TOREAN BITABLE 2.—Comparison of change in wholesale_price_index in the United States with that in principal countries of Europe and the British Commonwealth, June 1950-March 1951 Item Country New Zealand.. port Cond Union of South Africa. Price index March 1951 (June 1950-100) 108 108 109 111 115 115 Source: International Financial Statistics, monthly bulletin of the International Monetary Fund. pducts t Outl comes upply One explanation which has commonly been given for price increases on other occasions was notably absent during the period under discussion. During the nine months from July 1950 through March 1951 the Federal Government operated at a cash surplus in an aggregate amount of $7.7 billion-or at a surplus of $5.1 billion on a cononventional accounting basis. This surplus was in part the result of some reduction in non-defense expenditures. To a greater extent it reflected the effect of the rapid increase in prices, production, dex and business activity following the outbreak in Korea upon revenues due under existing law. But it was also due in part to the prompt action of Congress in raising taxes to meet the prospective rise in defense expenditures. The effect of these tax increases was much more important, however, in the following period (discussed subsequently) in preventing the fiscal situation from worsening more than it did. They were a necessary and important step in any adequate long-run program to safeguard the purchasing power of the 1 dollar. But, their results in the period under discussion were a disappointment to those who believed it possible to place almost exclusive reliance on fiscal policy in maintaining price stability. of The Defense Production Act of 1950, authorizing the direct control of prices and wages, became effective on September 8, 1950. A comprehensive freeze of prices and wages was not undertaken, however, until January 1951--and was then based on wages prevailing on January 25, 1951, and on the highest prices at which goods had been sold during the period between December 19, 1950, and January 25, 1951. Prior to this comprehensive freeze, only two selective control orders had been issued, one applying to the price of automobiles and the other to the price of hides. Aside from these two orders, exclusive reliance was placed upon appeals for voluntary cooperation. It is probable that during the period under revie the anticipation of the imposition of mandatory controls raised prie at least as much as they were held down by the use of hortator techniques and by the two controls actually imposed. The Defense Production Act also authorized the control of consum and housing credit, and in September the Board of Governors issu Regulation W, imposing selective controls on instalment credit. I October, it tightened the terms on instalment credit set by Regulatio W and issued Regulation X, imposing selective controls on credit fo the purchase of new housing. In January and February 195 Regulation X was broadened to include certain commercial constr tion. The rise in instalment credit, which had been very rapid in th months immediately following the Korean outbreak, soon leveled and the outstanding amount did not increase appreciably during th year 1951. The regulation of new real estate credit was less promp in taking hold due to the large number of loans for which commitment had been made at the time it went into effect-which commitment were exempted from the terms of the Regulation. Naturally man commitments were hastened in anticipation of the imposition of the Regulation. It seems, on the whole, that the selective regulation real-estate credit had no net restraining effect on inflationary pressure during the period up to March 1951. The During this period, while prices were rising rapidly, some modes steps were taken toward the institution of a stronger monetary policy These steps were confined principally to increases in short-term interest rates. (It is recognized that the cutting edge of monetary policy, least during the early stages of its application, consists largely in reduction of the availability of credit rather than in an increase in its cost. Nevertheless, making due allowance for this qualification, changes in interest rates are the most convenient quantitative measure of changes in the intensity of a general credit restriction.) average yield on three-month Treasury bills advanced from 1.17 percent in June 1950 to 1.39 percent in February 1951, while that on Treasury bonds with more than fifteen years to maturity or earliest call date advanced from 2.33 percent to 2.40 percent. These increases occurred before the "accord" between the Treasury and the Federal Reserve System, which was reached on March 4, 1951. As shown by the record, they were, for the most part, opposed by the Treasury. Despite the degree of reduction in the availability of credit re flected in the increases in interest rates just mentioned, total bank loans increased by $10.5 billion-one of the largest increases which has ever occurred in a period of equal length. In evaluating this increase, it should be remembered that Congress had decided that the defense build-up should proceed, as far as possible, by the expansion of privately owned plant capacity rather than principally by the con 1 The Defense Production Act states in part: * * "SEC. 402. (a) In order to carry out the objectives of this title, the President may encourage and promote voluntary action by business, agriculture, labor and consumers. "(b) (1) To the extent that the objectives of this title cannot be attained by action under subsection (8), the President may issue regulations and orders establishing a ceiling or ceilings * $13 Some