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flexibly to meet the situations that may develop, I think it would be better for all of us, and would certainly save us a lot of work.

Mr. MARTIN. Right.

Senator SPARKMAN. I wonder if you could give us just a very brief statement on the present economic outlook? I know you are called on for that just about every day. This is general housing legislation and while, of course, we have the recession in mind, that is not the primary factor in the consideration of this legislation. The Emergency Housing Act was, as you know, primarily an antirecession measure. I am glad to hear your comment that it has speeded up activity in housing. I think all of the statistics we have seen, and all of the statements we have had, indicate that to be true. But I wonder if you would tell us very briefly what you think of the present economic situation.

Mr. MARTIN. Well, I think it is very difficult to

Senator SPARKMAN. Is it improving, or is it getting worse, or are we on the bottom, or can you tell us just where we are?

Mr. MARTIN. No, sir. I do not think there are any conclusive indicators at the moment of general activity. I think in the spring, with the seasonal movements, we have to be very cautious about ascribing too much optimism to movements that are developing. I would say that the rate of decline in the economy has been slightly lower than it has been for some time, and there are some hopeful indications as a result of that that we are having a leveling out process, but I do not think any of the indications to date are conclusive. I think we have to be very careful about being either overoptimistic or overpessimistic. We have had a prolonged winter period. I do not want to exaggerate that aspect of it, but there has been bad weather in a great many areas, and floods in some areas, and cotton lands under water in Missouri, and that type of thing, which is very difficult to evaluate.

I would not want to forecast at this juncture at all, other than to say that there is this process of leveling out going on at the moment, and if we can consolidate our gains the factors that may come out of that may lead to a substantial spring rise. How far that might go is another story. That is about the best I can do on the general economy at the moment.

Senator SPARKMAN. I remember not too long ago you appeared before the Small Business Committee and I asked you the question as to whether we were in a period of inflation or deflation, and if my recollection is correct, you said you would say that the inclination is toward deflation. Do you still hold to that?

Mr. MARTIN. I think that there are more recessionary tendencies or deflationary tendencies, or whatever words you want to use, than there are the reverse. Yes.

Senator SPARKMAN. Do you have any information on the movement of mortgage interest rates as compared with other money rates?

Mr. MARTIN. Yes; we have some. We have a chart we would like to put in the record here. Mr. Young just constructed this. We think there is no question that the availability of mortgage money is increasing and that the rate is moving downward. These things take time. They just do not happen overnight.

(The chart referred to will be found on p. 188.)

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Senator SPARKMAN. When you say that the mortgage interest rates are moving down, are they moving down at the same rate as all interest rates, or faster, or what?

Mr. MARTIN. General interest rates are pretty difficult to measure. We have made four adjustments in the discount rate since we reversed our policy and three changes in reserve requirements. Short-term interest rates have declined from the 32-percent level to 14 percent and lower level. Longer term interest rates, after declining rather sharply initially, more or less stabilized, and there was a very amazing response, really, to the modest adjustment in the longer interest rate, and an enormous volume of financing has taken place in the first 4 months of the year. I think State and municipal securities sold for new capital in the first 3 months were something like $2.3 billion, and for the 4 months through April it is the largest State and municipal financing in our history.

Corporate financing has been just slightly below the record level of a year ago. This response has been dramatic, and the money supply has gradually begun to reverse itself and turn up, even though we have a very marked decline in production.

The production index of the Federal Reserve Board is down about 13 percent from the period of last August, when it was more or less steady, and slightly lower than the December 1956 high.

We feel that is quite an impressive response to monetary policy in terms of basic financing.

Now, mortgage rates have perhaps not moved much and certainly have not moved as fast as the short-term interest rates, but I believe you are coming to the period where the same decline that has occurred in the long-term rate is beginning to move over into the mortgage rate, and I would think that there is no question of the trend that I indicated.

Would you like to comment any further on that, either Mr. Riefler or Mr. Young?

Mr. YOUNG. No; except that mortgage rates always react with a certain lag, as this chart shows. When the bond market rises for the high-grade securities, it will be a few months until that commences to move over into the mortgage market. Then, when central market rates start to go down, it will take a few months before a similar movement begins in the mortgage market; but it always

moves.

Senator SPARK MAN. Senator Capehart is going to have some questions, so I will defer my questions until he asks them. Senator CAPEHART. Mr. Martin, what is inflation? Mr. MARTIN. What is inflation?

Senator CAPEHART. Yes; you hear a lot about it. We write about it; we talk about it. What is it?

Mr. MARTIN. I think that inflation is any excess-whether it is in the wage area, in terms of productivity, or in the credit area, in terms of foreseeable repayment, or whether it is in the price area, in terms of sustainable price movement. I think to try to make a simple definition of inflation is a great mistake. Really what we are dealing with here are fundamental excesses, whether it is wage inflation, credit inflation, or price inflation. All of these definitions have

come into being in the last 3 or 4 years, as though they were new discoveries, when what you are really dealing with is an unsustainable growth, an unsustainable demand, and other unsustainable factors in the economy that will be adjusted unless they are leveled off. Senator CAPEHART. Do we have inflation at the moment?

