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 Friday,

PRESENT:

February 29,

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

1952,

at

10:00 a.m.

Martin, Chairman

Sproul, Vice Chairman

Evans

Gidney

Gilbert

Leedy

Mills

Powell

Robertson

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. Youngdahl, Chief, Government Finance Section

Division of Research and Statistics,

Board

of Governors

Mr. Arthur Willis, Special Assistant, Securities

Department, Federal Reserve Bank of New York

Messrs.

Leach, 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, the minutes of the meeting

of the Federal Open Market Committee held on

November 14, 1951, were approved.

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Upon motion duly made and seconded, and

by unanimous vote, the actions of the executive

committee of the Federal Open Market Committee

as set forth in the minutes of the meetings of

the executive committee held on November 13-14,

1951, and February 11, 1952, 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 November 14, 1951 through

February 25,

1952,

inclusive.

Mr. Rouse presented a supplementary report

covering commitments executed on February 26-28, 1952,

mented briefly on both reports.

the file

inclusive, and com

Copies of the reports have been placed in

of the Federal Open Market Committee.

Upon motion duly made and seconded, and

by unanimous vote, the transactions in the Sys

tem account for the period November 14, 1951, to

February 28, 1952, inclusive, were approved,

ratified, and confirmed.

Reference was made to the report prepared by Mr. Rouse under

date of January 23,

1952, with respect to dealer commissions on transac

tions for the System open market account, as presented and discussed at

the meeting of the executive committee on February 11,

1952.

As recommended

at that meeting, copies of the memorandum had been sent to the Presidents

of all Federal Reserve Banks for their information and for such discussion

at this meeting as might appear to be desirable.

None of the members of the Federal Open

Market Committee and none of the Presidents of

the Federal Reserve Banks who were not members

of the Committee had any comments to make con

cerning the memorandum, and it was ordered re

ceived and filed.

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At Chairman Martin's request, the Secretary reported on a

change in the procedure for forwarding investment schedules pertaining

to the System open market account from the Federal Reserve Bank of New

York to the Division of Examinations of the Board of Governors currently

in connection with the examiners' audit of the System account.

Mr.

Carpenter stated that this change was made in January of this year with

the thought that much of the detailed work of the examiners which hereto

fore has been accomplished with borrowed help at the New York Bank during

the examiners'

audits of the System open market account could be done in

the Board's Division of Examinations on a current basis, and that the

investment schedules which previously had been set aside at the Federal

Reserve Bank of New York for the use of the Chief Federal Reserve Examiner

at the time of his examination of the Bank were now being forwarded to the

Board on as nearly a weekly basis as possible.

Members of the Committee

noted the change without objection.

Members of the staffs of the Board's Division of Research and

Statistics and Division of International Finance then presented an economic

review and outlook illustrated by chart slides.

At the close of the review,

Mr. Thomas made a statement with respect to credit and monetary policies

in relation to fiscal and debt management problems.

In his remarks, Mr. Thomas said that the economic picture was

one of approximate balance at high levels of activity, that this situation

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had prevailed for nearly a year during which there had been an important

measure of credit restraint, and that there now were in prospect some

factors suggesting the possibility of downward readjustments in prices and

decreases in some phases of business activity.

There are also in prospect,

however, a number of factors that would tend to generate inflationary pres

sures, particularly the expanding defense program and the continued high

level of capital expenditures by business.

With the Federal fiscal position

shifting from a cash surplus to a sizeable cash deficit which would be at

least $4 billion for the calendar year 1952, the Government might need to

borrow as much as $10 billion during the second half of 1952 in order to

meet the deficit and cover cash redemptions of maturing securities.

Mr.

Thomas felt that unless individuals and corporations put relatively more of

their liquid savings into Government securities and held smaller cash

balances,

there might need to be an expansion of bank credit, possibly as

much as $4 billion, to bring the volume of credit in line with potential

This would add to the money supply and be an inflationary in

demand.

fluence.

Under circumstances recently prevailing and in prospect, Mr.

Thomas felt that continuation of Federal Reserve policies of neutrality

would be particularly appropriate since under those policies monetary and

credit restraint or ease results from the interplay of market forces of

demand and supply with a minimum of Federal Reserve intervention.

Thus,

if

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borrowing demands should turn out to be less than the supply of savings

available for investment,

the money market should be relatively easy and

there would be little occasion for the System to try to prevent the ease

from occurring.

