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 Wednesday, March 3, 1954, at 10:00 a.m.
PRESENT:
Mr. Martin, Chairman
Mr. Sproul, Vice Chairman
Mr. Evans
Mr. Leedy
Mr.
Mr.
Mr.
Mr.
Mills
Robertson
Szymczak
Williams
Mr. C. S. Young
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Vest, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Bopp, Mitchell, Roelse, Tow, 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. Gaines, Securities Department, Federal Reserve
Bank of New York
Messrs. Leach, Fulton, and Earhart, Alternate Members
of the Federal Open Market Committee
Messrs. Erickson, Johns, Powell, and Irons, Presidents
of the Federal Reserve Banks of Boston, St. Louis,
Minneapolis, and Dallas, respectively
Mr. Clark, First Vice President, Federal Reserve Bank
of Atlanta
Mr. Willis, Financial Economist, Federal Reserve
Bank of Boston
Mr. Marget, Director, Division of International
Finance, Board of Governors
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3/3/54
Mr. Riefler referred to advices of the election for a period of
on one year commencing March 1, 1954 of members and alternate members of
the Federal Open Market Committee representing the Federal Reserve Banks.
He noted that a vacancy existed at the present time in the member to be
elected by the Federal Reserve Banks of Atlanta, St. Louis, and Dallas,
and that Mr. Bryan, who had been elected an alternate member by those
Banks was not present and had not executed the required oath of office.
Mr. Riefler stated that all
other members and alternate members elected
by the Federal Reserve Banks had executed the oath of office, and that
it
was the opinion of the Committee Counsel that the following members
and alternate members were legally qualified to serve:
Allan Sproul, President of the Federal Reserve Bank of
New York, with William F. Treiber, First Vice President
of the Federal Reserve Bank of New York, as alternate
member;
Alfred H. Williams, President of the Federal Reserve Bank
of Philadelphia, with Hugh Leach, President of the Fed
eral Reserve Bank of Richmond, as alternate member;
C. S. Young, President of the Federal Reserve Bank of
Chicago, with W. D. Fulton, President of the Federal
Reserve Bank of Cleveland, as alternate member;
H. G. Leedy, President of the Federal Reserve Bank of
Kansas City, with C. E. Earhart, President of the Fed
eral Reserve Bank of San Francisco, as alternate member.
Upon motion duly made and seconded,
and by unanimous vote, the following
officers of the Federal Open Market Com
mittee were elected to serve until the
election of their successors at the first
3/3/54
meeting of the Committee after February 28,
1955, with the understanding that in the
event of the discontinuance of their
official connection with the Board of
Governors or a Federal Reserve Bank as
the case might be they would cease to
have any official connection with the
Federal Open Market Committee:
McC. Martin, Jr.
Allan Sproul
Winfield W. Riefler
Elliott Thurston
George B. Vest
Frederic Solomon
Woodlief Thomas
Karl R. Bopp, George W. Mitchell,
H. V. Roelse, Clarence W. Tow,
and Ralph A. Young
Wm.
Chairman
Vice Chairman
Secretary
Assistant Secretary
General Counsel
Assistant General Counsel
Economist
Associate Economists
Upon motion duly made and seconded,
and by unanimous vote, the Federal Re
serve Bank of New York was selected to
execute transactions for the System open
market account until the adjourment of
the first meeting of the Committee after
February 28, 1955.
Mr. Sproul stated that the Board of Directors of the Federal
Reserve Bank of New York had selected Mr. Rouse as Manager of the System
Open Market Account,
subject to the selection of the Federal Reserve Bank
of New York by the Federal
Open Market Committee as the Bank to execute
transactions for the System account and his approval by the Federal Open
Market Committee.
Upon motion duly made and seconded,
and by unanimous vote, the selection of
Mr. Rouse as Manager of the System Open
Market Account was approved.
Upon motion duly made and seconded,
and by unanimous vote, the following were
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selected to serve with the Chairman of the
Federal Open Market Committee (who under
the provisions of the by-laws is also Chair
man of the executive committee) as members
and alternate members of the executive com
mittee until the selection of their succes
sors at the first
meeting of the Federal
Open Market Committee after February 28,
1955:
Members
M. S. Szymczak
J. L. Robertson
Allan Sproul
Alfred H. Williams
Alternate Members
James K. Vardaman, Jr.
A. L. Mills, Jr.
R. M. Evans
(To serve in the order named
as alternates for Messrs.
Martin, Szymczak, and Robertson)
C. S. Young
H. G. Leedy
(To serve in the order named as
alternates for Messrs. Sproul
and Williams)
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Committee
held on December 15, 1953, were approved.
Upon motion duly made and seconded,
and by unanimous vote, the action taken
by the members of the Federal Open Market
Committee on February 5, 1954 in reducing
the minimum buying rate on prime bankers'
acceptances from 2 per cent, as established
by the Federal Open Market Committee on
March 4, 1953, to 1-3/4 per cent, effective
immediately, was approved, ratified, and
confirmed.
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 min
utes of the meetings of the executive
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committee held on December 15, 1953,
and January 5, January 19, February
2, and February 17, 1954, were ap
proved, ratified, and confirmed.
Before this meeting there had been sent to the members of the
Committee a report prepared at the Federal Reserve Bank of New York cover
ing open market operations for the period December 15,
25, 1954, inclusive.
1953 to February
At this meeting there was distributed a supplementary
report covering commitments executed February 26 to March 2, 1954, in
clusive.
Copies of the two reports have been placed in the files of the
Federal Open Market Committee.
Upon motion duly made and seconded,
and by unanimous vote, the transactions
in the System account for the period
December 15, 1953 to March 2, 1954, in
clusive, were approved,ratified, and
confirmed.
Reference was made to the resolution adopted by the Federal Open
Market Committee on November 20, 1936, authorizing each Federal Reserve
Bank to purchase and sell at home and abroad cable transfers, bills
exchange, and bankers'
acceptances payable in foreign currencies,
of
to the
extent that such purchases and sales may be deemed to be necessary and
advisable in connection with the establishment, maintenance,
operation,
increase, reduction, or discontinuance of accounts of Federal Reserve
Banks in foreign countries.
