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The Papers of Eugene Meyer(mss52019) 117_02_001- Subject File, Federal Reserve Board, F.R. Bank of NY — Correspondence, 1932 -3 EUGENE MEYER SUBLIL, P4c4cie.€44 eesz-evz- 804/u) '• 4840( o,. 1./Y— (aiteEspodorre- _ FINAL COPY TRANSLATION Jarriary 150 1932 CABLEGRAM F::OM PARIS TO GOVT,,RNOR HA:- RISON 24 NEW YORK JANUARY 13 STOP INFLATION IS THE ORDF2 OF 7HE DAY RES7RVE RANKS AS WELL AS PH! LEGISLATIVE DECIDED TO TAKE THIS ROAD STOP STOP THE MEDAL Aa;EIDLIES SrEM TO HAVE THE DISCOUNT RATE WILL PRO-rABLY LOWERED AT THE NUT MEETING OF THE BOARD OF DIR7CTORS OF THE FEDERAL RESERVE BANK OF NEW YORK STOP THE REDUCTION OF THE BUYING RATE FOR ACCEPTANCES IN THE OPEN MARKET WHICH TOOK PLACE ON TUESDAY IS A PF.EPARATORY MEASURE TO WHICH THE FEDERAL RESERVE .'RANK ALWAYS HAS RECOURSE IN SUCH CASES STOP FINANCIAL CIRCLES CONSIDER IT AN INDICATION OF A CHANGE IN MONETARY POLICY AND EXPECT HEAVY PURCHASES OF GOMNMENT SECURITIES, ACCEPTANCES, AND PERHAPS OF OTHER P1 LS ,7T AND DEFOR THE PURPOSE OF INCREASING THE LIQUIDITY OF THE MAR7 FINITIVELY' ALLEVIATING THE GENERAL SITUATION STOP TH7 EFFORTS TO- WARDS CREATING MONETARY EASE ARE ACCOMPANIED BY PROPOSALS rrNDING TO BROADEN THE CR-DIT 73ASES AT THE FEDERAL RESERVE BANKS STOP PRESIDE:71T HOOVER SURUITTED THEM IN HIS MESSAGE OF JANUAR' , 4th AND HAS SINCE MANDED FROM CONGEESS VARIOUS MEASURES OF THIS NATURE STOP DE- THERE IS REASON TO EXPECT THAT ALL ATTEMPTS TO CURB INFLATION AND HAMPER CREDIT EXPANSION BASED ON LONG TERM PAPER OPPOSITION STOP WILL M7ET WITH GENERAL INFLATIONARY IDEAS HAVE SERIOUSLY TAKEN HOLD OF i!ANY MINDS IN FINANCIAL CIRCLES AND THEIR CONCERN IS !UCH MORE TO TARRY OUT THESE IDEAS AT LEAST I PART THAN TO LI'IT TH"IR DEVELOP- -2STOP WALL STREET IS GENERALLY IN FAVOR OF THE PROPOSED LEGISLATIVE MEASURES AND HAILS INFLATION AS ASSURING AN UPWARD MOVEMENT OF SECURITIES STOP THE MORE CONS"RVATIVE FINANCIERS ARE ALARMED BY THAT APPEARS TO BE THE INAUGURATION OF ANEW ERO EXTRAVAGANCE (TASTE) AND PREDICT POSSIBILITIES OF DANGEROUS CONSEQUENCES ENSUING STOP THEY 'RELIEVE THERE IS NO REASON TO EXPECT THAT BENEFICENT EFFECTS OF AN ERA OF CREDIT EXPANSION WILL LAST LONG AND THEY THINK GOOD RESULTS WOILD RATHER BE OBTAINED BY THE SYSTEMATIC APPLICATION OF OTR REMEDIES RELATING PARTICULARLY TO FORAM TRADE, GOVERNMENT FINANCING AND TAYES STOP THE GREATEST DANGER INHERES IN THE RISK TO VETCH THE FEDERAL RESERVE BANKS AE EXPOSED IN CONNECTTOU WITH THE VARIOUS PROPOSALS FOR THE BROADENING OF THEIR DISCOUNT AND LOAN OPERATIONS STOP THE FEDERAL RESERVE BANKS THEMSELVES SOME TIME AGO DECLARED AGAINST ANY CHANGE IN THE DISCOUNT RE-qULATIONS AND AGAINST ANY r'ROADENING OF THE OMIT 9ASE AS AT PRESENT AUTHORIZED PRESENT AS IF THEY HAD CHANGED THEIR OPINION STOP STOP IT LOOKS AT SOME EVEN INSIST UPON THE NECE:SITY OF SOFTENING THE REGULATION IN iORCE STOP IN 'an OF THESE DEVELOPENTS CERTAIN OBSERVERS REMARK TIAT THE GOLD EXPORT WHICHCEASED SOME TIME AGO MAY EASILY BEGIN AGAIN THE MARKETS MICH PERMIT THE FREE 17X.13071 OF GOLD HAVING EVERYWHERE BECOME VE27 NA7ROW H. PARKER WILLIS (3ANK OF FROCE) Foreign Information Division, January 15, 1952 GL Mb, • THE UNDER SECRETARY OF THE TREASURY WASH I NGTON March 22, 1933. TO GOVERNOR MEYER: Attached is a copy of letter dated March 21st from Governor Harrison in regard to certain foreign exchange transactions, together with a copy of my reply. I will greatly appreciate it if you will consider this and give us the benefit of your views as soon as practicable. Copy sent to: Dr. Miller Mr. James Mr. Hamlin Mr. Morrill Mr. Coldenweiser Mr. 7:yatt J/.(0j Mar& 22, 1933. Dear Governor Harrison: FOREIGN "EXCHANGE TRANSACTIONS I have your letter of March 21st in regard to certain transactions in foreign exchange which are being eonsummated under the Executive Order of the President of March 10, 1933. I should like to consider this question somewhat and shall discuss it with Mr. Kent when he is here tomorrow. I shall then write you further in regard to it. For the present it seems to me satisfactory to proceed unon the basis w-xich you indicate. Sincerely yours, . (Signed) A. A. BaL AA3:abm George L. Harrison, Esq., Governor, Federal Reserve Bank, New York, N Y. 44.0 COPY FEDERAL RESEEVh BANK OF NEW YORK March 21, 1933. Dear Mr. Secretary: I am writing to confirm our telephone conversation this morning with respect to certain transactions in foreign exchange which are being consummated under the Executive Order of the President of March 10, 1933. As you know, this Executive Order provides "No permission to any banking institution to perform any banking functions shall authorize such institution **** to engage in any transaction in foreign exchange except such as may be undertaken for legitimate and normal business requirements, for reasonable traveling and other personal requirements, and for the fulfillment of contracts entered into prior to March 6, 1933." This bank is required by the Executive Order of March 10, 1933, to report to the Secretary of the Treasury all transactions in foreign exchange in this district which are prohibited. Consequently, we are called upon to interpret the provisions of the Executive Order with regard to foreign exchange transactions and to decide as best we can whether those transactions are in fact in contravention of the Executive Order. There is one class of foreign exchange transactions about which we wish to advise you. There are, of course, many foreigners who own dollars in this market. As the principal money market in this country it is entirely natural that this should be so, and each day there are current dealings in foreign exchange by Federal Reserve Bank of New York 2. Hon. A. A. Ballantine. 3/21/33. foreigners whose dollars have accumulated beyond the amount which they would normally expect to carry, or which are required for other reasons. The purchase of foreign exchange by such for- eigners is considered a natural and normal transaction which the banks carry out in the course of the day's work. It does not rep- resent a flight of capital by American holders, but rather represents a repatriation of dollar funds by foreigners wishing, for one reason or another, to bring their dollars home. It is our judgment that it would be inadvisable for the banks to refuse to conduct these transactions so long as they are usual and normal transactions within reasonable limits. To do so would undoubtedly be interpreted abroad as a sign of weakness on our part and it might well result in a severe decline in the quotation of the dollar. By means of daily reports which we obtain from all dealers in foreign exchange in this district, we keep ourselves currently informed as to the extent of the movements of foreign funds in this market. As long as withdrawals by foreign owners remain within reasonable limits and do not materially weaken the position of the dollar, it is our belief that such transactions may properly be considered "for legitimate and normal business requirements." If, on the other hand, any withdrawals of foreign funds from this market should assume unreasonable and abnormal proportions and would appear to menace the position of the dollar, it would we believe be entirely appropriate to put a stop to such withdrawals as being in contravention of the above-mentioned provisions of the Executive Order. This letter is merely to advise you of the fact that transactions of this character are being carried on daily by banks and • . Federal Reserve Bank of New York 3. Hon. A. A. Ballantine 3/21/33 dealers in foreign exchange, that we do not believe it would be advisable to attempt to prohibit them so long as they remain within reasonable limits and do not prejudice the position of the dollar, but that if they should assume such unreasonable proportions as to menace the position of the dollar, we think they might then be prohibited on the ground that they are not "for legitimate and normal business requirements." Very truly yours, (Signed) Honorable A. A. Ballantine, Undersecretary of the Treasury, Treasury Department, Washington, D. C. George L. Harrison, Governor. Dictated over the telephone by Miss McCarrick. Basle Received May 4, 1932. PERSONAL FOR HARBISON THE PRESS REPORTS REGARDING THE GOLDSBOROUGH BILL, THE (1) CONTENTS OF WHICH ARE NOT CLEARLY REPORTED, AND THE VOTE IN THE HOUSE OF REPRESENTATIVES ON IT, HAVE CAUSED A NEW WAVE OF ANXIETY IN EUROPE CONCERNING THE DOLLAR. YESTERDAY AND TODAY WE HAVE RECEIVED PROBABLY FIFTEEN IELEPHONE INQUIRIES FROM ALL OVER THE CONTINENT. CONFIDENTIAILY, ONE SMALLER CENTRAL BANK TODAY WITHDREW ITS DOLLAR BALANCES, SUBSTITUTING INSTEAD FRENCH FRANCS. ANOTHER HAS INSTRUCTED US TO TRANSFER ITS DOLLAR BALANCES INTO GOLD. HAS (2) MY ONLY PURPOSE IN REPORTING THE FOREGOING, WHICH 1331 PROBABLY ALREADY COME TO YOUR ATTENTION FROM OTHER SOURCES, IS TO KEEP YOU ADVISED OF THE SENSITIVE AND NERVOUS DISPOSITION WHICH PREVAILS ON THE CONTINENT IN CONNECTION WITH AMERICAN DEVELOPMENTS. (signed) MCGARRAGH Extract from cable of May 4 from Governor Harrison to Mr. McGarragh I realize that the Goldsborough bill has had a bad psychological effect abroad and while it is not certain -That its fate will be in the Senate, nevertheless the reaction against the bill in the Dress and on the part of the most responsible people have been so widespread and vigorous that we are hopeful that it will be defeated in the Senate. In any event, however, our opinion is that it will certainly be vetoed. As you perhaps know, both Governor Meyer and I have publicly opposed its passage. By many the bill is not considered seriously or else is regarded as wholly innocuous. It was passed by the House, I think, largely as a political gesture on the theory that even if it would do no good, it could do no harm. But even if the bill should ever become law, which we think most unlikely, you will see from its text that it contains no realizeable threat of currency inflation. Furthermore, its enactment into law would not lead us to make any daange in our present policy. The bill reads as follows: "It is hereby declared to be the policy of the United States that the average purchasing power of the dollar, as ascertained by the Department of Labor in the wholesale commodity market, for the period covering the years 1921 to 1929, inclusive, shall be restored and maintained by the control of the volume of credit and currency. The Federal Reserve Board, the Federal reserve banks, and the Secretary of the Treasury are hereby charged with the duty of making effective this