Fateful Error

An astonishing thing has been going on in Washington, and its direful importance is understood by only a handful of U.S. citizens. On the doom-laden Question of Inflation, the President of the U.S. is allowing the power of his office to be thrown against the weight & authority of expert knowledge and understanding.

Nearly every authority on economics in general or finance in particular says--and has said publicly--that:

1) The Federal Reserve Board should stop buying Government securities from banks at the present pegged prices. Reason: unlimited FRB buying gives banks more money for loans, disproportionately adds to the amount of cash in circulation.

2) The Treasury should accept the consequences of this decision: an increase in the interest rate on new securities, by, say, one-quarter of one percent.

A Finger on a Fact. President Truman understands the obvious need for wage & price controls. What he does not seem to understand is that inflation cannot be controlled unless the flow of money is damped down. And the flow of money is controlled, to a large extent, by how freely banks can dump Government bonds, without loss, on the Federal Reserve.

A group of University of Chicago economists issued a report which strongly urged that the flow of money be retarded. The alternative: ballooning prices (through ballooning credit) and disaster. The report pointed out that most people think prices are rising because of defense spending, but that is not, in fact, the case. Actually, the Government has not yet got around to spending very much for rearmament; in the last half of 1950 it took in more money than it paid out.

The report put its finger on the key fact: in the second half of 1950, FRB purchases from banks of Government bonds rose by almost $3.5 billion. In that same period, bank loans rose by nearly $10 billion (20%). That, said the report, was the critical reason for high prices, and it rose directly from "the misconceived monetary policy."

The Chicago report might have been more startling if it were the first word spoken on that side of the subject. It was not. A Senate-House committee had polled 405 of the nation's top economists and found them unanimously against the Administration's cheap-money policy. The

Committee for Economic Development had spoken to the same effect. Marriner Eccles, most outspoken of the governors of the FRB, also stood for damming up the flow of money, but the FRB itself did nothing decisive; considering the imposing figures on the other side of the question, it kept its mouth timidly shut.

A Tunneled View. The figures on the other side were Secretary of the Treasury John Snyder and the President of the U.S. Any politician could understand the President's position, even though he could not explain it: Snyder is the President's friend, a man in whom he has confidence.

Why does Snyder take the stand he does? Answer, in simplest terms: if the price of Government bonds falls (and thus interest rates on new issues have to be raised), it will cost the nation more to finance the national debt (now $256 billion). It is as simple as that--and to the experts' eye as tunneled a view of a vast problem as a man could adopt.

Secretary Snyder had other arguments, seen through the tunnel--and they made a long essay on economics. So did the reply of the experts. But in short, the answer to Secretary Snyder is as follows:

If he sticks to his cheap-money policy it will cost a horrifying lot more to finance than an addition to the interest on the national debt. It will send prices skyrocketing, knock the value out of life insurance and savings and the purchasing power out of the household budget, shoot up the cost of rearmament, strike a deadly blow to the U.S. economy--and the economy of the free world. This is true, as the experts have pointed out, because the Snyder policy, in over-prosperous 1951, is sure-fire fuel for really dangerous inflation.

This file is automatically generated by a robot program, so reader's discretion is required.