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 Friday, August 18, 1950, at 11:10 a.m.

PRESENT:

Mr. Sproul, Vice Chairman

Mr. Davis

Mr. Draper

Mr. Eccles

Mr. Erickson

Mr. Evans

Mr. Peyton

Mr. Szymczak

Mr. Vardaman

Mr. C. S. Young

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Morrill, Secretary

Vest, General Counsel

Thomas, Economist

John H. Williams, Associate Economist

Rouse, Manager, System Open Market

Account

Thurston, Assistant to the Board of

Governors

Riefler, Assistant to the Chairman

Board of Governors

Sherman, Assistant Secretary, Board

of Governors

Kenyon, Assistant Secretary, Board of

Governors

Ralph A. Young, Director, Division of

Research and Statistics, Board of

Governors

John Wurts, Assistant Vice President,

Federal Reserve Bank of New York

Mr. Sproul stated that Chairman McCabe was returning from

Maine but that word had been received that his plane had been delayed

by weather conditions and that he had requested that the meeting

proceed.

Upon motion duly made and seconded

and by unanimous vote, the minutes of the

8/18/50

meeting of the Federal Open Market

Committee held on June 13-14, 1950,

were approved.

Upon motion duly made and seconded

and by unanimous vote, the actions of the

executive committee of the Federal Open

Market Committee as set forth in the

minutes of the meetings of the executive

committee held on June 14, July 10, and

July 21, 1950, were approved, ratified,

and confirmed.

Upon motion duly made and seconded

and by unanimous vote, the following

letter sent to the Secretary of the Treas

ury under date of July 31, 1950, with

the approval of the individual members

of the executive committee, was approved

and its sending was ratified and con

firmed:

"The executive committee of the Federal Open Market

Committee has given consideration to your letter of July 17,

1950, in reply to mine of July 12, 1950, which outlined the

serious problems now faced by the Federal Open Market Com

mittee in maintaining an orderly market for Treasury fi

nancing. My letter explained why, in our judgment, it was

urgent that the Treasury make an early announcement that

it had decided to raise funds by means of a long-term 2-1/2

per cent nonmarketable issue on a tap basis.

"The views expressed in your letter show concern that

no move be made in the Government security market which would

disturb confidence at this critical juncture.

We share this

concern.

"We think it will greatly contribute to confidence in

the value of the dollar and hence in Government bonds to

offer such a tap issue. It would signalize the Government's

purpose to rely primarily on nonbank financing, thus avoiding

as far as possible resort to the highly inflationary process

of financing through the banking system. Experience has

shown that it is not technically difficult for the Treasury

to raise money by selling securities which are either bought

directly or indirectly by banks, provided the Federal Reserve

supplies banks with the necessary reserves. The market and

8/18/50

"the public are now fully educated to these technical

possibilities and they know that a procedure of this

sort feeds the fires of inflation,

"In our judgment, every development in the economic

situation and the international situation since our

letter of July 12 reemphasizes what we said at that time,

particularly in paragraph four. Tt seems more urgent

than ever that an early announcement be made of the offer

ing of the long-term bond of the type suggested. We think

it will give confidence to the market at this stage. It

will constitute notice both to the market and to the country

that the Government intends to back up its anti-inflationary

tax and other programs by financing its requirements as far

as possible with nonbank funds. There is no more effective

way to meet these requirements with a minimum of inflationary

impact on the economy and also with less repercussion on

the level of interest rates.

"After consulting the presidents of the Federal Reserve

Banks last week, we are confident that funds will be avail

able for the purchase of such bonds in substantial amounts.

This is particularly true if the issue is continued on tap

over the period of emergency.

As defense expenditures mount

and avenues of peacetime investment are cut back, investment

funds will pile up in the hands of institutional investors

who will welcome an outlet for these funds such as we have

suggested. If the Treasury makes provision to tap these

funds from day to day as they accrue, there will be less

pressure to undertake huge bond drives, which necessarily

involve a temporary congestion in the market as well as a

large amount of indirect bank financing. Inevitable public

discussion of the fiscal policies of the Government and

the absolute size and rate of increase of the debt during

drives do not make for confidence.

"We do not mean to imply that a tap nonmarketable

issue should be the sole medium of Treasury financing during

We regard it, however, as

the emergency which lies ahead.

confidence in the value

public

of

maintenance

important to the

of money and as the instrument of Treasury financing par

ticularly appropriate to a situation in which normal invest

ment outlets are being curtailed.

