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Statement of
William McChesney Martin, Jr.
Chairman, Board of Governors of the Federal Reserve System

before the
Committee on Finance
United States Senate

August 13, 1957

Our country has been experiencing a period of unusual prosperity,
featured by heavy spending, both governmental and private.

As a nation,

we have been trying to spend more than we earn through production,
and to invest at a rate faster than we save.

The resulting demands,

strong and incessant, have pressed hard upon our resources, both
human and material.

In consequence, prices have been rising, and

the purchasing power of the dollar has been falling.
It is of the utmost importance to bring to bear on this critical
problem all of the information and intelligence that we can muster.
That is what you are seeking, and that is why this opportunity to appear
here is timely and most welcome.

We are not facing a new, or

insoluble problem--it is as old as the invention of money--and
history is marked with both defeats and triumphs in dealing with this
invisible but deadly enemy of inflation.

The question is not whether

we can solve the problem, but how best to deal with it under our form
of government and free enterprise institutions.

Solve it we can--

and must.
You have been inquiring particularly into fiscal policies and it
is equally important to inquire into credit and monetary policies.
They are closely interrelated, and are the two paramount and timetested means available to the Government in combatting inflation.
There are undeniably practical limitations of timing and scope upon


2 -

both, but they are the most effective weapons in the arsenal against this
destructive invader.

In fact they are indispensable.

By way of preface and for the record I should like to outline first
the general structure and organization of the Federal Reserve System.
Then I want to go into the nature and character of the problems the
nation is now facing.
Federal Reserve Structure
The Federal Reserve Act of I9 13 was the outgrowth of prolonged
Congressional study of the history of central banking in other countries
and of our own experience, particularly with the First and Second
Banks of the United States.

The Congress, seeking to avoid either

political or private domination of the money supply, created an in¬
dependent institution which is an ingenious blending of public and pri¬
vate participation in the System's operations under the coordination
of a public body - - the Federal Reserve Board - - here in Washington,
This question of "independence" has been thoroughly debated
throughout the long history of central banking.

On numerous occasions

when amendments to the Federal Reserve Act were under consid¬
eration the question has been reexamined by Congress and it has
reaffirmed its original judgment that the Reserve System should be
independent - - not independent of Government, but independent within
the structure of the Government.

That does not mean that the reserve

- 3 banking mechanism can or should pursue a course that is contrary to
the objectives of national economic policies. It does mean that within
its technical field, in deciding upon and carrying out monetary and
credit policy, it shall be free to exercise its best collective judgment
The Reserve System is an instrument of Government designed
to foster and protect the public interest, so far as that is possible
through the exercise of monetary powers. Its basic objective is to
assure a monetary climate that permits economic growth together with
stability in the value of our money.

Private citizens share in admin¬

istering the System but, in so doing, they are acting in a public

The members of the Board of Governors and the officers

of the Federal Reserve Banks are in a true sense public officials.
The processes of policy determination are surrounded with carefully
devised safeguards against domination by any special interest group.
Broadly, the Reserve System may be likened to a trusteeship
created by Congress to administer the nation's credit and monetary
affairs - - a trusteeship dedicated to helping safeguard the integrity
of the currency.

Confidence in the value of the dollar is vital to

continued economic progress and to the preservation of the social
values at the heart of free institutions.
The Federal Reserve Act i s , so to speak, a trust indenture
that the Congress can alter or amend as it thinks best.

The existing

- 4 -

System is by no means perfect, but experience prior to 1914 suggests
that either it or something closely approximating it is indispensable.
In its present form, it has the advantage of being able to draw upon
the knowledge and information of the directors and officers of its
12 banks and 24 branches in formulating and carrying out credit
and monetary policies.
Board of Governors
The Board of Governors, as you know, is composed of seven
members appointed by the President and confirmed by the Senate,
each for a term of 14 years. In appointing the members of the Board,
the President is required to give due regard to a fair representation
of the financial, agricultural, industrial, and commercial interests,
as well as the geographical divisions of the country.

