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, May 28, 1957, at 10:00 a.m.

PRESENT:

Mr. Martin, Chairman

Mr.

Mr.

Mr.

Hayes, Vice Chairman

Allen

Balderston

Mr. Bryan

Mr. Leedy

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mills

Robertson

Shepardson

Szymczak

Vardaman

Williams

Messrs. Fulton, Irons, Leach, and Mangels,

Alternate Members of the Federal Open

Market Committee

Messrs. Erickson, Johns, and Deming, Presidents

of the Federal Reserve Banks of Boston, St.

Louis, and Minneapolis, respectively

Mr.

Mr.

Mr.

Mr.

Riefler, Secretary

Thurston, Assistant Secretary

Sherman, Assistant Secretary

Hackley, General Counsel

Mr. Thomas, Economist

Messrs. Atkinson, Bopp, Mitchell, Tow, and

Young, Associate Economists

Mr. Rouse,

Manager,

System Open Market Account

Mr. Carpenter, Secretary, Board of Governors

Mr. Koch, Assistant Director, Division of Re

search and Statistics, Board of Governors

Mr. Roosa, Vice President, Federal Reserve

Bank of New York

Mr. Gaines, Manager, Securities Department,

Federal Reserve Bank of New York

Messrs. Hostetler and Wheeler, Vice Presidents,

Federal Reserve Banks of Cleveland and San

Francisco, respectively; Mr. Parsons, Di

rector of Research, Federal Reserve Bank of

Minneapolis; Messrs. Willis and Meigs,

5/28/57

Financial Economists, Federal Reserve

Banks of Boston and St. Louis, re

spectively; and Mr. Walker, Economic

Adviser, Federal Reserve Bank of Dallas.

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Com

mittee held on May 7, 1957, were approved.

Before this meeting there had been distributed to the members

of the Committee a report prepared at the Federal Reserve Bank of New

York covering open market operations during the period May 7 through

May 22, 1957, as well as a supplementary report covering commitments

executed May 23 through May 27, 1957.

Copies of both reports have

been placed in the files of the Federal Open Market Committee.

Mr. Rouse stated that Mr. Erickson recently suggested that

some elaboration of the report of open market operations at the meet

ings of the Committee would be helpful.

He went on to comment on the

money market during the past three weeks, stating that in this period

developments had worked out about as had been expected.

The principal

problem was the Treasury financing, which had been an unhappy experi

ence for the Treasury and had resulted in attrition of $1,167 million.

Float had climbed to its usual monthly peak during the past week and

had been only partly offset by System account sales, but the effect

of the reserves released by float had been confined to day-to-daymoney

market rates.

Basic rates remained unchanged, and investors did

not want to follow the bill rate under 3 per cent.

the $1,167 million attrition

Reinvestment of

didnot generate the expected demand

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for bills, Mr. Rouse said, and the bill rate yesterday had climbed

back to 3-1/4 per cent.

He added that the easier situation that

had developed in the money market a few days earlier might not have

been entirely the result of the rise in float but could have re

flected the distribution of reserves in the banking system.

For

the first time in some period, the New York banks had found them

selves in a somewhat easier position.

Looking ahead for the next three weeks, Mr. Rouse said that

the projections of reserves prepared at the New York Bank and by the

Board's staff were substantially in line with each other.

He did

not anticipate any material change in the present situation until

the tax period and the rise in float in June.

Mr. Rouse also said that he had been asked about the sale

of $300 million of gold by the International Monetary Fund to the

Treasury, which transaction was taking place today.

When he first

heard of this transaction, he requested the Treasury to arrange that

it take place on the day on which the effect on member bank reserves

of the payment for the Treasury tax anticipation bills would take

place.

In this manner,

the System account could avoid the problem

of putting in a large amount of reserves for a brief period and with

drawing them a few days later.

He noted that the Treasury would make

large payments for redemptions of F and G bonds next Monday.

past

Mr. Rouse stated that the major problem during the

week

had not been directly related to the reserve situation but had been

5/28/57

the fact that capital markets had been under extreme pressure.

New financing issues had been in record volume in

the first

quarter

of the year, and the calendar ahead was increasing so that the back

log was being maintained.

This had resulted in a rate situation in

the market which had been attributable in part to delays by the

Treasury in

offering refunding securities to holders of F and G

series savings bonds.

Perhaps a more fundamental factor was the

basic supply and demand situation.

The 3 and 3-1/4 per cent Treasury

bonds had remained where they had been for some time, while yields on

new corporate offerings had risen to as much as 5-1/4 per cent.

This

suggested, Mr. Rouse said, that there would have to be a rather sub

stantial adjustment in Treasury bond yields if

with the rest of the market.

they were to go along

We were dealing with a very delicate

situation, he said, one that would require the Trading Desk to be

constantly alert.

A serious situation could develop although Mr.

Rouse said he thought it

would continue.

more : kely that the present situation

However, if

a large offering should be pressed

for sale on the market by investors, there could be a sudden and

marked effect.

Mr.

Vardaman entered the room during the course of Mr.

Rouse's comments.

Mr. Robertson said that he wished to compliment the Manage

ment of the System Account on the way in which it

tions during the past three weeks.

He still

had handled opera

had a little

doubt about

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5/28/57

the tendency to offset such a matter as float on the tight side

and not to do so when it

tended to ease the market.

Mr. Leach noted that the report of open market operations

that had been prepared at the New York Bank comented on purchases

and sales of Treasury bills during the past three weeks and made

the statement that these purchases and sales were achieved without

any overt intervention in the market.

Mr. Leach expressed the view

that any sale of securities by the System account would represent

an overt action.

Mr. Rouse responded that the securities were not sold

ith

any splash, that purchases were being made at substantially the same

time, and that it

appeared that the net effect of whatever was being

done was substantially a wash operation.

Upon motion duly made and

seconded, and by unanimous vote,

the open market transactions

during the period May 7 through

May 27, 1957, were approved,

ratified, and confirmed.

A staff memorandum on recent economic and financial develop

ments in

the United Stater

and abroad had been distributed to all

members of the Committee under date of May 24, 1957.

This memorandum

stated that business indexes continued to show mixed tendencies,

some measures edging up and others drifting down.

with

The industrial

production index seemed likely to be off another point in May but to

continue above a year ago.

Inventory adjustments were continuing in

.6.

5/28/57

consumer durable goods industries and in

such as steel.

some other industries

Wholesale prices had been showing little

while retail prices advanced somewhat further in April.

change

Consumer

buying appeared fairly strong, particularly for nondurable goods

and services.

duced rate in

Private housing starts rose in April from the re

March.

