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Oral History Interview of Ralph Leach Conducted by Robert L. Hetzel May 21, 1998 Ralph Leach: Yeah, I got it. No, I got it. I got it. Robert L. Hetzel: So what was he like as an individual? I understand that he kind of dominated discussions, but you say it was sort of— Ralph Leach: He dominated them intellectually. No one could really best him on an argument simply because he had all of the tracks and all of the proper background at his command. But he was such a quiet person that the word "domination" just doesn't seem to fit. He began talking to me alone quite often not long after the challenge had been given to the Treasury in, I believe, September of 1950, by saying that we were going to raise the discount rate even though the Treasury was persisting in selling an issue that would, with our new discount rate, sell below par. And the Chairman was so obsessed with that—in fact, it was a part of Truman's appointment of the then Chairman of the Board—that he maintained all Treasury securities at par or above. And the solution that I had suggested was that we let the Treasury make this offering, but immediately put a par bid in and maintain that level. Even though it would cost us a tiny bit in a paper loss on the holdings, it would be a way to establish our challenge to the Treasury that interest rates needed to move a bit higher. This is with one-year certificates at seven-eighths of 1 percent, if you recall that time. And Win and I began talking about how to re-establish free markets at the time. This was my strong feeling that we had no market established. The only market was the Federal Reserve Bank of New York, and they ran it with an iron fist, just not allowing any of the dealers to change markets, in effect, without the Fed's permission. And as a result in the longterm, two and a half percent market, the Fed was maintaining that market by simply taking in all of the bonds that the big insurance companies wanted to sell in order to lend at higher rates, and not allowing those sales to have any pressure on the market. So during the interval between September of 1950 and March 4th of 1951, when the Accord was signed, I kept visiting the Open Market Desk in New York and finding nothing changed, even though the selling became heavier and heavier on the part of the insurance companies. And the Accord then released the Feds from the position of having to support all of Treasury securities at a price above par. [00:05:01] And one thing that Win and I worked at was an exchange of the long two and a half percent bonds, a voluntary exchange on the part of dealers or other holders of the securities, to trade them in on a five-year, one and a half percent note, I believe it was, which would be just about at the par level and would give them a little more liquidity. And then with that move, we did allow securities to drop below par. The blow to a lot of us at the lower staff level and at the Fed came that weekend. March 4th was a Friday, and the announcement of the Accord was made, and we congratulated ourselves on winning the battle and then found we thought that we'd lost the war, because Truman immediately appointed Martin as the new Chairman of the Fed. But he proved to be as strong a free market man as anybody and from then on, it was a matter of changing the directive from the Open Market Committee to the head of the Trading Desk at the New York Fed and telling them to maintain orderly markets. Then we found that to them, maintaining an orderly market meant that anytime anybody marked the price down a 32nd or two, they were afraid the market would become disorderly so they'd tell them not to make that change. This lasted for a few months, then after a couple of Open Market Committee meetings and with the help of a study of the market that had been done during that period, we changed the wording of that from not to maintain orderly markets, but to correct disorderly markets. In other words, you had to let a market get disorderly, however you defined it, before the Fed was allowed to do anything in terms of trying to restore what they called confidence in the market. If you get a copy of that report, in the words of the staff, it was called the Depth, Breadth & Stability Study. Robert L. Hetzel: Okay. Ralph Leach: They started by, the first page of it defines an orderly market as one that demonstrates depth, breadth, and resiliency. Robert L. Hetzel: Okay. Ralph Leach: I asked Win how he came up with those phrases, and he said, "Well, I have trouble with remembering things, and it happens that DBR are my son's initials. I can remember it that way." As soon as I got up there to New York, I found that Donald B. Riefler, the son, was working at the Guaranty Trust, and within a week, I'd moved him from the banking division to my associate, and he and I spent the rest of our careers together at running the money side of the bank. But that is a study worth finding. It was never published, as far as I know. It was an internal study done in the 1951 to '52 period, I'd say. Robert L. Hetzel: Okay. I'm sure I can find it in the archives, either here or at the Board. It's just a question of looking. I don't think anybody ever looks in those