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 2, 1955, at 9:40 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Sproul, Vice Chairman
Balderston
Earhart
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Fulton
Irons
Leach
Mills
Robertson
Szymczak
Vardaman
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Vest, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Daane, Hostetler, Rice, Roelse,
Wheeler, 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. Koch, Assistant Director, Division of
Research and Statistics, Board of Gov
ernors
Mr. Miller, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Gaines, Securities Department, Federal Re
serve Bank of New York
Messrs. Erickson, Johns, C. S. Young, and Powell,
Alternate Members of the Federal Open Market
Committee
Messrs. Bryan, Leedy, and Williams, Presidents of
the Federal Reserve Banks of Atlanta, Kansas
City, and Philadelphia, respectively.
3/2/55
-2
Mr. Riefler reported that advices of the election by the Federal
Reserve Banks for a period of one year commencing March 1, 1955 of mem
bers and alternate members of the Federal Open Market Committee had been
received, that each newly elected member and alternate member had exe
cuted the required oath of office,
and that it was the opinion of the Com
mittee Counsel, on the basis of the advices received, 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;
Hugh Leach, President of the Federal Reserve Bank of Rich
mond, with J. A. Erickson, President of the Federal Re
serve Bank of Boston, as alternate member;
W. D. Fulton, President of the Federal Reserve Bank of Cleve
land, with C. S. Young, President of the Federal Reserve
Bank of Chicago, as alternate member;
Watrous H. Irons, President of the Federal Reserve Bank of
Dallas, with Delos C. Johns, President of the Federal Re
serve Bank of St. Louis, as alternate member;
C. E. Earhart, President of the Federal Reserve Bank of San
Francisco, with Oliver S. Powell, President of the Federal
Reserve Bank of Minneapolis, as alternate member.
Upon motion duly made and seconded,
and by unanimous votes, the following of
ficers of the Federal Open Market Committee
were elected to serve until the election of
their successors at the first meeting of the
Committee after February 29, 1956, with the
understanding that in the event of the dis
continuance of their official connection with
the Board of Governors or with a Federal Re
serve Bank, as the case might be, they would
cease to have any official connection with the
Federal Open Market Committee:
-3-
3/2/55
Wm. McC. Martin, Jr.
Chairman
Vice Chairman
Allan Sproul
Winfield W. Riefler
Elliott Thurston
George B. Vest
Frederic Solomon
Secretary
Woodlief Thomas
J. Dewey Daane, L. Merle Hostetler,
Morgan H. Rice, H. V. Roelse,
0. P. Wheeler, and Ralph A. Young
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 adjournment of
the first meeting of the Committee after
February 29, 1956.
Mr.
Sproul stated that the Board of Directors of the Federal Re
serve 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
selected to serve with the Chairman of
the Federal Open Market Committee (who
under the provisions of the by-laws is
also Chairman of the executive committee)
as members and alternate members of the
executive committee until the first meet
ing of the Federal Open Market Committee
after February 29, 1956:
-4-
3/2/55
Members
Alternate Members
James K. Vardaman,
Jr.
C. Canby Balderston
A. L. Mills, Jr.
M. S. Szymczak
J. L. Robertson
Charles N. Shepardson*
(To serve in the order named
as alternates for Messrs.
Martin, Vardaman, and Mills)
Allan Sproul
Hugh Leach
W. D. Fulton
Watrous H. Irons
C. E. Earhart
(To serve in the order named
as alternates for Messrs.
Sproul and Leach)
* When he assumes his duties as a
member of the full Committee.
Mr.
Sproul noted that for some time it
had been the practice of
members of the Federal Open Market Committee who were not members of the
executive committee but who were living in Washington to attend meetings
of the executive committee.
He suggested that the practice be extended
and that, as a means of bringing them in closer touch with this work, all
members of the Federal Open Market Committee who were not members of the
executive committee be invited to attend meetings of that committee when
ever they could conveniently do so.
This suggestion was approved unanimously
with the understanding that in the future the
Secretary would notify all members of the Fed
eral Open Market Committee of the times at
which meetings of the executive committee were
called to convene.
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
January 11, 1955, were approved.
-5
3/2/55
Upon motion duly made and seconded, and
by unanimous vote, the actions of the execu
tive committee of the Federal Open Market
Committee, as set forth in the minutes of
the meetings of the executive committee held
on December 28, 1954, and on January 11,
January 25, and February 8, 1955, were ap
proved, ratified, and confirmed.
Before this meeting there had been sent to the members of the Com
mittee a report of open market operations prepared at the Federal Reserve
Bank of New York covering the period January 11, 1955 to February 23, 1955,
inclusive.
There was distributed at this meeting a supplemental report
covering commitments executed February 24 to March 1, 1955, inclusive, and
copies of both reports have been placed in the files of the Federal Open
Market Committee.
Mr. Rouse stated that while he had nothing additional
to report, he would like to emphasize that at the close of the period
covered by the reports the banking system appeared to be "well within the
scope of the control of the Federal Reserve System".
system appeared to be conscious of its
That is,
the banking
relative illiquidity after the
Treasury's refundings of the past twelve months and to be in a position
where slight changes in Federal Reserve policy could have a marked effect.
It
was Mr. Rouse's view that the market now was about at the point contem
plated by the full Committee and the executive committee for this particular
time.
Upon motion duly made and seconded,
and by unanimous vote, the open market
transactions during the period January 11
March 1, 1955, inclusive, were approved,
ratified, and confirmed.
-6
3/2/55
At Chairman Martin's request, members of the staffs of the Board's
Division of Research and Statistics and Division of International Finance
entered the room at this time for the purpose of presenting a statement
regarding economic activity in the United States and abroad, illustrated
by chart slides.
A copy of the script of this review has been placed in
the files of the Federal Open Market Committee, and following the meeting
copies were sent to all members of the Committee.
The review brought out
the fact that economic recovery in the United States since last autumn
had carried activity almost back to its previous peak and that gross na
tional product during the current quarter was estimated at an annual rate
of $369 billion, compared with a high of $370 billion in the spring of
1953 and with a level of $356 billion during the first
last year.
three quarters of
The review also stated that expansive forces had continued
generally strong abroad, that the Board's index of industrial production
in the United States was now estimated at 132 for February--9 points above
its 1954 low and 5 points below its mid-1953 high.
The rapid rise in
economic activity had been reflected in financial markets, where money
rates had risen sharply as credit demands had increased.
The entire pe
riod of business contraction and recovery since mid-1953 has been charac
terized by widespread confidence.
After reviewing the various aspects of
economic activity in some detail, the review concluded with the statement
that business recovery up to now in this country since the downturn in
mid-1953 had been impressive,
activity abroad.
It
as had also been the expansive strength of
was stated that there is more basis for hope than
-7
3/2/55
ever before in the last quarter century that these trends signify a pe
riod of full-scale sustained prosperity for the free world.
At the same
time, there were some disquieting developments such as the rapid and to
some degree speculative rise in
stock market credit in the United States;
the development of a financial climate giving rise to mergers, manipula
tion, and empire building; the unsustainable pace of current automobile
output and sales; the very high rate of home building; and particularly
the large volume of mortgages underwritten without a commercial quality
test.
The review also said that the sharpness of recent monetary actions
by the Bank of England suggested concern about the health of Britain's
balance of payments trends and stated that the result of these actions
was likely to be a check on expansion of consumer credit and a slackening
in the growth of investment expenditures.
The critical problem for credit and monetary policy in the United
States, the review said, was how to thread its way along the narrow ledge
that encourages sound economic growth and high employment and, at the
same time, limits speculative developments and discourages financial over
commitments by businesses and consumers.
Under credit and monetary
measures recently adopted in this country, restraint on credit expansion
had been tightened and money rates had risen sharply.
The impact of these
higher rates and of continuing credit restraints may not yet be fully re
flected in capital and credit markets, and in this situation, further cred
it policy actions would need to be weighed carefully in the light of busi
ness and financial developments in this country as well as abroad.
3/2/55
Chairman Martin stated that this meeting constituted the Commit
tee's quarterly review of the business picture.
He suggested that the
next order of business be the consideration of open market operations,
and he asked that the members of the Committee and the other Reserve Bank
Presidents express themselves on any phase of System credit policy--re
serve requirements, discount rate policy, margin requirements,
or open
market operations--in order that the Committee could consider all factors
together.
Mr. Sproul then made a statement substantially as follows:
1.
Economic recovery appears to be proceeding more gradually
than in last months of 1954. Perhaps the most striking figures
now showing up are the steel operating rate and automobile pro
duction and sales, but there may well be an element of borrow
ing from the future in these figures which helps to rob them
of explosive possibilities. The continued boom in construction
and the high level of consumer incomes and buying are the
broader underpinnings of the general economic situation.
2. I still
see nothing in that general situation which can
or needs to be curtailed by a generally restrictive credit pol
icy. Scattered increases in raw material prices haven't spread
to the general price structure.
Signs of speculative inventory
accumulation have not yet appeared.
There are still
some pools
of unemployment, which may persist for some time if the busi
ness upturn does not keep pace with a growing labor force.
Bank credit figures seem to be consistent with moderate economic
recovery, although not conforming entirely to admittedly sketchy
seasonal projections. Effects of increases in consumer credit
will be moderated by a heavy schedule of repayments on outstand
Business sentiment, while bullish for the next few
ing credit.
months, is uncertain about the later months of the year.
3. The mortgage credit situation obviously is a cause for some
Even though it is not possible to say that the recent
concern.
rate of housing starts is not sustainable, it is possible to
have doubts about the credit terms which have helped to sustain
With respect to this situation, however, there are
the boom.
two points to be made from the side of general credit policy.
3/2/55
-9
(a) First, the present high level wave of residential build
ing was started by last year's housing legislation, and sus
tained by easy money. Eventually the effect of the legislation
will begin to taper off--terms can hardly be further liberalizedand we have already taken some of the ease out of the credit sit
uation. Meanwhile it would be unwise to try to counteract what
is a national housing policy, by further restricting credit for
the whole economy.
(b) Second, it may be that this situation is beginning to
correct itself,
aided by what we have already done to take up
the slack in the reserve position of the banks. The present ease
in the mortgage market largely represents commitments entered
into last year, for the first
half of this year. There is some
evidence that this was overdone--some unusual warehousing of
mortgages with banks so as to be able to take up commitments.
