Morgenthau & Markets

Henry Morgenthau, who always had hoped to balance the budget, last week buried the ideological hatchet with ex-Spender Marriner S. Eccles, Chairman of the Federal Reserve Board, who had long since started preaching deflation.

Last spring Morgenthau fought Eccles' program to harden the money market (which would have raised the Treasury's interest rates). But spring was a long time ago last week. There are greater dangers to the country's economy than increased interest rates.

So in Boston Henry Morgenthau gave his first real anti-inflation speech. It melted commodity prices, like butter in the sun; even drove down the price of Treasury bonds. Cause and effect followed each other like bullets and death. The Secretary of the Treasury said:

We have been talking about inflation for a long time as if it were a threat remote from our daily lives. It is a distant threat no longer. We are facing it now. . . . The most effective way to prevent damaging price rises is, quite simply, to release surpluses from storage. I wonder if the housewife knows, when she pays 15% more than she did a year ago for a bag of flour, that our supply of wheat is the largest on record. . . . It seems to me desirable and necessary that we permit the entry of Canadian wheat in larger volume.

In Chicago next day wheat, at a four-year high of $1.20 a bu., broke 3-c-, corn 2-c-. In Washington six Senators from the farm belt announced that a small group was trying "to control prices by indiscriminate and ruthless use of surpluses."

We ought not to withhold cotton surpluses, or any stir pluses at times like these. The housewife ought not to be made to pay a tribute . . . when she buys a cotton sheet for her home or a shirt for her husband. . . . This has been historically a land of milk and honey, but too much of it is in the warehouses. Let's make it flow.

In New York the following day cotton futures slumped 39 to 46 points. Soybeans, after an 8-c- gain the day before, eased off 5-c-; beef sagged 1-c- a pound.

It is poor business, in the long run, for any businessman to seek exorbitant profits in this period of defense spending.

Dealings on the New York Stock Exchange sagged to 524,260 shares from 873,280 shares the day before. The Dow-Jones industrials average showed the greatest decline in a month. Industrials lost .90 of a point, rails .29 and Treasury bonds, deciding that hard money was now as likely as inflation, dropped 1/32 to 7/32.

Talk can jar markets, but it cannot stop a credit inflation. Base of U.S. credit is the excess reserves of the national banks which today total about $5,000,000,000, theoretically enough to blow up consumer purchasing power by at least another $35,000,000,000. Under the Banking Act of 1935, the Federal Reserve can raise its present reserve requirements by only one-seventh. This would still leave a $30,000,000,000 credit base for consumers.

So Morgenthau admitted (as Eccles did last month in a FORTUNE article) that the Government "may have to extend its control over bank credit," i.e., up the reserve requirement. He also remarked that still higher taxes were on their way. Moreover, he approved of increased social security taxes to build up a reserve from which to pay a "separation wage." This would skim off part of each worker's present purchasing power, give it back whenever he lost his job.

Despite the distance he had traveled since spring, Morgenthau was still behind Eccles on one issue: compulsory savings. The Secretary believes that voluntary methods will work, pointed proudly to the sale of $1,250,000,000 in defense bonds since June--"without coercion of any kind."

With Morgenthau almost agreeing with Eccles who agrees with Henderson, the Government was at least fairly unanimous on how to lick inflation before inflation licks the U.S.

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