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, February 15, 1956,

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

at 10:45 a.m.

Martin, Chairman

Sproul, Vice Chairman

Balderston

Fulton

Irons

Leach

Mills

Robertson

Shepardson

Szymczak

Vardaman

Powell, Alternate for Mr. Earhart

Messrs. Erickson 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.

Mr.

Mr.

Mr.

Riefler, Secretary

Thurston, Assistant Secretary

Vest, General Counsel

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 24, 1956, were approved.

Before this meeting there had been distributed to the members of

the Committee a report prepared at the New York Bank covering open market

operations January 24-February 8,

1956, and at this meeting a supple

mentary report covering commitments executed February 9-14, 1956, in

clusive, was distributed.

Copies of both reports have been placed in

the files of the Committee.

Mr.

that in

Rouse referred to the forthcoming Treasury refunding and said

informal discussions with Treasury representatives, he had indi

cated the desirability of offering Treasury bills in

exchange for System

holdings of approximately $1 billion of the 1-1/2 per cent notes due

April 1, 1956.

These notes were acquired by the System in

converted $1 billion of its

1951 when it

holdings of the 2-3/4 per cent convertible

bonds of 1975-80, which had been issued at the time of the accord, into

five-year 1-1/2 per cent notes dated April 1, 1951.

Subsequently, the

System had converted an additional $500 million of the bonds into notes

dated October 1, 1951,

1952,

another $500 million into notes dated April 1,

and some $700 million into five-year 1-1/2 per cent notes dated

October 1, 1952.

Upon motion duly made and seconded, and

by unanimous vote, the open market trans

actions during the period January 24 to Febru

ary 14, 1956, inclusive, were approved,

ratified, and confirmed.

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A staff memorandum dated February 10, 1956,

reviewing economic

and financial developments had been distributed prior to this meeting,

and at this time Mr.

Young summarized the economic situation as follows:

The present economic situation is characterized by more

diversity of tendency than at any point since the revival in

activity took hold after mid-1954.

Observers committed to a

mechanistic 42-month cyclical hypothesis for business fluctua

tions are disposed to diagnose the current position as one of

cyclical topping, implying that, after perhaps a few months

further of sidewise movement, downward adjustment will be dom

inant. A more optimistic view is that, after a year and a

half of rapid climb, the economy is undergoing a period of

necessary realignment in activities, as those that have gained

most rapidly gear themselves to more sustainable levels of

demand and as other activities that have been slower to revive

and expand, pick up in momentum and penetrate new high ground.

With many industries at very advanced levels of output, this

view must obviously recognize that further expansion in aggre

gate supply and demand can only be at a much slower pace.

In

support of the more optimistic view, it can be said that it is

hard to perceive in the conjuncture of available economic

indicators a formation that would definitely spell downturn.

The arrangement of materials in the staff report makes

clear that the appearance of some easing of the labor market

is perhaps the leading item of economic news. This is indi

cated by some extraseasonal decline in manhours worked, a

modest reduction in weekly earnings in manufacturing, a moderate

decline of employment in a number of durable and non

durable manufacturing lines, a small increase in temporary

layoffs at factories, a counter seasonal rise in claims for

unemployment compensation, and a sharp increase in new jobless

persons.

Preliminary estimates of industrial production for Janu

ary result in an index of 144, about the same as in other

Final data for January may put the index down

recent months.

Activity in most lines has been stable, with a few

to 143.

lines rising and a few receding. At the same time, output of

basic materials such as steel, paperboard, and fuels continues

very strong as does output of producers' goods, while output

of consumer nondurable goods remains well maintained at the very

Except where work stoppages have been

high autumn levels.

important, declines in output have been most marked in the area

of consumer durable goods, where production of household dur

ables has declined since autumn and auto output, beginning in

late December, has been cut back fairly sharply.

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Consumer durable goods markets have been showing a mixed

picture. New car sales in January were off about 5 per cent

from a year ago, and, even with reduced output, dealer stocks

rose further to new high levels.

On the other hand, used car

sales in January ran around 6 per cent more than last year, with

little

change in stocks. Used car prices have apparently firmed

significantly since mid-December.

Sales of household durables

at department stores in January were well above a year ago.

Over-all retail sales continue at the high autumn level.

The Board's index of department store sales for January came to

125 per cent of the 1947-49 average, compared with 122 for the

three preceding months.

Consumer instalment credit continues to rise though at a

slackening pace.

hile competition among lenders as to contract

maturities appears to have stabilized, competitive liberaliza

tion of downpayments still

seems to continue. With heavy auto

mobile inventories, dealers are under stronger pressure than at

any time to move passenger cars on a liberal downpayment and

maturity basis. Delinquencies on instalment paper have risen

somewhat over the past two months, but the level remains low

by prewar standards and not high by postwar standards.

In the real estate construction area, value of construc

tion was off further in January, reflecting declines in

residential construction activity. Contract awards in eastern

states continue at an unusually high level, but data for

western states (which are construction permits data) are down.

Housing starts in January were about at the December annual

seasonally adjusted rate, suggesting a halt in the decline in

residential building. Field reports indicate a readier avail

ability of construction and mortgage money and a general clear

ing up of the congestion that has characterized this credit area.

Applications for VA and FHA underwriting were up sharply in

January.

Inventory accumulation picked up in the fourth quarter,

but at least a third of the sizable increase reflected the

For the year inventory rose about

effects of price increases.

$5 billion or about 7 per cent. This was less than the rise in

sales, so that inventory-sales ratios at the year end were

at relatively low levels from an historical viewpoint.

still

Over-all, industrial prices have continued to rise this

Farm prices have recovered

year, though at a slackened pace.

somewhat from their seasonal lows. Price adjustments since the

year end for primary industrial materials and products have been

closely related to adjustments in activity. Most recently,

This has been

changes have been towards firmness or upward.

true of metals, building materials, textiles, crude and fuel

2/15/56

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oil, and a few other products.

Industry reports indicate that

a general rise in steel prices is still

under active considera

tion by the industry; also that a further rise in crude and

fuel oil may take place.

Abroad, economic activity continues at close to capacity

rates. It is still

rising in most European countries, but in

recent months the rate of rise has slowed down considerably.

European metal markets appear to maintain strength.

In a

number of countries, restraints on credit expansion have been

significantly tightened in recent months.

The latest information for U. S. foreign trade (for Decem

ber) shows that exports and imports have continued at the high

levels reached early last year.

Mr. Sproul commented that Mr. Young's report conveyed the im

pression of a changing tone in

of letting-up on expansion;

the economy, from one of strength to one

the mixed picture was what might be expected

in a period of topping-out a rise.

