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GOVERNOR ECCLES
BOARD OF GOVERNORS
FEDERAL RESERVE

SYSTEM

Office Correspondence
T o — B o a r d of Governor

Date.

Mny

19^1

Subject:.

From

Attached is a Bulletin approved by the Voluntary Credit Restraint
Committee yesterday for release in the papers of Monday, May 7 . It is intended that there will be a simultaneous release of a letter referring to
the Bulletin signed by M r . Charles E . Wilson. The approximate form of M r .
Wilson's letter is also attached.
Since the Voluntary Credit Restraint Committee wishes not to issue
Bulletins which meet objections from the Federal Reserve B o a r d , I request
that you read this material today. If the Board voices no objections, the
release will be given to the newspapers this afternoon.


Attachments.


DRAFT
BULLETIN NUMBER 3 OF THE VOLUNTARY CREDIT RESTRAINT COMMITTEE
RESTRICTION OF STATE AND LOCAL GOVERNMENT BORROWING
The Voluntary Credit Restraint Committee, at its meeting May 3 , 3-951, discussed the matter of credits to state and local governments and unanimously adopted
the following statement:
In 1951 state and local debt outstanding has reached an all-time high
approaching $22 billion.

Since Korea nearly $2 billion of public securities have

been ejold to raise new money.
To curb inflation in 1951 every segment of the economy, public and private*
must reduce expenditures wherever possible.

Financing institutions participating in

the Voluntary Credit Restraint Program should carefully screen loans to state and
local governments as well as loans to other borrowers.

Expansion programs that unde:

normal conditions would be financed without hesitation should be critically examined*
Ordinary government as well as private expenditures should be met largely out of
current revenue rather than financed by new borrowing.

If not urgently needed for

preservation of public health and safety or for purposes directly related to defense,
public works should be deferred.
Long Term Borrowing
Projects for expanding or modernizing municipally owned facilities constitute the major demand for public capital borrowing.

Roads, schools, water systems,

drainage and sewage projects and the like are the principal purposes.

In the ma-

jority of cases local governments can borrow only on the approval of the electorate,
which means that long periods intervene between first proposals and final financing.
In many cases funds were authorized some time ago to finance projects that are just
being put under way or which will be started shortly.

Some projects which had voter

approval before Korea are turning out to be under-financed at present prices and may




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require additional financing if they are carried forward on the basis of original
plans.

Examination of these plans might eliminate nonessential features and avoid

more borrowing.
It is sometimes difficult in individual cases to differentiate essential
from nonessential expenditures and to sort out those programs which should be undertaken immediately from those which it would be desirable to postpone.

Therefore,

certain tests are suggested to financing institutions cooperating in the Voluntary
Credit Rostraint Program to be used in arriving at financing decisions in discussions with municipal authorities.
Soldiers

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bonus issues are inflationary under today's conditions.

add to the spending power of the public through the creation of credit.

They

It would

seem desirable to postpone such issues until a time when immediate purchasing
power is needed to counteract unemployment and when it might be more beneficial to
the veteran.
Among the types of state and local government capital outlays for which,
in the judgment of the Committee, the financing should be postponed are:
1.

Replacement of any existing facilities that can continue to

perform their function during the emergency period.
2.

Construction of facilities of the types not recommended by

the Defense Production Administration—such as recreational facilities and war memorials.
3.

Acquisition of sites or rights-of-way not immediately needed.

U*

Purchase of privately-owned utilities by municipalities,

which involves borrowing to replace equity capital.




Short-Tern) Indebtedness
Lenders ore urged to encourage local governments to balance operating
budgets t>iid thus to tvoid any deficit borrowing*
borrowing in rnticipation of taxes or other revenues should be held
to the minima® amounts and periods required for operation of state and local
governments.

Such borrowing should be discouraged if it exceeds reasonable ex-

pectations of revenues, since there is always the danger that deficits may thus
be concealed.
Temporary borrowing for capital purposes, unless anticipating current
revenues, should be judged by the standards specified above for long-term capital
loans.

