Speech

STATEMENT ON BEHALF OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BEFORE THE JOINT COMMITTEE ON THE ECONOMIC REPORT, APRIL 13, 1*948 Mr. Chairman and Members of the Committee: engulfed by the economic and social problems which grow more menacing the longer the establishment When I testified before this Committee last No­ of a firm basis for permanent peace is delayed. vember 25, I emphasized that I was speaking only for the Board of Governors of the Federal Reserve Monetary Situation in November System. In presenting a further statement today Last November the country was faced with rap­ covering the monetary and credit situation as it has idly mounting inflationary pressures. The issue developed in the intervening four months, I am then was how to curb inflationary forces by striking again speaking only on behalf of the Board. directly at the basic cause, namely, an effective We, of course, do not participate in the Govern­ demand—composed of spending out of past savings, ment’s military or rearmament planning or in the current income and new credit—in excess of the formulation of programs for foreign relief. Ac­ over-all supply of goods and services. As pointed cordingly, what the Board has authorized me to say out in the Board’s statement to this Committee, with regard to the impact on our economy of mili­ correction of inflation at its advanced stage had to tary and relief expenditures is said solely from the be on a broad front; fiscal policy had to be our main standpoint of the implications so far as monetary reliance; and monetary and credit policy was supple­ and credit policies are concerned. We feel that in mentary to other fundamental actions. The Board any effort to deal with monetary and credit prob­ felt then, as it feels now, that effective monetary lems under the situation now existing, we should and credit policy would require legislation to pro­ clearly recognize the alternatives before us and the vide the Federal Reserve System with new powers economic consequences of expanding military out­ that would serve as a partial substitute for those lays superimposed upon the present large budgets traditional powers which had become largely un­ for military purposes and for our program of world usable in view of the huge public debt. aid. The essential monetary fact in the inflationary Never in our memories has the world been per­ situation at that time was the amount of liquid vaded by greater fears, confusion, and discourage­ purchasing power in the hands of the public, that ment, arising chiefly because of the disappointments is, currency, bank deposits and Government secu­ of the past and the uncertainties of the future. The rities, aggregating in all about 254 billion dollars, great hopes we had during the war for achieving a or more than three times the amount held in 1940. lasting peace in a prosperous world have been This amount of cash or cash equivalent was in large steadily diminished because a few ruthless and part inherited from the financing of the enormous despotic men hold a sword of Damocles over the Federal deficits incurred in preparation for and heads of free peoples throughout the world. It is prosecution of global war. Not only did we have difficult, if not impossible, to plan for a rational this huge volume of cash or cash equivalent already economic future either at home or abroad while available last November, but at that time, despite that sword hangs over us. the anti-inflationary influence of the Government’s We think that the prospect of removing the threat large budgetary surplus, the amount of liquid funds by peaceful means will be immeasurably enhanced was being rapidly increased as a result of bank the sooner we assert our moral and physical power credit expansion to finance businesses and indi­ to establish the foundations for peace before we are viduals as well as State and local governments. Because of the necessity for protecting the Gov­ * Presented by Marriner S. Eccles before the Joint Committee on the Economic Report on Apr. 13, 1948. ernment’s fiscal and debt management position by 1 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis STATEMENT BEFORE THE JOINT COMMITTEE ON THE ECONOMIC REPORT maintaining an orderly and stable market for Gov­ accorded generally with expectations held at that ernment securities, the Federal Reserve System was time. Fiscal and monetary operations together effec­ then and still is unable to restrain effectively further tively offset factors increasing bank reserves during monetary expansion. The commercial banking sys­ the period, such as the inflow of gold, return of tem held nearly 70 billion dollars of Government currency from circulation and purchase by the securities, which were being converted into addi­ Federal Reserve of Government securities from tional bank reserves through sales to the Federal nonbank investors. During the four-month period, Reserve. In addition, the System was providing December through March, the Federal Reserve pur­ reserves to banks by purchasing Government secu­ chased 8.6 billion dollars of Government securities, rities sold by nonbank investors. Finally, bank largely bonds, and sold in the market 6.3 billion reserves were being substantially augmented by a of securities, chiefly bills and certificates. The Gov­ heavy inflow of gold. ernment retired 3.9 billion dollars of its securities In brief, the banks at that time were in a position held by the Reserve System. The net result of these to supply unlimited amounts of additional credit, operations was to reduce Federal Reserve holdings and in the face of strong demands for additional by 1.6 billion dollars and thus to keep the bank credit from all sources further rapid monetary ex­ reserve positions under pressure during this period. pansion was occurring, intensifying existing infla­ The combined effect on the money supply of tionary pressures. This situation was potentially Treasury and Federal Reserve operations, which explosive because