fomc minutes · June 10, 1953

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, June 11, 1953, at 10:30 a.m.

PRESENT:

Mr. Martin, Chairman

Mr.

Sproul, Vice Chairman

Erickson

Evans

Fulton

Johns

Mills

Powell

Robertson

Mr. Riefler, Secretary

Mr. Thurston, Assistant Secretary

Mr. Vest, General Counsel

Mr. Thomas, Economist

Messrs. Abbott, Hostetler, Peterson, Roelse,

Parker B. Willis, and Ralph A. Young,

Associate Economists

Mr. Rouse, Manager, System Open Market Account

Mr. Carpenter, Secretary, Board of Governors

Mr. Sherman, Assistant Secretary, Board of

Governors

Mr. Youngdahl, Assistant Director, Division of

Research and Statistics, Board of Governors

Mr. R, F. Leach, Chief, Government Finance Section,

Division of Research and Statistics, Board of

Governors

Mr. Arthur Willis, Assistant Secretary, Federal

Reserve Bank of New York

Messrs. Gilbert, Leedy, Williams, and C. S. Young,

alternate members of the Federal Open Market

Committee

Messrs.

Bryan, Earhart, and Hugh Leach, Presidents of

the Federal Reserve Banks of Atlanta, San Fran

cisco, and Richmond, respectively

Messrs. Leonard, Director, Division of Bank Opera

tions, Board of Governors, and Deming, First

Vice President, Federal Reserve Bank of St. Louis

6/11/53

-2

Upon motion duly made and seconded, and by

unanimous vote, the minutes of the meeting of the

Federal Open Market Committee held on March 4-5,

1953 were approved,

The Secretary stated that advices of the election by the Boards

of Directors of the Federal Reserve Banks of Cleveland and Chicago of

W. D. Fulton as a member of the Federal Open Market Committee for the

remainder of the year ending February 28, 1954 had been received and

that Mr. Fulton had executed the customary oath of office.

The Secretary

also stated that Mr. Fulton had proposed that L. Merle Hostetler, of the

Federal Reserve Bank of Cleveland, be elected an associate economist of

the Committee to succeed Donald S. Thompson of that Bank; and that Mr.

Erickson had proposed that Parker B. Willis, of the Federal Reserve Bank

of Boston, be elected an associate economist of the Committee to succeed

Arthur A. Bright, Jr.

The election of Mr. Fulton as a member of the

Federal Open Market Committee for the remainder of

the year ending February 28, 1954 was noted, and,

upon motion duly made and seconded and by unanimous

vote, the election of Messrs. Hostetler and Willis

to serve as associate economists of the Federal Open

Market Committee until the election of their suc

cessors at the first meeting of the Committee after

February 28, 1954 was approved. These actions were

noted and approved with the understanding that in

the event of the discontinuance of their official

connections with the Federal Reserve Banks of Cleve

land or Boston, as the case might be, Messrs. Fulton,

Hostetler, or Willis would cease to have any official

connection with the Federal Open Market Committee.

In taking this action, it was also understood

that Mr. Fulton was selected as an alternate member

6/11/53

-3

of the executive committee, and that the order in

which the alternate members of the executive com

mittee would serve for Messrs. Sproul and Erickson

would be Mr. Johns, Mr. Powell, and Mr. Fulton.

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 execu

tive committee held on March 5, March 24, April 8,

April 2 4, May 6, May 13, and May 26, 1953 were

approved, ratified, and confirmed.

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

Committee a copy of a report prepared at the Federal Reserve Bank of New

York covering operations in the System open market account from March 4

to June 5, 1953, inclusive.

At this meeting, Mr. Rouse presented a sup

plementary report covering commitments executed from June 6 to June 10,

1953,

inclusive,

and commented briefly on the reports, copies of which

have been placed in the files of the Federal Open Market Committee.

Chairman Martin referred to operations in the System account dur

ing the past week, particularly to developments on Monday and Tuesday,

June 1 and 2, 1953,

when there was serious unsettlement in the Government

securities market which brought prices of longer term Government securi

ties to record lows for outstanding issues, and which caused the new issue

of 2-5/8 per cent certificates of indebtedness to settle below par.

said that on June 2 the System account handled purchases of $81.5 millions

of bills with dispatch and efficiency that seemed to bring commendation

6/11/53

from everyone.

-4

However, the question had been raised as to whether, in

view of the position taken by the executive committee at its meeting on

May 6, 1953 at which time it was agreed that there should be injections

of reserves into the market to avoid a further tightening, System purchases

of bills had been sufficient over the past several weeks.

The Chairman

then asked Mr. Rouse to give the Committee his rationale of operations for

the account during this period.

Mr. Rouse stated that he felt the purchases of securities made for

the System account had been sufficient although he recognized that in hind

sight judgments might differ on this point.

He had been surprised that

more people did not apply the "multiplier" with respect to the amount of

reserve funds that had been put into the market.

He felt that it had been

fortunate that funds had been available from Government investment accounts

last week for purchases of Government bonds, noting that $3.5 million of

long-term 2-1/2's were purchased at the opening on Tuesday, June 2, with

considerable effectiveness.

Mr. Rouse stated that while he knew there was

some feeling that purchases for the System account may not have gone far

enough, on the other hand it must be noted that the System had increased

its holdings of securities by $328.8 million since the last meeting of

the full Committee and that in recent weeks the Treasury had put $1100

million of reserves into the market through reductions in its balances with

the Reserve Banks and in a special account, and through sales of special

6/11/53

-5

certificates of indebtedness.

reserves were going to do the job, Mr.

Rouse felt the reserves had been available.

As far as the current market

concerned, Mr. Rouse said that at present the Treasury would have dif

ficulty in

selling securities in the amount of $1-1/2 billion to meet the

prospective deficit in July and August.

tion that the psychology in the market is

There is,

however, some indica

improving, Mr. Rouse said, al

though fairly sharp movements in Government bond prices may still

occur

on a single day.

Thereupon, upon motion duly made and seconded,

and by unanimous vote, the transactions in the Sys

tem open market account for the period March 4 to

June 10, 1953, inclusive, were approved, ratified,

and confirmed.

Chairman Martin referred to a draft of proposed revision in the

directive of the Federal Open Market Committee prepared pursuant to the

understanding at the meeting of the full Committee on March 4-5, 1953, a

copy of which had been sent to all members of the full Committee and the

executive committee.

At the Chairman's request, Mr. Vest commented on

the proposal, emphasizing that the drafts prepared by the staff were in

tended to change only the form of the directives and were not intended to

make any changes of substance in them.

Chairman Martin stated that while the drafts of revision had been

discussed by the executive committee at its

meetings on May 13 and May 26,

the committee had no recommendation to make with respect to the matter.

6/11/53

-6

During a brief discussion, he suggested that the full Committee refer the

matter to the executive committee with the understanding that the executive

committee would appoint two of its members to consider the proposal for

revision in directives, and with the further understanding that this special

committee would submit its recommendations to the members of both the full

Committee and the executive committee.

This suggestion was approved unani

mously.

Reference was then made to a memorandum prepared in the Division of

Bank Operations of the Board of Governors under date of May 21, 193 with

respect to the allocation of securities in the System open market account,

the present formula for which had been adopted effective January 1, 1948.

The memorandum had been prepared as a result of the action taken by the

full Committee at its meeting on March 4-5. 1953, at which time it was sug

gested that the staff study the present basis of allocations in the System

open market account with a view to having a discussion of any suggested

changes at this meeting.

At Chairman Martin's request, Mr. Leonard, Director of the Board's

Division of Bank Operations, reviewed the content of the memorandum, dis

cussing the present basis of allocation, reasons why there might be a

change, and possible bases of allocation.

In his comments, Mr. Leonard

stated that without making any recommendation the memorandum attempted

to present various allocation formulae which might be related to (a) expenses

6/11/53

-7

and dividend requirements as at present,

Banks as measured by various factors,

(b)

size of the Reserve

initially with freedom of movement thereafter within some pre-determined

range, (d) tending to equalize ratios of surpluses to capital, or (e)

district, financial, and other economic data.

Mr. Leonard said that it

was his belief that any formula adopted should not only be logical, but

should appear on its face to be so, that it should be simple, and that

it should eliminate the necessity for frequent adjustments in holdings

in the account.

He went on to say that if the allocation were based on

size of the Reserve Banks, about the same distribution would result from

use of either total assets or the total of Federal Reserve Bank deposit

and note liabilities.

Similar distribution would result from use of a

formula to equalize reserve ratios.

Chairman Martin said he had no fixed view on the matter but was

inclined to believe total assets was the best basis.

There ensued a general discussion during which several of the

Presidents of the Federal Reserve Banks expressed preferences for an

allocation system based upon total assets.

