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A meeting of the executive committee of the Federal Open Market
Committee was held in the offices of the Board of Governors of the Federal
Reserve System in Washington on Wednesday, February 14, 1951, at 2:45 p.m.


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

Mr. Szymczak, Member, Federal Open Market
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
Mr. Youngdahl, Chief, Government Finance
Section, Division of Research and
Statistics, Board of Governors
Mr. Leach, Economist, Division of Research
and Statistics, Board of Governors
For the purpose of bringing the members of the committee up to

date on developments since the meetings last week, particularly develop
ments on Saturday, February 10, Chairman McCabe read a memorandum which
he had prepared as follows:
"This morning, after reading in the newspaper that John
Snyder expected to go to the hospital tomorrow, February 11,
I telephoned to Allan Sproul and talked to him about the de
sirability of calling Snyder to ask him who would be authorized
to discuss open market operations and if anyone were author
ized to give us an answer to the memorandum we had presented
to him a few days ago. Sproul agreed with me that I should
telephone Snyder, which I did in mid-morning.



"I told Snyder that I was very sorry to hear that he had
to go to the hospital, and he told me that the doctor thought
he should go now. He asked me if I had received a letter from
him as he had written me on yesterday (Friday) saying that he
would have to have the operation, that he expected to be back
in about two weeks. I told him that I had not received the
letter, which he thought would be in my hands late Friday
afternoon. He said that we could take up our questions with
Bill Martin during his absence but he hoped that the major
question, as outlined in our last letter to him, would be
postponed until his return. I told him that I would have to
take up the question of postponement with the Open Market Com
mittee as I could not answer for them. He laughed and said he
understood that.
"Within an hour after talking with Snyder, I received a
telephone call from Senator Maybank, who told me that he was
in Senator Robertson's office with Senator O'Mahoney and Senator
Robertson. Senator Maybank said that Snyder had been in touch
with him and told him generally what he had told me over the
telephone. Senator Maybank made a strong plea with me to grant
Snyder's request and postpone any major change in our bond
support program until Snyder had returned as he thought Snyder's
request was a fair one, and he thought Snyder might hesitate
about going to the hospital if he thought it might be construed
that he was getting away for the purpose of postponing a de
cision. Senators Robertson and O'Mahoney got on the phone and
made essentially the same plea as Senator Maybank.
"Senator O'Mahoney told me that Congressman Patman was
anxious to conduct public hearings on the controversy with the
Treasury, that he was very critical of the Federal Reserve.
Senator Robertson told me that Senator Capehart had pressed
him hard for a public hearing.
"I told these gentlemen that I could not assume the responsi
bility of speaking for the Open Market Committee, but that I
would try to reach the members of the Executive Committee of the
Open Market Committee and ascertain their views. Senator
O'Mahoney asked me to telephone him at his office in the afternoon
and let him know what to expect. All three of these Senators
brought up during the telephone conversation with me our letter
to the President and strongly urged that I have the letter with
drawn as they thought it would be a mistake to have it publicized
at this time. Snyder made a similar request when he talked with me.
"I telephoned to Allan Sproul and it was his opinion that we
should not withdraw the letter to the President, but that we should
indicate that we would not publicize the letter and that the



"White House could use its own discretion about making it public.
He thought the letter should stand as the view of the Open
Market Committee. He said further that he did not think we
should commit the Open Market Committee in advance of the
meeting of its Executive Committee next Wednesday.
"I then phoned Governor Evans, who seemed to think we
should not oppose the request of the Senators to defer action
for two more weeks and that we should tell them that the matter
would be taken up and passed upon at the meeting of the Ex
ecutive Committee of the Open Market Committee next Wednesday.
He was not in favor of withdrawing the letter.
"I telephoned then to President Young in Chicago and he
took very much the same view as Governor Evans.
"I saw Governor Eccles at the Shoreham and invited him to
my apartment.
His opinion was very much the same as Allan
Sproul's. I asked Governor Eccles to stand by until I had
telephoned to Senator Robertson and Senator O'Mahoney,
"In my conversation with Senator Robertson, I told him that
my informal contacts with the members of the Open Market Ex
ecutive Committee indicated that they were disappointed that
Mr. Snyder had not reached a decision before he went to the
hospital and that they would agree to a postponement with
I said that we felt we had a very grave responsi
bility in checking inflation and we were disturbed by the
substantial amount of Government bonds that we were purchasing,
and that these purchases were furnishing reserves to the banking
system and thus were the basis of multiple credit expansion.
I told him that I doubted Mr. Snyder would be out of the hospi
tal within the two weeks' period, and that it must be understood
that even though the Open Market Committee might agree to a two
weeks' postponement, it must be understood it could not be for
more than two weeks. He said we might consider asking Snyder
to postpone the time for entering the hospital in order to

