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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 Wash.
ington, D.


on Wednesday,




January 31, 1951, at 10:00 a.m.

McCabe, Chairman
Sproul, Vice Chairman
C. S. Young

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

Open Market
Mr. Thurston, Assistant to the Board of
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
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
Mr. Arthur Willis, Special Assistant,
Securities Department, Federal
Reserve Bank of New York
Upon motion duly made and seconded,

and by

unanimous vote, the minutes of the meeting of the
Federal Open Market Committee held on November 27,

1950 were approved.

Upon motion duly made and seconded, and by
unanimous vote, the actions of the executive
committee of the Federal Open Market Committee
as set forth in the minutes of the meetings of
the executive committee held on November 17 and
27 and December 27 were approved, ratified, and
Mr. Rouse presented and commented upon a report of open market
operations prepared at the Federal Reserve Bank of New York covering the
period from November 27, 1950 to January 24, 1951, inclusive, and a sup
plementary report covering commitments executed from January 25 to Janu
ary 30, 1951,


Copies of both reports have been placed in the

files of the Federal Open Market Committee.
In commenting on the reports, Mr. Rouse stated that late last
week the volume of offerings of the longest restricted 2-1/2 per cent
Treasury bonds increased and that demand for such bonds was not sufficient
to absorb the supply, with the result that approximately $30 million of
bonds were purchased for the System account in accordance with the policy
approved at the meeting of the Committee on November 27, 1950.
of the increase in

In view

selling, Mr. Rouse said, he conferred informally with

Chairman McCabe and Mr. Sproul and it

was felt that no change should be

made in the existing policy, i.e., that the longest-term restricted bond
would not be allowed to decline beyond a point slightly above par, and
that an orderly market would be maintained.

Mr. Rouse went on to say

that early on Monday afternoon of this week the price of the longest
restricted bonds was allowed to decline 1/32 of a point to par and 21/32,
and that shortly he received a telephone call from Mr. Bartelt, Fiscal
Assistant Secretary of the Treasury, who stated he had talked with the



Secretary of the Treasury about purchase of the longest bonds for trust
accounts of the Government, and asked Mr. Rouse's view about the Treasury
giving the New York bank as fiscal agent of the United States an order to
purchase such bonds at par and 22/32.

Mr. Rouse said he replied that in

the past such orders had always been given to the Bank for execution at
the market and that the market was par and 21/32, and that he would not
be interested in having an order on any other basis.

Subsequently, Mr.

Rouse said, Mr. Bartelt called him on the telephone again and read the
following telegram which was being sent to Mr.

Sproul by the Secretary

of the Treasury:
"As fiscal agent of the United States, you are authorized
and requested to purchase for account of the Postal Savings
System not more than two hundred million dollars Treasury bonds
December 1967-72 at par and 22/32nds, plus commission, at such
times when open market purchases are not made at this price for
open market account."
Mr. Rouse added that yesterday purchases of the December 1967
72 Treasury bonds at par and 22/32, plus commission, pursuant to the wire
from the Secretary of the Treasury totalled $32,400,000 and that $500,000
June 67-72's were purchased for the System account at par and 21/32.
also outlined the reasons for the recent increase in market rates on
bankers' acceptances.
Upon motion duly made and seconded, and by
unanimous vote, the transactions in the System
account for the period November 26, 1950 to

January 30, 1951, inclusive, were approved, rat
ified, and confirmed.
Chairman McCabe then called upon Mr. Sproul who made a state
ment substantially as follows:



Chairman McCabe and I met with the Secretary of the Treasury

on January 3, 1951.

The Secretary had indicated that it would be

desirable for us to have frequent conversations and discussions
about debt management and credit policy in the light of the exist
ing situation and we immediately sought this meeting. Mr. Bartelt,
Fiscal Assistant Secretary of the Treasury, was also present. We
made it clear to the Secretary that there had been no meeting of
the Federal Open Market Committee since November 27, that we were,
therefore, talking with him as individuals, and that it was expected
we would have a full and free exchange of views so that we could,
at a subsequent meeting of the Federal Open Market Committee, dis
cuss what coordinated policy of credit and debt management could be
I had some notes which I had made beforehand and made

a statement to the Secretary based on those notes.
is danger that:


I said there

We will try to get mobilization and rearmament wholly as a by
product of a continuing peace-time business boom.
This is the
tempting idea of increased production, increased national in
come, and increased Government revenues, which will take care
of our civilian and military needs without civilian sacrifice

and Government borrowing.

It would relieve the pressure for

cuts in nondefense Government expenditures and for some reduc
tion in civilian consumption. Resilience and expansive power

of our economy is great, but time is a controlling factor. The
economy is already stretched and the necessary increases in
production can't be expected in 1951 even if work hours are

increased, the number of workers expanded, and normal produc
tivity gains are obtained. An inflationary stimulus under such
circumstances would raise prices not production.

Reliance will come to be placed too largely on direct controls,
and stern resolves about fiscal and credit policy will be for
gotten. Both kinds of controls now appear to be needed, but
the exemption of agricultural prices and softness toward wage
increases, weaken direct controls, which will fail, in any case,
unless backed by strong fiscal and credit measures.


We won't tax enough and in the right places (in order to cut
down consumer purchasing power not savings) and we won't have

the wisdom or the power to apply credit controls effectively
Admittedly, too high taxes may dull incentive or may then
selves become inflationary, through union pressure for higher
wages or corporate action to raise prices, or lowered manage
ment interest in cost control.

