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, June 26, 1956, at 10:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Balderston

Erickson

Johns

Mr. Mills

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Powell

Shepardson

Szymczak

Vardaman

Fulton, Alternate

Treiber, 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, 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. Larkin, Manager, Securities Department,

Federal Reserve Bank of New York

Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meetings

of the Federal Open Market Committee held on

May 23 and June 5, 1956, were approved.

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6/26/56

Before this meeting there had been distributed to the members

of the Committee a report covering open market operations during the

period June 5 through June 20, 1956, and at this meeting a supple

mentary report covering commitments executed June 21 through June 25,

1956, inclusive, was distributed.

Copies of both reports have been

placed in the files of the Committee.

In commenting on the reports, Mr. Rouse mentioned that net

borrowed reserves would tend to rise considerably during the next few

days and that he anticipated that repurchase agreements would be made

available to take care of this situation.

Mr. Mills inquired why repurchase agreements rather than out

right purchases of securities for the System account would seem de

sirable at this time, when it

appeared that additional reserves would

be required over a considerable period of time.

He also observed that

the System account had permitted $51 million of Treasury bills to run

off during the past week, and he expressed the view that if

crease were permitted to show up in

it

this de

the statement for the current week

might be interpreted as a shift in

the policy that the Committee

had been following in recent weeks.

Mr. Rouse responded that with net borrowed reserves in the

$200 million area he felt

the run off of bills would not be misunder

stood in view of the sharp easing that had taken place since early this

month, and the condition of the Government securities market.

He also

6/26/56

-3

stated that today the System account had purchased $27 million of

Treasury bills, having in mind the point that Mr. Mills had mentioned.

Mr. Rouse also stated that his thought that repurchase agreements would

be a desirable means of meeting part of the increased need for reserves

in the next few days was based on the assumption that the Committee

would continue at this meeting about the same type of credit policy

that it

has been following in

the past few weeks.

He had not had to

make a firm decision on the matter pending this meeting.

However, he

did not feel that some run off in System holdings of securities this

week or the possibility that Treasury bill

rates might move a little

above 2-1/2 per cent would be inconsistent with the policy approved

at the meeting of the Open Market Committee early in June, considering

the fact that the discount rate continued at 2-3/4 per cent.

said, in response to a further question from Mr.

Mr. Rouse

Mills, that he would

have in mind net borrowed reserves in the $200-300 million range in

this period.

Upon motion duly made and seconded,

and by unanimous vote, the open market

transactions during the period June 5

through June 25, 1956, inclusive, were

approved, ratified, and confirmed.

Mr. Cherry, Legislative Counsel for the Board of Governors of

the Federal Reserve System, entered the room at this point.

Chairman Martin referred to a letter dated June 20, 1956, from

Congressman William L. Dawson, Chairman of the Committee on Government

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Operations of the House of Representatives,

distributed before this meeting.

in

copies of which had been

Mr. Dawson's letter requested that

connection with a study by his committee of the operations of the

debt management advisory committees utilized by the Treasury, arrange

ments be made to have Mr. William Pincus, Associate General Counsel

for the Committee on Government Operations,

received at the Federal

Reserve Bank of New York on July 5 and 6, 1956 in

order that the proper

officials of the New York Bank and of the Federal Open Market Committee

might furnish him with an on-the-spot presentation of the activities

conducted at the Bank as they relate directly to the operations of the

Government securities market.

Mr. Dawson's letter indicated his under

standing that the Federal Reserve Banks act as fiscal agent for the

Treasury Department and that the System also is

involved in the opera

tions of the Government securities market by virtue of the holdings

of Government securities in the System open market account.

At Chairman Martin's request, Mr.

discussions with Mr.

Riefler reviewed earlier

Pincs, stating that on Friday, June 15, Mr.

Miller of the Board's staff received a telephone call from Mr. Pincus

inquiring as to various technical problems in

ment of Government securities.

the issuance and allot

In the course of the conversation,

Mr. Pincus invited members of the Board's organization to come to

his office for the purpose of further discussion of these questions.

Mr. Riefler stated that after presenting the matter to the Board, he,

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Mr. Miller, and Mr.

Cherry met with Mr.

the committee's staff.

policy as such.

Pincus and other members of

The discussion did not go to Federal Reserve

At the conclusion of the discussion, Mr. Pincus sug

gested that members of the committee's staff would like to visit

the

Federal Reserve Bank of New York for the purpose of obtaining on-the

spot information as to the fiscal agency activities of the Bank and

operations of the Government securities market.

Mr.

Riefler stated

that this request was brought to Chairman Martin's attention, who

expressed the view that such a visit should be based on a formal re

quest by the Chairman of the Committee on Government Operations,

it

and

was in this manner that Mr. Dawson's letter was received.

Chairman Martin stated that he had discussed this request with

Treasury officials at a luncheon meeting this past week, feeling that

the Treasury should be fully informed of the nature of the request,

and that it was his understanding that the Treasury was not opposed

to the proposed visit or to furnishing information to the committee

along the lines requested.

In response to a question from Chairman Martin, Mr. Cherry

stated that this request was an outgrowth of the investigation of

advisory committees to the Treasury being conducted by Mr. Dawson's

committee in which there has been considerable discussion of fiscal

operations of the Treasury, methods and techniques of entering sub

scriptions to new issues of securities, the basis for allotment of

such securities, the functioning of the Federal Reserve as fiscal

6/26/56

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agent for the Treasury, and the part played by Government securities

dealers in

connection with Treasury financings.

Mr. Cherry said that

it was his understanding that the committee was not exploring monetary

relationships as part of its inquiry, and he expressed the view that

it

would be desirable to cooperate with the committee in

so far as

that might be feasible.

Mr. Treiber stated that while Mr. Dawson's letter did not make

the nature of the visit entirely clear, he felt that the System should

assist the committee and its

representatives in obtaining information

as to the operations of the Government securities market and of the

functions of the Federal Reserve Bank as fiscal agent.

Mr.

Treiber said it

In doing this,

would be his view that System representatives

should avoid discussion of such things as directives of the Federal

Open Market Committee but, with that exception, they should be as help

ful as possible to Mr. Pincus or other members of the committee's staff.

Chairman Martin said that Mr. Treiber expressed the views which

he felt should apply to Mr.

Dawson's request.

Nothing

should be done

to place any road-blocks in the way of the committee, and efforts should

be made to assist its representatives in obtaining a better understand

ing of the operations of the Government securities market.

In response to a question from Mr.

Johns, Chairman Martin re

iterated his understanding that the Treasury would have no objection

to a visit such as Mr.

Dawson's letter proposed but stated that he

would confirm his understanding on this point before the committee

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representatives visited the New York Bank.

In response to a question from Mr.

