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 Tuesday, December 15, 1953, at 10:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Sproul, Vice Chairman

Erickson

Evans

Fulton

Johns

Mills

Mr. Powell

Mr. Robertson

Mr. Szymczak

Mr. Vardaman

Mr. Riefler, Secretary

Mr. Thurston, Assistant Secretary

Mr. Vest, General Counsel

Mr. Solomon, Assistant General Counsel

Mr. Thomas, Economist

Messrs. Abbott, Hostetler, Peterson, Roelse,

Willis, and R. 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. Gaines, Securities Department, Federal

Reserve Bank of New York

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

Members of the Federal Open Market Committee

Messrs. Bryan, Earhart, and Leach, Presidents of

the Federal Reserve Banks of Atlanta, San

Francisco, and Richmond, respectively

Mr. W. D. Gentry, First Vice President, Federal

Reserve Bank of Dallas

-2Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meeting

of the Federal Open Market Committee held on

September 24, 1953 were approved,

Upon motion duly made and seconded, and

by unanimous vote, the actions of the executive

committee of the Federal Open Market Committee

as set forth in the minutes of the meetings of

the executive committee held on September 24,

October 6, October 20, and November 6, 1953,

were approved, ratified, and confirmed.

Mr. Robertson stated that before the actions of the executive

committee of the Federal Open Market Committee at its meeting on Novem

ber 23, 1953 were approved by the full Committee he would like to bring

up for consideration the matter of "swaps" of Government securities that

were authorized by the executive committee at its November 23 meeting.

He then made a statement substantially as follows:

Pursuant to that authorization, "swaps" have taken place

during the past few weeks by way of sales of issues maturing

out to 12-1/2 months and purchases of an equal amount of bills.

But before getting to the merits - the basic question of the

advisability of "swaps" of this nature - I should like to clear

away the possible uncertainty, from a legal point of view, as

to whether the executive committee had authority to authorize

purchases and sales for the purpose of changing the maturity

pattern of the System Open Market Account portfolio.

Since our March 1953 meeting it has been our intention,

as I understood it, that open market transactions be confined

to purchases and sales for the purpose of releasing or absorb

ing reserves. The action taken at the June meeting, and re

scinded in September, did not affect this basic objective, but

related only to our modus operandi in pursuing it.

It is difficult to maintain that the sale, for example,

of December 1954 2s and the purchase of equivalent amounts of

bills fall within these limits, since such balanced sales and

purchases do not release or absorb reserves - they leave the

12/15/53

-3

volume of reserves at the level which prevailed before the

transactions took place.

I have at hand a memorandum which sets forth the grounds

on which it might be contended that the authorization of these

"swaps" was invalid, with supporting data, but since the entire

Open Market Committee is here and can clear up the matter by its

action today, there does not seem to be any reason for exploring

history. At the same time, since there is no question whatever

as to the good faith of the executive committee and the Manager

of the Account, there seems to be no good reason for permitting

the question of legality or validity of the action to remain in

history, possibly to be raised later when the facts are less well

in hand.

Therefore, having explicitly raised that

question, I wish, before going on to the merits

of this problem, and subject to any objections

on other grounds, to move that the actions of

the executive committee, as revealed by the

minutes of its meeting on November 23, 1953, be

approved, ratified, and confirmed.

Mr. Robertson's motion was seconded and,

following a brief discussion, approved by unani

mous vote

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

Committee a copy of a report of open market operations prepared at the

Federal Reserve Bank of New York covering the period September 24 to

December 9, 1953, inclusive.

At this meeting Mr. Rouse presented a sup

plementary report covering commitments executed from December 10 to Decem

ber 14,

1953, inclusive, and commented briefly on that report.

Copies of

both reports have been placed in the files of the Open Market Committee.

Upon motion duly made and seconded, and

by unanimous vote, the transactions in the

System open market account for the period

September 24 to December 11, 1953, inclusive,

were approved, ratified, and confirmed.

12/15/53

-4

Members of the staff of the Board of Governors then entered the

room for the purpose of presenting a review of recent business and credit

developments,

illustrated by chart slides.

Copies of the text of the re

view have been sent to each member of the Committee and a copy has been

placed in

the files of the Federal Open Market Committee,

Mr. Thurston joined the meeting at the conclusion of the economic

review, and, following a brief discussion, members of the staff who had

entered the room for the purpose of assisting in

its presentation withdrew.

Chairman Martin referred to the report of the ad hoc subcommittee

which had been appointed to study operations in the Government securities

market and to the discussion of that report at the meeting of the full

Committee on March 4-5, 1953.

He recalled that at that time two unfinished

items of business were referred back to the subcommittee for further con

sideration, namely (a)

the "housekeeping" arrangements and (b) the recommen

dation of the subcommittee that repurchase facilities at an appropriate rate

and with appropriate limitation as to volume be made regularly available to

nonbank dealers over week-ends.

meet with Mr.

Sproul for the purpose of discussing the housekeeping arrange

ments covered in

facilities,

(b) in

it

The ad hoc subcommittee was instructed to

the subcommittee's report; and, with respect to repurchase

was requested to review the recommendation set forth under

terms of the problem of orderly markets and of making reserve funds

available on an automatic basis,

Chairman Martin stated that the ad hoc subcommittee met with Mr.

Sproul on October 20, 1953 for the purpose of discussing housekeeping

12/23/53

arrangements.

-5

He noted that in its original report the subcommittee had

made no recommendation concerning housekeeping arrangements other than to

suggest that the full Committee re-examine and review the structure of its

organization.

