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For release i n a f t e r n o o n papers Address o f Thomas B. McCabe, Chairman o f the Board o f Governors of t h e Federal Reserve System, a t the Pennsylvania Week Luncheon o f t h e P h i l a d e l p h i a Chamber of Commerce, Monday, September 27, 1948 You have c o n f e r r e d upon me a great honor here today i n p r e s e n t i n g me w i t h t h e Chambers 194S Commerce and I n d u s t r y Award and I thank you from t h e bottom o f my h e a r t * I t means a g r e a t d e a l t o me t o know t h a t you, among whom I have worked f o r so many y e a r s , f e e l t h a t I have made a c o n t r i b u t i o n t o t h i s com« m u n i t y which m e r i t s such r e c o g n i t i o n « I have been connected w i t h commerce and i n d u s t r y i n t h i s area f o r over t h i r t y - t w o years and I can s i n c e r e l y say t h a t have enjoyed every day of i t « I I n recent years t h e r e have been a few i n t e r l u d e s , you might c a l l them, when I have been i n Washington, but my heart w i l l always remain here w i t h my f a m i l y , my f r i e n d s and my business connections * I know the t r u t h o f t h e o l d adage t h a t absence makes t h e h e a r t grow fonder• You know, most of us take our communities f o r granted and accept the b e n e f i t s t h e y o f f e r w i t h o u t much a p p r e c i a t i o n or p r i d e • For t h i s reason I t h i n k t h e annual event of Pennsylvania Week i s such an e x c e l l e n t idea® I t focuses our a t t e n t i o n on t h e f i n e t h i n g s we do have around us — abundant n a t u r a l resources and r i c h man-created resources, wrought by our own b r a i n s and brawn. Only l a s t week I f l e w over t h e s t a t e and I have never seen any countryside t h a t matches t h e beauty and t r a n q u i l l i t y o f the e a s t e r n counties of Pennsylvania, e s p e c i a l l y a t t h i s time o f t h e year* Since p r e - R e v o l u t i o n days t h e commerce and i n d u s t r y o f P h i l a d e l p h i a have been v i t a l t o t h i s n a t i o n , i n war and peace. What amazes me when I contem- p l a t e our a c t i v i t i e s i s t h e i r breadth and e x t r a o r d i n a r y d i v e r s i t y . Name any a r t i c l e t h a t we use i n our d a i l y l i v e s and the chances are P h i l a d e l p h i a commerce and i n d u s t r y have had some hand i n making or processing or i n s u r i n g o r shipping or financing i t * Economists t e l l me t h i s d i v e r s i t y , and e s p e c i a l l y the n i c e balance between t h e p r o d u c t i o n o f durable and non-durable goods, i s undoubtedly r e s p o n s i b l e f o r t h e h i g h degree o f s t a b i l i t y of employment and income i n t h i s area* f i n e s t a b l e c h a r a c t e r o f the people i s r e f l e c t e d i n the e x c e l l e n t The relationships t h a t e x i s t between management and workers and the r e l a t i v e l y low s t r i k e record that prevails. I t has been an e x h i l a r a t i n g experience and a source o f great p r i d e t o p a r t i c i p a t e d i r e c t l y i n the development o f one u n i t o f oui* l o c a l i n d u s t r y and i n d i r e c t l y i n many o t h e r s , I thank you a ^ a i n Mr, Kaufmann and members o f the P h i l a d e l p h i a Chamber o f Commerce f o r t h i s honor, and i n accepting i t I pledge t o continue t o give o f my energy i n h e l p i n g you make t h i s an even b e t t e r community. I would l i k e t o t e l l you something about my present assignment i n Washi n g t o n , and about t h e Federal Reserve System. When the President asked me t o t a k e a place on the Federal Reserve Board o f Governors and become i t s Chairman, I was f r a n k l y r e l u c t a n t t o go. Many of my f r i e n d s here and my f a m i l y were apprehensive about having me go back again t o f i g h t i n the b a t t l e o f t h e Potomac, as i t i s a strenuous l i f e and the men i n the s p o t l i g h t p o s i t i o n s are subject t o the sharpest k i n d