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, October 1, 1957, at 9:30 a.m.

PRESENT:

Mr. Martin, Chairman

Mr.

Mr.

Mr.

Mr.

Hayes, Vice Chairman

Allen

Balderston

Bryan

Mr. Leedy

Mr. Mills

Mr.

Mr.

Mr.

Mr.

Mr.

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.

Mr.

Rieflr, Secretary

Thurston, Assistant Secretary

Sherman, Assistant Secretary

Hackley, General Counsel

Solomon, Assistant General Counsel

Mr. Thomas, Economist

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. Koch, Assistant Director, Division of Re

search and Statistics, Board of Governor

Mr. Miller, Chief, Government Finance Section,

Division of Research and Statistics, Board

of Governors

Mr. Gaines, Manager, Securities Department,

Federal Reserve Bank of New York

Messrs. Abbot, Daane, Ellis, Hostetler, and

Wheeler, Vice Presidents of the Federal

Reserve Banks of St. Louis, Richmond,

Boston, Cleveland, and San Francisco,

respectively; Mr. Parsons, Director of

Research, Federal Reserve Bank of

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Minneapolis, 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 September 10, 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 June 18 through

September 25, 1957,

and a supplementary report covering commitments

executed September 26 through September 30,

1957.

Copies of both re

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

Mr. Rouse said that fortuitous developments in the market since

the preceding meeting had affected the distribution and volume of re

serves.

During part of the period net borrowed reserves had been lower

than some members of the Committee would have preferred, while during

part of the period they had been higher than other members would have

preferred,

on the basis of the discussion on September 10.

Mr. Rouse also referred to the offering of Treasury securities

announced on September 12,

good account of itself

in

stating that the market had given a very

connection with the securities.

that criticism that had appeared in

He felt

the press regarding the amount

of speculation in the offered securities had been somewhat overdone

and that the behavior of the market confirmed this to have been the

case.

l0/1/57

-3Upon motion duly made and seconded,

and by unanimous vote, the open market

transactions during the period September

10 through September 30, 1957, were ap

proved, ratified, and confirmed.

At Chairman Martin's request, Mr. Young presented a report on

current economic activity substantially as follows:

An increasing number of business observers are disposed

to the view that the momentum of major expansive factors on

the demand side has now been spent, that the pressure of

inflationary forces is in process of lessening and even

dispersing, and that the prospective movement of activity

and prices is to be downward.

The emphasis of these ob

servers is on the leveling out of business capital expendi

tures and of total product in real terms and on the prospect

of future declines both in business capital investment and

in military outlays of the Government. They also stress the

declines in primary material prices over the recent months

and in stock prices over recent weeks. And they discount,

as a statistical illusion largely, recent strength indicated

by measures of consumer spending. Finally, they point to a

leveling out in productive activity and demand in important

industrial countries abroad, to continuing pronounced infla

tionary trends in selected development countries, and to

international liquidity crises and persisting lack of

confidence in key international exchange values.

Obviously, this diagnosis reads with a bearish bias the

statistical record of current economic adjustment at a high

level and still (for the consumer area at least) inflating

prices, While it is possible that prices and activity

generally are at a crest and that the next broad movement of

prices and activity will be downward, the recent figures are

far from clear that such a development is becoming an

actuality

That important realignment of activities, com

modity prices, and investment values is taking,or has taken,

In fact, such realignments to

place, is not to be denied.

gether with a dampening expansion of aggregate demand would

appear to be a necessary precondition to reformation of ex

pansive forces without creeping inflation

That over-all inflationary pressures in the recent past

have been very strong is confirmed by the third quarter GNP

These show the annual rate of GNP in current dollars

figures.

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up another $5 billion, or over 1 per cent, above the second

quarter. However, in real terms--in deflated dollars, that

is--GNP in this quarter showed no gain; indeed, there has

been little,

if any, real gain in total product now for

three quarters, while the dollar rise over this period has

amounted to $13 billion, or 3 per cent.

The most significant development since the first

quarter

has been a pronounced rise in consumer takings, especially of

nondurable goods and services but to some extent also of

durables, notably automobiles.

This rise implies that further

increase in consumer incomes caught up last spring with the

consumer price level and that further rise in consumer prices

since has had full support of expanding consumer demand.

Various business observers have expressed skepticism

about this indicated rise in consumer buying because the

beginning of rising retail sales figures coincides with a

substantial revision in the information collection methods

for the retail sector.

