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0 P Y BOARD OF GOVERNORS OF THE FEDERAL RESERVE STSTM OFFICE CORRESPONDENCE To Files, Federal Open Market Committee Date January 31, 19k6 Subject: From Mr. Carpenter CONFIDENTIAL. This morning during a conference at -which Messrs. Eccles, Ransom, Szymczak, ScKee, Draper, Evans, Morrill, Carpenter, Connell, Hammond, Vest, Thomas, Townsend and Thurston -were present, Chairman Eccles made substantially the following report with reject to the conference at the Treasury which he, Mr. Sproul and Mr. Thomas attended yesterday afternoon for the purpose of discussing future credit policies of the System and Treasury policies with respect to the management of the public debt: We were there from 2:00 p.m., until about 6:00 p.m. In addition to Mr. Sproul, Mr. Thomas and myself, there were present Messrs. Vinson, Bartelt, Murphy, Haas, and Bernstein. As I look back on the discussion there was not asy phase of the whole issue that was not thoroughly discussed and explained. All of the reasons for our proposed action were brought out during the course of the conversation. ®We ended up by finding that there is a basic, fundamental, difference between the System and the Treasury. Messrs. Murphy, Bernstein and HaasTntave completely sold the Secretary on the philosophy of low and lower rates of interest, that low rates can have little effect on inflation, that inflation has to be dealt with by direct, rather than monetary, measures, that it does not make any difference whether banks or nonbank holders own Government securities, and that the lower the interest rate goes the higher the standard of living of the masses because it will make for a much better distribution of income, and stimulate consumption. They do not segregate in their minds the immediate inflationary problem from the long-range problem. We had difficulty in bringing out the point that when there is an adequate supply of goods low rates may be used to discourage saving and encourage spending which would keep goods from piling up, but such a situation as that is not in prospect for a year or two. They believe that they should sell all the series E, F, and G bonds they can but /at the same time take the position that the banks and corporations get the benefit of the market issues which they apparently feel makes for greater concentration of wealth and that is not where earnings from Government securities should go. They feel that if the Treasury got its money at low rates that would reduce taxes and to that extent would be helpful in the picture. There appeared to be confusion in their thinking and I did my best to try to get the Secretary to see our position. They have told him that we have always stood for higher interest rates and they have picked out what we have recommended on that. ~ ^^ifj Files, Federal Open Market Committee - 2- They stated that at one time I had proposed a 5/8 per cent bill rate. Tfiy response to that was that you have to take the whole record and that the recommendations on rates had to be considered in the light of the whole program recommended* I said the Federal Reserve had agreed to finance the Treasury at the pattern of rates that existed during the war and it was announced that there would not be rising interest rates. We have done that and people are amazed that we have done it as cheaply as it has been done. I said we are not ashamed so far as the record of the Reserve System is concerned; that we had supported the market during the war period and put into effect the preferential rate and the biding rate on bills when we needed the help of the banks to buy securities and the Federal provided the necessary reserves by buying securities from the banks* We went over the whole thing but I am thoroughly convinced that the Treasury staff has convinced the Secretary that this is not the time to rock the boat. The Secretary said "You have all these strikes," and I replied that that is the very reason why we need to take action; that if everything were going smoothly and goods were rolling into the markets we would not have this inflationary danger that would have to be met. I said we put margin requirements at 100 per cent knowing that it would have little effect but that whatever effect it would have it was out duty to bring about. Mr. Vinson expressed the opinion that the Board was six months late in taking that action and that it should have been taken last year when it would have had a better effect. * Secretary Vinson stated that if we change the preferential discount rate that would be the signal that rates were going higher. He is going to write us a letter setting forth the Treasury1s position. I finally said to the Secretary that it looked like W the System and the Treasury were at an impasse; that the Board was an agent of Congress with statutory responsibilities and that while the authority that the System had with which to meet the situation was not given at a time when the Government debt had reached $275 billion they were the only powers that the System had and that they could be exercised for the purpose of meeting the inflationary conditions to some extent. I said that were not proposing to put interest rates up or increase the cost of financing to the Treasury even though the inflationary conditions that exist and the amount of money that was being created by further monetizing of the public debt indicated that under the statute that is the action that the