committee. We are grateful to the International Monetar the loan of his services to the Joint Committee on the Eco port for this assignment. Finally, I want to express my personal thanks to all m the Subcommittee for their cooperation in conducting this general credit control and debt management. Respectfully submitted. WRIGHT PATM Chairman, Subcommittee on General Credit Control a JUNE 26, 1952. CONTENTS Summary of findings and recommendations- Introduction---. I. Fiscal and monetary policy since the outbreak in Korea__ 1. The period of price rise, June 1950-March 1951. 2. The period of relative price stability, March 1951- 3. Could a more vigorous monetary policy have averted B. The wisdom of monetary and debt management policy follow- 1. Factors which had to be considered in the period, 2. The actions of the monetary and debt management II. Fiscal and monetary policy for the future.... Page 1 9 11 11 11 24 24 3. Monetary and debt management policy since March A. Over-all role of fiscal and monetary policy; appropriate fiscal B. Role of monetary policy 1. Cost vs. availability of credit. 2. Private vs. public credit _ - . 3. Government lending and loan guaranty agencies... 4. Corporate self-financing - 5. Interest rates and long-term bond prices_ 6. Efficacy of general monetary policy.. C. Selective credit controls and the voluntary credit restraint program. 1. Selective credit controls_-_ 2. The voluntary credit restraint program. D. Management of the public debt. 1. General debt management policy. 2. Issuance of purchasing power honds. E. Congressional mandates on economic policy. III. Bank reserve requirements... A. Functions of bank reserve requirements; changes in require- B. Extension of requirements to nonmember banks_ C. New forms of reserve requirements. IV. The machinery for the determination of monetary policy. C. The position of the Federal Reserve banks and the Federal D. The composition of the Board of Governors. 2. Number and compensation of members.. 4. Qualifications for membership. E. Coordination of fiscal and monetary policy F. Finances of the Federal Reserve System.. 1. Private ownership of the stock of the Federal Reserve 2. Disposition of the earnings of the Federal Reserve 3. Tax exemption of the dividends on Federal Reserve 4. Budgetary and auditing procedures. V. The gold standard Statement of views by Senator Douglas- Appendix (Treasury-Federal Reserve accord). LIST OF TABLES AND CHARTS TABLES Pa 1. Increases in the prices of leading import commodities in the United States, June 1950-March 1951___. 2. Comparison of change in wholesale price index in the United States with that in principal countries of Europe and the British Common- wealth, June 1950-March 1951_. 3. Factors affecting the money supply, June 30, 1950-March 28, 1951---- 4. Increase in reserves available for expansion in the banking system, 5. Factors affecting the money supply, March 28, 1951-March 26, 1952- 6. Increase in reserves available for expansion in the banking system, March 28, 1951-March 26, 1952__ 7. Effect of hypothetical increases in interest rates on the price of a 20-year CHARTS 1. Selected economic factors in the post-Korean boom. 2. Prices, production, and the money supply, 1919–51- 3. Money supply, turn-over of bank deposits, and wholesale prices, MONETARY POLICY AND THE MANAGEMENT OF THE PUBLIC DEBT d SUMMARY OF FINDINGS AND RECOMMENDATIONS FISCAL AND MONETARY POLICY SINCE THE OUTBREAK IN KOREA 1. Wholesale prices in the United States rose about 16 percent etween June 1950 and March 1951. This rise might have been noderated somewhat by the earlier adoption of a more restrictive nonetary policy. But the use of monetary measures sufficiently Dowerful to havé averted most or all of the rise probably would have ad consequences even more undesirable than the rise itself. Reiewing the circumstances of the period, it is an open question vhether the somewhat more restrictive monetary policy which folowed the Treasury-Federal Reserve "accord" of March 4, 1951, hould have been applied earlier. [With respect to the timing, Senator Flanders notes that the predecessor subcommittee recommended in January 1950 that the freedom of the Federal Reserve to restrict credit and raise interest rates for general stabilization purposes should be restored even if this involved higher debt service charges and greater inconvenience to the Treasury in debt management. In his estimation, an "accord" established at that time would not have been too early.] 2. Wholesale prices reached a peak in March 1951 and declined bout 4 percent during the following year. Some of the credit for his turn in the price situation is doubtless due to the more restrictive nonetary policy following the accord and some is doubtless due to the mposition of price and wage controls in January 1951. For the most art, however, it appears to have been a natural reaction from the wave of "scare buying" set off by the Korean outbreak and would ave occurred in any event. 3. An examination of the relevant data shows remarkably little orrelation between price changes since the outbreak in Korea and hanges in either the money supply or in the budgetary position of the Tederal Government. During the period of rapid price rise the budget vas strongly over-balanced and the money supply was increasing ery slowly; during the subsequent period of price stability and decline he budget showed a deficit and the money supply was rising much nore rapidly. These factors doubtless had an influence on prices; ut, in the short run, this influence was outweighed by that of other actors. In the long run, however-when other factors tend to averge out-changes in the money supply and in the budgetary position f the Federal Government are likely to have a decisive influence. They are important at all times because they are subject to the concious control of the Government, whereas the factors originating in the "outside economy" are not. It is only by persisting in appropria fiscal and monetary policies that the Government can make its f contribution to price stability and high-level employment over t longer period. 4. The differences between the Treasury and the Federal Reser during the period between the outbreak in Korea and the accord we rather small when viewed in perspective. Prior to the turn of th year 1950-51, they were concerned principally with short-term intere rates. It was not until early 1951 that the Federal Reserve evidenc a desire to increase the long-term interest rate above 2%1⁄2 percent. A examination of the confidential correspondence between the Treasu and the Federal Reserve, and of the Federal Reserve with the Pres dent, shows, for the most part, that each agency was striving to serv the public interest as it saw it. The officials of the Federal Reser i System, the Secretary of the Treasury, and the President, howeve appear at times to have interpreted agreements differently and not a have been aware of each other's interpretations. This might hart been avoided by better staff work and by staff attendance at top-lew t conferences. 5. We believe that general monetary, credit, and fiscal polici should be the Government's primary and principal means of prom ing the ends of price stability and high-level employment and the whenever possible reliance should be placed on these means in prefe e ence to devices such as price, wage, and allocation controls and, to i lesser extent, selective credit controls-all of which involve inter vention in particular markets. Nevertheless, under present circums stances in which we do not yet know the full impact on the econom of the defense expenditure program-we believe that it would b improvident to repeal the legislative authority for either price, wage and allocation controls or for selective credit controls. [Mr. Patman believes that the disadvantages of selective con trols over consumer and housing credit are so great that the t authority for the imposition of these controls should be repealed 1 immediately.] II. FISCAL AND MONETARY POLICY FOR THE FUTURE b 6. We reaffirm the recommendation of our predecessor subcom a mittee that a flexible fiscal policy producing a surplus of revenue o over expenditures in periods of high prosperity and a surplus of er p penditures over revenues in periods of depression should be a princip s reliance of the Federal Government in promoting price stability an high-level employment. 7. We believe that monetary policy (variations in the ease tightness of credit) should also be used as a principal means of seek ing price stability and high-level employment. It must be used with t caution, however, in order to insure that measures taken to halt an a inflation do not aggravate a subsequent period of depression, or via [Senator Flanders feels that resoluteness in the use of monetary to policy should be emphasized as well as caution; effective efforts to check inflation should not be unduly inhibited by alarms about re possible subsequent depressions, or vice versa. re There is much to be said for more frequent small changes in se credit policy. This would help get the country out of "crisis 1 |