reserve requirements of the Reserve banks are important in enabling flexibility in monetary management to meet changing conditions.

"These legal provisions are not inflationary per se. Federal Reserve credit is not created just because the basis for such creation is available. It is the duty of the Federal Reserve System to see that Reserve bank credit is adjusted to the needs of the economy. Changes in the volume of such credit outstanding are now determined mainly by actions of the Federal Reserve System in accommodating the credit needs of consumers, commerce, agriculture, industry, and State and local governments, as well as the Federal Government. Such actions are taken only after a careful review of the economic and financial situation in the country at the time and after a full consideration of their inflationary and deflationary implications.

"An automatic check on the expansion of Federal Reserve bank credit, such as would be imposed by an increase in the ratio of gold certificates required against Federal Reserve notes and deposits would not be desirable. It was in part to prevent arbitrary and mechanical limitations on the volume of bank credit and money, resulting from too rigid a relationship between the credit and money supply and gold, that the Federal Reserve System was initially established."

Representative WOLCOTT. You, perhaps, will recognize that this is a fetish with me.

Secretary SNYDER. I beg your pardon?

Representative WOLCOTT. You will, perhaps, recognize that this is one of my fetishes.

Secretary SNYDER. I did not hear what you said.

Representative WOLCOTT. I say, you will realize that this is one of my fetishes.

Secretary SNYDER. Yes; but they are appropriate questions, as all are from the committee, and we would like to give a careful, studied reply to them.

Representative WOLCOTT. You mentioned in your statement that pressures were not quite as great as they had been-this is on page 5— and you say that there appears to be a lull at the present in inflationary pressures, and you go on to say, of course, that it is merely a lull, indicating that we are on some sort of a plateau, a little below where we were a few months ago.

What effect has "the accord," which you and the Federal Reserve reached, and the action which was taken by the Federal Reserve in not supporting the Government-bond market and increasing the rediscount rates to 134 from 112, and the issue by the Treasury of your 234, which could not be monetized, what would you say-what influence have those things had upon easing the situation?

Secretary SNYDER. Well, the raising of the rediscount rate had taken place prior to the accord. That took place in August. Representative WOLCOTT. I guess that is right. Secretary SNYDER. Yes.

Well, there has been, of course, a leveling off of inflationary pressures in recent months. The cost index on a number of items has gone down, the pressure of large inventories has had some effect and has been in some evidence as a depressant; the soft-goods area has had a depressing experience. I would say that we have been experiencing a lull in inflationary pressures, and I think that we all give due weight to the accord for being one of the many factors that brought about this situation.

Of course, the production capacity of the Nation had a great deal to do with it, too, in being able to rise to the demands and supply much of the requirements, even under the increased volume of income.

I think that we can sum it up by saying that the monetary steps
that were taken were a part of the broad influence that brought about
I do feel that we must care-
the situation we are experiencing now.
fully keep in mind that as a result of defense spending inflation may
become a trend again.

Representative WOLCOTT. Would you care to comment upon what effect the reduction in the value of the dollar of 46.15 percent in the last 10 years has had upon the savings bond market?

Secretary SNYDER. Well, on the E bond market over the whole postwar period, I do not think that the consideration of any change in the purchasing value of the dollar had any particular effect. Up to Korea savings bond purchases were well maintained. There was some increase in redemptions along with increased withdrawals from other types of savings in the heavy goods buying experience that we had following Korea. It has tapered off in recent months, however. Representative WOLCOTT. When you say it has tapered off, you mean the

Secretary SNYDER. The redemptions.

Representative WOLCOTT. The redemptions?
Secretary SNYDER. And sales.

Representative WOLCOTT. Since Korea?

Secretary SNYDER. The relationship between sales and redemptions has improved in recent months.

Representative WOLCOTT. What I am leading up to, since Korea the value of the dollar has dropped from 59 cents or 60 cents, somewhere along there, to its present 52.85. That has been the situation since Korea. It has dropped down 6 points since Korea. Has that any effect upon your savings bond market?

Secretary SNYDER. May I have you repeat the question? I just could not hear it.

Representative WOLCOTT. What effect has the drop of 6 percent in the value of our currency since Korea had upon your savings bond market?

Secretary SNYDER. Well, the indication I gave this morning was that for January and February, the most recent months for which we have a record the sales had gone up percentagewise over the same months for last year, and the redemptions had decreased over the same period. So it appears a corrective trend is being experienced.

