FOMC Minutes

A meeting of the Federal Open Market Committee was held in

the offfices of the Board of Governors of the Federal Reserve System

in Washington on Tuesday, January 24, 1956, at 10:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Sproul, Vice Chairman

Balderston

Earhart

Fulton

Irons

Leach

Mills

Robertson

Shepardson

Szymczak

Vardaman

Messrs. Erickson, Johns, Powell, and Young,

Alternate Members of the Federal Open

Market Committee

Messrs. Williams, Bryan, and Leedy, Presidents,

Federal Reserve Banks of Philadelphia, At

lanta, 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 Re

search and Statistics, Board of Governors

Mr. Miller, Chief, Government Finance Section,

Division of Research and Statistics, Board

of Governors

Mr. Marsh, Manager, 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

January 10, 1956, 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 January 10

through January 18,

1956, and at this meeting there was distributed a

supplementary report covering commitments executed January 19 through

January 23, 1956, inclusive.

Copies of both reports have been placed

in the files of the Federal Open Market Committee.

In commenting on the supplementary report, Mr.

Rouse stated

that in the auction for Treasury bills yesterday the average rate was

just under 2-1/4 per cent, compared with an average of just under 2-1/2

per cent in the preceding week.

ing to the decline in the bill

Among the influences in the market lead

rate was the investment of proceeds of

funds received from the sale of some $600 million of stock in the Ford

Motor Company and the sale of some $400 million of revenue bonds of the

Illinois State Toll Highway Commission.

Mr. Rouse stated that he would

anticipate that by the end of next week the special conditions which had

been influencing the bill rate recently might have been completed and

the relationship of that rate to the situation in the money market might

have become more normal.

Upon motion duly made and seconded,

and by unanimous vote, the transactions

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for the System account during the period

January 10 through January 23, 1956, in

clusive, were approved, ratified, and

confirmed.

Members of the Board's staff entered the room for the purpose

of assisting in

the presentation of a review of the economic and credit

situation, illustrated by chart slides.

The script of the review was

mailed to the members of the Committee following the meeting, and a copy

has been placed in the Committee files.

The review brought out that during 1955 the problems facing mone

tary and fiscal authority the world over were those of restraining infla

tionary forces rather than stimulating growth of demand.

The current

year has begun with activity and employment sharply above a year ago and

in many countries close to capacity limits.

In the United States, one of

the big factors distinguishing the economic position in January 1956 from

that in January 1955 is a 98 per cent capacity level for steel operations

rather than an 80 per cent level.

When operations in a number of impor

tant industries have already risen to near-capacity levels, further in

creases in

output can be achieved only slowly.

Relatively small increases

A rise of 4

in demand then may bring heavy upward pressure on prices.

per cent in

industrial prices during the year came largely after the

spring months, when activity reached very advanced levels.

servers,

Some ob

noting current reduced levels of farm prices and uncertainties

in housing and automobile markets, believe that upward pressures on

industrial prices otherwise inherent in

the present situation will be

eased by reductions in demand in these and other lines.

They would

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expect such easing as a result of credit restraints now in

for other reasons.

effect or

Other observers go further, saying that the economy,

after a year and a half of expansion, is nearing a cyclical peak and

that a reaction may be in prospect before long.

A third possible view

is that no important downward adjustments from present levels will

occur or that such adjustments as do occur will not be adequate to off

set potential increases in

In that event,

spending and investment throughout the world.

inflationary pressures would continue or even become

stronger.

While there begin to be evidences of slackening in

some of the

areas that have shown particularly rapid rates of increase during the

past year and a half, evidences of strength in

other areas are still

strong to call for relaxation of credit restraints at this time.

other hand, there is

clearly no need for further tightening.

of the latest increase in

too

On the

The impact

discount rates upon the credit situation has

so far been largely cushioned by the many special factors operating in

Present projections, which

the money market since the end of November.

allow for moderate credit growth, indicate that net borrowed reserves

may be substantially above $400

million in

February and March unless

prevented by System purchases of securities.

of a continuation of about

The restrictive effect

$400 million of net borrowed reserves and a

Treasury bill rate of around 2-1/2 per cent upon the allocation of exist

ing credit resources might prove to be excessive, although current market

behavior indicates otherwise.

The situation is one that calls for care

ful watching and sensitive adjustment to the prevailing attitude of

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expectations as indicated by behavior of all markets.

At Chairman Martin's request, Mr.

Sproul then made a statement

on the economic situation and credit policy substantially as follows:

1.

To paraphrase remarks recently attributed to the

Secretary of State, the art of central banking is to approach

the brink of inflation without falling in or being pushed in.

2.