Vardaman, Chairman Martin

stated that he had in mind informing the Chairmen of both the Senate

and House Banking and Currency Committees of the visit proposed by

Mr. Dawson.

Mr.

Treiber stated that he would be glad to send Mr. Dawson

a letter regarding the proposed visit of Mr.

Pincus and possibly

other members of the committee's staff.

There was unanimous agreement with

the procedure suggested in the foregoing

discussion.

Mr. Cherry withdrew from the meeting at this point.

Chairman Martin called upon Mr. Young, who made a statement

with respect to the economic situation substantially as follows:

Onset of summer doldrums finds the economy moving for

ward on a high and gently rising plateau.

Industrial pro

duction holds steady within the narrow range it has main

tained since last fall, but other areas of output evidence

Credit demands have been showing excep

expansive tendency.

tional strength, but wholesale prices, while firm, have

Stock prices have re

further advance.

featured little

bounded some from news of the President's illness, and,

reflecting more encouraging news from various economic

fronts, business and financial sentiment has a much more

confident tone than in the second half of May. Late data

flowing in from abroad confirm that expansive trends are

being sustained in most foreign industrial countries.

With the second quarter approaching a close, pre

liminary estimates of the economy's total performance for

They indicate a GNP figure of

the quarter can be made.

quarter

$402 billion, up $3-1/2 billion from the first

and $5 billion from the fourth quarter, reflecting in

part a higher price level. Personal income is estimated

quarter

at $317 billion, up $3 billion from the first

Disposable

quarter.

fourth

the

from

and $5-1/2 billion

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income and consumption expenditures are both estimated to

be up $4 billion over the past two quarters. Personal

savings holds at just under a 7 per cent rate,

The expansive influences carrying total output to new

record levels have been larger consumer spending on non

durables and services, larger business spending on plant

and equipment, and larger State and local government spend

ing. On the more or less neutral side have been Federal

Government spending, residential construction investment,

and investment in business inventories.

Consumer spending

for automobiles has been the main contractive influence.

Other details of the situation may be briefly reviewed:

(1) Industrial production for May is still

placed at

142 with the June figure expected to repeat this level.

(2)

Retail sales for May showed a 1 per cent gain over

April. Nondurable sales were responsible for the advance,

durable goods sales about holding even. Judging from depart

ment store sales, total and by major departments, thus far in

June and from the reported marked pick-up in new automobile

sales, further advance in retail sales may be registered this

month.

(3) Instalment credit outstandings are estimated to have

shown a $150-$200 million rise on a seasonally adjusted basis

in May, a little less than in April. The rise in the past two

months has reflected mainly increases in personal loans and

consumer goods paper other than automotive. Liberalization of

credit terms for new automobile paper, which was brought under

check late in the fall, has apparently resumed in a moderate

way.

Business inventory accumulation for April amounted

(4)

to about $600 million, mostly at manufacturers and particularly

in nondurable goods lines. High retail sales at nondurable

goods stores in May suggests that this development was in re

sponse to market demands and not a backing up of holdings from

At the distributive level,

retailers to manufacturers.

scattered information up to June points to an even stock posi

tion at retailers of diversified consumer hard goods, while

current information from the automobile industry points to

marked liquidation in June of new car stocks and perhaps some

Over-all the second

additional work down of used car stocks.

quarter is expected to show a reduced rate of inventory ac

quarter.

cumulation from the first

Total construction activity holds about at or just

(5)

under year ago levels, with residential construction down and

Contract award

offset mainly by greater business construction.

data show that strength continues to characterize all major

types of construction, as does also further upward trend of

construction costs and material prices. Recent reports on

residential real estate markets indicate that discounts on

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Federally underwritten mortgages have generally increased

in recent weeks, but they also indicate that the reduced

number of completed housing units is moving without ex

ceptional delays and that the inventory of unsold houses

is being held to moderate volume.

(6)

Total nonfarm employment in May was at a record

level of 51.3 million, 1.5 million above a year ago. Un

employment at 2.6 was about the same as in April.

An in

crease in unemployment is usual in June, reflecting the

increase of workers in search of summer employment. The

work week in May averaged about 40 hours, about an hour

below levels at the end of 1955.

Reflecting reduced over

time work in part, average hourly earnings in May showed

no change from April and average weekly earnings were off

slightly. In June, workers in a number of major industries

receive automatic wage rate increases, and in July a wage

rate rise goes into effect in the copper industry. The out

come of the steel negotiation is still unknown.

(7) Since mid-May, both industrial and agricultural

prices have been relatively stable. On the industrial com

modity side, prices of materials have strengthened after

earlier marked declines and price increases have been fewer

for partially fabricated and finished items.

Prices of farm

products and foods have held close to mid-May levels, but

prices of livestock, wheat, and fats and oils have eased

somewhat this month. The decline in livestock prices has

reflected larger marketings stimulated by the earlier price

advance for livestock.

(8) Abroad in major industrial countries, output con

tinues at high levels, with some irregularity in further

increases because of capacity and labor supply limitations.

In a number of these countries, the existence of inflationary

of their indexes of

pressures is shown by the upward tilt

average prices.

U. S. exports and imports, on a seasonally adjusted

(9)

basis, showed renewed strength in May after a dip in April,

according to preliminary indications.

Altogether, the total situation looks considerably better

than the indications at the last meeting. Observers generally

are now raising their sights for the third quarter. The

opinion is ventured by some that, assuming no prolonged steel

strike, over-all performances in the third quarter, on a

seasonally adjusted basis, may well better performance of the

second quarter. Regardless of the outcome, one can at least

say that the composite picture indicated by the most recent

data on production, trade, employment, and prices is not one

of an economy in recession or even poised to recede.

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Mr.

in

Thomas pointed out that credit developments,

other areas, indicated continued strength in

like those

the economy.

He said

that Treasury operations have recently been of prime interest in

financial markets,

cash surplus is

both mechanically and psychologically.

The Treasury

likely to be close to $5-1/2 billion for fiscal 1956

and the cash balance,

exclusive of gold, will probably be around $5-1/2

billion at the end of June.

This balance is

about a billion dollars

less than was expected earlier, owing largely to Treasury purchases of

securities, redemption of Commodity Credit Corporation notes, larger

redemptions of savings bonds than had been anticipated, somewhat

smaller receipts from income taxes withheld, and somewhat larger

expenditures.

The heavy turning over of funds and shifts from the

maturing tax anticipation securities to other investments had affected

money markets and Government securities markets recently, making it

difficult to bring out underlying trends.

Mr.

Thomas referred to the Treasury's borrowing needs during

the next seven months,

concerning which a memorandum dated June 25,

1956, from the Board's Division of Research and Statistics was dis

tributed earlier during this meeting.

The prospect is

that the Treas

ury will have to borrow around $4-1/2 billion during this seven-month

period, of which $1-1/2 billion might be deferred until January.