production and employment were were only made possible by the large budgetary close to the maximum then possible. surplus, was strongly anti-inflationary. The money supply was contracted by nearly 4 billion dollars. Changes since November Commercial bank loan expansion was sharply cur­ Last November we expected some abatement of tailed, partly reflecting fiscal and monetary develop­ inflationary pressures in the first quarter of this ments, partly reflecting the effectiveness of warnings year. Such a situation developed. It was recognized by banking supervisors and the success of the that there would be a large volume of funds drawn bankers’ own program of voluntary restraint, and from the banks by business and individuals in order partly reflecting the usual seasonal slack in business to pay taxes which would result in a large cash loan demand during the first quarter. surplus available to reduce the public debt. It was Concurrently with these developments, the world also recognized that the existing and contemplated crop outlook has become more promising and prices program of monetary and credit policy would have of farm products and foods have declined. In addi­ some restrictive effect. The program, which was tion, productive activity generally has held close carried out, included the statement by the bank to maximum levels. These developments have ex­ supervisory agencies, urging the banks to be more erted an anti-inflationary influence. restrictive, the lowering of Federal Reserve support levels for Government securities late in December, Prospective Monetary and Credit Situation a slight rise in rediscount rates early in January, Notwithstanding these salutary developments, it and some increase in reserve requirements for cannot be said that inflationary dangers have been banks in New York and Chicago in February. removed. Farm prices, though lower than they were, The banking fraternity, recognizing the dangers still continue firm, even though at present levels in rapidly expanding bank credit and the need they are much higher relatively than prices of most for restraint, undertook a nation-wide educational other commodities. Current and backlog demands program to bring about restriction by voluntary for many goods continue to be very strong. Prices of means. Finally, there was a widespread belief industrial products, wages, rents, transportation and that the supply of goods in many fields was gradu­ some other services are still advancing. The money ally catching up with deferred demands and that supply, though contracted by an estimated 4 billion favorable crop developments would combine to dollars, remains excessive in relation to total prod­ lessen inflationary pressures by the spring of this uct. Public holdings of cash or cash equivalent years. available for spending are nearly as large as last Monetary developments since November have fall—250 billion dollars compared with 254 billions 2 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis STATEMENT BEFORE THE JOINT COMMITTEE ON THE ECONOMIC REPORT —and continue to be broadly distributed among During the last three quarters of the year, it is holders. Commercial banks, though obliged to sell estimated that the budgetary deficit may exceed some securities to offset shrinking deposits, still hold 3 billion dollars. (In view of large tax receipts in 66 billions of Government securities, which are the first quarter of 1949, however, there may be readily convertible at the banks’ discretion into re­ a small budgetary surplus for the twelve-month serves. Upon these reserves a six-to-one expansion period beginning with April 1 of this year.) It is of bank credit and deposits can be built. To the also estimated that continued sales of savings bonds extent that the monetary gold stock is increased and and other public debt receipts will approximately Government securities are sold to the Federal cover voluntary redemptions of public debt by Reserve by nonbank investors, still more reserves holders of maturing issues. The current deficit will would be created. These additional reserves could need to be financed by drawing on Treasury de­ also support an inflationary six-to-one expansion posits which have been built up by tax receipts of bank credit. during recent weeks, or by borrowing in the market. On the basis of the monetary situation alone, Under these circumstances, there can be no net there would still be a dangerous inflationary po­ retirement of Government securities held by the tential, even if no further impetus were given Federal Reserve System. To the extent that the to inflationary pressures by other forces. However, Treasury may need to borrow new money, it prob­ upward pressures are now in prospect as a result ably will have to be obtained largely from the of several important new factors. One of these is banking system. the tax reduction bill. This bill will add about During the next few months Treasury use of 5 billion dollars to the purchasing power of the accumulated balances with Federal Reserve Banks public and take away a like amount from Federal will add to bank reserves, which will also continue revenues in the next fiscal year. The international to be augmented by the inflow of gold and possibly financial obligations which we have now accepted by further Federal Reserve purchases of Govern­ are another factor likely to add many billions to ment securities from holders wanting funds for Government expenditures in the future. The ex­ other uses. These last two factors may operate for panding program of military preparedness will a long time in the future. If the international out­ further increase the budget burden for next year look does not improve, Government deficits may and future years by still more billions. Stemming continue and even increase substantially, and banks from these developments, on top of existing infla­ may be called upon to purchase additional Govern­ tionary conditions, is a rapidly changing public ment securities. Under these