advisers of the Economic Stabilization Agency believed that these provisions constituted a man. date from Congress to give the voluntary method "a fair trial" before using compulsory methods, while other advisers disputed this contention. The relevant Committee reports provide little support for it. It should be remembered in this connection that the price-fixing power was conferred upon the President by Congress on its own motion rather than upon his request. riod un ed. MONETARY POLICY AND MANAGEMENT OF THE PUBLIC DEBT 15 ntrols rais truction of Government-owned plant capacity, as had been the case luring and preceding World War II. This policy tended, on the one use of hand, to reduce the volume of Government expenditures, and, on the >ther hand, to increase the strain on private financial resources and so ontrollo cause a greater demand for business loans from banks and other Govenmenders. The proportion of bank loans used for plant expansion ment directly connected with the defense effort seems to have been larger, et by however, during the following year (when the total loan expansion was ols on smaller) than it was during the period under discussion. of Februar During this period of rapid expansion of bank loans, the privately ercial held money supply (defined in accordance with the usage of Economic ery Indicators as adjusted deposits plus currency outside of banks) insoon lecreased only $2.5 billion (1.5 percent) during this period. The most bly durimportant of the offsetting factors which held down the increase to as less such small proportions were a decline in the Government security commholdings of the banking system 2 and an outflow of gold. The factors comm affecting the money supply during this period are analyzed in Table 3. turally: osition TABLE 3.-Factors affecting the money supply (consolidated accounts of the Federal regulat Reserve banks, all commercial banks, mutual savings banks, and the Postal Savings System), June 30, 1950, to March 28, 1951 ary pre omer Increase in loans. [Billions of dollars] Increase in investments other than Government securities tary p Decrease in Government securities.. rm Decrease in gold stock.. +10.5 +1.3 -4.0 -2.4 poli argely Increase in net assets of banking system. +5.4 ease! Increase in capital and miscellaneous accounts, net.. -0.3 alific Increase in assets held per contra to deposits and currency. +5.1 n.) e me Increase in cash and deposits held by the Treasury and deposits held by foreign banks (not part of the money supply) -2.6 om Increase in Treasury currency (not issued by the banking system) (1) NOTE.-Direction of change of individual items indicated in words; “plus” and “minus" signs indicate effect on money supply. Detail may not add to totals because of rounding. Source: Board of Governors of the Federal Reserve System. During the period under review the reserves available for expansion in the commercial banking system increased by a net amount of $1.1 billion. The factors which resulted on net balance in this increase, and the nature of the concept itself, are shown in Table 4. It will be fer noted that of the $4.3 billion increase in Reserve bank holdings of Government securities during the period, about $2.4 billion was offset by a net outflow of gold and another $2.0 billion by the increase in reserve requirements which became effective in January and February 1951. Excess reserves increased about $300 million and the remainder of the increase in available reserves was used to support the expansion of the banking system during the period. COL An increase in the Government security holdings of the Federal Reserve banks was more than offset by a decrease in the holdings of other banks. TABLE 4.-Increase in reserves available for expansion in the banking syste [Billions of dollars] Increase in Government security holdings of the Federal Reserve banks.. +4 Other factors, net.... Increase in member bank reserve balances.. Less: Increase in required reserves due to increases in reserve requirements.... -2: +31 -21 +1.1 Increase during period in reserves available for expansion_-_ NOTE.-Direction of change of individual items indicated in words; "plus" and "minus" signs indies effect on member bank reserve balances available for credit expansion. Detail may not add to totals b cause of rounding. Source: Board of Governors of the Federal Reserve System. The substantial increase in prices between June 1950 and March 1951, occurring during a period of relatively strong fiscal policy (i. e a relatively large budget surplus) but of relatively weak monetar policy (i. e., relatively easy money), together with the rough equalityd the percentage increase in bank loans (20 percent) and in wholesal prices (16 percent) during the period, naturally raised the question in many minds of whether the price rise could not have been avertedor whether it could not then be stopped-by the adoption of a strong monetary policy. This was the situation at the time the present Subcommittee was appointed. 