FOMC Minutes

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

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

Washington on Tuesday, April 17, 1956, at 10:45 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Sproul, Vice Chairman

Balderston

Erickson

Johns

Mills

Powell

Robertson

Shepardson

Szymczak

Vardaman

Fulton, Alternate

Messrs. Bryan, Leedy, and Williams, Alternate

Members, Federal Open Market Committee

Messrs. Leach, Irons, and Mangels,, Presidents of

the Federal Reserve Banks of Richmond, Dallas,

and San Francisco, respectively

Mr. Riefler, Secretary

Mr. Vest, General Counsel

Mr. Solomon, Assistant General Counsel

Mr. Thomas, Economist

Messrs. Abbott, Parsons, Roelse, Willis, and

Young, Associate Economists

Mr. Rouse, Manager, System Open Market Account

Mr. Carpenter, Secretary, Board of Governors

Mr. Sherman, Assistant Secretary, Board of

Governors

Mr. Miller, Chief, Government Finance Section,

Division of Research and Statistics, Board

of Governors

Mr. Gaines,, Manager,. Securities Department,

Federal Reserve Bank of New York

Upon motion duly made and seconded, and

by

unanimous vote, the minutes of the meeting

ofthe Federal Open Market Committee held on

March 27, 1956, were approved.

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4/17/56

Before this meeting there had been distributed to the members

of the Committee a report covering open market operations during the

period March 27, 1956 through April 11, 1956, and at this meeting a

supplementary report covering commitments executed April 12-16, in

clusive, was distributed.

Copies of both reports have been placed in

the files of the Committee.

Mr. Rouse called attention to a paragraph on the second page

of the supplementary report in which it

market rates of interest, it

is

was noted that at present

advantageous to the Treasury to invest

money available in the trust funds and investment accounts in out

standing Treasury bonds,

cerned,

and thus, so far as the market effect is

to "retire" the securities purchased.

con

Mr. Rouse noted that a

Treasury surplus may be anticipated this year and suggested that deci

sions of the Treasury as to the particular securities that might be

withdrawn from the market through retirement of outstanding debt and

the methods through which such retirements would be effected would

exert direct effects upon credit conditions.

This suggested the de

sirability of having the Federal Open Market Committee and its staff

study the possible implications for credit policy of alternative debt

management procedures.

Upon motion duly made and seconded,

and by unanimous vote, the open market

transactions during the period March 27

through April 16, 1956, inclusive, were

approved, ratified, and confirmed.

4/17/56

A staff memorandum on recent economic and financial develop

ments was distributed to members of the Committee under date of

April 13, 1956.

At Chairman Martin's request,

Mr. Young made a state

ment at this meeting on the economic situation substantially as fol

lows:

Economic activity continues to move sidewise on the

high plateau maintained since late last fall. While the

over-all picture is mixed, signs are present that pressures

growing out of advancing private investment are beginning to

tilt

activity upward.

Recently, evidence of private invest

ment pressures has been most conspicuous in credit and

capital market developments, but evidence continues to be

marked in such data as construction contract awards, unfilled

equipment orders, output levels for industries producing

primary materials, and industrial prices. Over the past few

weeks, auto and housing markets have stabilized, while other

consumer markets, after allowance for usual seasonal and un

usual weather factors, have been on the firm-to-rising side.

Demand for labor has remained active, with wage rates showing

further rise.

Business and investor psychology continues

very optimistic.

Abroad in industrial countries, activity maintains the

appearance of general strength.

Data for Great Britain sug

gest progress, at least modest progress, towards restoration

of balance in the British economy.

Key developments in specific areas merit brief summary:

(1) Industrial production for March is being estimated

at 142, down a point from the level of preceding months.

The

decline reflects mainly reduced auto output. Other consumer

durables output was off some but this was compensated by ris

ing equipment production. Late data indicate that demand is

being maintained in major industrial lines so that April pro

duction is expected to hold at least to the March level.

(2) Auto production is now running about a fourth of last

fall's rate, and is below dealer sales and export rates.

Dealers' stocks declined moderately in March and are expected

to show a larger decline this month. The used car market

both in sales and prices has been showing better than seasonal

strength. Sales of other durable goods in March regained

their high fall plateau, after a slipback in February. Con

sumer sales at nondurable stores were also up in March. De

partment store sales, however, showed little change from

February.

4/17/56

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(3)

Construction activity over-all showed a slightly

better than seasonal performance in March, reflecting higher

expenditures for business construction with stability for

housing construction.

