FOMC Minutes
A meeting of the Federal Open Market Committee was held
in the offices of the Board of Governors of the Federal Reserve
System in Washington, D. C., on Thursday-Friday, March 1-2, 1951,
at 9:35 a.m.
PRESENT:
Mr. McCabe, Chairman
Mr. Sproul, Vice Chairman
Mr. Eccles
Mr. Evans
Mr. Gidney
Mr. Gilbert
Mr. Leedy
Mr. Powell
Mr. Szymczak
Mr. Vardaman
Mr. A. H. Williams
Mr. Carpenter, Secretary
Mr. Sherman, Assistant Secretary
Mr. Vest, General Counsel
Mr. Thomas, Economist
Mr. John H. Williams, Associate 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. R. A. Young, Director of the Division
of Research and Statistics, Board of
Governors
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
The Secretary reported that advices of the election for a
period of one year commencing March 1, 1951, of members and alternate
members of the Federal Open Market Committee representing the Federal
Reserve Banks had been received, that each newly elected member and
3/1-2/51
alternate member had executed the required oath of office, and that
it was the opinion of the Committee's Counsel, on the basis of the
advices received, that the following members and alternate members
were legally qualified to serves
Allan Sproul, President of the Federal Reserve Bank of New
York, with L. R. Rounds, First Vice President of the Fed
eral Reserve Bank of New York, as alternate member;
Alfred H. Williams, President of the Federal Reserve Bank
of Philadelphia, with Hugh Leach, President of the Fed
eral Reserve Bank of Richmond, as alternate member;
Ray H. Gidney, President of the Federal Reserve Bank of
Cleveland, with C. S. Young, President of the Federal
Reserve Bank of Chicago, as alternate member;
R. Randle Gilbert, President of the Federal Reserve Bank of
Dallas, with no alternate member having yet been elected;
H. G. Leedy, President of the Federal Reserve Bank of Kansas
City, with C. E. Earhart, President of the Federal Reserve
Bank of San Francisco, as alternate member.
Upon motion duly made and seconded, and
by unanimous vote, the following officers of
the Federal Open Market Committee were elected
to serve until the election of their successors
at the first meeting of the Committee after
February 29, 1952, with the understanding that
in the event of the discontinuance of their of
ficial connection with the Board of Governors
or a Federal Reserve Bank, as the case might be,
they would cease to have any official connection
with the Federal Open Market Committee:
Thomas B. McCabe
Allan Sproul
Merritt Sherman
George B. Vest
Woodlief Thomas
Karl R. Bopp, Watrous H. Irons,
Donald S. Thompson, Clarence
W. Tow, and John H. Williams
Chairman
Vice Chairman
Assistant Secretary
General Counsel
Economist
Associate Economists
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Upon motion duly made and seconded, and
by unanimous vote, the Federal Reserve Bank of
New York was selected to execute transactions
for the System open market account until the
adjournment of the first meeting of the Com
mittee after February 29, 1952.
Mr. Sproul stated that it was expected that the board of
directors of the Federal Reserve Bank of New York at its meeting to
day would select Mr. Rouse as Manager of the System Open Market Ac
count, subject to the selection of the Federal Reserve Bank of New
York by the Federal Open Market Committee as the Bank to execute
transactions for the System account and his approval by the Federal
Open Market Committee.
Upon motion duly made and seconded, and
by unanimous vote, the selection of Mr. Rouse
as Manager of the System Open Market Account
was approved.
Upon motion duly made and seconded, and
by unanimous vote, the following were selected
to serve with the Chairman of the Federal Open
Market Committee (who under the provisions of
the by-laws is also Chairman of the executive
committee) as members and alternate members of
the executive committee until the selection of
their successors at the first meeting of the
Federal Open Market Committee after February 29,
1952.
Members
Alternates
Marriner S. Eccles
Oliver S. Powell
M. S. Szymczak
Rudolph M. Evans
James K. Vardaman, Jr.
Edward L. Norton
(To serve in the order
named as alternates
for members elected by
the Board of Governors)
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Members
Alternates
Allan Sproul
Alfred H. Williams
Ray M. Gidney
H. G. Leedy
R. Randle Gilbert
(To serve in the order
named as alternates for
Messrs. Sproul and
Williams)
Mr. Rouse stated that the Federal Reserve Bank of New York
was working on plans so that the System open market account could con
tinue to function in the event of a bombing disaster.
contemplate,
The plan would
he said, that the Federal Reserve Bank of Chicago would
be selected as an alternate to execute transactions for the System
open market account and that the Federal Reserve Bank of St. Louis
would be selected to operate the account, in the event neither the
New York nor the Chicago Reserve Bank was able to function.
Mr.
Rouse went on to say that a depot with necessary files was being set
up and that personnel were being trained to carry on such operations
at one of the Banks mentioned, and he suggested that the Committee
authorize the Chairman to appoint a Federal Reserve Bank as agent to
operate the System account temporarily in case the Federal Reserve
Bank of New York was unable to function.
Upon motion duly made and seconded,
Mr. Rouse's suggestion was approved
unanimously.
Chairman McCabe stated that this meeting had been called
for the purpose of bringing all
members of the Committee up to date
on recent developments and to meet this morning with Assistant
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Secretary of the Treasury Martin and Fiscal Assistant Secretary of
the Treasury Bartelt.
He then reviewed developments between Saturday,
February 10, 1951, and Wednesday, February l4,
1951, as recorded in
the minutes of the executive committee meeting held on February
14,
particularly with respect to his telephone discussions on February 10
with Secretary of the Treasury Snyder and Senators Maybank, Robertson,
and O'Mahoney, before Secretary Snyder went to the hospital on
February 11 for an eye operation, at which time he had stated that
during his absence Chairman McCabe could discuss matters with respect
to debt management problems with Mr. Martin.
The Chairman went on to say that following the meeting of
the executive committee on February 14, he called Mr. Martin on the
telephone and told him that the System was purchasing substantial
amounts of the June 1967-72 restricted Treasury bonds and that the
executive committee felt that it
slightly in
price.
should allow the bonds to decline
Chairman McCabe said that Mr. Martin asked that
he talk with Under Secretary of the Treasury Foley and tell him what
he had in mind, which he did, and that Mr. Foley called him back
later and stated that the Treasury would prefer to support the June
67-72s rather than have the price on that issue decline.
Mr. Foley
then made a plea, the Chairman said, that the System continue the
existing support level (par and 21/32) until the Treasury and the
Federal Reserve could have an opportunity to discuss the whole
matter.
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Subsequently, Chairman
McCabe said, Mr. Martin had lunch
with Mr. Riefler on Friday, February 16, at which time Mr.
Martin
again expressed concern that members of the staff of the Treasury
and the Federal Reserve were not in frequent consultation with each
other concerning problems of mutual interest.
Later on, the Chairman
said, Mr. Foley called him again and suggested that, before action
was taken to lower the support to par, the staffs of the Treasury
and the Federal Reserve be given an opportunity to explore the whole
problem before us, and that as recorded in the minutes of the meet
ing of the executive committee on February 26, 1951, it
that such discussions would be undertaken.
was agreed
These started, he said,
with a luncheon meeting at noon on Tuesday, February 20, at which
Messrs. Martin and Bartelt of the Treasury and Mr. Haas, Director
of the Technical Staff of the Treasury, had luncheon with him and
Messrs. Riefler and Thomas
of the staffs and Mr.
Chairman McCabe added that these members
Rouse also met the evening of February 20,
on February 21, and, at Mr. Foley's request, again on February 23.
The Chairman then referred to a telephone call which he
received from Mr. Murphy, Special Counsel to the President, on
Sunday,
February 25, asking that he attend a meeting at the .hite
House at 11:00 a.m.
on Monday, February 26, for the purpose of
discussing a financial mobilization program,
concerning which he
had sent a memorandum to Director of Defense Mobilization Wilson
under date of January 16,
1951.