He also said that comments from the

building industry tended to give the impression that it

was being hurt

more than was actually the case by the decline in private housing

starts; in reality, the picture was not a weak one,

as some comments

from the industry seemed to indicate.

Mr. Young agreed that the picture was a mixed one although he

felt

that on balance it

weakness.

showed more in

the way of strength than of

The picture for the building industry definitely is not one

of weakness either in housing or industrial construction, he said; it

is

characterized by critical shortages of some materials with a good many

price pressures.

Mr. Williams said that on the basis of discussions held during

the past few days with economists from several important industrial

firms and commercial banks in

the Philadelphia District, the picture

presented was one of optimism regarding the outlook for at least the

first

half or three-quarters of this year.

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2/15/56

Mr. Leach noted Mr. Young's comment that there was weakening

in the labor market and inquired whether this came largely from the

automobile industry.

Mr. Young responded that the weakening was more general,

though the automobile industry was the largest element with its

al

cutbacks

in employment and working hours both by automobile manufacturers and

parts suppliers.

Mr.

Some nondurable goods lines also were showing easing.

Thomas said that the review presented by Mr.

Young and

the picture brought out by the questions asked by Messrs. Sproul,

Williams, and Leach might be taken as indicating that activity had

reached a ceiling and was leveling off as a result of internal adjust

ments.

It

seemed probable that the danger of a push through the roof,

with a subsequent fall to the ground, had been averted at least for

the present.

The prospect of staying close to the ceiling was promibing,

however. The downward adjustment in automobile production and sales,

together with at least a leveling off of building activity, was re

leasing resources that might be absorbed in other industries sufficiently

to keep a high level of activity but still

prevent it

becoming too high.

Mr. Thomas expressed the view that a general decline may be avoided,

but it

ment in

was necessary to be alert to the possibility of such a develop

case the automobile situation were to become more serious than

was now expected,

or in

case it

should lead to declines in other areas.

Mr. Thomas went on to say that the leveling off in

activity had been reflected in

the credit situation.

economic

He presented figures

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showing that total bank credit and the money supply had shown about the

customary decline for this time of year and that the decline had been

somewhat larger than a year ago.

The money supply is

1-1/2 per cent above a year ago.

Commercial loan contraction this year

now only about

has resulted largely from refunding finance company paper, taking it

out of banks and placing it

privately with insurance companies.

Business

loans in nonseasonal industries this year have continued to rise more

than last year, indicating some continued business demand for funds

during recent weeks.

After commenting on the increased offerings of new capital

issues after a period of slack and on recent stock market fluctuations,

Mr. Thomas pointed out that money rates had declined somewhat, despite

a tightening in

bank reserve positions since the year-end.

This paradox

may be explained by the strong nonbank demand for securities, together

with the reduced holdings of short-term securities by banks, which are

more inclined to borrow rather than sell their longer issues.

After

pointing out that current reserve projections indicated the likelihood

of some increase in net borrowed reserves, Mr.

Thomas said that in

light of information available with respect to the economy,

the

there seemed

to be no need for increasing the degree of restraint at the present time.

If

such a need should develop, restraint might be effected by increasing

the discount rate,

more reserves.

rather than by making it

necessary for banks to borrow

On the other hand, Mr. Thomas said, developments might

2/15/56

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indicate a need for less restraint than at the present time, but market

behavior indicates that the current level of member bank borrowing is

not putting too much pressure on the market.

Net borrowed reserves of

around $400 million or less with the existing discount rate might pro

vide a position which would be appropriate for a high level of economic

activity without ebullience.

Mr. Balderston noted that Mr. Thomas had not mentioned the forth

coming Treasury financing, to which comment Mr. Thomas responded that

the Treasury financing was scheduled for sometime early in March and

that this would be one of the reasons why the Committee might not wish

to have the reserve pressures built up as much as the projections indi

cated they would be in

the absence of action by the Committee.

Chairman Martin then called upon Mr. Sproul who made a statement

substantially as follows:

1. This seems to be a period of cross currents in eco

nomic activity, and of some healthy readjustment where the

upward surge of 1955 carried production beyond presently sus

tainable levels. The economy as a whole still appears to be

strong, however, with neither inflationary nor deflationary

forces in the ascendant.

2.

It is in this kind of period that the time lags in our

statistical data, added to the gaps which always exist in such

data, make us more than usually dependent on what people

actually in business are hearing and seeing-in other words,

the "feel" of the situation among businessmen and bankers,

The directors of Reserve Banks

and among their customers.

should be able to make a special contribution to policy formation

under these circumstances.

3.

As we see it at New York business plans for capital

impressively strong and consumers are

expenditures are still

continuing to buy goods and services at a pretty fast clip,

2/15/56

although consumer instalment credit may be less of a prop to

consumer purchasing power than it was in 1955. Employment is

high for the season, and the presence of a considerable number

of marginal workers in the labor force provides some cushion

against an increase in real unemployment. Inventories have

grown somewhat, but so large a part of the increase has been in

automobiles as to make interpretation of the figures dependent

upon what happens in the automobile business this spring, a

story which won't be told for another month or two. Prices are

showing some of the same cross currents as business. There is

the possibility of another cost-price push upward as the new

minimum wage goes into effect, and as labor contracts in impor

tant industries are rewritten, but these influences may be

balanced by reduced pressure of demand for some materials and

curtailment of overtime working schedules. The agricultural

situation is not expected to be more of a depressant than it

has been, and the effects of our foreign trade and of Govern

ment spending upon the domestic economy do not seem likely to

change markedly. There is no evidence, as yet, of any general

slackening of demand for bank credit. In the aggregate the

banking figures are behaving about as might be expected at this

season of the year, with some repayment of business loans and a

substantial decline in total loans and investments. Finally

the Federal cash budget is in a period of substantial surplus

this half year, which means that bank credit will not be drawn

into the economy in support of a Federal deficit.

This sort of estimate of the situation, which paren

4.

thetically seems to be supported by the action of the stock

market, suggests to me that this is not the time for a major

credit policy move, in either direction, whether of open market

operations or discount rate. Both the data we have and our

"feel" of the situation confirm me in the opinion, however,

that we were right in our modest move toward slightly less

restraint in the directive we issued at our last meeting. We

no longer need the pressure of increasing resistance to strong

expansionary forces, and inflationary developments, which moulded

credit policy in 1955. At the same time the immediate course of

the economy is not clear enough to justify more than this minor

move toward relaxation of pressure, particularly since market

anticipations of an easier credit policy are already beginning to

outrun the facts. If we add further action to market anticipa

tions right now, we could quickly have more ease than we desire.