There is independent evidence of a

marked rise in consumer purchases since the first quarter,

however. About the most that can be said about the statis

tical issue is that, while the rise in takings may not have

been as much as the figures indicate, it was still

sub

stantial. Although nondurable goods sales to consumers have

been off in recent weeks, perhaps due to unfavorable shopping

weather, it is not without interest in this connection that

new automobile purchases in the first 20 days of September

ran 8 per cent ahead of the same period for August and 16 per

cent above a year ago. Used car sales also showed strength

at fairly firm prices, though less strength than did new cars

where price concessions were a sales attraction. Also relevant

here are reports of more active consumer demand in the new and

used housing market. Cessation of decline in new housing

starts and some apparent pick up in the past two months are

said to reflect somewhat better demand conditions.

Construction activity generally, reflective of continuing

strength of aggregate investment demand, has remained at high

levels, and data on contract awards suggest that, for the near

term future, total construction will remain at or near current

levels. All sections of the construction area have been show

ing recent strength.

Industrial production has been holding at the June-August

level but some uncertainties exist as to future trends. Out

put of nondurable goods has been rising and improved tendencies

have also characterized consumer durable goods output. But

output of producers and military equipment has generally,

though with some exceptions, been showing moderate declines

and output of primary metals and materials has been significantly

10/1/57

reduced, with some accumulation of stocks of particular

basic items (e.g., copper, newsprint, lumber, and

petroleum products).

Figures for primary metals suggest

a consumption of materials by secondary fabricators in

excess of metals output, with important inventory decumula

tion occurring in these secondary industries,

Pick up in

automobile output, after new model introduction, is another

uncertain factor for steel and other metal markets. With

large stocks of 1957 models on hand and with tight money

affecting instalment credit supplies, aatomobile producers

are evidently holding back in placing fall orders for sheet

and metal parts to produce new models.

Petroleum output

seems clearly subject to probable cutback ahead since stocks

have reached levels much in excess of industry schedules.

Reflecting continuing high levels of activity generally,

nonfarm employment since June has remained at record levels

through August, with declines in manufacturing employment

offset by gains in trade and local government employment.

Labor market information is sketchy for September, but initial

claims for unemployment compensation have risen fairly sharply,

a development associated with temporary layoffs for automobile

model changeover and some reductions in employment, again

possibly temporary, in aircraft, lumber, and steel industries.

Defense cutbacks in the months ahead are expected to contribute

to manpower availability, but these effects will probably be

felt only gradually.

Average prices at wholesale have declined 1/2 per cent

since the end of August, mainly reflecting significant declines

in prices of basic or sensitive commodities, especially

materials, and of agricultural products, notably meats and

livestock. With important inventory and downward price adjust

ments over the past year for such materials as copper, zinc,

lumber, and rubber, and for major farm products, prices of

basic commodities appear much less vulnerable to recession in

demand than earlier this year or at other postwar points of

potential business crest.

Average consumer prices at mid-August showed further

modest rise, reflecting especially further increases in prices

of foods and services and in rents. Some further rise in the

It is

consumer price index is expected to mid-September.

interesting to note that, with weekly earnings of factory

workers about stable since the beginning of the year, the rise

in consumer prices has reduced real weekly earnings by about

2 per cent.

The liquidity crisis abroad, confined though it is to a

few countries that did not contain their inflationary pressures,

will doubtless have contractive repercussions on U. S. exports

10/1/57

-6-

in the months ahead.

The countries involved have been

important importers from the U. S. and the dampening of

excess demand, which can no longer be postponed, can be

expected to reduce temporarily export demands.

In conclusion, we do not report a picture of a settling

or declining economy. Rather it is one showing diverse

tendencies in significant value indexes and little

change in

physical output and resource availability.

Business sentiment

is much more cautious about prospects than for some months,

but business sentiment has shown pronounced gyrations over

the past two years, being at times more optimistic than the

figures and portents, at other times less optimistic.

The

latter

mood seems to characterize the present situation.

While inflationary clouds may be breaking up, it would be

altogether premature to conclude that they have now scattered.

Mr. Thomas next made the following statement concerning recent

credit developments:

Perhaps the most significant financial development in

recent weeks has been the leveling out of interest rates at

the high level reached early in August. Relative steadiness

in interest rates, following earlier rising tendencies, has

persisted notwithstanding a number of developments that would

be expected to work toward higher rates. These include the

raising of Federal Reserve discount rates, the continuation

of member bank borrowing at a fairly high level, the large

volumes of new issues of securities offered by business

corporations, State and local Governments, Federal credit

agencies, and the Treasury, and finally the dramatic increase

in the Bank of England discount rate from 5 to 7 per cent.

The next most significant development has been the sharp

decline in prices of common stocks.

This decline and the

steadiness of bond yields at the advanced level are no doubt

related.

Investors appear to be shifting their preferences

in some degree from stocks to bonds.

This is

one channel

through which high interest rates have an impact upon in

vestment decisions and general economic conditions.

