View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

A meeting of the executive committee of the Federal Open Market
Committee was held in the offices of the Board of Governors of the Fed
eral Reserve System on Monday, February 26, 1951, at 9:15 a.m.
PRESENT:

Mr.
Mr.
Mr.
Mr.
Mr.

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

Mr. Szymczak, Member, Federal Open Market
Committee
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

Mr.

Carpenter, Secretary
Vest, General Counsel
Thomas, Economist
Thurston, Assistant to the Board of
Governors
Riefler, Assistant to the Chairman,
Board of Governors
Sherman, Assistant Secretary, Board
of Governors
R. A. Young, Director, Division of
Research and Statistics, Board of
Governors
Youngdahl, Chief, Government Finance
Section, Division of Research and
Statistics, Board of Governors

Chairman McCabe stated that he received a telephone call yesterday
from Mr. Murphy, Special Counsel to the President, asking that he attend a
meeting to be held at the White House at eleven o'clock this morning at
which, in addition to himself, there would also be present Mr. C, E.
Wilson, Director of the Office of Defense Mobilization, the members of the
Council of Economic Advisers, Under Secretary of the Treasury Foley in the
absence because of illness of Secretary Snyder, and Mr. McDonald,

Chairman

of the Securities and Exchange Commission. Chairman McCabe stated that he

2/26/51

-2

called Mr. Murphy on the telephone this morning to tell him that the ex
ecutive committee of the Federal Open Market Committee was meeting today,
that Mr. Sproul would be in Washington, and that he felt it would be
desirable if Mr. Sproul also could attend the meeting since it

involved a

discussion of matters before the Federal Open Market Committee, and that
Mr. Murphy responded that he would let him hear from him later.
Chairman McCabe then said that, as stated at the meeting of the
executive committee on February 14, Assistant Secretary of the Treasury
Martin had suggested that members of the staff of the Treasury Department
and the Federl Reserve meet to consider matters of mutual interest to the
Federal Open Market Committee and the Treasury, that Under Secretary of
the Treasury Foley subsequently called him on the telephone and made the
same suggestion, and that pursuant to this suggestion a luncheon meeting
was arranged in his (Chairman McCabe's) office on Tuesday, February 20,
1951, at which Mr. Martin, Mr. Haas, Director of the Technical Staff of
the Treasury, and Mr. Bartelt, Fiscal Assistant Secretary of the Treasury,
and Messrs. Riefler and Thomas were present, and that meetings at which Mr,
Rouse was present were continued that evening and on subsequent days through
Friday morning, February 23,

1951.

Chairman McCabe stated that before the

meetings started he requested that Mr. Martin be included as one of the
Treasury representatives and that the letter sent to Secretary of the
Treasury Snyder by the Federal Open Market Committee under date of February
7 be the agenda for the discussions,

and that his request was agreed to

2/26/51

-3

with the understanding that some other matters might also be
taken up.

The Chairman then referred to a memorandum covering the foregoing
discussions which had been prepared by Mr. Martin of the Treasury and con
tained revisions made by Mr. Riefler and agreed to by Mr. Martin.

At

Chairman McCabe's request the Secretary read the memorandum which con
cluded with the statement that at the end of the meetings it was made
clear again that the conversations were only exploratory talks at the techni

cal level and that it was suggested that the matter be referred to a higher
level where negotiations or counter-proposals might take place.
Chairman McCabe then made a statement substantially as follow:
Last night Under Secretary of the Treasury Foley called me
on the telephone about nine o'clock and said that Secretary
Snyder was still
in the hospital and that he thought it might be
a matter of two more weeks before he was fully recovered. He
made a very strong plea that these staff discussions be con
tinued and that they be resumed this morning. He felt that sub
stantial progress was being made, that they had devoted most of
the time to discussing the February 7 letter from the Federal
Open Market Committee to the Secretary of the Treasury, and that
now other ideas should be discussed. I said I was sure that the
Committee would be reluctant to consider a further delay, that
18 days had elapsed since we talked with the Secretary of the
Treasury and presented our letter, and that it seemed that ample
time had been given for discussion of various views.
I told Mr. Foley that there was to bea meeting of the ex
ecutive committee this morning at nine o'clock and that I would