It is not likely, however, that

the necessary tax increases to meet Government expenditures
during the calendar year 1951 will breach these points.
Admittedly, credit controls, by themselves, cannot wholly
check inflationary pressures when other strong forces are work
ing to increase costs and prices, but we must do all we can to
hold down the money supply, and that means we should use general
or quantitative controls which affect interest rates, as well as
selective controls. The next six months, while the Treasury
will be largely out of the market, offer the best chance to get
our house in order, through general credit measures. After that
the requirements of credit policy and Government financing needs
-refunding and new money - may be in conflict and financing
needs will take precedence.

Looking ahead to tremendous armament expenditures over a period
of years, and talking about plans and appropriations instead of
cash outlay, we may lose sight of the fact that the problem is
still of manageable proportions, as of the year 1951. If we
hit an annual rate of Government spending for defense of $45
billion by the end of calendar 1951, the cash deficit on the

basis of present tax rates (omitting the just passed excess
profits tax) would still be only about $6 billion. It is too
early to dismiss pay-as-you-go as merely a pious proposal, and
to talk of tremendous deficit financing, and of a frozen pattern

of interest rates to hop up the Government security market.
It is in the light of these present dangers, and in prep

aration for meeting the more difficult longer term problems of
financing full scale mobilization or war, that near term policy
should be determined.

If present inflationary advances in the credit sector continue,

as it appears they may during the next few months, further
action to restrict the availability of bank reserves would be

in order. Whether this is accomplished through open market
operations or further power (and use of that power) to increase
reserve requirements, or both, it must have some influence on

interest rates to be effective.

This would impose a further

marginal tightening in the availability of credit, and it would
permit the Federal Reserve System to offer additional resist
ance to the unloading of shorter term securities on the Open
Market Account, In terms of longer range objectives, it would
also move us closer to a horizontal yield curve, which will

tend to "pin in" existing holders of Government securities and
prevent playing of the pattern of rates in the period of renewed
deficit financing which may lie further ahead.


The immediate problem of debt management is in the area of long
term rates, and includes the problem of maturing savings bonds
and the sale of new savings bonds.
The lesson to be learned from the financing of the last
war is that long term financing at rates which won't hold up
in the market, without Federal Reserve support, is to be
avoided. This suggests a slightly higher rate than 2-1/2
per cent for long term financing. The attraction of a slightly
higher yield (almost regardless of maturity), particularly for
institutional investors facing actuarial income requirements,
could effect a significant diversion of new investment funds
into new Treasury issues.
Such investors will not, of course,
neglect attractive alternative private investments, but the
competitive position of Treasury offerings would be greatly
improved, having in mind the desire of these investors to find
the safest lodgment for their funds consistent with their
actuarial requirements.
In a technical sense, also, the Treasury will face a prob
lem unless it offers a higher long term rate. The fact that
present outstanding restricted issues running only 17 years to
call date, have to be heavily supported, suggests strongly that
no net sales of new securities of longer maturity, at the same
rate, would be possible. Nor would it be desirable, in terms
of orderly debt management to place any more new bonds within
this 17 year period.

In terms of immediate as well as longer term debt manage

ment, as well as credit policy, this suggests that if market
pressures continue the price of outstanding restricted bonds
of 1967-72 be allowed to decline to par, or only slightly above,

so that they may stand on their own feet as soon as possible,
so that forced injections of reserve credit into the banking

system may be stopped, and so that the ground will be prepared
for the long term financing which lies ahead. Never before has
the Treasury faced unknown new borrowing requirements in the
face of a very large outstanding debt. If it is to obtain new
money from long term investors rather than merely effect a
churning about in old holdings it must break away from old


The only way to reduce switching of outstanding

securities into new Treasury offerings will be through Treasury
action to set a higher long term rate, and through removing

the premium on the longest term outstanding restricted bonds.

In the long run debt management (as well as credit policy) must
be judged by the success of new offerings in attracting savings.


Mere switching out of old issues into new, with actual require
ments being met, indirectly, by bank money carries an explosive
charge of inflationary pressure that could disrupt all other
Government efforts to control inflation.


Savings bonds.
Since 1951 marks the beginning of substantial
maturities of savings bonds, methods of encouraging retention
and stimulating further sales will have to be worked out very
Terms on this type of security, sold to the general
public, cannot practicably be changed except infrequently;
consequently changes worked out in 1951 should be designed to
meet requirements for some years ahead.
A System Committee has been working on this problem for
some time, and has now been directed by the Federal Open Market
Committee to discuss its ideas with the Treasury staff. It is
hoped that out of these consultations will come recommendations
which the Committee can promptly submit to you. So far as
thinking has gone it suggests among other things that terms of
present E bonds be revamped, and that individuals be offered,
in automatic extension of existing holdings and for cash, a
bond which will return about 1/2 of 1 per cent more if held to
In addition to improving the terms of savings bonds, it
seems to me only slightly less important to revitalize the sav
ings bond sales organization, and to provide it with sufficient
appropriated funds to do an aggressive, all-out selling job.
Consumer incomes will continue to rise in excess of currently
available goods, we won't tax away the whole of the excess, and
we must attract some of this excess into savings or it will
express itself in higher prices, thus undermining the whole
savings bond program.


This is a program for the immediate future, which also looks
ahead to the time when large Government deficits may make neces
sary a fixed pattern of Government financing and some recourse

to the banking system to meet the Government's needs.

At that

time we shall need to have at least three things:
A method of bank financing which will cut down or
eliminate the leverage in the fractional reserve system; short
term rates then in effect need not be the rates applied to bank
borrowing, which may well have to be fixed, arbitrarily, at
some lower level.

