.
On the other hand, it is possible in an economy to get overconsumption, which means in the final analysis that you are living too richly
in the present and not thinking enough about building up your plant
and equipment .
Now, what I look at ultimately in an economy at any time is
whether those relative activities seem to be bearing a healthy relationship to one another. When you come over to the question of
money flows, whether you are talking about it in terms of income
within the economy-and tax policy and credit policy and price policy
and wage policy all have impact upon those money flows-I don't
look at it from the viewpoint of the money flows as a thing in themselves , but rather how they seem to contribute to the wise and intelligent support of the intelligent use of our resources .
Now, the basic question I would ask with respect to the question
you have raised is, first, have we been getting over the last few years
a sensible allocation of resources between business investment and ultimate consumption .
And, second, have we been getting it through a series of tools which
are within the limits of our free system the best way of getting it,
or would other ways seem somewhat better, or does getting it in
that way have certain counterbalancing defects to set off the benefits
achieved ?
Now, on the first part of the question, I incline toward the view
in general and over-all, although there have been some excesses, that
particularly since the advent of the Korean outbreak we have not been
overdeveloping our productive facilities as against immediate consumption, because I think that in the long run that is the way to build
the kind of strength that we need to carry this kind of security
burden, and I think we are going to have to carry it for a long, long
time.
Therefore, I would not be prepared now to support the thesis which
I supported in other periods of prosperity : that we ran the risk of
having overinvestment at the expense of underconsumption .
In fact, frankly I incline toward the view-and some of my friends
have thought that I have left them on this-that over the past year
or two and on into the next year or two we have been enjoying and
are going to enjoy a somewhat higher level of consumption than seems
to me consistent with the world responsibilities that we face, and the
part of our resources that we ought to devote to carrying those
responsibilities.
Now, when you come to the question that you have raised as to
whether the method by which business investment has been financednamely, partly out of borrowing, partly out of the price structure,
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partly out of accumulated reserves , and partly out of profits- whether
the post-World War II trend of financing a larger part of business
investment out of sources which financed a smaller part before World
War II is desirable or undesirable, I would not have any positive
judgment on that . And , even if I had a positive judgment, it might
be wrong.
I think it requires a lot more analytical observation. As I say,
the Council inclined toward the view at least before the defense emergency that too large a share was being financed out of the current
price structure and out of current prices, and that the effect of that
prior to the Korean emergency was commencing to face us with the
problem of whether at that high price level relative to the consumer
demand in the economy we were going to run into one of the more or
less traditional periods of overproduction or possibly more appropriately stated underconsumption . That was our view prior to the
Korean emergency .
Now, when you get into the Korean emergency, it changes the situation a bit because the whole question of the balance between investment
and productive equipment and current consumption shifts, for the
reasons I have given.
So, I am not so sure now as I was then-frankly, as I was in 1948that this is an unhealthy tendency. I still incline toward the view
taking into account all the factors, including the factor of maintaining
a clear road for small business as well as for large, taking into account
that we must think of the future as well as the present, that I would like
to see somewhat more of the financing of business investment out of
borrowing made available on terms that can be supported not only by
the large concerns but by the small , rather than financing too large a
part of new business needs out of price increases and an administered
price system based on what the traffic will bear. That is a long
answer.
Representative PATMAN. That is all right, I think it is a good
answer, and I can see on the side of justification that it is possible
that the concerns would not be able to raise the capital necessary to
have the production that is needed for our economy, unless we permitted something like that. That is to be considered too .
Although it is in the direction of concentration of industrial power,
and in the direction of monopoly eventually ; yet in an emergency,
if you cannot get capital otherwise for the purposes of industrial
expansion, possibly it is justified . I don't know. I am seeking the
answer.
But normally, under normal conditions and normal times, my horseback opinion, is that it is a very dangerous thing to permit. I think
we should look carefully into it.
Now, I am anxious to have this discussion continued about these
Government bonds. Yesterday Senator Douglas was asking you about
the good things about pegging the market and the bad things about
pegging the market. If Senator Douglas is ready to continue on that,
I will yield to him.
Senator DOUGLAS . First, let me say, Mr. Chairman, that I think I
took much more than my arithmetical share of the time yesterday.
Representative PATMAN. I was going to yield to Mr. Bolling, but he
said he had to go to a committee in a few minutes . And it would be
all right, although I realize that it is probably Mr. Bolling's time, for
you to go ahead.

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We are all very much interested in the questions that you ask and
the discussion in general, and we are certainly glad for you to continue, and we are delighted to listen to you.
Senator DOUGLAS. At the end of the session yesterday, I asked Mr.
Keyserling if he would state what he regarded as the disadvantages of
the so-called accord reached approximately a year ago between the
Federal Reserve and the Treasury.
That accord, as we all know, instead of providing for the Federal
Reserve buying an unlimited quantity of Government bonds in order
to maintain the price at a fixed price of slightly above par, it provided
for only limited support of the Government bond market, with the
understanding that, if this required the price of Government bonds
to fall off slightly, then that risk should be taken .
Now, that was done and the total quantity of Government bonds
held by the Fed. is now slightly less than what it was a year ago.
The Government bonds have not fallen off very appreciably. They
have fallen , I believe, to somewhere in the 97's. The Treasury increased the interest rate of long-time refunding from 212 to 24.
The price level has been relatively stable with some decrease in
wholesale prices, though the cost of living to consumers has gone up
a few points due to the prior increase in wholesale prices and as these
goods have moved downstream been reflected in higher costs to the
consumer.
In other words, we had a reversal of the policy which had been
adopted before. This reversal of policy has not been accompanied by
any catastrophic reduction in the price of Government bonds.
It has been accompanied by a diminution or by a recession of the
increase in the price level, and it has also been accompanied, as you
well know, by great industrial expansion.
Now, in view of these apparently obvious advantages, I wondered
if you would be willing to state for the record what you regard as the
disadvantages of the flexible support policy.
Mr. KEYSERLING. Well, in order to do that, again I think I would
like to ask the committee for the privilege to make a rather systematic
analysis of this problem, because I think it falls into numerous parts.
Of course, I would like to answer questions at any time in that analysis,
but it is rather a complicated question.
Representative PATMAN. I assume that will be satisfactory Senator.
Senator DOUGLAS . Certainly. I will try not to be captious by interruptions, and any questions that I raise will be for clarification.
Mr. KEYSERLING. I will try to do a better job on the answers than
I did yesterday, Senator.
Senator DOUGLAS . You did all right.
Mr. KEYSERLING. First of all , I want to clarify the position which
I yesterday took. I want to make a differentiation based on one of
the questions which Senator Douglas asked me.
Senator Douglas asked me whether prior to the accord I had recommended , or the Council had recommended, a change in the policy as
commonly understood before the accord. I stated that I had made
no such recommendation , and I stated that if the decision had been
in my hands I would not have made the change.
I want to make two things clear in connection with that, because it
has been subject to some misinterpretation in the press, inadvertently.
In the first place, that statement on my part yesterday, and repeated

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today, was nothing new. The Council of Economic Advisers twice a
year publishes reports embodying its views on the economic situation
and what policies and what changes in policies should at particular
times be considered by the President and the Congress .
Now, it is a matter of record that in the January 1951 Report of the
Council of Economic Advisers, 2 months, approximately, before the
accord, we did not recommend that change, so that what I said yesterday and what I said today is simply repeating the fact, the known fact,
that the Council of Economic Advisers was not among those advocating this change.
Senator DOUGLAS. Mr. Keyserling, would it be unfair of me to ask
another question ?
Mr. KEYSERLING. No question is ever unfair.
Senator DOUGLAS. Well, they sometimes are. Would you be willing
to state whether you favored the continuation of the policy which the
Federal Reserve then followed, buying an unlimited quantity of bonds
in order to maintain the price at the interest rates then charged ?
Mr. KEYSERLING. If it does not seem a distinction without a difference or the splitting of a hair, I think there is a difference between
not advocating at a particular time a basic change in policy and
feeling necessarily that the then pertaining policy is essential to be
maintained.
The difference is that my general view is that in an economy as complex as ours the weight should be on the side of doing what has been
done, unless a moderately strong case can be made for making a change.
Therefore, I would not want to say that, because we had not recommended this particular change, we had our hearts or minds set against
it ; that we believed it would be dangerous to make it.
I would say, rather, that we did not recommend it because , on the
complexion of the situation as we then analyzed it, we did not regard
it as of central importance. We regarded other things as of more
importance, and we concentrated our fire on what we thought were
the important things.
Now, I think I can illustrate that a little further by further clarification. I think that position is entirely consistent with what I said
yesterday at the end of the discussion and which was not completely
understood in all quarters.
The fact that I did not and that the Council did not before this
accord affirmatively recommend it should not be interpreted to mean
that I am now taking the position that the accord was undesirable ;
and that distinction , I think, is so clear that it needs no further
elaboration .
In the first place, it was something new, and something new will
always have differing opinions prior to its testing as to what its consequences are going to be.
At no time subsequent to the accord have I expressed a view challenging on over- all balance the fact that up to now I am willing to concede that the Federal Reserve Board and the Treasury, in working out
this accord, not only did what they thought was best, but I am not
prepared to say that what they did was wrong.
On the question of whether what they did was right, I simply say
that the period which has elapsed between then and now is not conclusive on that point, and I will come to that further in the course of
some of the other things I have to say.

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Senator DOUGLAS . You are going to list some of the disadvantages
which affect
Mr. KEYSERLING. I am coming to that, Senator . I just want to
make my position clear : that my position now on the accord is that
I am not prepared to challenge what the Treasury or the Federal Reserve Board did ; and , if I were prepared morally to challenge it , I
would do it.
If I have any defect, it is my willingness to state what I think, and
I am not bound by any edict from anybody as to following any particular line. I am not now, and I never have been.
Broadly speaking, I hope the committee will assume that the views

which I have expressed privately-and I think I am entitled to express views privately to the President-are in accord with the views
which have appeared in our published reports . That is the way I
have always been, and at the time when I can't be that way I won't be
here. There may be other reasons why I won't be here.
Now, coming to the question that Senator Douglas has raised about
my attitude toward the advantages and disadvantages, I had not intended yesterday to compress that within the limits of an analysis of
the advantages and disadvantages of this particular accord.
Although I do not want to duck, I will get into it, but I did not
feel that I could discuss that question in fairness to myself without
pointing out that the basic issue I have raised is not with respect to
the advantages and disadvantages of this mild change which has been
tried for a short time, but rather the question of how effective this
particular device of monetary policy can be in seeking the objectives
sought for it, what it can do, what it can't do , what its limitations are ,
what its dangers are.
And most importantly, not that it should not be used among other
things, but that I believe that in the current situation it is one of he
relatively moderate and relatively minor things which may be used
among many dealing with the subject both of stability and growth.
The second point I want to make in a general way, and then I will
get down to specifics, is that we cannot in questioning, in analyzing
the effect of a policy-we have to bear these things in mind : first, its
objective.
I take it that the stated objective of this particular policy as expressed by Senator Douglas-and let me see if I get it correctly—is to
contract the base, if not to contract to hold level, to hold level rather
than to permit the expansion ofSenator DOUGLAS. As a matter of fact, I have been trying to keep
my own views somewhat out of this. I did not think that we were
examining my views. I am not saying that we should contract the
economy. I did not say that the Federal Reserve should sell Government bonds and reduce the money supply.
I merely questioned whether the Federal Reserve should have expanded the money supply from June 1950 to March 1951 as much as
it did. I don't believe it should have, and I would like to point out
that when the accord then went into effect , the unlimited purchase of
Government bonds stopped and no catastropic consequences seem to
have been incurred.
I want to say it is not my view that you should enforce a contraction, a reduction in prices, and create unemployment . That is not my
contention at all.

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It is natural that we should not expand money supply faster than
the index of physical production , taking into account the velocity of
credit, and the aim is that so far as possible we should have a stable
price level so that savings can proceed within a stable price level and
not out of the inflated profits coming from price increases.
Mr. KEYSERLING. Senator, I think that if I had completed the unduly long sentence upon which I had started it would have become
clear that I was going to state the proposition as you stated it, but be
that as it may-and I do not want to intrude your views into my discussion of my views, so let me try to restate it in general terms.
The argument advanced for the utilization of this particular policy
under discussion seems to me to run as follows : That by repressing,
whether by preventing the expansion or by cutting back, the availability of a base for loans, that will have an effect upon the volume of
loans ; that the volume of loans, in turn , has an effect upon the price
level ; that it is a desirable objective to hold the price level, or at least
to prevent it from moving forward in rapid inflation. And that consequently this policy under discussion is a basic device for stabilizing
prices.
More specifically, in the particular period between the middle of
1950 and the accord of March 1951 , that if this device had been used,
presumably in about the combination that it was used since then or in
some more extreme combination , it would have stabilized prices, or
conversely, that the main reason for the price increase between the
middle of 1950 or late 1950 and March 1951 was the failure to use this
particular device for these particular reasons.
Now, I think broadly speaking, that is about the position of those
who advocate this policy and its extensive use. Now, I say in connection with that the following considerations have to be taken into
account : First, does the advocated policy accomplish the objective
sought ?
Now, that in itself is a difficult question, because we have a complex economy with many factors operating. I do not want to take
the time of the committee with the examination of a chart which
shows that unless we resort to independent analysis periods can be
shown where you have had converse movements of prices and expansion of credit or prices and expansion of bank reserves, and so forth
and so on.
But I will say that you have periods when different conclusions are
indicated, if you take these different factors. So you have to resort to
independent and additional analysis besides the mere juxtaposition
of two events to prove or draw a judgment about cause and effect.
Therefore, it is a difficult problem.
But there are other problems besides. The other problems are these,
and I will state the problems and then come back to the factual analysis of them. The other problems are these :
First, even if it is admitted that a particular economic policy will
accomplish, and does accomplish, the stated objective, and even if it
is admitted that the stated objective is sound, you have the question
of whether it generate other consequences which may not be so
desirable.
I want to address some attention to that, but first I want to give
some specific examples of that in the field of economic policy, which
I did in my opening statement.

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193

Certainly, since taxation is repressive, you could completely restrain
an inflation, or at least I think you could, by making taxes so heavy
that people just did not have enough money to force up the price of
available supplies, so that if one were looking simply at cause and
effect in a situation where the cause and effect is, I think, as clear as
in this case, and if one were looking solely at the objective of restraining price rises, one could say , Why go through all this bother of an
infinite complexion of economic policies which need to be reconciled
and understood by the public ? Why not just slap on enough taxes
to do it.
Well, the fairly obvious answer, it seems to me, is that you have to
ask the question what other consequences would result, and what are
the other objectives of economic policy.
The other consequences or result would be that the taxes at that
point, although I am not prepared to say at exactly what point, would
become so repressive that they would not only hold down prices, they
would hold down initiative, they would hold down public support,
they would hold down the growth of production, they would hold down
the support of the people for the Government policies as a whole ,
which is absolutely basic.
Now, I do not want to make this tedious by giving other examples,
but I could take almost any single element in economic policy.
Take price control . If you want to stop price rises, why not have
a price-control law which is so tough and which has so many enforcement agencies that it just says prices can't increase. I think that is
technically feasible.
I think if all the resources of the Government which are being put
into a variety of economic programs were put solely into price control ,
you could hold the price level that way, but you would have other
consequences.
In the first place, I do not believe that an absolutely frozen price
system is consistent with those adjustments within our economy on
the production side and on the resource side that we must retain , unless
we are prepared to accompany price control by the kind of absolute
control of manpower and materials and other things, which is a completely controlled system, which I am against.
In other words , you have to allow some fluidity in the price structure
so you can't use price control excessively because it has attendant
consequences which outweigh its benefit when you get to a certain
point. So you have to consider not only whether policy A assures
result A, but what policy A does with respect to result B, result C,
and result D if it is pushed far enough to accomplish result A. That
is the second point .
The third point I make is that in addition to all of that after
defining what you are trying to do, you have to consider not only
whether the policy will accomplish your result, but whether in view
of its collateral consequences there are other ways of accomplishing
the result, at least as to point of emphasis, which seem to give more
hope or more promise based on experience and analysis—and we must
use both- in view of the whole situation.
Now, the only main point that I am making about this particular
phase of monetary policy is that I ask the committee to look at all
of those phases of the problem.

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If, after looking at all of those phases of the problem, it comes up
with a clear and crystal finding, A, that the price stabilization between February of last year and now is mainly attributable to this
policy ; B, that the policy if continued for that purpose and pushed
much further-and I think it would need to be to achieve the same
purpose under a different set of facts-has no collateral effect measured against other policies, then I would say take this policy and go
to town with it.
But, on the other hand, if it is shown you need a mixture or variety
of policies on this situation , and if you try to ascribe a weight to
them on the basis of analysis , then I think the committee ought to
consider that .
With that foundation, my general approach, which I think cannot
be as confining as a simple vigorous demonstration of a particular
policy moving from A to B to C-because there are other policies at
play and other objectives at play-let us look at it more specifically.
First of all, what are the objectives of economic policy that we
are trying to accomplish ?
I still feel, first of all, that most important for a period of partial
mobilization over an enduring period of time where we are allocating
18 to 25 percent of our national product to a noneconomic purpose,
to a wasteful economic purpose, to a wasteful purpose in terms of
economics, although we must do it for reasons of national security ,
but it is not economically productive, it is a true burden upon the
economy, as distinguished from a burden simply measured by dollars
or by price changes, the defense program is a true burden upon the
economy, it is most important to realize as to the defense program
that in the final analysis it can be supported out of nothing but production. Only production can support guns and tanks and airplanes
and the other things we have to do.
Senator DOUGLAS. Would you resent an interruption ?
Mr. KEYSERLING. No, sir.
Senator DOUGLAS. Did I understand you to say that price changes
were not a burden on the economy?
Mr. KEYSERLING. No ; I did not say that. I said that in the final
analysis the burden of the defense program on the economy is primarily the resources it diverts from other purposes.
Senator DOUGLAS. You did not mention price changes ?
Mr. KEYSERLING. I think I made some reference to it, simply to
indicate that I wouldSenator DOUGLAS . You say an over-all increase in prices is a burden
on the economy ?
Mr. KEYSERLING. Sometimes it is and sometimes it is not, but I
want to discuss that in some detail, Senator. I think sometimes it
is and sometimes it is not. That is just the point I want to make.
Now, therefore, in the complexion of the economic policies that
we use at this time, we must place heavy weight on this productive
factor.
Now, let us set against this productive factor the theory of this
particuular type of monetary control as I understand it, and not only
as I understand it, but if I have not misquoted some of the people,
such as Goldenweiser and Sproul and others, whose views I set forth
in my statement, I would think there is rather common consent on
this point.

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195

The general theory of this particular device is that through, I don't
like to say contracting, because the Senator says he does not want to
contract, he wants to restrain, but let us say through placing certain
restraints on the money supply you ultimately bring about less pressure on prices .
However , it seems to me that the authorities are in relative agreement that in order to bring about that pressure on prices, I mean a
downward pressure or a restraining pressureSenator DOUGLAS. Again I want to protest. I am not saying that
the price level should necessarily fall . My point is simply that we
should try to prevent it from rising appreciably ; that the stability of
the price level should be the goal.
Mr. KEYSERLING . I would agree with that, although I am not quite
sure that some aspects of the price structure do not need to fall if we
are going to get some harmoniousSenator DOUGLAS . I am speaking of the general price level.
Mr. KEYSERLING . The general price level. Anyhow, whether you
speak of it in terms of preventing it from rising or from restraining
it, the general theory nonetheless is, as I undestand it and as the
authorities seem to concur, that for this particular device to be used
toward that purpose, it has to be pushed to the extent where it results
in a general decline in production and employment.
Senator DOUGLAS. I must protest that you might have picked out
quotations from Mr. Sproul and Dr. Goldenweiser to this effect, but
certainly that is not my position nor is it I think a general position of
the advocates of merely limiting the purchase of Government bonds
by the Federal Reserve.
I want to make it clear that those are not my positions and I do not
believe they represent fairly or in any representative fashion the point
of view of those who seek to stabilize the general price level through
credit and monetary control.
Mr. KEYSERLING. Let's illustrate that by a test, Senator. Could
the pressures upon the price level in the period between the middle of
1950 and March 1951 , the period to which you correctly direct attention, could the pressures upon price levels during that period have
been restrained more than they were restrained without reducing
either the level of consumption, the level of business investment, the
level of employment, the level of expansion in plant and facilities ,
and so forth ?
Senator DOUGLAS. Are you going to argue that question or merely
raise it ?
Mr. KEYERSLING. It would be rather novel to me because I haven't
observed it in the commentators'
Senator DOUGLAS . Are you saying that a stable general price level
would restrain consumption, would result in unemployment, and so
forth ? I would be much interested if that is your point of view.
Mr. KEYSERLING. No ; that is not what I am arguing. I think a
stable price level is consistent with that, but I say that under the
expansion of consumption and investment and inventory accumulation, in other words the rapidly expanding use of resources which
actually took place during that period, I do not see how price increases
could have been prevented without restraining some of those resource
uses .

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Senator DOUGLAS . Let me ask you this further question. To the
degree that these added purchases were made by drawing on savings,
that could have proceeded outside of the commercial banking system.
The question is as to whether we should have added to these other
factors this increase of $10 billion in commercial loans.
Would the increase in prices have been as great if the issuance of
bank loans had been more restrained, on the presumption that the
issuance of bank loans would have been more restrained if the reserves
had not mounted and the reserves would not have mounted if the Federal Reserve System had not purchased the bonds ?
I am not contending that general flow of money solely determines
individual prices. I am not ruling out the possibility of drawing
on accumulated savings.
I am merely saying that the total supply of bank loans does affect
the general level of prices, and that when you expand bank loans,
that has an effect on the general price level if it is not accompanied by
a corresponding increase in physical production.
Mr. KEYSERLING. Senator, in the period under review, my departure
from you is not as great as you think it is, but it is important in one
vital respect.
I am not arguing that the general expansion of credit or the general
expansion of bank loans under the conditions prevailing during that
period did not have any effect upon prices. What I am saying is that
the only way a restraint upon that factor could have had an appreciable result upon the price level would be if it were carried far enough
to restrain the demand of the people for the acquisition of resources.
Senator DOUGLAS . Let me ask you this questionMr. KEYSERLING. Let me illustrate that a little bit. Let's illustrate
that in various areas.
Suppose - not suppose because it actually happened. In the period
between November 1950, and early 1951 , people in the New York
area felt that because they had heard that there was going to beand this is not a limited illustration ; it can be generalized into a lot
of what was happening-felt that in the view of this Chinese intervention and the thought that it might result in this or that or the
other thing, and their vivid recollection of past shortages, they flooded
the department stores and started buying more pillow cases and more
bed sheets, and that on a broad scale was an important factor in the
particular kind of price inflation spurt which occurred at that time.
Now in the absence of price control, I say that in the short runand I am talking here mostly about short- run consequences- whether
those people ran in to buy those pillow cases by drawing down upon
their savings, or whether they ran in to buy them by saving less, or
whether they ran in to buy them because of an expansion of credit, is
not the prime factor in the price increases in those areas at those
times. They were trying to buy more pillow cases.
Now all I am saying is that if you try to trace through how a contraction in the general monetary supply through this device would
impact upon those sources of inflation, all I am saying is that for it
to do that-and I do not deny that there is a connection and that it
could do that you would have to push it far enough to accomplish
certain other things at the same time, and that on net balance they
would have been undesirable in that period .

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Senator DOUGLAS. Mr. Keyserling, I am not blaming you for this
because I know I interjected in your argument once or twice, but the
original question was directed to the period since the accord .
What bad results in your opinion has that accord had ? What disadvantages have occurred as the result of it ?
I wonder if you would be willing to turn your attention to this
period subsequent to April 1951 a period of almost a year under which
we have operated with this accord. That was the question that I
hoped you would answer yesterday.
Mr. KEYSERLING. Yes, sir ; but there is a direct connection between
the two.
Senator DOUGLAS. Time is somewhat limited, and half an hour has
passed since you started the discussion. You have not yet come to it.
I say it is not entirely your fault because I have twice interrupted,
but if we could at least declare a truce for the time being on the
period prior to the accord , would you be willing to move to the period
since the accord ?
Mr. KEYSERLING. Yes, sir ; but let us consider this, Senator , and I
want to say that I hope you will not take exception to this.
Frankly I think-and this is consistent with the whole argument
I am making that one of the disadvantages of the accord - and I
want to emphasize again that I am not saying on net balance it was
undesirable-is the extent to which on a Nation-wide basis people have
claimed for it more than it has accomplished .
Now I think that is a very important issue of economic policy, and
you can't separate that from the claim that the absence of the accord
before February was responsible for the price increases before
February.
Senator DOUGLAS . Remember this is politicallyMr. KEYSERLING . No, sir ; I am not talking politically.
Senator DOUGLAS. I want to use it as an illustration . We always
run into this question when any character comes up for appraisal.
We may say, "Well , he is not as good as he is cracked up to be," but
that is not my question . What positive faults are there in the man
and what are the positive faults in this accord ? That is the question
I am asking.
Mr. KEYSERLING. Senator, if you are willing to say that the accord
has not been————
Senator DOUGLAS . Oh, no, no, not at all. I am merely saying I
want to know what are the positive faults of the accord , what evil
consequences or bad consequences have followed in its wake. You
said it had advantages and it had disadvantages . Well , now I want
to hear the disadvantages. I have yet to hear any disadvantages.
Mr. KEYSERLING . Senator, I do not want to be in any respect captious about this, but I cannot avoid the consequence of this observation : That if I have rheumatism and a doctor tells me that drinking a
glass of water will cure me of that rheumatism , and I drink a glass of
water, and later I feel better, I do not think that the sole question
is whether the glass of water did me any harm.
There is also the question of whether that doctor should be allowed
to go around the country saying that drinking a glass of water is a
cure for rheumatism , and I think that that is an essential part of this
discussion.

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Senator DOUGLAS . Wait a minute, you said that the accord had
advantages and disadvantages.
Mr. KEYSERLING . I think one of the disadvantagesSenator DOUGLAS. What are the disadvantages ?
Mr. KEYSERLING. I think one of the disadvantages-and I will come
to others—is that it has led people to say on the basis of a juxtaposition
of events which are not cause and effect, that this policy is the central
core of price stability in this kind of mobilization period.
Now that has very important consequences , because it has a bearing
upon the extent to which we rely upon tax policy, it has a bearing upon
the extent to which we rely upon price and wage controls , it has a
bearing upon the extent to which we rely upon select controls, and
therefore it has a bearing on the whole thing. So I say again that
the question of whether or not the accord has led some people to overappraise its significance has a direct bearing upon the value of the
accord.
Senator DOUGLAS. Are there any positive disadvantages ?
Mr. KEYSERLING. Coming to the positive disadvantages, I would
like to amplify it a little bit by saying that I have never said basically
that this particular accord had demonstrated positive disadvantages,
but that to carry the accord to the point where it would have to be
carried to operate as a major stabilizing factor, it would have profound
disadvantages .
Senator DOUGLAS . Has it had any disadvantages to date ?
Mr. KEYSERLING. Well, it has had the one I mentioned, which I think
is significant .
Senator DOUGLAS. Aside from that ?
Mr. KEYSERLING. I think that it exercised some unstabilizing and
uncertain influences.
Senator DOUGLAS. In what respect ?
Mr. KEYSERLING. Well, I think it caused interest rates to move
upward.
Senator DOUGLAS . I think that is true. The interest rate has risen
from 212 to 234 percent on Governments, and there has been an upward
movement in interest rates generally.
Do you regard this increase
of interest rates as sufficiently serious so that the accord should be
discontinued ?
Mr. KEYSERLING . No ; I have at no time taken the position that the
accord should be discontinued .
Senator DOUGLAS . To what extent would the policy have to be
carried to have other injurious effects besides a rise in the interest
rates ?
Mr. KEYSERLING. Senator, I would first have to discuss the question
to what extent it would have to be carried to have beneficial effects,
because the basic point I am makingSenator DOUGLAS. Then, do you think it has had any beneficial
effects ?
Mr. KEYSERLING. I do not think that it has provable and substantial
beneficial effect except that other things being equal, to use a phrase
which you used yesterday, Senator, other things being equal, I think
it is very much better for the Treasury and the Federal Reserve
Board to be appearing to the public in the light of reconciling their
views than to be in conflict.

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Senator DOUGLAS. In other words, the advantages have been psychological rather than economic.
Mr. KEYSERLING. Well, I do not think there is any clear line between
the two . I would say that that is perfectly logical with my general
position, because since I say that these milder variations in this particular policy do not have very much effect on the economy, I would
much rather not see the Federal Reserve Board and the Treasury
fighting about an issue which seems to me not so important as many
other economic issues with which we now have to deal.
Senator DOUGLAS . On balance have the beneficial effects been less.
than the disadvantages in policy ?
Mr. KEYSERLING. I would be inclined to say that up to the present
time the beneficial effects have outweighed the detrimental effects.
Senator DOUGLAS. That is, the harmony between the Federal Reserve Board and the Treasury has been more important than the rise
in interest rates ?
Mr. KEYSERLING. Up to the present time I would say on balance
that that would be my view.
Senator DOUGLAS . Suppose you could have obtained harmony by the
Federal Reserve Board adopting the policy of the Treasury so that
you would have had harmony with the diametrically opposite policy.
Now, in that event you would have had harmony plus stability in
interest rates, and so, therefore, according to your reasoning, it would
have been still more beneficial, would it not , because you would have
added to the lower interest rates the advantage of harmony.
Mr. KEYSERLING . I am not sayingSenator DOUGLAS . By the method of logic that seems to follow. You
say that the disadvantage of the record is that it has raised interest
rates, and I grant you that. I think that should be granted . It
increased interest rates slightly. That is a disadvantage.
But you think that is outweighed by the harmony between the Federal Reserve Board and the Treasury. Now, if the accord had not
been concluded , if the Reserve had continued its previous policy of
buying unlimited quantities of Government bonds, let us grant that
the interest rate would probably remain lower, and you would also have
had harmony ; so I would think you might argue that instead of offsetting one against the other, the two would be added and would reinforce each other.
The only conclusion I can draw from your statement is that it would
have been still better if the accord had not been reached .
Mr. KEYSERLING. I have not said that, and I did not thinkSenator DOUGLAS . It follows implicitly from the contents of your
argument .
Mr. KEYSERLING. No ; you draw that conclusion only because-I
think there are certain limits on logic in this situation, too, for reasons
that I gave yesterday. You can follow logic within a narrow framework which precludes from consideration a lot of things that ought
to be in that framework before you start using logic. Logic is simply
a tool.
Senator DOUGLAS . Would it not have been better not to have had the
accord ?
Mr. KEYSTERLING. Senator, I have said on balance looking at it now,
that I think the accord has had some net benefits .

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Senator DOUGLAS. Simply because the Treasury finally gave in ?
Mr. KEYSERLING. I did not say simply because of that.
Senator DOUGLAS . You said the harmony outweighed the raise in
the interest rate. The harmony was produced by one side yielding to
the other. Up to March it had been the Reserve which had yielded to
the Treasury. Subsequent to March it was the Treasury which yielded
to the Federal Reserve.
Mr. KEYSERLING . Senator, my basic position is that if one looks
only at the changes which have thus far been made, my analysis is
that their effect upon the economy has not been large.
Now obviously you disagree with that. We have been over that
ground. You think that it had a profound effect upon the price level
between the middle of 1950- I mean not having that accord-between the middle of 1950 and February of 1951. I do not think so.
You think it has had a profound effect upon the price level between
March of last year and now. I do not think so.
Now we can go over that on a more factual basis . But the main
point I am making is that, since I do not think that the mild permutation between the situation before the accord and the situation after
the accord has had this profound effect upon the economy, then I think
there is room for saying that one of the major concerns here up to
this point is whether two agencies of Government, of public power,
if you do not want to call it Government, concerned with the policy
which up to this point and within these limits does not seem to me
to have had any great effect one way or the other, stand before the
people in trying times as able or unable to reconcile their differences.
And I am glad they have reconciled their differences, and I think
it is a net factor of a favorable factor.
Senator DOUGLAS. May I interrupt ? Do I understand your position that the limited purchase versus unlimited purchase of Government bonds has very little effect on the general price level ?
Mr. KEYSERLING. It depends on the quantity of purchase and the
time of purchase and the terms of purchase and what else is happening in the economy at the time.
Senator DOUGLAS . I am referring to one period in which the Reserve purchased $312 billion of Government bonds from June 1950
to March 1951. As I understand it in your judgment that did not have
much effect on price level.
Mr. KEYSERLING. That is my judgment.
Senator DOUGLAS. And from the period April 1951 to March 1952
the Federal Reserve Board has not purchased additional quantities of
Government bonds, in fact it has slightly diminished its holdings.
Do you say that has not had a steadying effect on prices, that there
is no indication that the increase in prices during the previous period ,
and the relative stability of prices during the latter period have been
tied to the bond purchase policy of the Reserve ?
Mr. KEYSERLING. I think that in both periods it has had some very
slight effect.
Senator DOUGLAS. But not appreciable ?
Mr. KEYSERLING. Taking this last period first, I think that the basic
reasons for price stability since March 1951 , I would place them in
this orderSenator DOUGLAS. I am trying-well , I will let you complete your
statement. I do not want to interrupt.

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Mr. KEYSERLING. I would say that since March 1951 the basic reasons
for price stability have been the following. First, while there was
an inflationary spurt caused largely by inventory accumulation and
by rapidly advancing consumer buying after the Chinese interventionSenator DOUGLAS. Are we speaking of the period July 1950 to
March 1951 now ?
Mr. KEYSERLING. I am speaking of the period from March 1951
until the current time.
Senator DOUGLAS. Which is a period of comparative price stability.
Mr. KEYSERLING . Yes, sir ; and I was starting to say that while there
had been this inflationary spurt after the Chinese intervention , nonetheless it is my view not only now but was my recorded view going back
to the first Korean assault and to the second, that in the long pull over
the next few years as of from then the basic size of the defense program
and its basic pace in a period of partial mobilization, related to the
then productive power of our economy, the supplies then available
in our economy, and the likelihood of productive expansion over the
next year and a half, was such that in the long run the inflationary
pressure strain of the defense program would not be great.
Now that is what has happened and that is the main factor. You
are asking why prices have been stabilized since March of 1951 .
Senator DOUGLAS . Now would it be improper for me to ask, whether
the stability of prices has or has not been aided then by the cessation of
purchase of bonds by the Federal Reserve ?
Mr. KEYSERLING. It has been aided , but if I were to list the eight
reasons which I would ascribe for price stability , I would list that
seventh or eighth, not first.
Senator DOUGLAS. Then I take it your position is that changes in
the money supply in these last two periods at least have had very little
effect upon the price level, that is from July 1950 to March 1951 , a
period of advancing prices when one policy was followed , leading to an
expanded money supply that is, and the period April 1951 -March 1952
when prices have remained relatively stable and Federal Reserve
holdings of securities have remained relatively stable ?
Mr. KEYSERLING. If I were listing the eight reasons for rapid price
increases between the Korean aggression and February of 1951 , and
the reasons for the relative price stability between February 1951 and
the current time, if I were listing the six reasons or the eight reasons
for that, I would list this particular reason in the degree that that
policy was used as about seventh or eighth, and not as first.
Senator DOUGLAS . The issue is very clearly joined then .
Representative PATMAN. Would you indicate what the seven or eight
are ?
Mr. KEYSERLING. I would say first the basic relationship between our
productive capacity and the demands upon our resources.
Senator DOUGLAS . May I interject there. The index of unemployment was 5.2 percent the 1st of July 1950 , and it fell to 3.4 percent in
February 1951 , or a decrease of 1.8 percent, so that there was a transfer of idle labor.
It is at present I believe 3.4 percent, for February 1952 , so that it has
since remained constant.
Now I grant that possibly a price increase did play a large factor
in the reduction of unemployment by 1.8 percent.

