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,

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

June 19,

1952, at 10:20 a.m.

Martin, Chairman

Sproul, Vice Chairman

Bryan

Earhart

Evans

Hugh Leach

Mills

Powell

Robertson

Szymczak

Mr. Vardaman

Mr. C. S. Young

Mr. Riefler, Secretary

Mr. Thurston, Assistant Secretary

Mr. Vest, General Counsel

Mr. Thomas, Economist

Messrs. Wheeler and Ralph A. Young, Associate

Economists

Mr. Rouse, Manager, System Open Market Account

Mr. Sherman, Assistant Secretary, 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. Willis, Special Assistant, Securities Depart

ment, Federal Reserve Bank of New York

Mr. Craft, Technical Consultant

Messrs. Erickson, Gidney, and Johns, alternate members

of the Federal Open Market Committee

Messrs. Williams, Leedy, and Gilbert, Presidents of

the Federal Reserve Banks of Philadelphia,

Kansas City, and Dallas, respectively

Mr. Clark, First Vice President of the Federal

Bank of Atlanta

Reserve

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Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meetings of the Federal Open Market Committee

on February 29 and March 1, 1952, were ap

proved.

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

March 1, April 4, April 21, May 9, and May

23, 1952, were approved, ratified, and con

firmed.

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

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

serve Bank of New York covering the period February 29,

1952, inclusive.

1952 to June 13,

At this meeting, Mr. Rouse presented and commented

briefly on a supplementary report covering commitments executed on June 16,

17, and 18, 1952.

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 February 29 to

June 18, 1952, inclusive, were approved,

ratified, and confirmed.

Chairman Martin referred to a recommendation of the executive

committee adopted at its meeting on April 21, 1952 and transmitted to all

members of the Committee under date of May 7,

1952, that the Federal Open

Market Committee authorize the executive committee to issue a continuing

formal authorization to the Federal Reserve Banks to purchase special

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certificates

of indebteness direct from the Treasury, from other Federal

Reserve Banks, or from the System open market account when such purchases

would facilitate

the handling of the Treasury balances on Saturdays or

holidays when the Federal Reserve Bank of New York is closed and another

Federal Reserve Bank is

open.

The reasons for the recommendation were set

out in the minutes of the meetings of the executive committee on April 4

and April 21, 1952, as well as in a memorandum from Mr. Rouse dated April

17, 1952, copies of which had been sent to each member of the Committee

before this meeting.

During a discussion of the recommendation, Mr. Rouse suggested

that if the authorization were given it be made clear that it would apply

when the Federal Reserve Bank of New York was closed and any other Reserve

Bank or branch was open.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, the Committee

authorized each Federal Reserve Bank, during

such period as the executive committee of the

Federal Open Market Committee may permit, to

purchase special certificates of indebtedness

of the United States, under arrangements made

with the Federal Reserve Bank of New York, di

rectly from the Treasury, from another Federal

Reserve Bank, or from the System open market

account, when such purchases will facilitate

the handling of the Treasury's balances on

Saturdays or holidays when the Federal Reserve

Bank of New York is closed and another Federal

Reserve Bank or branch is open; provided that

the amount of such special certificates held

by all

of the Federal Reserve Banks for their

own account as a result of such purchases,

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together with the amount of such special

certificates purchased directly from the

Treasury and held in the System open market

account, shall not exceed at any one time the

total amount of such special certificates

authorized to be held under the then current

authorization of the executive committee to the

Federal Reserve Bank of New York for the System

account.

Chairman Martin then referred to recommendations of the executive

committee adopted at its meeting on April 21, 1952 regarding bankers'

acceptances, a copy of which was sent to each member of the Committee on

May 7, 1952.

The recommendations included the proposal that section 8 of

the Regulation of the Federal Open Market Committee be amended to read as

follows:

"SECTION 8. OTHER OPEN MARKET OPERATIONS

"Subject to directions of the Committee and the following

conditions, each Federal Reserve bank may engage in open-market

operations other than the purchase or sale of Government

securities:

"(1) Each Federal Reserve bank, as may be required from

time to time by the Committee, shall report all such trans

actions to the Secretary of the Committee.

"(2) Only acceptances and bills of exchange which are of

the kinds made eligible for purchase under the provisions

of Regulation B of the Board of Governors of the Federal

Reserve System may be purchased:

Provided, That no obliga

tions payable in foreign currency shall be purchased or

sold for the account of the Federal Reserve bank except

in accordance with directions of the Committee.

"(3) Only bills, notes, revenue bonds, and warrants of

States, counties, districts, political subdivisions, or

municipalities which are of the kinds made eligible for

purchase under the provisions of Regulation E of the Board

of Governors of the Federal Reserve System may be purchased.

