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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 Saturday, March 3, 1951, at 10:40 a.m.
PRESENT:

Mr. McCabe, Chairman
Mr.
Mr.
Mr.
Mr.

Eccles
Szymczak
A. H. Williams
Leedy (Alternate for Mr. Sproul)

Mr. Gilbert, Member, Federal Open Market

Committee
Mr. Norton, Member, Federal Open Market
Committee
Mr. Carpenter, Secretary
Mr. Sherman, Assistant Secretary
Mr. Vest, General Counsel

Mr. Thomas, Economist
Mr. Rouse, Manager, System Open Market
Account

Mr. Thurston, Assistant to the Board of
Governors
Mr. Riefler, Assistant to the Chairman,
Board of Governors
Mr. Young, Director, Division of Research

and Statistics, Board of Governors
Mr. Youngdahl, Chief, Government Finance
Section, Division of Research and Sta
tistics, Board of Governors
Mr. Leach, Economist, Division of Research
and Statistics, Board of Governors
Chairman McCabe stated that he had received word that Assistant
Secretary of the Treasury Martin had not yet been able to talk with Secre
tary Snyder or to clear the points discussed with him and Mr. Bartelt, Fis
cal Assistant Secretary of the Treasury, pursuant to the understanding at
the meeting of the Federal Open Market Committee yesterday, but that it was
expected that word would be received from him not later than early after
noon.

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The Chairman then stated that this morning he had a long talk
with Mr. Wilson, Director of the Office of Defense Mobilization, who ex
pressed great satisfaction concerning the prospect that an agreement would
be reached between the Federal Reserve and the Treasury.

The Chairman

also said that he called Mr. Murphy, Special Counsel to the President, this

morning to tell him that unless some question was raised about the points
which the Committee had presented to Mr. Martin yesterday, it appeared
that an agreement might be reached today.

He stated that subsequently Mr.

Murphy called back to say that Mr. Keyserling, Chairman of the Council of
Economic Advisers, had told him he approved the proposed agreement as it
had been presented to him, and that while he (Mr. Murphy) had not been
able to talk with Mr. Wilson, Director of the Office of Defense Mobili
zation, he assumed that he approved.

Chairman McCabe then went on to say

that Mr. Murphy wanted to know more about what the agreement would mean
with respect to the prices of long-term bonds and particularly whether they
would drop below par, since he felt this would be of great interest to the
President.

Chairman McCabe stated that he responded to Mr. Murphy that

he did not know what would happen to the long-term bonds, that he could
not say whether they would go below par and if so, how much.

He said that

Mr. Murphy then expressed the view that if the agreement were consummated
it would be desirable for the President to issue a short statement indicat
ing that he was pleased with it and that it was a step in the program
which he (the President) had outlined at the meeting at the White House

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at 11 a.m. on Monday, February 26.

Chairman McCabe said that Mr. Murphy

then again asked him what the effects of the agreement would be on the
maintenance of Treasury bonds at par or above and that he reiterated that
he did not know, that that would depend on various factors, and that he
thought that Mr. Murphy should explain to the President the full signifi
cance of the agreement,

including the possible effects on short-term rates

as well as on the long-term rate, because it

was important that the Presi

dent know fully about the agreement so that there would be no possibility
of a misunderstanding.
Murphy said that if

At the close of their discussion, he said, Mr.

the President raised any serious objections it

might

be desirable for someone from the Treasury and Chairman McCabe to fly down
to Florida to discuss the matter with the President, but that he did not
think any question would be raised if

the President understood that the

Secretary of the Treasury and the Federal Reserve had reached an agreement.
The Chairman stated that he reiterated again as the conversation closed
that he did not wish the President to be under any misapprehension as to
the terms of the agreement,

that there would unquestionably be variations

in the short-term rate and that there would be a period of adjustment in
the long-term rate, but that both the Treasury and the Federal Reserve felt

that as the public came to feel that the Government bond market was not
being regulated, there would be greater confidence in it.
Mr. Rouse stated that he talked with Mr. Sproul by telephone this
morning and that Mr. Sproul was clear in his own mind that in view of the

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discussion which he participated in with Messrs. Martin and Bartelt yesterday
noon, there was no misunderstanding by either Mr. Martin or Mr. Bartelt
as to the terms of the agreement that had been proposed.

