employment such as we have now, with only 3.3 percent unemployed, is to inflate the money supply, and drive up prices. This in turn, increases the cost of Government services, eats into the income of those with fixed incomes and creates all the havoc of inflation. Is that not a rather poor policy? Secretary SNYDER. Well, let us take a look at the whole picture. Since the end of World War II financing, actually the bank-owned public debt has declined by over thirty billions of dollars. The point is we have not been——— Senator DOUGLAS. 1945 and 1946-that period was a very fortunate year, because the high war tax rates were in effect, and military expenditures had tapered off, and if we were to get into a discussion of budgetary policy, we would get into further issues, but I understood our chairman to say we were not going to discuss budgetary policy, so I am not going to pursue that subject any further. Secretary SNYDER. I am not trying to get into budgetary policy; I am just trying to point out, though, that it is not a matter of continually forcing the Federal Reserve to buy over the long run. Senator DOUGLAS. I helped conduct hearings parallel to these 212 years ago, and the testimony was perfectly clear, supported by sufficient documents that were introduced, to indicate that the Treasury has generally insisted in the past that the Federal Reserve System purchase Government bonds in order to support the market, and did so until the famous accord of April, agreed upon in March, but dated, I believe, early in April 1951. Now, some of us are a little fearful that this accord may be discontinued or if cooperation is obtained that it may be by the Federal Reserve agreeing to the policies of the Treasury. Now, I believe, we have a right to be fearful about that, Mr. Secretary. Secretary SNYDER. And the Treasury has a right to be hopefulSenator DOUGLAS. You mean hopeful that there will be inflation? Secretary SNYDER. That we will have accord. We do not have quite as much suspicion about an accord as you do. Senator DOUGLAS. And that the Federal Reserve will purchase unlimited supplies of Government bonds? Secretary SNYDER. No, that we will have cooperation and the Fed. eral Reserve and the Treasury in the fashion Senator DOUGLAS. Does that accord, in your mind, carry with it the idea that there will be large purchases by the Federal Reserve? Secretary SNYDER. It carries with it the idea that the Federal Reserve and the Treasury are going to sit down and work things out together to the best interests of the public. Senator DOUGLAS. Well, I do not know what to say that would reply to an answer like that. I suppose I ought to send bouquets to you both in the hope that you have a happy meeting. Secretary SNYDER. I hope you will share with me the hope that you will do that. [Laughter.] Senator DOUGLAS. Are you worried about inflation? Secretary SNYDER. Yes, sir; I have been continually. Senator DOUGLAS. Yet the purchase of large quantities of bonds by the Federal Reserve System leads to inflation, does it not? Secretary SNYDER. It contributes in a degree. Senator DOUGLAS. Therefore, I should think you would be very fearful and be afraid that the Federal Reserve System might buy large quantities of these bonds. Secretary SNYDER. We have the practical problem of managing the debt, Senator. Senator DOUGLAS. Which takes precedence, the management of the debt or the maintenance of a stable price level? Secretary SNYDER. I think that they are interrelated. Senator DOUGLAS. But when they conflict which do you think is the more important? Secretary SNYDER. You have to measure the conditions of the moment when you are making the decision-that is not a decision you make for all time. Senator DOUGLAS. That is, you might at certain times conclude that. the management of the debt was more important than the maintenance of stable prices assuming the two are in conflict? be. Secretary SNYDER. At times I think that you will find that it might Senator DOUGLAS. In a nonwar period? Secretary SNYDER. I did not say that. That is why I pointed out in times such as we are faced with now— Senator DOUGLAS. During a nonwar period, do you think the management of the debt is more important than the maintenance of a stable price level? Secretary SNYDFR. I think that was the type of problem faced by the Employment Act of 1946. Senator DOUGLAS. The Employment Act does not solve that problem. Secretary SNYDER. I know it does not solve it. It points up to us the real problem of meeting both inflationary and deflationary pressures, and put the problem right up to Congress and to the Treasury and to all of the Government. Senator DOUGLAS. And the way the Treasury solved it is to look the issue squarely in the face and say, "We won't solve it"? Secretary SNYDER. I will not project how we are going to handle all these issues in the future. I certainly could not, Senator, not in open session, unfortunately. Senator DOUGLAS. Then, since I am foreclosed from discussing the future, is it possible for me to discuss the past? Secretary SNYDER. That is right. Senator DOUGLAS. Did not the purchase of securities, Government securities, by the Federal Reserve System after Korea, give rise to an increase in (a) in the reserves of member banks in the Federal Reserve System, (b) increased loans by the member banks to private industry and individuals and (c) an increase in the price level? Secretary SNYDER. I think we cover that in answer 17 of the questionnaire. I will be glad to prepare another—— Senator DOUGLAS. Would you reply to it in hearings? Secretary SNYDER. I would be glad to read that into the hearing, yes. Senator DOUGLAS. Answer 17 is quite an answer. It extends over some pages. Secretary SNYDER. Yes, sir. Senator DOUGLAS. I would like to ask you very briefly, did not the purchase of Government securities by the Federal Reserve System after Korea result in an increase in bank reserves in the Federal Reserve System? Secretary SNYDER. I will be glad to read this into the record. Senator DOUGLAS. Mr. Chairman, I suggest that this is not an appropriate answer on the part of the Secretary. Secretary SNYDER. I want to suggest to the Senator that I have the responsibility to manage the debt, and I am going to be very careful how I answer each question. I want the best good to come out of these meetings. I am the person responsible for final decisions in the management of the debt, except in those cases in which the issuance of securities is subject to the approval of the President. I must be extremely careful of