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S e p te m b e r 1 7 ,


Hr. Oliver S. Powell,
c/o The Shoreham,
2500 Calvert Street, K.V.,
Washington 3, D. C.
Dear Olivers
Answering your good letter of September 8, I would like
to be able to say that developments during the recent past had
contained the elements of a strong csss for abandoning our "f i ls
only?..policy of open market operations* It would have "Seen^desXrable, I believe, to have had the possibility open to us of operations
in other sectors of the market, but it is difficult to assert that
we could have made effective use of such authority*
There sight ha^e been, perhaps, an oven chance that
higher yields on government bonds vould have brought more country
bank reserves into use, but an increase sufficient to bring this
about, particularly if the aarket thought we had engineered the
increase as a matter of policy would have run the risk of adverse
consequences* The maintenance of a high level of private and state
and local financing of capital expenditures, including construction,
is one of the present props of the economy which might be weakened
if it were thought that we were trying to tighten up in that area.
If you go further h c i however, I think it is fair to
say that we might have avoided the rapid run-dovn of rates, which
led to the recent situation If we had not confined our open market
operations to Treasury bills* It should have been possible to main­
tain a policy of nactive ease1 without such a run-down of rates as
we had, and therefore, to stay out of the box in which we recently
found ourselves*
In my book, this business of central banking requires a
little more complicated approach than just *putting in and taking
out reserves’ so as to maintain s r e figure or range of "free re­
serves* « The cost of credit at short ami long term is a central
banking consideration as well as the supply of bank reserves*

Hr* Oliver 8* Powell,
c/o the Shoreh&a,
Washington 8, V, C*


9 17/54

What I fear is that the longer we stay with the present
policy, tho harder it will b© to work our way out, short of an in­
flationary situation in which direct action to affect the cost and
availability of credit in all areas of the market would see®
readily understandable to the market and to the public* Ih&t is
why I argued so strongly that we should at least mail© our policy
determinations only "until the next aeetlng” of the Conm!ttee,
rather than sot for an indefinite future period until changed by
the Coxn&ittee* We have lost or are losing the ability to go in
lightly and exert moderate pressures to attain Halted objectives.
Action now, or in the future, is likely to be trumpeted about as
a major move having a significance beyond our intentions or desires*
nevertheless, I still believe we shall have to change our
policy of operating only in Treasury bills* I do not want to re­
vive the whole argument, however, until sy approach can s e s less
negative and more positive, and until we have "cooled off* a little*
This does not apply to what I consider to be our m ost foolish action,
which was to say for the record that we enter into open market
op rations solely to supply or absorb reserves* At our next meeting
I say suggest getting that off the books* So long as it is on the
books, I think we can prop rly be charged with having a thoroughly
narrow, mechanical and soaewhat primitive view of central banking
and monetary management*
With best regards*



Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102