Now, it is only natural for each individual bank to be seeking all of ne good loans it can get, and to sell Government securities which hey have, bearing a much lower yield than some of the loans, and make hese loans.

Now, they would be restrained, certainly, in undertaking to shift rom governments into loans, if there were a prospect of this plan. That is, if the Board had authority to require an increase in their eserve of either cash or short-term Government securities. It would e at their option. To shift from governments in order to make Dans would then reduce what is now a secondary reserve of 50 percent f their deposits.

It would have the possibility of reducing it to 25 percent. And the banks, with the amount of governments that they have, are free to sell o meet shifting deposit requirements, and there would be a very great estraint on further lending.

O Certainly they would be very much more selective, and as a lot of oans were paid, they would use the funds to buy short-term governments.

I do not think there is any question but what they would finance all of the needed corporation movements and that type of production, out when each business finds that the cost of doing business is more, because wages go up, and inventory costs go up, and open account credit goes up, and outstanding credits are increasing, both due to nflation and due to an increasing slowness of collection, each corporaion finds itself in need of more money.

And as the National City says, the need of more money creates inflation. It is part of the cycle. It is as much a part of the cycle, this expansion of credit, as increased wages are a part of increased prices, and profits are a part of increased prices.

It is the credit that sustains it. An advancing credit sustains higher prices and higher prices call for more credit, and more credit sustains higher prices.

The CHAIRMAN. If a man comes along with perfectly good assets and perfectly good credit and wants money, should not he be able to get it?

Mr. ECCLES. Not necessarily.

The CHAIRMAN. We can draw a distinction and say that is a loan that is not quite safe, and it is not a good loan, perhaps. We can draw a distinction between loans, but basically, do we want to cut off the right of business to borrow?

If their inventory does go up, over which they have no control, do they not have to borrow money to carry it?

Mr. ECCLES. That is right, and I have said that this is only a part of the program. Fiscal policy is a very essential part of the program. It would be a great mistake to try to control the entire inflation, merely by clamping down on bank credit.

Today, there is no real restraint on it, and all we are saying here is that there should be some way and some means to put some restraint on it if the need develops.

Now, certainly the Board would prefer not to have to enforce such a power. I will be perfectly frank to say the administration of this power would be a very, very unpleasant task.

The CHAIRMAN. Do you think the administration feels that way about the other powers they are asking for, too?

69371-48-11

Mr. ECCLES. I could not say how they feel about them at all. Senator O'MAHONEY. May I ask a question at this point, Mr. Chairman?

Mr. ECCLES. Just let me finish that one point.

We do not seek this power and as a matter of personal preference, there is not a member of the Board who would not hope that they do not get it. We cannot win. If we get it and inflation goes further. we will be blamed. If we use it and we get deflation, we will be blamed. But we, as an agent of Congress, could not do other than! point out what this situation is and suggest to you the only way that we thought that we could contribute to restraint, was by getting this type of power. We wanted to make that perfectly plain, that the powers we have are not adequate without causing the problems which I have pointed out, and we do not want to be crucified for not stopping this inflation, and we are giving the reasons here why we do not think we can do it with the power we have, and what we think would be an adequate substitute.

I am not pressing for this legislation. I want to lay the thing on the table as the agency of Congress, and certainly we will be very glad from an administrative standpoint if Congress sees fit not to give us these powers.

The CHAIRMAN. Mr. Eccles, I raise one question about your testimony, which is the last question I want to ask.

You said, "an increasing rate." My figures seem to show that there was a very rapid increase in demand deposits, and making of loans, up to July, but that since July, it has been substantially retarded as a matter of fact, and the growth today is at a very much less rate than it has been in the past.

Mr. ECCLES. It is much faster. It is the most rapid it has ever been in our history.

The growth at banks in leading cities from September 10 to November 12, a period of 2 months, has gone up in commercial loans $1,430,000,000; real estate loans, $160,000,000; in all other loans $145,000,000.

In security loans it has gone down $175,000,000. That is the one we have control on.

So that you have here an expansion in a 2-month period of better than one billion five hundred million dollars.

Now, then, we have to look at this credit situation et more than just a month at a time. You have to take it over a cycle, because there is a certain seasonal fluctuation.

The CHAIRMAN. I understand that.

Mr. ECCLES. Therefore you have to make your comparisons over the year as a whole.

Now, it is true that there will be certain seasonal liquidation, but you have to compare the outstanding credit from year to year, and the way the situation is developing now, the way it has developed, is that it looks as if in the past 2 years there has been an over-all expansion without fluctuation of about $5,000,000,000 a year.

The CHAIRMAN. Yes, that is what I have here.

Mr. ECCLES. That is correct.

There is every indication, however, that with the speed with which the inflation has been going lately, that one of two things will have to happen.

Either business and construction, because the cost of construction Es fantastic, and this housing situation is just unbelievable when it comes to the inflation that is in it, there is going to be required more and more money with the inflation, and it can gain momentum.

There is a possibility and a danger of it gaining momentum. We are not sure of it, but there is that possibility, and if it gains momentum, more and more bank credit would be required to do the same amount of business.

-We merely point out that some restraint in this field along with other restraints is needed, that this should supplement fiscal policies, and it should supplement other policies.

The banks, naturally, are opposed to it. As I say, they have nearly always been opposed to any change. They were opposed to the original Federal Reserve Act. They were very much opposed to some of the powers we got in the Banking Act of 1935.