5. Such a policy would seem to fit in with the Treasury's

immediate financing needs which will involve the refunding of

about $9 1/2 billion of securities maturing March 15 and April 1.

Only $4 1/2 billion of these maturities are held away from the

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2/15/56

Federal Reserve Banks, but a relatively large part of these hold

ings are in the hands of nonbank investors.

If a large pro

portion of these holders want cash at maturity, we shall need a

firm "rights" and "when issued" market in order to avoid a situa

tion such as that which caused an attrition problem last November

December.

We are likely to have it, if the general business and

credit situation and our policy are not such as to create appre

hension about the future course of interest rates and the avail

ability of funds, and if the prospective reduction in the supply

of short Governments during the March-June period brings in a

considerable nonbank demand for the new issue.

That, plus the

fact that the Treasury's cash position is now more comfortable

than it was in December, should mean that we would not have to

face the dilemma of conflicting aspirations and needs which we

had to face at the time of the last financing.

I would like to

reinforce, here, what Mr. Rouse said about the possibility of

the Treasury issuing a strip of bills in exchange for the 1 1/2

per cent notes of April 1, 1956 of which we hold the bulk. So

long as we are committed to the present practice of dealing only

in Treasury bills, except on special occasions, I think our

portfolio of bills is getting pretty small, not just in the

aggregate but in terms of the various maturities we hold for

trading purposes.

6.

I would suggest an open market program, operating under

our present directive, which aims at the maintenance of our

present position. That involves somewhat less restraint than in

the fall of 1955 and means that we should seek definitely to

prevent serious and continued stringency in the money market.

As rough guides to such a policy, along with the feel of the

market, net borrowed reserves of $200-400 million, average mem

ber bank borrowing in the $750 million to $1billion range, and

Treasury bill rates an eighth to a quarter below the discount

Just as we let seasonal increases

rate would seem acceptable.

in demand for credit press against the supply, and thus stiffen

restraint in the autumn, we have now let a seasonal slackening

in demand for credit show up in some lessening of restrictive

pressure.

7. We shall have to be ready, of course, to meet whatever

kind of situation which might arise as a consequence of announce

ment by the President of his political intentions, but that we

cannot anticipate now.

Mr. Erickson said that conditions still

District.

remained good in the Boston

Nonagricultural employment was up in December from November.

Construction awards in January were 27 per cent ahead of last

year even

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2/15/56

though residential awards were down 7 per cent.

Retail sales in Janu

ary were not good because of weather but more recently had been ahead

of last year.

As to credit, Mr. Erickson cited a recent comment by

a representative of a large bank in New England to the effect that

that bank's condition was tighter at present than at any time in

It

1953.

was Mr. Erickson's view that there should be no change in the dis

count rate and no change in the Committee's directive at this time.

He would not go as far as Mr. Sproul in

suggesting net borrowed re

serves down to $200 million; but he would go to around the $400 million

level.

Mr.

Irons said that conditions in

the Dallas District were

mixed, but he had the impression the plus signs outbalanced the nega

tive signs.

increase in

The petroleum industry was strong and there had been an

construction awards in

January, particularly in new housing.

Other industries were operating about as fully as they had been for

several months.

tail

Most employment changes were seasonal in nature.

Re

trade had been running about the same as a year ago, having

leveled off.

However, it

was difficult to judge trade activity closely

because some shopping days probably had been lost recently as a result

of storms.

There was probably a little

more optimism in

the agricul

tural area as a result of the recent 15 to 18 inch snow fall in

Panhandle section of Texas.

the

In a recent series of meetings over the

State of Texas, demand for bank loans had been described as being as

strong as at any time, if

not stronger.

Bankers were keeping this in

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2/15/56

check only by careful and regular selection of loans on their part,

plus the credit restraint policy of the Federal Reserve which was hav

ing an effect.

Discounts at the Reserve Bank were running fairly high

and were tending to be continuous with the pressure from loan demands.

City banks were trying to make adjustments in

at the discount window.

lean a little

On the whole,

their reserve positions

Mr. Irons said that he would

to the plus side and would hope the Committee could keep

about the degree of pressure that it

has maintained.

He would not

now favor any change in discount rate or open market operations.

Mr. Erickson, he would lean a little

Like

more to the higher side of Mr.

Sproul's suggested range of $200-400 million of net borrowed reserves

than to the lower side of the range.

and bill

He would hope that money rates

rates would continue to have about the present relationship

to the discount rate.

Mr. Powell noted that the Ninth District was still

winter weather.

having mid

There was no evidence at this time of which way business

would move during the coming year.

He had no reason to suggest any

change in Committee policy from that recently followed and would cast

his vote for continuing operations without much change one way or the

other.

Mr. Leedy said that the elements of strength in the economy still

may outweigh slightly the elements of weakness.

Accordingly, there

appeared to be no reason for relaxing the degree of pressure the Com

mittee had been attempting to apply in

the market.

Certainly there was

2/15/56

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no reason for any change in discount rate.

Mr. Leedy said he felt

to be entirely on the safe side, the Committee might insert in

its

that,

in

structions to the Manager of the System Account the requirement that

if

errors were made,

bit.

However,

they be made on the side of relaxing pressure a

reports of the performance of the stock market this

morning following the announcement of doctors that the President could

be a candidate for reelection provided no reason to be leaning in that

direction.

Mr. Leedy thought the immediate reaction to this report

might indicate that difficulties would be built up for the Committee

if

an announcement came promptly that the President had decided not

to be a candidate.

It

was too early to decide on Committee action in

that event, but Mr. Leedy said that he would apprehend the need for

some fast and extensive footwork at that time.

The general policy to

which he would subscribe at the present time was to continue operations

as carried on since the preceding meeting of the Committee.

Mr. Leach said that there was ample evidence in

trict

of continued economic strength.

the Fifth Dis

At the meeting of the Board of

Directors of the Richmond Bank last Thursday, two directors (one from

the head office and one from the Charlotte Branch) who were leaders in

the furniture industry reported that the industry is

far as midyear and that production for the year is

substantially above 1955.

sold ahead as

expected to run

Similarly, another director reported that

the cotton textile industry as a whole is

sold ahead well into the second

2/15/56

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quarter, that the industry is

continuing to operate on a three-shift

six-day basis, and that the cotton textile business generally is

best it

has been since Korea.

also show strength.