While housing starts were at 1.1 mil

lion unit rate in March, residential contract awards were at

an all time high, excepting only May of 1951 when special

awards for housing at atomic energy installations made for a

swollen total.

The mortgage market through March showed an

easing trend.

(4)

Employment and unemployment data have continued to

reflect mainly seasonal changes.

Average hours of work have

declined further, but average hourly earnings, after three

months of stability, have risen to a new high, offsetting the

further decline in hours of work and raising weekly earnings

again close to the peak reached late last year.

(5)

The annual rate of inventory accumulation for the

first

quarter of 1956 is estimated at $4 billion compared with

$5 billion in the fourth quarter of last year. These rates

are adjusted, of course, for inventory valuation change.

It

is significant that finished goods were a sizable proportion

of the inventory increment this past quarter.

With inventory

to sales ratios now closer to longer-turn averages, inventory

trends will bear close watching in the period ahead.

A special

fact of interest is that the steel industry is currently

estimating that from 8 to 9 per cent of shipments is moving

into inventory.

(6) With high levels of activity resulting in demand

pressure on basic industrial materials and products, average

At mid-April,

industrial prices have continued to creep upward.

half

the average was 5 per cent above the average for the first

of last year. With some recovery in agricultural prices since

early this year, the average of all wholesale prices is up 3

year. Markets for metals

half of last

per cent over the first

and many other materials continue strong, but markets for

textiles and textile fibres have been quite mixed, with syn

thetics showing marked weakness, woolens strength, and cottons

in between. By mid-April, farm prices had risen 6 per cent

5 per cent under the average

from December, but were still

for the first

half of 1955.

ith activity in industrial countries abroad at very

(7)

advanced levels, pressures on resources in these countries re

main strong. The picture generally in industrial countries

While both ex

is one of continuing business investment boom.

ternal and internal developments for Great Britain appear en

on the infla

couraging, cost and demand pressures are still

tionary side. Developments in Canada have been paralleling

those in the United States fairly closely. United States im

ports seem to maintain their up-trend, as do also United States

nonagricultural exports.

4/17/56

A summary of a statement next made by Mr. Thomas with respect

to the credit situation follows:

In the past three weeks, credit markets have been

adjusting to the impact of corporate tax payments and the

Treasury refunding operation which came together in March,

to heavy loan demand in capital markets and at banks, and

now to the rise in discount rates.

Some contraction followed

record expansion in bank credit during the first

three weeks

of March. Preliminary estimates for the week ending April 11

based on figures for nine districts indicate a decrease of

nearly $1 billion in holdings of U. S. Governments during

the past three weeks, following an increase of $400 million

in the previous three weeks.

All types of issues of Govern

ments have been liquidated by reporting member banks during

the most recent three-week period. The net decrease of over

a half billion dollars over the six-week period is about the

same as the decrease over the comparable six-week period last

year. Business loans showed little change in the three weeks,

following a sharp rise, and are still about $1.4 billion

greater than at the end of February. This compares with an

increase of only $300 million in the corresponding six weeks

of last year. Loans on securities decreased in the past three

weeks by nearly the amount of the preceding increase, reflect

ing liquidation of borrowings related to the Treasury financ

ing and other capital market developments.

Demand deposits adjusted declined by half a billion dur

ing the most recent three-week period, slightly more than in

the corresponding period last year, but over the six-week

period the decrease was negligible whereas a substantial de

cline is usual for this period. For the year to date money

supply changes have been close to those expected seasonally.

Treasury deposits declined about $1.5 billion in the last

three-week period, approximately the amount of the increase

In summary, the recent credit

in the preceding three weeks.

contraction, although noteworthy, has not offset the preced

ing record expansion and reports indicate continued strong

credit demands and pressures on the market.

Large tax receipts built the Treasury cash balance to

nearly $6 billion at the end of March - an important factor

in the credit squeeze. While there has been considerable de

crease since the latter part of March, the Treasury balance

has averaged much larger for the year to date than a year ago,

and is expected to stay fairly high through June. As Mr.

Rouse indicated, in addition to retiring $4.5 billion of tax

4/17/56

certificates in June, the Treasury might use some of its

cash surplus to retire special issues for Government trust

and agency accounts and replace them with other securities

bought in the market, which is the same as retiring long

term debt.

The cash surplus for this fiscal year is now

estimated close to $5 billion, and it may be $6 billion for

this calendar year.