(b) A long term bond which will attract new investment
funds (other than individual) and which will take care of itself
in the market under ordinary conditions.
It may be that some
form of compulsion will become necessary in this area, also,
to assure continued holding.
A savings bond which will attract and hold individual
The possibility of a refundable tax - or compulsory
saving - should be again explored.
In preparing for this longer term program we should con

tinually keep in mind that it may (we hope) lack the stimulus
of actual war, and that it may be of indefinite duration. We

must avoid, in so far as possible, doing those things which
have been excused during past wars as the lesser of the evils
which temporarily we faced.
The Secretary listened very attentively to what we had to say,
but gave back to us no comparable outline of his thinking on debt
management or credit policy. I certainly left the meeting with the
clear understanding and expectation that this was the first
of a
series of frequent consultations in which we would get his views
which we would be able to report back to this Committee, and then
present to him our thinking in the form of views of the Committee,
rather than as individual members of the Committee, and how those
views might be adapted to whatever debt management program might

be developed.
Chairman McCabe then made substantially the following


Following that discussion we brought up the report prepared
by the staff on the Series E savings bond program and asked the
Secretary how he would like to have that handled; whether he would

like to have the Federal Open Market Committee consider the matter
and make a recommendation, or to have the staff report as it was.
He suggested that we send the staff report to Mr. Bartelt and let
him discuss it with their staff, after which he would determine
whether he wanted a definite recommendation from us. In the course
of a few days the staff did send over the very comprehensive memo
randum on the study of the Series E savings bond program. Mr.

Bartelt called and asked if he and Mr. Graham, Assistant Secretary
of the Treasury in charge of Savings Bonds, could come over and
They came over on Tuesday, January 16, and Mr. Thomas,
talk with us.

Mr. Riefler, Mr. Young, Mr. Youngdahl, and I sat down to lunch with

them with the full expectation they would discuss all features of
the program. Mr. Graham spent most of the time at lunch trying to



sell us on how well the E Bond campaign was going over and the suc
cess they were meeting throughout the country. We commented gener
ally on the E Bond campaign, and then Mr. Bartelt asked about the
advisability of having savings bonds made eligible as collateral
for loans. They told us their staff report was on the Secretary's

desk awaiting final approval from him.

In that situation, there

was nothing to discuss since, so far as they were concerned, their
recommendations were on the Secretary's desk. That was on Tuesday,
January 16. On Thursday, January 18, the Secretary made his speech
in New York to the Board of Trade in which he outlined the program
for savings bonds. There certainly was not any constructive discus
sion of the program with us, since they told us early in the conver

sation at that luncheon meeting the sixteenth that their report was
on the Secretary's desk.
Previous to that meeting and to our talk with the Secretary on
January 3, I had received a communication from the President. This

was early in December - the President telephoned me at my home about
an article that had appeared in The New York Herald Tribune on Decem

ber 1, 1950, which said that there was "open speculation as to
whether the Federal Reserve is again undercutting the (Treasury)
financing," and that it was "obviously risking another huge shake
out of long holdings such as that which followed the Christmas

package of downward peg adjustments some years ago." That article
seemed to have upset the President very much. He mentioned the
fact that he hoped we would stick rigidly to the pegged rates on
the longest bonds. I told him the dangers of that. Fortunately,
I had right at my fingertips information about the restricted bonds
that we had purchased and told him who the principal sellers of
those bonds were. I said I could not understand why we would sit
there with such a high premium and allow the life insurance companies
to unload on us at such a handsome profit. Following that telephone
conversation, the President wrote me a note on December 4 and said
he was enclosing the article which he had called me about on the
telephone. This letter read as follows:
"I am enclosing you the article to which I referred in my
telephone conversation with you Friday night.
"It seems to me that this situation is a very dangerous

one and that the Federal Reserve Board should make it per
fectly plain to the open market committee and to the New
York Bankers that the peg is stabilized.
"I have succeeded in getting the Treasury to appreciate
the fact that we should have our obligations financed on


-10"longer terms than has been the case generally but, if the
Federal Reserve Board is going to pull the rug from under
the Treasury on that, we certainly are faced with a most
serious situation, because we are going to have an immense
amount of Federal financing in the next six months.
"I hope the Board will realize its responsibilities and
not allow the bottom to drop from under our securities.

If that happens that is exactly what Mr. Stalin wants."

I replied to the President in a personal and confidential
letter on December 9 as follows:
"As you can imagine, your telephone call a few days
ago and your subsequent letter of December 4 gave me
great concern because I was distressed that you should
have another problem added to the many critical ones
before you.
"The newspaper clipping to which you referred had
not been previously called to my attention. I would not
have considered it of special significance because it is
such a distortion of the facts. We suspect that it was
written by a man who we know makes a practice of baiting
the Federal Reserve and creating an appearance of contro
versy. You can rest assured that we are fully conscious
of the magnitude of the financial problems that face us,
and that we will do all in our power to insure the success
ful financing of the Government's needs.

"Tou will recall that I mailed you a copy of my let
ter of October 30 to John Snyder in which I outlined the
policy to be pursued by the Open Market Committee in
accordance with the assurance which I previously gave to
you and John in your office on October 26.
"We heartily subscribed to the Treasury's latest

refunding announcement and I assured John Snyder that the
Open Market Committee would do everything possible to
make it a success.
I told him that we might have to pur
chase between 2 billion and 4 billion dollars of the new
issue before the refunding was completed, but that we
I told him further that we would
were prepared to do it.
make every attempt to sell an equivalent amourt of other
securities in our portfolio in order to try to offset


-11"purchases. Excess of purchases over sales would tend to
increase bank reserves. The creation of additional bank
reserves in a period like this only adds more fuel to the
fire of inflation, We have conducted our operations in
strict accord with the policy which I outlined to you and
"Actually we have purchased more than 2.5 billion

dollars of the maturing issue in support of the Treasury
refinancing. In addition, we have continued to buy long
term 2-1/2 per cent restricted bonds in the narrow range
of from 23/32 to 26/32 above par. Since November 22 we
have made a net increase in our portfolio of well over
one billion dollars. We hope to sell enough Government
securities in the coming weeks to offset the effects these
purchases have had on bank reserves.

