Resumption of Inflation

December 14, 1953

The Eisenhower Administration, which so bravely abolished price controls and made such a promising effort to halt inflation when it first came into office, has reversed its direction. It seems to have embraced almost the whole economic philosophy of the New Deal, and above all its policy of continuous inflation. And it has resumed this policy under the old New Deal-Fair Deal pretense of “fighting deflation.”

The turnabout first became apparent in mid-May, when the Federal Reserve System began purchasing Treasury bills in the open market. Then on June 24 came the much stronger inflationary step of reducing the reserve requirements of member banks. This action was taken to release $1,156,000,000 of reserves in order to give the country’s banks another $5,780,000,000 in lending power. This was frankly done in anticipation of Treasury needs of some $6,000,000,000 of “new money.”

The action had the hoped-for results. In the month of July alone the total loans and investments of the nation’s banks were increased by $4,700,000,000. The country’s money supply (total bank deposits plus currency outside of banks) increased by about the same amount. At the end of September the nation’s money supply stood at the record high level of $204,900,000,000. This was three times the money supply at the end of 1939.

As a result of this policy, interest rates were brought down again. In the week ended Nov. 28, three-month Treasury bills sold to yield only 1.488 compared with a yield of 2.231 in June. Commercial borrowing rates were correspondingly lower, thus encouraging business to borrow more. As of Oct. 15, the cost of living rose for the eighth month in a row, and to a new high level.

In recent weeks, and especially since the Republican Congressional defeat in Wisconsin, there have been increasingly unmistakable signs of a decision in the White House to resume inflation. Secretary Benson has to all but a minor extent capitulated to the extreme farm-price-support demands in Congress. A few weeks ago William D. Mitchell was suddenly fired as head of the Small Business Administration. His chief crime seemed to be that he had been cautious in his lending policies, and tried to save the taxpayers money. Immediately after he left, the SBA indicated that government loans would be available to almost any type of business, not just to defense contractors or “essential” producers.

Then on Nov. 18 President Eisenhower announced at his press conference that the Administration had given up all hope, not only of balancing the budget in the present fiscal year, but even in the fiscal year 1955. He also declared that “when it becomes clear that the government has to step in . . . the full power of government, of government credit, and of everything the government has will move in to see that there is no widespread unemployment.”

The Wall Street Journal, in a news story the next day, declared that this statement was not merely offhand, because the Eisenhower Administration was hammering out, for use “when and if needed,” an elaborate “antirecession program.” This included all the usual Federal Reserve devices for loosening credit—lowering bank-reserve requirements and rediscount rates, and the purchase of government bonds. In addition, the story ran, seven “task forces” were working under Dr. Arthur Burns, chairman of the President’s Council of Economic Advisers, to study Federal credit insurance for home modernization and repair, liberalization of unemployment insurance, Federal aid to new construction, tax relief, public works, and the “whole field of community and private business planning.” Finally, private financial institutions, such as banks and insurance companies, were “being eyed to see where they fit into depression-fighting schemes.”

Most of these “depression-fighting schemes” seem to me to bear a striking resemblance to the New Deal’s inflationary devices, and its philosophy of “spend and spend, elect and elect.” But I could be wrong, and I hope I am.