Full text of William McChesney Martin, Jr., Papers : Federal Reserve Board - Treasury Department Accord : 1951, Box 19, Folder 2

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Federal Reserve Bank of St. Louis

.
REPORT ON GOVnatiftOlM AT THE TECHNICAL t£VSL OF
TROU3URI AKD FODEBAL

Participants?

StSlM REPRESEN5AHVE3

Mr. «u McC» Martin, Jr.
Dr. George C. Iteae
Mr. Edpard F. Bartelt

Treasury -

c-rvx -

Mr, mnfleld ¥» Riefler
Mr. Woodlief fhomas

First Meeting •»

Tuesday, February 20, 1951, 1*00 P.M»f
beginning at l^sncheon in Mr. IfcCabe's
office.
Adjcmrnad at 2 $45 P»M.
oral eserve
Board Koon and continued until 4-s30 r. «

Heeornrened -

Tuesday, February 20, 1951, 3?30 P. .,
faoss of Mr. lUefler
Adjowned at nj30 P«I .
Wednesday, February 21, 1951, 2s30 P.:.'.,
library of Federal Reserve Building
Adjourned at 6i15 P. •

Reconrer^d -

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Federal Reserve Bank of St. Louis

Friday, February 23, 1951, 9i45A.::.,
library of Federal Reserve Building
Adjourned at 12:15 P.! .

It was clearly understood by all that these were explorations at
the technical level and not negotiations*
Lengthy discussion of the techniques of the Open Market Cosraittee
and the necessity for better liason between the Fedora! Resenre and
Treasury waa a part of the early discussion, and it was clear that both
of us could be better iiifonaed on the thinking of the other»
InasiaueL as the Federal Haserve group had a specific proposal,
approved by the Open Market CooBitte*, in the letter of February 7 of
Chalrmn KcCabe to the Secretary, aost of the discussion attempted to
clarify what was interned in that letter.
The Federal .Reserve group continuously asserted the unhappiness
of the Open Market Ccoaitte* in*4fiBttM* moaetiiation of the Federal
\*0*44*

considerable discussion of the ^oidities in the present
and the fact that a large amount of selling was probably because
of oonmtjaents already aade by insurance oospanies, savings banks, loan
associations and the banking systcsa, and the coj^^quent r@plenisldng of
tlirough sa3jes to the Fedbxml B@s@rre in the open market of
securities*
In pismdng ^i@ policy propose! In the February 7 letter, the Federal
intends to withdraw support from the short term securities market and let
it adjust itself around the 1-3/4$ discount rate now prevailing* They
felt that when these adjustntons were laade, a groundwork would be laid in
the market which would act as a deterrent to lending and make it possible
to ujKlertafce in a nons orderly f«shiont although at sopirhat higher rates,
^vCdt-f

the refinancings «h!0h tlie treaayry faces in tht^wit'six aionths of the

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Federal Reserve Bank of St. Louis

Calendar Tear 1951*
Much of their argument revolves around the traditional abhorenee of
the banks for borrowing fro® the Federal Itoserva and. an aggregate reduction

of needed ro8C3*vcs..inii
ttin i^Attlr^Maau rate adjusts 4* the discount
r
a iji«
the^freasury group, they were willing

MU
tancing aj
u5 <&»
There was long discussion^ 'and lauch of it smiths tie to
£i
advanced ptlmlpally by Mr* Riefler 1&at th© Secretary announo©
aarketablg. 3*3/4f long term bond (29-1/2 years) which could be exchanged
for the. JuAe^avDeoember 2-3/2*8, the desire being to lock these two Issues

up as isuch as possible and remove thas as an iiaportant laarket factor, A
feature of this issue ml^ht be an alternative of .ejcohange for l-2/^ ^.ve«notes for t^ioee who desired rrn'' iTiiilmlr^ fnnrnlflMfifnn

the clear

than

At th© com33iding sessiofi it was suggested bjr ^Uie Treasury group i^iat
if the Secretary should accede to the Federal 1@*^J|f*| IWpCf al with respect
to the adjustment pi* tl^ short term rates and the
long term

to bp oxdhanged for the

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Federal Reserve Bank of St. Louis

term^lasues.

current levels In tljs June and ^^
UM£ ^F~

This was put forward, not as a counter proposal, but on an
exploratory basis and with an earnest plea on the part of Mr. Bartelt
that we not attempt to ptrejudge the market^ «si his hope that such an
arrangement would release pressure from the market and permit us to get
a start on the refinancing program without impairing any further public
confidence in the asarkete.
Jfr
It was suggested by the Federal thatjm night agre& to buy two

ih® treasury,

hundred million

/*'

one hundred mil2|u>tt by the/ Federal, and
four hundred million - 7jfe or tfcree imadr
the Treasury, an\ one hundred nrf.Hl

on to be purchased by
be purchased by the

had been purchased to re-examine
There was a lot of talk about secrecy and the difficulty if such
an agreement leaked in any other way than through the published statements
of the Federal and the 1*easuryf and the belief on Mr, Bartelt*s part
that knunStedge that the ^easury and the Federal !md gotten together would
act as a tonic in restoring confidence to the mazfcet*
There was general agreement throughout the discussions tfcat the
so-called feud between the Iteasury and Federal was by far the moat
significant psychological factor in the current situation*
After extended discussion, it seemed to be generally agreed by all
that the Federal Reserve approach «*a essentially a ^package one" and
not susceptible, i&th &w ccnslstency^ to liery saioh ooiaproaige, unless
there is a drastic change in the existing market situation, which on the
basis of our talks appeared unlikely in the near future* It in the Federal

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Federal Reserve Bank of St. Louis

view that their proposal would ^^^ff°

^^W {&arwPtion <& ***

security saarket and they se«i3vS^m8MW^that the increased
flexibility of the market would produce more confidence*
Their major point is an unwillingness on thetrjart to conUnp
-™~
monetiatio3i
•e»etissation of debt^aj^crfh 'they concede that
>
^•i

^t* '**

continue, although in thcdr^tt&gatfnt at^i^reduccd pace and at less cost
to them if th© supportr^K^^
priqpripri reduced*
Under continuous questioning, there IKS general agrearai&fes&iat we
were discussing degrees rather timn absolutes, and the Treasury was
questionin

effectiveness of the operation, and also questioning

the Federal evaluation that the repereasstons in the aarket would not
be serious*
It UBS clear
\
there was in what
along the line of
or pfursiaing th® co
accepting the
the emergency |>eri*
means than a revision of

1& +K- ^
basis whatever consistency
concepts seemed
in its entirety
his January IS address
debt during
its effects through other
t

At the and of Hie meetings it was made clear again that these were
exploratory talks and that no counter proposals had been offered by the
1^easury,^^eeordln^ly, it was suggested that the satter now be referred
to a hlgllSrlevel where negatiati one or counter proposals might take place,*

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Federal Reserve Bank of St. Louis

REPORT m COlTOHSaflONS AT THE TECHNICAL LS7EL OF
TREA3TJ1T AHD FEDERAL

Partieipant**

SYSTEM

Treasury -

Mr. l&a. MeC. Martin, Jr.
Dr. George C* Haas
Ifr. Edward F. Bartelt
Mr. Winfield W. liefler
Mr. Wo«wilief Tho^ft«
Mr. Robert Bouse ($«Y. Federal)

First Meeting - Tuesday, February 20, 1951, IjOO p.m., beginning
at luncheon in Mr. MeCabe1* office.
Adjourned at 2j45 p.m. to Federal Beserve Board
Room and continued until 4i3Q p.m.
Reconvened -

d -

, February 21, 1951, £s50 p.m..
Library of Federal Reserve Buildiag
Adjourned at 6il5 p.ai»
Friday, February 23, 1951, 9t45
Library of Federal Reserre Bailding
Adjourned at 12sl5 p.m.

4jS5 p.m. — Cleared with Martin
Ket cleared with Bartelt or

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Federal Reserve Bank of St. Louis

It was clearly understood by all that these were explorations at th*
technical level and not negotiations*
Lengthy discussion of the technlque|^if the Open Market Committee and
the necessity for better liaison between the Federal Reserve and Treasury
was a part of the early discussion, and it was clear that both of us could
be better informed on the thinking of the ether*
Inasmuch as the Federal Reserve greup had a specific proposal, approved
by the Open Market Cosaaittee, in the letter of February 7 of Chairman McCabe
to the Secretary, most of the discussion attempted to clarify what was intended
in that letter.
The Federal Reserve group continuously asserted the unhapplness of the
Open Market Coismittee in continual monetitation of the Federal Debt,
particularly at premium prices and they made it clear that it was the Judgment
of the Committee that the price of the long-term bonds should be permitted to
drop to par.
There was considerable discussion of the rigidities in the present
jaarket and the fact that a large amount of selling was probably because of
commitments already isade by insurance companies, savings banks, loan associations and the banking system, and the consequent replenishing <fa reserves
through sales to the Federal Reserve in the open isarket of Government
securities*
Under the policy proposed in the February 7 letter, the Federal would
withdraw support from the short-terra securities market and let It adjust
itself around the 1-3/4 percent discount rate now prevailing. They believe
that once these adjustments were saade, a groundwork would be laid in the

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Federal Reserve Bank of St. Louis

-2-

tJnder these conditions short-

term rates adjust to the discount rate*
Under considerable pressing by the Treasury group, the Federal Reserve
group were willing to explore with the Committee the feasibility of a commitment to maintain the discount rate at 1-3/4 percent for a period of time
running through December 1951 in order to facilitate Treasury planning of new
money and refinancing at the new levels established as a result of these
adjustments.

It was pointed out, however, that any such advance commitment

Bight present difficulties since it would involve all directors of all 12
Federal Reserve Banks as well as the Board of Governors*
There was long discussion, and much of it sympathetic, of a proposal
advanced principally by Mr. Eiefler th&t the Secretary announce V nonmarketable E-S/4 percent long-term, installment retirement, bond (29-1/2 years)
which could be exchanged for the existing 2-1/2*s Jttne and December of 1967-72,
the desire being to lock these two Issues up as much as possible and remove
them as an important market factor,

A feature of this issue might be an

alternative of exchange for 1-1/2 percent five-year notes for those who
desired to cash them or wanted a marketable issue*
At the concluding session it was suggested by the Treasury group that
if the Secretary should effer no objection to the Federal leserre proposal

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Federal Reserve Bank of St. Louis

-5-

with respect to the adjustment of snort-term rates and should decide to
announce a 2-3/4 percent long-term non-marketable issue, to be exchanged for
the outstanding long-term restricted issues, the Federal Reserve might consider
maintaining the current levels in the June and December issues until it was
demonstrated whether they would continue to require support* la the event that
continued support were necessary, the Treasury group suggested that the Federal
Reserve and the Treasury could meet again to consider the problem*
This was put forward, not as a counter proposal, but on an exploratory
basis and with an earnest plea on th© part of Mr. Bartelt that we not attempt
to prejudge the market. It was his hope that such an arrangement would release
pressure from the aarket and permit us to get a start on the refinancing
program without impairing further public confidence in the markets*
It was suggested by the Federal that if the Treasury desired to test the
new ex@ha.nge issue this way, they might consider an agreement that the cost of
supporting the first two hundred million purchased be shared equally by the
Treasury and the Federal Reserve, that the Treasury earry 7S percent of the
coat of the succeeding |400 million, and that the Treasury earry the whole
amount of any purchased in excess of #600 million*

There was a lot &f talk about secrecy and the difficulty if such an
agreement leaked in any other way than through the published statements of
the Federal and the Treasury, and the belief on Mr. Bartelt*s part that
knowledge that th© Treasury and the Federal had gotten together would act as
a tonic in restoring confidence to the market*
There was general agreement throughout the discussions that the so-called
feud between the Treasury and Federal was a most significant psychological

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-4-

faetor in the current situation.

Both groups attached great importance t©

the public's fear of further loss ia the purchasing power sf the dollar*
After extended discussion, it seemed to be generally agreed by all that
the Federal Reserve approach urns essentially a "package one* and is not
susceptible, with any consistency, to Tery much compromise, unless there is
a drastic change in the existing xaarket situation, which on the basis of our
talks appeared unlikely in the near future.

It is the Federal view that their

proposal would involve so serious disruption of the security market.

They

feel that the increased flexibility of the market would produce more confidence *
Their major point is an uawilliagaess on their part to continue mone~
tization of debt.

They concede that Maintenance of orderly markets will entail

some further monetizatioa which they would hope to keep at a minimum*
There was general agreement that we were discussing degrees rathor than
absolutes, and that the Treasury was questioning the effectiveness of the
operation, and also questioning the Federal evaluation that the repercussions
in the market would not lie serious*
.

Both sides agreed that monetination of debt must be stopped as far as
possible.

The Federal Reserve position was firm that this could-, not be done

without repercussions in the money market while the Treasury view has been
that it could be minimised through direct controls which were preferable to
increases ia interest rates.
January 18 address.

This was the philosophy back of the Secretary's

0pon exploration of the proposals in the light of that

address, however, it ms agreed that the proposals discussed did not run
directly counter to that address.

He did not discuss an exchange issue.

Such

aa issue at 2-3/4 percent, if it were long-term and aoa-marketable, would not
be inconsisteat with a 2-1/2 percent rate oa the outstanding; marketable issues*

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Federal Reserve Bank of St. Louis

-5-

At the end of the meetings it was aa.de clear again that these were only
exploratory talks. Accordingly, it was suggested that the aatter now be
referred to a higher level where negotiations or counter proposals Might take
plaee*

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Federal Reserve Bank of St. Louis

REPORT ON CONVERSATIONS AT THE TECHNICAL IEVSL OF
TREASURY AND FEDERAL RESERVE SYSTEM REPRESENTATIVES

Participants:

Treasury -

Mr. Wm. McC. Martin, Jr.
Dr. George C. Haas
1^. Edward F. Bartelt

Federal Reserve -

Mr. Winfield W. Riefler
Mr. Woodlief Thomas
Mr. Robert Rouse (N.Y.Federal)

First Meeting -

Tuesday, February 20, 1951, 1:00 P.M.,
beginning at luncheon in Mr. McCabe's
office.
Adjourned at 2;ii5 P.M. to Federal Reserve
Board Room and continued until ij:30 P.M.

Reconvened -

Tuesday, February 20, 1951, 8:30 P.M.,
home of Mr. Riefler
Adjourned at 11:30 P.M.

Reconvened -

Wednesday, February 21, 1951, 2:30 P.M.,
Library of Federal Reserve Building
Adjourned at 6:15 P.M.

Reconved -

Friday, February 23, 1951, 9:U5 A.M.,
Library of Federal Reserve Building
Adjourned at 12;15 P.M.
V

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Federal Reserve Bank of St. Louis

It was clearly understood by all that these were explorations at
the technical level and not negotiations.
Lengthy discussion of the techniques of the Open Market Committee
and the necessity for better liaison between the Federal Reserve and
Treasury was a part of the early discussion, and it was clear that both
of us could be better informed on the thinking of the other.
Inasmuch as the Federal Reserve group had a specific proposal,
approved by the Open Market Committee, in the letter of February 7 of
Chairman McCabe to the Secretary, most of the discussion attempted to
clarify what was intended in that letter,
The Federal Reserve group continuously asserted the unhappiness
of the Open Market Committee in continual sionetization of the Federal
Debt, particularly at premium prices and they made it clear that it was
the judgment of the Committee that the price of the long-term bonds should
be permitted to drop to par.
There was considerable discussion of the rigidities in the present
market and the fact that a large amount of selling was probably because of
commitments already made by insurance companies, savings banks, loan
I
associations and the banking system, and the consequent replenishing of
reserves through sales to the Federal Reserve in the open market of Government securities.
Under the policy proposed in the February 7 letter, the Federal
would withdraw support from the short-term securities market and let it
adjust itself around the 1-3/1$ discount rate now prevailing.

They believe

that once these adjustments were made, a groundwork would be laid in the

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Federal Reserve Bank of St. Louis

—2—
market -which would act as a deterrent to lending and at the same time make

it possible to undertake in a more orderly fashion, although at somewhat
higher rates, the refinancings which the Treasury faces in the final six
months of the Calendar Year 19£U
Much of their argument revolves around the traditional abhorence
of the banks for borrowing from the Federal Reserve and their confidence
in the restraining influence of borrowed reserves. Under these conditions
short-term rates adjust to the discount rate.
Under considerable pressing by the Treasury group, the Federal
Reserve group were willing to explore with the Committee the feasibility
of a commitment to maintain the discount rate at 1-3/1$ for a period of
time running through December 1951 in order to facilitate Treasury planning
of new money and refinancing at the new levels established as a result of
these adjustments.

It was pointed out, however, that any such advance

commitment might present difficulties since it would involve all directors
of all 12 Federal Reserve Banks as well as the Board of Governors.
There was long discussion, and much of it sympathetic, of a proposal advanced principally by Mr. Riefler that the Secretary Announce a nonmarketable 2-3/1$ long-term, installment retirement, bond (29-1/2 years)
which could be exchanged for the existing 2-1/2»s June and December of
1967-72, the desire being to lock these two issues up as much as possible
and remove them as an important market factor. A feature of this issue
might be an alternative of exchange for 1-1/2$ five-year notes for those
who desired to cash them or wanted a marketable issue.

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Federal Reserve Bank of St. Louis

At the concluding session it was suggested by the Treasury group

-3that if the Secretary should offer no objection to the Federal Reserve
proposal -with respect to the adjustment of short-term rates and should
decide to announce a 2-3/1$ long-term nonmarketable issue, to be exchanged
for the outstanding long-term restricted issues, the Federal Reserve might
consider maintaining the current levels in the June and December issues
until it was demonstrated whether they would continue to require support.
In the event that continued support were necessary, the Treasury group
suggested that the Federal Reserve and the Treasury could meet again to
consider the problem.
This was put forward, not as a counter proposal, but on an exploratory basis and with an earnest plea on the part of Mr. Bartelt that
we not attempt to prejudge the market.

It was his hope that such an

arrangement would release pressure from the market and permit us to get
a start on the refinancing program y/ithout impairing further public
confidence in the markets.
It was suggested by the Federal that if the Treasury desired to
test the new exchange issue this way, they might consider an agreement that
the cost of supporting the first two hundred million purchase^ be shared
equally by the Treasury and the Federal Reserve, that the Treasury carry
75 per cent of the cost of the succeeding $1;00,000,000, and that the
Treasury carry the whole amount of any purchased in excess of $600,000,000.
There was a lot of talk about secrecy and the difficulty if such
an agreement leaked in any other way than through the published statements
of the Federal and the Treasury, and the belief on Mr. Bartelt's part that
knowledge that the Treasury and the Federal had gotten together would act
as a tonic in restoring confidence to the market.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-liThere was general agreement throughout the discussions that the
so-called feud between the Treasury and Federal was a mos£ significant
psychological factor in the current situation. Tke^gseitti«i«ii»««*ve grou|
attached great importance to the public's fear of further loss in the
purchasing power of the dollar.
After extended discussion, it seemed to be generally agreed by
all that the Federal Reserve approach was essentially a "package one" and
is not susceptible, with any consistency, to very much compromise, unless
there is a drastic change in the existing market situation, which on the
basis of our talks appeared unlikely in the near future. It is the Federal
view that their proposal would involve no serious disruption of the
security market. They feel that the increased flexibility of the market
would produce more confidence.
Their major point is an unwillingness on their part to continue
monetization of debt. They concede that maintenance of orderly markets
will entail some further monetization which they would hope to keep at a
minimum.
TT

£^rT*""r~r"^^

there was general agreement that we
1
were discussing degrees rather than absolutes, and that the Treasury was
questioning the effectiveness of the operation, and also questioning the
Federal evaluation that the repercussions in the market would not be
serious.
Both sides agreed that monetization of debt must be stopped as
far as possible. The Federal Reserve position was firm that this could not
be done without repercussions in the money market while the Treasury view

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Federal Reserve Bank of St. Louis

has been that it could be minimized through direct controls v/hich were
preferable to increases in interest rates. This was the philosophy back
of the Secretary's January 18 address. Upon exploration of the proposals
in the light of that address, however, it was agreed that tfcwre the proposals discussed did not run directly counter to that address.
nrm n | i 1,1 imi.i nrQHiriftm»n1i tm tfru •Mtt L N«it, nT,, .,^flgfc-tiftTairiMifarb
discuss an exchange issue.

He did

not

Such an issue at 2-3/1$, if it were long-term

and nomnarketable, would not be inconsistent with a 2-l/2<£ rate on the
outstanding marketable issues.
At the end of the meetings it was made clear again that these
were-.exploratory talks,>c«d^lllU^M~44MI&^^
l^^tfeifffi?^^

IraH iNfefP'UKHUUU 11

it was suggested that the matter now be

referred to a higher level where negotiations or counter porposals might
take place,

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Federal Reserve Bank of St. Louis

February 24, 1951

REPORT ON CONVERSATIONS AT THE TECHNICAL LEVEL OF
TREASURY AND FEDERAL RESERVE SYSTEM REPRESENTATIVES

Participants:

First Meeting -

Treasury -

Mr. Wnu McC. Martin, Jr*
Dr. George C. Haas
Mr. Edward F. Bartelt

Federal Reserve -

Mr. Winfield IT. Riefler
Mr. Woodlief Thomas
Mr. Robert Rouse (N.Y. Federal)

Tuesday, February 20, 1951, 1:00 p.m., beginning
at luncheon in Mr. McCabe's office.
Adjourned at 2:45 p.m. to Federal Reserve Board
Room and continued until 4:30 p.m.

Reconvened -

Tuesday, February 20, 1951, 8:30 p.m.,
home of Mr. Riefler
Adjourned at 11:30 p.m.

Reconvened -

Wednesday, February 21, 1951, 2:30 p.m.,
Library of Federal Reserve Building
Adjourned at 6:15 p.m.

Reconvened -

Friday, February 23, 1951, 9:45
Library of Federal Reserve Buildinj
Adjourned at 12:15 p.m.

4:35 p.m. —

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Federal Reserve Bank of St. Louis

Cleared with Martin
Not cleared with Bartelt or Haas

It was clearly understood by all that these were explorations at the
technical level and not negotiations*
Lengthy discussion of the techniques of the Open Market Committee and
the necessity for better liaison between the Federal Reserve and Treasury
was a part of the early discussion, and it was clear that both of us could
be better informed on the thinking of the other*.
Inasmuch as the Federal Reserve group had a specific proposal, approved
by the Open Market Committee, in the letter of February 7 of Chairman McCabe
to the Secretary, most of the discussion attempted to clarify what was intended
in that letter.
The Federal Reserve group continuously asserted the unhappiness of the
Open Market Committee in continual monetization of the Federal Debt,
particularly at premium prices and they made it clear that it was the judgment
of the Committee that the price of the long-term bonds should be permitted to
drop to par.
There was considerable discussion of the rigidities in the present
market and the fact that a large amount of selling was probably because of
commitments already made by insurance companies, savings banks, loan associations and the banking system, and the consequent replenishing if reserves
»•
through sales to the Federal Reserve in the open market of Government
securities.
Under the policy proposed in the February 7 letter, the Federal would
withdraw support from the short-term securities market and let it adjust
itself around the 1-3/4 percent discount rate now prevailing.

They believe

that once these adjustments were made, a groundwork would be laid in the

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-2-

market which would act as a deterrent to lending and at the same time make
it possible to undertake in a more orderly fashion, although at somewhat
higher rates, the refinancings which the Treasury faces in the final six
months of the Calendar Year 1951•
Much of their argument revolves around the traditional abhorence of the
banks for borrowing from the Federal Reserve and their confidence in the
restraining influence of borrowed reserves * Under these conditions shortterm rates adjust to the discount rate,
Under considerable pressing by the Treasury group, the Federal Reserve
group were willing to explore with the Committee the feasibility of a commitment to maintain the discount rate at 1-3/4 percent for a period of time
running through December 1S51 in order to facilitate Treasury planning of new
money and refinancing at the new levels established as a result of these
adjustments.

It was pointed out, however, that any such advance commitment

might present difficulties since it would involve all directors of all 12
Federal Reserve Banks as well as the Board of Governors,
There was long discussion, and much of it sympathetic, of a proposal
advanced principally by Mr, Riefler that the Secretary announce*a non»•

marketable 2-3/4 percent long-term, installment retirement, bond (29-1/2 years)
which could be exchanged for the existing 2-1/2's June and December of 1967-72,
the desire being to lock these two issues up as much, as possible and remove
them as an important market factor,

A feature of this issue might be an

alternative of exchange for 1-1/2 percent five-year notes for those who
desired to cash them or tranted a marketable issue.
At the concluding session it was suggested by the Treasury group that
if the Secretary should offer no objection to the Federal Reserve proposal

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-3-

with respect to the adjustment of short-term rates and should decide to
announce a 2-3/4 percent long-term non-marketable issue, to be exchanged for
the outstanding long-term restricted issues, the Federal Reserve might consider
maintaining the current levels in the June and December issues until it was
demonstrated whether they would continue to require support*

In the event that

It was his hope that such an arrangement would release

pressure from the market and permit us to get a start on the refinancing
program without impairing further public confidence in the markets*
It was suggested by the Federal that if the Treasury desired to test the
new exchange issue this way, they might consider an agreement that the cost of
supporting the first two hundred million purchased be shared equally by the
Treasury and the Federal Reserve, that the Treasury carry 75 percent of the
cost of the succeeding $400 million, and that the Treasury carry the whole
amount of any purchased in excess of -|600 million*

There was a lot of talk about secrecy and the difficulty if such an
agreement leaked in any other way than through the published statements of
the Federal and the Treasury, and the belief on Mr. Bartelt1s part that
knowledge that the Treasury and the Federal had gotten together would act as
a tonic in restoring confidence to the market.
There was general agreement throughout the discussions tha.t the so-called
feud between the Treasury and Federal was a most significant

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

psychological

-4-

factor in the current situation.

Both groups attached great importance to

the public1s fear of further loss in the purchasing power of the dollar.
After extended discussion, it seemed to be generally agreed by all that
the Federal Reserve approach was essentially a "package one" and is not
susceptible, with any consistency, to very much compromise, unless there is
a drastic change in the existing market situation, which on the basis of our
talks appeared unlikely in the near future.

It is the Federal view that their

proposal would involve no serious disruption of the security market.

They

feel that the increased flexibility of the market would produce more confidence.
Their major point is an unwillingness on their part to continue monetization of debt.

They concede that maintenance of orderly markets will entail

some further monetization which they would hope to keep at a minimum.
There was general agreement that we were discussing degrees rather than
absolutes, and that the Treasury was questioning the effectiveness of the
operation, and also questioning the Federal evaluation that the repercussions
in the market would not be serious.
Both sides agreed that monetization of debt must be stopped as far as
possible.

The Federal Reserve position was firm that this coulfi not be done
«»•
without repercussions in the money market while the Treasury view has been
that it could be minimized through direct controls which were preferable to
increases in interest rates.
January 18 address.

This was the philosophy back of the Secretary's

Upon exploration of the proposals in the light of that

address, however, it was agreed that the proposals discussed did not run
directly counter to that address.

He did not discuss an exchange issue.

