off. No matter what we do, the costs of our inflationary binge of war escalation of recent years will be met for a long time to come. But beyond that, it must be recognized that inflation is fed by excessive demand for goods and services and by the expectation that the inflation itself will continue. Even those basking in the upsurge of popularity of some relatively extremist "monetarist" views will agree with the bulk of modern professional economists who see the direction of the economy determined by the demand for and supply of goods and services. The quantities of money, and its tightness or looseness, affect the economy through and to the extent of their influence on the demand for and supply of goods and services.

This demand and supply or total expenditures for production can, in monetary terms, be measured by the product of the quantity of money and its velocity of circulation. It is quite possible to have spending of $1,000 billion per year with a quantity of money equal to some $200 billion, such as we have now or a quantity of money equal to, say, $250 billion. The difference would be that in the first instance each dollar would on the average change hands or be spent five times per year while, with a larger quantity of money, each dollar would be spent or change hands on the average of only four times a year.

This is not to say that the quantity of money does not have some influence on the economy. If money, like almost anything else in our economy, is more scarce its cost will rise and fewer people will be able to have it or have as much of it. But velocity has, as we are suggesting, been subject to substantial changes. Increases in total spending in substantial excess of increases in the quantity of money have taken place, indeed are taking place right now, with consequent increases in the velocity of circulation of money which offset in large part, if not fully, the pressure for adjustment to the quantity of money. I might add, parenthetically, that substantial declines in total spending have usually been accompanied by declines in velocity of circulation as the quantity of money has not declined as much if at all. The difficulty is that money is only one asset in a wide spectrum, one in virtually an infinity of assets, that people and business can hold. If there is less money available we can make do with less money by holding less of it or, what comes down to this in the economy as a whole, by each of us as individuals holding money for a shorter period of time before passing it on to the next person. If money is scarce, there are many substitutes for money in the form of all of the varied and imaginative credit instruments that a sophisticated financial and business community can create in a developed, free enterprise economy such as ours. Trying to curb an inflation fueled by excessive demand. is like trying to diminish the size of an overinflated balloon by pressing in on it in one particular small place. The consequence is clearly to cause the balloon to expand in some other place where we are not pushing but do very little to diminish the volume of the balloon. Of course, I might extend the analogy by suggesting that if we persist in pressing hard enough and widely enough we may succeed in bursting the balloon. We may readily appreciate the implications of that extension of the analogy.

What has in fact happened now in our economy is that by continuing an increasing tightening of money we have twisted the balloon

seriously out of shape in several vital areas, while permitting its continued expansion in others. In particular, credit has become extremely costly or unavailable to small business, to State and local government, and to those interested in housing. In terms of any reasonable set of priorities, in terms of equity and in terms of pressing social needs, the results have been little short of catastrophic. Our cities, as places in which to live and work, to grow up and be educated, are dying in no small part because of the high or prohibitive cost of the capital necessary to clear slums, build schools, create adequate mass transit, combat water and air pollution, and even to equip adequate and well-trained police forces. In the area of housing, which I know is a special immediate concern of this committee, the combined effects of war and inflation and tight money are all too dramatic. As housing starts drop precipitously, we fall further and further behind our needs and the nationally recognized targets which have been set. Each year that we fail to build necessary new housing we place a burden not only on ourselves but on our children who will be plagued for years to come by the shortages which we leave them.

The basic reasons for this are not far to seek. Economists recognize, as must we all, that competition is far from the model of perfection that we frequently assume in analyzing the ideal type of free enterprise economy. The imperfection of competition becomes overwhelmingly apparent, however, in capital markets. The simple fact is that as money becomes tight, large corporate enterprise continues to get the funds that it needs. It may pay more for these funds but then indeed it is generally in a position to pass on the increased costs, paradoxically in light of the avowed purpose of the tight money, in higher prices of the products it sells. Those who are smaller borrowers and who are greater risks are the ones who are squeezed by the tight money. And those who can meet the inflated mortgage payments resulting from skyrocketing interest rates have nobody to whom to pass on these added costs.

