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Address of M*tK&IHE£ &. ECCLES before the Executives* Club of Chicago Hotel Sherman, Chicago, Illinois Friday Moon--Sepft ember 17, 1948. Chairman Corbett, Distinguished Guests and Members of the Kxecutives* C lu b of Chicago: this is, indeed,a privilege and with the business leadership of this great city. pleasure for me to meet a I never appear before a group to talk but that I am reminded of shat happened to me one evening when I was invited to speak to the editors of the McGraw-Hill Publishing Company, there were about thirty or forty of them and as we were having dinner I turned to one of my associates, who was an assistant while I was Chairman, and said to him, “ Elliott, as I look around I know a great many of these men and I am Just wondering if I have spoken to this group before.• Se s&id very seriously, *1 am sure that you have not, because if you had you wouldnH be here tonight.* j5*&ughte|7 So it is quite apparent that I have not spoken to this group before on the basis of that reputation! Tour chairman spoke of the rough ride that I had had on the Potomac. I rather feel that it was somewhat of, maybe, a fortunate ride, th e to fa c t th a t clarify my th a t re s ig n a tio n s ta te m e n t t o B o a rd a r e a p p o in te d b y t h e fo u rte e n years. d e s ig n a te d of four as th e y e a rs , I had had been in the Presidents desk. I spoke o f th in k I need this extent. The members of the Federal Beservw President and confirmed by the Senate ten years of C h a irm a n ie my term to run. th e fie e terms o f One of the members is of the Board by the President and the same is true of fo r C h a irm a n . to serve for a term Mr. Trufikiu neither appointed *se ae a aamber of the Board nor did he designate &* as Chkirca&n, It always tu-s been »y belief— and I no argued before the coauaittees of Congress durir^ the he&rings on the Banking Act of 1935— that the Chairman should serve at the ple*sur« of the President because he is the liaison between the Federal Reserve fcyst a uad any ^oiaLaist ration that nay be in power at any given tine, I did not succeed in getting that provision in the statute— 4ftat tne Ch&iraan serve at the pleasure of the President. However, as far as I was concerned, it seeded impractical that I, as Chairman, non &ou l d undertake to be a liaison if I wan person^ ^rsia with the President. So I said to Mr* Truaan, lrYou did not designate ae, and I want you to know that X will *ia*e available the chaimanship any time th&t you nay desire.* He assured m» upon that occasion and others fcfnt he would not hear of it. But, when ay term at Chairman— 4he four years*— did expire, which was last Jfanuury 31st, without any previous notice, except about two days, he had John Steelaaa advise ae he was not going to redesignate m years. aft *r X had served for so leanjr Veil, X didn't feel too happy about the way the setter was handled. I have been away from Washington nearly a month, during which time I have been up in Canada— Banff, Lake Louise, and Jasper— and out to my home in Utah. Therefore, X did not have either the inclination or the opportunity to prepare a written speecfe, and I am going to have to ask that what I say today be off the record. I do feel that it is one thing to speak on the record before the committees of Congress when you have no choice as to whether or not yon will go up there, but it is quite another thing to speak on the record under these circumstances and during these critical times, without preparing a state ment* Accordingly, If the press will be good enough to treat what I say say off the record, I will be glad to raeet them in a press conference after the meeting* I have nothing to say, bgb if they have some questions I can indicate whether or not X can answer them on the record. How, getting down to some of the serious problems I know you expeet and you want me to discuss, that is, the development of the inf1stionary situation with which we all are confronted, and some of the causes and the effects of the situation, X am going to read just briefly from a statement X aade before the Joint Comcittee on the Economic fieport, which is Taft Committee, on April 13th. Board. Known as the This is the statement I aade on behalf of the X Just want to give you this excerpt from, its ■lever In our memories has the world been pervaded by greater fears, confusion, and discouragement arising chiefly because of the disappointments ef the past sod the uncertainties of the future* The great hopee we had during the war for achieving a Lasting peace In a prosperous world have been steadily diminished because a few rv&hless and despotic men hold a sword of Damocles over the heads of a free peoples throughout the world. It is difficult, if not impossible, to plan for a rational economic future either at home or abroad while that swore! hangs over us* le think that the prospect of removing the threat by peaceful