View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

25
Remarks before
Conference of Illinois.Bankers
University of'Illinois, Urbane., Illinois
November 20, 19IS

Since the end of the var we have attained the objective of high
levels of employment. Nevertheless there has persisted a widespread uncertainty as" to our ability to sustain these levels. Our fears stem, m
Part, from our experience in the thirties and from the knowledge that recurrent boom and recession have always been characteristic of our economy.
Especially are we afraid that the inflation of the past few years has
set in motion forces that will eventually make a downturn both inevitable
and severe.
We are beset by conflicting interpretations of the present and expectations of the future. We are apprehensive that we shall sustain lurther inflation. Every dio in price and every slackening in sales—whatever the commodity may be--is taken as proof that a general downturn is
upon us. We also have the argument that despite the distortions which
have developed in recent years the economy is fundamentally so strong^
that full employment, production, and income will go on more or less indefinitely, rolling over one difficulty today and another tomorrow—all
the time approaching closer and closer to an equilibrium which is nou defined. It is clear that the current economic situation is not a tigure
or a combination of figures, bub an interpretation which looks both forwards and backwards.
postwar Inflation
The war has been largely responsible both for the high levels of employment and for the inflation that characterised the postwar years,
during the war, about two-fifths of our gross national product was devoted
to prosecution of the war. The expenditures for war goods created consumer and business incomes for which there was no matching supply oi
available goods.
Had it been possible to finance all war expenditures through taxation
e would have soaked up this excess of purchasing power and prevented the
large-scale increase in liquid assets. Such a rigorous policy wasnot
feasible, and the war was financed through a combination of borrowing arid
increased taxes, with taxes accounting for less than half the"total amouqt
raised. From December 1939 to December 19A5 the national debt, other than
that held by Federal agencies and trust funds, increased by 210 billion
dollars. Of this increase, nearly 115 billion was accounted for by nonhank investors; about 75 billion was held by commercial banks, and about
billion by the Federal Reserve Banks.

v

Price and wage controls and rationing kept prices remarkably stable
during the war, even if allowance is made for activity m black market.,
^ t this stability was possible only because consumers and industry in
general exercised remarkable restraint in the use of
ing voluntarily, rather than attempting to secure larger i n a i v i d u p o i
tions of the limited civilian output. Thus, about one-fourtn of personal
income after payment of taxes was saved in 1 9 U as compared to less than

26

5 per cent in 1929 and to about 7 per cent today. A very large share of
these wartime savings took the form of liquid assets, i.e., currency,
bank deposits, and government bonds. From the end of 1939 to the end of
1945, personal holdings of liquid assets more than tripled, increasing
from about 50 to over 150 billion dollars.
After the war the economy had available for spending not only high
current incomes but the large accumulation of war savings as well as exceptional access to credit. Incentives to spend were strong in view of
the great backlogs of demand for both consumer and producer goods. At
•the same time, we had heavy responsibilities abroad both for relief and
reconstruction. It simply was not possible to increase production fast
enough to meet demand. Moreover, increasing production itself increases
current income correspondingly.
Inflation was bred in such a war and postwar situation. Inflation
means that effective demand--!.e., demand backed by purchasing powerexceeds the current supply of goods and services at prevailing prices.
Prices advance in such a situation unless they are controlled and each
advance generates further advances. Rising prices have resulted in rising
incomes and expanding credit which have maintained a gep between effective demand and supply. This now familiar spiral of increased prices
followed by increased income has been repeated again and again since the
end of the war. Wholesale prices have increased about 120 per cent since
1939, consumer prices 75 per Cent, and personal income 190 per cent. A
very large proportion of each of these increases has come after 1945.
At the end of the war, notwithstanding all the inflationary forces,
we removed such wartime controls as might have been used as transition
safeguards. These included controls over prices and wages, consumer
credit, material allocations, and the high levels of wartime tax. In
addition, the extreme gravity of the housing shortage led to easy mortgage financing. The agricultural program resulted in price support for
farm products at levels which prevented large crops from having as deflationary an effect as they might otherwise have had. Desires to grant
taxpayers some relief after the long years of high taxation brought tax
reduction at a time when incomes were already excessively high in relation to the available supply of goods. In short, when a policy desirable
for other reasons crime in conflict with price stability, stability frequently was sacrificed.
' •
Economic Importance of International Situation
Maintaining price stability would have been difficult in any event
in the face of an unprecedently strong restocking and investment boom for
new plant and equipment, inventories, constimetion, and consumers' durables and semi-durables with demand supported by large and widely-held
liquid assets and high and rising incomes. Moreover, a disturbed postwar
international situation has been superimposed on an already inflationary
domestic one. Postwar has unfortunately not meant peace. Defense expenditures were cut drastically after the termination of hostilities, but
they nevertheless remained far above prewar levels. More recently, the
intensification of international tension has resulted in a substantially
enlarged defense program, with adoption of both a Selective Service program and plans for a 70 Group Air Force. For the fiscal year ending 1949>

