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 Wednesday, November 16, 1955, at 10:45 a.m.

PRESENT:

Mr. Martin, Chairman

Mr. Sproul, Vice Chairman

Mr. Balderston

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Earhart

Fulton

Irons

Leach

Mills

Robertson

Shepardson

Szymczak

Vardaman

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

Alternate Members of the Federal Open

Market Committee

Messrs. Williams, Bryan, and Leedy, Presidents,

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. 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

Mr. Mitchell, Vice President, Federal Reserve

Bank of Chicago

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Secretary's note: Mr. Powell, alternate

member of the Committee, planned to attend

this meeting but was unable to be present

because his plane was grounded.

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Committee

held on October 25, 1955, were approved.

Before this meeting there had been distributed to the members

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

New York covering open market operations during the period October 25

to November 9, 1955, inclusive, as well as a supplementary report cover

ing commitments executed November 10-15,

1955, inclusive.

Copies of

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

Committee.

Mr. Sproul noted that Mr.

the meeting, and it

Rouse had been delayed in reaching

was understood that discussion of the report would

be deferred until he arrived.

Chairman Martin called upon Mr.

Ralph Young for a statement on

the economic situation concerning which a staff memorandum had been dis

tributed under date of November 10, 1955.

Mr. Young reviewed the situa

tion in summary form, making a statement substantially as follows:

Currently, the economy is at a stage of bulging, even in.

features

flationary, industrial prosperity. Broad advance still

industrial output, though the pace of advance is slower than

earlier as capacity output is being approached in more and more

lines. Markets for industrial commodities are very strong, with

demand pressures manifested in a quite slow rise in business in

ventories, in a climbing backlog of manufacturers' orders, and

in a spreading of industrial price increases. The labor market

shows every evidence of further tightening. Also, business,

financial, and consumer confidence and optimism are once again

on the ebullient side.

While agriculture is

less prosperous

11/16/55

than last year, it is still

relatively well off. Furthermore,

with the peak of livestock marketings almost passed, the de

cline in farm prices would seem to have largely run its course,

Continued over-all price stability on the basis of offsetting

movements of farm and industrial prices is thus a less likely

prospect. With further substantial expansion in business capi

tal investment now indicated, demand pressures on the industrial

side are such as to point to some lifting of the average commod

ity price level.

As to the specifics of the situation:

The Board's index of industrial production is now put at

142 for September and about the same for October. At this early

point, the November index is expected to reach 143.

The further rise in industrial output reflects additional

advance in production of metals and fabricated durable goods

and a new high for the output of nondurables.

With automobile model changeovers now complete, automobile

production is proceeding at earlier advanced rates.

New model

reception is reported as favorable and, although dealers are

shaving prices to buyers, dealer margins are stated by trade

sources to be profitable on reasonable volume basis. In October,

new car stocks showed little change, as output approximated sales.

With used car sales holding one-fourth above a year ago, dealer

stocks of used cars showed an appreciable decline. Downward

used car price adjustments recently, except for older cars, seem

to be about consistent with new model introductions.

Output and retail sales of household durables have generally

been maintained at advanced levels.

Instalment credit expansion proceeds apace, with credit

terms--at least on the downpayment side--showing some tendency

to stabilize.

Retail sales, over-all, were off slightly in October, re

flecting mainly lower sales by auto dealers. However, they were

still about an eighth above a year ago. Department store sales

have held at high September levels until recently, when adverse

weather conditions have reduced sales in some areas.

Manufacturer sales in September, while a little under the

August level, ran a fifth larger than a year ago with increases

New orders ran ahead of sales again,

for the year quite general.

to $53 billion, or 10 per cent

orders

of

backlog

bringing the

time.

this

at

year

over last

Business inventory growth has been exceptionally moderate,

considering the momentum of the upswing, and recently price in

creases have played a greater part in the inventory value rise.

The month-end value of stocks for September was only 4 per cent

over a year ago.

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Value of new construction in October at just under $42

billion was off slightly from record spring and summer levels.

Construction for business purposes continued to rise. New

housing starts continued at a 1.2 million unit rate. But value

of contract awards were off from the high September volume, re

flecting mainly reductions in public works and utility

awards.

The McGraw-Hill compilation of plans for next year' s busi

ness plant and equipment expenditures clearly reflect the per

vasive optimism of businessmen, even though some window dressing

element may be present in the figures.

The plans would indicate

a 10 per cent increase from the fourth quarter of this year to

the fourth quarter of next year, assuming an even time spread

of the expenditure pick-up.

This percentage increase is no

greater than for this past year, but the economic situation

which is called upon to absorb the increase is altogether dif

ferent than a year ago.

Labor market figures show a further rise in total employ

ment, manufacturing employment, hours of work, and earnings,

greater tightness of supply in relation to

all spelling still

demand.

In agriculture, livestock prices have declined further,

declines affecting both hogs and steers. Grain prices have

adjusted to support prices, but recently cotton has firmed

some to above the support level.

Cash returns from farm marketing are continuing about 4

per cent under last year, and, with farm expenses not changing

Farm debt in these

much, farm net income is down even more.

conditions is showing a fairly substantial rise--up 10 per cent

over last year.

Despite the indicated price, income, and debt developments

confidential reports confirm a continuing,

agriculture,

for

though gradual, general rise in farm land values.

