Eccles on Inflation

When Franklin D. Roosevelt moved into the White House in 1933, Marriner Stoddard Eccles was a Republican banker in Ogden, Utah with a reputation for success and a hatful of original ideas. Not until 1934 did the lean, intense young Mormon go to Washington to dig in as an assistant to the Secretary of the Treasury. Within a year, to the vast consternation of his fellow Eastern bankers, Mr. Eccles was head of the Federal Reserve Board and writing his novel notions into the law of the land. He was not only committed to a strong central banking authority which would be an arm of the Government; what was worse in eyes of orthodox bankers, he was thoroughly sold on the idea of a country spending its way out of Depression.

But spending was only one facet of the Eccles financial philosophy. To apply to public policy the common economic virtues of private life, he has often declared, is to invite disaster. When the nation's individuals are assiduously practicing thrift, economy and budget-balancing, that is precisely the time for the Government to go into debt for compensatory public spending. Of course, this was the underlying fiscal philosophy of the whole New Deal, and Mr. Eccles came to be rated the arch-apologist of spending. Last week Mr. Eccles suddenly reversed his economic field, to the shocked surprise of all but a few who had not forgotten his oft-made point that his theory worked also vice versa.

Stepping forth from a routine Washington meeting with the heads of the twelve Federal Reserve Banks, Mr. Eccles issued a resounding statement "to correct erroneous interpretations" of his ideas on how to control inflation. It is no secret that Chairman Eccles is alarmed by the current trend of Recovery, particularly the dizzy rise in commodity prices. And after a visit to the White House last fortnight, the Government bond market broke wide-open (TIME, March 22). Hence, the natural assumption last week was that the Reserve Board might be ready to let interest rates seek a higher level. Said Mr. Eccles in correction:

"I have been and still am an advocate of an easy money policy and expect to continue to be an advocate of such a policy so long as there are large numbers of people who are unable to find employment in private industry, which means that the full productive capacity of the nation is not being utilized.

"The price rises," held Mr. Eccles, "are the result primarily of nonmonetary factors, including foreign armament demands,-- strikes and monopolistic practices by certain groups, both in industry and organized labor. These conditions have in turn led to speculative security and commodity buying, which serves to accelerate the price advances. . . . Increased wages and shorter hours when they limit or actually reduce production are not at this time in the interest of the public in general or in the real interest of the workers themselves. When wage increases are passed along to the public, and particularly when industries take advantage of any existing situation to increase prices far beyond increased labor costs, such action is short-sighted and indefensible policy from every standpoint. . . . The upward spiral of wages and prices into inflationary price levels can be as disastrous as the downward spiral of deflation." But to resort to tight money and higher interest rates "to reach special conditions" was to risk a halt in Recovery, said the Reserve Board chairman. He had, as often, a less orthodox solution. "The remedy lies ... in vigorous government intervention with all the powers at its command to deal directly with the causes.

. . . Under present conditions of accelerating recovery, a continued easy money policy, to be successful in achieving and maintaining a balanced recovery, must be accompanied by a prompt balancing of the Federal budget and subsequent retirement of public debt by the Government in relationship to the expansion of private credit.

I have not been and I am not now in favor of balancing the budget at the expense of the destitute and the unemployed who are unable to find private employment, but I am in favor of increasing taxes on incomes and profits if necessary to sustain the volume of relief and at the same time bring the budget into balance and permit the paying down of public debt as private debt expands. Only by this process can monetary inflation be prevented." All this had been on Mr. Eccles' mind for some time. Indeed, he had merely abridged a 7,000-word article appearing under his signature in April FORTUNE, out this week. But talk of a tax boost, coming from a man who had just come from the White House, brought puzzled howls from Congress, which always hates to have to go home after pinching the electorate under the purse pocket. "I am not flushed with any enthusiasm for new taxes if they can be avoided," drawled Speaker of the House Bankhead. Cried Mississippi's Rankin: "What I am afraid of is that we are embarking on a deflationary policy. Commodity prices are not high enough." Chairman Robert L.

Doughton of the potent House Ways and Means Committee allowed that he did not see any need for new taxes. Chuckled that unbelieving North Carolinian: "Mr.

Heckles is heckling us." Congressional misery took a turn for the worse when the Eccles warning was seconded a few days later by Secretary of Agriculture Wallace and Secretary of Commerce Roper. Pointing out that the South was now planting cotton under the "dangerous delusion" that the staple would fetch 20-c- per Ib. by next autumn (price last week: 14-c-), Secretary Wallace declared: "I think very definitely that the Government does not have sufficient powers now to effectively mitigate the wide swings of the business cycle." Bumbled Secretary Roper: "We must not let our optimism cloud vision and obscure danger signals." At once shares on the New York Stock Exchange sold off. Nor were impressionable financiers much encouraged by General Hugh Johnson's wry query in his syndicated column: "Who anointed the Secretary of Agriculture as an economic Isaiah? And where does Uncle Danny Roper get off as a synthetic and official Leonard Ayres or Roger Babson? And why should all markets reflect words of theirs in a marked recession?" Meantime, neither Chairman Eccles' reiteration of his easy money aims nor his courageous call for taxes and debt retirement checked the cracking prices of Government bonds, which despite more determined Treasury support dropped to new lows for the year. In the last three weeks the market value of all Government securities had shrunk more than $1,274,000,000. Already jittery from a continual rattle of strike news, the stockmarket continued to follow suit, steady selling erasing more than one-half the ground gained since the turn of the year.

*Agitated in the steel trade last week was an embargo on exports of scrap-iron and steel, which is now selling at about $23 per ton, more than 50% above the price a year ago and the highest quotation since 1923; and sending up the price of domestic steel production. In steelmaking, scrap is as important a source of raw material as iron ore. So heavy is the movement of scrap to U. S. seaports that many a railroad has had to refuse further shipments until their yards are cleared of present congestion.

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