"The period immediately ahead will be a critical one

due to the time which will inevitably be consumed in the leg

islative processes and in the creation of the administrative

organization needed to bring into operation the necessary con

trols. In the interval the stimulation of private spending,

"already out of hand, will be accelerated. The Presi

dent has stated in his Midyear Economic Report to the

Congress that we should rely in major degree upon fiscal

and credit measures, and that the more prompt and vig

orous we are with these general measures, the less need

there will be for comprehensive direct controls, We

share a joint responsibility to cooperate with respect

to credit and debt management policies and it is in these

t.o fields that positive and effective action can now

be taken to meet the international crisis and its economic

effects.

The nation at large has received the President's

program in the same spirit with which it acclaimed the

President's vigorous reaction to the military crisis posed

by the invasion of Southern Korea.

We are confident that

prompt purposeful action by the Treasury and the System

in furthering the same objectives would receive the same

wholehearted support.

"In our judgment, the problem of new financing for

the Treasury will not soon abate. We must face the long

run implications to the stability of the American econ

omy and the welfare of the American people of the methods

of financing we adopt in this critical period. Logic,

as well as the bitter experience of recent years, both

demonstrate hat it means to the ecomony to rely too

heavily on deficit financing through the banks. We believe

that you share with us the conviction that at this time,

when the needs of our country for defense are paramount,

the Government should seek to provide the needed funds

with a minimum of reliance on bank finance.

The Govern

ment's main instruments to this end must be an adequate

tax program and a program of debt financing directed

primarily to tap nonbank funds.

"In view of the extremely important implications

for the future that underlie the initial policies to be

adopted in meeting the heavy financial requirements of the

defense program, we hope that ee may have a full discussion

of the subject with you at your earliest convenience."

Copies of a report of open market operations prepared at the

Federal Reserve Bank of New York covering the period June 12 to

August 15, 1950, inclusive,

were then distributed.

Mr. Rouse com

mented briefly on this report and also on a supplemental report

8/18/50

-5

covering commitments executed for the System account on August 16

and 17,

1950.

Copies of both reports have been placed in the files

of the Federal Open Market Committee

Upon motion duly made and seconded

and by unanimous vote, the transactions

in the System account for the period

June 12, 1950, to August 17, 1950, in

clusive, were approved, ratified, and

confirmed.

Mr. Sproul referred to the letter sent to the Secretary of

the Treasury under date of July 12, 1950, to the Secretary's reply,

dated July 17, 1950,

and to the additional letter to the Secretary

dated July 31, 1950,

quoted above, stating that copies of these

letters had been furnished all members of the Committee and Presi

dents of Federal Reserve Banks who were not members of the Committee.

Mr. Sproul went on to say that the written record represented in

essence a continuing unwillingness on the part of the Treasury to

try to sop up available nonbank funds by issuing a long-term security

and also indicated a desire to sit

tight and do nothing in terms of a

change in the existing rate structure.

He then called upon Mr. Rouse

for a statement with respect to the meeting which Chairman McCabe

and Mr. Rouse had with Secretary of the Treasury Snyder on August 10,

1950, and Mr. Rouse made a statement substantially as follows:

Chairman McCabe and I met with Secretary Snyder

at 4 o'clock the afternoon of August 10. Mr. Haas,

Director of the Treasury's technical staff, was also

present. Chairman McCabe reviewed various aspects

8/18/50

of the developing inflation with the Secretary, illustrated

by up-to-date figures and charts.

He also reviewed with

the Secretary some of the thinking at the Board with respect

to credit controls which tne Board may be called upon to

administer if the pending legislation becomes effective,

and he invited comment from the Secretary. With respect to

consumer credit, at first

Secretary Snyder appeared to favor

a down payment greater than 33-1/3 per cent and a limita

tion of succeeding payments to 18 months.

After further

discussion, including Chairman McCabe's report on his visit

with the President, he agreed that in the first

instance it

might be wiser to make the initial regulation less restric

tive, tightening it up later if necessary.

Following this, Chairman McCabe inquired whether the

Treasury had come to any conclusion with respect to the

executive committee's recommendation for an announcement of

a long-term restricted tap issue. The Secretary replied

that they had given the matter earnest consideration; that

they had analyzed carefully our operations; had consulted

with various groups representative of the market; and had

concluded that on the basis of facts at their disposal which

the Treasury regards as most complete there were not suffi

cient nonbank investment funds available to assure a success

ful offering at the present time.