He stated that at the meeting on October 20 at which Mr. Sproul

was present there was a discussion of all aspects of the housekeeping prob

lem in a manner which had been useful and constructive.

As a result of that

discussion, Chairman Martin said, the subcommittee decided to make no addi

tional recommendations at the present time.

It also agreed that the problem

should be returned to the full Committee with the thought that such matters

as the budget for operating the open market account, management of the ac

count, the responsibility of management,

and the modus operandi would be re

viewed by the full Committee from time to time.

Chairman Martin referred

in this connection to the letter addressed by Mr. Sproul to each member of

the Committee under date of December 7, 1953 which presented information con

cerning the organization of the securities function at the Federal Reserve

Bank of New York and the management of the System account, including data

with respect to the expense of operation of the account,

He felt that the

information contained in Mr. Sproul's letter made a useful contribution to

the study of the problem and he noted that Mr. Sproul's letter extended an

invitation to all members of the Federal Open Market Committee to visit the

New York Bank to observe the actual operations of the account.

Chairman Martin stated that in suggesting that the housekeeping

problems be returned to the full Committee, it was not intended to eliminate

12/15/53

-6

review and study of these problems.

He urged that each member of the Com

mittee and appropriately designated staff members arrange to go to New York

as opportunity offered and spend some time observing the operations of the

account and the problems of its management, the responsibility for which

was shared by all

members of the Committee.

Chairman Martin also said that

he would like to have members of the Committee who were able to visit

New

York comment on the operation at forthcoming meetings of the full Committee.

With respect to the question of repurchase agreements,

Chairman

Martin said that the use of such agreements was a running problem and the

ad hoc subcommittee would like to have it

for whatever study seemed warranted.

been prepared by Messrs.

returned to the full Committee

He referred to a memorandum which had

Riefler and Thomas for distribution to all members

of the Committee under date of December 9, 1953 on the use of repurchase

contracts to meet temporary reserve needs in December of this year.

of this memorandum has been placed in

Committee.)

(A copy

the files of the Federal Open Market

Chairman Martin felt the questions raised in the memorandum

warranted study by the Committee but he did not think they could be decided

at this meeting.

He suggested that there be a discussion of this matter

later during this meeting as well as of a letter addressed by Mr. Sproul to

each member of the Committee under date of December 4, 1953 (a copy of which

has been placed in the files of the Committee)

by the full Committee at its

commenting on the action taken

meeting on September 24 in approving a motion

12/15/53

-7

by Mr. Mills that operations for the System account be confined to short

term securities (except in the correction of disorderly markets) and that

the System account refrain from certain transactions in Treasury securities

during a period of Treasury financing.

Chairman Martin went on to say that Mr. Sproul's letter of Decem

ber 4 set forth clearly and explicitly the position he had understood Mr.

Sproul to hold but that it

did not alter his (Chairman Martin's) views re

garding the desirability of confining operations to short-term securities

and refraining from dealing in

certain securities during Treasury financings.

The Chairman also said that he had asked the staff to gather additional data

as to the recent performance of the Government securities market about which

Mr. Sproul had commented in

his letter.

Such material would be sent to the

members of the Committee for their further consideration, Chairman Martin

said, even though statistics might not be conclusive in indicating the

validity of the position he had taken in his letter to the members of the

Committee of September 15, 1953,

nor would they necessarily carry out the

points made by Mr. Sproul in his letter of December 4.

He thought it

would

be desirable, however, for the members of the Committee to consider and

study the information that had been submitted and would be submitted in this

connection.

Secretary's note: A memorandum from

Chairman Martin presenting additional data

regarding pressure on the market during per

iods of refunding was sent to the members of

the Committee at the time these minutes were

distributed, and a copy has been placed in the

files of the Federal Open Market Committee.

12/15/53

-8

Chairman Martin emphasized that the problems which had been pre

sented in

the ad hoc subcommittee report and which had been covered in Mr.

Sproul's letters of July 16 and December 4, 1953, and in his (Chairman

Martin's) letter

of September 15 were problems which must be continually kept

under study by the members of the Committee.

He felt, he said, that the

study made by the ad hoc subcommittee had fulfilled its purpose; as a mem

ber of the full Committee,

he was encouraged by the amount of discussion that

had been engendered by the subcommittee's report, and he hoped the work done

by the subcommittee would continue to be a matter of discussion at meetings

of the full Committee and of the executive committee.

Thereupon, without objection, Chairman

Martin's report was accepted and it was agreed

that the ad hoc subcommittee be discharged.

Mr. Robertson then made a statement substantially as follows:

The recent "swap" transactions were not of great quantitative

importance, but they do serve to point up the fundamental and re

curring question of the appropriate role of our open market opera

tions.

As I understood it, one of the chief purposes of our action

at the September meeting was to effectuate further the principle

which permeated the ad hoc subcommittee report and underlay the

policy decisions of this Committee throughout 1953 - that our in

tervention in the market should be solely for the objective of

providing or absorbing reserves in accordance with the needs of

the economy.

There may be circumstances in which our intervention else

where than in the shortest-term sector of the market might have

beneficial effects from the point of view of debt management,

without having any material relation to monetary and credit policy.

All of us have given our best thought to this problem, and I for

one have concluded that the possible advantages of participating

in all sectors of the Government securities market, with a variety

of objectives, are outweighed by the benefits of a strictly lim

The chief of these benefits, as I see them,

ited participation.

are:

12/15/53

-9-

(1) The likelihood of increased effectiveness of market

action designed to effectuate general credit policy

when that action is not impeded and its objectives

are not obscured by the pursuit of other objectives;

(2) The development of greater depth, breadth, and resil

iency in the Government securities market, as dealers

and others become certain, as months go by, that (in

the absence of very unusual conditions) the Open Mar

ket Committee's transactions will be solely in the

shortest-term sector.

