more than has already been done. Should the proposed change in the act be enacted (H. R. 3871 and S. 1397, 82d Cong., 1st sess., sec. 106), it would be possible to restrain the use of real estate credit in the purchase of existing structures.

(c) Section 601 of the Defense Production Act of 1950 authorizes the Board of Governors of the Federal Reserve System to exercise consumer credit controls in accordance with Executive Order 8843 (August 9, 1941). Regulation W of the Board of Governors restricts the use of consumer credit; the use of such credit could be tightened substantially beyond the degree currently permitted.

3. Proposed legislation

(a) As noted above, section 106 of H. R. 3871 and S. 1397 would permit restrictions on the use of real-estate credit in connection with the purchase of existing structures.

(b) Section 611 of H. R. 3871 and S. 1397 would permit the President, whenever he determines that speculative trading on boards of trade causes or threatens to cause unwarranted changes in the price of any commodity, to prescribe rules governing the margin to be required with respect to speculative purchases or sales for future delivery. The provisions of section 21 of the Securities and Exchange Act of 1934 are made applicable in administering and enforcing this provision.

(c) Reserve requirements of commercial banks have been raised virtually to the limits of existing authority.

It is recommended that, as an emergency measure, legislation be sought to empower the Reserve authorities for a limited period to impose additional reserve requirements, either increasing the authorized percentages or in some other appropriate way that will have a minimum adverse effect on the Government security market. The refunding and new issue operations of the Treasury in the last half of this calendar year alone amount to in the neighborhood of $50 billion. Under these circumstances, it is imperative that any additional requirements for bank reserves imposed by the Federal Reserve should be such that they do not have a disruptive effect on the market for Government securities. In view of the emergency such requirements should apply to all insured banks. The feasibility of permitting nonmember insured banks to hold the additional reserves in balances with their correspondents should be explored. The task force on supplementary reserve requirements has considered various plans for reenforcing existing bank reserve requirements and has reported that two plans offer the greatest promise, namely, (1) the loan expansion reserve plan and (2) the primary (securities feature) reserve plan, which provides for additional required reserves and gives a bank, under conditions to be prescribed by regulation, the option of holding the additional reserves in the form of cash or Government securities.

The provisions of these plans may be summarized as follows:

Loan expansion reserves.-Every insured bank receiving demand deposits, other than a mutual savings bank, would be required to maintain additional reserves equal to a percentage, to be prescribed by the Board of Governors of the Federal Reserve System, of that part of its loans and investments in excess of a certain prescribed base.

In computing loans and investments, all assets of the bank would be included except (1) cash, (2) balances due from banks, (3) direct obligations of the United States, and (4) such special types of assets as the Board might prescribe from time to time.

Primary reserves and Government securities.-Either in substitution for or in addition to the requirement discussed above, an insured bank receiving demand deposits, other than a mutual savings bank, might be required to maintain additional reserves equal to a limited percentage of its demand deposits, in addition to the deposit balances now required.

Such percentages could be different with respect to banks in central reserve cities, reserve cities, or elsewhere.

In lieu of such a deposit balance, a bank under certain conditions, could count Government securities either at an amount equal to the dollar amount of the deposit balance which the securities replace or at some lesser figure. For example, the Board might prescribe that, for reserve purposes, $1.50 or $2 or $2.50 in securities might be equivalent to $1 of cash.

Within a few days the Board of Governors will ask the Congress to consider definitive legislation providing for supplementary requirements,

IV. CONCLUSIONS AND RECOMMENDATIONS

Conclusions

The measures thus far adopted make up the beginning of an effective program of credit restraint. There is, however, no assurance that these measures will prove sufficient to deal with the inflationary situation that may be anticipated as the national security program expands. Additional measures are needed to contribute to the anti-inflationary program and at the same time maintain stability in the market for Government securities.

In general, the additional measures which should be taken are: The extension and reinforcement of the voluntary credit restraint program, whose work this committee wholeheartedly endorses; the enactment of legislation to permit continuation and some broadening of selective credit controls; an emergency increase in the authority of the Board of Governors to require, in case of need, supplementary reserves for all insured banks. With a view to the possibility that all other anti-inflationary measures fail, or that needed powers may not be obtained in time, plans should be readied for the imposition of mandatory limits on total credits extended by banks and other financial institutions (excepting essential loans) if, in an extraordinary emergency, such controls should become necessary.

Recommendations

1. That section 708 of the Defense Production Act of 1950, which provides the legislative basis for the voluntary credit restraint program, be extended.

2. That close liaison be maintained between the Office of Defense Mobilization and the Voluntary Credit Restraint Committee. The Voluntary Credit Restraint Committee cannot exercise the most informed judgment regarding lending policy unless it is guided by up-to-date criteria of the shifting requirements of the defense program.

3. That the cooperation of such bodies as the Council of State Governors and the United States Conference of Mayors be enlisted by the Voluntary Credit Restraint Committee to help postpone issues of State and municipal securities to finance deferrable expenditures.