archives. -2- Ralph Leach: No. Robert L. Hetzel: So stuff is in there. Let me, I want to ask you just a couple more questions on this, but do you want me to call you back since you're paying for this phone call? Ralph Leach: Oh, that's all right. Robert L. Hetzel: Okay. So you've raised a lot of interesting questions in what you've said. Why wasn't the New York Desk more supportive of this? That is— [00:09:50] Ralph Leach: Oh, well, it was very obvious. Allan Sproul was the key figure, of course, at the New York Fed, and he began by sort of avoiding talking to me at meetings, but then gradually we got to be a little more friendly. And he took me aside one time and he said, "You realize, Ralph, don't you, that what you are leading up to is moving the focal point of the financial world from New York to Washington?" And I said, "Well, I think myself that with the political situation bound to move that direction, that that would happen inevitably. The Federal Reserve system is going to become a much more important thing than it ever has been in the past. And I realize what you're saying is that the New York Fed was the focal point of the world as far as the Federal Reserve policy and power is concerned." Certainly, under Ben Strong it was, and even under Allan Sproul, it was. But this, I had talked about with Win and Woody Thomas and Ralph Young and others as being one of the things that was making life difficult for us at Open Market Committee meetings. In fact, at one time, and you'd probably find it in your own bank's minutes, I believe it was at Richmond that it happened, Allan Sproul caucused with all of the Federal Reserve Bank presidents at the Richmond Bank for one day before an Open Market Committee meeting to decide whether they would challenge the supremacy of the Open Market Committee over the New York Fed operations. They didn't care for all this business about defining disorderly markets; they just wanted the usual kind of directive given to them which said during the month between this meeting and the next meeting, you will buy no more than 2 billion or sell no more than 2 billion government securities and maintain an orderly market. That was, as I recall, pretty much the wording that was used, month after month, after each meeting. And when we talked about this correcting disorderly markets, taking a chance that they become disorderly, I think Allan used that as the focal point for deciding whether to challenge a major change in the Federal Reserve system by exerting the power of the 12 banks and not taking power away from New York in the process. Robert L. Hetzel: Well, that was the issue of whether the head of open market operations, the head of the New York Desk, was going to report to the president of the New York Fed and his directors, or whether he was going to report directly to the FOMC and Chairman Martin. -3- Ralph Leach: Exactly. Well, I guess that's the technical way that it came about, but the manager of the Desk clearly went right on reporting to Allan before he did anything with anything that might surprise the Open Market Committee at his next meeting. Robert L. Hetzel: Hm-hmm, hm-hmm. Well, in terms of initiating the challenge to the Treasury, would Sproul or Eccles have been the key top figure? I mean, McCabe was chairman, but he was always just sort of caught in between, is that what you're saying? [00:14:45] Ralph Leach: Yeah. He was there sort of at the sufferance of Truman and as the protector of the par level on government bonds. Eccles had more or less stepped out of the picture, but again, on the day that the subject came up, the Fed had decided to change the discount rate. It was Sproul and Chairman—who was it again? Tell me. The Scott Paper guy. Robert L. Hetzel: McCabe? McCabe? Ralph Leach: McCabe, yeah. McCabe and Sproul were the ones who went over to see John Snyder at the Treasury and tell them what they were doing, and Snyder countered by announcing a week in advance a new issue of one-year certificates at the old rate, thinking that that would defeat the Fed, then, and force them to maintain the old rate. Robert L. Hetzel: So Sproul and probably the directors of the New York Fed were, at that point, the key initiators of the challenge. Meaning the— Ralph Leach: Of the challenge to the Treasury? Robert L. Hetzel: Yeah. I mean… Ralph Leach: No. No, no. No, that came from Washington. Robert L. Hetzel: Well, so that would have been Eccles would have been the key— Ralph Leach: Well, my recollection was that we reached the point of deciding that we would change the discount rate from whatever it was three-quarters percent up to 1 percent. And adjourned for lunch, and just before adjournment, Eccles had been arguing strongly that this should not be done; we shouldn't make this kind of a move without long discussions with the Treasury first. And during lunch, he and one or two others of the staff and I sat together and talked about the situation, and I tried to explain that it wasn't that big a challenge to the Treasury if, at the same time, we agreed to keep a par bid in on the securities that normally would have dropped below par. So one of the participants, and I think it was probably Woody Thomas, said at the resumption of the meeting, he openly asked