FEDERAL ESERVE BULLETIN DECEMBER 1947 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis EDITORIAL COMMITTEE ELLIOTT THURSTON WOODLIEF THOMAS CARL E. PARRY The Federal Reserve BULLETIN is issued monthly under the direction of the staff editorial committee. This committee is responsible for interpretations and opinions expressed, except in oificial statements and signed articles. CONTENTS PAGE The Current Inflation Problem—Causes and Controls. 1455-1463 Inflationary Aspects of Housing Finance. 1463-1465 Bank Credit Policy during the Inflation. 1465 Proposed Regulation of Consumer Instalment Credit. 1466-1468 Farm Production Loans at Commercial Banks, by Herman Koenig and Tynan Smith . 1469-1476 Farm Mortgage Loans at Commercial Banks, by Philip T. Allen. 1477-1482 The Structure of Interest Rates on Commercial Bank Loans to Farmers, by Richard Youngdahl.. 1483-1492 Current Events and Announcements. 1493 Statistical Bulletin of the International Monetary Fund. 1493 National Summary of Business Conditions. 1494-1495 Financial, Industrial, Commercial Statistics, U. S. (See p. 1497, for list of tables) 1497-1552 International Financial Statistics (See p. 1553, for list of tables) . 1553-1571 Board of Governors and Staff; Open Market Committee and Staff; Federal Advisory Council. 1572 Senior Officers of Federal Reserve Banks; Managing Officers of Branches. 1573 Federal Reserve Publications. 1574-1577 Map of Federal Reserve Districts. 1578 Index to Volume 33 1579-1602 Subscription Price of BULLETIN A copy of the Federal Reserve BULLETIN is sent to each member bank without charge. The subscription price in the United States and its possessions, Bolivia, Canada, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, Guatemala, Haiti, Republic of Honduras, Mexico, Newfoundland (in- cluding Labrador), Nicaragua, Panama, Paraguay, Peru, El Salvador, Uruguay, and Venezuela is $2.00 per annum or 20 cents per copy; elsewhere, $2.60 per annum or 25 cents per copy. Group sub- scriptions in the United States for 10 or more copies to one address, 15 cents per copy per month, or $1.50 for 12 months. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis VOLUME 33 December 1947 NUMBER 12 THE CURRENT INFLATION PROBLEM-CAUSES AND CONTROLS" Mr. Chairman and Members of the Committee: In money which they are trying to spend, bidding for appearing before you today I wish to make clear an insufficient supply of goods and services. This that I am speaking for the Board of Governors of effective purchasing power is composed of past the Federal Reserve System, an agency of Congress, savings, current income, or future credit. The sav- and I am not undertaking to speak for the Adminis- ings were largely accumulated during the war tration or the Presidents of the 12 Federal Reserve years in the form of currency, bank deposits and Banks. Government securities. You have requested me to testify, I take it, as to At the end of 1946, individuals and businesses what might be done in the monetary and credit held about 223 billion dollars of such liquid sav- field to deal with inflationary forces, which have ings, or more than three times the prewar total. already gone so far as to cause very serious malad- Similarly, current national income is at an all-time justments within the economy. Correction is over- high level. It is running at a rate of 200 billions due. The longer it is postponed, the more severe a year, or about two and a half times the total for will be the inevitable reaction. 1940, the highest year prior to the war. It is due I am sure this Committee recognizes that a great to a record high agricultural income, high wages of many factors and forces contributed to the infla- organized labor and other workers, but not all of tionary problem and that there is no easy, simple, them, and unprecedented business profits. This or single remedy. We are already in the advanced is augmented by a readily available supply of ex- stages of this disease. It is no longer a question of cessively easy credit for consumers' goods of all preventing it, but of moderating so far as possible kinds, for housing, for short- and long-term busi- its ultimate ravages. ness loans, for State and municipal expenditures, At best, monetary and credit policy can have only and for foreign credits and grants. The notable a supplemental influence in any effective treatment exception is loans to buy listed stocks, which are of either inflation or deflation. In considering what sharply restricted by the Board's margin require- can be done so far as monetary and credit action is ments. concerned, it is necessary to make a correct diag- In the face of these large and expanding demands, nosis of the multiple causes of the situation with production is practically at capacity and further which we are now confronted. growth will necessarily be slow. The physical What is inflation? It is the condition which