Changes in bank loans have conformed fairly closely

to the usual seasonal pattern. Reflecting the gradual but

pronounced decline in the liquidity of business corporations

during the past two years and the increaso in tax liabilities

due in mid-September, business borrowing at banks for tax

In the latest

larger than a year ago.

purposes was a little

week, however, there has been an unusually large decline in

business loans.

Loans to usual seasonal borrowers have shown

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about the same increase as a year ago.

Some of the recourse

to banks was represented by a temporary shifting of sales

finance company financing to banks from corporations.

The net result for the four weeks of September (based on

partial figures for the last week) has been a slightly smaller

increase in business loans than in most previous years. Other

types of loans in the aggregate also increased less than in

the two previous years.

In the same period bank holdings of

Government securities showed a somewhat smaller decrease than

in 1955 and 1956, with the result that total loans and invest

ments rose by about the same moderate amount in each year.

There was also little

net change in demand deposits adjusted

in September, both this year and last, but time deposits in

creased more this year. The money supply may have shown a

less than seasonal growth in recent weeks.

Turnover seasonally

adjusted has also shown little

or no increase in recent months

but continues higher than last year.

New corporate capital issues continued close to $1 billion

in September, corresponding to the monthly average for the past

12 months, and it appears that this figure may again be reached

State and local government issues were only slightly

in October.

below the recent monthly average of $500 million in September

but are scheduled to equal about $600 million in October. The

Treasury offering of about $3.5 billion was successfully floated,

although the premiums evident during the subscription period dis

appeared when subscribers offered the securities in the market.

Although Treasury cash holdings are now at a relatively high

level and somewhat larger than had been earlier estimated, addi

tional funds will be needed in October and more in subsequent

The projected British drawing on the Export-Import

months.

Attempts to

Bank credit adds to previous estimates of needs.

curtail defense expenditures are not expected to bring the

To keep within

fiscal year total down to the figure budgeted.

the statutory debt limit, some of the Treasury's cash needs

will have to be supplied other than through public debt

offerings--such as an issue of FNMA securities and perhaps

also the use of the Treasury's free gold.

Member bank reserve needs have been somewhat less than

projected three weeks ago, owing primarily to a

been

had

This

smaller increase in required reserves than was assumed.

deposits.

and

credit

bank

in

growth

moderate

the

reflects

Reserves have been absorbed during the past three statement

weeks by reductions in the System portfolio but are being

Net borrowed reserves,

supplied by purchases this week.

which were close to $400 million early in the month, declined

Owing,

to about $260 million in the middle week of September.

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10/1/57

however, to substantial liquidity requirements of banks and

customers in this period and to the continuation of heavy

borrowings by central reserve and reserve city member banks,

the money market generally continued to show signs of tight

ness. Subsequently net borrowed reserves have risen to around

$500 million.

System purchases will be needed to keep net

borrowed reserves from exceeding $700 million during most of

October and the first half of November. With the higher dis

count rate and reduced liquidity of banks and corporations,

adequate restraint should be exerted by a lower level of

member bank borrowing than was appropriate during the summer.

Banking developments, it appears, have kept fairly well

within the limits envisaged by recent policies of credit re

straint.

There is a possibility that interest rates in the

capital markets have reached a level appropriate to the

maintenance of equilibrium.

Investment demands throughout

the world seem still to be fully adequate to absorb all of

the lendable funds available at current rates.

Under the

circumstances there would seem to be no need for relaxation

of restraints, nor would any tightening of restrictive

measures be appropriate.

Mr.

Hayes concurred in

the general substance of the comments

that Messrs. Young and Thomas had made regarding the economic situation

and credit developments.

He then presented the following statement of

his views:

Business activity remains on the high plateau that has

In the aggregate,

prevailed for the past several months.

demands remain strong, with the best showing perhaps in re

tail sales--although the rate of gain over last year ap

parently is more modest than had been thought previously,

since part of the increase is attributed to a statistical

sales series. While declines in

adjustment in the retail

capital expenditures and Federal spending--and perhaps in

net exports--are now clearly foreshadowed, they have not

yet actually occurred, and there is no reason to expect a

pronounced downward drift in business activity as a whole

in the near future. At the same time, business sentiment

is cautious and there is a notable absence of the strong

upward pressures which were giving us concern early in the

The structure of demand and the level of inventories

year.

are such that any prospective changes seem likely to take

place gradually, giving us time for a continuous reappraisal

over the coming months.

10/l/57

The price situation is decidedly mixed. On the one hand,

important raw material prices have weakened further, and farm

prices have turned down in recent weeks.

However, prices for

finished goods and services as a whole continue to inch ahead,

despite the growing number of products which are characterized

by buyers' markets.

There is considerable talk and some evi

dence of a profit squeeze, but statistics on this point are

still

rather inconclusive.