Now, however, there are reports that commitments on the easiest
terms are harder to get, and this may be the beginning of an im
portant change.
In so far as capital demands outrun new savings
in the next several months, mortgage lenders will have to liqui
date present holdings to take on new commitments, or borrow from
banks.
If conditions in capital market are not too favorable to
such liquidation, and if we keep some check on bank reserve posi
tions, this shifting or this reliance on further bank credit will
not be so easy, and results will begin to show later in year. If
building operations should be turning down in any case, at that
time, we might have a different situation on our hands.
4. We have already done quite a bit to take up the slack in the
credit situation. Average weekly free reserves of member banks
which were running around 400 to 500 million in December, ranged
around 300 to 400 million in January and have fluctuated from
And it must be remembered that
150 to 300 million in February.
these free reserves are now largely in little
pools in the coun
try banks. Most of the time, the reserve and central reserve
city banks--the most sensitive money lenders--have zero or even
negative free reserve positions and there has been some inter
mittent increase in borrowing from the Reserve Banks.
There is also the fact that the banks have already liqui
dated a large amount of secondary reserves (mostly short-term
Governments) to avoid borrowing from the Reserve Banks and to
take on intermediate or longer term securities and mortgages.
Because of decreased liquidity, they should now be more sensitive
to pressure than they were.
The general ex
Then, there is the matter of expectations.
pectation in the market is that rates are bound to go up. If we
do too much to confirm and inflame those expectations they may
get out of hand.
3/2/55
-10-
5.
Finally, there are the Treasury's position and needs.
It
looks as if the Treasury would have to borrow from 3 to 4.5
billion cash during the rest of the fiscal year, of which 2 to
3 billion will be needed in early April (could take the form
of a tax anticipation bill
maturing in June) and 1 to 1.5 bil
lion will probably be needed at mid-May when 1.5 billion of
Series B Savings Notes mature.
In addition because of the
prospective temporary dip in Treasury balances during the first
half of March and June, some borrowing from the Federal Reserve
Banks (perhaps up to $1 billion in June) on a special certifi
cate may be necessary. We shall have to keep these needs in
mind, as well as the temporary effects on the money market and
on business conditions, of the March and April tax payments.
6. Putting allthis together, we may be on the threshhold of a
restrictive credit policy--more restrictive than is required
by the economic situation and more restrictive than we have in
tended. I think we shall have to be careful during the next
several weeks to see that we do not pass over that threshhold
unintentionally. There could be a rapid run-up in short-term
rates, a considerable rise in long-term capital yields (and de
cline in prices), and with Treasury borrowing entering the
picture, a cumulative expectation of really tight money such
as we had in early 1953. I should say we want to avoid such
developments and it may require some open market purchases.
7. We have now gotten to the point, I believe, where the Treas
ury bill rate will hover slightly below the discount rate (or
at times equal it) and member banks will be encouraged by the
profit motive to shift to borrowing to meet reserve needs rather
than going through the security market. I would let the situa
tion simmer there for a while, employing repurchase agreements
to meet temporary squeezes in the market, and buy securities if
the squeeze seems to have become permanent or if there is need
to put in some reserves to support bank underwriting of the
Treasury's financing.
8. Such a program would not call for any change in our present
directive.
Chairman Martin inquired of Mr. Sproul whether his closing remarks
were intended to indicate that the discount rate would bear watching.
Mr.
Sproul replied that, in broadest terms, a change in the dis
count rate must be considered in relation to the performance of the whole
economy,
in its domestic and international aspects.
He referred to two
-11
3/2/55
recent examples--the United Kingdom where the rate was recently increased
from 3 to 3-1/2 per cent and then to 4-1/2, and Canada where the rate has
just been reduced from 2 to 1-1/2 per cent.
In the United Kingdom, Mr.
Sproul said, the economy appeared to be expanding at full stretch, with a
tendency toward over-employment,
of the international position.
and foreign exchanges showed a weakening
An increase in bank rate was the classical
and proper response and when the first
a sharper warning followed.
mild warning didn't do the trick
In Canada, the mild recession of 1954 has not
been succeeded by a strong recovery, there is
still
concern about unemploy
ment, and the Canadian dollar has been strong--perhaps too strong in terms
of Canada's export trade.
A reduction in bank rate seemed to fit
the
domestic and international position.
Mr.
Sproul felt that it
was more difficult to generalize with re
spect to our own country, perhaps because we know more about it,
but that
our situation was somewhere in between the two situations described.
Our
domestic economy, after a period of recession and then of stability in
1954, made a vigorous start on recovery in the last quarter of 1954.
This
upward movement appears to have gone forward but at a slower pace thus far
in 1955.
in
We are well advanced from the recession lows of 1954 but still
the phase of gradual recovery, Mr.
Sproul said, and we are not yet in
the full "prosperity" phase, particularly when prospective levels of em
ployment and increases in the labor force are taken into account.
of economic conditions,
seem to be premature.
In terms
an increase in the discount rate at this time would
-12
3/2/55
Mr. Sproul also expressed the view that the adjustments the money
market might be called upon to make during the March-April tax period and
over the period of Treasury borrowing in April would be complicated by
an increase in the discount rate.
The reaction to such a move might re
sult in a deterioration in market values--particularly long-term or
capital values--that would be indicative of a more restrictive policy
than the System yet wishes to follow.
matter of expectations,
Mr.
Sproul also referred to the
stating that the general expectation in the mar
ket is that rates are bound to go up.
We are already getting a delayed
rate action to the recent change in open market policy, he said, and if
the discount rate were to be raised now, and thus further strengthen ex
pectations of tighter credit and higher rates, there probably would be
more of an immediate reaction than was desired.
Regarding international
money market relationships, Mr. Sproul said that the two increases in
discount rate at the Bank of England in recent weeks have been partly
to try to protect a weakening balance of payments position.
So long as
nothing in our domestic situation demands or requires an increase in dis
count rate, Mr. Sproul suggested that it might be helpful to the British
position to have as wide a spread as possible in short rates between the
two markets.
He added the comment that some movement of short-funds to
London (or the retention of funds there which might have come home) to
take advantage of higher rates, may give temporary relief to the British
position which would be in our long run interest.
3/2/55
-13
Mr. Sproul concluded his remarks by stating that he felt the Fed
eral Reserve should watch the rate situation closely but that no change
in discount rate should be made now.
Chairman Martin said that the reason he had raised the latter
question with Mr.
Sproul was that he thought the Committee might face a
situation within the next couple of months which called for more reserves
being put into the market, but that this might come when the System's de
layed action on the discount rate might result in
with other market rates.
its
being out of line
Thus, the System might find itself in the posi
tion of wanting to act in two directions at once, namely, raising the dis
count rate and adding to reserves through open market operations.
Mr. Erickson said that he thought the report of the economists
covered the situation very well although he could not find in the Boston
District as much optimism as there was in some segments of the economy.
Consumer buying in New England remained very strong with department store
sales since Christmas continuing to exceed year ago levels as had new
automobile registrations.
The shoe industry continued very active, es
pecially the market for women's shoes, and textile operations showed some
improvement in activity but with a low level of profitability.
Orders
for machine tools increased during December and January and were now run
ning ahead of shipments.
Figures on construction, notably public works
contracts, were well ahead of last year, and the latest figures of manu
facturing employment showed some small increase in nondurable goods with
a greater increase in durable manufactures.
3/2/55
-14.
Mr. Erickson vent on to say that as far as operations in the open
market were concerned, he thought the Committee should continue what it
had been doing, possibly reducing the amount of excess reserves very
slightly.
If
too much tightening resulted, repurchase agreements could
be used as a temporary measure.
At the moment Mr. Erickson did not think
that there should be any change in discount rates although the situation
should be watched carefully between now and the next meeting of the full
Committee.
He felt similarly about any possible change in reserve re
quirements.
Mr. Powell stated that for the first
time in many years we were
finding the foreign situation correcting itself.
The British upward move
ment in the discount rate had been a very wholesome thing, he felt, rather
than for that country to have called for help from abroad by asking for
lower rates in other countries.
For the moment, Mr. Powell thought that
the Committee could disregard the foreign situation and take care of
domestic affairs without too much regard for the foreign impact of what it
might do.
In the United States, the economy seems to be running along
very smoothly, he said, and he could see nothing to indicate a need for
particular moves by the Federal Reserve System at this time.
He was some
what concerned by the increase in mortgage debt although in the Minneapolis
District this had not been as sharp as in
some other section.
Mr. Powell
felt that present open market policy was just about right for this period.
If
present policy, under which some tightening was taking place, were con
tinued, the business recovery would gradually employ bank reserves more
-15
3/2/55
fully.
and if
This might cause some further tightening of money rates, he said,
that tightening in
rates got out of hand the System could conduct
open market operations or do something else to relieve the situation.
He
saw nothing in the picture such as a speculative move or any other devel
opment (other than the mortgage situation to which he had referred) that
might call for corrective action on the part of the System at the present
time.
Mr. Johns said that he would associate himself very largely with
the comments Mr.
Sproul had made.
see evidences of moderation in
Although he was not sure that he could
the rate of the upturn in activity, for
some time he had been apprehensive and fearful that the System might be
putting on the brakes too hard.
Whether this was true or not, he was in
clined to think that perhaps the Committee did not yet know just how hard
it
had put on the brakes.
He would recommend against any further restric
tion and would suggest a continuation of the present policy with complete
readiness to move in either direction.
Mr. Johns emphasized that he would
not hesitate to relax if such action seemed indicated by further develop
ments.
He would not favor an increase in discount rates at the present
time.
Mr. Bryan inquired of Mr. Sproul whether, in
connection with his
reference to the upward movement in the British discount rate, there had
been evidence of a movement of funds from New York to London or whether
there had been evidence that funds had remained in London which might
otherwise have moved out.
of funds, might it
If there had been such a retention or movement
have had an effect in the domestic money market.
-16
3/2/55
Mr. Sproul responded that he did not think there had been or
would be a substantial movement of funds which would seriously affect the
domestic money market but that there might be a temporary movement that
would assist the British in their position. Mr. Sproul stated that while
he had attempted to get as much information on the movement of funds as
possible, available information was only tentative and he had no estimates
as to what the movement of funds between London and New York might be in
the future.
