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 25, 1955, at 10:00 a.m.

PRESENT:

Mr. Martin, Chairman

Mr. Sproul, Vice Chairman

Mr. Balderston

Mr. Earhart

Mr. Fulton

Mr. Irons

Mr. Leach

Mr. Mills

Mr. Robertson

Mr. Shepardson

Mr. Szymczak

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

Alternate Members of the Federal Open

Market Committee

Messrs. Williams and Leedy, Presidents, Federal

Reserve Banks of Philadelphia and Kansas

City, respectively

Mr. Thurston, Assistant Secretary

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. Carpenter, Secretary, Board of Governors

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

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Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meeting

of the Federal Open Market Committee held on

October 4, 1955, were approved.

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

mittee a report prepared at the Federal Reserve Bank of New York covering

open market operations during the period October 4-19, 1955, inclusive, and

at this meeting there was distributed a supplementary report covering com

mitments executed October 20-24, 1955.

placed in

Copies of both reports have been

the files of the Federal Open Market Committee.

Mr. Rouse stated in

response to a question from Chairman Martin

that the only comment he had to make in

connection with the report was

that the average yield at the auction of Treasury bills

yesterday was 2.23

per cent compared with the level of 2.333 per cent established at the

previous auction.

This morning, he said, bills

were quoted at 2.18 per cent.

Thereupon, upon motion duly made

and seconded, and by unanimous vote,

the open market transactions during

the period October 4-24, 1955, inclusive,

were approved, ratified, and confirmed.

A report of an audit of the System open market account made by

the Division of Examinations of the Board of Governors as at the close of

business March 18, 1955,

was submitted to the Secretary of the Committee

under date of April 8, 1955, in

accordance with the action of the Federal

Open Market Committee at its meeting on June 21, 1939.

Copies of the

audit report were sent to each member of the Committee under date of

April 12,

1955,

and the report was presented for consideration by the

Committee at this meeting.

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Without objection, the audit report

referred to was noted and accepted.

Chairman Martin called upon Mr. Ralph Young for a statement on

the economic situation.

A staff memorandum relating to economic and

financial developments had been sent to the members of the Committee under

date of October 21, 1955,

and at this time Mr. Young summarized conditions

substantially as follows:

The economic situation is still one of advance but with the

pace of advance in terms of physical output slowing down with the

approach of capacity operations.

GNP for the third quarter is put at 392 billion dollars,

up 7 billion from the preceding quarter, and a further sizable

gain is in prospect for this quarter. Industrial production is

edging up further and the October index may reach 142.

Durable

goods output, especially in producer equipment lines, has

recently been and still

is, the main influence in this rise.

Steel production last week was at a new high, 98.9 per cent

of capacity. Nondurables output, after slackening over the

summer, has been rising again in late weeks. With final

sales large and continuing to rise, inventory accumulation

has remained moderate; in August, it was mainly at manufacturers.

New car sales have continued at high levels, thus enabling

a considerable cutback in dealer stocks during the model

changeover period, a process which will extend through this month.

New model output in November and December is scheduled to reach

earlier peak rates.

Used car sales hold up at about a third

above a year ago, with stocks and prices changing little.

Household durable sales have regained and are holding their

high early summer level, and output has expanded further from

mid-year.

With consumer durable sales at peak or close to peak levels,

instalment credit outstandings have continued to rise at a

6 billion dollar annual rate. Some slim evidence suggests a

halting of terms liberalization, but it is too early to judge

How far terms liberalization has already

these indications.

carried is indicated by data for one large finance company showing

that about 20 per cent of July and August new car contracts carried

an unpaid balance in excess of the dealers cost.

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With recent wage increases now working into the income

stream, personal income in September showed a further sub

stantial rise. Income is now 7 per cent larger than a year

ago.

The rise in income has, of course, supported rising

retail sales and in September these were 11 per cent over a

year earlier. Department store sales in the first

half of

October apparently increased further from the high August

September level.

With consumer markets strong, manufacturers' sales have

also been rising and in August were 22 per cent above their

low of last year, Manufacturers' new orders in August ex

ceeded sales by 5 per cent, putting unfilled orders a tenth

higher than last year and equal to two months sales.

Construction continues to maintain its high spring level,

with business construction rising and residential building

sliding off. New mortgage credit for the purchase of new and

old houses in August was well above any previous monthly total

and September held close to this volume.

Confidential information on the residential mortgage and

construction markets, collected by Federal housing finance

agencies, and just available to us, indicates that mortgage

credit in most urban markets is quite tight and tending tighter.

Reduced availability of FHA and VA funds is emphasized in field

reports, and likewise weakness in the secondary market. The

new house market is reported to be firm, but sales of existing

homes are said to have slowed down. A combination of market

conditions, financing troubles, and a cost-price squeeze on

new house construction is causing a cutback in builder plans,

which some market reporters believe will develop into a slow

This pessimistic

down of new home building activity next spring.

digest of many local real estate market reports needs to be viewed

in the perspective of the very high levels of home completions

and starts of the past several months,

The labor market continues to exhibit strength. Civilian

employment is running about 2.6 million over a year ago, with

The unemployed are showing

unemployment down to 3.2 per cent.

a fairly high turnover. Also, a comparatively high proportion

The manufacturing work week has

of the unemployed are women.

now reached 41 hours,

Hourly earnings of factory workers in September were up

5 per cent above a year ago and weekly earnings were up 8 per

cent.

The agricultural picture continues to be dominated by excess

Price declines in recent weeks have

supply and sagging prices.

reflected mainly larger marketings of meat animals and consequent

Although hog prices are a fourth

lower prices to clear markets.

