MONETARY POLICY AND THE MANAGEMENT OF THE PUBLIC DEВТ THURSDAY, MARCH 27, 1952 CONGRESS OF THE UNITED STATES, SUBCOMMITTEE ON GENERAL CREDIT Washington, D. C. The subcommittee met, pursuant to recess, at 10 a. m., in room 318, Senate Office Building, Representative Wright Patman (chairman of the subcommittee) presiding. Present: Represent Patman (chairman of the subcommittee), Senator Douglas, Representatives Bolling and Wolcott. Also present: Grover W. Ensley, staff director, and Henry Murphy, economist for the subcommittee. Representative PATMAN. The committee will please come to order. Again we are honored with the presence of a very distinguished panel of outstanding Americans this morning. We will call upon them alphabetically. First, I will read the topics for discussion : 1. What are the special interests of business, labor, and agriculture in monetary policy? How should each be represented in its formulation (except as they are represented in ordinary course in the formulation of Government policy generally)? 2. Should individual members of the Board of Governors or individual directors of the Federal Reserve banks represent special interest groups? If so, should the interest groups participate in their selection? 3. What monetary and debt-management policy is most in the interest of business? Of labor? Of agriculture? Now? Under other conditions? Participants this morning will be the following: John A. Baker, legislative secretary, National Farmers Union. Allan B. Kline, a farmer and president of the American Farm Bureau Federation. Mr. Kline is a class C director of the Federal Reserve Bank of Chicago, and he is a member of the board of trustees and of the agricultural committee of the National Planning Association. Murray Lincoln, president, Farm Bureau Insurance Companies; president. Cooperative League of U. S. A., and of the Cooperative for American Remittances to Europe (CARE); trustee of the National Planning Association. Donald E. Montgomery, director of Washington office, International Union, UAW-CIÓ. Former Director of Registration Division, Securities and Exchange Commission, and Consumers' Counsel in Department of Agriculture. Formerly with Wisconsin Department of Markets and with Wisconsin attorney general, administering State unfair competition and antitrust statutes. Herschel D. Newsom, a farmer and master of the National Grange. Connected with Grange activities for 30 years; formerly master of the Indiana State Grange. Member of the National Advisory Board on Mobilization Policy; also of the Mutual Security Agency Public Advisory Board; and of the Research and Marketing Administration Advisory Committee of the Department of Agriculture. Boris Shishkin, economist for the American Federation of Labor since 1933; secretary of the federation's housing committee and of its committee on social security. Formerly president, and at present Chairman of the Board of the National Bureau of Economic Research. Member advisory panel of the Joint Committee on Atomic Energy. Jerry Voorhis, for the last 5 years secretary to the Cooperative League of U. S. A., a national organization of regional wholesale cooperatives and mutual insurance companies with approximately 2 million members. Represented Twelfth California District in House of Representatives from 1937 to 1947. Author of book, Out of Debt, Out of Danger, devoted to monetary problems. Has written numerous articles and pamphlets on the subject of money and credit. In the discussions for this week the National Association of Manufacturers and the Chamber of Commerce of the United States of America were invited to be represented at this discussion, but they prefer to file statements instead. The statements will be included in the record. (The statements referred to are as follows:) Hon. WRIGHT PATMAN, NATIONAL ASSOCIATION OF MANUFACTURERS, New York N. Y., March 11, 1952. House of Representatives, Washington, D. C. DEAR MR. PATMAN: I must apologize for not having acknowledged earlier your invitation to participate in the Subcommittee on General Credit Control and Debt Management. Unfortunately we find that we will not be able to have a representative at the public-panel discussion on March 27. We will be following the hearings with a great deal of interest. If the hear ings should result in the introduction of a bill in Congress, we would like to testify at the time such a bill is considered. With appreciation for your invitation, I am, DEAR MR. PATMAN: Attached is a memorandum on the general subject of credit control and debt management which we should be glad to have you include in the hearings to be published. We appreciate your invitation of February 11 to participate in in a round table, arrangements to be made through Mr. Murphy, but in view of the extensive materials we have already sent to the joint committee in the last few weeks, we would be content to let the additional manuscript, herein enclosed, constitute our contribution, Dr. Emerson P. Schmidt, director of our economic research department, answered the economists' questions, and recently the economic research department prepared a memorandum on the President's Economic Report in which a good deal of attention was devoted to the subject of your particular inquiry. Nevertheless, we appreciate your kind invitation. Cordially yours, Attachment. CLARENCE R. MILES, Manager, Legislative Department. STATEMENT OF THE CHAMBER OF COMMERCE OF THE UNITED STATES PRESENTED TO SUBCOMMITTEE ON GENERAL CREDIT CONTROL, AND DEBT MANAGEMENT OF THE JOINT COMMITTEE ON THE ECONOMIC REPORT, MARCH 1952 MONETARY POLICY AND DEBT MANAGEMENT In response to the request of the chairman of this subcommittee the Chamber of Commerce of the United States is happy to present the following statement: Much of the significance of the specific issue of the relationship between the Treasury and the Federal Reserve System on monetary policy and debt management depends on the answer to another question: How important is money and monetary policy? It must be recognized that there is considerable lack of agreement about many aspects of this question. This is all to the good. It is through this discussion and debate that issues become clarified and resolved. This process, of discussion and debate, however, sometimes conveys the impression to the casual observer that there is very little agreement on any phases of the problem. This is not true. On many important and fundamental matters of money and monetary policy there is general agreement among responsible authorities. It may be useful to restate some of these areas of general agreement in order to see the more controversial aspects of money and monetary policy in better focus. Money is the communications system of the free economy. When incomes are paid in money, the individual has generalized purchasing power. In return for his contribution to productive activity, he can use his money to buy as he prefers. This pattern of consumer preferences expressed in the stores and the market generally tells