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.
Mr.
Mr.
Mr.
Mr.
Mr.
August 20, 1957, at 10:00 a.m.
Martin, Chairman
Allen
Balderston
Bryan
Leedy
Mills
Robertson
Vardaman
Williams
Treiber, Alternate for Mr. Hayes
Messrs. Fulton, Irons, 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. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Hackley, General Counsel
Messrs. Atkinson, Bopp, Marget, Mitchell, Roelse,
Tow, and Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Carpenter, Secretary, Board of Governors
Mr. Kenyon, Assistant Secretary, Board of
Governors
Mr. Miller, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Link, Economist, Research Department,
Federal Reserve Bank of New York
Messrs. Abbott and Wheeler, Vice Presidents of
the Federal Reserve Banks of St. Louis and
San Francisco, respectively; Mr. Balles,
Assistant Vice President, Federal Reserve
Bank of Cleveland; Mr. Parsons, Director of
Research, Federal Reserve Bank of Minneapolis;
and Messrs. Willis and Walker, Economic
Advisers, Federal Reserve Banks of Boston and
Dallas, respectively
8/20/57
-2
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meetings of the Federal Open Market Com
mittee held on July 9 and July 30, 1957,
were approved.
Chairman Martin suggested that Mr.
Department,
meeting.
Link, Economist, Research
Federal Reserve Bank of New York, be invited into the
There being no objection, Mr.
Link entered the room.
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 July 30, 1957,
through August 14, 1957,
as well as a supplementary report covering
commitments executed August 15 through August 19, 1957.
both reports have been placed in
Copies of
the files of the Federal Open Market
Committee.
Mr. Rouse reported that firm pressure on reserve positions com
bined with the effects of the special Treasury auction of $1-3/4 billion
of April 1958 bills and the advances in
the prime loan rate, acceptance
rates and discount rates had combined to put the money market under
severe pressure.
A paradoxical situation had developed, moreover, in
which the new April bills were now quoted at 4-1/4 per cent while the
April certificates were trading at 3.93 - 3.88 per cent and the issues
offered in
the recent refunding were at par or higher.
Net borrowed reserves averaged $600 million over the two weeks
ended August 7 and August 14, a level that seems to have been pretty
-3
8/20/57
severe for the special bill auction; underwriting proved to be rather
reluctant.
At the beginning of the statement week ending August 21
net borrowed reserves declined but were expected to return to about
$500 million by the end of the week.
Projections indicate a rise in
the following statement week, that ending August 28, to $750-$800
million.
The Account Management is
Treasury bills on Wednesday,
at present planning to purchase
August 21, for regular delivery,
in order
to alleviate pressures arising from the deposits created as banks make
payment on that day for the special April bills.
Longer-term rates have not so far adjusted as much as have
shorter rates.
Partly this seems to be due to a rather moderate
volume of new issues.
Today, however,
two large issues consisting
of $100 million Atlantic Refining Company convertible debentures and
$90 million Pacific Telephone and Telegraph debentures are being
publicly offered.
comes quite heavy.
Beginning with these two issues the calendar be
As a result, the upward movement in short rates
may be expected to spread into longer maturities.
With respect to Treasury financing,
Mr. Rouse stated that the
Treasury expects now that it will require $3-1/2 billion additional
cash financing by mid-September.
The offering will probably take
place on September 16 for payment about September 26 and will probably
involve a coupon, thus giving the market some leadership.
Reserves
will be needed in the weeks ahead to avoid excessive pressures that
might arise from the regular seasonal borrowing of business and from
the expected Treasury flotations.
8/20/57
-4
Mr.
Vardaman raised a question concerning the prospective
level of net borrowed reserves during the coming week and Mr. Rouse
stated that the average was expected to be between $750 million and
$800 million.
Mr.
Mills asked whether a $600 million level of net borrowed
reserves was correct for the present situation.
He further asked if
the market was conditioned to such a level and wanted to know what was
the present goal for net borrowed reserves.
Mr.
Rouse replied that in
his view net borrowed reserves were a symbol, not a target; it
seemed
to him that the view of the Committee at the last meeting had envisaged
net borrowed reserves of $600-$700 million.
mittee would view recent conditions in
He hoped that the Com
the money market, associated
with a $600-700 million level of net borrowed reserves,
He was,
however,
still
as too tight.
aiming at this symbolic figure, assuming that
the position of the Committee was unchanged.
However,
a lower level of net borrowed reserves would still
he thought that
bring about the
degree of restraint desired and recalled that in the second half of
1956 restraint had been maintained even though net borrowed reserve
levels had declined, and were substantially below $500 million.
Upon motion duly made and seconded,
and by unanimous vote, the open market
transactions during the period July 30
through August 19, 1957, were approved,
ratified, and confirmed.
Chairman Martin called upon Mr.
Young for a statement on the
economic situation, supplementing information presented in the staff
8/20/57
memorandum distributed under date of August 16, 1957.
Mr. Young's
statement was as follows:
In this country, over-all economic activity remains
at high levels, with GNP in constant dollars still
show
ing a modest upward tilt.
Abroad, output expansion also
continues at a moderate rate, and in many countries in
flationary pressures are dominant.
In western Europe,
disequilibria in investment-savings relationships and in
currency values have reached a critical stage, with credit
market conditions tightening markedly further and limited
devaluation of the French franc working to aggravate
rather than alleviate tensions.
The important economic news domestically relates to a
strengthening of consumer markets.
Improvement in consumer
demand since April and some liquidation of distributor
stocks has been reflected in significant improvement of the
output of consumer goods, especially durables.
This has
largely offset the influence of decreases in output in
business equipment, ordnance, and crude petroleum, and
stabilized the index of industrial production for June and
July at 144, compared with 143 for April and May.
Construction activity generally remains at record
levels.
Private housing starts in July, while below a
year ago, held close to the May-June level. Construction
costs, after some months of stability, have shown a rising
tendency since May. Recent adjustments in maximum per
missible interest rates and discounts on FHA home mortgages
would appear to place these investments on an effective
competitive basis with alternative capital market instru
ments.
The labor market continues strong, with employment at
record levels, unemployment low, and average hours of work
and hourly earnings showing little change.
since mid-July.
Wholesale prices have changed little
price
farm
products,
well
as
For industrial products as
mid-August
The
offsetting.
have
been
advances and declines
cost-of-living figure is not yet available, but some further
rise is indicated by advances of retail food prices,
notably meats and vegetables. Prices in the used car market
continue strong.
Crop production, according to most recent estimates,
will be 3 per cent below the record of last year, a smaller
Basic price
decline than indicated by earlier estimates.
per
cent, but
off
11
to
be
supported crops are expected
8/20/57
-6
sharp increases are expected for feed crops other than
corn and fruit. Current ratios of meat animal prices
to feed prices are high and are encouraging to expansion
of livestock raising.
The main thoughts I come back with from Europe can
be summarized as follows. First, the problems we face
here are common to all countries of western Europe, but
they are more aggravated there. Second, there is a good
deal of concern and apprehension about the situation in
western Europe, and also a little bit of worry about
economic developments in this country. Third, the basic
problem in western Europe is that financial expansion
continues apace while physical production has reached a
point where it may be slowed down in the future by the
availability of resources. That is, the rate may be
slower than in the past.
Governor Vardaman referred to the apparent tendency toward
more liberal terms for the purchase of automobiles and inquired whether
it
appeared whether the strengthening of consumer demand mentioned by
Mr. Young might simply represent taking advantage of extended credit
terms on cars and other consumer durable goods.
Mr. Young replied
that from the relationship of the increase of instalment credit to
the volume of total sales, say in the month of June, it would appear
there was no particular increase in the volume of credit sales as
opposed to cash sales.
He said that sales of automobiles on credit
were holding at about two-thirds of total sales.
Governor Balderston inquired of Mr. Young whether, on his
return from Europe, he sensed any increase in the number of "soft
spots" in the domestic economy.
Mr. Young responded in terms that
he had not yet had an opportunity to make a real appraisal, but that
he had been struck in going over available information by the resurgence
8/20/57
of strength in the consumer markets.
