Evening star., 1953-07-08
Eisenhower's Economics

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came complete, and the Govern
ment officially dedicated itself
to fighting imitation through the
application of economic controls
To understand what the Fed
eral Reserve victory meant-and
what the present temporary re-
treat from that philosophy means
it is necessary to look at some
of the history leading up to the
present situation.
When World War II began, the
Federal or public debt amounted
to $64 billion, regarded as a tre-
mendous sum at the time. Be-
cause of the staggering cost of
war. it zoomed up to $278 billion
by the end of 1945. This was sub
sequently cut to 1882 billion. It
has. however, climbed back since
the start of the Korean war to
over 1886 billion.
The requirements of heavy
Government wartime financing
forced the money managers to
resort to unusual measures to
meet the unusual situation.
War Policies BOOmeranged.
Faced with the necessity of
borrowing on an unprecedented
scale. the Treasury adopted pol
icieS which were hard to shake
off and which came back to
haunt the money managers in
the time of heavy inf1ationary
pressures attending the dropping
of wartime price and wage con-
trolls.
The Treasury raised the money
1t needed by selling most of it's
1OUS to commercial banks, which
provided a ready market. It
failed to make an all-out effort
to get these obligations into the
hands of individuals and nom
banking investors, like pension
funds and insurance companies.
If it had done so, its securities
would have been held longer than
they were, and the effect would
have been less inf1ationary than
1t was.
At the same time, the Treasury
put large part of it's debt into
short-term issues, which carry a
lover interest rate than long
term bonds and which must be
refunded frequently. Because
Short-term government securi-
ties can be exchanged quickly,
they are virtually the same as
cash. economically speaking.
Hence they are more infationary
than long-term issues.
Both these policies reflected
the Treasury's efforts to do it's
wartime borrowing at the lowest
possible rates-to have an "easy
money" economy at a time when
it needed money. And they led
to other policies, also initiation
ary IN Lnelr eI1ecCS.
Reserve Banks Buy.
When the Treasury began
floating it's huge bond issues to
pay for the war. the Federal Re-
serve Banks moved in to prevent
the bond market from breaking
under the impact of the heaviest
borrowing of all time. They let
it be known they would pay par
for any Federal bonds, an op-
Grafton known as "open market"
buying. BY so doing, they froze
government security prices at
par, and the Treasury was able
to hold to it's pattern of very low
interest rates.
Tight" as we'll as "easy"
money advocates agree that this
market support of bonds was alb
solutely vital in wartime. But 1t
was continued after the war on
insistence of Treasury Secretary
Vinson and his successor, John
Snyder, and whether it hurt or
helped the country then is a
point of great debate.
At the end of the war, holders
of bonds found ready market
at Federal Reserve for their Gov
ernment securities. The biggest
holders, the commercial banks,
sold billions in bonds to the Re-
serve system. They did it to build
up their reserves. Under the law
they can lend, on the average,
SIS for each dollar they have
above the legal reserve minimum.
And so the banks went on a
lending spree. The money they
loaned the public-in effect new
money created by them-was
used to bid up the price of goods,
scarce at the time. The Federal
Reserve people claim this pro-
cess was responsible for a major
part of the postwar initiation.
They wanted to drop the bond
support program. In that event.
they argued bond prices would
fall. The commercial banks
would not be so anxious to dis
pose of their bond holdings. And
in hanging or to their bonds,
they would stop feeding the fires
of imitation.
Treasury Feared Panic.
The Treasury people OF the
time argued, on the other hand,
that if Government bonds were
allowed to drop below par, that
drop might start a financial
panic. They said the consequent
increase of interest rates would
run up the cost of carrying the
Federal debt and so unbalance
the budget which, during those
years, showed surplus.
They said a bond support pol
icy and low interest rates are
healthy because they promote in
vestment and industrial expan-
sion.
The Reserve people countered
that initiation was running up the
Government budget faster than
any increase of interest rates
could raise the cost of carrying