From among

these members the President designates a Chairman and a Vice
Chairman for terms of four years. Some of the functions of the
Board of Governors are (1) to exercise supervision over the Federal
Reserve Banks; (2) to fix, within statutory limits, the reserves which
member banks are required to maintain against their deposit liabili¬
ties; (3) to review and determine the discount rates which are estab¬
lished biweekly at each Federal Reserve Bank, subject to approval of
the Board in Washington; (4) to participate, as members of the
Federal Open Market Committee, in determining policies whereby the
System influences the availability of credit primarily through the


5 -

purchase or sale of Government securities in the open market; (5) to fix
margin requirements on loans on stock exchange collateral; and (6) to
perform various supervisory functions with respect to commercial banks
that are members of the System and to administer Federal Reserve,
Holding Company, and other legislation.
Federal Reserve Banks
Each Federal Reserve Bank has a board of nine directors, of
whom six are elected by the member banks.

Of these, three are bankers,

one from a large, one from a medium, and one from a small bank.


more must not be bankers, but must be engaged in some nonbanking

The other three members are appointed by the Board of

Governors in Washington, which also designates one to be the Chairman
and another the Deputy Chairman.

None of these three may be an officer,

director, employee, or stockholder of any bank.
Reserve Bank supervise its affairs.

The directors of a

Subject to approval of the Board of

Governors, they appoint the President and First Vice President.


to review and determination by the Board of Governors, they establish
discount rates.
The stock of each Federal Reserve Bank is held by the member
banks of its district.

This stock does not have the normal attributes of

corporate stock; rather, it represents a required subscription to the
capital of the Reserve Bank, dividends being fixed by law at 6 per cent.
The residual interest in the surplus of the Federal Reserve Banks

- 6 belongs to the United States Government, not to the Bank's stockholders.
Federal Open Market Committee
The Federal Open Market Committee consists, according to law,
of the seven members of the Board of Governors, together with five
Presidents of the Federal Reserve Banks.

Four of these five Presidents

serve on a rotating basis; the fifth, the President of the Federal Reserve
Bank of New York, is a permanent member of the Committee. Since
June. 1955, when its Executive Committee was abolished, this Committee
has usually met at three-week intervals to direct the sale and purchase
of securities in the open market.

In practice, all twelve Presidents attend

these meetings and participate freely in the discussion, although only
those who are members of the Committee vote.
Federal Advisory Council
The Federal Reserve Act also provides for a Federal Advisory
Council of twelve members.

One is elected by the Board of each Reserve

Bank for a term of one year.

The Council is required by law to meet in

Washington at least four times each year.

It is authorized to confer direct¬

ly with the Board of Governors respecting general business conditions and
to make recommendations concerning matters within the Board's jurisdiction.
Judging Economic Trends
The work of the System requires a continuous study and exercise of
judgment in order to be alert to the way the economy is trending and what
Federal Reserve actions will best contribute to sustained economic growth.
Such decisions are often hard to make because of the existence of cross¬
currents in the economy.

Even in generally prosperous times, some parts

- 7 -

of the economy may not fare as well as others.

Credit policy must,

however, fit the general situation and not reflect unduly either the
condition of certain industries experiencing poor business, or that of
other industries enjoying a boom.

Residential construction illustrates

this point. In 1956 and so far in 1957 demand pressures on available
resources have been generally strong and prices have been moving up,
but housing construction has receded considerably from its 1955 peak.
The home-building industry undoubtedly could supply housing at a faster
rate than is now prevailing.
costs continue to increase.

But even at the current volume, building
The prices of some building materials have

fallen, it is true, but the over-all cost of housing construction has in¬
creased appreciably even in the face of moderately lower demand.


explanation is to be found in the fact that expenditures for all major types
of construction except residential have been maintained at or above record

This example shows why credit policy must take account of the

over-all situation, and can not be deterred unduly by special cases
that are not typical of the whole.
Another factor complicating economic interpretation is that even
in a period of broad advance and upward pressure on prices, there may
be lulls when conditions seem to be stabilizing and the next turn of
events is difficult to appraise.


8 -

The objective of the System is always the same - - t o promote monetary
and credit conditions that will foster sustained economic growth together
with stability in the value of the dollar.
human terms.

This goal may be thought of in

The first part may be considered as concerned with job

opportunities for wage earners; the latter as directed to protecting
those who depend upon savings or fixed incomes, or who rely upon pension rights.
of us.

In fact, however, a realization of both aims is vital to all

They are inseparable.


Price stability is essential to sustainable

Inflation fosters maladjustments.

In some periods these broad

aims call for encouraging credit expansion; in others, for restraint on
the growth of credit.