When he left for Europe, he
said, consumer markets seemed to be just "bouncing around," but now
consumer demand appeared to have strengthened a great deal.
In the absence of Mr.
Thomas,
Chairman Martin called upon Mr.
Miller for a statement on recent credit and financial developments,
and Mr. Miller's statement was as follows:
The summer doldrums which often characterize financial
markets in August have been replaced this year by unusual
activity and many important developments.
Money and security
markets, which experienced some relaxation in July, have
again tightened. A basic development has been the frequent
appearance of both private and public borrowers in the market
for new funds: the Treasury auctioned a special April bill
for $1.75 billion of new money; simultaneously it sought
money through sale of CCC cotton; and both the State and
local government and the corporate new issue calendars
snowballed to record size. A flurry of administered rate
increases appeared, led by an increase in the prime rate
to 4-1/2 per cent.
Commercial paper rates rose 1/8 per
cent and bankers' acceptances rates, reflecting the
financing of CCC cotton sales, rose 5/8 per cent in three
By mid-August the discount rate had been
separate jumps.
increased from 3 to 3-1/2 per cent at nine Federal Reserve
Banks. Only activity in the stock market followed the
typical August pattern as trading slumped from previous
weeks in a declining market which carried prices about
8 per cent below their July highs. Yesterday's sharp
break carried the averages down to near the February lows.
The Treasury's greater-than-expected need for new money
so far in the new fiscal year has been occasioned by heavier
than-anticipated spending, due mostly to major national
security outlays despite strenuous efforts to cut back defense
expenditures.
In July defense outlays were at an annual rate
$5 billion higher than a year ago and $1.5 billion higher than
Also, net redemptions of savings bonds are double
in June.
So far in August, these trends making for
last year's rate.
are continuing, and last Thursday the
cash
drain
heavy
a
Treasury's cash balance dropped to $1.4 billion.
The sale of special bills with payment due tomorrow should
maintain the Treasury's balance at a comfortable level until
October although a low point probably near last week's low
will be reached in mid-September just prior to receipt of
quarterly income tax instalments. Around $4 billion of new
cash borrowing for payment in early October probably will
be required. A cash surplus estimated at around $5 billion
next June will make it possible to offer a June tax anticipa
tion issue to cover at least a part of these needs. In
creases in regular weekly Treasury bill offerings could be
used to meet any marginal October needs as well as additional
cash needs at the end of calendar 1957. This kind of a
borrowing program, however, indicates that the permanent debt
ceiling of $275 billion would be exceeded in the fourth
quarter, assuming a normal cash balance.
These actual and prospective undertakings by the Treasury
along with the other aforementioned developments in the
financial markets have subjected the Government securities
market to a series of pressures which resulted in some sharp
run-ups in yields of shorter Treasury issues. The average
issuing rate in last week's auction at 3.50 per cent was an
all-time high except for an auction during the bank holidays.
In yesterday's auction, the average issuing rate dropped to
3.35 per cent. The April special bill, auctioned at an
average rate of 4.17 per cent and a stopout of 4.25 per cent,
was in sharp contrast with the 3.49 per cent average on last
June's auction of the March tax bill. On the other hand,
long and intermediate Treasury issues, led by the newly
offered August refunding issues, have performed remarkably
well over this period with some issues improving in price
following the August refunding. Although yields have
recently increased again, most issues are below their
earlier highs.
Yields on corporate and State and local government
securities, however, have moved to new highs. Rates on
both outstanding and new issues have increased markedly in
Yields on outstanding AAA-rated corporate bonds
August.
have reached a new high of 4.09 per cent and a newly-offered
electric utility first mortgage bond was reoffered to yield
5 per cent--some 35 basis points above that for a comparable
issue offered in mid-July. These developments reflect in
part a continually expanding corporate new issue calendar.
New corporate offerings this month are expected to total
below July and the largest
about $900 million--only a little
Since July issues
for any August in the postwar period.
amounted to more than $1 billion, this indicates a record
third quarter total. Prospects are for an even much heavier
calendar after Labor Day.
8/20/57
-9Prospective new State and local government issues for
August are also much above normal, and yields have shot
upward some 15 basis points on outstanding issues. On a
new offering, Los Angeles paid some 80 basis points more
last week than on a similar offering in April,
Bank loans in leading cities continued to decline in
August; in the four weeks ending August 7, business loans
were down over $400 million. Last year in the comparable
period, business loans increased slightly but in most other
recent years such loans rose markedly. This decline con
tinues to reflect the heavy repayment of business loans
following record tax borrowing in June. It is interesting
to note, however, that the volume of loans granted con
tinues to rise and that the decline in total business loans
reflects the trend that developed in the first half of the
year of increased repayments relative to the growth of new
loans.
Thus, new lending in the last month increased but
repayments--again reflecting the June bulge--were up even
more.
Bank holdings of Government securities, which increased
sharply in early July because of bank takings of the March
tax anticipation bills, have declined substantially as banks
have sold this issue. Thus total loans and investments at
city banks have dropped $1.6 billion during the recent four
week period.
Demand deposits and currency increased by the usual
seasonal amount in July and at the end of July the money
supply was slightly less than one per cent above a year ago
Time deposit growth continues and at commercial banks the
expansion has amounted to $3.8 billion so far this year.
Turnover of demand deposits outside financial centers rose
further in July.
Member bank reserve positions tightened sharply in the
past two weeks in marked contrast to late July. Net borrowed
reserves averaged $600 million during the past two weeks
compared to $150 million in the last two weeks of July. In
the past two statement weeks, reserves have been absorbed by
an outflow of currency, a decline in float, increases in
other Federal Reserve accounts, and a sizable drop in System
Government security holdings reflecting for the most part the
termination of repurchase agreements against issues involved
in the August refunding.
Net borrowed reserves are expected to average around $400
million for the current statement week and then move sharply
higher in the following three weeks and average in excess of
8/20/57
-10-
$900 million in the first
two weeks of September.
After
some ease following the mid-September rise in float, the
average is expected to climb to over $1 billion in the
early weeks of October.
Averages in October will be in
fluenced by the amount and timing of Treasury cash financ
ing.
Looking ahead to the end of the year, net borrowed
reserves in the last week of November are projected at
$1.2 billion and in the last week of December at $1.8 bil
lion.
These projections indicate that System action to provide
seasonal reserve needs will be required in coming months.
Probably both repurchase agreements and outright purchases
will be called for.
The terms under which the System should
be willing to make these additional reserves available, how
ever, will depend in part upon the additional reactions of
the financial community to the recent round of tightening
moves.
Financial markets will need to be watched unusually
closely because of the shifts in borrowing by business con
cerns from commercial banks and insurance companies into
the capital markets.
Money and security markets have taken
the many recent financial developments in stride, but the
many rate increases and the sharp snap-back in net borrowed
reserve positions have not been without important impact.
It should be remembered that the restrictive impact of the
net borrowed reserve position has been increased as the
raising of the discount rate at nine of the twelve Reserve
Banks has decreased the incentive to borrow and has increased
the effectiveness of a given volume of net borrowed reserves.
Mr.
Treiber then made a statement as follows on the business and
credit situation and credit policy:
The most important developments in the area of credit
policy since the last meeting of the Federal Open Market
Committee have been the increase from 4 per cent to 4-1/2
per cent in the prime rate, the increase from 3 per cent
to 3-1/2 per cent in the discount rates of nine of the
Federal Reserve Banks, and substantial increases in other
money market rates.
Apparently the directors of the several Reserve Banks
approached the idea of an increase in the discount rate
with varying judgments and with varying degrees of enthusiasm
for an increase.
On each of the last three Thursdays the directors of the
Federal Reserve Bank of New York had an extended discussion
8/20/57
-11
of the discount rate and the question of increasing it.
