View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.


January 26, 1939

Honorable Marriner S. Eccles, Chairman,
Board of Governors of the Federal Reserve System,
Washington, D. C.
My dear Governor Eccles:
The thoughts contained in your radio talk
on Monday evening (January 23) give rise to a number
of interesting problems and apparent counter-arguments.
Since the question put forward, however, is impossible
of final answer in view of the countless imponderables
involved, it must not be supposed that the following
suggestions are in absolute disagreement with your basic
contention, i.e., that government deficit spending in
depression periods is advisable as a supplement and
stimulant to private spending, using only the manpower,
materials, and money that otherwise would be idle and
using them only in a way that avoids competition with
private enterprise.
Aside from the well-publicized but nonetheless
undeniable detriment to the progress of industrial enter>rise entailed by a large and increasing tax burden,
/hich would seem to be a necessary corollary of a program
of government spending, it is difficult to conclude that
an increase in consumer spending, initiated by federal
"pump-priming", will inevitably result in an increased
national income, as you appear to believe. Government
.gives only what it gets — there can be no personificaJ tion of the federal power as a donor of wealth. Every \
I dollar spent by the government on behalf of one citizen \
I must have been received from some other citizen. Therefore, unless government funds are invested in incomeproducing projects, the net increase in the national income produced by government expenditures is nil. The



— 2—

thrown to business enterprises by possible small in.-eases in sales consequent to receipt of relief monies
in one form or another by portions of the consuming public
can hardly be considered of sufficient amount to restore
such concerns to a profitable operating basis, or to lay
the foundation for industrial expansion by effecting an
increase in the prospect of profit by rising demand over
the long term. Thus the hope of balancing the federal
budget by this means is largely dimmed.

In referring to "income-producing projects11,
I had in mind no specific type of investment or subsidy,
but I should like to offer the sugestion, in this connection, that impulsive loans or grants made haphazardly by
a hysterical (or politically concerned) central authority
in aid of some enterprise considered "fundamental" or
"essential", may indeed prove to be anything but incomeproducing if the profit-making days of the particular
industry are past. Care must be taken to distinguish
between a temporary recession affecting a particular industry or enterprise, resulting from cyclical movements,
and a permanent decline related to a definite switching
of demand away from the products of that particular industry or enterprise. The ability to make such distinctions requires an exhaustive analysis of a nature scarcely
suited to the emergency demands put forth by a catastrophic
yclical decline in business activity. In addition, the
.nole scheme of central planning on such a scale assumes
a superior intelligence on the part of the federal authorities, an almost divine insight, vvhich it is hardly necessary to state has not yet been in evidence, here or anywhere,
Two statements were made by you which might tend
to weaken your position, taken together. In one statement
you say substantially that we all admit the necessity of
borrowing, private and public, that it was always so in
the past, it is natural, normal, and must of course always
be so. Then you follow up with this: " . . . fundamental

changes which have come over our economy which • • . many
siness men and bankers either have not fully perceived
or fully appraised." It may be possible that one of the
"fundamental changes in our economy" is a disappearance
of the necessity and desirability of borrowing. We know
how commercial loans have dwindled to a shadow, the best
firms providing themselves with substantial cash resources
out of earnings, rendering themselves financially independent, leaving as loan applicants only those concerns
who would not be considered except by the Relief Board.
As for long-term capital, we see a replacement of the
old time bond issue by reinvestment of earnings, among
the leading industries, combined with issuance of common
stock, if outside funds must be secured at all. In plain
words, borrowing has fallen into disrepute. Right or
wrong, this would seem to classify as a fundamental change.
I have purposely avoided going into the question
of how your principles may have been applied by the administration over the past few years, particularly with reference to avoidance of competition with private enterprise,
as I feel you must recognize that the slipshod methods
irhich have been used do not permit of a fair evaluation of
the theory itself, and, if anything, indicate the hopelessness of establishing an omniscient federal authority under
the present method of selecting our national leaders. (I
not suggesting any reforms in this fieldl) The policies
allowed so far show an attempt to ruin the few prosperous
industries while prolonging the death agonies of the leading
"has-beens" at the expense of the tax-paying community.
The question "what to do about the economic
situation" remains unanswered. You have quite possibly
considered all the factors submitted here. That government must extend relief to unfortunate victims of trade
movements is irrefutable. However, needs of this type
should not, in my opinion, be glorified into an economic

- 4-

theory which can not be proved or disproved except by
ving rise to still further misfortune and maladjustment
Your willingness to lay open your position on
this subject is commendable, and would appear to indicate
a sincerity and determination of purpose.
Sincerely yours,

Edna M. Thompson
3222 North 27th Street,
Philadelphia, Pa.


February 9, 1939


Idna M. Thompson
3222 North 27th Street
Philadelphia, Pennsylvania
My dear Miss Thompson:
Mr* Eccles has asked me to acknowledge and
thank you for your letter of January 26 which he has
read with interest. While it is evident that you
are dubious as to the success of governmental intervention in the economic field, you recognize the inability of private enterprise to meet many of the
problems which result from the workings of our economic
system. While Mr. Eccles is convinced that government
must play an active role in the economic field, he is
likewise thoroughly aware of the difficulties of
coordination and timing involved in such a theory.
In this connection I thought you might be interested
to read his address beiore the New York Chapter of
the American Institute of Banking on December 1, 1938,
and I am enclosing a copy herewith.
Yours sincerely,

(Signed) Lawrence Clayton
Lawrence Clayton
Assistant to the Chairman


Received in
Chairman's Office

JAN 2 7 1233
Of the
Federal iieetti've System