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Statement of
Marriner S. Eccles, Member
Board of Governors of the Federal Reserve System

J U L Y 29 A N D 30,1948

(From the Hearings before the Committee on Banking
and Currency, United States Senate, on S. J. RES. 157)

M r . E C C L E S . M . S . Eccles, Governor, Federal Reserve Board,
Washington, D. C.
The C H A I R M A N . I want the record to be clear on that point, M r .
Eccles. You know, without more ado, the reason you are down here.
We are burdened and sincerely so, with the situation that exists in the
country. So when this committee was in session to consider these
matters, I sought to have the Chairman of the Federal Reserve Board,
M r . McCabe, to come down. He did not want to come. He felt
he was not ready to go on, that he needed until next Tuesday for
more preparation.
M r . Snydtet did not want to speak until after M r . McCabe spoke.
Needing a witness at once to come down and give us an understanding
of these things, I turned to you, and you demurred about coming
down, stating as was true of course, that you were no longer.Chairman
of the Federal Reserve Board, and if you came, you would come down
in your individual capacity as Marriner S. Eccles—I believe that is the
name—and you have come down here to tell us what you know as an
individual citizen, which is fine.
Subsequent to that time, Mr. McCabe decided he would come
down and he talked with you about it. You knew he was coming.
When I talked with you I told you the two outstanding questions I
had in mind. So I am going to propound those questions to you
now and I assume you have given them some thought and are ready
to speak in your own way. I think they are both $64 questions,
that is, $65 questions.
Here they come: Where should the American people place responsibility for the Federal Reserve Board not getting the credit controls
i t asked for?
Two, who is responsible for the inflationary development in this
country which has taken place since the war?
Go ahead, Mr. Eccles.
Mr. ECCLES. Senator Tobey advised me yesterday afternoon for
the first time that he desired me to prepare for this committee today.
I did demur. I told him I felt i t inappropriate for me to appear until
after the Chairman of the Board or the Secretary of the Treasury
appeared, for the reason that these hearings were being held as a result
of the President's special message to the Congress, and I did not feel
that I could or should be the spokesman for the Federal Reserve
Board or for the administration with reference to the inflationary
issues that were before the country and the Congress.
A t 5 o'clock Senator Tobey called *me up and said that he had been
unable to get either Chairman McCabe or M r . Snyder, Secretary
Snyder, for this morning; that he had called his committee together
ana did not have a witness, and asked if I would help him out. I told
him under the circumstances I would be willing to come up here, that
I had no statement prepared, that I could speak only as a member of
the Board of Governors, of course, as every Board member can speak,
not only as a private citizen but as a public official, as a member of a
board which is supposed to be and is an independent body and an
agent of the Congress.
I have a good deal of sympathy for the position that Chairman
McCabe took. I think that had I been Chairman, I would have felt
exactly as he did, that I could not well come before this committee
* July 29,1948,


upon such short notice without having an opportunity of checking
the matter with the Board, because, after a11, the Chairman is supposea
to speak for the Board.
The questions that the Senator indicated to me yesterday that he
desired me to discuss, because it was necessary for me to have some
idea as to what I was coming before the committee for, as you can
well observe, are questions that are controversial and possibly involved,
and I shall try as best I can, with such opportunity for review and
preparation as I have had, to answer the Senator's questions. I shall
try to be as objective as I can.
For the sake of the record, Senator, will you read the first question
The C H A I R M A N . Where shall the American people place tbe responsibility for the Federal Reserve Board's not getting the credit controls
i t asked for?
Second. Who is responsible for the inflationary development which
has taken place in this country since the war?
Mr. ECCLES. The responsibility for not getting the credit controls
wbich the Federal Reserve Board bas asked for must be shared by
more, of course, than any one person or any one group. To review
the position that the Federal Reserve Board bas taken, the Board
very clearly, I think, in its report to Congress, of 1945—and I would
like "to come back to that—called attention of the Congress to the
danger of further monetary growth, added to the great growth of
monetary creation as a result of financing the war and of its danger of
further inflationary development.
The Board considered its powers inadequate and, therefore, unable
to meet the problem and the Board stated the reason.
I n 1946 it again called the attention of the Congress to its report of
1945 and emphasized that the situation had become accentuated, that
the inflationary dangers were even more apparent then than they
had been before.
Senator C A P E H A R T . May I ask this question: Do you feel that
today they are greater even than they were in 1946 and in 1945?
Mr. ECCLES. I think you have had a great deal more inflation since
Senator CAPEHART. But is the danger greater today than it was in
1946 and 1945, of more inflation?
Mr. ECCLES. I don't know how far the bubble can go before it
breaks. Of course, we must say that if it is extremely small, it has
more room for expansion than if it has already expanded to proportions that it can no longer avoid breaking. As to how large the
bubble can go before it breaks, I don't know. I t has reached a large
Senator C A P E H A R T . Do you see any sign at the moment that would
indicate it had reached its peak?
Mr. ECCLES. Instead of getting into this questioning, I would like,
Senator, to follow through "my line of thinking on this whole subject,
and then maybe in that process I will answer some of these questions.
The Board in particular presented a program last November. The
President called a special session of Congress, as you well recall, to
deal with this same problem of inflation and, in addition, of course,
the critical necessity for European aid. Those were the two questions. I would like to review that situation.
The Board was asked in the preparation of that program to suggest,

if i t felt there was any need, a program to deal with the monetary
aspect of inflation. This was a considerable time before the Congress
met, several weeks, I. think.
The C H A I R M A N . Who asked you?
Mr. ECCLES. Clark Clifford called me up. I advised the Board,
and we proceeded, in line with our previous reports to the Congress,
to prepare a statement covering the entire inflationary situation.
We worked very closely with the Treasury and with the White
House, Although we considered ourselves an independent agency
and not speaking for the administration, yet we felt it was our duty
to suggest and to assist in developing a legislative program that in our
opinion was necessary and desirable in the field in which we have
statutory responsibilities.
This program was discussed and cleared with the Council of Economic Advisers of the President, and we were, I am sure, in agreement
with those people.
Up to this time we had no opposition to the program from the
Treasury. We were asked to prepare a short statement for the message covering the program. A statement was prepared. The statement was negotiated with Mr. Clifford, who was preparing the message, I think, and was, we thought, going to be incorporated in the
message. To our great surprise, when the message came forth, the
statement had been deleted. The question arose as to who had deleted
i t and as to whether or not the Federal Reserve Board was going to be
A conference was held with Mr. Snyder and I think Mr. Steelman
and others. However, we had found out from Mr. Clifford that the
deletion of the statement was due to the Treasury. We suggested
when we met that they carry the No. 1 item in the President's program, which was to restrain the creation of inflationary bank credit,
and that if they didn't want to support the Board's position, they
should propose a program. They had no program to propose ana
insisted that that was the Board's responsibility.
I consented to come before Mr. Taft's committee with the Board's
program with the understanding that the Treasury would interpose
no suggestion in objection. I t wasn't a question of support, but
there was a question that it was our responsibility and, inasmuch as
they had no program, that it would be up to the Congress to determine
the issue.
Senator C A P E H A R T . Y O U say they had no program; meaning the
Mr. ECCLES.' They had no program, the Treasury had no program,
with reference to controlling the creation of inflationary bank credit
covered by the President's message, and it was expected that we would
come and say what the Board felt it should say. We, of course,
didn't expect what we got.
Senator CAPEHART. They have no program today.
Mr. ECCLES. I would like to show the position of the Board of
Governors in connection with the November bank-credit program.
I quote from the Board's statement approved by Mr. Clifford:
Under prevailing conditions of employment and production, with the continued
shortage of labor and materials, an increase in the aggregate outstanding volume
of credit extended to individuals or to business would increase demand for goods
and services without increasing total production.

Tbis was supposed to be in the message:
For this reason, I recommend two measures at this time which would help to
restrain extension of credit beyond what is necessary to maintain the highest
possible production.

At least, these were some of the views that the Board had with
reference to what should be in the message and what we thought was
going to be and we only prepared i t upon request. We did not know
that it had been deleted until we saw the message.
Senator C A I N . May I ask one small question: Do you know whether
or not your Board was requested to give an opinion prior to the
President's last message to us?
Mr. E C C L E S . I wasn't here. I was out West. I would prefer you
find out from Chairman McCabe. I have been away for a month
and I got back just day before yesterday. So I am not acclimated.
Senator C A I N . You have had no reference made to such a request
in your presence since your return?
Mr. ECCLES. No; I nave had no request, but possibly the Board
or Mr. McCabe has. I don't want to answer the question, and I
don't want even to imply that there may not have been a request.
Then the question of consumer credit, which was also an item in
the program, comes in. One is the restoration, and so forth. The
balance of the suggested statement and the heart of it:
As a more basic means of restricting excessive growth of bank credit,
I recommend that Congress give to the Open Market Committee of the Federal
Reserve System a temporary authority under which all banks engaged in receiving
and paying out demand deposits may be required to hold in addition to present
required reserves, some specific proportion of their deposits in the form of cash
and balances with the Federal Reserve banks or other banks or in Treasury bills,
certificates, or notes. A t present the banking system has access, without effective
limitation, to reserves upon which a multiple expansion of bank credit can be
built. The proposed measure would serve to retard expansion of bank credit
beyond the requirements of full and sustained production.

I just wanted to let you know the view of the Board at that time
in response to the question.
The message of the President instead, contains these words:
One way to reduce monetary pressure is by restraining the excessive use of credit.
At a time when the economy is already producing at capacity, a further expansion
of credit simply gives people more dollars to use in biddfrig up the price of goods.

That is a good statement as far as it goes. I agree with it. No. 1
in the President's program was—
To restore consumer credit controls.

I appreciate the fact that this committee considered that matter and
acted favorably. However, what is by far the more important and
basic question, is the question of the quantity of money. No. 2 was—
To restrain the creation of inflationary bank credit.

That is all there was in the President's message about credit control.
In behalf of the Board, and the Board was unanimous, on the 25th
day of November, I appeared before the Taft committee as the first
witness in connection with this inflation question because this was
No. 1 on the President's program at that time, I presented a comprehensive statement which has had wide circulation and was published
in the Federal Reserve Bulletin, later I had an opportunity to appear
in connection with this statement before the House committee and
further elaborate; again appear before the House committee and
again appeared before the Taft committee—five times for discussion.

However, in the interim, Mr. Snyder appeared, and here are some
of the newspaper headlines: "Snyder disagrees with Eccles on reserves." "Snyder, Eccles, split on bank-credit controls." "Treasury
head against giving blanket power to raise reserve requirements."
And so on.
You all may be familiar with that situation.
With due respect to Mr. Snyder, I don't want to imply that we
would have gotten the power had he been favorable to i t or had he said
nothing, because we had very formidable opposition from the banking
fraternity, since nobody likes to be controlled. Everybody likes the
benefit of inflation where i t benefits them, but nobody likes to pay
the price. So it was only natural that the bankers would not be
favorable, and the Federal Advisoiy Council of the Board appeared
before this committee, Mr. Brown, Mr. Fleming, and appeared before
the Taft committee; and rather castigated the Board and myself for
the proposal, but they did not offer any alternative program for
dealing with the situation except largely the voluntary plan of control.
We nave had, or course, voluntary plans of control ever since the
war, and you all know the results of the voluntary operations.
I n addition to that, my good friend Allen Sproul, the president of
the New York Federal Reserve Bank, likewise appeared and testified
against the program, but offered no alternative course except to let
the short-term interest rate go up, which we were not opposed to,
winch we all agreed to, and still favor, so long as i t does not put undue
pressure on the long-term Government bond market.
I want to make it clear here that at that time and in this statement
the Board made it perfectly clear that they did not feel, or propose
that the program that they presented was all that was necessary. I t
was appropriately pointed out that the credit and monetary fieid was
supplementary to a proper fiscal program, that a sound budget should
be maintained, that a bugetary surplus should be continued, and so
A t that same time the Board pointed out that we were already in
the advanced stage of the inflationary disease:
I t is no longer a question of preventing, but of moderating it so far as possible.

We also said at that time that correction is long overdue and that
the lomger it is postponed, the more serious and severe will be the
inevitable reaction.
This is a very comprehensive statement on the whole inflationary
picture, and if you are interested in the Board's view, I suggest you
might read that statement. I t is entitled "Inflation, \is Causes and
Controls." I t is a statement you can get from the Board. I won't
read the statement. I t is pretty voluminous.
Senator M C C A R T H Y . D O you have any extra copies with you?
Mr. ECCLES. I don't have an extra one with me, but I will be very
glad to send you one, Senator.
The C H A I R M A N . Y O U might send each of the Senators one.
Mr. ECCLES. Yes, sir. That is very pertinent at this time, when
we feel that we have been pretty well defeated because we got absolutely nothing.
Senator CAPEHART. May I ask this question? Was any specific
legislation introduced?
Mr. ECCLES. The Board sent a draft of a bill to the chairmen—to
Chairman Wolcott and Chairman Tobey—with complete explanation
of the whole subject, for their introduction and consideration by the
committees if they chose to do so.

Senator CAPEHART. Was a bill actually introduced?
Mr. ECCLES. There were no hearings on the specific bill, and I do
not recall whether the bills were introduced. The Board did everything in its power. By the way, the bills were prepared and copies
submitted to, I think, the White House, even before the session was
I n answer to your question, I am trying to place the responsibility
for the Board's being in the position in which it now finds itself.
I received considerable encouragement when the President's Economic Report of 1947 was sent to the Congress because it appeared
that although the Treasury was opposed to the Board's having increased authority and power, and the bankers were, there were friends
in the White House who still felt that this was a proper subject for
consideration in the President's Economic Report.
He says on page 48, in the report that went up last January right
after the special session:
The regulation of credit in the process of inflation: One of the most potentially
dangerous sources of excessive demand is the expansion of credit. This applies
to consumer credit, commercial credit, real-estate credit, and credit on securities.

Then he recommends the consumer-credit controls be restored.
Also dangerous is the mounting volume of mortgage debt, urban and rural.
The longer-run interest of the people requires consideration of the present financial
policies of both private and governmental agencies.

I n the light of that, I cannot understand at this time the advocacy of
the Taft-EUender-Wagner bill as part of an anti-inflationary program.
He continued:
More dangerous than the expansion of consumer credit is the overrapid expansion of commercial loans by the banks. During the first half of 1947 commercial
credit expanded only moderately, but during the second half it rose at an annual
rate of almost $10,000,000,000, a much more than seasonal increase.

This was in line with the report of the Board to the special
session pointing these things out.
The increase coincided with the upsurging of inflationary developments. The
increase of bank credit was both a result and a further source of inflationary
pressure. The control of bank credit is not a simple task.

Nobody knows that better than we do. The control of any inflation
through any means is not a simple task, or deflation either. Nor is it
free from dangers.
Unwisely exercised, it could overplay its role and precipitate an undue liquidation of credit and a lowering of economic activity.

That is certainly correct, and the longer the expansion goes, the more
people who will get in debt for extremely high priced houses, with
little or no down payment, for consumer goods, and otherwise. The
further .the situation goes, of course, the higher up on the ladder you
would get and possibly the farther you would have to fall. I have
only been hoping that we could fall while we were able to pick up the
Furthermore, the problem is complicated by the relation of credit to the administration of the public debt.

I want to say considerable; not at this time, but I want to say later a
good deal on that problem, because here I have a bone to pick with
the Republicans on the question of the Board having adequate
authority already to deal with this question. I want to be objective
on this entire question, and there is an issue that I would think should

be clear about the Board having adequate power. I am going to discuss that issue at a later time, I hope either today or when I get a
chance, before this committee.
Limitations of the amount of commercial lending would probably be accompanied by higher interest rates except as special devices may be introduced which
can partially insulate the public debt * *

That was our proposal—
* * * Two unfortunate developments might take place. A decline in the
value of public bonds held by the Government, and an increase in the cost of
servicing the debt as refunding takes place. But these difficulties can be surmounted through the wise exercise of restraints upon excessive bank credit. I n
view of their central relation to the control of inflation, current proposals for
•credit control, especially those which have been presented by the Board of
Governors of the Federal Reserve System for the increase of bank reserve requirements should be given close study by the Congress, and legislation should be
enacted of a sufficiently comprehensive character to make available all the powers
•that may be needed.

Under "Management/' on page 85, there is more said upon the
subject. I am going to read one line of that:
I f it does not—

that is, voluntary control by the banks—
succeed, more direct action by the Federal Reserve banks will be required, but
such actions as may be taken would not involve withdrawing support from the
Government bond market.

The C H A I R M A N . A S to that voluntary plan, that is fine in its motivation, but the fact remains that you instantly create a competitive
situation in the average bank which lives for profit. Is that a fair
Mr. ECCLES. I t is. I came before the Taft committee in response
to the President's economic report. I n response to that report I was
called up by Senator Taft before the joint committee of Congress
whose job it is to consider the economic report. I appeared on April
13 ana presented a statement which was the unanimous view of
the Board before that committee of Congress in response to that
I n the interim this is what happened: I received a letter from the
President on January 27 in which I was advised that I had been
replaced as Chairman, which was perfectly all right. That is his
privilege. But I wish to call your attention to the last paragraph in
the letter. After asking me to stay* and assuring me that there was
no lack of confidence in me—
or dissatisfaction in any respect with your public service or disagreement on
monetary or debt-management policies, or with official action taken by the Board
under your chairmanship. All who are familiar with your record * *

and so forth.
Therefore, I urge you to remain a member of the Board and to accept the vice

which didn't develop, and I preferred not to accept it—
so that the benefit of your long experience and judgment will continue to be available and so that you may carry forward legislative proposals now pending in the
Congress dealing with the important problems of bank credit as outlined in the
President's Economic Report to the Congress * * *.

I read that report—
* * * as well as with pther matters in the interest of a sound banking system
and a sound economy.

That was fine. That rather pleased me because I was primarily
interested in the problem of inflation and not necessarily the Adminisration or any particular job.
T h e s t a t e m e n t o f A p r i l 13 I r e f e r r e d t o w a s i n c o m p l e t e a c c o r d a n c e
w i t h a n d i n l i n e w i t h t h e P r e s i d e n t ' s E c o n o m i c R e p o r t of the B o a r d f o r
further power.
T h e s h o r t s t a t e m e n t expressing t h e B o a r d ' s v i e w s
r e a d b y C h a i r m a n M c C a b e t h i s m o r n i n g is c e r t a i n l y i n l i n e w i t h t h i s
r e p o r t , a n d a l t h o u g h I d i d n ' t see h i s o t h e r s t a t e m e n t w h i c h i s a n e x pression of his views, I d i d hear a substantial p a r t of i t this m o r n i n g
a n d i t seemed t o m e t o be v e r y largely a c o n f i r m a t i o n or a r a t i f i c a t i o n
of t h e position w h i c h t h e B o a r d has been t a k i n g continuously a n d
p a r t i c u l a r l y the position w h i c h the B o a r d last took, w h i c h was n o t a
d e v i a t i o n f r o m w h a t i t t o o k b e f o r e , i n i t s s t a t e m e n t o f A p r i l 13.
I w a n t t o r e a d t h i s p a r t o f t h e B o a r d ' s A p r i l 13 s t a t e m e n t b e c a u s e
i t i s so p e r t i n e n t a n d b e c a u s e i t fits so c o m p l e t e l y i n t o t h i s p i c t u r e
and the need for a u t h o r i t y :
Need for additional powers—

I don't want to read more than is necessary, because it takes too long.
Speaking of prospects:
The prospects are that in the future gold inflow and Federal Reserve purchases—

these are where the reserves come from that create the credit—
and the purchase of securities in maintaining an orderly market for long-term
Treasury bonds will further increase bank reserves.

