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, September 25, 1952, at 10:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Sproul, Vice Chairman

Bryan

Earhart

Evans

Hugh Leach

Robertson

Vardaman

C. S. Young

Mr. Riefler, Secretary

Mr. Vest, General Counsel

Mr. Thomas, Economist

Messrs. Mitchell, Rauber, Roelse, Wheeler,

C. W. Williams, and R. A. Young, Associate

Economists

Mr. Rouse, Manager, System Open Market

Account

Mr. Sherman, Assistant Secretary, Board

of Governors

Mr. Youngdahl, Assistant Director, Division

of Research and Statistics, Board of

Governors

Mr. R. F. Leach, Acting Chief, Government

Finance Section, Division of Research

and Statistics, Board of Governors

Mr. Willis, Assistant Secretary, Federal

Reserve Bank of New York

Messrs. Erickson, Gidney, Johns, and Powell,

alternate members of the Federal Open

Market Committee

Messrs. A. H. Williams, Leedy, and Gilbert, Presidents

of the Federal Reserve Banks of Philadelphia,

Kansas City, and Dallas, respectively

Mr. Peterson, Director of Research, Federal Reserve

Bank of Minneapolis

9/25/52

-2

Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meeting

of the Federal Open Market Committee held on

June 19, 1952, were approved.

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 June 6, June 19,

July 22, and August 29, 1952, were approved,

ratified, and confirmed.

Upon motion duly made and seconded, and

by unanimous vote, the action of the members of

the Committee on July 22, 1952, revising the

conditions under which the Federal Reserve

Banks are authorized to enter into repurchase

agreements with non-bank dealers in United

States Government securities, was approved,

ratified, and confirmed.

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

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

Bank of New York covering the period June 19 to September 19,

sive.

1952, inclu

At this meeting, Mr. Rouse presented and commented briefly on a

supplementary report covering commitments executed on September 22, 23,

and 24, 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 June 19 to Sep

tember 24, 1952, inclusive, were approved,

ratified, and confirmed.

A review of the economic situation and credit outlook, including

a projection of gross national product and income through 1953, was then

-3

9/25/52

presented by members of the staff of the Board of Governors of the Federal

Reserve System.

A memorandum prepared in the Board's Division of Research

and Statistics unde. date of September 23, 1952 on the projection of gross

national product and income was distributed before the meeting, and a copy

of the script used in the visual presentation has been sent to each member

of the Committee.

Following the review of the economic situation, Chairman Martin

reported on developments since the meeting of the Committee on June 19,

stating that the general policy of neutrality which resulted in placing

some restraint on credit expansion had been interpreted by the executive

committee as meaning that only such reserves should be supplied to the mar

ket as were consonant with normal growth in the economy and which would

maintain the money flow so that the defense effort and the business commun

ity were not unduly hampered.

In carrying out this policy, the Chairman

said, the executive committee had done everything that it could to assist

the Treasury in its financing, consistent with a minimum growth in bank

credit.

In this connection, he stated that he had asked that members of

the Committee be furnished with a copy of a paper read by Mr. Riefler at

the annual meeting of the Western Economic Association on September 4,

1952 on "Debt Management, Fiscal Policy, and Monetary Controls", which

discussed in some detail the effects of flexible Reserve Bank operations

during July and August this year, with the thought that the members of the

Committee might wish to comment regarding the points covered in Mr.

9/25/52

-4

Riefler's paper at or before the next meeting.

Chairman Martin also sug

gested that during the next few months the members of the Committee give

special thought to its responsibility in connection with underwriting

Treasury financing,

adding that sooner or later the Committee would have to

reach a decision as to whether it should give up the underwriting of Treas

ury offerings or whether it

should proceed in more or less the manner that

has been followed in the past.

With specific reference to the October 1 financing, for which the

Treasury had offered a 2-1/8 per cent 14-month note in exchange for $10,861

million maturing 1-7/8 per cent certificates of indebtedness, the Chairman

noted that, except for purchases of the maturing issue during the four-day

period the books were open, the System's open market operations had supplied

only a negligible additional amount of reserves to the market since the end

of June.

He felt that the Committee's operations during this three-month

period had been reasonably successful in keeping an even flow of money

through the economy without having had funds "swishing over the banks" or

contracting unduly.