It is our job to try to see to it that, so far as the

money supply and the availability of credit are concerned, the

economy is in a position to work, to produce, and to consume,

at near capacity levels.

3.

Unfortunately, the brink of inflation is not always

clearly discernible, because the boundaries of near capacity,

full capacity, and over capacity are indistinct, and possible

at near capacity, probably at full capacity and certainly at

over capacity, too much money and too easy credit will lead

to increases in prices, but not to increased real income.

4. We are in a position now in which the economy in the

aggregate and with allowance for seasonal variations, seems

to be working near capacity, but could move over the brink or

back from the brink. Some of the strongest stimulants of the

past year - e.g., automobile production, residential building,

and foreign demand - may stay relatively high but are unlikely

to be pushing upward. Other stimulants - e.g., private capital

expenditures, state and local expenditures, and wage increases

seem likely to continue the upward push and some increase in

inventory accumulation might be a contributing factor. The

major continuing soft spot is the agricultural situation. The

resultant of all such forces, in terms of consumer expenditures,

which are the biggest factor in

not precisely determinable.

the whole economic complex, is

Aggregate incomes are likely to be

higher during coming months, which would suggest some increase

in consumer spending, but incomes may not be so readily inflated

with large doses of consumer credit on progressively easier

terms, or of mortgage credit, and savings may be larger.

At the moment we might be said to be feeling our way

5.

along at about the right place with reference to the brink,

with some seasonal contraction in credit taking place. This

suggests a steady hand on the monetary controls, which neither

tightens nor relaxes its grip. This would mean no change in

discount rates, and it would mean open market operations guided

by bank borrowing, net borrowed reserves, interest rates, the

general tone and feel of the market and market expectations

and anticipations, which would seek to maintain, for the

present, about the degree of pressure which we have now reached.

On the basis of present projections this could mean putting

some funds into the market during the next two weeks, but that

should be determined from day to day, in the light of all the

available facts and indications of tendencies or trends.

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Mr.

Johns stated that two weeks ago he had said with some

timidity that he would not be disappointed if

the Committee failed

to regain quite the same degree of restraint that existed last Novem

ber.

He was not aware of any reasons which would lead him to change

that opinion at this time.

He wished to make it

not talking about a change in

clear that he was

direction of policy and was not indicat

ing that there should be much change in the degree of restraint under

present policy.

He would not change the discount rate at this time.

Mr. Bryan said that activity in the Atlanta District continued

at an extremely high level.

There were soft spots as in agriculture,

but they were not as serious as might have been expected.

and productivity were still

expanding, although the lead of the Atlanta

District against national activity had declined somewhat.

national picture, Mr.

consequence,

although there might be some reduction from the extremes

Bryan said that his view would differ a little

Johns in

As to policy, Mr.

from that expressed by

the sense that, while he would not want to see any such

dramatic action as an increase in

a change in

However, he now

evidence of any general let-down or slackening of

of optimism that prevailed last summer and fall.

Mr.

On the

Bryan recalled that two weeks ago he expressed

the view that perhaps "the bloom was off the boom."

found very little

Employment

reserve requirements,

the discount rate at the moment or

the System should be very careful

not to permit an impression of "ease" to be created by permitting the

short-term rate to back away from the discount rate.

He would maintain

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the short-term rate structure in close proximity to the discount rate.

We have gotten over the shock, if

any, of the latest increase

in the

discount rate and at present the effective cutting edge of monetary

policy does not lie in the field of psychology but in

rates.

Accordingly, Mr.

the field of

Bryan said that he would advocate a policy

for the next few weeks of making certain that the Committee kept the

discount rate effective by open market operations designed not to

permit the bill rate to go much under, and not much above, the dis

count rate.

Mr. Williams said that there had been no substantial changes

in the economic situation in the Philadelphia District since the meet

ing two weeks ago.

He commented on various degrees of optimism in

different parts of the district and on the expectation that the

Philadelphia Reserve Bank soon would approach some member banks on

their use of the discount window.

Mr. Williams said that he felt the

Committee should not allow a feeling of ease to develop, but neither

should it

move in the other direction at the present time

Mr. Fulton described conditions in the Cleveland District as

still

being in a period of boom.

No one anticipated any great down

turn although there was talk of caution.

Under these conditions, he

suggested no decrease in the discount rate nor should there be a de

crease in the amount of net borrowed reserves.

he felt it

Mr.

Fulton said that

desirable to move back toward the level of restraint that

existed last November.

If

any relaxation became noticeable, that

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could be interpreted as an indication that the Federal Reserve System

saw a down turn in

activity, and such a reaction could have a profound

effect in the thinking of businessmen, the stock market, and other

aspects of the economy.

Mr. Fulton said that he did not feel relaxation

was in order at this time.

Mr.