Now that bank credit figures are available for most of

the third quarter, it is interesting to observe that the rate

of growth of total bank loans fell further behind that of a

year earlier during the third quarter than in the second

quarter.

This was due primarily to further slackening in

business loans, partly offset by somewhat greater growth in

consumer and real estate loans. With relatively small changes

occurring in the third quarter of either year in bank holdings

of securities (except for the effect of last week's Treasury

financing) total loans and investments showed a trend roughly

similar to that of total loans.

The money supply shows a gain

of less than 1 per cent over a year ago. We would expect an

even smaller year-to-year gain by the end of December, especially

if the improved tone of the bond market continues to permit the

Treasury to rely somewhat more on nonbank investors than was

possible a few months ago and to enable business to finance its

capital expenditures without recourse to bank credit.

It

is

not easy to determine the best credit policy at a

time when industrial output has leveled off, plant capacity has

been substantially increased, and world prices for many raw

materials are notably weak, while at the same time retail prices

However,

and wage rates show continued signs of upward pressure.

I feel that a policy of steady credit restraint should be main

tained, even though it carries with it some risk of further

pressure on profit margins, unless and until there is clear evi

We should, of course,

dence that the economy has turned downward.

provide reserves as needed for seasonal purposes. While target

figures for total net borrowed reserves must always be qualified

to allow for such items as geographical distribution of reserves,

seasonal tensions and other factors affecting the actual tight

ness of the money and capital markets, it would seem appropriate

to think roughly in terms of about the same general range of net

borrowed reserves which has prevailed for the last two weeks.

Current projections would suggest that a minimum of open market

operations would be required in the next three weeks, except

perhaps toward the end of the period, when the effects of the

usual monthly bulge in float will be felt.

Although I feel strongly that steady credit restraint

should be maintained under present conditions, I also believe

10/1/57

-10

that the System will have to be exceedingly alert during

the next few months for conclusive signs of any break-out

from the sideways movement now characteristic of business.

Such a breakout might well call for a modification of our

policies.

Mr.

Erickson said that in New England nonagricultural employ

ment continued at a high level but with slackening tendencies outweigh

ing those for further expansion.

August employment was up slightly

over July but not as much as last year, and manufacturing weekly earnings

also were ahead.

Automobile sales continued to drag and new car registra

tions through July of this year were 7.7 per cent behind last year.

A

sampling of 27 commercial banks showed that the amount of consumer loans

extended in

August was 12 per cent ahead of last year and that out

standings at the end of the month were 15 per cent ahead.

Department

store sales which had been affected unfavorably a few weeks ago by the

newspaper strike continued below a year ago,

perhaps partly because of

the excellent weather which had not been conducive to sales of winter

goods.

Preliminary figures of the vacation business this year indicated

that it

was 5 per cent ahead of the record 1953 volume.

Mr.

Erickson

stated that at the meeting of the directors of the Boston Bank last week

there was considerable discussion by the directors along the lines of

Ralph Young's opening statement, but there was unanimous agreement that

the present discount rate should be maintained.

The discount window of

the Bank had been used less in the last two weeks than for some time,

discounts having averaged slightly more than $10 million.

Mr. Erickson

said he would favor a continuation of the policy of restraint, making

10/1/57

-11

no change in the Committee's directive and continuing open market

operations along the lines followed during the past few weeks.

He

would make no change in the discount rate at this time.

Mr.

Thomas.

Irons subscribed to the statements of Messrs. Young and

In the Dallas District, conditions continued about as he had

reported at recent meetings.

The petroleum industry was somewhat over

inventoried and production schedules had been reduced further.

not anticipate much change in

He did

that industry over the next few months

unless cool weather were to increase demand for fuel oil earlier than

usual.

In agriculture,

than in 1956.

crops were larger and income higher this year

There had been good rains during the past ten days and

these would help winter crops.

to what Mr.

weeks:

Mr.

Irons said that he would subscribe

Hayes had said regarding credit policy for the next few

hold steady with about the same degree of restraint that we

have been experiencing.

Mr.

Mangels'

impression was that West Coast business sentiment

had deteriorated somewhat further, although sentiment often reacted

more strongly on the up side or the down side than statistical evidence

indicated that it

should, he stated, and current statistical evidence

indicated very little

changes in

change in

the underlying situation.

Recent

bank loans and deposits, both time and demand, followed the

national pattern.

Requests for discounts at the San Francisco Bank had

been quite moderate in recent weeks with no applications from San

Francisco banks in the week ending September 25,

but on September 26

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10/1/57

borrowings rose to $37 million when Federal funds were difficult to

obtain.

Mr. Mangels said that he felt the Committee should continue

the policy it had been following.