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My point is this : That the increase in production was about 10 percent and that therefore the greater utilization of idle resources accounts for only a small fraction of the increase in physical production.
Mr. KEYSERLING . No ; I did not say that the greater utilization of
idle resources was the main factor in the increase in total production .
I think part of the increase in total production has been due to increased productivity .
Senator DOUGLAS. Why was the increase in productivity dependent
upon the increase in the money supply ? That is, could not the increased productivity have occurred without such a large or rapid
expansion of the money supply?
think that we need to be wary of assuming that because productivity increases, it increases because of governmental policy.
Now the truth of the matter is there has been this long time of increase in porductivity at the rate of 3 percent a year more or less irrespective of Government policy.
Government policy may dampen it down, or may accelerate it
somewhat, but the long-time trend proceeds in Republican administrations, as well as in Democratic administrations and so on , and I
think frequently there is an error in assuming that because productivity has advanced, it is due to governmental policy.
Sometimes it is like the fly on the axle of the chariot wheel in the
Roman chariot race who at the end of the race got down off the wheel
and said, "See what a long distance I have traveled."
Mr. KEYSERLING. Well now, Senator , I did not say that the increase
in productivity was due to Government policy, although I think that
has been a factor in it, and I did not say that the increase in productivity was due to the increase in the money supply.
I simply started to enumerate the reasons why I think there has
been relative price stability from March 1951 until the current time,
and I do think that the first and most important of those reasons and I was just parenthetically stating why the increased production had taken place- is that in March 1951 the general level of
production had been raised very far above what it was at the time of
the Korean outbreak.
There had been expansion in basic productive capacity, there had
been expansion of various other kinds of output, and if you want
the figure in uniform prices of the changes in the gross national
product during that period, I will read them.
Senator DOUGLAS. I have them here. I would prefer not to use
gross national product because there are all kinds of inadequacies in
that figure. I prefer to take the index of physical production.
Let the record show there was an increase in the Federal Reserve
index of industrial production from 200 in June, 198 in July to 219
in March 1951 , or an increase of about 10 percent, but nearly all of
this occurred in the single month of August- when there was a
jump of approximately 6 percent.
Mr. KEYSERLING. Well, anyhow I would say the first and foremost
factor in the price stability over the past 12 months has been the increase in production, measuring the productive level during that
period with the productive level at the outset of the Korean trouble.
In other words, I do ascribe to the realization of our productive
capacity a very, very important role in preventing or avoiding price
inflation .

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Now a second factor, the factor of second importance which in a
sense relates to the first, because production must be measured against
utilization of resources, the fact is-and I say this not critically
but descriptively-that the actual pace of the take of the defense program, as we all know, has in actuality been slower than was contemplated by the business community and by the Government when estimates of the economic outlook were made in late 1950 or in early 1951,
so that you have had two complementary and interdependent factors playing .
First, a great increase in total production , and a particularly large
increase in the strategic areas of shortage , which had a good deal to
do with the inflation .
Second, and at the same time, a pacing of the defense programs take
upon the economy considerably slower than had been contemplated .
I am not saying that critically or in terms of praise . That depends
and I do think that the first and most important of those reait has been a factor in the economy. Those are two factors. Now
let's move on to a third factor.
I think a third factor has been the excellent judgment displayed by
the Congress in raising taxes.
Now, the fact that the Congress has not been willing to raise taxes
still further has tended to obscure the fact that never before in peacetime history did a Congress do so realistic and forthright a job in
increasing taxes as much as it did between the original Korean outbreak up to the present time.
I think on a comparable basis and allowing for the differences in
the circumstances, that they did a much more commendable job this
time than in World War II. Now, I think that is an immensely important factor in the effect upon price structure.
We have imposed a very heavy additional tax burden upon the
American business community and upon the American people. That
is factor No. 3.
I think factor No. 4- and when I get below 3, I am not as clear
as to the order of the importance, I mean whether it is 4 , 5 , 6 , or 6, 5 , 4.
Let us say another factor in the fourth category is the level of saving.
Now, of course you may say that the level of saving is affected by
these other steps which are taken, and there you get into a circular
process as to whether price control promoted savings by making the
people feel that they were not going to have to buy against price increases, or on the other hand that savings made price control effective
because if the people had tried to spend more price control could not
have been effective.
I think it is interrelated , and I would not want to claim excessive
partisanship toward the relative weight of the two factors.
But anyway, partly due to the abundance of supplies, partly due to
the restocking which took place in the end of 1951 , partly due, whether
desirably or undesirably there has been a sense of decreasing urgency
about the pace of the defense program-and I state that merely obJectively because I do not want to be implied as criticizing it one way
or another-anyway, partly due to all those factors the American
people have over the past year been saving at a fantastically high rate.
I won't say abnormally, because I do not know what norms are in
this kind of time, but anyway fantastically high by past measure-14
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ments, and I would ascribe to that a very important influence upon
price structure.
Next, I think that price and wage controls at least in a short period
of time have had a very important effect on it, because while I agree
with those people who say that it is not the most basic remedy, and
while I agree that it cannot in the long run contain prices , if the
other conditions are not favorable, yet I think that the statement
that price and wage stabilization for a period of time deals simply
with the effects and not the causes is an understatement.
I think that in the dynamics of the way collective bargaining works,
the way price policy works, that you get a push upon prices not only
from the demand side but also from the cost side.
I think, for example, taking a current example, that if you were to
have excessive wage increases-I do not want to get into the question of what would be excessive, because agencies of Government are
now wrestling with that problem, but the illustration serves anyway—
if you were to have excessive wage increases in the steel industry, I
think under current conditions that could give a very important fillup to the inflationary trend.
And getting back to the relationship between that and these other
policies, I hardly see just how monetary policy within doable ranges
could have any direct and quick impact upon that urgent situation
arising in the steel industry.
So I would put price and wage stabilization at least for a time as
an important contributing factor in the fifth or sixth category.
Then I think the allocation of materials is extremely important.
I think whether scarce materials are wisely or foolishly allocated
among various claimants, the pacing of that, how well it is figured
out, how it is done, that has a very important effect upon the price
structure both in direct economic terms and upon the sense which it
produces in the business community either that they are going to be
in great trouble or not in great trouble, depending partly on how
intelligently that job is done.
Now somewhere within that range at that point I would put the
effect upon the general price structure, under these times, of the permutation in monetary policy of the size and character which have been
undertaken and which it seems to me either the Federal Reserve Board
or the Treasury would be willing to undertake in view of all the circumstances now prevailing. That is about where I would place it.
Now I am perfectly willing to concede that it has some effect, and
I am perfectly willing to concede that if that particular device were
pushed far enough, just as if taxes were pushed-by "far enough" I
mean too far- just as if taxes were pushed too far or price control
too far, it could have a compelling effect.
But then I move over to say that within the range of that policy
as it has been operating, I would enumerate it as one of the factors
but certainly not the controlling factor.
Senator DOUGLAS. You would put it almost at the bottom.
Mr. KEYSERLING. I would not range it as high as the others that
I have mentioned.
Senator DOUGLAS. You have said you would put it at the very
bottom of all these factors.
Mr. KEYSERLING. Well, I could mention some others that I would
put even lower.

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Senator DOUGLAS . You mentioned six or seven that are higher.
What would be lower ?
Mr. KEYSERLING. Well, I think that under the current situation exhortations to people not to ask for higher wages or to be wise in their
price policy, I would put that lower.
Senator DOUGLAS. I would agree with you on that point.
Mr. Chairman, the witness has taken some time in replying to my
questions. I think I should now fade out.
Representative PATMAN. Mr. Bolling ?
Representative BOLLING. Mr. Keyserling, the first question that I
have is one to which I am very anxious to get a full answer, but I am
aware that the question may be a lengthy one. But I want a rather
long answer and I am aware that it will take you back over some
territory that you have already covered .
I raised the question with Mr. Martin the other day, that between
1942 and 1945 the Federal Reserve increased its holdings of Government securities by $22,000,000,000, and the consumer price index
moved up four- plus points.
During the period between 1946 and 1950 there was a net increase
in the Federal Reserve holdings of about $5.9 billion , and the consumer
price index moved up 40-plus. Now the periods of time are not
exactly comparable and I made no effort to make them exactly comparable.
I am aware that you have already discussed some of these things,
but I would like to get for my own mind your ideas of the differences
between the two situations.
What were the factors that maintained comparative stability in
the 1942-45 period, and what were the factors that made prices raise
so fast in the other period ?
Mr. KEYSERLING. Well, I will try to answer that as briefly as I can ,
but the most important part of my response is this : that the facts
which you have cited showing at various times an inverse trend in
these different elements is a factual illustration of what I was stating
generally.
I find that some business economists, labor economists, and others
have slipped into the habit of starting with a thesis and then it does not
require very great intellectual ingenuity to take a long-term chart in
a complex economy and pick out periods where A caused B, and
where A was the sole cause of B.
I just don't believe that. I believe that that is almost never true.
And the only concern I have about the attempted correlation between
the monetary policy between the middle of 1950 and March 1951 , and
the attempted correlation between March 1951 and the current time,
in juxtaposition to the price structure, is that it is an oversimplification,
I do not say that it has no validity. I do not say that it was not
one factor, but there are many other factors.
Now, the citation which the Congressman has given simply gives
factual illustrations of points in time where very different things
happened under a different complex of factors. Now, you asked what
were the reasons for that.
I do not want to bore the committee with a discussion of the whole
economic trend of World War II or even of the 1946-47 period , but
I would say simply that in World War II it was demonstrated that

!

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even with the allotment of 50 percent of our resources, approximately,
to war production as contrasted with a 20-percent range now, meaning
a greater strain upon the economy, that even with that and even with
a tax policy which in that time I think took an inadequate amount
of excess purchasing power out of the economy as against borrowing,
and even with financing of about half of the war effort through borrowing, even with all those things which were much more extreme
than anything we have had in recent times, nonetheless, as you point
out, there was achieved for a long period of time quite a large degree
of price stability, which seems to me to indicate at least-and I do not
want to prove too much for it-that we cannot single out as the determining factor in price stability a factor which was not present at that
time because at that time the Federal Reserve Board did support the
Government bond market and at that time it did follow the policy of
taking up these obligations as they occurred.
Now, I do not mean by that- and I want to take a moderate position
on that— that an even better job might not have been during World
War II if a somewhat more flexible policy similar to the one now in
effect between the Federal Reserve Board and the Treasury had then
maintained. Maybe that would have been still better. I am not
arbitrary on that.
I simply say that it is one factor in the picture and does not seem
on analysis to be the major factor within the range of what is doable
in that area now.
Now, I also think that during that period of World War II we
would have been better advised to have collected somewhat more in
taxes, although I do not believe you can be on a pay-as-you-go basis
in a total war, because we did, through not doing that, give the people
the impression , including our working groups, that they were increasing their real incomes because they were getting more wages at a stable
price level, but the only reason they were registering that gain was
because they were not allowed to spend the money.
If they had tried to spend the money, the increased production of
civilian goods was not underneath it, and, consequently, when they
did try to spend the money after the war, that, among other things,
forced up the price of those goods.
So I think it was in that sense a suppressed inflation, and I won't
say it was a subterfuge, because on balance I don't know-you certainly could not have financed the whole war out of taxation, and
maybe the right balance was struck, but if that was the right balance
we had to pay the cost for it in postwar inflation .
Now, whether the cost in postwar inflation was on net balance
a greater cost to our economy than the cost of a different system of
taxation during the war, I don't think any man can answer. I think
it takes an awful lot of analysis. It is a terribly difficult question .
So much for the World War II period. Now, coming over to the
other period that you refer to, Congressman, the 1946-47 period ,
there were a lot of factors operating then.
I think personally that the direct controls were demolished somewhat too rapidly in that period . I think the backlog of demand for
a tremendous accumulated nature of war-created shortages was an
immensely important factor.
We had practically full employment at high and growing wage
levels. We had a large accumulation of savings, and all of those

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things in combination forced the price level up rapidly during that
period.
If we had wanted to hold the price level reasonably stable during
that period, I think we would have had to defer the demolition of
price and wage stabilization, and I think we would have had to have
a higher tax program.
But there again that brings me to the other point that Senator
Douglas raised about price trends and gives me an opportunity to
discuss the third phase of the main point I made.
As you recall, I said three things. I said first that in weighing
a particular policy device, one has to ask first will it accomplish the
objective claimed for it, namely, in this instance, how much effect will
it have upon price stability.
Second, if it will accomplish that objective, what are its collateral
consequences and what are alternative methods of accomplishing
that objective.
But third, and perhaps most important of all, is the question : Is
that objective the sole or the predominant objective in the economy ?
Now, let us apply that to the question of prices. There is a great
inclination to the view that price stability is our primary economic
objective. I do not attribute that to you, Senator.
Senator DOUGLAS . I would say that it is a prime objective. Yes,
I would be very glad to say that.
Mr. KEYSERLING . I think it is one very important objective.
Senator DOUGLAS . I would say it is a primary objective.
Mr. KEYSERLING. I would agree that it is a prime objective, but I
will say that in the operations of the American economy, particularly
when since no election on our part we have had these great shifts in
the problem with which we have had to deal, I do not know just how
one could equate what degree of price stability would be consistent
under our system with the other things we have had to do at the same
time.
In other words , let us look at the situation going back to 1950.
In 1949 we ran into a recession . Some people thought that was going
to be quite serious, others did not think so. In other words, it was the
first important postwar testing of the stability of our economy.
In 1950 we started recovering from that recession, and there was
some ambivalence in the situation then . In the middle of 1950 we got
a different burden.
Now frankly I do not think economists, including ourselves or
others, have really moved on to an adequate analysis of at just what
point price trends equate with other objectives. In other words, to
what extent would the productive changes between 1950 and 1952 have
been the same if we had had absolute price control .
My inclination is to think that on balance, through not having absolute price control, the productive advantages outweighed the somewhat lesser stability. I cannot prove it but that is my inclination .
Second, there needs to be further analysis of the relationship
between the changes in the general price level and how those changes
affect resources and incomes throughout the economy. I would say
that if it could be shown-this is a theoretical picture to illustrate the
point, Mr. Chairman and members of the committee-that a change in
the price level was accompanied by an apportionment of resources
throughout the country which apportioned to each group exactly the

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same additional number of dollars, manifestly you would be working
with more chips but you would be back where you started from.
Therefore changes in prices either upward or downward affect the
economy adversely in one of two ways.
Either they produce a certain redistribution of resources which
in the long run affects economic stability, because things get out of
balance, or they produce a social redistribution of benefits which we
as a nation do not think is consistent with fairness or justice, and
they may do a complexion of those two things.
But it does not follow from that automatically that a generally
rising price level in the United States always produces the changes
in an undesirable direction . I would be prepared to say that rapid
upward spurts of prices at particular times do produce these consequences in an undesirable direction , and I, of course, am not arguing
against but rather for a firm stabilization program, and a rounded
stabilization program.
But I do not think that price is the only thing that we can look at
in the economy in determining economic policy. And consequently
when you prove that a monetary policy if pushed far enough would
hold the price line-and I think it would, any policy if pushed far
enough would you have to examine what the consequences of pushing
the policy that far would be not only upon prices but upon production,
upon the allocation of productive resources, which is vitally important
in this defense period.
And the main point I made on this monetary issue is that if it were
pushed far enough, actually to hold the price line, not to hold it now,
because I think many things are holding it now, but if it were actually
pushed far enough actually to hold the price line, not to hold it now,
sion and March 1951 , if it alone were relied upon or almost entirely
relied upon, if it were pushed far enough absolutely to hold the price
line, it would have to be pushed so far that in its consequences upon
the national debt , upon the financing thereof, upon changes in interest
rates, upon productive incentives and upon the allocation of resources,
then it would produce lots of other things that nobody would want to
countenance.
And that is the essence, Congressman, of my whole position here.
Representative BOLLING. Mr. Keyserling, our military build-up program places its major emphasis not just on the production of hardware
but on the production of productive facilities and the development of
production facilities. We could have used two techniques in achieving that.
One would obviously have been direct Government construction, the
other was the one we chose, private expansion, with various aids and
assistances. Where could that private expansion come from in credit
terms other than through an increase in credit available ?
Mr. KEYSERLING. I think that there would have to be some increase
in credit available to produce so rapid an expansion as has occurred.
Representative BOLLING . This is the question that I am not at all
clear on. You have said several times that the diversion of productive
capacity for military defense purposes is in a sense completely negative from an economic point of view.
Is there a difference in the negativeness between the production of
hardware and the creation of new production that does not produce
hardware for some time ? Do I make that clear ?

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Mr. KEYSERLING. Yes, there is a big difference and there is also a
difference between the production of end fighting weapons and the
production of facilities for their production. Let us take both of those
points.
First of all, when I said that a military program while necessary
on grounds of national security does not add to our economic strength
or our productive facilities, I was referring to fighting weapons.
I was not referring to that part of what is sometimes called the
security build-up which consists in the production of productive facilities, because most of those productive facilities, as we learned after
World War II, can be substantially transformed to the production of
civilian goods. Now that is the first part of the question.
In other words, I would not apply the comment that the military
build-up is not economic and in an economic sense wasteful , although
it is necessary on grounds of security, I would not apply that to the
expansion of a steel plant even though the expanded output of that
plant for the time being goes into the increased production of military
end items, unless one said that that would be a net loss after the defense
program because we would then have a disutilization of those facilities.
I think as a nation we have got to find ways to use those facilities
and can.
As a matter of fact, I do not think that in any of the important areas
of the expansion of productive facilities the expansion has moved much
if at all above the correlated factor with what the need in that area
would be anyway within a few years if we are going to have a highlevel employment with a growing labor force and improved technology.
Now coming to the second question as I understand it, of course the
inflation strain of the expansion of these productive facilities is mostly
while they are being built, because while they are being built they are
not even adding to the flow of goods, so that the balance is entirely
negative during the time they are being built , but that is true of any
building effort.
Where you are building a productive tool, you haven't got it until
you build it. That is true of a fighting weapon, and you have to
strike a balance, and that is why I think the problem of allocation of
resource use is the central question of this whole mobilization program,
the central question .
How much of your resources are you going to put into fighting
weapons as against plant build-up, plant build- up as against civilian
supplies, how long it takes to get the plant before you get the benefits
of it, and so forth, and so on ?
And it is just because I think that that is the central question that
I have raised these questions as to whether general monetary policy
is the kind of weapon which addresses itself to these adjustment
problems.
Now, again I am forced to say-I am not saying don't use this
weapon, but I am saying-when you look at the nature of the problems,
your problem of expanding production , your problem of getting this
allocation of resources, your problem of priorities after all , a defense
mobilization is a problem of national decisions on which things you
want to do first when you can't do everything- and so forth, and so on,
if I list those problems and then listed the range of weapons to deal
with them, I would not put this particular weapon near the top be-

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cause of its generalized character and its corollary consequences if it
is pushed too far.
Now, that does not mean it should not be used at all any more than
it means that the other weapons should not be used at all . I think
they should be used in blend .
The Council of Economic Advisers from the very beginning has not
been an opponent but an advocate of general credit and monetary
restraints .
We have proposed various increases in reserves toward that end
as one way of trying to reconcile that problem with the problem of the
management of the national debt, and, as I here again say and want
to emphasize, I would not as of this time list myself, for whatever
it is worth, as being opposed to the accord that was reached, and I
would not list myself as saying that on net balance as of now its
benefits have not outweighed its disadvantages.
I think its benefits have slightly outweighed its disadvantages. I
am afraid of it mostly because of the excessive things claimed for it.
Representative BOLLING. In the last part of your statement two
things came up that I want to pursue a little. You speak of the generalized character of the effect of monetary policy. Would you
expand on what you mean by that ?
Mr. KEYSERLING. I mean that it does not operate to produce the
selective kind of expansion and contraction which is so important to
a defense mobilization.
In other words, you see we have got to distinguish various situations .
A large body of economic policy and a large body of the thinking about
economic policy grew up during times when you were thinking of
(a ) dealing with a general depression or (b) dealing with a general
inflation, and then the policy very simply ran as follows :
If you are in a generally depressionary situation, let's lift prices,
lift the money supply, lift the general level of demand- let's lift
everything and get out of this trough.
Now in the typical inflationary situation-and by the typical inflationary situation I do not mean one that we have had typically.
I think it is more a stereotype than anything actually that has happened. That is regarded as the converse of the situation I have
described.
We have too much of everything . We are rising too fast. Let's
cut everything down. You decrease the money supply. You try
to push the price level downward, and so forth and so on.
Now, the point I am making is that the kind of long-term partial
defense mobilization which we are now confronting does not fit into
either of those two categories. It presents us with entirely novel
kind of problems, and the novelty of the problem arises from the
fact that manifestly we are undertaking at one and the same time
a rapid expansion of some very important things, and to support it, a
rapid contraction of other very important things.
We must rapidly expand military weapons, we must rapidly expand
the industrial mobilization base to increase our total strength, and
we must correspondingly contract insofar as we haven't got the resources to do both, housing, automobiles, and other things.
Therefore I say that a general policy which was properly conceived to produce and be effective through a general contraction of
economic activity finding its way quickly into all the crevices of the

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211

economy cannot be used very vigorously and very far-reachingly in
this kind of situation.
It can be used to exercise some dampening effect, and I am not
against that. But it cannot be used as strongly as advocated by those
who proposed it in an entirely different framework because we haven't
got the problem that they were thinking of when they developed over
the years that particular branch of theory.
That is what I mean when I say it is a generalized weapon.
Representative BOLLING. You mentioned previously the question of
supplemental reserves. Do you have some specific suggestions on that
at this time ?
Mr. KEYSERLING. I do not have specific suggestions at this time,
partly because I really haven't gotten very much into the techniques
of the relative merits of the different types of reserves. We have from
time to time advocated authority in the Federal Reserve to increase
bank reserves .
I understand that the current position of the Reserve Board is that
they do not want that authority at this time because they do not feel
that they should use it at this time. And I do not have any specific
reserve plan now to advocate.
Representative BOLLING. I raised this question with Mr. Martin the
other day. In view of the inevitable legislative lag, and the possibility of our needing an additional tool in this field, is it psychological
reasons that make it unwise to ask for the tool at this time ?
Mr. KEYSERLING . I do not intend to say that it would be unwise
to ask for it at this time. I simply say that it is my understanding
that the operating agency feels that way and that I have no specific
plan to offer.
I would be prepared to say in response to your general question that
it has always been my general view-and I think the view of the
Council that in this kind of fluid situation it is very bad to try every
few weeks or even every few months to revise your kit of tools to what
the outlook looks like for the next few weeks.
And it would be the part of wisdom for a discretionary agency like
the Federal Reserve Board to have a wide amplitude of tools that it
could rather quickly draw upon in view of the legislation lag.
Representative BOLLING . Senator Flanders.
Senator FLANDERS . Mr. Keyserling, would you think it an oversimplification to say that in the absence of direct controls, prices respond to the relationship between the money supply and the production ?
Mr. KEYSERLING. Oh, definitely they do, particularly if by "money
supply" you mean not the static volume of money but its turn-over
and so forth and so on.
Senator FLANDERS . Yes ; it is the availability of the money supply ?
Mr. KEYSERLING . Oh, yes, definitely .
Senator FLANDERS. Now would you also say that price-and - wage
controls are effective primarily in the short run, or do you feel they
can be effective in the long run over periods in which the relationship between the money supply and production is leading toward
inflation ?
Mr. KEYSERLING. I think that the question of what is in the short
run and what is in the long run, Senator, would be differently defined

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by different people. I mean some people would say that 2 years is in
the short run, others would say 3 and others 1.
Senator FLANDERS . What would you say ?
Mr. KEYSERLING . I would not be as sure as some people are, but I
would say this :
That it has been my view from the beginning that if we are embarked upon many years of partial mobilization, taking into account
the economic problems and the psychological problems and the problems of public consents, that I would go light in the long run on priceand-wage controls, and try to work toward a productive situation
where within a reasonable short period of time they could be taken
off. That is my general position .
Senator FLANDERS . Now, 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 ?
Mr. KEYSERLİNG. No ; because in the first place, in giving this low
rating to money supply, Senator, I want to restate something that I
think I said when you were not here.
I am giving a low rating only within an assumption that the monetary authorities, for reasons that seem to me important, could not push
monetary controls to their logical or extreme conclusion.
In other words, if the monetary authorities were willing to produce
extreme changes in interest rates, in the availability of credit and in the
money supply, I would certainly not then give a low rating in terms
of its effect upon the price structure.
I think if you pushed it far enough, you could bring the price structure downward through that method probably more quickly than in
any other way.
Senator FLANDERS. Now, would you say that there was any difference in that relation , that is, that pushing it to the extreme is dangerous ; in that respect does the money supply differ from any of the other
factors that you have mentioned ? Isn't any tool pushed to its extreme dangerous ?
Mr. KEYSERLING. I agree with that.
Senator FLANDERS . You see, I am trying to find out why you put
the money supply so low when it is apparently a prime factor in the
equation .
Mr. KEYSERLING. Well, first of all I would say that I gave specific
illustrations in different areas of economic policy where tax policy
and price policy were equally susceptible to disability if pushed too
far. Now, in my rating I simply said this :
I said that I thought—and this is a matter of judgment—that as
applying particularly to the period between March 1951 and now—
and I have been talking not about the application of monetary theory
in that connection but about the application of the specific change
that was made, which was a minor change- I said that on my evaluation that that minor change, I thought, had had less influence upon
price stability during this period than such things as the direct controls, the increases in taxes which have taken place, the fundamental
increase in production which has taken place, the allocation of materials in accord with certain criteria, and I think I mentioned the
others .
Senator FLANDERS. Let us go back to another period . Would you
feel that in the period after June 1950 that the money supply factor

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213

was satisfactorily handled, that is, that not using it was the thing
to do ?
Mr. KEYSERLING. I think I said to Senator Douglas that looking
backward I was not prepared to stand on the ground that it would
have been undesirable to have made this change represented by the
accord somewhat sooner.
In other words, I am not taking the position that the accord
was made precisely at the right time, that if it had been made sooner
it might not have made its contribution to stability .
I am simply taking the position-let's put it this way- that if the
accord had been made in the middle of 1950 rather than in March
1951, I still think, although I cannot prove, that much or most of
the price inflation which took place between the Chinese intervention
and February 1951 would have occurred anyway, because of the other
powerful factors at work.
Senator FLANDERS . I may say that in questioning I think, or perhaps I made a statement instead of questioning, both Mr. Martin
and Secretary Snyder raised the question as to whether monetary
control alone sufficient to have stopped the price rise would not have
been destructive .
I believe that an endeavor to completely negative the price rise
by monetary controls alone would have been destructive. To that
extent, if that is your position-and I think it is-I find myself agreeing with you, but I cannot agree with the low position you have given
the monetary policy in this series.
I judge that of the things you have given that you rate only exhortation lower, and that is low indeed. It seems to me you cannot
give so low a position to one of two primary factors.
Mr. KEYSERLING. Well, Senator, you may be right on that, but if I
sought to move them around and to put one of the others at the bottom , take for example tax policy, I would find it very hard to put that
at the bottom.
And in the short-run situation, frankly I would find it very hard to
put price and wage stabilization at the bottom because I think in this
the short-run situation, that it is very important.
Senator FLANDERS. On tax policy, for instance, I take it that you
feel that increased taxation necessarily and universally is antiinflationary ?
Mr. KEYSERLING . No , sir, not at all.
Senator FLANDERS . I just want to see you pull that down just a little.
Mr. KEYSERLING. Well, I am glad you are helping me do that.
Senator FLANDERS . Is that your position ?
Mr. KEYSERLING. No ; that is not my position at all. I say the tax
policy, as well as other economic policies, illustrate the point that
they have competing effects, and that some of the effects are good
and some are bad.
Insofar as taxation is generally repressive , it always has to that
extent a competing bad effect. There are certain things you do not
want to repress. You do not want to repress reward for effort, but on
balance you have to do some of it .
Now, I think, not getting to the point of whether it is an arbitrary
figure of 20 percent, 19 or 21 , taxation can reach the point where its
repressive effects far outweigh its beneficial effects, and I think it
can reach the point where on net balance it may be inflationary.

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Senator FLANDERS. Would you consider that there are any of its
effects which immediately affect prices unfavorably ? Take excise
taxes, for instance, do you consider it inflationary when a fur coat
has added to it the price of the excise tax ?
Mr. KEYSERLING. No, I do not .
Senator FLANDERS . Or when gasoline has added to it the price of an
increased excise tax ?
Mr. KEYSERLING. I find the gasoline question a little harder because
I regard a fur coat as a luxury and I do not know whether gasoline
is a luxury or not in our economy. Clearly, in one sense it is not, but
clearly the extent of its use is involved.
Senator_FLANDERS . Now, I am led into a little byway by this last
remark. If you consider inflationary only price rises in necessities,
then why should the Stabilization Administration cover the whole
water front of luxuries, necessities, and every other blooming thing
there is ?
Don't you find yourself at odds with them in that if you think that
inflation relates primarily to necessities ?
Mr. KEYSERLING. Well, in the first place, Senator, trying hard not
to quibble, I do not think I said that I never regarded price rises in
luxuries as potentially inflationary. I think price rises in luxuries
could be inflationary, and therefore I did not say categorically that I
would never try to restrain price increases on luxuries.
I did try to convey the general impression that the restraint of
price increases on luxuries, such as fur coats, seems to me less important by far than the restraint of price increases on necessities.
Now, I go one step further than that and say that I would incline
heavily toward the view that in a long-range defense mobilization the
effort involved , the complexity involved, the general spirit involved
in trying to price-control all luxuries far outweighs the benefits.
Now, I want to fair about that, and you realize the position I am in.
That is my general position.
I would not want that to be interpreted as a judgment on any
particular price action being taken by OPS, because they are an operating agency and they are closer to it than I am.
But my general view is—and I have expressed it many times—that
for a partial mobilization of long duration , price controls should be
selective rather than covering the whole economy. And I have never
followed the argument for this kind of situation that if you control
anything you have to control everything.
Senator FLANDERS . I have a number of other questions I could ask,
sir, but I do not think they are of great importance.
I presume that you have already explored- I have not been here
all the time-the apparent speaking with two voices in your section B,
formulation of fiscal and monetary policy, pages 849 and 850 (committee print entitled " Monetary Policy and the Management of the
Public Debt " ) . Page 849 at the end of the third paragraph from the
top :
Nevertheless, we do not question the desirability of making monetary policy
chiefly the responsibility of an authority having some degree of independence
from all Government departments and agencies engaged in borrowing or lending.

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215

While at the end of the third paragraph on the next page there is
this sentence :
The President, as Chief Executive and head of the executive branch, is the
only one person in the Government in whom this power of policy coordination
can be lodged.

Now do you see any conflict between those two statements ?
Mr. KEYSERLING. Šenator, I do not see a conflict between the two
statements , but I do not think that the two statements provide an
answer to the question or to the problem.
I do not think there is a conflict between saying that the Congress
in its judgment may set up one agency directly within the executive
structure, as for example the Treasury, and that the Congress in its
judgment may set up another agency such as the Federal Reserve
Board outside the executive structure, which is the first statement, and
saying that when the Congress does that, nonetheless , particularly in
times of urgency the President as the chief coordinating executive officer must try to lend the influence of his office, using that word in the
proper sense, to deal with the problem of coordination among those
agencies, since they both profoundly affect the economy.
And I think the Congress at times has recognized that, because the
Congress at times, having set up executive departments and having set
up the Federal Reserve Board, has in certain statutes given certain
functions in part to an executive officer under the President and in
part to the Federal Reserve Board.
For example, the power to deal with the problem of housing shortages in this current situation has been given by the Congress in part
to the Federal Reserve Board—and I say this not critically-in part
to the Housing and Home Finance Administrator, in part to Mr.
Wilson.
Now clearly in that decision the Congress has recognized, ( a) that
it wants to use all of these facilities, and ( b ) that there is a relationship among them. And once that is done, it necessarily does impose
upon the President some degree of responsibility of coordination . So
I think the two answers are consistent.
Now, let me get to the part of my comment that says that they did
not answer the problem. I do not think that the problem of how one
reconciles quasi-independent agencies, independent agencies- the
term "independent agencies" of course has been used in a lot of different ways. There are a lot of agencies that are called independent agencies that are within the executive structure .
I do not think of course that is a political science question rather
than an economic question-that question has been completely resolved ,
particularly for an emergency period of this kind .
Senator FLANDERS. I noted in the questioning of both Mr. Snyder
and Mr. Martin that those gentlemen steered off from any clear expression of principle such as asking the Congress to decide or anybody
else to decide which was paramount, the stability of the prices of
Government securities or the stability of the dollar, and apparently it
figured out as near as I could make out, to this statement.
That given the Secretary of the Treasury of the particular characteristics and the experience and ability, and given a board repre-

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sented in a chairman of the particular person or characteristics and
experience and ability, we might be assured that there would be no
trouble.
That seemed to be the result which both of those two gentlemen
asked us to accept as the solution certainly to the present situation and
presumably for all future situations. Do you think that is a good
solution ?
Mr. KEYSERLING. Senator, I think that in the current situation- the
only way I can state whether I think it is a good solution is to use a
technique which I tried on something else. If I were making the
decision now, Senator, I would leave it about as it is.
I would leave it about as it is and rely upon the Treasury and the
Federal Reserve Board to continue to work this thing out. That is the
import of my prepared statement, that that seems to me to be the
most prudent of solutions available at the current time.
Now, on the long-range question which, as, I say, is one of the political science or of the structure of the organization of public power,
that is more difficult.
One of the reasons that it is more difficult is that, as I said in my
statement, in my prepared statement, the argument for independence
may be based-and let me say I am not applying this particularly
to the Federal Reserve Board, because I will get in a situation here
where this general discussion will seem to be my view. I want to
state categorically that in the current situation my view would be that
the most prudent course would be to let things go as they are.
Now, talking about the subject of independence not as related particularly to the Federal Reserve Board but more generally, it rests
upon a variety of grounds which I think it is worth saying something
about.
One ground on which it rests is that if an agency is vested with
very important functions vitally affecting the whole economy, it should
be free of political influence.
I have never been able to see where that argument applies more to
one agency than to many other agencies that I could name which most
assuredly profoundly affect the whole economy and I believe that the
argument that bodies exercising powerful public functions should be
free either of the Congress or of the President on that particular
ground falls down under our system.
I have not been able to differentiate between one power and another.
I think that there is no power more vital than the question of our
national defense or under the current situation, as I pointed out yesterday, the allocation of scarce materials which affects the very life and
death of businessmen or of all industries, or the question of what kind
of prices you make hundreds of thousands of businessmen charge or
what kind of wages you make millions of workers accept.
Those are also enormously important powers over the economy, and
they are equally susceptible to improper pressures. And if you are
going to make the argument on that ground that a particular function
should be independent, it just seems to go to the whole question of the
philosophy of our system, so I cannot follow that argument very
much.
Then you come to the argument of whether as a matter of practical
fact you can have one important economic function free- wheeling in
times like these as against others.

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217

There it is my general view—and I think implicit in the Employment Act and in the concept of the Council of Economic Advisersthat an effort has to be made to reconcile these policies, certainly the
policies of the Treasury and of the Federal Reserve Board need to be
reconciled, using that term in its just sense of trying to arrive at a
harmonious solution of a problem on which both are vitally affected .
I get back to my initial point that for that process of reconciliation
I as an observer would say with the present situation taking into account all the factors they can move further in that direction by trying
to work together than by having a new legislative definition of their
respective functions .
Senator FLANDERS . Thank you . I would like, Mr. Chairman, just to
make a brief commentary on this without asking further questions.
From the testimony of Dr. Keyserling and the testimony of others
and from my own thinking on the subject, it seems to me that the two
things that are primary are the money supply and the production .
I see the limitations in using money supply, the monetary policy as
the sole agent of stabilization because it is very liable to affect the production adversely if carried to its extreme limits, but I would still make
it primary, of equal importance with production .
I would say that savings was an element in monetary policy. I
would say that taxation , the taking away of the available money supply, is an element of monetary policy, and I would find monetary
policy a coequal with production at the top of this list. That is just
simply a statement of my position .
Mr. KEYSERLING. Mr. Chairman , might I just make one brief comment. That the definition of monetary policy by Senator Flanders,
with which I do not disagree particularly, was not the one I used in
placing it lower on the list.
In other words, if you embraced taxation and savings within that
scope, I would certainly bring it to the top of the list and
Senator FLANDERS . Would reduce the money supply available for
the purchase of goods ?
Mr. KEYSERLING . Oh, yes ; taxation reduces the money supply, and
when I placed this monetary supply at the bottom of of the list, clearly
I was not including taxation . I was talking more to the particular
type of monetary devise which had been mostly discussed here during the 3 days.
But if you say that the money supply means the available spending
funds, and the taxation is one important method of reducing it, then
I would agree with you, and under that definition put it at the top
of the list.
Senator FLANDERS . Let us compromise , if we can, by moving it up
three or four spaces on your list, even in its narrow sense, but I do
not want to push that matter too far.
Representative BOLLING. Mr. Murphy, do you have any questions ?
Mr. MURPHY. I just want to ask one question , Mr. Keyserling.
The Douglas committee in its report 2 years ago included a statement that it believed it would militate against the purposes of the
Employment Act rather than work in favor of them if the United
States should return at this time to a free domestic convertibility of its
currency into either gold coin or gold bullion.
What would be your reaction to a reaffirmation of that position in
the report of this committee ?

