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 Wash

ington on Thursday, March 8, 1951, at 2:30 p.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

McCabe, Chairman

Sproul, Vice Chairman

Eccles

Evans

Gidney

Gilbert

Leedy

Norton

Powell

Szymczak

Vardaman

A. H. Williams

Mr. Carpenter, Secretary

Mr. Sherman, Assistant Secretary

Mr. Vest, General Counsel

Mr. Thomas, Economist

Messrs. Bopp, Irons, Tow, and J. H. Williams,

Associate Economists

Mr. Thurston, Assistant to the Board of

Governors

Mr. Riefler, Assistant to the Chairman,

Board of Governors

Mr. R. 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

Messrs. C. S. Young, Leach, and Earhart,

alternate members of the Federal Open

Market Committee

Messrs. Erickson, Johns, and Peyton,

Presidents of the Federal Reserve

Banks of Boston, St. Louis, and

Minneapolis, respectively

Mr. Clark, First Vice President, Federal

Reserve Bank of Atlanta

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Chairman McCabe reviewed briefly the developments since the last

meeting of the Federal Open Market Committee,

commenting particularly upon

developments in the open market since the announcement on March 4, 1951

that the Federal Reserve and the Treasury had reached full accord with re

spect to debt-management and monetary policies to be pursued in furthering

their common purpose to assure the successful financing of the Government's

requirements and, at the same time, to minimize monetization of the public

debt.

In connection with his review, Chairman McCabe called upon Mr. Sproul

who made a statement concerning developments in the market today, which was

the first

day in more than ten years on which the market for Government se

curities had been entirely without support from System open market operations.

The Chairman also stated that the decision to allow the market to stand en

tirely on its own today was reached after a discussion with Messrs. Martin,

Assistant Secretary of the Treasury, and Bartelt, Fiscal Assistant Secretary

of the Treasury, yesterday, that he felt it was a very wise decision, and

that he was hopeful that there had been established a new and better working

relationship between the Treasury and the Federal Reserve as a result of the

recent negotiations and joint announcement.

He added that Messrs. Martin

and Bartelt were coming over to see him at 3:30 this afternoon for further

discussions concerning market developments.

Mr. Sproul then presented and commented upon a report prepared at

the Federal Reserve Bank of New York of operations in the System open market

account covering the period January 31, 1951 to March 1, 1951, inclusive,

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and on a supplementary report covering commitments executed from March 2

to March 7, 1951, inclusive.

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

January 31, 1951 to March 7, 1951, in

clusive, were approved, ratified, and

confirmed.

Reference was made to the resolution adopted by the Federal

Open Market Committee on November 20, 1936, authorizing each Federal Re

serve Bank to purchase and sell, at home and abroad, cable transfers and

bills of exchange and bankers' acceptances payable in foreign currencies,

to the extent that such purchases and sales may be deemed to be necessary

or advisable in connection with the establishment, maintenance, operation,

increase, reduction, or discontinuance of accounts of Federal Reserve

Banks in foreign countries.

Mr.

Sproul stated that accounts were now

maintained with the Bank of Canada ($13,070), the Bank of England ($10,468),

and the Bank of France ($42.79),

that the latter was maintained for the

purpose of keeping the account alive, that the others were used moderately,

and that for reasons which he stated and which had been discussed at pre

vious meetings, he would recommend that the authority contained within

the terms of the 1936 resolution be continued.

Upon motion duly made and seconded,

and by unanimous vote, it was agreed that

no action should be taken at this time to

amend or terminate the resolution of November

20, 1936.

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Mr. Gidney then referred to the action of the Committee on

November 30, 1937, by which it

agreed that, since securities acquired by

the Federal Reserve Banks in settlement of claims against closed banks

would be in such small amounts as to be unimportant from the standpoint

of credit control, the Federal Open Market Committee would interpose no

objection to a Federal Reserve Bank holding such securities or to their

sale whenever such sale was deemed advisable by the holding bank.

He

stated that with the expanded loan activities of banks there may be

greater need for this authority than in recent years and that he would

recommend its continuance.

Upon motion duly made and seconded,

and by unanimous vote, it was agreed that

no action should be taken at this time to

amend or terminate the authority granted

at the meeting of November 30, 1937.

Mr. Sproul then referred to the authority granted to the Federal

Reserve Banks by the Federal Open Market Committee on March 1, 1950, with

respect to repurchase agreements covering short-term Treasury obligations

with nonbank dealers in United States Government securities qualified to

transact business with the System open market account,

stating that the

authority had been used infrequently and within the spirit and letter of

the Committee authorization, that it was useful as a supplementary market

instrument, and that it might be of greater use in a period such as that

immediately ahead.

