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For Release on Delivery

Statement of Wm. McC, Martin, J r . ,


Board of Governors of the Federal Reserve System,
before the
Senate Banking and Currency Committee,

2:30 p . m .

March 4, 1952.

You have asked me to testify this

afternoon on the over-all state of

the economy rather than on those sections of the Defense Production Act with
which the Federal Reserve System is directly concerned.

The views of the

Board of Governors with respect to the Act will be submitted to the Committee
in a separate memorandum.

Accordingly, I shall undertake to present my

personal views on the economic and financial problems facing the country.
I shall leave with you a memorandum on the economic situation prepared by
the Board's staff.
For a full year there has been abatement of the surging inflationary
pressures that developed after the outbreak of hostilities in Korea.


that year the annual rate of expenditures on this program has risen by about
20 billion dollars.

The expansion of outlays on private accounts to enlarge

our defense supporting industrial base is also

well advanced.

This record

is impressive.
The abatement of inflationary forces has reflected a variety of developments in the economy generally, including the application of restraints. They
are dealt with in more detail in the memorandum prepared by the Board's

We feel that the Federal Reserve has played a part in the salutary

result, not the principal part, but an indispensable part.

In the period

ahead defense spending will rise to its peak, with major impact on the

I will not attempt to forecast what the consequences of that

impact will be.

It is clear , however, that

the present is not a time to

dispense with the tools that are necessary for the restraint of inflation.
I do not think anyone can confidently forecast the period ahead or
the repercussions on the economy of the defense program on which we have

The forces involved are complex.

Who at this time last year

thought that inflationary pressures were at a peak, at least temporarily,
and that the year ahead would be characterized by the relative stability
that was, in fact, achieved?

This experience well illustrates the hazards of

The most we can do in surveying the future is to lay out the

nature of the problems that may be presented and prepare ourselves to
deal with them as competently as we can.
Large as it is, our defense program is within cur physical capacity
as a nation.

We have available the manpower, the equipment, the raw

materials and the know-how, to carry the program and to maintain a high
standard of living.

Such misgivings as I have relate more to the financial

than to the physical problem.

Our taxes are already heavy, yet they are

not sufficient to cover total Federal expenditures.

During the last half of

this calendar year we will face the problem of financing a large and growing
Federal deficit.

We all know that if the deficit is financed by borrowing

from the banking system such borrowing will increase the volume of bank
deposits and thus inflate further the money supply.

Our major problem

will be to find ways and means of financing the deficit by borrowing individual, institutional and corporate savings.

The savings are there. If


saving continues in its present volume, this can be done.

The program will

be within our financial as well as our physical capacity.
During the past year the American people have saved at unusually
high rates.

Otherwise, inflationary pressures would have been great.


task ahead is to do everything possible to encourage continued high savings
and their investment in Government securities.

In this way the deficit that

looms can be financed without resort to the inflationary process of creating
additional supplies of bank credit.
by the Treasury.

This view of the problem is fully shared

We see eye to eye on this problem and are cooperating

together to develop an effective program to deal with it.
You have before you the official forecasts of the deficit as contained
in the President's budget message.

That was prepared some time ago and

it may be that the deficit will turn out to be materially lower than the official forecast, due to a slower rate of spending by the defense agencies. On
the other hand, the outlays for military equipment may mount rapidly as
bottlenecks are cleared away, sufficiently rapidly to catch up with the rate
of spending assumed in the budget estimates.

I think the essential nature

of the problem at hand remains the same regardless of which view may turn
out to be more nearly right.

The blunt fact is that even if the more moder-

ate estimates should be realized and expenditures are less than the estimates,
we still face a deficit financing problem that can create serious inflationary
pressures if the deficit were financed through the banking system.

The most

optimistic estimates of our budgetary position still leave the Government with

a financing problem of large magnitude.
increases that problem.

Every increase in the deficit

Moreover, we do not know what will happen inter-

There is a tendency just now to think that the immediate danger

abroad is less.

While we all hope that the danger is in fact less, we cannot

run the risk of relying on that hope.
You will probably hear from some observers who feel that the danger
of a further resurgence of inflation is past or nearly past.

They are im-

pressed by the many soft spots in the economy and by the slide of sensitive
prices during recent weeks.

It is true that there are soft spots in the economy

and that some prices are weak.

These reflect situations such as Detroit

where cutbacks in the use of essential materials have resulted in cutbacks
in employment.

Soft spots of this type do not mean that inflationary pres-

sures are over.

The defense agencies are moving rapidly to place contracts

in these areas, and there will be a gradual lifting of restrictions on civilian
output as supplies of materials become available.
Some soft spots in the economy today, such as in the textile industry,
reflect excessive buying in the period immediately following Korea rather
than the effect of cutbacks in the use of essential


For about

eight months following Korea, consumers and businessmen were on a buying spree.

They thought that a full war economy was in the making and

that all sorts of commodities would be scarce,
could only go up.

They thought that prices

It was a period of reckless spending and borrowing. It

has left a lot of headaches, especially among businesses that borrowed too


much to acquire inventories at prices that are now demonstrated to have been
too high; headaches in expansion plans that proved too large to carry out
efficiently; headaches in the form of large holdings of receivables and of
inventories of finished products when customer markets turned sluggish.
It is fortunate that this situation was not even worse.

You cannot

have a period of reckless private spending such as occurred in this country
immediately after Korea without an aftermath.
Now I don't know how long it will take to get over these headaches.
I do feel, however, that it would be a great mistake to think that because of
them we should be complacent about the deficit on the theory that just a little
touch of further inflation would do no harm.

The prospective deficit and the

continued "take" required for defense are too large to take that risk.
Furthermore, the international situation is too tense.
going to cost a lot of money for a long time.
further inflation.

This program is

We must carry it out without

Neither this country nor the world can afford to lose

confidence in the dollar.
I wonder if we fully appreciate the significance of the dollar and what
it stands for in the world today.

For several years I was immersed in our

foreign financial dealings at the Treasury and I learned at first hand, day
by day, what the dollar really means in a world of currencies that are in
many cases all too weak.

The dollar holds a pivotal position in the financial

reconstruction of the free world today.

It signifies

ial and military might of the United States.

far more than the mater-

It symbolizes the moral strength

of the American people and their determination to preserve its integrity.