settle the question. I replied that I did not feel like taking
the responsibility of asking him to postpone an operation
which seemed so vital to him.
"I then called Senator O'Mahoney and told him substantially
what I had told Senator Robertson, Senator O'Mahoney reiter
ated a strong plea to have us take back the letter to the
President, but I told him there was reluctance on the part of
the Executive Committee to ask for its return as it was a
reply to the President's letter. I told him we would not press
for the public release of our letter to the President and that
it would be optional with him as to giving it to the press.
He said that
This did not seem to satisfy Senator O'Mahoney.
Congreesman Patman was pressing for a public hearing and wanted
to be appointed chairman of the subcommittee to conduct the

"hearings. He said he had asked Patman not to press the matter
during the two weeks' period.
"It was evident from my conversations with the Senators
that they were fearful of publicity of our letter to the Presi
dent and of public hearings.
"I spent the rest of the afternoon discussing various

Federal Reserve problems with Marriner Eccles."

In response to a question from Chairman McCabe as to whether the
memorandum covered the principal points with which Mr. Eccles was familiar,
Mr. Eccles stated that in the telephone conversation with Senator O'Mahoney,
referred to in the memorandum, Chairman McCabe placed great emphasis on
the fact that the System was buying long-term Treasury bonds at a premium,

that he had reiterated this fact several times and had said that by pay
ing a premium on the bonds the System was inviting their sale by others,
and that he felt the System should not be required to pay this premium
even if it seemed necessary to maintain par on the outstanding issues at
the present time.

Mr. Eccles also stated that the Chairman had pointed

out to the Senator when he was discussing the suggestion that the letter
sent to the President on February 7 be withdrawn, that the letter was one
which had been agreed upon by the entire Federal Open Market Committee
except for one member, that it was impossible to withdraw a letter that
was sent with the approval of eleven members of the Committeo without
getting their consent to its withdrawal, and that the executive committee
could not take such action. Another point which Mr. Eccles recalled the
Chairman had mentioned was the remark that if Secretary of the Treasury
Snyder could not return from the hospital within two weeks there should

by all

means be some arrangement whereby somebody else in the Treasury

would have authority to make policy decisions in an emergency situation.
Chairman McCabe added that Senator O'Mahoney stated that he
understood there had been additional legal authority given to the

Treasury since the Banking Act of 1935 with respect to the management
of the public debt and the terms on which Treasury offerings might be

made, but that after looking into this matter, Mr. Vest had informed him
that he had not been able to find anything that met the description given

by Senator O'Mahoney of such authority.

Chairman McCabe also said that

he commented to Senator O'Mahoney that, although Secretary Snyder had
stated he would be out of the hospital within about two weeks,



from the experience of one of the members of the Board's staff (Mr.


that an operation of the type the Secretary was undergoing might delay his
return to the office for as much as a couple of months, to which Senator
O'Mahoney responded that if

the Secretary was not back within two weeks

he would not ask for a further delay, that he thought the matter ought
to be completely reviewed, and that no one could ask the committee to go
beyond the two-week period in delaying action.
The Chairman then referred to a letter from the Secretary of the
Treasury dated February 9, bearing a post-office cancellation of 11:30
a.m. February 10, and received in his office on February 12, as follows:
"I have your letter dated February 7, to which we are giving
careful study.

"I am planning to go to the hospital Sunday to have the
eye operation which you know I have been postponing for some



"time. This is about the only time I can get away in view of
the fact that within a few weeks, I will have to be on the
Hill again in connection with the tax program.
I have been
advised that the Committee has scheduled a number of public
witnesses and that my personal appearance will not be neces
sary for awhile.
"Upon my return, we can arrange to have conferences on
the Debt Management Program."
The Chairman then stated that on Tuesday, February 13, there

was delivered to his office a letter from Senator O'Mahoney dated February
10, as follows:
"May I not send this brief note to summarize the opinions
which I expressed to you and to Mr. Allan Sproul at our confer
ence in your office on the morning of Thursday, February 8, with
respect to the conflict over federal debt management.

