give and take. It is of particular interest in this connection that t Federal Reserve itself did not reach the position reflected in the acc until some time around the turn of the year-well after the Chine intervention in Korea. The correspondence does show, however, a number of difficulties procedure. The agencies were often dealing with one another arm's length when more frequent face-to-face conferences, especial at the staff level, might have promoted greater understanding. It also regrettable that several of the key conferences were attended b the principals only and left a misunderstanding as to what had he actually agreed on, which might have been avoided had there bee adequate staff representation and a prompt preparation and inte change of official minutes. There are two cases in which this lack of effective staff liaison w especially important. On the one hand, it appears that Secretar Snyder went to the hospital for an eye operation early in February 195 believing, in good faith, that the other parties in interest had agreed on moratorium of action until he returned to his office, while the membe of the Open Market Committee had no such belief. Better sta work could have averted this misunderstanding. On the other hand it is difficult to explain or to excuse the action of the White Hous secretariat in furnishing to the press a statement giving what pur ported to be the substance of an agreement reached at a White Hous conference on January 31, 1951, contrary to the understanding of the Federal Reserve participants in the conference and without pri clearance or discussion with the Chairman or any representative the Board of Governors. These misunderstandings are deeply to be regretted, and it is hoped that the record appearing in the Compendium and Hearings of this Subcommittee may be of help to public officials and students of public administration in preventing similar occurrences in the future. Despite these misunderstandings, however, the Sub committee believes that the record shows principally the actions men of good will trying to work out a solution for an exceedingly complex problem. 3. Monetary and Debt Management Policy Since March 1951. The great majority of witnesses before the Subcommittee believed that the monetary and debt-management policies pursued since the accom have been appropriate to the underlying economic situation. This was true not merely of the official witnesses-who were responsible for the formulation of the policy and defended it of necessity-but also of the witnesses from both the financial and academic communi ties. This view is, on the whole, supported by the answers in the Compendium, as far as they bear on this subject and giving considera tion to the earlier date at which they were prepared. While the predominant view appeared to be in favor of present policies, there was a considerable body of opinion to the effect that the Treasury should make a more strenuous effort to sell long-term securities at somewhat higher interest rates than those then prevailing and a rather more considerable dissatisfaction with the then terms of Series E Savings Bonds. Since the close of the hearings, the Treasury has met these criticisms in part by a revision in the terms of savings bonds of all series and by an additional offering of 2% percent nonmarketable bonds. Dissents on the easy money side were much fewer connecti han those on the tight money side, but this may have been due in lected part to the preponderance of witnesses directly or indirectly conI after taccted with the financial community. The Subcommittee is, on the whole, satisfied with the monetary and er of diflebt management policies in the year following the accord. Wholehone sale prices declined slightly, the cost of living was fairly stable, and erences, here were some deflationary factors in the business situation. On the erstand other hand, with the major impact of defense expenditures still to were attcome, the Subcommittee feels that it would be improvident to return o what to the monetary policies prevailing before the Korean outbreak. had The Subcommittee commends both the Treasury and the Federal ation Reserve for their cooperation since the accord and trusts that they White White will continue a flexible policy adjusted to the situation as it develops. staffIt makes no more specific recommendation on general monetary and that debt-management policies for the immediate future. (A discussion Febr of more general principles appears later in this report, see pp. 31-41.) adag The Subcommittee believes that general monetary, credit, and fiscal e the policies should be the Government's primary and principal means of Belt Promoting the ends of price stability and high-level employment and e other that whenever possible reliance should be placed on these means in preference to devices such as price, wage, and allocation controls and, to a lesser extent, selective credit controls which involve intervention in particular markets. The Subcommittee cannot accept a system of nding price, wage, and allocation controls as a permanent feature of the thout American economy. Nevertheless, under present circumstances-in which we do not yet know what will be the full impact on the economy of the defense expenditure program-the Subcommittee feels that it would be improvident to repeal the legislative authority for price, wage, and allocation controls, and recommends that this authority be extended until the full effects of these expenditures have been felt. It makes the same recommendation with respect to the legislative authority for the existing selective credit controls, but expresses satisfaction that the administrative authorities have shown themselves ready to liberalize or eliminate these controls as soon as such action is, in their judgment, consistent with a policy of economic stability. Sentat eeply ompen lic off ԴՐԱՄ cti zeed да [COMMENT BY MR. PATMAN: Í believe that the disadvantages of selective controls over consumer and housing credit, as set out on pp. 36-37, are so great that the authority for the imposition of these controls should be repealed immediately.] 