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September 2 9 , 1952,

Professor Sumner H. Sllchter*
Harvard Graduate School of Business Administration.
2X0 Morgan flail,
Soldier* s Field,
Boston 63* Massachusetts.
Dear Professor SlickterI
I road vith much interest your article in the
August issue of Harper*! and also your letter of rebuttal
to the Editor of the Journal of Commerce. but vas left vith
. the feeling that you had begged store questions than you had
ff answered* How does anyone weigh the cost of preventable
] unemployment against the cost of rising prices, particularly
when both these costs vary widely at different times? Vhy
must we accept the proposition, in perpetuity* that labor
unions will always succeed in pushing wages up faster than
t productivity rises? Zf we are likely* in any case* to have
aore inflation than vould otherwise be necessary to keep
unemployment at a minimum, is not an attitude of complacency
toward or approval of "just a little inflation* a dangerous
attitude for us to adopt? Vould it not be better to resist
inflation wherever we find it on the theory* if sot the fact* '
that the best way to avoid the necessity of having to deal
with serious depressions and preventable unemployment is to
try to restrain the "boons**
Vhich brings me to the reel reason for my writing
you again, X didn't like your remarks about the timid policy
of the Federal Reserve authorities in controlling credit* It
smacks of the ivory tower* where X know you try to avoid reslidenee. X suspect you would agree that credit restrictions
sufficiently rigorous to have prevented the repressed inflation
'of the war period from becoming open inflation during the
early postwar period would have Interfered seriously with the
reconversion and expansion of industry needed to meet accumu­
lated demands at home and to *bulld up the economies of the
free world*. Even in the face of that situation* however* we


Professor Sumner B. Slichter,
Boston 63, Maasachusett3.

i e were not complacent or entirely passive* Because of all
that has been said about our inflationary support purchases
of Treasury bonds, especially in 1947 and 1943* it does not
seea to be generally realised even now that i e reduced our
total holdings of government securities by nearly ? billion
dollars from the end of 1945 to the fall of 1949* thus ab­
sorbing the greater part of the reserves which would otherwise
have become available to the banking systea as a result of
gold inflows and other lesser factors* the money supply, in
I the form of privately-held demand deposits and currency, la*
I creased by less than 9 per cent from the end of 1945 to the
I middle of 1950* the inflation of the early postwar years
I was financed largely by sore active use of the greatly ex;\panded money supply with which we emerged from the war* Per­
l haps we should have taken more vigorous measures In the fall
Iof 1950, but, as you know, to regain some freedom of action
"over the strong opposition of the Treasury we had to have
a knock-down, dr&g-out fight, with the financing of the
United States Government in the balance. For a time this
struggle tended to nullify the effectiveness of the measures
ve did take. In any case, 1 think you would agree that we
eould hardly have stemaed the rush for goods by the public
and by business (and even by the Government) immediately
after Corea by credit restrictions alone*
Your specific reference is to the relaxation of
,restrictions on consumer and mortgage credit in 1952* Are
I you not overlooking the fact that the regulation of consumer
I credit was first weakened, and eventually abandoned, by
I Congressional action, contrary to the recosssendations of the
I Federal Reserve System? The situation with respect to the
* regulation of mortgage credit va3 similar; it was not actually
abolished by Congressional action, but its use was made sub­
ject to such restrictive provisions that the Board had no
alternative but to suspend it recently.
It is true that Begulation ¥ was suspended by the
Board before the legal authority to apply it was terminated,
and 1 think, it can be argued on good grounds that the sus­
pension was appropriate, given the Congressional reason for
granting the power and the Congressional attitude toward
its use*
lou may remember that the original objective of
the advocates of consumer credit regulation was to dampen
the wide swings in the demand for consumers1 durable goods*
which had become one of the widest variables In the over-all
economic situation* The express purpose of reinstating the
authority to regulate consumer credit in the Defense Production
Act of 1950, however, was to restrain demand in an area where


Professor gumner B* ilichter*
Boston 63* Massachusetts*

It was assumed that severe shortages would soon become
inevitable because of the diversion of materials and manpower
to the defease effort* Long before the spring of 1952 it
had become apparent that this assumption vas erroneous
production of such goods had been maintained at high levels
and consumer demand had subsided, so that the supply of
consumer durables vas not merely adequate, but in many cases
excessive*] The only justification for continuing the restric­
tions on consumer credit under sueh circumstances vould have
been an attempt by this means to exert some restraining
influence on the over-all volume of credit* regardless of
conditions in the industries most affected by the regulation
(where there was, in fact, substantial unemployment)* The
better way was to place the responsibility on general credit
controls,which was done with considerable success* 1 think
anyone who has been in touch with the money market and credit
situation in recent months will tell you that our policy has
not been timid — that it has been about as restrictive as
could be justified by the existing economic situation*
Our adversaries at Vashlngton claim we have been
slow to fear deflation and quick to fear Inflation, and it
is strange, therefore, to hear the opposite charge from you*
It is more than strange to have you imply that the Federal
Reserve System has succumbed to the demands of business
Interests for weak credit controls* and that the election
this year vas also a controlling factor in shaping our policies*
X believe that a little more acquaintance with the facts behind
the statistics would have shown you that these implications
were not justified*
lours faithfully,

Allan Sproul,

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102