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Speech delivered before Alpha Chapter, Pi Gamma Mu Catholic University, Washington, D. C. May IB, ECONOMIC DEFENSE A colored fellow walked into a drugstore and asked for a slug.. He walked into the telephone booth - left the door open, deposited- the slug, got his number. The clerk overheard the following' conversation: "Does you all want a good man? A very good man who can keep your place very clean and work all hours of the day and night? What1s that? You all have a man, and you're satisfied with him? You don't want.another man? All .right." He hung up, started to walk out of the drugstore. The clerk remarked, "I see you didn't get the job you called for." "Oh, boss - that's the job I got. I just wanted to know how I stand." So true. We all want to know, and particularly do we want to know how we stand. More than that, we not only want to know, but we. want to know why. Upon that principle is based ail science. We search for causes, reasons, principles. In a world torn apart and depressed by the baser instincts of man, there is little light afforded to lead us in our search for causes, reasons, principles. We are almost lost. To say the least, we are bewildered. Even more bewildered than was Father Smith when, as he said himself tonight, he was asked to act as toastmaster. And yet, it is during times such as these that greatness comes to the fore. Today's history will be written, and when.it is, historians will show, or at least attempt to show, who is responsible, and why. Scientists will try to point to the causes, and politicians will make an attempt to remove them so that there will be no repetition of the present condition. And yet human nature tells us that men learn very little even from the most bitter of experiences. Therefore, is it all worth while? Shouldn't we just sit back and let events care for themselves? Should we? The answer is "Positively No!" For again, human nature comes to the fore and produces leaders. Bad leadership led us into this condition, and again, good leadership will lead us out of it. A gentleman with an excess of avoirdupois is riding horseback - he is perspiring, and the horse sweating,, but on his chest are medals galore. He rides alone, stops, asks a passerby - "Did-you see a parade go by here?" The passerb}' answers* "Oh, yes, it's gone by two hours ago,*" Response' from the rider: "Oh, I must catch up. I just must catch up, for ... for ... I'm their leader." That is not the kind of leadership we speak of here. There must be order - logic in the thinking of our leadership, else we have chaos. Therefore, upon you rests a great responsibility, not only because education enables you to think clearly, but also because you have the added advantage so essential - the advantage of religion. Once the world loses faith in God and in humanity, demagogs have easy prey. For the masses are crying for something - anything'. - and the demagogs seem to provide: that something or anything. Ii6 In a democracy - a form of government adopted by our United States the citizenry must be especially informed in order to participate actively in its responsibilities to attain the end sought by the State - complete welfare. Here, more than anywhere else in the world - because of our history, because of our social and economic and political nature, the individual must be constantly mentally alert to all of the processes of government. Otherwise, through blindness he is apt to be antagonistic at a time when he should be most cooperative. In other words, he may be helping to destroy the very thing that he cherishes and desires to preserve so much - liberty. Tonight at the dinner table Dr. Patterson asked me whether I knew the difference between the English expression "We muddle through" and the American expression, "We have the situation well in hand." I thought awhile and had to answer that I didn't. He looked at me and said he had given it a lot of thought, and had finally come to the conclusion that there was absolutely no difference - they both mean the same. Our country is in the process of preparing its defenses. It is logical that we should in a day such as this be strong in order to retain the liberty that we enjoy. But while we speak of "defense" we shouldn't limit it to military and naval defense. That is a mistake often made. Social, political and economic defense are likewise processes with which we should be much concerned. On the economic side we have two questions: (l) the effect of what is happening here and abroad on all of the factors that compose our economic structure - now; and (2) the effect of what is happening now, here and abroad, on our economic structure later, after the defense preparation period is over. The Federal Reserve System has many responsibilities. Among them is the responsibility in connection with influencing credit to the end of economic stability. To meet this responsibility it must cooperate with and obtain the cooperation of other governmental agencies. Therefore, we are continuously advising and being advised by others in the government. The uncertainties of the future are indeed tremendous. How long and how extensive will be the war? Will our participation be belligerent or nonbelligerent. Will the victory be partial or complete; will the peace be constructive or vengeful? However events may answer this question, we may be sure that the central banking functions of the Federal Reserve Syste.a will be more and more essential to our economy. We shall have more occasion than ever for a wise regulation of domestic credit, so that it may be readily available for proper use, wherever and whenever needed, and so that it may not be available for harmful, speculative use. This, therefore, reauires that central banking responsibilities be implemented in due course of time with effective powers, and not left