Large corporate capital spending has been reflected in

the securities markets.

Offerings of corporate securities

have been heavy and, although prospects are for lighter of

ferings in tne near future, the April total

will be above

that of last

year.

The four-month total

is above either of

the last two years. Volume of State and local issues for the

year to date is below 1955 but the calendar for the future is

still large. A tendency to postpone some of these issues re

flects difficulties in floating them, and some have been sold

at lower prices than initial offerings. Common stock prices

have declined somewhat in the past week from the highs reached

early in April but generally continue fairly firm. On the

whole, stock market credit has been stable for some time.

There has been a very marked adjustment in the interest

rate structure in the past three weeks with the sharpest rises

that have taken place since 1953.

Medium-term Governments

are selling on a yield basis of around 3-1/4 per cent or more,

which is above the level reached in 1953.

Prices of long-term

bonds have not declined as much as intermediates and their

yields are still

below the 1953 highs.

Corporate and municipal

bond yields are now the highest since the fall

of 1953 but

year. Treas

still

are not up to the high of the spring of that

ury bill

rates, which were kept down somewhat in February and

March by special seasonal demands, have risen sharply the past

They rose above 2-1/2 per cent even before the

three weeks.

discount rate increase and are now close to 2-3/4 per cent.

This week's auction average was 2.77, the highest since 1933.

The short end of the money market is no longer sharply out of

line with the rest of the yield pattern, as was the case in

February.

Bank reserve needs have been dominated recently by changes

in required reserves that reflect wide variations in Government

deposits. Required reserves increased sharply in the first

three weeks of March, decreased in the next three weeks, and

are showing little change this week. The current level is

about $300 million larger than projected early in March and

These reserve needs

currency demand was $100 million larger.

by a larger than expected increase in float,

were met earlier

by System open market purchases, and by increased member bank

4/17/56

borrowing at the Reserve Banks. Subsequently, float decreased

and the System reduced its portfolio. Net borrowed reserves

have been close to the $450 million level, with borrowings

of member banks generally above $1 billion and so far this

week about $1-1/3 billion. Announcement late on April 12 of

the discount rate rise was preceded by heavy anticipatory bor

rowing and banks met their needs for this entire week. This

accounts for the ease in the Federal funds market yesterday.

As will be seen from the table of projected reserve changes,

the pattern would call for only moderate net changes in reserve

needs during the next six weeks, but in June seasonal demands

will increase pressures substantially. Wide week-to-week

variations may be expected and the projections indicate that

net borrowed reserves will vary from as low as $130 million

to as high as $540 million. The average level appears to be

lower than would be appropriate for a restrictive credit policy

and might call for further sales from the System portfolio.

Needs for further System action will have to be judged

by reactions of lenders and borrowers to current restrictive

policies. Reflecting possible alternative developments, we

may ask: (1) Will credit expansion be curtailed to the point

needed to maintain balance without critical results and without

further restrictive action? (2) Will banks want to increase

further their borrowings from the Reserve Banks to meet further

undue credit expansion? (3) Will pressures of credit demands

remain so strong as to cause further rises in interest rates

and weak security markets that will eventually bring about a

money market crisis and a serious downturn in the economy?

Which course of events will be following should be indicated

by the pressures on capital markets and commodity markets,

and should be reflected in interest rates and prices.

In response to an inquiry from Mr. Vardaman, Mr. Young said

that reports indicated considerable "gray market" activity in steel

at the warehousing level recently, and that during the first quarter

of this year such gray market activity appeared to have been fairly

widespread throughout the United States.

Mr. Sproul referred to the statement by Mr. Thomas regarding

the capital markets and to Mr. Young's review of estimates of pros

pective private capital expenditures.

He inquired whether there may

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4/17/56

have been some over-emphasis on proposed capital expenditures in terms

of their future effects on the economy; that is,

whether their ef

fects may already have been largely felt.

Mr.

it

Thomas stated that this was a possibility and that if

developed that the actual rate of expenditures was not as large

as might be anticipated by the present pressure for borrowing in the

capital markets, this would be a desirable development.

hand,

if

On the other

corporations spend at the rate at which they have been at

tempting to obtain funds in the capital markets the effect would

be to create great pressure on the resources of the country.

Mr. Young stated that while the figures of prospective capital

expenditures did not extend over a sufficiently long period to provide

data for a thorough analysis of their behavior, the tendency had

been for corporations in periods of expansion to under-estimate the

amounts they actually would spend in future periods, particularly in.

the second half of the year.

