Full text of William McChesney Martin, Jr., Papers : Report on Credit and Debt Emergency : 1951 January, Box 15, Folder 5

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William McChesney Martin, Jr., Papers

Series IV, Subseries A

Box 15/Folder 5

Rep. on Credit & Debt Emergency, 1951


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CB

STRICTLY CONFIDENTIAL
j-

TOBKIHG

DOCUHEHT OB TREASURY POSITION IS CTJRBEBT

The responsibility for the sound conduct of the nation's finances is a
very grave one. Since the earliest days of our history, this responsibility
teas been placed with the Secretary of the Treasury. But the problems involved are not the problems of the Treasury alone. 1%ey are not the problems
of the Congress alone. They are the problems of every citizen of the Hat ion.
Here is the situation with which we are now confronted.

We have today

a public debt amounting to over $550 billion. Mot long ago we were worrying
about a debt which might reach $50 billion. We did not knov how the country
would be able to stand such a debt. We did not know how it would affect
the solvency of the Government. We did not know how it could be managed
without disrupting the financial life of the Kation,
But our public debt today is more than five times that figure. It is
the most important single factor in our financial structure. It represents
•me-half of all the debt obligations in the country. Mortgages, State and
liciptil securities, corporate bonds, other private obligations — all of
them added together only equal the SUB total of the present debt of the
Government•
insurance companies now own over $13 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. Wonfinancial
corporations own $20 billion, or nearly 15 percent of their current assets.
Individuals own $6? billion of Federal securities of all kinds -• representing
approximately one-third of their total liquid assets of more than $500 billion.
Commercial banks hold more than $6l billion — representing approximately

<

one-half of their earning assets.


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Before World War II, the situation urns entirely different. Financial
institutions and business concerns bad much wore of their Invested funds in
private obligations. Only a very small proportion of our individual citizens
vera owners of the securities of their Government.
As a result of World Ito II financing, the public debt became the predominant factor in the financial life of the Nation. The size, the Import-mce,
and the vide distribution of the dabt are nev facts to all of us. fhey create
nev problems. Utey place tremendous nev responsibilities on the Secretary of
the Treasury vho is charged by lav vith the sound management of the nation's
finances. And wader present conditions of International crisis and rising
inflationary pressures, both the problems and the responsibilities are enor~
mouoly Increased*
Throughout the postwar period, the public debt remained the single meat
Important influence Is the financial life of the Hation. But It has not bean
a disruptive factor, The problems Involved In managing a public debt of over
$350 billion are unprecedented, (But they have been successfully solved.^
/
Baring the postwar period, the debt has bean managed in such a way as to eaa*
the problems of reconversion mad promote our return to peacetime business at
the highest level of production and employment in history.
low urns this accomplished? It vas accomplished by means of maintaining
stability in the market for Federal Government securities and by spreading
the debt as videly ma possible among the people of the Nation — at the same
time that bank holdings of Federal securities vere being reduced.
The Treasury has bean aminently successful in achieving these objectives.
There has bean no more dynamic period in our entire Industrie! history than
the past five years. There has been no similar parted in vhich such a large
volume of long-range programs for increasing productive capacity and for

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- 3*
modernizing existing plant and operations ware put into effect. Stability
in tile financial markets was essential to these programs. Bat the maintenance
of stability did not require absolute inflexibility in interest rates. As
the economy Itself began to function smoothly at a new high level of activity
and trade, wore flexibility in the Treasury debt management program was
achieved by allowing short-ten interest rates to increase gradually. Mora*
over, there have been times daring the postwar period when keeping the market
stable has meant strong actions to keep prices from going too high, ffee
Federal Reserve System has lad to sell Government securities and the Treasury
has sold Issues held by the trust accounts to keep prices down. Federal
securities were in great demand, fhey ware considered very attractive, With
the outbreak of the crisis IB Korea, however, the considerations calling for
a high degree of stability in the Government security market once more beenm*
all important.
Likewise, the Treasury achieved great success in its program for increasing the proportion of federal securities in the hand* of nonbank investors and
reducing bank holdings of Government obligations. In the last half of 1950,
tho holdings of nonbank owners reached a new postwar peak, while bank holdings,
correspondingly, fell to a new lev for the postwar period. fteis shift in owner*
ship 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.
Tho Treasury's success in achieving these important objectives of debt
management — a stable and orderly market situation, a wide distribution of
securities among nonbank owners -* could not have been realised if our people
had not had full confidence in the ability of the Government to manage the
debt without disturbance to the economy. It could not have boon realised if
the citizens of the Hatlon had not had full confidence In Government securities. But they did have confidence — a confidence based on performance.

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Today, with the enormously Increased financial requirements of the defense
program before us, it is more important than erer before that people told on
to the Government securities which they now own. It is more important than
erer Before that they add to these holdings as their funds permit them to do
so.

One of the obvious things that has to be done if we want people to hold
on to an investment already mads is to stabilise the price. Pur ing the
present emergency, we must eliminate the fear that the owner or prospective
buyer of an obligation of the Government Is going to be penallied immediately
by having the market price of his investment drop, nobody who has any
choice wants to hold on to a commodity that is going down — that is being
priced lower all the time, (it doesnH take a financial expert to figure
that out.) It Is part of ordinary, everyday experience.
Lot us make no mistake about it — forcing up the interest rates on
Federal Government securities means forcing down the price. It means
siloing off a part of the investment which every owner of a marketable
security has made in the obligations of the Government. It mtsni that
owners offlsmonflobligations, such as savings bonds, may decide it is
prudent to cash in their bonds — to get their money out. There is little
inducement to hold a fixed inoomt obligation, such as savings bonds, when
the owners of other Government securities are getting increasingly higher
•
MM^taMM|^^

rVVHTUV »

Let me emsfeasite that word — increasingly. It la the trend that matters.
A given interest rate is unattractive — It will cause investors to shy away —
if the price trend of the market is down. The same rate can appear attractive
if Investors believe that next week, or next month, it won't be very different.

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A bond »ar!cet that is undergoing a major decline — that is being subjected
to rumors and forecasts of further declines — cannot be a confident market.
There will be many sellers. There will be a lot of people on the side lines.
But who will want to buy!
Let me repeat again — nobody wants a commodity that is going down
in price. It is imperative that we keep the securities of the Federal
Government attractire to owners and purchasers. It is imperative, therefore, that we keep the prices of these securities stable. We 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. With a Federal debt of
over $250 billion, interwoven throughout the financial fabric of the Nation,
there is no period when we can afford to raise doubts as to the wisdom or
prudence of an investment in Federal Government securities. tinder present
circumstances, however, when the money must be forthcoming for a greatly
enlarged defense program, the considerations calling for a stable and confident
situation throughout the whole broad structure 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 which may be made upon the
Government. We know only that they will be very large. The Congress ISM
already acted to Increase the revenues of the Government. Further measures
for a greatly enlarged revenue program are now being deliberated. But our
military spending is already rising at a rate which will result in a budget
deficit of several billion dollars by the last quarter of this fiscal year.

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- 6to the extent that additional revenue is not at hand to cover all of the
Governmentfe needs, we shall hare to borrow. We shall hare to Increase our
already large public debt.
Under any circumstances which ve can foresee, there appears to be no

•

possibility for some time to coee of reducing the outstanding debt of the
Government. This Beans that maturing obligations which come due must be
refunded. Every holder of a maturing issue — like every holder of a demand
obligation, such as savings bonds — may, of course, obtain cash for his
securities if he so desires. But the money to pay him will, in turn, have
to be borrowed from someone else. During the reminder of this calendar
year, for example, over 00 billion of marketable securities alone oust be
refunded. This in itself is a tremendous financing operation. It is as
ouch as all the private refunding in this country in the past 25 years.
The Government needs every dollar of nonbank money represented by these
securities. It needs a full 100 percent reinvestment, and where possible,
more than 100 percent. But this it cannot achieve without full confidence
of the holders of the maturing obligations and of investors generally in the
desirability and the wisdom of continuing their investment in securities
of the Government•
These are considerations of such weight that they cannot be overemphasised*
Questions and doubts as to the wisdom of investing in securities of the
Government would lead to conditions of financial chaos. If these questions
and doubts persisted to the point where important numbers of Federal security
owners attempted to liquidate their holdings, Irreparable hare would be done
to the entire financial structure of the Hation.


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- 7*
The course which the Federal Beserve has been purmuing during the
present period of international crisis involves precisely this risk. The
Federal 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 cheek credit expansion by reducing
incentives to sell Federal securities and by increasing incentives to hold
on to them or to buy new ones. This the Federal Keserve means to accomplish
by the price and interest rate route. It has pulled down prices — and
told the market that prices will go still lower. It has thereby raised
interest rates — and given notice that the rates will go still higher.
First and foremost, this program is dangerous because it takes the 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 have already been discussed.
It would very shortly involve a mass refunding of all Federal Government
securities, nonmarketable as well as marketable, on the basis of higher rates.
As already noted, refundings now come to about $50 billion a year. The
Federal Reserve action has already started a chain of events which could well
n

. result in a $250 billion refunding. So Federal securities would be exempt,
not even those held by the trust funds, since a large part of these require
an interest rate tied by law to the average interest rate on the public debt.
A mass refunding would drive many Federal security holders out of the
market for good. Others would stay on the side lines for an indefinite period.
The confusion and chaos which this would cause seem unthinkable to us now, after
many years of placid and orderly conditions in the Federal security market


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- 8as a consequence of successful debt management. But complete disruption of
the debt structure, with all that would entail, la not by any means beyond the
realm of possibility. It can happen. The failure of the two Important
refundings of the Government since last June, as a result of the federal
Reserve actions, shows that it might, in fact, happen very swiftly*
The experience of other nations shows us that no one can predict exactly
what final occurrence — possibly snail in itself — will start a full-scale
retreat from Government securities when conditions of uncertainty and confusion
hare been prolonged for some time. A flight from Government securities — which
would bring with it a flight from the currency of the country — would, of course,
cause a rampant inflation of a type never before experienced In this country.
Why should we take such a risk; why should we even consider actions which
might impair the credit of the Government of the United States? Iven if the
expansion of bank credit could be completely stopped by this method, it still does
not seem rational or reasonable to use this weapon, in view of the risks which it
involves. Ve know that it Is possible to maintain the Government bond market at
a level permitting new Issues to be offered at ao change in interest rates.
"Support" operations are not needed when investors are fully confident of a stable
market situation. Why, then, should we use a weapon which lovers the price of the
outstanding securities of the Government, seriously unsettles the Government bond
market, and raises doubts which, if not quieted, could impair the Government credit?
The great risks involved are thus the first consideration which must be
weighed in Judging the appropriateness of the federal Reserve policy. But it
Is important to note, in the second place, that even if bank credit expansion
were completely restricted, the battle against inflation would not necessarily
have been von In whole or in part. The present inflation is not fed only
by bank credit expansion — by an increasing volume of demand deposits.
Curing the years since the end of World War II, there have, at times, been

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advances in prices when there has been no expansion in bank credit and

- 9currency holdings; in other words, when there has been no expansion in the
money supply of the country,

^here have been other r»eriods when the T>rice

level stood still or declined, although the money supply was expanding*
Why then should we use changes in the interest rate at all to combat
inflation?
The stock answer to this question is that, in times of inflationary
pressures, we aast use all of the weapons at our disposal.

Such an answer

cannot be called anything but irresponsible, however, when it is used to
Justify measures which have the distinct possibility of doing more harm than
good.
But now let us coae to the possibilities for good.

Surprisingly enough,

in view of the vehemence with which the federal Reserve has clung to it*
position, we find that these possibilities shrink to the vanishing x>int under
the cold light of facts.

It has not been proved that a higher price for

credit is an effective measure In restraining bank loan expansion and in
fighting Inflation.

The evidence, on the contrary, is all on the other side.

The record of recent aoaths clearly show* that the Federal Reserve
policy, iacleroented by aeans of higher interest rates, hat had no perceptible
effect on credit expansion,

fatal loans of all coaunercial banks expanded

nearly $S billion in the last six months of 1950 — an increase of a Magnitude
which has never been equalled In this country.

w« have had other — and more

extreme — exaasles of atteaots to control bank credit expansion by interest
rate increases in the mst history of our country.

In the 1919-1920 infla-

tionary period, rates on short-term treasury issues were run up sharply un^il
they reached nearly 6 percent; and the rate on cnll-aoney went as high as
30 percent.


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In 192$, rates on short-tera Treasury issues were run up to

- 10 -

above 5 T>ereent; and the call-money rate went to 20 percent. Yet, bank credit
expansion vat not effectively checked until we had the market crashes with
which all of us are familiar.
It is perfectly clear to all of us, when we stop to think about it,
that higher Interest rates in a dynamic oeriod such as the oresent actually
nay result in spurring on the banks to make more loans. Higher rates on
Governments mean that private lenders can boost the rates which they charge
their customers, fhey can aake more money, fhis is the best possible
incentive to making more loans, at a time when there is no lack of borrowers

/ seeking funds.

And this has "been the situation since last June. Bvery businessman
knows that controls are about to become tighter, that many essential materials
for nondefentse products are about to dry uo, that tslant expansion may soon be
greatly restricted.

A Juan in the orice of credit, under these circumstances,

will not deter many borrowers.

In particular, it will not deter those who

need credit the least — the inventory hoarders, the speculators, the producers of soon-to-be-scarce consumer goods, fhey will try to borrow anyhow —
aad the leaders will get a windfall nrofit.
Whether Federal Beserve txjllcy has actually stimulated private borrowing
during the period since Korea,or whether it has merely coincided with a
credit expansion brought about by other forces, can never be decisively
determined. But there is one result of Federal Reserve actions which can be
fully demonstrated, that is the effect which these actions have had on the
stability of the Government security market and on confidence in the credit
of the United States. The Government security market has been seriously

4

unsettied; and the resulting fear has restrained investors from purchasing


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- uor holding on to Government obligations. The actions of the Federal Beserve
also bare brought about two failures in Treasury refunding operations —
an occurrence of such great significance that it warrants a full discussion
later in this statement. Finally, the confusion and fear vith 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 "sophisticated1* investors.
f\ These are the controlling factors in the opposition of the Treasury to
increases in interest rates on Government securities.
There is, however, another sure effect of the federal Beserve actions
in raising Interest rates which cannot be ignored. That is the Increase in
Government expenditures which will be required if the Government is forced
to pay higher interest rates on new issues of Government securities. The
Treasury is often quoted as being only concerned with this one aspect of
increased interest rates. That, of course, is not the ease* Invertheless,
it is the Treasury's responsibility to rsniassinfl fiscal policy which will
use the taxpayers1 money wisely. There is never any defense for needless
increases in taxes. 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.
It is helpful in understanding the effects of the federal Reserve
actions in raising interest rates on Government securities to review the
specific occurrences in the Government security market since the invasion of
the Republic of Korea. Let us take up that record now.


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Immediately following the outbreak of hostilities in Korea, the
Secretary of the Treasury took the position that our first line of defense on
the financial front was a stable and confident situation In the aarket for
United States Government securities. The considerations which lea him to
this view are evident. From that time forward, our defense needs were
paramount. They would have to fee financed. We should have to live with
our large public debt for a long time. We might have to Increase It.
Confidence In federal securities had to se maintained. Stability vas now not
,
only desirable; It was vital to a successful defense financing program.
Om Monday, June 26, Secretary Snyder requested the Fiscal Assistant
Secretary of the Treasury to coavey to the Open Market Committee of the
Fsderal Reserve System the feeling of the Secretary that "everything possible
should he done to aaintaln a basically strong position In the Governseat bond
during the jprsseat period of International disturbance.
Dm July l?f Secretary Sogrder wrote at some length to Chairman McCs.be of
the Board of Governors of the Federal leserve System, restating his feeling
that stability in the Government bond market was of paramount importance
because of the disturbed International situation and explaining the reasons
in some detail. In this letter, he also stated that It was Imperative that
every financing operation of the Government be carried through so a successful
conclusion.
Om many occasions since then — both publicly and privately and direct 3jr
to ehalrman McCabe and other officials of the Federal Reserve System —
Secretary Snyder restated his conviction that stability in the Government
security market is required.


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- 13 -

Officials of the Federal Reserve System have not agreed 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 vith 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 President 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 — acted
in a manner which unsettled the Government security market. Despite the
requests of the Secretary of the Treasury for a program which 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 long-term bonds. In the period from
June 27 through August IS, the System sold $1.1 billion of long bonds in
36 trading days. The market reaction to this operation was a rising tide of
doubt and questioning as to whether the 2*1/2 percent rate on long-term
issues was going to be continued.
The decision of the Secretary of the Treasury to maintain the 1-1/fc percent rate on the two issues of 13-month Treasury notes offered in exchange
for tlie $13-1/2 billion of Treasury bonds and certificates of indebtedness
maturing on September 15 and October 1 was no surprise to the Federal Beserve.
This offering — which, in accordance with the laws of the United States,

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had ttye approval of the President — was la line witli the Tr*asur#f s policy
maintaining stability in the Government security market.
The terms of the issues announced on August 18 were Identical with the
terms of the Issues offered in connection with refunding the certificates

/%J>4

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 . It Is of very great importance to note, also, that
the terms of the new issues met the needs of the market at that time. This
the Treasury is always careful to do, and indeed must do, if it is to be
fully successful in attracting the largest possible amount of nonbank funds
Into Federal securities. #hen long-term funds are fully committed, and
short-term funds are available, it Is the short-term needs which must be met.
This warn the situation in August. Short-term securities were, accordingly,
offered.
Despite aH of these facts and the careful evaluation of the situation
which the new issues reflected, the Federal Reserve, at the opening of trading on Monday, August PI, immediately proceeded to run up the rates on shortterm securities — that Is, mark down the prlees of these issues — to levels
wholly inconsistent with the rate on the refunding offering of the Treasury.
There has beeft a great teal of smphasls on the fact that the Federal
Reserve had to purchase a large portion of the maturing issues la the
September-October refunding operation In order to prevent the Treasury from
having to pay off almost the entire maturities In cash. Vhet has never been
msds clear if that this so-called "support" would not have been required if
the literal Reserve had not changed the market oa the first trading day after


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\

- 15 the financing announcement. It bears repeating that the refunding issues
were priced in line with the market and set the investment needs of the
market at the time. As in previous refundings, a large proportion of the
maturing issues would undoubtedly hare been presented for exchange if the
Federal Beserve 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 of outstanding issues a higher rate of return than they
would receive on the new issues offered by the Government.
This increased doubts as to the future of the entire rate structure — and
it started a stampede to the side lines, as far as the holders of the maturing
issues were concerned. Obviously, most of them did not choose to exchange their
holdings for the new issues, A great many did their own refunding through 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 Beserve and
retained the cash, or turned in the maturing issues to the Treasury for cash.
When it was all over, the figures showed that less than 6 percent of the
refunded issues were exchanged for the new issues by private holders. This
wan a measure of the extent to which the Federal Beserve had demolished the
Government securities market and caused a virtually complete failure in an
important refunding operation of the Government. The action taken by the
Federal Beserve with respect to this refunding, it should be emphasized, was
unprecedented in Government financing experience. Moreover, it was undertaken
in connection with a refunding operation of great market significance, amounting
to $13-1/2 billion.