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Mr. KEYSERLING. Well , in the first place, I do not like the statement
that a return to the free convertibility-the gold standard , isn't that
what you are referring to ?
Mr. MURPHY. That is correct.
Mr. KEYSERLING. I do not like the statement setting that in juxtaposition to the Employment Act, because the statement of the Employment Act is so broad that it is really a statement of objectives
for a stable and growing economy, and I do not like it said that it is
the Employment Act which stands in the way of this.
I would put it on a broader ground and say that it would be in
accord with my judgment that a return to that at this time would be
inconsistent with the interests of the American economy, taking into
account its stability, its growth, its monetary and debt management
problems, its current defense problems, taking them all into account.
In other words, taking into account our interests as a nation , I would
not be in favor now of a return to the gold standard.
Mr. MURPHY. The particular phrase in the Douglas report which
I was groping for is as follows :
We believe that to restore the free domestic convertibility of money in gold
coin or gold bullion at this time would militate against rather than promote the
purposes of the Employment Act, and we recommend that no action in this
direction be taken.
You agree with the conclusion but you would place it on a broader
ground than the Employment Act ?
Mr. KEYSERLING. Yes.
Mr. MURPHY. That is all.
Representative BOLLING. Mr. Keyserling, thank you very much in
behalf of the committee. The committee is now in recess until tomorrow at 10.
(Whereupon, at 12:20 p. m., the subcommittee recessed to reconvene at 10 a. m., Friday, March 14, 1952.)

MONETARY POLICY AND THE MANAGEMENT OF THE
PUBLIC DEBT

FRIDAY , MARCH 14, 1952

CONGRESS OF THE UNITED STATES ,
SUBCOMMITTEE ON GENERAL CREDIT CONTROL
AND DEBT MANAGEMENT OF THE
JOINT COMMITTEE ON THE ECONOMIC REPORT,
Washington, D. C.
The subcommittee met, pursuant to recess, at 10 : 10 o'clock a. m. , in
room 1301 , New House Office Building, Representative Wright Patman (chairman of the subcommittee ) presiding.
Present : Representative Patman (chairman of the subcommittee ) ,
Senator Douglas ; and Representatives Bolling 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 PATMAN. The committee will please come to order.
Mr. Wiggins, we are delighted to have you as a witness this morning. It happens that I have known Mr. Wiggins for a number of
years, and I do not know of a more versatile business and industrial
leader in the United States than A. L. M. Wiggins.
I have had the pleasure and the privilege of visiting with him in
his home town and in his home State, and I know something about his
many fine civic and patriotic connections, and the wonderful work
he has done as just a good American citizen, and I personally value
his views highly, and I am glad that he has favored us with his presence here.
Not only has he been a leader among the small-business groups of
different types , but he is a leader among the banking group as well.
In fact, he was a past president of the American Bankers Association ,
which itself is quite an honor, as we all know.
Mr. Wiggins, do you have a prepared statement ?
STATEMENT OF A. L. M. WIGGINS
Mr. WIGGINS. Mr. Chairman , I have a prepared statement, and with
the permission of the committee I would like to file this statement and
then more or less summarize informally some of the points that I have
undertaken to make in more detail in the statement, if that would be
satisfactory.
Representative PATMAN. That will be satisfactory. You may proceed.
219
97308-52-15

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

If you do not mind, I will get someone to read the first two paragraphs for you, or you can read them. I want the committee to know
something about your connections. Suppose you go ahead and read
them, if you will.
Mr. WIGGINS. My 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 Bank of Hartsville, Hartsville , S. C. , capital stock
$ 100,000, and president of a small nonbanking trust company.
For the larger part of my business career I have been a director
and manager of a number of small-business institutions engaged in
finance, merchandising, agriculture, and manufacturing, and newspaper publishing.
From January 1947 to July 1948 I was Under Secretary of the
Treasury. In this capacity, one of my duties was to assist the Secretary of the Treasury in the management of the public debt and,
in particular, to maintain liaison with the Board of Governors of
the Federal Reserve System, and other representatives of the openmarket committee .
Senator DOUGLAS. You had an interesting time, Mr. Wiggins .
Mr. WIGGINS. Quite interesting, sir.
Representative PATMAN. All right, you may proceed if you desire.
If you wish to yield for questions, that will be satisfactory.
Mr. WIGGINS. My discussion, gentlemen, is more of the practical
approach, based on the experience that I have indicated .
The questionnaires and the answers that were sent out and received ,
in my opinion, constitute the most valuable collection of thinking in
the field of money, in money management, problems of debt management, and other collateral questions that I have found anywhere .
I have read the entire 1,300 pages of this report since it was published about- since I got a copy about 10 days ago, and it is very
instructive and illuminating, and I congratulate the committee on
the character of the questions.
I wish to confine my discussion to three areas, and one of them,
Mr. Chairman, is a relatively small one, and I might dispose of that
first, which would be in inverse order to the statement.
The question has been raised about the ownership of stock in the
Federal Reserve banks. I think it might be well if I disposed of
that first, and then the other two are related and are really more
important.
The question has been raised as to whether or not the stock of the
Federal Reserve banks should be owned by the Government instead
of by the member banks. In my opinion it should not be owned by
the Government.
The Federal Reserve banks represent a combination of Government and private business under which the control is vested in the
Government. But it is through the ownership of the stock by the
banks that the Reserve System mobilizes the services of able individuals as directors. These men represent private enterprise and represent the public, and while the control is vested in the Board of
Governors almost entirely, at the same time these directors bring
the viewpoint of business, industry, and agriculture and banking to
the officers of their banks. I think that it is highly important for

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221

the Reserve banks to maintain close touch with conditions prevailing
in their respective districts, and this is the only official relationship
of the Federal Reserve System with business , agriculture, and
industry.
The members elect, it is true, part of the board, the Board of Governors appoint part of the board, and if the Government owned the
stock there would be no particular basis on which member banks
would select men to serve on the boards of these respective banks,
In fact, I think the relationship should be encouraged rather than
discouraged, and I have been able to find no sound reason for the
Government to acquire the stock in the Federal Reserve banks unless
the ultimate objective is to destroy the independence of the System
and make it merely a Government bureau.
Now, that is all the comment, Mr. Chairman , that I had on that
particular point .
Representatives PATMAN. I want to ask you one or two questions
on that point, Mr. Wiggins.
Do you consider the Federal Reserve System is a public institution ?
Mr. WIGGINS. So far as the-yes ; it is a public institution .
Representative PATMAN. A public institution ? You do not consider the amount of stock owned by the commercial banks as sufficient
to give them control of the institution ?
Mr. WIGGINS. The stock ownership , in my opinion, has nothing to
do with the control . It is a peculiar type of stock that earns only
6 percent. The owners of the stock have no interest in the earnings
of the bank beyond the 6 percent dividend they get.
Representative PATMAN. And they have only paid in 3 percent.
Mr. WIGGINS. Well, they get 6 percent on the amount paid in.
Representative PATMAN. Yes, they get 6 percent.
Mr. WIGGINS. Six percent on the amount paid in. They have paid
in only half of the par amount of the stock.
Representative PATMAN. In other countries of the world, do you
know of another country where the central bank is not owned by the
government ?
Mr. WIGGINS. At the moment, I do not.
Representative PATMAN. I think the fact is, Mr. Wiggins, that in
all countries the central bank is owned by the government, and in
this country I do not consider that the commercial banks own the
Federal Reserve banking system because they have that token amount
of stock, which is so small and insignificant compared to the business
done by these institutions ; you agree with that, do you not ?
Mr. WIGGINS. That is right.
Representative PATMAN. It is too small to consider that they would
have any supervisory power by reason of the ownership of that small
amount of stock which gives them a 6 percent dividend each year ?
Mr. WIGGINS . That is correct, sir .
Representative PATMAN. Yes. That is all on that particular question I would like to ask. I believe you said that covered your discussion of that ?
Mr. WIGGINS. Yes.
Senator DOUGLAS. May I ask a question ?
Representative PATMAN. Yes.

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Senator DOUGLAS . There has been some information from New York
that many of the private bankers would like to assert a claim to the
residual earnings of the Federal Reserve System. What is your feeling on that ?
Mr. WIGGINS. I think the residual earnings belong to the Federal
Reserve Banks ; it is part of their capital structure, and should be
owned by the banks, the Federal Reserve banks, I mean, and that the
member banks, the stockholders, should have no interest in those residual earnings .
Senator DOUGLAS. Well, at present, as I understand it, by a decision
of the Federal Reserve they have voluntarily turned over 90 percent
of the net earnings to the Government. Now, there have been some
groups in New York saying that since the private bankers own, as
as they say, the Federal Reserve bank, they should receive these net
earnings, which run up to around $200 million a year. In your
judgment, should those go to the private banks or should those earnings continue, as now, to go to the Government of the United States ?
Mr. WIGGINS. I think unquestionably they should remain in the
Federal Reserve banks for disposition either to the Govrenment or to
be added to surplus, as they may see fit.
Senator DOUGLAS. You would say that the decision as to these matters should be left to the Board of Governors of the Federal Reserve
System ?
Mr. WIGGINS. It raises a question as to whether the amounts paid
by the Federal Reserve banks to the Treasury should be fixed by some
statutory provision or not. I have sometimes thought that the particular vehicle used by the Federal Reserve was open to some question.
I think it could be done by statutory enactment if Congress disagreed
with the policies followed by the Federal Reserve.
Senator DOUGLAS. Suppose the Federal Reserve Board were to distribute these earnings to the owners of the stock in the the Federal
Reserve banks, and turn these earnings back to the private banks
rather than to the Government, would you feel that that was a wise
policy ?
Mr. WIGGINS. I do not.
Senator DOUGLAS. You think it might be advisable for Congress to
try to prevent that policy from being carried into effect, by statutory
enactment ?
Mr. WIGGINS. Senator, I am not certain , but my recollection is that
the law now provides a limitation of the dividend to 6 percent.
Representative PATMAN. It is cumulative but maximum ; and section 16 of the Federal Reserve Act provides a means for levying a
franchise tax for the Federal Government and I think it is necessary
that that be done. I do not think anyone should contest that right
because, after all, it is the credit of the Nation that is being used by
these banks. The small amount of stock that has been invested would
not support the huge credit structure of the 12 Federal Reserve banks.
It would be just nothing ; it would just be a fly speck. It would not be
anything, and so I do not see how any person who is familiar with the
situation would contend that-how much do they have invested now,
about $200 million, the commercial banks ?
Mr. WIGGINS. I do not have the figures ; I can look it up.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

223

Representative PATMAN. It is around $200 million , and that would
mean if they were entitled to that money they would get a hundred
percent dividend every year using the Government's credit.
(The paid-in capital of the 12 Federal Reserve banks totaled $237
million on December 31 , 1951. )
Senator DOUGLAS . My question is this : Is there anything in the
statutes which would forbid the Board of Governors of the Federal
Reserve System from distributing the earnings to the owners of the
stock rather than turning the earnings over to the Government ?
Representative PATMAN. I think that is a good question to look into.
Mr. WIGGINS . It is my understanding that the law provides a limitation of 6 percent ; I would not be positive.
(A letter from Chairman Martin covering this point appears on
p. 910. )
Representative PATMAN. All right, you may proceed , Mr. Wiggins.
Mr. WIGGINS. In order to conserve the time of the committee, I
direct the remaining statement to an area that has two angles : one is
the problems of restraining inflation and, in particular, the use of the
machinery of the Federal Reserve System, including open market
operations for the control of credit ; and the second one is the operation of the Federal Reserve System and the Treasury Department
and other Government departments and agencies in the fields in which
they have a common interest, and I will treat both of those along
together because they are closely related.
In my statement I have given figures showing what happened to
the deposit structure, debt structure, and the ownership of Government securities by commercial banks during the war period . Those
figures are familiar to the members of the committee, and I will not
repeat them.
Those figures indicate, however, certain facts or reflect certain
situations that are significant , highly significant, and I will list a
few.
One, that the total of the Federal Government debt increased to an
amount during the war period that exceeded all other debt , public
and private ; two, that in order to sell successfully Government securities during the war period, a rigid interest rate structure was maintained by agreement between the Treasury Department and the Federal Reserve System, and this rate structure was maintained until the
middle of 1947 .
Third, that about one-third of the increase in the public debt resulting from deficit financing found its way into the commercial banks ,
thereby multiplying the money deposit supply, and this added, of
course, to the inflationary developments that were, in part, the result
of the war conditions.
Fourth, that the purchasing value of the dollar has declined in
large measure during the war period, between January 1 , 1940, and
the last date I have, January 1 , 1951 , about 45 percent ; and five , that
at the end of 1945 , Government securities constituted 57 percent of
the assets of all banks ; and, six, as a result of the support of the
Government in financing the war and the scarcity of other desirable
investments, many investment institutions found their position at the
end of the war overbalanced in investments in Government securities ,

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

an unbalanced portfolio, and seventh, that as a result of the campaigns
for the sale of bonds, the ownership of the public debt became widely
distributed with the result that a substantial majority of American
families became owners of Government securities, many for the first
time.
These facts indicate that following that period there would , of
necessity, be considerable adjustment in the investment position of
many institutions, including banks and of individuals.
Another factor, of course, was the vast accumulation of liquid
wealth on the part of individuals throughout the country. That has
been estimated at the present time as some $200 billion , and , of course,
this liquid wealth is always a factor in any of our considerations
because if it should become dislodged and move into the spending
stream it could have a tremendous effect on our economy. It is there,
and it is a question of how-whether it is going to stay there or
whether some substantial parts may become dislodged through various
conditions.
It is against that background of the build-up in Government debt,
deficit financing, and all of the other factors that I have mentioned ,
and many others, that the Federal Reserve System has had to perform
its difficult functions in providing stability in the financial system,
and also that those factors were of an inflationary nature, either
actual or potential .
Now, at the end of World War II there was general fear that we
were going into a period of recession, and many actions were taken
to prevent that. The wartime pattern of interest rates was maintained
until the middle of 1947 and at that time it was felt on the part of
the Treasury and the Federal Reserve that the time had come to
relieve our economy of this strait-jacket of interest rates and begin to
move toward some freedom in the market .
Now, it happened at that time that the Federal Reserve was maintaining a rigid buying rate of three-eighths of 1 percent on bills, and
the Treasury Department was selling certificates at the coupon rate
of %, 1 -year certificates. They began to move to raise those rates,
and step by step they were raised during the summer of 1947 .
Senator DOUGLAS. You are referring to the short-time rates ?
Mr. WIGGINS. The short-time rates.
That program continued during the summer and fall of 1947, and
it encouraged banks and other investors to buy short-term securities
because of the higher rates, and the hope was that it would take
some of the pressure off of the demand for the long-term bonds which
were then selling at about 104 for the 1967-72, or a yield of about
214 percent.
However, the demand for the long-term bonds continued ; there
was an absence of investment in the long-term investment field at that
time, and so it seemed that the stage was set for really a "bull"
market that might put the interest rate down to 2 percent.
I speak of that with some confidence because I was sitting in the
middle of it there in the Terasury, and participated in the policy
discussions in the Treasury and with the Federal Reserve at that
time.
Unfortunately, at that time the Federal Reserve System did not
own any long-term Government bonds- substantially none. But the
Treasury in its various investments , had a substantial amount of

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

225

long-term Government bonds, and so, by agreement, and with full
understanding and with a common purpose between the Federal Reserve and the Treasury Department, the Treasury made available to
the Open Market Committee long-term market bonds which they sold
from day to day in an effort to meet the demand and to prevent a further decline in the rate as being desirable in the public interest.
I emphasize that somewhat, Mr. Chairman, because the feeling, the
thinking, seems to be abroad that the Treasury has always opposed any
increase in the interest rates, and here was a period in which the Treasury very positively not only favored an increase in interest rates but
took vigorous action to put the rates up . It was not so much a matter
of putting the rates up as keeping the prices of Government bonds
from going through the roof. And so we sat there in the Treasury,
and from day to day made available to the Open Market Committee
these long-term Governments and some days they would sell a hundred
million dollars of it, which is a lot of money in Hartsville, S. C.; and it
amazed me to see how the market absorbed these tremendous amounts
of long-term Government bonds with so little effect on the interest
rate or the price.
We sold during that period a billion and a half dollars of these
long-term bonds, and still the pressure was there.
Senator DOUGLAS . Did the Federal Reserve buy any of these for
itself ?
Mr. WIGGINS. No , sir ; they sold them for the account of the Treasury on the market .
Senator DOUGLAS. And did not buy any for themselves ?
Mr. WIGGINS. No , sir.
Now, at the end of that period we found, after consultation with
investors, that there was still an unsatisfied demand for long-term
bonds. It seemed to me that they thought that the Government would
never want to borrow any more money or nobody else, so in agreement
with the Federal Reserve, and working it out, both on a staff level and
policy level, the Treasury issued an 18-year, 212 percent nonmarketable
issue. They sold about a billion dollars worth, and that mopped up all
the loose money around in the investment markets. As a proof of
that, within weeks the investors who needed to adjust their portfolios
looked around to sell some long-term Governments that they owned,
and found that there was no money available in the investment market
and, as a result, the price-the pressure on the other side quickly developed. The Federal Reserve during that later period bought bonds
because of the tremendous offerings in the investment market of longterm Government bonds, and the curious thing to me was that some of
those who had bought the bonds a few weeks before at 104, with the
214 yield, within a period of a few months were selling the bonds at
102 on down to 100 and a fraction , and taking a loss on it. But that
is what happened ; and it was during that period that the Federal
Reserve bought a great deal of the long-term bonds at increased interest rates that finally got up to 2.48, which was just-kept the bonds
just slightly above par, 10014 , I believe. This shows how quickly a
situation can reverse itself ; and I have often wondered if we did not
oversupply the market with Government bonds in our efforts to bring
the prices down, and choked it too much , because the situation reversed
itself so quickly. The Federal came in, in order to provide an orderly
market, and bought a great many bonds.

$

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

Now, they continued to reduce their buying price slowly, and then
on the famous December 24 , 1947, the bankers having accused them
of giving them a very poor Christmas present, the Federal Reserve
reduced its buying rate to just a little above par, resulting, of course,
in a substantial loss to many investors who had bought those bonds at a
premium.
Another interesting factor is that between the middle of 1947 and
the middle of 1948 , when all of this movement of rates took place, in
which the Treasury and the Federal Reserve were seeking to get to
what we called at that time a breathing market as against the old rigid
market, but not an absolutely free market, because you could not go
from one to the other too quickly-there had to be an intermediate
step-during all this period, and in spite of all of the purchases of
long-time bonds by the Federal, between June 30 , 1947 , and June 30,
1948, in spite of all these transactions, the ownership of Federal
securities by the Federal Reserve System actually declined a half
billion dollars.
We hear much about the great purchases by the Federal Reserve of
long-term bonds during that period . We do not hear much about the
fact that actually it was a buying and selling program in which the
net result was a reduction of Federal Reserve holdings of Government
securities during that period.
What happened during that period was that the holdings by commercial banks declined 5,400,000,000, the holdings of insurance companies declined a billion eight, the holdings of savings bonds by individuals went up a billion six, the holdings by trust funds went up
$3 billion , and the total debt declined 6 billion.
I would like to make this observation : That not only did this big
reversal in the market take place within a few weeks ' time, and was
unanticipated both by the Federal Reserve and the Treasury, I think
I am safe in saying, and all of this churning around in an effort to get
to a breathing market, which we accomplished to some extent to a
considerable extent-particularly in the short-term field-the situation changed again by 1949 ; and, whereas, most of the efforts of that
period were directed both by the Federal Reserve and the Treasury to
restrictive objectives, anti -inflationary objectives, by 1949 the situation had changed again to the point that the Federal Reserve, in its
money market management and credit control found it necessary to
take steps of an expansive nature.
For instance, they reduced the stock margin requirements from
75 to 50 percent, installment credit terms were liberalized, and the reserve requirements of banks were reduced during that period by 4 percentage points on demand deposits, and 21/2 percent on time deposits.
That, of course, was during a period in which it looked as if we might
be going into a recession , and was done for that purpose, and properly
done.
So, I come back to the proposition that action , reaction-to take an
action , you do not know just what reaction is going to happen. Sometimes it is a great deal more than you have anticipated, and sometimes it is not at all what you anticipate. But in any event I would
like to make the point that during that period there was the highest
degree of cooperation between the Federal Reserve and the Treasury ;
their objectives were largely the same. The only differences that arose,
frankly, were that the Federal thought we should move faster, with

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

227

more shock effect of these various moves, and the Treasury Department thought that in an operation of that magnitude, with the widespread ownership of the debt, that the proper policy would be to move
step by step and slowly make the transition . That is the only difference of viewpoint. Both had the same ultimate objective.
Now, coming back to the changes taking place in 1947 and 1948,
the important factor-one highly important factor-in that period
was that we had a budget surplus of 2 years.
Senator DOUGLAS . You were fortunate in being in the Treasury
during a period when the wartime tax rates had not yet been greatly
reduced, and when expenses had fallen off .
Mr. WIGGINS . That is correct, sir .
Senator DOUGLAS . It was only accidental that this happened during
the period of the Eightieth Congress. [ Laughter. ]
Mr. WIGGINS. At any rate, the effect of a budget surplus at that
time was terribly important in all of the monetary and debt management operations that went on.
Now, gentlemen, I come to this observation, which I hope will be
accepted in the same spirit in which I give it : that many of the difficulties of the Treasury Department in its debt management, and of
the Federal Reserve System in monetary control and credit restraint
stem from the actions of Congress.
The principal difficulty is the fiscal situation that is created when
Congress appropriates for expenditure amounts of money substantially greater than it provides taxes to cover. If Congress were sufficiently interested in inflation as a primary objectiveSenator DOUGLAS. In restraining inflation .
Mr. WIGGINS . How is that ?
Senator DOUGLAS . In restraining inflation.
Mr. WIGGINS . In restraining inflation, it would under inflationary
conditions provide a budget surplus instead of a deficit.
I recognize all of the difficulties involved , of course, but I am stating
a principle.
It is an axiom that under inflationary conditions expenditures
should be kept at a minimum. However, many appropriations, laws,
and policies of Government are of a definitely inflationary character .
To illustrate, and I am sure I am not embarrassing the SenatorSenator DOUGLAS . I am turning my eyes down in proper modesty.
Mr. WIGGINS . To illustrate, we have but to recall the historic effort
of Senator Douglas to eliminate or reduce many of the appropriations
under the rivers and harbors bill in 1950 for projects of little or no
real value, and the failure of the Senate to respond to his sound arguments for a reduction in the appropriations.
Senator DOUGLAS . Mr. Wiggins, I want to thank you for this compliment, but I also want to say that while the Congress is frequently
at fault in the matter of these appropriations, I do not think you
should absolve the executive branch from its share of responsibility.
This frequently, is even greater because whenever any proposal is
made to reduce an appropriation the proper administrative official
immediately declares that we are plunging a knife into the operations
of Government, and the whole weight of the executive department is
thrown against anyone who tries to make the cut.
The officials of the department or agency in question will call you
up on the telephone and remonstrate with you, and then in about an

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hour you begin to get telephone calls from people in your own State,
and the inference that I draw from all this is that the departments
have their groups of outside friends with whom they get in touch,
and the heat is turned on you. Then , if your effort to make a reduction seems to be reaching serious proportions, the President always
rushes to the air waves and declares that a foul blow is being struck
either at the security of the country or the welfare of the people of
the United States, and the cry is taken up by the administrative bugle
men, who proceed to pour on their reports from downtown, and issue
press statements . The result is that you face not merely the political
interests of your colleagues, but you also face the mass power of the
executive agencies of the Government. In this present situation, when
the President has submitted a budget which, on the administrative side,
calls for a deficit of 142 billion, with no remonstrance from the Council of Economic Advisers-no remonstrance that has been published,
at least, and I see Mr. Keyserling and Mr. Blough in the room-and when any proposal comes to cut a specific appropriation, it is
promptly labeled by the Secretary of Defense, the Secretary of State,
or the Cabinet official involved, as tampering with the security
of the Nation ; they assert that not a dollar can be cut from the defense
appropriation, not a dollar from foreign aid, and we will hear the
same piteous song whenever each and every item is taken up.
While I can well understand the desire of a former Assistant Secretary of the Treasury, who has suffered at the hands of Congress, to
get in a polite dig at the Congress and we certainly have our faultsstill, in all justice, I think, having leveled your guns at us, now that
you are a private citizen you should turn them in the direction of the
Treasury itself, 1600 Pennsylvania Avenue, and the old State, War
and Navy Building, where the Executive Offices of the President are
now located.
So, after this barrage upon our position on Capitol Hill , will you
also level your artillery fire on Pennsylvania Avenue ?
Mr. WIGGINS . Senator, I am not attempting to say why these things
happen ; I am stating them as actual facts that add to the difficulty of
the monetary authority.
Senator DOUGLAS . That is true ; but behind the reluctance of Congress to cut is the opposition of the administration toward cuts.
Representative PATMAN. If I am any judge of the temper of Congress now, it will come more nearly to balancing the budget this year
than it has in 10 years .
Senator DOUGLAS. And then listen to the cries from downtown.
Representative PATMAN. Well , there are a lot of cries that will be
ignored.
Mr. WIGGINS. However, I think, gentlemen , we might observe that
the executive departments spend no money that Congress does not
appropriate. I think that is a fair statement.
It also might be pointed out that laws and Government policies
that tie the support of agricultural prices to changes in the prices
of industrial products, on the one hand and, on the other, escalate
industrial hourly wages on the basis of the increase in the cost of
living, that this combination constitutes a system of built-in inflation
that results in progressive deterioration in the purchasing power of
the dollar.

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229

I am not questioning the advisability of either of these . I am stating that they do have an inflationary impact.
It is also true that administrative agencies of Government, particularly in the lending and guaranteeing field , frequently follow policies and programs that add to inflationary pressures.
Senator DOUGLAS . Would you excuse a slang comment ! "Now
you're talking."
Mr. WIGGINS . These facts add up to the insistent and continuous
need for a coordination of the policies of the Congress and of the
administrative agencies if an anti-inflationary policy is to be effective .
They also bring out the point, and I am reading this , because I
want to be exact, " I am afraid I will get off the beam if I ad libthey also bring out the point that the problems of restraining inflation are involved in the actions of Government on many fronts
and that while, at the same time, efforts are being made by the monetary authorities to restrain inflationary pressures, other actions by
Government are directly inflationary and make difficult, if not impossible, the success of the efforts of the monetary authorities in the
limited areas in which they operate.
I have made the observation here that the basic difficulty in combating inflation is that in actual practice most people who say they
are opposed to inflation, actually embrace programs for personal
profit or benefit that are highly inflationary ; and my theory is that
a dam cannot be built that will successfully restrain the forces of
inflation if sections of it are missing, no more than a dam will hold
back the water of a river if the dam is full of holes.
Many people consider the device of raising interest rates as the
principal means for controlling inflation , the principal effective device. Such a proposal is painless to most people, and profitable to
many, and while this is a most desirable device as a part of an overall program, it will not do the job alone, and in my opinion, it is
highly overrated.
I then have a discussion here of the effect of increases in shortterm and long-term rates. I think most of these fact are well recognized, namely, that increases or decreases in short-term rates do
not restrain the borrower, and being to the benefit of the lender, do
not deter the lender from making loans.
The principal value in the short-term field affecting banks primarily, is the lack of funds to lend , and that is the point at which
the open-market operations of the Federal Reserve are most effective .
However, there is a limitation there due to the fact that the commercial banks own, as of December 31 , 1951 , a large amount of
short-term Governments that are running off within a year, $33,000,000,000 worth, so that increases or decreases in interest rates, the
buying and selling of short-terms, is not much of a deterrent to a
bank that has bills coming due every week.
It can merely collect its money when the bills come due and not
buy any more and , of course, a small increase in the short -term rate
does not affect the price of that security so much as it does in the
long-term field.
Now, in the long-term field the effect is different because a relatively small increase in the rate has a substantial effect in the price,
just as in the 1947-48 changes in rates of one-quarter resulted in a
decrease in the price of nearly $4 on the hundred . So, I would say,

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that a rise in rates and a reduction in price on long-term securities
does affect the lender who must take the loss if he sells his bonds to
get money to make loans for some other purpose, and if he must lose
$3 or $4 on the hundred to do that , that is a deterrent to his selling
those bonds.
It is not much of a deterrent to the borrower, and being a borrower
myself I speak with some personal knowledge, where you need the
money for an essential purpose, particularly for a defense purpose, you
must have the money, if the rates are a quarter higher you pay the
quarter higher, and I must admit that you get some satisfaction in
knowing that that comes off as an expense, of which Uncle Sam absorbs 52 percent, which somewhat softens the blow, but it is not too
serious a deterrent to the borrower as it is to the lender.
Senator DOUGLAS . What about the borrower of long-term capital
funds for private investment ? A rise in the interest rate there will
diminish the quantity of capital demand , will it not, on the part of
industrial companies ?
Mr. WIGGINS . I think unquestionably that is true, Senator, in the
case where there is a discretionary situation in which you are planning
a 20- or 40 -year program, as to whether you do it now or whether you
do it later. I think the difference in interest rates, particularly with
public utilities that have a narrow margin, that they will adjust their
programs, depending on the cost of the money.
Senator DOUGLAS. That is right .
Mr. WIGGINS . Now, I mentioned that the discount rate of the Federal Reserve was a very effective instrument in the earlier years when
we had a smaller debt, and it is a useful instrument, but not as effective as it formerly was, particularly while the banks own such a large
amount of short-term governments.
The question has been raised about reserve requirements of member banks. Of course, increasing reserve requirements reduces the
capacity of the bank to lend, and that is the nerve center of making
loans because it affects the availability of funds .
The present reserve technique, however, creates a great many inequities ; it is a somewhat brutal method , an ax method, and in spite
of a rate classification based on two types of deposits and different
sizes of cities, in order to try to reduce the inequities, it is highly questionable whether the present classification base is suitable for the present banking system. I doubt it very seriously.
Many studies have been made as to the desirability of changing the
base for reserve requirements, and one suggestion has been made that
it be done entirely on a classification of deposits. That plan would
also have some inequities, as any plan of reserve requirements would
have, but it might be highly effective in the use of reserve requirements as an instrument of credit control .
I think if any change is made in the base of reserve requirements it
requires a great deal of further study, and any change, of course ,
should be made at a period of relative monetary ease, so as not to disturb the financial situation too much.
Now, the objections that I have found among banks to the use of
that device-to the Federal Reserve using it, one objection is that
when the Federal Reserve increases reserve requirements, in effect,
it merely means transferring earning assets from the member banks
to the Federal Reserve, because if a bank has to part with some of its

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231

Government securities to get the cash for the additional reserves , and
then the Federal Reserve takes the cash and puts it in Government
securities the net effect is that it transfers the earnings from the
member bank to that extent. It has been suggested that these excess
reserve requirements might be required in the form of Government
securities. I do not think that proposition has too much merit because
it merely would make the bank, in some cases, an unwilling owner of a
certain type of Government security that would be used for that particular purpose. It would, in part, overcome the objection that these
excess reserve requirements deplete the earnings of the bank.
Another device has been suggested that reserve requirements above
a safety level- and I think banking thought generally is that reserves
are for two purposes, one, a safety factor ; and the other a device for
controlling the credit and the money supply in the markets-the other
suggestion was that on required reserves above the safety level, the
Federal Reserve pay interest to the member banks so at to overcome
the objection of transferring earning assets by increasing reserve requirements.
I would like to point out, however, that the use of reserve requirements with banks as a vehicle of credit control-it applies only to
banks does not directly affect other lenders who, in many cases, are
competing with the banks in making loans. It is an arm that restrains:
just the banks, and only slightly indirectly restrains their competitors
who are out, in many cases, for the same type of loans that the banks
are making.
Senator DOUGLAS. You mean building and loan associations, and
insurance companies ?
Mr. WIGGINS. Yes , sir.
Now, to move on and to broaden the base a little bit, I raise the
question of the major governmental policy, as expressed in the Employment Act of 1946 , questions about which were asked in many of
the questionnaires. That act, of course, is specifically directed at
employment.
It also provides that an objective of the policy shall be maximum
production and purchasing power, and all of this done "in a manner
calculated to foster and promote free competitive enterprise and the
general welfare."
Now, while the emphasis is on employment , recognition is given to
the maximum purchasing power. I think the inference of most people
is that it means real purchasing power and not dollar purchasing
power ; and I personally think it is terribly unfortunate that in the
wording of that act it does not contain a specific statement of objectiveof national policy to maintain long-run monetary stability .
Frankly, I do not think that the recent history of the legislative and
administrative departments of Government yields convincing evidence that the guiding policy has been one of maintaining long-rum
monetary stability.
I have tremendous respect for the American dollar, for the integrity
of it, and consider the depreciation and discount of that dollar as a
threat to our national welfare and the welfare of the rest of the world .
Throughout history, disasters in varying degrees have always, almost always, followed periods of serious inflation .

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In spite of that statement, I think we must recognize that under the
necessity of World War II the Government had to borrow vast
sums of money ; that there was need for quick expansion of military
facilities and production, and that these required a substantial expansion of the monetary supply. There was no other way to do it.
Now, in restrospect it appears to some that the money supply was
increased too much and, of course, if we had financed more of the war
from nonbank borrowing we would have increased the monetary supply
less, but the question we are dealing with now is the monetary supply
as it exists, and whether it is too great or too little or about the right
amount. Some think it is too great.
On the other hand, in terms of the vast outlays for the defense
effort that are being made and are in contemplation we may find that
the money supply is not too great, and we may find it necessary from
time to time even to expand it some.
My own views are that the economic policy under present conditions
should be directed against inflation through appropriate action by
Government on every front, including Congress and the administrative departments while, at the same time, avoiding as much as posisble
actions that will have serious adverse effects in other areas, and avoiding, so far as possible, rigidities in the operation of the privateenterprise system.
Selective controls and allocation of materials appear to be essential
in such a program, but the application of such controls should be subject to administrative flexibility so that they may be adjusted, dropped,
or increased as the needs of the situation develop .
It would be a mistake to place entire reliance or too much reliance
on the use of interest rates through monetary management to control
inflation. The need is to deal with the problem on every front under
a consistent and coordinated policy of Congress and the executive
departments.
Senator DOUGLAS. Mr. Wiggins, I do not want to take up too much
time, but I would like to make it clear that those of us who believe in
the essential need for monetary management do not so much emphasize
the interest rate as the supply of bank credit. In other words, we
aim to get price stability through the maintenance of the supply of
money and credit in relationship to the volume of production rather
than depending upon changes in the interest rate.
I mention this because I think the advocates of monetary management have in some cases stated their case badly in merely emphasizing
the interest rate, and because this has been used as sort of a whipping
boy by the opponents of what I would term anti- inflationary monetary
management.
Mr. WIGGINS. Of course, Senator, the practical effect is that the
Federal Reserve, if it refuses to buy Government securities and thereby
supplies the banks with increased money, increased reserves, the effect
is bound to be that the price will go down and the interest rate will
go up.
Senator DOUGLAS. Yes, that may and probably will be an effect.
The country will then have to choose whether it prefers a stable price
level even though that may mean rising interest rates or whether it
wishes stable interest rates even though that entails rising prices, and
that is really one of the fundamental issues at stake.
Mr. WIGGINS. Yes.