About $3 billion would be needed by late August or early September.

Refunding operations for the next six months will total around $22

$23 billion, of which the Federal Reserve holds over $9 billion of

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6/26/56

maturing securities.

Mr. Thomas stated that during the first

half

of calendar 1957 debt retirement might be as much as $8 billion.

The large amount of funds that will be available for debt

retirement should influence the types of securities that might be

offered by the Treasury in its

Thomas noted.

cash and refunding offerings, Mr.

By the end of the year, there will be a large concen

tration of outstanding issues in the 1-5 year category which would

make new issues in

that range not particularly appropriate and the

market has not been favorable for longer-term issues.

Thus, a one

year rollover plus optional tax anticipation issues would seem best

for the refunding offerings, and tax anticipation issues and bills

for the cash offerings.

Mr. Thomas said that the capital markets have continued active,

Cor

with a large volume of new issues being offered or in prospect.

porate issues are at a high level, with a considerable volume of

private placements,

and State and local issues are also large.

Bank

credit developments have been affected by corporate income tax pay

ments, Mr. Thomas said, and while comparisons with the past are made

difficult because of date differences,

at city banks in

he indicated that business loans

the three weeks ending June 20 had probably risen

close to $1.2 billion, compared with $800 million in June last year

and $1.5 billion in March of this year.

Other loans have also in

creased, and banks have added some to their holdings of Government

securities in

contrast to a decrease in the same period last year.

6/26/56

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Deposits and currency holdings of business and individuals, which

declined sharply in May, increased during the first two weeks of

June, as is usual prior to a tax date.

Changes in the money supply

this year to date have been close to seasonal, Mr. Thomas said, with

little net growth after adjustment for seasonal factors.

Bank reserves have been more freely available in the past

month than previously, Mr. Thomas noted, with net borrowed reserves

recently around $200 million.

The decrease reflected earlier System

purchases of securities and a recent sharp increase in float, which

more than offset an increase in required reserves.

Nevertheless, the

money market has not been particularly easy because of the greater

liquidity needs that banks have had at this time.

The rate for Federal

funds has continued close to 2-3/4 per cent; a decline in the bill rate

has reflected largely the switching of funds from tax anticipation

securities.

Mr. Thomas also referred to a sheet containing recent and pro

jected reserve changes, stating that perhaps as much as $400 or $500

million of additional reserves would be needed during the next two

weeks, if

net borrowed reserves are to be kept at the $200-$300 mil

lion range.

He thought some temporary increase in borrowing over the

July 4 holiday might occur and would not be undesirable.

Some of the

added reserves could be supplied through repurchase agreements, which

could be retired a little later in July as reserve funds again became

6/26/56

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available, but there will also need to be some outright purchases of

securities if

in

the Committee wishes to avoid an increase in pressure

the market during coming weeks.

One of the problems to be faced by the Committee in

the near

future, Mr. Thomas said, was how best to supply the projected reserve

needs of around $1.5 billion during the rest of the current year.

In

addition to purchases of Treasury bills, repurchase agreements and

member bank borrowing could be relied upon to cover some of the purely

temporary needs.

The use of member bank borrowing should depend on the

climate of credit demands and the attitude of banks.

noted that there had been some discussion in

Mr. Thomas also

banking circles of a re

duction in reserve requirements which would release some of the reserves

now used by banks in meeting their requirements.

for this device is

The argument advanced

the need to increase bank liquidity, which is

now so

low that banks might be reluctant to meet essential seasonal loan demands.

Mr. Thomas questioned whether such a measure would be appropriate in a

period of very strong loan demands with the economy operating at capacity,

Mr.

Vardaman inquired of Mr. Thomas whether he believed it

un

desirable to make outright purchases of Government securities to meet

the need for additional reserves during the next two weeks to an amount

of, say, $00

million, to which question Mr. Thomas responded that if

the staff projections of needed reserves proved to be correct, outright

purchases of as much as Mr.

Vardaman mentioned would make it

necessary

for some of the securities to be sold shortly after the Fourth of July

6/26/56

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holiday.

It

was for this reason and as a means of avoiding unneces

sary churning in the Government securities market that he (Mr.

felt

it

Thomas)

would be desirable to meet part of the demand through the use

of repurchase agreements.

Mr. Rouse said that he agreed with the views expressed by Mr.

Thomas, feeling that some use of repurchase agreements would facilitate

operations, particularly in view of the Treasury financing that is ex

pected shortly and of the desirability of maintaining an "even keel"

during the period prior to the Treasury's announcement.

Chairman Martin said that he anticipated that the next meeting

of the Open Market Committee would be held on Tuesday, July 17.

The

Treasury's Committee on Government Borrowing would be meeting on

July 11, he noted,

and it was his view that the problems connected

with the Treasury's financing, to which Mr. Rouse had referred,

be considered today.

be difficulty in

should

Chairman Martin said that as always there would

maintaining an "even keel" and in

color, and other factors in the market.

dealing with tone,

He then called upon Mr.

who made a statement substantially as follows:

The economy in the aggregate continues to move sidewise

at a high level. There have been no new soft spots, and

there has been no acceleration of existing soft spots. In

deed, the evidence indicates that a satisfactory adjustment

There appears to be more strength in the

is going on.

Production, employment,

economy than there was a month ago.

consumer purchases, and capital expenditures are at very

Inventory accumulation has slowed down.

high levels.

As for prices, farm prices continue to firm; industrial

raw material prices appear to be inching ahead in spite of

declines for some individual commodities in April and May.

Treiber

6/26/56

Prices are likely to rise at a gradual rate. The steel wage

negotiations are coming down the home stretch. It is apparent

that the price of steel will rise; the only question is, how

much?

The demand for bank credit continues high.

The June 15

tax period demand was very high, by past standards, although

not as high as in mid-March.

In the generally balanced cur

rent situation, price inflation is still

a threat and further

relaxation of restraint is not called for.

It looks as if the Treasury will announce the terms of its

refunding financing about the middle of July and that it will

undertake cash financing of a couple of billion dollars a few

weeks later.

The money market has been under less pressure in recent

weeks. In a period when there is customarily a great deal of

churning in the market, the System has made it clear that

needed credit will be available. While the rate on Federal

funds has continued at 2-3/4 per cent, the rate on Treasury

bills is now a bit below 2-1/2 per cent, and the rate on

bankers acceptances has recently been reduced to 2-1/2 per

cent.

The sharp drop in the rate on Treasury bills in the

last week or so apparently reflected a temporary distortion

in anticipation of the reinvestment of the proceeds of the

tax anticipation certificates which matured Friday. That

demand having been met, the disparity between bill rates and

the discount rate has narrowed again.

