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, December 3, 1957,
PRESENT:
at 10:00 a.m.
Mr. Martin, Chairman
Mr. Hayes, Vice Chairman
Mr. Allen
Mr. Balderston
Mr. Bryan
Mr. Leedy
Mr. Mills
Mr.
Mr.
Mr.
Mr.
Mr.
Robertson
Shepardson
Szymczak (first
Vardaman
Williams
part of meeting)
Messrs. Fulton, Irons, Leach, and Mangels, Alternate
Members of the Federal Open Market Committee
Messrs. Johns and Deming, Presidents of the Federal
Reserve Banks of St. Louis and Minneapolis,
respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Sherman, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Atkinson, 3opp, Marget, Mitchell, Roelse,
Tow, and Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr Carpenter, Secretary, Board of Governors
Mr. Miller, Chief, Government Finance Section,
Division of Research and Statistics Board
of Governors
Mr. Gaines, Manager, Securities Department,
Federal Reserve Bank of New York
Messrs. Daane and Wheeler, Vice Presidents of
the Federal Reserve Banks of Richmond and
San Francisco, respectively; Mr. Balles
Assistant Vice President, Federal Reserve
Bank of Cleveland; Messrs. Parsonsand
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Coldwell, Directors of Research at
the Federal Reserve Banks of
Minneapolis and Dallas, respectively;
and Mr. Meigs, Economist, Federal Re
serve Bank of St. Louis.
Chairman Martin presented for the approval of the Committee the
revised draft of the minutes of the meeting held on November 12,
1957.
Copies of the minutes had been circulated before this meeting, together
with a memorandum showing changes that had been made in
the preliminary
draft of those minutes.
Mr.
Robertson referred to the wording of the directive appearing
on page 46 of the mimeographed copy of the draft of minutes, and specifi
cally to clause (b) in
the first
paragraph calling for open market opera
tions with a view, among other things,
"to fostering sustainable growth
in the economy without inflation, by moderating the pressures on bank
reserves." He did not recall voting to approve that part of the clause
following the comma which called for "moderating the pressures on bank
reserves."
Mr. Riefler stated that the wording of clause (b) as recorded in
the minutes was the wording arrived at in the discussion at the meeting
on November 12 and that the wording had been read a number of times
during the discussion.
There had been no indication of dissent from
that wording when the Chairman had called for comments regarding the
change.
Mr. Robertson stated that he had not understood that the direc
tive adopted at the November 12 meeting was to have inserted in
(I)()
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12/3/57
the clause "by moderating the pressures on bank reserves."
so understood, he would have voted against it.
If he had
Consequently, he wished
to have the minutes of that meeting show his adverse vote and the
reason therefor.
There was a discussion of the procedure followed in
arriving
at the change in wording of the directive at the November 12 meeting,
in the course of which Chairman Martin said that, while this was an
"after the fact" discussion, the minutes of the November 12 meeting
had not been approved and he could see no objection to having anybody
who wished to do so clarify the statement of his views both for the
minutes and for the record of policy actions that would be published in
the Board's Annual Report for the year 1957.
Mr. Shepardson said that he would like to have included in the
minutes of the November 12 meeting a comment that he had made and which
the Secretary had informed him was included in notes of the meeting but
which had not been set out in the minutes.
This was a detail that he
had not noted when the preliminary draft of the November 12 minutes
was sent to him because he did not read the minutes in
full at that
time.
Chairman Martin stated that he saw no objection to including
such a comment in the minutes.
He suggested that, under the circum
stances, approval of the November 12 minutes be held over until the
next meeting of the Committee and that another revision be distributed
so that the members of the Committee would have the exact wording of
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the changes before acting to improve the minutes.
Chairman Martin
went on to say that it was incumbent on all members of the Committee
to read the drafts of minutes as they came around and to get their
suggestions in
before the meeting at which the minutes were to be
presented for approval, or, if that was not possible, to ask that they
be held up until they had had an opportunity to suggest revisions.
Otherwise, the Chairman felt there was danger that the Committee would
not have an accurate record of its
It
meetings.
was understood that the procedure suggested by Chairman
Martin would be followed.
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 November 9
through November 26, 1957, and a supplementary report covering commit
ments executed November 27 through December 2, 1957.
Copies of both
reports have been placed in the files of the Federal Open Market Com
mittee.
Commenting on operations since the November 12 meeting, Mr.
Rouse pointed out that the directive and instructions adopted by the
Committee at that meeting contemplated a different set of circumstances
than those that actually developed following the change in discount
rates.
Acting within the new circumstances emerging from the discount
rate action, the Account Management carried out the instructions of the
Committee,
although at times there had been differences between the
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actual reserve statistics and those discussed
at
Mr.
the last meeting.
Rouse reported that he had not been too much concerned about the
higher-than-anticipated net borrowed reserve figures this past week
since to have attempted to reduce them in
the prevailing bullish
atmosphere would have made the System look silly in the market.
The
change in the discount rate had a definite easing effect on market
psychology.
Also, active rumors that reserve requirements would be
changed had been an easing influence during the past week, as had been
the relatively easy reserve position of the New York banks.
In supply
ing reserves to the market, Mr. Rouse reported that as much as possible
had been done through repurchase agreements in order to make it
easier
to withdraw these reserves if that should be advisable later,
Mr. Rouse went on to say that the projections suggest the need
for a rather sizable release of reserves through open market operations
during the next few weeks.
To the extent possible, these funds also
would be supplied through repurchase agreements, so that the withdrawal
of reserves after the end of the year would be simplified.
With respect to the Treasury financing, Mr. Rouse reported that
the refunding was definitely successful, but the attrition, while rela
tively small, was still
surprisingly large.