We buy those and that creates money and that is the way we
financed the war. Now we are financing private banking credit
expansion through the sale of Government securities to us.
The banks thus would be in position to extend loans and make investments for
private purposes, and this would mean still more inflationary expansion of the
money supply. To restrain such potential expansion, the Fedeial Reserve would
have to take action to absorb any excessive volume of reserves. Two types of
measures should be adopted. First, interest rates on short-term secuiities and
discount rates * *

and by the way, discount rates have got to follow. You can't merely
raise them. You have to follow the short-term rate on governments.
Otherwise, it doesn't mean anything because the bankers will get the
money by selling the governments instead of borrowing. So that the
discount rate is largely academic.
Interest rates on short-term securities and discount rates should be permitted
to rise to the extent possible without raising rates on long-term bonds and, second,
to the extent that this action is not adequately restricted, the Federal Reserve
should have the power to increase reserve requirements substantially to cover at
least any growth in the total supply of reserves.

The C H A I R M A N . Y O U have come to that point now, a short- and
long-term ratio of 2% percent.
Mr. ECCLES. The 2% is still there. The short term has not come up.
The first of these measures which could be adopted by the Reserve and the
Treasury without any legislation would be designed to induce banks to purchase
short-term Government securities from the Federal Reserve and to discourage the
expansion of credit to private borrowers.

That would sterilize either the gold inflow or the excess reserves that
are created by our being forced to buy Government securities in the
market, particularly from insurance companies and nonbank investors.
The policies during the past year have moved in that direction about as fast
as feasible without unduly upsetting markets. There are limits, however, to such
a course. Short-term rates cannot be raised much more without upsetting'the

2)4 percent rate for long-term Treasury bonds. Moreover, it is doubtful how much
any rate that is feasible will deter banks from making loans at higher rates to
private borrowers or purchasing higher-rate Government or other securities.

I expressed before the committee the possibility that the short
rate might go up as far as l}{ percent if the Treasury permitted it,
without putting too much pressure on the long-term rate. That rate
has not been permitted to go up by the Treasury, although while I was
still Chairman, before Mr. McCabe was confirmed, the executive
committee of the Open Market Committee with the Treasury and
pointed out the situation and recommended strongly that the shortterm rate be permitted to go to one and a quarter. If it had been,
we could have raised our discount rate possibly to one and one-half,
which certainly would have had some slight influence. I t would
have been a trend in the right direction.
Later, after Chairman McCabe had been confirmed, he and Mr.
Sproul, who i$ Vice Chairman of the Open Market Committee,
followed through on the same program and recommended the action,
but it was not followed. I t was announced by the Treasury that
both the June and the July refunding would be done at the same rate
as heretofore, one and an eighth. 1 just wanted to bring you up to
date on that.
On the question of the need for additional power:
Accordingly, the board believes that the System should be given authority to
increase the reserve requirements of all commercial banks. For the present,
this authority should make it possible for the System to require all commercial
banks to maintain primary reserves with the Reserve Svstem amounting to 10
percent of the aggregate demand deposits, and 4 percent of time deposits in addition to the present reserve requirements. This would give the Reserve System
power to increase reserves in the aggregate by a maximum of about $12,000,000,000.

The C H A I R M A N . Are you speaking only of member banks?
Mr. ECCLES. N O , sir. I am speaking of all banks, and in that
$12,000,000,000 is included the reserve requirements that would still
be imposed upon the central Reserve city banks, New York and
The C H A I R M A N . Mr. McCabe, this morning when that matter came
up, as I remember his testimony, said there might be constitutional
Mr. ECCLES. I do not see how there could be a constitutional difficulty. I am not a constitutional lawyer, of course. Maybe I shcu d
not say that. But our lawyers say there isn't any question about it,
and I would like to say it has been determined by the courts that
banks are in interstate commerce, that they are subject to the Wage
and Hour Act, and they are likewise subject to the Labor Relations
Board Act.
The C H A I R M A N . Regulation W applies to all banks.
Mr. ECCLES. Regulation W applies to all banks.
The C H A I R M A N . And the security holders of national banks.
Mr. ECCLES. SO does regulation U , covering margin requirements*
So that would not be a factor at all.
T h e CHAIRMAN. Yes.
Senator C A I N . Mr. Chairman,

I think one of our members raised
that question, not Mr. McCabe.
Mr. ECCLES. Senator Robertson raised it, and as he went out I told
him I disagreed with him.

Authority of this amount would enable the System to absorb the reserves that
are likely to arise from gold acquisition and from the necessary System purchases
of Government securities sold by nonbank investors over the next few years. I n
case banks should persistently follow the practice of selling Government securities
to the Reserve banks in order to expand private credit, notwithstanding higher
short-term rates and notwithstanding the increased primary reserve requirements, then the System should be granted the supplementary authority to impose
especially the optional reserve requirements along the line proposed by the Board
before the special session of Congress in November. This type of authority may.
be described as an optional reserve requirement because it can be held at the option
of the individual bank in cash assets or in short-term securities. The maximum
requirements under this plan could properly be limited to 25 percent of aggregate
demand and 10 percent of time. To be effective and equitable, it should apply toall commercial banks.

I would like to say so far as I am concerned, and I know i t also is
the view of some of the members of the Board, that unless this applies
to the nonmember banks as well as the member banks, I think we
would prefer to have no further authority, because it would tend to
destroy the Federal Reserve System. I t would not only stop us from
getting an increase in member banks but i t would be a great inducement
to many of the members to withdraw because i t would be the profitable
thing for them to get out so they would not have that amount of their
deposits tied up. The nonmember banks have the largest earnings,
taking them in the aggregate today, and they are the biggest expanders
of credit in the aggregate in proportion to their size, on real estate,
consumer credit ana all.
This would have no effect upon the dual banking system at all
I t has nothing to do with the dual banking system. We already
have nearly 3 , 0 0 0 State banks which are members, as well as national
banks. We are not asking that they be members. This does not
force them into membership. All we ask here is that those who are
not members would still have to carry with the Reserve System and
have locked up the same amount of their deposits or their reserves as
the members have by reason of this particular action. Aside from
this proposed 10 percent, what we call country banks, which are
member banks, already have 14 percent locked up, the Reserve city
banks have 20 percent, and the central Reserve city banks, 24 percent.
This is another 10 added to it. To let out the nonmember banks
would be a very great and vital mistake and as I say it has no relationship whatever to the dual banking system. I am for the dual b a n k i n g
system. Certainly I am not an enemy of the small bank by any
manner of means. If you are going to make a law or regulation work
on a national scale in a matter of this importance, i t has to be pretty
free from a lot of loopholes.
Senator CAPEHART. Mr. Eccles, I have to go in a couple of minutes,
and will be back later. Are you in a position now to answer the
question that I asked before: Are we in more danger of further inflation than we were in 1945 or 1946?
Mr. ECCLES. I don't know.
Senator CAPEHART. Would you care to give an opinion?
Mr. E C C L E S . N O ; I wouldn't want to give an opinion. You are
saying, are we in danger of further inflation.
Senator C A P E H A R T . I S the danger greater today than i t was in 1 9 4 5
or 1 9 4 6 ? Will prices go much higher?
Mr. E C C L E S . I don't think the danger today of prices going higher
is more dangerous than i t was after the controls were taken off m 1945.
I think there is more danger than when the controls were on, but I


would say there probably isn't as great danger at this point of its
going higher as there was in 1946 because in 1946 we had had very
little inflation by that time in the price level. We have had twice
as much inflation, practically, since the controls were taken off in 1946
as we had all during the entire war period from 1940 up until the end
of the war.
Senator C A P E H A R T . D O you think unless something is done about
it, that prices will go higher than they are today?
Mr. ECCLES. I think there is a very good prospect that many of
the prices will go higher than they are. I don't know the extent.
I do say that inflation is well advanced, that the barn door has been
left open so long I think maybe the horse is gone.
Senator F L A N D E R S . Are you saying that we are going to have a
Mr. ECCLES. We certainly are going to have a bust, but as to just
when it will be, I can't predict.
Senator F L A N D E R S . That will end the danger of inflation?
Mr. ECCLES. I t will not only end that, but it will end some other
things. I was going to say with reference to the question of a break,
as to when i t will come will depend certainly to a considerable extent
upon whether or not we have a budgetary deficit in the future, and
the extent to which the budgetary deficit develops.
The inflation can be carried much further and for an indefinite
period of time if we should develop budgetary deficits and have to
finance those deficits, as we may well have to do, through the banking
system. Then I don't know how far it would go. Then you have a
possibility of a lot more inflation, but so long as you keep a balanced
budget, you can get a budgetary surplus, and there of course is less
danger of a run-away.
Senator C A P E H A B T . Are there more contributing factors toward
increased inflation today than there were in 1945 and 1946? Are
there more factors that are pushing prices up than there were back
in 1946 and 1945?
Mr. E C C L E S . N O ; I don't think there are any more.
Senator C A P E H A R T . Are there as many?
Mr. E C C L E S . I think you have the same factors that you had then
pretty largely, except two that you didn't have then. Then you had
a tax program that created a very substantial budgetary surplus for
1947 and 1946, whereas today you reduce taxes by approximately
$5,000,000,000. You have an expanding military program that went
up from $11,000,000,000 to $14,000,000,000. I f our military people
have their way, i t will likely go up considerably in the future because
of the fact that you have no apparent terminal point in the military
expenditure nor do you have in the foreign-aid program. So you do
have those factors to a greater extent.
Senator C A P E H A R T . D O you have more contributing factors today
than you had in 1945 and 1946?
Mr. E C C L E S . I n 1945 of course you did not have a balanced budget.
Senator C A P E H A R T . Let us say 1946 and 1947.
Senator C A I N . We are spending more money every day.
Mr. E C C L E S . Y O U have more in some ways, and in others you have
less, because you have caught up in your production. I n your food
situation today, especially i n pains, there is a very much better situation. The situation with reference to many products is better, for


example, cotton, textiles, and sugar. There has been a certain catching
up on some items.
Senator C A P E H A R T . May I ask you this question: Is i t not a fact
that as far as the Government is concerned, as far as it is within their
control, there are more factors today to push prices up today than
there were in 1946 and 1947? We are spending more money in
Europe, we are spending more money for military purposes, we are
spending more money afl the wav across the board.
Mr. ECCLES. Of course the Congress is appropriating i t or you
wouldn't have it.
Senator C A P E H A R T . I used the term "Government," did I not? I
was under the impression the Congress was a part of the Government.
Mr. ECCLES. All right, if you are speaking of the whole Government. That is right, they are spending more.
The C H A I R M A N . And it is a Republican Congress, too.
Senator C A I N . What we are trying to get at is what are the facts.
Mr. ECCLES. That is right. I t is a met that the budget—after
getting down to about a $37,000,000,000 budget—is now going up
again to about $42,000,000,000. So in that sense it is unfavorable,
yet a $42,000,000,000 budget in one sense is no larger than a $37,000,000,000 budget was because you have had more than that much
inflation. As long as you have inflation, in terms of dollars, your
budget is going to continue to go up. You have a national product
at the present time running as high as $230,000,000,000. That
national product has been going up, and at the present rate it may
reach $250,000,000,000. And you have had a third round of wages.
Your whole price structure has gone up. You are getting more taxes
in the aggregate, but the dollar is not worth as much, and the Government has to spend more. You can continue that process to where
vou may have a budget of $100,000,000,000, and it won't be any
larger than the $37,000,000,000 budget was in terms of its purchasing
That is the problem and that is the basic inflationary danger.
The C H A I R M A N . You just told Senator Flanders, in answer to his
pertinent query, that we are going to have a bust, and the only question is when it will happen.
Mr. ECCLES. And the degree of deflation; let's put it that way.
I don't like "bust."
The C H A I R M A N . Suppose I had the power to command you and I
said, "Marriner Eccles, you admit we are going to have a bust and we
all admit if it we all go hell-bent for election and all that, therefore
we are charging you now and giving you the power to set up the protective measures to stop having a bust," what would you say?
Mr. ECCLES. I would say i t was too late.
The C H A I R M A N . You are quite certain of that answer, are you?
Mr. ECCLES. Exactly.
The C H A I R M A N . That is your answer?
Mr. ECCLES. That is my answer. You have to stop a thing before
it happens.
Senator C A P E H A R T . Let me ask you this question.
Mr. ECCLES. You can moderate it, though.
Senator C A P E H A R T . The President is asking that we do something
here to reduce prices. That, of course, is deflation, is i t not? I n other
words, if you reduce prices, you deflate them. That would be the


beginning of a reduction in prices, a reduction in wages, and a reduction in the national income, would i t not?
Mr. ECCLES. I suppose it would. That is the only way. You
can't get rid of inflation in anjr way except to stop it, and in the
process of stopping i t you are going to get some deflation.
Senator CAPEHART. D O we want to stop i t where i t is, or do we
want to deflate it X amount and then stop it?
Mr. ECCLES. I would like to stop it where it is. I would like to
have stopped it before i t got where it is, because you would have had
a lot less people in debt for a lot of goods that wUl be hurt when you
stop it. But the longer the thing goes, the more people will set in
debt, more people will use up their savings. You will have developed
more disequilibrium in the economy, and you will have more difficulty
making an adjustment. So i t is just a question of facing the unpleasant alternatives. We all want an easy way out. I t is too late
to find one.
Senator CAPEHART. I introduced a bill last December to freeze
i t and stop it but couldn't get it initiated.
Senator C A I N . There are hard ways not only to stop it but to cure
Mr. ECCLES. That is true. Nature, with its economic factors and
laws, will take care of that. There is no question about that.
Senator C A I N . I am going back when I have an opportunity to
chat with you about your statement of November 25. You nave
some very positive ideas there which were designed to effect a cure
for inflation and not just control it.
Mr. ECCLES. That is right. They were important.
The C H A I R M A N . I remember Mr. Taft telling me that day on the
floor of the Senate that Eccles made the best presentation he ever
heard him make.
Senator C A I N . The only reason I brought it up was that in answering your question a minute ago, Mr. Eccles says i t is too late. We
have to reconcile those two divergent points of view.
The C H A I R M A N . Y O U see, gentlemen, this isn't a tenpin game.
This is a 100 percent imponderable. We are up against it. We
might as well bring these things out and talk them over. There is
nothing gained by kidding ourselves.
Senator C A I N . The tenpins are before this committee. The big job
lies outside this committee and that is what Mr. Eccles was telling
Mr. Taft's committee a few months ago.
The C H A I R M A N . Y O U agree we have both an opportunity and duty
and privilege of elucidating these things for the public good.
Senator C A I N . And not mislead the public into believing in this
committee lies the major solution for this problem.
Mr. ECCLES. I would like to quote from Mr. Taft, who wrote me
a letter on November 28, 1947, when I had just appeared before the
committee. He said:
I wish to say how much impressed I was with the careful presentation you made
before our committee. Certainly I will give every possible consideration to your
forthright statement.

You mentioned that. That just happened to be in my file.
I f I may, I should like to finish these recommendations, which are
the last recommendations that the Board made in April. We got diverted but I think it was pertinent.

To the extent that it may become necessary to rely upon the banks for any
Government financing operations, the optional reserve requirements would be an
especially valuable instrument, and in the case of large-scale deficit financing, it
would be a "must."

You couldn't finance deficits without it.
I n such financing, it would be advisable to make available to banks only shortterm securities. Application of the optional reserve requirement would have the
effect of immobilizing these securities so they could not be used to obtain reserves
to pyramid new bank assets upon them on the 6-to-l ratio. I n other words,
securities issued in new Treasury financing through banks would be tied to the
deposits which were created by their purchase.

Lock the deposit with the security when it is created.
A ready market for short-term Governments would be assured, and the Treasury
would be lielping in successfully carrying out both its refunding operationa and
its deficit financing. At the same time the Federal Reserve would be enabled to
exercise some restraint upon the money market for private credit.

That covers that.
The dominance of the public debt and the present credit situation has rendered
the System's traditional powers generally unusable for purposes of restraining
further inflationary credit expansion. The Reserve Board is not now seeking
additional power beyond what they formerly possessed. I t is merely pointing
out that the System has little or no authority to deal with the credit situation
as it currently exists and seems likely to develop. I f the Congress wants the
Reserve System to perform the functions for which it was established in the
beginning, the System must have a substitute or at least a partial substitute for
the powers that have become unusable. The Board feels that it would be remiss
if it failed to bring this matter to the attention of the Congress. There-is no
simple way of holding in check either expansion in excess of essential public and
private needs. The problem should be met in a combination of ways, by general
credit controls and in particular areas by selective controls, such, for example, as
the reimposition of consumer installment credit and the continuation of margin

I think it is pertinent for me to answer this assertion that the Reserve Board has powers that they are not using, but before doing that,
I want to emphasize that the excerpts from the Board's statements
from which I have just read are certainly in conformity with the
economic report of the President. Now, what happened to me and
the Board as a result?
To my great amazement, at the President's first press conference
after I had appeared on April 13, the Wall Street Journal said:
Eccles1 bank-credit proposals don't have the support of the President.

Another Wall Street Journal headline read:
Eccles' bank-credit proposals don't have support of President. Truman disowns
the program; Snyder declares he doesn't know what-it is about.

The C H A I R M A N . That is all right. You cannot condemn a man
for telling the truth.
Mr. ECCLES. Here is another press quotation:
Eccles spoke for himself alone, Truman explained.

I want to read the first paragraph of the Board's statement of
April 13:
When I testified before this committee last November 25, I emphasized that
I was speaking only for the Board of Governors of the Federal Reserve System.
I n presenting a further statement today coveiing the monetary and credit situation as i t has been developed in the intervening 4 months, I am again speaking
only on behalf of the Board.


I want to say that that was a unanimous Board, and I want to say
further that the statement which Mr. McCabe discussed this morning,
as I told you, is in basic substance pretty much on all-fours with what
has been the Board's position continuously and what now appears to
be the position of the administration as expressed in the message
which you received a few days ago, and I quote:
I recommend that the Federal Reserve Board be given greater authority to
regulate inflationary bank credit. T h a t is the third time.

The C H A I R M A N . I S that a death-bed repentance?
Mr. ECCLES. Y O U asked the question as to why we hadn't been
f'ven these powers, and I just wanted to give you a part of the record.
would like to say i t seems to me that there are a lot of people responsible, but certainly you have the record here of the bankers before
your committee, the Advisory Council and M r . Sproul. A t this
period of my demise as chairman, I want to speak in defense of the
Federal Reserve Board, because in conditions of inflation and bust,
there is always an effort made to find the goat. I do not want the
Federal Reserve Board to be the goat. A t least I do not want the
Federal Reserve to be the goat because of what took place during all
this period of inflationary development while I was the chairman.
I want to protect and defend the record.
I appreciate this opportunity of doing it.
On the question of the Reserve System having adequate authority,
i t was intended when the Federal Reserve Act was passed in 1913 that
the Federal Reserve System be able to control the expansion of the
supply of money. They were expected to be able to create what was
called a flexible currency and to meet the needs of commerce, agriculture, and business, not more than their needs. "When you take i t
as a whole, when there is more money than there are goods, you are
meeting more than their needs. We were given that authority. For
the purpose of doing it we provided reserves to the banks, through
their borrowing from the Reserve banks, and we could curb i t by
shutting off their borrowing and by raising the discount rate so that
the borrowers' rate would be rather prohibitive.
That was done to a disastrous extent in 1920. Bad as i t seemed to
appear in 1920 and 1921,. the situation righted itself rather rapidly
and it may well have been that the short dose that it took in 1920
may have been better than would have been the case if inflation had
continued for years. I don't know. But I remind you of the situation that developed.
We have all the powers that we need now if we were to withdraw from
the support of the Government security market. The residual market is now the Federal Reserve System. We could not have financed
the war without the Federal Reserve. This large expansion of money,
I would say the biggest end of it, was created as a result of war financing. I f taxes had been higher, we would have had to finance less,
but we didn't do such a bad job. We are now confronted with this
situation, and it is a question of alternatives. They are unpleasant.
The public debt is about $250,000,000,000. That $250,000,000,000 is
about 60 percent of the country's entire debt, both public and private.
A very large part of the national debt is short-term, and I will give
you the figures on it. Within 1 year there falls due 48.8 billion dollars,
bills, certificates, notes, and bonds.

