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passed in 1950 with a request that it be extended to June 30, 1953, together with certain amendments. The hope is expressed by those who administer this program that by that time we should be in reasonably strong shape, and that, of course, it will require some sacrifices and some surrender of freedom.

In view of that time factor, would you say that the initiation of the St. Lawrence waterway project at this time, which will take a long time to complete before it shows any useful results, would be justified now?

Mr. KEYSERLING. Senator, I again say that I genuinely don't want to duck any question, but that I cannot, in the nature of my work and in the nature of the service that I am trying to perform, get down to a particular judgment on each project. I want to be concrete. I don't want to be vague and general. But I think there is a vast difference between the job that the Congress itself gave me in enacting the statute under which I serve, and the job of passing upon the relative need of individual projects.

I think we can analyze the situation, and provide and I hope we are providing-standards and criteria which have great significance for general policy. But when it comes to the matter of whether, considering the wisest use of our resources, we should build a seaway here and a channel there and a dam here, or a housing project there, I don't think that our Council is in a position to do that detailed job on the multitude of problems that arise.

Senator BENTON. I have just been sent for; they are very eager to get a quorum on the Senate floor.

Senator DIRKSEN. I want to go in and vote, too, but I want to ask one more question.

Mr. KEYSERLING. Subject to that reservation, my general view would be that the development of the St. Lawrence project falls within the general criteria that I have stated, that it is immensely important to develop our productive resources. That particular development is closely tied in with the ore problem that was referred to earlier in connection with steel. My judgment would be that that is a project which we ought to try to include within our program.

Senator BENTON. May I say to the Senator from Illinois that I don't know about that word "now" that you used. It seems to me the St. Lawrence waterway project should be kept as a high-priority project. Whether it should be started now as a subject on which I don't have the knowledge to express a dogmatic opinion. I think it should be kept high up.

Senator DIRKSEN. My attention is called to the fact that in the Economic Report to the President, January, 1951, there is this statement: "The St. Lawrence Seaway and Power Project should be started immediately.”

Mr. KEYSERLING. Of course, as I have said in answering your question, while I don't have any acute judgment on that, my view on balance is that this project does fall within the criteria that I have stated. I want to say one other thing on that: that I think it would be most disastrous to apply as the sole test to a project whether it can be completed within a reasonably short period of time. I think we have a lot of developmental problems in this country which by definition take a long time to do, but that, if they are things that we need, the fact that

they take a long time to do may be a reason why we should get going or should have gotten going sooner.

Senator DIRKSEN. One more question: Mr. Keyserling, we haven't gotten very deep into the wage discussion, but I am very curious about what the effect of the escalator clause in these industrial contracts is going to be on the wage-stabilization program.

There are probably 1,000,000 employees who are covered by escalator clauses so that, when the cost of living goes up, automatically there must be a wage increase.

Now then, after we have certain ceilings set and suddenly the ceiling is punctured by contractual obligations, what would be the impact upon others who are seeking increases and who are reminded that à ceiling exists?

Has that matter been discussed or brought to your attention?

Mr. KEYSERLING. Oh, very definitely. I don't say that anybody has the right answer. I can give you my views on it; my views on it are that the degree of tightness which is imposed in a control program depends on your whole situation. In other words, you would get tighter in an all-out war than you do now, not because you are derelict now but because it is a different situation.

In the current situation, if we are going to be faced with this burden for a number of years, which is the most hopeful estimate, and if we are going to get a system of controls which will be workable, and moderate, and tolerated by the people and supported by the people, then I do not think we have yet reached the stage where, as a matter of national policy, we can say to 35 million working families, "We are going to hold your wages even if we cannot be successful and competent in holding the cost of living." I just do not think that would be a practical approach, and I think practical considerations enter into this whole business of what is a successful policy.