policy." Plan for Providing Immediate Employment. (Revised as of June 27th, 1932) ress and by states and cities The plans being considered in Cong d ide eployment are, first increase for relief of unemployec or to prov or ars, doll of hundre's of millions charity on a large scale running into re natu and ss, in location, timeline second, creation of public works which ic publ not meet the need. The "Eia-FiEtent of employment required, will liability for maintenance and ng works will constitute also a continui ° - few in number. ing idat liqu f "sel the operation except to work almost immediately This substitute plan proposcs to put that a total of 3,000,000 people will 11000,000 people and it is believed be given employment. As part of the be employed who otherwise would not to employment is averaged on the base work is seasonal, the objective as actual number of employes. of increoso in number of days rather than employment to which they are This Plan puts the people to work in the migration of people and accustomed and very largely at home, saving lt; that is, if people employed the destruction of communities as a resu values will be maintained, are kept in communities already created, and savings banks kept open; es property create'' there made useful, stor vity to all creative industry and the incident business and labor acti will be maintained. of available bank reUnder this plan the very large reservoir nels and under existin7 governserves will be employe through normal chan nstruction Finance Corporation, ment and banking agencies including the Reco g savings banks,building and loan Federal Reserve System, all banks includin will have the cooperation of the societies, and the like. These agencies set up in each Federal Reserve Business and Banking Committees recently be necessary. District with such sub-committees as may e will be no call on the Through the use of existing reserves, ther a loan fund. The only call upon government to sell securities to create time, and when incurre, for actual the government will be over a period of handled through the Reconstruction losses to be paid, these losses to be its other operations. Finance Corporation and classified apart from s but Will increase The plan will not put any burden upon the bank nature and.therefore tax bearing their usefulness. It will be productive in s program involves. instead of tax consuming, which public 'eork s of labor and material, The Plan in its essence is that employer record and known character, will agree in good standing because of previous additional materials, certifyto employ additional labor and therefore usr and materials would not othering in applying for the loan that such labo the approval of the Banking and wise be use, that loans will be made with O.K.'d by representatives of the Business Committees referred to and resnonsive to such applications. They Reconstructicn Finance Corporation able to repay on basis of his shall be repaid as fast as the borrower is Rate of interest is one par earnings as indicated by income tax returns. rict (but this is open to dis cent above the rediscount rate in that dist g to the judgment Security may or may not be reeuired accordin cussion). ion may be made icat apnl The of the con -ittee that has power to approve. on to the comit send its recommendation '7111 to a local bank, which with mittee or sub-committee, or it may be made direct. -2The loans are roughly classified into two groups: First, those of users of labor and material who have been successful in the pst but now find themselves going into liquidation because of inability to secure working capital, the banks being either unable to furnish the money, or desirous in protecting themsalves and not takinp, any chances, of asking for repayment of existing loans through liquidation of inventoriea and other current assets and the like: this being largely for fear the industry will not be able to supply working capital from other sources. The second group will be those such as of the railroads and other industries who are deferring all possible expenses in order to avoid charges to operating expenses, and through such avoidance, maintain their black ink situation, showing they have earned fixed charges; and further than that, to keep their cash in position to meet anticipated demands. Many such industries can properly enlarge upon their operations without any question of overproduction being involved. It is proposed therefore that money advanced shall not involve charges to current operating expenses except with the consent of the borroi:,er, but will be carried in a suspense account as an "anticipated expenditures", and later on, _hen net earnings make federal income tax payable and these loans likewise become due and are paid, either be charged direct to profit loss or into the normal operating account as may be decided. V1ith respect to the railroads, counsel and auditor advise me that only the approval of the Interstate Commerce Commission is needed to create such a suspense account with deferred liabilities set up as proposed. Activities under this plan can cease in any section or with respect to production of any commodity, or as a whole l on action of the Reconstruction Finance Corporation or the President. Of necessity, it decentralizes the power of making loans except large loans; but this will not interfere with current, intensive revier of all loans made including classification or cessation of activity temporarily or permanently at any time as may be concluded best. The plan brings into use the needed experience and ability of business leaders and gov-:rnment finance officers and banks locally gained, on the broad foundation of considerinr- the national and local need for employment and the use of materials; with a quickening of the pulse of business generally it is believed an advance in commodity prices will core since demand depends 75% on employment; and taxation, which is now a tremendous burden, must depend almost altogether on productive employment. The point of under consumption rather than overproduci-ion has certainShelves are bare; buying in on a hand to mouth basis. Fear ly been reached. and lack of purchasing power have reduced demand tremendously. As to overproduction, the situation canbe safeguarded by limiting the productive activity of any concern to the quantity produced say in the twelve months ending June 30th, 1931. It can be further and perhaps better controlled by stopcing activity with respect to the production of any kind of goods if there appears to be an over supply. I firmly believe, however,that the increased payrolls and increase of material we will need, will in alnott every direction overcome any problem of presumed overproduction without any narked limitation on loaning power that might be created through this plan. The plah does not go beyond encoarea7ing the activities which would be done in normal times The plan indeed is not intended and to a normal extent without this aid. to go Beyond using money and ere ,it to a normal extent as ressured say by the twelve manths ending June 30th, 1931. If the railroads during the twelve Tonths ending July 1st, spend as much money on maintenance as they did in the twelve months period name,-1, it would illustrate the aealication of a so-called normal esure to an abnarrially depressed situation. The objections to the plan are plain. The lack of adeauate security, the lack of definite time of repaairent, errors in judgment which will make for losses, competition in an industry whore some people need help and some do not, and use of credit which will in some instances create an unsuccessful activity -- these have been thought of and weighed as against the vast charity distribution we hlve to make or the great waste of money in public expenditures; and have not been found formidable. There is the advantage that after this plan is tried, it may be changed or done away with and without any undue shock or publicity Further, it proposes to give help to those who have been successful heretofore; but have not set up a back log of credit because they have not foreseen these abnormal conditions. &nd to encoura7o everybody to do the the things they would like to do if they could keep black ink above fixed charges. It will be noted that the alan provides not for handlnaa out the money, but for contracts for loans; and the borrower must each month make a report in order to secure his noney showing that he has lived up to his obligations to provide additional employment of labor and use of materials in accordance with the datails set forth in. such contract. This is not an impossible condition at all since all large corporations have authority for exaenditure reauests covering in every detail every unusual expenditure before the work is undertaken; and the cost of the work is then checked up against such detailed requests. I h,ve attached hereto in detail a suggestion as to how the plan should be made operative. This foreword covers the purpose and the method in a general way. If I did not feel the railroads could be induced in thirty days to 100,000 men to work under it that would not otherwise be employed this Put year, I would not propose it. The test is before acceptance to get them to agree to it. Yeeorendum of Plan in Detail Its objectives are: (a) Put to work 1,000,000 men in sixty days nfter nechinery established, and as n direct incidence nean the employment of 2,000,000 more, (b) the work to be Productive, of neture to which people ere accustomed and therefore fitted, requiring minimum of migration from homes- thus making for least economic waste in personal affairs, (c) revive industry along normal lines without material waste and save from bankruptcy or absolute disappearance thousands of business • activities heretofore successful, and: in other instances maintaining a necessary efficiency, (d) not to interfer?with the very vital and necessary efforts of industry to maintain black ink in its operations essential to its credit and indeed to its life; which under existing conditions hns necesserily resulted in a narrowing circle of use of both labor and nnterial, (e) utilizing existing agencies - all banks, bui1din7 and loan associations Reconstruction Finance Corporation, Federal Reserve System, the newly created Business and Banking Committees in each. Federal Aeserve District - minimizing additional machinery and exeense, (f) bring into use united exp rience and ability of business leaders, goverment finance officers, and bankers to the end that loans may