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,
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
September 11, 1956, at 10:00 a.m.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Erickson
Johns
Mr. Mills
Mr.
Mr.
Mr.
Mr.
Mr.
Powell
Robertson
Shepardson
Szymczak
Fulton, Alternate
Messrs. Bryan, Leedy, Treiber, and Williams,
Alternate Members, Federal Open Market
Committee
Messrs. Leach, Irons, and Mangels, Presidents of
the Federal Reserve Banks of Richmond, Dallas,
and San Francisco, respectively
Mr. Riefler, Secretary
Mr. Vest, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Abbott, Parsons, Willis, and Young,
Associate Economists
Mr. Rouse, Manager, System Open Market Account
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. Mitchell, Vice President, Federal Reserve
Bank of Chicago
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
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9/11/56
meeting of the Federal Open Market Com
mittee held on August 21, 1956, were ap
proved.
Before this meeting there had been distributed to the members
of the Committee a report covering open market operations during the
period August 21, 1956, through September 5, 1956, and at this meeting
a supplementary report covering commitments executed September 6
through September 10, 1956, was distributed.
Copies of both reports
have been placed in the files of the Committee.
Mr. Rouse called attention to projections prepared by the New
York Bank and by the Board's staff which indicated that a fairly easy
situation would develop during the next ten days, largely because of
a mid-month rise in float, and which might require some selling of
bills by the System account.
He thought that the relative ease that
might develop need not concern the Committee especially, believing
that the situation in the capital markets, including uncertainties
in the minds of underwriters and the general atmosphere this would
create, would offset any statistical ease that might develop during
this period.
In response to a question from Mr. Shepardson, Mr. Rouse stated
that he still
would contemplate that an occasion for selling some securi
ties from the System account would arise, perhaps beginning tomorrow, in
addition to permitting maturing bills to run off during the current week
as well as next week.
9/11/56
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Upon motion duly made and seconded,
and by unanimous vote, the open market
transactions during the period August 21
through September 10, 1956, were approved,
ratified, and confirmed.
Mr. Young made a statement on the economic situation substantially
as follows:
The composite of most recent economic data confirms a
rising trend for aggregate demand and supply, sustained vigor
in the demands for credit and capital, and a confident busi
ness and financial psychology.
The wholesale price drift of
fabricated industrial products appears still
to have an up
slant, but for materials and farm products a levelling-off
tendency has been evident.
Upward drift of consumer prices
has been further extended. Abroad, although rates of output
expansion have been slackening because of resource limitations,
the situation remains generally strong, with price levels firm
or rising. International markets continue alert to possible
worsening of the Suez crisis.
Recent developments meriting highlight comment include the
following
The Commerce-SEC survey of business plant and equip
(1)
ment expenditures for the fourth quarter shows a further rise
of about the same average quarterly amount as during the past
year and a half. These expectations, if realized, will result
in an annual rate of expenditure for the fourth quarter of
about $38 billion and in an annual expenditure for the year as
a whole of $35.5 billion, one-fourth higher than for the year
The indicated further rise in expenditures will be gen
1955.
eral for all industry groups except mining which expects to
about maintain a record volume of investment.
The Board's index of industrial production for August
(2)
is now estimated to have about recovered its May-June level and
Steel output is pressing
in September is expected to exceed it.
against rated capacity; minerals output is close to earlier ad
vanced levels; producers' equipment activity (except farm
machinery) is rising; automobile parts manufacturing is expand
ing; and nondurable goods output, which has been stable at
reduced levels for some months, is reported to be under stimulus
of an increased flow of orders.
(3) Retail markets except for new automobiles have been
showing considerable strength. Sales of household durable goods
reached a new high in July and were at least close to
at retail
9/11/56
the June rate in August.
New auto sales in August were down 6
per cent further from July to 27 per cent under a year ago, but
used car sales continued at the July rate (about 15 per cent
under last year) and used car prices after allowance for depre
ciation rose slightly further.
Department store sales over-all
in August held at a seasonally adjusted rate of 127, down 1
point from the record July level but well above August a year
ago.
Consumer instalment credit has apparently continued to rise
in the third quarter at about the same monthly rate, seasonally
adjusted, as in the second quarter,
(4)
Construction activity in August maintained but did not
exceed the record annual rate of July. Industrial construction
held steady for the first
time this year. Commercial construc
tion rose, but was under its spring peak. Residential construc
tion continued stable at about 12 per cent under the record level
of last year.
(5)
Employment for August showed a record high and unem
ployment showed more than the usual seasonal decline.
The level
of unemployment was about at the year-ago level--2.2 million.
Average hours of work remained close to the level of the past
three months, but average hourly earnings and weekly earnings
were up.
(6)
Price increases of finished industrial items and some
manufactured materials have been numerous in recent weeks and
further markups, notably an increase of perhaps 7 per cent on
new model cars and trucks, are soon to be announced.
Outside
of metal lines, further price increases for cement and a few
industrial chemicals are worthy of note. Industrial material
prices, after rising in early August, have been offsetting in
Farm prices, reflecting sharp declines in vegetable
recent weeks.
and fruit prices, have been off from July, but reflecting strength
in livestock, grains, and dairy products have averaged above a
year earlier.
Farm price developments, with larger marketings and
(7)
point to a higher net realized income
soil bank payments, still
for farm operators than last year.
The consumer price index rise of .7 per cent for July
(8)
so surprised the Bureau of Labor Statistics that a complete
double check of data was felt necessary before release of the
The rise particularly reflected higher food prices
figures.
but other prices also edged up. Since mid-July, prices of many
fabricated consumer items and services have advanced further so
that additional increases for the index may be expected to mid
September.
Abroad, demand continues to press against resource
(9)
limitations, and both central bank and fiscal actions to cope
9/11/56
-5
with financial pressures continue to be reported. In such
key countries as Germany and Great Britain the evidence of
recent data suggests that financial actions to contain in
flationary pressures have been progressively effective in
bringing about a better balanced demand-supply situation
domestically and a better balanced payments position inter
nationally.
Mr. Thomas said that financial markets have now crossed the
threshold of fall seasonal demands which will be added to already exist
ing large cyclical and growth demands for credit.
The interest rate
structure as well as the level of interest rates is close to that
characteristic of a high level economy, the first time such a relation
ship has existed except for temporary emergencies in twenty-five years
or more.
The 3 per cent Federal Reserve discount rate is
festation of this situation than a factor in bringing it
fact, it
is
more a mani
about.
In
questionable whether, with the economy threatening to burst
at the seams,
so low a bank rate can be justified.
that restraints are too severe, Mr. Thomas said,
There is
no evidence
noting that credit de
mands are being met although there are indications that the restraints
may be keeping down expansion.
The current policy questions are how
much restraint should be maintained during the fall period of seasonal
demands and how should this restraint be exerted.
Mr.
Thomas noted that prospective Treasury borrowing needs are
now estimated to be a little
larger than was expected earlier; it
now
appearing that the Treasury will need an additional $3 billion of new
funds in
October and perhaps a total of $6.2 billion for this half
9/11/56
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year, compared with $9 billion in
be in
the 1955 period.
The Treasury will
position to retire perhaps $8 billion of marketable debt in the
period from January to June 1957,
and the careful planning of current
borrowing as to types and maturities of issues will have a bearing upon
the program of debt retirement that will be possible.
Capital markets continue under pressure of past, current, and
prospective offerings, Mr.
Thomas said, and there is
for the remainder of the current month.
a heavy schedule
Corporate issues for the
third quarter of this year will total about a third more than in
the
third quarters of 1954 and 1955, although State and local issues are
expected to be less than in
previous years.
Interest rates have not
risen much further since discount rates were increased in late August
although long-term bond yields have continued a tendency to rise.
