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P, 0 . Box 131, C i n c i n n a t i , Ohio. April 17, 1935. Mr* Lawrence Clayton, A s s i s t a n t t o t h e Governor of t h e Federal Reserve Board, Washington, D, C. Dear S i r : I thank you for your l e t t e r of the 12th, commenting on the b o o k l e t , " H T Y U CAN D ABOUT DEPRESSIONS, TAX BURDENS, UNEMPLOYMENT", and WA O O pointing out the s i m i l a r i t i e s between some of the views t h e r e i n expresses and some of t h e views of Mr. E c o l e s , Governor of the Federal Reserve Board. I a l s o thank you for sending HB a copy of the Governor's speech of February 12th before the Ohio Bankers' Association at Columbus, in which he o u t l i n e d some of his conceptions of the o b j e c t i v e s of the Banking B i l ] of 193 5. You conclude that t h i s B i l l is a s t e p in the r i g h t d i r e c t i o n i n ban! ing l e g i s l a t i o n and that i t should r e c e i v e the support of a l l those who share my views or are w i t h i n h a i l i n g d i s t a n c e of my v i e w s . I have not read the d e t a i l e d and s p e c i f i c p r o v i s i o n s of the proposed B i l l , nor analyzed i t ; and I should g r e a t l y appreciate your sending me two c o p i e s of the t e x t of i t . I I b e l i e v e , however, from the e x t r a c t s and some of the d i s c u s s i o n s II have read of i t , that anyone who shares my economic v i e w s , or whose viewj are w i t h i n h a i l i n g d i s t a n c e of them, w i l l b e , if not opposed, at l e a s t I not e n t h u s i a s t i c i n support of the B i l l . I There are, in my opinion, two fundamental t h i n g s that must be done I by t h i s Nation if we are t o have SOUND PROSPERITY and SOUND BANKING. I These two fundamental t h i n g s are as f o l l o w s : I (1) Enact income t a x l e g i s l a t i o n drawn on the p r i n c i p l e s o u t l i n e d I i n the booklet referred t o . with r a t e s for the b a s i s of the I tax (not r a t e s f o r the tax) approximately as high as g i v e n I t h e r e i n ; and w i t h the provisions a p p l i c a b l e to ALL CorporaI tions (not merely s o - c a l l e d personal holding companies) so as I to induce adequate declarations of dividends out of net p r o f i t ^ (If the above is done, i t w i l l not be necessary for the F e d e r a l Government to r e s o r t t o i n f l a t i o n a r y bank-credit l o a n s , nor toH i n f l a t i o n a r y p r i n t i n g - p r e s s money - as i n f l a t i o n i s defined onfl page 44 of the b o o k l e t ) . I -2- (2) Enact banking legislation (with adequate sanctions to induce observance) PROHIBITING inflationary bank loans, inflationary security investments, and investments in fixed assets, beyond a relatively small percentage of the excess of their total assets over their capital stock, of a l l banks not exclusively investment banks. The above two things I consider fundamental to sound prosperity and sound banking. As a corollary to No. 2 above, I would suggest a provision that Time Deposits be sub-classified into at least three groups, wit] perhaps the R L T V interest rates between them fixed (or fixable by the EAI E Reserve Board) for d i s t r i c t s . The classes of Time Deposits should be based upon the time of not ice-of-withdrawal required, say 3-months, 6-months, 12-months. These Time Deposits should be saleable to and transferrable to other already existing or then becoming depositors of like-notice or longer-notice class in the same bank. These Time Deposits should also be utilizable , on demand, by the depositor in paying loans due from hini to the same bank in which the deposit is held. But a l l this is more or less just adjunct to the main proposition that inflationary loans are not to be permitted. The proposed Banking Bill of 1935, as I understand i t , does not get at these fundamentals, does nothing much in these directions, and therefore in m opinion would do l i t t l e if any real good. I understand, of y course, that a banking b i l l is not a tax measure; but I hope it will be so amended as to prohibit inflationary loans, or investments in inflationary loans, by any banks the.t are amenable to Federal Control, exoept within definitely prescribed limits - permitted only as a "breathing spell" for the temporary financing of Capital Asset production by bank loans, untillthe proceeds of a security issue sold to investors (other than commercial banks) can cancel these temporary loans off the books of these banks. \ I I I I I Unless the proposed banking b i l l is amended along these l i n e s , I I cannot become enthusiastic about i t ; and neither do I see how others who I share m views more or l e s s closely, can become so* y I The present depression has -been severe and long. I t s severity and i t s length have been proportional to two factors, namely, the unusually large proportion of the net income after taxes which f e l l into the hands of large incoias receivers, and the extremely great and legally permissible bank-credit inflation (as I define inflation) which was actually brought into existence up to the middle of 1929. I I I I I I Governor Secies says, in the speech you sent me, that "It also seenufl evident to m that neither capitalism nor democraoy can survive another I e depression of the magnitude of the one from which we are just emerging"•• H may be right; I hope he's wrong; because the present depression is e I