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 Wednesday,

PRESENT:

October 11,

1950, at 10:10 a.m.

Mr. McCabe, Chairman

Sproul, Vice Chairman

Mr. Davis

Mr. Eccles

Mr. Erickson

Mr. Evans

Mr. Norton

Mr. Peyton

Mr. Powell

Mr.

Szymczak

Mr. Vardaman

Mr. C. S. Young

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Vest, General Counsel

Mr. Thomas, Economist

Messrs. Langum, Neal, and Williams,

Associate Economists

Mr. Thurston, Assistant to the Board

of Governors

Mr. Sherman, Assistant Secretary, Board

of Governors

Mr. Ralph A. Young, Director, Division

of Research and Statistics, Board

of Governors

Mr. John H. Wurts, Assistant Vice Presi

dent, Federal Reserve Bank of New York

Mr. Youngdahl, Chief, Government Finance

Section, Division of Research and

Statistics, Board of Governors

Mr. Leach, Economist, Division of Research

and Statistics, Board of Governors

Mr. Wurts presented an oral report, and there were distribu

ted to the members of the Committee copies of a written report of

open market operations prepared at the Federal Reserve Bank of New

-2York covering the period from September 28 to October 9, 1950, inclu

sive.

Mr. Wurts also presented and commented on a written supplemen

tary report covering commitments executed on October 10, 1950.

Copies

of both reports have been placed in the files of the Federal Open Mar

ket Committee.

Upon motion duly made and seconded,

and by unanimous vote, the transactions

in the System account for the period Sep

tember 27 to October 10, 1950, inclusive,

were approved, ratified, and confirmed.

Messrs.

Wurts and Leach commented briefly on the preliminary

results of the October offering of F and G bonds.

Chairman McCabe made a statement substantially as follows:

At the end of our interview with Secretary Snyder on

September 28, he told us he wanted a couple of days in

which to give us the benefit of his advice. We heard noth

ing further from him and finally on the following Wednes

day I telephoned him and made an engagement to see him

Thursday afternoon, October 5, at 4:30 p.m. prior to a

meeting of the executive committee later that day. I re

ported that conference to the executive committee as re

corded in the minutes of its meeting on October 5.

The chief thing which seemed to be concerning the

Secretary was the fear of the people engaged in E Bond

sales that the long-term bonds might go down in price

even to a point below par. This fear, he said, was hav

ing a detrimental effect on sales of E Bonds.

When he called me in accordance with his commitment

to give us his views not later than October 9, he expressed

himself very forcibly as being opposed to any change in

short-term rates at this time, and the possible effect

on the sale of savings bonds seemed to be his major rea

son for that position.

He made that point as strongly

as he could, and in a subsequent telephone conversation

He told me this morning on the

ne has re-emphasized it.

returned from Pittsburgh where

just

he

had

that

telephone

10/11/50

he again heard that fear expressed rather strongly. He

said that he felt

stronger than ever that we must do ev

erything possible to keep the market on an even keel dur

ing the E Bond campaign.

I called him this morning, told him the Open Mar

ket Committee was meeting today, and that I would try

to give the Committee his point of view.

I also said

that, if he so desired, I was sure the Committee would

be very glad to have him come over here or we would go

over there and hear anything he had to say. I said I

just wanted to make sure the the Open Market Committee

had the full benefit of his point of view before it

acted. He said that if the Committee would like to

have him come over after having met and discussed the

matter he would be available.

It will be for the Com

mittee to decide whether it wishes to hear directly

his point of view.

He wants to keep the market as steady as possible

chiefly for the reason that I have stated. Mr. Sproul

and I have told him of the various inflationary forces

that are operating in the economy and we emphasized as

strongly as we could the expansion of bank loans and

the reasons for our wanting to put some restraint on

the sale of Government securities by banks to the Fed

eral Reserve Banks.

Mr. Sproul stated that he and Chairman McCabe had emphasized

to Secretary Snyder that the thing that would determine the success of

the savings bond campaign more than the quotations on market bonds

.ould be the purchasing power of the savings bonds now coming to ma

turity, that is,

the purchasing power of the dollar, and that this

point was strongly in

the minds of the public and employers who had

a growing question whether they could urge their employees to purchase

E Bonds when they had doubts themselves as to the future value of the

dollar.

Mr. Sproul also stated that the Secretary said he was not

talking so nuch about what the prospective purchasers were thinking or

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what the employers were thinking, but he was reflecting the con

versation of the persons on the savings bonds sales staff.

Mr. Sproul

added that he and Chairman McCabe stressed that the most effective way

to assure the success of savings bonds sales was to give convincing

evidence of a will

to restrain inflation.

Chairman McCabe referred to the decision of the executive

committee at its

meeting on October 5 to delay putting into effect

the instructions approved by the full Committee at its

meeting on

September 28 with respect to the short-term rate in view of the re

quest by Secretary Snyder that he be given until Monday of this week

to express his views.

He said that he and Mr.

Sproul had reported

fully the position of the Secretary of not favoring a change in the

short-term rate or an increase in

reserve requirements,

that every

effort had been made to give the Secretary ample time to express his

vie.s and for the Committee to give careful consideration to his posi

tion in

an attempt to reconcile the different viewpoints that had

been advanced, and that the Secretary had not changed his position and

the members of the executive committee felt they had no choice in the

discharge of their responsibilities but to permit the short-term rate

to rise, and that the question before the Committee was what action

it

would take in

the circumstances and whether it

wished to invite

the Secretary over or go to the Treasury for the purpose of hearing

directly what he had to say.

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10/11/50

The question whether the Secretary should be invited to meet

with the Committee was discussed at length and each of the members of

the Committee expressed his opinion.

