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A meeting of the Federal Open Market Committee was held in the
offices of the Board of Governors of the Federal Reserve System in
Washington, D.

C.,

PRESENT:

on Tuesday-Thursday, February 6-8, 1951, at 10:17 a.m.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

McCabe, Chairman
Sproul, Vice Chairman
Eccles
Erickson
Evans
Norton
Peyton
Powell

Mr. Szymczak
Mr. Vardaman
Mr.
Mr.

C. S. Young
Gilbert (alternate member)

Mr. Carpenter, Secretary
Mr. Vest, General Counsel
Mr. Thomas, Economist
Mr. Rouse, Manager, System Open Market
Account

Mr. Thurston, Assistant to the Board of
Governors

Mr. Riefler, Assistant to the Chairman,
Board of Governors
Mr. Sherman, Assistant Secretary, Board
of Governors
Mr. R. A. Young, Director, Division of
Research and Statistics, Board of
Governors
Mr. Youngdahl, Chief, Government Finance
Section, Division of Research and
Statistics, Board of Governors
Mr. R. F. Leach, Economist, Division of
Research and Statistics, Board of
Governors
Chairman McCabe stated that the reason this meeting had been
called so soon after the meeting on January 31, 1951, was because the
rapid developments made it

desirable to review the situation as it

now

existed, to give the members of the Committee the benefit of what had

2/6-8/51

-2

transpired during the past few days, and to counsel as to what the future
course of action of the Committee should be.

He stated that in his opin

ion this was a very crucial meeting, that the Committee should deliberate
very carefully, and that if

it

should decide to issue a statement, that

should be done only after most careful consideration and in the light of
the circumstances as they had developed.

He then referred to the executive

session of the Committee on January 31, following the meeting with the
President at the White House,

stating that Mr. Vardaman had suggested that

the executive session be held so that if

there were any leaks the 12

members of the Committee could be held responsible, that he (Chairman
McCabe) had made a plea to the members of the Committee not to divulge
anything that had taken place at the White House or at the executive ses
sion, that as the Committee knew statements had since been released, and
that as a result the Committee now found itself
ferent from what it
ary 31.

appeared to be when it

in a position very dif

met on the afternoon of Janu

Chairman McCabe stated that he had not divulged any information

concerning the meeting at the White House and, although he had received
inquiries from the press, he had responded that he had no comment to make
because he considered that any conference at the White House was confi
dential until the President saw fit

to make a statement concerning it.

He

went on to say that on the morning after the Committee called at the White
House on January 31 the President issued a statement through his Press
Secretary giving his interpretation of the meeting, that that was followed

2/6-8/51

-3

almost immediately by a Treasury spokesman interpreting what had happened
at the meeting, and that late in the afternoon of that day (February 1)
there had been delivered to him a letter from the President as follows:
"I want the members of the Federal Reserve Board and the mem
bers of the Federal Open Market Committee to know how deeply I
appreciate their expression of full cooperation given to me
yesterday in our meeting,
"As I expressed to you, I am deeply concerned over the inter
national situation and its implications upon our economic sta

bility.

"Your assurance that you would fully support the Treasury De
fense financing program, both as to refunding and new issues,
is of vital importance to me. As I understand it, I have your
assurance that the market on government securities will be
stabilized and maintained at present levels in order to assure
the successful financing requirements and to establish in the
minds of the people confidence concerning government credit.
"I wish you would convey to all the members of your group my
warm appreciation of their cooperative attitude."
Chairman McCabe stated that because of the content of the Presi
dent's letter, which he had considered to be highly confidential, he
studied the matter carefully on the afternoon and evening of February 1
and the morning of February 2, and that he reached the conclusion that the
best procedure would be to discuss it

with the President before he com

municated with the other members of the Federal Open Market Committee with
the thought that he would ask the President to withdraw the letter, but
that in the meantime the letter was released by the White House on Friday
afternoon, February 2, before he had had a chance to talk with the Presi
dent.

2/6-8/

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Chairman McCabe then referred to the discussion at the executive

session of the Committee following the meeting at the White House and to
the request made of Mr.

Evans that he prepare a memorandum of the meeting

with the President which would be checked with Mr. Sproul and sent to the

other members of the Committee.

He stated that Mr. Evans prepared such a

memorandum and sent a copy of it to Mr. Sproul on February 1, that Mr.
Sproul telephoned on Friday morning, February 2, to suggest certain changes

in the memorandum, that the memorandum was read at an informal meeting of
the Board of Governors on Friday morning at which a few additional sug
gestions were made with respect to language, and that all of the members
of the Board of Governors agreed that the memorandum was an accurate record
of the discussion that had taken place at the White House.

At Chairman McCabe's request, copies of the memorandum prepared by
Mr. Evans as changed by Mr. Sproul and subsequently by Mr. Evans in the

light of the discussion of the meeting on Friday morning, were distributed
to the members of the Committee and the Secretary read the draft as set
forth in the minutes of the meeting on January 31, 1951.

Following the

reading of the memorandum, Chairman McCabe asked the members of the Com
mittee who lived outside Washington for their comments upon it and each of
them expressed the view that the memorandum was an accurate and compre
hensive record of the conference with the President.
During the ensuing discussion some minor suggestions for changes
in language or content were made, Mr. Vardaman suggesting that inasmuch as

2/6-8/51

-

there was no discussion of rates on Treasury securities at the meeting with
the President, the memorandum need not state that there was no such dis
cussion.
Mr. Sproul expressed the view that since such a discussion did not
occur, it

was especially important that the memorandum so state inasmuch

as the letter from the President which the White House had made public indi
cated that he believed that the Committee had given assurance that the
market for Government securities would be stabilized and maintained at
present levels.

He went on to say that he would prefer to have this point

spelled out more fully than appeared in the memorandum but that the refer
ence now contained in the memorandum was sufficient to meet his point.

No

action was taken by the Committee to change the form of the memorandum as
contained in the minutes of the meeting of the Committee on January 31,

1951.
In commenting upon open market policy, Mr. C. S. Young expressed
the view that the Committee should continue the policy that had been agreed
upon although he felt that it

would be necessary for the matter to go to

Congress eventually in order to clarify the position of the Committee in
its

relationships with the Treasury.

Mr. Young added that several individual

bankers who had commented to him on the matter on the basis of press reports
had indicated that they were sympathetic with the position taken by the
Federal Open Market Committee,
would take a position in

but he doubted whether banking as a group

support of the policy advocated by the Committee.

2/6-8/51

-6.
Mr. Szymczak then referred to an article that appeared in The

Washington Evening Star on February 5, 1951, by Doris Fleeson, purporting
to disclose information concerning the discussion at the executive session
of the Committee on the afternoon of January 31 and stating how individual
members voted on the question whether the Committee should continue its
existing policies,

and he asked Mr, C. S. Young whether Miss Fleeson had

communicated with him following the meeting of the Committee with the
President.
Mr. Young responded that he had never heard of Miss Fleeson until
her article was brought to his attention after he reached Washington
yesterday, that he had received several telephone calls from members of
the press over the week end asking for comments on the meeting with the
President, and that he told them he had no comments.

He added that he

had not reported to his Board of Directors on the meeting with the Presi
dent and that so far as he knew he was the only person in Chicago who was
familiar with the discussion at that conference until reports of it

ap

peared in the press.

