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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

RELEASED FOR PUBLICATION
MORNING PAPERS

February 15

'

1951

FEB 1 9 1951
Dear Senator Bricker:
Your letter of the 7th is acknowledged with thanks. I
particularly appreciate your having taken time to read ray statement,
although the connotation of "totalitarianism" which you place on it
surprises me almost as much as if you had suspected me of cannibalism,
for instance. That interpretation, and fear that you may have drawn
really serious conclusions just as foreign to my intent, make it
necessary for me to make myself more clear than I evidently did in my
statement. Therefore, I will reply to each paragraph of your letter
in detail.
In my statement of February 5th I said that in my opinion
Governor Evans' account of the conference between the President and
the Federal Open Market Committee was correct as to what was
actually said. But I expressed the thought that regardless of the
words spoken the President was allowed to leave the conference with
the erroneous belief that the Committee would support the Government's program. I understand that some other members of the Board
had the same thought; and only one member, so far as I know, has
denied that the President was allowed to leave the conference with
a false impression.

c

You are correct in interpreting my statement to indicate
my belief that this Board should support the Government's program
as officially promulgated on January the 18th by the Secretary of
the Treasury, the spokesman for the Government in this field. My
advocacy of such support is based upon both legal and economic reasons. However, my statement did not indicate approval or disapproval of the Government's plan, nor did I discuss its economic
advantages or weaknesses. I simply say that since this Board has
absolutely no statutory authority to alter or to cancel the Government 's debt financing plan, and has not even the remotest suggestion of statutory authority to initiate a substitute plan, it should
support the Government's program until such time as the Congress
clarifies the situation by legislative enactment which will either:




c

-2(1) Give the Board authority in the area of public debt management, or
(2) Give the Board more effective control of investments and
reserves of banks and insurance companies and other
depositaries, lending agencies and institutions whose
operations materially affect the national credit structure,
or
(3) Relieve this Board of some of its responsibility for credit
control.
The Federal Reserve has supported the Government bond market at
arbitrary price levels whenever necessary for the past nine years. While
the Board has repeatedly reported to Congress the dilemma which confronts
it, so far as I know the Board has never asked the Congress for relief
from its implied obligation to continue this self-imposed practice, and
the Congress has not seen fit to direct the Federal Reserve System to stop
this practice. Failure of the System at this time to give the same degree
of support to the Government plan, and the withdrawal of this arbitrary
price support, would probably result in a chaotic Government bond market
and a decline in the price of long time Government bonds to some figure
below par. Just where the price would go is anybody's guess, but any
material decline under present circumstances might result in some sort
of a baying panic that would further decrease the purchasing power of the
dollar.
If I may be permitted a question at this point: Would you as a
citizen or as a United States Senator recommend that the System withdraw
its arbitrary support from the Government bond market, and allow the bonds
to go below par?
If you will read again my statement you may consider it less
"amazing" if you note that I did not advocate waiver of any actual statutory responsibility, authority or prerogative. What I did advocate was
that we do not now raise a question regarding: prerogatives and authority
which this Board has never had nor claimed to have; and which if they ever
existed by Congressional intent or otherwise, have most probably been
waived and forfeited by this Board's actions or lack of action.
In this connection it should be borne in mind that the Board
issued a public statement on December 8, 194-1 which said in part:
"The System is prepared to use its powers to assure that
an ample supply of funds is available at all times for financing the war effort and to exert its influence toward maintaining conditions in the United States Government security market
that are satisfactory from the standpoint of the Government's
requirements."