Senator O'MAHONEY. Mr. Eccles, you have about convinced me that you are right, and I hope that you are not going to back away from this proposal merely by laying it before this committee.

I think it is clear that the country faces a very unpleasant situation here. Inflation is here, and if we do not act intelligently, it is bound to get worse with disastrous effects.

Mr. ECCLES. It may.

Senator O'MAHONEY. The further it is permitted to run.

Mr. ECCLES. Well, I would not say it is bound to.

Senator O'MAHONEY. I say, if it is permitted to run.

Mr. ECCLES. I say it is very likely to.

Senator O'MAHONEY. Let us get my question clear. If inflation continues without restraint, it is bound to result disastrously; is it not? Mr. ECCLES. Oh, definitely. Definitely.

Senator O'MAHONEY. Now, let me see if I understand your basis correctly.

Mr. ECCLES. It has already gone so far that we are facing some disasters, I think.

Senator O'MAHONEY. Now, that is a much better answer from my point of view.

Mr. ECCLES. Already it has gone that far.

Senator O'MAHONEY. You have convinced me of that.

Mr. ECCLES. It could become cataclysmic and the whole system would be jeopardized.

Senator O'MAHONEY. If I understand your proposal, you do not propose in making this recommendation to prevent loans to sound borrowers from the banks. Your fundamental desire is to prevent the accumulation of monetary reserves so as to increase the total over-all debt against the economy; is that right?

Mr. ECCLES. The total over-all bank credit which creates money. Senator O'MAHONEY. Yes; but you are advising us that as we consider this problem of inflation, we must take into consideration both the Government debt and the private debt?

Mr. ECCLES. That is right.

Senator O'MAHONEY. So that if bank credits are expanded now, they have the effect of piling on a new debt, a new total debt beyond our already excessively high debt.

Mr. ECCLES. That is right. That is exactly right.

Senator O'MAHONEY. So that these restraints which you propose are intended not so much to prevent any proper borrower or business man from getting a loan from a bank, but to require the bank, if it makes such a loan, not to use a certain proportion of its reserves for other expansion of credits.

Mr. ECCLES. Buying other investments. They are out buying other investments, such as municipals and other investments. They, of course, have been expanding consumer credit, not to customers at all, but just out seeking the credit. They are expanding mortgage credit at a very rapid dangerous rate, and it is not to customers. It is merely a seeking of an outlet that is more profitable than the holding of short-term Government securities.

Now, there would be a great restraint on that seeking of credit if they did not have this 50 percent of their total assets in governments, and they feel a great liquidity or ease to dispose of them for other loans and investments.

The individual banker is not thinking about the multiple expansion. He is just thinking that he is transferring a Government bond to a loan, and he does not realize when he makes that loan, that becomes a reserve in another bank, and you get six times multiple expansion for every dollar of Government securities they sell.

The banker does not realize that individually at all.

Senator O'MAHONEY. But if that process is permitted to continue and all the banks of the United States, State and local, and national, continue this practice, the inflationary process also continues; is that right?

Mr. ECCLES. There is no question about it, but you have today a great expansion in municipal financing which is inflationary because they are spending more than they are collecting in taxes.

They are putting out new bond issues, for veterans and other purposes, in very large amounts. They are putting out issues to finance all kinds of public activities and at very high costs, and these securities are competing with private financing for funds.

Senator O'MAHONEY. Did I understand you in quoting from the November letter of the National City Bank to cite that institution as authority for the fact that these debts are rapidly accumulating now?

Mr. ECCLES. That is, they make inflation. I do not know how rapid. That is right, the implication was that this credit was expanding and it was creating more inflation.

Senator O'MAHONEY. Now, will you, for the record, provide us with the specific month to month figures so that there will be some possibility of measuring this rapid momentum of which you speak? Mr. ECCLES. Well, I would say this: We would be glad to furnish those figures.

(The figures are as follows:)

Principal assets and liabilities of all commercial banks (figures partially estimated) [In billions of dollars]

! Gross demand deposits, other than interbank and United States Government deposits, less cash items in process of collection.

? Preliminary.

Mr. ECCLES. I would say this: that even aside from any rapid expansion, and that is a relative thing, that the monetary authorities in this kind of a situation should have a standby power as a substitute for a power that they cannot use because of the huge size of the public debt. In other words, Congress gave to the Reserve System in the beginning, 1913, and again in 1935, certain powers. It was expected that those powers would be used in the judgment of the Board to restrain excessive bank credit expansion.

Now, we cannot use those powers, as I have indicated. Therefore, all we are saying is that we would like the Congress to know that we cannot, the way the situation is today, restrain bank credit expansion. Now, I do not know whether the bank credit expansion is going to continue at a rapid rate. We are going to do everything we can, whether we get these powers or not, to advise, to counsel, and by means of propaganda and otherwise, to restrain them.

Senator O'MAHONEY. You are trying to put the brakes on?

Mr. ECCLES. Maybe we will be partly successful, but my only point is I want the Congress to know and the public to know that we do not have adequate powers unless we breach the Government interest rate, with all the dangers involved, and we do not recommend that. Senator O'MAHONEY. May I interrupt?

I want to refer to another part of your testimony. You spoke of the four aspects of the inflationary condition in which we find ourselves. Wage, price, profits, and credit.

Mr. ECCLES. That is right.

Senator O'MAHONEY. Now, do you regard those as all contributing toward the condition in which we find ourselves?

Mr. ECCLES. I certainly do. They are all cause and effect, and it is difficult to say which is first.