Within from 1 to 5 years, there will be an additional 48 billion
dollars, and in from 5 to 10 years, 100 billion dollars. Within 1 year
practically 50 billion dollars. That is in addition to the nonmarketable securities of 53 billion dollars in savings bonds, and 4 billion
dollars in savings notes which are demand obligations.
The cost of carrying this debt even at present rates is heavy, and
certainly if you let" the Government bond market go by dropping the
support level of the long-term Government bonds, nobody can say to
what extent they would decline and what the additional cost would be.
I f you judge i t by what a 26 billion dollar debt did after the last war,
the Government paid 5 percent for 6 months paper on a totally taxexempt basis. That is what happened. Long-term 4K percent
Government bonds, fully tax-exempt, went down to 82. The present
long-term rate that the Government pays is 2% percent. With this
much debt falling due, certainly you would have to refund it at
whatever the market was. The statement has been made, "You
don't need to abandon the market. Just go half way. Just let it
work down a little and stabilize." But how can you price a refunding
issue of securities when the public has no knowledge or confidence or
feeling as to what the market is going to be? How could you price a
security in a refunding operation of that sort? How do you determine
how to price it? What happens to all these savings bonds if the public
can get rates very substantially higher? I t is certainly a possibility
that they may all be cashed in. On this point Mr. Sproul and I
agree, and on this point Mr. Snyder and I agree.
The C H A I R M A N . We ought to make a monument to that effect.
Mr. ECCLES. And on this point I think many of the bankers agree,
although there are some who don't agree. The Republicans should be
perfectly forthright about it, they should tell us openly, and they
should tell the public exactly what they mean when they say that now
we have adequate powers which we are not using. They should say,
" I t seems to us, that the Reserve System should let Government
bonds seek a lower level or seek their own level; let the Government
pay a higher interest rate, let the public who own the bonds take their
loss on the bonds. The Reserve System can in this way deny credit."
That is exactly what is implied, and if that is not what they mean,
then I don't know what they mean. I say they should tell the public
openly and frankly that they do not believe m pegging the 2% percent rate.
I agree that you can let the short rate go up. I am for it. But I
think i t is relatively minor in the picture.
A t the present time, so long as the Federal Reserve System supports
the public credit and provides the residual market for Government
bonds and supports the 2% percent rate, the System has no authority,
either through the discount rate or through reserve requirements to
meet the problem. We find ourselves now without control of the
money system. And I say that under the circumstances that now
exist the Federal Reserve System is the greatest potential agent of
inflation that man could possibly contrive. I hope the press, if they
say that, wUl make it perfectly clear, that unless we get further powers
to curb bank credit expansion, or unless we permit the Government
bond market to seek its own level and thereby deny the banks further
credit, we are unable to deal with this problem*


The C H A I R M A N . That is the administration bill on Federal Reserve
matters. Will that do the trick?
Mr. ECCLES. I haven't seen the bill.
The C H A I R M A N . Look it over.
Mr. ECCLES. I understand, though, that what the bill proposes is
to give the Board power over consumer credit. I would be personally
opposed to the Board having that authority alone because it would
make it appear that the Board had been given power to control
inflation which it couldn't possibly control simply by consumer credit
Senator C A I N . Some of us voted against your previous proposal
for consumer credit for that very reason, that it would only indicate
to the public that they werejgetting something which they were
not getting.
Mr. ECCLES. Consumer credit regulation is probably desirable." I t
is less desirable that it was a year ago because we have had a lot of
expansion in consumer credit.
Senator C A I N . I t still sounds good.
Mr. ECCLES. That is right, and I think it is still desirable and
necessary as a part of any comprehensive program. So far as the
increase in reserve requirements is concerned, this increase is what
was proposed in April, and we think it is desirable and necessary.
However, there is this
The C H A I R M A N . Except the secondary reserve is not in it.
Mr. ECCLES. That is all right. We simply said that so far as the
secondary reserve is concerned, we can get along with this if we
don't get budgetary deficits; in other words, if the Treasury does
not have to expand its debt.
The C H A I R M A N . This bill would increase by 4 points and 10 points
the reserves that the Reserve member banks are required to maintain.
Mr. ECCLES. That point I don't agree with. I would be unalterably opposed to, any bill that excludes nonmember banks and I have
already given the reasons why.
Senator C A I N . That is the administration bill.
T h e C H A I R M A N . Y e s , i t is.
Senator C A I N . I n your direct

testimony, Mr. Eccles,, you said you
would rather not have that at all.
Mr. ECCLES. I don't say that.
The C H A I R M A N , He said unless the nonmember batiks come in.
Mr. ECCLES. I would like No. 1 of the bill, regulation of installment
credit. I would certainly favor the other if it were amended to include
the nonmember banks. I n that regard it would fit into the statement
that the Board made last April before the Taft committee.
Senator C A I N . May I pursue that just one step further: Did you
say, Mr. Eccles, that if nonmember banks were not included you
obviously would rather not have the authority?
Mr. ECCLES. That is right.
Senator C A I N . But are nonmember banks included in the administration's proposal?
Mr. ECCLES. They are not included, and I would say unless they
are included, and I have stated the reasons for it here I think rather
Senator C A I N . Therefore, your system would be the greatest
inflationary source in the country.


Mr. E C C L E S . N O ; that isn't it.
Senator C A I N . If the nonmember banks are not here.
Mr. E C C L E S . All I am saying is that if the nonmember banks are
not included, I would be opposed to the bill because it is a discrimination against the Federal Reserve System; it weakens the Federal
Reserve System. There is no need of my repeating because the
record of why I think the nonmember banks ought to be in has
already been made. I think there may be some people in the System
who would sooner have this than nothing. I personally would prefer
not to have this power unless it is sufficient to cover all banks, because
I think even with that power there is even then the question of
Senator C A I N . Your basic reason, Mr. Eccles, is that you think it
would tend obviously to destroy the effectiveness of the Federal
Reserve System because it would give an easy way out.
Mr. E C C L E S . I t would make it very difficult for us to get members
in the System. We might well lose members from the System. I t is
inequitable, it is unfair, especially to the State member banks that
we now have not to include all commercial banks.
The C H A I R M A N . Marriner, at the time you were here last April, we
had the hearings, Mr. Sproul came and you had the Advisory Board
that did not agree with you>. Then we had the 12 individual banks;
Ned Brown and Mr. Sproul.
Mr. E C C L E S . That was the Advisory Board.
The C H A I R M A N . They spoke for the banks as well as individually.
They were against it. What I am coming at is that we had the central
Federal Reserve Board taking a position here and we had the Advisory
Council representing the individual banks against it.
You recall also that I introduced a bank holding bill in Congress
last year. You and I talked it over, among others. Suddenly the
ABA came out with a letter against the bank holding bill. Are you
acquainted with that fact?
Mr. E C C L E S . I am pretty familiar with that.
The C H A I R M A N . I remember distinctly just before adjournment I
met some of the officials of the ABA over in front of the Senate
restaurant, and I was rather outraged to put it kindly. I felt pretty
strongly about their coming in against the holding-company bill,
which was very dear to my heart and in the interest of the public.
What do you suppose the answer they gave was? "The reason we
take this position/' they said, "is that we don't like to have the central
bank too powerful. We think it would give more power to the central
That is the reason they gave me in the front of the Senate Restaurant. What do you say to that?
Mr. E C C L E S . I think that is a good banker reason.
The C H A I R M A N . If you have that in the financial system of the
country today, if you have on the one hand the Federal Reserve
Board and over here the advisory committee of the ABA pulling and
hauling, what have you got? Depending on the strength and size
of these banks, is the influence going to permeate this country? This
is an important point I am making here. Do you see it?
M r . E C C L E S . Y e s , I see i t .
The C H A I R M A N . I t is very important, is it not?
Mr. E C C L E S . I t is very important, and, of course,

it does not only
apply to banking, but you can find it in every other field.


The C H A I R M A N . Exactly.
Mr. ECCLES. That is probably one of the difficulties that democracy
is confronted with and that is one of the reasons that we seem to
have these booms and busts, for the very reasons that you point out,
that our free-enterprise system seems to indicate that everybody
should be left completely alone and be pretty free, and anything that
is done by a central authority, of course, is iooked upon as being too
much of a police-state activity.
The CHAIRMAN. We forget t h a t the whole is greater than any p a r t ;
do we not?

Mr. ECCLES. I sometimes think that we don't understand or we
don't know what our self-interest is. We need a little bit more, I
would say, a lot more of enlightened self interest. Altruism does not
solve our problem. We need a competitive system, but we need an
intelligent understanding of what our enlightened self-interest is,
which is very difficult to get across.
The C H A I R M A N . Plus a sense of interdependence, is that correct?
Mr. ECCLES. We have an interdependence.
The C H A I R M A N . Have we a consciousness of it, though?
Mr. ECCLES. Because we don't understand what our enlightened
self-interest may be.
Let me bring out one or two points here that I didn't bring out
because I was covering this historically.
Senator MCCARTHY. I wonder if I could ask t w o or three questions
first. I have to leave soon.
M r . ECCLES. A l l r i g h t .
Senator M C C A R T H Y . Mr.

McCabe, as I recall, told us that he was
of the opinion that we could not include the nonmember banks in
this bill, assuming that we did decide to pass it, for the reason that
the technicalities of perfecting it, the constitutional question, the
lengthy hearings would make it impossible to do it in the special
session. Have you any thought on that?
M r . ECCLES. I f y o u don't include them now, y o u w i l l never include
Senator MCCARTHY. DO y o u t h i n k i t is too involved a problem t o
be disposed of hurriedly?
M r . ECCLES. I d o n ' t t h i n k so. I t h i n k there is nothing new about
the problem. I f y o u w i l l go back to 1939 or 1940, I would like to
b r i n g t h a t record up tomorrow, because at t h a t time the Board and
the Advisory Council and the Open M a r k e t Committee were unanimous i n recommending to the Congress just such a proposal to include
all the nonmember banks. T h a t was the time when there was such a
large excess reserve and no place t o p u t the money. We were i n a
depression and interest rates had dropped to zero. W i t h that k i n d
of interest rate, w i t h earnings i n a very difficult position, the Advisory
Council and all the Reserve bank presidents were willing to increase
reserve requirements for member and nonmember banks alike t o
sterilize the excess reserves t h a t the large gold imports had created.
W e have all given a great deal of study to i t . There is nothing complicated about i t . I t is a perfectly simple matter. I t isn't anything
Senator MCCARTHY. I missed p a r t of your testimony. I am sorry
I did, b u t I had to be away.

Do I gather that your feeling is that your program last year was
effectively sabotaged by the Secretary of the Treasury?


Mr. ECCLES. I wouldn't want to put it that way. He was opposed
to the program, and he prevailed with the administration. I don't
think that he was any more responsible for defeating the program
than the Advisory Council. I think maybe the Advisory Council
may have had a part in persuading him. But certainly Mr. Sproul,
of the New York bank, was opposed to doing anything about the
whole matter of reserves.
Senator M C C A R T H Y . I n any event, am I correct that it is your
feeling that had Mr. Snyder not prevailed in his line of thinking,
together with the Advisory Board, that had he not prevailed as
against your line of thinking, as of today we would not have the inflation which we now have?
Mr. ECCLES. N O ; I wouldn't say that. I do think that we would
be in a much better position. I would put it this way: I think that
had those powers existed, you would have found, even without their
use, the attitude of the bankers would have been entirely different
from what it was under the voluntary plan, and you would have found
a much greater restraint upon credit. Instead of credit expansion,
you would certainly have held the credit line and you might have had
considerable contraction.
Senator M C C A R T H Y . Let me ask you this last thing: A year ago
you offered us a program. As of today we have higher prices, a
greater degree of inflation than we had a year ago.
M r . ECCLES., T h a t is right.

Senator M C C A R T H Y . I S it your thought that had your line of thinking prevailed rather than Mr. Snyder's, then as of today prices would
not be as high, and there would be less inflation? That is the measure
of whether or not your program would have been successful.
Mr. ECCLES. I t is difficult to say. I think yes. I think if the
five-point program that .1 proposed had been adopted, I think we
would have had less inflation. The five-point program included a
provision against tax reduction. That was No. 3. I t pointed out
that the credit program was only supplementary. I would like to
make this impression with this committee: We certainly are not saying
and never have said that monetary credit control alone will do the job.
We have said it was supplemental.
I made a statement before the Taft committee and I signed a letter
as Chairman pro tem on the 25th day of April to this committee on
the housing picture. I pointed out at that time that that was one of
the most inflationary factors in the entire situation and that any
credit control given to the Federal Reserve banks could be sabotaged
very well by a housing bill which under inflationary conditions provided a large secondary market.
The CHAIRMAN. Y o u are t a l k i n g about t i t l e V I ?
M r . ECCLES. I a m t a l k i n g about the whole thing.

The C H A I R M A N . Are you talking about the slum-clearance part of
the biU?
M r . ECCLES. I am t a l k i n g about t h a t , too, now.
The CHAIRMAN. Are y o u t a l k i n g about public housing?
M r . ECCLES. I am t a l k i n g about public housing.
The CHAIRMAN. Are y o u t a l k i n g about title V I ?
M r . ECCLES. Yes, sir; all three of them.
The CHAIRMAN. I understood y o u to say some time ago, and I
t h i n k I heard y o u say i t , t h a t the menace of the housing situation
was title V I f r o m the inflation standpoint.


Mr. ECCLES. And so are the others at this time, because you don't
get more housing with more credit. You get more housing with labor
and materials.
Senator M C C A R T H Y . May I interrupt there, Mr. Eccles: What
many of us feel we should do is to try and get more lower-cost homes,
in other words, more living space with the number of board feet we
have. The purpose of the liberal provisions of the two bills is to make
it easier for a man who wants to build a cheaper house, rather than
the man who builds a more expensive home.
I n other words, it is an attempt to channelize the building materials
into those homes which will give you more living space.
Would you disagree with the general theory of that, forgetting for
the time being whether or not we have adopted the right method of
doing it?
Mr. ECCLES. I certainly would say, if you recognize the available
supply of labor and material, and you have building permits and you
have the allocation of materials so that you put it where you want it,
as you did during the war, then, of course, you wouldn't have had the
condition that did exist in housing and you could direct it there. I t
is like all the controls.
Senator M C C A R T H Y . Let me stop you right there. You speak of
allocations, and I think we should make a record of this at this time.
Housing if one of the reasons why we were called back here. As of
today and during the last session, we were seeking to pass housing
legislation which would produce a million and a half units per year.
I t is generally agreed that unless we can produce roughly a million
and a half units per year, there will continue to be a tremendous
housing shortage. We passed a bill last year which gives the President,
through the Commerce Department, the right to allocate scarce
materials. Some of the materials that go into a home are very
scarce, principally those made from metals—nails, plumbing equipment, soil pipe. The Commerce Department has been carrying on
an alleged attempt to make voluntary allocations. The steel industry
has stated, perhaps with their tongues in their cheek, I don't know,
that they will go along with any program worked out by the Commerce
Department. The Commerce Department, however, has been working out an allocation which will take from the housing program housing
materials all except enough of the scarce materials to build a million
If they are successful in doing that, then I believe we all heartily
agree with you that extended credits will not build additional homes.
However, if the two different departments of the Federal Government
will get together and if your allocation is on the basis of a million and
a half units per year, then no one will suffer and a great many people
will be helped very greatly by liberalizing loans for housing.
Mr. ECCLES. I think that what you really get to is the question of
price control of the labor and materials that go into the housing.
As I said before the Taft committee, good low-cost housing cannot
be built with high-cost materials and high-cost labor. Neither the
Government nor private industry can produce that miracle.
Senator M C C A R T H Y . If one department of the Government says we
will allocate away from the home-building program everything over
and above enough to produce a million homes, if this committee and
the Joint Housing Committee and the Taft Postwar Economic Planning Committee, and every committee that has studied this program


has set a bottom figure of a million and half units per year. Do you
follow me?
M r . ECCLES. Y e s .
Senator M C C A R T H Y .

I n other words, every committee that has
studied it has set a bottom figure of a million and a half units per year
as the minimum housing needs. If one department of the Government
says we will make it impossible to build more than a million homes
a year, then of necessity you are going to have nails selling in the
black market, you will have plumbing equipment selling for too much,
you will have all of the scarce materials that go into a home selling
at very highly inflated prices. Am I right?
Mr. E C C L E S . I don't think so. I t seems to me that with what you
have today you are not making it impossible as far as the Government
is concerned.
Senator M C C A R T H Y . Are you aware of the fact—and if you are not
I do not want to ask you something that you have not considered—
that the Commerce Department has been carrying on attempts to
allocate scarce materials and that they are asking for an allocation
to the home building program that will produce no more than
1,000,000 homes per year, despite the President's request that we pass
the Taft-Ellender-Wagner bill which will provide a million and a half
of these homes?
I n other words, we have one department of the Government saying
we want a bill to produce a million and a half homes which are needed,
and we have another department of the Government saying we will
keep the scarce materials down so you can produce no more than a
million units.
Are you aware of the fact that we have that contradiction?
Mr. E C C L E S . I understood there was a department trying to do some
allocating, but I wasn't aware of the fact that you had one advocating
one amount and another a different amount.
I don't believe that even if the Commerce Department decided to
to allocate the materials for a million hemes, it would succeed by that
alone. I n fact, I think the allocation alone would be very unsuccessful.
I think the job of allocation under the present bill is not effective,
because you do not have building permits, which will enable you to
stop the use of materials except in the type of homes you want to have
built, such as was carried on during the war, and immediately after.
You do not have price control and wage control.
I t seems to me you don't meet this housing problem by more credit
or by any legislation unless you cover the whole field, and I don't
believe you can put that back.
I t is like Humpty Dumpty on the wall. You know the story. He
took a great fall, and all the King's horses and all the King's men
. can't put Humpty Dumpty together again.
I t seems to. me that at this stage, short of a war, it is going to be
extremely difficult, if not impossible, to put on all of these various
types of controls jbhat we once had, and which were prematurely taken
off, as was pointed out by the Board before this committee, practically
all of them in 1945, by Executive order immediately after the war.
Senator M C C A R T H Y . One further question before I leave:
I might say that I have gotten much from your testimony, Mr.
Eccles, and I certainly personally appreciate very much the apparent
nonpartisan approach you take to these problems.