In view of the unequal and discriminatory impact of tight money, I therefore recommend that the money supply be allowed again to grow at a rate of at least 6 percent per year, which is close to the expected growth of gross national product during the coming year. It is also an appropriate rate over the long run if our economy is to achieve its maximum potential rate of real growth with a minimum of price inflation. This shift to a stable, adequate growth of the money supply would in itself ease conditions in the area of credit for housing. My reaction is mixed toward the several bills proposed to offer special aid in financing housing. I am sensitive of the essential imperfection in capital markets and the consequent suggestion of need to make funds available in housing at rates at least as low as those accorded for large corporate borrowers. My own personal sense of priorities would call for a considerably greater investment in housing, at least up to the 26 million unit housing goal over the next decade. I also believe that maximum possible ownership of housing units would contribute to breaking the vicious cycle of poverty, slum, and despair in black ghettos and more generally among the poor.

I am somewhat uneasy, however, about the addition of new interferences in an already distorted market without a clear perception of their relevance toward achievement of the priorities which we seek.

I particular, homeowners, who tend on balance to be middle- and upper-income families, already have substantial economic advantages through tax deductibility of interest payments and property taxes, the failure to tax implicit rental income, and the capital gains and inflation hedge involved in owning real property. Further, a significant element in the failure to provide for the Nation's housing needs has been the failure of the construction industry, because of restrictions by builders or by unions or both, to accept and train all qualified workers regardless of race. Questions have also been raised-and on this I have no expertise as to the openness of homebuilding to innovation, technological progress, and increases in productivity and efficiency. With these reservations and hesitations in mind, I find myself sympathetic to the objectives of H.R. 13694, which would create a homeowner's mortgage and loan corporation aimed at facilitating loans to "moderate income" eligible families currently defined as those with incomes with $12,000 or less, and to H.R. 14639 which would establish a development bank to aid and finance low- and moderate-income housing, and public facilities in certain urban and rural areas.

I am out of sympathy, however, with H.R. 15402, which would create a unique burden on private pension funds to meet our housing needs. To the extent that private pension funds provide for the retirement of masses of low- and modern-income families, the attempt to divert pension funds to the purchase of mortgages would merely be taking away with one hand what would be given with the other in an attempt to meet the housing needs of low- and modern-income families. The argument that yields are low on pension funds, which are frequently invested largely in common stock or other equity, fails to recognize that the reported yields from common stock and equity do not include the capital appreciation which is usually the major element in the return on this form of investment. Forcing pension funds to invest substantial portions of their resources in mortgage loans would therefore appear likely to entail a major loss in the value of these funds over time and a reduction in the income consequently available to those living on pensions.

With regard to H.R. 11, I have some general sympathy with the apparent objectives of securing monetary policies which are consistent with the apparent overall economic policy of the Government and in the public as opposed to private interest.

On the general issue of appropriate fiscal and monetary policy, I return to the homily I expressed earlier in this statement: one cannot expect to get something for nothing. As the new report of the President's Council of Economic Advisers aptly makes clear, in any given year there will be a limit on the total output available. If more is taken for one thing less is left for another. Our current difficulties go back to the increase in claims on production on the part of Government entailed in escalation of the war in Vietnam. This made inevitable a relative reduction in the output available elsewhere. Since it proved difficult or inexpedient to take direct measures to limit other claims on output, the excess of claims was invalidated by inflation. As a consequence of that and increases in tax rates, real, take-home wages of industrial workers remained the same or actually declined, certainly contributing in no small measure to discontent and tensions in our cities. More

recently, tight money has led to a particular diversion of resources away from housing construction.

I personally favor putting more resources into housing: it is high on my list of priorities. I would therefore make credit cheaper and more readily available in housing markets. I also think it particularly important in a period where it is imperative to raise the incomes of masses of blacks and other poor workers that this not be done to the accompanyment of higher tax rates on moderate-income workers who are just above the lowest rung. This is the path of social antagonism and chaos.

