MONETARY POLICY AND THE MANAGEMENT OF THE PUBLIC DEBT FRIDAY, MARCH 28, 1952 CONGRESS OF THE UNITED STATES, AND DEBT MANAGEMENT OF THE JOINT COMMITTEE ON THE ECONOMIC REPORT, Washington, D. C. The subcommittee met, pursuant to recess, at 10 a. m., in room P-36, United States Capitol Building, Representative Wright Patman (chairman of the subcommittee) presiding. Present: Representatives Patman, Bolling, and Wolcott. Also present: Grover W. Ensley, staff director; Henry Murphy, economist for the subcommittee; and John W. Lehman, clerk to the full committee. Representative PATMAN. The committee will please come to order. We have two witnesses this morning, Mr. H. Christian Sonne and the Comptroller of the Currency, Mr. Delano. The committee will meet Monday, March 31, 1952, in room 224, Senate Office Building, and then Tuesday we have an executive session for the purpose of discussing what we have done, and then trying to agree on a program for the future. We are not expecting any more hearings, but they are possible. Mr. Sonne, you have a prepared statement, I notice. Would you like to read your statement or would you like to answer questions? We would do whatever you would like to be done. You could read your statement or we can ask questions or any way you want. Mr. SONNE. I can read it, and you may interrupt me whenever you like. Representative PATMAN. Proceed, sir. STATEMENT OF H. CHRISTIAN SONNE, CHAIRMAN, BOARD OF TRUSTEES, NATIONAL PLANNING ASSOCIATION Mr. SONNE. My name is H. Christian Sonne. I am chairman of the board of Amsinck, Sonne & Co., 96 Wall Street, New York 5, N. Y. I am also chairman of the board of trustees of the National Planning Association, 800 Twenty-first Street NW., Washington, D. C. The National Planning Association is a nonprofit, nonpolitical association which is devoted to planning for democracy. It is our conviction that American businessmen, farmers, workers, and Government must plan to avoid a planned economy. We have on the board of trustees a number of men who, I believe, represent our various walks of life 97308-52- -54 in a very significant manner. The views I am presenting today are my own and are not necessarily shared by my colleagues in the NPA. Through my connection with NPA and also as a businessman in this country for 35 years, I have had occasion to concern myself repeatedly with questions of fiscal and monetary policies. I welcome the broad-gaged examination of the problem, undertaken by this subcommittee. The material published in the background volumes in itself is a treasure of information and is very valuable for every student of the subject. At the request of the Joint Committee on the Economic Report. the NPA sponsored a meeting on fiscal policy of a group of prominent economists from all over the country in September 1949. In October 1951 we had a similar meeting on monetary policy. Each of these meetings resulted in a statement on which the majority of the participants agreed. I was pleased to note that the statement resulting from NPA's October 1951 conference is included in one of the background volumes published by this subcommittee. We picked fiscal policy as the first subject for discussion because that topic was more acute at the time. Also we believed that, in spite of the great variety of opinion prevailing on fiscal policy, an attempt should be made to reach an agreement on such a vital issue among economists belonging to different schools of thought and representing great differences in background. The conclusions of that conference were presented to the Subcommittee on Monetary, Credit, and Fiscal Policies under the chairmanship of Senator Douglas in September 1949. I was pleased, and he indicated that he was surprised, to see a report that reflected such a high degree of agreement on a vital issue. We organized a similar meeting on monetary policy subsequent to that on fiscal policy because the right monetary policy can do a lot in reenforcing the right fiscal policy, and the wrong monetary policy can make the task of fiscal policy much harder. On the other hand, I would not attribute to monetary policy the same significance which I attribute to fiscal policy. It is a much finer tool which will be most effective if used to complement and supplement other policy devices. The monetary policy is such a fine tool that it can only iron out small movements in the market, but cannot by itself have much effect on big movements. At a time when we hear so much about deflation and inflation, there is one thing of which I am certain, and that is that there has been a great deal of inflation in the appraisal of what monetary policy can accomplish. I feel there is a great deal of inflation in the recent debate on monetary policy. We have been told that, with a different credit policy but other factors remaining the same, we could have avoided the postKorean inflation. We have also been told that the introduction of flexibility into Federal Reserve policy or a rise in interest rates or a drop in the price of Government securities would have created chaos and a panic in the money market. I believe