as monetary, specialists would be required to assess all of its provisions from a general economic standpoint. Our comments, accordingly, will be directed to those phases with which the Board is concerned because of its responsibilities in the monetary and credit field.

At the outset, I should like to express the strong sympathy which the Board has for the objective of this committee in helping to solve the Nation's housing problem. We realize that your task is extremely difficult because of the many facets of the problem-social and political as well as economic and financial.

Socially, an adequate supply of housing of reasonable quality and comfort and at bearable cost is essential to a decent standard of living. Economically, housing construction is one of our strategic areas of industrial activity, and stability of housing construction is of vital importance to the maintenance of over-all economic stability.

Financially, housing is a principal outlet for the direct placement of individual savings as well as a principal asset in the financial statement of a large proportion of American families, and housing mortgages are a principal medium of investment for our savings institutions and a source of indebtedness for American families.

The Board of Governors is confining its comments on the proposed bill to its economic and financial implications. We recognize, however, that the President and the Congress must take full account of all aspects of this legislation and that such opinions as we may offer on the economic or financial phases will be judiciously balanced against other relevant considerations.

Our first concern with this housing legislation, as with most legislation, is to assess its potential effects on the total volume of debt or credit and therefore on the problem of maintaining high-level economic stability; that is, of avoiding the twin perils of inflation and deflation.

The traditional powers entrusted to the Federal Reserve System are concerned primarily with influencing the total volume of debt and credit in the interest of monetary and economic stability. From the end of the war through 1949 the total debt in the economy—that is, public debt, excluding trust funds, plus private debt-increased about $37,000,000,000. Private debt increased $67,000,000,000 to $208,000,000,000, while public debt declined $30,000,000,000 to $237,000,000,000. The decline in public debt was due mainly to a repayment of outstanding Federal obligations, held by the banking system, through the drawing down of Treasury cash balances accumulated as a result of the Victory Loan and budget surpluses. The greatest relative increase in private debt was in consumer and mortgage borrowing.

Consumer credit increased from $7,000,000,000 to nearly $19,000,000,000 and residential mortgage credit on one- to four- family structures doubled and rose phenomenally from 19.2 to 37.5 billion dollars in the 4-year period.

It should be pointed out that there is such a thing as a credit inflation as well as price inflation. There is some limit to the volume of debt an economy can carry and service. It is desirable to retain as much of our national borrowing power as possible for periods of recession when the availability of funds for cash purchases by consumers and business enterprise is relatively low. We must always bear in mind the possibility of periods of recession. The carrying

over of huge debts into such periods will restrict consumer buying power and accentuate the downward cycle.

As you will recall, from the end of the war through 1948 our economy was characterized by heavy and persistent demands for all types of goods and services by consumers, business enterprises, all levels of government and for export to the rest of the world.

During this period the supply of goods and services available to satisfy the large over-all demand was growing, but still limited. As a result, prices rose sharply and during 1948 we were in a dangerously inflationary situation. During this early postwar period, personal and business incomes were high, accumulated holdings of liquid assets were large, and bank and other credit was readily available at low cost.

It was in this environment that the Federal Reserve System undertook through its monetary and credit powers to exercise some antiinflationary restraint. Voluntary commercial bank efforts to avoid excessive or speculative lending activity were encouraged; stringent curbs on stock market credit were maintained; wartime consumer credit regulation was extended to late 1947 and reimposed in the early fall of 1948; and higher reserve requirements were imposed on member banks.

It was mainly in the mortgage lending and agricultural fields that no restraint was directly applied. Yet the impact of the Government's support program in both these areas, by contributing to the volume of spending power and the demand for materials and labor in short supply, accentuated the inflationary trends that pervaded the economy during those years.

In making this statement I wish to say that I am aware that the acute shortage in the existing housing supply was an important factor in the inflationary situation. I also appreciate fully the contribution which the housing authorities made in their strenuous efforts to channel new construction activity into the building of low-cost units, thus adding the largest number of units to the housing supply with available labor and materials. During these years, however, the Federal Reserve System was subjected to sharp criticism because the sacrifices which were imposed on those sectors of the economy subject to its restraints were being offset by inflationary developments in other sectors, such as mortgage finance.