Mr. Bryan stated that he would like to associate himself with the
comments that had been made thus far.
He was unable to see that the
economic recovery was in any sense out of hand. He felt the recovery was
moving very satisfactorily with some danger spots which might give trouble,
such as the mortgage market.
He agreed with what he took to be the sense
of the other remarks, that there may have been some forces already at work
effecting corrections in this market.
Mr. Bryan said that he was in the
somewhat difficult position of having said that he did not know quite what
the policy of the Committee was and that, therefore, he found himself em
barrassed in trying to comment on something he did not understand. How
ever, he would dislike any further restraining measures until the effect
of measures already taken had become more evident.
Mr. Irons said that the comments on the national picture reflected
his impressions of the situation.
He thought there had been less modera
tion of recovery in the Eleventh District than nationally.
During the
fourth quarter of 1954, there was a very sharp resurgence of activity in
3/2/55
-17
the Dallas District and for the most part that movement had continued on
into the current year with activity at near-record levels in retail trade,
employment, petroleum activity, construction, and general economic ac
tivity.
It
was difficult to see much beyond June of this year, Mr. Irons
said, but he anticipated a generally favorable situation, particularly in
building and construction, with total building 15 to 25 per cent ahead of
a year ago.
Petroleum would continue to improve.
situation varied from area to area.
In agriculture, the
Some areas were still
suffering from
drought, but the agricultural outlook was not unfavorable on the whole.
As to credit policy, Mr. Irons would not recommend any change from the
policy that had been in effect in recent weeks.
He had less concern than
comments of some others indicated about being as restrictive as the Com
mittee had been, and he did not think that at the present time conditions
justified any relaxation.
Neither would he favor an increase in the dis
count rate at this time, partly because he would like to see some of the
Federal Reserve credit that might be needed by the market extended through
the discount window.
in
Mr. Irons also said he would not recommend a change
reserve requirements at present.
In the Philadelphia District, no marked changes have developed
recently, Mr. Williams said.
There was a decline in
factory employment in
January as compared with December but this decrease was less than a year
ago, and unemployment claims were somewhat smaller than a year ago.
automobile registrations were 11 per cent higher in
year earlier.
New
January 1955 than a
With respect to the national situation, Mr. Williams said
-18
3/2/55
that he retained his consistent position of watchful waiting.
the policy the Committee had been pursuing should be continued.
He felt
He could
see nothing on the price front or in the employment situation or in the
inventory picture that would warrant any change in Committee policy.
For
the immediate future, he thought the Committee should continue to be in
a position where it
could move in either direction.
Mr. Earhart said that he concurred generally with views expressed
thus far.
In the Twelfth District, the situation might be described as a
boom, he said.
There was still
a heavy inward migration of population,
which acted as a stimulant to the economy; construction activity was high;
and the generally high level of construction throughout the United States
was serving as a stimulant to the important lumber industry of the Twelfth
District.
There was still
some unemployment, however, which might be con
sidered as largely frictional due to the continued influx of people.
Mr.
Earhart said that he had felt for some time that discount rate policy had
not been entirely in line with open market policy and that the System had
attempted to adjust day-to-day temporary needs for bank reserves through
open market operations when frequently the adjustment might better have
been accomplished through the discount window.
He felt that individual
banks needing reserves might have come voluntarily to the Reserve Bank if
the discount rate had not been a penalty rate.
He noted that recently
short-term rates in the market had increased and there was more consistency
between discount policy and open market policy.
found it
Mr. Earhart said that he
difficult to think of credit policy merely in terms of the amount
-19
3/2/55
of reserves taken from the banks or furnished to them, or of the amount of
excess reserves or free reserves; to him, it
was more definite to think
also in terms of money rates, which was a necessity when the discount rate
was being considered.
rates on Treasury bills
Thinking in those terms, Mr. Earhart said that with
and Federal funds now closer to but still
below
the discount rate, and with present open market policy, an increase in the
discount rate would not be called for at this time.
Mr. Earhart went on
to say that some of the directors of the San Francisco Bank felt that the
System currently should be more restrictive and some would like to see the
discount rate increased, although he had not yet been ready to recommend it.
Mr.
Fulton said that in the Cleveland District operations in the
steel area were at a high level and profits were good.
However, in
some
other parts of the District there were reports of almost a profitless econ
omy although activity was high.
the District.
Demand for loans was high in all
parts of
There was some concern about stock market activity and the
rapid rise in prices and there was some indication among banks that an in
crease in margin requirements to 75 per cent would have a salutary effect.
Residential building continued at a high level and houses were being sold
rapidly, although old houses were moving more slowly.
Conditions in
the
stock market and in housing construction should be viewed with some appre
hension, but it
should be recognized that a cut-back in
automobile produc
tion would have sharp repercussions in the steel industry.
Mr. Fulton said
that he too would like to see discount operations given a relatively more
important place in System credit policy, and he would not recommend an in
crease in the discount rate at the present time.
3/2/55
-20
Mr. Leedy said that conditions in the Tenth District resembled
those described by Mr. Irons for the Eleventh.
Notwithstanding the per
formance of agricultural prices, conditions were,
ceedingly good.
generally speaking, ex
Retail sales since the first of this year were showing
a higher rate of increase than for the country as a whole,
was very active.
and housing
For the country as a whole, Mr. Leedy could not quite
subscribe to Mr. Sproul's appraisal.
He felt that we might be underesti
mating the forces that were at work in the economy; the economic review
by the staff gives little evidence of anything other than an enormous
underlying surge.
He felt the Committee should not be taking precipitate
action toward slamming on the brakes, but it should be moving further
along the line on which it had moved recently.
With respect to the dis
count rate, Mr. Leedy felt the System was approaching the time when it
should give serious consideration to a moderate increase.
The present
rate was the one in effect when the Open Market Committee was pursuing
a policy of "active ease".
If
it
was appropriate at that time, it
not seem to be the proper rate for the present time.
would
Mr. Leedy said that
he would like to see greater use made of the discount rate than had been
the case for some time.
He would not be fearful that an increase in the
rate would have an undesirable effect on the Government securities market,
feeling that some discounting of such an increase had already taken place.
Mr. Leedy added the comment that the sentiment reflected in the stock mar
ket required that the Committee be acutely aware of the likelihood that it
would have to put some additional pressure on the market.
3/2/55
-21
Mr. Balderston said that although the rate of housing and automo
bile production relative to probable demand seemed so imprudent as to give
concern, so too did the amount of unemployment now existing in the face of
the degree of recovery that the country seemed to have had.
This contrast
led him to favor a policy that would not induce unwanted tightness of psy
chological origin until the effects of the recent British action increas
ing its
discount rate and of the Treasury's offering of a long-term 3 per
cent bond had become more fully evident.
During this period of watching,
Mr. Balderston said that he would let the yield on Treasury bills
rise to
about the level of the discount rate, without changing the latter until
the situation was more clear.
It
might be that modification of margin re
quirements without actually increasing the percentage should be contemplated
when the discount rate was being considered.
the discount rate only if
point where it
Mr. C.
He would favor an increase in
the market seemed to be on the rise again to the
was stimulating excessive speculative fervor.
S. Young said that the situation in the Chicago District
had not changed since mid-January, that sentiment was very bullish, and
that automobile people were extremely optimistic and their enthusiasm had
spread to all their suppliers and to many manufacturers.
not as optimistic as some persons, however,
Mr. Young was
feeling that the current pro
duction rate of about 8 million cars a year could not be maintained for
many months and that when a contraction came,
it
would have a decided ef
fect in the Chicago District on both the automobile industry and suppliers.
The mortgage market was expected to become a little
tighter and, while the
-22
3/2/55
industry was very optimistic, the more responsible builders felt that they
had to be very careful.
Farm land prices were still
liberal appraisals were being made.
about crop prices as they had.
rising and more
Farmers were not complaining as much
Mr. Young felt that the System should go
slow in applying any further restrictions, commenting that while four of
the directors of the Chicago Bank had indicated they would favor an in
crease in the discount rate, he personally had not felt like recommending
such an increase to the directors until the outlook for the economy became
clearer.
Mr. Robertson said that while he could not add to the information
on the economic picture that had been presented this morning, he wished to
express satisfaction with the general credit policy the Committee had been
following recently, which he would characterize as a slightly restrictive
policy.
This was the time to be wary, he said, and the Committee should
continue in a position where it could move in either direction in accord
ance with the signs of the moment.
Mr. Leach said that he had found no evidence in the Fifth District
of speculative inventory accumulation.
Business continued good but there
was somewhat less optimism than a month ago, particularly with respect to
the second half of 1955.
This reflected doubts concerning the automobile
and residential building industries after the middle of this year.
Direct.
ing his comments mainly to the monetary situation, Mr. Leach said that he
saw no reason why the Committee should be combating inflation or deflation
at this time.
He liked to feel, he said, that the Committee recently had
3/2/55
-23
not been restrictive, but that it
slack in the situation.
had simply been taking up some of the
He would not now lean against either inflation or
deflation, but he would stand up straight.
market recently had been about right.
The degree of tightness in the
With respect to open market opera
tions, Mr. Leach felt that this was by far the most important tool the Sys
tem had and he would like to see it
used on occasions when the Committee
was combating inflation or deflation or for the purpose of meeting the longer
run needs for reserves, but not for making day to day adjustments in the
market.
He thought the situation now called for keeping an even keel, and
this called for more use of the discount mechanism which he felt had been
neglected in the past two years.
Mr. Leach said that the discount rate
should not be permitted to lag so far behind other money market rates as it
had in the last two years.
He would prefer to see the rate changed say,
five times a year, rather than twice a year.
felt it
As to the present level, he
exactly right because market rates had caught up to it.
Consider
ing the whole matter broadly, however, the discount rate should be used more
frequently.
Mr. Leach would like to get away from using open market opera
tions too frequently, and he hoped that from now on until some unusual need
arose, the discount window would be the usual means for obtaining Federal
Reserve credit, and that repurchase agreements would be used only when nec
essary.
He was afraid, however,
that conditions would be so tight that the
Committee might soon have to furnish reserves through open market operations.
Mr. Mills said that he could not feel complacent with what Mr.
Earhart had referred to as the "prevailing sentiment" expressed at the meet
ing.
