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 Thursday, September 28,

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

1950, at 10:00 a.m.

McCabe, Chairman

Sproul, Vice Chairman

Davis

Eccles

Erickson

Evans

Norton

Peyton

Powell

Szymczak

Vardaman

C. S. Young

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Vest, General Counsel

Mr. Thomas, Economist

Messrs. Langum, Peterson, Stead, and John

H. Williams, Associate Economists

Mr. Rouse, Manager, 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. Ralph A. 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. R. F. Leach, Economist, Board of

Governors

Special Assistant,

Mr. Arthur illis,

Securities Department, Federal

Reserve Bank of New York

Messrs. Williams, Gidney, Gilbert, and Leedy,

alternate members of the Federal Open

Market Committee

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Messrs, Leach, McLarin, and Earhart, Presidents

of the Federal Reserve Banks of Richmond,

Atlanta, and San Francisco, respectively

Mr.

Townsend, Solicitor, Board of Governors

Chairman McCabe stated that it

had not been possible to ar

range for a conference with Secretary of the Treasury Snyder before

this meeting, as suggested at the meeting of the executive committee

yesterday, but that he and Mr. Sproul had an appointment with Mr.

Snyder for 11:30 this morning.

Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meet

ing of the Federal Open Market Committee held

on August 18, 1950, were approved.

Upon motion duly made and seconded, and

by unanimous vote, the action of the members

of the Committee on August 22, 1950, increas

ing from $2 to $4 billion the limitation con

tained in the first paragraph of the direc

tion issued to the executive committee on Aug

ust 18, 1950, authorizing transactions for the

System account was approved, ratified, and

confirmed.

Upon motion duly made and seconded, and

by unanimous vote, the actions of the execu

tive committee of the Federal Open Market Com

mittee as set forth in the minutes of the meet

ing of the executive committee held on August

18, 1950, were approved, ratified, and con

firmed.

Before this meeting there had been distributed to the members

of the Committee a report of open market operations prepared at the

Federal Reserve Bank of New York covering the period from August 18 to

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9/28/50

September 21, 1950, inclusive.

Mr. Rouse presented a supplementary

report covering commitments executed on September 22 through 26, in

clusive, and commented briefly on both reports.

Copies of the re

ports have been placed in the files of the Federal Open Market Com

mittee.

Upon motion duly made and seconded, and

by unanimous vote, the transactions in the

System account for the period August 18 to

September 26, 1950, inclusive, were approved,

ratified, and confirmed.

Chairman McCabe said that there had been no meeting with the

Secretary of the Treasury since he and Mr. Sproul called to inform

him of the action taken by the Committee on August 18, and that he had

had no telephone communication with any Treasury representative,

rela

tive to the action taken at that time, since Secretary Snyder informed

him by telephone later in the afternoon of August 18 of his decision

with respect to the refunding of the Treasury securities maturing in

September and October.

Chairman McCabe went on to say that the executive committee had

a full discussion of open market policy at its meeting yesterday and,

although it

had not adopted any formal recommendations to be made to

the full Committee,

that there appeared to be general agreement that

the Committee had a grave responsibility in the light of the further

rapid expansion of bank credit in recent weeks, that it

was quite ob

vious that appeals of supervisory agencies and bankers associations

for restraint in granting credit had had little effect, and that it

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was felt that serious consideration should be given to allowing the

short-term interest rate to rise further to continue to carry out

the policy adopted at the meeting on August 18, 1950, in an effort

to restrain, if possible,

the selling of Government securities to

the System.

In his comments,

Chairman McCabe referred to the report of

open market operations submitted by Mr. Rouse and discussed earlier

at this meeting and to memoranda prepared in the Board's offices

under date of September 21, 1950, with respect to an increase in re

serve requirements and the outlook for Treasury cash requirements,

copies of which had been distributed to all members of the Committee

before this meeting.

At Chairman McCabe's request, the members of the Committee

and the Presidents of the Federal Reserve Banks who were not members

of the Committee expressed their views as to whether action should

be taken to permit a further increase in the short-term rate and

.hether the Board of Governors should use its

reserve requirements of member banks.

authority to increase

There was general agreement

that there should be a further increase in

the short-term rate to

continue to carry out the policy adopted ty the Federal Open Market

Committee on August 18, 1950.

With respect to the question whether

the Board of Governors should increase reserve requirements of member

banks as an additional or alternative means of placing restraint on

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credit expansion, all of the Presidents of the Reserve Banks expressed

the view that an increase should not be made at this time.

the Presidents felt that, if

Several of

the Board decided that such an increase

;,ere desirable in dealing with the current inflationary situation,

action should be deferred until after the results of the increase in

the short-term rate and other System actions could be observed.

Messrs.