The ad hoc subcommittee did a thorough and objective job, and

its reasoning and conclusions, together with our discussions of the

matter, have convinced me that our wisest course is a policy of

rigorous self-limitation along the lines I have described. Our job

is to supply reserves and withdraw reserves in order to contribute

to the maintenance of an economy that is both stable and highly pro

ductive.

In ordinary circumstances, the way to accomplish this

efficiently, without weakening the fiber of the Government securi

ties market and without tinkering with problems of debt management

that are not our responsibility, is to confine ourselves (apart

from repurchase transactions) to selling securities in the shortest

term sector when we believe reserves should be absorbed and buying

such securities when we believe additional reserves should be sup

plied. This will enable us not only to pursue single-mindedly our

most vital duty of keeping reserves as close as possible to the

optimum level, but at the same time to contribute to the strength

of the market by enabling dealers and investors to make decisions

and take positions with a minimum of worry about a massive but

the effect of transactions

largely imponderable "X" factor - i.e.,

of the Federal Reserve

portfolio

overpowering

on behalf of the

System.

Needless to say, this policy would bar such "swap" transac

tions as took place during the past month, since their purpose

and effect were not the supply or absorption of reserves,

In view of the fears expressed in September that our action

in this matter might be regarded as immutable - written in tab

lets of stone, as Mr. Sproul said - it is appropriate to reiter

ate that what I propose is no more than a statement of the present

policy of the Committee, always subject to modification at any

time when experience with the policy or changed conditions call

for modification.

Therefore, I move that the Federal Open

Market Committee adopt the following policy,

to be followed until such time as it may be

superseded or modified by further action of

the Committee:

-10

12/15/53

Transactions

for the System account in the open market

shall be entered into solely for the purpose of providing

or absorbing reserves (except in the correction of dis

orderly markets), and shall not include offsetting pur

chases and sales of securities for the purpose of alter

ing the maturity pattern of the System's portfolio,

Mr. Mills stated that he would agree with the proposal that

transactions for the System account in the open market shall be entered

into solely for the purpose of providing or absorbing reserves (except in

the correction of disorderly markets).

However,

it

was his impression,

he said, that the ad hoc subcommittee's study of swaps and recommendation

for their elimination had reference only to occasions of Treasury refund

ings,

It

was his belief that the swap transactions currently undertaken

had especial characteristics having to do with corporate financing in

the market that were not comprehended by the ad hoc subcommittee's finding

against such actions.

It was his conclusion that the present experience

with swap transactions had served the useful purpose of clearly demonstrating

their inadvisability under all

foreseeable circumstances.

He would, there

fore, favor the motion proposed by Mr. Robertson.

Mr.

Earhart inquired whether there was any objective in the swap

operations carried on since the meeting of the executive committee on

November 23,

1953 beyond that indicated by the minutes of that meeting,

namely, to acquire some additional holdings of bills in

order to facili

tate operations in the System account in carrying out credit policy,

Mr.

Rouse stated that at the meeting of the executive committee

on November 23 there was some discussion of the possibility of withdrawing

-11

12/15/53

reserves from the market in January and the suggestion for authorizing

swaps was for the purpose of increasing holdings of January bills in order

to facilitate the withdrawing of reserves in January if that seemed desir

able under the Committee's credit policy.

He stated that the proposal was

not for the purpose of changing the maturity of the portfolio of the

System account in any other sense.

was passive in the operation.

He further noted that the System account

It had simply responded to offers from

the market.

Chairman Martin noted that the executive committee made the de

cision to authorize the swaps at its meeting on November 23 and that the

Manager of the System Account had engaged in the swap transactions referred

to pursuant to the action taken by the executive committee at the time,

He stated that while Mr. Robertson had raised the question of validity of

that authorization,

he (Chairman Martin) was inclined to think that the

executive committee had authority to authorize such transactions and that

it acted within its authority at the November 23 meeting. However, since

a question as to the validity of the action had been raised, Chairman

Martin felt it would be preferable to have the action confirmed by the

full Committee at this meeting.

Chairman Martin went on to say that in approaching this problem

he felt the full Committee should be very careful not to find itself in

the position of being "doctrinaire" about the matter.

He did not feel that

the swaps made in the account during the period since November 23 had

-12seriously impaired the market although as a matter of principle, generally

speaking, he felt

that the position suggested by Mr. Robertson in his motion

would be a sound position in

the light of the general philosophy under

which the Committee had been working for some time.

Mr.

Robertson emphasized that he was not contending that the

action of the executive committee was clearly invalid legally; he was merely

saying its

validity was questionable and that it

clarify in

the record the authority for the action that had been taken

would be desirable to

as well as to indicate what the full Committee felt should be the authority

of the executive committee in this connection hereafter.

Mr. Sproul noted that he was not present at the meeting of the

executive committee on November 23, and he then made a statement substan

tially

as follows:

1.

2.

Governor Robertson's motion suggests that the sole pur

pose of open market operations is to put reserve funds

into the market and to take them out.

It can properly

be said that this is the primary function of open

market operations, but to say it is the sole function

is much too narrow an interpretation; much narrower than

saying that the sole purpose is to effectuate the objectives

of monetary and credit policy. And it also denies

secondary functions, one of which the Committee has

formally recognized in connection with debt management.