Such

an issue at 2-3/4 percent, if it were long-term and non-marketable, would not
be inconsistent with a E-l/2 percent rate on the outstanding marketable issueso

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Federal Reserve Bank of St. Louis

-5-

At the end of the meetings it was made clear again that these were only
exploratory talks. Accordingly, it was suggested that the matter now be
referred to a higher level where negotiations or counter proposals might take
place*

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Federal Reserve Bank of St. Louis

It waft clearly understooa by all that these were explorations *t the
technical level and not negotiations.
Lengthy disoussion of the technique* of the Open Market Coawlttee and
the necessity for better liaison between the Federal Reserve and Treasury
was a part of the early discussion, and it was clear that both of us could
be better informed on the thinking of the other* The dissuasion broutht ^ut
the high decree* of cooperation which exists between the Treasury and the
Federal Reserve in coordinating the function of the Treasury in maintaining
Its dally cash position with the function of the federal Reserve in controlling
bank reserves. It was a»ntioned that the Treasury consults freely with the
Uumger of the Open Market Account in forecasting daily and weekly cash receipts
and payments and in determining the amounts of calls to be made on Treasury
Tax and Lean Accounts. The Hamper of the Open Market Account was comaended
for his courtesy in furnishing information and answering questions regarding
the Market, when requested* but the view was expressed taut if the Federal
Reserve would consult aore freely with Treasury before aoveaents are aade
in the direction of changes in price levels (with consequent effects on
Interest rates) thera would be brought about a eloser coordination of the credit
policy of the Federal Reserve with the debt smaacewent poliey of the Treasury,
Treasury mentioned, particularly. Its helplessness when Open Market Policy
between financing periods results in a saarket situation which virtually predetermine* an interest-rate change for the new financing-. It was also felt
that confidence Is not promoted if new issues are permitted to "sour** shortly
after they have been put on the >Jarket«
Inasmuch as the Federal Reserve group had a specific proposal, approved
by the Open Market Coissdttee, in the letter of February 7 of Chairman McCabe

1^/26/51 -

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Federal Reserve Bank of St. Louis

-2-

to the Secretary, most of the discussion attempted to clarify what was Intended
la that letter*
The Federal Reserve group continuously asserted the uaheppineas of the
Open %Sark®t Committee in continual swnetization of the Federal itobt,
particularly at premium prices and they Bade it clear that it ms the judgment
of the Cosadttoe that the price of the long-term bond* should be permitted to
drop to par.
There was considerable discussion of the rigidities In the present
saarket and th« fact th*t a larf,® amount of selling was probably because of
ooauaitaenta already nade by Insurariee companies, savings banks, loan associations and the banking system, and the consequent replenishing of reserves
through sales to the Federal Beaerve in the open aarket of Government
securities.
Under the policy proposed in th* February 7 letter, the Federal would
withdraw support froa the short-term seeuriti«s market and let it adjust
Itself around the 1-3/4 percent discount rate now prevailing. They believ*
that once these adjustments were aade, a groundwork would be laid in the
aarket which would act as a deterrent to landing and »t th« same tio« make
it possible to undertake In & more orderly fashion, although attsomewhat
i-

higher rates, the refinaaeln.-* which, the Treasury faces In the final six
months of the Calendar Tear 1951.
Much of their argun*oat revolves around th© traditional abhorence of the
banks for borrowing from the Federal Reserve and their confidence in the
restr&iaiiif Influence of borrowed reserves, tinder theae condition* shortterm rates adjust to the discount rate.
At the sugfestion of the Treasury group* the Federal Reserve group
indicated a willingaeac to explore 'with the Coisaiittee th© feasibility of a

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Federal Reserve Bank of St. Louis

-3-

a oossiitsaent to maintain the discount rate at 1-3/4 percent for a period of
tisse running through December 1951 In order to facilitate Treasury planning of
new money and refinancing at the new levels established as a result of these
adjustments.

It TWS pointed out, however, that any such advance eommitiaent

mi;ht present difficulties slnoe it would involve all directors of all 12
Federal Reserve Banks a« well as the Board of Covernors*
There was long discussion, and much of it sympathetic, of a proposal
advanced principally by Mr. Riefler that the Secretary announce a noa-umrketable 2-3/4 percent long-term, iastftllsient r^tireoexit, bond (29-1/2 year*)
which could be exchanged for the eatistiog 2-1/^'s «fuue wad December of 1907-72,
the desire being; to lock these two issues up as much as possible and reaaove
them as sin important isarket factor.

?hia aeourity would aot be redeemable

by the Treasury .prior to maturity.

Howsvor, a feature of this issue night

be a privilege to exclmn e it prior to maturity for & 1-1/2 mrketfeble flyeyeitr aot« in order to take car® of •Ifaatimis where enaers subsequently might
desire a security that oould be sold oti the market.

Mr. Riefler indicated

that the amortiaatloa feature of _ th_e propoaed 2-3/4 percent non-osarketable
bond could be elimiimted froa the t^r^a if oa oonai deration by the Treasury
that adght be undesirable.

At the concluding session it was suggested by the Treasury group that
if the Secretary should offer no objection to the Federal Eeserve proposal
with respect to the adjustment of short-term rates and should decide to
announce a 2-3/4 percent long-term non-mriws table issue, to be exchanged for
the outstanding loaf-term restricted issues, the Federal Reserve aight consider
aaintainiag the current levels in the Jua* and Deeeatber issues until it iNi«
demons tre ted wheth&r they would continue to require support.

In the event that

continued support were necessary, the Treasury group sugfested that the

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Federal Reserve Bank of St. Louis

Federal Reserve* and the Treasury oould aeet agbin to consider the problem.
This was put forward* not as a counter proposal, but on an exploratory
basis and with an earnest plea on the part of Mr* Bartelt that we not attempt
to prejudge the market, or the ability of the Treasury later in the year to
sell a 2-OL/2 percent security, such as a G bond or the 2-1/2 percent Investor
Series type issued ia the Fall of 1947*

It uas his hope that such an arrange-

ment would release pressure from the market aad permit us to ret a start on
the refinancing program without i^jairinr further public confidence in the
Markets.

It was suggested by the Federal that if the Treasury desired to test the
new exchange issue this my, they mirht consider an agreement that the cost of
supporting- the first two hundred million purchased be shared equally by the
Treasury and the Federal Besenre, that the Treasury carry 76 percent of the
cost of the succeeding |400 million, and th*t the Treasury carry the whole
amount of any purchased in excess of $600 million*
•

There was a lot of talk about secrecy and the difficulty if such an
agreement leaked la any other way thai; through the published statements of
the Federal and the Treasury, and the belief on Mr* Bartelt's part that
knowledge thrt the Treasury and the Federal had gotten together Vould act as
a tonic in restoring confidence to the aurket*
There -was general arreement throughout the discussions th&t the so-called
feud between the Treasury and Federal was a most significant psychological
factor in the current situation.

Both groups attached ~r©*t importance to

the public's fear of further loss in the purchasing po^r of the dollar.
After extended discussion, it se@ja©d to be generally agreed by all that
the federal Reserve approach was essentially a *paofcafre one** and is not

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Federal Reserve Bank of St. Louis

-5-

susoeptible, with any consistency, to very »ueh oonpronise, unices there 1*
ft drastic eh&n~e in the existing warket situation, which ©a th* basis of our
talks appeared unlikely in the near future.

It is the Federal view that their
,
, .
proposal would involve no serious disruption of the security market* They
feel tfafot the increased flexibility of the s»rk©t would produce more confidence,
Their oajor point is an unwillingness on their part to continue moneti&ation of debt. They concede that maintenance of orderly aarkets will entail
soiae further mooetination which they would hope to keep at a minimum.
There was general agreeaant th? t we were discussing degrees rather than
absolutes, and that the Treasury was questioning the effeotivenes* of the
operation, and aiao ^ucstioninc, th« Federal evfklu&tioa th^t the repercussions
in the market would not be serious.
Both sides agreed th&t auxoetication of debt £iust be stopped as fer as
possible.

The Federal Reserve position was fira that this could not be doae

without repercussions in the aoaey oarket while th« Treasury view has been
that it could be sainim? *«d through direct controls w ich were preferable to
iacre&aes in interest rates.

This was the philosophy back of the Secretary's

January 18 address. Upon exploration of th« proposals in th« li^-ht of that
address, however, it was agreed that the proposals discussed dltd
•i- not run
directly counter to that address* H0 did not discuss an exchange issue. Sueh
aa issue at 2-3/4 percent, if it were long-term and non-sarketahle, would be
consistent^ith the pattern of <* 2~l/2.percent..rate &a ftnaouac^d by the
3_aoretary on January 13_.

At th© end of the aeetirt;^ It was a»4e ol«ar a^aia that these were only
exploratory talks. Aeoordingly, it was su&i;«sted that th» matter now be
•i
referred to a higher level where negotifttioas or counter proposals Bi$ht take
pl&ce.

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Federal Reserve Bank of St. Louis

REPORT ON CONVERSATIONS AT TEE TECHNICAL LEVEL OF
TREASURY AND FEDERAL RESERVE SYSTEM REPRESENTATIVES

Participants:

Treasury -

Mr. Wm. McC. Martin, Jr.
Dr. George C. Haas
Mr. Edward F. Bartelt

Federal Reserve -

Mr. Winfield W. Riefler
Mr. Woodlief Thomas
Ifr. Robert Rouse (N. Y. Federal)

First Meeting;

Tuesday, February 20, 1951, 1:00 P.M.,
beginning at luncheon in Mr. McCabe's
office.
Adjourned at 2:1*5 P.M. to Federal Reserve
Board Room and continued until 1^30 p,

Reconvened:

Tuesday, February 20, 195l, 8:30 P.M.,
home of Mr. Rieflcr
Adjourned at 11:30 P.M.

Reconvened:

Wednesday, February 21, 1951, 2:30 P.M.,
Library of Federal Reserve Building
Adjourned at 6:15 P.M.

Reconvened:

Friday, February 23, 1951, 9:1*5 A.M.,
Library of Federal Reserve Building
Adjourned at 12:15 P.M.

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Federal Reserve Bank of St. Louis

Strictly Confidential
It was clearly understood by all that these were explorations at the
technical level and not negotiations.
Lengths'- discussion of the techniques of the Open Market Committee and
the necessity for better liaison between the Federal Reserve and treasury
was a part of the early discussion, and it was clear that both of us could
be better informed on the thinking of the other. The discussion brought out
the high degree of cooperation which exists between the Treasury and the
Federal Reserve in coordinating the function of the Treasury in maintaining
its daily cash position with the function of the Federal Reserve in controlling
bank reserves.

It was mentioned that the Treasury consults freely with the

Manager of the Open Market Account in forecasting daily and weekly cash receipts
and payment s and in determining the amounts of calls to be made on Treasury
Tax and Loan Accounts. The Manager of the Open Market Account was commended
for his courtesy in furnishing information and answering questions regarding
the market, when requested, but the view was expressed that if the Federal
Reserve would consult more freely with Treasury before movements are made
in the direction of changes in price levels (with consequent effects on interest rates) there would be brought about a closer coordination of the credit
policy of the Federal Reserve with the debt management policy of the Treasury.
Treasury mentioned, particularly, its helplessness when Open Market Policy
I
between financing periods results in a market situation which virtually predetermines an interest-rate change for the new financing. It was also felt
that confidence is not promoted if new issues are permitted to "sour" shortly
after they have been put on the Market.
The Federal Reserve group emphasized the desirability of keeping the
Treasury fully informed of all open market operations and the reasons for them.
The Manager of the account supplies the Treasury with regular market reports

Draft
2/27/51

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Federal Reserve Bank of St. Louis

- 2.•

given to the Board and members of the Open Market Committee and also keeps
the Treasury staff currently informed of operations.

The Manager is glad

to answer any questions that may be raised try the Treasury as to operations
and objectives of policy.

The Federal Reserve group are of the opinion that

all operations have been conducted on the basis of and within the limits of
policies previously determined by the Committee and communicated to the
Secretary of the Treasury. They feel that any misunderstanding that might
have risen in the past might be avoided through closer staff contact of the
type contemplated for the future.
Inasmuch as the Federal Reserve group had a specific proposal, approved
by the Open Market Committee, in the letter of February 7 of Chairman McCabe
to the Secretary, most of the discussion attempted to clarify what was
intended in that letter.
The Federal Reserve group continuously asserted the unhappiness of the
Open Market Committee in continual monetization of the Federal Debt, particular 3y at premium prices and they made it clear that it was the judgment of
the Committee that the price of the long-term bonds should, be permitted to
drot>
* to *par,
There was considerable discussion of the rigidities in the present
market and the fact that a large amount of selling was probably 'because of
commitments already made by insurance companies, savings banks, loan associations and the banking system, and the consequent replenishing of reserves through
sales to the Federal Reserve in the open market of Government securities.
Under the policy proposed in the February 7 letter, the Federal would
withdraw support from the short-term securities market and let it adjust itself
around the 1-3/ii per cent discount rate now prevailing. They believe that
once these adjustments were made, a groundwork would be laid in the market

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-3which would act as a deterrent to lending and at the same time make it
possible to undertake in a more orderly fashion, although at somewhat higher
rates, the refinancings which the Treasury faces in the final six months of
the Galsndar Year 19£l.
Much of their argument revolves around the traditional abhorence of the
banks for borrowing from the Federal Reserve and their confidence in the
restraining influence of borrowed reserves. Under these conditions shortterm rates adjust to the discount rate.
At the suggestion of the Treasury group, the Federal Reserve group
indicated a willingness to explore with the Committee the feasibility of a
commitment to maintain the discount rate at 1-3/J-i- per cent for a period of time
running through December 19f>l in order to facilitate Treasury planning of new
money and refinancing at the new levels established as a result of these adjustments.

It was pointed out, however, that any such advance commitment

might present difficulties since it would involve all directors of all 12
Federal Reserve Banks as well as the Board of Governors.
There was long discussion of the possibility of offering in exchange for
the outstanding longest-term restricted bonds a new issue of a type that would
_. Particulock funds in and remove these bonds as disturbing market factors.
lar attention, generally sympathetic, was given to a proposal advanced
principally by Mr. Riefler that the Secretary announce a non-marketable 2-3/U
per cent long-term, installment retirement, bond (29-1/2 years) which could
be exchanged for the existing 2-1/2's of June and December of 1967-72.
security would not be redeemable by the treasury prior to maturity.

This

However,

a feature of this issue might be a privilege to exchange it prior to maturity
for a 1-1/2 marketable five-year note in order to take care of situations

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Federal Reserve Bank of St. Louis

-uwhere owners subsequently might desire a security that could be sold on the
market.
2-3/U Per

Mr. Riefler indicated that the amortization feature of the proposed
cerrt

non-marketable bond could be eliminated from the terms if on

consideration by the Treasury that feature might be considered undesirable.
At the concluding session it was suggested by the Treasury group that
if the Secretary should offer no objection to the Federal Reserve proposal with
respect to the adjustment of short-term rates and should decide to announce a
25-3/1; per cent long-term non-marketable issue, to be exchanged for the outstanding long-term restricted issues, the Federal Reserve might consider
maintaining the current levels in the June and Decenber issues until it was
demonstrated whether they would continue to require support.

In the event that

continued support were necessary, the Treasury group suggested that the Federal
Reserve and the Treasury could meet again to consider the problem.
This was put forward, not as a counter proposal, but on an exploratory
basis and with an earnest pl^a on the part of Mr. Bartelt that we not attempt
to prejudge the market, or the ability of the Treasury later in -the year to
sell a 2-1/2 per cent security, such as a G bond or the 2-1/2 per cent Investor
Series type issued in the Fall of 19U7.

It was his hope that such an arrange-

ment would release pressure from the market and permit us to get^ a start on
the refinancing program without impairing further public confidence in the
markets.
It was suggested by the Federal that if the Treasury desired to test the
new exehaige issue tiiis way, they might consider an agreement that the cost of
supporting the first two hundred million purchased be shared equally by the
Treasury and the Federal Reserve, that the Treasury carry 75 per cent of the
cost of the succeeding $i;00 million, and that the Treasury carry the whole amount
of any purchased in excess of $600 million.

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Federal Reserve Bank of St. Louis

-5There was a lot of talk about secrecy and the difficulty if such an
agreement leaked in any other way than through the published statements of
the Federal and the Treasury, and the belief on Mr. Bartelt's part that
knowledge that the Treasury and the Federal had gotten together would act as
a tonic in restoring confidence to the market.
There was general agreement throughout the discussions that the so-called
feud between the Treasury and Federal was a most significant psychological
factor in the current situation. Both groups attached great importance to the
public's fear of further loss in the purchasing power of the dollar.
After extended discussion, it seemed to be generally agreed by all that
the Federal Reserve approach was essentially a "package one" and is not
susceptible, with any consistency, to very much compromise, unless there is
a drastic change in the existing market situation, which on the basis of our
talks appeared unlikely in the near future.

It is the Federal view that their

proposal would involve no serious disruption of the security market. They
feel that the increased flexibility of the market would produce more confidence,
Their major point is an unwillingness on their part to continue monetization of debt. They concede that maintenance of orderly markets will entail
some further monetization which they would hope to keep at a minimum.
There was general agreement that we were discussing degree^ father than
absolutes, and that the Treasury was questioning the effectiveness of the
operation, and also questioning the Federal evaluation that the repercussions
in the market would, not be serious.
Both sides agreed that monetization of debt must be stopped as far as
possible.

The Federal Reserve position was firm that this could not be done

without repercussions in the money market while the Treasury view has been
that it could be minimized through direct controls which were preferable to

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

increases in interest rates. This was the philosophy back of the Secretary's
January 18 address. Upon exploration of the proposals in the light of that
address, however, it was agreed that the proposals discussed did not run
directly counter to that address. He did not discuss an exchange issue. Such
an issue at 2-3/1* P6** cent, if it were long-term and non-marketable, would be
consistent with the pattern of a 2-1/2 per cent rate as announced by the
Secretary on January 18.
At the end of the meetings it was made clear again that these were only
exploratory talks. Accordingly, it was suggested that the matter now be
referred to a higher level where negotiations or counter proposals might take
place.

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Federal Reserve Bank of St. Louis

REPORT ON CONVERSATIONS AT THE TECHNICAL LEVEL OF
TREASURY AND FEDERAL RESERVE SISTEM REPRESENTATIVES

Participants

Treasury -

Mr. Ifcu McC. Martin, Jr.
Dr, George C* Haas
Mr. Edward F. Bartelt

Federal Reserve -

Mr. TELnfleld W.
Mr* Wbodlief Thomas
Mr. Robert Rouse (N.Y. Federal)

First Meeting -

Tuesday, February 20, 1951, ItOO P*H.,
beginning at luncheon in Mr» McCabe's
office.
Adjourned at 2s45 P»M» to ederal Reserve
Board Room and continued until 4$30 P*M»

Reconvened -

Tuesday, February 20, 1951, 8?30 P.M.,
home of Mr, Itiefler
Adjourned at 11:30 P«H*

Reconvened -

Wednesday, February 21, 1951, 2z30 P.? .,
Library of Federal Reserve Building
Adjourned at 6:15 P»M»

Reconvened •

Friday, February 23, 1951, 9*45 A.M.,
Library of Federal Reserve Building
Adjourned at 12:15 F.IU

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Federal Reserve Bank of St. Louis

It was clearly understood by all that these were explorations at
the technical level and not negotiations.
Lengthy discussion of the techniques of the Open Market Committee
and the necessity for better liason between the Federal Reserve and
Treasury was a part of the early discussion, and it was clear that both
of us could be better informed on the thinking of the other.
Inasmuch as the Federal Reserve group had a specific proposal,
approved by the Open Market Committee, in the letter of February 7 of
Chairman McCabe to the Secretary, most of the discussion attempted to
clarify what was intended in that letter.
The Federal Reserve group continuously asserted the unhappiness
of the Open Market Committee in continual monetissation of the i?ederal
Debt, particularly at premium prices*
There was considerable discussion of the rigidities in the present
market and the fact that a large amount of selling was probably because
of commitments already made by insurance companies, savings banks, loan
associations and the banking system, and the consequent replenishing of
reserves through sales to the Federal Reserve in the open market of
Government securities.

III pursuing the policy proposed in the February 7 letter, the Federal
\
intends to withdraw support from the short term securities market and let
it adjust itself around the 1-3/4^ discount rate now prevailing. They
felt that when these adjustmens were made, a groundwork would be laid in
the market which would act as a deterrent to lending and make it possible
to undertake in & more orderly fashion, although at sctaewhat higher rates,
the refinancings which the Treasury faces in the next six months of the

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Federal Reserve Bank of St. Louis

Year 1951*
Uuoh of their arguaent revolves arcmnd the traditional abhorenee of
the banks for borrowing froa the Federal Beserv* and an aggregate reduction
of needed reserves as the short tern rate adjusts on the discount rate as
* governor*
Under considerable pressing by the Ireasury group, they were willing
to undertake for A period of tiae running thru st the aoet March 1952, or
st least through Deceober 1951, a fitted pattern of rates covering new aoney
and refinancing at the levels established as a result of these adjustments.
ttiere was long discussion, and much of it synthetic to a proposal
advanced principally by Mr* Riefler that the Secretary announce a notvaarketable 3-3/4£ long tera bond (29-1/2 ytars) which could be s»ahangsd
for the Jam or December 2*0/2% the desire being to look these two issues
tap as fluoh as possible and remove tham as an important raatl-et factor* s>
feature of this issue night be an alternative of oxobm^o for V4/V fiveyear notes for those who desired moro l%iidity« Itevortholeas, the dear
intent was to drop the long term issues to par and hones rule out for the
tine being at least the issuance of ai^ 2-3/3$ bonds of longer maturity than
17 years*

At the concluding session it was suggested bgr the ftroasury group that
if ^ie Secretary should accede to the Federal Eesirv* propoeal with reepect
to the adjustaant of the short term rates and the announcement of a S-3/4#
long term issue, to be exchanged for the outstanding long two issues, would
the Federal Beserve undertake to maintain the cuzrent levels in the June and

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Federal Reserve Bank of St. Louis

•wl'W^W*

3*
this HAS put forward, not as a counter proposal* but on an
eoplor&tory basis and with an earnest plea on the part of Mr* Bartelt
that we not atteapt to prejudge the warket, and his hope that such an
arra&eenant would release pressure from the aarket and permit us to get
a start on the refinancing program without is$airing any further public
confidence in the markets*
It was suggested by the Federal that ws Bight agree to buy two
hundred million of the long terms - one hundred million by the treasury,
one hundred million by the Federal, and then agree to purchase another
four hundred million - 75? or three hundred Mil ion to be purchased by
the 'Treasury, and one hundred million or 25} to be purchased by the
Federal, end tfhen art* hundred
t *^*mmm

VOTV w

w*+*^mm

WP^VM*

•

i had bean nmrah&aod *L& jft^taousA3M
•

V^V^^P

• "^^^WPW

^^FiMBi ^P9*^^^^^^^w

^nf

«* ^P*^^ilWWBMWHBMWF

the problem*

There was a lot of talk about secrecy and the difficulty if trash
an agreement leaked in aqy other way than through the published statenants
of the Federal and the *>oasuryf and the beUaf on llr* Bartelt9s part
that kncwledge that the treasury and the Federal had gotten together would
act as a tonic in restoring confidence to the market*

Ttisre was general agreeaent throughout the discussions tfrnt
•». the
so-called feud between the Ireastiry and Federal was by far the most
significant psychological factor lii the cyrrant sittiation.
After extended discussion, it saeiaed to be generally agreed by all
ttiat the Federal Reserve ai^roaoh was essentially a "package one" and is
not susceptible, with asy consistency, to very such coaproaise, unless
there is a drastic change in the existing sarket situation, which on the
basis of our tall® appeared unlikely in the near future* It In the Federal

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Federal Reserve Bank of St. Louis

4*
vie* that their proposal would lim&ira no siariotss disruption of the
security aarket and the? seem to be ccmtsrxJtng that the increased
flexibility of the martoet would produce sore confidence*
Their major point is an uinrlllingness cm their part to continue
Bonetlaatlon of debt although thegr concede that this monetlaation would
continue, although In their judgment at a redwood pace and at less ooet
to them if the aapport jffioea were reduoecU
tinder omtinuous ojaeattodng, there nae general agreement that «*
nere disct»alng degrees rather than abaaLutea^ and the treasury naa
^MNitlofdng the <!ffeotlvene«» of the operation, and also questioning
the Fedessl evaluation that the reperooaalorui in the mrket would not
It m» oloar that at loast on a theoratloal basis whatever ooneistency
there was in what obvicu*3y were two an^enUally opposing concepts seemed
along the Hue of either following the federal proposal in its entirety
or pursuing the course advocated by the Secretary in Ms January IS address
accepting the necessity of soae further monetise.lion of the debt during
the eiswgency periodf but attempting to adnijiiae its ef Iteets through other
mean© than a revision of interest rates*

<
At the end of the meetings it was made clear again that these were

ejqp&mtery talks and that no counter proposals had been offered by the
?*eastiry« Aooordtngl^, it was suggested that ths matter now be referred
to a higher level where inegotiiiti ora or counter proposals might take place*

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This document is protected by copyright and has been removed.
Article Title:

From A Survey of International Banking: Flexible Money in the
United States

Journal Title:

The Economist

Date:

November 20, 1954

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(Draft February 5. 195D
Statement He Program for Curtailment of Honessential Bank
Credit
(February 1951)
No tax program could be successful under current
conditions, unless it were supported by restrictive monetary and credit policies. Deficit financing is no answer.
The demand for credit continues to mount relentlessly because of unusual opportunities for profit, fear of the
future (including rising interest costs), end defense needs.
The Federal Reserve and the Treasury have the power
and the machinery between them to establish whatever interest rates are deemed wise. Under normal circumstances,
open market operations of the Federal Reserve might penalize
banks sufficiently to deter expansion of credit. But in a
period of national emergency, one is justified in questioning the traditional techniques of the market and calling
utxm the banking system to police itself through resort to
voluntary restrictions.
Curtailment of credit in accord with our agreed objectives is one of the most effective means of preserving the
value of the dollar and maintaining the independence of the
banking system.

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In a column in the Washington Poet for February 8, 1951> Mr* Walter
Lippmann presents the Federal Reserve case with respect to the present
interest rate controversy.
This case is as follows: We have had a serious inflation since last
June. This inflation was caused by "the compulsory manufacture of money in
the Federal Reserve System in order to buy those Government securities which
the Treasury insisted must be bought at a fixed price." After noting the
rise in demand deposits between April and December and the price rise
occurring at the same time, Mr. Lippmann concludes "This is about as clear
a case of purely monetary inflation as one can find."
We have here a clear statement of the Federal Reserve charge. There has
been a monetary inflation says the Federal Reserve. This was caused by
the Treasury insisting that the Federal Reserve buy Government securities at
a fixed price.
To say that the purchase of Government securities caused inflation is
to mistake form for substance — and in addition to miss the main part of the
form.
Inflation was caused by a rush to buy inventories — to b^at the price
rise — to get in ahead of the other fellow — to expand before controls
clamped down. To do these things business concerns and individuals needed
credit. Some of the buying could be done with cash. But credit was needed

too. A lot of it.
They got credit — $_

**''
billion of new ? bank- <M?e44* between June and

Ml-nu^ 2>

December; $_
in this area.

