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TREASURY DEPARTMENT OFFICE OF COMPTROLLER OF THE CURRENCY IONAL BANK EXAMINER Post Office Box 1193 Austin, Texas January 30, 1948 PERSONAL Ur. llarrlner S. Eccles C/o Board of Governors Federal Reserve System Washington 25, D. C. Dear Ur. Eccles: This refers to your letter of December 16, 1947, referring to ay letter of November 29, 1947, with respect to the proposal which you submitted to the Congressional committees. Only a comparatively few bankers really understand that approximately $25 billion of the deposits of the banks (and Fed eral Beserve notes ia circulation) are the proceeds of the Federal deft owned by the Federal Reserve Banks — borrowed money, ia a sense, the sane as i f the banks had borrowed froa the System and purchased the securities* I f the officers of each individual bank would regard, say, 10£ to 20£ of their deposits as borrowed money, they would be more fav orable to your ideas and proposal and make loans and investments accordingly. I f some restraint, as effective as your proposal, be not made into law ithin a reasonable time, bank-credit inflation, next to printing-pre3s money, is most certain to continue with disasterous effects in the md, because self-discipline or voluntary action w ill not do the job. The desire for profit w ill be the reason that most bankers w ill continue to make loans that are inflationary. Of course, certain commercial and production lending must be continued, but, to the extent that average loans rise, regardless of the kind, there is some inflation from them, unless the in fla tion be offset by really increased production. Let us hope that lending w ill level o ff in a proper manner and noTgo on (as in the 1920*8) and a ll banks stop lending at the same time (as during 1929-33) and a ll start calling loans at the same time when prices start down (as in 1929) after we have a surplus of goods and services (under consumption), which is most certain to cone because high, and higher prices w ill u lti mately drive the mass buying rarer into the hands of so few people that they cannot consume (buy) our enlarged production. Boon! Bust! Ur. Marriner S. Eccles — 2 January 30, 1948 I had no thought of moving to the banks $15 to $18 billion of the Federal debt now held by the System. You are correct in that such a program "could only be accomplished at the risk of catastrophic effects upon the long-term bond market. " Those of us who favored more taxes during the war, applying more of excessive war profits on the war's cost, did not have outf^ ideas made into law, and now we have to deal with the almost un controllable effects of $200 billion of back-log of- buying power plus the very high current national income, a ll bidding up for goods and services, a presently existing fact that some of us predicted five years ago would come true i f we failed to take excessive profits out o f war by more taxes in seas form. Let us also hope that we do not hare to devalue farther (in later years) our dollar, as France is now doing with her money, but I fear that we w ill some day. That day may crate after infla tionary price8 drive the backlog of buying power into ownership of too few people and current income w ill be inadequate to consume our production, which w ill mean p surplus or under consumption (depression] Under such a condition, the national income w ill drop so low that the Treasury again w ill have to resort to deficit financing, and, i f so, then we may be certain the "next come back" w ill be by a very much cheaper dollar, and "pump priming" then w ill make our deficit financing (which was necessary and unavoidable) in-the 1930's look like "fly specks" comparatively. While I enjoy your letters more than I can express in words, I must not bother you with a lot of correspondence, but I shall appreciate your acknowledging this letter that I may know you received it . This is confidential and is to encourage you in helping to save the economy of our country, because it is under A otic and depressioj conditions that the bad isms spread. Very sincerely yours February 3, 1948. Deal* Mr. Hawkins: Thank you very much for your personal letter of January 30 and the expression of your views regarding the current fiscal and monetary situation. I shall continue to do all that lies in my ability to carry out the program which I have advocated. Sincerely yours, Mr. J. Vs. Hawkins, Post Office Box 1193, Austin, Texas. CNs.am
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