be most wisely made to fit our national need, (g) enable banks to utilize or loss to either stockholders fulness, security and earnings and loan associations, and any eluded, their great reserves without fear of depositors or depositors, but instead incrense the useof banks, saving and loan essociations,building other financial institutions that may be in- (h) use the credit of the United States most economically through the Reconstruction Finance Corporation (using as agencies the factors mentioned in (e), to extent necessary with least actual draft in Immediate future on such credit in proportion to service that credit will render), (i) necessitating the establishment of no new government debt to meet the requirement that our people be put back to work; will check inflation later on beceune of repayments necessary, (j) the operation to be slowed down, changed or stopped entirely as the need dwindles or disappears, or lack of usefulness is demonstrated, (k) maintain industry which pays the taxes and upon which the government must depend for existence. In other words, spend the money through tax-payin instead of tax-spending activities. VA) cannot collect taxes from highways, post offices, bridges or other public enterprises, (1) would ston many desirable business activities from liquidating their working stocks to meet their debts, such liquidation involving further demoralization of erices RS well as putting activities out of business and further reducing employment, r, 0041.1116 (m) as a. final result, entail a very modest loss (comparatively) to the Government from loans made compared with any other evenue of expenditure proposed that will bring Pack employment; such losses to be realized over st period of time and not immediately. Use of Govevneont Credit. (I) Broaden vowers of Reconstructien Finance Corporetien end enable St to establish additionel creeit for purpose of restorine employment of capital and lebor under cenditions thet, while eiving fair aseurance of return of loans with interest, involve risks that banks, insurance cereanies, saving and loan societies, and building and loan corporations cannot undertake because of their responsibilities to depositors, lenders and share holders; and also loans that normally would be made by such orgenizetiens End cannot now be undertaken because of present liettations on their lending powers. Further to induce railroads and other large corporations to under- teke naintonance and other work deferred with provision thet current operating charges will not be increased thereby. (2) Ageneiee to lea i:naployee. The agencies to be employed are the Fedoeal Reserve eystee, the banks, building and loan associatiers, and the Business and. banking Comeittees recently established, slid such other agencies as Reconstruction. Finance Corporntlen may select. (This will save any unnecessary expense in admininistration. Nxisting loan agencies such as the banks can then carry the loans thomeelves if they wish, thus utilizing any reserve creJits they may have to the extent they choose to do so, eith asserenco thet if need arises, loans will be taken off their hands by the Reconstruction Finance Corporation through Federal Reserve banks when disceentee or direct.) (3) General Rules Governine Loans. Loans will be finally aperoved, if not in greater sum than 4‘i0,000 to any one borrower, by a oommittee consisting in each Federal Peserve District ofthe nominees of the Reconstruction Fieance Uorooratien, the Federal Reserve beard, and the Busiress and Bankine Coneittee recently _3organized. or by reference This comrittee ray either upon the initiative of loan by a joint action thereto be instructe1 with respect to any particular principal representatives of the Governor of the Federal Reserve Eoard, the ct, and the Business of the Reconstruction Finance Corporation in thqt distri whole to consider such and Banking Comrittee calle as a committee of the loan. rm 7 ttees within the The loan committee will also be aided by sub-co three organizations as ray be fror tiro to tire create separately or collectively. by such organizations, (Separate loan committees may be establishoj in districts geograohically large.) al of the three If a loan exceeds 0.00,000 it must hnve the aprov organizations in meeting called for that purpose. If it excers 45s000,000 Finance Corporation through it must hove the an7roval of the Reconstruction (Those local authoriits properly authorized officers at V;ashingtons D.C. ovorburden ':,nshington ties granted are to secure prompt action necesspry, not on for informed authorities, the local cor71ttee must generally bn depended judgments anyway.) the The Reconstruction Finance Corporation will hive DO or to nding at any one time,and deter•ne the maximum arount of loans to be outsta for each Reserve District; will from time to time ratably deterrine the limit and may Impose conditions as to loans to any one industry. The borrower d his principal must apply for loans within the district in wh;ch is locate through one channel. place of business and shall make application only One subsenuent loans. The loan does not preclude the borrower from securing shall not at any total loans contracted for, whether or no n.ctually made, time exceed five billion dollars. Initially the Reconstruction Fiance Reserve Districts Corporation shall apportion a creOlt among the Federal In such amounts as it finds necessary. must have been The borro7ers or their oredeces ors in interest engaged in the business on account of which loans to be rade continuously . L Loane can be made only for ourooso of employrent 311100 Jan ory 1, L3-30. r and of capital and labor that according to the best judgeont of the borrove .2111.21in would not otherwise have boon created. The borrower a_aLLaa.LaL.12 Er o'rtnership, other corporation or or tive coopera a ual, individ may be an any institution or individual norm'Illy obtnining credit. Loans shall be ride only within a period of two yearn after the effective date of lecislation making such leans available. The Reconstruct- ion Finance Corporation ray with the approval of the President suspend the makine of loans at any tire and for any period. within a period of five years All loans must be repaid except as provided for hareinefter by collections in connection with payment of income taxes. shall be one per cent The rate of interest above the discount rate effective in such Federal Reserve District st the time the 1 ,an is made and subject to revision annually in accord with the discount rate in effect as arranged for thirty days prior thereto. Interest payeble semi-annually. The cormittees havin0authority to approve loans shall determine what security, ifeany, shall be required but unless otherwise provided when loan is made, any addition in the way of security through such loans shall be maintained free and clear of incuMbrance, or other security equal in value given in lieu thereof as security for the loan. No loan shall be made that shall cover expenditures extending over a period of more than tee years. No loan shall be made that withhis otle-r expenditures vill exceed the expenditures of the borrower for like purposes for a correseondine; prior period on seasonal or annual besis in the :veers ondce June 30, 1931. (4) Applications for Loans. The applicant may apply direct to the loan comeittoe in each Federal Reserve District or to any bank, building and lean association, or other approved financial agency willingto act as agent therefor. He will contract ment through for such loan as will enable him to give additional emplo exDenditurF,s for labor and materials. "Mat.-)rials" ill include all supplios and -rtcles of utility essential to his work. Be will accompany such application with an Authority for Exrendituro Request, such as in use by railroads and other large corporations Trener ally, showin7, , )roDose:! use of the money to be borrow ed, its anticipate' divisi on between employment of labor and purchase of materi al, overhead chsrges, and inter;Ist, the estimated time within which it is to be used and all other inf ormativo dQt us that will, responsive to the inf ormation required in suc h expenditure request by the Reconstruction Fin ance Corporation, enable the loan committee to pass promptly upon the loa n with a minimum of additi onal investigation by the agency or sub-com-itte esprovided for. If the application be mad e through an agency such cs a bank, then that agency shall in transr-itting the request to Vie loan com7ittee give its views, if any, as to desirabil ity of such loan and the abi lity and willir.gness of the borl.ower to carry out the ..c,rms of the contract. The borrower shall in thi s certificnte under oatl state that to the best of his belief and judgment the money will provide, Insofar as his business is concerne,10 use of materials and labor th9t ould not otherwise be created; not more than 15% may be used for olp.rhead and interest charges. If a l ,an be aporove , a certificate shall be issuea by the loan com-Ltteo. Loan shall then be rode through an age ncy of the borrower's choosing or if he has no cho ice or the agency chosen is not wil1in to set, then through an agency of the committee's selection. The Ian certificate shall cc deposited with such agency. Rec'mstruction Fin ance Corporation shall provide report blanks on a form on zhIch the bor rower may record and attest to the expenditures made in accord v.ithlthe provis ions of the loan contr,--ct. borrower may then call on the agency at the end of any .-ree6 period but not more frenDe ntly than once a month with atieste- statement of expenditures incurred for labor and materials in accord with the terms of the contract, and the agency thereupon will pay to the borrower the amount shown, takini7 his receipt therefor, upon the loan controt and attach:ng •statorent of expenditures thereto as voucher. (It is exrected that 90% of loans approved locally will be made through bf?nks as agencies.) Reconstruction Finance Corporation, if the loan be of any areunt req4iring its home office aproval, will detersne the channel through which payment is to be Ir.a.de. 