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Today I should like to discuss three subjects because they are
closely related: First, the current economic situationj second, the longrange problem of economic stability; and third, the need for establishing
peace in the world before we can successfully deal with either our current
or our long-range economic problems.
The Current Economic Situation.
For several months our economy has been in a phase of deflationary readjustment. In nearly all important areas, in both soft and hard lines,
the supply of goods has overtaken demand at prevailing prices. Many prices
have weakened and production has been cut back. Huge crops press down the
prices of practically all agricultural commodities, and this i? reflected
in lower prices of foods. New private construction, particularly in housing,
has declined. In m&ny parts of the country a large number of new houses
built last year remain unsold and are being narked down in price. Inventories have been at an all time record and pressure to reduce inventories
in most lines is very great. Sales volume, on the other hand, is declining.
Savings are increasing and bank loans are declining. Our export surplus
has been contracting as production in other countries has increased and as
they have used up their gold and dollar resources.
Some readjustment is not only inevitable but desirable after such
a prolonged period of inflation. For nearly a decade the economy has been
running under forced draft. During the war the tremendous increase in output that we achieved went largely into the wastes of war. Much of the income generated by the increase in output, however, went to swell the cash
balances and liquid asset holdings of individuals and businesses because
of shortages in the supply of goods.
Viith the end of the war there was a huge backlog demand for all
kinds of goods in this country and throughout the world. There was also
the need of filling empty inventory pipelines and meeting current demand
that would have existed had there been no war. These demands were supported by a very large current income, by huge accvynulations of liquid assets
in the form of currency, bank deposits and Government securities, widely
distributed, as well as by easy credit. Excess demand inevitably spilled
over into price inflation as the harness of controls, including excess
profits taxes, were prematurely abandoned and as private credit expansion
pumped new money freely into the already swollen spending stream.
AS a result we have had a very substantial inflation. The
average of consumer prices at the peaK was 75 per cent higher than in 1939*
and 35 per cent higher than at the end of 1945. Prices of housing, most
foods, and many other consumer as well as capital goods increased much more.

-2Some prices increased very little while others went up as much as 300 to
400 per cent, wages also increased from a very little to more than 150
per cent. This disparity in price rises was sure to bring with it serious
dislocations that made for future trouble.
Meanwhile, we have refilled the pipelines, taken the edge off
of most urgent backlog demands of individuals and businesses, supplied
their current demands, and provided to foreigners a very large net export
of goods financed by existing gold and dollar balances and Government loans
and grants. In addition, we have maintained huge military and veteran aid
Readjustments Needed.
Last October at a meeting of Iowa bankers, when some early evidences of the current deflationary movement were beginning to appear, I
expressed the hope that needed readjustments would be permitted to occur.
It is important not to dissipate our basic elements of strength and our
cushions against the current recession in an attempt to shore up the economy at present inflated levels, thus perpetuating economic dislocations
that developed in the inflation process. The deflationary drift of recent
months has been painful to some, but beneficial to others. It was certainly
unavoidable at some stage and is less onerous now than it would be if further delayed by using one costly prop after another.
One danger is that we will not face up to the necessity for
adequate readjustments. It is politically difficult to resist the numerous
minority pressure groups. Each one wants the benefits of inflation for himself, but he wants the others to pay for them. The farmer wants a floor
under his prices at present high levels, but he wants lower labor and living
costs* Labor has fought for lower prices, but resists lower wage costs.
Business wants competitive free enterprise, but does not want to make competitive price reductions.
Needed price readjustments should not be postponed by pumping
more easy credit into the economy. In my opinion too much credit has already gone into housing snd purchases of consumer goods at inflated prices.
The Longer-Range Problem.
But the more important aspect of the economic problem is not the
transitory one which . have just been discussing. It is the longer-range
question called to mind by the astonishing ease with which our economy has
met the tremendous production demands placed on it in the war and postwar
period. Our remarkable achievements here, however, pose forcefully an old
but unsolved problem, given conditions of peace in the world. That problem
is: How can we keep our economy producing on a sustained basis at the high
levels of which our manpower and productive facilities are capable? How
can we provide a steady distribution of the goods and services that we are
able to turn out?

