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, May 17, 1951, at 10:05 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, 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, Thompson, 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. Ralph A. Young, Director, Division of

Research and tatistics, Board of Governors

Mr. Youngdahl, Chief, Government Finance Sec

tion, Division of Research and Statistics,

Board of Governors

Mr. Ralph F. Leach, Economist, Division of

Research and Statistics, Board of Governors

Messrs. Hugh Leach, C. E. Young, Bryan, 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.

Upon motion duly made and seconded, and

by unanimous vote, William McChesney Martin,

Jr., was elected Chairman of the Federal Open

Market Committee to serve until the election

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of his successor at the first meeting of the

Committee after February 29, 1952, with the

understanding that in the event of the dis

continuance of his official connection with the

Board of Governors during that period, he would

cease to have any official connection with the

Federal Open Market Committee.

At the meeting of the Committee on March 1, 1951, it was noted

that no alternate member of the Federal Open Mrket Committee had been

elected for Mr. Gilbert, President of the Federal Reserve Bank of Dallas.

At this meeting it was stated that advice of the election of Malcolm H.

Bryan, President of the Federal Reserve Bank of Atlanta, as alternate

member for Mr. Gilbert for the remainder of the year ending February 29,

1952, had been received, and that he had executed the customary oath of

office.

Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meetings

of the Federal Open Market Committee held on

January 31, February 6-8, March 1-2, and March

8, 1951, were approved.

Upon motion duly made and seconded, and

by unanimous vote, the actions of the execu

tive committee of the Federal Open Market

Committee as set forth in the minutes of the

meetings of the executive committee held on

January 31, February 8, February 14, Febru

ary 26, March 2, March 3, March 8, March 13,

and April 5, 1951, were approved, ratified,

and confirmed.

A report of open market operations prepared at the Federal Re

serve Bank of New York covering the period March 8 to May 11, 1951, in

clusive, was then presented and commented upon by Mr. Rouse.

He also

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presented a supplementary report covering commitments executed from

May 12 to May 16, 1951, inclusive.

Copies of both reports have been

placed in the files of the Federal Open Mrket Committee.

Upon motion duly made and seconded, and

by unanimous vote, the transactions in the

System account for the period March 8 to May

16, 1951, inclusive, were approved, ratified,

and confirmed.

There was then presented a report by members of the staff of the

Division of Research and Statistics of the Board of Governors, illustrated

by chart slides, covering the economic situation and referred to by Mr.

Ralph Young as a report on "Control Problems as Seen During a Lull in

the Boom."

Following the presentation, Mr. Thomas made a statement in which

he emphasized that the answer to the continuing inflationary pressures

could not be found in more production of goods and services when the

economy was operating at capacity, that primarily the inflationary pres

sures arose from the creation of additional money through credit expansion

and through increased turnover of money.

Vigorous restraints on credit

expansion would have to continue if the development of substantial further

inflation was to be avoided.

Mr. Thomas noted that if

the defense program

developed as contemplated and as the needs of the Treasury for refunding

of securities progressed during the remainder of this year, there would

probably be continued demands for credit from both banks and other lenders,

although credit expansion would probably be at a reduced rate.

While some

lending institutions would continue to sell Government securities,

nonbank

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investors as a group would increase their holdings.

The Federal Reserve

would be called upon to purchase Government securities or increase advances

to member banks in order to supply some of the funds needed to meet credit

demands and also to cover a drain on bank reserves resulting from the sea

sonal currency demand and a probable outflow of gold.

In the aggregate,

he suggested the possibility of a further increase in Reserve Bank credit

by the end of 1951 of as much as $3 billion. These needs for reserves would

provide an element of restraint, particularly if a policy of reluctant buy

ing is followed.

In a discussion of credit policy in the months ahead when develop

ments in the international situation were so uncertain, Mr. Eccles raised

the question whether,

if the Federal Government budget were balanced, there

was justification for any expansion in bank credit, and whether the objec

tive of Federal Reserve policy should not be to avoid supplying additional

reserves to the market except the amounts required by a rise in demand for

currency, a gold outflow, or an over-all expansion of production.

There was a general discussion of the various factors in the con

tinuing inflationary situation which would tend to increase the amount of

Federal Reserve credit outstanding and it was agreed that the objective of

System credit policy should be to limit the increase as much as possible.

During the discussion Mr. Vardaman left the meeting.

Chairman Martin stated that the principal development not previously

reported to the Committee since the last meeting was the announcement on

M.y 8,

1951, by the Secretary of the Treasury that he would not call the

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September 2's of 1951-53,

and that there would be issued a new series of

tax savings notes, both of which actions were recommended to the Treasury by

the executive committee on May 7,

1951.

Chairman Martin also stated that

the Treasury had decided not to announce it

ing in June,

July,

refunding of securities matur

or August until the latest practicable date, which prob

ably would be late this month, and that this too was in accordance with the

recommendations of the executive committee.

In a discussion of open market policy, reference was made to a memo

randum prepared in the Board's offices under date of March 16,

1951, with

respect to the conversion of System holdings of 2-3/4 per cent bonds of 1975

80 into 5-year 1-1/2 per cent notes.

Copies of the memorandum were distributed

to the members of the Committee before the meeting and a copy has been placed

in the files of the Federal Open Market Committee.

Mr. Sproul stated that the memorandum apparently had been prepared

on the assumption that there would be an exchange of the nonmarketable bonds

for marketable notes, and that the only question was when and on what kind

of a schedule it

should be made.

His own judgment,

he stated, was that it

would be desirable to convert $1 billion of the bonds at the present time,

$500 million on October 1, 1951, and an additional $500 million on April 1,

1952, at which time consideration might be given to the disposition to be

made of the $700 million remaining in the System account.

Mr.

