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O w w r a M a t , w i t * ! > o U U 9**9f m s i n t o * •*•**» » *•* a * * * * * * * to os-static* at *uae«a«i mat tta l /oo ar# fu lly atmr* timt UmM » m * b* oo d im c atjr tMwrd M i l l ttw •p w .u ™ * « “ «• i * t * « *• I m H 1* U tw tSon t o * t t i M t k i iM ft takes »,fj>WMri*t* a otisa *l»«g «Im U u > vlth whiaii I t i t M a *l*t» ly faailiwr. 350S $BXS&Mffit Of TSS TKBftS&lY £ ** 0 lashington ~ P “ £ ~ ~ I 0 P X July 1?, 1950 Bear Xoms Thank you w r y m e h for your letter of July 12, expressing your thoughts and those of the Executive Committee of the Federal Open Market Committee with respect to new financing and the cur rent situation in the government bond market* As I asked Mr, Bartelt to transmit to t&e Open Market Committee on Jane 26, X feel that everything passible should be done to maintain a basically strong position In the Government bond market during the present period of international disturb* anee. She finsness with which the Motet baa withstood the Impact of the events of the past three weeks is certainly a testimonial to good management* It is also the best possible evidence of the confidence which has been built up In our abil ity and determination to maintain a stable market for federal securities, I know you will agree with me that it Is of the utmost im portance at the present time to maintain that confidence and, in addition, to do everything possible to strengthen it, this in volves, first of all, avoiding any course which would give rise to a belief that significant changes In the pattern of rates were under consideration. The operations of the Open Market Committee since the beginning of the crisis hate been well adapted to this end. As I have studied the situation, I have become convinced that present circumstances c a H for one further precaution which is, per haps, of even greater Importance than maintaining a good balance in current market operations. Xn my view, we must take extreme care to avoid introducing any factor which would run the risk of pro ducing unsettlement in the broad market for Federal securities represented by Investors throughout the Nation. It is my belief, in particular, that no new financing program should be undertaken at the present time without maximum assurance that it will be well received and can be carried through to a successful conclusion* Our future tasks, whatever they nay fee, would bo made rtry ®uch noire difficult by anything lose than 100 percent success in a prograa for raising new aoaay. la ay Jud&aent, we can not at* tain the aminoas assurance of success until the outlook with respect to both the International and the domestic situations has beooaa considerably more clarified. At present, the defense needs which nay have to be financed in the near future are not known. Our expectations as to revenues are also subject to considerable change as the situation develops, ter these reasons, as you know, Z reccMaanded that tbs Congress postpone action so the tax bill now under consideration in the Senate finance Consulttee. She saae basic considerations load to W strong belief that na a m financing program whose reception is to any considerable axtent unpredictable should be Introduced Into the aaricet at the present tia®, There are, of course, occasions which call for quick and hold action. Tfeaae occasions hare occurred with respect to the Federal security naxfeet and they nay occur a$ain. But e m y appraisal of the present situation Indicates that the Maintenance of stability should take priority over all other narfcet considerations. A stable and oonfldant situation in the aarfcot for Federal securities is our first line of defense on the financial front, no natter what nay he ahead of us* As you know, developments in the Covermwnt head market hav® repercussions which fan oat through the entire eoononor. Both the sise and the wide distribution of the Federal debt are unfreeedanted in oonparison with the situations which faced us at the start of other periods of crisis* Under these c ir cw ta no es , we havu an obli gation of the highest order not only to aalxttala the finances of the Oovamssnt in the soundest possible condition, but also to fulfill our responsibilities to the Billions of Federal security holders throughout the Hatlon. There is one further consideration uhich coof tens agr view that the present situation calls in the highest degree far caution and pr&iaace. Baring the present stags of the eaergenoy, it is vital to aala use of opportunity for assuring oar citlsens that these at the head of their Qoreraasnt have a strong and a f e M y hand on the helm. The reaponse of the Ration to the Pr&sldent*s oourngeoua action In the Korean crisis was one of the greatest demonstrations of unity that we have ever had in this country* The U&tion is m m waiting to learn what domestic prograas ©ay be needed in order to utilise our full strsngth in the Interests of national defense. When these programs are brought forward, it will take time for the public to assimilate them. In view of these facts, it is of the utmost impor tance that no action be taken at the present time which could be construed In any sense as anticipating proposals for defense which may later be outlined by the President. In short, every circumstance nesa and manifest strength in the measure of economic preparedness* I see it. And, as you will note, just as they have occurred to me, Of my thinking as events unfold. at the present time calls for SteadiFederal security market as a primary !That is the net of the situation as X am sending my thoughts on to you in order to let you know the course Sincerely yours, (signed) JOES W . SH1P1H Secretary of the Treasury Honorable Thomas B. McCabe Chairman, Board of Governors of the Federal Beserve System Washington 25, B* C.
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