They were unanimously of the view that economic conditions
did not call for an increase; and each week they re
established the 3 per cent rate. In advising the Board
of Governors of such action on August 8, and in advising
Chairman Martin informally on August 15, we reported that
the directors felt strongly that there have been no
significant changes in business and credit conditions
that would justify a change in the disccunt rate at the
New York Bank; they believed that the outlook was less
buoyant. They were impressed with the way in which the
System's continued policy of restraint has seemed to be
achieving its objectives, and they did not believe there
should be any action by the New York Bank which might be
interpreted by the public as an indication that we are
apprehensive of new inflationary developments in the busi
ness and credit situation.
With the increase in the discount rates of other
Reserve Banks and the further increase in market rates in
the last fortnight, our directors will, of course, have
other factors than just the business situation and business
prospects to consider at their meeting this Thursday. It
is difficult to predict what action they will take.
As for the economic situation, business conditions are
substantially unchanged since the last meeting of the Fed
eral Open Market Committee. The sideways movement in
physical production continues, with no convincing evidence
to suggest a major breakout on either the upside or the
downside in the near future. At the same time price indices
are holding at peak levels or are advancing further. The
policy of credit restraint should be continued.
The demand for bank credit is strong, as is the demand
for capital funds. The strong demand is likely to continue
during the remainder of the year, although the demand for
bank credit is not expected to be as intense as last year.
The prices of stocks have declined with little inter
ruption for the past month and have now lost nearly two-thirds
of the February to July rise. Less optimistic appraisals of
business prospects appear to be the major factor, but the
renewed rise in interest rates and the uncertain international
situation probably have been contributing influences in the
recently accelerated decline.
In the foreign field, in many places there is a nervous
uneasiness about future exchange parities. Measures taken,
and likely to be taken, by some foreign countries may have
the effect of reducing the demand for goods for export from
the Unites States.
8/20/57
-12
In the atmosphere of severe credit restraint which has
existed for some time, short-term market rates of interest
have been almost constantly under upward pressure.
The
action of the commercial bankers in increasing their prime
loan rate, followed by the increase in Federal Reserve dis
count rates has touched off a major realignment of prices
and yields in the money and securities markets.
Open market
operations should be conducted so as to avoid an intensifica
tion of pressures while this realignment is still
in process.
The latest issue of $1-3/4 billion of 237-day Treasury
bills maturing April 15, 1958, which are now selling at a
yield of about 4-1/4 per cent are to be paid for tomorrow.
During the remaining months of 1957, the Treasury will have
to borrow again for cash, at least once and probably twice,
and will have one refunding issue.
In certain respects the
Treasury is at the end of the line in seeking to raise money
for cash. Because of the high demand of other borrowers, the
Treasury's problems are most difficult.
We cannot be un
mindful of them.
The Treasury could no have sold its current issue without
bank underwriting and, of course, the banks need additional
reserves to do the underwriting.
We may expect the banks to
seek to sell most of the bills within a reasonable time.
In
the meantime the Federal Reserve Banks will have to take this
factor into account in their administration of the discount
window.
In the two statement weeks ended last Wednesday, member
bank borrowings averaged about $1,100 million ($1,060 and
$1,156 million), while net borrowed reserves averaged $600
million ($580 and $620 million). So far this week net borrowed
reserves have been temporarily reduced by an increase in float
Our projections
and a small reduction in Treasury balances.
indicate slightly less than $400 million this week. Our pro
jections for the next few weeks indicate substantially higher
net borrowed reserves.
We should continue to make reserves available to meet
the seasonal needs of business and of the Treasury. Whether
or not we approve of Government spending programs or of the
Treasury's having to borrow so much for cash in the second
Especially
half of the year, the Treasury must be financed.
in the light of the recent increases in the discount rates
and the adjustment in market rates that is continuing to take
place, it is particularly important that it be clear to the
public that reserves will be available for necessary purposes
in 1957.
8/20/57
-13
In view of the current adjustment in rates still going
on, the cumulative effect of credit restraint on the markets,
the difficult international situation, the need of the banks
for additional reserves this week to support the new deposits
growing out of the current Treasury financing and the con
tinuing need of the banks during the remainder of the year
for additional reserves to support the legitimate seasonal
needs of business, we believe that the release of reserves
through open market purchases should be made promptly as the
need for them develops. While we don't want to make errors,
if there are errors it would seem better that they be a
little on the liberal side rather than run the risk of
creating fears that seasonal needs and Treasury requirements
will create an intense credit squeeze as the fall season
progresses. It is important not to increase at this time
the degree of restraint as reflected by the course of rates
and the feel of the market; indeed, a modest relaxation of
the intensity of the restraint of recent weeks may be in
order. Recognizing the dangers inherent in concentrating
on statistical measurements, it seems to us that net borrowed
reserves of $.5 billion would be an appropriate symbol of the
desired degree of tightness.
Mr. Erickson said that conditions in the First District continued
to follow pretty much the national pattern.
While nonagricultural employ
ment rose seasonally by about 43,000 from May to June, the rise was not as
great as it was last year.
In fact, June was the first
hind the year ago level since February of 1955.
month to fall be
The weakness on a year
to-year basis comes from the continued lag on nondurable goods manu
facturing (particularly textiles) and from the newly developing lag in
some durable goods manufacturing.
The average factory workweek lengthened
seasonally from May to June and the average factory weekly earnings rose;
the man-hour index rose from 91.5 per cent in
May to 93 per cent in
June.
The district's manufacturing index also rose from May to June, the rise
being pretty widespread between the various industries.
For the first
8/20/57
-14
six months total construction contracts lagged 10 per cent behind
the first six months of last year, with a 16 per cent gain in non
residential building offset by declines in residential and heavy
construction.
New England performance in
construction led the
national average in April and May but was behind in June.
sales continued to be disappointing, the six months'
total being 8-1/2 per cent less than a year ago.
tinued to trail
the national average.
New car
cumulative
New England con
A sample of 14 banks disclosed
a continuing trend towards a liberalization of credit terms on instal
ment purchases of new cars.
The banks reported 40 per cent of their
direct loans written for more than 30 months in
20 per cent in
June 1956; also in
36 months which is
It
June as compared with
June 1.9 per cent were for more than
the highest month since this series started in
1955.
would seem that New England terms continued to be relatively more
liberal than the national average.
While department store sales had
been up for the year to date they have been down in
recent weeks.
There had been a newspaper strike for the last ten days, which of
course would have its effect on department store sales.
As reported
at the last meeting, discount window activities were materially reduced
in July as compared with the second quarter.
Early in August there was
more active use again of the window, mostly by the banks in larger
cities, such as Providence, Worcester,
in
Springfield,
and New Haven, but
the last week borrowings had not been as heavy as they were in the
8/20/57
-15.
early part of the month.
Two so-called problem cases had paid off
their loans and had told the Reserve Bank they will be out of debt
for some time.
As regards credit policy for the next period, Mr.
said that he would recommend no change in
Erickson
the directive and believed
that the same degree of restraint as had prevailed in the last few
weeks should be continued, recognizing that we were approaching a
period when we would have to put reserves into the market.
to pin-point any figure for net borrowed reserves, but if
He hesitated
he had to, he
would say from $500 to $600 million net borrowed reserves.
Mr.
Irons said that conditions in
the Eleventh District had not
shown much change recently and that seasonal movements of no more than
the usual extent were anticipated.
In general, the picture was one of
strength and all important indices had shown gains this year.
ment store sales were running well and employment was high.
sales in
Depart
New car
the major cities reflected an intensely competitive situation,
but apparently sales were ahead of last year by about 10 per cent.
Prices appeared to be holding up quite well, and bargains were not as
real as might be gathered from advertisements.
prevailed in
the used car market.
A similar situation
The cutback in defense expenditures
for aircraft had not hit the district appreciably; in Dallas and Fort
Worth the cutbacks had been relatively small thus far.
The petroleum
situation was unchanged, with production in Texas still running on a
8/20/57
-16
13-day basis.
The agricultural situation appeared to be quite good
and recent estimates indicated an increase in
the yield very high.
the cotton crop, making
As to banking, the country banks generally con
tinued liquid with free reserves, but the reserve city banks were well
loaned up.