"(4) No Federal Reserve bank shall engage in the pur

chase or sale of cable transfers for its own account except

in accordance with the directions of the Committee."

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6/19/52

The executive committee also recommended that:

"A. Each Federal Reserve Bank be authorized to purchase

prime eligible bankers' acceptances in the open market from

banks and financially responsible experienced dealers and to

hold such acceptances in its own portfolio.

"B. The minimum buying rate on such prime eligible bankers'

acceptances shall be fixed by the Federal Open Market Committee

at this time at 1-3/4 per cent, subject to change from time to

time by the Committee in order to carry out its policies.

"C. The effective rates at which a Federal Reserve Bank

may purchase bankers' acceptances shall be not less than the

minimum buying rate and shall be specified from time to time

by the manager of the System Open Market Account in the light of

market conditions and developments and in accordance with any

directives or limitations prescribed by the full Committee or the

executive committee for the purpose of carrying out the current

Any change in

policies of the Federal Open Market Committee.

the effective buying rates on bankers' acceptances shall be prompt

ly reported by the Manager of the Account to the Federal Open

Market Committee."

At Chairman Martin's request, Mr. Vest reviewed the reasons for

the proposed amendment to the regulation and for the other recommendations

made by the executive committee concerning purchases of prime eligible

bankers'

acceptances and setting of rates on such acceptances.

Upon motion duly made and seconded,

and by unanimous vote, the recommendations

of the executive committee as set forth

above were approved.

Mr.

Craft reported on the ad hoc committee study of the scope

and adequacy of the Government securities market, stating that satisfactory

progress was being made and that during the discussions with securities

dealers that had been taking place since June 9 there had been a fairly

consistent pattern of comments developed on the basis of the detailed out-

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line which had been prepared by the subcommittee for the express purpose of

securing comments from dealers in Government securities.

that

Mr.

Craft added

the subcommittee was considering the possibility of preparing an appro

priate type of outline to be sent to some of the larger investor groups

such as insurance companies, savings banks, and State funds, with the

thought that their comments could be obtained largely by mail rather than

by asking that individuals come to Washington for discussions.

Mr. Vardaman raised the question whether copies of statements

made by securities dealers during discussions with the subcommittee might

be made available to all

Committee members from week to week,

and Chairman

Martin commented that it was contemplated that a report would be submitted

to all members of the Committee as promptly as possible, that it did not

seem feasible to prepare interim reports, and that he expected the sub

committee would not be in

a position to submit a written report until

some

time in September which would mean about 90 days from the time the study

commenced.

At this point members of the staff of the Board's Division of

Research and Statistics

and Division of International Finance entered the

room and there was presented a review of the economic situation and credit

outlook, illustrated by chart slides.

In concluding this review, Mr. Thomas pointed out the implications

for Federal Reserve policy indicated by recent and prospective economic

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6/19/52

developments.

He indicated that there are favorable prospects for contin

uation of an economic situation of approximate balance at a high level of

activity but the maintenance of such a balance may require even greater

reliance on general monetary restraints, particularly in view of the relaxation

of selective and voluntary measures.

Prospects for the second half of 1952

are for substantial cash borrowing by the Treasury while private credit

demands may be only slightly less than last year even with relatively stable

prices.

large,

Although savings and the accumulation of liquid funds may continue

it

will be necessary for the Treasury to adopt vigorous measures to

attract available funds into Government securities and for the Federal Re

serve to restrict the availability of bank reserves, if undue expansion of

bank credit is to be avoided.

The intermediate financing in process and

subsequent offerings of tax anticipation bills, together with moderately

favorable results from the new savings bonds, may be adequate to meet the

Treasury's needs.

Increased reserve needs might be adequately supplied

through member bank borrowing and repurchase agreements with dealers, with

a minimum of direct purchases of securities by the System.

the continuation of tight money markets.

This would mean

If credit demands tend to become

excessive, an increase in the discount rate might be appropriate.

Following the economic review,

Chairman Martin reported briefly on

preliminary information he had received concerning the response to the cash

offering of 2-3/8 per cent Treasury bonds of 1958, on which the books were

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opened for subscription on Monday, June 16.

He stated that it

appeared that

the offering had been oversubscribed more than three times, that subscriptions

from nonbank investors apparently exceeded the amount of the offering of

$3,500, 000,000, and that the total allotment would have to be expanded in order

to provide any minimum allotment to commercial banks.

There followed a general discussion of the Treasury financing, during

which Mr. Evans called the Committee's attention to the fact that since the

war the Federal Open Market Committee has had several objectives in mind:

1. To refinance the public debt so that a larger proportion

would be in long-term securities in the hands of nonbank

investors.

2.