"1. The soviet dictators are convinced that the capitalistic
world will wreck itself by economic collapse arising from the
inability or unwillingness of different segments of the popu
lation to unite upon economic policy.
"2. Inflation in the United States is the result of no
single cause and therefore cannot be remedied by a single cure,
but only by a variety of policies of which taxation to establish
a 'pay-as-you-go' policy and economy in government expenditures
will be the most effective.
"3. High interest rates on commercial paper are of them
selves no obstacle to inflation. Witness the fact that call
money in New York before the crash in 1929 on the average was
higher than 10% while the yield on short-term governments was

at times higher than 5%. In a run-a-way inflation the cost
of bank credit is no deterrent to borrowers who think they know
how to take advantage of rising prices.
"4. Rising prices after Korea resulted largely from scare
buying, hoarding and profiteering by those who sought to gain favor
able positions for themselves by hedging against inflationary
controls which were widely believed to be inevitable because
of the beginning of the war and the military preparedness program.
"5. With a national debt of 257 billion dollars of which
155 billions are in marketable securities of the government and
58 billions are in savings bonds which are actually demand notes,
a policy intended to drive down the market value of the marketable
securities would, if successful, undermine the confidence of the
holders of the savings bonds and might precipitate a rush to



"6. If the price of outstanding bonds is driven to par
because the Federal Reserve Board desires to save the premium
of 22/32 which has been currently paid, no one can predict what
other sales at lower prices may result and how much the Treasury
will be forced to increase interest rates on new issues, if
"7. We can determine exactly how much an increase of
interest rates on new issues will cost the government, and, with
the annual service charge now running at a total of 5.8 billion
dollars, the rising cost to the government of carrying the debt
by reason of increased interest is perfectly obvious.
"8. While it is possible to compute exactly the cost of
increased rates on governments, we can only guess what effect

higher interest rates on bank borrowings will have on bank credit
"9. It is imperative in this crisis that there should be
no conflict between the Federal Reserve Board and the Treasury
the two most important fiscal agencies in the world upon the
intelligence and patriotic cooperation of which may depend the
success of this nation in the idealogical conflict with Russia.
"I appreciate very much the opportunity of discussing

this and other problems with you and your associates.
conferences are always helpful."


Chairman McCabe went on to say that this morning he telephoned
Assistant Secretary of the Treasury Martin and told him that Secretary
Snyder had given him to understand that during the latter's absence Mr.
Martin was the person with whom he should communicate at the Treasury on any
questions concerning Treasury financing.

The Chairman said he told Mr.

Martin that the executive committee of the Federal Open Market Committee
was meeting in Washington today and that he and Mr. Sproul would be glad to

talk with him at some convenient time during the day.

Chairman McCabe went

on to say that Mr. Martin came over and the problem before the Treasury and
the Federal Open Market Committee was extensively reviewed.
Mr. R. A. Young, Director of the Division of Research and Sta

tistics, Board of Governors, joined the meeting at this point.

Mr. Sproul expressed the opinion that there were two matters before
the executive committee, (1) whether the letter to the President should be
withdrawn, and (2) whether assurance would be given to anyone that no change
in the existing basis for open market operations would be made for a period
of two weeks.

It was strongly his view that the letter should not be with

drawn and that assurances of the kind referred to should not be given at a
time when conditions were changing so rapidly and the responsibilities of
the Federal Open Market Committee might require that some action be taken.
Other members of the executive committee expressed concurrence
with Mr. Sproul's views and it was agreed unanimously that the letter to
the President would not be withdrawn.
There was a discussion of the whole problem of System credit
policy and its relationship to Treasury debt management in the light of the
developments that had taken place, the effectiveness of a more restrictive
credit policy in retarding the growth of bank credit, the basis upon which
further discussions with the Treasury should be conducted, and what other
conclusions were called for by the executive committee at this time.
In a discussion of the additional authority that should be re
quested from the Congress by the Board of Governors with respect to bank
reserve requirements, it was the consensus that an increase in the present
maximum legal requirements should be requested, and that the increased
authority should be made applicable to nonmember as well as member banks
with the understanding that nonmember banks should be permitted to carry



their reserve requirements with their correspondents or with the Federal
Reserve Bank and supervision of the requirements so far as nonmember banks
was concerned should be placed in the hands of the State bank supervisors,
There was agreement with the suggestion by Mr, Sproul that any request for
additional authority over reserve requirements should not be advanced as a
reason for delaying the use of the existing powers of the System should
conditions call for their use.