Mr. Vardaman stated that before the discussion went any further he
wanted to state that he had been accused of having disclosed the names of
officials and how they voted at the meeting, that he denied having done
that, that he did not discuss the matter with Miss Fleeson until approxi
mately 10:00 p.m. on Sunday, February 1, that she called him on the
telephone at that time and read him a statement along the lines that she
planned to publish, that she had the entire story at that time, that that

2/6-8/51

-7

was his first

contact with her on this matter, and that he had never dis

closed to Miss Fleeson or to others what took place at meetings of the
Federal Open Market Committee.
Mr. Szymczak stated that the reason for the question addressed to
Mr. Young was that in a discussion at a meeting of the Board earlier this
morning Mr. Vardaman had suggested that Miss Fleeson might have obtained
her information from Chicago or Atlanta and he wanted to know whether Mr.
Young had discussed the meeting of the Open Market Committee with persons in
Chicago who might have given the information to Miss Fleeson or representa
tives of hers.
Mr. Norton stated that he wanted to report that he had talked to
Miss Fleeson on Sunday, February 4, that they met at church, that she asked
him whether he agreed with the statement released by Mr. Eccles relating
to the meeting at the White House, that he replied, "Not exactly," and that
he did not mention the names of persons who were at the executive session
of the Open Market Committee and that she did not mention any names of
individuals present or votes cast at that session.
In response to an inquiry from Mr. Szymczak, Mr. Thurston stated
that he received a telephone call from Miss Fleeson about 11:00 p.m.,
February 4, that she did not read him her statement or tell

him what she

was going to write, but that she did say she had the whole story and that
Mr. Vardaman had suggested she call him (Mr. Thurston) and discuss it

him.

with

2/6-8/51

-

Mr, Vardaman stated that when Miss Fleeson called him earlier that
evening he suggested that she telephone Mr. Thurston.
Mr. Gilbert stated that he had not known much about the release of
information at the time he left Dallas inasmuch as their local papers
carried very little

on the matter, although he had known that, following

the release of the President's letter at the White House, Mr. Eccles re
leased part of the memorandum covering the meeting with the President.

He

added that he had noticed a press report that Senator Maybank had requested
Senator Robertson, Chairman of the Subcommittee on Federal Reserve Matters
of the Senate Banking and Currency Committee, to confer with Chairman McCabe
to find out about the situation and report back.
Chairman McCabe withdrew from the meeting at this point to answer
a telephone call.
Mr, Gilbert went on to say that in his judgment the Committee
should continue the present policy which it
consideration, although it

had agreed upon after careful

seemed to him that it

was only a matter of time

until the question would be brought before the Congress for an indication
of its

wishes concerning the policy that should be followed.
Mr. Erickson stated, in response to a question, that he had talked

with no one other than the members of his board of directors at the Boston
Bank on Monday of this week at which time he had told them generally of
the discussions at the meeting of the Committee last Wednesday.
Mr. Peyton stated that he had been convinced right along that the

2/6-8/51

-9

position taken by the Open Market Committee was the correct one, that the

Treasury was mistaken, and that he felt the Committee should continue with
the policy as presently stated.

He went on to say that he did not think

resignation of members of the Committee would be proper, that if they be
lieved in their position they should stand and defend it,

that he felt the

issue was one worth supporting, but that he could not be sure what the
position of the new members of the Open Market Committee would be when the
present representative members were succeeded by new members in March of
this year. He added that he felt all members of the Committee should be
in reasonable agreement and that if necessary the matter should be taken
to Congress which had the power to define the position it wished to have
the Committee take.

Mr. Peyton added that if

the country was at war the

situation might be different but that the country was not at war and that
he felt the policy agreed upon by the Committee should be given a try as a
means of holding down further inflationary developments.
Mr. Sproul then made a statement substantially as follows:
First, I think the record of our interview with the Presi
dent as read at this meeting is fair and accurate in all its
I think each one of us might have something
essential aspects.
that is not in there or we might suggest some
we might remember
thing that might be taken out, but I think it represents accu
rately what was said and the atmosphere in which it was said.
I can pick out the President's reference to his Liberty Bond ex
perience as an indication that he does not know very much about
the subject. Second, looking at the content of the statement,
the President said we had done a good job and he wanted us to
We have been doing a job since the beginning of Korea
continue.
that has brought us into violent conflict with the Treasury, and
we have gone ahead despite that conflict, and he said it was a

2/6-8/51

-10-

good job that we were doing and wanted us to continue. He also
said he did not want to undertake to discuss details of Treasury
financing; he did not want to get into a discussion of whether
prices should be up a thirty-second or down a thirty-second. I
think that is not talking about the rigid market the Treasury
wants.
Finally, when it comes to the question of issuing state
ments, the President said he would have no objection to our
making a statement and thought it might be a good thing. That
was the whole atmosphere of the conversation and the subsequent
letter from the President wholly misrepresented it. I think
that what goes on at a Presidential conference should not be dis
closed until the President gives it out and when he does, he
should give it out accurately. That was not done in the letter
that was disclosed by the White House concerning our conference.
For that reason I am glad that Mr. Eccles took the individual
action he did in releasing our memorandum of what went on. I
think, in the intolerable situation of the President's releasing
a letter which was not accurate and which I think was dictated
by the Treasury, that Mr. Eccles' release of the memorandum
temporarily retrieved our place in the financial community and
with the public. I resent, however, individual disclosure, no
matter how it comes about, of what takes place in meetings of
the Federal Open Market Committee. Disclosure of individual
votes is wholly inexcusable and a blot on our record. Having
said that, I think we should now get official again. We should
quit issuing statements on individual responsbility.
Mr. Szymczak commented at this point that leaks of information
do not necessarily go directly to the press, but that they might go to

someone in the Treasury or elsewhere in Washington and be let out from

there-intentionally or otherwise.
Mr.

Vardaman commented that the leaks rarely ever come from par

ticipants in the meetings,

that someone tells a friend something, that

that friend tells someone else, and the story gets around.
Continuing with his statement, Mr. Sproul said substantially
First, this Committee should make a reply to the President's
letter which was addressed to the Chairman. The outline of
that should be that we are sorry when he has so many other

2/6-8/51

-11-

demands on his time, that he was brought into a controversy
in an area where we are charged with responsibility, and
that there must have been some misunderstanding,
(Mr. Sproul then read a draft of a letter along the lines
he proposed.)
I would not consider this to be a public document and
would not consider it something to be given to anyone else un
less the President took action to give it out. I think the
second thing this Committee should do is to send a letter to
the Secretary of the Treasury and outline what we feel should
be done following up on what we stated as a desirable pol
icy in our letter to him on October 30, 1950.
(Mr. Sproul then read a draft of letter such as he pro
posed to be sent to the Secretary of the Treasury.)
Having sent such letters to the President and to the
Secretary of the Treasury, I think this Committee should then
consider what action it is that we are talking about. The
action I would have in mind would be the previously stated
policy which contemplated backing away from the premium on
the longest-term bonds, which gives profits to sellers of such
bonds. When the Treasury stops supporting that market, and if
and when the market needs further support and we are called
upon to give it, we should promptly put into effect the pre
viously adopted policy of backing down close to par. Second,
we should continue with our previously adopted policy which
contemplated a further increase in the short-term rate until
it is up to the discount rate. There would, of course, have

to be consultation with the Treasury on the basis of the state
ment in our letter to the Secretary on October 30 before there
would be a further increase in the short-term rate. Mr. Thomas'
memorandum of January 30 states the case very well. We have a
situation in which it looks as though there will be pressure
on us continuously for the next few months. The avail
ability of bank reserves is going to be a critical factor in
this situation, and we should not stand there and take the se
curities and thus increase bank reserves at the will of the
market. It is not a question of interest rates. It is a
question of the availability of bank reserves.
Mr. Szymczak commented that he felt it

was necessary to clarify

the point just mentioned by Mr. Sproul, that comments from both the White

2/6-8/51

-12

House and the Treasury recently had put emphasis upon fractional increases

in interest rates as an anti-inflationary weapon, and that the Committee
should make it clear that it was not talking about a slight increase in
the short-term rate or a slight decrease in the premium on long-term bonds,
but about making reserves available to the banks, upon the basis of which
there is

a multiple expansion of credit.
Mr.

Vardaman raised the question whether thought had been given

to sitting down with the President and making clear to him that it was the
goal of the Committee to reduce the premium on the longest-term bonds so
that they would come down to par.