Now, that points up the extreme importance of tight and stiff industrial price control, because we live in a basically industrial economy. That is the heart and core of the thing, which conditions large other parts of it. I think if we move as rapidly as we can on a stiff, tight, but fair industrial price-control policy, we will eliminate very important factors that enter into the wage picture. The first of the things that enters very much into the wage picture is the profit picture. Now I am for profits. They are a necessary part of our economy. But, whatever the economics of it may be, you cannot undertake effective wage stabilization on the kind of profit showing which is unfolding itself now, and I do not say that critically of anybody. You just cannot have effective wage stabilization, and certainly not a wagestabilization program which did not even allow for changes in the cost of living, when your level of profits is moving in the way that it is now moving; and I think business would recognize that. You can do part of the job with taxes, but I think you have to do part of the job with a good, stiff industrial price-control program which will not cut excessively into profits ample for incentive, reward, and expansion. If you have to get a particularly high rate of expansion in particular areas, then the Congress has provided certain specific devices, such as amortization and others, for providing larger incentives in those particular areas than you can afford over the economy generally. Tight price control is basic to wage stabilization.

One of the factors inciting wage increases is high profits. The other is the change in the cost of living; and if you stabilize prices so that you get reasonable success on the cost-of-living front, then, as I have said, I am for a wage policy which, aside from the cost-ofliving adjustments, and the inequities, says that in general increases in wage rates at this time are not consistent with a sound stabilization program. But I do not think you can successfully, through mandate in this kind of situation, prevent wage adjustments related to the cost of living if the Government is trying but not succeeding in holding the cost of living. I think it is fundamentally inconsistent.

Senator SCHOEPPEL. If they cannot do that, they should not be expected in the agricultural to accept a ceiling-freezing parity. Those things are interrelated. If you permit flexibility in one phase of the economy, such as wage adjustment, to be fair and equitable, you would have to take another look at the freezing or putting ceilings or roll-backs on agricultural products.

Mr. KEYSERLING. My extemporaneous testimony here toda with the charts has more than covered the prepared statement I sent up yesterday. Therefore to insert that prepared statement would be redundant and wasteful.

Senator BENTON. I am sure I speak for the committee in saying that this has been an instructive afternoon.

The CHAIRMAN. We will recess now until Friday at 10:30.

(Whereupon, at 5:20 p. m., the committee recessed until Friday, May 11, 1951, at 10:30 a. m.)

DEFENSE PRODUCTION ACT AMENDMENTS OF 1951

FRIDAY, MAY 11, 1951

UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C. The committee met, pursuant to adjournment, at 10:30 a. m., in room 301, Senate Office Building, Senator Burnet R. Maybank (chairman) presiding.

Present: Senators Maybank, Robertson, Moody, Bricker, Schoeppel, and Dirksen.

The CHAIRMAN. The committee will come to order.

Without objection, I will make a part of the record the chairman's statement, unless the chairman desires to read the whole statement, or would you rather just high light it, Mr. Martin? STATEMENT OF WILLIAM MCHESNEY MARTIN, JR., CHAIRMAN

OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM; ACCOMPANIED BY RALPH A. YOUNG, DIRECTOR OF RESEARCH AND STATISTICS; GEORGE B. VEST, GENERAL COUNSEL, LEGAL DIVISION; GUY E. NOYES, DIRECTOR, DIVISION OF SELECTIVE CREDIT REGULATIONS; AND FREDERIC SOLOMON, ASSISTANT GENERAL COUNSEL, LEGAL DIVISION

Mr. MARTIN. I will do whichever is most satisfactory to you.
The CHAIRMAN. Senator, what is your wish?

Senator BRICKER. It does not make a bit of difference. I read it last night.

The CHAIRMAN. Suppose we make it a part of the record, and you may high light it for us, because I want to ask a few questions that may take a little while.