Labor market demands and supplies seemed in

reasonable balance, with no strong uptrend or downtrend in

employ

ment and with fluctuations in unemployment reflecting mainly seasonal

Demand for credit continued heavy and interest rates had

changes.

risen again recently.

The review indicated that concern about a

cyclical decline in business apparently had diminished, and stock

market prices had been advancing.

Abroad, demand pressures remained

generally dominant and new anti-inflationary measures had been an

nounced this month in

several important countries.

Chairman Martin called upon Mr. Young at this point, and Mr.

Young stated that the staff would make a chart presentation at this

meeting giving background material on recent Federal Reserve policy

problems.

This presentation had been prepared, Mr. Young said, with

the thought that it

might be used in furnishing information to the

Senate Finance Committee in its

policy and other matters,

room to assist in

forthcoming inquiry into monetary

Members of the staff then entered the

the presentation, after which they withdrew.

The presentation pointed out that for two years, since

recovery from the minor recession of 1953-54,

economic activity in

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5/28/57

the United States had been at record levels with resources

generally being used intensively.

Thus, the recent economic

policy problems of Government had been the problems of a period

of high production and employment,

not those of a period of

curtailed production and widespread unemployment.

Widespread

price increases over a considerable period of time had been

disturbing.

Greatly increased demands for short-term credit

and also for long-term credit had been reflected in an increase

during the past two years of $18 billion, or about one-fourth, in

the volume of loans outstanding at commercial banks.

Banks had

obtained more than half the funds needed to increase their loans

by reducing holdings of Government securities, however, and the

growth in

total bank credit had thus been much less than the growth

in loans.

Savings as well as demands for funds had increased over

the past two years, but even with some growth in total bank credit

demands for funds had been so strong relative to the amount avail

able that interest rates had risen substantially.

Even with this

substantial rise, the level of rates now prevailing was not high by

historical standards or by comparison with rates prevailing in other

countries.

The review also pointed out that gross national product

had risen from an annual rate of $387 billion in the second quarter

of 1955 to a rate of $427 billion in the first quarter of 1957.

About half of this increase of 10 per cent represented a rise in

prices and half a rise in volume of output.

In concluding this

5/28/57

-8

presentation, it was stated that one of the possibilities in the

period ahead was a situation characterized by growing capacity

and high production, with credit expansion restrained and price

changes held within relatively narrow limits.

A period of "rolling

readjustments," with fairly stable prices, could be expected to last

much longer than a speculative boom based in any substantial part on

hope of gain from perpetually rising values.

A copy of the script of the foregoing presentation was sent

to each member of the Committee following the meeting, and a copy

has been placed in

the files of the Federal Open Market Committee.

Chairman Martin stated that since the preceding meeting of

the Committee, Senator Byrd had called him on the telephone and out

lined to him the course of the proposed hearings before the Senate

Finance Committee on Governmental financial and monetary policies.

It was contemplated that, if

Senator Bryd agreed, the presentation

that had been made by the staff this morning would be used at the

hearing.

The current plan, Chairman Martin said, was that Secretary

of the Treasury Humphrey would appear as a witness at the hearings

in mid-June,

that Under Secretary of the Treasury Burgess would ap

pear after the Secretary,

and that he (Chairman Martin) would appear

following testimony by the Secretary and Under Secretary.

Chairman Martin noted that the Committee had been trying to

find a better procedure for communication with the Treasury in

the

hope of being more certain that each understood the problems of the

5/28/57

other.

-9.

Along this line, he and Mr.

Humphrey,

Balderston met with Secretary

Under Secretary Burgess, and Mr.

Secretary, last Thursday, May 23,

interest.

Wren, Assistant to the

to discuss problems of mutual

The Treasury representatives were anxious that the Fed

eral Open Market Committee understand the nature of their problems.

They recognized that they would have to pay the market rate for

any

financing that the Treasury might do, but at the same time they

emphasized the difficulty of their position and the delicate problems

that were being caused by the higher interest rates, including the

increase in rates on series E and H savings bonds.

They pointed out

that the Treasury had secured the maximum increase in the savings

bond rate that could be gotten from the Congress at this time, and

it

was out of the question as a practical matter to secure any

further increase in

that area.

This meant that, with a large volume

of series F and G savings bonds outstanding in the form of demand

obligations,

the Treasury officials were apprehensive regarding

possible developments.

They desired that the Committee be fully

aware of these problems and of their apprehensions.

Chairman Martin

expressed his feeling that the Committee had a delicate problem with

respect to the underpinning of the Government securities market

generally.

Mr. Balderston added the comment that Secretary Humphrey had

referred in this discussion to the expectations of businessmen as a

factor creating some of the current difficulties confronting the

country.

5/28/57

-10Chairman Martin then called upon Mr.

Hayes for a state

ment on the economic situation and open market policy, in response

to which Mr.

Hayes made a statement substantially as follows:

The economic situation continues fundamentally strong

and essentially unchanged since the last meeting. Business

optimism seems to have increased perceptibly, even though

most current indices of physical production and distribution

indicate a sidewise movement at best, and perhaps a slight

downward tilt.

Instead of enumerating all the major elements of

strength and weakness, which are well known to all of you,

I should like to stress a few rather confusing elements in

the picture.

For example, it is difficult to reconcile the

failure of retail sales (seasonally adjusted) to record any

progress since November with the rising trend of consumer

income and of the consumers expenditure component of gross

Another surprising development has been

national product.

the upward revision in estimated corporate profits for the

last quarter of 1956 to an annual rate of 46.7 billion

dollars and the maintenance of about this level in the first

Apparently the widely held view that busi

quarter of 1957.

ness generally has been subjected to a profits squeeze is

not based on a firm statistical foundation, although such a

squeeze may yet develop, and some industries have no doubt

experienced it.

The profit trend suggests greater gains in

productivity than had been generally expected. It may ac

count in part for the growing business optimism and for the

maintenance of capital spending programs at very high levels

despite the loss of momentum in

consumption.

In the area of prices we also find rather mixed trends.

On balance the upward pressures on prices may have subsided

somewhat, with some basic material prices again tending

downward after a period of hesitation. Wholesale prices in

the aggregate are no higher than a month ago, but consumer

prices rose again in April and will probably increase further

in May. In sharp contrast with the recent trend of basic

material prices is the widely expected increase in steel

prices in July which could have pervasive effects in the

certainly

economy, and upward wage pressures also are still

automatic

for

provisions

of

result

as

a

part

in

in evidence,

increases embodied in existing contracts.

