How to Depoliticalize Money

November 26, 1951

Two years ago a Congressional subcommittee headed by Sen. Paul H. Douglas made a careful study of monetary policy. It emerged with the conclusion that “the freedom of the Federal Reserve to restrict credit and raise interest rates for general stabilization purposes should be restored.” But tucked away in a footnote was a dissent from Congressman Wright Patman: “Steps should be taken,” he said, “to increase the responsibility [i.e., the subservience] of the Federal Reserve System to the executive department.”

Now, by one of those political miracles that happen so often in the Administration’s favor, a new subcommittee has been appointed, headed by none other than Patman himself, to investigate the same subject all over again.

There is the usual affectation of open-mindedness; but no one can be in any real doubt concerning the conclusions at which Congressman Patman is determined to arrive. He has already sent out heavily loaded questionnaires.

Patman, in fact, as the November monthly letter of the National City Bank of New York reminds us, has a long record in support of the crudest and most flagrant inflation. It was “a shame and a disgrace,” he said on the floor of the House on June 27, that the Federal Reserve had allowed government bonds to decline below par. He wanted Congress to compel the Federal Reserve Banks to buy at par or better any government security issued at par. In 1932–35 we find him advocating Treasury issues of paper money to pay off “adjusted service certificates” held by first-world-war veterans. In 1941 he proposed in a radio speech that the government buy the stock of the Federal Reserve Banks: “Then it will not be necessary for the government to issue and sell interest-bearing bonds. Then as money is needed, non-interest-bearing bonds can be delivered to these twelve banks, credit given for them on the books of the banks, and checks drawn by the Treasury to pay any debt that is owed by the government.” In other words, the government can just print all the money it needs as it goes along.

The Patman proposals are a threat of hyperinflation. What is desperately necessary today is the exact opposite of the course he proposes. The Federal Reserve System must be taken out of politics. It must be freed from domination by the President. It is still under that domination. Between June 21, 1950, a few days before the outbreak of war in Korea, and Nov. 14 of this year, the Federal Reserve Banks on net balance had bought nearly $6,000,000,000 of additional government securities, putting out more money and feeding inflation.

The hard fact is that the central bank in practically every nation today has been or is being used as an enormous inflation factory to serve the incumbent government’s political purposes. In view of this hard fact, I should like to advance a counterproposal of my own. Let the Federal Reserve Board retain every power it already has to prevent or to halt inflation. Give it, if necessary, added powers of disinflation. But remove entirely from the board any power to inflate or “reflate.”

This would mean that neither the Federal Reserve Board nor the Federal Open Market Committee would any longer be permitted to lower reserve requirements on its own initiative, to compel open-market purchases of government securities, or to lower rediscount rates. (And that would prevent any repetition, for example, of the disgrace of 1927, when the Federal Reserve Board not only ordered the individual Federal Reserve Banks to lower their rediscount rates, but openly overrode the Chicago bank when it refused.)

Under this proposal, on the other hand, full responsibility would still rest on the board for any further inflation. For it would still have full powers to increase reserve ratios, to recommend sales of securities, and to order a higher discount rate by Federal Reserve Banks when it thought such actions necessary. Any “reflationary” initiative could come solely from the individual reserve banks.