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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



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



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,