Eccles, Szymczak, Vardaman, and Powell thought that

the increase should be made effective very promptly after the short

term rate had been allowed to rise.

that it

Mr.

Evans was of the opinion

should precede an increase in the short-term rate, which he

felt would be of little

value in restraining credit expansion.

The members of the Committee who commented on the long-term

rate felt that the 2-1/2 per cent rate on Government bonds would

have to be held during the present emergency.

Several of the Presi

dents felt that System policy should not be held indefinitely to the

2-1/2 per cent rate.

During the foregoing discussion Messrs. McCabe and Sproul

withdrew to keep their appointment with Secretary of the Treasury

Snyder.

The members of the staff of the Board's Division of Research

and Statistics made an oral and visual presentation by charts of eco

nomic developments since the invasion of South Korea commenced on June

25, 1950, and a memorandum dated September 27,

1950, on the current

9/28/59

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economic situation and outlook was distributed.

randum has been placed in

A copy of the memo

the files of the Federal Open Market Com

mittee.

Mr.

policy in

Thomas made a statement on problems of Federal Reserve

which he said that economic developments and prospects

continued to be dangerously inflationary, that pressures so far were

due primarily to private spending and investment rather than to an ac

tual increase in

Government spending, and that inflationary pressures

were likely to increase for a while as private activities and increases

in Government spending added to incomes and there were reductions in

supplies of certain products for civilian use.

Mr.

Thomas said that

measures to prevent inflation, such as the increase in income taxes

effective October 1,

1950, allocations and inventory controls,

sumer credit controls,

yet effective,

and real estate credit restrictions,

con

were not

and that general credit restraint through the open mar

ket policy adopted August 18,

1950, had been frustrated through the

necessity of supporting Treasury refunding operations,

the System hav

ing supplied a substantial amount of reserves which would provide for

further credit expansion since that date, in

addition to having sup

plied reserves to meet an outflow of gold and an increase in demand

for currency.

There had, however, been some adjustment in the rate

structure since August 18, and now that it was no longer necessary

to support Treasury refunding and since there probably would be no

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need for new Treasury funds until next summer, Mr. Thomas felt that

an additional small increase in short-term rates could be permitted.

A small rise in rates could have a restraining effect, Mr.

said,

Thomas

the important thing being that the economy worked through the

marginal borrower and it

was necessary to affect only a small per

centage of loans in order to make System policy effective.

Mr. Thomas

ent on to suggest that the System permit an increase in rates on 12

and 13-month Treasury issues as a means of encouraging market pur

chases which would widen the spread between the bill rate and the

12-month rate, absorb some of the reserves in

adjustments in

the market, and permit

the System's holdings of securities.

It

might be nec

essary for the System to purchase some long-term bonds, but the amount

of such purchases should be kept small.

Other possible measures in

cluded an increase in reserve requirements which would be more effect

ive if

it

was preceded or accompanied by an increase in

the short-term

rate, adoption of a Treasury financing policy which would reduce the

supply of short-term securities in

the market,

and, in the event in

stitutional and other investors should sell large amounts of long

term bonds for the purpose of making loans of an inflationary charac

ter, consideration of abandonment of par support for long-term Treas

ury bonds.

The meeting then recessed and reconvened at 2:10 p.m. with

the same attendance as at the beginning of the morning session.

9/28/50

Chairman McCabe said that he and Mr. Sproul met with Secretary

of the Treasury Snyder at 11:30 this morning and that Mr.

Haas, Di

rector of the Technical Staff of the Treasury, and Mr. Bartelt, Fiscal

Assistant Secretary of the Treasury, were also present.

He then made

a statement substantially as follows:

We told the Secretary that we had tried to see him at

9:30 this morning before the Committee met, that the Commit

tee was now in session, and that we would like to have the

benefit of any views that he might have on how we could curb

inflationary forces, particularly as they were operating in

the banking field. We pointed out the expansion in bank

credit and said that had given us very much concern and that

we needed his counsel as to how the expansion could be

curbed.

He immediately asked if we would give him any

thought we had in mind on what might be done, so we men

tioned an increase in reserve requirements, and the pos

sibility of restricting bank reserves by being reluctant

buyers of securities and allowing a moderate further in

crease in short-term rates. During the course of the

conversation he took up each of these points.

On reserve requirements, he was quite emphatic in

ruling that out as not being particularly effective at

this time. On the question of an increase in the short

term rate, he questioned us at great length as to what

effect we thought that would have. There was a big

question in his mind whether the recent increase of 1/8

per cent had had any value whatever, or whether it, plus

other things taking place, had simply resulted in keep

ing the market upset. Both the Secretary and Mr. Bartelt

brought up the cost to the Government of an increase in

the short-term rate, asking in different ways what proof

we had of the effectiveness of the increase. He seemed

pretty emphatic that any further increase in the short

term rate would be a step of a very doubtful character.

