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July 31, 1946.
Honorable M. S. Eccles, Chairman,
Board of Governors of the
Federal Reserve System,
Washington 25, D. C.
Dear Marriner;
I have read with interest and have studied the memorandum which you sent
me with your note of July 25th. It is a fine presentation of the views which you
have been developing in recent weeks, and with much of it I am in agreement. Perhaps its principal defect, as I analyze it, is a product of the climate in which it
grew. It tends to emphasize monetary and fiscal controls too much, in the light of
their limited possibilities. I know that they have been pretty well ignored in the
recent past, but we do not want to try to lean too heavily on them now, even though
other controls have been removed or are in process of breaking down.

I should count it a great misfortune if, during the next few months, a
fight over fiscal and monetary controls should divert our attention and our energies
as did the recent fight over price controls. Neither during the war nor now are
controls the final answer. As you say, production is the ultimate answer, and we
want attention to be centered on production. But it must be balanced production,
with declining costs and increasing efficiency, not unbalanced production at rising
costs and with decreasing efficiency; otherwise we shall lose the battle while we may
seem to be winning it. Recent statements by leaders of both of the big labor organizations have indicated that this truth is being recognized, and that is to me a most
hopeful sign. I think it should be emphasized in any statement of policy that this
is what we must concentrate on, and that controls, of whatever kind, will only be
effective and helpful as they contribute to this end.
Some of the things you suggest will, of course, make such a contribution.
Reduction of Federal expenditures and achieving a surplus in the budget, elimination
of unnecessary private, state, and local expenditures, curtailment of unnecessary
further creation of credit, and disposal of Government surpluses, are all in this
category. I should hope, however, that the budget surplus could be the result of
reduced expenditures and increased income arising from increased production, rather
than dependent on an increase in existing taxes or a restoration of abandoned taxes.
These things, as you know, would be stoutly resisted, and the fight over them would
divert attention from the main battle. We haven 1 t time for another diversion of this
sort; we have to use the means and the weapons that are available to us now. We also
have to keep in mind, I think, that while inflation is now a greater danger than it
has been heretofore, the possibility of a reversal of this situation is always present
If repressive measures are emphasized too much they may bring on the deflation which
it is our aim and purpose to avoid.


Federal Reserve Bank of St. Louis


Hon* M. S. Eccles


I should like to urge that the Government take the lead in espousing a
"business-labor program of holding down wages and prices, and increasing output per
man hour. It is only if this is achieved that our fiscal and monetary controls
will have a decent chance to make their contribution to the fight against inflation,
I wanted to let you have this general reaction to your statement, partly
as an indication of my appreciation of your sending a copy of it to me. I am off
for a vacation next month and hope to forget some of these problems, temporarily.

lours sincere!