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FED ERAL RE SE R V E BANK
OF NEW YORK
r Circular N o. 3 6 9 9 "1
L
M ay 7,1 9 51
J

POSTPONEMENT OF STATE AND LOCAL GOVERNMENT FINANCING
Bulletin No. 3 of Voluntary Credit Restraint Committee
To all Financing Institutions in the
Second Federal Reserve District:

W e set forth below the text o f Bulletin No. 3 issued by the national Voluntary Credit
Restraint Committee.

This is followed by the text o f a letter from

C h a r le s

E.

‘W i l s o n ,

Director, Office o f Defense Mobilization, to governors o f all states, mayors of m ajor cities and
financial officers of principal counties and political subdivisions, in which reference is made
to this bulletin of the Committee. Both the bulletin and the letter have been released for
publication today.

POSTPONEMENT OF STATE A N D LOCAL G O V E R N M E N T B O R R O W I N G
The Voluntary Credit Restraint Committee, a i s l t s meeting on May 3 1951, discussed the
t t aet
,
matter of cred ts to State and l c l governments and unanimously adopted the following statement:
i
oa
In 1951 State and l c l debt outstanding has reached an a l t m high approaching $22 b l i n
oa
l-ie
ilo.
Since Korea nearly $2 b l i n of public s c r t e have been sold t r i e new money.
ilo
euiis
o as
To curb i f a i n in 1951 every segment of the economy, public and p i a , must reduce expendi­
nlto
r v te
tures wherever p s i l . Financing i s i u i n participating in the Voluntary Credit Restraint
osbe
ntttos
Program should carefully screen loans to State and l c l governments as well as loans to other bor­
oa
rowers. Expansion programs that under normal conditions would be financed without hesitation should
be c i i a l examined. Ordinary government as well as private expenditures should be met largely
rtcly
out of current revenue rather than financed by new borrowing. If not urgently needed for preserva­
tion of public health and safety or for purposes directly related to defense, public works should be
deferred.
Long-term borrmving

Projects for expanding or modernizing municipally owned f c l t e constitute the major demand
aiiis
for public capital borrowing. Roads, s h o s water systems, drainage and sewage projects and the
col,
l k are the principal purposes. In the majority of cases l c l governments can borrow only on the
ie
oa
approval of the e e t r t , which means that long periods intervene between f r t proposals and
lcoae
is
f n l financing. In many cases funds were authorized some time ago t finance projects that are
ia
o
just being put under way or which w l be started s o t y Some projects which had voter approval
il
hrl.
before Korea are turning out t be under-financed a present prices and may require additional
o
t
financing i they are carried forward on the basis of original plans. Examination o these plans
f
f
might eliminate nonessential features and avoid more borrowing.
I i sometimes d f i u t in individual cases t d f e e t a e e s n i l from nonessential expendi­
t s
ifcl
o ifrnit seta
tures and t s rt out those programs which should be undertaken immediately from those which i
o o
t
would be desirable t postpone. Therefore, certain t s s are suggested to financing in t u i n co­
o
et
s it t o s
operating in the Voluntary Credit Restraint Program t be used in arriving at financing d cisions in
o
e
discussions with municipal a t o i i s
uhrte.
Soldiers’bonus i s e are inflationary under today’ condit o s. They add t the spending power
sus
s
in
o
of the public through the creation of c e i . It would seem desirable t postpone such i s e until a
rdt
o
sus
time when immediate purchasing power i needed to counteract unemployment and when i might be
s
t
more b n f c a to the veteran.
eeiil



Among the types of State and l c l government capital outlays for which, i the judgment o
oa
n
f
the Committee, the financing should be postponed are:
1 Replacement of any existing f c l t e that can continue t perform their function during
.
aiiis
o
the emergency period.
2 Construction of f c l t e of the types not recommended by the Defense Production Adminis­
.
aiiis
tration— such as recreational f c l t e and war memorials.
aiiis
3 Acquisition of s t s or rights-of-way not immediately needed.
.
ie
4 Purchase of privately-owned u i i i s by municipalities, which involves borrowing t
.
tlte
o
replace equity c p t l
aia.
Short-term indebtedness
Lenders are urged t encourage l c l governments to balance operating budgets and thus t avoid
o
oa
o
any d f c t borrowing.
eii
Borrowing in anticipation of taxes or other revenues should be held t the minimum amounts
o
and periods required for operation of State and l c l governments. Such borrowing should be d s­
oa
i
couraged i i exceeds reasonable expectations of revenues, since there i always the danger that d f c t
f t
s
eiis
may thus be concealed.
Temporary borrowing for capital purposes, unless anticipating current revenues, should be judged
by the standards s e i i d above for long-term capital l a s
pcfe
on.
Advance clearance of large issues
Regional committees have been established for consultation as t whether or not pending financ­
o
ing i consistent with the principles of the Voluntary Credit Restraint Program.
s
The Committee recognizes that the established procedure for origination and bidding on public
i s e of State and l c l governments d f e s from other types of financing. We are advised that for
sus
oa
ifr
t i reason Defense Mobilization Director Wilson has requested public bodies t submit financing o
hs
o
f
$1,000,000 or more to these regional committees for a ruling as to conformance with the Program
before negotiation or private s l or advertising for public s l .
ae
ae
Financing in t u i n are requested to cooperate in t i matter by not participating in the
s it t o s
hs
public or private s l or purchase of such s c r t e unless the i s e involved has been cleared by
ae
euiis
su
the proposed i s e , or as the result of an application for a ruling by the financing instit i n i s l .
sur
ut o t e f
All such transactions, regardless of s z , should be screened by the financing i st t t o s in accord­
ie
n iuin
ance with the Statement of Principles of the Program, and may be referred t the regional com­
o
mittees i the financing i t t t o s so d s r .
f
ns i u i n
eie
The regional committees available t consider these transactions are the Investment Banking
o
Regional Committees as follows:
Committee
Eastern