A good deal of comfort is to be found in the latest

place, the growth in

In the first

figures on bank credit.

business loans in the four weeks through May 15 was much

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5/28/57

less than a year ago, and there was an actual decline in

total loans as compared with a sizable increase in 1956.

Even with a substantial allowance for June tax borrowing

it seems likely that the rise in bank loans for the second

quarter may be only about half as great as last year.

Secondly, the last four weeks have witnessed a sharp drop

in bank holdings of Government securities, following the

large gain occasioned by the bank underwriting of the cash

offering late in March. As a result, whereas privately

held demand deposits had expanded by some $1.2 billion in

the four weeks ended April 24, this rise was more than

wiped out by a drop of $1.6 billion in the following three

weeks.

Thus it would appear that maintenance of steady

pressure on bank reserves has succeeded in preventing any

lasting addition to the money supply in connection with

the recent bank underwriting of the new Treasury issues.

This is particularly gratifying in view of the fact that

Treasury cash borrowing has been so much larger in 1957

to date than in any spring period of recent years.

In contrast with this modest easing of demand for

bank credit, the demand for long-term capital remains

extremely high and apparently well in excess of

available

savings. Personal savings are reported to have turned

downward in the first quarter, reversing the trend of the

preceding year, although these statistics are admittedly

none too reliable. There is some circumstantial

evidence

to confirm this result, however, in the reduced rateof

deposit expansion at mutual savings banks in the first

quarter.

If

the rate of savings has actually fallen, this

is still another confusing element in view of the failure

of retail sales to expand as personal incomes have risen.

Even after the past month's substantial upward adjustment

of yields on new corporate and municipal issues, there

are still

signs of indigestion in this area, and the feel

ing of uncertainty in the capital markets is enhanced by

the prospect of a new Treasury cash offering of $3 to $

billion within the next month or two, together with the

large refunding required in connection with the Treasury's

August maturities.

The very fact that the economic indicators are some

what mixed and confusing suggests that it should not be

too difficult to determine sound credit policy at this

juncture.

Until the business outlook is further clarified,

I would think it unwise to make any overt change in policy,

and I would therefore favor maintenance of about the same

degree of pressure on the money market as has obtained for

5/28/57

-12-

the past several weeks, with no change in the discount

rate or in the directive.

Additional justification for

a policy of cautious steadiness in applying restraint

may be found in the recurrent waves ofuneasiness that

have characterized the capital markets, as each new rate

plateau has proved too low for a sustained equilibrium

between supply and demand. The demand pressures will

soon produce even greater stresses as repeated Treasury

refunding operations are interspersed with cash borrow

ing of $8 to $9 billion over the summer and autumn, while

the usual seasonal demands of business will be crowding

upon the banks.

Indeed, expectations of that coincidence

of heavy demands may already be exerting new unstabilizing

Subject to the usual

influences in the capital markets.

reservations as to our trying to set any specific statis

tical target, I would think that net borrowed reserves of

somewhere around $500 million and member bank borrowings

around $1 billion, would be entirely reasonable.

If our

present projections for the next three weeks turn out to

be at all accurate, this would mean that a minimum of

open market operations would be required to accomplish

our objectives, although it is conceivable that a moderate

purchases

volume of repurchase agreements and outright bill

might be called for during the coming week, especially if

the atmosphere in the capital markets should show any

further deterioration.

Mr.

Erickson said that during the last three weeks there had

been no significant changes in the economy of New England.

ment was still

high.

Employ

April 30 figures of purchasing agents indicated

that expansionary forces were not now as strong as they were earlier

but they were still

present.

It was expected that expenditures for

research and development would be 20 per cent greater in 1957 than

in 1956.

Figures covering mutual savings banks as of the end of

April indicated the same tendency that Mr.

a continuing decline in

Mr.

Hayes had reported, namely

the rate of growth of deposits

at such banks.

Erickson said that he would recommend no change in the discount

5/28/57

-13

rate or in

the Open Market Committee's directive at this time.

He

would suggest a continuation of the same policies and operations that

had been followed during the past three weeks.

Referring to the comments that Mr. Rouse had made concerning

recent open market operations,

such a report by Mr.

Mr. Erickson stated that he suggested

Rouse with the thought that it

to the Committee in reaching its

would be helpful

judgments to have a brief oral resume

of salient factors at the beginning of each open market meeting.

would be in

This

addition to the excellent written reports that each mem

ber of the Committee received from the New York Bank each week and

before each meeting.

Mr.

Erickson also referred to the daily wire that was sent to

each member of the Committee and each Reserve Bank President before

lunch, immediately following the morning telephone conference.

suggested that if,

He

after reading the wire, any of the members of the

Committee had questions as to what the desk should do, they discuss

them with the Trading Desk at the New York Bank to see if the situa

tion could be clarified.

They should also talk with the Chairman of

the Committee and in that way attempt to have a continuous understand

ing of what was going on.

Chairman Martin said that these were excellent suggestions,

adding that having Mr. Rouse comment on the general situation at the

beginning of each meeting would be helpful to all of those present.

He then called upon Mr. Irons.

5/28/57

-14

Mr.

Irons said that there had been no new developments of

significance in the Dallas District during the past three weeks.

The district was moving along at a high level of activity with

tendencies similar to those in the national picture.

and confidence were strong.

up to expectations,

although it

Department store sales had not come

and petroleum production was down a little,

was still

high.

These were about the only indicators

showing declines in the area at the present time.

up; construction was up.

the first

The outlook

Employment was

Residential awards had been larger during

quarter of this year than a year ago while nonresidential

construction was very strong.

New automobile sales during the first

four months of 1957 were 10 per cent above the comparable period last

year.

The agricultural situation had been favored with ample moisture

but the rains had delayed planting of some crops.

Reserve city banks

were in a moderately comfortable reserve position and country banks

had excess reserves.

Borrowings had not been heavy although there

were three or four continuous borrowers with whom the Dallas Bank

was keeping in touch.

Mr.

Irons said that Mr. Hayes had expressed his view as to

credit policy:

to try to maintain during the next three weeks about

the degree of restraint that had been maintained recently.

This was

called for by the economic situation, but at the same time the very

delicate situation in

the capital markets meant that the details of

the operation must be left to the judgment of the

Management of the

5/28/57

-15

System Account.

Mr. Irons would not favor a discount rate change

at this time or any overt action to alter conditions in the money

market.

Mr.

Mangels said that West Coast conditions paralleled

closely those described thus far.

There had been a little improve

ment from the situation reported at the preceding meeting.

agricultural employment had increased slightly.

Non

Contrary to the

pattern of the past two years, residential building permits were

higher in April than in March, and they were also higher than in

April of either 1956 or 1955.