means will be immeasurably enhanced the sooner we assert our moral, and our physical power to establish the foundation* for peace before we are engulfed by the economic and social problems which grow more menacing the longer the establishment of a firm basis for a permanent peace is delayed.11 Mien the defense program was started in 1940, we had a great cushion of unemployment, of excess food, of idle productive facilities. It was not long, however, until the excess capacity of men, material, and plants had been utilised, that was brought about by war defense and soon thereafter by war financing. The war financing would not have brought about the inflationary situation had it all been financed currently out of taxes. But that was not done. It possibly could not have been done. It never has been done in any country and we financed during the entire war only about <44 per cent of its cost, which was over U O O billion, out of taxes. The balance of it was financed out of borrowing and the public debt went up from something around $45 billion to |£70 billion in the short space of five years. k very substantial part of that pnblic debt was financed by the banking system, which was the process of creating money. Money comes from bank credit— and I won*t go into the mechanism of how that is brought about except that it is a fact. At the end of the war, the expansion of bank deposits and currency had increased about three times. la addition to that, the public held large quantities of government securities which were the equivalent of cash. Se wanted to prevent inflation daring the war when 45 per cent of our entire productive capacity and good* were being devoted to the sustaining of the war and the balance wae left for the civilian population. The money supply in the hand* of the civilian population equaled 100 per cent because the goods available for war were not available for purchase by the civilian population who produced the goods, but they had the money which they got for the production. Therefore, you had a very large supply of money and a growing m ; .1} supply of money without a growing supply of goods available to the civilian population. In order to prevent inflation during the war, the harness of controls was put Into effect— price control, rationing, allocation of scarce materials, building permits, wage controls, export licenses, and excess profit taxes. It was perfectly natural that when the war ended there would not be a supply of goods and services available to meet tae demand and available purchasing power. How, inflation is a condition where the means of payment in the hands of those who will spend it exceed the supply of goods and services available— had- and still have*and you certainlyy&*s& that condition. You had a terrific potential inflation. Ton had a backlog of demand that had accumulated for many goods and services over a period of five years. Is addition to that, you had shat was the normal current demand which you would have had had there been no war. So immediately there was what was the current demand pine everybody1s desire to get shat was the backlog of dmsand* Khat we have had sinee the war ended is an attempt on the part of the American people and American business to not only satisfy their current demands, bat to satisfy this backlog demand. It was not physically possible to produce what would be the equivalent of seven years in housing, automobiles, and many goods in a period of two to three years, the miracle is that w© have not had far saore inflation. If it had not been for the great faith of the public in the government and the purchasing power of the dollar— in i&ich they have been deceived, I think, in mJiy instances— we certainly could have had far more inflation than we have had. Mow, to i«ake this inflationary situation even worse, we have had re cently an expanding military program without a terminal point, ie have had an expanding European Aid Program, and there is no terminal point to that. world aid program would be better. about #5 billion. A Bight in the face of that, we cut taxes So the most important anti-inflationary weapon we had in the Kit, which was a budgetary surplus, has practically disappeared. the taking off of the controls was a tragic mistake— and that Mistake was made, not last year, but in 1945* before the end of 1945* Practically every control was taken off Price control was left on, but price control was completely useless without rationing, without allocation, without wage control, and without the other harness of controls* All it did was to play into the black market— the racketeers, who were the strongest advocates for a continua tion of price control, they were just like the bootleggers during prohibition— they wanted prohibition continued; and Just so did the black market operators want price control continued* It was ineffective when you took the controls off* Mr* Vincent and Mr. Snyder strongly advocated the taking off of the