View original document

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

Fori,» F. R. 1 1



Oftice Correspondence
Chairmen Eccles

Lauchlin Currie





O t b r is, 1957.
co e

Subject; A Tentative Program to Meet the
Business Recession

Attached is a tentative outline of certain things I think might be
explored to combat the recession that seems to be on us.

October 13, 1937.
L. B. Currle


The situation
The situation is daily becoming worse and the decline in business
activity is gaining momentum.

A further decline in production while

inventories are being worked off is indicated.

A decline in plant,

equipment and maintenance expenditures is likely as production recedes.
The downward movement should be somewhat arrested by the probable more
than seasonal expansion of automobile production in October and November,
but this will merely be borrowing production from next year.

The federal

government is making virtually no contribution towards increasing incomes
now and by next March activity-decreasing receipts may be expected to
exceed activity-increasing expenditures.

Most forecasters are talking

in terms of the Federal Reserve Board index going to 100.

They all are

relying upon an upswing in building to start us upward again sometime
next year.
There is no need to elaborate on the bad aspects of this recession
while it is occurring.

There is one aspect of it, however, that may be

If inventories are permitted to be worked off to a relative-

ly low volume anything that later changes the picture may lead to another
scramble for goods at advancing prices.

If building is permitted to lag,

the steadily accumulating shortage will result in an even worse eventual

Therefore, on political, social and economic stability grounds

it is highly desirable that consumer buying and residential building be
sustained and that thereby the recession be tempered as far as possible.


A tertative program
I have a strong feeling that the President has not grasped
the seriousness of the situation.

I should like to suggest that

you see him and point out the possibilities and outline a possible
program designed to moderate and shorten the recession.

The follow-

ing points seem to me to be worth exploring:

Open market purchases

Total adjusted demand deposits declined one-half billion from
December 1st to June 30th.

Since that date there has been another

half billion decline in reporting member banks alone.

With a poss-

ible retirement of publicly-held government debt next year and a
probable leveling off in commercial loans it is possible that adjusted demand deposits may decline further.

Although the importance

of this can be easily overstressed, still what influence it has is

In any case the immediate danger of deposit inflation

is over and there would seem to be no objection to substantial purchases of governments by the Federal Keserve banks and much to be
said in favor of such a course.

Insofar as these were purchased

from banks it would relieve the pressure on the capital market of
continued bank liquidation of governments.

Insofar as governments

were purchased from non-bankers a corresponding volume of deposits
would be created.

Finally, the psychological effect would be favor-

able and might help to check the expectation of lower prices and
moderate the decline in inventories.



Margin requirements

If it is advisable to raise margin requirements as stock prices
advance and brokers* loans increase, it would seem equally advisable
to lower margin requirements as prices fall and brokers' loans decline*

Although it might not have much effect in increasing buying

directly the psychological effect should be favorable.
5. Public expenditures
Very shortly it appears that there will be an excess of cash
collections over cash disbursements, thus contributing to a contraction of buying power.

While we should not deviate from the goal of

a technically balanced budget in the fiscal year 1939, when it is
expected that restraint will be desirable, there is some question as
to the expediency of economy efforts in the next nine months.


political difficulties aside, the proper fiscal policy from an orderly
recovery point of view would be one that would provide for an increase
in buying power for the next six months and for a decrease in buying
power in the calendar year 1939.

If, in other words, we can be reason-

ably sure of an upswing in business in 1939, it would be both permissable and advisable to provide for increased tax payments in that year
in the coming regular session of Congress.

Ihile we are doing that,

however, we should do all that we can to moderate and shorten the recession in the current fiscal year.


Certain points in line with this general policy might be

The f. P. A. ar>propriation, for example, provided

only for a seasonal expansion of unemployment this winter.


it appears that we will have in addition a cyclical expansion.
In view of the changed circumstances, some thought might be given
to the advisability of providing another $100 million or so
additional relief this winter.

Expenditures of this type are most

effective in maintaining consumer buying power and helping inventories to be moved.
The Governmentfs accounts should be studied with a view
to the possibility of increasing revenue with a minimum of unfavorable effect on consumer buying.

For example, the R* F. C. has out-

standing #576 million in preferred stock and capital notes of banks.
In view of the vastly improved position of banks it would appear
possible to exert some pressure for repayment in the next fiscal
year, thus obviating in part the need for additional taxes.


long as the interest rate on such obligations is a maximum of 31percent there is not much inducement to pay them off.
There might also be a study in order to ascertain the possibilities of speeding up expenditure of appropriations already made.
There should be some opportunity to do this in connection with
P. W. A., public highways and navy appropriations.