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lower than a year ago, the present relationship with feed

prices is not too discouraging to fall hog production.

The

price-feed relationship for dairy products and eggs has

recently been quite favorable to output expansion.

The large

cotton crop this year foreshadows both another acreage cut

back and a lower price support level for 1956.

Yesterday's

rather sharp break and partial recovery in cotton futures

prices, reflecting among other things increased crop prospects

abroad as well as here, emphasizes the cumulative supply

demand disequilibrium affecting this crop.

Industrial prices have risen since mid-year about 3 per

cent.

The first

rise was in industrial materials and, then,

accompanying or following this summer's wage increases, it

has spread to many intermediate and finished products.

Mar

kets for industrial materials have been hesitant in recent weeks,

but at the intermediate product stage a new advance in steel

prices seems to be in the testing phase.

Consumer prices rose

slightly in September, reflecting increases in meats, dairy

products, fuels and apparel.

World trade has again

In Europe, the boom is continuing.

picked up, according to July and August figures.

The London

market continues tight and tomorrow Chancellor Butler will

bring forward his new series of economic and fiscal measures

to meet Britain's balance of payments and internal inflation

plight. Other items on the world financial front include

increases in the discount rates of Canada and South Africa.

Reference is frequently made these days to an alleged down

turn showing by the National Bureau's eight leading business

cycle series. Without arguing the merits or demerits of this

mechanical forecasting approach, it may be of interest to note

A simple count of the most recent

the latest indications.

changes reported--some from July to August, some from August

to September, and some from September to October--shows five

series registering advances, two registering declines, and one

registering no change.

On the basis of a broader look at these series over

several months, about all that one can say is that most of

them are showing moderate fluctuations at advanced levels,

rather than definite trend lines in one direction or the other,

Two series do show a trend--new orders for consumer durables

show an advance, and residential building contracts a decline.

Stability in basic commodity prices, another leading index

series, has reflected advances in industrial materials offset

Altogether, it would seem

by declines in prices of foodstuffs.

to be forcing a conclusion to infer that any indication of a

turn in the business situation is brought to light by this

composite of data.

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10/25/55

In response to an inquiry from Mr. Balderston, Mr. Young stated

that information available regarding the construction industry showed that

nonresidential construction has been rising for some months and that this

rise has tended to offset the decline that has been showing up in residen

tial construction contracts since late last spring.

Mr.

Thomas said that one of the interesting and significant devel

opments in the credit situation was that the Treasury's balance has been

holding up better than expected.

Outlays have been less and revenues have

been larger than were estimated.

On the basis of this development,

Mr. Thomas said that Treasury borrowing needs would probably be less than

had been anticipated, but it probably would have to obtain around a billion

dollars in December either through a new Treasury issue or through some

issue by the Federal National Mortgage Association or the Commodity Credit

Corporation.

Another striking development has been the large volume of new

securities issues.

Notwithstanding the tightness in

the money market,

prices of bonds have gone up and long-term yields down.

Corporate secu

rities issues have been running higher than last year and the total for

1955 is

likely to exceed that for 1954, and, although State and local gov

ernment issues have been less than last year, they have increased recently

and there is

a large list

of prospective issues.

possibility that the recent rise in

Mr.

Thomas indicated the

the prime lending rate at commercial

banks might bring out more issues of securities, noting that utilities have

been borrowing heavily from banks and the increased prime rate might induce

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10/25/55

them to refund into capital issues.

Already both finance companies and

utilities have been moving in this direction.

Mr. Thomas also commented briefly on developments in the stock mar

ket and in figures of bank credit.

The money market, he said, recently has

been characterized by generally firm short-term rates; the bill rate had

risen above the discount rate although it

the last few days.

had been a little

easier during

The decline in longer-term rates may reflect some shift

ing from stocks to bonds, suggesting that some investors might feel that

the rise in interest rates had reached its

market has been firm.

have taken place.

peak,

At any rate, the bond

Increases in nearly all major categories of loans

The increase in business loans slowed down during Octo

ber after rising considerably during September.

The money supply showed

more than a seasonal increase in September and currency in

circulation has

continued to increase at more than the usual seasonal rate.

Reserve needs,

which have been somewhat greater than projections presented at the meeting

on October

4, have been suplied by System open market operations.

Net

borrowed reserves since that meeting have been exceptionally stable,

Mr.

Thomas noted, around the $300-400 million level.

Projections indicate that, in the absence of System operations, net

borrowed reserves would rise to more than $500 million by the week of Novem

ber 9 and increase further in the last week of November and during December.

Mr. Thomas indicated that the situation could be handled through a small

increase in

member bank borrowings and some use of repurchase agreements,

with a minimum of outright purchases for the System account.

Even toward

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the end of the year the sharp seasonal rise in

handled with little

outright purchases.

need for reserves might be

Mr. Thomas expressed the view that

there was no evidence that present policy has been too restrictive.

Expan

sion continues in the business area and slackening in the rate of expansion

appears to reflect more an approach to capacity than any decline in demand.

There may be a question whether credit policy has been sufficiently restric

tive in view of the underlying elements in

the picture and the firmness in

the bond market.

In response to a question from Chairman Martin, Mr.

Thomas stated

that estimates indicated approximately three-quarters of a billion of ad

ditional Reserve Bank credit would need to be provided between now and the

end of the year.

This amount could be supplied by increasing member bank

borrowings and repurchase agreements to a total outstanding amount of

between $1 and $1.5 billion in November and December.

