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998 Ameeting of the Board of Governors of the Federal Reserve 8Y5tam with the Presidents of the Federal Reserve banks was held in W48 41ington on Tuesday, June 20, 1939. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Ransom, Vice Chairman Szymczak (part of meeting) McKee (part of meeting) Davis Draper Morrill, Secretary Bethea, Assistant Secretary Clayton, Assistant to the Chairman Thurston, Special Assistant to the Chairman Mr. Wyatt, General Counsel Mr. Goldenweiser, Director of the Division of Research and Statistics Mr. Smead, Chief of the Division of Bank Operations Mr. Dreibelbis, Assistant General Counsel Mr. Vest, Assistant General Counsel Mr. Myrick, Technical Assistant in the Division of Bank Operations Mr. Mr. Mr. Mr. Messrs. Young, Harrison, Sinclair, Fleming, Leach, Parker, Schaller, Martin, Peyton, Hamilton, Gilbert and Day, Presidents of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco, respectively Mr. Sproul, First Vice President of the Federal Reserve Bank of New Va‘. Williams, Vice President of the Federal Reserve Bank of New York Mr. Kimball, Secretary of the Presidents' Conference President Harrison reported that, as a result of the considcition given by the Presidents' Conference to the broad questions 797 6/20/39 cif -2- Policy arising from the situation which had developed from the correspondence of the Manufacturers' National Bank of Detroit with the Federal Reserve Bank of Chicago with respect to the collection °r Imassorted items and other matters, he had appointed a committee Or five ( consisting of Messrs. Fleming, Chairman, Sinclair, Leach, l'erker and Schaller) to study the matter and that the Conference had 7°ted to recommend to the Board that it take no action on the matter Or the time being. President Harrison explained that, since the 49w subject was closely allied to the subject of free services, he 484 aPpointed on the new committee the first three named members, l'41° had served on the committee on free services of the Presidents' Conference. Chairman Eccles suggested that the Board await the report °r the Presidents' Conference before giving further consideration to the matter. This suggestion was concurred in unanimously by the °ther members of the Board who were 'present. The Chairman then asked Mr. Goldenweiser to make a statement to the meeting regarding recent developments in the economic situat1°11 and his views as to the outlook for the immediate future. Mr. Goldenweiser reported that recent developments have bee ll encouraging for the immediate future and that the index of in- production, which had declined from the high of 104 reached 1 "t December to 92 in April of this year, had remained stationary 798 6/20/39 -3- 111 MaY, and that it would be his guess that it would reach 97 during the current month. Be said there had been a definite upturn in steel, " 4 improvement in coal and textiles, and in fact a pretty general 4rit11111. However, the upward movement at most merely offset the sharp clecline in March and April and the present level is still considerably below the high of last year. He said that the prospect for the current year was one of a gradual advance. Production and consumption are approximately even at this time. It was his view that any further advance would probably %end on further increase in consumer demand. He pointed out in this cclInection that the present indications were that expenditures for 15111311c works would decrease in the fourth quarter of the current year, 44lees something more was done in the meantime to prevent this happenHe said there was nothing new in the field of prices and that t44 Shell) decline in agricultural prices was largely attributable to livestock and products. As to the foreign situation, he said that politically there 11461 e breathing spell at the moment and as a result there had been a cleel'ease in the inflow of gold, which had dropped to about $30,000,000 4 week since the end of April from about $115,000,000 a week in the Pl'eeeding period beginning with German absorption of Czechoslovakia 14 the middle of March. 448 definitely declined. The flight of capital to the United States He referred to the fact that there was about 799 6/20/39 )100,000,000 of gold under earmark for the account of foreign central blinks and governments, and that the Federal Reserve banks hold substantial balances for foreign central banks, so that the total gold shd dollars held by foreign authorities here was in excess of C4)500,000,000. He added that the balance of trade is not as heavily favor of the United States as previously, because imports had increased considerably. He thought, however, that there was no prospect Or the gold movement stopping, to say nothing of being reversed. Mr. Goldenweiser said that it was expected, on the basis of the recently revised estimate of the Department of Commerce, that the national income would reach 467,000,000,000 in 1939, which repreenta something of an advance over last year but falls short of the %tire for 1937. In his opinion there was no chance of restoration Of the national income to a level sufficient to provide substantially 11111 employment unless there is a much heavier growth of investment 14 the capital goods industries, of which there is little prospect. ' 4.tou flotations were still very low except for refunding purposes. , . lauicated that on the basis of certain industries which had been attldied it appeared unlikely that there would be sufficient capital exn -- enditures to rebuild national income to a level where it ought to be and that, therefore, there was practically no chance of such a 'oration in the absence of some important new invention or a sub- atatri.