The motion goes on from this sweeping but narrow gen

eralization to a prohibition of "swaps" by the open

market account. Recent swaps approved by executive

committee in the short-term sector of market were

an appropriate use of System portfolio - they helped

the banks and particularly others to readjust their

short maturities as they desired, and increased the

System's holdings of January bills which we may

want to use as a weapon of credit policy. That it

may have prevented some decline in yields of other

yields is

short securities and some rise in bill

12/15/53

-13-

no particular concern of ours in the existing situ

ation, and no real interference with market flexi

bility,

3.

It is now held or charged or suggested that there was

some breach of principle in this action. This is the

doctrine of the unbreachable principle in its most

extreme form,

4. For my part I see no breach of principle in this

action but if there were I would be for it.

5. As I said in my recent letter to members of the

Committee, I see no compelling reason permanently

to proscribe swaps by the System Account.

6. The purpose of such swaps in their broader meaning

would not be to operate against a market trend but

to steady a market groping for the trend, and to

bring about desirable adjustments in the Account

portfolio, in terms of credit policy.

7. With the present enormous volume (and variety) of

Government securities, both actually and in relation

to all other debt instruments, and with the whole

private security market basing itself, in part, on

the Government market, I think we may be asking too

much of that market at all times and in all circum

stances to make prompt adjustments to sudden changes

in credit or other conditions. The advantages of al

lowing the large System portfolio to assist in this

process, at times, seem to me to outweight the dis

advantages. We would still have plenty of flexibil

ity in the market and plenty of room for private ar

bitrage, on the part of the great majority of those

interested in and concerned with the Government se

Only a very few most agile operators

curity market.

might feel their style might be cramped, I doubt

if even they would be seriously hindered in their

proper pursuit of profits in the Government security

market - but in any case open market policy shouldn ' t

be determined by their views or assumed needs for

"freedom" in the market,

In response to a question from Mr. Leach as to exactly what is

undesirable about swaps,

Mr.

except that some in the market may object to them,

Mills said that he had reached the conclusion from watching the

12/15/53

-14

operations of the System account recently that the swaps that had taken

place had clouded the pattern of the Government securities market.

It

was his view that dealers in Government securities were very alert to

every influence injected into the market and that where that influence was

in the form of entrance by the System open market account in a manner

which

was not clearly discernible in

its

objectives, the action might

cause confusion among Government securities dealers in

judgments.

On the whole, Mr.

reaching their

Mills felt that the disadvantages of the

swaps outweighed the possible benefits from such operations.

In response to a question by Mr. Rouse as to what objectionable

effects had been observable in

the market recently, Mr. Mills stated that

the effects of the recent swaps had been only nominal,

However, it

was

his view that to inject into the market any extraneous influence that was

apart from the free market concept would result in throwing a haze over

the market.

This could be easily avoided, he said, by refraining from

swaps which might militate against the depth, breadth, and resiliency

sought in the market.

Mr. Rouse responded that there had been no discernible effect

on dealer positions or on the willingness of dealers to take positions.

While there may have been no observable effect on the position

of dealers,

Mr. Mills said he felt that the recent swaps had given the

dealer fraternity some indication that the System open market account may,

on occasion,

enter the market for purposes other than providing or

12/15/53

-15

absorbing reserves or correcting disorderly markets, that this would cause

uncertainty, and that the sooner such uncertainties could be disabused,

the better.

Mr. Szymczak stated that while he attended the meeting of the execu

tive committee on November 23, he withdrew from the room before the action

was taken authorizing swaps.

Had he been present at that time, he said,

he would have indicated disagreement with the proposal for such swaps.

The small amount of bills acquired in the recent operation, which admittedly

had had only nominal effects in

the market, did not increase the System's

holdings of bills sufficiently to help significantly in carrying out credit

policy; and if the swaps had been in sufficient volume to have facilitated

carrying out credit policy, the swaps would have caused a disturbance in the

market.

Mr. Szymczak felt there was no need for the question to have

come before the full Committee, that it would have been sufficient for the

executive committee at its meeting today to have indicated that the swaps

that had been authorized by it on November 23 should be discontinued.

Mr. Vardaman felt that the question was one to be determined by

the full Committee rather than the executive committee since, in his judg

ment, engaging in swaps amounted to market manipulation rather than opera

tions to carry out credit policy, and the authority for such activities

should definitely be removed from the executive committee.

the full Committee felt it

such transactions.

desirable to engage in swaps,

If at any time

it could authorize

12/15/53

-16

At Mr. Johns' request, Mr. Robertson reread his motion, following

which Mr. Johns expressed the view that the first

resolution, i.e.,

clause of the proposed

"transactions for the System account in

the open market

shall be entered into solely for the purpose of providing or absorbing re

serves (except in the correction of disorderly markets)",

would be repeti

tive of the position that was implicit in the Committee s action last March

in

agreeing that "it

is not now the policy of the Committee to support any

pattern of prices and yields in the Government securities market and

intervention in

the Government securities market is solely to effectuate

the objectives of monetary and credit policy (including correction of dis

orderly markets)".

felt

While the wording was slightly different, Mr. Johns

that the effect was the same.

Mr. Robertson stated that he thought the action approved in March

was designed to achieve the same end, but obviously it had failed to do so

as evidenced by the recent use of "swaps"; the wording of his motion was in

tended to make specific and thus to clarify the intention of the full Com

mittee so that there could be no misunderstanding in the future.

Mr. Johns said that he was present and serving on the executive

committee at the meeting on November 23 when it

authorized the swaps under

discussion, that he would be entirely willing at this time to reverse that

action and withdraw the authority.

He was doubtful about the need for

Mr. Robertson's motion, however, his feeling being that the general policy

was pretty well understood and that the proposed resolution might be con

fusing rather than clarifying.