(The memorandum addressed to Mr.
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Wilson was read to the Committee at its meeting on February 6, 1951.)
This meeting with the President and others on February 26 was reported
in the press, the Chairman said, and was also commented upon in the
minutes of the meeting of the executive committee held on that day.
Chairman McCabe then suggested that before Messrs. Martin
and Bartelt arrived he would like to have Mr. Riefler report on the
discussions between members of the Treasury and Federal Reserve staffs
which had taken place February 20-23.
The Secretary then read the
letter which the Federal Open Market Committee approved and sent to
the Secretary of the Treasury under date of February 7, 1951 and
which had been used as an agenda for the discussions, and Mr. Riefler
read a statement covering the discussions, written by Mr. Martin and
revised by Mr.
Riefler, with
Mr. Martin's concurrence,
as follows
It was clearly understood by all that these were explora
tions at the technical level and not negotiations.
Lengthy discussion of the techniques of the Open Market
Committee and the necessity for better liaison between the
Federal Reserve and Treasury was a part of the early discus
sion, and it was clear that both of us could be better informed
The discussion brought out the
on the thinking of the other.
high degree of cooperation which exists between the Treasury
and the Federal Reserve in coordinating the function of the
Treasury in maintaining its daily cash position with the
function of the Federal Reserve in controlling bank reserves.
It was mentioned that the Treasury consults freely with the
Manager of the Open Market Account in forecasting daily and
weekly cash receipts and payments and in determining the
amounts of calls to be made on Treasury Tax and Loan Accounts.
The Manager of the Open Market Account was commended for his
courtesy in furnishing information and answering questions
regarding the market, when requested, but the view was ex
pressed that if the Federal Reserve would consult more freely
with Treasury before movements are made in the direction of
changes in price levels (with consequent effects on interest
rates) there would be brought about a closer coordination of
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the credit policy of the Federal Reserve with the debt
management policy of the Treasury.
Treasury mentioned,
particularly, its helplessness when Open arket Policy
between financing periods results in a market situation
which virtually predetermines an interest-rate change for
the new financing.
It was also felt that confidence is not
promoted if new issues are permitted to "sour" shortly after
they have been put on the Market.
The Federal Reserve group emphasized the desirability of
keeping the Treasury fully informed of all open market opera
tions and the reasons for them.
The Manager of the account
supplies the Treasury with regular market reports given to
the Board and members of the Open Market Comittee and also
keeps the Treasury staff currently informed of operations.
The Manager is glad to answer any questions that may be
raised by the Treasury as to operations and objectives of
policy. The Federal Reserve group are of the opinion that
all operations have been conducted on the basis of and within
the limits of policies previously determined by the Committee
and communicated to the Secretary of the Treasury.
They feel
that any misunderstanding that might have risen in the past
might be avoided through closer staff contact of the type
contemplated for the future,
Inasmuch as the Federal Reserve group had a specific pro
posal, approved by the Open Market Committee, in the letter of
February 7 of Chairman McCabe to the Secretary, most of the
discussion attempted to clarify what was intended in that letter.
The Federal Reserve group continuously asserted the un
happiness of the Open Market Committee in continual monetiza
tion of the Federal Debt, particularly at premium prices and
they made it clear that it was the judgment of the Committee
that the price of the long-term bonds should be permitted to
drop to par.
There was considerable discussion of the rigidities in the
present market and the fact that a large amount of selling was
probably because of commitments already made by insurance
companies, savings banks, loan associations and the banking
system, and the consequent replenishing of reserves through
sales to the Federal Reserve in the open market of Government
securities.
Under the policy proposed in the February 7 letter, the
Federal would withdraw support from the short-term securities
market and let it adjust itself around the 1-3/4 per cent
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They believe that once these
discount rate now prevailing.
adjustments were made, a groundwork would be laid in the
market which would act as a deterrent to lending and at the
same time make it possible to undertake in a more orderly
fashion, although at somewhat higher rates, the refinancings
which the Treasury faces in the final six months of the
Calendar Year 1951.
Much of their argument revolves around the traditional
abhorrence of the banks for borrowing from the Federal Re
serve and their confidence in the restraining influence of
Under these conditions short-term rates
borrowed reserves.
adjust to the discount rate.
At the suggestion of the Treasury group, the Federal Re
serve group indicated a willingness to explore with the Com
mittee the feasibility of a commitment to maintain the dis
count rate at 1-3/4 per cent for a period of time running
through December 1951 in order to facilitate Treasury plan
ning of new money and refinancing at the new levels estab
lished as a result of these adjustments.
It was pointed out,
however, that any such advance commitment might present dif
ficulties since it would involve all directors of all 12
Federal Reserve Banks as well as the Board of Governors.
There was long discussion of the possibility of offering
in exchange for the outstanding longest-term restricted bonds
a new issue of a type that would lock funds in and remove
Particular atten
these bonds as disturbing market factors.
tion, generally sympathetic, was given to a proposal advanced
principally by Mr. Riefler that the Secretary announce a non
marketable 2-3/
per cent long-term, installment retirement,
bond (29-1/2 years) which could be exchanged for the existing
2-1/2's of June and December of 1967-72.
This security would
not be redeemable by the Treasury prior to maturity.
However,
a feature of this issue might be a privilege to exchange it
prior to maturity for a 1-1/2 marketable five-year note in
order to take care of situations where owners subsequently
might desire a security that could be sold on the market.
Mr.
Riefler indicated that the amortization feature of the pro
posed 2-3/4 per cent non-marketable bond could be eliminated
from the terms if on consideration by the Treasury that
feature might be considered undesirable.
At the concluding session it was suggested by the Treasury
group that if the Secretary should offer no objection to the
Federal Reserve proposal with respect to the adjustment of
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short-term rates and should decide to announce a 2-3/4
per cent long-term non-marketable issue, to be exchanged
for the outstanding long-term restricted issues, the
Federal Reserve might consider maintaining the current
levels in the June and December issues until it was
demonstrated whether they would continue to require sup
In the event that continued support were necessary,
port.
the Treasury group suggested that the Federal Reserve and
the Treasury could meet again to consider the problem.
This was put forward, not as a counter proposal, but
on an exploratory basis and with an earnest plea on the
part of Mr. Bartelt that we not attempt to prejudge the
market, or the ability of the Treasury later in the year
to sell a 2-1/2 per cent security, such as a G bond or
the 2-1/2 per cent Investor Series type issued in the Fall
It was his hope that such an arrangement would
of 1947.
from the market and permit us to get a
pressure
release
start on the refinancing program without impairing further
public confidence in the markets.
It was suggested by the Federal that if the Treasury
desired to test the new exchange issue this way, they
might consider an agreement that the cost of supporting
two hundred million purchased be shared equally
the first
by the Treasury and the Federal Reserve, that the Treasury
carry 75 per cent of the cost of the succeeding $400 mil
lion, and that the Treasury carry the whole amount of any
purchased in excess of $600 million.
There was a lot of talk about secrecy and the difficulty
if such an agreement leaked in any other way than through the
published statements of the Federal and the Treasury, and the
belief on Mr. Bartelt's part that knowledge that the Treasury
and the Federal had gotten together would act as a tonic in
restoring confidence to the market.
There was general agreement throughout the discussions
that the so-called feud between the Treasury and Federal was
a most significant psychological factor in the current situa
tion. Both groups attached great importance to the public's
fear of further loss in the purchasing power of the dollar.
After extended discussion, it seemed to be generally
agreed by all
that the Federal Reserve approach was essentially
a "package one" and is not susceptible, with any consistency,
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to very much compromise, unless there is a drastic change
in the existing market situation, which on the basis of
our talks appeared unlikely in the near future.
