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JANUARY 23, 1948

Mr. Chairman and gentlemen:







We are'met today to discuss and to lay plans
to combat one of the most vicious phenomena of our
complex economic world.

It is an aspect of that world

that in itself has caused and is today causing untold mal­
adjustment and misery, but that is most to be feared
because of the utter chaos that follows inevitably when
it has run its course*
I refer, of course, to that fifth horseman of
the Apocalypse, inflation, and its even more hideous twin,
Of itself, inflation is not an ominous word; in
fact it has a rather pleasant sound*

But its connotations


are extremely unpleasant.



If it occur in a person’s ego,

then that person is due for an abrupt and unpleasant
awakening to reality.

If it occur in a toy balloon, then

that toy is due for deflation, either through its regular
opening or through the more sudden and ignominious death
of a loud bang.

If it occur to excess in our economy,

then the pains that we have felt in the past will seem as
nothing to the agony that the future will hold.
The banks, of course, can not win the fight
against inflation single-handedly.

It is a battle that

requires the understanding and the effort and the cumulative
force of every individual in this country.

But the banks,

asCredit reservoirs for their communities, and the baakers,
as outstanding citizens of those communities can do much
by precept, by example, and by patient education to

convince our people that inflation cannot, must not and
will not be allowed to go its heady way unchecked.
And it is a heady sort or way, comparable in
many respects to the exuberant, carefeee, spendthrift
glow of a celebrant on New Year's Eve.

But Just as

surely as there is a New Year»s Eve with its gaiety and
abandon, so there is New Year's Day with its headaches
and its remorse and its resolutions.

We have tasted the

spurious Joys of inflation many times before.

We also

have spent years nursing ourselves back to health after
the hangovers set in and vowing that it would never happen

I hope and pray with all my heart that this time

you and I mean what we say, and that we all shall spread
the anti-inflation gospel as diligently as the most sincere
evangelist preaches his beliefs

At the risk of oversimplifying a really
complex problem, I should like to state as my fundamental
belief that the banker can do two things that will retard
inflation materially and that will contribute to earlier
stability of our economy.

These are:

First, Bankers

must lend only when the credit will increase available
supplies of basic raw materials, increase plant capacity,
or otherwise help production of needed goods.


Bankers must intensify their efforts to encourage savings
on the part of their customers to absorb as much as
possible of the increased purchasing power that is
bidding for the goods and services in short supply.



may seem small thumbs in the dike, but they are steps
that will serve effectively as brakes until the full might
and resources of the nation can be thrown behind a truly

effective anti-inflation program.
The President and the Congress have indicated
their awareness of the problem and have taken some steps
to unwind the inflationary spiral in an orderly way.
There is every indication that the new session of Congress
will move further in this direction.
The Federal and State bank supervisory agencies
together with Federal Deposit Insurance Corporation, have
made plain their viex^s on what banks should do to help
win the fight.

In a Joint statement issued on November 24,

the supervisory agencies and the Corporation said, in part,
U0ur country is experiencing a boom of dangerous proportions.
The volume of bank credit has been greatly inflated in
response to the needs for financing the war effort.


and foreign demands for goods and services are exerting a




strong upward pressure on prices in spite of the high
volume of our physical production.

These demands would

be inflationary without any further increase in the use
of bank credit, but the demand is being steadily increased
through continued rapid expansion in bank loans, in
addition to other factors outside the control of the
banking system.
"A substantial increase in production,
agricultural as well as industrial, would be highly

However, increases can only take place slowly

and to a limited degree.

In industry, they are dependent

upon corresponding increases in the available supply of
basic raw materials, plant capacity, and the number and
productivity of the labor force.

Therefore a further

growth of outstanding bank credit tends to add to the
already excessive demand and to make for still higher
"The Board of Governors of the Federal Reserve
System, the Comptroller of the Currency, the Federal
Deposit Insurance Corporation, and the Executive Committee
of the National Association of Supervisors of State Banks
are unanimously of the view that present conditions require
the bankers of the country to exercise extreme caution in
their lending policies.

It is at times such as these that

bad loans are made and future losses become inevitable.
"It is recognized that a continued flow of bank
credit is necessary for the production and distribution
of goods and services.

