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October £5, 1957. Mr. R. B. Wood, President, Sears, Roebuck and Co., Chicago, Illinois, Dear General Food: This is to thank you for your the enclosure from Lionel D, Bdie. I have pecially because you agree with it. It is field by letter and I must be content with letter of October 19th with noted it carefully, esfutile to cover this huge one or two observations* With reference to paragraph 5 of Dr. Edie's comment, let us assume for the sake of argument that "the Federal Reserve stepped on the brake too hard last spring11. The demand was so widespread and insistent at that time that the Board resort to a tight aoney policy to meet the then threatened price inflation that I was forced to issue a statement to eaphasize why any such action was wholly inappropriate. I emphasized as strongly as I could the danger to the progress of the recovery movement in rapidly spiraling prices which throw the whole econoi^y into disequilibrium. Particularly, I stressed the pricing policies and the effects of high labor costs on building and construction generally and the detrimental effects on the farmers, the unorganised workers and, in fact, the entire purchasing power of the country. We did not then yield to the demand for a definitely deflationary policy, nor have we yielded to it at any tiiae. This Board has repeatedly emphasized that it was acting at the only time it could act to keep out of the credit base a huge volume of gold arising exclusively from imports and thus remove inflationary dangers arising from this source. Interest rates had been driven down to a point that was discouraging private enterprise and that could not be sustained over a long run* The Board emphasised then and has repeatedly since that it would continue a policy of monetary ease. That policy has been consistently maintained through open market, discount and rate policies. We still have a billion dollars of excess reserves. This is idle unused money for which there is no demand. Rates are still at the lowest levels in our history. To characterize this as a deflationary policy seems to be wholly unrealistic. Mr. R. E. Wood - (2) October 25, 1957 Dr. Edie says that •officials seem still to be nursing the illusion that th© credit contraction is not significant because the bulk of the decline is in the fora of inter-bank deposits rather then of individual deposits*• I do not happen to know any officials who nurse any such illusion. The significant thing is the downward trend at the very time that the trend should be up. He then assumes that by piling more idle reserves upon the still unprecedented volume of idle reserves we could somehow Bturn the situation around*. X isust say that 1 wish I thought it were that simple. One illusion I do not have is that you can aaintain or turn situations around by juggling reserves and Ignoring other equally or iaore potent factors. that you noted Dr. Edie's reference to "another violent inflation scare" that would follow any such action as a wholesale desteriliaation plus a reversal of reserve requirement policy. If I -thought that you, with all your experience, regarded a "shot in the arm" or any inflation scare as the remedy at this time, I would throw up ay hands in despair. I am not hard-boiled about easing up all along the line. I do not care whether I am accused of inconsistency or what-not, but I do think it is of supreme importance not to be deluded by a false diagnosis and a false reiaedy at this point in the recovery movement. I do not want to do asyt&ing that would distract attention fro® what, I think you will agree, are the real fundamental factors; that is such obstacles as exist in price and labor policy and in other fields that are inhibiting private initiative and enterprise. It strikes me as the utmost folly to say that you can remove these obstacles by a dose of inflation. What you would do would be to scare people into spending money because they would be afraid their money was no good. I, for one, am not in favor of that. I aai in favor of .fixing attention on the inhibiting factors, especially where organized labor is concerned. Nobody is any sore eager than I aa to see labor standards and wages increased or more (tytfposed to seeing a few strategically well-located and organized ^"oups bid their wages out of line with, the mass of the workers, the farmers and the white collar people, thus helping to drive up prices of new houses and other badly needed things to levels at which the rest of the population cannot buy the®. How that can do anybody, including the organized workers, any good is beyond me. You have only to glance at the railroad picture to see what has happened in that field. Wage increases have absorbed practically all of the net earnings. That means collapse of railroad securities, cancelation of plans for equipment buying and discharge of thousands of workers not only employed by the railroads but by interrelated industries. Mr. R. E. Wood ~ (3) October 25, 1957 There are undoubtedly other factors in taxation, possibly in various regulations. The point is that almost without exception, they are non-monetary. As you know, 1 am not adverse to some monetary gestures if they will do any good, but they are gestures and by no means fundamental. I always appreciate having your frank opinions. We both want to get the right answers. If I am isrong, nobody wants to know it sooner than I do. It does seeia to me to be all important to get this picture in correct focus and find the constructive answers. I think they are not hard to f i ^ heedless to say, I am writing you again candidly and freely and, of course, confidentially. Sincerely yours, M» S # Eccles, Chairman.
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