Shepardson said the economic situation impressed him as

being fairly well balanced with some downward indications being offset

by upward factors.

Along with that, the psychological factors and the

political aspects of this period made it

more important than ever that

the Committee hold a line that would not give way to inflationary

pressures.

He would prefer to see net borrowed reserves maintained at

a level that would bring the short-term rate back closer to the dis

count rate, and he would certainly not favor an easing in

the situation.

Mr. Robertson said that the views thus far expressed fairly well

coincided with his thinking.

A short time ago, when we had a very easy

reserve situation, the levels of interest rates and yields were firm,

but as reserve positions have tightened more recently the interest rate

level has declined.

This decline might be construed as a move toward

ease on the part of the Federal Open Market Committee.

Mr. Robertson

said that he felt that in the immediate future the Committee should

attempt to offset some of the special factors in the market, such a

the vast nonbank funds which had been having an influence on rates, in

order to avoid if possible unfortunate construction.

He would no, go

too far in that direction but would make it very clear that the Com

mittee's policy is

still

one of firm restraint.

He would not change

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the discount rate at this time and would not in any other way indicate

any relaxation,

Mr. Mills said that his reasoning followed the channel that

had been opened up in

the discussion thus far.

The Committee should

maintain a firm hand on reserve positions of banks and on the money

market in

order to prevent any hint of relaxation.

Mr.

Mills recalled

that at the meeting two weeks ago the Chairman brought out the fact

that the System's operations were under a much closer scrutiny from

the investment and business fraternity than usual, and that there was

a temptation on the part of analysts to read into any actions of the

Committee possibly more than the Committee intended.

for if

the Committee were now to relax it

moved by political influences,

or it

This was a warning,

might be charged with being

might have its

actions read as

confirming some of the doubts about the economic future that are being

expressed from time to time.

How the Committee can maintain the neces

sary degree of firmness may be a problem.

from $200 to $400

Net borrowed reserves running

millions might be an appropriate target on which to

tie policy.

The Federal funds rate, which is

running at 2-1/2 per cent,

suggests a greater degree of pressure and firmness in the market than

has been indicated from the recent movement in Treasury bill

That being the case,

care must be exercised not to be misled by the

extraneous influences that have brought Treasury bill

line.

Mr.

rates.

rates out of

Mills said that he would disagree with Mr. Robertson that

1/24/56

-10.

the Committee should move in

the direction of offsetting the reduction

in

Treasury bill

rates.

The market seems to be analyzing and inter

preting the figures in accordance with their significance, and the

Committee should rely on market analysts to reach the conclusion that

the direction of System policy is

firmness at the present time.

It

should be made clear that the Committee's actions can be taken as a

guide to its

policy, so that when the Treasury comes to the market

some weeks hence it

can make its

a clearly defined System policy.

announcement against a background of

It

would be extremely difficult to

indicate what System policy should be toward withdrawing or supplying

reserves over the next few weeks,

Mr. Mills said, and the Manager of

the Account presumably would have to be in

a position to use his judg

ment to meet promptly any situation that might develop either toward

undue ease or tightness in

reserve positions.

Mr. Vardaman concurred in the views expressed by Mr. Sproul as

to the present economic situation, and he said that he approved of Mr.

Mills' injection of the political angle into the discussion of what the

Committee's operations should be this year.

He would regret any evi

dence of a loosening or weakening of the Committee's position of firm

ness.

On the other hand, he felt it

imperative that the Committee

"stand by the wheel" with a sharp eye to whatever might develop in

the

next 60 days, adding that, at the slightest indication of a psychological

fear being built up on the part of the public regarding the future, the

Committee should not hesitate to take whatever action might be called

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for at that time.

It

should be prepared to loosen the reins if

it

appeared from developments that such a move was necessary.

Mr. Leach said that the economy of the Fifth District con

tinued strong.

Consumption of cigarettes increased 3 per cent in

1955 over 1954 and man hours in the industry are nearly at the highest

level since 1953.

First quarter production in textiles has been com

pletely sold out.

Commitments are fairly high in the second quarter.

Furniture manufacturers are very optimistic and expect to continue

production at high levels.

could see little

change in

For the country as a whole, Mr. Leach

the economic factors since the meeting two

weeks ago other than that the cutback in

all of us had expected,

automobile production, which

has actually begun.

seem to point to a strong economy in

1956.

Over-all indicators still

On the other hand, Mr. Leach

said that he sensed a change in the attitudes of some businessmen.

optimism is expressed than was the case last November.

be somewhat cautious seems to characterize January.

Less

This tendency to

In January last

year, he noted there were general doubts as to the ability of the economy

to sustain recovery.

