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- 11 "Dear Tom: "Thank you very much for your letter of July 12, expressing your thoughts and those of the Executive Committee of the Federal Open M arket Committee with respect to new financing and the current situation in the Government bond market. nAs I asked Mr, Bartelt to transmit to the Open Market Committee on June 26, I feel that everything possible should be done to maintain a basically strong position in the Government bond market during the present period of international disturb ance* The firmness with which the market has withstood the impact of the events of the past three weeks is certainly a testimonial to good management. It is also the best possible evidence of the confidence which has b een built up in our ability and determination to maintain a stable market for Federal securities, “ I know you will agree with me that it is of the utmost im portance at the present time to maintain that confidence and, in addition, to do everything possible to strengthen it. This involves, first of all, avoiding any course which would give rise to a belief that significant changes in the pattern of rates were under consideration. The operations of the Open Market Committee since the beginning of the crisis have been well adapted to this end. - 12 MAs I have studied the situation, I have become convinced that present circumstances call for one further precaution w hich is, per haps, of even greater importance than maintaining a good balance in current market operations. In m y view, w e must take extreme care to avoid introducing any factor which would run the risk of producing unsettlement in the broad market for Federal securities represented b y investors throughout the Nation. It is m y belief, in particular, that no new financing program should be undertaken at the present time without maximum assurance that it will b e well received and can b e carried through to a successful conclusion. "Our future tasks, whatever they m a y be, would be made very much more difficult b y anything less than 100 percent success in a program for raising new money. In m y judgment, we can not attain the maximum assurance of success until the outlook w i t h respect to both the international and the domestic situations has become considerably more clarified. tfAt present, the defense needs which m a y have to be financed in the near future are not known. Our expectations as to revenues are also subject to considerable change as the situation develops. For these reasons, as you know, I recommended that the Congress postpone action on the tax b ill now under consideration in the Senate Finance Committee. The same basic considerations lead to - 13 m y strong belief that no new financing program whose reception is to any considerable extent unpredictable should be introduced into the market at the present time. wThere are, of course, occasions which call for quick and bold action. These occasions have occurred with respect to the Federal security market and they m ay occur again. But every appraisal of the present situation indicates that the maintenance of stability should take priority over all other market considerations. A stable and confident situation in the market for Federal securities is our first line of defense on the financial front, no matter what m a y be ahead of us. "As you know, developments in the Government bond market have repercussions which fan out through the entire economy. Both the size and the wide distribution of the Federal debt are unprecedented in comparison with the situations which faced us at the start of other periods of crisis. Under these circumstances, we have an obli gation of the highest order not only to maintain the finances of the Government in the soundest possible condition, but also to fulfill our responsibilities to the millions of Federal security holders throughout the Nation. •'There is one further consideration which confirms m y view that the present situation calls in the highest degree for caution and - 14 prudence. During the present stage of the emergency, it is vital to make use of every opportunity for assuring our citizens that those at the head of their Government have a strong and steady hand on the helm. The response o f the Nation to the P re s id e nt ’ s courageous action in the Korean crisis was one of the greatest demonstrations of unity that ne have ever had i n this country. The Nation is no w waiting to learn what domestic programs may be needed i n order to utilize our full strength in the interests of national defense. When these programs are brought forward, it will take time for the public to assimilate them. In view of these facts 3 it is of the utmost impor tance that no action be taken at the present time which could be construed in any sense as anticipating proposals for defense w hi c h may later be outlined b y the President. MIn short, eveiy circumstance at the present time calls for steadi ness and manifest strength in the federal security market as a primaiy measure of economic preparedness. I see it. That is the net of the situation as And, as yo u will note, I a m sending my thoughts on to yo u just as they have occurred to me, in order to let you know the course of my thinking as events unfold. "Sin ce rely yo u r s , 11
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