I gather you are very much concerned about the present high prices,
and the innationaiy trend. You feel that a contraction of credit may
help the situation. Let me ask you this:
What do you think about the Agriculture Department's present
program, its goal,.announced in the last few days, for production last
year, their goal of reducing the number of cattle in the country by
half a million in 1949?
They were successful in reducing i t by 3,000,000, which \^as the
goal in 1948. That goal was achieved. Their program to reduce the
number of hogs by 3,000,000. That makes a total of 8,000,000 reduction since the first part of 1947.
The goal to reduce the wheat acreage by 3.5 million. At the same
time that all of these particular items are in great demand and prices
are entirely out of reason.
For example, hamburger is selling at 90 and 95 cents a pound. Do
you think any type of credit controls that we give you can be effective
unless the Agriculture Department makes a complete about face, and
instead of trying to curtail the amount of food being produced, they
attempt to increase the food being produced?
Mr. ECCLES. I don't think any program of restrictions on production at this time makes sense and certainly not in the field of food.
I f you want to reduce the cost of living, food is the biggest item in
the picture, and there is no single group in the economy who have
gotten as much out of the war inflation as the agricultural group. I
don't object to any group getting their share, but it seems to me that
there are certain groups who have gotten far more than their share,
and the group at the top of the list is the agricultural group.
Certainly business needs no sympathy because the business group,
based upon their profit—and I know, for I am a businessman; I have
been extensively engaged in business—are in the same group.
Senator M C C A R T H Y . Are you not going on a false premise when
you assume that a reduction in the number of cattle on the American
farms, the reduction in the number of hogs on the American farms,
will increase the income of the farmer?
I gather that is your premise. I think that is entirely false. I
gather that even Mr. Taylor will agree with me on that—that it is a
completely false premise that you can increase the income of the farmer
by making him kill off the hogs or raise less cattle.
Mr. ECCLES. I don't agree with that. I say that when you produce a surplus, a surplus beyond the market demand
Senator M C C A R T H Y . Wait a minute, now. There is no danger of
a food surplus in 1948.
Mr. ECCLES. All right. So far as the agricultural people are concerned, I assume the fact that they want to cut the production is
certainly for the purpose of maintaining prices. They would certainly
have not the slightest idea of restricting what was going to be produced for any other reason than to maintain the parity price.
Senator M C C A R T H Y . I might say——
Mr. ECCLES. I can't see what other purpose there would be.
Senator M C C A R T H Y . I might say I worked on a farm for a number
of years myself, and I know as many farmers as anyone, I think.
And I have yet to find a single farmer who feels you can increase his
income by making men on the farm raise insufficient food to feed the


American people. You are talking about a surplus. Certainly, no"
one has said there is a surplus of meat, of beef, or hogs in 1947 or 1948.
I do not believe you or I are concerned with a surplus of beef or
pork or wheat in 1949.
Mr. ECCLES. Then why have a floor under agricultural prices?
Why not withdraw the support prices entirely and forget the question
of parity altogether?
I t seems to me if the farmer is not concerned about a surplus, then
he would not be so concerned about a floor.
Senator M C C A R T H Y . The floor under agricultural prices is to induce
the farmer to produce more. You see, we are putting a floor under
the prices of certain articles to get him to produce more, at the same
time we establish goals to get him to produce less.
While we are getting him to produce less beef and less pork, then
your Department—and I am not criticizing you; I think I may agree
with what you say in regard to curtailing credit, but while one department says, "We will produce less beef, pork, and wheat," then the
other department, yourself, comes in and says, " I n order to keep
prices down, we will curtail credit."
I n other words, on the one hand you curtail production to force
prices up, and on the other hand you curtail credit to keep them down.
Isn't that completely a crazy-quilt pattern?
Mr. ECCLES. I T is* cockeyed.
Senator M C C A R T H Y . Thank you.
Mr. E C C L E S . I would like to say this: I have indicated—at least,
tried to indicate—here that the easy way out is not simply to pass
the buck to the Federal Reserve by giving them credit control. That
isn't the way out.
As long as you are going to have these easy housing credit and
secondary markets, for it, as long as you are going to put floor prices
under f i r m products and buy potatoes, and Senator Tobey indicated
this morning the same thing, and as long as you are going to have,
under this inflationary situation, a budget that has no surplus, then I
say that you have little or no chance of controlling inflation, and the
Federal Reserve Board does not want and does not expect to be the
The powers requested here are still only supplemental. I want to
emphasize that again.
The C H A I R M A N . Y O U made a statement there a while ago that I
don't like to have go out over the country on your "bust-we-must"
theory. You said it is too late. I don't believe you are correct in
that, Mr. Eccles.
Who am I to criticize you? But there must be some way. If you
are correct, and I think you are, we have a bust on the horizon, and
then there must be some way to offset that and build some fences and
supports to stop this thing.
What are the ways to do it? You have none—you say you haven't,
and I don't think you are correct there.
Mr. E C C L E S . I don't see, personally, any way at this time of avoiding some unpleasant adjustments* You have in the economy, as I
started to explain to Senator McCarthy, of Wisconsin, a terrific disequilibrium, and that largely developed after the war when all of these
various parts of the harness of controls were taken off in 1945 and 1946,
not during the Congress of most of you people.


Where you have a large and increasing part of the population that
are sustaining themselves not only by spending all of their current
income, but by using up their savings and by going into consumer
and other debt, and you have other groups, and a smaller group, the
farmers, especially the .well-to-do farmers, not the tenants so much,
and the business groups, making abnormal profits and income, you
find that whereas the general inflationary situation may have upped
the cost of living 75 or 80 percent, there are certain groups whose
income has not approached those levels, and there are others who
have gone far beyond that increase.
So you have this terrific disequilibrium. That will create a bust
inevitably. You .can't keep the great masses of your people sustaining themselves by using not only a^l their current income, but by
piling up consumer credit and by gomg into debt as fast as they are
for housing at these prices, xou can't expect the economy just
automatically to adjust itself when the people quit going into debt,
or when the creditors say^ the point of saturation has been reached
and they have to start collecting.
That time may well come. If it were possible, and it isn't possible
in a free economy—if you had a regimented economy; if you had an
economy where you could go back and say at the end of the war or
before the war that this group has profited greatly as a result of war,
and we are going to put a capital levy on them and adjust the thing,
and we are going to apply that against the public debt; if we could
reduce this volume of deposits; if you had a wav of lifting up the income of the low-income, especially the white-collar, group; if you had
a way of saying to the person who is a pensioner, to the people who
have bought insurance, to the savers—and there are millions of them—
that we are now going to take it away from those who have made it
and are going to give it to you who have been in a sense defrauded
as a result ofinflation, you could get an equilibrium. But you can't
do that in our system.
The great evil is that when we knew what was happening we ever
permitted it to happen. Why on earth, the minute the war was over,
when the dangers of inflation were very much greater than during tho
war—and I want to read to you this, which 1 said in 1944 before a
Inflation seldom gets out of hand during wartime, but the danger carries over
after peace comes, and a war-weary people, tiled of controls and restraints, are
eager to throw them off. That is just the time when it may be fatal to relax
prematurely the controls of the war-engendered inflationary forces.

I said that before Mr. Wolcott's committee on April 19, 1944.
That was the statement of the Board at that time.
Senator M C C A R T H Y . See if I am correct in this:
I n this country today we have a situation in which you have the
cost of living at a certain level. You have the wage scale of the
18 or 20 million industrial workers.
Mr. ECCLES. 14,000,000. •
Senator M C C A R T H Y . I am including all of the industrial workers,
organized and unorganized.
Mr. ECCLES. They have more than their share in relation to the
other group.
Senator M C C A R T H Y . Yes. Then you have some 4 0 , 0 0 0 , 0 0 0 workers,
the nonindustrial workers, with a wage scale at a different level.


Your thought is that unless we can bring them all pretty much to the
same level, we are bound to have a depression; is that right?
Mr. ECCLES. Unless you can bring them closer. I don't think you
are ever going to have an equality. The difficulty, the thing that
always brings about a depression, is when the mass of people begin to
lack enough purchasing power to sustain your production, ana new
investment will falter when production can't be maintained, when the
production capacity is more than the people can buy.
You can sustain that with war, you can sustain it in the form of
lending, you can sustain it with credit to the masses, as long as somebody is willing to give you credit.
Senator M C C A R T H Y . We can recognize what the situation is. We
can^recognize the danger of it. You say we cannot do anything about
Let me ask you this question: Don't you think it is a rather simple
thing to increase the minimum wage, to increase the pensions so that
you will bring this group of some 40 million up somewhat to the same
level that your 16 or 18 million are on now?
Mr. ECCLES. I think that is a point.
Senator M C C A R T H Y . Wouldn't that do much to prevent this
depression that you and I and all of us fear?
Mr. ECCLES. N O , I don't think that, because I think there aren't
an awful lot of people who are getting the minimum wage. I think
the minimum wage of 40 cents is purely academic.
Senator M C C A R T H Y . We are speaking now of increasing it so the
minimum wage will actually raise the earning power of the 40,000,000.
Mr. ECCLES. I don't think it will raise the earning power of many
people, because I think the minimum wage would only apply to the
interstate business. I t doesn't apply to the States.
I would say that in those businesses the number of people who get
less than 75 cents an hour is statistically pretty unimportant in the
picture, actually.
I am not saying that an increase in the minimum wage isn't justified,
but it seemed to me that about half of the President's program was
inflationary and the other half deflationary. I t had factors that would
increase purchasing power and spending, as well as curbs in the program. Our difficulty today, of course, is that we have more money to
spend than goods to buy; that is the essence of it.
The C H A I R M A N . On the minimum wage, Marriner, regardless of the
fact that many are getting over 75 cents, as you say, which is true,
it is a disgrace to the country to have in the United States of America
a minimum wage standard set at 40 cents.
I t is a disgrace to the country.
Mr. ECCLES. I agree with you 100 percent.
The C H A I R M A N . The point I am knowingly making is not that I
disagree on that. The point I am making is that merely to increase
the minimum wage, and think that solves the inflation or economic
problem, is, of course, a myth.
Senator M C C A R T H Y . I T would help.
Mr. ECCLES. N O ; it wouldn't help to solve the inflation problem.
I t wouldn't help at all to solve it. I t might help to solve a deflation
problem, if you had some deflation.
Senator M C C A R T H Y . This is my last question:
I apparently niisunderstood you. I gather that you said that one
of the reasons for this dangerous situation today is that there is a


certain group of people who ore getting far beyond their share of the
income. A certain other group are getting far less than their share.
I t will take some type of violent recession to bring those people on
an even keel, so they can all bid.
Mr. ECCLES. Unfortunately, a recession doesn't bring about an
equilibrium. I t forces the Government to intervene on an increasing
scale, and-that is why the inflation is so dangerous, because when it
brings deflation, you have to intervene—just as in 1932. You all
recall that. That was a mild situation to what we could have. You
all recall that that practically collapsed the banks and what happened
to the homes and all the rest in that sort of situation.
The Government had to intervene on a very important scale, and
people didn't like it. The Government could well have to intervene
on a scale far in excess of any intervention that happened at that time
if this thing should go far enough and the public demanded an intervention
That is the danger of permitting inflation to develop.
Senator M C C A R T H Y . Am I right in this, Mr. Eccles?
The reason an inflation is dangerous, the reason it always heads into
abuse, because the economy of the country gets out of balance. I f
all wages and the cost of living went up in the same balance, then you
wouldn't necessarily head into abuse; isn't that right?
Mr. ECCLES. That is partly true. I t isn't quite that simple. I t is
a little complex.* I t has seemed to me that the means of payment
currently received by the entire population, the entire income from
the national product, must be currently spent, and by "spent" I mean
on capital goods and investments or spent on consumer goods.
That is the only way to keep, employment and production. We
have too much of that total national product being spent faster than
the goods are produced; that is inflation.
I n other words, if enough »f it isn't being saved—I will put it that
way—on the other side, when you get too much of the national
income available for investment in productive goods and there isn't
a demand for it, then you get what you call an oversavings.
I n other words, it is a question always of the use of the total national
product between investment and savings on the one hand, and consumption on the other.
Where is the balance point between those two? The balance
force is in the tax system, it is in fiscal policy and monetary policy.
That is where it is, and I have always said that if you are going to
control the excessive boom and the excessive bust, then it must be
through fiscal and monetary policy.
That can be supplemented in a deflation by Government subsidy
of low-cost housing, heavy road construction, by Government expenditures, including social security universally applied. That can be a
very important stabilizing factor, because m a deflation social security
spends more than it collects. I t is putting money out.
Then in a deflationary period the Government's budget will naturally be unbalanced, and that tends to stop the deflation. Conversely
if in an inflation the budget is overly balanced, it would help to stop
an inflation.
Those are the supplemental things that are applied. The difficulty
always seems to be that on the inflationary side we seem to want to
do many of the things that should be reserved for the deflationary side.


We should have higher interest rates, we should have tight money.
We have difficulty now in doing that because of the public debt
I f it weren't for that, we would make interest rates higher, but the
public debt, as I have tried to indicate to you, creates a special problem.
Certainly we should have as tight money as we can get, and at the
same time support the public debt, and on a deflationary situation we
should reverse the process, the monetary and credit process.
Senator C A I N . I have just one question at the moment that I think
fits in here: After a lot of thought that I individually have given
Marriner Eccles' statement that he gave before the Taft committee,
I would conceive that we could not any more control inflation than
we could fly by a literal translation of the President's declaration to
the Congress the other day in all his steps.
One of the reasons being, as Mr. Eccles has pointed out, that i t
asks for a curb on inflation while at the same time stimulating that
very same inflation.
When Marriner Eccles said he thought maybe it was too far gone
to control, I conceived, Mr. Eccles, that partly your reason is that you
think the American people are not sufficiently aware of their responsibility, and the Government is not going to tackle this fiscal problem
which merits first priority, and we are going to end up after this
Congress, whatever we do, about where we start out.
To what extent do you approve or disapprove of that point of view
of mine?
Mr. ECCLES. I think you put too much emphasis on the statement
that I don't think I made, that it was too far gone to control. What
I meant to imply was that it was too far extended to avoid a deflation.
You can call it a bust or whatever you want. But I did not say that
it could not go substantially further, and therefore the deflation and
the bust be that much greater.
I t certainly is desirable that further inflation be controlled.
The C H A I R M A N . I hope the press will get what he is saying, because
the bald statement he made a while ago troubled me, and he is qualifying it now. I hope you get the distinction because the effect on the
countiy as a whole might be very disastrous if they took hook, line,
and sinker, the original statement that bust we must, and you can't
stop it.
Mr. E C C L E S . M y point is that you can't avoid a deflation. I will
put it this way: After you have had as much inflation as we have had,
and as much credit expansion as has gone on, much of it undesirable,
you can't avoid some deflation, it seems to me.
That is what I meant. You can't avoid it.
I do say that it is desirable to curb further inflation, because even
though it already has been permitted to go too far, that is no reason
that it should be permitted to go further, because the further it goes,
the more damage it does to the public, the more injustice it heaps
upon a great many people, and the more difficult the adjustment will
be, and the greater the deflationary process may well be.
I would like that substituted for that other remark.
The C H A I R M A N . I wish the press would kindly take note of that.
Your sense of news value is very keen, and should be of course. But
here is a statement that changes and colors the influence of the*
original statement. I would like to have you treat this and give
prominence to this, too, as well as to the original remark.

Senator C A I N . Mr. Eccles, I think we are setting about to try to
control and curb, but not in very many instances are we trying to
cure any of the basic causes of inflation,"some of which you have put
your finger on this afternoon.
I refer you to a statement in your own statement, again before
that Taft committee, in which you say this:
Allocations, construction permits, price and wage ceilings, commodity margin
requirements, installment credit regulations, export and rent controls and similar
devices are all in the category of curbs, rather than cures.

Mr. ECCLES. That is right.
Senator C A I N . Yet, we have had no encouragement to get into
fiscal policies in this country. Unless they are changed in major
degree, I see that we can curb within reason, but we are not going
basically to turn the tide of the excess numbers of dollars that are
presently in circulation.
Do you share that reasonable fear with me? You have already
pointed it up in part where you have mentioned that in the same
program we are encouraged to give the President certain powers and
to exercise certain rights ourselves, while at the same time we are
encouraged to stimulate looser credit in this country.
How do you think we reconcile those two divergent views?
Mr. ECCLES. I don't think you can reconcile them. I think it
looks to me, as I view this whole picture, and I have read both the
statement of the President and the reply of the Republicans to that
statement, and I must say that in a good"many particulars both statements seem to me to be failing to face up to the economic facts of life.
I t seems to me that both could be accused of being guilty of passing
the political buck, so to speak, and that the public possibly under the
circumstances are the goats.
Senator C A I N . Y O U are taking advantage of a grand opportunity
to put your considered thinking on the record so that we shall have an
opportunity, politics to the side, to study it.
Mr. ECCLES. That is right.
Senator C A I N . I think it is a very valuable contribution.
Mr. ECCLES. What I am trying to do is to state, as I said in the
beginning, I was going to try to state objectively as I saw it the
economic situation, based on a long period of experience here in
I have honestly tried to do that, I have tdways tried to do it, because
I think, after all, it is important in the final analysis that we try to
solve these problems. The only way you can solve the problems is to
face up to what the facts are without fear or favor.
Senator C A I N . Have I understood you to say that in themselves
the control of bank credit and consumer credit would almost be
meaningless in the face of this tremendous burden of inflation that
we have in this country? I f we don't do in a positive fashion many
other things outside of those two particular fields we are not going
to accomplish very much?
Mr. ECCLES. I wouldn't want to write them down that much. I
do think they are important. I do think anything that will stop or
curb the further expansion of bank credit even by itself is a very
important factor.


I think i t would be unfortunate if the Reserve System had the sole
responsibility through monetary control to curb inflation. I don't
want to write down its importance, because it is very important.
The C H A I R M A N . Gentlemen, here is the situation: I t is now 5:15.
We have been in session all day. J think probably it is a fair statement
that of all the legislative hearings I have attended in 13 years in
Congress in both branches, I have never known one that was a more
concentrated solution of economic truths and fallacies, and so forth,
that you have shoved down our throats.
I t will take some time to assimilate this and digest it. The country
is going to hear all this, and it will make a lot of people think. We
are here for a little while to try to bring some order out of chaos in
the country as a whole. This committee is just beginning its work.
I don't know how long we are going to sit.
Tomorrow we are going to hear Mr. Snyder. We are going to hear
Mr. Paul Porter We are going to hear others. There will be opponents to what you have suggested come before us.
I hope, before we get through we will be able to present some legislation that will be helpful. Whether we can get it by, I don't know.
I am very profoundly grateful to the gentlemen who have appeared
here today for their coming and for their very frank testimony, and
I want to thank you, Marriner, for your kindness.
I want the privilege of having you come back tomorrow and, if you
will, deal with a few salient points. I will let you know sometime in
the morning, very early, by 9 o'clock.
Mr. Snyder will come before us tomorrow, too: I t is a little hard
to be definite about the program at this time, but I will give you the
news just as soon as I can have the exact time.
Mr. E C C L E S . I think I might get through here. The committee,
I imagine, would be through with me without too long further discussion. After what has been said, there may be some questions
T h e CHAIRMAN. Yes.
Mr. E C C L E S . I should prepare to be available at 10 o'clock?
The C H A I R M A N . I f you would, kindly.*
Mr. E C C L E S . Unless I hear from you, shall I be here at 10?
The C H A I R M A N . Unless you hear to the contrary; yes.

I thank you all for attending, and the press for their courtesy, and
good night to you.
(Whereupon, the committee recessed at 5:15 p. m., until 10 a. m.,
of the following day*)



(Whereupon, at 2:30 p. m., the committee reconvened, pursuant to
the taking of the noon recess.)
The C H A I R M A N . Mr. Eccles, I might ask you a few questions I
think you can answer. I would like to have you answer, because I
think i t is a timely subject. You attacked housing as inflationary,
and I go.t your point of view. Let me ask you three questions bearing
on housing.
Since the slum clearance provision of .S. 866, the Taft-EllenderWagner bill, would enable plans to be made now but would defer
actual demolition of slum housing and reconstruction of cleared areas
for some 2 years where the housing shortage is acute, why is this
provision inflationary at the present time?
Mr. E C C L E S . Of course, it would not be inflationary unless the
money is expended. I would prefer to see legislation dealing with that
subject passed at the time when the expenditures or the plan can be
carried out. I f you pass legislation now dealing with a subject of
that sort, it may prove to be more than is needed; and if you fix i t
within a 2-year period, the timing may not be right. I see no good
reason under these conditions to anticipate something of that sort
that can't be done.
The C H A I R M A N . I n other words, you would not plan ahead?
Mr. E C C L E S . Yes; I would plan, but I wouldn't introduce the
legislation. I mean I wouldn't pass the legislation. I think i t is
very well to have the thing discussed and considered and have i t on
ice and have it available.
The C H A I R M A N . Did you not favor with me the so-called full
employment bill a few years ago, which is set up now in law, which
provides for maximum employment in times of depression by public
works for States and Federal Government if and when the States
cannot take care of it, as an anchor to windward and insurance in
times of depression.
M r . E C C L E S . I think at the time a letter was sent to the committee—
at least, I know that I wrote a letter; I am not sure whether i t was a
Board letter or not—making certain qualifications, favoring, of course,
the objective of as full employment as one can get without its being
The difficulty about the problem of full employment is that there
is a very thin line between full employment and overemployment.
Wherever you get a situation where there is a short supply of labor
as there may be in materials, you can get certain inflationary pressures.
I think the unemployment insurance program is desirable to take
care of what we call residual unemployment, and I think that bill
was modified as i t was originally introduced.
The C H A I R M A N . I t was modified to this extent: The conferees
split on the words "full employment." We broke up, and I had a
happy thought and said, " I have a happy compromise." I said
•July 30, 1948.