'Any bank or other financial _corporation so erToered acting as agency for the loan cammittee may carry loans made for its awn account for such period as it max choose and collect interest and principal accordingly; but rendering staterent as often as the loan cor,eittee shall require of such loans so carried, and status of each.. It shall be at liberty at any time to call upon the Reconstruction Finance Corporation through such agency as it may direct (preferably the Federal Reserve Banks) to take over any such loans. Federal Reserve Ban'ics may discount such obligations accordingly. Agencies for the loan comvittoes will be paid for actual expenses incurred under such rules as may be established by the Rec:Aistruetion Finance Corporation, and such expenses shill be charged to the borrower, Loan corrittee, or any sub-committee, or any agent for either shall at all times have the right to examine the borrower's books or rake any other investigation desired with respect to conduct of his arfairs that may be related to the use of the money secured through the loan. If agency does not desire to carry the loan, it shall under the rules and through. channels provided by the Reconstruction Finance- Corporation, be promptly relieved by advances equal to the arount paid to the borro.::er with intre.ost under the certificates of expenditure hereinbefore referred to. at loan rate -7(5) Accounting for Xxponditure of rt)ney Secured from Logns. Imsnuch 5 the money secure:: under loans involves exyorditures that otherwise would not have been'undertaken and which may not immediately return to the borrmer any net returns, it rmy be desirable thRt all such loans bz; carrie in a zusense account with full detsil. ThP exenditures made thereunder shall not 6.1, entered in the norral accounts of the borrower unless othrwise a7reed at tine loan is contracte for, or later desired, except as and when repaynnts are mpdc., when with the interst accrue'j and paid he ray dispose threof with apropriato allocations to ceoltal and profit and loss accounts or direct to operating expenses. n 'oc;:nstructi Finance kl:oeporetian will det-rm;ne the method of aceountin7 disposition, it being undretood, however, that unless the borrower cnnsents, his normal accounting as it oth•-rwise would exist without such loans shall not be This is of vital importance and requires careful c:nsiderntien. disturbed. Plan must be worked out so ns not to interfere with borrower's necessary efforts to raintain black ink in his operations. It is rel!Aed to orvision thst loans seed not be repaid until borrcmer makes roney !-ls shown by income tax staterent. He must have an incentive to borrow and take a chance. The •••••••=1•011.11.1. enployment is borrower's necessity for nein- thief cusr.! of dwindling taining black ink In accounts and cash in banks. (6) tieonyment of Loans. Leans shall be made for Et p7r1od not exceecling five years except as renaid through income taxes but nay be repaid by the borrower at any time with accrued interest notice. the end of any calendar month on tirty days' After makin7 allowance for any such payments, the loan will be collecte!1 through annual paynents equal in amount each yoar im the Income tax paid by the borrovier until the whole remaininr: amount with interest is repaid. Collection will be made at same time and throw7h the same asFlor channel as the income tax is collected. Collection through income, tax channels shall be established in 1934 for leans made in 1932; in 1935 for loans rade thereafter. The amount of such collections by the income tax representatives shall be credited to the Reenstrnetion Finance Corporation; or a receipt showing payment from the holders of loan contract for amount due under this paragraph will be accepted as a credit by the income tax bureau of the Treasury Department* All loans made hereunder, principal and interest, to extent remaining unpaid shall be due and payable November 10 1942. The agencies that can give the greatest immediate employment NOT cannot do so unless they have a real incentive. The incentives are: (1) Vo call on their cash. (2) Wo necessary repayment until as shown by income tax return they can afford it - subject to ten year limitation. (3) No edde llred ink° to current.operation through added charges to operating expenses. (4) opportunity to repay when money is easy with them or cheap loans avnil4b1e. (It is not probable that 11:eney actually will be collected threuf9a income tax channels; but the orovision will insure collections when borrower has made money.) (5) The revival of industry which will help everybody. The question is - will these inducements be sufficient to enable large industrial enterprises to add to their activitiest I think so. I will ascertain the attitude of the railroads; an ennfident they will authorize added emplement equivalent to giving sobs to 100,(X0 men. As to less r enterprises or those in more difficult situations who cannot Fo ahead unless they can borrow money through other channels than normal bank credits, though heretofore successful and enjoying such bank credit. I know personally at least fifty such - perhaps could name a hundred. In some instances the life of a whole community is involved. The incentive to then is sufficient. They will remain going concerns Instead of liquidating, and will give employment and buy material accordingIy4 Th..- largest building and lean association on the-Pecific Coast has -9not made a loan in thirteen months. It is pressing, collections instead because of constant cash withdrawals. No end of foreclosures are under lay. dislike even to think This must not continue or we will have n problem we about. wish to It could, for example, make many loans now to people 'ho build. Direct relief can be afforded to sore extent there; more 1:7Tortant is the resumrAion of onployrent which will stabilize that situation v.ith resrect both to building and loan pfrsrents and withdrawals. The basis of this plan is tht the great bank credit re!lerves shall be made available for loans to increase employment and encourage industry by the assumption of any lose by the povernr7ent. There will be loss, but it will be wisely incurred for loans will be intelligently made; nnd such loss will be snall compared with the alternatives. The dole budFet now exceeds 0 0,CC0,000 annually if we include cormmity chests and the like. Any nati nal dole legislation will increase this enormolzsly; and pork barrel public work involves such west°, inefficiency nn to objectives andicontinuing 119b3.lities to be intolerable. Nor will our incorre tax returns suffer, even if the ;oncentive be 2(, if plan succeeds; for unless sore bold step be succesfully undetaken there wIll be only drie1 up sources for such taxation. And again, I would point out such a plan as this with the apnroval of the President and the Reconstruction Finance Corporation can be dropped, slowed down, modified or for the time being susended notice. almost without R,/ — tti \i KING AND INVOSTRIAL COMITTEE of the RESERVE DISTRICT FEDERAL SECOND July 16, 1952. Proposals for Putting Credit into Use 1. Public mrks - Many worthy projects may be found, but measures must be taken to improve budgetary positions of States and municipalities in order that they can borrow. Snell reduction in current expenditures or increases in receipts would assure service for large loans. a. New York City has public works program of 2 billion dollars; authorizations for projects to be undertaken this year have been rescinded to extent of 100 Anions and few, if any, authorizations are being made for next year, because of inability to borrow. b. New York Port Authority projects. c. Other State and city projects. 2. Private or semi-Public construction _Projects a. East Side housing development to clear slums and provide cheap hems.ing. In stage of negotiation Ath several interested, and opmetiines conflicting, parties. Some important auestions remain to be solved, but it is possible that if strenuous efforts were made active work of demolition could be started within 60 days. b. Rehabilitiation scheme - Formation of into groups of large non-competetive companies to supply financing for repairs, etc. of atructures now obsolete. other. Several such groups may be formed to compete with each Expected that participants will be able to obtain funds with- out special action. question of organization, not of credit. -23. Mortgage funds Not only does lack of mortgage money retard new building, but also failure to renew or large payments of principal required on maturing mortgages at this time of reduced incomes necessitates considerable harmful liquidation. Although reduction in mortgage debt is justified on basis of reduced vaues, postponement of zonte of this readjustment would materiany aid present situation. This will °all in some cases for gen- erous measures of relief 'with some sacrifice of principles of soundness, but in many cases perfectly sound arrangements are possible. a. Crintral Savinps and Loan Bank of New York - Funds have been promised and this plan may considerably relieve situation in New York State. b. Aid needed for New Jersey and Connecticut, nnd probably for other districte„ not only to check necessitous failure to renew mortgages, but Paso to take up those rthich must be paid. 0. Reconstruction Finance Corporation loans and Home Loan Discount Bank might help to check liquidation. do Private corporation in process of formation to finance home construetion under new l5-,year mortgage plan. 4. Industri and trade - Numerous complaints received of inadequate credit accommodations from banks. Uthout detailed credit investigations, difficult to determine whether individual restrictions arc justified. Rhera restrictions are due to bank stringency and not to defective credit standing of borrowers 130111e assistance should be provided. ao Uvular be desirable to set up machinery for receiving and investigating individual claims of this nature, and then to find banking accommodation for them. Such procedure may be necessary unlar Glass amendment to relief bill. b. Aid may be provided by working with large industrial or local groups that have been hurt by banking difficulties. Toward this end an investigation is now being made of the clothing industry in New York City. Possible measures are (1) formation of new bank; (2) capital contribution by interests in industry to and participation in some existing bank; (3) formation of some sort of finance company by industry. c. Further investigations of this nature are being made by the National Industrial Conference Board. d. Trade acceptance plan might provide credits to some concerns to which usual credit channels are now closed. e. Concerted efforts by large industrial establishments to continue operations and provide employment, accumulating inventories where possible. Many concerns agreeing to follow such a policy might be able to finance themselves; others might need emergency credits of some sort. f. Financing equipment purchases and repairs and maintenance by railroads and other industries. In some cases econo- mies are possible Which would fully justify such expenditures. 