The fact that member banks had continued to borrow in

the neighborhood of $1 billion from the Reserve Banks during most of this

period suggested that consideration might be given to the possibility of an

increase in the discount rate if further restraint on credit expansion be

came necessary.

The Chairman suggested, however, that at this time the

problem was whether the Committee's present policy of neutrality, which in

practice meant a situation having modest restraint upon credit expansion,

9/25/52

.5

should be reaffirmed, modified in the direction of greater restraint, or

changed to bring about easier credit conditions during coming months.

Mr. Earhart stated that he felt the existing policy should be

reaffirmed but that he had been somewhat disturbed by the amount of Gov

ernment securities purchased at a premium by the System open market

account in connection with the October 1 Treasury financing, whereas in

the August 15 financing, the Federal Reserve was not willing to pay a

premium on the maturing issue and acquired only a small volume.

In response to Mr. Earhart's comment, Chairman Martin made a

statement substantially as follows:

I think a discussion of that point would be very useful.

It touches directly on the underwriting problem we have in front

of us to which I have just referred. The executive committee at

the time of the August refinancing decided not to do anything

with respect to purchases of "rights" at a premium.

In discuss

ing the October 1 financing at our meeting on September 15, the

executive committee decided to make purchases of "rights" at a

whether

The question Mr. Earhart raises is first

premium of 3/64.

we put in more money in connection with the October financing

than our projection of the demand for credit this fall would call

for, and second, if we did whether we can secure the position in

connection with the approaching sale of Treasury tax anticipation

bills, which will increase the demand for reserves. I think this

operation is extremely difficult, particularly while we are mov

ing from a pegged market to a free one. During this period there

is bound to be a certain amount of misunderstanding in the market

and misinterpretation of what our policy is. At the last meet

ing of the executive committee we had quite a debate as to whether

we would buy the "rights" at a premium of 1/32 or 1/64 or 2/32

or something else. The 3/64 represented a compromise. The area

of difference in the amount of attrition we took on ourselves

is somewhere between 97 per cent of the total maturing issue and

91-1/2 per cent. In view of all the circumstances, that does

not seem to me to be a great amount. I was sorry we had to buy at

all but it still does not seem too much. If we had bought the

9/25/52

-6

"rights" at a premium of 1/64 we might have bought less. I think

that by and large we ought to err, if we are to err, on the side

of being sympathetic with the Treasury's problem since we have,

perhaps wrongly, assumed some underwriting responsibility in the

past year or so for their issues. Whether we should proceed more

cautiously and minimize Federal Reserve takings of the maturing

issue is a very real problem.

I would think you could make a

pretty good argument on either side as to the handling of the

Treasury's October 1 offering, but my feeling is that the way

we did it was on the right side. The question whether our pur

chases, if any, should be at par and 1/32 or 1/64 or 3/64 is

something that can only be determined over a period of time.

In the executive committee meetings we have been discussing

very frankly the area of necessary discretion that lies between

I think

decisions in policy matters and decisions on operations.

we are feeling our way between the problems of debt management and

of monetary policy from day to day. I would also like to have Mr.

Sproul give his views on this.

Mr. Sproul then made a statement substantially as follows:

As to how we should proceed, I think it was and is a question

of judgment based on experience during this period of transition

from a pegged market to a free market. The results of the August

financing and of the October 1 financing are perhaps significant:

In August we bought "rights" only at par and the attrition on the

In the

Treasury was 17-1/2 per cent and on us 7-1/2 per cent.

October 1 financing when we bought "rights" at par and 3/64, the

attrition on the Treasury was 8 per cent and on us 17-1/2 per

In other words, at a time of restraint on credit avail

cent.

ability and rising interest rates or anticipation of rising

interest rates, we must expect that attrition on these Treasury

issues is going to be substantial. We should no longer think in

terms of 5 or 10 per cent attrition over-all.

As to the general question of whether we or the Treasury

ought to take the attrition, I should think we should want, in

a period of credit restriction, to let the Treasury take the

attrition since we would wish to avoid supplying reserve funds.