(

I have noted that the September-October refunding was approved by the
President before its announcement. When it became apparent that the actions


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- 2*-

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. The President was assured
that this would be done. In the weeks that followed, nevertheless, the
Federal Beserve continued to push up rates on Government securities.
While 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 Bovember 22. Because of the actions
of the federal Reserve in the intervening period, an interest rate higher than
the rate in August bad to be offered in order to price the new issue in line
with the market, folders of the December-January maturing issues were,
accordingly, offered 5*year Treasury notes drawing Interest at the rate of
1-3A percent per year. The new issue was in accord with the federal Reserve
recommendation to the Treasury; and Mr. McCabe assured Secretary Snyder of
the full cooperation of the System in the refunding operation*
The announcement was made on lovember 22. The following day was
Thanksgiving| so that Friday, lovember 2^, 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»l/2fa by 2/32 during the day. This latter action
was of particular significance because this issue is the bellwether of the
10ag-t«» bend market. It Has a particularly sharp impact, therefore, on
market psychology.

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-17As a result of the continued uncertainty vita respect to the price and
yield outlook created in the minds of Government security owners, the exchange
experience in the December-January refunding operation — while considerably
improved over September-October — was still far from satisfactory. Only
$1 percent of the maturing Issues were turned in to the Treasury by private
holders for the new Issues. Moreover, the cash redemption experience was
only slightly better than in September-October.

Cash redemptions amounted

to lk-1/2 percent of the total of the maturing issuesj in the previous operation they had amounted to 17*1/2 percent.

This compares with an average on

offerings of this type of a little over 5 percent in recent years.
In addition to unsettling the Government security market by sharp
mark-downs in the prices of outstanding Government Issues, the Federal Beserve
System continuously instigated rumors of further increases of rates on
Government securities, fhis type of thing led to further doubt and confusion
as to where the Federal Beserve System intended to take the Government market.
This "planned confusion,M 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. In other words,
conditions requiring "support" operations were worked up by the Federal Beserve.
The Federal Reserve portfolio of Government securities increased by nearly
$2-1/2 billion between June 30 and December 31 — the opposite of the effect
the Federal Keserve actions were intended to have. This was the real meaning
and the real result of the so-called support operations of that period.


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- 15-

Although there vat tone pressure oa the long end of the Government market,
the events which have just "been described affected primarily the short* aad
medium-term issue* of Government securities.

However, early ia January,

Mr. KeCabs aad Mr. Sproul — President of the Federal Reserve Bank of
lev Tork — outlined to the Secretary of the treasury a program which would
involve a complete reoriaatatioa of debt management policy.

They proposed

a program of further increase* ia interest rates, particularly ia the longterm area,

they also urged higher iaterest rates oa savings bonds.

Secretary Saydcr decided, under these circumstances, aad ia view of the
large financing operations comiag «o withia a few months, that the time aad
come to settle for the duration of the emergency the matter of the rate on
long-term Goveramieat bonds,

decisions oa federal Government financing were,

of course, the responsibility of the Secretary, assigned to him by lav.
were responsibilities which could not be delegated.

They

Accordingly, Secretary

Snyder met with Iresident frataa and with Chairman Me Cab e to discuss the
aatire defease financing program.

At this time it was agreed that market

stability was essential and that, therefore, the 2-1/? percent rate oa longterm Gover-aaent bonds would be continued aad that refunding aad new-money
issues should be financed withia the pattern of that rate. This was immediately prior to the speech which Secretary Snyder made on January IS,
before the lew Tork Board of frade, announcing this policy.
Ia the course of this saeeeh, the Secretary outlined ia some detail the
considerations which had led to his decision on continuing the 2-1/? percent
rate.

The 2-1/2 percent rate, h« noted, is a fair aad equitable oae — to

the Soverameat, which is borrowing the money; to the purchaser of Government
bonds, who is leading the money; aad to the taxpayer, who has to pay the
iaterest oa the moaey borrowed.

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- 19 fhe Secretary pointed out that the 2-1/3 percent rate of interest on
long-term Government securities has become an integral part of the financial
structure of the country. During the past 10 years, it has become a most
important influencing factor in financial policy throughout the IfatIon. It
is a foremost consideration in the financial policies of our insurance
companies, our mutual savings banks, our commercial banks, and even In the
financial decisions made by private business concerns and individuals
throughout the country. It is the single most important factor In the bond
markets — Government, corporate, and municipal.
As an exanple of the way in which the 2-1/2 percent rate has been woven
Into the financial fabric of the nation, the Secretary noted that the guaranteed interest provisions of new life insurance policies during the past decade
have been brought into conformity vlth that rate. In consequence, about
85 percent of the nev life Insurance premiums received by insurance companies
at the present time are on policies written at interest rates of 2-1/2 percent,
or less. Mutual savings banks, likewise, have tied their current Interest
rate on funds of depositors to the Government rate.
It Is Important not to mice one other highly significant fact with respect
to the 2*1/2 percent rate. The existence of this rate has coincided with a
period of unprecedented growth and prosperity for the financial institutions
of the Sation. There is now ^100 billion more life insurance in force than
there was a decade ago. fhe deposits in mutual savings banks are twice as
large as before World ¥ar II. Earnings of banks and life insurance companies,
moreover, are sore than doable those of 10 years ago* Financial institutions
of every kind, in fact, ere enjoying the most frofttable period in their
history. It is clear, therefore, that the existence of the 2-1/2 percent

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rate has been in no vay stifling to the financial life of the Hation. It
has, on the contrary, provided the necessary financial stability for a graving
economy and at the save tine made possible earnings vhich are not only folly
adequate, bat richly rewarding to the financial institutions of the country.
Despite the Height of evidence bearing on the visdom of Secretary Snyder's
declslom to continue the 2-1/2 percent rate — and despite Chairman NeCabe's
agreement vitfe the treasury policy before the Secretary* a announcement -*
officials of the System launched a public attack oft the policy immediately
following its announcement, fhe attack has beam carried on vitto rigor since
that time. Mr. Sproul and Mr. Bccles, in particular, have strongly eriticiaed
the announced program. Moreover, the Federal Beserve has continued since
January 16 to pat pressure on the long-tern bond market. On January 2?, the
Open Market Coaaittee again reduced its buying price on Victory loan 2*1/2*a.
It vas at this Juncture that President fruaaft asked the Open Market Committee
to meet with him, so that he could impress upon the Ooms&ttee the need for
stability in the Sovernwent bond market and confidence in the credit of the
United States as long as the emergency lasts i and request that they fovern
their actions accordingly* As is well knova, the Federal Reserve subsequently
gate out Information to the press indicating that the Open Market Cca«dtte«
intended to follow ite ovn course and disregard the request of the President.
For a full understanding of the program which has been pursued by the
federal leaarve since last June, it is important to note the source of the
Federal Reserve's power »• of Its ability to act contrary to the established
financial policies of the Government.
In an act passed during the first session of $he First Congress of the

I

Baited States, the Secretary of the Treasury was given full responsibility for


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the conduct of the Nation's finances. This responsibility has remained vith
him since that time. The instruments vhieh enable the Federal Reserve System
to assume an important part of this responsibility itself and to dictate the
financial policies of the Government have fallen into its hands accidentally.
They are the direct result of the great changes in our economy and in our
financial life brought about by the increase in the public debt — vith an
accoa^panyiog increase in the Government security holdings of the Federal Reserve
System.
In 1913* vh«n the Federal Reserve System vas established, it was given
permission by lav to carry on transactions in the financial markets. This
permission was thought of as an incidental part of its discount functions —
namely, as an incidental outgrovth of credit operations carried on betveen
the banks and their own. members. There vas no thought and no possibility at
that time that market operations could influence to any appreciable extent
the financial policies of the Government.
For mny years, such aarket transactions as were carried on by the
System were conducted by informal groups or committees. In the middle Thirties,
however, when the 3ast isajor revision of the Federal Reserve Act took place,
an agency for carrying on aarket transactions was established by law and vas
given full statutory authdfity to conduct all of the open market operations
of the System. This agency was designated the Open Market Committee of the
Federal Reserve System. It Is made up of the seven Governors of the System,
together vith five of the presidents of the Beserve Banks. At that time —
as la 1913 — there wa» no reeogaition that conditions might develop which would
give this Committee the powers it nov has to dominate the financial markets
and to dictate the financial policies of the Government.

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- 22 -

Between 1935 and the present time, the Federal debt has grown from
$33 billion to over $250 billion. The Government security holdings of the
Federal Reserve System have grown from about $2-1/2 billion to over $20 billion.
Because the public debt is widely distributed among institutional,
business, and individual owners throughout the Nation, the Open Market
Committee need use only a small part of its current holdings to establish
any price or interest rate level it chooses for the Marketable securities
of the Federal Government. Because of the size of the public debt, this
action in turn has the effect of a depth charge. It sets up repercussions
which are felt throughout the entire economy. But first and foremost, it
leads to conditions which may Impair the public credit. It leads to conditions
which may drive the Treasury into the dangerous waters of bank financing —
including Federal Keserve bank financing.
Interest rates alone do not sell bonds. Confidence in the public credit
sells them. Salesmanship sells them — backed up by the belief of our
millions of bondholders that the product they are buying is a good investment
in itself and a sound instrument of public debt management. For the very
good reason that the credit position of the United States Government is higher
than that of any private organization or Institution, the Government need
never compete on interest rates with other borrowers. Baising the rates
on Federal Government securities simply pushes up other rates all along the
line, The Government's competitive position — viewed solely from the
standpoint of interest rates — is unchanged by such a policy.


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- 23from every point of view, therefore, the program now being followed
by the federal Beterve i* seen to be utterly futile for the purpose intended —
namely, eat ting back the volume of bank credit and steaming the rise in
ricea. If at the saiae tliae this futile process undermines the credit of
the United States, forces federal security owners out of the market, and
makes necessary refunding operations of the Government a failure, then surely
it is time to call a h&lt 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.
These things we mat do*

^irat, we wist have comprehensive urogrsme for allocating scarce materials
aad we oust take the other necessary steps for reducing the incentives to
speculative orojects*
Having dome 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 custom--r.

Selective credit controls

sich as those already put into effect — voluntary credit control irograms
such as those used effectively by the American 3ank»*s Association la 19^ —
are of the greatest importance. Other measures for reducing the availability
of credit to noneseential borrowers may be required.
fhird, we snist kee) the volume of public borrowing at a minimum through
increasing our taxes along with our increased defense seeds.
Fourth, we must manage our outstanding sublte 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 noabank investors, and keeping
the bank holdings of federal securities at the lowest possible figure. Any


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policy which leads to Increasing the dependence of the Treasury on the tonka
and decreasing the rolume of Federal securities in the hands of noribank
investors is to the nicest 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 oar defenses against
aggression.


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o
CO


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'

I

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(


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THE LONG-TERM GOVERNMENT SECURITY MARKET
Yields, July 1,1950 to Date
2 '/2% Bond, Sept. 15,1967-72


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Federal Reserve Bank of St. Louis

TREND OF BANK LOANS
Loans, 1948-1950

Loans J950 Weekly

Aug.22-0ct.l6
I year rate
gradually increased to
1.37V. and
held there

June
July
I960

Oct.17-25
I year rate
uppedto
1.49%


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Dear Toms
Thank yo* **ry «*oh for your letter of July 12, expresaiag
your thoughts and those of the Ea»cutlTe Coonitt^e of tb» F»d»r«a
OfMi Market Cowtlttee with respect to nev financing acid the our*
reat situation la the Oorennaent bond wirket.
As I asks* Mr. Bartelt to transmit to the Open Market
Committee on June 26, I feel that ererything possible should bs
4ooo to maintain * basically strong position In the GoYerament
bond market during the present period of latematioaal dlsturbejaoe, fks f inmesa vith vhich tls Mortot bae vithatood the
impact at tlMi erente of tlie post three weeks is certainly *
testimonial to good Bttnagement. It is also the beat possible
eriAenos of the confidence vaieb has been built «p in our ability and determination to mn1 stain a stable market for yederal
securities,
I know you will agree vith me that it is of the utmost importance at ttte present time to maintain tfcat confidence and, in
addition, to do ererytaing possible to strengthen it* This in*
rolTes, first of all, araiding any course iriiiea would give rise
to a belief that significant changes in toe pattern of rates were
under consideration. The operations of the Open Market Committee
since the beginning of the crisis fcsve been well adapted to this
end.
As I have studied the situation, I have become convinced that
present circumstances call for one further precaution which is, perhaps, of even greater importance than maintaining a good balance la
current market operations. In my view, we mast take extreme care
to avoid introducing any factor which would run the risk of producing unsettlement la the broad market for Federal securities
represented by investors throughout the nation. It Is my belief,
la particular, that no new financing program should be undertaken
at the present time without mayfmMi assurance that it will be well
received ami can be carried through to a successful conclusion.


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0«? future tasks, whatever they may be, would be made vmry
•Mil we* difficult toy anything !**• than 100 percent success la
a program for raising new money, la ay «jud#*wat, we can not attain the maximum assurance of success until the outlook with
respect to both the international ana the domestic situations has
beooms considerably more clarified.
At present, the defense needs which may tow to be finance &
la the near future are not known. Our expectations as to revenues
•»• also subject to considerable change as the situation develops.
postpone action on the tax bill now under consideration in the
Senate finance Coamittee. the save basic considerations lead to
my strong belief that no new financing program whose reception is
to any considerable extent unpredictable shoul* be introduced into
the market at the present time.
There are, of cooreef occasions which caH for o.midc and bold
action. These occasions have occurred with respect to the Federal
security aarket sad they aay occur again. But every appraisal of
the present situation indicates that the Maintenance of stability
should take priority over all other market considerations. A stable
and confident situation in the market for federal securities is our
first line of defense on the financial front, no natter what aay be
ahead of as*
As you know, developments in the Government bond market have
repercussions which fan out through the entire econoay. Both the
size and the wide distribution of the federal debt are unprecedented
in comparison with the situations which faced us at the start of
other periods of crisis* Under these circumstances, we have an obligation of the highest order not only to maintain the finances of the
Government la the soundest possible condition, but also to fulfill
oar responsibilities to the allllons of federal security holders
throughout the Vatloa*
There is one further consideration which confirms ay view that
the present situation calls in the highest degree for caution and
pradence. During the present stage of the emergency, it is vital to
make use of every opportunity for assuring oar citizens that those
at the head of their Government have a strong and steady hand oa the
helm. The response of the Bation to the President's courageous action
la the Korean crisis was saw of the greatest demonstrations of unity
that we have ever had in this country. The Ration is now waiting to
learn what domestic programs may be needed in order to utilise our
»^a*SMS» ^f ^Pv^sv^m^-Wwft


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Federal Reserve Bank of St. Louis

**»

vaa^p

<•»*•V^PJSV^B^PJ w^P

^p»

4w^v^Mp^nH^v4k ai^PsV ^BH^W^P •

^WPKBv WMBBp«s*^P

- 3programs are brought forward, it will take time for the public to
assimilate them* In view of these facts, It is of the utmost important* that no action so taken at ths present time which could be
construed in any sense as anticipating proposals for defense which
may later be outlined by the President*
in snort, every circumstance at the present time calls for steadiness aad manifest strength in the Federal security market as a primary
measure of economic preparedness. That is toe net of the situation as
I see it. And, as yon will note, I am sending my tbougfcts on to you
Just as they hare occurred to me, in order to let you know the course
of my thinking as events unfold*
Sincerely yours,
JOB* V. SWOB
Secretary of the treasury

Honorable Thomas B. HcCabe
Chairman, Board of Governors of
the Federal Beserve System
Washington 25, B. C.


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bd

§4

P.

o

>-b
i-3

3

This article is protected by copyright and has been removed.
Author:

Collins, Edward H.

Article Title:

Economics and Finance: Mr. Snyder Outdoes Himself

Journal Title:

New York Times

Date:

January 22, 1951


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TREASURY DEPARTMENT
Washington

The following address by Secretary Snyder
before a luncheon meeting of the Sew York
Board of Trade at the Commodore Hotel,
New York, N. Y., is scheduled for deliver;
at 1;30 P.M., EST, rhursday, January
I-95I7 'land "is for release at ITOO' P.r"

We are facing critical times. It is especially vital
that under the circumstances, we take every opportunity to
exchange views on urgent national and international problems.
Many of you members of the New York Board of Trade have at
various tines come down to Washington to give the Treasury
Department the benefit of your judgment on measures under
consideration in the area of Federal finance, Others of
you have participated in such discussions through committee
memberships. This exchange of views which we have had with
individuals and groups of individuals -- not only in
Washington, but on various occasions in almost every part
of the country -- has been most valuable to the Treasury in
making policy decisions.
More than three-quarters of a century ago, the founders
of the New York Board of Trade set down certain important
goals of cooperative effort. These were -- among others -to provide useful information, to encourage needed legislation, to promote civic improvements,, and to adjust
differences and misunderstandings on an equitable basis .
The guides to action which were set down by your founders
are in keeping with the doctrines of our American form of
Government and our American system of free enterprise. It
is in the spirit embodied in these principles that I should
like to discuss with you today some of the issues which are
involved in our present national task of mobilization for
defense. I am grateful to the Board of Trade for affording
me this opportunity to speak openly and frankly about the
financial and economic problems that now confront us.