Requests for VA and FHA appraisals

had risen, indicating that building conditions might improve in

future months.

Steel furnaces of the district were operating at

100 per cent of capacity,

and finished steel was being produced

at 95 per cent of capacity, rates somewhat better than the national

figures.

Automobile sales during the first

5 per cent above the first

quarter of 1957 were

quarter of 1956, improved sales in

Arizona and California having more than offset slower sales in

other parts of the district.

Twelfth District bank loans increased

during the latest four-week period by more than the national in

crease.

Borrowings at the Reserve Bank were nominal, and Twelfth

District banks were still

As to policy, Mr.

net sellers of Federal funds.

Mangels said that he would go along with

what had been said thus far, believing that the Committee should

continue about the same policy that it

had had in recent weeks.

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5/28/57

There should be no change in the discount rate.

Mr.

Mangels said

that he would have no objection to modification of clause (b) of

the Committee's directive so as to eliminate the reference to the

international situation; he did not believe that a change was neces

sary at this time although the Committee might wish to consider a

change in the directive soon.

Mr. Deming said that the situation in the Minneapolis District

was about the same as in

made.

the districts for which comments had been

Agricultural prospects were better than in the past two or

three years, with producers of both crops and livestock feeling that

the outlook was very good.

Farmers generally were optimistic.

ore shipments had risen in April.

Iron

Credit demand continued strong.

With respect to the national picture, Mr. Deming said that he would

not disagree with the comments made at this meeting.

There should

be no overt action taken at this time to change policy and there

should be no change in

Mr.

the degree of restraint.

Allen reported that Seventh District business sentiment

had made a further swing in the direction of greater optimism.

over-all situation was still

one of high level stability.

The

Retail

sales revealed reasonably aggressive consumer demand, with department

stores reporting a sales gain of 5 per cent in

the four weeks ending

May 18 compared with a year earlier, and a 4 per cent gain for the

year to date.

Total employment was slightly higher than last year

in most district centers.

Salaries and wage payments were up 5 or

5/28/57

-17

6 per cent as in

Mr.

the nation and were expected to show further gains.

Allen said that residential construction in

was slow and gave no evidence of a pickup.

the Seventh District

However,

employment in

construction was higher than last year in all large Seventh District

cities and in

many smaller commnities.

Hiring plans in most cities

of the district were fairly optimistic, with shortages of engineers,

machinists,

draftsmen, clerical workers,

continuing.

stenographers,

and typists

The Chicago Reserve Bank currently had 250 unfilled

requisitions.

Commercial banks reported a continued strong demand for loans.

The smaller rise in

business loans thus far in

1957 than in correspond

ing months of 1956 had been caused primarily by a larger volume of re

payments.

The volume of new loans had been either higher or virtually

the same as last year for all industries except construction.

mobile credit terms had been easing,

Auto

Mr. Allen said, and the proportion

of loans on new cars written for more than 30 months to maturity had

been rising in recent months.

In April, 29 per cent of such loans in

Indiana were for more than 30 months maturity; in Southwest Michigan

the proportion was 19 per cent, and in

income in

other areas 43 per cent.

the Seventh District had been gaining, Mr.

and cash receipts in

Allen stated,

March were 8.6 per cent ahead of a year earlier,

compared with a gain of 4.5 per cent for the country as a whole.

was not expected that this margin of gain would continue for the

entire year of 1957,

Farm

but it

was expected that enlarged Government

It

5/28/57

-18

payments would more than offset any decline in income from marketings,

with the result that total cash farm income and net farm income as

well would show modest gains over 1956.

Farm spending apparently had

increased in recent months, with gains at country stores greater than

at city stores.

Farm machinery manufacturers reported improved sales.

Another evidence of optimism on the part of farmers was provided by

the continued advance in farm real estate prices, Mr. Allen said.

There was a very strong demand for farm land to be added to existing

farms,

very little

land was being offered for sale, and country

bankers reported a substantial amount of funds awaiting opportunity

for investment in

farm land.

Mr.

Allen summed up the Seventh District

farm situation by stating that agriculture had shifted position from

that where it

provided some drag on the over-all level of economic

activity to one where it

was now providing a mild expansionary force.

Mr. Allen stated that he was in agreement with what had been

suggested by others regarding monetary policies to be followed during

the next few weeks.

Mr. Leedy said that the Tenth District had had continuing

improvement in moisture conditions since the preceding meeting.

Sur

face moisture was more than adequate in some sections and there had

been a very material improvement in

subsoil moisture.

delayed planting of corn in parts of the district.

in

Rains had

Excessive moisture

some areas and cool weather had affected the wheat crop, but it

was

estimated that yield per acre would be up from last year even though

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5/28/57

the total crop would be down because of a 20 per cent reduction

in the acreage planted in the district.

Mr. Leedy referred to

the recent severe tornado in Kansas City which had destroyed about

750 small houses.

It was expected that these would be rebuilt by

workers who had been on strike, but who were returning to work to

help in

alleviating the situation in

which usually increased in

the stricken area.

Employment,

the spring, had not shown a rise this year,

reflecting to some extent cutbacks in automobile assemblies.

also had been some lessening in

production of oil.

There

Retail trade in

the past three weeks showed that the Tenth District was doing less

well than the balance of the country.

Borrowings from the Reserve

Bank had increased sharply in the past several weeks.

Mr. Leedy said

that the rise had come from city banks which had experienced a drain

from interbank deposits.

seasonally,

Country banks were expanding their loans

and correspondent banks were coming to the Reserve Bank

to help meet the added demands.

Mr. Leedy said that he concurred in

pressed as to credit policy.

the comments already ex

He believed that the Committee should

continue to apply about the same pressure as had been exerted in the

past three weeks.

Mr. Leedy concluded his remarks by referring to the delicate

situation with which the Treasury was faced.

If we were moving toward

a higher level of interest rates, he suggested that the so-called new

plateau might raise the question whether the Treasury Department had

5/28/57

-20

made a mistake in attempting through the savings bond device to

encourage the public to place their savings in that form.

In view

of the large volume of savings bonds outstanding, further indications

of a higher level of interest rates might make it necessary for the

Treasury to consider whether this whole program should be revised.

Mr. Leach said that divergent trends continued in the Fifth

District economy.

Shipbuilding,

aircraft manufacturing,

residential construction were strong.

mobile sales and residential building.

and non

On the weak side were auto

Businessmen and bankers in

the Baltimore area were optimistic, but sentiment in the tobacco

growing districts of eastern North and South Carolina were slightly

pessimistic.