He was not complacent about a continuance of a level of around $200-300
3/2/55
-24
million of free reserves or the consequences of having drawn the volume of
free reserves down to that level.
He then made a statement substantially
as follows:
Data prepared by the Division of Research and Statistics of
the Board of Governors projects System open market operations
through the remainder of 1955 on a basis contemplating the main
tenance of a $200 million to $300 million level of free reserves.
This projection has not taken into account the effectsof having
previously reduced the volume of free reserves to the projected
level. There is now evidence that in the process of reducing
the volume of free reserves, multiple credit contraction has been
engendered which has, in turn, caused the credit base to shrink.
Whether System policy intended to contract the credit base is
not clearly stated in the directives of the Open Market Committee,
in any event such has seemingly been the result of policy action
since the first
of the year in withdrawing reserves.
The effects of withdrawing reserves have been accentuated
by the fact that country banks historically maintain excess re
serves in a way that is not practiced either by reserve city
That being the case, the
banks or central reserve city banks.
impact of reserve withdrawals has fallen on the central reserve
city and reserve city banks and particularly on the latter, in
that they are not as accustomed to flexibly adjusting their re
serve positions as are the central reserve city banks. In con
sequence, reserve city banks and those country banks who are the
more active purveyors of credit have been put under considerable
pressure, which up to the point that it has checked overinvest
ment policies and the overextension of real estate mortgage credit
is desirable. However, itis quite possible that this pressure has
been or will soon be too severe in its effects, of which indica
tions are now appearing in the progressively softer market for
U. S. Government securities brought about in considerable part by
commercial bank liquidation of such securities as a means of main
taining their reserve positions.
The present market is also shadowed by the fact that Govern
ment security dealers are understandably less willing to make
markets and take positions than would be the case in a more stable
All circumstances considered, it is now pos
market atmosphere.
sible that the psychological effects of a falling market for U. S.
Government securities may extend its disturbing influence beyond
the investment fraternity and to the business community, thereby
setting in turn a readjustment in industrial and commercial pro
gramming of an undesirable character. In the absence of conclusive
3/2/55
-25
evidence that a lasting business revival has been established,
an adjustment of this character could prove damaging to the na
tional economy, especially if it should occur in conjunction
with a weakening of the economies of England and of various
Western European nations who may now offer less buoyant export
markets for United States goods and, consequently, lend less
support to domestic economic revival in this country.
Open market policy thinking has dwelt very largely on
what should be considered an appropriate level of free reserves
without perhaps taking into full consideration the economic
consequences that stem out from the mechanics of producing such
a level of free reserves. Consideration may now well be given
to such consequences, with current open market policy adjusted
accordingly.
Such an adjustment might desirably take the form
of providing a somewhat more liberal volume of free reserves to
be available over the period of the next six weeks or longer,
during which the opportunity can be taken to observe the direc
tion of economic trends which, if they are strongly upward, can
be met by curtailing, or, if downward, by maintaining or increas
ing the volume of free reserves above the levels projected in
the present memorandum submitted to the Open Market Committee.
Certainly by early June a clearer picture should be obtain
able of the course of economic events on which subsequent open
market policy decisions can then proceed to be developed on a
more day to day basis rather than on a basis which attempts to
Adap
foresee the course of the economy for some months ahead.
tation to a shift in policy direction toward providing a somewhat
more liberal volume of reserves could readily be undertaken at
the time of the Treasury's tax collection period and in conjunc
tion with the fluctuation of reserves pertaining thereto. A
shift of policy taken in that atmosphere would be less obvious
and, accordingly, less subject to challenging interpretations
on the part of the investing public. Any change of policy un
dertaken at such a juncture would assume that increasing strin
gency in credit conditions can be avoided between now and the mid
March period of the Treasury's tax collection and fiscal dis
bursement activities.
As to the discount rate and a change in margin requirements,
should the momentum that our policies have gathered broaden into
a strong upward movement in interest rates, the presumption would
be that it would be unrealistic to leave the discount rate at the
present level for too long a period. If, however, conditions
don't move in that tightening direction too severely, a case might
be made for a change in margin requirements. If developments in
the securities market moved upward rapidly, such an increase in
margin requirements could be buttressed by an increase in discount
rate. I would interpret it that our policy is one of restraint on
-26
3/2/55
reserves, but there are very decided limits to which that
restrictiveness can be pressed.
An increase in the dis
count rate can serve to give an indication of the think
ing and economic policy of the System without at the same
time producing a further tightening in the market.
There
would be the reasonable possibility that, if the discount
rate were raised under those events, rates on new loans
and new securities offered would tend to move toward the
discount rate without an unfavorable effect that would be
had by a withdrawal of reserves.
Mr. Vardaman said that he would like to highlight two phases of
Mr. Sproul's analysis of the economic and credit situation.
First, if as
a result of expectations of a higher interest rate structure, there devel
oped a condition of timidity among borrowers or lenders, this situation
would require close watching so that it would not become too restrictive.
Mr. Vardaman thought that possibly this point was now being approached.
Second, with respect to the discount rate, he agreed with Mr. Sproul that
it was healthy to consider an adjustment in the discount rate in relation
to the British situation, feeling that if a differential existed which
resulted in a movement of funds to London it would be helpful to us in
the long run.
Mr. Vardaman also agreed with Mr. Johns and Mr. Mills that
we may not yet have felt the full effects of the policy that has been fol
lowed by the Committee recently, and it
was his view that the System should
not move in a more restrictive direction until it
had a clearer picture of
what has happened or is happening as a result of what the System has al
ready done.
Mr.
Vardaman said that he would not wish to see the discount
rate disturbed at the moment,
although he agreed with other comments that
it should be changed more frequently than has been the case in the past.
While he would not wish to have the discount rate changed in any Federal
-27
3/2/55
Reserve District right now, Mr. Vardaman said that he felt the System was
reaching a point where it
could break away from a uniform discount rate.
Mr. Szymczak said that the comments pointed up the difficulties
of monetary and credit policy.
It
was difficult to be restrictive in a
specific area without in some way affecting the whole economy.
It
was
clear, he said, that the Committee did not want to affect the economy
generally on the down side.
However, to the extent the Committee had been
able to be a little more restrictive without causing a down turn, this was
all to the good.
Mr. Szymczak felt that there were three areas of concern,
namely, residential construction and real estate credit, the up-trend in
production due largely to automobile output, and the rise in activity and
prices in the stock market.
all economy.
These were indicative of a trend in the over
Some helpful changes might be made in the margin regulation
short of raising margin requirements.
continued as they have recently,
However, if open market operations
short-term rates could be expected to get
out of line with the discount rate and that would call for an increase in
the discount rate.
Mr. Szymczak hoped that short-term rates would not
move up too fast and necessitate an increase in discount rates.
He would
prefer to have about the amount of reserves in the market that are now
there and he would try to maintain that position as equitably as possible
among different groups of banks.
operations.
This might require day-to-day open market
He would not change open market policy at present and, in
general, he would continue just what the Committee was now doing.
-28
3/2/55
Mr. Johns said that he had limited his earlier remarks on the
discount rate to the question whether an increase was needed at this time.
He wished to add, he said, that he associated himself completely with the
views expressed by Messrs.
Earhart and Leach regarding the administration
of the discount rate.
Chairman Martin stated that this had been an extremely good dis
cussion of the economic situation and credit policy.
He felt that in gen
eral the policy the Committee had been following had come as close as pos
sible to satisfying the various views expressed at this meeting.
view would lean a little
His own
on the side of less ease, he said, his general
feeling being one of a little
more confidence in the economic situation
than had been indicated by some of the views this morning.
Chairman Martin
said that he recognized the fears that the automobile industry might not
be able to sell all of the cars it
might be a strike in that industry.
would produce this year and that there
However, he thought there was an amaz
ing exuberance and vitality in the economy.
in
While he wanted as much ease
interest rates as possible with a sustained economy, he hoped that ease
would not go so far as to produce a level of activity that would have to
be liquidated later on.
The Committee should be careful not to permit so
much ease that people would think they should postpone doing the things
needed in their businesses.
Chairman Martin said that he would support
the general views of Mr. Sproul that the present policy be continued, and
that the existing directive be renewed without change.
Chairman Martin
-29
3/2/55
then read the first
paragraph of the Committee's general directive and in
quired whether any of the members felt that the wording should be changed
at this time, and whether all of the members of the Committee were willing
to stand on this directive as a statement of the policy to be followed by
the Committee for the time being.
None of the members indicated that any
change should be made in existing policy or in the wording of the direc
tive to the executive committee.
Thereupon, upon motion duly made
and seconded, the following directive
to the executive committee was approved
unanimously:
The executive committee is directed, until otherwise di
rected by the Federal Open Market Committee, to arrange for
such transactions for the System open market account, either
in the open market or directly with the Treasury (including
purchases, sales, exchanges, replacement of maturing secu
rities,
and letting maturities run off without replacement),
as may be necessary, in the light of current and prospective
economic conditions and the general credit situation of the
country, with a view (a) to relating the supply of funds in
the market to the needs of commerce and business, (b) to
fostering growth and stability in the economy by maintaining
conditions in the money market that would encourage recovery
and avoid the development of unsustainable expansion, (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 purchased
from time to time for the temporary accommodation of the Treas
ury, shall not be increased or decreased by more than
$2,000,000,000.
The executive committee is further directed, until other
wise directed by the Federal Open Market Committee, to arrange
for the purchase direct from the Treasury for the account of
the Federal Reserve Bank of New York (which Bank shall have
discretion, in cases where it seems desirable, to issue par
ticipations to one or more Federal Reserve Banks) of such
3/2/55
-30
amounts of special short-term certificates of indebtedness
as may be necessary from time to time for the temporary ac
commodation of the Treasury, provided that the total amount
of such certificates held at any one time by the Federal Re
serve Banks shall not exceed in the aggregate $2,000,000,000.
Mr. Mills inquired what would be the practical interpretation of
the foregoing directive, that is,
whether it
fixed level of free reserves or whether it
latitude to made changes.
was a mandate to maintain a
gave the executive committee
Mr. Mills said that it
was very difficult to
foresee whether the projected level of reserves was such as to bring
further downward pressure on the market, or whether it
would be such as
to require further tightening.
