The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
BOARD DF 7/14/50 — GOVERNORS OF THE FEDERAL RESERVE SYSTEM memo dictated by M . b. Eccles This memo is the substance of what I discussed with Symington and Keyserling in person, and also with Senator Douglas on the telephone. Senator Douglas said he agreed 99*9% Symington and Keyserling agreed, except that Keyserling said he would like to consider further the question of the section covering the Treasury relative to raising the interest rates.before he could agree, I tried to see Senator Taft but found he was in Ohio — talked to his assistant, Mr. Martin. Mr. Martin suggested I write to Senator Taft and send him a copy of the memo. Senator Douglas suggested I send him a copy* I did not leave a copy with Symington and Keyserling, as I decided to rewrite the memo and make some corrections and additions before sending a copy to them, as well as to Taft and Douglas. Mr. Thurston is, therefore, revising the memo according to ray suggestion and he will air mail a copy to me at Ogden on Monday, 7/17 Washington, D . C., July H , 1950: Governor M . S. Eccles discussed this program with the following ¥ . Stuart Symington (Chairman of the National Security and Resources Board) Leon H . Keyserling (Chairman of the Council of Economic Advisers) (In the office of M r . Symington, who invited M r . Keyserling to be present) They agreed, except that M r . Keyserling said he would like to consider further the question of the section covering the Treasury relative to raising the interest rates before he could agree. Senator Paul Douglas (on the telephone) He said he agreed 9 9 • S u g g e s t e d sending copy. M r . Martin (Assistant to Senator Taft). Senator Taft was in Ohio; M r . Martin suggested M r . Eccles write to Senator Taft and send him a copy of the memo to his Washington office. M r . Eccles did not leave a copy of his original memo with Messrs.Symington and Keyserling as he decided to rewrite it and make some corrections ana additions before sending copy to them and the two Senators. On 7,/lo/50 M r . Thurston sent copies of the final memo to Senators Taft, Douglas and Fulbrightj he overlooked sending copies to Messrs. Symington and Kesyerling until 7/26/50 (after telephone call from M r . Eccles on 7/25/50, Ogden). July lli, 1950, To protect the c o u n t r y in the first instance from the inflationary I dangers inherent in the Korean crisis — without resort to-blanket of price controls, rationing, etc», such as would be required to wage another world war — and, secondly, from an abrupt subsequent industrial collapse, the Government shouldi 1« Appeal to every bank to unite in a nation-wide voluntary agreementi First, to atop bank credit expansion at its source by extending no new credits on balance» this means that the volume of new loans made by «ay bank would not exceed the voluae of loans paid off* Second, to prevent further monetisation of the public debt, that is, selling Government securities to obtain reserves on which to pyramid new loans and investments* Banks that gain deposits should invest in Government securities; banks that lose deposits would m i l such securities« this will balance out in a way that will be a steadying influence toward an orderly aarket« To this end, the Treasury should issue 15-year, 2-1/2 per cent non-marketable bonds| short term rates should be permitted to rise moderately* The combined result would relieve pressures on the long-term market» At the same time the Federal Reserve should increase the discount rats to 2 per cent« If this voluntary prograa succeeds, as it can with «holehearted support of every American banker, sharp increases in reserve requirements, which would be the only other effective way to accomplish the aam purpose, would not be necessary« XI» Pot stiff consumer instalment credit terms in effect at once with down payments high enough and maturities short enough to halt further swelling of the already excessive volume of these borrowings to buy automobiles, refrigerators, washing machines, end ether appliances« Stopping further growth of this credit — preferably causing a shrinkage on balance — would help to relieve ths drain on critical metals and other materials, as well as reduce the inflationary impact of excessive demands for goods« III* Reduce, so far as possible, ths budgetary gap, by a baa on new tax cuts, by closing existing loopholes, by increasing the postal rates to a pay-as-you-go basis, and by other steps, the most important of which is to levy an excess prof its tax of 75 psr cent maximum based on percentage of infested capital, since there Is no existing base period to use as a guide because corporate profits in ths post-mar years have been phenomenally large« *he excess profits tax should exempt the first $5,000 of earnings for ell corporations« this would benefit w a l l -3- business« The tax should be graduated, starting, for example, at a rate of 10 per cent up to the first million dollars« IV« Curb further expansion of housing credit by stopping further purchases of mortgages by "FannyMay*, suspending special benefits for veterans and others and by a closely restrictive FEA lending policy« this is essential to reducing demands for lumber, steel, copper, etc«, as well as for labor« Call upon the public, which is remarkably united in this crisis and will respond to firm leadership, to save and invest in 0« $• Savings bonds« By such a vigorous credit, fiscal, and monetary policy as the foregoing, the used will not exist for direct controls, the enforcement of which, in peacetime, is virtually impossible, aside from the army of administrators required and the inevitable harrassmsnts to businesses and individuals« Such a program, loyally supported, will prevent the boom now that spells inevitable • " bust later when the crisis is past« t:
@FedFRASER