During further discussion of this subject and comparisons with

the 1937-38 period, Mr. Williams reported a comment by two utility

directors of the Philadelphia Bank that further disturbances in the

long-term bond market would lead to increased demand by the utility

industry on banks for short-term funds.

Expansion plans by utilities

are made for periods of several years ahead and are not subject to much

postponement.

4/17/56

Mr. Leedy stated that he had the impression that a considerable

part of the anticipated capital investment programs reflected plans

based on long-term growth factors, particularly growth in population

extending to,

say, 1965, and that in

these cases the failure of

anticipated growth to develop as rapidly as forecast would not be

of too great importance over short periods of time.

In opening the discussion of credit policy, Chairman Martin

said that since the System's action increasing the discount rate

effective April 13,

1956, he had received a number of comments sug

gesting that the System might precipitate another situation such as

that which existed in the spring of 1953 when there was apprehension

about a sudden concerted closing of the discount window.

The Chair

man suggested that we bear in mind that we don't want continuous

borrowing,

but also we don't want to make money "unavailable."

The

Chairman also suggested that in reviewing the Committee's directive,

the discount rate, and the discount window, it

take into account all

factors that might bear on the situation.

Mr. Sproul then made a statement substantially as follows:

With the production index showing a slight decline

1.

for March, employment showing no more than seasonal improve

ment, the average work week declining, and inventories in

creasing, we have a potentially unstable situation, in which

what now appears to be overoptimism on the part of the

business community might perhaps quickly change to a more

sober appraisal of the future. For the present, however, it

is significant that consumer incomes are staying nigh, and

retail sales are holding up, which is the fundamental basis

for nigh production and employment.

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4/17/56

2.

In these circumstances, and in the light of the

strong demand for credit and capital and the likelihood of

upward pressures on prices from the cost side, I think we

are right in maintaining pressure on bank reserve positions

and probing into the structure of interest rates by increas

ing the cost of reserve funds.

3.

I would emphasize that it should be a probing opera

tion, however, not a major operation since we do not know for

certain what is wrong with the patient nor how drastic the

reaction might be if we vigorously tried to redress the ex

isting balance of forces.

4. This suggests to me that we watch the reaction to

our recent increase in discount rates, and try to maintain

about the position of reserve availability which we had at

tained earlier this month, but that we should not press our

policy too harshly nor too far while we are still

operating

more on feel than on facts.

Mr. Johns said that he was in

Mr.

Sproul's statement.

substantial agreement with

He noted that three weeks ago he had sug

gested that the construction outlook and employment in the St. Louis

District might be lagging somewhat behind the national picture.

It

now appeared that this was not the case as to construction, and at

this time conditions in the Eighth District do not appear to differ

significantly from the national picture described by Mr. Young.

Mr.

Johns said that for the time being he would not wish to increase

the pressure in

the market but would try to observe the effects of

the recent change in discount rates; he would hold the line until the

future became a little

clearer.

Mr. Bryan reported discussions at recent meetings of the

executive committee and the board of directors of the Atlanta Bank

with regard to the increase in

the discount rate.

He said that the

directors were unanimous in believing the System was compelled to act

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4/17/56

in a restraining way.

They felt that the increase in the rate would

have a needed sobering effect.

As to policy for the next few weeks,

Mr. Bryan said that his position was indicated by the suggestions

made by Messrs. Sproul and Johns,

that is,

that the Committee pursue

a watchful waiting attitude while observing developments.

He would

like to have the discount rate effective; he would not allow the bill

rate in any spasmodic movement to go much above the discount rate,

but he would not allow it

to back away from the 2-3/4 rate by any

large amount.

Mr. Williams said that recent comments of directors of the

Philadelphia Bank indicated considerable accumulation of steel in

ventories,

as Mr.

Young reported.

This was in anticipation of price

increases and sustained demand for consumer durable goods.

He re

ported that an oil company executive had said that the growing dis

cussion of increases in

the prices of crude oil was not meeting a

favorable response on the East Coast, in part because of the pos

sible effect on imports.

If

domestic crude prices are increased,

there will be a temptation to increase imports and this ultimately

might result in demands for restrictive control over imports.

Mr.

Williams reiterated his earlier comment that utilities companies

might be seeking alternative sources of funds for capital expansion,

which might cause difficulty through adding to loan demands at banks.

