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 Wednesday, November 14, 1951, at 10:05 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Sproul, Vice Chairman

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, 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. 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

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

and Statistics, Board of Governors

Mr. Arthur Willis, Special 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 and Peyton, Presidents of

the Federal Reserve Banks of Boston

and Minneapolis, respectively

Mr. Attebery, First Vice President of the Federal

Reserve Bank of St. Louis

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Upon motion duly made and seconded, and by

unanimous vote, the minutes of the meeting of

the Federal Open Market Comittee held on

October 4, 1951, were approved.

Upon motion duly made and seconded, and by

unanimous vote, the actions of the executive com

mittee of the Federal Open Market Committee as

set forth in the minutes of the meetings of the

executive committee held on September 25 and

October 4, 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 October 4, 1951 to November 7,

1951,

inclusive, had been sent to the members of the committee before

this meeting.

Mr. Rouse presented a supplementary report covering com

mitments executed November 8-13, 1951, inclusive, and commented briefly

on both reports.

Copies of the reports have been placed in the files

of the Federal Open Market Comittee.

Upon motion duly made and seconded, and

by unanimous vote, the transactions in the

System account for the period October 4, 1951

to November 13, 1951, inclusive, were approved,

ratified, and confirmed.

Before this meeting there had been brought to the attention of

each member of the Comittee a report of examination of the System open

market account as of August 24, 1951, made in connection with the regular

examination of the Federal Reserve Bank of New York and submitted by the

examiner in charge for the Board of Governors.

The report took no exception

to the handling of the account and stated that the accounting procedures,

records,

and system of internal control maintained and the degree of care

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exercised by the Federal Reserve Bank of New York in connection with the

System open market account were reviewed and continued to be regarded as

satisfactory.

Upon motion duly made and seconded,

and by unanimous vote, the report was re

ceived and ordered filed.

Mr. Thomas stated that the economic situation had not changed

greatly since the meeting of the Committee on October 4, 1951, and that the

situation was still

one of equilibrium at a high level of activity.

This

situation, he felt, was likely to continue during the next few months, but

longer-run prospects still

pointed toward inflation, primarily because of

continued expansion of Government expenditures in connection with the defense

program.

Mr. Thomas said that Government expenditures on a cash basis would

total approximately $58 billion in 1951, and were expected to equal or exceed

$80 billion in fiscal 1952 and to reach $84 billion in fiscal 1953, when

they should begin to level off.

He estimated that during the fiscal year

1952 cash receipts would approximately equal expenditures, but that in the

calendar year 1952 and also in the fiscal year 1953, the deficit was likely

to be around $5 billion on a cash basis or $10 billion on a budget basis.

Mr. Thomas went on to say that the outlook was for private capital

expenditures to continue at a high level, although housing construction might

be expected to decline from recent levels depending on supplies of critical

materials and ability to find substitutes, as well as upon demand which would

be influenced by credit restraints.

He felt that inflationary pressures dur

ing the next few months should be less than in the past year, although consumer

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demands might be expected to continue in excess of current output re

sulting in some drawing down of inventories of durable consumer goods.

In

comes probably would continue to grow, reflecting increased economic activity

and further advances in wage rates, and savings would have to be large if

further inflation were to be avoided, which raised the questions (1) how

to keep savings large, and (2) how to attract them into Government securities.

As to credit prospects, Mr. Thomas indicated that expansion in the

last half of 1951 was running less than in the corresponding period of 1950,

and that further growth in the money supply would depend on bank holdings

of Government securities and Treasury borrowing from nonbank investors.

On

the whole, Mr. Thomas felt that savings institutions would have increased

funds to invest and smaller acquisitions of mortgages and hence might be buy

ing rather than selling Government securities; that corporations might also

add to their holdings of Government securities, although purchasing less dur

ing the next year than in the past; and that individuals would have large

savings.

little

If funds could be attracted from institutions and individuals, very

need for bank purchases of Government securities should develop.

All

of this could be done and still provide adequate financing for business and

housing.

In connection with Mr. Thomas'

remarks, there was distributed a

memorandum, Projection of National Product and Income through 1952, pre

pared in the Board's offices under date of November 14, 1951.

In response to a question from Chairman Martin, Mr. John H.