Following this, there ensued a spirited discussion as

to the correctness of this interpretation.

It resulted in an

This was followed by the suggestion of the Secre

impasse.

tary that it should be a factual matter and determinable, and

he suggested that the System avail itself of the data which

Mr. Haas had at his disposal.

We agreed that this should be

done.

Secretary Snyder and Mr. Haas also had obviously been

irritated by the publicity given the staff memorandum sent

to the Joint Committee on the Economic Report at the latter's

request, and it prompted remarks by them to the effect that

periodic pressure on the short-term market frequently derived

from comment by the Federal Reserve, leading the market to

consider the possibility of increases in the short-term rate,

and so leading people to dispose of such securities in the

hope of avoiding possible losses later on.

The Secretary then remarked that he had attended a meet

ing of the National Security Council that afternoon and that at

8/18/50

this time there was no way of knowing what might come

out of the Korean situation, that even if that did not

increase the debt the management of the $257 billion debt

was still a heavy responsibility, and that the cost of

carrying the debt could not be treated lightly; and that

he saw no reason currently for any change in interest rates.

Again referring to pressure on short-term rates that has

developed from time to time, he stated that he sometimes

thought it might be wise to ask the Congress to put the

responsibility for handling the debt in the Federal Reserve

which had the money market tools, adding that, of course,

he realized the Congress wouldn't do that and the Federal

Reserve would not want to take that responsibility.

Chairman McCabe then reviewed the volume of our sales

and purchases, remarking that we had provided through our

purchases upwards of $400 million of reserves in the last

three months.

He then asked the Secretary just how far he

thought the System could go in providing hot money.

The

Secretary replied that it wasn't a question he should try

to answer but that he did not like hot money any better than

anyone else and that in the natural course of things reserves

needed tc be supplied to the market.

The Secretary stated

that inasmuch as he had changed his plans and had postponed

his trip to Europe there would be time for further discussion.

By this time it was clear that the Treasury had no

intention now of making any new effort to absorb nonbank

money or of voluntarily agreeing to a change in short-term

rates.

In conclusion, Chairman McCabe remarked to the Secretary

that in the circumstances there was nothing further that he

could say except that he would report this conversation to

his committee.

During the meeting there was no discussion of the re

funding operation which the Treasury faces in connection with

its September and October maturities.

Mr. Sproul stated that, subsequent to the meeting with the Secre

taryof the Treasury on August 10, it

Open

Federal

was suggested that members of the

Market Committee should see the slides prepared by the

8/18/50

-8

Treasury staff showing distribution of Treasury securities since the

beginning of this year and that a tentative appointment had been made

at the Treasury to present the slides to the Committee between 2 and

3 o'clock today.

Mr. Sproul then called upon Mr.

Thomas, who stated that he

called Mr. Haas of the Treasury on the telephone on August 11 but was

informed he was out of the office that day, and that he talked with

Mr. Tickton, Assistant Director of the Treasury's Technical Staff.

He

said that he explained to Mr. Tickton that he would like to arrange

for some of the members of the Board's staff to see the Treasury figures

of funds available for purchase of Government securities and to discuss

with the Treasury staff the sources,

assumptions,

and methods of deriva

tion used in making them up, so that there would be an opportunity to

analyze them before the Committee met.

Mr. Tickton responded, Mr.

Thomas said, that the figures were all on work sheets and not in form

which he could make available at this time and that it

would not be

possible to make them available that day because of pressure of work,

but that he would have Mr. Haas call next Monday.

Mr. Thomas said that

he received a call from Mr. Haas at noon on Monday, August 14, at which

time he again asked that their figures underlying the slides showing

distribution of Treasury securities be made available for the Federal

Reserve staff to study before the Committee saw the slides, and that

Mr. Haas stated that, while he would be glad to show the slides to mem-

8/18/50

-9

bers of the Committee and the staff, he and his staff could not

spare the time for a discussion of the figures.

Mr. Haas also said

that because of pressure of work he would not be able to make the

figures available for study before then, adding that he thought they

were the same as those Mr. Thomas had and simply showed that all avail

able nonbank funds had been absorbed by mortgages and other invest

ments and that the Government could not raise additional amounts with

out depressing those activities, which he felt was not desirable.

Mr. Thomas stated that memoranda covering his telephone talks with the

Treasury on August 11 and 14 had been placed in

the files of the Fed

eral Open Market Committee.