Long
term Treasurys are now yielding about 3-1/4 per cent and high grade
corporate bond yields are above 3-1/2 per cent, with new offerings
bringing close to 4 per cent.
Treasury bill
yields recently have
fluctuated between 2.65 and 2.80 per cent, with this week's auction at
2.77 per cent.
Total loans and investments at city banks increased during the
past six weeks following a decrease in
the end of June as a whole,
July.
Taking the ten weeks since
total loans and investments showed little
change, whereas this total declined during the corresponding period of
1955.
Loan expansion has been much less than last year, when banks sold
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9/11/56
large amounts of Government securities to make loans.
They have been
unable or unwilling to effect such sales in any quantity this year.
This change probably reflects the impact of restraint measures.
money supply appears to have declined in
August this year, Mr. Thomas
said, contrary to the usual seasonal lack of change,
but the decline
followed seasonally adjusted increases in June and July.
past year, growth in
The
Over the
the money supply has been barely 1 per cent, but
velocity has been at an increased level and continued high through
July and apparently also during August.
Time deposits increased by
5 per cent and U. S. Government deposits are temporarily higher.
Mr. Thomas noted that the System has made substantial purchases
of United States securities during the past three weeks in order to
supply reserves to meet seasonal needs for currency and credit expan
sion.
Net borrowed reserves have ranged around $350 million but pres
sures on banks have not been especially severe.
Mr. Thomas then presented chart slides showing weekly varia
tions in reserves and the principal factors that have affected them
over the past three years, with projections covering the remaining
weeks of this year.
Comparison was also shown with the monthly pro
jections that had been made by the staff in
March of 1956, and the
variations of the actual from the projected figures indicated both
reasons for and consequences of policies followed in
the period.
projections for the remainder of this year indicated that seasonal
The
-8.
9/11/56
needs along with some growth in deposits and currency would call for
around three-fourths of a billion dollars of reserves to meet addi
tional reserve requirements and for about the same amount to meet
added currency demands, including a growth factor of around $300
million.
To maintain net borrowed reserves at around $350 million
and to provide for the seasonal and growth demands assumed, Mr. Thomas
suggested that System purchases of securities of around $1.1 billion
would be needed after allowing for a considerable expansion in float
during November and December.
He felt that it was neither necessary
nor desirable to offset completely the mid-month or end-of-month in
creases in float that would be expected.
Policy questions presented, Mr. Thomas suggested, were:
Whether these demands for bank reserves should be met entirely through
open market operations?
Whether in view of the strength of demand
pressures banks should be required to borrow more to cover their re
serve needs?
Whether the reduced liquidity of banks might make them
more sensitive to a small volume of borrowing?
ing is
in
If
complacent borrow
evident, Mr. Thomas expressed the view that a further increase
the discount rate would be appropriate.
Chairman Martin then called upon Mr. Hayes,
who made a state
ment substantially as follows:
Nothing has occurred in the last three weeks to
1.
alter fundamentally our appraisal of the business and
appear to
Inflationary tendencies still
credit outlook.
be dominant.
9/11/56
2.
Indications are that demands from business, con
sumers, and governmental bodies will continue to increase
through the remainder of 1956. With the labor force already
at a record level, and with many industries operating at
near-capacity rates, it is not surprising that we have seen
so many price increases, not only for basic raw materials
and for capital goods in general, but also for many con
sumers' items.
3.
Our most recent estimates of Treasury financing indi
cate a smaller cash surplus than was expected earlier. In
addition the redemption of Series F and G Savings Bonds and
Investment Series A Bonds has been accelerating rapidly as the
yields on marketable issues have advanced.
It now appears that
the Treasury will have to borrow a minimum of $3 billion addi
tional in 1956.
If there is high attrition on the December
certificate refunding and if the redemption of nonmarketable
issues increases further, the Treasury may have to borrow more.
We expect that they will have to borrow early in October, and
possibly again in December.
4. While it is impossible to gauge accurately the fall
demand for bank credit, the latest figures on bank loans sug
gest gains at least equal to normal seasonal expectations, and
in addition there is some tendency for borrowers to shift from
the capital markets to the commercial banks. At the same time
the backlog of new corporate and municipal bond offerings re
mains very large. Parenthetically, we have been told by a
number of leading New York bankers that they are fully aware of
the need, under present conditions, to resist the trend toward
use of bank credit for capital purposes. However, they have
also stressed the difficulty of turning down good customers,
especially in view of competitive considerations. Some of the
bankers would apparently like more moral support from the System
to meet this problem, but we feel that such support has been
given adequately by our actions themselves.
5. Evidence of the general effectiveness of the Federal
Reserve System's policy of credit restraint may be found in the
relative stability of the total money supply, and in the con
tinuing upward trend of medium- and long-term interest rates.
6. The market's reaction to the recent increase in Fed
There was
eral Reserve discount rates was about as expected.
some "settling" effect, which has not, however, prevented a
continued expectation of lower bond prices and higher interest
rates.
7. While another increase in the discount rate would not
seem to be called for at this time, the inflationary outlook
9/11/56
-10-
warrants a policy of continued credit restraint, with a
gradual probing approach toward increased restraint. This
could take the form of permitting seasonal needs to emerge
first
at the discount window and then to be replaced only
partially through open market operations. Recognizing that
the current needs for reserves are in large part seasonal,
the banks might be less reluctant to borrow than at other
periods of the year. In this way additional restraint
could be developed through the natural activities of the
banking system itself.
8. The next two weeks present some difficulties in
getting started with such a program, chiefly because very
large gains in float will tend to cut net borrowed reserves
to about zero, in the absence of open market operations, as
compared with a recent level of around $350 million of net
borrowed reserves.
Sizeable sales of Treasury bills for
System account will probably be necessary in the next week
or so.
The extent and timing of these sales will of course
have to depend to a considerable extent on the "feel" of
the market.
Recognition of the temporary nature of the
bulge in float may make it possible to maintain the present
degree of restraint even with a lower figure of net borrowed
reserves, but in any case additional member bank borrowing
After this two-week
is not likely under these conditions.
period of above-average float has been dealt with, there
may be opportunities for application of gradually increasing
pressure in the form of larger member bank borrowings, sub
ject of course to the need for considering the Treasury cash
financing which is expected in October.
Mr. Johns said that much of what he had in mind to say had al
ready been suggested this morning.
He recalled that three weeks ago
he had expressed the opinion that it would be undesirable to attempt
under existing circumstances to apply more pressure by further restric
tions on credit availability and that he hoped added pressure could be
brought about through increasing the cost of credit.
The net result
of his study of the situation during the past three weeks had led him
to the conclusion that in
the period between now and the end of this
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9/11/56
year, the figure of net borrowed reserves would be less reliable as
an indicator of the degree of pressure under which the commercial
banking system should be placed.
The liquidity of the banking system
has been impaired and bankers are concerned about that factor,
Johns said.
Mr.
In addition, the proportion of loans to deposits and of
loans to assets has reached such a stage that bankers are actively
concerned about that situation.
As a result, there is a very sub
stantial amount of restraint at present and a considerable reluctance
on the part of banks to make loans and to do the things that are neces
sary unless banks can count on additions to their reserves.
Mr. Johns
noted that his conclusion that the net borrowed reserve figure would
not serve as a satisfactory indicator of restraint for the banking
system did not solve the Committee's problem. However, discussions
with members of his staff had brought him to the conclusion that there
is a seasonal loan demand that should be accommodated during the rest
of this year and which the System should not fear to accommodate. It
was difficult to sort out credit that represented desirable expansion
from that which should be inhibited, particularly the spillover of
bank credit into the capital markets.
Nevertheless, he felt that the
Committee should observe closely the behavior of loan volume and that
pressure should be gauged partly by the loan volume that developed.
The Committee should be careful that it not inadvertently apply more
pressure than wanted.
9/11/56
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Mr.