Mr. Sproul stated that accounts were now
maintained with the Bank of Canada (book value $11,759, market value
$15,052),
the Bank of England(book value $10,463, market value $10,517),
and the Bank of France (book value $42.79, market value $42.73).
Mr.
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Sproul stated that the only activity in these accounts during the past
year had been in the account with the Bank of Canada, and that some $21
million in transactions had been put through that account representing
Canadian funds acquired as fiscal agent of the United States.
It was agreed that no action should
be taken at this time to amend or terminate
the resolution of November 20, 1936.
Before this meeting there had been sent to each member of the
Committee a memorandum dated February 18, 1954 from Mr. Rouse and Mr.
Leonard, Director of the Board's Division of Bank Operations, with respect
to the procedure for allocation of securities in the System open market
account on the basis of total assets of the several Federal Reserve Banks.
This procedure,
a detailed statement of which was set forth in a memo
randum dated July 14, 1953 and in the minutes of the meeting of the execu
tive committee dated August 4, 1953, became effective September 1, 1953,
pursuant to the action taken by the Committee at its meeting on June 11,
1953.
There was distributed a sheet showing a pro forma reallocation of
United States Government securities in the System open market account as of
March 1, 1954, based on preliminary figures of daily averages of total
assets of the Federal Reserve Banks during the twelve months ending
February 28, 1951.
None of the members of the Committee or of the Presi
dents of Federal Reserve Banks who were not presently members of the
Committee suggested any change in the current procedure which provided for
a reallocation as of April 1, 1954 on the basis of daily averages of total
assets during the 12 months ending February 28, 1954.
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It was agreed that no action should
be taken at this time to amend the pro
cedure for allocation of securities in
the System open market account which was
adopted pursuant to the action of the
Committee at its meeting on June 11, 1953.
Chairman Martin referred to the authority given to the Chairman
of the Committee at the meeting on March 1, 1951 and renewed at the meet
ings in March of 1952 and 1953 to appoint a Federal Reserve Bank as agent
to operate the System account temporarily in case the Federal Reserve Bank
of New York was unable to function.
He stated that the authority was
adopted as an emergency measure and raised the question whether any action
should be taken to modify or eliminate it at this time.
It was agreed that no action should
be taken to modify or terminate this
authority at this time.
Reference was made to the authority granted to the Federal Reserve
Banks for repurchase agreements with nonbank dealers in United States
Government securities which had existed continuously since January 1948
and the conditions for which had been modified from time to time since
then, the latest statement of conditions having been adopted at the meet
ing of the full Committee on March 4-5,1953.
It
was noted that in earlier
years the authority was used infrequently but that during the past year or
two it
had been used upon frequent occasions to help relieve tightness in
the market.
Mr. Robertson stated that while he would not object to continuation
of the existing authority for repurchase agreements,
he had serious doubts
as to the desirability of setting rates on such agreements below the discount
3/3/54
rate at any time.
There was unanimous agreement that
no action schould be taken at this time
to amend or terminate the authority with
respect to repurchase agreements as ap
proved at the meeting of the Committee
on March 4-5, 1953.
It was agreed unanimously that dis
tribution of the weekly report of open
market operations prepared by the Fed
eral Reserve Bank of New York should be
continued without change.
The list
of
those to whom distribution of the report
was authorized follows:
The members of the Board of Governors.
The Presidents of the 12 Federal Reserve Banks.
The Secretary, the Economist, and the Associate
Economists of the Federal Open Market Committee.
4.
The Secretary of the Treasury.
5. The Under Secretary of the Treasury.
6. The Special Deputy to the Secretary of the
Treasury working on debt management problems.
7. The Assistant Secretary of the Treasury work
ing on debt management problems.
8. The Fiscal Assistant Secretary of the Treasury.
9. The Director of the Division of Bank Operations
of the Board of Governors.
10. The officer in charge of research at each of
the Federal Reserve Banks which is not repre
sented by its President on the Federal Open
Market Committee.
11. Mr. Treiber, alternate member of the Federal
Open Market Committee; the Assistant Vice
President of the Federal Reserve Bank of New
York working under the Manager of the System
Account; the Manager of the Securities Depart
ment of the New York Bank; the Vice President in
Charge, and the Manager, of the Research Department
of the New York Bank; and the confidential files
of the New York Bank as agent for the Federal
Open Market Committee.
1.
2.
3.
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Chairman Martin then bought up for review three statements of
continuing operating policies of the Committee.
The first of these was
listed on the agenda as item 10 (a) and represented the action taken by
the Committee at the meeting on March 4-5, 1953 in reaching a decision
that "it is not now the policy of the Committee to support any pattern
of prices and yields in the Goverment securities market and intervention
in the Government securities market is solely to effectuate the objectives
of monetary and credit policy (including correction of disorderly markets)."
He stated that in the absence of objection, the foregoing statement would
be continued as an operating policy of the Committee.
There was unanimous agreement that
no change should be made in the foregoing
statement with respect to the Committee's
policy.
The second statement of continuing operating policies (agenda item
10 (b)) read by Chairman Martin was the Committee's decision, last discussed
at the meeting on December 15, 1953, that "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) outstand
ing 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."
He
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inquired whether any member of the Committee felt that there should be a
change in this statement of the Committee's operating policies.
It was agreed that no action
should be taken at this time to modify
or terminate this statement of operating
policies.
The third continuing operating policy referred to by Chairman
Martin (agenda item 10 (c))
was the action taken at the meeting of the
Committee on December 15, 1953, at which time it was agreed that trans
actions 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), and shall not include offsetting pur
chases and sales of securities for the purpose of altering the maturity
pattern of the System's portfolio; such policy to be followed until such
time as it
may be superseded or modified by further action of the Federal
Open Market Committee.