Mr. Sproul responded that he did not

believe the letter to the President should go into that inasmuch as the
President had indicated at the conference on January 31 that he did not
wish to discuss details, and the purpose of the letter would be to make it
unnecessary for the President to comment further on a technical matter on
which he could not be expected to be informed.
Chairman McCabe rejoined the meeting at this point, and Mr. Sproul
reviewed the suggestions he had made and re-read the drafts of proposed
letters to the President and to the Secretary of the Treasury.
There was a general discussion of the content and purpose of the
suggested letter to the President during which Mr. Vardaman stated that
the suggestions made by Mr. Sproul did not contemplate any change in the
policy of the Committee, that that was the crux of the matter, and that if
the Committee did not tell

the President what it

contemplated, it

was not

2/6-8/51

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likely to get a clarification of the situation.
pressed the view that the Committee should tell

Mr. Vardaman also ex
the President that it

con

templated letting bonds go down to par and holding them there.
Mr. Sproul responded that what he had in mind and what the Commit
tee had contemplated,

now and in the past, would not be destructive of the

financial strength of the Government or of the country, that this assur
ance had been given to the President upon numerous occasions, that he
questioned whether the more specific statement suggested by Mr.
would serve any useful purpose, that in

Vardaman

his view the purpose of the letter

was to relieve the President of concern for the Government's financial
security in so far as operations of the Open Market Committee were related
to it

and to assure him he could leave it

to the Committee to continue its

consultations with the Secretary of the Treasury.
At Chairman McCabe's request, the Secretary read the letter ad
dressed to the Secretary of the Treasury by the Federal Open Market Com
mittee under date of October 30, 1950.
Mr. Norton suggested that the Committee might write a letter which
would assure the President that it

was cooperating in the general program

that he had suggested, without going into details concerning rates and
open market operations.
Mr. Sproul responded that if

such a statement implied concurrence

in the President's wishes as set out in the letter he had made public, it
would be contrary to the views that had been expressed by the members of

2/6-8/51

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the Committee, that the President should never have been embarrassed by
having been brought into the controversy, that the Committee was trying
to get the President out of the controversy with the least possible
embarrassment to him, and that in his opinion the suggestion made by Mr.
Norton would only embarrass the President further.

He went on to say that

the Committee has the authority and the responsibility for action, and
that if

it

acted under that authority it

would provide an opportunity for

the Congress to review the matter and take whatever action it
to be desirable, whereas if

believed

the Committee went along with the program sug

gested by the Secretary of the Treasury on January 18, it
that the Congress would take any action in

was not likely

connection with it.

Chairman McCabe raised a question as to the powers of the Presi
dent under the Defense Production Act of 1950, particularly whether that
Act gave him authority to direct the Board or the Federal Open Market Com
mittee in its

operations.

Mr. Vest stated that under the Defense Production Act of 1950 the
President had the power to issue orders and regulations to carry out the
purposes of the Act, and that if

it

came to a question whether the func

tion of the Federal Open Market Committee was encompassed in the Defense
Production Act he felt
that it

the language of the Act was not such as to indicate

contemplated giving such authority to the President.
Chairman McCabe stated that he had hoped that the letter which the

President sent to his on February 1 would not be made public because the

2/6-8/51

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letter sounded as though it

was a directive, that it

for the President to withdraw it

since it

would be difficult

had been released, that he had

tried to avoid having the issue come to a climax particularly in the press,
but that since the letter had been released the weight of opinion in the
financial press and with such groups as the Committee for Economic Develop
ment, the American Farm Bureau Federation, and others seemed to support the
general position taken by the Federal Open Market Committee.
however, that it

He suggested,

might be desirable again to discuss the matter with the

President in the hope that he would see that there was much to be con
sidered in the matter, that he doubted whether any written communication

would accomplish much in that direction, but that it might be worth trying
a letter if written in the proper tone and spirit.
Mr. Sproul stated that his suggestion for a letter was to help get
the matter back on an official basis, to relieve the President of an em
barrassing situation, and to make another attempt to resume negotiations
with the Treasury along the lines which the Chairman had suggested to the
President at their conference on the afternoon of January 31.
Mr. Eccles then made a statement substantially as follows

I think what we have been talking about, in part at least,
is right. I think there is a way to do these things and that
we have to answer the President's letter. Whether he under
stands it or not is not our fault; he has a staff of people who
can read it for him, or he can send it to the Treasury. The
question of the letter is pretty much the record of an official
body. As Mr. Sproul says, a letter would get us back on an of
ficial basis.
Now I, possibly being the principal cause of the situation
that brought about this meeting today and kept this issue alive,

2/6-8/51

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have no apologies to make.
I have no regrets.
I did what I
think was right. If I had it to do over, I would do exactly
what I did. I think under the circumstances it was the way
that I could best discharge my public responsibility, the way
I could best protect the position of this System, as well as to
protect my own record. I regret exceedingly that the situa
tion developed to a point where releasing what was to be a
confidential document seemed to me to be absolutely essential
under the circumstances. I took the entire responsibility for
it myself. I purposely avoided talking with anybody or telling
anybody what I was going to do, because I did not want in any
way to involve anyone else. I did not act on the advice of
anyone or as the result of consultations with anyone. I merely
want to say that for the record.

Now it seems to me that this Committee has a public re
sponsibility that is as important for it to discharge in trying
to prevent inflation as it is that we carry out a defense pro
gram. There is going to be nothing for us to protect in this
country unless we are willing to do what is necessary to pro
tect the dollar. Our responsibility is not a minor one; it is
a very great one under the conditions that ex.st, and if we
fail, history will record that we were responsible, at least to
a very great measure, in bringing about the destruction or de

feat of the very system that our defense effort is being made
to protect and defend.
We are not in a war. We do not now have deficit financing.
The situation is not comparable in any degree with the situation
that confronted us in 194l at a time when we had a great deal
of slack in the economy. We were then in a deflation with 10
million unemployed people and many idle factories and huge ex
cess bank reserves, with practically no securities in our Sys
tem portfolio and no power to increase reserve requirements. It
was under those conditions that the defense program started,
after there had been substantial budgetary deficits in 1938,
1939, and 1940. During those years, this Board and the Federal
Open Market Committee did not object to the deficit and cheap
money for that was a time when it was desirable to expand credit.
It was desirable to get people to spend their savings; it was
desirable to do just the opposite of what is desirable and neces
sary at this time.
The inflationary forces began to develop as a result of the
war program, especially the very heavy deficit financing program
Then the amount of financing was very great
after Pearl Harbor.

2/6-8/51

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with deficits up to $60 billion a year which ran the public
debt up from $50 to $280 billion in five years. Under those
conditions, it would have been impossible to finance the war
time deficits of that size under a restrictive and tight money

policy; it would have been impossible during that period to
float securities on a declining and falling market. We recog
nized that fact.

The situation today is exactly the opposite.
We have had
for the last four or five years an aggregate budgetary surplus
of nearly $13 billion. The inflation that has taken place and
the expansion of the money supply was due largely to private
financing through the commercial banking system; to the banks'
ability to get reserves on which to expand credit and increase
the money supply. Before Korea, we had inflation on our hands;
credit was expanding in the spring even before Korea. Up to
the present time there has not been a budget deficit, and the
defense program has not been a factor so far as expenditures

are concerned in the inflationary situation that has developed.
We can not wait to act.

Action is far overdue.

In retro

spect, I would say, if anything, that we have been derelict in
not acting sooner and more aggressively. We have failed to take
as drastic and strong and aggressive action as the situation
has been calling for. We have relied upon selective credit con
trols, a slender reed that was entirely unable to deal with the
credit expansion that this Federal Reserve System has pumped
into the market through its cheap money policy. I say action
is long overdue. I do not think we can wait. We have a
statutory responsibility, and it seems to me that under the
circumstances, if we expect to discharge our responsibility,
there is one thing for us to do as an agent of Congress and
that is to carry out that responsibility by the use of the
tools we have until we get additional authority.
You only protect the public credit by maintaining confi

dence in the Government and in its securities and to the extent
the public will buy and hold those securities. The thing we

are doing is to make it possible for the public to convert
Government securities into money and to expand the money supply
We have permitted
of this country by $7 billion in six months.
an increase in the money supply of this country by more than 8
per cent since Korea. That was not done for the purpose of
carrying out our responsibilities, but for the purpose of trying
to hold the interest-rate structure. It was due entirely
to our efforts to carry out the demands or requests of the

2/6-8/51

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Treasury,
It seems to me that this is an issue that we ought to be
prepared to stand up to, as any soldier would stand up in times
of great stress, and face our responsibilities to the American
public. We are almost solely responsible for this inflation.

