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 on Tuesday, February 28, 1950, at 9:40 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

McCabe, Chairman

Sproul, Vice Chairman

Draper

Earhart

Eccles

Gidney

Leach

McLarin

Szymczak

Mr.

Mr.

Mr.

Mr.

Morrill, Secretary

Carpenter, Assistant Secretary

Vest, General Counsel

Thomas, Economist

Messrs. Thompson, C. W. Williams, and

John H. Williams, Associate Economists

Mr. Rouse, Manager of the System Open

Market Account

Mr. Thurston, Assistant to the Board of

Governors

Mr. Riefler, Assistant to the Chairman,

Board of Governors

Mr. Sherman, Assistant Secretary, Board

of Governors

Mr. Young, Director, Division of Research

and Statistics, Board of Governors

Mr. Youngdahl, Chief, Government Finance

Section, Division of Research and

Statistics, Board of Governors

Mr. Arthur Willis, Special Assistant,

Securities Department, Federal Reserve

Bank of New York

Messrs. Erickson, Young, Davis, and Peyton,

alternate members of the Federal Open

Market Committee

Messrs. Williams, Gilbert, and Leedy, Presidents

of the Federal Reserve Banks of Philadelphia,

Dallas, and Kansas City, respectively

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Mr. Stead, Vice President, Federal Reserve

Bank of St. Louis

Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meeting

of the Federal Open Market Committee held on

December 13, 1949, were approved.

Upon motion duly made and seconded, and

by unanimous vote, the actions of the execu

tive committee of the Federal Open Market

Committee as set forth in the minutes of the

meetings of the executive committee held on

December 13, 1949, and January 6 and February

6, 1950, were approved, ratified, and con

firmed.

Before this meeting there had been sent to each member of

the Committee a report, prepared at the Federal Reserve Bank of

New York, of operations in the System open market account covering

the period December 13, 1949, to February 21, 1950, inclusive.

At

this meeting Mr. Rouse presented a supplementary report covering

commitments executed during the period February 23 to 27, 1950,

inclusive.

Upon motion duly made and seconded, and

by unanimous vote, the transactions in the

System account for the period December 13,

1949, to February 27, 1950, inclusive, were

approved, ratified, and confirmed.

Chairman McCabe reviewed discussions with the Secretary of

the Treasury subsequent to the meeting of the executive committee

held on February 6, 1950, and other developments leading up to the

announcement by the Treasury of the terms of the refunding of

securities maturing during March and April 1950.

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Chairman McCabe also said that while the Committee on

Government Borrowing of the American Bankers Association was in

Washington for the purpose of discussing the March and April financ

ing and making recommendations to the Treasury thereon, he (Chairman

McCabe) met with the Committee at its urgent invitation to discuss

the financing.

After commenting on the questions which he had con

sidered as to the advisability of accepting the invitation and its

possible implications, as well as the nature of the discussion at

the meeting, he asked for the opinion of the other members of the

Federal Open Market Committee as to whether he should continue to

meet with the Committee when it came to Washington.

He stated

that while there were some advantages in talking with the Committee,

such an arrangement could be the cause of difficulties in the

future.

He added that he had met with the Committee on this

occasion only because some of the members urged that he do so.

During a discussion of the matter, it was pointed out that

the Treasury's presentation to the members of the Committee did

not attempt to cover the business and credit situation, that the

Board's staff was better equipped than any other group in Washington

to review current economic and credit conditions, and that the

Committee should have that background for its discussions of

Treasury financing.

It

was suggested that the Committee might be

invited to the Board's offices for such a presentation during which

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the financing could be discussed in general terms without disclosing

any conclusions that might have been reached by the executive

committee or the Federal Open Market Committee.

The further comment

was made that the recent Treasury presentation to the Committee

created the impression that any funds raised in new financing this

year would have to come from banks as it

appeared that there was

no substantial amount of nonbank funds available for investment in

Government securities, while the staff of the Board and the Federal

Open Market Committee felt that substantial amounts of nonbank

funds could be attracted if the right kind of securities were

offered by the Treasury.

At the conclusion of the discussion, no objection was expressed

to further meetings by Chairman McCabe with the Committee if

advisable, and it

he felt it

was understood that he would give further considera

tion to the procedure that should be followed in this connection in

the future.