-3Sustainable economic stability is the foremost long-run problem
of democratic capitalism. Democracies have not yet succeeded in solving
it« On the contrary, recurrent depression has been a chronic tendency
of Western capitalism. And there is a tendency for depressions to become
more severe. From the record it is perhaps not surprising that in other
parts of the world there has been a drift away from democratic capitalism.
Only a month or so ago, we read in the newspapers that the economic wizards
of Russia had met to discuss the timing and severity of our next collapse.
However small our success in maintaining stability, capitalism
has succeeded in developing an unrivaled technology of production. For
a long time, except in war or general inflation, our capacity to produce
has constantly exceeded our use of that capacity. The problem has been
to maintain aggregate demand for total output. Let me explain what J mean.
When total income at high levels of employment does not flow back directly
or indirectly into the expenditure stream, demand becomes insufficient to
take off the market what it produced. As a result, production, income, and
employment fall off and deflation inevitable sets in.
Miose responsibility is it when this happens? The answer is that
it is nobody's individual responsibility, but everybody1s collective responsibility. There are millions of people and tens of thousands of businesses
in our country who receive income and decide how to use it. There is no
assurance that these many income recipients will make a sufficient amount
of total expenditures to disburse the entire income. If they do not then
trouble begins to develop.
This characteristic pattern of instability has increasingly required collective action through Government to supplement the spending
stream in order to provide a sufficient amount of total expenditures.
Government intervention is the only answer we have yet devised and it is
likely to be th$ only answer to the problem of depression when it arises,
because Government alone is in a position to act on a sufficient scale.
I do not like this any more than you do, but it seems to be unavoidable
if we are to maintain, without loss of our freedoms, the high living
standards for our people which we have the capacity to produce. The expert
ience of history plainly shows that political and other freedoms will not
survive in the midst of widespread unemployment and destitution. These
freedoms only thrive when there is reasonable freedom from want and insecurity.
Complexity of the Problem Today.
Our problem of maintaining economic stability and providing per-*
sonal and family security is immensely more complex today than it was be-*
fore the first toorld toar, Since that time, we have become immeasurably
more industrialized, urbanized, and interdependent. Geographical frontiers
have largely disappeared, to have seen the rise of huge business, labor
and farm organizations with concentrated decision-making and centralized
power. Our prices and costs have become increasingly rigid. A great deal

-4more of our expenditures are for goods of a durable type, the purchase of
which is temporarily or indefinitely postponable. The Federal Government
as well as State and local governments are asked to provide a vastly wider
array of public services as an ordinary day-to-day matter of satisfying
community wants.
V e now have a Federal debt of &25G billions. It was only about
one billion before world bar J. Before that war, the Federal Governments
tax revenues amounted to about seven dollars per capita. Today per capita
tax receipts average more than $300. Up untiltoorldfcmrII the Federal
debt occupied a relatively subordinate place in the economy. The Federal
debt was equal to about one-fourth of the entire debt of the country in
1940. By the end of 1945 it represented nearly two-thirds of the entire
debt of the country. Fiscal and debt management policies have accordingly
assumed a new and strategic importance in relation to the problem of
economic stability.
Our more complex economy has fundamentally changed our ideas of
personal security and our methods of achieving it. In the interdependent
society that we have developed, personal security is attainable by too
few people through individual effort and savings alone. Today, the average
person1s security is no greater than the stability of the economy in which
he participates. When unemployment and depression develop, the average
person, willing to work, inevitably IOQKS to Government to do something in
order to give him an opportunity to make a living.
Responsibility for Leadership.
To recognize frankly the circumstances in which democratic eapi~
talism finds itself today need not be an endorsement of New Deaiism, Fair
Dealism, or Socialism; nor is it in any sense a commitment to the idea of
what is called the heifare State. I do assert that in the kind of an economy we have today there must be some planning and action by the Government
if democratic capitalism is to achieve and maintain a reaspnable degree of
stability and provide a reasonable degree of individual security. This was
recognized for the first time by the Government when the Congress passed the
Employment Act of 1946.
Such a need for Government intervention to maintain stability is
increasingly acknowledged in all capitalistic democracies, and practically
all of them have gone much further than we have. The problem is how to
keep such intervention at a minimum. This can be done, I think, only if
there is information and understanding as to what the enlightened selfinterest of the people is. This implies that individuals having great economic power or occupying other positions of leadership must show a high
level of statesmanship, and do all in their power to guide the Government
wisely in the development of policies that would maintain maximum employment and production. In the type of economy we have today, the issue of
national economic stability will not, and cannot be resolved alone by
business, farm, and labor leaders in their own are$s of self-interest and
independent responsibility.