present his views to the committee, but that I felt that the
committee would be very much concerned about the fact that it
was still
buying very substantial amounts of Government bonds
and creating reserves which was highly inflationary. Mr. Foley
said that he had not been able to present the question to
Secretary Snyder in the way in which he would like because of
his condition, but that they were going to see him again today,
and I suggested that there should be someone in the Treasury
authorized to act in the absence of the Secretary.

-4.

2/26/51

With reference to the meeting at the White House at eleven
o'clock this morning, I think it likely that the position will
be taken that the memorandum which I sent to Mr. Wilson on

financial mobilization on January 16 has been studied and that
there is about to be launched a complete study of financial
mobilization.
There will be a plea for everybody to cooperate

in the study until it

is completed.

My guess is that the time

limit on that will be about the same as the two-week period
that Mr. Foley indicated would elapse before Secretary Snyder
got back.
It appears that the question of the financial
mobilization program has gone beyond Mr. Wilson and that they

have brought in the Council of Economic Advisers and the Treas
ury so that the studies suggested will be along a somewhat
different line than was contemplated in my memorandum.

I would suggest that we discuss the matter generally at
the meeting this morning and that the committee not take
definite action as to what our response would be, but that we
report back after we have met with the President and others
at the White House.
Mr. Sproul stated that he had summarized his views in the form of
questions and answers concerning the program the Federal Open Market Com
mittee was attempting to follow, and he then read the questions and
answers as follows:
1.

What are we trying to do?
Quit providing easy reserves to the banking system to

feed an inflationary expansion of credit.

Quit monetiz

ing the Federal debt.

2.

How do we propose to do it?
(a)

By cutting down our ready buying of short securi
ties so that the discount rate becomes effective
and the strong tradition of the banks against

borrowing heavily and continuously comes to our
aid.
(b)

By relieving ourselves of rigid support of the
long-term market, either by allowing the price of

2/26/51
outstanding issues to decline to a point where
rigid support will not be necessary, or by getting
rid of weakly held outstanding bonds with an ex
change offering.
3.

Why is this the time to do it?
Because expansion of credit is still a strong infla
tionary factor, because further tax increases seem to
be some months off, because direct controls are in a
preliminary and ineffective state, and because the Treas
ury has no need to come to the market for refunding or
new money.

4.

Is this a new policy on our part?
Quite the reverse. This is the policy and program we
forecast in June 1949 with Treasury blessing, which we
reiterated in August 1950 over Treasury opposition, and
which we have made the basis of our subsequent struggle

against pressure and intimidation. It is the only policy
consistent with the present economic situation and our
responsibilities to the Congress and to the nation.
5.

Does such a policy usurp the debt management functions of
the Treasury?
Certainly not. The essence of debt management is to
tailor your offerings to the market in terms of the ex
isting economic situation, not to have the market
tailored to your offerings by the central bank. When
the Treasury has to come to the market later in the year

we hope it will tailor its offerings to the market. If
it doesn't, however, we shall have to see that they go
over.
6.

What harm can come from such a policy?
The steps we have already taken to implement such a
policy in the short area have been beneficial not harm
ful.
In nearly every other country with an economic
organization similar to ours, adjustments upward in long
rates and downward in prices, in response to market

forces, have taken place without disaster--in fact quite
the reverse.

We have created our own par bogey, but we

ought to quit being frightened into an inexcusable credit
policy by it.

2/26/51
7.

