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about which, I am afraid, nobody knows very much. What is the degree of elasticity or inelasticity of response of private investment spending to upward changes in the rate of interest?

I think that all monetary policy must pass through the eye of this needle of interest rates. I say this with due deference to the imperfect competition aspect of the problem, which is quite important in the first 3 months after you do something, I am sure. It seems to me the true debate between the hot adherents of this policy of tight money and the opponents of this policy, and people who, as I regard myself, are in the middle on this, would be on the question: What is the likely quantitative degree of elasticity?

Now, Professor Ellis started to break this down into the different categories of borrowers and, I think, that is absolutely the most fruitful way to handle the problem, to go through the different kinds of borrowers and just see what the likely pressure of interest costs will be at each point, and I hope I will learn more about this subject today. Thank you, Mr. Chairman.

Representative PATMAN. Mr. Whittlesey.

STATEMENT OF C. R. WHITTLESEY, PROFESSOR OF FINANCE AND ECONOMICS, UNIVERSITY OF PENNSYLVANIA

Mr. WHITTLESEY. I wish to begin, Mr. Chairman, by addressing my remarks for a moment to the question of the appropriate policy and I start by saying that I agree heartily with statements presented by the Federal Reserve authorities themselves, particularly at times when emotions were somewhat less aroused than they have been in the last few years.

I quote first from the Federal Reserve Annual Report for 1948 which was submitted by the Chairman in the middle of 1949. On page 4 the annual report says:

In earlier periods

rected

* * *

*

*

toward

Federal Reserve policy could be

* *

reserves

*

*

[blocks in formation]

*. With a large Government debt which is likely to be a dominant part of the debt structure for many

years, the Federal Reserve has to cope with the dual problem of maintaining an orderly Government security market and exercising control over the volume of bank reserves.

Going back a couple of years to the Annual Report of 1946, which is dated June 17, 1947, we have an pages 6 and 7, the following:

While it would continue to be necessary for the System to support Government securities and maintain an orderly market, the relationship between rates for various types of market issues might be permitted to become more responsive to demand and a greater degree of flexibility would be restored to control of credit through the money market.

An attempt to restrict credit through sale by the System of securities in the open market or even by limiting the System's purchases might cause sharp declines in prices of Government securities which could not be tolerated and which might fail to accomplish the desired purpose.

On page 7:

If, in the changed postwar situation, the Reserve System is to be able to perform the function for which it was established, namely, to adjust the supply of bank credit and money to the needs of the economy, and, especially, to prevent undue credit expansion in periods of inflation, additional powers will be *. The problems * required will continue for many years. Ace tion along these lines will be needed to rehabilitate the traditional instruments of Federal Reserve policy-open market operations, discount rates, and re

*

*

serve requirements and to assure a reasonable degree of financial stability in the future.

Some of these statements were presented, as I said, as late as 1949. The essential features of Federal Reserve policies may be summarized. There is, first, the necessity of coordination with policies followed by the Treasury, and that is not to say that either should dominate.

Secondly, there is the dual character of these policies, namely, security markets and the volume of credit.

Finally, the methods in conformity with the statements made, relate to both quantitative and selective instruments as conditions seem to indicate, plus fiscal policies to the extent that is possible. This includes avoiding deficit financing under inflationary conditions.

Now, I want to turn to the troublesome problem of the effectiveness of policies introduced in the last year and a half or 2 years, to which reference has frequently been made.

I have asked that all the members of the subcommittee and the panel be given copies of the most recent Federal Reserve chart book, and I shall refer to various of these charts by number. I am sure that it will facilitate the explanation if you follow as I direct your attention to them. I must acknowledge at the start the complexity of this problem and the existence of a great variety of influences. I hope that you will not feel me unduly guilty of oversimplification; such oversimplification as exists is necessary in order to save time. First of all, a rather minor point, but one which has attracted a great deal of attention. Please turn to chart 1, where you will see a chart showing life insurance company assets. These are the assets of selected savings institutions; the largest, of course, are the life insurance companies.

The curve for United States Government securities shows a steady decline since the end of 1946.

You will notice that up to the time of the accord, which was early in March of 1951, the decline had been continuous; some months it was fairly steep, but by inspection one would say that it went down just as rapidly, perhaps a little more rapidly, after the accord than it had done before.

My point is that the statement so frequently made to the effect that the accord brought about a marked reduction in sales of life insurance holdings of Government bonds is contradicted by this chart.

I might make one further refinement, which is slightly technical. The figure toward the end includes nearly a billion dollars of bills, but did not at the start of the period. That means that they sold nearly a billion dollars more of bonds than this figure indicates, so that the decline would be still greater if we allowed for the fact that they sold bonds and then put some of the cash back into short holdings which are a substitute not for bonds but for cash. Thus the sales of bonds are understated by this chart.

Secondly, and again an important but, perhaps, relatively minor point, the action failed to halt visibly new bond flotations and new security registrations.

I have here a chart which I will pass around-I regret that I do not have copies for everybody. This chart is from the Statistical Bulletin of the SEC for January 1952. It discloses very clearly a sharp increase in bond offerings in March 1951 (chart 2).

97308-52-45

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Source: Statistical Bulletin, Securities and Exchange Commission, January 1952.

0

CHART 3

SECURITIES EFFECTIVELY REGISTERED UNDER THE SECURITIES ACT

FOR CASH SALE FOR ACCOUNT OF ISSUERS

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[graphic]
[graphic]

1000

IST SND 3RD 4TH

1948

IST END SAD 4TH IST END 3RD 4TH IST END 3RD 4TH

1949

1950

1951

IST SNO 380 4TH

IST SND 3RD 4TH

1ST 2ND 3RD 4TH

1948

1949

1950

1951

INCLUDES FOREION GOVERNMENTS

(By Quarters)

03-3240

Source: Statistical Bulletin, Securities and Exchange Commission, February 1952.

500

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