He had in mind negative free re

serves somewhere in the $400-$500 million range.

He saw no occasion

for changing the directive or the discount rate.

Mr. Deming saw no change in the over-all situation in the Ninth

District during the past three weeks and no indication of an appreciable

change in the near term outlook.

There seemed to be a continuation of

the sidewise movement that had been evident most of this year.

ever,

How

somewhat wider diversity in the stronger and weaker tendencies

was noted, he said.

In Montana, the nonferrous mining and lumber

industries had been quite weak for some time whereas the farm situation

was stronger than usual.

On balance this gave a somewhat better than

average picture for Montana.

This was true of the district as a whole,

but business sentiment was cautious with the exception of the retail

trade people who foresaw a strong fourth quarter this year.

Mr.

Deming

said he could see no occasion for changing the Committee's policy over

the next few weeks, and he would continue about the same level of net

borrowed reserves for the present.

Mr.

Allen said that he did not feel that there had been any

basic change in

the over-all business situation in

the past three weeks.

Business capital expenditures had been leveling off at a high level

and seemed likely to decline in 1958.

This was neither surprising nor

disturbing to him in view of the very high level of such expenditures

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10/1/57

in the past two years.

that way.

Retail sales have been strong and continue

Cash receipts from farm marketings continue to expand in

the Seventh District somewhat faster than nationally, largely as a

result of large harvests over most of the district.

Shipments and

retail sales of farm equipment have improved this year,

sources express confidence that a further rise is

of higher farm income.

Mr.

The automobile business is

and industry

in prospect because

in between models,

Allen noted, and at this time he had nothing to add to his comments

at recent meetings except that there was a general belief in Detroit

that automobile prices would advance only 2 to 4 per cent on 1958 models,

which would be considerably less than the advances made last year.

Since the seasonal low at the end of July, business loans at

Seventh District reporting banks had increased dollar-wise more than a

year ago, Mr. Allen said, and nationally the increase was not far be

hind that of last year.

Chicago money market banks had been under

heavy pressure for the past three weeks and experienced their largest

basic reserve deficit since May.

Very few country banks had been borrow

ing in recent weeks.

Mr. Allen said that the concluding sentences used by Messrs.

Young and Thomas in their statements expressed his feelings very well:

while inflationary clouds might be breaking up, it would be altogether

premature to conclude that they have now scattered, and he could see

no occasion for an intensification of pressure at this time nor should

there be an easing.

-l4

10/1/57

Mr. Leedy said that the most important thing that had happened

in the Tenth District in the last few weeks had been the general and

ample rains.

Planting of winter wheat had progressed well and pasture

conditions throughout virtually the entire district were most favorable.

Mr. Leedy commented that last year when the time for planting winter

wheat arrived acreage put in

the soil bank came to the extremely large

total of ten million acres.

This year because of favorable moisture

conditions up to mid-September only one and one-half million acres had

been signed up and, while the time would not expire until October 4, it

was expected that participation in the soil bank this year would be much

less than last year.

Growth of business loans in the Tenth District as in the Chicago

District had been different than nationally, Mr. Leedy said, in

that there

had been a larger increase since mid-year in the Tenth District than had

occurred last year.

Borrowings at the Reserve Bank recently had been the

reverse of the reports of the Boston and San Francisco Districts in that

discounting at Kansas City had risen quite sharply.

On balance, Mr. Leedy said that it seemed to him that at this

juncture the System should be particularly cautious to make sure that

seasonal requirements were met.

The fact that there had been less ex

pansion of loans and a most moderate increase in the money supply, along

with the other indications that the situation was quite different from

that with which the Committee had been dealing for a considerable period

of time, should cause the Committee to be very cautious with respect to

10/1/57

-15

the degree of pressure that was applied.

Mr. Leedy said he did not

intend to suggest a change in policy; he believed the Committee should

continue about the same level of pressure that it

recently but it

Mr.

had been striving for

should be quite cautious about overdoing the restraint.

Leach said that on balance it

turn in business activity in

appeared that the seasonal up

the Fifth District during the past month

had been somewhat weaker than in past years.

In the important textile

industry market interest remained concentrated on immediate and nearby

delivery.

Orders for future delivery were lagging behind the usual rate

for this time of year, and the long awaited improvement in

was still

around the corner.

the industry

On the other hand, the furniture industries

in North Carolina and Virginia seemed to be running slightly ahead of

the year-ago production rate.

Marketings of the 1957 crop of flue-cured tobacco currently was

under way in three of the four belts of the district, Mr. Leach said.

Assuming no price changes during the rest of the marketing season, it

was estimated that growers income this year would be down 25 to 30 per

cent from last year which would mean a loss in income of $175 to $200

million.