Observers have been conscious of the System's desire to

prevent mid-June technical factors from causing strain. They

are watching to see whether recent System action is directed

primarily to the technical situation or whether it foreshadows

an easier credit policy. We should continue to make reserves

available to meet the basic needs of growth and to meet seasonal

needs, such as the midyear currency demand. Since the Treasury

will be announcing its financing arrangements before, or at

about the time of, the next meeting of the Committee, we should

contribute to the maintenance of an "even keel" in the market.

We should avoid, however, indicating a basically easier policy.

The contraction of float and the outflow of currency cur

rently going on have withdrawn reserves from the banking system

This should

and have increased net borrowed reserves somewhat.

yields

bill

Treasury

in

distortion

present

help correct the

bills.

Treasury

of

purchases

outright

begins

before the System

Since part of the reserves needed over the early part of July

will be temporary in nature, repurchase agreements should be

instance, supplemented by outright purchases

used in the first

to supply reserves needed more permanently.

The trend toward easier conditions which has been pursued

The purpose

in recent weeks has served a highly useful purpose.

6/26/56

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having been accomplished, we should now seek to stabilize

money market conditions. We should pay particular atten

tion to the Treasury bill rate and the tone in the market.

Recognizing that "net borrowed reserves" are but one of

many factors indicating the tightness of the money market,

we could stand a higher range of net borrowed reserves than

we have had in the last two weeks; net borrowed reserves

amounting to something over $200 million--perhaps in such

a wide range as $200 to $400 million--would seem appro

priate.

The officers of the Federal Reserve Bank of New York

believe that there should be no change at this time in

the Bank's discount rate.

Mr.

Johns said that he had nothing significant to report by way

of data from the Eighth District.

He had no reason to disagree with

the summary of general conditions presented by Mr.

Young, although he

might have some question regarding the general employment picture be

cause of a seeming tendency for unemployment compensation claims to

resist declines.

In view of the present apparent state of the economy

and the apparent expectations of business people and consumers as well,

Mr.

Johns said that no further relaxation of monetary and credit re

strictions was indicated at the moment.

The question was whether

there had been such a change in the business picture as to indicate

a need for greater restraint.

Mr. Johns said he was not sure whether

there had been a turn-around in the business picture or whether at

an earlier period the Committee may have misread the signs, but at

the moment he was not inclined to believe that greater restraint was

indicated.

Therefore, he would undertake to maintain net borrowed

reserves somewhere in the neighborhood of $300 million although he

would not be disturbed by fluctuations from this figure.

He hoped

6/26/56

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that the Treasury bill rate would be at or slightly above 2-1/2 per

cent.

As to the discount rate, Mr.

Johns said that he did not be

lieve the rate at the St. Louis Bank (now 2-3/

per cent) needed to

be changed at the present time.

Mr.

Johns said that he was glad that the use of a reduction

in reserve requirements as a possible means of meeting some of the

need for reserves later this year had been mentioned.

He recalled

that Chairman Martin had stated recently before a Congressional Com

mittee (Subcommittee on Economic Stabilization of the Joint Committee

of the Economic Report) that present reserve requirements are probably

too high.

Mr.

Johns said that it

seemed to him that the System should

be searching for opportunities to reduce reserve requirements rather

than for reasons not to reduce them.

problem of public relations if

He recognized that there was a

reserve requirements were reduced at

a time monetary policy was restrictive, but he felt this would be

mitigated if

at the same time there was a considerable seasonal need

for additional reserve funds which the System needed to supply and

which the Committee had indicated would be supplied.

Mr.

Johns noted

that changes in reserve requirements had been referred to as a blunt

instrument, as a meat-axe approach to monetary policy.

felt

it

However,

he

time to explore whether the System could supply some of the

reserves that would be needed by a reduction in reserve requirements

later this year.

He suggested that a reduction of 1/2 per cent in

reserve requirements across the board would release approximately

6/26/56

-18

$700 million in reserves and, while this might not be desirable now,

later in the summer or autumn consideration might well be given to

release of around $500 million by lowering reserve requirements.

He

thought that by telling why the reduction was being made, it would be

possible to offset undesirable public relations that otherwise might

result from such action.

Mr. Bryan said that the economic situation in the Sixth District

seemed to be relatively stable.

Mortgage credit apparently is

becoming

very scarce, and discounts on mortgages are increasing in the Atlanta

area.

He would not now recommend a change in the policy the Committee

has been following.

While he had fear of a policy action that would

seem to be dramatic,

at the same time he had a great deal of sympathy

for the view Mr.

Johns had expressed regarding reserve requirements.

Mr. Bryan referred to the figure of $400-$500 million of added reserves

that Mr. Thomas had mentioned as probably being needed during the next

two weeks if

net borrowed reserves were to be maintained at the $200

$300 million level, and he suggested that requirements against time

deposits might be reduced from 5 per cent to 4 per cent as a means of

meeting much of this demand since it

the neighborhood

would free in

of $400 million.

Commenting further on a question from Mr.

Mr.

Vardaman as to timing,

Bryan noted that projections indicated net borrowed reserves averag

ing over $700 million during the week ending July 4.

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6/26/56

Mr. Thomas commented that if

$400 million were released

through a reduction in reserve requirements early in

July, it

probably would be necessary to sell some $200 million of securi

ties from the System account soon after July 4 as currency returned

from circulation.

Mr.

Williams said that the economy of the Philadelphia District

was continuing to move sidewise.

mism than three weeks ago.

Psychologically there was more opti

He presented comparative figures showing

that new automobile sales in the district had been relatively better

this year than in most other areas, and he cited comparisons of de

partment store sales as well as strong demands for credit as evidences

that upward pressures were likely to continue.

Mr. Williams noted a

growing tendency on the part of small business concerns to use term

loans at commercial banks on the grounds that pressures are likely

to continue to force them into plant and equipment expenditures in

order to remain competitive, and that they do not have available

facilities for obtaining funds for that purpose except at the com

mercial banks.

Mr.

Williams also noted that national concerns were

activating lines of credit at Philadelphia banks.

Mr.

In summing up,

Williams said that he could see no need for any further relaxa

tion in

where it

credit policy,

is,

that he felt the discount rate should stay

and that net borrowed reserves might be permitted to

range around the levels that have prevailed for the last couple of

weeks.

6/26/56

-20

Mr.

Fulton said that it

would be a steel strike.

severely in

now appeared quite likely that there

Even a limited strike period would be felt

the Fourth District, but it

would furnish an impetus to

a very high level of steel production during the fourth quarter of

the year.

Other activities such as machine tool and paper production

were continuing at a very high rate.

Mr.

Fulton said he would not

favor any further relaxation in open market policy at this time and,

in fact, the present policy may have produced more relaxation than

was needed to take care of seasonal needs.