In particular,

Mr. Sproul mentioned that he felt there was a clear-cut understanding
in the minds of both Mr. Martin and Mr. Bartelt as to the meaning of the
maintenance of an orderly market as stated in the fifth point of the
understanding set forth in the minutes of the full Committee meeting
on March 2.
In a discussion of whether under the agreement the other re
stricted issues would be permitted to go below par (Messrs. Riefler
and Thomas feeling that there should be a discussion with the Treasury
before they were permitted to go below par during the conversion),
Mr. Rouse said that it

would be a question of what constituted an

orderly market, that if pressures in the market were very severe these
issues might go below par, but that he felt that it might be a mistake
to have them go below par in the immediate future.

He also expressed

the feeling that the operation of the System account during the period
through the conversion would have to be "played by ear", that he did
not wish to be committed in advance to any particular course of action,
since the period would be a very difficult one, but that there would
be ample opportunity for discussion between himself and Mr. Sproul
and other members of the Open Market Committee and the Treasury.
It

was agreed that the proposed program contemplated frequent

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discussions with the Treasury so that it

could be kept informed of System

operations and we could be informed of Treasury decisions with respect to
financing.

In this connection Mr. Rouse stated that he had asked Mr.

Bartelt to have one of the senior members of the Treasury staff come to
New York next week to observe the market operations so that he would have
a first-hand opportunity to see how the market acted and the part that the
System account played in it.

He added that he thought that Mr. Bartelt

would also be consulting frequently with him in connection with market
developments.
Mr. Eccles then raised the question concerning the rapidity with
which the market might move away from the present short-term rate, and
there was a general discussion of this matter as well as the changes that
might take place in longer-term rates over the period of the next several
weeks.

There was also a discussion of the possible terms of the conversion

issue that would be announced by the Treasury in the event of an agreement
and of the manner in which it

might be accepted by holders of the present

2-1/2 per cent 1967-72 restricted Treasury bonds.
With respect to the latter point, Mr. Thomas stated that the
assumption on the part of those in the Treasury who had discussed the agree
ment had been that the Treasury should be able to do long-term financing
in

the market at a 2-1/2 per cent rate, that while he had doubts about

this it could not be ascertained at this time whether such rates would be
possible, and that market developments would determine the rates at which

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future financing could be offered.

Messrs. Riefler, Thomas, and Rouse were

satisfied that the Treasury representatives understood this point. Mr.
Thomas also said that the Treasury representatives had emphasized that any
public comment or any interpretation that the conversion issue might not
be a success would jeopardize its acceptance, and that a basic part of
the agreement was the understanding that it would be carried out in a
spirit of enthusiastic cooperation.
In the discussion of the possible maturity of the new nonmarketable
issue, Chairman McCabe stated that it was understood that the Treasury
would begin immediately to hold consultations on that point and that, there
fore, the first announcement would not disclose what the maturity would be
on the new issue or the maturity or rate of the note for which the new issue
could be exchanged.
Chairman McCabe then referred to the announcement to be made
jointly by the Treasury and the Federal Reserve and at his request, the
statement was read as follows:
"The Treasury and the Federal Reserve System have reached
full accord with respect to debt-management and monetary policies
to be pursued in furthering their common purpose to assure the
successful financing of the Government's requirements and, at the
same time, to minimize monetization of the public debt."
Mr. Rouse stated that one of the points which the Treasury had
mentioned was that while there would be no reference to the January 18
statement of the Secretary of the Treasury in the announcement, it reserved
the right to say, if asked, that the announcement was not inconsistent with