It is
the Federal view that their proposal would involve no
serious disruption of the security market.
They feel
that the increased flexibility of the market would pro
duce more confidence.
Their major point is an unwillingness on their part
to continue monetization of debt.
They concede that
maintenance of orderly markets will entail some further
monetization which they would hope to keep at a minimum.
There was general agreement that we were discussing
degrees rather than absolutes, and that the Treasury was
questioning the effectiveness of the operation, and also
questioning the Federal evaluation that the repercussions
in the market would not be serious.
Both sides agreed that monetization of debt must be
stopped as far as possible.
The Federal Reserve position
was firm that this could not be done without repercussions
in the money market while the Treasury view has been that
it could be minimized through direct controls which were
preferable to increases in interest rates. This was the
philosophy back of the Secretary's January 18 address.
Upon exploration of the proposals in the light of that ad
dress, however, it was agreed that the proposals discussed
did not run directly counter to that address. He did not
discuss an exchange issue.
Such an issue at 2-3/4 per
cent, if it were long-term and non-marketable, would be
consistent with the pattern of a 2-1/2 per cent rate as
announced by the Secretary on January 18.
At the end of the meetings it was made clear again
that these were only exploratory talks. Accordingly, it
was suggested that the matter now be referred to a higher
level where negotiations or counter proposals might take
place.
Mr.
February 27,
Riefler went on to say that about 6:30 p.m. Tuesday,
Under Secretary of the Treasury Foley called Chairman
McCabe on the telephone and said that he would like to have the staff
discussions resumed and that Mr. Martin, in a discussion with Mr.
Riefler, suggested that they be confined to those two.
They met,
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Mr. Riefler said, at Mr. Martin's home on Tuesday evening, February
27, and early yesterday morning Mr. Martin informed him over the
telephone that he could say that from the standpoint of the Treasury,
the matter was sufficiently in hand so that it
could be presented to
the Federal Open Market Committee as a basis for discussion.
evening Mr.
Last
Martin called him again and stated that Secretary Snyder
wanted very much to have Mr. Bartelt accompany him so that there could
be no possibility of misunderstanding of the matters which he would be
authorized to discuss.
Mr. Norton joined the meeting during the foregoing discus
sion and at 10:17 a.m. Mr. Martin, Assistant Secretary of the Treasury,
and
Mr.
Bartelt, Fiscal Assistant Secretary of the Treasury,
entered
the room.
Mr. Martin made an introductory statement substantially as
follows:
In our discussions, we have not in any way exceeded our
instructions.
We attempted to clarify the letter of February
7, to see how far apart our thinking might be, and to see
what areas of agreement there might be.
I want to say for
the Treasury people we could not have had pleasanter or more
frank or more open discussions of the problem. I feel we got
a good deal of education out of it.
It at least gave us a
better understanding of our mutual problem.
I am authorized by Secretary of the Treasury Snyder, who
regrets he cannot be here, to make a definite counter-proposal.
I want to make it clear it is not our desire to say "take it
or leave it."
There was never anything of that kind in our
conversations.
There is not any element of that in what I am
about to propose.
The Secretary has authorized me to come
over and discuss this with the Committee. He would have liked
to have been able to be here but his eye is just not in condi
I have been over to discuss it with him
tion to permit that.
3/1-2/51
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step by step. He tires very easily and it would not be pos
But that is the authority on
sible for him to come down.
which I am speaking.
We are very sorry on our side that this word "stable"
has gotten construed as it has.
Certainly John Snyder never
intended that "stable" meant a peg at a price that would
never vary. This has gotten into an area that is not just
black and white.
One thing that came out of our discussions
was that that is not really a matter of absolutes but of
degrees. As stated in the memorandum of our discussions,
we have to look at this in terms of fluid market conditions.
That is what a market is.
It is a composite of judgments of
a variety of people at a given time.
The best judges in the
world could not be sure about markets or values under given
conditions.
The Secretary has in the back of his mind a very real
concern about the seriousness of this present situation. I
do not want to make any forecasts of what his thinking is,
but he is very concerned about taxes, about the possibility
of a direct attack on the United States within the foresee
able future, the demands that might be made on the Treasury
in the light of that, the history of previous war financing,
and the nature of the crisis which he has described as
"business as usual, and politics as usual." He is just as
sincere as any of us in wanting to resolve in a spirit of
cooperation the impasse we have arrived at in what, I think
you will agree, is one of the most difficult financial
situations the United States has ever faced. We have re
funding of $400 billion during a six months' period with an
Irrespective of what
indeterminable amount of new money.
happens on the tax situation, there will be a lag in tax
We have tried to work on the Treasury side in
collections.
a perfectly honest and objective way, but within the frame
work of the Secretary's speech of January 18. There are
some inconsistencies that I would not try in any way to
becloud to this group. All of you are more familiar with
With that as a background, I would
this subject than I.
like to get on to the proposition.
Mr. Martin then read the following statement:
"With a view to reconciling the debt management problem
of the Treasury with the problem of controlling credit by
the Federal Reserve, the Secretary of the Treasury authorizes
the fiscal and technical staffs of his department to negotiate
with the Federal Reserve on the following basis
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"The purpose of this negotiation is to reduce to a
minimum the creation of bank reserves through monetiza
tion of the public debt without creating a market psychol
ogy which would entail a lack of confidence in the sta
bility of the Government securities market. More specifi
cally, the purpose of the proposal is to relieve the Federal
Reserve to the fullest extent practicable of the support of
long-term Governments without compelling the Treasury to
refinance maturing obligations during this calendar year,
or to finance new fund requirements, on the basis of in
determinable rising interest rates. This can be accomplished
within the framework of the 2-1/2 per cent long-term interest
rate pattern announced by the Secretary of the Treasury in
his address before the New York Board of Trade on January 18.
"The proposal involves 3 elements, (1) a new nonmarket
able security to be issued in exchange for outstanding long
term 2-1/2 per cent bonds of June and December, 1967-72,
(2) refunding the $50 billion of maturing securities between
June 15 and December 15 of this year, and (3) the raising of
new funds to finance the present emergency.
"These elements, while interrelated, will be dealt with
separately.
"EXCHANGE OFFERING OF NONMARKETABLE 2-3/4%
FOR OUTSANDING RESTRICTED TREASURY BONDS
OF 1967-72.
"In consideration of an agreement on the part of the
Federal Reserve to maintain a stable securities market, as
more specifically outlined below, the Secretary of the
Treasury would agree to issue a long-term 29-year 2-3/4%
nonmarketable security, which would not be redeemable by
the Treasury prior to maturity, but which would be exchange
able prior to maturity for 1-1/2% 5-year Treasury notes.
The purpose of this offering would be (a) to retire a large
segment of the marketable debt, which is now causing dif
ficulties for the Federal Reserve, and (b) provide a degree
of flexibility for holders of the new nonmarketable security
by making them exchangeable for a 1-1/2% 5-year note that
could be sold on the market in case cash funds are needed.
At the same time it avoids an increase in the demand obliga
tions of the Treasury.
"One of the merits of the proposal is that it avoids a
It is believed that
prejudging of the securities market.
this exchange privilege would give bouyancy to the restricted
Treasury bonds of 1967-72, since the 'rights' or exchange
privilege would be attractive to long-term investors who are
more interested in interest return than they are in specula
Thus, there would be created a buyers'
tive possibilities.
market for the restricted Treasury bonds of 1967-72, and
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to this extent should relieve the Federal Reserve of a
great deal of pressure.
Conceivably, if market confi
dence would be restored through an unequivocal joint an
nouncement by the Treasury and Federal Reserve that an
agreement had been reached, the present market support
problem of the Federal Reserve might disappear.
