Congress’s Monetary Duty

August 27, 1951

The renewed Defense Production Act, with its emphasis on price control, is a fraudulent remedy for inflation. The only genuine anti-inflation proposal that even got to a vote in connection with it was the amendment offered by Rep. Jesse P. Wolcott. This amendment—which would have put pressure on the Treasury and Federal Reserve Board to start using the real anti-inflationary powers that they have long possessed—was defeated by virtually a straight party vote. In the Senate the matter was never even brought up. As a result we now have on the books a so-called anti-inflation measure unmarred by a single clause calculated to halt inflation.

There is only one way to stop inflation. That is to stop the further increase in the supply of money and credit. Congress has not only the right to regulate money and credit, but the clear constitutional duty to do so. One of the enumerated powers of Congress (not of the President) is “to coin money” and “regulate the value thereof.”

Now the value of our present money is not stable—precisely because Congress has neglected its clear duty. It has delegated excessive discretionary powers to the executive and to his appointed officials, and it has done this at the request of these officials.

The original Federal Reserve Act provided that the Federal Reserve Banks must hold a reserve in gold and lawful money of 35 percent against deposits and 40 percent against notes. On June 12, 1945, under the plea of the Federal Reserve authorities that further inflation might be necessary, Congress reduced the required legal reserves of the Federal Reserve Banks to only 25 percent against deposit and note liabilities combined. Germany had already surrendered a month before. Hostilities against Japan ended less than three months later. Yet the Federal Reserve authorities have never requested that the former Federal Reserve ratios be restored, and Congress has never restored them. The duty of Congress is plain. It must restore the required legal reserves of the Federal Reserve Banks to their former level. It must do this whether or not the Federal Reserve authorities request it or even if they actively combat it; for there is almost no case on record in which a Federal agency has asked for limitations on its own powers or discretion. In fact, because of the Administration’s present irresponsible course, it is desirable that Congress:

1—Restore the minimum legal reserve ratio of the Federal Reserve Banks from the present 25 percent to at least 35 percent against combined deposit and note liabilities.

2—Authorize the Federal Reserve Board to raise the legal reserve requirement to 40 percent—and even (as an emergency measure) as high as the actual reserve ratio existing at the time of the Board order. Such a power would make the Federal Reserve Board itself clearly responsible for any further failure to halt inflation. And it would provide a conclusive answer to those who have been opposing a restoration of the former Federal Reserve Bank legal reserve requirements on the incredibly confused ground that even this restoration would still allow further inflation. Of course it would; but it would allow far less further inflation than the present legal requirement. And if Congress in addition empowered the Board to raise the legal reserve ratio of the Federal Reserve Banks as high as their actual reserve ratio at the time of the order, then the responsibility for further inflation would be clearly upon the Board.

3—Authorize the Reserve authorities to raise the legal reserve requirements of member banks as high as their already existing reserve ratios. But only if (a) reserve requirements of the Federal Reserve Banks have already been raised to at least 40 percent and (b) if Reserve Bank required ratios have also been frozen where they are. In short, the Federal Reserve authorities should no longer be permitted to exempt their own goose while they tie up the other fellow’s gander. Especially as new Federal Reserve credit is the reserve basis for new member-bank credit, and hence many times as inflationary.