It is not deficit financing that is responsible because there

has been surplus in the Treasury right along; the whole ques
tion of having rationing and price controls is due to the fact
that we have this monetary inflation, and this Committee is the
only agency in existence that can curb and stop the growth of

money.

Congress has done a good job of increasing taxes, but I do

not believe we have done a good job on this question of credit.

It seems to me that we should get down and face the facts today.
We should not think that we are going to work this out with the
Treasury; we have been trying to do so for more than a year and
have not worked anything out. We no longer have time to work it
out in that way. I, for one, feel that the issue has to be faced.

When you think that we have bought $3-1/2 billions of Goverment
securities since last May, during a time when the Government has
had a budget surplus, which has been anti-inflationary, it is
apparent that we have provided the means for the growth in the
money supply, which has been directly related to the increase in

cost of living and the price level.
We can not pass this responsibility; we should tell the
Treasury, the President, and the Congress these facts, and do
something about it.
I do not believe we should be concerned
about a directive from the President. He can give us a direc
tive, that is

true.

If

he does, certainly the responsibility is

his. That is one thing. But until he does, we are giving the
public the impression that we have capitulated to the extent that
we do not do something about this problem. The public today is
confused. They think this is nothing but a feud for power be
tween the Treasury and the Federal Reserve. It is no such thing.
We have not only the power but the responsibility to do a cer
tain job. We know what the job is. There should be no con
fusion in the minds of the public with reference to where this
responsibility is.
It seems to me the way we can clarify this
is to come out with a public statement as to what has happened,
If the
what our responsibility is, and what to do about it.
President wants to give us a directive, that is not evidence of
our capitulation. If Congress does not like what we are doing,

2/6-8/51

-19

then they can change the rules. But until they do that, we have
the responsibility and the authority.
I believe we have been derelict; I think that I, as a mem
ber of this Committee, have not been as aggressive as I should
have been. I think I have not made the record I should have.
As I look back to 1946 and 1947, when the Treasury and a budget
ary surplus and the war was over, particularly when we were
having our troubles with Secretary of the Treasury Vinson, we
should have taken a stronger stand. If we had had a row, I
could have resigned. As I look back on it, I regret I did not
take a stronger stand for obtaining substitute authority from
the Congress.
But until we get that authority, it is up to us
to use what we have.
Chairman McCabe suggested that the Committee reach a decision as
to whether a letter should be sent to the President and then take up the
question of what the policy of the Committee should be.
Mr. Powell stated that he felt a letter to the President should be
written, that it

should make the record clear, but that he would not be in

favor of a letter to the Secretary of the Treasury if

it

was for the pur

pose of discussing the Secretary's statement in New York on January 18.
He would have no objection, however, to a letter to the Secretary which
carried out the previous statements of the Committee to consult with him
in

connection with open market policies which would affect either the

long-term rate or the short-term rate.
Mr.

Vardaman stated that he was not in

favor of another innovation,

and that he would favor issuing a statement saying that the Committee would
do what the President had asked and that it
gress for clarification.

would take the matter to Con

2/6-8/51

-20
There was a further discussion of the possible content of a letter

to the President and of the policy that might be followed by the Committee,
following which the meeting recessed and reconvened at 2:30 p.m. with the
same attendance as at the close of the morning session.

Mr. Evans stated that he thought the Committee had to write a letter
to the President or discuss the matter with him or perhaps do both.

Such a

letter should state the facts concerning the inflationary situation, that
the Federal Reserve System was not interested in interest rates as such but
that it

was concerned with restricting the availability of bank reserves,

and that it
in

was greatly concerned with maintaining Government credit which,

the last analysis, would depend upon maintaining confidence in the

purchasing power of the dollar.

In his comments Mr. Evans referred to a

memorandum which Chairman McCabe had given to Mr. C. E. Wilson, Director

of the Office of Defense Mobilization, on January 16, 1951, concerning a
program to combat the inflationary spiral, and, at his suggestion, the
Chairman read the memorandum to Mr. Wilson, as follows:
"In the past six months we have given top priority-and
rightly so-to a reassessment of our international position,
and to the development of a comprehensive military program. We

have given urgent consideration to procurement problems and
production problems.

Now that these programs are launched, the

next order of business must be to work out a comprehensive pro
gram for financing the defense effort and for maintaining the
integrity of the dollar.
Inflation is our Number One unresolved
problem today.
"The strong upsurge of prices over the past several months
dramatizes the potency of current-let alone future-inflationary
forces.
"If it is in order to contemplate such heroic measures as a
complete freeze of wages and prices across the board, is it not

2/6-8/51

-21-

"equally in order, and essential for the long-run, to initiate
simultaneously emergency action on the fiscal and credit fronts?
For example, an emergency tax measure-one that would jolt the
country-might stop this inflation psychology in its tracks.
More drastic action on selective credit controls (Regulations W
and X, and margin requirements) plus emergency restrictions on
loan portfolios of insurance companies, banks and other lenders
would curb inflationary credit expansion. To be enacted
quickly, these measures might have to be crude and should be
temporary. But they would provide time to work out a more care
fully evaluated program.
"No dam of wage and price controls can be expected to with
stand pressures of the magnitude that are in sight. Increased
incomes resulting from defense spending will be far in excess of
goods available for civilian purchase.
The outstanding volume
of bank and other credit is more than enough to finance the
entire economy even at forced draft. Fully as important is the
current movement to convert liquid assets into land, equities,
and commodities, the so-called 'hedge against inflation.'
This
movement is well underway and is gaining momentum. It feeds on
itself. It will accelerate with any further rise in the infla
tionary spiral and will accentuate the spiral. The volume of
liquid assets already outstanding is out of all proportion to
the needs of the economy.
"Inflation is not inevitable.
"I suggest the Defense Mobilization Board immediately con
centrate on a study of the problem of financial mobilization
The study should be just as comprehen
and inflation control.
sive as that given to the requirements of military mobilization.
The problem of war finance is much more complicated and much
It
more urgent than it was at the beginning of World War II.
cannot be solved by minor adjustments in fiscal policy, in debt
management policy, or in monetary and credit policy. We need a
Complete reappraisal of what is involved in financial mobiliza
tion for a fullscale defense effort. We must not repeat the
mistakes of World War II financing. As President Truman so
clearly and correctly pointed out last Fall. 'During World War
II we borrowed too much and did not tax ourselves enough. We
must not run our present defense effort on that kind of finan
cial basis.' Certainly the President and the Treasury have
taken an heroic stand in this emergency to press for a 'pay-as
we-go' tax program, and the suggestions made here are for the
purpose of strengthening their hands.
"The American economy has been subjected to a major in
flation in spite of the harness of direct controls applied dur
ing the last war. That program broke down rapidly when hostilities

2/6-8/51

-22

ceased. As soon as the harness was removed the pent-up power
of the swollen money supply, which resulted from the war fi
nancing methods, broke loose in a tremendous inflationary tide.
"Last Wednesday consideration was given to building a dam
of general price and wage controls to stem these forces. Such a
dam along-and at this time-will not suffice. Unless it is
part and parcel of a broadscale carefully integrated program of
direct restraints on spending plus fiscal and credit measures
to lock up demand, it may actually compound the problem by
precipitating widespread hoarding as the freeze on automobile
prices has already done. A general freeze on prices and wages
creates an illusion of anti-inflation security. By itself it
does not deal with the fundamental causes. The inflationary
flood which threatens to engulf us must be stemmed at the source."
Mr. Szymczak stated that he considered a letter to the President to
be essential because the President had released the letter to the Chairman,
as a result of which an answer was required for the purpose of clarifying
the matter in the President's mind, if not for public release.