Loans at banks in
major cities were running about
55-65
per cent of deposits, with rather moderate negative reserve positions.
Thus far there had not been any heavy increase in member bank borrowing
from the Federal Reserve Bank.
It
had been thought that this might
develop about the middle of the month, but the demand did not materialize.
On the whole, the pressure on bank reserves did not appear to be ex
cessive.
In reviewing the discount rate changes from a distance, it
seemed to him that they had been made without shock to the economy
and that the discount rate was now in better relationship to other
market rates.
There appeared to be less uncertainty and a better
understanding of System policy with respect to direction and degree.
He hoped that the present degree of restraint would be maintained,
with net borrowed reserves in
the area of $500-$600 million and borrow
ings above $1 billion on the average.
the bill
rate.
If
that situation prevailed,
rate might be expected to be near the 3-1/2 per cent discount
If errors had to be made, he hoped that they would not be made
on the easy side and that a firm degree of restraint would be main
tained.
It
might be necessary,
of course,
to put funds into the mar
ket for seasonal purposes and to assure that funds would be available.
8/20/57
-17
Mr. Mangels said that the production and employment picture
in
the Twelfth District seemed to be maintaining itself at generally
satisfactory levels, although there were some areas of cloudiness.
In the State of Oregon, the employment situation continued to be
rather poor and delinquencies in
to appear.
One lender reported 1,800 delinquencies out of 10,000
accounts in August,
somewhat.
the repayment of loans were beginning
and 60-day delinquencies appeared to be increasing
Oregon expected the next six months to be rather slow and
difficult, with some further decline in
lumber prices.
In Washington,
the Boeing aircraft plant anticipated releasing between 6,000 and
8,000 workers before the end of the year.
Releases of aircraft
workers in
southern California also were continuing,
directors'
meeting one director reported having been told that the
and at the last
over-all release of aircraft workers would probably aggregate about
100,000.
in
In California,
manufacturing employment declined somewhat
July, due to declines in the automotive and aircraft industries
and strikes in
the machinist and building trades.
strike, however,
had now been settled.
tion, nonfarm employment in
The machinist
Except for the strike situa
California, Utah, and Washington had been
maintained close to the June levels.
In June, steel production at
West Coast plants ran at about 97 per cent of capacity, compared
with a rate of 85-1/2 per cent nationally, but in
was lower than in
May or June.
8 per cent from May.
In the first
July production
Construction awards in
June were up
half of 1957, the value of
8/20/57
-18
residential construction ran about
of 1956,
4 per cent under the first half
but nonresidential was up about 2 per cent and public works
and utilities
construction was up about 60 per cent.
store sales maintained a fairly even keel,
for the first
Department
while new car registrations
six months of 1957 were about one per cent below 1956.
In four States new car registrations were down, while in
they showed an increase.
three States
Twelfth District bank loans declined $38
million for the three weeks ended August 7, demand deposits were up
$19 million, and time deposits were down $3 million.
Member bank
borrowing from the Reserve Bank on August 15 aggregated only $6-1/2
million.
As to Federal funds, banks in
the district reverted to the
position of net lenders in the last reporting period, with purchases
totaling $49 million and sales $141
million.
An analysis of the June 6
call reports showed that the ratio of total loans to total deposits was
54.1 per cent, compared with 52.1 per cent a year ago.
The ratio of
total loans less real estate loans to demand deposits was 58.8 per cent
compared with 53.4
per cent, and the ratio of real estate loans to time
deposits was 47.9 per cent compared with 50.2 per cent.
The increase in
the discount rate, Mr.
Mangels said,
provoked
no particular comment from the banks in the district, or from the press
or the public.
The action of the San Francisco directors was based
primarily on the fact that the general rate structure had gone up
rather than on economic conditions in
the Twelfth District.
It
was
8/20/57
-19.
his view that the System should continue to maintain about the same
degree of pressure on reserves, and he had in mind that a level of
about $500 million of net borrowed reserves would be appropriate.
However, he felt that the Manager of the System Open Market Account
should be permitted some degree of discretion in the light of circum
stances as they might develop from day to day.
It was his opinion
that the current directive from the Committee need not be changed.
Mr. Deming reported that the expected good year for agriculture
in the Ninth District was now virtually confirmed, and that district
farm income this year would be 4 or 5 per cent ahead of 1956.
Other
district indicators pointed to continuation of about the same trends
that had been evident in recent weeks.
He saw nothing in particular
to comment on with respect to the national economic developments,
he
felt that the present course in credit policy was about right, and he
saw no reason to change the direction of that policy.
He recognized
that it would be necessary to put reserves into the market to meet
seasonal needs during much of the remainder of the year.
It
seemed
to him that a broad target of $.5 billion net borrowed reserves for
the next three weeks would produce about the degree of restraint that
the System had been attempting to obtain.
Mr. Allen said that recent reports indicated that business
activity was stronger in
the May,
June, July period than the major
economic indicators revealed at the time.
Gross national product,
-20
8/20/57
the industrial production index, nonfarm employment, and retail
trade had all been revised upward from the preliminary estimates,
and a most significant development was the renewed uptrend in
sales.
retail
After six months of little variation, the figure increased
in May, again in June, and still further in July.
Department store
sales provided the only basis for comparison on a regional basis
with national developments,
and sales by stores in
compared favorably with national figures.
Midwest centers
For both the four weeks
ended August 10 and the thirty-two weeks ended August 10, sales in
stores in the Seventh District increased more than the stores
throughout the nation.
As had been said, in July employment in non
farm establishments throughout the country again set a high for the
month, and unemployment was calculated to be only 3 million, or
100,000 below last year.
Except for Michigan, the States in the
Seventh District compared favorably with the nation on the numbers
of insured unemployed.
The construction picture,
offered no basis for pessimism.
Mr. Allen said,
For the first half of 1957 the
volume of construction put in place was 3 per cent more than last
year, and recent figures on contract awards reported by F. W. Dodge
indicated continued strength.
In June, total awards were 10 per cent
above 1956 compared with a gain of 5 per cent for the year to date.
Increasingly,
the construction boom was being carried by public works
and public utilities.
-21
8/20/57
Mr. Allen went on to say that over all the outlook for
credit demand was still
business loans in
July.
strong despite a substantial decline in
The amount of money being raised and
expected to be raised in the capital markets was huge.
Although
there was a substantial decline in business loans in July, such
loans at Seventh District banks, in contrast to the national trend,
increased $140 million since the end of May,
increase of a year earlier.
40 per cent over the
Loans by banks in
the district to
metals firms had continued downward, but loans to other businesses,
particularly public utilities and retail trade, more than offset
this decline.
Business loans should now begin to show signs of
seasonal demands,
and the larger banks in the Seventh District had
told the Reserve Bank that they expected the current heavy demand
for loans to continue and, in fact, to increase in the months
immediately ahead.
The recent renewed pressures on money center
banks appeared to have been heavier in New York than in Chicago,
the basic reserve deficit of the four larger Chicago banks having
increased only moderately from $26 million for the week of July 31
to $45 million for the week of August 14.
Two of those banks were
borrowing at the discount window, while a third bank, which had not
been borrowing in recent weeks, had been buying and selling Federal
funds on the same day, taking advantage of the differential between
the 3 and 3-1/2 per cent discount rates.
That bank was a net seller
on the days when it operated on both sides of the market.
8/20/57
-22
Mr. Allen reported that crop prospects in the Seventh District
had improved in July and August, but that indicated production of the
major cash crops, that is volume produced, remained below the excep
tionally large 1956 production.
Nevertheless, prices over all had
improved, particularly in livestock and livestock products which
represent by far the most important source of the district's farm in
come, and district farm income would, in the Reserve Bank's judgment,
continue to exceed the year-ago level through the remainder of 1957
and possibly the early months of 1958.
So far this year it was running
between 5 per cent and 6 per cent ahead of last year.
With respect to
automobile production, he recalled having reported some weeks ago that
the industry expected to turn out 500,000 cars in July, 500,000 in
August, and 300,000 in September.
The July goal was attained, and
thus far in August production had been at a 500,000 monthly rate.