In reviewing industries in more detail, Mr. Leach said that

textile mills were still

maintaining curtailed schedules of operations,

although there had been recent indications of a more favorable out

look.

There had been selected improvements in

some prices.

orders and firming of

Production of bituminous coal was above a year ago,

reflecting particularly foreign shipments from January 1 to May 4 of

this year, which had been 37 per cent above the same period in 1956.

Prospects for that industry were somewhat less promising than earlier,

partly because steel mill requirements were lower, foreign orders had

receded,

and the April price increase was not sticking.

Mr. Leach said that the most striking recent change in the

-21

5/28/57

Fifth District was in

the outlook for the furniture industry.

The

Southern Furniture Market was disappointing; attendance was poor,

business written was small and the influx of orders usually received

after the market did not materialize.

Industry expectations were

that the situation would get worse before it

gets better.

Member bank borrowing at the Richmond Bank had averaged $43

million thus far this month, Mr.

Leach said.

Approximately half of

this amount was concentrated in a few large North Carolina banks which

had been forced to absorb the impact of a gradual withdrawal from

banks throughout the State of $90 million in

State funds.

In view of the continued crosscurrents in the Fifth District

and in the country as a whole,

Mr. Leach said that he would favor

continuing as the Committee goal the same degree of tightness that

it

had been attempting to achieve.

would be reflected in

Mr.

As far as he could see now, this

net borrowed reserves of around $500 million.

Leach added the comment that he thought the New York Bank was

right in not offsetting the temporary ease during the last statement

week which was caused by an increase in float.

He would not recommend

a change in the discount rate at this time.

Mr. Vardaman said that in the circumstances, he would make no

change in

the present policy of the Committee.

Mr.

Mills next made a statement substantially as follows:

The most pressing problem in my judgment that confronts

the Federal Reserve System today is the condition of the

5/28/57

-22

capital markets where financial developments have brought

the capital markets almost out of contact with the markets

for bank credit.

This is a situation which might deserve

radical and bold Federal Reserve System action by way of

bringing our influence to bear on the capital markets so

as to hasten adjustments that appear to be in the making

and to be imminent.

Obviously what I refer to would be

an increase in the discount rate by the Federal Reserve

Banks, the thought being that the adjustment of the capital

markets to an increase in the discount rate would clear the

general atmosphere in the capital markets and in doing so

also facilitate the Treasury's financing operations.

In

theory, an increase in the discount rate through the in

terest-cost factor, should tend to ration the supply of in

vestment funds only to those prospective borrowers who are

able and willing to pay the going market rate of interest.

In that process, less credit-worthy borrowers or borrowers

who could postpone their claims for the time being would

fall

out of line and some degree-of pressure on the capital

market would be relieved.

Under such circumstances, the Treasury might then be

in a position to come to the market with a long-term offer

ing at an interest rate conforming to whatever structural

interest rate adjustment had been reflected by the higher

discount rate.

This kind of policy would be a departure

from general Federal Reserve System thinking and action,

in that we would direct our influence to the capital mar

kets and recognize a responsibility in that area as well

as our fundamental responsibility for assuring the commercial

and banking community that credit will be available in

Along with an in

adequate supply for legitimate needs.

crease in the discount rate, it would of course beneces

sary for the System also to determine its policy in the

In that

general area of the availability of bank credit.

connection, we know that an increase in the demand for bank

credit is in prospect over the middle-June tax period and

that some uncertainty has already been voiced as to whether

the System will provide the reserves to carry that situation

over without undue restrictiveness.

The discussions thus far around the table have reached

the conclusion that the general scheme of policy that has

been in effect over the last three weeks should be continued.

The question can be raised whether we should press our

restrictive credit policy to the same degree that has been

in effect recently if a structural interest rate adjustment

5/28/57

-23

in the capital markets is

imminent and, especially, if

the adjustment should be induced by a Federal Reserve

discount rate action. In the light of the last two weeks,

I would judge that a level of negative free reserves of

around $400 million and a level of Federal Reserve Bank

discounts ranging from $700-800 million had effected about

the right degree of pressure.

If so, a level of discounts

of a billion dollars and of negative free reserves of $500

million could subject the market to heavier pressures than

would be desirable at the present time, Again, I would

feel that the Manager of the Account and the Desk should

have very wide latitude in their operations and in the feel

of the market to prevent kinks and unnecessary pressures.

In concluding his remarks,

presented was very broad.

could be rationalized, it

If

Mr. Mills said the subject he had

the type of policy he had suggested

not only would forward the objectives of

the Treasury but would also be conducive to the appropriate objectives

of credit restraint on the part of the Federal Reserve System.

Mr. Robertson said that he was concerned with the inflationary

pressures that existed, and he thought similar concern was implied in

the remarks of those who had preceded him this morning.

He was more

concerned for the long run than for the short run but felt that the

pressures were very real now.

Mr. Robertson asserted that the Com

mittee had not taken into account sufficiently the increased velocity

of money in

adjusting the volume of money; if

would be in

favor of reducing the volume.

he could do it

over, he

In that connection, he

stated that he too had been thinking of the discount rate, principally

because it

seemed to him that the only feasible time for an early in

crease would be in

June; if

opportunity would be in

action were not taken them, the next

August.

Mr.

Robertson said that he had come

5/28/57

-24

to the conclusion that such action in

much of a jolt.

He hoped that the System would continue to think

about the discount rate and be in

and desirable.

June would probably be too

In the meantime,

a position to act when feasible

he hoped the Committee would strive

toward a degree of tightness no less than had been achieved at the

moment.

He wished to think of the suggested $500 million of net

borrowed reserves for the next few weeks not as the top but as the

bottom,

on an average basis.

Mr. Robertson said he hoped the Com

mittee and the Manager of the Account would be no more concerned

about offsetting temporary tightness than about offsetting excessive

ease that might arise,

for example, through float.

If

we are to take

offsetting action on one side, we should act on the other side as

well.

He hoped that the tightness to be achieved over the next three

weeks would be as restrictive as that achieved up to now and, if any

thing, he would prefer to be on the tighter side.

Mr. Shepardson said that he was in substantial agreement with

the comments made thus far to the effect that the economy was generally

in a sidewise movement.

He was in accord with Messrs. Mills and

Robertson in feeling concern about the latent pressures that might

break out with the change to a greater feeling of optimism on the

part of the public that had been reported this morning.

at the moment the economy might be static, it

Even though

seemed to him that

there was considerable danger of an outbreak of further upward

pressures.

The question in

Mr. Shepardson's mind was when the

-25

5/28/57

System should move to do something about such pressures. He

realized that, with the Treasury activities in prospect during

the next few months, the Committee might be more or less precluded

from taking action at certain times.