The response to the increase in the discount rate was that it

be expected,

was to

Mr. Williams said, and there was some question as to how

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4/17/56

effective it would be in restraining credit expansion.

He reported

conversations with major sources of borrowing at the Reserve Bank

which he felt indicated that the concern banks were showing regarding

credit expansion was genuine.

Mr. Williams also reported a statement

by the President of the Pennsylvania Bankers Association recently

suggesting that bankers should look to their responsibilities for

seeing that the situation did not get out of hand, and appealing to

them to exercise self-discipline.

Mr. Williams said he assumed there

was no need for any change of policy at this time in the light of

developments of the last

Mr.

three weeks.

Fulton said that the Cleveland District continued to re

flect a high rate of activity.

The steel inventory situation might

differ from that suggested by other comments,

in that the only ac

cumulations reported were in the industries allied with the automobile

industry.

could get.

Mr.

Other customers were cutting up about all the steel they

Expenditures for capital improvements are going forward,

Fulton said, and the increase in

cost of money was not expected

The only deterrent which he noted

to deter carrying out these plans.

currently was inability to get steel for construction.

Projections

made by manufacturers as to the need for the products they make were

paramount in their minds at present.

Summing up, Mr. Fulton felt that

at present there was an abundant economy and this situation would

continue as far as could be seen.

He said that he thought no relaxation

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4/17/56

should creep into Federal Reserve policy at this time and that at

least the existing degree of firmness should be continued.

Mr.

Shepardson said that he felt

the Committee was in a posi

tion where it needed to hold steady for a period.

Mr.

Robertson stated that he saw nothing in

the picture that

would warrant a decline in pressure or an increase, and he thought

it

too early to determine what the reactions would be to last week's

discount rate increase.

Consequently, this was one of the times when

the Committee's agent should have real latitude in

carrying on opera

tions depending on what the reaction to the increase in

rate turned out to be.

If

the discount

real stringencies were to develop, the

management should be in a position to ease the situation.

other hand, if

On the

the rate increase had no effect on the market, Mr.

Robertson said that he would wish to hold steady until the next meet

ing of the Committee.

Mr. Mills said that his sentiments followed the thoughts thus

far expressed,

especially the desirability of waiting for a period to

observe the effects of and reactions to the change in the discount

rate.

We knew from experience that there was always a delayed reaction

to any shift in System policy, Mr. Mills said, and a waiting period

might be particularly important at the present time in order to allow

the market for U. S.

Government securities to adjust.

Mr. Vardaman said that his feelings were similar to those ex

pressed except that, having acted on the discount rate with considerable

4/17/56

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force, the personnel of the System should now adopt the "golden

standard" of silence, and that the Board and Bank personnel both

should forego at least for awhile any further discussion of restric

tions in the field of money and credit.

psychosis might be developed,

Otherwise, he said a fear

which could result in a buyers'

strike.

On a broad geographical basis, he found a real fear not as to the

cost of money but as to its

availability.

discount window was not going to be open.

important, Mr.

as possible.

There was a fear that the

It

seemed to him extremely

Vardaman said, that this fear be eliminated as soon

Mr.

Vardaman also expressed the view that there was an

inequitable distribution of loanable funds across the country which

was causing complaints, particularly in agricultural areas.

would adjust itself if

the System would now "sit

the situation closely for the next few weeks.

This

tight" and observe

Mr. Vardaman also said

that he had been unable to find evidence as to where the gray market

in steel was putting inventories unless it

be in the housing industry.

Mr. Leach made a statement substantially as follows:

Two key factors in the current situation directly related

to our recent changes in the discount rate are the prevalence

of upward price pressures and the strength of loan demands.

At our Directors' meeting last week one of the Directors

who is with an electric tool manufacturing concern commented

that he had experienced about a 5 per cent increase across

the board in the price of materials entering into his prod

ucts and that he was anticipating another 5 per cent in

As a result, he had notified his

crease in coming weeks.

sales people that a 10 per cent increase in prices of his

products was in prospect two months from now. This seems

to be typical of what is happening to prices.

4/17/56

-15-

A week's visit to eighteen banks in the Carolinas and

interviews with other bankers gave me the impression that

the strong demand for loans is getting stronger, particularly

at the larger banks. Many bankers are worrying about their

liquidity positions.