Other leading industries in the district

Employment continues high, and trade-other than

automobiles-continues at record levels.

situation as pictured in

The national economic

the staff review presented this morning ap

pears to be more mixed than the situation in

Leach said.

the

Nevertheless, he was not in

of restraint at this time.

the Fifth District, Mr.

favor of further lessening

Now that the unusual demand in the market

resulting largely from the Ford and Illinois Turnpike financing is

over he would expect interest rates to be above recent levels.

Mr.

Leach said that he would think that the desired degree of restraint

could be maintained with net borrowed reserves somewhat less than the

recent average of $400 million.

In response to a question from Mr. Thomas as to how much the

high levels of activity in

Fifth District industries reflected the

imminent increase on the minimum wage rate, Mr. Leach said that he

thought this had had its

it

influence last fall but that he did not think

explained current high levels of activity, and it

was not a reason

for lessening the degree of restraint at the present time.

In response to a question from Mr. Vardaman as to whether the

high levels of furniture production were based on firm, noncancellable

orders, Mr. Leach said that orders for furniture could be cancelled.

2/15/56

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The high level of operations reflected the current views of leaders of

the industry who, he said, were quite optimistic.

They think they will

get business which otherwise might be going into purchases of auto

mobiles.

With the furniture industry and cotton textile industry

at high level operations (synthetic textiles are not operating at as

high levels relatively speaking) and with coal mining and cigarette

manufacturing activities up, Mr. Leach could see no reason from the

standpoint of the Fifth District for a policy of credit ease.

He

could see a mixed situation in the country as a whole but would not

suggest a program of ease at the present time.

Mr. Vardaman said he would go along strongly with the idea that

the Committee not make any outward change in wording of its

directive.

He would like to emphasize what Mr. Sproul had said, particularly about

the anticipations which seemed to be abroad that the Committee was going

to lessen its

restraints.

To encourage that idea by any overt action

or word would be unfortunate.

However,

in view of the forthcoming

Treasury financing and the political situation resulting from the Presi

dent's decision, Mr. Vardaman said that he would also emphasize what

Mr. Sproul had said about the necessity of the Reserve Bank presidents

and directors keeping a close feel of the situation, and of the need

for "playing our hunches" by ear.

Mr. Vardaman thought that if the

President announced he would be a candidate for reelection there would

be a terrific resurgence in the economy and the Committee should be

alert to preventing the inflation which might result from such an

2/15/56

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announcement.

On the other hand, if the President announced that he

would not run,

there would probably be a deep sag temporarily, but

that such a sag would also be followed by a strong upswing and the

Committee should also be prepared to prevent the inflation which might

result from that resurgence.

For the moment,

he would play along with

about the present reserve situation, but would not want it

tighter.

made any

In detail, he would suggest net negative reserves of between

$200-300 million.

Mr. Mills made a statement substantially as follows:

It seems to me that we have come far enough into the year

to pick up the color of the business community's thinking.

Even after taking account of the conflicting economic data

which have been presented and which are essentially historical,

the color of thinking in the financial and business world as

well as economic prospects, as I see them, are not as bright

as they were.

If that is the case, we should consider adapt

ing System policy to the community's thinking and to the

planning and decisions likely to stem therefrom.

Stronger

prices for United States Government, municipal, and corporate

securities have seemingly developed from a genuine investment

demand, an investment demand that should be welcomed and not

discouraged.

Therefore, it would be a mistake to interfere

with the tendency of bond prices to rise. To do so would

risk losing track of the availability-of-credit factor in the

present credit outlook.

Mr. Erickson mentioned the tight

loan position of a bank in his district, and I gather there

are many similar cases throughout the banking world.

If the

present degree of credit pressure--which is signified by a

level of negative free reserves approximating $400 million

was thought to be appropriate, I believe that we should have

deplored rather than have felt equanimity at the temporary

Moreover,

increase above that level, even though accidental.

on the basis of current estimates, negative free reserves

may rise again to the $500 million level. With that prospect

in mind a good case can be made for supplying some new reserves.

As one way to do so, reserves released through reductions in

required reserves might no longer be absorbed as they have been

until now.

Put in another way, if bank loans contract further

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2/15/56

along with a reduction in bank deposits, any leeway in the

marginal repayment of loans could reasonably be allowed to

serve as a foundation for making new bank loans whose creation

would be further supported by the reserves made available

through the lower required reserves referred to. In that con

nection it appears from the reports made around this table

that, by and large, loan demands are for legitimate purposes.

If those loan demands are made with the help of adequate re

serves simultaneously with a strong market for United States

Government securities backed by a genuine investment demand,

the combined result should be to improve the actual liquidity

as well as the sense of liquidity of the commercial banks

at a time that such encouragement is desirable. It seems to

me that we should let well enough alone and bring negative free

reserves by very gradual and almost imperceptible steps to the

$300 million level, or possibly lower. In doing so, neither

control of the market nor an appropriate degree of credit

restraint need be sacrificed.

Mr. Robertson said that it seemed to him that, since the last

meeting, money market conditions had been easier than he had contem

plated they would be and easier than most of the members of the Com

mittee contemplated at that meeting.

The Committee had given the

Manager a free hand to operate as he saw fit

and no member of the Com

mittee was in a position to criticize the Manager,

and he did not

intend to do so even though he disagreed with some of the operations

carried out since the meeting.

With respect to the future, Mr. Robertson said that it

seemed

to him that the economy was showing some weaknesses at the moment.

However,

there still

were indications of price rises and of possibili

ties of inflationary pressures.

In his view, during the next three

weeks the Committee should direct the Manager of the System Account

to maintain at least the present degree of pressure in the market.

He

2/15/56

-18

would not measure this by a single indicator such as the volume of free

reserves but would include such factors as changes in

and the general tone of the market.

interest rates

The Manager should be directed

to take appropriate steps to see that interest rate levels did not

decline but, if

anything, rise slightly.

Mr. Robertson said that he

felt the Committee should maintain a position of firmness now, not

only because of economic conditions but because of the Treasury refund

ing which was in

next meeting.

the offing and which might be announced before the

He would hope that the April 1 maturities would be re

placed with bills although that was a decision that rested with the

Treasury.

He felt

that the Committee should now move to tighten the

market rather than to wait until one or two days before the Treasury

made a decision as to what its announcement would be.

He would make no

change in the discount rate at this time or in margin requirements,

nor would he change the Committee's general directive in any respect.

Mr. Robertson went on to say that he felt the Committee should

go further than this in view of the Treasury refunding that would occur

shortly and take appropriate steps to notify the Treasury (1) that it

hopes there will be no occasion during the next refunding for a

repetition of the November support actions; (2) that the Treasury cannot

count on us for support of that nature save in exceptional circumstances;

and (3) that in the Committee's opinion attrition in a refunding is

to

be expected and that even a large amount does not necessarily denote a

failure but merely indicates the need for other steps to complete the

financing,

e.g., by the auction of additional bills to make up the dif-

2/15/56

-19

In response to an inquiry from

(Mr.

