FOMC Minutes

A meeting of the Federal Open Market Committee was held in the

offices of the Board of Governors of the Federal Reserve System in

Washington on Tuesday, October 4, 1955, at 10:00 a.m.

PRESENT:

Mr. Sproul, Vice Chairman

Mr. Balderston

Mr. Earhart

Mr. Fulton

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Irons

Leach

Mills

Robertson

Shepardson

Szymczak

Messrs. Erickson, C. S. Young, Johns, and Powell,

Alternate Members of the Federal Open Market

Committee

Messrs. Williams, Bryan, and Leedy, Presidents

of the Federal Reserve Banks of Philadelphia,

Atlanta, and Kansas City, respectively.

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, and R. A. Young, Associate

Economists

Mr. Rouse, Manager, System Open Market Account

Mr. Sherman, Assistant Secretary, Board of

Governors

Mr. Koch, Assistant Director, Division of

Research and Statistics, Board of Governors

Mr. Miller, Chief, Government Finance Section,

Division of Research and Statistics, Board

of Governors

Mr. Gaines, Securities Department, Federal

Reserve Bank of New York

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

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meetings of the Federal Open Market Com

mittee held on September 14 and 26, 1955,

were approved.

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

Committee copies of a report prepared at the Federal Reserve Bank of

New York covering open market operations during the period June 22

September 28, 1955, inclusive, and at this meeting there was distributed

a supplementary report covering commitments executed September 29

October 3, 1955.

Copies of both reports have been placed in the files of

the Federal Open Market Committee.

Upon motion duly made and seconded,

and by unanimous vote, the open market

transactions during the period since

September 13, 1955 were approved, rati

fied, and confirmed.

Members of the Board's staff from the Divisions of Research and

Statistics and International Finance then entered the room for the pur

pose of presenting an economic review illustrated by chart slides.

Following the meeting, a copy of the text of the review was sent to each

member of the Committee.

The review stated that by late September the economic situation

had advanced to a point where financial developments had become a more

critical factor in the shaping of business trends.

Consumer credit had

been rising rapidly to new heights and so also had mortgage credit, sup

porting very active markets for autos and housing.

The buoyancy in stock

prices during late September had been especially striking, a buoyancy

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10/4/55

that in

recent months appears to have been mainly fostered by ebullient

confidence rather than speculation on the basis of credit expansion, for

the growth in stock market credit tapered off following the second in

crease in margin requirements in April and by summer had virtually ceased.

It was at this stage of economic development that announcement of Presi

dent Eisenhower's illness came as a shock to confidence.

While it is too

early to assess the economic significance of that announcement, the

immediate response was a sharp set back in stock prices accompanied by a

sharp rise in trading.

Events in the stock market often foreshadow

changes in business activity and suggest at least the possibility of more

widespread hesitation and also of some postponements in business and con

sumer spending.

After commenting in some detail on various elements of the economy,

the review concluded with a statement regarding projected reserve needs

for the balance of 1955.

This projection assumed that seasonal and normal

long-run growth in demand deposits during the remainder of this year would

be about $4-1/4 billion and that currency in

circulation would show the

usual seasonal increase of about three-quarters of a billion.

The projec

tion indicated a need for a little over $1 billion of Federal Reserve

credit for the rest of this year-about $500 million in October and most of

the remainder in late November and December when large pre-holiday needs

for credit and money were expected.

The review suggested that the Federal

Reserve could supply the reserves needed by outright Treasury bill purehases

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or repurchase agreements, or it could refrain from open market action in

which case member banks would need to increase their borrowing.

bination of these means could, of course, be used.

in the economic outlook, it

A com

Despite uncertainties

was suggested that the situation still

appeared to be one in which demands were expanding rapidly while supplies

of industrial products were coming under capacity restraints.

In this

situation, a strong case could be made for limiting the volume of re

serves made available through open market operations but such a policy

would need to be pursued with caution in order to avoid the sudden

emergence of undue restrictive tension in

credit markets.

Under such a

program, the discount rate level might need to be raised further at a

relatively early date.

Critical qualitative scrutiny of consumer and

mortgage credits should be continued if not strengthened.

Finally, the

System would need to be alert--perhaps more than in most other periodsto possible shifts in the general economic situation which might call

for modification of current monetary and credit policy.

Mr. Sproul inquired of Mr. Young as to what elements in the

economic situation, aside from mortgage credit and consumer credit,

might be considered to be unsatisfactory.

Mr. Young said that he would add the agricultural situation to

the list of elements which were not satisfactory.

However, taking the

economic situation as a whole, it was very strong and the outlook was

very good.

The existing situation was just what would be desirable if

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it did not present a danger of spiraling prices based on levels of demand

running ahead of supply.

Mr. Thomas felt it important that, as brought out in the economic

review, there had been great expansion in the economy thus far and in

dustry was now approaching capacity levels.

Further expansion in demand

could not continue without putting upward pressures on prices,

In response to a question from Mr. Johns as to whether the re

tardation in the rate of expansion reported prior to the President's

illness was attributable solely to limitations of capacity of industry,

Mr. Young said that while there were other elements, he felt that the

approach of output to relatively full capacity was the most important

factor.

The members of the staff who had entered the room for the economic

review then withdrew from the meeting.

Mr.

Sproul called for comments regarding open market operations to

be pursued in the light of the review of economic and credit conditions.

Mr. Balderston stated that until after the payment date for the

current Treasury financing (October 11) he would attempt to maintain the

degree of restraint that existed in the market last week.

After October

11, however, he would favor still greater restraint such as would be re

flected by a bill rate of 2.30 to 2.40 and negative free reserves of

perhaps $500 million, more or less.

Despite the psychological shock to

the business community caused by the illness of our Chief Executive,

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Mr. Balderston felt that the current and prospective momentum of recov

ery must be appraised carefully by the Committee.

