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vailing risks that are involved in foreign investments is cooperative to the extent that our country is brought into closer relationship with the rest of the world.

These two problems, the problem of mutual defense and prevention of world war III, and the problem of bringing our productive resources and economic activities into harmony with those of other free nations, are the paramount and the immediate objectives of national policy which must govern all other decisions.

In other words, fiscal credit and debt policies are dictated not only by the fundamental objective of maintaining and encouraging maximum employment of men and of physical and institutional resources of the country, of furthering the growing and expanding economy. but also of meeting the larger challenge confronting the Nation: Its stature and status of its people.

Labor does not believe that a static policy dealing with many aspects of economic equilibrium is proper or defensible. Economic policy must be dynamic.

Labor believes that the budgetary policies of the Federal Government should be sound. By the word "sound" I mean that the Federal Government should be in a position to provide the services necessary to carry out its duties to the people and at the same time to approach as closely as possible the meeting of the cost of its investments and expenditures out of the current income. And by "current income," I do not mean income in the same month, or even in the same year, but income that the current growth and the economic yield of that growth in the shortest practical span of time, and not greater than the productive span of time of the same generation.

The end of the budgetary policy is not to balance the budget annually. In fact, an annually balanced budget may be neither feasible nor desirable. The purpose of the budgetary policy is dictated by the larger requirements of the Nation's security and economic welfare.

The far more important problem is not the elimination of the deficit but the management of the deficit and the manner in which the deficit is met. The same applies to the problem of debt management. Debt management had, of necessity, to pursue a set of different objectives in the recovery period of 1932-40, in the wartime period 1940-46, in the postwar period 1946-50, and in the present post-Korean phase, the defense period at the present time.

Much attention has been paid to the question of how much or how large is the public debt and not enough attention has been paid to the question of who owns the debt, and the equally important question of the composition of the debt.

There have been some developments that are quite important and I think throw an important light on the problem that has been under discussion this morning. The figures that we have on the changes in the ownership of the public debt in the period following 1946 would indicate rather significant shifts. For example, the largest single change in any single class of investors was a reduction of almost $26 billion in the holding of commercial banks. The reduction in the holdings of the Federal Reserve banks, however, was less than $1 billion. It was purely nominal. There was a slight decline in the holdings of the savings banks, about $1.3 billion, and about $8 billion decline in the holdings of the insurance companies. There were increases in the the other sectors, not large increases but significant increases: Other corporations and associations, an increase of $3.2 billion; State and local governments, $1.5 billion; individuals, $2.6 billion, $2 billion in other categories; and Federal Government investment accounts, $12 billion.

This throws light on the fact that in the current approach to the debt, the reductions in commercial bank holdings did not in themselves fall into a pattern of an affirmative coordinated policy by the agencies of the Federal Government. In other words, you can see that the policy was dictated by the immediate considerations of the Treasury for immediate need for money.

The transfer of the debt to some extent from banks and banking institutions into the nonbanking sources did occur, but the Federal Reserve Board policy did not contribute to that. I am merely using that as an illustration, because I cannot, in the very short time here, go into detail and analyze the problem. I am using the illustration simply to point out, and I think it is important to point out, that the question of debt management and the part that it plays in the current problem must be put in the proper perspective; that debt management cannot accomplish a great deal toward arresting inflation if the approach is made primarily on the basis of considerations of meeting the immediate cash needs of the Treasury.

But debt management can contribute to economic stabilization a great deal if it is used to reinforce both the fiscal and the monetary policy. So here is the real testing ground for the argument that has already been made, which is now before this committee, for closer coordination between the agencies responsible for the several parts of our monetary, credit and fiscal policy. We should bear in mind that fiscal policy not only determines the Government receipts and expenditures but it also determines the size of the public debt and, consequently the amount of the outstanding debt. Monetary and credit policies, on the other hand, should be formulated to provide for noninflationary absorption of the public debt. Private debt, which is extremely important and which has been rather dramatically left out of the major considerations in our dealing with the problem of inflation in the past 2 years, presents an extremely vital problem.