The Treasury would be able to offset the attrition with increased

issues of weekly Treasury bills or tax anticipation bills. It

should not be unduly embarrassed.

9/25/52

In this last operation, we put more credit into the market

than any of us would have preferred at that particular time. How

ever, over the next few weeks we have the natural factors of

decreasing float, building up of Treasury balances, and seasonal

increases in required reserves working in our favor to reduce the

amount of reserves available in the market. If we hold back now

so that the banks are again brought into the position of substan

tial

borrowing, I think we can retrieve what we lost in the

October 1 financing.

Several other members of the Committee commented on reactions in

their areas to the results of the October 1 financing and there followed a

brief discussion of factors which might affect the demand for Government

securities during the first

part of 1953.

During this discussion, Mr. Evans commented that while he did

not think anyone could say how great the credit needs would be during the

next month or two, he felt that the policy should be one of constant re

straint, so that the amount of money put into the market would be held to

a minimum.

None of the members of the Committee indicated that there should

be any change in the current general policy of neutrality, which means re

straint on undue credit expansion, and at the conclusion of the discussion

there was unanimous agreement with Chairman Martin's suggestion that the

present policy be reaffirmed.

Chairman Martin then expressed the view that the policies of the

Federal Open Market Committee would be having their maximum effect if

member banks were in a position where they were borrowing from the Fed

eral Reserve Banks somewhere in the neighborhood of $1 billion.

He felt

-8

9/25/52

that if borrowings increased to $1-1/2 or $2 billion or more, the restric

tive effects might decrease.

The point, he said, was that as the volume

of borrowings increased bankers became more accustomed to being in debt

to the Federal Reserve.

He also felt that too heavy a load of borrowing

might have undesirable repercussions in the mobility of the money markets.

Some of the members of the Committee felt that banks have a gen

eral reluctance to borrow and that while, to some degree,

they might become

reconciled to discounting, there would be accumulative restraining effects if

the situation developed to the point where further larger borrowings at the

Federal Reserve Banks were necessary.

In reponse to a question from Chairman Martin as to the use of

repurchase agreements, Mr. Rouse stated that the present authority contin

ued to be useful but that it

was not a major tool and had not been used to

any great extent during the past few months.

With respect to the Chair

man's comment that member bank borrowing ranging upwards from $1 billion

might become progressively less effective,

Mr. Rouse agreed in general

that when borrowing got much over $1 billion it meant that the money market

was tight, that dealers were less likely to make a market under such condi

tions, and that some of the flexibility was thus taken out of the market.

He felt it

was not possible to give a categorical reply to the question

whether the situation would become less restrictive if borrowing rose above

that figure although he expressed doubt that it

would.

9/25/52

In a discussion of Treasury needs for additional funds during

coming months, Mr. Thomas stated that it

appeared that somewhere between

$4 and $5 billion would be needed between now and the end of the year and

that this probably would be met by the issue of tax anticipation bills

announced by the Treasury in the amount of $2-1/2 billion this week and by

a further additional issue of tax anticipation bills within the next month

or two for about the same amount.

While there would be a small refunding

totaling approximately $1 billion around December 1, 1952, Mr. Thomas felt

that no conclusion could be reached at this time as to the best means of

handling that refunding.

Reference was then made to a memorandum dated September 23, 1952,

from Mr. Leonard, Director of the Division of Bank Operations of the Board

of Governors,

concerning open market participation in special Treasury

certificates of indebtedness.

The memorandum, copies of which had been

sent to each member of the Committee before this meeting, pointed out that

at present such Treasury certificates of indebtedness (which are carried

only on a few occasions during the year and only for a few days at a time)

are carried in the open market account with resulting participation by all

Federal Reserve Banks.

It

also stated that the procedure whereby these

certificates are allocated to the several Federal Reserve Banks involves

considerable bookkeeping and considerable exchange of telegrams between the

manager of the open market account and the individual Reserve Banks and

also results in complications when certificates are carried over Saturdays

9/25/52

-10

and holidays, when some Reserve Banks are open and others are closed and

the Treasury wishes to make payments on the certificates.