Quality of credits

being granted must be appraised; the approach of production to capacity

in the steel, construction, and other industries must be observed; and

the resultant danger of price and inventory increases must be watched

carefully.

Mr. Balderston's concern was that the existing business

momentum was being accompanied by such changes in wages and labor costs

and in raw materials costs as would bring about price rises detrimental

to consumers generally and especially to farmers.

He felt that the

price increases now evident and in prospect would be conducive to in

ventory growth that would ultimately cause trouble to the economy.

Therefore, Mr. Balderston felt that in addition to greater restraint

exercised through open market operations after October 11, an increase

in the discount rate to 2-1/2 per cent prior to mid-November would be

called for.

This date was mentioned, he said, so that a condition of

relative stability might be established prior to the Treasury financing

to take place in December.

Mr. Szymczak thought that the present situation was one which

called for continuing the present policy of tightness without allowing

the tightness to become so severe as to be a cause, or to be cited as a

cause, of a down turn in the economy, if such a down turn developed.

did not think that negative free reserves of as much as $500 million

would be desirable and was inclined more to a level of around $300 to

He

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$350 million. He would also allow member banks to come to the Reserve

Banks with discounts for additional funds that might be needed, but at

this time he could not say whether he would favor a discount rate change

later on since the need for such an increase at a later date could not

be appraised at the present time. Mr. Szymczak also noted that the

Treasury now had its books open. Developing trends should be observed

over the next two or three weeks, he said, and in the meantime he would

favor continuing the general policy of tightness discussed at meetings

of the Open Market Committee during the past month although he would not

have quite as much tightness as before the illness of the President.

Mr. Erickson thought that open market policy had been handled

very well recently.

He would not go as far as Mr. Balderston in re

straint during the present period.

The President's illness had caused

some weakening of confidence in the general economic picture and, while

he would keep pressure on and would let it increase slightly over the

next few weeks,

he would not move to tighten the situation sharply.

He

hoped that the discount window would be used more and he would not raise

the discount rate at the present time.

Mr. Erickson said that he would

favor taking another look at the situation toward the end of this month

to see what the effect of developments had been during the month of

October.

He also noted that a very distinct tightening of mortgage money

had become apparent in New England recently.

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Mr. Irons said that he generally agreed with the position taken

by the staff in its review.

The economic situation is very strong.

seemed to him that this reflected the consequences of a full

full employment situation.

It

production,

The economy was moving nearer capacity in

many respects, and as this point approached less efficient means of pro

duction would be utilized and prices would tend to rise.

While it could

not be known what uncertainties might arise as a result of the President's

illness, it

seemed to Mr. Irons that the Committee should continue to

exert pressure on bank reserves, the bill rate should be in better rela

tion to the discount rate, and if he were to use a figure of negative

free reserves he would say something in the range of $300 to $350 mil

lion rather than any substantially higher amount.

He would not be

prepared at present to recommend an increase in the discount rate and

would wait for two or three weeks to consider such a change.

In carrying

out this program, he would resolve doubts on the side of restrictiveness

rather than ease.

He also felt that during the next two to four weeks

the day-to-day situation might be such as to make it desirable to allow

the management of the account considerable leeway so as to permit it to

meet, within the limits of the Committee's general policy of restrictive

ness, whatever conditions developed.

Mr. Earhart stated that his views were very close to what he

understood to be the views expressed by Messrs. Szymczak, Erickson, and

Irons, rather than to the more vigorous policy suggested by Mr. Balderston.

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Mr. Powell said that he would favor waiting a little

longer than

Mr. Balderston had suggested before making any further restrictive moves.

The larger banks in

the Ninth District were beginning to borrow quite

heavily again, he said, indicating that the 2-1/4 per cent discount rate

was not offensive to them.

If this tendency to borrow were to develop

much further he would feel inclined to recommend to his board of directors

a further increase in the discount rate promptly.

After commenting on

economic conditions in the Ninth District as well as in the United States

generally, Mr. Powell said that he was inclined to favor a "go slow"

attitude for a period of two or three weeks with the thought that con

sideration could be given to what further moves might be necessary when

the next meeting of the Committee was held.

Mr.

Leedy recalled that for some time he had taken the position

that the Committee should have applied more pressure than it

At this particular juncture, however,

had exerted.

he felt the situation was sensitive

and that the Committee should not attempt to increase the pressure it

been applying recently.

has

Developments over the next two or three weeks

would enable the Committee to appraise the situation much better than was

possible today.

At that time it might seem necessary to increase the dis

count rate or the amount of negative free reserves.

For the present,

however, Mr. Leedy felt that the Committee should continue just about the

same program it has been applying recently although if, from day to day

it appeared that some little increase in pressure could be made, he would

10/4/55

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favor that course.

In other words, he would resolve doubts on the side

of additional mild restraint.

Mr. C. S. Young expressed the hope that no increase would be made

in the discount rate for several weeks.

There was much uneasiness under

the surface, he felt, and he would hope that negative free reserves might

run around the $300 million level during the immediate future, rather

than closer to the $500 to $600 million level.

Mr. Leach said there had been no fundamental change in the econ

omy since the meeting on September 14.

It

looked as strong as before but

the Committee could not be certain as to the effect the President's ill

ness and the down turn in the stock market would have on business

planning.

Once the Treasury financing was behind, Mr. Leach felt that

Committee policy for the next three weeks might be the same as before

the telephone conference meeting on September 26.

This would mean restora

tion of the understanding that doubts in carrying out open market opera

tions be resolved on the side of tightness rather than ease.

Estimates

of free reserves indicated a substantial negative position during the

next several weeks, Mr. Leach said, and in addition to use of repurchase

agreements to take care of temporary situations outright purchases of

securities probably would be necessary.

