"The Problems of Prosperity"

The opening rounds were fired last week in what may become the great political battle of the second Eisenhower Administration. Principal opponents ranged against each other across a highly polished table in a Capitol hearing room: Texas' Democratic Representative Wright Patman, chairman of a joint congressional subcommittee on economic stabilization, and Federal Reserve Board Chairman William McChesney Martin. Their general subject: inflation. The specific issue: tight money v. easy money in U.S. economic policy.

Wright Patman, nursing (as the Christian Science Monitor noted) "an old-fashioned Populist's suspicion of Eastern bankers," unloosed the first salvo. Opening a subcommittee inquiry into U.S. monetary policy, Patman explained that the hearings were justified by "the danger that the tight money policy may wreck the economy." He attacked the Federal Reserve Board for raising its discount rate (i.e., the fee charged by the Federal Reserve system on loans to member banks) from i^% to 3% over the last 20 months (TIME, Sept. 10). By thus restricting credit, rumbled Patman, the Federal Reserve Board has driven farmers, small businessmen, home and school builders to the wall--all for the sake of high profits to big moneylenders.

"Outright Inflation." Bill Martin replied quietly, lucidly, in a prepared statement. The job of the Federal Reserve Board, said he, is "to determine the volume of credit that needs to be made available in order to keep the economy running in high gear--but without overstrain. Too much credit would intensify upward pressures on prices. Too little could needlessly starve some activities . . . Creating more money will not create more goods. It can only intensify demands for the current supply of labor and materials. That is outright inflation." No sooner had Martin finished his statement than the politically potent questions began flying fast from Chairman Patman and his subcommittee colleague, Wyoming's Democratic Senator Joseph O'Mahoney. Their substance:

Is the Federal Reserve's credit policy responsible for muffling the housing boom? Said Martin: additional home-building credit will not create more houses, but would increase the demand for already scarce labor and materials and therefore drive up prices.

What about rising interest rates? This, replied Martin, was "one of the problems of prosperity" which are often more difficult than the "problems of adversity." The Federal Reserve "wants interest rates to be as low as it is possible to have them without producing inflationary pressures. Our discount rate has tended to follow the market, not to lead the market."

Does Martin think the "fiscal policy of the U.S. should be carried on exclusively for the interests of the banks?" "Certainly not."

// the Federal Reserve's policy is aimed against inflation, how does Martin explain the fact that the cost of living is at an all-time high? "We have never said our policy has been 100% effective and we never will . . . But the real test is how much higher those prices would have risen if the law of supply and demand in the market place had not been permitted to operate to dampen somewhat the rate of spending and proceed to move in the direction of increased savings."

Does Martin realize that high interest rates are preventing school districts from selling their bond issues and thus preventing school construction? Said Martin : if too many schools are built too fast with cheap money, a $3,000,000 school might wind up costing $3,500,000.

Well then, does Martin want to delay school building? The calm reply: "I think it is preferable to delay than for everybody to rush in on a limited quantity of steel and building materials and bid the prices up."

The debate over school building pointed up the political cleavage in the hearing. One school, represented by Patman and O'Mahoney, considers inflation worth risking for the sake of social programs. This credo was summed up by O'Mahoney in his admonition to Martin: "Make your first consideration sound people rather than a sound dollar." The opposing school, represented by William McChesney Martin (and Dwight Eisenhower) is convinced that neither the nation nor its people can be sound without a sound fiscal standard.

The issue is almost as old as the nation itself, but the arguments are not as simple as they used to be. Perhaps the wisest suggestion of the hearings came from Economist Elliott V. Bell, onetime consultant to GOP Presidential Candidate Tom Dewey. The whole U.S. economy, said he. deserves a close new look by a national economic council. Reason: since the Federal Reserve system was set up in 1913, new lending agencies, e.g., savings and loan associations, life-insurance companies, union pension funds, have got into the act that used to belong exclusively to the banking system. Moreover, since both political parties are committed to full employment, the new council should examine the relationship between the FRB and the federal agencies that spend Government money and plan employment policy, e.g., the Treasury, Commerce and Labor Departments.

Only one thing was really clear as the hearings adjourned: the Great Economic Debate of 1956-60 has only begun.

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