S-2575

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I need not tell you that the destiny of a nation is not
always decided on the battlefield -- nor oven in the sometimes
equally hazardous and difficult paths of diplomacy. .In any • ,
national emergency, much depends upon our work in the
-,,..
factories and in the fields -- and the keystone of our production and economic effectiveness is the financial stability
of our country.
Today our Nation is in a state of emergency. For the
second time within less than a decade, we are being called
upon to marshal! our great military strength to resist the
forces of aggression which'see-k to destroy us. Very serious
days are ahead of us. The varnish of Soviet pretense to
peace has worn off. Soviet imperialism is -threatening the
structure of world security. We have no time for illusions.
Wo must be alert -- we must be fully .aware'of the peril --..
and we must know wherein the hazard lies.
The danger we face is all the more menacing because of
the sinister nature of the campaign -which the aggressors are
waging. This campaign is typical in most respects of. all
the campaigns of imperialist dictators, but the Soviets
have added some stratagems of their own.
The Moscow plan is one. of arousing hatreds — nationality
against nationality, class against class, creed against creed -to bring about mutual destruction of those peoples on whom
they cannot count to play the Moscow game. Here in America,
the Communisms .^aggressors, through their agents and propagandists.,
seek to stir up suspicion and strife among us -- and so to
create disunity.
. .
It is their theory that if a democracy is subjected to
enough of their propaganda of confusion, its people will be
unable to act swiftly and confidently if attacked. A first
step which we must take in defense against such strategy,
obviously, is to see through the smokescreen of propaganda,
to expose their lies, and to meet- their threats with a solid
front of strength which is at once spiritual, economic and
military.


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(

Determined efforts and concentrated energy arc needed
to gain this goal. Yet, at the same time, we must maintain
the basic stability and productivity of our domestic economy.
Public policies'today, in every area of domestic
endeavor '-- fiscal and otherwise -- must 'be so designed as
to strengthen the sinews of our productive power. We must
plan in such a way as to avoid any measures -- however well
adapted they may seem to a specific purpose -- which would
undermine the ability of the American economy to meet the
tremendous demands which are being made upon it.
The Secretary of the Treasury has far-reaching responsibilities in the formulation of fiscal policy to meet the
financing needs of our Government. To fulfill these responsibilities adequately, it is necessary to have the counsel and
aid of the most able financial and economic minds of our
country. The successful merging of revenue measures and.
borrowing programs in such a way as to make the most
effective contribution to the productive power of the Nation
is one of the most difficult and most important problems on
the domestic front.
One of the most serious threats to the strength of our
defense economy is undoubtedly inflation. And it is a threat
which could develop into disaster.
The essence of inflation is the uncontrolled spiraling
of prices and wages. There have been manifestations of this
economic disease in every period of war or defense effort
of this country and of all countries. Our defense program
today presents the same hazard.
The effects of pronounced price instability are diffused
in many directions. One of the most dangerous rosults is
that mobilisation itself is handicapped through both direct
and indirect influences. Far-reaching inequities arise from
the inflationary process in the uneven distribution of income
and profits. The defense burden is inequitably distributed
among groups and communities by Inflation. We lose productive
efficiency. Inflation feeds the very fires of controversy.


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To keep Inflation in check, then, is the first need in
our defense undertaking. As we transfer a great portion of
our productive power from civilian to military output, and
so reduce the supply of civilian goods, we must put brakes
on the purchasing power of consumers. This means that a
substantial part of both business and personal incomes must
be diverted from the consumer markets.. The alternative of
allowing prices to move higher and :higher would vitally damage the defense effort.
Without question a most effective over-all fiscal
measure for avoiding the evils of deficit financing, and
thereby combating an inflationary spiral in prices is a
revenue system which enables the Government to pay its current bills out of current income. No one'welcomes heavy
taxes. But in a time of unprecedented national danger like
the present, I am certain that all groups of our population
will soon realize that very much higher taxes -- for themselves, as well as for others -- are a necessary defense
measure.
While adequate revenues are an essential safeguard
against the development of inflationary tendencies, they
cannot do the job alone. Measures for allocating essential
materials have been adopted in order to assure priority for
our military needs without increasing the strain on the price
structure. Selective credit controls such as those embodied
in the Defense Production Act passed by the Congress last
&&y are also of definite help. Other measures of demonstrated
effectiveness in curbing inflationary tendencies, such as
price and wage controls, are under consideration and will
assuredly be adopted soon.
You will note that I have not included the use of
fractional increases in interest rates on Government
securities as one of the measures of effectively controlling
inflation. The Treasury is convinced that there is no
tangible evidence that a policy of credit rationing by means
of small increases in the interest rates on Government borrowed
funds has had a real or genuine effect in cutting down the
volume of private borrowing and in retarding inflationary
pressures. The delusion that fractional changes in interest
rates can be effective in fighting inflation must be dispelled
from our minds.


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- 5 In the absence of new legislation, the Federal deficit
will amount to $16.5 billion in the fiscal year 1952.
This deficit is a result largely of our defense requirements. In non-defense spending, as the President has noted,
the only major new public works projects included in the Budget
are those directly necessary to the defense effort. Construction of many public works projects now under way has
been substantially curtailed. Many other activities have
been abbreviated.
The revenue requirements which the defense situation
demands need no comment. These requirements can be met
without damage to the economy if our citizens have mutual
willingness to make the necessary sacrifices.
Along with adequate revenues and specific controls
required for curbing price and wage rises, there is a
weapon of groat importance available to us for keeping
inflationary forces under control. That is a debt management program which is directed toward placing the largest
possible proportion of Federal securities in the hands of
nonbank investors -- individuals, insurance companies,
mutual savings banks, and other investors outside the
banking system -- and reducing the proportion of Federal
securities held by commercial banks and Federal Reserve Banks.
This program is a powerful weapon in combating inflation.
There seems to be a lack of sufficient public knowledge or
understanding of what the Treasury has achieved in this
area during the postwar period. It should be pointed outj
therefore, that as a result of specific Treasury debt management policies, holdings of Government securities by private
non-bank investors have increased substantially since the
end of the war, and have reached an all-time peak during the
last half of the calendar year 1950. This activity has been
accompanied by a decline in the holdings of the commercial
banking system, which reached new postwar lows during the
last half of If50. Three years ago the public debt was the
same as it is nov/. But thr; Government security holdings of
the commercial banking system have dropped nearly $10 billion;
and approximately $4 billion of this reduction took place
during 1950,

<

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The Importance of this anti-inflationary accomplishment
can not be overestimated. This reduction in the money supply
of the coxmtry holds particular significance at the present
time when it is vitally important to the well-being of the
economy that the inflationary potential of commercial bank
assets be kept at a minimum.
There are two other important matters relating to debt
management policy which hold particular interest at the
present time and which have been given extensive consideration
in the financial community and elsewhere in recent months.
The first is the place of savings bonds in the Government
financing picture, and the actions that will be taken to
refund maturing MEn bonds. The second is the rate of interest
that the Treasury is going to pay on long-term Government
bonds in refunding and nev,T borrowing programs. I want to
take up each of these two questions in turn.
A moment ago, I stated thc.t an important anti-inflationary
action could be accomplished by placing the largest possible
proportion of Federal securities in the hands of non-bank
investors. As part of the Treasury Department's endeavor
toward this end, the Savings Bond Program has been of
outstanding value. It has been both dramatic and effective.
It has been dramatic because it is sustained on practically
a volunteer service basis. It has been effective because
today, the total of outstanding Savings Bonds represents
approximately 25 percent of the entire Federal debt.
It is really Inspiring to know that there are about
$10 billion more Savings Bonds outstanding today than there
were at the end of World War II financing. The tremendous
aelllng program involved in achieving this remarkable record
is due in the main part to the volunteer efforts of individuals,
business groups and all organizations who have contributed
time, money, and ingenuity to the promotion and sales of
Savings Bonds.
There are only about five, hundred paid employees in the
Savings Bond Division of the Treasury. These employees plan
and coordinate the program. The real volume of the work,
however, is don3 through the generous efforts of those
volunteers who have sold Savings Bonds to over eighty-five
million purchasers.


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_ 7 Of the $58 billion total of outstanding Savings Bonds,
nearly $35 billion is in "E" Bonds. This is a,noteworthy
accomplishment -- for no one would have been rash enough
to predict at the end of World War II hostilities that five
years later there would be a $4 billion increase in tha total
of outstanding M E U Bonds. Most of us were sure in 19^5
that there would be a heavy cashing of Savings Bonds as soon
as war acarcities and restrictions were over. On the
contrary, however, the "E" Bond total has gone up every year
because of the organized promotion by volunteers in bringing
the merits of the Savings Bond investment to the attention
of the public. As a matter of fact; in the calendar year
just ended, the volume of "E" Bonds outstanding rose by
three-quarters of a billion dollars., notwithstanding the fact
that there were increases in ,redemptions as a result of the
scare buying immediately following the outbreak of the
Korean crisis. It is interesting to observe in this connection that the redemption of "E" Bonds — in relation to
the amount outstanding -- was less percentagewise than
other comparable forms of savings. So it becomes readily
apparent that the Savings Bond is, in fact, a very popular
form of savings.
It was this last fact that led to the conclusion on
our part, after consulting with many individuals and business
groups, that the Treasury should continue the Savings Bond
Program after World War II as a major effort to encourage
the promotion of thrift. It is this same conclusion that
leads us to announce that the Treasury will continue to offer
the "E." Bond, in its present form, to the public as a Defense
Bond during the mobilization period. The aim now is not
only to promote thrift, but to act as an anti-inflationary
force and to help further distribution of the ownership of
the public debt.
As you know,' beginning in May of this year, a portion
of the Savings Bonds bought during the war years will mature.
While some, of the holders of these bends may desire to
cash them tipqn maturity, it is our belief that the majority
will desire to..continue their investment in United States
Savings Bonds. Therefore, the Treasury is adopting the
following plan for-J^andling the maturing bonds. The holder
may have his choice ol*y< one,' accepting cash if he so


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desires; two, continuing to hold the present bond with an
automatic interest-bearing extension; and three, exchange
his bond for a current income savings bond of Series G.
Under Option 2^ the bond would be automatically extended, bearing interest at the rate of 2-1/2 percent for
the first seven and one half years and interest at a rate
sufficient thereafter so that the aggregate return for the
10-year extension period will be 2.9 percent compounded.
The term of the extension would be limited to 10 years after
maturity. The existing option of paying taxes on interest on
Sories E bonds currently or at maturity would be retained,
Necessary Congressional legislation to authorize this option
will be requested isnmediately. Once the plan is placed in
effect., it will apply to all outstanding E bonds as they
mature, and will apply by right of contract to all new
Series E savings bonds that are issued.
These decisions with, respect to the refunding of
savings bonds and their future place in the Federal securities
structure have been reached after long deliberation and
extensive consultation. Among those who have given us the
benefit of their thought and judgment are representatives
of the Federal Reserve System, which has done such a
magnificent job in facilitating the smooth functioning of
the savings bond mechanism throughout the Program's entire
history,
Almost a year ago^ at the annual Fiscal Agency Conference
held in San Francisco, various alternatives with respect to
the refunding of savings bonds were fully discussed by
representatives of. the Federal Reserve System and the
Treasury. Following that conference, other groups and
individuals continued to meet with officials of the Treasury
and to give time and thought to the refunding measures which
would be in the best interests of both the Government and
the bondholders. The program which I have outlined to you
today is the result of this cooperative effort.
As soon as
the necessary Congressional legislation is completed., full
details of the extension Savings Bonds Program will be released to the public. I believe that we have adopted a good
program.


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- 9Now let us go on to the subject of interest rates. It
is my view that a 2-1/2 percent rate of interest on longterm Treasury bonds is a fair and equitable rate -- to our
Government which is borrowing the money, to the purchaser of
Government bonds, who is lending the money, and to the taxpayer who has to. pay the interest on the money borrowed.
The 2-1/2 percent rate of interest on long-term Government securities is an integral part of the financial structure
of our country. During the past ten years - - a period in
which wo fought our most costly war and made a most extensive
reconversion to peacetime activities -- the 2-1/2 percent
rate has become a most important influencing factor in
financial policy in the country. It dominates the bond
markets -- Government, corporate, and municipal. Moreover,
it dominates the operations of financial institutions. Most
of these have already adjusted themselves to the 2-1/2 percent
rate -- and after so doing, have become more prosperous
than ever before.
Most life insurance companies, for example, have changed
the guaranteed interest provisions of their pew policies faring
the past decade to conform with the 2-1/2 percent rate, so
that today about 85 percent of the new life insurancepremiums received by insurance companies are on policies
written at interest rates of 2-1/2 percent or less. Mutual
savings banks also have tied their current interest rate on
funds of depositors to the Government rate.
Any increase in the 2-1/2 percent rate would, I am
firmly convinced, seriously upset the existing security
markets -- Government, corporate, and municipal.
We cannot allow this to happen in a time of impending
crisis, with the heavy mobilization program to finance. We
cannot afford the questionable luxury of tinkering with a
market as delicately balanced as the Government security
market. Now is no time for experimentation.
We have not hesitated to draft our youths for service
on the battlofront, regardless of the personal sacrifice
that might be entailed. Neither can we hesitate to marshal
the financial resources of this country to the support of
the mobilisation program on a basis that might, in some


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- 10 -

(

instances, require a degree of profit sacrifices.
In the firm belief} after long consideration, that the
2-1/2 percent long-term -rate is fair and equitable to the
investor, and that market stability is essential, the
Treasury Department has concluded, after a joint conference
with President Truman and Chairman McCabe of the Federal
Reserve Board, that the refunding and new money issues will
be financed within the pattern of that rate.
When I came to the Treasury in June 19^-6, the war
had been over less than a year, and war financing had only
recently been completed. I felt at that time that stability
in the Government bond market during the transition period
was of vital importance. As the economy became more stabilized,
the Treasury used more flexibility in its debt management
program by allowing short term rates to increase gradually.
Later, beginning with the crisis in Korea, however, the;
considerations calling for stability in the Government bond
market became tremendously important. The credit of the
United States Government has become the keystone upon which
rests the-economic structure of the world. Stability in our
Government securities is essential.
I do not -think that we can exaggerate when we emphasize
these matters. I think they are basic to our national survival .
I have outlined for you the highlights of our financial
mobilization program, I believe that with vigorous, cooperativeeffort, wo can make it a successful one.
The democratic processes and tho free institutions of
our country enable us to do just that. We are a Nation of '
strong individuals, united in our belief in American
principles and in our determination to defend them. We do
not expect - • and wo do not wait to be told what to think
and what to do. We will not govern our actions according
to decrees which represent thinking done for us by some oneelse. Every American citizen today 'is searching his mind and
heart for answers to the challenge of aggression. We do this
because we know that in a free Nation such as ours, decisions
on matters of national import must be made by the citizens ••
themselves.

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/

- 11 The formulation of a successful policy of financial
mobilization is not easy. It must, of necessity, be one
that will require sacrifices from every one of us. Let me
make on thing clear. Even a short period of weakness in
the financial stability of the United States could mean a
generation of disaster to us and to the world.
The Communist regime knows this — and ever since the
close of the Second World War, it has sought to undermine
the structure of peace and stability we have tried so
patiently,, and with so marked a degree of success, to help
build in the free world. Rud Imperialism has taken the
offensive against the free world in almost every area of
human cooperation where civilization might again be made
secure. It has coupled with a bollicoso avowal of peace the
most flagrant and most insidious forms of human sabotage.
Let there be no mistake about it. We want real peace in
this world. To seek this, we set up a forum in which men
might work out their differences and arrange for solutions
of common problem0 We tried very earnestly to win an
honorable peace across the council table. But the Russians
have tried to make a mockery of the vital work and procedure
of the United Nations, While we have tried to restore
economic and financial stability to nations suffering from
the ravages of war, the Soviet Union has sought to dissipate
the effects of our unprecedented and successful aid to
free nations and are now trying to destroy the fruits of our
aid with the blight of urgent and costly need for selfdefense .
As the economic and financial stability of our friends
and allies in Western Europe became more certain -- Soviet
Imperialism became bolder and laid down a barrage of direct
and indirect assaults on the free world.
It is but a natural reaction to hope, in an emergency,
that we can preserve our freedom, and save ourselves from
danger, without sacrifice. Any such hope runs counter to
all of human experience. Readiness to sacrifice for freedom
is the first requisite of life in a free land,


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I have every confidence that whatever sacrifices are
required of our pooplc to repel the aggressors will
bo willingly, earnestly,, and confidently made.
What we face is obvious.

What we must do is plain.

VJc shall diligently continue our efforts with free
nations to help establish peace and prosperity in the world.
But in the meantime,• wo shall face realities -- face them
in the knowledge that our pride in America's past and
present, and our confidence in her future, permit no passiveacceptance of the dictates of a foreign aggressor.
We arc going ahead with our military and our financial
mobilization measu.ros to whatever extent the unfolding
disclosures of Communist intentions make necessary. In
justice to ourselves and to all other believers in freedom,
we can follow no other course.


