Mr. BLACKBURN. I agree with you, in the sense that what we are attempting to do is use monetary and fiscal policy to bring about a change in the climate of economic conditions to cool off the inflation. Because of the psychology of inflation which has built up over the last 4 or 5 years, people just make their plans on the basis that there will be continued inflation.

So what we are fighting today is not the mechanics of inflation, that is, poor fiscal and monetary policy, but the psychology of inflation. Now, Mr. Roosa, I noticed on page 4 of your prepared statement you say that the final sanction of wage and price controls will have to be "the power of public opinion." That is the last paragraph there. Now, haven't we had the jawboning techniques, the 3.2 guidelines, and haven't all of these things failed?

Mr. Roosa. If I were to agree with you, sir, I would of course not have written this.

Mr. BLACKBURN. They have failed, though?

Mr. ROOSA. No, I don't think they have. I think they have been incompletely successful, and in many cases have misfired. My hope is to learn from the things that haven't worked as well as they might in the past.

And let me just say this about the force of the way in which public opinion I think can be exerted here. The guideposts, the 3.2 percent, and so on, were effective so long as they weren't expected to do too much on their own. And I will join you in criticizing the past Democratic administration of which I was a part in saying that it was a mistake to assume that the guideposts themselves would carry the burden and not impose tax increases in parallel with the increase in defense spending. We put too great a strain on the guideposts. We didn't buttress them with other controls of demand at that time.

Mr. BLACKBURN. As I recall, we did have consumer credit controls, did we not, in the early 1950's?

Mr. DISALLE. Yes.

Mr. BLACKBURN. We haven't done this so far. Don't you think that this is an area that needs attention?

Mr. DISALLE. As I point out in my statement, in the early fifties we had consumer credit controls. We had higher individual taxes than we have now. We had excess profits in effect. But when the North Koreans cross the 30th parallel and we became involved, none of those controls was effective. We started the wage-price spirals that existed until we imposed a general freeze. And it cost the people of the United States at that time an increase in the cost of living of approximately 8 percent from June to January.

Mr. BLACKBURN. I recall very well everybody running out and buying a new set of tires, because they remembered the experience of World War II.

Mr. DISALLE. The coffee that got mouldy.

Mr. BLACKBURN. But today we do not have the shortage, or the threat of a shortage, of some of these essentials.

What about the possibility of credit controls as it would apply to commercial paper? I have seen figures that indicate that commercial paper issued by private industry is really what is financing the continued inflation at the present time. And I believe Mr. Roosa pointed that out, that the businessmen are not feeling the 12 percent interest rates because they are having to pay it out of income before taxes

anyway, and they figure that inflation next year is going to absorb part of the higher interest, so it is really not a factor in their planning to the extent that it is in the planning of an individual. What would you think of the possibility of imposing some sort of limitation on the growth of commercial paper?

Mr. ROOSA. This is a nice idea. But I am afraid it can't work. In this respect I am always impressed by what in banking we regard as the fungibility of money. The increase in commercial paper has occurred in large part because other controls had already been imposed which were intended to limit the increase in the availability of credit for the larger business concerns which can issue commercial paper. Those controls were so effective that we have had an increase, if I remember the figures rightly, from an outstanding volume which had been running a year or two ago in the neighborhood of something like $10 to $12 billion, now up to more than $20 billion. This isn't going to make or break the economy, but of course it has been an additional source of spending and demand.

But I am afraid there and I would make this as a supplemental comment-that we are not at the time where we are going to gain much more by selective limitation of particular times of credit. Everything just sort of oozes out from other corners in order to meet the intense demand that exists.

I think what we have to do is apply, as we have, as the Fed and the administration have, a general restraint on the total amount of demand, and then when it bites unduly tight on one sector or another we have to provide ways of easing the pressure on that hard-hit sector, but maintain the control on the general level.

This is a matter of individual philosophy. But it is one that I feel, having done my best through this period, and from the vantage point of a little commercial bank where we can see how the moving parts are working, perhaps sometimes more clearly than in the big oneI have not lost any of my old Federal Reserve zeal for at least trying to think through conceptually what I would do if I were trying to put a cork on this bottle or that one.

