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, May 9, 1956, at 10:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Sproul, Vice Chairman

Balderston

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. Thurston, Assistant Secretary

Mr. Vest, General Counsel

Mr. Solomon, Assistant General Counsel

Mr. Thomas, Economist

Messrs. Abbott, Parsons, Roelse, 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

Mr. Harris, First Vice President, Federal Re

serve Bank of Chicago

Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meeting

of the Federal Open Market Committee held on

April 17, 1956, were approved.

Before this meeting there had been distributed to the mem

bers of the Committee a report covering open market operations during

the period April 17 through May 2, 1956, inclusive, and at this meet

ing a supplementary report covering commitments executed May 3-May 8,

1956, inclusive, was distributed.

placed in

Copies of both reports have been

the files of the Committee.

Upon motion duly made and seconded,

and by unanimous vote, the open market

transactions during the period April 17

to May 8, 1956, inclusive, were approved,

ratified, and confirmed.

Members of the Board's staff then entered the room to assist in

a presentation of an economic review, illustrated by chart slides.

A

copy of the script of the review was sent to each member of the Com

mittee following the meeting.

Mr.

Young opened the review with a statement substantially as

followss

So far this year, the aggregate demand for credit has

been very large.

Business credit demand has been especially

heavy, both in short- and long-term markets.

Consumer credit

demand, while tapering off a bit, has continued fairly strong.

Outstanding credit volume in all sectors has risen to levels

substantially above those prevailing last year. With credit

demand mounting and with bank credit supply under restrictive

pressure, borrowers have found it necessary to offer higher

interest rates in endeavoring to satisfy their financing

needs.

The physical side of the economic picture contrasts

sharply with the financial side, as output has been showing

change at a high level. For eight months the Board's

little

index of industrial production has been within the 142-144

range. The number employed in April continued at a high

level, with employment outside manufacturing well above the

below the

1953 peak while employment at factories was still

high of that period. Unemployment declined seasonally in

April to 2.6 million.

With near capacity output in some major industries

and with credit extensively relied on to supplement private

resources for spending, upward price pressures on industrial

commodities have continued, though the pace of the price rise

for these commodities has slackened.

Prices of farm com

modities have moved upward from year-end lows. Average in

dustrial prices are about 5 per cent above the first half of

1955 and average wholesale prices of all commodities are up

3 per cent. Recently, prices of some leading materials have

reacted from earlier highs. On the other hand, business

circles generally expect very large increases in steel prices

this summer, following negotiation of a new wage contract.

Gross national product in the first quarter was up only

slightly from the fourth quarter, and the rise can be largely

accounted for in terms of higher prices in some sectors. Pres

ent indications point to a moderate further rise in the second

quarter, again partly accounted for by price rise.

Compared with early stages of revival from mid-1954 lows,

when consumer buying led the way, and with most of last year,

when demand advances were general, recent economic strength has

gained special support from business buying. Consumer demand,

on the whole, including demand for nondurable goods and serv

ices as well as for durables and housing, has about held its

own since autumn. The rise in business demand has been in

producers' equipment and business construction. Inventory ac

cumulation has continued near the earlier rate.

Concerning the changed relationship between consumption

and investment expenditures, three questions may be posed.

One is whether a further rise in consumer income, generated

in part by increased capital expenditures, may prompt a fresh

rise in consumption demand before new productive capacity has

A second question is

greatly supplemented market supplies.

whether growth in credit demands as generated by expanding

business investment can be substantially counterbalanced by

a larger savings flow so that tolerable balance will be

maintained in money markets.

A third question is whether,

with the advance in consumption slackening and with inven

building up, congestion may develop in many

tories still

lines, rendering capital expenditure programs less attractive.

Mr. Thomas concluded the review with the following statement on

the credit situation

The world-wide picture shown by today's review continues

In the United States, with

to be one of over-all advance.

total output leveling off at close to capacity levels, the

gradual price rise accounts for much of the further lifting

of value aggregates.

Over-all credit demand remains strong,

with the balance in excess of available savings pressing

against a bank credit supply subject to Federal Reserve limita

tion. Thus, money rates have risen some, although markets just

now are not as tight as they were three weeks ago.

While production in the economy has leveled off since last

autumn and while consumers have been increasing their debts

less rapidly than before, business borrowing this spring has

been in unusually large volume. To some extent the recent

sudden expansion in business borrowing was not foreseen, and

the reasons for it are not yet wholly clear. Apparently some

of the funds that should have been reserved for taxes had

previously been used to finance the large capital expansion

programs and further additions to inventories.

Loan demands

arose from the need to pay taxes without hurting cash posi

tions, and perhaps also from efforts to assure adequate funds

for future needs under relatively tight credit conditions. A

large Treasury cash surplus and substantial debt retirement

have been of some importance in offsetting private credit ex

pansion and reenforcing restrictive monetary policy.

Under the circumstances, some strengthening of Federal

Reserve pressure on the credit brake was appropriate, and the

events of the past month have supported the need for that

action. As the economy approaches the period of a seasonal

uphill climb, some lessening of restraint may be appropriate

to permit needed credit expansion. Yet the advance still

shows evidence of basic momentum, as indicated by the rela

tively high rate of monetary velocity in the face of a re

stricted rate of monetary growth.

While a somewhat faster rate of increase in total out

put and in money balances would be consistent with the

objective of sustained economic growth, there could be more

assurance of sustainability if adjustments in some markets,

such as automobiles, were more nearly completed, if further

business inventory growth were being generally supported by

growth in sales, and if the advance in prices were to cease.

In the absence of clear indications in these directions and

in view of the momentum evident in some important sectors

of the economy, continued restraint on expansion would seem

to be the most appropriate course for current Federal Reserve

policy in the immediate future.

Chairman Martin suggested that, with the review as background, the

Committee's discussion this morning should cover not only open market

policy but Reserve Bank discount rates, discount policy, and all

aspects of the situation having a bearing on the reserve position

of banks.

He then called upon Mr. Sproul who made a statement sub

stantially as follows:

1.

We are still in an area of low visibility so far

as the balance between inflationary and deflationary

forces in the economy is concerned. Aggregate measures

of economic activity continue to show a roughly sidewise

movement at a high level, supported largely by a heavy

program of capital expenditures and related strength in

the construction and machinery industries. Within the

aggregates, however, movements are taking place which

could have more significance than the apparent steadiness

of the aggregates.

2.

A disturbing example is the automobile industry.

Right now this industry, one of the most important in the

whole economy, seems to be in trouble. The hoped for

spring increase in

sales has been disappointing, inven

tories of cars remain quite high, and further cuts in

production and employment are being made to try to clear

the decks for the early introduction of the 1957 models.