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oOo


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CO

ro c
M3
ro n
G
O
.3

Tbe Ufe Insurance Pie* for Sifter Interest Bate*

For winy years life insurance companies have felt that the interest
rate paid by the Treas ry oa long-tern securities was too low to wet
their needs. Five years age there was a vigorous campaign conducted
by the life insurance business for higher interest rates. At that
time life insurance companies felt that they had done their patriotic
duty in supporting the large treasury financing operations during the
war on a 2-1/2$ basis and now that war financing was drawing to a
close the Treasury should give serious consideration to raising the
interest rate. They claimed that there were three harmful results
of the 2-1/2$ rate on the life insurance business: (1) that the
lowness of the rate increased the cost of lift insurance, (2) that
it threatened their solvency, and (3) that it increased the eost of
living and hence decreased the value of life insurance to its holders.
But the* the large volume of private mortgage and corporate financing
began to open up, the rat* of earning* of life insurance started to
rise, and the campaign lessened in intensity.
At the present time a new cycle of protest appears to be in the
making, steaming in part at least in the statement by Mr. Thomas
Parkinson twc weeks ago in which he argued that as far as the life
insurance companies* government portfolios were concerned "their
interest meeds — indeed, their very 3olv«nc./ — call for a minimum
rate of 3*.*
ttft have examined the position of the life insurance Industry in
some detail and have come to the conclusion that the life companies
are currently in excellent condition. They do not seem to have be*n
affected adversely by a period of approximately 10 years of Treasury
long-term issues at 2*1/2$ and it does not seem likely to expect that
they weald be affected seriously if that rate is continued.
The fact that the amount of life insurance in force in the United
States today is 50$ larger than it was 5 years ago and is twice as
large as it was 10 years ago is Just one evidence of the current
strength of the life Insurance industry. Life insurance Is a product


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S**r*tary $ayd*r *
vhich 1* ooistalar, n >rotiuct which tern b**a selling woll yo^r i&ftor y*ar
aad provisos to do *o far *a«y y*ar» ah*ad.
Aa*«t* of lif* Ia*ur«a8o eoa **!<>• aa** »l*o 4otfcl*d during til*
la«t 10 y*ar* and thair *urr>lus fxtndt ar* current!/ alao«t g~l/a tta*»
at largo a* th*y w*r* ia 19^0. fhl* tro**o4em* «T >sasloa ia the lif*
iaiaraaeo busia««a during the l&st d*«ad* a&» t**k«a plae* doaplt* the
fact tAftt th* go lag rat* on loag-t*m gor*miient **euriti«* h«* r*»
aalA*4 at d»l/2£ for th* «atir* o«rlo4. It b*t tnk*m ->lae* 4«a it«
th* fact Ui&t »ach «ucc«a«lTe r»&r through 19^7 showed a d«clla« la
th* aT«raf* rat* of r*turm oa lif* iasuraae* lftV9sia*atK.
ell a* did aot Utmlr ta* *olv«ac/ of ta* lif* la*or«ao* eo«
it HA* refl*ct»4 for ta« aost ^*.rt ia ta« Io0r*aa«d oo*t of
to iolicyttold«rt. A* a r*»mlt dlri**n«i« (wbicfl &r« realljr a rotiira
of ir*»iu») tead«d to 9*«o«* a sa&llsr proportloa of total
aftor y*arf falliaf fro* 11-1/2 ia 19^0 to 9*tt*taiag lik*
ta* pr***at tlae.
It do** aot appoar taat lif* ia*uma«* oo« *al^i h«r« *uff«sr«4
at ta* *3m«a»* of oth«r owiaf* iawtitmtioa* a* a r**ult of tat*
la«roa*od oo*t of ia*«raaeo. Soriag ta* Ia*t fivo y*ar« sarla^t of
iaitiYidtoalf ia ta* fora of nriv* t« insurance iaor*a*oA oy ov*r
a* ooamr*d with laor*a*** for outmml oaviaa* oaak <Sooe*it« of
for *«rlan* aooo^at* ia eo«n«relftl oaak*v aad a 15/* lacr**,** ia
boad* a*ld bjr ladlTi *&*!*. Oaljr ta* porooatag* iaeroa*o la
aaa loan *har** is ia *xe*** of taat for intmraae*. la t*m*
of total lav*»ta«Rt Indlrldualt aow a«r* aa ««|ttity ia nrtvat* insur?inc»
taet *xe**d* $60 billion, a fl«ur« almost aa larg* a« i«4ividoal holding*
of Fod*ral *oonriti**v or iadividvMl aoimng* of all fora* of oaTiago
Account* ia aataal *«fia§* V*ak*t o*a*j*rol»l baakt» «aviat* mad loaa
a**ooi«iti0a*9 aad ^oatal
If ta* lov l«rr*l of ta* iat«r*«t rat* oa «nv*rn««ntt w*r* a factor
lif* i marine* sow mai«* toimrd la*olY«ncy oa* vo«ld *xp*et taat
th« fir*t tslao* wa*r* ta«t no«ld »* «ridoat would b* ia th* ttoek *ark*t
p*rfofiMiaoo of th* stock laamraao* eeiapaal**, which sccmtat for about
cm*- fifth of ta* lif* ia**r*aeo a**<tt* in tao country. Typically the**
eoaoaal** h«T* gro*« "*r*«iw« om th*ir aoar>artioi rAatiag pollelo* which
aro low«r taaa tho** of th« t}artioi')&tiag peliel** of amtmal coa -aais«,
*o that th*y do ant ha** th* r«eour»* of eattiag dowa or *liaiiiatlag
to polieyaoldora.
Wo aav* takoa a look, th*r*for*9 at th* r**ord of tdi* *tocks Ibr
tar** of tao larg**t stock eoaidal*** fra,ir«l«r*, A*tan I4f* aad
Coaaootlemt 0*a*r&l> to t**t tao goaoral aarlwt a.-^raisal of th«»*


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tosratary ftaydar * 5
iaauraafta somjpaaj stocks. Tfess* tferoo eoapanies mold *frout O9*»tteird of
the aassts of all rtoek eoayamias. travalars aad Aotas Ufa also do a
firs aad oasoalty buslnssa vhiek eoatriktttas smtsrisOly to thalr profits
althoagli upsmrds of 85t of tha aasots of *otk eoapaaloa ara mirraatly in
their Ufa iaaaraaea dapartissata. Taa eaaisjsss of Comsetlettt Ooasral is
saslraly Ufa, asslta amd aseldsat ii
l^K) to 19*5, *b*ft the 2-l/?H Oowrataiit rate first sisss*
final? e»tnbHsb«<l, tinrr* was s 4*sjrtk of prlvat* Itvestossnts arall»hl*
to ilfs eo«ps«lss. f#Y«rth*l*»«, *H thr«« of thsso
l«or«iMr«s In stock frlsos whl -h sitter «ppro»l*«t«d or «xe**4«4
s>»srsj|ss OB Dov-Jon«s l«4t*strl*ls as s vhols. Placs 19^5, qootstlons
OA tk^ss tkrss stocks fes*» eontlnosdi to rl§« st ft rstto v«ll IB oxe+ss
of tk* lMUf*«s« In tfcs laduttrUl
tills *«*# isesAs9 tUtrs b»f Worn s st*s4y loersss* 1»
to stocttteldsrs 1m «*eh of tkoss tliroo nffspssiss. Cssb aiTldkm4s pal*
sir rrwtlsrs Issursjieo C<SJ>SB/ s»owit*d to $|«? atllloa in
lion in 19*% sad $5 .6 mlllloii In If JO. Tor As^os. Uf«f tbs
VM $f .1 «llllo»j 111 19^5, it VM $9.2 *lUio»t sad U 1950, *M «llll
His lacrosso ia dividend* vltli regsrd 1m Coasoctteat G«fwr»l is
strlkittgi ttey row frosj 10.2 sAllioa la 19*0 to *0>wtUlon in 19^5 sa«
$0.9 •ililoa la 1950. Ta**o i«yrassiw smrsst sad aivloJsad roooria sr«
ia«lcatiir« of tfcs flaaaoial strs«gtli of tbs stock
sbillty of Ufa insurance coutp*nle» to kos% stroaf flaanelally
la spite of a 4oellaiaf rata of intaraat oa iar»«ts4 fuaAs stavs fresi
tws factors. A large part of iasiiraaso la for@a ta4a^ vas vrlttaa oa
th« ssiiapltun of latsrast rataa of 3< or ^ettar. t^« a«fi«i«iMsr of
mctaal latarait earaiacs aa uoapaiid vita tlM rataa at wlileli tbaaa oarlls-r
foiielas v«ra wrlttes la «or* taaa offaat ¥jr th« fast taat ta* airtrats
>»*rlo«o is oov llTiag Vottgsr taan aa ttss4 to. 9jp uatil rataar rsoottl^r,
life lasorasjos yoliaiaa n»rw tfpically vrlttim oa the bssis of ttes Mssrisaa
teyorlaaaa faalss >as*4 oa a»rt^lity «xp«ri«»oa lomr slaea out of aat«.
This resttJt»»fi la tba lasar&ae« ccwpaaiet torlag a »i gulf least margin la
th*y could *»sorfe a 4a«tia* la latoraat samlags.
Durlag tba last fas yoa
Jsseriasji ViporlstBoa Tmbl

for

ta* fast tliat div

i

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paaies smva swnroi avajr
lc&lly osiaf toe
aaais. 't t«« sssjs time,
loimr rutrs. Oa tha %a^is of

^al lift iasisTsmta aas«tn la tfe* «omtry, al sra
aasi vitb intorost rats assi«p%ioas raa«iag frosi
s*!*!** 8 aes^inUs, 6 sail only aoaparticipntla*
at a ^Itglitly kigfesr itwr^at^sd r*tt to offset
ar« aot paid oa siMrli peliciei . ttea

Secretary Snyder * k
of the present Interest rates at which new insurance is being written with
comparable rates as recently a* five /ear* ago is rather striking. At
that tise M> of the 4f companies were writing their insurance on an interest
rate assumption of 3$ or tetter.
It vomit appear* therefore, that the life insurance industry has over
the coarse of the last decade become adjusted to the existence of a 2-1/2$
rate on governments. The problem has perhaps seemed less acute to them
during the last two or three years because they have seen their average
rate of earnings oa invested funds growing slightly from 2.88% in 19^*7 to
something like 3.05-3.10* at the present time, with the increase reflecting
the growing importance of private investments and the declining importance
of guisiHsenis in their portfolios.
What the life insurance companies seem to fear at the present time is
that the defense expaasloa program will seriously curtail the voltne of
as* private investments appearing oa the market aad that they will again
be la a position of relying more heavily oa governments aad again their
average rate of earnings will begin to fall. It does not seem likely,
however, that ths rate will change much ia 1951* With new plant aad
equipment expenditures likely to continue close to their all time highs
there will still be a significant volume of new corporate issues on the
market. It is true that the increase la mortgage debt la 1951 will undoubtedly fall considerably below the rise la 1950. Re vert he less, it
still seems logical to assume that life insurance companies will find
aa outlet for most of their funds ia 1951 la other than government securities. Life insurance companies have already adjusted by aad large to the
existence of ths a-l/2$ rate, however, as we have noted above. Even If
the average rate on earnings should fall off slightly in the next year or
two, the solvency of the companies Is not threatened.
There are two other important questions, in addition to the problem
of life insurance solvency, which should he answered: (1) Who pays the
cost of increased interest rates as against who receives the benefits, and
(a) do higher interest rates stimulate saving and help alleviate inflationary
pressures•
Life insurance companies often emphasise the widespread distribution
of life insurance ownership ia the country, thereby giving the Impression
that treads la interest rates would be aa important factor la connection
with the policies of amay millions of Americans. It is true that there
are many millions of Americans involved, bat it should be remembered that
the rate of Interest really has no effect oa tera insurance aad group life
Insurance and very little effect oa the cost of industrial insurance
(since reserves built up against these types of policies are either nonexistent or very small). It does have a considerable effect oa the cost
of whole life policies aad is a major factor la the cost of endowment* and
annuities. It Is probably true, therefore, that the interest rate Is of
real importance to a relatively small number of lares pollcyholders with


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S*er*tftry
above aver*** taooa**. If laattraae* eoapafti** (ami otter tar*store as **11)
•hottld rtceiye signer int*r-§t rat** to the fufeu-e A larg* eter* of th*
Vurdea should fall directly on ta* ta*»»y«r* of th* country, a* Federal,
State, itad local gororoaeAt dobt cott« aro iattr«n««4. Host of th« ro*t
would fall tlroctljr om ho»o ovmtr« «nd romt«p«9 on rnifelie ut111 ty aad
pailron* ratir^ayor* at»d om eoa«iMor« gnaamlly. It wo«ad a^p««tr» th«r«f«jr«,
tfeftt tJbo oo« t of &tt tat*r**t rato rt«o would %• far aoro wldoonroad than
wO^^w

^v^P^^^Mv * Ww •

ifcft ia*araao« ccvttaaai** al»o arftt* th»t th* us* of A h!gh»r mt* of
iat*r«*t would •acour*c» *a»*ag«. H i * doubtful if 1% earn »* nro<rod
tfc&t tadlvidnal* wo aid *a?*) »or* *l higher ratw of 5nt«-*»»t thioi *t
l*v«r rat^s, o«irtlou3%rly vu«i on* !• talkla^ la t»nns of & diff«r«atitl
a* «»«11 «• 1^, lm f*a*i^l %k« folww of soring *t ai^r flv«t tlo» i»
•ueh »or* * function of 900* factor* a* *&« (1) «ii* of th* >ovom««at
«*flol%, (a) th« r«laiiT* ability or InaHIUy of b»«la*»ii te fliuuic*
it» ova CftDiti;! ^T^»aditur*t ihrowrh retaioad Pofita a*d re«*rr*«« a«d
(i) tii* oonsiMi ^tion «jid fetorlft habi t« of th« lafi« body of *«r«r«« fte*»i
«JNI th« pritterar factor*» vhile small eh»af«« In tte «**• of l«l«r««% ar«
•4M4NMlaiy*

foa ««/ B* later<i«t«d IR %H« %nt *tt*«iM* tslil«« oa (1) toa« of tfc*
t»;>ort«nt flf«r*s oa tfe* fiaAacial stata* of life ianaraaeo eo« anl«§
%fid (2) tfa» data oa ta« aot rat* of i«t*r»»% «ara«4 oa life iainir&aeo
iureated faad*.


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itt Bates of Interest lamed on
Life Insurance Invested Funds
1925-1950
1925
1930
1935
19^0

5.11*
5.05
3.70
3.*5

19^1

3.M

19*2

3.*C

19^3
1^
19^5
19^6

i9Vr

19*^
19^9
1950 e

3.«f
3*19
3.0T
....*

8*92

s>*as

a*96
3.<A
3.05-3.10

)ffle* of the Secretary of the Treasury,
Office of the Technical Staff.
Jaa. 12, 1951
Soyree: Institute of Life Issuraace,
• fBttaated by Treasury.

(

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1935-1950
in force

»•••*••••««*•«*»*•••
»•••••*»•**»«»•.**»*••
* »*»***»•••*<»***»**»»•


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*••»•••«»»•»•*••
••••»»*••*

•»•**«.*••••**

**••*•**•»•••••••
»•»»•••••••*»•••<•
•% «••*»•*•*••••»

13.5

1.8
2,2
S-7


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CIR90L08T Of IfUffft RELATING TO THE OOtVMDRf 61CUHJTT NHQCIf
1. June 25

—-• the Bepubllc of Korea is invaded.

t. June 86

*•

Secretary Snyder conveys to the Open Market Committee
through the Fiscal Assistant Secretary his feeling that
•Everything possible should be done to maintain a basically strong position in the Government bond market daring
the present period of international disturbance."

3. June 2? t© July 17 — federml Reserve ignores the Secretary and continues
to sell long bonds In the market. In 13 trading days, the
Federal Deserve sells over $300 million of long*term bonds,
k. July 12

—

MeCabe writes the secretary that, instead of stability,
continued pressure should be placed on the Government
security market in order to reduce bank credit.

5. July 17

—

Secretary replies to MeCabe, calling again for stability
in the Governsttnt bond market and explaining his reasons
therefor at same length, (Copy attached.)

6. July 1? to August 10 •* Federal fiesenre continues to put pressure on
Government security market, selling $600 million of long*
term bonds in la trading days*
. August 10 — Uddafee and Bouse met witte the Secretary. KcC*be expotfltffei
oa problem of preventing inflation. Tattta about higher
liacount and abort-t«r?« interest rates, and further prvsaare on the lang-terai nartett. Secretary reiterates the
imce»»ltj for stability in the Govem»int security market
during interaatioaal erials. «cC*be ret«e«t« another eon*
fereace to dlacus* the jsatter iritb tto Secretary further,
aad this is set for Jtufiitt IS.
8* August 10 through August Id — federal Keserve continues pressure on long*
ter* bond nmrket, selling |1%5 nlllion of long bonds in
T trading days.
9. August IS —


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Federal Reserve Bank of St. Louis

MeCabe and %rcml sjset with the *cretary, not for the purpose
of discussing interest rates as indicated on August 10, but
to tell him that the federal Besenre has decided to raise the
discount rate b? l/k of 1 percent, and to tighten rates in the
short-tens market generally* The Secretary tells them that
his viev* on stability remain unchanged aM that be cannot,
therefore, go along with the Federal Hesenre. The Secretary
announces the September-October refunding, as approved by the
President. MeCabe check* the proposed discount rate increase
witb the President, vno tells him that he doesn't want
Government security rates raised. Federal Beserve, nevertheless,
gees forward with its program and announces change in the
discount rate.

- 210. August 21 —

Federal Beserve raises interest rates in the entire shortterm government security market. Billions of dollars of
Government securities go to * discount in the first half
tour of trading.

11. August <& —

Secretary informs President of the situation la the market.
President talks to MeCabe about it and sea*him a letter
calling for the maintenance of confidence in the credit of
the United States and stability in the Government security
market. MeCabe returns the letter to the President,
assuring him, however, that bis request will be carried out.