Sales
in the first ten days of August averaged 16,319 daily, which was dis
appointing, and it compared with a daily rate of 17,500 for the month
of July.
However, a ten-day period is not always significant.
On
August 10 the industry's inventory of finished cars was estimated at
798,000, which is
high; however,
a big inventory had been planned so
that the dealers would not run out of cars in
between seasons.
Three
makers of cars were now producing only 1958 models, namely Rambler,
Lincoln, and of course the new Edsel, scheduled for public introduction
on September 4.
Mr. Allen then said that it was possible at this time, or at
almost any time for that matter,
to find in
an economy as large and
8/20/57
-23
diverse as that of the United States mixed trends in business
developments which produce a basis for somewhat different judgments
on the business outlook and the monetary policy appropriate to the
period ahead--different judgments, too, as to the timing for changes
in monetary policy.
To him, the evidence pointed to a real possibility
of intensification in inflationary pressures,
in
consumer spending.
But even if
sparked by the upturn
that possibility were no more than
an outside chance, he would continue the System's present policy be
cause it
seemed to him that the measures needed to halt, let alone
reverse,
the trend in
prices and the psychology of the business and
financial community had yet to demonstrate their effectiveness.
The
situation, he said, was one which had intractable aspects and which
would not yield,
about 'restraint'
as one writer had expressed it,
and 'responsibility'."
to "hopeful noises
It was becoming increasingly
apparent that the adjustments needed will come only by hard necessity.
That was a principal reason why he had recommended that the Chicago
Bank's Board of Directors vote for a higher discount rate and it
was
the reason why he felt that the Open Market Committee should at this
time continue its
Mr.
policy of credit restraint.
Allen commented,
with Mr.
it
From what he had said,
must appear obvious that he was in
Irons and not with Mr.
to err on the liberal side.
agreement
Treiber, in that he would prefer not
However, he was in
agreement with both
of them in that, recognizing the difficulty of setting a figure, he
would suggest that net borrowed reserves should be held if
in the $500-$600 million range.
possible
8/20/57
Mr.
trict
Leedy stated that most of the signs in
indicated economic strength.
slightly higher than a year ago in
except Oklahoma and Nebraska.
the Tenth Dis
Nonfarm employment was running
all of the States in
the district
The construction pattern was contrary
to that reported for the New England States.
The total value of
construction awards topped last year's figure by 6 per cent, slightly
better than the national average.
Both nonresidential and residential
construction were continuing at levels slightly above the national
average, but public works and utility construction were lower than
the national levels.
Department store trade for July had been roughly
8 per cent higher than during the same period last year.
as a whole,
however,
For the year
sales were only about one per cent higher,
and
when the price increase was taken into account this would indicate
that physical sales were slightly down.
Business loans had risen in
recent weeks contrary to the national picture and were now running
significantly ahead of the volume a year ago.
up and a sharp increase in
in
Demand deposits were
interbank deposits was noted.
The picture
agriculture was similar to that reported in the Dallas, Minneapolis,
and Chicago Districts, with soil conditions much improved.
Cash farm
income should be substantially higher, as payments from the soil bank
and improved prices for livestock contrived to make the farm picture
better than it
had been running.
As to policy,
for the immediate future, Mr.
Leedy said that he
subscribed to a continuation of the same degree of restraint, in
so far
8/20/57
-25
as it could be accomplished, that had been exerted during the period
since the last meeting of the Open Market Committee.
He went on to
say that personally he would not want to attempt to set a benchmark
for net borrowed reserves.
If he understood correctly, Mr. Rouse had
said that there had been greater restraint at times with lower levels
of net borrowed reserves than had prevailed at other times with con
siderably higher levels.
He would attempt to continue the degree of
pressure that the Committee had attempted to obtain, and had pretty
well accomplished, over the recent period, with no relaxation. While
he agreed with Mr. Treiber that there should be no intensification of
pressure, he would be opposed to any relaxation of pressure.
views indicated,
These
of course, that he would favor no change in the
Committee's directive.
Mr.
Vardaman said it
seemed to him that psychologically,
so far
as the public was concerned, and politically, so far as the Congress
was concerned,
commercial banks and the Federal Reserve System had made
serious mistakes in
raising at this time the prime commercial rate and
the Reserve Banks' discount rates.
In terms of economic effects, he
felt that the results might be opposite from what was desired.
As he
had said at the last meeting of the Committee, he thought that the
cumulative influence of the System's policy of restraint was becoming
more and more effective,
and it was his opinion that there should have
been continued credit restraint in the same degree as in
recent months
without any rate changes on the part of the commercial banks or
8/20/57
-26
Reserve Banks.
These last rate increases, he said, may prove to be
more frightening than otherwise, both to the purchasing and borrowing
sides of the economy.
He went on to say that he would like to adopt
as his own remarks those made by Mr.
Treiber, except that if
the
psychological effect of the rate changes should result in an actual
precipitous rise in business operations it might become necessary for
the System to lead the market by a definite snubbing action such as a
major raise in
the discount rate accompanied by appropriate open market
operations, to achieve an actual brake on the inflationary tendencies.
He thought it
was particularly unfortunate that the Reserve
Banks had seen fit to confirm the action of the commercial banks on
the prime rate with such alacrity by an increase in the discount rate.
Although,
as he had said at the last meeting, he recognized that the
discount rate was out of line on the low side, he did not favor follow
ing the action on the prime rate so quickly for he felt that this tended
to confirm the public fear that "the rise was going out of the roof,"
and that the Reserve System had lost control of the situation to the
commercial banks.
While he had voted with the other members of the Board to
approve the increases in
the discount rate, he had done so with great
reluctance and primarily for the purpose of presenting a united front
by the Board.
placed in
As stated in
an explanatory memorandum which he had
the Board's minutes at the time, he felt that the rate
increase could be justified only on the basis that member bank
8/20/57
-27
borrowing had increased greatly during the previous week.
that even this was a slim reason because it
He felt
was generally believed
then that such borrowing would shortly return to previous recent
averages.
Mr.
Mills said that where the broad objective of System
credit policy was to exert restraint on the expansion of credit
and where in
his opinion there was general public acceptance of
the System's intentions and purposes, it
seemed important to him
that the symbols of System policy be as consistent as possible
with those stated and recognized objectives.
would be fearful if
For that reason, he
the level of negative free reserves, through
design or circumstances,
should drop substantially below the $500
$600 million level that was re-established two reserve weeks ago.
His thinking, he said, followed very closely the ideas expressed
by Mr.
Irons as to developments in
ness of System credit policy.
If
the economy and the appropriate
there should be a relaxation in
policy at a very early date, that could create an unfortunate mis
conception on the part of analysts of System policy as to what the
intentions of System policy were.
For those reasons an argument
could be made for being cautious about the injection of additional
reserves at too early a date.
After pointing out that it
only two weeks until the Labor Day period, with its
flow of currency,
Mr.
was now
substantial out
Mills said that at the same time the System
8/20/57
-28
could probably anticipate a further momentum in
for bank credit.
the seasonal demand
In the interest of consistency with the declared
intentions of System credit policy,
he felt
that it
could prove
desirable to delay any substantial injection of new reserves,
beyond
those that would be necessary to support the Wednesday payment date
for the last special Treasury bill
issue, until the Labor Day period,
when the action would be fully understood by the market, would be
related to seasonal conditions,
change in
and would not be interpreted as a
policy.
Mr.
Robertson,
who had just returned from vacation yesterday,
commented that one of the advantages of a vacation is
that it
one to come back and take a fresh look at the picture.
enables
He said that
he had been trying to do exactly that, and while he probably did not
have all
of the information that he should have, he was led to believe
that the economy had been strong and that inflationary pressures
continued to be very evident notwithstanding the fact that this was
the summer season.
He expressed himself as delighted by the discount
rate action and said that if
in
approving the increase in
he had been present he would have joined
any complaint about the past, it
had been too little
If
the rate to 3-1/2 per cent.
he had
would be that the restrictive action
and too late, and he saw nothing in
the picture
to suggest reducing the current degree of restrictiveness.