On the other hand, should combined borrowing demands from

Government and private sources exceed the supply of savings and call for

much bank credit expansion, a tighter market should be expected unless the

Federal Reserve intervenes to supply reserve funds.

Only in case forces

of recession or inflationary pressures become overwhelming should there be

need for positive and vigorous action by the System to operate against

the trend of borrowing demands, Mr. Thomas felt, and principal reliance

should be placed on member bank borrowing as a means of obtaining ad

ditional reserves.

With respect to financing the prospective deficit, Mr. Thomas

stated that it

was impossible to provide easy credit for Government without

at the same time making easy credit available to private borrowers.

There

should be a positive program of debt management aimed at attracting nonbank

funds to meet the deficit.

An improved savings bond program and offerings

of other securities attractive to individuals would be needed to attract

savings into Government securities.

While additional restrictions on credit seemed unnecessary at

present, Mr. Thomas expressed the view that relaxation of restraints was

not called for and measures should continue in readiness to restrain any

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resumption of inflationary tendencies.

Following Mr. Thomas'

comments, Mr. Powell stated that it

ap

peared that during 1951 an important measure of restraint had been exercised

by the public through its willingness to save at a high rate but that if

the public were to resume spending at a substantially higher rate during

coming months, upward pressure on prices would be renewed.

Under these

circumstances, Mr. Powell asked what the Committee might do in the field

of monetary and credit policy to offset the increased spending.

Mr. Thomas commented that in that situation vigorous action to

reduce the supply of funds would be desirable.

Mr. Sproul stated that he felt it was possible to place too much

emphasis on the role of consumer spending.

He also said that while consumer

restraint in spending had been an important factor in the relative price

stability over the past year, it was his opinion that no small part of

the willingness of consumers to save reflected a belief that measures were

being or might be taken to preserve the purchasing power of the dollar, and

that if

consumers continued to believe appropriate measures in that direc

tion would be taken there would be a continuation of savings.

On the other

hand, if the public began to feel that proper fiscal and debt management and

monetary policies were not being pursued and that there was a likelihood of

renewed inflationary movements, the incentive to save would be reduced.

Mr.

Sproul said that in that case the remedy prescribed by Mr. Thomas--vigorous

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action to reduce the supply of funds--would not be easy to apply.

the reasons, Mr.

Sproul said, it

Whatever

was becoming increasingly apparent that the

country would not have an adequate fiscal policy in that there would be a

large Federal deficit at a time when the budget should be balanced.

In the

field of debt management, the Treasury faced a need for substantial borrowings

to finance the deficit during the last half of the calendar year 1952, at the

same time that it

tions.

would be almost constantly in the market with refunding opera

This may well preclude a vigorous credit policy, so that if the public

does not continue to save a difficult problem will be presented.

Under these

circumstances it was Mr. Sproul's view that it is necessary to begin immedi

ately to pursue a bold, vigorous program for obtaining funds from nonbank

sources wherever possible and that both an improved savings bond program and

a more effective program of sales of Government securities to nonbank investors

would be needed to accomplish this purpose.

The problem ahead appeared to him

to be a very difficult one which could be quite intractable in terms of an

adequate credit policy if there were not a complementary problem of debt

management.

Chairman Martin commented that he felt some encouragement could

be found in the program undertaken by the Treasury in connection with its

March refunding although he did not minimize the difficulties outlined by

Mr. Sproul in his comments.

He felt that the Committee should take advantage

of the period prior to the refunding of the July certificates to work out a

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further program with which to attack the problem.

In this connection, he

referred to the memorandum on Government Financing in 1952 prepared by the

System Research Committee on Government Finance under date of January 25, 1952,

copies of which were sent to all members of the Committee before this meeting,

and at his request Mr. Youngdahl summarized the comments appearing in that

memorandum on pages 17-23 regarding types of long-term securities that might

be offered by the Treasury.

Following Mr. Youngdahl's statement, Mr. Sproul said that he felt

that, even under existing circumstances,

a long-term unrestricted marketable

bond was preferable to a nonmarketable convertible issue, as it

would be the

means by which the Treasury could raise the largest amount of long-term funds

from nonbank sources at the lowest cost.

While there were risks in undertaking

long-tern financing in the situation which faces us, he felt that they were

necessary in order to do the financing in a manner that would not be inflation

ary and that would avoid greater risks of doing an unsatisfactory job of

attracting nonbank funds.

He recognized that prices of existing issues would

decline but felt that the extent of the decline would be limited by the willing

ness of existing holders to sell at a loss.