The latter is what is required at present, for

clearly the most critical economic problem now facing this country is
that of inflation, or put in the terms of the man on the street, it is the
rising cost of living.
The Current Problem of Inflation
This problem is far different from the one that beset us during the
depressed 1930!s, and left an indelible impression on our thinking.


problem then was one of drastic deflation with widespread unemployment,
both of men and material resources.
through the years since World War II.

Today's problem has persisted
It consists of inflationary price

increases and the economic imbalances that have resulted.
This is the overriding problem that faces the Federal Reserve System
today, for a spiral of mounting prices and wages seeks more and more



9 -

It creates demands for funds in excess of savings, and since

these demands can not be satisfied in full, the result is mounting interest
rates and a condition of so-called tight money. If the gap between in¬
vestment demands and available savings should be filled by creating
additional bank money, the spiral of inflation which tends to become
cumulative and self-perpetuating would be given further impetus. If the
Federal Reserve System were a party to that process, it would betray
its trust.
Conflicting Views on Causes
There is much current discussion of the origin of inflationary

Some believe they reflect a recurrence of demand-pulls,

similar to those present in the earlier postwar period.

Others believe

they originate in a cost-push engendered by administered pricing policies
and wage agreements that violate the limits of tolerance set by advances
in productivity.
These distinctions present an oversimplification of the problem.
Inflation is a process in which rising costs and prices mutually interact
upon each other over time with a spiral effect.

Inflation always has the

attributes, therefore, of a cost-push. At the same time, demand must
always be sufficient to keep the spiral moving.

Otherwise the marking up

of prices in one sector of the economy would be offset by a reduction of
prices in other sectors.
There is much to be said for the view that contractual or other
arrangements designed as shelters or hedges from inflation have the effect

- 10 of quickening its tempo.

The 5 per cent rise in the cost of living which we

have experienced over the last two years has probably reflected and been
reflected in more rapidly rising wage costs because of the prevalence of
cost of living clauses in many modern wage contracts.

Cost plus contracts

tend to have the same quickening effect on the inflationary spiral.
The spiral is also, however, a demand spiral.

At each point of time

in the development of the inflationary spiral, there must be sufficient
demand to take the higher-priced goods off the market and thus keep the
process moving.
The Inflationary Spiral
The workings of the spiral of inflation are illustrated by the economy
of the moment,

As has been brought out at some of the earlier hearings

of this Committee, we are now faced with the seeming paradox that prices
are expected to continue to rise, even though the specific bottlenecks in
capacity that impeded the growth of production in 1956 have now been
largely relieved, and investment in productive facilities continues at very
high levels.

Houses, automobiles, household appliances, and other con¬

sumer goods, as well as most basic materials, are all readily available-at a price.

The problem is no longer one of specific shortages or bottlenecks

causing prices of individual commodities to be bid up because of limited
availability but rather it is one of broad general pressure on all of our

In other words, aggregate demand is in excess of aggregate

availabilities of these resources at existing prices.
Taking the situation as a whole, as individuals, corporations, and

- 11 governments proceed with their expenditure plans, buttressed by borrowed
funds, they are in the position of attempting to bid the basic factors of
production -- land, labor, and capital -- away from each other and in the
process the general level of costs and prices is inevitably pushed upward.
Recently, this general pressure has been expressing itself particularly in
rising prices for services as compared with goods. Despite the existence
in some lines of reduced employment and slack demand, many employers
now face rising costs when they seek to expand activity by adding appreciably
to the number employed.

Often, the additional manpower required has to

be bid away from other employers. As a result, many current plans for
further expansion of capacity place great emphasis on more efficient, more
productive equipment rather than on more manpower.
This generalized pressure on resources comes to a head in financial
markets in the form of a shortage of saving in relation to the demand for funds.
A considerable volume of expenditure is financed at all times out of borrowed
funds. When these funds are borrowed from others who have curtailed their
own expenditures, no additional demand for resources is generated. On
balance, however, demands for funds by those who have wanted to borrow
money to spend in excess of their current incomes have outrun savings.


who have saved by limiting their current expenditures, and thus made funds
available for lending, have still not kept pace with the desire of governments,
businesses, and individuals to borrow in order to spend.
Just as an intense general pressure on available resources manifests
itself in rising wages and prices, a deficiency of savings relative to the

- 12 demand for borrowed money manifests itself in an increase in the price
of credit.

