The Need for Credit Control

October 2, 1950

In understanding the real causes of inflation and recommending the means for combating it, one Federal agency has come nearer to realities than any other. This is the Federal Reserve System, which after ten years of subserviency is at last rebelling against the Treasury’s reckless inflationary cheap-money policy.

The best discussion I have read by any Federal official of the true causes and preventives of inflation is a lecture by M.S. Szymczak, a governor of the Federal Reserve System. The lecture was delivered on Aug. 29 before the School of Banking of the University of Wisconsin. An extensive excerpt from it was published by The Wall Street Journal of Sept. 11.

“I do not believe,” he declared, “[direct] controls [including price and wage fixing and rationing] are the present answer to our immediate inflation problem. They deal only with effects and not with basic causes. The basic cause of our inflationary problem is continuing rapid credit and monetary expansion, abetted by current government deficits which threaten to grow larger and larger. . . . If the fuel of inflation is provided, all that direct controls can do is to drive the inflationary pressures underground and to postpone some of their effect. . . .

“The cornerstone of our anti-inflation program must be bold fiscal measures. . . . Financing the expanded military budget cannot be limited to the taxation of wealthy individuals and business enterprises if it is to be useful as an effective anti-inflationary measure. It must restrict spending, and most spending is done by the vast number of individuals and families with low-and middle-bracket incomes. In an emergency situation like the present, our tax changes must be designed primarily to meet the danger of inflation.”

Szymczak goes on to recommend debt-management policies designed to tap real savings by sales of government securities to non-bank investors, so as “to reduce the volume of government financing through banks, which is highly inflationary.” He endorses the restriction of consumer and real estate credit, and the action of the Federal Reserve System in August of raising the New York and other discount rates from 1½ to 1¾ percent. If the measures so far taken are not effective, he adds, “monetary policy will need to resort to even more restrictive use of one or more of the general instruments of credit control at its disposal, namely, open-market operations, changes in the discount rates, and changes in bank-reserve requirements.”

All this is excellent as far as it goes, and Szymczak and those for whom he speaks in the reserve system deserve great credit for their courage and clearsightedness in going even this far. But Federal Reserve officials are still the prisoners of their own submissive record of the last ten years.

The official statement of the Board of Governors on Aug. 18, for example, declared that they were prepared to use all the means at their command to restrain further expansion of bank credit “consistent with the policy of maintaining orderly conditions in the government securities market.” Now this phrase is ambiguous. If we may judge by its interpretation in the past, it is little more than a euphemism for saying that it is the duty of the Federal Reserve System to continue to support government securities at substantially their present artificial inflationary low interest yields. And if this is Federal Reserve policy, it cancels bold words about fighting inflation with “all the means at our command.”

It is the duty of the Treasury itself to make the market for its securities “orderly” by paying rates of interest that will appeal to real investors and—if necessary to protect existing holders—by refunding its outstanding long-term securities at higher rates or even, perhaps, as an emergency measure, with securities bearing a variable coupon rate (see this column, Newsweek, Oct. 4, 1948).

The country cannot continue indefinitely to be the victim of the Treasury’s past as well as present inflationary cheap-money policy. That policy must be terminated now.