Industrial prices have been rising about 1 per cent a month

since mid-year and already indicated and prospective increases

appear likely to sustain this rate of advance in months immedi

Crude rubber prices have advanced again; also

ately ahead.

copper scrap, and London futures for copper. At some producers,

carpet prices and some cotton textile prices have been marked

Other recent price advances of note include crude

up recently.

oil, newsprint, cement, tin cans, new model autos, tires and

Expectations of a further

tubes, and a variety of other items.

widespread.

are

rise

steel price

change, although

Consumer prices have been showing little

prices of commodities other than foods and of services have been

edging up, Sears, Roebuck & Co. have stated that the average of

prices in the company's forthcoming catalogue will be up 2 per

cent from the mid-year edition.

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11/16/55

Abroad, trade and industrial development seem best charac

terized as showing some further advance but with greater uneven

ness of trend. In some cases, as in Britain, capacity operations

offer obstacles to further advance. Wholesale prices in a number

of countries have been registering some advance. Among the more

important items of foreign news are the indications of a gradual

lifting of adverse financial clouds over Britain.

Mr. Thomas stated that the situation presented in the economic

review was reflected in financial developments and in

It

the money market.

was becoming clearer that the economy was operating very close to

capacity and that the possibility of further growth was much more limited

than a year ago.

Hence,

some slowing of credit growth would be needed

if consumption and production demands were to be kept in

ductive capacity.

line with pro

The pressures of demand on limited supplies were

beginning to appear in rising prices of industrial materials and prod

ucts, Mr. Thomas said, and the ebullient economy was showing signs of

inflation.

Mr. Thomas noted that since the meeting on October 25 there had

appeared some ease in the money market.

To some extent this had been

attributed to rumors of a shift to an easier credit policy.

However,

his view was that the appearance of ease could be partly explained by

a more active use of the available money supply to purchase securities.

Such increased use of available money is a result to be expected in a

period of high interest rates, Mr. Thomas said.

Within the past few

days there had been some tightening in the money market more in accord

ance with the restricted bank reserve position.

Credit demands continue heavy, Mr.

Thomas pointed out; consumer

credit has expanded at an unprecedented rate; mortgage demand continues

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11/16/55

very large, and there are complaints of difficulties in obtaining funds.

New capital issues were exceptionally large in October and quite sub

stantial in November, and the calendar for the period ahead is also

heavy.

Business loans at banks continue to increase, compared with

declines in the same period last year.

Mr. Thomas reviewed changes in bank condition figures, noting

that within the past year commercial banks had increased loans by nearly

$12 billion but reduced holdings of Government securities by over $7

billion.

Thus, there had been a decline in the liquidity of the bank

ing system, but on the other hand there had been an increase in the

liquidity of the economy which had expanded holdings of both cash and

Government securities.

Individuals, businesses, and institutional in

vestors had used funds to purchase Government and other securities

which they considered to represent liquid assets.

Apparently, about

$$ billion of Government securities had been absorbed by public and

private pension and trust funds, and corporations and individuals had

each added about $1 billion to their holdings.

In addition, nonbank

investors had acquired substantial amounts of other securities and

mortgages.

Mr. Thomas also noted that the money supply had increased dur

ing the past year, although at a slower rate than during the three pre

ceding years.

Since January, the growth had been at a seasonally ad

justed annual rate of barely 1-1/2 per cent, but the rate of turnover

of deposits had increased.

There had been greater activity in security

markets and common stock prices had risen to the previous high level.

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Net borrowed reserves recently have been running around $600

million to $700 million and, while there would be some reduction in

borrowed reserves during the next few days, the level was expected to

average above $500 million for the current reserve week.

In the ab

sence of open market operations it was anticipated that net borrowed

reserves would be somewhat lower in the next statement week and then

would increase to around the billion dollar level in December.

Pur

chases or repurchases of Government securities by the System of around

1/2 billion dollars would maintain something like the present pressure

on the market.

Pressure could be increased by forcing banks to borrow

more of their needs.

Mr. Rouse entered the room while Mr. Thomas was presenting his

statement.

In response to Chairman Martin's question, Mr. Rouse said that

he had no comments to make on the reports of open market operations

prepared at the New York Bank and distributed prior to this meeting,

and none of the members of the Committee raised any questions in con

nection with the reports.

Thereupon, upon motion duly made

and seconded, and by unanimous vote,

the open market transactions during

the period October 25-November 15, 1955,

inclusive, were approved, ratified, and

confirmed.

Chairman Martin stated that before proceeding with discussion

of open market operations, he wished to comment on a telegram he had

sent to the President of each Federal Reserve Bank under date of

11/16/55

November 9, 1955 suggesting that, without implying that action should

be taken on the matter, there be a full review of the discount rate by

the directors of the Reserve Bank at their next meeting.

That wire,

Chairman Martin said, was sent out in accordance with the general

thought that the Federal Open Market Committee should be the focal

point of discussions of all aspects of System credit policy.

The wire

should not be construed as indicating that any position had been taken

by the Board regarding a possible change in the discount rate; it was

sent with the thought that it

would be desirable if

all of the Presidents

could be adequately prepared to discuss the problem of the discount rate

at today's meeting.

Chairman Martin then called upon Mr. Sproul who

made a statement in which he brought out the following points:

1. There seems to be little question about it--businessmen

and consumers have thrown off, for the present, doubts about

the economic situation which may have been created by the

President's illness.

2.

Consumer spending and borrowing continues in high gear,

the savings ratio is down to the lowest level of recent years,

demand for business loans is still

high, and plans for busi

ness spending for plant and equipment during 1956 are sub

stantially, even dramatically, higher than in 1955.

3. At the same time we are obviously nearer to current ceil

ings on production and employment than we have been for some

time past.

4. Combined with a generally optimistic attitude about the

outlook, as reflected, for example, in the stock market which

has recovered most if not all of its September-October losses,

and with the fact that increased costs are still working their

way through the economy, this is a situation which might well

be headed for higher prices and the possibility of speculative

excesses.