"It is realized, of course, that consideration would
have to be given by the technical staffs of the Treasury
and the Federal Reserve as to the effect of this action
on other outstanding marketable securities in the inter
mediate and long-term area.
"In order to provide for this proposal a fair and
reasonable testing period, it would be necessary for the
Federal Reserve to agree to support the securities af
fected at present market levels. In a spirit of cooperation
the Federal Reserve and the Treasury should become partners
in the support program under which each agency would take a
pro rata share of any purchases that may be required; that
is, the Federal Reserve Open Market Account would take a
percentage of the purchases and the Treasury would take the
balance for Government investment account. It has been sug
gested, for instance, that the first $200 million purchased
under the agreement would be shared equally by the Treasury
and the Federal Reserve; that the Treasury and Federal Re
serve would finance 75% and 25%, respectively, of the suc
ceeding
$400million; and that the Treasury would carry the
full amount in excess of $600 million. This would seem to
be a reasonable basis of purchase during a testing period,
but there is an inherent danger in the event of a 'leak'
hile it
that the Reserve is committed to a stated amount.
is realized that the Federal Reserve might not be willing
to accept an 'open end' agreement, it must be recognized
that public knowledge of a limitation would not encourage
market confidence.
"REFUNDING OF THE $40 BILLION OF MATURING
SECURITIES BETWEEN JUNE 15 AND DECEMBER
15 OF THIS YEAR
"During the 6 months period, June 15 - December 15,
the Treasury will be required to refund almost $40 billions
of maturing obligations, exclusive of Treasury bills. Suc
cess of this refunding demands confidence in the stability
Therefore, it is
of the Government securities market.
imperative that the Treasury and the Federal Reserve reach
an agreement on a monetary-debt policy for the balance of
the calendar year, at least. Obviously, this program should
not be encumbered with uncertainty, misunderstanding, and
the prospect of rising interest rates. In return for an
understanding that the Federal Reserve would maintain a
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stable price level during this period of financing so that
the Treasury would not be required to finance on a rising
interest rate, the Treasury would agree to a policy under
.:,ich the Federal Reserve would allow the short-term securi
ties market to adjust itself before June 15 around the 1-3/4%
discount rate now prevailing. From the Treasury point of
view it would be desirable to extend this period of stability
for the duration of the emergency, but it is doubtful whether
the Federal Reserve would be willing to commit itself that
far ahead. On the other hand, if a closer working relation
ship could be established between the technical staffs of
the Federal Reserve and the Treasury, it may be possible to
suggest a program of monetary-debt management which might be
acceptable to the policy-making officials.
"THE RAISING OF NEW FUNDS TO FINANCE THE PRESENT
EMERGENCY
"On the basis of the President's budget estimates, and
without making allowance for an increase from new taxes, it
is estimated that new borrowings from this time to June 30,
1952 will amount to approximately $23 billion, distributed
as follows: May 1951 .3.6 billion; July $6.5 billion; October
$7.5 billion; April 1952 $5.4 billion. These figures make
allowance for attrition on debt refunding operations of $3.6
billion, in addition to the cash deficit. The figures might
be reduced by a revitalized savings bonds program and a re
vision of the yields on Treasury savings notes.
"Conferences with the Federal Reserve on the technical
level might be helpful in laying out a program of debt
composition in order that the Reserve may consider itself a
full partner with the Treasury in maintaining an orderly
market for the securities after they have been issued.
"It is generally recognized that there are no sub
stantial amounts of non-bank funds seeking investment at
Some people seem to think that there will
the present time.
be funds seeking investment sometime this Fall after other
It would seem that
sources of investment have declined.
attempt to prejudge
this
time
to
no
need
at
there would be
the market so far ahead or to assume that the 2-1/2% long
term rate mentioned in the January 18 address will not be
Therefore, if a joint announcement of the
appropriate.
Treasury and the Federal Reserve should be agreed upon,
with a view to reestablishing market confidence, reference
might be made to the fact that the Series G bond or the
Investment Series Bond issued in 1947 might be made avail
able for purchase by non-bank investors from time to time,
the purpose of this reference being to indicate that there
has not been abandonment of the policy statement in the
January 18 address.
3/1-2/51
-17-
"While the following might appear unduly optimistic,
and would, of course, depend a great deal upon the ef
fectiveness of selective controls and other factors af
fecting the availability of investments, there is a pos
sibility that this program may be of assistance to the
Federal Reserve in de-monetizing some of the public debt
which it now holds, and may enable the Treasury to acquire
new money by selling in the market some of the restricted
2-1/2% bonds of 1967-72 previously acquired for Government
investment account."
While reading the above statement Mr. Martin made substan
tially the following supplementary comments:
I started off by saying the purpose of this negotiation
is to reduce to a minimum the creation of bank reserves
through monetization of the public debt without creating a
market psychology which would entail a lack of confidence in
the stability of the Government securities market. By that
we mean orderliness; we do not mean a precise peg. I have
heard it said that the Federal Reserve intends to let bonds
I know there is nothing to
drop to 10 in the near future.
that.
It is as inaccurate as the report that the Treasury
wants a rigid peg,
Next, as to the purpose of the proposal: It is to re
lieve the Federal Reserve to the fullest extent practicable
of the support of the long-term Governments without compel
ling the Treasury to refinance maturing obligations during
this calendar year, or to finance new fund requirements, on
This is
the basis of indeterminable rising interest rates.
the year we are directly concerned with for the purposes of
this discussion.
We do not think you can precisely deter
mine a rate level because, in the nature of the proposal,
you will see that that could not be. We do want to keep
within a reasonable framework during the period of this re
financing and the initial demands for new money, without
magnifying unduly on either side the forces there are in
the market, a pattern which would give us some basis for
determining what the cost is going to be. We do not want
to feel we are starting on a rising pattern of interest
No one
rates in what could be a period of war financing.
here will say we could not have war by the end of this
year or that we could not have a very serious situation
in this country resulting from an attack on us. On the
basis of this, we think the need could be determined with
in the framework of the 2-1/2 per cent rate pattern an
nounced by the Secretary on January 18.
3/1-2/51
-18
Now I would like to refer to the specific proposal
for the exchange offering. Some people will think the
2-3/4 nonmarketable bond is a trick issue.
meet that head on.
It is.
We want to
It is an attempt to lock up
as much as possible of these longer-term issues. The
rate is another point for discussion.
There is probably
a large amount of money at 3 per cent.
If tested on that
basis, there is probably quite a bit. What there is at
2-3/4 per cent is quite doubtful.
It is with full under
standing of that hazard that we approach this. But it is
also with the sincere feeling that if something like this
is put out, we would unite to sell it to the public. We
would hope that the offering would result in retiring a
large segment of the marketable debt which is now causing
difficulties for the Federal Reserve, and would provide a
degree of flexibility for holders of the new nonmarketable
securities by making them exchangeable for a 1-1/2 per cent
5-year note that could be sold on the market in case cash
funds are needed.
Consideration by the technical staffs of the Treasury
and the Federal Reserve of the effect of the 2-3/ per cent
issue on other outstanding issues in the intermediate and
long-term area will require continuous discussion. We would
hope that could be set in a broad picture of a joint Treasury
Federal Reserve debt management program. What the result of
that will be, the very difficult market situation will deter
mine.
In our discussions we talked about a fair and reason
able testing period for this.
We felt there would have to
be a spirit of cooperation between the Federal Reserve and
the Treasury in a support program of this type. We would,
in the nature of the current difficulty and not in terms of
consistency with overall logic, want support at current
levels during the testing period to assure people generally
that the Treasury and Federal Reserve were partners in the
We mention some figures for this support but we
agreement.
are very wary about precise limits to the assurance that
might be given because of the inherent danger of a "leak"
Nevertheless, we
that the support is for a limited amount,
have discussed in our group and I have discussed with the
Secretary that the first
$200 million might be shared equally
by the Treasury and the Federal.