Mr.Vardaman as to whether he

Robertson) felt that the Committee should now increase the degree

of tightness in

the market, Mr. Robertson responded in the affirma

tive, stating that he personally thought that the degree of tightness

now was on the low side.

It

was his view that the Committee should

now start to raise the level of firmness,

ness would be appropriate,

if

it

felt increased firm

and not wait to do so until shortly before

the Treasury decided upon its

financing.

Mr. Shepardson said that the picture was a mixed one.

His

feeling, he said, was in line with that expressed by Messrs. Erickson

and Irons as to the position he would look forward to in the period

ahead.

Mr.

Fulton said that the Cleveland District was still

enjoying

a very high level of economic activity and expected no particular

slump.

Some layoffs have occurred in the automobile industry, and

deliveries of some orders for steel and components have been pushed

back.

These, however, were not cancellations.

For the latter

part of

the year, expectations for the automobile industry were high; the coal

industry also was very active with the largest coal mining company

reporting that its

production was sold out for this entire year.

should be no relaxation at this time in

he said, adding that a little

the existing degree of pressure,

more relaxation may have taken place

since the Committee met on January 24 than was intended.

should not let

situation.

There

the market gain the impression that it

The Committee

was easing the

2/15/56

-20

Mr. Williams noted that the Committee was making policy for

only three weeks.

turn has come,

but it

is

There have been some misgivings as to whether the

and there is

still

a strong economy.

should be made in

Mr.

some evidence of softening in the economy,

For the present, he felt

no change

the Committee's policy.

Bryan said there was nothing in the Atlanta District's

economy or financial picture that would indicate a judgment different

from that already expressed as to the outlook.

His feeling was that

this was not the time for an overt policy decision.

Mr. Bryan said that

he too was influenced by the fact that the Committee was making deci

sions for brief intervals.

is

softening.

We may have a situation in

which the economy

If that proves to be true, he thought the evidence of

the softening would be found in employment and related figures perhaps

as quickly as anywhere.

very carefully.

If

Accordingly, he would watch employment figures

unemployment begins consistently to pile up, he

would revert to a policy of supplying reserves on the basis of some

growth factor that was calculated as rationally related to a full em

ployment economy.

Mr.

Bryan also said that he was impressed with Mr. Thomas'

comment on the small growth of the money supply over the past year.

He

felt that a radical slackening in the rate of growth of the money supply

would, if

it

Mr.

has not already done so, restrain the economy.

Johns said that he was quite well satisfied with the Com

mittee's failure to get the degree of restraint it

had last November.

He

-21

2/15/56

did not think the Committee had stopped too far from that level.

the next meeting of the Committee,

Until

he would continue as at present.

He said he had not conceived the program for the next three weeks as

being one of progressive easing.

Mr. Johns also referred to a telegram which he and some of the

other Reserve Bank Presidents had received from Mr. Balderston last

Friday asking for information with respect to collection of accounts

of implement and other merchants in agricultural areas, and he stated

that he was prepared to comment on it.

Chairman Martin indicated that he was not familiar with this

inquiry.

Mr. Mills described the reason for the request, stating that

Mr. Hauge of the White House Staff had met with a farm group a few

days ago and that the group had informed him that collection of retail

accounts was slow in agricultural communities.

The group also repre

sented that bank accommodations were becoming difficult to obtain, not

only on the part of individuals but also on the part of merchants who

were experiencing slow collection of their receivables.

said that Mr. Hauge felt

Mr. Mills

that this was in the area of the System's

credit responsibilities and that telegrams were sent to a number of

the Reserve Banks last

Friday asking that they be prepared to report on

this situation at today's meeting.

Mr. Johns said that he had found nothing in

the Eighth District

to support the charge that collections were slowing down significantly.

In southern parts of the District-Arkansas,

for example-collections by

-22

2/15/56

merchants were reflecting the fact that farmers have more money than is

customary at this time of year because they had extraordinarily good

crops last year.

Even in northern parts of the District there is no

indication of any significant decline in collections.

tions are reported to be off a little,

Where collec

reporters were quick to point

out that this was not because farmers were not paying their bills.

Mr. Johns concluded his statement by saying that he could find no

evidence of failure on the part of banks to accommodate merchants in

agricultural areas according to usual standards.

Mr.

Irons stated that the situation in the Dallas District was

substantially the same as that described by Mr. Johns.

Mr. Leedy said that while collections from farmers had slowed

a little

in

the Tenth District, this was in areas where income had

fallen severely.

In most cases income and other liquid assets have

been such as to confirm the general picture given by Mr. Johns.

Mr.

Szymczak said that it

in both directions in

was apparent there were forces going

the economy at the present time.

During the next

few weeks, he would follow a policy slightly less restrictive than the

one the Committee was following last November.

borrowed reserves might be in

He suggested that net

the $200-$300 million range.

Mr. Balderston said he hoped the Committee might urge the

Treasury informally to issue another billion dollars of bills in its

forthcoming financing.

Bank, Mr.

As to the Committee's directive to the New York

Balderston was puzzled as to how the desk could learn the

2/15/56

-23

consensus of this Committee if it abstained from any figures, as had

been urged by Mr.

single figure is

Robertson.

He shared the feeling, he said, that no

reliable enough to reflect the consensus; on the other

hand, words alone would not seem adequate.

Mr.

Balderston said that

his thinking was that the present position should be held through

the Treasury's financing, unless an announcement by the President

forced a departure from that.

below the discount rate.

He would like to see a bill

rate slightly

He did not know what level of negative free

reserves would be compatible with that objective although he expected

a minus $400 million would reflect his view.

member bank borrowings to suggest.

He had no figure of

He did feel, however,

that the Com

mittee lacked an adequate means of communication with the desk that

was sufficiently concrete to give the desk a clear indication of the

Committee's decisions.

He had no suggestions to offer as to language

that would accomplish this.

Chairman Martin said that he thought it

obvious from the dis

cussion that no member of the Committee really wished to change the

wording of the directive that was adopted at the January 24 meeting.

He had great sympathy with the desk, as he had pointed out previously,

he said.

He did not believe the Committee could use figures or

estimates as measures of tone or color.

Chairman Martin went on to say

that the Committee seemed to be more or less evenly divided, with a fine

degree separating most of the views.

important degree.

