Insurance is the means by which people seek security against the hazards to life, health, and property. But it is only a small part of their security needs. In the long run what happens to our economy is more important to that security than how much insurance they buy. May I just interject here, Mr. Chairman. I would like to confirm what you said, Mr. Baker, about the needs for additional money by these farm and home agencies. Only yesterday both the heads of the Ohio and Pennsylvania administrations called up, and we have done all we could as an insurance company to take up some of those mortgages, but there is a tremendous need and I don't think anybody can challenge the principle of guided credit in what they have done. As I see it, our policyholders, as people, have three broad needs which are affected by monetary and debt management policy. 1. The first need is for stable prices. Our policyholders as consumers no less than as savers, need a dollar which will buy more, not less, in the future. We have seen the 1939 dollar drop to 52 cents in value within our own recent experience. Those of us who can remember back to the turn of the century can recall when a dollar would buy three times as much as it does now. In 1820, the dollar bought four times what it does in 1952. This is a serious matter for an insurance company. It affects all those millions of Americans who put their savings into life insurance. Constant price inflation has affected our companies as insurers of automobiles and as fire underwriters. It plays hob with claims and with calculations of cost. But this is of small moment compared to what inflation has done to Americans as consumers and savers. The insurance industry cannot divorce itself from the interests of the economy as a whole, or of people as people. A stable price level ought to be the first objective of monetary policy. To achieve it, the Federal Reserve should limit the creation of money to the increased volume of goods and services turned out each year by agriculture and industry. Instead, the Federal Reserve officials have disclaimed concern with maintaining a stable price level. Consequently, the money supply has soared and the purchasing power of the dollar has continued to drop. Since 1939 our national production has risen by about 80 percent, but the money supply during the same period has tripled. With "more dollars chasing goods" prices have almost doubled. The results have been inequitable gains by borrowers at the expense of lenders, an undermining in the incentive to save, loss of confidence in insurance and Government bonds, and a wasteful diversion of economic resources into speculative and less productive activities. I would recommend that Congress make price stability the principal objective of monetary policy, and that the performance of the Federal Reserve be judged according to its success in meeting this guide to action. 2. The second great need of our policyholders is for security of income. That means the elimination of depressions and unemployment. A man whose income is cut off cannot provide his family with the security of insurance. An unstable economy is one where the general insecurity becomes the personal insecurity of every man in it. As Edward Hallett Carr has said so well in his book, Conditions of Peace: Our most urgent economic problem is no longer to expand production, but to secure a more equitable distribution of consumption and a more regular and orderly utilization of our productive capacity. Inequality and unemploymentunemployment both of manpower and of material resources are the crying scandals of our age. The main thing the Federal Reserve can do in relieving unemployment is to fit monetary policy into a broader program of fiscal policy and public works. It should also try to prevent bankers from making things worse by squeezing their borrowers. In the past, however, our monetary authorities have too often been timid and unimaginative in dealing with a recession. At worst, they have supported deflation, as in 1920, when their "stabilization" policies were disastrous to the farmers. One leading authority also maintains that their policies during the period 1931-32 "transformed a bad depression into a catastrophe." I share Mr. Allan Sproul's concern when he says, "I have been and am greatly disturbed by what seems to me to be the fact that banking does not speak with a voice that is in touch with the great underlying social movements of our time, with a voice that reaches the public and enlists its support." The experience in 1920-21 shows that credit deflation, used to correct inflationary mistakes in wage and price policies of labor, agriculture, and business, produces nothing but increased unemployment. Let us hope this error is never again repeated. 