The Secretary would like to
have the whole $600 million supported equally by the Federal
and the Treasury, but to assure you that I am not here to
try to get a program of that sort, we would reluctantly agree
to make it a 75-25 per cent arrangement on the next $400 mil
lion.
That does not mean that we would adhere to precise
-19-
3/1-2/51
amounts if the total reached say $630 million, or that
we would not want to consider the matter actively again
before we reached that limit.
It is vital that this ar
rangement not become public as that would endanger the
whole thing.
One of the most difficult things we have is
the fact that newspaper people and market people, generally,
(I do not say this comes from the Fed, it comes from the
Treasury too) have more information on actual operations of
the Treasury than there is in the Treasury and the Federal.
We would really like to see the June 67-72s, if possible,
marked up from 21/32 above par to 22/32 as an initial part of
this operation.
The success of the refunding of $40 billion of maturing
securities between June 15 and December 15 of this year de
mands confidence in the stability of the Government securi
ties market.
In using the word "stability" in reference to
that period, we mean a "confident tone", that we would use
such resources as we have to keep the market in a confident
tone.
We realize that "stability for the duration of the
emergency" would be for an indeterminate period and there
may be an advantage for both of us in not going that far.
Therefore, I would say for the calendar year 1951. On that
basis, if the Federal would maintain a stable market to the
end of this year, the Treasury would be prepared to have
the short-term rate adjust around the discount rate. We
fully recognize that the influence of the discount rate may
or may not be changing as to its effect in the market. We
understand the traditional abhorrence of the banks to bor
row reserves and the restraining influence that may have.
We are fully prepared to see the rate adjust, but we would
like to have it as nearly as possible adjusted by market
forces in an orderly market and not driven to the higher
level.
Mr.
Sproul commented at this point that there seemed to be
some implication in Mr. Martin's statement that the Committee might
drive the market to a position.
The fact was, he said, that the Com
mittee did not in its operations drive securities to any price or
yield, that market forces had been the determining factor, and that
only in resisting the creation of reserves had the Committee been a
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3/1-2/51
party to an increase in rates.
That, Mr. Sproul said, was the result
of market forces, and not the action of the Committee.
it
should be clear that if
He added that
securities were offered in substantial
amounts and the Committee did not choose to buy because it
wish to put reserves in
did not
the market, prices would go down and yields
up.
Mr.
Martin then continued with his statement substantially
as follows:
I am glad that you interrupted me because I did not
mean to give that implication. It was demonstrated to
the satisfaction of the Treasury representatives in our
discussion that there was no desire on your part to in
crease rates and that you did not operate in that frame
work.
I agree with what you say about the operation of
market forces.
Isn't
it understood that in going along
in the adjustment to the discount rate, we do it not with
any criticism of past actions but that you will maintain
a policy of not attempting to influence the market? It
would be possible from the connotation of this that you
could go in and influence the market. We have to concede
that these negotiations are in an unhappy atmosphere be
cause there have been so many discussions.
On that point,
one thing that struck Mr. Bartelt and myself was our in
ability to answer many questions that come up with re
spect to Federal Open Market operations.
It is difficult
to run a show in a gold fish bowl and you can not have
Treasury people sitting up in New York all the time, but
we would hope that we would have closer discussions and
cooperation so that we would not have as much loose talk
that cannot be answered.
I have made it very clear to the Secretary that it
would be our understanding that it would be agreed by
the Federal that the discount rate would be maintained
at 1-3/4 per cent for the balance of this calendar year.
In the course of the adjustment to the discount rate and
with current market conditions, we are under no illusions
as to how far the adjustment could go.
It might exceed
1-3/4; it might go to 1.85. Some people do not think it
-21-
3/1-2/51
could go quite out there.
Some people think it would stay
pretty close, while others feel it would exceed the dis
count rate somewhat.
But I wanted to make it clear in this
discussion that we are not talking about adjusting on 1-3/4;
we are talking about that as a pivot.
Now we come to the raising of new funds to finance the
present emergency.
We estimate that new borrowings from
now until June 1952 will be approximately $23 billion, al
though that might be reduced by a revitalized savings bond
program and a revision in the yields on Treasury savings
notes which we recognize will be needed.
We think that discussions with you would be helpful in
laying out a program of debt composition in order that the
Reserve may consider itself a full partner in maintaining
an orderly market for securities after they have been is
sued. Therefore, if a joint announcement should be agreed
upon, reference might be made to the fact that the series
G bond or the investment series bond issued in 1947 might
be made available for purchase by nonbank investors from
time to time. The purpose of this reference would be to
indicate that there has not been abandonment of the January
18 statement.
It is offered in
That in essence is our proposition.
the most cooperative spirit and an earnest desire to get a
I do
united team of the Federal Reserve and the Treasury.
not see any solution by Congress which will be satisfactory
to everyone in the long run. We are in the situation of
the Army and the Navy and we have to work together in a war.
Chairman McCabe expressed the appreciation of the Committee
for the frank manner in which Mr. Martin had spoken, and stated that
it
had been reported to the Committee that in the Treasury-Federal dis
cussions the Treasury representatives had continuously worked with a
most cooperative spirit.
In response to a request by Mr. Szymczak for a clarification
of the proposal that prices for Treasury restricted bonds of 1967-72 be
maintained at 22/32s above par, Mr. Martin said that he recognized that
-22
3/1-2/51
there was some inconsistency in this suggestion, but that there was
also a basis for it
in that there was some feeling that maintenance
at that level throughout the period of .the proposed conversion would
help assure a successful conversion operation.
Mr.
confident if
Bartelt stated the belief that the market would be more
the securities remained where they were for a short while.
If the prices for the securities declined immediately, he said, he felt
it
would impair market confidence and that the new 2-3/4 per cent
security would not get off to a good start.
He added that a figure of
100 or 100-22/32 had nothing sacred about it,
but that if the over-all
program was adopted, it
was important that the refunding have a fair
chance, and that in his opinion the program would have a better chance
of success if
it was not started off by a decline in bond prices.
Mr.
Bartelt also said that the Federal Reserve was not being asked to
maintain these prices forever, that it
was being asked to give the new
conversion issue a chance, and that he felt that the best chance for
success would come if the market was held at present levels.
It was also brought out that the period of support under
discussion was only until a reasonable time after the conversion had
been completed.
Some of the members of the Federal Open Market Committee
commented that in their opinion the new issue would have a better
chance of success if
the price for the 67-72s was not maintained at
a premium but permitted to decline to where support would not be
-23
3/1-2/51
required except for the purpose of maintaining an orderly market.
The reasons for this position were fully discussed.
With respect to the discount rate, Mr. Martin stated that
he realized the difficulties of a commitment such as that proposed,
but that it
seemed important to have assurance that the short-term
market would be permitted to adjust itself around the present dis
count rate, that the Treasury would prefer that this assurance be
given for the duration of the emergency but realized that that was
asking more than the Federal Reserve might feel it
could give, that
the next best would be to have assurance through the calendar year
1952,but that in the memorandum he had read it was suggested that
assurance be given for the remainder of this calendar year as some
thing which could be accepted by the Treasury and might be acceptable
to the Federal Reserve.
Mr.
Szymczak inquired whether there had been discussion in
the staff meetings of increased authority over reserve requirements
and Messrs.
Szymczak, Evans, and Vardaman said they felt, particularly
if
the short-term rates were limited in accordance with the proposal,
it
would be essential to have additional authority over reserve require
ments if
the Federal Reserve was to maintain an orderly market for
Government securities and at the same time avoid undue monetization
of the public debt.
