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FEBRUARY 26, 19$1

The President met this morning with the following:
Mr. Thomas McCabe, Chairman, Board of Governors,
Federal Reserve System
Mr.v CftS.rles Wilson, Directory Office of Defense
Mr. Edward Foley, Under Secretary of the Treasury
Mr. Charles Murphy, Special Counsel to the President
The Council of Economic Advisors, Mr. Leon H.
Keyserling, Chairman; Mr. John D. Clark and .
Mr. Roy Blough
Mr. William McChesncy Martin, Assistant Secretary
of Treasury
Mr. Allan Sproul, Vice Chairman, Federal Reserve
Open Market Committee
Mr. Harry A. McDonald, Chairman, Securities and
Exchange Commission
The President read the attached memorandum to the group
and there was a general discussion of the subject covered by the
memorandum. The President did not ask any of those present for any
commitments on the subjects under discussion, but expressed the
hope that they would go ahead speedily with the study requested.
Mr. Wilson expressed the hope that a report could be made
to the President within ten days or two weeks.


The Secretary of the Treasury,
The Chairman of the Board of Governors of the
Federal Reserve System,
The Director of Defense Mobilization,
The Chairman of Council of Economic Advisers.

. I have "been much concerned with the problem of reconciling
two objectives: first, the need to maintain stability in the Government
security market, and full confidence in the public credit of the United
States, and second, the need to restrain private credit expansion at this
time. How to reconcile these two objectives is an important facet of the
complex problem of controlling inflation during a defense emergency which
requires the full "use of our economic resources.
It would be relatively simple to restrain private credit if that
were our only objective, or to maintain stability in the Government security
market if that were our only objective. But in the current situation, both
objectives must be achieved within the framework of a complete and con­
sistent economic program.
We must maintain a stable market for the very large financing
operations of the Government. At the sane time, we must maintain flexible
methods of dealing with private credit in order to fight inflation. We
must impose restraints upon non-essential private lending and investment.
At the same time, we must maintain the lending and credit facilities which
are necessary to expand the industrial base for a constant build-up of our
total economic strength. Instead of fighting inflation by the traditional
method of directing controls toward reducing the overall level of employment
and productive activity, a defense emergency imposes the harder task of
fighting inflation while striving to expand both employment and production
above what would be regarded as maximum levels in normal peacetime.
What we do about private credit expansion and about the Govern­
ment securities market is, of course, only a part of the problem that
confronts us, A successful program for achieving production growth and
economic stability in these critical times must be based upon much broader
considerations •
We must make a unified, consistent, and comprehensive attack
uptn our economic problems all along the line. Our program must include,
in proper proportion, production expansion policy, manpower policy, tax
policy, -credit policy, debt management and monetary policy,•and a wide
range of direct and indirect controls over materials, prices and wages.
All of these policies are necessary* each of them must be used in harmony
with the rest; none must be used in ways that nullify others.


We have been striving in this emergency to develop such a
unified program in the public interest. Much progress lias already “
made, both on the production front and on the anti-inflat ion front. Many
peacetime activities of Government, including the activities of lending
and financing agencies, have been pruned down. Cutbacks of civilian supplies
and allocations of essential materials have been successfully undertaken.
Important expansion programs for basic materials and productive capacity
needed in the defense effort have been gotten underway. Price and wage
controls have been initiated. Restraints on consumer and real estate credit
have been applied. Large tax increases have been enacted, and additional
tax proposals are now pending. In all these fields further action is
being planned and will be taken as needed.
One outstanding problem which has thus far not been solved to
our complete satisfaction is that of reconciling the policies concerning
public debt management and.private credit control. Considering the diffi­
culty of this problem, we should not be discouraged because an ideal solution
has not yet been found. The essence of this problem is to reconcile two
important objectives, neither of which can be sacrificed.
On the one hand, we must maintain stability in the Government
security market and confidence in the public credit of the United States.
This is important at all times. It is imperative now. We shall have to
refinance the billions of dollars of Government securities which will come
due later .this year. We shall have to borrow billions of dollars to finance
the defense effort during the second half of this calendar year, even assuming
the early enactment of large additional taxes, because of the seasonal nature
of tax receipts which concentrate collections in the first half of the year,
and because of the inevitable lag between the imposition of new taxes and
their collection,by the Treasury. Such huge financial operations can be
carried out successfully only if there is full confidence in the public
credit of the United States based upon a stable securities market.
On the other hand, we must curb the expansion of private loans,'
not only by the banking system but also by financial institutions of all
types, which **ould add to inflationary pressures. This type of inflationary
pressure must be stopped, to the greatest extent consistent with the defense
effort and the achievement of its -production goals.
The maintenance of stability in the Government securities market
necessarily limits substantially the extent to which changes in the interest
rate can be used in an attempt to curb private credit expansion. Because
of this fact, much of the discussion of this problem has centered around
the question of which is to be sacrificed — stability in the Government
securities market or control of private credit expansion. I am firmly
convinced that this is an erroneous statement of the problem. We need not
sacrifice either.