In response to Chairman Martin's request for comments on this
operating policy, Mr. Sproul made a statement substantially as follows:
1. The only one of these continuing operating policies I want
to discuss specifically today is the first part of 10 (c) on
the agenda for the meeting. That does not mean that I am in
agreement now with 10 (b) or the second part of 10 (c). I am
not. But I think my remarks about the first part of 10 (c) will
also serve to indicate why I am not in favor of 10 (b) and the
second part of 10 (c), and beyond that I see no use in challenging
again, so soon, a substantial majority of the Committee which,
temporarily at least, is in favor of these policies.
2. I hope you will not be surprised that I want to discuss the
first part of 10 (c); however, I was taken by surprise when it
was proposed. At least, I had never heard the fundamentalist
view of central banking, which the motion stated so baldly, dis
cussed by the Committee in a way which would have adequately pre
pared all of us for the prompt vote which was taken.
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3.
Here was a statement not of operating policy but a capsule
statement of a whole theory of central banking--"that operations
of the System account in the open market shall be entered into
solely for the purpose of providing or absorbing reserves (except
for the correction of disorderly markets)." The evolutionary pro
cess which ended up in that classic statement of the theory of
central banking has, I think, been obscured rather than illuminated
by some of our previous discussions.
4. We started out with the appointment of an Ad Hoc Committee to
study the scope and adequacy of the Government security market.
When the report was presented to the Open Market Committee
we first talked largely about technical details of the market and
of open market operations, many of which were outmoded or in pro
cess of change.
Then we talked about the relative roles of the full Committee,
the executive committee, and the New York Bank, with the political
and personal overtones involved in such a discussion.
And finally we adopted this December motion as a preamble to
outlawing swaps.
We have, in effect, allowed our whole theory of central bank
ing and the whole scope of central bank operations to be defined
by a study of a particular market and the methods we use in operat
ing in that market.
5. To be sure, the Ad Hoc Committee recommended that the Federal
Open Market Committee should intervene 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 recommendation was adopted by unanimous vote.
And it has been suggested that this was the same as saying that
open market transactions shall be entered into solely to provide or
absorb reserves. That stretch of language can only be made, however,
if you include in your purposes the chain reactions which may result
from an increase or decrease in reserves, and accept the theory that
these reactions must be and should be left to work themselves out in
the market. And that, it seems to me, is not adequately conveyed by
the capsule statement which has been adopted.
6.
I, of course, do not agree with this theory. We have been
misled, I think, by our aversion to pegged or manipulated mar
kets, and bemused by the ideal of a "free market". Such a market
has been and is being defined "as one in which the allocation of
available funds among various uses is effected through competition
in the market. Borrowers offer interest rates and other terms that
enable them to obtain funds they require, and lenders bid for loans
and securities in accordance with their appraisal of risks and yields
3/3/54
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and their portfolio needs. In such a market Federal Re
serve purchases and sales would be solely for the purpose
of influencing the supply of bank reserves in order to promote
economic stability and growth." That may be fine classical
economics and fine 19th and early 20th Century central bank
ing tradition, but I think the fact is that we can't and don't
now have a "free market" as thus defined. We have a market
in which lenders and borrowers have to and do take account of
action and possible action by the Federal Reserve System to
increase or reduce the supply, availability, and cost of funds;
a market which has to and does take account of possible actions
by the Treasury with respect to debt management, and by the
Government with respect to fiscal policy.
7.
The proponents of the doctrine of solely putting in and
taking out reserves go on to say that "changes in bank reserves
necessarily affect the supply, availability, and cost of credit."
That as I have said is sliding over a critical point. Changes
in bank reserves not only affect the supply, availability, and
cost of credit--they are for the purpose of influencing the sup
ply, availability, and cost of credit. And I would go on to say
that we cannot rely solely on the supply of reserves, at all
times and in all circumstances, to achieve our objectives in all
areas of credit policy in a mixed Government-private economy
such as we have.
That is a fundamental problem, however, which needs more
8.
thorough study and discussion than we have yet given to it.
Meanwhile, I think the sooner we get back to the general state
ment of policy adopted unanimously when the Ad Hoc Committee re
port was presented, that we shall intervene in the market solely
to effectuate the objectives of credit policy, the better off
we shall be, in terms of our record, in terms of objective think
ing about the subject, and in terms of objective appraisal of the
results of the practices we are now following.
Mr. Sproul went on to say that he did not propose any change in the
Committee's actual open market operations at this time but that he would
propose a change in the operating policy statement under discussion.
Mr. Sproul then moved that the
first clause of the continuing operating
policy referred to as item 10(c) on
the agenda, which provided that "trans
actions for the System account in the
open market shall be entered into solely
for the purpose of providing or absorb
ing reserves (except in the correction
3/3/54
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of disorderly markets)," be rescinded,
and that the Committee rely on the policy
statement, "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 money markets)," to state its views
on the purposes of open market operations.
Chairman Martin stated that he would call on Mr. Robertson for
comment with respect to Mr. Sproul's motion since it
involved a change
in an action which had been adopted at Mr. Robertson's suggestion at the
preceding meeting of the Committee.
Before calling on Mr. Robertson,
however, Chairman Martin said that he would like to make it
clear that
he had not known of Mr. Robertson's motion before it was made at the
meeting on December 15 and that Mr. Robertson had not discussed the motion
with him prior to that time.
Although the members of the Board of Governors
had been having discussions from time to time regarding problems which re
quired daily or weekly consideration, and although some of these included
certain aspects of open market operations,
there had been no effort on the
part of the members of the Committee who were also members of the Board of
Governors or on the part of members of the Board's staff to bring any of
these questions up for action without adequate discussion,and there had
been no attempt to preclude full discussion of the scope or nature of any
aspect of any proposal at any meeting.
To the extent that personalities
and overtones on relations of the New York Bank to the Board, or of
individuals in that Bank to the System, were concerned, Chairman Martin
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3/3/54
emphasized that there had been no intention at any time to raise any
questions in terms of personalities,
except in the sense that individuals
were members of the Committee and were involved in some of the operations.