But the fact is that resources are limited. We must face up to the reality that if more is to go into housing, if more is to go into cities, if more is to go for education-and I consider all this desirable-it must come from somewhere. That means, as a matter of arithmetic and realism, that there must be the speediest possible reduction in our economic commitment to the war in Vietnam. It also means, as a major move to redirect priorities, free resources, and end the inflationary psychology, the modest reduction in the President's military budget for the coming fiscal year must be vastly extended. It is comforting to learn that the military budget is finally coming down, although the failure to reveal the component estimates of Vietnam war costs leaves unclear how much of this budget reduction may be considered firm and how much is based on contingent estimates of further hostilities. It should be distressing to the members of this committee, in face of all the needs in housing and elsewhere with which they are appropriately concerned, that of projected Federal expenditures for goods and services, well over 70 cents of every dollar will continue to be devoted to the military.

If inflation is to be slowed, we must look squarely at its source. Tight money is, in my judgment, an inefficient and inequitable method of combating inflation or shifting resources. It is desirable to ease money to stimulate housing. And it may be politically wise to meet each need as it is perceived. But as an economist, I cannot fail to remind you again that you can't get something for nothing.

Chairman PATMAN. Thank you very much, sir. You gentlemen have presented excellent statements. We are grateful to you. Your testimony will be of great help to us.

Now, Professor Eisner, I want to ask you to elaborate. What you said about the pension fund doesn't necessarily relate to all private and public trust funds, does it?

Mr. EISNER. Well, any effort to constrain the investment of a fund would appear to me to lower the value of that fund, unless the constraints were better conceived than the policies of those managing the fund. Presumably, if the managers of a fund are doing what is in the best interest of the fund, if we tell them what to do, we are departing from what they conceive to be the best interests.

Chairman PATMAN. But suppose they are investing their funds in Government bonds at a lower rate of interest. It occurs to me that housing loans are very good loans, and they are pretty well paid, and paid promptly over the country. And I wouldn't think they would run any risk. But where the interest rate is higher on housing loans or just as high, the people in charge of those funds could decide for themselves.

Now, you state that the money supply should increase about 6 percent a year.

Mr. EISNER. Yes.

Chairman PATMAN. Do you think that will be sufficient to take care of the national housing goals?

Mr. EISNER. I think that it might be sufficient if fiscal policies were such that resources were freed and some of the other measures were taken that I have indicated. However, I am aware that capital markets being imperfect, even with a normal growth of the money supply, it is possible that the small borrowers, who are the people that would be concerned in housing in the main, would find access to funds difficult and more costly. So I would not rule out the desirability in principle of various kinds of aid in making credit available, aids in housing.

I do think, however, that a major part of the current difficulty is that the Government has been taking resources very heavily for other purposes, and particularly the war, and then it has aggravated the matter as far as housing goes by taking measures to curb demand which bear uniquely on housing. If the resources were freed, these measures to curb demand would not be in order and a large part, though possibly not all, of the housing needs would be met normally. Chairman PATMAN. Now, you mentioned that fiscal affairs should be taken into consideration in our overall economy. I agree with you on that. But don't you think that the Federal Reserve should enter into this matter in a very large and more meaningful way than they have, especially in housing? The Federal Reserve has never been helpful to us in the public area as far as helping people get homes is concerned. What do you think about that? Do you think the Federal Reserve has done enough or should they do more?

Mr. EISNER. I am not really sure exactly whether the Fed itself should intervene, whether it should be the Fed or other lending agencies of the Government. I have generally had the impression that the Federal Reserve role is largely to control the supply of money as a whole.

Now, I would be open to the possibility that the Federal Reserve could take action itself in terms of the kinds of securities it buys to have some direct influence, but I really had not given thought to the technical details.

Chairman PATMAN. The housing market is in a desperate situation, as you know. It is no comfort to us that we let people live in these shacks and mobile homes because they cannot get any kind of financing. I have a feeling that Congress can do something about that with the aid of the Federal Reserve, which we could direct if we had a majority in Congress who would go along with us.

Now, suppose we considered setting aside $10 or $20 billion of the credit of the Nation through the Federal Reserve System, segregated, not mixed up with the open market operations at all, but just set aside for the purpose of helping on housing. Don't you think something feasible and practical could be worked out that way; financed by the Federal Reserve through the direction of Congress?

Mr. EISNER. I am not, again, entirely clear as to the unique advantage of having the Federal Reserve do this. If the Federal Reserve