Mr. Sproul then made substantially the following statement:

1. We still

haven't too much to go on, in the way of facts

and figures, in order to come to a judgment as to the economic

effects of what may be the altered outlook of businessmen and

consumers as a result of the President's illness, the immediate

reaction of the stock market, and the possible longer term

politico-economic consequences of theseevents, nationally and

So far as the present and the near-term future

internationally.

are concerned, however, we think we can see the general shape

The growth of economic

of the domestic economic situation.

activity is continuing although at a slower physical rate than

earlier in the year. Some signs of inflationary pressures are

present, but they do not seem to be carrying through to specula

tive excesses in such things as the accumulation of inventories

Particularly encouraging in this respect,

or in spiraling prices.

perhaps, has been the responsiveness of raw material prices to

increased supplies, and the indication in preliminary estimates

-9of Gross National Product that inventory accumulation in the

third quarter of the year was at a slower annual rate than in

the second quarter ($3 billion as against $4 billion). The

banking figures for the third quarter appear to have repeated

much of the pattern of the first

half of the year, taking account

of seasonal influences.

There was a substantial rise in bank

loans, an almost equally substantial decline in investments,

total loans and investments were little

changed, and liquidity

was further reduced.

Both investments and loans were up during

the first

half of October, partly due to Treasury sale of secu

rities during that period.

The money supply declined during the

first

three quarters of the year, and it is now anticipated that

the growth during the fourth quarter will bring about a total

increase of about 2-1/2 per cent for the year as a whole which,

in the light of the growth of the economy, does not indicate

too great pressure from the money side, even allowing for in

creased velocity.

2.

The Treasury's position is coming modestly into line

with the economic situation.

It now appears that a surplus in

the cash budget of $1.5 to $2 billion can be expected in this

fiscal year, and it may be larger if expenditures hold steady

and receipts continue to increase.

The Treasury's direct cash

borrowing needs during the remainder of the present half year

are not large--perhaps in the order of $1 billion.

And this

borrowing is still

at least a month or so away as is the next

refunding of $12.2 billion of notes and certificiates which

The problems of debt management are not

mature December 15.

an immediate handicap to the exercise of freedom of judgment

with respect to credit policy.

There has been considerable speculation as to the

3.

effect that recent events might have on credit policy. One

body of opinion has been that policy will now be relaxed be

cause of the shock which business confidence has recently

received. Another body of opinion has held that inflation is

the enemy, that we haven't done much to combat it, and

still

Then there

that it is late but maybe not too late to do more.

My own view is

is the middle view between these two extremes.

that, so far as general credit controls are concerned, we shall

do well to maintain the pressure we have been exerting, but

that we should not be driven to harsher measures, either in an

attempt to convince the market we haven't relaxed, or in an

attempt to make up for what some consider to have been our past

I think

shortcomings in the way of vigorous and timely action.

the banking figures which, week after week, show that the Sys

tem has not relaxed its restrictive policy, will take care of

I don't know quite what the second group wants

group.

the first

-10since our economy in so many respects has been performing so

well. If we could have gotten rid of the imperfections which

have been apparent in the mortgage credit and consumer credit

fields by way of a general credit policy, which did not stran

gle other business, we should have tried it, but I doubt if it

could have been done given other national policies. And if

there were some way general credit policy could redress the

imbalance between industrial prices and farm prices, which is

threatening economic and political distortions, I would be for

it; but there isn't.

4. The short-term market or credit market has been show

ing a natural response to pressure, in terms of rising rates

of interest, as seasonal demands for credit press against a

supply which is increasing, with our aid and consent, but not

increasing to the extent of meeting all demands at a fixed

price.

The capital market, which had begun to show signs of

responding to pressure a few weeks back, has been less tract

able, in the sense that it has rebounded and become, if anything,

too buoyant. But this may have been temporary.

The mortgage

market is under pressure but not so great, I think, as the ad

vocates of an ever ascending housing boom would have us believe.

5. I should say that, in order to maintain but neither to

relax nor increase pressure, we should continue to feel our way

meeting some of the need for reserves, which now stretches ahead

for several weeks

with a more or less continuous volume of repurchase

(a)

agreements, thus having a current check on our re

serve projections while at the same time helping the

bill

market to function;

(b) making some outright purchases of bills which we

would expect to run off after the turn of the year;

and

(c)

keeping the banks substantially and perhaps increas

ingly in our debt at the discount window.

As of today, I wouldn't want to assume the hasard of

6.

the possible reactions to an increase in the discount rate which

might create greater concern about present economic conditions

It may be that this situation can be

than would be warranted.

out during the next month, however, without any commitment

felt

on the discount rate by an increase in our repurchase rate,

rate goes substantially above

particularly if the Treasury bill

the present discount rate and stays there.

In response to a question of Chairman Martin's, Mr. Sproul said

10/25/55

-11.

that his view would be that figures of net borrowed reserves might range

around $300-400 million between now and the next meeting of the Committee.

Mr.

himself,

Szymczak said that he felt much as Mr. Sproul had expressed

Figures were not available to indicate whether a change in busi

ness plans for plant and equipment expenditures had resulted since the

President's illness.

its policy at all,

Mr.

Szymczak did not think the Committee should relax

but he doubted the advisability of pursuing a tighter

policy especially at this season of the year.

He would concur with the

thought of keeping negative free reserves in the $300-400 million area.

He would not increase the discount rate.

He would use repurchase agree

ments freely to meet temporary needs in the market, and he would do whatever

was required in

the way of direct purchases for the open market account in

order to have negative free reserves in

this general area.

Mr. Erickson said that he could not add much to the views already

expressed.