While he would not tie ex

clusively to any one or even two indicators in measuring tightness, he

was thinking in terms of a level of around $1 billion of member bank

borrowings and short-term interest rates about where they are.

This

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presumably would mean negative free reserves around $400 million.

Mr. Leach went on to say that there seemed to be some difference

of opinion as to how the Committee's restrictive policy had affected

banks.

He was convinced, he said, that in the Fifth District the larger

banks approved the policy and that they had become more selective and

restrictive in making loans.

be expected at this season.

While loans were increasing, this was to

Mr. Leach did not think the restrictive

policy had directly affected the smaller banks a great deal except that

most of them now have some depreciation in their security accounts.

While he advocated resumption of the degree of restraint that existed

before the President's illness, he would not wish to intensify pressure

at this time by increasing the discount rate.

Mr. Mills said he gathered that all of the comments were moving

toward the same goal.

He referred to the economic review which presented

a picture of an active economy which might be approaching a leveling off

period and which might be unusually exposed to psychological influences.

At the same time, he felt the economy needed the influence of credit

restraint.

In applying credit restraint, however, Mr. Mills felt that the

Committee should not be too severe.

For example, negative free reserves

should not go much beyond the $300 to $350 million level that had existed

recently.

The economy may not yet have felt the full effects of the opera

tions of the commercial banking system against a level of free reserves of

this scope.

Mr. Mills said that he would favor experimenting for a period

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with the program the Committee had already pursued so that it

sure it

could be

was not shutting down on the availability of credit in a way

that would be harmful to the economy rather than helpful.

Until after

October 11 when the Treasury financing payment date would have passed,

the Committee would not wish to move more aggressively by altering the

pattern now being followed.

The next positive step to be taken by the

System, he felt, would probably be an increase in the discount rate to

2-1/2 per cent.

For the immediate period, however, and considering the

reserve requirements for the remainder of this year which would call for

additional reserves of a magnitude around $1 billion, he felt that a

combination of repurchase agreements, additional discounting at the Re

serve Banks, and direct purchases of securities for the open market

account was called for.

Mr. Robertson then made a statement substantially as follows:

1.

2.

The degree of restrictiveness of monetary policy has been

inadequate during the past six months. We have been too

slow to act in the light of the upsurge of economic forces

with inflationary tendencies. Today it is wholly inade

quate. A given volume of negative free reserves today

lacks the restrictive weight of a much smaller volume a

few weeks ago.

In the week before the President's illness our action was

wholly inadequate. At the time of the last meeting of

this Committee on September 14th, the New York Bank's

estimate of the average level of free reserves for the

week ending September 21st was -60 million dollars. Yet

despite that estimate, no action was taken to tighten re

serves. The actual figure for the week turned out to be

-116 million dollars. Some market participants misinter

preted this development as a swing toward ease, particularly

in view of the fact that we had been so prompt and precise

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to keep negative free reserves around a level of -250 mil

lion for several weeks preceding. It would seem probable

that if the projection had shown negative free reserves as

much above the target as -60 million was below, credit

easing action would have been taken by the account promptly.

3. The action of the Committee on September 26th to take the

"strings" off the Manager (i.e., relieve him of the obliga

tion to resolve doubts on the restrictive side) in order to

enable him to move to offset unexpected and indeterminable

public psychological reactions to the President's illness

was a sound and correct action. It did not intend, I feel

sure, to seek a back-up in the absence of unexpected

tightening beyond levels contemplated at the last meeting,

although the activity on September 27th and 28th and 29th

would indicate that perhaps that was the understanding of

the Manager of the Account.

4. The purchases during the first few days of last week can be

justified both on the basis of the sharp decline in stock

prices that occurred a week ago yesterday and the sub

stantial decline in reserve positions. However, I can find

no justification for the repurchase agreements entered into

last Thursday, particularly of the magnitude involved

almost a hundred million dollars. They came a day after the

account itself had predicted that average free reserves

would decline from a level of about -350 million dollars to

-330 million and despite the fact that the degree of tight

ness has been consistently overestimated in these projec

tions from week to week in the past.

5. This behavior of the account's operations over the past

three weeks strikes me as crystal clear evidence that we

must find ways and means of more clearly delineating our

judgments and more specifically fixing targets if our

directives are to be properly implemented.

6. The rebound in the stock market on September 27th and its

behavior since then is evidence that the break of Monday,

September 26th, may have been simply a short-lived jittery

reaction to a calamity, based in large part on sentiment,

and was not indicative of any over-all weakness in the

economy. Certainly this morning's presentation of the

economic outlook evidences the continued upward trend of

important economic indicators.

7. Today many people take it for granted that the Federal Re

serve cannot move, and as a result it is disregarded as a

potent force to stop the upward trend. It is being dis

regarded on the theory that it is now too late to act and

that we are frozen into position--as we are to some extent,

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8.

9.

-14at least. Only a shock could restore the restraint called

for by the economy in order to prevent damage in the way

of unwarranted expansion, and during the next ten days we

can hardly administer a shock and still

maintain an "even

keel" during the government financing period. This is so

even though this particular financing is not one that can

be affected adversely by restrictive monetary policy to

the same degree as ordinarily would apply, because of the

volume of available funds in the market and the character

of the offering.

Bank loans are continuously moving up, and despite cries of

tightness, the banks seem able both to meet advance com

mitments and expand loans generally without reserve

difficulties. It is possible that between operations in

the Federal funds market and borrowing from the Federal Re

serve Banks, some banks are continuous borrowers and some

even could be characterized as complacent rather than

"reluctant" borrowers. Certainly there has been small

liquidation recently of government securities in order to

meet needs for reserves on which to base credit expansion.