Williams stated that the country had been having a serious inflation with a

balanced Federal budget and that it should not be concluded that further

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inflation from Government spending would necessarily be avoided by any par

ticular combination of taxes and suitable offerings of Treasury securities.

Mr. Williams said that he was coming to feel increasingly that the military

program might be too large and might be moving too rapidly.

Chairman Martin stated that, as reqested at the meeting of the

full Committee on October 4, the executive committee met yesterday afternoon

for the purpose of considering the memorandum prepared under date of

September 28, 1951 by the Research Committee on Government Finance on

how the defense bond program could be strengthened.

The executive com

mittee was in general agreement with the study, Chairman Martin said, and

recommended that the report with minor revisions on pages 6 and 9 be sent

to Secretary of the Treasury Snyder with a letter which would state that

while the Committee felt that the problem was an important one and should

have prompt consideration, it had come to no final conclusion as to the

steps that should be taken and that it would be glad of an opportunity to

discuss the matter with Treasury representatives or to be helpful in any

other way that it could.

The reason for emphasizing prompt consideration,

he said, would be that the Committee recognized that there were limitations

on when a new savings bond drive could be started, that the present drive

was just coming to an end, that the results of the drive had not been too

successful, and that it would take time to obtain funds and personnel and

otherwise to revitalize the savings bond program.

Chairman Martin went on to say that he had discussed the matter

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ith Secretary Snyder this morning, expressing to him in general the views

of the executive committee, and that, while Secretary Snyder was thoroughly

receptive to any ideas for improving the savings bond program, he emphasized

that he was in the "middle of the stream" at the moment, noting such prob

lems as going to Congress for the necessary funds to finance the program,

and the desirability of consulting with the savings bond field staff if

there were to be a change in the program in order to have the benefit of

their suggestions concerning both the type of bond and changes in sales

technique that might make it more effective.

Chairman Martin then asked for comments by all of the members of

the Committee and the other Presidents of Federal Reserve Banks who were

present as well as Mr. Attebery.

Various ideas were expressed, including

the suggestion that although the savings bond program was a smaller part of

the total problem of Government financing, it was important not only in a

dollar sense but in terms of its psychological effect and as a means of

attracting funds of small investors that otherwise would go into inflationary

channels.

It was suggested that a thorough effort should be made to work

out an effective program through collaboration with the business community

and otherwise.

It was generally agreed that changes in savings bonds, par

ticularly in redemption schedules for early years but also in the over-all

yield, would be highly desirable in order to make the bonds more competitive

with other outlets for savings, and that a revitalized method of selling the

bonds was needed in the light of developments since the present series were

first issued in 1941.

Differing views were offered as to whether savings

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bonds should be made eligible as collateral for loans, at least to a limited

extent, and as to the merits of marketable as compared with nonmarketable

bonds.

With respect to the suggestion in the memorandum prepared by the

Research Committee on Government Finance that some form of tax exemption

for small holdings of savings bonds would make them more attractive, dif

ferent views were also expressed, some feeling that tax exemption was objec

tionable in principle while others felt that a program which would have a neg

ligible effect on tax revenues would be desirable if

it

served to make savings

bonds more attractive as a medium for investment of savings which were

accumulating at a rapid rate.

During the discussion Mr. Sproul commented that an attempt should

not be made to separate the savings bond program from the longer-term debt

management program, that both were necessary parts of a general program

designed to raise the funds needed to finance the Government, and that the

Federal Open Market Committee should now do the same thing for marketable

securities that it

had done with respect to savings bonds,

i.e.,

work out

a program for long-term market financing in terms of improving the debt

schedule and getting the needed funds in the next calendar year in the

way that would best fit

the needs of sound debt management and credit policy.

He felt that a study should be made of that problem on the basis of which

suggestions could be made to the Treasury with respect to the debt manage

ment policies to be followed during the latter part of 1952.

At the conclusion of the discussion, Mr. Sproul suggested that

the recommendation of the executive committee as presented by Chairman

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Martin earlier in the meeting be adopted, i.e.,

that the memorandum pre

pared by the Research Committee on Government Finance,

revised to include

changes suggested by Mr. Youngdahl at the meeting of the executive commit

tee, be transmitted to Secretary of the Treasury Snyder with a letter in a

form which he outlined.