In such circumstances, interest rates are bound to rise.


rise in rates might be temporarily held down by creating new bank money to
meet borrowing demands, but this, as I have said, would add fuel to infla¬
tion and bring about further increases in demands.

In the end, as prices

rose ever faster, interest rates could not be held down.

In summary,

whatever the special features of the current inflation, the important fact is
that it is here, and that it has created demands for borrowed funds in excess
of financial savings, even though these have grown appreciably.

Any at¬

tempt to substitute newly created bank money for this deficiency in savings
can only aggravate the problem and make matters worse.
Effects of Higher Interest Rates
The response to higher interest rates is complex.

One result is

that some would-be borrowers draw on cash balances to finance projected
expenditures or lenders draw on their balances to lend at the higher rates,
thus reducing their liquidity and increasing the turnover of the existing
money supply.

In recent years, with the large volume of Federal Govern¬

ment securities outstanding, many holders of these securities - - both
institutions and individuals - - have liquidated their holdings in order to
shift funds to other uses.

This has been an important influence in bring¬

ing about the decline in bond prices.

To the extent that accumulated

cash balances or other past savings can be used more actively, expenditures
remain high relative to available resources and prices tend to rise, but the
reduced financial liquidity eventually exerts restraint on borrowing and spending.

-13Another result of higher interest costs, together with greater
difficulty in obtaining loans, is that many potential borrowers revise
or postpone their borrowing plans.

To the extent that expenditures are

revised or deferred, inflationary pressures are reduced.
The most constructive result is the encouragement of a volume
of savings and investment that permits continued expansion of productive
facilities at a rate consistent with growing consumption demands,


in this way can the standard of living for a growing population be
improved and the value of savings be maintained.
Such constructive adaptations, if made in time at the onset of
inflationary pressures, need not be large in order to restore balance
between prospective demands and the resources available to meet them.
It is essential, however, that the adjustment be made.


prospective expenditures will continue to exceed the resources avail¬
able and the pressure of excess demand will foster an inflationary spiral.

Expectations of Continuing Inflation
Once such a spiral is set in motion it has a strong tendency to
feed upon itself.

If prices generally are expected to rise, incentives to

save and to lend are diminished and incentives to borrow and to spend
are increased.

Consumers who would normally be savers are encouraged

to postpone saving and, instead, purchase goods of which they are not in
immediate need.

Businessmen, likewise, are encouraged to anticipate

-14growth requirements for new plant and equipment.
increased on both counts.

Thus, spending is

But, because the economy is already-

operating at high levels, further increases in spending are not matched
by corresponding increases in production.

Instead, the increased

spending for goods and services tends to develop a spiral of mounting
prices, wages, and costs.
Unfortunately, during the past year, as price indexes gradually
rose, some segments of the community apparently became reconciled
to the prospects of a !lcreeping" if not a "runaway11 inflation.

One of the

baneful effects of inflation stems from the expectation of inflation.
While a price increase, in itself, may cause serious dislocations and
inequities, other and more serious effects occur if the price rise
brings with it an expectation of still other increases.


clearly have a great influence on economic and financial decisions.


fact, decisions to spend or to invest too much in a given time are a
direct cause of inflation.

Also, if further inflation is expected, specula¬

tive commitments are encouraged and the pattern of investment and other
spending--the decisions on what kinds of things to buy-~will change in a
way that threatens balanced growth.
"Creeping Inflation*1
The unwarranted assumption that "creeping inflation" is inevitable
deserves comment.

This term has been used by various writers to mean

a gradual rise in prices which, they suggest, could be held to a moderate
rate, averaging perhaps 2 per cent a year.

The idea of prices rising

-152 per cent in a year may not seem too startling--in fact, during the past
year, average prices have increased by more than 2 per cent--but this
concept of creeping inflation implies that a price rise of this kind would
be expected to continue indefinitely.

According to those who espouse

this view, rising prices would then be the normal expectation and the
Federal Reserve accordingly would no longer strive to keep the value of
money stable but would simply try to temper the rate of depreciation.
Business and investment decisions would be made in the light of this
Such a prospect would work incalculable hardship.

If monetary

policy were directed with a view to permitting this kind of inflation-even if it were possible to control it so that prices rose no faster than
2 per cent a year--the price level would double every 35 years and the
value of the dollar would be cut in half each generation.