Mr. Bryan stated, on the other

hand, that he would have a preference for the use of Federal Reserve Bank

deposit and note liabilities, as being somewhat more closely related to

the conventional concept of reserve requirements; he agreed it was desir

able to have the allocation based upon some measure of the size of the

6/11/53

-8

Federal Reserve Banks.

During the discussion, Mr. Earhart raised the question whether

possible legal aspects of the loss-sharing agreement of the Reserve Banks

might be affected by a change in

the procedure for allocating securities,

in response to which Mr. Vest expressed the tentative opinion that a

change in allocation procedure would not be of such a basic nature as

to affect the validity of the loss-sharing agreement.

Following the discussion, it was agreed

unanimously that Messrs. Leonard and Rouse be

requested to prepare a memorandum for the con

sideration of the Committee covering the de

tailed steps which might be necessary in order

to change the present allocation procedure to

one based upon total assets of the respective

Federal Reserve Banks.

At this point Mr. Leonard withdrew from the meeting and members

of the staff of the Board of Governors entered the room to participate

in the presentation of an economic review, illustrated by chart slides,

and of an analysis of the changing debt structure and its relationship

to developing economic conditions, as well as the current issues of credit

and monetary policy.

A copy of the text of the presentation was sent to

each member of the Federal Open Market Committee following the meeting

and a copy has been placed in the Committee's files.

The review stated that the period since the meeting in March had

been characterized by a moderately higher level of economic activity and

generally stable prices.

While the economic situation has continued

6/11/53

-9

strong, financial markets have been unsettled at times and throughout the

period there has been an undertone of concern about potential declines in

economic activity.

Doubts have related to the strength of underlying con

ditions, concern has been expressed lest measures designed to limit credit

expansion to sustainable proportions be carried too far setting in motion

forces of decline which would be difficult to check,

and in recent weeks

uncertainties have been increased by new developments in Korea.

As to the analysis of debt it

was stated that, considering the

nature of the defense economy in prospect for some time yet, the charac

ter of the present debt, and the financial position of lending institu

tions,

was difficult to visualize any widespread liquidation of debt.

Thus, the study of the debt situation had been somewhat reassuring.

How

ever, restraint in further increasing the volume of debt may be important

for preventing development of an unsound debt structure such as that of

the late 1920's.

With respect to credit and monetary developments, Mr. Thomas stated

that the cumulative effectiveness of monetary restraints had gradually be

come more evident in the financial and business community and that with

the present tone of sensitive markets and the higher productivity of the

economy, there seemed little

immediate danger of excessive optimism or a

renewed inflationary upsurge that would extend very far,

Whether there

the opposite danger, requiring at some point an aggressive easing of

6/11/53

-10

the credit situation, is

not now evident, but it

evident that additional

credit will be needed this year to meet seasonal demands and to finance

further economic expansion and that these needs will be substantial.

During a discussion of the economic review, Mr. Powell referred

to statements made on the Senate floor yesterday afternoon by Senator

Humphrey of Minnesota with respect to the costs of servicing the Govern

ment debt and raised the question as to the probable future relationship

between disposable income and debt servicing costs,

Mr. Powell also

raised the question whether the rise in interest rates might shut off

the market for corporate and municipal investments with the result that

the decrease in such issues might bring on unemployment because of the

lack of capital funds for investment.

He also inquired as to possible

repercussions on the farm mortgage market and in other segments of the

economy.

Mr.

Ralph Young stated that the longer the increased level of

interest rates was maintained, the higher would be the ratio of costs of

debt service to disposable income.

He went on to say that in so far as

the volume of new issues was concerned, the rise in interest rates appar

ently had brought about acceleration in borrowing, partly reflecting the

feeling that funds would not be available later in view of the heavy

Treasury borrowing that might be anticipated in the second half of the

year.

Mr. Young also said that the volume of corporate issues scheduled

for June was very large, that municipal issues were high in relation to

-11

6/11/53

last year, and that it

appeared that there would be a record volume of

new issues in June of this year.

With respect to the mortgage market,

Mr. Young said that the situation developing was rather disturbing in that

the higher rates available on corporate securities apparently were caus

ing some firms which had furnished mortgage money in

the past to defer

making commitments for such loans, at least to large scale building op

erators.

Mr. Thomas commented that the whole purpose of the restrictive

policy had been to exercise restraint, that if there were repercussions

of the type Mr. Powell feared that was the course to be expected, and

that the question was whether the restraint was too great.

If the restraint

were cutting down the flow of funds to a point where the resources of the

economy were not being utilized, that would indicate restriction was too

great.

However, Mr. Thomas said, there is

no evidence that such develop

ments have occurred thus far.

Chairman Martin then made a statement substantially as follows

I would like to make some general comments on that question

because it bears directly on the subject of this meeting and

points up the problem the executive committee has been wrestling

with since the last meeting of the full Committee in carrying out

That policy, interpreting it

the policy laid down at that time.

By the end of April, it

restraint.

broadly, was one of modest

up which may have changed

shaping

forces

some

was clear there were

the situation from one of modest restraint to one of real restraint.

The capital market had a real jolt. At the meeting of the execu

tive committee on May 6, we took account of those developments. I

think the charts indicate that we had a decrease in the money sup

ply during May, probably more than we would have liked to have had

6/11/53

-12-

if we could have measured it beforehand.

These are extremely dif

ficult things to measure.

This has been a most interesting period

and there is room for difference of opinion with respect to its

implications, but basically our thinking at the time of the May 6

meeting was that there would have to be put into the market between

that time and the end of the year reserves of between $2-1/2 and

$3-1/2 billion in order not to tighten the market further. That

amount would be needed just to maintain the market as it was at

that time.

As to the point Senator Humphrey referred to, which Mr. Powell

has cited, the jolt in the capital market has served to accelerate

the number of capital issues coming forward at this time rather

than to decrease it.

Regardless of whether some have been post

poned permanently, so far as May and June are concerned you have

had a terrific increase in capital flotations, particularly be

cause of the fear that funds would be harder to obtain later on.

All of us who have followed the capital markets know that the

strongest volume of issues is written at the top of the boom and

that is a cause for concern at the present time.

The point I am trying to focus on for discussion at this

meeting is the point I raised with Mr. Rouse at the beginning of

this meeting, that is, whether in pursuing the course of putting

funds into the market so as not to tighten it further, we have

erred on the side of not putting in sufficient funds during this

period. In terms of its technical aspects, it is not a question

But if we wish to supply the reserves indicated

of "easy money".

to the market between May 6 and the end of 1953, the question is,

should we not have stepped up our purchases more rapidly?

That brings into focus the other problem we have had: namely,

the fact that the discount rate is behind the market. If we wanted

to meet the market, we certainly would raise the discount rate. We

have had several suggestions that we raise the discount rate and at

the same time step up open market purchases, and we have had sugges

tions that we reduce reserve requirements across the board. The re

sult of this whole situation is now before this Committee, I think

we ought to move forward and have a full discussion of the question.

I would like to have Mr. Sproul's comment on the question of whether

bills are an adequate medium in relation to our policy of supplying

funds to the market. All of these questions ought to be put on the

table. We ought to realize that this is a critical situation, that

we may have to call the full Committee back into session during the

summer months-not once but maybe twice. We can not dispose of this

matter this morning and wait until next September. We are at a criti

cal turning point where common sense indicates certain forces are op

We are not engineering anythings

erating in supply and demand areas.

-13we ought not to be.

If I am critical of anything in our opera

tion, I am critical of my own judgment with respect to the tight

ness of the money market in May,

I think the money market in May

got so tight across the board that it violated one of the cardinal

principles of good central banking operations. It became so

tight that money was almost unavailable. We should discuss the

most effective way of supplying reserves to the market aside from

embracing an easy money policy.

Mr. Sproul then made a statement substantially as follows:

On the question of the amount of reserves put into the market

during May, as Chairman Martin said, in making a change over from

a policy of credit restraint which, partly due to other influences

than our own had become more restrictive than was felt to be de

sirable, it was the view of the executive committee that we did

not want to make a complete change to a policy of credit ease.

Therefore, we had the difficult task of trying to put sufficient

funds into the market to try to maintain a sufficient degree of

restraint or ease without allowing it to become a policy of easy

There are many other factors that impinge on reserve funds

money.

aside from our own operations and it is difficult to estimate these

factors in advance so that, while you can lay out a fairly good es

timate of a needed amount of reserve funds to the end of the year,

you can not lay out an estimate which will be at all accurate from

week to week.

The amount of funds we put into the market has to be

The

geared to other factors affecting the supply of reserve funds.

Chairman mentioned that during May, the amount of reserve funds put

into the market may not have been sufficient, or may not have been

put in in the right way or at the right time. We had days when the

market had "air pockets" in it. Whether you could accurately say

that credit was almost unavailable-though never quite unavail

able, I doubt.