Employment gains in tobacco stemming and redrying plants in

Virginia in August were smaller than usual possibly due to the reduced

volume of flue-cured tobacco resulting from the drought and acreage cuts.

In contrast, cigarette production in the district for the first

months of this year was 7 per cent ahead of last year.

seven

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10/1/57

Business loans of weekly reporting banks in

increased 3.4 per cent in

said, a little

the Fifth District

the three weeks ended September 18, Mr.

faster than for the country as a whole.

Borrowings from

the Richmond Bark had averaged less than $30 million in September,

pared with $50 million in August and $l0

As to policy, Mr.

Leach said it

Leach

com

million in September a year ago.

seemed appropriate that the

Committee should continue for the immediate future the same degree of

tightness that it

had been achieving.

In his judgment,

it

was not yet

time for any easing and the Committee should be careful not to ease too

soon.

At the same time,

he thought the Committee should be careful not

to be any more restrictive.

In short, he thought the degree of pressure

in recent weeks had been just about right and should be continued, but

the Committee should be on guard to refrain from becoming too inflexible

on the tight side as some of our friends feared.

Mr. Vardaman said that even if he had contrary ideas he would

hesitate to express them in the face of the views expressed by Messrs.

Young and Thomas and the eight Presidents of the Reserve Banks who had

reported thus far.

It seemed obvious, he said, that the Committee should

continue just about as at present and that it

should pay particular at

tention to the point made by Mr. Leedy about taking care of seasonal

needs.

Mr. Vardaman would take care of these needs even cordially, and

he felt that commercial banks should be encouraged to take care of the

seasonal needs of their customers.

He would continue the Committee's

directive and general policy without change.

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10/1/57

Mr. Mills said that his views of credit policy followed those

that had been expressed in favor for the present of exerting about the

same degree of pressure in evidence since the last meeting of the Com

mittee.

He hoped that this would promote a redistribution of the

securities that were acquired by the commercial banks during the

Treasury's recent financing operation, and in

so doing make the re

serves then supplied available to support the prospective seasonal

expansion of bank credit.

Mr.

Mills then referred to reports of a sluggish reception and

distribution of new securities offerings by various Federal agencies.

These offerings were largely of a short-term nature and presumably

found a market in

the same investment area that was usually attracted

to Treasury bills and certificates.

It had occurred to him that the

present active demand for Treasury bills might indicate a strong liquidity

preference on the part of investors that was being reflected in

the in

vestment market for intermediate-term securities by the cool reception

given the Federal agency offerings.

Mr.

Mills suspicioned that an early offering of a substantial

issue of FNMA securities and likewise a successful refunding in December

of the Treasury's issue of 3-5/8 per cent certificates might be handi

capped by the influence of the relatively slow market for Federal agency

securities.

Inasmuch as the FNMA issue is in effect a substitute for a

direct offering by the Treasury,

he believed that the Committee should

especially consider what responsibility the System had within the limits

10/1/57

-18

of appropriate credit policy for facilitating this financing operation.

He hoped that Mr. Rouse would discuss this subject later in the meeting.

Mr. Robertson said that, for the first

time in a long time, it

seemed to him that the Committee's restrictive policy was beginning to

bite.

He was of the opinion that the degree of restraint had been in

adequate for a long period and therefore slow in

believed that it

was now beginning to work.

taking hold, but he

Hence, he believed the

System should adopt the position of waiting and watching.

System

policy should not be made more restrictive at this time, but it

cer

tainly should not be relaxed.

Mr.

Shepardson reported that in

recent weeks he had visited a

considerable part of the agricultural sections of the Northwest.

He

could not recall when he had seen better conditions over those areas

as judged by current crop and range conditions, the condition of live

stock, the attitude of the people in

the areas, and the indications of

well-being as judged by the appearance of houses, barns,

and so on.

The condition of agriculture in

outbuildings,

this rather large section

was a pleasant surprise and furnished an indication of good economic

conditions generally.

Most persons with whom he had talked who were

actively engaged in the farming business were feeling quite optimistic.

Mr. Shepardson said that he was thoroughly in accord with the

presentations made by Messrs. Young and Thomas and with most of the

views expressed by others who had commented this morning.

He would

differ somewhat from views expressed by Messrs. Leedy and Vardaman in

10/1/57

-19

that, while he felt the System should meet seasonal needs for credit,

he would meet those needs with some continuing degree of restraint

rather than as freely as he understood their comments suggested.

Mr.

Shepardson thought that Committee policy was beginning to get some of

the results that had been wanted and that it

indicate a change in

would be a mistake to

policy just as these results were starting to

appear.

Mr. Fulton said that the situation in the Fourth District was

not quite as bright as had been indicated for some other districts, but

it

should be characterized as one of high level activity.

in

the steel industry were a little

Operations

higher than the national average.