There may be some cause for concern, also, in

3.

Demand for steel

connection with the steel industry.

has kept output at or near capacity, and the pressure

of this demand has been showing up in increased prices.

But there is uncertainty as to how much of the current

demand for some steel items is going into inventory,

as a hedge against a possible strike or further price

increases or both. It could be that strength in the

second quarter of 1956 is being borrowed from the third

quarter.

The agricultural situation, of course, continues

4.

to pose a problem for the country's balanced economic

growth, and currently is affecting the market for farm

machinery in an important way.

5. It seems to me clearly to be a situation in which

the direction and vigor of movement in the economy is not

certain, that readjustments, and important readjustments,

taking place. While consumer incomes and spend

are still

ing continue high, the shift of demand from consumer

durables to consumer nondurables and services creates a

situation of some delicacy.

-66. We get what is perhaps our clearest indication of

the proper course for credit policy from the action of prices

and the trends of bank loans. Prices of many industrial

goods and prices at wholesale continue to edge upward both

because of pressure of demand where we are straining current

capacity, and because of increased costs.

Demands for bank

credit continue larger than can easily be explained by the

current needs of a business situation which, in the aggregate,

is moving sidewise.

The great bulge in business loans during

March has been little

reduced during April, if at all, and

the prospect of another bulge in borrowing during June is

being discussed.

7. It is because of these movements in prices and in

bank credit, and because our increases in discount rates were

taken as warnings rather than storm signals, that I think we

can be satisfied with what we did last month.

Now, for a

period, I think we should hold a steady course. We need to

watch the trend of production and employment over the next

few weeks. We need particularly to watch the course of the

capital markets and of bank credit. The capital markets seem

to have found a new trading base; it should be further tested

before any additional move is considered, so great is our

reliance on the capital expansion program for continued

strength in the economy.

8.

In the field of bank credit we need to watch out for

what may be the cumulative effects of the developments of the

past year including our policy of credit restraint.

The

liquidity squeeze to which both business and banks have been

subjected during the past year may now be showing its real

effects. It is beginning to appear likely that the demand for

bank credit of many industries and businesses, in considerable

part, has grown out of an over-all squeeze on corporate

liquidity, accompanying a growth of inventories and receivables,

and the temporary use of tax accruals for working capital pur

poses.

It is beginning to appear likely that the commercial

banks, now recognizing that this situation may not be relieved

in a matter of days or weeks and, in the light of their own

reduced liquidity, are taking more vigorous steps to hold their

loans in check.

We have done and are doing enough to keep

credit under restraint at the moment. We do not want to pre

cipitate a decline any more than we want to facilitate an

excessive use of credit if the economy temporarily, and in the

aggregate, is attempting to produce and consume more than its

physical resources will permit.

9.

My prescription would be to maintain about the exist

ing degree of pressure on the reserve position of the banks for

5/9/56

-7

the present, to leave the discount rate alone, and to keep

the discount window open as always but with administrative

scrutiny of actual discounting.

Mr. Erickson said that in

the Boston District conditions were

about the same as described nationally except in

the textile industry.

Employment was higher in most States of the district in March than in

February.

At their meeting last Monday, directors of the Boston Bank

reported no evidence of any reductions in plant expansion plans.

Mr.

Erickson also reported on a recent business outlook conference composed

of economists from banks and industrial concerns, stating that all but

two of those present held an optimistic view for the whole of the cur

rent year.

Two were not quite as optimistic because of conditions in

their local industries.

The median of their projections of gross

national product for the last quarter of this year was $407 billion

with a range from $394 to $430 billion, and their median projection of

the Board's industrial production index was 1 4 6 with a range from 139

to 150.

Mr.

Erickson said the Boston Bank had had no particular in

crease in activity at the discount window since the last meeting of

the Committee except for one day, although banks are talking about the

tightness of money.

Mr. Erickson said that he was concerned about the

automobile business, one question being whether there may be a lag in

the effect of the decline in sales of automobiles on the suppliers

which would not be evident for some months.

As to credit policy, Mr.

Erickson said that he would favor maintenance of the existing degree

5/9/56

-8

of restraint, but that conditions in the automobile and construction

industries should be observed carefully for any indication that there

should be an easing in

credit restraint.

He would not favor a change

in discount rate at this time.

Mr. Irons said that activity in the Dallas District continued

at a very high rate.

Perhaps there was a lessening in the feeling of

confidence that had prevailed a short time ago.

Department store

sales and other lines of retail trade have flattened off.

Automobile

sales in Dallas and Houston have not come up to hopes for this spring

and there is

great pressure for making sales through trading, dealing,

discounting, and the like.

There appear to be very substantial stocks

of automobiles in warehouses.

Business and industrial construction is

moving ahead but residential construction is

caution.

being approached with more

Large numbers of older houses are available for sale.

Rain

fall last week in agricultural areas improved the spirits of farmers

and probably improved the outlook for crop production.

Mr.

Irons said

that he felt the restrictive credit policy probably was beginning to

have some effect.

Bankers were beginning to be a bit more careful in

allocating available supplies of credit and were emphasizing the fact

that the restrictive policy is

beginning to take hold.

The bankers

are not critical of the System's credit policy, and the recent in

crease in the discount rate was favorably received.

Mr. Irons said

that he would like to see no change in the discount rate at this time

and would favor a continuation of open market operations in a manner

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5/9/56

that would maintain about the degree of restraint that has been ex

perienced, without putting too much reliance on any particular figure

of free reserves.

At the same time the System should remain flexible

so that it could move as developments might indicate.

The discount

window should, as always, be kept open but administered so as to

avoid misuse.

Mr. Mangels said that demand for loans continues to be quite

heavy in the Twelfth District, noting that from April 4 to 25 loans

of reporting member banks increased $146 million, or 40 per cent of

the national total.

Practically all of this rise came in commercial,

industrial, and real estate loans.

There has been some indication

that increased borrowing at member banks was resulting from a reluctance

of borrower applicants to sell Government securities at a loss.

FHA

and GI mortgage money is tight but funds are available for conventional

mortgage loans at 5, 5-1/2, or 6 per cent.

Automobile sales in

California were somewhat larger in March than in February.

In Southern

California, banks have tightened up on extensions of credit for auto

mobile purchases, particularly for maturities over 30 months.

Resi

dential construction is down about 10 per cent but this has been off

set by an increase in industrial and commercial construction.

In

the Pacific Northwest, some softening of the market for plywood is

evident but lumber people have not yet indicated much concern because

of this.

In the over-all picture, Mr. Mangels said that the Bank had

5/9/56

-10

received nothing but favorable comment on the System's credit program

and that it

had been complimented, and had had no criticism, on the

increase in the discount rate even though the San Francisco Bank's

rate had moved higher than that of other Reserve Banks excepting

Minneapolis.