"You can see from these figures that we have faith
fully followed the policy as outlined to you.
"It is our view that moderate fluctuations in price
in response to market forces serve a useful purpose and
help to maintain public confidence. Our feeling is that
too rigidly pegged prices of securities encourage greater
selling by investors. Our experiences over the past
several months, in which we have had both rigid pegs for
an extended period and slight fluctuations on the long
term restricted bonds, have convinced us that a moderate
degree of flexibility is preferable. Since the end of
November, covering the period when the subscription books
to the new Treasury refunding issue were open, we have
maintained a fixed buying price for the long-term
restricted bonds.
"I would prefer not to take up with the Open Market
Committee the question of notifying the New York bankers

of a fixed peg until I have had an opportunity fully to
discuss with you the possible adverse consequences of
such an action.
"I expect to be in Birmingham, Alabama, and Chicago
until December 15. I will be pleased to see you either
on Friday, the 15th, or Monday, the 18th, if either of
those dates is convenient to you. I can assure you that
in the meantime our operations will be directed toward

maintaining stability in the market."



I told the President I was leaving to be away for several
days but would like to come over and see him the next week, and
I did see him on December 18. I took over to him the complete
day-to-day record of our performance -- what had happened to

the volume of transactions during that period when the peg was
held rigid and what had happened during the period when prices
had dropped one or two thirty-seconds. There was nothing in
the figures to indicate that we purchased more bonds when the
price dropped than when the peg was rigidly maintained. I
went over this in great detail with him and I got the feeling
that he had confidence in what we were doing.
Then on Wednesday, January 17, 1951, I met at the White
House with the President and the Secretary of the Treasury,
at the President's request of the day before, and when I
returned to the office I dictated the following memorandum of
our conversation:
"On Wednesday, January 17, 1951, the President asked
me to meet with John Snyder in his office at 10:45 a.m.
The President opened the conference by saying that he was
concerned about the market for Government securities and
wanted to take this opportunity to discuss with John and

me what might be done as he wanted us all in complete
accord on the policy to be pursued, particularly in con
nection with the long-term 2-1/2 per cent restricted bonds.
He said, 'You know that my chief concern is the mainten
ance of the 2-1/2 per cent rate on these bonds.'
"I expressed surprise at this statement because I

said that we had had a very clear understanding at the
last meeting of the three of us and that following that
meeting I had written a memorandum, and asked the Presi
dent if he recalled it. He said he did and thought that
meeting was worth while. He said that yesterday he was
thinking about the subject again, mentioned it to John
Snyder, and suggested that the three of us get together
"I said that I still did not understand his concern
because the market was behaving very well and that our
chief concern was the volume of restricted bonds which
we were having to buy from insurance companies and savings
banks as the purchase of these bonds resulted in the crea
tion of reserves in the banks, which were very inflation
ary as the demand for bank credit was exceptionally strong.

I then related several instances of bank credit expansion,

"John Snyder spoke up and said he was quite happy
with the way the market had been handled recently and that
there was no complaint about our operations. John said
that his interest was to have a clear understanding about
the maintenance of the 2-1/2 per cent rate and that it

was his strong feeling that the sooner we let the public
know that the 2-1/2 per cent rate was going to be main
tained, the better.
"I said that since the Treasury will not need any
new funds before the middle of the year that it did not
seem to me that he had much of an immediate problem. Be
replied that he might want to offer some long-term bonds
before the middle of the year if he could find a propi
tious time to make an offer, that his idea was that the
rate should be 2-1/2 per cent. I said that there was
some doubt about the market taking a 2-1/2 per cent issue
for a twenty-five or thirty-year bond and that thought
had already been expressed to John. He said he was thor
oughly convinced in his own mind that the 2-1/2 per cent
rate would be acceptable if the market could be stabilized
and some of the uncertainties removed.
"I remarked again that I did not know what we were
concerned about because everything, to my mind, seemed to
be under control. The President reiterated his former
statement, namely, 'I have been concerned about maintain
ing confidence in Government securities and wanted to make
sure that we were in agreement about our ideas of main
taining the 2-1/2 per cent rate.'
"Snyder, at one point, interjected the thought that
since he was making an announcement with regard to the E
Bonds, it would materially add to the sale of the E Bonds
if the public felt that the 2-1/2 per cent rate was being
"On two or three occasions I reiterated the thought
that I did not see what we were concerned about. I went
into some detail to tell the President about the long-term
securities we have had to absorb, and when I had finished,
Snyder said, 'If you had not jiggled the market the way
you did a few months ago, you would not have had to absorb
so many bonds from the insurance companies.' He further
said, 'I think that most of the securities you have been
called upon to absorb have been the result of market un
"Throughout the interview, I was under the impres
sion that we were talking about current operations and



"maintaining the 2-1/2 per cent rate on the outstanding
points. I did not give any consideration to a public an
nouncement on possible 2-1/2 per cent bonds to be issued
in the future.
"I was shocked to read the account of Snyder's speech
in New York the following day as he did not mention the
speech in our conference with the President, nor did he
tell us that he was going to make a public announcement."
On January 19, 1951, I added this note:
"The President told me today that he did not know
about the New York speech or the proposed announcement.
I think that the New York speech was very cleverly worded
in its references to the President and to me, as the word
ing indicates that he consulted with us and then made his
decision, and there is a strong inference that we concurred
in the announcement. The President may have concurred in
his mind, or privately, but I was not asked to concur in
the public statement.
"Before seeing the President this morning, I con
ferred with Governors Szymczak, Evans and Norton about
the points that I would raise with the President regard
ing the Snyder speech, and it was the strong advice of
Governors Evans and Norton that I not raise an issue re

garding it.