12. October 2 —

MeCabe and Sproul meet vitn the Secretary and advise him
that they are going to raise short-term rates further, (the
one-year rate had already been raised from a 1-1/4 percent
to a 1-3/8 percent basis,} this is confirmed by letter on
October 16. This letter assures the Secretary, however, that
"these action* will not affect the maintenance of the a-1/2
percent rate for the outstanding longest term government
bonds.*

13. October 17 * Federal Reserve starts to raise yields on short-term Treasury
issues further. Dee-year rate rises to nearly 1-1/2 percent
within a few days.
14. October 26 - Meeting at the ^hite louse between ths President,
Secretary &t»yd*r, and Chairman MeCabe. McCabe finally
agrees to prevent short-term
rates from going up further
and, 'for the present,1* to maintain the one-year rate at
1-1/2 percent. Tbla is confirmed by letter on October 30.
1|. November 17 - McCabe gives Secretary the federal Reserve views on DecemberJanuary financing, proposing a five-year, 1-3A percent note.
Secretary agrees to go along with MeCabe so long as the
financing earn be done vithin the pattern of 1-1/2 percent on
one-year securities and 2-1/2 percent on long bonds.
16. November 2k - Federal Reserve allows market to go off sharply as result of
Hovember 22 announcement of Oeeember-January financing.
Unsettles market psychology further by dropping price on
Victory Loan Issue 2/32 during the day.
17. December 1 - Secretary Snyder sees the President and tells him about
developments in the im&rket. The President calls McCabe,
discusses the matter with Mm and tells him that he is
relying on the Federal Beserre to carry out the commitment
to keep the market stabilised*


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Federal Reserve Bank of St. Louis

- 3Id. PiinsAiir 19 * MeCabe atria** the Soerotary that tho Board hae farther

measures for credit control in mind, ayoelfieally, raising
reaerve requirement* and increasing mwrgim requirements cm
securities, ffee Secretary tells Mcfabe he doesn't think
these moves vill do much toward controlling credit and wakes
it clear to MeCabe that he vants stability in interest rates.
KcCsbe assures the Secretary that he does sot haw furtter
Interest rat*filMMfMen Goyenua*nt t«enrlti«9 in mind.

19.

BMMtor 26 • F»der«l Ft5*«TV* reduce* tfee ^rie« of the Victory Loan i«»ue

fro« iOO-t3/32 to 100-?2/3?. Ait* «nMttl*« th# wurtet
mad cau»»* mieh oonvftrsmtioa »• to vheth*r tlM Gov*n»<»nt
r«»lly proposes to maintain th« ?-!/? peroottt rato.
20. Pi oortar §6 * HcCab* o4viso« the Secretary that the Federal Ke«»rt« h»«
takea action to raise renenre r«f«lre«emts| tells the Secretary
farther that the Federal io»erw propoofts to rodu^e the
buyia* price o« Yictory ioaa f-l/$», allovimg thea to 90
tovm l/3t a day. io wntioas a floor of IS0*S/32 and ***»
3<Vir?at6 fc rame of between 100A/52 aad 100-8/3? for this
Issue, fho Secretary tells I^Cabe he vantft stability maintained
is the 10ag»t*rtt market.

f

21. Jaaaary 3 .. n» Boerotery neets with MeCebe aad Oproul, «lio outllwe a
progriB iftieh would IsvolYe a complete roorieiitatlati of debt
maaageswrnt folley* They propose a progrom of higher Interest
ratos, particularly im the l®«f»ter» area, fhoy also vent
higher iatoroat rat«s oa fisviags bonds.
ft* January IT — JToiat «^«feren<je between th* Presldoot, the Soerotary, atad
M«0abe to discuss the defense financing program, at vhieh
tise it Is agreed that mmrhet stability is essential aad
that, therefore, the 9-1/2 percent rat* OB loag-term gotoramemt
botUlfl shall he aaititttla^d, aad that refoadiag «md mov money
I«SU*B vill he fimameod within the pattera of that rate.
9|. Jeauary 10 — Secretaryfs speech before the ffeir Tork Board of trade anaowaolmC
a peliey of market stability and stating that during the
defense period refunding and neir-swney issties will bo flnaneed
withim the pattern of the 2*1/2 percent rate.
2%. January 2$ — Sprout «&£*« * «f*e@h before the l«v Torlc ft ate Bankers
Aseoeiatiim, attfucking Secretary Snyder's statement on
defense financing «m4 wmrket stability policy,
25* January 25 —fccloa testifies before the Joint Committee on the laomomtie


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Federal Reserve Bank of St. Louis

Benort and strongly eritieisws Tromanry financing policy.

26. January 29 • Federal Beserv* reduces the buying price on Victor/
Loan 2-1/3* to 100-21/32. In order to assure market
stability, Secretary authorises the Federal BeserYe,
as fiscal agents, to purchase this issue for the aecoynt
of the Postal Savins* Systea at 100*22/32 — the price
that had existed up to 2:00 j>.«, cm this day.
27. January 30 * federal Reserve fails to cooperate vitfe Treasury action.
Terminates open-aarfcet purchases of Victor/ toan a«l/2a
aad buys $33 million of this is*ua for Postal 3avi&§*
account,
26. January 31 . Op«n Mai%«t Cowaitte* a««ts vitb th» Pr*«ideot in accordance
with bis mqaaiit of tfea pp*rtou» day.
29. F*bru*ry 1 — Tbm vfaita fiouea ralamaoa a $tat*a»st o« tb« Jaeuary 31
aaatiag, irfeieb »ay« that the F«4eral n«a«rrt Board bad
fIa4fa4 it* support to tte Fr«»14«iit to aaintaln tba
stability of Oovenawnt »*curlti#a as long aa th» WBargaocy
lasta. F:r»as ^sratary Snort anaouftea* that this statanaat
is to fiti*t r^NOra of 4iff»r*&e*« of opinion b«tw»«a the
f rwwury and th* Fa4»ral $toa*rv» Board,
JO* Fabraary 2 — ?r«slci«at Truwn sands l«tt«r to. Cnairaan MeCalia, thanking
tfe« Board and tne Qp*n Hark«t Coanittaa for tteir assuranes
tfcAt they would rally support th» fraasury refinancing
ofaxmtion astto refunding and n*v isaues; and would stabilize
tlM aanwt for Oov*na»nt s*c«ritia« and maintain it at
present, i«v«ls in c>rdsr to ass&r* snoe«ssfui financing
f«%uirtwnftts and esta&lisb in tna ninds of our p«opl€ eon*
fidaece eonc*ming OoveniWHit eredit.
31. FalwiMury ^ -»» leel«s releaswis to tn« press nis viaws on ths atstlng vita
ttes Fm«ld«nt. la dlsput«s ths asson^tion that tbs Board
st^forts tfee treasury position and, i» avidanc* thsrsof,
relsasts tt» O^an Hart«t Conmitt** rscord of the netting.
32. February 5 and February 6 — ftesrs is con*iJierabie diseussion on the floor
of ths House about tfc* fras>si*ry-red*tml Hesarve controversy —
lavolYing |>riaarily Representatives NeComf as, Patsmn, and
Crawford*
Fehrwary 5 and ^sbruary 6 •« Tbe press aarries a report tnat on Febjryary 5
tbe Senate Banking Coswittae starts an inquiry to decide
vnether public Hearings should be held. This is followed fey
a press release on JNbrtiary 6 that Senator Jtofcertson has
closed the door OB any stfelie bearing*, stating that neither


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Federal Reserve Bank of St. Louis

- 5•fttvgy vLstMMi to usurp tbt fmotiOM of th* otter Attd ^hul
te thiaka tte mtter it goim« to IM adju«t«d fey «utu*l
cooperation.
34, Febrmry 6 — IfrOfto mad Sfrroul moot with the secretary and hand the

ecretary a latter IB wbieh they propose for the present
to maintain long-tor* bonds above par with the further
proviso that if substantial Reserve buying is necessary,
the Soerotftry would b« pr*^*red to anoouAce a oov long-tora
higher-incogs bond iato vttieli ho nould exchange all of tho
otrtstoadins issuos. With rospoct to short-torsi rates, the
Federal Eosorro proposes to hold purchases of short-torsi
issue* to a,minimal aM, if bank credit dssaiflj continue,
to increase short-term rates. McCube roads to tho Secretary
tho letter tho Q^oo Market Cosnittoo proposes to sond to
the Prosidoat. It Is in open defiance of tho Prosident's
request that tho aarket for Oovernsjent securities bo
stabilised. Tho letter is dated February 7, but appears
to havo boom deli-^erod February 8.

35* February 8 — Tho President tolls his weekly nows conference that ho
understands a majority of tho f*6oral Bosorvo Board ftov
agrees with tho Goverwsent's interest rate irievs; and adds
that he had thought all of tho isoabers of tho Board
,hese viows, based oa what tho Board told him.
February 9 — Senators O'Mahoaoy, Maybank and Bcbertson aeet with McCabo
•aft aak him to provail upon tho Opon Market Cosnittoo to
withdraw tho letter writton to tte President^ and to maiotain
tho market at status ^uo until after Secretary returns
from hospital. KcCabe agrees to try.


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Federal Reserve Bank of St. Louis

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

STAFF MEMORANDUM

*X7 AtfSIOX
£9 i
l
i IfriftPffiBf OF

fh« following 4i»e it«Ua %•§!*» with A *t*t«b«at of

to

la*f retire yaiA^r ^r*«»«t eca4itl^ft» *•
•*t**«tr« IMA «K«9MMtMl to
It t»to *
»x*«ta*

ia
•mulitl

at tau»d rlT%t« «A4 ^ttklic or»4it la
*** •laaia
* ••t.

I

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

-

af tlw ?o<So*al Hoaorvo autboritio* MM!
otter jptffWM for MI yadi*«ri«ioativg rtttrlcU*« credit policy to
BMfrat inflation is ia fcoopiag vith * looff timdltioa.

It <MM a

•omd tradition ia tfeo g i reM«ttaa<TOt ia which it ATOM. Bat A
otthod of ceatyol tatt «M will tmoiigfc aiaptod to a baariat *yat«i
Itt ^til til tao aalk of baak aoaots coaoiitod of buslaos* loaaa
ottKVt %o offo«ttvoiy or «afoly tpalioa wlthottt aoAif ic*tion to
oao ia wmlcfc tao bulk of baak aaaota eon«i«t« of Oovonaatat
Tao logio of m tim^ltloaal toaofOA jpo*trictiv« «rodit policy
can t>o simply »oaa»riso4
ia oauo»d ay oxoooaivo «poadia§ rolativo to tao
output of tao ajgaai aad oonriooo iooifod Vr tao public.
an oBeooaifo troluav of •aoadiag oa» iovoloo vltlwat aiiitioao to
tao t*»ply of aaojty , it i* pow»rf»U/ «tiawlato4 *y «a«li a441a 4UHK A- w ^^Ma\ w^ 4feMlM!IMMa> 4MaM» J^V^fV^ fWNl w3T 7^9ilMMivlBpB9HV • ft

»ya»ly. fhi* is faartieuiarijr tr^o of lojat JafC
%&«•» ^aaa^a^aY

*^ JMalalka^

fla^a^a>aa

J^^ht^a^a^A 4 ^ aY

^aaa^av

^ai^a^aaaaa^fc ^1 **

Aai^^aaa^

Vb^a^fe^a; L kA^a»

4 aa^a

taoai fwlly. If %a«k IOOJMI coa »o atoyaoA froav ospaadiac or to


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

•otiaat, tao total ^oluM erf yrimto afoadiag
ualy feo «<grtatlo4.

- 3-

1950, tfew oapOMioft ia loam* of oil ccwaerciat
banks la tbt Ifeltod Stotoa OM»*toft to *9,7 billioa. fholr loan*
to bitaiataa ••foaitot 15 Mllioo sad ttaair roal oatata aod
looaa oaeb axfoodod by aboot $2.5 billion. Tha sot

b, •

A W_^

---

--

A

» .^^^fc

**.&

^.^LM

k

^Md^Mh.^L^^

-**4 ^

^fe^h^K^ft

^1 ^k^h^A 4 ^k.

ft

J ^

* WV* IHBWjF w JLvv MHHK JuBHlMl^B HI

«• eawiot halt tbt Mkroii «f litf l*tl«« fey inc rawing t«jt»«. By
all iMMMAlCMI *A OflM Of tlMI

it

pevtr. But tb* offset of m glv«c tttcp»»> is tax** is Imrgjtly or
vtolly d««troy«4 if on o^ftl ojoount of nov if«»di«« fomor it »Of«ittodl
to b« ci

too traditional aotfeot of ttujyia^ or ro*or*i«f «a
in tlM (MKPMHBftO VOlvBBt of iMMlt lOMMI Hlfrft book dOOOOitC i* tO

too loBdiag fovtr of too ftMOOtriUl banks. This tuu *lr«*4y
iam is port fey miaiag to* r«qulr«d rosorvoo of joofjiijjf boak*,
for tliout V5tlui of total book it9ooitof tot* «o Hftvo
virtually rtoilni too statutory U«it i« tola direction. Aaotoor
•toy airoo4y tokoa tea boom to imiao too diseoiint imtoa at ^io& too


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

looorvo boidcs *ro »t^paro4 to rodiaooimt iMuiinasa anft

fopor y«ovlo«aly 'iiitomtot by oooltf booti for tlaoir

cm tea*re aat at vhiefe tbo ftecorvo baafc* will «ak» direct loacs
to aertbtr bank*. ?fei« ha* tho effect of aafciag it aore expensive
for aaaber baa** to obtola odAiUoaal reeorvoa by redl»eo%tatiag or
borroviag *t th« lv«»«rv« bwk«. Bat it* prmetic*! ittfluoaeo 1*
««»uBtl»« Md borrow!«« *i« mo loagtr th*
if>ti<ltj Mtftottr lailii obtala •ddltioatl
•!! €k» t r•»••! M«uriti«« to tb*
Siaoo %)» MMftMir b»lit evn *feo?it 459 biUioa «T
vifty*Uf u«li«it«4 fteui»$« of A
M IMC »• ^M Hoor^o >iMiii rraolB r**Ay to
price* tfeo iMHte will MNMpt* Aad
additional rooervea obtaiaed by the aaaber baatm a? a whole eaablae
their loojis »»a inv«*t»«ata b
Apart fro* aoiml n«MMtlomf wbleii te»* «J.r»*dy b«oa
%y MHMM of Biilillii ptWMQMNMMHits OAd letters urclBC looji res*
trletiwi, the oftly »ub«twitUil roMUaiag tool avtiiafeio to the
ao««rv«t SyotfK yador present iwr is to «tot oMi«g to their
fciolitaye of foveroM&t »ecuritiee ott «et halaiieo or actuollr to

taia new re*«rveo by Mllimg floyofMOiot eoeuritio* to tbo Peeerve
bOjOu^ the? will l»o ua*Mo to l&cre«Ae tho total voliaai of
their dopoeitt. AaA if tho «Mfeor bottk* or tlMtir evoteaotm toy


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

by the !o*orv* oeuka, they will looo rooomo of

- 5(fpMBU*t*ly the eajet aaoestft, the? will be forced to
the TiliiMt of tfeeir ieeeiit* by elxwt »iv tie** the loe« in their
they «1U reduce their aeposit li*btlitle» Vy pmeeatittf
Tree>«ury securitlee for i*4M9Uoa without r«pl»cl»g them,
fey fe^Uag %• reeew * porticm of «fttutiag loejac, and by
eeevntiev tto tl* MNMNHit ^isblic. In this ve^f ttet
the oewitry»» ejoaey tuf^iy will be bmmglil to halt or reversed;

Tbe Iwatiac «r rever*%l «f the «rovtb of ••rtn bank:
power would be e*eeqpe*le4 by * rite t* i*t*re*t rmtee. It i*
BMrteeiai by eo«t, though aot by all, «4y»ce.te8 of tighter
th»t eueh * rice «411 eaert «d4tttieaal ejiU-iaflatiooexy effects.


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

ift tfct* BMurtry at « t JJM vim th» *Ok of th»
•t

of *U


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

ital
^^•»

Aid

w^^^PW

to ««

J| ^

prtanfily *» * ••Uctiiw 9Mtei4tt«a «i

not fiMMt for without critically roteeUg
of tb* bmtaott ooMOdty* fbio va» particularly trua prior
to 191* itomM it m* toon tfco faabion of teoloaoo ofttospriooo
to finaoce a far groatai prcportioa of tholr working capital rait is today* KfOtt a •odorato

a lorn, tbar»for«, bit dlrwrtly at a particularl/ actlv* aoJ stxa
r of tb« country's MM^ mpply, «ai eo«0oaly foreod

did vet aeaioifo «U«i s «irb os tfct availability of baak ertdlt

Xt tfotila lov Qpemte HHnly

ta« ooft of Jtat*, 1950, laoai of all fcl*to of mil tl» iaovroi
•areial boalui Itt tteo OfcltoA Sta>too ooMttitato4 ooly 3T pomHut
of tbalr •arniag aaaoto. UNTO taaa a pirttr Of tbtlr loans,


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

Ltioof tbou«h IOM llouia. tl» total of tholr
1

MM oaly 16 yoroo&t of

^4t

—• -—- ^ i • i^ ^ X. A -—- -

_

i^ Jl -^ % mm

Ha^k^ft.^k^M^^I

~-

— -*~

^^^~ <* A

A J ^*^^

¥** Bli^i la tho institution! •itwtloa
talvt WiMvoaa foiMHrly a gMMwal ti£at MMMT yoltfiy
ai lM»alatol^ to r»«trlct loaaa to tartaott
a flHwcaJt tlMrti IMMUT Jitlt^y woaaa a

vooU flrat tevo to «aio through ^Ullon» of
Boat ooo%urtit*oa ovBoa tor tat ocMBMMPa«ba» vaafe
bold aoarljr $t ^illioa if Tf»a<aiy Mil*, aoa» «f vaiea
and all «f irtioh aatitv* vitkia 13 voaioi* 2f tfeo

to ao^d to


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

VI lift <•

of &u«i»»»» koft*» fer
In Biuik .-or

Tt i* «r«H04 by ooao that tho H«* im fmtf»r*«t r*U»
a tt£bt*r «oa*y ?*oHejr %f tfc*
In th« mtrk«t t»ri0«
ib»t tfc* Vs«V:» weald %« r««tr»ia«Ml fire*
of tb* Cft^iUl lo««»f «na/ of **•* w
would %* ««r« **tr«eti?«. Sat * a»4«r*t0 H«» la
i» UMI urtc** of

still **11 a¥or« ff if tfc* «br>rt-t*r» r&tt of
to £ » * « *

If * H«Bk W» * «»o*

i* *>* lil^Mr %» %• 4«t«rr^l trm
it« fMtMwry «ot«« at 99 t& *rd*r to ftttmla th« fund* for
th* V,ak» ov* l*r««
vhieto tiuiy e«tild tura i* to
tfe« rr««t«Lrgr far c*»h HOMI atttisritgr without last*


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

on f r***U7 mot«» utmli met
r tiw b«mkt »ttr«tetiT« if •<t»ol »r
la th« ri^l<5» »btAlm* !• fr»« bmoimofi lo»a«.
tak«

- 10 -

la short* a Mftarato Irf jfrtfttJimi of tat
ooaditioaa will aot prorlde an off oetito cart on fcaai*
loan oxyaiiaiQtt froaaaia of tlw iaclfoaoly larav 9«aatfl» of

t IHI/ ccwJLd mil o§> aULov lui va^im la oord^r

ro«trictiY« orvdlt
to ao * loag twg
it emit a«Pi«Mljf Iteit ta«

of otter fiaacnial lastitv

if aaj, effect afoa tao loaa
tioaa.