In this connection,

reference was made to the action of the Com-

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mittee at the meeting on February 8,

1951 under which the Federal Reserve

Bank of New York was authorized, notwithstanding the provision in (1)(a)

of the authorization approved March 1, 1950, to enter into repurchase

agreements at a differential of less than 1/8 per cent from the average

issuing rate on United States Treasury bills, so that the agreements could

be made at 1-1/2 per cent with a view to encouraging dealers to take posi

tions in bills which they could resell readily in the present market and

which it would not be necessary for the System account to purchase.

Mr. Thomas commented that the authority might be very useful in

helping to develop a freer market, particularly if a situation developed

where the money market was tight and dealers had to take in bills.

Following a discussion, upon motion

duly made and seconded, it was agreed

unanimously that no change should be made

in the authorization approved at the meet

ing on March 1, 1950, except that the

Federal Reserve Bank of New York would

continue to be authorized, until otherwise

instructed by the Committee, to enter into

repurchase agreements at a differential of

less than 1/8 per cent in accordance with

the authorization approved at the meeting

of the Committee on February 8, 1951.

Mr. Sproul referred to the existing procedure for the allocation

of securities in the System open market account approved at the meeting

of the full Committee on December 9, 1947, and discussed further at the

meeting of the executive committee on January 20, 1948, which was continued

unchanged at the meeting on March 1, 1950.

Mr. Sproul stated that the

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requirement in the second paragraph of the procedure authorized on

December 9, 1947, that there be a periodic readjustment in the alloca

tion of the System account in order to maintain a 35 per cent minimum

reserve ratio at each Reserve Bank, was resulting in considerable book

keeping because the ratios of several Reserve Banks were fluctuating around

the 33 per cent figure, and he suggested that this figure be lowered to

30 per cent.

Following a discussion, upon motion

duly made and seconded, and by unanimous

vote, approval was given to a telegram to

all Federal Reserve Banks in the following

form:

At meeting of Federal Open Market Committee March 8, 1951,

it was voted unanimously to continue the present method of

allocating securities in the System Open Market Account except

that the minimum reserve ratio to be maintained, as specified

in paragraph two of the allocation procedure set forth on

pages 15 and 16 of the minutes of the meeting of the Federal

Open Market Committee held on December 9, 1947, and as ampli

fied in the memorandum approved at the executive committee

meeting of January 20, 1948, was reduced from 35 per cent

to 30 per cent.

There was a discussion of the published terms on which the

Federal Reserve Bank of New York transacts business with qualified dealers

in United States Government securities for the System open market account.

Mr. Sproul stated that from time to time non-qualified dealers had questioned

the arrangement, that these questions arose only during periods when the

System was actively supporting the market and was the principal purchaser

of a particular issue or issues of securities, that this problem should

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tend to disappear with the freer market now anticipated, and that since

the existing terms had worked well in the past he felt it would be desirable

to continue them.

Chairman McCabe suggested the desirability of having a formal re

port submitted to the Federal Open Market Committee on this matter inasmuch

as the most recent study submitted had been made in 1948, and Mr. Sproul

responded that he felt it

would be appropriate to ask the Federal Reserve

Bank of New York to make such a report to the executive committee at an

early meeting of that committee.

Upon motion duly made and seconded, and by

unanimous vote, it was agreed that no change in

the statement of terms would be made at this time,

with the understanding that the Federal Reserve

Bank of New York would submit a report with re

spect to the arrangement for consideration at an

early meeting of the executive committee.

Following a brief discussion, upon motion

duly made and seconded, and by unanimous vote,

the distribution of the weekly report of open

market operations prepared by the Federal Reserve

Bank of New York was approved as follows:

1.

2.

3.

4.

5.

6.

7.

The members of the Board of Governors.

The Presidents of the 12 Federal Reserve

Banks.

The Secretary, the Economist, and the

Associate Economists of the Federal Open

Market Committee.

The Secretary of the Treasury.

The Under Secretary of the Treasury.

The Fiscal Assistant Secretary of the Treas

ury.

The Chief of the Division of Bank Operations

of the Board of Governors.

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8.

9.

The officer in charge of research at each of

the Federal Reserve Banks which is not rep

resented by its President on the Federal

Open Market Committee.

Mr. Rounds, alternate member of the Federal

Open Market Committee; the Assistant Vice

President of the Federal Reserve Bank of

New York working under the Manager of the

System Account; the Manager of the Securities

Department of the New York Bank; the Vice

President in charge, and the Manager, of the

Research Department of the New York Bank;

and the confidential files of the New York

Bank as agent for the Federal Open Market

Committee.

