by ROLAND I. ROBINSON
Division of Research and Statistics, Board of Governors
The primary objective of postwar management of the public debt must be economic stability, but this in turn, if it is to be achieved, requires monetary stability. The wartime expansion of the Federal debt has already caused a vast increase in money holdings and has weakened the resistance of the economy to further monetary expansion. If large postwar demands for capital outlays and deferred consumption should create the initial conditions of inflation, the money supply, already large, could under present conditions expand further and so prevent the realization of even approximate monetary stability.
There are indeed other objectives of debt management than monetary stability. The budgetary problems of the Federal Government would be simplified by a low debt service charge. Other considerations permitting, it would be desirable to avoid instability in the market value of Government securities. The large debt should not be permitted to create a new or expanded rentier class. But all of these objectives are subsidiary; if conflicts between objectives should emerge, they must be resolved in favor of monetary stability.
Discussion of the effect of the national debt and its management on monetary stability is focused on the long-range possibility of inflation, not because inflation is more likely than deflation, but because it is the powers of the credit authorities to resist further credit expansion that have been impaired by the wartime increase in the Federal debt. Unavoidable inertia toward modifying the debt structure and the overhang of contractual rights and obligations probably means that the structure of the debt cannot be modified quickly enough to meet transitional postwar inflation should it develop. The wartime tax structure and such direct controls as are still in effect are much more suitable weapons for that purpose. For the longer term, however, these instruments will be much less potent and unless the problems of debt management are met, the possibility of unwarranted monetary expansion will persist.