Mr. Martin responded that discussion of that point was out
side his instructions, but that he understood the inter-agency
-2
3/1-2/51
committee appointed by the President on February 26, 1951, of
which Mr. Wilson, Director of the Office of Defense Mobilization,
was Acting Chairman, expected to have a study made of that matter
with a view to getting administration support for an increase in
reserve requirements.
Mr. Sproul referred to the program for series E savings
bonds, stating that the staff report submitted to Mr. Bartelt early
in January of this year made some suggestions with respect to this
program.
in
He expressed a hope that a revitalized program, not only
terms of the securities to be offered, but also the organization
for promoting their sale could be given further consideration before
the heavy maturities of savings bonds started in 1952
emphasized the view that it
Mr.
Sproul
was highly important that people now
holding savings bonds be convinced of the desirability to continue
to hold them, and that it
was equally important that such bonds be
made attractive so that new purchasers would wish to hold them.
He stated that he did not feel that the present program would do
the job, that unless a more attractive bond and a more effective
selling organization was developed, not much could be expected,
even if
the inflationary rise in prices was halted.
Mr. Bartelt responded that the Treasury would be glad to
receive any information which the System had on this matter, and
that he would be glad to get out the staff memorandum which had
been sent to him early in January and study it
further.
3/1-2/51
-25
Chairman McCabe raised the question as to how long
it
was contemplated the books would be open for the conversion
of the 2-1/2 per cent bonds into the new nonmarketable 2-3/4
issue, and Mr. Bartelt responded that it
period of time,
probably two weeks, although if
were successful it
offer.
ought to be a limited
this conversion
might be followed by a later opening of the
He stated that the steps in the program would be, first,
announcement of a joint agreement by the Treasury and the Federal
Reserve and,
simultaneously, a general announcement of the new
offering would be made with a statement that details would be
given a little
it
later.
In this connection,
it
was suggested that
would be highly desirable that the announcement of an agree
ment be made over the coming weekend, and that if
this were done,
the books for the conversion offering would be open, either during
the week beginning March 19 or the week beginning March 26.
Returning to the question of the support to be given to
the restricted bonds and whether the proposal of the Treasury con
templated any support at all
following completion of the conversion
offering, Mr. Bartelt stated that he wished to avoid any difficulty
that would cause holders of the securities to accuse either the
Treasury or the Federal Reserve of trickery, and that he felt the
question of the length of time for which support should be given
should be worked out within the framework of the memorandum which
Mr. Martin had read.
He added that an orderly market might have
-26
3/1-2/51
developed by the time the conversion was completed and that he
was concerned that nothing be done to indicate that the Federal
Reserve was running out on any agreement that might be reached,
since that would cause a further lack of confidence in the entire
Government securities market.
Mr. Martin stated that with respect to the timing of the
announcement he would think that the coming weekend would be the
most desirable time from the standpoint of the market.
He added
that whatever announcement came out after having been carefully
worked out would have to be cleared with Secretary Snyder, and
that this might demand a little
could be done in
time,
but that he believed it
time for this weekend.
Mr. Martin added that
with respect to support of the present restricted issues, their
program contemplated that there be no support after the conversion
issue was out of the way.
Mr. Bartelt stated that the new conversion issue was only
a part of the program of the Treasury, that it was apparent that
there would have to be some revision in the terms of savings notes,
and that he felt the Treasury might sell substantial sums of such
notes during the next fiscal year by making their yields more at
tractive.
Mr. Bartelt also commented on the large maturities that
would fall due in June and July of this year, and on the importance
of having the market in a condition at that time to assure success
of whatever issues might be offered.
3/1-2/51
-27
Mr.
Martin stated that he wanted to make it
clear that
there had been an atmosphere of misunderstanding between the
Treasury and the Federal Reserve for some time, that it
to talk about mutual cooperation, but that if
was easy
there were to be
genuine understanding it would require continuous effort and con
sultation on the part of the technical staffs of both the Treasury
and the Federal Reserve.
He added that he felt that the two staffs
were closer together than they had ever been, that he wanted to
make a sincere effort to continue on that basis, that the problem
of debt management required close cooperation between the Treasury
and the Federal, and that he had approached the problem with a
very real spirit of humility.
Mr. Bartelt stated that he greatly appreciated the
friendliness of the Federal Reserve people in carrying on fiscal
activities,
that as far as day-to-day operations were concerned
there had been absolute harmony at all times on a partnership
basis, that the Treasury had attempted to manage its tax and loan
account so as to assist the Federal Reserve in minimizing fluc
tuations in bank reserves, that it
was in constant communication
with the Federal Reserve Bank of New York on this matter, and
that in
the event of a difference of estimates of tax receipts
or other factors affecting the Treasury's cash position, more
often than not the Treasury accepted the judgment of the Reserve
Bank in determining operations.
-23
3/1-2/51
On behalf of the Federal Open Market Committee,
Chair
man McCabe expressed the appreciation of the Committee for the
very frank and cooperative manner in which the Treasury representa
tives had worked with members of the Board's staff in the recent
discussions, and the effective and cooperative manner in which the
proposals of the Treasury were presented at this meeting.
The meeting recessed at 12:45 p.m. and reconvened at
2:20 p.m. with the same attendance as at the close of the morning
session except that Messrs.
Martin and Bartelt of the Treasury
were not present.
At Chairman McCabe's request, Mr.
Carpenter read the
letter sent to the President under date of February 7, 1951, in
response to his letter to the Chairman dated February 1, 1951,
both of which are recorded in the minutes of the meeting of the
Committee on February 6-3, 1951.
In response to a question,
Chairman McCabe stated that the letter to the President was still
at the White House, that he had received two requests to withdraw
it, and that the executive committee agreed unanimously at a meet
ing on February 14 that the letter should not be withdrawn.
also said that Mr. Murphy,
Special Counsel to the President,
cone over to discuss the letter since it
him and if
He
had
had been turned over to
a reply were to be sent he would have to prepare it,
and that Mr. Murphy stated he did not know what to say in reply
but if a reply were expected he would like to discuss it with
-29
3/1-2/51
members of the Federal Reserve staff.
The Chairman said that he
told Mr. Murphy he was welcome to discuss the letter with members
of the staff and that it was entirely optional with the President
whether he wanted to make any reply.
He added that, having heard
nothing further, he doubted that there would be a reply.
Mr. Carpenter then read again the letter to the Secretary
of the Treasury, dated February 7, and the statement which Mr. Martin
had read at the session this morning.
During the ensuing discussion, Chairman McCabe commented
on views expressed by the Federal Advisory Council at its meeting
on February 18-20 concerning a practicable and feasible program of
action that might be followed by the System to combat inflationary
developments,
particularly with respect to Federal Reserve-Treasury
relations, and at his request Mr. Carpenter read the statement sub
mitted by the Council which presented views differing from those
expressed by the Federal Open Market Committee.
The Chairman raised the question whether, since the views
of the Federal Advisory Council failed to support the position taken
by the Federal Open Market Committee, it
would be desirable to have
the matter discussed at meetings of Federal Reserve Bank directors
in order to ascertain their views, but no conclusion on this point
was reached.
There was an extensive general discussion of the proposals
made by the Committee in its letter to the Secretary of the Treasury
-30
3/1-2/51
on February 7 and of the points of difference between those pro
posals and the program suggested in the memorandum read by Mr.
Martin earlier in the day in the light of the responsibilities
of the Federal Open Market Committee in the existing inflationary
situation for restricting the expansion of bank credit.
During this discussion, Mr. Vardaman withdrew from the
meeting at 330 p.m.
In the course of the discussion, the members of the Com
mittee expressed their views at length on various aspects of Federal
Reserve policy.
Questions were raised as to the exact meaning of
some of the proposals contained in the memorandum that had been
read by Mr. Martin and whether he and Mr. Bartelt fully understood
the significance of some of the proposals as interpreted by Messrs.
