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December 4, 1950

Honorable Marriner 3* Eccles,
Board of Governors of the
Federal Reserve System,
Washington 25, D. C*
Dear Marriner:
It was a real disappointment to me not to be
able to get in for a good visit with you while I was in
Washington, particularly in view of some of the rumors that
were going around about your prospective resignation* You know
how I feel about that* I had intended to try to catch you for
a few minutes Wednesday afternoon if you were free, but I had
to see Matt, Jake Vardaman, Sam Carpenter and Dale Lewis,
and by the time I got through with them I had to run for the
I am certainly glad you took time to read the
N.I*C.B* talk and that you found it worthwhile. Knowing how
much reading matter crosses your desk and how much more you
know of this particular subject than I ever will, I treasure
your comment particularly*
No matter what changes the next year may bring
to both of us, I want to express the hope that some place,
some day, you and I may find ourselves up in the Rockies
somewhere together with nothing on our minds but the fish,
the scenery and good company*

Always your admirer,

Chester C* Davis.




Office Correspondence

Governor Eccles


^ r . Gheadle

Date November 29. 1950
Subject! Address by Chester C. Davis
before the 317th meeting of the
National Industrial Conference Board

This is to comment on the excellent speech made by Mr. Chester C.
Davis before the National Industrial Conference Board meeting in Chicago
on November 16, 1950.
After briefly describing the prospects and factors that make for
a further intensification of inflationary pressures, Mr. Davis turned to
consideration of ways in -which these pressures cou3d be contained.
Direct controls should be avoided since, "Price and wage controls
by themselves do not stop inflation. They may conceal and defer the effects
of inflation, but sooner or later, if the fundamental causes of inflation
are not dealt with, there will be an explosion."
Inflation develops, says Mr. Davis, "when the rate of flow of
spending exceeds the rate of flow of goods and services into the market."
The inflationary process can be attacked on two sides—either the rate of
flow of civilian goods and services can be increased or the rate of growth
of purchasing power can be restrained. Since it is not possible to increase the supply of goods in the forseeable future, inflation can only
be contained by action on the money supply,
Mr« Davis then lists several ways in which action can be taken on
the money supply:

Voluntary self-restraint
Reduction of non-military spending
Taxation to meet military costs as nearly as
possible on a pay-as-yoti-go basis
A restrictive monetary policy

After briefly discussing the first three items, Mr. Davis presented simply but very effectively the case for a restrictive monetary
policy. The process by which bank credit expands and contracts and the
effect of such changes on the money supply are by no means simple to explain or understand. It's a whole lot easier, Mr. Davis said, just to
cuss out the Federal Reserve and let it go at that. Statements have been
made "to the effect that the Federal Reserve System thinks it can keep
people from borrowing by raising interest rates a fraction of one per
cent. That is a complete misinterpretation of the System position. The
rise in rates may have no effect whatsoever on the demand for credit, but
it does reduce the availability of credit and that is exactly what the
present and prospective situation seems to call for."


Governor Eccles

- 2 -

Since rising interest rates apply to Government securities as well
as to private securities and private loans, an increase in rates increases
the cost to the Government of carrying the public debt. Concern over the
cost of servicing the vast public debt is easy to understand and explain,
"but the issue is by no means one-sided, and should be weighed calmly, openly,
and objectively and good-naturedly as possible." ..."The Federal .Reserve believes that (an increase in Government rates) is part of the price to regain
control over the rate of expansion of bank credit." Increased cost to the
Government, which could be counted In the millions, "should be weighed against
the total cost to the Government and the public involved in further inflation,
which would be counted in billions paid in increased prices for each percentage
point the price level goes up."
In summing up the case for monetary and fiscal controls, i r Davis
pointed out that "there is a relationship between...#a program of general
monetsrv restriction.. .and the preservation of individual choice and freedom.
General controls leave freedom of business choice and decision to the individual; direct controls.. .do not. Pointing out that "there is an increasing
demand for a more controlled econonry. ..among all segments of the American
people.... It is an ironic exaggeration, perhaps, to observe that the socalled economic planners at present constitute the main vocal group now speaking against all-out direct controls, and in favor of a general anti-inflation
program that will tend to preserve individual freedom."