It was difficult to obtain, more difficult to ob

tain than we wanted it to be, perhaps, but not unavailable.

That

leads me to the point of what we need to discuss as a policy of

the Open Market Committee.

1. Since the last meeting of the Federal Open Market Com

mittee we have been operating under two prohibitions adopted by

the Committee, the general prohibition limiting operations to

short-term securities at all times, and the special prohibition

limiting operations, during periods of Treasury financing, to

exclude the purchase of maturing issues, when-issued securities,

and outstanding issues of comparable maturity to those being

offered in exchange.

2. In my opinion, the present situation and the likely

situation during the next three months require that we remove

these prohibitions and restore to ourselves greater freedom of

action. Private demands for capital and credit continue strong,

and the Treasury is going to be a large and necessitous borrow

er.

Our policy, in the circumstances, is one of maintaining

restraint on credit expansion, while trying to prevent that

restraint from being intensified by Treasury demands on the

banking system. If this continues to be our policy, and if we

continue to confine our operations to purchases of bills, I do

not think we can walk the tightrope successfully. Our policy

of restraint will be intensified at a time when it should be

leveling off with the boom.

On what grounds would we continue to deprive ourselves

of freedom of action? With respect to the prohibitions we adopted

at our last meeting,

(a) we were told that the market should be relieved of the threat

of our intervention in the longer term areas so that it might de

velop breadth, depth, and resiliency.

(b) We have not intervened in these areas for some months and,

in one way or another, the market has acquired the idea that we

Yet seldom has the market shown

are not going to intervene.

less breadth and depth while quotations have shown, if anything,

too much resiliency.

cerning our intervention in the market was once the cause of un

certainty, it was a transient phenomenon. Other factors have

since been at work. Recently there has been our restrictive

credit policy, continued heavy private demands for funds, and

These have generated the expecta

mounting Treasury cash needs.

tion of a decline in Government security prices (and private

security prices) and a rise in interest rates of unknown extent

and duration.

(d) Under such conditions a market of the size and present vul

nerability of the Government security market doesn't develop

real breadth, depth, and resiliency, and the Treasury's neces

sitous financing can be made unnecessarily difficult and onerous.

(e) In so far as credit policy is responsible for this, the

problem is how to direct open market operations with sufficient

flexibility and versatility to minimize the adverse effects of

the general policy without sacrificing the general objective.

I don't think we can do it if we continue, as we have

been doing, to confine ourselves at all times to operations in

Treasury bills. We have been told that operations in bills

-15would have prompt and pervasive effects throughout the market,

That was the theory of perfect fluidity-perfect arbitrage.

think historical records and current observation indicate that

a prompt and invariable response between short and long markets

can not always be expected.

Under present conditions operations

solely in bills may relieve the reserve position of the banks

without giving timely relief from the complex pressures in the

credit and capital markets created by large Treasury borrowing

operations.

If the threat of our intervention isn't the source of

lack of breadth, depth, and resiliency in the Government security

market, and if that market and the whole capital market isn't as

fluid as the theory of perfect arbitrage would suggest, why do we

deprive ourselves of freedom of action? It seems to me that we

must either still be reacting violently against market pegging

or embracing a somewhat doctrinaire attitude on free markets.

6. There is a middle road. No one here wants to return

to pegging nor to try to substitute our judgment as to prices

and yields for those of the market.

But if our credit policy

calls for putting funds into the market, as it does, and if at

the same time we can assist the Treasury with its very difficult

task of debt management, we should do it.

It would be in accord

with the resolution we adopted on relations with the Treasury

and it would contribute to economic stability. We should be

free, particularly at times of Treasury financing, to make

purchases in whatever area of the market is under most pressure,

so that there will not be an unnecessary erosion of rates, af

fecting adversely investor and banking psychology and intensi

fying the restrictive effects of our credit policy at the wrong

time.

7. We have made it clear to the market that we are not

interested in pegging prices, and the Treasury has made it clear

that it wants to price its obligations on the market, not on us.

Within this framework, I think we should reserve for ourselves

maximum freedom to operate in any way which, without sacrificing

credit policy, will support the Treasury's program and the sta

bility of the market.

To withhold the System portfolio from participation in

the market, except for bill transactions, in the light of the

present economic situation and the Treasury's needs, seems to

me to be sacrificing credit policy to untried theory. To go

further, and to withhold the System portfolio from participa

tion in the tremendous redistribution and swapping process which

takes place in the market during the short period of a Treasury

financing is likely to prove to be irresponsible.

6/11/53

-16

I suggest the elimination, from the instructions of the

full Committee to the executive committee, of the present pro

hibition against open market operations in other than short-ter

securities, and against operations in certain kinds of securities

during Treasury financings.

10. Even though our operations continue to be largely in

bills, effective credit policy can best be achieved, in my

opinion, by retaining flexibility of action to meet the un

predictable circumstances which are always arising.

To freeze

the System into a pattern of behavior which involves not doing

certain things could be just as harmful to the success of credit

policy as a frozen commitment to do certain things. We can't

afford a succession of black Mondays and Treasury near-failures

over the next few months and the omens are none too good.

Chairman Martin said that in adopting the two recommendations of the

ad hoc subcommittee referred to by Mr.

Sproul, it

was not intended that they

should be frozen into the Committee's understanding for all time.

agreed with Mr.

resiliency in

He dis

Sproul's judgment with respect to the depth, breadth, and

the Government securities market as far as operations of the

System account may have affected that market.

There had been no claim on

the part of the ad hoc subcommittee that there would be perfect arbitrage,

he said, and a clear indication of the validity of the subcommittee's

recommendation had been given by the Government securities market on Tuesday,

June 2, when market sentiment improved markedly following purchases of some

$81 million of Treasury bills for the System account.

Martin's belief that if

was Chairman

the System account had made aggressive purchases of

bills during the last several weeks there would have been a much sounder

market.

The full Committee had covered the matter of dealing with a dis

orderly market,

Chairman Martin said, but so far as he knew the Manager of

6/11/53

-17

the Account had never notified the executive committee that disorderly con

ditions existed.

Mr. Rouse agreed with the statement that he had not notified the

Committee that, in his opinion, we had a disorderly market,

He said he had

considered the question on Monday and Tuesday, June 1 and 2, but that pur

chases of $3.5 million of long-term 2-1/2's for Treasury investment accounts

at the opening on Tuesday morning took care of the situation.

Mr. Rouse

said that one of the factors affecting the market was the attitude of the

Reserve Banks toward making advances to member banks; there had gotten to

be a feeling around the country that the Federal Reserve was almost en

tirely opposed to discounting, and this was a factor in the current situa

tion in the market.

Chairman Martin said that there was no question but that such a feel

ing existed, that there had been a conjunction of misinterpretations and

rumors along with factors such as Mr. Sproul had mentioned which had created

a tightness that was not anticipated, that had become more severe and more

savage than he personally had anticipated.

He did not wish to be doctrinaire,

Chairman Martin said, but he was unconvinced that, in supplying reserves, it

was desirable for the Committee to put them into the long-term market.

There

might be exceptions (there may have been conditions in recent weeks which were

disorderly and it might have been advisable to invoke the authority for cor

recting that situation) but as a matter of minimizing intervention and of

6/11/53

-18-

not maximizing intervention, he felt, and it

committee,

had seemed to the ad hoc sub

that, by and large, dealing in short-term securities was a sound

general policy to outline.

He did not think that fears that the System

would or would not get into the long end of the market had deterred that

market.

What had happened,

the Chairman said, was that there had been a

fear that the Federal Reserve was not going to supply any reserves between

now and the end of 1953, a condition which could not help but have an effect

on the market, whereas actually it

has been the intention of the Committee

to supply reserves needed for normal economic conditions,

and it

had been

estimated that as much as $3 billion of reserve funds would have to be put

into the market between May and the end of 1953.

Chairman Martin said that

his conception of the operation was that the Committee should put a minimum

burden on the open market account and the Open Market Committee for determin

ing what the market shall be, that it

se, but of levels of pegs.

should be free not only of the peg per

Each member of the Federal Open Market Committee

might have a different judgment from that of the Manager of the Account, he

noted, with respect to what ought to have been done in

order to have depth,

breadth, and resiliency, but if

to be out of the

the Federal Reserve is

business of making a market, there should be some general rule for the

guidance of the account manager.

Sproul in

Chairman Martin also disagreed with Mr.

that he questioned whether there had been a fair test of the extent

to which arbitrage might take place if

System purchases were confined to the

6/11/53

-19

short end of the Government securities market,

Mr. Sproul said that he was suggesting that, so long as it

was the

policy of the Committee to put funds into the market, there be more freedom

to put them in where the pressures were greatest in order to minimize the

amount the Committee would have to put in to achieve its

purpose; that he was

objecting particularly to having the recommendation of the ad hoc subcommittee

that operations be confined to short-term securities, whittled down so that

only operations in Treasury bills are permitted.