It

was the consensus that, since

the Secretary's position had been fully reported to the Committee and

the views of the Committee had been given in detail to the Secretary

by Messrs. McCabe and Sproul and inasmuch as there would be some dis

advantages in departing from the established procedure for the exchange

of views with the Treasury which had worked very satisfactorily in the

past,

Chairman McCabe should call Secretary Snyder and tell him that

his views had been presented to the Committee as fully as they could

but that the Committee would be quite willing to hear from him in

person so that he might amplify his position if

he so desired.

Chairman McCabe and Mr. Sproul then left the room to call

Secretary Snyder and upon their return Chairman McCabe stated that

the Secretary said that, unless the Committee wanted to ask him some

specific question, he would prefer not to depart from the established

procedure.

Chairman McCabe then stated that the purpose of this meeting

was to consider further the decision made at the meeting of the Fed

eral Open Market Committee on September 28.

He emphasized the im

portance of a careful review of that action in the light of the

strong feeling of the Secretary of the Treasury that the action should

not be taken.

He expressed the opinion that the decision of the Committee

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as to how it should proceed was one of the most important decisions

it had been called upon to make.

In that connection, he outlined

reasons why the System could not count on support of its decision

from bankers and stated that it would have to rely entirely on the

soundness of its action for its ultimate support.

At the Chairman's request, the motion made by Mr. Davis and

adopted at the meeting on September 28 was then read.

In response to a question whether there had been any change

in the economic situation since the last meeting of the Committee

which would have any bearing on its views, Mr. Thomas stated that

there had been no material change since September 28, that there

was always the likelihood in any situation like the present that

there would be a slackening of the upward pressures for a tempo

rary period, and that there might be a slackening or a lessening

of the inflationary pressures if

the consumer credit regulation

were tightened and as the real estate regulation became effective.

He said that he felt inflationary forces were stronger today than

on August 18, 1950, when the Committee adopted its policy of re

straint, but that they were no stronger than had been expected at

that tine.

The inportant thing, he felt, was that existing infla

tionary pressures did not represent any increase in Government ex

penditures, that increased pressure had come from anticipation by

the public of shortages of consumer goods which had caused them to

increase their spending of private funds including consumer credit

10/11/50

and savings.

-7

This activity, he said, was resulting in an expansion

of incomes which would be added to the increased Government expendi

tures yet to come, and this expansion was creating the familiar re

sults of an inflationary spiral.

He felt that the danger in the situ

ation was not that restrictions to be put into effect would be too

drastic, but rather that more would be needed than were available in

order to be adequate,

Chairman McCabe then called upon each member of the Commit

tee to express his views with respect to the action to be taken by

the Committee at this time.

During their statements and the discus

sions that followed, all of the members indicated that, in the light

of current and prospective economic conditions and of the policy of

the Administration as announced in The Midyear Economic Report of

the President with respect to reliance on fiscal and credit measures

to restrain inflation, and having in mind the continuing expansion

of bank loans including further expansion during the period since

the action of the Committee on September 28,

they saw no reason for

changing the instruction given to the executive committee at the

meeting of the Committee on September 28.

the

It was also noted that

only reason given by Secretary Snyder for not going ahead with

the more restrictive program was the fear that it might be unsettling

to the Government securities market and might interfere with the suc

cess of savings bond sales.

10/11/50

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 securi

ties, 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

developments, to maintaining orderly conditions in the Govern

ment 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 snort-term certificates

of indebtedness purchased from time to time for the temporary

accommodation of the Treasury shall not be increased or de

creased by more than $4,000,000,000.

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 certi

ficates of indebtedness as may be necessary from time to time

for the temporary accommodation of the Treasury; provided that

tne total amount of such certificates held in the account at

any one time shall not exceed $1,000,000,000.

Upon motion duly made and seconded, it

was voted unaninously that in accordance with

tne policy announced by the Federal Open Mar

ket Committee and the Board of Governors on

August 18, 1950, it be understood that (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

10/11/50

move up to the highest point, not exceeding

the Federal Reserve Bank discount rate of 1-3/

per cent, which will not result in such pres

sure on the longest term restricted bond as

will cause continuing purchases in substantial

amounts of long-term bonds for the System ac

count, (2) the longest term restricted bond

will not be allowed to decline beyond a point

slightly above par, and (3) an orderly market

will be maintained;

That it be further understood that the

foregoing motion is predicated on the under

standing that as promptly as practicable in

the discretion of the Board of Governors af

ter short-term rates increased in accordance

with number (1) above (but not necessarily

waiting until such increase reached the high

est authorized point) the Board would announce

an increase in reserve requirements of all

member banks by two percentage points on de

mand deposits and one percentage point on time

deposits, to be effective at such times as

the Board determined to be advisable; and

That it be further understood that a

statement would be prepared setting forth

fully the reasons for the Committee's views

in a form satisfactory to the executive com

mittee and the Board of Governors and suit

able for the policy record.

With respect to the policy to be followed in 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 cre

dit policy of the Federal Open Market Committee,

The Committee's Secretary raised the question whether it

was

necessary for the Chairman or Vice Chairman of the Committee to con

tinue to sign the minutes of the meetings of the Committee since copies

10/11/50

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were sent to them as well as to other members of the Committee for

review and comment prior to approval at a subsequent meeting.

unanimously agreed that, effective following this meeting, it

It

was

would

no longer be necessary for the Chairman to sign the minutes, that min

utes of future meetings would be signed only by the Secretary,

and

tnat the existing procedure for submitting copies to the members of

the Committee for comment prior to approval would be continued.

Thereupon the meeting adjourned.

Secretary.

Approved:

Chairman.