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trillion of consumer credit — despite the new restrictions

11
- 2-

Let's take the bank credit. That is mainly what the Federal Reserve is
talking about.
The first decision on creating bank credit conies from the banker. He has
to decide to make the loan or not make it. The point of contact between the
banker and the businessman is a crucial part of the credit process. But let
us pass on from there. Let us say the banker grants the loan. The businessman has his money — and goes out to use it.
We are staying with the bankers in examining the credit process. He
is increasing the demand deposits on the books of the bank. How does he
get the necessary new reserves to cover these deposits?
He used to get them by borrowing from the Federal Reserve Bank — the
central bank. The price he paid — the rate charged him — was called the
discount rate. It was put up, or put down, on the theory that a higher rate
could discourage borrowing during inflationary periods, and that a lower rate
could encourage loan applications during deflationary periods.
This theory stems from an England of long ago. It had no application —
it never worked — in the dynamic American economy during periods of dynamic
change. It only seemed to work when both the economy and the -vplume of credit
were relatively static.
During boom periods — the post World War I boom — the 1929 boom —
higher rates didn't work at all.

People went right on borrowing.

The price

of credit didn't matter, when a 100 percent or a 1,000 percent profit was
the glittering goal.
At the depths of the depression, it didn't work either.

The price of

credit couldn't get low enough to start businessmen borrowing — to stimulate

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- 3expansion — when business activity was shrinking, when consumer markets were
lifeless.
It doesn't take a financial expert to understand these things. They are
perfectly obvious, when we get away from big words, from high sounding phrases,
aid look at the facts. The facts are simple, ordinary, a part of everyday
experience.
The only strange thing is that, in the face of these facts, the theory
persisted. It still persists. More than that, it has been given new life by
the insistence of the Federal Reserve that discouraging or encouraging
borrowing by means of changes in the interest rates must be true. The theory
must be true, the Federal Reserve insists, because it ought to be true.
Higher prices ought to discourage purchases — of credit or of other things.
Slightly higher prices ought to discourage purchases a little. Very much
higher prices outht to discourage purchases a lot. But as every one knows
this doesn't happen when the purchases are greatly desired or hold out the
possibility of big profits. As we have noted, higher prices for credit
didn't stop borrowing in 1920, in 1929.

Lower prices didn't start up

borrowing in 1932.

But, says the Federal Reserve, they should^iave.
V
Now, let us get back to the present, to right now. We are in one of

the most dynamic periods in our history. The economy has to grow. It has to
provide for tremendously increased defense needs. It has to provide essential
civilian goods — enough to maintain the working efficiency of our population,
over a long pull, not just a swift peak effort. Let us get away from the
economist phrase "inflationary pressures". Prices are going up, are pressing
up, because the different groups in our competitive free enterprise economy

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are striving to push ahead, to expand before controls, to get hold of scarce
materials, to build up inventories. As you see — I come back to these
essential facts in the present situation.
Now, for the theory that higher interest rates can have a decisive
effect in inducing borrowers not to borrow, and bankers not to lend — in
holding back prices from jumping ahead. Let me borrow from a leading
financial Journal, one of our most sober, for a phrase to sum up the appropriateness
of this theory. According to comment in this journal, an attempt to turn back
the forces making for higher prices at the present time by means of putting
up the price of credit would be like a slap on the wrist of a charging
gorilla. I cannot improve on that summary of the situation.
But in order to stay with the essential facts of the situation, let us
get back to the banker. He has made the loan. Let's say he made it at
k percent. He might have asked a lot more and got it, the way things are
today. That's what he did in 1929• But now he has made the loan. Both he
and his customer will make money — plenty of it — under present rates.
They made money, a great deal of it, last year — on the basis of prevailing
loan rates. Corporation profits were the highest in history. ^Bank profits
are phenomenal.
The banker has made his loan. Now he has to increase his reserves to
take care of it. Since World War II, he has not had to borrow from the
Federal Reserve in order to do this. The discount rate — whether it is high
or low — is of little interest to him. As a consequence of World War II
financing, commercial banks own $6l billion of Federal securities. These
securities are a part of their earning assets. In fact, they represent onehalf of them. But Federal securities do not earn as much as private loans.

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- 5When a profitable loan is in view, the banks can sell Federal securities in
order to get the money for making the loan. This simply means the exchange
of one earning asset for another and more profitable one. Because of their
large Federal security holdings — a legacy of World War II — that is what
the banks do nowadays when they need more loan funds. They sell Federal
securities.
The Federal Reserve says that it wants to stop bank credit from going
up. It wants to stop that transaction we first talked about — the loan which
the banker makes to his customer. But how does the Federal Reserve want to
do this? It wants to stop this transaction by lowering slightly the price
which banks get for Federal securities when they sell them. This would
©.use the bank to pay more — just a little more — for the funds they need
to make loans to their customers.
This process is absolutely ineffective for the purpose intended. It
never worked in the past when the discount rate reflected the price of the
money needed by banks to make new loans. It hasn't worked now, when the
Federal Reserve has had to put its theory into effect by going into the markets
for Federal securities and altering the price structure for suofi securities.
Since last June the Federal Reserve has gone ahead unchecked in a policy
of doing Just that — of lowering Federal security prices as a means of
increasing the price which banks must pay for new funds to loan out to their
customers. But what has happened during this period?
Two things have happened. First, banks have not stopped making loans.
Bank credit has gone up by $

billion since last June — an increase

unprecedented in any similar period in our history. This is the first thing

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- 6that has happened during the period when the Federal Reserve was putting its
theory into effect.
But while this theory was being proved utterly useless as a means of
inflation control, it was having other and more serious consequences. The
attack the Federal Reserve System on the prices of Government securities was
succeeding in undermining the confidence of investors in the securities of
their Government. It was driving important numbers of Federal security
owners out of the market — causing them to turn their holdings into cash or
to refrain from putting new funds into new Government securities. It was
having exactly the opposite effect than that intended by the Federal Reserve,
namely, to cause investors to hold on to their Federal security holdings.
It was causing unsettlement and disturbance throughout the entire debt
structure of the Government — and this at a time when we must build up our
defenses, financial and otherwise, for new tasks and new demands of unforeseeable extent and magnitude. Ae the result of Federal Reserve manipulations
in the market — let us remember, with the sole justification of a theory
which had been proved ineffective many times in the past — the two important
refunding operations of the Government between last June and th^ present
time were failures. People didn't want to refund their Federal securities —
they didn't want new ones. The amount of maturing issues which were turned
in for cash or dumped in the market by private investors were of a magnitude
unknown during World War II days. They were of a magnitude unknown during
the entire postwar period. People were getting out of Federal securities.
That was the effect of the Federal Reserve action.
The only result of such operations, if allowed to continue, will be that
the Treasury will have to resort to the banks to a greater and greater extent

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,I
- Tfor the funds it needs. Nothing could be more inflationary. Nothing could
cause more harm to our economy and to the entire defense effort. Credit
must "be controlled.

Price rises must be checked. We have effective measures

for doing this — measures which bring in their train no harmful consequences
to the economy. Raising the price of credit won't do it.
Credit is an essential commodity like steel. We have to be sure that
the defense producers get it. We have to be sure that those who don't need
it don't get it. Those who need credit least — speculative buyers —
inventory hoarders — producers of soon to be scarce consumer goods — will
pay the most for it. They will not be deterred by interest charges which
are 1 percent, 2 percent, 10 percent higher or even 30 percent higher, as
in 1929.

And if at the same time, this futile process — this futile slap

on the wrist of a charging gorilla — undermines the credit of the United
States, forces Federal security owners out of the market, makes necessary
refunding operations of the Government a failure, and drives the Government
ever closer to inflationary financing — then surely it is time to call a
halt to theory. It is time to recognize the essential facts in the vital
problem of inflationary control and act on the basis of these facts.
V
These things we must do. First, we must have comprehensive programs
for allocating scarce materials and we must take the other necessary steps
for reducing the incentives to speculative projects.
Having done this, we must, second, keep the volume of private borrowing
at a minimum, through measures which act at the crucial point of the borrowing
relationship between the banker and his customer. Selective credit controls
such as those already put into effect — voluntary credit control programs such

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as those used effectively "by the American Bankers Association in 19^8 are of
the greatest importance.

Other measures for reducing the availability of

credit to nonessential borrowers may "be required.
Third, we must keep the volume of public borrowing at a minimum through
increasing our taxes along with our increased defense needs.
Fourth, we must manage our outstanding public debt in such a way as to keep
the inflationary potential at a minimum. This means keeping the largest
possible proportion of the debt in the hands of noribank investors, and keeping
the.bank holdings of Federal securities at the lowest possible figure. A
Federal security which a commercial bank does not have is a Federal security
which it cannot cash in in order to get funds for making new private loans.
Any policy which leads to increasing the dependence of the Treasury on the
banks and decreasing the volume of Federal securities in the hands of nonbank
Investors is to the highest degree inflationary. It is to the highest degree
dangerous to the ability of our economy to move ahead swiftly and surely in
its great task of protecting and strengthening our defenses against aggression.

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I an very happy to have this opportunity of appearing: before the Banking
and Currency Comittee in order to discuss with you the problems involved in
the

~..t of the jlation's finances,
'•.•:asibility for the sound conduct of the Nation's finances is a
• ; v e one.

Since the earliest days of our history, this responsibility

has been placed with the Secretary of the Treasury.. But the problems
involved are not my problems alone.
alone.

They are not the problems of the Congress

They are the problems of every citizen of this Nation*

Here is the situation as I see it.
amounting to over -250 billion.

V/e have today a public debt

Not Ion" a:-.;o we were worrying about a debt

which might read: ^50 billion. Y7e did not know how the country would be
able to stand such a debt.
of the Government.

We did not know how it would affect the solvency

7fe did not know how it could, be managed Tilth out disrupting

the financial life of the Nation*
That today we have a debt more than five tines that figure.
most important single factor in our financial structure.
one-half of all the debt obligations in the country*

It is the

It represents

Mortgages, state and

municipal securities, corporate bonds, and other private obligations — all
of them added together onlv equal the sum total of the nresent dbbt
o^ the
I
Government,
Life insurance companie 3 now own over 513 billion of Federal Government
securities — about one-fifth of their total assets. "Mutual savings banks
own $11 billion — about one-half of their total assets.

ITonfinancial

corporations own 020 billion, or nearly 15 percent of their current assets*
Individuals own 06? billion of Federal securities of all kinds — representing
approximately one-third of their total liquid assets of more than $200 billion*

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" <C

Commercial banks hold more than :)6l billion — representing approximately
one-half of their earning assets.
Before World War II, the situation was entirely different.

Financial

institutions and business concerns had. much more of their invested funds in
private obligations*

Only a very small proportion of our individual citizens

vrere owners of the securities of their Government.
After World War II, the public debt was in a predominant position in the
financial life of the Nation,

size, the importance, and the wide dis-

tribution of the debt are new facts to all of us. They create new problems.
place tremendous new responsibilities on the Secretary of the Treasury
who is charged by law with the sound management of the Nation's finances.
Ar>d undor present conditions of international crisis and. rising inflationary
pressures, both the problems and the responsibilities are enormously increased.
Throughout the postwar period, as I have emphasized, the public debt v/as
financial life of the nation. But
it has not been a disruptive factor.

The problems involved in managing a

public debt of over '!j250 billion are unprecedented. But they have been successfully solved. During the postwar period the- debt lias been managed, in
such ?. May as to ease the problems of reconversion and promote oi^r return to
peacetime activity at the highest level of production and employment in history.
How was this accomplished? It was accomplished by placing the largest
possible proportion of Federal securities in the hands of nonbank investors
and reducing bank holdings of Government obligations,
The Treasury has been eminently successful in this program. During the
past three years alone, bank holdings of Federal securities were reduced by
nearly f.)9 billion and in the last half of 1950 reached a postwar low. Correspondingly,

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in 1950 nonbank holdings reached a new postwar high.

Tliis shift in ownership

is of the greatest significance at the present time, since it acts directly
on the money supply by reducing the inflationary potential of bank assets*
These results could not have been achieved if our people had not had
full confidence in the credit of the Government.

They could not have been

achieved if the citizens of the Nation had not had full confidence in
Government securities — and acted on that b ' '.

HOY;, it is more important than ever before that people hold on to the
Government securities ^.rhich they no"./ c.. .
that t

is mor<- '

"tant than ever

d to these holdings as their funds permit them to do so,

can yre accomplish this end?

fer can

uce our citizens to hold

on to their investments in Government securities ana to buy more?
As I see it, we must accomplish this end just ar
other piece of merchandise, i/Sfe must stabilise

:lc-;s.

uld v/ith any
"e must eliminate

• t the cjw'nor ci1 prospective buyer ol an obligation of the Govemmei
C&uuvn-j, ^jt*x« AM^^MB^ &]£ *&++4s^fft*wb

±s going to be pens
investment drop.

'--awssssBwwiit- by Raving feie Market price of his

Nobody wants to hold on to a commodity that is going clovm —

that is being priced lovrer all the tii .
I am not sure that there is rreneral Dublic understanding of, the fact
I
th^nforeing up the interest rates on Federal Government securities means
forcing down the price..

It means slicing off a part of the investment which

every owner of a marketable security has made in the obligations of the
Government.

It means that owners of demand obligations^ such as savings

bonds, may decide it is lorudent to cash in their bonds — to get their money
out.

There is little inducement in holding on to a fixed income obligation,

like savings bonds, when other holders of Government securities are getting
increasingly higher returns.

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- 4Let me repeat again — nobody wants a comod.ity that is going down in
price. It is imperative that we keep the securities of the Federal Government
attractive to owners and purchasers*

It is imperative, therefore, that we

keep the prices of these securities stable. V/e must avoid every action
which holds the risk of starting a rumor, a belief, or a fear that investment
in Federal securities is not a good investment — now or in the future.
These considerations are urgent at all times, "ith a Federal debt of
over $250 billion, interwoven throughout the financial fabric of the Nation,
we cannot afford to raise doubts as to the wisdom or prudence of an investment
in Federal Government securities.

Under present circumstances, however,

when our national survival demands a greatly enlarged defense program — a
program the duration of which none of us can predict — the considerations
calling for a stable and confident situation throughout the whole broadstructure of the public debt are magnified many times*
Because of the uncertainties of the international situation, we cannot
foresee the full extent of the financial demands v;:,ich maybe made upon the
u

overnment. We know only that they will be very large.

The Congress lias

already acted to increase the revenues of the Government. Further measures
for a greatly increased, revenue program are now being deliberated.

I am

faced with the fact, however, that on the basis of present legislation, we
must expect a budget deficit of approximately $15 billion during the last
three quarters of the present calendar year. In the absence of new taxes,
deficit financing will therefore be required, after the seasonally high tax
collections of March of this year. To the extent that additional r evenue is
not at hand to cover all of the Government's needs, we shall have to borrow.
We shall have to increase our already large public debt*

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Under any circumstances, hoi/ever, there appears to be no possibility,
for some time to ccme, of reducing the outstanding debt of the Government.
This means that maturing obligations T/hich come due must be refunded*

Every

holder of a maturing issue may, of course, obtain cash for his securities at
the time they come due.

But the money to pay him will, in turn, have to be

borrowed from someone else,

-firing the remainder of this calendar year, for

example, over f-50 billion of marketable securities alone must be refunded,
This in itself is a tremendous financing operation.

It cannot be conducted

successfully -without full confidence of the holders of the maturing obligations
in the desirability and the v/isdorn of continuing their investment in/securities
of the Government,
These are1 the considerations which I must weioii if I am to fulfill my
responsibilities for the sound conduct of the Nation f s finances.
they cannot be overemphasized,

In my view,

Doubts as to the wisdom of investing in

securities of the Government would Ir-ad to conditions of financial
A

If these questions and doubts persisted to the point where important numbers
of Federal security owners attempted, to liquidate their holdings, irreparable
harm -would be done to the entire financial structure of the Nation.
Faced with these facts and the tremendous public responsibilities placed
upon me as Secretary of the Treasury, I cannot experiment -with theories,
cannot stand back wfa&jbe a course of action ^g^iriMii^'Hhich folds "the risk
of endangering the financial functioning of cur Government and disrupting
the financial life of the country at a time when we must move swiftly,
confidently, and surely in building up the defenses of our llation.
The Federal Reserve has been pursuing a course of action during this
period of international crisis whicnYihvolv«^•^e^is^Iylms^TsT. The

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- 6Federal Reserve, has carried on a policy which has resulted in lowering substantially the prices of outstanding issues of Government securities.

The

stated purpose of this program is to check credit expansion by raising
interest rates.
st ahd

~"i
*
"
7T**
luji'fcmiusLji Hiis

program is dangerous because it takes the
ff * •
grave risk of upsetting the debt structure of the country — not only the
debt structure of the Government itself, but the private debt structure as
well.

This would involve all of the difficulties which I have previously

discussed.
•.v'ith a debt of the size and importance that ours is now, even a moderate
increase in interest rates — with the corresponding decline in the prices of
outstanding Government securities — would have the most serious consequences*
It would hold the risk of initiating in this country a kind of inflation
•with which we are not familiar — namely, a flight from the money of the
country.
dollar.

7/c have never had in this country an intensive flight from the
Never have people, throughout the whole country, rushed to buy real

property and other tangible assets because they feared that their Government
Y/as not going to be strong enough to protect the value of its money and
maintain confidence in its credit.

If, however, we permit interfst rates to
V

rise so that the outstanding debt obligations of the Federal Government con~
tinuously sell at declining prices, the result overnight would be to
ikvevs* <j£#W*£u

aoriflualfi iliipjui jJlt the ability of the Government to protect its financial

position.

Ls could well cause wholesale liquidation of Government security

holdings, in order to invest the proceeds in goods, such as refrigerators,
electric freezers, television and radio sets, other electric appliances,
automobiles, real estate, and a host of other things.

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This is exactly what

-;/e are trying to avoid. Ue are trying to encourage people to save and put
their money into Government securities, in order to prevent them from buying
unnecessary goods — particularly those in scarce supply — since such
pure rases at a time like this, when a large portion of the country's production is being diverted to military needs, could only result in pushing the
price of those good;

L •"•r.

I ask why we should take such a risk; why y.~e should even consider
actions which might impair the credit of the Government of the United States*
Even if the expansion of bank credit could be completely stopped by this
method, it

still does not seen -^ + -' ^r> mri—fr* • »i; u w mi > n & to use this weapon,

knowing, as we do, the risk "which it involves. Why — at a time when it

possible to maintain the Government bond market at a level permitting new
issues to be offered at no change in interest rates — should we use a
weapon which lowers the price of the outstanding securities of the Government,
seriously unsettles the Government bond market, and raises doubts which, if
not qujfibed, could impair the uovernment credit?
In the second place, even if bank credit exmnsion were- eomnltf^ely
restricted, theN^ttle against inflation would not have J>em won.
resent
t
inflation is not fed oiTLbjcby bank credit expansioj^f There have been recent
•oeriods when there lias been noeSCpansion i^The money ciu-roV- and j^t the

price level has advanced; there hajjpe^DeeXother periods when the price
level stood, still, although the money supply wasN^rowing.
,<

been true to sane extepir since the Korean crisis starro4*

This has, in fact,
Cne of the vitally

important factorsx^n today's economy is the huge volume of l^j^id assets in
jS^

the handsoJr indi-Tiduals and. business concerns.

^***\^

These assets arc '»m^r-, money"

This means that we can completely stop the expansion in the money su^ply^and

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- 8-

still have a huge volume of purchasing power which might be brought into
play to push up pricesTJ

inflation?
answer to this question to that^---a.n-'ta.ag o.t' inflationary
r g o o o ' u r n O j V T e must use all of tne weapons at our disposal, it does not sscir.
A
JTt toto me that this theory is appropriate. It oarnottec^-cail&d.aa^Ahin^ but

se an effective measure in restraining bank loan expansion and in fighting
inflation*
/>
The record of recent months clearly shows that the Federr.l '.-.r-serve
actions in increasing interest rates have had no perceptible effect on credit
expansion.

Total loans of all banks expanded, near?/

Million in the last

six months of 1950 — an increase of a magnitude •which has neve^ been
»•
equalled in this country.
control

ve had other oujmmK. examples of 2:

bs to

Credit expansion by interest rate increases in the past Mstor\r

of cur country.

In the 1919-1C2C inflationary period, rates on short-

m Treasury issues were run up sharply until they reached nearly 6 percent;
and the rate on call-money v;ent as hi^h as 30 percent.

In 1929, rates on

short-tem Treasury issues vrere run up to above 5 percent; and the call-money
rate went to 20 percent.

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Yet, bank credit expansion ims not effectivel- checked

-9until we had the market crashes with which all of us are familiar*
The demonstrable results of the Federal Reserve actions in raising
interest rates are those which affect the stability of the Government security
market and confidence in the credit of the United States.

The Government

security market has been seriously unsettled; and the resulting fear has
A
restrained investors from purchasing or holding on to Government obligations.
The actions of the Federal Reserve System also have brought about two
failures in Treasury refunding operations.

Finally, the confusion and fear

with respect to the prices and yields of Government securities may even have
weakened the appeal of savings bonds.

During the last part of 1950, there

was a noticeable decrease in the sales of the larger denomination savings
bonds and an increase in redemptions of these denominations, which are
ordinarily bought by the more "sophisticated" investors.
These are the controlling factors in my opposition to increases in
interest rates on Government securities.
There is, however, another sure effect of the Federal Reserve actions
in raising interest rates which I cannot ignore.

I refer to the increase

in Government expenditures which will be required to pay for the higher
interest rates which we are now forced to pay upon new issues 01 Government
securities.

The Treasury is often quoted as being only concerned with this

one aspect of increased interest rates.

-t+4*^•

I am bure that I have made it quite

clear to you today that this is not the case.

Nevertheless, it is the

Treasury's responsibility to recommend fiscal policy which ?dll use the
taxpayers1 money wisely.
in taxes.

There is never any defense for needless increases

I am sure that you agree with me that to use the taxpayers' money

to pay for further increases in the interest cost of the public debt in an
ineffectual attempt to control inflation is clearly unjustifiable.

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-10I believe it would be helpful to you in understanding the effects
of the Federal Reserve's actions in raising interest rates on Government
Securities, if I spent a few minutes now discussing more specifically what
has happened in the Government security market since the invasion of the
Republic of Korea.
As soon as I received the news of the Korean crisis, I went over in
my mind what this action would mean with respect to the finances of the
Government of the United States.

It seemed to me that if we were to keep

the economy on an even keel during the period ahead —

if we were to prevent

the defense effort from producing strong inflationary pressures and otherwise
unbalancing the economy —

our first line of defense on the financial front

was a stable and confident situation in the market for United States Government securities.

You can see from the previous discussion why I reached

this conclusion.
Accordingly, on the ^ay following the outbreak of hostilities in
Korea -- that is, on Monday, June 26 -- I had the Fiscal Assistant Secretary
of the Treasury convey to the Open Market Committee of the Federal Reserve
System, my feeling that "everything possible should be done to maintain a
basically strong position in the Government bond market during-the present
period of international disturbance".

On July 17, I wrote at some length

to Chairman McCabe of the Board of Governors of the Federal Reserve System,
restating my feeling that stability in the Government bond market is ®f
paramount importance because of the disturbed international situation and
explaining my reasons in some detail.

In this letter, I also stated that

it was imperative that every financing operation of the Government be
carried through to a successful conclusion.

I have restated my conviction

that stability in the Government security market is required on many occasions

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Federal Reserve Bank of St. Louis

-11since then — both publicly and privately, and directly to Chairman McCabe
and other officials of the Federal Reserve System*
As I have stated, officials of the Federal Reserve System have not
agreed with me that the situation calls for stability in the Government bond
market.

The System has ignored, in its actions, the fact that the Secretary

of the Treasury, as chief fiscal officer of the Nation, has grave responsibilities with respect to the management of the outstanding obligations of
the Government of the United States.

The System has made it

clear that, in

its opinion, it has complete right to disregard entirely the wishes of the
Secretary of the Treasury and of the Government in managing the Government
security market.
Although discussions of the differences between the viewpoints of the
Treasury and the Federal Reserve on stability in the Government security
market almost always start with the actions of August 18, the Federal Reserve
right from the beginning of the outbreak of the conflict in Korea — took
actions to unsettle the Government security market.

Despite my requests for

a program w ich would promote confidence in the Government's financial
position, the Open Market Committee did not stop its

program of weakening

the market for Government securities by continuously putting pressure on
the long-term Government bond market.

In the period from June 27 through

August 18, the System sold fl.l billion of long bonds in 38 trading days,
ISy decision to maintain the 1-1/4

percent rate on the two issues of

13-month Treasury notes offered in exchange for the |13-l/2 billion of
Treasury bonds and certificates of indebtedness maturing on September 15
and October 1 was no surprise to the Federal Reserve.

This offering —

which, in accordance with the laws of the United States, had the approval

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Federal Reserve Bank of St. Louis

-12of the president -- was in line with my policy of maintaining
in the Government security market.

stability

The terms of the issues announced on

August 18 were identical with the terms of the issues offered in connection
with refunding the certificates of indebtedness which had matured on June 1
and on July 1.

Furthermore, the terms of the new issues were in line with

the market on the day of the refunding announcement, and met the needs ©f
the market which required a short-term security at that time.

Nevertheless,

the Federal Reserve, at the opening of trading on Monday, August 21,
immediately proceeded to run up the rates on short-term securities —
is, mark down the prices of these issues —

that

to levels wholly inconsistent

with the rate on the refunding offering of the Treasury.
There has been a great deal of emphasis on the fact that the Federal
Reserve had to purchase a large portion of the maturing issues in the SeptemberOctober refunding operation in order to prevent the Treasury from having to
pay off almost the entire maturities in cash.

What has never been made clear

is that this so-called "support" would not have been required if the Federal
Reserve had not changed the market on the first trading day after the financing
announcement.

The refunding issues were priced in line with the market, as

I have said; and the market would have responded to the refunding operation
i»•
satisfactorily, if the Federal Reserve had not immediately changed the market
pattern of yields on outstanding securities.

The Open Market Committee

accomplished this by lowering the prices at which it sold Government securities
from its portfolio, thereby giving purchasers a higher rate of return than
they would receive on the new issues offered by the Government.
Obviously, most of the holders of the refunded issues did not choose to
exchange them for the new issues.

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Federal Reserve Bank of St. Louis

A great many of them did their own refunding

-13through the process of selling the maturing issues to the Federal Reserve
System and buying back outstanding issues which were more favorably priced.
Most of the remaining holders either sold their securities to the Federal
Reserve and retained the cash, or turned in the maturing issues to the
Treasury for cash.

Only 5.8 percent of the refunded issues were exchanged

for the new issues by private holders.

The Federal Reserve exchanged 76,7

percent of the maturing issue,s; and the remainder, 17,5 percent, was turned
in to the Treasury for cash.

The cash pay-off of 17.5 percent compares with

an average of about 5 percent paid off in cash in refunding operations of a
similar nature during recent years.

It is obvious, when one looks at the

redemption experience, that the actions of the Federal Reserve in raising
interest rates on Government securities made the refunding operation a
failure.

Moreover —

and perhaps of greater significance in its probable

impact on confidence in the credit of the United States Government — is
the fact that, for the first time since 1931, a new Government security was
traded in the market below par immediately upon issuance*
I have noted that the September-October refunding was approved by the
President before its announcement.

^#ien it became apparent that the actions

of the Federal Reserve System were threatening to cause a failure in the
»•
refunding operation, President Truman — personally and by letter — requested
Chairman McCabe to see that the actions of the Federal Reserve System were
consistent with maintaining confidence in the credit of the United States
and stability in the Government security market.
assured that this would be done.