"maximum employment" instead of "full employment," and they
grabbed it like a fish a fly.
Mr. ECCLES. Maximum.
The C H A I R M A N . I S the greatest possible.
Mr. ECCLES. That is right; the greatest possible.
The C H A I R M A N . What is "full"? I t cannot be fuller than full.
Mr. ECCLES. I don't think you could get full employment all the
time. You can put the words in there, but you wouldn't get it.
The C H A I R M A N . H O W are you going to get maximum?
Mr. ECCLES. I t is the maximum you are able to get without inflation, I would say. I n other words, you might put a further qualification—maximum employment so long as you don't create any
shortages that create an inflationary situation.
The C H A I R M A N . Y O U are creating hedges now.
Mr. ECCLES. That is really where the limitation should be.
The C H A I R M A N . Coming back to housing, if programs for slum
clearance and public housing are particularly important in times of
depression, should we not have legislation on the books which would
enable us to make the necessary plans now? That is in line with my
question before using the illustration of the full employment bill.
You have answered that.
The last question: So long as the housing shortage.continues to be
critical, should we not make every effort to provide more and better
housing at reduced costs? Is not such increased production the o ^ ,
real way in which the present shortage can be overcome and inflated
prices reduced? Does not the Taft-Ellender-Wagner bill provide the
type of production aids we must have to give more adequate housing
at lower costs?
Mr. ECCLES. That is a long question I certainly agree that we
should have a very much better housing condition for our people. Of
course, it is a disgrace in a rich country of this kind to have extreme
poverty and slums, on the one hand, and, if you have been to Miami
and Palm Beach, the mansions, the luxury, on the other hand.
I don't believe that those extremes can long endure. I think you
must bring up the standards of living. Of course, adequate housing
is one of the most important factors of the lower-income groups. I
think, however, it is a question of time. I t is a question of patience.
I t is a question of capacity. I t isn't possible, after a period of 4 or 5
years of war, when we were diverting one-half of our productive effort
and capacity to the prosecution of the war and were able to build very
few houses, and when the population was growing rapidly, to catch
up with that backlog of demand supported by a very large accumulation of money and credit without getting the inflation that we have
gotten in the- housing field.
I don't think that we really perform a useful long-term service to
the public by getting them in debt for housing at a highly inflated
cost; As I said, it is a question of patience and time.
I would like to read the following extract regarding housing in a
statement that I made before Mr. Taft's committee, or the Committee
on Banking and Currency:
Finally, from the long-range standpoint, it is vitally important to prevent inflation in the housing field from getting any worse than it is. The greater the inflation, the more severe will be the aftermath of defaults, foreclosures, liquidation,
and bankruptcy. Over the years the construction industry, which is a major

outlet for investment and supports a wide variety of related manufacturing,
transportation, and distributing activity, has been characterized by violent upswings and downs* ings. I f greater stability could be introduced into this field—

Housing is a great element in the construction industry—
it would go far toward achieving the national objective of stabilizing production
and employment at maximum levels.

There is your full employment.
The C H A I R M A N . There is your maximum, too.
Mr. E C C L E S (reading):
The more the backlog of demand for housing is filled at exorbitant prices now,
the smaller will be the cushion under the entire industry when prices come down,
and therefore the more intense the deflation in that industry will be. Manifestly,
this is not in the best interest of the general economy, and what is not good for
the country as a whole is not good for any group, veterans or otherwise. As has
been well said, there is 110 such thing as an easy credit under inflationary conditions. True, it is easy to get into debt, but the easier it is to get in—

Under inflationary conditions—
the harder it is to get out—

Under deflationary conditions.
This applies to all of us, including war veterans.

The C H A I R M A N . When you were here yesterday, I asked you two
questions, and you answered one, the major question. The last one
I asked you I do not think you had finished. Before we have any
questions, I would like you to finish up on that.
The question was, Who was responsible for the inflationary developments which have taken place in the country since the war?
Senator M C C A R T H Y . Before he changes the subject, I wonder if I
could ask Mr* Eccles a few brief questions on this matter of housing
as relates to the over-all inflation picture, if you do not mind.
Is that agreeable, Mr. Chairman?
T h e CHAIRMAN. Yes, sir.

Senator M C C A R T H Y . Mr. Eccles, many of us feel, and I know a
sizable number of individuals over in the various housing agencies
feel, that unless something is done—unless some legislation is passed
at this session, when the commitments that have previously been
made under title V I and under title I I have beeriL exhausted, which
should be along in late October or early November—at that time
there will be a tremendous slump in building—that the building of
homes will drop off.
If that occurs, do you not think that may well be the start of a
depression, keeping in 'mind what you have testified previously and
what you have testified to here today, and that is that the building
industry is so interwoven and so interlocked with the balance of the
economy and there are so many related industries in which prosperity
depends upon a prosperous building industry, if we do have that falloff in home building along in October or November, it well may be
the beginning of a depression?
Mr. E C C L E S . I can answer* that possibly by asking a question.
Until there is a falling off in the demand for housing due to the restriction of credit that may tend, as you say—and I agree—to reduce the
demand, but until that happens, how are you going to get down the
price of houses? And is it fair, is i t right, to get your young people,
particularly your veterans, in debt at the present inflated prices so


that they will be in the position that the farmers were in after the
last war, if you will recall? I n the first slump they will have incurred
an obligation for housing at inflated prices when the dollar is worth
possibly 50 cents, and they have to pay it off
Senator M C C A R T H Y . I get your thought fully. I wonder if you
have in mind just what we think of when we refer to housing legislation. I t is legislation designed to bring down the price of housing.
For example, one part of the housing bill that has been proposed is
the setting up of a housing home financing agency to work toward
the standardization of code, a standardization of measurements. We
all realize that the building industry is about 50 years behind the
Mr. ECCLES. I am for that.
Senator M C C A R T H Y . There is no standardization whatsoever. I f
we can do that
Mr. ECCLES. Let's get that first.
Senator M C C A R T H Y . If we can standardize the codes throughout
the country, and it will take some time of course, we cannot do it by
merely passing a Federal law, but we can set up an agency to service
the cities and help them to do that if, No. 2, we can get the standardization of measurements, it is generally agreed by even the more
pessimistic that those two things alone, even if prices remain as high
as they are now, those two things alone will result in reducing the
cost of a home by about 30 percent.
When we talk about housing legislation, I want you to keep in
mind the purpose of this is to not increase the cost of a home, but to
cut down the cost of it.
Mr. ECCLES. Title V I , though, would help to maintain the price of
a home.
Senator M C C A R T H Y . Title V I would make it possible for a man
without much funds to obtain one.
Mr. ECCLES. I t is an unsound form of mortgage credit.
Senator M C C A R T H Y . I t would make it possible for a man without
much money to buy a home, that is true, and from that standpoint
it would increase the demand for homes; but at the same time title V I
would result in the building of more homes.
Of course, the more homes you have, the lower they ultimately drop.
Are you not at all disturbed that if we cut off this credit for home
building, to begin with, the Federal Reserve System sends out a bulletin saying "cut down your loans on homes, tighten up." That means
a man who wants to buy a home cannot get the money.
If, in addition to that, we do nothing whatsoever to provide Federal
guaranties on these mortgages, that will mean the present commitments run out, which should be sometime along in October or November, the building of homes will just drop down, and if that happens,
let me ask you this again—I am not trying to cross-examine you—if
that does happen, if the production of homes drops off in the fall of
the year, do you not think that might well precipitate a depression?
Mr. ECCLES. I t might well help to do it, and certainly we are likely
to have one sooner or later. As I say, I think that a deflation from
the inflated prices is overdue, so if we can get it in October or November, some adjustment, so much the better.
I regret personally that we have had the inflation we have had
since the end of the war, which has been very serious.


Senator M C C A R T H Y . Y O U understand there are many of us who do
not subscribe to your theory at all that a depression is inevitable.
We do not believe that this country is so lacking in intelligence and
ingenuity that we cannot prevent a depression. There are many of
us who do not agree with you in that.
Mr. E C C L E S . I hope you are right and I am wrong.
Senator M C C A R T H Y . Many of us do not feel that we can sit back
and relax, feeling that the act is inevitable now.
I am exploring, asking these questions, forgetting for the time
being that the question of depression is inevitable and let us go
ahead and see what, if anything, we can do to prevent it if possible.
Mr. E C C L E S . I am for that. I am for doing everything possible
to prevent it.
Senator M C C A R T H Y . D O you not think, then, and I will not pursue
this indefinitely, that it will be for the benefit of the entire economic
picture if we make it possible for men without too much by way of
cash resources, but who have good credit, to get money so they can
buy the cheaper-type home?
The housing legislation we now have in mind is designed to make it
easier for the man without too much funds to build or buy a cheaper
Mr. E C C L E S . That would be fine if you had an excess of building
materials and building labor and you were unable to utilize your building labor and your building resources on the basis of the title I I
mortgage provision, upon the basis of what we may consider larger
down payments. I would say that the time to use the smaller down
payment and induce the public to utilize the construction resources
that we have would be at such a time as to cushion a depression.
That is the way to prevent a deflation of any serious proportion, to
have reserves of that sort available. That would .be the time when
public housing would be justified and public works would be justified,
and easier consumer credit would be justified, and lower taxes would
be justified.
I n other words, we are pursuing m our whole economic policy a
course that tends not only to sustain inflation, but to make for further
Senator M C C A R T H Y . There is one other question: Assume that we
were to agree with you in all of that, do you not think it would be
well then at least to pass a law at this special session setting up an
agency, the framework of a housing agency, to work toward the standardization of codes and building standards in the building industry;
in other words, trying to bring the building industry up to date?
Mr. E C C L E S . Yes, sir. I would be 100 percent for doing all the
preparatory work. I n other words, the time to get ready for trouble
is when you don't have the trouble. If you want public housing
Senator M C C A R T H Y . I am not speaking of public housing.
Mr. E C C L E S . Then private* rental housing, any type of bousing.
Certainly the building industry as it is organized today with the
racketeering that goes on in the cities, with the building codes that
are in effect, is among the most archaic industries that we have.
Anything and everything that can be done to correct that situation
should be done. The Federal Government should be prepared with a
program that would stimulate better housing at lower prices for more
people when the economic situation is such that you need such activity
in order to employ your people and to utilize your surplus materials.

Senator M C C A R T H Y . I n other words, you pretty much agree with
me on this, Mr. Eccles. No. 1, the archaic building code is completely outmoded, the old specification code. The fact that your
building industry is 40 or 50 years behind the times, no standardization of measurements whatsoever. That is in effect causing everyone
to pay a dollar for 50 cents' worth of building today.
Regardless of what else we do, we could contribute a great deal to
the entire economy of the country by at least starting to do two
things: No. 1, get some standardization of codes, bringing them up
to date so that the}r do no more and no less than protect the public
health and safety; No. 2, get some semblance of standardization of
measurement in the building industry.
Senator C A P E H A R T . Is that not purely a matter of State and city
Senator M C C A R T H Y . If you are asking me the question, the answer
is definitely and emphatically "no." That is the job which only the
Federal Government can do. You will never get a standardization
of measurements unless the Federal Government does something
about it. You will never get a standardization of codes. Wilson
Wyatt urged that you pass a Federal building code. Obviously you
cannot do that under the Constitution. But we can set up an agency
in the Federal Government that can be of service in the cities in
helping them to draft and modernize their building codes.
Senator C A P E H A R T . Y O U are not talking about legislation.
Senator M C C A R T H Y . I will give you the picture in a moment. Let
us take a typical city in your State, City X. You have elected a
young fellow who has been successful perhaps as an insurance salesman or tavern keeper. He takes over the city of 30,000 or 35,000
population. Their building codes are 30 or 35 years old. They are
completely outmoded. If a company comes in from the outside and
wants to build a prefabricated house or to do some precutting or have
the kitchen units preassembled, he runs into the building cede in
your city.
This young fellow has been elected mayor and most likely would
like to have an up-to-date building code. To begin with, before he
can do anything, he of course does not know anything about a code,
you have to go before the city council and get them to appropriate
$10,000 or $20,000 and hire a firm of lawyers; the firm of lawyers know
nothing about the code.
After 3 or 4 years they throw up their hands and give it up. If you
have a Federal agency that can work with the labor unions, the building associations, such as your Pacific Coast Builders, they have a good
standard code. Your building contractors have been working on a
building code for 10 years. If you have a Federal agency that can
work on this without the selfish personal interest that some of the
groups that have been working on it have, but utilize those groups,
then they can say to the young mayor of this city of yours, "Here, we
have a model code. We present that to you." I t would ke very
simple for him then to get passage of that code.
I know from our experience in our hearings from one end of the
country to the other that you have an unlimited number of mayors
of such cities who would like very much to modernize their codes and
thereby cut down the cost of building, but they just do not. know

how to get started and by the time they get around to learning how
to get started you have a different mayor in the city.
That is on the standardization of codes. On the question of
standardization of measurements, that is definitely a Federal problem.
The industry as a whole agrees quite clearly if you can get a standardization of measurements in the building industry, then you can have
widespread precutting. I do not mean prefabrication, but precutting
of the lumber so you can go down to the mill and order your joists and
your rafters, your studding, all precut and do away with a tremendous
amount of waste of lumber. The lumber that we now have would
produce many more homes. You would do away with an unlimited
amount of on-the-site labor costs. Industry, both the labor unions
and the builders, agree, if we can get a standardization of measurements we will cut down the cost of building up to 20 or 30 percent.
If you couple that with a standardization of codes, that will amount to
at least 30 percent.
If I may further enlighten you, take for example the brick industry,
if you had standardization, it would mean immediately the retooling
of many of your brick companies. About 22 percent of them are
already doing that, anticipating a standardization along the lines of
modular coordination. I t is generally agreed that if you have
standardization of measurement, built for example in multiples of
four, that would cut down your masonry costs in brick buildings by
at least 50 percent.
Does that answer your question?
Senator C A I N . I have two propositions that worry me a little,
Mr. Eccles, quite a lot in fact.
We have a concrete proposal before our committee to which you
addressed yourself in pait yesterday, which is to increase the reserves
of nonmember banks. There are some of us, and we do not know
whether we are right or wrong, who think that would jeopardize the
future health of the Federal Reserve System, if we increase the member
banks' reserves without increasing the reserves of nonmember banks.
Mr. Snyder appeared before us this morning and, as I recall his testimony, he first did not have any thought or conviction that the increases ought to be for nonmember banks, and member banks as well.
He referred to the fact that the proposal was drawn by the Federal
Reserve System.
Mr. ECCLES. That is not correct.
Senator C A I N . That is what he said this morning, I think.
Mr. ECCLES. N O . That wasn't drawn in the Federal Reserve. I t
was drawn by the White House. I checked that. I found out it was
drawn by them; somebody I don't know. I t was under their direction. The Federal Reserve were merely asked, I understand, if they
would come over and discuss the whole program. I wasn't here, but
Mr. McCabe sent Mr. Thomas, our Director of Research, over and
he reported last week that the bill was drawn to exclude the nonmember banks.
Senator C A I N . This perhaps is important, sir. I wonder, Mr. Chairman, if you would permit Mr. McKenna to get hold of the transcript
of this morning, because there is no intention to be unfair to the
testimony of Mr. Snyder, but I think he said specifically, " I support
this legislation without knowing much about it because it was drawn
and presented by the Federal Reserve Board."


Mr. ECCLES. The Federal Reserve Board and Mr. Thomas checked
it, went over it, and the lawyer approved it as to its legal form, but
that is very different from the question of policy as to whether or not
it was all right. When the matter was put up to the Board, the Board
insisted that the nonmember banks must be included, that the nonmember
Senator C A I N . I beg your pardon. Will you stop right there. Mr.
Chairman, I think we have an item here that is very important on
this policy of possibly increasing the reserves for member banks under
the legislation mentioned by the President. Mr. Eccles has just
testified that his board had a meeting in which they conclusively
recommended that in order for the legislation to serve its intended
purpose; it must cover nonmember banks as well as member banks,
and this morning Mr. Snyder said "Yes; it would be helpful, and we
would like to have the Congress do it."
Mr. ECCLES. Mr. McCabe yesterday morning
The C H A I R M A N . A half-hearted response.
Senator C A I N . That is right.
Mr. ECCLES. Mr. McCabe yesterday when he presented the statement that the Board agreed to, after he was called
The C H A I R M A N . We have not the transcript, but both the counsel,
who are pretty keen fellows, affirm that Mr. Snyder intimated this
morning it was approved by the Federal Reserve Board.
Senator C A I N . He said he didn't know very much about it but it
came out of the Federal Reserve and so on.
Mr. ECCLES. The present form has not been approved by the Federal
Reserve Board.
Senator C A I N . Y O U mean the recommendation that the increases
be restricted to member banks?
Mr. ECCLES. That is right. The Federal Reserve Board does not
agree that the increases should be restricted to Federal Reserve banks,
but both Mr. McCabe and I testified yesterday that nonmember banks
should be included. I was a little stronger than Mr. McCabe. And
if you will look at the Board's statement and the report that I read
into the record yesterday covering the hearing on the President's
Economic Report before the Taft committee on the 13th day of April,
we presented this identical plan on the 13th day of April before the
Taft committee with the exception that we included nonmember banks.
I made the point before the Taft committee, I read it into the record
yesterday when I quoted from that statement the necessity of including nonmember banks. I quote here from the statement of Mr.
McCabe yesterday morning.
Senator C A I N . Please do, because in a policy sense I think we are
talking about the fundamental, if there is one, of increasing these
bank reserves.
Senator C A P E H A R T . I t does not require any imagination, does it,
to know that you certainly must include all banks if you are going to
make the plan effective.
Mr. ECCLES. The plan that has been presented here does not include
all banks.
Senator C A P E H A R T . I know it does not, but I mean it certainly
The C H A I R M A N . The committee can change that plan and will.
Senator C A P E H A R T . We can change it and as far as I am personally
concerned, I will vote to have it changed.

