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August 10* 19SS* Honorable Joseph ?* Robinson* United States Senate* Washington, D* C* Dear Senator Robinson* X should like to draw your attention to certain banking and monetary aspects of the J^a$ier-I»eiake Bill (£• 212)* As you know, the bill provide that the refinancing of farm mortgages be carried through with the proceeds of the issue* at par* of 1 1/2 percent Federal land bank bonds* In cam such bond* are not "readily purchased*" the Federal Reserve Board is directed to take them up and pay for them with Federal Reserve notes* up to $3*000*000*000* It appears obvious that the bonds would not be readily purchased* since bonds cannot be issued for the periods over which the mortgagee run* sixty-aix yeare* at 1 1/2 percent* Even Government bonde with a tenyear maturity yield more than 2 I/2 percent* The Federal Reserve Board would* therefore* be called upon to take up these bonds to the extant of #3*000*000*000* She issue of 15*000*000*000 of Federal Reserve notes in thie manner would have serious monetary consequences* Hotee issued to preeent ;acrtgage holders* the majority of whoa are institutions* could not remain in circulation* since there would be no reason to aspect from the passage of this bill any increase in the demand for hand-to-hand currency® The notes* therefore* or an equivalent amount of other currency* would be immediately deposited in banks* The banks* in turn* having no use for the cash* would redeposit it with the Beaerve banks* where it would count as additional reserve* of member banks* These reserves are at present $2*500*000*000 in ©access of legal requirements* and the issue of $3*000*000*000 of notes would have the effect of io~ creasing these excess reserves to a figure of acre than $5*000*000*000* On the basis of excess reaervea of this magnitude* member banks could* whan a credit expansion got under way* create additional depoaita to the extent of more than $50*000*000*000; in other words* they could con* aiderably sore than double the country1 a means of payment* or money* There are* to be eure* soma means at the diapoaal of the Federal Beaerve System to counteract such an expansion by the use of ita instruments of monetary control* auch as the eale of United States Government obligations and the raising of reserve requirements of member banks* The System, however* in case an Inflationary movement develops* will have to Honorable Joseph ?« Hobinson ** (2) absorb a very large voluae of excess reserves that ar© now In existence and that may arise froa other sources already established, such as the issuance of silver certificates and the disbursement by the Treasury of the stabilisation fund, as well as froa the inflow of additional gold* the System* s holdings of United Eta tee Government obligations would bo entirely inadequate to cope with the situation* the extent of the Board's power to raise reserve requirements has not yet been determined by Congress* but in any ease the use of that power to abeorb excess reserves of #5,000,000,000 or more would be fraught with many difficulties, particularly since banks would have the choice of giving up their membership in the System rather than to submit to a drastic advance in their reserve requirements. I assure you that the possibilities X have pointed out are not feigned or imaginary* As zay public record will show, I have long been an advocate of a vigorous reflation policy, designed to restore incases and employment* X have also urged that everything should be done to maintain prosperity, once It is achieved* It is precisely because I believe that the passage of the ftasier^Lea&e Bill would not result in Increased spending or employment now, but would cause a danger oC excessive expansion of credit after recovery has been achieved, and would, therefore, contribute to a boom and a subsequent collapse, that I oppose the bill* There are other features of the bill that are not sound, in** eluding the fact that the federal Reserve banks would be required to invest $8,000,000,000 in assets which, regardless of their intrinsic quality, would have a market value, on the basis of a capitalisation of the rate of return, of perhaps about half that amount* Consequently the Reserve banks could not, without a ruinous loss, dispose of these assets at any tide for the purpose of absorbing excess reserves, or for any other purpose* This is an important phase of the matter, but I have discussed priawrlly the monetary aspects of the bill, since I believe that the dangers in that field are sufficient proof that it should not be passed* Sincerely yours, (sgd«) liarrinor £* Scales, Governor* (copy-b)
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