HOW MUCH MONEY?
Harris, Seymour E.
How Much Money? by SEYMOUR E. HARRIS TTOW MUCH money do we need? Who should control the supply? These questions recur explosively throughout all our history—and are very much with us again...
...They are ready to pay the price of a modest dose of inflation, say, a three per cent increase of output annually against a one per cent increase in prices—a proportion not greatly out of line with the history of the last eight years...
...In the great debates over the Second Bank of the United States in Andrew Jackson's day of the 1830's...
...This Committee also made it clear that fiscal policy is more effective when it places greater dependence upon income and similar taxes that automatically respond to changing economic conditions...
...It has not always been clear just what this Accord meant...
...Indeed, in 1951 under pressure from financial groups and others fearing the inflationary ellects of these policies, an Accord had been signed by the Treasury and Federal Reserve...
...In early 1953, the Eisenhower Administration embarked on its "Hard Money Crusade...
...Why then did the Administration suddenly find it necessary to increase the yield on government securities by a greater percentage than in the previous seven years...
...The Democratic Party has always been more disposed to depend upon government to stabilize the economy and help it grow than has the Republican Party...
...These questions recur explosively throughout all our history—and are very much with us again today...
...It is no wonder that the Administration's anti-inflationary policies have not been highly successful...
...Hence monetary supplies would decline in periods of rising prices and increase in deflationary periods...
...In a way this was fortunate...
...According to the Secretary, unless federal expenditures are cut substantially in the years to come, we shall have a depression that will make our hair curl...
...In looking back...
...Secretary of the Treasury Humphrey has often commented that the large rise of prices in the years 1939-1952 resulted in robbery of savers...
...But his is not exactly a fair appraisal...
...1 find no inflationary dangers justifying strong anti-inflationary measures...
...In this same period, war or associated outlays absorbed $656 billion, or 80.5 per cent of all federal outlays...
...This time there were signs of inflation: the state of the stock market, the scarcity of raw materials, the wage-price spiral, and the large rise of prices in industrial markets which would have been much more serious in the absence of the decline in farm prices...
...The Republicans were in power in all but four of these years...
...In fact, the last is by far the most important and accounts for most transactions...
...Burgess had been one of the leading bankers in the country...
...In the 1956-57 debate over monetary policy, the Democratic Party genSEYMOUR E. HARRIS, chairman of the department of economic* at Harvard University, has served as consultant to a number of economic agencies of government...
...Contrast these views with those of Secretary Humphrey and his friends...
...in 1920-21, the year of the "Wall Street Conspiracy," in the years of the Great Depression, when President Hoover would reduce the supply of money drastically by cutting expenditures and increasing taxes and Treasury Secretary Andrew Mellon would liquidate "labor, liquidate stocks, liquidate the farmers . . . when the people get an inflation brainstorm," and finally now in '57 when the government, fearful of inflation, is trying to get interest rates up—in all these years the crucial issue has been, how much money and who should control the supply...
...This is the Administration that refused until recently to allow significant increases on the civil benefits budget despite the growth of the economy and the rise of prices...
...It depended excessively on the weaker weapon, and it did not even use this weapon effectively...
...This 30 billion dollar error led the Administration to reverse its monetary policy...
...in the second quarter of the Nineteenth Century, the era of the Bimetallists and the Greenbackers...
...Then a choice has to be made...
...The great inflations have been war-induced and are not the product of any one party's economics or ideology...
...Many students raise the question whether the way out is credit restriction through higher rates...
...but in 1953 he appeared to take the lead in pressing the Federal Reserve into establishing a so-called free market for money...
...Another way of looking at the problem is to compare the rates in vogue before the present Administration came in with the long-term rate at the end of 1956: the rise was about 7/10 of 1 per cent, or a rise of 25 per cent from the 1952 rate of 2.7 per cent...
...The Federal Reserve, then, has to work out common policies with other branches ol the government to achieve such objectives as stability, growth, and equity...
...The banks manufacture money which they lend to the government to pay its bills...