On June 2, he said, prompt

aggressive purchases of a large amount of bills, aided by small Treasury pur

chases of long-term bonds, had a considerable effect, both actually and

psychologically.

However, at the time of the recent Treasury financing with

2-5/8 per cent certificates the pressure was not in the bill markets

one was trying to get into the bill

every

market along with the Federal Reserve,

and the Federal Reserve was putting funds into the bill market where there

was no need for them while other sectors of the market were responding more

violently to a temporary lack of demand than was necessary under the Commit

tee's policy.

His suggestion, he reiterated, was that the full Committee

give to the executive committee more authority than that embodied in the di

rective for correcting disorderly markets.

He thought that the present pro

hibition put a premium on sluggish action which would not meet the situations

that may arise.

Mr. Mills expressed the view that to follow Mr. Sproul's suggestion

would run the risk of confusing monetary policy with the market itself

and

6/11/53

-20

of creating a condition which would only cloud the objectives of monetary

policy.

His view was that the position of the market was secondary to

monetary policy, albeit a reflection of that monetary policy.

Mr. Sproul reiterated that his suggestion would apply only when it

would not conflict with the objectives of monetary policy.

Continuing, Mr. Mills said that in his judgment the Committee should

reaffirm the existing understanding as to confining operations to the short

end of the market,

that prior to the appearance of a disorderly condition

in the market there was no good reason for putting funds into the market

other than in the short end, but that if

a disorderly condition were indi

cated then action to correct the situation should be prompt and immediate.

In other words,

there should be no change in the Committee's present policy

this respect.

Mr. Sproul responded that he could not see that there would be any

change in

credit policy under his suggestion, that he could see no deviation

from credit policy if

than bills, if

the Committee were to purchase bonds of 56-59 rather

was going to put funds into the market anyway and provided

the pressure was in

that area of the market.

The only time such purchases

would be considered, he said, would be when they fitted into present policy

the Committee should not let concern for the Government securities market over

ride credit policy.

6/11/53

-21

Mr. Mills suggested that if

the Committee were to buy other than

bills for the purpose of reassuring the market, it

would mean the selection

of issues where purchases would relieve conditions which were affecting

dealers'

positions which, if

given time,

would correct themselves without

Federal Reserve action.

To this, Mr. Sproul said that purchases would not be for the purpose

of relieving dealers'

positions, that they would take account of the fact

that the System portfolio is

a very large factor in the market and would

allow the account to make some response to supply and demand conditions in

the market in

order to get the best results from its

open market operations

Operations solely in bills, Mr. Sproul said, assume that through arbitrage

the same effects would be gotten that might be obtained through direct action,

All he was suggesting was that if

operations are limited to bills, the

response may be too late and too tardy in terms of the existing market to

be effective; he felt

likely that there would be times and circumstances

in the next few months when the reaction to bill

purchases and arbitrage

would be too tardy to accomplish the Committee's purposes.

Mr. Mills did not believe that situations in

the market of the type

Mr. Sproul was talking about necessarily deserved correction through open

market policy other than through the medium of bills, and Mr. Sproul ex

pressed the view that the Committee would be justified in

acting if

other

wise the situation might become so severe as to have an effect on the market

6/11/53

-22

psychology of businessmen,

investors, and the whole economy.

Chairman Martin referred to the 2-5/8 per cent certificates offered

by the Treasury recently, stating that he felt that they were priced close

to the market, that he had expressed the view at the time that it

have been better to price them at 2-3/4.

would

He also said that the tightness in

the availability of credit that occurred in May must have had a profound

effect on the Government securities market at the time.

Mr. Sproul commented that this is

Treasury, that it

a very difficult period for the

will have to come to the market very shortly for around

$4 billion of new funds, that its

need is

not one that can be postponed, and

that any assistance which the Committee can give would be justified if

does not conflict with credit policy.

offering in May, Mr. Sproul felt it

As to the 2-5/8 per cent certificate

was not the tightness in the money mar

ket that had affected the Treasury financing.

bank reserves were concerned,

The money supply, as far as

did not tighten in May, and banks were reduc

ing their borrowing during that month and their free excess reserves were

increasing.

While there was a question whether they might have been given

more funds by System purchases,

the fact was that the banks'

reserve posi

tion was easing during the month because of the System's operations.

Mr. Rouse said that there was a fluidity in the market during May

but that with the decline in prices of Government securities and with

losses showing on the books of the banks many of them just were not inter

ested in moving.

6/11/53

-23

Mr. Powell commented on Chairman Martin's remarks regarding the

money supply during May,

stating that he did not believe the money supply

always in the same relation to the volume of business.

During the past

few weeks, Mr. Powell said, the money supply has been going down partly

because corporations have been buying securities and, while these funds

get back into the banks shortly, the net effect is

to reduce the money

supply as a by-product of the increase in interest rates which has made

it profitable for corporations to put funds into the bill market.

that the Committee should be very careful in its

significance of short-term changes in

problem, Mr.

Powell felt

He felt

conclusions as to the

the money supply.

As to the broader

that in the last few months the Open Market Com

mittee had been faced with an impossible task-inflation control, tighten

ing up the money market to restrain undesirable credit expansion such as

some forms of consumer credit, and at the same time putting funds into the

market so that normal business would not die.

Mr. Powell felt

this was a

tightrope, that present conditions did not call for what the account has

been doing in

its operations,

that sticking to short-term Treasury securi

ties was not desirable, that because of the imperfect flow of funds from

the short end of the market into other sectors this involved the danger of

supplying more bank money through the multiplier effect than was necessary.

In other words, to put funds only into the short end of the market might

create more bank reserves than was necessary, Mr. Powell said.

felt

He also

the Committee should not overlook the public confidence factor. For

6/11/53

-24

one reason or another, he said, the public is concerned about the present

situation and he cited comments by members of the Board of Directors of

the Federal Reserve Bank of Minneapolis,

the concern shown by many banks

regarding the decline in Government securities prices even though they

did not have long-term securities in their portfolios, and bad reaction

in the press.

He felt that even though the System might be doing the

things that would carry out its

true function, the public, through lack of

understanding or through misinterpretations of policy, might be critical

of the System and irreparable damage might be done.

He stated that he

would like to support Mr. Sproul's thesis that the Manager of the Federal

Open Market Account be allowed to use any part of the Government bond mar

ket for the purpose of supplying reserves in times such as the present.

Mr. Earhart felt that the System may have underestimated the

effects of the tendency to move to a tougher discount policy in recent

He noted that the view had been expressed several months ago that

months.

there might be around a billion dollars of borrowings but that banks should

not borrow to avoid the excess profits tax,

Gradually the System has moved

practically to the position that banks should not borrow under present con

ditions because they should not be borrowing in order to make a profit, and

there is

a profit motive back of almost every borrowing operation.

This

has had the effect of exerting more pressure on the borrowing banks to

follow a restrictive policy, at least in the Twelfth Federal Reserve Dis

trict,

Mr. Earhart said.

As Federal funds have become available most of

6/11/53

-25

the borrowing banks have reduced their indebtedness to the Reserve Banks and

purchased Federal funds, but, as yet, there has been no appreciable easing

of credit in the Twelfth District.

Mr. Hugh Leach said that city banks were very cautious and that

country banks were very concerned because of conditions in the Government

securities market and for other reasons.

He felt that if there was anything

the Federal Reserve could do to relieve this concern, it

should be done if

did not conflict with credit policy.

Chairman Martin doubted that the suggestion that had been made

would help the Treasury.

The real point under discussion, he said, was

whether the Committee was going to have a method of operation which leads to

a minimum of intervention, or whether it

was going to have a procedure which

would lead to maximum intervention by the Federal Open Market Committee in

the market.

the System account were to start specializing in some of

the individual Treasury issues,

would be limitless.

could uncover a role for itself that

At the same time, Chairman Martin said, the Committee

should not be doctrinaire and a provision for dealing with disorderly condi

tions in the market had been adopted.

not wish it

He went on to say that, while he did

to be taken as criticism of the management of the account, he

had been somewhat surprised that the Manager of the Account did not notify

the executive committee of a disorderly condition recently in view of this

provision of a method for dealing with an exceptional situation,

6/11/53

-26

Mr. Rouse suggested that as background for further consideration

of the problem, the Committee note that the Treasury had put $1100 million

into the market recently which it

would have to take out before the end of

June.

In addition, the Treasury shortly would have to borrow a large sum

and it

appeared that something like $1700 million of reserves in addition

to those already put in by the System account would be needed within the

next few weeks.

The meeting then recessed for luncheon and reconvened at 2:15 p.m.

with the same attendance as at the close of the morning session.