What I wanted to emphasize in this is that when we are dealing with the present problem we have to recognize that we are still in a phase, of necessity, of inflation. Inflation has come into a new phase, a different phase but, nonetheless, it provides a very special problem in our dealing with the defense segment of our entire policy, both in terms of the amount of expenditures and in terms of the alinement of our resources to support the defense program. That, I say, is still there. The present soft situation should not be misleading.

The kind of adjustments that are taking place are the result of quick inflation which was highly speculative in the initial phase. The first post-Korean phase, was to a large extent speculative and noneconomic in terms of the volume of goods, services, and money available, and in the direction of transactions that went on. The post-Korean speculative cycle, despite subsequent readjustments, still leaves us, in the latter part of this year, with a very serious danger of further inflation that must be met through sound policy.

Now this problem at hand cannot be met solely through the kind of isolated dealing with it that has sometimes been suggested. We feel

that we need price and wage stabilization policies to be carried on, and labor has supported them. But labor has supported those policies with the understanding that the equally important set of policies will be applied on the monetary credit and tax side.

We are not going into the question of what can be done on taxation. We have made specific recommendations on that and have pointed out both the inequities, loopholes, and the positive means through which a more equitable tax approach could be made that would be antiinflationary.

In terms of the credit and monetary policy I would like to reinforce the point that has already been made, and that is that the approach that has been made toward the consumer, toward the worker or the family in need of a place to live is one that is completely differentiated from the need of the business community for funds. There has been no equity in the approach as between the two segments. In other words, the selective controls under regulation W and regulation X, regressive as they are, have been much more insistent in providing a limitation on the amount of consumer credit available for the necessities. Yet in the case of the business community there has been no real attempt made on the part of the Government to provide that insistence.

As to the relationship between the Federal Reserve Board and the rest of the economic policy of the Government, we feel it is extremely important to accomplish one result, and I am not going to attempt to spell out any specific recommendation as to how it should be made, and I don't know whether at this stage it would be wise to make a specific recommendation of that kind. But we do feel that the Federal Reserve policy needs to be concerted with the broad requirements of national economic policy, a policy which obviously is subject, in its entirety, to congressional review, which is the ultimate source of policy making. But within the executive branch of the Government there needs to be harmony achieved so we will not have contradictory or conflicting purpose pursued by one agency simultaneously with another. It certainly needs to be started by a direct operating relationship among the representatives of the Council of Economic Advisers, the Treasury and the Federal Reserve Board, there is no question about that.

Finally, it seems to me in any agency such as the Federal Reserve Board, which is a bankers' institution, which is divorced to a very large extent of direct control even by the Congress, and certainly by any executive agency, there is need for consultation with public interest groups.

I am not proposing any advisory committees for the Federal Reserve Board of Governors, or anything of that sort. I am proposing a kind of machinery that has been used, for example, by the Council of Economic Advisers, which has provided means for consulting with all the representative groups and taking into account the current views on the part of the public. In this way, the Board of Governors, which is now just above the angels, can be brought down to earth, in order to find out and take into account the interests and necessities of the public which they serve, beyond those of the select fraternity of bankers.

Those are, in a very general way, the recommendations, Mr. ChairWe feel, at some stage, it might also occur to those concerned with the operation of the System that those involved in the operation of the Federal Reserve System might consider the general public, to include a few men who labor, or who have been in the position to express the labor point of view. Now there have been men in the individual Federal Reserve districts who have been drawn from business, who have been drawn from among the farmers. Mr. Kline is one example of it. He served as a director because he represents a farm organization. But it has yet to happen that the public, as defined by the Federal Reserve System, would include labor.

man.

Now I am not asking for labor representation as such, all I am suggesting is that labor is a member of the public and it should be taken into account.

Thank you.

Senator DOUGLAS. Thank you very much, Mr. Shishkin.

The final witness is Mr. Jerry Voorhis, who, for 10 years was a very valuable Member of the House of Representatives and for the last 5 years has been secretary to the Cooperative League of the United States of America, and who has given a great deal of very careful consideration to the question of money and credit. We are very glad indeed, Mr. Voorhis, to have you take part in the discussion.