The President was

In the weeks that followed, nevertheless,

the Federal Reserve continued to push up rates on Government securities.

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Federal Reserve Bank of St. Louis

-14Tvhile these events were taking place, it was necessary for the Treasury
to undertake another refunding offering.

The terms of the refunding of

$8 billion of certificates of indebtedness and bonds maturing in December 1950
and January 1951 were announced on November 22.

Because of the actions of

the Federal Reserve in the intervening period, a higher interest rate had
to be offered than in August in order to price the new issue in line with
the market.

Holders of the December-January maturing issues were, accord-

ingly, offered 5-year Treasury notes drawing interest at the rate of
percent per year.

1-3/4

The new issue was in accord with the Federal Reserve

recommendationj and Mr. McCabe assured me of the full cooperation of the
System in the refunding operation.
The announcement was made on November 22.

The following day was

Thanksgiving; so that Friday, November 24, was the first trading day after
the announcement was made.

On that day, the Federal Reserve permitted the

market to go off sharply; and further unsettled market psychology by dropping
the price on the Victory Loan 2-1/2's by 2/32 during the day.

This latter

action was of particular significance because this issue is the bellwether
of the long-term bond market.
As a result of the continued uncertainty with respect to the price and
>
yield outlook created in the minds of Government security owners, the cash
redemption experience in the December-January refunding operation was only
slightly better than in September-October.

Cash redemptions amounted to

14-1/2 percent of the total of the maturing issues.

As I have already noted,

the average on offerings of this type has been a little over 5 percent in
recent years*

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Federal Reserve Bank of St. Louis

-15In addition to unsettling the Government security market by sharp
mark-downs in the prices of outstanding Government issues, the Federal Reserve
System continuously instigated rumors of further increases of rates on Government
securities and of impending upward changes in member bank reserve requirements.
All of this led to further doubt and confusion as to where the Federal Reserve
System intended to take the Government market.
This "planned confusion," as it was called by one market commentator,
was supposed to make banks hold on to their Government securities and refrain
from expanding; loans.

What actually happened was entirely different.

There

was so much confusion and unsettlement in the market that investors were
restrained by fear from holding on to Government securities.

As a result, the

Federal Reserve portfolio of Government securities increased by nearly
|2-l/2 billion between June 30 and December 31 — the opposite of the effect
the Federal Reserve actions were intended to have.
'or a fan. understanding of the program which has been pursued by the
Federal Reserve sih<je last June, it is important to note the source of the
Federal Reserve's power/"XThe System has been given no mandate by law for
initiating or directing the financial policies of the Government. The
•~%y\x^b*j, &u«*vj
instruments which enable it to ao sbvhave fallen into its hands^ accidentally*
First, the Federal Reserve System isNvirtually immune from public control*
Second, it has tremendous capital resources --Nk $20 billion portfolio of
Federal Government securities.

Third, it has tremenotb^s profits — nearly all

of them either received directly from the Government in the r^rm of interest
payments on holdings of Federal securities, or derived indirectly J^S^m the
Government, as a result of operations in the Government security market*

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Federal Reserve Bank of St. Louis

/
—

JL<

The System can use its freedom from control and its great resources
to go ihto the public financial markets and conduct operations — for
whatever purpose — which result in setting the prices and yields im the
entire marketable debt of the Federal Government*
si the OpenV'arket Committee was eivcn full statutory authority in

1935 "to carry on all Vf the transactions for the Federal Reserve System in
the public financial ipaakets and to require the reserve banks to participate
in these transactions, theVe was no possibility that' such operations could
influence to any appreciable\pxtent the functioning of our financial system,
The Federal debt at that time mounted to approximately ^33 billion, a figure

which represented only about 13 percent of the total debt of the Nation.
Government security holdings of the federal Deserve System in 1935 amounted
to about $2 billion.
Between 1935 and the present time,\the Federal debt has grown from
billion to over g250 billion.

The Government security holdings of the Federal

System, as '.'. have noted, have grownVrorn. .f2 billion to over ')20 billion*
Because the debt is widely distributed among institutional, business, and
individual owners throughout the Nation, the Cpe\ l.Iarket Committee need use
only a small part of its large holdings to establish any price level it
chooses for the marketable securities of the Federal\Governnentc
£3 7 have alreac"

asised, powers of this magnitude, If aiLj..'. HB.HX.U

juts i*ogCM1 LI t o "»• iiT i r • • • 11 r „ j nti^i"0st, hold the possibility of irretrievably
da:.i£.ging the credit of the Government.

They hold the possibility of drivin:-

nonbank investors out of the Government security market and forcing the Government fo finance its needs by increasing resort to the banks — t\£ most inflationary type of financing which it would be-possible to devise,

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Federal Reserve Bank of St. Louis

I am very nappy to have this opportunity of appearing before the Banking
and Currency Committee in ord«r to discuss with you the problem* involved in
tlie mmmagssjs&t of the Ration's finances.
The responsibility for the sound conduct of the Hat ion* • finances is a
very grave one. Since the earl lee t days of oar history, tola responsibility
has seen placed with the Secretary of the Treasury. But the problem*
involved are not ey problems alone. They are not the problems of the Congress
alone. They are the problems of every citizen of this nation.
•ere is the situation as I aae It. We have today a public debt amounting
to over $f30 billion, lot long ago w* were worry lag about a debt which might
reach $50 billion. Ve did mot know how the country would be able to stand
such a debt. Ve did not know how It would affect the solrency of the
Government * Ve did not ftmov how it could be managed without disrupting the
financial life of the lation.
But our public debt today 1* more than five tines that figure. It la
the moat important single factor ia our financial structure. It represents
one-half of all the debt obligations in the country. Mortgagesf state and
municipal securities, corporate beads, other private obligation^ *- all of
I
them added together only equal the ium total of the present debt of the
Government.
Life Insurance companies now own over Hi billion of Federal Government
securities — about one-fifth of their total assets. Mutual savings banks
own $11 billion « about one-half of their total assets. Sonfiaanclal
corporations own $20 billion, or nearly 1$» percent of their current assets.
Individuals own $6? biUloa of Federal securities of all kinds — representing
approximately one-third of their total liquid assets of more than $200 billion.

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Federal Reserve Bank of St. Louis

CONHDtNTlAL
CoMnerelal bank* fcold »ore than 461 billion — repreaentlng approxiamtely

. .
Before World War II, the altuetioa v«a eatire Jy different. Financial
institution* and business concern* bad aroch more of their inveeted fund* in
private obligation*.

Only * vor/ tgall proportion of our Individual

eltisen* were ownera of the aeeuritlea of their Government.
After fcorld War II, the public debt woa la a prsdoeinant posit ion io tfea
financial lifa of tte iatloo. Tl» alia, tHa i«fortaQc«, and tha wida diatrittftloo of tha daat ara new fact* to all of ua. Taajr craata aav problasa.
Taajr plaoa traaandoua aav paapcDalbllltiaa on tfea Sacratarj of tha Traaata-jr
vfco ia chared *gr Uv vitfe toa aound WMUgaMBt of tha *atlonf* fiaanca*.
And undar preaant condltiona of latarnational orlala and rl»ln« laflatlonaiy
praaauraa, hoth tha problaaa and tha raapooaihilitlea ara anormottal/ inoraaaad.
Throttflhout tha poatumr parlod, aa I hava aajphoitad, tha pahlio Atht waa
tha aoat U^ortaat aiogla factor in tha f inaneial lifa of tha Ration. B*t
It haa not hoaa a dlaruptlvw factor,

tfea arotlaaai involved to •anaglag a

oubXic da%t of orar 4250 billion ara mprooadostad.

But thajr hava BOOB auc-

eaaafully aoXvad. During tha pootwur narfod taw daht haa be«i iinaajai in

>•

Ottoh * «*? aa to oaao tha nroblaoa of raoopvaraioa and prooota our ratam to
poaoatiaa activity at tha highest level of production and aaplcgroiut in feiatory.
So* mm thia aaoo«»11abatt It «aa acoompllahad by aaana of aaiatainint
atmbility in tha »ark*t for Federal Qufurt^ant aecurltiea and hy spreading
the debt oo widely oo poaalhla aaong the people of the Ration — at the ease
tiae that bank holding* of federal aoomritlao were being reduced.
The Treaamry haa been eminently auooeaeful in achieving tbeee objectivea.
There haa boon no sore dynaalc period in our entire Induatrial history than

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Federal Reserve Bank of St. Louis

CONHDtNi
- 3the past fivs years. There has been 90 similar period IB which such a lange
volume of long-range p*x>gram» for increasing productive capacity and for
modernising existing plant and opsratisns were put lato effect. Stability
In the financial markets vaa essential to thess programs, lot the maintenance
of stability lid not y*tmi*» ftteoluto iaflwtibllity In intenwt rates. As
tho •conoagr Itself »«0Mi to fvaotlon raoothljr »t * new high level of Activity
end trade, »ore flexibility in the Treaaury deet aeniigtaint program vao
aoaiered by alloiriag short-term interest rate* to increase gradually. Vitk
the outbreak of the orleia la Korea, Bowerer, the coneideratlone calling for
a high deties of etabllity In the Gorenment eeemrity Market once aore beeane
all important.
Likewise, the Treaeury aehleTod groat eueoeee in its) progratt for
increasing the proportion ef federal eeemrltieo in the hands of nonbank
Inveetore and redB<t1ng bank holdlnge of GoTemsent obliipatlona. la the last
half of 1950, «Ffrt holdings of aoabank owners reaohed a new jiustnii1 peak,
while bank holdings, oorrespoodingly, fell to a new low for the postwar
period, this shift in ownership is of the greatest signifioance at the
prese&t tiae, sines it acts directly oa the »os»y supply by reditelng the
These results could not have been achieved if our people had not sad fall
confidence In the aelllty of the rufuisBiiit to waasgs ths dost without disturbance to the econcsor. They could not hare soon achieved if the eitlsens
of the Nation had not had full coafidence la OoveraMOt securities ** and
acted oa that belief.
Today, vita the eaoraomsly iacreased finaacial re^uirsaiats of ths defense
pr^graa before us, it is more important than over before that people hold oa

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Federal Reserve Bank of St. Louis

CONFIDENT 1
to th* Government securities which they nsw ova,

Xt i* more Important than

ever before that they add to these holding* as their fund* permit them to do

•o.
On* of the obvious thing* that has to be dona if we want people to hold
on to an investment already nade 1* to *tablllte the price. During the
present emergency, we must eliminate th« fear that the owner or prospective
buyer of an obligation of the dm si'issimt is going to he penalised immediately
hf having the Market mrloe of hi* itttreataent drop. iobod> wmo haa any
ohoiee va&te to hold on to a coModitj that i* going dmm — that i« heing
prioed lover all the tine. It doeenH take a finanelal expert to figure
out the direct and liaaediate oonee^iienee* of eueh a price decline on the
pereonal finance* of the *ecuritj ovner.
Let u* nake no mistake about it — forcing ap the interest rate* on
federal Government *ecuritle« neent foreing down the price. Xt aeen*
slicing off a part of the Investment which every owner of a marketable
security mas mads in the obligations of the QuvsiisMiit. Xt swans that
owners of demand obligations, suoh as saving* bonds, may decide it is
prudent to sash in their bonds — to get their money oat* fhese is little
Isdmeement to hold a fixed Inceme obligation, like saving! bonds, when
the ovmsrs of other Orvemmtnt ssearities are getting increasingly higher
returns.
Let me repeat again — nobody want* » commodity that is going down
in price. Xt is Imperative that we keep the securities of the federal
Government attractive to owners and. purchaser*. Xt i* imperative, there**
fore, that we keep the price* of the** *ecurltie* stable. Ve mast avoid

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Federal Reserve Bank of St. Louis

- 5every «etion which bold* tins risk of starting * rumor, a belief, or a fear
that investment SB Federal securities U not & good investment ~ now or in
the future.
Theee *om* iteration* are urgent at all time*. With a federal debt of
ever $250 billion, Interwoven throughout the financial fabric of the Hat Ion,
there i* me period when we earn afferd to raiae doubt* aa to the wladcm or
predenee of am investment is federal government aeeuritie*. Under preaent
circuaat&nce*, however, when the money mat he fortheomiag for a greatly
enlarged defenae pfugram, the consideration* calling far a stable aad confident
•Itnation throughout the whole broad structure of the public debt are
magnified many tines*
isaauee of the uncertainties of the international eltuation, we cannot

Ounnana». tfe know only that they will he maty large* fie Congreae haa
already acted to increaee the revenuee of the) Ooremaent* further wMunirea
for a greatly enlarged revenue piugi'eji are now being deliberated. X am
faced with the fast, however, that our military • pending ia already rising
at a rate which will reeult in a budget defieit of aereral biUion dollare
>•

by the laat quarter of tbi* fieeal year, fo the eztemt that additional
rerenme ia not at hand to cover all of the Government0* nee**, we ahall
have to borrow. We ahall have to inoreaae oar already large public debt.
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poaeibillty for *om* time to come of reducing the owtetanding debt of the
Oovermmemt* fhi* meana that maturing obligation* which come due moat be
refunded. Ivory holder of a maturing i*aue — like every holder of a
obligation, amah at eavingi bond* — may, of eourae, obtain oaah for hi*

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Federal Reserve Bank of St. Louis

CONFIDENTIAL
««curiti*s if b*. ae $aair*». Bat tfa« BOOT/ to pay hia will, in turn, t*f*
to b« borrow** fro* acseon* al*». During to* r*«aindar of thin caiandar
y*ar» for ****?}*, «<r*T $50 feilliom of amrfcotael* securities alon* sust ba
r«fvmd*d.

Tbia in itaalf i» * tr**»ndoua JTiaaaciBg <^«ratAOH, It e*an
tu<»n«fully with«mi full coofld«ac« of OM hoM«r« of the

of eontiaylr^ tb«lr la-/«»t««at in ts«eiiritl«8 of
th« eMWidtmtiolM uteich X vast wt-igh if X ML to fulfill «>
for th« touMi eooduet of tlet nation's finAue^a,

IP, «y

»naph>itlt*A» koMtiocui «ad 4oabt» «« to th« wladc« of
in «*e«ritt«c of tlw OowrMMmt w^yl4 X«»A to eondition* df
ebaaa, If tl»»« <j^*stioBs *nd 4oubt» ^raist»d to the
of 7«teml *««i»rity cWM»r» *ttM»t«4 to Iiqiti4mt« their holdings,
^^ldt tee 4on« to %IMI «itif» financial »tr«cturo of th«
lation*
?»c«d vitli tbeae flMitd, and fully «co</eixin« tlMi pibUe trust which 1*
placed 1st ve as ;'«e.r9%AJ7 cf tha Tr«as--jr)% I eansot stand ba«k while
aff acting tl^t pat lie er*4it art !-*iu,« triad,

Sacb «irp«ria«iits bold th»

risk of aadantariBE t)w floaeeial fuztetionlDg of s»or Oovamaant and
th» finaneial life of tba country at tba vor^- tint wfe*& vt neat mova avifti
, and *-.iraXy in bsiildlng up tha d«f*Bs»» of our

tetiea.

F«d*ral .i^Mrv® ba@ bean aurauifig a ccizrwi of action during tai*
;int«^aticniki ttrttin wMeh luvolvan tr«^i@*iy thi« rftak.

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Federal Reserve Bank of St. Louis

ffee

on a ^slisy wtiieii fea« raault*d in loiwirimg tubof Gov«rnaant ««curitia«. Tha

CONFIDENTIAL
•tatod pmrposo *f tait i>rogr*« It t
rato*.
First aad forsstost, this pro^r^» — a» I in?v» jtttt «n|d ~ is diuagorouc
It t&k«* tl&* grnvo risk of u^stUn^ tho d«bt ntr*^etttr« of tho
aot oalgr th* d«Vt straotur* of tk* $9v*r*»ftat it»*lf. ^t»t tb*
«tr\tctw« R» w*ll.

fhlt V0JA IHVI»IT<I all ^f tb« difficulties vhiefa 1

I ft»k wlqr w» should tak* twj& » risk? migf wt thomld «r#u c^antdw aotloaa
nigkt iamir tn* credit of t&« i%v«nm«it of tb« Ualt*d $Ut*t. BTCK If
rtioiiioft of bwiw credit could %« C9*?l*t.<*ly •%o?>r>«d bjr thlt «*thod. It
still do*t not «»*« ratiaral or r«a«o&aoln to •«• this w«Aor>a» knowing, as «•
do, tho risk vhlch it IttrolTos.

*ty — at a ti»« %rh»a it i* povsiolo to

tlMi 6oT«riMM»*t boad »ark*t «t a l*v«l i«mittiag now issu*s to »• offor*4 at
ao oluu^ro iii interest j*p.t«* — should wo uso A tfonpon vftlch lowers th* orico of
ta« outstojudi^; «oeuriti«» of t&« ,or*mc«at, soriousljr uAsottloo tho Gorsraasnt
bond market, aad raisof doafett wnieii, if aot qniot«rd« could in *tlr tfe* Oovon&aoat
credit?
la t&o soooad >lao«» OT«H if brouc er«dit «3r>«aalnit w«r« eojos^letoly rostrietod,
tb« omttlo >«aln«t iafls.tioa would aot a«coK«^rily h»ro booa wea la wael* or
ia -mrt.

Jh« t»rot«t Inflation is aot fod onl^ by baa* erndlt sicpaaaioa. t^riag

tao |ro«r* «ine« th« «ad of orld Mar il, th*r« anvof at ti»«« 0 b«oa AdTaacos ia
so» thoro has b*«i ao •xp«a«loa ia %*«k erodit *ua4 earrtaeir holdis^s —
eroAit i^d ourroiut/ ooa^titato th* s^ntgr su^nly of th* eomatyy.
b««a othor i>«Hods w»«m ta« ^rliso I«TH! «tdo4 ttill or
tao

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Federal Reserve Bank of St. Louis

fhoro

Way team »Bould v* DM afcaag** im tit* tutor**t rato at all

the stock answer to tfcii$ gaeetion 1* that, in tines of inflationary pressures,
we *ust use all of Use weapons* at our disposal. It does not sees to m that
thii theory i« appropriate. It cannot fee called anything hut irresponsible to
use aea*ures vhieh have the distinct possibility of dolly *or* bar*; than they

diseussion up to this point tenters around why I would fee

tHat tai« pfocram would $neek credit expaasien. But 1 -am aloe oppo«ed to the
Federal Beeerf* policy because it aa» not hoon prored tlmt it is aa effective
in restraining bana loam expansion and in fitting; inflation*

fne

foatrary, i* all on tlie ataer «ido.
of recont nonth« elearl.? show* that the Federal ikoaonre actios

total loans of all aonnereial baak« flipaaaod nearly 46 billion ia
last «ix nosths of If5@ *• an iaeroase of a *agnit*j4e whieh has
in tai» oomHry. He laa^e had other outre** exaaplee ofv attempts to
control teeak credit expansion by interest rate inereaeo* in the past history

rate on cail-noney went an high as 30 pereent. In 19t9» rate* on short-term
Traaaviry issues were rum «p to afeoye 5 percent; and the eailHaene;? rate went to
tO poroont* fet9 bank credit expansion was not effectively checked until wo
had the aarfcet crashes with which all of us are fssaiiar.

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A l\ f I

a l l I

demonstrable results of tbe Federal leserve aetlosa in raising
interest rates are those which affect the stability of tfe* Oevanssent security
narket and confidence la the credit of the United State*. The Ctoverantnt
security narket tea been seriously unsettled; and tfce resulting fear haa
r«3traic*t invett^rs fro* pure baaing or holding on to GoveraBNi^t obligation*.
ffe* action* of tba F*4eiml Re«er«r* ay*te« alao have brought about l»o
failures iis Treaaury refoadidg operations. Finally, the eopfuftloo atd fear
with respect to the priced and yield* of Goveratefit eeouritieo my evea have
*•••••<• A the affeal of saving* bon^is. Dtirittg the last part of 1950, there
waa a noticeable decrease ia the vales of the larger djeaoAinatlos savings
boots a d an l&creaae in re4ei9>tioma of these deaaaiaatioas^ which are ordlaarlly
bought Vy the wore **so^histieated' ittveetor*.
these are the eoatrolliaf factors in my opposition to i&ensases in late rest
rate* «* Oovcruieat securities,
There is, honever, sooths r sure effect of the Federal Reserve aetioms
ia raisltig interest rates irfeich I caaaot ignore. I refer to the isereane
in Oovenssaat ejcpeiiditures vhleh vill be required to pay for the^ higher interest
•*

rates uteich ve art BOW forced te pay 19011 new issttes of Gov»nat»nt securities.
fhsi Tieasary Is often fuotsjd as being only eo&cemed with this one aepeet of
imereaaed interest fates* 1 a* sure that I have >a&e it Quite clear to you today
that this is not the case, ifevertlitlea?, it is the treasury's responsibility
to r»c Diane nd fis«ml policy which will use the taxpayers* tsoaey wisely. There
is never any defense for needless increases in taxes. I an sure that you agree
with *» that to WM the taatpayera' sjoney to pay for further increases in the
Interest cost of the publl® debt in an ineffectual attempt to eemtrel inflation
is absolutely unjustifiable,

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Federal Reserve Bank of St. Louis

CONFIDENTIAL
- 10 •

X »*Xl*v* it would ** h*lpf*l to j«* m tiad*r*taadlai th* «ff *et*
*f th* »OO*WM» KOOOJPfO * a*tiOSI* la Fal*llig l&t*tf**t Vat** OR (MfflMnMMHRt

ooourlti**, if 1 *p*at A f*w aiavt** aov di*d«**liie aor* *f*elf IsaHjr *hat
la* h*pp*a*d ia tl» G0rerna*nt ••ourit/ aaxfeot *ia** th» Inrajiien ef the
^WwJ^^"^^»V

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A A ^M^JMk AM 7 V^ftA^C Vttdt 4ktfe^k M^^Mtt 4^F
•BP
^WPWHi W «fc *WiWHi» TwiR vflw «PWPW 9V

4k ^A

fl^Afl^ftAtt MV'f • ^ A
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Vv«V«MP ^

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*Y i^Bpww
fPT^E* ZO

•gr mind vtet this »cti0a voald «••& with r»»pect to tt» fiwiatM of th«
»A VMk
» w<^T ^^F
IHk
R^^
w^^^ mflfll
WPW w

fron >r«dsK5ln« «tron« iiaf l»t ianur yrmmarm and othtnria*

it**** mxxd oonf idMt »ituation la tte Mitoit f«r Unit.4

th*

'» oa th* day folia*!** th* oathr*ak of hoatiXitl** ia
Monday* Jua* 3& ** X had th* Fiona! JMwiiotaal
»O iffJIM^ *wlNHfll wBMHDi^ii C^O(B(wL V'lWN^ Cli

wflM£ J^0NBMP^PMa^

•
JuBL ^H«IIP ^M9M^8flHBBB(RH0a* •PflBBW' lllHPlBlPv CLvUkdLZHSt

wJBffl

IMPJUMMat

of th* f*d*raX n*aarm %ot*»f vootatiac ay f**liag that *tal>Uity

^Ljj.'iBIw^HPiWII^I. 3JBw4KBAfl*v l^BMBHiHi> 8* vmKv«L4Hft» vHMa 4HK1^4^k«*' •

9VNHIMMMP «Uflt ~£^MMfc vH^vflv&w*

oporatlofi of th* flovtiio*m h* c*rrl»d throafh to a »«ce«*»ful conclu«ion.

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CONFIDENTIAL
«*•»*!•*• tiaft* th«a — betfc mibllely mad »rlvat*lyf ta4 d I root I/
to Caalraaa He8«fe* *ad ©thsr sffiel*!* of th« P*<t*ral H**«rv* $y«t*» — X
r*«t»t*d my eoavlotlon that tt ability la th* &o**ra»*at t*eturity aM*rk*t is

f«ld, official* of th* F«d*ml t«*«rr« Sjr«twi attT* oot
for »taMltt> it ta« 3ev«ra**at lioft*?
ant fgaor*d. ta it« Actions, ta« f««% Ui«% WMI S«emt^qr of
, at chltf fi**al •ffl««r «f t^« V^ttoo, teat |^r»»
ta* aaaAg«i*at *f tii» outttftadlog obligation* of th*
Of %H* Ualttdl 3tAt*«.

fat 3?tt*a h»i a».4« It ei*^ taat. la lit onialon, It

rtf?fct to dl*r*gar4 «mttr*l/ th« vlthas of th* ^<*cr»tary of ta*
of ta* ^r*tld*at la ««aflml9tg ta* §*T*n«*at t*e«a*itjr mrktt.
seiisslQa* of in* 4lff*r«ae«s b*tv«*m ta* Ti«^rK>latt of ta*
t&* f«d«r&l /-:»»«nr* oa utatelllt^ IR th* ^ov*
a«rk*t ftlaott al««|r* «tart wltfi ta* ftctloa* of Jtagnst IK, ta* ?*d*r»l
fro* ta* »*^lnala« of th* outbr***c of ta* e?mflict I
is a «aaa*r which taaa*t%l*4 ta* 3oir*ra«*at **eurlty ar rk«*t.
agr r*qu*At* for a profrait vclch i^oula ^ro«ftt* goafi**it&* lit th*
, th* Op*a Narlmt 0owtltt«* 4td not «t^ it* ^ro^raa of
for Oo<r*ww*at s*e>irltl*« l»y coatintto^^ly >»utliag
or**#mF« en loa^t*m lioo^*.

In th* ^arlort fr<«t ^«a» 1*7 through August t

%*t*ii told $1.1 till! oa of loa« lN?a4« lit 3« trudlaf A«grt.
if? 4«a*«lo« t« *%latala tfe* l^lfb ?**»«*at rat* os tfe* tw^ i^tuvt of

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Federal Reserve Bank of St. Louis

la *xaiMtfiir* for ta* $13-1/2 blllloa of
of l»^**t*4a*ii» •atarla* oa 9*pt««i*r 15

CONFIDENTIAL
•ad Qttobar 1 mm ao aurpriaa to tha Fasaral Baaarva, ffeia of ft ring —
irfeich, In aoeordanea wltb tfca new of tba Unitad Stataa, had tha approval of
tha ?r«si4ant — was la Una with ay policy of aaiatalalag stability la tba
Mauri ty a*?***,
fha tarm* of tba iasaaa aaoouao^i OE 4ug%t4t 18 vart id*atleal with tb«
tfaut latite* off«r«(i IB eoaoactloa ¥ltb rttfum4iag tbe c«rtiric«t«» of
iad»bt«da«36 vhloh ba4 a»tur«4 oa JIUMI 1 and oa «ft*ly 1. F«rtis«r«ort, tlw taraa
of tbt aaw i«»ia«« w»r» in line irltfc th« oMurftat Ofc ttea day of taa rafuadiag
, aad aat %aa aaa4* of th« aartet which r*<pir*4 a *lN»rt*tam
at that Una. Vavartfealaaa, taa fadaral i«carraf at tea ofaaiag of
trmdlag oa Monday, August 2i, iaaadlataly pro»aaaad to vua up ilia rat«« am
»hort-t«rm s*ctirlti»is — that i», wark dona ttoo pric«a nf tiieiM laauat *» to
vboll^ Ineonaietant with th« rata OR tb« r»fuadia« offariag of taa Tr«a*ury.
fbara ha* ^aa& a graat daal of •«pb*ai*» cm tfe® fact tbat tto
had to purcha«« a Xar§« |>ortiou of tbe aaturiat laaiMM ifi taa
r«fundlo^ oftratioa la ordir to pravant th* fi«aanr/ fm» having to

pay off alao»t tt» *3stiJ« vaturltia* i» ca«B. Haat Itaa oavar ibooa aada ciaar
I
1» that tlsltf so«cal3j»d Ms«vtortw utmld, sot bava baoa requirad if Vtfaa F*4axml
Raaanra Had not ebaa^td tba aartuit oa taa first trading Oay aftar taa fiaaacla*
aaaouae«w»at. fh« rafaadla« iaanaa wr« prie«4 la lls» with tfe* aartet, aa
I feav* $al4| ast the aar^t wouia hair* raapoodad to tha rafuadlag operatic*!
satisfactorily, If taa r»dax«l itaaarva aad act iaaiKliataly BlKajii tha aarkat
pattans of ylalda oa ^jitataadiag aocurltlaa. fh« Opaa Markat Cowdttaa
aceoapl.lsfe»d this bv lotmrlag 1*a prlc*» at i^leb it aoid. Govaraasat
from it* portfolio, tha ruby givla« pirelMiaarft a hi«bar rata of ratum than
taay va*U raealva oa tha aa* isauaa offarad ay tfca Oovaraatat.