Mr. Thomas went on to say that, in

the absence of the Treasury

figures, the Board's staff had prepared a memorandum dated August 17,

1950, analyzing the ownership of Government securities, a copy of which

had been distributed to the members of the Committee before this meet

ing together with a memorandum dated August 17, 1950, on the current

economic situation and outlook.

The estimates presented indicated

that, to meet the deficit and cash redemptions of maturing securities,

the Treasury might need to borrow as much as $2 billion in new money

during the last half of 1950, in addition to small net sales of savings

bonds and notes and withdrawals from the Treasury's cash balance.

analysis of ownership of Government securities made by the Board's

staff, which used substantially the same data available to the

The

-10

8/18/50

Treasury Department, Mr.

Thomas said, led to the conclusion that a

substantial volume of nonbank money would become available for in

vestment during the next few months, and that the additional funds

needed can and should be raised by offering long-term securities to

nonbank investors.

Mr.

Thomas emphasized that there should be no

need for the Treasury to borrow from banks.

There followed a discussion of the data presented in the mem

oranda referred to by Mr. Thomas on ownership of Government securities

and the current economic situation.

Mr. Sproul then made a statement substantially as follows:

The question today is what we are going to do in our

sphere of primary responsibility, not what we are going to

recommend to the Treasury that it do in its primary sphere.

It is not a question of the long-term bond issue or of re

funding the September-October maturities, but what are we

going to do about making further reserve funds available to

the banking system in a dangerously inflationary situation.

The increase in war expenditures will be gradual, no doubt,

and the Treasury may not need new funds for some time ex

cept what it will get from savings bonds and notes. Never

theless, inflationary pressures of higher income and antici

patory consumer and business spending and possible expansion

of private capital investment have been added to an already

buoyant situation. Bank loans are expanding rapidly despite

the exhortation of banker organizations and supervisory au

These trends may change later, particularly if

thorities.

the Korean situation takes a turn for the better, but right

now the economy is in the grip of strong inflationary pres

Over-all direct controls have been held to be un

sures.

necessary unless and until more of our economy is involved

Reliance is to be on fiscal

in war and .ar preparations.

and credit measures. Fiscal measures, I think we all agree,

will be slow to bite and probably less than the situation re

It is apparent that the Treasury is unwilling to

quires.

funds with a long-term issue, particularly

nonbank

try for

-11in advance of its actual need. Credit measures are both

particular and general. There will be a lag in the selec

tive measures being proposed before they become effective

and in any case they only cover a part of the problem,

General credit measures, to be effective, must be timely

and prompt. I think we all agree that drastic credit

measures are not in the picture. We can't do the whole

job with general credit measures but in view of our respon

sibility and the national program I think that general

credit measures should now be used. They would have the

added advantage of being quickly reversible if the situa

tion would change. We have marched up the hill several

times and then marched down again. This time I think we

should act on the basis of our unwillingness to continue

to supply reserves to the market by supporting the existing

rate structure and should advise the Treasury that this

If we don't

is what we intend to do--not seek instructions.

act we will have failed to take the action required by the

economic situation and the national program for meeting the

present emergency. We will have exposed ourselves to a

worsening of the rate structure, which will intensify our

problems and our dangers, and will have given support to

the growing belief that effective steps to curb inflation

will be too little and too late, that the purchasing power

of the dollar is bound to decline further and drastically,

and that Government bonds are a poor investment and the

dollar in the form of cash a poor gamble. It seems to me

that our course is clear: we should move to an immediate

adjustment of market rates toward a 1-3/8 per cent basis

for one-year money and should advise the Treasury that this

If we allow ourselves to be

is what we propose to do.

diverted from our main responsibility we will only expose

ourselves to further delay and frustration.

Mr. Evans stated that he doubted that an increase of 1/8 per

cent in the one-year rate for money would be sufficient, by itself,

that he felt a much broader program was needed,

that this program

should include, in addition to a raise in discount rates, an increase

in reserve requirements of member banks, and that it

should also in

clude a request to Congress for additional authority witn respect to

8/18/50

-12

reserves of member banks, perhaps something along the lines of the

special reserve plan previously discussed.

Mr. Sproul stated the Committee had expressed its

views at

previous meetings and through the Chairman concerning a broad pro

gram for restraining the present situation, and that he was address

ing his remarks to the primary sphere of responsibility of the Fed

eral Open Market Committee without attempting to say that it

the entire program.

covered

He went on to say that so long as the present

level of short-term rates was maintained he felt it

would be useless

to request additional authority from Congress and that higher reserve

requirements imposed upon member banks would be relatively ineffec

tive,

His emphasis on discussic

of a change in the rate structure

reflected the fact that such a change immediately involved relation

ships with the Treasury,

the Committee were committed to a

and, if

program of higher short-term interest rates, the other steps suggested

in an over-all program would seem to follow.