Mr. Williams asked whether the Treasury had voiced any concern

about conditions in the Government securities market in a way indicating

that it

felt that the Federal Reserve could help it

through a transition

period, or whether any action that might be taken by the Federal Reserve

would be independent and gratuitous.

Chairman Martin replied that the Treasury had not "thrown itself

on the mercy of the Federal Reserve" nor had it

indicated that it

the support of the Federal Reserve in order to carry on its

operations.

needed

financing

had not been critical of System operations nor had it

indicated in any way that it

down during this period.

felt the Federal Reserve had let the Treasury

The Chairman felt, however,

that the Treasury

would welcome any assistance which the Federal Reserve could give it.

Mr. Rouse agreed with this statement and Mr. Sproul commented to

the effect that immediately prior to the meeting of the executive committee

6/11/53

-27

on May 6, when Messrs. Burgess and Heffelfinger of the Treasury met

with members of the executive committee, Mr. Burgess had made it

plain that

the Treasury considered that credit policy was a problem of the Federal

Reserve.

Chairman Martin then suggested that the individual members of the

Federal Open Market Committee and the Presidents of the Federal Reserve

Banks who are not now members of the Open Market Committee express their

views concerning the proposal that had been made by Mr. Sproul.

Mr. Erickson said that he agreed generally with Mr. Sproul,

the major part of the Committee's operations should be in the bill

he could visualize some circumstances where it

elsewhere.

bility.

While

market,

might be desirable to operate

Therefore, he felt that the Committee's policy should have flexi

There should be no figure of the amount of operations to be car

ried on since figures have a habit of getting outside the Committee,

said, but whatever was advisable at the time should be done.

He reiterated

that he would prefer generally to operate in the short-term market, and he

suggested that a more precise definition of "disorderly" might be helpful,

adding the comment that he had felt last week that the market was bordering

on being disorderly.

Mr. Sproul said that there had been some clarification of the mean

ing of "disorderly" at this meeting.

His impression of a disorderly market

as discussed at the March meeting had been the situation that might exist

in the event of outbreak of war or some other major disruption of the market,

-28

6/11/53

whereas it

now had been suggested that during the past two weeks there

may have been a disorderly condition,

or incipient disorder.

Mr. Erickson reiterated the statement that he had felt a week ago

that the market was bordering on being "disorderly", and that he had dis

cussed the situation with Mr. Rouse by telephone at the time.

Mr. Robertson felt that there need be no greater flexibility in

the authority given by the full Committee to the executive committee and

that there need be no deviation from the policy adopted at the meeting last

March.

There might, however, be a need for greater flexibility between the

executive committee and the Manager of the System Open Market Account.

Mr. Johns stated that he was a little uncertain about the question

that had been raised; that he was not sure how far apart the two views

which appeared to be in opposition really were.

He was under the impres

sion that those expressing the two points of view perhaps would agree that

at times during the past two weeks it

might not have been inappropriate

to intervene in the market in some sector other than the short-term area:

side said it

would not have been surprised if

the management of the account

had suggested the possibility of a disorderly market, while the other side

would say that instead of trying to operate under a more flexible concept

of a disorderly market, it would be better to relieve the account of the

prohibition embodied in the present agreement regarding operations in the

short end of the market.

Mr.

Johns felt this was a difference in procedure

one

-29

6/11/53

without any radical difference in

that in

the matter of procedure,

substance.

He was inclined to believe

would be preferable to relieve the

executive committee of the prohibition agreed upon at the March meeting,

but in

any event, he could not understand why any member of the full Com

mittee should not suggest that a disorderly market existed or that it

was an incipiently disorderly market; he could not see why the whole onus

of determining whether the market was disorderly should be on the Manager

of the Account and he felt that any member of the full Committee,

regard

less of whether he was located in New York or Washington or elsewhere,

should be able to raise the question.

On the whole,

Mr. Johns said, his

leaning was more toward the view expressed by Mr. Sproul than by the

others.

Mr. Earhart referred to the views regarding the effects of the

discount operations of the Reserve Banks which he had expressed at the

meeting this morning,

adding the comment that the relief the Committee

had attempted to give to the market recently had not been as effective

as it

might have been because of the feeling on the part of the banks that

the System did not want them to borrow.

on the suggestions made by Mr.

He went on to say that his views

Sproul were much the same as those expressed

by Mr. Johns; there seemed to be more or less agreement that something ad

ditional might have been done recently in the market and it

just how to proceed.

was a matter of

He could not see any particular reason why the execu

tive committee should have a firm instruction from the full Committee which

6/11/53

-30

would prohibit the executive committee from deciding between bills and

certificates.

Chairman Martin stated that there was no such prohibition on the

executive committee at present, that the present understanding was that

under present conditions operations should be confined to the short end

of the market except in the case of correcting a disorderly market.

question being presented, he said, was whether it

The

better, as a general

policy, to confine System account operations to the nearest thing to money.

He referred to the recommendation made by the ad hoc subcommittee that

some of the uncertainties that were detrimental to the development of

depth, breadth, and resiliency of the Government securities market could

be eliminated by an assurance that henceforth the Committee "will inter

vene in the market,

not to impose on the market any particular pattern of

prices and yields but solely to effectuate the objectives of monetary and

credit policy, and that it will confine such intervention to transactions

in very short-term securities, preferably bills".

The wording of

the

Federal Open Market Committee's understanding on this point, as recorded

the minutes of the March meeting,

had been written very carefully,

Chairman Martin said, and provided that "under present conditions,

operations

for the System account should be confined to the short end of the market

(not including correction of disorderly markets)".

As to why the onus for

determining a "disorderly market" should be on the management of the account,

Chairman Martin said that anybody should be able to raise the question at

6/11/53

-31

any time.

The members of the Committee should realize, however, that the

Manager of the Account is much closer to the market, and is

in a position

to see forces that others may not be able to judge from a distance.

What

the Committee has been driving at, he said, is giving the Manager of the

Account the maximum protection but at the same time the maximum latitude

so that he could operate as a broker, the members of the Committee should

be careful about operating the account in relation to a scare situation,

Chairman Martin said, emphasizing that the Manager of the Account is

infi

nitely better qualified as the Committee's agent on the floor to evaluate

the forces that may determine whether a disorderly or incipiently dis

orderly situation exists.

Mr. Gilbert said that under more normal conditions he would pre

fer to intervene in the market only through purchases of bills but that

these were not normal conditions and he thought there should be more

flexibility than there appeared to be.

purchases of certificates,

notes,

He would favor also permitting

and short-term bonds,

favor purchases of very long-term bonds,

but would not

except to correct disorderly

market conditions, because such purchases might tend to create confusion

the market and would very likely be interpreted to mean that the System

had decided to support market prices at a given level and thus substitute

its own judgment for that of the market itself.

Although the under

standing reached at the March meeting to which Chairman Martin had referred

might not include a specific prohibition against purchases of short-term

6/11/53

-32

securities other than bills, Mr. Gilbert said, it

had been interpreted

as being the sense of the Federal Open Market Committee that purchases

should be limited to bills.

Chairman Martin then read the following provisions which were

under discussion and which were set out on pages 41 and 42 of the min

utes of the meeting of the full Committee held on March 4-5, 1953:

"There was further discussion of the various suggestions

made in the subcommittee's recommendations regarding relations

with the market in the course of which unanimous agreement was

reached on the following points:

"1. Under present conditions, operations for the System

account should be confined to the short end of the market (not

including correction of disorderly markets).

"5.

It was understood that, pending further study and

further action by the Committee, the Committee approved the

subcommittee's recommendation that it should refrain during

a period of Treasury financing from purchasing (1) any matur

ing issues for which an exchange is being offered, ( 2 ) when

issued securities, and (3) any outstanding issues of compar

able maturity to those being offered for exchange."

Mr. Riefler noted that, as Secretary, he had transmitted the

foregoing paragraphs to the Federal Reserve Bank of New York on April 8,

1953,

in a letter which had been approved by the executive committee at

a meeting on that day and which embodied the substance of the recommenda

tions in the ad hoc subcommittee report which had been agreed upon at

the meeting of the full Committee held on March

Mr.

4-5.

C. S. Young commented that it was clear that no action by

the full Committee was needed to permit the System account to go into

6/11/53

-33

Treasury certificates and Mr.

Rouse stated that while this was true,

he had raised the question at the meeting of the executive committee

on May 13, 1953,

noting at that time that there was a shortage of bills

in the market and suggesting that the easiest procedure for getting

reserve funds into the market would be for the System account to make

purchases of 2 per cent Treasury bonds due in

1953 and 1954, in

to which Chairman Martin had expressed the view that it

response

would be a mis

take for the System account to make purchases of 2 per cent bonds in the

open market at the time, that it would be distinctly preferable for the

System account to continue to operate in the bill market, and that he

(Chairman Martin) believed bills would be available.