Your subcommittee has included in the bill Mr. Foley's suggestion which would give the President authority to adapt the terms and scale of operations of any Federal program involving loans for housing to the state of the construction industry and to the state of the economy generally. It is a source of satisfaction to the Board that the importance of gearing the scale and character of Federal housing programs to the general economic situation has been recognized.

Our second main concern with housing legislation in general is the effect it may have on the total volume of public debt with which the Open Market Committee of the Federal Reserve System has to cope. The complex problems presented to the Treasury and the Federal Reserve by the huge volume of publicly held securities now outstanding has been thoroughly explored and reviewed by the Subcommittee of the Joint Committee on the Economic Report, of which Senator Douglas is chairman.

Certainly the efforts of the Federal Reserve to restrain the postwar inflation in the years from 1945 to 1948 would have been considerably more successful if the System had not felt obliged by the then existing circumstances to purchase huge quantities of marketable securities. Right here I would like to repeat the statement I made to this committee in reviewing that situation in May of last year:

* * * From September 1, 1948, to November 1, 1948, bonds in the amount of 3.25 billion dollars were purchased to carry out this policy of stability.

In retrospect, I am certain that our action in support of the Government securities market was the right one. That program was a gigantic operation. In the 2 years 1947 and 1948, the System's total transactions in Government securities amounted to almost 80 billion dollars. Despite this huge volume of activity, the net change in our total portfolio was relatively small. I am convinced that we could not have abandoned our support position during this period without damaging repercussions on our entire financial mechanism as well as seriously adverse effects on the economy generally.

In the legislation now before you, you have noted the section of the bill which would provide for building up separate reserves back of the securities to be issued by the proposed National Mortgage Corporation for Housing Cooperatives. These reserves are designed to insulate the Treasury against any losses that might be incurred from the Corporation's operations. Nevertheless, the guaranteed securities issued by this public corporation would generally be considered United States Government securities. They would be purchased by banks and others on this basis. Indeed, it is this fact of market standing which would permit them to be sold at the low rates contemplated. This very same fact would mean that these guaranteed issues would represent additions to the volume of publicly held debt with which the Federal Reserve is particularly concerned. In this connection, I would like to call to the attention of the committee the fact that we have had some experience with publicly floated guaranteed securities of Government corporations. Several issues of this kind were brought out during the early part of the recovery program in the 1930's. This device was used, for example, to finance the operations of the Home Owners Loan Corporation. These experiments were later discontinued as a matter of public policy. Inflationary problems have not been acute since the end of 1948, but it would be an illusion to premise major public policies on the assumption that all inflationary dangers have passed. During the first half of 1949, inflationary pressures generally abated; prices declined moderately, and the rate of growth of private debt tapered off. The response in the field of housing was particularly noteworthy. Larger supplies were available, and there was a relaxation of the high-pressure demand that had characterized preceding years, reflecting in part the reluctance of lenders to finance lowinterest mortgages.

In response, costs of new housing reversed their previous upward trend and fell moderately. Subsequently, in fact from near the middle of 1949, housing demand expanded, and a year that opened with marked consumer resistance to high building costs closed with a record for the largest number of houses ever started in this country. The expansion in the operations of the Federal National Mortgage association played its part in financing this renewed activity. During this recent period, construction costs and values of improved

real estate were not far below postwar peaks of about double prewar levels.

During the first half of 1949, the Federal Reserve was prompt to recognize the change in current trends, and showed great flexibility in relaxing its special anti-inflationary restraints. It also inaugurated a more flexible money-market policy.

These actions had some effect in checking recession tendencies of that period and in encouraging revival, but the contribution of credit relaxation to these developments should not be overestimated. To an important extent, the sustained high level of economic activity has reflected continuing large consumer spending out of high current incomes and the continuing use of previously accumulated liquid savings. Since about the middle of 1949, both public and private debts have shown increases as well as tendencies toward accelerating growth. In recent weeks, prices have strengthened in selected areas, notably those relating to the building trades, where, as I have said, activity is at record-breaking levels for this time of the year. Personal holdings of liquid assets, totaling 177 billion dollars, are still large in relation to current production.