The objective,
however,
in raising questions was merely to see that they
were analyzed and that, to the best of the ability of the Committee, the
right answers to the problems were found.
Mr. Sproul stated that he withdrew any implication of connivance
on the part of members of the Board of Governors that may have been in his
statement.
Mr. Robertson then made a statement substantially as follows:
I think Mr. Sproul's statement is nicely written, but I did
not hear anything in it that has not been fully discussed before.
I heard nothing to cause me to change the position I espoused at
the last meeting of this Committee. Since the policy that is
specified in the resolution is one that can be changed at any time
when conditions warrant, from my point of view this is the policy
that should be followed until conditions warrant a deviation from
it.
In other words, for the time being, I would carry out central
banking policy in the manner indicated. I don't see anything to
I do not think
be answered regarding this policy at this point.
The resolution is simply
this point should be gotten out of focus.
an operating policy designed for the present time and is not a
"capsule statement" designed to encompass the "whole theory of
If any member of the Committee wishes to discuss
central banking".
The question is of
the question further I shall be glad to do so.
great significance and we ought to exercise our best judgment in
trying to reach an answer.
Chairman Martin noted that the Committee had before it a motion
that had been made by Mr. Sproul to rescind that part of a statement of
one of its present operating policies which specified that transactions
for the System account in the open market shall be solely for the purpose
of providing or absorbing reserves (except in the correction of disorderly
markets).
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3/3/54
Mr. Szymczak inquired of Mr. Sproul whether anything had happened
since the meeting in December when the policy under discussion was adopted
that would indicate that it
should be withdrawn at this time.
Mr. Sproul responded by stating that he felt the statement which
limited the purpose of transactions to providing or absorbing reserves
represented confusion with the statement which had been adopted in March
1953, that "intervention in the Government securities market is
solely to
effectuate the objectives of monetary and credit policy (including cor
rection of disorderly markets)".
The latter represented a general state
ment which could be supported in terms of central banking policy, whereas
the statement that transactions shall be "solely to provide or absorb
reserves" represented a different and more limited objective of open
market transactions.
Nothing had happened since the meeting in December,
Mr. Sproul said, which could make the two statements mean the same thing.
With respect to the view that the latter statement might be all
cause it
could be changed at any time, Mr. Sproul felt it
for the Committee to have in
right be
undesirable
its record such a statement of central bank
ing policy which he thought tended to freeze thinking about the whole
problem of operations within the Committee's credit policy.
mittee wished to prohibit "swaps",
If
the Com
as was done by the latter part of the
motion that had been proposed by Mr. Robertson in December, that could be
done without the part of the statement in question.
The part of the state
ment saying that transactions shall be solely to provide or absorb reserves
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3/3/54
was subject to misinterpretation, Mr. Sproul said, or, at any rate, would
need to be interpreted.
He cited a suggestion which had been made at a
recent meeting of the executive committee that, in the event the Board of
Governors were to reduce reserve requirements of member banks by a sub
stantial amount, the Committee should sell from its portfolio securities
to an amount sufficient to offset the reserves thus released for the
purpose of improving the liquidity position of banks.
Mr. Sproul doubted
that such a purpose would be consistent with the provisions of the state
ment under discussion, since the sale of securities in that case would
not be solely for the purpose of putting in or taking out reserves.
He
emphasized the view that while the primary purpose of open market opera
tions might be for the purpose of providing or absorbing reserves, there
were always other purposes involved, sometimes two or three subsidiary
purposes.
For example,
as a general rule when the Committee ,.rried on
open market operations it
was doing so for the purpose of affecting the
cost and availability of credit.
Mr. Szymczak stated that he thought Mr. Sproul was correct in
this statement but that it
shouldbe noted that the Committee had not
yet agreed to make offsetting sales of securities from the System account
in the event the Board of Governors were to reduce member bank reserve
requirements.
Mr.
Johns inquired of Mr. Sproul whether it
was true that the
clause stating that transactions for the System account shall be solely
3/3/56
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for the purpose of providing or absorbing reserves was intended as an all
inclusive statement of Federal Reserve policy or whether it
was intended
only as a statement of open market policy, recognizing that Federal Re
serve policy as a whole involved more than the policies of the Federal
Open Market Committee,
Mr. Sproul expressed the view that while the statement in question
was directed toward open market policy, it
was in effect a statement of
central banking theory which applied to all operations affecting the re
serves of banks.
Mr. Robertson said that the language of the statement was contrary
to this view, that it
applied only to transactions for the System open mar
ket account which might be entered into at the direction of the Federal
Open Market Committee.
Mr. Sproul responded that he did not think there could be a theory
of open market operations which was apart from central banking theory.
Without debating that point, however, he felt that the statement that open
market transactions were solely to provide or absorb reserves was mislead
ing to the Committee's thinking and to the public that might be interested
in the purpose of the Committee's operations.
And he could see no need
for the statement since the purpose of policy transactions of the Committee
was fully covered by the continuing policy statement that intervention in
the Government securities market was solely to effectuate credit policy,
and by whatever administrative decisions the full Committee and the executive
committee might take under a policy action.
3/3/54
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Mr. Robertson disagreed with this view, stating that the mere fact
that "swap" transactions were authorized by the executive committee last
November made it imperative that there be a statement such as that under
discussion so that transactions of this sort could not be entered into.
During further discussion, Chairman Martin stated that he felt
there was an honest difference of opinion on the question under discussion.
So far as the Federal Open Market Committee was concerned, he thought it
important procedurally that the authority for arranging for transactions
and determination of the purpose of such transactions be in the Open Mar
ket Committee.
It was not all a matter of central banking theory: trans
actions for the System account resulting from day-to-day decisions had
direct reactions in the market, both psychologically and actually.
results affected the entire Open Market Committee.