Johns also noted earlier comments regarding fluctuations
in float and, while he did not wish to minimize the importance of
studying that question, he suggested that officers of commercial banks
either consciously or unconsciously make allowance for float and,
the most part, rule out brief monthly increases in its
for
volume as a
source of reserves for credit extensions, recognizing them as temporary
additions only.
The Committee should not make frantic attempts to off
set these fluctuations in float, Mr.
Johns said, lest it
attempt to
adjust for something that the commercial banking system adjusts for in
stride.
He therefore would concur with the suggestion that the Com
mittee not be too concerned about the bulge in float that would come
in the next two weeks,
and he would not be too eager to offset such a
bulge through open market operations.
Mr. Bryan made a statement substantially as follows:
The major economic shift in the Sixth District has been
a quickening pace of consumer spending, reflecting record
breaking payrolls.
This development has been aided by the
settlement of scattered labor disputes, which in August prob
ably sent nonfarm employment to a new high. Earlier gains
over a year ago in agriculture, however, have been reduced
by lack of moisture in many areas. There are also increasing
reports
desired
On
August,
that the restraining monetary policy is having the
effect of slowing down planned investment expenditures.
the financial side, total loans increased slightly in
but the rise was probably less than seasonal. Dis
security and real estate loans were the only types to
trict
gain significantly, and we have the impression that a con
siderable amount of real estate speculation is continuingdespite the fact that mortgage credit is scarce and builders
generally report difficulty in arranging permanent financing
and construction loans as well.
9/11/56
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Borrowing from the Federal Reserve Bank has declined
and excess reserves have risen. Unborrowed reserves in
August averaged a small positive figure.
With regard to the problem of policy, Atlanta is im
pressed by the following considerations:
1. Recent news continues to confirm the mid-summer
price bulge; and the weight of logical expectation is for
a further upward slant in final-user prices during the next
few months.
2.
The appearance of other background factors that may
be of importance:
a)
An apparent dampening, as it seems to us, of the
wildly ebullient mood so universally in evidence some
weeks ago;
b) Some evidence that capital expansion plans are
being cancelled in a few cases, fringe items eliminated
in other cases, and fulfillment stretched out in still
other cases;
c) The declines in new orders for heavy equipment
and an apparent hesitation in construction and residen
tial building.
3. An apparently weak, as it appears thus far, fall ex
pansion in loans. This appears to us related to the fact that
total reserves of the banking system in August were, practically
speaking, identical with the reserves a year ago; and, hence, an
expansion of loans can only be accomplished by means that are
becoming increasingly distasteful to the banking system. At the
same time, the privately held money supply, as distinguished from
bank reserves, is apparently now no higher than it was a year ago.
In trying to evaluate the foregoing and other considerations,
some of them largely intuitive, I come to the following conclusions:
1.
There is no adequate, present evidence justifying a
change of monetary policy. For the immediate present, mone
tary policy should remain as is, neither easing or tightening
its money-rate effects, and being especially careful to guard
against an inadvertent easing or tightening.
Monetary policy has by now placed the economy in a
2.
I believe
situation of genuine rather than illusory restraint.
that present policy, by its dampening effect on the economic
boom, is serving the public interest.
I also believe that failure to meet a developing
3.
seasonal need for reserves could easily place the economy under
a degree of restraint that is undesirable and that we do not
presently intend. There is at the moment, in my view, no
reason to supply reserves in such quantity as would weaken the
9/11/56
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general structure of money rates and there likewise is no
present reason to contemplate so niggardly a supply of reserves
that money rates, by an increase in yields, would signal an
increased tightening.
In the light of these ideas, and the substantial estimated
changes in float, first increasing and then decreasing in the
weeks immediately ahead, and in the light of the imponderable
reactions of the money market to a given level of negative free
reserves, it would seem to me wise not to aim at a particular
level of negative free reserves nor to base the account's sales
or purchases on our statistically adept, but so often mistaken,
estimates of float behavior.
Instead, it would seem to me wise to base account action,
not on preconceptions--if I may be forgiven for so calling themof float or negative free reserves, but on the actual behavior of
the market. The consensus of the market, by the behavior of
price changes over the whole range of the yield curves, is likely
to be a more revealing guide to a developing ease or tightness
than are our seasonal derivations of float or our aimed-at level
of free reserves.
It seems to me that we may want in the next
weeks or months to shift policy in the light of developing eco
nomic conditions, either easing or tightening as a developing
complex of economic and financial factors may indicate; but we
will want to avoid inadvertence in our action; and so it would
seem to me best to keep in mind the fact that money availability
and money demand take effect in money rates, which are the equat
ing price that clears the supply and demand sides of the market.
Thus, if float makes it necessary to sell bills from the
portfolio in the next few weeks, I would wait until the consensus
of yield changes in the yield curve tells us that money rates are
easing and that, if we do not want ease, which I do not at this
time, we should be taking countervailing action. Likewise, if
purchases are called for later on, it would seem to me prudent
to wait until the consensus of the market, by the behavior of
price changes throughout the yield curve, tells us that money
rates are tightening and that, if we do not want tightening,
we should take countervailing action. By pursuing policy in
that way it would seem to me possible to avoid in a measure
the risk that we will create an ease or a tightness that we do
not intend, that we have sometimes effected in the past, and
that I think could easily occur in the next weeks and months.
In closing, I would like to bring up for further considera
tion a suggestion that I have previously advanced, and that is
not, I know, before this body. That is, I should like to raise
again the question of whether or not, beginning sometime in the
next few weeks, it might be wise to schedule a one-percent
reduction in reserve requirements on time deposits. The follow
ing thoughts occur to me in
that connection:
9/11/56
1. The seasonal requirements for reserves are going to
be massive.
The reserves released by the suggested reduction
on time deposits, about $400,000,000, would leave ample room
for Open Account maneuver, so that we would in no sense lose
command of the reserve situation.
2.
The reductions could be announced but scheduled a
quarter of a per cent per week over a four-week period, or
even at longer intervals, thus putting no large volume of
reserves in the banking system at one time.
3.
Over forty-eight per cent (48.4 per cent) of the re
serves thus released would be placed in country banks, which
account for only 27.5 per cent of the seasonal loan expansion.
a)
There would thus be no sudden easing in the
market;
b) The reserves would not go in major part into the
banks where the capital loans of large corporate borrowers
are coming to rest;
c) The reserves would eventually become available to
the banking system; but the process would require a good
deal of scrambling by the commercial banking system to
get the reserves to the places most needed. This factor,
coupled with the modest amount of the reduction, and the
scheduling of the reduction over a period of time would
give double assurance that no sudden ease would appear,
4.
The action would be taken as an approbation of those
banks that are struggling to maintain their place in the savings
field. I believe, for a variety of reasons not here pertinent,
that that struggle on the part of many banks is in the long-run
best interest of the banking system and in the national interest.
The account, what with its present portfolio and addi
5.
tional necessary purchases of bills through the fall season,
would seem to possess sufficient bills to restrain an excess
easing tendency after the year-end if monetary restraint still
seems called for by economic conditions at that time.
Mr.
trict
trict.
Williams said that the evidence available in the Third Dis
was at variance with that presented by Mr.
He noted that a few days ago U. S.
Bryan for the Sixth Dis
Steel Corporation had made
known plans for an additional $95 million expansion in
during the next eighteen months,
its
Fairless plant
and a smaller steel company also had
announced an additional expansion of $16 million in its plant.
9/11/56
-16
Mr. Williams said that the Philadelphia Reserve Bank had
made another of its quick surveys of firms that sell industrial
equipment.
His report of the information thus received indicated
that, except in the case of a textile firm, these companies were
going ahead with capital expenditure plans, that backlogs were still
large, that one important suppliers orders now on the books are suf
ficient to make the company' s 1956 sales budget, and that a pickup in
activity during the fourth quarter of this year is anticipated.