5. Ortanized support to commodity marXets. a. Formation of corporation to buy and hold commodities, selling options for two or three years to consumers. Recent strength in commodities might make such steps unnecessary, or, on other hand, might indicate that such a scheme could now be effective and profitable. -4-. b. Endeavor to induce banks to encourage borrowing for purpose of buying and carrying commodities. c. Credits to foreign purchasers of commodities, especially in countries where there are exchange restrictions. 6. Security market. a. American Securities Corporation is presumably giving organized support to bond market, and speculative interest in bonds seems to be growing. b. Loans to railroads (and to other corporations) for purchase of their own bonds at depreciated prices. Some plans call for retirement of these bonds; others would permit their sale at higher prices, thus providing corporation with new funds without necessity of floating new issues. c. Banks might be encouraged to be more generous regarding collateral loans. lateral. New loans might now be made on bond col- Some banks are now permitting obligors on inad- equately secured collateral loans to purchase new collateral instead of making payments on loans. d. Relaxation of pressure on banks by supervisory authorities. Much has been done in this regard. It has been suggested that Shifts in holdings of bonds Should be permitted without marking down value of assets. 7:7 July 22, 1952. I. COORDINATION OF THE NATIONAL RECONSTRUCTION AND CREDIT PROGRAMS g a. R. F. C. to provide funds to stop liquidation and aid in financin public projects. b. Federal Reserve to furnish basis for credit expansion. c. Member banks to extend credit to meet needs of Treasury, R. F. C., and business. d. Banking and Industrial Committees to discover and promote projects to utilize credit for increasing employment. II. PROGRAM FOR BANKING AND INDUSTRIAL COMMITIEES A. National Projects *1. 2. 5. 4. *5. 6. securities Markets - American Securities Investment Corp. Commodities. Railroads. Equipment purchases in other industries. Trade Accentances. Coordination of district programs. * Already under way. B. District or Re:Atonal Projects *1. *2. *5. 4. 5. Public works and public credit. Home mortgages and cheap housing. Credit needs of business - by industries. Credit Supply to business - the banks. Spreading work. * Experts at work 3n these projects in Second District. July 23, 1952. PROGRAM FOR BANKING AND INDUSTRIAL COMMITTEES It is the primary function of these committees to discover and promote such use of bank credit as will stimulate employment, restore confidence and hasten recovery. They should make every effort, therefore, to bring together sound borrowers and lenders and see to it that no legitimate demand for credit, useful in achieving these ends, is neglected. There All naturally be two principal fields of activity (a) national — (b) district or regional. A. NATIONAL PROJECTS 1. Security Markets — The American Securities Invest— ment Corporation with an authorized capital of $100,000,000 has al— ready been established for the purchase of sound securities. The question may be raised whether a larger volume of funds should be made available for the operation of this corporation by extending participation to banks or others throughout the country. This question was discussed when the Securities Corporation was first organized, but may well be raised again in developing a national program. 2. Commodities — The advisability of organized efforts in support of basic commodity markets may well be considered. Proposals in this field are discussed in an accompanying memorandum. 5. Railroads — Railroads are an outstanding case where credit might be utilized wisely to increase employment. Rail— roads could reduce operating costs and improve service largely by replacing obsolete with modern equipment. To accomplish this may - 2- July 25, 1952. require not only immediate means of financing such improvements but a broader program of bettering the basic financial position of the roads. A corporation organized to lend railroads funds to buy their own bonds and to buy new equipment is worth considering. 4. Equipment Purchases in Other Industries - Methods adopted for financing railroad equipment purchases may be applicable to other industries where similar savings can be effected, thus helping to restore employment in capital goods industries where unemployment is most acute. 5. Trade Acceptances - With the sponsorship of the New York and other committees and with the cooperation of the Federal Reserve Banks, the American Acceptance Council, the National Association of Credit Men and committees appointed by them, a campaign for the wider use of trade acceptances is already under way. This campaign can be further promoted by judicious publicity, both local and national, and the cooperation of Chambers of Commerce, trade associations, and similar bodies. 6. Coordination of District Program - Some informal machinery appears desirable to facilitate an exchange of views between districts, and to avoid duplication or conflict of efforts. B. DISTRICT OR REGIONAL PROJECTS 1. Public Works and Public Credit - The establishment Of a subcommittee, with an expert, to discover and promote means for increasing employment and stimulating activity through public works by cities and states. This project, which is described in the ac- companying memorandum, involves dealing with citizen organizations _ 3 _ July 23, 1952. and promoting budget revision with the objective of improving state and municipal credit in order that these bodies may be in a position to borrow to finance public works in the market, using the facilities of the Reconstruction Finance Corporation only as supplementary to and as an aid to such borrowing. 2. Home Mortgups and Cheap Housing - The estab— lishment of a subcommittee, with an expert, to deal with real estate problems, with the object of stimulating building construction both by arranging a more liberal supply of mortgage money and by discovering and promoting various housing projects as may be economically justified, such as housing projects for the lower East Side of New York. It would be the function of this subcommittee to promote adequate facilities for the renewal of maturing mortgages as a necessary preliminary to the stimulation of new building activity. The rehabilitation of old buildings would offer another field for the activity of this committee. 5. Credit Needs of Business by Industries - Each district committee should set up machinery for exploring the adequacy of the present credit supply for business and agriculture and finding means for supplying credit in cases where it is warranted, but not now available. There may be some question as to how far this work should be done by the banking and industrial committees and how far by departments of the Reserve banks organized under the Glass amendment to the relief bill, but the committee in each district should see to it that the work is done. This appears to involve some survey of business and agricultural credit requirements and the extent to which they are being met, as well as the examination of particular cases which make themselves known. The work may involve leadership — 4 — July 23, 1932. in the organization of credit corporations of one sort of another or other devices for placing business in a position to tap the available supplies of credit. The promotion of the wider use of trade acceptances is one such device. 4. Credit Supply to Business — the Banks. The problem of supplying adequate credit to business involves the added question whether there are difficulties within the banking structure itself which may stand in the way of the banks' supply— ing adequate funds to business. There may be changes in banking policies, practices, and organization which would enable the banks to meet business needs more fully. Bank policies and practices as to collateral loans, maturity of investments, relations with new customers, etc., may well be examined. It may be well to ascertain the attitude of bank examiners, with a view to seeing whether their policies also are adapted to current developments. In some districts steps may be desirable for restoring banking facilities in communities where adequate facilities no longer exist. 5. "Spreading Work" — A subcommittee, with an expert, to study the possibilities of distributing available em— ployment among the largest number of workers. 6. Other Projects — Various districts will prob— ably present problems that are peculiar to one or more districts and not to others. In agricultural districts, for example, special aid may be needed of a kind different from that required in industrial districts. July 23, 1932. PUBLIC WORKS BY CITIES AND STATES Authoritative estimates now indicate that the total number of unemployed exceeds 10,000,000, an increase of about 3 million over the total for last autumn. This unemployment constitutes the major social and economic problem the country now faces. There are two possible methods for meeting the problem. One is by providing employment, and the other is by direct relief. Of these two the former is much the more desirable, both socially and economically. It hardly seems likely that sufficient business recovery upon which the real solution of the unemployment problem must ultimately depend - will have occurred six months from now to absorb any large proportion of the unemployed in their normal occupations, though every effort should be made in that direction. iaeanwhile, the great weight of this problem will fall upon the Federal Government, states, and municipalities. Only a relatively small part of the needed relief can be met with private charity. At present there is no comprehensive plan of the states and municipalities for dealing with this problem. On the con- trary most of them have only been able to secure the money they need for current operations at the price of drastic programs of curtailment. Retrenchment has usually begun at the easiest point for curtailment, which was public works. Thus the total ex- penditure on public works by states and municipalities now contemplated is considerably less than normal. The Federal Government program, aside from relatively moderate plans for national public works, is embodied