The question now is whether the uncertainty con

cerning the outlook is temporary or whether it will actually carry over

into the real economic processes in terms of business and consumer spend

ing.

Mr. Leach emphasized that doubts about the outlook still generally

apply to the third quarter of the year.

Since the Committee's primary

concern is with the immediate developments, he thought it would be a

mistake to move toward a policy of ease because of the psychological

developments.

In fact, a move in this direction by the Committee would

1/24/56

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probably accentuate reactions.

On the other hand, he saw no justifica

tion for intensifying the present policy of restraint.

would not relax restraint and would not want it

In brief, he

to appear that the

Committee was relaxing at this time.

Mr. C. S. Young reviewed conditions in the Chicago District,

stating that the optimistic statements of a month ago were still being

repeated by business leaders in the area.

They indicated a little worry

following their earlier optimistic statements and some, as in the auto

mobile industry, had toned down their comments but they still felt quite

optimistic.

Mr. Young felt the Committee should not relax now.

day to day proposition it

should not move very far either in

tion of relaxation or greater restraint.

As a

the direc

A move toward relaxation would

give notice to the investment community that business is not as good as

we have been thinking.

Mr. Young also said that he would not increase

the discount rate at this time.

Mr. Leedy said there seemed to have been no change yet in the

general economic picture that would justify a change in

program from that approved two weeks ago.

to apply about the degree of pressure it

serves.

He felt

It

the Committee's

should continue the effort

had been aiming at on bank re

the management of the account had done a very good job

under difficult circumstances.

Mr.

Leedy assumed that with the passage

of the special conditions which had resulted in a reduction in

the Treas

ury bill rate, there would be a reflection of the Committee's general

policy in a movement of the bill

rate closer to the discount rate.

He

1/24/56

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would feel the Committee should continue doing about what it

has been

doing recently.

Mr.

Powell said that agriculture in

doing quite well this winter.

the Ninth District was

On a recent visit to Montana he found

cattlemen reasonably satisfied with conditions,

and it

looked as though

the water supply for the western part of the Ninth District would be

adequate this spring, which would practically assure fairly good crops

during the coming year.

Retail trade had been rather unsatisfactory

in December and figures which had become available since the meeting

two weeks ago confirmed the belief which he then expressed that there

had been considerable accumulation of stocks.

Turning to the national

picture, Mr. Powell thought that the building boom may have passed its

peak and he felt

quite sure that the automobile industry has passed its

peak for some time to come.

There might be a conjunction of a number

of weak spots in the economy this year that would cause considerable

difficulty.

For the moment, however, he did not see a need for antici

pating a down turn in business and he would favor a continuation of

about the present level of restraint.

Mr. Earhart said there had been some moderation in the very high

degree of optimism that had developed last fall, but there was nothing

tangible enough to cause a change in Committee policy from that agreed

upon two weeks ago.

He hoped open market operations could be conducted

so that the public would feel the Committee had made no change in its

policy for the present.

at this time.

He would suggest no change in the discount rate

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Mr. Irons favored continuation of the general policy agreed

upon two weeks ago, which he felt had been very effective in keeping

pressure on the market but avoiding any tendency toward ease or further

restriction.

Mr. Erickson said that in the First District the plusses were

wider than the minuses.

Experience in automobile sales recently has

not been good, registrations of new cars in Massachusetts the last two

weeks of December having been 40 per cent and 80 per cent below those

of a year ago even though weather conditions this winter have not been

bad.

On the other hand, construction contracts are well ahead of a

year ago.

Mr. Erickson agreed with most of the comments on Committee

policy and would keep the same degree of restraint for the present

with no change in discount rate.

He noted that one of the factors

which caused difficulty in making Committee policy effective was the

variation in float, and he suggested that additional study of this

factor might be desirable.

Mr. Szymczak said that there seemed to be agreement that there

had been no sufficient change in the situation to call for a change in

open market policy at this time.

The Committee should continue the

degree of restraint it has been following, he said, but should watch

the economic indicators carefully, particularly developments in the

automobile and construction industries, so as to be in position to act

in whatever direction might be called for.

Mr. Balderston then made a statement substantially as follows:

Despite the difficulties of communicating with precision

ideas relating to policy, I will attempt to indicate my beliefs

.15-

1/24/56

as to what the policy objective should be and why. My present

position is slightly different from that of two weeks ago when

I felt that the bill rate target should be the discount rate,

plus or minus.

rate minus.

Now I would prefer as a target the discount

This suggests a modification of the objectives of our

policy from that of restraining inflation, to that which Mr.

Sproul discussed with great clarity.

I would now prefer an

objective that stressed the maintenance of stable equilibrium

just beneath capacity.