In a discussion of the general direction to be issued to the exec

utive committee, it was suggested that the authorization in the first para

graph be reduced from $3 billion to $2 billion.

Thereupon, upon motion duly made and

seconded, the following direction to the exec

utive committee was approved unanimously, with

the understanding that the limitation contained

in the direction 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 transac

tions 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 inflation

ary 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 adminis

tration of the account; provided that the aggregate amount of secur

ities held in the account at the close of this date other than spe

cial 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.

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The executive committee is further directed, until otherwise

directed by the Federal Open Market Committee, to arrange for the

purchase for the System oen market account direct from the Treas

ury of such amounts of special short-term certificates of indebt

edness as may be necessary from time to time for the 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.

At Chairman McCabe's request, the Secretary read a revised draft

of the memorandum prepared by Mr. Martin, Assistant Secretary of the Treasury,

containg revisions made by Mr. Riefler which had been concurred in by Mr.

Martin, covering the staff discussions which had taken place during the

period February 20-23, 1951.

The memorandum is set out on pages 6-10 of

the minutes of the meeting of the Federal Open Market Committee held on

March 1-2, 1951.

The Secretary,

also at Chairman McCabe's request, read

the statement of the principal points of the understanding with the Treasury,

approved by the Committee on March 2, 1951, and set forth on pages 30-31

of the minutes of that meeting.

In connection with a discussion of market developments this week,

Mr. Riefler read a draft of statement being released today by the Life Insur

ance Association of America and the American Life Convention, which had

been read to him over the telephone earlier today by Mr. O'Leary, Director

of Investment Research, Life Insurance Association of America.

The state

ment read as follows:

"Last Monday a subcommittee of the Joint Committee on

Inflation Control of the Life Insurance Association of America

and the American Life Convention had the opportunity for a

long talk with top officials of the Treasury and Federal

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"Reserve System meeting jointly. This subcommittee consisted

of Carrol M. Shanks, President, The Prudential Insurance

Company of America, Newark, New Jersey; George L. Harrison,

Chairman of the Board, New York Life Insurance Company; and

Frazar B. Wilde, President, Connecticut General Life Insurance

Company, Hartford.

"The Joint Committee believes that the recent accord

reached by the Treasury and the Federal Reserve System is a most

heartening and important development in the fight against in

flation. The Treasury and Federal Reserve System deserve high

commendation for the realistic step they have taken. The com

plete terms with respect to the exchange offering of 2-3/4 per

cent Treasury bonds have now been announced by the Treasury.

"The Joint Committee strongly urges all life insurance

companies to support the exchange offering to the maximum

possible extent. The Joint Committee believes that the new

Treasury program is a significant step in the right direction

in the fight against inflation and thinks that it will prove

but the first measure, growing out of the accord, in a con

tinued vigorous program by Treasury and Federal Reserve

authorities to prevent a further expansion of the money

supply."

Chairman McCabe said that representatives of several life insurance

companies met with him and Messrs. Martin and Bartelt on Monday of this week,

that representatives of the investment bankers met with him yesterday, and

that both groups indicated their views as to the terms that should apply on

the Treasury note that would be available for exchange for the new 2-3/4

per cent nonmarketable bonds to be offered for conversion from the 1967-72

restricted Treasury bonds.

He went on to say that some of the representatives

felt that a 1-1/2 per cent 5-year note would be the most desirable offering,

and that he felt that this would be the final decision of the Treasury.

Chairman McCabe then suggested that it be understood that, operat

ing under the general direction issued earlier at this meeting, the executive

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committee continue to carry out the program agreed upon at the meeting

of the Federal Open Market Committee on March 1-2, 1951.

This suggestion was approved unanimously.

The meeting then recessed and, following a meeting of the executive

committee, reconvened at 3:35 p.m. with the same attendance as at the

close of the earlier session except that Messrs.

McCabe,

Sproul, Vardaman,

Thomas, and Riefler were not present.

Members of the staff of the Division of Research and Statistics

of the Board of Governors then gave a visual presentation of recent

economic developments.

In this connection there were distributed a memo

randum prepared in the Board's offices under date of March 6, 1951, on the

Outlook for Treasury Cash Requirements, a memorandum on gross national

product and income,

dated March 7, 1951, and two memoranda prepared in the

Board's offices under date of March 8, 1951, presenting information with

respect to (1)

action to check inflation and (2)

the supply of funds

available absorbing new money offerings of Government securities.

Copies

of these memoranda have been placed in the files of the Federal Open Market

Committee.

The time for the next meeting of the Committee was set tentatively

for the week beginning May 14,

Secretary.

1951.

Thereupon the meeting adjourned.