Then we asked the Secretary if he could suggest

anything else that possibly could be done to curtail

bank credit. He mentioned the American Bankers Associ

voluntary campaign and suggested we might

ation 1948

get the new President of the association and other of

ficials to put on a strong campaign to restrain credit.

We talked of other controls, such as on consumer credit

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and real estate credit, and he expressed hope that these

controls might be effective.

We pointed out the desirability of discussions of

this character and expressed the hope that we could have

them more frequently, that there should be a meeting of

minds, and that we should try to settle these questions

in this way. There was some discussion also of the rela

tive responsibilities of the Treasury and the Federal Re

serve and he indicated that he thought it highly desir

able at some time for this whole question of responsibility

to be reviewed by the proper authorities because condi

tions had changed so materially since action by the Congress

creating the Federal Open Market Committee as now consti

tuted. At the time of that action, he said, we did not

have a public debt of anything like the present magnitude,

and in view of the problems involved in the handling of

the debt, he felt there should be a review of the Congres

sional authority and the responsibilities of the agencies

should be re-defined.

We spent considerable time discussing

the long-term rate and brought out that we did not want to

carry the short-term rate up to a point that would affect

the 2-1/2 per cent rate.

At the end, the Secretary said that he would like to

have a couple more days to think about the matter and that

he would get in touch with us and give us the benefit of

his views. Mr. Sproul and I discussed this afterwards and

felt that he had given us a clear indication of his views

both on reserve requirements and the short-term rate,

We

felt that we should report back to this Committee and per

haps we should see him later today and tell

him the action

of the Committee or we could give him a couple of days in

which to express his point of view.

In a further comment on the conversation, Mr. Sproul stated

that the Secretary was unequivocal in indicating that an increase

in reserve requirements would be useless and ineffective at this

time and would simply shift earning assets from commercial banks to

Federal Reserve Banks,

and that the increase in the short-term rate

had gone too far already.

Mr. Sproul also said that Secretary Snyder

made the statement that the Treasury considered that cooperation

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in these matters was a two-way street and that the Treasury had gone

along with the Committee when it

did not agree and felt the Committee

was wrong, and that he thought the Treasury should have its

way some

of the time.

There followed an extensive discussion of the report by Chair

man McCabe and Mr. Sproul and of the possible courses of action that

might be taken by the Committee.

During the discussion Chairman McCabe stated that if

the Com

mittee felt the short-term rate should be permitted to increase fur

ther as a restraining influence it

could either authorize him and Mr.

Sproul to call on Secretary Snyder again today and tell

arrived at after having considered his views, or it

him the decision

could authorize

the executive committee to proceed to carry out the policy at a time

that was agreed upon by the executive committee after hearing from

Secretary Snyder again.

Chairman McCabe expressed the view that, for

reasons which he stated,

it

would be preferable to wait a couple of

days before permitting the short-term rate to rise further in order

to give time to hear from Secretary Snyder.

He also said that if

the decision of the Committee was at complete variance with the views

of the Secretary of the Treasury the matter would probably go to the

President of the United States, that in his judgment the President

would not be likely to take a position against the views of the Secre

tary of the Treasury,

what its

and that the System would then have to decide

course of action should be.

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9/28/50

Mr. Evans said that he thought the Committee could delay ac

tion a few days until it

and that if

had heard from the Secretary of the Treasury

the Secretary was opposed to the action which the Commit

tee felt should be taken he should be requested to state his views in

writing.

Mr. Szymczak felt that the Comittee would be in a better posi

tion in

its

relations with the Secretary of the Treasury if

were taken until it

no action

had heard from him again.

Mr. Sproul felt that time was of the essence and that delay

not damaging to the results the Committee hoped

would be unfortunate if

to accomplish,

that it

had gotten the Secretary's reaction to the Com

mittee's views and knew beyond any reasonable doubt that there was going

to be no change in his attitude on either the short-term rate or an

increase in reserve requirements,

and that it

would be better for

the Federal Open Market Committee to decide now what it

do and take the action today.

Failure to take action today, he said,

would run the risk not only of still

further delay but of added pres

sure not to take the action at all even though it

of the Committee that it

sponsibilities properly.

was going to

was necessary if

it

was the judgment

was to discharge its

re

Mr. Sproul felt that the question should not

go to the President of the United States as he should not be called

upon to decide questions of this kind, and that the members of the

Board and the Federal Open Market Committee could not avoid their re

sponsibility for making decisions.

9/28/50

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Mr. Eccles said that, if

the Committee could not get agree

ment with the Secretary of the Treasury, the Committee must decide

upon a course of action in the light of its

responsibilities under

the Federal Reserve Act and take action, going to Congress later if

necessary.