-5During the past fifty years our problem of maintaining employment has too often been hidden by chance developments, In the early part
of this period, our undeveloped resources and technologies provided great
opportunities under our system of government for individual initiative and
enterprise, tohen the momentum of this period slowed down, the necessities
of v«orldtoar1 provided a new stimulant. The devastation of the war and
the backlog of demand accumulated during this period gave use a postwar
inflation boom and also provided a carry-over of support for the uneven
prosperity of the twenties. But we only succeeded in maintaining high
levels of employment during the 'twenties by relying upon excessive expansion of domestic and foreign credits, culminating in the debacle of the
Tha,t period was one of major crisis for democratic capitalism.
Expenditures failed to absqrb output and to provide adequate employment
opportunity. Intervention by Government was too long delayed, and when
finally undertaken it was entirely inadequate. Recovery was slow and uneven. Democratic capitalism the world over was unable to organize as
effectively for the distribution of wealth as it was technically organized
to produce wealth. No satisfactory answer to the problem had been found
by the time involvement in another Kvorld war again postponed the need for
Our immediate short-^run problem is to get some healthy readjustments so as to secure a better balance in our economy. But assuming that
this is accomplished, the question remains: How do we maintain satisfactory
levels of employment over the long-run period, given conditions of peace
in the world?
Various measures have been suggested in the past which might
well be a part of a positive program looking toward economic stability,
such as public works, including housing, adequate social security and
minimum wages, farm support prices, etc., coupled with appropriate fiscal,
monetary and credit policies, we have much to learn as to the amounts and
timing of such actions and their effect on economic stability.
At present democratic capitalism is drifting. Our economy is
being stimulated by fortuitous developments and temporary stop-gaps, he
are depending on a heavier investment in certain capital goods sectors than
can be sustained in steady volume, he are increasing dependence on public
subsidy through high price supports and stock piling. Most important of
all, vte are bracing up our levels of activity by a huge military prepared^
ness program and a large world aid program, both without foreseeable terminal
points as to time or amount.
The Overshadowing Problem of Peace.
But the problems of today and of tomorrow, to which I have alluded,
are all overshadowed and made infinitely more complex because nearly four
years after the war there is, as yet, no peace. You may have noticed a

-6recent address by Bernard M. Baruch in which he said:

The overhanging threat of another war penetrates
everywhere. Until we make up our minds what to do
about this threat of war it is impossible for anybody
to know what to do.
"How much of our resources are to go to the 'cold
war1 and for how long? Are we to be called upon continually to make new commitments?"
And,he added:
"Today the crux of our problem is that there is
no peace, lv must deal with this first. It is futile
to talk of free enterprise with a threat of war overhanging for free enterprise needs peace to function.
It is equally futile to talk of planning until we have
determined how to achieve a decision in the peacemaking."

I am quoting his words because they so well express what I have
deeply believed since the war ended and it became unmistakably clear that
the Communists mean to have another war, if need be, to exterminate
Not long after the war, Major General John R. Deane, who headed
our military mission in Moscow throughout the period of what he calls
"the strange alliance" with the Soviet, wrote:
"Never before in our history have we had so much
advance warning of the peril which confronts us ..•
he must adopt a program which is designed not to defend our American way of life passively but offensively
to counteract constructively those forces which threaten
And he added:
" o have the moral and physical power to stop the
Soviet leaders cold and ne should not hesitate to use
It was his conviction from intimate daily contact with Soviet
leaders that the effective way to deal with them was to present them with
a decision, not with a negotiation. Every action and move of the Soviet
leaders since the war confirms General Deane1s conclusion*

-7Let me cite another informed witness, namely, winston Churchill.
In addressing the Parliament on February *3> 1948, he said:
"The best chance of preventing war is to bring
matters to a head and come to a settlement with the
Soviet Government Defore it is too late. This would
imply that the western Democracies.••would take the
initiative in asking the Soviet for a settlement*
It is idle to reason or argue ^ith the Communists*
It is, however, possible to deal i*ith them on a fair,
realistic basis, and, in my experience, they will
keep their bargains as long as it is in their interest
to do so, which might, in this grave matter, be a
long time, once things were settled*"
He added:
"I said that the possession of the atomic
bomb would give three or four years1 breathing space.
Perhaps it may be more than that* But more than two
of those years have already gone* I can not think
that any serious discussion which it may be necessary
to have with the Soviet Government would be more
likely to reach a favorable conclusion if we wait
until they have got it, too. V e may be absolutely
sure that the present situation cannot last,"
Again, last October, he said:
"The western nations will be far more likely to
reach a lasting settlement without bloodshed if they
formulate their just demands while they have the
atomic power and before the Russian Communists have
got it too."