At this point Chairman McCabe and Mr. Vest withdrew from the

meeting for the purpose of completing the statement to be made by

Chairman McCabe tomorrow morning before the Senate Banking and

Currency Committee on the bank holding company bill.

Mr. Sproul then called upon Mr.

Thomas for a report on the

economic situation.

In his remarks,

Mr. Thomas referred to the following memoranda

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sent to members of the Committee before this meeting, copies of which

have been placed in the files of the Federal Open Market Committee:

(a) Current Economic Trends and Prospects, prepared in the Division

of Research and Statistics of the Board under date of February 24,

1950, (b) Outlook for bank reserves and Treasury cash requirements

dated February 21, 1950, and (c) New Treasury Financing in 1950,

prepared by an ad hoc research committee of the System Research

Advisory Committee under date of February 23, 1950. Mr. Thomas

stated that developments in 1949 had lessened the major fears of

inflation and depression, that the principal postwar readjustments

had been almost completed, that the economy was now closer to

"normalcy" than at any time since prewar and probably since the

1920's,

and that the prospects for 1950 were on the whole for

continuation of economic activity at moderately high levels with

some uncertainties and the likelihood of some decreases toward the

end of the year.

Mr. Thomas also referred to some of the problems

that might develop, perhaps in the latter part of 1950, when the

backlog of demands on the part of business and consumers that were

now in the picture were satisfied, including eventual termination

of the unusual demands for automobiles and housing and a smaller

export balance when foreign aid was reduced or ended.

Mr. Thomas

pointed out that the prospective Federal cash deficit would probably

exceed $7 billion for the calendar year 1950 and that nearly

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$2 billion would be needed to cover cash redemptions of maturing

marketable securities.

About $2 billion might be met by drawing

down the cash balance of the Treasury and over $2 billion might be

raised from sale of savings bonds and notes in excess of redemptions.

Additional new financing would need to be around $5 billion. Since

new corporate security issues and the increase in mortgages would

probably be somewhat less than in 1949 and the volume of lendable

funds larger, nonbank investors should be able to absorb all of the

additional borrowing by the Treasury.

He also stated that demand

for bank credit would probably increase somewhat, apart from any

increase in holdings of Government securities by banks, with a

resulting expansion in bank deposits.

Mr. Thomas indicated that under the circumstances the

appropriate Federal Reserve policy would seem to be one of neutrality

as to the supply of reserves, with easy money definitely not needed

and vigorous restrictive measures probably unnecessary, but with

changes in the demands for credit reflected in interest rates.

The

situation called for debt management policies, he stated, which

would (a) continue to refund maturing Treasury issues into inter

mediate issues, (b) avoid increasing the outstanding supply of bills

or other short-term issues which would attract only bank funds and

particularly any that would require Federal Reserve support, (c)

move toward higher rates on short-term issues when necessary to

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discourage their sales to the Reserve System in connection with

shifts to longer-term securities, and (d) raise new money needed

by offering long-term nonmarketable issues attractive to nonbank

investors.

In response to a suggestion from Mr. Sproul, each of the

Presidents of the Federal Reserve Banks commented on conditions in

his district and, while there were variations in some districts,

their comments on regional conditions largely corroborated Mr.

Thomas' statement with respect to the national outlook.

There followed a discussion of the question whether the

present relatively high level of economic activity was being

maintained largely because of deficit financing by the Federal

Government and of what might be expected to sustain effective

demand if unemployment increased further, agricultural prices and

income declined further, and consumer credit ceased to expand.

Mr. Sproul then called on Mr. John H. Williams for a state

ment with respect to the recent trip which he made to Europe at

the request of the Organization of European Economic Cooperation

(OEEC) to assist in the preparation of the second interim report

of OEEC which had since been published and which was one of the

bases for the request for appropriations for the Economic

Cooperation Administration for the next fiscal year on which

hearings were being held in the Congress.

A copy of Mr. Williams'

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statement has been placed in the files of the Federal Open Market

Committee.

Following Mr. Williams' statement, there was a discussion

of problems facing the United States between now and the end of the

ECA program in 1952,

some of which are expected to continue after

that date.

At the conclusion of the discussion, the meeting adjourned.

Secretary.

Approved:

Chairman.