Ordering Inflation

August 10, 1959

The Democratic majority in Congress has been playing transparent politics with the nation’s fiscal and monetary system. The effect of the policies it advocates would be to let loose a more dangerous inflation than any the country has yet experienced.

On June 8 the President requested Congress to eliminate the 4¼ percent legal limit on rates the Treasury may pay on new issues of bonds with a maturity of more than five years. As a result of the rise in interest rates, the Treasury can no longer count on selling long-term bonds below this rate.

After pondering a full month, the House Ways and Means Committee, on July 8, instead of simply removing a legislative ceiling that should never have been there at all, gave the President, as a sort of favor, the right, for not more than two years, to disregard the interest-rate ceiling when he found higher rates necessary “in the national interest.” The obvious political intent of this was to try to make the President seem personally responsible for paying any higher rate that market conditions might make necessary. The Democrats went even farther. An amendment to the proposed authorization read:

DOUBLE-SPEAK

“It is the sense of Congress that the Federal Reserve, while pursuing its primary mission of administering a sound monetary policy, should to the maximum extent consistent therewith utilize such means as will assist in the economical and efficient management of the public debt, and that the system, where practicable, should bring about needed future monetary expansion by purchases of U.S. securities of varying maturities.”

Here was a beautiful specimen of double-speak. The Federal Reserve System was to bring about more inflation by monetizing the public debt, short-term or long-term, but to do this only to the “extent consistent” with “sound monetary policy.” It was to give us inflation and sound money at the same time.

When the Federal Reserve and the Treasury objected to the inflationary implications of this, Sam Rayburn, Speaker of the House, angrily declared that the Federal Reserve authorities considered themselves “immune to any direction or suggestion by the Congress, let alone a simple expression of the sense of Congress.”

There are several issues involved here. The first is whether the provisions of the measure approved by the House Ways and Means Committee are inflationary. To this there is only one answer: They certainly are. They would put pressure on the Treasury to continue with short-term rather than long-term financing. They would put pressure on the Federal Reserve to expand the currency by monetizing the debt. Both proposals, it is obvious, would be inflationary.

BAD REFUNDING

True, our debt management record since the end of World War II is not one of which successive Secretaries of the Treasury can feel very proud. At practically any time up to 1956 the Treasury could have funded the debt in long-term bonds at 3 percent or less. It kept failing to do so because short-term rates (largely as a result of inflationary Federal Reserve policies) were lower still, sometimes falling to 5/8 percent. The Treasury acted as if this situation would last forever. It kept missing opportunities because it assumed that short-term rates would stay low or that long-term rates would go lower. Now it must pay more than 4¼ percent for long-term money. A few weeks ago it paid 4.7 percent for one-year money. But it must be said that the Treasury and Federal Reserve authorities acted through the postwar years with the inflationists in Congress constantly breathing down their necks.

A final question has to do with the independence of the Federal Reserve System. Certainly it should be free from direct political interference, dictation, or pressure. But a further question is whether any governmental administrative body, no matter how set up, can be granted wide discretionary power without excessive political pressure being put upon it to inflate. What is necessary is to reduce the range of administrative discretion, to move in the direction of fixed, almost “automatic,” rules. The most important step in that direction would be a return to the gold standard.