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 Washington on Tuesday, December 7, 1954, at 9:30 a.m.

PRESENT:

Mr. Martin, Chairman

Mr. Sproul, Vice Chairman

Mr. Balderston

Mr. Bryan

Mr. Leedy

Mr. Mills

Mr. Robertson

Mr. Szymczak

Mr. Vardaman

Mr. Williams

Mr. C. S. Young

Mr.

Mr.

Mr.

Mr.

Riefler, Secretary

Thurston, Assistant Secretary

Vest, General Counsel

Solomon, Assistant General Counsel

Mr. Thomas, Economist

Messrs. Mitchell, Rauber, Roelse, Tow, 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. Miller, Economist, Government Finance

Section, Division of Research and Statistics,

Board of Governors

Mr. Gaines, Securities Department, Federal Re

serve Bank of New York

Messrs. Leach, Fulton, Johns, and Earhart, Alternate

Members of the Federal Open Market Committee

Messrs. Erickson, Powell, and Irons, Presidents of

the Federal Reserve Banks of Boston, Minneapolis,

and Dallas, respectively

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Commit

tee held on September 22, 1954, were ap

proved.

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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 22, October 5,

October 20, November 9, and November 23,

1954, were approved, ratified, and con

firmed.

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

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

serve Bank of New York covering the period September 22 to December 1,

1954, inclusive, and at this meeting there was distributed a supplementary

report covering commitments executed December 2-6, 1954.

Copies of both

reports have been placed in the files of the Federal Open Market Commit

tee.

Mr. Rouse commented briefly on developments during the period

covered by the supplementary report.

Upon motion duly made and secoded,

and by unanimous vote, the open market

transactions during the period September

22-December 6, 1954, inclusive, were ap

proved, ratified, and confirmed.

Members of the staff presented a review of the economic and credit

situation and outlook, illustrated by chart slides.

Copies of the script

of the review subsequently were sent to all members of the Committee, and

a copy has been placed in the files of the Federal Open Market Committee.

In commenting on the economic situation, Mr. Ralph Young stated

that the big question with which business observers are now concerned is

whether a recovery movement is definitely taking form.

Following the

staff presentation of evidences of recovery, both foreign and domestic,

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Mr. Young stated that judgment as to the recovery outlook would depend

in considerable part on what one thought about expenditure prospects

in the area of recent expansion--State and local government outlays,

residential building, and consumer takings of both nondurable and dura

ble goods--and also about prospects for outlays in categories which had

held down gross national production this past year.

Mr.

Young thought

it possible that national defense outlays would decline much more slowly

than had been the case over the past year or so; that expenditures for

producers durables would no longer be going down,

might be accumulated rather than liquidated.

and that inventories

Also, it

seemed possible

that residential construction would be at least maintained and that con

sumer takings would rise.

In addition, Mr. Young noted that Federal

fiscal policy since early this year had been on the stimulative side with

tax payments by businesses and individuals down more than Federal ex

penditures, and it was indicated that the Treasury would show a moderate

cash deficit in the calendar year 1955 compared with an approximate bal

ance of cash income and outlays in the current calendar year.

Mr. Thomas commented upon credit developments,

stating that Fed

eral Reserve policy needed to be in a position of maneuver with respect

to the possibility of either a slow recoveryover the next twelve months,

reaching the 1953 peak level of industrial production by the end of the

year; or the possibility of a rapid recovery with second quarter 1953

levels of industrial production reached and even exceeded before mid-1955.

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The first

alternative would find the economy with still

some margin of

unemployed resources while the second alternative would no doubt bring

problems of unhealthy inventory accumulation and strong upward pressure

on prices.

Mr.

Thomas stated that one approach might be a shift in policy

from one of active ease, which has meant keeping banks generally out of

debt to the Federal Reserve,

to something like the so-called policy of

neutrality followed in 1951 and 1952.

That policy meant some bank bor

rowing to cover temporary needs and larger amounts of borrowing as credit

expansion accelerated.

Mr. Thomas also presented data with respect to bank reserve posi

tions in the period immediately ahead, stating that the level of free re

serves may continue during the current and following week below or only

a little above $400 million.

Over the remainder of December additional

bank reserves would be supplied by float and other factors but there

would be a further increase in required reserves and, in the absence of

further open market purchases, average free reserves would probably rise

to around $500 million in the last week of the month.

Mr. Thomas noted

that a large volume of reserves would be supplied by the usual post

Christmas return of currency, that required reserves might also decline

substantially, and that free reserves would probably range around $1-1/2

billion by the end of January, unless offset by Federal Reserve open mar

ket operations.

