Committee Prints

CHARTS

1. Selected economic factors in the post-Korean boom....

2. Prices, production, and the money supply, 1919-51----

3. Money supply, turn-over of bank deposits, and wholesale prices,

January 1950-February 1952_-.

ONETARY POLICY AND THE MANAGEMENT OF

THE PUBLIC DEBT

SUMMARY OF FINDINGS AND RECOMMENDATIONS FISCAL AND MONETARY POLICY SINCE THE OUTBREAK IN KOREA 1. Wholesale prices in the United States rose about 16 percent tween June 1950 and March 1951. This rise might have been derated somewhat by the earlier adoption of a more restrictive netary policy. But the use of monetary measures sufficiently werful to have averted most or all of the rise probably would have d consequences even more undesirable than the rise itself. Rewing the circumstances of the period, it is an open question ether the somewhat more restrictive monetary policy which folred the Treasury-Federal Reserve "accord" of March 4, 1951, ould have been applied earlier.

[With respect to the timing, Senator Flanders notes that the predecessor subcommittee recommended in January 1950 that the freedom of the Federal Reserve to restrict credit and raise interest rates for general stabilization purposes should be restored even if this involved higher debt service charges and greater inconvenience to the Treasury in debt management. In his estimation, an "accord" established at that time would not have been too early.]

2. Wholesale prices reached a peak in March 1951 and declined out 4 percent during the following year. Some of the credit for is turn in the price situation is doubtless due to the more restrictive onetary policy following the accord and some is doubtless due to the position of price and wage controls in January 1951. For the most rt, however, it appears to have been a natural reaction from the ve of "scare buying" set off by the Korean outbreak and would ve occurred in any event.

3. An examination of the relevant data shows remarkably little rrelation between price changes since the outbreak in Korea and anges in either the money supply or in the budgetary position of the deral Government. During the period of rapid price rise the budget is strongly over-balanced and the money supply was increasing ry slowly; during the subsequent period of price stability and decline e budget showed a deficit and the money supply was rising much re rapidly. These factors doubtless had an influence on prices; it, in the short run, this influence was outweighed by that of other Mors. In the long run, however-when other factors tend to avere out-changes in the money supply and in the budgetary position the Federal Government are likely to have a decisive influence. hey are important at all times because they are subject to the conwus control of the Government, whereas the factors originating in

the "outside economy" are not. It is only by persisting in appropr fiscal and monetary policies that the Government can make its contribution to price stability and high-level employment over longer period.

4. The differences between the Treasury and the Federal Rese during the period between the outbreak in Korea and the accord w rather small when viewed in perspective. Prior to the turn of year 1950-51, they were concerned principally with short-term inte rates. It was not until early 1951 that the Federal Reserve eviden a desire to increase the long-term interest rate above 2%1⁄2 percent. examination of the confidential correspondence between the Treas and the Federal Reserve, and of the Federal Reserve with the Pr dent, shows, for the most part, that each agency was striving to s the public interest as it saw it. The officials of the Federal Rese System, the Secretary of the Treasury, and the President, howe appear at times to have interpreted agreements differently and no have been aware of each other's interpretations. This might h been avoided by better staff work and by staff attendance at top-l conferences.

5. We believe that general monetary, credit, and fiscal poli should be the Government's primary and principal means of prom ing the ends of price stability and high-level employment and t whenever possible reliance should be placed on these means in pre ence to devices such as price, wage, and allocation controls and, lesser extent, selective credit controls-all of which involve in vention in particular markets. Nevertheless, under present circ stances in which we do not yet know the full impact on the econo of the defense expenditure program-we believe that it would improvident to repeal the legislative authority for either price, w and allocation controls or for selective credit controls.

[Mr. Patman believes that the disadvantages of selective c trols over consumer and housing credit are so great that authority for the imposition of these controls should be repes immediately.]

II. FISCAL AND MONETARY POLICY FOR THE FUTURE

6. We reaffirm the recommendation of our predecessor subc mittee that a flexible fiscal policy producing a surplus of rever over expenditures in periods of high prosperity and a surplus of penditures over revenues in periods of depression should be a princ reliance of the Federal Government in promoting price stability high-level employment.

7. We believe that monetary policy (variations in the ease tightness of credit) should also be used as a principal means of se ing price stability and high-level employment. It must be used w caution, however, in order to insure that measures taken to halt inflation do not aggravate a subsequent period of depression, or

versa.

[Senator Flanders feels that resoluteness in the use of monet policy should be emphasized as well as caution; effective eff to check inflation should not be unduly inhibited by alarms ab possible subsequent depressions, or vice versa.