Their
What the Committee was
aiming at, in Chairman Martin's view, was a means of having shared responsi
bility, and the procedure should be such that the Committee's responsibili
ties did not get out of its
hands.
Chairman Martin recognized that the
wording of the action under discussion might not be the best way of carry
ing out this objective although he thought it was; but the primary purpose
of these meetings and of discussions such as this was to find the best way
of carrying out the Committee's responsibilities.
Otherwise, Chairman
Martin felt the Open Market Committee meetings became pretty much a matter
of "passing words around the table."
Mr. Szymczak then made a statement regarding the historical devel
opment of the System's part in the "pegged" market in Government securities.
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3/3/54
long before there had been a pegged market, he said, the Committee had
gotten into the practice of "operating" in the market on the basis of
having an "orderly" market.
When heavy financing of the Treasury came
during the war period, the Committee moved readily from an "orderly" mar
ket into a "pegged" market, and the record contained many statements why it
was desirable to continue to peg the market after the close of the war.
It
had taken the Committee a long time to extricate itself from the pegged
market, Mr. Szymczak said, and this had not finally been done until the
dramatic developments of January and February 1951 which led up to the
Treasury-Federal Reserve accord.
Even then it
was not until December 1952
that a Treasury refunding operation was carried on without any support
from the Federal Reserve.
tee,
Mr. Szymczak thought it
in view of this experience,
slipping back to a pegged market.
natural for the Commit
to "lean over backwards" to keep from
It
might be, he said, that the Committee
had gone too far in adopting the particular language in question, but in
his opinion the more clearly the Committee could state the reasons for or
purposes of its operations, the less likely it
pegged market.
was to fall back into a
This was especially true when it
was noted that the Commit
tee was made up of members from the Board of Governors and those selected
by the Federal Reserve Banks,
that the full Committee gave instructions
to an executive committee, and that the executive committee carried out
operations through a Federal Reserve Bank and the Manager of the System
Account.
3/3/54
-20
Mr. Sproul said that even accepting Mr. Szymczak's version of
history, he still did not think it necessary to say that transactions were
solely to provide or absorb reserves, in order to prevent the Committee
from slipping back to a pegged market.
In his view, the statement that
"intervention in the Government securities market is solely to effectuate
the objectives of monetary and credit policy" and the prohibition against
purchases of certain Treasury securities during periods of Treasury re
funding were adequate to keep this from happening so long as the Committee
had a desire to do so.
After further discussion, Chairman Martin noted that there had been
no second to Mr. Sproul's motion.
In the absence of a second to
Mr. Sproul's motion, Chairman Martin
stated that it would be understood
that the Committee agreed to continue
without change the existing statement
of operating policy under discussion,
namely, that "transactions for the Sys
tem 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)
and shall not include offsetting purchases
and sales of securities for the purpose of
altering the maturity pattern of the Sys
tem's portfolio; such policy to be followed
until such time as it may be superseded or
modified by further action of the Federal
Open Market Committee."
At Chairman Martin's request, Mr. Szymczak made a statement with
respect to bankers' acceptances.
There had been a brief discussion of this
subject at the meeting of the executive committee on February 17, 1954 in
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3/3/54
connection with a suggestion by Mr. Rouse that consideration be given to
setting the minimum rate on acceptances below the discount rate in order
that the rate on acceptances might become a market rate which would reflect
demand and supply forces.
In his comments, Mr. Szymczak noted that the
rate on acceptances had conformed to the discount rate for many years.
Historically, the acceptance market had never developed in the United
States to the extent that it had abroad, and the volume of acceptances
in this country had never been large from the standpoint of the total
money and credit supply.
There was some feeling, however, that if the
System were to reduce its
minimum buying rate on acceptances to a figure
below the discount rate, say to 1-1/4 per cent under present conditions,
and if the Manager of the System Account were instructed to purchase a
moderate amount of acceptances--$15 or $20 million--adjusting the effective
buying rate to whatever rate was necessary in order to accomplish this
purpose, the market for bankers' acceptances might be stimulated,
were done and a volume of acceptances developed it
If this
would provide a short
term instrument in which the Committee's operations might be carried on
in addition to Treasury bills.
Mr. Szymczak said that, as indicated by
Mr. Rouse at the executive committee meeting on February 17, there was a
continuing demand for acceptances in excess of the available supply.
While
informal discussions since the meeting of the executive committee on Febru
ary 17 showed that some members of the Committee felt it
would be desirable
to reduce the acceptance rate to 1-1/4 per cent immediately, some others
felt it would be preferable initially to reduce the rate to 1-1/2 per cent
-22
3/3/54
and gradually to move to a lower rate.
Mr. Szymczak also said that there
seemed to be a general feeling that it would be desirable to encourage
the acceptance market, but it was not clear at this time just how a reduc
tion in the rate would affect the market and it might be appropriate to
study the matter further before any course of action was decided upon.
Mr. Sproul stated that acceptances should be and were intended to
be an open market piece of paper at rates which followed closely and flexi
bly the supply of funds in the market.
Through misuse over the years and
because of the shortage in the supply of acceptances and a tendency on the
part of bankers to engage in swaps of acceptances so that they did not get
out into the open market, the acceptances had become not an open market
piece of paper but an "inside" or bank piece of paper with rigid rates.
The proper
functioning of the market was being disturbed because of that
rigidity in rates.
As to the rate, Mr. Sproul had no strong feeling regard
ing the level at which it should be set if the Committee wished to do some
thing although he had a slight preference for the more gradual approach in
reducing the rate in order to avoid the appearance of seeming to try to
break down the whole structure of rates.
Mr. Erickson commented on the historical use of bankers' acceptances
in the United States, after which he said that it was his feeling that since
the acceptance was an instrument which had not been used to any extent for
twenty or more years, it would be desirable to move gradually in any program
for getting it into wider use.
Mr. Erickson suggested that when the Committee
3/3/54
-23
had reached some decision as to what might be done,
it
would be desirable
to advise the Federal Advisory Council of the action decided upon and why
such action was to be taken.
that it
With respect to the rate, Mr. Erickson felt
should be reduced progressively rather than by a single move to
1-1/4 per cent.