He would have in mind negative free reserves between $300 and

$400 million, but would resolve doubts on the side of larger negative free

reserves.

He would not raise the discount rate at this time.

Mr. Irons said he was in

agreement with the general views expressed

with respect to the uncertainty in

the economic picture and with respect to

the effects of the System policy of restraint.

He would maintain about the

degree of tightness maintained in recent weeks and would resolve doubts on

the side of pressure rather than ease.

Mr.

Earhart said he was in

substantial agreement with what had been

10/25/55

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said thus far.

He was inclined to feel that enough demand was likely to

be forthcoming during the remainder of this year to maintain pressure on

output capacity, but he believed that a measure of caution had been in

duced by the President's illness that worked in the same direction as the

Committee's restrictive policy.

to a decline in rate of growth in

pressed the view that it

Mr.

Earhart also thought we might be close

demand.

Under these conditions he ex

would be better to maintain about the degree of

restraint the Committee had been maintaining rather than to increase pres

sure at present.

Mr.

Earhart said that he had been unable to reconcile the

easing of interest rates in

securities'

the capital market as indicated by long-term

prices, with the action of rates on short-term securities and

evidence, which he cited, that mortgage money had been quite tight.

He

thought the tight mortgage situation was caused partly because of over

commitments by savings and loan associations and others.

Mr.

C. S. Young said the picture in

the same as that given by others.

the Seventh District was about

He noted particularly tightness in the

real estate credit picture and commented on letters being sent out by

builders'

associations raising a question as to what the Open Market Com

mittee would do about the tightness in the mortgage market.

this could be discounted,

basis.

While much of

Mr. Young thought that the comments had some

He also noted that increased interest rates on savings were being

offered by banks for the purpose of attracting deposits and that some banks

had eliminated service charges as another means of attracting deposits.

The

agricultural situation in the Midwest was a disturbing element in the picture.

10/25/55

Mr.

-13

Young felt

that the Committee's restrictive policy had had an effect,

and he hoped that no change would be made in the discount rate at this

time.

Chairman Martin next called upon Mr. Leach, who made a statement

substantially as follows:

Current developments indicate to me that our policy of re

straint is working quite well.

Economic activity continues to

move upward, but the rate of expansion has apparently slowed

down and there are few, if any, signs of speculation, gray mar

kets, bottlenecks, or excessive inventory accumulation.

Business

leaders and the public are still

optimistic but their optimism

has been tempered considerably.

In the credit area we have not yet seen the full effect of

the tightening actions that have been taken, particularly in the

area of mortgage credit. A survey made last week of bankers and

businessmen in various sections in the Fifth District fully sub

stantiates the report that commitments for mortgage money are

becoming more difficult to obtain. There has been strength in

the long-term Government securities market in recent weeks, but

I suspect that it is largely based on wrong expectations and will

prove temporary.

I realize, of course, that prices of manufactured products

have been subject to upward pressures and that these pressures

may intensify as we get closer to productive capacity, Such a

development could call for more restrictive measures, but for the

time being I favor maintaining about the same degree of pressure

To me, this means discounts close

as during the past three weeks.

to $1 billion, net borrowed reserves in the neighborhood of $400

million, and a long bill rate fluctuating around the discount rate.

I would not advocate an early increase in the discount rate, for

such an increase would have its principal effect in the capital

market and that effect might be much stronger than we would like.

Mr.

Leedy said that he did not differ with the views expressed as

to policy for the next two or three weeks although he arrived at his con

clusions perhaps by a different process.

He thought that changes in prices

of raw materials might not be as useful as a guide as the increases that

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-14

have been occurring in prices of industrial goods.

What could be done

through monetary policy to deal with this situation in the light of its

reflection of wage increases was a question.

As to the next few weeks,

he would aim at the upper side of the suggested range of $300-400 for net

borrowed reserves.

He would give no encouragement to the press and others

who were speculating on the possibility of a change in the direction of

easing monetary policy and, as a matter of fact, Mr. Leedy said that by

aiming for negative free reserves on the higher side of the suggested range,

the Committee might give notice that an easing was not in the picture.

would meet temporary needs in

He

this period as largely as possible through

repurchase agreements rather than outright purchases and he would not make

a further change in the discount rate at this time.

Mr. Mills said that he would second what Mr. Leedy had said.

He

believed there was an abnormal sensitiveness in the market at present to

whatever System policy is,

or whatever new direction it

might take.

being the case, we certainly should not act to ease our policy, if

other reason because a shift in

for no

that direction could be misconstrued as an

official foreshadowing of a decline in economic activity that is

lieved to be in early prospect.

That

not be

That would leave a decision on forward

policy as to the degree of tightness that might reasonably be exerted.

The

discussion this morning had generally moved toward continuation of the

present pressure, Mr.

Mills said, as reflected in negative free reserves up

to a range of around $400 million.

There is

increasing comment in

the

10/25/55

-15

financial press on the direction of policy and an assumption that the

System is moving along a narrow rut and continuing to let the pressure of

negative free reserves of $300-400 million make policy for us.

Sooner or

later, if that is the Committee's policy, the market would make its own

price determinations and the Committee would risk losing the advantages of

flexibility in handling its policy through the actions of the Manager of

the Open Market Account,

Perhaps for the next three weeks, until the next

meeting, the Committee might wish to consider as its guide the pressure of

demand on the commercial banking system for seasonally new credits, as re

flected in the weekly reports of reporting member banks.

If there is a

consistent rise in the total volume of bank credit in all of its various

classifications, the financial community would understandably assume that

the pressure of that credit against the supplies of reserves would bring

about an increasing tightness.