How
ever, the thought was expressed by one individual that the peak of
new orders may have been passed.
Mr. Williams stated that in agri
culture this year's results were turning out better than anticipated
somewhat earlier; production would be very good and income might rise
5 per cent above that of last year.
Factory construction contracts
were up substantially during the first seven months of this year as
compared with last.
Taking the situation as a whole, Mr. Williams
said that the economy of the Third Federal Reserve District was at
a high level, that demand for bank credit was continuing strong, and
that borrowings from the Federal Reserve Bank continued high.
He was
concerned about their participation in the seasonal credit demands
that could be anticipated from other districts.
One of the large
Philadelphia banks which over the years has participated in moving
the cotton crop, recently notified its Memphis correspondent that it
would not have funds available to meet those needs this year.
Some
9/11/56
-17
of the country banks that had been steady borrowers but which had
gotten out of debt are now back at the discount window on a seasonal
basis.
Seasonal demands plus demands for other than seasonal require
ments indicate a need for the Reserve Bank to increase pressure, Mr.
Williams said, and he had in mind calling in
some of the country banks
to discuss the situation with them, the outlook having reached a point
where discounting must be tailored to the individual bank's needs.
The Reserve Bank is
watching the situation carefully to avoid affect
ing adversely the seasonal demands,
he said, since failure to create
such credit might result in a public press that could make more diffi
cult the handling of the total situation.
Mr.
Fulton said that if
there were any pessimists in
Cleveland District they were very quiet at the present time.
whole tone of business is
quarter.
the
The
one of expectation for a very high fourth
Steel mills in the area are operating at a very high capacity
and are reluctant to take additional orders.
He also noted large
capital expenditure plans recently announced in the Cleveland District.
Mr.
Fulton said there was a large and continuing demand for loans in
the Cleveland District which bankers had described as insatiable.
Many of these loans classed as commercial loans are for fixed asset
purposes for long terms, he said, noting that some of the borrowers
had been continually in
In other words,
debt to the banks for as much as five years.
the so-called commercial loans in some cases did
9/11/56
-18.
not have liquidity because they were in fact for fixed asset purposes,
and he felt this a dangerous aspect of the situation.
The question of
what was a reasonable way in which to handle the kind of demands that
were coming up, along with the seasonal expansion which necessarily must
be met, was thus presented, Mr. Fulton said.
His view was that between
now and the next meeting reserves should be supplied rather reluctantly.
Seasonal factors should be permitted to tighten the situation and banks
should be permitted to borrow to obtain needed reserves--he could see
no evidence that banks were reluctant to come into the Reserve Bank to
borrow for that purpose.
If the System supplied the reserves to meet
these various demands without restraint, it would be adding to the
forces making for price increases.
The major source of any added re
serves in this situation should be the discount window rather than
open market operations.
Mr. Shepardson said that it seemed to him that the general
picture was much the same as it has been for some time and that there
was still need for the same level of restraint that has existed
recently.
In fact, he had wondered whether the restraint had been as
great as it should have been.
Some of the comments this morning
indicated an encouraging situation in his view by suggesting that
perhaps the restraint was beginning to take hold; it would be un
fortunate if the System now let the complaints as to restraint lead
it to any easing in the situation.
Upward price pressures were still
9/11/56
-19
strong and probably would increase, and the System should try to curb
those pressures and to keep bank credit from going into the capital
markets.
Mr. Shepardson agreed that normal seasonal demands should be
met, but there should be sufficient restraint in doing so to try to
avoid having the credit dissipated into other areas.
He felt there
was merit to the suggestion that reserves be supplied at least in
large part through the discount window rather than through the System
account.
Whatever could be done to bring further pressure and to
discourage continuous borrowing by banks at the discount window should
be done.
Perhaps there should be closer screening of discount window
activities,
and consideration should be given to a differential dis
count rate that would discourage continuous borrowing.
Mr. Robertson said that it
seemed to him that the biggest
factor in the picture today was the increase in inflationary pressures.
The System has not been tight enough, he said, and it is continuing to
make too much credit available.
The economy
is reaching a point where
the mass of people over the country as a whole are inclined to want to
buy things for fear prices are going higher and higher.
At the moment,
the situation has not become too bad, but we are edging further towards
it.
felt,
The System has been too easy in its policy for a long time, he
and he was very glad to hear the cries of bankers with respect to
the degree of tightness that now exists.
He hoped that in
the future,
at least during the period between now and the next meeting, nothing
9/11/56
-20
would be done to ease the situation.
He agreed that the Committee
need not offset the entire amount of float that would arise during
September but it should offset a sufficient part of it to maintain
the degree of tightness that exists at the moment.
As soon as this
period of ease has passed the Committee should tighten up the situa
tion.
Tightening should develop through permitting increased borrow
ings at the Federal Reserve Banks, with the pressures that that would
bring.
Perhaps we were approaching the point where a shock treatment
was needed.
used in
Mr. Robertson said he did not care what criteria were
judging the situation, so long as the System did not make so
much money available as to feed the inflation that is
taking place.
He did not feel that we were near the point where the Committee should
consider a turn about, believing that the great fear now is
little
that too
action will be taken and that the public will become frightened
with respect to inflation and will increase its buying activity.
Mr. Mills said that his view of the situation was decidedly
at variance with the views expressed by Mr. Robertson and was in
complete agreement with the analysis submitted by Mr. Johns.
There
is a restrictiveness in the present banking situation that does not
show up through any level of free reserves or through any other
criterion.
That being the case, Mr. Mills said that he had welcomed
what seemed to be a moderation in System action over the past two weeks,
during which the level of negative free reserves fell.
He was still
-21
9/11/56
fearful of an overly severe monetary and credit policy which could
ultimately place a heavy burden on the consumer elements in the
economy through failure to take into account the lag between System
action and economic reaction. Such an overly restrictive credit
policy could result in shrinking the very markets that must be relied
upon to pick up the output of the increased productive capacity that
is coming into operation.
Without that output going through the mar
kets and on into the hands of consumers, we could aggravate a problem
that would be difficult to handle through future policy actions.
There
fore, the attempted correction of any potentially surplus productive
capacity might better be left to itselt rather than risk unduly shrink
ing markets by means of restricting the availability of credit.
Mr. Mills said that he shared the opinion that the Committee
should not allow itself to be greatly concerned about fluctuations in
the volume of float.
The banking fraternity understands those changes
and the Committee should not seek fully to offset fluctuations in either
direction, especially at present when we are on the threshold of a new
Treasury financing program.
The Committee must take some responsibility
for the indifferent success of the last two Treasury financing opera
tions, he said, and if we try too hard to offset float fluctuations we
might handicap the Treasury's financing plans by confusing investors
as to System intentions.
We should follow a policy of moderation,
keeping a watchful eye on the general condition of the money markets.
9/11/56
-22
In that connection, Mr.
Mills felt
that the Committee had a special
obligation, within the limits of a policy of prudent credit restraint,
to foster stability in
Mr.
the U. S. Government securities market.
Leach said that economic conditions in
have been following about the same pattern as in
Production of bituminous coal is
ago.
the Fifth District
the country as a whole.
running about 11 per cent above a year
Shipyards at Newport News and Baltimore have recently received
new contracts for six tankers and three ammunition ships.
Department
store sales for August approximated the new high reached in July.
On
the other hand, the textile industry which is very important in that
district continues to evidence no boom.
Informed people in the industry
state that new orders during the next three weeks will be crucial for
the state of the industry during the remainder of this year.
Mr. Leach referred to the action taken by the Richmond Bank in
increasing the discount rate last month, noting that the directors at
that time had asked that the First Vice President (in Mr. Leach's ab
sence) convey to the Board of Governors the suggestion that the Board
consider including in
its
announcement of approval a statement to the
effect that there was a limit to what this change in the rate could be
expected to accomplish.