12/15/53

-17

Mr. Robertson stated that he felt it preferable to have the

full

Committee's intentions explicitly stated in the minutes rather than to

leave the matter to a general "understanding".

Mr. Mills questioned whether the ad hoc subcommittee or the full

Committee had ever considered prohibiting swap arrangements except during

periods of Treasury refundings.

It was his view that if the full Committee

desired to prohibit swaps, the question of authority could only be settled

by a motion such as that proposed by Mr. Robertson.

During a further discussion of this question, Mr. Erickson stated

that he felt the action taken by the executive committee on November 23 in

authorizing swaps was fully within its authority, that under the circum

stances he felt it was appropriate to authorize the management of the ac

count to engage in swaps for the purpose indicated, that he still felt

that under the same set of circumstances at a future time similar authority

should be given, and that he therefore would oppose a motion such as that

proposed by Mr. Robertson.

Chairman Martin said that unquestionably the over-all concept

embodied in the proposed prohibition of swaps permeated the ad hoc sub

committee report; if that concept would be clarified without having such

clarification preclude reopening the question at any time, he felt it

wholly appropriate to vote on Mr. Robertson's motion.

Mr. Sproul responded that while the theory embodied in the motion

probably may have permeated the whole ad hoc subcommittee report, the whole

-18

12/15/53

ad hoc subcommittee report was never accepted by the Federal Open Market

Committee in toto,

The suggested resolution would go beyond what was set

forth in the ad hoc subcommittee report.

In Mr. Sproul's view, the emphasis

in open market operations should be on putting reserves into or taking them

out of the market,

and the ad hoc subcommittee report indicated that to be

the primary responsibility of the Committee,

but the entire experience of

the Committee's operations indicated that there might be times when money

market factors (and therefore credit policy) suggested operations which were

not solely for the purpose of putting in

felt that if

or taking out reserves.

the Committee adopted the proposed prohibition, it

Mr. Sproul

would be mov

ing further into a situation of freezing itself into a position from which

it

would be difficult to extricate itself; its adoption would be an attempt

to put the Open Market Committee on record in

resiliency or flexibility in its

such a way that the idea of

policy formation would almost disappear.

Mr. Erickson stated that he would dislike having the record show

a formal motion approving Governor Robertson's proposal and suggested

that the concept might be indicated satisfactorily by having the minutes

of this meeting show that it

was the sense of the Committee that operations

ordinarily should avoid swaps.

Chairman Martin stated that there certainly was no intention on

his part or on the part of the ad hoc subcommittee of denying the validity

of flexibility of operations.

He recognized that it

could be argued that

either the position taken by the ad hoc subcommittee or the position

12/15/53

-19

suggested by Mr. Sproul would work against flexibility.

however, that it

It

seemed to him,

was more appropriate to develop a philosophy and make

exceptions to that philosophy, rather than to take the view that there

should be no philosophy.

Mr. Sproul thought that a philosophy had been developed in

gen

eral terms by the Committee but that Mr. Robertson's motion tended to push

that philosophy into a corner out of which the emergence of a flexible

policy would become more and more difficult.

Chairman Martin stated that it

all

should be clearly understood by

members of the Committee that, in the event Mr. Robertson's motion

should be voted on and carried, the Committee should have no hesitancy in

reversing the action in the event circumstances arose which made that seem

to be desirable.

This could be done at any time by calling a meeting of

the full Committee or, in the event of need, by telephone.

During a further discussion of this question, Mr. Sproul again

expressed the view that step by step the Committee was building a pattern

of very limited flexibility or none at all.

Mr. Earhart suggested that it

Government securities market if,

might be more disturbing to the

in January, the System account were to

make outright sales of securities in order to contract the supply of re

serves,

than to have swaps such as were authorized by the executive com

mittee on November 23 take place during December.

Chairman Martin responded that it

was always a matter of judgment,

of balancing between a philosophy of a free market and the degree to which

12/15/53

-20

the Federal Open Market Committee assumed responsibility for the market.

In the longer run, what would produce depth, breadth, and resiliency in the

market?

His own views were at the opposite pole from those expressed by

Mr. Sproul, he said, but he recognized that judgments might differ on what

would produce the kind of market that was being discussed.

Mr. Leach stated that if

he were a member of the Committee he

would vote against Mr. Robertson's motion, assuming that the action that

would be taken would have to be included in the record of policy actions

to be published in accordance with Section 10 of the Federal Reserve Act.

His disposition was not to take formal actions of this sort which had to

be made a matter of public record.

Chairman Martin noted that the action of the Committee in

in

June

reversing by a five to four vote the action that had been taken by the

full Committee in March with respect to confining operations to short-term

securities and to refraining from certain operations during periods of

Treasury financings was one which would have to go into the policy record.

He did not feel that the concept of a free market was one on which the

members of the Committee could refuse to take a definite stand.

Mr. Sproul then moved that, without ac

cepting in any way the idea of a perpetual

policy such as was suggested by Mr. Robertson's

resolution, that motion be amended to provide

that it would be effective "until the next

meeting of the Federal Open Market Committee".

Mr. Sproul stated that his reason for moving to amend Mr. Robert

son's motion was that the whole temper of the discussion of that motion

12/15/53

-21

as well as of Mr. Mills' motion which was approved at the meeting on

September 24, 1953 had been to the effect that the actions proposed

were always subject to review.

While he assumed that all members of the

Committee would agree that the action proposed by Mr. Robertson would

be effective only until the next meeting, Mr. Sproul felt that it

was

important enough to warrant having this point clearly stated so that the

Committee would not slide into the position of having frozen policy in

definitely.