Mr. Rouse went on

to say that since no member of the executive committee had taken exception

to Chairman Martin's statement (Mr. Sproul was absent), he had taken it

as a guide to operations in the account since that time.

Mr.

C. S. Young expressed the view that wherever support was

needed, the Committee probably should give it

into the long-term market.

term market, Mr.

the

provided it

did not go

Committee were to go into the long

Young said, it might be the worst thing it could do

in that critics would say that pressure had been brought to bear and

that the Committee had acted accordingly.

However,

purchases in the

intermediate market or in certificates might be desirable,

Mr. Young

said that, in his opinion, the Committee was minimizing the element of

distrust and the lack of buying power in various segments of the economy.

6/11/53

-34

He felt that the Committee should not be so optimistic about the business

outlook, referring particularly to the agricultural income situation,

the feeling of bankers and others about the restrictive credit policy,

declines in Government bond prices,

and widespread uneasiness caused

by and resulting from various rumors.

He mentioned specifically that

there were rumors that the Comptroller of the Currency was going to require

national banks to charge off depreciation in Government bond accounts of

banks.

Mr.

Johns said that he was having difficulty understanding why

some seemed to assume that if

purchases were made of securities other

than bills, which, as Chairman Martin said, were the nearest thing to

money, the transactions ipso facto lost their character as monetary

policy operations and became support operations.

He could not see

why if other securities were purchased, when such purchases were con

sistent with monetary policy, they should not be considered as primarily

to effectuate the objectives of monetary policy and that whatever support

might be given to other segments of the market was wholly collateral.

Chairman Martin suggested that the question asked by Mr. Johns

be put in reverse, i.e., why should not purchases of bills be equally

satisfactory in carrying out monetary policy.

Mr. Sproul said that purchases of bills would put reserves

into the market but that in view of the lack of liquidity of the

banking system, they might not be as effective as would be desirable

6/11/53

in avoiding unwarranted changes in the Government securities market.

Changes in that market might affect investment conditions generally

and be a factor to be considered in carrying out the aims of monetary

policy.

Mr. Mills stated that if the account were now to enter all

segments of the market it

might confuse the market thoroughly, that

the market would not have any indication of how the System account

was going to operate or what sector of the market it

might enter.

went on to say this was one of the main considerations in the study

of the ad hoc subcommittee,

that its recommendations in this respect

had been given credence by the full Committee at its meeting in March,

and that before there was to be a change, the whole report of the sub

committee should be reviewed.

Mr. Sproul said that the full Committee had given credence

to that part of the ad hoc subcommittee's report under present con

ditions but that in his opinion conditions had changed.

It was not a

question of trial under all conditions; the understanding reached in

March had referred to present conditions and in Mr. Sproul's opinion

conditions since then had changed.

In response to a statement by Mr. Powell that he could not

recall voting on this matter at the meeting in March,

Chairman Martin

replied that the matter had been voted on, that it was agreed to unani

mously, and that it

was fully recorded in the minutes of the meeting

6/11/53

-36

which had been sent to all members of the Committee and approved unani

mously,

Mr. Sproul added the comment that the matter of confining

operations to the short end of the market was voted on "under present

conditions", and that the question of restricting operations during

periods of Treasury financing was voted on "pending further action

and study by the Committee",

These actions, he said, could not be

considered as permanent actions which could not now be considered

and changed by the Federal Open Market Committee.

that the market would not be disturbed if

Committee put into it

were in

Mr.

Sproul felt

some of the funds the

a form other than in bills, and he

said that there was no thought that if

the instructions in question

were changed, the executive committee would authorize the New York

Bank to go into the market under any and all conditions and buy

securities of all maturities.

made only, he said, if

Purchases other than bills would be

credit were needed in a certain sector of

the market which was not being reached immediately and promptly by

purchases of bills.

Mr.

Hugh Leach said that ordinarily purchases for the System

account should be in Treasury bills and that ordinarily the account

should not come to the rescue of the Treasury.

He did not like to

have this as a permanent policy, however, and he thought the situa

tion was now different from what it

was in March.

He felt that the

6/11/53

-37

Manager of the Account had been right in not suggesting that a dis

orderly market existed recently but he said that if

quotations for

Government bonds were to change by several points in a day, the

executive committee should be in a position to do something about it.

Mr.

Leach believed that disorderly markets should be interpreted a

little

differently now than had been the case earlier in view of the

discussion at the March meeting and he said that he was more con

cerned at present about the Treasury's financing problem than he had

been.

Mr.

Evans said that the discussion at this meeting clearly indicated

that pegging of Government security prices was deeply rooted in the Com

mittee's thinking and that it

rid of the idea.

was evident it

was having a hard time getting

Some of the members of the Committee still

seemed to look

upon the Government security market as "our" market, he said, and while

there was talk of a free market, it

was not so clear that a free market

was really wanted when we were faced with the reality of it.

Mr. Evans

said that there had been little discussion of the economic situation at

this meeting, that as a member of the executive committee he felt it im

portant that the full Committee indicate whether it

still

believed the boom was

pretty stout and credit policy should be relatively neutral; or

whether the boom was a thing of the past and the economy was approaching

a serious deflationary period which would call for supplying ample reserves

6/11/53

-38

to the market.

niques,

Most of the discussion had been directed to market tech

Mr. Evans said, and to a suggestion for changing some of the pro

cedures that had been agreed upon in March as a result of the study by

the ad hoc subcommittee.

For his part, Mr. Evans would like to continue

the operating procedures agreed to in March and, as a member of the execu

tive committee,

he would like to have the full Committee indicate whether,

as a matter of credit policy, funds should be put into the market, whether

the market should be kept about as it

is,

or whether it

should be permitted

to become tighter.

Mr. Leedy said that while he was not a member of the full Committee,

as an alternate member,

he felt this was a discussion basically of the

question whether the agreement reached with respect to the report of the

ad hoc subcommittee should be carried forward or dropped.

had not been a fair trial

He felt there

of the procedure of putting funds into the short

end of the market, which was just becoming acquainted with what it

pect from System operations.

might ex

the present procedure were to be changed

now, the market would not have any guide as to what to expect from the Com

mittee.

As to the business situation, Mr. Leedy referred to the estimate

that perhaps $3 billion of reserves would have to be put into the market

between May and the end of the year in

economic developments.

order to meet the needs of normal

He suggested that some indication from sources

within the System that the Committee recognized that a sizeable amount of

reserves would have to be put into the market and that it

was prepared to

6/11/53

-39

provide them might help to accomplish the Committee's objectives.

Mr.

Leedy also said that he would be greatly disturbed, as Chairman Martin

had indicated, if

the Committee got into an operation where there was

a series of pegs and there seemed to be a substitution of the Committee's

judgment as to where prices of Government securities ought to be, rather

than letting market forces determine them.

In sum, Mr.

Leedy felt

that

conditions at present had not changed sufficiently to warrant a departure

from the agreements reached in March regarding confining purchases for

the System account to short-term securities and refraining from certain

operations during periods of Treasury financing.

Mr. Mills said that while the recommendations in the ad hoc subcom

mittee report could be magnified out of their true importance,

expressed in

the principles

the report were vital and fundamental to the Federal Open Mar

ket Committee s operation.

would be a great mistake in his opinion to

depart from those principles as now in operation; such departure would be

evidence of weakness and vacillation on the part of the Federal Open Market

Committee.

Mr.

Robertson stated that the discussion at this meeting proved

the correctness and wisdom of the Committee's decision in March not to

issue a statement of principles regarding its

operations,

that the mere

fact that there had been this discussion of possible changes in techniques

illustrated how embarrassing the position of the Committee might have been

made if

had issued such a public statement of principles,

Mr. Robertson

6/11/53

-40

said that he had become convinced in his study of the recommendations of

the ad hoc subcommittee that it

was desirable to limit operations to the

short term area of the Government securities market except in the case of

disorderly conditions.

that there was little

under discussion.

He felt that Mr. Johns was mistaken in believing

difference in the two opposing positions that were

While the Manager of the Account should, of course, be

completely free to recommend action to correct a disorderly situation,

Mr.

Robertson said that he would not have thought that the market last week

had been disorderly and he would have felt that the Committee's operations

should have been limited to purchases of bills.

To depart at this time

from the understandings reached in March would be a step back toward the

position of trying to rig the market, Mr. Robertson said; he thought that

injection of reserves at the short end of the market should be just as ef

fective as though the Committee were to put itself in the position of seem

ing to influence other sectors of the market, thus creating an additional

factor for investment portfolio analysts to deal with in trying to measure

the forces that were affecting the long-term Government securities market,

In hisopinion, some members of the Committee were getting a little panicky

about the rise in interest rates; it

been effective in

was his judgment that this rise had

reducing or postponing demands for credit and this was

one of the objectives of the Committee.