Rouse stated that the 5-year notes to be obtained in exchange

for 2-3/4 per cent bonds would bear the sane maturity date if converted

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anytime between now and the end of September 1951.

There was a general discussion of the

advantages and disadvantages of converting

the nonnarketable bonds under any of the

suggested alternative procedures and at the

conclusion of the discussion, upon motion

by Mr. Sproul, it was agreed unanimously

that steps should be taken at an appropriate

time between now and the end of September

to convert $1 billion of present System

holdings of the 2-3/4 per cent nonmarketable

bonds of 19 75-80 into 5-year 1-1/2 per cent

notes to be dated April 1, 1951, that an

additional $500million should be converted

into notes to be dated October 1, 1951, and

that an additional $500 million should be

converted into notes to be dated April 1,

1952, with the understanding that further

consideration would be given at a later meet

ing as to the program for conversion of the

remaining $700 million held in the System

account.

Chairman Martin suggested that, inasmuch as the terms of the new

refunding offering to be made by the Treasury would not be announced until

the latter part of this month, the executive committee be authorized to

determine, within the limits of the general direction to be issued at this

meeting by the full Committee to the executive committee,

the basis upon

which transactions would be conducted for the System account in bills and

other short-term securities after the announcement was made.

This suggestion was approved unani

mously.

Chairman Martin then suggested that System operations in longer

term issues be carried on in a more aggressive manner than had been fol

lowed in the past, that such an operation be undertaken on an experimental

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basis with a view to probing the market for Government securities to see

if there would be developed a more active interest on the part of potential

buyers of such securities.

He also suggested that the Committee authorize him to appoint a

committee to consist of himself as chairman and not less than two or more

than four other members of the Federal Open Market Committee to make a study

of the scope and adequacy of the Government securities market during the

coming months with the understanding that the committee would be authorized

to call on outside assistance if

and that it

mittee.

that should be considered to be necessary

would report to the executive committee and to the full Com

Chairman Martin emphasized that his suggestion for a study of this

type was in no sense a criticism of the operations of the System account.

In response to questions, he indicated that there was a need for a broader

market for Government securities, that perhaps there would be value in

studying the British Government securities market, that the time may come

when the Federal Open Market Committee might find it

the procedure whereby it

necessary to change

did business with only a small number of qualified

dealers, and that he hoped the study proposed would make some worthwhile

suggestions along these and other lines.

Several other members of the Committee expressed the view that it

would be desirable to have a study such as that proposed by Chairman Martin.

Thereupon, upon motion duly made and

seconded, Chairman Martin was authorized to

appoint a committee to make a study of the

Government securities market along the lines

he suggested.

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Turning to a discussion of the suggestion for more aggressive op

erations in the System account, Chairman Martin said that the Government

securities market had suffered a distinct shock since the Treasury-Federal

Reserve accord was announced on March 4, that there was a feeling in some

quarters that the market for Government securities was deteriorating be

cause of pressures from more sources than institutional investors who were

liquidating securities to meet previous commitments, and that he would like

to see the Committee authorize the use of, say, $250 million to carry on a

more aggressive operation with a view to probing the extent of the underly

ing demand for Government securities.

This, he said, would mean that

instead of waiting for dealers to offer securities to the System when they

were under pressure there would be times when the System might have aggres

sive bids in the market.

The general purpose of such a probing operation

would be to bring out buying which could result in a stronger and more

certain market for the large volume of Treasury refunding issues that would be

coming on the market.

Mr. Sproul stated that he did not feel the Committee had been entirely

passive although it had not been aggressive in exactly the manner suggested

by Chairman Martin.

He agreed that there had been a shock to the Government

securities market in recent weeks but he did not think there was deteriora

tion in the market, that quite the reverse was true, and that the market had

shown stability and steadiness and was not one which reflected a psychology

of fear.

He added that there was no indication of a feeling that could lead

5/17/51

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to failure of Treasury refunding issues over the next six months.

on to say that if

He went

the full Committee wished to direct the executive committee,

and the executive committee to direct the New York Bank and Manager of the

account, to operate in a more aggressive fashion, it

could do so without

any special authorization of a specific amount to be used for that purpose.

Mr.

Sproul added that it

market is

sui generis,

should be remembered that the Government securities

that it

cash positions are now made,

is the market in which most adjustments of

that our operations in the market are conducted

in a "gold fish bowl" with weekly publication of our purchases and sales,

and that when we buy or sell we use a special kind of money, namely, reserve

funds.

For these reasons, he said, the Government securities market and

operations in

it

are quite dissimilar to the stabilizing operations of pri

vate interests in other security markets.

During a comment on Chairman Martin's suggestions,

Mr. Eccles stated

that he felt it would be worth while undertaking such an operation with a

relatively small volume of funds, even though it

by Mr.

involved the risk indicated

Sproul of adding to reserve funds in the market.

Other members of the Committee expressed themselves as favoring an

experimental operation along the lines suggested by Chairman Martin, and it

was agreed that, in

issuing instructions to the Federal Reserve Bank of New

York for transactions in the System account, the executive committee should

do so in the light of the foregoing discussion.

Secretary's note: Before leaving the meet

ing Mr. Vardaman stated to the Secretary that

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he would favor whatever recommendations

were made by Chairman Martin as to actions

to be taken by the Committee.

Thereupon, upon motion duly made and

seconded, the following direction to the

executive 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 di

rected by the Federal Open Market Committee, to arrange for such

transactions for the ,ystem 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 exercis

ing 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;

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 otherwise

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

purchase for the System open market account direct from the Treas

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

ness as nay 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.

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

for October 3,

1951, with the understanding that a meeting of the Presidents'

Conference would be held earlier in that week.

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Thereupon the meeting adjourned.

Secretary.