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 Monday, December 8, 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. Thurston, Assistant Secretary

Mr. Vest, General Counsel

Mr. Thomas, Economist

Messrs. Mitchell, 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. 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.

Upon motion duly made and seconded, and by

unanimous vote, the minutes of the meeting of

the Federal Open Market Committee held on Sep

tember 25, 1952, were approved.

12/8/52

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 September 15, September 25, October

8, October 22, November 5, and November 25,

1952, were approved, ratified, and confirmed.

Before this meeting there had been brought to the attention of

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

market account as of October 17, 1952, 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,

system of internal control, and degree of care

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 received and

ordered filed.

A report of open market operations prepared at the Federal Re

serve Bank of New York covering the period September 25 to December 3,

1952, inclusive,

had been sent to all members of the Committee before this

meeting and at this time there was presented a supplementary report covering

commitments executed on December 4 and 5, 1952.

on both reports,

Mr. Rouse commented briefly

copies of which have been placed in the files of the

-3

12/8/52

Federal Open Market Committee.

Upon motion duly made and seconded, and

by unanimous vote, the transactions in the

System account for the period September 25 to

December 7, 1952, inclusive, were approved,

ratified, and confirmed.

At this point, members of the staff

of the Board of Governors

entered the room to assist Messrs. Thomas and Ralph Young in presenting

a review of the economic situation and credit outlook.

out that high level economic stability

The review pointed

had continued during the autumn

with activity and employment advancing to higher levels than last

and with prices not advancing.

the defense program in

close at hand,

spring

There was some evidence that the peak of

terms of requirements for materials and manpower is

and that the rise

in

public expenditures in the next six

On the other hand,

months would be much less than expected earlier.

if

problems in Korea or elsewhere should become more serious than heretofore,

military expenditures might resume a rapid rise.

In either case,

continua

tion of acute international uncertainties may have the result of encourag

ing many businesses to hold larger inventories and more standby capacity

than otherwise.

Government policies on stock piling and production

capacity goals will also continue to reflect

foreign situation.

the uncertainties of the

Because of these uncertainties and for other reasons,

there will probably be heavy pressure on the Federal Government to do

everything possible to avoid any marked decline in economic activity.

With respect to the credit situation, the review stated that total

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credit demand had been at record peacetime levels this year reflecting

particularly Federal deficit financing during the last half of the year and

that the recent accelerated bank credit expansion was a matter of concern in

view of the economy's present intensive use of its physical resources and the

large volume of credit already outstanding.

While monetary expansion, partly

because of a greatly enlarged savings supply, had been held to moderate

limits this year, the economic outlook beyond the next few months was by no

means clear.

Accordingly, the review stated that credit and monetary policy

would need to be kept alert to realignments in underlying forces that might

affect long-term growth and stability so that it could be adjusted promptly

and effectively to changing condition

as they develop.

It

was felt that

the progress made during the past two years in redeveloping a pattern of

Federal Reserve operations based on traditional procedures, adapted to a

market in which Government securities play a prominent role, provides a

workable basis for future credit and monetary policies geared to the needs

of a dynamic economy.

During the discussion regarding the presentation, Mr. Ralph

Young, in response to a question, stated that, while current information on

inventories of manufacturers and distributors was rather sketchy, avail

able data indicated there had been some further development of inventory

accumulation during the month of November.

He added that the increase re

sulted to some extent from the fact that many concerns probably desired to

carry larger inventories at this time as a safeguard against possible

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-5

shortages that might develop if the international situation worsened,

but

that the inventory accumulation also reflected expanding private demands

for final products.

Chairman Martin then referred to a memorandum prepared in the

offices of the Board of Governors under date of December 8, 1952 on the

outlook for Treasury cash requirements and bank reserves, copies of which

were distributed before this meeting.

Mr.

In response to the Chairman's request,

Youngdahl commented upon this memorandum,

stating that although it

referred to an estimated Treasury cash deficit for the fiscal year ending

June 30,

1953 of about $3.5 billion, there was now some feeling among

informed persons in Washington that the actual cash deficit might be below

this figure.

