The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
T H E W H ITE H O U S E W A S H IN G T O N MEMORANDUM FOR The S e c r e ta r y o f th e T re a s u ry and The C hairm an o f th e Board o f G overno rs o f The F e d e r a l R es e rv e System D u rin g th e p a s t fe w months I have d is c u s s e d w it h each o f you many tim e s my c o n cern o ver th e p ro b le m o f i n f l a t i o n and th e approaches w h ic h m ig h t be ta k e n by th e Governm ent to c o n t r o l i t . The G overnm ent has d u r in g t h i s p e r io d ta k e n many s te p s to b r in g th e p ro b le m o f i n f l a t i o n u n d er c o n t r o l* In my c o n s id e r a tio n o f th e i n f l a t i o n p ro b le m , I have been aw are o f th e d i f f i c u l t i e s fa c e d by th e F e d e r a l R eserve System i n c o n t r o llin g p r iv a t e c r e d i t e x p a n s io n a t a tim e when we have a la r g e p u b lic d e b t. A l l o f us r e c o g n iz e , o f c o u rs e , t h a t c r e d it e x p a n s io n is s im p ly one phase o f th e w hole i n f l a t i o n p ro b le m ; and t h a t , in f a c t , some c r e d i t e x p a n s io n i s n e c e s s a ry to f a c i l i t a t e th e g ro w th o f p ro d u c tio n w h ic h i s essen t i a l to th e d efen se e f f o r t . B u t, th e e x p a n s io n o f lo a n s n o t o n ly by th e b a n k in g system b u t by f i n a n c i a l i n s t i t u tio n s o f a l l ty p e s , adds f u e l to o th e r i n f l a t i o n a r y fo r c e s and must be stopped to th e g r e a t e s t e x te n t pos s ib le c o n s is te n t w it h th e needs o f th e d e fe n s e e f f o r t . s to p p in g c r e d i t e x p a n s io n , h o w ever, I f e e l t h a t we s h o u ld use m easures t h a t a re f u l l y c o n s is te n t w it h th e n e c e s s ity f o r m a in ta in in g s t a b i l i t y i n th e Governm ent s e c u r it y m a rk e t and c o n fid e n c e i n th e c r e d it o f th e U n ite d S ta te s * 14 As you know, i t is l i k e l y t h a t we s h a l l have to b o rro w b i l l i o n s o f d o lla r s t o fin a n c e th e d e fe n s e e f f o r t d u rin g th e second h a l f o f t h i s c a le n d a r y e a r be cause o f th e s e a s o n a l n a tu r e o f ta x r e c e ip t s w h ic h con c e n t r a t e c o lle c t io n s i n th e f i r s t h a l f of th e y e a r and th e i n e v it a b le la g betw een th e im p o s itio n o f new ta x e s and t h e i r c o lle c t io n by th e T re a s u ry ; I t is my hope t h a t such new money as i t i s n e c e s s a ry f o r th e T re a s u ry to b o rro w d u rin g th e months ahead to - 2 - fin a n c e o u r m i l i t a r y re q u ire m e n ts can be o b ta in e d i n th e l e a s t i n f l a t i o n a r y manner p o s s ib le , t h a t i s , fro m t r u e in v e s to r s o u ts id e o f th e b a n k in g s ystem . W ith th e s e f a c t o r s i n m in d , I a s k t h a t each o f you g iv e im m ed iate c o n s id e r a tio n to th e ty p e o f program t h a t m ig h t be w orked o u t a lo n g th e f o llo w in g li n e s — a program w h ic h w ould p ro v id e th e n e c e s s a ry r e s t r a i n t on c r e d i t e x p a n s io n and a t th e same tim e make i t p o s s ib le to m a in ta in s t a b i l i t y i n th e m a rk e t f o r Governm ent s e c u r i t i e s . T h is program w ould ( 1 ) c o n tr o l bank lo a n s ' th ro u g h th e u t i l i z a t i o n o f th e powers p ro v id e d by th e Em ergency B an kin g A c t o f 1933 a n d , p o s s ib ly , th e T ra d in g w it h th e Enemy A c t; ( 2 ) s e t up a com m ittee s im i la r to th e C a p it a l Is s u e s C om m ittee o f W o rld War I ; ( 3 ) f u r t h e r r e s t r a i n th e le n d in g and m ortgag e in s u ra n c e a c t i v i t i e s o f th e v a r io u s Governm ent c r e d i t a g e n c ie s ; and ( 4 ) encourage s a v in g s th ro u g h th e medium o f an a g g re s s iv e s a v in g s bond cam paign* (1 ) The powers p ro v id e d i n th e Em ergency B an kin g A c t o f 1933 c o u ld be u t i l i z e d to c u r t a i l le n d in g by member banks o f th e F e d e r a l R es e rv e System * These powers a re v e s te d i n th e S e c r e ta r y o f th e T re a s u ry s u b je c t to my a p p r o v a l. The S e c r e ta r y c o u ld by r e g u la t io n d e le g a te th e a d m in is t r a t io n o f t h i s program to th e 12 F e d e r a l R eserve B an ks, each to a c t i n i t s own F e d e r a l R eserve D i s t r i c t . I t is c o n te m p la te d t h a t th e c r e d i t needs o f th e