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—3—
Since December, 1941, the Federal Reserve has consistently and
without exception supported the United States Government bond market at
arbitrary price levels whenever it considered such support advisable or
necessary. The System is currently following the same course. Under
present conditions and in view of the actions of the Board extending over
a period of more than nine years it seems to me that any statutory prerogatives in the premises, if they ever existed, have been forfeited by
the precedent set by the Board itself.
You might be interested in knowing that for more than a year I
have advocated, and I believe some other members of the Board have done
likewise (but I speak only for myself), that conversations with the
Secretary of the Treasury and action by the Bo^rd be initiated with a view
to reducing to par the arbitrary price on long time Government bonds. 1
could not then see any justification for supporting those bonds at high
premiums, while at the same time owners of "E" savings bonds, mostly small
individual savers, were penalized by loss of some interest if their bonds
were cashed before maturity.
Also 1 was afraid that if we continued such high level arbitrary
support the market might become frozen into that pattern by circumstances
and events which would make it inadvisable or impossible to change the
arbitrary price without disrupting our economy. The Board has not acted
to free itself of this shackle to a pegged price which the Board voluntarily put on itself in December 1941 and has consistently worn since that
date. Therefore, the System, which is a creature of the Congress, now
finds itself in a situation where public debt management, an area in
which the Board has no authority, is having a material affect on credit
control, an area in which the Board does have statutory authority.
The dilemma is serious and warrants the most careful and constructive consideration by every thoughtful citizen, and especially you
and your colleagues in the Congress. And until the Congress acts I do
not see any constructive course of action left open to this Board other
than to carry on the same general policy it has followed during the past
nine years, because the Government's financing program has been officially
promulgated and stands today as the only financing program which the Government has. If we do not support that program, what are we to do, since
we have no authority to cancel or change it and no authority to initiate
one of our own?
And here again let me emphasize that I am speaking in this letter
only for myself.

c

My statement does not indicate in any way that I am willing to
waive, nor did I advocate that the Board waive, any statutory authority
or prerogative which the Board as such may have or which the individual
board members may have under the law or under their oaths of office.
Educated as a lawyer and having enjoyed more than twenty years successful
experience as a practicing attorney, banker and businessman, the law is




-uvery real to me. I have always believed that our Constitution with its
implementing framework of sta.tu.tory laws is the most sacred and valuable
asset which we as a nation possess. And, incidentally, I have spent more
than six years in the combat forces of our amphibious Army and Navy defending that belief. In civil life my most serious disagreements with friends
in public office have been based on r y thought that their actions were in
a
some way interfering with the operation and perpetuation of our constitutional republic. In view of this well known official and personal
record, your inference that I am a sponsor of totalitarianism seems to me
to be less than justified.
As to this Board's accountability to the Congress the minutes of
the Board should show that during my nearly five years membership I have
emphasized on several occasions my firm belief that we were accountable
to the Congress and to no one else. From time to time and particularly
during recent years we here in the Board have had more than one discussion
of this subject, and 1 have been critical whenever one of my colleagues
acted in any way which I felt might jeopardize our limited right to freedom of action as provided under present law.
The admonition in the last paragraph of your letter is cordially
and wholeheartedly accepted and I assure you in your official position as
a United States Senator that as long as I serve as a member of the Board
I will not willingly waive my responsibilities under the statutes or under
my oath of office.
Let me repeat, the law is silent as to the Federal Reserve's
authority in the area of debt management, end on the other hand the law is
quite specific in placing responsibility for management of the public debt
in the hands of the Secretary of the Treasury. Therefore, I feel that the
welfare of the Nation would be better served if this Board continued to
support the official Government financing program just as it has since 194-1
and that the Board should immediately approach the Congress with an explanation of its position and ask for such clarification as the Congress might
care to make in the premises. To do otherwise, that is, to withdraw the
arbitrary support of Government bond prices which we have maintained continuously during the past decade, could result in near panic in the Government bond market which might easily depress Government bond prices to
some unknown level. On the other hand if we continue to give the Government financing program the Board's customary support until the Congress
shall determine otherwise it is possible that the present pressing necessity for arbitrary support of the market might be considerably lessened
or even eliminated during the coming months.
Again, please accept my thanks for writing to me as fully as you
have. And I would welcome an opportunity to discuss these grave questions
with you personally, or with any of your colleagues who may take the
problem under advisement.




With best wishes, I am
Sincerely,
(Signed) J. K. Vardaman, Jr.
J. K. Vardaman, Jr.