The situation had changed primarily, Mr. Youngdahl said, as a

result of lower-than-anticipated expenditures for security purposes.

In response to the Chairman's request, Mr. Thomas commented that

in recent weeks the demand for credit and particularly for currency had been

greater than amounts projected earlier this fall as representing moderate

seasonal demands.

The net result had been that Reserve Bank credit other

than float had risen about $1-1/4 billion in the September-November period

compared with the earlier estimate of $800 million.

The difference had

been reflected in an increase of member bank borrowing to over $1-1/2 bil

lion.

The task for the next few weeks, Mr. Thomas said, was to take care

of holiday and year-end demands,

smoothing out any money market strain.

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-6.

He thought that strain probably had reached a peak during the past week, and

that, if

the expected increase in Federal Reserve float took place between

now and Christmas, borrowings from the Reserve Banks could be reduced

somewhat.

There would be a temporary strain in the market at the year-end,

after which the return flow of currency would make for easier conditions in

the money market, but reduction in the large volume of member bank borrowing

and of repurchase contracts outstanding would absorb a substantial amount

of the reserve funds that would become available.

The question then, Mr.

Thomas felt, would be the extent to which the System would wish to maintain

a tight rein on the situation by permitting bills to run off, and perhaps by

selling certificates if there were an opportunity.

Additional restraint

could be imposed upon future demands by increasing the discount rate.

Chairman Martin referred to the statement by Mr. Sproul contained

in the minutes of the meeting of the executive committee for November 25, 1952

with respect to the possible desirability of a change in the discount

rate and suggested that there be a further discussion of that question at

this meeting of the full Committee both as related to the immediate situ

ation and the situation that would exist after the turn of the year.

Mr. Hugh Leach stated that the situation at the year-end in 1951

had presented considerable difficulty, that this year borrowings from the

Reserve Banks were much higher than a year ago, and that if the discount

rate were raised between now and the first of the year it would increase

problems in the money market and would make it necessary for the System

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.7

to purchase additional securities which was something to be avoided.

He

felt the System should wait until January to see what changes in prices

took place, what inventory developments were indicated, and whether the

expected seasonal liquidation of credit occurred before deciding whether

an increase in the discount rate were necessary.

Mr. Powell raised the question whether the quality of credits

of member banks may have deteriorated with declines in prices for products

collateraling such credits.

He cited instances of increases in farm

mortgage debt recently for the purpose of securing farm loans that were

undercollateraled because of declines in livestock prices, and of the

concern on the part of some bankers because underfinanced companies were

building up inventories and borrowing on receivables.

Mr. Powell felt that

this situation might be considered in a discussion whether the discount rate

should be increased, adding that a small increase in the rate would not

upset the market and might be a warning that the Federal Reserve System

thought collections on loans ought to be watched.

He also suggested that

such a warning might be given now rather than waiting until after the first

of the year.

Mr. Evans commented on conditions he had observed in the Middle

West during the past two weeks, stating that on the basis of his observa

tions, Mr. Powell's description of conditions in that area was, if anything,

an understatement of the situation; that some of the bankers he had talked

with stated that a good deal of livestock paper now represented 100 per cent

12/8/52

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loans based on present prices.

little

Mr. Evans felt the Committee had been a

too lax in permitting credit to expand as much as had taken place

during the past six to eight months.

He thought it

a question, however,

whether the Committee should now tighten credit very much in view of the

conditions prevailing in the Midwest as a result of the drought, declines

in cattle and other farm products prices, and accumulating inventories of

dealers and manufacturers of farm equipment.

Mr. C. S.

Young stated that while he agreed with Mr. Powell as to

the need for studying the quality of credits, he felt the redeeming factor

was that member banks were aware of this situation, that they were doing a

remarkable job of weeding out poor loans and of securing additional collateral;

on the whole, he felt the banks were in good condition although the quality

of some loans had deteriorated.

Mr. Leedy stated that the drought was a serious factor in the

Kansas City District and, although conditions had been improved somewhat

by moisture during the past two weeks, the winter wheat crop for next year

would be small.

With respect to cattle loans, most such paper being offered

the Kansas City Reserve Bank for discount indicated there was still a

satisfactory margin of collateral.