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- 13Obviously, aost of tb* holdere of the refunded issue* did not choose
to exchange the* for tbe ae* issues* A §re*t sMtay of the* did t1j*ir mm
refunding throagh the process of selling the maturing issues to the Federal
Sooonro System sad buying back outstanding i»«u«f vhicb imro wore f«ror«bly
priced. Moot of tlt» ronaielag holders eitlior *old their i«curiti«* to tae
Federal Hotorv* n&d rot«i««d tbe ewth, or turood in the «Atnring issues to
too froit»ury for took,

t»«t tb«a 6 petreeat of tli« refolded istuet wtr*

•acbftifod for tbe o«v issuos by privftt« boldort.

It is obvious, vhen one

looks ot tlio oxcbMgo expert«ac«, ttet ttet «etio«s of to* Fodersl Feserve
ia rftisi&g Interest rates OA Goremsjeat securities ssAe the refanding operation
ft failure.
I save noted ttwt the Softe^ber-Oetober refunding vas approved by
President before its onsovojoeveot* Wien it iMNMHse sppere,iit tlist tbe
of toe foojorel Hoeenpe Syoteti vere tbre«t*ni«f to e«ase o fmilurft in tbe
refwftdiag operation, ^resident frvsott — personally sad by letter •* refvested
Cbairman MeCsbe to see tb*t tbe setioos of tbe Federal focervo System wtro
oOBSistent vitfe malntftlnin« coafideuee in tbe credit of tbe tfnit«d ^tates
sad stability is tbe Cart rosiest security market. Tbe ^rosideat vss assured
tbis noiild be don©,

fa tbe nooks tbat followed, Be*ertb*le6sf tbe

Reserve eoattsaed to pueh up rotes OB gOferssMBt securities,
these events wore talcing place, it was seeosssry for tbe Treasiary
to gmisrisbe aaotber refusing offeriag,

fbe ter«« of the reftt^diaf of

|6 billioft of eertinestes of Indebteiaes* aad booAs maturltvr in

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- Ik -

CONFIDENTIAL

1950 and Jajusary 1951 **** ttHMWeed on Wevsdbtr ££. teeaae* of the notions
of the federal Reserve 1m the Intervening period, a higher Interest rate had
to be offered than ia August i» order to priee the fsew Isaae Is line vitb the
aarket. folders of tlie r*ce*b*r«Janu*ry matmrtnr issues vere, seeordliurly,
offered 5-yeer Treasury aotee dreviaf lotereet at t^e rate of 1*3A peree&t
per fe*r* ffee aev luevte was in accord vlth tbe federal Feeerve rccoraeendftand Mr* NeCiibe assured Be of the full cooperation of the Sy*te« In ttte
operation.
fhe •MMineiiMtat va« Bade OB •eeeapar g2.

fhe follovlmg d*y «••

Than)t«glTtn«; eo tbat Friday, fcf^rtbar t^f was the first trading day after
toe aaaoittM«WHrt waa wade. On tfeet day, tbe Federal feeerv* permitted the
market to go off sharply; and fUrtaer unsettled market peyetiology hy droppittff
tiM prise on the Victory I**ft $*l/f*s by f/S^ dvriaf the day. This Utter
aetlott wfts of pertieular •Igmifieaaee because this issue is the bellvether
of the lon^-tera hoed Bartet.
As a result of the coatlaued uncertainty vith reapeet to the price and
yield otitlook created In the «tnd« of CNififiiBeui eec«rlty ovmerts, the exelMBB
experience In the D«c^«b«?r»jraiwary r*fundlft« operation — vhlle considerably
*
improved over Septesiher-Octoher •* was still far fro« satisfactory. Only
51 pereeat of th# sMturiat Issues mere turned 1« to tie Treasury by private
holders for the as* issuea. Ktereov^r, the cash redemption experience was
only slightly better tha® la S«pt*Bh*r-October. Caah redemption* mmoimted
to 1^-1/2 percent of the total of the nsturlag iastses- lit the previous operatioa they tad sBomatirt to lt*l/t percewt. This compere* vith a« average on

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Federal Reserve Bank of St. Louis

of this type of a little over 5 percent in reeent year*.

• 15 *
In addition to unsettling the government security market by scarp
mark-downs in the prices of outstanding Ooversmest issues, the Federal Reserve
System continuously instigated rumors of further increases of rates on Government
securities. This type of thing led to further doubt and confusion as to
where the Federal S*serve Bystem intended to take the Government market.
This "planned e infusion/5 as it was called by one market eotsfssctator,
was supposed to.make banks hold on to their Government securities and refrain
from expanding loans. What actually happened was entirely different. There
was so such confusion aaA U6settle*ent In the market that iovastors vere
restrained by fear from holding on to Government securities. As a result, the
Federal Reserve portfolio of Sovermment securities increased by nearly
$3-1/2 billion between June 30 and December 31 ** the opposite of the effect
the Federal Beser^e actions were intended to have*
Although there was some pressure on the lomg end of the Government market,
the events which I have Just described affected primarily the short- and mediumterm issues of Gov*?isment securities. However, early in January, ifr* McCabe
and Mr, Sproul — President of the Federal Reserve Ban! of Hew York — outlined
to me a program which would involve a complete reorientatloa of '4ebt management
policy, they proposed a program of further Increases in interest rates,
particularly in the loaf-tar* area. They also wanted me to put higher interest
rates < n savings fcHsnds. It seemed to m», under these eireu*stsaees, that the
time had eon* to settle for tte duration of the emergeaey the "natter of tb«
rate on long-term OovernmeBt bonds. Accordingly, I met with the President
Chairman "fcCabe to discuss the entire defers* financing program. At this
time it was agreed that aarkirt stability was s-ssentisj. a»1 that, therefore,

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CONFlDtNIiAL
tho 2-l/£ ^«ru*jit rat* on 10BMt~t*r» Sov«rtu8«i*t bonds •tumid 0«
tfee.1 r«f*adiag aftd B**~aoa*y U»u«* alumld bo fia«ae«d within tfco patt«r* of
that rut*.

tfeia vat iaaodi&t«ly ;*rior to ibe «po*eh vhicb I andtt on JFfuw&ry 1 ,

b*for« lh« S#ter York Board of ?rad«, *«aouw5laf th!« policy.
At yom «11 teaow, off lei alt ©f %h« f«d«ral H«»*rr»
Iftlt polio/, doooito ib* faet th*t Gh^lrwn MeCifcH« had a^r««d to It
its naooac%««at.

«urtical«rly Mr. Sfeiroul and Mr, £eel

iat muiottiicod f»rofraa.

M«r<»oT«r( sul»tt4|a«mt to th*

Fodor^l ^»*«rr« S/ttwt cont^.nu«»*i to out pro«vujr« on the l!>a#»t»ra
On J^tmary ,?9t ^«« rt^«fi «»rk»t Coanltt«« a^ain rodueod its buying
prlo* oa flctory Loiwa a-l/a*t. It vat st thit Juootur* tiiat ?ar««idfttt f
atkod t&« Opon Karkot Coanitt»» to a*ot with hi«, so that too oould inprots
apoa %h« CoMrtttoo t^« a««d for »t ability la th« frOTurnaont bond «ark«t n.ad
coafid^ne* in th« erodit of tn« -Juitod itat««l mad r«qu»«t that thty goT»rn
taoir action t «ee&rdid«ly. Tom all fcaov tbo r<»tult* of thin •oatlag*
For a fmll mad*r$tandiii( of tuo aro^raii vhich oat b«oa 9iir«u*d by tfto
lotorvo time* !.<-«% .fttai, it is i»nortq«t to aat<t tbn toureo of tho
«
1
Roa^rr* * po*«r*
ir-

la aa aot pa««od dmrin^ th« first sossioe of th« first Ooafr*«« of th«
S%at*tv t^o locrotary of tii« froriio-ry w»« givoa full r**poa*ibllity for
t»* coadiKft of th* ifattoa* * fittnuc^s,

Thit rosnoa^iblllty h»» roftaiftod with

siaoo tfaat ti»«. Th« ittatnimmtti wMoh tambl« thu

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Federal Reserve Bank of St. Louis

CON
. Pint
- 17 to assume this responsibility itself and to dictate tb* flannel*!
of the government have fallen Into its bands accidentally. fb*y ere the
direct result of the great ebanges in mar economy and in mir financial lift
brought about hy tin increase la the publie debt — with MI accompanying
increase Is the Government security holdings of the federal Beserve System.
In 1913 f vh«a tlie F*d»r*l i«««rv» Systtsi »»» *«t«fell8b*d, it v*
pcmlscioa by l*w to curry oa tranaactlonf In tte fiaaaelal s*rk#ts.
9*r«t»@toa WM thought of »* *a IncldcntRl part of its discount fnaetloas —
naat«?ly, &s an incidental part of credit Of*r«tio** c«rrl*d on ¥«t«s«a the
teaks and tholr ova m*«b<sre. flMre wu oo tteotight aad no poaeiVility at teat
tim« that market opwrationa could inflw»nc« to anyfcppreciatel*extent taa
finaaclnl policitt* of tb* OOTernwmt.
for »aay y«wirs, t«ea Market traasactioni aa vtre carried oa by tb*
Syatesi war* ooaaacted by informal groups or eooalttees. In tae vlddle Tbirti«s,
howsvar, *fe*a tae laat major revision of the federal fteaerve Act took place,
aa agency for carrylag om aarket traasautioas vaa ettablisbed by lav and was
give* full statutory authority to conduct all of tbe opea market
of t»e System. Tola ageaey was designated the Open Market Coaalttee of tfce
I
Federal Iteserve System. It was aade ap of tbe seven doveroorsvof tae System,
together vitb five of the president « of the ffaeerve leaks. §t that time — mm
in 1913 — there vaa no recognition that conditions might develop which would
give this Committee the povers it aov has to dominate the financial markets
and to dictate the financial policies of the Oovermmtat*
letveen 1935 and the present tlm«», the federal debt has trovn from
$33 blUioa to over *2fl» hillion* HM> Oovenmwwit se«r«rlty holdings of the

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CONFIDENTIAL
-18Femoral looorra Syatoa har» grama fnaai about $2*1/2 blllian to otor |2Q billloa. iooaitao tho public debt la *14oly distributed a«oa* Institutional,
b%*ia»M, aad individual ovaora thro«c*mt tb» nation, tho Oyoa Karfcot
CoMdttoo a»*d uao oaly m mail s*rt of Ita currwat holdln^i to
latarMt r*to» sad e«tAbIl»h aaj frioo lorol It elwoaos for tte
•oenritios of tte T«d«ral Oovormoat. Booanoo of tl» «lt» of tfct public
doMf thio *€tlaa la turn haa tao offoet of a dafta olmngo. It aota up
rafMpenaaloaa wtilea art folt throughout tao antiro ooooaaqr.
A« l hftTc alrosdr wipliaaJzod, povora of tola mgaitado9 if oxoreiaod
witiM«t r«o»rd to tft» paallo latoroat, ke»ld tao paoaiMilt? «tf irrotrl«^»
daMgiag tao «todit of tao Oovoiwaaet. fhoy hold tao po»»ibilUy of
aoabanlt Inroatora oat af tao OwtrnaMiH aoourlty vartrot and f«rolag tao
Govowaaaat to flaaaoo Ita twoda ay lacwwwilag Foaort to taa oaaka *» tKo
•oat inflationary type of flaaaolag vaiofc tt vould ao pooaialo to dortao.
I MI eortoia taat tao Coagroaa aad too Nation will not vtai to dolay
la ro»«rla§ tao foaalblllty of a«oa a taaajayoaa dovolopwat daring tala
erltloal porlod la tao nation*• hlatory*
I hop* taat I haro ouoooodod today la dlapolliac tao Hliaiia|it taat
thoi-o to aay ayatory about tao atooa vmioli «o noat tafea If no aro to flaaaoo
dofoaoo aooda without ham to tao •ooaotyr. fho proaloa la oloar. our
la plain, iot «a aov do away with ftttlJya thtory aad eoajfotaro.
i«t UB got oa vita oar groat taak of building up our dofoaaoa ay utiliElng
la f«ll aoaaara tao atwigtlt, tao vitality, aad tao jpowor for growth of tao

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the problem of an independent agency of the United
States Government is again being highlighted by the current

.discussions about the relative roles of the Federal Reserve
System and the U.S. Treasury. A great deal of nonsense is
being talked about. No agency is made independent in order
to make it r.ossible to alter or sabotage the policies of the
government of which it is a part.
The Federal Reserve is not seeking independence in the
sense of being apart from political responsibility, which was
the original concept, but is seeking an active role in the
management of the public debt, without any commensurate responsibility for the outcome.
Would the Chairman of the Board of Governors of the
Federal Reserve System like to be a member of the President's
Cabinet? Would the Federal Reserve like to go to Congress
and request the taxes to balance the Federal Budget?

Would

the Federel Reserve like to assume responsibility for the
Federal Budget?
It is quite clear to me th*t the independence Voodrov
Wilson wished to see the System acquire was in no way related
to these responsibilities. If the statutory powers of the
Federal Reserve are inadequate to meet the current situation,
then th© Congress and the Treasury should be seriously concerned with the matter, but the approach of the Federal Reserve

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Federal Reserve Bank of St. Louis

in the first instance should be to obtain the support of
the Secretary of the Treasury for the change?' deemed desirable,
rather than to attempt to change the policies of the Treasury
by means of the authority which it new has on issues which
are clearly matters of judgment and not matters that can be

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Federal Reserve Bank of St. Louis

in black and white.

IBLE LOHO-TESH INTEREST RATES AND EBBT M4SAOSBIHT
.

Is there any possibility of a quick resolution of the present differences
of opinion between the treasury and the Federal Reserve System which would
both enable the Federal Reserve System to utilise the open-?narket techniques
they favor during the naxt few months and, at the

time, avoid the adverse

fiscal consequences of such operations?
fh© objection of the freasury to the Federal Reserve proposals as they
stand is that whereas they are avowedly directed at a short-ttea bank loan expansion problem, th^jr would result in a substantial increase in the public debt
service charge for the indefinite ftrbore,
The objection of the Federal Reserve to the Treasury's adasmnt stand in
favor of the peg on the long-term goverraent rate is that it usakes it Impossible
for the Reserve System to do anything, under its present authority, to check
bank loan expansion other than throigh a elective credit controls.
In my opinion, both the Federal Reserve and the treasury are on souwi
ground, 1h» conflict could^ however* be resolved if a way were fOUIK! to enable
the Federal Reserve to

interest rate fleacibility via open-market operations

but at the same time to offset the fiscal consequences of higher yields on certain categories of government securities.
There is one line of approach which would, in theory at least, reconcile
the two positions:
The treasury could, for its part, agree to let the Federal Reserve go
and introduce sufficient flexibility into the long-tena £ovemaent securities
rat© to achieve the restrictions on bank loan exisansion that the System thinks
practicable over the

six months*- The Federal and the Breaaury would jointly

request Congress to authorise the Reserve System to require coomercial banks to
establish speeial reserves of up to 50 percent against demand deposit liabilities*

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•

The special reserves would b© held in the form of special Treasury reserve
certificates bearing interest at 1 1/2$ and would always be redeemable at par
on demand. The banks w>uld be authorised initially to ©change any of their
existing holdings of government securities at par or market, whieharer is high©rf
for the treasury reserve certificates.
The eoBsaereial banks m&ild, no doubt, object violently to ny proposal for
the introduction of special reserve requirements, especially of this magnitude*
If, however, the Federal Reserve System were to let the yield on long-term
fwernagnts rise to 2 3/4^ or higher during the first couple of months of its
flexible rate operations and the laarket reached the conclusion that the future
long-term ggyeynaent rate would be nearer 3 than 2 1/2$, th© coraaercial banks
might be mmh more favorably disposed to an exchange of a portion of their
existing long-tezm government securities for Treasury -Reserve certificates*
Sine© th© present long-term government holdings of the banking system havw been
acquired *t price® above par, they sdght even prefer to hold gitaranteed 1 1/^5
Treasury reserve certificates redeecatble on desiand to a isixed portfolio of
goverment semiriti^ purchased at various prices, with the earlier pwshases
quoted at market pri.c®s involving a contingent liability against capital and
siarplus. Bat in any errent, the Treasury and Federal Reserve System, standing
together, sight be able to persuade the Congress and th© public that a guaranteed
rat© was a reasonable return to the banks on an absolutely risklawi
security*
If this- type of special reserve r@quireffl©nt were adopted, the Treasury would
be able to count on having upusrds of 40 billion dollars of the public debt carried
permanently by the hanking system at 1 1/2^, TW.s nould be an offset against ttie
higher rate on long-terras brought about by the Federal Beserv« operations and also
represent a peroanent

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in the composition of the Federal debt*

MEMORANDUM:
I had an opportunity to discuss the new Treasury financing individually
with each member of the Bankers group and, as you already know, they are very
disturbed and most unhappy.
the $2.6 billion of 1-1/2
1-1/8

AH of them are convinced that lumping together

percent, maturing December 15, and £5.3 billion of

percent certificates, maturing January 1st, would be most ill-advised.

They do not think the market will take $8 billion of securities unless a
rate of 1-7/8 percent or two percent is placed on it.
While they are probably overly pessimistic, particularly if the Treasury
and the Federal Reserve can get together and present a united front,

never-

theless, their view may not be far wrong.
I feel quite confident that a 1-3/4 percent, five-year note to replace
the December 15 notes, would be well received, oversubscribed, and release
pressure on the 1-1/2

percent rate.

1/Vhen it comes to the larger amount

due in January, I think one-half of it might be put into 1-3/4
five-year notes.

percent,

But if the entire amount were lumped with the previous

offer, I am at least apprehensive that the issue will be soggy and difficult
for the market to digest.
before going overboard.

At least it might be wise to test it a little bit
To have a failure after the fiasco of August would

be very serious at this time and prudent management requires weighting
judgment on the side of discretion with a minimum of risk.

Of course, it

must be remembered that a five-year note would add that amount to maturities
in 1955 which are already out of proportion to a proper financial pattern.
All the bir bankers in New York and Chicago think this is very serious,
personally, I doubt it and would prefer to run that risk rather than pay the

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-2-

price of one-eighth and one-quarter higher for a longer maturity.

Once this

decision is out of the way, barring unforeseen conditions, no new financing
will be required before June of next year, and we will have an opportunity
to judge the cash needs of the rearmament program and the attitude of Congress
toward the defense financing.
The Federal Reserve holds roughly $13 billion of short-term securities
which should be adequate for any legitimate demands to replace short-term
maturities.
but it

This is probably unorthodox thinking to the Treasury technicians,

seeins to me that the market is the important thing to watch at this

time, and I have tried to divorce myself completely from the views of anyone
and to think of this problem in a vacuum entirely on my own.
As a student of Marget's and after talking to Mr. McCabe and Mr. Szymczak
and attempting to evaluate the personalities, I would be inclined to divide
up the $8 billion into four and f o u r as the more conservative thing to do.
But on the bolder side, if you want to accept some risk, I would be inclined
to take a chance on lumping the entire $8 billion into five-year notes and,
with a little good luck and some judicious support by the Open Market Committee,
I would think the chances are 75-25 of success.
This sums up my best judgment both of the maturity of the present market
and the psychological

factors required to balance its

recent adversity.

Last night I went back through Treasury history and can recall only two
other periods of any value historically.

One would appear to be the 1826-28

financing which, in comparable terms, was a mop-up from the protracted period
of the War of 1812 and it
a decision.

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seems to me worthy of study before finally coming to

I also think there is a parallel, though perhaps a bit more forced,

-3-

in Grover Cleveland's administration when ill-advised Treasury financing
produced the gold panic that forced him out of office and then four years later
made possible his return through the calculated risk that Mr. Morgan took in
underwriting the Treasury's gold —

one sound comment which may be of use.

Assuming we are in the midst of a money revolution, there is a real parallel
between the period following the panic of 1907 and the establishment of the
Federal Reserve System of 1914.
I am working on developing this parallel in my spare time but think you
might bear it in mind in considering the problem of lenghthening the debt
and maintaining reasonably stable interest rates.

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There are obviously Biany, and perhaps eteeiaive, political difficulties
in the way of getting legislative approval to any form of special reserves requirements at this session of Congress* the above suggestion slight well be even
more objectionable to Congress than the more orthodox t^pe of special reserves
reqairetaents, naiaely, long or short-term government securities or cash reserves
at tbe option of the conmercial bank* But if the treasury and the Federal Reserve
jointly mqjpor-tod the proposal as tin? one penssnent means (uhich I think it is)
of reooneilinf flexible long-term interest rates on govern^nt setmritiea and
U.S. debt aanagei^nt requirements tinder oiretsmatanoes prevailing in thig country,
ttie onus for its rejection would be placed aqparely on Congress* If that happened,
Congress -would also have to accept the responsibility for the fiscal consequences
of the higher yield on govertwmt i^euriti^s resxtlting from the Federal Recerve
qpen-*iarket operations*
Whatever the drawbacks of the above approach m&& bef I have personally
reached the concision that ttere are no alternative methods for controlling
bank loan expansion in M.ght that iroi&d b© aoc^ptabl« to the Pedaral S««erve S^itssi
aaid at the

tiae pi^s©rv« figidCty tJ» peg pri«5iple« Dii^ect loan ceilings

mre c^en to a variety of a<teinistmtive and political dlfflmilti©» nhieh are, in
^ judg««eKtf protobly irapipa^abl®» Spjcial; i^serve i*equir€i»itt»t tal^n b^
th«^ielY«sf mmld not fully laeet tJ» bsaik l®sai e^pai^ion problem and in any e^ent
nwild, raq^ir©

f«p legislative appro-ral. fhe alternativ®® on which agreement

Might be reached iso^Mj in i^

be sane coniprasdse wi14i the Federal Reserve

on the governtoit p«§ princiijle which wcwld hold to a B&nimBm the adverse fiscal
impact, or sm agreement ^ try to feet a fundamental solution along the above lines
which nouM couple interest rut© fleseibility nith s ma^cxr new ln»toa»nt of bank
reserve control - debt maaageaent policy.

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It was clearly understood by aH that these were explorations at
the technical level and not negotiations.
Lengthy discussion of the techniques of the Open Market Coraaittee
and the necessity for greater liason between the Federal Reserve and
Treasury was a part of the early discussion, and it urns clear that both
of us could be better informed on the thinking of the other*
Inasmuch as the Federal Reserve group had a specific proposal,
approved by the 0|>en Market Cossaittee, in the letter of February 7 of
GhairnanfclcCabeto the Secretary, most of the discussion attempted to
clarify what was intended te that letter.
The Federal Reserve group continuously asserted the unhappiness
of the Open Market Comaittee in continual monetization of the Federal
Debt, particularly at premimi prices.
there was considerable discussion of the rigidities in the present
market and the fact that a large amount of selling was probably because
of eomitsients already made by insurance companies, savings banks, loan
associations and the banking system, and the consequent replenishing of
reserves through sales to the Federal Reserve in the open market of
Government securities.
StHsiltaneotts3y pursuing this policy, they intended to withdraw
support from the short term securities market which would be expected
to adjust iteelf around the l~3/4$ discount rate now prevailing* they
felt that when these adjustiaents ware made, a groundwork would be laid
in the market which would deter lending and make it possible to undertake
in a more orderly fashion, although at somewhat higher rates, the refinancings which the Treasury faces in the next six months of the

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Calendar Tear 1951*
Mu0h of their argument revolves around the traditional abhorence of
the banks for borrowing from the Federal Reserve and an aggregate redaction
of needed reserves as the short term rate adjusts on the discount rate as
a governor*
Under considerable pressing by the Treasury group, they were willing
to undertake for a period of time running thru at the most March 1952, or
at least through December 1951f a fixed pattern of rates covering new money
and refinancing at the levels established as a result of these adjustments,
Thtr* was long discussion, and much of it syispathetic to a proposal
advanced principally by Mr* Riefler that the Secretary announce a nonmarketable 2-3/4^ long tena bond (29-1/2 years) which could be exchanged
for the ,June or December 2-3/2*s, the desire being to lock these two issues
up as much a* possible and remove than as an important market factor. A
feature of this issue might be an alternative of exchange for 1-2/2^ fiveyear notes for those who desired more liquidity. Nevertheless, the clear
intent was to drop the long term issues to par and hence rule out for tht
tfcae being at least the issuance of any 2-2/2$ bonds of longer maturity than
17 years.
At the concluding session it was suggested by the treasury group that
if the Secretary should accede to the Federal Reserve proposal with respect
to the adjustment of the short term rates and the announcement of a 2-3/4g
long term issue, to be exchanged for the outstanding long tena issues, would
th® Federal Eeserve undertake to maintain the current levels in the June and
December issues?

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3.
This ma put forward, not as a counter proposal, but on an
exploratory basis and irith an earnest plea on the part of Mr* Bartelt
that *e not attempt to prejudge the market, and hia hope that such an
asrangement would release pressure from the market and permit us to get
a start on the refinancing program without isgjairing any further public
confidence in the isarkets.
It nas suggested by the Federal that we might agree to buy two
hundred million of the lone terms ~ one hundred million by the Treasury!
one hundred million by the Federal, and then agree to purchase another
four hundred million - 75% or three hundred million to be purchased by
the Treasury, and one hundred million or 25$ to be purchased by the
Federal, and when six hundred million had been purchased to re-examine
the Droblosu
There was a lot of talk about secrecy and the difficulty if such
an agreement leaked in any other way than thrcugh the published statements
of the Federal and the Ireasury, and the belief on Mr. Bartelt^ part
that knowledge that the Ireasury and the Federal had gotten together would
act as a tonic in restoring confidence to the market*
There was general agreement throughout the discussions that the
so-called feud between the Ireasury and Federal was by far the most
significant psychological factor in the current situation.
After extended discussion, it seemed to b© generally agreed by all
that the Federal Reserve approach was essential^ a "package one* and is
not susceptible, with any consistency, to Irary saich ooiaprostLse, unless
there is a drastic change in the existing Market situation, which on the
basis of our talks appeared unlikely in the near future. It is the Federal

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view that their proposal would involve no serious disruption of the
security raarket and they seem to b© contending that the increased
flexibility of the market would produce more confidence*
Their major point is an unifillingness on their part to continue
monetAsation of debt although they concede that this monetization would
continue, although in their judgment at a reduced pace and at less cost
to them if the support prices were reduced*
Under continuous questioning, there was general agreement that we
were discussing degrees rather than absolutes, and the Treasury was
questioning the effectiveness of the operation, and also questioning
the Federal evaluation that the repercussions in the market would not
be serious.
It was clear that at least on a theoretical basis whatever consistency
there was in what obviously were ts?o essentially opposing concepts seasied
along the line of either following the Federal proposal in its entirety
or pursuing the course advocated by the Secretary in his January IS addr0«§
accepting the necessity of some further monetigation of the debt during
the eaiergsncy period^ but attempting to minimise its effects through other
means than a revision .of interest rates*
At the end of the meetings it was made clear again that these were
exploratory talks and that no counter proposals had been offered by the
Treasury* Accordingly, it was suggested that the matter now be referred
to a higher level where negotiations or counter proposal* sight take place.