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Senator DOUGLAS. I am very glad you bring it out.
Mr. WIGGINS . Now, in this connection I think we must consider
as an important factor a somewhat unpredictable thing that I like
to call human behavior. Officials of the Federal Reserve frequently
refer to the psychological effect of an action taken rather than the
actual economic or monetary effect, and it is an important factor, as
we all know, particularly in a country like this, where we have such
vast resources, along with a great degree of freedom to use those
resources pretty much as we want.
I would like to give one illustration that his impressed me, namely,
that at the beginning of 1951 I think all of us generally agreed that
inflationary pressures would likely be rather strong in 1951 , and it
did not develop to the extent that most people anticipated , and one of
the most important factors, in my judgment, was a curious phenomenon that developed between the first and second quarters of 1951 , in
which people shifted from spending to saving. I note that whereas
the disposable personal income between those two quarters went up,
at an annual rate of 5 billion, personal savings increased between
those two quarters at an annual rate of 11.6 billion.
I mention that because, so far as I know, it was an unpredictable
human behavior that few, if any, anticipated , so that this factor of
how people react to given things is still an unknown field to the human
mind, and so, in the light of the fact that a vast majority of American
families own Government securities, when we deal with the price and
interest rate on Government securities we are dealing with a factor
in which the possible action of large numbers of people needs to be
considered.
I developed a strong respect for the size of the national debt when
I was in the Treasury, its proportion to all debt and its widespread
ownership , and all the factors involved . To me, it is an atomic bomb,
chain reaction , in the minds of the people. I do not think it is necessarily one that is going to explode in our face, I want to be quick to
say that ; I think it can be handled successfully and satisfactorily, and
I think it can be raised to a much larger amount under war necessity
with perfect ability on the part of this country to service it.
But, after all, the public debt is based on the confidence of the
people in it, which is one factor ; and, second, the productive capacity
of this country to service it, and there is little question about the
latter, and we must , by all means , preserve the former.
However, any disturbance to that confidence is a matter of serious
concern and, again, I hope the Members of Congress will not misinterpret me and my motive when I say that many individual owners
of Government securities and potential buyers are concerned over the
vast expenditures of Government, some of which they consider unnecessary or even wasteful and, particularly, when, in spite of heavy
taxes Government expenditures promise to exceed Government
revenues.
Others look with concern on the decline in the value of the longterm securities below par. I might say that in 1947 , 1948 , neither
the Federal Reserve nor the Treasury thought in terms of long-term
securities going below par. That has been a later development, and
these individuals who are concerned somewhat with the decline of $3
from a hundred to 97, they are always concerned with how much

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more decline may take place through the decision of the monetary
authorities as to the price of those securities.
I think, however, there is more concern about the deterioration in
the purchasing value of their savings bonds and savings accounts in
banks and life-insurance policies than with the $3 drop in the price
of long-term Government bonds. I emphasize, Mr. Chairman, that
all of these factors enter into the reactions of human beings as to
what they might do, and we must consider at all times not only the
economic and financial effects of actions taken in debt management
and monetary management but what the human behavior that will
result from that might develop.
I would like to add again that I found the highest degree of cooperation between the Federal Reserve and the Treasury while I was
there, and I might say the finest sort of devotion on the part of the
Federal Reserve officials to their public duties , and a spirit of public
service on the part of both that when these problems arose in which
there were differences of viewpoints, that the spirit of what is the
best thing in the public interest to be done under the circumstances
was the catalyst that usually resolved those differences .
Now, there are some people that think that in the exercise of discretionary administrative policy of national importance there should
not be any difference between top officials, but if they occur there
ought to be some supreme authority of law or the Chief Executive
should dictate what the answer is, the policy to be followed .
I think it is highly important within the executive departments of
Government for there to be that degree of coordination of policy, and
so I support the proposal that an advisory council be set up by Executive action, not by law- it is not needed by law-and I might say that
in 1947 and 1948 at times there were informal groups set up to deal
with certain areas of credit and money, and it was found to be a useful agency .
The purpose of this advisory group would be to exchange information and views for coordinating administrative policy.
And while I think it would be desirable for the Chairman of the
Board of Governors or his representative to sit with this group, I do
not believe that he or the Federal Reserve Board should in any degree
be bound by any decisions reached by such administrative advisory
group .
On the other hand, the Board of Governors should give tremendous
weight to any decisions or conclusions reached by such an administrative policy group, because it is assumed that that group represents the combined judgment of top administrative officials as to the
proper policies to be followed.
However, the Federal Reserve System has specific statutory duties
that involve semijudicial decisions that are based not only on tangible
factors but intangibles, and in my opinion they could not conscientiously discharge their duties if bound by the dictates of the executive
department of Government.
And while I think it is highly desirable for the Chief Executive to
coordinate policies within the executive departments, I think it would
be highly improper for him to dictate actions to be taken by such semijudicial bodies, for example, as the Federal Reserve System or the
Interstate Commerce Commission , Securities and Exchange Commission, or similar bodies.

MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

235

He should communicate his views directly or through such a coordinating advisory group within the executive department to the Federal Reserve System, and they should be aware at all times of the
factors involved in administrative decisions.
But to subordinate a semijudicial and an independent body set up
by Congress to the directives of the Chief Executive, in my opinion
would destroy the effectiveness of such agencies. As I have indicated , usually the differences between the Federal Reserve and the
Treasury are resolved .
In the first place there are not too many, and most of those that turn
up are resolved , and it is only occasionally that a serious difference
develops .
And in my opinion , in spite of the fact that an authoritarian set-up
would get the results definite and directly, that it would be too high
a price to pay to lose all of the benefits of our basic principles of
checks and balances among thinking men in trying to find answers for
difficult problems in such fields as monetary management and debt
management .
And I should also like to make this point, gentlemen : That we
should recognize that no man and no group of men dealing with the
various problems of our public debt and monetary system are omniscient. Too many factors are involved , not only economic and
financial but in the realm of possibilities of human behavior for any
one man or any group to know all the answers .
And I think it would be a catastrophe if we were to make the Federal Reserve System merely an administrative agency of the executive
department of this Government .
However, I would like to raise this red flag-I don't like to use the
words " red flag"-but this warning that the history of central banking, as was brought out earlier by the chairman, is that central banking cannot get too far away from the policies of Government too
long ; and that while central banks historically have won battles
against the Government, they have always lost the war.
That is history and that is the condition throughout the rest of
the world. Now, gentlemen , I have a summary here, but I think that
I have covered the field , and in the interest of timeRepresentative PATMAN. Well, we will insert the whole statement
in the record, Mr. Wiggins .
Mr. WIGGINS. Thank you very much.
(The prepared statement submitted by Mr. Wiggins reads, in full,
as follows :)
STATEMENT OF A. L. M. WIGGINS BEFORE THE SUBCOMMITTEE ON GENERAL CREDIT
CONTROL AND DEBT MANAGEMENT OF THE JOINT COMMITTEE ON THE ECONOMIC
REPORT
My 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 Bank of Hartsville, Hartsville, S. C. , capital stock $100,000, and president of a small nonbanking trust company.
For the larger part of my business career I have been a director and manager
of a number of small-business institutions engaged in finance, merchandising,
agriculture, and manufacturing. From January 1947 to July 1948 I was Under
Secretary of the Treasury. In this capacity, one of my duties was to assist the
Secretary of the Treasury in the management of the public debt, and, in par97308-52-16

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

ticular, to maintain liaison with the Board of Governors of the Federal Reserve
System and other reppresentatives of the open-market committee.
In the interest of conserving time my statement will be limited largely to
three areas of questions raised by this committee.
In this connection I wish to congratulate this committee and its staff on the
preparation of the comprehensive and searching questionnaires which were sent
to governmental agencies, economists, and financial institutions and their representatives. The replies constitute a wealth of financial literature, objective
reporting, keen analysis, frank opinions, and constructive suggestions in the field
of finance, money, banking, debt management, and fiscal affairs.
The three areas which I wish to discuss are :
(1 ) The problems of restraining inflation, and, in particular, the use of the
machinery of the Federal Reserve System, includingopen-market operations ,
for control of credit.
(2 ) The operations of the Federal Reserve System and the Treasury Department and other Government departments and agencies in fields in which they
have a common interest.
(3) The question of ownership of the stock of the Federal Reserve banks.
A brief review of certain factual background is necessary as a basis for discussion of items ( 1) and ( 2 ) :
During the 6-year war period from the end of 1939 to the end of 1945, money
in circulation quadrupled from $6 billion to $26 billion. During the same period,
bank deposits increased from $56 billion to $121 billion, or a total increase in
money supply from $63 billion to $148 billion. During this period the ownership
of Government securities by the banking system, including Federal Reserve
banks, increased $97 billion.
During the six calendar years 1940-45, inclusive, the gross public debt increased
$231 billion, or five times. During the same 6-year period, expenditures of the
Government exceeded receipts in the conventional budget by the amount of $210
billion.
In the calendar 5-year postwar period, 1946-50, inclusive, Government debt
was reduced $22 billion, largely through the use of excess cash balances from
the Victory loan in 1945 and the use of a net budget surplus of $1 billion during
this period. During the same period, as a result of debt reduction and the use
of trust 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 ) Total Federal Government debt increased to an amount that exceeded the
total of all other debt, municipal and private.
(2 ) In order successfully to sell Government securities during the war period,
a rigid interest-rate structure was maintained by agreement between the Treasury Department and the Federal Reserve System and this rate structure was
maintained until the middle of 1947.
(3 ) About one-third of the increase in the public debt resulting from deficit
financing found its way into the commercial banks, thereby multiplying the
deposit-money supply. This added substantially to inflationary developments
that were, in part, a result of war conditions.
(4) The purchasing value of the dollar in terms of the cost of living declined
between January 1, 1940, and January 1, 1951, by 45 percent.
(5 ) At the end of 1945, Government securities constituted 57 percent of the
total assets of all banks.
(6) As a result of their support of the Government in financing the war and
the scarcity of other desirable investments, many investment institutions found
their position on December 31, 1945, overbalanced with investments in Government securities.
(7) In response to campaigns for the sale of bonds, the ownership of the public
debt was widely distributed, with the result that a substantial majority of
American families became owners of Government securities, many for the first
time.
It is clearly evident from the above facts that at the end of World War II
there was need for a substantial readjustment of the investment position of
many investors , particularly institutional. When and as opportunities were
presented for a better diversification of investments and for securing a better
rate of return, they found it necessary to sell Government securities. With
commercial banks holding nearly $91 billion of United States Government securities on December 31, 1945, of which a substantial proportion was in short-term
maturities, they had abundant resources which any one bank could convert into

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237

reserves through the sale of the securities or by permitting them to run off as
they fell due.
Another development of the war period was the large accumulation of personal
savings, a substantial part of which consisted of liquid assets . It is estimated
that at the present time liquid assets owned by individuals, of which a substantial part is represented by Government securities, aggregate a total of some
$200 billion. These savings may be dislodged and find their way into the spending stream.
It is against this background, of which I have mentioned only a few factors,
that the Federal Reserve System has had to perform its difficult functions of
providing stability in the financial system . Practically every factor in the
situation contributed to inflationary pressures, actual or potential.
Following the cessation of World War II, there was general apprehension
throughout the country of a postwar recession . Due to prompt measures taken
by Government, a recession did not materialize, but our economy promptly
moved into increased production and employment. During this transition period,
however, it was felt that the wartime pattern of interest rates should be maintained so as to avoid any disturbance that might hinder the transition from a
wartime to a peacetime economy. By the middle of 1947, our economic machine
was forging ahead , inflationary pressures had developed , and , in the absence of
a demand for loans by business and industry, investors were reaching for Government securities at higher prices and at declining rates.
I wish to discuss some of the actions of the Treasury Department in debt
management in which I had a small part, as well as actions taken by the Federal
Reserve System in monetary and credit control in that period.
As a result of numerous conferences between Treasury and Federal Reserve
officials in the second quarter of 1947, there was agreement that the time had
arrived for the removal of the wartime rigidities of the fixed pattern of interest
rates that had been maintained for Government securities. As a result of this
understanding and common objective , the Federal Reserve discontinued its policy
of a fixed buying rate of three-eighths of 1 percent on Treasury bills and the
Treasury Department, in its refunding operations, began gradually to raise the
rate on 1-year certificates from seven-eighths of 1 percent. This program continued during the summer and fall of 1947 and encouraged banks and other
investors to purchase short-term securities at the better rates rather than reach
for the longer bonds at premium prices which netted a return at that time of
about 2.25 percent. Simultaneously, a program was being carried out to relieve the pressure of investment funds on the long-term bond market. At that
time, the Federal Reserve System owned practically no long-term Government
bonds and, therefore, in its open-market operations was unable to supply the
market with that type of investment. The Treasury Department, however, held
large amounts of long-term bonds in various investment accounts. After consultations and discussions, both at a staff level and at a policy level, between
the Treasury and the Federal Reserve and in full agreement, the Treasury Department, through the open-market committee of the Federal Reserve, sold
large amounts of long-term Government bonds so as to fill the demand and to
prevent a further decline in the long-term interest rate. During this period,
the Treasury sold $ 1.5 billion of long-term bonds. However, the amount was not
adequate to satisfy the demand nor to increase the market yield on such securities. Thereupon, the Treasury Department, after consultation with the Federal Reserve and with full agreement on the part of both, sold a nonmarketable
18-year issue in the amount of $1 billion. The purpose of this sale was to mop
up any remaining investment funds that were exerting upward pressure on the
market. The entire program was anti-inflationary.
In a matter of weeks the situation reversed itself. Other desirable forms of
investment became available to investors at better yields than long-term Governments and investors finding themselves bare of funds began unloading longterm Governments on the Federal Reserve in substantial amounts . It was a
curious phenomenon that many investors who were eager buyers of long-term
Governments on a 24 -percent yield basis should so quickly become eager sellers
at a higher interest rate and at some loss . The Federal Reserve moved promptly
to stabilize the situation and found it necessary to make large purchases of
long-term Governments. It was during this latter period of 1947 that the Federal Reserve, in consultation with the Treasury, began to reduce its buying prices
slightly and, on December 24, 1947, made a substantial reduction in the price
it was willing to pay for long-term Government bonds. It was thought that
this somewhat drastic reduction might serve to stabilize the market at the new

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level. Such did not prove to be the case. Under the needs of many investment
institutions to obtain funds for other investments and out of the fears that had
been generated by the reduction of the prices at which the Federal Reserve was
willing to buy long-term Government securities that further price reductions
might be ahead, a large volume of long-term Governments was sold by investors
and purchased by the Federal Reserve.
In the meantime, the rate on short-term Governments continued to rise as a
result of the coordinated policies of the Federal Reserve in its open-market
operations and of the Treasury Department in its debt management program.
At the increasing rates on short-term securities, investors other than the Federal
Reserve were large buyers. The result was that between the middle of 1947
and the middle of 1948, the Federal Reserve purchased large amounts of Government bonds through its open-market operations, but at the same time, reduced
its holdings of bills, notes, and certificates with the net result that its total holdings of all Government securities actually declined during the period by half a
billion dollars.
During the same period the holdings of Government securities by commercial
banks declined $5,400,000,000 , the holdings by insurance companies declined
$1,800,000,000, savings bonds held by individuals increased $1,600,000,000 and
holdings of United States Government agencies and trust funds increased $3,000 ,000,000 and the total gross debt of the Government declined $6,000,000,000.
It is interesting to observe that whereas the principal monetary and debt management policies in 1947 and 1948 were restrictive and designed to be anti-inflationary in effect, we find that in 1949 the Federal Reserve found it necessary to
take steps of an expansible nature. Stock-market margin requirements were
reduced from 75 to 50 percent, consumer installment credit was liberalized and
reserve requirements of banks were reduced during a period of several months
in 1949 by 4 percentage points on demand deposits and 2½ percentage points
on time deposits. It was during this period that there was some evidence of
a business recession. It might be questioned whether or not the nature, the
methods and the extent of the restrictive measures taken in 1947 and 1948 may
have contributed to the necessity for contra actions in 1949.
At this point I would like to emphasize the high degree of cooperation between
the Treasury and the Federal Reserve System during 1947-48 in a common objective to remove the rigidities of the wartime pattern of interest rates and to bring
about some degree of freedom in the money markets. Naturally there were some
differences of opinion between the Treasury and the Federal Reserve as to details
of the various moves that were required to accomplish this objective, the principal difference being that the Federal Reserve, on the whole, thought it desirable
to increase interest rates faster and with a more shocking effect on the market,
psychologically as well as actual, while the Treasury position generally was that
in an operation of such magnitude and involving a Government debt structure
that represented more than half of all the debt outstanding in the United States,
the reduction in the market value of Government securities through Government action should be made slowly, step by step, and adjusted to conditions as
they might develop during the program. I believe it is generally admitted in
the financial world that the shift in 1947-48 from the rigidity of the wartime
pattern of short-term interest rates to what we called at that time a "breathing
market" was accomplished with a minimum of adverse repercussions.
It should also be pointed out that the program of increasing long-term interest
rates during that period through the sale to the market of long-term Government
bonds was possible only because the Treasury Department had in its investment
accounts large amounts of such bonds which it turned over to the Open Market
Committee for sale. Here was evidence of the high degree of cooperation between
the two agencies for a common objective.
It should be kept in mind that an important factor in the situation during
this period was a budget surplus in the fiscal years 1947 and 1948 aggregating
$9 billion. This surplus served not only to reduce the debt, but its use in extinguishing bank-held Government securities served also to reduce inflationary
credit pressures by reducing bank reserves. A budget surplus simplifies the
problem of restraining inflationary credit, whereas a substantial budget deficit
multiplies inflationary credit pressures.
Many of the difficulties of the Treasury in debt management and of the Federal
Reserve System in monetary control and credit restraint stem from the actions
of Congress. The principal difficulty is the fiscal situation that it created when
Congress appropriates for expenditure amounts of money substantially greater
than it provides taxes to cover. If Congress were sufficiently interested in re-

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straining inflation, it would , under inflationary conditions, provide a budget
surplus instead of a deficit. It is an axiom that under inflationary conditions
expenditures should be kept to a minimum. However, many appropriations,
laws, and policies of Government are of a definitely inflationary character. To
illustrate, we have but to recall the historic effort of Senator Douglas to eliminate or reduce many of the appropriations under the rivers and harbors bill in
1950 for projects of little or no real value and the failure of the Senate to
respond to his sound arguments for a reduction in that appropriation .
Also , it might be pointed out that the laws and governmental policies that tie
the support of agricultural prices to changes in the prices of industrial products
on the one hand, and on the other escalate industrial hourly wages on a basis of
the increase in the cost of living-this combination constitutes a system of builtin inflation that results in progresive deterioration in the purchasing power of
the dollar.
It is also true that agencies of Government, particularly in the lending or
guaranteeing field , frequently follow policies and programs that add to inflationary pressures .
These facts add up to the insistent and continuous need for a coordination of
the policies of Congress and of the administrative agencies if an anti-inflationary
policy is to be effective.
They also bring out the point that the problems of restraining inflation are involved in the actions of Government on many fronts and that while, at the
same time, efforts are being made by the monetary authorities to restrain inflationary pressures, other actions by Government are directly inflationary and
make difficult, if not impossible, the success of the efforts of the monetary authorities in the limited areas in which they operate.
The basic difficulty in averting or combating inflation is that while people
generally are opposed to inflation in theory, in actual practice many embrace programs for personal profit or benefit that are highly inflationary.
A dam cannot be built that successfully will restrain the forees of inflation
if sections of it are missing, no more than a dam will hold back the water of a
river if the dam is full of holes.
Many people consider the device of raising interest rates as the principal
means for controlling inflation. Such a proposal is painless to most people and
profitable to many. While this is a desirable device as part of an over-all program, it will not do the job alone and, in my opinion, is highly overrated .
Small increases in short-term interest rates have some value psychologically
but actually produce little credit restraint. The short-term borrower, if funds
are required for a necessary purpose, is not deterred by a small increase in rate.
The short-term lender is not deterred but may be encouraged to make loans when
his rate of return is increased. The real deterrent to the short-term lender is
the lack of funds to lend and it is in this area that open-market operations of
the Federal Reserve System are most effective. One difficulty in curtailing such
funds is that a bank with large holdings of short-term Government securities
may secure reserves by allowing its securities to run off at maturity. As of
the most recent date for which figures are available, December 31, 1951 , shortterm Government securities held by banks, other than the Federal Reserve,
amounted to $33 billion. A small increase in the interest rate on such securities has little effect on the decline in price and such decline may be more than
offset by the higher rate obtainable from a loan. So long as the commercial
banking system owns such a substantial amount of short-term Government securities, the effectiveness of a slightly increased short-term interest rate will not
be too important in reducing the acquisition of reserves by banks.
On the other hand, a small increase in the interest rate on long-term Governments reduces prices substantially and is a deterrent to the sale of such securities
because of the loss involved. It is more effective in restraining the lender, who
must take a loss in the sale of his bonds than it is on the borrower who needs
the funds, particularly under present tax laws where the larger part of the
increased interest cost to the borrower is absorbed by the Government through
reduction in the taxpayers' taxable income.
The discount rate set by the Federal Reserve was an effective instrument of
credit control in the earlier years of the system. While it has an important
place in present-day operations, it has limited effectiveness so long as the banks
own large amounts of short-term Government securities.
Reserve requirements of member banks of the Federal Reserve System constitute an effective brake on bank lending. Increasing reserve requirements
reduces the capacity of a bank to make loans. However, the reserve technique
creates many inequities and is a somewhat brutal method of securing results.

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In spite of a rate classification based on a combination of two classes of deposits
and on different types of cities, which device attempts to eliminate some of the
inequities, it is highly questionable whether the present classification base is
suitable for 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 would also have within it some inequities, but might
be highly effective in the use of reserve requirements as an instrument of credit
control. If any change is made in the base on which reserves are required, it
should be carefully designed and should be instituted in a period of relative
monetary ease.
The objection of banks to reserve requirements that are higher than may be
needed for safety are that such reserves are nonearning assets of the banks but
are earning assets of the Federal Reserve System. An increase in reserve requirements merely transfers earning assets from the member banks to the
Federal Reserve.
It has been suggested that reserve requirements be changed so that only part
of these reserves would be required in cash and part in certain types of shortterm Government securities on which the owning banks would receive the interest. This proposal is of doubtful merit. In effect, it would force some banks
to become unwilling holders of a particular type of Government securities.
Another suggestion has been made that when reserve requirements are above
certain percentages of deposits that the Federal Reserve banks should be
required to pay interest to the member banks on the excess reserves required.
It should be noted that the use of reserve requirements as a vehicle of credit
control, applies only to banks and does not directly affect other lenders- some
of whom compete with banks in making loans.
Any discussion of the problems of dealing with inflation raises the question
of over-all major policy under the directive of the Employment Act of 1946.
While this act specifically provides for a national policy as to employment by
creating and maintaining "conditions under which there will be afforded useful
employment opportunities, including self-employment for those able, willing,
and seeking to work and to promote maximum employment," it also states as
an objective of the policy to promote maximum "production and purchasing
power," and all of this to be done "in a manner calculated to foster and promote
free competitive enterprise and the general welfare." Emphasis in this policy
directive is on employment, but recognition is given to the need for maintaining
maximum purchasing power. Although the inference is that what is meant is
real purchasing power, which requires relative stability of the dollar. I think
it is unfortunate that the wording of this act does not contain a more specific
statement of national policy to maintain long-run monetary stability.
An examination of legislative and administrative history of the Federal Government for the past few years does not yield convincing evidence that the guiding policy has been one of maintaining long-run monetary stability .
I have tremendous respect for the American dollar as one of the most important single factors in the world today. The integrity of the dollar must be
preserved. Any depreciation or discount of that dollar is a threat to our own
national welfare and the welfare of the rest of the world. Throughout history,
disasters in varying degrees have almost always followed periods of seriousinflation.
However, there can be little doubt that under the necessity of the Government
borrowing vast sums to finance World War II and the need for quick expansion
of military facilities and production, that a substantial increase in the monetary
supply was required. It may now appear in retrospect that the money supply
during the war period was increased to a greater degree than was desirable.
If it had been possible to place a larger proportion of the public debt in the
hands of nonbank holders and less in the banking system, there would have been
less increase in the monetary supply.
The question now is whether or not the money supply is too great in terms of
the needs of the present defense effort. At times, this appears to be the case,
but, on the other hand, in terms of the vast outlays that are being made and
are in contemplation, we may find that the money supply is not too great. In
the meantime, we have the practical problem of restraining inflationary pressuresand dealing with the money supply as it now exists. Credit needs for the defense
effort must be filled while, at the same time, it is highly desirable that inflation
be restrained.
My own views are that economic policy under present conditions should be
directed against inflation through appropriate action by the Government on
every front, while at the same time avoiding as much as possible actions that

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will have serious adverse effects in other areas and avoiding so far as possible
rigidities in the operation of the private enterprise system. Selective controls
and allocation of materials appear to be essential in such a program, but the
application of such controls should be subject to administrative flexibility so
that they may be adjusted, dropped or increased as the needs of the situation
develop.
It would be a mistake to place entire reliance or too much reliance on the use
of interest rates through monetary management to control inflation . The need
is to deal with this problem on the broad front under a consistent and coordinated policy of Congress and the executive department of Government.
To deal with this problem on the monetary front alone is to ignore the many
areas of inflationary pressures other than in the field of credit and monetary
supply.
In this connection, there is an intangible factor somewhat unpredictable that
we might call human behavior. The officials of the Federal Reserve System
frequently refer to the effect of actions which are taken as psychological rather
than economic. This factor is one of tremendous import in a country in which
people have such vast resources along with a large degree of freedom to use
these resources as they desire.
As an illustration, there was general agreement among economists at the beginning of 1951 that inflationary pressures throughout the year would be strong.
Such did not develop to the extent anticipated . Almost no one anticipated the
abrupt change that took place between the first quarter of 1951 and the second
quarter in the shift from spending to saving on the part of individuals. Disposable personal income increased between these two quarters at an annual
rate of $5 billion, yet personal savings increased at the rate of $11.6 billion.
Personal savings more than doubled between these two quarters both in dollars
and in percent of disposable income. The sudden shift from spending to saving
on the part of the people did much to cool off the pressure on prices of consumer
goods.
In dealing with the public debt and changes in prices of Government securities,
we should keep in mind the fact that a substantial majority of the American
people owns Government securities and reacts to developments that 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 for the size of
the national debt, its proportion to all debt and its widespread ownership. The
ownership of that debt is based on the confidence of the owners in the Government. Any disturbance to that confidence is a matter of serious concern. Fairly,
I think it might be said that many individual owners of Government securities
and potential buyers are concerned over the vast expenditures of Government,
some of which they consider unnecessary or even wasteful, and particularly when ,
in spite of heavy taxes, Government expenditures promise to exceed revenues.
Others look with concern at the decline in the value of the long-term securities
below par. Many of them do not understand economic theory, but do understand
the fact that whereas they paid $100 for a long-term Government bond, it is now
worth only $97, and are concerned with the possibility of a much further decline
in prices. They also have concern over the deterioration in the purchasing value
of their dollar investments made in recent years, whether in savings bonds, bank
savings accounts, or life insurance. In a free country in which we have universal
and quick communications, we must deal with the factor of human behavior and
public reactions to current events. All of these considerations have a bearing
on the sale of 'Government securities, particularly to individuals.
While in the Treasury, in 1947-48, I came to have tremendous respect for the
officials of the Federal Reserve System and their devotion to public service. In
dealing with intricate problems of monetary control and debt management,
about which, at times, there were different viewpoints and different evaluations
of the effect of proposed actions, there was always evidence of a desire, fully
shared by the officers of the Treasury Department, to resolve such differences
in the interest of the general welfare. The spirit of public service was the
catalyst in the presence of which all discussions of policies and measures were
considered.
There are those who believe that in the exercise of discretionary administrative policy of national importance, there should be no differences of views
among top officials and if they occur, a supreme authority of law or the Chief
Executive should dictate the policy to be followed. Generally speaking, it is
of highest importance that even though differences of opinion are to be expected
among thinking men, effective results in carrying out a policy cannot be achieved

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in the executive department of Government unless there is a coordination of
effort among the various departments and agencies under a common policy.
For this reason, I support the proposal that 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 with credit and money, for
the purpose of exchanging information and views and for coordinating administrative policy. While it would be proper and desirable for the Chairman of
the Board 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 Board of Governors of the Federal Reserve
System should give tremendous weight to any conclusions reached by such a
policy group because it is assumed that any decisions reached will represent
the combined judgment of top administrative officials as to proper policies to
be followed in fiscal, monetary and credit affairs. However, the Federal Reserve
System has specific statutory duties that involve semijudicial decisions that
are based not only on tangible factors but intangibles and they could not conscientiously discharge their duties if bound by the dictates of the executive
department of Government.
It is proper and desirable for the Chief Executive to coordinate the activities
of Government that are under his direction under a common policy but, in
my opinion, would be highly improper for him to dictate actions to be taken
by such semijudicial, independent bodies as the Federal Reserve System, the
Interstate Commerce Commission, the Securities and Exchange Commission or
other similar bodies. I think that he has the right and duty, however, to communicate his views to such agencies and that these views should be received
with respect and careful consideration. However, to subordinate semijudicial
and independent bodies set up by the Congress to the directives of the Chief
Executive would destroy the effective value of such agencies.
Recognizing the differences of viewpoint on desirable action may arise between
the Treasury Department and the Federal Reserve, a proper question is how
such differences may be resolved . Fact No. 1 is that the differences are few.
The second fact is that almost without exception such differences are reconciled . This is done through discussion and agreement and sometimes through
'compromise, but always in a spirit of trying to find the right answer in the
national interest. It is my firm conviction that such a method of dealing with
common problems between an agency of Congress and an executive department
is of the essence of democratic government. In some cases, the results are
not as definite nor as effective as they would be with an authoritative set-up
under which one might be subordinated to the other or both directed by a
supreme authority. However, in my humble opinion, this is a cheap price to
pay for the preservation of the basic principle of checks and balances in a
democratic government.
We should recognize that no man and no group of men dealing with the vast
problems of our public debt and our monetary system are omniscient . Too
many factors are involved, not only economic and financial, but in the realm
of the probabilities of human behavior for any one man or group of men to
know all of the right answers.
It would be a catastrophe to weaken or destroy the independence of the
Federal Reserve System as a semijudicial body by making it merely an administrative 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 major governmental
policies. It is my understanding that such is the present policy of the Federal
Reserve System. It might be pointed out that the history of central banking
throughout the world is tragic evidence that such institutions lose their independence if their actions are inconsistent with major governmental policies.
Central banks win battles against government but governments always win the
war.
Summarizing :
(1 ) The needs for financing World War II and the multiplication of productive facilities to carry on the war resulted in a huge increase in the public debt
and in the money supply.
(2 ) While the larger part of such increase was necessary there remains a
question as to whether or not such money supply is more than is desirable for
a peacetime economy.

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(3) The result of the increased Government debt and increased money supply
was to depreciate the purchasing value of the dollar-another name for inflation.
(4 ) The results of the sale of large amounts of Government securities were :
(a) to create an unbalanced investment situation on the part of many institutions that required a later liquidation of part of such securities ; ( b ) to fill the
banking system with 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 run off as they fall due ; and ( c ) to make the vast majority of
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
during the period of World War II but since. Congress , under the Constitution,
is charged with the responsibility for regulating the value of money. It has the
powers to perform this function and should be held responsible for substantial
changes in the purchasing value of the dollar. It should be recognized that
Congress, over a period of time, represents the will of the people.
( 6) The public generally, while opposing inflation in principle, actually desire
a certain amount of inflation as it may affect their particular interests. It is but
natural that the farmer should want higher prices for farm products, the
workingman higher wages for his services, the businessman higher profits, and
the lenders higher interest rates. All of these objectives are inflationary except
to the extent that higher interest rates are contra-inflationary .
(7) Congressional inflationary actions in the presence of the large monetary
supply and the huge Government debt have added to the difficulties of the Treasury Department in debt management and, in particular, have multiplied the
difficulties of the Federal Reserve System in its money market management
directed toward restraining credit.
(8) Under certain conditions, there is conflict between monetary control and
debt management. The almost continuous necessity for refunding maturing obligations and the frequent need for borrowing money in the management of the
debt require a considerable degree of monetary stability for successful accomplishment. Proper monetary management at times necessarily requires actions
that disturb the money markets. The objectives of proper debt management to
preserve confidence in the public debt and permit its orderly handling are essential 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 in the public interest. Decisions in both fields are highly
complex and are based not only on known financial and economic factors but on
the uncertainties of the future, including the factor of human behavior.
or group of men can, with precision, correctly evaluate all of the factors involved.
in debt management and monetary management.
(9) With the widespread ownership of the public debt among individuals, the
attitudes of people toward the Government debt constitute an important consideration of the possible public reactions to actions taken. Serious reductions in
the prices of Government securities are disturbing to many people.
( 10 ) The basic consideration in monetary management and debt management.
is that so far as possible they should be consistent with each other in spite of the
fact that they have different primary objectives. A high degree of close cooperation and coordination is necessary between the two in the interest of both. The
greatest care should be exercised that : (a ) Actions in one field should not
seriously disturb operations in the other field ; ( b ) that careful consideration:
should be given to the long-run adverse effect of actions taken to accomplish
immediate desirable objectives ; and ( c ) in view of the intricacies of the problems
involved in debt management and monetary management and the necessity for
the exercise of judgment that is based not only on known factors but unknown
factors and with changes in conditions beyond the control of monetary authorities, that there should be no mandate or directive by law that would restrict the
necessary freedom of actions for proper debt management and monetary
management.
(11 ) The close working together by the Treasury Department and the Federal
Reserve System has resulted in a high degree of cooperation in which differences:
have been minimized. It is in the interest of both that actions of one should not
be contrary to the objectives of the other. While admitting that thinking
men will not always agree on every specific action to be taken in the field of
monetary control and debt management, it is far more important in terms of
our democratic system of checks and balances that the freedom to disagree be

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preserved rather than to destroy the independence of either the Treasury or the
Federal Reserve System in working out problems common to both. Neither
should the Federal Reserve System become subordinate to the executive department of Government nor should it be allowed to take over the functions of that
department.
The third item in my discussion is on the question of ownership of stock in the
Federal Reserve banks. The stock in these banks is now held by the member
banks. This stock carries a fixed dividend and the stockholders have no interest
in any earnings of the banks in excess of the amount required to pay the dividend. The question has been raised as to whether or not in 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 in such ownership would be to receive the dividend
on the investment of the Government to acquire this stock. The difference in the
dividend and the cost of the money with which to buy the stock is not of sufficient
amount to have an important bearing on the question. If the Government owned
the stock of the Reserve banks, the implications would be that the Reserve
System was merely an executive agency of the Government, such as the RFC for
instance, and subject to Executive direction .
The Federal Reserve banks represent a combination of Government and private business under which control is vested in the Government. It is through
the ownership of the stock of the Reserve banks by member banks that 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 in 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
that is valuable to the Reserve banks in maintaining close touch with conditions
prevailing in their respective districts . The Federal System has no other direct
official relationship with 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 in the Reserve banks not only gives the
banks an opportunity to vote in the election of six of the nine directors of each
bank, but affords a relationship in which bankers have a direct interest in the
functioning of the Reserve System. To divest the member banks from this
stock ownership would result in losing a valuable asset of support to the System
and an interest on the part of banks and other businessmen in the System's
operations.
The operations of the Federal Reserve System are so intimately related to
commerce and industry and the operations of the chartered banking system
that it is highly desirable in the national interest that such relationships be
encouraged 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. If 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 in 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 it merely a Government bureau.
Representative PATMAN. I will state that you have given the best
reason for the continuance of the token ownership by the commercial
banks of the Federal Reserve System that I have heard given , the
most logical reason for it.
Mr. WIGGINS. Thank you very much, sir.
There is some more detail in my statement, Mr. Chairman, than I
gave.
Representative PATMAN. Mr. Wolcott ? Senator Douglas ?
Senator DOUGLAS. I want to compliment the witness on his extraordinary able statement. It is indeed one of the ablest statements
which I have ever heard on the subject.