He did not think this a very

His own view of the discussion at

the last meeting

-24

2/15/56

was that the Committee then agreed that the trend of operations should

be in the direction of ease rather than of restraint.

had been so imperceptible that it

talking about.

was only a shading the Committee was

His judgment was that this was the best posture for

the System to be in at this particular juncture,

adding that it

He thought this

might wish to reverse its

take overt action.

the Chairman said,

position very drastically and

For the present, Chairman Martin believed that the

best position for the Committee to be in was to be trending in the

direction of ease.

He recognized that this view was not the same as

that suggested by Mr. Robertson.

that, since the last meeting,

whole.

Chairman Martin expressed the thought

the program had worked out well on the

He regretted the anticipations that had appeared in

the news

papers of an easing of System policy; perhaps he had contributed to

this by his testimony before the Joint Committee on the Economic Report

with his comments regarding "feel" of the situation.

said that it

Chairman Martin

was difficult to answer some of the questions that had been

presented to him in

such a way as to avoid repercussion.

he could at the time.

He did the best

He recognized that the interpretation that would

be put on any remarks that might be made would depend on what the writer

wished to say.

Summing up, Chairman Martin said that for the next few weeks

he would favor moving in

the direction of $200 million of negative

free reserves and whatever tone developed out of that.

The $200-$400

million level Mr. Sproul had suggested was entirely agreeable to him.

2/15/56

-25

He would not worry if negative free reserves got up to $400 million

or, for that matter, to $500 million if the tone and shading of market

developments showed a trend in the direction he had indicated.

Chairman

Martin concluded by suggesting that the Committee renew the directive

to the New York Bank without change in the language from that approved

at the preceding meeting, and that it assume the Manager of the System

Open Market Account would do the best he could to carry out that in

struction.

He did not think a vote on this would be useful but thought

that we should try to operate with no significant change and with no

overt action in either direction, but to let the tone of the market

develop pretty much on its own within the limit of this general di

rective.

He then asked that Mr. Rouse comment on the program as he

contemplated it would work out from an instruction such as he had out

lined.

Mr. Rouse said that it

seemed to him a majority of the Committee

was distinctly of a mind to continue the situation as it has existed.

In looking ahead, there was a temptation to lean against the expecta

tions in the market.

Mr. Rouse thought that the expectations now in

the market would bring about the easier situation Messrs. Martin and

Sproul had spoken of.

In the past three weeks an attitude had developed

which had resulted in a trend toward an easier situation and this might

come about again even though the figures of negative free reserves were

to rise to the $500-$600 million level.

2/15/56

-26

Mr. Vardaman said he would emphasize comments by Messrs.

Leach, Fulton, and Sproul regarding orders on the order books.

These

could be most deceiving and should be watched most carefully.

He also

agreed with Mr.

Bryan's suggestion that figures of unemployment should

be observed closely.

Mr. Robertson said that if he were in the position of the Manager

of the System Account,

Committee wished.

he would have some doubt as to what it

was the

He thought Chairman Martin over-stated the con

sensus by giving the impression that the trend should be on the easier

side.

Mr. Robertson did not believe that this represented the general

thinking of the Committee, and he did not think Mr. Rouse should be

in a position of uncertainty as to the Committee's views.

Mr. Robertson

said he thought the majority view of the Committee was that the same

degree of firmness be maintained during the next three weeks that had

existed during the past three weeks.

Mr. Rouse said that he had gotten the impression that the

majority of the Committee would wish negative free reserves around the

$400 million level.

Chairman Martin had expressed the idea of a trend

toward a somewhat lower level, and Mr. Sproul had suggested the $200-$400

million range.

Most other comments indicated a continuance of about

the same level, Mr. Rouse thought.

However, most of the comments

recognized that over the past three weeks there had been a tendency

toward an easier atmosphere,

and Mr.

Rouse believed a similar situation

would be brought about again over the next three-week period.

2/15/56

-27

Mr. Robertson suggested that the Manager of the Account could

lean against the market's expectations of ease.

Mr. Rouse responded by stating that if net borrowed reserves

were constant at around $400 million, he would think the matter of ex

pectations would be fairly well taken care of.

Chairman Martin stated that he wished to make certain that the

record differentiated his personal views from what he thought appeared

to be the consensus of the Committee.

It

was his personal position

that he was referring to when he suggested net borrowed reserves at the

$200 million level.

He doubted whether any purpose would be served

by taking a vote on the question of whether a $200 million or a

$400 million net borrowed reserve level was desired, or on whether

the Committee wanted operations to lean against the expectations of

the market.

The Manager would have to judge from day to day how opera

tions should lean at the time,

and it

would only confuse him if

the Committee tried at this time to pinpoint any particular course of

operations.

Mr. Robertson said he was not advocating that the Committee

pinpoint operations to a specific figure, but he was advocating that

it

pinpoint operations to a degree of firmness without any relaxation.

He thought the Committee should have a preconceived notion of what it

expected in the way of tone in

the market.

He did not advocate $400

million or $300 or $200 million or any other figure of net borrowed

reserves.

2/15/56

-28

Mr. Vardaman stated thathe interpreted Mr. Robertson's remarks

as suggesting a policy of stiffness in operations, to which Mr.

Robertson responded that he felt the Committee should maintain at least

the same degree of firmness that it

would move to greater tightness.

had before and, if anything, he

He recognized that in taking this

position he differed from the views expressed by others.

Mr. Vardaman stated that as far as he could recall, the con

sensus of the meeting was to continue about where we are now without

permitting any greater tightness.

Mr. Robertson indicated concurrence except that there should be

nothing on the side of relaxation.

Mr. Bryan said that he would like to comment on the point that

had been raised by Messrs.

Robertson and Balderston, that is,

the mat

ter of conveying instructions of the Committee to the Manager of the

System Account in

tives.

terms that would be understandable as policy direc

While he did not believe it

was too important at this particular

time because the differences indicated were minor in

shading, he sug

gested that the time would come when there would be differences of

opinion in

the Committee which were important,

and if

an instruction

could not be given to the Manager of the System Account in

clear terms

the Committee would find itself in real difficulty.

Chairman Martin stated that he would not disagree with this

general statement, adding that this was a problem that the Committee

had been struggling with for at least four years.

He knew of no way

2/15/56

-29-

of defining tone.

He welcomed any suggestions as to how to make clearer

the intentions or wishes of the Committee,

had expressed himself on this point.

there were further comments,

and he was glad Mr. Robertson

He then suggested that unless

the Committee renew its

directive to the

New York Bank without change and with emphasis on the point that there

should be no significant change in policy.

