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 on Thursday, October 4, 1951, at 10:05 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Sproul, Vice Chairman

Gidney

Gilbert

Leedy

Norton

Powell

Szymczak

A. H. Williams

Mr. Carpenter, Secretary

Mr. Sherman, Assistant Secretary

Mr. Thomas, Economist

Messrs. Bopp, Irons, Thompson, Tow, 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 Statistics, Board of Governors

Mr. Solomon, Assistant General Counsel, Board of

Governors

Mr. Youngdahl, Chief, Government Finance Section,

Division of Research and Statistics, Board

of Governors

Mr. Ralph F. Leach, Economist, Division of Research

and Statistics, Board of Governors

Mr. Arthur Willis, pecial Assistant, Securities

Department, Federal Reserve Bank of New York

Messrs. Hugh Leach, C. S. 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.

Mr.

Townsend, Solicitor, Board of Governors

Mr. J.

Marvin Peterson, Director of Research,

Federal Reserve Bank of Minneapolis

10/4/51

Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meeting

of the Federal Open Market Committee held on

May 17, 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 Com

mittee as set forth in the minutes of the

meetings of the executive committee held on

May 7, May 17, June 27, August 8, and August

27, 1951, were approved, ratified, and confirmed.

Before this meeting there had been sent to the members of the

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

serve Bank of New York covering the period May 17 to September 27, 1951,

inclusive.

Mr. Rouse commented briefly on this report and on a supple

mentary report covering commitments executed September 28 to October 3,

1951, inclusive, copies of which also were distributed to the members of

the Committee.

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 May 17 to October

3, 1951, inclusive, were approved, ratified, and

confirmed.

Members of the staff of the Division of Research and Statistics

of the Board of Governors then presented a report, illustrated by charts,

covering the economic situation.

Following this report, Mr. Thomas made

a statement on the implications for credit policy in the current economic

outlook in which he said that during the first four months of the new

Federal Reserve policy developments indicated that either the policy was

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effective in restraining further credit inflation or that the abatement

of inflationary pressures for other reasons was so great as not to subject

the monetary policy to a rigorous test.

Mr. Thomas went on to say that

there was evidence that credit restraints played some part in curbing

inflation, especially in the mortgage market, and that it was likely that

had the change in policy not occurred investment institutions would have

continued to sell bonds to the Federal Reserve with the result that re

serves thus created would have moved into the banks and inducement for

credit restraint would have been weakened.

Mr. Thomas also said that in

this period the money market functioned on its own, that there was little

or no increase in total Reserve Bank credit, total bank loans and invest

ments, or total deposits, although the private money supply expanded some

what because of a reduction in Treasury balances.

Within the past three

weeks, Mr. Thomas said, the picture had changed drastically and the System

had found it necessary to add nearly a billion dollars to its portfolio,

reflecting temporary factors such as tax payments, the desire of the banks

to avoid borrowing on a statement date, and a lack of enthusiasm for the

new Treasury refunding issues.

The increase also reflected seasonal

loan and currency demands, which would continue during the rest of this

year, and the imminence of new cash borrowing by the Treasury, as well as

prospective large corporate issues,

Mr. Thomas felt that Federal Reserve

Open Market purchases at this time, rather than forcing reliance on

borrowing by banks to meet reserve needs and permitting interest rates to

rise, could be justified on the grounds that some of the demands were of

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a temporary nature and that strong inflationary tendencies were absent

at this time.

As for the immediate future, Mr. Thomas said that the large

volume of excess reserves now outstanding (about $1 billion) and the

low level of borrowing at the Reserve Banks (less than $70 million),

together with a seasonal expansion in Reserve Bank float, should make

it possible that all reserve needs could be met during the remainder of

1951 without any further purchases of securities by the System unless

purchases were needed to assure success of new financing offers by the

Treasury.

Mr. Thomas felt that the large increase in the private money

supply that had already occurred and that would continue, together with

growing defense expenditures, might result in a resumption of inflationary

pressures; if this occurred, the System might wish to adopt more positive

measures of restraint.

The most promising approach for dealing with the

situation would be for the Treasury to offer securities of a type that

would compete with other demands and attract the available nonbank funds.