However,

he felt that the

System should be thinking very definitely of the possibility that

additional upward pressures might develop and it

ing when it

could best move to check them.

should be consider

Mr. Shepardson said that

he was not certain that now was the time for a discount rate change,

but some little

time might be required to get ready for such a change

and in his opinion the present was not too early to begin this

process.

Mr.

Shepardson said that he would not favor any easing in

the situation and if

tion, it

there were any deviation from the present situa

should be toward tightness rather than toward ease.

Mr. Fulton described Cleveland District employment as high

with a diminishing number of unemployed.

The steel operating rate

was down but the industry expected that inventories would be worked

off and that the operating rate would improve rather shortly.

Fulton felt there was no doubt that steel prices would rise.

had been some reduction in manufacture of appliances.

Mr.

There

The wage cost

problem was facing industry but profits were quite substantial.

business community was optimistic.

tion was actively with us and that it

The

There was a consensus that infla

must be controlled.

Mr. Fulton said that he had come to the conclusion that there

was no reason for easing the reserve situation now despite the reduced

5/28/57

-26

steel rate.

had.

Rather, the System should maintain the posture it now

New capital offerings in

June were expected to be large and

demand for credit was growing. He would go along with the comments

of Messrs. Mills and Robertson regarding the possibility of an in

crease in

the discount rate in

said, adding that if

Fulton

the System did not take action prior to the

Treasury's refunding it

other occasions.

the somewhat near future, Mr.

He felt

would be hemmed in

again as it

had been on

that we could not live indefinitely with

a constantly increasing short-term interest rate, with the bill rate

constantly above the discount rate.

If the market was thus reflect

ing a demand for funds, the System should recognize it through the

discount rate.

Mr. Fulton expressed the feeling that at least by

July closer consideration should be given to an increase in the dis

count rate.

Mr. Williams said that business activity in the Third District

continued to move sidewise.

equal to a year ago.

Department store sales were just about

Automobile sales were slow.

were running well below last year.

New housing starts

The Third District situation was

comparable to that outlined by others.

Loans and investments of

reporting member banks increased in the three weeks ending in mid

May but by a smaller amount than last year.

somewhat less than a year ago.

million in

Business loans were up

Total deposits were off about $75

the three-week period.

Banks met this drain of deposits

5/28/57

-27

by liquidation of Government securities,

of Federal funds,

substantial net purchases

and borrowings from the Federal Reserve Bank.

Preliminary approaches to the persistent borrowers from the Reserve

Bank had been made and they had indicated that demands on them would

be quite heavy in

the period ahead.

Mr. Williams remarked that

several months ago the statistics were outrunning sentiment, whereas

now the attitude of the business public was outrunning the statistics.

As to credit policy, Mr. Williams said that he would suggest

no change in

either the objectives or the procedures being followed.

The Philadelphia Bank had not taken into consideration the suggestion

made by Mr.

Mills of a possible change of the discount rate in

anticipation of developments in

Williams said,he felt

the capital market.

Personally, Mr.

that the System would need more evidence on

this suggestion before it

was ready to move on the rate.

Mr. Bryan said that Sixth District employment was staying

steady or moving slightly upward.

In the financial field, there had

been a rather sharp drop in deposits at some of the larger banks with

the result that borrowing had increased.

again in a movement in which it

The district seemed to be

was losing funds to other parts of

the country.

Mr.

prices.

Bryan noted that Mr.

Allen had commented on farm land

He said that he sensed a very substantial speculative fever

5/28/57

-28

in all States of the Sixth District with regard to land and

property transfers.

On the national picture, Mr. Bryan stated that he had

come to this meeting with a greater sense of alarm than had been

generally expressed.

price level.

The country had had another increase in

The persistent and large increases that had been

occurring for a good many months had been exceeded in

amount in

recent years only by the increases during the Korean period.

Bryan felt

the

that the Committee must face certain facts.

that the depreciation of 4 per cent in

during the past year,

if

One was

the value of the dollar

not a galloping inflation,

more than a creeping inflation.

Mr.

Secondly, Mr.

was certainly

Bryan felt that we

confronted with a rip-roaring capital goods boom, and

were still

he could see no reason for this boom stopping either in

future or in the fairly long run.

the immediate

The System was confronted with the

problem of what to do about both the near term and the longer run

prospects.

It could decide that it would fight it out with the

present level of rates, or it could try to exercise further restraint

on the situation.

Mr. Bryan said that he was belatedly convinced that the

System had a moral responsibility to exercise further restraint in

this situation.

In the second half of the year the volume of bank

credit was almost certain to go up.

a major Treasury problem.

Mr.

This would also be a period of

Bryan said that it

seemed a foregone

5/28/57

-29

conclusion that the System would supply reserves in

of the year, and in considerable amount.

the second half

The sole question that the

System had to decide was whether it was to supply these reserves at

the present level of interest rates or at a higher level.

Mr. Bryan

felt that the Committee would do better to supply the reserves at a

higher level of interest rates.

The present level had not stopped

the inflation, and he did not believe that we had yet reached an

equilibrium in the demand and supply of money savings for the economy.

He believed, therefore, that the System should increase the discount

rate, and he followed the line of reasoning that had been set forth

by Mr.

Mills.

This increase should be made fairly promptly.

If we

were to go far into the second half of the year without doing some

thing, the System would be frozen with the present rate.

Mr. Bryan

said he shared to some extent the thinking that Mr. Robertson had

expressed that an increase in the rate might be a shock to the market

if it were to come suddenly.

He had the idea that the System might

approach this problem advertently as it

namely with one Bank raising its

had another time inadvertently,

discount rate and thus warning the

market that the System was fundamentally concerned with this problem

and that it was not committed to the existing level of discount rates.

To that end, Mr. Bryan said that he had asked his staff to examine

the situation in the Sixth District in order to determine the validity

of some of the signs that indicated that the Atlanta Bank might be

justified in

having at this time a differentially higher discount rate.

5/28/57

-30

Mr. Johns said that he was not ready to take a position

with respect to the matter that had been raised by Mr. Mills.

He

had come to this meeting believing that inevitably the System was

going to supply some reserves in the coming months and that perhaps

it

would have to take into account in

that process the desirability

of maintaining the structure of interest rates at about the present

level, believing that to be a good level and where the System wanted

to keep it.

That would have implications for open market policy in

coming weeks.

Mr. Johns said that he still had some slight fear that

for the System to tolerate or even encourage an increase in

of interest rates might entail more restriction than it

was not so sure of that as to argue vigorously for it,

the level

wanted,

He

however.