^

I

the expenditures for defense may rim more 'than 1-1/2 billion dollars above
tk°se for the' preceding year. The present program if fully carried out,
w
ill mean a further substantial increase in the following year.
'"Furthermore, the war left a large part of the world desperately in
need'of outside aid. This was true both of our allies and of our former
enemies. Our vast foreign aid programs for relief and,reconstruction reflect not only humanitarian motives but also a desire for enhanced security. By the spring of 1947, our exports of merchandise had risen /to a
level close to that in wartime, which included lend-lease. Since then,
exports have declined more or less steadily, but are still at very high,
-evels. Meanwhile, imports have continued to increase. As a result of
^hese divergent movements, the excess of exports of good3 ana services
declined from its peak in the first half of 194-7, but is still very
great, amounting to an annual rate of over 7 billion dollars in the second quarter of 1?48.
..' The continued excess of exports of goods and services has been financed in a variety of ways, but the most important hrs been aid furnished
b
y the United States Government. This aid has taken the form of both
gifts and loans* It has included credits on sales of surplus property
ships, loans made by the Export-Import Bank, the British loan, con-,
butions to UNRRA and pest UNKRA, civilian supplies for occupied coun^'iesj interim;aid to France, Italy, and Austria, the Greek-Turkish aid
Program, and most .recently the European Recovery Program. Loans have
become relatively less important while gifts have become increasingly iqtPertant. It is-estimated that this country will spend or lend mpre than
billion dollars on such aid in the current fiscal year, which is close
the very high rate of the first half of 1947. A large proportion of
nig year's aid represents expenditures under the European Recovery- r
°gram. <>.,.-Other major means of financing the export surplus have been liquida'
foreign holdings of gold and dollar assets (which were,, run. down
y 4-1/2 billion dollars in 1947 and by about 1 billion dollars in the
irst
half: of 1948), operations of the International Eank and the Monetaiy
F
and gifts and loans from private sources in the United States.
b~

on

^atJJovelooments.

\

;

'

'

' •

' Z'

' .

iQya Con tinued development of postwar expansive forces has occurred in
- ™
'The first1 quarterrwas one, of some business hesitation, with gross
^t-ional product showing no. change over the fourth auarter of 1947, and
h
Prices of many farm products breaking sharply in February. In. the
a
c
® °nd quarter, however, adoption of the .enlarged defense program, the
lr
^Pean Recovery Program, and tax reduction furnished a strong upward
ls
P >h to the economy, and especially so since these actions were taken in
^ situation still characterized by excessive"over-all demand. Expansive
nc
s , *encies W6re further reinforced late in the second auarter by the ref
l^rge mass-production companies to wage demands after an
eP -nsiveness
ofl
th
^
strong resistance to a third-round wage increase. After
.n<~ signing of a two-year agreement between General Motors and the United
^
Workers on May 29, new wage contracts, were SQon negotiated elsewhere
the automobile industry and in such other key industries as electrical
^ehinery, rubber, farm equipment,: bituminous ana anthracite coal, and
ee
l* Wag© increases have since spread,•and are still spreading .

