STATEMENT OF RALPH E. FLANDERS, PRESIDENT, FEDERAL RESERVE BANK OF BOSTON; CHAIRMAN, RESEARCH COMMITTEE, COMMITTEE FOR ECONOMIC DEVELOPMENT

Mr. FLANDERS. Mr. Chairman, for the record my name is Ralph E. Flanders. I am serving a term as president of the Federal Reserve Bank of Boston. While so serving I am on leave as president of Jones & Lamson Machine Co. and Bryant Chucking Grinder Co., both being machine tool builders of Springfield, Vt. In addition, I am chairman of the research committee of the Committee for Economic Development, commonly called CED.

The full-employment bill, H. R. 2202, which you are considering, is a most important piece of legislation. Its objectives meet with general approval. Nearly everyone who has appeared before you and before the Senate committee considering the corresponding bill, S. 380, has expressed his hearty support of sufficient job opportunities in a free, competitive economy. I would add my measure of tribute to these high purposes.

Full employment has been attained in our generation. It has been attained under dictatorships whose social system denies those freedoms which our people have willingly given their lives to preserve. This full employment has been attained at the additional cost of providing a niggardly scale of living for the workers. They have sold their freedom for a mess of pottage.

Full employment has likewise been attained in this country in time of war. While reasonably good living standards have been maintained along with an enormous war production, it has been at the cost of accepting a measure of totalitarian control of wages, prices, production, and job opportunity; and has resulted in a burden of national debt we would have shuddered to contemplate at the war's beginning. Full employment has also been reached or approached on several occasions in this country in times of peace, but has not been long sustained.

Observing these beginnings of recent history, it is clear that our objective must be not merely one of ample job opportunities. These job opportunities must also be productive, free, and not dependent on heavy debt expansion. Such is, I am sure, the purpose of the full employment bill.

If I am to criticize the bill, I would say that it falls short in the same means proposed for reaching its objective. It properly recognizes governmental responsibility, but depends finally on but one governmental resource, that of providing work for the unemployed. This final act can be successful only if the volume of unemployment is kept low. Major unemployment cannot be solved by this means without running the risks of regimented wages, prices, and labor, and a swelling debt.

Use of this final resource is only one of the responsibilities devolving on the Government. To keep unemployment down, it must consider well and decide wisely as to the effect of taxes, social security, monopoly control, labor policy, monetary and fiscal policy, and numerous other legislative and administrative determinations. I would suggest that a reading of the testimony before the Senate committee

on bill S. 380, presented by the Honorable Harold Smith, Director of the Budget, would give an idea of the many tools of Government which may and must be employed to hold the final, remaining unemployment down to a minimum.

The CHAIRMAN. Mr. Smith testified before our committee, Mr. Flanders. We asked him if there was anything in this bill in relation to the national budget that could not be done under existing law and he told us no, but he did admit that it would be a most diflicult task to forecast what might happen 18 months from now.

Mr. FLANDERS. On that matter, since these bills were introduced I have thought of just what sort of a forecast would have been made in January 1937, as to what was going to happen to our economy. I am sure the official forecast would have been of danger of an inflation; whereas, as a matter of fact, we had a tail spin at the end of that year. That is an example of the history of the difficulty of predicting very far in advance and basing policies on those predictions.

The CHAIRMAN. And that was also true in 1929.

Mr. FLANDERS. Yes, sir.

The CHAIRMAN. We had very rosy, optimistic predictions from some of the great statistical organizations of the country.

Mr. FLANDERS. Yes, sir; there is also a danger, as we see it, that if the President and his advisers think that there is danger of a tail spin, and so announce to Congress and ask them to make preparations therefore, that the tail spin will be assured. You had more or less that situation in 1929.

The CHAIRMAN. And it would accelerate a tail spin which was in the making?

Mr. FLANDERS. Yes, sir.

The CHAIRMAN. People would start reducing inventories.

Mr. FLANDERS. Yes, sir.

The CHAIRMAN. And consumers would stop purchasing. Isn't that so?

Mr. FLANDERS. Yes, sir; the President and his advisers, officially speaking on that subject, will have a tremendous psychological effect that probably will go far beyond any measures that you can take of the kind suggested here. The President has to be careful when he speaks.

The CHAIRMAN. That is what I say. If the President were to announce on January 1 that there would be a terrible reduction in employment in July 1946, the stock market would immediately reflect that statement by dropping many points in 1 day.

Mr. FLANDERS. Yes, and the banks would begin to call in loans; the manufacturers and merchants to check up on their inventories, and other things.

The CHAIRMAN. And the banks would quit loaning money.