Mr. Eccles stated that he agreed with Mr. Sproul, that he

felt it

was time the System, if

it

with any independence whatsoever,

expected to survive as an agency

should exercise some independence,

that the country today was faced with the probability of an even

greater expansion in military expenditures then had been announced

and therefore with an increasing deficit, that while he felt

an in

crease in taxes to meet the additional expenditures was essential it

8/18/50

-13

was also essential that credit expansion be curbed, especially

since it

would take time for additional taxes to become effective,

and that such credit restraints should be applied on all fronts

selective controls in the consumer and housing fields, and general

restraints on the banking system as a whole.

Mr. Eccles went on to

say that while he felt an increase in the short-term rate alone would

not stop acquisition of additional reserves by banks, it

was desir

able to let the short-term rate go up in order to take the pressure

off the long-term rate, especially since the System was running out

of long-term bonds that it

such securities.

He felt it

could make available to investors seeking

also would be desirable to increase

Reserve Bank discount rates and to consider an increase in reserve

requirements, and, if

to request additional authority from

necessary,

Congress to help the System to immobilize reserves of banks.

Mr.

Eccles said that, before additional authority was requested from Con

gress, however,

the System should use its present powers,

including

authority under selective credit controls proposed in pending legis

lation.

Mr. Szymczak stated that he agreed with what had been said,

that he felt the first

step to be taken was a change in open market

operations so as to get started on a program of greater flexibility

in the short-term rate structure.

increase in the discount rate.

This, he said, should be tied to an

After these steps had been taken, and

8/18/50

-14

perhaps after present authority to increase reserve requirements had

been used, it

probably would be necessary to request Congress to give

additional authority to immobilize bank reserves,

Mr. Vardaman stated that he agreed with the proposal made by

Mr.

Sproul but questioned how it

would affect the Treasury's ability

to obtain new money during the next year.

He also questioned whether

the action proposed would encourage the Treasury to issue a long-term

bond on a tap basis for nonbank investors along the lines previously

recommended by the Committee.

Mr. Sproul replied that the proposed action would not interfere

with the ability of the Government to finance itself

under any cir

cumstances that might arise, that the only question would be one of

the method of financing and the cost, and that that would depend on

a number of factors.

Sproul felt

As to the issuance of a long-term bond, Mr.

the proposed action would not encourage or discourage the

Treasury from offering such a security.

Mr. Eccles then referred to the statement appearing in the

separate report by Senators Douglas, Fulbright, and Flanders of the

Senate Banking and Currency Committee,

of 1950, which stated in

on the Defense Production Act

part that:

"The primary method of dealing with inflation should

be the coordinated use of proper monetary, credit and fiscal

policies, which can actually prevent inflation. Higher taxes,

on personal and corporate incomes, and excess profits taxes

should be given an opportunity to work their effect, prefer

ably before the country is placed in the economic strait-jacket

-15

8/18/50

"of another OPA, or at least simultaneously with such

controls.

Credit should be restrained by controls on

instalment buying, real estate credit, and general bank

credit; and these controls should be coordinated with

each other. The Treasury's debt-management policies

should be reexamined, especially in view of the new sit

uation, and they should be coordinated with the duties

of the Federal Reserve Board to restrain credit."

This statement, Mr. Eccles said, indicated the support of at least

some of the members of the Banking and Currency Committee for a pro

gram such as that proposed.

Mr. Sproul stated that the proposed action would be in accord

ance with and would support the Government's announced program in the

present situation and he quoted from the President's mid-year economic

report dated July 26, 1950, which said:

"First of all, for the immediate situation, we

should rely in major degree upon fiscal and credit

measures..... The more prompt and vigorous we are

with these general measures, the less need there will

be for all of the comprehensive direct controls which

involve the consideration of thousands of individual

situations and thus involve infinitely greater inter

ference with individual choice and initiative."

Mr. C. S. Young stated that he favored the proposed change

in open market operations which would permit the short-term rate to

rise above the present 1-1/4 per cent level and that he felt an in

crease in discount rates at the Federal Reserve Banks should accompany

that action.