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Mr. WIGGINS. Thank you very much, sir.
Representative PATMAN. Mr. Bolling ?
Representative BOLLING. No questions, Mr. Chairman .
Representative PATMAN. I will ask two or three questions of Mr.
Wiggins.
You know, the Comptroller General in the General Accounting
Office usually audits and has control of the auditing and general supervision of the bookkeeping of public agencies. Do you believe that
the General Accounting Office should be given the power to audit the
books of the Federal Reserve System and the Federal Reserve Board ?
Mr. WIGGINS . Mr. Chairman, I can see no particular objective except to give another agency some more work, and they would probably
want another appropriation to do it . The Federal Reserve has an
effective internal audit, and I do not know what would be accomplished by it or what the desirable objective is.
Representative PATMAN. It costs as much money to have a private
audit as it would for the Government auditor.
Mr. WIGGINS. I really am not familiar with the type of audits that
the Federal Reserve make except that I know they do have a very
elaborate system of audit of their own.
Representative PATMAN. The question involved here is they audit
their own books, whether or not that is a good policy.
Mr. WIGGINS. I am strong for an internal audit regardless of
whether you have another auditor or not. I think it is the most effective means of controlling a business, with a unit of the same business ,
an independent group charged with the same responsibilities that some
other auditors would perform.
Representative PATMAN. Another question on annual appropriations. Most of the agencies of the Government and public bodies
depend upon Congress for annual appropriations. In that way they
are under the direction and scrutiny of what you might call their
master, the Congress .
Would you be in favor of the Federal Reserve System turning in all
of its receipts like most of the other agencies do, and receiving money
for their support and salaries, maintenance, and operation from a
budget like other agencies are required to do ?
Mr. WIGGINS. Frankly, I would not want to run that business if it
had to be done that way. I think that the type of operations of a
huge banking system, that the men at the head of it should be given
the authority to run it without requiring an appropriation of Congress for their detailed expenses and costs.
I do not know how you would cover the losses that they might take
on Government securities. It would be an expense of the operation.
That certainly could not be covered by statute, I mean by any particular appropriation. I think they ought to have the freedom that they
now have, Mr. Chairman .
Representative PATMAN. Of course, so far as independence is concerned, Mr. Wiggins, the Supreme Court receives its annual appropriations from Congress .
It is a coordinate branch of our Government, and it is just as independent, I believe, as any part of our Government can possibly be, and
they certainly have not found it to be any handicap, and it seems to be
a part of our traditional system, but the question is whether or not we
should make an exception in this case. Take the executive branch

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of the Government. It is dependent upon Congress for every dollar
under their control and every dollar that they spend.
Mr. WIGGINS. That is true.
Representative PATMAN. So the argument that it destroys the independence of the agency I believe is somewhat weakened by the experience of the executive and the judicial branches of our Government.
Mr. WIGGINS. The Federal Reserve System, however, is an incomeproducing operating business, and I think is entirely different from
such operations as the courts, where it is a matter of expense.
The Congress does fix the salaries of the members of the Board of
Governors, which I think is proper, but it does not fix the salaries:
of the presidents of the Federal Reserve banks, and I think many
Congressmen might think when you came to appropriating an amount
that would be necessary to employ the type of ability that is required
for the president of a bank, that the salary would be too high.
I am afraid that Congress would not appropriate adequately to get
the type of personnel that we now have in the Federal Reserve System,
and in my opinion it needs the best men that can be found.
Representative PATMAN. Without arguing the question with you,
Mr. Wiggins , Congress has been rather liberal with the Supreme Court
for instance. They receive rather liberal salaries and allowances and
retirement benefits, and if you add it all up , I suspect it would amount
to about as much as the presidents of the respective Federal Reserve
banks receive.
Mr. WIGGINS. I think the Supreme Court, Mr. Chairman , is a holy
of holies that we regard with such high favor that we ought not to
compare this banking system with the Supreme Court. It might be
compared with something else.
Representative PATMAN. And so far as its status as a revenue-bearing agency is concerned , we should keep in mind, too, that all its revenues are by reason of its holdings of United States Government securities.
Mr. WIGGINS. And the note-issuing privilege.
Representative PATMAN. Yes ; using the credit of the country. If
you want to put the Supreme Court in a comparable situation, you
can just turn over $20 billion worth of Government bonds and say,
"All the interest on that money you can use to run the judicial system,"
and then put the rest of it back into the Treasury.
Mr. WIGGINS. My opinion , Mr. Chairman, is that if the Congress
is not satisfied with the way the Federal Reserve System is run, then
they might take over the functions of appropriating and requiring
the receipts to be brought into the Treasury, but the practical facts
are that you need as presidents of some of your Federal Reserve
banks the ablest financial brains in America ; and you have got it, in
my opinion.
You are competing with the presidents of banks that pay salaries
that are very high in terms of the salary that a Congressman gets.
Senator DOUGLAS. There we come to a point, namely, that the salaries
of members of the Federal Reserve Board are appreciably below the
salaries of the presidents of the Federal Reserve banks, although the
position of the Federal Reserve Board is really much more important
in framing general policy than the operating heads of the banks.

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Would you favor increasing the salaries of the Federal Reserve
Board ?
Mr. WIGGINS. I certainly would . I think it is a shame that those
men receive the salaries they get when they occupy a position of such
importance in our whole economy, when you have to draw from a source
of the kind of men you want, men who receive salaries several times
as great .
I do not think that in some cases you will get that type of man with
salary alone. In some cases you have that type of man already on
the Federal Reserve Board where the salary is less important to him
than a sense of serving the Government.
Senator DOUGLAS. You are aware of what happened when some of
us tried to increase the salaries of members of the Federal Reserve
Board from $15,000 up, I believe , to $22,500.
The record is perfectly clear that the Federal Deposit Insurance
Corporation with all its influence injected itself in the situation and
said, "You can't increase the salaries of the Federal Reserve Board
unless you increase ours. We are as important as they are."
And I am sorry to say that a large proportion of your fellow bankers
went along with the Federal Deposit Insurance Corporation , because
my files are full of telegrams from the bankers of my State protesting
against an increase in the salaries of members of the Federal Reserve
Board. Now I hope that you can use your influence with your fellow members of the American Bankers Association on this question.
Mr. WIGGINS. Well, the question of comparative salaries is always
raised when you change anybody's salary. It is a tough problem in
business, of course, with your own personnel .
Senator DOUGLAS. I was greatly disappointed in the attitude of the
Federal Deposit Insurance Corporation.
Representative PATMAN. Mr. Wiggins, we thank you very kindly
sir.
Mr. WIGGINS. Thank you, gentlemen.
Representative PATMAN. Mr. Wiggins, will you come back just a
moment please. I forgot to call on Dr. Murphy and Dr. Ensley and
ask if they wanted to ask any questions.
Mr. ENSLEY. I have no questions.
Representative PATMAN. Dr. Murphy ?
Mr. MURPHY. I have only one question .
years ago said :

The Douglas report 2

We believe that 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 that no action in this direction be taken.
What would be your reaction if this committee reiterated that
statement or some variation of it in its report ? Would you comment
on that, Mr. Wiggins?
Mr. WIGGINS. Would you mind reading the heart of that ? I did not
quite hear you, Mr. Murphy.
Mr. MURPHY ( reading) :
We believe that 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 that no action in this direction be taken.

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

That was stated in the Douglas report 2 years ago. The question
is, Do you think it would be a constructive thing for this committee
in its report to reaffirm that position ?
Mr. WIGGINS . There are a number of people who toy with the idea
of making gold convertible to cure many of our economic ills.
I am ashamed to admit that I wrote a treatise on gold about 30 years
ago and I hope it will never be read or discovered , because what I said
at that time is so foolish today that I am ashamed to admit that I
wrote it.
In my opinion if there is any substantial demand or advocacy of
making gold freely convertible, I think it might be well for the committee to express itself somewhat along the same lines as it formerly
expressed itself. I personally think that making gold freely convertible would only result in transferring the hiding of the gold in the
ground at Fort Knox to hiding it under the mattresses and in the
socks over the country.
I think if you really want to deflate, Senator-we were talking about.
deflating if you would announce on a certain day that anybody can
go to any bank in the country and get all the gold they want, I believe
in 3 hours why the gold supply would disappear.
Some people do not agree with that, but I have asked some of the
advocates of convertibility of gold what they would do if they had
the right to convert their money into gold, and I think uniformly
everyone has said, "Well, I would get all I could get and I would put
it away in a good, safe place."
I do not go along with any proposition at the present time under
the present world conditions to make our gold supply convertible
freely.
Senator DOUGLAS . You do not agree with the apparent meaning,
therefore, of an eminent candidate for the Presidency who declared
that he wanted a solid American dollar with a modern gold standard .
Representative PATMAN. I think you would have to define what is
meant by a "modern gold standard . "
Senator DOUGLAS . Strike my query from the record.
Representative PATMAN. No, no.
Well, thank you very kindly, Mr. Wiggins.
Dr. Blough, we are glad to have you as our witness. Do you have
a prepared statement ?
STATEMENT OF ROY BLOUGH, MEMBER, COUNCIL OF ECONOMIC
ADVISERS
Mr. BLOUGH. Mr. Chairman , the opportunity which the committee
gave the Council to respond to the committee's questionnaire has given
me plenty of opportunity to explain my views on the subject under
consideration. There is one point, however, I think on a rather central
problem, that may not stand out as clearly as might be wished . I
have prepared a statement on that point.
If it meets with your approval, I would like to have that statement
appear in the record, and to have the committee's indulgence for me
to summarize very briefly the points involved , after which I shall be
happy to address myself to whatever questions the committee may
wish to ask me.

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Representative PATMAN. Without objection , that will be satisfactory, Mr. Blough.
( The prepared statement submitted by Mr. Blough is as follows :)
THE DILEMMA OF MANAGING A LARGE PUBLIC DEBT IN A PERIOD OF INFLATION
The hundreds of pages devoted by individuals and agencies to answering the
questions submitted by your committee testify to the many facets that mark
the relationship between monetary policy and the management of the public
debt. It is obvious that I can deal with only a small segment.
There would seem to be three general kinds of problems involved in this subject of the relationship between monetary policy and the management of the
Federal debt. At the center is the economic problem of how to manage a very
large Federal debt with the least harmful influence on the economy. This
economic problem comprises several problems that are more specific, among them,
how to manage the Federal debt without contributing to inflation , how to manage
the Federal debt without contributing to deflation and depression, and how to
manage the Federal debt without causing a monetary crisis .
A second kind 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 fair distribution 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, it is necessary to
choose among them-to weigh the advantages of a little more of one against the
disadvantage of a little less of another. A rapid shift from a civilian economy to
a mobilization economy, for example, might have been difficult to achieve without some increase in prices.
The third kind of problem may be designated the organizational problem.
This is the problem of how to allocate the powers of Government in such a manner
that the economic methods used and the policy decisions made will 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 with the
least harmful and most beneficial results for the economy. More specifically,
I wish to deal with the problem of managing the Federal debt without contributing to inflation.
PROBLEMS PRESENTED BY A LARGE PUBLIC DEBT
The Federal debt, which on December 31 , 1951 , totaled $259.5 billion, is one of
the most important economic facts of our time. This Federal debt is 45 percent
of the total net debt, public and private, outstanding in 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. During the year 1952, it will probably
be necessary for the Federal Government to refinance over $35 billion of the
Federal debt in 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, it may be necessary, in addition , to borrow from the
public as much as $10 billion in new funds during the calendar year 1952. The
magnitudes of these operations are so much vaster than those involved in private
financing, and the Federal Government is so different from a private business,
that there is no reason to believe that all 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 rid of the debt, at least not in our lifetimes, so we must learn to
live with it. A basic fact in considering problems of monetary policy and debt
management is that every dollar of the Federal debt at all 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 in some fashion
whether by individual investors , corporate investors, commercial banks, or Federal Reserve banks.

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Under most economic conditions, a large public debt presents no problem for
monetary policy ; indeed, under some conditions, the debt can serve as a useful
tool. Under the following circumstances, however, a difficult problem arises in
using monetary policy to stabilize the economy while managing the public debt :
(1 ) When there are substantial issues maturing currently that require refunding,
or when additional borrowing is necessary because revenues are insufficient to
cover expenditures ; and ( 2 ) when demand for goods and services has pushed employment and production to so high a level that any additions to demand will
not result in greater production but will give rise to inflationary pressure ; and
(3) when the combined total of demands for loanable funds by Government and
private borrowers is in excess of the supply of loanable funds available from the
voluntary savings of individuals and corporations. Conditions of this character
have existed during much of the time since the Korean attack in June 1950.
They exist in the main today and they promise to become accentuated over the
next 12 months or so because of the large Federal deficit which we shall soon
be incurring.
It is well to bear in mind that it is the relation of spending ( including consumer spending, business spending, and Government spending ) for goods and
services to the supply of goods and services which is the biggest factor determining prices. All kinds of financial transactions , including the increase in
the money supply ( of which a minor fraction is currency and the major fraction
is bank deposits ) affect prices only as they result in a an increase or decrease
in spending or a decrease or increase in the supply of goods and services. For
example, the effect on prices of an increase in 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 in a period of inflation
than in one of deflation , when there may be no further steps at all, at least not
for months or years, but even in a period of inflation the timing and amount
of the consequences are uncertain . In all discussions of the effect of monetary
and debt transactions, it is necessary to follow through to the effects on actual
spending and on the actual supply of goods and services.
The economic dilemma that is presented when the demands for loanable
funds exceed the supply in a period of full employment is suggestive of the
parlor game of musical chairs , in which there are less chairs than people. In
musical chairs, there would be no game if the number of people and the number
of chairs were the same, but in the situation just described regarding the Federal debt, the number of players and the number of chairs must in some manner
be made the same. The problem is how to restore equilibrium between the supply
and demand of loanable funds while maintaining price stability in maximum
degree. Either an equilibrium must be achieved between the supply of loanable
funds and the demand for loanable funds, or some kind of rationing of loanable
funds will have to be carried on by action of either the lenders or the Government.
INCREASING THE SUPPLY OF LOANABLE FUNDS
To achieve an equilibrium between the supply of loanable funds and the
demand for loanable funds, it 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 their savings. Since the spending of
the loan is offset by reduction in spending by the saver of the money, the result
is not inflationary. Another method of increasing the supply of loanable funds
is for persons and corporations to loan funds which they formerly held idle. In
this way, the velocity of circulation is increased and spending is increased ; the
result is inflationary. The lending power of banks can be increased by enlarging commercial bank reserves through an inflow of gold, rediscounting with
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, of course,
in the reverse ways by raising reserve requirements, by an outflow of gold, by
paying off rediscounts, and by the sale of securities by Federal Reserve banks.
There are conditions under which an expansion in the supply of loanable funds
is not inflationary. As just mentioned, if savings are being simultaneously increased, an increase in spending growing out of increased loans will not create
additional inflationary pressures. Moreover, to the extent that the economy is
growing with respect to the physical volume of production or trade, a larger
supply of money is required to carry on the increased volume of business at the
existing price level. Expansion in the supply of money or increase in the velocity

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of its use that is not in excess of such additional needs does not increase inflationary pressures. Otherwise, however, if an increase in lending power is actually
followed by an increase in loans and if this, in turn, is followed by an increase
in spending by consumers or businesses for goods and services, inflationary pressures are added to the economy. Whether price increases will actually result
depends on what measures are taken to hold down spending elsewhere in the
economy through such measures as taxes, rationing, priorities, and allocations,
and so on.
The fact that inflationary pressures are increased at one point or from one
cause, therefore, does not mean that actual inflation must result. However, it
is clear that bringing about an equilibrium between the demand and the supply
of loanable funds by increasing the supply of loanable funds through the expansion of bank reserves is likely to add to inflationary pressure and thereby to
make the problem of preventing inflation more difficult to solve.
It is for these reasons, of course, that stress is placed on the desirablity of
avoiding the indefinite expansion of the holdings of Government securities by
the Federal Reserve banks. But Government spending financed by selling securities to the public in exchange for idle funds also is inflationary. The hope of
achieving an equilibrium between the supply of and demand for loanable funds
through an increase in the supply of funds lies in the increase in real savings.
To increase real savings is, of course, easier said than done.
EFFECTS OF A RISING INTEREST RATE
The second method of bringing equilibrium between the supply and demand
of, loanable funds is to decrease the demand for such funds. One way to do
this is to permit the interest rate to rise. The chief way in which permitting
the interest rate to rise brings about equilibrium between the supply of and
demand for loanable funds is by causing some prospective borrowers to drop
out because of the increase in the cost of the loans to them. Clearly, as the
cost becomes higher and higher, more and more borrowers will find the expense
of borrowing too great for them to undertake.
Many persons have taken the position that the problem of the public debt is
solved when the Federal Reserve System ceases to buy Government securities .
In fact, however, this is only the beginning of the problem. It is all very well
to say that the Federal Reserve must not buy the securities, but the stubborn
fact is that it is absolutely necessary that someone buy them. How is this to be
done when there is a bigger demand than supply for loanable funds ? Presumably, the Federal Government can, if it will, outbid other borrowers of funds who
do not have the same imperative necessity to borrow, by offering high enough
interest rates . Clearly, if only the interest rate is to be used to cut down the
private demand for loans, the Federal Government cannot stop short of outbidding other borrowers. This might be a serious matter, since the highest
marginal rate which the Treasury had to pay on the last dollar it borrowed
would tend to set the rate pattern for the whole of the Federal debt, which, as
previously noted, is nearly as large as all the private debt put together. Thus,
the interest rate paid on this tremendous volume of debt obligations would tend
to be determined by how rapidly a rise in the rate of interest drove other borrowers out of the market or discouraged lenders from loaning to the other
borrowers.
If this course is to be followed, it becomes very important to know whether
the Federal Government will have to bid very high to refinance its loans and to
borrow what new money it will need . I do not know how high the interest rate
would need to go, but several factors may be indicated. A rise in interest rates
may affect the market for loanable funds by affecting the supply and by affecting
the demand. As previously indicated , only increases in the supply of funds that
result from increased saving avoid being inflationary. It is not generally
believed by economists that moderate increases in rates of interest have a substantial stimulating effect on the level of saving. There are forces working in
both directions that tend to offset each other.
The second effect of rising rates of interest is on the demand for loans. This
is a very crucial question, since if the demand for loans is very elastic in relation to interest changes , a small rise in interest rates may suffice to restore
equilibrium between the supply and demand of loanable funds, while if the
demand is very inelastic, a very large rise in interest rates might be necessary
to reduce demand sufficiently to bring about an equilibrium. When demand for
loanable funds is decreased by an increase in the rate of interest, it is of course
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important that this decrease not be in those sectors that are vital for the promotion of the defense effort.
We cannot approach the present situation as a normal one in which only traditional economic techniques will be sufficient to meet the problem. The expansion and diversion required by the defense program, the tremendous volume of
private capital formation, and the heavy anticipated Federal deficit combine to
make this a special situation which may call for special measures.
It may be useful to run over briefly the different demands for loans. As previously stressed, Government loans cannot be reduced at all by debt management ; somehow or other, Government must get the money and, unless other
measures are to be used to prevent the market from being entirely "free," the
Government must be prepared to outbid the interest rates that other borrowers
would pay. The demand for speculative loans would be very slow to drop out,
because the interest cost is a very small element among the factors determining
speculative purchases. The demand for loans to carry inventories would also be
very slow to decrease as interest rates rose, because again the rate of interest
is a very small part of total cost, especially when the risks of the operation
are considered part of the cost. The demand for loans to finance the purchase
and production of machinery, tools, and equipment would be relatively slow to
respond, because again interest is a small proportion of cost for items of equipment which are written off or depreciated at a relatively fast rate of speed.
The demand for loans to finance industrial and commercial construction would
presumably be reduced to a greater extent, since the interest rate is a relatively
important factor in determining the profitability of the operation. This is true
also of residential construction, since the amount of rents that home owners can
pay is dependent on their wages and other income, and as interest rates rose,
demand would fall off. It should be pointed out, however, that with respect to
the present situation the limits on the amount of construction ( industrial, commercial, and residential ) have been set in recent months not by the aggregate
demand of borrowers but by the supply of scarce materials. Even at higher
interest rates the demand of borrowers would likely have continued sufficiently
great to take up all of the available supplies of materials. It is not clear how
long this will continue.
On the basis of the above analysis, there is good reason to conclude that it
might very possibly happen that an increase in interest rates of a moderate
character would have an insufficient effect in reducing the private demand for
loans. In that case, the Federal Government would be obliged to face the
prospect of outbidding private demand for loans with even higher rates of
interest.
It may be urged that although an increase in the rate of interest would have
relatively little effect in reducing the demands of borrowers for loanable funds,
the lenders would ration their supplies of funds in such a way that the Government would receive what it required . The argument has been made that
an important reason why insurance companies, for example, have been loaning
money in the private market instead of to the Federal Government is that the
companies have certain contracts which they must fulfill, and that the rate of
interest offered by the Government is not enough to satisfy the needs of the companies in fulfilling these contracts. It has been argued that a small increase
in the rate of interest on Government securities would make them attractive
to the insurance companies, which under those circumstances would be willing
to buy from the Government instead of loaning money in the private market.
Likewise, it has been said that banks have certain earnings expectations , and
that when these are satisfied, the banks will be willing to lend to the Government instead of lending the funds to private borrowers .
While it may be granted that there is a short lag while the appetites of lenders
are temporarily satisfied by an increase in the rate of interest, it is not human
nature for this satiation of appetite to continue. As a matter of fact, the rates
of interest which some observers said last winter would be satisfactory for
insurance companies are being said now not to be satisfactory. An increase in
interest stimulates the appetite instead of satisfying it. If private borrowers
are willing to pay more for their loans, I can see no reason to expect that
private lenders will not take advantage of the higher interest rates and force
the Federal Government to keep raising its bid in order to place its securities
in the hands of private holders .

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DISADVANTAGES OF LARGE INCREASES IN INTEREST RATES
The point may be made that 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 will be held
without inflationary consequences. Can this view be accepted ?
If the interest rate necessary for the Federal Government to outbid private
borrowers were a permanent equilibrium interest rate, there might be little
objection to the Federal Government engaging in such competitive bidding. But
this means that we would expect the country for a long time to come to be in an
inflationary situation. We would expect the rate of demand for loanable funds
to be so much in excess of the supply of saving that the cutting off of demand for
construction and for machinery, tools, and equipment for the longer run would
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. But this is not the outlook in the United States.
This Nation has a tremendous capacity for saving. It does not have the capital
shortages that a war-ravaged Europe or an underdeveloped Asia, Africa, 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, in my opinion, this
is a high-saving economy and a low-interest-rate economy. That is, savings
will be made in large volume, in my opinion, and to keep them invested in real
capital, as they must be if unemployment and depression are not to threaten
us, the interest rate that is paid for the use of savings will have to be to a relatively low one. If 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 in
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.
But why is this situation a matter of any concern ? Why not have high interest
rates now and low interest rates when we need them ? The difficulty is that
interest rates in the past have not adjusted downward with sufficient rapidity
to meet the changing needs. That adjustment requires a process of reeducation to a lower interest rate standard. The average yield of Aaa corporate
bonds in 1932 was higher than in 1929. It took a long time after 1932 for
interest rates to fall substantially, and positive action on the part of the Government was involved . Do we want to educate lenders to a high interest rate
only to have to go through another slow process of reeducation to lower rates?
Of course, the Government could engage in direct lending at such a time and
thus break the interest rate structure. But most of us, I am sure, would like
to minimize such activities by Government. We shall be much surer of having the needed lower interest rates when they are required for a healthy economy
if they do not rise too high during the intervening period.
Another reason for avoiding high-interest rates is that the continually rising
interest rate which might be necessary for the Government to outbid the market
might result in placing actually less securities in the hands of the public than
if a lower interest rate had been maintained . This might happen for two reasons.
First, the declining value of Government securities might cause investors to
avoid investing in Government securities for the future, because of the capital
losses suffered in the past and present. Second , investors might reason that an
increase in the rate of interest would be followed by still further increases and
that therefore they might as well wait until later before buying any intermediate
or long-term securities. Relatively little is known about the probable behavior
of Government security holders under various possible circumstances. The situation is not one, however, in which bold experimentation can be lightly undertaken.
With about half of the total debt of the Nation in the form 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. It is not convincing to argue
that market supports were discontinued and that the fear of security market
disorganization proved to be a bogey. Support was not discontinued, and was
handled with great care and skill. Moreover, the more difficult financing problems have not yet been faced.

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Another result of higher interest rates would be, of course, that the cost of
servicing the public debt would rise. No one will question the undesirability of
unnecessarily increasing the tax burden on the public. On the other hand, no one
will question that if the only way to maintain stability is through a higher rate
of interest on the Federal debt, it would be far cheaper for the country to pay
the higher taxes than to experience the inflation . But in view of the uncertain
effects of rising interest rates and the possibility that other methods can be
used to prevent inflation, it is understandable that a substantial increase in the
interest rate is not to be viewed wtih complacency .
It should also be mentioned that much of American financial strength rests on
a foundation of the values of Federal securities. The substantial declines in the
values of those securities that would accompany substantial increases in interest
rates might have very repressing effects on types of financial and business operations necessary for the sound functioning of the economy especially in the defense
mobilization period.
OTHER METHODS OF RESTRAINING PRIVATE DEMAND FOR LOANS
I want to make it clear that I do not defend any particular level of interest
rates as being the correct level. It may be, moreover, that under the circumstances we face, the equilibrium level will not involve much if any increase in
interest rates. But for the reasons mentioned , large increases in interest rates
would have undesirable effects, and it is necessary accordingly to review other
possible ways of reducing the demand for loanable funds and of inducing lenders
to prefer Government securities to private loans.
The problem in short is one of finding ways to reduce private loans in order
that the Government's debt may be held without undesirable increases in the
rate of interest and without an inflationary expansion of credit.
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 in materials available for 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 for loanable
funds with respect to purchases of consumer durable goods and of houses. Willingness of banks and other institutions to lend has been diminished through
voluntary credit-restraint programs that bring the social and moral pressure of
the whole industry to bear on its individual members. Price controls reduce the
desire to engage in speculative transactions and help to hold down the requirements for working capital.
In the actual management of the public debt, it should not be assumed that 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.
In practice, it may be found necessary and desirable to make some use of all of
the methods, and possible to do so without inflationary pressures resulting.
The policy of supporting the market for Government securities that seems to me
best suited for 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 kind of support keeps large holders from readily monetizing their holdings ;
it does not preclude active support of the market when this seems necessary or
desirable ; it helps prevent the kinds of fluctuations in Government security prices
that would make difficult the sale of future issues ; and it should prevent seriously
hurtful market confusion and economic disruption.
In closing, I would like to repeat that monetary policy and debt management
are by no means all there is to the problem of economic stabilization or its
solution. The inflationary problem is one of holding down total spending, not
simply that relatively small part which is financed by increases in debt, public
and private. A well-balanced stabilization program using all the other measures
at the disposal of the Government should go along with a monetary and debt
management policy that itself should be to the largest practicable extent noninflationary, despite the handicap placed upon it by that basic inflationary influence,
too little revenue to match expenditures.
Mr. BLOUGH. The problem with which my statement is concerned
is the dilemma for policy that arises in a certain combination of circumstances. The circumstances are :

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1. An economy experiencing full employment or under inflationary
pressures .
2. A large Federal debt .
3. A considerable volume of refinancing or, what is worse, new
borrowing to be undertaken.
4. An excess of demands for loanable funds over the supply of loanable funds available from the voluntary saving of individuals and
corporations.
Now under those circumstances we have a situation much like the
parlor game of musical chairs in which there are more players than
there are chairs. There is more demand for loanable funds than
there is supply from the voluntary savings of individuals and corporations.
The difference is this : That in musical chairs there would be no
game unless there were more players than chairs, while in monetary
policy and debt management, the number of chairs and players must
be made equal by some method.
The central requirement in any solution to this problem is that all
of the Federal debt must be held by someone at all times, whether
by individual investors , corporate investors, institutional investors,
commercial banks, or Federal Reserve banks. That is a very vital
necessity in any thinking about this subject.
One method for achieving the equilibrium between the supply and
demand of loanable funds is to increase the supply. Any method of
increasing the supply of loanable funds, assuming a strong demand
for funds, increases inflationary pressures unless it is accompanied
by an addition to saving through contraction of spending.
This increase is greatest of course when new money that is bank
deposits, is created to increase the supply. This is the reason for
concern about the purchase of Government securities by the Federal
Reserve System, since this may add to the reserves of the banking
system and permit the expansion of bank deposits and the money
supply by several times the amount of the increase in reserves.
Since I am very deeply concerned with the problem of inflation,
I believe it is important to avoid the expansion of the supply of loanable funds as much as possible consistent with a high level of production, but I would like to stress the point that to say that the Federal
Reserve should not buy Government securities is no solution to the
problem, but only a way of raising the problem, because someone
must hold the securities.
The second method of bringing about an equilibrium between the
supply and demand of loanable funds is to allow interest rates to rise .
It may be presumed that at some point an increase in the rates
of interest will cause enough demand for loanable funds to drop out
so that the securities of the Government can be placed without requiring an expansion of loanable funds through the increase in bank reserves or otherwise.
There are two major questions here . One question concerns how
high the interest rate would have to go in order to cut down the private
demand for loanable funds by a sufficient amount to produce an equilibrium. I explain in my statement why I am rather skeptical about
the effectiveness a moderate increase in interest rates would have in
reducing the private demand for loanable funds.

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The second major question is what harm a high interest rate would
do. These matters are discussed in the statement, and I will simply
refer to them in the summary.
A third method of bringing about an equilibrium in the supply
and demand of loanable funds is to reduce their demand in other
ways than through higher interest rates.
The allocations and restrictions in connection with the shortages
of material imposed on civilian production , especially investment,
when combined with price control may cut down the demand for
loans to an important degree.
Price control itself, if effective, reduces the desire for speculative
activity and the need for large working capital. Voluntary creditrestraint programs bring the moral pressure of the whole industry
to bear on individual bankers and other lenders in holding down their
loans. And there are no doubt other methods of achieving this result.
In practice it seems likely that all three of these methods will be
used to bring about the equilibrium of supply and demand . Some
expansion in the bank loans and money supply can take place without
actual inflationary results.
Moreover, to the extent that inflationary pressures may develop
because of the difficulties of financing a large deficit in completely
noninflationary ways, it is possible to use the various other elements
in a general stabilization program to prevent inflation from actually
occurring.
The most helpful step, which would not solve the problem but
would be very helpful , would of course be to eliminate the deficit and
to achieve a budget surplus.
Mr. Chairman, that is the end of the summary of the statement which
I have filed with the committee, and in order to expedite the work
of the committee, I am ready for any questions that you may wish
to ask.
Representative PATMAN. Mr. Wolcott, would you like to ask any
questions ?
Representative WOLCOTT. No, thank you.
Representative PATMAN. Senator Douglas ?
Senator DOUGLAS. Not at the moment.
Representative PATMAN. Mr. Bolling ?
Representative BOLLING. Mr. Blough, I would like to get clear in
my own mind what would happen if the Treasury faced a substantial
refinancing or new issue if a percentage of that issue found no market
whatsoever .
Mr. BLOUGH. What has always happened in the past under those
circumstances is that the Federal Reserve System has come to the
rescue and has taken up the part of the issue which found no placement
anywhere else.
Representative BOLLING. What I would be interested in is what you
feel could happen if the Federal Reserve refused to move in and take
up that part of the issue.
Mr. BLOUGH. That would depend on the Congress. My own judgment would be that in an aggravated case the independent Federal
Reserve System might very shortly thereafter lose its independence
through adverse congressional reaction.
Representative BOLLING. You arrive at that conclusion very rapidly
but what I am trying to do is to clear in my mind the dilemma that

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257

would be faced . It is entirely a theoretical question because, as I
understand it, it has never happened, but what would the alternative be?
Mr. BLOUGH. To answer your question I would like to refer to the
developments between June of 1950 and March of 1951. While I could
approach your question without doing so , I believe it may be helpful
to deal with that period, since the same general problem is involved,
although of course that is not the question you asked.
Representative PATMAN . It was going to be asked anyway. Dr.
Murphy expected to ask you that question, so you may go ahead.
Mr. BLOUGH. It is the same point, one difference being that at that
time there was no new financing going on. There was, however, a
considerable amount of refinancing, with a weekly turn-over of bills,
of something in the neighborhood of $1 billion a week, and certain
other refinancing. We had a balanced budget, so the situation was in
that respect easier than it will likely be later on.
On the other hand, people were in the grip of a very powerful urge
to buy things. I can't stress that point too much ; there was a fear that
we were going into an all - out war, and a widespread desire to buy
things before supplies became short and prices rose. Individuals and
businesses bought in advance for later use, hoarding in some cases.
Businesses stepped up production and sought to increase their inventories. There was really a very tremendous pressure to buy things
and to get the funds with which to buy.
Now how could businesses and people get funds with which to buy
things under these circumstances ? Well, in the first place many of
them had their own funds. They had currency and bank accounts
which they could draw on. The economy was very liquid.
The velocity of circulation increased substantially during this
period.
That increase in velocity might have been considerably
greater than it was if funds could not have been secured by borrowing.
In the second place, it was possible to borrow from the banks, thus
adding to spendable funds through increasing the supply of money.
It is at this point that Federal Reserve action becomes important.
Suppose that the Federal Reserve had during that period refused
to buy any securiites from the banks. What might have happened ?
I would like to use a rather homely illustration which I hope will
clarify rather than obscure my point .
Suppose a thousand people urgently desired to go from Washington
to Baltimore. This represents the powerful effort to buy goods, which
I have mentioned . There are several roads to Baltimore . One of the
roads that enables people to go to Baltimore-to spend in buying
goods-is the action of the Federal Reserve in buying Government securities. This gives people spendable funds and at the same time
enlarges bank reserves, thus increasing the lending power of the banks .
We might say well, we will stop that road to Baltimore. But that
does not necessarily mean that the thousand people are not going to
get to Baltimore, because, in the second place , there would be the possibility that the banks, if they wanted to increase loans, would discount their paper with the Federal Reserve , that is, borrow from the
Federal Reserve .
Senator DOUGLAS. Short-term Government bonds ?