During February, little

serves was expected.

further net change in bank re

During the next three months ahead there might be

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an underlying element of expansion in the economy.

Because of the exist

ing low level of interest rates and because recent Treasury refunding

operations have so materially reduced the liquidity position of banks,

any material tightening that might be permitted to occur or be brought

about would probably bring prompt response in the interest rate structure.

Question may be raised, therefore,

not only as to a shift in the direction

of policy but also as to some elements of administering that policy.

Chairman Martin stated that the presentation by the staff provided

a splendid background for a discussion of open market operations and,

while he did not feel that the Committee should be unduly influenced by

projections of developments either on the upside or on the downside, he

suggested that it have in mind the fact that it had been using the phrase

"active ease" in describing its credit policy for some time.

At this

stage, the Committee should carefully consider the extent to which it

wanted to allow the forces of the market to operate.

His own thinking,

Chairman Martin said, was running in the direction that it was time to

re-examine the "active" part of the phrase, "active ease".

If there were

to be a change in the Committee's policy, any shift in operations should

be gradual if it were to be most useful.

Chairman Martin then called upon Mr.

Sproul, who made a statement

substantially as follows:

1.

There is now a basis for mild optimism concerning the

economic situation during the next 3 to 6 months. Con

suers are taking this view according to the most

recent survey of their intentions, and have the income

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2.

3.

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and the savings to make it effective. The plans

for business capital expenditures, in the aggregate,

seem to he set at or slightly above the levels of

the last months of this year. The plans for State

and local expenditures show an increase. The build

ing boom is expected to continue, and a new flood of

mortgages will help to keep savings at work. The

Federal Treasury is out of the market as a borrower

of new money for two or three months (except in

directly through FNMA), but will be running down its

balances, and will have to come to the market for

new money sometime before the end of the fiscal year.

In terms of open market operations, the problem which

now faces the System is whether to continue aggressively

seeking to promote a condition of ease in the money

market, or whether we should take up some of the slack

in the credit situation now that the economy seems

definitely to have turned upward, or whether we should

shift to a policy of restraint. The choice seems

to me to lie with the two latter courses; the danger in

continuing to pursue the first

course is that it might

now encourage speculative forces in the economy which

could lead to a brief burst of activity and another re

.apse.

There are some surface manifestations of speculation in

the economy, for example in the stock market and, per

haps, in the building industry and in the automobile in

dustry in terms of borrowing present sales from future

demand. We have been able to find little or no evidence

in credit data, however, to support fears of generally

unsound speculative developments.

Business loans of

commercial banks were declining during the first

three

quarters of 1954, and the relatively modest expansion

in the fourth quarter is no more than a reflection of

the improved business situation. The investment bank

ing market, in which corporate security issues have been

substantially smaller this year than last, has shown no

Real estate

tendency toward a speculative psychology.

credit will probably increase about $12 billion this

year compared with less than $10 billion in 1953 and 8.5

billion in 1952. It is possible that the present rate

of new construction, stimulated by Government housing

policies, may not be sustainable and may be a potential

At the same time, real estate credit

element of weakness.

figures do not seem to signal a speculative situation

real estate values and material and labor costs have re

cently been no more than steady.

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4.

5.

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Total consumer credit outstanding after in

creasing $4.4 billion in 1952 and $3.7 billion in

1953, is expected to increase only slightly in 1954.

There is yet little

indication that consumers are

using consumer credit in a speculative manner.

Stock market credit has been going up but is

still

at historically low levels. We have only

figures which indicate trends in the use of credit

in the stock market, to be sure, but the figures we

have do not give cause for serious concern, even

though we feel pretty sure that some speculative

fever is getting into the market.

If we seek support for a finding of speculative

forces in the economy, therefore, which might bring

about a short-lived upturn to be followed by a dan

gerous set-back actually and psychologically, we

have to find it in guesses as to the future, not in

present credit conditions.

Making some guesses as to the future, in order to

formulate timely credit policies, despite its hazards,

is part of our job.

It is not enough to know what has

happened.

My own present view is, however, that we

do not want to make a guess about the future which is

itself

too speculative.

We are just coming into a

recovery phase of economic activity, in which wewant

to avoid a false speculative upturn, but in which we

also want to avoid nipping the bud of real recovery.