as at present with powers that the developments of recent years have rendered ineffective. We shall also have more occasion than ever for a strict husbanding of our credit resources against the time when they can be used for restoration of trade relations with other countries. It is in this process, both for our own good and for that of the world at large, that the proper use of our gold stock must be found,, and as the gold r.ow abnormally accumulated here is redistributed, the Federal Reserve tank credit may be counted on to take the place of the gold withdrawn, if necessary, to prevent distrubance of the economic supply of credit. As you know, the member banks - that is, the commercial banks which are members of the Federal Reserve System - can borrow at the Federal Reserve Bank just as you borrow at your bank. Today, of course, the member banks are rot borrowing at the Federal Reserve Bank because they have a large excess reserve position. In other words, there are about six billion cr more in excess reserves that the member banks can lend to their customers - to industry, commerce and agriculture. At the present time, likewise, the volume of deposits at banks, now sixty billions, could be doubled. A volume of deposits twice as large could be capable of doing twice as much work, and if the amount of goods and services in the country did not increase at the same, rate, there would be the danger that prices would rise rapidly. This, of course, is not in the interest of a stable econory. Finally, let me point out that the economy would become unstable if the use of existing deposits were doubled. In other words, at the present time the velocity of deposits that is, the use or turnover of present deposits, is about 13. There have been times in the past when this velocity or turnover was 26. Therefore, if existing deposits should be used twice as actively as they are now used, that too would represent a dangerous situation. This, also, therefore, is not in the interest of a stable economy. After deposits have once been created, there is little that the Federal Reserve System can do about them, as that has to be dealt with by non-monetary means, such as restricting of price advances, rationing, etc. The Federal Reserve authorities, however, if given sufficient power by Congress, can regulate the growth of deposits, but they cannot control the turnover or velocity of existing deposits. Therefore, the Federal Reserve System has advised Congress of the fact that it needs sufficient powers in sufficient time to deal with the existing excess reserves of six billion, should ever the occasion arise for the System to act in the interest of a stable economy on the credit side of our economic picture. Of course I must point out at this juncture that credit .is not overextended just now. But the time may come when action may have to be taken because of the increased business activity in this country due principally to the defense program, and to take effective action, the Federal reserve System must be in possession of powers to meet its responsibilities in this monetary field. At the time that we issued our statement to Congress, which was on the first day of January, this year, there was much concern expressed by bankers and others about what was construed to be an unnecessary warning against inflation - that is, overextension of credit. But we did try to point out, perhaps ineffectively, that we weren't asking for the powers in order to use them at once, but rather we were asking for the powers to be in a position to use them should, occasion arise for us to do so. For U8 timing, as you know, is the essence of proper monetary action. To revert to the old saying -"You can't close the barn door after the horse has been stolen" - it just won't do any good. That is the one side of our responsibility. The other side is the one that we are constantly concerning ourselves with. This requires long range studies. Every part of our economic structure must be geared up to an emergency tempo, and coordinated with one objective - our National success. We envisage problems the solution of which is dependent upon the studies of various aspects of our past, current and future economy. Our central banking authorities - the Federal Reserve System - are studying and considering the following in order to be in a position to discharge their particular duties wisely. 1. The magnitude and timing of the Defense Program. The probable effect of the Defense Program upon the national income, employment and output. 3. The and housing, equipment at cial studies probable magnitude of private investment in plant, equipment and the probable expenditures on automobiles and household various income levels. In this connection we are making speof instalment credit control. The probable volume of business profits; of corporate, institutional and individual savings at various income levels. 5. The probable magnitude of tax receipts (assuming different tax structures) at various income levels. 6. The probable Federal expenditures and deficits under the Defense Program. 7. The probable Federal borrowing from commercial banks, savings institutions, corporations and individuals. 8. The prospect with respect to commodity price inflation (industrial, agricultural and food prices) under varying conditions. 9. The danger of bottlenecks with special reference to steel, railway equipment and skilled labor. 10. The prospect with respect to wage increases and labor unrest. 11. Control of inflation: rationing, priorities and other direct measures of control; consumption control; the so-called Keynes plan for compulsory saving and deferred payment; excess reserves and direct monetary controls. 12. The impact of the war on foreign trade and post-war trade policy. 