System should take* I said that power was given to us to meet an entirely different situation than when 2/3 of the debt was Government debt and that that being the case the suggestion had been made that the System go to Congress and point out the entire problem and let them know that the Board and the Open Market Files, Federal Open Market Committee - 2 - Committee are not in a position to deal with the problem except through the meditcn of interest rates and suggest that legislation is needed to meet the problem in another way, by segregating bank investment in Government securities from nonbank investment. I pointed out that the reason for the monetization of the Government debt ty the banking system is the wide-open door that the banks have to the Federal Reserve Banks through the preferential rate, the buying rate on Treasury bills and the support which the System is committed to give to certificates. We automatically provide a mechanism/that was designed to finance the Government during the war but which is not designed to meet the situation when we do not want the banks to purchase additional securities. Therefore, we should block off bank purchases of securities. The one alternative is to let things go with a further drop in interest rates and further monetization of the public debt with the Federal Reserve having no control whatever. The other alternative is for the Federal Reserve to exercise such^control as it has by increasing interest rates and the cos# of carrying the public debt as well as the earnings of banks, both of which are undesirable. ^Secretary Vinson disagreed completely with our position. (Mr. Thomas interpolated that Secretary Vinson apparently does not want high interest rates and does want a long-term commitment that there will be no increase in rates.) Mr. Sproul is convinced that it would be a definite mistake for us to approach the matter in further discussions with the Treasury along the lines that he suggested yesterday morning. The Treasury people referred to the 7/8 per cent rate mentioned in our statement and said that we proposed to get rid of the preferential rate and the bill-buying rate and that the next step would be to increase the 7/8 per cent rate. I replied that that was not the case at all, and that if the program were accepted we would expect to make a report to Congress pointing out the problem and that the 7/8 per cent rate would be supported until there had been an opportunity for Congress to enact legislation which would meet the problem and which would increase the demand for short-term paper and might reduce, rather than increase, the 7/8 per cent rate. Certainly, if we got that legislation we would support that rate indefinitely. Secretary Vinson asked "what we would do if we did not get the legislation and I replied that would depend on the attitude that Congress took toward it and that Congress might say we should use the powers we already have, in which case we would not have much Files, Federal Open Market Committee -2- choice other than to act through increasing the rate. Mr. Vinson asked what we would do if Congress did not indicate anything, to which I replied that we would have to sit down and talk the thing over with the Treasuiy and that it might be agreed, after discussing the alternatives, to increase the rate. lie have a very difficult problem ahead of us. I told the Secretary that we thought the System had a responsibility under the statute and it might have to take action to meet the issues and might not be able to go along with the Treasury. He replied that we were implying, in this time of crisis and emergency, that we were going to insist upon our rights even though the Treasury did not feel that we should take action. He said it looks like a sit-down strike on your part and that when we got right up tb the issues that he did not think we would have a sitdown strike. So we really have an issue — we either do nothing or we take action. I think we should meet this by getting a report to Congress as quickly as possible, pointing up the whole problem, the difficulty we have in meeting it, the consequences of trying to meet it with our present powers, and suggesting legislation that will enable us effectively to meet it. We might go so far as to have it brought out in Congress that the pattern we have established for war financing, the Treasuiy is insisting we maintain in the postwar period, and that we hesitate, because of the responsibility of the Treasuiy, to take action i?hile the Treasury feels that no action should be taken and that, therefore, the matter was one of such far-reaching importance that it should be clarified by Congressional action. /r I told Mr. Vinson that it appeared that the Treasury wanted us to be a rubber stamp and he said that he did not think we would want to take action when we received his letter. Our entire conference was friendly and on a nonpersonal basis and when we left we all shook hands. (C I met Secretary Vinson later in the evening at the dinner which Mr. Delano gave for Mr. Harl, the new Chairman of the Federal Deposit Insurance Corporation, and he m s very pleasant. I said to him that we appreciated the time he had given us to discuss the matterj that he had given us every opportunity to present our position, and that if we had not succeeded in persuading him it was not because he had not given us that opportunity. > | SRC :ms /s/ SRC
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