In such a period no drastic nor dramatic change in

credit policy is desirable; whatever change we make

should be made so gradually as almost to escape detec

tion. We no longer need to push out reserve funds as

aggressively as we have been doing, but we do want to

maintain a situation in which credit is readily avail

able and the present or prospective cost of capital is

not a deterrent to capital expenditures.

The prescription for doing this, I would say, is

(a) An instruction from the F.O.M.C. to the executive

committee which takes out of the present direc

tive the command to be aggressive in maintaining

We should now be aiming at

a condition of ease.

taking some slack out of the market, but not at

restraint.

(b) An instruction from the executive committee to

the Manager of the System Open Market Account which

aims at a smaller volume of free reserves than we

have tried to maintain during the past several

months.

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6.

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(c) Action by the Manager of the System Open Market

Account which responds to the feel of the mar

ket, within the limit of these authorities, rather

than being too closely bound by particular figures

of reserves. And the feel of the market will in

volve responsiveness to signals given by interest

rates as to where pressure may be building up,

and to signals given by the temper of lenders

and borrowers which might influence production,

employment, and price levels.

If we adopt a policy of taking up some of the slack in the

credit situation, we shall have to be particularly careful,

I think, not to bring undue pressure on the long-term

capital market.

Long-term market rates of interest have

been rising and are expected by the market to rise some

what further over the near term. At this stage of economic

recovery, a credit policy which discouraged high levels of

capital investment would not be warranted.

Its effect on

employment and unemployment, where the outlook is not too

promising in any case, might be dangerous.

We want to be

alert but not nervous in working the controls.

Mr.

Szymczak concurred in

the views expressed by Mr.

Sproul.

The

situation was such that the Committee's operations might have to go either

way.

tent it

Therefore, under the Committee's policy of flexibility, to the ex

reduced its

monetary policy.

sights as to free reserves, that would help carry out

However, such a step might have to be reversed as the

Committee obtained a clearer view of the economic situation, since at

this stage it

was not possible to know whether indications of recovery

would be sustained.

Mr.

Szymczak felt that no announcement of a change in

the Committee's policy would be desirable at this time, that any reduction

in the amount of free reserves from recent levels should be made slowly,

and tnat such reduction should not be of an extent to indicate that the

Committee had adopted an entirely different policy which would become

evident in

the rate structure.

In response to a question from Mr. Williams,

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Mr. Szymczak stated that, by avoiding an announcement, he did not mean

that the word "active" should not be eliminated from the full Committee's

directive, that what he wanted to avoid was an announcement at this time

or action of a magnitude which would indicate to the public that there

had been a change in policy.

Chairman Martin said that he felt there was entirely too much

general discussion in

policy.

the Government of policy and possible changes in

He illustrated this by reference to stock market margin require

ments, saying that he felt that under conditions such as existed today,

the Federal Reserve had a real responsibility not to discuss this subject

outside System circles.

He went on to say that in several instances he

had responded to recent requests for comment on the stock market by stating

that he had no comment whatsoever, because he did not see how any comment

other than that could help but be misconstrued to the advantage or dis

advantage of some individuals.

He felt that a similar approach should be

applied to open market policy and that any discussions of current policy

should be kept strictly within System circles.

Mr. Sproul stated that as far as margin requirements were con

cerned, the New York market was full of rumors regarding margin require

ments and possible changes in

such requirements, and Mr. Rouse stated that

he felt the fact that people in the market were discussing the subject

had its

healthy aspects as indicating a realization of some of the implica

tions of recent stock market activities.

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Chairman Martin responded that he felt it

very healthy for per

sons outside the Federal Reserve System to discuss all aspects of the

matter, but that his point was that it was incumbent on representatives

of the Federal Reserve System, since it

was the System's responsibility,

to keep their observations strictly within the family.

Otherwise, com

ments would be misconstrued by the public, and at all times the System

should do everything possible to avoid having members of the public in

dicate that they had obtained information through "leaks" from headquarters.

Mr. Earhart said that Mr.

which he (Mr. Earhart) held.

Sproul had very well expressed the views

His observations,

confined largely to the

Twelfth District, found widespread optimism among businessmen and the

public generally.

Demonstration of that optimism, however, was largely

confined to the stock market and apparently had not been translated into

any undue accumulations of inventories or forward buying.

Mr. Earhart

noted that some firms such as glass concerns had found that demand was

exceeding supplies and that additional orders could not be filled as

quickly as desired, with the result that some had gone abroad to obtain

supplies.

For the most part, however, optimism as to business had been on

the conservative side.

Mr.

