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October 21, 1935

Mr. Lawrence Clayton,
Assistant to the Governor,
Federal Reserve Board,
Washington, D. C.
Dear Mr. Clayton:
I thought you and your Chief would be
interested in reviewing the enclosed report, which
will be acted upon by the Economic Policy Commission
of the American Bankers Association at its meeting
in New Orleans, November 11 to 14*
The report was prepared by Colonel Leonard
P. Ayres, Vice President of the Cleveland Trust Com­
pany. He has purposely avoided a discussion of con­
troversial subjects such as banking legislation,
federal activities in the field of banking, or most
of the other banking problems that are now inescapably
conditioned by federal activities, and has formulated
instead a review of business conditions and prospects.
It is unnecessary for you to return the re­
port to me but, needless to say, if you have any com­
ments to make concerning it, I should be pleased to
hear from you.
Cordially yours,


October £8, 19?5.

Mr* A* ?• Giannini,
Bank of America,
1 Powell Street,
San Francisco, California.
Dear Sir* Gianninis
This will acknowledge yours of October 21st in
which you enclosed for my personal consideration a draft
of the proposed report of the Economic Policy Commission
of the A* B. A. to be submitted at the New Orleans meet­
ing next month.
In general I find this statement very fair and
logical. I would suggest, however, one or two small changes
which are ray personal ideas and not at all reflective of any
opinion of the Board or its steff, At the bottom of psge 1
there is included among the factors making for an increase
in consumer purchasing power "the refinancing of farm and
urban mortgages." I agree that this has brought about in­
creased consumer purchasing power, but not simply because
such mortgages have been refinanced. The point is that this
refinancing has been done on a lo*er interest basis and with
longer maturities as to principal. This results in a lower
per annum cost of carrying such mortgages, consequently the
mortgagor is willing to spend more for consumer*s goods, Ur.
Ayres of course understands this fully, but I think it would
be better from the point of view of the average reader if the
clause read something like this* "the refinancing of farm
and urban mortgages at lower interest rates, generally longer
maturities and easier principal installments.”
On page 6 there is an interesting discussion of in­
flation which concludes that there is no real danger in sight,
with which I entirely agree. The definition of inflation, how­
ever, is not too fortunate in ay opinion when it is stated
that "rapid advance® in the general level of the prices for
commodities, is a phenomenon that develops when the demand for
goods is so active that would-be buyers bid up the prices of
the goods in order to get them, while sellers are reluctant to
part with them.” I would prefer to say that the demand for

Mr. A. P. Giannini - £.

goods becomes greater than the volume/ of production can
accomod&te, consequently sellers fire unable to satisfy all
buyers end the bid price goes up. My particular objection
is to the statement that "sellers are reluctant to part with
them." This puts the accent on the mental attitude of the
seller rather than on the fact that he sells willingly at
the rising prices, but is sorry that he hasn*t more goods to
sell. The sentences following are right in line with my con­
ception of the situation, namely, that there is sufficient
unused productive capacity at the present time to take care
of a considerable increase in the dem? nd for goods of all
kinds which, as *Jr. Ayres points out, tends to reterd further
price advances. To my mind, inflation does not come until
the demand exceeds or at least largely absorbs total produc­
tive capacity, in which case prices must inevitably rise.
I think the summary and conclusion is very good and
as stated at the beginning, the entire report i3 fair and log­
ical. The suggestions I have made ere purely matters of re­
finement and you may not feel th; t they improve the statement
in any way.
I am returning the article herewith and appreciate
your courtesy in referring it to me. When are you coming to
Washington again?
With kindest personal regards, I am
lours sincerely,
(Sig:.od) Lawrence CSaytari
Lawrence Clayton,
Assistant to the Chairman.