businesses what to produce and how much to produce. If consumers dislike a product, sales are slow, losses follow, and production is curtailed. If they like a product, sales and profits rise, and production is encouraged. One assumption is fundamental to our way of life. Wealth and economic activity exist to serve people. Money is the means by which people communicate their desires and needs to business and industry, thereby telling businessmen what and how much to produce. In this way, through the "ballots" of consumers' dollars, production and the allocation of productive resources are channeled and guided along lines designed to assure maximum consumer satisfaction. Money is thus an essential aspect of political and economic democracy. If money is to be a useful "communications" system for a free economy, people must have confidence that its value will remain reasonably stable. Historical experience and common sense make this quite clear. When consumers begin to have fears about the value of their money, their main concern is to spend, not well and wisely, but quickly. No longer is what they buy necessarily what they most want or need. Price inflation becomes both a result of this and a further cause. Economic activity eventually deteriorates to primitive barter. While we usually illustrate this with examples of China, or Germany, or Russia, it is well not to forget that "not worth a continental" comes from our own history. Or, as in the early 1930's, there may be a disorderly scramble back into cash. Deflation, unemployment, and demoralized markets are then the result. We believe this whole point is particularly well stated in a study suggested by Congressman Wright Patman and Senator Ralph E. Flanders, and prepared by the staff of the Congressional Joint Committee on the Economic Report: "One of the most important elements making for economic strength is maintenance of confidence in the value of the dollars. Inflation, that is, a steady depreciation in the value of the dollar, is the main enemy within the gates. If allowed to run its course, it in every instance brings unrest and has in some instances paved the way for communism. China and Czarist Russia are but recent examples. Military measures on the fighting front are bound to fail if not matched by vigorous anti-inflationary measures on the home front."1 1 General credit control, debt management, and economic mobilization, materials prepared for the Joint Committee on the Economic Report by the committee staff (82d Cong., 1st sess., 1951), p. 1. Thus there is general agreement among responsible authorities regarding the importance of money to economic activity and the necessity for maintaining relative stability in the value of our monetary unit. Those responsible for monetary policy must, therefore, be able to employ such monetary measures as changes in interest rates, changes in bank reserves, and changes in rediscount rates if they are to implement the objectives of sound monetary policy. Proper monetary policies are of considerable importance in mitigating cyclical fluctuations in prices, production, and employment-provided those responsible for such policies are prompt, courageous, and skillful in applying them. What we have to say subsequently about the set-up of the Federal Reserve System is based to a substantial degree on our profound concern that the banking system make its maximum contribution toward maintaining economic stability. With this in mind, we now turn to the specific issue in question-the relationship between the Federal Reserve System and the Treasury. What is an "independent" Federal Reserve? It is essential at the outset to keep one thing in mind. The Federal Reserve is not a constitutional creation; it is a creation of Congress. It is the major instrumentality through which Congress has chosen to exercise its monetary responsibility. The Federal Reserve was established presumably in recognition of two things. First, responsibility for the country's money supply is an important one. Second, Congress as such, for a variety of obvious reasons, some of which became clear through experience, is not itself in a position to assume this responsibility directly. Moreover, experience has taught us that when Congress intervenes directly in these matters the results have not always been very reassuring. It, therefore, has delegated this function to a special-purpose organization, retaining, of course, ultimate policy authority and responsibility. Consequently, the Federal Reserve cannot and never has been independent of Congress because it is an instrumentality of Congress, performing a function which the Constitution explicitly and implicitly has declared to be ultimately a congressional responsibility. If a Federal Reserve independent of Congress were deemed desirable, it would be a fundamental departure from the present basis of Federal Reserve authority. What this independence apparently does mean is this: The Constitution gave to Congress, and not the Executive, power to regulate the money supply. Consequently, the Federal Reserve, as an instrumentality of Congress, is not subject to Executive authority. This would be a fundamental departure from the original scheme of things. Changing Federal Reserve objectives This does not dispose of the matter. An organization once created develops a momentum of its own. The objectives and functions of the Federal Reserve have tended to evolve with experience, tradition, and subsequent statutory directives. Therein lies a part of the present problem. While all of this makes precise discussion and documentation virtually impossible, it is nevertheless desirable to say something about the major changes in thinking or shifts in emphasis about what the objectives or guideposts of monetary policy ought to be. 1. Early the objective of Federal Reserve policy was conceived to be to provide a more elastic currency or money supply. The preamble to the Federal Reserve Act itself, which presumably comes close to the initial definition of objectives, states that it is: "An act to provide for the establishment of Federal Reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes." Moreover, the nature of the discussions at the various hearings and studies preceding the adoption of the Federal Reserve Act reinforce the view that the role of the new central banking institution was to provide for a more flexible and orderly monetary and banking system. This is suggested by some of the more frequently cited problems for which, it was hoped, the new Federal Reserve System would provide an answer. (1) Reserves were unduly centralized in the financial centers, and in times of stress when banks tried to call home reserves they produced monetary erises because there was no ultimate source of liquidity. On a smaller scale, the same money tightness occurred when seasonal demands for credit were high, (2) Currency in circulation was highly inelastic, depending as it did largely on a fixed or even shrinking supply of eligible Government securities. |