The memorandum

suggested that consideration be given to having the special certificates

carried by the Federal Reserve Bank of New York for its own account instead

of being held in the open market account, noting that the System's earnings

on such certificates are relatively small ($4,000 in 1951 and $49,000 dur

ing 1952 up to September 22) and that the proposed procedure should not

affect significantly the earnings position of any Reserve Bank.

Chairman Martin stated that he felt the procedure suggested in

the memorandum would be desirable and, in response to the Chairman's request,

Mr. Sproul reviewed the reasons for the proposed change in procedure.

Sev

eral of the members of the Committee who also were Reserve Bank Presidents

stated they would favor having the New York Bank handle the special Treas

ury certificates.

Mr. Rouse stated that adoption of the proposed change would prob

ably make unnecessary the authorization approved at the meeting of the full

Committee on June 19 concerning purchases of special certificates over week

ends when some Federal Reserve Banks are closed but others are open.

He

observed that that authorization had been approved to make it possible for

the Treasury to pay down the amount of the special certificates on any day

when only a portion of the Reserve Banks or branches were open, but that

the Treasury had indicated to him that the possible saving in interest was

not sufficient to justify the use of the procedure on a recent occasion

9/25/52

-11

when most of the Federal Reserve offices were not open.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, the Com

mittee authorized the adoption of a proce

dure whereby the Federal Reserve Bank of

New York would purchase direct from the

Treasury, for its own account, such amounts

of special short-term certificates of in

debtedness as may be necessary from time to

time for the temporary accommodation of the

Treasury within the limit authorized by the

executive committee. In taking this action

it was understood that (1) in cases where it

seemed desirable, the New York Bank was au

thorized to issue participations to one or

more Federal Reserve Banks, and (2) the exe

cutive committee was authorized to issue

such detailed instructions to the New York

Bank as were needed to carry out the action

of the full Committee.

Mr. Rouse referred to the discussion at the meeting of the execu

tive committee on April 4, 1952 at which time the executive committee agreed

to recommend to the full Committee that the remaining $713 million of 2-3/4

per cent non-marketable bonds of 1975-80 held in the System account be con

verted into 5-year 1-1/2 per cent marketable Treasury notes to be dated

October 1, 1952.

It was agreed unanimously that

the remainder of the non-marketable

bonds of 1975-80 should be exchanged

for 5-year 1-1/2 per cent marketable

Treasury notes to be dated October 1,

1952, in accordance with the recommen

dation of the executive committee at

its meeting on April 4, 1952.

During a discussion of the general direction to be issued by the

full

Committee to the executive committee,

Chairman Martin mentioned that

9/25/52

.12

some minor changes in wording would be necessary as a result of the Commit

tee's approval earlier during this meeting of the proposal that special

Treasury certificates of indebtedness be carried by the Federal Reserve Bank

of New York rather than in the System open market account, and he suggested

that the existing direction, revised to include such changes in wording as

Mr. Vest felt were necessary to carry out that decision, be approved.

The

Chairman also mentioned that the June 19, 1952 direction included a clause

to the effect that the authority to purchase securities direct from the

Treasury would terminate on June 30, 1952 if the authority contained in

section 14(b) of that Reserve Act were not extended beyond that date, and

that since Congress had extended this authority for an additional two years,

the clause was no longer needed.

Mr. Rouse suggested that the existing

limitations in the direction be renewed at this time.

Thereupon, upon motion duly made

and seconded, the following direction

to the executive committee was approved

unanimously.

The executive committee is directed, until otherwise directed

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

tions for the System open market account, either in the open market

or directly with the Treasury (including purchases, sales, ex

changes, 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 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 aggre

gate amount of securities held in the System account (including

commitments for the purchase or sale of securities for the account)

at the close of this date, other than special short-term certifi

cates of indebtedness purchased from time to time for the temporary

-13

9/25/52

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 direct from the Treasury for the account of the Federal

Reserve Bank of New York (which Bank shall have discretion, in cases

where it seems desirable, to issue participations to one or more

Federal Reserve Banks) of such amounts of special short-term certi

ficates 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 at any one time by the Fed

eral Reserve Banks shall not exceed in the aggregate $2,000,000,000.

It

was agreed unanimously that the next meeting of the Federal Open

Market Committee would be held during the week beginning December 8,

Thereupon,

the meeting adjourned.

Secretary

1952.