5. To be sure, the statistics of the recent past don't make

The

an ironclad case for further anti-inflationary measures.

pace of physical expansion is slower than it was. Clear evi

dence of either an upward wage-price spiral or of widespread

11/16/55

material or employment bottlenecks is still

lacking, although

there are some evidence of both. While inventories are in

creasing, they are increasing less than sales (this may be

involuntary) and at a slower rate than earlier in the year

($2.5 billion annual rate in the third quarter, compared with

$4.5 billion in the second quarter).

It might indeed still

be argued that, except for the agricultural situation, we are

enjoying an almost ideal state of production, employment, in

come, and prices.

But part of our job is to try to help keep

it that way, and recent pressures suggest the possibility of

an outbreak on the upside, which we could help to prevent be

coming a movement of prices rather than of production.

6. We have, of course, been allowing the seasonal demand for

bank credit to press against available reserves during recent

weeks, and member bank borrowings are higher, net borrowed re

serves are higher, the money market has been tighter, and the

tendency of most short-term rates of interest has been upward.

In other words, a policy of credit restraint has been maintained

and even increased, but it has not worked through as effectively

as might be desired, either in terms of the supply of bank credit

or in the capital markets. Particularly in the municipal and

corporate bond market, during most of the past several weeks,

there has been more buoyancy than two or three months ago, with

some issues which were then withdrawn because of unsatisfactory

bids coming to the market at equally favorable or more favorable

rates.

7. One thing that has worked against the effectiveness of exist

ing credit policy has been the widespread opinion, following the

President's illness, that credit restraint had reached its peak

and that relaxation was in the offing as 1956 approaches. The

published figures of open market operations have begun to dispel

this belief, I think, but until the last few days they seemed

slow in taking hold. Another increase in the discount rate might

confirm the continuance of restraint and help ward off possible

speculative excesses which now appear more likely than they did

a few weeks ago. We can't allow rumors to make policy but, at

times, they do become part of the climate in which policy is made.

8. Treasury operations are again about to become a complicating

factor. The Treasury will be in the market to refund a $12 bil

lion December 15 maturity at the end of this month or early in

December, and it will probably have to follow that up with up

to a $1 billion cash borrowing before the middle of December.

Avoidance of an unsettled market during the period of Treasury

financing means we shall have to stand aside, pretty much from

mid-November to mid-December. If it were not for this factor, I

would favor postponing further restrictive action until we have

had a little more time to observe the results of what we have

already done, which appears to have begun to take hold during

the past week.

11/16/55

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9. In all the circumstances, however, it seems to me to be

the part of prudence and wisdom to increase the discount rate

to 2 1/2 per cent now, putting a little

more cutting edge on

the relatively high level of borrowing which I assume we shall

expect to maintain, for the present, through open market opera

tions. If such an increase in the discount rate has too great

an adverse effect, particularly in the capital markets, of course,

we may have to give temporary relief through open market opera

tions.

The way for an increase in the discount rate has been

somewhat prepared, however, by the increase in our repurchase

rate from 2 1/4 to 2 3/8 per cent on November 10, and the "shock"

of an increase in the discount rate should not be so great, given

the prevailing broad optimism about the economic future.

10. Gradual consistent pressure, when further expansion of bank

credit may go into increased prices rather than into increased

production (as it has already been doing, for example, in the

building industry) seems to me to be the way to try to have a

boom that doesn't "bust".

Mr.

Szymczak inquired whether Mr. Sproul's statement to the

effect that an increase in discount rate should not be made between

mid-November and mid-December because of the forthcoming Treasury

financing indicated that he did not favor an increase in the rate at

this time, or whether it

should be taken to indicate that the rate

should be increased immediately.

Mr.

Sproul responded that he felt the rate should be increased

at once since, unless the increase were made this week, it

probably

would have to wait until after the Treasury financing.

Mr. Szymczak said that he favored an increase in the discount

rate at this time.

He would then observe the situation closely until

the first part of 1956 to see what happened as a result of seasonal

changes and political developments that might affect the economy.

Also,

he would pursue an even tighter policy in the open market than had been

11/16/55

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followed recently, although he felt the open market account should be

in a position to furnish additional reserves to the money market for

a temporary period if

an increase in

the discount rate resulted in too

much tightness.

Mr.

Erickson commented on conditions in the Boston district,

stating that activity there did not seem to be "boiling" as much as in

other districts.

In speaking of consumer instalment debt, Mr. Erickson

noted that the percentage of the United States total of such debt held

in New England was larger than the percentage of the country's consumer

income in

that region.

Consumer debt at member banks in New England

had increased by 19.2 per cent since December 1954, compared with an

increase of 15.1 per cent for the United States as a whole.

Mr. Erickson

cited an instance of a mutual savings bank which had asked a Boston cor

respondent for a written confirmed line of credit for a period of one

year for which it

sure that it

was willing to pay a commitment fee, in order to be

would have funds available to meet its

advances during that period.

needs for mortgage

He went on to say that, considering the

economic situation and the psychology of businessmen and the general

public, he proposed to recommend to the Board of Directors of the Boston

Bank at its meeting to be held next Monday that it

rate.

increase the discount

Mr. Erickson said that he also believed that the Open Market Com

mittee might well follow a somewhat tighter policy than it

lowing.

has been fol

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11/16/55

Mr. Earhart said that he favored an increase in the discount

rate to 2-1/2 per cent and would so recommend to his directors.

He

also said that the members of the research staff at the San Francisco

Bank were opposed to an increase of the discount rate at the present

time.