Advance Clearance of Large Issues
Regional committees have been established for consultation as to whether

or not pending financing is consistent with the principles of the Voluntary Credit
Restraint Program.
The Committee recognizes that the established procedure for origination
and bidding on public issues of state and local governments differs from other
types of financing.

We are advised that for this reason Defense Mobilization

Director Wilson has requested public bodies to submit financing of $1,000,000
or more to these regional committees for a ruling as to conformance with the
Program before negotiation of private sale or advertising for public sale.
Financing institutions are requested to cooperate in this matter by not
participating in the public or private sale or purchase of such securities unless
the issue involved has been cleared by the proposed issuer, or as the result of
an application for a ruling by the financing institution itself.

All such trans-

actions, regardless of size, should be screened by the financing institutions in




-U-

accordance with the Statement of Principles of the Program, and ma.y be referred
to the regional committees if the financing institutions so desire.
The regional committees available to consider these transactions are
the investment banking regional committees as follows:
\ ttoe

Chairman

Territory

Eastern

Percy M . Stewart,
Kuhn, Loeb & Co.,
52 William Street,
New York, New York.

The Atlantic Seaboard to and including Ohio, West Virginia, Tennessee
and Alabama.

Mid-Wostern

D. Dean McCormick,
McCormick & Co.,
231 S. LaSalle St.,
Chicago Uj Illinois.

Michigan, Indiana, Kentucky, Mississippi, Missouri, Kansas, Nebraska,
the Dakotas, Minnesota, Iowa and
Colorado.

Southwestern

John H. Rauscher,
Rauscher, Pierce & Co.,
Mercantile Bank Bldg.,
Dallas 1, Texas.

Texas, Louisiana, Arkansas, Oklahoma
and New Mexico.

Western

Frank F. Walker,
Dean Witter & Co.,
U5 Montgomery St.,
San Francisco, Calif.

The West Coast states along with
Arizona, Utah, Wyoming, Montana,
Idaho and Nevada.




TO ALL GOVERNORS OF STATES, MAYORS OF MAJOR CITIES AND FINANCIAL OFFICIALS
OF PRINCIPAL COUNTIES AND OTHER POLITICAL SUBDIVISIONS:
Control of inflation is vital to national defense.

The national

defense outlay will grow monthly to a peak in 1952 or later.

It will take

1

steadily increasing share of our country s production and absorb a growing portion of its manpower during this period.

Thus, to avoid a runaway

rise in prices, it is vital that all practicable steps be taken to reduce
demand for goods and labor at this time.
I am writing to you as the leader of a great municipality to enlist your support and the understanding and cooperation of your constituents in this objective which is second only to adequate defense to the
future well-being of our people.
Borrowing—bank loans, insurance loans and bond issues—adds dollars
of buying power to today's income.
power to spend today.

In effect, they mortgage future buying

Regardless of the soundness of the borrower's credit,

it should be used sparingly if at all at this time.

You and the citizens

of your communities will agree that this rule applies to State and municipal borrowing as well as to private borrowing.
On behalf of our government I ask you to postpone borrowing, no
matter how worthy the purpose, if the project is postponable.

While many

municipal projects are urgent, others might be set back to a time when they
would contribute to maintaining a high level of employment in a period of
slack business.

Soldiers

1

bonus payments, many war memorials, and munici-

pal recreational projects are but a few important examples of postponable
projects which will serve the nation better at a future time.




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2

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Your Federal Government has set up machinery for voluntary screening of loans as to desirability in this defense period.

Under the Defense

Production Act of 1950, the Board of Governors of the Federal Reserve System
has appointed a Voluntary Credit Restraint Committee.

I am attaching a bul-

letin from that Committee with the urgent request that you read it and conduct your constituency's financing in accord with its spirit.
Regional committees have been chosen from the leading investment
bankers of the nation.

They are at your service to advise as to the current

desirability of your financing.

Their names appear in the attached bulletin.

It is my earnest request that, during the defense emergency, every
State and municipal borrowing of $1 million or over receive the approval of
one of these committees before being consummated either by a single lender
or by public sale.

Unprecedented as this request may b e , your cooperation

will be a major contribution to the future welfare of our country.
could have a higher aim.




Chas. E. Wilson

No one