Mr. Mangels said that he would subscribe to the view

that the existing credit policy has been effective and should be

continued without any particular modification for the present, but

with careful observation of developments that might call for a shift.

Mr. Powell said that banks in

the Minneapolis District were

borrowing more from the Federal than their proportionate share of the

national total.

This was being done by a relatively small number of

banks and for a variety of industrial and commercial purposes.

ness activity continues high and unemployment is

part of this exuberance results from growth in

which is

stage.

at exceedingly high levels.

Mr.

Powell noted that there is

very low.

Busi

A large

heavy construction,

Many projects are in the planning

a gray market in

steel in the

Minneapolis District and that some other materials are beginning to

be scarce, particularly window glass and cement.

This was true

despite some decrease in the volume of residential building.

is

There

considerable inventory accumulation but some of the retail stocks

are being worked off.

Powell said.

Farmers seemed to have turned the corner,

Mr.

Loans to farmers have risen more slowly than loans to

industrial enterprises.

Farmers are currently more cautious about

commitments for new equipment and machinery.

Mr. Powell said that

5/9/56

-11

he had not had the same experience as Mr. Mangels in connection

with the discount rate increase, indicating that there had been

some criticism of the Minneapolis Bank's 3 per cent rate by member

banks in the Ninth District.

However, at this point he did not

have in mind recommending action to reduce the pressure inasmuch

as demand for credit is

continuing strong, and it

was his view that

a continued growth of inventories, which additional bank loans would

foster, would not be healthy.

Mr.

Leedy said the Tenth District has not experienced the zest

that has prevailed in most of the rest of the country.

district's principal crop, wheat,

and if

moisture is

satisfactory.

Outlook for the

has improved because of recent rains

somewhere near normal, this year's crop should be

There has been some complaint about the increase in

the Kansas City Bank's discount rate from 2-1/2 to 2-3/4

per cent in

parts of the district where agriculture has been having difficulty.

Mr. Leedy said that he would subscribe to the suggestion made by Mr.

Sproul for continuing to apply about the same degree of pressure on

reserves that has been applied in recent weeks and to watch the ef

fects of this program carefully.

He would make no change now in

existing discount rates.

Mr. Leach said that while large plant outlays are going ahead

in the Richmond District, some signs of slightly less strength have

appeared recently.

Production of textiles has declined, particularly

of synthetics, and bituminous coal output has slackened.

April

-12.

5/9/56

department store sales slowed a little

sales did not increase seasonally.

from March and automobile

While these factors indicate

a temporary lack of strength, Mr. Leach said that he continued

bullish on the economy.

Loan demand continues strong and banks

expect this to persist.

In addition to pressure from within the

district, Mr. Leach reported evidences of efforts by national con

cerns which had had unused lines of credit in

the Fifth District for

sometime to seek to use credit facilities in this area, and he noted

that some of the banks were loaned up to the point where they were

not accepting new borrowing customers.

System policy seems to be

achieving the degree of restraint appropriate to the current situa

tion, Mr.

Leach said, and he expressed the view that the recent in

crease in the discount rate had not yet had its full effect.

would be reluctant to see any further increase in

time in

He

restraints at this

any way.

Mr. Vardaman commented that he had voted to approve the recent

increase in the discount rate with some reluctance and with some fear.

However, whatever fear he had had was now eliminated,

and his belief

that the action was correct had been strengthened materially during

the last two weeks by the nature of the complaints and complainers

who have come to him on the telephone and in person.

The psychological

effect, he said, especially that growing out of the difference in

count rate levels, has been excellent.

dis

He felt it extremely fortunate

that two Banks had gone to the 3 per cent level while others had

5/9/56

remained at the 2-3/

-13

per cent rate, and he suggested that this had

practically stopped the tendency that had been developing somewhat

alarmingly to speculate in inventories.

The restrictive effects of

the discount rate increase and other System actions have not yet been

fully felt, and developments should be observed closely.

Mr. Vardaman

said that he was concerned about the apparent unequal distribution of

credit facilities and loanable funds in

different parts of the country.

This was a serious problem, he said, and there was no doubt that small

borrowers even though sound credit risks were suffering.

He believed

that in this tight money period the so-called "class B" credits were

almost totally excluded, and this was an unfortunate development

banking system could not be operated on "class A" credits only.

a

This

was not a responsibility of the Federal Reserve System, however, since

without totalitarian powers the best that it could do was to influence

the total amount of available funds and to leave the distribution of

those funds to the free and uninhibited banking system.

He hoped that

the System would let things run along as they are; he would dislike

any further tightening or any attitude that would indicate any move

toward loosening the situation.

Mr. Vardaman said that he felt the

statement Mr. Sproul had given was one of the clearest, finest state

ments summing up the current economic situation that he had ever heard.

His suggestion would be that open market policy continue the existing

situation and that there be no change at the discount window for the

present.

-14Mr. Mills said that in

his judgment, in

System's monetary and credit policy,

determining the

the time has come to shift

emphasis from what might be called the mechanical factors to the

psychological factors that influence the credit situation.

He then

made a statement substantially as follows:

In developing Federal Reserve System monetary and

credit policy, first place must be given to the problem

of the availability of credit. In keeping with the eco

nomic objectives of the System's present policy of credit

restriction, commercial banks are now under automatic

compulsion to screen and select their loans with increas

ing care. With the effects of System policy reaching more

deeply into the reserve city bank and country bank areas,

the practice of critical credit selection by commercial

banks is becoming more widespread, and in that process

complaints about the unavailability of credit have become

more frequent and more vocal.

In the writer's opinion, the basis for the complaints

now being heard is more imaginary than real. Under no cir

cumstances, however, can such complaints be ignored because,

while probably lacking substance at the present time, they

undoubtedly do indicate concern both on the part of com

mercial bankers and their customers about the future avail

ability of credit with which to meet the seasonal demands

that are in the offing. Inasmuch as public psychology at

the present time reflects a measure of doubt about the

economic future, it is incumbent upon the Federal Reserve

System to dispel whatever fear exists about the future

availability of credit for deserving and constructive pur

poses.

It is, therefore, highly important that the System

now clearly confirm by action Chairman Martin's statement

before the Pennsylvania Bankers Association that credit

will be available for the nation's seasonal needs. To

that end, it would be advisable to allow the level of

negative free reserves to recede to around the $450-million

level which it had been the writer's impression at the last

Open Market Committee meeting was to be maintained pending

observation of the effects of the last increases in the

discount rate. In the light of recent experience, a

$450-million level of negative free reserves should be

sufficient to guarantee the commercial banks an adequate

5/9/56

-15

reserve base on which to meet the demands for credit now

before them and at the same time to give confidence to

the business community that the System will make credit

available for seasonal purposes.