He said

that the letter should be as clear as possible but particularly he suggested
that it emphasize that the Committee was not interested in interest rates
as such, that it was not talking about a thirty-second or an eighth or a
quarter of one per cent, but that it was talking about the availability
of bank reserves.

He suggested that the letter bring out the fact that

the Committee had been virtually prevented from carrying out the policy
adopted on August 18, 1950, because of Treasury opposition, that everything

it had attempted to do was in the public interest, that the public interest
would be best served by preserving a sound dollar, that the inflationary
situation was developing rapidly before the Korean incident in June, and
that it had become much worse since then.

Mr. Szymczak also suggested that

it was important to point out the difference between the situation in 1941,

2/6-8/51

-23

when the country had idle plants and manpower and large excess bank re
serves, and the present when plants and manpower were operating practically
at capacity.

Mr.

Szymczak also expressed the view that a program for supple

mentary reserve legislation should be decided upon by the Board, or, pos
sibly, by the Committee, that it should be brought before the Congress as
soon as possible, and that it

should stress the necessity for additional

authority if the Federal Reserve was to carry out its responsibilities in
the fight against inflation.
Following a report by Mr. Thomas of conditions in the market for
Government securities, the discussion turned to a consideration of policy
that might be followed, during which question was raised as to whether any
of the members of the Committee would wish to go along with the program
announced by the Treasury, of freezing the long-term interest rate on both
refunding and new issues at present levels.
Mr. Vardaman reiterated the view that the Committee should go along
with the position taken by the Treasury, meantime taking the matter to Con
gress for clarification.
Chairman McCabe suggested that, on the basis of the views expressed,
Messrs. Thurston, Riefler, and Thomas be asked to prepare, for considera
tion by the Committee at a meeting tomorrow morning, drafts of letters that
might be sent to the President and to the Secretary of the Treasury.
Thereupon, the meeting recessed and reconvened at 12:30 p.m. on
Wednesday, February 7,

1951, with the same attendance as at the close of the

2/6-8/51

-24

session on February 6, except that Mr. Vardaman was not present and re
quested that the minutes show that he had left the building at 12:15 to
attend a meeting at the Department of Defense on the V-loan program.
At Chairman McCabe's request, the Secretary read a draft of letter
to the President prepared pursuant to the understanding at yesterday's
session.

During a discussion of the draft, Chairman McCabe raised the

question whether the letter should include specific reference to main
tenance of the 2-1/2 per cent rate on long-term securities, and it

was

the concensus that inclusion of a reference to that rate would not be
desirable.

He then suggested that the staff prepare another draft in

the light of the suggestions made and that it

be considered at another

session this afternoon.
The meeting recessed at 1:32 p.m. and reconvened at 3:30 p.m., with

all of the members of the Committee present and all of the staff that had
been present at the previous session except that Messrs. Carpenter, Thomas,
Rouse, Thurston, and Riefler were not present.
Chairman McCabe stated that the staff was still working on a revi
sion of the draft of letter to the President and he suggested that in the
meantime consideration be given to a memorandum prepared under date of
February 5, 1951, in the Board's offices at the Board's request and under
the direction of Mr. Powell, with respect to a program that might be pro
posed by the Board of Governors or by the Committee for restraining the
expansion of credit.

Mr. Vardaman withdrew from the meeting at this point.

-25

2/6-8/51

At the Chairman's request, the memorandum was read and Chairman
McCabe called the Legal Division to inquire whether there had been any
legislation since the Banking Act of 1935 which gave additional authority

to the Treasury in the field of public debt management as it related to
the functions of the Federal Open Market Committee,

and it

was understood

that the Legal Division would prepare a memorandum covering this subject.
As the reading of the memorandum was completed, Messrs. Carpenter,
Thomas, Rouse, Thurston, and Riefler, joined the meeting.
Mr. Carpenter then read a revised draft of letter to the President,
during which Mr. Vardaman joined the meeting.
The revised draft of letter was discussed and changed and re-read
by the Secretary.
Mr. Vardaman stated that he had no suggestions to make about the
letter but that he would not wish to vote to approve its

transmission to

the President until he knew what program the Committee was going to follow.
Mr. Sproul suggested that the Committee should be prepared to tell
the Secretary of the Treasury what the program of the Committee would be,
and that a statement with respect to the program need not be included in
the letter to the President for reasons previously stated.

This point was discussed, and at the
conclusion of the discussion, upon motion
duly made and seconded, the letter to the
President was approved in the following form,
Mr. Vardaman voting "no" for the reason pre
viously stated by him:
"You as President of the United States and we as members of
the Federal Opon Market Committee have unintentionally been drawn

2/6-8/51

-26-

"into a false position before the American public-you as if you
were committing us to a policy which we believe to be contrary
to what we all truly desire and we as if we were questioning
your work or defying your wishes as the chief executive of the
country in this critical period. We would betray our duty to
the country as well as to you if we failed to do all in our
power to clear up these misunderstandings,
"In your recent meeting with us you clearly stated as your
objective one which underlies Federal Reserve operations-the
maintenance of confidence in the integrity of the dollar and
therefore in Government securities, In your recent economic
report to the Nation you said:
'If inflation continues to gain
cumulative force it will multiply the cost of the defense pro
gram. It will undermine production, destroy confidence, gen
erate friction and economic strife, impair the value of the
dollar, dissipate the value of savings and impose an intolerable
burden upon fixed income groups. This must not happen.'
"We propose to do all in our power to prevent it happening.
We are dedicated to the preservation of the purchasing power of
the dollar. Any policy which eats away this purchasing powerwhich increases the cost of living-at the same time and to the
same degree undermines confidence in the credit of the United
States. The credit of the United States Government in the
final analysis rests with the American people. It depends upon
the public's willingness to buy and hold Government securities,
"The heart of the problem which confronts us is this: How
can we stop the decline in the purchasing power of the dollar?
How can we curb the dangerously rising tide of credit which is
adding to the country's supply of dollars at an unprecedented
rate? How can we arrest the flight of dollars into hedges
against inflation when the supply of dollars is growing so
fast? How can we best encourage people to hold and increase
their savings and to spend less so long as inflationary dangers
threaten?
"Without confidence in sound financial management, this
flood of newly created dollars in the form of credit cannot be
controlled. It will overwhelm whatever price, wage, and similar
controls, including selective credit measures, that may be con
trived. This problem was not present in the mobilization period
preceding World War II. Then the country had an abundance of
unused plant, materials, and manpower. Savings had been de
pleted. Liquid assets were low and the public did not fear ris
ing prices or shortages of goods and therefore did not antici
pate the possibility of inflation.
"Today our concern and our responsibility is with the basic
problem of bank reserves which continue to generate a rising

