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For immediate release

March 25, 191*6

Statement by Chairman Eccles:

In testifying before the Banking and Currency Committee of the House in opposition to continuance of price controls, President Wason of the National Association of Manufacturers
contended that the enormous accumulation of liquid funds available
to the general public does not constitute an inflationary danger
at this time»
As an aid to correct evaluation of the inflationary
pressures inherent in this volume of liquid funds, I am making
public the attached comments on the reasoning and arithmetic
whereby Mr, Wason arrives at his astonishing conclusion.




The National Association of Manufacturers on Liquid Assets
President Wason of the National Association of Manufacturers
in his testimony in opposition to the extension of the Price Control Act
on March 18 commented on an earlier statement by Mr. Bowles with regard
to the inflation potential inherent in the accumulation of wartime savings.
In discussing consumer demand, Mr. Bowles stated that wartime sa-vings of
the people now amount to lU5 billion dollars. He appraised the significance
of these savings as follows:
"Should people, whether consumers or businessmen, once lose confidence that the price line will be held and rush to meet future
needs ahead of anticipated price increase, these vast wartime savings
could throw the Nation into a wild inflationary scramble exceeding
any it has ever experienced.*1
Mr. Wason apparently interprets Mr. Bowles figure of lU5 billion
as referring to the Federal Reserve estimate of liquid assets (that is currency, deposits and U.S. securities) held by individuals and trust funds at
the close of 19U5* Although Mr. Bowles1 reference was to different data,
Mr. Wasonfs interpretation will be followed for purposes of these comments
How, then, does Mr. Wason manage to reduce his initial figure of l ± billion
i5
to a mere 17 billion, and how does he conclude that these assets do not constitute an inflationary danger if only production is allowed to expand without price ceilings?
Mr. Wason*s Figures
(1) At the outset it must be noted that Mr. Wason*s total of 1U5
billion is no overall figure for liquid assets held by the public. It is
limited to personal holdings only and excludes holdings by corporations and
unincorporated businesses. If 52 billion dollars of corporate holdings (excluding banks and insurance companies) and 28 billion dollars of holdings by
unincorporated businesses are added, the overall figure for December 19U5 becomes 225 billion.^/ Business demand at this time is as much a part of the
inflation problem as are purchases by consumers. The danger of excessive inventory- accumulation i - an important factor. Thus, liquid assets held by
s
businesses, as well as by individuals, are part of the broader picture.
(2) Even the 225 billion holdings for these groups is not all inclusive. It excludes Treasury deposits which will be added to private cash
holdings and checking accounts when the Treasury balance is disbursed. Also,
it excludes holdings of liquid assets by non-profit associations, State and
local governments and certain other groups. A more inclusive figure (still
excluding holdings by Government trust funds, commercial banks, savings banks,
and insurance companies) for December I9U5 approaches 275 billion dollars.
1/ Figures used by Mr. -Bowles were derived from Dept. of Commerce estimates
of individual savings during the war period. By coincidence the total happened
to be the same as FRB figures for total personal holdings of liquid assets as
of Dec.51,19l4-5* Accordingly, Mr. Wason's interpretation is readily explained.
2/ For a breakdown of these figures, see Federal Reserve Bulletin for
February 19U6, p. 123.



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(3) In reducing the lU5 billion dollars of personal holdings
to 17 billion dollars, Mr. Wason first excludes all items other than
currency and demand deposits held by individuals — that is, he excludes
holdings of all types by trust funds (16 billion), as well as all time
deposits (U5 billion) and U.S. security holdings (Ul billion) of individuals. Thus, he reduces the total from I45 to b3 billion. "While there
I.
is justification for arguing that liquid assets held in the form of currency or demand deposits are more likely to be spent than those held in
the form of time deposits or as investments in U.S. Government securities,
this difference is one of degree only. Certainly, it is not justifiable
to exclude altogether the 86 billion dollars of time deposits and U.S.
security holdings by individuals. Should investors be given reason to
fear that the purchasing value of their investments might dwindle away
due to price increases, securities would be offered for sale on a large
scale. In protecting the Government security market the banking system
would have to stand ready to absorb these securities and in the process
they would be transformed into cash and demand deposits, which would then
be available for expenditure.
(U) Taking the b3 billion dollars of currency and demand deposits held by individuals, Mr. Was on argues that the amount held in 1939,
or 11 billion dollars, should be deducted and only the increase of 32
billion be considered. Some adjustment of this kind is not unreasonable.
Individuals and businesses may be expected to draw more readily upon recent additions to their liquid assets than to reduce their holdings below
a level to which they have been accustomed for some time. Yet, it does
not follow that, therefore, the entire amount of prewar holdings cannot be
drawn on under any circumstances. That depends on people's expectations
as to price developments.
(5) Next, Mr. Wason points out that personal incomes have about
doubled since 1939 and concludes that people may hence be expected to carry
approximately twice the amount of their prewar holdings of liquid assets.
Deducting another Vy billion on these grounds, he arrives at a total of
about 17 billron. Again, Mr* Wason much overshoots the mark.
When considering the increased volume of liquid assets, some allowance can properly be made for the simultaneous expansion- in the level of
output and income. Some increase in the level of liquid asset hpldings is
to be expected. However, the sharp increase in liquid assets relative to
the level of national income that has occurred (see table) far exceeds a
reasonable allowance for this factor under present conditions, when a large
part of the gross national product is not yet available to civilian purchasers and production is not yet adjusted to demand. Thus, liquid assets
held by businesses and individuals were 60 per cent of gross national product
in 19Ul; for the end of 19U5 the same percentage is estimated at 12U per cent.
Taking demand and currency alone, the increase is f rom 30 to J48 per cent.
Taking U.S. security holdings, the increase is from 12 to. $0 per cent. These
are large increases and should not be dismissed as merely the result of
higher levels of income and production.