Mr. Mills felt the Committee could test

the future more aggressively than had been suggested.

If the natural forces

for demand for credit express themselves vigorously, the Committee might

allow negative free reserves to rise to $$00 million, feeling its way cau

tiously and observing the effects on interest rates and sensing what the

business community felt as to the availability of credit.

To attempt a

policy of that sort would mean eschewing any rigid directive to the Manager

of the Open Market Account as to limits within which action could be taken.

It would contemplate "feel" of the market as against developments.

weeks ago, Mr. Mills said, he would have favored an increase in

Three

the discount

rate but subsequent developments would scout that as now being desirable.

10/25/55

-16

Mr. Robertson made a statement in

substantially the following

form:

I think all will agree that the business and credit out

look presented to us this morning remains exceedingly strong.

Practically all of the economic indicators continue to point

sharply upward.

There are few chinks in the wall of business

prosperity.

The situation appears to me to call for somewhat additional

credit and monetary restraint. Despite the drop in free re

serves to around a level of minus 400 million dollars over the

last week or two, money market conditions have actually eased

somewhat rather than tightened. There appears to be increasing

complacency developing, both among member banks as to being in

debt to the Federal Reserve and in the financial community in

general, as to the degree of restraint that can be imposed by

the Federal Reserve in a situation like the present.

Recent

developments in short- as well as long-term credit and capital

markets seem to indicate that the financial community senses

that somehow the Federal Reserve has been hamstrung, that it

is powerless to exert further restraint.

I think that this situation should be remedied, and

promptly.

As I see the picture, in order to avoid an actual

increase in ease in credit and money markets, one of two things

must be done over the next few weeks.

Either we shall have to

increase the discount rate or, alternatively, allow free re

serves to drop to a substantially larger negative figure.

I

strongly prefer action on the discount rate, mainly because I

am not sure that even a substantially larger volume of negative

free reserves at this time of year would bring about the desired

amount of restraint. The complacency that has accompanied the

recent change in free reserves from minus 300 to minus 400 mil

It seems to me such com

lion dollars confirms my judgment.

placency might not be dissipated by a further change in free

reserves to minus 500 or even minus 600 million.

Consequently, I hope this Committee will adopt a policy

designed to achieve further restraint, and direct the Manager

of its Account to permit the volume of negative free reserves

to drop to between 500 and 600 million, in the event the dis

I feel

count rates are not raised within the next two weeks.

I hope it

confident such action will not be too restrictive.

will be adequate to moderate the upward movement of the

economy and stem the inflationary pressures.

Mr.

Shepardson referred to Mr.

Sproul's comment on the disparity

10/25/55

-17

between the agricultural situation and the general industrial picture.

He

stated that he had just returned from a week's visit through the Midwest.

He had been impressed in his discussions with persons in that area that,

notwithstanding the decline in

some farm prices and a good deal of talk

about the present decline in hog prices, the general reaction was that the

outlook is

good.

The cattle industry feels quite confident,

Conditions

in most of the range territories are good, and feed prices are favorable

for the coming season for all classes of livestock producers.

Even in the

case of hog producers, Mr. Shepardson said, the general attitude was not

too unfavorable.

This general situation along with other factors caused

him to feel that continued pressure on credit extensions was necessary.

He was not sure that he would wish to go as far as Mr. Robertson had sug

gested, but he felt that policy during the next few weeks should be one

of keeping net borrowed reserves on the upper side of the $400 million

figure mentioned rather than on the down side.

increase in

He was not sure that an

the discount rate would be in order at this time and for the

present would think the procedure should be to tighten a little

further

through increasing the amount of net borrowed reserves as indicated.

Mr.

Fulton said that in

tinued at a very high rate.

the Cleveland District activity had con

There seemed to be more uncertainty in the

minds of those observing developments than in

the minds of the businessmen

who were putting out tremendous sums to increase production facilities.

New orders had increased and were firm.

Mr.

The only hampering factor,

Fulton said, was the shortage of skilled labor to operate the factories.

10/25/55

-18

Real estate operators were in somewhat of a "squeeze" but were still

claiming they could sell houses before the foundations were dug,

Persons who had the down payments could get mortgage money even though

financing was being referred to as a problem.

Bankers and financial

institutions had become accustomed to operating with negative free re

serves around $350 million.

Mr.

Fulton said he agreed with Mr. Mills that

from now until the end of the year natural forces should be permitted to

tighten the situation.

He would favor higher negative free reserves, and

the discount rate might well be looked into.

However,

he would favor

waiting on the latter point until after the next meeting of the Committee.

By then the Committee could see whether the recent increase in

rate had helped its

restrictive policy.

the prime

On the whole, Mr. Fulton felt that

additional restriction was called for and he was certain that the Committee

should not "float along on a level plane" when the market was demanding

more funds.

Mr. Williams said that there was a feeling of confidence and opti

mism in

the Philadelphia District.

He noted that capital expenditures in

1955 will total around $308 million or 28 per cent above the forecast for

such expenditures at the close of 1954.

The estimate of capital expend

itures for 1956 was now $286 million, about 7 per cent below the probable

actual total for 1955.

With respect to these figures,

Mr. Williams noted

what seemed to be a persistent tendency of manufacturers to overstate prob

able declines and to understate prospective increases in

capital expenditures

10/25/55

-19

for a future period.