Losses would

thus be inflicted upon millions of people, pensioners, Government
employees, all who have fixed incomes, including people who have part
of their assets in savings accounts and long-term bonds, and other
assets of fixed dollar value.

The heaviest losers would be those unable

to protect themselves by escalator clauses or other offsets against prices
that were steadily creeping up.
Moreover the expectation of inflation would react on the composition
of savings.

A large part of the savings of the country is mobilized in

savings deposits and similar claims that call for some stated amount
of dollars.

If people generally come to feel that inflation is inevitable,

•16they will not save in this form unless they are paid a much higher interest
premium to compensate them for the depreciation of their saved dollars•
It is for this reason that it is impossible, in a period of demand in
excess of savings, to maintain lower interest rates through a policy of

easy" credit.

The country is experiencing a period of generally high

employment in which investment outlays remain high, but if fears of
inflation cause people to spend more of their incomes and save l e s s , the
result could only be more rapid inflation and still less saving in relation
to income. Such saving as remained, furthermore, would be less and
less in the form of loanable funds to finance homes, highways, school
construction, and other community needs.
Effects on Productive Enterprise
An inflationary psychology also impairs the efficiency of productive
enterprise --through which our standard of living has made unparalleled
strides. In countries that have had rapid or runaway inflations, this
process has become so painfully obvious that no doubt remained as to
what was happening to productivity. In the making of decisions on whether
or not to increase inventory, or make a capital investment, or engage in
some other business operation, the question of whether the operation
would increase the profit from inflation became far more important than
whether the proposed venture would enable the firm to sell more goods
or to produce them at lower cost.

The incentive to strive for efficiency

no longer governed business decisions .

- 17 Productivity--Key to Sustained Prosperity
Why have real wages in this country risen to the highest levels in
the world, thus permitting our standard of living to rise correspondingly?
Certainly, it is not just because wages have risen as the cost of living
has risen.

The big source of increase has been the increasing pro¬

ductivity of our national economy.

Real incomes have gone up because

the total size of the pie, out of which everybody receives his share, has
grown so magnificently.

What has enabled the productivity of the American

economy to achieve the levels that make all this possible?

One vital

factor has been the striving by so many people, each in his own field,
for better and more efficient ways of doing things.

Equally important

has been the willingness to set aside a part of current income to provide
the machines, tools, and other equipment for further progress.


are essential if our standard of living and material welfare are to go
on advancing.
Effects of Inflation
Inflation does not simply take something away from one group of our
population and give it to another group.

Universally, the standard of living

is hurt, and countless people injured, not only those who are dependent
on annuities or pensions, or whose savings are in the form of bonds or
life insurance contracts.

The great majority of those who operate their own

businesses or farms, or own common stocks or real estate, or even those who
have cost of living agreements whereby their wages will be raised, cannot es¬
cape the effects of speculative influences that accompany inflation and impair
reliance upon business judgments and competitive efficiency.

-18Finally, in addition to these economic effects, we should not
overlook the way that inflation could damage our social and political

Money would no longer serve as a standard of value for

long-term savings.

Consequently, those who would turn out to have

savings in their old age would tend to be the slick and clever rather
than the hard-working and thrifty.

Fundamental faith in the fairness

of our institutions and our Government would deteriorate.

The under¬

lying strength of our country and of our political institutions rests upon
faith in the fairness of these institutions, in the fact that productive
effort and hard work will earn an appropriate economic reward. That
faith cannot be maintained in the face of continuing, chronic inflation.
There is no validity whatever in the idea that any inflation, once
accepted, can be confined to moderate proportions.

Once the assump¬

tion is made that a gradual increase in prices is to be expected, and
this assumption becomes a part of everybody' expectations, keeping
a rising price level under control becomes incomparably more difficult
than the problem of maintaining stability when that is the clearly
expressed goal of public policy.

Creeping inflation is neither axrational

nor a realistic alternative to stability of the general price level,
"Pegging" the Market
It has been suggested, from time to time, that the Federal Reserve
System could relieve current pressures in money and capital markets
without, at the same time, contributing to inflationary pressures.
These suggestions usually involve Federal Reserve support of the United

-19States Government securities market through one form or another of
pegging operations.