His reasons for favoring the increase had been well stated by

others this morning, Mr. Earhart said, and in addition, banks in

the

Twelfth District seemed to be going ahead fairly freely in meeting

credit demands and some of their use of the discount facilities had

reached the stage where the borrowing was for more than temporary con

tingencies.

This raised the question whether the Reserve Bank should

"close the discount window" just a little

by cautioning banks with re

spect to the programs they were following.

Mr. Earhart recalled the

difficulties which arose as a result of admonishments against extended

use of the discount facilities in

his opinion if

the spring of 1953 and stated that in

the impression were created that the Reserve Banks were

closing the discount window a little,

that might create a tighter situa

tion than would be caused by an increase in

the discount rate.

His

preference was to have an increase in the rate rather than to resist

too strongly the borrowing of banks at the Reserve Bank.

While he would

prefer to be able to wait a week or two to see whether the actions al

ready taken by the System were having enough effect in the short-term

money market and in

the capital market, he felt that in view of the

timing of the Treasury's financing,

was called for at this time.

action in raising the discount rate

11/16/55

.13

Mr. Irons said that conditions in

booming.

the Dallas District were

There had been a resurgence of confidence among businessmen

during the past few weeks.

A survey that the Dallas Bank had made in

82 counties and parishes of the District during the past two weeks showed

almost without exception that the picture was one of very strong con

fidence.

Bankers,

businessmen, and farmers anticipated stronger business

this year-end than a year ago and were highly confident about the first

six months of 1956.

Agriculture was in fairly good condition, although

many farmers in the Dallas District were discontented and disgruntled.

This feeling seems to be associated with the belief that the farmer is

not sharing in the boom to the same extent as industry; in

the farmer is

addition,

unhappy about the price developments for farm products.

From the standpoint of income,

many farmers are better off than last

year and banks were expecting farmers to pay off loans which had been

carried from earlier years.

currently is

Demand for credit in

the Dallas District

stronger than at any earlier time although banks, which

are under considerable pressure, are resisting these demands and are

culling their loans.

Mr. Irons described the discussion of the discount

rate at the meeting of the Dallas directors last Thursday in the light

of the telegram received from Chairman Martin.

While he recommended re

establishment of the rate but without any attempt to press the matter,

he said, he thought most of the directors would have voted against an

increase in the rate at that time unless he had developed an unusually

strong case in

support of an increase.

Mr. Irons stated that he felt

11/16/55

-14.

an increase in discount rate at this time would have its

initially in

the capital markets and that it

under these circumstances if

would seem more appropriate

such an increase originated in New York.

Some of the Dallas directors had indicated that if

creased its

greatest impact

the New York Bank in

discount rate, they would be willing to follow promptly with

an increase at the Dallas Bank.

Mr. Irons stated that he would be pre

pared to call a special meeting of his Board and recommend an increase

in the discount rate, assuming that action were taken promptly by other

Banks,

including New York.

Mr. Leedy said that Mr. Sproul had "covered the water front"

and that he agreed one hundred per cent with his analysis of the situa

tion and his suggestion for moving further in applying restraints.

The

only variation from what he understood to be Mr. Sproul's position was

that, quite aside from consideration of the Treasury's financing needs,

he (Mr.

Leedy) felt

that an increase in the discount rate was called for

at this time.

Mr. Young said that in the Chicago area his contacts with leading

businessmen during the past few days caused him to be prepared to recom

mend to his directors at their meeting tomorrow morning that the discount

rate be increased.

While he did not anticipate a unanimous vote, he felt

the increase would be approved.

Mr.

Leach recalled that at the meeting on October 25, he was

quite satisfied with the results of the Committee's general policy except

for the increase in

prices of long-term Government securities.

He thought

11/16/55

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that increase would be temporary.

The Richmond Bank's directors met

last week and at that time considered the discount rate, after receiving

Chairman Martin's telegram.

They voted unanimously to renew the exist

ing rate of 2-1/4 per cent.

After describing the consideration which

led to this decision, which was in accordance with the recommendation

he had made at that time, Mr. Leach said that he was impressed with the

change that has taken place very recently in the psychology of the public

and businessmen at a time when we were approaching capacity.

There had

been a notable change in psychology during the past week or two.

In view

of the fact that this was probably the last chance for the System to in

crease the discount rate before the end of the year, Mr. Leach said that

he now expected to recommend to the directors an increase of 1/4 per cent

in the rate.

As to open market operations,

Mr.

Leach said that several

hundred million dollars of reserves would be needed before the end of the

year and he thought these should be largely supplied through the discount

window and through repurchase agreements.

Outright purchases should be

used only if the situation became quite tight.

He referred to Mr.

Earhart' s comments regarding "tightening up" at the discount window,

stating that his bank had given a great deal of consideration to this

possibility over the past few weeks.

However, he was hesitant to give

the impression among banks at this time that the discount window was

being "closed" somewhat, feeling that such a development might have more

effect than anything else the System could do to bring on a sudden tight

ening.

For these reasons, he expected to wait until the end of the season

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when some of the banks which had been borrowing continuously were paying

off their loans, at which time the situation would be discussed with

them.

Mr. Vardaman said that he would not comment on whether the dis

count rate should be increased until all of the Reserve Bank presidents

had expressed their views.

He wished to emphasize what Messrs. Earhart

and Leach had said about the discount window:

if there were to be fur

ther tightening, it should be done by direct means, such as an increase

in the discount rate and in

open market operations, and not by partly

closing down the discount window.