o f a t t a c k and c r i t i c i s m . Since I had been connected w i t h t h e Federal Reserve here i n P h i l a d e l p h i a f o r s e v e r a l y e a r s , the System was i n my blood and I could not r e s i s t t h e challenge and t h e o p p o r t u n i t y t o serve a t a t i m e when the need was so g r e a t . columnist so a p t l y s a i d , " I was a sucker f o r a curved b a l l . " As one I d i d not assume t h e o f f i c e w i t h o u t searching a p p r a i s a l o f t h e r e s p o n s i b i l i t i e s i n v o l v e d . a p p r a i s a l i n c l u d e d t h e j o b the Federal Reserve has t o perform i n t h i s p e r i o d and the adequacy o f i t s t o o l s . could be done. This critical My a p p r a i s a l convinced me t h a t the j o b I am s t i l l o f t h a t o p i n i o n * - 3 * Walter L e a f , the d i s t i n g u i s h e d E n g l i s h banker, once declared t h a t t h e r e are t h r e e main causes t h a t dispose men t o madness - l o v e , a m b i t i o n , and t h e study o f monetary problems. And he added t h a t t h e l a s t was t h e w o r s t . A f t e r some f i v e months i n o f f i c e a t t h e Federal Reserve Board, I know e x a c t l y what Mr. Leaf had i n mind. The Federal Reserve A c t , passed i n 1913, i s a monumental piece of l e g i s l a t i o n and g r e a t c r e d i t i s due i t s a u t h o r , Carter Glass, f o r h i s f o r e s i g h t and « wisdom. I t s o r i g i n a l purposes as conceived by i t s founders were t o give t h e c o u n t r y an e l a s t i c currency, t o p r o v i d e f a c i l i t i e s f o r d i s c o u n t i n g commercial paper, and t o improve t h e s u p e r v i s i o n o f banking. Over t h e years the System has developed a broader o b j e c t i v e , namely, t o h e l p prevent i n f l a t i o n s and d e f l a t i o n s and t o do i t s share i n c r e a t i n g c o n d i t i o n s f a v o r a b l e t o sustained h i g h employment, s t a b l e values and a r i s i n g standard o f l i v i n g . There are over f o u r t e e n thousand banks i n t h e United S t a t e s , w i t h t o t a l d e p o s i t s o f approximately 154 b i l l i o n d o l l a r s . E i g h t y - f i v e percent of t h e com- m e r c i a l deposits are h e l d by members of t h e Federal Reserve System. banks keep t h e i r reserves w i t h t h e Federal Reserve Banks. These member The Federal Reserve Banks are a l s o d e p o s i t o r i e s and f i s c a l agents o f t h e United States Government. The System i s close t o you and your businesses even though you may not always be aware o f i t s o p e r a t i o n s . I t was e s t a b l i s h e d on p a r a l l e l l i n e s w i t h our p o l i t i c a l government as a f e d e r a t e d system o f twelve r e g i o n a l Reserve banks r a t h e r t h a n on a s i n g l e c e n t r a l bank j u s t so t h a t i t could be q u i c k l y responsive t o t h e economic and f i n a n c i a l needs o f each area and remain close t o the grass roots. One of these t w e l v e r e g i o n a l banks i s the Federal Reserve Bank of P h i l a - d e l p h i a , of which I was chairman f o r s e v e r a l years before I t o o k the appointment i n Washington. - 4 * The Federal Reserve System has b o t h i t s n a t i o n a l and l o c a l aspects and i s a magnificent achievement i n i t s p r o v i s i o n both f o r c e n t r a l i z e d r e s p o n s i b i l i t y and d e c e n t r a l i z e d o p e r a t i o n s , i n i t s p r o v i s i o n f o r a c t i v e contact both w i t h the executive departments and w i t h t h e f i n a n c i a l community. The D i r e c t o r s o f the t w e l v e banks, a m a j o r i t y o f whom are e l e c t e d b^ the l o c a l member banks, r e p r e s e n t , w i t h t h e i r branch d i r e c t o r s , an e x c e l l e n t c r o s s - s e c t i o n o f t h e leaders i n f i n a n c e , commerce and a g r i c u l t u r e o f t h e i r r e s p e c t i v e r e g i o n s , and I have found t h a t t h e i r advice and judgment on the problems o f t,he System are i n v a l u a b l e * « Each r e g