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December 2, 1954



Robert V. Eoosa

Subject: Farther Comments on the
Revised Second Draft of Chairman
Martin* 8 BepOLy to Question \ $
(from the Flanders Subcommittee)

Copy to Messrs. loose and Soelse

I$r response to your request for something farther on the Chairman* s
answer to question 3 can best be handled in a series of 3 memoranda, of which
this is the first.

This one will just comment cm changes between the Chair^

man*s draft of November 18, and his revised draft of November 26, and prepare
the way for my next two memoranda.

The second memorandum will be the direct

response to your request for a short punchy rebuttal that G o u l d practicably
be used within the short time likely to be available at the roundtable next

with apologies, I found it much simpler to write this in the first


Hie third will summarise the data bearing on Aether or not the new

procedures have improved 12i depth, breadth and resiliency of the market.
Mr. Boose and I both want to stress again that we would feel it a
violation of the most confidential side of oar relations with the dealers to
use any actual data obtained from them on positions or volume.

Ve doubt that

yon should even refer publicly to the existence of these data, owing to the
risk that this would only pcrompt some Congressman to ask for them.


quently, the third memorandum is prepared essentially to reinforce year own
convictions, so that yon can *state with absolute confidence, or full assur­
ance*.,n the more generalised conclusions suggested in the second memorandum.
We hope, of course, that much of the third memorandum, and even more, can at
some time become the basis for & calm and judicious review of the facts by
System officials themselves on an entirely confidential basis*
The final version of the Chaixman's reply on question 3 is even more
effective than the edition of November 18.

He has rearranged the sequence of

some of the text;

be has dropped an occasional sentence that we might have

been expected to pounce upon;

and he has shaded various phrasings.


notably, he has succeeded at last in reducing the frequency with -which the
words "depth, breadth aad resiliency" are used*

The major additions are

elaborations of the technical market aspects of the Chairman1s case*

He adds

erne major point of principle, but he improves all the rest of his case*

The addition indicates that he,1too, recognized hie earlier failure to give
some indication of the meaning of depth, breadth and resiliency*

Bis vague

references that might be interpreted to mean something on dealer positions,
or on dealer volume, remain about the same, hat he has added something on the
nature of the pricing psrocess in the market*
Having discovered alternatives to the term "depth, breadth and
resiliency”, in use of the words "continuity" and "responsiveness", he now
goes on to define them*

Be indicates that "continuing markets1 are those in

* "which dealers stand •willing continuously to quote firm prices at " hi h, they
w c
will buy reasonably large quantities of securities from any or all sellers in­
cluding each other"*

(p. 8).

He later adds the farther clarification that

| "continuity exists when variations in quotations as between successive trans­
actions are minor", (p* 9)*

As for "responsiveness", this condition obtains

when the "impact of sales in any particular sector,1instead of being concen­
trated in that sector, is cushioned and dispersed in greater or less degree
throughout all maturity sectors* (p* 9).

Consequently, if I were -writing now the memorandum I sent to you on
Hoveoiber 26, I would add a 10th major point, on nhieh,' if worded our way,
there could be foil agreement between the Chairman's position and our own.

-3That point would be that the continuity and responsiveness in the Markets,
as now defined, by the Chairman (partly as substitutes for, bat also as addi­
tions to, the "depth, breadth and resiliency" phrase) should be maximized
through any techniques the System night use, in order to improve the capability
of the Government securities market to contribute towards conditions favoring
economic stability and growth*

Bat the iarovise would have to be added some­

where in there,1as in so much of the rest of the Chairman’s statement, that
these things must be judged by what happens in the market place and not in the
rarefied atmosphere of theoretical discussion conducted ia another world.
further essential qualification should be that



techniques should be chosen,

in the effort to achieve the ends of continuity and responsiveness, 1which would
reduce the effectiveness of central banking itself, or keep it materially below
its maximum potential for contributing to the growth and stability of the
The second and third memoranda in this series will follow shortly.


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