-6
What benefits would come from such a policy?
It would not stop inflation, but it would restrain the
expansion of bank credit and it would make inflation
less easy and less certain, while we are passing tax
legislation to make "pay-as-we-go" a reality, while price
and wage controls are being perfected for whatever they
are worth as a temporary obstacle to inflation, and while
production is being increased. It might also encourage
the Treasury to adopt a debt management program which will
concentrate on mopping up savings--individual and
institutional--and minimize the use of bank credit. (The
cost to the Treasury would be many times less than the
costs of further inflation.) It would give the country a
welcome injection of courage in fighting inflation. There
isn't much faith in us or anyone else on this score now.

8.

What is there to hold us back?
Nothing but our own inhibitions.
If what we do is not what
Congress and the country wants we shall soon find out.
Meanwhile the rearmament program will go on, production and
employment will continue to bump the ceiling, and when the
Treasury has to come to the market it will have a better
market than it has now and than it will have if we do
nothing.

Mr. Sproul concluded with the comment that he felt the Committee was being
prevented by delay after delay from carrying out an effective program, that
this had been the case since it adopted a policy of greater flexibility
in June 1949, and that he did not feel that any exploratory committee which
might be set up under the Director of Defense Mobilization could supersede
or add to the knowledge that had been collected by the Open Market Com
mittee which had been studying this matter over a period of years.
if

the

Even

results of a study of such a committee supported and confirmed the

views of the Open Market Committee, Mr. Sproul said, the responsibility
would still be that of the Committee and it seemed to him that the pleas

2/26/51

-7

for further delay were only wasting valuable time, when the Committee
could make its

policy effective without any harm to the defense program

and with the hope of helping to restrain inflationary forces.
Chairman McCabe then referred to the statement submitted to the
Board of Governors by the Federal Advisory Council at a joint meeting on
February 20, 1951, which failed to support the policies adopted by the Fed
eral Open Market Commitee.

He stated that it

was difficult to understand

why the members of the Federal Advisory Council would take a position so dif
ferent from that taken by the Presidents of the Federal Reserve Banks and
that it

might be desirable to present the matter for discussion at the next

meetings of directors of Federal Reserve Banks with the view to finding out

what views were held by them.

There was a brief discussion of this matter

but no action was taken.
There followed a discussion of actions that might be taken in the
light of the letter to the Secretary of the Treasury on February 7 and of the
fact that the System was continuing to provide additional reserves to banks
through purchases of Government securities.

During this discussion, Mr.

Eccles expressed doubt as to the adequacy of the program set forth in the let
ter of February 7, and said that in his opinion it was important that the
Board of Governors be given additional authority over reserve requirements of
member banks.

There was a discussion of legislative proposals that might be

submitted to the Congress to provide additional authority to the Federal Re
serve System for increasing bank reserve requirements.

Following comments

2/26/51

-8

by Messrs.

Szymczak and Evans that the Federal Open Market Committee should

not continue to delay action and that it

should resist further suggestions

for delay, the discussion indicated a unanimous view that in further dis
cussions with representatives of the Treasury and others the Committee
should continue to emphasize the urgent need for prompt action by the
Federal Open Market Committee to carry its proposed policies into effect.
At the conclusion of the discussion, the meeting recessed to
enable the Chairman and Mr. Sproul to attend the meeting at the White House.
It reconvened at 2:15 p.m. with the same attendance as at the morning
session except that Mr. R. F. Leach, Economist in the Division of Research
and Statistics of the Board of Governors, also was present.
Chairman McCabe stated that he and Mr.

Sproul attended the meeting

with the President in the Cabinet room of the White House at 11:00 a.m. and
that there were also present Mr. Wilson, Director of the Office of Defense
Mobilization, Messrs. Keyserling, Clark, and Blough of the Council of
Economic Advisers, Under Secretary of the Treasury Foley and Assistant

Secretary of the Treasury Martin, Chairman McDonald of the Securities and
Exchange Commission, Mr. Murphy, Special Counsel to the President, and Mr
Murphy's assistant.