In the first volume of his story of world war II, Churchill has
eloquently recounted how the victorious Allies, after World Vvar I, permitted
the vanquished Germans to regain their military power and to plunge the
world into another global war. That is why Churchill termed it the
"unnecessary war." He pointed out that until 1934 the victors of iwrld
War I possessed unchallenged power not only in Europe but throughout the
"There was no moment", he wrote, "in these sixteen years when
the three former allies, or even Britain and France with their associates
in Europe, could not in the name of the League of Nations and under it5
moral and international shield have controlled by a s>ere effort of the
will the armed strength of Germany*"

~8It is his contention, and I certainly think he is right, that the
tragedy of the secondtoorldn»ar could have been prevented if the democracies
had not yielded to counsels of appeasement, if, in fact, they had through
united action enforced the disarmament clauses of the peace treaty* That
would have avoided violence and bloodshed. As I understand him now, it is
his informed judgment — and again I think he is right — that the best
chance of avoiding a third world war is to compel a settlement promptly.
That likewise represents General Deanefs conclusion, As he put it:
"The chances of attaining our objective by peaceful
means will be enhanced immeasurably if we are prepared to
defend our position by force at any point where it is
threatened. Nothing induces greater restraint on the
part of Soviet leaders than a display of strength by their
He added:
"Until the Soviet Union has atomic bombs of her own,
She will be restrained from crossing swords with those
who have.11

In any realistic appraisal of the outlook today we are bound to
ask ourselves whether v e are embarking on the road to peace or to war, and
whether we are not relatively better prepared now — or could soon become
better prepared — to enforce a settlement than we will be five years, or
ten years from now. Certainly the Soviets have not been idle since the
war ended in strengthening their position -~ nor will they be idle in the
future. There is every indication that they are consolidating their position and mustering their strength as rapidly as they can. You can find
little hope in reading history that a competitive armament race is the way
to avoid war.
But beyond all this the question is how long, to what end, and
at what consequences to our economy do we follow this path? he do not have
inexhaustible supplies of manpower and resources to support indefinitely,
with no end point in sight, programs of the magnitude which we are now
shouldering or contemplating for armament, both at home and abroad, and
for other foreign aid. On the sea and in the air we are unquestionably
in the same relatively dominant position today to enforce a peace that the
Allies were at the end of World war I. The democracies then could have
stopped Nazi rearmament and kept the Japanese from invading the Continent
of Asia. There need have been no Munich and no Pearl Harbor.
If we look back over the chaotic interval since the end of World
toar II such comfort as we may derive from our success during this past year
in Western Europe is more than offset by the extent to which we have been
losing the cold war in the Orient. Desirable as the Atlantic Pact and the
rearmament of western Eurppe may be, we must not be lulled into the belief
that they are final answers to the problem of lasting world peace.

-9You may have seen a recent article by that prophetic exponent
of air power, Major Seversky, rfho states that "The indispensable condition
forfcestEuropean rearmament is tne existence of a force capmie of shielding the undertaking." "Invincible strategic air power," he writes,
"operating in part from the britisn and in the main from the iimerican
Continent must therefore iuve number one priority in planning the economic
revival ana military defense of Europe." It is nis belief that such a
strategic air force, whether it delivers atom bombs or any other Kind
of destruction, is the only deterrent that will be effective against the
Soviets. "Under present day conditions", he contends, "huge armies and
navies can hardly deter a nation whose great might is on the surface."
It has seemed with increasing clarity to me that the best way to
avoid ultimate war, the best hope of peace in our time, is to confront the
Soviets with the decisions which will lay the foundations cjid the conditions
of a lasting peace while we have the strength to do so. If the Kremlin
is not willing to accept such a settlement, backed up by tne moral force
cf free peoples ail over tho world and by countless others now enslaved,
then is it not better to know it as soon as possible? Will tttis menacing
cloud that hangs over the world grow less threatening if we procrastinate
and postpone a settlement?
All this admittedly is outside my field of monetary, banking
and credit matters. Yet it is impossible to consider realistically either
our short-run or long-run economic outlook without recognizing that the
snadow of the Soviets looms benind every major issue. At the moment huge
expenditures for military purposes ana foreign aid also serve as economic
props for which we have not yet developed substitutes. They waste rather
than add to our national wealth and there is always the danger that we
will cling to them indefinitely, not only in the hope that this is the
way to peace, but also because they sustain economic activity at home.
The challenge to democratic capitalism today comes,— first,
from its sworn enemy; and, second, from the failure to face up to the problems of how to achieve <and maintain stable economic progress, foe must meet
tiiese challenges, in my opinion, boldly and sobn. foe would do well to
heed Churchill's warning when he wrote in nis current memoirs:

"...foe shall see now the counsels of prudence and
restraint may become tne prime agents of mortal danger;
how the middle course adopted from desires for safety
and a quiet life may be found to ie<*d direct to the
bull's-eye of disaster."