Mr. Leach said that the directors were con
cerned over any possible implications that this discount rate change
by itself could or was intended to reverse the probable price pressures
resulting from recent labor cost increases.
Mr. Leach went on to say
-23
9/11/56
that he personally did not think the announcement of the discount rate
increase would have been the best occasion for such a statement although
he agreed that the System might intensify its
the idea that monetary policy by itself
tortion in the economy.
informal efforts to dispel
could correct any and every dis
Mr. Leach emphasized that this did not mean
that either the directors of his Bank or he had a defeatist attitude,
To the contrary, they favored continuing a restrictive credit policy
directed toward dampening expansion.
The System's present policy was
having that effect, Mr. Leach said, and he was convinced that member
banks, particularly the larger ones,
are quite aware of the importance
of screening loans and are actively doing so.
At the same time, he
recognized that some of the reserves being furnished for seasonal needs
inevitably are being channeled into additional capital loans and other
types of undesired loans.
Mr. Leach did not think this could be
avoided because the System could not carry restriction to the point
of demoralizing the Government securities market or of permitting
conditions to develop under which funds for appropriate purposes
could not be secured at some price.
As to policy for the next two weeks,
Mr. Leach favored con
tinuing the same degree of pressure, using "feel" of the market as
a guide in maintaining a consistent and obvious posture of market
restraint.
Under these circumstances he would have no objection to
in and out operations in
the market,
if
necessary, although ordinarily
-24
9/11/56
he did not like to see such operations for the System account.
Mr. Leedy said he saw no signs whatsoever of any abatement
of inflationary pressures.
Capital expenditures during the last
quarter of the year are indicated at an unprecedented level.
large volume of capital issues still
A very
apparently would be offered in
the market, despite the fact that rates have increased and that there
has been ample publicity as to the tight money situation.
Many
companies seem to feel that in order to retain what they consider
their share of competitive markets they must go ahead with plans for
capital outlays.
At the same time, there is virtually full employ
ment and, most disturbing, Mr. Leedy said, the price level is
ing.
increas
Against this background, he felt that the System was called on
to whatever extent it
straint.
could do so to attempt to exercise further re
In the next couple of weeks, projections indicated that
ease would be substantial in
offset it.
the market unless action was taken to
Mr. Leedy said he would subscribe to the view that the
System need not completely offset this ease, but if
the net borrowed reserve figure is
his feeling that
being watched closely is
correct,
he felt the System should attempt to continue to indicate clearly a
policy of restraint.
Mr.
Leedy said he liked Mr. Hayes'
suggestion
that there be probing with respect to having some of the seasonal
requirements met by an increase in borrowings through the discount
window.
His conclusion was that the System should be applying some
additional pressure to the extent that could be done without too much
-25
9/11/56
risk of doing unintended damage, while at the same time responding
to seasonal needs.
Chairman Martin noted that Mr. Mitchell had attended this
meeting on behalf of the Chicago Bank, and called upon him for a
statement at this point.
Mr.
Mitchell said that economic conditions in
District were good.
still
the Seventh
He could not say very good because the district
has two problems, namely, the automobile situation in Michigan
and the general farm situation.
The farm outlook has improved con
siderably during the current year, and in Eastern Michigan automobile
manufacturers are now filled with great expectations believing that
there will be a 10 per cent increase in sales next year rather than
a loss of better than 25 per cent as had occurred during 1956.
The
25 per cent decline during the current year has had important secondary
effects in
Eastern Michigan, Mr.
Mitchell noted, having affected total
retail sales to the extent that a decline of around 12 per cent was
indicated during the first
five months of this year and probably a
greater decline had occurred during June and July.
of the Seventh District, if
there are any, are in
Booming sections
the Milwaukee and
Peoria areas, he noted, which are centers of capital goods production.
Mr. Mitchell mentioned particularly steel and earth moving machinery
manufacturers,
noting that one large farm implement company had merged
with a manufacturer of earth moving equipment as a means of improving
its
position in
the future.
-26
9/11/56
Turning to agriculture, Mr.
in
Mitchell said that the improvement
farm prices, including cattle prices, had encouraged farmers.
seasonal decline in hog prices is
in
the offing but farmers do not ex
pect anything like the 40 per cent decline in
last year.
A
prices that occurred
Mr. Mitchell also commented upon agricultural loan figures
available for four types of farming areas in
expressing the opinion that a decline in
the Seventh District,
loan renewal rates did not
necessarily indicate that farmers were being denied credit that they
needed.
Bank loans to seasonal borrowers (retail
commodity dealers,
textile, food, liquor, and tobacco firms) were not
being extended by Seventh District banks in
as last, Mr.
and wholesale trade,
as great volume this year
Mitchell said, and the evidence as to whether seasonal
borrowers are demanding less accommodation or being cut back by lenders
is
still
not clear.
Mr. Powell commented on agricultural conditions in
the Ninth
District, stating that while this had not been a bumper crop year
generally and while the wheat crop was quite small, agricultural in
come would prove to be fairly satisfactory.
is
very strong and retail
national averages.
he was in
trade is
Unemployment is
Industrial employment
running at a higher rate than the
very low.
Mr. Powell said that
agreement with the views expressed by Mr.
System might do itself
Mills that the
and the United States economy a real disservice
-27
9/11/56
if it tightened conditions too much in the face of seasonal demands
for credit.
He was more concerned about the need for meeting seasonal
factors than he was about excesses in the use of bank credit in attempt
ing to provide capital goods.
Mr. Powell said that he would favor the
System supplying part of the reserves that would be needed to meet
these seasonal demands through a reduction in reserve requirements
against time deposits, such as Mr. Bryan had mentioned.
This would
be a way of supplying reserves to most of the banks of the country
without their going through the discount window or through the open
market account,
neither of which would supply reserves to all
except indirectly.
banks
The timing of such a reduction was important,
however, and Mr. Powell recognized that this was not a decision within
the scope of responsibilities of the Open Market Committee.
Mr. Powell stated that the price increases taking place were
partly in
the agricultural field, which he felt to be good, and partly
due to factors over which the System had no control and which are not
monetary in
in
their origin.
He felt that the System had had its
effect
ameliorating these price increases last spring when a firm monetary
policy tended to soften wage demands.
been granted, the economy is
Now that the wage demands have
inevitably in
for price increases and the
only way that they can be offset would be to create a condition of
unemployment which, in
undertake.
his opinion, the System was not prepared to
For these reasons, Mr. Powell said that while he was
9/11/56
-28
concerned about the price increases he felt it was necessary to
accept them, and to recognize that there will be more and that
there is
nothing that the System can expect to do to offset them.
Under these circumstances,
the System should do what it
could to
permit the seasonal factors to have their normal play and it
should
not be too ready to put additional pressure on the money market at
this time.
The Committee might wish to change its
policy to one of
greater restraint when the seasonal rise in need for reserve funds
has passed.
Mr. Mangels said that the Pacific Northwest was still
by softness in
the lumber situation.
Demand is
still
down,
bothered
and prices
have consistently declined for several months due in no small measure
to a reduction in
residential housing construction.
evidence yet of improvement in that demand.
There is
On the other hand, the
general economy of the Twelfth District continues strong.
is
no
Retail trade
progressing quite satisfactorily and over-all employment is
at high
levels with some areas reporting an acute employment situation.
over-all anticipation is
for a booming fourth quarter this year.
The
De
mand for bank credit continues extremely heavy and reports are that
seasonal demands for the rest of this year will be heavy.
Neverthe
less, member bank borrowings from the Reserve Bank continue at a
reduced level, he said, and one of the large member banks recently
informed him that it
would hope to get through the remainder of this
year with only intermittent use of the discount window.