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

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 gen

eral 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 developments in the

interest of sustainable economic growth while taking into ac

count 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

(including commitments for the purchase or sale of securities

for the account) at the close of this date, other than special

short-term certificates of indebtedness purchased from time to

time for the temporary accommodation of the Treasury, shall

not be increased or decreased by more than $1 billion;

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

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

cases where it seems desirable, to issue participations to one

or more Federal Reserve Banks) such amounts of special short

term certificates of indebtedness as may be necessary from time

to time for the temporary accommodation of the Treasury; provided

that the total amount of such certificates held at any one time

by the Federal Reserve Banks shall not exceed in the aggregate

$500 million;

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

for gold certificates such amounts of Treasury securities

2/15/56

-30-

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 cur

rently quoted in the open market.

No suggestion was made for change in

or in

the repurchase authority

the statement of conditions previously in effect.

Thereupon, the following authorization

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 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

(b)

(c)

(d)

2.

3.

Treasury bills;

Shall be for periods of not to exceed 15

calendar days;

Shall cover only Government securities matur

ing within 15 months; and

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.

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 referred to the action taken by the Committee

on November 30, 1955 authorizing the purchase of not to exceed $400

2/15/56

-31

million of 2-5/8 per cent Treasury certificates on a when-issued basis

and to the suggestion that this subject be considered prior to the

next Treasury financing in

terms of the general policy that the Com

mittee wished to follow.

Mr.

Robertson suggested that steps be taken to re-establish an

understanding of the Committee's policy on whether it

securities involved in a Treasury financing.

should purchase

In his view, the Com

mittee should advise the Treasury along the lines suggested in his

statement earlier in this meeting.

He felt that some such statement

was necessary because of the implications of recent statements by

Secretary of the Treasury Humphrey and Under Secretary of the Treasury

Burgess in which they indicated an expectation of support from the

Federal Reserve in

connection with debt management problems.

Chairman Martin described discussions which he and Mr. Balderston

had had with the Secretary of the Treasury recently in which the sub

ject referred to by Mr.

Robertson had been reviewed.

Chairman Martin

added the comment that in his view Secretary Humphrey's testimony be

fore the Joint Committee on the Economic Report regarding the rela

tionship between debt management and monetary policy was very satis

factory.

Mr.

Balderston noted that Secretary Humphrey had commented in

his testimony that he could subscribe 100 per cent to the views ex

pressed by Chairman Martin at the time he appeared before the Senate

Banking and Currency Committee in

a member of the Board.

connection with his renomination as

-32-

2/15/56

Chairman Martin said that he thought the problem before the Com

mittee was to make certain whether there had been any basic change in

the Committee's operating policy, and he called upon Mr.

Sproul for com

ments.

Mr. Sproul then made a statement substantially as follows:

1.

It seems to me that Governor Roberston's memorandum

on our purchases of when-issued securities in connection

with the December financing of the Treasury, reverts to the

pronouncements of the Ad Hoc Subcommittee report instead of

to the action which was actually taken by the Federal Open

Market Committee on this subject, and oversimplifies the

specific experience with which it deals.

2.

I make the first

statement because his memorandum left

out the concluding and saving clause in the action of the Fed

eral Open Market Committee "that this policy be followed until

it is superseded or modified by further action of the Federal

Open Market Committee."

Whether or not such supersession or

modification was permanent or temporary, and I took it to be

temporary in November, this clause and subsequent statements

had, I thought, removed the idea that the commandment had

been chiselled in stone and could only be sandblasted out.

3.

I make the second statement because the November

incident cannot be considered in isolation, but should be con

sidered as the cumulative result of a situation in which the

Treasury had had to come to the market frequently for refunding

and for new money, while we were pursuing a policy of increas

ing credit restraint.

4.

During 1955 the Treasury-and it is a Treasury as

fully committed to the maximum possible separation of debt

management and credit policy as we are likely to get-found it

necessary to make substantial and increasing underwriting

purchases out of its own funds to aid in the market digestion

There was no pegging of prices, but under

of its offerings.

writing assistance was needed, as I think it must always be

when the market has to attempt to make adjustments to such

No dealer group

large offerings in the space of a few days.

have

the necessary

does

it

nor

underwriting

can provide such

incentives to do so in the case of a Treasury financing.

Nor did we stand aside in the earlier financing of 1955.

We regularly adopted a policy of maintaining an "even keel"

immediately before, during and after a Treasury financing even

though it might mean a temporary halt in a policy of tightening

2/15/56

-33-

credit which we intended to pursue.

There was coordination

of debt management and credit policy on an ad hoc basis, al

though our rules of operation prevented advance planning of a

concerted approach.

5.

Governor Robertson seems to say all right, let the

Treasury handle its own underwriting problems, and if attrition

on its offerings is too great, it can make it up by a quick

resort to additional cash financing, with perhaps an inter

mediate dip into direct borrowing from the Federal Reserve

Banks.

There are at least two major risks involved in this

attitude:

(a) One of these risks is that a less cooperative Treasury

might acquire a bad habit of stage managing the market

for its offerings, with possible or probable outright

collisions with credit policy. I do not think we want

to push the Treasury too far in that direction, lest we

find we have abdicated a central banking responsibility

and been saddled with Treasury dominance.

Consultation

and coordination is better.

(b) The second risk rises out of the fact that credit policy

itself

is at stake in these operations and may be

jeopardized by Treasury attempts to do the job alone

under all

circumstances.

At times, when the System has

been following a policy of increasing credit restraint

for a period of months, and when a major cause of market

uncertainty is market doubt over the timing and the

severity of further System action, credit policy is

involved in helping the market to establish sustainable

equilibrium levels of trading at a time of Treasury

financing. We, as well as the Treasury, had a responsi

bility in November to provide some resistance to a de

terioration of market psychology which could have gone

far beyond the bounds of intended credit policy. Subse

quent action of the market for the securities offered in

December indicates that we had a temporary aberration on

our hands, not a longer term trend and not a price mis

calculation by the Treasury.

6.

The alternatives to what actually was done are not too

They were to buy Treasury bills in whatever amounts

alluring.

might have been needed to change the tone and anticipations of

the market, or arrange with the Treasury to run down its balances

We

and then to borrow directly from the Federal Reserve Banks.

with

around,

a

market

had some experience with trying to turn

purchases of bills, when expectations have gotten out of hand

as in May 1953, and I think that in November 1955 such purchases

in the amounts which might have been needed would have thrown our

credit policy much further out of whack than what we did in the

when-issued market.

2/15/56

-34-

The second alternative would similarly have run the risk

of putting an excessive amount of reserve funds in the market,

but would have left

it to the Treasury to determine the amount

and to do the actual buying.