Hence, it seems to me that now (during the last two of the

next three-week period) is the time to be putting on the

brakes a little harder.

a. Therefore, I suggest aiming toward between 450 and

500 million dollars negative free reserves during

that portion of the three-week period, provided

that aiming at such a target will lead to a short

term government rate of near 2-1/4 per cent, a

volume of borrowing between one billion and one

and one-half billion dollars, and a reasonable

curtailment of member bank lending.

b. We should refrain from moving too fast in adding

reserves through either outright purchases or re

purchase agreements--movements should be made in

the light of the results achieved through aiming

at the suggested target.

c. In addition, grave thought should be given to an

increase in discount rates as soon after October

15th as possible. The Treasury financing will be

out of the way by then. A fairly even keel will

have been maintained through the government

financing period. Such an increase will not be

wholly unexpected but will evidence a concern with

the maintenance of stability and can be followed

by a more restrictive open market policy at the

next meeting if conditions then warrant.

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Mr. Sproul asked that Mr. Rouse comment on two questions that

Mr. Robertson had raised about the operation of the System account:

(a)

whether a decline in negative free reserves during the week ending

September 21 might not have been offset by operations for the System

account so that the average level of negative free reserves might have

been considerably higher; and (b) whether it was appropriate to enter into

repurchase agreements on Thursday, September 29.

Mr. Rouse noted that projections of average negative free reserves

during the week of September 21 differed, the projection prepared at the

Board indicating a substantially larger volume than the one prepared at

the New York Bank.

While the projections indicated a reduction in nega

tive free reserves on Thursday and Friday of that week, there was also

an indication that there would be a very high deficiency the following

Monday-Wednesday.

The System account management did something about the

situation, Mr. Rouse said, through arranging with the Treasury for a

special call which would bring its balance up and thus reduce the volume

of reserves.

It was because of this action that an average free reserve

position of minus $120 million for the week ending September 21 was

attained.

Mr. Rouse said that he also had in mind that if an attempt had

been made to sell securities from the account to reduce the volume of free

reserves on the Thursday and Friday in question, it would have become

necessary to reverse that operation on the following Monday because of the

expected very tight situation.

Such in-and-out operations, he had

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understood, were generally not desired by the Committee.

Mr. Rouse also

stated that during the week in question when free reserves averaged

negative $120 million, there was no dimunition in the feeling of tightness

that existed in the market.

Mr. Rouse then referred to the repurchase agreements executed on

September 29.

He was not at the New York Bank that day but there was a

question whether the System account should facilitate the dealers' opera

tions by picking up some of their bills.

Dealer positions were large as

a result of their allotments of new bills on that day and the selling by

corporations and by banks preparing for their September 30 statements.

Also, since the quarterly statement date fell on a Friday, bank borrowing

was large on Thursday to average out against repayment the following day.

As a result of these conditions, there seemed to be a degree of tightness

developing which resulted in the decision to make the repurchase agree

ments.

As it turned out, the judgment appeared to have been right, Mr.

Rouse said, in that average negative free reserves that day turned out to

be minus $335 million which was about $36 million higher than on the pre

ceding day.

Approximately that volume of negative free reserves has con

tinued up to the present time.

Mr. Robertson said that he thought Mr. Rouse was overestimating

the criticism to be put on in-and-out transactions; he (Mr. Robertson) did

not understand the Committee to be clearly opposed to "in-and-out" trans

actions for the System account if they were not confusing to the market.

10/4/55

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Nothing in his statement was designed as criticism of the management of

the account, he said, but rather of the Committee for failing to be more

specific in its directives.

Mr. Shepardson said that there still seemed to be a strong move

ment upward in

the economy with considerable indication of further wage

and price pressures.

The situation in agriculture did not give promise

of immediate improvement, he said, and with other segments of the economy

moving in the direction in which they appeared to be moving, a further

disparity was developing between agriculture and the rest of the economy.

He felt the System was fully justified in continuing a strong and in

creasing pressure on the credit structure.

During the past week an

unusual situation was presented because of the element of uncertainty and

the Committee should continue to watch this closely.

On the other hand,

Mr. Shepardson felt that the first shock of the President's illness was

pretty well behind us and that the Committee should continue to exert the

pressure contemplated prior to the meeting on September 26.

He would

favor going back to a continuing degree of tightness with some increase in

negative free reserves and with the understanding that, in carrying out

operations for the System account, doubts should be resolved on the side

of tightness.

Mr. Shepardson also expressed the view that for a consid

erable period of time operations had been carried on with doubts having

been resolved on the side of ease.

While he did not wish to suggest a

precise limit, he felt that negative free reserves should increase somewhat.

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He would not suggest an increase in the discount rate at this time.

The

System should be looking toward the probability that such an increase

would be advisable when the Treasury's current financing was completed,

but he felt it unwise to make any commitment on this point at present.

Mr. Shepardson went on to say that he gathered from discussions

of this subject that reluctance to engage in "in-and-out" operations in

the past had arisen partly because of the tendency of some elements in

the market to look at changes in the open market account rather than at

the resulting free reserve situation.

He suggested that if the amount of

free reserves was a significant index of the degree of tightness, it might

be desirable to try to get the financial community generally to look at

the level of free reserves as such an index and thus to interpret buying

and selling for the System account in those terms.

This, he felt, would

give the System more freedom in using the open market instrument.

Mr. Sproul said that he personally did not think the Committee

should take negative free reserves as the index of whether it should be

tightening or easing the market, and he did not think the market should

be brought around to believing that the Committee assumed that negative

free reserves represented the index or that the Committee was relying

solely on that index.

In the first place, a good deal depended on the

distribution of reserves, whether they were concentrated in reserve cities

or central reserve cities or spread out over the country; also, on whether

the existing volume of negative free reserves was having effects on the

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market which were in accordance with or contrary to the policy the Com

mittee was trying to pursue.

