Inflation Plus Usurpation

February 19, 1951

On Jan. 31, at a meeting that should never have been called, President Truman presumed to lecture the Open Market Committee of the Federal Reserve System on what its policies ought to be in the present crisis. The next day the White House Press Secretary announced: “The Federal Reserve Board has pledged its support to President Truman to maintain the stability of government securities as long as the emergency lasts.” Then Mr. Truman made public a “Dear Tom” letter to Chairman McCabe of the Federal Reserve Board in which he thanked him for “your assurance that the market on government securities will be stabilized and maintained at present levels.”

Governor Eccles of the Federal Reserve Board was “astonished” by the President’s version, denied flatly that the agency had given any such pledge, and made public the board’s own memorandum covering what took place. The memorandum failed to support Mr. Truman’s version.

We need not be diverted by any attempt to appraise the comparative accuracy of these conflicting versions. If we keep our eye on the legal and economic issues involved, it is clear that Mr. Truman is wrong on both.

The President has no more legal right to tell the Federal Reserve Board what to decide than he has to tell the Supreme Court what to decide. To minimize Presidential influence, Congress deliberately made the board an independent body, with fourteen-year terms for each of the seven members, overlapping so that no President should have the appointment of more than one member in any two-year period. The late Senator Glass long ago quoted President Wilson as saying: “The very moment that I should attempt to establish close relations with the [Federal Reserve] board, that moment I would be accused of trying to bring political pressure to bear.” The pressure that Mr. Truman is now bringing to bear on the board is a clear usurpation of power.

President Truman and Secretary Snyder are patriotic and sincere. They simply do not understand the economic consequences of what they are proposing. They wish to force the Federal Reserve Banks to keep buying as many government bonds as necessary to hold them above par, and so keep down the long-term yield to the arbitrary maximum of 2½ percent. Now when the Reserve banks buy such government bonds they pay for them simply by creating deposit credits or printing money in exchange. These in turn become the reserve bases for member banks to create still more money and bank deposits. This creation of more money and bank credit without more goods is not merely the cause of inflation; it is the inflation. Mr. Truman and Secretary Snyder might just as well tell the Federal Reserve Board point blank: “We demand more inflation!”

None of the reasons that either Mr. Truman or Mr. Snyder gives for wanting Federal bonds pegged at par or over will stand examination. Mr. Truman recalled before the Open Market Committee “his wartime experience when he bought Liberty bonds out of his soldier’s pay. When he returned from France and had to sell his bonds to buy clothes and other civilian things, he got only $80 or a little more for his hundred dollar bonds. . . . He did not want the people who hold our bonds now to have done to them what was done to him.”

Now none of the Liberty bonds ever fell quite as low as 80. Some issues did fall within a few points of that price, but only for a few months in 1920. And the decline affected only those people who were forced to sell in those months. The maximum loss even of these people was only about 18 percent. Today, on the other hand, mainly as a result of the very bond-pegging and low-interest policies on which Mr. Truman has insisted, a government bond bought in 1942 has a purchasing power in terms of consumer prices of only 70 percent of what it had then. This is a real depreciation of 30 percent. Which policy—that of the first or the second world war—was worse for the bondholders?