Chairman McCabe stated that the remaining immediate question
before the executive committee was the response to be made to the request
of the Secretary of the Treasury for a two-week delay in any change in the

present basis of open market operations of the System.
During the discussion of this and other points, Chairman McCabe
stated that Assistant Secretary of the Treasury Martin was anxious to have
staff-level discussions of the whole problem presented by the letter to the
Secretary of the Treasury dated February 7, 1951, and that it was his (Chair
man McCabe's) assumption that such discussions would be carried on on the
basis of that letter.

This understanding was unanimously agreed to.

There was also a discussion of the nature of the reply to be made
to the letter from Senator O'Mahoney and it was understood that a reply
would be drafted and sent upon the approval of Chairman McCabe.
Secretary's note: The reply sent
to Senator O'Mahoney on February 23,
19 1, in accordance with this under
standing was as follows:



"Thank you very much for your letter of February 10,
summarizing your views on monetary and debt management policy.
I intended to respond more promptly but the pressures here
have been exceptionally heavy. I should like to set down my
views in order that we may be able in a very friendly way to
see where our opinions coincide, as I think they do at most
points, and where we may perhaps differ.
"(1) I agree with you entirely that the Soviet dictators
would like to bring about our economic collapse and, as you know,
inflation is perhaps the greatest force for arraying the various
sectors of a capitalistic economy against each other. John Maynard
Keynes stated in his 'Economic Consequences of the Peace' (1919):
'Lenin is said to have declared that the best way to destroy the

Capitalist System was to debauch the currency...Lenin was certainly
right. There is no subtler, no surer means of overturning the
existing basis of Society than to debauch the currency. The
process engages all the hidden forces of economic law on the
side of destruction, and does it in a manner which not one man
in a million is able to diagnose.'

"(2) We are in agreement that inflation in the United States
is the result of no single cause and can be remedied by no single
cure. A major cause of the inflation since Korea, however, has
been abnormal spending by individuals and businesses financed by
the liquidation of Government security holdings and by an un
precedented volume of borrowing, particularly from banks.
Inflation occurred despite a balanced Federal budget, and a prompt
increase in taxes. Under the conditions in prospect, even if the
essential pay-as-you-go taxes are adopted, further inflation
cannot be prevented without effective restraints on business and
other private borrowing combined with appropriate debt management

"(3) I would like to make clear my view that anti-inflation
restraint through monetary and credit action is not effected
through interest rates alone. It is augmented through measures
and actions designed to limit the availability of bank reserves,
the effect of which is to reduce the willingness of bankers to
lend. When credit demand is active, all such limitations on the
supply of credit necessarily affect interest levels. In 1919-20,
restraining action by the Federal Reserve was too long delayed
but, once taken, was too drastic and was too long continued.
The action was followed by termination of the boom. Certainly
it cannot be said that monetary action was ineffective in curbing

inflationary pressures at that time.



"Restraint on the availability of bank reserves in the late
1920's, (reflected in part in the interest levels of the period),
effectively prevented an expansion by banks of the money supply.
Prices of commodities and services remained relatively stable during
this period. The great inflation was in stock prices with stock
purchases heavily financed through stock market loans by others