The condition of the money market is not

always a direct resultant of any fixed level of free reserves, Mr. Sproul

said, and different levels of reserves could show up in different move

ments of interest rates, in the condition of the dealers in the market,

or in the operations and attitudes of member banks including their

willingness to borrow from the Federal Reserve System.

Mr. Sproul did

not feel that it would be fruitful to use negative free reserves as a

single indicator of the direction either of System credit policy or of

conditions in the money market.

Mr. Fulton thought that the uncertainty the country was supposed

to be in was more a matter of conversation than actuality.

Businessmen

in the Cleveland District indicate that they have not changed plans for

expansion one iota, he said, and the man in the street is satisfied with

his welfare under the present administration and feels that if a change

in administration comes along there might be some inflation which would

result in his receiving more dollars.

With this background, Mr. Fulton

did not feel that actions of individuals in making commitments had been

affected by the incident of the President's illness.

One problem, he said,

was the difficulty industry was experiencing in obtaining fairly skilled

workers to operate the machines already available and this was an element

causing production to seem to "top-off."

in the Cleveland District as a whole.

There were still free reserves

Mr. Fulton felt that the System

10/4/55

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should be on the tighter side, that it should resolve doubts in its opera

tions on the side of tightness, and that the discount rate should not be

moved until the Committee could see more clearly whether the economy would

level off in the next couple of weeks.

Also, he felt the discount rate

should not be advanced again until market rates had been brought up con

sonant with it.

Mr. Bryan said that he was less certain as to which way the

economy was going than was indicated by some of the other comments.

loans were still

Bank

going up but marginal borrowers in the Atlanta District

were having difficulty in

finding credit.

He felt the System's restric

tive policy had been having an effect during the last 60 days and there

was unmistakable evidence that the mortgage market in

had tightened rapidly during the past 30 days.

Mr.

the Sixth District

Bryan was inclined to

attach more significance to the behavior of the equity market than others

had indicated.

The situation in

the equity market, he thought,

was not

fundamentally produced by the President's illness but by a level of prices,

particularly for high quality equities, which was

predicated on a continuing advance in

high and had been

the economy and in profits.

Such a

level of equity prices could not be justified even on the assumption that

the economy would continue stable.

Mr. Bryan felt that monetary policy may

have had a basic cause and effect relationship to developments in the equity

market and,

in

turn, there might be effects from the stock market decline

(and the possibility of further rapid declines) which might well induce a

10/4/55

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more cautious approach to expenditures and capital commitments.

less,

Neverthe

information showed a booming economy and one that could increase

price levels sharply with the result that serious capital distortions in

the economy might develop--something that the System would not desire.

Mr. Bryan's inclination was to go along with the general theory that the

System should not relax pressure and he noted the suggestion for using

a combination of methods to pursue an appropriate degree of tightness:

some reserves to be supplied through open market operations but not the

entire seasonal requirement; some reserves to be supplied through re

purchase agreements, and part of the seasonal requirement to be met dur

ing the fall months at the discount window.

He would agree with this

general approach although he thought that the System might find there

would be a sufficient additional tightening if

member banks were brought

further into debt at the Federal Reserve Banks.

Such a development would

be desirable as a means of offering an opportunity to talk directly with

the member banks on a lender-borrower basis.

Mr. Bryan also said that he

was inclined to agree with Mr. Balderston regarding the level of the

short-term rate.

which he (Mr.

Mr. Balderston had suggested a level of 2.30 to 2.40,

Bryan) would agree with as an experimental approach to

further restraint.

As to negative free reserves, Mr. Bryan felt that the

Committee would do better if it would watch the short-term rate rather

than the volume of negative free reserves.

He also felt that Governor

Robertson was correct in thinking that it would be necessary for the

-22

10/4/55

Committee to state more precisely than it has in the past just what it

wishes to have the Manager of the System Account do to carry out the

Committee's policy.

Mr. Williams said that his judgment was that the Committee should

exercise restraint but he would not do it in the clear cut and forceful

manner that Mr. Robertson had indicated.

Such a program would be too

heavy-handed during the next two to four weeks.

Mr. Williams felt that

the reaction stemming from the President's illness was largely emotional

but it

could become more important and could extend throughout not only

the domestic economy but into the international picture.

His view was

that in this country there was already a tendency to discount the effects

of this emotional reaction.

Banks in the Philadelphia District were be

coming more selective in credit extensions and on the whole he felt that

the full effects of the adjustments that would result from this emotional

reaction were yet to be seen.

Mr. Johns said that his views were similar to those expressed by

Mr. Szymczak.

This did not mean that he would not sooner or later agree

with the views expressed by Mr. Balderston along the lines of greater re

straint, but he was not yet ready to agree with that position.

He also

referred to the comments in the economic review which he interpreted as

indicating that slackening in the rate of economic expansion might have

resulted from an approach to capacity rather than from actions taken with

respect to monetary and credit policy.

Mr. Johns expressed doubts about

10/4/55

-23

the desirability of supplying at the discount window too large a propor

tion of the reserves which would be needed during the remainder of this

year.

In the St. Louis District banks had not made preparation for their

fall needs.

Some of them were warehousing mortgages and were obtaining

funds through the Federal funds market to help in carrying these credits.

Also, some banks were extending credit to finance companies heavily.

If

the System were niggardly about supplying reserves through the open

market, banks would be forced into the discount window.

These banks would

more and more find it impossible to get funds they needed in the Federal

funds market and would tend to become continuous borrowers at the discount

window.

If

this developed and if

the discount function

were to be admin

istered in accordance with what seemed to have been recent decisions, it

would mean that the Reserve Banks later this year would be applying much

more pressure than the System intended through the discount window.

Johns' preference,

therefore, was to rely a little

Mr.

more on open market

operations, and a little less on the discount window than some of the

others had indicated.