Chairman Martin inquired what Mr. Mills would suggest.
His own
view, he said, was that the level of free reserves was too high, whereas
he gathered that Mr. Mills felt it
was too low, and the question was, how
could the Committee get in the middle?
Chairman Martin thought this was
a difficult matter to vote on and expressed the view that the Committee
should be in an equalizing position through the management of the account,
operating in the light of the policy directive and the discussion leading
up to its adoption.
Mr. Robertson commented that the directive contained broad lan
guage which would permit the executive committee to operate flexibly so
long as it
stayed within the general policy contemplated by the clause
providing that transactions should be in the light of current and prospec
tive economic conditions and the general credit situation of the country,
with a view to "fostering growth and stability in the economy by maintain
ing conditions in the money market that would encourage recovery and avoid
the development of unsustainable expansion."
3/2/55
-31
Mr. Sproul said that his interpretation would be that the general
directive called for the maintenance of about the level of reserves the
Committee recently had been maintaining.
It
was also expected that mem
ber bank borrowing would take care of more of the adjustments of individ
ual bank positions and of day-to-day fluctuations in reserves than had
been the case in the recent past.
The Committee would be expected to
watch closely to see that the situation did not develop to a point where
it
was more restrictive than desired; it
should watch interest rates, in
cluding rates in the capital market, to be certain that the effects of
policy did not become more restrictive than was indicated by the foregoing
discussion.
If the volume of reserves, the level of bank borrowing, or
the level of interest rates indicated the situation was becoming more
restrictive than the discussion indicated was desired, then the executive
committee should take action to relax.
Mr. Mills wondered whether there was a hidden restriction in this
kind of an operation.
He stated that as banks had been compelled to liq
uidate short-term Government securities, the reasons they might otherwise
have had temporarily to adjust their reserve positions by borrowing were
absent.
Considering the lack of liquidity among commercial banks and less
freedom of choice of going to the discount window as compared to selling
intermediate or long-term securities, Mr. Mills visualized the possibility
of rising concern among investors that could pose a real problem as bank
selling exerted downward pressure on the U. S. Government securities mar
ket.
If, under those conditions, banks had little choice but to come to
-32
3/2/55
the discount window, it
might indicate not a tightness of position, but
rather, a very stringent position.
Mr. Sproul said that if that situation came about or if
indicated that it
it was
was developing in capital markets, the situation should
be relieved through open market operations.
He agreed with Mr. Mills that
there was some hidden element of restriction in operations such as he had
described.
Banks were concerned with their liquidity as well as with
their reserve positions.
It would be necessary for the executive commit
tee to watch not only the reserve position of banks but also short-term
and long-term rates in evaluating this picture.
from Mr. Vardaman, Mr.
In response to a question
Sproul expressed the opinion that the unwillingness
of banks to borrow at the discount window tended to increase as the volume
of discounting rose.
However, to meet individual bank positions, Mr.
Sproul felt that there would and should be additional borrowing.
Mr. Vardaman said that this was probably true of city banks but
he questioned whether it applied to country banks.
He felt that banks in
smaller towns would hesitate to borrow unless their competitors nearby were
also borrowing.
He would not wish to delay open market operations until
the volume of discounts had risen substantially.
Mr. Earhart stated that he had mentioned the use of interest rates
as a guide to credit policy because it
what the results would be if
the market.
was not possible to know exactly
a given level of free reserves were put into
Rates on Treasury bills or other securities were something
that could be seen in
specific terms and something which could be definitely
3/2/55
-33
understood.
A Treasury bill rate closer to the discount rate would seem
to be desirable.
Treasury bill
Mr. Earhart questioned the desirability of having a
rate considerably below the discount rate with the resulting
tendency to concentrate reserve adjustments in
New York.
Mr. Earhart's
conception of the recent open market policy was one that would bring the
Treasury bill rate closer to the discount rate.
Open market policy should
continue to be geared somewhat to that concept which should prevent credit
from becoming tight.
Chairman Martin thought there was no way of specifying precisely
how operations should be carried out.
The multiple contraction of reserves
to which Mr. Mills had referred might have an effect and, if business did
not show any contraction,
the market might get tighter.
The educational
processes of all these instruments was going on steadily in all communities,
just as it was around this table.
Chairman Martin doubted whether the Com
mittee would have a recurrence of the developments of the Spring of 1953
because he did not think the same psychological situation existed.
So far
as the instructions to the executive committee and to the Manager of the
Account were concerned, he felt that they had to be in terms of general di
rectives such as had been issued in the past, with the understanding that
the Committee did not want "knots" to appear on the tight side, any more than
it wanted a loosening of the spigot to let reserves flow out on the easy
side.
Mr. Thomas suggested a third measure in addition to the projections
of free reserves and the course of money rates.
The projections, he said,
3/2/55
-34
are measures of what performance might be if
the seasonal pattern and to expectations.
actual performance of the economy.
developments conformed to
The question was, what is
the
The volume of deposits or of required
reserves might be considered to be the ultimate measure of performance
and test of the effect of system policy.
The actual factors affecting
reserves since December had conformed very closely to the pattern of pro
jections presented in the forepart of December, although there had been
wide variations from day to day.
Mr. Thomas commented that the volume of
free reserves could be expected to approach zero or there might be negative
free reserves during the next few days reflecting a large volume of bor
rowings at the Reserve Banks.
Borrowings would be large not only at city
banks but also at country banks.
Mr. Thomas felt that one test was whether
borrowing by banks from the Federal Reserve was causing them to extend
credit at a slower rate than the Committee desired, or whether they were
extending it
at a faster rate than the Committee felt was desirable.
If
banks were extending credit at a faster rate than the Committee thought
was desirable the discount rate might be increased to penalize borrowing;
if
they were contracting credit, or expanding at a slower rate than was de
sired, this might call for an increase in open market operations to relieve
the banks of the need for borrowing.
Chairman Martin said he thought the answer was that the Committee
could not prejudge operations beforehand.
rective, stating that he felt it
He came back to the general di
would govern a situation such as Mr.
Thomas described, permitting action on both sides depending upon what
seemed necessary at the time.
3/2/55
-35
In a further discussion, Mr. Mills said he thought the sentiment
of the Committee was quite clear, that the Open Market Committee was con
tent with a level of free reserves around the present level, and that
there had been no dissent to the projected rapid and serious contraction
in free reserves, perhaps to a point below the zero level.
Mr. Robertson did not think there was any intent in the Committee's
directive as to a specific amount of free reserves.
that would depend on what the economy needed.
This was something
There was nothing to bind
the Committee to following a free reserve position which would be out of
line with the needs of the economy.
Mr. Sproul concurred in the latter view, stating that the Commit
tee should avoid "kinks" in the market, and that it
shortly would find it
might well be that it
necessary to put some funds into the market if the
projections of free reserves were borne out.
Mr. Rouse commented that it
might well be that some additional
reserves would be called for later this month during the period of heavy
income tax collections when there might be a withdrawal of as much as
$850 million from the market for a temporary period.
Mr.
Johns inquired who would be making monetary policy if
a di
rective, worded in the general terms stated, were given to the executive
committee with the suggestion that the executive committee determine the
level of free reserves on the basis of its appraisal of the needs of the
economy.
3/2/55
-36
Chairman Martin stated that he had not intended to bring the
question up at this point but that he had contemplated suggesting later
in this meeting that the full Committee consider whether the executive
committee should be abolished.
While he did not wish to have a discus
sion of the question at this meeting, he suggested that it be placed on the
agenda for the next meeting of the Federal Open Market Committee.
A deci
sion to abolish the executive committee should not be made without full
consideration, Chairman Martin said, but his thought was that, in practical
terms, it
would mean that only three additional Presidents of the Reserve
Banks who were members of the full Committee and alternate
members of the
executive committee would need to come to Washington in order to have a
meeting of the full Committee, rather than of the executive committee, with
all members in attendance.
He felt that Mr.
Johns had raised an important
question that had come up in some degree at various times in the past and
while he had no question as to the propriety of the full Committee operat
ing through the executive committee,
it might be more effective if the
executive committee were abolished and if meetings of the full Committee
were to be held as frequently as necessary to carry forward Committee
operations.
Chairman Martin also said that he was very glad that Mr. Sproul
had suggested that all members of the full Committee be invited to attend
meetings of the executive committee.
However, he would like to have the
question whether the executive committee was needed at all considered care
fully and discussed at the next meeting of the full Committee.
3/2/55
-37
Chairman Martin then reverted to the discussion of the interpreta
tion of the directive from the full Committee to the executive committee,
inquiring whether there were further suggestions.
it
After brief discussion,
was understood that the executive committee would carry out the direc
tive as approved, in the light of the discussion at this meeting.
Mr. Riefler then made a statement with respect to the availability
of minutes and records of the Federal Open Market Committee,
a review of the list
stating that
of those who now have access to the Committee's
minutes and records, which by Committee direction are in the custody of
the Secretary of the Committee, was made a few months ago.
Mr. Riefler
said that under current practices copies of the minutes are sent to mem
bers and alternate members of the Federal Open Market Committee, Presidents
of the Reserve Banks who are not currently on the Committee, and officers
of the Committee.
In addition, certain members of the Board's staff in
the Office of the Secretary and in the Division of Research and Statistics
who are actively engaged in working on Committee matters have access to
the minutes and records of the Committee when necessary.
Mr. Riefler
stated that the practices described had been followed for many years and
that no change was suggested.
However, to insure that minutes and records
are available to all proper persons and not to others, he suggested that
it would be desirable that the Committee confirm and authorize the contin
uation of existing practices.
This would mean that the minutes and records
of the Federal Open Market Committee and its
made available to members,
executive committee could be
alternate members, and officers of the Committee,
-38
3/2/55
to Reserve Bank Presidents not currently on the Committee, and to such
extent and at such times as may be needed, to such other persons having
functions and responsibilities in connection with the work or the records
of the Committee (including auditing) as may from time to time be speci
fied by the Secretary of the Committee.
Chairman Martin stated that as he understood the suggestion it
would mean that the Committee was specifically authorizing the inclusion
of those involved in auditing the System open market account on the list
of those already having access to the records.
In response to a question
from the Chairman, Mr. Vest stated that in his opinion the suggestion
made by Mr. Riefler would be appropriate as a means of confirming the
existing practices and would assure that those actually working on open
market matters would, through the Secretary, have access to the minutes
and records which were in his custody.