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Mr. BLOUGH. I am thinking of any of those kinds of assets which
the Federal Reserve will take for rediscount. I am not at this time
thinking about short-term Government securities but of any assets
of the bank on which the Federal Reserve bank will lend its money,
thereby increasing bank reserves and expanding the lending power
of the banks.
But the Federal Reserve does not have to discount this paper, as I
understand it. It could either say no to the member bank or raise the
discount rate to a prohibitive level . While that is quite possible so far
as abstract economics is concerned, we must not forget that in setting
up the mechanism of rediscounting Congress indicated that the purpose was to accommodate the needs of commerce and business.
Senator DOUGLAS. Yes, but Dr. Blough, I want to point out that
this might apply in the case of commercial paper but the Federal
Reserve was certainly not set up in order to provide a dumping
ground for short-term Government securities . Carter Glass was very
specific on that point in the debates.
Mr. BLOUGH. I have not said anything about short-term Government securities , Senator.
Senator DOUGLAS . As a matter of fact isn't it true from the testimony that Mr. Martin gave I think, that the increase in discounts
by the Federal Reserve had been discounts of short-term Governments,
not commercial paper. I believe he said that discounting of commercial paper had fallen into disuse more than he would like.
Mr. BLOUGH. That as a matter of fact I think is correct , but I believe
most of the banks hold adequate short-term commercial paper if
they wanted to use it as backing for their discounts, so that there certainly is this possibility.
But whether or not the basis for the discount is the short-term
paper or the short-term Government security, my point is this : That
the loans which were being demanded at that time were business loans
and that under the statute, an important function of the Federal
Reserve is to accommodate commerce and business. I am simply
suggesting the heavy pressures from the business community that
would be brought to bear upon the Federal Reserve if it refused to
accommodate commerce and business by discounting paper presented
to it by member banks.
But suppose the Federal Reserve was adamant and refused to discount the paper. Well, there is still another road to Baltimore, to
continue the illustration. The banks were holding then, as they are
now, large quantities of short-term Government securities, some of
which were maturing almost continuously. The banks could have
allowed these short-term securities to run off, demanding cash instead
of resubscribing, thereby increasing the amount of their cash.
Now that in itself would not increase their reserves , to be sure,
but it would increase the cash assets of the owners of the securities.
Senator DOUGLAS . How would the Treasury pay for these shortterm securities ?
Mr. BLOUGH. The Treasury would in that case be obliged to get
the funds wherever it could get them.
Senator DOUGLAS. Where would it get them?
Mr. BLOUGH. It could get them from one of two sources. It could
attempt in this period of tremendous pressure on the part of all bor-

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259

rowers for funds, to outbid the market for them and thereby get the
funds and pay them to the holders of the maturing securities.
Senator DOUGLAS . It would raise the interest rate?
Mr. BLOUGH. 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
it 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.
Now, perhaps the existing funds at the higher velocity would meet
the need for spending power, in which case, perhaps, there would be
no problem. But to carry my illustration to the end, it seems to me
very likely that on this road, which might be much too narrow, the
thousand people could become so involved in trying to get ahead of
each other as to cause a riot. In other words, if the Federal Reserve
had been adamant at all points, it may well be that a major financial
and monetary crisis would have arisen.
And if a major financial and monetary crisis arose under those
circumstances , either the Federal Reserve would come to the rescue
and straighten things out again as best it could at that late date, or,
to repeat my earlier thought, I wonder how long the independence
of the Federal Reserve System would be permitted to continue by the
Congress of the United States . This does not mean that Federal
Reserve open-market operations cannot be used with considerable
effect, or that the earlier adoption of the accord would have made
no difference in the inflationary movement. My point is that shutting off expansions in the supply and velocity of money is not an
easy or simple matter.
The same general line of reasoning can be applied to the kind of
situation which we might expect to face in the future, but with several changes in the circumstances. On the one hand, we probably
would not have that tremendous pressure for funds to support spending that we had during the months from July 1950 to March 1951 .
I certainly hope that we do not enter a period of that kind again.
If we do not, that will be a change on the good side. The situation
would be more orderly and more capable of being handled .
On the other hand, of course, a large deficit is anticipated . If that
deficit is realized , the problem on the financing side will be much
bigger than it was in 1950.
I do not think the dire possibilities that I have mentioned are at
all likely to occur, but to be logically complete we must consider them.
Representative BOLLING. As a matter of fact in this case all roads
do not lead to Baltimore. They lead to the Federal Reserve.
Mr. BLOUGH. All but one, and that is the road of increasing the
velocity of circulation . I do not think that road should be underestimated in an economy as liquid as our economy is with its tremendous
volume of currency and bank deposits, and the large amounts of near
moneys that are available. I do not think we should underesti-

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mate the effects of increases in velocity that might occur under the
pressure of tremendous desire for increased funds.
Representative BOLLING. Mr. Chairman, I have another question
which stems from that, but since this is a whole in itself, if any of
the other members had questions on this, I would like to see them
have the opportunity to present them at this time.
Representative PATMAN. Any comments ?
Representative WOLCOTT. I have a general question. I do not know
whether they want to answer it offhand or not, but I found myself
the day before yesterday at a loss in what I think Senator Douglas
characterized as a semantic wilderness .
I am just a plain unadulterated Member of Congress here without too much knowledge of economics, and most of the people's representatives are not educated in economics and financial matters . I
would hesitate to go back to my people and try to explain to them
the recommendations of the Council of Economic Advisers as to just
what we can do to stop inflation .
Now can somebody, either you or Mr. Keyserling or somebody representing the Council, in very brief understandable language give the
recommendations of the Council of Economic Advisers as to what must
be done to prevent further inflation, recognizing I think as we all
do that we do have inflation .
Mr. BLOUGH. Congressman, I would be glad to try. These comments represent my personal views, but I believe they are also the
views of the Council.
We look upon inflation as a problem of spending against supply,
spending being Government spending, consumer spending and business spending for goods and services, including building up inventories, buying new equipment and new construction, and so on. When
the spending is in excess of theRepresentative WOLCOTT. Wait just a minute. Let's not go into that
any further. I think we all recognize that as the problem. You have
stated in your last paragraph as follows :
In closing, I would like to repeat that monetary policy and debt management
are by no means all there is to the problem of economic stabilization or its
solution. The inflationary problem is one of holding down total spending, not
simply that relatively small part which is financed by increases in debt, public
and private. A well-balanced stabilization program using all the other measures
at the disposal of the Government should go along with a monetary and debtmanagement policy that itself should be to the largest practicable extent noninflationary, despite the handicap placed upon it by that basic inflationary
influence, too little revenue to match expenditures.
That to me is a statement of our problem . Now I want to know
what the Council suggests as a remedy, as a solution to the problem.
Mr. BLOUGH. I see I started my answer at too basic a level.
Representative WOLCOTT. Is it more taxes, is it less spending, and
in what fields can there be less spending and how can we increase taxes,
if that is the position ?
I would like to have you put one, two, three in simple terms your
recommendations as to what we might recommend to the Congress,
what we should do here as a matter of administration that will solve
this problem .
Mr. BLOUGH. I think you will find, Congressman Wolcott, that the
views of the Council have been expressed in the reviews of 6-month
periods, and they involve the following points in the program. First,

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261

there is spending. Obviously Government spending is very largely
the genesis of the problem at the present time.
Representative WOLCOTT. Why should it be ? Please explain how
Government spending affects the value of money?
Mr. BLOUGH. All the different kinds of spending put together—if
the total is in excess of the supply of goods when people are fully
employed, the demand being in excess of the supply drives prices up.
Representative WOLCOTT. Again, can we have an answer to the
question as to why spending on the part of the Government or why
deficit financing results in inflation ?
Mr. BLOUGH. I think that what happens is this. Suppose you had
a fully employed economy with the Government spending $40,000 ,000,000.
Then with the Government spending $40 billion , and with business
spending and consumer spending-all the spending added together
is taking all of the goods and services which all of the people are producing working at a high level of employment and a high level of
plant operations.
Now suppose that the Government undertakes an additional program, that involves, let us say $20 billion additional spending. This
$20 billion is used to buy goods and services of various kinds. It is
used to pay military personnel, to buy tanks, planes , food , clothing,
build military bases, and so forth .
That $20 billion is added to the spending that is already taking
place by the Government and business and consumers. But there is
no increase or very little increase in the supply of goods to meet this
increase in demand of $20 billion on the part of the Government .
Unless some way is found either to increase the supply of goods without also increasing consumer and business spending or to decrease such
spending, we will inevitably get an inflationary pressure.
Representative WOLCOTT. That is fundamental . Now what do you
suggest is the remedy ?
Mr. BLOUGH. Since increased expenditures give rise to the problem,
if it were possible to reduce expenditures, as I said beforeRepresentative WOLCOTT. What does the Council recommend by way
of reducing expenses ? In what field do we reduce expenses ?
Senator Douglas has said every time we try to cut expenses, from
the White House down we have a barrage of protests, so that apparently is not the practical solution so long as we are going to be faced
with executive opposition, that probably is not the practical way of
solving this problem .
Mr. BLOUGH. There has been a good deal of reduction of nondefense
expenditure in the past 2 or 3 years. It is possible there could be more.
The very large part of this problem, however, is in the military side.
Representative WOLCOTT. You say it is possible. What can you
recommend in that field to us ?
Mr. BLOUGH. I am not qualified to make recommendations in the
military field . I am sure you will find plenty of people who will
recommend specific points to cut.
Representative WOLCOTT. People in Government ?
Mr. BLOUGH. Some people in Government but no doubt mostly
people outside of Government.
The budget process, Congressman Wolcott, as you know cuts down
the request for appropriations and expenditures by many billions of

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dollars before these programs ever get to the Congress, so that all
of the work which has gone before to cut down and hold down expenditures never is observed by the general public, which sees only the figure
that is presented to Congress, and which always looks larger in total
than anyone would wish.
Representative WOLCOTT. It is getting larger and larger all the time.
Mr. BLOUGH. The only figures that are getting larger and larger are
the military expenditure figures. Even the military appropriation request figures are lower this year than they were last year.
Representative WOLCOTT. But still we have inflation .
Mr. BLOUGH . We have inflation because
Representative WOLCOTT. We are raising more money than we ever
raised before.
Mr. BLOUGH. But we are not raising enough to meet
Representative WOLCOTT. Is that your point, you have got to raise
more by taxes ? In other words, have we got to continue throughout
the next 8 or 10 years to siphon off inflation through taxation , and if
so where do we reach the saturation point ?
Mr. BLOUGH. My point is that the source of the problem is in military expenditures, and the amount of those expenditures is determined
to an overwhelming extent by forces pretty much outside our control.
Representative WOLCOTT. That contemplates a continuance of
debtMr. BLOUGH. Not necessarily, sir. Higher taxes can prevent an
increase in debt and also reduce inflationary pressures . In order to
cut down private demand , the most positive way is of course to take
funds out of the private economy through taxation.
This has the advantages that it pays the cost directly , immediately
through taxes, does not add to the debt, and does not give rise to some
of the problems we have been talking about.
It cuts down on private spending, and that is the natural and normal
way for cutting down inflationary pressures growing out of governmental spending. It has been the accepted way used in the United
States throughout our history.
Representative WOLCOTT. Now at what point in this tax structure
do we arrive at the floor of diminishing returns due to a discouragement of production expansion to keep pace with our expanding economy?
That is the problem and the thing that has bothered me. If industry, individuals, agriculture have to get their capital out of earnings,
how much of their earnings can we take before we destroy the capital
structure which is the foundation that has built this production expansion, which we all agree is necessary to keep pace with an ever
expanding economy ?
Mr. BLOUGH. You ask for the point of diminishing returns for the
tax system as a whole. I don't know the answer to that.
Representative WOLCOTT. I think you should find the answer. Unless we just give encouragement to a lot of the platitudes in respect to
the desirability of siphoning off this inflation through taxation , I
think we had better find out before we go any further as to whether we
perhaps have not reached the point now where we are discouraging
production expansion to keep pace with our expanding economy, because if we have done that then, of course, any increases that we have
legislated in taxes last year and in the future under your 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. BLOUGH. 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 want to get away from that idea. I
think the Council of Economic Advisers should put in a very orderly
manner and very simple terms their recommendations as to what the
Congress, what the Federal Reserve, what the Treasury and all the
rest of them, should do to prevent inflation . I think that is what we
are here for.
Mr. BLOUGH. I would like to follow up on the point about the limit
of taxes. I said I do not know where that limit is, but I intended to
go on immediately to say that there is no evidence that I can observe
at the present time that during this period of very large Government
spending we have reached or in any way closely approached the limit
with regard to the burden of taxes in general .
There are two kinds of problems. One is the distribution of the
burden, the other is the total burden.
Neither the distribution nor the total burden seems at the present
time to be interfering with the accumulation of large amounts of
funds by businesses, the reinvestment of those funds in businesses ,
and a very high level of industrial growth and expansion . The signs
are not there that taxes are interfering with the growth of the
economy.
Now, certainly we must have in mind the danger that they might
interfere with the growth of the economy, and I am not saying that
if the expenditures were to be greatly reduced the present level of
taxes would not interfere with the growth of the economy.
Representative WOLCOTT. Do you think we are getting enough production now to meet nondefense demands and the military demands ?
Mr. BLOUGH. The increase in production is not being limited by
the willingness or financial ability of business to expand. There are
always exceptions, of course.
In the soft-goods industries there could be somewhat greater production if consumer spending were higher. In the hard-goods industries materials also are an important factor limiting production . In
the defense industries there could be a somewhat larger and more rapid
increase of production if plants and facilities were more quickly available. They have to be constructed . There are some important
shortages.
Representative WOLCOTT. You have got facilities in the automotive
industry to produce at least 40 percent more than they are producing
now. You have a very serious unemployment situation in Detroit
and in some other areas in the United States.
We can't convince any of the members of the CIO or the AFL
out in Detroit that something serious is not happening to them .
Mr. BLOUGH. Congressman Wolcott, until we have reached the
point where we have an adequate supply of these materials, we will
have to shut down somewhere. In other words, this is a process of
diverting-Representative WOLCOTT. Now you bring up the availability of
materials. We are told repeatedly that the big bottleneck is in cop-

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per and there isn't any particular shortage of sheet and wrought steel.
Warehouses are so full of it that they have difficulty finding places
to store it.
Mr. BLOUGH. It seems to have been discovered only in the last
couple of weeks, and only in some specific items.
Representative WOLCOTT. It was discovered by me last fall. A
Toledo warehouseman came to me and said, "We don't know where
we are going to put another ton of steel. We can't dispose of it. "
There are a lot of steel warehousemen out there who are finding it
difficult to warehouse this steel. They would like to move it into
industry, and the men employed in industry would like to have this
steel moving into industry, but that is an entirely different situation .
It is a little outside the scope of our discussion here, perhaps , but
you haven't come up with a suggestion yet. What is the one phase
of your program that you would recommend to stop inflation ?
Mr. BLOUGH. I have already talked about two methods that are
involved in inflation .
Representative WOLCOTT. Taxation ?
Mr. BLOUGH. That, of course, is a very fundamental method, and
some people think it would be enough all by itself.
We have recommended credit restraints ; both the general control of
credit and specific methods of restricting the use of credit in purchasing durable goods and new houses and in stock market operation .
Representative WOLCOTT. As to discounting, the Federal Reserve
has all the authority it needs in that field, and they have not been able
to agree yet on recommendations with respect to increasing bank
reserves . As a matter of fact, I think Mr. Martin indicated that
increased reserve authority probably would not be advisable.
I know here a few months ago when we asked him about the reserve
situation, whether they needed any additional legislation, they could
not agree as to the advisability of it or how much, so it seems as
though somebody has abandoned the idea of shutting off credit by
either arranging rediscount rates, reserve requirements, and yet they
all admit that the pressures on inflation have been lessened by the
actions taken in firming up our money policy.
And I think it is quite generally agreed that if we do not do something to firm up the dollar here, pretty soon it is going to have an
effect upon the world economy, and I might say, to be a little dramatic
about it, this world has no hope of peace unless the American dollar
is firmed up pretty quickly.
Mr. BLOUGH. Let me proceed with the list that you have asked for.
Firming up the American dollar is stopping inflation, that is all.
One of the methods of credit control is the increase in reserve
requirements. The Council has favored an increase in reserve requirements.
Another method is the allocation of materials to those needs which
are most important. Such allocation is desirable not only for promoting the defense effort and for building up the productive power
of the economy but it is desirable also to prevent the pressure of
competing demands in the markets by businesses trying to get these
materials and bidding the prices way up. So allocation and priorities
is an important anti-inflationary method.
Another method of restraining inflation, of course, is the direct controls, price control and wage controls, which were put into effect a

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265

year ago this last January, and which were, I think the turning point
in this inflationary movement.
Representative WOLCOTT. You say that the Federal Reserve
takes the attitude that bonds issued ought no longer be monetized,
increased its rediscount rates, and discovery that to support the Government bond market above par was inflationary, so they discontinued
that.
They maintained that that was the cause, but you fellows in government, if you can't get together on the causes of inflation, how do we in
Congress expect to solve the problem ?
Mr BLOUGH. I don't think there is any inconsistency.
Representative WOLCOTT. We have had this controversy between
the White House and the Treasury on one side, and the Federal Reserve on the other, as long ago as the Douglas committee met . We got
together, I thought, in a pretty good way.
As a matter of fact, Senator Douglas surprises me. When he first
came into the Senate here I had some pretty crazy ideas, I find now,
about what his policies might be.
Senator DOUGLAS . You are becoming a better Democrat every day.
Representative WOLCOTT. We are getting so close together that I
am either becoming a better Democrat or you are becoming a better
Republican . Anyway, we found ourselves so closely together in that
report that instead of filing a minority report I just dissented to some
minor technicalities in a few footnotes.
Yet we recognized this same problem 21½ years ago. We thought
that by cracking some heads together we might be able to get somewhere, and I do think we had some executive sessions between the
Treasury and Federal Reserve, and two years afterward they met
their accord.
I would like to think that the accord machinery was started at that
time. Two years afterward they met in this " accord." What further
should be done in addition to that accord to stabilize our economy,
stabilize our money ?
Mr. BLOUGH. May I clean up one or two loose ends that have gotten
away in the previous discussion ?
I said I thought it was the imposition of the wage and price controls in January of 1951 that was the turning point. Before that time
there was a tremendous psychological churning, a mass movement
of demand for goods.
People had been talking about price and wage controls . There was
an expectation that they would be put on. Prices were being pushed
up, not only because of demand and supply factors, but in order to
get ahead of whatever the control would be.
Wages had been pushed up also for the same reasons. There was a
fever in the air. The price and wage freeze did , I think, put a
psychological freeze on the public mind.
It was then discovered that inventories had been built up very
rapidly, that war shortages were not going to be felt as soon as had
been anticipated, and that instead of shortages there were plenty of
things to be bought . The Federal Reserve action, which came about
the same time, unsettled the investment side of the market, and I think
all of it worked together toward quieting down the inflationary
movement.

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In my opinion, the turning point in this movement was the freeze
of prices and wages in January, but I do not think that view is inconsistent with recognizing a measure of benefit from the action which
took place a little later on by the Federal Reserve .
Representative WOLCOTT. I do not want to take any more of the time
of the committee, but I do wish that I could have an answer to my
questions.
This committee is trying to work very closely with the Council of
Economic Advisers. Make some definite suggestions as to what we
might recommend to the Congress in our report by way of a program
which will stop this inflation. If you do not, the value of the dollar
having already dropped 6 percent in the last 18 months, with the impact on defense spending coming up sometime in the next couple of
years, we can anticipate over the next 3 years a further drop in the
value of the dollar of about 12 percent, bringing the value of the dollar
down to 40 cents .
That is the problem we are confronted with here and we have to
find a solution to it. I think you owe it to us members who are not
ecoonmists who find it rather difficult to understand what you are
talking about, to put in very simple terms what we can do to stop
inflation .
Mr. BLOUGH. May I say that I do not share alarmist expectations
about further rises in prices.
It seems to me our adjustment to the military program is fairly
nearly completed. I do not anticipate the kind of increases you have
suggested.
Representative WOLCOTT. Right there, do you think that in the next
2 or 3 years that we are not going to have any more inflationary pressure than we are having at the present time ?
Mr. BLOUGH. I did not say that.
Representative WOLCOTT. What was the import of your remark ?
Mr. BLOUGH. The import of my remarks was that my hope, my
expectation is that we will not have serious inflationary pressure.
Representative WOLCOTT. What is your opinion ?
Mr. BLOUGH. My opinion is of course no one knows what is going to happen - we will not have nearly as strong inflationary pressures over the next 2 years as we have had in the last 2, assuming no
international flare-up .
Representative WOLCOTT. Are the pressures going to be greater or
less than they are at the present time ?
Mr. BLOUGH. At the present time we are in a rather-the word
"lull" has been used. I have used it myself. There is a sideward
movement in business. I am somewhat disturbed about the impact
of the deficit which will begin to show up in new borrowing before
very long.
Representative WOLCOTT. That is what I had in mind. If we continue this policy tying the value of our money to debt, we might expect
we will have to indulge in deficit financing between $10 and $20 billion
in the next 3 years, with the influence deficit financing has had on the
dollar, then how can we avoid further depreciation in the value of
the dollar ?
Mr. BLOUGH. In the relation to the total budget, those amounts will
not be nearly as large as they may seem in absolute terms. But the
Council has indicated the desirability of higher taxes.

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Representative WOLCOTT. You recommend that we raise taxes by
$10 billion ?.
Mr. BLOUGH. No. If I recall correctly , we recommended that taxes
be raised by about $ 5 billion at this time. There can be some noninflationary borrowing.
Representative WOLCOTT. You would still have deficit financing by
$5 or $6 billion .
Mr. BLOUGH. Suppose the deficit should amount to as much as
$142 billion, which is the figure in the budget . I don't know how
much it will be ; that is pretty far ahead to look. The budget has
to look far ahead.
Suppose the deficit amounted to $ 14½ billion . About $4½ to $5
billion is received by the trust funds in excess of the payments from
the trust funds. That leaves roughly $ 10 billion.
If Congress accepted the President's recommendation for an increase in taxes of $5 billion , that would leave $5 billion to be borrowed
in the open market.
Senator DOUGLAS. Why not cut expenditures by $5 billion ?
Mr. BLOUGH. If Congress decides that can safely be done, I would
not object.
Senator DOUGLAS. What I very frankly object to in the report
of the Council of Economic Advisers is that it did not indicate the
need for cutting expenditures. I know it is difficult for one branch
of the executive to criticize the actions of another branch of the executive, and so I can quite well understand the difficult position in which
the Council was placed.
But if you offered advice to Congress as well as to the Executive,
which I understood Mr. Keyserling said he regarded as a proper
function of the Council, we would like to have you offer advice to
us with that same degree of frankness which you undoubtedly exhibit
to the Executive.
Representative WOLCOTT. Will you put in the record language
which I can understand as to your recommendations ?
Mr. BLOUGH. We can try again, if you wish, Congressman Wolcott,
but I think if you will examine the answers I have given to your
questions during the last few minutes, you will find that I have given
a list of measures which, if adequately followed through, would bring
this inflationary pressure under adequate control.
Senator DOUGLAS. Is this a cruel question ? In your capacity as an
adviser to Congress now, do you advise Congress to cut expenditures
by $5 billion or would you prefer not to answer ?
Mr. BLOUGH. I always like to answer your questions, Senator, whenever I can. Let me say that I consider myself completely at liberty
to discuss with Congress economic trends and developments, the effects
and implications of governmental policies, and the different ways
in which various policy objectives can be achieved. I am very pleased
to have an opportunity to do this, and I try to do it in as objective a
manner as my basic attitudes permit. However, in view of the budgetmaking process, a definite recommendation on expenditures, it seems
to me, is advice that I can more properly give to the Executive than
to Congress.
Senator DOUGLAS . I want to say there is no moral wrong attached
to your not advising us on this matter.
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I would like to point out moreover that this is the situation which
we are placed in : that the Council of Economic Advisers when it offers
advice to the Congress does not ever feel it can offer advice contrary to
the recommendations of the Executive .
I think we have now put our thinking on an extremely important
point of Government structure, which means that once the decision
is made by the Executive, the Council of Economic Advisers, whatever
advice it may have previously offered, the Executive then cannot go
contrary to the decision which the Executive has taken and Congress
therefore has to proceed on its own.
Representative BOLLING. Isn't there another factor involved there ?
The Council of Economic Advisers is not the agency that advises the
Executive as to the level that is necessary for military expenditures.
Yet its problem when that level is in its judgment going to have the
effect of seriously damaging the economy , it then would come within
its perview to indicate that the level of expenditures was damaging to
the economy, but to that degree they are not the agency that makes
the decision by any means.
Senator DOUGLAS . That is correct, it is the President who makes
the decision.
My point is that once the decision is made, then the Council of
Economic Advisers apparently cannot offer to us the same frank advice which I hope they offer to the President.
Representative BOLLING. But they could be considered to be in a
position of having indicated implicitly that they did not think that
the economy was going to be damaged by a controlled deficit of $5
billion. There could be very serious areas of disagreement in that.
Senator DOUGLAS. That is right.
Mr. BLOUGH. I am prepared to say that I think there is no serious
problem in managing a cash deficit of $5 billion under these circumstances.
Representative WOLCOTT. They should be a little more explicit in
their recommendations .
Senator DOUGLAS . Well, Congressman, as you know, Senator Benton and I have prepared a supplemental opinion to the report of the
congressional committee proposing a reduction in expenditures of
7.6 billions and an increase in revenues of 2.4 billions to balance the
budget. I hope we can get your support.
Representative WOLCOTT. You surely can on the reduction of expenditures. I might have to take another look at your recommendations to increase taxes.
Senator DOUGLAS. With the reduction in expenditures that would
leave a deficit of about 212 billion, and if a deficit of 5 billion does
not seem too serious to Mr. Blough, I am sure a deficit of 2.5 billion is
only half as serious.
Mr. BLOUGH. It is less than half as serious in my judgment.
Senator DOUGLAS. This is a very grave question . I do not know
that it is the fault of the Council, but I think it indicates that the
Council in the political nature of events becomes primarily an adviser
to the President, and cannot be as frank an adviser to the Congress .
Representative BOLLING. Perhaps, Mr. Chairman , it would not be
inappropriate to suggest that the chairman of the Council comment
on that.

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Representative PATMAN. Yes ; I think it would be a fine thing.
Would you like to, Mr. Keyserling ?
Mr. KEYSERLING. Yes ; I would like to comment.
Representative PATMAN. Suppose you pull your chair up next to
Dr. Blough. We would like to have your comments.
STATEMENT OF LEON H. KEYSERLING- Resumed
Mr. KEYSERLING. Yes, I want to comment on two things. First, on
the question that Senator Douglas has raised as to the role of the
Council, and whether or not it is in a position to express itself frankly.
Senator DOUGLAS . Frankly to the Congress that is.
Mr. KEYSERLING. Tothe Congress, and second on the question raised
by Congressman Wolcott, which I think is very pertinent.
As to the first question , I have always felt that I should comment
as frankly to the Congress as to the President.
I have always felt that if the President on any fundamental
matter of economic policy which as a public servant of integrity
I felt departed from my-I am using the personal pronoun here because I do not want to involve my colleagues in this-I have always
felt that if the President in any recomendations which he made to
the Congress on economic policy departed from the advice that we
gave to him to the point where a public servant of integrity felt that he
was fundamentally repudiated, that such public servant ought to
resign and not give the color of his approval to the recommendations
of the President.
Now of course that involves questions of degree. Nobody would
claim that a man of integrity in the Government service resigns every
time the President adopts some variation from his suggestion, because
that is the proper nature of the Presidential office.
But I have felt that basically on major matters people in our position
are really in no different position from an adviser in another field , in
the field of international policy, in the field of what is needed to protect
the country , and that we should stand before the Congress in the same
light that we stand before the President as men of integrity willing to
support anywhere advise that we give anywhere, insofar as it does not
violate confidence.
Now coming to the second point—if I have not covered that point
fullySenator DOUGLAS. Let me listen before I ask a question.
Mr. KEYSERLING. Now coming to the second point, the second point
has to do with the Economic Report submitted to the Congress in January which set up certain proposals with respect to the disposition
of our resources between public spending and private endeavor, and
that gets into the substantial question, Senator and I will try to be
very frank with you on that the question of public spending and
the deficit.
My view is that an inflationary situation is caused when an effort is
made to use our total resources more rapidly than resources are
available for their use. That effort is made through spending.
Consequently the inflationary pressures increase as the effort to
spend increases faster than production increases, and I think that this
is implicit in the general definition here of inflation , trying to do too

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much too fast, trying to take more out of the economy by way of enjoyments than the economy is producing by way of goods and services.
And that is why I have always believed, and I think Congressman
Wolcott would agree, that in the long run the solution to the inflationary problem is to do as much as you can to expand your output,
use your technology and not cramp it through excessive controls .
Now in the short run, after the middle of 1950 , I would say that the
inflationary situation rose for these reasons, and I covered them in the
beginning of my prepared statement :
The Nation was trying to do three things , three basic things : Use
resources for the building of capital equipment by private industry.
That is what I refer to as investment in the broad sense.
Use resources for consumption, which is the second great purpose,
and use resources for Government outlays, including an expanding
security program, which is the third great purpose.
I think the inflation occurred because the Nation was trying to use
resources for the total of those three purposes in excess of what the
economy would support at its then available productive capacity and ,
consequently, well, there are lots of ways you can state it. You can
say demand exceeded the supply, or the effort to spend money exceeded
the available flow of goods, and that caused the inflation .
Now the way to deal with that situation in the final analysis gets
down to one thing. Until you can solve the problem through production, which you can't in the short run, you must cut the demand.
Now the next question is where do you cut the demand, and it is
in the approach to that question of where you cut the demand that
I begin to make some suggestions which are rather novel to some
phases of economic thought, although they are I at least think sound.
When a government undertakes through a series of policies to cut
demand, it must consider national priorities. That is the essence of it.
When the Government is undertaking to cut demand, whether
through a cut in public demand through the reduction of public outlays, or through a cut in private demand through higher taxes, or
through a cut in private demand through reducing the volume of
house construction, it must consider national priorities.
In other words, it can't say that as a matter of national priority
the appropriate first cut in demand is always public outlays.
Now I think as a general statement this is self-evident, because
otherwise you would say we should cut the defense program to zero
before we attempted to make any cut in private demand through
national policy, and nobody would say that. So it comes down to
a matter of the priorities which the Congress as the ultimate arbiter
of national policy wants to apply in cutting down demand.
It has been my personal view that far from-I do not want to introduce a political note in this far from cutting Government spending being a hard thing, I think there are some harder things politically
than cutting public outlays for national defense , and I think personally that some of those harder things are what might well be
considered in this situation .
For example, it seems to me that the level of general consumption
by the American people in 1950 and 1951 was too high as measured
against our resources and what it seems to me we need to do to help
make our contribution to world security. Therefore, since you asked
for frank advice and it may be wrong-I will give it to you.

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271

I think the first thing that should have been considered constantly
from 1950 until the current time is whether there should not have
been more of a cut in the level of consumption . Now, that is not
politically easy to do, and I am not giving youSenator DOUGLAS. How would you do that, through an increase in
taxes ?
Mr. KEYSERLING. A variety of ways. I think an increase in taxes
is very important if the taxes are imposed at the right points.
Representative WOLCOTT. Rationing?
Mr. KEYSERLING. I do not think the shortages were great enough to
entail the administrative difficulties of rationing. If the shortages
were great enough, yes, but I do not think they were.
Representative WOLCOTT. They have not developed yet ?
Mr. KEYSERLING. No, sir, not to that extent but I would say that the
first thing that I would advise you-of course, that is predicated on a
judgment noneconomic in character as to whether the world situation
calls for a big security program.
Senator DOUGLAS . Dr. Keyserling, what about the possibility of a
reduction in governmental expenditures ? Can you say that every
dollar is necessary to national security ? What about wastes in the
civilian branch and what about wastes in the military branch ?
Mr. KEYSERLING. I think I am addressing myself to that problem
and will cover it a little more fully, but I am saying one cannot automatically say, since the problem is one of national priorities-and I
think that proposition is incontestable-that by definition you should
make all of the reduction to the level of total demand which can be
supported by the output of the economy in reduced public outlays
before you consider reduced private outlays.
Now, if you have an economy which is producing $320 billion of
goods and services and $200 billion of that, roughly, is in personal
consumption and $60 billion of it or $70 billion of it, roughly, is in
public outlays, and $50 billion or $60 billion of it, roughly, is in
private gross capital formation, I think you have to look at all three
of them and to say in terms of the priority of our national purposes,
admitting that you have got to cut somewhere and probably cut everywhere, what types of cuts will do us the most good and the least damage
in the long run.
Now, by those criteria-and I do not think the criteria can be
seriously challenged-I would say where we have made our greatest
error thus far is in trying to be too easy on cuts in consumption.
And that I would feel that we were safer as a nation and still adequately supplied with the good things of life if we cut a little more
heavily on that before we cut too heavily on foreign aid and the defense
program.
Senator DOUGLAS. You would favor an increase in taxes more than
a reduction in expenditures ?
Mr. KEYSERLING. I would not automatically assume in terms
of true economic and national security that a cut in the amount of our
resources going into security was preferable to a diminution of our
resources going into consumption.
Senator DOUGLAS. Are you defending the position that there is no
waste in Government ?
Mr. KEYSERLING. No, but I think there is waste also in private
outlays.

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Senator DOUGLAS. I understand, but we have little control over private outlays and lots of control overMr. KEYSERLING . You have tremendous control over private outlays ..
Take the question of capital formation. Now, as a matter of fact,
Senator, when you identify as one of the main areas for economic policy
this monetary policy, that is directed toward contracting the availability of funds for private outlays. It does not affect the volume of
public expenditures.
The volume of public expenditures is determined by appropriations
and authorizations by the Congress, so you yourself have identified
the importance of private outlays in this inflationary situation. Now
I am saying this
Senator DOUGLAS. I do not want to use this verb, but why do you
move attention to everybody except the governmental budget which
is before us ?
Mr. KEYSERLING . I am not moving attention awayRepresentative BOLLING. Mr. Keyserling, before you proceed , I
would like to interject at that point. I do feel very strongly a rather
exaggerated amount of attention is paid to Government expenditures
as opposed to the attention paid to these other approaches.
Mr. KEYSERLING. I want to carry it a little further, Senator , and
I do not think that either my originally prepared statement or what
I want to say now goes against the point that you should attempt to
squeeze waste out of Government outlays, and I want to say a little
bit more about that. But I am trying frankly to answer Congressman Wolcott's question.
I am saying that , begining in the middle of 1950 we had an inflationary situation because we were trying to do three things in total
too fast against our resources.
The total of business invesment, of public spending, and of consumption was too high, and the only way you could have avoided the
inflation and the only way you can avoid its recurrence is not letting
the total of those three things get higher than our resources can
support. And you have got to face that problem.
Representative WOLCOTT. Wasn't the overproduction between
Korea and 1951 due largely to the threat of allocations ?
Mr. KEYSERLING. I did not indicate an overproduction.
Representative WOLCOTT. I thought you did.
Mr. KEYSERLING . Overbuying .
Representative WOLCOTT. I have been under the impression that you
have all agreed more or less there was an overproduction in the first
8 months succeeding Korea, which filled up our inventories and filled
up the pipelines to the point where the impact of defense spending
was not felt.
Mr. KEYSERLING. I think there was an overaccumulation of inventories, certainly.
Representative WOLCOTT. Then there was an overproduction, wasn't
there ?
Mr. KEYSERLING . Well, there was an overultilization of resources for
that purpose. I think if those resources had been used instead to build
more plant capacity or to build more end fighting weapons, we would
have been better off, yes.
But the point I am making is, let us take the business investment as
one example of it. One of the very important factors in the inflation

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273

during the time that prices were moving upward-and I would like
to say something about the question of whether we are still in that
situation—we had in the first half of 1950 a $44 billion level of business
investment. We had in the second half of 1950 , as I recall , a $54 billion annual rate.
Now, of that $54 billion in business investment, $512 billion was net
inventory accumulation, which was too high. You take that off, you
have still got $481
/
2 billion, which was very high.
Now I say that one part of the problem of controlling inflation was
to consider as a matter of national policy whether the allocation of
resources to that purpose, which I consider one of the three sides of
the triangle, was too high on some scale of national priorities. I
think you have to have a scale of priorities whenever you start cutting
anything.
I am inclined to think it was. In other words, I think for example
that a million and a quarter houses in 1950 , 1,100,000 houses in 1951nobody knows better than Congressman Wolcott that I am a housing
enthusiast, but I think measured against our total resources in that
period, that it was too much, and I say that I would rather see that cut
some more than to see our defense build -up cut.
Representative WOLCOTT. Yet you found in the economic report that
we would have to produce , what was it , a million and a quarter houses
for the next 10 years to meet the normalMr. KEYSERLING. That was an estimate of the need for high-level
employment prior to the emergence of this new defense situation ,
Congressman .
Representative WOLCOTT. You found also it should be cut to 800,000
or 850,000 this year, but you insisted - talking now about cutting Government expenses-that the same number of public housing units be
constructed under an 800,000 unit program that you built last year
under 1,100,000 .
Mr. KEYSERLING. As I recall, Congressman , the number of publichousing units per year is somewhere in the neighborhood of 50,000
or less, and the very point I would make on this is that as you cut the
total product, you have to consider more closely the priorities of
national need.
Representative WOLCOTT. Wait, we should not have gotten into this,
but do you think the Government can build houses with less material
than private enterprise ?
Mr. KEYSERLING. I think when you cut the housing output from a
million and a quarter a year to 850,000 a year or 600,000 a year, you
have got to be even more careful that the very limited supply goes
where it is needed most.
Representative WOLCOTT. You say it is needed most in public housing or private housing ?
Mr. KEYSERLING. I would say that workers moving into crowded
defense areas are less likely to be suitable to home ownership and to
paying the current costs of home ownership and current rentals of
privately built housing than the mass of the population which is
necessary to consume a million and a quarter units of housing.
Representative WOLCOTT. I wish you had not brought up this question of housing.