Governor Szymczak felt that I should make

my position clear.
"In my conference with the President this morning I
devoted most of the time to a discussion of my memorandum

to Charlie Wilson on inflation controls. Then at the end
of the interview I spoke of my astonishment in reading
the account of Snyder's speech and said that it was most

unfortunate that he did not tell us of his intention to
make the speech and the announcement which he proposed to
make. I said I followed the policy of checking with the
interested parties before the Federal Reserve made a pub
lic announcement, and in this instance I felt strongly
that he should have checked the announcement with us,
particularly since he used the President's name and my

name. The President said he thought I was right and that
he would speak to John about it.
"The President commended me highly for the way in
which I cooperated with Government officials. He said
he could offer no criticism of our actions. He told me
also that he would have a conference shortly with Charlie
Wilson on the memorandum and that he was very much impressed


"with the recommendations.
cerned about inflation."

He seemed to be greatly con

Yesterday the White House called and said that the President

would like to meet with the full Federal Open Market Committee

today at four o'clock. I think that we might give consideration
here to the question of what the President might possibly wish to
say to us and what would be our reply. I would assume, without
having any knowledge of it, that he will talk about the Govern

ment bond market and that he will make a very strong appeal to
the Federal Open Market Committee to back up the statement of
the Secretary of the Treasury in New York on January 18.

Mr. Gilbert, alternate for Mr. Davis, joined the meeting at this
Chairman McCabe stated that there were three possible alternative
positions that the Federal Open Market Committee might take:


Assure the President that the Committee would literally carry

out the program announced by the Secretary of the Treasury on January 18 of
maintaining the 2-1/2 per cent long-term rate on existing and new issues of
securities for the period of the emergency.

This program would be made

known to the public so that it would be known that the Committee was acting
in response to a specific request of the President during the emergency.

Assure the President that the Committee would carry out the

letter and spirit of the announcement of the Secretary of the Treasury with
the reservation, however, that if changing economic conditions warranted a
different course of action, the Comittee would make known its views to the
Secretary of the Treasury and the President and urgently request that a con
ference be held in which the policy announced by the Secretary and agreed
to by the Committee would be modified.

This procedure would also be public-


ly announced.

If the views that might be expressed by the President were

diametrically opposed to those of the Committee,

the members of the Commit

tee could resign.

was Chairman McCabe's view that the Committee should thoroughly

discuss these alternatives.
In response to an inquiry the Chairman made the following addi
tional comment:
Miss Barrows, Secretary to Mr. Connelly, who is Secretary to
the President, called yesterday to say that the President was very
anxious to meet with the Federal Open Market Committee today at
four o'clock. I asked if the meeting was to be "on the record".
She transferred me to Mr. Connelly, who said he assumed it would

be on the record but that he would send a note to the President.
I said I thought the President should give careful consideration

to this point and to any statement that might be made to the press
regarding the meeting because it was very unusual for the Commit

tee to meet with the President and it was important that the Presi
dent be prepared for the comments that might be made on the meeting.
I said it might be desirable if I could have a few minutes with
the President before the meeting with the Federal Open Market Com
mittee, and Mr. Connelly suggested that I come over before four
o'clock. I do not know how the meeting originated and I do not
know whether the Secretary of the Treasury will be there.
In this connection, there were distributed two memoranda prepared
by Mr. Thomas under date of January 30, 1951, with respect to debt manage
ment and credit policy, and a memorandum on the Outlook for Bank Reserves
and Treasury Cash Requirements,

also dated January 30.

Copies of these

memoranda have been placed in the files of the Federal Open Market Committee.
There followed a general discussion in the light of the Committee's
responsibility under the law, of the possible positions that it

might take at



the meeting with the President.

In this discussion Mr. Sproul expressed the

view that apparently the Secretary of the Treasury was not satisfied with the
commitments that had been made by the Federal Open Market Comittee, partic
ularly its letter of October 30, 1950, and that it looked as if he had gone

to the President, expressing the view that he could not get a clearly satis
factory understanding with the Committee and that he would like to have the
President call the members of the Committee in and obtain assurances of the
policy to be followed.
There was also a discussion of the comment that had appeared in the
press recently concerning Mr. Eccles'

testimony before the Joint Committee on

the Economic Report on January 25, 1951, and of a call that Senator O'Mahoney,
Chairman of the Joint Committee on the Economic Report, had made to Chairman
McCabe yesterday with respect to Mr. Eccles'
mittee at the request of Senator Taft.

having appeared before the Com

Mr. Eccles stated that Senator Taft

had requested that he appear before the Comittee, that he accepted, that his
acceptance had nothing to do with whether Chairman McCabe appeared, that Chair

man McCabe had said nothing to him about appearing in his place, and that he
made it clear in his opening comments before the Committee that he had not been
requested to represent the Board.
Mr. Sproul then referred to the three possible courses of action
that Chairman McCabe had suggested and stated that he would add a fourth.
said that the first


suggestion would leave the Federal Reserve with nothing to

do in the field of general credit controls as a means of getting the financial



mechanism in order for a full mobilization and a possible war, and that
in the present situation the second alternative would be equally bad.
Under either alternative, although the Federal Reserve could impose cer
tain selective credit controls, such controls would not do the main job
Congress had given the System to do; in terms of the importance of the
matter to the Federal Reserve and to the nation, the most important job
was to maintain public confidence in the real value of the dollar and
the Government credit and not in a fixed interest rate or in fixed prices
of Government securities.