Chairman Martin commented that while he felt there was no ques
tion but that the records should be made available to the persons working
on matters for the Committee to the extent that they needed them, it
might
not be desirable to place upon the Secretary the responsibility for pass
ing on who should have access to the records.
In this connection there
was a brief discussion of the practices followed by the Presidents of the
Reserve Banks in making available minutes or other open market records to
members of their staffs.
Some of the Presidents indicated that only they
and the associate economist from the Bank currently elected by the Commit
tee had access to any records other than those reflecting a completed
3/2/55
-39
action, while other Presidents indicated that they made the records
available to such members of their staffs as might be working on open
market matters at the request of the President at the time.
discussion it
During this
was suggested that the matter be reviewed further with the
understanding the actions of the Secretary prior to this meeting in mak
ing available records as outlined in his statement were confirmed, and
with the understanding that pending further discussion of the matter,
the Secretary was authorized to provide the minutes or other records to
those specifically mentioned by him as working on open market matters,
including persons auditing the System open market account.
This suggestion was approved unani
mously.
Secretary's note: Subsequently, during
this meeting Governor Robertson suggested
and it was agreed that the Committee ap
prove a procedure under which minutes and
records of the Committee would be made
available to officers of the Federal Open
Market Committee and, with the approval
of a member of the Federal Open Market
Committee or any other President of a Fed
eral Reserve Bank, with notice to the
Secretary, any other employee of the Board
of Governors or of a Federal Reserve Bank.
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 and bills
of exchange and bankers'
acceptances payable in foreign currencies,
to
the extent that such purchases and sales may be deemed to be necessary or
-40
3/2/55
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, as had been the case
for some years, accounts were now maintained with the Bank of Canada, the
Bank of England, and the Bank of France.
These were all small,
their total
book value approximating $21,000,
and with the exception of the Canadian
account were practically unused.
Mr.
Sproul recommended, however, that
they be continued as a means of maintaining an open account on the books
of each of these banks which might prove useful upon occasion.
It was agreed unanimously 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 Com
mittee a memorandum from Mr. Rouse and Mr. Leonard, Director of the Board's
Division of Bank Operations, with respect to the allocation of securities
in the System open market account among the several Federal Reserve Banks,
as it
would take place on April 1, 1955 under the formula approved in 1953.
The percentage allocations to each Federal Reserve Bank, under this formula,
would be based on the ratio of total assets of each Federal Reserve Bank
to the total assets of all Federal Reserve Banks,
computed on a daily
average basis during the 12 months ending February 28, 1955.
It was agreed unanimously that no
action should be taken at this time to
amend or terminate the procedure 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.
-41
3/2/55
Chairman Martin referred to the authority given to the Chairman
of the Committee at the meeting on March 1, 1951, and renewed in March of
each year since that time, 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 inquired whether any action should
be taken to modify or terminate it at this time.
It was agreed unanimously that
no action should be taken at this
time to modify or terminate this
authority.
There was presented a list of those authorized at the meeting of
the Committee in March 1954 to receive the weekly open market report pre
pared at the Federal Reserve Bank of New York.
In this connection, Mr.
Riefler suggested that the existing authorization be modified to include
not only the Secretary, the Economist,
and the Associate Economists of
the Federal Open Market Committee but to permit distribution of the report
to such other members of the staffs of the Board of Governors or the Fed
eral Reserve Banks as may be actively engaged in working on Federal Open
Market Committee matters.
Unanimous approval was given to
distribution of the weekly report of
open market operations prepared at the
Federal Reserve Bank of New York as
follows:
1.
2.
3.
4.
5.
The members of the Board of Governors.
The Presidents of the 12 Federal Reserve Banks.
Officers of the Federal Open Market Committee.
The Secretary of the Treasury.
The Under Secretary of the Treasury.
3/2/55
-42
6.
7.
The Under Secretary of the Treasury for Monetary Affairs.
The Assistant Secretary of the Treasury working on debt
management problems.
8.
The Fiscal Assistant Secretary of the Treasury.
9.
The Chief of the Division of Bank Operations of the
Board of Governors.
The officer in charge of research at each of the Federal
Reserve Banks which is not represented by its President
on the Federal Open Market Committee.
The alternate member of the Federal Open Market Committee
from the Federal Reserve Bank of New York; the Assistant
Vice President of the Federal Reserve Bank of New York
working under the Manager of the System Account; the
Managers of the Securities Department of the New York
Bank; the Vice President in Charge, and the Manager, of
the Research Department of the New York Bank; and the con
fidential files of the New York Bank as agent for the Fed
eral Open Market Committee.
With the approval of a member of the Federal Open Market
Committee or any other President of a Federal Reserve Bank,
with notice to the Secretary, any other employee of the
Board of Governors or of a Federal Reserve Bank.
10.
11.
12.
Secretary's note: The foregoing list
re
flects the addition of item 12, in accordance
with the understanding reached later during
this meeting as to making minutes and rec
ords of the Committee available to individ
uals working on open market matters.
The meeting then recessed for luncheon and reconvened at 1:30 p.m.
with the same attendance as at the close of the morning session except that
Messrs. Williams and Wheeler were not present.
Mr. Robertson referred to the discussion at the morning session of
the authorization for making minutes and other records of the Federal Open
Market Committee available, stating that he would suggest that the Committee
approve a procedure whereby such records would be made available to officers
of the Federal Open Market Committee and, with the approval of a member of
3/2/55
-43
the Federal Open Market Committee or any other President of a Federal Re
serve Bank, with notice to the Secretary, any other employee of the Board
of Governors or a Federal Reserve Bank.
This would, of course, be in
addition to making such records available to Committee members and their
alternates and to other Federal Reserve Bank Presidents.
also suggested that if
Mr. Robertson
this authorization regarding minutes and other
records of the Committee were approved,
change be made in the list
an appropriate corresponding
of those authorized to receive the weekly open
market report prepared at the Federal Reserve Bank of New York.
In response to a question from Mr. Vardaman, it was stated and
agreed that the procedure suggested by Mr. Robertson would not authorize
the making available of any confidential open market records to the Chair
man or other directors of a Federal Reserve Bank.
Mr. Robertson's suggestion was
approved unanimously.
Mr. Riefler stated that a related question involved the practice
of distributing the special reports of open market operations prepared for
meetings of the executive committee.
In the past, he stated, these re
ports had been furnished to members of the executive committee and to all
members of the Board of Governors,
as well as to staff members actively
working on open market matters, and he suggested that in the future they also
be sent to all Presidents of the Federal Reserve Banks.
This suggestion was approved
unanimously.
-44
3/2/55
At this point all of the members of the staff withdrew from the
meeting with the exception of Mr. Riefler, Mr. Thomas, Mr. Rouse, and Mr.
Sherman.
At Chairman Martin's request Mr. Robertson made a statement with
respect to repurchase agreements with nonbank dealers in United States
Government securities.
Mr. Robertson's statement was substantially as
follows:
Observation of our use in recent months of repurchase
agreements with dealers in Government securities leads me
to believe that it is a device that can be used effectively
in our work.
Consequently--and notwithstanding my doubts
about the legality of this instrument--I propose that the
Committee continue to use repurchase agreements where con
sidered advisable, not as a supplementary technique in the
regulation of credit, but admittedly for the purpose of
enabling dealers in Governments to maintain broad and ready
markets.
It would be appropriate to utilize and police this pro
cedure in a manner similar to rediscount operations--an
open window for carrying dealers at rates preferably above
but in no event below the discount rate--in order to assist
them in sustaining a closer and more continuous market.
Dealers should feel assurance that the facility is always
available to them within reasonable limits (perhaps dollar
or percentage figures), as the discount window is open to
member banks. Needless to say, the operation of a dealer's
window of this nature would be subject to such policing as
may be necessary to avoid its abuse by any dealer, or any
use that unduly interferes with our general credit policies.
There followed a general discussion of Mr. Robertson's proposal,
including consideration of the manner in which rates on repurchase agree
ments would be fixed in relation to the discount rate, the purpose of
repurchase agreements in terms of facilitating open market operations and
in terms of helping to maintain a market for Government securities
ith
3/2/55
-45
greater depth, breadth, and resiliency, and in terms of the possible
value of a modified procedure with respect to repurchase agreements along
the lines of Mr. Robertson's suggestion.
In the course of the discussion,
reference also was made to the procedure by which a dollar or other limit
might be placed on the extent to which each individual dealer might utilize
the repurchase facility under an "open window" arrangement, and question
was raised as to the way in which a situation might be dealt with if the
volume of Federal Reserve credit extended at the dealers' initiative under
the proposed repurchase arrangement were to become so great as to conflict
with open market policy.
Mr. Williams entered the room during the foregoing discussion.
At the conclusion of the discussion, Chairman Martin stated that
he felt Mr. Robertson had made an interesting suggestion but that he did
not think it could be acted upon at this meeting. He suggested, therefore,
that Mr. Robertson's suggestion be made available to all of the members of
the Committee and other Reserve Bank Presidents with a view to studying it
between now and the next meeting of the full Committee, at which time it
be placed on the agenda for further consideration. Chairman Martin also
suggested that, in the meantime, the existing authorization for repurchase
agreements be continued in the form approved at the meeting of the full Com
mittee on June 23, 1954, except that the words "short-term" be deleted from
provision "(c)" of the existing authorization, pursuant to the suggestion
made at the meeting of the executive committee on February 8, 1955.
3/2/55
-46
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the
authorization for repurchase agreements
with nonbank dealers in United States
Government securities was approved in the
following form:
In lieu of the authority granted with respect to repur
chase agreements at the meeting of the Federal Open Market
Committee on March 4, 1953, the executive committee is hereby
authorized to direct the Federal Reserve Banks, or any of
them, to enter into repurchase agreements with nonbank dealers
in United States Government securities at such times, in such
amounts, and at such rates (or rate ranges) as the executive
committee shall prescribe, subject to the following conditions:
1. Such agreements
(a)
In no event shall be at a rate below which
ever is the lower of (1) the discount rate
of the purchasing Federal Reserve Bank on
eligible commercial paper, or (2) the
average issuing rate on the most recent
issue of three-month Treasury bills;
(b) Shall be for periods of not to exceed 15
calendar days;
(c) Shall cover only Government securities matur
ing within 15 months; and
(d) Shall be used with care and discrimination as
a means of providing the money market with
sufficient Federal Reserve funds to avoid un
due strain on a day-to-day basis.