He suggested that net

borrowed reserves of $350 million or more would be quite appropriate

during the next few weeks.

He also said that he concurred in the

view that reserve requirements could well be reduced from their pres

ent levels.

There should be no change in

the discount rate at this

time.

Mr.

Shepardson said that the general atmosphere seemed to have

improved in

recent weeks and that there was a little

than existed a month or so ago.

slackness in

more optimism

Possibly there had been a little

the money market during the past week or so, and he

would be inclined to take up some of this slack although he would

not favor action that would place greater restraint or pressure on

the market.

From the standpoint of agriculture, Mr.

noted that a number of areas had suffered severely in

outlook because of drought.

Mr.

Shepardson

their crop

Shepardson said that he too had

6/26/56

-21.

been thinking about reserve requirements and had come to the con

clusion that any change in the level of requirements should be

deferred until later on.

Mr. Mills called attention to the fact that at its last meet

ing the Open Market Committee was influenced by the doubts that had

been raised in many quarters about business prospects and that at

that time it would have welcomed a more optimistic sentiment in the

business community.

In the face of improved business sentiment, he

felt it would now be a mistake to shift System policy toward more

severe credit restriction because of a hagridden fear of an inflation

bogey.

Inasmuch as the System previously indicated by word and action

that credit would be available for the requirements of the economy, a

shift at this time to a tighter monetary policy would be construed as

a reversal of earlier policy declarations and could have damaging con

sequences.

Mr. Mills contended that as a matter of fact the reduction

brought about in the level of negative free reserves in recent weeks

has not resulted in the degree of ease that might have been expected

from having supplied so sizable a volume of new reserves, and for

the reason that member banks employed the new reserves at their dis

posal to the liquidation of their discounts at the Federal Reserve

Banks.

It

was brought out that as the new reserves that were supplied

by System action were canceled out through the retirement of Federal

Reserve Bank discounts,

through which the member banks had previously

supplied themselves with reserves on their own initiative, a base for

6/26/56

-22

building a harmful expansion of credit had not been laid.

The fact

that the rate on Federal funds has held continuously at 2-3/4 per cent

would seem to bear witness to a generally tighter money market condi

tion than might have been indicated by only looking at the reduction

effected in

the level of negative free reserves.

Mr. Mills went on

to say that this experience suggested that under present conditions

the volume of Federal Reserve Bank discounts might be a better indi

cator of the degree of tightness in the money market than the level

of negative free reserves and that System actions to vary the out

standing volume of Federal Reserve Bank discounts could be construc

tively used to achieve System policy objectives.

In the light of this reasoning, it

was Mr.

Mills'

opinion that

direct purchases of Treasury bills for the System open market account

should be undertaken promptly in

the supply of reserves that it

is

by a process that would result in

order to prevent the shrinkage in

estimated would otherwise occur and

a gradual increase--rather than in

an abrupt increase--in the System open market account's Treasury bill

holdings.

In

carrying out this policy, repurchase agreements would

be used to even out reserve situations that could not be treated as

well through the vehicle of direct Treasury bill purchases.

Mr. Mills had in mind that a level of negative free reserves

of $200 million or less would be visible evidence to the financial

and business community that the System was not reversing its

policy

6/6/56

-23

and was prepared to supply such reserves as were necessary for the

seasonal and growth requirements of the economy.

He was inclined

to believe that of late the factor of growth had been neglected in

System policy thinking.

And according to his reasoning, the current

objectives of System policy in supplying reserves should therefore

take into account both the seasonal and the growth requirements of

the economy.

As to the question of a reduction in reserve require

ments, it was Mr. Mills' belief that the subject deserves study but

that no such action should be taken at least until later in the year.

Mr. Vardaman said he agreed with everything that Mr. Mills had

said under existing circumstances.

The attitude of the public during

the last three weeks has been one of hope, he said, and the System

should not do anything to dampen that feeling. Producers and con

sumers seem to be moving pretty well together and nothing should be

done to get one or the other out of step.

Policy should be continued

about as is, but there should be no indication in the slightest degree

of any further tightening at the present time.

A reduction in reserve

requirements at this time would be magnified out of its

importance,

Mr. Vardaman said; he was not sure that reserve requirements on time

deposits should not be reduced, although he was confident that that

should not be done at present.

Consideration might,

given to such a proposal along in

however, be

late August or September.

Mr.

Vardaman said that he would suggest negative free reserves around

$200 million.

Also,

he would prefer to rely first

chases of securities and would let

on outright pur

repurchase agreements be used as

6/26/56

-2

a means of meeting additional reserve needs, rather than to rely

primarily on repurchase agreements to make reserves available in

the period immediately ahead.

Mr. Leach said that the month of June brought no appreciable

change in

business conditions in the Fifth District.

the staff that the third quarter now looks a little

did three weeks ago.

trict,

he said.

He agreed with

better than it

Loan demand continues high in the Fifth Dis

Although the loan-deposit ratio of the weekly re

porting member banks is

only 4 6 per cent compared with a national

average of almost 56 per cent, many Fifth District banks have indi

cated that they are at or above their desired goals in terms of the

relation of loans to deposits.

During the last several days, some

of the larger banks of the district have returned to the discount

window after having been out of debt for a period.

Mr.

Leach said that the Committee's actions to reassure the

market of the availability of reserves over the tax date resulted

in a much lower level of net borrowed reserves.

He thought it de

sirable to leave net borrowed reserves at this lower level for the

time being.

This presumably would require substantial additional

purchases of Government securities in the near future to prevent

undesired tightening.

No change in

the Committee's directive was

needed at this time, Mr. Leach said, and consistent with this posi

tion he did not propose to recommend to the board of directors of

6/26/56

-25

the Richmond Bank a change in the discount rate at present.

said that he felt

Mr. Leach

that reserve requirements are higher than they should

be but he would not suggest a decrease at the present time.

Mr.

Leedy presented comparisons which showed that employment in

the Tenth District during the first

four months of 1956 had increased

by significantly lower percentages than in the United States as a whole,

in

comparison with both the first four months of 1955 and the first

four months of 1953.

He also stated that agricultural conditions in

the Tenth District this year are not quite as good as last year.

On

the national picture, Mr. Leedy suggested that the Committee's activi

ties in furnishing additional reserves to the market may themselves

have contributed to the recent improvement in business sentiment.

The

commentators may have gone too far in their interpretations of the

Committee's operations and intentions in recent weeks,

noted that Mr.

he said, and he

Treiber had expressed the view that market observers had

appraised these actions as "bridging the gap" of the June tax period

without coming to the conclusion that there had been any change in

credit policy.

Mr. Leedy said that he had a different impression,

feeling that rather generally observers believed that there had been

a change in policy in the direction of a very definite easing.

this juncture he felt

At

that no action could safely be undertaken to

correct this impression, he said; he would not favor any tightening

in

the immediate future and as a matter of fact he felt the pattern

of operations that had been followed during recent weeks should be

6/26/56

-26

continued.