His feeling was that the Committee should maintain

the existing degree of pressure and "put a little

on the brake."

in

more power into the foot

He would not go as far as Mr. Robertson, but if

direction were to be made during the next few weeks it

any move

should be toward

a slight increase in pressure and the Committee should be prepared to move

promptly in

either direction if

Mr. Powell said that if

that seemed advisable.

negative free reserves were kept in the

neighborhood of $300-400 million at this time of year the Committee's

action would be misunderstood.

their borrowings at this season,

mittee should not let

It

was expected that banks would increase

and he could see no reason why the Com

borrowings proceed to the normal limits without

indulging in open market operations as a means of reducing the effect of

such borrowings.

If

negative free reserves rose above $500 million during

the next three weeks he could see no reason for concern.

He would hesitate

to do anything as drastic as increasing the discount rate again at this

time of year, feeling that that might be misconstrued as indicating that

the System was trying to eliminate the normal seasonal expansion of credit.

He did not think the Committee desired to keep business from having the

normal seasonal credit increase which would be followed by a seasonal

decline.

Mr. Powell said that he would leave open market operations almost

completely dormant during the next three weeks,

reserves by borrowing.

letting banks obtain needed

He thought there would be no unusual borrowing

which would force the Committee to change that policy before the next

meeting.

-20Mr.

Balderston said he continued to be concerned about the rise in

industrial prices stemming from wage adjustments on the one hand and on the

other from the fact that production is

industries.

Therefore,

than we have had in

in

pressing on capacity in numerous

he would move in the direction of greater restraint

the past three weeks.

He would not now favor a change

the discount rate until there had been opportunity to see more clearly

what, if

any, importance the change in prime rate has had.

Concretely,

Mr. Balderston said, he would hope the Committee would aim at these targets:

(a)

a bill

rate somewhat in

excess of the present discount rate, (b) nega

tive free reserves of approximately $500 million but certainly in excess of

$100 million.

He felt

it

extremely important that actions of this sort

serve as a signal that the Committee was not being "taken in"

views appearing in

the press as to imagined changes in

since the illness of the President.

by any of the

the business mind

Some of these press comments, he felt,

were designed to bring about changes in policy which would be politically

beneficial next year; we were in

the midst of talk which was difficult to

interpret except in the light of an election year coming up.

that businessmen may have changed their minds in

He suspected

some respects because of

the President's illness, but he could not find clear evidence of that having

happened.

Chairman Martin said that he had had the benefit of having heard

the comments of the others this morning.

his reaction to the President's illness in

the time and felt

it

He wanted to start by indicating

September.

He was in Rome at

was as dramatic a shock in Europe as any event that

10/25/55

-21-

had occurred in his lifetime.

While this was a broad statement he was

judging by discussions he had had with correspondents and others.

Word

of the President's illness came at a time when nothing of that sort

was expected and at a time when inflation was uppermost in

the minds of

many, and when the President had assumed a leadership as a result of

the Summit Conference,

which had resulted in

a bulge in confidence out

of all proportion to any other recent events.

Without being disrespect

ful in any way, Chairman Martin said that he thought the announcement

of the President's illness had a very helpful influence because it

de

flated the "confidence bulge" that had been blown up out of all

proportion to what was justified.

Chairman Martin went on to say that he was among those who

believed the Committee had been dilatory in

in the spring and summer of the year,

dramatically earlier it

time.

If

approaching the build-up

the System had acted more

would have been in a better position at this

However, he agreed completely with Mr. Sproul that, even if

were true,

this

that was not a reason at this later juncture to put more

burden on monetary policy than that policy could bear.

If

he were

correct that the System would have been better off to have increased

pressure faster earlier this year, that was no reason to try to press

things at this juncture.

The Christmas trade is

Martin said, and he thought it

would be colossal.

upon us, Chairman

He was convinced

-22that much of the bulge that was exploded by the President's illness

would be rebuilt.

which, if

put in

In other words,

he thought business has a confidence

terms of the stock market may well see prices rise to

the old highs even though there would be some drag.

Chairman Martin said that his own thinking ran completely with

what he sensed to be the majority view expressed this morning except

that he leaned very strongly on the side of not relaxing, and he would

not be the slightest bit

worried about a substantial rise in net

borrowed reserves for a limited period above the $400-500

range.

In other words,

million

he would make whatever errors were made on the

side of dispelling the idea that the System was going to ease its

policy.

He thought it

would be unfortunate to let

market commentators

interpret policy for the System.

It

said.

was a problem how to sum up this policy, Chairman Martin

He thought no change in

the basic directive of the Committee

to the New York Bank was called for and,

specifically, clause (b) of

paragraph 1 of the directive which called for open market transactions

with a view "to restraining inflationary developments in the interest

of sustainable economic growth" seemed to meet the views expressed.

Chairman Martin inquired whether there was any other view as to the

wording of the general directive, and none of those present indicated

-23a different view.

The Chairman then went on to say that the discussion

had revolved around Mr. Sproul's suggestion that, as a rough guide, a

range of $300-400 million for net borrowed reserves be used as a target

for the next three weeks.

He said that he assumed, however, Mr. Sproul

did not intend that this be an exact target.

Mr. Sproul said that he thought too much emphasis had been

placed in

the discussion this morning on some particular figure or fig

ures of negative free reserves.

$300 or $400 or $500 million.

He did not know whether it

He thought it

the effects as conditions developed in

should be

more important to consider

the money market.

$300 million

If

of net borrowed reserves were accompanied by a further run-up in short

term interest rates which seemed to be creating greater tightness than

the Committee intended, that would call for one action; if

level was not bringing about that sort of response,

require any action.

a $500 million

then it

might not

Mr. Sproul thought the Committee should be paying

more attention to the market effect on interest rates and credit exten

sion than to any particular figure of negative free reserves.

the Treasury bill

Also, if

rate should go above the discount rate and stay there,

the rate on repurchase agreements might be raised, thus giving an

indication of the Committee's willingness to see rates move up some

what without actually raising the discount rate.