Even among builders, some caution was evident, and

Earhart cited deferment of plans for shopping centers which might ulti

mately be built but which were not being put forward at this time because

some of those already constructed had not proved as profitable as had been

anticipated.

Mr.

Earhart stated that there was evidence that new houses

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were being sold as completed.

Vacancies were developing somewhat rapidly

in older commercial buildings.

Mr.

Erickson said that he had been unable to find any evidences

of undue inventory accumulation in New England.

On the other hand, he

could not find any great evidence of optimism.

The textile industry

was still

not in good condition, and machine tool manufacturers were just

getting along.

Shoe manufacturers anticipated good business next spring

and construction was continuing active.

But for the area as a whole, Mr.

Erickson said, he could not find indications of enthusiasm such as was in

dicated by the economic review presented this morning.

With respect to

credit policy, Mr. Erickson said that he did not disagree with Mr. Sproul

and that he felt

Mr.

any transition from existing policy should be very gradual.

Johns said that the views already expressed were quite ap

plicable to the Eighth District.

Laying aside some aspects of stock mar

ket activity, he found no evidences of speculative fever in business at

titudes or decisions of businessmen in the Eighth District.

Some felt

the stock market had gotten too high, and there was a little

evidence of

speculation in real estate lying in

the path of residential subdivisions.

Speculation was not of major importance, however, and generally the at

titude seemed to be that business for 1955 would be somewhat better than

during the current year but not as good as in 1953.

As to credit policy,

Mr. Johns concurred generally in the views already expressed,

stating

that it was too soon seriously to consider dropping from the full Commit

tee's directive any reference to "ease" but that he would seriously

12/7/54

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consider eliminating the word "active" from the directive.

also felt it

Mr. Johns

was too soon to begin talking again about an inflationary

threat.

Mr. Leedy associated himself completely with the views Mr.

Sproul had expressed in appraising the economic situation.

He was unable

to find any real evidence of speculation going on in the Tenth District;

there was some optimism but probably less than in other parts of the

United States because of the importance of agriculture in the Tenth Dis

trict and the continued unfavorable effects of the drought.

With respect

to credit policy, Mr. Leedy felt that the views already expressed covered

the subject.

The Committee had gone as far as it

should with the policy

of "active ease" but to "slam on the brakes" suddenly would be a mistake,

and any reduction in

the amount of ease should be gradual.

Mr. Irons said that his views, based on conditions in the Eleventh

District, would vary only in degree from those already expressed.

He had

been unable to find any tangible evidence of speculation in that district;

people were generally optimistic but with a degree of caution, particularly

with respect to inventory accumulation.

In making the survey which had

been suggested by the executive committee at its

meeting on November 9,

businessmen reported that inventories currently were about in balance with

sales and that if

sales went up they hoped inventories would not be in

creased but that there would be a more rapid turnover of stocks.

that the agricultural situation is

To say

either "good" or "bad" as a whole is

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not very meaningful because in

some sections of the district it

and in others fairly good.

looks as though total farm receipts in

It

is bad

the district for this year will be only a little below receipts of last

year.

Mr. Irons could see no evidence of speculation which would favor

a reversal of current credit policy although a moderate transition from

aggressive active ease would seem appropriate.

Such a shift should

avoid dramatics and should be made as gradual as possible.

Mr. Powell stated that his survey in the Ninth District brought

out nothing to call for a different opinion than that already expressed.

He had found nothing that looked like inventory speculation in his area,

and goods seemed to be flowing to final consumers without backing up to

any extent.

Pointing out that the Ninth District was largely agricul

tural, Mr. Powell said there was remarkably little

duction in farm income,

concern about the re

noting that that district had escaped the drought

which had affected some other sections severely in 1954.

As to credit

policy, Mr. Powell thought no action should be taken which would make it

appear the System was afraid of recovery:

the economy must reach new

high levels through growth if it is to keep resources employed, he said,

and the System should follow policies which would help to that end with

out speculative excesses.

At this stage the System should take no steps

needed to.

He could see

to indicate it

was "running for cover" before it

no evidence in

the Ninth District that a move to raise margin requirements

was necessary, but if the Board of Governors felt the stock market was too

12/7/54

-14.

active it

had power to act in that field.

open market operations and,

This, however, need not affect

in general, Mr. Powell favored little or

no change in open market policy although it might be desirable to remove

the word "active" from the directive in its reference to ease.

Mr. C. S. Young mentioned the resurgence of optimism among farmers

in the Seventh District, stating that land prices which had been going

down since 1952 were now rising and sales transactions were increasing.