There is no way for the Federal Reserve System

to peg the price of Government bonds at any given level unless it stands
ready to buy all of the bonds offered to it at that price.

This process

inevitably provides additional funds for the banking system, permits
the expansion of loans and investments and a comparable increase in
the money supply--a process sometimes referred to as monetization
of the public debt.

The amount of the inflationary force generated by

such a policy depends to some extent upon the demand pressures in the
market at the time.

It would be dangerously inflationary under condi¬

tions that prevail today.

In the present circumstances the Reserve

System could not peg the Government securities market without, at the
same time, igniting explosive inflationary fuel.
Do Rising Interest Rates Add to Inflation?
We must be clear in viewing these relationships to distinguish
cause from effect and not to confuse them.

It is sometimes Said that

rising interest rates, by increasing the costs of doing business, lead to
higher prices and thus contribute to inflation.

This view is based upon

an inadequate conception of the role of interest rates in the economy,
and upon a mistaken idea of how interest costs compare with total costs.
In municipal government budgets, it is about 2 per cent; in many utilities,
it is 3 to 5 per cent.

Thus, as an element of cost, interest rates are

relatively small; but as a reflection of demand pressures in markets
for funds, interest rates are highly sensitive.

As previously explained,

-20rising interest rates result primarily from an excess of borrowing
demands over the available supply of savings. Since these demands
are stimulated by inflation, under these circumstances rising interest
rates are an effect of inflationary pressures, not a cause. Any attempt
to prevent such a rise by creating new money would lead to a much more
rapid rise in prices and in costs than would result from any likely
increase in interest rates. Such an attempt, moreover, would not
remove the need for a fundamental adjustment in the relation between
saving and consumption and would probably fail in its purpose of stabiliz¬
ing interest rates.
Basic Factors in Recent Inflationary Pressures
A major cause of recent inflationary pressures has been the attempt
to crowd into this period a volume of investment greater than the economy
could take without curtailing consumption more than consumers have been
willing to do. In fact, there has been some increase in consumption on
borrowed funds. Increases in interest rates naturally come about
under such conditions; they are the economy's means of protecting itself
against such excessive bunching of investment or the building up of an
unsustainable rate of consumption.

While the effect of a moderate

change in interest rates on the cost of goods currently being produced
and sold is small and relatively unimportant, changes in interest rates
do assume importance as a cost in the planning of new investment out¬

These costs do not affect current operations or add to upward

price pressures to any substantial extent. They do tend to deter the

-21undertaking of new investment projects and to keep the amount of invest¬
ment spending that is being undertaken in line with the economy's ability
to produce investment goods. To maintain artificially low interest rates
under these conditions, without introducing any other force to restrain
investment, would be to invite an unbridled investment boom, inflation,
and an inevitable collapse later.
It is necessary to emphasize that there are many influences,
other than monetary policies and interest rates, that affect the volume
of consumption, investment, and saving and their relationships.
Monetary policies operate directly through the volume of bank credit
and bank-created money. The volume of current saving out of income
and the uses made of new and outstanding savings have a more important
bearing upon the availability of investment funds than bank credit.
Interest rates, therefore, are influenced by the relationship between
investment demands and the availability of savings, independently of
monetary policies. Interference with these relationships through
monetary policies, in fact, may prevent necessary and healthy adjust¬
ments that help to maintain equilibrium in economic growth.
In a Nutshell

An inflationary spiral is always characterized by:

An interaction between rising costs and rising
prices; and


An increase in overfall effective demand sufficient
to keep the spiral going. As prices generally keep
rising, a larger and larger volume of demand (in
dollar terms) is needed to sustain the same volume
of transactions (in physical terms).

As long as it persists, therefore, an inflation will
always show evidence of both demand pulls and cost
pushes with their relative manifestations shifting as
the inflation runs its course.


The tempo of interaction between rising costs and rising
prices will be speeded up if the situation is characterized

The release of a previously created overhang of
pent-up money demand (such as existed when
direct controls broke down or were relaxed at
the end of the war).


The creation in volume of new money demand
through excessive credit expansion and/or
activation of existing cash balances (such as
happened when war broke out in Korea).


The widespread existence in the economy of
escalators which act automatically to transfer
rising costs or prices into rising prices and
costs (cost of living clauses in collective
bargaining agreements, cost plus contracts, etc.).