1 II. FISCAL AND MONETARY POLICY FOR THE FUTURE A. OVER-ALL ROLE OF FISCAL AND MONETARY POLICY; APPROPRIATE FISCAL POLICY The Subcommittee's mandate did not extend to a detailed consideration of fiscal policy, nor was the subject of fiscal policy covered other than incidentally in the Compendium or the Hearings. The Subcommittee would nevertheless like to express its conviction that sound fiscal policy-meaning by this sound policies with respect to Government receipts and expenditures-together with sound monetary policy must be the foundation stones of any over-all program seeking price stability and high-level employment. Four members of this Subcommittee were members of the previous subcommittee under the chairmanship of Senator Douglas, which considered the subject of fiscal policy at length, and all of us join in reaffirming the following two recommendations made by that subcommittee (Report of the Subcommittee on Monetary, Credit, and Fiscal Policies, Senate Document No. 129, 81st Cong., 2d sess., p. 1): THE ROLE OF MONETARY, CREDIT, AND FISCAL POLICIES IN ACHIEVING THE PURPOSES OF THE EMPLOYMENT ACT We recommend not only that appropriate, vigorous, and coordinated monetary, credit, and fiscal policies be employed to promote the purposes of the Employment Act, but also that such policies constitute the Government's primary and principal method of promoting those purposes. FEDERAL FISCAL POLICIES We recommend that Federal fiscal policies be such as not only to avoid aggravating economic instability but also to make a positive and important contribution to stabilization, at the same time promoting equity and incentives in taxation and economy in expenditures. A policy based on the principle of an annually balanced budget regardless of fluctuations in the national income does not meet these tests; for, if actually followed, it would require drastic increases of tax rates or drastic reductions of Government expenditures during periods of deflation and unemployment, thereby aggravating the decline, and marked reductions of tax rates or increases of expenditures during periods of inflationary boom, thereby accentuating the inflation. A policy that will contribute to stability must produce a surplus of revenues over expenditures in periods of high prosperity and comparatively full employment and a surplus of expenditures over revenues in periods of deflation and abnormally high unemployment. Such a policy must, however, be based on a recognition that there are limits to the effectiveness of fiscal policy because economic forecasting is highly imperfect at present and tax and expenditure policies under present procedures are very inflexible. Monetary policy may be defined for the purpose of this discussion as that policy which has for its immediate objective the establishment of a desired degree of ease or tightness in the supply of credit and seeks through attaining this immediate objective to contribute to economic stability. As the Federal Reserve System is always pursuing some type of monetary policy, the money market can never in the m literal sense of the term be "free." The best working definition of. "free" money market, therefore, may be a market which (a) is 1 firmly pegged and (b) in which the existing level of rates has bee brought about by a monetary policy consistent with economic stabilit Selective credit controls which restrict the availability of credit f special purposes will be considered separately. A tight monetary policy makes money hard to get. Less mone will be borrowed and less spending will occur from borrowed fund When interest rates are higher (and bond prices lower), some person holding liquid assets or fixed-interest-bearing obligations, who migh otherwise have sold them and spent the proceeds, will prefer inste to continue to hold them. As the greater portion of our money supp consists of commercial bank deposits "created" by bank loans a investments, a less liberal lending policy on the part of banks w decrease the money supply and so increase the ratio between goods an money. A tight money policy tends, therefore, to combat inflatio Contrariwise, an easy money policy reverses the process just describe and so tends to combat depression.' other These effects, it is true, will be offset to some extent by the effects changes in interest rates as costs, in which aspect increased interes rates will tend to increase prices as would increases in any element of cost-and vice versa for decreases in rates. But, excepti industries where the ratio of capital to output is extremely high (e.g hydroelectric plants), the net result is likely to be as previously stated The main lines of effect on the price level to be expected from monetary policy are therefore clear. But, before an unhesitatin recommendation can be made that it be used with great vigor, accoun must be taken of many qualifications and refinements. 1. Cost versus Arailability of Credit.-In determining the degree d ease or tightness existing in the money market at any particular time two factors must be taken into consideration (a) the cost, and (b the availability of credit. The cost of credit is reflected in interes rates and in the other open or concealed charges made for the lending of money. The availability of credit, on the other hand, refers to the readiness with which a prospective borrower is able to obtain funds s the rates nominally quoted for the type of loan which he seeks. The Federal Reserve has urged that much greater emphasis than has gener ally been customary be placed on changes in the availability of credit as contrasted with changes in its cost. Changes in the supply of loan funds relative to the demand. whether induced by the monetary authorities or occurring autono mously, are generally first reflected partly in the cost and partly in the availability of credit. Interest rates, like many other prices, are "sticky" and do not move readily over as wide an arc as might appea to be justified by changes in the underlying supply and deman situation. A tightening in the money market is therefore likely in its early stages to be reflected largely in increased difficulty in securing, funds at the quoted rates. The quality of loans on which the same In traditional theory there was added to these considerations a supposed tendency on the part of ind viduals to save more out of their income when the reward of saving in the form of interest rates was higher, However, it is far from clear that this is true to a significant extent, except as higher interest rates encours the holding of liquid assets and fixed-interest-bearing obligations which has already been taken account of No effect of monetary policy on savings is therefore assumed in this report. But even without this assump, tion, the general case for the efficacy of monetary policy is a powerful one. |