Optimism had become apparent among cattle feeders and other agricultural

producers during the past ninety days, and businessmen generally felt

very optimistic.

However, there was no movement in the Seventh District

so far as he had been able to discover showing increases in inventories;

his reaction to the recent inquiry as to whether a feeling of speculative

activity was developing was that the Board of Governors had the authority

to increase margin requirements if that seemed necessary.

Mr. Young would

go along with the views expressed earlier regarding credit policy, em

phasizing that the word "restraint" should be used very sparingly at this

stage.

Mr. Leach noted that in 1953 the Committee's policy had been di

rected toward avoiding deflation and later toward actively bringing about

recovery.

This had been done and we were now just where we wanted to be.

In surveying conditions in the Fifth District there was little indication

of speculative activity, although there was optimism as to the outlook.

The building industry was active but unsold houses were not accumulating

and there was no reason to think that there was any undue speculation in

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inventories of materials or otherwise.

Mr. Leach said that if the Com

mittee was not now leaning against deflation, and if

it

felt that there

was an upward movement which called for a change in credit policy, the

minimum change he would make would be to leave the word "active" out

of the directive in

its

reference to ease; he would consider eliminating

the reference to "active ease" and simply have clause (b) in the direc

tive refer to promoting "growth and stability".

Mr.

As to the discount rate,

Leach would make no change at this time. and he was certain that

nothing indicating restraint should be in the directive of the Open Mar

ket Committee or in the policies of the System at present.

Mr.

Vardaman stated that he had recently talked with a number of

top-level businessmen and that he found an attitude of hopefulness,

rather than a spirit of real optimism.

general presentation, but he felt it

bing" at this stage.

in

He agreed with Mr. Sproul's

would be a mistake to do any "snub

The System should stand ready to prevent any increase

speculative activities or in inventory speculation which,

if permitted

to develop, would necessitate a sudden movement by the System to restore

balance; but he would dislike any change in the wording of the directive

from the full Committee to the executive committee at this time, unless

there was more evidence than had been presented of speculative activity

in the economy.

Mr. Vardaman felt strongly that there should be no re

straint and it was his view that the existing directive provided all the

flexibility needed to maintain proper conditions of ease.

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Mr. Mills said that he interpreted the comments made this

morning to mean that the System must make a continuous study of how much

slack could be taken out of the market without hindering the legitimate

loan and investment functions of the commercial banks.

feeling.

He shared this

He was very conscious that there was a time lag between System

action and public reaction, but he felt that an abrupt movement in Sys

tem operations might cause needless concern about System policy and in

tentions, and that this should be avoided.

If

the System found that

there was a build-up in inventories on the shelves of securities dealers

or if

there was a tendency for deferment of new security offerings, that

could very well be an indication of an undesirable tightening in the.

market and an indication that the System was cramping the very sources

of expansion that it

would like to foster on a reasonable basis.

Relative

tightness in the market has been a normal phenomenon during much of

December because of seasonal factors, but with the turn of the year it

was possible that a very sensitive condition might develop.

There would

be need to replenish some of the inventories withdrawn during the Christ

mas season and some of this would be desirable.

If it became necessary

to retard that stocking at a later period the System could take action to

do so.

If a restrictive policy were to be taken during the first few

weeks of 1955, there was real danger that the System might be cramping

back the planning and the expansion implicit in that planning at the very

time when business programs for the remainder of 1955 were being determined.

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Mr. Mills felt that a restrictive policy at that time along with seasonal

contraction in deposits just after the liquidity position of the banks

had been reduced would be undesirable.

One possibility of being too

severe would be to cause undue alarm on the part of the business com

munity and to leave the banks in a position where they could not function

normally which,

munity.

in

turn, would aggravate the alarm of the business com

Mr. Mills felt

that the problems over the next six to eight

weeks should be resolved on the side of not taking out too much slack

from the market, which would mean that there should be no fixed volume

of member bank free reserves or member bank borrowings.

Mr. Robertson felt

that differences in the views already expressed

were mostly a matter of degree.

He commented that he had heard more pes

simism among the comments given this morning than he had heard anywhere

else recently.

Mr.

Robertson felt

the Committee should be in a position

to move in either direction, depending upon how the situation developed.

It

should be in a position to discourage expansion if

sary, and it

should be in

that seemed neces

a position to make certain that there was no

shortage of credit for legitimate business expansion.