Senator C A I N . Senator Capehart, this morning the Secretary of the
Treasury was lukewarm and unenthusiastic on the theory.
The CHAIRMAN. Lukewarm and unenthusiastic, period.
Senator C A I N . That is right. On that particular problem. He
says we support it because that is our custom but we do not know
very much about it.
Senator CAPEHART. May I say the administration is lukewarm on
the whole problem and are not willing to face the issue. They are
not anxious for the kind and type of legislation that will get the job
done that they continually talk about.
Senator C A I N . Marriner, I have been coming to this question and
I have been veiy serious about this. I t was my feeling from listening
to you yesterday that it might be your considered opinion that if this
Congress adopted this proposal to increase the reserves of member
banks and left the 7,500 or 7,000 other banks outside that restriction,
there would potentially be more future damage in the passage of that
legislation than if we did not pass it.
Mr. ECCLES. T O the Federal Reserve System.
Senator C A I N . That is what we are talking about, and we want to
clear that matter up if we can. You are of that opinion?
Mr. ECCLES. I went so fat as to state that I would prefer no legislation whatever increasing reserve requirements, giving the Reserve
System authority to increase reserve requirements, unless it did cover
nonmember banks.
Senator C A I N . And yet this morning, Mr. Eccles, and without
prejudice to him, the Secretary of the .Treasury said, No. 1, the item
is under the control or the recommendation is under the control of the
Federal Reserve System; and No. 2, i t would be much better to have
the proposal enacted into law than not to do it.
The CHAIRMAN. Yes; here is the statement of Mr. McCabe.
Perhaps you are familiar with it:
The proposal with respect to bank reserves is similar to that of the Board in
April except that the increased requirements would be applicable only to member
banks, whereas the Board had recommended that it be applicable to all commercial

Senator C A I N . Yes, sir; the message comes up on the basis of an
emergency from the President. We want you to pass this proposition
only covering half the banking system of this country. Having come
out of a bank once upon a time, talking about logic I think, is there
any merit in the proposal at all?
Senator CAPEHART. That is the typical way the administration has
of handling all matters.
Senator M C C A R T H Y . Mr. Chairman, I wonder if it would be amiss
for this committee to recommend that this be referred back to the
administration that called this special session and ask the President
if he could not sit down with the Federal Reserve Chairman and
members and sit down and talk with the Secretary of the Treasury,
and then present something to us that they can agree on, instead of
having one division of the Government come down and say we want
one thing, and another member of the President's family say we want
another thing.
I think we at least should know what the President's official family
wants and what the President's program is. Mr. Snyder came down
here and said, "We approve this measure because the Federal Reserve

Board drafted it." Now we find that the Federal Reserve Board did
not draft it, that not only did they not draft it, but they do not want
this in its present form.
Mr. ECCLES. Let me put it this way.
Senator M C C A R T H Y . Pardon me, just a moment. I am addressing
the chairman. I think it would not be amiss for this committee to
take action to refer this matter back to the President over the week
end and ask him if they could not come down with some measure
which the entire official family can agree upon.
The C H A I R M A N . Speaking only as my personal opinion, my judgment would be that that would not be the way to do it, but the way
to do it as a matter of conviction with us and the others is that when
we draw up a piece of legislation, which I hope and expect we are
going to draw up, something which will be helpful, the committee
will say "thus sayeth the Lord."
Senator M C C A R T H Y . M y only thought, Mr. Chairman, is that the
President called this special session and this is the No. 1 piece of
legislation. Apparently if we pass the type of legislation that Mr.
Eccles recommends, and I think it is far better than what the administration sent down, we do not know whether he will veto it or not.
I believe we should refer this testimony back to him so that the
President knows that his Secretary of the Treasury and the Federal
Reserve System disagree wholeheartedly on what type of legislation
should be presented and find out from him just who is spokesman
here before us. We may not agree with the President, but I would
like to know just what his position is. As of now, we do not know
whether Mr. Snyder is his spokesman or Mr. McCabe, or Mr. Eccles.
Mr. ECCLES. I am sure you know I am not.
Senator CAPEHART. We are certain of that.
Senator M C C A R T H Y . If we pass the program sent to us by the
Federal Reserve Board, we do not know whether it will be signed. I
think we should know what the President wants.
Senator CAPEHART. I think we know what he wants, but I think
we will decide what is best.
Mr. ECCLES. I think I can help clarify that. I think there may be
some misunderstanding. I n the first place, this proposal was not
made by the Federal Reserve Board in the form that the White House
sent it up here. That is No. 1. The Chairman of the Board, so I am
informed, was invited to come over to a conference to consider the
program because the Federal Reserve Board was included in the program. He did not go, but sent Mr. Thomas, the head of the Research
Division, and Mr. Thomas reported that the program included consumer credit and also the others. I think that at a later date, Mr.
Vest, the general counsel of the Federal Reserve, was called in by
the people at the White House who were drafting the bill and approved
the form in which the bill was drafted. There is a great difference.
Senator M C C A R T H Y . Who is Mr. Vest?
Mr. ECCLES. He is the General Counsel of the Federal Reserve.
Senator C A I N . That is a legal matter.
Mr. ECCLES. That is right. The question of policy as to whether
or not nonmember banks should be included is not a matter that either
Mr. Vest or Mr. Thomas would be in a position to determine. Only
the Board can determine that. The Board had had no opportunity


to meet. Four members of the Board were out of town. Two of
them were away on their vacations, another away on business. The
Board had not had an opportunity to meet prior to the time when the
message came here. This very short statement that Mr. McCabe
presented as a statement of the Board, was two paragraphs only, as
presented here yesterday morning, and the rest of the statement was
his own statement, and he explained why.
That is the latest view and expression of the Board.
I quote here. I want to read this very point, because it is so important:
The proposal with respect to bank reserves is similar to that advanced by the
Board in April, except that the Board in April proposed that increased requirements would be applicable only to member banks, whereas the Board had recommended that they be made applicable to all commercial banks. This is a significant difference. " We feel deeply that it is not fair to member banks in their
competitive relations to nonmember banks to require that they be singled out to
carry the additional reserves that may be necessary to combat this inflationary

That is the statement. I n the statement I presented before the Taft
committee in April I elaborated to a great extent upon that matter,
and I did yesterday morning, but it all goes to that point.
I am not sure that when the administration presented the proposal,
they knew how strong the feeling might be against not including
nonmember banks.
Senator C A I N . We are still trying to help curb inflation, are we not,
and you cannot do it by excluding half your system.
' Mr. ECCLES. The report that came to me on the hearing was to
the effect that Mr. Snyder did not propose to include nonmember
banks. Certainly you must conclude that in the field of finance he
would be the spokesman for the administration. He and the Chairman of the Board are the only two that could possibly speak for the
administration in this field. The Board would not speak for the
administration. The Board isn't a part of the administration. I t is
an agent of Congress.
Senator M C C A R T H Y . Let me interrupt you there if I may. Mr.
McCabe was down here before us and we'have a lot of respect for
his good judgment, the same as we have for yours. He tells us that
he felt that we could not include the nonmember banks in this bill
for the reason that the special session would not be long enough to
allow for the very lengthy hearings which he felt would be necessary
to present an intelligent and workable bill, including nonmember
Whether he is right or wrong, that is the Chairman of the Federal
Reserve Board's opinion. He feels we cannot include the nonmember
banks. You yourself are a former member of the Board
Mr. ECCLES. You said a former member?
Senator M C C A R T H Y . Former Chairman.
Senator C A I N . Y O U can go so far without going out.
Mr. ECCLES. The other is only a designation, you see.
Senator M C C A R T H Y . We have you, the former Chairman of the
Board, come down and tell us that unless we do include the nonmember banks, you think the bill should not be passed. The present
Chairman says we cannot include the nonmember banks. We have
the former Chairman of the Board tell us that unless you do include
the nonmember banks, let us not pass it.


Then we have the Secretary of the Treasury who comes up here and
says in effect, " I am in favor of this bill not because of what is in it,
but I am in favor of it because the Federal Reserve Board drafted the
Is that not right, Mr. Cain?
Senator C A I N . I n part; but he went on to say if any measure any
way could be found to include the nonmember banks, he in support of
Mr. McCabe's position taken yesterday, would likewise be in support
of it. He saw good reason to do it but he thought it much more important to pass half a measure than not to pass any at all.
Senator M C C A R T H Y . I n view of the fact that the President and this
Congress have enough confidence in Mr. McCabe to confirm his
appointment, knowing he was going to be Chairman of the Board, we
can assume he knows considerable about banking, most likely more
than we do. He says this special session cannot include the nonmember banks. Mr. Eccles says unless you include them, do not pass
the bill. I think in view of that contradictory, perhaps intelligent
contradiction, I do not know, I believe this committee should refer
this bill back to the President and ask him to see if he cannot get the
different members of his official family together and present to us a
bill that they support, so at least someone can come down here and
after the President has called this special session say this is the bill
he wants.
Mr. ECCLES. The Board is the agent of your committee. I t is not
in the administration.
Senator M C C A R T H Y . We may not agree. We may not pass the
bill. But I think we should know.
Mr. ECCLES. I think you know. I think you have all the evidence
in the world you need.
Senator M C C A R T H Y . We know what we want, but I would like to
know what they want, legislatively.
Mr. ECCLES. I think you have that. I think they want this bill,
including the nonmember banks. That is certainly the position of
Mr. McCabe. That is the position of the Board.
Senator M C C A R T H Y . That is not the position of Mr. McCabe.
Mr. McCabe told us yesterday
Mr. ECCLES. He thought maybe you couldn't get it, but that doesn't
mean he doesn't want it.
Senator M C C A R T H Y . He said he was convinced that the special
session wouldn't have time adequately to consider.
Mr. ECCLES. He didn't think you would. .
Senator M C C A R T H Y . That, in other words, he is convinced of that.
Mr. ECCLES. I don't recall he said he was convinced; in his judgment he didn't think that you would have time to consider it. But
Mr. McCabe is a member of the Board, like the rest of us, and what
he said, which is in this statement that I just read,, is the view of
the Board.
Senator C A I N (presiding). But you did not read it all, Mr. Eccles.
If you will read the last sentence of the second paragraph, it will only
the more confuse this issue, but we may find a solution in due time.
Let us have this sentence which is an answer to you, Senator McCarthy. The last sentence:
As an emergency measure, however—


after saying he wanted it for all member banks and it was not in there—
as an emergency measure, however, the bill would be adequate to meet the immediate need for additional authority to deal with the reserves.

I do not see how anything can be adequate if it stands a chance of
jeopardizing the future health of the Federal Reserve System. To me
that is a contradiction that must be resolved in terms of the future of
this country.
Mr. ECCLES. The responsibility, of course
Senator M C C A R T H Y . Before you go into that, let me ask you this:
Do you feel if we do submit this amendment including the nonmember
banKs, then it would be necessary J o hold open hearings and allow all
those opposing the inclusion to be heard, all those raising a constitutional question to be heard, and to go into this matter in detail. Do
you think that will be necessary or do you think just upon the recommendation of yourself we could include nonmember banks?
Mr. ECCLES. I t depends entirely on the extent to which you think
the emergency exists. Congress has passed important legislation in
a much shorter time than 2 weeks. I t it is the view of the Congress
that something should be done at this special session, I think that
could very well be. You have certain precedents for it. As I explained to the committee yesterday, the nonmember banks are covered
by consumer-credit controls as well as the member banks.
Senator C A I N . May I explore that with you a second. Why
should it be more difficult for the Congress to include both member
banks with reference to a reserve requirement when we have done
the same thing in years gone by, Senator McCarthy, for consumer
credit. They are both part and parcel of the same credit structure.
Mr. ECCLES. The Board regulates the nonmember bank today
under regulation U? That is the margin requirements against listed
Senator C A I N . If, in other words, this is an emergency with which
this country is confronted, do we want a full measure as an attack
upon the problem, or do we want just to jockey along with it because
there will be some opposition, in the words of Mr. McCabe or Mr.
Mr. ECCLES. Of course there will be a great deal of opposition.
I t is perfectly natural. You will not only have opposition, but
plenty of it. If you wait to get the approval of the banks, you won't
get the approval of the member banks, either. You will get the most
vigorous opposition possible from the member banks as well as the
nonmember, but you will get more opposition from the member
banks if you exclude the nonmembers. That is, at least the smaller
banks. The large city banks that are the city correspondents of the
nonmember banks will take the position of the nonmembers. They
are not going to oppose the position of the nonmember banks. The
city banks would no doubt like to see the reserves of the nonmember
banks carried as balances in the reserve cities. You have to look at
that aspect of the problem. Here is the situation:
The banks are not going to be any more anxious to have restriction
on the control of credit than the people who sold consumer credit
want to have restriction on consumer credit, or than labor would
want you to put a control on wages. There isn't any question that
the opposition to this will be, like all other restrictions, extremely


Senator C A I N . Mr. Eccles, there are seven members of the Board
of your Federal Reserve Board. You have taken a position as a member, which is simply to say that in your considered approach to this
problem, you do not approve of this legislation unless it covers both
sides of our dual banking system. As I read Mr. McCabe's official
statement of yesterday,- he says:
I want it to cover the dual system, but if we can't get that, as an emergency
measure, we will take what we can get.

Is it fair to ask, if you have any opinion as to what the other five
merhbers think on this rather fundamental issue, Marriner?
Mr. ECCLES. Unless they have changed their view since I appeared
for the Board in April before the Taft committee, they feel as I do,
because when we appeared before the Taft committee in connection
with this control and when I appeared in connection with the special
reserve requirement last November, there was never any thought
that increased credit controls should exclude the nonmember banks
by any member of the Board or by any membe of the staff.
Not only was the Board very vigorously in favor of including all
banks, but the staff were equally favorable to it. That was in connection with the preparation of the statement that was to meet this
same condition, to meet this call for credit control that the President
made in his special message last November. When the Joint Committee on the Economic Report met in April to consider the President's economic report and the Board was asked to present its views
as to what should be done in the credit field, we again presented their
views and we offered as a substitute for the optional special reserve
proposal, this identical plan, with the exception that we included all
b&nks. That was the view of six of the seven members and I see
no reason now
Senator M C C A R T H Y . Will you pardon me for a minute? Mr.
Chairman, it is now nearly 3:30. I understand we are not going to
have hearings tomorrow. I think we all want to consider this matter
over the week end. I think in view of Mr. Snyder's testimony that
the reason he favored this bill was because he understood it was
drafted by the Federal Reserve Board. We learn from Mr. Eccles and
Mr. McCabe that the Board has never met, that they knew nothing
about the call of the special session until after it was called. We
learned from Mr. Barkley on the floor of the Senate this morning
that he only knew of the call of the special session 1 hour before the
President announced he was going to call it.
I have a lot of respect for Mr. Snyder, a lot more than Mr.
Eccles has.
Mr. ECCLES. You may be assuming something.
Senator M C C A R T H Y . He is running a tremendous business over
there. I think before we pass a bill that affects his handling of that
$260,000,000,000 concern that he is running, the national^ debt, I
believe he should be consulted further, and I think someone should
now, this afternoon, notify him that his basis for approving this bill
was wrong, that the Federal Reserve Board did not help to draft it;
that their counsel merely approved it from the technical standpoint.
Mr. ECCLES. I wouldn't say that. The counsel actually may have
drafted the bill.

Senator M C C A R T H Y . Let me finish and then you can correct me if
I am wrong. This does not represent the policy of the Federal
Reserve Board. Notify him that in Mr. Eccles' opinion the other
members of the Board feel the same as he does, that the nonmember
banks should be included. Notify him that Mr. McCabe said he
thought the time was not long enough to include the nonmember
banks because we could not have extensive enough hearings.
In view of that, ask bim to come down and let us know what his
official view as Secretary of the Treasury is and if possible let us
know what the view of. the President is.
As acting chairman, I suggest that we contact Mr. Snyder now
and ask him to corns down here.
Mr. ECCLES. I would like to correct your assumptions, your statement, in this particular: I don't know the extent to which the Federal
Reserve counsel drew the bill. Even if the Federal Reserve counsel
drafted the bill in its present form, it was merely the legal job of
putting a bill into legislative form, and he would not be in a position
to determine the policy as to ^whether or not the nonmember banks,
would be included, and neither would Mr. Thomas who went over
As to what the present views of the Board with reference to this
subject may be, I would not be able to state. All I am stating here is
what the views of the Board were when the Board's proposal was.
submitted at the last session of Congress at the time the optional
reserve plan was proposed and in April what the Board's views were
when we submitted a report to the Taft committee.
Senator M C C A R T H Y . May I interrupt again. . I n any event this
committee can assume that this bill does not represent the thinking or
the policy of the Board as a whole. The Board has never met, I
understand, since the call for the special session to discuss this legislation. So at this time we don't know whether the Board approves or
disapproves of this bill in its present form. We do know this: We
know you yourself, the former chairman of that Board, tell us if we
pass it in this particular form, it can ultimately wreck the Federal
Reserve System.
Mr. ECCLES. I didn't say it could wreck the System.
Senator M C C A R T H Y . What did you say; what was the wording?
Mr. ECCLES. I said I would prefer to have no bill than a bill that
excludes the nonmember banks.
Senator M C C A R T H Y . Will it weaken it? What language did you
Mr. ECCLES. I n my opinion it would greatly weaken the Federal
Reserve System.
Senator M C C A R T H Y . I understood you to use the word "wreck."
But you said it would greatly weaken the Federal Reserve System.
Mr. ECCLES. I gave my reasons for it.
Senator M C C A R T H Y . I think in fairness to the Congress and in
fairness to the people of this country we should ask the Congress to
call together the Federal Reserve Board and have them in meeting
decide what their policy is; have them discuss that with the Secretary
of the Treasury. I think it is an insult to the intelligence of the
Congress; I think it is an insult to the American people to present
legislation as all-important as this, and then discover that the Federal


Reserve Board has never met, has never passed on it. We find a very
competent member, a former Chairman of that Board, tell us that if
we pass this bill it will greatly weaken the Federal Reserve System.
We find the Secretary of the Treasury comes down and says, " I am
for this bill because the Federal Reserve Board drafted it."
With that type of picture I think we should call back the Secretary
of the Treasury and I do think we should refer this back to the President and ask him to call together that Board so he can tell this
Congress what it is the Federal Reserve needs, and what the Federal
Reserve Board wants; what the Treasury wants.
Senator C A I N . Will you permit me to answer in this way for the
reason that I am acting for Senator Tobey due to his absence, from
which he may return in a few minutes. I t would be improper in that
official sense for me to do as you suggest.
Senator M C C A R T H Y . I understand. We would have to have a
quorum present.
Senator C A I N . I t is certainly proper that that portion of today's
testimony which deals with this subject should be taken out by itself
and presented to Senator Robey later on this afternoon or this evening,
as the case might be.
Personally, I think you are on sound ground in going further in this
matter, but all of us in an effort to be objectively fair to the Secretary
of the Treasury, as we are to Mr. Eccles and Mr. McCabe, will want
to study carefully what he actually said this morning because it is
awfully easy to get mixed up in words.
Senator M C C A R T H Y . D O you not think this—and I wonder if
Mr. Eccles will not agree with me—do you think that before we take
any action on this particular measure there should be a meeting of
the Federal Reserve Board tomorrow or Sunday or sometime and
have them go over this bill, have them go over the testimony, so that
Monday morning or as soon as possible
Mr. ECCLES. I t isn't possible. Some of them are out of town.
They will be here Monday, but you couldn't possibly get a meeting
before Monday.
Senator M C C A R T H Y . Even Monday. Do you not think, Mr.
Eccles, that before we take any action you should have a meeting of
that Board so that we will know what the policy of the Federal Reserve
Board is on the matter?
Mr. ECCLES. Y O U mean as to whether or not the Board now, at
least the majority of them, feel that the nonmember banks should
have been included?
Senator C A I N . We do not know whether they would or would not.
Mr. ECCLES. I t can be determined certainly, I think by Monday,
whether or not they would prefer the bill as it is rather than have no
Senator M C C A R T H Y . I would like to know also whether they join
with you in your thinking, with which incidentally I agree, that this
bill in its present form would weaken the Federal Reserve System.
I would like to get their thought on that. If it does, we certainly
would hesitate a long time before we would pass it.
I would like to know whether they agree with Mr. McCabe on the
other hand that it is impossible at a special session to hold sufficient
hearings to pass a good, workable bill including the nonmember banks.
Senator C A I N . Mr. Eccles, inflation, I think we all agree, is greater


than it was last April in its scope, when you expressed the point of
view of the Board before the Taft committee.
Mr. ECCLES. That is right.
Senator C A I N . What was the date of the letter, portions of which
you read to us yesterday, as having come to you from the President
at the time?
Mr. ECCLES. January 2 5 .
Senator C A I N . Prior to January 2 5 , in order to keep the record
straight, had you, speaking in your official capacity for the Board,
recommended that members and nonmember banks be included in
any increased reserve provisions?
Mr. ECCLES. I n November, I think the 25th, before the Taft
Senator C A I N . D O I remember correctly from your reading of that
letter yesterday that the executive branch of this Government said
that they were making a change in the chairmanship without prejudice
to you or to your policies and that they had subscribed to those credit
policies? i
Mr. ECCLES. That is correct.
Senator C A I N . Y O U notice, therefore, what strikes me is a great
inconsistency. Inflation is getting worse and our proposed methods
of dealing with inflation becoming less vigorous and strong. How,
in the words of just an ordinary man, do we reconcile what appears
to be an impossible approach to a grievous problem? Senator
McCarthy, this is only a further exploration of the big problem. Do
you have any feeling about that, Mr. Eccles?
Mr. ECCLES. I certainly am unable to read the mind of the President or other leaders in the administration as to what their thinking
may be. All I am able to do is to read the record, and I tried yesterday
to present as best I could the written record as it has been made. You
will have to draw your own conclusions from the written record that
was presented.
I would like to call the committee's attention to what I saw just
before coming up here over the Dow-Jones ticker. I shall read it:
Truman told his news conference yesterday that consumer credit is building
up fast. He said that is why he asked for credit controls that he didn't seek in
his anti-inflation message last November.