This would mean the level of net borrowed reserves should

not be permitted to exceed $300 million and perhaps should trend down

ward.

Notwithstanding the optimism that seems to exist, Mr. Leedy

said that he felt that uncertainties with respect to a steel strike,

the layoffs that would take place during the summer because of vaca

tions and for other reasons, and the uncertainties that must exist in

the minds of many persons with respect to the President's intentions

meant that this was not the time to be trending in any direction other

than that in which the Committee has been moving during the past few

weeks.

He felt the System account should purchase bills to whatever

extent they were expected to remain in the portfolio, and it should

supply additional reserves through repurchase agreements to the extent

that might be needed, particularly during the period until the Treas

ury's financing is

Mr.

out of the way.

Powell said that there was a very high level of economic

activity in the larger cities of the Ninth District and in the mining

areas, but that in

the Western part of the district some areas were

faced with a severe drought--some crops were already gone and replant

ing was necessary.

Retail trade is

up in the larger cities and employ

ment is at a new high, largely because of increased employment in

manufacturing of certain products such as industrial machinery and

electrical equipment.

Construction is

up 26 per cent over a year ago

even though residential building is down about 4 per cent.

Retail

6/26/56

-27

trade in

country areas is

below a year ago and recently the figures

have shown greater decreases than earlier in the year.

Farm imple

ment sales are down and the general agricultural outlook is

Mr.

not good.

Powell said that he would favor a reduction in reserve

requirements on time deposits, a move which would be particularly

beneficial to country banks.

He could not see that there would be

any harm in such a reduction at an early date.

The 3 per cent dis

count rate of the Minneapolis Bank still seemed appropriate in view

of the rather feverish activity in the principal cities of the Ninth

District.

However, there was growing concern about the position of

banks in country areas where a number were now borrowing and addi

tional banks would soon begin to borrow seasonally.

he did not know

Mr.

Powell said

what the directors of the Minneapolis Bank would decide

about the discount rate at their meeting to be held in

July, in view of

the diverse conditions that he had described as prevailing in the Ninth

With respect to open market operations, Mr. Powell felt that

District.

a middle of the road policy was indicated at this time.

We had gotten

through the June tax period successfully and there was no reason for

making money cheaper at this time.

in

A level of net borrowed reserves

the $200-$00 million range seemed appropriate for the immediate

future.

If

it

seemed desirable to do any substantial easing, Mr.

Powell would be sympathetic to a reduction in

reserve requirements

on time deposits as a means of easing the situation where ease would

be most needed.

6/26/56

-28

Mr. Mangels said that economic conditions in the Twelfth

District continued good with a fractional rise in

a decline in unemployment during May.

employment and

Automobile plants in Southern

California, at which layoffs took place earlier this spring, were now

anticipating a reversal of that situation and additional employment

was also expected in the aircraft, fruit packing, and other industries.

The West Coast labor situation is very tight.

The lumber situation in the

in May were 20 per cent below a year ago.

Pacific Northwest appears a little

New automobiles sales

brighter than a month ago and there

have been some increases in prices of Douglas fir.

A number of in

dustries recently have granted wage increases.

Bank loans continue to increase, Mr.

Mangels said,

and following

the pattern he had reported before, a third of the increase in the

national total of loans at reporting member banks during the four weeks

ending in mid-June took place in the Twelfth District.

On the other

hand, borrowings at the San Francisco Reserve Bank last Thursday were

by only two banks in the amount of $29 million.

Both of these banks

Since

have been consistent borrowers and are also using Federal funds.

the first of the year, 21 of the 25 reserve city banks have borrowed

from the San Francisco Reserve Bank, Mr.

Mangels said, while in

other

large cities only 10 banks have borrowed since the beginning of the

year.

Only three country banks have borrowed in that period.

Mr.

Mangels referred to a meeting held at the San Francisco Bank week

6/26/56

-29

before last attended by the presidents of all banks in Los Angeles

and San Francisco and to a discussion of the loan demand following

the meeting.

The general feeling was that banks needed more deposits

and less loans, and some were concerned as to how they would meet the

demand for loans.

One banker thought that the demand for commercial

and industrial loans had now reached its

peak.

Some of the bankers

expressed the hope that reserve requirements would be reduced to

assist them in meeting loan demands.

Mr. Mangels also referred to

comparisons made of the ratio of loans to deposits in the Twelfth

District and in New York, and to a discussion regarding why Twelfth

District banks should be penalized with a 3 per cent discount rate

when banks in New York with a higher loan-deposit ratio had a lower

rate.

The comparisons which Mr. Mangels presented developed the fact

that the increase in

the ratio of loans,

exclusive of real estate loans,

had been greater in the San Francisco District than in the New York

District.

Mr. Mangels said that the San Francisco Bank's directors

voted to maintain the present 3 per cent discount rate at their June

meeting although not by a unanimous vote.

The question would again

be considered at the meeting scheduled for July 11 and Mr. Mangels

said that he did not know what action would be taken.

been a definite improvement in

There has

psychology in recent weeks,

Mr. Mangels

said, and whereas a short time ago many were talking about a poor

third quarter,

the general attitude now is

to look for a bright fourth

6/26/56

-30

quarter.

Mr.

Mangels said he did not think all the inflationary

dangers were past but that, as Mr.

Mills had indicated, it

not be desirable to move toward a more restrictive policy.

would

On the

whole, he would favor a continuation of the situation about as it

had existed during the past three weeks.

In response to a question from Mr. Leach as to why member

banks in

the Twelfth District would borrow from the Federal Reserve

Bank at the 3 per cent rate when Federal funds were available at

2-3/

per cent, Mr. Mangels said that the two banks borrowing were

using Federal funds, and they were discounting at the San Francisco

Reserve Bank to obtain the additional reserves which they needed.

Mr. Irons said that conditions in

strong.

Department store trade is

both in manufacturing and in

the Dallas District continue

about seasonal.

up

total nonagricultural activity, and

estimates of industrial production show some gain.

strong.

Employment is

Confidence is

Agricultural conditions have deteriorated within the past

three to five weeks because of lack of rain but in most agricultural

areas income is

activities.

also produced from oil and gas leases and other

Automobile sales have improved in

theattitude of automobile dealers.

Production of chemicals has in

creased and on the whole economic conditions in

are generally strong.

recent weeks, as has

the Eleventh District

Observers expect about the usual seasonal

movement during the third quarter of the year and a good fourth

quarter.

The national picture points to strength,

6/26/56

-31

Mr. Irons stated that he would like to see no further easing

of credit policy although he has been pleased with developments in

the last three weeks.