Mr. Sproul then made a statement substantially as follows:

1.

The President's illness suggests an analogy with our pres

ent economic situation. There has been an unforeseen event,

the ultimate consequences of which cannot be foretold.

The

immediate repercussions were sharp in a sensitive nerve

center, but so far we cannot know whether this was wholly

an emotional and psychological reaction or whether it also

has a deeper significance. We can be pretty sure, however,

that the event will leave some scars, and we are now con

cerned with the question of how an otherwise vigorous

10/4/55

2.

3.

4.

5.

-24economic organism will function despite the scar tissue.

What we can observe at the moment is an economy which seems

to be levelling off at a high level of production, but in

which increasing upward pressure on prices and the demand

for credit may be accumulating. The index of industrial

production, which had increased about five points on the

average in each of the previous three quarters, rose only

two points in the past quarter and some of the more sensi

tive indicators of economic activity have turned down. On

the other side of the shield, there are still strong foreign

and domestic demands for raw materials and for our products

and services, much of the pressure of increased costs on

prices is probably still to be felt, personal savings are at

a lower rate than in recent years, and demands on the

capital and mortgage markets have been exceeding the

accumulation of savings, bringing in increased participation

by commercial banks.

The situation is clearly not one that calls for the use of

the oxygen tent of easy money, It does suggest to me, how

ever, that we should not now step up the pressure of credit

restraint as we might previously have contemplated. And I

am fortified in this view by the fact that the strongly

competitive character of the business situation, with its

reflection in buyer's markets at retail for many consumer

goods and in the failure of undue inventory accumulation to

appear, indicates that we have not pressed to the limits of

productive capacity.

I continue to believe, therefore, that our best policy for

the immediate future is the continuance of the measure of

credit restraint which we have been trying to maintain for

the past two months. Since the effectiveness of credit re

straint is greatly influenced by opinions about the future,

and since opinions about the future may be undergoing some

revision, I think such a policy of maintained but not

affirmatively intensified pressure will be most conducive

to our objective of contributing to the highest possible

levels of economic activity without inflation, in this

period. And for the next three weeks, of course, such a

prescription is further suggested by the fact that it is a

period which brackets a payment date on a Treasury financ

ing, which will call for additional reserve funds beyond

the seasonal needs of business and agriculture.

In so far as figures can be our guide, such a policy might

mean member bank borrowings of around $1 billion, negative

10/4/55

-25

free reserves around $300 million plus or minus, and money

6.

market rates grouped reasonably closely around our present

discount rate, with the Treasury bill rate perhaps above

the discount rate at times. And we shall have to keep a

sharp watch also on the effect of our policy in the capital

markets, which are going to have heavy demands made upon

them during the coming quarter and whose continued active

functioning is necessary to keep our economy going at high

levels.

On the basis of the present forecasts of reserve positions,

a policy of this sort will mean some increase in member

bank borrowing, substantial outright purchases for System

Open Market Account, as well as timely use of repurchase

agreements during coming weeks.

We shall have to be guided

not only by figures but by feel; by whether or not the

seasonal demand for credit seems to be adding significantly

to tightness in the money market, and by whether signs

appear of gray markets, inventory hoarding, overtime work

and other evidences of increased inflationary pressures.

In summing up his view, Mr.

Sproul said that he would share the

views expressed that the Committee should adopt the same general instruc

tion with respect to open market operations that it

ing on September 14, 1955.

adopted at the meet

From the comments made at this meeting it

seemed that while there were perhaps differences of opinion and various

shades of opinion,

the general view expressed by the majority was that

the Committee desired at this time to maintain the degree of credit re

straint that it

had been trying to maintain on the basis of the instruc

tion given on September 14 and that this meant it

the instruction given at that meeting that, in

wished to reestablish

carrying out open market

operations, doubts should be resolved on the side of tightness rather than

of ease.

There was agreement with Mr. Sproul's statement of the majority

10/4/55

-26

views expressed at this meeting.

Mr. Sproul then referred to the suggestion made by Mr. Rouse at

the meeting on September 14 that the Committee increase the authorization

for purchases of bankers acceptances from $25 million to $50 million, and

to the memorandum sent to the members of the Committee by Mr. Rouse under

date of September 26 commenting on this recommendation.

Mr. Rouse stated that, as indicated in his memorandum, he felt it

would be desirable to increase the limitation on purchases of bankers

acceptances but that this suggestion did not contemplate any change in

the original concept of the Committee in authorizing such purchases.

In

sum, he felt that it would be desirable to spread some of the System's

outright purchases into the acceptance market as a means of further indi

cating that some real use is intended for this means of providing reserves

directly through this channel of business financing.

Mr. Mills stated that he had raised a question regarding Mr.

Rouse's recommendation at the meeting on September 14 and that while he

did not think it was a matter of vital importance one way or the other,

he still questioned the desirability of authorizing an increase in the

limitation.

He then made a statement substantially as follows:

The Federal Reserve System's interest in bankers' accept

ances is to foster the use of a form of financing that will

strengthen and enlarge the United States as an international

money market. It is doubtful that an increase from $25 million

to $50 million in the amount of bankers' acceptances that can

be held in the System Open Market Account will go far to serve

that purpose.

10/4/55

-27-

Financing accessibility at competitive international inter

est rates is the first requisite to a greater use of bankers'

acceptances in the United States. New York, on a rate basis, is

now competitive with London and Continental money markets. As

interest rate is not presently a barrier, it is fair to look

upon the lack of widespread currency convertibility as a

principal hindrance to the development of bankers' acceptance

financing on an international scale in the United States. A

greater willingness on the part of our domestic commercial banks

to encourage bankers' acceptance financing at a cost at least

comparable to the cost of the prime interest rate is also neces

sary to the expanded use of this financing vehicle.