(The prepared statement of Mr. Martin, follows) : STATEMENT OF WILLIAM McCHESNEY MARTIN, JR., CHAIRMAN OF THE BOARD

OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. Chairman and members of this committee, I appreciate this opportunity to present to you the views of the Board of Governors of the Federal Reserve System with respect to the responsibilities placed upon or delegated to the Federal Reserve System under the Defense Production Act of 1950. The Board is strongly of the opinion that these provisions of the act should be continued.

As has been repeatedly emphasized before this and other committees of the Congress primary reliance must be placed on fiscal, credit, and monetary measures in combating inflationary forces inevitably generated by the expanding defense effort. It is hardly necessary to emphasize that the forces creating upward pressures on prices are likely to continue dominant in the economy even though these pressures may appear temporarily to have been moderated. Nor is it

necessary to recount again the many circumstances and factors which have combined to produce grave inflationary dangers, or the preventive and precautionary steps already taken to safeguard the economy. On behalf of the Board I therefore shall address myself particularly to those provisions of the act with which we have been directly concerned. These provisions deal with certain supplementary rather than primary credit restrictions as well as with the so-called V-loan program to aid the defense effort.

It is important to emphasize that the marked advances in prices and the exceptionally large increase in bank and other credit that have taken place up to the present time reflect mainly expansion in private expenditures. The full effects of expansion of defense activities are still to be felt. While expenditures for defense purposes have doubled since last summer as yet they account for only about 10 percent of total output. Moreover, they have thus far been met out of growing Government revenues and no new Federal borrowing has been needed. However, Federal expenditures for defense and related activities are scheduled to rise sharply and may account for as much as 20 percent of total output within a year. This is the overriding consideration for national stabilization policy. If inflationary trends are to be held in check, public policy will need to limit private spending, especially such spending as is financed by borrowing or by the use of past savings. This is a time for saving, not spending.

ROLE OF CREDIT RESTRAINT Credit expansion has financed a substantial share of the increased consumer and business spending since June 1950. Without the restraints provided by the Defense Production Act the expansion in credit and upward price pressures undoubtedly would have been even greater. From the end of June 1950 to the end of March outstanding loans and holdings of corporate and municipal securities by all banks increased by over $12 billion. This increase was almost as much as occurred in the 2 years 1947 and 1948 together and these were both years of rapid credit expansion and inflationary trends. Credit extended by other lenders to businesses, municipalities, and consumers also was in unprecedented volume.

Such credit was supplemented by drawing on liquid asset holdings. Between the end of June 1950 and the end of March of this year, redemptions of savings bonds exceeded cash purchases by over a billion dollars, and savings accounts were reduced by close to three-quarters of a billion dollars. Reflecting the demand for and use of ready cash, demand deposits of businesses and individuals increased by over $7 billion in the last half of 1950 and showed only a moderate seasonal decline in the first quarter of 1951. The turn-over or rate of use of these deposit balances rose sharply.

It has become increasingly evident during recent weeks that this acceleration of inflationary tendencies has been checked, temporarily at least. The prospects for getting inflation under control are now better than at any time since Korea. To succeed, however, will require full and continued use of all of the credit measures now up for renewal in the Defense Production Act. It would be extremely unfortunate if any of the means we have been using to stem the inflationary tide should be allowed to lapse at this critical moment when they are achieving a considerable measure of success.

There are tangible evidences that the availability of bank reserves has been reduced, that banks have become more restrictive in their lending policies, and that the over-all expansion of bank credit has definitely slackened despite acceleration of lending to finance defense production. Further evidences of the effects of the various measures of monetary and credit restraint may be seen in the markets for consumer credit, mortgages, and new capital issues. Consumer installment credit has ceased to grow. New commitments by insurance companies and savings banks to purchase mortgages have been reduced. Plans for issuance of some new securities have been withdrawn or postponed and others have had to be revised, although the total volume of new issues has continued very large.

The record of the past year has clearly demonstrated that selective measures of credit restraint are an effective and necessary supplement to general credit measures and at the same time are an important line of defense for the Government securities market.

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