As to Mr.

C. S. Young's suggestion

that banks were getting concerned about the prices of Government bonds

and the rumor that the Comptroller of the Currency might require them to

6/11/53

-41

write down depreciation, Mr. Robertson said that the Comptroller still

had

effect his agreement that such depreciation would not have to be taken

valuing bank portfolios.

The Board had in effect the same policies

with respect to bond accounts of State member banks.

With respect to the

economic situation, Mr. Robertson said that he could see nothing in the

economic presentation of the staff this morning or in the comments of the

members of the Committee or the Presidents from the individual Federal Re

serve districts which would indicate that the situation had changed materi

ally recently; it

appeared still

to be a situation of delicate balance at

a very high level of activity.

If there were to be any change in the un

derstandings reached at the March meeting with respect to recommendations

the ad hoc subcommittee report, Mr. Robertson said, such proposals should

be seriously considered only when the members of the Committee came fully

prepared to discuss and debate the recommendations in that report.

Mr. Sproul felt

that all members of the Committee

should have

studied the report and should have come to this meeting prepared to debate

the subject.

Mr. Powell stated that he would wish to bar a doctrinaire attitude

a situation as critical as the present and that he would like to leave the

open market operation as flexible as possible in any instructions given by

the full Committee.

Mr. Fulton said that while he would like to see operations for the

System account continued as largely as possible in

the short end of the

6/11/53

-42

market, he believed that greater flexibility for operations in other areas

was needed.

He noted that the only way many banks could adjust their re

serve position was by selling securities of a type other than those which

the System account was interested in buying, that some of the bankers were

saying that they would rather make loans to any one than to buy a Govern

ment bond, and that the attitude of bankers with respect to the Government

securities market seeped down through the whole community including holders

of savings bonds.

Mr.

Fulton felt that a little

the open market account in

support on the part of

the longer end of the Government securities

market would be of great help to that market,

such support was within

the amount of reserves that the Committee thought should be put into the

market.

He also noted that it takes time for reserves to seep down through

the market to the smaller banks throughout the country, and he felt that

purchases for the System account in the short end of the market were taking

a longer time to seep into the long-term Government securities market than

the requirements of the present situation dictated.

Mr. Williams said that Mr. Leedy had expressed his thoughts fairly

closely.

As a result of the ad hoc subcommittee's report, Mr. Willimas said,

the full Committee made a change in policy.

had to be a debate as to whether it

He did not think that there

was a permanent change or a temporary

change; the Committee was now in the midst of an operation which was experi

mental.

A lot of publicity had been given to the change which was generally

considered,

at least among bankers,

to have resulted from the study of the

- -43

6/11/53

ad hoc subcommittee.

If,

at a time when the public was jittery, the Com

mittee by another action indicated that there was still

come,

would add still

deal with.

Mr.

another change to

another set of problems to those it

was having to

Williams did not feel that the Committee at this stage could

be sure enough about the wisdom of a change such as that which was being

proposed to be certain that it

should make it

now.

It ought to continue

to experiment along the present lines, with a willingness to make a change

as that seemed to be indicated.

Mr. Williams said that a shift in

the Com

mittee's operating technique in the Government securities market now would

be interpreted as an indication that the Committee did not know what it

doing.

was his belief that the present general type of operation should

be continued,

that the situation should be watched carefully, that the Com

mittee should try to give adequate publicity as to what it

was

the way of injecting funds into the market, and that it

counteract some of the present jitteriness in the market.

was going to do

should try to

As to the business

situation, Mr. Williams said there was a wide difference of opinion, that

at the last meeting of the Board of Directors of the Federal Reserve Bank

of Philadelphia reports were brought in from nine regional meetings indicat

ing businessmen were making plans for further expansion, while the representa

tive on the Federal Advisory Council reported that at the May meeting of the

Council the reports generally were to the effect that businessmen were dis

turbed about the outlook.

Mr. Williams felt that the credit policy of the

Committee should continue about as it

for the present.

6/11/53

-44

Mr. Bryan stated that the discussion at this meeting had gotten into

three fundamental questions:

(1)

Mr. Evans' question as to whether the

policy of the Committee with respect to adding reserves to the banking system

has been adequate.

adequate.

In his opinion, Mr. Bryan said, the program is

not

Although not a member of the Committee, Mr. Bryan felt that if

did not embark rapidly on a more adequate program of adding reserves to

the banking system it

was entirely possible that we might get what Mr.

Sproul seemed to fear, a widespread convulsive tightening in the market.

(2) There is the question of arbitrage between the short-term market and

other sectors of the Government securities market, and (3)

the question

whether the Federal Open Market Committee should give discretionary au

thority to the management of the account to intervene in the long-term

Government securities market.

Mr. Bryan said that we had lived through

a period in the market which was most unfavorable to arbitrage of the

short- and long-term market.

He recalled some of the things that had hap

pened since last March when the present experiment in free markets was

undertaken.

Before that time, there had been an extraordinarily long

period of more or less "administered" markets and it

was then impossible

to predict the extent and duration of changes in the yield curve in getting

back to a free market.

its

Within recent months there has been the tightening

reserve positions of banks, the Federal Reserve made no additions to

portfolio until May, the Treasury's 3-1/4 per cent 30-year issue was

permitted to be slaughtered by the free-riders, the Treasury was indicating

6/11/53

-45

at every opportunity that it would come into the long-term market, and

it was evident that there could be an almost unlimited supply of long

term bonds, if the Treasury were determined in such a policy, Under these

circumstances, Mr. Bryan said, it was remarkable that the long-term Govern

ment securities market had not "fallen completely out of bed", As to the

immediate situation, Mr. Bryan felt that the manager of any investment

portfolio would note that System purchases have been very modest, that the

current easing in the market has come from Treasury operations and other

considerations of a temporary nature, and that to expect the portfolio

manager of an insurance or other investment company to show interest in

long-term Government bonds under these conditions was to expect the im

possible.

While the Federal Open Market Committee might know that it had

a policy of supplying reserves that might be needed for normal business

operations during the next few months, managers of investment accounts do

not know what that policy is.

Mr. Bryan did not believe that the efficacy

of arbitrage had been settled by any manner of means by the experience of

the past few months.

On the matter of giving greater discretion to the

executive committee or to the management of the System account, Mr. Bryan

noted that the Committee had already provided a procedure by which, with

a considerable degree of latitude, the management of the account could

call to the attention of the executive committee by conference telephone

or individual telephone calls, in a matter of moments, any situation in

which the market was or threatened to become disorderly in the long end.

6/11/53

-46

He would dislike to see any change in the present procedure, which he felt

was adequate,

he did not believe this procedure had been fully tried, and

he suggested that it

be given a trial

before the full Committee voted un

limited discretion to the executive committee along the lines suggested.

was his view that neither on the basis of experience during the past

three months nor in principle would it

be wise for the full Committee to

give discretion of such magnitude.

Mr. Sproul said that the question under discussion at the moment

was the instruction of the full Committee to the executive committee, that

there was no question under discussion of giving full discretion to the

management of the System open market account.

Rather, the question was

whether the full Committee should freeze the executive committee's author

ity or whether it should give the executive committee more discretion to

meet a situation that might develop.

In referring to a lack of an adequate

period of testing, Mr. Sproul said, this got back to the idea that some

how the full Committee had permanently adopted a policy in March that would

not be changed.

In Mr. Sproul's opinion, the March policy was adopted

"under present conditions," conditions have changed since March, and con

ditions in the next three to six months will be peculiar conditions such

as we have seen in

recent weeks.

He did not feel the authority for deal

ing with a disorderly market situation, as understood at the time of the

March meeting, was adequate to meet the situation that might develop, but

at the moment he was not talking about abandoning that procedure.

The

6/11/53

-47

situation that the Committee now faces is

whether it

making open market

policy effective in the best way possible, in the light of the business

situation and other factors.

Mr. Robertson inquired whether, if

disorderly markets were de

fined to include a situation such as has existed in the last week or two,

Mr.

Sproul would feel differently, and Mr. Sproul responded that that would

be much better than the basis on which the account had been operating but

that he would prefer to have the full Committee not limit the executive

committee at this stage with any attempt at definition of a disorderly

market.

Mr. Sproul reiterated that it would not necessarily be the objec

tive to go into the long-term market, that that might or might not be the

market under the most pressure or the weakest sector of the market at any

given time.

He did not feel it

was a question of going back to pegging

or to a series of pegs, nor was it a question of substituting the Commit

tee's judgment for that of the market.

Chairman Martin said that, having heard the comments of all mem

bers of the Committee and of the Presidents who were not on the Committee,

he still

held the views he had expressed early in the meeting.