2/6-8/51

-27-

"tide of money. In the face of existing inflationary pressures
there is no effective way of stemming this tide that will not
reflect itself in interest rates. It merely confuses the issue
to charge that the Open Market Committee favors higher interest
rates per se . We favor the lowest rate of interest on Govern
ment securities that will cause true investors to buy and hold
these securities.
"Today's inflation is not due to deficit financing by the
Government. It is due to mounting civilian expenditures largely
financed directly or indirectly by sale of Government securities
to the Federal Reserve. You have taken a courageous and forth
right stand for increased taxes to finance the defense effort on
a pay-as-we-go basis. If the additional taxes which you have
recommended are enacted, little
or no new Government borrowing
will be needed.
The experience of the past year, however, has
clearly demonstrated that a balanced budget alone cannot stop
inflation. We shall still
need to deal with inflationary threats
arising from civilian spending based largely upon the present
excessive money supply, augmented by the liquidation of Govern
ment securities by the banks and other holders.
"It continues to be, as it has always been, the policy of
the Federal Reserve System and of its Federal Open Market Com
mittee to adapt credit policy to the needs and requirements of
the Government as well as of the country. Our support of Treas
ury financing in time of war and in time of peace has given
clear proof of this policy.
"However, in inflationary times like these our buying of
Government securities does not provide confidence. It under
mines confidence. The inevitable result is more and more
money and cheaper and cheaper dollars. This means less and
less public confidence. Mr. President, you did not ask us in
our recent meeting to commit ourselves to continue on this
dangerous road. Such a course would seriously weaken the
financial stability of the United States and encourage a further
flight from money into goods. It would not be consistent with
our responsibility to the Congress and to the people of this
country to follow such a program.
"In your meeting with us you mentioned the experience of re
turned veterans and other small holders with Liberty Bonds after
As you know, the Savings Bonds of today are specifi
World War I.
cally designed to avoid a repetition of this experience. The
Liberty Bonds were marketable securities subject to market
fluctuations in price. These fluctuations were excessive fol
lowing World War I, particularly because a large volume of
Liberty Bonds were not purchased out of savings but with bank
borrowed funds. Later many of these were dumped on the market

2/6-8/51

-.28-

to repay loans. As a result, in the absence of any provision
for support to maintain orderly conditions in the market, they
reacted excessively in price.
"The Savings Bonds of today, unlike Liberty Bonds of World
War I, are redeemable on demand at specified values. The
holder of Savings Bonds need not be concerned with market
fluctuations because he will always get back dollars he has put
into such bonds with a stated amount of interest,
"In our open market operations we are concerned only with
the marketable issues, which are largely held by banks, other
financial institutions, and experienced market-wise corporate
and individual investors.
We have maintained, and plan to con
tinue to maintain, orderly conditions in these issues. These
holders are accustomed to changes in prices of securities and
to shifting their investments in order to take advantage of more
profitable opportunities.
Today they are able to sell their
Government bonds to the Federal Reserve at a premium, whereas
the owners of Savings Bonds, in which savings of the mass of the
people are invested, must accept a lower interest return if they
redeem their bonds before maturity.
"In accordance with our assurances to you, we shall seek to
work out with the Secretary of the Treasury as promptly as pos
sible a program which is practicable, feasible and adequate in
the light of the defense emergency, which will safeguard and
maintain public confidence in the values of outstanding Govern
ment bonds, and which at the same time will protect the purchas
ing power of the dollar.
"Finally, at this critical time, when the cooperation of
every one is desperately needed, we sincerely trust that the
decisions which are made will be for the best interests of the
people of the United States."
Chairman McCabe suggested that in order that there would be no
question about the matter, the letter to the President carry a postscript
to the effect that 11 of the 12 members of the Committee approved the
letter and that Mr. Vardaman was opposed.

Upon inquiry by Chairman McCabe

as to whether Mr. Vardaman would have any objection to such a postscript,
the latter stated that he would have none with the understanding that the
reason for his dissent would be stated in the postscript that he wanted to

2/6-8/51

-29-

have a program decided upon by the Committee before the letter to the
President was transmitted.

Chairman McCabe stated that the next order

of business would be the question of what would be said to the Secretary
of the Treasury with respect to credit and debt management policies and
that if

Mr. Vardaman wanted to change his vote he would be at liberty to

do so.
Chairman McCabe then suggested that it

be understood that the

manner and time of transmittal of the letter to the President be left to
the discretion of the Chairman.
Upon motion duly made and seconded,
and by unanimous vote, this suggestion
was approved.
Secretary's note: It was the deci
sion of the Chairman that the letter should
be transmitted to the White House without
the postscript referred to above. Mr.
Vardaman was not informed of this decision
and did not know of it until he inquired
of the Secretary's office after reference
was made to the existence of the letter in
the press. At that time Mr. Vardaman dis
cussed the matter with Messrs. Carpenter
and Thurston and stated to the latter that
he would be satisfied if Mr. Thurston would
call Mr. Short, Press Secretary to the Presi
dent, and advise him that Mr. Vardaman had
not approved the letter. Thereupon, Mr.
Thurston called Mr. Short and informed him
accordingly.
The letter was delivered to the White
House shortly after 7:30 p.m. on Wednesday,
February 7, 1951, and in response to an
inquiry from a member of the White House
staff as to whether the letter was impor
tant, since an important letter would be de
livered directly to Blair House for the

2/6-8/51

-30President that evening, it was stated that
the letter was important and that the White
House staff should handle it in accordance
with whatever procedure was usually followed
in the case of an important communication.

At Chairman McCabe's suggestion the Secretary then read a draft of
letter to the Secretary of the Treasury.
The draft was discussed and upon motion
duly made and seconded, and by unanimous
vote, approved in the following form:
"Following the meeting of the Federal Open Market Commit
tee with the President on January 31, at which the President
expressed the wish that the Committee provide support to the
Government securities market during the emergency period, the
Committee has considered what policies might be advisable in

the immediate future.

We should like to discuss with you at an

early date a coordinated credit policy and debt management pro
gram which would assist in the highly important fight against
inflation and improve public confidence in the market for Gov
ernment securities. We would suggest as a basis for that dis
cussion a program along the following lines:
"(1) The Federal Reserve, for the present, would
purchase the longest-term restricted Treasury bonds

now outstanding in amounts necessary to prevent them
from falling below par.
"(2) If substantial Federal Reserve support of
the longest-term restricted bond is required, you
would be prepared to announce that at an appropriate
time the Treasury would offer a longer-term bond with
a coupon sufficiently attractive so that the bond
would be accepted and held by investors. It would be
announced that outstanding long-term restricted bonds
would be exchangeable for the new bond and that the
new bond would be offered for cash subscription by non
bank investors on a basis to be determined.
"We should like to discuss with you possible
features for the new bond that would remove or reduce
the need for Federal Reserve support of the market in
the future.
For the purpose of restricting the creation
"(3)
of bank reserves through sales of short-term securi
ties to the Federal Reserve, particularly by banks,

2/6-8/51

-31-

the Committee would keep its purchases of such securi
ties to the minimum amounts needed to maintain an
orderly money market,
"Under this policy, banks would be expected to
obtain needed reserves primarily by borrowing from
the Federal Reserve Banks.
If demands for expansion
of bank credit and bank reserves should continue,
short-term interest rates presumably would adjust to
a level around the discount rate.
"This is the time to inaugurate the suggested program.
It appears that the Treasury will not need any financing either
for new funds or for refunding until next summer. It is im
portant that rate adjustments be made before that time so that
your large refunding and new money financing in the second half
of this year may be carried out smoothly and successfully with
out undue support by the System.
"Only through policies such as these can restraint on
credit expansion be exercised in the degree that is so neces
sary to avoid continued erosion of the purchasing power of the
dollar and to maintain the strength of our economy in this
critical period. Both the Treasury and the Federal Reserve
have a vital interest in this objective.
"We hope that we may have an early opportunity of dis
cussing this matter with you."
Secretary's note:

The letter was de

livered by Chairman McCabe and Mr. Sproul
to the Secretary of the Treasury when they
met with him at 9:00 a.m. on Thursday,
February 8, 1951.
In response to a question, it was stated that this meeting of the
Federal Open Market Committee would take the place of the one that had
been called for February 13, 1951, at the last meeting of the Committee.
Mr. Sproul then stated that there had been some very regrettable
leaks of information on what had happened during yesterday's session of
the Federal Open Market Committee and he moved that it
(1) no one would make any comment on today's session,

be understood that
(2)

if there was any

leak the Committee should seek to determine the source, and (3)

if the

-32

2/6-8/51

source of the leak could be traced to a member of the Committee that would
be sufficient cause for removal of the member from the Federal Open Market
Committee,
Chairman McCabe referred to the article which appeared in The
Wall Street Journal of this date commenting on yesterday's session of the
Federal Open Market Committee and giving erroneous information with respect
to the views of individual members as expressed at that session and indi
cating that there had been acrimonious discussion at the meeting which was
also contrary to the fact.