Mr. Peyton stated that he favored both the proposed open market

action and the increase in the discount rate and that he also believed

that a whole series of procedures should be planned which the System

-16

8/18/50

might employ so as to present a full program if

it

became necessary

to request additional authority from Congress.

Mr. Davis felt that action should be taken today to change

open market operations along the lines suggested and that discount

rates of the Federal Reserve Banks should be increased promptly.

He

also favored issuance of a statement which would show clearly why

such steps were being taken and how they were related to the other

powers the System has for future use, as well as a statement indicat

ing that if

necessary the System would go to Congress to request ad

ditional powers.

Mr. Erickson felt that the first

step should be a change in

open market operations along the lines suggested by Mr. Sproul and

that the other steps indicated should be taken as necessary.

Mr. John H. Williams stated that the basic question was how

far the Committee would be willing to see interest rates rise in order

to curb monetary inflation and that everything else proposed would be

ineffective unless there was a rise in interest rates.

While, in view

of the large public debt, the extent to which rates might rise would

be limited, he said, the significance of an increase in

the short-term

rate and especially in the discount rate would be recognized by many

persons.

Mr.

Williams agreed that monetary and credit policy were

secondary to a sound fiscal policy, but he emphasized the necessity for

a rise in interest rates as an essential part of the program,

8/18/50

-17

The discussion then turned to the question of timing of the

proposed actions and the kind of statement that might be issued if

these actions were taken.

At this point Mr. Sproul stated that word had been received

that Chairman McCabe was expected to reach Washington during the noon

hour and he raised the question whether the Committee wished to see

the slides prepared at the Treasury showing changes in the distribu

tion of the public debt and, if

so, whether all members of the Com

mittee or only part of the Committee should go.

It

was the consensus that the members of the Committee who

could arrange to do so should go to the Treasury at 2:00 p.m.,

upon their return to the Board's building, at which time it

and that

was ex

pected Chairman McCabe would be present, the Committee would reconvene

for further consideration of actions to be taken.

The meeting then recessed.

Secretary's Note: In accordance with the

foregoing understanding, the members of

the Committee and of the staff went to the

Treasury between 2:00 and 3:00 p.m. to see

the slides and hear an explanation of their

significance, following which they returned

to the Board's building.

The meeting reconvened at 3:05 p.m., with the same attendance

as at the close of the morning session except that Chairman McCabe was

also present.

At Chairman McCabe's request, Mr. Sproul reviewed the discussion

and tentative conclusions at the morning session, stating that it appeared

8/18/50

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to be the feeling of all members of the Committee that open market

operations should be changed immediately with a view to breaking

through the 1-1/4 per cent one-year rate in the expectation that the

market would almost immediately adjust to a 1-3/8 per cent basis for

one-year Treasury securities, and that it

was felt that this course

should be taken with the expectation that the Board of Governors would

approve an increase in

Banks.

It

the discount rates of the Federal Reserve

was also the consensus,

Mr. Sproul said, that if

these

actions were taken the Secretary of the Treasury should be informed

of them today and that a brief statement announcing and commenting

upon the actions should be made public.

Chairman McCabe asked Mr. Thomas whether, after seeing the

Treasury presentation, he would alter the figures which he had pre

pared for the Committee or his conclusions as to the desirability of

the Treasury issuing a long-term tap bond, and Mr. Thomas stated that

the information presented on the slides did not change the situation

so far as he could see, that the question was partly one of interpreta

tion, and in his opinion the Treasury was not interpreting the figures

correctly.

As to when the Treasury would need additional funds, Mr.

Thomas stated that it

did not appear that any additional cash would

be required by the Treasury until the fourth quarter of the year,

and that, while it

was only one element in

most important, he would still

the situation and not the

favor the issuance of a long-term tap

bond which would obtain a substantial amount of funds from nonbank

8/18/50

-19

investors from month to month and, with funds from sales of savings

bonds and notes, would provide the Treasury with the new money it

might need during the remainder of the year.

In response to a similar question from the Chairman, Mr.

Sproul stated that he felt there was nothing in the Treasury figures

to alter the views previously expressed by the members of the Com

mittee as to the situation or the course of action that should be

taken at this time.

Chairman McCabe then questioned the extent to which the

Committee discussed the possibility of letting the short-term rate

increase and at the same time providing the market with additional

reserves through the purchase of securities if that became necessary

to preserve orderly market conditions or to keep a Treasury financing

operation from failing.