Eccles if he would explain his position further, his morning position further. And Eccles said, "Having thought it over, I think this is a good -4- way to resolve this. And let's get it out into the open and each of us can defend his own position; nobody's losing face here." Something to that effect. And as Woody said as we walked out, "Well, we walked him up one side of the street and then crossed over and walked him back down the other side," and it turned out well. However, I got a call about, oh, 3:00 or 3:30 that afternoon saying that at 5:00, Marriner wanted to see me in his office privately, or something to that effect, and he gave me quite a dressing down for having been too forceful in some of the things I said, I believe was the gist of it. But I was getting carried away with the fact that it was a hell of a good idea and I hoped we could carry it through. Robert L. Hetzel: So the challenge— [00:19:35] Ralph Leach: The challenge really came from the Board, though. The New York Bank was not, my recollection is, then particularly—was it Bob Rouse, I think, was the head of the Desk. Robert L. Hetzel: Right, right. Ralph Leach: Particularly Bob was arguing strongly that this is no way to act, as openly in the face of the Treasury as we should do, and all that sort of thing. It had to be done behind the closed doors. He had to meet—He should meet with his counterparts at the Treasury and go through a lengthy discussion with them and all that sort of thing. Robert L. Hetzel: So the general environment, then, was that in June of 1950, the Korean War had broken out. Ralph Leach: Yeah. Robert L. Hetzel: And— Ralph Leach: And I arrived at—I started work that day. Robert L. Hetzel: Oh, really? Gosh. Ralph Leach: Woody had hired me out in Phoenix, Arizona, and the first day I arrived, the war had been declared the day before, and he came down and he said, "Well, we hired you as our market expert and there isn't going to be any chance for you to exercise anything but restraint," he said, "because with a war going on, we're back in the market support situation for sure." Robert L. Hetzel: And so, you could see the economic numbers coming in suggesting inflation. Ralph Leach: Yeah. -5- Robert L. Hetzel: I mean, they, if even today, you look at the series, and they just jump out— Ralph Leach: Right. Robert L. Hetzel: —at you, just how strong— Ralph Leach: Oh, yes. Robert L. Hetzel: —the everything, just, you know, I guess, well, people thought that price controls would come back, and they rushed out to buy consumer durables and, you know, thought they would disappear from the market, and… Ralph Leach: Oh, yeah. No question about it. And the selling by the insurance companies was stepping up pretty rapidly. They were beginning to think that the peg wasn't going to hold for much longer. They were anxious to get out as much as they could. Robert L. Hetzel: That's a good point. It's like a fixed exchange rate. Ralph Leach: Right. Robert L. Hetzel: Yeah, absolutely. And at this point, the Fed had already, its view, from the 1930s, had changed. In the 1930s, it didn't see itself as a central bank that created money. It was trying to find money for banks that were in distress, but it didn't see itself as the institution that created money. Ralph Leach: I would say that it wasn't even thinking in terms of its powers as an open market operation. And then some of them even going back to the Real Bills Doctrine, and the atmosphere was one that was hard to cope with. For somebody who had been out in the marketplace and seen what was going on, it was difficult to restrain yourself. And even though McCabe had once warned me in an Open Market Committee meeting when I decided to express an opinion on the market, he said, "We don't have opinions on the market down here; they come from the New York Federal Reserve." (Laughter) Ralph Leach: Flatly, so…It was a very strange atmosphere. Robert L. Hetzel: In 1949 when the Fed had last been concerned with inflation, it raised reserve requirements. Ralph Leach: Yeah. Robert L. Hetzel: And what it found was that the bank simply met those reserve requirements by transferring Treasury securities to the Fed— Ralph Leach: Right. -6- Robert L. Hetzel: —and, in effect, getting around the restricting-ness of a increase in required reserves. That must have made an impression on the Fed. That must have made Fed people say, "Hey, you know, we're creating bank money." That must have been— Ralph Leach: I think Win was one of the first that alerted them to that; that was before I was there. But at later discussions, people were saying, "Wow, Win, you really tagged that one well." But Win was-- going back to Riefler himself, he was the intellectual leader of the staff by a very wide margin, I'd say. Robert L. Hetzel: Okay. So— Ralph Leach: Even, not taking it away from Woody Thomas and Ralph Young; they were both excellent in their fields, but they didn't have the full grasp that Win had. Robert L. Hetzel: Hm-hmm. So you said something that was interesting earlier on. You said that Riefler had been talking with Bill Martin at Treasury. [00:24:49] Ralph Leach: Without any of us knowing it. Or maybe others did, but I didn't, and it became known only, as I recall, within maybe a week