2. Reports of such transactions shall be made to the Manager
of the System Open Market Account to be included in the
weekly report of open market operations which is sent to
the members of the Federal Open Market Committee.
3.
In the event Government securities covered by any such
agreement are not repurchased by the dealer pursuant
to the agreement or a renewal thereof, the securities
thus acquired by a Federal Reserve Bank shall be sold
in the market or transferred to the System Open Market
Account.
In connection with the continuation of
the existing authorization for repurchase
agreements, Mr. Robertson stated that his
agreement with the existing procedure was
with the understanding that consideration
would be given at the next meeting of the
full Committee to his suggestion for a
change in the authorization.
3/2/55
-47
Mr. Earhart stated that he had voted to continue the authorization
for repurchase agreements but that he hoped that under present conditions
there would not be occasion to set the rate for such agreements below the
Federal Reserve Bank discount rate.
Mr. Rouse stated that this was also the attitude of the Manager
of the System Open Market Account.
Chairman Martin stated that this was a pertinent comment which
should be recorded in the minutes of this meeting.
Mr. Vest entered the room at this point.
Chairman Martin referred to the action of the executive committee
on January 11, 1955 in recommending to the full Committee that the full
Committee authorize the executive committee to acquire bankers' acceptances
when consistent with the general credit policy of the Federal Open Market
Committee; that it discontinue the establishing of a minimum buying rate
on bankers' acceptances; and that it authorize the use of repurchase agree
ments covering bankers' acceptances.
He stated that Mr. Robertson had not
voted to approve this recommendation of the executive committee and suggested,
therefore, that Mr. Robertson open the discussion of the question.
Mr. Robertson then made a statement substantially as follows:
During the past year a number of questions have arisen re
garding Open Market Committee policy and practice in this field.
The specific proposal before us today is that (1) we take af
firmative action to acquire acceptances when consistent with
our general credit policy, and that (2) we discontinue the
minimum buying rate and the effective rate on acceptances.
The suggestion that we take the initiative in purchasing
some $20 to $30 million of acceptances was advanced early last
year, the purpose being to "free demand generally from administered
3/2/55
rate constriction and to make market rates responsive to changes
in the demand for and supply of acceptances". Although the un
derlying objective--to support and encourage the American ac
ceptance market--is the same today, I feel that a more effec
tive and acceptable procedure may be available.
Since 1952 the Open Market Committee has maintained a
minimum buying rate for acceptances and the "effective rate"
has been specified by the Manager of the Account and has been
published regularly. Apparently there is some uncertainty as
to the precise status and functions of the effective rate.
During the heyday of acceptances, some thirty years ago, the Fed
eral Reserve System supported the acceptance market by standing
ready to buy acceptances virtually without limit at the Reserve
Banks' current buying rates, and dealers sold acceptances to the
Reserve Banks when they needed funds to tide them over periods
of temporary stringency. It was thought at that time that the
acceptance market was strengthened by thus "back-stopping" deal
ers and others who held portfolios of bills.
That arrangement seemingly worked satisfactorily and it may
be advisable for us to act in accordance with a policy which has
been tested by experience. On the other hand, if we are con
vinced that the objective of building up the acceptance market
as an increasingly important element of the international money
market justifies stronger measures, we might wish to maintain a
posted rate for acceptances that would establish the market rather
than back-stopping it. In other words, we could maintain a posted
rate that would give an "edge" to the use of acceptances, rather
than bank loans.
There is no pressing need for immediate action on this sub
ject. It is my impression that the relationship between the ac
ceptance market and our open market policies has not been worked
out and clarified for many years, and calls for clarification.
I therefore present for consideration the advisability of appoint
ing a subcommittee to refresh our recollection of the place of
the Reserve System in the acceptance market in the past, and the
extent to which changed conditions call for a changed relationship.
However, if this Committee concludes that the matter does not
merit a detailed objective study, it is my suggestion that our ef
fective rate on bank acceptances should resume the status of the
rates formerly maintained by the Reserve Banks--namely, to support
the acceptance market and thereby to encourage increased use of
acceptances by assuring dealers and others active in the market
that the Reserve System stands ready to acquire acceptances sub
stantially without limit, at a rate slightly above the "normal"
market rate at the particular time, whenever the supply of bank
acceptances outruns the demand for them.
-49
3/2/55
In other words,
in order to advance our objective of
strengthening the acceptance market, our published rate
should reflect an open window comparable to the discount
window--that is to say, an acceptance window that is pre
pared to absorb all offerings at the posted rate unless it
appears that (1) the facility is being misused, or (2) the
demands placed upon it are so great that they threaten the
effectiveness of System monetary policy to an extent that
cannot effectively or wisely be offset through operations
in the open market. By this means, we can give solid as
surance of the System's active support of the acceptance
market without adversely affecting other phases of our mon
etary and credit policy.
Chairman Martin stated that, on behalf of the majority view in the
executive committee,
there were a variety of objectives contemplated by
the committee's recommendation.
His thought was that some modest partic
ipation by the Federal Reserve in the market for bankers'
acceptances,
which he conceived of as being the counterpart in the international field
of the Treasury bill
in the domestic field, would be quite desirable.
The
Federal Reserve System should avoid any "finagling" in the market, he said,
but should participate in a very modest way to show the interest of the
central banking organization in this market, which was expanding and which
might become one of the important means for financing international trade
transactions.
Mr.
Sproul said that, as another member of the executive committee
which had made the recommendation to the full Committee,
the statement made by Chairman Martin.
in the bankers'
he concurred in
He felt this kind of participation
acceptance market was preferable to maintaining an open
window for any sector of the market such as Mr. Robertson had suggested,
since such an open window meant that the seller would have an automatic
3/2/55
-50
call on Federal Reserve credit even though the Reserve Bank was policing
the operation.
He felt that the recommendation of the executive committee
for modest participation in the acceptance market would encourage the use
of acceptances but should not be considered as a means of providing Re
serve Bank credit automatically through an open window.
Mr. Williams stated that Chairman Martin had expressed his views
in approving the recommendation made by the executive committee to the
full Committee.
to him that if
trade,
it
His only additional point, he said, was that it
seemed
adoption of this resolution served to promote international
would also be a step in promoting growth and stability in the
domestic economy.
Mr. Leach stated that as a member of the full Committee he would
go along with the recommendation of the executive committee but without
much enthusiasm and without expecting any marked results.
mittee would be making a mistake if
it
He felt the Com
expected too much in the way of re
sults but on the other hand, there was nothing to lose by the action and,
since it
offered a chance of helping the acceptance market, it
was worth
trying.
Mr. Earhart said that he held much the same view as that expressed
by Mr. Leach.
While he did not think the proposed action of the Committee
would stimulate the use of bankers'
acceptances particularly, he had no
objection to following the recommendation.
Chairman Martin referred to Mr. Robertson's suggestion for a sub
committee to study the matter.
He felt that while there could be a further
3/2/55
study it
-51
would be preferable if
the full Committee approved the recommenda
tion of the executive committee, recording any dissent to that recommenda
tion which any member of the Committee wished to place in the record.
Mr.
Riefler stated that Mr. Rouse had suggested that, since the
volume of acceptances acquired under the proposed resolution would be small,
they be purchased for the account of an individual Reserve Bank, in order
to save the bookkeeping that would be required if they were acquired for
the System account with the necessary resulting allocation among the twelve
individual Federal Reserve Banks.
Mr. Szymczak suggested that purchases be for the accounts of in
dividual Federal Reserve Banks so as to avoid the necessity for allocation
among the several banks of the relatively small figures of acceptances con
templated, and that in the event dealers failed to take up any acceptances
under repurchase agreement, those also be held by an individual bank if
they were not sold in the market.
There was then presented a draft of directive which Mr. Vest had
prepared which was intended to carry out the recommendation of the execu
tive committee, if
approved by the full Committee.
There was considerable
discussion of the wording of this draft, during which Chairman Martin sug
gested that at this meeting, the full Committee approve in principle the
recommendation of the executive committee,
with the understanding that a
revised draft of resolution to carry out the recommendation would be sub
mitted to all members of the Committee and other Reserve Bank Presidents,
-52
3/2/55
that the executive committee would consider the draft at its next meeting
in the light of any suggestions that might be made, and that the resolu
tion would become effective when approved as to form by the executive com
mittee.
Under Chairman Martin's suggestion, the full Committee would now
approve in principle the recommendation that it
committee to acquire bankers'
authorize the executive
acceptances when consistent with the general
credit policy of the Federal Open Market Committee; that it
the establishing of a minimum buying rate on bankers'
that it
discontinue
acceptances; and
authorize the use of repurchase agreements covering bankers' ac
ceptances.
Upon motion duly made and seconded,
this suggestion was approved.
On this action, Mr. Robertson voted
"no" on the ground that there appeared to
be no adequate reason for the Reserve
Banks' seeking actively to buy acceptances
for their own accounts. He was inclined
to believe that efforts in that direction
were likely to be ineffectual or even in
jurious when market demand for acceptances
is strong; and when supply is heavy as
compared with private demand, the objec
tive of supporting and encouraging the ac
ceptance market could be achieved more ef
fectively through the traditional policy
of standing ready to purchase all seasoned
prime acceptances offered to Reserve Banks
at their published rates.
Mr. Vest withdrew from the meeting at this point.
Chairman Martin then brought up for review three statements of con
tinuing operating policies of the Committee listed on the agenda for this
meeting as 13.a.,
13.b.,
and 13.c.
These statements, which were last
3/2/55
-53-
reviewed and continued without change at the meeting of the Committee on
March 3, 1954, were as follows:
13.a. Decision that it is not now the policy of the Committee
to support any pattern of prices and yields in the Government
securities market, and intervention in the Government securities
market is solely to effectuate the objectives of monetary and
credit policy (including correction of disorderly markets).
13.b. Decision 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 securi
ties, or (3) outstanding issues of comparable maturity to those
being offered for exchange; and that these policies be followed
until such time as they may be superseded or modified by further
action of the Federal Open Market Committee.