They are largely out of short-term se

curities, and bonds which are not pledged to secure deposits

can be sold only at substantial losses. We have received in

quiries in regard to borrowing on eligible paper and are

bringing our forms and procedures up to date. One of the

largest banks in our district with $400 million deposits is

planning to send us this week a bundle of eligible paper to

be used in case of need.

This bank expects to borrow inter

mittently for three months in varying amounts ranging up to

$25 million.

A number of bankers in whom I have confidence tell

me they

are screening loans closely. Several have eliminated or re

duced lines to finance companies.

I heard a South Carolina

banker turn down an application for a $75,000 loan to a good

business customer to be secured by listed stocks. The banker

had learned that the purpose of the loan was to repay a loan

to his customer's brother which had been called by his New

York bank.

The South Carolina banker told his customer he

would lend him any reasonable amount if needed for his own

business but he would not let a security loan be transferred

from New York to his bank. His lending capacity would be

saved, he said, for the expanding business needs in South

Carolina.

Loan expansion is occurring in practically all areas.

Much of it comes from business enterprises which are expand

The larger corporations can

ing plant or buying new machines.

issue securities or place loans directly with insurance

companies, but insurance companies want loans that will run

or no interest in

for at least ten years and have little

loans that can be paid out in monthly installments over one to

Consequently, such prospective borrowers turn

three years.

to their banks.

In my opinion we should maintain but not increase pressure

in the immediate future.

Mr. Leedy said that the matter of borrowing on eligible paper

to which Mr. Leach had referred had already been experienced in the

Kansas City District in one case with a country member bank.

He was

more disturbed by an inquiry the other day from a non-member bank about

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4/17/56

borrowing on direct obligations of the U. S. Government.

This in

quiry caused him to feel that perhaps the Bank should take a second

look to see whether the rate was at a level that would discourage

such borrowings by a non-member bank.

Mr.

far.

As to the Committee's policy,

Leedy said that he did not differ from the suggestions made thus

The management of the account had done a remarkable job since

the preceding meeting in applying pressure, he said, and for the

period ahead, he would surmise that even more skill might be required

in managing the System account.

Mr. Leedy said that there was a

question how far the Committee could go in maintaining the pressure

that seemed to be called for in

out creating disturbances in

the Committee desired.

the light of its

present policy with

the short end of the market beyond what

He also felt that the fact that the stock

market had taken the increase in the discount rate in

stride was dis

turbing; this confirmed the feeling that the existing optimism is

justified.

If

this feeling prevails generally in

munity, Mr. Leedy said, there is

not likely to be any cessation in the

demand for credit and a problem is

However,

the business com

thus presented for the Committee.

in the period intervening between now and the next meeting,

he would attempt to apply pressure about as has been done during the

past few weeks.

Mr. Powell summarized conditions in the Ninth District as bet

ter than a year ago right across the board.

The fact that current

farm income was holding above a year ago reflected the large crops

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harvested last fall.

All indications were that business was doing

very well and much better in

pected.

some cases than previously had been ex

In one respect the Ninth District differed from the rest

of the country in

its

banking statistics and that was the higher

borrowings from the Federal Reserve Banks as a percentage of required

reserves.

Mr. Powell said that the substantial increase in the dis

count rate made at the Minneapolis Bank from 2-1/2 to 3 per cent was

necessary to avoid getting the borrowing situation farther out of line

without closing the discount window.

Restraint still

order so far as the Ninth District was concerned,

seemed to be in

he said, and as long

as it also seemed desirable for the national picture, that seemed to

be the policy for the Committee to pursue during the next three weeks.

However, Mr. Powell would be cautious about increasing pressure during

this period.

Mr. Mangels said that he subscribed to the views expressed

as to the policy that should be followed for the next three weeks.

over-all economy of the Twelfth District is

The

much the same as that

described for the country as a whole, Mr. Mangels said.

Loans by banks

have been increasing during the past few weeks and are substantially

above those of a year ago.

Mr. Mangels commented on an analysis of

loans of 29 of the large banks of the district, stating that the

average of their loans to deposits was 51.9 per cent and that this

ranged from a high of 60.3 per cent for one very large bank to a low of

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4/17/56

18.8 per cent for a bank in Salt Lake City.

48 per cent of time deposits of the banks,

Real estate loans averaged

ranging from a high of

64 per cent at one bank to a low of 14 per cent at another bank which

is

not inclined to make real estate loans.