9/11/56
-29
Mr. Mangels said that he was glad that Messrs. Powell and
Mills had commented as they had since he, too, felt that the infla
tionary situation with increasing costs was pretty well frozen into
the economy until there could be an increase in productive capacity.
The increase in
credit needs that goes with a normal seasonal demand
for goods faces us, and everything indicates that trade during the
rest of this year, including the holiday business, will be extremely
heavy.
This will require more credit even though it
sent an expansion in business other than seasonal.
does not repre
An additional
credit demand on top of all other so-called legitimate purposes also
can be expected when the 1957 automobile models come on the market.
Over all, Mr. Mangels felt that the System would be well advised to
modify the degree of restraint that it
several weeks,
in
has exercised during the past
and he would be inclined to be a little
more liberal
furnishing reserves to member banks in the period immediately
ahead because of the several factors he had mentioned.
Mr.
Irons said he had nothing to add to the comments of Messrs.
Young and Thomas on the national economic picture, his appraisal being
about the same as theirs.
In the Dallas District, tendencies are
toward further strength in
the petroleum, construction, and other in
dustries for which data are available.
labor situation is
tight.
Unemployment is
Retail trade is
low and the
very favorable.
Housing
9/11/56
-30
starts are holding about steady at the level that has existed for
the past few months.
slow side lately.
drought in
While some crop production is
certain areas, there is
conditions in
come.
Automobile sales have been slightly on the
off because of the
a tendency for the more favorable
irrigated sections to help average out total farm in
Bankers continue to report strong loan demands,
Mr.
Irons said,
with some indication that some out-of-district firms would now like to
obtain loans from Texas banks that would be in
credit.
Unfortunately,
the nature of capital
some of these demands are coming from con
cerns that the Dallas District banks have been trying for years to
get as customers.
The banks express the hope that the System will
make available the reserves to meet seasonal and essential and legiti
mate requirements, Mr. Irons said, and while a reasonably satisfactory
definition of seasonal needs might be arrived at, the "essential and
legitimate" requirements are not so readily recognized.
be said that the discount window is
While it
could
always open for appropriate and
discontinuous use, this did not make a satisfactory answer to banks
wishing assurance that they could obtain funds they might need.
are heavily loaned and Mr.
Banks
Irons said that there was a considerable
amount of term credit included in the so-called commercial loan figures
and, as indicated earlier in
the meeting,
banks are in an illiquid
position because of such loans.
Mr.
Irons said he agreed with the policy of restraint, and that,
9/11/56
-31
although the discount window should be open for appropriate and dis
continuous use, the discount policy should be administered firmly
toward the end of helping to meet seasonal requirements, but avoiding
inappropriate or continuous use of the privilege.
In terms of policy,
he felt that the System should continue the degree of restraint that
it has been maintaining.
If anything, he would be inclined, at least
during the next few weeks, to be persistently and gradually moving
toward more restraint with respect to bank reserves, recognizing that
the System could not be wholly accurate in supplying reserves that
might be needed in the market.
His inclination, however, would be
to resolve doubts on the side of reluctantly supplying needed reserves
or of being almost niggardly.
There should be judicious use of the
discount window on a case-by-case basis.
He would place the System
account management in the position of following closely all factors
that might be indicative of the needs of the market, without use of
any figure of net borrowed reserves or any other specific figure as
a guide.
Mr. Erickson said that conditions in the Boston District re
main very strong in almost all lines.
In July, nonagricultural employ
ment was the highest July on record, and this covered all areas except
textiles and leather; leather in July is between the spring and fall
runs.
Construction is still very strong with a 13 per cent increase
in August over August 1955, and a 7 per cent increase in residential
9/11/56
-32
construction in August over last
recent increase in
to 4 per cent,
year.
Mr.
Erickson commented on the
the prime rate of the First National Bank of Boston
stating that that bank had hoped that some of the demand
for credit would be shifted from it
to other areas at the time the in
crease in the rate was announced.
Mr. Erickson said he would not make a change in reserve require
ments of member banks at this time, and that he agreed with Mr. Irons
that the same degree of restraint that has existed recently should be
maintained; if anything, there should be an increase in the next few
weeks, although seasonal requirements should be supplied.
Mr. Erickson
suggested that financial writers and others might misinterpret actions
of the System if it permitted net borrowed reserves to get down to the
zero figure through failing to offset the mid-month rise in float, and
his inclination would be to do enough in this period to keep the net
borrowed reserve figure somewhere around the $300 million level.
He
would have no objection to going in and out of the market when that
seemed desirable to the management of the account.
Mr.
Szymczak said that since all
of the facts and figures pre
sented at this meeting indicated a high level of economic conditions
at least for the balance of this year, since prices were continuing
upward,
and since the System had taken action to offset the influences
of a shift in
float when it
declined, he felt
it
quite natural that
the System should now take action to offset float when it went up.
The market would expect it.
Otherwise,
it
would assume that the
-33
9/11/56
System only intended to offset float on the one side.
By the very
nature of the situation, he felt that the account should sell securi
ties at least for the next two weeks and observe the market in order
to get a better perspective. The System would, of course, have to
supply some reserves during October and no doubt during November and
December to take care of the seasonal needs that would arise, but Mr.
Szymczak would rather not supply these through the discount window so
much as through the open market.
If banks get the impression that the
System expects them to borrow in order to make loans, difficulties
might be presented for administering the discount function later on.
Mr. Balderston said that it
seemed to him that the policies of
commercial banks are becoming less and less sound.
On the one hand,
they are permitting short-term money to be used for capital expansion
which should be financed from savings; on the other hand, they are
losing sight of the importance of liquidity.
He was concerned that
the banks were now pledging collateral on their own initiative when
they should be retaining it
to protect their deposit liabilities.
This
tendency and the level of the loan ratio, which had risen to 60 per cent
or above in some cases, led him to believe that the System should
vigorously tackle the problem of credit availability by seeking effective
means of discouraging the use of bank funds for long-term uses.
Turning to the Committee's policy, Mr. Balderston said he had
sympathy for the problems of timing that Mr. Mills had brought to our
9/11/56
-34
attention.
However, it
seemed to him that the price rises were in
part the result of mistaken policies by corporate borrowers a year
ago and in
part the result of a too lax credit policy by the System
at that time.
As we approach the crest of this wave of economic
activity, the problem of timing would become more and more of concern
to the System; what we do now will of course affect business a year
hence.
Despite that, consumer prices are rising as a result of cost
increases that have taken place since June a year ago, and these may
trigger another crop of wage advances.
Moreover, plans for capital
expansion are now pressing both on supplies of critical materials
and on manpower resources,
industries.
as well as on capacity of capital goods
The Treasury will have to come to the market in October
in the face of a very strong corporate demand for credit.
In sum,
his feeling was that short-run policy of the Committee should be that
expressed by Mr. Leach.
While the System should not permit positive
reserves to develop and in the main the decisions should be left to
the desk, he hoped that operations could prevent outside interpreters
of System policy from being deceived and that, in general, the same
degree of tightness would be maintained that now exists.
Mr, Balderston
said that he had a feeling that we dare not become less tight because
of the price rises that are occurring and are going to continue to
occur this fall.
On the other hand, he was not sure that the System
should move toward greater tightness until the picture became clearer
later on.
9/11/56
-35
Chairman Martin said that it
encouraged him a great deal
to observe the amount of thought and time and effort that each of
the members of the group had been putting into the problems facing
the System, as evidenced by this morning's discussion.
The forces
we are dealing with are large, and we must try to keep in perspective
what the System is
trying to accomplish.
We must also constantly
keep in mind the question of how much money and credit policy can do
in dealing with these forces.
They are as large in
their nature as
the tides, and monetary and credit policy can possibly not do more
than wave a red flag at the dangers presented.