in the relief -2bill just passed, which provides for loans by the Reconstruction Finance Corporatianto cities and states and other public or semipublic agencies primarily to promote activities which will furnish employment. The Federal program thus rests largely uponithe city and state programs. While the Federal agency can assist in financing local public works projects, it clearly should do so only in cases where there is a sound budgetary programir which justifies the city or state in increasing its debt. The present financial position of cities and states leaves considerable doubt as to the extent to thich they will be in a position to utilize the facilities of the Federal agency. The principal reason for this situation is that recently city and state financial programs have been determined almost solely from the point of view of the banker and the taxpayer, both of whom are primarily interested in cutting all expenditures rather than in dealing with the unemployment problem. There is clearly need for another approach to the problem by which the budget will be readjusted, not solely with a view to reducing expenses but more broadly with a view to improving the administration, and thereby the credit, of states and cities, placing them in a position to borrow for necessary public works. The situation in New York City may be taken as an illustration. Last winter when the city needed more funds it was compelled to make a drastic revision of its budget. A first step in this revision was the rescinding of authorizations on projects valued at more than $1000000,000 and offering potential employment to many thousands of workers. No adequate steps, however, have been taken to reduce salaries or to reduce non-essential expenses of government, nor have adequate steps been taken to place the city's commercial enterprises on a self-sustaining basis. If these latter steps were taken New York City could borrow in the market the necessary funds to continue her 4100,000,000 program of public works, and so do much to meet the problem of unemployment. Banking and industrial committees in the several Federal Reserve districts are public bodies which could well undertake the task of organizing public support for budgetary revisions in cities and states which would clear the way for bond issues for necessary public works. A program of budgetary reform based on these principles would have a much sounder and more effective appeal than a program the sole object of which was to cut expenses and relieve the taxpayer. And, on the other hand, a program of public works could be better justified from the viewpoint of taxpayers, bankers, and municipal officials if accompanied by sound budgetary reform. The social appeal pf putting the unemployed to work should constitute a lever powerful enough to force the necessary reforms. A program of this sort, broadly conceived and energetically carried out throughout the entire country, would not only do much to meet the unemployment problem and promote business recovery, but would as well bring about long-needed reforms in city and state finances and would benefit the bond market both by the improvement in city and state credit and by the issuance of sound new securities. July 25, 1932. BANKING AND INDUSTRIAL COtEITTEE of the Second Federal Reserve District ORGANIZED SUPPORT FOR COMMODITY MARKETS In view of the great influence of commodity prices upon the world business situation, the suggestion has frequently been made that the banking and industrial committees should sponsor some scheme which would stabilize or raise commodity prices. The plans suggested may be grouped under the following headings: (1) Organization of a corporation to be participated in by consumers of commodities. Basic commodities would be purchased at present prices and options for three years or less sold to stockholders in anticipation of their repluirements as consumers. (2) Organization of one or more private corporations of the investment trust type to speculate in commodities. Such organizations might be similar to the present securities corporation or it might be effected without sponsorship of the banking and industrial committees. It is rumored that some such corporations are already in the process of formation. (3) Orpnized efforts to induce banks to be more generous in making loan-3 to consumers or speculators for the purpose of purchasing commodi— ties at present prices and holding them for future use, or for speculative profits. (4) Some scheme for providing credits to foreigners who may wish to purchase basic commodities in this market. This would apply particularly to purchasers in those countries that are under foreign exchange restrictions. Reasons advanced in favor of such schemes: (1), Prices of most basic commodities are at the loi.est levels of the century and prices of many are at the lowest levels in history. These July 25, 1952. — 2— prices are well below any reasonably computed costs of production. It is logical to believe that under such conditions prices will rise at some time within the near future. Under these circumstances there are great possi— bilities for profit to speculators and to consumers anticipating future requirements. (2) With prices at such low levels and buying in small volume relatively few funds would be needed to provide substantial support. is in contrast to previous efforts at stabilization. This situation Any substantial buying of commodities at this time and firmness of prices would probably lead other purchasers to enter the market in order to anticipate price advances. (3) Speculative commitments in most commodity markets are much smaller than usual. There is need for a group of buyers to take the position ordinarily held by speculators. e (4) Consumers' stocks are also small and any scheme which would encourag restocking would provide an element of strength to commodity markets. (5) As in security markets, there are also at times forced sales of com— modities by owners unable to hold them further. Under present conditions these forced sales have a demoralizing effect upon the market. Some organ— ized support is needed to broaden the markets and to take care of this type of distress selling. (6) A rise in commodity prices would immediately bring a change of sentiment in vast world areas devoted to producing raw materials, would increase the buying power in those areas, and thereby give a stimulus to business recovery. Aroumeats advanced against such schemes: purchase and holding of commodi— (1) Any action which provides only for the of production, consumption and ties does not change the fundamental factors — 3 — July 25, 1952. and supplies on hand, which must be influenced before a sustained rise may be expected. The real need is for measures which will increase consump— tion or reduce production so that the large supplies now available for nearly all commodities can be reduced. If this were accomplished, prices would rise without need for any organized support. (2) All that most of the suggested schemes, with the possible exception of that providing for foreign purchases, propose to accomplish is simply the shifting of available supplies from one group of holders to another. This may bring about a rise in prices if the supplies are shifted from weak to strong holders who are able to keep them off the market. If this is done, however, by some publicly organized body, knowledge that these stocks are overhanging the market will be an influence of uncertainty similar to that attributed to the Federal Farm Board holdings. (3) The fact that prices are now below the cost of production has no market significance unless producers actually reduce output or consumption is increased. If production continues in excess of current consumption, there is no fundamental reason to believe that prices can be maintained at higher levels. In many commodities there has as yet been insufficient decline in output to strengthen the technical position of the particular markets concerned. On the other hand, there are probably important short— ages in finished goods. July 25, 1932. Conclusion: There remain to be settled two auestions, one of policy and one of procedure. The first is primarily a matter of public psychology. If it is felt that public reaction to a program of organized support to commodity markets would be favorable, the next step would be a careful study of the statistical position of individual commodities. Support should then be directed to those commodities whose position justifies the expectation In /such an advance sustained. and effected be could improvement price that other commodities would probably share. July 25, 1932. ANp INEUSTRIAL COMITTEE of the Second Federal Reserve District BANKING ORGANIZED SUPPORT FOR COMMODITY MARKETS In view of the great influence of commodity prices upon the world business situation, the suggestion has frequently been made that the banking and industrial committees should sponsor some scheme which would stabilize or raise commodity prices. The plans suggested may be grouped under the following headings: (1) Organization of a corporation to be participated in by consumers of commodities. Basic commodities would be purchased at present prices and options for three years or less sold to stockholders in anticipation of their requirements as consumers. (2) Organization of one or more private corporations of the investment trust type to speculate in commodities. Such organizations might be simi- lar to the present securities corporation or it might be effected without sponsorship of the banking and industrial committees. It is rumored that sorlo such corporations are already in the process of formation. (3) Organized efforts to induce banks to be more generous in making loans to consumers or spoculators for the purpose of purchasing commodities at present prices and holding them for future use, or for speculative profits. (4) Some scheme for providing credits to foreigners whc may wish to pur- chase basic commodities in this market. This would apply particularly to purchasers in those countries that are under foreign exchange restrictions. Reasons advanced in favor of such schemes: (1) Prices of most basic commodities are at the lowest levels of the century and prices of many are at the lowest levels in history. well below any reasonably computed costs of production. These prices are It is logical to believe that under such conditions prices will rise at some time within the near future. Under these circumstances there are great possibilities for