i o n a l bank and t h e B o a r d s s t a f f i n Washington are w a t c h f u l l y f e e l i n g t h e pulse o f t h e economy, f o r the Federal Reserve research groups c o l l e c t , c o r r e l a t e , and i n t e r p r e t a host of data about every "moving part' 1 o f t h e f i n a n c i a l and commercial machinery. And t h e System i s always working t o m a i n t a i n s t e a d i - ness and s t r e n g t h i n the f i e l d of money, banking and c r e d i t 0 I n doing t h i s , has achieved a r e a l s t a t u s as an independent body, f r e e from p o l i t i c s , it serving only the public i n t e r e s t . As everyone knows, t h e number one problem before t h e c o u n t r y i s inflation. I n a n a l y z i n g t h e problem, the f i r s t q u e s t i o n i s — How d i d we get i n t h i s p o s i t i o n o f h i g h and c o n t i n u a l l y r i s i n g p r i c e s ? t h e r e can be no doubt c B a s i c a l l y the cause was t h e war, of t h a t The p r o d u c t i v e c a p a c i t y o f the n a t i o n was l a r g e l y devoted t o war purposes f o r almost f i v e years 0 At t h e peak more t h a n f i f t y per cent o f our r e c o r d p r o d u c t i o n was f o r war use. While m i l l i o n s o f people were coming i n t o possession o f more money t h a n any people had ever had t o spend and save, t h e r e was a s c a r c i t y o f t h i n g s t o spend i t f o r * Consequently two great backlogs r a p i d l y accumulated - a backlog o f u n f i l l e d wants and a backlog of money savings. With removal o f c o n t r o l s t h i s pent-up spending power, plus an unprecedented volume of c u r r e n t income, was t u r n e d loose i n a market c h a r a c t e r i z e d by s c a r c i t i e s and s h o r t ages * P r i c e s , wages, and p r o f i t s rose r a p i d l y , and t h e s p i r a l of i n f l a t i o n was on i t s way. - 5 * When you consider t h a t h a l f o f our i n d u s t r i a l c a p a c i t y was taken up f o r so l o n g w i t h making t h e nonproductive t o o l s o f war, and t h a t many m i l l i o n s i n our l a b o r f o r c e were p a i d t o t u r n out a r t i c l e s t h e y could not buy, i t is amazing t h a t t h e shock t o our economy was so w e l l w i t h s t o o d and t h a t our recovery has been so o r d e r l y . I t h i n k t h a t i s a g r e a t t r i b u t e t o the s t r e n g t h of our p r i v a t e e n t e r p r i s e system. At p r e s e n t , t h e supply of money or p o t e n t i a l money r e a d i l y a v a i l a b l e t o » buy t h e c u r r e n t output o f goods and s e r v i c e s i s about t h r e e times level. the prewar Yet t h e o v e r - a l l p h y s i c a l volume o f p r o d u c t i o n of goods and s e r v i c e s i s l i t t l e over a h a l f l a r g e r t h a n t h e prewar maximum. t o emphasize, i s p r a c t i c a l l y a t c a p a c i t y . P r o d u c t i o n , i t i s important There have been o n l y small o v e r - a l l i n c r e a s e s i n p h y s i c a l output d u r i n g t h e past year and a h a l f , n o t w i t h s t a n d i n g t h e g r e a t pressure o f u n s a t i s f i e d demands, expanding c r e d i t , and r i s i n g p r i c e s 0 I n s p i t e o f c e r t a i n s o f t spots which are o c c u r r i n g i n the p r i c e s t r u c t u r e , t h e economic prospects i n d i c a t e a c o n t i n u a t i o n of strong i n f l a t i o n a r y pressures d u r i n g t h e immediate f u t u r e . I n d i v i d u a l incomes have continued a t a h i g h l e v e l , w i t h a tendency t o increase as p r i c e s and wages have r i s e n and employment has grown w i t h t h e l a b o r f o r c e . Consumer spending, based on c u r r e n t incomes, t h e use o f past savings, and borrowing, a l s o has continued t o expand. Construc- t i o n volumes seem l i k e l y t o remain f o r a w h i l e a t c a p a c i t y l e v e l s , w i t h p o s s i b l e further rises i n prices i n t h i s f i e l d . at a high rate. Business expenditures are a l s o c o n t i n u i n g Government expenditures are i n c r e a s i n g , p