Mr. Mills said that he concurred in the desirability of moving

promptly to a 2-1/2 per cent discount rate and maintaining, and if

increasing, the pressure on bank reserves.

possible

This must be done with a very

open-minded attitude and with careful consideration of the liquidity posi

tion of commercial banks and of their reaction to such changes.

As in

dicated by the discussion this morning, the acquisition of Treasury bills

by corporations and institutional investors has been at the expense of

bank deposits, and central reserve cities have felt the brunt of that

situation most severely.

There may possibly be a "psychology of uncer

tainty" that might change to fear if

the System were to act too aggres

sively, regardless of the desirability of the objectives of such action.

Further, on the assumption that the New York and Chicago Reserve Banks

will move to a 2-1/2 per cent discount rate tomorrow, the Committee must

be conscious of the fact that yesterday's moderate sales of $37 million

11/16/55

-17

of Treasury bills gave evidence of this sensitivity of the market

through an immediate downward price pressure on the market.

Mr. Mills

suggested that in this situation perhaps the Manager of the Open Market

Account could comment on the way in which open market operations during

the reserve week starting tomorrow should be correlated with an increase

in the discount rate.

As natural forces in the reserve picture are

going to ease the market tomorrow and during the rest of the current

week, if

the discount rate were increased Thursday, this might be a very

happy circumstance.

It

might be desirable to suspend any Treasury bill

sales for Thursday and Friday with the thought that natural forces could

be allowed to reassert themselves next Monday in order to obtain the de

gree of tightness that might be desired.

This would allow two days of

fleeting ease for the market to adjust to the change in discount rate

and would avoid implying that the change in discount rate was being ac

companied by very agressive open market sales of Treasury bills.

Mr. Rouse commented on the prospective easing in

the reserve

situation during the rest of this week, noting that the picture was ex

pected to shift back next Monday to net borrowed reserves of around $600

million to $650 million.

Mr.

Rouse said that his thought would be per

haps to continue some sales of bills today for delivery tomorrow, and

if

the rumors of a discount rate change were persisting today, this

probably would be sufficient having in mind the extremes contemplated

in net borrowed reserves.

He estimated net borrowed reserves would

average around $300 million for the week ending November 23 and $700

million for the week ending November 30.

Mr. Rouse thought the slightly

easier situation suggested by Mr. Mills between now and the end of this

week would not be undesirable,

announced tomorrow.

done in

if

a change in the discount rate were

He would be inclined to do nothing beyond what is

the market today.

Mr. Robertson stated that he agreed with the views expressed at

this meeting and he presented a memorandum expressing his views,

read

ing as follows:

At the last meeting, I advocated a policy more restric

tive than the one theretofore followed. At that time it was

my judgment that the key financial and economic facts called

for an increase in the discount rate rather than a higher

level of negative free reserves. The events since then have

tended to confirm my judgment that an inflationary situation

was threatening and that anything short of a rise in the dis

count rate would be an inadequate gesture to curb such a threat.

In the two weeks ending November 9, free reserves dropped

from a negative level of $303 million to $44 6 million and then

to $577 million. On Wednesday, November 9, negative free re

serves were over $900 million, and on November 10, repurchase

agreements were entered into at 2-3/8%, 1/8% above the discount

rate. Despite these restrictive Open Market developments, credit

and capital market conditions had not until this week tightened

materially. The Treasury bill rates at first did not rise, but

actually declined further to almost 2%. Only this week have

they regained a level around the discount rate, and then only

by virtue of a volume of negative free reserves in excess of

what was contemplated by the Committee at the time of the last

meeting.

Intermediate and long-term Government bond yields have

risen only moderately, and corporate and municipal yields have

The feeling continues wide

remained relatively unchanged.

spread in financial markets and in the business community in

general that credit restraints will not be tightened any further.

This feeling has not only affected money rates and bond

yields, but has also affected investment and spending as well.

October saw the largest monthly volume of municipal and corpo

rate financing for many months, and all major types of bank

11/16/55

loans also continued to increase rapidly. New financing in

November is continuing very high. Such new financing at at

tractive rates has meant additional funds available for spend

ing by business, consumers, and state and local governments.

It is at least questionable whether the recent rates of

increase in consumer credit, real estate credit, and business

loans can be maintained. If they cannot, the impact on future

levels of business activity will be serious.

Although there has been some rise in Treasury bill rates

this week as a result, in part, of the higher volume of nega

tive free reserves, it is questionable whether even the present

degree of restrictiveness can be maintained by continuation of

this level of negative free reserves. The market becomes ac

customed to any given level of reserves and the pressure result

ing therefrom tends to diminish with time. This is particularly

true at this season of the year.

I am aware that discount rates, as such, are not within the

province of the Open Market Committee, but the Open Market policy

of this Committee must be geared to action on the discount rate.

I still feel that the System's policy of restraint should be

greater rather than lesser, and that the best means of achieving

this end is through an increase in the discount rate.

It seems to me that a rise in the discount rate is necessary

to convince the public that the Federal Reserve is going to exer

cise restraint when such restraint is called for by the over-all

economic situation.

Failure to raise the discount rate could, in the existing

situation, contribute to an inflation that is very likely al

ready in process--except for the agricultural area, price rises

are already widespread and are becoming more so. Such a failure

will not prevent the adjustment in money rates and bond returns

that is bound to come if business is as strong as our economists

portray, but it may postpone it, probably to a time when the mal

adjustments would be even more acute than now and when an adjust

ment would be even more disrupting than now.

On the other hand, a moderate increase in the discount rate

(e.g., a quarter of one per cent) would tend to restore flexi

bility in the use of this instrument. It would now have a

psychological significance, which should be an attribute of

movements in the discount rate, but which will be largely lost

if we wait until after a rise in the rate is past due and partly

or wholly discounted. There are times, and I think this is one

of them, when it is better to lead with the discount rate than

to follow.

