America's Money Machine

224
PART III/DEBACLE OF AN IDEA
As long as the Federal Reserve System is required to buy government
securities at the will of the market for the purpose of defending a fixed
pattern of interest rates established by the Treasury, it must stand ready to
create new bank reserves in unlimited amount.
This policy makes the entire banking system, through the action of the
Federal Reserve System, an engine of inflation. 4
On the thirty-first, the Board's Open Market Committee was summoned
to the White House for a lecture from Truman on the need to
support the government credit and immediately following the meeting
the White House announced that the Federal Reserve Board had given
its pledge "to maintain the stability of government securities as long as
the emergency lasted." Within an hour a Treasury spokesman announced
that this meant that the Federal Reserve was committed to stabilize the
market for government securities at existing levels. 5 At the same time
Secretary Snyder issued a challenge to critics of a cheap money policy,
warning that an increase in average interest rates would add to mounting
inflationary pressures on the economy unless passed on to the public in
the form of taxes-which the Administration did not propose to do.
"It should be thoroughly understood," he said in an interview, "that
an increase of as much as one half of 1 per cent in the average rate on
long-term government securities would mean an increase of $1 1/2 billion
in annual carrying charges on the public debt."6
To box the Federal Reserve in, the President wrote a letter to McCabe
and released the letter to the public, stating:
Your assurance that you would fully support the Treasury defense financing
program, both as to refunding and new issues, is of vital importance to
me. As I understand it, I have your assurance that the market on government
securities will be stabilized and maintained at present levels in order to
assure the successful financing requirements and to establish in the minds of
the people confidence concerning government credit. 7
Eccles now determined to cast politics and his political future to the
winds, and played his final stroke. It was on a Friday afternoon that the
White House released the President's letter. Chairman McCabe had gone
for the weekend. A memorandum of the critical meeting of the Open
Market Committee with the President had been drawn, at the Committee's
request, by Committee member R. M. Evans; the only copy, however,
was in the custody ofthe Secretary of the Board ofGovernors, Sam
Carpenter. Eccles now routed him from his home, and got him to deliver
the memorandum to him. Eccles had it copied, and next day, after