System action of this character should in no wise

lead to an unwarranted conclusion in the business com

munity that any major shift in System policy had been

made from credit restriction to relative credit ease.

If, however, evidence accumulates from lessening eco

nomic activity, consideration can then be given to what

ever change in policy is held to be appropriate. For

the present, there would seem to be no reason for any

change in the structure of discount rates.

Mr. Robertson said that he saw nothing in the economic picture

as presented today that would warrant deviation from a course of action

such as that expressed this morning of holding steady, provided he

understood what "steady" meant.

If it

meant that the Committee failed

to offset the easing expected over the next two weeks, he would be

opposed to such a program; if holding steady meant that the System

would attempt to hold the same degree of pressure over the next few

weeks that it

has had in

the recent past, he would concur.

Even though

he had doubts that the System had made the recent increase in the dis

count rate effective,

he thought the natural forces would tend to make

this increase effective in

the near future.

Mr. Robertson said he

hoped there would be no change in the discount rate and he particularly

hoped that the two Banks which had fixed the rate at 3 per cent would

not prematurely reduce it.

This should be a period of careful observa

tion during which pressure would not be reduced and during which the

System should not pay too much attention to cries of tightness on the

part of banks.

Tightness was what the Committee wanted.

Banks should

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5/9/56

be concerned about the volume of credit they were extending and the

reliance they would place on the System in making credit extensions.

Mr. Robertson felt

that the statement that Chairman Martin had made

at the Pennsylvania Bankers Association meeting described the approach

to be taken during the next three weeks.

Mr. Shepardson said that he agreed entirely with the position

suggested by others that the present situation should be maintained

for the time being.

He went on to comment on Mr. Sproul's suggestions

about administrative supervision of the discount window, stating that

he felt careful judgment should be exercised in

this connection.

Some

of the comments that had come to his attention, particularly from agri

cultural areas,

showed concern on the part of the largely agricultural

banks as to whether,

have difficulty in

hoped that in

under the policy of restraint, they were going to

taking care of necessary credit accommodations.

He

any discussions as to use of the discount window, full

account would be taken of the needs of the banks in

agricultural areas.

These would of necessity call for longer borrowings, particularly in

sections of the country affected by drought.

Weather conditions have

not been favorable this year and that fact should be kept fully in

mind in

these discussions.

In the over-all, Mr.

would continue credit policy about as it

Shepardson said, he

is.

Mr. Fulton said that he subscribed to much that had been said

this morning.

In the Cleveland District, economic activity continues

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5/9/56

very high.

Steel mills are very active but expect some decline in

the third quarter due partly to weather conditions, vacations, and

exhaustion of facilities.

is

Demand for steel continues very high and

expected to be good for the whole year.

Many employees laid off

in the automobile industry have found work elsewhere and there has

been a net decline in unemployment.

well.

Construction outlook is

further plant expenditures.

Retail sales are holding up

very good as are the prospects for

The comments made by Mr.

Vardaman on

the so-called "B" class risks were referred to by Mr.

Fulton, who

stated that the consensus of bankers was that firms which were

slightly less than acceptable as credit risks were doing most of

the complaining about the shortage of credit.

Mr. Fulton agreed

that the discount window should be readily available to all member

banks, but he said that the Cleveland Bank was observing the use of

funds to be made by its

borrowers.

He personally had favored a

higher discount rate for the Cleveland Bank than the 2-3/4 per cent

approved but, on the whole, he felt that the present restraint being

exercised on the financial structure was entirely appropriate.

should be no diminution of pressure and it

There

would be desirable to

counter any easing that might take place during the next three weeks.

Mr. Williams said that economic activity continued high in

the Philadelphia District as a whole, but he made a distinction be

tween the situation in

Pennsylvania,

on the one hand, and in Delaware

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5/9/56

and New Jersey, noting that there had been some failure of pro

jected plant expansion programs to materialize in Pennsylvania

recently.

Department store inventories have increased sharply

in relation to sales.

increase in

and there is

Volume of borrowings continues high.

The

discount rate has had an effect, Mr. Williams said,

more discrimination in

granting credits than had been

the case, with considerable talk as to whether the discount window

would continue to be open.

Mr. Williams read a memorandum from a

large Philadelphia bank addressed to its

loan officers formulating

policy on credit extensions at this time, the substance of which

indicated the bank's policy of limiting credit extensions on a

carefully selected basis.

After reading the memorandum, Mr. Williams

stated that his view as to credit policy would be that there should

be no change in the present policy and that the Committee should

watch developments carefully between now and the next meeting.

Mr.

Bryan said that a very slight drop in employment has

taken place in the Sixth District due largely to reductions in

automobile assemblies and to some decline in textiles.

However,

despite the decline in employment and in hours of labor, the in

crease in the minimum wage rate has resulted in an increase in

total wage payments.

Residential building has increased and, all

in all, Mr. Bryan said that the economic situation is continuing

a sidewise movement.

Loans of banks have increased contraseasonally

5/9/56

-19

for the seventh week.

Borrowings from the Federal Reserve Bank also

have increased sharply recently and he anticipated a further increase,

as some banks have seasonal problems to deal with.

the System is

now in

a "wait and see" period.

There is

evidence of a turn-around that would warrant easing.

seem to be evidence of excessive tightness.

He suggested that

no convincing

There does not

On the contrary, the

effect of the higher discount rate may be wearing off, Mr. Bryan felt,

rather than accumulating.

in

His inclination would be to make no change

the discount rate at the present time, but he would make the dis

count rate effective.

He would not allow any temporary forces in

the market to ease the situation.

For the present, he would watch

the capital markets and especially watch the behavior of prices which

he felt represented a grave threat to economic stability.

His prefer

ence would be not to allow the bill rate to back away substantially

from the discount rate.

Mr.

Johns said that there were no significant differences be

tween the appraisal of the economy for the Eighth District and that

presented nationally by the staff.

He referred to the chronically

sick Southern Illinois section, stating that it

the reach of monetary policy.

seemed to be beyond

He also commented on the employment

picture and the effect of shut downs of industry in

tions.

Mr.

industrial loca

Johns said that generally speaking loan demands continue

very strong in the Eighth District, especially in reserve cities.

-20

5/9/56

National accounts which heretofore have not borrowed in

the district

but which have had established lines of credit are beginning to use

them to some extent.

There is some evidence that correspondent banks

are beginning to restrict loans to smaller banks and some of those

have resorted to the discount window at the Federal Reserve Bank.

