Speech

Speech delivered over Kadio Station W-I-N-X, Washington,'D. C. January 6, 19 A9 WHAT LIES AHEAD No one is now in a position to state with certainty just what lies ahead. It depends first on what the consumer public and business firms do, which is always difficult to forecast with any great degree of ac- curacy. It depends second, on what the Government does —• that is, on ^e size of Government spending, particularly for-foreign aid and de- fense — which the present unsettled state of international relations ®akes so uncertain. Finally, it depends on the methods used by the Gov- ernment to finance the spending which is actually undertaken. • i, . So far as the buying public and business firms are concerned, there has recently been evidence that the pressure of inflation may be subsid- es* at least temporarily. But this is not the first time things, have looked that way since the war; and so, to judge the current situation properly we must place it in the setting of the entire postwar period. ..o-f Inflationary Pressures We all know that the economic developments that we have experienced ^n the postwar period to date have been an outgrowth of the war itself..; First, while the war lasted, it absorbed about 40 per cent of our pro- Ruction, and as a result the things we were accustomed to in civilian life became either scarce or not obtainable. Everyone had to do without.' had to postpone buying till the war was over, had to await the return of Peace and prosperity. Second, in addition, the war left us with heavy - Responsibilities for relief and reconstruction abroad, placing a furthei heavy demand on our factories, on our farms, end on our other productive resources. ' ' And, finally, the method of getting the money to pay the cost of ". the war has also been an important factor in the postwar inflation, j^ess than half the expenditure for war goods and services was financed by the noninflationary method namely by taxation. The remainder wa.s fi- nanced through Government borrowing which is inflationary. This heavy Reliance on Government borrowing meant that when the war ended .people ^d available for spending both their high current incomes and also a ^ |arge accumulation of savings put away during the war. Besides that,"; ey had exceptionally easy access to credit. Consequently, people had a tremendous, long-deferred demand for goods for both personal and busi- £ess uses'; and to. back up that demand they had more dollars than they' nad ever had before. , You can see, then, that the result has been that the public has en trying to buy things faster than they could be produced, The.de- ^and was greater than the supply. Therefore, prices have risen steadily. rising prices produce greater incomes, which in turn produce still greater demand, which in turn produces still higher prices. Thus the " .. Vlci°us spiral goes round and round and up and up. And here, in brief, the results: Wholesale prices have increased about 110 per cent, since 1939. consumer prices 73 per cent; and personal income' increased aj-most 200 per cent. Domestic I ^^International Situation . ," Now it is important to note that the problem of maintaining price stability has been considerably aggravated by a disturbed international situation. The end of Vorid i/ar II meant the termination of hostilities but not the re suction of peace, except peace of a very uneasy kind. ' e have not been able to ignore"the possibility that an international crisis might develop at any time. • : iis e result, expenditures for national defense sre higher than they ever were in peacetime and ere going still higher, ^dded to these are the country's vast foreign aid programs for relief and reconstruction, which reflect not only humanitarian motives but also a desire for secur- ity. We have been sending abroad more goods than we have been receiving, and this excess is financed largely by Government aid. Though this ex- cess of what we send out of the United states over what we receive from abroad has declined from its peak .•reached in the first half of 1947, it is none the loss still very great. Pnttt. interruptions in the Course of InfLiUon However, the postwar inflation has not followed an entirely uninter- rupted course. In the period from March to June last year, and again m the first two months of this year there was evidence, that tilings were getting better. But each time it turned out to be- only a temporary lull, after which'the inflation resumed , its progress, carrying.