Mr. Robertson stated that he would prefer not to have his reso

lution amended as proposed by Mr. Sproul inasmuch as such an amendment

would mean that the resolution automatically became ineffective after the

next meeting of the Committee unless positive action were then taken to

renew it.

Mr. Williams then suggested that the executive committee would

have a pretty clear indication of what the full Committee had in mind if

in Mr. Robertson's motion, the word "primarily" were substituted for the

word "solely" so that the affected part of the motion would read

"......

transactions for the System account in the open market shall be entered

into primarily for the purpose of providing or absorbing reserves......"

Mr. Robertson replied that he would be opposed to the change

recommended by Mr. Williams since there was no clear understanding of what

would fall

in

outside the realm of "primarily".

Thus,

such a change would,

effect, defeat the purpose of his motion which was intended to draw a

12/15/53

-22

dividing line which, without further interpretation, would be clearly un

derstood by everyone concerned.

Chairman Martin stated that, for the reasons given by Mr. Robertson,

he would dislike substitution of the word "primarily" for "solely".

Following a discussion, Mr.

to amend Mr. Robertson's motion

Chair and lost: Messrs. Sproul

voting "aye" and Messrs. Martin,

Johns, Mills, Powell, Robertson,

Vardaman voting "no".

Sproul's motion

was put by the

and Erickson

Evans, Fulton,

Szymczak, and

Mr. Robertson's motion, that transactions

for the System account in the open market shall

be entered into solely for the purpose of pro

viding or absorbing reserves (except in the cor

rection of disorderly markets), and shall not

include offsetting purchases and sales of

securities for the purpose of altering the

maturity pattern of the System's portfolio, was

then put by the Chair and carried: Messrs.

Martin, Evans, Fulton, Johns, Mills, Powell,

Robertson, Szymczak,

and Vardaman voting "aye",

and Messrs. Sproul and Erickson voting "no".

Mr. Sproul stated that he had another proposal to make which

was related to the foregoing discussion.

by the Committee at its

motion by Mr.

He referred to the action taken

meeting on September 24, 1953 in approving the

Mills that "the Federal Open Market Committee take the position

that operations for the System account be confined to short-term securities

(except in the correction of disorderly markets)

and that during a period of

Treasury financing there be no purchases of (1) maturing issues for which

an exchange is

being offered,

(2)

when-issued securities,

or (3) outstanding

issues of comparable maturity to those being offered for exchange; and that

12/15/53

-23

these policies be followed until such time as they may be superseded or

modified by further action of the Federal Open Market Committee".

Mr. Sproul then moved that the last clause

of the foregoing action taken at the meeting on

September 24, 1953 be amended to read "and that

these policies be followed until the next meet

ing of the Federal Open Market Committee."

In commenting upon this motion Mr. Sproul stated that, in pro

posing the amendment,

he was in no way altering his opposition to the

general purport of the whole action approved by the full Committee on

September 24, 1953

He felt,

however, that the proposed language would

correctly reflect the sense of the meeting on September 24, that is,

that

the action would be subject to review at the next meeting of the Committee.

He preferred the suggested wording, he said, so that everyone would know

that the action taken did not represent a permanent policy.

During the discussion that followed, Mr. Szymczak expressed the

view that those who might not vote to approve Mr. Sproul's motion would not

necessarily have any objection to considering the question at the next or

any other meeting of the Committee.

Mr. Mills raised the question whether in the opinion of the Counsel

for the Committee modification of the action taken at the meeting on Septem

ber 24 by including a specific time limitation such as suggested by Mr.

Sproul's motion was necessary to preserve the legal freedom of action for the

Committee s members subsequently to alter their views.

Mr. Vest stated that from the legal standpoint it

was clear that

any member of the Committee had the right at any meeting to bring up any

12/15/53

-24

subject of the type under discussion for consideration; whether the specific

provision suggested by Mr. Sproul was included in the resolution or not, this

right was always there as a legal matter and could not be taken away by

action of the Committee,

Mr. Erickson stated that he would vote to approve Mr. Sproul's

motion since it

and since it

Mills'

represented the position which he had felt all along existed

would not alter the views he held in voting to approve Mr.

resolution at the meeting on September 24,

1953.

Thereupon, Mr. Sproul's motion was put by

the Chair and lost: Messrs. Sproul and Erickson

voting "aye" and Messrs. Martin, Evans, Fulton,

Johns, Mills, Powell, Robertson, Szymczak, and

Vardaman voting "no".

Mr. Robertson stated that so long as the question of the action

taken by the Committee at the meeting on September 24 had been raised, he

would suggest that the wording of the motion be clarified by inserting the

words "in

the open market" following "System account" so as to make it

clear

that the action applied only to transactions in the open market and not to

transactions with the Treasury.

This suggestion was discussed briefly and

it was agreed unanimously that, as a matter of

clarification of the subject action taken at

the meeting on September 24, 1953, the words

"in the open market" be inserted following

the words "System account".

Secretary's note:

With this change, the

action would read as follows:

"Mr. Mills then moved that the Federal

Open Market Committee take the position that

12/15/53

-25

operations for the System account in the open

market be confined to short-term securities

(except in the correction of disorderly markets)

and that during a period of Treasury financing

there be no purchases of (1) maturing issues

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

issued securities, or (3) outstanding issues of

comparable maturity to those being offered for

exchange; and that these policies be followed

until such time as they may be superseded or

modified by further action of the Federal Open

Market Committee."

Mr. Vardaman withdrew from the meeting at this point.