While the Reserve Bank has assisted banks where that seemed justified,

plans have been laid for liquidation of indebtedness.

complaining mildly about losses of deposits, Mr.

Large banks are

Johns said, due to a

tendency of corporations and country banks to withdraw deposits and

invest them in

Treasury bills.

important later in the year is

Another factor which might become

that banks are already under pressure

because of their capital funds position.

Risk-asset ratios are now

about at a point that banks consider to be tolerable and which they

apprehend supervisory authorities will consider tolerable.

This

raises the question of what use they would make of reserves that

might be made available to them.

Discounts have tended to rise not

withstanding the recent increase in the rate.

Notwithstanding that

situation, the response to the increased discount rate has been gen

erally favorable,

although some mortgage bankers have complained that

the rate increase has wrecked the construction industry.

Mr.

Johns

was skeptical of this and felt that policy was doing what it was in

tended to do.

Increased borrowings at the Reserve Bank reflected not

only the pressure of loan demands and failure of bank resources to

-21rise but a scarcity also of Federal funds.

Generally speaking, Mr.

Johns said that he believed that the degree of restraint the Com

mittee has been maintaining is

would not change it

about right.

For the time being he

nor would he change the discount rate.

It was

his expectation that he would recommend to the directors of the St.

Louis Bank tomorrow reestablishment of the existing discount rate.

Mr.

Szymczak said that he could see no change in the economy

that would call for a change in credit policy.

Therefore, he would

vote for a continuance of the tight money policy that has existed.

Mr.

Balderston then made a statement substantially as follows:

My comments will be altogether academic in that my sug

gestions will be lost in the minority position. I would

leave the general tightness unchanged until the current

borrowing-spending binge has abated somewhat and the demand

for equipment and construction no longer exceeds capacity.

So, as to the general degree of tightness, I am in agree

ment with the majority view.

But as to the relative reliance upon our several tools,

I would prefer a slight alteration, and am perhaps in dis

agreement with all of you. First, as to the discount rate:

an increase to 3 per cent in one or two additional districts

might induce prudence in impending steel industry moves to

raise wages and prices and it might also serve to postpone

some of the planned construction.

If that were done and only if that were done, a reduc

tion in the net borrowed reserves to the $400-$450 million

As to the discount window,

level would seem appropriate.

I would deal with heavy continuous borrowers the way I

would drive a car if I struck a slick, icy pavement going

Member banks who have been borrowing

at a fast speed.

continuously should not increase their loans above the

present levels nor should they be forced to liquidate

Conversations with member banks

Government securities.

a

very informal basis to induce

might well be kept on

caution in their extensions of loans without any meetings

or statements leading to rumors that would generate fear

psychology. We are in a situation that takes skillful

-22handling.

That there is as much continuous borrowing is

to be regretted, but I don't think that this is the time

to reduce it except at a gentle note.

The comments of

Chairman Martin and President Florence at the meeting of

the Pennsylvania Bankers Association held at Atlantic City

last week were helpful in indicating the present posture

of the System.

Chairman Martin next made a statement substantially as follows

I think my comments at the Pennsylvania Bankers

Association may have gotten considerably more attention

than they would have gotten if it had not been for a

conjunction of circumstances. It was not my intention

to make any policy at that meeting but to reiterate a

position it seems to me the System has always held vis

a-vis the discount window.

I think the problem we are struggling with here is

one of meaning when we say that we want to maintain the

existing situation or that we will keep the market steady.

This is no criticism of the desk, but the level of net

borrowed reserves got higher during the past two weeks

than I anticipated it would have gotten in the light of

our discussion at the meeting on April 17. However, in

the light of the over-all situation that is not surpris

I think that

ing and it probably was net to the good.

is the type of thing we are wrestling with whenever we

say we are going to maintain the degree of tightness that

we have.

I am somewhat enamored of Mr. Balderston's suggestion

of going to a 3 per cent discount rate at one of the Banks.

If such a request came in, I would be disposed to approve

But I am not sufficiently persuaded on that to feel

it.

it is anything I would want to take a stand on this morning.

I think we are in a period of "wait and see." That might

be the right step, but it might not have the effect we want.

The point I am driving at here and that we continually have

to assess is not only the administration of the discount

window but the external factors that are always in the public

mind.

Since our last meeting we have had two remarkable state

ments from the President of the United States about the role

of the Federal Reserve System. I think they have been con

structive. We have also had comments by two cabinet officials

which, if newspaper men had their way, would blow this up in

to a great fight of whether the discount rate action was

proper or not. I think there is no fight. There is a dif

ference of opinion but at this moment there is no fight.

5/9/56

However, it

-23is a factor in monetary and credit policy.

The markets have been influenced by a good many rumors

and by a good many comments about our action on the dis

count rate.

At the Pennsylvania Bankers Association meeting, I

had no idea of what Secretary Weeks or Secretary Mitchell

had said but several persons approached me with statements

to the effect that they had blasted the System. I think

they had no idea of blasting the System but what they said

was newsworthy.

I think we ought to go along with the consensus ex

pressed this morning, recognizing that we ought not to

change horses in the middle of the stream when we are still

under the momentum of a movement unless we have convincing

evidence that one of the major factors in the economic

system has shifted.

This factor of momentum is major.

The weather and seasonal influences and other things will

always be of significance, but the factor of momentum is

such that we still

might see the declines that are taking

place in automobile sales and production and the increases

in inventories of automobiles and steel disappear in June.

In other words, we should continue to assess this factor

of momentum very carefully.

I think the degree of tightness that we have is ap

The present consensus in the Committee per

propriate.

suades me that we are not ready for any major change in

front. The desk will have to bear in mind the fact that

there will be a tendency for ease to come into the picture

in the next three weeks, but that there also is this

psychological factor which will tend to offset that ease.

In the past two weeks, statements by the President and

other factors have created a climate which it is impossible

I would think we ought to accept the consensus

to assess.

I would hope in this connection that we

this morning.

might have another meeting on May 23 or 24 rather than to

I would hope that Mr. Sproul

carry it over for three weeks.

One of the things that has

could come down to that meeting.

impressed all of us this morning is how very much we are

going to miss the thoughtful papers that he has presented

in these meetings, and we want the benefit of his comments

just as long as we can have them.

Secretary's note: The two statements

of the President referred to by Chair

man Martin were made at press conferences

held by the President on April 25 and

May 4, 1956. The questions asked by the

reporters and the President's responses,

as published in the transcripts of the

conferences that appeared in The New York

Times for April 26 and May 5, 1956, re

spectively, were as follows:

Excerpt from The New York Times,

April 26, 1956

EDWIN L. DALE, JR. of The New York Times-Mr. President,

it has been rather widely reported that your Secretary of the

Treasury and chief economic adviser both had serious reserva

tions about the latest increase in interest rates by the Fed

eral Reserve.