everything I say Senator DOUGLAS. I am asking you about the past. Secretary SNYDER. Yes, sir; I want to give you exactly what hap-. pened in the past. I don't want to rely on memory. Senator DOUGLAS. May I say for the record, the answer to question 17 began on page 50, and it concludes on page 74. Is it the intention. of the Secretary to read 24 pages into the record, each page of which consists of approximately a thousand words? Secretary SNYDER. Well, I will add this sentence, substitute this for that. Of course, 17 is part of the record anyway and is available to the committee, but I would like to say here that at the start of the Korean invasion on June 25, 1950, the Federal Reserve System was selling bonds, continuing that policy which had been adopted in November 1949, making bonds readily available as prices were marked down. From November 1949, to June 21, 1950, the Federal Reserve holdings. of bonds declined approximately $1,900,000,000. Senator DOUGLAS. Holdings of the Federal Reserve declined? Senator DOUGLAS. From June 1950? Secretary SNYDER. From November 1949, to June 21, 1950. Senator DOUGLAS. Oh, well I am speaking of the period immediately after Korea, namely, from July 1, 1950, on. Secretary SNYDER. Oh, Senator DOUGLAS. Is it not true that after Korea the holdings of the Federal Reserve System of Government bonds increased from 18.2: billions on June 28, 1950, to 22.2 billions on March 7, 1951, or an increase of 4 billions? These figures are found in the report of the Federal Reserve Bulletin for May 1951, page 515, and in the same. document, page 527, the figures on all bank loans are given. These loans increased from 52 billions on June 30, 1950, to 62 billions... on February 28, 1951, and 63 billions on March 28, or an increase in that time of 11 billions. That is, during the 8-month period when there was an increase of $4 billion in securities held by the Federal Reserve System, there was an increase of $11 billion or roughly 21 percent in bank loans. During the same period we also had an increase of 16.6 percent in wholesale prices. Now was not the increase in bank loans one of the reasons which permitted the increase in wholesale prices to take place? Secretary SNYDER. It could have been one of the many reasons. Senator DOUGLAS. Well, was it not an important reason; in fact, the important reason? Secretary SNYDER. Well, I would not say it was the important reason. Senator DOUGLAS. What other important reason could there be? Here you have bank credit increasing by 21 percent, wholesale prices increasing between 16 and 17 percent. The inference seems to me obvious. When you increase the quantity of money in relationship to goods, the price level rises. Secretary SNYDER. There was a general rushing in to buy by the consumer. Senator DOUGLAS. Yes; but they could not have made these speculative purchases had they not been able to get the bank loans, and the bank loans would not have been obtained unless bank reserves had been expanded through the purchase of additional securities by the Reserve System. It was the purchase by the Reserve System of the securities which made bank credit available for speculative purchasing. Secretary SNYDER. There was a tremendous amount of stored-up savings in the business world that had no effect Senator DOUGLAS. These are not by any means all stored-up savings. These are loans, which made up the added monetary purchasing power. Secretary SNYDER. Loans were only a part of the picture. That is why I say that was not the whole matter. Senator DOUGLAS. Is it not interesting that you have an increase in the quantity of bank credit at about the same ratio as the increase in the price level? Incidentally you will find that the increase in physical production and in velocity roughly balanced each other at about 8 or 9 percent apiece. You can therefore throw those out. It is the increase in the quantity of money and credit that primarily caused the increase in prices. Secretary SNYDER. It was, of course, recognized that efforts must be made to curtail credit expansion. Senator DOUGLAS. But during this entire time the Federal Reserve System, under encouragement from the Treasury, was purchasing enormous quantities of Government securities. Secretary SNYDER. Well, the total holdings of the Federal Reserve in Government securities today are not much different from what they were they are really lower than at the end of the war finance period. Senator DOUGLAS. I am not speaking about the war. I am taking this critical post-Korea period, and I am pointing out that in that period the Reserve purchased roughly $4 billion net of Government securities, building up member bank reserves. These increased member bank reserves in turn permitted member banks to increase loans, which they did in the total of $10 billion, that is up to March 1, 1951. This would be an increase in the quantity of credit of 19 percent with prices increasing by about 17 percent during the same period. And when you increase the quantity of money in relationship to goods, you increase the price level. Secretary SNYDER. Well, of course, Senator, it is interesting to note that since the accord Senator DOUGLAS. Well, since the accord, quite right. Secretary SNYDER. But loans have gone up just the same since the accord-credit has not been cut off-and prices have leveled off. That is the point I was making. The statistics which support this statement are as follows: Federal Reserve holdings of Government securities went up $1.6 billion between February 28 and December 26, 1951, and commercial bank loans went up $4.8 billion. But wholesale prices went down during this period-over 3 percent as measured by the Department of Labor's all-commodity wholesale prices index (900 commodities) and 15 percent for the 28 commodities included in the Department of Labor's basic commodity index. Wholesale prices were, in fact, beginning to show a tendency to level off at the time the accord was reached. The following tables give the figures in detail: TABLE 1. Federal Reserve holdings of Government securities and commercial bank loans TABLE 2.—Department of Labor index of all commodity wholesale prices 1.6 4.8 180. 1 183. 6 184. 0 183. 6 182.9 181. 7 179. 4 178. 0 177. 6 178. 1 178. 3 177. 8 183.9 NOTE. The weekly index covers a much smaller number of commodities (115) than the monthly index (900); it is used primarily to indicate the trend of price changes in the interim periods between the publication of the monthly figures. TABLE 3.-Department of Labor index for 28 basic commodities |