He

had come here prepared to say that he thought the System should main

tain about the degree of restraint it had recently had.

That would

have involved supplying reserves in such quantities and at such times

as needed.

Mr.

Szymczak said that normally he would favor an increase in

the discount rate, perhaps now or sooner than now.

Under the circum

stances, however, he was afraid that any increase in discount rate

would hurt the very markets we were talking about, that is, the

capital market and the market for Government securities.

One could

not tell how such action would be interpreted, but Mr. Szymczak said

that he had the feeling that the market would interpret it

to mean

that the System not only intended to be as restrictive as it had been

-31

5/28/57

but more restrictive.

An announcement of an increase in discount

rate by one Bank or by twelve of the Reserve Banks could be con

strued to mean that the System felt that the rate generally should

be higher and that the System would not make available reserves.

Mr.

Szymczak felt that the System would have to provide some reserves,

perhaps beginning early in the second half of the year.

Therefore,

he would favor negative free reserves between $400 and $500 million

and borrowings by member banks below $1 billion.

He would also give

the Manager of the System Account as much latitude as required to

meet the situation that might arise.

Mr. Szymczak commented that

the Treasury's problem was our problem because it

market and the capital market is

must go to the

a part of our problem. Whatever

happens to either affects the reactions of the public and of members

of the Congress to System actions regarding monetary policy.

Mr. Balderston then made a statement substantially as follows:

I share much of the concern that Mr. Szymczak has ex

pressed about the need for not unsettling the capital mar

kets right now. On the other hand, I have a continuing

concern about what is happening not only in this country,

but throughout the world. We had the news last week of

certain wage contracts in California that will run for

five years and give a raise of 18 cents per hour each year

Such develop

to laborers in the construction industry.

ments increase the tendency for people to want to buy now

rather than later. The wage price spiral is about to re

As a

ceive another twist of built-in escalator clauses.

result, steel prices will apparently increase, and perhaps

I mention steel and freight rates

freight rates as well.

because they are such pervasive influences.

Utilities and local governmental units will have to

The

come to the capital market to an increasing extent.

5/28/57

-32-

margin between the present discount rate and the rate

on Government securities seems to me likely to widen.

Already it is wide enough to present some technical

difficulties.

This means that I now regret our dis

count rate was not raised earlier this year.

In

cidentally, our rate is the second lowest among the

developed nations of the world, the Swiss alone having

a lower one at 2-1/2 per cent. The French have a

per cent rate and the British 5 per cent. Ours remains

at 3 per cent.

In the face of the world-wide inflationary tendency,

I am not too comfortable with this rate. But if and when

we do move up our discount rate, the timing would require

very careful attention so that the market could be gotten

into a steady state before the Treasury's August refinanc

ing.

That will be a difficult financing: $8 billion out

side of the Federal Reserve System, of which only $3 bil

lion is in the banks and $5 billion in the hands of

nonbank holders. We not only have the big August financing

ahead, but we also have the real risk that too much turbu

lence in the capital markets may cause the more rapid

redemption of F and G bonds.

If these are redeemed at a

faster rate, enough of these are outstanding to accentuate

the Treasury's problem.

In short, I think that discount rate action may need

to be taken even at this late date; but any action taken

ought to be so timed as not to make the Treasury's financ

ing problem more difficult. That means that unless taken

right away, it would have to wait until fall.

Mr. Bryan commented that one of the difficulties that was be

ginning to appear and that would continue to be present in the capital

markets arose from the fact that, as short-term interest rates moved

well above the discount rate, there was speculation as to the future

of the discount rate; and in

consequence of this many persons would

not make commitments because they believed that the present level of

rates had no stability.

Thus, the System would either have to adjust

the discount rate or give assurance to the market that it

would not

5/28/57

-33

increase the rate.

Mr. Bryan said that his preference would be to

adjust the discount rate.

Chairman Martin said that he was alarmed about the picture;

and "alarmed" was the correct word to use.

not know the answer.

At the same time, he did

He had been mulling the situation over for the

last couple of weeks and still

did not see the answer clearly.

The

Committee had been dealing with some psychological aspects of the

situation for a couple of years and it

been miscalculations.

It

might well be that there had

might have been wiser if

raised the discount rate earlier.

the System had

The Committee had been uncertain

as to what the business situation would be earlier this year.

As Mr.

Williams had said, the statistics were then outrunning sentiment,

whereas now sentiment seemed to be outrunning the statistics.

The Chairman said that he was inclined to think that the System

must supply reserves and supply them quite actively during the second

half of this year.

Regardless of Mr. Robertson's point that the System

may have miscalculated as to the velocity of money, it

had restrained

the volume of credit and the velocity had been taken into consideration.

In terms of the growth of the economy,

additional reserves would be

needed and needed actively in the second half of this year.

said before,

As he had

in this situation the System must have a posture of re

ducing spending and increasing savings.

If what Mr. Hayes had said

about the reduced rate of growth in savings in the first quarter of

5/28/57

-34

this year was correct,

this made the picture even more alarming.

The Chairman said that the only thing he knew of that was seriously

short in

it

supply was savings.

After errors have been made, he said,

becomes very easy in retrospect to see them.

Without stating

that errors had been made, Chairman Martin said that all of us

would have done many things differently if

we had been able to know

how the situation would develop.

Chairman Martin went on to say that the System had a very

real obligation to consider the Treasury's problem, as Mr. Szymczak

had pointed out.

indicated in

While he would not go as far as Mr. Johns bad

saying that the System would have to supply the reserves

to maintain the interest rate structure, the Chairman said that he

had not changed the judgment that he held when he came to the meeting

this morning.

Perhaps we should consider an increase in

rate, but to take such action immediately would,

the discount

in his opinion,

compound the System's and the Treasury's difficulties.

It

cult to gauge what were legitimate fears and apprehensions,

was just idle speculation.

However,

was diffi

and what

anyone looking at the capital

markets today and seeing the volume of issues and the sort of situa

tion mentioned during the meeting this morning with new issues selling

as high as 5-1/4 per cent yield--anyone observing that situation must

realize that we were faced with a delicate operation.

The Treasury

too had a problem with the large volume of demand debt in

of savings bonds.

the form

5/28/57

-35

Chairman Martin said that we were talking in

this room

and that we must be extremely careful about comments on the subject.

However,

we were dealing with what could amount to a run on a bank.

Runs on banks can start for no good reason, he noted, adding that

the Treasury could be faced with that sort of a problem because of

the large volume of savings bonds outstanding.

While he was not

suggesting that this would happen or that this was the Committee's

controlling obligation, nevertheless, if

the Treasury should have

a "run on the bank" the System would be faced with a very difficult

problem.