There is a rather long history of this situation.

I wonder if you have any comment on it.

A.--Well, I think the only comment I can logically make is

this: The Federal Reserve Board is set up as a separate agency

of Government.

It is not under the authority of the President,

and I really personally believe it would be a mistake to make

it definitely and directly responsible to the political head of

the state.

The Federal Reserve Board had the unanimous conclusions of

their twelve district

boards that this rediscount rate ought to

be raised, and after studying the whole situation they decided

to go ahead and do it.

Now, of course, the thing was argued for a long time. Cer

tain individuals had viewpoints on opposite sides of the fence.

But having done it, I do have this confidence in the Federal Re

serve Board: They are watching this situation day by day.

They

are watching whether money dries up, because there are two things

about money: one, it gets a little

dearer in its cost to the

borrower; the other is that it is just not there to borrow. And

they are watching it very closely, and I personally believe that

if money gets to what is normally referred to as too tight, they

will move in the other direction in some way or other as soon

as they can.

Excerpt from The New York Times, May 5, 1956

LLOYD M. SCHWARTZ of Fairchild Publications--Secretaries

(of Commerce, Sinclair) Weeks, (of Labor, James P.) Mitchell and

(of the Treasury, George H.) Humphrey, and apparently Dr. (Arthur

F.) Burns (economic adviser) are all questioning the wisdom of

this Federal Reserve Board's latest rise in discount rates on

member banks.

I wonder whether you have any reservation about that in

crease and the impact of it?

A.--Well now, everybody has their opinion about a thing

like this.

I think I made it very clear last week or the week be

fore that here is an independent body reaching its decisions

through the action, in this case of a unanimous vote of its

member boards, eleven member boards, and of this board itself.

I don't know whether the vote was unanimous in this board,

but anyway they reached a conclusion.

It is their duty and

responsibility to make their conclusions effective.

Now, what we are concerned in is that the necessary ex

pansion of this country's industries and economy, in order to

bring about a constantly increasing standard for a constantly

increasing population, that the money is there to do it, that

those finances are there to provide for these expanded facili

ties, and we watch that all the time, and I am sure the board

is doing exactly the same thing.

If it believes that money is getting too tight because of

this, they will take measures to meet it.

There was no indication of disagreement with Chairman Martin's sug

gestion that open market policy for the period until the next meeting of

the Committee be one of maintaining about the existing degree of pressure

on the reserve position of banks.

Thereupon, upon motion duly made

and seconded, the Committee voted

unanimously to direct the Federal Re

serve Bank of New York until otherwise

directed by the Committee:

(1)

To make such purchases, sales, or exchanges (includ

ing replacement of maturing securities, and allowing maturities

to run off without replacement) for the System open market ac

count 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 com

merce and business, (b) to restraining inflationary developments

in the interest of sustainable economic growth, and (c) to the

practical administration of the account; provided that the

aggregate amount of securities held in the System account (in

cluding commitments for the purchase or sale of securities for

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

term certificates of indebtedness purchased from time to time

-26-

5/9/56

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 partici

pations to one or more Federal Reserve Banks) such amounts of

special short-term certificates of indebtedness as may be

necessary from time to time for the temporary accommodation

of the Treasury; provided that the total amount of such

certificates held at any one time by the Federal Reserve Banks

shall not exceed in the aggregate $500 million;

To sell direct to the Treasury from the System ac

(3)

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 referred to a memorandum distributed by Mr.

under date of May 3,

1956, in which he (Mr.

Federal Open Market Committee at its

Sproul

Sproul) suggested that the

next meeting take certain actions.

The suggestions of Mr. Sproul, the discussion of those suggestions, and

the actions taken by the Committee are set forth below.

Suggestion No. 1 - The Federal Open Market Committee authorize

and direct that a staff committee be appointed to study the

facts of our experience with present operating procedures.

Discussion of the substance would

This would be spade work.

then take place in the full Committee and the value judgments

would be made by the Committee.

Chairman Martin said that he felt it

would be very desirable to

have a staff committee appointed to do the spade work suggested by Mr.

Sproul.

This would mean that the substantive matters should be discussed

by the full Committee.

The Chairman suggested that the proposal be ap

proved with the understanding that he and Mr. Sproul would discuss who

would be designated for this study from members of the staff of the Board

-27of Governors and the Reserve Banks.

He added that he felt the Manager

of the System Open Market Account should be one of those designated.

This suggestion was approved

unanimously.

Suggestion No. 2 - The Federal Open Market Committee suggest

to the Treasury that a joint staff committee be appointed at

the technical level to study matters involved in the coordina

tion of debt management and credit policy. This study could

include such problems as

A. The feasibility of experiments with various techniques

for issuing new debt instruments intended to minimize

the collision between debt operations and System policy.

Mr. Riefler's recent memorandum (Experience Since the

Accord with Short-term Federal Debt, April 10, 1956)

suggests one such experimental technique.

B. The significance of the maturity schedule of the out

standing marketable debt as it relates to the invest

ment needs and liquidity requirements of the economy

at large. Our memorandum of September 29, 1955, and

the memorandum from the Board staff prepared in the

spring of 1955 on the need for more bills have touched

upon some aspects of this problem.

C. The effects on credit conditions, interest rates, and

the availability of funds at different maturities re

sulting from various alternative methods of using the

Treasury surplus to withdraw marketable debt from the

market.

Chairman Martin suggested that the Open Market Committee authorize

him to hand copies of Mr. Riefler's memorandum of April 10, 1956 (Experi

ence Since the Accord With Short-term Federal Debt) to Treasury officials

and to take up with the Secretary and the Under Secretary of the Treasury,

after they have had an opportunity to read the memorandum, the desirability

of working out a mutual approach to studying these problems.

Chairman

Martin said that he would propose to go forward with this promptly if

Committee agreed with the idea.

This suggestion was approved

unanimously.

the

5/9/56

-28

Suggestion No. 3 - The Federal Open Market Committee

arrange to be kept currently informed by the New York

Bank of the progress being made by a committee of the

New York Clearing House, being set up in response to

my (Mr. Sproul's) suggestion, to study the functioning

of the money market with particular reference to the

financing of Government security dealers and the clear

ing arrangements for Government security transactions.

While it is preferable to have suggestions come from

the market for its own improvement, the Federal Open

Market Committee should be prepared to act promptly in

evaluating the results of the Clearing House study and

to take action, if action on its part seems desirable,

when the Clearing House report is completed.

Chairman Martin said that he felt the Committee would like to be

informed by the Federal Reserve Bank of New York of progress made regard

ing this study of the money market.

