America's Money Machine

Doubtful Victory 223
at a cost of 1 1/4 per cent. By this act the Federal Reserve proclaimed
its independence of the Treasury so far as short term yields were concerned;
but the central bank's open market operations on the long end
of the market remained inhibited by the asserted need for maintaining a
2 1/2 per cent yield ceiling on the Treasury's longest-term bonds. 2
Apparently with the object of tightening the rein on the Federal Reserve,
onJanuary 18, 1951, Secretary ofthe TreasuryJohn Snyder issued
a statement without consulting the Board, to the effect that the rate on
long-term bonds would be held at 2 1/2 per cent. The announcement
declared that the determination had been made at ajoint conference with
the President and Chairman McCabe.
The announcement created consternation not only in the Federal Reserve
but in the banking community, and the New York Times commented:
In the opinion ofthis writer [Edward H. Collins] last Thursday constituted
the first occasion in history on which the head of the Exchequer of a great
nation had either the effrontery or the ineptitude, or both, to deliver a public
address in which he so far usurped the function of the central bank as to tell
the country what kind ofmonetary policy it was going to be subjected to. For
the moment, at least, the fact that the policy enunciated by Mr. Snyder was,
as usual, thoroughly unsound and inflationary, was overshadowed by the
historic dimensions of his impertinence. 3
OnJanuary 25, Senator Taft questioned Eccles in a hearing oftheJoint
Committee on the Economic Report.* Eccles restated the Federal Reserve
VIew.
"To prevent inflation," he declared,
we must stop the overall growth in credit and the money supply whether for
financing government or private deficit spending. The supply ofmoney must
be controlled at the source of its creation, which is the banking system.
Under our present powers, the only way to do this is by denying banks
access to Federal Reserve funds which provide the basis for a six-fold expansion
in our money supply. The only way to stop access to Federal Reserve
funds is by withdrawing Federal Reserve support from the government
securities market and penalizing borrowing by the member banks from the
Federal Reserve System.
He went on to say:
*According to Eccles, Chairman McCabe begged off from testifying, finding himself in
the dilemma of either defending the Treasury's position or opposing it and resigning.