Chairman Martin then called upon Mr. Thomas who commented

briefly on the outlook for the reserve position of banks after the turn

of the year, particularly the effects of the return flow of currency from

circulation following the holiday shopping season and the easing influence

such return flow would have on the money market.

(A Staff memorandum on

The Outlook for Treasury Cash Requirements and Bank Reserves had been dis

tributed to the members of the Committee under date of December 11, 1953.)

Mr. Thomas raised the question whether the Committee would wish to withdraw

funds from the market during January as a means of avoiding a large volume

of free reserves (excess reserves less discounts and advances)

period.

It

during that

was his view that, assuming that any additional reserves supplied

by open market operations between December 10 and the year-end were made

available through the repurchase facility and assuming further that repur

chase contracts were fully repaid early in

January, the System would need to

mature or sell about $500 million of Treasury bills in

January if

serves were to average about $100 million by late January.

free re

12/15/53

-26

Chairman Martin suggested that consideration be given at this point

to the memorandum from Messrs.

Riefler and Thomas dated December 9, 1953,

which he had referred earlier in this meeting.

to

While he did not believe the

Committee was prepared to make changes at this time, he felt

discussion of

the subject was desirable since questions had been raised regarding the

recent action of the manager of the System open market account in

reducing

the effective rate on repurchase agreements to 1-3/4 per cent, a level below

that of the discount rate (2 per cent).

He noted that there had also been

a question whether repurchase facilities should be extended to member banks

rather than only to non-bank dealers in Government securities.

With respect

to the relationship between the discount rate and the repurchase rate, it

was Chairman Martin's view that an educational process had been taking place

in

the market and that action to lower the discount rate in December and put

it

back up in

January would be widely misinterpreted in the business com

munity.

Chairman Martin went on to say that the action in

reducing the

repurchase rate was taken under the authority given to the manager of the

System account by the full Committee,

after the manager of the account had

discussed the proposed action with him (Chairman Martin).

Mr. Sproul then made a statement substantially as follows:

I think a repurchase rate lower than the discount rate is

1.

peculiarly adopted to relieving temporary situations in the money

market and can effectively and most appropriately be carried out

by making it available to Government security dealers, other than

banks.

2.

We have an example in the recent situation. As Governor Mills

pointed out at the last meeting of the executive committee, we

12/15/53

-27

had a relatively easy reserve position in most of the country and

relative tightness in New York. It was a money market phenomenon

of temporary character. Our job was to smooth it out, without

actual or apparent major or significant changes in general credit

policy. A reduction in the repurchase rate and an increased use

of repurchase facilities avoided a temporary undue run-up of rates

and a temporary undue tightening of credit due to increased bank

borrowing, and also avoided the substantially more permanent commit

ment of a reduction in the discount rate, and the slightly more

permanent commitment of larger outright purchases of Government

securities. It emphasized the money market aspect of the situation

as distinguished from the overall business and credit aspect.

3. Used in this way to meet temporary situations, which I think is

the way it should be used, I see no need to extend the repurchase

privilege to dealer banks nor to all banks. The banks are able to

make their necessary adjustments in large part through the Govern

ment security market by virtue of the repurchase facility afforded

to the dealers, and without resort to the amount of borrowing which

would otherwise be necessary.

4. To expand the privilege by making it available to dealer banks,

in addition to being unnecessary to make the machinery work, would

seem to me to run counter to a fundamental tenet of the Federal Re

serve Act that the affairs of each Federal Reserve Bank will be ad

ministered fairly and impartially without discrimination in favor

of or against any member bank or banks.

5. To try to overcome this difficulty by making the facility

available to all member banks would seem to me to lead us into

an error to correct an error which doesn't exist. It would be,

in effect, the establishment of a preferential borrowing or dis

count rate. And one thing I think we have learned is that no

matter how you slice it, the preferential rate becomes the ef

fective discount rate, at least for the banks that know how to

use it.

I don't think we want to get back into that situation.

Repurchase agreements have been and can be used effectively as

an instrument of monetary policy geared specifically to meet

temporary situations in the money market-of which the Treasury

short term market is now the core. There is a clear difference

between the repurchase rate in its restricted use and the discount

rate in its general use, and I don't think that distinction should

be blurred.

If the repurchase rate didn't become a preferential rate, it would

be because most banks were not familiar with it, and then we would

be right back where we started, with a special facility for a few

money market banks.

12/15/53

-28

In response to a question from Chairman Martin, Mr, Sproul indi

cated that he would contemplate that the existing rate on repurchase agree

ments would be kept until about the end of this year; the usefulness of the

present 1-3/4 per cent rate on repurchase agreements would be ended with the

return flow of funds after the turn of the year when repurchase contracts

would be repaid.

There followed a general discussion of the use of repurchase agree

ments and of the question whether the rate on such agreements should be set

at a level below the discount rate of the Federal Reserve Banks.

discussion, Chairman Martin stated that he was in

During this

complete agreement with

the views expressed by Mr. Sproul regarding repurchase agreements.

He felt

they represented an appropriate device in the money market which could be used

from time to time in helping to accomplish the objectives of credit policy,

and he noted that they had been used since the early 1920's,

the Board having

then authorized the Federal Reserve Banks to engage in such transactions.

Messrs. Robertson,

Bryan, and Johns expressed some doubts as to

the appropriateness of present arrangements for repurchase agreements but

were not prepared to suggest changes in the procedure for their use at this

time.

Mr. Mills suggested that, entirely apart from the procedure for

using repurchase agreements,

he sensed a tendency to rely unduly on such

facilities as a means of supplying reserves over the coming year-end period.