Such measures would be even more essential the latter part of 1952 when

Treasury borrowing needs probably would be tremendous, and unless those

needed funds could be obtained outside the banking system, Mr. Thomas felt

further sharp growth in the money supply would result and would present a

continuing strong inflationary threat.

There followed a brief discussion of the reports given by members

of the Research staff and Mr. Thomas, at the close of which Mr. Townsend

withdrew from the meeting.

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10/4/51

Chairman Martin then referred to a memorandum prepared in the

Board's offices under date of October 3,

1951, on "Treasury Cash Requirements

and Financing, October-December 1951" and to new financing alternatives

presented in that memorandum, copies of which were distributed among the

members of the Committee prior to this meeting and a copy of which has

been placed in the Federal Open Market Committee files.

In response to a request from Chairman Martin, Mr. Rouse made a

statement concerning prospective Treasury financing needs during the next

few months in which he said that the bill

market was congested and was not

in a condition to take additional weekly offerings of regular bills, that

there was no outside demand for long-term Government securities at the

present price level, and that the source of nonbank funds appeared to lie in

the tax liabilities of corporations.

He felt, therefore, that the Treasury

might avail itself of the situation in the short-term money market and sell

securities which would be purchased ultimately by corporations for use in

paying tax liabilities in the spring of 1952, when the Treasury could

repay such borrowings.

Chairman Martin then called upon Mr. Thomas who summarized informal

discussions that members of the staff had had with representatives of the

Treasury staff.

Mr. Thomas said that, while the discussions were explora

tory, it was generally agreed that around $2.5 billion would have to be

raised by the Treasury to cover the deficit and attrition in refunding of

market issues this fall, that there was rather general agreement this could

not be raised by long-term issues, and that most of the funds available

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were funds held by corporations in anticipation of tax payments they would

have to make during 1952.

One of the proposals under consideration, Mr.

Thomas said, was the offering of tax-date bills maturing about March 15

and June 15, 1952; such bills might mature within a few days after these

tax payment dates but would be acceptable in payment of taxes on March 15

and June 15.

Mr. Thomas also commented upon alternative methods of issuing

such securities, stating that some individuals felt they should be issued

at one time while others preferred a series of issues coming out over a

period of several weeks.

There followed a discussion of the suggestions made in the staff

memorandum dated October 3, 1951, and of the comments of Messrs. Rouse and

Thomas, including discussion of the terms on which the tax anticipation

bills might be issued, at the conclusion of which Chairman Martin suggested

that the executive committee be authorized to submit recommendations to

the Treasury concerning both refunding and new financing needs, in the

light of the discussion at this meeting.

This suggestion was approved

unanimously.

Chairman Martin also referred to a report prepared by the System

Research Committee on Government Finance under date of September 28, 1951,

on "How the Defense Bond Program Can Be Strengthened", copies of which had

been sent to the members of the Committee before this meeting.

He suggested

that the report be reviewed by the executive committee with a view to

having that committee submit a recommendation to the full Committee.

He also

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suggested that Mr. Norton be asked to serve with the members of the executive

committee in making this review of the savings bond program in view of his

interest in and tentative suggestions concerning a more effective program

for merchandising bonds.

In connection with a discussion of the time for a meeting of the

Federal Open Market Committee at which consideration might be given to

matters which should be taken up with the Secretary of the Treasury before

the end of this year, including the savings bond program, Chairman Martin

suggested that there be a meeting of the full Committee at which Federal

Reserve Bank Presidents who were not now members of the Committee would

also be present sometime during November 1951.

He added that he had dis

cussed the question of possible changes in the savings bond program with

Secretary of the Treasury Snyder and that he was under the impression that

any recommendations which the Committee might wish to make should be sub

mitted by the latter part of November.

Following a discussion, it was agreed

unanimously that a study of the savings bond

program should proceed as suggested by Chair

man Martin, and that the next meeting of the

Federal Open Market Committee, at which the

Presidents of the Federal Reserve Banks who

were not now members of the Committee would

also be present, would be held on Wednesday,

November 14, 1951.