He stated, therefore, that it would be his

feeling that in the future, as in the past, the Federal Reserve should
seek to adapt its policy to the needs of the Government and the Treasury,
but that that did not mean the System should go right down the line in
supporting a policy determined and set in the Treasury and announced
publicly without consultation.

He went on to say that he felt the System

would have to maintain some flexibility in the short-term rate and that

might be necessary to consider a higher rate on long-term Government

issues if that was found necessary to make them acceptable to the public.
He added that he hoped, before the Treasury made a decision with respect
to a new long-term issue, there would be an opportunity for the Committee
to review the matter with the Secretary, particularly since he (Mr.


seriously doubted whether the market would accept new long-term issues at
the 2-1/2 per cent rate announced by the Secretary on January 18 vithout
heavy support by the Federal Reserve.

Mr. Sproul said that if




could be accomplished along this line he did not believe resignation of
the Committee to be a real alternative, since it would be an admission of
failure or inability to carry out our statutory responsibilities, without
giving the Congress an opportunity to review our performance and to ex

press its will.

A fourth and better alternative, he said, would be to go

to Congress and ask for a new set of rules to govern the Federal Reserve
System because it could not continue on the present course which involved
either continued open conflict with the Treasury or complete abdication
of the responsibility of the members of the Federal Open Market Committee.
Mr. Peyton raised the question whether it was necessary at this
time to make a decision on the statement that would be made to the Presi
dent or whether it would not be better simply to attend the meeting as re
quested, to listen, and subsequently to consider any suggestions the Presi
dent might make.

It was suggested, however, that in view of the fact that

the President might be expected to inquire as to the views of the Committee
concerning support of the program announced by the Secretary of the Trea
sury on January 18, it would be desirable to explore at this meeting the
response that should be made to that question,
In the course of the discussion, Chairman McCabe read the letter
sent by the Committee to the Secretary of the Treasury under date of Octo

ber 30, 1950, in which it was stated that the Committee was in complete
agreement that under present conditions it was necessary to protect the
2-1/2 per cent rate (par) on the longest-term Treasury bonds now outstanding


but that if

further inflationary or market forces should develop at

any time in the future which would make it
to reconsider that decision, it
to seek the Secretary's counsel.

necessary for the Committee

would feel it

desirable and compelling

Chairman McCabe stated that he felt

was this statement that was giving the Secretary concern in that it

appeared that the Secretary would like to be assured that any deficits
that might grow out of the defense program during the next few years
would be financed on the basis of a 2-1/2 per cent long-term interest

rate, regardless of whether the market would support such a rate, and
that the Secretary felt that the Federal Reserve should commit itself
to purchasing securities to whatever extent was necessary to maintain
such a rate.

The Chairman went on to say that the drop of 1/32 of a

point in the price of the long-term restricted bonds on Monday of this
week to which Mr. Rouse referred earlier in this meeting was, in his

opinion, the thing that again had made the Secretary of the Treasury
uneasy as to the procedure that would be followed by the Federal Open
Market Committee

and that undoubtedly this was the reason for the Presi

dent's request for the meeting this afternoon.
While the discussion was in progress, Mr. Thurston stated it


just been announced on the ticker that the Federal Open Market Committee
would meet with the President at four o'clock.

At the end of the discussion Chairman McCabe suggested that the
staff prepare a draft of statement which might be used to present the



views of the Federal Open Market Comittee to the President and that
the Committee meet again after lunch to consider the draft.

This suggestion was approved unanimously.
Thereupon the meeting recessed and reconvened at 2:25 p.m. with
the same attendance as at the close of the morning session.
The Secretary read the draft of statement that had been prepared
in accordance with the discussion at the morning session.

A copy of the

draft has been placed in the files of the Federal Open Market Committee.
In the course of a lengthy

discussion of the statement, Mr. Vardaman

said that he would make his views known to the President and would state
that the Committee, having been requested to follow a course by the Secre
tary of the Treasury and by the President, had no alternative but to follow
that course; that, in a period such as the present, the members of the
Board ceased to be civilian officers of the Government, and that he would

be guided by whatever request was made by the President as Commander-in

He then requested the Secretary to read the following statement

which he had presented to the Board of Governors on January 30, 1951:
"It is my understanding that Chairman McCabe was
invited to appear, on behalf of this Board, before the
Committee on the Economic Report and that Chairman O'Mahoney
announced at the opening of the hearing when Governor Eccles
testified, that Governor McCabe was unable to attend because

of illness and absence from the city and that Governor Eccles
would appear in his place. In spite of Governor Eccles' state
ments that he was speaking for himself personally and not for

the Board, the impression seems to be that he was, unofficially
at least, expressing the Board's opinion.



"As a Board member I had no notice that the Chair
man had been officially requested to appear before this
committee. If I had had such notice I would have urged
that the Chairman or some spokesman for the Board appear
before the committee and make a statement substantially
as follows.
"'The Federal Reserve Board has made its
recommendations to the Secretary of the Trea
sury in connection with the interest rate on
short-term Government obligations and also with
reference to the interest rate and maturities
on funding and refunding bonds. In the exercise
of his statutory authority and obligation, the
Secretary has not thought it wise to follow all
of the suggestions made by this Board in connec
tion with these matters. Acting in his official
capacity, as the spokesman for the Government,
the Secretary has announced a financing program,
and this Board has nothing further to say on the
questions involved other than to state quite firmly
and clearly that the Board will support to the
fullest extent of its authority the program as
officially promulgated by the United States Trea

"'Whenever it is in line with its statutory
authority to do so, the Board will advise with the
Secretary on all matters relating to the manage
ment of the public debt or any other questions
which he may desire to discuss. But it should
be clearly understood that under our constitutional
framework and present statutory laws, the manage
ment of the public debt is the responsibility of
the Secretary of the Treasury, and this Board will
support him to the utmost of its ability in his
officially declared programs and actions.
"'We believe the duty of this Board to be to
make its ideas available and known in council, but
not to make such ideas prevail and the Board will
act in accordance with this belief in the present
"Under no circumstances should this Board be guilty of
endeavoring to bring outside pressure to bear in an effort
to have its way.
"It is my intention to offer a motion in the meeting of
the Board on Tuesday, the 30th, to request the Chairman to a public statement similar to the above, on behalf of
this Board at the earliest appropriate moment."


