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3804 Greystone Avenue New York 63, N Y November 28, 1947 M r M & r r i n e r S Eccles, C h a i r m a n B o a r d of G o v e r n o r s of T h e Fe d e r a l R e s e r v e S y s t e m Wa sh in gt on , D C D e a r M r Eccles; So m e t h o u g h t f u l e c o n o m i s t s feel that, w i t h b u s i n e s s loa ns c u r r e n t l y at a h i g h level, a d e p r e s s i o n m a y be t o u c h e d off by a c o n t r a c t i o n of b a n k credit* F o r t h e last y e a r a n d a half, t he s t o c k m a r k e t has f a i l e d d i s m a l l y to p r o v i d e I n d u s t r y w i t h t h e e q u i t y m o n e y It n e e d s a n d w o u l d l i k e t o have. In o r d e r to c o n t i n u e at the p r e s e n t h i g h r a t e of I n d u s t r i a l act iv it y, L i o n e l E d i e has s ai d t h a t I n d u s t r y m u s t ra is e 6$- to 7 b i l l i o n s No n t h e o u t s i d e " f o r the n e x t 5 y ea rs . A t t h e m om en t, b an k l o a n s a p p e a r t o be the m a j o r s ou r c e of n e e d e d c d p i t a l funds. T his Is w h y 1 w a s b e w i l d e r e d to read, th e o t h e r day, t h a t y o u p r o p o s e t h e b a n k s I n c r e a s e the l i q u i d r e s e r v e s th e y a r e r e q u i r e d to k e e p a d d i t i o n a l re s e r v e s of 25/6 o n d e m a n d d e p o s i t s a n d 1 0 % on ti m e d e po sit s. I no t e t h a t as o f D e c . 31, 1 9 3 9 of to ta l b a n k I n ve st me nt s, 4 4 £ w e r e loans, 3756 w e r e gove rn men ts , a n d 19% o t h e r I n v e s t m e n t s ; t h a t as of Dec. 31 last y e a r 21% w e r e loans, 6 6 % w e r e g o v e r n m e n t s , stnd 9% o t h e r I n v e s tme nt s. F r o m y o u r remarks, I c a n d r a w o n l y two c o n c l u s i o n s : e i t h e r (1) t ha t y o u r e g a r d the c u r r e n t h i g h l e v e l o f ca p i t a l f o r m a t i o n as g r a t u i t o u s a n d n o t r o o t e d I n ne ces s i t y ; o r (2) th a t In y o u r of f i c e y o u a r e m o r e w o r r i e d a b o u t w h a t m a y h a p p e n to the g o v e r n m e n t b o n d m a r k e t t h a n by w h a t m a y h a p p e n to U.S. I n d u s t r i a l e n t e r p r i s e If b a n k c r e d i t f o r p r o d u c t i v e p u r p o s e s Is wi t h h e l d . W o u l d y o u set m e s t r a i g h t a b o u t t h i s ? S i n c e r e l y yours, c». James P Rich v December 5, 1947 Ur. James P. Rich, 3804 Ureystone ^venue, New York 63, New York. Dear Mr. iiich: Your letter of November 28 raises very far-reaching questions which are difficult to deal with in a letter. I assume that your comment was prompted by fragmentary accounts of my recent testimony and for that reason I enclose a copy of the full text, which should lead you to very different conclusions from the ones you have drawn. However, I was not specifically discussing the important question of capital formation and its adequacy. I have given a good deal of thought to this matter and to the contention that business should finance itself more through capital markets and less through bank credit. In either case, however* to the exteftt that bank credit is expanded inflationary pressures on the demand side of the equation are intensified in view of continuing short ages of labor and materials. It cannot, therefore, be xeaionahly contended that such financing will call forth new production. As for equity versus bank financing, I have concluded from considerable inquiry into the matter that business is dis posed to borrow from the banks because bank credit is readily available at relatively low interest rates and the interest cost can be charged off on corporate tax returns; whereas, equity financing involves considerable expense and dilutes equity owner ship in corporations, a s for the actual volume of capital forma tion that, of course, gets into tax problems and estimates of what may be needed in the future rather than under present conditions. Sincerely yours, U. Enclosure Et:b Accles, Chairman.
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