View original document

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

Form, F. R. 5111 a)

Mr. Morrill


Gov. Eccles


Would you have a chance to look over this,
mark it and prepare a friendly reply to
Reno Odlin?





September 1, 1949

Dear Marriner:
The other night I had to fill an
engagement at the Pacific Coast Banking
School at the University of Washington.
My talk had to do with the fiscal and monetary questions of the day and I'm sending a
copy forward to you for your information,
and would welcome any criticisms you may have.
With best regards,
Sincerely yours,


Hon. Marriner S. Eccles
Member, Board of Governors
Federal Reserve System
Washington, D. C.

AUGUST 22, 194-9.

About two soaths ago, to ba e m e t on June 24-, W associate on ths Federal
Advisory Council, Dr. W. Randolph Burg©as of Hew York, delivered a lector® to
the student body of the Graduate Sahool of Baaking of Hew Brunswick. The lecture was titled "Ths Future of The Federal Reserve System0. It is available in
pamphlet fora from the American Bankers Association. 1 suggest that you i&o are
interested in a very d e a r and learned study of the Federal Reserve System aaad
for a copy of the pamphlet.
Dr. Burgeas, w&ode intimate knowledge of the Federal Reserve System and
whose rank as an authority is irell knouni to you, diseases in his lecture the
critical questions of the relation of the System to the Treasury., the balance of
power within the System, and the tread toi?&rd control of banking by the Systeau
As his conclusion he warns of the drift toward concentration of powe? in Washington
through unjustifiable additions of controls and power of regulation In the Federal
He believes that the* traditional powers of the Federal Reserve Sy&tea to
influence the cost and volume of credit are sufficiently powerful instruments for
moderating business fluctuations and provide an edeq&Ate degree of monetary management.
And he warns that everyone should recognise that the Reserve System ie only
one of many influences on business fluctuations• He sayss
"The final result reflects maay eausess fee wisdom or
u&cdsdoa of business men in accusml&ting inventories, in
starting new ventures, in keeping production costs and
selling prices dow&| the soundness of labor union policies;
the international situation; the thousands of ways government stimulates or retards activity; the spending or saving
habits of the individual; etc. The Reserve System is ao
substitute for sound policies in all these areas, nor can it
wholly offset unsound policies. In the long run, the S C O E onie trand reflects the stresses and tha strains from all
these fields."
I commend thir* lecture* to your attention*
I thought it proper to devote my attention tonight first to the so-called
new phase of central bank policy v&ich «as inaugurated on June 2& whoa the Open
Market Coumittoe issued the folloT&ag stat^aenti
•The Federal Open Market CoEsnittes, after consultation
with the Treasury, amaouncad today (June 2S) that with &
view to increasing the supply of funds available in the

sarket to meet the needs of commerce business, and agriesultar® it will b@ the policy of the Coffitaittee to direct
purchase^ sales, and exchanges of Government s@euriti.os
ty the Federal Reserve Banks with priss&ry regard to the
general business end credit situation. The policy of maintaining orderly conditions ia the Gov&r&Bent security
market and the eoafidenee of investors in Goveraaest boscUs
will be continued. Under present conditions the saintsnance of a relatively fixed pattern of rates has the undesir
able effect of absorbing reserves from the market at a tine
the availability of credit should be increased •
£here haa beea elaborate interpretation of this amsunceftant and spaea«
lation as to its meaning,
For example, the July 27 issue of the Guaranty Survey of the Guaranty
Trust Conpaay of Hew lork has this to says
"The committee1 s statement indicated that its priaary
deavor henceforth would be to increase the supply of funds
available to meet the needs of business, rather than C O B
tinue to maintain a relatively fired pattern of interest
rates on Government obligations through the gale of such
securities, a policy which had the effect of withdrawing
funds fra» the aoaey market = » • • *. -. The exact nature of
the new policy# especially in its longer-tezn aspects, h
been a subject of considerable discussion in financial circles since the statement t?as issued* For the immediate
future,, the change seems to point'dearly in the direction
of f easier' aoney. The nain question is whether this supposedly expansionary influence will be followed by correepondingly greater credit restraint i&ea the economic b®lmc<&
swings again toward the inflationary tide,