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the Secretary's speech in New York on January 18.
Mr. Thomas then read a draft of the proposed announcement to be
made by the Treasury of the 2-3/4 per cent conversion offering as follows:
"The Secretary of the Treasury announced today that
there will be offered for a limited period a new invest
ment series of long-term nonmarketable Treasury bonds in
exchange for outstanding 2-1/2% Treasury bonds of June 15
and December 15, 1967-72, the details of which will be
announced on March 19.
"The new bonds will be issued in registered form only
with appropriate maturity, and will bear interest at the
rate of 2-3/4% per annum payable semi-annually.
They will
not be transferable or redeemable prior to maturity; how
ever, owners of such nonmarketable bonds will be given an
option of exchanging them prior to maturity for marketable
Treasury notes bearing terms to be announced in the official
offering.
"The new nonmarketable 2-3/4%Treasury bonds will be
acceptable at par and accrued interest in payment of Federal
estate and inheritance taxes due following the death of the
owner.
They will not be acceptable in payment of Federal
income taxes.
"The offering of this new security is for the purpose
of encouraging long-term investors to retain their holdings
of Government securities, in order to minimize the monetiza
tion of the public debt through liquidation of present holdings
of the Treasury bonds of 1967-72.
"The Secretary stated that he planned to open the sub
scription books on Monday, March 26, and that the full terms
of the offering and the official circular would be made available
on March 19. The Subscription books will remain open for a
period of about two weeks, although the Secretary will reserve
the right to close the books at any time without notice.
"The Secretary indicated that a special offering of Series
F and G bonds, or an offering similar to the 2-1/2% Treasury
bonds, investment Series A-1965, will probably be made available
for cash subscription at a later date when it appears that a
need therefor may exist."
At this point Mr. Riefler was called from the room and upon
his return stated that at 11:35 he received a telephone call from As-

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sistant Secretary of the Treasury Martin who stated that the proposed
agreement had been cleared and that it was planned to release the joint
announcement for publication in the Sunday morning papers, March 4.

Mr. Riefler added that Mr. Martin would like to know whether the Committee
would now formally indicate its approval of the statement and of the
agreement as set out in the memorandum read by Mr. Martin to the full

Committee on March 1, 1951, and as clarified and interpreted by the clari
fying points discussed yesterday.

In this connection, Mr. Riefler

reiterated the request of Mr. Martin that, during the period while the
agreement with respect to support of the two longest-term restricted bonds
was being carried out, there be no written understanding as to the extent
to which the longest-term restricted bonds would be supported at 21 or 22/32
above par or as to the period of time for which such support would continue.
Mr. Riefler also said that Mr. Martin stated that while the agreement as

referred to above was satisfactory from the Treasury's standpoint, advice
of it had been transmitted to the President in Florida and it was felt

desirable to give him an opportunity to comment on it before it was released.
Mr. Thurston stated that Messrs. Lynch and Bartelt of the Treasury,
in preparing the

joint press statement, had emphasized that unless there

was the utmost secrecy about the terms of the understanding, the success of
the conversion offering, and as a matter of fact the entire agreement, would
be jeopardized.

He suggested, therefore, that it be understood that the

statement to be released would speak for itself and that there would be no

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comments in connection with it by any member of the Federal Open Market
Committee or the staff.
This suggestion was approved

unanimously.
There was a further discussion of the proposed agreement during
which Mr. Szymczak inquired whether any reference was made in the
conversation with Mr. Martin to concurrence by the Secretary of the
Treasury in the request of the Board for cooperation of the Treasury in
seeking early supplemental legislation to restrict expansion of bank
credit.

He said it

was highly important that there be an understanding

on that point for the reason that it

would be difficult if not impossible

to get legislation without Treasury support and that because of unavoidable
limitations on open market operations it was necessary that the Board of
Governors be given supplemental authority over bank reserves.
Mr. Riefler stated that he did not know whether Assistant
Secretary of the Treasury Martin had specifically mentioned the question
of additional legislative authority over bank reserves to the Secretary
of the Treasury, but that Mr. Martin was on notice as to the Board's
feeling and that the point was listed on the sheet which Mr. Martin had
undertaken to show the Secretary of the Treasury.

He also said that

during the conversation Mr. Martin referred to the six points in the
statement submitted to him by the Federal Open Market Committee yesterday
and stated that there was agreement on those six points, that he had
requested that for the time being there be no written record of the third

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point, with respect to support of restricted issues, and that it was
possible that his reference to agreement on the six points included
specific acceptance of the request for legislation.
Mr.