• 41E11 upsurge in industry of which there appears to be no present 800 6/20/39 -5- 151 ' 0epect. The only other way is for the Government to increase its activities in the investment field by engaging in largely self-supP"ting, noncompetitive enterprises of a socially desirable nature. 14 the long run a more effective distribution of income between con- 811111Ption and investment can be achieved, but that is a slow process, 147o1ving revision of our tax, social security, and tariff laws. In the meantime, expansion of Government activity appears to be the only itmediate means of restoring adequate employment and national income. In conclusion Mr. Goldenweiser stated that it was his view that the prospect for the rest of the current year was one of mild eecrv'ery and that beyond that things were very uncertain. At this point Mr. McKee joined the meeting. In response to a query from President Young as to whether he believed that the depression would last for some time to came, MI% Goldenweiser replied that he was afraid this would be so. Chairman Eccles observed that while Mr. Goldenweiser had (11151'e8sed the view that there was little opportunity for expansion "Private industry, as he understood it, this would not preclude 4 45 or $6,000,000,000 increase in the national income " 4 Yet leave the economy in a comparative depression. Mr. Golden- Weteer agreed with this observation and stated that in his judgment eth increase of at least $15,000,000,000 or 20,000,000,000 in the 4tic3nel income, on the basis of the present level of prices, would 6/2V39 -6- be required in order to provide substantially full employment. Mr. Goldenweiser stated in response to a question by President Harrison as to how many were unemployed that he thought 10)000,000 was a fair estimate and, omitting seasonal employees, 81°00,000 would be approximately correct. He stated that there We something less than 3,000,000 on the W. P. A. rolls. He added tha in his opinion it would be necessary for the index of IndustIbial Production to reach 140 or 145 before we would have substantially full employment. Mr. Szymczak joined the meeting at this point. Mr. McKee inquired of Mr. Goldenweiser whether in his judgellt we had passed the low point for 1939. Mr. Goldenweiser stated that he believed that we had and that he did not expect the level °r the index of industrial production to go below the present figure. thought that the average for the current year would be less than the 105 which had been anticipated and would be 100 or less, which WcIllld mean a rise to around 110 before the end of the year. Chairman Eccles then suggested that Mr. Williams state his '161 ' 1 as to the existing nind prospective economic situation. Mr. Williams stated that he agreed with what Mr. Goldenweiser had said about the tmmediate outlook, that we had passed the low 1)°Int for 1939 in both industrial production and national income, " (I that the trend would be upward but probably not at a rapid rate. 802 6/20/39 -'7- Said that he did not think that we ought to put too much enphasis (111 unemployment because he felt that the substitution of machines 86141 new methods is bringing about a general change in the economic situation. The task of sustaining the economy rests more and more 11Po1i the replacement and improvement of capital equipment and less 11Pon new investment. In England history shows that capital has been gl"Ing but at a declining rate for the past fifty years, and at the seize time they have been making progress in output and real income, they have what amounts to chronic unemployment. it was He felt that necessary to count on such a condition in this country in look- lug to the future. He did not know what the minimum unemployment might 138 but felt that we should think in terms of output and that the emShould be placed on production, provided we take care of the " 4 111Ployed. Be had concluded that we should not over-emphasize the Ileed for new investment but rather consideration should be given to tile teed for improvement and replacement of the enormous amount of elisting equipment. As the country gets older there should be an 14erease in consumption relative to investment. He pointed out that 111 the "twenties" there was an increase in consumption of durable c°11.84mPtion goods such as electric refrigeration, radios, automobiles, etc', which had continued in the "thirties", with automobiles in the " r erront. Mr. Williams pointed out