r i m a r i l y because o f cur European a i d and defense programs. At t h e same time income taxes were lowered, t h e r e b y s h a r p l y reducing t h e Treasury s u r p l u s . T h a t ! s t h e s i t u a t i o n we f i n d ourselves i n t h i s autumn® done about i t ? What can be - 6 * C e r t a i n l y no one a u t h o r i t y or agency can accomplish the d e s i r e d r e s u l t alone. I t i s f a r t o o deep-rooted i n the c o m p l e x i t i e s o f our economic and p o l i t i c a l l i f e for that. However, w i t h i n t h e i r f i e l d s t h e Federal Reserve and the Treasury have r e c e n t l y made f o u r moves t o check f u r t h e r growth i n t h e supply of c r e d i t . These moves have been: 1. 2. 3. Higher s h o r t - t e r m i n t e r e s t r a t e s An increase i n t h e rediscount r a t e R e s t o r a t i o n o f r e s t r i c t i o n s on i n s t a l m e n t 4. An increase i n bank reserve requirements credit Time w i l l not permit me t o go i n t o a d e t a i l e d e x p l a n a t i o n o f how these moves l i m i t t h e supply o f c r e d i t , because t h e y are r a t h e r t e c h n i c a l . You are a l l f a m i l i a r , however, w i t h the c o n d i t i o n s of i n s t a l m e n t c r e d i t , reimposed as a r e s u l t o f the a u t h o r i t y granted by the S p e c i a l Session o f Congress. These c o n d i - t i o n s are l e s s r e s t r i c t i v e t h a n i n wartime, y e t t h e y w i l l prevent much unsound borrowing and overreaching f o r goods 0 Let me say t h a t g r e a t e r t h a n a n y t h i n g else we can do from a Governmental s t a n d p o i n t i s t h e maintenance o f a Treasury s u r p l u s . Such a surplus means t h a t more money i s removed from t h e spending stream t h a n our n a t i o n a l expenditures put back i n t o i t . The d i f f e r e n c e , i f used t o r e t i r e t h a t p a r t of the debt h e l d by t h e Federal Reserve System, reduces t h e money and c r e d i t pressure more d i r e c t l y t h a n any o t h e r move. The Treasury had an excess of cash income over cash outgo o f 9 b i l l i o n d o l l a r s i n t h e f i s c a l year 1947-4&* But t h e prospects f o r t h e current year are f o r o n l y a f r a c t i o n o f t h i s amount. This d i f f e r e n c e i n the surplus reduces c o n s i d e r a b l y t h e most important anti-inflationary influence. I know t h e r e are many i n t h i s audience who would l i k e me t o say somet h i n g about our p r i c e support o f Government bonds. t h e House Banking and Currency Committee I w i l l here repeat what I on August second. told - 7 * I t i s my view t h a t t h e System i s o b l i g a t e d t o m a i n t a i n a market f o r Government s e c u r i t i e s and t o assure o r d e r l y c o n d i t i o n s i n t h a t market, not p r i m a r i l y because o f an i m p l i e d commitment t o wartime i n v e s t o r s t h a t t h e i r savings would be p r o t e c t e d , nor t o a i d t h e Treasury i n r e f u n d i n g m a t u r i n g d e b t , but because o f t h e widespread repercussions t h a t would ensue throughout the economy i f t h e v a s t holdings o f t h e p u b l i c debt were f e l t t o be o f unstable v a l u e . When you consider t h a t t h e p u b l i c debt i s one and a h a l f times a l l o t h e r debt i n the c o u n t r y combined, i t seems obvious t o me t h a t t h e market f o r t h e Government debt s e c u r i t i e s must be one where i n v e s t o r ^ can deal a t a l l times w i t h confidence. I remain o f t h e c o n v i c t i o n t h a t f o r the foreseeable f u t u r e t h e support program should be continued. This c o n v i c t i o n i s shared by a l l t h e members o f the Board o f Governors and by the Treasury. I t i s a l s o supported by the weight of f i n a n c i a l opinion i n the country. During t h e past t h r e e months, non-bank holders of Government bonds insurance companies, savings i n s t i t u t i o n s and o t h e r s - have g r e a t l y complicated our problem i n t h i s regard f o r t h e y have s o l