In studying the

directive of the full Committee, he said, he had come to the conclusion

that perhaps the best solution was to delete from the phrase of the di

rective which provided that operations should be with a view "to promot

ing growth and stability in the economy by actively maintaining a condi

tion of ease in

the money market" all of the words following "economy".

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12/7/54

He felt this would leave the executive committee in a position to lean

either way, depending on developments, which was desirable in view of

the fact that no one could tell

would go.

at this stage just which way the econom

In operations, he felt, it

would be desirable to strive to

ward a much lower volume of free reserves than had existed recently and

to place greater reliance on use of the discount window.

said that it

However, he

would be undesirable to lay down specific plans at this

stage for a period of as long as three months since this was a period in

which it

was necessary to have flexible responsibility placed in the

executive committee with authority for it

to meet conditions as they arose.

Mr. Balderston felt that the existing policy of the Committee

should be continued with an attempt to take up the slack in the money

market.

He was concerned, however, that any change in the wording of the

directive to the executive committee might be misinterpreted by the pub

lic, and this was the reason why he would make no change in the wording

of the directive at the present time.

He would be willing to instruct

the executive committee to take whatever action was required with the un

derstanding that whatever was done would be almost imperceptibly gradual.

It was better for any shift to become evident as a result of action rather

than words.

Mr.

Fulton agreed strongly with Mr. Balderston.

Optimism in the

Fourth District resulted when the steel rate moved up from 60 to 80, he

noted, but there was no evidence of speculation in inventories or in any

other phase of activity.

Residential building was high but there was no

12/7/54

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evidence of "stickiness" in sales of new houses; many persons were look

ing at new automobiles but sales were not too good, partly because of

old balances on instalment contracts.

Bankers considered it much too

early to begin putting on the brakes, and were not concerned about

speculation even in the stock market.

Mr. Fulton said that, in his

opinion, the present wording of the directive of the Committee would not

seem to preclude any proper action that would need to be taken if

spec

ulation began to be apparent.

Mr. Williams said there was general optimism in the Philadelphia

area--he described it as "group" optimism--and it was greater than ap

peared to be warranted by specific items of economic information.

Mr.

Williams thought the Committee should not speculate about the future and

it

should increase its efforts to obtain evidence as to just what trends

were in the economy.

Mr. Williams would eliminate the word "active" from

the full Committee's directive and would rely on a direction to maintain

"ease".

He would be entirely ready to explain such a change, notwith

standing the reasons suggested by Mr. Balderston as to why any change in

wording might be misinterpreted.

Mr. Bryan said that the differences of opinion indicated by the

discussion seemed to him more largely differences of emphasis than of

substance.

His own emphasis would be in line with his understanding of

points made by Messrs. Vardaman and Mills.

He felt that reliable evi

dences of recovery are of very recent date and the extent of economic re

covery thus far is well within the limitations imposed by the materiel and

manpower of the economy.

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Mr. Bryan said he thought our use of the word "active" may have

over-emphasized in our own minds the degree to which Reserve System

actions had contributed to monetary ease.

He felt that the appearance

of monetary ease may in considerable part have resulted from the liquida

tion of inventories and the fact that the economy has been operating at

less than full capacity.

After noting that he had heretofore questioned

the usefulness of "free reserves" as a tool for regulating the money

supply, Mr. Bryan said that in his opinion the additions to total reserves

in the past few years had not been excessive when considered in relation

to the growth of reserves needed in the light of historical experience

and the growth of the country's manpower and general economic potential.

He concluded that little or no change of policy was thus needed at this

time and said that if a broad, strong eccnomic recovery is now in process

he assumed credit would tighten automatically, even though the System

continued providing net additions to total reserves at about the same

rate as in the past 24 months.

Mr. Bryan said that he could not now see

much speculation in the economy.

He questioned whether there should be

any change in the wording of the directive and felt certain that there

should be little or no change in the monetary policies of the Committee.

Mr. Bryan went on to say that while he may have misunderstood

Mr. Sproul's suggestion about giving the Manager of the System Open Market

Account authority to operate more on the basis of the "feel" of the mar

ket, he would like to express the judgment that a directive to feel the

12/7/54

-21

market is not the sort of directive that a principal can appropriately

give to his agent or that an agent can wisely accept from his principal.

Chairman Martin stated that the question of action to be taken

was a matter of degree and of emphasis.

He referred to the difficulties

experienced in using projections of business and of quantities of re

serves; yet, the Committee could not get away from at least an implied

projection of the business situation in considering changes in credit

policy.