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

»i£ Ufo iaamraaoo ooaaaaioo, for *xaa$lo, faaotioa aa
f hoy oataor tao ialo oaaa aad
VHW Jwo^aWa vflPHo* i^(a^ w*j*

aetlvo mat
»p»r policy

billion a joof, tmlillac taom to aaxo taia
a^v'V^P'HaiHNaVv ^P JPliHiMHaJaBb *

u It ia ¥oll kaooa taat tao
*•»l&aa C5J

"

llflLiUUi^p

-u*
•ad tart tbaj jarorid* aa laportaat f Hit Una of tao total, leag*
tow Inunt f 0r inteotriaX yl^nt ozjaaoioa MM! rooldoatlal aad

f i¥O

, aad otaor f loUMiAl iaotitvtloBO also yroTlto Ittrg*

do aot aoalaaXlx add to tao
taay «** aa loaa off oetivo ia fiaaaolag
aetl*ato tao Idlo aaaa aad oaivoat aaYiaea of aillioa* of
aaaH aavota. If iaflatiea U to W foa^t offooti^oly
p

*

•aall contrib«t iom to taia oad offorod tqr aa


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

ti»frtl-Wk
ev^ltw j^^FmmM^^j
T^lliiT mju-1^
**M«**4 tktf^M«ai
•>* * %*» w A T^P ipaj^mBjija
>vwuMM Ite
i^v ^httit
VNBWw *a^pjaR*^rwiaTwwaaha>wa^pBi t^A
vflaw

taa aoxt aaotlaau

L«

Foo woajwi o* Qovowwspa 4* %ao
•olattlv* ovaolt

It) duriag iorld Mar II, aad tala control vai
ay raujnai aad ia aamia la offaet* laat fan it s

and obtaia** coaaidoralO* powar 99** eoaatruetioa loaaa (it*
toaaUtioa 1).

Tboro ia little doubt that It would Ilk*

control over ta* loading and iawtiag aotiTitioo of
•ad otter aoa-baak financial institutions. Taaas
la tbs direction of ssooif ie or aaalitativo controls
or»r credit la various f lolds clMrljr iadlcato that tn«
ta ftvare of tlw

••ft•!li«it policj.
tbo public ai* also far
action than tbay
»o«t of thalr MCOOJ ••§§!/ fonwrlgr area* tram
4

^ dk

4"^a^k^k

aw%^4 .^a^^a ^^^a^^a^av

A-^a^a^Bk

^k^aA^^b ^ ^* 41 ^B^k

to Waking aallnloi «• Boat of it ia nav ovaod. ly tboa fgao cd
dlroct atert^tow 6a%fca to ta* Iwaka* III addition, taajr aov
owa iiiHicaa of dollarv OK BariDatavIo or rodiaoavabla Oo'varBaioa
•ocwitioa. vkoroaa tkajr foraorl/ aold miTy Baall aaooata of
aoaota. la Jun» 19fi6f tfc» loaaaf laoladiag r*al oatato loan*, of
al baaka aawavtod to 11% jwroavt of tha total of tbair
ita aad of taa carraaojf ia oiroulation
of baaka] by tlM> and of 19!X)» taajr ooaatitatod oaljr
. At tbo oad of 1950, iadividaala a»ld
billion of li«ttid aMotaf M iBBftirii wltb
180 MUioa ia ta» aiddlo of 193^1 «ad «orpotmtioaa l»ld


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

MUioa, a* aaaiaat appromiaaWU $1 billloa ia 1^1* (lifalt

- 13 -

•

a»«cclatlawi, pott* I MTlng*, aM holding*

to


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

«*•* is tb»»» im/» OHM direct I/ fro* thUr petatz>»d

of •«cxirlti««; and

III lighor iatoioot rotoo auro ooift to

•Bti-lafUtiomr/

offoeto In 3«rer«l way»» Lot «o

of tJMOi Vrfofl^t

(1)

to
la

to
profit

to

In-

A oo
1p A&^if *

Jr VHk

$160,000 wo«U fin*

j

a rUo

r«loo tfc* coot of

w^fiP ifw^jp

fl^m^VW1

w^r

*^^w^*«*-«fc

3 to 6 ft t eta I In lt«
Igr oaly $130*
bo MQVO Is*

ttt

(2) ffco ooollnoo IA tko

otoJL feaafcB fra» oo


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

(I) At M0»r /i«ld», TMMiiij **ettrtti*« would attract
ticaal i8***to** ««»lBflt tte competltloa af aw prlyat« invest

tat MNbMMMl*


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

70 tiit •Xt^Pft %lMrft %te MMNQPi$$4NI 9

would ftHM» to r*4ne^l.
iP^w^K

iPl^

Ifc* w^PJTiHI^J*

^(^F

vv^^^MPWiJi^p

%o %• >r>tlii%10 f of MMdi Ifwrfto fcfetftn
•

jWPXTPllw

l& t>lMi jriftXdi c^tilBilils tTcm bi^

-i
«•* IflMrt- tt»

*t*y ?«t If tte** «f Ti^nn/ ••curl
jri«ld «Jf *** f *M*«fy** latex of

«t

2-3A <»" 3 f^r ««t? Yrtmory ••curlti««


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

«» »ec«rity i*

mad to eff*r lw*r i.zlc«* for i»mitMmt> l«alila« tfeMU la
if

Iwt
im tn« t^tunw off«i
T^flMJ^^B-^L^MIK

•dditlonml

- 17 -

la interest rates. Few housewives are likely to forego the purchase of an el*etris refrigerator because tt» yield obtainable
from Saviags Isjsjie rises frosi 2.9 to 3*1/2 or *t per cent.

IB,fact,

ft rl*« In iaterest rates vould reduce soae laportant kinds of saving. th» att pxwd^JM payabl« cm llf« in&urmace policl«», which
for a autmtantlal voluwt of lndlvilu«i «aviagft* iwuid beBo alto vo »ld tht aavoal wwu&ts of savings vsquiroi
to aeouMulato a «ivmi capital »u« or a givoa aaaulty. tconfl«l«ta
•» fact ial kM«!lo49i of tao *t*poa«i*»!M8» of total «avl&g«
la i»t*r«8t jmt««. fi»y 4o not ovon knew tao dlmction
of tht rotpoaag — that l«, vfeoth*r «oro ton4» to t» caYtd at higbor
or at lovor intoro-t rate*.
(5) Hany tank fepetitar* «mU bo iaini>o4 by tbo ki^or In*
toroct rates to convert thoir dopo«it« lato Mturitioa purchaaod
froft tao banks, tteroby rod^^lag tao dispooltiOK of tho
to spoad, aed rolNni^t tl» total of ^aak tt^oslts,
TJH* «ay nell bo tlio toaaoaoy^ o«t ao oviitaeo ojtlsta to
dieaU that tk* actual offoet would feo Jar«n. AB o&cortala fractio» of \>atrifc fjgpotltt Is riflirligi by tboir cnmers a« a prized
fom of proporty, fixod SB 4^Uar vaitw ftaa is*tft*tly atailablo,
but mot 4»»tinod for spoaiiag nintor ox^llaary eirooastaaeos* ftot
groator store oft tao afe*olut« *afoty and availability of taoir
tbaa iapam sHbld. if tkoy did oot, tlioy vouli already kavo ic-

if as appreciable aaouat of *x»ck deposits wire ievested iato

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

aoeorttiet, tbe aati-iaflatioaary offoot would bo

negligible, for the deposits taeoselves are regarded by tbese
Mrs as a form of in*estn*at* not available for spending*
Anotbsr portion consist* of funds bsld temporarily to
corporate and individual tax liabilities or contemplated
empendltares. Because of tbe nigh leirei of tax liabilities
in recent years, substantial deposits are accumulated to
Principally for this reason, business corporation
a good smrfcet for sbort-tersi Treasury obligations;
about 19 billion of fax Boies alone; and a rise in yield*
nmgnt attract a •issisnai larger voles* of funds. But no significant
w&ti-iariatlonary result is achieved vnen idle deposits bold for

^f sec^rltie», vitbout reducing tbe spending of tbose *fcu> would

tae largest portion of bonk deposit* consists of
tbose .sed for %>>••• utioa* nifrobases. It is possible that bigber
interest rates VDold attract seas of tbese into Qoversjnent
seeurltiea, but no one eonl* oonfiAomtly say that the saount veuld
be large. ¥ne anti>iafistitanaij effeet of such eonversion as
aid ocewr wuld be offset to a& usbnows and serhapi substantial


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

*xt«nt bocauso tb* rcmiaiig dajK»*it balaae** would bo u»o4 w>ro
aetivoly. ffco aaaual rst* of turnover of bmnk d«posit« IMMI
In ."»eent yMir» but 1* still far b«l<^ ti» rat* la 1919
prier y«ar«. i.wai
a »al« of Oov<nn««Bt «*curitl** to iBdivld^ala aad bu«in«»i


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

regard tb«M Meuritio* as clo«« «nb»titut«« for ea*af
availablo for

_
aametlt Credit Poalley

Ito ha.va hith«rtc *s*uaa4 for pxtrpeaai ef discussion that
a gaaaral *a«ti*fttl*a •vatlt policy eould ba kept aodarat* 1*
Its iaaaet*.

1* particular, w» aaiUMi that aoa-baak lnY«»tor»

mould *aaAUy abiort ttM QoMiMMnt ««rurltl«a liqtiidalad by
r offtef*d ^f tba Ti^iatuj'y ta rafvBd baok^hald
oblieatlaa*. Thia i» by ao «MMM Ukaly.
alstakaa asauaptloa la c&aaaaly aaaa- taat taa ooa»
aaraat far Oumaaaai aM otter bigli gvaaa aaearltlat la

axtaanlv* axaarlaaea aad that of invtitaant banking
claari/ laftlcataa otharviaa* Lat MM aaa vby«
•«• lant tMtltuttoaal lavastera caaaot avy laxia
^HflHI^HMa^Ht A

(tti n$ ~ t^a V\ I **

fha blgiaat lav*ctor« 1» aarkatabla Ounfaaant and ataar
high graaa aaeurltias art inttitutioaa • laaataaaa eenpaalaa^
eovatrelal aad aaviag* baak*, tm«taa«, pansioa fuadii and
fcualaaa* corporatiaaji holdla« Oifiraa»iit aaaurltla* far taaaorary la^attatat» altfear ia «ntictpati-» af eorporata tarn
liabllltiaa or contaaplata^ avpaadl turwv .
OB PiiiMflur |lt W50, of tha |tl6 MlUoa af tha Uaitaa
:"tataa govamacat ofeligatifflM, diract aad indiract, uald


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

- aomtoio* of goToraieat fuiraaoio*, too ooaiiorotiil fcamfca
ftooorro tamito molg A total of 982 fcllltoa. th* attfetal **rtag«
lamfri am* tmottfamoo oompamloo $30 billion, bo»in*»« oo
tlf Mllioa, otfeor la*tl*utlom*l aaooamt*, I*clu4log
o4 40ftl«r«f $11 till!**. m«4 »taU amd local ftnr«rs»*»t« $S ¥11*
Uom.

SHi» loft f€? MXli«« 1m too fettto of ladliria^lo

tlllioa of tHoir aoldla^t w*o U tM foi« of * rla««
ottljr $17 Ml Uom U tteo fom «>f «MrtcotoHlo oomritto*
ift«tit»tlom*l lavooter* toouro Ukoir
Jao roool.-.-t of

ramivm ^>of»o«to

, lutoroot* ro&to, «m4 profit oi ofti taoy «t^ il/ lavott
tmoa r»tfa«r piwajstly at tmo i»ia« fatoo* «« tho roeointo
1m. ffcay raroly aoW laf^ aaotimto of lolo c««h.

Homeo

tmoy oammot omUx^o taolr !MTOA«O«O of 0ovonMoat oommrttloo
gromtljr la «my »ao*t OPOOO of timo owo^t fey U<t«l&»ti»g othor
tmo ^rtmol*?*! narliol fo* otiioF Migpl
4tt M

tmo arttt-Oftak isrootoro oawaot -Mhoomjro mow fum«S« for
Ooyoraagtttt %y *olltmg olao* lavottaomls to omo oaotmor.

¥fco

fmma* obt«iiio4 la tmle «*/ »? tho oollovo a«M« tmoa «mot to
giro* «p lr tmo fettjrors.
MmrooTOtr« ao «o lucro >rorlo\i«ljr motod. t&o /lold« om
otmor mlem «ra«« l»To*t*oat« will aloo H«o If tho irlolilo om


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

ooeuritioo increase,

Attoapt* to liquidate tb*«c

ec?npotins high gtad* invoetaoatft "by tbooo ioairing to svitch
to govonHMot* will drivo down thtir prieoa, pu** up tfcoir
yioldt, ant tborob toad to mintad a tfeoir rolatlvo at tract! v««**• a* agalnat Trvaeury i^euriti**.
My «ub*tantial vol«»e of additional Qevornwot aecuriti«* can bo aold to iastitutio«al in^ot^ra in a tfeort «pac«
of tiao only if now iavoetoottt outlot* for thoir iaoottiac
»uch as aow corporato boat isooao and rooitoatial
» f aro groatiy m!«eo4f aa thoy ooro duriog Horld War ZZ.
Ovor a loagor poriod, aa iaoi^taoo in tbo fablie's oavia§o
is tbo fora of lifo lasiyaaco prooiliaa^ saving* deposits, and
tho llko, will a4d to tho inroctvoat roooureoo of tbo Institutiooal
Inroitors, bat no largo increase ean bo oxyootod in aay short
^paco of tijoo •
ilAilarl^ vita too IB oitooai rooourooo of iadiridxaals.
Za tho aggrogato individual* oaoaot obtain aay not ia«roaoo
im f^mde availablo f<r tho yorebaso of flu »•••»• I oaottritioo
by aollittft otbor aooata to otto anotbor. tt*oy oan ooouro ad^«d« for tola yuyfooo oni/ throufb additional «avor by uoiag provioaoly aooonulatod bank doyooito. «•
haro provieiMiXy net** that in tho rtMQJBi of


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

of desired eoaotaytioa aad ioreetoeat goodfc, tint soring* of
individuals art primarily respoasive to tbo level of their
ifteoeMs aaA to toe prevailing staadards of ooneoaption *nd
soviag. Thoy are not highly re*foasive to iagfoasis ia interest

of mjor o^etrttotioa* to private iav*»taent and
spendioc, tbo boalrt and tlM Treaaury could sell largo
- •"
*"
, •»
j.
«• ^ j» • «»4 •#• 4 ^^^ 4 **, ^d^^ft ^^^^^» 4 ^haa^b^bA^^^^Mi ^ «^ ^^A«*
or
TToaaurjr
»ecumie»
to BOO neiK iwrooiovo MI OBjf
K

of tU» ott^r »y forooadimg dopoeitore to toy thorn vttk prorimwly
aecuoxlate* Aopoolt balaacee. Ho ham notod tao difficuitie*
ani tbo OML& aati*inf latiooary ree^lte to bo osaoetod la thjl>
diroetioa. ievortooloas^ «oo*thiait eeuld »o aeeooplleaod tovard
rhia end by vigerotte public pa^aigae oyovloM oofflfomto 1m tbo
ttability of tbo 0OTonMMit bond «arfr»t woro oaiatolnelj But if
n» aro to ooo iaoroases In yield* to accoopli»h thi« rewilt, too

If the risias yiolda took ploce as tao result of selling
pressure OB too aarket b tbo eooaereial baaka and Federal
Heaorve Nuaks, the deeli&lag price tread of Oovemaeat oo««ritio«
would quick*B fears of farther price deeliaes. Many iaeti*
tutlooal iaroetore uto ooaf ideotly pureha«e


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

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

tioo totej, vooM to M*** to hoi* off, o* tbo?
teXA off in tJMi poot ^hnytifg MHriUMto of 4bMlJUtitec

Jola ia the s«Uiag.

