Hypocrisy about Inflation

August 23, 1948

When we keep in mind the demagogic bombardment to which it was subjected by the President, the record of the special session of Congress was far better than might have been expected. Its virtues consisted chiefly in what it did not do. It ignored most of what would have been the disastrous program proposed by Mr. Truman.

It did pass a modified housing bill, not inflationary enough to satisfy Mr. Truman, of course, but nonetheless inflationary. Mr. Truman himself pointed out in his recent economic report that the present “volume of residential construction is already straining the capacities of the construction industry” and “competing with other primary national needs.” The further doses of government credit made available in the new housing law, therefore, are not likely to increase the volume of the nation’s new housing, but merely the cost of that housing.

The controls that Congress reimposed on consumer installment credit touch only the fringes of inflation. Many consumers will simply draw down their savings accounts or sell Series E bonds to make their purchases. To the extent that installment credit controls really are effective, they will simply shift buying away from durable products like automobiles, refrigerators, and furniture into more perishable goods. For installment credit does nothing in the long run to increase the total volume of consumer buying. The $50 a month that a family puts aside to meet installment payments cannot be spent on books, sundaes, cigarettes, or movies. Finally, one must point out once more the glaring inconsistency of liberalizing government mortgage credit for homes while tightening private credit for furnishings to put in the homes.

Nor did Congress accomplish anything important when it gave the Federal Reserve Board power to increase reserve requirements of member banks by 4 percentage points against demand deposits and 1½ percentage points against time deposits. For under present conditions the member banks can simply rediscount or sell their government securities to the Federal Reserve Banks, which stand ready to receive them at guaranteed minimum prices.

The one really important anti-inflation step that the House took was thrown out by the Senate. This was the provision restoring reserve ratios of the Federal Reserve Banks themselves to the legal requirements, which existed up to 1945, of 35 percent against deposits and 40 percent against notes, compared with the present “emergency” requirement of only 25 percent.

The mutually contradictory reasons which were put forward for rejecting this revealed the appalling confusion and hypocrisy that still exist in Washington regarding inflation. Some opponents dismissed it as “meaningless,” on the ground that Federal Reserve Bank reserves are already above 35 and 40 percent. These critics, in other words, believe that we shouldn’t lock the stable until after the horse has been stolen. It is precisely because reserve-bank ratios are still above 35 and 40 percent that we could safely restore the legal requirements now without monetary disturbance. The purpose would not be to roll back present inflation but to limit future inflation. The Secretary of the Treasury and the representatives of the Federal Reserve System who appeared before Congress realized this. They opposed the provision precisely on the ground that it would ultimately prevent the Federal Reserve Banks from continuing to inflate by supporting and monetizing government securities.

Congress should have forced the Federal Reserve authorities to put their own house in order before giving them more powers over member banks and installment credit. It should not only have restored the original reserve-bank reserve ratios, but required the reserve board to add at least one additional percentage point to the Federal Reserve Bank reserve ratios for every additional point that the board thought necessary to add to member-bank reserve ratios. But Congress merely gave the authorities more power to prevent others from inflating, while leaving them free to continue to inflate recklessly themselves.