The Committee had to make some estimate of the future in reaching

its decisions.

it

It could not assume that all the evidence would be in if

would wait a few weeks.

Chairman Martin felt that the Committee had

done well in its operations recently and that the economy was more robust

than Mr. Bryan had suggested.

He had more confidence in the growth of

the economy than some had indicated at this meeting, but this did not

mean that he was taking an optimistic position to the extent of "going

out on a limb" as to the immediate future.

Chairman Martin strongly disagreed with Mr. Balderston on the

question of a change in the wording of the directive, stating that to

make no change would leave the System in

policy of "active ease".

the position of maintaining a

In Chairman Martin's judgment, the outside

situation just did not warrant continuing the same program that had been

followed in past months, if the System was talking about a flexible policy.

Essentially, Chairman Martin said, the Committee wished to promote growth

and stability in the economy.

There was no formula as to what the rate

of growth should be and it was something that obviously was going to

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12/7/54

vary with the conditions from time to time.

The System had an obligation

not to perpetuate waste and inefficiency in the economy, Chairman Martin

said, and he did not believe that inflation provided jobs for people on

a sustained basis although it

might temporarily promote jobs.

He felt

the Committee should be very careful about leaning too far on the side of

easy money, and he expressed the view that on the basis of the comments

made at this meeting,

it

appeared to be the majority view that some change

in the directive to the executive committee would be desirable at this

time.

There followed a general discussion of possible changes in the

wording of the directive to be given the executive committee.

During the discussion, Mr. Sproul moved

that clause (b) of the existing directive to

the executive committee with respect to ar

ranging for open market transactions be

amended to delete the word "actively" so that

it would read that such transactions were to

be with a view "(b) to promoting growth and

stability in the economy by maintaining a

condition of ease in the money market".

During discussion of this motion, reference was made to the sug

gestions contained in Mr. Sproul's statement earlier in this meeting,

namely, that there be taken out of the present directive the command to

be aggressive in maintaining a condition of ease and, instead, to aim at

taking some slack out of the market, but not at restraint.

Some of the

members of the Committee indicated that they felt a program of this sort

could be carried on without change in the wording of the present direc

tive.

Others felt that the directive preferably should be changed to

12/7/54

-23

eliminate all reference to maintaining ease in the market, and to provide

in clause (b)

only that transactions be with a view "to promoting growth

and stability in

view, it

the economy."

In connection with both these points of

appeared to be the consensus that some shift from the existing

policy of "active ease" was desirable but that any change between now

and the next meeting of the full Committee would be gradual and would

not amount to restraint.

Mr. Sproul recalled that in past years the Committee's general

directives had been sufficiently general in nature to cover whatever

program was contemplated at the time of the meeting, with the result that

the wording of the directive had shown little

or no change over considerable

periods of time even though there were major changes in policy.

to 1951, he noted, the Committee had decided that it

spell out a little

Subsequent

was preferable to

more definitely the policy to be followed between meet

ings and, since it now seemed to be the consensus that the Committee con

templated a change in policy, even though it

ever so gradual, he felt

it

was to be ever so mild and

desirable that a change be reflected in the

wording of the directive.

Mr.

Leedy said that he would be somewhat disturbed by a change in

the directive which eliminated all reference to ease, and which would pro

vide only that operations were to promote growth and stability in the

economy.

To make the directive so general in nature would be to return

to the type of directive that Mr.

Sproul had mentioned had been used a few

years ago; such a directive would provide no definite guide to the executive

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12/7/54

committee but would be so broad in its

terms that it

be changed no matter how policy might change.

would never need to

Mr. Leedy questioned the

desirability of resuming the use of directives so general in nature.

On

the other hand, he felt that since some change in policy was contemplated,

a change should be evident in the wording of the directive and he, there

fore, would be inclined to favor Mr. Sproul's motion.

Chairman Martin stated that he was impressed with the points

made by Mr. Leedy and that, while he felt the general purpose of the Com

mittee was to promote growth and stability in the economy,

would be undesirable to change clause (b)

it

probably

of the directive so that it

provided only for this objective.

Following further discussion in the

light of the alternative suggestions re

ferred to and of Mr. Leedy's comments, Mr.

Sproul's motion that clause (b) of the

directive be changed to delete the word

"actively" so that the clause would read

"to promoting growth and stability in the

economy by maintaining a condition of ease

in the money market" was approved by unani

mous vote. In taking this action, it was

understood that the Committee contemplated

a gradual reduction in the amount of ease

in the market without approaching a policy

of restraint.