11/16/55

-20-

There is very little

time remaining in this year within

which action on the discount rate can be taken without seriously

interfering with Treasury financing activities.

It would seem

to me that failure to act in the next few days will mean that

there can be no action at least until after the end of the year.

If the discount rate is raised, it is possible that a sharp

rise in money rates and bond yields would ensue, but this is

less likely now in view of the increase in the level of the

bill rate during the past three days and the present level of

member bank borrowing from Federal Reserve Banks. Furthermore,

if the general business situation is as strong as our economists

picture it, the chance that such a rise would lead to undue

financial stress is very slim. Even in the remote chance that

it would, we have the means to combat such a development. If

general business is, in fact, on the brink of a downturn, an

increase in the discount rate at this time might precipitate

the turn. But no facts before us today warrant any such eco

nomic prognosis.

If the recent McGraw-Hill survey, which fore

casts business plant and equipment expenditures for 1956 at

13% above those a year ago, is anywhere near the mark, some

thing will have to give, in an economy already operating at

capacity.

Consequently, I feel that there are inflationary pressures

present which should be checked now by a firmer monetary policyone firm enough to curtail spending and thus dampen price pres

The best instrument to use at the moment is the discount

sures.

rate policy. The rate should be raised. The risks involved in

raising the rate are less than those involved in failing to act.

If the discount rate is not raised, then it seems to me

that Open Market policy should be geared to achieve somewhat

greater restraint over the next few weeks than that prevailing

even in the past few days, notwithstanding the fact that, in

view of the projection for free reserves during the next two

weeks, this is likely to be difficult to achieve.

Mr.

Shepardson said that he was thoroughly in

accord with the

views expressed, particularly with those given by Mr. Leedy.

He had

thought an increase in the discount rate was desirable, regardless of

the pending Treasury financing.

Mr. Shepardson went on to say that

agricultural prices had stabilized somewhat recently but as far as he

could see there was no prospect of improvement in general agricultural

11/16/55

-21

prices as long as heavy, burdensome surpluses were overhanging the

market.

The best help the System could give agriculture, he felt, was

to try to prevent further increases in the prices of things the farmer

has to buy.

Mr. Fulton said that the Cleveland Bank directors discussed the

discount rate at their meeting last week reaching a consensus that it

should be raised but did not act to increase it

feeling that they did

not wish totake the lead in such action at this time.

District is

The Cleveland

on an "overtime" basis, Mr. Fulton said, even in the formerly

depressed coal mining industry, and large plant expansion programs are

under way.

Mr. Williams said that a recent survey of conditions in the

Philadelphia District confirmed the need for an increase in the discount

rate at this time.

Mr. Bryan described the discussion of the discount rate at the

meeting of the Atlanta Bank's directors last week, following receipt of

Chairman Martin's telegram.

The directors were inclined toward an in

crease in the rate, he said, and much of their discussion was whether

the increase should be 1/4 of 1 per cent or more.

asked but never answered was, if

One of the questions

the Federal Reserve System does not act

for further restraint under the conditions that now exist, under what

conditions would it

act?

It

was clear that the directors felt that action

should be taken, Mr. Bryan said, and they were prepared to act promptly

11/16/55

-22

to increase the discount rate, provided other Reserve Banks took

similar action.

Mr. Bryan also suggested that, in terms of the longer run

picture, the System might consider whether we have not now passed an

all-time low in the monetary returns on savings.

He suggested that

this subject might be profitably discussed in terms of the shift of

income distribution in the United States, the tendency of population

figures to increase, and the volume of savings that would be necessary

in order to produce a capital endowment for the next generation that

would be equivalent to that available for this generation.

Mr. Johns commented on a discussion of the discount rate at a

meeting of the directors of the St. Louis Bank last Thursday, at which

time Chairman Martin's telegram of November 9 was brought to their at

tention.

The directors re-established the existing rate at that time.

Mr. Johns said that at the time of the directors' meeting, he had just

returned from a vacation and he made no recommendation for a change in

the rate, partly because he wished to have the benefit of a discussion

at this meeting and partly because he wished to review and analyze the

data that had become available to him on the situation upon his return.

He had now reached substantially the position indicated by the views

expressed at this meeting, and he planned to recommend to his directors

that the discount rate of the St. Louis Bank be increased to 2-1/2 per

cent.

11/16/55

Mr.

-23

Balderston concurred in

the general views expressed during

the meeting.

Chairman Martin said that he concurred in the view that the dis

count rate should be increased.

However, he stated that it would be

most unfortunate to have anything in the way of a panic develop among

banks during this period and, while it was desirable to increase the

discount rate, that did not mean that the supply of money also should

be decreased during this period.

He felt that an increase in the cost

of money and a decrease in the supply of reserves did not have to take

place at the same time.

This was a problem to be considered by the

Manager of the Open Market Account,

Chairman Martin said, and he re

iterated the view there should be nothing in the way of a panic, and

nothing should be done that would risk developing a feeling of panic

on the part of banks regarding their ability to use the discount window.

This did not mean that the System was giving up any principles regarding

the discount window.

The System should do what it

could to restrain

excesses at this time, but it should not put undue pressure on the sup

ply of reserves during the period in which the money market and banks

were adjusting to an increase in the discount rate just preceding the

Treasury financing that would be announced at the end of November or

early in December.

Chairman Martin also said that if the discount rate

were not increased at this time, he seriously doubted that a change

could be made until some time after the turn of the year.