Mr. Sproul

reiterated that he thought too much attention had been paid to "free"

10/25/55

-24

reserves and that more attention should be paid to (a) member bank bor

rowings,

(b)

developments,

the level of reserves,

and (d)

changes in

to a question from Mr.

Thomas,

bond market as well as in

observed, in

whether it

(c)

the reaction in

interest rates.

the market to these

He also said, in

response

that he would include developments in

the

the short-term market as another factor to be

terms of the effectiveness of the Committee's policy and

was carrying through.

As he had indicated before,

the present

buoyancy might be based partly on market expectations which the Committee

would not wish to make come true by its

policy.

There had been a temporary

dearth of new offerings which was now being remedied and which would con

tinue to be remedied in

the next few weeks.

Mr. Rouse referred to the suggestion that the repurchase rate might

be permitted to rise above the discount rate,

and he expressed the view that

such an increase need not depend on whether the average issuing rate for

new issues of Treasury bills rose above the discount rate.

Mr. Pobertson inquired what Mr. Sproul might have in mind as an

average issuing rate on bills, and Mr.

specific figure in

Sproul responded that he had no

mind although he would think the average issuing rate

would move higher if

the Committee policy were carried out in line with the

discussion at this meeting.

This did not mean that the repurchase rate

would need to be administered in accordance with changes in

if

that rate should go down for one week.

However,

if

the bill

changes in

rate

Treasury

bill rates and other short-term rates and the attitude of banks toward

-25

10/25/55

making loans contributed to a feeling of ease greater than had been main

tained recently, then it

reserves to rise.

Mr.

would be appropriate to allow negative free

Sproul went on to say, in response to a further

question from Mr. Robertson as to what degree of restraint the Committee

wanted to maintain, that in terms of the bill rate he would think it

would

be a rate fluctuating around the discount rate.

Mr. Leach said that he thought there had been a tendency in dis

cussions to attach too much importance to small changes in net borrowed

reserves.

He had mentioned $400

million of borrowed reserves as a desir

able target, but he would not be concerned if

reserves of $500 million.

the results showed borrowed

After all, he said, there would not be a tre

mendous increase in pressure if

we should supply an additional $100 million

of needed reserves through the discount window.

Chairman Martin said that this pointed up the problem that the

Committee had been wrestling with for the last several years.

know how it

could be resolved.

He did not

None of the members of the Committee

thought of these figures as exact goals; they were target figures only.

It

seemed to him that, whatever was used as a guide,

the majority opinion

expressed today leaned on the side of restraint but not dramatically.

He

thought this might be as good a summing-up as the Committee was likely to

get at the moment.

One or two of the comments this morning were on the

side of more negative reserves; some would maintain the status quo and not

get any tighter; but none had indicated they wanted to ease the situation.

10/25/55

-26

The Committee was dealing with a series of imponderables.

It seemed to

the Chairman that the consensus of the meeting was that the Committee

should maintain a restraining influence on the market but that it

wish to increase that pressure drastically.

did not

He inquired whether any one

could suggest a clearer statement of what the Committee had in mind for

the next three weeks.

Mr. Shepardson said that it

seemed to him that the discussion

might indicate some firming of pressure so that there would be no doubt as

to which way the Committee was inclined.

Chairman Martin said that this was another shade of emphasis on

the same consensus he had tried to state.

He again inquired whether there

were any other suggestions for phrasing the consensus of the Committee more

accurately.

Mr.

Sproul stated that he thought Chairman Martin's preceding

phrasing--"to maintain a restraining influence on the market but not to

increase pressure drastically"--expressed the majority sense of the Committee.

Mr. Rouse said, in

response to a question from Chairman Martin, that

he thought the intent of the Committee was reasonably clear from the dis

cussion.

There had been an even keel during the last

three weeks and the

Committee would like to keep up the pressure during the next three weeks

and have a little

more.

It was understood that the policy to

be pursued by the Committee would be in

terms of Chairman Martin's suggestion that,

until the next meeting, operations be with

10/25/55

-27

a view to maintaining a restraining

influence on the market without in

creasing pressure drastically.

Thereupon, upon motion duly made

and seconded, the Committee voted unan

imously to direct the Federal Reserve

Bank of New York until otherwise di

rected 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

commerce 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;

provided 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;

To sell direct to the Treasury from the System

(3)

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.

-28-

10/25/55

It was also understood that the

Committee approved a renewal of the

authorization for repurchase agreements

as follows:

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 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 the Federal Reserve Bank of New York

shall be sold in the market or transferred to the Sys

tem open market account.

Mr.

Thomas said that some of the discussion of the mortgage situa

tion implied that there had been an actual cutback in

mortgage funds available.

the amount of

He noted that more mortgage loans were now being

made than at any previous time in history and inquired whether the situa

tion was not one in which demand for funds was simply exceeding the supply,

particularly now that there had been some restraint on additions to available funds.

-29

10/25/55

Mr. Earhart said that in the Twelfth District the tightness in the

mortgage situation was the result of the increased demand for such funds.

Mr. Rouse noted that in

associations,

the case of the Federal savings and loan

some of the reaction was related to the decision by the

Federal Home Loan Bank Board to cut off additional supplies of funds.