He felt System policy should be careful not to exclude outright purchases of

12/15/53

-29

securities in the event repurchase agreements did not meet the needs of the

market for reserves.

Mr. Sproul stated that, while the question of the credit policy to

be pursued in coming weeks had not yet been acted on by the Committee, he

would agree that if

conditions developed where repurchase agreements were not

taking care of the situation in

accordance with the Committee s credit policy,

outright purchases of securities should not be excluded.

The discussion then turned to the credit policy to be followed

during coming weeks in the light of the economic review presented earlier in

the meeting and of the review Mr. Thomas had given of the projections for

bank reserve positions, particularly through the month of January.

Chairman

Martin noted that the Committee had been pursuing a general policy of "active

ease" in the money market, which meant that reserves would be supplied to

the market to meet seasonal and growth needs of the economy.

He inquired

whether, in terms of the foregoing discussion, any of the members of the Com

mittee felt there should be a modification of the Committee's existing policy.

This question was considered and there was unanimous agreement that

the over-all credit policy should continue along the lines that had been

pursued recently with, however, more emphasis on a program of actively

maintaining a condition of ease in the money market.

In this connection there was also a discussion of the possible

desirability of a reduction in the discount rate of the Federal Reserve Banks

as a means of helping to carry out the Committee's stated policy of actively

12/15/53

-30

maintaining a condition of ease in the money market.

Mr. Johns stated reasons why he felt a reduction in the discount

rate might be considered at this time, emphasizing that such a reduction

need not be thought of as something of a very temporary nature to be followed

by an increase soon after the first

of the year; it

was Mr.

Johns'

thought

that a reduced discount rate at this time might be a desirable indication of

flexibility.

Several of the other members of the Committee and Presidents of

Federal Reserve Banks who were not members of the Committee questioned the

desirability of a reduction in the discount rate at this time.

Chairman Martin expressed the view that a reduction in the discount

rate at present might "muddy the stream" in view of the fact that the Com

mittee had already started on a program of meeting year-end credit demands

by use of repurchase agreements.

As to the business situation, he noted

differences of opinion on how serious the current readjustment might be and

suggested that on the whole it

might be wiser to avoid changing the discount

rate at the present time.

Mr. Sproul agreed with these comments,

adding the view that the

thoughts expressed regarding the discount rate in no way indicated a feeling

on the part of the members of the Committee that its

credit policy should in

any sense be one of restraint during the period immediately ahead,

The meeting recessed at

1:10 p.m. and reconvened at 2:00 p.m. with

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

12/15/53

-31

During a discussion of the directive to be issued, it

was suggested

that the clause in the existing directive which had provided that the exec

utive committee should arrange for transactions for the System open market

account with a view, among other things,

"to avoiding deflationary tendencies"

should be changed in keeping with the decision at the morning session that

the over-all objective of credit policy should be one of actively maintaining

a condition of ease in the money market.

There was also a discussion of the purpose of clause (d) of the

directive which authorized that transactions be with a view "to the practical

administration of the account".

Mr. Vest said that it was difficult to

state precisely what was authorized by this clause but that it gave a certain

amount of leeway for incidental transactions in the account which were neces

sary to carry out effectively and appropriately the policies otherwise pre

scribed by the Committee,

within the limitations established under the

general policy or other directives adopted by the Committee.

that the clause in

Mr. Vest noted

its present form or in a similar form had been used in

virtually all directives of the Federal Open Market Committee and of the

executive committee since the Committee was reorganized pursuant to the Bank

ing Act of 1935.

After some discussion, Chairman Martin suggested that the clause

be retained in the directive to be issued at this meeting but that its

purpose be reviewed before the next meeting, and there was unanimous agreement

with this suggestion.

12/15/53

-32

Following a further discussion, during

which it was stated that no change in the limita

tions contained in the directive was necessary,

upon motion duly made and seconded, unanimous ap

proval was given to a directive in the following

form:

The executive committee is directed, until otherwise directed

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

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

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

exchanges, replacement of maturing securities, and letting maturi

ties 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 sup

ply of funds in the market to the needs of commerce and business,

(b) to promoting growth and stability in the economy by actively

maintaining a condition of ease in the money market, (c) to correct

ing a disorderly situation in the Government securities market, and

(d) to the practical administration of the account; provided that

the aggregate amount of securities held in the System account (in

cluding commitments for the purchase or sale of securities for the

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

certificates of indebtedness purchased from time to time for the

temporary accommodation of the Treasury, shall not be increased or

decreased by more than $2,000,000,000.

The executive committee is further directed, until otherwise

directed by the Federal Open Market Committee, to arrange for the

purchase direct from the Treasury for the account of the Federal

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

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

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

ficates of indebtedness as may be necessary from time to time for

the temporary accommodation of the Treasury, provided that the total

amount of such certificates held at any one time by the Federal Re

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

It

was agreed that the next meeting of the Committee would be held

during the week beginning March 1, 1954.

Mr. Robertson stated that, since the ad hoc subcommittee was being

discharged, he would not wish to have this meeting adjourn without first

saying that he felt the subcommittee was entitled to the commendation of

12/15/53

-33

the entire Federal Open Market Comittee.

He felt that the job the subcom

mittee had done was of great benefit to the System, not only because of

the specific suggestions it had made, but even more particularly because

of the general interest it had stimulated among the members of the Federal

Open Market Committee in open market operations.

Mr. Robertson added the

comment that he felt especially indebted to the subcommittee for the work

it

had done.

Thereupon the meeting adjourned at 2:15 p.m.

Secretary.