There is much to be said for more frequent small changes credit policy. This would help get the country out of "er

psychology" in these matters. Furthermore, skillful steering, whether of an automobile or of the national economy, is brought about by small, frequent adjustments.]

8. Selective credit controls interfere with the allocation of resources hich would occur under the unfettered operation of the price sysm. In the absence of affirmative evidence to the contrary, the location of resources which would result from the free operation of e price system must be considered that most likely to maximize cial welfare. Selective credit controls should be used with especial ution, therefore, and only when thoroughly justified by special

rcumstances.

9. The voluntary credit restraint program, initiated in March 251 and terminated in May 1952, was probably helpful in restraining flationary pressures during the period in which it was in effect. rograms of this character are easily subject to abuse, however, and re unlikely to be uniform in their distribution of burden. They also end to become less effective with the passage of time. We believe hat such programs should be resorted to only under extraordinary onditions.

10. Neither the problems of monetary policy nor those of debt anagement can be solved in isolation from the other. We recomand that the Treasury and the Federal Reserve should continue to deavor to find by mutual discussion the solutions most in the public nterest for their common problems, with final appeal to Congress. 11. We recommend against the issuance of securities the terms of payment of which are determined wholly or partly by changes in he purchasing power of the dollar.

12. The principal mandate concerning economic policy at present aven by Congress to both the Treasury and the Federal Reserve ystem is that contained in the Declaration of Policy in the Employment Act of 1946. Neither agency has any clear directive other than as to seek the ends of price stability and high-level employment. The declaration of policy does not directly mention price stability, but this can be inferred and the Treasury and the Federal Reserve ach state that they have taken it into account in their own interpreWe agree with these interpretations, but suggest that further studies be made of the wording of the declaration in order to secure a more balanced emphasis. We do not believe that this is a matter of great urgency, however, as each agency is in fact interpreting the present declaration in the same manner as it would if the aim of price ability were more explicitly spelled out.

III. BANK RESERVE REQUIREMENTS

13. We believe that nonmember banks should be required to mainain the same reserves as member banks and should be given equal access to loans at the Federal Reserve banks. This change is desirable both in order to increase the effectiveness of credit control and to spread its cost more uniformly over all banks. We see in it no threat to the dual banking system.

14. While we see no immediate need for the imposition of higher reserve requirements or for reserve requirements of new forms (e. g., requirements which might be met in whole or in part by United States securities or requirements expressed as percentages of assets rather

20499-52-2

than of liabilities), we believe that further consideration should b given to the adoption of legislation providing the Board of Governor with additional powers over bank reserve requirements for use at it discretion. The time to provide such powers is during a period o quiescence in inflationary pressures and not when the discussion o them would dramatize and so intensify existing pressures.

IV. THE MACHINERY FOR THE DETERMINATION OF MONETARY POLICY

15. The independence of the Federal Reserve System is based, no on legal right, but on expediency. Congress, desiring that the claim of restrictive monetary policy should be strongly stated on appro priate occasions, has chosen to endow the System with a considerable degree of independence, both from itself and from the Chief Execu tive. This independence is in no way related to the unsettled question of whether the Board of Governors is or is not a part of the Executive Branch of the Government. It is naturally limited by the overriding requirement that all of the economic policies of the Governmentmonetary policy and fiscal policy among them-be coordinated with each other in such a way as to make a meaningful whole. The inde pendence of the Federal Reserve System is desirable, not as an end in itself, but as a means of contributing to the formulation of the best over-all economic policy. In our judgment, the present degree of independence of the System is about that best suited for this purpose under present conditions.

16. The independence of the Federal Reserve System must be an independence within and not from the Government. The determination of monetary policy is an important public function and cannot be finally delegated to private parties.

17. The three principal instruments of Federal Reserve policy are the determination of rediscount rates, the variation of reserve requirements, and open-market operations. These three instruments must be used in conjunction to serve a common end, and there is no rational basis for the assignment of the most important of them, open-market operations, to a body (the Federal Open Market Committee) different from that controlling the other two (the Board of Governors). Nevertheless, we recommend the continuation of the Federal Open Market Committee as a useful link between the directors and managements of the individual Reserve banks, on the one hand, and the Board of Governors, on the other. Such a continuation presents some danger that the Open Market Committee (not all of the members of which are responsible either directly or indirectly to the electorate) might at some future date adopt an open-market policy not compatible with the over-all economic policy of the Government as approved by Congress. In such an event this recommendation would have to be reconsidered.

18. We note with concern the complete absence of any representation of labor on the directorates of the Federal Reserve banks, despite the fact that labor is so vitally affected by monetary policy. We recommend that the Board of Governors give consideration to including representatives of labor among those whom it considers eligible for appointment as class C directors.

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