than banks. Despite a potential return on their money as high
as 8 to 10 per cent on the average in the call market for loans
on stock exchange collateral, member banks did not expand these
loans. Yields on short-term Government securities averaged about
4-1/2 per cent in late 1928 and early 1929, compared with about
3 per cent previously, while yields on long-term Government bonds
rose only from 3-1/4 per cent to about 3-5/8 per cent. The
mistake of the Federal Reserve authorities in this period was that
restraining action was too long delayed and was inadequate.
"(4) I agree with you that rising prices after Korea resulted
largely from scare buying, hoarding, and profiteering. This was
financed with a steady rise in national income as well as with cash
obtained from liquidating Government securities in a supported
market, and on the basis of unprecedented resort to credit which was
all too freely available.
If liquidation of Government securities
had not been so free nd if credit had not been so readily available,
prices could not have been bid up as much as they were. Excessive
buying still continues without sign of let-up, if not in fact at
an accelerated pace. It is still being made possible to an important
degree by a shockingly large growth in bank loans and by liquidation
of Government securities at prices that do not retard such liquida
"(5) and (6) Confidence of the public in Government securi
ties as well as in other forms of liquid savings is inextricably
bound up with public confidence in the value of the dollar. With
the large overhand of such liquid savings, and considering among
other things the heavy maturities of savings bonds coming up next
year, it is extremely important that confidence in the dollar be
firmly established by Government policies that destroy the in
flation threat at its roots. Continuation of too easy money
policies will make it next to impossible to engender confidence
in the sustained real value of Government securities.
"(7) and (8) The interest cost on the public debt should
be as low as is consistent with economic stability. Interest
rates should be high enough, however, so that the debt will be
bought and firmly held by the investing public and will not need
the support of an undue amount of money creation. Figures on
additional interest cost that have been widely quoted are many
times larger than any increase that is likely to occur in the



"next several years. We should also keep in mind that interest
rates on short-term Government securities also decline in periods

of recession as they did in the 30's and more recently in 1949.
I am old fashioned enough to believe that history will repeat
itself and that over a period of years interest rates will fluctu
ate with changing economic conditions.
"(9) The Federal Reserve has always tried to avoid conflict

with the Treasury. The record over the years shows patience,
compromise and much sacrifice of basic convictions to this end.
I en still hopeful that a basis of mutual understanding and agree
ment can be reached. If not, we will have no defensible alterna
tive save but to do what, in our considered judgment, is for the
best interests of the country, in accordance with our statutory
responsibilities. We can, of course, always go to the Congress
that created us and to whom we report and appeal for a redefi
nition of our responsibilities.
"It is gratifying to have had this opportunity for frank
interchange of views with you. I hope we will continue to
confer whenever it may be helpful to either of us to do so."
At the conclusion of the discussion, it was agreed that the po
sition of the executive committee with respect to the request of the
Secretary of the Treasury for a two-week delay, should be that if the market
offerings of long-term restricted bonds continued and the System was
called upon to purchase these issues in the volume purchased during the
last few days, it would be necessary for the executive committee to take
action to permit the System's support price to decline, and that in that
event Messrs. McCabe and Sproul would endeavor to confer with the repre

sentative of the Treasury who would have authority to discuss the matter
and to advise him of the action which it was felt should be taken.
Chairman McCabe then called upon Mr. Rouse for a report of open
market operations since the meeting of the executive committee on January

Mr. Rouse presented reports prepared at the Federal Reserve Bank of



New York covering commitments executed from January 31 to February 5,

inclusive, and from February 6 to February 13, 1951, inclusive.


of these reports have been placed in the files of the Federal Open Market
Upon motion duly made and seconded,

and by unanimous vote, the transactions
in the System open market account, as
reported to the members of the execu

tive committee for the period January 31,
1951 to February 13, 1951, inclusive,
were approved, ratified, and confirmed.
It was agreed that no action need be taken at this meeting with
respect to the direction issued by the executive committee to the Federal
Reserve Bank of New York on February 8, 1951.
Mr. Carpenter stated that a wire had been received from the
Secretary of the Federal Reserve Bank of Dallas dated February 8, 1951,
advising that the directors of that Bank had elected President Gilbert a
member of the Federal Open Market Committee for a one-year term beginning
March 1, 1951, and W. S.

McLarin, Jr., President of the Federal Reserve

Bank of Atlanta, as Mr. Gilbert's alternate.

Mr. Carpenter suggested that,

inasmuch as Mr. McLarin had requested retirement effective February 28,
1951, the following wire to the Dallas bank be approved:
"Your wire February 3 relating to election of Messrs.
Gilbert and McLarin as member and alternate member re
spectively of Federal Open Market Committee for year beginning
March 1. Inasmuch as Mr. McLarin has requested retirement
effective February 28, assume that at next meeting of your
board of directors you will elect another alternate member in
Mr. McLarin's stead."


Upon motion duly made and seconded,
the wire was approved unanimously.

was agreed that the date for the next meeting of the executive

committee should be subject to call.

Thereupon the meeting adjourned.