In a reference to his suggestion that the executive committee might

instruct the Manager of the System Open Market Account to operate on the

"feel" of the market, Mr.

Sproul stated that Mr. Bryan must have misunder

stood the suggestion when it

was first

made.

His thought, Mr. Sproul said,

12/7/54

-25

was that the Manager might be instructed by the executive committee to

take into account the "feel" of the market as well as the volume of free

reserves, money rates, and other factors.

In other words, "feel" was to

be only one of the factors to be considered in determining open market

operations within whatever limits were prescribed by the full Committee

and the executive committee.

In response to a question from Chairman Martin, Mr. Rouse stated

that he had no suggestion for change in

the limitations in the directive

to be given by the full Committee to the executive committee.

Thereupon, upon motion duly

made and seconded, the following

directive to the executive commit

tee was approved unanimously:

The executive committee is directed, until otherwise

directed by the Federal Open Market Committee, to arrange

for such transactions for the System open market account,

either in the open market or directly with the Treasury

(including purchases, sales, exchanges, replacement of

maturing securities, and letting maturities run off with

out replacement), as may be necessary, in the light of

current and prospective economic conditions and the gen

eral credit situation of the country, with a view (a) to

relating the supply of funds in the market to the needs

of commerce and business, (b) to promoting growth and

stability in the economy by maintaining a condition of

ease in the money market, (c) to correcting 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 (including commitments for the purchase or sale of

securities for the account) at the close of this date, other

than special short-term certificates of indebtedness pur

chased from time to time for the temporary accommodation

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

than $2,000,000,000.

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12/7/54

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 Treas

ury, provided that the total amount of such certificates

held at any one time by the Federal Reserve Banks shall

not exceed in the aggregate $2,000,000,000.

Chairman Martin suggested that Mr. Robertson commenton the sub

ject of repurchase agreements, concerning which he had raised questions

in his memorandum of October 20, 1954, and with respect to which the

New York Reserve Bank had furnished a memorandum dated November 9, 1954.

Mr.

Robertson stated that he had prepared an additional memoran

dum with respect to this matter since reading the memorandum prepared at

the Federal Reserve Bank of New York under date of November 9, 1954, and

that he would suggest that copies of his additional memorandum be dis

tributed with the thought of postponing discussion of the matter until

the next meeting of the full Committee.

Mr. Robertson stated that in

the meantime he would have no objection to continuing the existing pro

cedures with respect to repurchase agreements.

There was agreement with this

suggestion.

Mr.

Szymczak stated that he had received copies of a report by

the Special Committee on Foreign Operations of American Banks on Bankers

Acceptances, prepared pursuant to the suggestion made at the meeting of

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12/7/ 5 4

the full Committee on September 22, 1954.

Since the report had come to

him only yesterday afternoon and members of the Committee had not had

an opportunity to study it,

it

was suggested and agreed that the full

Committee ask the executive committee to study the report and give some

indication at the next meeting of the executive committee as to its

concerning the report.

If

views

necessary, a meeting of the full Committee

could be called to consider changes in the procedure with respect to

bankers' acceptances.

There was agreement with

this suggestion.

Mr. Rouse then stated that at the present time no authority

existed for executing repurchase agreements covering bankers' acceptances,

and he raised the question whether it would be desirable to extend the

existing authority covering repurchase agreements for Treasury securities

so as to include bankers' acceptances.

Mr.

Robertson stated that he would be averse to extending the

authority as suggested by Mr. Rouse, that in his view the whole question

of bankers'

acceptances should be considered before making a change of

the type proposed,

and that he would, therefore,

suggest that the pro

posal be carried over until the next meeting of the executive committee.

There was agreement with

this suggestion.

In an additional comment on this subject, Chairman Martin stated

that he felt the year 1955 might be much more important as a year in

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12/7/54

terms of what was done in the foreign trade field than seemed probable

in terms of domestic trade.

garding bankers'

It

He felt, therefore, that the proposals re

acceptances merited consideration.

was agreed that the next meeting of the full Committee would

be held during the week beginning February 28, 1955.

Mr. Sproul stated that as indicated in his letter to the members

of the Committee dated November 24, 1954, he would carry over until the

meeting in March discussion of the actions taken by the Committee in

December 1953 and in March 1954, to which he had referred at the close

of the full Committee meeting on September 22, 1954, to the effect that

transactions of the System open market account will be entered into

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

disorderly markets).

Thereupon the meeting adjourned.