To prevent further accumulation of Government securities

by banks.

3.

To reduce bank loans in order to retard inflation.

Mr. Evans pointed out that these objectives have not been attained.

Up to the present time the refinancing of the debt with long-term

securities has not been effectively attempted and the average maturity of the

public debt has shortened.

all-time high.

Banks have increased their loan portfolios to an

Commercial banks are once more interested in purchasing

Government securities and they are available to them.

Mr. Evans suggested that the Committee give careful thought to its

statutory responsibilities and conduct its open market operations in such a

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way as to prevent the further deterioration of the purchasing power of the

dollar.

The immediate policy question to be raised is how much bank credit

expansion--and, specifically, how much Reserve Bank credit expansion--can we

really afford to tolerate this year?

Turning to open market operations, Chairman Martin raised the

question whether there should be any change in the Committee's existing policy

of neutrality, 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.

Mr. Sproul then commented briefly as follows:

The reception accorded the cash offering of new 2-3/8 per cent

five-year Treasury bonds reflects fever rather than health in the

patient. There appear to be two primary dangers in the current

situation. The first of these is the confirmation of opinion held

by some at the Treasury that there is no such thing as market deter

mination of prices and yields on Government securities and that the

Treasury and the Federal Reserve System can and should make the

market.

In that view, Treasury borrowing becomes a simple, crude

process of deposit creation by the banking system closely akin to

printing money. The second danger is the risk that the market will

assume as it has, and be confirmed in its assumption that the Treasury

and the Federal Reserve System are reverting to the wartime practice

of giving reserves to commercial banks in amounts necessary to make

each Treasury financing a complete success and to assure an advance

in the price of each new issue subsequent to its offering, if not

facilitating repeated offerings at rising prices. The large sub

scription response to the new 2-3/8 per cent bonds of 1958 means

little regarding the true needs and the true resources of the sub

scribers. Commercial banks have a definite interest in the new

bonds but lack the reserves (apart from their creation by the

Federal Reserve System) to fill their needs. For the most part,

the response from nonbank investors represents "free riding" under

taken largely in the hope of selling the issue profitably at an early

date without risk of price depreciation. The current economic and

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market situation suggests the wisdom of keeping a close check rein

on credit without committing the System to a policy which would

suggest that it was concerned either with the development of in

flation or deflation at this time.

In terms of open market operations

that would mean allowing the market to adjust itself with a minimum

of positive assistance from the System open market account while,

at the same time, encouraging commercial banks to meet reserve needs

through rediscounting rather than extending direct aid to them through

open market transactions.

A collateral result would be to eliminate

some of the profit from "free riding" operations by speculative

subscribers to the 2-3/8 per cent bonds. It appears that many

investors must relearn the meaning of a free market. It would seem

wisest to reaffirm the current policy of neutrality and to continue

efforts to encourage the banks to seek reserves through the discount

window.

Chairman Martin suggested that in the absence of objection the Com

mittee reaffirm its existing policy, and none of the members of the Committee

indicated disagreement with this suggestion.

Thereupon, upon motion duly made and

seconded, the following direction to the execu

tive committee was approved unanimously with the

understanding (1) that the limitation contained

in the direction would include commitments for

the System open market account; and (2) that if

the authority contained in Section 14(b) of the

Federal Reserve Act to purchase securities

directly from the Treasury were not extended

beyond June 30, 1952, the authority given in the

second paragraph of the direction would terminate

on that date:

The executive committee is directed, until otherwise directed

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

actions 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 matu

rities 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 inflationary developments, to maintaining orderly conditions in

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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 accommodation

of the Treasury; provided that the total

amount of such certificates

held in the account at any one time shall not exceed $2,000,000,000.

It was agreed that the next meeting of the Committee tentatively

should be scheduled to be held some time during the week commencing September

22, 1952.

Mr.

Sproul stated that in view of the fact that John H. Williams,

Economic Adviser to the Federal Reserve Bank of New York and presently an

associate economist of the Committee, would retire from active service effec

tive June 30, 1952, continuing only as a consultant at the New York Bank, he

(Mr. Sproul) would recommend that Harold V. Roelse, Vice President of the Fed

eral Reserve Bank of New York, be elected an associate economist of the Federal

Open Market Committee effective July 1, 1952 to succeed Mr. Williams.

Thereupon, upon motion duly made and

seconded and by unanimous vote, Mr. Roelse

was elected an associate economist, to serve

until the selection of his successor at the

first meeting of the Committee after February

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28, 1953, with the understanding that in the

event of the discontinuance of his official

connection with the Federal Reserve Bank of New

York he would cease to have any official connec

tion with the Federal Open Market Committee.

Thereupon the meeting adjourned.

Secretary.