I do not mean we should actually shift

our policy at present to any obvious relaxation of the rigors

of restraint. I do mean, however, that our future problem is

likely to be one of perpetuating a high level of production

and employment just beneath capacity--just far enough beneath

it

to minimize upward price pressure.

objective might well be reflected in

This shift of policy

today's directive to the

New York Bank.

My reason for urging this shift of objective is that the

momentum which the economy carried over into the new year seems

to be lessening. Or if not, the rate of acceleration seems to

be decelerating. Despite the continued strength of metal prices

here and abroad; despite a strong continued demand for com

mercial and industrial loans; and despite a tendency to accuma

late inventories, one notes a tendency toward "topping off" in

the reduction of housing starts and the increased difficulty of

selling automobiles and consumer durables. One also notes

other factors that may have a bearing on our problems some

months hence.

Prices of shares in the London market have been

softening for some months.

In the New York market, we also

have a softening of stock prices recently.

In the capital

market, the schedule of offerings is small. I am concerned

that the high rate of expansion that we anticipate this year

in corporate construction may be followed by a dearth of such

expansion and growth, which we will need if capacity is to

keep pace with future population.

Therefore, I favor an inconspicuous shift of policy ob

jective designed to maintain the current high level of em

ployment and production without so pressing on capacity as

to push industrial prices higher. I would like to see a

shift kept carefully within this Committee. This last obser

vation seems to me especially important at the moment because

the Committee should be free to take whatever action seems to

be needed to counteract the gyrations in business psychology

that will follow the President's announcement, whatever it

may be. The economy may suffer very turbulent times in the

weeks and months following the President's announcement of

whether he will or will not be a candidate. We may have

ebullience and speculative fever or we may have a psychologi

cal let down.

I would, therefore, like to see us keep prepared

1/24/56

-16-16

to act decisively in either direction and at the right time.

Chairman Martin next made a statement substantially as follows:

From my point of view, this is not quite as easy as the

last few meetings.

For some time, I have been able to say

that I agreed with the consensus, and there was no problem of

agreeing on what our policy would be. I do not mean that I

disagree very much now, but I would like to make some general

observations on what my thinking is.

First, the Committee should be extremely careful in deter

mining policy not to let it be weighted by apprehensions as to

what the political implications of our decisions may be, and

not to get into a frame of mind in which we say that we should

not move one way or the other because it might be interpreted

by the public in terms of politics. We should be objective

about economic developments and about determining our policy

for the good of the economy.

Also, I have the strong feeling that none of us can gauge

the economy very accurately.

When we deal in fine degrees, we

are falling into the error that Mr. Sproul has pointed out many

times of giving a little

credence to the idea that monetary

policy can do more than it can, and that we can turn on the

faucet or turn off the faucet and can achieve a precise objec

tive.

I don't think you can rely too much on analogies but some

times I think they illustrate an idea.

My sixth sense has made

me believe that in recent weeks the machine has been going for

ward, but it has reached a plateau and it is wobbling and the

road before us has some rough spots. If we can use the analogy

of using the brakes on a machine, it may help to illustrate

what I have in mind. When you are driving a machine and when

you reach a plateau and you are wobbling a little bit, the

degree of pressure that you put on the brakes has quite a

little influence on whether the wobbling continues or not. I

don't for one moment intend to imply that I favor relaxation

of credit restraint at this time, nor do I quarrel too actively

with the majority sentiment of the group. I merely call atten

tion to what I personally think we should be watching for.

If I were doing it over again, I would say that perhaps we

followed a policy of active ease a little too long and we let

ourselves get into a position of a strait jacket, of letting

the "even keel" become the status quo, rather than of having

the flexibility we desire in monetary policy. I do not think

Mr. Sproul intended that in his use of "even keel." In the

period we face there are many psychological factors, and we

1/24/56

-17-

will have to operate on the basis of what we feel and of the

projections that will be before us, without really knowing

what loan demand will be.

To take part of the statement that Mr. Johns made, I

would favor two weeks later than he did (he suggested it at

our meeting two weeks ago) that, within the imprecise pro

jections we have to work with, I would be trending in the

direction of zero free reserves--not in a target sense, be

cause of the imprecise tools we have to work with, but I

would be trending in that direction. If this turns out to

be a plateau and not a valley, we will still be in a strong

position to raise the discount rate or to take whatever ac

tion we believe is needed.

I want to reiterate that flexible monetary and credit

policy require that we not get into the position where people

can say, "The Federal Reserve just held blindly to one par

ticular course and then all of a sudden turned around." We

did not do that in 1953 when we altered our course, and we

do not know whether we want to do that today. I may tend to

minimize the forces that are at work in the economy, all of

us may tend to minimize them, but nevertheless they can be

quite real and the effects can come quickly when they do come.

