Money and Credit
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Bank credit and monetary inflation, which had resumed its upward trend under Federal sponsorship in late 1949, had attained new high levels by mid-1950. This accomplishment had proceeded strictly according to the banking and finance laws as they existed on the books. Federal credit, which was directed into all phases of the nation’s economy, was combined with a policy of artificial controls and government operation by deficit financing. The extensive credit expansion was reflected in such items as increased government-guaranteed real-estate loans, new highs in consumer credit, high-price policies for foods and raw materials, increased business loans, increased inventory values, extensive borrowing by finance companies, and much available Federal credit at low rates. These conditions were supplemented by the availability of substantial amounts of funds from savings banks, insurance companies, savings and loan associations, pension funds, and large trust funds. The prevailing attitude indicated an over-all disregard for inflation or its consequences. In early 1950, and coincident with this trend, plans were made to introduce into Congress legislation which would provide for Federally guaranteed and supervised loans for small business on a liberal basis.
Under the mandate of the law and in harmony with the policies of managed-money exponents it was pointed out in 1950 that socially devised central banks of a quasi-public nature were now required to re-enforce the nation’s private banking structure. Modifications of the Federal Reserve Act of 1913, many of which were made after 1930, were stated to have worked toward this end. It was further held that under this new banking structure the efficient performance of banking functions has provided just the right amount of credit expansion. It was also contended that enough credit expansion meant not so much as to foster inflation and not so little as to induce deflation. The Federally controlled central bank was portrayed as the correct arbitrary instrument for arbitrary control to maintain just the right amount of money and credit for a sound, progressive economy. Mention was omitted of the influences of Federal lending agencies upon the nation’s credit.
Inflation.
The policy of debt management and operation of Federal gratuities, since the end of World War II hostilities, had extended their influence into stimulating the nation’s inflationary forces to such a degree that most existing or operating managed controls failed to function. The extra stimulus given to panic buying and hysterical hoarding which resulted from the Korean crisis of mid-1950, confused most issues of control and balance advocated by the many appointed government managers of credit. Inflationary forces swept the national economy in late 1950 and economic fire fighters appeared in many places.
Credit Control.
On Aug. 18, 1950, the Board of Governors of the Federal Reserve System and the Federal Open Market Committee published a policy statement. In it they proposed an increase in discount rates, the restraint of bank credit, increased taxation and the principle that all citizens must voluntarily stop inflation of their own will.
In a manner similar to that followed by the public, which under the pressure of inflationary fears had run to buy and hoard, the members of Congress rushed to turn out emergency legislation as a corrective measure.
The Defense Production Act of Sept. 8, 1950, was created to bring about a stable economy. Emergency provisions were to be set up and administered by Federal appointees. This act endeavored to establish priorities and allocations for facilities and materials, provide financial assistance and expand productive capacity, stabilize wages and prices, settle labor disputes, control credit, and in general place the nation as a whole in an economic strait jacket. Meanwhile the Government itself continued to increase Federal debt, loans, and expenses, which furthered inflation through the operations of its various agencies, corporations, and bureaus. It also continued arbitrary price supports and subsidies.
The new Federal contracts necessary for the military expansion usually amounted to large sums of money. The Labor Department exercised its authority over these contracts by injecting a clause which fixed the minimum wages to be paid in such production at the level it designated. At the same time both the military men and Congress became astounded at the 1950 increased costs of materials and equipment. These expenditures for the fiscal years 1949 and 1950 had been over $12,000,000,000 for each year, while the 1951 estimates had become astronomical in size.
In the meantime the Federal Reserve Banks of the nation still had to accept Federal bonds at par, and interest rates remained pegged near 2 per cent. Under these general conditions the Defense Production Act was devised to control the economy and stop inflation.
Executive Order No. 10,161, issued by the President of the United States on Sept. 9, 1950, definitely assigned these legislated controls by delegating their administration to the various governmental departments and agencies. In mid-December Charles E. Wilson, head of the General Electric Corporation, was selected to act as head of the production-control program second only to the President of the United States.