He went on to say that he would like to see action taken

by the full Committee today authorizing the executive committee to per

nit an increase in the short-term rate with the understanding that the

executive committee would defer action until it

had given the Secretary

of the Treasury opportunity to express his views in a few days,

as he

had indicated he would do.

Mr. Vardaman said that he welcomed intercession of the Presi

dent in time of war, that he thought the Committee should give the

Secretary of the Treasury time,

.ith him it

and that if

it

should go to the President and if

could not get agreement

he could give a good

reason for delaying action the Committee should delay and go to the

Congress in November.

There was also a discussion of the effect of an increase in

the short-term rate on the price of the longest term restricted Treas

ury bonds and it

was agreed that, for the reasons discussed, the Sys

tem should not at this time permit the longest term restricted Treas

ury bonds to go below par even though a policy of supporting such

bonds at or slightly above par meant that use of traditional central

banking methods for putting restraint on bank credit expansion could

have only a limited effect.

9/28/50

Mr. Davis stated that the picture had not been changed by the

introduction of any new factors since the meeting of the Committee on

August 18,

1950, that in his judgment the Committee should go ahead

with the policy adopted at that time,

ther increase no

and that this called for a fur

in the short-term interest rate and, when in the

judgment of the Board of Governors it

serve requirements of member banks.

was timely, an increase in re

He thought that the Committee

ought to state its position and give the executive committee authority

to act.

He felt there could still

be a short delay in carrying out

the action, but that there was no reason why the Committee should re

cede from the policy adopted August 18.

Mr. Davis moved that, in accordance with the pol

icy announced by the Federal Open Market Committee and

the Board of Governors on August 18, 1950, it be under

stood that (after the conference which Chairman McCabe

and Mr. Sproul are to have with the Secretary of the

Treasury early next week at which they will advise

the Secretary of the views as expressed at this meet

ing, and in the absence of the submission of any new

information by the Secretary of the Treasury which

in the judgment of the executive committee would call

for further consideration by the members of the full

Committee) (1) the executive committee, acting under

the general direction issued at this meeting, will

take such action as may be necessary over such period

as may be desirable to allow the market yields for

Treasury securities on a one year basis to move up

to the highest point, not exceeding the Federal Re

serve Bank discount rate of 1-3/4 per cent, which

ill

not result in such pressure on the longest term

restricted bond as would cause continuing purchases

in substantial amounts of such bonds for the System

account, (2) the longest term restricted bond would

not be allowed to decline beyond a point slightly

above par, and (3) an orderly market would be maintained;

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That it be further understood that the fore

going motion is predicated on the understanding

that as promptly as practicable in the discretion

of the Board of Governors after short-term rates

were increased in accordance with number (1) above

(but not necessarily waiting until such increase

reached the highest authorized point) the Board

would announce an increase in reserve requirements

of all member banks by two percentage points on denand de

posits to be effective at such times as the Board

determined to be advisable; and

That it be further understood that (1) a state

ment would be prepared setting forth fully the rea

sons for the Committee's views in a form satisfactory

to the executive committee and the Board of Gover

nors and suitable for the policy record, which could

be furnished to the Secretary of the Treasury follow

ing the conference with him next week, and (2) a meet

ing of the executive committee would be held early

next week.

Mr. Davis' motion was put by the

Chair and carried unanimously,

Reference was then made to the general direction to be issued

to the executive committee to arrange for transactions in the System

account and it was suggested that the direction be in the same terms

and amounts as 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

directed 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 (in

cluding purchases, sales, exchanges, replacement of maturing

securities, and letting maturities run off without replace

ment), as may be necessary, in the light of current and

9/28/50

prospective economic conditions and the general credit

situation of the country, with a view to exercising re

straint 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 adminis

tration 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 $4,000,000,000.

The executive committee is further directed, until oth

erwise directed by the Federal Open Market Committee, to ar

range 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 temporary accommodation of the Treas

ury; provided that the total amount of such certificates

held in the account at any one time shall not exceed

$1,000,000,000.

In a discussion of the policy to be followed in the replacement

of System maturing bill holdings, it was understood that the executive

committee should 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 also understood that, acting under the general direc

tion of the full Committee in carrying out the understanding referred

to in clause (2) of the first paragraph of Mr. Davis' motion, i.e.,

that the longest term restricted bond would not be allowed to decline

in an orderly market beyond a point slightly above par, the executive

committee would be authorized to permit the market price of the long

est term restricted bond to decline to between 4/32 and 8/32 above par.

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The time of the next meeting of the Federal Open Market Com

mittee was tentatively set for November 27, 1950.

Thereupon the meeting adjourned.

Secretary.

Approved:

Chairman.