A second requisite to the wider use of bankers' acceptances

is the development of a broader investment market for these

instruments. The Federal Reserve System's present policy of

purchasing bankers' acceptances in modest amounts can be helpful

in providing dealers a stopgap market for their offerings pend

ing final distribution to permanent investors. Repurchase

agreements are especially useful in this regard. Direct pur

chases, however, are open to question, particularly if their

effect is to push down the market rate on bankers' acceptances

to an artificially low level, in which event the investment

attractiveness of this instrument is diminished. Obviously, to

raise the System Open Market Account's purchase ceiling to $50

million would aggravate this difficulty, and the more so in that

dealers would have a less salable security to offer and, there

fore, less incentive to press its sale. In other words, ex

cessive System support to the bankers' acceptance market can,

in part, defeat the very purpose for which it is intended.

Instead of raising the System Open Market Account's ceiling

for purchasing bankers' acceptances, a more appropriate policy

would be to retain the present ceiling and in so doing operate

more flexibly as to the total amount held. Implementation of

such a policy would contemplate a wider use of repurchase agree

ments to tide dealers over the short periods necessary to

distribute their holdings, and a lesser use of direct purchases.

Under this program direct purchases would not be made to main

tain a relatively constant holding of bankers' acceptances, but

the total holding would fluctuate in amount with market

conditions and the ease or difficulty with which these instru

ments found investor homes. By these means the System would

continue to exhibit its solicitude for bankers' acceptance

financing but without an interest depressive influence or giv

ing the appearance of coddling the market. By the same token,

10/4/55

-28-

the interest return on bankers' acceptances would better find its

level in the structure of interest yields on high quality in

vestments which would tend to broaden their market and thereby

add zest to dealer incentives for their handling. Under present

conditions a broad and free market for bankers' acceptances

offers the most constructive target at which System policy in

this field of finance can aim.

Mr. Robertson then made a statement as follows:

I will not take up the time of the Committee to repeat my

views on this matter, which I expressed in dissenting from the

Committee's March 1955 decision to purchase bank acceptances up

to $25 million.

In 1954 I resisted this proposal vigorously because I was

concerned about its feasibility and the wisdom of its purpose

to "free demand generally from administered rate constriction

. ." Later, however, this objective apparently was dropped,

and when the Committee decided to enter the bank acceptance

market in March 1955 the Chairman expressed the view of the

majority that the Federal Reserve System should avoid any

"finagling" in the market but should participate in a very

modest way in order to show the interest of the central banking

organization. It seemed to me that this limited objective made

the proposal relatively innocuous, although I felt that the

acceptance market would receive more convincing assurance of

Federal Reserve interest if we resumed the "backstopping" pro

cedure that worked quite well in the 1920's.

In any event, I am unable to see any valid reason for now

raising the permissible maximum from $25 million to $50 million.

As the Chairman said, it was intended that our participation in

the bank acceptance market should be a very modest one. Our

present modest holdings clearly display our interest in the

development of American bank acceptances. To the extent that

the Federal Reserve increases its holdings, the participation

of others is necessarily limited, and the acceptance market is

thereby deprived of the participation of a certain number of

financial and industrial organizations that otherwise would be

holding the additional acceptances taken by us. The more we

take, the smaller is the number of participants in the market

and the more limited are its breadth, depth, and resiliency.

To sum up, I believe we could better strengthen the

acceptance market by standing ready to purchase at a rate

slightly above the current market, rather than by making modest

purchases at the market rate. However, if the Committee wishes

10/4/55

-29

to continue the present practice, an increase in our holdings

offers negligible benefits and would tend to narrow rather than

broaden the self-sufficient market we wish to see developed.

During the discussion that followed,

Mr. Szymczak stated that he

favored increasing the authorization to $50 million as recommended by

Mr.

Rouse but that he thought that the increase should be used gradually

and that the System account should also make repurchase agreements cover

ing bankers' acceptances.

The reason for favoring this procedure was that

he felt this would provide the System with an additional instrument to be

used in furnishing reserves to the market.

Mr. Earhart then moved that the present

authorization for bankers' acceptances be

continued with retention of the limitation

of $25 million, and Mr. Earhart's motion was

seconded by Mr. Mills.

Mr. Earhart's motion was put by the

Chair and carried, Messrs. Balderston,

Earhart, Fulton, Leach, Mills, and Shepard

son voting "aye" and Messrs. Sproul, Irons,

and Szymczak voting "no".

On this action,

Mr. Robertson did not vote, stating that he

would not vote to increase the authorization

nor would he vote to continue the existing

authorization for the reasons indicated in

the statement he had made at this meeting.

In response to a question from Mr. Sproul, Mr. Rouse stated that

he had no suggestions to make with respect to a change in the authority

for repurchase agreements with nonbank dealers in Government securities.

Thereupon, upon motion duly made and

seconded and by unanimous vote, the Com

mittee approved a renewal of the authoriza

tion for repurchase agreements as follows:

-30-

10/4/55

The Federal Reserve Bank of New York is hereby authorized

to enter into repurchase agreements with nonbank dealers in

United States Government securities subject to the following

conditions:

1.

Such agreements

(a)

In no event shall be at a rate below whichever

is the lower of (1) the discount rate of the

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 as a means of providing the

money market with sufficient Federal Reserve

funds to avoid undue strain on a day-to-day

basis.

2.

Reports of such transactions shall be included in

the weekly report of open market operations which is

sent to the members of the Federal Open Market Com

mittee.

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 the Federal Reserve Bank

of New York shall be sold in the market or trans

ferred to the System open market account.

Mr. Rouse stated in response to a question from Mr. Sproul that he

had no changes to suggest in the general directive to be issued to the Fed

eral Reserve Bank of New York.

