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r>Message delivered by F .R . 468 Rev* 1 /4 7 Form P. R. 511 "TO____________Mr# Thomas FROM_________ Mr* Thurston I'm somewhat puzzled about this ex ception. 71/hat do you think of it? CHAIRMAN'S OFFICE COMMITTEE FOR. ECONOMIC DEVELOPMENT Department of Commerce Building Boom 6222 Washington 25, D. C. December 2, 19^7 Mr. Marriner S. Eccles Chairman, Board of Governors of the Federal Reserve System Washington 25, D. 0. Dear Marriner5 I heard your testimony on the Hill the other day and am, of course, very much for a credit contraction program as was suggested way hack in our C.E.D. staff study, "Jobs end Markets". I did take exception to your sugges tion that a limit or contraction of hank credit would result in more than frictional unemployment. I am enclosing a copy of a letter I wrote to Ralph Flanders giving my reasons for this belief. Good luck to you. Very sincerely. Gardiner C. Means Department of Commerce Building Booa 6222 Washington 25* S. C. December 2, 19^7 The Honorable Balph 3. Flanders B o o b 311 United States Senate Washington, D. C. Dear Bclph: X want to congratulate 70a on the report of your -price subcommittee* It is a product worthy of the Chairman of the CBD fieaearch Connittae. On one point X wiah to raise p. question. On page 17* you point oat that "we 'broke the high prices of the early 1920*s partly by monetary me?na in volving a raising of the interest rate. Unemployment resulted. Judging by past experience both here and abroad, action of this sort usually results in unemployBent*" .X fully agree with this statement but I very much question that it is relevant to- the present situation because the r?rlce rise jjurlng this v*r -period has been so fundamentally different from th*t in the first war. At the beginning of the first war we had relatively full employment and a fairly good balance between administered prices (i*e», prices such as those of turret lathes which are set by businessmen in the light of costs and n&rfcet conditions) and narket prices (i.e., prices such rs those of wheat and cotton which are cade directly by supply and demand forces in the market)* De mand daring the war raised both groups of prices roughly 125?® (125£ and 121$). When demand was reduced by monetary policy end otherwise, market prices fell rapidly but administered prices fell only slowly (19£ as against h 2 jo ). The •stickiness* of adainistered prices lead to unemployment* She second war started with heavy uneaployment end with market prices as a group way below a satisfactory balance vith adainistered nrices. (By ay calculations, rtra£hly3®£ belowa fair balance.)- Between the beginning of the war end March 19^2, the date used for the general price freeze, employment ex panded until we had close to fbli employment and market prices rose while adainistered prices rose only 6?. This rlsa.hrought the two gra m s of-nricaa into alflost.exactly the same relation they held in the fall eorlovaent rerlods 191^ ,aBa..2326r22» Between March 19^2 and June 19^7 (X do not have later figures) market prices as a group rose about 70/® while administered prices as a group rose only 2 5 i* ' Assuming that these price groups were in more or less reasonable balance in March 19^2, market prices as a group are now way above a reasonable balance with adainistered prices* Also, it can be shown that, for aost administered priced items, demand is considerably In e»aeas of «st>1t. « 2fhe contrast between price behavior In this var period taken as a whole v&th the first war period la olaar* In the first war,, market prices increased 121$ while administered prices Increased 123$. In the aeoond var period (to ^ne 19^7)> market prleee increased roughly 150Jt bat administered pricaa Increased only 35f>* 1a the first war, the two groups of prices started apd, remaned approxinately' In balaace clear to the top of the price rise. In the second war, prices started in an unbalanced condition vith market prices too'lov In relation to administered pricaa .and rose relative to aidjjlniatered pricaa until today they are ancb too high in relation to-administered prices* The elgniflea&ee of this difference for anti-Inflation policy l*t>a« f o l l o w a ' general eontraotion of daoand which brought market prices down Intff folanceillttt administered prices would'not re tire a general reduction in adniniatered prices and therefor not lead to an increase lrf ttpeftployqe&t beyond frictional unepployaent. Such or most of the* excess in the deoand for admin** iet.ared priced iteas would disappear along with ,th^ deplin? In aaxfcet prices., &ut'bea&*seadaintstsre& prices “-would Thot,h£*e,-t©MBe«eidownt ‘their etiokiaess would>not lead to uaeijployiaent* Of coarse« a drop in, demand which reduced-.mar ket,prices JgalStt abalanced relation to adalnletered prleee would, lead to nora than1tr lotlonal 'ttnemployasent. X aa convinced that this difference in the prioe rise during this war (which X think.is..in large part due to tbit' good sense and restraint of U g boelnese) mafcea possible a considerable amount of price redaction, say a ,5^ drop i » the wholesale price index vith an 8 to 10J& drop' la food prices without creat ing flora thijn friotional unemployment* Very sincerely* Gardner 0* Keans
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