Mr. Sproul responded by stating that almost two years ago the

original suggestion was made that representatives

of the New York money

market study this matter, but that nothing had happened.

Therefore, he

recently had taken up with the President of the New York City Clearing

House the question of going forward with such a study.

Mr. S.

Sloan

Colt, President of the New York Clearing House Association, sub

sequently had informed him that he had designated Mr.

Chairman of the Clearing House Committee,

John Traphagen,

to oversee such a study.

Mr.

Sproul said that a working committee to make the study has now been ap

pointed and is

about ready to go to work and he (Mr.

shortly to receive a formal response from Mr.

Clearing House Committee has done.

Sproul) is

expecting

Colt telling him what the

Mr. Sproul added the comment that

he would plan to send a copy of his letter to Mr. Colt and whatever

5/9/56

-29

response he received from Mr. Colt to all members of the Federal Open

Market Committee.

It was understood that Mr. Sproul's

suggestion set forth above was approved

by the Committee and that efforts would

be made to obtain information from time

to time regarding the progress being made

by the Clearing House in connection with

the study mentioned.

Suggestion No. 4 - The Federal Open Market Committee to re

quest the appropriate arm of the System to make a study of

the Federal Funds market as it has developed over the past

two or three years. This would seem to be necessary if we

are to have a better understanding of the inter-regional

flow of funds, and should contribute to effectiveness of

the day-to-day operations of the System Open Market Account.

Mr. Leedy noted that the Presidents' Conference had discussed a

study of the Federal Funds market and recommended that such a study be

made.

Chairman Martin said that he believed all members of the Com

mittee were favorable to such a study and that the necessary steps would

be taken to implement it as soon as possible.

Mr. Sproul said that in presenting this proposal at the Presi

dents'

Conference earlier this week,

divided into two phases:

to what is

going on in

the first,

he had suggested that it might be

the development of information as

each of the Federal Reserve Districts with re

spect to developments bearing on the national Federal Funds market and

on local Federal Funds markets that have been growing up.

He felt

that

this phase of the study might be undertaken by the Federal Reserve Banks

operating under a responsible committee of the Presidents'

Conference.

5/9/56

-30

The second phase of a study of the Federal Funds market would deal

with policy questions which would grow out of the study of the actual

developments taking place in the Federal Funds market.

This phase

would seem to be more appropriate for study by the Open Market Com

mittee.

Mr.

Sproul also commented that the Presidents'

Conference

committee might well have associated with it a representative from

the staff of the Board of Governors.

Chairman Martin stated that he felt the proposal for the study

of the Federal Funds market was completely appropriate and that it

would be understood that the necessary steps would be taken along the

lines of Mr.

Sproul's suggestion.

There was no indication of dis

agreement with Chairman Martin's state

ment.

Suggestion No. 5 - Operations in short-term Government

securities other than Treasury bills.

The supply of Treasury bills in the System Account has

now become so low - approximately $350 million - as to

suggest that the Manager of the Account should have some

discretion as to operations in other short-term Govern

ment securities of up to twelve or fifteen months maturity.

This suggestion is concerned not only with the depletion

of our bill holdings, but also with possible distortions

in the bill market which our operations may accentuate,

causing bill yields to change widely and sharply, quite

apart from underlying conditions in the money market.

In view of the large volume of Treasury bills which has

been pretty effectively removed from active trading, and

the small volume of our holdings it would seem desirable

to widen the area of our operations.

Suggestion No. 6 - Limited authority to make swaps in

Treasury bills. Because of redemptions of entire maturi

ties and because of market preferences for other maturities

-31

5/9/56

when we have sold outright, it had proved almost impos

sible to keep anything like an even balance of holdings

in the different bill maturities in the System Account.

It would be most useful if swaps among bills could be

authorized to help rearrange the bill maturities in the

Account.

The Committee could authorize the Account

Management to make offsetting purchases and sales of

Treasury bills for the purpose of altering the maturity

distribution of the System Open Market Account when, in

the Manager's judgment, such purchases and sales would

not distort the functioning of the market, and would

improve the capacity of the Account to perform effectively

in supplying or absorbing reserves.

Chairman Martin suggested that these two proposals of Mr. Sproul

be discussed together.

He recalled the Committee's existing instruction

(action taken at the meeting of the executive committee on March 2, 1955,

which became an action of the full Committee at its

meeting on June 22,

1955) that provided that the New York Bank effect transactions for the

System account through purchases or sales of short-term Treasury securi

ties, preferably bills.

In practice, he said,

the Manager of the System

Account had adhered to "bills only" transactions.

was necessary to sell some securities it

Chairman Martin said

did not seem to him

that if

it

that it

would be inconsistent with the Committee's wishes if

sold something other than bills in

the short-term area.

the account

He called upon

Mr. Rouse to review the current situation in the light of the System's

present holdings of Treasury bills and in terms of how he would go about

making swaps in Treasury bills.

Mr.

Rouse noted that the System account now held approximately

$350 million of bills.

Projections of reserves for the next two to

three weeks indicated that, under a policy of maintaining about the

5/9/56

-32

existing degree of pressure on the reserve position of banks, the

present holdings of bills would be sufficient in that period.

Mr.

Rouse said that he felt an undue amount of talk might be caused if

the System account got entirely out of bills.

Having in mind that

the Committee's directive was a "bills preferably" instruction, it

had occurred to him that if sales became necessary these might be

in the form of certificates although he would not have in mind selling

notes which would be due in August and which already have something

of a rights value.

Mr. Rouse stated that he wished to put the Com

mittee on notice as to the present holdings of bills and as to the

possibility of using some other short-term securities, if the Com

mittee wished to have him follow that procedure.

In view of the dis

cussions of operations in the past, Mr. Rouse said, he would not wish

to engage in transactions in securities other than bills without

having placed the Committee on notice.

As to the proposal regarding swaps, Mr. Rouse noted that the

Systen account was now out of or virtually out of 6 of the 13 issues

of weekly Treasury bills outstanding; of its total holdings of $350

million, $97.5 million was in one issue.

From time to time, oppor

tunities arose for the System account to switch from one maturity

into another.

He had not come prepared to present a specific pro

posal to the Committee this morning but felt that it would be a

relatively simple matter to make some swaps in order to get a better

-33

5/9/56

distribution of Treasury bill holdings.

Mr. Rouse said that he

could see no way in which any outsider could possibly take advantage

of such an operation.

Mr.

Mills inquired whether in such a transaction there would

be any sentiment in the market that the account management was cloud

ing the situation as to the purpose of the Committee in carrying on

such a transaction.

If so, how could that be dispelled?

Mr. Rouse said that he had not been aware of any misunderstand

ing of the kind Mr. Mills referred to and he doubted whether such a

misunderstanding would result.