d over two b i l l i o n d o l l a r s of these s e c u r i t i e s , t h e r e b y c r e a t i n g a d d i t i o n a l bank deposits and reserves o f t h a t amount. One of t h e r e s u l t s o f t h e recent increase i n reserve requirements o f commercial banks w i l l be t o take up those a d d i t i o n a l reserves so t h a t t h e y w i l l not be t h e b a s i s o f m u l t i p l e c r e d i t expansion a t t h i s time when our c r e d i t volume i s a l r e a d y out o f p r o p o r t i o n t o the amount o f goods a v a i l a b l e . The problem o f i n f l a t i o n i s so v a s t i n i t s causes, as w e l l as i n i t s effects, that i t i s everybody 1 s d u t y t o help i n t h e s o l u t i o n . our e n t i r e economy i s a t s t a k e . The w e l f a r e of Each o f us must exercise r e a l r e s t r a i n t i n t h e use o f money a l r e a d y i n e x i s t e n c e , and not b i d f o r t h e scarce a r t i c l e s i f can be d e f e r r e d . purchase The hard f a c t i s t h a t we simply do not a t t h i s time have enough r e a l resources t o provide a l l the t h i n g s we would l i k e t o have. I f we i n s i s t on t r y i n g t o acquire them anyway, we s h a l l end by d i s s i p a t i n g our resources through - h i g h e r prices# 8 - The gospel of r e s t r a i n t i n the spending o f money should be t a k e n t o h e a r t by every i n d i v i d u a l and by every organized group, p u b l i c and p r i v a t e * The g r e a t e s t p o s s i b l e economy should be p r a c t i s e d by t h e Government, not o n l y in d i r e c t spending, but a l s o i n the e x t e n s i o n o f c r e d i t by or under guarantees o f governmental agencies. Commercial banks have embarked on a program of v o l u n t a r y r e s t r a i n t in t h e e x t e n s i o n of c r e d i t , under t h e auspices o f t h e American Bankers A s s o c i a t i o n * T h i s i s an e x c e l l e n t example o f teamwork and sets a p a t t e r i i f o r cooperative e f f o r t which might be copied w i t h p r o f i t by many other e n t e r p r i s e s * a n d o r g a n i z a t i o n s . And l e t me say r i g h t here t h a t t h i s n a t i o n owes a debt o f g r a t i t u d e t o commercial bankers f o r t h e i r t a s k i n a s s i s t i n g w i t h t h e f i n a n c i n g o f the war and f o r t h e i r g e n e r a l cooperation w i t h t h e s u p e r v i s o r y a u t h o r i t i e s i n combatting c r e d i t Few a n t i - i n f l a t i o n a r y moves are p o p u l a r . a v e r y unpopular p u r s u i t . inflation* I n f a c t , checking i n f l a t i o n i s Each o f us i s i n c l i n e d t o f e e l t h a t i n f l a t i o n i s wrong and c e r t a i n l y something should be done about i t - by someone other than h i m s e l f * The Federal Reserve System has a r e s p o n s i b i l i t y t o the c o u n t r y t o use i t s a u t h o r i t y t o t h e best o f i t s judgment. statutory C e r t a i n l y we would be d e r e l i c t i n our d u t y and would v i o l a t e our oaths o f o f f i c e i f we d i d not " c a l l them as we see them11 and act accordingly. But t h e problems which now face the country are not t h e e x c l u s i v e problems of the Federal Reserve or t h e commercial banking system* Action i n the monetary f i e l d .alone cannot r e a d j u s t t h e unbalanced r e l a t i o n s h i p s w i t h i n t h e economic s t r u c t u r e which have a l r e a d y been created by i n f l a t i o n a r y f o r c e s , and cannot check f u r t h e r i n f l a t i o n a r y pressures a r i s i n g from non-monetary causes. A g r e a t r e s p o n s i b i l i t y r e s t s upon every c i t i z e n , upon every group o r o r g a n i z a t i o n o f c i t i z e n s , upon t h e housewife, l a b o r , i n d u s t r y , business, and f i n a n c i a l i n s t i t u t i o n s o f a l l c h a r a c t e r t o u n i t e i n combatting i n f l a t i o n and by cooperative e f f o r t accomp l i s h t h e o b j e c t i v e s which a l l recognize as e s s e n t i a l t o our w e l l - b e i n g *
@FedFRASER