On its face, the coomittee^a statement leaves ? O O B for
the inference that such restraint idll be attempted—ia
other words, that the wartime policy of maintaining rigid
stability in tfc© Government bond market will be relaxed ia
favor of a policy aimed at greater stability in eoismodity
prices and business in general. If this Is the ease, and
if the experiment proves successful, £ significant step
toward healthier eeononie conditicns Trill have been taken*

The wording of the statement has been criticized in coae
quarters as eabiguouso Certainly different isplications can
be read into different parts, and tae coassiittee has left
itself (as it probably intended to do) considerable lati
tude ia the choice of specific courses of sctioa radar
varying conditions = Rsad &s a diol@, however, the aanouncesent wist In fairness be interpreted AS indicating at least

a teaporaty a&d perhaps a permanent shift of saph&sie toward
greater flexibility and & bro&der objective of central-bask
In analysing -the sige&fieaaea of this aev statement of p&lijgr, it sould
be advisable to review t&e sionetaiy eireuB&tances of the last ttm ys&xs
to bear 3JH aind the developments in that field sinee9 say 1935 In 1935 the basking system of the United States began piling up
reserves to gn extent never dreamed of before. These reserves in
part developed ivom & flow of capital and gold froa Soxope into this country ©a
a trssieadons scale. 1!h© gold, it *&11 be recalled, mis valued at 035>00 c;
ounce ia comparison with the former long-standing rat© of $2G»67 an ounce*
Reserves naunted steadily and siraLLtaneously snort-texa money ratets drifted
steadily Ssymamx& ixotil at one $tage there m a actually a aisais yield on. United
States Treavsry bills. Urea th@ d®maads of the Federal goversaeztt for defioit
financing did jsot rssalt in eontraetloa of SSZCSBS reserves or in firming of
interest rates«. la 1936-37 bank reserve r@quir?^eats were increseed and ths
problem of excess resorrae became the principal concern of the basking systea
and of the moaetaTy authorities. There was a brief slump ia 193&* and
requirements were, rsdueed s$omm^k&% iron the 1937 level«
In Hoveaberj, 1941? baak rasarve reqalresumts were substantially raised to
&ttac£c the inflation problem, and this action cut excess reserves substantially^
but still left them at a figure near four blllio&«
We then entered the war and in the light of probable financing requirements of the ^overnsent, rates bzgm to stiffen.. Tliere d.eveloped at thla poll
the so-called "pattern* of interest rates which prevailed throi^iout the
war period—-3/8 per cant on Treasury bills, 2 1/2 p^r cent on tli* long-tex-ia
bonds# and a aurv© ia between the two reflecting th© yields for intermediate
maturities. In other nox-ds, an arbitrary •pattern* was adopted, sisd the
islasslcal relationship between e^caes reeerfos and m.on<&y i!ate& disappeared.
That war-time Mpattarn* of rates) was atowly sodifled afto? th® war had
ended* But ia the process of maintaining the rate ^pattern® th© Teser^^e banks
had increased their holdings of government securities from around two billion
dollars at the start* to some 24 billion dollars at the end of the m r j ©xio: on
this reserre base the b&aking system absorbed & trssieadoue amount of gpvernmen
In Julj ? 194-7^ ih® repurch&se option o^ T5feasury billsP which had 1 •
effect of making theaa aliaost the equivalent of o*sh, was te2oin&.ted. ty the:
Federal asd the rate on bills ros© sharply and continued to rise; to oim&cl
1 1/8 p@r cent* The rate on certificates rose in a parallel B p&ttera 8 B Late
in 1947 the longer-tent goversment securities began to show the offset of
increasiag dexiaad for credit and were bought by the Federal Reserve in considerabXe Eiaoimts ia order to s&intaia the Icatg^term 2 1/2 per cent rateOn December 24, 1947, the Open Market Goisiaittee reduced Its buying prices
for bonds, and yields on eosic maturities rose very sharply; but to support
the Reserve Syeten was obliged to btiy large quantities of bonds*