In some ways it was like trying to control the Eurodollar market. As such you cannot do it, in my view, as a practical matter. But you can limit the totals. And then when the limiting of the totals becomes too strenuous for a given sector, as it has in housing, then you find within that total ways of providing supplemental assistance to encourage housing.

But when you try selectively bit by bit to apply controls to individual techniques, human ingenuity is too great.

That is the same reason why I don't think any overall system of price controls for the economy would work very long. I think it has to be temporary.

Mr. BLACKBURN. Thank you very much. My time has expired. appreciate the observation by the need for some supplemental assist ance for the housing industry particularly the passage of the Emer gency Housing Act.

The CHAIRMAN. We will have to observe the time schedule to ge through by 12.

Mr. Ashley.

Mr. ASHLEY. Thank you very much, Mr. Chairman.

Governor DiSalle and Mr. Roosa, I am delighted to join in welcoming both of you, particularly I might say my old and very dear friend Mike DiSalle, whom I have known for some 25 years, and whom I regard as a political godfather.

Mr. DISALLE. I wish you wouldn't use that term "godfather."

Mr. ASHLEY. His career as mayor of the city of Toledo and Governor of Ohio as well as the roles that he has played here and in Ohio have made him one of our really preeminent citizens. It is, as I say, a particular pleasure to greet him.

I might just say at the outset that I am interested in Congressman Blackburn's insistence that the evidence is so clear-and he is probably right that the seeds of the most recent inflation were planted in the last administration. I think that is generally admitted. What we are concerned with is the fact that a promise was made by the President of the United States that he would get the job done of extinguishing the fire. What he did do was to show up with a garden hose when something substantially larger in our view was needed. The fire is not out, and that is why we are discussing what we are today.

Mr. STEPHENS. Would the gentleman yield?

Mr. ASHLEY. I will yield.

Mr. STEPHENS. I think we should agree with Mr. Blackburn that the seeds of inflation might have been laid in the last 8 years. But wasn't our effort sort of to overcome the many years before that when the Republicans were for 8 years in power?

The CHAIRMAN. Mr. Ashley, I do not agree to that at all. The seeds of inflation were laid during Mr. Eisenhower's administration. He increased the rates substantially. That is when it started.

Mr. STEPHENS. Mr. Chairman, that is what I said. I don't know whether you caught that or not.

Mr. ASHLEY. Governor DiSalle, on page 5 of your statement you point out that the Fed has recently shifted from a policy of no increase in the money supply to expanding the money supply at a rate of 5 or 6 or 8 percent or more according to different reports. And you ask, does this mean that monetary policy is disengaging from its unsuccessful and costly attempt to stabilize prices? What we have certainly seen over the past year and a half or so, as a result of Federal policy has been a marked escalation in interest rates, isn't that so?

Mr. DISALLE. Absolutely.

Mr. ASHLEY. Now, their more recent policy of expanding money supply has had no noticeable impact on the high level of interest rates, isn't that also true?

Mr. DISALLE. That is true. There is a great demand for money.

Mr. ASHLEY. Now, if it is necessary-and this I would direct to you, Mr. Roosa-is it possible for the Fed to continue its present policy of credit expansion without fanning the flames of inflation? If not, and they revert to a policy of greater restraint, wouldn't that of necessity perpetuate the high level of interest rates that we are confronted with today?

Mr. ROOSA. The rate of credit expansion we have recently had is in my opinion, untenable. It will actually lead to even more inflation. If one is theoretically inclined, you can say that when a triple A issue yesterday appeared in the market at an offering rate of 9.35 percent, and it was only a short time ago when I used to live in Washington

when triple A issues were offered at 434 percent, you get a little bit of the sense of what has gone on here.

Now, within that differential of, say, 412 percent, a major part is a reflection of the inflation we are now having. It is the additional price that has to be paid to get people to take fixed interest obligations when they are expecting that the value of the dollar will be eroded at a 4, 5, 6 percent rate each year.

So that among the many forces at work, the inflation itself has now become so dominant that it is not possible for the Fed by just increasing the supply of money to bring those rates down. It will just feed the same inflation psychology and the inflation component within those interest rates will go still higher.

So what do we need to break the psychology? In my view it is this combination of at least a moderately restrictive Federal Reserve policy-it does not have to be quite as brutal as we have seen it sometimes, but moderately restrictive and a fairly tight fiscal policy.