that we have had some recovery from 803 6/20/39 -8- the depression and that we are again finding upward impulses. The feet is, he said, that, notwithstanding the recession of 1937-1938, we ere still in a broad phase of recovery. Mr. Williams felt that the easy money policy has been carried t00 far and that there has been too much public spending; that we Could have achieved as much with less expenditure. He stated that if in 1934, 1935 and 1936 the Government had tapered off its budgedeficit and taken the view that the country could came back with°lit further public spending we would be in a much better position t"eY. He said that small banks and small savers universally were being injured and that the easy money situation had reached a point Where it was tearing down rather than building up. He thought that lt Government authorities would change their point of view and turn their attention to the building industry much might be accomplished in that direction. He pointed out, for example, that there had been e°11IPerative absence of building in the "thirties" and that if the Qc)verntaent had stimulated building the recovery might have been frther along. He said that something was wrong with the cost of lehor and materials and that he thought a national investigation Of building industry would be a good thing. If that industry e'3141c1 be restored to something like what it was in the "twenties" all the collateral effects on other industries, he said, we Wolild enjoy full prosperity. 804 6/20/39 Mr. Williams stated that if the building industry has a good Year and there is a spurt in automobiles he would not be surprised to see a recovery at an earlier date than presently anticipated. He mentioned that the upward surge in 1935 came after a period of ups and downs. Mr. Goldenweiser pointed out, however, that in 1935 there W48 a better adjustment between prices of various commodities than Prevails at present. Mr. Ransom inquired of Mr. Williams whether his outlook was 144 optimistic in the light of the large number of unemployed and the maladjustment in farm prices. Mr. Williams stated, however, that 4 aherP decline in fern prices is to be expected in a depression and that in agriculture the fluctuations came in prices rather than in °IltPlit whereas in industry it is frequently just the opposite. He 4dded that a fall in agricultural prices is in itself a familiar 13henomenon in a depression. Mr. Ransom then asked Mr. Williams if he could compare our "sY money policy with that of England and Mr. Williams stated that Ithile England has an easy money policy it has not been carried as " r 48 has been done in the United States. He said that in England baziking is confined to a few large banks and that there was also to be co nsidered the difference in temperament between the British and the Americans. Mr. Goldenweiser interposed with the observation the t England has the machinery to curtail the effect of an inflow t cePital on the economy. He said that, while he was not pessimistic 805 6/20/39 -10- la looking forward ten or twenty years, he thinks that the developZents referred to by Williams are going to be slow due to our 41"chaic tax and tariff systems. Mr. Goldenweiser said that these 17°41d have to be corrected promptly if we are to expect a marked im1)r0vement within the next five years. Chairman Eccles referred to Mr. Williams' observations regardthe trend in England during the past fifty years and pointed out that Government spending in this country is temporary in an emergency aituation pending a long range program, whereas in England when new lavestment capital is needed saving is stimulated. He stated that he social security and tax program of our Government is most contradictory of the needs of our economy. He pointed out that in this e°1111trY the Government is collecting unemployment and social security t4las in excess of the amount which it pays out for such purposes, '41411 e in England all funds taken in for this purpose would be paid °Ilt end additional expenditures would be made for this purpose by the Government. He said that last year this country added k°0)000,000 to enforced savings and that .'i500,000,000 to 000,000,000 1143ra Will be collected this year than the Government pays out. He baerved that until the Government does something along the line of l'ecilleing taxes that fall, directly or indirectly, on consumption and increasing taxes which fall on funds that would otherwise remain this country will not be on a basis comparable with England. 8C6 6/20/39 -11Mr. Williams observed that England had gone through its de- Tiression without having an unbalanced budget and that he felt that °Ile reason Why England found it possible to keep its budget in bal44ce was that it already had such a large public expenditure that it had to look to other means of meeting the problem. He added that %land had more adequate fiscal and banking machinery to work with th "did the United States which, of course, was an important factor. Thereupon the meeting adjourned. Chairman.
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