While orders from automobile manufacturers for steel had not come in

expected,

as

orders for the fourth quarter for some components were quite

satisfactory.

Unemployment had increased somewhat because of layoffs

connected with the changeover to new model automobiles.

An indication

of sentiment for future manufacturing expansion was to be found in

inquiries for new business sites, Mr.

active demand for such sites in

Fulton said.

He reported an

the Fourth District in

connection with

programs for 1959 and 1960.

With respect to policy, Mr.

Fulton said that while this was a

period of some hesitancy and while sentiment on the down side seemed

to be outrunning the statistics, he considered the over-all outlook

for the future to be buoyant.

He agreed with Mr. Shepardson that the

Committee should not give a sign of relaxation.

It should take care

10/1/57

-20

of seasonal needs,

of course,

but it

should retain about the tightness

of the past three weeks, which he felt had been quite appropriate.

Mr. Williams said that business developments in the Third Dis

trict

in

general were not markedly different from those described for

other districts.

He then reported the views that had been expressed

at a recent meeting of seventeen business economists from firms located

in

the Third District, summing up their comments with the statement that

it was clear that the pessimistic evidences were weighted more heavily

than other evidences in

the expressions of those men.

that there had not been significant changes in

Mr.

Williams said

the banking figures

recently although there had been some increase in borrowings at the

Philadelphia Bank.

In view of the cautious business sentiment that

existed and the lack of evidence of a strong fall

upturn, he believed

the Committee should continue about the same degree of restraint that

had existed recently, and he suggested that net borrowed reserves might

continue in

Mr.

the $l00-$500 million range.

Bryan said that conditions in

the Sixth District for the

most part reflected stability at a generally high level, with the

exception of the State of Florida which continued to have sharp rises

in activity.

He found little

or nothing in

the comments or suggestions

made by others at this meeting with which to disagree,

Mr.

Johns agreed with the conclusion quite generally reported

heretofore that there should be no change in

policy either toward

-21

10/1/57

tightening or relaxing.

Some of those with whom he discussed these

problems were beginning to feel that the time might be near for dis

cussing whether a change might be necessary in policy and in the Com

mittee's directive.

Mr. Johns said he would be quick to agree that

the Committee's frequent meetings and procedures for determining policy

for relatively short periods should not obscure for the Committee

developments that should be in view.

For the moment, however,

see no need for changing the Committee's directive.

he could

In fact, he felt

the wording of the directive was perhaps better in relation to current

conditions than it

Mr.

had been at some previous periods.

Szymczak agreed that there should be no change in the policy

now expressed in

the Committee's directive, and he also agreed that there

should be no change in

discount rate at this time.

However, he said that

he leaned toward a milder restraint attitude than he thought had been ex

pressed by most of the others who had commented thus far.

mixed elements in

There were

the economic situation, and there were the Treasury's

and seasonal needs to be considered.

Because of these factors, at the

present time he would lean toward negative free reserves in the $300

$400 million range rather than in the $400-$500 million range, he would

not change the Committee's directive, would not change the discount rate,

and would lean toward more ease in the policy of restraint.

Mr.

Balderston noted that Mr.

about the future.

Johns had indicated some concern

He also referred to Mr.

Marget's report to the Board

on the overspending in recent years by France, India, Japan, and other

countries, which had added to upward price pressures on industrial

10/1/57

-22

materials and which had now brought those countries into exchange

difficulties.

Mr.

Balderston said he mentioned this point because,

while he say nothing that the Open Market Committee should do at the

moment because of the clouds that were appearing beyond the ocean, it

seemed quite obvious that our future export trade would be affected

adversely.

There may be anticipated appeals from abroad for help by

our Government that, if

granted,

would add to the spending here.

Another concern was that next year when large employers

negotiate wage contracts,

that the economy can ill

they not abdicate and buy peace at a price

afford.

Mr. Balderston said he felt

that

this time vigorous bargaining might bring a period of labor disputes

and interference with production.

However, he felt

it

important that

developments should not lead either side to have unfounded expectations

as to the future of business and as a result to press for wage advances

in excess of productivity.

As for the present, Mr.

Balderston said there seemed to be a con

tinuance of pressures as had been indicated by the discussion.

a question about a remark Mr.

He raised

Thomas had made to the effect that the

diminished liquidity of the commercial banks would make a lower net

borrowed reserve figure as effective a restraining factor as a higher

figure previously had been.

Mr. Balderston noted that a year ago he

thought this to be true, but that the lover net borrowed reserve figure

of last fall now seemed to have been a mistake.

In view of last year's

-23

10/1/57

experience with net borrowed reserves of around $200 million, he urged

that the Committee keep the $400 million level as the current guide.