Mr. Mills stated that he would question whether this matter should
be discussed with the Federal Advisory Council or with any one outside the
Board of Governors and the Federal Reserve Banks prior to the Committee's
making a policy decision. He felt that a change in the use of acceptances
which might attract more international business to the United States was
a long range matter and in his judgment a change in the rate would be much
more significant in the short-run than would be a change in the System's
policy toward use of acceptances.
A reduction in the rate to 1-1/2 at this
time would have a psychological reaction of much greater importance than its
actual effect in the acceptance market and would produce a reaction in the
money market generally that would support the Committee's policy of active
ease.
Mr. Erickson commented that it was not his thought to discuss the
question with the Federal Advisory Council before reaching a decision; he
merely felt that it
would be desirable to inform the members of the Fed
eral Advisory Council of the action taken before they learned of it
through
the market.
Mr. Rouse commented briefly upon the market for acceptances and rates
-24
3/3/54
in that market, during the course of which he referred to possibilities for
increased use of bankers'
acceptances as a means of financing certain trade
transactions such as exports of cotton in the event a more favorable rate
became available.
In the event the outstanding volume of such acceptances
were increased, that might in turn facilitate other foreign financings.
If
it was the desire of the Committee that the System account engage in accept
ance operations, Mr. Rouse thought that the first
step which should be taken
would be to suggest to the principal acceptance dealers, of which there were
four, that the present rates were not realistic and that a lover rate--per
haps 1/8 per cent lower--might make some difference.
it
Mr. Rouse added that
probably was true that the immediate effect on the market for bankers'
bills would be minor since the tax advantages on these instruments to foreign
central banks and other foreign investors would maintain their demand down
to a level of rates at least equal to the Treasury bill rate.
At the same
time, a lower rate on bankers' bills would tend to bring into the market
borrowers who had been employing regular promissory note financing.
Mr. Riefler felt it
quite important to get the acceptance market
active and functioning again, stating that it
ket in private commercial credit.
a question.
was the one international mar
How fast this could be brought about was
He felt that the manner in which the acceptance market func
tioned could have a direct bearing on the current recession. Up to the
present time exports from the United States have been maintained even though
imports have shown some letdown.
As long as foreign central banks feel free
3/3/54
-25
in their reserve position, Mr. Riefler said, they would be inclined not
to institute restrictive monetary and credit measures.
help maintain the United States export market.
That very fact would
If the acceptance market
in this country were functioning and low money rates were effective, it
might be expected that some trade financing now executed in the London
market would move to New York.
Such a development would relieve drains
on foreign central bank reserves and provide a real inducement not to
adopt restrictive measures in order to protect reserves,
Mr. Robertson stated that he had given some thought to this ques
tion and was inclined to think that there should be no minimum buying rate
on acceptances;
that if
they were to be the subject of open market activi
ties, transactions should be at the market rate, whatever it
happened to
be at the moment, as in the case of Treasury bills.
During a further discussion, Chairman Martin stated that he did
not feel that the Committee was prepared to act on the proposal for a change
in the acceptance rate at this time, and he suggested that the executive
committee be requested to study the matter further.
He also referred to a
memorandum which had been prepared at the Federal Reserve Bank of New York
to which reference had been made earlier in the discussion, suggesting that
it might be desirable for the members of the Committee to have the benefit
of the information contained in that memorandum.
In response to a question
from Mr. Szymczak as to whether under his proposal for further study the
executive committee would have authority to make a reduction in the minimum
-26
3/3/54
buying rate on acceptances if it concluded that such action would be desir
able, Chairman Martin stated that his suggestion could be interpreted to
include that authority if none of the members of the full Committee had any
objection to that procedure.
Chairman Martin's suggestion was
approved unanimously, with the under
standing that the executive committee
was authorized to reduce the minimum
buying rate on acceptances if in its
judgment such action was desirable
prior to the next meeting of the full
Committee.
Chairman Martin stated that, as agreed at the meeting on December
15, 1953, Mr. Vest had looked into the meaning of the phrase in the Com
mittee's directive providing that transactions, among other things, be with
a view to "the practical administration of the account".
Each member of
the Committee had been furnished with a memorandum dated December 29, 1953,
concerning this point.
Mr. Vest reviewed briefly the content of the memorandum referred to,
stating that the phrase or some closely similar phrase had been used in vir
tually all directives of the Federal Open Market Committee or of the execu
tive committee since the Committee was reorganized pursuant to the Banking
Act of 1935.
He said that the phrase gave authority for those incidental
decisions, procedures, and actions necessary to carry out effectively and
appropriately the policies otherwise prescribed by the full Committee and
the executive committee and within the limitations established by their
directives or otherwise.
It did not permit actions to influence or change
market conditions other than in accordance with the policy directives.
It
3/3/54
-27
was Mr. Vest's view that while the phrase perhaps was not essential, it
was preferable to have it
or some similar phrase in the directives.
Following a brief discussion, it
was agreed that the phrase under dis
cussion would be retained in the Com
mittee's directive.
At this point members of the Board's staff entered the room for the
purpose of presenting a review of current economic developments illustrated
by chart slides.
A transcript of the text of the review was sent to each
member of the Committee and to each President of a Federal Reserve Bank who
was not currently a member of the Committee following the meeting, and a
copy has been placed in the Committee's files.
Following the review and a discussion of the economic situation,
the members of the staff who had entered the room in connection with the
presentation withdrew.
Chairman Martin then suggested that there be a discussion of the
Committee's existing policy of actively maintaining a condition of ease in
the money market, and whether modification of this policy would be desir
able in terms of the current and prospective economic and credit situation.
Mr. Sproul stated that as far as open market operations were con
cerned, continuation of the present policy appeared to be indicated in view
of the economic situation and the credit information presented.