In order to achieve the maximum pressure against credit

expansion, it

was necessary for the System to handle its

market

operations very carefully.

Chairman Martin said that he would lean in the direction

that Mr.

Mills had suggested because he believed that if

the System

could raise the discount rate and supply the reserves that it

going to have to supply at a little

was

higher level of interest rates,

this would be the most effective action that the System could take.

However,

he was inclined to think that the present would be a little

too early to raise the discount rate in

was swinging around.

something all

view of the psychology that

The suggestion for an increase in the rate was

of those present should study very carefully in terms

of the most effective timing.

If

the action were misinterpreted, it

could result in widespread misunderstanding throughout the country.

By and large, the Chairman said he was convinced that in may small

5/28/57

-36

communities the discount rate change was a major item.

the E and H savings bonds were held in

Many of

areas where that attitude

existed.

The Chairman expressed the view that this was a most critical

juncture in

the battle against inflation and that anyone who minimized

the alarm he had indicated as to the possibility of an ultimate flight

from the dollar was making a serious mistake.

On the other hand, if

there were anything that tended toward a run on the Treasury, such a

development could become one of the elements in

dollar.

a flight from the

Chairman Martin did not see how we could fail to recognize

the elements in

the picture.

His own feeling was that the Committee

should maintain the present degree of restraint, taking overt action

in neither direction, and letting the Manager of the Account have the

maximum latitude to feel his way in this market.

All of the members

of the Committee should bear in mind the problem of reserves and of

levels of interest rates and the possibility of a change in the dis

count rate at some time in

the near future.

mind the problem of the Treasury:

wrong course,

the Treasury may have taken the

as Mr. Leedy had suggested, but the fact was that at

the present time the Treasury had $55

billion of demand obligations

outstanding in the form of savings bonds.

picture,

We should also bear in

Considering the entire

Chairman Martin said that he came out at the point that

the Committee should maintain the directive without change.

not feel that the change in

He did

the international situation had been

5/28/57

-37

such as to warrant deleting the reference to it in clause (b) of

the directive.

The aim of the Committee during the next few weeks

should be to maintain as even a keel as possible and to let this

psychology work itself out. Perhaps the advertent method which Mr.

Bryan had suggested could be used, but at the present juncture

Chairman Martin said that he would not wish to take a positive posi

tion as to that suggestion.

Mr. Shepardson inquired whether the Chairman's comments

implied that June might be a month when the System could put reserves

into the market and at the same time increase the discount rate with

out undesirable consequences.

The Chairman responded that this could be the case but that

he was not taking a position at the moment.

Mr. Hayes commented that he understood on the strength of the

projections that float would probably take care of most of the addi

tional reserve needs in June.

Thus the System would not be in the

position of having to put reserves into the market at that time.

On the larger question, Mr. Hayes said that if there were to

be an increase in the discount rate the System should be very clear

as to why the increase was being made.

He noted that two reasons had

been given for such an increase, and he was not sure that the two were

consistent.

One of these was the obvious reason that there were

serious inflationary threats and that the System should increase the

discount rate to combat these threats.

This, he felt, was the essence

5/28/57

-38

of the statement made by Messrs.

Robertson and Shepardson.

other was the suggestion he understood to be implied in

comment,

that is,

a rise in

The

Mr. Mills'

the discount rate would provide greater

settlement and stability in the capital markets on the theory that

the existing uncertainty as to rates was a drawback in the capital

markets and that perhaps elimination of that uncertainty would help

provide a better equilibrium.

With respect to the second objective,

Mr. Hayes said that he had very grave misgivings as to whether an

increase in the discount rate now would produce an equilibrium, be

cause of the whole atmosphere in the securities market.

It was very

much open to question, he said, whether dealing with such a delicate

problem ratewise might not have an effect just the opposite of that

desired.

Personally, Mr. Hayes said that he had misgivings as to

whether such a move was needed strictly as a monetary measure.

He

had not reached a conclusion that the inflationary forces were very

definitely and strongly in the ascendency. He stressed the confused

and mixed character of the picture, as he and some of his colleagues

saw it.

It was true that sentiment had improved, Mr. Hayes said,

but he was impressed by the statement Mr. Williams had made that

sentiment has improved but statistics have worsened. He thought it

very questionable whether this was a desirable time to make an overt

move toward greater restraint.

He did not believe such action was

called for, with the business picture looking the way it does, There

was wide room for judgment on that, of course.

5/28/57

-39

Mr. Erickson said that it seemed to him that business

sentiment in the spring of each year following a good year was

always tending down early in the year, and later on it improved.

He would like to be sure that we did not overemphasize such de

velopments this year.

Mr. Vardaman said that he was wholly in agreement with the

comments Mr. Hayes had made.

Without meaning to be presumptuous, he

noted that there were some forty persons in the room, and he suggested

that if word of this discussion got outside the room it would have

almost as disturbing an effect on the market as though the discount

rate were raised.

Chairman Martin said that he had already commented on the

latter point and that he was glad that Mr. Vardaman had reiterated

the need for not commenting about discussions in this room

On the

other hand, it was essential that the Committee discuss these prob

lems, and it must rely on the intelligence and discretion of the

persons attending the meetings.

As to policy, the Chairman said that he would gather that

the consensus was that the Committee should maintain the status quo

and that it should continue to study the problems that had been

discussed at this meeting.

Mr. Shepardson said that he had no objection to that state

ment.

However,

the comment Mr.

Hayes had just made regarding the

-40.

5/28/57

difficulty of judging the business situation was one that always

faced us; the Committee would always be behind the figures,

it

and

was part of the Committee's job to reach a judgment before the

figures reached it.

Chairman Martin inquired of Mr. Rouse whether he had any sug

gestions regarding the directive, and he responded that he had none.

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

(including replacement of maturing securities, and allow

ing 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 wi;h 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

recognizing uncertainties in the business outlook, the

financial markets, and the international situation, and

(c) to the practical administration of the account; pro

vided 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 in

debtedness purchased from time to time for the temporary

accommodation of the Treasury, shall not be increased or

decreased by more than $1 billion;

To purchase direct from the Treasury for the

(2)

account of the Federal Reserve Bank of New York (with

discretion, in cases where it seems desirable, to issue

participations to one or more Federal Reserve Banks) such

amounts of special short-term certificates of indebtedness

as may be necessary from time to time for the temporary

5/28/57

-41

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 accommoda

tion 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.

It

was agreed that the next meeting of the Committee would be

held at 10:00 a.m. on Tuesday,

June 18, 1957.

Thereupon the meeting adjourned.

Secretary