3. Finally, there is need for a rising standard of living for all people. We have achieved an astounding measure of abundance in this country, and in my opinion we have only just begun. Within a generation the United States will have the manpower and the productive capacity to double present output. If we make use of our own creative forces, each American can enjoy a standard of living 50 percent above what we have now. But the increased production must be distributed. Monetary policy can and must, through more enlightened financial leadership, provide the credit required for increased consumption. Insurance functions best in a prosperous and a growing economy. That is why we at the Farm Bureau Insurance Co.'s are not primarily interested in interest rates and credit as they affect our own portfolios, but as they affect the general welfare. It is one of the stated principles of the Farm Bureau Insurance Co.'s that people have within their own hands the tools to fashion their own destiny. In terms of this basic philosophy, we have recently organized a development company to build low-cost homes for the families who cannot afford a conventional high-cost house. We have also established mortgage and finance companies to meet the needs of people for loans at reasonable rates of interest. The credit policies of the Federal Reserve will determine in large part how far we can go with these services. The dynamic productive forces of our economy should be given full sway, particularly during this period of international stress. As a Nation, the principle of an expanding economy has helped us to meet our international-security commitments more effectively. Since 1947, the 60-billion-dollar increase in annual output, measured in 1951 prices, has been greater than the total cost of the defense program during 1951. But the military build-up means that many nonessential forms of investment and consumption must be deferred. Our companies have participated in the voluntary-credit-restraint program, which limits the use of funds for nondefense purposes. Our policies have also conformed to regulation X, relating to construction credit, and to regulation W, relating to installment-purchase credit. We favor these flexible forms of credit control in preference to direct controls. However, even these credit restraints may precipitate a recession if they are retained after the inflationary factors have disappeared. The Reserve officials should be sensitive to any need for revision of their policies, and should act promptly to forestall deflation. Role of special-interest groups in monetary policy It is my opinion that the members of the Board of Governors and Directors of the Federal Reserve banks should not represent specialinterest groups. The function of regulating the supply, availability, and cost of money is a broad public responsibility, and it must be exercised in the interests of the general welfare. At the present time, bankers and big business exercise too much influence on the Federal Reserve System through the Reserve banks. The Open Market Committee, which handles open-market operations relating to the purchase and sale of Government bonds, should be abolished and its functions taken over the the Board of Governors. The method of selection of class B directors of the Federal Reserve banks might advantageously be changed. These directors should be chosen, not for their representation of special producers' interests, but for their capacity to represent the general interests of the people. The welfare of people as consumers, for example, should be at the forefront of banking policy. In selecting the Board of Governors, I would recommend that at least two of the seven members be outstanding public-minded citizens rather than individuals identified primarily with business or financial interests. Role of Government in monetary policy I further suggest that the Secretary of the Treasury and the Chairman of the Council of Economic Advisers be made members of the Board. These changes would permit the Board to work more closely with Government agencies and would help to resolve the conflicting responsibilities which give rise to differing viewpoints. If it has done nothing else, the credit controversy of the past few years has demonstrated this fact. The responsibilities of the Treasury are so vitally affected by monetary policy that the Secretary must have a direct voice in its formation. The delicate job of managing the public debt can be made impossible by ill-timed credit operations. Fluctuations in Government security prices resulting from Federal Reserve open-market operations can be a severe blow to investment planning by companies such as ours which have invested heavily in these bonds. And it will, of course, make the Treasury's large refunding operations most difficult. Understandably, the Treasury wants to keep interest costs on the debt down and maintain public confidence in Government bonds by holding their prices steady. There are other reasons why testimony before this committee advocating increased independence of the Federal Reserve is mistaken. Government spending and taxation have great influence on monetary matters. Fiscal policy is one of the most powerful instruments for stabilizing economic conditions, and it must be closely coordinated with credit policy. Each is a separate cog in the machine. By making the Secretary of the Treasury a member of the Board he would have to realize his monetary responsibilities. At the same time, it would prevent Treasury concern with debt management from dominating credit policy. When Congress passed the Employment Act in 1946 it gave the Federal Government, among other powers, responsibility for promoting employment, production, and purchasing power, and the right to use all practicable means to these ends. The Chairman of the Council of Economic Advisers, as chief economic adviser to the President, will be better able to perform this function if he sits on the Board as representative of the President. The Federal Reserve System is one of