The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
V M&y U , 1951. Mr. Edward A. Rumely, 205 ^2nd S t r e e t , Hev York 17, Hew York. Dear Mr. Rumelyj Let me thank you f o r your kind l e t t e r o f A p r i l 3> 1951 j and f o r the d r a f t o f D r . K i n g ' s very I n t e r e s t i n g study "Why Not Apply Science t o the Bat i o n ' s Monetary and Peace ProblssuT" I s h e l l be very g l a d t o pass on t o you my consents on Dr. King's proposals. D r . King has proposed t h a t each coaaaercial bank ( i n * eluding those t h a t are not p r e s e n t l y members o f the System) be r e q u i r e d t o maintain a t a l l t i m e s , i n the form e i t h e r o f cash or o f reserve balances a t i t s Reserve Bank, reserve assets equal t o 100 per cent o f deposit l i a b i l i t i e s . T h e r e a f t e r , the p r i v a t e banki n g system as a whole could not create money through the expansion o f i t s l o a n , investment, or other assets. D r . King has c o r r e c t l y p o i n t e d out t h a t c r e d i t c r e a t i o n f o r the economy as a whole would be a f u n c t i o n s o l e l y o f the monetary a u t h o r i t i e s under h i s p l a n . However, D r . King assumes t h a t the procedure would be f u l l y automatic and would take care o f a l l changes i n the volume o f t r a d e , a p o i n t w i t h which I cannot f u l l y agree. A predetermined p r i c e l e v e l would be established which would correspond t o p a r . Whenever p r i c e s rose above or below p a r , t h e Federal Reserve Board would s e l l o r buy Government s e c u r i t i e s i n the open market i n order t o Influence the lending power o f the commercial banks and the q u a n t i t y o f money. These changes i n the q u a n t i t y o f money would then be t r a n s m i t t e d t o t h e p r i c e l e v e l ssd would be capable o f I n f l u e n c i n g p r e c i s e l y the l e v e l o f business a c t i v i t y according t o Dor. King's p l a n . I should l i k e t o make several p o i n t s i n r e p l y t o Dr. King. ( 1 ) The Federal Reserve Board has cm several occasions asked the Congress t o grant i t a d d i t i o n a l monetary powers, o f a s i m i l a r but more l i m i t e d type than those recommended by Dr. King. These powers might i n c l u d e , f i r s t , the l i m i t e d a u t h o r i t y t o increase primary reserve requirements o r , second, the broader a u t h o r i t y t o r e q u i r e Mr. Edward A* Rumely - 2 - a l l commercial banks t o h o l d an adequate percentage i n a s p e c i a l reserve i n Government s e c u r i t i e s * Use vould doubtless help the Federal Reserve t o c o n t r o l bank lending and monetary expansion and, t h e r e f o r e , business a c t i v i t y , o f t h e i r deposits o f these powers the volume o f the l e v e l o f I cannot agree, however, t h a t there i s any mechanistic r e l a t i o n s h i p between t h e q u a n t i t y o f money and the p r i c e l e v e l , which would permit a s c i e n t i f i c determination o f p r i c e s a t a l l times on t h i s b a s i s . We cannot c o n t r o l the economic f l u c t u a t i o n s i n the same way that we can s p l i t the atom. Too many human considerations are i n volved i n the s o c i a l sciences which prevent the development o f any precise s c i e n t i f i c mechanisms i n t h i s f i e l d . (2) I have always believed t h a t i n f l a t i o n a r y pressures a r i s e whenever the combined demands o f businessmen, consumers, and Government exceed the current supply o f goods and s e r v i c e s . S i m i l a r l y , d e f l a t i o n occurs when these combined demands are not s u f f i c i e n t l y great t o take from the market a l l o f the goods and services c u r r e n t l y being produced by our tremendous productive f a c i l i t i e s . I t i s q u i t e t r u e t h a t unchecked monetary expansion can be a powerful, and i n some cases the major, f a c t o r c o n t r i b u t i n g t o an excessive demand f o r goods and services and, t h e r e f o r e , t o i n f l a t i o n a r y pressures. However, monetary p o l i c i e s alone cannot e f f e c t i v e l y regul a t e t o t a l demand i n r e l a t i o n t o the current production o f goods and s e r v i c e s . The use o f appropriate t a x and expenditure p o l i c i e s , which r e a c t d i r e c t l y upon the spending stream I t s e l f as w e l l as upon the q u a n t i t y o f money, i s necessary i n order t o check both the boom and the depression. ( 3 ) You are making a r e a l c o n t r i b u t i o n i n the present f i g h t against i n f l a t i o n i n p o i n t i n g out i t s d e s t r u c t i v e long-range e f f e c t s and i n s t r e s s i n g t h e d e s i r a b i l i t y o f t a k i n g appropriate monetary measures t o f i g h t I n f l a t i o n a r y pressures. I agree w i t h you t h a t the d o l l a r already has been p e r m i t t e d t o depreciate too ffer, and t h a t i t s consequences have worked a grave i n j u s t i c e on great masses o f our people. I f e e l , however, t h a t the Cooalttee and S r . King might p o i n t the discussion even more i n the d i r e c t i o n o f s p e c i f i c monetary and p a r t i c u l a r l y f i s c a l measures which should be adopted a t the p r e sent time t o prevent even f u r t h e r d e p r e c i a t i o n o f the d o l l a r . There i s mot enough discussion i n the paper, f o r example, o f why an e f f e c t i v e pay-as-you-go program o f f i n a n c i n g defense expenditures i s a b s o l u t e l y e s s e n t i a l i n r e s t r a i n i n g i n f l a t i o n a r y pressures a t the present t i m e . ( 4 ) I n conclusion, l e t me quote several paragraphs from t h e A p r i l 1939 learns o f t h e Federal Reserve B u l l e t i n which are p a r t i c u l a r l y appropriate i n connection w i t h fir* K i n g ' s proposals. Mr. Edward A. Homely - 3 - "The Board o f Governors i d I n complete sympathy w i t h the desire t o prevent boons and depressions, and has always considered I t i t s duty t o do what i t could t o help accomplish these r e s u l t s . "Experience has shown, however, t h a t (1) p r i c e s cannot be c o n t r o l l e d by changes I n the amount and cost o f money; ( 2 ) the Board's c o n t r o l o f the amount o f money i s sot complete and cannot be made complete) ( 3 ) e steady average o f p r i c e s does not necessarily r e s u l t i n l a s t i n g p r o s p e r i t y ; and ( k ) a steady l e v e l o f average p r i c e s i s not n e a r l y as important t o the people as a f a i r r e l a t i o n s h i p between the p r i c e s o f the commodities which they produce and those which they must buy. "Steady p r i c e s and l a s t i n g p r o s p e r i t y can not be brought about by a c t i o n o f the Federal Reserve System alone, because they are a f f e c t e d by many f a c t o r s beyond the c o n t r o l o f the Federal Reserve System.* Very t r u l y yours, M» S. Eccles Slfte
@FedFRASER