Safeguards Against Monetary Inflation

Report Outline
New Proposals to Forestall Inflation
Excess Reserves and Danger of Inflation
Proposed Revision of Monetary Powers
Measures to Curb Excess Reserves

New Proposals to Forestall Inflation

The danger that the industrial boom now being promoted by the arms program may develop into a general and uncontrolled inflationary movement was brought forcibly to public attention at the beginning of 1941 by the submission to Congress of a special report on the subject by the Federal Reserve System. The report was submitted jointly by the Board of Governors of the Federal Reserve System, the presidents of the Federal Reserve Banks, and the Federal Advisory Council. It called for withdrawal of certain inflationary powers delegated to the President in the early days of the New Deal and recommended that new controls be instituted to reduce present risks of monetary inflation.

Federal Reserve Reforms and New Deal Theories

Since the report recommended discontinuance of the President's power further to devalue the dollar and abolition of other monetary powers which the administration supposedly considered valuable weapons to combat future depression tendencies, it was at once assumed the Federal Reserve proposals would encounter stiff opposition from the White House and the Treasury. While Secretary of the Treasury Morgenthau subsequently attributed a decline in prices of government bonds to the report, and Federal Loan Administrator Jones said he had seen no indications of inflation, President Roosevelt withheld comment. Certain passages in the President's budget message to Congress, moreover, seemed to indicate agreement with some of the Federal Reserve recommendations.

The proposals of the Federal Reserve report were not basically inconsistent with the general New Deal theory that the government in time of depression should encourage recovery by borrowing and spending and by following an easy-money policy, but that in time of prosperity it should reverse this procedure, work toward a balanced budget, and apply safeguards against inflation. Submission of a recommendation that the latter course now be taken signalized a belief by Federal Reserve authorities that the transition from depression to prosperity was well under way and might soon be expected to produce inflationary tendencies of dangerous proportions.