the principal means of achieving the purposes of the Employment Act; in fact, it would be practically impossible to attain them without extensive use of monetary policy. At the same time, there are a large number of Federal institutions granting and guaranteeing loans which are outside the scope of Federal Reserve, such as the RFC, the FHA, and various agricultural agencies. Through their extensive operations they can directly affect credit policy. The Chairman of the Council, through his membership on the Board, can help to integrate the various policies into an over-all monetary credit and fiscal program. Finally, I would suggest a complete revision of the banking and monetary laws of this country. This has not been done since 1861. There are numerous parts of our financial legislation which need revision and clarification. Such work, however, would be a long-range undertaking, and would require a comprehensive study of our monetary system. The immediate problem is to clarify the appropriate roles of the Federal Reserve and the Treasury in monetary management. I am confident, Mr. Chairman, that the work of your subcommittee will be a major contribution in this regard. I am equally confident that it will help to develop credit policies which will stabilize prices and lay the foundation for a prosperous and growing economy. Senator DOUGLAS. Mr. Lincoln, it is always a great pleasure to have you testify before any congressional committee. We regard you as one of the truly great citizens of this country. I would like to ask some questions, if I might, about the first part of your paper and the latter part. On page 1 you say that the primary objective should be the stability of the price level, and then on page 2 you criticize the Federal Reserve for inflating the money supply since 1939, and apparently also since Korea, and imply that this is the fault of the Federal Reserve. Later in your paper you suggest added powers for the Secretary of the Treasury and a joint council of economic advisers, you would have them put on the Board and increase the influence of the executive branch in the conduct of the Federal Reserve Board. Now I think we have taken enough testimony before this committee and I think that the documents for which we have asked, if they are ever published show that the record is very clear that while the Federal Reserve Board has been weak in buying Government bonds in the open market and thus permitting banks to make more loans and we have had increasing prices, and so on, while the Federal Government has been weak, the force which has been pushing them all the time has been the Treasury. The testimony is abundantly clear on that point. As I say, if the documents are ever published, I think they will bear this out. I wonder if there isn't a contradiction between the first part of your testimony and the latter part? That what you are apparently proposing is that the real sinner, the real forces making for inflation should be put in the driver's seat. Mr. LINCOLN. Senator, I have respect for your opinion. When I asked our assistants the type of question you would probably ask in order to be better prepared to answer, they said you would raise just this question. Now, as far as I see it and maybe a layman has a right to inject himself into this great controversy that is going on down there-while there may be some validity in what you say, if we can push the two forces together we might get a compromise, at least, on what is good for everybody, rather than have the controversy that is going on. Senator DOUGLAS. I am reminded of the fact that under the agreement that was reached before I came in I probably should not ask you any questions until after you had finished, but I will just make this comment, and that is that, that type of cooperation reminds me of the cooperation between the tiger and the young lady. You know the two went out to ride and when they finished the ride they finished it with the lady inside and a smile on the face of the tiger. Mr. LINCOLN. I think that opens some discussion, Senator, but at least I think this might offer an opportunity of both forces pulling together. Senator DOUGLAS. I think it would result in the Federal Reserve System winding up in the alimentary canal of the tiger, the Treasury Department. Mr. LINCOLN. We do not share that opinion, particularly if Congress gives the Federal Reserve a clear mandate to stabilize prices, as we suggest. You may be right, however. Senator DOUGLAS. Well, excuse me. The chairman had to go to another meeting. He presented his apologies and he asked me to go on. The next witness is Mr. Donald E. Montgomery, who is director of the Washington office of the International Union, United Automobile Workers-CIO. Mr. Montgomery has had a great deal of experience in economic matters. He served as consumers' counsel in the Department of Agriculture, in the Wisconsin Department of Markets, and with the Wisconsin attorney general administering State unfair competition and antitrust statues. Mr. Montgomery, we will be very glad to hear you. STATEMENT OF DONALD E. MONTGOMERY, DIRECTOR OF WASHINGTON OFFICE, INTERNATIONAL UNION, UAW-CIO Mr. MONTGOMERY. Mr. Chairman, I am going to confine my comment to just two items of the large subject matter which your committee has been considering. In order to cover the two items in this brief time I am going to read the statement I have prepared. |