I don't know whether this is correct. With all due respect to DowJones, of course I don't know whether this is a correct quotation, but
certainly it would seem to me that if it is a correct quotation, the
President is under the impression that in his ariti-inflation message last
November, he did not then ask for credit controls, and that the only
reason that he is now asking for credit controls is because consumer
credit is piling up. I t would appear that he may think he is only
asking for controls because consumer credit is building up and that
the consumer credit control is the important credit control.
You will recall that yesterday I quoted to you a statement that
was made by the President last November on this question of credit
control, and the statement that we suggested that he-make in his
message when we were asked to submit something that we thought
was acceptable, and you also recall the statement that was made in
his message this year.
I n those instances the question of credit was one of the most
important and was one of the most anti-inflationary parts of his pro

gram. So the reason for asking for credit controls now could not
very well be due to the fact that the situation is now different than
i t was in November when he didn't ask for anticredit controls.
I just wanted to correct this statement because in both instances,
last November and at the present time, credit controls on both consumer credit and on bank credit were asked for, and in both instances
the Federal Reserve Board supported the necessity for those controls.
I just wanted to straighten the record out in that particular.
Senator Tobey asked me a question yesterday, and I started to
answer it and we got off on this subject. Unless there is something
else and if he wants me to answer it, I would like to do so.
Senator C A I N . The record and Senator McCarthy and I would be
very much in your debt if you would raise the question, Mr. Eccles,
and then give us the answer that you have in mind.
Senator M C C A R T H Y . D O you recall the question?
Senator C A I N . On page 9 5 , question 2 : If this is the one to which
you referred:
Who is responsible for the inflationary development in this country which has
taken place since the war?

Mr. E C C L E S . I think I probably answered some of that yesterday.
A t least we covered certain aspects of that problem.
What I want to do on this thing is to make the record for the Federal
Reserve. That is what I am primarily interested in.
Senator C A I N . We would like to have that for that reason and we
would like to have it not only for the benefit of this committee, but
for others who have access to the record.
Mr. ECCLES. Before covering the Federal Reserve Board, I want
to make a statement or two, and thenl want to sum up this particular
picture as I see it, briefly.
Senator C A I N . G P ahead, sir.
Mr. ECCLES. I recall distinctly the conccra of theBoard as well as
my own concern in the latter part of the war about the inflationary
dangers, and of course we did everything in our power to impress and
influence everyone about the danger without very much success. We
followed these i n f l a t i o n a r y developments very closely. I t was our
business to do so. Here is part of the record. I want to show you
how very quickly all inflation controls were removed and when they
were removed and how prematurely they were removed.
The sudden end of the war on August 14, 1945, brought drastic reductions in
military procurement. The question of maintaining controls immediately became
a major public issue. The policy of the administration on this matter was
enumerated on August 18, 1945, in Executive Order 9599, by the President when
he instructed the Federal agencies to move as rapidly as possible without endangering the stabiUty of the economy toward the removal of price, wage, production,
and other controls; and toward the restoration of collective bargaining and the
free market.

That was 4 days after the termination of the war.
The day following the surrender of Japan, all controls over manpower were
dropped, and OP A removed rationing restrictions on gasoline, fuel oil, all processed
foods, and heating stoves. By the end of 1945, only sugar continued under
rationing control. Several hundred items were removed from price control
within the first 100 days after VJ-day. On August 25, 1945, the war Production
Board discontinued the controlled-materials plan which had become the cornerstone of the War Production controls. The controlled-materials plan was a
relatively simple device for dominating the industrial economy by giving W P B
complete control over the strategic commodities such as steel, copper, aluminum,


I n other words, they allocated them at that time. The very thing
we are talking about doing again.
A great many control and priority orders were revoked by the end of August,
including controls over most metals except tin, lead, and antimony. Industrial
construction restrictions were first eased and on October 15, 1945, the construction order L - 4 1 —

This is a building permit order—
was revoked by WPB, and with it went all the limits on new construction.
Before the end of August 1945, the Office of Defense Transportation lifted almost all its controls over all transportation. On August 25, 1945, all lend-lease
was suspended. Early in September a large portion of controls over exports—

Another item that is now coming into the picture—
was lifted, and coastal and intracoastal shipping was removed.

I could go on in elaboration of that, but the point I want to make is
that as early as 1945 and early in 1946 all of these controls were
removed. Later on, we know what happened to wage controls. We
know what happened to price control. The price-control bill in 1946
was passed and was an extremely weak and ineffective bill. I recall
I was asked for an opinion and I recommended that it be vetoed. I
said it would be ineffective, that it would only encourage blackmarket operations, that price control alone was useless, that the other
controls were needed as supports. Time after time in meetings and
conferences, I, among others, advised against the premature removal
of controls.
Senator M C C A R T H Y . D O you think it would be a good idea at this
time to reinstate a system of allocations of scarce materials such as
Mr. ECCLES. I haven't studied the thing enough, Senator, to know.
Inflation was held in check during the war because there was a harness
of controls. They all fitted together well. One was an integral part
with another. As a result, we got through the war notwithstanding
the terrific pressures of purchasing power and the shortest possible
supply of goods. Inflation was held in check by that harness. When
that harness was removed, it was just like a horse trying to pijll a
load with the tongue down and the halter off. The thing just.leaped
I t is a very difficult thing, it seems to me, to have a system intended
for instance, to control prices when you don't have rationing and you
don't have allocations and you don't have wage controls and you
don't have excess-profits taxes. They fall apart, and the thing did fall
apart. I n 1946 all price controls were removed.
Senator M C C A R T H Y . Would you do this for me? Just restrict
yourself to the question of allocations, if you will, and let us know
what you think about that. For example, what I have in mind is this:
In the building industry, steel companies are not producing enough
nails. They are running short. There are shortages in certain other
raw materials, certain other productions. For example, pig iron is
being diverted, I think, to where it should not be diverted. There is
not nearly enough going to the producers of soil pipe and that sort of
thing. Do you think a system of allocation without price control
would be of benefit in diverting the raw materials into the right
channels, or do you think it would be worth while?


Mr. ECCLES. I doubt that it would work. I think the administration job would be almost an impossible one. I would certainly hate to
be charged with a job of that sort.
Senator M C C A R T H Y . We have also been urged by some to reinstate
the system of premium payments. You are aware of that program
which was discontinued some time ago. Do you think that would be
Mr. ECCLES. I don't think so. I think you are trying to deal with
effects instead of causes and I think you have reached the point in this
situation where you have to deal more directly with causes. The
causes are the excessive amount of purchasing power now in existence
and credit that only adds further purchasing power. Anything that
adds to the existing purchasing power now in existence or further
purchasing power by a further expansion of credit is inflationary and
cannot help but be.
So, the two most important fronts upon which you can deal with
this thing without direct regimentation of course are in the field of
taxation and in the field of credit control. That was emphasized by
the Board last November and again in April.
Senator C A I N . Let us assume that you are right on keeping those
taxes up. Then we have budgetary surpluses. I t is fine if those
surpluses are used to reduce ana retire debt, as I understand it, but if
those moneys are only used for other expenditures, you are no better
Mr. ECCLES. Y O U couldn't have a surplus unless Congress appropriated. But after all you have a Congress here that can raise the
money and then hold down the appropriations so there would be a
Senator C A I N . There is the difficulty of it. Both Democrats and
Republicans were all in this thing. When we have the money, we
listen to requests for spending huge sums and we go ahead and
appropriate the money, and we are moving in the opposite direction.
Mr. ECCLES. Y O U are only saying then that in our system we can't
really control booms and depressions. That is in effect what you are
saying because if you won't deal with the causes then you are saying
that because of the political pressures our Government will not deal
with the conditions that create the booms and hence the depressions
that are the aftermath.
Senator C A I N . I personally have not been here long enough to have
a positive conviction on that.
Mr. ECCLES. I t looks like it may be the case.
Senator C A I N . I t is helpful to the record. Because as we do not
reduce taxes, we follow the logic of having surpluses to retire debt.
If our surplus disappears kecause we spend it in other directions,
however worthy those other projects are, we get no better and continue to get worse, do we not, as a Nation?
Mr. ECCLES. The thing that is important in inflation isn't so much
the question of whether you reduce taxes or not if you can cut spending enough to have a surplus. The important thing is haying a
budgetary surplus. If you can cut taxes and still have a substantial
budgetary surplus, that is anti-inflationary. If you can't cut taxes
and have a substantial budgetary surplus, because you won't cut
expenses enough to do it, then you should maintain taxes because you
practically have to have a budgetary surplus in an inflationary period


just as you will have a budgetary deficit whether you like it or not, in
a deflationary period.
Senator C A I N . H O W , Mr. Eccles, can you do two things at one and
the same time? I t is too bad we have to refer to the administration,
because we are trying to understand this thing, but they have laid 19
separate proposals before the Congress and hope that we take action
on all or some of them, most of which they themselves call for the
spending of additional large sums of money.
Mr. ECCLES. I am not defending the administration proposal,
although, as I said yesterday, there are certain aspects of it that would
be very helpful. But at the same time certain other features of the
proposals are inflationary and would tend to nullify the deflationary
effects of other proposals.
The program, taken as a whole, certainly does not make economic
Speaking of taxes, one of the proposals is to reinstate the excessprofits tax. I n that connection, the excess-profits tax was in my
opinion one of the most effective anti-inflationary measures on the
statute books, the repeal of which I vigorously opposed. When the
Honorable Fred Vinson was Secretary of the Treasury, on October 20,
1945,1 wrote him a letter and enclosed a long memorandum. I said:
Referring to our brief conversation when you expressed surprise at my opposition to the repeal of the excess-profits tax at this time, I am venturing to enclose
a memorandum outlining my reasons for my position. I apologize for inflicting
any reading matter upon you knowing how busy you are, but I would like to
have you know why I think it is a great mistake to take the tax off at this time*

This is a long memorandum, and I won't read it all but I would like
to quote from it.
The main reasons for high wartime taxes, including excess profits tax, are, one,
to hold down the deficit.

I t was at that time, or, as at present to increase the surplus if you
have inflationary pressures.
* * * and the need for borrowing particularly from the banking system
because that adds to money. Second, to reduce the inflationary pressures at a
time of greatly excessive demand for goods and services relative to the supply.
And third, to curb the profiteering out of war. Taxation is the last real bulwark
against inflationary forces because of the weakening or the removal of other
Such as the War Labor Board exercised over wages and hence prices, or such
as the War Production Board exercised in the construction field. The most
prudent course at this juncture would be to defer tax reductions until such time as
supply is more nearly in balance with demand, and we have begun to approach a
balanced budget. At this stage we would be wise to err on the side of too much
rather than too little revenue. Taxes can't always be reduced.
Since the basic problem today is one of shortage of goods in relation to demand
and purchasing power, prudent fiscal policy requires that high taxes be maintained in order to reduce the deficit or create a surplus as far as possible. Not
only is the backlog of demand unprecedented but the supply of money in the
hands of the prospective customers is at an all-time high and will be further increased as employment in peacetime occupations occur. The situation would be
entirely different if we were confronted with a progressive deflation and inventories
were in excess of effective demand. Then the problem would be to create more
demand for goods, to give employment, and fiscal policy would call for first reducing taxes on the lower incomes.

I have more, but I just wanted to make that point.
Senator M C C A R T H Y . Before you leave the subject of taxation, Mr.
Eccles, I gather you feel that it was a mistake to reduce taxes last year

but let me ask you this: Yesterday you said that you thought that it
would be of some benefit if the pensioners were to receive more, if
those in the static low-income groups were to receive more monev. Do
you think it is a good idea to take some seven million of those lower
income individuals off the tax roll? Do you think that was a pretty
good idea? You have in mind that last year we took some 7,000,000 of the people in the lower income group off the tax roll, which, of
course, increased their purchasing power.
Mr. ECCLES. Well, those are certainly the first taxes I would reduce.
Senator M C C A R T H Y . SO you do think that was a good idea?
Mr. ECCLES. I would certainly think it was first, but I do think
that while you have an inflationary situation such as we are confronted
with and the cost of living, particularly the cost of many items, going
where they are, we are possibly just as much justified in maintaining
taxes as we would be in war. Inflation is not quite as immediately
urgent as war is, but it may in the long run prove to be almost as serious.
Therefore, because the urgency isn't there, it does seem to me that
if we are justified in war in imposing restraints and restrictions and
taxes, we are equally justified in periods of inflationary development
in imposing restriction by taxes or in any other way within our
democratic framework.
Senator M C C A R T H Y . Yesterday you said that one of the reasons
why inflation was dangerous was because those in the lower income
group are not able to buy the products they otherwise could, and that
if you could increase the income of those in the lower income groups
that would be of some benefit.
My question now is this: That being the situation, do you not think
it is an excellent idea, if you can give a tax reduction such as was
given, wiping 7,000,000 off the tax rolls in the lower income group,
that is the same as giving them a wage increase?
Mr. ECCLES. That is right.
Senator M C C A R T H Y . This accomplished what yesterday you recommended we should do in another manner.
Mr. ECCLES. Of course, if you are going to bring the thing into
equilibrium by trying to raise everybody and freeze the inflation
where it is, we should do just that. The pensioners and the savers,
and so forth, should likewise be subsidized because of what has
happened to them. As a practical matter, there is no way in which
you can equalize and bring everybody up so that you have this
equilibrium, that I can see. I think I said that yesterday. I t is an
impossible job to do. We can justify on the basis of equity doing a
lot of things, which at the same time make for inflation. I t is a
question of unpleasant alternatives.
Senator M C C A R T H Y . We have always looked forward to substantially what we have today, that is, high employment, full employment,
nobody looking for a job; high wages, high consumption. According
to the statistics everybody is eating more pounds of meat today than
they ever had before, eating more iood. We have looked forward to
that. We have full employment, we have high wages, we have high
income to farmers, but with that goes high prices.
As you point out, there is a danger of their getting too high. Of
course, with a $250,000,000,000 debt, we must live on a higher
Mr. ECCLES. That is right.

Senator M C C A R T H Y . If we were to roll prices and wages back, say,
to the 1939 level, we would have the greatest depression this world
has ever seen.
Mr. ECCLES. If you rolled them back far less than that—You
are never going to roll them back anything like that without collapsing your economy. There is no desire to do that. With the
public debt that we nave as well as the private debt at these high
prices, you are limited in your roll-back to what you can do without
causing general bankruptcy.
Senator M C C A R T H Y . Then would it not be better to look forward
to this as the best solution, if we can attain it, to try to hold prices
where they are as much as possible, and at the same time increase
the earnings of those in the so-called static low-income group, the
ones you pointed out yesterday, the white-collar workers, et cetera?
Could that not be done to some extent by passing a minimum wage
law of 70 cents, 75 cents, or 80 cents an hour, rather than to roll
those on top down; why not try to bring those on the bottom up?
Mr. ECCLES. Y O U have to increase production. If you have full
employment and full utilization of your facilities and are getting all
the production you can, you do not gain anything for the economy
as a whole by the wage increase you mentioned, because to the extent
that you increase purchasing power, you only put more pressure on
prices unless you can increase production an amount equal to the
increased purchasing power.
Everybody wants to have a condition of prosperity and as full
employment as you reasonably can have, and there would be no
complaints certainly if that could be done on the basis of a stable
cost of living and reasonably stable price level. The difficulty is
that we have not had that. We have had the thing going up continuously for 4 years.
Senator M C C A R T H Y . Will you do something for me? I may have
a habit of interrupting you but I try to do it to keep you on the
question that I have been asking and not get you on a different
subject, even though everything you do say is enlightening. So if
you will pardon me when I interrupt, will you stop and let me ask
the question?
Mr. ECCLES. I think in my answers I am trying to answer your
questions. They are a little difficult to answer because the problems
are quite involved.
Senator M C C A R T H Y . I n line with your statement in regard to production, let me ask you this: I know you might be in a position to
answer it, but you may be able to throw some light on it in case you
are not. We know that as of today the steel industry is not producing
enough steel to produce sufficient farm machinery and automobiles
and cars and freight trains to help hold down inflation. We know from
the hearings held by Senator Martin's committee and others that the
industry has pretty much taken the position that it would be financially unsound for them to expand at this time and increase the rolling
capacity of the various mills.
Unless the* steel companies do make an about-face and decide that
the country is growing and that when we have an additional 10,000,000
or 15,000,000 population over the last 10 years that of necessity means
they must increase the capacity of their mills; unless they do that, can
we hope effectively to combat inflation over the next few years?


Mr. ECCLES. I think so. I think you may find you have adequate
steel capacity on the long-run basis. You have to remember that we
certainly can't continue to export on balance the present large amount
of goods. I f we ever get paid back, we will be taking steel from
abroad some time. At least that is the theory of foreign credits. I n
this idea of expanding an industry to meet what might be considered
an abnormal demand due to the. backlog that has been accumulated
as a result of war, we are making a serious mistake, just as I indicated
when I read part of that memorandum on housing. I t is the same
situation. You have to make haste slowly.
You would not have these great shortages if it were not that you
are meeting what would normally be considered a current demand
plus a backlog demand. When you get the backlog demand satisfied
and you have only largely the current demand, which will be increasing
with an increasing population and an increasing standard of living,
we may well have adequate capacity in many fields, but today you
have the current demand, which would be normal, plus the backlog
demand. You have to catch up with that backlog demand slowly as
you take care of the current demand. We don't seem to have the
understanding or the patience to do that.
You can force that condition to a certain extent if you exercise control over the purchasing power through the credit mechanism and the
tax mechanism.
Senator M C C A R T H Y . I S there any place where you think we could
cut down on the exports of scarce materials without impairing the
working of the Marshall plan?
I n other words, do you think we are exporting too much in view of
the high prices in this country? If so, where do you think we could
cut down exports without seriously impairing our programs in Europe?
Mr. E C C L E S . I am not sufficiently familiar with the plan. There
was a time when I, as a member of the National Advisory Council,
kept in touch with this foreign situation. That was one 01 my jobs.
But since January I have not attended a meeting. I have been completely out of touch with any aspect of the foreign situation.
Senator C A I N . Y O U were talking about the causes of inflation. I
remember how successful our War Savings bond programs were.
Today we are in an emergency. We have high prices and high wages
and full employment, although several of those things are very desirable. Is it possible at all to think in terms-of a national program of
placing part of the responsibility for minimizing the obvious dangers
of inflation on the American people by encouraging them for patriotic
and every other reason, to work more, work longer, save more, and
spend less?
I n terms of advertising, is it possible? I am serious about this
because the people of the United States are looking to the Congress
and .the administration through legislation to cure what can only be
partly curbed by legislation.
Senator M C C A R T H Y . I said would you recommend Mr. Luckman
for that job?
Senator C A I N . I do not know Mr. Luckman. I noticed in -one of
your presentations before one of the committees of Congress some
months ago you said in better language than I have just used, substantially what I am asking about now. That was your No. 1 hedge
against inflation. Will the American people do it and can they do it


and can the Congress so explain these matters to them that they
will be sympathetic toward it?
Mr. ECCLES. I rather doubt that on a voluntary basis you would
get much of a result. We have tried it. I think during the war
period you got a better response.
Senator C A I N . Y O U think in the absence of the essence of patriotism
for war purposes, it is asking almost too much?
Mr. ECCLES. Even then we found out we had to put an awful lot of
controls on, and in spite of the controls that we put on and that we
could count on war-inspired patriotism, we found a lot of blackmarket operators and a lot of tax evasion.
Senator C A I N . I n answer to my question, realistically, then, you
think all the vices that appeared during the war would only be accelerated in peacetime?
Mr. ECCLES. I think they are accelerated in peacetime, and I doubt
very much if we are going to get much of a result through voluntary
efforts or persuasion. I am sorry to have to come to that conclusion.
Senator C A I N . I t is an important conclusion, because if the people
in the mass would assume part of the national responsibility, it certainly would be less of a burden on the Congress.
For example, I live, let us say, within my income and comfortably,
but I could spend less if I wanted to, and to the extent that I would
I would create a sales resistance as an individual, in itself not important. Fifty million people pursuing the same policy would amount
to something.
Mr. ECCLES. A lot of people today are pursuing a different course,
and the Government is helping them to do it when it takes off credit
controls and liberalizes housing credit. You are not only helping
people spend current income and credit they can get without security,
but you are making it easy for them to get more credit for consumer
goods and for housing. So contrary to the idea of asking the people
voluntarily not to spend so much, we are doing everything to enable
them to spend even more. I just can't see how you are going to do
much on a voluntary plan.
To sum up here, if I may, unless you have some other questions
Senator C A I N . I wish you would summarize for the record.
Mr. ECCLES. I would like to make this final statement, then:
The Federal Reserve Board has been very conscious, even during
the period of the war, of the great inflationary dangers that were
being built up. They have called this to the attention of the administration on numerous occasions and in numerous ways, both in connection with the control program in effect during the war and immediately after, and the tax program, the debt management, and the
credit program. They have called it to the attention of the Congress
through their hearings and through the annual reports to the Congress, during and since the war.
They have called it to the attention of the Congress on numerous
occasions in connection with hearings upon various bills and in connection with responses to questions by the Congress for the opinions
of the Board. There is a voluminous record in the Board's files on
this score. I t has been called to the attention of the country through
various public appearances, speeches, press releases, in meetings with
various banker and other groups.