Mr. Mangels stated that

visits which he and Governor Balderston made to banks in cities of

the Pacific Northwest during the past two weeks gave the impression

that the banks expect loan demand to increase in

though they will screen these applications,

rise.

the future and,

even

the volume of loans will

He reported that sales of new automobiles during March in

creased somewhat less than seasonally.

Sales of used cars have been

quite strong, and stocks of used cars have declined to a point where

dealers are expressing some concern.

New car inventories have de

creased somewhat recently, partly because of the pick-up in sales,

partly because manufacturers have reduced output, and partly because

dealers have been more willing to refuse to take as many new cars

from manufacturers as previously had been the case.

Construction

activity is holding up well in the Twelfth District, partly reflecting

added construction being undertaken for automobile assembly, aircraft,

and other plants.

Mr. Mangels also commented on an application for

an industrial loan for $2-1/2 million received by the San Francisco

Bank recently, which,

make it

while containing provisions which would normally

acceptable, was declined by the directors of the Bank in the

light of current System credit policy and of the fact that the applicant

had a commitment from an insurance company for a somewhat smaller loan.

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4/17/56

Mr. Mangels also referred to the action of the Board in ap

proving an increase in the discount rate at the San Francisco Bank

from 2-1/2 to 3 per cent, effective April 13, and to the announcement

of the Board's approval which was received in San Francisco shortly

after noon on April 12.

A number of bankers indicated their approval

of the increase in the rate to the 3 per cent level.

One result of

this announcement prior to the close of banking hours was that seven

banks borrowed a total of $130 million at the San Francisco Bank

that day.

is

Four of those borrowings were from four to six days.

It

the policy of the Bank to limit the period of borrowings under such

conditions to the end of the current reserve computation period,

even though some banks might seek credit for a longer period of time.

Mr.

Mangels felt that in view of the recent increase in

rate it

the discount

would be desirable for the System to observe developments

for a few weeks before taking further action.

Mr. Irons said there had been no significant changes in the

economic situation in the Dallas District since he reported three

weeks ago and that activity continued at a very high level in most

areas, although lack of rainfall is

culture.

Loan demand continues very strong in

District, Mr.

tightness.

an unfavorable factor for agri

cities of the Dallas

Irons said, and those banks are feeling the pressure of

Most country banks are carrying excess reserves and are

not heavily loaned up.

Only three country banks have borrowed from the

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4/17/56

Dallas Bank for a long time and those borrowings have been essen

tially seasonal in character.

A number of large city banks have

sent eligible paper to the Reserve Bank for processing so as to have

it "on tap" in case of need.

loan demand in prospect.

These banks can not see a decline in

The response to the increase in the dis

count rates last week was favorable, Mr. Irons said, although there

seemed to be some question whether it would stop the pressure on

banks for loan expansion.

Mr. Irons stated that he felt this was a

time when the System should observe the situation carefully.

The

management of the System open market account should be given great

leeway in order to meet whatever situation may arise.

Mr. Erickson said that business in New England is about as

outlined in the economic review for the country as a whole.

tion awards are still

running well ahead of last

in the case of residential contracts.

Construc

year, particularly

The textile industry has not

shared in the high level of activity to the extent that the boot and

shoe, paper, and a number of other industries have.

Mr. Erickson said

that there was no anticipatory borrowing at the Boston Bank in connec

tion with the announcement of the discount rate increase last week.

He expressed concurrence with tne view that for the present the Com

mittee should observe the situation carefully without changing its

existing policy or operations.

Mr. Szymczak stated that he felt the Committee should continue

about the existing situation and that it should be careful not to add

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4/17/56

to pressures on the reserve situation during the next three weeks.

Mr. Balderston said he had no recommendation to make but that

he wished to raise a question stemming from the high loan-deposit

ratio reported by many banks and from the existence of a "hard core"

of continuous borrowers at the discount window.

He felt that net

borrowed reserve figures of $400 to $500 million might prove to be

deceptive if

the twelve Reserve Banks should simultaneously bring

pressure upon continuous borrowers to correct that situation.

Mr,

Balderston suggested that the volume of so-called continuous borrow

ing might amount to as much as $600 million, and if

action were taken

to induce large banks to clear up their individual situations this

might precipitate the indiscriminate sale of intermediate Government

securities and thus bring about an unwanted over-tightening in

the

situation even though net borrowed reserve figures remained unchanged.

The critical question was, he said, in how many of the twelve districts

are the so-called continuous borrowers likely to be taking action to

correct their situations during the next three weeks.