profit to speculators and to consumers anticipatin7, future requirements. (2) With prices at such low levels and buying in snail volume relatively few funds would be needed to provide substantial support. is in contrast to previous efforts at stabilization. This situation Any substantial buy- ing of commodities at this time and firmness of prices would probably lead other purchasers to enter the market in order to anticipate price advances. (3) Speculative commitments in most commodity markets are much smaller than usual. There is need for a group of buyers to take the position ordinarily held by speculators. (4) Consumers' stocks are also small and any scheme which would encourage restockinP, would provide an element of strength to commodity markets. (5) As in security markets, there are also at times forced sales of com- modities by oTners unable to hold them further. Under present conditions these forced sales have a demoralizing effect upon the market. Some organ- ized support is needed to broaden the markcts and to take care of this type of distress selling. (6) A rise in commodity prices would immediately bring a change of sentiment in vast world areas devoted to producing raw materials, would increase the buying power in those areas, and thereby give a stimulus to business recovery. Arguments advanced against such schemes: (1) Any action which provides only for the purchase and holding of commodities does not change the fundamental factors of production, consumption and supplies on hand, which must be influenced before a sustained rise may be expected. The real need is for measures which will increase consumption or reduce production so that the large supplies now available for nearly all commodities can be reduced. If this were accomplished, prices would rise without need for any organized support. 3 (2) All that most of the suggested schemes, with the possible exception of that providing for foreign purchases, propose to accamplish is simply the shifting of available supplies from one group of holders to another. This may bring about a rise in prices if the supplies are shifted from weak to strong holders who are able to keep than off the market. If this is done, however, by some publicly organized body, knowledge that these stocks are overhanging the market will be an influence of uncertainty similar to that attributed to the Federal Farm Board holdings. (3) The fact that prices are now below the cost of production has no market significance unless producers actually reduce output or consumption is increased. If production continues in excess of current consumption, there is no fundamental reason to believe that prices can be maintained at higher levels. In many commodities there has as yet been insufficient decline in Gut- put to strengthen the technical position of the particular markets concerned. On the other hand, there are probably important shortages in finished goods. Conclusion: There remain to be settled two questions, one of policy and one of procedure. The first is primarily a matter of public psychology. If it is felt that public reaction to a program of organized support to commodity markets would be favorable, the next step would be a careful study of the statistical position of individual commodities. Support should then be directed to those commodities whose position justifies the expectation that price improvement could be effected and sustained. In such an advance other commodities would probably share. In ( (Proposed Letter) Mr. J. H. Case, Chairman Federal Reserve Bank of New York, New York, New York. Dear Mr. Case: The Federal Reserve Beard has received and noted with interest your letter of July 22, 1932, wherein you advise that, at an executive meeting held on July 21* 1932, your Board of Directors voted, subject to the ad ?oval of the Federal Reserve Board, to take certain action which in effect amounts to a reduction in the compensation of all of the employees of the bank, othJr than officers, in an amount equivalent to 8-1/0'4 of their present salaries, and a reduction in the compensation of all offioers (which it is ; of their ' assumed includes directors) in an amount equivalent to 10 present oompensation. The .nly reasm for this action stated in your letter is that the program was "formulated faiths light of present employment and salary conditions throughout the country"; and the letter and the inclosed copy of the report of the Committee of the Dir=tors on the i.elfare of the Staff contain no discussion of this or any other reason for the action and no reference to the existing situation respecting the larnings and expenses of the Federal Reserve Bank of New York or the possible effeot of the proposed action on the welfare, morale or efficiency of the bank's staff, It appears frame previous corres)ondrmee and negotiations with the bank regarding lroposed increases in the salaries of its officers and employeass and fr)la conversations betwe,In Governor - Harrison and members of the Board's staff, that the oomIensation of the bank's officers and employees has never been at as high a rate as that of oorsons bolding eorresponding positions in the larger co..-ercial banks in New York City and is not now as great as he compensation of those employees, even after the re uctions which have been made in the colapensation of the latter. It also appears that, since Jarrviry 1, 1962 the Bunk has earned an amount which is not only sufficient to pay all of its expenses, depreciation charges and dividends at the rate of C per annum, but also to provide for some addition to its surplus. In this connection, the B ard is advised that the bank has book profits res lting from the appreciation of Government securities held by it in an amount exceeding the cbpreciation charged against its surplus at the end of the calendar year 1931 for the purpose of creating a reserve for depreciation in its bond account, so that the bank's bond account probably will show a net profit and this will result in a further addition to its surplus. The plan formalated by the Directors for the reduction of the compensation of the bank's officers and employees bears a striking similarity to the provisions for the reduction of the conpensation of officers and employees of the United States -3Government contained in the Act of June 30, 1932, making appropriations for the Legislative Branch of the ,;-over nment for the fiscal year ending June 30, 1933; and this has given rise to the question whether the action of tne Directors wan influenced to some extent by the policy adopteu 41f Congres regarding officers and employees of the Government for the purpose of balancing the Gover nment's budget and, if so, whether the directors were cognizant of the fact that the Legislative .‘ppropriation expressly exempts the members of the veder al Reserve Board and its officers and employees, along with all other persons whose compensation is pAu from assessment s on banks, from the provisions discontinuing leaves of absence with pay and requiring compulsory furlouOis without pay, as well as from the provt.ions regarding reductions in salaries. ids°, the question has been raised whether this similarity of action might not adu to the erroneous impression that now exists to some extent that Teueral eeserve banks are government institutions and that their officers and employees are in the general category of officers and employees of the Government. Incidentally, the suggestion has already been made that the Federal reserve banks be require..:. to make detailed reports of their earnings and expenses to the Comptroller General of the United States. In this connection, the Legislative Appropriation Act limits the reduction in compensation of officers and employees of the overnment definitely to the fis:al year endin ' g Julee 30, 193, thereas no definite limitation of time is placed upn the proposed reduction in the compensation of officers and employees of the 'Federal Reserve Bank of New York. oment and salary As to the general question of present empl ciate advice conditions througnout the country, the Board would ap:re of the "Federal as to what consideration was givan by the directors such as increased facReserve Lank of Kew York to recent developments al average of wholesale tory employment and the upward trend in the geer ning of an improvement commodity orice:3 which may inriicate that the begin ect. in general business conditions Is in prosp The Board would also ii ..e to know hether your directors have ble effect of its proposed action given careful consideration to the possi tions. on the public and on general business condi Such action might not yet reduced salaries encoura4e other business concerns which haydy reduced salaries to make to do so and encoura,:e those w.lich have alrea further reductions. aso, in view of the superior facilities of the ting information regarding Federal reserve banks for gathering and diges bility that the public business and economic conditions, there is a possi that the Federal reserve adght interpret such action as an indication leads them to fear some banks are in possession of information wilich unfortunate employment impendinz development which liould prolong the about to emerge. conditions from wnich the country apparently is Such al resrve banks should an impression would be increased if other reder al Reserve Bank of follow the precedent established by the reder New officers and employees;and York and reduce the compensation of their in discouraging the public And its effect night be equally as potent as the passage of the Goldsretarding business and economic recovery tives, and in this way any general borough Bill by the House of Representa employees of the Federal reduction in the salaries of officers and reserve banks at this time might prove to be distinctly contrary to -5.. the public interest. You Are reque3ted to present this letter to your Board of Directors at its next meetin and to ask that the directors give careful consideration to the questions raised above. If, after careful con- sideration of these questions, your Directors are still disposed to make a gener,1 reduction in the compensation of the bank's officers and employees, you are requested to furnish the Pederal Reserve Board for its consideration a full statement of the views of your directors on the subjects discussed above and also the following inform-,tion: 1. ;more detailed and definite statement of the reasons prompting such action 2. The reasons for effecting the pr000sed reduction in compensation througn the furlou-h system. 