Mr. Earhart said that activity on the Pacific Coast appeared to

be running a little ahead of the national level at this time reflecting a

continued inflow of population plus the inflow of funds resulting from transfers

of funds of individuals and payments by the Federal Government for aircraft,

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the aggregate of which exceeded the outflow of funds from the Twelfth

District.

Building was very active, particularly in the southern part

of the district, and while one of the largest banks felt the outlook for

the entire year 1953 was good another bank which had been making large

volumes of real estate loans was beginning to feel that there were real

dangers ahead, particularly in the real estate market.

Mr. Earhart said

that he would go along with the view that there should be no change in

the discount rate now but that he felt it

was too low, that it

should

have been increased before this, and that after the turn of the year

there might be reasons which would make it

seem about as untimely to in

crease the rate as the present.

Mr. Gidney commented on the discussion recorded in the minutes of

the November 25 meeting of the executive committee,

stating that in his

judgment the reasons for an increase in the discount rate, as summarized

by Mr. Sproul, were much more convincing than the reasons presented for

not increasing the discount rate promptly.

The high level of bank loans,

the fact that Federal Reserve credit in use had gone up recently while

the Committee apparently was operating on a policy of "neutrality", and

recent economic developments (other than the modest change in wholesale

prices) pointed clearly to the desirability of an immediate increase in

the discount rate.

He added that the present offered a better opportunity

than is likely to occur for some time for making such an increase without

disturbing the market unduly, while after the turn of the year reasons

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against making a change quite probably would develop or be advanced,

in

cluding those related to interference with Treasury refunding operations.

Chairman Martin stated that he seriously questioned the desirability

of an increase in the discount rate at this time.

The period over the year

end would be difficult in any event because of disturbed conditions in the

money market and uncertainties as to the credit outlook; to take action at

present would only add to the upset condition in

the market and probably

would achieve little in the way of affecting the differential between the

discount rate and the bill rate.

If,

following January 1, conditions did

not bring about liquidation of the credit that had been extended this fall,

it would be desirable to give consideration to an increase in the discount

rate at that time.

Mr.

in

Bryan said that

the discount rate at this

while he had no argument to present for a change

time,

it

seemed somewhat absurd for the central

bank to have a discount rate of 1-3/4 per cent at

a time when plant and labor

supplies of the country were being utilized virtually at capacity.

He felt

that the Committee had been in a self-congratulatory mood over the past year

in taking the view that the country was having stability at a high level.

But unemployment now was negligible, and Mr. Bryan felt this could not per

sist without a rise in prices.

He wondered, therefore, whether the Committee's

policy had been sufficiently restrictive.

Mr.

Sproul felt

that

the price level had reflected a relatively

stable economic situation up to now and that the policy of the System, what-

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ever its influence, had been consistent with a stable price level

and a

high level of economic activity.

Unless it was felt that credit restraint

should have been used to bring about an actual decline in prices, he did

not see how the "high level stability" during the period under discussion

could be considered a criticism of the policy pursued.

Looking ahead, Mr.

Sproul felt that two points of view, perhaps paradoxical, had been raised:

first, there was the view that the general outlook was for a high level

of income and production over the next three to six months with no immediate

evidence of price inflation although there was some evidence of inventory

accumulation.

This view suggested that the Committee should remain on

the alert, but it did not call for action at this time.

The other point

of view, Mr. Sproul said, was that there were some elements in the situa

tion which suggested disintegration in the area of bank credit such as loans

which were becoming undercollateraled because of agricultural production

difficulties and prospective or present declines in the agricultural outlook

and prices.

This might suggest a relaxation instead of a tightening of

credit policy.

To some extent, Mr. Sproul said, the System was a prisoner

of the fact that it was just working back into the use of the discount rate

and flexibility in that rate.

It had laid great emphasis on the meaning

of a change in the discount rate, and a move now might be regarded as symbolic

of a change in the general economic situation rather than a technical read

justment.

Mr. Sproul doubted whether an increase of one-fourth or one-half

of one per cent--which was all that he assumed anyone would suggest at this

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time--would accomplish anything in the next two or three weeks except to

complicate adjustments in the year-end money market.