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The Treasury and Federal Reserve System hare been actively pursuing the
problems connected with the refinancing of some $39 billion of short and mediumterm debt during the balance of the calendar year of 1951.
la conformity with the address of the Secretary of the Treasury on
January 18, 1951, every effort is being made to foresee the best possibilities
of reorienting the market in such a manner as to facilitate the orderly spacing
and stable relationships of a structure which will not facilitate the 2-1/2
percent long-term rate.

It is proposed that the $19-1/2 billion of June and

x-t~»-vl< •?**<**

Victory 2-1/2 f s be unpaid in such a way as to lock up as much of this issue
as possible.

A 2-3/4 percent non-marketable, non-redeemable issue would be

exchangeable for these securities if the owners so desire or if they wished
shorter term maturities, they may exchange their holdings for a 1-1/2 percent,
five-year note issued at par to yield approximately the same coefficient.

the interim period, the short-term rate would be permitted gradually to rise
until it approaches the discount rate and the banks would be expected to replenish their reserves by borrowing directly from Federal Reserve banks,

Yw -L~f..,,,.. .;

Since the banks traditionally

for reserve purposes, it is felt by the

Federal officials that pressure will be exerted to restrain additional lending
if reserves are inadequate.
At best, this is only a flee bite but, nevertheless, it does have some bite
and may produce some results.

At least the general market for Federal securities

will be relaxed in such a way that water can seek its own level.

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A PROPOSAL
With a view to reconciling the debt management problem of the
Treasury with the problem of controlling credit by the Federal Reserve,
the Secretary of the Treasury authorizes the fiscal and technical staffs
of his department to negotiate with the Federal Reserve on the following
basis:
The purpose of this negotiation is to reduce to a minimum the creation
of bank reserves through monetization of the public debt without creating a
market psychology which would entail a lack of confidence in the stability
of the Government securities market. More specifically, the purpose of the
proposal is to relieve the Federal Reserve to the fullest extent practicable
of the support of long-term Governments without eoEipelling the Treasury to
refinance maturing obligations during this calendar year, or to finance new
fund requirements, on the basis of indeterminable rising interest rates.
This can be accomplished within the framework of the 2-1/2^ long-term interest
rate pattern announced by the Secretary of the treasury in his address before
the New York Board of Trade on January 18,
The proposal involves 3 elements, (1) a new nonrnarketable security to
be issued in exchange for outstanding long-term 2-1/2$ bonds of June and
December, 1967-72, (2) refunding the |$fc billion of maturing securities
between June 15 and December 15 of this year, and (3) the raising of new
funds to finance the present emergency*
These elements, while interrelated, will be dealt with separately.
EXCHANGE

OP
2-3A^ BOND FOR
RESTRICTED TKFASWt BONDS OF 1967-72.

In consideration of an agreenent on -the part of the Federal Reserve
v
to maintain a stable securities market, as more specifically outlined
>

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-abelow, the Secretary of the Treasury would agree to issue a long-term
29-year 2-3/4$ nonmarketable security, which -ssould not be redeemable by
the Treasury prior to maturity, but which would be exchangeable prior to
maturity for 1-1/2^ 5-year Treasury notes. The purpose of this offering
would be (a) to retire a large segment of the martetable debt, which is
now causing difficulties for the Federal Reserve, and (b) provide a degree
of flexibility for holders of the new nonmarketable security by making them
exchangeable for a 1-1/2$ 5-year note that could be sold on the market in case
cash funds are needed * At the same time it avoids an increase in the demand
obligations of the Ireasury.
One of the merits of the proposal is that it avoids a prejudging of
the securities market* It is believed that this exchange privilege would
give bouyancy to the restricted Treasury bonds of 1967-72, since the "rights11
or exchange privilege would be attractive to long-term investors who are
more interested in interest return than they are in speculative possibilities.
Thus, there would be created a buyers1 market for the restricted Treasury bonds
of 1967-72, and to this extent should relieve the Federal Reserve of a great
deal of pressure. Conceivably, if msrket confidence would be restored through
an unequivocal joint announcement by the Treasury and Federal Reserve that
an agreement had been reached, the present market support problem of the
Federal Reserve might disappear,
It is realized, of course, that consideration -would hav® to be given
by the technical staffs of the Treasury and the Federal Reserve as to the
effect of tMs action on other outstanding marketable securities in the
intermediate and long-term area.

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In order to provide for this proposal a fair and reasonable testing
period, it weuld be necessary for the Federal Reserve to agree to support
the secisrities affected at present market levels. In a spirit of cooperation
the Federal Keserve and the Treasury should become partners in the support
program under which ©aoh agency waa34 take a pro rata share of any pxirchases
that aay be required! that is, the Fedoral Reserve Cj>en Market Account
would take a percentage of the purchases and the Ireasury would take the
balance for Gosrernaent investment account* It has been suggested, for
instance, that the first |200 million pijrchased tinder the agreement wcu Id
be shared equally by the Treasury and the Federal Eeservej that the Treasury
and Federal "Reserve would finance 75£ and 25^f respectively, of the succeeding
^400 niillioni and that tfa& freaswry wsuid carry the fuH amotint in excess
of $600 adllion* This mmld seem t© b© a reasonable basis of purchase
dttring a testing period, but there is an inherent danger in the event
of a lfl@mk» that the Reserve is committed to a stated aiuount* While it
is realized that the Pedeml Beeerve laight not be willing to accept an
w

open end» agreement^ it must be reco^iged tlmt public knowledge of a

limitation would not encourage market confidence.

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REFUNDING OF THE $40 BILLION OF MATURING SECURITIES
BETWEEN JUNE 15 and DECEMBER 15 OF THIS WE

During the 6 months period, June 15 - December 15^ the Treasury
mil be required to refund almost $40 billions of maturing obligations,
exclusive of Treasury bills. Success of this refunding demands confidence

in the stability of the Government securities market.

Therefore, it is

lucrative that the Ireasury and the Federal Reserve reach an agreement
on a raonetary-deht policy for the balance of the calendar year, at least.
Obviously, this program should not be encumbered with uncertainty, misunderstanding, aid the prospect of rising interest rates.

In return for

an understanding that the Federal Reserve would maintain a stable price
level during this period of financing so that the Treasury would^not be
required to finance on a rising interest rate, the Ireasury ratfnt agree
to a policy under which the Federal Reserve would allow the short-term
securities market to adjust itself before June 15 around the 1-3/4$ discount
rate now prevailing. From the Treasury point of view it would be desirable
to extend tl is period of stability for the duration of the emergency, but it
is doubtful whether the Federal Reserve would be willing to ooimiit itself
that far ahead. On the other hand, if a closer working relationship could
be established between the technical staffs of the Federal Reserve and the
Treasury, it may b@ possible to suggest a program of monetary-debt management
which might b© acceptable to the policy-making officials.

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On the basis of the President's budget estimates, and wittiout jaaking
allowance for an increase from new taxes, it is estimated that new borrowing*
from this tiuse to June 30, 1952 wHl amount to approxiimte;!^ |23 billion,
distributed as follows j May 1951 13*6 billipnj July $6.5 billionf
October $7.5 billioaj April 1952 |5*4 billion. These figures nsake
allowance for attrition on debt refunding operations of $3.6 billion,
in addition to the cash deficit* The figures might be reduced fc^ a
revitalised savings bonfis progrwi and a revision of the yields on Treaaafcy
savings notes.
Conferences with the Federal Beaerve on th© technical level might be
helpfol in laying oat a program of debt composition in order that the Heaerve
*

aay consider itself a full parter with the Ireasury in maintaining a market
for the securities after th@^ have been iseraed*
It is generally recogniz^ that there are no substantial amounts of
non-bank ffcuads seeking investment at the present time* Some people seeni
to iJiink tlmt there -sill be funds seeking investment sometime this Fall after
other sources of irwestiaent have declined. It wuld seeia that there wotild b©
no need at this time to atteiqpt to prejudge the market so far ah©ad or to
aaeuiae that the 2-3/2^ long-term rate mentioned in the January 18 address
nill not be appropriate. Ifjerefore, if a joint annotmceaent of th§ Treaswy
and the Federal Heserv© shcwld be agreed upon, -with a view to reestablishing
mrket confidence, reference sdght be

to the fact that the Series G bond

or the Investment Series Bond issued in 1947 might b© siade available for

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purchase by non-bank investors Iron time to time, the purpose of thia
reference being to indicate that there has not been abandonment of the
policy statement in the January 18 address*
While the following might appear tmdfcdy optimistic, and would, of
course, depend a great deal \ipon the effectiveness of selective controls
and other factors affecting the availability of investments, there is *
possibility that this program may be of assistance to the Federal Reserve
in de-cionetiaing soiae of the public debt ??hich it now holds, and may enable
the Treasury to acquire new soney by selling in the market some of the
restricted 2-1/2^ bonds of 1967-72 previously acquired for Ooverniaent
investment account*

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With a view to reconciling the debt management problem of the
Treasury with th© problem of controlling credit by the Federal Reserve,
the Secretary of the Treasury authorizes the fiscal and technical staffs
of his department to negotiate with the Federal Reserve on the following
basis:
The purpose of this negotiation ia to reduce to a minimum the creation
of bank reserves through monetization of th© public debt without creating a
market psychology which would entail a lack of confidence in the stability
of the Government securities market. More specifically, the purpose of th®
proposal is to relieve the Federal Reserve to the fullest extent practicable
of the support of long*-term Governments without Gospelling the Treasury to
refinance maturing obligations during this calendar year, or to finance new
fund requirements, on the basis of indeterminable rising interest rates.
This can be accomplished within the framework of the 2-2/2$ long-term interest
rate pattern announced by the Secretary of the treasury in his address before
the New York Board of Irad© on January 18*
The proposal involves 3 elements, (1) a new nonmarketable security to
b@ issued in ©xcliange for outstanding long-term 2-3/2$ bonds of June and
December, 1967-72, (2) refunding the |40 billion of isaturing securities
between June 15 and December 15 of this year, and (3) the raising of new
funds to finance the present emergency.
These dements, while interrelated, will b© dealt with separately.
IX
ING OF NOMUlEKBmBLE 2-3/4$ BOM) FOR
OUTSTANDING RESTRICTED TREASURY
OP 1967-72.
In consideration of an agreement on the part of the federal Reserve
to maintain a stable securities market, as more specifically outlined

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\
below, the Secretary of the Treasury would agree to issue a long-term
29-year 2-3/4$ noraaarke table security, which would not be redeemable by
the Treasury prior to maturity, but which would be exchangeable prior to
maturity for 3^-1/2^ 5-year Treasury notes. The purpose of this offering
would be (a) to retire a large segment of the marketable debt, which is
now causing difficulties for the Federal Reserve, and (b) provide a degree
of flexibility for holders of the new noranarketable security by making them
eKchangeable for a 1-3/2^ 5-year note that could be sold on the market in case
cash funds are needed. At the same time it avoids an increase in the demand
obligations of the Treasury.
One of the merits of the proposal is that it avoids a prejudging of
the securities market. It is believed that this exchange privilege would
give bouyancy to the restricted Treasury bonds of 1967-72, since the wrights»
or exchange privilege would be attractive to long-term investors who are
sior© interested in interest return than they are in speculative possibilities*
Thus, there would be created a buyers* market for the restricted Treasury bonds
of 1967-72, and to this extent should relieve th© Federal Beserve of a great
deal of pressure* Conceivably, if market confidence would be restored through
an unequivocal joint announcement by the Treasury and Federal Reserve that
an agreement had been reached, the present market support problem of the
Federal Reserve might disappear.
It is realised, of course, that consideration would have to be given
by the technical staffs of the Treasury and the Federal Reserve as to the
effect of this action on other outstanding marketable securities in the
intermediate and long-term area.

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In order to provide for this proposal a fair and reasonable testing
period, it would be necessary for the Federal Deserve to agree to support
the securities affected at present market levels. In a spirit of cooperation
the Federal Reserve and the treasury should become partners in the support
program under which each agency would take a pro rata share of any purchases
that may be required! that is, the Federal Reserve Open Market Account
would take a percentage of the purchases and the treasury would take the
balance for Government investment account. It has been suggested, for
instance, that the first $200 million purchased under the agreement would
be shared equally by the treasury and the Federal Reserve | that the treasury
and Federal Reserve would finance 75$ and 25$, respectively, of the succeeding
$400 million! and that the ^Treasury would carry the full amount in excess
of $600 million. This would seem to be a reasonable basis of purchase
during a testing period, but there is an inherent danger in the event
of a ttleak" that the Reserve is committed to a stated amount. While it
is realized that the Federal Reserve might not be willing to accept an
"open end" agreement, it Mist b® recognized that public knowledge of a
Hiaitation would not encourage market confidence.

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Federal Reserve Bank of St. Louis

SEFUBDZHQ OF THE $40 BILLIOH OF MATURING SECURITIES
BETWEEN JUNE 15 And DECEMBER 15 OF THIS YEAR
During the 6 months period, June 15 - December 15» the treasury
will be required to refund almost $40 billions of maturing obligations,
exclusive of Treasury bills* Success of this refunding demands confidence
in the stability of the Government securities isarket* Therefore, it is
imperative that the Treasury and the Federal Reserve reach an agreement
on a monetary-debt policy for the balance of the calendar year, at least.
Obviously, this program should not be encumbered with uncertainty, misunderstanding, and the prospect of rising interest rates. In return for
an understanding that the Federal Reserve would maintain a stable price
level during this period of financing so that the Treasury would not be
required to finance on a rising interest rate, the Treasury would agree
to a policy under which the Federal Reserve would allow the short-term
securities market to adjust itself before June 15 around the 1-3/4$ discount
rate now prevailing* From the Treasury point of view it would be desirable
to extend this period of stability for the duration of the emergency, but it
is doubtful whether the Federal Reserve would be willing to cosmit itself
that far ahead. On the other hand, if a closer working relationship could
be established between the technical staffs of the Federal Reserve and the
Treasury, it may be possible to suggest & program of monetary-debt management
which might be acceptable to the poliey~meking officials*

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Federal Reserve Bank of St. Louis

THE RAISING OF KM KfflDS TO .glHAKCE THE PRESENT EHERGEHCy
On the basis of the President^ budget estimates, and without making
allowance for an increase from new taxes, it is estimated that new borrowings
from this time to June 30, 1952 will amount to approximately $23 billion,
distributed as follows: May 1951 $3.6 billion! July $6.5 biHion|
October |7.5 billions April 1952 |5»4 billion. These figures make
allowance for attrition on debt refunding operations of |3»6 billion,
in addition to the cash deficit. The figures might be reduced by a
revitalised savings bonds program and a revision of the yields on Treasury
savings notes.
Conferences with the Federal Reserve on the technical level might be
helpful in laying out a program of debt composition in order that the Reserve
may consider itself & full partner with the Treasury in maintaining a market
for the securities after they have been issued.
It is generally recognized that there are no substantial amounts of
non-bank funds seeking investment at the present tine. Some people seem
to tiiink that there will be funds seeking investnent sometime this Fall after
other sources of investeent have declined. It would seem that there would be
no need at this time to attempt to prejudge the market so far ahead or to
assume that the 2~l/2% long-term rate mentioned in the January IB address
will not be appropriate. Therefore, if a joint announcement of the Treasury
and the Federal Reserve should be agreed upon, with a view to reestablishing
market confidence, reference might be made to the fact that the Series G bond
or the Investnent Series Bond issued in 194-7 might be made available for

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Federal Reserve Bank of St. Louis

purchase by non-bank investors f**om time to time, the purpose of this
reference being to indicate that there has not been abandonment of the
policy statement in the January 18 address*
While the following might appear unduly optimistic, and would, of
course, depend a great deal upon the effectiveness of selective controls
and other factors affecting the availability of investments, there is a
possibility that this program may be of assistance to the Federal Reserve
in de-monetizing some of the public debt which it now holds, and may enable
the Treasury to acquire new money by selling in the market scsae of the
restricted 2-1/2$ bonds of 1967-72 previously acquired for Government
investent account.

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Federal Reserve Bank of St. Louis

)RAND!r

The Secretary of the Treasury and
The Chaiman of the Board of G-overnors
of The Federal Reserve System
During the past few months I have discussed with
each of you many'tlines ny concern OYer the problem of
lation and the approaches which might be"taken by
the Government to control it. The Government has during this period taken many steps to bring the problem
of inflation under control.
'U^L^ ^^^ ^wJL
In my consideration of the inflation problem, I
have been aware of the difficulties faced by the
Federal Reserve System in controlling private credit
expansion at a ti
en w© have a large public debt.
All of MB recognise, of course, that credit expansion
is si. 1 one phase of the whole inflatlouj3foble- :
and that, in fact, some (credit expansion is necessary
to facilitate the growth~bf production which is essential to the defense effort,
, the expansion of loans,
d only by the banking1 system but by financial institutions of all types, adds fuel to other inflationary
forces and must be stopped to the greatest extent possible consistent with the needs of the defense effort.
In stopping credit expansion* however, I feel that we
•se measures that are fully consistent with tefff"
uu!»iijjiiAl|fe&u naintslning" stability in the Government
security market and eon^irlenee in the credit of the
United States.
As you know, it is likely that we shall have to
borrow billions of dollars to finance the defense effort durin
secor
I
Is c-^lender year be*
cause of the ser..
nature of tax receipts which concentrate collections in the first half of the year and
the inevitable li
I -sen the: imposition of new taxes
and their collecticr
I
r»easnry* It is my
hope that such new fnoney as it Is necessary for
the Treasury to borrow during t"
^ths ahead to

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Federal Reserve Bank of St. Louis

finance our solitary PtqpIffSNHii can b?' obtained in
the least inflationary fattier possible, Qtitt igf froa
time Imrastara sufcilw.if the banking systauiQ
Hth these r

tione la ttlai* I ask that

each of you git*-ight to tlit type of pogyifta th&t
«l|:!it be i^>i4e«i oat *I*ttf th« followiisf liaes *» a
• .-^ Alek would ffttlto tho nt€«siai7 rtstraint
4 it iniMloa an-l at th* sms^e tiaw imka it
to iminttin sttbillty la tho tsarkat for -OT^
.*tti*c« Tb.lt po«WMi would (1) coatrol

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Federal Reserve Bank of St. Louis

the utilisation of thus ?ow«r8 prtviloi by tht
.-aoy iamklug 4*1 of 19KS til, fOMiU; . l;ho
with t^i Ej»«v Aetf (i) ttt up a eonmlttoe
to tfit Cmfltu l*mi«» tantHiMi of itarU *i* If
(3) fwtlttf ristrala th<? loading nni
of th«
(1) Ito i«M* fforil^ in
et of 1938 Muli b« wtillmti
to <mrinll len^laf by nmibop banks of
« Ftioral RtMfii Syttont
- ••
pnwiFi aM ftstad In the BaiMt«99 of
ih» ft»«mtti^» Th« pro^rata eoul^ bo
aiaiiiilstaiw If th« 12 ?«4«Ml Kaaorra
Banks * oaoh in Its otm Fallal B-nserv«
Dl*trl«t« It is eoatmplatafll that the
cra«lt aet«s
is ev>
be such
>gpam night wall
p«lt flexibility between Federal
Utriete tul indlTldttal parts
of m^ Dlatrtatef in order to allow for
flaaMi^g o
la types of In*
•astrlal and apMSPatal| as wall as
ad loc .
'mie effort,
if

-eeaaary to
fi

@l t1

••aars prortdai by the
the nea
(2)

tte«

>vlU

-•^ittee
larli iw* I§ tat ofsf
ia a broedlar araa <jr
e created

-—-—

Fxecntlvo >£ . fh» ob|«etiv0s of
this Cwaltt** w&nU be to f***ftil
borraftrt to ri^no* their «p«n3to curtail tbulr borrowing*
an5 ta p*r*mil upon liofflpi to limit
thulr l*«nSlng« Fhia eo»itte» muld
mark closely with the ^«ft?i8« ageacits
^?<ir Vfr* lilsan with tha objactire of
ettj»tall'!'
'locfttlons of erttical am!
etsential Bttariela tsh^re necessary to
etH|M»l eaopsrmtloju

(3) The activities of awsrsswnt eredit
Us slight ba c!«ptail«d fiiFth
-^ I && willlri^ to eonsW*r tlM 1st
C£ of
te orders alonf this
lir^
•rjcies f ftMffig others,

a» r

lug JUhdni»tF»tlon
1 f

tht ' ^wtn»
ifl
Credit Mnifilstption, a^i'-' I

^t.! *

j^.

^*
-Pv£'
. it Is possib^!
' )u.M r;it«
to a
fel
- iori^r
ftctirltles of th©§« ^•neiesri«xetpt to
I r* activlf l^s eon*
]
tribxit* ^ircctl^ to thi d«f«ns« tffort*
I
i»—NB^iM^H*

1$ ^I
Mttioa
•? forego
to the* pr^s^nt Ml^tttlii r.r^6it control
-vi'^a
a ?
of er^it (eurtidl;*icfn' , It
':'i^t f
l be«a- so co:icc
1 I
-cant
*? — th^t Is, i
Lwly
vr
rts train th* ^zpan:
. Pah^i
'
>»
:v'
* ^ T

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Federal Reserve Bank of St. Louis

'r>9 th^

-;pt"

-fersst rate p^tternt ami
1

ort, will b#* ••"Hint

TOP SECRET

MEMORANDUM FOR The Secretary of the Treasury and
The Chairman of the Board of Governors
of The Federal Reserve System
During; the past few months I have discussed with each of you many
times my concern over the problem of inflation and the approaches which
might be taken by the Government to control it. The Government has during this period taken many steps to bring the problem of inflation under
control•
In my consideration of the inflation problem, I have been aware of
the difficulties faced by the Federal Reserve System under existing
practices in controlling private credit expansion at a tine when we have
a large public debt. All of us recognize, of course, that credit expansion is simply on» phase of the whole inflation problem; and that, in
fact, some loans are neoesaary to facilitate the growth of production
which is essential to the defense effort. But, th© expansion of other
loans, not only by the banking system but by financial institutions of
all types, adds fuel to other inflationary forces and must be stopped to
the greatest extent possible consistent with the needs of the defense
effort. In stopping credit expansion, however, I feel that we should use
measures that are fully consistent with raaintaining stability in the
Government security market and confidence in the credit of the United
States.
As you know, it is likely that we shall have to borrow billions of
dollars to finance the defense effort during the second half of this
calendar year because of the seasonal nature of tax receipts which con*»
centrate collections in the first half of the vear and the inevitable
lag between th© imposition of new taxes and t; eir collection by the
Treasury. It is my hope that such new money as it is necessary for the
Treasury to borrow during the months ahead to finance our military requirements can be obtained in the least inflationary manner possible
through increased savings by the public.
With these considerations in mind, I ask that each of you give
thought to the type of program th&t might be worked out along the following lines — a program wnich would provide the necessary restraint on
credit expansion and at the same time make it possible to maintain stability in the market for Government securities* This program would
(1) control bank loans through th© utilization of the powers provided by
the Emergency Banking Act of 1933 and, possibly, the Trading with the
Enemy Act; (2) set up a committee similar to the Capital Issues Comaii
of world War 1} and (3) further restrain the lending and mortgage insurance activities of the various Covernment credit agencies*
(1) The powers provided in the Emergency Banking Act of 1933
could be utilized to curtail lending by member banks of
the Federal Reserve System. These powers are vested in
the Secretary of the Treasury. The program could be

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Federal Reserve Bank of St. Louis

-2-

TOP SECRET
'•'' '
'""=

A Committes similar to the Capital Issues Committee
of World ^ar I, but operating in a broader area,
could be created by Executive Order* The objectives
of this Conoidttse would be to prevail upon borrowers
to reduce their spending and to curtail their borrowing-, and to prevail upon landers to liiuit their lending. This committ^s would work closely with the
defense agencies under Mr» Alison with the objective
of curtailing; allocations of critical and essential
materials "where necessary to induce cooperation.

(3)

The activities of Hovenraent credit agencies mifht
be curtailed further, and I am willing to consider
the issuance of appropriate orders along this line
to such agencies, among others, as the Federal Housing
Administration, the Veterans Administration, the Farm
Credit Administration, and the Reconstruction Finance
Corporation. Indeed, it is possible we should give
thought to a suspension of those activities of these
agencies which facilitate new borrowing, except to the
extent that such activities contribute directly to
the defense effort.