Upon motion duly made and seconded, and

by unanimous vote, Mr. Sproul's suggestion was

approved with the understanding that the letter

should be sent in a form satisfactory to Messrs.

Martin and Sproul.

In connection with Mr. Sproul's proposal that a study be made of

the problem of long-term market financing, Chairman Martin suggested that

the Research Committee on Government Finance be asked to make this study

also, and that Mr. Thomas be requested to work with the Committee.

Mr.

Sproul added a further suggestion that the Presidents of the Federal Reserve

Banks make inquiries in their respective districts as to the prospects for

available long-term funds and possible solutions of the problem of long

term market financing and that they send whatever information they might

be able to develop to the Committee on Government Finance for its use in

making the study.

Upon motion duly made and seconded, the

above suggestions were approved unanimously,

with the understanding that since the problem

of debt management was primarily a Treasury

responsibility, the Presidents in making their

inquiries would make it clear that the Federal

Open Market Committee was merely seeking the

best advice it could get in order to be as help

ful to the Treasury as possible in finding a solu

tion for this problem.

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Chairman Martin then referred to a memorandum on Treasury cash

requirements,

prepared by Messrs. Thomas, Youngdahl, and Leach under date

of November 9,

1951, copies of which had been sent to all members of the

Committee before this meeting.

He stated that the executive committee would

be glad to have comments from any member of the full Committee concerning

the recommendation that should be made to the Treasury as to the refunding

of approximately $1,100,000,000 of partially tax exempt bonds called for

payment on December 15, 1951.

No suggestions were offered, other than those contained in the

memorandum referred to above, and it was agreed unanimously to continue

the understanding at the last meeting of the Committee that the executive

committee would be authorized to submit recommendations to the Treasury

concerning both refunding and new financing needs.

Chairman Martin stated that toward the end of November a recom

mendation would be made to the Treasury, in the light of conditions exist

ing at the time, with respect to the December refunding.

It was agreed unanimously that there should

be no change in the present understanding that the

executive committee would 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 should

be conducted for the System account in bills and

other short-term securities.

In a discussion of the basis upon which operations should be con

ducted in longer-term securities, Mr. Rouse referred to the existing under

standing of the executive committee that in conducting orderly market operations

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10

the Federal Reserve Bank of New York would not permit the longest-term

restricted Treasury bonds to decline below 96-3/4.

He also referred to the

understanding at the meeting of the full Committee on October 4, 1951, that

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

maintaining orderly market conditions.

of existing conditions it

It was his view that in the light

should be the policy of the Committee to conduct

its operations on the basis of the accord reached with the Treasury last

March and that if

long-term bonds should decline below 96-3/4 in response

to market influences they should be allowed to do so as long as the movement

was an orderly one.

There was unanimous agreement with

Mr. Rouse's statement and it was agreed that

the executive committee would be guided accord

ingly.

In a discussion of policy that might be applied to operations

after the turn of the year when there would be an easing of the money

market resulting from a substantial return flow of currency from circula

tion and other factors,

it

was the unanimous view of the Committee that

it would be appropriate for the executive committee to direct sales of

securities from the System account as freely as possible to withdraw

reserves from the market and at the same time to maintain an orderly

market.

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 com

mitments for the System open market account:

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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

(including purchases, sales, exchanges, replacement of

maturing securities, and letting maturities run off with

out replacement), as may be necessary, in the light of

current and prospective economic conditions and the gen

eral credit situation of the country, with a view to

exercising 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 Treasury of such amounts of

special short-term certificates of indebtedness as may

be necessary from time to time for the temporary accom

modation 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.

Chairman Martin referred to the drafts of replies to two questions

addressed by the Subcommittee on General Credit Control and Debt Management

(Patman Subcommittee)

of the Joint Committee on the Economic Report to the

Chairman of the Federal Open Market Committee,

copies of which had been

distributed to the members of the Committee before this meeting,

He stated

that he and Vice Chairman Sproul would be glad to have at this time, or to

have submitted in writing, any comments or suggestions which any of the

members of the Committee might wish to make in connection with the drafts

of replies.

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It

was agreed that the next meeting of the Committee would be

subject to call by the Chairman and that in the absence of unforeseen

developments a meeting would not be called until after the first of the

New Year.

Thereupon the meeting adjourned.

Secretary.