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Sears,Roebuck and Co.
Executive Offices

October 19, 1937.

Honorable M. S. Eccles,
Chairman, Board of Governors
of the Federal Reserve System,
Washington, D, C.
Dear Governor Eccles:
I thought you might be interested in the attached bulletin put out by Lionel
D. Edie. Dr. Edie has quite a following in New York.
While I do not agree with him on all points, he is a
brilliant man, and I do agree with what he says in
paragraph 5 of this particular bulletin.
In the light of subsequent events,
I feel that the Federal Reserve Board did make a mistake last spring. I think that if it does not start
and start speedily to try to remedy this mistake, we
are in for quite a serious time. I do not think the
Federal Reserve Board should continue to sit by idly,
and I want to put myself on record personally as giving
you this opinion. Either the remainder of the gold
ought to be desterilized or the last 50$ increase in
reserves eliminated or both steps taken and in the
very near future. If the state of near-panic in the
securities market is allowed to continue, it is bound
to have very serious repercussions on business, on
employment, on the tax problem, and on the relief problem this winter.

Very truly yours,


October 15, 1937


The year started out on a keynote of inflation, with nearly every
one making commitments on the inflation premise. That premise has
turned out to be wrong. The error of calculation has been costly to most
corporations and a considerable recession in business is necessary to correct it. The pendulum has swung sharply from extreme forward commitments
to extreme hand-to-mouth buying and, in this swing, new demand suffers

These sharp changes are not reflected in the broad index (Bureau
of Labor Statistics) of wholesale prices which continues to hang
around the 86-87 level. Hor is much change in this sluggish index expected
over the balance of the year. But this is such a broad average that it
conceals some very striking developments within the price structure, fifteen principal raw materials reached a peak in late March and early April
at a time when everybody was talking about shortages, inability to get
deliveries, armament boom and inflation. Since that peak, there has been
a decline in spot prices of about 25 per cent, futures prices have also
cone down sharply. The peak of futures was reached at about the same
tirae as spot, but the decline has "been greater, amounting to over 30 per
cent. This special weaknosrs in futures is mainly traceable to farm commodities which reflect bumper crops. If the proposed AAA legislation goes
through Congress this coming; winter, and right now the prospect is all in
that direction, it seems inevitable that the curve of futures prices will
turn upward, perhaps rather sharply. Spot prices would logically be delayed for come time in responding sympathetically to the influence of
futures. These futures prices are now about 44 per cent below the average
of 1924—1926 and the stage is set for an upturn when crop control on 1938
acreage becomes assured. Since a special session of Congress has been
called for November, futures on some farm commodities are quite likely to
3. A general scramble is now under way in the merchandise field to
reduce inventory. Just as the tide six months ago was toward big
forward commitments, so no?/ the struggle is toward empty shelves. In retail trade this objective will be reached by most companies by December
or January. A longer period would be required in some manufacturing lines.
What happens when empty shelves are reached? Probably another inflation
scare and another wave of forward commitments some time in 1938.
4-. The universal attempt to pass higher costs en to the consumer has
come at an unfortunate time. Consumer resistance is more apparent
now than was anticipated by most merchants. Dollar value sales show fair
percentage gains over a year ago but the gains are mainly absorbed by price
advances. Automobile sales have not yet mot the test of price advances,




Ootober 15, 1937

but it would be surprising if they do not have the effect of dropping unit
sales below the year ago level by a figure in the neighborhood of 10 per
cent. In retail trade generally the next few months are likely to witness
many special sales, anniversary sales, price-slashing sales. It is difficult to say how much these will amount to on the average but the peak
prices of autumn are on the defensive. Some kind of new equilibrium will
doubtless be found for the retail price structure during the coming winter.

These matters cannot be adequately explained without reference to
' monetary policy. No two people seem to agree on money questions
and the view here entertained is open to all kinds of dispute. However,
the view will be stated without reservation. The view is that the federal
Reserve stepped on the brake too hard last spring and started a deflationary
spiral of the same sort as prevailed under the Hoover Administration. The
high prioe of gold has failed to avert these consequences. The year to date
has been marked by contraction of total deposits of commercial banks. Officials seem still to be nursing the illusion that the credit contraction is
not significant because the bulk of the decline is in the form of inter-bank
deposits rather than of individual deposits. Before the winter is over one
oannot help wondering if the federal Beserve will not be compelled to admit
the error and to reverse the influenoe of monetary policy. They have already taken initial steps in that direction but bigger steps are necessaryif
monetary policy is to be a factor in turning this situation around. If and
when such action is taken, the logical accompaniment would be another violent inflation scare. Everyone has to be on the watch for this possibility,
indp-d m o b i l i t y . One great supporting factor all this year has been that
British'monetary policy has definitely refused to adopt the deflationary
character which has been true of Washington policy. Por the year 1957,
supposedly inflationary Washington has actually pursued a deflationary
policy and conservative London has held the fort of the world price structure. The Hew Deal experiment in managed currency has made a serious error
tureprobably, after undue delay, will seek to correct it before the winter
is over.