Mr. A. H. Williams stated that in the Philadelphia district the

most general view was that a change in the discount rate should not be

made until there had been an opportunity to observe developments after

the turn of the year so as to be more certain whether a change was needed.

Mr. Gilbert said he would not be in favor of an increase in the

discount rate at this time, that he would much rather wait until after the

end of the year to observe whether the normal repayment of borrowings

that had developed this fall took place; if the seasonal liquidation in

loans did not take place, he thought consideration then should be given

to an increase in the rate.

Mr. Erickson agreed with this view.

Mr. Bryan reiterated the comment that while he did not advocate

an increase in the discount rate at this time, he thought it an extra

ordinary event in terms of central banking that the rate remained at 1-3/4

per cent at a time when the economy was operating with virtually full

em

ployment, and that such a rate was defensible only in terms of the record

of the Open Market Committee over a period of several years.

Chairman Martin commented that it was also important to remember

that the present rate had existed in a conjunction of circumstances evident

in the return to a freer market in Government securities.

He went on to say

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that, as he had indicated at the meeting of the executive committee on

November 25, the Federal Reserve System was in a constant dilemma with

respect to the effect of its actions on Treasury financing.

it

At some point

would be necessary to meet this issue head-on; this, he said, should

preferably be done in conjunction with the Secretary of the Treasury.

He

felt that the System should not make a move to increase the discount rate

until it

was convinced that such an increase was appropriate, but that it

should then act even though at that time the System might be faced with

the immediate question of the effect of the increase on the Treasury's

financing program.

The System may have "missed the boat" in not having

raised the discount rate some time ago, the Chairman said, but if that

were true it

still

did not warrant taking corrective action at this

particular time simply because it might be more difficult to face up to

the problem of appropriate monetary policy when Treasury financing vas

under active consideration early next year.

Chairman Martin added that

the System had been going through these periods of anxiety, that it

made some progress in

had

its monetary policy, that Mr. Bryan had made an

excellent point in suggesting that the Committee not be too ready to

congratulate itself, and that Mr. Gidney had brought out a view which it

was very desirable to discuss.

Nevertheless, Chairman Martin said, the

discussion indicated that the Committee should proceed with its present

policy, having in mind that it

might become necessary to have another

meeting of the Committee soon after the first

of the year.

12/8/52

-14There was no indication of disagreement with Chairman Martin's

suggestion for continuation of the existing policy of the Committee.

Mr. Sproul noted that speculation regarding a possible change

in the discount rate caused disturbance in the money market and suggested

that, in so far as possible, discussion of such a possibility not be

carried on outside.

Chairman Martin agreed with this suggestion, adding that while

it

was necessary for the directors of the Reserve Banks to discuss the

matter, it

would also be desirable for the Reserve Bank Presidents to

caution them against discussion of the subject outside the meetings of

the directors.

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 transactions for the System open market account,

either in the open market or directly with the Treasury (in

cluding purchases, sales, exchanges, replacement of maturing

securities, and letting maturities run off without replace

ment), 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 con

ditions 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

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 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.

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The executive committee is further directed, until other

wise 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 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 at any

one time by the Federal Reserve Banks shall not exceed in the

aggregate $2,000,000,000.

In a discussion of a date for the next meeting of the full Com

mittee, reference was made to a memorandum prepared by Mr. Vest dated Decem

ber 2, 1952,

it

stating that inasmuch as March 1, 1953, will fall on a Sunday,

would seem to be desirable,

if otherwise practicable, for the meeting

of the new Committee to be held during the first

week of March 1953.

In

commenting on this, Mr. Vest stated that the organization meeting of the

new Committee usually had been held on March 1 of each year and that it

was customary for a meeting of the old Committee also to be held late in

February in order to ratify actions taken up to that time.

was no reason why,

He said there

if ratification is necessary, the new Committee could not

ratify actions taken by the previous Committee, and that he did not think

it

essential that the old Committee meet in late February.

cussion, it

Following a dis

was agreed that the next meeting of the full Committee should

be held during the week beginning March 2, 1953.

Thereupon the meeting adjourned.

Secretary