With re

spect to the point raised by Mr. Fulton regarding efforts by the System

to restore confidence among bankers, Chairman Martin said that he believed

any actions which the System might take in that direction would not only

not benefit the Government securities market but would actually harm it

6/11/53

-48

through deviating from a policy which the Committee has been working to

ward over a period of two years.

changed over the months,

While he would grant that conditions have

was a matter of judgment as to the extent of

such change and he did not feel that the operating procedure approved in

March as a result of the recommendations of the ad hoc subcommittee had

had a test at all,

He felt that more aggressive purchasing of bills dur

ing the recent period would have had a marked reaction in terms of arbi

trage, and he felt that the procedure which had been authorized by the full

Committee and the instructions given by the executive committee fully per

mitted such operations.

Chairman Martin noted that only nine voting mem

bers of the full Committee were in attendance at this meeting, and he in

quired whether any member of the Committee thought that on a question as

grave as this one it

was appropriate to put the matter to a vote.

His own

feeling was that, where there was such a difference of opinion as had been

expressed on a matter of as much importance as the one that was involved,

the Committee should not put it to a vote in the absence of some members

and a lack of real urgency.

Mr. Sproul inquired as to what kind of instructions would be given

to the executive committee and, in turn, what kind of instructions would

the executive committee give to the New York Bank.

Chairman Martin suggested that in order to answer Mr. Sproul's

question, the Committee turn to consideration of the credit policy that

should be followed.

Should the Committee aggressively and on a rising and

6/11/53

-9

progressive scale supply reserves to the market from this point on?

the discount rate be changed upward?

duction in

reserve requirements?

Should

Should consideration be given to a re

He noted that at its meeting on May 6 the

executive committee took the position that there should be no further tighten

ing in the market, and he raised the question whether the position then taken

by the executive committee should be validated, or whether there should be an

easing of the market, or whether there should be further tightening.

Mr. Evans stated that he felt the Committee should put more funds

into the market to ease the reserve position of banks.

Mr. Sproul felt that the policy which the Committee has been fol

lowing is

the course that it

should continue for the present, that is,

should maintain the existing degree of restraint but it

the restraint to be further intensified, and if

should not allow

errors were made they should

be on the side of ease rather than restraint.

Mr. Mills agreed generally with Mr. Sproul's position except that he

would emphasize quite strongly supplying reserves to the market liberally.

Chairman Martin stated that he felt that in

System should step up its

expressed by Messrs.

purchases quite sharply.

Evans,

the immediate future the

He noted that the views

Sproul, Mills, and Bryan all emphasized that op

erations should be on the side of easing the market, and Mr. Rouse said

that he was thoroughly in accord with that view.

Mr. Earhart said that this view was reflected in recent comments by

members of the Board of Directors of the Federal Reserve Bank of San Francisco,

6/11/53

-50

that they felt generally that the economy was cresting, and that he felt

sure the directors of that Bank would be loathe to take any restrictive

action such as increasing the discount rate or doing anything else that

might be interpreted as further tightening of the situation,

None of the other members of the Committee expressed views contrary

to those indicated, and Mr. Rouse mentioned again the fact that the Treasury

had put $1100 million into the market recently which would have to be re

placed within the next few weeks along with additional reserves needed in

connection with Treasury financing.

System would have to put in

six weeks.

This might mean, he said, that the

around $1600 to $1700 million within the next

Mr. Rouse felt that some relaxation in the attitude of the Reserve

Banks toward discounting would have an effect in the market and the extent

to which discounts were used would, of course, have to be considered in con

nection with the amount of funds put into the market by the System account.

Following further discussion, Chairman Martin stated that it

appeared

to be the consensus of the Federal Open Market Committee that there should

be an aggressive supplying of reserves to the market during the near future,

on a sharply rising basis.

None of the members of the Committee expressed a

different view and Chairman Martin stated that, accordingly, this would be

the general policy of the full Committee, to be carried forward in its

instructions to the executive committee.

Chairman Martin then reverted to the proposals made by Mr. Sproul

for changes in the understandings at the March meeting with respect to

6/11/53

-51

confining purchases to the short end of the market and with respect to

System operations during periods of Treasury financings.

Mr. Sproul stated that the only question being raised was that of

the instructions from the full Committee to the executive committee:

no vote were taken on his proposals, that amounted to a vote to continue

the present instructions, which he felt ought to be changed.

His recom

mendation, therefore, as suggested earlier, was that the restrictions on

the executive committee against buying securities in other than the short

term area except in correcting a disorderly market, and against certain

purchases of securities during periods of Treasury financings, be rescinded.

Chairman Martin again questioned whether Mr. Sproul felt that the

matter was of sufficient urgency to put it

members of the Committee, when it

to a vote in the absence of some

involved, as it

did, a change in policy

of importance.

Mr. Sproul responded that he did feel the matter was urgent or he

would not have kept proposing the change, and he referred to the Treasury

financing needs during the next few weeks as a consideration.

In response

to a question from Mr. Thomas as to precisely what his suggestion was, Mr.

Sproul said that he was proposing to rescind the two prohobitions adopted

at the meeting of the full Committee on March 4-5, 1953, namely, that (a)

under present conditions,

operations for the System account should be con

fined to the short end of the market (not including correction of disorderly

markets),

and (b) pending further study and further action by the Committee,

the Committee should refrain during a period of Treasury financing from

purchasing (1) any maturing issues for which an exchange is

(2)

when-issued securities, and (3)

being offered,

any outstanding issues of comparable

maturity to those being offered for exchange.

This would mean, Mr. Sproul

said, that the executive committee would not be prohibited from authorizing

transactions in other than short-term securities, or from purchasing securi

ties as indicated during periods of Treasury financing; whether the execu

tive committee would want to use that authority would be up to the execu

tive committee.

Thereupon, Mr. Mills moved that the

two understandings referred to by Mr. Sproul

and noted above be reaffirmed by the full Com

mittee and that the executive committee be

instructed to continue to operate accordingly.

Mr. Mills' motion was put by the Chair

and lost, Messrs. Martin, Evans, Mills, and

Robertson voting "aye", and Messrs. Sproul,

Erickson, Fulton, Johns, and Powell voting "no".

Mr. Sproul then moved that the understand

ings relating to confining operations for the

System account to the short-term sector of the

market and to refraining from certain purchases

during periods of Treasury financings, as ap

proved at the meeting of the Committee on March

4-5, 1953 and as set forth above, be rescinded,

with the understanding that the executive committee

would be free to determine how operations should

be carried on in the respects mentioned, in the

light of the current general credit policy of

the Federal Open Market Committee.

Mr. Sproul's motion was put by the Chair

and carried, Messrs. Sproul, Erickson, Fulton,

Johns, and Powell voting "aye", and Messrs.

Martin, Evans, Mills, and Robertson voting "no".

-53Chairman Martin then referred to the directive to be issued to

the executive committee and mentioned a suggestion by Mr. Riefler that,

in view of the policy adopted at this meeting that operations in the

account should be to supply reserves aggressively to the market during

the near future on a sharply rising basis, there should be a change in

the wording of the phrase in the present directive which stated that op

erations should be "with a view to exercising restraint upon inflationary

developments".

There was agreement with this suggestion and also with Mr.

Rouse's suggestion that the limitations in the directive be continued at

the present levels.

Thereupon, upon motion duly made and

seconded, the following direction to the

executive committee was approved unanimously:

The executive committee is directed, until otherwise di

rected 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 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 (a) to relating the supply of funds in the market

to the needs of commerce and business, (b) to avoiding de

flationary tendencies without encouraging a renewal of in

flationary developments (which in the near future will require

aggressive supplying of reserves to the market), (c) to cor

recting a disorderly situation in the Government securities

market, and (d) to the practical administration of the ac

count; 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 indebted

ness purchased from time to time for the temporary accommoda

tion of the Treasury, shall not be increased or decreased by

more than $2,000,000,000.

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 parti

cipations 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 t

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 ex

ceed in the aggregate $2,000,000,000.

Mr. Hugh Leach stated that it

ing of the Presidents'

was contemplated that the next meet

Conference would be held during the week beginning

September 20, 1953, at the time of the annual convention of the American

Bankers Association which is

20-23,

to be held in Washington, D.

C. on September

1953.

Chairman Martin suggested that a meeting of the Federal Open Market

Committee also tentatively be scheduled for the week beginning September 20,

but he emphasized the probability of having to call at least one meeting

of the full Committee before that time.

Thereupon the meeting adjourned at 3:45 p.m.

Secretary.

Cite this document

APA

Federal Reserve (1953, June 10). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19530611

BibTeX

@misc{wtfs_fomc_minutes_19530611,
  author = {Federal Reserve},
  title = {FOMC Minutes},
  year = {1953},
  month = {Jun},
  howpublished = {Fomc Minutes, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/fomc_minutes_19530611},
  note = {Retrieved via When the Fed Speaks corpus}
}