just a good sized frisky pup compared with the devouring dog which the • next depression will undoubtedly be, unless we wake up soon, quit kiddinB outselves, show some signs of a sense of reality, and do the needful witfl some degree of courage and completeness. And the needful, in my judge- • nent, means above all else (1) a more proper distribution of "net inoomel after A L taxes, and (2) the prevention of inflation in any form. L • -3- The already accomplished devaluation of the monetary unit, the varioi amendments to the Federal Reserve Act and other Banking Acts already passe during the past two years, (and now the proposed b i l l of 1935), merely la] the ground-work for an immensely greater legally permitted inflation (as 1 I define inflation) than any inflation we have had in the past. And now to change the subject somewhat:- I do not relish to appear to be hypercritical of any of our governmental Officials, Boards, and Departments; but when I see some of them gathering and publishing tremendous masses of s t a t i s t i c s , obtained at considerable expense to the Nation and to i t s commercial, industrial, and financial concerns, some of which s t a t i s t i c s liave in m judgement a value quite low in proportion y to their bulk, and at the same time see them neglecting to gather and publish s t a t i s t i c s which (pardon the 'impolite* expression) get at the G T of matters, I sometimes wonder why this i s so. US To give just an illusteation in the field of banking i t s e l f : - The Comptroller of the Currency calls regularly for quite elaborately detailed condition statements from the National banks. Yet for the f i r s t time in history (as of Ivlay 13, 1933, with the results published in the July 1933 Federal Reserve Bulletin) did a comptroller call for a report of the number of deposit accounts, and the size of their balances (with no division as between Time and Demand deposits). I I I I I I I Those s t a t i s t i c s were extremely enlightening. They were not avail- I able at the time I published m booklet; but they corroborate i t s thesis I y quite strikingly. They showed, for instance, that in a l l the banks all I over this Nation, that were licensed to be open for business on May 13, I 1933 - — which was A T R the general bank closing and bank cleanup, FE I A T R almost four years of depression, A T R the so-called 'flight of FE FE I capital' had taken place we s t i l l had a situation which showed that I O T E A E A E for the whole Nation, one depositor in every thousand N H VR G I owned $446.00 out of every $1,000.00 of deposits; and that less than 2 % I of the number of depositors owned more than 68$ of the volume of deposits Never since, so far as I know, have such s t a t i s t i c s been gathered and I published. I What protection is a reserve requirement of 13, or 10, or 7 percent I on demand deposits, and 3 percent on time deposits under such a composi- I tion of accounts? I Yet another classification of deposits, which io far as I know, havJ never been gathered, but which I think would be extremely valuable, woul<B be somewhat as follows: I (1) Deposits due to non-debtors of the bank, classified as between I citizens and domestic corporations, and foreign. I (2) Deposits due to debtors of the bank, in excess of their indebtedness to the bank* I I (3) Deposits due to debtors of the bank (whether debtors on loans I or on investments, and whether the loans are s t i l l held or haveB been discounted with a contingent l i a b i l i t y ) , which deposits arB N T in excess of these depositors' debts to the bank, subO I classified as follows: I I Deposits due to debtors on loans or investments which a r e , (a) Payable on demand, or within 6 months. (bj Payable after s i x but not exceeding 9 months. (o) Payable after 9 months. (Some debtors might f a l l into more than one class* In suoh oases deposits should be s e t off, so f a r as they w i l l go, f i r s t against the nearest due-date paper; next, to the next nearest; and so o n ) . I take i t a s being f a i r l y obvious to anyone familiar with economios and current banking finance t h a t the smaller the proportion of t o t a l dep o s i t s in the larger-sized-balance accounts, and the larger the proportion of deposits due to debtors of the bank, the sounder i s the economic and financial condition of t h e Nation. I venture the a s s e r t i o n that had such two c l a s s e s of s t a t i s t i c s been gathered a t regular and not too widely separated i n t e r v a l s , prior to the onset of the present depression, the f a i r l y rapid and great weakening of the economic and financial structure of the Nation, beginning at about the middle of 1927, W U D HAVE BEEN STRIKINGLY fiBVIOUS. OL I cannot refine these ideas further herein, quite long. The l e t t e r i s already Those who have the public r e s p o n s i b i l i t y for supervising the operation and proper functioning of our financial and economic system w i l l of course continue to call for such s t a t i s t i c s as tjiey f e e l they need and uld find u s e f u l . I have merely set forth some of my ideas of the kind s t a t i s t i c s and information I would f e e l to be necessary t o me i f I had any direct part in that public r e s p o n s i b i l i t y . Thanking you again for having written t o me, I am, Yours t r u l y , £\ Klair Klearsight Copy t o : Hon. J. F. T. 0'Conner, Comptroller of the Currency, Washington, D. C.