to tte •M&X oApikeit^ osf tlm ttCMftank •Mcivt to
la OJQT start CIMOO aC tlao

AM «0M&»t tto bi4jfia

of thooo wl» woiiU %• at*

M A^k^k ^K^K^&^» JL^k •k^^^b 4K A ^ M^IW^& ^»^ ^«^M^

XQUU9 vVHUC uOBOOlW WO

•UkCBv ^k^k
OO

to ooflwoyt o. poflrtioo> of tbolF 40M0ttft ixto
It low If tte Moctet foWkintd oto^lo voal4 1m

i, oo voUL •• otter

• 25 »

iBfoatora, sold koariljr from tatir holding of long-torn
tronary fttouriti**. Ta*lr holding of loog-t«r» Troaaurjr
•oc«riti*» vor* roiaoot If approximate |ft Mil loo la thi»
fovioij wblla, OB aot Valanea, tte wbol« tammt of tte

oTwwot eould not to held wltlOm
limlU vitikMl MMltHMHW «ad «4»t«it* ••§>«!! buyiag OA th»
*

iv

utmll te^» to
____ ^______^

_

^^

ft>r, it i* ioaotifoiljt tlvt A
loos of oo«fi4t«oo la too etodlt of tfeo Tronuy vonlt result,

rioo la ooBMo^ltj fvlooo ivui Io4 to foam aad

of «bwrp dUootmt* on Tioaouij ••cvrltloa would ooaf lim onoa
foox« 1» tao al&o» of ooao* Aat if » »1wrUj aftor, taa
amA to «o to tao Mtfeot to imloo oaootaatlol saao for
dof loita or ali-oat vart ta» 4if noaltloa of aoo-Urf l*tloomr/
f Inancinf vomld feftfo oooa a«oa far


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

tft tte otter hud, If the rise la yields were aeeoB&listed
by * treasury of f«r to refund tte whole public debt at rate*
one-half o* one percent higher at all aaturitles than the pre-

wcmld be «elBtalned hgr their aarfeet support, there vomld
be Itttle, if any, gala IB credit control » CovaeroUl banka
would eoatlvee able to expend their reeerree at viU by telling
Treasury eeevritlee to the Heeerre Bank*, end the rise in yield*
of btielBee* loan* and «rlv»£e eeeoritie* would Mate it profitable

to tte interest cost of tte eabUe debt. The oaly 0aln

Treeiary eeeoritiee — ao oae oen say how auefc, and we
for belierlng tte ejeooat would be aatll — alght be
ey

World War II iadioatee that when tfe
direct eoatrole over steel sat otter •earee aateriale, sad tte
tie*, tate hold during tte

(


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

n
f9y yriT»to
o*tl»t« for iawMtMttt if.«••*<•§
w
^^» will
•brink Mttori*!!?. Itoofc of tho voofc to w*«k receipt* of

'»
Institutional lafooioro will than feavo ao otbor
to go tbaa into nofirMMat ooeoritioo. XT tho Troaoory


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

at a 4»f Iclt, tkoao lrrr^tor» will be

»W9 (Hi

will INI AoovndJKti&c fvftto fw*

IMM
for OotoMMOt Mowritioo from Indirldu^l* will

for Wok «y*4i*i %«t tte or«r-o>U ©atlook U
Will

a mfcatential
ie* la tfeo Wtal

buciaaaa. TtoT* i» ia?olv*d fca*» act oaljr *a*
tat the Millet* of dollara af leag*t«ni ••curlilw
public Htilltiw, rmllro*<U, aal «ta
a* tfc» lnt«r»«t t«et« »tmetttr» of

1* now ^riNkbtod la tb» •arfcvt pric«« of *T1 high
it would tafc* «Oy * f«v anatH «f undl«crlmia*tlng
credit i^«triotirm to blaat tte «iMMM «f «frint*1n1»g or soon


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

la mtoh a lrr«l. Ths «ff«et« of a •o-c«ll*d

« that lad to ralala*

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

- f9 -

*I»t

i*rtiettl»rijr tlM part

U)
. *• tev* «lr»«fly

Vt «t» •»% rwlytug

flw MM* prlnctpl* is »j>plt«*He to cr^ilt. im tte

- 50 should have • first dai« 119001 tl» credit resource* of th*
eouatry. fh» ie»iii» of credit available to the Ooveraatttt and
to the business enterprises serving its emergency needs, ms
Ml tiui rate* paid for this credit, should mot be detrained
tte r*«*U&es* of non-ei 8»ntiai us*rs of credit to outbid th«
Ours ••nut and its sufflisr*.
tbs) tstal amouat of srsdit IB us« swst be restricted to
curb ioTlatioe, but th* restrlctio* steuld b* *«lscti/«.
ttMdit wust b* providsd for s«ppli*r» of military sad i*lat*d
foots, an* for ths norsml ro^uirosisists of *sa*Btl*l civilian
*

i

•

^Wk ^

A - -• - - — ^- — -*

a

,

flMW^k.

^^^^^MifcA^K^

j^.&

* •^^^k.JI A A

*

.^^

%-

_

j» A ^- ^-

slMMild bs) rsjduooA to tbs; sstottt Aoodod to avoid Inflation* A
few aottths hone*, eucb reduetioe will b« aocusjilishad
ia eoasitermbl* •omsor*, by too direct

essential uses, and by the reeeat limitatioas ue«s loam* for
But other asasures are also appropriate •

(1)
Aa I sen Uat€ stay, aad one that req-^ires no legislation, would
be the estabU«hs»»t on ft yolumt«r>' bftsis of national and local
orgftftiiatioYs of baaka aad >tber IsftAers for the purpose of dissuading
borrower<* aad lead«r» froei eeterimg ioto credit transactions, except


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

» &•
tfemt vottlt contribute to ttte defe*M ftff&rt »r t* e»«efttl*i
civilian ref*ir«»eittft* UN fre*tde«t soul<t gt*« till*
?r«*tl£« and »oral authority *y lesuUg MI te**tiv* Orter
it, c*U** the Voluntary Cr«41t C«»tr*l CoMd»*ioa
«f til* Seeretary ef tb« trta««fT, th^ C^Mlrun «f tbe
<knr«r»>ra ^f tl» PNtorftl t«Mrpt ayi*««» tke Writer «f tl» Offie*

y tli*
of A»«rlc&, a*
«oclfttlo«^, to INT
tfet* fMUirftX JB0Mft LfMdi ^uddt BottPA*
policy

tr«ui*ctloiia
yvMHnt riM«Jtti««*» It vooli
*^rt*M

4^AAl4*

*f€ ifc

it.^A

MM^k^AM A0*

JIAMC^Al

to 1»1> In ttot

If tlw irolttst«ry farogrwi wirwi Mt ^ffeetlTe, tl»r« *rt two


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

under ubieli qixalttfttir* r«f ulatleti of baak lomms coul€

coult Issue a. r*gulatloo r*^ulrln4C «U a Matt rial «ai

ft

prior
It tbo fftttiet&a* Loaior**

of lo*** would
forwilm.

••rest ft*** t*
tfei*

o rwitrict
oo»t af grave laj^rir to tfc* «ark*t fwr

to


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

of

DM rettatioa of GovorMMiBt

itttlMNl t)M& tould IMI

- 33 -

r«t err* la €*** or *» 4**9«it wltfe * ?*4*r*l £*oor*O **•* of
ft «9*«lft<Ni $*t«o*tafft of tfco i»er**o* U tfe« tot*l of
lOftft* ft*i i*v*tt«*»ttf a
%!*• fro» OM wiowti on * **** OA%««
U o»t«Ji« of Hi* **«« NMiumt might o@ p*r«ttt*4
*«tbor 1 smt too of
to o*4o to »n«>l
'^* I^^^WBK^ W^^

fli^^W^^r

*

P9^HMMNHfc ^MW^P^WP ™ iHiW^j^^Oi^A

W^l^p '(W^^^^WPI^R

» ^ww

^H^^w ^RoK*^*

•^o^Wfli^Wj

tut *«f**ti*l ^ivtit** ro^«lr«MOt#f 1m Iu^ia4, in

of

ability of tkt iNkftklog «fvt*tt t* ««^»oi pri^iit* «r*41t for

of
to to* ««iai».

If tiM o«*o ooooittoi of o

fio4 proporttoo of frl^ito 'le«ii« ««d t»T*«t««at§ to o^yoolt* or
of ^M iaanat of
00 ft aryt«lfi-»4l 4ftt«t th« >!*»

of to*
lot*
t**ft tlMi OMMi pr^*rltoa.
tit**? of t»«- foiNi|iol«9 «pt»od« of
Of %*0k t»e4ia* wotO4 IN cifortoir o»««i*« of


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

to aa i*e*«ftM ia ordinary r***r*m r*quir*s«at«4 ?<>* tb»
r*a*aa tl»y would %* superior to th* adoption of what «as
tanMd ft calUag rewirv* f lam, vfcich wouid iapoit * 160

•ay bank. Aa ift*i<aa»« ia ordinary r*s«r?« ra^uirnMmu or tS»
Imposition, of a eeiii&g re««rv* r»qpir*a»m veold «ario\»aly
IMba eajiaeitj? a&4 aisfonittcm af %l» Tiantu te ®wn
Traaaury ««curitl«*, ¥0«M r*d«e* bank •*rniag«, aod
aott @iMi:ivl>a •ai4Ntt-i'vaJLy aaaiaa^ •^•euXa^iva awl o'tiMtx* imaann>ary

(c) Ba^^lw^i^ ajf Toaiif

"^r

1

al %fe* loaa* of iasuranwi ceapaaiac aad
Iti^Ura is aaaitd to *y?>pl»«tnt tb« raguiatloa «f bank
Wii «cw3Ld taka flae« «a4»r tte v»l«oitar>- ©rgasitatioa
4taen^ad«

If veluatary a«tbM« proved

ttia ajutiMMrity «f tH» fmiiag iritk tlta IUM^ A«* sould INI
Ia tMl« eoaatctiott, it aigkt %• 4*cid*4,, far «w»lo, tbai all

ia «3tc»9» of ilOOyOOD, otkar than ^nit*4 3tata» Iknramatnt
a^n»»* authoricatAoa %r a iaai«aatad
%« givMi omly ta loaa» or
at wcuritift^ 5**m*:\ *so*f*tiai for tfe* icfaaa* aff^rt


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Federal Reserve Bank of St. Louis

* 35 -

oaata. ft* affaot would ha t* diaiaiab tl* siwiilafeiUty for
priirata iOTtfttaant of t&a larga surr»Bt accession* to tba fttftd* of
Institutional imrattora a*d tttafaby to laeraasa tfe*ir aa«md for

K » I a t i o p of Haw

lnv«« tawnt

wmld still niMla for tto salt of a** **euriti«s, feotb
m>r* y<urtlei}l«rl/» pp»f*rr«4 MA ffna^tn stocks , to
indivliual tat eonpoimtn inv**tr,rs. A espita
b« »«tabli«*>«4, «a wae d«a» iuri«g tforld liar I,
would ba rt^ilred for tha salt of any oav lastia of **curiti*a in a*ea««
ef $100,000 fry coT^oratloas an4 state a^d toliA ja»ar«MHta,,

fha

autboriiatioo« could be confined to ia^iaa daawNI 4a«xrabie la tba
national tntarest. Tb« »ff act would Im to divart iavaatttt&t fund*
to tfWMury jacuritia* and to f*d»ie* ttoa volax* of ift**atan»t

^aaAlM «at

4 alfalfteaat ra^Litetioo 1m prlvata Invaataaiit afamdiac could
»• «rr««t«« ^ afedmstzfttiv* radtt«Uo« af ttw »ol«a» of IOMW aad
*5 ^gt^ta«fc


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

At^^aMiA'^^^a^b^ iH^ft^t^fe

fr*w*^i^a%*

^k^a^^l tt^-^t ^a^M

•^•^MMi^k^MM^^^aMMfc^'^a ^

^h-%*dh^v^^^^^BA

* 36 •
ftpBloaoatary las* taaoryo* Collating
ffe* groirtfe ia *aa* holding* of Qonjoaont ooouritios to a
lavol at vhich tbtjr coattltuto tfctt *r**t«r fart of tlM «ax*nlag
as«ot« of coo**rci*J bank* bas created a strueturml chaat,* ia

for

of ^aak credit ext»nd»i to >>u5ii»*«i «nt«r*• im teav* •««» la «S*tall la tb* for»a awid to i*«trlct «r»41t •xyaasloa to bu§ !»»«• «aa
««ly
through disnptia^ tiw »Brk«t f «r Qewrnptat
>
p e v i r . fh* pr«««nt •pat^aacy faa» spot lighted tale anowily
av* «taat« it* Oalaas e€mm«taaf it will t«pala aftar

%aak« ata teatlaaA will.?-alUy to coatiau*
ta ova a larga aaooat aC Oavaroaaat <pturlti.ii. Ttveir
aiftaA ta aaa^paali lavoa«ot» ealor o»ar a tang period

of tlaa, aa& oaiy at ttoo eo»t of otttovfelaft roal Mnria^i. It is a
coot taiag %» aa*ot% ottviaav ia talo nay dtarim*

period*, «aoa taa attoo^t t« iavaat tnoa ia pool gooaa
ad4 t\m\ to tao iaflatioa.

In .foitoda of laaortajyloym

it vo«14 ao vastoful and otlwniiao baraf iti to absorb f m«fe sa^Uojo

•paatar MOB no my rogi^ot taa pbaaoaanal incre*a» froa $36
(

biilioa %o |US ^illias in tho -voliiM of flipBii lopoatto aad eurfaaey


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

-37*

of
siaa* lf|9» tt» tffott*/* wmoloamlo rodfcetioa wanid bo far norao

thaa tht offoet« of tbo iaeroaso, fba country has already btttoa*
adjusted to ao«tf If aot aii, of too incroatad aonty »v^ply. At
^tttSf

Z^BMVVV a vral^BIPft iMMIMBB j i w^»-i^t

• !&JBl*JLAfiMyNBPCa- 'w^Hfcfc VMU * "^'

•" •**

a^^tMLK\^3ry

soeuritl** fro« tfeo bank* to tbo »»-bank imbllc la tHa for*s*a*ja«
fataro could absorb * I**** fraction of teal; boldlagt of aoro than

la tbe aaantl**, tm« hug* cu^blon of «artotafal« Tr«aaury

autaorltios to rtg^lat* tboir loan «rpanaion, (t) eraatet
jroblam* for ^t baakiag authorities in regulating tho Mituritioa
of tbo Ti-otMimij soeuritioii the baaks ehoosa to boldj (3) eroato*

•ad (^) r«quir«8 th« trtajiury to und«rtak« fraq'jaat larg» seal*
r«fuaala« «p«rations far tiMM »«curltJas without *ff«ctle«

fht «atae U tuation la a mudter of otter co^atrlae has boon
%aja|»» throng* *t«tat« or laforaal agrew«nt, to
ofortlon of tfetlr MM»t« l» tut fot* of gdvtmaint
noeurl ties, or to rofimln fron rottielat ttiolr bold 1*38 of Oovorinaiai
Meurs tio« vltlNNlt parmlssiot. A similar oroposal ttBte ia its


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Federal Reserve Bank of St. Louis

aa»«al roport to Coamoo fej tho loart of Oo^traoTO of ti»
loaarv*. Ststom wo«14 roqviro banks to »aistain

-*-

>» **
la ea»»t ofwO, to a otato* fraction of ta*ir ioyaait iiakilltl«,

iviaa %aiaM fa *4dlt ioa to tao apiaaxr

aorito womlt fajitfa ttat tto

of tteir

tfea itaaaai trtT *fy %aalt»
"• *

^1 a*

to aoot ta* C«rtlf leat« t^ttm r»i»inaaat«. fha


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Federal Reserve Bank of St. Louis

not avta a f laal aatarlty «ato» tlMiafh tkay «ataUI la

Bhiar such a& anraagatawat, taa prtaa&t raaarva
atnti of tha Board of Oo**?aoT« would conrU.au* to gov«r*
credit •gyanitatt* f fea yf*eiaa f*raa&tag0a tfcat Bacorv*
Cartlf ieat«& uoimld comsUtut* *f dupOfcitt f r©» tiav t@ ti*»
•i^bt b« l«ft io tit* dlBcrwtior. ef th»
U«it* »*t*bli*te»l by Cwi^imss, wwi tut p«r««nt*«»« could
for «ifr«r%ct <I|ASM« «f iN
i* trwi of orAlnaiy r«wtrv« r«quir«««nt«.
mttta^* «T tiNMMforwinc * Ji*ar^ fxmcportion of t&t pibli« da^t is

1, BM Traatury wowld p«ar«»»«atiy famd at a low
tnt«r»«t rat* p«rfcap« at waefc aa ««*»*tblrd of all tba
amrfctftafeia •iaiir«raatittt ocupiti^tti is trivata hands,

fha

would ba to roftw* tfclt iar#» fmet on of tba t<?*al fro« taa
category of ordinary p^lt« da%% otei Igatioa* aad to ollminat*
all tlia rifuodi^ ofiaratioa* otbanrl** aaoaaamty for it,
aay iBdi^idyaJ %«ak could raAaam tisa Baaar^ra 0«rtlfIcatoa
, ttoa f raa«ury woaH aav*r ojcpariaae* a mat lo»« of
eaaH to taa ban** aa a wfeola «sla«a th* oaa*«


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

a redact ion is tiiair

f. ffco tooorv» Soj&o would rogaia a eooftloorabl*
of eoatrol otvr dlxoot tank leading feoeaaao tfco Individual
ciooMi'util BOO* coald ao loB0»r o&ta In f aaoo for IMA a»fooi
oioa tkro&£lk tfeo li^ttitetloA of 1%» gewmHHWtA «Ke*pt in
la vhlcfe it vault centlaua to mm
th* oaralBgt of

i* fl» tlpiit of ayoiOio WHIM

of JMMmiMMMrtpO lor tiMi tooim OA& %IMI •c-oomowrliMi tiuroftt to
tte •tn^llity of intoroot rmt«» oat too «Wl/ of M0oar
v<mld oo gi^etijr r«dac*d. T«» a^illtj «od disposition of tte

ooUlag If otkor laetootovo oai to yorf om thoiy tr*ditioo»I
oorvieoo l» tfto tiotrllmtlom of TJMO.OOJI' ooowitloft would %o
oT*P^«HMo> ^HKBWp^Ol^^ * ^KJfe^

v-^S^F

^^OBWOOMS^P

W^^^pAfl* J|^^WBOP^P"OP

^pHWfcijf

^W

oft of tlioir proooot ooHtnuo of BWltotoliio ojovow
* QB too oto>r lno>t« for tlo> OOOMI ronauii, too lapoot of
* i*otrt@tlf* crodlt foUejr ^ tko tooorto ojotom oomli


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

* * 700 ooooawwHwuL oooaBO WOOJMI vo ronovoo. o*

an

tao fatom ooajow of ietotoot rat»« and bond yriooo oe far
**2* of taoir ooooto to couiaiiaod. Hita p*rtap» 50 to d^
OT taoir oojojalM ooooto ao Tnojur »nfe>et to price ri«k»,

i&dividaaJ.feajBkv••§
an ft whola would %* Man»i*3/ iacg»«<»d. fi» »ffa<st

•ta-bllitT la tha ToloBt of AapooltsftftMMftamjMttbftt

would %• tettor rafniUtod with *•!! barat» r««ard for
wwM^mJP 4N»XtMM^^^I '99NMft> iwRMfe" 48NEMBDn^E9F 41 ^WHMBBH CBi iKHM

A OWHRftMKw HKHtoPw

ttt

A JM9V

f «r that part «f tl» i«e»fti» la 4rtt vHUk «M to

*-—^^-^-^a^-

**--

•

^, ^J| Jfc ^

^^^k^ii^fc JB

ffMHE VvHRlNtHp WflttJUR

ite to tiat an* tte additieoal 1H«un Certificate sold to
ti» banits.