Representative Wolcott. There is not any question, is there, but what inflation has affected the market for Government bonds, especially in the field of savings bonds?

Now, what incentive, excepting through stabilization of our economy, can we use to create a better atmosphere in which bonds can be marketed, except to increase the interest rates slightly?

Secretary SNYDER. Mr. Chairman, may I ask the subcommittee, you and the subcommittee, this privilege-that anything that has to do with future actions in reference to securities of the United States Government-I be permitted to answer in writing for executive consideration?

Representative WOLCOTT. That is perfectly agreeable to me.
Secretary SNYDER. Yes.

Representative PATMAN. That will be all right.

Secretary SNYDER. Thank you, sir.

Representative WOLCOTT. We talk about these things so freely that I guess we do not respect your position in that field.

Secretary SNYDER. Unfortunately, as I said this morning, I just cannot detach myself from being Secretary of the Treasury, and as much as I would like to talk freely on my own sometimes, why

Representative PATMAN. That will be eminently satisfactory, Mr. Secretary. I have some questions along that same line, but I will withhold them as you suggest.

Secretary SNYDER. Thank you.

Representative WOLCOTT. Would you recommend, as the President has, that we give the Federal Reserve additional power to increase reserves, reserve requirements?

Secretary SNYDER. I believe that in answers 35 and 36 I addressed myself to that problem. I will be glad to call attention to that answer. It has already been submitted.

Representative WOLCOTT. The problem seems to be that the Federal Reserve Board at the present time has been unable to agree upon the amount of authority which they are going to ask us for. I wondered, when the President in the economic message asked for additional reserve authority, whether he and the Federal Reserve Board had come to some understanding in respect to the authority which they would ask for, how much they would ask for.

Secretary SNYDER. I am not in a position to answer that.

Representative WOLCOTT. Last year when we brought it up it was suggested that probably they would not have too much trouble in getting a little more authority to have some more reserves, and my memory is that we could not get the Board to agree on how much they should ask for, and so no action was taken.

Have there been any discussions in respect to the restoration of these gold reserves that I mentioned behind the deposit liabilities. issued by the Federal Reserve?

Secretary SNYDER. That looks like an easy question to answer, but I would like to do it in writing. I say I would like to answer that one in writing. Unfortunately, Mr. Congressman, too many times when I have said that we have had, or have not had, discussions the remarks have been interpreted as meaning we have some plans. That is the reason why I am making that request.

Representative WOLCOTT. Well, we are all against inflation; are we

not?

Secretary SNYDER. We can agree on that.

Representative WOLCOTT. Now, speaking for myself, and I will not ask you for an answer to affirm my position, it seems to me that if we are against inflation, having created inflation legislatively in the 1930's, the Congress could stop the inflation if it did an about-face and restored the powers and authority and the standards and guides that were in existence in legislation in the 1930's before we changed. them.

Secretary SNYDER. Well, I think we would have to measure it very carefully against conditions at that time and conditions today, and the problems facing us at both times before we could make a complete acceptance of the theory of reversal.

Representative WOLCOTT. Do you think that we have got to accept inflation as a matter of permanent governmental policy?

Secretary SNYDER. I certainly hope not. We had up until last June an over-all balanced budget situation for 5 years, as you know-in fact, receipts exceeded expenditures by nearly $8 billion in that period. I would be very hopeful that we can return to a balanced-budget situation as quickly as possible.

Representative WOLCOTT. Thank you, Mr. Secretary. I think that is all I have, Mr. Chairman.

Representative PATMAN. Mr. Secretary, I would like to ask you a few questions. I have two written out here that I think I will read to you first.

About a year ago prices suddenly stopped advancing. Since then they have declined slightly, at least at wholesale. Some of the pricecontrol people and some of the monetary people have taken pretty complete credit for this. Others think that it was principally a natural reaction from the post-Korean buying spree. What do you think about it?

Secretary SNYDER. First, and most important in my mind, was a leveling off in consumer and business demand after the early rush to buy goods and stock large inventories after the outbreak of hostilities in Korea. Largely, this was the result of a rapid increase in the output of consumer and other civilian goods before defense demands had created a shortage of materials-thereby easing the fear that there would be shortages such as prevailed in World War II. Coupled with this has been an array of measures designed to alleviate particular areas of inflationary pressures. We have had priorities and allocations of scarce and strategic materials; Government production loan guaranties and loans to increase production for national defense needs; selective restrictions on credit in areas such as consumer credit and realestate credit; the voluntary credit-restraint program; and price and wage controls-all of which have made an important contribution to the over-all problem of inflation control.