2. The Period of Relative Price Stability, March 1951-March 1952– The average level of wholesale prices, after reaching a high in March 1951, stabilized and then turned slightly downward. The average level of all wholesale prices declined about 4 percent during the year following March 1951 and stood about 12 percent above its 1947-19 average in March 1952. Consumers' prices-which normally lag after wholesale prices and which had advanced about 8 percent during the period between June 1950 and March 1951-slowed down their rise markedly and rose only about 2 percent during the year which ended in March 1952. A number of causes could be assigned for this abrupt charge in the inflationary situation. Much attention was given in the testimony to an attempt to arrange these causes in order of significance. Those which appear most important to the Subcommittee are listed here without prejudice as to order: (a) The international inflation in raw material prices had run its course. Most raw material prices had reached their high and turned down by early 1951. (From the viewpoint of the world as a whole this was, of course, an effect rather than a cause of the diminution in inflationary pressures. But, from the viewpoint of any individual country-even the United States-it was a cause and an important one of a diminution in domestic pressures.) The sharp rise in the prices of raw materials may have been partly caused by the stockpiling methods of American Government and business, and the down-turn may have been in part brought about by changes in these methods. (b) The wave of "scare buying" on the part of both business and consumers had spent itself. Consumers who had rushed to buy goods → the banking. uring the earlier period found that most types of goods were still vailable, while they themselves were short of cash or faced with ;reatly increased debts. A natural revulsion set in which was reflected Serve bank n an increase in consumer savings from a low of 2.2 percent of disbosable income in the third quarter of 1950 to a high of 9.2 percent of lisposable income in the third quarter of 1951. A corresponding evulsion took place in the attitude of businessmen with respect to their inventories. ve (c) The price and wage controls-which had been the occasion of requiranticipatory increases as well as of restraint in prices and wages during the earlier period-became purely restraining influences, the effectiveness of which may be variously evaluated. At the same time, the backlog of commitments made in anticipation of the selective y not regulation of real estate credit began to be worked off, so that this selective regulation came to have a substantial net restraining effect on new housing starts and on expenditures for construction. on. 'minus" siz I policy ak mon h in who he (d) A more active monetary policy was inaugurated, commencing and with the Treasury-Federal Reserve accord of March 4, 1951.3 This more active policy was reflected (subject to the qualifications made earlier) in an increase in the yield of three-month Treasury bills from eq 1.39 percent in February 1951 to 1.66 percent in March 1952, and in an increase in the average yield of Treasury bonds with a maturity or earliest call date of 15 years or over, from 2.40 percent to 2.70 percent. Furthermore, in the same month as the accord-March 1951-a formal Voluntary Credit Restraint Program was launched under the the auspices of the Federal Reserve System. The effectiveness of this program, which is difficult to measure, would, of course, be felt only in the totals of credit extended and not in the interest rate figures just quoted. que Daven of a s ch 1 pre in M e ave 194 It is difficult to measure the effectiveness of this increase in the the intensity of monetary policy (including the Voluntary Credit Restraint Program). Money supply (privately-held deposits plus currency lags outside of banks), which had increased only $2.5 billion during the ring nine-month period July 1950 through March 1951 (characterized by heir relatively easy money), increased $10.4 billion during the year of somewhat more stringent monetary policy which followed. The factors affecting money supply during this period are analyzed in Table 5. The most important factors accounting for the striking difference between the two periods are (1) the Government security holdings of the banking system, which had fallen in the first period, rose in the second," and (2) the monetary gold stock, which had fallen The I he The substance of the Treasury-Federal Reserve accord was an agreement that the Federal Reserve would pursue a somewhat more restrictive monetary policy than theretofore, that the Treasury, in cooperation with this policy, would offer a new 234 percent nonmarketable bond in exchange for certain of its outstanding marketable 212 percent bonds, and that the Federal Reserve would cooperate in insuring the success of Treasury short-term borrowing operations during the remainder of the year at rates consistent with the Federal Reserve rediscount rate of 134 percent (which "in the absence of compelling circumstances not then foreseen" would continue unchanged until the close of the year). The accord, the terms of which had never previously been revealed, was described in identical language by the Secretary of the Treasury ard 'he Chairman of the Board of Governors in answers to the Subcommittee's questionnaire (Compendium, pp. 74-76 and 349-351). This identical reply is reprinted in full in the Appendix to this Report. 4 It should be noted that the first period is 9 months, the second a full year. There is also some tendency for March figures to be seasonally low. The contrast-and the variance from a priori expectations--is, nevertheless, remarkable. 5 Government security holdings of the Federal Reserve banks rose in the first period and fell in the second, but the Government security holdings of other banks fell in the first period and rose in the second. In each case the changes in the holdings of other banks (i. e., commercial and mutual savings banks and the Postal Savings System) were larger and dominated the movement of the consolidated series. The difference between the two periods is as much a commentary on fiscal policy as on monetary policy-in the first period the total debt was falling and in the second period it was rising. In each period it all had to be held by some one. |