I would like to see a much closer balance in the Government's accounts, so that we are not taking additional resources out of the capital market for Government needs. And then I would also like to see the interposition of the public interest in the price determining process. And once that happens, I think you will see the inflation component in interest rates squeezed out, and it will be more important than anything the Fed itself alone can do.

Mr. ASHLEY. I am fascinated to hear you say that. What you really have confidence in is the ability of an incomes policy to have a direct impact on the interest rate structure, is that correct?

Mr. ROOSA. The effect is a little roundabout. But I will say that it is a direct effect.

Mr. ASHLEY. The reason I am fascinated is that almost all interested people on this subject say that we are in for a credit shortage for the next 10 years, certainly, that our national requirements are sufficiently great to justify that prospect.

On this basis, then, what you are saying is that there will not be a return to the triple A rated offerings at the 4 percent level again, but certainly something less than their present exorbitant level, is that correct?

Mr. ROOSA. Exactly. You have said it much more clearly than I could have. Yes.

Mr. ASHLEY. It has also been clearly said that my time has expired. Thank you.

The CHAIRMAN. Mr. Wylie?

Mr. WYLIE. Thank you, Mr. Chairman.

As a member of the committee I am pleased to welcome the distinguished gentleman from Ohio, and my friend, Governor DiSalle. As is usual, your testimony has been intelligently presented, thoughtprovoking and controversial.

I think it is safe to say that this is likely to become a partisan issue before we are through.

Mr. Roosa, I appreciate your appearance also, and the contribution you are certainly making.

Along those lines, Mr. Roosa, along the lines of the previous question. in the first portion of your statement you have suggested that we should not engage in policies that disrupt the basic functioning of a market economy. Isn't the imposition of wage and price controls the

ultimate disruption of a market economy in that it halts the process whereby wages, prices, and money seek their own level?

Mr. ROOSA. Yes. This is the perpetual problem of Government when it enters into any responsibility for economic life. The aim of Government in the public interest in my view should always be to improve the functioning of the market processes when they are impaired by whatever extraneous influences have occurred.

The overriding extraneous influence that I think becomes a Government responsibility now to cope with is that of a cumulative runaway inflation which is in fact impairing the functioning of the market process.

Therefore, I suggest in my statement an approach which I think comes as close as I can within reason to assuring a return to the orderly processes of market allocation and price determination, while in an intermediate way breaking the pattern, or lack of pattern, the irregularity of the inflation that we are suffering now.

So that you are quite right, as to any kind of controls that interfere with a market process. That began the minute Government intruded in any way in the trade process; there is the risk that the influence would do more harm than good. And we just have to hope that we are going to be able to get a little more good than harm.

Mr. WYLIE. Thank you.

Governor DiSalle, the Federal Government is the largest single spender of money in the United States of any entity. Do you think that some sort of a policy of voluntary wage and price controls incorporated in defense contracts would work to cool the economy?

Mr. DISALLE. I think it would be helpful. I don't know that it would work for any long period of time.

Mr. WYLIE. The idea would be that wages and prices would be fixed as of a certain date so that they couldn't be increased during the term of the contract.

Mr. DISALLE. What really interferes with the success of a voluntary program is that managers of corporations are responsible to their shareholders, and they have to show profit, and they have to pay dividends. And union leaders are subject to the pressure of the membership that are constantly asking for more money. No one at this present time is speaking out for the consumer and the customer that you referred to.

Mr. WYLIE. You think that it is essential that we impose mandatory wage and price controls now?

Mr. DISALLE. Sooner or later we are going to get to it. And I think it would be best if it was sooner. I think that when we accelerate the war in Vietnam, hand-in-hand should have gone price and wage controls immediately. And we would have saved a great deal of money, and we would have kept inflation at a much lower level.

Of course, one of the mistakes we made was because we interpreted every price and wage increase as being inflationary. It isn't true. The model T Ford at $800 can't be compared with the product today that sells at $3,800 or $4,000. It is a much better product, and a safer product, and it is worth more money. So the increase is not inflationary of itself.

But I think we can impose a price freeze and begin a control program immediately. We did under OPS. Decontrol started immediately.