...He had been in the forefront of the groups fighting for what they called a free market for securities...
...The rise of wages should be tied, for the economy as a whole, to rising productivity, and price rises should be related to the actual increases in costs...
...The Democratic Party has always been the party of the little man, the debtor, the worker seeking a job or access to a new business through the use of credit...
...This has not been my interpretation...
...In 150 years our monetary supplies increased by 3500 times compared with rises of 400 times for national income and 28 times for population...
...The history of the last few years suggests that the monetary authority finds it most difficult to withhold money under these conditions...
...Inflationary pressures arise not only as a result of increases in the supply of money in relation to limited supplies of labor and raw materials and other factors of production, but also as rising wage rates followed by rising prices bring inflation directly...
...Why did the Federal Reserve at this time support the Treasury's hard money policy...
...The Republicans have been in command in the great deflations of American history...
...Falling prices brought on by deficiencies of money is one disease that the capitalist system cannot long endure...
...Indeed, the originators of modern monetary policy in this country were die Democrats who established the Federal Reserve System over Republican opposition...
...and 2) manipulation of the rediscount rate, a tool used to force member banks to borrow from the Reserve Bank at higher rates in inflationary periods and thus induce them to discourage borrowing by themselves making loans at higher rates...
...He receives no compensation for the rise in prices or the increase of interest rates of about 25 per cent since 1952...
...But by die 1950's the Democrats had deflated monetary policy as a sharp weapon and were concentrating on fiscal policy...
...It is this latter group which is injured when prices fall, for it is forced to pay its debts when money is scarce—in dollars of higher purchasing power than those it borrowed...
...When some flexibility of money rates is needed, the managers of our economy must assume some responsibility for assuring the nation that the effects will not be a diversion of capital to speculators against home builders and municipal authorities forced to borrow to build schools...
...The Federal Reserve Board and the Federal Reserve Open Market Committee are entrusted with the responsibility of controlling the supply of money...
...Insurance companies, finance companies, savings and loan associations, and especially the federal credit agencies increased their activities enormously...
...This is an unusually slow rate of increase in the supply of money, and therefore one may be surprised that the economy moved ahead as well as it did in these years...
...Large corporations have large surpluses and liquid balances and, moreover, have access to the capital market...
...The Secretary subscribes to an entirely different theory: when the economy is unusually prosperous so that a budgetary surplus is in prospect, taxes should be cut...
...Second, the failure or incapacity to deal with the financial intermediaries has largely nullified its effects...
...In an able report the subcommittee of the Joint Congressional Committee on the Economic Report in 1955 said without quibble that the government should spend more and tax less in periods of depression and spend less and tax more in periods of inflation...
...Thus, the Secretary argues that when consumer spending is already too high, we should provide opportunities for the public to spend even more...
...This is consistent with their roles in American history...
...In wartime, with its concentrated need of resources and the slow expansion of tax receipts, the government has to depend heavily on monetary expansion to pay its bills, thus creating inflation...
...In the record deflation of 1929-1932, it was President Hoover who was in the White House...
...But since the issuance of money was involved, this meant not only that the price of bonds was maintained but also that inflation was encouraged...
...Why so much concern over the supply of money...
...The answer lies partly in the events of recent history and partly in the views and attitudes of the new manager of the national debt, Randolph Burgess, Undersecretary of the Treasury...
...Over all our history the so-called inflationists—those who demand more money and prefer the danger of inflation (rising prices) to the danger of deflation (falling prices)—seem to have had considerable success...
...In the first place, it was used clumsily in 1953...
...A major increase of close to one billion dollars a year, which might well rise to two billion dollars, is to be found in the cost of financing the national debt...
...Rather the Federal Reserve, the Treasury, the Housing Administration, and other interested agencies would determine policy on the basis of the best interests of the nation...
...Failures of monetary policy rather than successes were responsible for this result...
...Moreover, three major wars account for 92 per cent of the peak debt...
...for then the businessman loses money and reacts by laying off workers, who in turn spend less, with the result that larger losses are incurred with further reduction of jobs...