Riefler, Thomas, and Rouse, in the light of the staff discussions
that had taken place.
Among the points about which it was felt
additional information was needed before the Committee could indi
cate whether the proposals made by Mr. Martin could serve as a
basis for an accord, was the exact meaning of the suggestion that
the Federal Reserve and the Treasury jointly support the restricted
Treasury bonds of 1967-72 at par and 21 or 22/32s, and the relative
extent and length of time for such support.
It was also suggested
that Mr. Martin should be informed that the Open Market Committee
could not make any commitments with respect to discount rates of the
Federal Reserve Banks and of the extent to which the Board of
3/1-2/51
-31-
Covernors of the Federal Reserve System might make a commitment
with respect to such rates if
it
considered it
desirable to do so.
A third point not covered in
Mr.
Martin's memorandum was whether
the Treasury would support or oppose legislation which would give
the Federal Reserve additional authority over bank reserves.
Mr.
Sproul emphasized that we should not, in any way, indicate ac
ceptance of the implication or interpretation that the proposed
agreement could be carried out within the framework of the address
of the Secretary of the Treasury before the New York Board of Trade
on January 18.
It was also suggested that before indicating whether
the proposals could be used as a basis for agreement, more informa
tion would be needed on the wording of the proposed joint statement
to be issued by the Treasury and the Federal Reserve.
assist the Committee in its
it
In order to
further consideration of the matter,
was suggested that Messrs. Riefler, Thomas, and Rouse meet with
Messrs.
Martin and Bartelt again tonight to clarify further the
proposals for agreement.
It was agreed that this suggestion should
be followed and that, because of the lateness of the hour, the meet
ing would reconvene tomorrow morning for the purpose of hearing the
report of the members of the staff.
In this connection,
Mr. Eccles stated that because of a
previous speaking engagement before the Executives'
Club of Chicago,
which he did not feel he could cancel, he would not be present at
3/1-2/51
-32
the session tomorrow but that, if
it
was ascertained that the Treasury
would be willing to have the entire Government securities market adjust
within the range of the 1-3/4 per cent short-term rate, he would be in
clined to vote to approve an accord on the basis of a temporary support
for the 1967-72 restricted Treasury bonds, within the dollar limits sug
gested in Mr. Martin's memorandum,
up to a date not beyond April 15, 1951.
The meeting then recessed at 6:35 p.m. and reconvened at 9:35
a.m. on Friday, March 2, 1951, with the same attendance as at the begin
ning of the afternoon session the day before, except that Mr. Eccles was
not present.
Chairman McCabe called upon Mr. Riefler for a report of the
staff conversations last night, and Mr. Riefler made a statement in
part as follows:
We met last night at Mr. Martin's house from 8:30
p.m. until a little after 11:00 p.m. Messrs. Martin,
Bartelt, Thomas, Rouse, and I were present. It was a
long discussion during which we tried to bring out on
the table and discuss every possible angle, slant, in
nuendo, and facet of the problem so that there would
There is a
be no possibility of misinterpretations.
possibility of a misunderstanding on one point we should
cover because Mr. Rouse questions whether there is a
full understanding of what the possible effects of the
proposed program may be and it is important that both
sides understand what it may mean in terms of market
prices and rates.
First, we went into reserve requirements and
opened up by asking the Treasury attitude toward the
President's statement in the memorandum which he read
at the White House on February 26. We do not have
much to report on that. The matter has not been taken
3/1-2/51
-33-
to the Secretary of the Treasury for policy decision;
therefore, there is no statement as to Treasury policy
that can be made.
Mr. Martin did say that the Secre
tary has expressed himself as friendly toward some
plan of reserve requirements.
The one they are most
interested in is the security reserve plan, but that
has not progressed to a point where there has been any
policy decision.
Next we took up the question of the discount rate,
explaining that the Open Market Committee as such had
no power to commit on discount rates. We also said that
it was obviously very difficult for the Board of Governors
to commit twelve Federal Reserve Banks on the rate, and
we thought the best that could be done would be to say
that before the Board of Governors would approve an in
crease in the discount rate, there would be consultation
with the Treasury, and the reason would have to be very
compelling.
They indicated they would be satisfied with
such an arrangement.
On the question of the support and the premium on
the long-term restricted bonds and the handling of the
conversion issue, we went through many facets of that
and tried to cover all possible areas of misunderstanding.
The only place where there could be monetization of debt
under the program, which they understand, is in any com
mitment for support of the restricted bonds during the
exchange offering, and a misunderstanding as to what is
meant by "orderly market", or what would be involved in
refinancing a new money issue in the last six months of
this year.
On the question of orderly markets, it was
their understanding that "orderly" meant "orderly".
There is no peg in this proposal, except the 22/32 above
par for the restricted issues to be exchanged; after
that, orderly means an orderly market without reference
to par. That would apply even to the 67-72s after the
conversion.
On the refunding and new financing in the last half
of the year, the proposal envisages that the Treasury,
in consultation with us, will offer maturities and terms
which will be designed to raise the necessary funds with
out support.
The Treasury would not be committed in the
program to raise money at any rate but rather to offer
issues which will not require support, because the
3/1-2/51
Secretary of the Treasury did not mean in his January 18
speech that new funds would be raised by monetization of
the debt.
If war were declared, they would expect the
Federal Reserve to help raise the necessary new money
but they would collaborate with the Federal to the fullest
extent so that monetization of the debt would be held to
a minimum.
Mr. Bartelt feels that the proposal they made is the
best way to bring out the new conversion issue, i.e.,
that we should not cause any disturbance in the market at
the time of announcing the new issue, but that if the
$600 million referred to in Mr. Martin's memorandum were
reached fairly quickly, Mr. Bartelt would feel that the
matter would be open for discussion and change.
He did
not feel that support would be continued for long after
the close of the offering and that we would not find our
selves going into May or June with a peg at that end of
the market.
Support of the two restricted issues during
the conversion is a controlling point. The proposal
Our
would be dropped if it did not include this point.
commitment would be limited to $200 million and after
that additional support, if given, would be carried on
with Treasury funds.
With respect to the proposed joint statement, Mr.
Martin expressed the thought that it should be as finan
cial as possible, that they would not want a reference to
the January 18 address of the Secretary, that that point
would be covered by a reference in the announcement of
the conversion offering to the possible opening of F- and
G-type bonds later on, and that they very much wanted a
clause indicating that the purpose of the agreement was
to reduce to a minimum the creation of bank reserves
through monetization of the debt. Mr. Martin was not
definite about the period for which the Treasury would
expect support of the 2-1/2 per cent restricted bonds
of 1967-72 at 21/32s above par.
In supplementary comments, Messrs. Thomas and Rouse ex
pressed generally the same views as those given by Mr.
cerning the discussion with Messrs.
Riefler con
Martin and Bartelt last evening
except that they were somewhat less certain that both Mr. Martin
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3/1-2/51
and Mr. Bartelt understood fully that their interpretation of the
proposals involved no support for longer Treasury restricted bonds
after the conversion except for maintaining orderly markets,
During the ensuing discussion, it
was suggested that
Messrs. Martin and Bartelt be invited to meet again with the Com
mittee this morning for further clarification of any questions that
might occur to any members of the Committee, and to make certain
that the Treasury representatives understood the full significance
of the proposed agreement.
In the course of the discussion of sup
port levels for Treasury bonds,
several members of the Committee
expressed the view that there should be no commitment for support
at any level beyond the commitment for maintenance of an orderly
market except for an understanding that the 1967-72 restricted
bonds would be supported at existing levels within a limited dollar
amount of purchases and for a period of time not extending beyond
approximately the period of the conversion offering.