Mr. Sproul expressed the view that Mr. Vardaman's proposed

statement would make the Federal Reserve System a bureau of the Treasury

in the light of the responsibilities placed on the System by the

Congress, would be both impossible and improper.

Other members of the

Federal Open Market Committee indicated agreement with this view.

appeared during the discussion that it

would not be possible

to perfect a statement before the meeting with the President and it


suggested that no formal statement be taken to the White House and that
the Chairman be authorized to speak for the Committee, his statement to
be in the light of the discussion at this meeting and the letter sent


the Secretary of the Treasury under date of October 30, 1950.
It was agreed unanimously that this procedure
would be followed and the meeting recessed at 3:28 p.m.
Following the meeting with the President, the meeting reconvened
in executive session at 4:50 p.m. with only the members of the Committee

At 5:50 p.m.,

Messrs. Carpenter, Vest, Thomas, Rouse, Thurston,

Riefler, Sherman, R. A. Young, Youngdahl,

and Leach were called into the

The Chairman reported that the members of the Committee had
agreed that Mr. Evans should prepare a memorandum of the meeting of the
Committee with the President which, after such changes as Mr. Sproul might
suggest, would be circulated to the other members of the Committee for
coment and approval.


Secretary's note: This statement
prepared by Mr. Evans and approved
by the individual members of the
Committee, was as follows:

"The full Federal Open Market Committee met with Presi
dent Truman in the Cabinet Room shortly after 4:00 p.m. on

Wednesday, January 31, 1951.

Chairman McCabe had met with

the President in his office a few minutes earlier and came
into the Cabinet Room with him. The President shook hands
cordially with everyone present.
"The President stated that during the past few weeks
he had met with many groups in Government because he wanted
them to know the seriousness of the present emergency and
to ask for their full assistance and cooperation. He stated
that the present emergency is the greatest this country has
ever faced, including the two World Wars and all the preceding
"He gave a brief sketch of the difficulty of dealing with
the Russians and said they had broken 32 parts of the agree
ments entered into at Cairo, Potsdam, and Yalta. He mentioned
that these agreements, among other things, provided for a unified

Germany, unified Poland, cooperation with Nationalist China,
and a unified Korea, which would select its own Government by
democratic process. He stated that the Americans provided
Nationalist China with about 3-1/2 billion dollars of war equip
ment, much of which Chinese generals and other leaders disposed
of to the Communist forces. He characterized the Nationalists
as being the most corrupt government in history.
"He stated that General Eisenhower's report to the Cabinet
today, after his visit to 12 North Atlantic countries, empha
sized the seriousness of the situation but that the General
believed Europe has the will to rearm and resist with our help.
He mentioned some figures about the number of troops involved,
in support of his statement that the emergency is very serious
"The President emphasized that we must combat Communist

influence on many fronts. He said one way to do this is to
maintain confidence in the Government's credit and in Govern
ment securities. He felt that if people lose confidence in
Government securities all we hope to gain from our military
mobilization, and war if need be, might be jeopardized. He
recalled his war-time experience when he bought Liberty bonds
out of his soldier's pay. When he returned from France and
had to sell his bonds to buy clothes and other civilian things,
he got only $80 or a little more for his hundred dollar bonds



"and later they were run up to $125. He said he did not
want the people who hold our bonds now to have done to
them what was done to him.
"He stated that most politicians would not ask for
higher taxes prior to election but that he had vetoed a
reduction in taxes before election and won anyway. If
it had not been for that irresponsible reduction in taxes,
he said, the Federal budget would have been in balance
all these years. He stated that he wanted to levy all the
taxes necessary to pay the cost of the defense effort, which
he felt would be between 100 and 120 billion dollars over
the next few years.
He stated that he had just met with
the Congressional leaders and asked for 16-1/2 billion
dollars in taxes and that he expected to get this in two
bites--a quick tax bill
yielding about 10 billion and the
other 6-1/2 billion to come after more careful
He wanted us to understand that he is doing all he can
on the tax front to combat inflation.
"The President gave each member of the Committee a
copy of 'The Federal Budget in Brief'.
He expressed the
opinion that the budget had been pared to an irreducible
He said that he had participated in the prepara
tion of 16 budgets and felt he was competent to judge and
understand them. Maybe something could be cut out but it
would make a hole in the defense effort and that he would
not do.
"The President said that he felt we had done a good
job and wanted us to continue to do a good job in main
taining the financial structure of the country. He further
stated that he had had a number of conferences with our
Chairman but this was his first
opportunity to meet and

talk with the entire Committee.

He made no mention of

recent discussions with the Treasury.
"Chairman McCabe thanked the President for receiving
us and indicated that we all share his concern for the
maintenance of the Government credit. He stated that al
though the support of the Government bond market was some
thing in the nature of an extra-curricular activity for
the Federal Open Market Committee, it had performed this
service for the past nine years or more and had done a
He stated that the Committee had always
very good job.
carefully weighed its responsibilities to the Government
and to the general economy as well and that these are
statutory responsibilities which it could not assign,


it would.