holdings of bonds rose froa one billion is late 1947 to over 11 billion in
the latter part of 1«M&« Short~t@r& holdings declined in someimat the sass
amount eo that the total holdings of the System did not inere&s« materially.
During this era it was argued rather ntvongly in m®xy quarters that tfc©
Reserve Systea should turn loose the pegs end perait its holdings of gcTersments
to decline in order to elia&n&te excess reserve©, stop the esqpaiasion of b&sak
credit and thereby brake the inflationary trend. This, however, would h&Ye insolved the abandonment of the support of the goYarmaent bond market, «bicb the
Federal Reserve was not •sdlling to do« Tihera were strong arguments on both sides
of that particular question; msnj people believed the coat in inflationary price
rises was greater than the value of maintenance of the pegs and that they sh©uld,
therefore, be dropped! others feared that a withdrawal of the supports would have
a disastrous effect and that the supposed cur© isould be worse than the diseaseo
Every linking person recognised that the Federal Reserve authorities «©re f&ced
with a very difficult diicasa and that either coura© of action—sibaadosmdat or
support of the bond pric® level—carried witfe it very serious rifsks and potentialities»
ground the latter part of 194&* howsve?, th© question seecisd to solve itself to soiae isxtente Baak loans turned downward and the expansion of bink credit
became a contraction. Th© pro&Uaa of restraining inflation dis&ppoai'ed and beease rather a problem of a deflation.
This very sketchy backgroiaid will parhaps ser^e to set the new policy
pronouncement in the right scenery and clarify its meaning? the Federal Esserre
is no longer withdrawing funds froa the money ss&xfcet to restrain inflation; it
has turned to an affirmative policy of providing funds to increase the availability of credit.
It seems proper to eoaa^ent that the Open Market Coesaittee probably did
not mean to suggest that there mis a credit shortage* There is oertalnly %o
such thing at the aomento Goamercial bank loans have gone down substantially
during the past aevea aaonths Jiot becaus® of lack of availability of credit but
because of a lei-dowa in the denand for credit. There have bssa in the history
of the country nany shortages of credit, but that is a situation ^faieh Host
certainly does not present itself today•
We have had exceptionally aeasy isonsy8 conditions in this eoxrntry for
a&ny years paste The addition of funds into the money market today can hardly
be expected to have much effect other than psychological. Bank lo&ns m21
expand ^ien the deaand for loane increases aad lower rates will have little to
do with that expansion* L sore favorable ecosoaie climate and more favorable
prospects for business are the pre^roquisites to an increase in (iea&iiai £QT arodit.
Sensible and equitable changes in tax policies are the most important steps that
should b<3 taken o
But froia the standpoint of the Treasury, easier rates present a eonsid-'
arable advantage from the fiscal angle* The Treasury is facing very substantial refunding problems, and the fiscal policy of the administration is apparently

Page 5
based upon the deliberate creation of a budget deficit. As a matter of fact
the President recently stated that it would be ^economic folly® to try for a
balanced budget undsr these condition* *
The long range effects of th© easy credit pronouncement &r« a little harder
to prophesy. The wording has been interpreted as announcing a greater flexibility of Federal Reservs policy. One wonders whether this i3 to be a two-way
flexibility and whether political considerations ndll permit the reversal of
the easy money policy when circumstances indicate the wisdom of that course.
Probably the Open Market Committee deliberately left a degree of ambiguity in
th@ statement* It w u l d perhaps be unfair to expect them to be more preclsa than
they were.
As a matter of fact the announcement of June 28 is really improperly
called a *n«^* policy. In the pre-war era the Federal Reserve open market policies were presumed to be established «ith "primary regard to the general business
and credit situation."
Section 12 A of the Federal Reserve Act contains this language relative
to open market operations:

The time, character, and volume of all purchases and sales
shall be governed with a view to accommodating commerce and
business and with regard to their bearing upon the general
credit {Situation of the country.18
This is the language of the Federal Reserve Act since 1933 at which tiise
statutory recognition was given to the "Federal Open Market Committee".
In its August, 1949 letter, the National City Bank offlev.York says the
•The objective of ^maintaining orderly conditions in the
government security market6, restated with secondary empiaasis
in 'the new policy statement, has no foundation in statute,
though the Reserve System has always been attentive to the
problems of Treasury financing and in the two world wars made
assistance to the vast loan drives its prepossessing concern.
The 'orderly markets* language nas first used publicly in the
spring of 1937 vnhen reserve requirement increases, invoked to
cut down excess reserves, threw the bond atarket into turmoil.
The Federal Reserve entered the market and, with |200 million
purchases of long-term governments, restored order. They again
intervened in the market to soften the impact of the outbreak of
the war in Europe in September, 1939* and thetalorcof Pearl
Harbor in December, 1941T h e wisdom of theee emergency open market operations, in th©
circumstances, nas never seriously questioned. But the easing
of an unexpected shock is quite a different sort of thing than
the detailed control of prices and trading raileh has been in
effect since the 'pattern of rates* technique isas adopted in 1942.

experie&ce of th.s postwar p.
ias taught—not only here
but in iSigland, £toeti«ii ar.d el6ettb@r«~»ifc&t when a cent:*:
Icing system clsvotes itself to controlling government security
pricee it reduces its po¥?er to control credit. The two things
are incompatible.•
The seme authority points out that the primary purpose of the
Beserve System u^is to provide an elastic currency for this country, and t
vid® a system under when the resezros of the banking structure would be mobil
ised and made available to serve the purpose implied in the word "reserves*.
So the ^nei?11 policy is roally a restatement of toe original purposes end
intentions of the Federal Bsserve Act- It seems to me the significance is that
conditions hava changed to an osctont that the wartime deviation from fees©
original purposes can now be corrected end the System can revert to its original
objectivesIn view of the frtque&t requests for nor© powers and controls by
Board of Governors of the Federal Reserve System, ftfoich requests many of
have felt unnecessary and \mwise, it seems pertinent to add, a few comments by
people identified tdth the Syotcsa in its earlier days.
The other day I read the proceedings of the .American Bankers Association
convention of 1915* the year following tlie inception of the Federal Reserve
System^-which convention by coincidence was held here in Seattle*
In on address by Mr. F- A, Dala&Op ¥i«a Governor of the Federal !:
I found the following:
central banks were not created to transact busine
with the public but primarily9 as their name implies, for t
purpose of holding tie reserve deposits of their aiming bsnks-,
Among the important services which they may render to their
aejnber banks the most important is the right to rediscount
their paper and issue ba&k notes against it* Manifestly, t^aens
the first great result of creating twelve banks has been to
bind together all the national banks of the country into twelve
strong regiments, thereby creating an effective solidarity,
*Beferenca hag been mads to the fact that under the old
system in effect, for fifty yearss there had been developed a
system of depositing reserves of smaller basics with other and
larger banks* This had led not only to serious duplication
of reserves which rapidly evaporated in times of strsss but
in addition to this, the results of active competition for
deposits led to many vicious practices, such as paj&ng high
rates of interest or granting speaial facilities or favors.
Banks kept rsci-procal baXane&s with each other and by a
system which might be likened to the time honored plan of
•you. tickle me, I tickle y^u f , they got ahead, at least on
paper. However., these methods vers not eond^civa either to
safe banking or to lo* and steble interest rates for the public,

Page 7

H@ne@ it s?as that one of the objects of this new lasr
to n&ke banking less hazardous, z&ake profits fmrer, bat to
aoeoapliela it in such e ??a:r tfcat the i&restor, the manufacturer, the merchant, each and all, could count en banking facilities in good times and bad and also a fair stability of interest rates0
"The new plan geek® to put the reserves #iare you can
count on thes, The reserve© in the (central) r@a©aT© b&isk of
the district are used expansively as the basis of note issues,
so that instead of these reserves bsing iraavailable in ti&e of
need they are at once available to the fullest extent* Tho
operation, simple enough to most of you, consists ia allowing
mejaber banks to bring around their coasmereial .paper and provided it complies the sot onerous provisions of the
law and roles of the Federal Reserve Boards you are giTen &
credit on the books of the bask or, at your option, Federal
Reserve notes for the full aaount*1*
Mr. Delano added:

The rodiscounting of commercial paper of jsesiber baiake by
the Esserve Bank is the chief function of the«?^ banks,..*.»e
In the proceedings of tho coaventioa of the following y^ar,
Governor Harding of the Federal Hesarre Board, in hig address, s&id tbiai
"The Faderal Reserre Board is not a legislative body; its
functions are admiaistratiTe* Occasionally it has quasi**
judicial functioas to perforr*, but in the aai& its duties
are administrative«

Section 16 shrinks into insignificance as compared with
the underlying principles of the Federal Reserve Aot9 the
utilising of the cash resources of this country, the care
of the gold, the ultimate monetary redesiptios., the only
international sonsya

That, gentleaen, is the hi^ieist prorince of the Federal
Reserve B&nk, ^hich is to regulate and stabilise our currmey^
so that those of you who hold any foiia of paper money, issued
through gDveromental agency, m y bs> enir© of your red»«a©3?~~
and that you can get the ©old !&®n the nesd for it arrives.*
At that same aeetiag in the address of Paul H. Warburg, Yi«e Goveraor
of the Federal Reserve Board, I found the following?
•I believe it is safe to say that, in general, those laws
have proved the best which put into legs! form e2& usages

already recognised by actual experience as sound both in.
principle and practice,.

I» 1910 I published a tentative plan entitled, *k United
Reserve Bank of the United States11 • Later on Senator Aldrlcn
elation* | and, finally the Ows^-GIass committees devised t
Federal Reserve Systesi", v&ich «as enacted iato law. Tbe
^ord ®res?3rveffi has bean embodied in ell these varying assiess
and this is significant because the adoption of the principle
of co-operative reserved is the characteristic feature of each

±a? as the name laplies<» what om# holds baek» It
generally means as extra supply of something kept idle for
purpose of being immediately available to teka ears cf
increased demand in exeass of normal
It mould seem, from these Ctseerpts that the primary purposes of the
Reserve System were dearly and completely imderstood. M&& at this poisit 1
again csommaad to you Br* Burgees5 discussion of the proper scope of Federal
Hesarve operatioES
ar© maBy of us T & O feel that oven the additional powers requested
so frequently fry the Board of Governors could at best senr© B O great purpose
in the absence of a soimd overall, fiscal policy in this country. I believe
it was Mr* Allan Sproul^ president of the Mew York Federal ReseTTo Ba2Jk(, idao
said to the Senate Backing and Currency Coastlttee# ®We cannot do etrerything
wrong ew^r^titBTfB else and then aspect to cure thi&gs ty bmak controls."
Monetary managfieaaBt occupies a fle3x1 of tremendous importance end yet
it n»ould seeia that the best monetary management would be a w r y poor substitute for sound fiscal i&anagaaent*
The surriml of our way of life and nost certainly the eoatiouaiaes of
our ability to help out in the survival of representative governments alxroad
hinges on the solvency of this country and the soundness of its fiscal policy
Recently Senator Byrd saidt
"Without American solvency our constitutional freedoms
would disappear at horn© ssd -Uiere iBould. be so detere&t to
Casanjnissi abroad. existing circumstances it is no
exaggeration to say ther© Is literally nothing on earth
sore isipe-rfcant than the preservation of the fiscal
integrity of the Federal gavttrnneat of the United States
and the financial stability of our free