In a discussion of open market policy, Mr. Powell expressed the

view that the money market, in a variety of ways, was stating the case

that interest rates had definitely risen and if the Treasury was going

to spread its refundings over a term of years in order to reduce the

size of the annual roll-over of debt,

it would have to pay the higher

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rates that others were willing to pay.

Mr. Powell went on to say that

this was the inevitable result of inflationary pressures and the System's

attempt to control them with money market instruments, and, after comment

ing on the factors evidencing upward pressure on the level of rates, he sug

gested that consideration be given to the question whether it would not be

necessary to permit interest rates on Treasury borrowings to rise, if

Treasury financing was to be fitted into a situation in which the Open

Market Committee continued to exert pressure against inflation through

the use of open market instruments.

Chairman Martin stated that Mr. Powell had raised a very pertinent

question, that there was a real problem of how effective the System could

be in a period of deficit financing in attempting to restrain inflation

through open market instruments.

After comments by several Reserve Bank Presidents concerning the

attractiveness of long-term Treasury securities to the average saver at

existing rates, Chairman Martin called upon Mr. John H. Williams who

stated that he shared Mr.

Powell's views, that he felt the only way in which

the System could overcome inflation was through raising interest rates and

thus providing a means by which the Treasury could copete for savings.

felt

that this was the way to exert monetary pressure,

that it

He

looked as

though the country was getting to the end of the road as far as tax

increases were concerned except perhaps for a general sales tax, and that

the country was confronted with such questions as whether the military pro

gram was too large, whether it

should be stretched out over a longer period

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of time than was now contemplated, whether it

should be financed through

use of savings of the country, or whether it

would have to be financed by

resorting to bank credit.

Mr. Bopp stated that he did not feel the question was one of a

deliberate raising of interest rates so much as one of letting the demand

for funds force rates up, rather than taking action to prevent a rise.

Mr. Thompson agreed with the comment made by Mr. Bopp, adding

that he felt it

was unfortunate that the System was too often identified

with the proposition of raising interest rates whereas the proposition

was basically one of restricting the supply of funds so that those who

wanted credit would have to compete for it,

which might mean an increase

in rates.

Mr. Tow said that any increase in interest rates should be a re

sult of monetary policy rather than a deliberate raising of rates, that

the question whether to permit rates to rise was one that would have to be

faced in terms of all factors in the situation at a given time,

and that

it was not particularly significant whether such a change was permitted to

occur just after a savings bond sales campaign or at some other time.

Mr. Irons said that the System should not prevent rates from

rising if

the forces in the market tended to bring about an increase. He

expressed doubt that the present rates, certainly those paid on savings

bonds, were sufficient to attract savings into Government securities, and

he felt that the System should be affirmative to the extent that it

not prevent rates from rising.

should

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Mr. Peterson felt that it would be a mistake to concentrate on

the savings bond rate as such and leave longer-term securities out of

consideration.

Mr. Bryan stated that he would like to associate himself strongly

with the general line of thought initiated by Mr. Powell and that he did

not disagree with most of the comments made subsequently.

it

He added that

seemed to him that in a considerable part of the postwar world, central

banks had proceeded on an impression that there would be a savings surplus,

whereas,

in fact, we had come into a situation where there was a savings

deficit.

He commented that he did not see any way by which it

was going to

be possible to avoid further inflation unless, in consort with the Treas

ury, the central banking system could reach a full recognition of the circum

stances in the market and permit an adjustment in the level of rates that

would meet the demand.

Of the various choices available, Mr. Bryan felt

that the best was to face the rate question over a longer term since this

was the basic problem, rather than the technicalities as to how short-term

financing should be accomplished.

There was a further discussion at the conclusion of which Chair

man Martin stated that the problem was one of finding out how to attract

new money into Government securities in the period ahead.

Chairman Martin then referred to the authority given to all

Federal Reserve Banks on March 1, 1950, which was modified on February

8, 1951, and renewed on March 8, 1951, with respect to repurchase agreements

covering short-term Treasury obligations with nonbank dealers in United

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States Government securities qualified to transact business with the System

open market account.