conditions, the Federal psychology with respect to the inflationary outlook. Reserve would find it difficult, and perhaps impos­ Businesses and consumers will be more disposed sible, to sell Government securities in order to ab­ to use existing liquid resources and to expand their sorb bank reserves without seriously upsetting the borrowings to finance current expenditures. The market for such securities. prospect is that the demand for new financing, Prospects are, therefore, that in the future gold aside from Government requirements, will exceed inflow and Federal Reserve purchases of securities the supply of available savings. This would mean in maintaining an orderly market for long-term that many in need of financing will turn to the Treasury bonds will further increase bank reserves. banks for credit. A growth in the total volume of Banks would thus be in a position to expand loans bank credit and money, under such a situation, and investments for private purposes and this would can only add to inflationary pressures. Moreover, mean still more inflationary expansion of the money these pressures would be aggravated if the demands supply. To restrain such potential expansion, the of the defense and foreign aid programs for goods Federal Reserve would have to take action to ab­ which are already in short supply further reduce sorb any excessive volume of reserves. Two types the quantities available to the public. of measures should be adopted: (1) Interest rates The Government’s fiscal operations for the bal­ on short-term Treasury securities and discount rates ance of the calendar year 1948 are likely to show a should be permitted to rise to the extent possible budgetary deficit which would eliminate the only without raising rates on long-term bonds; and remaining important anti-inflationary influence. (2) To the extent that this action is not adequately 3 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis STATEMENT BEFORE THE JOINT COMMITTEE ON THE ECONOMIC REPORT restrictive, the Federal Reserve should have the properly be limited to 25 per cent of aggregate power to increase reserve requirements substan­ demand deposits and 10 per cent of time deposits. tially to cover at least any growth in the total supply To be effective and equitable, it should apply to of reserves. all commercial banks. A detailed description and The first of these measures, which could be analysis of the Board’s special or optional reserve adopted by the Federal Reserve and the Treasury proposal was submitted to the House Committee without any new legislation, would be designed on Banking and Currency and has been published to induce banks to purchase short-term Government in the Federal Reserve Bulletin. securities and to discourage extension of credit to To the extent that it may become necessary to private borrowers. Policies during the past year rely upon the banks for any new Government fi­ have moved in that direction about as fast as is nancing operations, the optional reserve requirement feasible without unduly upsetting the market. would be an especially valuable instrument. And There are limits, however, to such a course. Short­ in the case of large-scale deficit financing, it would term rates probably cannot be raised much more be essential. In such financing, it would be ad­ without unsettling the 2 1/2 per cent rate for long­ visable to make available to banks only short-term term Treasury bonds. Moreover, it is doubtful how securities. Application of the optional reserve re­ much any rate that is feasible will deter banks from quirement would have the effect of immobilizing making loans to private borrowers or purchasing these securities so that they could not be used to higher rate securities. obtain reserves to pyramid new bank assets upon them on a six-to-one ratio. In other words, securities Need for Additional Powers issued in new Treasury financing through banks Accordingly, the Board believes that the System would be tied to the deposits created by their pur­ should be given authority to increase the reserve chase. A ready market for short-term Governments requirements of all commercial banks. For the pres­ would be assured and the Treasury would be helped ent this authority should make it possible for the in successfully carrying out both its refunding oper­ System to require all commercial banks to maintain ations and its deficit financing. At the same time, primary reserves with the Reserve System amount­ the Federal Reserve would be enabled to exercise ing to 10 per cent of aggregate demand deposits and some restraint upon the money market for private 4 per cent of time deposits in addition to present credit. requirements. This would give to the Reserve Sys­ The dominance of public debt in the present tem power to increase bank reserves in the aggre­ credit situation has rendered the System’s tradi­ gate by a maximum of about 12 billion dollars. tional powers generally unusable for purposes of An authority of this amount would enable the restraining further inflationary credit expansion. System to absorb the reserves that are likely to The Reserve Board is not now seeking additional arise from gold acquisitions or from necessary power beyond what it formerly possessed; it is System purchases of Government securities sold merely pointing out that the System has little or by nonbank investors over the next few years. no authority to deal with the credit situation as it In case banks should persistently follow the prac­ currently exists and seems likely to develop. If the tice of selling Government securities to the Federal Congress wants the Federal Reserve System to per­ Reserve in order to expand private credits, not­ form the functions for which it was established, withstanding higher short-term interest rates and the System must have a substitute or at least a increased primary reserve requirements, then the partial substitute for those powers that have be­ System should be granted supplementary authority come