...Much more concerned with inflation than with the possibility of unemployment, the Administration directed its major effort, as might be expected, on a rise of rediscount rates and attempts to keep reserves of member banks low...
...In the years 1952-54, the banks continued to hold on to securities, and the Treasury was less successful in getting the banks to dispose of and the public to purchase them than the Democratic Administration had been in the years 1945-52, when there was no recourse to a policy of higher rates...
...Small borrowers—including farmers, home builders, and small businessmen—not only pay much higher rates from the beginning...
...But they would be most unhappy with an inflation of, say, five per cent for each one per cent rise in output...
...In 1953-54 the Administration drastically cut public expenditures and also introduced a hard money policy...
...Once we admit that the government has a responsibility for the health of the economy, we cannot subscribe to the theory of independence...
...The Accord also implied that monetary policy once more was to be flexible...
...The answer is that in a modern economy the supply of money determines to a great extent the volume of output and its distribution...
...If the supply is inadequate, there is less money to speed the movement of goods, and prices tend to fall...
...They are the ones most likely to be squeezed out once the supplies of cash become scarce...
...What happened was that as the Federal Reserve restrained the commercial banks, other financial institutions expanded at a dizzy rate...
...Without money the employer is unable to hire workers and the consumer is unable to buy goods and services...
...But they are also aware that the attainment of a rising output may necessarily be accompanied by some inflation...
...and despite later claims of dangerous accumulations of inventories, I could find little evidence of such a trend...
...erally has been critical of the restrictive policy of the Federal Reserve, and the Republicans generally support this policy...
...For example, the fact that in the recent rising prosperity the yield of the productive income tax rose in response to higher incomes meant that the inflationary trend was automatically checked to some extent because potential spending power was drained off by taxes...
...In summary, monetary policy since 1952 has been no great success...
...Since the Great Depression the Democrats have tended to stress the objective of rising output more than price stability...
...Apparently the Federal Reserve did not let the various federal agencies like the Federal Housing Administration and the Veterans' Administration in on the secret that they were forcing retrenchment...
...To some, including Burgess and the President, it has apparently meant the independence of the Federal Reserve from Treasury control or, as the President has said, an independent Federal Reserve...
...and in 15 months we experienced a decline of 15 billion dollars of income instead of the expected 15 billion dollar rise...
...The objective was to raise the price of money—the rate of interest—and thus discourage borrowing and keep the supply of money from rising...
...Yet a purchaser of these bonds in 1944 would receive back in dollars of stable purchasing power 60 per cent of what he invested (aside from the interest) and his compensation in higher interest rates would be only the slight increase granted in 1952...
...Fifth, they have shown little concern over the inequities involved in rising rates...
...Perhaps the most important issue involved is the wisdom of a dear money policy...
...He is the author of "Saving American Capitalism," "Inflation in the American Economy," "Foreign Economic Relations In the United States," and "The Economics of Social Security," and editor of "Postwar Economic Problems" and "The New Economics...
...It was fortunate indeed that these branches of the government were not on speaking terms...
...The cost of financing the national debt rose from 6.5 billion dollars in fiscal year 1953 to an estimated 7.35 billion dollars in fiscal year 1958 (year ending June 30, 1958...
...Whenever the price tended to fall below what corresponded to a two per cent yield, the Federal Reserve, under orders from the Treasury, would bolster the price of Treasury securities through the issue of additional money...
...The government suffers, as is evident in the price paid for borrowed money...
...In response to die pressure of rising output and the wage-price spiral, the supply of money somehow responds...
...If they had been, our Gross National Product would be considerably less than the present $412 billion...
...Their technique consists of two devices: 1) open-market operations to increase the cash reserves of member banks, which in turn largely determine the amount of money the banks create by lending...
...But in 1956, the Federal Reserve introduced a dear money policy once more...
...Fourth, even when rates have risen, the authorities time and again, both in 1953 and 1957, have refused to assume the responsibility: they were merely reflecting market conditions, they insisted...