Operations
should be flexibly geared to changes in the money market, he said, and this
raised the question whether it
might be desirable to try to operate more
closely to the level of discounts and reserves than had been done over the
3/3/54
-28
past two months, so as to avoid unnecessary pressures as between supply and
demand in the short-term money market.
Mr. Sproul stated that the mainte
nance of a substantial volume of free reserves at a time when there was
considerable confidence on the part of the banking system in the economic
outlook had resulted in
creating pressures on the short-term market which
had coincided with other dramatic changes in the volume of securities avail
able to that market as a result of the Treasury refunding.
He thought it
might be possible, without any change in the psychological effect on banks,
to operate more closely to the market than in the recent past.
Mr. Szymczak felt that this would be reasonable but Mr. Mills ques
tioned whether there might be a danger of moving too closely toward tightness.
Mr. Sproul thought that there should be no deviation from the policy
of active ease,
stating that he would not think of moving toward tightness
in the market.
The question was whether the Committee could get the same
effect as far as its policy of active ease was concerned if there were less
attempt to maintain a substantial volume of free reserves and if
there could
be an avoidance of some of the "sloppiness" that had occurred in the market.
Mr. Mills felt
that it
might react and whether it
got back to the question of how the market
might regard a closer relationship between dis
counts and reserves as a change in the Committee's policy.
Mr. Sproul responded that in his opinion, the Committee must avoid
giving any such impression, that there should continue to be assurances that
reserves would be available readily at all times, and that whatever amounts
of reserves were needed by both the private business situation and because
3/3/54
-29
of borrowing needs of the Treasury from the banking system would be met.
There should be no misunderstanding of the policy of active ease and of
making reserves available.
Chairman Martin suggested that the Committee agree on a continuation
of the existing policy of actively maintaining a condition of ease in the
money market as a policy appropriate in the light of current economic condi
tions.
This suggestion was approved
unanimously.
Chairman Martin then requested that there be a discussion of a
possible change in reserve requirments of member banks,
concerning which
a memorandum prepared by members of the staff of the Board of Governors
under date of February 24, 1954 had been distributed before this meeting.
He noted that the economic review presented earlier this morning indicated
a possible need for additional reserves later this year growing out of the
Federal Government's deficit, and one of the System's problems would be how
this need should be met.
While setting of reserve requirements was essen
tially a responsibility of the Board of Governors,
the question was not one
which could be disassociated from open market policy.
Chairman Martin asked
for comments as to the possible impact of a change in reserve requirements,
so, the procedure
whether present requirements should be lowered,
and, if
that might be followed in bringing that about.
He recalled that at the
meeting of the executive committee on January 19, 1954 Mr. Mills had sug
gested consideration of a reduction in reserve requirements with offsetting
3/3/54
-30
sales of securities from the System open market account for the purpose
of improving the liquidity position of banks.
Such a procedure, Chairman
Martin said, would have political implications in that it would mean the
transfer of assets from the Federal Reserve Banks to commercial banks.
There was also a question as to how such action would be interpreted by the
financial markets and the business community generally which, he said, still
needed quite a bit
of education on such matters.
Chairman Martin emphasized
that the Board of Governors had reached no conclusions and had no proposals
to make regarding this matter; he was raising the question in order that the
members of the Board might have the benefit of comments from all members of
the Federal Open Market Committee and Presidents who are not currently mem
bers of the Committee.
Mr. Earhart stated that, leaving aside the question of timing, he
rather leaned toward a further reduction in reserve requirements.
His basic
feeling was that there was no particular reason why member bank reserve re
quirements should continue so much higher than the minimum rates established
by statute.
It was Mr. Earhart's view that the long-run problem before the
System was still concerned with inflationary factors and he felt that if
reserve requirements were kept near the maximum limits permissible, there
would not be as much leeway for meeting the development of inflationary
forces as would exist if
requirements were lowered from current levels.
such a reduction were to be made,
it
would seem that it
a period of downward readjustment in economic activity.
If
should be done during
-31
3/3/54
Mr. C. S. Young concurred in Mr. Earhart's statement, commenting
that he felt
business conditions currently were really worse than the
economic review indicated. He felt that there would be an important
psychological effect by telegraphing across the country through a reduction
in reserve requirements word of the System's policy.
Mr. Leedy did not think that the present was the time to be making
adjustments in reserve requirements.
His understanding of the economic
presentation was that the real need for additional reserves would not come
until perhaps in May of this year.
Until then, he could see nothing to
be accomplished by a downward adjustment in reserves and he would be par
ticularly concerned that the psychological reaction might be one of indicat
ing that the Federal Reserve was feeling growing concern regarding the
economic situation.
Mr. Leedy stated, however, that a reduction might be
considered sometime later if a need for more reserves became apparent.
Mr. Fulton concurred in Mr. Earhart's general view.
Bankers now
seemed to feel that ample funds were available for loans, both for short
term purposes and for longer-term investment, and while it would be desir
able to have a lower level of reserve requirements which might be helpful
later on in combating an inflationary movement, Mr. Fulton did not think
the present a good time psychologically for a reduction.
Mr. Leach stated that he found difficulty in determining what an
appropriate level of reserve requirements would be although he felt it
better to have them lower than at present with some leeway to permit an
increase.
He did not think the present was the time for a change,
however,
3/3/54
-32
because of a possible interpretation by bankers and others throughout the
country that the Federal Reserve was more concerned with the state of
economic activity than was really the case.
Mr. Leach also had doubts
about a reduction in reserve requirements with an offsetting sale of
securities from the System account for the purpose of improving the liquidity
position of banks.
He wondered what would be the reason, from the atand
point of central banking policy, for lowering reserve requirements and then
immediately offsetting that effect by another action.
At Chairman Martin's request, Mr. Vest commented briefly on the
statutory provisions relating to changes in reserve requirements, stating
that authority was given to change requirements "in order to prevent injuri
ous credit expansion or contraction".