The degree to which a speculative psychology
backed by effective demand pervades business

The tennpoof interaction between costs and prices will
also be affected by the degree to which administered
prices and wage rates are prevalent in the economy.
These effects are not always in the same direction.
The net effect of the many and various factors
influencing administered prices and wages sometimes
tend to slow up and sometimes to accelerate price
movements, depending upon the particular circumstances.


23 -


Whatever the mix of the above ingredients, an inflation
once under way will tend to persist as long as the credit
necessary to finance the rising level of costs and prices
is forthcoming. Credit may be supplied through new
bank credit expansion or by activation of already
existing money.


Whatever its antecedent characteristics, an inflation will
tend to feed upon itself and be accentuated once the invest¬
ing and saving public come to think of further inflation
as the prospect,


It is the nature of inflation hedges to act as aggravating
rather than equilibrating factors.


No one suffers more than the little man from the ravages
of inflation.


A monetary authority dedicated to promoting the public
welfare must not relax restraints in the face of continu¬
ing inflationary pressures, since any efforts to relax
merely add to the forces tending to keep the inflation
in motion.
What More Can Be Done ?

How, then, may further inflation be restrained?

Bluntly, the

answer is to be found in a moderation of spending, both governmental
and private, until the demands for funds are balanced by savings.


prudence must be coupled with sound fiscal policy, which means a larger
budget surplus as well as effective monetary policy to restrain the growth
of bank credit.
Among the factors influencing saving and consumption are those fiscal
policies relating to taxes and governmental budgets.

These require

special attention because they are not as responsive to changes in the
availability of credit and interest rates as are private activities,


-24fiscal policies can create or eggravate imbalance in the economy and
thus dilute the effectiveness of monetary policies. On the other hand,
fiscal measures that help to maintain balance can reduce the degree of
restraint that monetary policies might otherwise have to exert.
Experience over the centuries has demonstrated that there is no
tolerable alternative to adequate fiscal and monetary policies, operating
in an environment of open, competitive markets under our system of
human freedoms. Neither an economic dictatorship nor complacent
acceptance of creeping inflation is a rational or tolerable way of life
for the American people.
There is no panacea, no magical means of assuring orderly
economic growth, nor are we much more likely in the future than in the
past to achieve perfect performance in the timing and execution of policy
and action. We have every reason to believe, nevertheless, that we can
discern and follow the right path. Thus, it is clear that the present
situation calls both for a larger budgetary surplus than we have had or
have in prospect, and a continuance of restraint upon creation of new
supplies of money.
Action Required
Let us not follow the defeatist path of believing that widespread
unemployment is the alternative to inflation.

-25There is no question that the Federal Government and the
American people, pulling together, have the power to stabilize the cost
of living.

The only question is,whether there is the will to do so.

If the will is there, and it is demonstrated convincingly to the
American people, the cost of living can be stabilized, interest rates
will relax, and a sufficient volume of savings will be encouraged to
provide for the economic growth needed in this generation and the next.
This Committee and the Congress can contribute greatly to that
end by declaring resolutely--so that all the world will know--that
stabilization of the cost of living is a primary aim of Federal economic
The goal of price stability, now implicit in the Employment Act,
can be made explicit by a straightforward declaration and directive to
all agencies of the Government that anti-inflationary actions are to be
taken promptly whenever the cost of living begins to rise.
The Executive and Legislative branches of Government, in conjunc¬
tion, can assure adjustment of Federal revenues and expenditures so
that, in times when total spending threatens to burst the bounds of
capacity and drive up the cost of living, the Federal Government will
set an example of restraint in outlays and at the same time produce a
surplus to counter inflationary pressures from any quarter.
The Congress and the Executive can take steps to assure that free
and vigorous competition is maintained in all segments of the economy as
the bedrock of our free enterprise system,

-26The Federal Reserve System, itself a creation of the Congress,
can--and I assure you that it will-~make every effort to check excesses
in the field of money and credit that threaten the cost of living and thus
undermine sustained prosperity and growth of our economy,
In all of these ways we can, if we have the will, set the face of
the nation so resolutely against inflation as to keep that enemy from
our gates.
No greater tragedy, short of war, could befall the free world than
to have our country surrender to the easy delusion that a little inflation,
year after year, is either inevitable or tolerable. For that way lies
ultimate economic chaos and incalculable human suffering that would
undermine faith in the institutions of free men.