He said that he agreed strongly with Mr.

Sproul's motion, adding that, if there was any further leak of information
and it

could be traced to a member of the Board of Governors,

the Committee

should request the President to take steps to remove the member from the
Federal Open Market Committee,

and if

a leak should be traced to a Federal

Reserve Bank President who was a member of the Federal Open Market Commit
tee, or to a member of the staff, the Board of Governors should take action
to remove the individual from office.

He went on to say that he felt it

disgraceful that there had been leaks of information such as that appearing
in The Wall Street Journal today and in other papers recently, that he had
talked with the publisher of The Wall Street Journal today and had taken
steps to trace the source of the story in today's edition, and that under
the circumstances the publisher of the paper indicated he was sorry that
the article had appeared in the form it

had.

Chairman McCabe also stated

that certain Senators had called him on the telephone and stated that

2/6-8/51

-33

material had been sent to them by a member of the Committee, that they
were also being asked for appointments,

that it

was very embarrassing to

them, and that Senator O'Mahoney had called him this afternoon to ask
whether there was any way in which he (Chairman McCabe) could put a stop
to such procedure.

Chairman McCabe stated that he told Senator O'Mahoney

that he was very sorry, that it

was embarrassing to the Committee as well

as to the Senator, and that the worst part was that the report appearing
in The Wall Street Journal today was erroneous since, while there had been
honest differences of opinion at the session of the Committee yesterday,
the discussion had been on a very objective basis.

Chairman McCabe also

suggested that it be understood that if there was any instance in which a
member of the Committee was found to be undermining with members of Congress
or others the position of the Board of Governors or the Federal Open Market
Committee,

those facts should be brought to the attention of the President

with great force.
Thereupon, upon motion duly made and
seconded, unanimous approval was given to
Mr. Sproul's motion.
Mr. Eccles suggested that some thought be given to what might be
said to the press when this meeting adjourned and it

was agreed that Mr.

Thurston would prepare a draft of statement for consideration at another
session to be held tomorrow morning.
Thereupon, the meeting recessed and reconvened at 11:25 a.m. on
Thursday, February 8, 1951, with the same attendance

as at the close of

2/6-8/51
the previous session, except that Mr. R. F. Leach was not present.
Chairman

McCabe stated that he and Mr. Sproul had had two con

ferences this morning, one at nine o'clock with Secretary of the Treasury
Snyder in the latter's office at which Messrs. Martin and Bartelt were
also present, and one at ten o'clock with Senator O'Mahoney, who had
called at Chairman McCabe's office.
Chairman McCabe then made a statement substantially as follows:
We met with Secretary Snyder at nine o'clock. He had very
strong feelings about the situation that had been created. He
took up first my conference with him and the President on Janu
ary 17 and said that he thought he had certain definite under
standings, and he went on to give me those. Then I gave my
views. We had a little discussion. Then he referred back to
the August 18, 1950, meeting, which he dwelt upon at consider
able length because he felt that we had then delivered an
ultimatum to him without giving him a chance to express his
point of view. Mr. Sproul answered him very effectively on
that. Then there followed a general discussion of what had been
taking place, and, finally we got around to reading him a copy
of the letter to the President. His comment was that it sounded
a little "preachy" to him, and he questioned whether we should
send a letter of that type. He also made the comment that if
the President did not release the letter, he supposed that with
in 24 hours someone over here would do so. Then we read him
the letter addressed to him, and there followed quite a dis
cussion in which he expressed strong reservations about doing
anything at this time, saying that he thought it was largely a
question of settling down and everybody keeping quiet and
letting the market have a chance to act. When it had a few
days to do that, he said, the market acted very well. He
ended up by saying that he would like to have that letter and
go over it and discuss it with us again.
I also read to Secretary Snyder the memorandum which I
read to this Committee when we met on January 31, the one that
I dictated after the conference with the President and Secre

tary Snyder on January 17. He did not disagree with any part
of the memorandum except to say that it was very definite in
his mind that he was talking about future financing.

I said,

2/6-8/51
what I could not understand was, if he was going to make a
public announcement and a speech in New York the following day,
why he would come to a meeting like that and not make a com
ment on what he was going to say. I said I knew nothing of
the purpose of the meeting with the President, that in my
previous conversations with Mr. Snyder and the President the
primary thing was maintaining confidence in long-term re
stricted bonds, and that the President started off his con
versation by saying, "I am concerned about those 2-1/2 per
cent bonds." I also said that if the Secretary had in mind
making a public announcement like the one he made on January
18, I felt strongly that he should have let me know, especially
where he used my name and the President's name. He said the
President knew exactly what he was going to do and what he was
going to say. I said to the Secretary, "The President told me
afterward that he did not know you were going to make a speech
in New York." That disturbed Secretary Snyder very greatly.
He said the President knew exactly what he was going to say.
I replied that I could not understand why the Secretary did not
spell this out for me, and give me a chance to have my say,
particularly since he knew that as Chairman of the Committee I
could not commit the Federal Open Market Committee on future
policies.
He said hereafter we will have it all spelled out,
because then we will know exactly what it is, and I said I would
like to have it spelled out. I said this had cut me very deeply
because I did not know the statement was going to be issued, and
I did not know he was going to make the speech in New York and
make the announcement as he did. I did not feel his explanation
of the circumstances was satisfactory.
As to the meeting of the Committee with the President on
January 31, the Secretary said he had no idea that the President
was going to call the Federal Open Market Committee over there.
Mr. Sproul spoke up and referred to the Treasury's official
announcement immediately after that meeting as to what was
pledged on the part of the group and I do not think the Secre
tary made any comment.
I suppose that we will wait for a few days to get his com
ments on our letter to him and then there will be another
meeting.
In response to questions by Chairman McCabe and others while he was
giving the foregoing report, Mr. Sproul made additional comments at various
intervals during the report substantially as follows:

2/6-8/51

-36-

The Secretary started out by saying, and he was very
emphatic about this, that he had nothing to do about arranging
the President's invitation to the Federal Open Market Commit
tee to come to the White House and knew nothing about it.
In
presenting the Secretary with a copy of the letter to the

President, it was clearly understood that it would be regarded
as confidential unless the President approved giving it out.
In connection with our letter to the Secretary, he said that
he would take it and study it, but his whole attitude during
the discussion was that the market should be maintained as it
was and that stability of the market at present prices should
be continued. He spoke of his great financing problems and

of the critical situation of the country at this time. The
Secretary did not answer the Chairman's question as to why he
(the Secretary) did not say at the meeting with the President
on January 17 that he was going to make a speech in New York

and what he was going to announce at that time.
In commenting on the meeting of the Committee with the
President, I said to the Secretary that, while the President's
request to come over was unprecedented, we went and the con
versation was in general terms and there was nothing we could
find fault with in the conference with the President, but that
what appeared afterwards in the White House press coments and
subsequent interpretations of the Treasury was not in accord
ance with the conference.
When the Secretary brought up the question of the August
18, 1950, meeting and spoke of it as an ultimatum and of his
not having had an opportunity to express his views, I said

that I would like to have him know how the situation looked
from the other side of the fence, that perhaps he did not know
how it looked to us, that we had been discussing these problems
with him for more than a year, that we had come over and laid

down our programs with him time and time again, that we had
presented them to him in writing and in discussion, that he had
discussed them with us little or not at all, that he had
usually turned to an associate and usually asked if they had any
comment to make and had then said that he would let us know what
he was going to do, that that had usually been followed by an
announcement by him, often anticipating far in advance his needs,
of the financing program which had differed almost completely
from our recommendations and which had had the effect of freez
ing our position. I said that it was only in the light of that

experience that we thought it was asking too much last August to
expect to get agreement from him in advance, and that we therefore

2/6-8/51

-37

decided to come over and tell him at that time what we were
going to do.
He responded that from his side of the fence it
did not look that way at all, that we had come over and told him
what was going to be done, and that within a few hours what we
said would be in the papers and that before he had had a chance
to consider and make up his mind, the possibility of any other
course of action had been denied him.
There followed a discussion of the statements by Chairman McCabe
and Mr. Sproul during which question was raised as to whether the letter
to the President was likely to be released.