The President opened the meeting, Chairman McCabe said,

by reading a memorandum addressed to the Secretary of the Treasury, the
Chairman of the Board of Governors of the Federal Reserve System, the
Director of the Office of Defense Mobilization, and the Chairman of the
Council of Economic Advisers.

At Chairman McCabe's request, Mr. Carpenter

2/26/51

-9

read the memorandum which was as follows:
"I have been much concerned with the problem of reconciling
two objectives: first, the need to maintain stability in the
Government security market and full confidence in the public
credit of the United States, and second, the need to restrain
private credit expansion at this time. How to reconcile these
two objectives is an important facet of the complex problem of
controlling inflation during a defense emergency which requires
the full use of our economic resources.
"It would be relatively simple to restrain private credit
if that were our only objective, or to maintain stability in the
Government security market if that were our only objective. But
in the current situation, both objectives must be achieved with
in the framework of a complete and consistent economic program.
"We must maintain a stable market for the very large
financing operations of the Government. At the same time, we
must maintain flexible methods of dealing with private credit in
order to fight inflation. We must impose restraints upon non
essential private lending and investment. At the same time, we
must maintain the lending and credit facilities which are neces
sary to expand the industrial base for a constant build-up of our
total economic strength. Instead of fighting inflation by the
traditional method of directing controls toward reducing the over
all level of employment and productive activity, a defense
emergency imposes the harder task of fighting inflation while
striving to expand both employment and production above what would
be regarded as maximum levels in normal peacetime.
"What we do about private credit expansion and about the Gov
ernment securities market is, of course, only a part of the prob
lem that confronts us. A successful program for achieving pro
duction growth and economic stability in these critical times
must be based upon much broader considerations.
"We must make a unified, consistent, and comprehensive
attack upon our economic problems all along the line. Our pro
gram must include, in proper proportion, production expansion
policy, manpower policy, tax policy, credit policy, debt manage
ment and monetary policy, and a wide range of direct and in
direct controls over materials, prices and wages. All of these
policies are necessary; each of them must be used in harmony with
the rest; none must be used in ways that nullify others.
"We have been striving in this emergency to develop such a
unified program in the public interest. Much progress has already
been made, both on the production front and on the anti-inflation
front. Many peacetime activities of Government, including the
activities of lending and financing agencies, have been pruned

2/26/51

-10.

"down. Cut-backs of civilian supplies and allocations of essential
materials have been successfully undertaken.
Important expansion
programs for basic materials and productive capacity needed in
the defense effort have been gotten underway. Price and wage
controls have been initiated. Restraints on consumer and real
estate credit have been applied. Large tax increases have been
enacted, and additional tax proposals are now pending. In all
these fields further action is being planned and will be taken
as needed.
"One outstanding problem which has thus far not been solved
to our complete satisfaction is that of reconciling the policies
concerning public debt management and private credit control.
Considering the difficulty of this problem, we should not be
discouraged because an ideal solution has not yet been found.
The essence of this problem is to reconcile two important objec
tives, neither of which can be sacrificed.
"On the one hand, we must maintain stability in the Govern
ment security market and confidence in the public credit of the

United States.
now.

This is important at all times.

It is imperative

We shall have to refinance the billions of dollars of Gov

ernment securities which will come due later this year.

We shall

have to borrow billions of dollars to finance the defense effort
during the second half of this calendar year, even assuming the
early enactment of large additional taxes, because of the
seasonal nature of tax receipts which concentrate collections
in the first
half of the year, and because of the inevitable
lag between the imposition of new taxes and their collection
by the Treasury.
Such huge financial operations can be carried
out successfully only if there is full confidence in the public
credit of the United States based upon a stable securities
market.
"On the other hand, we must curb the expansion of private
loans, not only by the banking system but also by financial
institutions of all types, which would add to inflationary
pressures. This type of inflationary pressure must be stopped,
to the greatest extent consistent with the defense effort and
the achievement of its production goals.
"The maintenance of stability in the Government securities
market necessarily limits substantially the extent to which
changes in the interest rate can be used in an attempt to curb
private credit expansion. Because of this fact, much of the
discussion of this problem has centered around the question of
which is to be sacrificed--stability in the Government securi
ties market or control of private credit expansion. I am
firmly convinced that this is an erroneous statement of the
problem. We need not sacrifice either.