I have most vigorously, and I think consistently, over the years
done everything within my power to remind the administration, the
Congress, and the country of these dangers, to apparently no effect,
with the result that I stepped on too many toes; and, because of these
efforts that I particularly made as the Chairman of the Board—but
the Board was always back of me in these efforts—I seemed to be a
political liability to the Truman administration.
Senator C A I N . Permit me to interrupt you, for I should like at this
time to read a question which Senator Tobey asked me to read, and
i t seems to me that you have of your own initiation answered it in
part. He just asked if I would read this question to you:
Why, M r . Eccles, do you think that the President failed to reappoint you as
Chairman of the Federal Reserve Board when you had put up such a vigorous
fight against inflation?

Mr. ECCLES. I think possibly that has been answered in part. I
don't know any more than anybody else. The administration has
certainly appeared to want inflation control. Certainly I have not
been out of harmony with anything that was done to cooperate and to
assist in that effort, and I therefore must conclude that it was because
I was possibly too assiduous and too aggressive, and it no doubt
offended certain people or groups who may well have been benefited
by the inflationary development. I therefore became a political liability in that regard. I t seems that may well have been the case.
I did want to get into the record these facts with reference to the
position that the Board has taken over the years to try to make it
perfectly apparent that the responsibility for the Board's not getting
controls to curb credit expansion is not due to any failure of the Board
but is due certainly in part to our failure ty get support from the
administration, and that the purpose of increased taxes through an
excess-profits tax at this time and the fact that other controls are
being called for seems to me an admission of a premature removal of
th§ controls when they existed and a premature removal at least of
the excess-profits tax when it existed.
All of these matters were called, by either myself or the Board, to
the attention of the administration.
I am not saying that the present administration, which certainly
did remove these controls and the excess-profits tax, did not have a
very willing support by the minority in Congress during 1945 and
1946 as well as the support of a great many of the public. However,
the present administration did nothing to prevent the removal of all
these inflationary controls, which certainly now appears to have been
premature. I t seems to me to be quite a futile effort at this time in
a special session of Congress to put back a harness of involved controls, including an excess-profits tax, with any degree of success. The
job is almost an impossible one without giving a great deal of consideration to the effect of such an involved program.
As I said yesterday, it is like trying to put humpty-dumpty together
again. I t would not have been a difficult job to have continued the
controls, but to put in such an involved program of controls, with
the putting together of an administration of those controls, is in itself
a Herculean task in a peacetime period. I t seems to me a most
difficult thing to accomplish.
Senator C A I N . Permit me to ask this question: If we were all to
assume in the Congress—everybody—that your present conclusion


about its being almost an impossible job to do because of its complexion
during a special and limited session, and that we all as a Congress,
Democrats and Republicans, settle down to the issue involved-with
particular emphasis on cures rather than on curbs, beginning with the
new session, what opinion do you have as to what is likely to happen
to the commodity market and prices in general between now and the
beginning of August and the beginning of the next year?
We are assuming that we can't do something, and we are assuming
that we are going to do it 5 months from now. What happens in that
5 months' period?
Mr. ECCLES. I don't like to try to be a prophet, but there is every
indication that a further substantial expansion of bank credit will
take place, which means additions to the existing money supply.
There is some evidence that for some little time there will be a serious
shortage, based on today's purchasing power, of certain foods, such
as meat and dairy products in particular. There is no indication that
there will be no further increasing demand for higher rentals and for
housing, if easy credit is continued or further credit is made available.
So far as some of the consumer durable goods, particularly automobiles, are concerned, the demand is extremely great. The prospect
of meeting that demand is at present rather remote. I n the field of
farm implements we likewise have great demand and shortages. Of
course, steel, lumber, copper, and oil, the basic raw materials, as we
all know, are in short supply. Every day we read of increased prices
which are both a cause and a result of further increased wages. A
shortage of manpower is likely to develop between now and the end
of thej year because as the harvest proceeds the demand for labor
increases. There is certainly every indication that the cost of labor
is more likely to go up even in the unorganized fields than down
because of the shortages.
Add to that an expanding military program and the effect of the
European aid program, and of course you face quite a serious situation.
Senator C A I N . The appropriations that are already authorized but
not spent.
Mr. ECCLES. But not spent. That is right. Of course, basically
it is pretty difficult to talk about dealing with the inflationary problem
in this country until you get a basis for world peace. That is really
at the root of the thing. Until we get a solid basis for world pcace.
as long as we are confronted with a military and foreign-aid program
of increasing expenditures,, the situation is not a hopeful one.
Senator C A I N . We ought to recognize it as being what it is.
Mr. ECCLES. And sooner or later if that continues, we have got
to confront budgetary deficits. That means, of course, the possibility
of further inflation or more taxes.
That is the inflationary side.
Senator C A I N . Just one other side to try to dovetail these questions:
If you were writing the ticket for this country and assuming that
you had a special session which for obvious reasons could last for
only 2 or 3 weeks, you would know that it was possible within reason
to do certain things and almost impossible to do other things. What
would you recommend as being the best hedge against inflation in
this interim period between now and the opening of the new session,
when hundreds of people would presumably have a chance to settle
down and do a serious job?


Mr. ECCLES. I think the credit situation.
Senator C A I N . The two proposals in the form that we have before us?
Mr. ECCLES. I think they are the simplest and the easiest, but I
think from the standpoint of the Board we would feel quite unhappy
if the impression were given to the country that that would be the
solution of all of our economic problems.
Senator C A I N . I think the press, and I think all of us, are conscious
that whatever we do, we ought plainly to tell the people why we are
not doing certain other things and that what we do is nothing but a
temporary interim hedge, the best that can be acted on within a
limited period of time.
We are not going to get the answer to our gigantic problem out of
this or any other short session.
Mr. ECCLES. Possibly it would be more important than any other
single item of the program. They are less involved, and their administration could be quickly undertaken, because the organization to
administer them is an old-line, well-established organization. I t
would not require the setting up of any new machinery. From that
standpoint, they do have some advantage over oth?r proposals.
Senator C A I N . Let us assume, then, that positive action is taken
by increasing bank reserves and by way of argument for nonmember
as well as member banks, and consumer credit, and that no other
positive action is taken, to what degree do you consider that action
to be a constructive hedge against inflation?
Perhaps I do not put the question very well; but, in a material
sense, would it be of assistance to our problem, in your opinion?
Mr. ECCLES. I think it would. I think it would be of material
value in the picture.
Senator C A I N . All rigtit, sir. That is one side of the picture.
That is a hedge against inflation.
On the other side of the picture is the primary objective for which
this Congress was called, the housing approach, included in which
there is a liberalization making credit more freely available. We
assume that we have put in bank reserves and consumer credit, and
at the sam? time let us assume that we pass all the housing proposals
which perhaps are necessary, but are highly inflationary, what is the
net result of that combination?
Mr. ECCLES. Y O U would tend to nullify. I t would be ineffective.
I t would be like trying to fill up the bathtub with the stopper out—
you try to stop inflation through one means while you open the door
for it through another avenue.
Senator C A I N . That is precisely what we have before us.
Mr. ECCLES. Y O U have a perfectly contradictory program.
Senator C A I N . Y O U use the word "nullify." To what extent would
liberalizing housing credit in this special session offset the benefit
that would come from the hedge created by bank reserves and consumer credit controls?
Mr. ECCLES. Of course, it would be impossible to say the extent
that one would offset the other.
Senator C A I N . Would it be material, in your opinion?
Mr. ECCLES, Yes; I think it would be material.
Senator C A I N . We are in a fix, then, are we not, from your point of
Mr. ECCLES. If you pass both of them.


Senator C A I N . We have been requested to pass both of them, and
the Congress is giving serious consideration to both of them.
Mr. ECCLES. I think they are contradictory as anti-inflationary
controls; they are contradictory as anti-inflationary proposals.
Senator C A I N . One is and one is not.
Mr. ECCLES. One is inflationary and the other is deflationary.
Senator C A I N . One is answering a need for additional housing,
which happens to be inflationary. The other is anti-inflationary.
Mr. ECCLES. We all recognize that need.
Senator C A I N . Mr. McKenna, who sits on my left, a counsel among
others for this committee, has posed this question which is germaine.
How long, Mr. Eccles, in your opinion, will it take for the results to
show if the Federal Reserve S^ystem is granted the powers under
discussion? Assuming again that the power you would get would be
Mr. ECCLES. I can't answer that question.
I n the first place, it would depend on when the Board would use the
Senator C A I N . That is a question you might venture to answer.
Mr. ECCLES. I only happen to be one member of the Board. When
the Board reviews the powers, of course it would have to be determined
by a majority of the Board. I would like to say, however, that in the
case of the consumer credit, those controls of course would be required.
That would not be discretionary as to timing. They would be required to be put into immediate effect. I am sure the Board, because
it has previously administered the consumer credit controls, could put
them into effect in a short time and could administer them readily
through your decentralized Reserve banks and branches.
Senator C A I N . We are all in agreement that that is the least
effective of the proposals which have yet been made.
Mr. ECCLES. I t certainly is. I would be rather unhappy to see
one of those without the other.
Senator C A I N . Can we take as an assumption that the Federal
Reserve Board would put into operation immediately—or at least
let us take that as an assumption—the powers that we are discussing;
then how long would it take for an appreciable result?
Mr. ECCLES. I am going to say this: The very fact that the Federal
Reserve Board had that power would have a very wholesome influence
upon the banking system, even without putting the increased reserve
requirement into effect, for this reason: Every bank would want to
keep themselves in a position where they would have either excess
reserves or have securities readily available that they could dispose
so as to meet the increased reserve requirements if it were put into
effect. The effect upon the bank lender of this program would be
Banks get increased reserves and deposits from gold imports.
They likewise get them from sale by the nonbank investors, particularly insurance companies, savings banks, and the like, of Government securities. When banks come into possession of those deposits
which the Federal Reserve creates through its purchase of nonbank
securities and through the Government's purchase of gold, they then
have what you call idle money. We could sterilize with this increased
power the inflationary effect of our purchase of securities from nonbank investors, whicn we cannot now do. That isn't deflationary.

All it tends to do is to neutralize what would be an inflationary
influence on the banking system. That in itself is important because
it tends to take off the banks the. pressure to invest their surplus
The very fact that we get increased reserve requirements is going
to cause the banks to hesitate at least to increase their loans as freely
when they have to sell Government bonds to do so, because as they
sell Government bonds in the market and they increase their loans,
they become less liquid and they become less able to meet the increased
reserve requirement. Therefore, the expectation of having to do that
in itself would be a deterring factor.
I t seems to me that is the effect that this would have
Senator C A I N . Of the nonimposition of the regulation.
Mr. ECCLES. Yes; that would be the prospect. I t is certainly
desirable and rather important as a supplement to this, as I stated
in the April statement, that the Treasury permit the short-term rate
to go up as well. That should happen. That doesn't require legislation.
Senator C A I N . "Would that automatically follow, or do you have
reason to believe that it would automatically follow?
Mr. ECCLES. I t isn't very consistent. I think that if we should
increase reserve requirements on the banks, we reduce their earnings
and unless we let the short-term rates go up, we put them under
pressure to make loans rather than buy the Governments from the
Federal Treasury, which, of course, is necessary if this proposal is
effective. So, as a part of the operation of this mechanism, the shortterm rate should go up and the discount rate should go up as well as
the increase in reserve requirements.
Senator C A I N . Both of the other two items being under the control
of the Treasury.
Mr, ECCLES. The discount rate is under the control of the Board,
but the discount rate, to be effective, should follow an increase in the
short-term rate.
Senator C A I N . You need no additional authority to change your
discount rate.
Mr. ECCLES. N O ; we need persuasive powers from the Treasury.
Senator C A I N . Mr. Eccles, one brief question about your Advisory
Board. Do you know whether or not it has recently considered the
two proposals that are presently before the Congress?
Mr. ECCLES. Y O U mean the Federal Advisory Council?
Senator C A I N . Yes; your Council.
Mr. ECCLES. I don't think so because they have not been here;
they have had no chance to consider them., because they wrere proposed by the administration. I don't think the Council has had an
opportunity to consider them, as far as I know.
Senator C A I N . May I make this suggestion to you? We well remember that the Council, rightly or wrongly, was very much in opposition to your reserve increase proposals of some months ago.
Mr. ECCLES. I think they will be in opposition to this.
Senator C A I N . I think this committee and the Congress is entitled
to know what they, a statutory body, think. Importantly, and in
addition, I know that the committee would like to know whether or
not, assuming that the requirements were going to be raised for the
member banks, whether they would think that was at all tenable if

the nonmember banks were not involved. I should think that perhaps by a telegraphic poll or telephone conversation in the next week,
the attitude of that Council could be determined.
Mr. ECCLES. I t possibly could. I would say that that Council
and the 12 Reserve bank presidents as well as the Federal Reserve
Board unanimously—I think it was in 1939 or 1940—proposed a special message to the Congress as an anti-inflationary or sound monetary
proposal. This was when the interest rate was virtually at zero on
the short-term debt because I think there was six or seven billion of
excess reserves and no demand for credit. They then proposed that
the reserve requirements of all banks be increased. So i t Was apparent
at that time that they felt that it not only could be done constitutionally, but they felt that as a matter of equity it should be done and
applied to all banks.
Senator C A I N . If there is a reasonable way in which to establish
their present thinking, I think we ought to have it.
Mr. ECCLES. Y O U have to remember, to the extent that these
members are connected with large metropolitan banks
Senator C A I N . Oh, indeed, but they are a statutory body.
Mr. ECCLES. T O the extent that they are connected with large
metropolitan banks, and they have a large correspondent bank relationship, they are put on quite a spot.
Senator C A I N . We are all there.
Mr. ECCLES. If many of their correspondents are nonmember
banks and object strenuously to having this imposed upon them.
Senator C A I N . We cannot very well satisfy the requirements of an
emergency without asking the advice of those who are charged by
law with giving it to us.
Mr. ECCLES. I am not saying you should not ask for the advice.
I am only saying to you that you may put some of them on a spot.
Senator C A I N . I take it you have been on one for the better part
of this afternoon. Certainly we are the better part of 365 days
of the year.
Mr. ECCLES. For the better part of 14 years I have been on one.
Senator C A I N . Y O U very interestingly said a while ago that your
Advisory Council had not considered these two proposals recently
because they had been advanced by the administration and not by
the Federal Reserve System.
Mr. ECCLES. N O . What I meant was that if the Federal Reserve
had been going to advance them, we would have had the time to permit a discussion of the matter with the Council, but inasmuch as we
had nothing to do with the determination of the timing of it, it was
not possible. I am sure if the Council had been in session here
Senator C A I N . Y O U would normally have done it?
Mr. ECCLES. We would have advised with the Council, but the time
element did not make it possible.
Senator C A I N . Earlier in the day we were curious about what Secretary Snyder had actually said this morning. I have one paragraph on
the subject:
Secretary SNYDER. This proposal that is in this bill was prepared by the staff
of the Federal Reserve Board, so I presume that we are extending here an existing
law that the members of the Federal Reserve System have accepted.

Mr. ECCLES. I think I explained that earlier this afternoon, and
I do think the language was prepared or approved by them, but that

didn't mean that the Board wanted to have excluded the nonmember
Senator C A I N . That is right.
Mr. Eccles, if you will bear with us a second, if the Congress passes
no legislation during this special session, would you favor the lowering
of support prices on Government bonds? Would we accomplish
Mr. E C C L E S . N O ; I would not favor the lowering of the support
price on the 2}{ percent. Let me put it this way: I would like to change
the phrasing of that, if you will.
Senator C A I N . Yes, sir.
Mr. E C C L E S . Y O U can ask if I would favor discontinuance of maintenance of the 2% percent rate on long-term Government bonds, and
I can say: No; I would not. I favor the continuation of the support
of the 2}f percent rate on long-term bonds, permitting the short-term
rate to rise to whatever extent it may rise in relationship to that paid
on the long-term rate.
I don't believe in the pegging of both the short- and the long-term
rate. I believe in one peg and letting the rate of the shorter securities
adjust themselves in relation thereto.
Senator C A I N . One final question: Assuming that we can do something in this Congress but by no means do as much as we or the
American people would like us to do, is there any reason to believe
that whatever we do, assuming again we grant the Federal Reserve
the power it needs for things to be helpful, that there is any immediate
prospect of prices being lowered.
Have the American people, in other words, regardless of the action
to be taken at this special session, a period before them of continuing
present level and even higher prices before there is a decline in the
price structure?
Mr. E C C L E S . I would say that that would be my opinion, at least
so far as the next 8 months is concerned, to the end of the year.
Senator C A I N . People are better qualified to face a situation,
Marriner, if they know what that situation is.
Mr. E C C L E S . I can't see anything in the period of the next 6 months
that would change the present price trend. I can see in the next
year many factors that might. Our production is increasing, and we
are getting more people out of savings and more people in debt.
The markets are going to dry up sooner or later. They are going
to be priced out of them sooner or later. You have that developing.
That can be offset and the inflation could be continued indefinitely
with an expanding budgetary deficit due to a military and foreign
aid program. That cannot but continue this thing and continue
the bubble. That, of course, would be the most catastrophic thing
ultimately that could happen to us.
Senator C A I N . I thank you very much.
Mr. E C C L E S . I found that statement that I mentioned about the
position of the Federal Advisory Council.
Senator C A I N . Will you just throw in a sentence or two to support
their then position?




The inflationary dangers inherent in the war emergency—

this was in 1940—
were widely recognized in the early phases of the national defense program. I n
late December 1940—months after we had a substantial defense program—the
Federal Reserve Board, the presidents of the Reserve banks, the Federal Advisory
Council, unanimously joined in a special report to the Congress pointing out the
inflationary dangers to the national economy as a whole in the defense effort,
and advising that the authority of the Federal Reserve System was inadequate
to deal with the existing and the potential excess reserve problem of the banks.

You have an excess reserve problem in the form of Government
bonds today. Then it was cash, but today it is just as liquid because
the excess reserve problem is in the form of Government bonds.
Senator C A I N . What was the date of that message?
Mr. ECCLES. Late December 1 9 4 0 .
Accordingly, this special report recommended that Congress increase the
statutory reserve requirements for demand deposits in banks in central Reserve
cities to 26 percent, for demand deposits in banks in Reserve cities to 20 percent,
for demand deposits in country banks, 14 percent—

and so forth.
* * * and empower the open-market committee to make further increases
of reserve requirements sufficient to absorb excess reserves subject to limitations
that reserve requirements shall not be increased to more than double that specified
in paragraph (a).

Instead of only increasing 10 percent, they wanted authority to
double the reserve requirements.
Senator C A I N . Is there any reference to the nonmember banks?
Mr. ECCLES. Yes; just a minute:
Authority of the committee to change reserve requirements for central Reserve
city banks or for Reserve banks or for country banks or for any combination of
these thret, the present reserve requirements applicable to all banks receiving
demand deposits regardless of whether or not they are members of the Federal
Reserve System.

That was unanimously agreed to. There is the report by the Federal Advisory Council and the 12 Reserve bank presidents. I t seems
to me that they have crossed part of the road right there.
Senator C A I N . I want to thank you on behalf of Senator Tobey
and the entire committee.
Mr. ECCLES. All right, sir; thank you.
Senator C A I N . I think a lot of people ought to read thoroughly and
thoughtfully what you have said, whether they agree or disagree with
(Thereupon, at 5:05 p. m., the committee adjourned, to reconvene
Monday, August 2, 1948, at 10 a. m.)