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

if it W*P» dec 14^ to ffMnn aiiltlaaal iaf lclt» *y

ordinary rooerw r«quir*meati* being raised to offset tbe expansion
tfeot would result In member bank reserves.I/

I/ Shift* of deposits between beaks would result in mo change
in the axouat of ioaorvo Certificates outstandinf. Bank A, whieb
gained $100 of deposits, would m«et tne Certificate teserwe B«qulr«mont by buying 00 of Boner** Certificates from t*e Treasury nt tne
noxt settlement gate (and "would meet its ordinary reserve re^joiro**
momt by depositing $80 with its Federal »%eo*rre bonk). Bank B,
which had lo»t tme $100 of deposit-, would bo required to turn in
dote f and vould also me»ve it* orminory

by
An Increase in the ordinary reserves of too
mo a whole, which could be brought about by on increase in Federal
fteserre credit, gold importst or a return of eurreney from circulation, among other menna, would be eapable of producing tne some
multiple expansion of memJber beak credit «* la tne enne tod*y, but
one-half of tne expansion vould have to take the form of increased
of Seoerre Certificates (a-?sating a 00 percent Certificate
requirement) * Thus, if a customer of Bank A «old $100 of
marketable seeurltie^ to a Reserve bank, and deposited the
irlth Bank lit the latter4* r**iir*«& and deposits would each b«
iner*aaad by $100. Bask A would be refstred to keep about $90
of its nov funds as ordinary lawful reserves and to
of additional ies**re Certifie&tes from Hie Treasury, leavinir it
$30 fr«« for learns and other istwstmemtf, Tme $30 it M nseo pl«»
the 06 paid to the Treasury, which tme latter would use to retire
am efttml amount of Its other obligation** would find their way into
tme reserves of other banks to serve in similar meaner *s the basis
for deposit expansion, until a total of approximately $500 of nov
ntmbtr bank deposits |»id boon ere«te4 on the basis of the $100 of
r*oor*oo erosttedl by the teserve bank pmrehaee of §oe«ritie» (the
f to 1 ratio being the r«*olt of the to portomt nverage ordinnry


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Federal Reserve Bank of St. Louis

(3)

^ontiimlmq layhmslf _ oa C«aiyarta>«mt<aUlm|
tke Public Debt

vita tft* public toot at Its fr**««t slief *xc« salve *ark«t
fuitlYity 1ft 1***wjr a«ewrltie* i« *lv*y* potentially temfagaaia.
It Is 4**lr*&l«?, tfcerefor*, to lucre*** the a*Ba»u-ket«ble proper*
tloa aad t» toiler ^»n of tlM»*e atti marketable »eettrlt l*»
to tli« «N^U Of

C*rtlfle*t* l»«erT« plus netfldy of «0or»«f autowtirrlly
«• mil a* r«wret frtwi tile w^rt^fc, 9. very
ft of tli* pttkltc 4«tet. fte lf f f «ad 0 boad
rt»«lt. UT»erfill2liig tk« Il»it9 «i MttBtl p«rrh«i«** of
ft«4 •• ««rl««t «at p«rh*p6 *xt»nftlAf tteelr maturities, alght
fnaia Imto tb««.
Igr **M«lt*tlmi vltfe ittsumace comp*nlc« «nd «aa*c«r« of
p«Mlon f«a<J», It ««y INS possible te 4*ri»« *p*elftl varlftmt« of


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

to

It

pcreomt during tfee first f«v y**r9, th*n a percent,
«r 3 p«rceat or mom la **b«ofuettt ytart, vltfc tl
from ls«tt^ 4nt« to final Maturity at about f*l/? perc«tit.

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

it is
*c

JHK

•a f>«bli« d^t to «p^k of (about & Milton) «e* «> tfe* MteanO.

.'f v.l^w c^nt-f? r-$ *t"b^ut tiii* element of

>M>ia*ms are act the little Imllono, out oft too ccotrory or* tl*t

tfoy « la ot&or wo&fto* tooro is o> lar^t oloswBt of fsri4Ui iavolvod*

to ^«OSAt fiOOS tfe ikifi OHDO^riMOW OBft SOSCtiOttlOI*l,y wiO OOJUPO Of AiJ^OOwOJ^O*

to aolbo tooiy Aoo^UtfJNHl iook ooA* ?fcio io vlor o fTootioiB
All Xfifitt«>tOZV ^JHlMHMOBfe JWtOO


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Federal Reserve Bank of St. Louis

Witfe O OOVVOtOOOMOjJ^HI OOftXX O^NHS ift

wool* oo A«Mdorod oy tto IHojr thot
Iswtr o«A lewor oai tlw portfolio NOB ^so ooM oorly «**&§

~ 2reason that he would be able to either (a) jninimize his losses, or
(b) make some profits by reinvesting later at lower prices.
The Federal Reserve position seems to be that it is possible to
capitalize on the very fact that there is nervousness In the minds of
a large body of holders of our vastly expanded public debt. It is said
that this very sensitivity can be used to advantage, and that small
manipulations of interest rates and bond prices say produce highly desirable changes in the monetary situation* In other words, the argument
is that the growth of the debt and the nervousness of some of the holders
aeans that the Federal has mere control than ever because of the leveraged
effect of its manipulations*
la any event, there is agreement on the existence of a substantial
body of nervous holders* The difference in opinion lies primarily in

i
the conclusions about how these nervous holders would react to uncertainties steaming from changes in interest rates and bond prices* The
federal Reserve position is one of confidence that smll changes can
produce comfortable results* The Treasury position is that small changes
may produce chain reactions leading to completely unpredictable results*
This is obviously a Blatter of judgment*
The Federal Reserve is willing to experiment and feels that if it
makes a mistake it can easily correct it* The Treasury is afraid to
experiment because of the volatility of public opinion and contends
that it laay be virtually impossible to correct mistakes. Moreover,
the anti-inflationary results seem so slim relative to the size of the
risks involved that th* game does not seem to be worth the candle to
the Treasury* In fact, the Treasury feels that there is a distinct


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Federal Reserve Bank of St. Louis

- 3chance that scaring the nervous holders by Manipulation could result in
an intensification of inflationary pressures. This is because if people
are already worried about the declining purchasing power of the dollar,
will not their fears increase if they feel that savings are not safe
because the financial markets themselves show heavy selling and declining
prices? The natural reaction might be to say that this caps the climax
and it is best to save not dollars but acquire only things.
The Federal Reserve argument for raising interest rates and lowering
bond prices has shifted around from tine to time. Three arguments cons*
into peoples1 minds for talcing this action to stem inflation. One is that
higher interest rates encourage savings. The second is that higher interest rates discourage spending with borrowed money. The third is that
declining capital values on Government securities discourage lenders from
selling then to raise funds to make loans. Apparently the Federal Reserve
feels that the first two arguments do not have ouch validity now and it
is tbe third argument which is motivating their thinking. To repeat this
argument, it is that the introduction of capital losses on holdings of
Government bonds will discourage banks and insurance companies from
liquidating them in the market to raise funds to make loans.
This point requires critical examination. There is undoubtedly some
truth in it. tet it is hard to believe that there is a universal rule
here. It depends on a great many things — the size of the capital loss
involved, the relative attractiveness of the loans to be made, the question
of whether "good customers11 are involved, the question of whether a future
business relationship is involved, and other factors. In general, it
•SSTTH hard to believe that this would be a very important factor if
only fractional losses in bond values are assumed to be what is desired
by the federal Beserve,

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Federal Reserve Bank of St. Louis

For example, would a price of 99 on the Victory Loan 2-1/2* s reduce
selling on the part of insurance companies because of the capital loss
feature, or would selling be increased because of the fear of further
declines to come? Might not the market be deluged with selling without
Federal Beserve attempt to restore order there with a new peg at 99?
If this were allowed to really stick, would it have accomplished much
from hairing it pegged at par or above* Are not the securities going
to be "near-money* if there is a peg at any level! Would not alternative
investments or loans appear equally attractive at any peg in view of the
fact that there Is always a spread between rates on Government securities
and rates oa private debts? Tb* Treasury feeling, therefore, comes down
to simply this — a decline in the bond price to 99 may have too much
effect and oeke things worse, or it Kay have no effect at all if the
market Is convinced that stability will be maintained from there on out.
The Federal Beserve position would be somewhere between these two, with
a feeling cf confidence that things would be able to be worked out
just right.
There is, of course, agreement between the federal Beserve and the
Treasury that inflationary pressures should be controlled and that the
expansion of bank credit should be limited. The difference of opinion
lies in the question of remedies. The Treasury is afraid of the interest rate remedy, and the Federal Beserve wants to try to use it
again. In this discussion the Treasury position has aot been made clear.
It has seemed to be arguing for low interest rates in order to keep down
budgetary interest costs* If this were the only argument, it would be


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Federal Reserve Bank of St. Louis

~ 5inadequate. Surely if an increase in interest rates would neatly stop
the inflation, it would fee a small price to pay even if it cost several
billion dollars. The Treasury fear is that an increase in interest
rates would have very little to do with stopping inflation or aiight
upset the balance in the financial markets and cause more inflation
and, therefore, it is not a suitable remedy* Besides which it would
Increase interest costs*
It should also be noted that banks could largely avoid having to
take capital losses on securities liquidated to raise reserves in any
•vent. They could do this by sisaply cashing in treasury bills each
week as they mature and by not exchanging certificates, notes, and
bonds when they coiae due from tiiae to time. Out of $|§ billion of
securities reported by commercial banks included in the Treasury Survey
of Ownership, about $20 billion was due or callable within one year
(October 31 figures)* Another $25 billion was due or callable within
from one to five years, fifo conceivable manipulation of interest rates
and security prices could keep most banks from manufacturing new reserves at will by cashing in short term issues as they come due. The
Treasury would thus be providing them with all the reserves which they
wanted. Of course, the Treasury in turn would have to raise funds and
it does not seem likely that the Federal Reserve could stand by and permit
the treasury to have real financing difficulties, so in the end, the
federal Reserve would probably have to step into the picture anyway.
fhe i&portent point here is that commercial banks hold the initiative.
She federal Reserve ought to be given additional poweres to control
bank credit. A longer run approach to this problem would be to try to


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Federal Reserve Bank of St. Louis

- 6lock up the relatively free reserves in the banks represented by their
holdings of Government securities. This method can be used only slowly,
however, and while it sight wen have a place in a program at this time,
it cannot, by itself, solve the present problems* There are several
reasons for this which need not be gone into at this time.
There are other methods available for providing immediate assistance
to the federal Reserve in controlling bank credit* These were referred
to In the President9 s memorandum the other day. Aside from voluntary
efforts to liait credit expansion a variety of formulas could be developed to limit bank loan expansion directly. The problem would be
to develop one which would limit unnecessary and undesirable expansion
but would still permit expansion to the extent needed in the interests
of the defense program and the necessary expansion of our basic facilities, including neasures to increase the supplies of raw materials in
short supply*
The conflict between the Treasury and the federal Reserve System
has been over-simplified. Actually the place of the Federal Reserve
System in the field of economic controls by Government has changed
sharply over the years. When the federal Reserve was established in
191*b it constituted something like 90 percent of all of the economic
functions of Government at the tiiae. The only other measures consisted
of the tariff, the anti-trust policy, and. a few other program*, such as
the control of railroads, today the Federal Beserve powers have been
shrunk back very sharply relative to the rest of the economic controls
of Government. low we have Government policies regarding wages, we
have agricultural support programs, we have housing loans, subsidies
and guarantees, and we have veterans aids of many kinds, we have a

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Federal Reserve Bank of St. Louis

- 7conscious fiscal policy Involving scrutiny of the economic aspects of
expenditures, receipts and the deficit, we have a huge debt with many
ramifications throughout the whole financial structure, and we have a
whole host of physical controls exercised through Mr. Wilson and his
associates. With this changed picture, it seems fair to say that the
place of the federal Reserve monetary controls has been very sharply
reduced to perhaps something like 10 percent of the whole galaxy of
Government economic program*.
Clearly the central bank is in a position where It needs new
Methods to do its original job of controlling private credit. The use
of selective controls is very Much to the point. They should be stepped
up since they can work In close haraony with the direct controls on
materials exercised by Mr* Wilson*
It seems perfectly consistent with the history of central banking
to search for ever new ways of doing the job. A British economist has
pointed out that the post-war experience in central banking la England
aad the United States has been consistent with the long evolutionary
processes of central basking in developing aew sensitive spots to press
against as the old ones lost their significance. Competent observers
assert that the most effective weapon the Federal Reserve has ever used
was the selective control Involved in surveillance of lending policies
of banks borrowing from the federal Reserve during the 1920*s, Quantitative controls do not appear to have been very successful over the life
of the federal Beserve. They have their place, of course, but the evidence of the *20*s seems to be that the selective controls were the
thing that really worked* At that time something between one-half and


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two-thirds of asmbsr banks customarily found it necessary to borrow frwn
the Federal Beserve banks* This put the federal Beserve in the position
of controlling credit policies of these banks since the federal
always had the right to refuse to make loans. What nay be needed today
is souse device to restore this type of credit supervision to the federal
Reserve, The facts sees to indicate that as reserves became more plentiful in the 30fs, and as Government securities became essentially free
excess reserves in the bO*s, the federal Beserve lost the power to supervise the credit policies of aesfcer banks because so few of them found it
necessary to borrow* There seen* to be no real evidence that quantitative
Methods today could be used to restore the federal leserve's position.
At least there is a strong difference of opinion about the risks and
benefits which might be involved*
It also sesms appropriate to ask whether the role of bank credit
has mot been exaggerated as a cause of the inflationary trend* As noted
earlier in this memorandum, there are a great isany Government programs
with ln^ortant economic aspects* Soae of these were distinctly on the
inflationary side in the whole post-war period, and steps are being taken
to reduce their scope In the present emergency*
Since the Korean war began, the sharpest price increases have occurred
In sensitive raw mterials whica, by and large, are in very short supply
relative to demand, fhe price rises in these raw materials seem to bear
only the remotest connection with monetary matters. Indeed the case may
be made that these price rises would have occurred even If bank credit had
remained stationary during this period* It is distinctly questionable
whether rigid control of bank credit could have reduced the avid demand


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Federal Reserve Bank of St. Louis

for copper, lead, zinc, rubber, steel, cotton, wool, alcohol, chlorine,
hides, and a host of other raw materials. Probably some inventories of
businessmen would have grown less rapidly if bank credit had been curtailed, but it is another thing to say that the great demands for these
Items ill short supply would have been abated. It should also be noted
that inventories were low in the early part of 1950 following the recession fears of 19^9 and businessmen would naturally need to increase
their inventories as a new peacetime high in industrial production was
being reached in June and as production rose still another 10 percent
following the outbreak of the Korean war. It should also be noted that
it would be sound public policy to run our pleats at full capacity
daring the interim period when the military program was snail and was
gradually to rise to the point where it was to take a substantial part
of our total output.
These points are made not to argue that the increase in credit was
aH desirable, but rather to p&int out that some of it was desirable
that the sharp increase in the price of raw materials was the greatest
inflationary force and yet was not inspired by monetary policies.
looking ahead fro* this point on it would seem that demands for
credit may taper off from here on out. Physical controls win limit
housing and capital formation generally as well as inventories. It
is probable that by the end of the year lenders will find that their
demands have dropped off rather substantially* At that point insurance
companies will probably be net buyers of Government securities thereby
eliminating the federal Beserve problem of providing a market for these
issues. Bank loans will probably level off end may even decline.


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Federal Reserve Bank of St. Louis

- 10 -

This is a reasonable prediction of what nay happen, but we
cannot rely completely on predictions that things will work out
this way. J£very step that is possible should be taken at once to
limit credit expansion but great care should also be taken to avoid
disturbing nervous holders of the public debt with the distinct
possibility of creating something resembling a panicky flight froa
bonds and from the dollar* This is no tia* to scare people further,
particularly since the credit problem can be handled by other measures
and will probably be less intense a few months hence in any event.


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Federal Reserve Bank of St. Louis


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