Now that
this degree of restraint had been achieved and was having some effect,
he felt
that it
would be wrong to do anything to alleviate it
and
8/20/57
-29
thereby give a false impression of future actions.
almost completely with Messrs.
He said he agreed
Irons, Allen, Leedy, and Mills that
this was not the time to reduce the degree of restrictiveness.
While
he thought that the Manager of the Account should have some degree of
latitude to work in during this period, it
was his view that the System
should endeavor to maintain the kind of restraint that would reduce
inflationary pressure and he would favor reaching that end without
attempting to fix any specific goal in terms of a volume of net borrowed
reserves.
He felt that the System should carefully avoid creating any
impression that it was trying to reduce the effectiveness of what it
had been endeavoring to accomplish.
Mr.
Fulton, who had also just returned from vacation, said that
although a degree of concern was expressed in the Cleveland District
about some of the industries that were now in the doldrums, there was a
very high degree of optimism about prospects for the fourth quarter of
the year.
fail
If
sales of automobiles and other consumer activities should
to manifest themselves strongly in the fourth quarter, however,
the present psychology could change rapidly.
first
Steel production in
three weeks of August had increased in the Wheeling,
and Lorain areas,
indicating an upswing in
also appliance manufacturers,
the
Cleveland,
demand from automotive and
which had been very dull during July.
In other areas of the district the increase had been nominal because
those areas had been operating at a higher rate.
Coal production in
July was 16 per cent higher than a year ago, indicating that fuel was
8/20/57
-30
being taken in
anticipation, and capital expenditures were still
holding at a very high level.
There seemed to be no recent can
cellations of any such expenditures and businessmen were going ahead
with their plans.
This afforded an indication that regardless of
fears expressed about a downturn, those apprehensions had not yet
"touched the pocketbook."
There was anticipation of further wage
increases and although some businessmen had talked in terms that
they might have to absorb part of the higher costs, this apparently
was not going to deter them from raising prices.
As to employment,
three areas in the district had been declared surplus labor areas for
reasons peculiar to the respective communities, but on the other hand
one city had come out of the surplus labor category and manufacturing
had picked up in that area.
Following six weeks of decline, business
loans increased during the past week.
It was reported that many of
the national concerns having lines of credit with banks in the district
were coming to the banks for long-term credit, seemingly to escape
the discipline of the capital market.
This was reported to be
embarrassing to the bankers but the commitments had already been made.
Member bank borrowing was very heavy in
June and July--at more than
twice the rate for the corresponding periods last year.
the rate of borrowing diminished, although it
week.
In August
increased again last
The rate was somewhat under that of last year and he did not
know just how to interpret the situation.
Mr. Fulton then noted that the Cleveland Bank had not yet raised
its discount rate from 3 per cent and said that there would be discussion
8/20/57
-31
of the matter at the directors'
meeting this Thursday.
It was his
personal view that the Cleveland rate should have gone up along
with the others and that the increase was fully warranted in the
light of the action of the capital market,
short-term rates, and
the increase in the commercial bank prime rate.
With regard to
open market policy, he said that he would regret it very much if
any relaxation should creep into the System's firm hold on the
money market.
While he felt that the Manager of the Account must
be given some flexibility, it was his view that the degree of re
straint that had been achieved was about right and he would not
like to see it reduced, particularly if this were interpreted as a
change in policy.
He was of the opinion that a level of net borrowed
reserves of from $500 to $600 million would be appropriate, with a
shading toward $600 million preferable.
Mr. Robertson then supplemented his previous comments by saying
that he thought a great deal of the inflationary pressure was fostered
and given momentum by public psychology, and that there had grown up
in the country a feeling that inflationary pressures were here to stay.
He expressed the opinion that the recent Congressional hearings had
done much to indicate that the System stood firmly against inflation
and that the actions taken by the System were carrying out such a
policy.
This, he thought, represented one more reason why nothing
should be done at this time to reduce the current degree of restraint,
for the System should take advantage of the benefits that had been
derived from the hearings in
terms of public psychology.
-32
8/20/57
Mr. Williams reported that there had been several interesting
banking developments in
the Third District recently.
Philadelphia banks have raised the prime rate.
All of the large
Most of them also will
raise the interest rate on savings deposits from 2 to 2-1/2 per cent;
the mutual savings banks in Philadelphia are going to raise their rate
from 2-3/
to 3 per cent on October 1.
had declined $34
million in
Total loans of reporting banks
the three weeks ending August 7, and re
payments percentagewise were somewhat greater than for all weekly
reporting banks.
Nevertheless, Philadelphia banks were under considerable
pressure for funds.
Total deposits were down,
by marketing nearly $30 million of securities.
and the drain had been met
Member bank borrowing
dropped sharply in the latest statement week (August 14).
After the
discount rate increase there was an incentive to buy Federal funds in
preference to borrowing from the Federal Reserve Bank and some banks
stepped up their purchases substantially.
Mr. Williams said there was
little of significance to report in the way of business developments.
Department store sales dropped below a year ago in early August but
had now come back.
Factory employment was holding quite stable at a
rate slightly below a year ago.
With regard to open market policy, Mr. Williams was of the view
that while reserves should be made available for seasonal needs as those
needs might appear, errors on the liberal side should be avoided.
Mr.
Bryan said that there were no recent developments of great
significance to report from the Sixth District.
Employment and payrolls
-33
8/20/57
continued at record levels, consumer spending was up, and the volume
of construction was higher than last year.
The district was gaining
funds; total bank credit was up by virtue of increases in loans and
Government security holdings.
However, there was a difference between
the smaller country banks and the city banks.
The city banks had
recently not gone up.
The most interesting and dynamic development in
is
not new but is
the district
one that has been continuous over a period of years.
It is the rapid shift of population within the district.
As to policy, Mr. Bryan expressed agreement with the statements
that had been made that the System would not want to reverse its situa
tion by liberalizing the supply of reserves.
Unfortunately,
however,
he did not know quite what he meant in saying that he agreed with these
statements.
There was some point to Mr.
Treiber's remarks--a very real
point--that with the terrific capital demand, the probable seasonal
demand for loans, and the Treasury's problems,
the System could get
into a situation where it might become a great deal more restrictive
than was intended.
This presented the problem of trying to give in
struction to the desk, and at this point he was fearful of giving an
instruction in
terms of net borrowed reserves because,
count rate change,
with the dis
the degree of restraint at a level of $500-$600
million might be very different than a few weeks ago or at some time
in
the past.
In the circumstances,
he would be inclined to tell
desk to watch the behavior of rates in the market and, if
it
the
seemed
8/20/57
-34
desirable to increase significantly the supply of reserves to the
market, to do so in a manner that would hold them steady.
In response to a request by Mr.
on the shifts in population in
that in
Vardaman for further comment
the Atlanta District, Mr.
the district there are 448 counties,
tion between 1950 and 1955.
Bryan said
of which 207 lost popula
The movement had been from the rural
agricultural counties into the areas where industrial plants are
locating.
It
was his net impression that the district was being
strengthened by these shifts, because if the people had remained on
the farms they would not have been as economically productive as
they are in
their new locations.
However,
in villages in the areas
that had been losing population the local merchants at times were
very disheartened.
Mr.
Johns said that he would forego the opportunity to talk
about developments in the Eighth District, although with some reluc
tance because there were on his mind two recent reports--one a local
survey and one a study by a Government agency in Washington--which
took a less than optimistic view about the St. Louis area.
In general,
the area was characterized as being in a state of economic stagnation.
From the long-run point of view, however,
he felt that these studies
might have a wholesome effect by directing attention to the criticisms
to which the area was subjected.
Mr. Johns then stated that, as the Board of Governors was
advised late yesterday, the directors of the St. Louis Reserve Bank
-35
8/20/57
had established a discount rate of 3-1/2 per cent subject to review
and determination by the Board of Governors, thus becoming the tenth
Reserve Bank to establish that rate.
