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Mr. Thurston says this is a draft of the letter
to the President which was never given
out to the press.

The Federal Reserve System is prepared today, as the Board of
Governors announced it was in December 191*1* to use its powers to assure
that an ample supply of funds is available for financing the defense
effort and to exert its influence toward maintaining conditions in the
U. S. Government securities market that are satisfactory from the standpoint of the Government's requirements*
It continues to be, as it has always been, the policy of the
Federal Reserve System and of its Federal Open Market Committee to adapt
credit policy to the needs and requirements of the country and of the
Government. Ve have given unequivocable proof of this in time of war
and in 4e time of peace to the extent of supporting all Treasury financing
and maintaining an orderly market in Government securities, even vhen
this did not completely coincide with what we deemed to be the full requirements of credit policy*
We have stated our policy and our program most recently in our
letter to the Secretary of the Treasury dated October

» We cannot commit

ourselves further to the program of debt management recently outlined by
the Secretary of the Treasury without abdicating our statutory responsibilities which require us to exert some influence over the availability
and cost of bank reserves*

This may well result in further changes in

short-term rates and require a review of the considerations affecting
long-term financing before such financing becomes possible or necessary*
Our whole endeavor goes to the heart of the Governments antiinflationary program which, in its essence, is to maintain public confidence
in the real value of the dollar and in all Government obligations* This
confidence will be destroyed if inflationary pressures now so strong in

our economy are sot restrainedfayall the means at our disposal*
The crux of the problem which confronts us is this: How can
we arrest the flight of money into inflation hedges?

How can we curb

the dangerously rising tide of credit which makes up most of the country's
supply of dollars and is adding to thesa at an unprecedented rate? Unless
confidence in sound financial management is restored and this flood of
newly created dollars in the foxm of credit is controlled it will overwhelm whatever barriers of price, wage* and like controls we may contrive*
Oar concern and our responsibility is with this basic prbblem of bank
reserves which generate and continue to generate this tide of money*
It would be augmented by the program that has been announced*
ratesfiremerely a reflection of this basic force®


He favor the lowest

rate of interest on Government securities that will not augment the tide —
that will cause true investors to save and to hold Government securities
instead of letting thorn become the basis for continued additions to the
supply of money*

there is no effective way of dealing with this problem

that will not reflect itself in the rate structure*
The road we are now on, aweaitow unable to cope with the constantly
expanding volume of credit leads inevitably to inflation*

As you so well

stated, Mr* President, in your Economic Report this months

If inflation continues to gain cumulative force, it will
multiply the cost of the defense program. It will undermine
production, destroy confidence, generate friction and economic
strife, impair the value of the dollar, dissipate the value of
savings, mad impose an intolerable burden upon fixed income
groups. This must not happen**
Vital as it is to tax ourselves to the limit, even a substantial
budgetary surplus cannot protect us against the danger of a reckless credit

I I dealing with the problam it would be a grave mistake to have
the issue confused by assertions of prerogative or interpretations of
statutory responsibility. It would be equally misleading to confuse what
is at stake here by speaking in terms of administrative encroachment or
usurpation of authority. In essence, the Federal Reserve System for the
first time is being asked to pledge unqualified support to a financial
program that we can only regard with the deepest apprehension. We have
searched our minds most conscientiously to determine what reply we can
make. It would be a great relief to us if we could abdicate our responsibilities, and in good conscience say that this is an emergency and that in
such a period it is the duty of everyone to give his best advice and, if it
is not followed, proceed loyally to cany out whatever decision is arrived at.
It would be equally a relief to take the position that since we
cannot see eye to aye with the Administration, we resign individually and
collectively so that a body can be appointed that would find it in its
conscience to operate even more exactly than we have in conformity with the
announced program.
Neither of these arenas of escape are open to us in view of our
oaths of office*
Our oath of office requires us conscientiously to support the
Constitution and the laws of the United States enacted thereunder*


Federal Reserve Act for which we are particularly responsible requires us
specifically to conduct our open market operations in accordance with our
best objective judgment of the requirements of the economy, the legislative
history of the Federal Reserve Act, when it was originally passed in 1913,

and whan it was extensively revised in 193$, makes it very clear that it was
the propone of Congress on both occasions that the Open Market Committee should
sot operate against its best judgment to &ake an adfcinistrative decision
effective* For us to take such a way oat would* in our Judgment* do violence
to our oath of office*
the Federal Reserve Act as it was enacted* both in 1913 and 1935*
took particular pains to insure that the members of the Board would be appointed
at two-year intervals* Again the legislative history makes it plain that the
object was to insure that no single administration would be able
to enforce
its views by appointing a majority of the Board*
circumstances* we do not see how we can find a way out
from the current iapasse* either the road of acquiescence or the road of

Either could unduly defeat the purpose of Congress in drawing

the Federal Reserve Act as ihqy did*

Either would be inconsistent with

our oath of office*
Congress* however* is in session*

It has full power to resolve this

difficulty* either through redefining the responsibilities of the Board and the
Open Market Coaedttee or by abolishing the preeent Board and providing for the
qppointaent of a new Board*
Me respectfully suggest that we lay this issue before the Congress*