"The President interjected that he was familiar
with that but wanted the Committee to continue its good
work during the defense period. He emphasized that he
was speaking of the defense period only.

"Chairman McCabe referred to the fact that in the last
few days the Government bond market had gone up a few thirty
seconds and then had come down a few thirty-seconds, which
he considered to be a proper market operational technique.
The President said he would not undertake to discuss details
of that kind, that he was principally concerned with main
taining the confidence of the public in Government securi

ties as one way of presenting a unified front against

He did not indicate exactly the details of

what he had in mind, but he reiterated that we should do
everything possible to maintain confidence in the Govern
ment securities market. The Chairman outlined concisely
some of the responsibilities with which we were charged,

principally to promote stability in the economy by regulating
the volume, cost and availability of money, keeping in mind

at all times the best interests of the whole economy. The
Chairman turned to the members of the Federal Open Market
Committee and said the President could depend on everyone in
the group to do what they could to protect the Government
"Chairman McCabe stated that with a group of men such

as those composing the Federal Open Market Committee (and with
responsibilities in conjunction with those of the Treasury)
there would, of course, be differences of opinion as to just
how the best results could be obtained. The President nodded,
indicating that he understood this. The Chairman suggested

the following procedure--that we consult frequently with the
Secretary of the Treasury giving him our views at all times
and presenting our point of view strongly, and that by every
If this could
means possible we try to reach an agreement.
not be accomplished, he (the Chairman) would like to discuss
the matter with the President. The President said this was
entirely satisfactory and closed the meeting on the same
note as it was opened--namely, that he wanted us to do every
thing possible to maintain confidence in the credit of the
Government and in the Government securities market and to
support the President of the United States in achieving this
"The Chairman stated at the end of the meeting that he
presumed that any statement concerning this meeting would be
made by the President. The President said he would have no
objection to our making a statement and thought that it might

"be a good thing. The Chairman then asked him what would
be the general nature of the statement and he said it can
be said that we discussed the general emergency situation,
the defense effort, budget and taxes, and that he had stressed
the need for public confidence in the Government's credit.
He said further that he would be talking to the press the
next morning and that he would be prepared to answer any
questions that might be raised. Since the President indi
cated that he would be discussing it with the press, the
Chairman said he felt it would be best for us not to issue
any statement to the press at this time. The President did
not seem to be particularly concerned about whether or not
a statement was issued. The press conference scheduled for
the following morning was canceled because of General
Eisenhower's appearance at the Capitol. The White House
press secretary gave the press the following statement
which appeared on the ticker about noontime:
"'Washn - A P - The Federal Reserve Board
has pledged its support to President Truman to
maintain the stability of Government securities

as long as the emergency lasts.
"'White House press secretary Joseph Short
announced this today, saying there have been re
ports of differences of opinion between the Trea
sury and the Federal Reserve Board.

"'This is to quiet those rumors - Short said.
"'Members of the Federal Reserve Board conferred
with Mr. Truman yesterday - Secretary of the Treasury
Snyder did not attend the meeting.'

"A little later the following statement appeared on the
"'Washn - A P - A Treasury spokesman said the White
House announcement means the market for Government secur

ities will be stabilized at present levels and that these
levels will be maintained during the present emergency.'"
Chairman McCabe stated that as he understood it,

the action taken

by majority vote during the executive session was that the market on the

long-term restricted bonds would be held at par and 21/32 until the next
meeting of the Federal Open Market Committee, which was to be called for
Tuesday, February 13, 1951.



Mr. Sproul said his understanding of the action was that the
Comittee would continue in effect until the meeting on February 13
the existing policy with respect to the purchase of long-ter


bonds which would mean that, if the Treasury discontinued its support
purchases of the long-term restricted bonds, the price might decline

below par and 21/32.
In the ensuing discussion it

was understood that the action

taken in the executive session by majority vote was as stated by Mr.

Chairman McCabe expressed strongly the view that until the Commit
tee had had an opportunity to determine what its


over-all policy was to

would be a mistake to allow the price of long-term

restricted bonds

to decline further.
Mr. Sproul suggested that the general direction to be issued to
the executive committee be in the same form as that presently in effect
but that the limitation in the first

paragraph of the direction be re

duced from $3 billion to $2 billion.
Thereupon, upon motion duly made and
seconded, the following direction to the
executive committee was approved unanimously
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 di
rected by the Federal Open Market Committee, to arrange for
such transactions 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 maturities run off without replacement),


may be necessary, in the light of current and prospective
economic conditions and the general credit situation of
the country, with a view to exercising restraint upon
inflationary developments, to maintaining orderly condi

tions in the Government security market, to relating the
supply of funds in the market to the needs of commerce and
business, and to the practical administration of the ac
count; provided that the aggregate amount of securities
held in the account at the close of this date other than
special short-term certificates of indebtedness purchased
from time to time for the temporary accommodation of the
Treasury shall not be increased or decreased by more than

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 certifi

cates held in the account at any one time shall not exceed

was also agreed that the understanding with respect to the

rates at which short-term securities should be purchased and sold for
the System account, reached at the meeting of the Committee on October
11, 1950, should continue in effect with the further understanding that
in accordance with the letter sent to the Treasury following the meeting
on October 30, 1950, the executive committee, for the time being, would
not permit the rate on new securities maturing within one year to rise
above 1-1/2 per cent.
With reference to the replacement of maturing Treasury bill

holdings, it was agreed that the present understanding should continue

and that

the executive committee should be guided by what



be required in the light of current conditions in the money

market to carry out the general credit policy of the Federal Open
Market Committee.
Thereupon the meeting adjourned.