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November 3, 1937.
Dear Chairman Eccles:
Since the Presidents1 Conference two weeks ago, we have
been giving a good deal of further thought to the questions discussed at the Conference with the Board, concerning the implications
of the recent decline in the securities markets and the less
drastic but marked recession in business. My associates and I have
discussed these problems with our directors and with others and,
in the light of all the circumstances as we see them, there seem
to be some steps which might now be taken to remove certain obstacles to business activity and further to encourage business
Perhaps no one can say with entire confidence whether the
current economic recession may not become a serious depression.


is not necessary to recount the various opposing factors in the
situation, of which you are aware, but one conclusion seems to
stand out, namely, that at a time when the stimulus of government
spending and credit expansion through government borrowing is coming to an end, the business spending which should take its place
is at least partly blocked.

The transition from public spending

to private spending is evidently not being effected smoothly. I
think we are all agreed that more government spending is not a
feasible way out.

The government and the people have set their

faces against continued deficit financing.

Indeed, in this



Hon. Marriner S. Eccles,


atmosphere and at this stage of recovery, it is altogether doubtful whether it would work anyway*

There has recently been evidence

that added amounts of government securities might find the market

Renewed deficits would likely further discourage and

longer postpone private spending*
The real problem is to get private spending going again
and in sufficient amounts to fill the gap left by the sharp decline
in the governments net income producing expenditures*

There is

plenty of private spending that needs to be done and there is
plenty of money available. A beginning has been made, for the
amount of private spending in 1956 was larger than in 1955, and
even though the last quarter may be relatively poor, the full year
1937 will show larger private spending than 1936. But Just


the machinery seems to be partly stalled.
Suggestions which we have received from others and which
we have ourselves examined, as to what might be done to accelerate
business activity, may be classified under three general headings;
(l) the general atmosphere in which business is conducted,
(g) specific business problems, and (S) problems of business
financing, including taxation and general credit policy*
(l) I am sure I do not need to emphasize the fact that the
business community is just now extraordinarily sensitive to every
wind that blows from Washington.

Whatever can be said or done to

indicate the awareness of the Administration concerning the
problems business now faces and to clarify its objectives as they
relate to business is likely to be as effective as more specific
action. Business is now hesitant about making long term plans
partly because it feels it does not know what the rules of the


game are going to be.


Hon. Marriner S. Eccles,


If business were planning further ahead it

could readily be employing more people and disbursing larger payrolls.

To a great extent this is a problem of general atmosphere.

The recent action of the Board of Governors in reducing margin requirements is proving helpful not solely or even largely because
of its technical effects but more as an indication of understanding
and a cooperative attitude.
(2) On the more specific business problems and more specific
ways in which spending may be expedited and employment increased,
the four fields which appear most promising are: (a) building,
(b) public utilities, (c) railroads, and (d) general manufacturing
and mining. The potential demand for new housing is generally attested, and in the other fields mentioned, there is reported to
be large accumulated need for the replacement of obsolescent
plant mnd equipment, making up deferred maintenance, and construction of plant for new or cheaper production.
(a) I hesitate to make any comments about building because
you yourself know that field so thoroughly.

Many had hoped that

increased activity in building this year would be the chief aid
in helping us over the transition period from government to
private spending.

But a hopeful beginning was interrupted by a

rapid increase in building costs (both wages and materials) and
latterly by the general uncertainty accompanying declines in the
security markets.

I do not have any specific suggestions to

offer on this p&int beyond those which you have discussed from
time to time, but any summary would be incomplete without the
general suggestion that this field, in which actual output is
still at least 50 per cent below any reasonable normal expectancy,



Hon. Marriner S. Eccles,


is one in which much progress is still to be made. Time is, of
course, working with us, for the shortage of proper housing is
steadily increasing, and rents are rising, though evidently they
are stJLl not high enough to offer adequate inducement for building enterprise.

It may be that some recession in building at this

time will have been helpful as far as costs are concerned, for
past experience seems to indicate that such a rapid run-up of costs
as occurred in the first half of this year does not prove very
rigid in the face of falling demand.
In the case of the utilities and the railroads, though
the maximum potential demand is probably less than in building,
spending could be more promptly released.

