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He made the startling allegation in a public speech in Wheeling, West Virginia, saying the State Department was infested with communists and brandished a sheet of paper which purportedly contained the traitors' names.
Senator McCarthy told the Ohio county women's Republican Club that Secretary of State Dean Acheson knew the names of 205 people who were in his words still "working in and shaping the policy of the State Department".
His comments brought an immediate denial from Lincoln White, press officer at the State Department.
Mr White said: "If he is correctly quoted, his allegation that the Secretary of State has a list of 205 Communist Party members who are working and shaping policy in the State Department is entirely without foundation.
"We know of no Communist Party members in the department and if we find any they will be summarily dismissed. We did not furnish Senator McCarthy with any such list and we would be interested in seeing his list."
Senator McCarthy has made his claims against a background of growing anti-Communist feeling.
Alger Hiss, a former senior public servant, was convicted and jailed last month of perjury after being accused of being an accomplice to a self-confessed former member of an underground Communist network.
Senator McCarthy's speech also coincides with the collapse of the Kuomintang regime in China and the establishment there of a Communist government, adding to American fears about the global spread of Communism.
Mr McCarthy was defeated for the Republican nomination for the Senate in 1944 but two years later was able to win the Republication nomination away from veteran Senator, Robert La Follette.
In the election he beat his Democrat opponent after a campaign of continuous misrepresentation of Professor Howard McMurray as a Communist sympathiser.
Two days after this initial outburst, Senator Joe McCarthy wrote to President Harry Truman saying he had been able to compile a list of 57 Communists.
On 20 February he delivered a six hour speech to Congress in which he referred to 81 individuals - not by name but nevertheless identifiable - who he said were members of the Communist Party or loyal to it.
By the time an investigating sub-committee was set up to look into his claims, his list of communists had dwindled to 10 names. He named Dr Owen Lattimore as "the top Russian espionage agent".
His claims were not substantiated, but many lost their jobs or reputations. He used a combination of intimidation and hearsay evidence to browbeat the accused.
His Communist witch-hunt did win him popular support. At its height, 25 states passed legislation outlawing communist organisations.
The conviction in March 1951 of Julius and Ethel Rosenberg for passing atomic secrets to the Russians also helped fuel his campaign.
His downfall came when he turned his attentions to the US Army. His methods were finally exposed to the public during a televised cross-examination of army personnel following further unsubstantiated allegations.
In 1954 he was censured by the Senate committee. His health declined through heavy drinking and he died in 1957.
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