both these claims and fears are exaggerations and need a great deal of deflation. What is required, in my judgment, is that we take a much less dogmatic attitude and more businesslike approach as to what monetary policy can do and cannot do, and then sit down and figure out how we can make the best out of monetary policy. Our efforts to reach agreement at the economists' conference on monetary policy-I think you were there, Mr. Ensley-were less successful than in the field of fiscal policy. Our statement had to be rather general in order to achieve consensus. Nevertheless, there remained a greater number of dissents than we had on fiscal policy. I believe that was natural and resulted, in part, from unreconciled viewpoints in economic theory. To show you what I have in mind, I may mention the question of interest rates. Some hold the view that interest rates should be kept low under all circumstances because low interest rates are needed both to permit financing of the Government debt at low costs and to promote economic expansion. Others say that interest rates in a period of actual or threatening inflationary pressure should be high to discourage less essential business expansion and the holding of large stocks of commodities and merchandise. I personally cannot agree with either of these propositions. First of all, I believe that in a free society a government can, in the long run, no more control interest rates than it can control the tides of the ocean because interest is a living thing, like commodity prices. I believe there should be no dogmatic stand on low or high interest rates, even if we could control them, but that the rate should be related to the basic structure of the economy. By that I mean that if in an underdeveloped country a businessman of average ability can earn 7 or 8 percent on his capital it is logical to expect that normal business in such a country will go into the market to borrow at, let us say, 5-percent interest, because it can pay that interest, and yet make a very nice profiit. If business is willing and able to pay 5 percent for safe loans it would be utterly absurd to expect the Government in a free market to place a large amount of Government bonds at 2 percent. If, on the other hand, in a highly developed country like Holland in the old days, before the war, business could earn only a moderate vield on its capital, say 3 percent at a time when, for instance, in United States of America, General Motors earned 9, then it is natural that the Government could obtain financing at 2 percent. I believe that in each country interest rates should be allowed to gradually find their own level, determined by the abundance of saving and the opportunity for earnings in the particular country. As a Wall Street man, I would not regard it as complimentary to American businessmen, if, in the light of the tremendous and profitable use for capital I foresee in this still rather undeveloped country, the interest rate for riskless capital, such as Government bonds, were permanently to settle at a level of 2 or 22 percent. I recognize the impact of the interest rate on the huge national debt, and the need to move gradually and in good order toward an interest level that reflects long-range earning opportunities in the United States. When I say that the Government cannot in the long run control interest rates, I do not mean to imply that they have not a right to build dams to let the flood come down in a very slow and deliberate manner. I maintain that if the Government were to go on controlling interest rates for many decades they will accumulate such a flood of water above the dam that one day it will break and you may face a terrific catastrophe. These few remarks do not pretend to offer a solution of the delicate problem of interest rates. I made them mainly to illustrate the fact that important questions of monetary policy and theory still remain unsettled. Another reason why it is difficult to obtain a clear-cut solution of monetary problems is that monetary policy is a tool that can serve and must serve a variety of objectives. The first objective should be stability of prices; the second, economic development in the creation of jobs; the third, debt management, which must be considered at the time when, unfortunately, large amounts of Government bonds have to be refunded, and, perhaps, new financing provided for. Then again, many of the current discussions have attempted to answer the question: What is the appropriate monetary policy under the present conditions? And right now we are not sure whether we have inflation or deflation to cope with. I feel that it is equally important to ask: How should the tool of monetary policy be perfected so that it can be used to meet possible future contingencies? I use as an example of that the early years of World War II, when we all knew that a very large amount of Government bonds would have to be placed, though we did not know the amounts involved. If at that time the consequence of placing very large amounts of securities for the war effort had been judicially appraised, with a few toward