excess profits tax* Mew, I am not saying that the Republicans who were not in control of Congress at that time raised any objection to taking off these controls* Neither am I saying American business and farmers and labor raised objection to it* Everybody Wanted them off, except; labor wanted wage controls off, but wanted price controls left onj business wanted wage controls left on, but wanted excess profit taxes tcken off; the farmer wanted the ceiling taken off of his farm products, but wanted a floor kept on themj the banker wanted higher interest rates as a means of cant rolling credit, but wanted no other means on the part of the Federal agencies to control his banking operations. Boll, you know the story. The Democratic Administration are largely responsible for the results. They were supported to a great extent by the Republic ans and most of the American public. The longer inflation goes, the more serious will be the adjustment. You have already c reated a terrific disequilli brium. Business as a whole, and the farmer and organized labor have not suffered by inflation, the in come of business after taxes has more th&n doubled. I am speaking nationally. The income of the farmer has gone up more than two and a half times sines 194U The wages of organized labor— not taking into account their inefficiency, which in many cases is appalling— has likewise doubled. On the other hand, you have the great mass of the unorganised groups, the pensioners, people living on annuities, the white collared groups, and tho returned veterans— many of them mere not members of unions. The union members are about 14 million out of about 60 million people employed. Thai group is hurt, and in order to keep up their standard along with the groups that have been benefited, they have usod up some of their savings. in their *1* bonds aad they have gone into debt. They have cashed Consumer credit since the war ended has practically doubled, ment eonsuiaar eredit has sore than doubled. &l«ost doubled In the past two yferi. Install Mortgage debt on housing has He *uve bsan getting the litti® fellow 1 st debt to purchase inflated house# In the last two y^ara at ths rote of around #9 billion a year. Mo«, true, you can have inflation as long- a* you iceep up the process of getting the public living beyond tneir incomes by the process of consuwer credit, mortgage credit, or bank credit that is n.;t tied directly to the pro duct ion that would not be produced with ut tbe bank credit. On too of all of this inflationary effect, as I &uy, you have had the Federal Government aad the states and au&lclpalitl&a carrying out public works and public projects. So what you should be holding toaay for a cushion for a deflationary period . in public wor<s and public roads, not only on the part of the Federal govern ment but on the part of all the asinicip&lltlaa and states, is being spent, that, In addition to/state and local government* have been passing soldier bonuses and increasing the public’ s purchasing power. These Lseasures have been financed through defat, and this creation of debt ha* helped to sustain inflation. You have had the Federal government stisailate this housing program on the one hand, particularly through the *sortgage which Is Known as Titl* 6, while they *ro talking about controlling inflation on the other. *e have had the veterans* housing progr&j?. which has boon ancth&r stimulation. to h~v* had the HFC to provide credit where banfcd did not* So wo have been perfectly inconsist ent.Ait one and the »i.me time, the Government talks about controlling inflation through various means while 1 doing the very thing that tend* to create and sustain it. You have got what we call parity payoent in the ease of the farmer. The Dopart&eot of Agriculture talks abovt tho reduction of production so as to be *ble to sustain prices. It appears now thfet w* *rs going to get ao*as fsurpluse* &nd, with the Ootrema«at bound to »aint-in parity, they are going to have to buy up the surpluses &ad therefore there is a feeling that pro duction should he restricted so Oovenament »ilL not have to buy up the surpluses. You >ee, we are not dealing with the economic facts of lifo— neither the governsi©at, aor business, nor the farmers, nor labor. It is ua- It is too Late to mt the«& on non. foktunate that i» did not keop controls m. First of &Xlf the public would not accept thett. It is like huapty-duapty on the wall. You Just cannot mt it together again, sad one control without all of the others would be -uit* useless. You aaist have the entire harness, and I dca't think say such a regi mentation in peaoetlas is practicable or possible without * greater degx-as of education and understanding than the public now h*s. There are some things that could be dons. I aa going to Just give you «hat I s^id off the cuff the other day before, the Gessalttee of Congress, If X have it hors* X u& not sure that X do. This was before the Coo&dttee, and it read fairly well, so I possibly could not say it any better. "that we are interested la this tiae, of course, is not so seech reoriaination. *h&t we are interested in is what c m be doas, at this late dite, to overeo&e as far as possible the aist*kes of tho past. X do not beilsve It practical to j^ut back a complete harness of wartias inflationary controls.