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Senator DOUGLAS. I was just about to say that this beautiful friendship which has been sprouting between us is now being strained to its
very limits.
We will give a little relief to the hard pressed Keyserling for a
moment to say we contemplated the level of public housing for the
slums a little over 200,000, and the total housing production of 1,250,000 units . Now we have accepted a cut to 50,000, one- fourth of
this figure, when the total number of private units goes down from
1,000,000 to 750,000 . We have accepted a cut of 80 percent where there
has only been a cut of 25 percent on private housing.
Now you would like to abolish this completely. You live in a beautiful residential city in between the Lakes there at Port Huron, but you
go into any major city in the country and you will find the slums
rocking the population away, so on this point please , Jesse, don't
disturb this new found alliance between us.
Representative WOLCOTT. I want to mention that this mansion in
that very beautiful city is almost a mile away from the river, and it
probably would be comparable to many of the slums in other cities. I
find it difficult to maintain a $5,500 valuation on it.
Senator DOUGLAS . I would suggest, Jesse, if we want to keep in
closs alliance on this matter, don't push Mr. Keyserling too far on
this public housing.
Representative WOLCOTT. He says in his economic report there
were 75,000 started last year and there should be the same number of
public housing start this year, although he is cutting the over-all
production of housing units from 1,100,00 to 800,000 .
I can't reconcile the fact that percentagewise it should be a greater
percentage of public housing units this year than there was last year.
Mr. KEYSERLING. Congressman Wolcott, I have been talking about
the allocation of scant resources, and for the benefit of some of the
Members of Congress who have not been here as long as you have, I
just want them to know that you and I discussed this housing question
at considerable length at various times.
Representative WOLCOTT. 1937, 1939, and then it went to sleep
until the Eightieth Congress came in.
Mr. KEYSERLING. I will come back to the housing thing, but I would
like to spend a minute on the general idea I was developing and
addressing to the Congressman's question.
I am simply saying that, when we found we had a new security burden, the size of the security burden, the pace at which our private capital formation was proceeding, and the pace at which consumption was
proceeding, was during that inflationary period higher than we could
support. We could not do all those things at once so fully.
Now I think that insofar as the Congress is dealing with national
policy, is has to decide on a basis of priorities which things it is best
to cut first or to exercise pressure to cut first in the interest of the
Nation.
Now I am perfectly willing to admit, as a believer in the enterprise
system, that where other things are equal, you should cut Government
spending first, because other things being equal, if you can accomplish
result A through private spending or through public spending, you
cut the public spending first.
But all public spending is based on the theory that you are accomplishing certain things in that way that you can't accomplish through

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275

private spending. That is the only justification for any public spending.
Therefore I say the basic question that has to be decided is what do
you think we can better afford to cut, the amount of resources being
consumed by the security program, the amount of resources being consumed by the industrial build-up, or the amount of resources being
consumed by 155,000,000 consumers generally. That is the first issue
of national policy.
Now when you address yourself to that issue, then you have the
next question : How do you do it ? And that is where you get to the
tools.
Now I happen to think we should have placed more restraint upon
$54 billion of capital formation, for one thing.. What are the tools
available for that purpose ?
Well, taxation is a general tool that helps to do that, and consequently we were in favor of higher taxes.
Specifically, the so-called selective controls are another method of
doing it, and that is why we were for some of the selective controls
to cut down on the volume of housing.
Allocation of materials is another way to do it, and that is why we
were for some of the allocation controls, again to cut down on the
volume of housing and some other nonessential things.
So much for the business side. You have taxation, you have allocations, you have limitations on the use of materials, and you have this
tool on which Senator Douglas has placed emphasis, and I want to say
again that I think that is a tool that can be used in moderation to cut
down on excessive business boom.
The only point I made about it is that if you push it too far, you are
likely to cut down on the general increase of production or the general
expansion of productive facilities on a nondiscriminating basis.
Senator DOUGLAS . Is this a cruel question, Mr. Keyserling ? If so ,
I do not wish to play the part of Torquemada, but do you advise reduction in the total expenditures of the Federal Government ?
Mr. KEYSERLING. Let us take that bit by bit. Senator, one of the
thingsRepresentative WOLCOTT. You mean these are the trees in the semantic wilderness now ?
Mr. KEYSERLING . No. One of the things that stirs me on this is •
that I read with enormous admiration the Senator's article in the New
York Times of a few weeks ago, and and first few pages of that
particularly, pointing out the size and pace of the Russian military
build-up. The more recent figures which have come out point to the
fact that they are putting 30 percent of their more limited resources
into a military build-up, and all the cogent arguments which you there
advanced make me feel that the allocation of our resources to national
security is not too high against our wealth and strength as a nation.
Now think that is a separate question from the question of waste.
I think that if by specific examination you can find that the amount
of national security which is being produced for $ 50,000,000,000 or
$55,000,000,000 can be produced for $40,000,000,000 or $45,000,000,000 ,
of course that should be done, and I commend the Senator and I commend Congress and I commend anybody who is trying to do that.
But I do not think that this is the same thing as saying that we
can get along with less security or that automatically a reduction of

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funds allocated for security from fifty or fifty-five to forty or fortyfive is going to produce that kind of economy. It may just produce
less security .
I think they are two separate questions in the field of national
security just the same as in the field of private outlays. My basic
position is that I do agree that through better procurement policies,
better scheduling policies, and more intense pressure on the part of
the Congress, which I applaud, that the military can get a lot more
per dollar spent, and that if they got a lot more per dollar spent, they
could get a given volume of security with several billion dollars less.
But that seems to me to be confused with the quite separate question
of whether we are allocating too much of our productive resources to
national defense. There you can't apply an economic judgment.
You might call it a policy judgment, you might call is a subjective
judgment. There I happen to feel that we are not ; and that, on the
contrary, what we are not foregoing enough of is in civilian enjoyments on a lush level and all kinds of private capital formation , and I
would regard that as a very important guide to policies in these times.
I would like to see more efficiency and competence in the security
outlays combined with a larger net allocation of our resources to security in the broader sense, because I think we can do that without
carrying the consumption level of 155,000,000 people below very wellsustainable levels, and without carrying business development below
levels very consistent with building up our productive strength and
our tools and our equipment .
Now, of course, that is a noneconomic judgment, but the Senator
asked me to express frankly my views on this subject.
Representative PATMAN. Do you have any other questions, Mr.
Bolling?
Representative BOLLING. I think mine have been covered.
Representative PATMAN. Mr. Douglas ?
Senator DOUGLAS . No.
Representative PATMAN. Mr. Wolcott ?
Representative WOLCOTT. No.
Senator DOUGLAS . Senator Flanders could not be here today. He
asked that it be stated for the record he has read your statement ,
Dr. Blough, and he commends it.
I don't believe I have any further questions. We want to thank
you very much for your attendance and your answers to our questions
and for the statement that you have filed for the record ; and we thank
you, too, Mr. Keyserling.
(The statement referred to is as follows :)

SUPPLEMENTARY STATEMENT BY LEON H. KEYSERLING
Although the subcommittee was most generous in the time allotted to me in my
appearance before it on March 12, 13, and 14, I find upon reading the record that
a further amplification of my views may be helpful to the subcommittee, to the
Joint Committee on the Economic Report as a whole, and to other interested
parties. Consequently, I have prepared this supplementary statement for insertion in the record at the end of my testimony .
Limited scope of issues raised during my testimony
During my 3 days of testimony before the subcommittee on March 12-14,
practically no questions were asked me covering the whole range of credit and
monetary policy. Consequently, my views were not elicited concerning the important role of monetary and credit policy in general ; and my testimony should
not be construed to minimize this role.

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277

Instead, the central question placed before me was how much importance should
be attached to the particular and limited change in monetary policy represented
by the accord of March 1951 between the Treasury and the Federal Reserve
Board, specifically with reference to its effect upon prices. My testimony before
the subcommittee was addressed to the assertion, or at least the intimation , that
it was the absence of the policy represented by this accord that was largely or
mainly responsible for the serious price inflation between the Korean aggression
in mid-1950 and March 1951, and that it was the presence of the accord of March
1951 that was largely or mainly responsible for price stability thereafter. My
testimony converged upon the point that I do not believe that this particular accord device, to the extent that it was actually used, was among the more important factors explaining the shift from inflation to stability.
The main line of questioning directed to me was based, as I understand it,
upon this thesis : That the Federal Reserve Board's support of Treasury obligations on an inflexible basis during the period between the Korean aggression and
March 1951 , prior to the accord, made possible and resulted in a large increase in
bank reserves ; that this large increase in bank reserves in turn made possible and
was responsible for a many times larger increase in bank loans ; and that this
large expansion of loans correlated almost exactly with and was mainly responsible for the increase in prices. This thesis, as I understand it, holds that much or
most of the inflation during this period would not have taken place if the accord
had then been in effect, and similarly that the adoption of the accord in March
1951 has been a powerful or predominant factor in the maintenance of price
stability since then.
In disagreeing with this thesis, I have not taken and do not take the position
that sufficiently drastic use of monetary policy does not importantly affect the
price level. Clearly, it does. Further, I agree that the Federal Reserve Board
during this period between the Korean aggression and March 1951 could have
departed sufficiently drastically from the policy of purchasing Treasury obligations to have drastically affected the volume of bank loans and thus to have reduced business spending and attempted spending sufficiently to have had a very
important effect upon the restraint of price inflation. For example, if the Federal Reserve Board had refused absolutely to purchase Government bonds, it
would have had an enormous effect upon the whole economy and upon the price
level, until that policy was reversed.
However, my position in my testimony was based upon my belief that, if the
accord between the Federal Reserve Board and the Treasury had taken effect
immediately after the Korean aggression, it would not have operated under all
the conditions then prevailing in the economy to have changed the degree or
nature of Federal Reserve Board purchases of Treasury obligations sufficiently to
have affected bank reserves enough to have restrained the volume of loans
enough to have had much effect upon business spending and attempted spending.
And as the effect upon business spending and upon the amount of funds that
business would have had available to try to spend (i. e., competitive bidding
for scarce goods ) would in my judgment have been slight, the effect upon total
inflationary pressures at that time would have been very slight because inflationary pressures were coming also from intensified consumer buying and from
the prospect of rapidly accelerating Government spending.
Correspondingly, my belief that the accord of March 1951 has been far less
responsible than other factors for the price stability since that date, is not based
upon the idea that a drastic contraction of the money supply or of bank reserves
or of loans does not affect prices. It is based instead upon the belief that the
variant between what the Federal Reserve Board did during this latter period
under the accord, and what it would have done in the absence of the accord, did
not under all the factors then pertaining have an important enough influence
upon bank reserves or loans to affect prices substantially. I ascribe the price
stability since February 1951 predominantly to factors other than this accord.
This appraisal on my part that the mild variant in Federal Reserve policy has
not been the basic factor in the sharp inflationary movement after the Korean
aggression, or in the price stability since March 1951 , should not be equated
with an assertion that drastic changes in monetary policy or in bank reserves or
loans would not substantially affect the price level . I have made no such
assertion.
I do believe that a change in monetary policy, drastic enough to have had a
substantial effect upon price inflation during the period from the Korean aggression to March 1951, would have had damaging effects outweighing the beneficial
effects, as I shall subsequently develop in this supplementary statement. But I

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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT

do not believe that there would have been such a drastic change in monetary
policy immediately after the Korean aggression even if the accord had been put
into effect at that time, and I do not believe that the accord has represented any
such drastic change in monetary policy since it has been put into effect.
This should not be taken to mean that I condone the price inflation between
the Korean aggression and March 1951. I deplore this price inflation as much as
anyone else, and believe that more effective measures could have been taken,
and should have been taken, to restrain it. But I believe that the measures which
would have accomplished this restraint, without damaging consequences outweighing the beneficial consequences, are predominantly outside of the mild
variant in monetary policy represented by the accord.
It is on this narrow ground that I disagree with the thesis that the absence
of the accord was basically responsible for the price inflation between the Korean
aggression and March 1951 , or that the adoption of the accord has been basically
responsible for the price stability since that time. Other factors seem to me to
have been predominantly responsible for the price situation in both periods.
Reasons why I do not believe that the accord, as actually employed, has had much
effect upon prices
I conceded in my testimony that the adoption of the accord in March 1951 may
have had some slight effect upon the control of inflation since then, but a lesser
effect than a number of other factors. Correspondingly, I stated the view that
the absence of the accord was not an important factor in the sharp price inflation
during the months immediately following the Korean aggression , and particularly
the Chinese intervention.
My reasons for believing that the absence of the accord had little to do with
the price inflation during the earlier period are as follows :
The inflationary pressures between the Korean assault and March 1951 were
caused by a total of spending and effort to spend available funds, by business ,
by consumers, and by Government, in excess of our productive capacity to try to
satisfy all these demands without price inflation . The price inflation arose in
response to all of these sources of demand, and not just from one of them. To
have avoided the price inflation, it would have been necessary to reduce the total
demand, and probably to reduce each of the three main segments of demand to
which I have referred.
If the accord had been in effect between the Korean assault and March 1951 ,
it would not have reduced Government spending, or consumer spending by much.
The main issue is whether it would have reduced business spending and efforts
to spend (i . e., use of available funds for competitive bidding) . I do not believe
that it would have reduced business spending or efforts to spend by much, because
even with the accord business in the main would have found the funds under the
circumstances then prevailing to capitalize upon the economic outlook as it was
then appraised by business .
Of course, there is a correlation between business loans and business spending
and efforts to spend ; there is a correlation between business loans and bank
reserves ; and there is a correlation between bank reserves and Federal Reserve
Board purchases of Treasury obligations. But establishing this correlation does
not give the whole picture, because many other factors were at work in the total
situation.
If the accord had been in effect in late 1950 and early 1951 , the Federal Reserve
Board might have purchased less Treasury obligations, but nonetheless the rate
of purchase would have had to be very high. If the Federal Reserve Board had
purchased less Treasury obligations there would have been a smaller expansion
of bank reserves, but not correspondingly smaller, because reserves could be
created in other ways. If there had been a smaller expansion of bank reserves
than actually took place, there might have been a smaller amount of loans , but
not as much smaller, partly because business could have procured some loan funds
in other ways. If there had been a contraction of total loans to business, business:
spending might have been somewhat reduced, but I do not think it would have
been reduced very much because of the amplitude of business financial resources
and because of the great incentives to business at that time to exploit the prospects offered by the emerging defense program. And if business spending and
attempts to spend had been lower, the inflationary pressures would have been
less, but not correspondingly less, because of the importance of other types of
spending. Taking all of these factors into account, it seems to me that the inflationary pressures would not have been greatly different during the period under
consideration if the support policy of the Federal Reserve Board had then been

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modified to the slight degree that it was in fact modified by the accord of March
1951.
My belief that the accord, if it had been in effect in late 1950, would not have
been a powerful deterrent upon the over-all level of business activity and spending is supported by the fact that the expansion of bank loans and of business
spending, particularly for plant and equipment, continued after the accord.
Correspondingly, I do not believe that the adoption of the accord in March
1951 ranks high on the list of factors which have contributed to price stability
since that time. After the accord, as I have stated , bank loans and business
investment continued to expand, and it is not ascertainable whether they would
have expanded at a much more rapid rate if the accord had not been put into
effect. The fundamental business outlook, and trends of the defense program,
particularly the expansion programs, have primarily conditioned the level
of business investment and other spending. As I said in my testimony, I would
rate the accord as being less responsible for the past year of price stability
than the expansion of production , the rephasing of the defense program, the
higher rates of taxation, the increase in voluntary savings, the selective credit
restraints, and the price and wage stabilization program.
Further, let us not confuse monetary policy in general with the particular
device represented by the accord . Certainly monetary policy could be so drastically used as to affect the price level profoundly. The only point I am making
is that one particular monetary device, namely, the accord, has not been the
main reason for price stability since March 1951 , and its absence was not the
main reason for price instability before then. Clearly the accord has had no
appreciable effect upon the level of Government spending or upon the size of
the Federal deficit, and yet at times some ascribe to these two factors the
controlling effect upon the degree of inflation .
I have rarely seen an economic analysis which ascribed either the inflation
from late 1950 to early 1951, or the stability since March 1951 to the particular
monetary device represented by the accord. Most of the analyses which I have
seen, made by economists and others, tend to enumerate about the same causal
factors as I do, in about the proportion and blend that I have stated them.
Significance of correlation between bank loans and price trends between Korean
aggression and March 1951
For the reasons which I have indicated above, I do not believe that bank
loans would have been sufficiently affected during this period to have had
an important effect upon prices even if the accord policy had then been in effect.
I think that even if the accord had been in effect under all of the powerful
economic forces then prevailing , the Federal Reserve Board policy of supporting Treasury obligations and its consequences upon bank reserves would not
have been changed drastically enough to affect bank loans very much, and that
consequently the effect upon business spending and attempts to spend would
not have been substantial enough to have substantially altered inflationary
pressures.
A separate and distinct question raised during my testimony was whether,
because in this particular period there was an increase of 18 percent in bank
loans and an increase of 16 or 17 percent in prices, the conclusion should be
drawn that the increase in bank loans was almost the entire explanation of
the increase in prices, and that an exact correlation between the two is established as a guide to national policy. I do not accept this conclusion . The
fact that A and B took place in approximately the same quantitative degree during a short space of time is not sufficient to establish a theory of cause and effect
or to derive national policy. During the period running from 1946 to 1951
there were times when a rapid expansion in bank loans and in the monetary
supply was not accompanied by a rise in prices, and also periods when a rise
in prices was not accompanied by an expansion in bank loans and in the money
supply. Sometimes, in fact, the trends moved in opposite directions. For
example, the upward sweep of bank loans during 1951, and particularly the
second half of 1951 , was about as steep as during 1950, although 1950 wholesale prices rose very sharply and during most of 1951 wholesale prices moved
moderately downward. To take another example, there was an upward movement of the money supply during the last three quarters of 1949, and a downward movement of wholesale prices. To take still another example, bank loans
increased enormously from the beginning to the end of 1948 while the money
supply was approximately the same at the end of that year as at the beginning
of the year. From the third quarter of 1946 to the second quarter of 1947

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wholesale prices increased enormously while the money supply changed very
little. From the middle of 1946 to the end of 1951 the money supply, with the
1946 average as the base, increased from a little over 100 to about 115, while
bank loans increased from a little over 100 to about 210. I do not cite these
figures to establish any particular theory of cause and effect, but merely to
show the danger of oversimplification .
If someone wanted to ascribe cause and effect predominantly to a different
set of factors , one could show that the stabilization of prices started with the
price and wage freeze of February 1951 and has been maintained since then ...
An overenthusiast for price and wage controls could make the argument that
the price inflation from late 1950 to early 1951 was caused predominantly by
the absence of price and wage controls, and that the stability thereafter was:
caused predominantly by the existence of price and wage controls. I do not
ascribe the change-over from inflation to stability to price and wage controls ,
or to any other single factor. Many factors were at work in both periods . It
is intellectually possible to prove almost any causal relationship that someone has made a predetermination to prove, because in our changing and flexible
economy some period of time can be found when there is a coexistence of almost
any A and almost any B.
The fact that there is no clear and precise correlation between the expansion
of bank loans and rising prices, especially in the short run , strengthens my
belief that the minor change in the volume of bank loans which might have
resulted if the accord had been adopted right after the Korean aggression would
not have had much effect upon the resulting inflationary price trends.
Would it have been desirable, and by what means, to reduce the volume of business spending and attempted spending during the months immediately following the Korean aggression?
It seems to me to be skipping a step to consider how business spending and
attempted spending might have been reduced during the inflationary period.
under discussion , without first asking the question as to how much it would have
been desirable to reduce business spending during that period, as against the
alternative of reducing other types of spending such as consumption. My own:
view is that more stress should have been placed upon the reduction of consumer buying, because much of the business spending was necessary to build up
our productive strength. In short, we should analyze what kind of spending
it would have been desirable to reduce, before appraising the relative worth of
various measures.
I readily admit that it would have been desirable during the period under
discussion to have had a somewhat lower level of total business spending, since
some of that spending was excessive and not necessary to the build-up of our
productive strength. For example, there was excessive inventory accumulation ..
But here also the analysis to be meaningful must ask what kind of measures
should then have been used more extensively than they were in fact used to
reduce business spending. On this question, I make these three points : ( 1 ) That
the mild variant in Federal Reserve policy represented by the accord of March
1951 , if it had been adopted in the fall of 1950, would not have reduced business
'spending very much for reasons that I have stated above ; ( 2 ) that if the particular monetary device reflected by this accord had been pushed far enough
to have had a profound effect upon business spending under the conditions then
prevailing, it would undesirably have upset debt management and the general
economy, and impaired essential production without being selective enough to
weed out the undesirable rather than the desirable types of investment ; and
(3 ) that the measures which would have been desirable somewhat to reduce
the level of business spending and attempted spending during this period would
have fallen mainly outside of the device represented by the later accord . Still
more use of higher taxation , selective controls, allocation of materials, limitation.
orders upon inventory accumulation and upon nonessential construction , would
have been essential to repress further the level of business investment ; and
price control would have tended to reduce speculative inventory accumulation.
Limitations on drastic use of monetary policy during early stages of defense
build-up
While I have expressed my belief that the Federal Reserve Board would not
under any circumstances have altered the monetary policy sufficiently to have
had a major effect upon price inflation in the period immediately after the
Korean aggression, I of course admit that a drastic variant in that policy would
have affected not only the price structure but also the whole economy very

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281.

greatly. But it is my view that so drastic a policy, if it had been countenanced ,.
would have had disadvantages far outweighing its advantages.
Such a drastic policy would have thrown confusion into the financial markets,.
impaired confidence on the part of ordinary holders of Government bonds, and.
raised most difficult problems of debt management. Perhaps more important,
for such a drastic policy to have impacted greatly upon the price level, it would
have had to exercise a repressive effect upon the general level of production.
and employment. This would have run counter to the prime objective of a
rapid build-up of our productive strength, which I have regarded as absolutely
essential to meet the burdens imposed upon us by the international situation ..
Further, I believe that this impact upon production and employment would.
not have been selective enough to repress the nonessential or wasteful types of
private economic activity, consistent with retaining stimulae to the essential
or desirable types of expansion.
The general use of monetary policy to fight inflation through the process of
general economic contraction, whatever might be said for it under different circumstances, is not suitable to the economic strategy of the mobilization program .
That strategy has been based upon rapid expansion of certain vital productive
facilities, accompanied by counter-balancing contraction in other areas, and
combined with the general purpose of expanding the total production of the
economy as the labor force grows and as technology and productivity advance.
To reconcile this sound strategy with the containment of inflation requires a
much more highly selective variety of restraints upon the economy than are
consistent with the generally repressive effects of monetary contraction along
theoretical or classical lines. General monetary policy , to be sure, can be used
mildly to take the edge off excessive ebullience of inflationary sentiment. But
it cannot be used drastically without taking the edge off essential productive
advance. The basic weapons for fighting inflation in a mobilization period
should be consistent with the accomplishment of mobilization .
Nor is it at all clear that drastic restraints upon the money supply, which
would have forced prices downward or prevented them from rising, would have
had a beneficial effect upon the general standard of living or upon income distribution, even if we conceded these to be desirable or attainable objectives during
the early defense period. Not nearly enough analysis has been devoted to this
question by economists and others. If drastic restraints on the money supply
affected the price level without disturbing maximum production and employment,
it could have little effect upon the general standard of living, unless it resulted
in a higher level of consumption by diverting more resources away from the
defense build-up and from the business build-up. I do not know that it would
accomplish this diversionary effect upon resources, and if it did, I would question
the desirability under current conditions for reasons which I have already stated
fully. On the other hand, if a drastic repression of the money supply reduced
production and employment, which it is at least arguable that it might do, then
I believe that it would reduce the general standard of living, and, based upon
past experience, I think that it would also have an unfavorable impact upon the
distribution of income. That is why it seems to me inadequate to try to appraise
the economic significance of a trend upward of the money supply or of prices ,
or a repression of the money supply or of prices, without tracing through to
the ultimate effect of these trends upon our economy and our people . The ultimate effect depends upon the level of production and employment, and upon the
distribution of resources and of incomes at any given level of production and
employment. That is why I believe that the most fruitful economic analysis
should commence by looking at these considerations, and then appraise various
economic tools, monetary and otherwise, in terms of their impact upon these
considerations.
In appraising economic developments, price trends should be evaluated in the
context of other trends
Just as insufficient analysis has been directed to the ultimate effects upon the
economy of a drastic monetary policy, I likewise believe that there is a strong
tendency to evaluate economic developments excessively in terms of price trends,
to the neglect of other very important matters.
There has in general been a rising price level for a considerable number of
years. During this period, as shown recently by a study of the National Bureau
of Economic Research, published in part in the New York Times, there has been
a distinct trend toward a larger portion of the national income in real terms:
going to those in the lower parts of the income structure. As national production and productivity have expanded greatly, these groups have benefited most,.

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not by dragging others downward, but by they, themselves, moving upward. It
seems, also, that this change in the income structure, aside from its effect upon
the reduction of poverty and hardship, has helped to make the economy more
stable with respect to the maintenance of high levels of employment and
production.
It may well be argued that it would have been still better if the great advance
in total production and employment, and in per capita productivity and standards
of living, which has occurred generally during the past 20 years, had been accompanied by a stable price level rather than by a generally rising price level.
But this argument does not meet the question of whether, in the dynamics of the
American economy, a stable rather than a rising price level would have been
consistent with the great productive advances which have taken place. Economists may range themselves on either side of this question ; but the established fact
in any event is that we have had a rising price level, and that this has been
compatible not only with productive advances which have exceeded the most
sanguine expectations, but also with improvements in the income structure from
the viewpoint of equity and the reduction of poverty and hardship.
It is true that the fixed -income groups have been adversely affected by rising
prices. For this reason among others, I have always favored vigorous programs
to prevent rapid price inflation. But even on this question of the fixed-income
groups, there has been insufficient analysis of the actual situation by economists
and others. How many people are in the fixed -income groups in the sense of not
having shared in the rising standard of living over a long span of years ? Insofar as they have not shared, would it be more feasible to improve their lot by
supplementing their money incomes, and would this cost the economy more or less
than the steps which would have to be taken to raise their standards of living by
forcing a decline in prices ? And if the price level were forced downward by
drastic monetary or other measures, what proportion of the fixed-income groups
would be more hurt by such a deflationary policy, through unemployment or otherwise, than other income groups would be hurt? In short, what would be the net
effect upon the economy ?
I am inclined strongly toward the view that a reasonably stable price level
should be the objective of national policy, with advances in national production
equitably reflected by increases in money incomes. But while a stable price level
seems to me highly desirable, we should guard against the easy assumption that it
should always be maintained regardless of other economic objectives ; and we
should certainly be on our guard against measuring the desirability or undesirability of economic trends and developments as a whole solely by whether the
price level is stable or moving upward or downward.
This problem now seems to be very important, because there is evidence that the
popular tendency to rivet attention upon price trends has tended to distract attention from other vitally important factors in the economy. For example, I
believe that, in the current world situation, we would do better to place relatively more emphasis upon marshaling our productive strength and keeping it
fully active, and relatively less emphasis upon controlled stabilization, although
both are important. In the long run, I think this change in emphasis would
result not only in a richer and stronger economy, but also in a more stable
economy. It would also result in a more effective release of the peculiarly dynamic energies of the American enterprise system, and would provide a basis for
more unity and less discord and friction among the great functioning groups in
the economy with respect both to private and public economic policies.
Further, I would not accept without a great deal of qualification any statement
that it was the rising price level after the Korean aggression which depressed
the standard of living of most of the American people since the defense program
started. We have been operating at relatively full employment, and relatively
full utilization of our current resources. If the general standard of living has
been reduced, or prevented from rising as it otherwise might, it has been because
the defense program and the business build-up have commanded a larger share
of our total production than they would in more normal times. There is no monetary device or anything else which can provide for the people as high a standard
of living as they would be able to have, at full employment, if the defense program and the business build-up took a smaller proportion of our resources.
I think the proper thing is to tell this to the American people, so that they
will not labor under the illusion that they can have their cake and eat it, too.
Considering the importance of the business build-up, and the importance of the
security program, I think that the American people should be told that their
standard of living has been kept remarkably high during the past 2 years, and not

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that it has been excessively reduced . Measured against the world situation, the
American people in the main have not had great sacrifices imposed upon them.
Further, I think it in the interest of the American people in the long run to put
relatively more resources for a time into the business build-up, and relatively
less into the expansion of consumption. By increasing our productive strength,
we shall in the long run be able to support and enlarge our current standard
of living even if the defense burden remains high. There is no other way
to do it.
This is not an argument in favor of price inflation. The point I am making
is that the general standard of living could not be higher without sacrifice of the
defense program or of the business build-up, because our resources are not limitless and they have been used fairly fully during the past 2 years. And of course,
I agree that a rapid upward sweep of prices, particularly when it runs ahead of
increases in production, is highly undesirable by almost any test. The rapid
upsweep of prices in the period after the Korean aggression was clearly undesirable. The Council of Economic Advisers, and I personally, have constantly
urged a strong and comprehensive anti-inflationary program whenever the country
has been confronted with current or prospective inflationary pressures, because
there are many valid and necessary objectives which such a program can well
serve.
The economics of public spending under current conditions
I should like to amplify my testimony with respect to my attitude toward the
size and character of public spending during the defense emergency. This involves also the question of balancing the budget, and of the Federal deficit.
There are really two issues involved here : First, what economic activities we
conduct as a Nation , and second, the method we use to finance these activities.
There is a relationship between these two issues, but they need to be analyzed
separately for the sake of clarity.
I believe that in the United States, with our abundant resources, our maximum
economic strength and progress depend primarily on how we use these resources.
We should use these resources to maximize production and employment, without
excessive strain, because the more we produce the more we have. In order to
do this, we must allocate resources sensibly among three great purposes , which
are ( 1 ) capital formation and development by business of our productive facilities
through the investment process, ( 2 ) immediate consumption by 155 million people,
and (3 ) Government programs, mostly national defense under current conditions .
If any of these three uses gets seriously out of balance with the others, the
economy is weakened.
Practically all Government spending, aside from when it is spent in a period
of depression to enlarge the total of economic activity, is based upon the idea that
utilization of a part of our resources through this degree of Government spending is of a higher order of national priority than if these resources were utilized
through business spending or through consumer spending. If the judgment is
correct that the Government spending serves a higher priority of national need
than would otherwise be served, then as a generalization the spending is justified.
Otherwise, and to the extent that it fails to meet this test, it is unjustified.
The question of whether Government spending since the Korean outbreak has
employed resources which it would have been in the Nation's interest to employ
through private spending, turns primarily upon whether the resources absorbed
through Government spending have cut excessively into the resources and incentives available for private business activity, or cut excessively into the resources
available for immediate consumer use or into the funds that consumers have
had available with which to obtain goods and services. I shall not repeat here
the facts cited at length in my opening prepared testimony. These facts seem
to me to demonstrate conclusively that, in 1950 and 1951 , and prospectively for
the years immediately ahead , diversion of resources through Government spending has neither deprived business of the ability and the desire to build up our
productive facilities and perform its other functions at an extraordinarily high
rate of growth, nor deprived consumers in 1950 and 1951 or prospectively in the
years immediately ahead of a very high standard of living indeed. In fact, if
world conditions should necessitate a larger security program short of total war,
the facts show clearly that even that large a program could be well reconciled
with a very healthy allotment of resources both for business development and for
.consumer satisfactions.
So, by this basic test, I think that the level of public spending predominately
for national defense, is consistent with the maintenance of a strong economy,
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and with the achievement year by year of an even more productive and therefore
even stronger economy.
There remains, of course, the question of whether the level of public programs,
including national defense, is so high as to perform functions which have a lower
order of priority than would be served by the private use of the same resources.
This, necessarily, is a matter of judgment and not subject to much qualitative
analysis. All I can say here is that it is my belief that the security program is
not absorbing more of our resources than would be prudent in view of world
conditions, and, consequently, since there is also the fact that our economy is
being kept strong despite the security program, I would not now favor a sizable
reduction of the security program. As to public programs other than national
security, I incline to the belief that in the main they are serving needs of the
Nation and of our people of at least as high an order of priority as the needs
that would be served if the resources were used in some other way. Obviously ,
there will be wide varieties of opinion about this .
There is also the question of whether the size of public outlays contributes
to inflationary pressures . Manifestly, there is such a contributtion, because
the inflationary pressures have resulted from excess demand at given times
relative to available supplies, and Government spending has been a large part
of this demand. But that only brings us to the point of deciding what types of
demand should be cut first, and in what amounts, to avoid or reduce the inflationary pressures . This again, at least insofar as national policies are involved, is a matter of national priorities. My own reasoning is that it would have
been better for us as a Nation, during the inflationary pressures augmenting
from the Korean aggression to early 1951 , to have cut back more on private
business outlays for nonessentials and on consumer outlays than to have had
a slower security build-up which would have been the main way to cut back much
on public outlays. The same criteria would apply to consideration of how to
reduce inflationary pressures in the future as they may appear, until the defense
build-up reaches a point which gives us a larger measure of security in a troubled
world than we have thus far attained.
As a matter of fact, not enough attention has been paid to the relative magnitudes of private and public spending, and to the relative size of he changes in
these magnitudes, in connection with the inflationary problem. For example,
comparing the second quarter of 1950 with the first quarter of 1951 , personal
consumption expenditures rose from an annual rate of $188 billion to an annual
rate of 208 billion ; gross private domestic investment rose from an annual rate
of 48 billion to an annual rate of 60 billion ; and purchases of goods and services
by the Federal Government rose from an annual rate of 21 billion to an annual
rate of 32.4 billion, with expenditures for national security rising from an annual
rate of 17 billion to an annual rate of 28.8 billion. It should be clear from these
figures, quite aside from the question of national priorities on which I have
placed so much stress above, that restraints upon the use of resources by others
than the Federal Government is quite as important to the inflationary problem
as the restraint of Federal outlays . Yet one would think, from some discussion
in some quarters, that attention should be directed almost solely to the matter
of Federal outlays.
Moreover, there is need for closer analysis of how much of a cut in Federal
outlays, or in fact in total outlays throughout the economy, would be necessary
even if the avoidance of inflation were our only national problem. I submit that
the events of recent months have tended to vindicate the views I expressed much
earlier, that the American economy had the productive power in the long run to
carry the kind of security program being contemplated without great or excessive
inflationary or other strain. Price stability has been maintained for more than a
year, and both wholesale and retail prices are now tending downward . Employment is not too high, and unemployment is by no means too low. There is definite
slack in some parts of the economy, and many businessmen fear , I believe erroneously, that a general slack will become pronounced before very long. Through the
productive expansion programs, many of the basic material shortages of not long
ago have practically been overcome. The effective workweek is relatively low,
certainly as contrasted with the World War II situation. The technology and
other resources available for the further expansion of production lead to the
conclusion that, unless the economy gets excessively slack, we will increase our
total output by well over 5 percent per annum during the next few years short of
a total war.
All in all, I cannot see anything in the current economic situation or outlook
to justify the conclusion that the security program must be slashed in order to

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avoid dangerous inflation. On the contrary, I believe that the now proposed
security program can be fully maintained consistently with the maintenance of
price stability, if we hold on to and keep in good working order the variety of
anti-inflationary tools which are now in active use. I think it would be most
imprudent now to get rid of these tools , because some new international incident
or some other cause for a change in the psychology of businessmen or consumers.
could result in a new wave of buying similar to that which took place after the
Chinese intervention.
In summary or this phase of my argument, of course Federal spending and
security outlays should be reduced if they are serving needs which as a Nation
we should be serving on a smaller scale. But the proposition that, independently
of this, or even recognizing the magnitude of the international danger, we should
reduce our own defense build-up or the Mutual Security Program in order to
protect our economy from danger, is a proposition to which I cannot subscribe.
Since we clearly have the productive resources to support what we are now
trying to do, this brings me to the second phase of the analysis : How should what
we are trying to do be financed ? In other words, what would be preferable, a
reduction in expenditures or an increase in taxes?
I believe that an increase in taxes of about $5 billion at this time could be
imposed, if wisely apportioned , without having a dampening effect upon the level
of business investment and the level of consumer enjoyments which we ought
to try to sustain during the defense emergency. I will not labor this point,
because it seems clear that for all practical purposes the Congress has already
arrived at a decision not to increase taxes along these lines. I yield to this
decision, because the Congress is the appropriate body to decide such ultimate
issues of national economic policy.
But it does not automatically follow, even assuming no increase in taxes,
that such inflationary pressures upon the economy as would result from the
size of the deficit created by the expenditure program recommended by the
President, would outweight the dangers involved in slashing our own defense
program or the Mutual S. curity Program.
The size of the Federal deficit is not the only factor bearing upon the degree
of inflationary pressures. Based upon the analysis of the whole economic outlook which I have made above, it seems to me that a deficit of the size in prospect, if taxes are not raised and expenditures not cut appreciably, would not
be inconsistent with the maintenance of a stable price level through the antiinflationary program now in effect. This conclusion is based in part on the
fact that developments since January would indicate now a smaller estimate as
to the size of the prospective deficit than the estimate which was made in
early January. The conclusion is also based in part upon the fact that, even
at current tax rates, a budget balance could be achieved within a year or two
when the defense build-up will have passed its peak and when the productive
output of the economy at reasonably full employment will have further increased a great deal. It is based also upon the observation that many other
factors besides the budget affect the degree of inflationary pressures.
There remains, finally, the question of the size of the national debt. If other
things were equal, it would be desirable to reduce that debt. But the world
situation being what it is , I cannot reach the conclusion that an increase in the
national debt by 5 to 10 billion dollars a year, or even somewhat more, would
confront us with unmanageable problems , in view of the fact that we have the
resources to increase our national product by about $20 billion a year without
strain, and in view of the fact that such an annual increase in productive output would be about three times the total annual carrying charges on the national debt.
None of what I have said should be taken to minimize the seriousness of a
deficit or of an expanding national debt, but merely to set these factors in the
perspective of the whole economy and all of the urgent problems with which we
must deal.
Interest manifested by the Council in Government economy
A question raised during my testimony as to whether those members of the
Council appearing before the subcommittee had any recommendations to make
to the subcommittee as to how or where the budget submitted by the President
might be cut, prompts me to the following clarification of my position.
The Council of Economic Advisers as a whole, and I as well, have constantly
emphasized that the outlays of the Federal Government in these times should
be held to the lowest levels consistent with the hard effort we are now making