3. Ilether such proposed action is based. upon any operating or financial condition connecte with the Federal lieu:rye Bank of New "fork as distinguished from general economic conditions. 4. How the present aDmpensation of the officers and employees of the Tederal Reserve Bank of Sew York compares with that now being paid to officers and employees of large commercial banks in the Gity of New York, after the reductions which have been made in the cac..pensation of the lrItter. 5. Mother the compens2.tion of the officers and employees of the ?ederal Reserve Bank of New York was proportionately incre,sed during the time that the large commercial banks in New York were increasing the compensation of their officers and employees and frequently -6- paying them bonuses at the end of each year. , 6. Ilether the directors have adopted a nev, polic y which contemplates that increases as well as decre ases in the compensation of ofticers 'lid employees of large commercial banks in New 'York will hereafter be met by corresponding changes in the compensation of the officers and employees of the 17ederal Reserve Bank. 7. 'thether the proposed reduction in the compe nsation of officers and employees of the bank ,is intended to conti nue indefinitely Or is intended to be limited to a definite period. 8. hether the : t4-enera1 economic conditions which in the opinion of your Directors justi.ty a reduction in the compensation of the officers and employees of ,our bank would also justi fy a reduction in the dividends paid by your bank, even though the law provides for cumulative dividends. 9. ,hether the "iederal reserve bank has insti tuted any special survey of the Possibilities of effecting economies in other respects, such as in operating methods, eliminatio n of unnecest.ary expenses, the reduction or elimination of free servi ces, etc., and, if so, what specific results havu been achieved. Very truly yours, Chester Morrill, Secretary. 411/1/1111""Pr CC)1%,t 12-31 1 CLAAAA.A4 COI& 11/ DERAL RESERVE BANK OF NEW YORK OFFICE CORRESPONDENCE To FROM DATE September 1, 1932. sU DJ E CT:__FaC tors governing recent move- M. T. E. Crane manta of sterling exchange, E. M. Despres The purpose of this memorandum is to indicate the factors which have governed the movement of sterling exchange since the middle of June. This date appears to have marked a turning point in the British exchange situation; in order to indicate adequately the character of the change which occurred at that time, a brief summary will first be given of the factors which seem to have been of predominant importance before the middle of June. Sterling exchange before the middle of June. Since the suspension of gold payments in September of last year, the Bank of Englama and the British Treasury had acquired up to the middle of June approximately $800,000,000 in foreign currency assets. Of this amount some- thing more than ci550,000,000 had been used to repay emergency credits, totaling 050,000,000, which were obtained by the Bank and the Treasury in New York and Paris just prior to the suspension of gold payments. Of the remainder, it is known that holdings of dollars totaled approximately 0.60,000,000 and it is believed that holdings of francs are about half or this figure, or the equivalent of approximately $80,000,000. The factors which enabled the British authorities to acquire foreign funds at the rate of ,;;100,000,000 a month during this period without exerting a seriously depressing influence on sterling exchange will be enumerated in the following paragraphs. It does not appear to have had its origin in a basic improvement of the British international position. The adverse character of the British balance of payments prior to the suspension of gold payments has been frequently commented upon in the press and elsewhere. Although the decline of 0'M 12-31 . MISC. 1.1 6 FEDERAL RESERVE BANK OF NEW YORK OFFICE CORRESPONDENCE To DATE E. 1*_ 1932. SUBJECT:_ Factors governing recent move- fr. X. E. Crane FROM SeRteMber =nits of_erling exchange. Despres 2 sterling exchange has been accompanied by a modest improvement in Great Britain's merchandise balance of trade, this factor has been more than offset by the continued decline in income from overseas investments and from shipping and financial services rendered to foreigners. The strength of the British exchange situation prior to the middle of June appears, therefore, to have been the result of forces of a short-term or speculative character. Many foreigners owing debts payable in sterling took prompt advantage of the depreciation of the exchange to repay their obligations. Prominent among those participating in this movement were the speculators who had taken a short position in the pound. The increase in the rupee price of gold, which resulted from the depreciation of the British pound, accelerated the movement of gold from Indian hoards, which was sold, either direct or from the London market, generally to buyers in France, Holland and Switzerland. From the standpoint of its effect on sterling, the principal consequences of this movement were the repayment of certain Indian debts in the London market, and the accumulation of Indian balances there. A further factor of strength in the British exchange situation refolsulted from the world feeling of optimism concerning Britain's position existed in the lowing the passing of the critical financial emergency which had summer of 1931. balancThis sentiment was further sustained by the news of the ing of the national budget. Supplementing this factor, especially during May and of the United States June of this year, were the doubts concerning the position and its ability to maintain gold payments. While private foreign balances in Lon- balances in this country were don were reported to be increasing rapidly, such 11!""FF ll! i J/F 6_ 12-31 MISC. 3.2!M FEDERAL RESERVE BANK •e OF NEW YORK DATEegtember 1, 1932, OFFICE CORRESPONDENCE To suBJEcT,Factors governing recent move- Mt. X. E. Crane FROM_ ments of sterling exchange. E. M. Despres 3 reduced to a working minimum. In addition, there were periodic reports of sales of American securities by British investment trusts, and of the transfer to London of investment money derived from sales of American securities by other foreigners. Under these circumstances it is quite clear that in the absence of large purchases of foreign exchange by the British authorities, the pound would have appreciated rapidly. Sterling exchange since the middle of June. The change which occurred about the middle of June in the world attitude concerning the stability of the dollar coincided with a marked diminution of the feeling of optimism concerning the British situation. On the one hand, our ability to withstand the final withdrawals on the Bank of France was quite widely interpreted as a sign of the strength of the dollar and the general financial stability of this country. On the other hand, it was increasingly recognized that although the financial crisis in England had terminated with the suspension of gold payments, the general economic crisis in England had not been relieved. Commodity prices, the activity of industry, and employment had shown little or no improvement and the difficulties concerning the national budget appeared not to have been wholly solved. This change in attitude was reflected both in the movement of shortterm funds and in the international movement of securities. Short-term funds "due from" figures collected by this Bank show a decline of .A0,000,000 in England from June 8 to August 24. Reports from London indicate that this out- rather general withdrawal ward movement of American funds was only a part of a 32s 60M 12-31 FEDERAL RESERVE BANK OF NEW YORK • # DATE September 1, 1932. OFFICE CORRESPONDENCE To SUBJECT:_ Factors governing recent move- Mr. J. E. Crane FROM_ E. M. DOSPrOS ments of sterling exchange. 4 of foreign short money from the London market. Aportion of the funds which were withdrawn from London were transferred to this country in the form of short-term balances, but an examination of our own short-term fund statement would appear to indicate that these funds were transferred more largely to our security markets. Moreover, reports have been current, appearing both in the British and in our own financial press, of substantial British purchases of American securities. Although no quantitative data are available concerning foreign buying of American securities, the existence of such a movement may be inferred from the fact that the recent inward gold movement cannot be wholly accounted for in terms of the other items in this country's balance of payments. In addition to the psychological factors indicated above, the movement of sterling exchange has been influenced in recent weeks by a seasonal increase in imports of raw materials by Great Britain. Although this factor does not become of great importance until the autumn months, bills financing the movement of cotton and other raw materials to England have already been noted in the foreign exchange market. In consequence of these adverse factors, the British authorities appeerta have considered it desirable to render financial support to sterling exchange. Despite a reduction of ,70,000,000 in British official funds in this market since the middle of June, and presumably some drawing down of official balances in Paris, the pound has declined from 43.66 1/4 on June 15 to 43.47 on August 31. V. -.41111 • NIIsCA4.24001,1 6-32 FEDERAL RESERVE BANK OF NEW YORK OFFICE CORRESPONDENCE DATE SeptEmber_l, )9_32. SUBJECT: Factors governing recent move- E. Crane M_ FRO To Mr. J. ments of sterling exchange. E. M. Jespres 5 Note concerning rovement of Short Term Funds Short term funds figures collected by this bank give some indication and of the importance of the movement of short money between this country England as a factor in the recent weakness of sterling. In millions of dollars 1932 April 6* June 8 August 31 "Due to" England 113 58 171 110 43 49 51 in" 100 "Due from" England 88 116 67 Excess "due to" England 83 37 33 Official (Treasury and Bank of England)** Private Total First reporting date following final repayment of American private credit * to British Treasury. It is ** Does not include dollar deposit of Bank of England with B. I. S. d during increase S. known that Bank of England's dollar holdings through B. I. ntly reduced. were subseque they the period from April 6 to June 8, and that
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