Mr. Rouse also said that any such trans

actions would probably be in amounts of $10 million or less at any one

time.

Mr. Mills then referred to the practice followed by Federal Re

serve Banks of purchasing and selling United States Government securi

ties for member banks, stating that there had been some question in his

mind whether this was an appropriate service to offer to member banks.

In addition, there was the question whether in a market climate such

as now existed such transactions for member banks might on occasion

give a false lead to the investment fraternity regarding System policy.

Mr. Rouse said that he did not think this was a serious problem.

He described the types of transactions that the Federal Reserve Bank of

New York executes for member banks,

emphasizing that banks having con

venient access to the regular Government securities dealers are en

couraged to effect transactions through them.

-34

5/9/56

Chairman Martin commented that the question Mr. Mills had

raised might be reviewed in terms of the practices that were followed

by other Federal Reserve Banks.

Mr. Thomas said that in transactions for the System account

it was desirable to bear in mind that the weekly variations in net

borrowed reserves resulted in different effects in the market at dif

ferent times of the month.

That is,

a large volume of borrowings

around the turn of the month did not always have a tightening effect

on the market,

just as a smaller volume around the middle of the month

did not always have an easing effect.

Mr. Thomas said that the next

two weeks would represent a period with a relatively small volume of

net borrowed reserves but that the market might not be any easier

during this period.

Thus,

it

was a matter of observing the market

and getting a feel of the market.

Mr. Thomas also said that if

pres

sures mounted as anticipated, the System account might be purchasing

bills in moderate amounts during June and in increasing amounts later

on.

He thought that there would be a very short period during which

the account might find it necessary to sell any securities and perhaps

not at all.

Mr. Thomas also inquired why Mr. Rouse did not feel that

it would be desirable to make sales of the notes maturing in August.

Mr. Rouse said, on the last point, that the only reason he had

suggested that sales be in other securities was that the August notes

have a rights value and that he assumed that the Committee would not

5/9/56

-35

wish to engage in that type of transaction.

Chairman Martin stated that it

to avoid sales of the August notes.

stated that Mr. Thomas'

would seem to him desirable

After further discussion, he

questions pointed up clearly some of the

problems in connection with these two proposals.

Mr. Robertson said that he seriously doubted the need for

sales of securities other than bills or for swaps.

He thought the

likelihood of having to make sales from the System account within

the next two weeks was not very great and that after that period

the System would be finding it

necessary to buy securities.

While

he would have no reluctance to authorizing a move from bills into

the next longer issue of short-term securities, he felt that any

such transactions should take place only when the System found them

to be necessary,

and not in advance.

to start dealing in

He did not think it

necessary

securities other than bills today and in fact

would wait to do so until present holdings of bills were exhausted.

Mr. Rouse responded that he did not think there was any dis

agreement between the view expressed by Mr. Robertson and what he had

in mind.

He noted that the Committee met at three-week intervals,

that in the interim it might be necessary to effect transactions, and

that the existing authorization is such that he is free to engage in

transactions in

short-term securities other than bills.

He said that

he wished to bring to the attention of the Committee the situation he

5/9/56

-36-.

had described because he would not wish to effect such transactions

without having discussed the matter with the Committee.

Mr. Robertson referred then to the sixth suggestion regard

ing swaps, stating that he thought it

would be very unwise if

Committee authorized that sort of transaction in

clear advance notice to everyone in

the

the absence of a

the market as to what the Com

mittee was doing.

Mr. Sproul said that he did not know what harm could result

from the proposed transactions.

The amounts would be so small that

they would not have any effect on the market's knowledge of open

market policy.

If

the Committee were to deal in other areas of the

market, there might be a question whether it

with arbitrage.

But when it

would be interfering

was dealing only within a 90-day period,

he did not think that the volume of such transactions within a weekly

statement period could possibly cause any danger of a misunderstanding

as to credit policy.

In response to a further question from Mr.

Robertson as to

whether harm might result from informing dealers that in the course

of the next month the System contemplated action such as that proposed,

Mr.

Sproul said that the danger in

such a course was that the System

account would get into the impossible position of trying to explain

each action it

took or contemplated taking.

In the course of further discussion, Mr.

Robertson suggested

that the question regarding swap transactions be held over until the

-37.

5/9/56

next meeting inasmuch as he would like to have an opportunity to

study the matter further.

Mr.

some,

Mills suggested that, until Mr. Rouse had experimented

he would not know what his final process would be.

It would

be necessary for the Manager of the Account to use his judgment in

carrying out any authorization.

Mr.

Sproul said he thought this was somewhat like the question

of dealing in

short-term securities other than bills.

ings of bills in

When the hold

the System account got down to existing levels, the

Manager of the System Account should raise the question.

today and two weeks hence, Mr.

As between

Sproul said that he did not think the

matter was of importance.

Mr. Shepardson suggested that it might be desirable to authorize

some experimentation during this period so that when the Committee con

sidered it

two weeks hence it would have the benefit of the experience

that might be gained.

Mr.

in

bills, it

on hand.

gage in

Szymczak stated that as long as the Committee was dealing

should have a supply of bills of the various maturities

Therefore,

swaps in

the question was whether the Committee should en

order to provide such a distribution of maturities.

Chairman Martin said he thought this was a very minor matter.

So far as the objectives were concerned, he would not have any ques

tion about approving the proposal today.

This was a matter of judgment

on which there would be differences of opinion on the part of the

members of the Committee as to whether the action proposed was necessary.

5/9/56

-38

The management of the account was quire correct in bringing this to

the attention of the Committee for its

sonally was concerned,

He then inquired of Mr.

judgment.

As far as he per

Chairman Martin said that he did not like swaps.

Rouse how important he thought the problem

would be during the next week or two.

Mr. Rouse said that he did not think it

a vital matter to

settle today and probably not a vital matter at the next meeting.

He

thought it a desirable operation and he would like to get a better

balance in the System account.

Chairman Martin suggested that, since a question had been raised

as to the proposal for swaps and in view of Mr. Rouse's comments that it

was not a vital matter for the next two weeks, action be postponed with

regard to the sixth proposal Mr.

that the Committee indicate its

term securities than bills.

Sproul had made.

He also suggested

approval of transactions in

other short

He noted that this would be within the Com

mittee's existing instruction to the New York Bank which provided that

transactions for the System account be in

the short end of the market,

preferably bills.

No disagreement with Chairman Martin s suggestions was indicated.

Chairman Martin then noted that the next meeting of the Open Mar

ket Committee would be held on Wednesday, May 23, 1956, and he again ex

pressed the hope that Mr. Sproul would be able to attend that meeting,

Thereupon the meeting adjourned.

Secretary.