-prices to st.,.u higher levels. Recent Indications of -Abatement And now again the pressure of inflation seems to be subsiding, both retail .and wholesale aric.es on the average are somewhat lower than they were at the peak last August. Second, the supply of many gooes is now in better balance with demand at current prices than at tny time s^ before the war. Third, the big harvest-of.this year haa resulted in re- duced prices- of such basic crops as wheat, com, and cotton, vmch are now down close to the levels supported by our Government; also imports ••is the fact that the agricultural situation abroad has also improveo.. Fourth, the number of new houses and apartments started each montn has been declining since may of this year, in contrast to the pattern of. iv* wheri the number of new units started kept on rising through the summer and early fall. Fifth, department store sales in che pre-holiday oerv- were below-those of 1947 until well into December; while for November and December as a whole sales only about equalled those of last year, despite higher personal incomes. Sixth, the figures show that for soa> time now people seem to have been saving larger portions ot their curr incomes after taxes, and this of itself may reduce the demand for and the upward pressure on prices.• Further, and finally, the use oi cu snmer credit seems to have moderated somewhat; in October installment credit increased nuch less than a year ago, and also there has been a . ticeable slacKoning in the volume of additional bank credit extended ^ all types of borrowers. filaments (?f Continued Strength But, mind you, this is not the whole story, because underlying ^ct° crnni? vhlch a considerable expansion is possible. In the first place, • s n I? ^ everyoody is employed and wage increases are continuing to inJZ P- f sustains Peonies and purchasing power. Also, not only bus- amlf f,but pe°pie generally have large bank deposits and hold large ThpcTl °f Oovemnient securities which they can readily turn into cash. th, UlCtors form a stronS base f°r continued high levels of buying by consumer public. ^ e y fant In thG Se°0nd plaCe' larg9 Pr°graffis still remain for expansion of othr ! and manufacturing equipment, for railroads, utilities, and reco ii1Stries; also the Profits of business corporations are stiU at commn'!-teVelS' And? what's more> shortages persist for many strategic *modities, particularly metals and metal products; and these shortages BtePi ?g ^eflected in rising Prices in many specific areas, such as iron, lead, zinc, farm machinery, and automobiles. incvJ? third place> State and local governments, which have rapidly u r^ ir spendin- throughout the postwar period, must still meet fc^-nt needs for schools, other public buildings, and roads. termifnd f:!fially» perhaps the factor of greatest single importance in de- io , ng thG course that our domestic economy will travel from here on t denti 31ZS °f the 1?ederal Government's expenditures. Even if the Presi- budLf recftly recommended 15 billion dollar ceiling on the military Julviotn lollowed> Federal expenditures for the next fiscal year, from ^ar pi June 1950 are sti11 lively to be higher than for the current greatl 11 Xt 1S necessai^ to enlarge the military budget to a figure seem t ln excess of this amcun"^ as informed and able military leaders fXati reC0Im;iend> ^cording to published reports, then further price in- iiV u Mb 0 U nd to follow unless we find some positive means of prevent- critic n Wl11 we haYG to do? The answer is clear. The supply of ^'ill h V:np°rtant materials vil1 have to be tightly allocated. Taxes icit ,Q bS raised in order t0 avoid an inflationary Government def- avoid u lf Ve fail t0 raise taxes sufficiently, we shall be able to rect substantial Price increases only by extensive price and other di- controls. <*o:n J 13 clear> then> that the Problem of maintaining stability in our e s iW Qconom->r is greatly dependent on the state of the international e>'De r n* In the absence of ^rther substantial increases in defense ttight > S' therG W0Uld be Some Srounds for believing that stability the • achieved through successive readjustments in the supply and in do mPriCe °f one commodity after another. But if defense expenditures *lav rapidly> then this certainly means that we can avoid further in- ahd °nly if We have the courage to adopt vigorous countermeasures n® wisdom to adopt them before it is too late. the .Tberefore> what lies ahead, speaking broadly, depends largely on international situation abroad and our collective action at home.

M.S. Szymczak (1949, January 5). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19490106_szymczak

@misc{wtfs_speech_19490106_szymczak,
  author = {M.S. Szymczak},
  title = {Speech},
  year = {1949},
  month = {Jan},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19490106_szymczak},
  note = {Retrieved via When the Fed Speaks corpus}
}