He said that this action was
taken by a 6-1 vote, with a considerable degree of expressed reluctance
on the part of the directors who voted favorably.
This reluctance was
based on the view that no intensification of inflationary pressures
was discernible at this time or in the recent past, and the need for
a toughening of monetary restraint therefore was not apparent to the
directors.
Mr. Johns said that he did not find himself in disagreement
with that view.
In any event, however, a clear majority of the Reserve
Banks had indicated a different view and desire with regard to monetary
policy and the St. Louis Bank decided to conform.
With this action taken, Mr. Johns said that he found himself
confronted with the question of what the change in
meant in
terms of open market policy.
the discount rate
He said he was unable to accept
the view which had been expressed in some quarters that the rate in
crease signaled no change in policy.
As he looked back over the
record of policy actions contained in the annual reports of the Board
of Governors, and particularly the explanation of the discount rate
changes which had been made in recent years, he noted that it was
always claimed that such changes, whether up or down, did signal a
change in
policy and had considerable significance of that kind.
Looking to the future, he doubted the desirability of taking a step
8/20/57
-36
in the direction of establishing a principle that discount rate
changes do not signal a change in Federal Reserve policy; in the
long run he believed the System would find it
desirable in
its
own interest--which also meant the public interest--to continue
to claim that the discount rate was a significant instrument of
policy and that its use meant something more than merely conforming
to market rates established by others.
Holding that view, he found
himself unable to agree that following an increase of 1/2 per cent
in the discount rate there should be any relaxation of policy or
pressure on bank reserves.
He wished to make it
clear, he said,
that the view held at the St. Louis Bank with respect to the lack
of need for intensification of restraint should not be mistaken for
a view that inflationary pressures had diminished or subsided,
or
that there was less need for monetary restraint than there had been.
Nobody in
the St. Louis Bank, he said, would argue for relaxation.
In the circumstances,
he believed that the least that should be done
with the open market instrument was to continue the degree of restraint
that had prevailed in
the recent past; in
fact, it
would not take much
argument to convince him that there should be some intensification of
that pressure in order to be consistent with the action taken in
changing the discount rate.
Turning to the Committee's directive to
the Federal Reserve Bank of New York, he called attention to the
language of clause (b) with regard to "recognizing uncertainties
-37
8/20/57
in the business outlook, the financial markets, and the international
situation" and recalled that he had dissented mildly when this language
was first included because of a feeling that it should be understood
that these uncertainties would be taken into account at all times
along with other relevant matters.
He assumed that when this language
was written into the directive, the Committee intended to put special
emphasis on the uncertainties and to say almost that this was a
"teetering decision."
Now, having signaled in his opinion a change
in policy by increasing the discount rate, he wondered whether it was
desirable to place such emphasis upon the uncertainties which the Com
mittee saw in
the picture several months ago.
Governor Balderston observed that Mr. Miller, in his report
today,
had suggested that the change in
the discount rate might have
an influence upon the degree of restraint represented by a given amount
of net borrowed reserves, and that this same point had been made by
Mr. Bryan and others.
He also noted that for the five months ending
in July the average of net borrowed reserves was about $430 million.
The question that perplexed him, he said, was how to meet the desire
expressed by so many at this meeting to maintain a policy of restraint
that would be consistent with the discount rate action and yet take
care of seasonal and Treasury needs this fall.
Mr.
He thought that perhaps
Mills had given an answer by suggesting that the Labor Day period
would provide an opportunity to supply some reserves in
a fashion that
8/20/57
-38
might be described as "imperceptible."
course,
Seasonal needs would, of
have to be taken care of and the Treasury's problem seemed
likely to grow worse, not only because of the high rate of redemptions
but because of the heavy calendar of capital issues this fall.
fore, as he had said,
There
the problem was one of how to maintain a con
sistent policy for the sake of public understanding of the System's
objectives and yet meet the fall requirements of business and the
Treasury.
He felt that perhaps this problem might be resolved by
using a level of net borrowed reserves of from $500 to $600 million
as a goal for the moment, and then using the Labor Day period to begin
to inject the increased reserves that must be supplied.
In clarification of his earlier remarks, Mr. Treiber said that
he did not mean to suggest a change in policy or to suggest open market
operations that would appear to indicate a change in policy.
wanted to emphasize the important difficulties in
He had
a period of readjust
ment, the importance of avoiding open market operations that might ap
pear to indicate a further intensification of restraint, and the need
for flexibility.
Chairman Martin expressed the view that the most difficult
problem at present was a psychological one.
In terms of the over-all
struggle against inflation, which was by no means won, he felt that
the System had gained during the past few weeks through the Congressional
hearings.
In this connection, he referred to quotations in the press
from his testimony and said that there were of course some remarks
-39
8/20/57
that he wished in retrospect he could have phrased a little
differently,
He did not think that anyone here today had any doubt about the diffi
culty or nature of the inflationary problem, but he believed that in
flation could be stopped, that the real question was how best to proceed
in the fight against inflation, and that the answer had not yet been
obtained by any means.
As a preface to his next coments,
Chairman Martin said that
they should not be understood to reflect criticism of the Management
of the System Open Market Account and that he just wanted to lay his
thoughts on the table.
He said that when there is
a movement in
net
borrowed reserves from a level of $150 million to a level of $600
million, there are bound to be problems of interpretation and this
creates a problem for the Treasury.
In the last week the level of
net borrowed reserves had been a little
higher than he would have
interpreted the intent at the last meeting of the Committee, although
on the basis of the record of the meeting the management of the
account was proper.
been a little
It was his feeling that the situation may have
tighter just prior to the new Treasury special bill
offering than the Committee had intended,
matter of conjecture and judgment.
him to have been a little
Also,
but admittedly this was a
the situation seemed to
easier several weeks ago than was intended.
The same directive from the Committee had been in
effect all the time,
he pointed out, and whether there should be a change in
the wording
8/20/57
-40
was a different matter.
He went on to say that the Manager of the
Account has an almost impossible task in gauging the market.
It
was his view that the Manager had done surprisingly well, consider
ing all of the conflicting cross currents in the economy, when one
looked at the record for the last nine months.
With regard to the comments by Mr. Johns, he observed that the
economic situation was a "bundle of inconsistencies," that this was the
nature of the operation in which the System was engaged, and that one
could never hope to have complete consistency.
For the last nine months
the bill rate had been substantially higher than the discount rate,
primarily because of the plight of the Treasury.
However, he thought
that the Treasury had been acting well recently and that this fact
ought to be recognized, and he said this against a background of having
disagreed with almost every move that the Treasury had made over a period
of several months.
In thinking on the matter, he said, he had tried to
place himself in the position of those responsible for debt management
during the last 30 days.
With reference to the discount rate, Chairman Martin said that
when one realized--as he did in the course of the recent Congressional
hearings--that during the 11 years from 1937 to 1948 the discount rate
was at or below one per cent, that there had been a pegged market, and
that seven changes in the rate now had been made during the last two
years, one could see the amount of thinking that had been done by
-41
8/20/57
businessmen, bankers, and the public regarding the use of the rate.
Critics at the hearings had raised many questions regarding the role
of each Federal Reserve policy instrument at any given time and he
had found it
but it
somewhat difficult to explain all of the System's actions,
seemed clear that the System had been moving in the direction
of a more flexible policy.
He regarded the last discount rate change
as primarily a technical move.
rate in line with the bill
in his opinion it
The preceding hesitancy in moving the
rate had put the System in a position where
would have been just as difficult to explain why the
discount rate did not go up after the change in the prime rate as to
explain why the rate was increased.
have to gauge their loan demand,
The commercial banks, he said,
and if
they were willing to increase
the prime rate the question for the System to decide was whether it
was proper to have a spread of 1-1/2 per cent between the prime rate
One might contend that the System could police
and the discount rate.
member bank borrowing by administration of the discount window, but
the question then would be one of why the System should not have a
very low discount rate, say a rate of one per cent.
Unless rates
were to operate effectively, he felt that the System would be defeating
itself in
its
approach to the problem.
