INTRODUCTION

The Subcommittee on General Credit Control and Debt Managent was appointed by Senator Joseph C. O'Mahoney, Chairman of › Joint Committee on the Economic Report, early in April 1951. mewhat more than a year before (in January 1950) a previous subnmittee the Subcommittee on Monetary, Credit, and Fiscal licies, under the chairmanship of Senator Douglas-had submitted report dealing with fiscal and monetary policy. Since that time › invasion of South Korea by Communist forces, beginning in late ne 1950, had caused a marked increase in international tension and launching of a greatly enhanced program of defense expenditure the United States and, to a lesser extent, by the other countries of free world. Accompanying this increase in tension and increased inning for defense expenditure was a world-wide increase in prices, ming in two waves one immediately following the outbreak in orea and the other following the Chinese intervention in November. holesale prices in the United States rose altogether about 16 percent tween June 1950 and March 1951.

During the period of this rapid rise in wholesale prices, the budget the United States Government was not merely balanced but showed substantial surplus. This coincidence of a rapidly rising price vel and an over-balanced budget naturally caused many people to estion whether the price rise could not, and should not, have been erted by the more vigorous use of monetary policy. This question is given especial point by the large price rise which had already curred since the end of the war; by the report of the previous submmittee, which had recommended a more vigorous use of monetary licy; by a return to a more vigorous use of monetary policy in cerin European countries, notably Belgium and Italy; by a revival nong many academic economists in the United States of confidence the efficacy of monetary policy as a means of combating inflation; id, most important of all, by a prolonged struggle between the Treasy and the Federal Reserve System over the extent, if any, to which neral credit policy should be used as a means of combating the >st-Korean inflation in the United States. This struggle had just rminated in a so-called "accord" between the two agencies, announcI on March 4, 1951. The extent of the disagreement between the vo agencies during the struggle and the points upon which they were ow in agreement were equally unknown. The announcement of the :cord simply said:

The Treasury and the Federal Reserve System have reached full accord with spect to debt-management and monetary policies to be pursued in furthering eir common purpose to assure the successful financing of the Government's quirements and, at the same time, to minimize monetization of the public debt. It was against this background that the present Subcommittee >mmenced its work. The two tasks before it were, broadly, to udy and make recommendations concerning (1) the appropriate olicies, and particularly the appropriate monetary policies which

should be used in promoting economic stability, and (2) the appr ate governmental machinery for implementing these policies.

As the first step in its inquiry, the Subcommittee sent questionn to the heads of the principal Government agencies concerned an many persons in the private economy. The questions were diffe for each class of respondent, depending on the interests and spe sources of information of each, and, in the case of those addressed Government agencies, involved the preparation of a considera volume of background material. The questions, which were develo in discussions with the respondents and others extending over a per of several months, were published by the Subcommittee in Octo 1951 in a pamphlet entitled Questions on General Credit Control e Debt Management. The answers to these questions, containing mu valuable material on the issues before the Subcommittee, were p lished in February 1952 in a two-volume document entitled Monet Policy and the Management of the Public Debt; Their Role in Achier Price Stability and High-Level Employment. This document, which hereafter cited as the Compendium, served as the basis for the sub quent hearings of the Subcommittee, which extended from March through March 31, 1952. Many of the witnesses at the hearings been contributors to the Compendium and all of them were furnish copies to study as an aid in preparing their testimony. Gene reference is made to both the Compendium and the Hearings for supp of the subsequent discussion and conclusions in this report (and many cases for argument supporting other conclusions, as most of t matters dealt with are highly controversial). In the interest brevity, particular reference is made only in cases where it appea especially helpful to the discussion.

1 Senate Document No. 123, 82d Cong., 2d Sess.

1

2) thes

policies questi ncerned

s were I. FISCAL AND MONETARY POLICY SINCE THE OUTBREAK

sts and

Se addr

cons

vere der

IN KOREA

A. PRICE MOVEMENTS FOLLOWING THE OUTBREAK IN KOREA overs 1. The Period of Price Rise, June 1950-March 1951. Wholesale tee in prices in the United States rose about 16 percent between June 1950 it Co and March 1951. The increase in prices which followed the outbreak taining of hostilities in Korea was world-wide in scope and was greatest in ee, we internationally-traded raw materials. The increases during this led period in the prices of each of 14 leading commodities imported into in the United States are shown in Table 1. The average price of all ent, commodities imported into the United States increased during this or the period by 57.1 percent, as shown in Chart 1, taken from the testiml mony of Roy Reierson, Vice President of the Bankers Trust Company hear of New York. The increase in the average of all wholesale prices in re for the United States during this period was somewhat less than that in v. most of the other principal trading countries of Western Europe and fors the British Commonwealth, as shown in Table 2. This comparison ort is not in any way intended to acquit the responsible policy-making most authorities of the United States, including Congress, the Treasury inte Department and the Federal Reserve System, for any failure on their its part to adopt appropriate policies during this period, but merely to indicate the scope of the problem with which they were confronted. TABLE 1.-Increases in the prices of leading import commodities in the United States, June 1950-March 1951

Source: International Financial Statistics, monthly bulletin of the International Monetary Fund.

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June

1950

CHART 1.-SELECTED ECONOMIC FACTORS IN THE POST-KOREAN BOOM

NOTE. The beginning and ending dates and the definition of money supply used in preparing this chart (taken from the testimony of Mr. Roy Reierson at p. 647 of the Hearings) are somewhat different than those used elsewhere in this report. ences are of no importance as far as the argument of the report is concerned.

These differ