It is my belief that the addition of the foregoing to the present
selective credit controls will provide a well-balanced program of credit
stabilization* It will do the very thing that each of us has been so concerned about in recent months — that is, effectively restrain the expansion of loans. Such a program would aim directly at the restriction
of non-defense private borrowing, and would not increase the cost of
essential borrowing-. It would be analogous to our restrictions upon the
non-defense use of materials. Pending the development of this program,
I hope that no further attempt will be made to change the interest rate
pattern, and that unquestioned stability in the "overnmsnt security
market, which is imperative at this critical time for the financing of
the defense effort, will be maintained*

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

TOP SECRET

MEMORANDUM FOR The Secretary of the Treasury and
The Chairman of the Board of Governors
of The Federal Reserve System

During the past few months I have discussed with each of you many
times my concern over the problem of. inflation and the approaches which
might be taken by the Government to control it. The Government has during this period taken many steps to bring the problem of inflation under
control.
In my consideration of the inflation problem, I have been aware of
the difficulties faced by the Federal Reserve System under existing
practices in controlling private credit expansion at a time when we have
a large public debt. All of us recognize, of course, that credit expansion is simply one phase of the whole inflation problem; and that, in
fact, some loans are necessary to facilitate the growth of production
which is essential to the defense effort. But, the expansion of other
loans, not only by the banking system but by financial institutions of
all types, adds fuel to other inflationary forces and must be stopped to
the greatest extent possible consistent with the needs of the defense
effort. In stopping credit expansion, however, I feel that we should use
measures that are fully consistent with maintaining stability in the
Government security market and confidence in the credit of the United
States*
As you know, it is likely that we shall have to borrow billions of
dollars to finance the defense effort during the second half of this
calendar year because of the seasonal nature of tax receipts which concentrate collections in the first half of the year and the inevitable
lag between the imposition of new taxes and their collection by the
Treasury. It is my hope that such new money as it is necessary for the
Treasury to borrow during the months ahead to finance our military requirements can be obtained in the least inflationary manner possible
through increased savings by the public.
these considerations in mind, I ask that each of you give
thought to the type of program that might be worked out along the following lines — a program which would provide the necessary restraint on
credit expansion and at the same time make it possible to maintain stability in the market for Government securities. This program would
(1) control bank loans through the utilization of the powers provided by
the Emergency Banking Act of 1933 and, possibly, the Trading with the
Enemy Act; (2) set up a committee similar to the Capital Issues Committee
of Yibrld War I; and (3) further restrain the lending and mortgage insurance activities of the various Government credit agencies*
(1) The powers provided in the Emergency Banking Act of 1933
could be utilized to curtail lending by member banks of
the Federal Reserve System. These powers are vested in
the Secretary of the Treasury. The program could be

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Federal Reserve Bank of St. Louis

TOP SECRET
-2-

administered by the 12 Federal Reserve Banks, each
in its own Federal Reserve District. It is contemplated that the credit needs of the country are
likely to be such that the program might well permit
flexibility between Federal Reserve Districts and
individual parts of such Districts, in order to allow
for the financing of certain types of industrial and
commercial, as well as State and local, projects
necessary to the defense effort. The program could
be extended to institutions other than member banks
if desired through application of powers provided by
the Trading with the Enemy Act«
(2) A Committee similar to the Capital Issues Committee
of World ^rar I, but operating in a broader area,
could be created by Executive Order. The objectives
of this Committee would be to prevail upon borrowers
to reduce their spending and to curtail their borrowing, and to prevail upon lenders to limit their lending. This committee would work closely with the
defense agencies under Mr. T?ilson with the objective
of curtailing allocations of critical and essential
materials where necessary to induce cooperation.
(3)

The activities of Government credit agencies might
be curtailed further, and I am willing to consider
the issuance of appropriate orders along this line
to such agencies, among others, as the Federal Housing
Administration, the Veterans Administration, the Farm
Credit Administration, and the Reconstruction Finance
Corporation. Indeed, it is possible we should give
thought to a suspension of those activities of these
agencies which facilitate new borrowing, except to the
extent that such activities contribute directly to
the defense effort.

It is my belief that the addition of the foregoing to the present
selective credit controls will provide a well-balanced program of credit
stabilization* It will do the very thing that each of us has been so concerned about in recent months — that is, effectively restrain the expansion of loans. Such a program would aim directly at the restriction
of non-defense private borrowing, and would not increase the cost of
essential borrowing. It would be analogous to our restrictions upon the
non-defense use of materials. Pending the development of this program,
I hope that no further attempt will be made to change the interest rate
pattern, and that unquestioned stability in the Government security
market, which is imperative at this critical time for the financing of
the defense e f f o r t , will be maintained*

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Federal Reserve Bank of St. Louis

ttf VMI

X IIMNI IMMMI mull

^k.^bn^ft

JBWI

of i^» unitwi st»t»
on pr&imt« w^dit ••jBHtn At tliU tlxw* 7M« 1« aot
^ ^^MMI^M^L^htt^Bl

Jl^l^^MtfuAt rffk1^ 4^)%A

^tdA^^M%^ ^HIV •m^^^^lk^t' .^^^ft

^fc^ ^^lkVft4tj^^tfk\ ^ft 4t ^^«w

ift^^fl rf** ^ ^*^K

It iwottld IMI f^UUft^r atapl* to restrain prlf»te er*4it
if th^i wef* «w oelr «bj*cti7» «r tt aMilffllmia st«Mlit,/ in tb*

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Federal Reserve Bank of St. Louis

op«ration« of %li« CN&vemwtnt* 4t

*n& 1?1<!1% .firflltlitsi ittJyri^ w iiwswMWMpy %• iitttfMl
l^&^A
f-*1**-" ^Mv
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http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

, ^i^kM^k^^Jk^K

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fiM«*tayy |*ajtegr» and * vfci* rat* «r direct •&«* i*tii*ot

a «ye tl»t nullify ou»r«. th«
tflfW f^f' .JUMMl ite llWftlilKllMl S

tMJUTi^Kl pTOSHWI UttiUJI

IMHHI wuto} Mtti <MI UK jiitilm >1m Jdtwrt* undi on u» a&tl-lnf i^ii^m

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

^*--^^ »d^fc

,tt ^M§

^.^Ll^^k

K^k^uMMA- ^te*^ ^

« »<MsBP' <Bwft VHflll jOBBwflPWiUP

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IMMHI mi* tai^

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VHpPuMvWNv

o*ooa*o of tbip problam IP to roowioi]* two i*p«r *nfc ofej«otiv*of
iMith^F of miiiott c*n bo o&CfifieodU

upQVV^KPEHHMK^w ft^MB^dKV'^^p^r W^^*C^w IKHK* f3fel^^3MOw5H^^

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%!MI ttK&lrflA Wtoi^Wtt ^Plfiff Jtv Umpwtfitnlfc v^ m^.^ t»SsswBS* 1%
to refliwno« tfw billion*
idULJL iMMHfli ffrttiBt jLtt&tSfp *&iiJLji Vttisr*

$fp

of tux :r»fp||y%P «lii«li Cx.aB«trftt« ooUeeiloiui la
HIP fifpfe Hilf of t-h» ywupf «od IMMMMNI pf ti*» iapfit.nlkl.il Xs^

tfSNBWpify*

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

•5 *

orOj if th*r» i« fwll oxifidone* in tint public credit
*f tho Ui*tt**l ffc&too \*®*9& iMMi ft stable *ewiU*» »&*k*t»
nov progroa, referred to fc*10w» em* bo dcvolo:*d
with thi* el»J«atiV9f 1 hop* th*t ft^ u,tt«ipt idil be siad* to

not

•

V -.

rtl

a||r

of aJ,.l.

Hi
of

market

«ub»ta«ti*nj tb*

In tho latoroct
of

credit
tills

tfe*

s&crlficod — stability in tho Cbvototont •ecuritteo

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

U 1

la to I*

either.
the L'ltereat rate is only -xie of eei
be *>r.aldered for curbing credit ••yxmrf.oo,
wi

achiovt « »3ia»l p©c .elllafel^-'ii ia. tin
and «onfiden«« in piOOle credit

Wn lum •fffec&l'VD MWHAt^ f<wr
at a pfo^«r *->l»tioa*
nf i^»rt*nt ct«p9 IMMW been

T».**^4Mp Wfflitof

T^iH^MjPBS^flCTwe^ilJt! ^JflP* wJFwJfc «i0fiNIK'''VML ^PVNvVK^w^v m^PHRwflHR VRIMp enlft£^BRHn6NWi tftfli

the «•!» and <wntr»l organ for ecowwU et,tMI1iatlon, after WaaM
vfiiyp XX» jui A MKMD "HKwe ee6B%EeK etNiMMHBme niSMii e> 9HUB9B 'BKjre1 eowwwudc
tra^ework nf jjfeiiU'iiitiil ftcti^itiae affeotli^ the eoniuiej, tlMi

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Federal Reserve Bank of St. Louis

- 7•
«f f&mm&Q Adviftoro u«c ovtuftllahe* Iqr tfe* Ooagrooe
tbo Koptegraoift Aet of 1944 to Mftvlo* tho Pnnliml, «a& holp

h A IMMII 90t%%iJLi^i9di tw ooowH*W MM!
m effort* la «ddUta§9 MM of tlM»

•ff ct

tte Cl«jdfwm of tlM f o*wi B«Mrw Iw*, tte« Glr«oiar of
tlui €^otiMiai of tho fnuMirn of fiiiiiioMli
to flt^Sj uttgro «ni M«MI to sswido tho aooooomy r^ofcmlat on

^«

__ j ^ » .^

.«

.... ^

» »_ ^

of Mhom-tu

(1) to limit prtirato lending tlmigi wOwtifjr *ctt ns

•Kill «• «to toio M Ik aanrotr fitM %r tlio Capital loauea Coaelttoe of

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

*«r If ^r thrombi 4ti*t* Ctw«ru»ttAt aoatrOsf v2) **

tt* Wte**X taMim tyvtoi ultt* PMW» t* laps**

ttentr jiff' 4ili^MM|f wy^rmi^' bgf t»tn
TUIIIIIII iilMiil IIN^MHi iii>offi1it1f»>j|, fltfl^ tto& lift

MhMT MMto «t primw v^bwtny MUM to telwgiag *»at

te
Iwdl win^^-iiig In n iMNliMf *apM# fl^i <s^bJ^Mrtl-Mft iMt trcurti n

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

tiOt'.voiiri Iw V^NKMENI ttHHlir ffgiBrt^Biig cwl IMI
asud I* yir^ii'lili wrm Ijaadtow
if' ^iff CMMii-'tM t^iiM 1M

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Federal Reserve Bank of St. Louis

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http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Memorandum for: The Secretary of the Treasury,
Toe Chairuian of the Board of GOTO more of the
Federal Reserve System,
•

The Director of Defense Mobilization,
the Chairman of Council of Economic Advisers,
I have been much concerned with trie problem of reconciling two objectives: first, the need to maintain stability in
the Government security market and ffcii confidence in tae public
credit of the United States, and second, the need to restrain
private credit expansion at this time. How to reconcile these
two objectives is an important facet of the complex problem of
controlling inflation during a defense emergency which requires the full
use of our economic resources*
It would be relatively simple to restrain private credit
if that were our only objective, or to maintain stability in tae
Government security market if that were our only objective* But
in the current situation, both objectives must be achieved within
.'
the framework of a complete and consistent economic program.
tie must maintain a stable market for the very large
financing operations of the Government. At the same time, we must

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Federal Reserve Bank of St. Louis

TDEHTIAL
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http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CONFIDENTIAL

**» jl «•

monetary policy, and a wide range of direct and indirect controls
over materials, prices and wages. All of these policies are necessaryj each of them must be used in harmony with the rest| none
moat be used in ways that nullify others*
We have been striving in this emergency to develop such «
unified program in the public interest* Much progress has already
been made, both on the production front and on the anti-inflation
front* Many peacetime activities of Government, including the activities of lending and financing agencies, have been pruned down*

Cut~

backs of civilian supplies and allocations of essential materials have
been successfully undertaken. Important expansion programs for basic
materials and productive capacity needed in the defense effort have
been gotten underway* Price and wage controls have been initiated.
Restraints on consumer and real estate credit have been applied*
Large tax increases have been enacted, and additional tax proposals
are now pending. In all these fields farther action is being planned
\
and will be taken as needed.

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Federal Reserve Bank of St. Louis

One outstanding problem which has thus far riot been solved
to our complete satisfaction is that of reconciling the policies
concerning public debt management and private credit control.

Con-

sidering the difficulty of t xfe problem, we should not be discouraged because an ideal solution has not yet been found, fhe
essence of tds problem is to reconcile two important objectives,
neither of whioh can be sacrificed*
On the one hand, we aust maintain stability in the
Governnent security market and confidence in the public eredit of
the United States. This is inportant at all times. It is imperative now* He shall have to refinance the billions of dollars' of
Government securities which will cone due later this year. We
shall have to borrow billions of dollars to finance the defense
effort during the second half of this calendar year, even assuming
the early enactment of large additional taxes, because of the
seasonal nature of tax receipts which concentrate collections in
the first half of the year, and because of the inevitable lag between the imposition of new taxes and their collection by the
Treasury* Such huge financial operations can be carried out

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Federal Reserve Bank of St. Louis

CONFIDENTIAL

-5successfully only if there is full confidence in the public credit
of the United States based upon a stable securities market.
On. the other hand, we mist curb the expansion of private
loans, not only by the banking system but also by financial institutions of all types, which would add to inflationary pressures*
This type of inflationary pressure must be stopped, to the greatesl
extent consistent with the defense effort and the achievement of
its production goals*
The maintenance of stability in the Government securities
market necessarily limits substantially the extent to -which change*
in the interest rate can be used in an attempt to curb private
credit expansion. Because of this fact, much of the discussion of
this problem has centered around the question of which is to be
sacrificed — stability in the Government securities market or control of private credit expansion* I aia firmly convinced that this

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Federal Reserve Bank of St. Louis

CGHFIMMflAL

- 6is an erroneous statement of the problem. We need not sacrifice

.
either.
Changing the interest rate is only one of several methods
to be considered for curbing credit expansion. Through careful
consideration of a Mich wider range of methods, I believe we can
achieve a sound reconciliation in the national interest between
maintaining stability and confidence in public credit operations
and restraining expansion of inflationary private credit*
We have effective agencies for considering this problem
and arriving at a proper solution.
Over the years, a number of important steps have been
taken towards developing effective machinery for consistent and
comprehensive national economic policies. One of the earliest steps
in this century was the establishment of the Federal Reserve Systea
before forId War I. At that time, under far siupler conditions than
those now confronting us, the Federal Eeserve System was regarded as
the laain and central organ for economic stabilisation.

After World

War II, in a much more complex economic situation and a much more complex framework of governmental activities affecting the economy, the

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Federal Reserve Bank of St. Louis

- 7Council of Economic Advisers was established by the Congress under
the Baployneat Act of 1?1*6 to advise the President and help prepare
reports to the Congress concerning how all Major economic policies
ni$it be coi-ibined to promote our economic strength and health* Still
more recently, in the current defense emergency, the Office of Defense
Mobilisation has been established to coordinate and direct operations
in the mobilisation effort* In addition, some of the established departments, euofa as the Treasury Department, have always performed
>
economic functions which go beyond specialized problems and affect
the whole econosy.
Consequently, 1 am requesting the Secretary of the Treasury,
the Chairman of the Federal Reserve Board, the Director of Defense
Mobilisation, and the Chairman of the Council of Economic Advisers
to study ways and means to provide the necessary restraint on private
credit expansion and at the sane tine to make it possible to maintain
stability in the nartot for Government securities, !Mle this study is
underway, I hope that no attempt will be nade to change the interest
rate pattern, so that stability in the government security aarket win
be Maintained*

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Federal Reserve Bank of St. Louis

Anong otlier things, I ask that you consider specifically the

CQHFIBSNTIAL

desirability of laeasures:

(1) to limit private lending through voluntary

actions by private groups, through Governja.mt-sponsored voluntary actions
such as was done in a narrow field by toe Capital Issues Comndttee of
World War I, and through direct Government controls; and (2) to provide
the federal Reserve System with powers to impose additional reserve
requirement a on banks.
Under the first heading, 1 aa sure that you are a*are of the
efforts that are already underway by tne African Bankers Association,
the Investment Bankers Association, and the life insurance association.
I want you to consider the desirability of this or other kinds of private
voluntary action in bringing about restraint on the part of lenders
and borrowers.
I should like you to consider also the establishment of a
eoaadttee similar to the Capital Issues Coasaittee of World War I,
but operating in a broader area. The objectives of such a Ccaaaittee
would be to prevail upon borrowers to reduce their spending and to
curtail their borrowing, and to prevail upon lenders to limit their
lending* the activities of this coiwittee could be correlated with
those of the defense agencies under Mr. Wilson with the objective of
curtailing unnecessary uses of essential materials.

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Federal Reserve Bank of St. Louis

CCHFIDEHTIAL
-9 -

Furthermore, I should like you to consider the necessity
and feasibility of using the powers provided in the Emergency Banking
Act of 1933 to curtail lending by member banks of the Federal Reserve
System. These powers axe vested in the Secretary of the Treasury
subject to my approval. The Secretary could by regulation delegate
the administration of this program to the 12 Federal Reserve Banks,
each to act in its own Federal Reserve District under some flexible
procedure* The program could be extended to institutions other than
member banks, if desired, by using the powers provided bgr the Trading
with the Bnemy Act.
Under the second heading, you will recall the recommendation
I made to the Congress a number of times in recent years to provide
additional authority for the Federal Reserve System to establish
bank reserve requirements. I should like you to consider the desirability of making that or another recommendation with the same general
purpose at the present time*
Tou are all aware of the importance of this problem, and
the need for an early resolution, I should like your study to proceed
as rapidly as possible* I hope you will be able to give me at least
initial recommendations by March 15*. I am asking the Secretary of
the Treasury to arrange for calling this group together at mutually
convenient times*

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Federal Reserve Bank of St. Louis

CONFIDENTIAL

- 10 -

At the same time that we are working to solve this
problem of laaintaining the stability of the Okyvenuaent securities
market and restraining private credit expansion, we shall, of
course, continue vigorously to review Government lending and
loan guarantee operations. Since the middle of last year, we
have taken a series of steps to curtail such operations and limit
the® to amounts needed in this defense period. I am directing
the agencies concerned to report to me by March 15 on the nature
and extent of their current activities, so that these operations
may again be reviewed as part of our over-all anti-inflationary
program.

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Federal Reserve Bank of St. Louis

V.re have "been striving in this emergency to develop such a
unified program in the public interest. Much progress lias already "been
nn.de, both on the production front and on the anti-inflation front. Many
peacetime activities of Government, including the activities of lending
and financing agencies, have "been pruned down. Cutbacks of civilian supplies
and allocations of essential materials have "been successfully undertaken.
Important expansion programs for "basic materials and productive capacity
needed in the defense effort have been gotten underway. Price and wage
controls have been initiated. Restraints on consumer and real estate credit
have been applied. Large tax increases have been enacted., and additional
tax proposals are now pending. In all these fields further action is
being planned and will be taken as needed.
One outstanding problem which has thus far not been solved to
our complete satisfaction is that of reconciling the policies concerning
public debt management and private credit control. Considering the difficulty of this problem, we should not be discouraged because an ideal solution
has not yet been found. The essence of this problem is to reconcile two
important objectives, neither of which can be sacrificed.
On the one hand, we must maintain stability in the Government
security market and confidence in the-public credit of the United States.
This is important at all times. It is imperative now. We shall have to
refinance the billions of dollars of Government securities which will cope
due later this year. Ve shall have to borrow billions of dollars to finance
the defense effort during the second half of this calendar year, even assuming
the early enactment of large additional taxes, because of the seasonal nature
of tax receipts which concentrate collections in the first half of the year,
and because of the inevitable lag between the imposition of new taxes and
their collection by the Treasury. Such huge financial operations can be
carried out successfully only if there is full confidence in the public
credit of the United States based upon a stable securities market.
On the other hand, we must curb the expansion of -private loans,
not only by the banking system but also by financial institutions of all
types, which would add to inflationary pressures. This type of inflationary
pressure must be stopped, to the greatest extent consistent with the defense
effort and the achievement .of its •production goals.
The maintenance of stability in the Government securities market
necessarily limits substantially the extent to which changes in the interest
rate can be used in an attempt to curb private credit expansion. Because
of this fact, much of the discussion of this problem has centered around
the question of which is to be sacrificed'— stability in the Government
securities market or control of private credit expansion. I am firmly
convinced that this is an erroneous statement of the problem. Ve need not
sacrifice either.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

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http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

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_ 4 ~
Furthermore, I should like you to consider the necessity
aid feasibility of using the powers provided in the Emergency Banking
Act of 1933 to curtail lending by member baik^r of the Federal Reserve
System. These powers are vested in the Secretary of the Treasury
subject to my approval The Secretary could by regulation delegate
the administration of this progran to the 12 Federal Reserve Banks,
each to act in its own Federal Reserve District under some flexible
procedure. Ihe program could be extended to institutions other than
member banks, if desired, by using the powers provided by the Trading
with the Enemy Act.
Under the second heading, you will recall the recommendation
I made to the Congress anumber of times in recentyears to provide
additional authority for the Federal Reserve System to establish
baik reserve requirements. I should like you to consider the desirability of making that or another recommendation with the sa»e general
purpose at the present time.
You are all aware of the importance of this problem, an. d the
need for an early resolution. I should like your study bo proceed
as raidly as possible in order that I may receive your recommendations
at a very early date. I am asking the Director of Defense Mobilization
to arrange for calling this group together at mutually convenient
times.
At the same time that we are working to solve this problem
of maintaining the stability of the Government securities market and
restraining private credit expansion, we shall, of course, continue
vigorously to review Government lending and loan guarantee operations.
Since the middle of lastyear, we nave taken aseries of steps to
curtail such operations and limit them to amounts needed in this
defense period. I am directing the agencies concerned to report to me
by March lf> on thenature add extent of their current lending aid loan
guarantee activities, so that these operations m§r again be reviewed
as part of our over-all anti-inflationary program.

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Federal Reserve Bank of St. Louis

February 26, 1951

MEETING IN CABINET ROOM
WHITE HOUSE
lliOO A.M«-12»00 M.

Present -

The President in the Chair
Mr. C. E. Wilson, Director, Office of Defense Mobilization
Mr. Leon Keyserling, Chairman, Council of Economic .Advisers
Mr. John D. Clark, Council of Economic Advisers
Mr. Roy Elan!/ Council of Seonomic Advisers
Mr. Harry McDonald, Chairman, SEC
Mr. Thornss MoCabe, Chairman, FR8
Ifr. Allan Sproul, President, New York Federal Reserve
Mr. Edward foley. Under Secretary of Treasury
Mr. 15a. McC. Martin, Jr., Assistant Secretary of Treasury
Mr. Charles Murphy, white House Staff
Mr. David Bell, mMte House Staff

The President opened the meeting in the most pleasant and conciliatory
manner, and stated that he had been worried with this problem for some time
and wished to get this group together for the purpose of frank and open
discussion of the problems.

He said that the RFC (obviously mis-spoken as

he olesrly intended the CIA) and the Treasury Staff had been working on some
ideas which seemed to him to make a lot of sense and so he wanted to take
the liberty of reading them to the group.
This he did, very clearly and with emphasis on certain points, such as
the importance of the public credit of the United States, which he said
several times was vital to Mr. Alison's work, and so important that unless it
were maintained the Russians would have achieved their purpose completely*
Mr* Wilson nodded agreement*

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Federal Reserve Bank of St. Louis

-2-

After the President finished, he said that he -Minted frank and open
discussion of the ideas in the memorandum.
Mr* McDonald opened the discussion by passing around a memorandum on
the volume of new securities and indicating that Municipal financing in
particular had boomed.

The President thought this very interesting.

Mr. Clark spoke next. He said the President's comments made good sense
to him and recalled historical situations, such as the one calling for the
creation of the Federal Reserve System and the banking Act of 1933. He felt
we mi?ht have a similar type of situation today and the powers required to
meet the current problem should be studied*

He thought the Treasury position

in the matter of interest rates sound and appropriate in the lipht of
mobilization efforts and the Federal Reserve certainly ought not to drive
rates up by selling in the market and should work with the Treasury to keep
confidence in a stable orderly market and that later in the year after tax
receipts which were going to be lar^e wherein more money for investment would
appear and the financing problem would be possible of solution at current
levels.
Mr. Sproul spoke next. He stated there was no disagreement on maintaining the credit of the government. If the Federal Reserve had anything to
reproach itself on to date, it was the dilatory actions it had taken to
restrict bank reserves. The System should have stopped net-buying governments
on the scale it has been doing so long ago*

This, he said, under current

conditions, was monetizing the debt in a way which strained the conscience of
the Open Warket Committee with respect to their responsibilities* He did not
think the actions contemplated by the Coamittee would impair confidence ia

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Federal Reserve Bank of St. Louis

-3-

the markets as most of these securities were marketable and held by experienced
investors who were used to the hazards of the market and expected it. In fact,
he was of the opinion that elimination of existing artificialities and more
dependence on the market itself would generate confidence and improve the
outlook for the refinancing and new money issues which the Treasury would be
faced with later in the year.
Mr. MeCabe spoke next. He started off by stressing the element of time.
He was interested in -the memorandum the President had read from, and he would
be particularly pleased to hare the support of other agencies of the Government
for increased reserve requirements. Up to date, he had never been able to
obtain any support for this. However, he was concerned at the moment with
the necessity for making a decision on operations in the market for which the
Open Market Committee was pressing.
He then spoke of the fine work that had been done by Bill Martin and
Jli.n Riefler in trying to see if there was an area of agreement that could
be worked out.

He thought both Treasury and Federal Reserve were opposed

to monetiEation of debt and they ought to be able to get together ®n a
program.
He stressed the fact that life insurance companies and corporations
and other large non-banking investors had purchased the lonp;-term restricteds
at par and now were in a position to eash them in at a handsome profit to
make good on their commitments, while purchasers of savings bonds could only
oash in their securities at the face price and by sacrificing the interest to
maturity.
He wanted to emphasize to the President the clear purpose of the Open
Market Committee to maintain an orderly and stable market but to depend as

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Federal Reserve Bank of St. Louis

far as possible on the judgment of the market itself. The Federal Peserve had
a statutory responsibility ?;iven to it by Congress , and he felt that they must
act on their judgment in the matter and despite his best efforts, he had been
unable to arrive at an understanding with the Secretary of the Treasury, who
is now in the hospital. He was very sorry the Secretary was in the hospital,
but thought that time was very important and they ought not to be asked to
delay indefinitely, Mr. Foley had called him and suggested that they mir.ht
" delay two weeks which, coming on top of a previous delay of two weeks, meant
roughly thirty days without any action. He urged the President to appreciate
how sincere they were in ckndeavoring to stop inflation and protect the
purchasing power of the dollar but how apprehensive they were about the way
things were developing*
Mr. Foley spoke next* He said he wanted to clarify a point Mr* McC-abe
had made with respect to the Secretary which was perhaps due to a misunderstanding.

•

It was possible the Secretary might be able to engage in negotiations

before two weeks were up but he had expressed to Mr. McCabe, whom he had tried
to get repeatedly over the weekend without success until late Sunday evening,
how anxious he was not to upset the Secretary unduly. On Friday neither he
nor Mr. Martin had been able to see the Secretary as there was some evidence
that a possible hemorrhage might occur in the eye and the Doctors refused to
permit anyone to see him. The constant visits for instructions which he
and Mr. Martin and others in the Treasury had been forced to make during the
past week had unquestionably retarded his recovery and in asking for two weeks
time of Mr. HcCabe, he was merely making an estimate of what he thought would
be desirable without intending to close th® door to negotiations more
immediately,

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Federal Reserve Bank of St. Louis

He then stated the Treasury's fear that lowering the pegs in the longterm restricted issues would unsettle the market, bring an avalanche of
selling, and seriously impair public confidence in the issues.

He said the

debt was very large and that we were very apprehensive of creating any unnecessary danger which would make it difficult to refinance or obtain new
money.

He pointed out that the debt was now |257 million and a panie in the

market would be a catastrophe*
He stated that the conversations which had been conducted at the
technical levels appeared to be making some progress and there was a fine
spirit of cooperation and good will on both sides*

He hoped that these could

be continued and that ultimately they might be brought to a successful understanding which would benefit both the Treasury and the Federal*

He thought

it vital that everything possible be done to maintain stability in the market*
Mr. Keyserling spoke next.

He said he had listened carefully to what

had been said by his colleague Mr. Clark, Hr. Sproul, Mr. McCabe, and
Mr. Foley and without commenting on what had been said, he wanted the President
to know that he didn't think the problem was being faced.

He felt that it

was important to determine whether there was a forum or vehicle by which two
clearly opposing positions could be resolved b> meuif of good will.