The Federal Reserve Board of Governors and the banking system in general were fitted into the plan by Regulation V, on loan guarantees for defense production; Regulation W, on consumer credit; and Regulation X, on residential real-estate credit. These regulations are discussed in more detail at the end of this article. Thomas B. McCabe, Chairman of the Board of Governors of the Federal Reserve System, in an address before the National Association of Supervisors of State Banks on Sept. 21, 1950, at Boston, emphasized the stressed items relative to banking controls, that regulations of consumer credit, real-estate credit, and others were selective controls which applied in general to specific areas of credit. He admitted that they were important but emphasized that they would not perform miracles. Greater importance was placed by Mr. McCabe upon the monetary and fiscal policy followed by all banking institutions and the extent to which they were effective. This, combined with the support they should receive from Federal and state agencies and supervisory authorities, would reach into areas outside that covered by the legislated controls. This view was amplified and reasserted in an address before the Committee for Economic Development on November 15, at New York. Again in December, at a conference of the American Bankers Association in Chicago this viewpoint was reiterated, but Mr. James E. Shelton, President of the Security First National Bank of Los Angeles also pointed out to the conference that inflation was the direct product of the Federal Government, started in the thirties and fostered by Federal agencies and policies. An attempt to shift the blame to the banks was not received sympathetically.
Deficit Financing.
Banking throughout the nation in 1950 had participated in financing increased consumer credit, easy (guaranteed) housing credit, new issues of both Federal and state credit, and extensive increased fixed loans to agriculture and business. Where such credit was restrained, complaints by business to Congress brought threats of a new Federal lending agency. Paucity of civilian supplies during the World War II period, and pent up individual demands backed by large supplies of cheap money, now released buying pressures upon the newly produced available supplies. This, combined with personal savings and business reserves that were inadequate to meet these new expenditures, resulted in more 1950 debt or deficit spending by business, Federal, state and local governments, private citizens, and foreigners. Over-all demands for bank credit in 1950 were heavy, and Government securities used as provided for by law acted as one of the important facilitating vehicles. The 1950 conflict of opinion on policy in banking and finance, which concerned the interest rates advocated by the Treasury Department in contrast to money rates advocated by the Federal Reserve Board, terminated late in the year with increased rates. The Federal Reserve System’s point of view had prevailed at least temporarily.
While matters of policy relative to inflation had been viewed with varying attitudes from different positions in both public and private financial circles, Federal corporations and credit agencies had increased their easy money loans in 1950 with funds procured from the U.S. Treasury, which was also very much in debt. These loans amounted to about $12,733,000,000 at the end of 1949 and about $13,350,000,000 by the end of the first quarter of 1950. Federal budget expenditures reported had continued for the first half of 1950 at a rate which varied between $2,496,000,000 and $4,296,000,000 per month. The nation’s banks continued to hold about $84,000,000,000 in Federal securities, and yields on taxable Treasury bonds were held at about 2.34 per cent. Total money in circulation, which was backed basically by Federal debt, had increased slightly from about $26,941,000,000 in January to about $27,156,000,000 by June, while deposit currency (demand deposits) had indicated an increasing trend when they exceeded $96,000,000,000.
Venture Capital.
In the field of banking concerned with financing long-term operations in 1950, new securities offered for cash in the United States had by August reached a level of about $13,601,680,000 and more than $9,269,731,000 was for noncorporate purposes. Corporate issues for cash which resulted from the sale of stock were able to provide only about $591,922,000 through common stock and $405,026,000 through preferred stock. Financing through long-term loans, bonds and retained earnings had continued to prevail in 1950. Institutional lenders were very active, and investment banking continued to find its activities in competition with these institutions and Federal agencies. The last quarter of 1950 provided considerable disturbance in the field of banking and finance. This was related to inflation, the nature of credit controls, and the extent of taxation. Credit restraints had taken a definite form in the Defense Production Act. Executive Order No. 10,161 had started action, and December brought a declaration of national emergency by the President. The nation’s prosperity figures, voiced by the council of economic advisers, were now regarded by both public and private banking leaders as highly inflated. Savings and fixed income provided little purchasing power, and debts were high as 1950 closed.
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