*1 The p ro o s can g o t t h i s because t h is Is w hat X s a id b e fo re th e C o a a ltte e o f C o n g re s s . *X the job. not do do X adjustment at boea c re a te d b e lie v e t h a t t o b e lie v e eoae that it poiat. sad ta s is put back to o soae late to T h o d l soq a llllh r lw a public are in d e b t* X s a d le a v e & v o id a aad th e o ff others would do serious deflationary d is t o r t io n s h a ve a lr e a d y do b e lie v e t h a t th e inflation esa go further if nothing is done and if budgetary deficit# develop,* that is, if we don't have the budgetary surplus, *it can be long- postponed, and can be catastrophic in its ultimate effect the longer it is postponed, I do believe that the sooner inflationary development is stopped the less serious the adjustment, or the deflationary development, will be. *1 do believe it essential that credit controls, sufficiently broad * power and authority, both in consumer credit and bank reserve# field, be m d e available. That can be, at the present, the most useful, the most practical and the most effective.* Of course, budgetary surpluses mould be more effective than anything! bat that is not something that you can get quickly. •I cu> believe that everything within the power of the administration and the Congress should be done to maintain or to secure a budgetary surplus. I do believe that the Federal Government should do everything within it# power to encourage the States and cities to postpone every expenditure that it is possible to postpone, and to set an example to the states by doing likewise. X do believe that the Federal Government should not, for wh&t seems to m# political reasons, encourage a housing program in excess of the capacity of labor and material available, and encourage further inflation thereby. I de believe that the Federal Government should do everything in its power to bring d o m food prices, to take off floors if necessary, and to encourage more and not lees produeti n*— at least at this time. •I do believe that we should...and I may sound naive in this regard-— adjourn political consideration#, and I say that for both parties, and to ^,in consider honestly and openly in the interest of all the people^ the economic facts of life.* -1 0 *- In the beginning of my sti.tament, I quoted from a statement that I had read on the 13th of April, which you Kill observe, recognised that our domestic inflationary situation eould not toe de*It with, no matter what we did, adequately as long as we did not have a basis for peace in the world* So long as we have a burden of world aid to prevent cooKsanis* from engulfing the world, and so long as we feel it necessary and urgent to spend the billions we are for a preparedness progrsa, it is pretty difficult to deal *ith these canonic problem on the domestic front* ie cannot and do not operate in a vacuum. Therefor®, I think that we ranat be realistic in dealing with this foreign situation, and I cannot help but feel that the results of the past three years have not been very fruitful. It is apparent to all of us that the world situation has been rapidly deteriorating, le have not kept pace with the developments, at least sufficiently, to even maintain a status quo which was entirely unsatisfactory. But it seems that we may h_ve lost ground. le must have a basis for world peace, and we must have it soon. If we mast risk war while *e have the atom bomb and the enemy does not have it, then we had better risk it now rather than be forced into it at a time when, with all of our preparation— *nd preparation is relative— we say be less well prepared than the enemy. A program of preparedness is all right if it is preparedness for offense. But a preparedness program for defense does not seem to me to make too much logic. If a preparedness program of defense means anything in the present situation, it means an armament race and an armament r*ce ultimately leads to war— and in this instance it would be an atomic war. le may not be the ones to choose the time, democracies seldom, if ever, do. The British and the French were sufficiently preoared to stop the Germans and enforce the conditions of the Versailles Treaty in 1934 and *35 and 936, even though they user* less prepared than they were in *39 wnen they were entirely unprepared to deal with Hitler. Ye were well prepared to stop the Japs from going into Manchukuo when they broke the Nine-Power Pact. But oven though we were possibly much better prepared at the time of Pearl Harbor, relatively we were less prepared. It seems to mm that we ore confronted with these very difficult