He would like to see the Federal Reserve main

tain a condition of firmness in the market without moving toward

further ease beyond what has already been attained.

Mr. Irons said

that he had decided to give up using figures of net borrowed reserves

because he doubted their meaning.

He did not feel that the easing in

the money market in recent weeks had been as great as was indicated

by a reduction from $600 million to $100 million in net borrowed re

serves.

Mr. Irons said he would not recommend a change in discount

rate to his directors at the present time and that Mr. Treiber had

expressed the view he held, that is,

the Committee should attempt to

stabilize money market conditions at their present state and to be in

a position to move in whatever manner was called for in the next few

weeks.

Mr. Erickson said that conditions in the First District still

remained strong and that favorable factors outweighed the unfavorable.

Employment in the Boston area is getting tight.

Loans did not increase

prior to the June tax date as much as had been expected.

Easing of

restraints during the past three weeks had resulted in a turn-around

in borrowings at the Boston Reserve Bank, with less than half as many

banks borrowing as a little earlier.

Mr. Erickson said that at this

time he would suggest no change in the Committee's directive, would

hope that the discount rate would remain at its

present level, and

6/26/56

-32

that he was inclined to agree with the view Mr.

Shepardson had ex

pressed that the Committee might take up some slack during the next

two or three weeks.

He would prefer net borrowed reserves in the

$250-$300 million range.

Reserve requirements are too high, Mr.

Erickson said, but this question should be given further study before

action was taken to make any change in

the present level.

Mr. Szymczak said that in his opinion the major question before

the Committee at the present time was related to the Treasury's plans.

about to carry through a large refunding operation and

The Treasury is

it will need to obtain new money shortly.

This being the case, the

Committee should provide some measure of stability to the market so

that the Treasury will be able to enter the market with its

refunding

and cash offerings, knowing what the market will require in

the way of

interest rates.

Statistics that have become available regarding eco

nomic activity a month or two ago show that conditions were not de

teriorating at that time as much as the Committee was then inclined

to think.

This might be a warning to the Committee not to become so

concerned as some reports and comments might suggest.

hand, Mr.

On the other

Szymczak said that he felt the Committee had met the situa

tion properly during the recent tax period.

should now concentrate on its

He thought the Committee

over-all objectives in

the light of the

Treasury's needs and should seek to keep the market as stable as

possible.

It

should provide reserves by buying Government securities

6/26/56

-33

outright and also by making repurchase agreements available, and by

preparing to do whatever the situation called for as we move into

July.

Mr.

Balderston said he shared the views expressed by most of

the members of the Committee.

The immediate problem is

one of timing,

because of the impending Treasury financing, and the Committee should

look beyond the next meeting tentatively set for July 17.

It

would be

comforting not to have to determine the degree of tightness until after

we know whether there will be a steel strike; on the other hand, July

17 would be too late to change our posture.

Business psychology seems

to have improved recently as retail trade has gained and as plant con

struction has continued to provide underlying support.

The wage and

price increases that are impending plus the strong loan demand suggest

that the slackness often associated with the summer "doldrums" may

have been offset.

Mr.

Balderston said he would hope that the discount rate would

not be lowered because of the effect such action might have on public

psychology:

he would like to see the System retain present discount

rates and aim at a net borrowed reserve target of about $250 million.

Whatever posture we adopt today should permit us to move in

direction as summer comes to an end.

ther

At that time the pressure on

prices and demand for loans may be very heavy and the Federal Reserve

may wish to apply the brakes vigorously.

However,

if

a prolonged

steel strike causes business psychology to turn sour, the System may

6/26/56

-34

wish to give business a stimulus.

Mr. Balderston said he would like

to see the Committee adopt today a policy that can be adhered to

throughout the period of the Treasury financing and also permit the

Committee to move toward either tightness or relaxation without too

much commotion in

the press.

He was very happy,

he said, with de

velopments of the past few weeks and he felt that the System had

accomplished what it

set out to do.

It

should now adopt a stance

that will serve the Committee between now and late August.

Chairman Martin said that he thought it

apparent that the views

expressed this morning were not far apart and, although the policy to

be followed was not crystal clear, it

was reasonably clear,

He

emphasized the factor of stability in relation to the Treasury financ

ing, stating that we were now getting into one of those periods in

which the Committee always seemed to find difficulty in gauging the

market in

terms of the phrases it

uses--psychology,

tone, and color.

The Committee was seeking to foresee the needs and developments for

the next several weeks, but it was not possible to judge precisely

the results of the policy that might be agreed upon.

The Chairman went on to say that he could fully understand the

Powell and Mangels regarding the discount

views expressed by Messrs.

rate, but he also wished to note that any change in discount rate

would create a problem if

ing.

We could not know in

it

came in the midst of the Treasury financ

advance how a change would be construed by

the public and, as indicated by the comments of Messrs. Leedy and

6/26/56

-35

Treiber this morning, our judgments of the public opinion differ.

Chairman Martin said that he agreed with Mr. Irons in his de

sire to get away from using net borrowed reserve figures.

these figures had led the Committee down a path that it

been wiser not to have gotten on to.

Perhaps

would have

However, if we were to use

these figures, the Chairman said that during the period just ahead

he would prefer something around $200 million of net borrowed reserves,

assuming that this would create stability.

This would call for rather

drastic action in view of the projections indicating that, without

System operations,

net borrowed reserves might rise to the $700 million

level within the next two weeks.

He recognized that instead of $200

million, the figure might range up to $300 or $400 million.

Chairman Martin cautioned that the Committee not be misled by

rapid shifts in sentiment such as we have seen in the last few months.

Mr.

Szymczak had called attention to the fact that recent statistics

of business had not borne out the sentiments that existed a few weeks

ago.

Sharp swings in

sentiment such as these must be discounted by

the Committee, no matter which way they go and even though business

people are influenced by the feeling at the moment.

are coming on us,

summer is

Chairman Martin said, but some slipping off during the

entirely normal and is

state of business.

The summer doldrums

On the whole,

financing problem coming up it

not necessarily a reflection of the

his view was that with the Treasury

would be preferable to resolve doubts

on the side of ease rather than to take actions that might be construed

6/26/56

-36

as additional restraint.

He would prefer this regardless of what

commentators might say or misconstrue regarding System policy.

He

was referring to the summer period, he said, and could foresee the

possibility that the System might find it

desirable to move across

the board toward substantially greater restraint in the fall.

were not for the Treasury financing,

it

he would be sympathetic to the

view expressed by Mr. Shepardson that it

slack out of the market at this time.

If

would be desirable to take

But the Treasury refunding

would come at a time when there were other opportunities for use of

funds and it

might not be handled as easily as the Committee would

hope.

Chairman Martin said that his interpretation of this meeting

was that none of those present wished to change the Committee's di

rective.