Representative PATMAN. You have said that you favored some flexibility in interest rates as an instrument for influencing inflationary and deflationary forces. Do you believe at the present level of interest rates on marketable securities that it is suited to present conditions? Will you distinguish in your answer between short-term and long-term rates?

Secretary SNYDER. The present situation is one in which we are experiencing a lull-inflationary and deflationary forces seem to be about in balance. In this situation, stability in interest rates seems appropriate-in both the short- and long-term area.

Representative PATMAN. I asked you the next question in writing and you have submitted the answer. It was, Could you present a table for the record showing the change in interest rates since the end of 1949 and tell us briefly what it shows.

Secretary SNYDER. We would like to put the answer into the record, the answer that I have supplied.

Representative PATMAN. You gave me a letter on that, and without objection we will insert that in the record at this point. It is quite interesting.

(The document referred to follows:)

EFFECT OF CHANGES IN INTEREST RATES ON THE COST OF SERVICING THE PUBLIC

DEBT

GENERAL STATEMENT OF THE PROBLEM

Interest costs are affected by four elements: (1) Changes in the total amount of the debt; (2) the nature of the debt in which changes occur; (3) changes in composition of the debt resulting from refunding operations; and (4) changes in interest rates.

There are five different classes of debt which must be considered in dealing with interest costs: (1) Short-term marketable debt which currently is responsive to changes in interest rates (e. g., Treasury bills and certificates of indebtedness); (2) longer-term marketable debt which reflects changes in interest rates as the debt matures and is refunded; (3) nonmarketable debt which has been affected by changes in rates, such as Treasury savings notes; (4) nonmarketable debt, the rates on which have not yet been affected by changes in interest rates on other debt, such as United States Savings bonds; (5) special issues for trust accounts which are affected by the over-all average rate of interest, viz., the Old-Age and Survivors Insurance Trust Fund and the Unemployment Trust Fund; and (G) special issues which are not affected by changes in the average interest rate, such as the National Service Life Insurance Fund.

Increases or decreases in interest rates affect interest costs to the Treasury on different types of debt in different ways, and at different times. For instance, the interest costs on short-term marketable debt is more quickly affected by changes in interest rates than the interest cost on long-term marketable securities, the nonmarketable debt, and the special obligations which are issued to trust funds and Government investment accounts. Changes in interest rates in Treasury bills are reflected more currently since they are rolled over every 91 days, but even here there is some overlapping of the effects of interest rate changes as between fiscal years.

The amount of change in interest costs as a result of increased or decreased interest rates cannot be determined merely by comparing total interest payments in one fiscal year with that of another. One of the reasons for this is that the full effect of a change in the interest rate on actual expenditures is not reflected in expenditures until the fiscal year following the one in which the change in the rate has occurred. This is generally true in the case of securities which have a year or more to run. As an illustration, the interest on a 1-year certificate of indebtedness issued in August of one fiscal year would not be payable until August of the following year. The same sort of situation occurs with respect to securities, the interest on which is payable semiannually. For instance, a note or bond dated in the first half of a fiscal year would carry only one 6-month interest coupon payable in that fiscal year, and a bond or note issued in the second half of a fiscal year would not have any interest coupons payable during that fiscal year.

CHANGES IN INTEREST RATES

During the period from December 31, 1949, to February 29, 1952, the interest rates on 90-day Treasury bills fluctuated between 1,076 percent and 1,883 percent. The latest issue in December of 1949 was sold to yield 1.087 percent on an annual basis, as compared with a rate of 1.563 percent for the latest issue in February of 1952, an increase of 0.476 percent. If this increase in rate should be applied to the total amount of 91-day Treasury bills outstanding on February 29, 1952, the increase in the annual interest cost on this segment of the debt would be $74 million.1

The interest rate on an 112-month certificate of indebtedness dated March 1, 1952, was 1% percent, as compared with a 1-year rate of 1% percent in December of 1949, an increase of 34 percent. On the total amount of certificates of indebtedness outstanding on February 29, 1952 ($29 billion), this would result in an increase in the annual interest cost of $218 million.

On April 1, 1951, as part of the Treasury-Federal Reserve accord, the Treasury issued $13,574 million of 24 percent of nonmarketable bonds in exchange for an equal amount of 21⁄2 percent marketable bonds of 1967-72. An increase of 4 per

1 Does not include the tax anticipation bills.