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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Of&Ce Correspondence Wfo Mr« Thurston THnhard A. Misgrave 0 ( * ' W Date December 18, Subject: Chairman's Letter Regarding Budget Message I am attaching a draft of a letter to Budget Director Smith for the Chairman* s signature* Mr* Thomas has seen the draft* Some of the points in the letter reflect a recent discussion -which I had -with Mr* Col$Lf particularly the reference to excises and the desirability for f l e x i b i l i t y in the President1 s program* I hope that the l e t t e r can go out before the Chairman leaves and, i f possible, reach the Director before the Holidays* If the letter i s sent, the Chairman may wish to consider transmitting a copy to Secretary Vinson* Attachment - \ i December 2 0 , 19U5Harold B. Rnt^sg State l?tb Bt« y ?5» $• C. Pear Ha mid i &toi#JsJ ra©«*st vy^ni i t has H««a mi stems xy to include? udrvt R«a«ftf» «•€»%© r«**»?*X «tft^«m«3ttt *>a the treada of tax pulley. As tW e i s the t i n t wh*ia the smseage i s in i t s f o n M t l w mtafre, I frhr>uld lilDi t«' p>F9S#?it Hii1 your ocusldesr atloa aosae rievit on t h i s rssttttr* A» Chalnafta of lisoajpri of or« of the Kederal Pmmrm Byfgtm&t 1 hftve a 4ireet Interest i n thl« question be*3ttn»# I S^liov^ that ttty «TSR p e » r t i b i l i t i « e # t»ktn alone f id.11. b d*velo*&«Ba,t« thtst are i a Hi wj tiiM., I t la 1*d.f;.hly teportitfit to av^id ass^r ate eosfdt?nen^» repartUni^ further tmx re4iietiaii« for X9l>6« ^ of the wo«t e r t t l e a l p:rt-*bl«»« facing; the Adt&i&istnttlon in to «tr*ttffi}a«a «i»S «Tts««id prl«e o«ntrf*l|, both tfe-r^xtrh direct OPA. •ares And HmM^li abeorptlon ef #xce«s be^fiag pewvr* The • t r a t l o n ' t Mi8« f^r prle© o^ntrol WMall >>e rr^Sfe-tij.11 iswa-kened i f or t a i rt4hMrH«Ml V^T« a.^im€?«?* at "or ap a'wa.re that oartnln €»w?i tenant* -metre ?5«.d© >»y Ies/!«r8 l l th» f!®bat@ over the l*«t Tt#T0jm« Aet # tJasit Cox^r»#s ?dll wawfe to e©ss^m««i a general tax aiaidy sh&rtly after th» turn of the year and to alder the exeise tax picture prior t o Jul^ X* Aleo # i t way be exp*«teKl t l » t Co^resn w i l l *&ttt to vote further tax cuts prior to the loli£ eloistio&a and to adjourn l a early suiaaer* nowev«r9 in view of the current outlook # the Adriai at ration should not to thle policy* The ecoa&iaie aituatlon early i n the yemr be altogether unsuitable for tax r e a c t i o n s and i t 1« l i k e l y that this situation w i l l continue through the l a t t e r half of 19l4^» Slnoe th« lon^er-mn outlook 1ft highly uncortain, th» President way *ish to indicate that now rdoomr-anaations may be j?«de at a l a t e r date should condition* ©till for Honorable Harold D- Smith - (2) To forestall a program of tax reduction, I think it exceedingly important for the Administration to take a firm position in the budget message* This is no time to reduce excise taxes, which curb buying power and should not come off until buying power is no longer vastly in excess of the supply of goods* This is all the more true if labor is to get general increases* To cut down or cut out excise taxes on top of that, would amount to an unwarranted and inflationary subsidy* Developments since V-J Day have not borne out the deflationary forecasts and anticipations of extensive unemployment which were so widely accepted* Current trends — including the high level of consumers' purchases, the prospect of large net exports, the tardy flow of civilian supplies, and th© sharp increases in prices of those products removed from control — indicate that inflationary pressures are strong and quite possibly may gain in strength* The continued sharp rise in capital values tells the same story* In view of these tendencies and the prospects tor a further weakening or even discontinuation of price controls, further tax reductions would be most unfortunate and entirely Incompatible with a hold-the-line policy in other areas* As one who has advocated low taxes &n.& an adequate level of Federal expenditures during the depression years, X urge that the same logic be applied to the present situation. fn&n the economy was excessively deflated, now the opposite conditions prevail* Then a deficit was inevitable and needed* Mow every effort should be made to approach a budgetary balance as soon as possible. If we do not exert our efforts in this direction now, it will be difficult indeed to persuade the bondholder that we shall ever intend to do so. Quite likely the problem some years hsnce will again become one of preventing deflation, but that is not the present situation* The present need is for giving assurance to consumers and bondholders that prices will not increase and that the purchasing power of their savings and incoiaes will be proteoted. A forceful statement along these lines in the budget message would contribute greatly to dispelling th« growing beliof that rising prices are inevitable. Sincerely yours, i S. Eooles, Chairman* RA. HiET:b
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