He would also interpret the comments as desiring "stability"

or an "even keel" from the Committee's daily operations.

None of the

members of the Committee indicated disagreement with Chairman Martin's

statements of policy to be followed, and he then called upon Mr. Rouse

for comments regarding the suggested policy and operations for the

System account during the next three weeks.

Mr. Rouse said that the policy stated by the Chairman would be

difficult to achieve.

Repurchase agreements would be availed of the

next few days to the extent needed and there would be outright purchases

for the System account and,

later on, sales of Government securities.

6/26/56

-37

He felt that the Committee should have in mind that the market has

been very conscious of the Treasury's doing financing in a relatively

easy period followed almost immediately by tightening in the market.

Dealers and participants generally feel they have had a raw deal in

this respect.

Mr.

Rouse thought there would be an advantage in not

permitting the market to get too easy during the next few days,

particularly if

there seemed to be a good chance of its

tightening

up fairly soon, because the Committee probably would be faced with

the need for maintaining an even keel into the period of the Treasury's

cash financing.

Mr. Rouse also said in response to a question from

Chairman Martin that he interpreted the sense of the meeting as calling

for stability with around a quarter of a billion dollars of net borrowed

reserves.

As Chairman Martin had indicated,

as to tone, color, and state of the market in

Mr.

this would require judgments

general.

Bryan said that he agreed with the comments on the importance

of stability in

this situation.

However,

he felt

there had been an

adequate demonstration that the Committee did not get stability for a

Treasury financing on the basis of stability of free reserves or some

thing of that sort.

Stability could be gotten in

basis because financing is

Mr.

the market on a rate

done on a rate basis, not on reserves.

Bryan also referred to the suggestion that some of the

reserves that would be needed be provided by a reduction in reserve

requirements,

and he stated reasons why he believed the System might

do well to take every opportunity that presented itself

to do something

6/26/56

in

-38

the way of bringing requirements down to the statutory minimum.

Chairman Martin stated that there was a good deal to what

Mr. Bryan said but that in his judgment a reduction in reserve re

quirements should not be made in

ing.

connection with the Treasury refund

There was a problem of whether such action would be interpreted

as an overt change of policy, Chairman Martin said, and his judgment

was that the most opportune time to consider a reduction would be in

connection with the Treasury's cash offering.

He did not know whether

the System would wish to change reserve requirements at that time but

it

should study the question and if a change were to be made, it could

state openly and frankly the purpose of the reduction.

Mr. Szymczak said that some of the instruments of credit were

the interpretations placed upon them by the

largely psychological in

A reduction in reserve requirements at a time when a re

public.

strictive monetary policy was being pursued would almost inevitably

confuse the public.

One question was whether this was the time when

the System wished to confuse the public.

Mr.

Treiber said that he agreed basically with the views Chair

man Martin had expressed.

He thought it

reserve requirements at this time.

reserve requirements is

change in

It

would be a mistake to reduce

Generally speaking a change in

recognized by the public as a symbol of a

credit policy, more so than a change in

the discount rate.

would not be desirable to send up a signal at this time that the

public was likely to interpret as it

ments.

would a change in

reserve require

6/26/56

-39-

Chairman Martin said that he hoped the Committee could get

away from the use of net borrowed reserves in its discussions.

How

ever, if net borrowed reserves were suddenly to rise to the projected

$750 million level, such a figure would attract a great deal of atten

tion that a more modest figure would not attract.

It would be unwise

to permit the level to rise to anything like that figure because of

the interpretations that would be put on it, particularly if a strike

in the steel industry should take place.

He then suggested that, un

less there were further comments on the policy to be followed during

the next three weeks the existing directive to the New York Bank be

approved without change.

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 while taking into account any

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

practical administration of the account; provided that the

aggregate amount of securities held in the System account

(including commitments for the purchase or sale of securi

ties 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

6/26/56

-40

Treasury, shall not be increased or decreased by more

than $1 billion;

(2)

To purchase direct from the Treasury for the

account of the Federal Reserve Bank of New York (with

discretion, in cases where it seems desirable, to issue

participations to one or more Federal Reserve Banks)

such amounts of special short-term certificates of in

debtedness 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

(3)

account for gold certificates such amounts of Treasury

securities maturing within one year as may be necessary

from time to time for the accommodation of the Treasury;

provided that the total amount of such securities so sold

shall not exceed in the aggregate $500 million face amount,

and such sales shall be made as nearly as may be practicable

at the prices currently quoted in the open market.

Chairman Martin referred to Mr, Sproul's suggestion, made prior

to his leaving New York, that a copy of the memorandum prepared at the

Federal Reserve Bank of New York under date of September 29, 1955 en

titled "Notes on Debt Management,

the Structure of the Debt, and Credit

Policy" be sent to the Treasury for consideration along with the memo

randum prepared by Mr. Riefler under date of April 10, 1956, on

Experience Since the Accord with Short-Dated Federal Debt.

Martin went on to say that he thought it

Chairman

would be just as well to let

the Treasury have the memorandum, although he would not wish to trans

mit it

as a memorandum bearing the endorsement of all

Open Market Committee since in

there was not agreement.

his view it

members of the

raised questions on which

He suggested, therefore,

that the memorandum

the

be transmitted to the Secretary of the Treasury as one prepared at

6/26/56

-41

Federal Reserve Bank of New York and distributed to members of the

Federal Open Market Committee by Mr.

Sproul, who had suggested that

a copy be furnished to the Treasury in order that it

might have the

benefit of the paper.

Mr.

Treiber stated that he thought this would be a good way to

proceed, that the memorandum represented "thinking out loud", and that

to whatever extent it

might be helpful it

seemed desirable to make it

available to the Treasury without the endorsement of the Open Market

Committee.

It was understood that the pro

cedure suggested by Chairman Martin

would be followed.

Secretary's note: Chairman Martin

transmitted a copy of the memorandum

referred to above to Secretary of the

Treasury Humphrey under date of June

27, 1956.

Chairman Martin noted that the proposal made by the New York

Bank that it be authorized to engage in swaps in Treasury bills,

originally suggested in Mr.

Sproul's memorandum of May 3,

been placed on the agenda for discussion at this meeting.

1956, had

He said

that Mr. Robertson who was unable to attend this meeting held rather

firm views on this matter and that in view of the lack of pressure

for a decision it

meeting when Mr.

would seem desirable to carry it

Robertson might be present.

There was agreement with this

suggestion.

over until a

6/26/56

-42.

Chairman Martin noted that the next meeting of the Committee

would be held on Tuesday, July 17, 1956.

In response to a question, Mr. Treiber commented briefly on

the status of the proposed section 13b loan to Studebaker-Packard

Corporation, referred to at the meeting held on June

Thereupon the meeting adjourned.

Secretary

5,

1956.