unusable. The Board feels that it would be to impose a special reserve requirement along the remiss if it failed to bring this matter to the atten­ lines proposed by the Board last November. This tion of Congress. type of authority may be described as an optional There is no simple way of holding in check bank reserve requirement because it could be held, at the credit expansion in excess of essential public and option of the individual bank, in specified cash private need. The problem should be met in a com­ assets or in short-term Government securities. bination of ways—by general credit controls and The maximum requirement under this plan could in particular areas by selective controls, such, for 4 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis STATEMENT BEFORE THE JOINT COMMITTEE ON THE ECONOMIC REPORT example, as reimposition of consumer instalment thus prevent the serious inflationary effects brought credit regulation, and the continuation of existing about by strikes. margin requirements on stock market credit. Situation Now and in 1940 Other Anti-Inflationary Actions The Board believes that any realistic appraisal The Congress is currently considering continu­ of the economic outlook from the standpoint of ance of easy mortgage credit for housing. Easy monetary and credit policy must take account of mortgage credit is one of the most inflationary the underlying facts of the international situation. factors in the domestic credit picture. At the very During the war there was no doubt about the ulti­ most Government mortgage credit programs at this mate victory. The country looked forward confi­ time should be limited to relatively low cost housing, dently to an era of stability and peace following particularly for rental housing, and should be ac­ the hostilities. Nearly three years after the end of companied by some restriction on other less es­ fighting, however, we seem to be farther away from sential types of housing. The housing shortage can­ these goals than ever. Our national debt still ex­ not be overcome by increasing the competitive ceeds 250 billions, or more than five times the pre­ pressures on scarce supplies of materials and man­ war total. Federal budgets have never fallen under power. They are the limiting factors on the volume 37 billions a year and we are confronted now with of construction. It is one thing to provide easy the prospect of an expanding debt and budgets. credit facilities to encourage special types of resi­ During the war we expected the peace to bring an dential construction activity under a system of allo­ end to these enormous drains on our resources. cations and permits. It is quite another thing to Today, there is no end point in sight. Threaten­ provide such encouragement in a free market al­ ing as the inflationary potential was at the end of ready characterized by heavy accumulated demands the war, it is worse today. When we embarked and by strategic shortages in supply that are likely upon the defense program in 1940 we had a tre­ to be intensified by the defense and world aid mendous slack in the labor force, with nearly programs. 12 millions fewer employed then than now. We had In restraining inflationary pressures under pres­ surpluses of most raw materials, of unused indus­ ent and prospective conditions, monetary and credit trial capacity, of housing, of foodstuffs, and of policies must be combined with fiscal and other countless other things. The impact of our heavy governmental policies. The public should be given armament expenditures was not inflationary so long every possible assurance that the Government will as the total demand on our resources did not exceed protect the purchasing power of the dollar so that capacity. It rapidly became inflationary as civilian the public would be more willing to defer the purchasing power created by the expenditures began satisfaction of wants, particularly for houses and to exceed the available supplies of goods and durable goods. services. Wherever possible, Government expenditures that We held the excess purchasing power fairly well will add to pressures on the labor and capital goods in check while the war was on. We have now seen markets should be deferred, and State and local the consequences of premature removal of the governments should be requested likewise to defer harness of wartime controls. Even the one remain­ nonessential expenditures of this type. There should ing anti-inflationary force, that is, a large budget­ be early action to close loopholes in our tax laws ary surplus used to reduce our money supply, is no and to strengthen the tax collection machinery. longer in prospect. If the stage is reached at which Government ex­ penditures again threaten to create large budgetary Over-All Policy Alternatives deficits, then a reimposition of wartime levels of On the basis of present trends, we believe that taxation and direct economic controls along the the country, sooner or later, has to choose between lines proposed by Mr. Baruch, for example, should three broad alternatives. be undertaken. If young men are to be drafted into First, we can continue on the present course of the military forces, then a way should be found providing essential foreign aid and of carrying out to keep men at work in essential industries, and a military program on a scale of, as yet, undeter- 5 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis STATEMENT BEFORE THE JOINT COMMITTEE ON THE ECONOMIC REPORT mined size and cost, while at the same time we ceptance of such controls as may become necessary have no effective checks on the free play of eco­ to prevent inflation at home while abroad we lay nomic forces. This is the certain road, if followed at the earliest possible moment the foundations for long enough, to a ruinous inflation. Surely no one peace. Surely an informed public would be ready would seriously contend that we can go on adding to accept even burdensome controls and taxation if more and more pressure in the boiler