We as a Committee ought to be in the position of putting

our foot on the brake pedal but not pressing on the brakes. I

think that is what all of us have had in mind in one way or

another in what we have said this morning. It is a matter of

emphasis. This is one of those extremely difficult periods

where I personally would be in favor of an "even keel" if we

could get an even keel, but I do not believe that we can get

an even keel under current conditions. I do not believe that

Mr. Rouse, if he were the ablest manager in the world--and I am

not implying he is not the ablest manager in the world-I don't

believe that the forces we are dealing with here make it pos

sible to say that $300 or $400 million of negative free re

serves is precisely what is needed, or that the tone of the

money market calls for any precise amount of reserves. We may

say that we should maintain the pressure we now have in the

market but I do not believe we or the public knows what the

degree of pressure is that we are maintaining.

The point I am driving at is that I feel we ought to con

sider looking at the directive we now have had for almost six

months, and perhaps we should make a modest adjustment in that

In this

directive to permit more flexibility, if we wish.

of

the

management

have

to

general picture, I would be inclined

brakes

the

on

pressing

not

of

the Account trend in the direction

but of not releasing the brakes.

I want to reiterate my comment on the political side of this.

I know

We are going to have that to deal with all this spring.

1/24/56

-18

that I find myself inclined to say that we ought to make

it plain that we are not being influenced by political

considerations and that we are following a course which

is clearly not a political course.

But that is just

digging the System's grave so far as effective monetary

policy is concerned.

I am not talking about a political

grave, I am talking about our objectives and fulfilling

the functions the System is supposed to have in view in

a flexible monetary and credit policy.

I have talked this over with Mr. Riefler and, in con

nection with the wording of the directive, he has suggested

some language which would change clause (b) so as to make

it plain that we are following flexible monetary policy.

It seems to me that a little

difference in emphasis is called

for at this time.

We should remember that this policy di

rective is a public record and if we feel that a little

shift

in emphasis is called for, it is desirable that we show that

in the public record.

There followed a discussion of Chairman Martin's suggestion for

a change in

the wording of clause (b) of the directive to be issued to

the Federal Reserve Bank of New York.

Mr.

In the course of this discussion,

Johns said that when he spoke earlier in

the meeting he did not re

fer to the language of the directive, assuming that there would be an

opportunity to discuss that question when the directive was presented

for approval.

However,

Louis Bank yesterday,

at a meeting with some of the staff of the St.

there had been considerable discussion of the word

ing of the directive at which time he had taken the position that the

time had come for the Committee to eliminate sole emphasis on "restraint"

in

the wording of the directive and to substitute something more like the

language of the directive issued at the meeting last June.

was strongly in

He personally

favor of some such change, and wording along the lines

suggested by Chairman Martin and implied in Mr.

Balderston's comments

would seem suitable.

Mr. Sproul said that he, like Mr.

Johns, had assumed that a

1/24/56

-19

discussion of the directive would come up later in this meeting al

though he felt it logically fitted in with this discussion of policy.

He thought there was a danger when the Committee met every three weeks

that changes in

the economic situation between meetings might be almost

imperceptible and that therefore it

for in

the wording of the directive.

might seem that no change was called

However,

he sensed that the Com

mittee does not feel that no change has occurred in

recent weeks.

Sproul said:

There has been a change in

the situation in

the economic situation, Mr.

certainly the rate of growth has decreased and there are

ruts in the road which were not there before.

He did not feel that

the Committee could apply a policy with sole regard to restraining in

flationary forces any longer.

It

had to take account of the possibility

the other direction, and in Mr.

of a move in

Sproul's opinion, the Com

mittee should consider whether the time had come for a change in the

directive.

Mr.

The policy actions of the Committee are a public record,

Sproul said; the Committee is

a deflationary bias, and it

constantly being charged with having

was his view that since the Committee felt

that a time had arrived for a change in policy or policy emphasis,

change should be reflected in

published record in

that

the directive which would be part of the

order that the public might know the Committee's

views had changed.

At Mr.

Balderston's suggestion, Mr. Sproul repeated some of

the comments he had made earlier in

the meeting.

He felt that the

concept of making credit available to permit the economy to work, to

-20

1/24/56

produce, and to consume at near capacity levels suggested a change in

the directive at this time.

While determination of the exact wording

was difficult, he said that one of the points to be considered was that

the wording should be not only a reflection of what the Committee's

thinking and judgment was; it

also should be in language to enable

the public to understand what the Committee had in mind when it

changed

the directive.

Mr.

Mills raised the question whether it

would be preferable to

make a change in the directive at this time or to defer doing so until

the next meeting, by which time the Committee might be firmly convinced

that the time had approached when a change should be made.