do
throughout the economy generally. Although the increases this year have
been more selective and diverse than in precectit,i$ years> the average increase approximates the rise,in consumer prices during the last;year.
After the first quarter, further increases occurred in retail sales
and consumer and wholesale prices. Gross national product.and disposable
income (i.e., income of individuals afterpayment of personal'tares)
reached new peaks in the second and third quarters as business", government, and individuals all enlarged their expenditures. Unemployment has
continued at a low level, below 2 million persons. The' index of industrial production, which had declined in July, recovered in August, and by
September was back to its June level.
Slackening in Monetary Expansion
Expansion in bank loans has continued to make a substantial contribution to total spending power, though not on quite as large a scale as
last year. Loans of all banks ,are estimated to have increased 1.8 billion dollars between the second and third quarters, as compared to the
2 billion dollar expansion in the corresponding period last year. Though
smaller in total, the second-to-third quarter growth of loans this year
has followed a pattern not much different from that of last year. Increases have taken place in all three of the main loan categories—
business, real estate, and consumer loans with the smaller increase this
year chiefly accounted for by a r?ecline in the rate of growth in the
business category. Currently, business loans are increasing only about
one-fourth as rapidly as they were at this time last year.
Incomes Increasing
Personal income continues to increase, both as a result of increasing employment and of the spreading of wage increases throughout industry*
Despite the 3harp drop in prices of many crops, net income of farm proprietors has been maintained at a level above the already high level of
last year. The price-support.program combined with the large-volume of
marketings prevents substantial declines in farm incomes*. Personal1 hold
ings of liquid assets are still very large and are widely distributed,
despite some tendency to concentration in the hands of upper income
groups. Re-establishment of Regulation W has slackened the rate of
growth but has not precluded the further expansion of consumer credit.
These factors—high current income, large past savings, and ready
access to credit—reinforced by the continued backlog of demand for some
durables (e.g., automobiles) furnish a strong basis for continued high
levels of personal consumption.
Anti-inflationary Developments
Taken together, all these indicate a considerable degree of current strength. Nevertheless, there are also evidences that in some important areas supply is equalling or exceeding demand at current prices.
These products include not only some finished consumer goods but some
raw materials as well. As these products tend to stabilize or fall in
price, they serve to relax somewhat other upward pressures on costs and
prices elsewhere in the economy. Probably the most important development of this sort has been the record breaking crops of this year, whicn

^ave ^suited in redudtidh df prices o£ wheat, corn, and cotton, to ^support levels,
u
_ '
'
.
Possible balance or even excess of supply at current prices are also
reported in connection With Siicti products as cotton textiles* shoes, men's
Clothing, liquor, housefurnishings, coal, paper, and radios. There have
been reports of more than seasonal weakness in prices of used cars.
It may also be noted that wholesale prices in general have shown
smaller increases so far this year than in 1947. Furthermore, considerable divergence has developed in price movements of various commodities.
Great strength has been shown by metals and moderate strength in such industries as building materials and fuels. On the other hand, prices of
some foods, hides and leather, textiles, paper and pulp, and chemicals
are close to or below their January levels.
Another possible symptom of general weakness may be read into the
act that new housing starts have declined and are below last year. The
declines this year at this time may be interpreted as an indication of
some softening in the market, reflecting the facts that the most urgent
demands for housing have been met, and that consumer resistance to the
extremely high prices charged for houses is becoming effective. Nevertheless, construction costs have continued to advance steadily and the
fndex of wholesale prices of building materials in early October was at
its peak.
f

federal Prospects
Signs of general weakness must be watched closely, because after the
peat price increases of recent years, the economy is becoming increasin
8ly vulnerable both to sharp price declines in particular areas and to
the effects of such declines on credit and on business and consumer expectations generally.
It is well to remember, however, that the postwar boom has already
over-ridden many deflationary forces and periods and that greater strength
some lines may well continue to offset weakness in specific lines. In
tl:i
e past two years we have overcome the sharp break of stock prices in the
fall of 1946, the weakness in nondurable goods and trade in the first half
1947, some reduction in new private construction in the second quarter
194.7, the sharp break in prices of many farm products in February of
this year, and the large Federal cash surplus in the first quarter of
this year and the use of much of this surplus to retire bank-held debt.
More important than all of these things in conditioning my thinking
about current economic trends is the continued state of tension in interna
tional affairs. Our defense requirements have precluded over-all reduction in Federal expenditures. The enlarged defense and foreign aid programs adopted last spring are being carried out at an accelerating rate.
Their full economic effects will not be felt until next year. Who can
3a
y that the present programs represent the peak of defense and foreign
assistance efforts? Under the circumstances it would be dangerous to assume that inflationary forces have run their course. While the recent indications of moderation of some inflationary pressures are hopeful signs,
the direction of most broad measures of economic activity continues

upward. All of our energies and abilities must continue to be directed
toward establishing.a permanent peace without, which our hopes,for
achieving lasting economic stability at high levels'of employment and •
production cannot be realized.
-•?'(»•".'.

...

. V>"