The Committee should
wave this red flag, the Chairman said, but against the Juggernaut of
Government spending, and against the Juggernaut of inflationary prices,
it
should not persuade itself that monetary and credit policy will be
successful in halting what is
occurring.
And, he added, this is
not
defeatism.
The Chairman went on to say that he thought it
would be a
mistake for the Committee to reduce the pressure on the market sub
stantially by overt action, but he likewise thought it
mistake to increase the pressure in
would be a
the market by overt action.
The
System should recognize the problems we are facing and should endeavor
to develop as reasonably stable conditions as is
framework of the situation that is
possible within the
developing, for example, as a
prelude to what will probably be the most difficult Treasury financing
-36
9/11/56
in
years to come.
That is
something all
of us should consider.
Mills had mentioned the two preceding Treasury financings,
Mr.
and the
Committee should recognize a certain degree of responsibility.
There should be no misunderstanding of the situation the Com
mittee faces.
We are within eight weeks of an important political
decision, the Chairman said, and while it
is
the Committee's duty to
be uninfluenced in
either direction by that fact, it
not to ignore it.
However much the System might wish to avoid mention
ing that fact, it
it
is
could not avoid recognizing that it
colored whatever the System may do.
also its
duty
existed and that
Chairman Martin thought this
should be brought out on the table.
Chairman Martin referred to letters of criticism that he re
ceived from time to time, stating that one of the things he was hearing
was that the System lived in
an ivory tower, that it
aware of the forces that are developing around us.
irritated him:
not live in
the System and its
an ivory tower.
was not completely
This point of view
staff are not isolated, and we do
Nevertheless,
there is
a tendency not to
mention politics because of the possible implications.
System is
not political in
political situation in
its
actions,
it
While the
should recognize the
the spirit that he had mentioned.
Reverting to policy, the Chairman reiterated the view that the
System should not by overt action move either to tighten credit or to
loosen it
at this time.
The degree of probing that Mr.
Hayes had sug
gested with respect to further tightening had to be evaluated against
9/11/56
-37
the feel of developments in
the market and would have to take into
account the Treasury's financing which would total roughly $3 billion,
probably early in
October.
It
was his hope, although it
was not his
expectation, that that financing would be out of politics.
there were shades of difference to be recognized in
While
the comments at
this meeting, the Chairman said that his appraisal of the group's
feeling was that no one wished to change the Committee's directive
at the present time, either as to wording or as to amount, and in
the absence of comment to the contrary, he suggested that the Committee
approve the directive to the Federal Reserve Bank of New York.
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 (in
cluding replacement of maturing securities, and allowing
maturities to run off without replacement) for the System
open market account in the open market or, in the case of
maturing securities, by direct exchange with the Treasury,
as may be necessary in the light of current and prospective
economic conditions and the general credit situation of the
country, with a view (a) to relating the supply of funds in
the market to the needs of commerce and business, (b) to
restraining inflationary developments in the interest of
sustainable economic growth, and (c) to the practical
administration of the account; provided that the aggregate
amount of securities held in the System account (including
commitments for the purchase or sale of securities for the
account) at the close of this date, other than special
short-term certificates of indebtedness purchased from
time to time for the temporary accommodation of the
Treasury, shall not be increased or decreased by more than
$1 billion;
9/11/56
-38
(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)
(3) To sell direct to the Treasury from the System
account for gold certificates such amounts of Treasury
securities maturing within one year as may be necessary
from time to time for the accommodation of the Treasury;
provided that the total amount of such s ecurities 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.
Turning to the consensus as to guides to be given to the trading
desk, Chairman Martin said that some of the comments tended toward ease,
others (which he thought represented a majority) would stay somewhat in
the middle ground,
some would stay on the side of tightness in resolving
doubts, and one or two would overtly move toward greater tightness.
Mr. Hayes suggested that a good deal of the discussion and a
good deal of the difference in
views pointed out by Chairman Martin in
volved suggestions relating to a somewhat longer run than the next two
week period.
Most of the program that he (Mr.
as desirable during the rise in
Hayes) would contemplate
seasonal demands for credit would be
deferred until after the next meeting of the Committee.
He doubted
whether as a practical matter the System account could do enough sell
ing during the next two weeks while float is supplying reserves, to
create the tightness that would lead to the probing actions he had
-39.
9/11/56
suggested--probably most of the probing would have to be deferred
until the October Treasury financing is out of the way.
Following some discussion of Mr. Hayes'
comments,
Chairman
Martin suggested that until the next meeting of the Committee, which
would be held on September 25, 1956, it
would appear to be the majority
consensus that the Committee wished to maintain a degree of stability
in the market with doubts being resolved on the side of tightness
rather than of ease, but with the understanding that the Account
Management would not make conscious moves on the side of tightness.
In response to a question from Mr. Shepardson, the Chairman stated
that this would contemplate some selling of bills in the near term
but that such sales would be with the idea of not permitting negative
free reserves to go to the zero level.
None of the members of the Committee indicated disagreement
with Chairman Martin's statement as to the policy guides to be followed
until the next meeting.
Chairman Martin called upon Mr.
Hayes in
connection with the
proposal that had been made by Mr. Sproul in his memorandum of May 3,
1956, and discussed in
subsequent memoranda that had been referred
to at a number of meetings of the Committee since that date under
which proposal the Committee would give limited authority to the
Account Management to make swaps in Treasury bills.
9/11/56
-40..
Mr. Hayes noted that a memorandum had been distributed by
Mr.
Rouse under date of August 14,
1956, covering interviews held
with representative dealer firms in
accordance with the suggestion
made at the meeting of the Committee on August 7, 1956, regarding the
possibility of making swaps in
Treasury bills for the System account.
He stated that, as Mr. Rouse's memorandum pointed out, not only did
these dealers have no objection to the proposal but they indicated
considerable optimism as to the assistance the suggested procedure
might give to the functioning of the Treasury bill
market.
Mr. Hayes
stated that since the August 7 meeting he had taken occasion to review
the whole proposal and to consider further the reasons why it
lieved to be desirable.
While it
was be
was not a matter of major signifi
cance, Mr. Hayes said he had concluded that benefits would obtain
from the proposal and he hoped the Committee would act favorably on
it.
At Mr. Hayes'
stating that if
initially of its
it
suggestion, Mr. Rouse commented on the proposal,
was approved, he would expect to notify the market
adoption by the Committee with the thought that
dealers would come to the System account when they desired to engage
in swaps, although very occasionally the System account might wish
to go to the market.
Chairman Martin said that he would like to reiterate for the
record his thinking on this proposal.
He still thought that as a
-41
9/11/56
matter of principle the Committee would be wiser not to engage in
swaps.
However,
he certainly did not want to stand in
the way of
anything that under certain circumstances might be helpful in
ing out the Committee's objectives.
be wrong in
His judgment on principle might
this particular instance, he said, but if
be undertaken it
was important that it
lead to misunderstanding;
carry
be in
swaps were to
a way that would not
the procedure should make it
clear that
the swaps were at the initiative of the Committee and not at the
beck and call of the dealers who might take the initiative away from
the Committee,
Mr. Szymczak said he had no objection to the proposal for
swaps in Treasury bills, that he thought it
mittee should engage in
of undertaking it
eventually.
was something the Com
He questioned the advisability
at this time, however,
and suggested that it
might
be deferred until next January.
Mr. Rouse stated that the proposal had been made sometime
ago and that he would prefer to have the matter settled one way or
the other.
Mr, Mills said that to him adoption of the proposal except
under unusual circumstances when the Committee's holdings of bills
were reduced to a very minimum would be putting a foot in the doorway
to opening the System open market account to general trading.
He
recognized that was an extreme point of view but felt the action would
-42
9/11/56
represent a step in the direction stated.