In both cases we are

informed, as we assume you are, that there are programs for maintenance and construction all prepared, which could provide a
prompt basis for added employment.
(b) It is my own view, as I stated at the joint conference
with the Board on October 19, that perhaps the best opportunity
for an effective immediate release of productive forces is in the
public utility field.

From the best information we are able to

obtain about the utilities, power consumption appears to have
about caught up with present producing capacity. Maintenance and
new equipment expenditures appear to be behind.

The utilities

estimate that they could spend, promptly, at least as much as
$1 billion and continuing amounts of about the same magnitude,
over a period, if their immediate future were clarified on the one
point of government competition.

The utilities, and present and

potential investors in their securities, are afraid that the


Hon. Marriner S. Eccles,


government may set up competing subsidized distributive systems,
and thus destroy all or part of the value of their properties.
If they were affirmatively reassured on this one point, they could
go ahead with plans now formulated and could tap the market for
needed funds.

Such a decision as to government policy, which it

seems to us need not be in conflict with previous policy, would
give business a quick impetus in an important capital goods industry and thus would readily open the way for a considerable amount
of reemployment.

The railroads are another possible field in which in-

creased employment might be effected, though there is difference
of opinion as to the speed with which this can be accomplished.
Increased traffic, due to increased business activity in general,
would of course be directly helpful.

The railroads, however, have

been caught between the pressure of advancing costs, due to wage
increases, higher taxes, etc*, on the one hand, and depressed and
regulated income on the other.

How much this difficulty can be

remedied by rate revisions or what other steps might be necessary
is a question to which prompt attention should be given.


that can be done to improve the position of the railroads would
not only be importantly helpful to business in general, but would
also help one large area of the securities market which is now
most depressed and on which savings banks, commercial banks and
insurance companies are greatly dependent.

General manufacturing and mining concerns are now large

spenders for maintenance and for new plant and equipment.

For a

number of months, for example, machine tool manufacturers have



Hon • Marriner S. Eccles,

been working practically at capacity*


Mr. Terborgh of your staff

has estimated that all such expenditures in manufacturing and
mining will total over three billions of dollars this year*
Clearly, this is a large enough sum so that even minor fluctuations
have an important effect on employment.

There may not be any

single move in government policy which would influence this spending, but those more general moves which were mentioned earlier,
and the more specific sorts of action just discussed, would be
the kind of evidence as to the future of business which is calculated to replace the present hesitancy with renewed activity.

Concerning the problems of business financing, perhaps

the main point to be emphasised is the

widespread belief, ap-

parently leading to decisions by business men and investors, that
certain of our present taxes inhibit the financing of business
and promote disorder in security markets. A program to review and
revise the tax system, particularly the undistributed profits tax
and the capital gains tax, would be a constructive step, not only
by the removal of possible defects in the tax system, but also by
encouraging business initiative generally.
As I understand it, the System1s philosophy with respect
to these problems has been to bring about increased production and
increased employment.

Our assumption has been that our success

eventually would depend largely upon a revival in the capital
goods industries, which in turn demands that these industries
have easy access to the capital market.

We believe that anything

which unnecessarily interferes with the further development of
this process is contrary to al^that has been done to try to improve


Hon* Marriner S. Eccles,


the standard of living of the whole population•
I realize that this letter does not do much more than indicate what we deem to be the most likely points of attack on the
problem of preventing the current recession from becoming, perhaps,
a real depression*

I am enclosing a memorandum which Mr* Williams

has prepared in the course of our discussions and which undertakes
a review of the current situation from the historical and theoretical standpoints. We are also preparing other memoranda
relating to business financing and the capital markets which I
shall send along to you as they are finished*

In the meantime,

however, it has seemed to me to be worth while to give you this
summary of our views*

It will, at least, prepare the ground for

further specific suggestions which we may develop, or for a
common effort to answer some of the questions which have been
raised, or for discussions at the next meeting of the Federal Open
Market Committee, when many of these questions will likely form a
part of our discussion of open market policy*
Faithfully yours,


Hon* Marriner S. Eccles,
Chairman, Board of Governors
of the Federal Reserve System,
Washington, D. C.