An Anti-Inflation Program

April 26, 1948

Marriner Eccles, making his exit as spokesman for the Federal Reserve Board, recommended to the Joint Committee on the Economic Report an increase in reserve requirements for Federal Reserve member banks and the extension of reserve requirements even to nonmember banks. Senator Taft, the committee chairman, told reporters that added authority of this sort was not likely at this session of Congress.

Inaction on this subject, however, would be a mistake not only from the national standpoint, but even from the standpoint of Republican prospects in November. Unless the Republican majority in Congress itself frames and passes a positive anti-inflation program, its criticisms of President Truman’s policies will seem very unconvincing by election day if inflation resumes its progress in the next six months.

This does not mean that such a program should take the precise form that Mr. Eccles recommends. His particular recommendations are too vulnerable. But he is right on his central point, which is that inflation is primarily a consequence of money and credit expansion. A Congressional anti-inflation program should include four main provisions:

1—It should at least authorize the Federal Reserve Board, if it does not direct it, to restore the former legal requirements for 35 and 40 percent reserves in the Federal Reserve Banks instead of the present 25 percent reserve requirement.

2—It should authorize the Federal Reserve Board, as Mr. Eccles suggests, to increase the reserve ratios of member banks. Present maximum legal reserve requirements are 26 percent for member banks in New York and Chicago, 20 percent in other reserve city banks, and 14 percent in so-called country banks. Mr. Eccles suggests that these be raised to about 35, 30, and 25 percent respectively. But if something like this is authorized, Congress should stipulate that the board cannot order any increase in member-bank reserve ratios until it has first restored the previous Federal Reserve Bank ratios. Only such a provision can halt the continuous efforts of Federal Reserve officials to restrict the lending powers of the member banks at the same time as they increase the far more inflationary lending powers of the Federal Reserve System itself.

3—A comprehensive program should terminate some inflationary measures still on the books. It should repeal the Thomas greenback amendment. It should repeal sections 8 and 9 of the Gold Reserve Act of 1934, which gave the Secretary of the Treasury the power, with the approval of the President, to purchase and sell gold “at such rates and upon such terms and conditions as he may deem most advantageous to the public interest.” It might tidy up our present hodgepodge currency system by repealing the Silver Purchase Act of 1934, and by providing for the prompt retirement of Federal Reserve Bank notes and the gradual retirement of national bank notes and United States greenbacks.

4—Most important of all, an anti-inflation measure should contain a general declaration of policy on the part of Congress. This should direct the Federal Reserve Board to follow policies designed to bring a halt to any further inflationary expansion of money and bank credit. The board should be instructed to do this with care, to avoid precipitating any sudden or severe contraction of credit that could have serious deflationary consequences.

Only by such a comprehensive measure (combined with sounder expenditure and tax policies) can Congress prevent the present inflation from going farther. Only by such a measure can it take the offensive in the battle against inflation and center public attention on the fact that it is, above all, government fiscal and credit policy that creates inflation. Otherwise President Truman will continue inflationary monetary policies while declaring, as in his speech to the American Society of Newspaper Editors, that the only cure for inflation is to give him power to fix prices.