11/16/55

-24

Mr. Balderston said that he was concerned that the System go

into the Treasury financing period able to discharge its secondary

obligation to the Treasury by keeping an even keel during the period

of the Treasury's financing.

However, it should go into this period

with as much tightness as the System could contrive to exert without

deceiving the market.

He noted that there had been a rise of 3-1/2

per cent in the industrial component of the wholesale price index

since June of this year and that this meant that the rise has been

at an average rate of 7/10 per cent each month. While it was true

that the rise between July and September immediately after the big

wage settlements was at double the rate of October and November, the

fact was that heavy individual demand was being enlarged by consumer

credit of doubtful quality, and this was being superimposed upon heavy

corporate demand.

The suspicion that businessmen might be altering

their expansion plans for plant and equipment has been answered by

McGraw-Hill and other surveys of next year's expectations.

For these

reasons and because the System's secondary obligation to the Treasury

would inhibit its freedom of action shortly, Mr. Balderston said that

he believed that the System should proceed at once to increase the dis

count rate to 2-1/2 per cent.

Chairman Martin said he did not think it possible to pinpoint

precisely the reaction in the market to an increase in the discount

rate or to say what the adjustments in the market would be between such

an increase and the Treasury announcement of its financing.

The point

11/16/55

-25

he wished to make was that this is clearly a situation where the System

does not want to have both an increase in the discount rate and simul

taneous appearance of a strong reduction in the supply of money.

He

did not object to considerably increased restriction, but it seemed to

him that if both the increase in the rate and a reduction in the supply

of money took place at this particular time it could compound the situa

tion in a way that the Committee did not wish.

before the Treasury financing.

We have a limited period

Whereas he would normally be in favor of

open market operations to reinforce another credit action, in the present

situation he would favor giving the desk some latitude in deciding how

far to go in this period of adjustment.

Mr. Sproul said that he would like to emphasize two points that

had come up in the discussion.

First, it would be quite undesirable

and a great mistake in his opinion to have any indication of a "shut

down" at the discount window at this time.

Secondly, Mr. Sproul thought

the Committee would have to continue its open market operations in the

light of what the reaction to an increase in the discount rate might be

without any preconceived idea as to what net borrowed reserves should be.

He said that he had been a little disturbed by the implication some of

the members of the Committee had given this morning of aiming for even

greater tightness in open market operations.

He did not think the Com

mittee should now commit itself to an even tighter policy until it had

had an opportunity to observe the reaction of the market to a change in

the discount rate.

His concept, Mr. Sproul said in response to a question

-26

11/16/55

from Mr. Robertson, was that the Committee should maintain about the

situation that has developed during the past three weeks, but it should

not say that there should be a particular figure of net borrowed reserves

at the time of a change in the discount rate, particularly since the capi

tal markets within the past few days have begun to react to what the Com

mittee already has done through its open market operations.

Mr. Robertson said that he would agree that it was not desirable

to set a level or even a range of net borrowed reserves, because it was

not possible to see what the pressure would be at any given level.

He

thought, however, that the Committee should maintain at least the degree

of tightness that had existed during the past few days.

In other words,

it should maintain an even keel in relation to the last few days.

Mr. Sproul said that he agreed with Mr. Mills' suggestion that

it

might be appropriate, in terms of carrying out monetary policy, to

have a little

less tightness during the rest of this week as a means of

helping to iron out the adjustments after announcement of the increase

in the discount rate.

Mr. Robertson said that he agreed completely with this view also,

but that for the next three weeks as a whole, the desire to maintain an

"even keel" did not mean that the measure should be what had happened

over the last three weeks, but rather the last three days.

Chairman Martin said that the only place where he would differ

with Mr. Robertson--and the difference might be only one of emphasis

would be his emphasis on giving the Management of the Open Market Account

11/16/55

-27

latitude in

carrying on operations during this period of adjusting to

the rate increase.

He would not be concerned if the operation did not

achieve the recent degree of tightness in

and the Treasury financing.

the period between the increase

What he was suggesting, he said, was trying

to move in the direction of maintaining tightness, but avoiding having

the two forces of an increase in

cost of money and a decrease in supply

of reserves present at the same time the Treasury was getting ready to

announce its

financing.

This was a very difficult situation, he said,

and the Committee should not minimize the difficulties that would be

presented to the Management of the Account in this period.

Mr. Robertson said he did not disagree--that he was in full ac

cord with giving the Management of the Account latitude along the lines

suggested by the Chairman.

Mr. Shepardson referred to the understanding at the meeting on

October

4,

that "the Committee desired to maintain the degree of restraint

that it had been trying to maintain . . . and that . . . doubts should be

resolved on the side of tightness rather than of ease."

He suggested

that the current understanding might be the same, except for omission

of the provision that "doubts should be resolved on the side of tightness

rather than of ease."

Chairman Martin said that this suggestion could be put in the

minutes, but that he did not think it needed to be adopted, and there

was no disagreement with this comment.

He then inquired whether the

11/16/55

-28-

directive to be issued to the Federal Reserve Bank of New York needed

any change.

Mr. Rouse stated that the wording of the directive seemed appro

priate to the objectives of the Committee as discussed at this meeting

and that he had no suggestion for change in any of the existing limita

tions in

the directive.

Thereupon, upon motion duly made

and seconded, the Committee voted unani

mously to direct the Federal Reserve Bank

of New York until otherwise directed by

the Committee:

(1)

To make such purchases, sales, or exchanges (including

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 securities, 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 devel

opments 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;

To purchase direct from the Treasury for the ac

(2)

count 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;

11/16/55

-29-

(3)

To sell direct to the Treasury from the System

account for gold certificates such amounts of Treasury

securities 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.

