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LETTER OF TRANSMITTAL

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DEAR SENATOR O'MAHONEY: There is transmitted herewith the Report of the Subcommittee on General Credit Control and Debt Management.

This Subcommittee, which was appointed by you in the spring of 1951, has made an intensive study of the general field assigned to it. In the fall of 1951, after a long period of preparation, it addressed a series of questions to the principal officers of the Federal Government concerned with monetary policy and debt management, and to numerous persons in the private economy. An excellent response was had from those addressed, both inside and outside the Government, and the results, published by the Subcommittee in February 1952 in a two-volume document entitled Monetary Policy and the Management of the Public Debt; Their Role in Achieving Price Stability and High-Level Employment, served as the basis for the subsequent hearings of the Subcommittee, which extended from March 10 through March 31, 1952.

The procedure of the Subcommittee is described at length in the Foreword to the document just referred to and in my opening statement at the hearings. It is also described briefly in the Introduction to the appended Report. Throughout the entire inquiry the Subcommittee has worked together in a spirit of cooperative endeavor and every member has made a substantial contribution to our joint product. I wish to take this occasion, on behalf of the whole Subcommittee, to thank again those who answered our questionnaire, the witnesses at our hearings, and all others who have contributed so effectively to the successful completion of our work.

The report covers a wide variety of subject matter, and, dealing as it does with material which has so often been treated more in the heat of the emotions than in the light of the intellect, shows a surprisingly large area of agreement. We believe that this widening of the area of agreement on matters on monetary policy and debt management, both among the members of the Subcommittee and among students of the subject generally, represents the principal accomplishment of our inquiry. The extension of areas of agreement by patient discussion represents the democratic process at its best; the persistence of residual areas of disagreement shows that the process is the democratic process indeed, for complete agreement can seldom be attained this side of either Utopia or Tyranny.

We express our special appreciation to Dr. Henry C. Murphy for his services as Economist to the Subcommittee. His technical competence and resourcefulness were of invaluable assistance to the Subcommittee. We are grateful to the International Monetary Fund for the loan of his services to the Joint Committee on the Economic Report for this assignment.

Finally, I want to express my personal thanks to all members of the Subcommittee for their cooperation in conducting this study of general credit control and debt management. Respectfully submitted.

WRIGHT PATMAN, Chairman, Subcommittee on General Credit Control and Debt

Management. JUNE 26, 1952.

CONTENTS

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Summary of findings and recommendations.

Introduction.-

I. Fiscal and monetary policy since the outbreak in Korea -

A. Price movements following the outbreak in Korea..

1. The period of price rise, June 1950–March 1951.

2. The period of relative price stability, March 1951-

March 1952...

3. Could a more vigorous monetary policy have averted

the price rise?

B. The wisdom of monetary and debt management policy follow-

ing the outbreak in Korea---

1. Factors which had to be considered in the period,

June 1950–March 1951.-

2. The actions of the monetary and debt management

authorities, June 1950–March 1951..

3. Monetary and debt management policy since March

1951..

II. Fiscal and monetary policy for the future...

A. Over-all role of fiscal and monetary policy; appropriate fiscal

policy.

B. Role of monetary policy

1. Cost vs. availability of credit.

2. Private vs. public credit.

3. Government lending and loan guaranty agencies.-

4. Corporate self-financing-

5. Interest rates and long-term bond prices.-

6. Efficacy of general monetary policy--

C. Selective credit controls and the voluntary credit restraint

program.

1. Selective credit controls..

2. The voluntary credit restraint program.

D. Management of the public debt.

1. General deht management policy -

2. Issuance of purchasing power honds.

E. Congressional mandates on economic policy-

III. Bank reserve requirements.--

A. Functions of bank reserve requirements; changes in require-

ments.....

B. Extension of requirements to nonmember banks...

C. New forms of reserve requirements.

IV. The machinery for the determination of monetary policy.

A. Legal status of the Federal Reserve System.

B. Independence of the Federal Reserve System.

C. The position of the Federal Reserve banks and the Federal

Open Market Committee......

D. The composition of the Board of Governors.

1. Tenure of members...

2. Number and compensation of members.

3. Designation of Chairman.

4. Qualifications for membership-

E. Coordination of fiscal and monetary policy -

F. Finances of the Federal Reserve System.

1. Private ownership of the stock of the Federal Reserve

banks.

2. Disposition of the earnings of the Federal Reserve

banks...

3. Tax exemption of the dividends on Federal Reserve

bank stock.

4. Budgetary and auditing procedures.

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62

MONETARY POLICY AND THE MANAGEMENT OF

THE PUBLIC DEBT

SUMMARY OF FINDINGS AND RECOMMENDATIONS

I. FISCAL AND MONETARY POLICY SINCE THE OUTBREAK IN KOREA

1. Wholesale prices in the United States rose about 16 percent between June 1950 and March 1951. This rise might have been moderated somewhat by the earlier adoption of a more restrictive monetary policy. But the use of monetary measures sufficiently powerful to have averted most or all of the rise probably would have had consequences even more undesirable than the rise itself. Reviewing the circumstances of the period, it is an open question whether the somewhat more restrictive monetary policy which followed the Treasury-Federal Reserve "accord" of March 4. 1951. should 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 about 4 percent during the following year. Some of the credit for this turn in the price situation is doubtless due to the more restrictive monetary policy following the accord and some is doubtless due to the imposition of price and wage controls in January 1951. For the most part, however, it appears to have been a natural reaction from the wave of "scare buying" set off by the Korean outbreak and would have occurred in any event.

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

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