Szymczak said that he could not vote to approve the agree

ment with the Treasury unless there was a clear understanding that the
Treasury would support such legislation.

He requested that steps be taken

to get such an understanding since in his opinion it was an essential part
of the agreement.
Chairman McCabe stated that this morning Mr. Blough of the
Council of Economic Advisers called to discuss the report being proposed
by Mr.

Wilson, Director of the Office of Defense Mobilization, at

the

request of the President, and that he stated to Mr. Blough that, if the
proposed agreement with the Treasury with respect to debt management and
credit policy were approved, that phase of the problem would be eliminated
from the report but that the other aspects of the problem of inflation
would continue to be very important including the question of control of
bank reserves,
in

and that the Board of Governors would not want again to be

the position that it

had been in before of having no support from

other departments or agencies of Government when it
additional authority over bank reserves.

went to Congress for

The Chairman also said that he

told Mr. Blough that he would send to him the memoranda which had been
prepared in the Board's offices on the various proposals that had been
advanced as to the form the further regulation of bank reserves might take,

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-11.

and that he would like to have Mr. Blough's views.
After some further discussion Chairman McCabe stated that he
would like to get word to Mr. Martin as soon as possible and therefore
would like to have a vote on whether the executive committee would proceed
under the authority granted by the full Committee at its meeting yesterday,
to carry out the agreement.
Mr. Rouse stated on the basis of a telephone conversation with
Mr. Sproul this morning, if the latter were present at the meeting he would
vote to put the agreement into effect.
Mr. Szymczak stated that he could only vote to carry out the
agreement with the understanding that the request for cooperation of the
Treasury in seeking early supplemental legislation to restrict expansion
of bank credit was understood by the Treasury and that the Treasury would
cooperate in securing the passage of such legislation.
Mr. Eccles stated that while he voted for the program which had
been negotiated with the Treasury he did so reluctantly because he felt
strongly that before any new, refunding, or conversion issues of Govern
ment securities were offered to the public the market should be permitted
to make price adjustments which more nearly reflected the real public
market, always taking into account the need of maintaining an orderly
market.

He felt the proposed conversion was a case of prejudging the

market.

However, he said, he realized that the compromise program was the

best that could be had in the circumstances, that it was a very important

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step in the direction of a more flexible market and greater freedom in
the determination of System open market policies, that failure of the
Federal Open Market Committee to approve the program might continue the
unsatisfactory working relationship with the Treasury that had existed
in the recent period, and that in these circumstances he felt justified
in voting for it

along with all other members of the Committee.

Chairman McCabe reiterated that Mr. Martin had stated that the
agreement was dependent upon the enthusiasm with which the Federal Open
Market Committee backed it

up, that concern was great that by additional

comments or leaks the success of the program might be jeopardized and that
he urged each member of the Committee to bear this in mind, and that the
suggestion made by Mr. Thurston for not elaborating upon the public
announcement be adhered to strictly.

He also suggested that consideration

be given at an early date to adopting a rule that members of the Committee
would not discuss open market matters with persons who prepared market
letters having to do with security sales.
Chairman McCabe also stated that, in his opinion, the biggest
hope in the agreement was the fact that he felt that it marked a new era
in Federal Reserve-Treasury relations.

He went on to say that if he did

not feel that way, he could not vote for the agreement, but that he really
believed that it

was the beginning--and just the beginning--of a period

of better understanding, and that a big responsibility rested on the mem
bers of the Open Market Committee just as it

did on the Treasury, to see

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to it that this new spirit of cooperation succeeded.
Thereupon, upon motion made by Mr.
Szymczak and seconded, it was voted unani
mously to carry out the agreement reached
with the Treasury as evidenced by the memo
randum read by Assistant Secretary of the
Treasury Martin to the Federal Open Market
Committee on March 1, 1951 as clarified
and interpreted by the seven-point program
set forth in the minutes of the meeting of
the Federal Open Market Committee on March
2, 1951, with the understanding that this
included approval of the joint statement
to be issued by the Secretary of the Treas
ury and the Chairman of the Board of Gov
ernors of the Federal Reserve System and
of the Federal Open Market Committee as
set forth above.
Thereupon the meeting adjourned.
Secretary.