It
was his view that one must
recognize these technical considerations at times,
period was one where,
in
and that the present
terms of broad approach to the problem of
inflation, the Federal Reserve System had gained considerably.
technical operations,
however,
there was still
In
a long way to go in
-42
8/20/57
the matter of Treasury relationships, and he felt that this was the
fundamental problem faced by the System in that area.
The Committee,
he noted, was now going to study that area and it would be desirable
to work with the Treasury soon to see whether it would be possible to
come up to financing operations without having the Treasury "behind
the eight-ball" every time.
Chairman Martin then said that he did not perceive any basic
disagreement this morning with respect to policy.
would be inclined to go along with Mr.
Treiber,
Personally, he
and be in
the minority,
to the extent that with the seasonal demand coming on he would tend
toward a $500-$400 million level of net borrowed reserves rather than
risk getting up to $600 million or higher.
He doubted whether that
degree of tightness was needed, and he thought that the phrase had
been used roughly.
While he might be wrong in
his judgment, he be
lieved that the move back from net borrowed reserves of $150 million
to $600 million had bit harder than necessary.
made it
clear in
The discussion today
his opinion that there should be no change in the
Committee's directive and no change in
that point of view completely.
policy,
and he subscribed to
On the technical side, however, he
would favor a level closer to $400 million of net borrowed reserves
in
so far as any benchmark was worth anything.
As to the timing of
any conditioning of the market, he would not care particularly whether
that was done now or closer to the Labor Day period and he felt that
the timing must be weighed by the Manager of the Account.
But he
would like to see any such conditioning substantially accomplished
8/20/57
-43
before the Treasury came to the market rather than to have the kind
of swings that had taken place in the last 45 days.
Mr. Rouse said he also understood it
to be the sense of this
meeting that there should be no change in policy.
However,
there was
a change in the sense that the Committee was endorsing some flexibility
in the management of the account which he did not feel was there follow
ing the last meeting of the Committee.
that he had much room.
At that time, he did not feel
The Committee had been aware of the Treasury
financing and he thought that the operations in the account had been
in accord with the sense of the meeting.
But with the sense of leeway
that he discerned at this meeting, with no change in policy, he felt
that it would be workable.
As to between now and Labor Day, looking
at the calendar he noted that it would be necessary to act tomorrow
to put some reserves in for Thursday and then again in the following
statement week because the demand for currency for the long holiday
week-end would come before Friday.
This would carry right into Labor
Day with practically no interval as far as reserve requirements were
concerned,
so there would be no serious difference of views there.
Chairman Martin then repeated that the consensus of this
meeting seemed to favor no change in policy and no change in the di
rective, with the understanding that the Manager of the Account should
be given latitude for flexibility.
In making this statement he
recognized the shades of difference in
vidual members of the Committee.
the views expressed by indi
8/20/57
-44Thereupon, upon motion duly made and
seconded, the Committee voted unanimously
to direct the Federal Reserve Bank of New
York until otherwise directed by the Com
mittee:
(1) To make such purchases, sales, or exchanges (includ
ing 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 securi
ties, 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 develop
ments in the interest of sustainable economic growth while
recognizing uncertainties in the business outlook, the financial
market, and the international situation, 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 de
creased by more than $1 billion;
(2)
To purchase direct from the Treasury for the account
of the Federal Reserve Bank of New York (with discretion, in
cases where it seems desirable, to issue participations to one
or more Federal Reserve Banks) such amounts of special short
term certificates of indebtedness as may be necessary from
time to time for the temporary accommodation of the Treasury;
provided that the total amount of such certificates held at
any one time by the Federal Reserve Banks shall not exceed in
the aggregate $500 million;
(3) To sell direct to the Treasury from the System account
for gold certificates such amounts of Treasury securities matur
ing within one year as may be necessary from time to time for
the accommodation of the Treasury; provided that the total
amount of such securities so sold shall not exceed in the ag
gregate $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.
Reference then was made to a memorandum which Mr.
Riefler had
sent to the members of the Committee and the other Reserve Bank Presidents
8/20/57
-45
under date of August 12, 1957, transmitting a list of questions re
lating to open market operations which had been submitted to Chairman
Martin by Congressman Patman in connection with the former's recent
testimony before the House Banking and Currency Committee concerning
the proposed Financial Institutions Act.
In commenting on the matter at the request of the Chairman,
Mr. Riefler referred to the amount of work that would be necessary
to prepare the answers and pointed out that it would be necessary
for the Federal Open Market Committee to authorize submission of
the requested information.
He also referred to two letters from
Mr. Patman, both dated August 14, 1957, in which other questions
were asked, including some having to do with open market matters.
Copies of these letters were then distributed.
Chairman Martin said that all were aware of the problem that
was being encountered at the present time and that his general approach
was that the System had absolutely nothing to hide at any time.
anything was wrong,
he felt that the sooner it
If
was found out the better.
He went on to say that there existed in both Houses of Congress a group
of members who were going to be seeking information on the Federal Re
serve System continually, and he thought that as much information
should be furnished as could reasonably be supplied.
To put it another
way, he felt that the System had an obligation as a public body to
supply the requested information and that the data should not be
refused simply on the basis of the work that was involved.
He
8/20/57
-46
recognized that there might be a difference when it came to submitting
information on current open market transactions but r ecalled that a
response to a request by Senator Gore for current data already had
been made.
In an ensuing discussion, question was raised about the response
that should be made to certain questions asked by Mr. Patman involving
information that would have to be obtained from dealers in Government
securities.
Chairman Martin expressed the view that, when this was the
case, the information should be obtained by the Congress direct from
the dealers or the dealer community.
He did not feel that it
would be
proper to supply information which had been given to the System on a
confidential basis.
Question also was raised as to whether the amount of time
necessary to compile the responses should be pointed out in some
manner in furnishing the information and Chairman Martin expressed
the view that there would be no objection to bringing this out in
some appropriate way.
Governor Vardaman suggested that this could
be pointed out in explaining what might seem to be an undue delay in
compiling the information.
In connection with a question by Mr. Rouse concerning whether
the information should be compiled on an overtime basis, Chairman
Martin indicated that the System should not be "stepped on" at all,
but that on the other hand the System should not be unduly dilatory
in furnishing the data.
-47
8/20/57
Governor Vardaman expressed the view that the very furnishing
of the information sooner or later would be an asset to the System.
Governor Robertson said that in going over the questions it
occurred to him that one could not determine,
just by reading them,
what information could properly be given and what could not be given.
He suggested that it might be necessary to set up a committee to make
those decisions in the first instance and then come back to the full
Committee.
Chairman Martin then said that he had had in mind suggesting
that the Committee give a blanket authorization for the furnishing
of such noncurrent information as appeared feasible and proper, that
it authorize Messrs. Riefler and Rouse to confer with respect to the
matter, and that if they felt that it was not feasible or proper to
furnish certain information they bring the matter back to the full
Committee for discussion at a meeting of the Committee.
He also sug
gested that this authorization apply to the questions raised in the
August 14 letters as well as the original list
of questions,
to any subsequent inquiries of the same general nature.
Secretary's note: On Friday, August 23,
the Secretary talked to all of the members
of the Federal Open Market Committee who
were present at the meeting on August 20
except Messrs. Mills and Williams, who
were not available, about whether the
names of parties with whom the Account
conducted specific transactions fell with
in the confidential category. It was
unanimously agreed that they did not, and
that the names should be furnished.
and also
-8
8/20/57
Mr. Riefler said that, as he understood it,
the line of
distinction would be that when the information which was requested
had come to the System on a confidential basis from an outside party,
the information should be obtained by the Congress from such party.
Thereupon,
the procedure suggested by Chairman Martin was ap
proved unanimously and Messrs. Riefler and Rouse were authorized to
proceed on the basis indicated.
It
was agreed that the next meeting of the Committee would be
held at 10:00 a.m. on Tuesday, September 10, 1957.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1957, August 19). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19570820
@misc{wtfs_fomc_minutes_19570820,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1957},
month = {Aug},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19570820},
note = {Retrieved via When the Fed Speaks corpus}
}