Chairman
P ercy M . S tew art,

Kuhn, Loeb & C .
o,
52 William S r e ,
tet
New York, N. Y.
Mid-Western

D . D e a n M c C o r m ick ,

McCormick & C .
o,
231 S LaSalle S .
.
t,
Chicago 4 I l n i .
, lios
Southwestern

J o h n H . R a u sch er,

Rauscher, Pierce & C .
o,
Mercantile Bank Bldg.,
Dallas 1 Texas.
,
Western

F

rank

F. W

alker.

Dean Witter & C .
o,
45 Montgomery S .
t,
San Francisco 6 C l f
, ai.
May 7,1951



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

Michigan, Indiana, Kentucky, M s s ip i
i si s p ,
Missouri, Kansas, Nebraska, the Dakotas,
Minnesota, Iowa and Colorado.
Texas, Louisiana, Arkansas, Oklahoma and New
Mexico.

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

(Letter from Director, Office of Defense Mobilization)
May 7 1951
,
Gentlemen:
Control of i f a i n i v t l to national defense. The national defense outlay w l grow monthly
nlto s ia
il
t a peak in 1952 or l t r I will take a steadily increasing share of our country’ production and
o
ae. t
s
absorb a growing portion of i s manpower during t i period. Thus, t avoid a runaway r s in p i e ,
t
hs
o
ie
rcs
i i v t l that a l practicable steps be taken t reduce other demand for goods and labor at t i t m .
t s ia
l
o
hs ie
I am writing t you a the leader of a great municipality t e l s your support and the under­
o
s
o nit
standing and cooperation o your constituents i t i objective which i second only t adequate
f
n hs
s
o
defense t the future well-being of our people.
o
Borrowing— bank l a s insurance loans and bond i s e — adds dol a of buying power t
on,
sus
l rs
o
today’ income. In e f c , they mortgage future buying power t spend today. Regardless of the
s
fet
o
soundness of the borrower’ c e i , i should be used sparingly i at a l at t i time. You and the
s rdt t
f
l
hs
c t z n of your communities w l agree that t i rule applies t State and municipal borrowing a
iies
il
hs
o
s
well as t private borrowing.
o
On behalf of our Government I ask you t postpone borrowing, no matter how worthy the pur­
o
p s i the project i postponable. While many municipal projects are urgent, others might be s t
o e, f
s
e
back t a time when they would contribute to maintaining a high l v l of employment in a period
o
ee
of slack b s e s. Soldiers’bonus payments, many war memorials, and municipal recreational projects
u in s
are but a few important examples of postponable projects which w l serve the nation better a a future
il
t
tm
i e.
Your Federal Government has s t up machinery for voluntary screening of loans as to desir­
e
a i i y in t i defense period. Under the Defense Production Act of 1950, the Board of Governors
blt
hs
of the Federal Reserve System has appointed a Voluntary Credit Restraint Committee. I am attach­
ing a b letin from that Committee with the urgent request that you read i and with the hope that
ul
t
you w l conduct your constituency’ financing in accord with i s s i i .
il
s
t prt
Regional committees have been chosen from the leading investment bankers of the nation. They
are at your ser i t advise as t the current d s a i i y of your f
v ce o
o
e ir b l t
inancing. Their names appear i
n
the attached b l e i .
ultn
I i my earnest request t a , during the defense emergency, every State and municipal borrow­
t s
ht
ing of $1 million or over receive the approval of one of these committees before being consummated
e th r by a single lender or by public s l . Unprecedented as t i request may b , your pa r t c co­
i e
ae
hs
e
t io i
operation w l be a major contribution t the future welfare of our country. No one could have a higher
il
o
aim.
Sincerely,
(Signed)

C harles
C harles

E. W
E. W

il s o n
il s o n

Director
A d d itio n a l co p ie s o f th is circu la r w ill be fu rn is h e d u p on request.




A

llan

S proul,

President.

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