He stated that question had been raised as to whether

the present authority which gave additional leeway to the New York Bank

for executing repurchase agreements should be extended to all Federal

Reserve Banks.

In the discussion that followed, it

was stated that the present

authority included the requirement that the rate on such agreements be at

least 1/8 per cent above the average issuing rate on the most recent issue

of United States Treasury bills, except that the Federal Reserve Bank of

New York was authorized by the actions of February 8 and March 8, 1951,

to enter into such agreements at a differential of less than 1/8 per cent

above the average issuing rate on United States Treasury bills.

The view

was expressed that while this authority would continue to be used

primarily if

not exclusively by the Federal Reserve Bank of New York, it

should be granted to each of the Federal Reserve Banks so that it

could

be used in the interest of orderly conditions in the Government securities

market, and that Federal Reserve Banks other than New York should have

the authority in case of an emergency necessitating the transfer of the

execution of open market operations to another Federal Reserve Bank.

Following a discussion, upon motion

duly made and seconded, it was voted unani

mously to authorize each Federal Reserve

Bank, in lieu of all similar previous

authorizations, to enter into repurchase

agreements with nonbank dealers in United

States Government securities who are qualified

to transact business with the System open

market account, under the following conditions:

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1.

-12Such agreements

a.

Are at a rate which will be fixed in fractions of 1/8

per cent and which ordinarily will be not less than

the nearest fraction above the average issuing rate

on the most recent issue of 3-month Treasury bills

but which at times may be below the average issuing

rate on bills but not more than 1/8 per cent below;

(for example, when the issuing rate on Treasury bills

temporarily may have risen slightly above the existing

repurchase rate);

b.

Are for periods of not to exceed 15 calendar days;

c.

Cover only short-term Government securities selling at

a yield of not more than the issuing rate for 1-year

Treasury obligations; and

d.

Are used with care and discrimination as a means of

providing the money market with sufficient Federal

Reserve funds as to avoid undue strain on a day-to

day basis.

2.

Reports of such transactions are made to the Manager of the

System Open Market Account to be inluded in the weekly re

port of open market operations which is sent to the members

of the Federal Open Market Committee.

3.

In the event Government securities covered by any such agree

ment are not repurchased by the dealer pursuant to the agree

ment or a renewal thereof, the securities thus acquired by

the Federal Reserve Bank are sold in the market or transferred

to the System Open Market Account.

In taking this action it was under

stood that a letter would be sent to all

Federal Reserve Banks advising them of

the above understanding.

Reference was made to the decision reached at the meeting of

the Committee on May 17,

1951, with respect to conversion of 2-3/4 per

cent nonmarketable bonds held in the System account into 5 year 1-1/2 per

cent marketable notes.

Mr. Rouse stated that following out that action

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it would now be appropriate for the

System

to convert

$500

million of the

2-3/4 per cent bonds into the 1-1/2 per cent notes and that an additional

$500 million should be converted on a similar basis in April 1952 at which

time consideration would also be given to the program for conversion of the

remaining $700 million held in the System account.

Mr. Rouse went on to

say that before carrying out the exchange of $500 million at this time, it

seemed desirable to raise the question whether the Committee wished to

make any change in the earlier understanding.

He also said that so far

as he was concerned in the management of the system account,

it

would not

matter whether the present understanding was carried out or whether the

conversion was made in some other manner.

Mr. Szymczak suggested that unless there was good reason for

changing the decision reached at the meeting on May 17, it would seem

desirable to proceed on the basis of that action.

This suggestion was approved

unanimously.

It was agreed that the executive committee should be author

ized 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.

It was also agreed that

no change should be made in the existing understanding that operations

in longer-term securities should be conducted with a view to maintaining

orderly market conditions,

in the light of the general direction to be

10/4/51

issued to the executive committee at this meeting.

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 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 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 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.

The Secretary stated that he had been advised that the examiners

of the Board of Governors of the Federal Reserve System, in connection

with the regular examination of the Federal Reserve Bank of New York, had

completed an audit of the System open market account and that they had

no objections to raise to the handling of the account.

He added that the

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customary report of the audit would be distributed among the members of

the Committee in the usual manner.

Thereupon the meeting adjourned,

Secretary.