In view of the Government deficit and consequent borrowing, which is increasing outstanding liquid assets, it is important to scrutinize closely all legislation such as this that will further add to their volume. This brings us to our third point of concern with housing legislation: namely, the extent to which it will contribute to the deficit. All of us, I am sure, look with anxiety on the present fiscal situation where we are running a deficit at a high level of activity. Both the administration and Congress are exploring every channel of taxation and expenditure to see how the deficit can be minimized and how the economy can be protected from the inflationary implications of an unbalanced budget. I mention this third area of concern to remind us that close to 1 billion dollars, or one-fifth of the current cash deficit is attributable to the special support given housing by the operation of the Federal National Mortgage Association.

The proposed bill would broaden the operations of the Federal National Mortgage Association. If some way could be found to make the mortgages now purchased by the Federal National Mortgage Association more attractive to private lenders, it would contribute to monetary and fiscal stability.

Senator BRICKER. Did the suggestion of a private pool of capital subscribed by lending institutions come from the Federal Reserve, or where was that proposition originated?

Mr. MCCABE. It didn't come from us, sir.

Senator BRICKER. You had no concern with that at all?

Mr. MCCABE. No, sir.

Senator BRICKER. Thank you.

Mr. MCCABE. It would also seem well worth while to consider restoring the authorization that was previously in the law for organizing private national mortgage associations.

I would like to say in that connection, Senator Bricker, that some of the people interested in this have discussed it with us, but it was not initiated in our Board.

Senator BRICKER. Thank you.

Mr. MCCABE. We have a fourth area of concern of a somewhat different order with respect to housing legislation; namely, that pro

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grams to stimulate housing should not be pushed at any one time to the point where problems of instability are created for the future. Today, we are all aware of the inflationary impetus that can be given to the spiral of wages, prices and costs throughout the economy when the supply of housing is acutely short relative to effective demand. Conversely, as we all know, the opposite situation can prevail, and when it does the effects are deflationary on widely ranging aspects of the economy.

This result comes about, for one reason, because the housing industry, directly or indirectly, is perhaps our largest area of employment, and for another, because it is a major form of investment and saving for the mass of the people.

I mention this point not because we think it is raised acutely by the proposed bill, but because it is implicit in all legislation that promotes housing construction.

Senator BRICKER. If we could continue over a period of 10 years at a million houses a year, it would be far better on the economy gen erally than to produce two or three million for 2 or 3 years, and then drop down to a half million for the remainder of that period, on the economy generally?

Mr. McCABE. Senator, the more you can spread out any program of this kind, the more desirable I believe it to be.

Senator BRICKER. The more stable you keep the construction industry the better off we are in the long run.

Mr. MCCABE. In the long run; yes.

The areas I have outlined summarize the concern which we in the Federal Reserve have for the varying aspects of all housing legislation. Concentrated as we are on watching the economy to detect trends that may foster instability, inflation or deflation, we must ask ourselves of each piece of proposed housing legislation: One, will it overly stimulate the total volume of credit? Two, will it still further expand the now huge volume of marketable public debt which greatly complicates the conduct of Federal Reserve open-market operations? Three, will it add to a cash deficit when the economic situation calls for a Government surplus? And, four, is there serious risk that it will overstimulate construction activity and eventually contribute to deflation in the housing industry?

During recent years many pieces of housing legislation have given us concern on one or more of these grounds. At the same time, we have recognized that the housing situation was abnormal and that emergency measures were required. We are aware that, although the housing situation is steadily improving, and shortages and exorbitant rentals are abating, there may be still areas where special action may be justified.

We believe that the time is close at hand when it will be desirable to begin adjusting housing legislation toward a pattern better adapted to normal peacetime conditions. These adaptations should be based on the principle that credit for residential building should be private credit, subject to the market tests governing other private credit, to be influenced in its volume by Federal Reserve monetary and credit policies.

Such adaptations should not proceed on the assumption that residential mortgage credit should be public credit, relatively immune to