4. That the appropriate Government agency consider whether financing institutions, not now included in the voluntary credit restraint program, be included in it.

5. That Government loan and loan guaranty agencies should follow policies consistent with those of comparable private lending institutions as set forth in the statement of principles of the national voluntary credit restraint program. If the policies of the two groups of lenders are not coordinated the voluntary program might be undermined. This subject is more fully treated in the forthcoming report of the Director of the Budget, the Director of Defense Mobilization, and the Chairman of the Council of Economic Advisers on the policies of Government lending agencies that was requested by the President to complement the work of the present committee.

6. That section 601 of the Defense Production Act of 1950, which provides authority for regulation W of the Board of Governors restricting the use of consumer credit, be extended.

7. The section 602 of the Defense Production Act of 1950, which furnishes the legislative basis for regulation X of the Board of Governors regulating the extension of real-estate construction credit, be extended and that the proposed change in the act (sec. 106, H. R. 3871 and S. 1397, 82d Cong., 1st sess.), which would make it possible to restrain the use of of real-estate credit in the purchase of existing structures, be enacted.

8. That section 611 of H. R. 3871 and S. 1397 be enacted, which would permit the President, whenever he determines that speculative trading on boards of trade causes or threatens to cause unwarranted changes in the price of any commodity, to prescribe rules governing the margin to be required with respect to speculative purchases or sales for future delivery.

9. That the Congress be urged to act promptly and favorably on the proposals for emergency additional bank reserve requirements, when these are advanced by the Board of Governors of the Federal Reserve System.

10. That mandatory control of credit be imposed only if the problem to be solved is most serious, and only after a demonstration that more moderate measures are too slow in their impact, or too uncertain in operation, or are otherwise inadequate. While we do not propose the imposition of such man

datory controls at this time, detailed plans for their imposition, in the unfortunate event they become necessary, should be prepared.

11. We have pointed out in this report that credit controls must play an important role in a program of economic stabilization that is in accord with the necessities of the defense program and the Government's financial requirements. We wish to point out with equal emphasis that neither selective nor general credit controls can, in themselves, assure such economic stabilization. Economic stabilization requires, first and most importantly, as pay-as-we-go tax program. Any failure in this respect aggravates immeasurably the problems of economic stabilization. Even with adequate fiscal and credit policies there still remain inflationary pressures during the expansion of the security program. During that period, therefore, direct controls, such as allocations and price and wage controls, are essential. Only in a rounded program in which each control measure contributes its share can we accomplish the purpose of mobilization and stabilization.

C. E. WILSON,

The Director of Defense Mobilization, Chairman.

JOHN W. SNYDER,

The Secretary of the Treasury.
WM. MCC. MARTIN, Jr.,

The Chairman of the Board of Governnors of the Federal Reserve System.
LEON H. KEYSERLING,

The Chairman of the Council of Economic Advisers.

(Whereupon, at 12: 15 p. m., the hearing was recessed until 2:30

p. m. of the same day.)

DEFENSE PRODUCTION ACT AMENDMENTS OF 1951

FRIDAY, MAY 11, 1951

EXECUTIVE SESSION

(Cleared for publication by the Committee and the Department

of State)

UNITED STATES SENATE,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C.

The committee met in executive session at 2:30 p. m. in the committee room, Senate Office Building, Senator Burnet R. Maybank (chairman) presiding.

Present: Senators Maybank (chairman), Fulbright, Robertson, Sparkman, Frear, Benton, Bricker, and Schoeppel.

Also present: Harold F. Linder, Deputy Assistant Secretary of State; Willis Coburn Armstrong, special assistant, Office of Materials Policy, Department of State; Robert Bruce Wright, Assistant Chief, Economic Defense Staff, Department of State; Florence Kirlin, Special Assistant to the Assistant Secretary of State for Congressional Relations; and Matthew Hale, assistant solicitor, Department of Commerce (on loan to Office of Defense Mobilization).

The CHAIRMAN. The committee will come to order. Off the record. (Discussion was had outside the record.)

The CHAIRMAN. What is the desire of the Senators as to procedure? We could have our witness, Mr. Linder, and those accompanying him, simply answer the questions I know we all have in mind; or perhaps he has a statement he would like to make to us, and then answer questions. We very much want the information that the State Department can give us on this export-controls matter, and the only question now is as to the procedure.

Mr. LINDER. I think I would prefer, Mr. Chairman, if it is agreeable to you and the Senators, to read a statement I have here, which will not take more than 15 minutes. The statement is an endeavor on our part to present the situation in regard to trade with the Communist bloc.

The CHAIRMAN. Yes; you may proceed with your statement. But before you begin would you mind being interrupted as you go along if the Senators have questions at particular points?

Mr. LINDER. Not at all, sir.

The CHAIRMAN. We will be very glad indeed to have you go on with your statement, then, sir.

Mr. LINDER. The purpose of my statement today is to outline briefly what the United States Government has been doing and proposes