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to improve the security position of the free world, and with other essential
national purposes. It would not be correct to assume, because I did not urge
before the subcommittee that the President's budget as submitted to the Congress be cut drastically, that I have not been interested or active in trying to help
to hold down Federal outlays to the lowest safe and prudent levels in these
times. Before the President submits his budget to the Congress, there are
months of detailed and searching study, examination, consultation, and advice.
In this process, the Council of Economic Advisers participates. And in this
process, huge cuts have taken place in the estimates made by various departments and agencies. It is a matter of common knowledge, for example, that the
estimates for defense outlays contained in the President's budget as sent to the
Congress are tens of billions of dollars lower than the estimates made by some
defense officials. I would make a rough calculation that the total of the estimates originally submitted to the Bureau of the Budget and to the President
by all the agencies and departments of the Government were many tens of billions
of dollars higher than the total in the final budget as submitted by the President
to the Congress. In this budget-making process, the Council of Economic Advisers has had its chance to exercise, and has exercised, its influence in the
direction of economy. The proper time for us to exercise this influence is before
the President submits his budget to the Congress, rather than to come before
congressional committees and take issue with the President's budget in open
hearings. This is true for reasons that I try to set forth fully in this statement,
in my discussion of the relationship of the Council of Economic Advisers to the
President and to the Congress. So I hope the subcommittee will not think that
the members of the Council and I, personally, are not interested in proper
economy, and have not exerted great efforts to help achieve it, just because I
have not responded to the invitation to point out to the subcommittee how much
or where the President's budget could or should be cut.
But I would not be frank if I left the idea, by way of indirect intimation,
that I think the budget ought to be slashed but am not in a position to say so
here. Broadly speaking, I have already participated in the considerations leading to the formulation of the budget, and, broadly speaking, I think that it is not
out of line with our national needs and our economic ability to serve these needs
without weakening our economy.
This issue turns primarily upon the size and pace of our security program ,
both domestic and international. I read with enormous admiration Senator
Douglas' article in the New York Times of a few weeks ago, particularly the first
part of it which pointed to the size and pace of the Russian build-up of their
offensive striking forces. The most recent figures which have come out indicate
that the Russians are putting above 30 percent of their resources, which are
much more limited than ours, into their military build-up. I cannot bring myself to believe that the proportion of our total productive resources which the
budget proposes that we allocate to national security is too high , measured
against our wealth and strength as a Nation and our further productive capacity.
The dollars requested for national defense are one measurement of the size and
pace of the program.
Relationship of the Council to congressional committees
Senator Douglas raised certain questions concerning the degree of freedom
with which members of the Council of Economic Advisers can express their views
to congressional committees, since the Council is advisory to the President. The
Council of Economic Advisers is established by law in the executive branch of
the Government, in fact in the Executive Office of the President, and its members
are appointed by the President and confirmed by the Senate. The main duties
of the Council, as defined by the Employment Act of 1946, are to study economic
trends and the economic outlook and also national economic policies and programs, to advise the President with respect to these matters, and to assist
the President in the preparation of his Economic Reports to the Congress which
deal with these matters and contain a comprehensive program of specific recommendations to encourage the stability and growth of the economy under a system
of free competitive enterprise. The phrasing of the statute also set forth for
the Nation as an objective the promotion of maximum employment, production
and purchasing power.
It is thus clear that the members of the Council are employees of and advisers
to the President, and that they are not employees of and advisers to the Congress
in the same sense.
But this does not mean, in my opinion, that the members of the Council cannot or should not testify before, cooperate and consult with, and in a sense

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give advice to, committees of the Congress, just as this is done by heads of other
agencies in the executive branch, and even other agencies in the Executive
Office of the President such as the National Security Resources Board, who are
appointed by the President and confirmed by the Senate under statutes defining
their functions and responsibilities, and who are employees of and advisers to
the President in the sense that they work under his direction as members of
his "official family” and may, of course, be dismissed by him .
The Economic Report of the President to the Congress is prepared by the
President with the assistance and advice of the Council of Economic Advisers,
just as presumably a message appraising the international situation and recommending international policies is prepared and transmitted to the Congress by
the President with the assistance and advice of the Secretary of State and his
staff ; just as presumably a message appraising our security needs and making
recommendations for defense outlays is prepared and transmitted by the President to the Congress with the assistance and advice of the Secretary of Defense
and other people in the Defense Establishment ; and just as presumably heads
of other agencies not of Cabinet rank advise and assist the President in the same
way when he sends appraisals and recommendations to the Congress in the field
designated for the operations of these other officials by statute.
In all of these cases, under the way our Government now operates and has
generally operated , none of these officials except in rare instances makes available to the public or to the Congress the nature of the advice he gives to the
President while he is assisting and advising the President in the preparation of
such Presidential messages and the recommendations contained therein ; and
likewise, it is only in rare instances that such officials make it known to the
public or even to the Congress if there is a variance between the advice they
give to the President and the extent to which the President follows that advice
and conforms to the recommendations contained therein in the messages sent
by the President to the Congress after getting that assistance and advice.
Nonetheless, after the Presidential message in question and the recommendations
contained therein are sent to the Congress and to the congressional committee
or committees concerned therewith, it has been practically the universal custom
and is entirely appropriate for those officials whose statutory responsibilities
make it clear that they have been advisers to the President in the field covered
by such Presidential message and recommendations to appear before such congressional committees, to discuss and analyze the matters involved, and in
fact to amplify and support the recommendations made by the President and
the analysis underlying them. In addition, it has been the almost universal
custom and entirely appropriate for such officials to appear before congressional
committees and to make analyses and give advice in the fields in which they
operate under statute, even when this has not been preceded by a Presidential
message covering the specific matters before the committee.
In appearing before committees of the Congress in this role, I cannot see
where the Council of Economic Advisers is doing any different or appearing in
any different light from what is done by heads of other agencies working in
different fields. And I have never seen any valid reason why the members of
the Council, in view of the statute under which they operate and the nature
of their role, should follow a contrary course or differentiate between themselves
and the heads of the other agencies to whom I have referred above. Certainly,
the distinction cannot be that the members of the Council deal with economic
problems, because many heads of many other agencies deal with economic problems, or even predominately with economic problems.
That this construction of the Council's role is correct is supported by the
legislative history of the Employment Act, by the expressed views of some of
the legislative sponsors of the act, by the fact that the Joint Committee on the
Economic Report and other congressional committees have frequently invited
the members of the Council to appear before them for this purpose, and by
the fact that doing so is in accord with the Council's responsibilities as defined
by the President. More important, it is in accord with the whole tenor of the
American system of Government, and I believe it a good and healthy thing that
public officials should be subjected to the questioning and testing of their views
by congressional committees, particularly when these public officials have been
appointed and confirmed under acts of Congress to deal with the very subject
matters which these committees are considering and to help in the preparation
of the very reports and recommendations which the President sends to these
committees.

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The next phase of the question is whether the members of the Council are in
a position to express themselves frankly and fully to congressional committees,
in view of the fact that they are advisers to the President, and in view of the
fact that the advice and recommendations that they give to the President may at
times not be exactly the same as the advice and recommendations which the
President transmits to the Congress. There has been considerable interest in
this subject, and I am glad of this opportunity to express my views.
I believe that members of the Council of Economic Advisers are in exactly the
same position, with respect to expressing themselves frankly and fully before
congressional committees, as any other agency heads of integrity who have
advised the President in important fields in which the President makes recommendations to the Congress. Under our system, no responsible official in such a
position, while working for the President, parades before the public or before
congressional committees the differences of viewpoint that there may be between
himself and the President on matters under consideration by the Congress . If
these differences are minor in character, the responsible public official does not
feel entitled to the luxury or self-satisfaction of having the President agree with
him in every detail ; Government could not function if that were expected. But
if the President, in his recommendations to the Congress, were to depart from the
analysis and advice given him by the official in question to the extent that it could
be regarded as a fundamental repudiation of that official's views, the official of
integrity should resign where under all the circumstances he believes it in the
national interest to do so . But it seems to me incorrect to say that a public
official in this kind of job can place himself in open conflict with the President
for whom he works, and at the same time stay on the job. Obviously, also , a man
of integrity should resign if the President for whom he works should ask him to
go before a congressional committee or anywhere else and stultify himself by
making analyses or supporting policies which this official believes to be against
the national interest.
The view has been expressed in some quarters , that members of the Council
of Economic Advisers, in order never to be faced with a choice based upon the
situations described above, should solve the problem by advising the President
but by refusing to appear before congressional committees to analyze and support those recommendations by the President to the Congress which are in accord
with the advice they have given him. I can see no more reason why the members
of the Council should duck their basic responsibilities by so doing than why other
officials should thus avoid their responsibilities . Under our system, if it is to
function and if congressional committees are intelligently to process reports and
recommendations sent to them by the President, there must be and there always
has been someone from the executive branch available and ready to come before
the congressional committees and to work with them in the customary fashion.
With respect to analyses and recommendations sent by the President to the
Congress in those areas of economic policy which are the province of the Council
as defined by statute, if the members of the Council are not the proper persons
to come before the congressional committees for this purpose, then who are the
proper persons ?
If my analysis is at all correct, it seems to me that for a member of a congressional committee to raise a question about my freedom to be frank, or
whether I agree with recommendations made by the President, or whether after
the President has sent up recommendations I am estopped from expressing my
own views, is the same as asking that question of the head of some other statutory
agency of Government appearing before a congressional committee.
My own answer to the question is as follows : I always have and always will
try to speak frankly and deal fairly with congressional committees. I ask the
subcommittee to assume what is in fact the truth, that the analyses and recommendations which I make to it are consistent with the analyses and recommendations which I make to the President. So long as the recommendations made
by the President to the Congress conform in the main to the recommendations
which I have given him, I feel privileged and duty-bound in appearing before
a congressional committee to give my reasons for supporting those recommendations . If the President were to fundamentally repudiate my views as to what is
in the Nation's economic interest, and were to send recommendations to the
Congress in basic conflict with them, then I would resign. That situation has not
arisen. At all times, consequently, I hope this subcommittee will feel that the
analyses and recommendations I present to it represent my honest convictions.
I would not present them if they did not.

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I hope that the subcommittee will excuse the length at which I have covered
this subject, but it goes to the heart of the relationship between the Joint Committee on the Economic Report and the Council of Economic Advisers, and I feel
strongly about it.
Representative WOLCOTT. Mr. Chairman, I will not be able to be
here next week, but I assure you that I will follow the hearings .
Representative PATMAN. Next week we will have our hearings in
362 Old House Office Building. That is the caucus room, the third
floor of the Old House Office Building. Our session will commence
at 10 o'clock in the morning.
The first day, March 17, we will have Mr. Marion B. Folsom and
Mr. J. Cameron Thompson, of the Committee for Economic Development ; Mr. W. L. Hemingway, of the American Bankers ' Association ; and Mr. John F. Fennelly, of the Investment Bankers' Association. That is for Monday.
We will stand in recess until Monday morning at 10 o'clock.
(Whereupon, at 1:05 p. m. , the subcommittee recessed to reconvene
at 10 a. m. Monday, March 17, 1952. )

MONETARY POLICY AND THE MANAGEMENT OF THE
PUBLIC DEBT

MONDAY, MARCH 17, 1952
CONGRESS OF THE UNITED STATES,
SUBCOMMITTEE ON GENERAL CREDIT CONTROL
AND DEBT MANAGEMENT OF THE
JOINT COMMITTEE ON THE ECONOMIC REPORT,
Washington, D. C.
The subcommittee met, pursuant to recess, at 10:10 a . m. , in the
caucus room, Old House Office Building, Representative Wright Patman (chairman of the subcommittee) presiding.
Present : Representative Patman , Senators Douglas and Flanders,
and Representative Bolling.
Also present : Grover W. Ensley, staff director ; Henry Murphy,
economist for the subcommittee ; and John W. Lehman, clerk to the
full committee.
Representative PATMAN. The committee will please come to order.
We will hear first from Mr. Marion B. Folsom, representing the
Committee for Economic Development. Mr. Folsom is chairman of
the board of trustees of the Committee for Economic Development,
treasurer of the Eastman Kodak Co. , a member of the Board of Directors of the Federal Reserve Bank of New York, formerly a member
of the board of directors of the Buffalo branch of that bank, and a
member of the Advisory Committee on Social Security, which advised
the Social Security Board and the Senate Finance Committee in connection with the comprehensive revision of the Social Security Act in
1939.
Mr. Folsom, we will be very glad to hear from you.
The statement which you furnished the committee last Thursday
or Friday has been furnished to each member of our committee-I
went over the statement myself yesterday. You may proceed .
STATEMENT OF MARION B. FOLSOM, CHAIRMAN, BOARD
TRUSTEES, COMMITTEE FOR ECONOMIC DEVELOPMENT

OF

Mr. FOLSOM. Mr. Chairman , Mr. Thomson is also appearing with
me today, and I would appreciate it if the committee would give us
an opportunity to go through our statement, both, first, and then you
can question us later, because many of the questions you might ask
me will probably be answered in Mr. Thomson's statement.
Senator DOUGLAS . That is probably a wise request.
Mr. FOLSOM. I am appearing this morning in my capacity as Chairman of the Committee for Economic Development.
291

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The Committee for Economic Development is an organization of
businessmen and educators formed to study and report on the problems of achieving and maintaining a high level of employment and
production within a free economy. Its research and policy committee
issues from time to time statements of national policy containing recommendations for action which, in the committee's judgment, will
contribute to maintaining productive employment and a rising standard of living.
I am pleased to have the opportunity to appear here, along with Mr.
Thomson, to discuss CED's views on monetary policy at the request of
your committee. CED has regarded the problem of monetary policy
as one of the four or five basic problems involved in the efficient operation of a free society. In 1948 the committee issued a statement entitled "Monetary and Fiscal Policy for Greater Economic Stability,"
in which we presented our general recommendations in this field. We
have also published two research reports by Dr. E. A. Goldenweiser,
who was Director of Research of the Federal Reserve Board from
1926 to 1945. We are submitting copies of our policy statement and
Dr. Goldenweiser's books for the use of the subcommittee and its staff.
For the past 2 years a CED subcommittee under the chairmanship
of Mr. Thomson has been studying the difficult problems of monetary
policy in an attempt to make our recommendations more complete and
definite. We hope to issue a policy statement on this subject later this
year. Pending issuance of that statement our remarks here must be
regarded to some extent as our individual views, although I believe
we can represent fairly accurately the current thinking of our committee members.
In our work we have consistently approached the problem of monetary policy as part of the problem of maintaining economic stabilityof avoiding serious depressions and serious inflations. Certainly before this committee I do not need to elaborate the tremendous importance of economic stability to the welfare of the American people
and to the survival of the American free society. The Joint Committee on the Economic Report, like the other mechanisms of the Employment Act, was created because of the great national concern over
instability of our economy. Since the end of the war we have escaped
serious unemployment- the aspect of the instability problem that was
most feared 6 or 7 years ago. But we have had enough recent experience with inflation-the other aspect of the instability problemto remind us that the problem has not been solved .
We have found, in CED , that whenever we approach the problem
of economic stability, and from whatever angle we approach the
problem we come quickly to the question "What can monetary policy
do ?" The fact that your committee has twice undertaken to study
monetary policy suggests that you also have found monetary policy
to lie close to the heart of the stabilization problem. The national
interest in monetary problems, so much in evidence in the past few
years, is not a theoretical or academic interest. It is a practical interest in the problem of stabilization-specifically in the problem of
inflation. I suppose this is obvious. But I point it out because unless
we remember what our practical interest is we are in danger of getting
off the track in an area that is the subject of so many traditional
slogans and so much subtle theorizing.

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293

Reasonable judgments about monetary policy for economic stability cannot be reached by looking at monetary policy alone. Monetary policy is, of course, not the only instrument of national policy
that affects and can be used to promote economic stabilization . Each
of these instruments has certain difficulties and limitations. If any
one of these instruments is examined by itself these difficulties are
likely to appear overwhelming. The conclusion is likely to be that the
difficulties of this particular instrument are so great that we had better
seek stability by other means-that is, by means whose difficulties we
have not explored .
Specifically, if we look at monetary restriction alone as a means of
preventing inflation we see certain difficulties :
(a ) There is considerable disagreement among experts about the
effectiveness of monetary restriction in preventing inflation ;
(b ) Monetary restriction may have unsettling effects upon capital
markets ;
(c) Monetary restriction is likely to raise the interest charge on
the Federal debt .
These difficulties might lead one to the conclusion that monetary
restriction should play only a minor part in the restraint of inflation ,
and that reliance should be placed instead on other measures , such as
budget policy or direct controls. This conclusion would be unjustified.
The alternative to monetary restriction also involves real costs and
risks, which must be considered in deciding on the role of monetary
restriction .
One alternative is higher taxes. But there is uncertainty as to how
effective higher taxes above the present level would be in restraining
inflation . The taxes might be passed on in higher prices or might
simply reduce saving. Higher taxes will weaken incentives to produce
and may cause serious inequities. Moreover, it is only realistic to
recognize that higher taxes are unlikely to be adopted.
Another alternative is reduction of Government expenditures . I
am confident that Government economy should and can make a great
contribution to economic stability in present circumstances. But here
again action to the extent needed is difficult to achieve.
A third alternative is direct Government controls over prices, wage
rates, investment, and production. How much contribution such controls can make to stability is uncertain . Direct controls are difficult
to administer at best, and would be likely to break down if unrestricted
credit expansion were permitted greatly to increase the purchasing
power of businesses and consumers. In any event , I am certain that
whatever is accomplished by these controls will be purchased at great
cost to efficiency and economic growth and to the freedom of our
economic system .
And so we come back to monetary restriction , not because it is easy
or without costs but because its difficulties look less formidable when
compared with the alternatives. The stabilization problem is a
problem of getting a reasonably adequate result out of the use of a
number of imperfect instruments in a balanced combination. It is
our belief that in such a combination monetary policy will always have
an important role to play.
The relative emphasis to be placed on different instruments depends
upon the circumstances. Considering only inflationary situations, the

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reliance upon direct controls should probably be greater in a time of
complete mobilization than in a period of limited mobilization like
the present. Also we should probably rely more on budget policy,
specifically on budget surpluses , in a period of normal budgets than
in a period of extraordinarily large budgets.
I should like to indicate briefly what seems to us a balanced combination of instruments to be used to prevent further inflation during
the present defense program .
First, we believe that direct price and wage controls have only a
stop-gap function in the present situation. They can help us temporarily to avoid some of the consequences of failure to use other measures adequately. Such support as there is for direct price and wage
controls stems from the belief that they are necessary, not from the
belief that they are good. But surely whether or not such controls are
necessary depends upon what is done by other means-notably by fiscal
and monetary policy. It is the function of these other means to create
a situation in which we are reasonably safeguarded against serious inflation. It is the function of direct price and wage controls to disappear when that situation has been created.
Second, we believe that balancing the cash budget is a desirable and
achievable goal of fiscal policy. A balanced cash budget would make
an important contribution to the avoidance of further inflation . It
does not, of course, provide a guarantee against inflation ; much depends on the type of taxes imposed , the size of the tax burden , and
the strength of the inflationary forces. In addition to its anti -inflationary effect, we believe that adherence to the pay- as-you-go principle
is desirable in order to preserve one of the few forces now working in
the direction of Government economy .
The real question in most people's minds is whether the budget can
be balanced. It appears to us realistic to estimate that on a cash basis
revenues from present taxes would fall about $7 billion short of expenditures for the programs proposed in the fiscal 1953 budget. We
believe that approximately this amount could probably be cut from the
proposed expenditures without reducing the real content of the security programs or interfering with other essential Government functions. We have tentatively estimated that about 4 billion of this
total saving could be achieved by more rigorous screening of military
requirements and specifications and by more efficient military procurement.
Senator DOUGLAS . Mr. Folsom, I must ask pardon for breaking the
rule which you wanted to lay down at the beginning, to say that great
minds move in the same channel. It so happens that in the economic
report of our Joint Congressional Committee on the Economic Report
I make an identical estimate of $4 billion to be saved out of the military budget, so I am delighted that we move together.
Mr. FOLSOM. I might say, sir, that we originally had ourselves set
at 6 billion, but upon further study we had to raise it up to 7 billion.
As I say, we believe that the fiscal 1953 cash budget could be balanced without a tax increase. However, we do not have sufficient
information about the military programs, which are the core of the
problem, to be sure that this is the case. By the time the hearings on
the military appropriations are completed Congress should have a
much firmer judgment on how much can be saved. If it should be
the judgment of Congress that an amount large enough to balance the

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budget cannot be saved , consideration should be given to the enactment of a broad-based consumption tax.
Given a balanced cash budget, it should be the function of monetary
policy to prevent the existence of any significant excess of total demand
for goods over the supply. In case the cash budget is not balanced ,
monetary restraint will become more difficult but may be even more
important. Under the head of monetary policy I include not only
the use of the Federal Reserve's powers but also the management of
the Federal debt and other steps taken by the Government to promote
saving.
It will be noted that the function assigned to monetary policy is a
residual one, and the precise degree of monetary restriction called for
is uncertain . No one can tell just how strong inflationary pressure
will be in the next year or 18 months. Therefore no one can tell just
how much anti -inflationary action is required. It is necessary and
proper that this uncertainty should be concentrated on monetary
policy. One of the great advantages of monetary policy is that it can
be flexibly adapted to changing economic conditions. Tax rates and
expenditure programs, on the other hand, must be decided for a period
at least 12 months ahead, and after a considerable period of deliberation. It is an efficient division of labor between monetary policy and
budget policy to plan in advance for a balanced budget and to leave
to monetary policy the task of shorter-period adjustment to variable
and unforeseeable economic conditions.
We believe that this task, of working alongside a balanced budget
to prevent further serious inflation , is within the capacity of monetary
policy. More important we believe that the costs of such a policy
will be less than the costs of the alternatives-which are more inflation, more taxes, or more reliance upon a price- wage control system
working against strong pressure. The costs of monetary restriction
are usually thought of in terms of the effects upon interest rates.
These costs are not likely to be large unless the inflationary pressure
is great-greater than now seems probable. But if the inflationary
pressure is great, the value of a restrictive monetary policy, and the
costs of the alternatives, will be correspondingly great.
In his reply to this subcommittee's question about the economic objectives of the Treasury, Secretary Snyder listed as number 7 "to hold
down the interest cost of the public debt to the extent that this is
consistent with the foregoing objectives," and included among the foregoing objectives "to use debt policy cooperatively with monetarycredit policy to contribute toward healthy economic growth and
reasonable stability in the value of the dollar." I think this is a sound
appraisal of the position of low interest costs among the objectives of
national policy.
Also it is important to note that we have now crossed the bridge of
allowing Government bonds to fall below par. During the past year
we have demonstrated that it was not necessary for the Federal Reserve
to peg prices at some predetermined level, that Government bonds can
stand on their own feet, and that we can have a genuine market in
Government securities with none of the catastrophic consequences that
were once predicted . It seems probable that financial markets and
investors are fairly well adjusted to the prospect of some variation in
the prices of Government securities. If anti -inflationary monetary

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policy should result in some further decline of bond prices this is less
likely to produce a financial panic or similarly extreme result than
was the first drop below 100 a year ago-assuming, of course, that
care is taken to maintain orderly market conditions . This means that
we can carry on a flexible monetary policy with more confidence .
Mr. Thomson will discuss the problem of carrying out an effective
monetary policy, and I want to make only one general observation on
that subject. We believe that the existing powers, techniques and
organizational arrangements are adequate for the performance of the
function of monetary policy. This does not mean that improvements
may not be possible. We should keep an open mind on that subject.
But it means that deficiencies in powers, techniques and organization
have not been the main cause of inadequacies in monetary policy in
the past and are unlikely to be the main cause in the future.
The main problem is to get a wider agreed understanding of the
potentialities, functions, and methods of monetary policy. Without
such an understanding no changes of techniques or organizations can
prevent a vacillating and ineffective policy. With such an understanding, present arrangements can work very well. Forward steps
in money and debt policy during the past year have been due to improved appreciation of the fundamental issues. The investigation
conducted by the subcommittee under Senator Douglas made a major
contribution to this improvement. We are confident that the present
investigation will make a similarly important contribution to better
understanding and thereby to better policy.
Thank you, Mr. Chairman.
Now, if Mr. Thomson can present his statement.
Representative PATMAN. We shall be very glad to accede to your
request that the two of you be heard before yielding to questions.
Our next witness is Mr. J. Cameron Thomson, also representing the
Committee for Economic Development. He is chairman of the Committee for Economic Development's committee on monetary, fiscal,
and debt policy, and president of the Northwest Bancorporation of
Minneapolis.
Mr. Thomson, we shall be very glad to hear from you.
STATEMENT OF J. CAMERON THOMSON, CHAIRMAN, COMMITTEE
ON MONETARY, FISCAL AND DEBT POLICY, COMMITTEE FOR
ECONOMIC DEVELOPMENT
Mr. THOMSON. Thank you, Mr. Chairman.
I would like to throw in one sentence at the beginning and say that
I appear here with a lot of humility and a desire to be helpful, and I
hope we can do that.
It is a pleasure to accept your invitation to appear before this committee on behalf of CED. As Marion Folsom has indicated, we have
found the problems of monetary policy exceedingly difficult . The
materials you have already published have demonstrated that the
work of your committee will contribute a great deal to our study,
and we are happy to participate in your investigation .
Mr. Folsom has described our general approach to the problem of
monetary policy. I should like to comment on three critical aspects
of this problem :

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1. The effectiveness of monetary restraint, possible limitations on
monetary restraint set by the existence of a large public debt, and
the possible use of new tools to surmount these limits.
2. The implications of a flexible monetary policy for public debt
policy.
3. The position of the Federal Reserve System within the Government.
In the light of these things, I also should like to say something
about the problems of the next 2 years.
Before I turn to these specific points may I make one general observation. The question before your committee is not one of disagreement on technical points of interest only to scholars or of disputes between Government agencies. The question is the survival
of our free society. Can we be confident of the survival power of
our free society if we cannot control inflation without authoritarian
methods ? And can we be confident of our ability to control inflation
without authoritarian methods if we are not able to control our monetary system effectively ?
We believe that monetary restraint can make an important, even
indispensable, contribution to preventing inflation . The methods by
which monetary restraint operates have been explained in many of
the replies to your questionnaires. Banks and other financial institutions find it more difficult or more expensive to obtain funds to
lend . The availability of credit to borrowers from these financial
institutions is reduced, which may involve an increase of interest
rates. Some of these borrowers become unable or in some cases unwilling to carry out expenditures they had planned.
Even individuals and businesses who are not borrowers are affected. They find that the market value of assets they hold , such
as bonds, is lower and the inflow of cash to them is reduced by the
indirect effects of the restraints on bank lending . It becomes more
difficult or expensive for these individuals and businesses to finance
expenditures out of their own funds, even if they had not planned
to borrow .
I believe it is generally agreed that this process goes on. However it is sometimes argued that the effects are marginal, applying
to only a small fringe of transactions, and therefore the conclusion
is that they are unimportant . In my opinion this conclusion is mistaken. If we look at the $350 billion of expenditures that buy the
gross national product we see relatively little of it that would be directly affected by monetary restraint. But the problem of inflation is
not the whole of this $350 billion . The problem is in an unsatisfied
margin of demand, usually relatively small. We can have inflation
when the gross national output is $350 billion and the demand for
output is $355 billion . This gap of $5 billion can produce a large
inflation as the excess expenditures produce larger incomes that produce larger expenditures , and so on. The effectiveness of monetary
policy must be judged in relation to this unsatisfied margin . Judged
in this way, I believe it is very important.
It is sometimes maintained that while this may all have been very
true in the past it is no longer true, chiefly because of the large size
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It is said that their holdings of public debt give the great lending
institutions so much liquidity that they are largely protected against
the Federal Reserve's monetary restraints. I think this is a mistaken
conclusion. The fact is that our lending institutions have become
more closely concerned with the Government bond market because
of their large holdings of Government's. This would mean, and I
believe it to be true, that they are increasingly sensitive to the changes
in the market that the Federal Reserve can bring about.
In the second place, it is argued that not only the lending institutions, but people and business generally have acquired such large
amounts of liquid assets that for the most part they are in no need to
borrow. They seem to be beyond the reach of credit restraint . Again
there is an element of truth. But it is true also that while some parts
of the economy have become less dependent upon outside financing,
others have come to rely on credit to an increasing degree . Installment credit and housing credit, for instance, are much more important today than formerly. Also, as a banker I know that even though
a business may have no need to borrow, it usually still has to watch
out for its liquidity. A tightening of credit makes itself felt not
only among borrowers, but all over. And , finally, I cannot see how one
can conclude, from the high degree of liquidity that the public debt
has provided, that credit restraint should be abandoned . If the
danger of inflation is greater owing to the debt and greater liquidity,
credit control would seem the most natural means of dealing with the
situation .
I could go on citing still further arguments that have been put
forward to show that credit policy today cannot work. But to all.
of them my reaction is the same as to those already mentioned . They
point to something that is quite true in itself, but they do not draw
what seems to me the proper conclusion . What all those arguments
show, and what I think is undeniable, is that the circumstances under
which monetary policy must work have altered very much during
the last 20 years. But they quite fail to show, in my view, that it is
any less essential today than it used to be, and they overlook the new
opportunities for its success that have arisen .
The main argument usually advanced against monetary restriction
is not that it will not work but that in the process of working it will
do serious damage. Therefore it is said that monetary restriction
must be stopped short of the point to which it might be effectively
pushed in the interest of curbing inflation .
I am pleased to note in the replies to your questionnaires that there
is no longer much sentiment for rigid pegging of bond prices. Some
people may think that abandoning par support for 22 percent bonds
a year ago didn't do much good ; but no one can say that it did any
serious damage. And now that par has been left behind, no one is
urging that we go back to it. Par has lost whatever symbolic value
it may have had. Moreover no one is suggesting a new peg at 98 or
968. The whole idea that one could say that there is one best interest
rate that will continue to be best forever has been seen to be irrational ; and beyond, of course, you affect all lenders, including the
banks, as well .
However, I think I see in some of the replies to your questions the
development of a new philosophy.
This is the philosophy of the
What this seems to imply is that monetary
stable bond market.

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restraint can be used in a period of inflation provided it does not
involve allowing bond prices to fall below the bottom of some predetermined range. Such a policy becomes important only if an inflationary situation arises in which anti -inflationary monetary policy
would involve a decline of bond prices below the predetermined
bottom. But if such a situation does arise we would find ourselves
back in the same old box- unable to make a free decision about how
far to pursue monetary restriction and finding monetary policy locked
in more and more securely the longer we stay in that position . If
this is what is meant by a stable bond market policy, I do not believe
it solves the problem of orderly adjustment of monetary policy to
changing economic conditions .
I think the answer to the question "How far should we go with
monetary policy ? " is like Abraham Lincoln's answer to the question
about how long a man's legs should be.
Monetary restriction , in
combination with budget policy, savings policy, and other appropriate measures, should be adequate to prevent inflation . The problem, as Mr. Folsom has pointed out, is the problem of the right combination. When in an inflationary situation we decide not to push
monetary restriction further we should be deciding to do more of
something else. The right combination will vary from time to time
and can only be judged by evaluating costs and benefits.
Beyond this I can only urge that in appraising the costs of monetary restriction we should not be frightened by bogeymen. We should
not exaggerate the fragility of our financial system.
It is sensitive
but sturdy. We should not exaggerate the difficulties of Treasury
financing in a moving bond market.
It has been done before and
the Treasury is doing it successfully now. We should not exaggerate
the significance of the interest burden. The Secretary of the Treasury
has clarified this matter in his reply to the committee . We should
not fear that secular stagniation is around the corner, requiring perpetually low or zero interest rates. We should not think that persons
who receive interest are less entitled to their incomes than those who
receive other shares in the national income.
I think that if these considerations are borne in mind we will find
an important and active role for general credit policy.
If we do not follow this course, if we soft-pedal credit control , we
probably shall have to put up either with more inflation, or with
more direct controls over prices, wages, and materials. Quite likely
we shall have to put up with more of both. I think we are all agreed
that inflation is a great evil , and that direct controls are alien to our
way of life and should be used as little as possible. This is one of
the reasons why I think it is so important for us in our present situation to make vigorous use of credit policy, particularly those instruments usually referred to as "general credit policies," that is, open
market operations, discount rate, and flexible reserve requirements.
These tools of policy, though they may sometimes hit hard, do so
through the process of the market. They do not involve direct interference with the actions of individuals and businesses . The same
cannot altogether be said of the so -called "selective" instruments of
credit policy chiefly over consumer and housing credit under regulations W and X. These do involve some interference , even though
of a rather impersonal kind. For this reason they should , in my
opinion, be regarded as subsidiary devices upon which we do not
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want to rely too heavily or too long. In our present defense economy,
however , there is special need to guide credit and resources to the
most important users and to limit their use by others . Under these
unusual conditions, the selective instruments can usefully complement our general credit policies. The use of these powers must be
flexibly adapted to changing conditions and the Federal Reserve
should have sufficient authority to operate in this flexible way.
As times change, supplementary tools of credit policy may need to
be added . The Federal Reserve in effect now has several new tools.
Among them are regulation X, which relates to construction credit,
and the revived regulation W, relating to installment purchase credit .
For further powers I see no urgent need at this time. I think so
particularly because open market operations have now been revitalized
through the removal of the peg. I do not favor, therefore , proposals
made in recent years for secondary reserve requirements in the form
of Government securities, nor for reserves against different types of
assets. The main goal of these devices was to insulate the Government securities market to some extent against a tightening of credit
for private borrowers. It was thought that this might be a way of getting back to a flexible rate policy in the private money and capital
market, without causing equal fluctuations in Treasury obligations.
In my opinion it is doubtful that such devices could have been effective so long as the bond market was pegged.
Meanwhile, the policy of par support for Government securities
has been abandoned . No extreme repercussions have been felt, as had
been feared by many. There seems to be less need now for adopting
such protective devices, even though the principle of seeking to insulate the Government market has some merit, as I explain later.
Both the securities reserve requirement and the asset reserve plan
would mean a major change in our credit system. They would make
it less flexible and less well able to serve the needs of our growing
economy . And the compulsory holding of Government securities
under such plans might well have a bad effect upon people's attitude
toward the public debt in general.
The voluntary credit restraint program is, as its name implies, a
voluntary organization of our private financial institutions aiming
to hold down the use of funds for nondefense purposes . It operates
under standards set by the Federal Reserve, and represents something
quite new on our financial horizon. Its efforts in fighting inflation
are a real contribution. But beyond that, it has done something else
that is very worth while. Through its work, the financial sector has
come into close working contact with monetary policy. Perhaps this
will mark the beginning, in this country, of the closer relationship
between the market and the monetary authorities, that has proved so
fruitful in some foreign countries.
I should now like to turn to the relations of debt management to a
flexible monetary policy. That the debt, and decisions about its
rates, maturities, and related factors play a very powerful role in the
market is obvious. This influence results, in the first place, from the
sheer size of the debt. The Federal debt now amounts to close to 50
percent of the sum total of all public and private debt in this country.
It further results from the fact that refunding operations keep the
Treasury almost constantly in the market for large amounts.

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Finally, the debt's influence results from the fact that the Federal
Reserve must , if unsettlement and conflict are to be avoided, create
market conditions that will put the market in line with the decisions
made about the debt.
This calls for the closest cooperation between the Treasury and the
Federal Reserve . Their cooperation must be of a kind that does not
infringe upon the Treasury's primary responsibility for the public
credit. It must insure, at the same time, that the Federal Reserve
can carry out its statutory obligations in the regulation of money
and credit. In this joint venture of the two agencies, it seems to me
that the main burden of day-to-day cooperation falls mainly upon
the Federal Reserve. It must maintain an orderly market for Government securities. It must also maintain conditions