He took

that t© be the purpose of this meeting, and he thought it important that a
real effort be made to work out this specific problem.
The President then commented that he thought it was very important to
work it out and was very vital to Mr. Wilson's work, and he was very anxious
to get everybody together — that's why he was asking for this frank discussion*
He was not trying to reach a decision today but hoped this would not work out
the way Wage Stabilization did where a fight had developed with everyone

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Federal Reserve Bank of St. Louis

-6-

resigninf.

He didn't want to take arbitrary action, but he had certain

powers and there came a point when he would have to exercise them*
HP. Wilson spoke up — said he didn't think it was necessary to delay
this matter too long, end he wondered if we couldn't contact the Secretary
of the Treasury about this particular matter promptly*

Mr. Foley inter-

jected that he was sure that could be done, and he hoped that if Mr. Wilson
would undertake to get the ball in motion and ^et the task forces or subcommittees set up, he knew the Secretary would be most appreciative.
There seemed to be general agreement that this would be a good idea
and the meeting broke up a little after twelve with the President asking
that an effort be made to report to him as promptly as possible.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

i» McC. Martin, Jr.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

IMMEDIATE RELEASE

FEBRUARY 26,

Mr. Thomas McCabe, Chairman,' Board of Governors,
Federal Reserve System
Mr. Charles Wilson, Director, Office of Defense
Mobilization
Mr. Edward Foley, Under Secretary of the Treasury
Mr. Charles Murphy, Special Counsel to the President
The Council of Economic Advisers, .Mr. Leon H.
Keyscrling, Chairman; Mr. John D. Clark and
Mr. Roy Blough
Mr. William McChesney Martin, Assistant Secretary
of Treasury
Mr. Allan Sprpul, Vice Chairman, Federal Reserve
Open Market Committee
Mr. Harry A. McDonald,,. Chairman, Securities and
Exchange Commission
The President read the attached memorandum to the group
and there was a general discussion of the subject covered by the
memorandum. The President did not ask any of those present for any
commitments on the subjects under discussion, but expressed the
hope that they would go.ahead speedily i^ith the study requested.
Mr. Wilson expressed the hope that a report could be made
to the President x^ithin ten days or two weeks.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CHARTS
RELATING TO

THE
MILLS PLAN

FOR
CORPORATION TAX PAYMENTS

The Chase National Bank
of the City of New York
November, 1952.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

FEDERAL
BILLION
28

CASH
A.

DOLLARS

1916

1947

INCOME

AMOUNTS
BILLION

1949

1948

PER CENT
I L/\J
•••••••••«

OPERATING

1951

1952

PERCENTAGES

DOLLARS

1953

OESTIMATEDH

PER

/X (QUARTERLY )v;

CENT
100

£££ OTHER vXv~;

CORPORA!

1946

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

1947

1948

1949

I960

TAXES

1951

1952

1953

CESTIMATEDH

OUTGO
BILLION
10

(QUARTERLY)

DOLLARS

CORPORA!

TAX

DOLLARS
10

RECEIPTS
; S'

FEDERAL
NET
OPERATING INCOME

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

BILLION

MATED

OUTGO (

-10

1955

CORPORATE
BILLION
15

PROFITS
BILLION DOLLARS
15

DOLLARS

1946

1947

CORPORATE
BILLION

GROSS

1950

1951

1952

1948

1949

TAX

PAYMENTS AND

1953

CESTIMATEDD

ACCRUALS

DOLLARS

BILLION

DOLLARS

ACCRUALS /

1946

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

1947

1948

1949

1950

1951

1952

1953

CESTIMATEDD

CORPORATION

FEDERAL
ACCRUALS,

BILLION

TAX

PAYMENTS

1951-1955

(QUARTERLY)

DOLLARS

AND
BILLION DOLLARS
10

8
CASH
NEED
N ACCRUALS

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CASH
SOURCE

CASH TAX
PAYMENTS

(ESTIMATED)
3

CORPORATE
TAX
BILLION
60

CASH ASSETS
LIABIL ITIES

DOLLARS

AND
BILLION

DOLLARS

(QUARTERLY)

CASH
AND
U.S. GOVERNMENTS

TAX

LIABILITIES

0 .
1946

1952

1947

COMMERCIAL
B L JON

BANK

LOANS

DOLLARS

1953
MATEDH

BUSINESS
BILLION

DOLLARS
24

0
1946

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

1947

1948

1949

I960

1951

1952

1953

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

INTEREST BEARING PUBLIC MARKETABLE U.S. TREASURY SECURITIES
OUTSTANDING DECEMBER 15, 1952
( Due within 1 year and due within 1-2 years )

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

INTEREST BEARING PUBLIC MARKETABLE U.S. TREASURY SECURITIES
CHANGES IN HOLDINGS OF 1 YEAR DEBT

3.'

TABLE I
Amount of
Maturing Issue
Outstanding
(million)
5,695

Books Open

Maturing Issue

Type

Series

Exchange
Offered
Into

1/1/50

12/19/49

1 1/4 Jan. 1, 1950

C. of I.

1 1/8-1/1/51

Ctf.-A 12 mo.

2/1/50

1/20/50

1 1/4 Feb. 1, 1950

C. of I.

1 lA-10/1/51

Note-A 20 mo.

1,993

3/1/50

2/17/50

1 1/4 Mar. 1, 1950

C. of I.

1 lA-7/1/51

Note-B 16 mo.

2,922

180

4/1/50

3/20/50

1 lA Apr. 1, 1950 C. of I.

1 1/4-7/1/51

Note-C 15 mo.

963

6/1/50

5/22/50

1 lA June 1, 1950

C. of I.

1 lA-7/1/51

Note-D 13 mo.

5,019

201

7/1/50

6/21/50

1 lA July 1, 1950

C. of I.

1 1/4-8/1/51

Note-E 13 mo.

5,601

250

9A5/50

9/5/50

1 1/8 Sept. 15,1950 C. of I.

1 lA-10/15/51 Note-F 13 mo.

1,197

158

Date

•
N

Type
&
Series Maturity

Amount
Not
Exchanged
322

2 1/2 Sept. 15,195O1952

Bond

1,186

281

2 Sept. 15, 1950-52

Bond

it n

4,939

942

10/1/50

9/18/50

1 1/8 Oct. 1, 1950 C. of I.

6/15/51

6/4/51

2 3/4 June 15,19511954

Bond

1 lA-11/1/51

Note-G 13 mo.

6,248

995

1 7/8-4/1/52

Gtf.-A 9 1/2 mo.

1,627

110

•

1 1/4 July 1, 1951

Note

n n

2,741

134

•

1 lA July 1, 1951

Note

n n

386

•

1 lA July 1, 1951

Note

n n

4,218

248

7/8-7/1/52

Ctf.-B

mo.

5,351

135

7/8-8/15/52

Ctf.-C

mo.

755

172

7/8-9/1/52

Ctf.-D

mo.

1,918

1 lA Oct. 15, 1951 Note

7/8-10/1/52

Ctf.-E

1/2 mo.

5,941

1 1/4 Nov. 1, 1951

Note

5,253

265

2 1/4 Dec. 15, 19511953

Bond

3/1/51

7/16/51

1 lA Aug. 1, 1951

Note

9/15/51

9/4/51

3 Sept. 15, 1951-55

Bond

10/1/51

9/12/51

1 lA Oct. 1, 1951

Note

10/15/51

10/1/51

12/15/51

12/3/51

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

1 7/8-12/1/52

n it

Ctf.-F 11 1/2 mo,

1,118

Amount
Not
Excliaiu-ed

Maturing Issue

3/1/52

2/18/52

1 7/8 Apr. 1, 1952

C. of I.

1 7/8-2/15/53 Ctf.-A

11 1/2 mo.

9,524

656

7/1/52

6/16/52

1 7/8 July 1, 1952

C. of I.

1 7/8-6/1/53

11 mo.

5,216

253

8/15/52

8/4/52

1 7/8 Aug. 15, 1952 C. of I.

10/1/52

9/15/52

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

17/8 Sept. 1, 1952 C. of I.
1 7/8 Oct. 1, 1952

C. of I.

C
D

2-8/15/53
""" »

Ctf.-B
Ctf.-C
Ctf.-C

2 1/8-12/1/53 Note-A

Maturity

Amount of
Maturing Issue
Outstanding;

Books Open

Series

TyPe
&
Series

Date

T;ype

Exchange
Offered
Into

12 mo.
" "
H mo.

583

150p

1,832

258p

10,861

318p

Treasury Bulletin
.TREASURY SURVEY OP OWNERSHIP, AUGUST

1952.

The Treasury Surrey of Ownership covers s e c u r i t i e s
Issued by the U n i t e d States G o v e r n m e n t and by Federal

Information on the distribution of ownership by types
of banks and insurance companies Is published each m o n t h .

agenoles. The banks and I n s u r a n c e c o m p a n i e s Included
In the Survey account for approximately 95 p e r c e n t of
such securities held by all banks and Insurance companies
In the U n i t e d S t a t e s . Data were f i r s t published for
March 31, 1941, In the May 19^1 "Treasury B u l l e t i n " .

Additional Information showing the holdings of commercial
banks distributed according to Federal Reserve member bank classes and nonmember banks is published for June 30
and December 3!.

Section I.- Securities Issued or Guaranteed by the United State* Government
Table 1.- Summary of All Securities
(Par raluee - la aJ 11 loos of dollar*)
Held by IV 'eetors covered In Treasury 8v irrej
Total
Classification

outstand108

Interest-bearing securities:
Public narks t*bls. .

1VU.186
78 605
38,307
261,098

Total interact -bearing securities
Matured debt and debt bearing no Interest £/

2,127

Total eecurltlea laaued or guaranteed by the
U. S. 'VnT«ma»nt ^/. . , , . , , , , . ,

263 225

7 11^

cne»»rrlal
banks i/ 2/

526
mutual
earing*
banka I/

Insurance coBpenlea
317
life

U. 3. GOTSI iiasnt

606 fire,
casualty,
and Marine

5*,380
2,21k

7,6*2
2,073

6,517
3,7*

MW
1,009

56,59*

9,715

10,301

5,180

aoeounta and
Federal Reeerre
Beaka

Held b7
all other
Inreatore
37

k5,900
65,2*5

25,577
k,280
38,307
68,16k

111,1**

Footnotea at end of Section H.

Table 2.- Summary of Interest-Bearing Public Marketable Securities
(Par ralnea - In mllllona of dollars j

laid by Inn reatora coTerec . in Treasury Scnrrey
isannnt
outatandlag

Type of security:
Jsiiued by 0. S. OorenaMOt:
T*»««nry not*» . , , , i j . . , , . . . .
TrBaaury bond* - bank eligible
Poatal earlnga and Pamaa Canal bonds....
Guaranteed by U. S. Ooremwot 6/
Total
Call elaaaee;
bue or first becoming callable:
Within 1 year
1 to 5 years
10 to 15 years
15 to 20 years
Tarlooa (Federal Homing Administration
debentures )
Tot^l
Tax status:

7 113

ccemerclaj.
banks I/ Zj

526
Mutual
aarlnga
banka I/

Inaurano«I companies

317
life

606 fire,
casualty,
and marine

0. 3. OOTJI lasint
Inreataent
accounts and
Federal Beaerre
Banks

all other
lore store

*93
97
3
1,00k
k,912
•
9

91
377
332
1,925
1,**3
1
e

*75
11,969
5,569
3,308
k,227
27
•

U,351
9,151
2,6*0
11,625
11,030
91
11

5*,380

7k
90
39
2,338
5,092
e
9
7,6k2

6,517

*,171

25,577

*5,900

70,519
29,kJ»6
17,566
20,0k9
6,568
.

27,556
18,313
5,8*0
287
2,375

kkk
135
2,35*
*,525
175

6*0
120
1,162
*,505
8l
-

1,121
581
1,338
1,008
123
-

Ik, 200

26,558
*,223
5,171
6,*96
3,**1
-

38
Ikk,l86

8
5»,380

9
7,6*2

9
6,517

*,171

25, 577

13k
7,kO2
136,6*9
lW.,lfi6

Ik
6,208
k8,158
5*. 380

17
7,625
7,6*2

•
*
6,5X3
6,517

1
238
3,931
*,171

27
85
25,*6k

17,206
28,019
18, 97k

52,kk5
27,369
13*
38
Ikk,l86

U,722

6,335
10,390
32,2k5
66k
Ik
8

6,073
1,702
3,228
373
-

11
*5,900

Partially • leapt fro* Federal Inoraai taxes . . .
Subject to Federal Inccaw taxes 'jj
Total

Frxytn/jtes at ond of Section II.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

25,577

91
850
**,958
*5,900

Xnvmfvr

39
.TREASURY SURVEY OF OWNERSHIP, AUGUST 31, 1952,

Section I - Securities Issued or Guaranteed by the United States Government
Table 3.- Interest-BearIOK Public Marketable Securities by Issues
(I'ar values - In allilone of dollars)
Held by lures tore covered In Treasury Surrey
Issue
(Tax

7,113

commercial
banks \J 2/

statue 8/ la shown In parentheses)

Treasury bill*

(taxable)

17,206

Certificates of I
1-7/8)1 September 1952-D..
1-7/8 October
1952-1
1-7/8 December 19%' -F

(taxable)
(taxable)
(taxable)

262
10,861
1,063

173
1,163
509

(taxable)
(taxable)
(taxable)

8,868
*,963
3,003

1-7/8
1-7/8
2

February
June
August

1953-A
1953-B
1953-C

Total Certificates of Indebtedness

526
mutual
sarlnes
ring
bankn I/

Insurance c
317
life

Held by
all other
lores tor*

•93

1*75

U,351

3
65
18

2
6,810
5

7*
2,756
526

115
126
51

3,757
1,210

2,979
1,820
996

377

11,969

9,151

1*3

8*2
8U5
9*0

V3
5

21*

1,987
1,737
767

19
11*

••

?8,019

6,335

606 fire,
casualty,
and marine

U. S. GOT.
nt
Inrestment
accounts and
Federal Retterre
Bank*

u
1
•-

Treasury notes:
1-3/8* March
1-1/2 March
1-3 A December

19^-A
1955-A
1955-B

(taxable)
(taxable)
(taxable)

U, 675
5,365
6,851*

2,578

1-1/2
1-1/2
1-1/2

1956-EA
1956-BO
1957-EA

(taxabloj
(taxable)
(taxable)

1,007
550
523

7
UO
17

April
October
April

1,000
500
500

332

Total Treasury notes
Treasury bonds:
Bank eligible:
2%
September 1951-53
2
December 1951-55
2
June
1952-51*

(taxable)
(taxable)
(taxable)

7,986
510
5,8?5

3,925

207
15

'
•

2-lA
2
2

June
December
June

1952-55
1952-5^
1953-55

(taxable)
(taxable)
(partially)

1,501
8,662
725

,
6,020
679

2-lA
2-7/B
2-1/2

June
March
March

195»-56
195'5-6o
1956-58

(partlaUy)
(partially)
(taxable)

681
2,611
1,1*1*9

5-?2
1,876
1,163

2-lA
2-3A
2-3/B

September 1956-59
September 19'.X>-59
March
1457-59

(taxable)
(partially)
(taxable)

3.8B2
932

2,919
908

2-3/8
2-3 A
^-lA

June
June
Juno

1958
1958-63
1959-62

(taxable)
(partially)
(taxable)

l»,2*5
919
5,281

2,1*50
835

2-3A
2-1/2
2-1/2

ixscember 1960-05
June
19^2-67
Septoaber 19ti7-T«-'

(Partially)
(taxable)
(taxable)

I, 1 - '.
2,llfi
2,716

1,31,

(96
. ,1ft

'••
1

212

1*0
79
32

3
33

29
1
27

106

3,i»68
2,829
3,758

18ft
31*
35

861

2,*59
139

1.62

298

31*0'

80
•

5
339

6*7
36
88

103
1
582

1,007
1*0
2,01*7

375

390
28

3
373
6

36
132
1U

120
1*66
355

3,308

11,625

326
277
176

75*

1,**6
33
1,0*82

1.U3
1.3U
860

2-1/2
:'-l/2
2-1/2

December
March
March

19614-69
1965-7"
1966-71

(taxable)
(taxable)
(taxable)

3,835
"»,752
2,976

31
57

907
853
1*20

1,01.3
1,209
877

2O2
181
123

538
1,1*1

2-1/2
2-1/L1

June
December

1967-72
1967-72

(taxable)
(taxable)

1,899
•.-.

81*
189

257
1*6

48
110

123
2.6

btA

Total bank restricted
Total Treasury bonds

Footnotes at end of Section II.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

79,

32,910

5,916

(Continued on following page;

3,368

1 3
» 22
3,086^

n,o3Q

1,W.3

7,1*30

*3
57»
188

7
26*
39
539

1,332

220
1,939
30

U
1,191

*21

78
22

1,220

1,925

(taxable)
(taxable)
(taxable)

2,6X0

15
1

Total bank eligible
Bank restricted: £/
2-1/1** December 1959-62
2-1/2 Decoder 1963-68
2-1/2 June
196U-69

•
K

5,569

7,53b

2C.655

Treasury Bulletin

1*0
.TREASURY SURVEY OF OWHERSHIP, AUGUST 31, 1952,

Section I - Securities Issued or Guaranteed by the United States Government
Table 3.- Interest-BearIng Public Marketable Securities by Issues - (Continued)
(Par values - In millions of dollar*)
Held by 1m eetora covered in Treasury Su rr«ar
Total

Issue
(Tax status 8/ la shown In parentheses)

Other bonds:

outatand-

toj

banka i/ 2/

Guaranteed securltlea: 6/
federal Housing Administration debentures
( taxable iO/ )

"&6
mutual
tarings
banka I/

7,113

Insurance companies
606 fire,
casualty,
and marine

317
life

u. s. f i i i n i i B M i i i i
Inreataent
account a and
Federal Reaerre
Banka

Held by
all other
Investors
i/

50
13k

9
6
Ik

»
*

•
•

•
1

27
•

1*6
*3

•

Ikk,l86

5M80

7,6k2

*,171

25,577

*5,900

6,517

Footnotea at end of Section II.

Table 4.- Interest-Bearing Public Nonniarketable Securities by Issues
(Par values - in milllone of dollare)
Held bj investors covered in Treasury Surrey
Issue
(Tax status 8/ la ahown In parentheses)

Total
amount
outstanding

7,113
commercial
banks i/ 2/

526
mutual
savings
banks I/

Insurance companies
317
life

606 fire,
casualty,
and marine

U. S. Gorernmant
Investment
accounts and
Federal Reserve
Banka

Held by
all other
Investors

'Jblted States sarlngs bonds:
3^,926
3,838
18,687
93
Series K.T.

(taxable)

8
165

57,753

kkl
925
2
1

1,375

Other U. S. securities:
6,330

385
Treasury bonds:
Inree totant Sor 1 en A
Inreataent Series B

( taxabl « )
(taxable)

Guaranteed securities: 6J
Coanodlty Credit Corporation demand
obllgatlona
( taxable)

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

II.

38
277

83
U5k

1
1
19

3*. 925
3,253
l6,kkk

1
2

•

93
37
151

590

318

5^6

5>»,90k

•
•

6,187

13,186

189
193

123
1,360

301
3,165

37
363

100
M52

20S
3,952

20,852

839 li/

l,^

3.U66

k63

k,259

10,3*1

2,073

3,7»

k,280

65,2k5

951

*
78,605

Footnotes at end of Section

72
385 li/

17
568

2§y

12/
2,21k ^/

1,009

TABLE II

INTEREST BEARING
PUBLIC MARKETABLE U. S. TREASURY SECURITIES
OUTSTANDING DEC. 15, 1952

(million dollars)
Due within 1 year
Bills
Certificates & Notes
1 7/8-A - Feb. 15, 1953
1 7/8-B - June 1, 1953
2
-C - Aug. 15, 1953
2 1/8-A - Dec. 1, 1953 N
Total C. of I.'s & Notes
Treasury Bonds
2'3 - 9-15-53
Total Bonds

$21,712
$ 3,868
4,963
( 3,071e)
10.542
27,444
7,986
7.986

TOTAL MARKETABLE OBLIGATIONS ACTUALLY
DUE WITHIN 1 YEAR
Due in 1 .- 2 years
Notes
1 3/8 - 3-15-54
Total Notes
Treasury Bonds
2's - 6-15-54/52
2's - 12-15-54/52
Total Bonds

$ 4,675
4,675
5,825
8.662
14.487

TOTAL MARKETABLE OBLIGATIONS DUB IN 1 - 2 YEARS

$19.162

Additional - Callable Within 2 years
Bonds
2 1/4 - 6-15-55/52
2
- 12-15-55/52
2
- 6-15-55/53*
2 1/4 - 6-15-56/54*
Total Bonds

$ 1,501
510
725
681
I 3.417

Due or Callable after 2 years to 5 years
Notes
1 1/2 - 3-15-55
1 3/4 - 12-15-55
1 1/2 - 4/1/56
1 1/2 - 10/1/56
1 1/2 - 4/1/57
1 1/2 - 10/1/57
Total Notes

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Federal Reserve Bank of St. Louis

$ 5,365
6,854
1,007
550
531
722
$15,029

Bonds
2 7/8 - 3-15-60/55*
2 1/2 - 3-15-58/56
2 1/4 - 9-15-59/56
2 3/4 - 9-15-59/56*
2 3/8 - 3-15-59/57
Total Bonds

* 2,611
1,U9
3,822
982
927

TOTAL DUE OR CALLABLE AFTER 2 YEARS TO 5 YEARS

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Federal Reserve Bank of St. Louis

$ 9,791
$24,820

STRUCTURE OF U- S. PUBLIC NON-MARKETABLE DEBIT*

Total Redeemable at Option of Holder
Total Convertible into Five Year Notes
Total Non-Marketable Public Debt
Maturity
Schedule
As of 1~1~£3

$6$ Billion
13 Billion
$78 Billion
Maturity
Schedule
Over Ten Years
$15 Billion
(With $13 Billion
Convertible into
Five Year Notes)

Over Five
Years
$38 Billion
Five to Ten Years
$22 Billion

One to Five Years
$30 Billion
?athin Five
Years
Billion

Within Ona Year
$7 Billion
Matured and Extended
$li Billion (Estimated)
$78 Billion
Prepared by National Ci
Bank of Cleveland H»18

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Federal Reserve Bank of St. Louis

Maturity schedule based
on final due date«

• STRUCTURE OF U. S. PUBLIC NON-MARKETABLE DEBT*

1-1-53
(Millions)
Over 10 Years
Series F Bonds
I 158
Series J Bonds
53
Series G Bonds
772
Series K Bonds
195
Investment Series A 196? Bonds
'951
Investment Series B 1980«75 Bonds 13,182

Matu

$15,311
Ifetturing 5
Series
Series
Series
Series

to 10 Years
E Bonds
H Bonds
F Bonds
G Bonds

$H,li52
'116

$22,201

1 to 5 Years
Series E Bonds
Series F Bonds
Series G Bonds
Series A Savings Notes
Series D Savings Notes

1*997
7^761

82
529,851*

Matu
Within 1 Year
series E Bonds
Series F Bonds
Series G Bonds
Series D Savings Notes
Series A Savings Notes
Depositary Bonds

189
9U6
511
0
390
$ 7,077

Ifeitured and Extended

$ 3,878

Total Non-Marketable Debt:

$78S321

Prepared by National City
Bank of Cleveland H-l8-£2

* Maturity schedule based
on final due date*

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Federal Reserve Bank of St. Louis

STRUCTURE OP U. S-> PUBLIC MARKETABLE DEBT*

Maturity
Schedule
~7 t

As of
12-31~U6

Maturity
Schedule

3&%

Over Ten
Years
$6U Billion

23%

Five to Ten
Years
$U2 Billion

10$

One to FivB
Years
$17 Billion

Over Five
Years
$106 Billion

$9*

\
/
1S,

With:In Five
Years

$71 Billion
10*

31*

Vfithin One
Year
$£ii Billion

\/
$177 BiUion
Prepared \sy National City
Bank of Cleveland 11~18~52

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Federal Reserve Bank of St. Louis

* Maturity schedule based
on final due date.

STRUCTURE OF U. S. PUBLIC

Note: Projection of the marketable debt structure as of l-lrSii is made on the assumption
that maturities would be refunded with securities due before 1-~1-£S>«
Maturity Schedule

Over Ten
Years
$31 Billion

As of
1-1-53

As of

Maturity Schedule
>V

21t%

Over Five
Years

Over Ten
Years
$30 Billion

20%

Five to
Ten Years
$18 Billion

12%

One to
Five Years
$21; Billion

8U8![illion

Billion
36%

Five to
Ten Years
$23 Billion

32%

One to
Five Years
$38 Billion

2%%

Within
Five Years

Uhdesp Five
Year?3

$9$ Billion

$101 Binion

Within
One Year
$£7 Billion

Within
One Year
$?? Binion

39%

$1U9 Billion
Prepared by National City
Bank of Cleveland 11-18-52

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Federal Reserve Bank of St. Louis

100^

_^f
$1U9 Billion

Maturity schedule based
on final due date*

100£

August 3,
WVR-ET

DRAFT

"My dear Mr. President:
It is now five full months since the Treasury and Federal Reserve
reached an accord, a sufficient interval to judge the action with some
perspective. I was intimately involved from the Treasury side in the preliminary discussions that led to the accord, and have tried in my present
position at the Federal Reserve to operate faithfully under it. I am
moved, accordingly, to make this report to you.
The real meaning of the accord lay in its spirit. It did not
attempt to prejudge the future or to settle by argument and debate the
relative merits of the issues that were then dividing the two institutions.
Rather, both agreed to work conscientiously together to meet constructively
the pressing problems that were before us. The country was in the throes
of an active inflation at a time when the fiscal problems that faced the
Government in refunding and new money financing were stupendous. Neither
of us wanted to see further nionetization of the debt. We knew that meant
more inflation. Both were concerned to assure the efficient financing of
the Government.

In the true spirit of the accord, we have worked together

to assure the success of the Treasury financing program with a minimum
monetization of the debt.
Looking back over the five months, I think it is fair to say
that the economy has been in equilibrium at a high level of activity.
During this period it has accommodated a large transfer of resources from
civilian to defense production without further inflation. During this

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Federal Reserve Bank of St. Louis

-2-

period also savings have begun once more to accumulate in savings institutions. The Treasury has financed successfully two major maturities,
and confidence has returned to the market for Government securities,
I realize that there are sharp differences of opinion among
your advisers with respect to how much the accord has contributed to
this happy result. Without pressing my own view as to its importance,
I think that most fair-minded people would agree on two propositions:
(1) That we would not have experienced this period of equilibrium without
the accord, and (2) that this interval in the inflationary spiral has
given the Government its first real chance to organize itself to meet
effectively the economic problems arising out of the defense program.
Respectfully yours,

Wm. McC. Martin, Jr.,
Chairman.

The president,
The White House.

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Federal Reserve Bank of St. Louis

AGENDA FOR MEETING OF GOVERNMENTAL SECURITIES COMMITTEE

Morning Session
I

Forecast of Receipts and Expenditures
Estimate of New Money Requirements t

AvaUabUity of Funds

III Debt Structure
Long Term Financing
IV

Savings Bonds

Afternoon Session
Market Techniques^*.'
,L^_ • m

Treasury Refundings
III Mills Plan

November 21, 1952.

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Federal Reserve Bank of St. Louis

Full text of William McChesney Martin, Jr., Papers : Federal Reserve Board - Treasury Department Accord : 1951, Box 19, Folder 2

FRASER