Mr. MARTIN. We do not

Senator CAPEHART. We do not have inflation?

Mr. MARTIN. We do not have inflation in that sense, because, as 1 said, the pressures have been reversed, with the exception of one fundamental, which is the overriding problem today. You have a wage-cost-price inflationary spiral that persists at the moment-even though wages are still increasing and some prices are still increasing at a time when demand is falling. In that sense we have not solved that problem. But the other factors in the economy in terms of credit have completely slowed down. The pressures are almost all in this area of wage-cost-price.

Senator CAPEHART. Do we not ordinarily think of inflation in relationship to the prices of things we buy?

Mr. MARTIN. I think we do, but at the tail end-the difficulty when inflation gets far ahead of you is that the unraveling process is the most difficult at the end.

Senator CAPEHART. In relation to the things we buy, meaning all of us, at the moment do we have inflation, or do we not?

Mr. MARTIN. We still have inflation

Senator CAPEHART. In relation to the things we buy?

Mr. MARTIN. That is right.

Senator CAPEHART. In other words, prices at the moment are higher than they have ever been?

Mr. MARTIN. They are.

Senator CAPEHART. My next question is this: I was always taught to believe that big production would reduce prices. We were told by everyone in this committee when we had price control that big production would reduce prices, particularily when we were talking about OPA and those things. Now today we have the greatest production in the history of the Nation of almost every conceivable thing. Why do we have such high prices under those conditions?

Mr. MARTIN. I think the answer to that is that the people do not like to take losses and they hold on as long as they can. But we have not gotten away from the supply and demand factors yet, and in the long run you are bound to have some adjustments. I think some adjustments are taking place.

Senator CAPEHART. How do you account for the fact that we have some 5 million unemployed, and yet prices are going up?

Mr. MARTIN. I account for it in the fact that this wage-cost-price surge got ahead of us over the last couple of years, and it is still ahead of us. And, as I indicated, it does not make any sense for wages to continue to rise when unemployment is increasing, or for prices to continue to rise when the demand for products is declining.

Senator CAPEHART. I asked you the question as to what inflation was. What is deflation?

Mr. MARTIN. Deflation is the reverse.

Senator CAPEHART. Of inflation.

Mr. MARTIN. Of inflation. And the most difficult problem we have in the Federal Reserve is trying to get people to see the relationship between inflation and deflation.

Senator CAPEHART. But in respect to prices of the things that we buy, we have no deflation today; do we?

Mr. MARTIN. That is right, but I do not say none at all. There is no question that prices are coming down in many areas. Take our cost index; the price index. Services and farm prices primarily have accounted for the rise recently. There are also some quality changes that are not reflected in the price mechanism and in the present price index. I do not mean to criticize the Consumers Price Index we presently have, but my commonsense makes me question whether it is completely representative of what is happening at the moment. I think over a period of time it may be indicative, but I have some question about it at the moment.

Senator CAPEHART. Is this a fact, and is it historically correct, that we have low interest rates when we have deflated business and lots of men unemployed, and we have higher interest rates when everybody is working and we have a great demand for goods and services that requires a tremendous amount of money for financing?

Mr. MARTIN. Well, not necessarily as a generalization, but I think that anyone who thinks easy money, in itself, will produce good business has only to look at the period of the thirties.

Senator ČAPEHART. Has there ever been a time when we were prosperous, with all of our people working, when we did not have all of our money likewise working, which meant it was not particularly easy to secure?

Mr. MARTIN. Rising interest rates have generally been associated with good business, but when the price mechanism is reflected in the interest cost on a basis of acting as a general governor on the economy, it has been

Senator CAPEHART. Is it not a fact that, the more people that become unemployed the less demand there will be for money, because of the fact that they are unemployed, which means we are not building things and creating things, or rendering services? So will we not get a lower interest rate gradually because there is no demand for the money?

Mr. MARTIN. You will have a lower interest rate. Unless people see an opportunity to make a profit, they are not going to borrow.

Senator CAPEHART. Is it not likewise true, if all of the people are working it means the economic machine is going ahead at full steam, and then we have higher interest rates and a greater demand for money to build all of the things and projects that the men are working on?

Mr. MARTIN. That is right.

Senator CAPEHART. Then, if we advocate lower interest rates, unless we mean to have it controlled by the Government, meaning price controls and controlling money, just as we might control any commodity or any material thing, then we are asking for poor business and unemployment?

Mr. MARTIN. I do not think it is quite as simple as that, but I think it frequently works in that way. The supply and demand factors in the economy are such that we should lean against this wind, as I have

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