He thought this sort of market

adjustment preferable to trying to cushion the effects of long-term financing

by a nonmarketable convertible issue.

Such issues, he said, would establish

an undesirable mechanical connection between short- and long-term rates and

would,

in effect be a trap for the investor who might buy without full real

izetion of the conditions and penalties of liquidation.

He also said such

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issues would take control of the debt structure out of the hands of the

Treasury because it

would not know whether it

obligation outstanding.

had a thirty-year or five-year

He added that, although the convertible issue offered

by the Treasury last year was a desirable means of meeting the problem confront

ing the Treasury and the System at that time, the issue should not be further

imbedded into the debt structure and should not be recommended to the Treasury

as a way out of the dilemma of getting long-term funds as a supplement to an

improved savings bond program.

During Mr. Sproul's statement Mr. Riefler, Assistant to the Chair

man, Board of Governors, joined the meeting.

There was a further discussion of the advantages of marketable and

nonmarketable issues during which Chairman Martin inquired if the members of

the Committee had any views that differed from those expressed by Mr. Sproul.

No further comments were made whereupon Chairman Martin suggested that the mem

bers of the Committee continue to study the problem presented in the memorandum

prepared by the System Research Advisory Committee, that the full Committee

ratify the action of the executive committee in sending a copy of the memorandum

to the Treasury, and that the Treasury be advised that, after considering the

memorandum, the Federal Open Market Committee agreed that use of a marketable

security at a competitive rate would be preferable to the use of a nonmarket

able convertible issue in Treasury long-term financing operations later this

year.

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There was also a discussion of other questions relating to

Treasury financing including possible new money financing during May of

this year and question was raised as to whether the Treasury might find

it desirable to use tax anticipation bills similar to those issued in the

fall of 1951.

bills, if

There was also a discussion of whether payment for such

issued, should be permitted through credit to tax and loan ac

counts of banks or whether they should be sold only to corporations (in

cluding banks) which might use them in payment of their own taxes.

Chair

man Martin said that these were matters in which the Committee should work

closely with the Treasury.

Mr. Sproul expressed the view that, if possible, it would be

desirable not to go to the market for new money in May or June of this

year, particularly since large refinancing operations would become neces

sary in July and new money financing would be necessary during the second

half of this year.

If

it

should become necessary for the Treasury to

obtain new money before the end of June, Mr. Sproul suggested the possible

use of the authority of the Federal Reserve System to purchase direct from

the Treasury short-term certificates of indebtedness for the temporary

accommodation of the Treasury.

Chairman Martin suggested that the question of a recommendation

to the Treasury on this point and other matters relating to Treasury financing

be left to the executive committee, that the Committee ratify the trans

mission to the Treasury of the memorandum on Government Financing in 1952,

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and that the Treasury be informed that the Committee would favor long-term

financing by means of a marketable issue rather than a nonmarketable con

vertible issue.

This suggestion was approved

unanimously.

Chairman Martin then referred to a memorandum dated February 25,

1952,

with respect to the establishment of rates on purchases of bankers'

acceptances which had been sent to all

members of the Committee together

with an opinion by Mr. Vest concerning the establishment of such rates

by the Federal Open Market Committee.

At the Chairman's request, Mr.

Carpenter reviewed the circumstances which gave rise to the memorandum,

stating that when the currently effective buying rates for acceptances

were increased by the Federal Reserve Bank of New York in December 1951

in accordance with a rise in

Banks,

dealers'

rates,

some of the other Reserve

instead of establishing a schedule of currently effective rates,

presented to the Board of Governors for approval an increase to 1-7/8 per

cent in

at

their

that time,

authorized minimum buying rate.

he said,

it

As a result of discussions

was agreed that consideration should be given

at this meeting to the procedure to be followed in the future.

Chairman Martin suggested that the matter be referred to the

executive committee with a view to having it

the next meeting of the full Committee.

submit a recommendation at

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This suggestion was approved

unanimously.

There followed a general discussion of open market policy during

which Chairman Martin commented upon the possible need for additional

bank credit to carry inventories incident to rescheduling of defense

production.

At the conclusion of the discussion it was unanimously agreed

that no change should be made in the Committee's current policy of neutrality

in the market under which market forces of supply and demand are permitted

to have their effect with a minimum of System intervention except to the

extent necessary to promote orderly market conditions.

Secretary.

Thereupon the meeting adjourned.