Mr. Williams suggested that the problem might not be one of

reducing the amount of continuous borrowing but rather of avoiding an

increase in

it

in

the light of prospective demands ahead, and Chairman

Martin commented that this was a good point in terms of pressures that

might exist.

Chairman Martin then stated that on the basis of the discussion

this morning it

seemed clear that there was agreement that no change

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4/17/56

should be made in

the Committee's policy at this time, and that this

would mean that no change was called for in the wording of the direc

tive to be issued to the Federal Reserve Bank of New York.

quired of Mr.

He in

Rouse as to whether this was his understanding, and Mr.

Rouse indicated that it

was,

and that no change in the limitations in

the directive was called for.

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 (in

cluding replacement of maturing securities, and allowing

maturities to run off without replacement) for the System

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

maturing securities, by direct exchange with the Treasury,

as may be necessary in the light of current and prospective

economic conditions and the general credit situation of the

country, with a view (a) to relating the supply of funds in

the market to the needs of commerce and business, (b) to

restraining inflationary developments in the interest of

sustainable economic growth, and (c) to the practical admin

istration of the account; provided that the aggregate amount

of securities held in the System account (including commit

ments 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 ac

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

cretion, in cases where it seems desirable, to issue par

ticipations 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 Re

serve Banks shall not exceed in the aggregate $500 million;

4/17/56

-23

(3)

To sell direct to the Treasury from the System ac

count for gold certificates such amounts of Treasury securi

ties maturing within one year as may be necessary from time

to time for the accommodation of the Treasury; provided that

the total amount of such securities so sold shall not exceed

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

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

currently quoted in the open market.

Chairman Martin suggested that the next meeting of the Com

mittee be set for Wednesday,

May 9,

1956, and there was agreement

with this suggestion.

Chairman Martin next brought up the question of the authority

for repurchase agreements.

He noted a suggestion that, instead of

considering the authority for the Federal Reserve Bank of New York

to enter into repurchase agreements with nonbank dealers in Government

securities at each meeting of the Committee it

might be sufficient

to raise this question at less frequent intervals, and he inquired

whether any of the members of the Committee would object to that

procedure.

Mr. Vardaman stated that he could see no reason for bringing

the question up at each meeting of the Committee,

suggested that it

and Chairman Martin

would seem sufficient to bring it

up at the annual

meeting of the Committee to be held next March unless some occasion

arose for discussing it

again prior to that time.

There being no indication of dis

agreement with Chairman Martin's sug

gestion, the authority for repurchase

agreements was renewed in the following

form with the understanding that it

4/17/56

-24would continue in effect until the annual

organization meeting of the Committee to

be held in March 1957, unless a condition

developed prior to that time which would

make it desirable for the Committee to

consider it earlier:

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

commercial paper, or (2) the average issuing

rate on the most recent issue of three-month

Treasury bills;

(b) Shall be for periods of not to exceed 15

calendar days;

(c) Shall cover only Government securities matur

ing within 15 months; and

(d)

Shall be used as a means of providing the

money market with sufficient Federal Reserve

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

basis.

2. Reports of such transactions shall be included in

the weekly report of open market operations which

is sent to the members of the Federal Open Market

Committee.

3.

In the event Government securities covered by any

such agreement are not repurchased by the dealer

pursuant to the agreement or a renewal thereof,

the securities thus acquired by the Federal Reserve

Bank of New York shall be sold in the market or

transferred to the System open market account.

Chairman Martin noted that the Committee was scheduled to

meet tomorrow, Wednesday, April 18, 1956,

for the purpose of discussing

questions raised regarding certain continuing operating policies of

the Committee,

referred to in a memorandum distributed by Mr. Sproul

under date of March 21, 1956.

He suggested that the members of the

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4/17/56

Committee and the Reserve Bank Presidents not currently serving as

members of the Committee meet in executive session at 9:30 a.m. on

April 18,

1956, for the purpose of discussing this subject, and there

was agreement with this suggestion.

Thereupon the meeting adjourned.

Secretary's note: In connection with the discussion

of certain continuing operating policies to be held on

April 18, 1956, Chairman Martin distributed under date

of April 17, 1956, a memorandum intended to make clear his

personal position on the basic points raised in Mr.

Sproul's memorandum of March 21, 1956, concerning this

subject.

Subsequent to the executive session on April 18,

the Chairman reported to the Secretary that the subject

had been discussed and that the discussion had not re

sulted in a decision to change the existing statements

Secretary.

of policy.