alternatives. Ve carry on a preparedness program of an expanding amount of money— $15 billion this year, eleven last and eighteen or twenty next. knows? The Jtore inflation you get, the more money it takes. program to hold our position! in a sense. Iho A world aid All of that &eans that we are getting weaker Ve are getting weaker in an economic sense on the home front while bar enemy is getting stronger. It seems to me, then, that we are confronted with either wrecking oureelres ultimately on the rocks of inflation, or destroying the very system that we are preparing to save by the adoption of such rigid controls that we would bo, in essence, a totalitarian economy ourselves to control the domestic situation, or the third alternative is to find ways and moans very shortly of forcing a basis of peace in order that we can avoid the catastrophe that we will bo ultimately confronted with if we do not face up to these very unpleasant alternatives. 2m that connection, I would like to give you some quotation from a book written by none other than Major General Dean wno headed the Salted States Military Mission in Moscow throughout the Period of Our lar Alliance with tho Soviets. Mobody could Know better than he the situation. -1 2 - Hiat does he say? *If the record up until the end of the war was not sufficient to clarify Soviet intentions, certainly all doubts snould have been dispelled by February 9, 194&, «hen Stalin reaffirmed the doctrine of Marx and Lenin in exhorting his people to extraordinary efforts in the preparation for the inevitable wars which must be expected so long as the capitalistic system exists* ■In a sense, we are fortunate that the issue is so clearly drawn* Merer before in our history have we had so such advance warning of the peril which confronts us* Sever has it been more important to t*ke preventive measures to avoid the dangers which lie ahe^d and to prepare to or ercome them if they prove to be unavoidable* This is going to require American leadership which is crystal clear as to our o**n objectives and which is sup ported in pursuit of them by a unified public opinion. Most important, we must adopt a program which is designed not to defend our American way of life passively, but offensively, to counteract constructively those forces which threaten it, •Again, Soviet leaders would probably have used the threat of the Eed A m y with much greater abandon were it not that they know that we still have a strategic air force whereas they have noj£th«t is comparable to it, that we still have naval supremacy despite the number of our ships that are inactive and above all that we alone have the atom bomb. Until the Soviet Union has atom bombs of her own, she will be restrained from crossing swords with those who have and the chances of obtaining our objective by peaceful means will be enhanced immeasurably if we are prepared to defend our position by foree at any point where it is threatened* -13- •Sothing induces greater restraint on the part of the Soviet leader# thaa a display of strength by their adversaries*. I have just one more quotation— linston Churchill, that great British wartime leader, in an address before the Parliament on February 23rd of this year said: *The best chance of preventing war is to bring matters to a head, to come to a settlement with the Sov et government before it is too late. This would imply that the western democracies would ta&e the initiative in asking the Soviet for a settlement* comumnists. It is idle to reason or to argue with the It is, however, possible to de&l with them on a realistic basis and in my experience they will keep their bargain© only as long as it is in their interest to do so, which might, in this grave aatier, be a long ti^s once things are settled. *1 said that the possession of the atom bomb would five three or four years4 breathing space, perhaps it asay be move than that* years of tneee years have air ady gone* But more thaa two I cannot think that any serious discussion which it may be accessary to have with the Soviet government would be more likely to reach a favorable conclusion if we wait until they have got it, too* tie may be absolutely sure that the present favorable situation cannot last** that I have said on this last subject is entirely out of my field of monetary banking aad credit control* But I cannot think ia terms of a S s s a t i s economic social problem when every problem you look at, whether it is taxes, whetaer it is appropriations for ths military or foreign aid, or Aether it is inflation, goes back to Russia* That is ths controlling factor at the present time, not only of the foreign situation, but of our domestic situation* •Up Ton have been very patient and I possibly have talked too long. Sihat I have said h&s been off the record, and I appreciate very aaich your attention* I thank you! (The audience arose and applauded) M M W tf < K M Ir W T c a S T T w
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