That is not a real solution. But

if nothing had been done, and if the attrition had been allowed

to run up unchecked, we could have had a further deterioration

of market psychology, with an enlarged need for Treasury cash

borrowing, which in turn might have run into difficulties, and

made it even more difficult to maintain credit policy. Even

after our purchase of "when-issued" certificates, large purchases

of bills, and assurances of repurchase facilities, the cash

offering of $1.5 billion of Tax Anticipation Bills on December 8

was threatened with a very sour reception and it was deemed

necessary to encourage bidding by the banks.

The eventual re

sults looked handsome but without concerted System effort there

might have been a deadlock in the market with serious repercussions

on credit policy. The Treasury would have gotten its money,

but we might have had a fright mentality to contend with over

the difficult year-end period.

7. My own view is that we faced a difficult situation in

November, which involved both the Treasury and the System, and

that since we were going to have to provide reserves to the

market as a matter of credit policy, we could well afford to

depart from our general rule and provide some of these reserve

funds through purchases of when-issued securities, thus co

ordinating our operations with those of the Treasury in performing

an appropriate underwriting function for a large issue, brought

out at the right price but under unusually difficult circum

stances. It is not fair to say that the Treasury was concerned

solely with the surface aspects of a large attrition. It was

concerned with the whole state and behavior of the Government

security market during a Treasury borrowing operation, and with

the consequences of a failure of that operation on future bor

We shared these concerns.

rowing and on all security markets.

8. I do not want to seem to imply that I think everything

the Treasury did and we did in November was perfect, but I think

that, so far as we are concerned, improvement of our performance

would have to rest on a fundamental re-examination of the rules

the Committee adopted in 1953 for its general and ordinary guidance

at times of Treasury financing. These rules have become the

"status quo." They should be re-examined in the light of our

experience with them, and of a re-appraisal of the facts, as

suming that the findings of the ad hoc subcommittee are not to

be considered complete and final for all time, thus relieving

us of further thought about and discussion of the problem. To

proceed to such a re-examination in a constructive way, and to

prepare for further conversations with the Treasury about the

-35-

2/15/56

coordination of debt policy and credit management on a longer

term basis, I think the Federal Open Market Committee should

have a study made by a representative System committee of the

highest caliber, and preferably made up of men who do not seem

to have adopted rigid positions on the question at issue. I

would have in mind, for purposes of illustration not exclusion,

such men as Mr. Miller at the Board and Messrs. Neal, Roelse,

Such a com

Bopp, Daane, Mitchell and Deming at the Banks.

mittee could review the experience of the past four years,

and analyze all aspects of the problem for our consideration.

I would hope and expect that they would avail themselves of

the testimony of those who have had the responsibility for

carrying out the directives of the Federal Open Market Com

mittee during this period, so that their views would not be

crystallized into findings before such testimony had been heard.

In this way we may arrive at some agreed conclusions, repre

senting a fair compromise of whatever divergent views may exist.

Meanwhile, I cannot subscribe to Governor Robertson's view that

a so-called principle was thrown out the window in November

no matter how attractive that disposition of such a principle

Nor would I want to make further representa

might be to me.

tions to the Treasury now, as he has suggested, as to what we

shall or shall not do under all circumstances in the future.

In response to a question from Mr. Robertson, Mr. Sproul said

that he thought the rule against purchases of securities involved in a

Treasury financing was still

the will of the Committee,

thought the Treasury knew this to be the case.

and he also

He would not wish to

go to the Treasury with a statement that the Federal Open Market

Committee would do nothing to assist in the next Treasury financing,

although he did not think the problem would arise in March in

it

the way

did last November.

Mr.

Robertson stated that, as his earlier statement indicated,

he was not suggesting any such absolute statement, admitting of no ex

ceptions.

He was interested, however,

in knowing whether the policy

of the Committee today was the same as before the action taken last

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November,

or whether the action taken at that time superseded the Com

mittee's policy.

Mr. Sproul said that there was no doubt in his mind at the time

of the Committee's action on November 30 that the action represented

an exception to policy rather than a change in policy, and he still

thought that to be the case.

Chairman Martin commented that he thought this was agreed to

by the Committee.

It

could reaffirm now the view that its

action on

November 30, 1955 represented an exception to the general rule it

had been following since 1953.

Chairman Martin said that Mr. Sproul

had done the Committee a service in presenting his statement and in

proposing a re-examination of the policy.

He proposed that Mr.

Sproul's memorandum be made available to all members of the Committee

and that further discussion of his suggestion for a re-examination

of the Committee's policy be deferred until the next meeting of the

Committee, which he suggested be held on Tuesday, March 6, 1956.

There

was agreement with these suggestions.

Mr. Robertson inquired whether Chairman Martin felt that any

further steps should be taken to reiterate to the Treasury the Com

mittee's views regarding Committee operations during periods of

Treasury financing,

and Chairman Martin responded that in his judgment

no more formal steps were needed.

Chairman Martin noted the proposal of the International Monetary

Fund to invest $200 million in United States Treasury bills, and he raised

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the question as to what Committee operations should be in the light

of such investment.

Mr.

Rouse stated that it

was expected that the investment by

the Fund in bills would take place over a period of time and that the

amount invested in any one week might run from $10 to $20 million.

It

was his view that System operations could be adapted to these in

vestments without difficulty.

Mr. Sproul suggested that in

executing orders for the Fund it

should be understood that they would be fitted into the policy of the

Open Market Committee in the best way available at the time, and there

was general concurrence in

this suggestion.

Mr. Mills recalled the operating policy of the Federal Reserve

Bank of New York adopted in 1953 whereby transactions for foreign ac

counts in Treasury bills might be at the convenience of the Federal

Reserve Bank of New York and in such a manner as not to interfere with

open market policy.

He suggested that the same understanding would

apply in the case of investments for the Fund along the lines suggested

by Messrs. Rouse and Sproul.

Mr. Sproul agreed with Mr. Mills, and Mr. Rouse stated that the

International Monetary Fund understood that this procedure would be fol

lowed.

Mr. Riefler stated that members of the Committee and its

staff

would shortly receive a volume of excerpts covering open market invest

ment policy during the years 1923-28 and that later on similar excerpts

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covering the years 1929 to mid-1931 would be sent to them.

Chairman Martin said that these excerpts had been prepared in

a form in which Committee members could refer to them conveniently

because he had had an opportunity to examine them recently and thought

that it

would be helpful to review the discussions of policy in

years.

Thereupon the meeting adjourned.

Secretary

those