Chairman McCabe stated that

he had tried to get in touch with Mr. Connelly, Secretary to the President,
to suggest that it be released but that he had not reached him.

During

the discussion a report was brought into the room that at a press confer
ence that morning the President had told newsmen that he understood that a
majority of the Federal Reserve Board agreed with him on his interest rate
views, and that it was his understanding that a majority of the Reserve
Board members sided with him on the interest rate question between the
Board and the Treasury.
In this connection Mr. Carpenter stated that after the letter to
the President had been delivered to the White House last night a call came
to the building asking whether the letter was important, since if

it

important it

was not

would be delivered to Blair House at once, but if

it

it would be held at the White House for delivery in the morning.

was

Mr.

Carpenter added that the White House inquirer was informed that the letter
was important and that it
for such letters.

should be handled in whatever way was customary

-38

2/6-8/51

Mr. Szymczak stated that it

was understood at the meeting of the

Committee yesterday that no information would be given out by the members
of the Committee with respect to the meeting and that any breach of that
understanding would be grounds for removal.

The problem, he said, was

what was to be said by the Committee to the press, that there would be an
attempt on the part of the press to find out what had been discussed at
the meeting of the Committee,

and that for that reason there should be

some kind of a statement from the Committee,

He also said that members

of Congress were becoming increasingly interested in the whole question and
were making speeches on the floor with respect to it

and that there should

be some statement that could be made to them.
Chairman McCabe said that if

the President should decide not to

release the letter from the Committee it would be in order for the Committee
to decide whether it wished to issue a statement and that it might be left
to the executive committee to issue a statement or to prepare a statement
that could be cleared with the members of the full Committee,

It was also

suggested that the question of a statement to members of Congress could be
covered in

discussions with the Chairman of the Subcommittee of the Senate

Banking and Currency Committee on Federal Reserve Matters and the Chairman
of the Joint Committee on the Economic Report.
Mr.

Szymczak stated that if

the White House did not release the

letter to the President and the Treasury delayed a reply to the letter to
the Secretary, there should be a statement by the Federal Open Market Com
mittee.

2/6-8/51

-39

Mr. Thurston stated that the question might be asked by the press
whether there had been a reply to the letter from the President to Chair
man McCabe,
There was a discussion of what might
be said in that situation and it was
agreed unanimously that if such an inquiry
should be made, Mr. Thurston would be
authorized to say in response to the in
quiry if made that a reply had been sent
to the White House.
There was also a discussion of the procedure that should be fol
lowed in the event the Treasury did not accept any part of the program out
lined in the letter to the Secretary.

Mr. Szymczak pointed out that there

was the immediate problem of what should be done with respect to the price
at which long-term restricted bonds would be bought for the System account
and Mr.

Sproul stated that when the Treasury discontinued its purchases

of the longest-term restricted issue, the New York Bank, acting under in
structions from the executive committee,

should begin to drop the price

rapidly in an orderly market to slightly above par.
Mr. Rouse stated that there should be some clarification of the
manner in which the price should be permitted to decline--whether it

should

be by steps of 1/32 or 2/32 at a time or whether the decline should be a
rapid drop to slightly above par.

Mr. Sproul suggested that in terms of an

orderly market the decline should not be more rapid than 4 to 8/32 a day.
It was stated that as long as the Treasury continued to purchase
the December 67-72 restricted bonds at par and 22/32, the market price on

2/6-8/51

40

the June 67-72 issue would not decline very far and Chairman McCabe ex
pressed the opinion that until

the Treasury discontinued its

purchases

there would be no point in lowering the System's support price on the June

67-72 issue.
During the discussion, Mr. Vardaman withdrew from the meeting to
keep another appointment and at the conclusion of the discussion it

was

decided that pending further discussion with the Treasury no action should
be taken to permit the market price of long-term restricted bonds to decline.
Mr. Sproul stated that a decision on System policy should not be
long delayed and that if

no word was received from the Secretary of the

Treasury early next week the matter should be taken up with him again.

It was agreed unanimously that the pro
gram which the Committee would like to see
put into effect was set forth in the letter
to the Secretary of the Treasury dated Febru
to
ary 7, 1951, and that it should be left
the executive committee to carry the program
into effect so far as open market operations
were concerned, if an agreement could be
reached with the Treasury. In reaching this
agreement, Chairman McCabe emphasized the
necessity for exercising extreme care to
assure that in carrying out the policies of
the full Committee no grounds be given for a
charge by the Treasury or anyone else of bad

faith on the part of the Committee.
In the light of the above discussion, it was agreed that a meeting
of the executive committee should be held in Washington at 2:30 p.m. on
Wednesday, February 14,

1951.

During the discussion, Mr. Sproul reviewed briefly the substance

2/6-8/51

-41-

of the discussion which he and Chairman McCabe had this morning with
Senator O'Mahoney,

Chairman of the Joint Committee on the Economic Report.

Mr. Sproul suggested that the general direction of the full Com
mittee to the executive committee to arrange for transactions in the System
account be renewed without change.
Thereupon, upon motion duly made and
seconded, the following direction to the
executive committee was approved unani
mously with the understanding that the
limitation contained in the direction
would include commitments for the System
open market account:
The executive committee is directed, until otherwise directed
by the Federal Open Market Committee, to arrange for such trans
actions for the System open market account, either in the open
market or directly with the Treasury (including purchases, sales,
exchanges, replacement of maturing securities, and letting maturi
ties run off without replacement), as may be necessary, in the
light of current and prospective economic conditions and the gen
eral credit situation of the country, with a view to exercising
restraint upon inflationary developments, to maintaining orderly
conditions in the Government security market, to relating the
supply of funds in the market to the needs of commerce and busi
ness, and to the practical administration of the account; pro
vided that the aggregate amount of securities held in the account
at the close of this date other than special short-term certifi
cates of indebtedness purchased from time to time for the tempo
rary accommodation of the Treasury shall not be increased or de
creased by more than $2,000,000,000.
The executive committee is further directed, until otherwise
directed by the Federal Open Market Committee, to arrange for the
purchase for the System open market account direct from the
Treasury of such amounts of special short-term certificates of
indebtedness as may be necessary from time to time for the
temporary accommodation of the Treasury; provided that the total
amount of such certificates held in the account at any one time
shall not exceed $1,000,000,000).
Mr. Rouse then referred to the authorization given by the Federal
Open Market Committee to the Federal Reserve Banks on March 1, 1950, to

2/6-8/51

-42

enter into repurchase agreements with nonbank dealers in United States Gov

ernment securities who are qualified to transact business with the System

open market account under certain conditions and to the provision in the
authorization that such agreements

would be at least 1/8 per cent above

the average issuing rate of United States Treasury bills.

Mr. Rouse went

on to say that the average issuing rate on Treasury bills had increased to
a point where if

the foregoing provision was observed literally the rate

would be 1.52 per cent, that it

had been customary to move the rate on the

repurchase agreements in steps of 1/8 of one per cent which would mean a
rate of 1-5/8 per cent, and that it

would be his recommendation that the

New York Bank be authorized to enter into such agreements at a differential
of less than 1/8 per cent so that the agreements could be made at 1-1/2 per
cent.

At that rate, he said, dealers would take positions in bills which

they could resell readily in the present market and it

would not be neces

sary for the System account to purchase them.
It was agreed unanimously that, pend
ing further action by the Committee, the
authorization referred to by Mr. Rouse
would be modified in accordance with his
suggestion.
It

was tentatively agreed that the next meeting of the Federal Open

Market Committee would be held on March 9, 1951.
Secretary.

Thereupon the meeting adjourned.