The banks of the country have

adequately met this important need in the reconversion




Under existing conditions, however, the banks

should curtail all loans either to individuals or
businesses for speculation in real estate, commodities
or securities.

They should guard against the over-

extension of consumer credit and should not relax the
terms of installment financing.

As far as possible

extension of bank credit under existing conditions should
be confined to financing that will help production rather
than merely increase consumer
Let me emphasize on behalf of the supervisory
agencies and the Federal Deposit Insurance Corporation
that our views on bank credit policies have not altered
during the past two months.

We are firmly convinced that

the ppol of consumer purchasing power must be dried
rather than augmented, and we believe that judicious use

of their lending power by bankers can accomplish at least
half that objective.
It is gratifying to see how your own American
Bankers Association has entered into the fight and has

organized this splendid program for education and exchange
of ideas,

in this case, certainly, even the most crass

critic could not accuse the bankers of feathering their
own nests at the expense of our Nation’s welfare.
The program outlined early this month by
Mr. Dodge, your ABA president, and currently being
elaborated through a series of meetings such as this, has
the unqualified approval of the Federal Deposit Insurance
Corporation, and I feel safe in saying that the federal
and state supervisory agencies share this view.




Mr. Dodge*s program parallels that of the
supervisory agencies in that he urges rigid restriction
of speculative commodity and inventory loans, postponement
of mortgage loans for non-essential building, and priority
to borrowers who can turn out needed goods and services
in order to keep existing plant facilities functioning at
maximum levels and in order to encourage the development
of new plant capacity*
The program goes
with the supervisors.

further than was possible

It urges a greatly intensified drive

to sell Treasury savings bonds to the public and to promote
other forms of thrift, such as savings accounts in banks,
as a means of absorbing seme of the surplus money in the
spending stream which would otherwise continue to compete


for the goods and services in short supply.


tlis supervisors cannot, with any hope of success, tell
the people to save, rather than to bid against each
other for scarce goods.

But you bankers, known and

respected in your communities, should be able to make
it evident to your neighbors that they are doing themselves
and the Nation a great disservice in bidding up scarce

I hope that you will spread wide this gospel,

’’Make every dollar you lend, produce; make every dollar
you spend buy one hundred cents worth of goods or services.
While we are on the subject of saving, I should
like to point out that bankers again can teach by example
as well as by precept*
The commercial banks emerged from World War II
with assets over twice the pre-war total, while capital
accounts were only about 25 percent larger.

As a



consequence, the ratio of capital to total assets declined
sharply during the war period and the average now is
substantially below the level which in former years was
considered to be a safe minimum.

The question of adequate

capital did not receive much attention during the war,
since it was felt that the banks should be free to purchase
as many United States government bonds as might be necessary
to finance our war effort.

However, that condition no

longer applies, and both bankers and bank supervisors must
reexamine the entire question of the adequacy of bank
Large scale reduction of the Federal debt and a
rapid increase in the rate and amount of bank lending
during the past two years have altered the composition of
banks* total assets in great degree, the net result being


that there has been a sizable gain in the ratio of the
so-called “risk assets“ to total assets in most institutions.
It is axiomatic that an increase in risk calls for an
increase in the protection against risk— in this case
steady and considerable augmentation of bank capital
accounts is indicated.
In some instances the sale of new issues of bank
capital stock is difficult these days.

Sound banking and

supervisory policy, therefore, must call for the establish­
ment of adequate reserves against risk assets and for the
steady plowing back of bank earnings into capital accounts.
The time to save money is when we are making money.


banks are making money, and I urge that they set an example
of thrift and husbandry by judicious use of their earnings


In conclusion, I cannot overemphasize the
importance of the role that you bankers must play if we
are to win the battle against inflation.

The soundness

of our whole economy depends upon the soundness of its
financial and monetary systems, and you men are the
guardians of those systems, charged with responsibility
for their health and their proper functioning.
bank management is never a simple task.


Today it requires

more vision, more unselfish service, and more courage than
ever before.

The financial fate of our Nation rests in

the hands of you men and your colleagues.

I hope you will

meet the challenge of inflation squarely and fight it with
every weapon at your command.
the battle.

I am confident we can win