Mr. Thomas,

comment,

in

response to Chairman Martin's invitation that he

said that he had nothing to add other than to say he agreed with

the conclusion stated by Mr.

Balderston.

His suggestion was for a lower

level of net borrowed reserves than the $500 million or more common

during the spring and summer of this year, but not for a level of $200

million or less that prevailed during the late months of 1956 and early

1957.

Chairman Martin said that there was a surprising degree of unani

mity today.

He observed that he had visited with seven Ministers of

Finance and six Governors of central banks at the annual meeting of the

Boards of Governors of the International Monetary Fund and the Inter

national Bank for Reconstruction and Development during the past week.

He was impressed with the unanimity of their views that inflation in

each instance had gotten ahead of them, that it

in their countries,

was the primary problem

and that there would be no way of coping with the

inflation other than a little

decline in

that, with two minor exceptions,

business.

The Chairman said

he found no apprehensions concerning

that prospect, but there was a general view that the main problem was

one of public relations in

dealing with the feeling in

some quarters

that central banking policy was seeking a depression or was endeavoring

to precipitate a decline in

each of these countries,

business.

This was the problem faced in

the Chairman said, and each of the individuals

10/1/57

-24

with whom he had talked was seeking ways of explaining the problem

to the people.

That problem was similar to the one presented to

the Federal Reserve System, Chairman Martin said, adding that it

was

interesting to get this synthesis of views, with the same awareness

on the part of each of the individuals of the inability of monetary

policy to supply a magic solution.

Chairman Martin said there was

also an awareness that there would be pressure on the monetary

authorities to reverse their policies in order to prevent an adjust

ment from taking place,

and an equal awareness that they did not have

a means for pulling the levers and avoiding a readjustment.

Chairman Martin then said that it

appeared that the consensus

clearly was that there should be no change in

policy or in

the Com

mittee's directive at this time.

Mr.

Robertson said that his understanding of this statement

was that the Committee desired to follow the same policy during the

next three weeks that had been followed during the past three weeks.

While the Chairman had not mentioned the volume of net borrowed re

serves, he (Mr.

Robertson) would assume that the averages of net

borrowed reserves that had been sought during the past three weeks

would continue to be sought during the next three weeks.

Mr.

Rouse stated that he understood the Committee's discussion

and instructions to be principally in terms of degrees of pressure

rather than net borrowed reserves,

intended no change in

its

but he understood that the Committee

net borrowed reserve objective.

10/1/57

Chairman Martin added that this would be with a view to

seeking the same degree of restraint that had been sought before.

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 Committees

(1) To make such purchases, sales, or exchanges

(including replacement of maturing securities, and

allowing maturities to run off without replacement)

for the System open market account in the open market

or, in the case of maturing securities, by direct ex

change with the Treasury, as may be necessary in the

light of current and prospective economic conditions

and the general credit situation of the country, with

a view (a) to relating the supply of funds in the market

to the needs of commerce and business, (b) to restraining

inflationary developments in the interest of sustainable

economic growth while recognizing uncertainties in the

business outlook, the financial markets, and the inter

national situation, and (c) to the practical administra

tion of the account; provided that the aggregate amount

of securities held in the System account (including commit

ments for the purchase or sale of securities for the ac

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

term certificates of indebtedness purchased from time to

time for the temporary accommodation of the Treasury, shall

not be increased or decreased by more than $1 billion;

(2)

To purchase direct from the Treasury for the ac

count of the Federal Reserve Bank of New York (with dis

cretion, in cases where it seems desirable, to issue par

ticipations 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 maturing within one year as may be necessary

from time to time for the accommodation of the Treasury;

provided that the total amount of such securities so

10/1/57

-26.

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.

Mr. Rouse then referred to the comments Mr. Mills had made

earlier in

the meeting regarding new securities offerings by various

Federal agencies.

He said that during the past one and one-half years

there had been a substantial increase in the volume of such issues,

both in

number and amount, and the spread between Treasury issues and

agency issues had increased markedly in

order to absorb this rise.

Within the past few months the demand for the agency issues had not

increased as rapidly as had the volume of such issues and the market

was now faced with the possibility of a substantial FNMA issue.

Mr.

Rouse expressed the view that such an issue probably would have to

be in

the six to eight month maturity range, although there was the

possibility of a fairly long issue if

it

was not in

a very large

volume.

Mr. Vardaman suggested that it might be of interest to the

Committee members if the Board's Division of Research and Statistics

would prepare a list

showing the labor management negotiations that

might take place during the calendar year 1958 as a result of expire

tion of existing contracts.

It was agreed that the next meeting of the Committee would be

held at 10:00 o'clock on Tuesday,

October 22, 1957

Thereupon the meeting adjourned.