View original document

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



May 1 4 , 1925.
Dear Governor Eccless
In all the discussions of the Patman Bonus Bill there
has been little, if any, mention of the fact that the enforced
issue of somewhat over #2 billions of United States notes, apart
from everything else, would result in an immediate increase in
excess reserves of an equivalent amount.

Those excess reserves

would not be reduced by any corresponding decline in the volume
of other kinds of currency outstanding.

The passage of this law

would, therefore, very materially increase the problem which
would face the Federal Reserve System in the event that it becomes necessary to control the expansion of credit based on the
huge volume of excess reserves.

I mention this now only because

I gathered from the press reports (probably incomplete) of your
testimony before the Senate Banking and Currency Committee last
Friday that you felt that the passage of this bill would have
little inflationary effect other than that which would arise from
the "psychology of fear."
While I personally cannot feel that the enactment of
this law and the consequent increase in excess reserves would
immediately have a substantial inflationary effect apart from
fears that might result from the issue of non-interest bearing
notes of the government, there are other features in the bill
which I believe should seriously concern us in the Federal Reserve




Governor Eccles,\^.

May 14, 1935.

I refer particularly to Section 3, sub-paragraphs (a)

and (b) which, instead of providing a means for the retirement
of the United States notes issued to pay the bonus, attempt to
set up a plan to check inflation by the restriction or termination of the issue of other kinds of currency, including Federal
Reserve notes, in the event that the price level should exceed
the average of prices from 1921 to 1929. You are probably
familiar with the extraordinary character of these provisions.
It suffices to say that in the event of an increase in the price
level to the figure fixed, the Reserve System and the member banks
might be seriously embarrassed in the future conversion of reserve deposits into necessary currency, and the Reserve System
would in any event find itself operating under the orders of the
Secretary of the Treasury on matters of currency issue. Furthermore, the whole section is built upon the predicate that price
levels can be and should be controlled by currency expansion and
contraction, a theory with which I know you disagree.

It does

not deal with the real problem, which is control of the volume
of bank reserves.
You probably have these aspects of the bill in mind.


am referring to them now only because they seem to us so important
in relation to the Administration's approach to the whole bill.
Faijbhfully yours,

Oefrge L. Harrison,
Hon. Marriner S. Eccles,
Governor, Federal Reserve Board,
V/ashington, D. C.