of inflation convinced they are essential to safeguard our econ­ without an ultimate explosion. Those who view us omy against a ruinous inflation, and that there is with a hostile eye no doubt hope that we will an early end point in sight which will enable us wreck our economy on the shoals of inflation. It to maintain our system and our institutions in a would be a cheap way to defeat us. peaceful world. Secondly, the country could be subjected to a To sum up the situation as the Board sees it, we full harness of direct economic controls—for ex­ are faced with the possibility that still further up­ ample, allocations, construction permits, rationing, ward pressures will be added to the tremendous price and wage controls, as well as taxation at inflationary potential generated by war financing higher levels. Without such a harness, amounting and intensified by subsequent developments. We to a regimentation of the economy in peacetime, should do everything possible within the existing there is no sure protection against inflationary dan­ authority of the Government to moderate and gers that may lie ahead. They cannot be success­ counteract these forces. Federal, State and local fully combated by any single means or on any governments should practice the strictest economy single front. There is no power that the Board now and defer all public works and similar expenditures possesses or that the Congress could give us in the that can be postponed until there is a surplus of monetary and credit field that would be adequately manpower and materials instead of the shortages effective by itself. that now exist. Every effort should be made not Beyond that, we must ask ourselves whether the only to preach but to practice economy and savings public would be willing in peacetime to submit to at this time. The need still is urgent to spend less the sacrifices and rigid restraints of a wartime and save more—to invest in Government Savings economy. If our preparedness program calls for a Bonds. Every assurance should be given that the military draft upon our young men, should it not purchasing power of these savings will be protected. call also for control of the profits arising from that So far as the monetary and credit field is con­ program? cerned, we have tried to make clear that action We may well ask for how many years must we on these fronts alone cannot guarantee stability. maintain enormous and probably expanding mili­ Nevertheless, we believe that the Reserve System tary expenditures. The question is, how long, to should be armed with requisite powers, first to what end, and at what consequences to our econ­ increase basic reserve requirements of all com­ omy? We do not have the inexhaustible supplies of mercial banks and, later on, if the situation requires manpower and resources to support indefinitely, it, to provide that all such banks hold an additional with no end point in sight, programs of the magni­ special reserve. Both of these would be protective tude which we now are shouldering or contemplat­ measures. The first could be used to offset gold ing. We cannot go on year after year bearing these acquisitions and purchases of Government securi­ crushing costs without jeopardizing what we seek ties by the Federal Reserve, and thereby restrict to save. If we were confident of the early establish­ continued expansion of our already excessive money ment of peace, we could tolerate a tightly controlled supply. The second would be essential in case banks economy. We believe that the time element is the embark upon an inflationary credit expansion very essence of this grave problem. through the sale of Government securities to the Our nation sought neither territory nor repara­ Federal Reserve or to assist the Government in tions in either World War. We seek neither now. case of large-scale deficit financing. We ask only for the earliest possible establishment We believe it is the part of prudence to recognize of the foundations for enduring peace. To that clearly that the underlying cause of the continuing end, our third and best course may be to choose inflationary dangers arises from the disappointment a combination of alternatives; that is to say, ac­ of our great hopes for the early establishment of 6 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis STATEMENT BEFORE THE JOINT COMMITTEE ON THE ECONOMIC REPORT world peace. Surely we must summon all our hu­ We are aware that the questions of policy de­ man and material resources needed to assure that signed to achieve the cardinal purpose of assuring peace. If necessary to protect our economy at home an enduring world peace are outside the domain of so that we shall not lose by inflation what we seek those charged with responsibilities in the monetary most of all to save, we should be willing and pre­ and credit field, but we feel that such responsibilities pared to reimpose to whatever extent the situation have to be exercised in the light of the burdens demands a harness of controls, including higher which the economy must bear. The earliest attain­ levels of taxation. Nobody wants such regimentation able settlement of the issues that now stand in the but in the hard choices before us it is infinitely way of lasting peace offers the best hope for the preferable to economic chaos and possible collapse preservation of our institutions and our freedoms. of our system, to which all free men look for de­ Meanwhile, they must not be jeopardized either by liverance from the evils of war and misery that uncontrolled inflation or long continued regimen­ feed on economic distress. tation at home. 7 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Marriner S. Eccles (1948, April 12). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19480413_eccles

@misc{wtfs_speech_19480413_eccles,
  author = {Marriner S. Eccles},
  title = {Speech},
  year = {1948},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19480413_eccles},
  note = {Retrieved via When the Fed Speaks corpus}
}