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January 28, 19U6

Board of Governors
Subject: Meeting with Treasury staff

From: Woodlief Thomas

On Friday Mr, Piser, Mr. Kennedy and I had an extended meeting
with several members of the staff of the Treasury, including Assistant
Secretary Bartelt, Commissioner of the Public Debt Kilby and Messrs.
Heffelfinger, Haas, Murphy, Lindow, Tickton and Bernstein.
I outlined to them the general situation that the System is
facing, indicating that while the System did not wish to take action which
would raise the general level of interest rates, it felt that some action
was necessary to check continued expansion in bank holdings of Government
securities and the resulting decline in long-term interest rates. It would
be contrary to the Systemfs responsibilities to permit such expansion to
continue in the face of inflationary developmentsā€¢ The question before the
System is how to check the expansion without raising the level of shortterm interest rates and thereby the cost to the Treasury of carrying the
public debt1
The Treasury economists questioned the need for any action and
also felt that nothing cfould be done that would have any effect upon
inflation. Mr. Murph^made a strong case for lower interest rates and
indicated belief that long-term rates should go lower than they are now.
He thought long-term rates might in the near future reach 2 per cent and
later might approach zero. His case for low interest rates is that they
not only reduce the cost of carrying the public debt, but also that they
encourage consumption and investment and result in a more equitable distribution of income. Although admitting the desirability of discouraging
spending during a period of inflation, he preferred to use other methods
and not permit interest rates to rise, because that would delay the desirable long-run downward adjustment of rates.

With respect to the inflationary influence of bank credit expans ion* they presented the view that sales of securities to banks would
be made by a relatively small number of holders, who would not be deterred
by restrictions on bank credit expansion nor encouraged particularly by
further decline in interest rates. Rate of spending or investment by such
holders would not be influenced by the form in which they held their liquid
assets, i%e* by whether they were Government securities or bank deposits#
After considerable discussion of the need for action, the Treasury
people wanted to know what line of action the System might want to follow.
I outlined the Chairmanfs four-point progra% emphasizing that these measures
would be adopted in sequence and that the System would giye any support that
the market might require to hold the j/8 per cent rate on certificates and
the 2 l/2 per cent yield on long bondsf

- 2 With respect to the preferential rate, they took the position
that the amount of borrowing at that rate was so small as to be inconsequential, but that removal of the rate might weaken the certificate
market. Mr. Bartelt had difficulty in understanding how borrowing leads
to multiple expansion of credit and expressed an interest in looking into
that matter more fully, Mr. Haas wanted to know if there would be a posted
rate on certificates.
As to the change in Treasury bill procedures* they were dubious
about public reception of a special issue for the Reserve Banks.
They did not seem averse to the idea of using some of the Treasury
balance to pay off debt* Mr, Murphy wanted to know if only the maturing certificates held outside the Federal Reserve Banks could be retired. He doesn't
like any tightening effect, even though temporary, that might result from
the reduction in Federal Reserve holdingsā€¢
No strong objection was expressed to the bill-certificate requirement for banks, and I got the feeling that they were sympathetic to
the idea. Murphy said that he preferred a special-certificate scheme, but
thought that the one proposed had merit in that it might have the desired
effect on the market before legislation could be obtained.
In retrospect, I get the general impression that they are favorable
to measures that would reduce bank earnings but not to those that would tend
to keep interest rates from falling,
When we suggested another meeting to work out an agenda to be
presented to the Secretary of the Treasury and the Open Market Committee
for joint consideration they were not inclined to join in such a proposal.
Mr. Bartelt suggested that the four^point program together with a discussion of the need for action, would provide an adequate agenda. Mr* Haas
said that the Treasury staff would need much more time to consider the
questions that had been raised before being prepared to present proposals
for consideration by the Secretary, They indicated willingness to consider
the matter and will let us know if they think that anything can bo accomplished by having another meeting before Wednesday, It is my opinion that
they will not want another meeting.