In response, Mr. Sproul stated that the Committee had con

sidered the results of such action and felt it

should permit the

short-term rate to go as high as 1-3/8 per cent immediately, with a

decision as to any further rise subject to further discussion of the

Committee.

In the present market, he said, if the short-term rate

were to go through 1-1/4 per cent it would probably go to 1-3/8 per

cent immediately and at that point he felt the System would be in a

slightly less bad position than at present, in that the spread between

the long-term and short-term rates would be narrowed and some indica-

8/18/50

-20

tion would have been given that credit instruments were to be

used in the present situation.

He also stated that the ability of

the System to withstand a downward pressure on yields in the long

term market was fast coming to an end with the reduction in its

hold

ings of long-term bonds that might be sold to meet demand for that

type of investment.

Mr. Evans then raised the question as to the policy that would

be followed in connection with long-term bonds and how far the prices

of such securities would be permitted to decline.

In a discussion of this question, the view was expressed that

if the yield on short-term securities increased there might be a tem

porary lessening of demand for long-term securities with a resultant

decline in price.

Mr. Rouse stated that he felt such a decline in price might

take place and that he assumed that the operations would be guided by

the direction issued by the Committee on June 14,

that if

the price

of the longest restricted issue should decline to between 100-1/2 and

100-3/,

the executive committee would direct only such operations as

were necessary to maintain orderly market conditions pending a meeting

of the full Comittee which would be called promptly to consider how

far any further decline that would be brought about by market condi

tions would be permitted to go.

Mr. Evans reiterated his view that an over-all program of

-21

8/18/50

restraint should be decided upon by the Committee,

that he would be

in favor of the action proposed with respect to the short-term rate,

but that he felt the long-term bond rate should not be permitted to

increase above a yield of 2-1/2 per cent.

He also stated that he

felt the System should increase the discount rate, that it

should con

tinue to advocate the issuance of a long-term restricted tap issue

by the Treasury,

that it

should use its remaining power to raise

reserve requirements, and that it should request Congress to grant

additional powers for immobilizing reserves,

Mr. Peyton agreed with Mr. Evans on the necessity for having

such a program in mind and Mr. Sproul said that he felt there was

general agreement upon this necessity; that he had concentrated on

the first steps of such a program of credit restraint--open market

operations and the increase in the discount rate at the Federal Re

serve Banks--because these are actions which can and should be taken

immediately.

Mr. Sproul also stated that it was his understanding

that the proposed statement to be issued by the Board of Governors and

the Connittee should emphasize the subordinate character of monetary

measures in dealing with the inflationary situation, but would say

that the System would use such powers as it

has to restrain further

expansion of bank credit and ask for additional authority from the

Congress if

needed.

Mr. Eccles agreed that a statement along the lines outlined

8/18/50

by Mr.

-22

Sproul was as far as the Committee could go at this time.

Chairman McCabe asked whether any member of the Committee dif

fered with the views expressed as to the actions that should be taken

with respect to open market operations and the change in the discount

rate and there was no indication of disagreement.

The Chairman then

stated that he and Mr. Sproul had a tentative appointment to see

Secretary Snyder at 4:30 p.m. today and that they would plan to keep

it, and he suggested that it might be desirable to have a copy of the

announcement to be released to show the Secretary at that time.

There followed a discussion of the timing of the proposed actions

and their announcement, as well as the form of statement to be re

leased.

During the discussion Mr. Riefler read a draft of possible

statement which he had prepared during the meeting and a number of

suggestions were made for its revision.

A question was raised as to what the procedure should be if,

upon being informed of the policy adopted by the Committee, the Treasury

were to announce a refunding of securities maturing in September and

October with an offering at the 1-l/4 per cent certificate rate.

It

was the consensus that, in such event, the System would not let the

Treasury financing fail, that it should purchase the new securities

offered to the extent necessary to assure that the issue would not

fail, and that so far as possible it should offset such purchases by

the sale of other securities to the extent necessary to prevent in-

8/18/50

-23

creases in bank reserves.

Mr. Sproul suggested that the Committee direct the executive

committee to arrange for transactions in the System open market

account,

commencing on Monday, August 21, 1950, with a view to dis

continuing support of the one-year Treasury certificate rate at 1-1/4

per cent and to allowing the rate to adjust to 1-3/8 per cent as

rapidly as it

would, assuming that the Board of Governors would act

immediately to approve an increase in the discount rate of the Federal

Reserve Bank of New York and the other Federal Reserve Banks as

rapidly as they could take action and that, immediately following this

meeting, the Board of Governors and the Federal Open Market Committee

would issue a joint statement of the policies adopted with respect

to curbing further inflationary expansion of bank credit by use of

the existing powers of the Federal Reserve System and, if necessary,

requesting additional powers from the Congress.