Changing the interest rate is only one of several methods
to be considered for curbing credit expansion* Through careful considera­
tion of a much wider range of methods, I believe we can achieve a sound
roconciliation in the national interest between maintaining stability
and confidence in public credit operations and restraining expansion of
inflationary private credit*
Wo have effective agencies for considering this problem and
arriving at a proper solution.
Over the* years, a number of important steps have been taken
towards developing effective machinery for consistent and comprehensive
national economic policies. On& of the earliest steps in this century
was the establishment, of the Federal Keserve System before World Y/ar I.
At that time, under far simpler conditions than those nor; confronting
us, the Federal Reserve System was regarded as the main and central
organ for economic stabilization. After ^orld 'Tar H , in a much more
complex economic situation auo a much more complex fratiework of govern­
mental activities affecting the economy, the Council of Economic Advisors
was established by the Congress under the Employment Act of 1946 to
advise the president ana help prepare reports to the Congress concerning
how all major economic policies might be combined to promote our
economic strength and health* Still more recently, in the current de­
fense emergency, the Office of Defense iiobilization has been established
to coordinate and direct operations in the mobilization effort. In
addition, some of the- established departments- such as the Treasury
Department, have always perforated economic functions which go beyond
specialized problems and affect thu whole economy.
Consequently, X am requesting the Secretary of the Treasury,
the Chairman of the Federal Reserve Board, the Director of defense
mobilization, and the Chairman of the Council of Economic Advisers to
study ways and means to provide the necessary restraint on private
credit expansion and at the same tint, to make it possible to maintain
stability in the narket for Government securities. While this study is
underway, I hope that no attempt will bo made to change the; interest
rate pattern, so that stability in the government security i&rket will
be maintained.
Among other things, I ask that you consider specifically the
desirability of measures: (l) to limit private lending t h r o u g h voluntary
actions by private groups, through Government-sponsored voluntary actions
such as was done in a narrow field by the Capital Issues Coi^dttee of
V/orld War I, 2nd through direct Government controls; and (2) to provide
the Federal K. serve System with powers to impose additional reserve re­
quirements on banks*
Under the first heading, I an sure that you are aware of the ef­
forts tilat are already underway b y the American Bankers Association, the
Investment Bankers Association, and the life insurance association* I want
you to consider the desirability of this or other kinds of private voluntary ^
action in bringing about restraint on the part of lenders and borrowers.
I should like you to consider also the establishment of a com­
mittee similar to the Capital Issues Committee of world War I, but operating
in a broader area* The objecti es of such a Committee would be to prevail
upon borrowers to reduce their spending and to curtail their borrowing, and
to preva il upon lenders to limit their lending* The activities of this
committee coula be correlated with triose of the defense agencies under lir.
Unison with the o&'jeitivk bf curtailing unnecessary Uses of essential


« 4: •*

Furthermore, I should like you to consider the necessity
and feasibility of using the powers provided in the Emergency Banking
Act of 1933 to curtail lending by member banks of the Federal Reserve
System. These powers are vested in the Secretary of the Treasury
subject to my approval The Secretary could by regulation delegate
the administration of this progran to the 12 Federal Reserve Banks,
each to act in its own Federal Reserve District under some flexible
procedure, Bie program could be extended to institutions other than
member banks, if desired, by using the powers provided by the Trading
with the Enemy Act,
Under the second heading, you will recall the recommendation
I made to the Congress anumber of times in recentyears to provide
additional authority for the Federal Reserve.
System to establish
bank reserve requirements. I should like you to consider the desira­
bility of making that or another recommendation with the same general
purpose at the present time.
You are all aware of the importance of this problem, ai d the
need for an early resolution. I should like your study to proceed
as raidly as possible in order that I may receive your recommendations
at a very early date. I am asking the Director of Defense Mobilization
to arrange for calling this group together at mutually convenient
At the same time that we are working to solve this problem
of maintaining the stability of the Government securities market and
restraining private credit expansion,£l,.of course, continue
vigorously to review Government lending and loan guarantee operations.
Since the middle of lastyear, we have taken aseries of steps to
curtail such operations and limit them to amounts needed in this
defense period. I am directing the agencies concerned to report to me
by March 1$ on thenature add extent of their current lending aid loan
guarantee activities, so that these operations nuy again be reviewed
as part of our over-all anti-inflationary program.