Mr. FLANDERS. Yes; and another thing would take place. I was very much impressed by something General Wood told me once a few years ago. In the fall of 1937 Sears, Roebuck did what it always has done. It made an estimate of the agricultural income of the country and then they based their commitments for purchases on that estimate. Well, in 1937, agricultural prices were at their peak. They were pretty good. They did not have bumper crops but they had good crops and that combination of fairly good prices and fairly

good crops meant good agricultural purchasing power and they placed their orders in accordance with it. But when they got along in the end of the year and into the next year, January and February 1938, the stuff that they had bought was not moving. So they sent out their investigators to find out what the trouble was and the report came back, and this would be a typical instance. Mr. Jones out in Iowa, with plently of money in the bank, and Mrs. Jones are discussing whether to send to Sears, Roebuck for lineoleum for the kitchen. The linoleum down was pretty well worn. They have the money and need the linoleum, but the farmer says to his wife: "I do not know. I have been reading the newspapers and listening to the radio and it looks like we have a depression coming along, and I think we had better hold off buying that linoleum. At least we can let it go a year."

So it is not merely the effect of the banks and the manufacturers and the books of the merchants, but it is the effect of the ordinary purchaser.

The CHAIRMAN. Or he might have decided to use that money to take a vacation.

Mr. FLANDERS. Yes, and spread it into the system another way than by buying linoleum. I thought that was an interesting instance, and that is the way they figure the drop-off of sales occurred in 1937, largely in their case on account of the consumer psychology. The CHAIRMAN. Fear of a depression.

Mr. FLANDERS. Yes, sir; the sole responsibility indeed does not lie with the Government. Duties likewise and with equal seriousness lie on business, organized labor, agriculture, and the individual job seeker. In my testimony before the Senate committee on August 23, I endeavored to outline these responsibilities, which must be adopted if high level of productive employment is to be attained. Your attention is respectfully directed to the record of this testimony. Likewise worthy of your attention is the testimony of Paul Hoffman, chairman of CED, on August 30, and Beardsley Ruml, a fellow member of the CED research committee, on August 24. As a result of the Senate hearings and debate on the floor, the amended S. 380, in my opinion, comes much nearer to recognizing the various steps involved than did the bill in its original form, which is now before you. It is likely that you also will wish to make such alterations as will render this legislation more effective.

The whole task to which the Congress is addressing itself really goes beyond the scope of this bill, except as referred to incidentally in lines 12-20 on page 5 of H. R. 2202. The subjects listed therein. are not incidentals, but constitute the very heart of the problem of bringing unemployment under control. This matter is discussed more in detail in a recent policy statement of CED entitled "Toward More Jobs and More Freedom." I would refer you particularly to pages 5, 6, and 7 of that document, copies of which have been distributed to you. I think you have that.

The CHAIRMAN. Yes.

Mr. FLANDERS. An important recommendation of this policy statement is that the joint committee of Congress, called a Committee of the National Budget in your bill, should become a Committee on Full Employment, thereby recognizing that the national budget is only a

small part of the field which must be covered in solving the problem with which it is concerned.

There is further recommended the immediate appointment of a President's Commission on Full Employment. This Commission should be headed by a representative of the President. It should be a small working body composed of the ablest men to be found. Its members should be chosen as representatives of the general public interest (particular economic groups or viewpoints can be represented through advisory groups). The Commission should be serviced by a staff of the most competent authorities in the various fields. It should make policy recommendations to the President periodically, beginning as promptly as possible. It should lay the groundwork for the development of a continuing and coordinated program of Government action.

The Full Employment Commission should be responsible for the prompt development of recommendations outlining in detail the responsibilities which the Federal Government should assume in achieving and maintaining full employment. It should also be responsible for the prompt development, for consideration by the legislative and executive branches of the Federal Government, of a comprehensive, unified, and forward-looking program of measures for meeting those responsibilities.

The cooperation of the Joint Committee on Full Employment and the Full Employment Commission provides, we believe, the soundest way to attack the problem of unemployment.

The bill you are considering can become a landmark in man's long warfare against the evils of idleness and poverty. But if its potentialities are to be realized, it must be supported and implemented by the development of a realistic program for meeting this central economic problem of our time.

The CHAIRMAN. Mr. Flanders, I have some fear about some of the things in this bill. I am for planning, but I am just wondering if it is possible for us to assure continuing full employment by pledging the Federal Treasury to take up slack to provide jobs. I am just wondering whether we should lead the people to believe that every person was entitled to a job and could secure a job on a particular project at the prevailing wage.

Mr. FLANDERS. Well, that question is a very serious one. It can be partly solved provided the amount of unemployment which has to be taken care of by Government expenditure is kept to a very small minimum. After all the other things which have to be done to maintain employment are leveled down, in my judgment, then I think, as I expressed here, the solution of mass unemployment by Government expenditure does involve wage and price controls and the control of labor, too, of course; and it does involve a very great increase in the national debt.

The CHAIRMAN. It could lead to the necessity of limiting production. Mr. FLANDERS. Yes; it can lead us very far away from our ideals of the relations that should exist between the Government and the individual. Now I like to take, in thinking or talking, the view that if Government and industry and labor and agriculture and all these people that consume, play their part, that the mistakes of which Mr. Mosher was speaking when I sat back here, the mistakes of private in