ex- volume of output of manufactured goods and min- ists when effective demand exceeds the overall erals in 1947 has averaged 186 per cent of the supply of goods and services. Potential overall de- 1935-39 average. Current output is about one-fifth mand always exceeds supply. What is lacking in below the wartime level, largely because of the re- deflation is effective demand. We are witnessing duction in weekly working hours. Agricultural effective demand today when individuals and busi- output in physical terms has continued for the nesses, together with State and local governments, past three years at record levels of about a third as well as the Federal Government, generally have above the maximum of any prewar year. This volume reflects general favorable weather and fur- * Statement by Marriner S. Eccles, Chairman of the Board of Governors of the Federal Reserve System, before the Joint ther growth can hardly be expected. Construction Committee on the Economic Report, Special Session of Congress, Nov. 25, 1947. of all kinds, including residential building, is close DECEMBER 1947 1455 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis THE CURRENT INFLATION PROBLEM- CAUSES AND CONTROLS to any previous peacetime peak. Expansion in performed a vital service in the financing of the war building is now being retarded by shortages of essen- and particularly in the sale and distribution of tial labor and materials. Railroad transportation savings bonds and of other Government securities. is limited by the shortages of railroad cars and other If it were possible to finance a great war entirely equipment. Employment is at very high levels with by taxation there would, of course, be no increase in acute shortages in many fields and with a minimum the public debt. Or if it were possible to do the of unemployment. financing by a combination of taxation and borrow- The source of the present inflation is war fi- ing outside of the banking system, there would be nancing and the enormous Federal deficits incurred no increase in the money supply. In retrospect, in preparation for and prosecution of global war. we can see that we could have and probably should During the six-year period, June 30, 1940 through have taxed more and borrowed more from non- June 30, 1946, the Government raised about 398 bank investors and less from the banking system. billion dollars, but only 176 billion dollars, or 44 We are suffering the consequences today of an ex- per cent came from taxes. The remainder of 222 cessively swollen money supply which neither the billions, or about 56 per cent, was raised by bor- bankers individually nor Government authorities rowing. And of this total which was borrowed, have adequate means at present of controlling. approximately 90 billion dollars, or 23 per cent In order to enable the banks to purchase Gov- of total needs, was raised by selling Government ernment securities essential to the financing of the securities to the commercial banking system, in- war, the Federal Reserve System maintained easy cluding those purchased by the Federal Reserve money conditions and made Federal Reserve Banks. credit and reserves readily available to the banks. As the Reserve Board stated in its 1945 Annual The vast money supply thus created was held Report to Congress, it is important to bear in mind in check by an elaborate harness of controls con- that borrowing from the banking system, whether sisting, among other things, of allocations of by the Government or by others, creates an equiva- scarce materials, construction permits, price and lent addition to the country's money supply. To wage ceilings, rationing, and the excess profits the extent that the Government did not finance its tax. When the harness of controls was prema- war program by taxation, it was obliged to borrow, turely removed and no effective substitute was and to the extent that it did not borrow from non- devised to hold back the flood of effective de- bank investors, it relied upon the banks and thus mand, it was apparent, or at least it should have created new supplies of money. The Federal Re- been apparent, that a sharp rise in prices was serve by purchasing Government securities, supplied inevitable. the commercial banks with reserves needed as a As a result, the economy was caught in a dan- basis for the increased money supply. gerous wage-price-profit-credit spiral, acutely in- As a result, the country's money supply, as meas- tensified by short farm crops abroad, and reduced ured by privately held demand deposits and cur- corn and cotton crops at home. Critical conditions rency in circulation, increased more than two and abroad, in part resulting from our rising prices, one-half times, rising from less than 40 billion dol- impose upon us obligations which must be met lars in June of 1940 to 106 billions at the end of even though they add to our inflationary difficul- June 1946.