Chairman Martin next inquired whether there was a suggestion

for a change in the instruction to be issued in connection with repur

chase agreements, particularly whether any change was needed in the

provision that the rates on such agreements should be not less than

(a) the discount rate of the Federal Reserve Bank on eligible commercial

paper, or (b) the average issuing rate on the most recent issue of three

month bills.

Mr. Rouse felt that the existing provisions with respect to the

rate were satisfactory for repurchase agreements that might be used be

tween now and the next meeting of the Committee.

Thereupon, the following authoriza

tion was approved by unanimous vote:

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;

be for periods of not to exceed 15 calen

Shall

(b)

dar days;

(c) Shall cover only Government securities maturing

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.

11/16/55

-30

2.

3.

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.

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 System open market account.

Chairman Martin suggested that it might be desirable to set the

date for the next meeting of the Federal Open Market Committee on Tuesday,

December 13, 1955, with a view to having a full scale review of the eco

nomic and credit situation at that time and with the further thought that

the following meeting of the Committee might be held after the turn of

the year.

There was unanimous agreement with this suggestion.

Chairman Martin said that, without implying criticism of anyone,

there was one other matter which he would like to mention at this time.

An article on the Committee's policy had appeared in

the magazine

"Business Week" shortly after the meeting held on October 25, 1955, and

the article contained comments reflecting so closely the substance of

the meeting that he did not see how it

could have been written without

some person who was familiar with what went on at that meeting having

discussed the matter.

He reiterated that he was not implying that any

one had discussed the meeting and he said that he had complete confidence

of the members of the Committee and the others who participated

in

all

in

the meetings.

However, the article had impressed him and he felt

it

necessary that all those who participated in the meetings be extremely

careful about their discussions about what went on in

any such meetings.

11/16/55

-31

Chairman Martin then called attention to a copy of a letter

from Congressman Brent Spence,

Committee,

dated October 25,

Governors on a bill,

on January 5,

Chairman of the House Banking and Currency

1955, requesting comments by the Board of

H. R. 569, introduced in

1955, by Mr.

the House of Representatives

Patman, which proposed to increase to 12 the

number of members of the Board of Governors of the Federal Reserve System

and to provide that their terms of office shall be six years, and to

abolish the Federal Open Market Committee and transfer its

to such Board.

functions

Chairman Martin said that copies of Congressman Spence's

letter and the bill

had been distributed at this meeting and that he

would appreciate suggestions or comments which might be of assistance

to the Board in preparing a response which, he hoped,

to Mr.

Spence not later than the first

could be submitted

part of January.

He also noted

that Mr. Balderston had suggested that comments be sent in

in time to

be considered at the meeting of the Committee on December 13, 1955.

Mr.

first

Sproul referred to the request made by Senator Douglas,

discussed at the meeting of the Committee on September 14, 1955,

regarding a visit which the Senator proposed to make to the Federal

Reserve Bank of New York, probably between October 20 and November 1,

for the purpose of observing the handling of open market operations.

He stated that Senator Douglas,

accompanied by Dr. Achinstein, had

visited the Bank on October 26, 27, and 28, in

tion of the Federal Open

Market Committee,

response to the invita

which he as Vice Chairman of

the Committee had sent to the Senator by letter

dated October 6, 1955.

11/16/55

-32-

Mr. Sproul then described the visit in substantially the following

terms:

Each morning Senator Douglas and Dr. Achinstein came to

the bank at about 9:30 and had a preliminary talk with Mr.

Rouse and me. At the first such meeting, I spoke to them of

the possible adverse effects of publicity concerning their

visit, which might be played up as a Senate investigation of

open market operations with possible unfortunate repercussions

in the Government securities market. I pointed out that if

they attended the dealer conferences, or listened in on market

telephone conversations which would necessitate disclosure of

their being "on the line," there might be a flood of rumors.

Senator Douglas said he wished to avoid anything of the sort

and, so far as I know, no publicity attended the visit.

At 10 o'clock or shortly thereafter each day, they went

to the trading room and stayed there the rest of the morning.

After lunch at the bank, we usually went over any questions

that had come up, and they would leave in the early afternoon.

The Senator' s chief interest appeared to be how policy

directives are translated into action, how operations are

actually carried out in the market, and how the System is

kept advised of open market operations. We showed them the

forms and data we regularly use in analyzing the position of

the banks and the money market each day, except the reports

of individual dealer's position and volume. They also sat

in on the eleven o'clock telephone calls to the Board and

Federal Reserve Bank of Dallas (the latter was the other

Reserve Bank being included in the call during that week),

and were informed of conversations with the Treasury on its

position, of our regular routine surveys of the market, of

transactions which are carried out for System Account, the

Bank's account, Treasury account and foreign or member bank

account, and of the information which we supply regularly to

the Federal Open Market Committee and to all of the Federal

Reserve Banks.

The Senator appeared to be well satisfied with his visit

and said he intended to report on it to his Committee. He

gave no indication of his own views as to policy formulation

by the Federal Open Market Committee or the method and means

of conducting its operations. When asked what questions or

criticisms he might have about our performance, he evaded the

question. Dr. Achinstein largely sat by and let the Senator

do the talking and ask the questions. His role seemed to be

to observe and to pull together the information obtained, pre

sumably to brief the Senator before each day's visit, and to

help prepare a report for the Senator.

11/16/55

-33

Chairman Martin stated that he was glad to have this report

of Senator Douglas'

visit and that he felt the Committee was indebted

to Mr. Sproul and to the New York Bank for the manner in which they had

handled Senator Douglas'

request and visit.

Thereupon the meeting adjourned.

Secretary