...Since the potent weapons for control of the economic system are fiscal and monetary policy, and since fiscal policy implies the application of tax and spending policies to stabilize and stimulate the economy, the Republicans would be more disposed to use monetary policy—especially where monetary policy is interpreted as following the laws of supply and demand...
...Indeed, from 1953 on, the authorities were successful in keeping the supply of money down...
...Another source of embarrassment is that the rise in rates has been concentrated on the large investors...
...For example, expenditures in the course of four major mobilizations accounted for $528 billion, or 65 per cent of all federal expenditures over 163 years...
...He would resign, he said, should the government resort to deficit financing in order to cope with depression...
...But the modern economist favors tax cuts when the economy is declining, with the result that more money is left in the hands of the public and spending is increased just when it is needed...
...In 1866-1893 commodity prices declined by 43 per cent...
...The income tax is to be preferred to excise or property taxes not only on grounds of equity but also because it moderates economic fluctuations...
...This school believed that the government had been issuing excessive supplies of money for years in order to keep long-term government bonds at a price which would yield only two per cent...
...This was a surprise, for in both December 1952 and March 1953 the Federal Reserve Open Market Committee had found no sign of inflation...
...By 1955, the leading Democrats had learned the lessons that Keynes, Hansen, and others had been preaching for a generation...
...In the first Eisenhower Administration, it rose only about one third as much as the relative rise in Gross National Product (GNP...
...Third, too great a burden was put upon monetary policy, in part because of unwillingness to make adequate use of fiscal policy and in part because of the inflationary effects of other federal policies...
...That means once the entire debt is subject to refinancing at present rates, the cost of financing the rise in the same debt would be up about two billion dollars (average maturities are about four years...
...This does not mean they do not want a stable monetary unit...
...for had it succeeded in its aims, it undoubtedly would have deflated the economy...
...He has promised many times that this would not prevail under the Republicans...
...This is easily explained...
...The objective, of course, is to increase the price of money in order to keep down the supply...
...that is, rates were to move up in periods of inflation and down in periods of depression...
...This is an embarrassing development for a government which came to power on an economy program...
...But a reduction in the sup...
...Small investors, purchasers of E bonds, receive the same interest they did in 1952...
...Burgess seemed to believe in the independence theory...
...In general, the Eisenhower Administration depended much more on monetary policy than had the Truman Administration...
...ply of money incites protests from those who are pinched by the resulting reduction of money, absolute or relative...
...The inter-party difference in monetary policy stems from a fundamental difference in ideology: The Republicans are the party of property and savings, whereas the Democrats are the party of jobs and protector of the debtor class...
...This was more than the economy could take, for both policies reduced spending...
...By offering securities at higher rates of interest, he hoped to induce investors to take more securities and thus make the security market independent of the issue of more money and free it from dependence on buying by the banks, a process which in turn resulted in increased supplies of money...
...The large borrower is relatively unhurt by the increase in rates and the restraints on the manufacture of money...
...Far from it...
...The price level had been surprisingly stable for two years: the Federal Reserve had reduced margins on stock market loans, thus encouraging speculation— a policy scarcely to be expected in an inflationary period...
...The Accord meant to me merely that the interests of the Treasury were not to determine monetary policy...
...In fact, from 1952 to fiscal year 1958 (estimated) loans and guarantees of federal institutions will be no less than from 40 to 85 billion dollars, or an increase of 112 per cent...
...Secretary Humphrey admits that the rate of interest on Treasury issues rose from 2.49 to 2.67 per cent in 1956...
...Despite the hard money policy, the Treasury failed to achieve one of its major objectives...
...Perhaps what is necessary is a more conservative wage-price policy...
...But the idea that the Federal Reserve was to be independent strikes me as absurd...
...With the public debt roughly equal in these years, the rise in interest charges becomes roughly 13 per cent...
...Money, by the way, includes not only paper money and coins but also deposits in banks which are subject to check...
Vol. 21 • March 1957 • No. 3