the future, the number of the headaches that have been plaguing us in recent years could have been reduced. At least, we want to learn now from that experience, and give the most careful thought to future repercussions of present policies. As one instance, I may say that we are spending many billions of dollars for defense so that we can be militarily ready in case of a major conflict that would be forced upon us. What are we doing so that we are also financially prepared for such contingency? My own feeling is that in a period like this we should avoid adding to our national debt. This may be so because our ability to continue for a great number of years to hold ourselves in readiness may be the very thing that will make us win out. Therefore we have got to be prepared for a long, continuous struggle. I can see the point that we do not want to raise taxes just to meet a short but rapid rise in expenditures in one fiscal year when taxes. after a short period, may have to be reduced again. But taking the period of the defense build-up, as a whole, it should be financed without recourse to additional borrowing. Personally, I think, and I wish, we could go beyond that and at least reduce that part of the national debt that is held by the banks. That is about $60,000,000,000. This would put us in a much better position to finance a further increase in the armament program if world conditions should force that necessity upon us. The removal of the Government bonds from the banking system might from some angles be likened to the Bank of England, in the old days, going back to the gold standard after a war, with the result that they were ready in case of need, and if other emergencies arose, to again suspend gold payment and use the resulting reserves to face a new emergency. It had been my great hope that we would have been able during the first 5 years after the war to accomplish this through surpluses in our budget. But if current taxes cannot produce such a surplus to redeem part of the debt within the next few years, I, as a citizen, do not shrink from the proposition that an extraordinary, one-time levy, presumably based on capital, should be imposed for this purpose. I cannot but feel that citizens of this country, and particularly the practical businessman should pay with good grace a sum that may amount in total to as much as 5 percent of their capital payable over a number of years. Such an extraordinary and one-time payment would indeed be a small premium to insure that we can continue to do business without threat of disruption because aggression is in evidence. I am, of course, aware of the constitutional and political problems which are involved in such a suggestion; but I mention this possibility mainly to indicate how strongly a number of us feel about the need for tackling the problem of financial readiness as an indispensable part of our defense readiness program. Discussion of the adequacy of Federal Reserve powers also has become confused by uncertainty as to whether we are thinking of the monetary policies needed for the immediate situation or of those required for future contingencies. You will notice that recommendation IV of the NPA statement says: The existing powers of the Federal Reserve over the reserve position of the banks should be strengthened by additional legislation. But you will also find a dissenting footnote by those who believe that additional powers are unnecessary, and another by those who feel that in addition they are undesirable. I am sure that those who believe that additional powers are unnecessary are thinking mainly of the present circumstances, while those who recommend that Congress should grant additional powers of reserve requirements have in mind perfecting our tools of credit policy in order to meet possible future contingencies. I hope Congress will give serious consideration to such a provision, at least as a stand-by authority. My discussion of unreconciled viewpoints in monetary theory, such as interest rates and, I may add, gold and exchanges, and the multitude of objectives which must be considered in determining monetary policy, leads me to one conclusion. It may well be that the determination of monetary policy is the final responsibility of Congress; but we are clearly in an area in which it would be as impossible for Congress to determine details of policy as it would be for Congress to legislate on the allocation of steel or any other day-to-day administrative activity of the Government. Congress can fruit fully lay down the basic principles of monetary policy, but their execution must be delegated to proper agencies. This conclusion leads me to the question of organization and administration which is the particular issue with which I would like to deal. The organizational problem in the field of monetary policy is more difficult than in the field of fiscal policy. This is, perhaps, another reason for the heat and exaggeration in the present controversy. Fiscal policies which include expenditure policy, tax policy, debtmanagement policy, all relate to functions which naturally belong to |