He was fear

ful that a change at this time, particularly with language which he found

difficult to understand,

would be regarded in

the future as an escape

clause rather than as a decision based on a firm conclusion as to what

direction policy should take.

Mr. Bryan expressed somewhat the same view as that just indicated

by Mr.

Mills, adding, however,

that he had no strong conviction that the

directive should not be changed at this time.

During the discussion, Mr. Robertson said that he was not as sure

as the others had indicated that the Committee should not be watching in

flationary aspects.

were not still

He would be very much surprised, he said, if

present during the next three months.

they

At the same time,

he did not deny the possibility of some deflationary movement and he

would have no objection to changing the directive along the lines sug

gested by several of the members of the Committee.

1/24/56

-21

After further discussion and consideration of several sug

gestions of possible wording for a modification of clause (b) of

the first paragraph of the directive to be issued to the Federal Re

serve Bank of New York, the Committee agreed unanimously that clause

(b) should be changed by adding after the word "growth" the phrase

"while taking into account any deflationary tendencies in the economy"

so that this clause would read "(b) to restraining inflationary

developments in the interest of sustainable economic growth, while

taking into account any deflationary tendencies in the economy,"

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

that he had no suggestion for change in the limitation contained in

the existing directive:

Thereupon, upon motion duly made and

seconded, the Committee voted unanimously

to direct the Federal Reserve Bank of New

York until otherwise directed by the Com

mittee:

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

ing replacement of maturing securities, and allowing maturities

to run off without replacement) for the System open market

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

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

in the light of current and prospective economic conditions and

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

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

merce and business, (b) to restraining inflationary developments

in the interest of sustainable economic growth while taking into

account any deflationary tendencies in the economy, and (c) to

the practical administration of the account; provided that the

aggregate amount of securities held in the System account (in

cluding 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 in

creased or decreased by more than $1 billion;

1/24/56

-22-

(2)

To purchase direct from the Treasury for the ac

count of the Federal Reserve Bank of New York (with discre

tion, in cases where it seems desirable, to issue participa

tions 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;

(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 inquired whether there were any suggestions for

change in the repurchase authority, and no such suggestions for change

were indicated.

Thereupon, the following authoriza

tion was approved by unanimous vote

The Federal Reserve Bank of New York is hereby author

ized to enter into repurchase agreements with nonbank dealers

in United States Government securities subject to the follow

ing conditions:

1. Such agreements

(a) In no event shall be at a rate below which

ever is the lower of (1) the discount rate

of the Federal Reserve Bank on eligible com

mercial 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.

1/24/56

-23

3.

In the event Government securities covered by any

such agreement are not repurchased by the dealer

pursuant to the agreement or a renewal thereof, the

securities thus acquired by the Federal Reserve Bank

of New York shall be sold in the market or trans

ferred to the System open market account.

Chairman Martin stated that he had contemplated having a discus

sion at this meeting of the Committee's policy that during a period of

Treasury financing it

securities,

would not authorize the purchase of "when-issued"

and whether the deviation from that policy authorized in

connection with the Treasury financing at the meeting November 30, 1955,

was simply an exception to it.

He stated that he thought it

important

that the Committee have a discussion of this question and reach an under

standing prior to the next Treasury financing as to whether this con

tinued to be the Committee's policy.

However,

of the hour he raised the question whether it

in view of the lateness

would be preferable to

carry over discussion of this subject until the next meeting of the Com

mittee.

It

was understood that discussion of this topic would be de

ferred until the next meeting.

Chairman Martin referred to his appearance before the Senate

Committee on Banking and Currency on Friday, January 20, 1956, in con

nection with his renomination as a member of the Board of Governors,

stating that at that time Senator Douglas requested the vote on an

action of the Federal Open Market Committee last December authorizing

the purchase of when-issued securities in

financing.

connection with the Treasury

He went on to say that he had told Senator Douglas how he

voted and that he had also revealed that the Committee's action on

1/24/56

-24

this matter was decided by a split vote 9 to 3, but that he felt

he

should not reveal how the individual members voted without clearing

with the Committee,

even though a statement of the action and the

individual votes would be made public later in

the Annual Report of

the Board of Governors covering the year 1955.

Chairman Martin in

quired whether any of the individual memoers of the Committee or the

Committee as a whole would object to his furnishing the Chairman of

the Senate Committee on Banking and Currency with the information

which Senator Douglas had requested prior to the date this informa

tion was made public in

the Board's Annual Report.

Upon motion by Mr. Earhart, duly

seconded, Chairman Martin was author

ized by unanimous vote to furnish the

Chairman of the Senate Banking and

Currency Committee with the names of

the individual members of the Committee

voting for and against the action in

question.