13.c. Decision that transactions for the System account in
the open market shall be entered into solely for the purpose of
providing or absorbing reserves (except in the correction of
disorderly markets), and shall not include offsetting purchases
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 inquiry as to whether there was
any suggestion for change in or termination of the first
of these three
statements of operating policy, Mr. Robertson said that while he intended
later on to propose a revision which would incorporate 13.a.,
13.b.,
13.c. in one statement, he had no suggestion for change in the first
the three decisions.
Thereupon, it was agreed unani
mously that the first of the three
decisions listed above should be con
tinued without change.
and
of
3/2/55
-54
Chairman Martin then referred to the statement set forth as 13.b.
above,
stating that at the meeting of the executive committee on February 8,
1955, it
was suggested that the Committee clarify whether the foregoing
decision was intended to apply to repurchase agreements.
It was his sug
gestion that the limitations of the decision should not apply in the case
of repurchase agreements,
and he proposed that, to clarify this point,
there be inserted in the decision the words "other than repurchase agree
ments" so that the first
clause would read that it
was the decision of the
Committee that "operations for the System account in the open market, other
than repurchase agreements, be confined to short-term securities..."
Mr. Sproul stated that although he was going to vote "NO" on the
continuance of this statement of operating policy, he was not going to try
to reargue the question at this time since he had no reason to believe he
would be more successful today than he had been in past meetings when the
subject had been under discussion.
He said that he had been encouraged,
however, by the public statement (contained in Chairman Martin's replies
to questions submitted by the Subcommittee on Economic Stabilization of the
Joint Committee on the Economic Report in connection with subcommittee
hearings on December 7, 1954) that these operating policies are experimental,
and by the warning this should convey to the market that there is no promise,
expressed or implied, that these policies will always be followed.
Mr.
Sproul said that a continuing period of intensive study of how our present
methods of operation are working and how they might be improved seemed to
him to be indicated.
mended it
He was following that course, he said, and he recom
to other members of the Committee, lest they lapse into thinking
3/2/55
-55
that these questions have been settled for all time.
Mr. Robertson stated that the revision he intended to suggest
in these statements would result in a change in the decision listed as
item 13.b., and Chairman Martin requested that he present his proposed
revision at this time in order that the Committee might have an opportu
nity to consider it before passing upon the continuation of the decision
under discussion.
Mr. Robertson then made a statement substantially as follows:
At the September meeting of the Open Market Committee, Mr.
Sproul indicated his intention to call up for discussion the
actions taken in December 1953 and March 1954 providing that
System Open Market account transactions should be entered into
"solely for the purpose of providing or absorbing reserves
(except in the correction of disorderly markets)".
Mr. Sproul
said he thought this reflected much too narrow a view of cen
tral banking and was misleading to the public, and that he did
not believe open market operations could be entered into with
out concern for the costs and availability of credit.
I was struck at the time with the thought that, although
there are some real differences of opinion among us as to how
our operations should be conducted, there are also some ap
parent differences which must arise because the words and
phrases we use mean one thing to one person and something else
to another.
It was I who offered the motion in December 1953 to which
Mr. Sproul objects. But I do not myself believe that open
market operations should or can be entered into without con
cern for the cost and availability of credit. I certainly did
not intend the December 1953 action to mean that we do not
have such concern. I doubt if anyone who voted for the motion
had such an intent. In March 1953 the Committee unanimously
recognized that putting reserves into the market or withdraw
ing them from the market inevitably would affect prices and
yields on government securities, which is another way of say
ing that such actions inevitably affect the cost and availa
of credit.
bility
There is a well-known legal principle, which happens to
be based on sound sense, that a person--even a committee--is
3/2/55
-56-
presumed to intend the necessary consequences of his acts.
An adult offender will not be permitted to say that he re
leased the brakes of a car parked on a hill just for the
sake of releasing them, and had no intention that the car
should roll down the hill and smash into another car parked
at the bottom. By the same token, this committee knows
certain of the effects of supplying and withdrawing bank re
serves, the chief of which is the effect on the cost and
availability of credit. Surely no one, even among our crit
ics, would charge that we turn on the motor, increase its
speed, or turn it off, merely because we want to listen to
a quiet hum, a loud hum, or silence, at the particular
moment. The motor is switched on to make the machinery do
its work.
The purpose of the motion of December 1953 was to re
move from the executive committee the authority to make
"swaps", leaving otherwise unchanged the substance of the
previously adopted operating directives which grew out of
the ad hoc committee's report. This was brought out in our
discussion at the December 1953 meeting, when our action was
described as being in accord with the March 1953 decision to
intervene in the government securities market "solely to ef
fectuate the objectives of monetary and credit policy". The
question whether to engage in "swap" transactions at any
particular time was considered sufficiently important to
warrant a decision by the full Open Market Committee. That
was the intent of the motion. If its language was such that
it seems to some people to be an effort to state a new philos
ophy of central banking in capsule form and to be much nar
rower than the phrase "to effectuate the objectives of mone
tary and credit policy", then the language had best be changed
to avoid such misinterpretation.
In the hope that something can be done to clarify issues
and to avoid disagreement resulting from choice of words
rather than matters of substance, I have tried my hand at
drafting the following substitute motion to supersede the
resolutions adopted in March, September, and December, 1953:
I move that the Federal Open Market Committee con
tinue the following policies and practices until such
time as they may be superseded or modified:
It is not now the policy of the Committee to
support any specific pattern of prices and yields
in the Government securities market, and trans
actions in the open market shall be undertaken
3/2/55
-57
solely for the purpose of influencing the volume
of bank reserves and thereby the costs and avail
ability of credit, in order to promote economic
growth and stability (including correction of dis
orderly markets).
Transactions for the System account in the
open market shall be confined (except in correc
tion of disorderly markets) to short-term securi
ties, preferably bills, and shall not include
offsetting purchases and sales of securities of
different maturities (i.e., "swaps").
During periods of Treasury financing there
shall be no purchases of (1) maturing issues for
which an exchange is being offered, (2) when
issued securities, or (3) outstanding issues of
comparable maturity to those being offered for
exchange.
I wish to reiterate that, in my opinion, the question
whether our open-market activities should be confined to the
short end of the market can never be answered, for all time,
as a matter of unchangeable principle. We all must recognize
that there are advantages to trading in Government bonds on
occasion. There are also advantages to minimizing our domina
tion of the market. I believe that the latter outweigh the
former as a basis for normal operations under present condi
tions. At no time have we restricted the authority of the
executive committee and the account Manager to enter into
transactions with respect to securities of any maturity, in
the event of a disorderly market. The point of this motion,
like its predecessors, is simply that transactions in other
than short-term securities, except in emergencies, should re
ceive the specific attention of the full Committee.
It is also hardly necessary to point out that the effect
of our policies is a matter of continued study by the Commit
tee and staff, and I am sure no member of the Committee would
hesitate to modify or reverse any policy if conditions changed
significantly or if future developments demonstrated that our
information, reasoning, or judgment had been faulty or incom
plete and had led to adoption of policies that did not work
out satisfactorily.
Chairman Martin stated that while Mr. Robertson's proposal impressed
him favorably, this was the first opportunity that he had had to know of the
3/2/55
-58
suggestion, and he expressed the view that it would not be desirable to
act upon the proposal without giving all members of the Committee an op
portunity to study the suggested phraseology.
Mr. Sproul stated that while he was inclined to think that Mr.
Robertson's suggestion took care of his objections to the third operating
policy to be considered, set forth above as 13.c., he would still wish to
vote "NO" on that portion of the proposal which related to the decision
that operations for the System account in the open market be confined to
short-term securities, etc. i.e., 13.b.
Chairman Martin suggested that under the circumstances the Commit
tee give consideration at this meeting to the second and third statements
of operating decisions in the form set forth above as 13.b. and 13.c.,
with the understanding that Mr. Robertson's statement and proposed revi
sion which would consolidate the three continuing operating policies be
sent to all members of the Committee for study and consideration at the
next meeting of the full Committee.
The Chairman also suggested that in
considering 13.b., the Committee action be based upon his earlier proposal
that the statement be revised to include a reference to repurchase agree
ments,
so that it
would read as follows:
Agreed, that operations for the System account in the open market,
other than repurchase agreements, be confined to short-term securi
ties (except in the correction of disorderly markets) and that
during a period of Treasury financing there be no purchases of (1)
maturing issues for which an exchange is being offered, (2) when
issued securities, or (3) outstanding issues of comparable maturity
to those being offered for exchange; and that these policies be
followed until such time as they may be superseded or modified by
further action of the Federal Open Market Committee.
3/2/55
-59
It was agreed that this statement
should be continued in the revised
form set forth above, Mr. Sproul vot
ing "NO" for the reasons stated.
Chairman Martin then read the third statement of operating policy,
listed as 13.c. above.
It was agreed that no action
should be taken at this time to amend
or terminate this statement of operat
ing policy. On this action, Mr. Sproul
voted "NO" for reasons previously in
dicated.
Mr. Leach stated that he had voted to approve the continuance of
the three operating policies set forth above.
However, he recalled that
at the time the Committee appeared before Senator Flanders'
Subcommittee
of the Joint Committee on the Economic Report on December 7, 1954, Chairman
Martin had expressed the view that there was greater depth, breadth, and
resiliency in the Government securities market than there was at the begin
ing of 1953,
in which year these operating policies were first adopted,
whereas, Mr.
Sproul, as Vice Chairman of the Committee, had expressed a
contrary view.
Mr. Leach felt that it
bers of the Committee if
would be helpful to the other mem
a study were made to show just what changes had
occurred in the Government securities market since these operating policies
were adopted.
Chairman Martin stated that he felt it
would be very desirable to
have such a study made and that Mr. Leach's suggestion would be given con
sideration.
Messrs. Rouse and Thomas withdrew from the meeting at this point.
The following pages (60-92) contain the minutes
of that part of the meeting of the Federal Open Market
Committee on March 2, 1955, which, except for the Secre
tariat, was held in executive session.
meeting started at 2:40 p.m.
This part of the
Cite this document
Federal Reserve (1955, March 1). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19550302
@misc{wtfs_fomc_minutes_19550302,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1955},
month = {Mar},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19550302},
note = {Retrieved via When the Fed Speaks corpus}
}