He could not reconcile
such a step with the idea of a free market,
it
and he did not think
a policy that the System should countenance.
Mr. Robertson said he held exactly the same views that the
Chairman had stated and that he also had some of the feeling expressed
by Mr. Mills.
However,
he did not think the matter of principle of
sufficient importance one way or the other to throw road blocks in
the way of the management of the System account in
the Committee's operations more effective.
trying to make
He did think, however,
that the Committee should do everything possible to see to it
the initiative for swaps remained in
its
hands.
that
Consequently, he
had prepared a draft of a resolution which he felt would assure that
the initiative remained with the Committee, and he read the resolu
tion as follows:
If at any time it appears to the Manager of the
Open Market Account that a different maturity distribu
tion of Treasury bills in the account would facilitate
future action in supplying or absorbing reserves, the
Manager may make exchanges of Treasury bills of differ
ent maturities. Such transactions shall be undertaken
only for the purpose indicated above and only if, in
the Manager's judgment, they will not distort the
functioning of the market. Before effectuating any
such transactions, the Manager shall give notice to
all dealers in Government securities with whom the
account regularly transacts business of the purpose
and proposed extent of such transactions.
In discussing Mr. Robertson's proposed resolution, Mr. Rouse
said he felt that prior notification to the market before every swap
9/11/56
43-
transaction would not be feasible for several reasons.
First, to present swaps to the market as suggested
would create operational problems. Some dealers would
bid on one side of the proposed swap, some on the other
side, and other dealers would bid for both sides on the
understanding that either price would hold only if both
sides of the transaction were done with him. In short,
attempts to determine best prices would involve endless
negotiation by the staff of the Trading Desk.
Second, by advising the market of the swap it intended
to work out, the System would call unnecessary attention to
its particular interest in certain maturities and would en
courage a movement of interest rates on these maturities to
its own disadvantage (not only on the swap but perhaps on
subsequent outright purchases as well). Mr. Rouse added
that, as a general principle, the more nearly the System
account handles its operations on the basis of best prices
and without regard to maturity, the less distorting effect
it will have on the structure of rates. The authority to
enter into piecemeal swaps in response to the opportunities
that arise daily in the market--without forcing the securi
ties we want out of the market--would make it possible for
the Trading Desk to be less interested in maturity at the
times it is buying Treasury bills outright for reserve
purposes.
Third, dealers for purely business reasons supply the
Trading Desk with valuable information on transactions they
are attempting to work out in the market since there is a
possibility that the Trading Desk might react to this infor
mation by executing one side or another of the transaction
in filling a foreign account or Treasury order. If the
System account were able to respond to bill
swapping oppor
tunities, this flow of information could be increased, but
not if the full go-around technique were used since this
would demonstrate to dealers that failures to keep the desk
informed would not cost them any business.
Fourth, if an attractive swap should be presented to
the Trading Desk by one dealer and the Account Management,
showed it
rather than executing the swap directly, first
to the rest of the market, the System would be guilty of
a serious breach of confidence and it might be assumed
that such swap would not be shown to the desk in the future.
9/11/56
-44
In summary,
Mr. Rouse said that if
it
were necessary to
employ the go-around technique in doing a swap, the resulting dis
turbance to the market and distortion of rates would probably off
set the modest operating advantages that swaps are intended to achieve.
On the other hand, if the management were allowed to react to swap
propositions coming to it from the market, it should be possible to
work toward an orderly attainment of particular maturity distribution
objectives while at the same time facilitating the functioning of the
market by providing maturities that dealers need to complete trans
actions.
In the latter
case the Trading Desk would simply react to
situations as they develop and there would be no forcing of the market
to promote System portfolio objectives.
In closing, Mr. Rouse said
that although he would prefer that most swaps originate in the marketwith final initiative resting,
of course, with the Trading Desk-he
would like to leave open the possibility that swaps might occasionally
originate with the System.
Even in
the latter case, however, it
would
be better business practice for the Trading Desk to direct swap in
quiries to dealers known to hold the maturity the System account wanted,
rather than to direct them into the market on a full "go-around".
all cases it
would be contemplated,
however,
In
that no swap would be
executed unless the price involved were in
line with quotations cur
rently being reported to the Trading Desk,
and unless several dealers
were specifically canvassed for bids and offers on the maturity in
volved, with transactions actually executed on a "best price" basis.
9/11/56
-45
Mr.
Robertson responded by stating that on the basis of the
comments Mr. Rouse had made,
he would be completely opposed to
authorizing swaps on the grounds that they really would prevent a
free market.
Chairman Martin noted that under Mr. Rouse's proposal,
initiative for swaps would be in
Mr. Rouse concurred,
the
the market.
stating, however, that the fact that a
dealer might initiate a proposal for a swap did not mean that the
System account would follow the market.
Mr. Hayes stated that this was a very cogent point.
to him that it
It
seemed
was necessary to clarify what was meant by "initiative."
The opening move might be by a dealer but the Account Management would
have every right, and would certainly use it,
action if
it
felt
that should be done.
Committee would be giving up its
originated in
the market.
to refuse a given trans
Mr. Hayes did not think the
initiative because a given transaction
The entire proposal before the Committee was
an operating matter, he said, to be used as an operating tool, and if
the Committee were to implement the idea, if
details of it
the idea had merit, the
should be worked out largely by those who were on the
firing line and who would have to apply the tool.
the proposal was desirable and that it
out any damage to the market.
He still
felt that
would be handled sensibly with
He believed that the way in which the
tool should be used probably was along the lines Mr. Rouse had in
mind,
9/11/56
-46
rather than with the restrictions that Mr. Robertson had proposed.
Mr. Robertson said that he would not attempt to force on
the Management of the Account the proposal he had made because if
it
appeared that swaps would distort the market,
not deviate at all
Mr.
the Committee should
from principle.
Hayes said that he was not arguing the question on the
basis of general principle but was thinking of the proposal entirely
as a useful tool to be considered on its merits.
Chairman Martin suggested that copies of Mr. Robertson's pro
posed resolution be made available to the Committee for further study
and that the matter be taken up again at the next meeting, and there
was agreement with this suggestion.
Chairman Martin said that he wished to bring to the attention
of the members of the Committee a letter dated August 28, 1956, that
he had received from Congressman Wright Patman, Chairman of the Sub
committee on Economic Stabilization of the Joint Economic Committee,
in
which Mr.
Patman recalled the hearing held in
December 1954 on
recent and current experience with monetary policy at which members
of the Board of Governors and Presidents of the Reserve Banks met with
the committee.
Chairman Martin said that Mr. Patman's letter was for
the purpose of informing him that he proposed to arrange a similar
meeting next December at a time that would fit
in with a meeting of
the Reserve Bank Presidents in Washington and that he hoped the mem
bers of the Board and the Presidents could meet with his committee at
9/11/56
-47
that time.
Chairman Martin also said that Senator Robertson and
members of the staff of the Senate Banking and Currency Committee
meet with the members of the Board tomorrow in
connection with the
proposed hearings on banking legislation.
Mr. Young noted that it was customary for members of the staff
to give an economic review in the form of a chart-slide presentation
at meetings of the Federal Open Market Committee held in conjunction
with meetings of the Conference of Presidents of the Federal Reserve
Banks four times a year.
This would call for such a presentation at
the meeting to be held on September 25, and Mr. Young inquired whether
it would be satisfactory to defer such a presentation until October.
None of the members of the Committee indicated any objection to post
ponement of the review as suggested.
It was understood that the next meeting of the Committee would
be held at 10:00 a.m. on September 25, 1956.
Thereupon the meeting adjourned.
Secretary.
Cite this document
Federal Reserve (1956, September 10). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19560911
@misc{wtfs_fomc_minutes_19560911,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1956},
month = {Sep},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19560911},
note = {Retrieved via When the Fed Speaks corpus}
}