Secretary's note: Pursuant to the fore

going authorization, Chairman Martin sent

a letter to the Honorable J. William

Fulbright, Chairman, Committee on Banking

and Currency, United States Senate, under

date of January 21, 1956, reading as

follows:

"In the course of the questioning when I was before your

Committee last Friday, Senator Douglas requested the vote on

an action of the Federal Open Market Committee last December

and I stated that the vote was 9 to 3. Senator Douglas asked

me to state who voted in the negative and I demurred that I

thought it would be preferable to await the annual report

since it would be out in a couple of months and would contain

a full discussion of the matter.

"I had in mind the fact that Congress, as you know, has

established that procedure as the regular method for reporting

1/24/56

-25

"to

the Congress the actions and policies of the Federal

Open Market Committee with the votes and reasons therefor.

However, I said I was perfectly willing to say that I

voted for the action but that I hesitated to give the names

of my absent associates before I had had an opportunity to

consult with them. I have now done so and since no objec

tions have been raised, I wish to report that those voting

against the action were Governors Mills, Robertson, and

Vardaman. Those voting for the action were, besides my

self, Messrs. Sproul, Balderston, Earhart, Fulton, Irons,

Leach, Shepardson, and Szymczak.

"I trust that this is the information Senator Douglas

wishes to have."

At Chairman Martin's request, Mr. Thurston commented upon in

quiries being made regarding the dates of meetings of the Federal Open

Market Committee,

which subject had been discussed briefly at the meet

ing on January 10.

Mr. Thurston said that he felt no special signifi

cance should be attached to a meeting date and that it

would be prefer

able to respond to inquiries on this question by stating that Committee

meetings were held regularly and frequently.

an inquiry from Mr.

He added, in response to

Robertson, that he would not hesitate to state that

the next meeting of the Committee was tentatively scheduled for or

would be held on a specified date unless the Chairman of the Committee

or some members of the Committee decided to depart from that day.

It

was understood that the procedure suggested by Mr. Thurston

would be followed in the event of inquiries regarding the dates of meet

ings of the Committee.

Chairman Martin then brought up the problem of press reports

which presumed to give information regarding discussions and actions

taken at meetings of the Federal Open Market Committee.

He asked that

1/24/56

-26

Mr. Thurston also comment on this problem.

Mr. Thurston referred to the report in the January 14, 1956

issue of Business Week which purported to give the substance of dis

cussion at the meeting of the Committee held on January 10.

He stated

that he understood that a reporter for Business Week had been making

calls to the Presidents of the various Federal Reserve Banks a day or

so before meetings of the Committee and, while he was not suggesting

the Presidents should not talk with reporters under such circumstances,

it

occurred to him that some might unintentionally provide information

which the reporters would use in preparing stories purporting to tell

what went on at the meeting.

Mr. Williams stated that a representative of Business Week

Magazine had called him before the meeting of the Open Market Com

mittee held on January 10 and that he had talked with him regarding

the business situation.

However,

Mr. Williams felt that the reporter

should not have inferred in his story that what Mr. Williams talked

with him about prior to the meeting was a portion of the discussion

at the meeting.

Mr. Williams expressed doubt as to whether it was

desirable to talk with reporters in

such circumstances.

Chairman Martin stated that he thought there could not be a

single rule which would apply to inquiries from the press but that he

thought this was a problem which all

Committee meetings should bear in

of those attending Open Market

mind.

At Chairman Martin's request, Mr. Riefler commented on the

procedure for implementing the report of the Subcommittee on Defense

1/24/56

-27

Planning for the Federal Open Market Committee,

ing on January 10, 1956.

Mr.

approved at the meet

Riefler stated that, to carry out the

last paragraph of the Subcommittee's report, he would suggest that Mr.

Vest be requested to prepare drafts of resolutions to be adopted either

by the Committee or by the Board of Governors to carry out certain of

the recommendations of the Subcommittee; that Messrs.

Rouse and Thomas

be requested to prepare guides for open market transactions by the

individual Federal Reserve Banks and for training of personnel as sug

gested in the Subcommittee report, with the understanding that they

would consult with Mr. Leonard, Director of the Board's Division of

Bank Operations, who had been working on defense planning matters for

the Board and the System; both of these requests being with the under

standing that he (Mr. Riefler) as Secretary would work with Messrs.

Vest, Rouse, Thomas, and Leonard in preparing material to be brought

before the Committee.

These suggestions were approved

unanimously.

It

was tentatively agreed that the next meeting of the Committee

would be held on Tuesday, February 14,

1956.

Secretary's note: Subsequently, further

checking resulted in setting Wednesday,

February 15,1956, at 10:45 a.m. as the

date and time for the next meeting of the

Committee.

Thereupon the meeting adjourned.

Secretary