In this connection, Mr.
much in
Evans stated that he was very
favor of getting as far as possible away from supporting
the longest-term bonds, that it
was the responsibility of the
Secretary of the Treasury to set the terms for his offerings of
securities, that the Federal Reserve should insist that the Treasury
sell such securities to nonbank investors and not expect either the
Federal Reserve or the commercial banks to buy them beyond the re
quirements of orderly markets.
He thought that if
the proposed
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3/1-2/51
agreement were reached,
the most important task the Committee
had to perform was to get additional legislation that would give
the Federal Reserve control over bank credit expansion and mone
tization of the debt.
Mr.
Szymczak stated that the program suggested by the
Treasury would be helpful and of first importance in restricting
the creation of bank reserves, that that and not interest rates
was the real problem, but that in his opinion it
particularly if
would be essential,
a period of deficit financing were entered, for
the Federal Reserve to have additional authority over bank reserves.
Mr.
Szymczak also said that he felt it
very essential that the
Committee have ample opportunity for careful study of any statement
covering an agreement that might be reached before it
was issued.
To assist in a further review of the proposed agreement
with Messrs. Martin and Bartelt, and to make certain that there
could be no possible misunderstanding,
there were discussed and
set down the principal points of the proposed understanding as
follows
1.
Purpose - to reduce to a minimum the creation of
bank reserves through monetization of the public
debt, while assuring the financing of the Govern
ment's needs.
2.
Agree with the idea of conversion offering which
should be designed to do the job of removing long
term restricted 2-1/2s from the market.
3/1-2/51
3.
-37
Will support outstanding 2-1/2s (restricted) at
21/32 above par on Junes and 22/32 above par on
Decembers (in an amount up to a maximum of $200
million and for a period not exceeding April 15,
1951).
4.
Discount rate - Board of Governors will approve
no change during rest of calendar year without
prior consultation with Treasury and unless very
impelling circumstances.
5.
Orderly market - with exception of support of long
term 2-1/2s for fixed amount and fixed period during
conversion offering, orderly market means maintaining
orderly conditions without reference to par on any
issue.
6.
Public statement - brief general financial non
political statement.
7.
Board requests your cooperation in seeking early
supplemental legislation to restrict expansion of
bank credit.
The meeting then recessed in order to give Mr. Riefler an
opportunity to discuss the above points with Messrs. Martin and
Bartelt, who had come to the Board's offices at 11:30 a.m.
It re
convened at 2:55 p.m. with the same attendance as at the close of
the morning session except that Mr. Thurston was not present.
Chairman McCabe then called upon Mr. Riefler for a report
of his latest conversation with Messrs. Martin and Bartelt, explain
ing that he and Mr.
Sproul had joined the discussion before it was
completed.
In commenting on the discussion of the seven points, Mr.
Riefler stated that both Messrs.
Martin and Bartelt said that there
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3/1-2/51
was no issue in connection with number 1, that they agreed with
points 2 and 4,
that they felt point number 6 could be worked out
satisfactorily since their views accorded with those expressed in
the statement, and that a discussion of point number 7 (legislation
on reserve requirements) was outside the range of their authority
and they could not discuss it.
Most of the discussion, therefore,
centered on points 3 and 5.
r. Sproul stated that point number 3 was one of the most
difficult for them to agree to and that they were extremely anxious
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 statement in writing with respect to any dollar amount of or
period of time for support of the 1967-72 restricted bonds.
After
discussion, he said, they agreed that the interpretation of this
point as presented by the Committee was implicit in the whole agree
ment, but Mr. Martin was not certain whether he had discussed the
significance of the point fully with the Secretary of the Treasury,
and he could not be certain that the Secretary of the Treasury
understood it
Therefore,
again in
as clearly as was set out in the list
Mr. Martin felt it
of seven points.
would be necessary to see the Secretary
order to make certain that there could be no possible mis
understanding on this point.
orderly markets,
Mr.
With respect to point number 5 on
Sproul said both Mr. Martin and Mr. Bartelt,
3/1-2/51
-39
after the latest discussion of the matter, also realized the Com
mittee's interpretation of that point was implicit in the whole
agreement.
This,
like point number 3, was one which Mr.
Martin
was not certain that he had covered sufficiently with Secretary
Snyder, and he felt it
would be necessary to make certain that
the Secretary had a full appreciation of its
any agreement was concluded.
This,
significance before
he said, probably could not
be done until tomorrow morning.
Mr. Szymczak inquired as to whether Mr. Martin would
discuss with Secretary Snyder the question of additional authority
over bank reserves, and Chairman McCabe responded that it was his
understanding that while Mr. Martin expected to mention the matter
to the Secretary,
he did not feel that there would be more than a
general indication as to what the Treasury's position would be,
particularly since no specific program for increased authority
over reserves was before the Secretary for consideration.
Chairman McCabe then stated that Mr.
and ;r.
Thurston, Mr. Bartelt,
Lynch, General Counsel of the Treasury, had prepared a draft
of joint statement that might be issued with a view to having it
available for consideration by the Committee, and that Mr. Martin
would like to clear it
with Secretary Snyder when he saw him to
discuss the foregoing points of the agreement.
as follows:
The statement read
-40
3/1-2/51
"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
mininize monetization of the public debt."
Following a discussion, it was
agreed unanimously that the foregoing
statement for release and the state
ment of the Committee's understanding
of the proposed agreement contained in
the list
of seven points set forth
above should be submitted to Secretary
Snyder with the understanding that if
he agreed with the program as discussed
the executive committee of the Federal
Open Market Committee, acting under the
direction of the full Committee, would
be authorized to carry out the program
and to resolve any questions raised by
the Treasury which would not change the
essential features of the program,
The members of the Board of Governors present indicated
that a meeting of the Board would be held following the meeting of
the Federal Open Market Committee to approve and ratify the above
joint statement, a statement by the Board contained in
the seven
principal points set forth above that it would approve no change
during the rest of this calendar year in the discount rates of the
Federal Reserve Banks without prior consultation with the Treasury
and unless very impelling circumstances existed, and a request for
the cooperation of the Treasury in seeking from the Congress early
supplementary legislation to restrict the expansion of bank credit.
With respect to the instructions to be issued to the execu
tive committee,
Mr.
Sproul suggested that in view of the possibility
3/1-2/51
-41-
of an increased volume of transactions that might result if
the
proposed agreement were carried out, the limitation in the first
paragraph of the general direction to be issued to the executive
committee be increased from $2 billion to $3 billion.
Thereupon, upon motion duly
made and seconded, the following
direction to the executive commit
tee was approved unanimously with
the understanding that the limitation
contained in the direction would in
clude commitments for the System open
market account:
The executive committee is directed, until otherwise
directed by the Federal Open Market Committee, to arrange
for such 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 with
out replacement), as may be necessary, in the light of
current and prospective economic conditions and the gen
eral credit situation of the country, with a view to
exercising restraint upon inflationary developments, to
maintaining orderly conditions in the Government security
market, to relating the supply of funds in the market to
the needs of commerce and business, and to the practical
administration of the account; 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 $3,000,000,000.
The executive committee is further directed, until
otherwise directed by the Federal Open Market Committee,
to arrange for the purchase for the System open market
account direct from the Treasury of such amounts of
special short-term certificates of indebtedness as may
be necessary from time to time for the temporary accom
modation of the Treasury; provided that the total amount
of such certificates held in the account at any one time
shall not exceed $1,000,000,000.
3/1-2/51
-42
Upon motion duly made and sec
onded, and by unanimous vote, the
transactions in the System account
for the period February 6, 1951, to
February 28, 1951, inclusive, were
ratified and confirmed.
Thereupon the meeting adjourned.
Secretary.
Cite this document
Federal Reserve (1951, March 1). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19510302
@misc{wtfs_fomc_minutes_19510302,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1951},
month = {Mar},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19510302},
note = {Retrieved via When the Fed Speaks corpus}
}