13. Gold and exchange policy of the United States, especially in view of Germany's access to the gold and foreign balances of virtually the entire European continent. h9 .14 • Problems relating to the post-defense slump, particularly post-defense Federal budget, the fiscal capacity of the States, the Federal-State fiscal relations, variable grants-in-aid, social security programs (including old age, unemployment, food stamp plan, health, education), Federal works programs, housing.ijid, finally, 1$. Long-range proposals with respect to expansion, full utilization of resources, anti-depression policy, flexible tax structure, flexible program of public works, a Fiscal authority Planning Agency. This is a formidable list, and it challenges our best effort?; in study and research, and yet it is incomplete. On the immediate side of our concern is the vast sum of money that must be raised by the government .in finrncing our rearmament program. The question on that side is not put to us, directly, for the responsibility there is with Congress and the Treasury. But since fiscal operations have an effect on our economic structure,we naturally are concerned with a financing program. And we ask this question: What are the basic aims to be considered in formulating a program to obtain this huge sum for governmental expenditures? Stated simply, the financing program must be or should be equitable and efficient. By equitable we mean that each of us shall bear his fair share of the burden, and by efficient we mean that the program should be one that can be carried out with rapidity and with the least possible disruption of our economic activity now and in the post-war period. To spend this money the Government must first obtain it. It obtains it from two sources; first, by borrowing and second, by taxation. Both borrowing and taxation affect our economy. If we borrow, we can borrow from the banks or from the public, by selling securities: bonds, notes and bills. Suppose we rely primarily on borrowing from the banks. I.hat about the equity end efficiency of this method? Such a policy would-have the effect of increasing the total supply of purchasing power, to which I referred a few minutes ago namely, bank deposits would increase. For when the banks buy government securities they give the govern,lent credit on their books, which credit the government is then free to spend. Such an increase in the supply of bank money or deposits, especially now when we are all likely to spend our money more rapidly with better business conditions, is apt to lead to rising prices - to what is generally called inflation. Therefore, suppose we finance defense by borrowing from the public rather than the banks? whet difference would this make? The answer is that while borrowing from the banks increases the total supply of purchasing power, borrowing from private savers only transfers purchasing power from them to the government. In other words, when securities are sold to the public ^ private savers give up so much purchasing power to the government, and therefore do not retain those funds to compete with the government in the market. Thus the desire of the Treasury to sell as many of their securities as possible to private investors is most desirable. Such a program of 50 course is by no means a guarantee lgainst price rises for there are or may be many other causes of increased prices, but it does avoid increasing the supply of bank deposits,which might prove a basis for inflation. Suppose we finance defense by taxation. Here the general effect is very very much like borrowing from the public so far as inflation is concerned. The effect is a transfer of purchasing power from private, zo governmental hands, and there is 110 increase in total purchasing power. Taxes, however, must be equitable and efficient. And in the consideration of a tax program, we must give thought to the present tax burden. And from our observation and study, we find that there is no justification for substantially higher rates on the middle income group, and probably for a broadening of the income tax base below the $2,000 income for a family of twoj assuming, of course,, that new and different, sales and excises falling heavily upon the lower income groups are to be avoided. Heavy ex^ cess profits taxes in business income surely have a proper place in an equitable defense taxation. Also on the efficiency side .we must distinguish carefully between taxes as such and the. effects of•different, specific taxes, remembering all the while that from an economic stability point of view we must be in favor of taxation as the basic need to avoid serious price inflation in the future. For the present, therefore, there seems to be a strong case for the reliance on selected tax, and on borrowing from the public if we wish to finance our defease program equitably and efficiently. In a period such as this, too much emphasis is apt to be placed on revenue alone, for revenue's sake, with little or no attention to the problems of equity in avoidance of post-war disiuptions. The Federal Reserve System, looking upon the economic picture as a whole and as one of the responsible public agencies cooperating with others, is giving its full energies to certain aspects of our economic problems. Alone, however, we can do very little. Vie can only be effective when the public is enlightened, when the public is cooperating. Again I wish to repeat that democracy necessarily rests on an educated and cooperative populace, jmd to revert to my introductory remarks, responsibility rests upon the leadership of the country. Universities, therefore, play an important part in thos whole defense program, for education is an effective part of our National Defense. This is our program, just as this is our country. And it was written, as you know, that "it ain't the individual, r.or the army as a whole, but the everlastxn' teamwork of every bloomin' soulI"
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