Mr. Sproul then made a statement substantially as follows:
1. I don't think we should confuse current credit policy with the
long run problem of the level of reserve requirements, nor with the
problem of increasing the ratio of bank earning assets to capital,
and strengthening the capital position of the banks. Those are
largely separate problems.
2. So far as credit policy is concerned, I think we have already
done and can continue to do, with open market operations and the
discount rate, what credit policy can and should do to cushion
or combat the current decline in economic activity. Present
economic conditions and the outlook do not seem to me to justify
additional measures with a shock impact such as a reduction in
reserve requirements.
3. I cannot agree with the argument that banks and other lenders
need the impetus of increased liquidity to encourage them to seek
loans and investments. The reports and evidence we have indicate
that the banks are now actively seeking additional loans and in
vestments and have no fears about the availability of reserves.
4. Interest rates have declined appreciably in recent months and
are not, I think, a restraint on borrowing. Even the prime loan
rate is being shaded in other ways than actual reduction of the
-33
3/3/5
rate, and the banks are facing increased competition from the
commercial paper market.
The days of the present prime loan rate
are already numbered.
5.
Treasury borrowing during the remainder of this fiscal year,
particularly if it is done in two or three bites as seems likely,
is not of sufficient magnitude to force our hands on reserve
requirements. I see no need to supply a large additional amount
of reserves to the banks in advance of current borrowing by the
Treasury.
It may be that later in the year large Treasury bor
rowings and seasonal needs of private borrowers will again afford
an opportunity to reduce reserve requirements.
6.
I doubt if secondary reserves of the banks need to be bolstered
by a reduction in reserve requirements, accompanied by open market
sales of Government securities to prevent a sloppy situation. The
evidence for some time has been that the banks are already tending
to extend their maturities and to seek new loans, and are not yet
deterred by a too delicate regard for their secondary reserve posi
tion. There is also the possibility that such a two-way operation,
by increasing the banks' earning assets painlessly and safely
might even lessen their incentives to seek new loans or longer
term investments to maintain earnings.
7. My own view is that the economic situation has not yet declared
itself in terms of further and cumulative decline, in a way to war
rant use of the over-all weapon of a reduction in reserve require
ments. The tight spots in credit of all kinds appear to have been
eliminated, business-mortgage-consumer. I would hold additional
fire until economic conditions more clearly indicate the need for
further action in the monetary sector or until private demand and
Treasury borrowing put pressure on the reserve position. Meanwhile
I wouldn't try to make monetary action carry too much of a load
which should also be carried by fiscal policy, if more vigorous
action is needed.
Mr. Robertson concurred in Mr. Sproul's statement.
Mr. Williams stated that he was impressed particularly with Mr.
Sproul's comments regarding interest rates.
Mr. Williams did not feel that
the present was the time for the System to add to downward pressures on
money rates.
Mr. Erickson stated that he could see no occasion for a reduction
in reserve requirements at present.
He agreed with Mr. Sproul's analysis
3/3/54
-34
but would put more emphasis on the point that, if
commercial banks ob
tained additional earning assets through sales of securities from the
System open market account, the incentive for them to seek other loans
might well be reduced.
Chairman Martin and Mr. Mills emphasized that there had been no
disposition on the part of the Board of Governors to reduce reserve re
quirements, that this discussion was purely exploratory, and that in
raising the question there was no implication of any intention to reduce
reserve requirements.
Chairman Martin referred to the directive to be issued by the Com
mittee to the executive committee.
He stated that without intending in
any way to indicate an intention on the part of the Board to change re
serve requirements,
there had been prepared a possible paragraph to be in
cluded in the directive which would authorize the executive committee,
in
the event the Board should decide to reduce reserve requirements before
the next meeting of the Committee, to give authority to the New York Bank
to sell from the System account securities having a maturity at the time
of not more than one year, in an amount not in excess of the estimated
amount of member bank reserves released by such reduction in reserve re
quirements.
The draft paragraph would also include the understanding that
the amount of any such sales shall not be included in the limitation re
garding increases or decreases in the amount of securities held in the Sys
tem account and, if the executive committee so instructed, such sales might
be made at prices determined as of a selected date prior to the sale.
-35
3/3/54
Chairman Martin
went
on to say that he had no feeling as to whether the
paragraph should be included in the Committee's directive, that he merely
wanted to point out that the Committee should have in mind that some de
finite instructions would be needed if a decision were reached to follow the
suggestion that offsetting sales of securities be made from the System
account in the event the Board of Governors reduced reserve requirements.
There was a brief discussion of the draft paragraph at the conclu
sion of which it was agreed unanimously that no action should be taken to
incorporate it
in the directive at this time.
Mr. Rouse stated in response to Chairman Martin's question that he
had no suggestions for change in the directive.
Thereupon, upon motion duly made
and seconded, the following directive
to the executive committee was approved
unanimously:
The executive committee is directed, until otherwise directed
by the Federal Open Market Committee, to arrange for such 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 supply of funds in the market to the needs of com
merce and business, (b) to promoting growth and stability in the
economy by actively maintaining a condition of ease in the money
market, (c) to correcting a disorderly situation in the Govern
ment securities market, and (d) to the practical administration
of the account; provided that the aggregate amount of securities
held in the System account (including commitments for the pur
chase 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.
3/3/54
-36
The executive committee is further directed, until otherwise
directed by the Federal Open Market Committee, to arrange for the
purchase direct from the Treasury for the account of the Federal
Reserve Bank of New York (which Bank shall have discretion, in
cases where it seems desirable, to issue participations to one or
more Federal Reserve Banks) of such amounts of special short-term
certificates of indebtedness as may be necessary from time to time
for the temporary accommodation of the Treasury, provided that the
total amount of such certificates held at any one time by the Fed
eral Reserve 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 June 21, 1954, it being noted that if necessary
a special meeting of the Committee could be called to convene before that
time.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1954, March 2). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19540303
@misc{wtfs_fomc_minutes_19540303,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1954},
month = {Mar},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19540303},
note = {Retrieved via When the Fed Speaks corpus}
}