Page. 9

W© &ra bsi&g told today that our badge t cannot be balanced even at
the fantastic Isval of some 40 b5JJ.ions psr year. Political platforms of
all political parties are built on prosds©s sad assurances to the people
that goverssie&t will continue and increase th« cut-pouring of contribution
and greats for every imaginable purpose. The Preeidsnt has asnouneeel a
policy of dafieit financing to permit the continuance and expansion of -this
w&Lfams state of ours< la 1948 over one-fourth of the national incase went
to federal, rfcat* and local gowrsament, doubles the e&ount that went in that
direction in
In the course of his recent financial study Senator Byrd concluded!
*X am eonvinesa that in the cosing yoar ws shall extend
our fiscal and economical stability to extrsmas ^ier» it
say be unabls to tfithst&ndiag additional pnMScmres wiiieh
are unavoidable in fiscal year 195!« W^en our fiscal sad
seonomic stability weakens, there is c&rtain to be a d^aosv
alising domestic crisis i«hich probably would be disastrous
to our priTate enterprise system and, therefore9 to our f o m
It would seem that it is higfc time for ua to c^it worrying about
tiTely unisportsnt proposals aad. eonceatrate upoa ths all iMportemt probloi
of national fiscal policy* It, therefore, seems -to me that th® eidditioc&L
controls recueated \t$ the Board of GoT®2iiors are relatiTely trivial ia importance and that the attention of the highest authorities in goTeri5BieK.t afeould
be directed to the real problest. f?hen s. Gaaergeney operation is urgently
necessaryp the c-octor doesn't waste too saich tis# coiootaisg domi a broken
finger mdX on the patient.
Reeling as I do that the tax and fiscal questions are the important
ones, I not© *&th pleasure aacL prfwde that tlie Ckai^aan of the Board of
Governors of the Federal Reserve System has within the past few deys
himself dearly and convincing3^r in answering a questioa po®«d to his "by
Ch&irnan Mayb&ak of the Senates BaEiking Cojisi^itt®©* Chairman Ihoaas B. Me
was asked to espsrass his views as to shat should be done to improve the
of equity fiaac;eingt on idfeich our ^hole eeononie structure rests»
tor* McCaba suggested that the attention of the coamittee and of the
Congress be directed toward changes ia the tax structure, 'with particular
consideration of lowered surtax rates in fee uppetf braekat^ wo?® liberal
carry-back tax prtj^isions for corporations, elimination of ^double t?ixatio
of corporate ineosae, siors rapid depreciation allowances, and some changes
the capital gains tax provisions»
He also suggested the possible rsmoml of tax exsaaption from "
exempted state ®M& local aeeuritiftSn consideration for iiasuranc©
to take a plac© 5n equity financing to some extent, and several other ideas.

P*.ga 10
He said among other things t
"To realize our potential sustained expansion, w® need
to be concerned sdth assuring a steady and adequate fl©\7
of savings into equity oimership. •
It seems to me that.such a statement coming from the Chairman of the
Federal Reserve Board is one of the iacst imporiasi and encouraging pronounce-aents in recent years. Some months ago I had occasion to compliment former
Chairman Marriner Secies upon the courageous and forthright Banner in r M e h
he opposed many of the unsound proposals presented to the special session of
the Congress last year. I think his position in respect to the; proposed
housing legislation, for one example, was one of the most constructive contributions the Federal Beserve or its people could have made. It is a pleasure
now to note ths contribution which Chairman McCabe has made toward better
understanding and dearer thinking in respect to our'national economy.
Bie Federal Reserve System is a creature of the Congress of the United
States- It was created by the Gongres3 and is required to report to the Congress.
It seems to me that it can best serve the people of the. United States by stating
clearly and unequivocally that its own monetary policies ©an at bast do very
little to create the right economic climate unless accompanied by a sound taxation
and debt management and budget policy, which in the final analysis rests with the
Congress and thus isith the people of the United States.

September 9# K)

Mr* Reno Odlin, President,
Ihe iuget Sound National Bank,
Taeoma 1, Washington.
Dear Reno*
lhank you very much for letting me have a copy of your
address to the Pacific Coast Banking School at the University of
Washington on Monday* August 22, 19lp« Inert, i s much that I can
agree with in your talk, especially your complimentary reference
to me in the next to the last paragraph* Ihere are other things
that you would naturally know that 1 would not entirely agree
with but I won't undertake to burden you with any detailed d i s oussion because I a sure that you have been "fed upn with m
views a t numerous sessions of the Federal Advisory Council* Mowever, i t so happens that Larry Clayton made an address before a
Virginia Bankers Conference at Charlottesvill© on September 8 in
which he also discussed the recent lecture by Randy Burgess a t
the Graduate School of Banking a t ifcatgers to which you referred,
and I a taking the liberty of sending you a oopy of Larry's speech
because I think i t might help you in getting a somewhat different
slant than that indicated in yovr talk*
Looking forward to seeing you from time to time, and again
expressing my appreciation of the opportunity of reading your
speech, I am.
Very truly yours,

.. ,


M. 3 . Eooles.