2/26/51

-11

"Changing the interest rate is only one of several methods
to be considered for curbing credit expansion. Through careful
consideration of a much wider range of methods, I believe we
can achieve a sound reconciliation in the national interest
between maintaining stability and confidence in public credit
operations and restraining expansion of inflationary private
credit.
"We have effective agencies for considering this problem
and arriving at a proper solution.
"Over the years, a number of important steps have been
taken towards developing effective machinery for consistent and
comprehensive national economic policies. One of the earliest
steps in this century was the establishment of the Federal Re

serve System before World War I. At that time, under far
simpler conditions than those now confronting us, the Federal
Reserve System was regarded as tne main and central organ for
economic stabilization. After World War II, in a much more
complex economic situation and a much more complex framework of
governmental activities affecting the economy, the Council of
Economic Advisers was established by the Congress under the
Employment Act of 1946 to advise the President and help prepare
reports to the Congress concerning how all major economic poli
cies might be combined to promote our economic strength and
health. Still more recently, in the current defense emergency,
the Office of Defense Mobilization has been established to co

ordinate and direct operations in the mobilization effort. In
addition, some of the established departments, such as the
Treasury Department, have always performed economic functions
which go beyond specialized problems and affect the whole
economy.

"Consequently, I am requesting the Secretary of the Treas
ury, the Chairman of the Federal Reserve Board, the Director
of Defense Mobilization, and the Chairman of the Council of
Economic Advisers to study ways and means to provide the
necessary restraint on private credit expansion and at the same
time to make it possible to maintain stability in the market for
Government securities. While this study is underway, I hope
that no attempt will be made to change the interest rate pattern,
so that stability in the government security market will be
maintained.
"Among other things, I ask that you consider specifically
(1) to limit private lending
the desirability of measures:
through voluntary actions by private groups, through Government

sponsored voluntary actions such as was done in a narrow field
by the Capital Issues Committee of World War I, and through
direct Government controls; and (2) to provide the Federal Re-

2/26/51

-12

"serve System with powers to impose additional reserve require
ments on banks.
"Under the first heading, I am sure that you are aware of
the efforts that are already underway by the American Bankers

Association, the Investment Bankers Association, and the life
insurance association. I want you to consider the desirability
of this or other kinds of private voluntary action in bringing
about restraint on the part of lenders and borrowers.
"I should like you to consider also the establishment of a
committee similar to the Capital Issues Committee of World War I,
but operating in a broader area. The objectives of such a Com
mittee would be to prevail upon borrowers to reduce their spending
and to curtail their borrowing, and to prevail upon lenders to
limit their lending. The activities of this committee could be
correlated with those of the defense agencies under Mr. Wilson
with the objective of curtailing unnecessary uses of essential
materials.
"Furthermore, I should like you to consider the necessity
and feasibility of using the powers provided in the Emergency
Banking Act of 1933 to curtail lending by member banks of the
Federal Reserve System. These powers are vested in the Secretary
of the Treasury subject to my approval. The Secretary could by

regulation delegate the administration of this program to the 12
Federal Reserve Banks, each to act in its own Federal Reserve
District under some flexible procedure. The program could be ex
tended to institutions other than member banks, if desired, by
using the powers provided by the Trading with the Enemy Act.
"Under the second heading, you will recall the recommendation
I made to the Congress a number of times in recent years to pro
vide additional authority for the Federal Reserve System to
establish bank reserve requirements. I should like you to
consider the desirability of making that or another recommenda

tion with the same general purpose at the present time.
"You are all aware of the importance of this problem, and
the need for an early resolution. I should like your study to
proceed as rapidly as possible. I hope you will be able to
give me at least initial recommendations by March 15. I am

asking the Secretary of the Treasury to arrange for calling this
group together at mutually convenient times.
"At the same time that we are working to solve this prob
lem of maintaining the stability of the Government securities
market and restraining private credit expansion, we shall, of
course, continue vigorously to review Government lending and
loan guarantee operations. Since the middle of last year, we
have taken a series of steps to curtail such operations and
limit them to amounts needed in this defense period. I am