c o u n try a re l i k e l y to be such t h a t th e program m ig h t w e ll p e r m it f l e x i b i l i t y betw een F e d e r a l R eserve D i s t r i c t s and i n d iv id u a l p a r ts o f such D i s t r i c t s , i n o rd e r to a llo w f o r th e f in a n c in g o f c e r t a in ty p e s o f i n d u s t r i a l and c o m m e rc ia l, as w e l l as S ta te and l o c a l j p r o je c t s > n e c e s s a ry to th e d e fe n s e e f f o r t . The program c o u ld be e x te n d e d to i n s t i t u t i o n s o th e r th a n member banks i f d e s ir e d th ro u g h a p p lic a t io n o f powers p ro v id e d b y th e T ra d in g w it h th e Enemy A c t . - 3 - (2 ) k com m ittee s im i la r to th e C a p it a l Is s u e s Com m ittee o f W o rld War I , b u t o p e r a tin g i n a b ro a d e r a r e a , c o u ld be c re a te d b y E x e c u tiv e O rd e r. The ob je c t iv e s o f t h i s Com m ittee w ould be to p r e v a i l upon b o rro w e rs to red u c e t h e i r sp en d in g and to c u r t a i l t h e i r b o rro w in g , and to p r e v a i l upon le n d e rs to l i m i t t h e i r le n d in g * T h is com m ittee w ould w ork c lo s e ly w it h th e d e fe n s e a g e n c ie s u n d e r M r. W ils o n w it h th e o b je c t iv e o f c u r t a i l i n g a llo c a t io n s o f c r i t i c a l and e s s e n t ia l m a t e r ia ls w here n e c e s s a ry to encourage c o o p e ra tio n * (3 ) The a c t i v i t i e s o f Governm ent c r e d i t a g e n c ie s m ig h t be c u r t a i le d f u r t h e r , and I am w i l l i n g to c o n s id e r th e is s u a n c e o f a p p r o p r ia te o rd e rs a lo n g t h i s l i n e to such a g e n c ie s , among o t h e r s , as th e F e d e r a l H ousing A d m in is t r a tio n , th e V e te ra n s A d m in is t r a tio n , th e Farm C r e d it A d m in is t r a tio n , and th e R e c o n s tr u c tio n F in a n c e C o r p o ra tio n . In d e e d , we s h o u ld g iv e th o u g h t to a v i r t u a l m o ra to riu m on th e a c t i v i t i e s o f governm ent c r e d i t a g e n c ie s , e x c e p t to th e e x te n t t h a t t h e i r a c t i v i t i e s c o n tr ib u te d i r e c t l y to th e d e fe n s e e f f o r t # (4 ) I t w ould a p p e a r d e s ir a b le to u n d e rta k e as soon as p r a c t ic a b le an a g g re s s iv e s a v in g s bond cam paign to encourage s a v in g s as a p a r t o f ou r a n t i - i n f l a t i o n p ro g ram . A good s tro n g s a v in g s bond program w ould a p p e a l to th e im a g in a tio n and p a t r io t is m o f th e A m erican p e o p le and by i t s own success w ould h e lp to encourage s a v in g s g e n e r a lly by ou r p e o p le . In a d d it io n to th e f o r e g o in g , c o n s id e r a tio n s h o u ld be g iv e n to t ig h t e n in g e x is t in g s e le c t iv e c r e d i t c o n tr o ls w h e re v e r t h a t i s p o s s ib le , and program s in v o lv in g v o lu n t a r y r e s t r a i n t on th e p a r t o f le n d e rs and b o rro w e rs s h o u ld be e x p lo re d to th e u tm o s t. - 4 - I t i s my b e l i e f t h a t th e s u g g e s tio n s I have made w i l l p ro v id e a w e ll-b a la n c e d program o f c r e d i t c u r t a i l m ent* I t w i l l do t h e v e r y t h in g t h a t each o f us has been so concerned a b o u t i n r e c e n t months — t h a t i s , e f f e c t i v e l y r e s t r a i n th e e x p a n s io n o f lo a n s * T h e r e fo r e , I am a s k in g th e S e c r e ta r y o f th e T re a s u ry to c a l l a m eetin g , w it h th e F e d e r a l R eserve to ta k e a c t io n to w a rd im p le m e n tin g th e s e p ro p o s a ls as soon as p o s s ib le * In t h i s c o n n e c tio n , c o n s id e r a tio n s h o u ld be g iv e n to m aking th e e f f e c t i v e d a te o f th e new c r e d i t c o n t r o l program c o in c id e w it h th e d a te o f t h i s memorandum. T h is w ould a v o id th e p o s s i b i l i t y t h a t an a d van tag e m ig h t be g a in e d by some b o rro w e rs o r le n d e rs d u rin g th e p e r io d i n w h ic h th e program i s un d er d is c u s s io n . P ending th e develo pm ent o f t h i s p ro g ram , I hope t h a t no f u r t h e r a tte m p t w i l l be made to change th e i n t e r e s t r a t e p a t t e r n , and t h a t u n q u e s tio n e d s t a b i l i t y i n th e Governm ent s e c u r it y m a rk e t, w h ic h i s im p e r a tiv e a t t h i s c r i t i c a l tim e f o r th e f in a n c in g o f th e d e fe n s e e f f o r t , w i l l be m a in ta in e d .
@FedFRASER