STATEMENT OF JERRY VOORHIS, SECRETARY, COOPERATIVE LEAGUE OF THE UNITED STATES OF AMERICA

Mr. VOORHIS. Thank you, Mr. Chairman.

Mr. Chairman, members of the committee, and members of the panel:

Cooperatives are owned, controlled, and patronized by large numbers of little people-people of small resources-who by means of cooperatives are able to participate in significant ownership, responsibility, and decision making. The interest of the farmers and consumers who make u the cooperative membership is the same as the general public interest of the whole Nation. So when that general public interest is involved the cooperatives are eager to do what they can to advance and protect it.

Inflation and deflation are wrong, economically and morally. They are violations of contracts, they take bread from peoples mouths, they stifle Nation's production. Inflation means that the money supply is being increased faster than the supply of goods or services to be purchased with that money is being increased. Deflation means that the supply of money is falling below the amount needed to maintain an active demand for the goods and services that are being or could be produced. Both conditions create severe economic maladjustments; both unjustly benefit certain sections of the population at the expense of others; and both could be prevented, if rational monetary policy were laid down by Congress and rational action in the field of money, credit and debt were taken.

We have never in all the long history of this Nation either adopted such a policy or followed such a course of action. We are probably closer to doing so today than has been the case for a long time. The holding of these hearings by this subcommittee, the membership and chairmanship of the committee are good omens indeed.

Furthermore, some sensible things are being said, written, and spoken. Statements are being made now, and listened to, which a few years ago fell on relatively deaf ears when some of us made exactly the same statements in Congress. For example, the Federal Reserve Bank of New York has published an excellent pamphlet entitled "A Days' Work" in which we find this statement:

A commercial bank, unlike any other business, can "manufacture" money in the form of checking account deposits. A borrower signs one piece of paper promising to pay the bank a certain sum on a certain date and the banker enters on another piece of paper a deposit in the borrower's checking account.

Even more pointed is the statement of Mr. Charles E. Wilson, president of General Motors Co. in his speech at Michigan State College last October 17, backed with charts and statistical data, to this effect:

Changes in the money supply preceded all sustained changes in the Consumer Price Index. There is not a single instance in which the cost of living has risen appreciably and the rise been sustained except after a prior substantial increase in the money supply in excess of the trend line of need for the country.

In other words, Mr. Wilson is telling the Nation as some of us, including the chairman of this subcommittee have been doing for years, that since 1939 the dollar has lost almost half of its buying power more unhealthy depressions are the result of monetary causes.

President John Adams told us that 150 years ago when he said:

All the perplexities, confusion, and distress in America arise, not from defects in the Constitution or confederation, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit, and circulation.

The historical record is not a pretty one. Most people know today that since 1939 the dollars has lost almost half of its buying power due to inflation of bank-credit money. Many people know that between June 1950 and December 1951, the banking system created over $12 billion of new money and loaned it into circulation. Practically everyone knows that this resulted in an increase in wholesale prices of nearly 16 percent. But most of us may have forgotten that in December 1915, using 1926 as base, the dollar had a buying power of $1.35, that this fell to $0.59 by April 1920, rose again to $1.01 in the following year only, during which time farm prices fell to about half their former figures.

Today we hear more alarm about inflation than about deflation. Most of the factors in the present situation, especially the devoting of about a fifth to a quarter of our total production to military supplies which cannot be purchased by those receiving wages or profits for producing them, are inflationary factors. But in my opinion we should view the whole problem as one problem, recognizing that the worst thing about inflation is not the inflation itself so much as the deflation and depression which thus far have always resulted from it.

Of the two evils deflation is the more devastating, the greater threat to our valued institutions and the more difficult to remedy-unless some more or less new measures are applied to it.

While inflation gradually robs every possessor of money in the land of a portion of that money and corresponding benefits debtors, it is nonetheless usually accompanied by full employment for labor, a high volume of business activity and prosperity for the farmer, whose prices are probably more subject to fluctuations in response to monetary influences than those of any other group. Furthermore, a net reduction in the real debt burden, especially where the public debt is very large, has certain desirable aspects to it. Finally, the remedies

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