Thereupon, upon motion duly made and

seconded, the Committee voted unanimously

10/4/55

-31to direct the Federal Reserve Bank of

New York until otherwise directed by

the Committee:

(1) To make such purchases, sales, or exchanges (includ

ing replacement of maturing securities, and allowing maturities

to run off without replacement) for the System open market

account in the open market or, in the case of maturing securi

ties, by direct exchange with the Treasury, as may be necessary

in the light of current and prospective economic conditions and

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

relating the supply of funds in the market to the needs of com

merce and business, (b) to restraining inflationary develop

ments in the interest of sustainable economic growth, and (c)

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 Treasury, shall not

be increased or decreased by more than $1 billion;

(2) To purchase direct from the Treasury for the account

of the Federal Reserve Bank of New York (with discretion, in

cases where it seems desirable, to issue participations to one

or more Federal Reserve Banks) such amounts of special short

term certificates of indebtedness as may be necessary from time

to time for the temporary accommodation of the Treasury; pro

vided that the total amount of such certificates held at any

one time by the Federal Reserve Banks shall not exceed in the

aggregate $500 million;

(3) To sell direct to the Treasury from the System

account for gold certificates such amounts of Treasury securi

ties maturing within one year as may be necessary from time to

time for the accommodation of the Treasury; provided that the

total amount of such securities so sold shall not exceed in

the aggregate $500 million face amount, and such sales shall

be made as nearly as may be practicable at the prices currently

quoted in the open market.

It

was agreed that the next meeting of the Committee should be

scheduled for Tuesday, October 25,

1955.

In this connection,

Mr. Earhart

raised the question whether the hour for the meeting should be at 10:45

-32

10/4/55

a.m. or 10 o'clock, and after brief discussion it was agreed that the

meeting to be held on October 25 should be scheduled for 10 a.m.

Mr. Sproul then referred to the discussion at the meeting on

September 14 regarding a visit which Senator Douglas proposed to make to

the Federal Reserve Bank of New York, probably between October 20 and

November 1, 1955, accompanied by a member of his staff, for the purpose of

observing the handling of open market operations.

Mr.

Szymczak reviewed a conversation he had had with Senator

Douglas pursuant to the understanding at the meeting on September 14 dur

ing which he stated that Senator Douglas proposed that Mr. Asher

Achinstein, a member of the regular staff of the Library of Congress,

accompany him on the proposed visit to assist in his discussions of the

matters that he observed.

There followed a discussion of the proposed visit at the conclu

sion of which it

was agreed that Mr. Sproul, in

Chairman of the Committee,

his capacity as Vice

would communicate with Senator Douglas, stating

that he understood the Senator wished to visit the New York Bank and to

bring Mr.

Achinstein with him and indicating that he (Mr.

Sproul) would be

glad to arrange for such a visit on a mutually convenient date.

It

was

understood that while the New York Bank would be glad to assist the

Senator and Mr.

Achinstein in observing the operations of the securities

desk, information concerning the policy of the Open Market Committee or

transactions for the Open Market Committee would continue to be made

-33

10/4/55

available only through the channels which have been established previously

for formal transmission of information to Committees of Congress.

Mr.

Balderston stated that in a letter dated September 22, 1955,

addressed to him as Vice Chairman of the Board of Governors,

Congressman

Wright Patman expressed the point of view that the Open Market Committee's

operations should be removed from New York and located in Washington.

The

Board's reply of September 29, signed by Vice Chairman Balderston, indi

cated that Mr.

Patman' s point of view would be presented to the membership

of the Open Market Committee.

By this time, he said, each member of the

Committee had doubtless received a copy of Congressman Patman's letter.

Mr.

Balderston said that he wished to record the fact that the request of

Congressman Patman had also been presented to the Committee in

session.

formal

Although he did not share Congressman Patman's view, because of

the practical difficulties of conducting the desk at a distance from the

New York financial center,

he expressed the belief that Congressman

Patman's suggestion should have careful consideration.

Mr. Balderston then moved that

Congressman Patman's proposal be

referred to the subcommittee that has

been studying the housekeeping arrange

ments for the Open Market Account,

pursuant to the action taken by the

Committee at its meeting on March 2,

1955.

This motion was put by the Chair

and carried unanimously.

In response to a question from Mr.

Robertson, Mr. Balderston stated

10/4/55

-34

that the intent of his motion was to refer Congressman Patman's letter to

the subcommittee for its

consideration with the understanding that in the

normal course the subcommittee would report back to the full Committee on

the matters which it had been requested to consider.

Mr. Robertson recalled that at the meeting of the Committee held

on September 14 it was noted that a subcommittee had not been appointed

for the purpose of reconsidering defense planning for the Federal Open

Market Committee.

(This subject had been discussed at the meeting on

July 12, 1955, with the result that Chairman Martin was then authorized

to appoint a subcommittee for the purpose of making such a review.)

Mr.

Robertson went on to say that at the meeting on September 14, Mr. Sproul

had suggested that he (Mr. Robertson) might do some advance thinking on

the problem in order to facilitate the work of the Committee.

In accord

ance with this suggestion, he said, he had prepared a memorandum regarding

defense planning for the Federal Open Market Committee, and he suggested

that copies be distributed to all members of the Committee and to other

Reserve Bank Presidents following this meeting with the thought that any

comments which the Committee members or other Presidents might wish to

make be transmitted to the Chairman of the Committee prior to the meeting

to be held on October 25.

It was his further hope that it would be pos

sible to consider the subject matter at the meeting on October 25,

which event it might not be necessary to appoint a subcommittee for

further work on this matter.

in

10/4/55

-35

This suggestion was approved unani

mously with the understanding that the

Secretary would distribute copies of

Mr. Robertson's memorandum following this

meeting.

Thereupon the meeting adjourned.

Secretary.