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LIQUID ASSET HOLDINGS AND G30SS NATIONAL PRODUCT
(in billion dollars}
Liquid Assets Held by
As Percentage of GNP
Individuals and businesses^/
Calen'
dar
Year
GNP

Total

Demand De- Time
posits and
DeCurrency posits

U.S.
Govt.Securi- Total
ties

Demand Deposits and
Currency

Time
Deposits

U.S.
Govt.
Securities

I92I

7O.7

52.9

17.5

I6.6

18.8

7U.8

21;. 8

23.5

26.6

I929

99.1+ 60.7

22.1

28.6

10.0

61.1

22,2

28.8

10.1

I932

55.1+ 51.0

I7.I

2U.8

9.1

92.1

30.9

11.
++8

16.1+

I9UO

97.1

67.6

28.9

26.7

12.0

69.6

29.8

27,5

12.1;

19Ù1

120.5 7U.2

33.9

27.I

I3.2

6I.6

28.1

22.5

11.0

19U2

151.5

90.3

U.i

26.5

22.7

59.6

27.I

17.5

I5.O

191+3

187.8 130.9

57.6

29.6

I+3.7

69.7

30.7

15.8

23.3

19UU

198.7 169.7

67.8

35.0

66.9

85.1+

3I+. 1

17.6.

33.7

I9I+5Í1/182.0 225.3

87.il

48.2

89.7

123.8

1+8.0

26.5

I+9.3

l/ Holdings as of June 30*
companies are excluded»
2/

Commercial banks, savings banks and insurance

GNP is tentatively estimated annual rate for end of year and liquid asset
figures are for December 31*

For further details see Federal Reserve Bulletin for February 1 9 P *

122«

Mr» .Wasoil's Interpretation
Even if Mr. Wason's residual of 17 billion were accepted, there
would be no reason for complacency. It is still twice the corresponding
1939 figure and sufficient, if expended rapidly, to touch off inflation.
An analysis of the liquid asset figures in itself does not mean much unless
it is related to the abnormal economic situation with which we are confronted at this time when, as a result of the war, demand is far in excess
of supply. It is obvious that in urban and farm real estate, in security
markets and in other areas not subject to price controls, prices have
sharply advanced.




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Because of the abnormality of the present situation, a sharp
distinction must be drawn between the economic significance of these
liquid assets in the current setting and their likely effect later on
when the economy has returned to a more normal situation. At such a time
the liquid assets- may well be helpful in maintaining adequate demand and
high employment. In the present situation, if expended prematurely, they
would have disastrous inflationary consequences.
It is true, of course, that inflation is caused not by the existence of liquid assets but by their use to bi"d up prices. It is difficult to say to what extent they have been thus, used to date, but it is a
fact that there has been a sharp reduction in the rate of saving. Personal
savings as a percentage of disposable income which had reached JO per cent
in the second quarter of' 19U5 a**e now less than 20 per cent and may decline
still further in the course of the year. This tendency should not be accelerated by raising expectations that those who do not buy now will have
to pay higher prices later on. Such a development would be invited by a
weakening of CiPA controls.
Mr. Wason is correct ' n pointing out that the use of liquid assets
i
for purchases does not of itself reduce the total volume of such assets.
If individuals or businesses draw on their liquid assets'to finance purchases, the result is merely a shift of funds from the buyer to the seller.
The volume of liquid assets can be reduced only to the extent that Government debt is paid off out of tax receipts or securities are sold by commercial banks ?to nonbank* investors. Mr. Wason is therefore right in. emphasizing the need for a balanced budget and contending that liquid assets
cannot be absorbed by increased production.
It does not follow, however, that because large liquid assets '
will continue to exist, it will also be necess'ary to retain OPA price controls indefinitely. Inflationary pressures at this time result from the
fact that there are large backlog as well as current demands while the
supply of goods in many lines is inadequate and cannot become adequate
in a few months because production and distribution in sufficient volume
take time. Once goods become available in ample supply to satisfy current
demand and the most urgent backlog demand has been met, the excessive
pressures from buyers will be reduced and at the .same time c-ompetition
among sellers will be increased. When this happens, price controls can
be removed safely even though liquid asset holdings remain large.