Mr. Erickson said that in the Boston area savings banks, which

formerly had from 40 to 45 per cent of their deposits placed in mortgages,

more recently had found that they were getting closer to the 60 per cent

legal limit for such investments and that this was adding to the feeling

of tightness for such funds.

Mr. Leedy commented that a well-informed person in the residential

building field had expressed the opinion in the presence of Governor

Shepardson and himself that the manner in which action was taken by the

Home Loan Bank Board in

curtailing credit to savings and loan associations

would have a definite effect on building starts, and also that recent public

statements regarding warehousing of mortgages would have the effect of

cutting back mortgage extensions.

Mr. Roelse commented on a conversation he had had last week with an

official of a New York savings bank who gave the impression that some of the

savings and loan and other mortgage lenders had gotten into an overextended

position earlier this year and were now in process of cutting back on their

commitments in order to get their institutions back into line.

This would

have an effect on builders over the next few months but the situation, ac

cording to this official, might get pretty well in balance by the end of

10/25/55

-30

1955 and, by the spring of 1956, there would be a freer flow of mortgage

money.

By then, a good volume of mortgage money could be expected to be

available.

Mr.

Shepardson referred to Mr. Leedy's comment and to a state

ment he had heard in

the Midwest last week that there would be a very

material school-building program within the next year or so which would

tend to offset any shrinkage in residential construction.

Mr. Sproul said that there seemed to be a growing attitude in

the residential building industry that any amount of funds should be forth

coming to support a growing volume of building that had been stimulated by

the easy terms.

This was resulting in diverting more and more of the mort

gage credit to banks rather than having it

accumulated savings,

go to institutions which mainly

such as savings and loan associations,

savings banks,

and insurance companies.

Chairman Martin asked that Mr. Robertson comment on a memorandum,

prepared under date of September 29,

1955, on defense planning for the

Federal Open Market Committee.

Mr.

Robertson stated that copies of the memorandum were distrib

uted in accordance with the understanding at the meeting of October 4 and

that the only suggestion received thus far was one from Mr.

Irons, who

raised the question whether all Federal Reserve Banks might be designated

as alternate agents for the Committee.

Mr. Robertson indicated why, on

the basis of the test at the relocation center in

June of this year, it

-31-

10/25/55

would seem preferable not to designate all

Mr.

Robertson also said in

Federal Reserve Banks as agents.

response to a question from Mr. Earhart that

the suggestion for training individuals contained in his memorandum would

apply to individuals at Federal Reserve Bank branches as well as at head

offices.

Mr.

Sproul made a statement substantially as follows:

The following comments are suggested to me by Governor

Robertson's helpful memorandum on emergency planning.

1. All Federal Reserve Bank planning is now going forward

on the basis of no Federal Reserve Bank or branch being

able to carry on its functions in its usual location.

This means setting up of relocation centers and I see no

reason why we should plan for the conduct of open market

operations on a different basis in case of an emergency.

2.

Federal Reserve Open Market Committee planning must re

late to

operations having to do with monetary and credit

(a)

policy,

operations having to do with our responsibility for

(b)

the Government securities market, and

operations having to do with the immediate needs of

(c)

the United States Treasury.

So far as monetary and credit policy is concerned, outright

3.

purchases may have to be made to supplement member bank

borrowing.

All Federal Reserve Banks might be authorized to make

(a)

direct purchases from holders of Government securities.

Some Federal Reserve Banks might be authorized to make

(b)

purchases for System Open Market Account either direct

from commercial banks or through the Government securi

ties market, if functioning.

The Government securities market might be disorganized or

4.

temporarily non-existent and we might wish to provide a

market or prevent disorderly conditions in the market.

Immediate Treasury needs might have to be met by direct

5.

purchases from the Treasury.

Advance authorities will be needed to make it possible

(a)

6.

for these operations to be carried out.

There will have to be personnel at the selected re

(b)

location centers to handle whatever open market opera

tions are undertaken by individual Federal Reserve Banks.

10/25/55

-32

(c)

7.

Location of the System Open Market Account.

The probable location of a Government securities

market, if functioning, the fact that a large part

of the Government securities that ordinarily pass

through the market are held by banks in New York City,

and the possible availability of experienced personnel

suggests the primary location of the System Open Mar

ket Account at the relocation center of the Federal

Reserve Bank of New York.

Supplementary facilities

might be located at one or two other relocation centers

of Federal Reserve Banks and if New York's relocation

center is not able to function, available members of

its staff might be moved to one of the other reloca

tion centers.

In order to develop specific arrangements drawing on

Governor Robertson's memorandum and these comments I think

it would be desirable to appoint a subcommittee to be

assisted by informed staff members,

Chairman Martin noted that under a previous action by the Commit

tee he was authorized to appoint a committee for the purpose of studying

defense planning for the Federal Open Market Committee and said that, in

the absence of objection, he would proceed to appoint such a committee

No objection to this procedure was indicated.

Chairman Martin stated that another letter had been received from

Congressman Wright Patman under date of October 17,

1955, in which Mr.

Patman inquired as to the Board's views regarding provisions of the

Internal Revenue Code which permit banks to treat capital losses on securities

as fully deductible from ordinary income.

Mr.

Patman had inquired whether

this provision of the Internal Revenue Code conflicted with Board policy,

for example in a period when policy sought to restrain excessive expansion

of bank credit.

At Chairman Martin's request, copies of the letter were

10/25/55

-33

distributed, and he stated that he would be glad to receive any sugges

tions regarding the answer to be made to Mr. Patman.

There was agreement that the next meting of the Committee would

be set for 10:45 a.m. on Wednesday, November 16, 1955.

Thereupon the meeting adjourned.

Assistant Secretary