or so before we reached the Accord. Robert L. Hetzel: Okay. Ralph Leach: Well, they had been talking for quite a long time privately and without it, at least without it coming down to my level. Put it that way. Robert L. Hetzel: And so, Martin, because of his background at the New York Stock Exchange and— Ralph Leach: Yeah. Martin was right in tune with everything we wanted to talk about. Robert L. Hetzel: So, I mean, he understood— Ralph Leach: Oh, yeah. Robert L. Hetzel: —that you had markets, you'd buy and sell. For him, a market was not something that was strange, so this was easy for him to understand. Ralph Leach: Well, and for that matter, no one on the staff in Washington had every had any experience in the market. It was all theoretical to the point where I invented, or reinvented, a game that used to be played in the street during the Depression when stockbrokers had no orders to execute and they were going around talking to their customers. They would start a game in the morning, which, let's say 10 people each drew a number that would be the deciding market figure at the end of the day. And if you drew a number, you -7- wanted to trade either below the average price at which you started, and then they would settle up for 50 cents on the dollar or something like that. Robert L. Hetzel: Yeah. Ralph Leach: But it gave them a chance when they were in a customer's office to say, "What's happening in our favorite stock?" And the guys would give him a quote, and he'd say, "Well, buy a thousand for me," and that would supposedly get the customer interested in something about that was, something was going on in the market. But they were—And I used that as a way to explain to these guys how markets work, by having them sit around a table and make markets to each other. And sure enough, what happens in a thing like that, there's the one of the participants at some point will widen his spread to a ridiculous level, not knowing whether he wants to buy or sell at that point. And you explain to him that, for an orderly market, you have to have an agreement that you have no more than an eighth of a point spread between the bid and offered price that you're talking about, and you have to be willing to execute on that. Robert L. Hetzel: Yeah, yeah. Ralph Leach: But anyway, that was the type of the group. And that included Jack Noise (phonetic), Dick Youngdahl, and people like that. And we probably had seven or eight of the staff at times playing that game to find out how markets worked. Robert L. Hetzel: So Sproul and Eccles, they really weren't economists the way— Ralph Leach: No. Robert L. Hetzel: They really didn't kind of think about markets the way that we do. Kind of, what came together was that they were willing to challenge Truman because Eccles had no love for Truman and Sproul had no love for monetary policy being made in Washington. But it was the staff that understood that in this inflationary environment of the Korean War, something had to change, so the staff was there kind of pushing and explaining and supporting and kind of handholding and everything, kind of leading McCabe and Eccles and Sproul through this. Ralph Leach: Right. Robert L. Hetzel: Were there any other governors that come to mind who were effective at the time? Ralph Leach: Oh… (Laughter) Robert L. Hetzel: Not Vardaman. You told me— -8- Ralph Leach: Vardaman, yeah. Robert L. Hetzel: You told me that story about the American Banker leaks. Robert L. Hetzel: Yeah, he was the leaker. He was close to Truman, so he had the ear of a lot of newspaper people and he could leak stories to them. He's the only one that really stands out, in my recollection. And of course, the president of the Federal Reserve Bank of Richmond did, because he happened to be named Hugh Leach. Robert L. Hetzel: Oh, right. Yeah, he was president for a long time. [00:29:55] Ralph Leach: Yeah, a very, very fine guy. Robert L. Hetzel: Yeah. What about Karl Bopp from Philadelphia? He'd been around for a long time. Ralph Leach: He'd been around, but he was a good participant, but not a standout like the others. Robert L. Hetzel: I talked to Bob Mayo a couple weeks ago just to interview him. I was mostly interested in his experiences as budget director, but he was in the Treasury at the time. Ralph Leach: Hm-hmm (affirmative), yeah. I knew Bob well at the Treasury. We lunched together occasionally. Robert L. Hetzel: He said that Martin told him once that after the Accord, Martin was walking down the street and just by chance came across Truman. Truman was no longer President. I think he said this was in New York. And Truman looked at him and said, "Traitor," and then just walked on, and that was it. (Laughter) Ralph Leach: I'll be damned. Well, that would be understandable, but I would think he'd be above that. Robert L. Hetzel: Well, he was a Populist— Ralph Leach: Oh, yeah. Robert L. Hetzel: —so I think he probably never understood why banks just didn't set the price at a reasonable low, or, whatever, high level, whatever. Ralph Leach: And yet, was one of our best Presidents, too. -9- Robert L. Hetzel: Yeah. Yeah. Well, he was pugnacious, and, you know. Okay, well, gee… [END OF RECORDING] - 10 -
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