Marriner S. Eccles and Thomas B. McCabe: 1945–1951

The war with Japan ended in August 1945. The Federal Reserve had played a major role in the war effort by preventing the yield curve from rising and, especially, the rate on Treasury bills (hereafter, t-bills) from rising above 0.375%. As a result of its extensive purchases, the Federal Reserve’s share of outstanding federal debt had risen by 50% between December 1939 and December 1945, more than half of which was in the form of t-bills. The future course of the economy was very uncertain. A large number of economists feared that the economy might tumble back into a depression because of the expected large reduction in federal spending on the war and sharp reductions in armed forces personnel. Others recognized that production facilities had been severely depleted by high wartime operating rates and that stocks of consumer durables and housing were depleted by the Great Depression and wartime shortages. They feared that inflationary pressures would become very great, especially if rationing and price controls were removed quickly. Both would be removed in 1946. In addition to these concerns, the Federal Reserve was worried that a rise in interest rates might inflict large capital losses on banks and others who were holding bonds. As a result, its initial policy in the postwar period was to continue pegging interest rates on government securities.

It is important to recognize that information available in 1945 was seriously incomplete as can be seen in Table 1. Quarterly National Income and Product Account (NIPA) statistics would not become available until 1947 and many financial measures that guided decisions in later periods were not available. The money stock measure, M1, is a rough approximation of the formally defined quantity, which the Federal Reserve began to report only in January 1959. The unemployment rate and civilian participation rates were redefined in 1948; comparable data for earlier years are not available.