2/26/51

-13

"directing the agencies concerned to report to me by March 15
on the nature and extent of their current activities, so that
these operations may again be reviewed as part of our over-all
anti-inflationary program."
Chairman McCabe said that he and Mr. Wilson knew nothing of the
memorandum before the White House meeting and after the President read it
and commented on various phases of it
proposals contained in the memorandum,

he called for a frank discussion of
commenting that, while it

could be

issued in the form of an executive order, he would prefer not to use the
authority of his office to make it

a direction.

Chairman McCabe also said

that Mr. Clark talked first, expressing views very much in support of the
Treasury position, that Mr. Sproul made an excellent presentation of the
position of the Federal Open Market Committee and its responsibility, and
that it

was apparent from comments by Messrs. Foley and Keyserling that

they knew about the memorandum before the meeting.

He added that in view

of Secretary Snyder's illness, the President requested Mr. Wilson to
assume the Chairmanship of the Committee to make the study outlined in the
memorandum and that Mr. Wilson responded that he felt the study should be

made within ten days rather than by March 15 because he felt some action
should be taken in order to prevent the situation from undermining the
things his organization was trying to accomplish.

The Chairman went on to

say that he commented on the situation created by the continued purchase
by the System of restricted bonds at a premium, and that his comments
were followed by a statement by Mr. Foley to the effect that the proposed
action by the Federal Open Market Committee might cause a crisis which

2/26/51

-14

should be avoided.

There was a discussion, Chairman McCabe said, of

whether the memorandum should be released and it was understood that it
probably would be released with a supplementary statement by the President
that there were no commitments asked for or given during the meeting.
At this point a Dow Jones ticker story was brought into the meet
ing which stated that the memorandum had been released to the press.
There followed a general discussion of the memorandum and of the
powers that might be exercised under the Trading with the Enemy Act and
the Emergency Banking Act of 1933 to regulate the business of banks and
other financing institutions.

During the discussion it

was suggested

that, in view of the fact that Mr. Wilson had been asked to assume the
Chairmanship of the Committee in making the study outlined in the Presi
dent's memorandum,

it would be desirable to discuss with him the proced

ure that might be followed.

It was also suggested that, even though it

appeared that the program suggested in the President's memorandum would
cause further delay and that there was little
study could contribute anything new, it

reason to expect that the

would be desirable under all the

circumstances to delay making a change in open market operations at least
until Chairman McCabe and Mr. Sproul had discussed the matter with Mr.

Wilson.
At the conclusion of the discussion, Chairman McCabe suggested
that a draft of statement which might be presented to or discussed with

2/26/51
Mr. Wilson be prepared by Mr. Sproul and such members of the staff as he
should select, and that he and Mr. Sproul seek a meeting with Mr. Wilson
later today if possible for the purpose of discussing the proposed study
in the light of the views held by the members of the Federal Open Market
Committee.
This suggestion was approved unani
mously with the understanding that Chair
man McCabe and Mr. Sproul should use their
judgment as to whether a written statement
should be left with Mr. Wilson.
Secretary's note: It was subsequently
agreed by Messrs. McCabe and Sprcul that a
letter should not be presented to Mr.
Wilson. Chairman McCabe subsequently re

ported that he and Mr. Sproul met with Mr.
Wilson and Mr. Weinberg, Special Assistant
to Mr. Wilson, on the evening of February
26 at which time Mr. Wilson discussed how
the study proposed in the President's
memorandum was to be made.
Thereupon the meeting adjourned.
Secretary.