The importance of securing a building revival next year cannot
be overstressed.

The continuation of recovery depends on it.

Certain types of increasing expenditures are primary and certain
types are secondary or derivative.

For example, plant and equip-

ment expenditures are derivative in the sense of depending on a
grov/th in demand and production —
an upward movement.

we cannot expect them to initiate

This is the basic weakness in the position of

those who are merely content to make a large volume of capital funds

Occasionally inventory expenditures can be the primary

source of an upturn in incomes, as in 1933.

This, however, depends

on some bullish development that leads to expectations of rapid
price advances.
Mare generally the impetus to increasing expenditures must come
from building, as in 1922 and 1924, or from an excess of government
expenditures over receipts, as in 1934-1936.

Since there will be

an excess of tax collections in the near future, we are by a process
of elimination forced back to building as being the primary source
on which we must depend for a reversal of the downward trend in incomes,
demands and production.
The prospects in this field are not encouraging.

We have had

to revise steadily downward our expectations for this year from
450,000 units to 300,000 units.

Hence, with a national income in 1937


some seven or eight billion dollars higher than in 1936 we will
only get 20,000 more housing units built this year.

Since rents

have continued to move up the explanation for this disappointing
showing must be sought in higher building costs.

Although there

appears to be some prospect of a softening in building material
prices, this may be offset by a leveling off in the index of new
rents if incomes decline and unemployment increases.

It appears

dangerous, therefore, to wait until a natural readjustment of the
rent-cost relationship leads to increased building.

What positive action might be taken by government to stimulate
It appears to me that several things might be done:

The President must be made to see how much is at stake

and be induced to take the lead in getting the unions, equipment
and material producers and lenders together in a concerted effort
to reduce costs.

Full publicity might be used and the feasibility

of annual wage contracts be aired.

The possibility of a national

conference and the setting up of local committees might be explored.
Out of the resulting publicity and discussions would come pressure
toward reduced costs, and against higher costs.

Additional pressure

would be brought on Congress to amend the Federal Housing Act and
the Wagner-Steagall Act.



The Federal Housing Act should be amended along the

lines you suggest.

I do not think, however, that this will be

Even with the modifications you propose, facilitat-

ing the formation of national mortgage associations, there is
some question whether the volume of large-scale mortgages available and the spread in the interest rates will make the formation
of such associations attractive.

In any case the urgency of the

problem is such that we should leave no approaches unexplored.
Therefore I renew my suggestion that

The financier costs of insured mortgages should be reduced.

This could be done without legislation.

I would reduce not only

the maximum but also adopt a sliding scale whereby it would become
profitable to insure 50 or 60 percent mortgages.
time very few such mortgages are insured.

At the present

A 4 percent maximum rate

for a 50 percent insured mortgage, with a one-half percent service
charge and a one-fifth of one percent insurance charge would put
pressure on the whole mortgage lending field.

I would couple this


An amendment thet F. H. A. mortgages after 1939 would con-

tinue to be guaranteed by the Government.

The possibility of amending the Wagner-Steagall Act in

order to secure some immediate expenditures might be explored.
According to the Chairman of the New York City Housing Authority,
New York City is prepared to spend immediately all that it is eligible
to receive in the next three years, $40 million.

If the Act is inter-

preted to mean that a State can only have a maximum of ten percent


of the yearly appropriation, this would reduce New York Cityfs yearly
share to the negligible figure of $13 million.

If possible it

appears highl3r desirable to amend the Act on a first come, first
serve basis.

Generally, the possibility of putting some steam

behind the Act might be explored.

An administrator is not even yet

appointed and if nothing is done it is doubtful if we will get any
expenditures from this source at the time we most need them.


The President has made such definite commitments on the

Wage-Hour Bill that it appears useless to oppose it.

¥hat could be

done, however, is to represent to him the advisability of avoiding
any abrupt change and, so far as possible, to time the application
of the Act to any industry to increasing profits and activity in that

As an aid in putting any program over it would be highly

desirable for the President or for you to make a speech frankly stating the position, how we got into it, and what we propose to do to
get out of it, giving the country the sense of a grasp of the problem
and of a well-rounded and concerted program designed to meet it.
In your absence there have been too many of the old discredited type
of statement to the effect that everything is fine and conditions
are fundamentally sound.

Such statements do a lot of harm.