Upon motion duly made and seconded,

the foregoing suggestion was approved by

unanimous vote,

Thereupon a draft of statement along the lines discussed

earlier in

the meeting, to be issued jointly by the Board of Governors

and the Federal Open Market Committee immediately following this

meeting, was discussed.

Upon motion duly made and seconded,

it was voted unanimously to approve the

statement with such perfecting changes as

8/18/50

-21would be satisfactory to Messrs.

McCabe, Sproul, and Eccles, and with

the understanding that it would also

be approved by the Board of Governors,

Secretary's Note: The statement, as

perfected by Messrs. McCabe, Sproul,

and Eccles, and thereupon approved by

the Board of Governors, was released to

the press at 6:10 p.m. on Friday, August

18, 1950, in the following form:

"The Board of Governors of the Federal Reserve System

today approved an increase in the discount rate of the Fed

eral Reserve Bank of New York from 1-1/2 per cent to 1-3/4

per cent effective at the opening of business Monday, August

21.

"Within the past six weeks loans and holdings of cor

porate and municipal securities have expanded by $1-1/2

billion at banks in leading cities alone. Such an expansion

under present conditions is clearly excessive. In view of

this development and to support the Government's decision

to rely in major degree for the immediate future upon fiscal

and credit measures to curb inflation, the Board of Governors

of the Federal Reserve System and the Federal Open Market

Committee are prepared to use all the means at their command

to restrain further expansion of bank credit consistent

with the policy of maintaining orderly conditions in the

Government securities market.

"The Board is also prepared to request the Congress for

additional authority should that prove necessary.

"Effective restraint of inflation must depend ultimately

on the willingness of the American people to tax themselves

adequately to meet the Government's needs on a pay-as-you-go

basis. Taxation alone, however, will not do the job.

Parallel and prompt restraint in the area of monetary and credit

policy is essential."

In order to carry out the change in policy adopted at this

meeting by the Committee, the wording of the first sentence of the gen

eral direction of the Committee to the executive committee to arrange

for transactions in the System account was changed to provide that

such transactions should be in

the light of current and prospective

8/18/50

-25-

economic conditions and the general 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.

Mr. Rouse stated that he would not now recommend a change in the limits

contained in the existing direction.

Thereupon, upon motion duly made

and seconded, the following direction to

the executive committee was approved

unanimously with the understanding that

the limitations contained in the direc

tion would include commitments for the

System open market account:

The executive committee is directed, until otherwise di

rected 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 without replacement), as may

be necessary, in the light of current and prospective economic

conditions and the general credit situation of the country,

with a view to exercising restraint upon inflationary develop

ments, 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 $2,000,000,000.

The executive committee is further directed, until other

wise 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

8/18/50

-26

temporary accommodation 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.

Reference was then made to the ranges within which bills

and certificates would be purchased and sold by the Federal Reserve

Bank of New York for the System account and it

was suggested that the

Federal Open Market Committee continue the existing authority to the

executive committee to determine from time to time the ranges within

which such purchases and sales would be made with an upper limit of

1.36 per cent for both bills and certificates and a lower limit in the

case of bills of 1.16 per cent and in the case of certificates of

1.20 per cent, the authority to be exercised within the framework of

the general credit policy of the Federal Open Market Committee.

Upon motion duly made and

seconded, the foregoing suggestion

was approved unanimously.

In connection with transactions in long-term securities, it

was agreed unanimously that the executive committee should continue

to arrange for such transactions with a view to maintaining orderly

market conditions and that, should the price of the longest restricted

issue decline to between 100-1/2 and 100-3/4, the executive committee

would direct only such operations as were necessary to maintain orderly

market conditions pending a meeting of the full Committee which would

be called promptly to consider how far any further decline that would

be brought about by market conditions would be permitted to go.

-27

8/18/50

It

was also agreed that the existing understanding with

respect to the replacement of System maturing bill

holdings should

be continued and that the executive committee would be guided by

what would be required in

the light of current conditions in the money

market to carry out the general credit policy of the Federal Open

Market Committee.

It was agreed that the next meeting of the Federal Open Market

Committee should be subject to call by the Chairman.

Thereupon the meeting adjourned.

Secretary.

Approved:

Chairman.