There must have been a good
many small blocks of the December 1 certificates on which the profit to
be made by selling "rights" at a 6/32nd premium was not sufficient to
justify the effort of selling them.
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Thereupon, upon motion duly made and
seconded, and by unanimous vote, the open
market transactions during the period
November 9 through December 2, 1957, were
approved, ratified, and confirmed.
Prior to this meeting there had been distributed copies of (a)
a letter from Congressman Abraham J. Multer, dated November 22, 1957,
addressed to Chairman Martin, requesting copies of the daily reports
of dealers'
operations in U. S.
Government securities for each of the
17 bank and nonbank dealers who trade in Government securities with the
System Open Market Account covering the days November 11-15,
1957, and
(b) a letter from Congressman Wright Patman, dated November 26, 1957,
referring to the photostatic copies of records of transactions of the
System Open Market Account transmitted with Chairman Martin's letter
of November 12,
1957,
and requesting additional information and
explanations concerning not only transactions for the System Open Market
Account but also concerning bids submitted by Government securities
dealers in the Monday Treasury bill
auctions.
Chairman Martin said that he would like to have an expression
of views concerning the handling of these letters.
He felt that the
Federal Reserve should be reasonable in supplying information, but he
thought some of the requests being made by Mr. Patman and others might
go beyond what the System reasonably could be expected to supply.
Mr. Hayes said that he and members of the staff at the New York
Bank had studied the requests of Messrs.
Multer and Patman carefully.
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12/3/57
With respect to Mr. Multer's request, Mr.
Hayes said that he felt it
could be turned down quickly and positively because it
was a request
to reveal information which the System account received on a strictly
confidential basis.
There seemed to be no question but that there was
reasonable grounds for refusing to disclose the requested information.
With respect to Mr. Patman's letter, Mr. Hayes said that some
of the data might represent a reasonable request and might be helpful
in understanding more about the System's operations.
He felt that in
general it would be desirable to take a little time in studying this
request and in preparing whatever response seemed appropriate.
It was
Mr. Hayes' thought that the Secretary of the Committee, in consultation
with the Chairman, the Vice Chairman, and the Manager, might work up a
draft of letter for consideration at a later meeting.
At Mr. Hayes' request, Mr. Rouse then commented in some detail
on Mr. Patman's letter, after which there was a general discussion of
the requested material.
for dealers'
bids in
In connection with discussion of the request
the Monday Treasury bill
auctions,
it
was sug
gested and agreed that this was not Open Market Committee record
material and that any request for such information would properly have
to be directed to the Treasury Department.
Regarding Mr. Patman's
request for information on System account tansactions up to June 30,
1957 rather than to the end of 1956,
one view was that there might be
no objection to providing information to that date in view of subsequent
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12/3/57
developments in
System credit policy, while another view was that no
information should be given regarding transactions until the open
market policy record required by section 10 of the Federal Reserve
Act to be included in
the Annual Report of the Board of Governors
to the Congress had been submitted and made public.
After discussion, Chairman Martin stated that the suggestion
Mr. Hayes had made for denying Congressman Multer's request for informa
tion regarding dealers' operations on the grounds that the information
was strictly confidential seemed an appropriate way to dispose of that
matter.
With respect to Mr. Patman's request, he suggested that in
line with Mr. Hayes' proposal, Messrs. Riefler and Rouse be requested
to prepare a draft of reply in the light of the discussion at this
meeting for consideration at a later meeting of the Committee.
There was agreement with these suggestions, and it was under
stood that appropriate drafts of letters would be prepared.
During this discussion, Mr. Szymczak withdrew from the meeting.
In this connection, Mr. Riefler noted that drafts of replies to
the list of questions submitted by Congressman Patman to Chairman Martin
on August 6, 1957 when he appeared before the House Banking and Currency
Committee in connection with the Financial Institutions Act of 1957 were
largely completed and that they would be circulated to the members of
the Committee within the near future.
Chairman Martin next referred to a telegram that had been sent
by the Secretary on November 25, 1957, to the available Committee members
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and to the Presidents who are not currently members suggesting that
because the Treasury expected that it
would be necessary to borrow
temporarily from the System at times during December it
would be
appropriate to reconsider the rate of interest at which special
certificates of indebtedness are purchased from the Treasury under
the authority contained in
the second paragraph of the Committee's
directive to the Federal Reserve Bank of New York.
The telegram
noted that the rate charged for this facility--currently 1/4 per cent
was last approved by the Federal Open Market Committee at its
meeting
on June 28, 1949, and that the facility was last used in March 1954.
The Manager of the System Open Market Account had recommended that,
considering the existing market rates of interest, the rate on special
certificates of indebtedness purchased direct from the Treasury be
increased to a level 1/4
per cent under the discount rate of the Fed
eral Reserve Bank of New York, and the Secretary concurred in this
recommendation.
The telegram also stated that the Treasury was agree
able to this rate.
Chairman Martin said that at the time the telegram was sent, it
appeared that the Treasury would wish to use the facility in December
and that in order to have a changed rate effective, a Committee decision
would have been needed that week.
However,
it
had developed that the
Treasury would not use the facility immediately and the matter had there
fore been held over for consideration at this meeting.
Chairman Martin
went on to say that the Treasury had been trying to put all Government
12/3/57
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transactions on a realistic interest bearing basis and that the sug
gestion to have these special certificates carry a rate 1/4 per cent
below the discount rate would seem to be in
Treasury position.
line with the general
There had also been some discussion of whether
the rate for the Treasury's borrowings from the Federal Reserve might
preferably be 1/2 per cent below the discount rate.
On the other hand,
the Chairman said that some individuals had spoken to him, indicating
that they were inclined to keep the existing rate of 1/4
of 1 per cent
on the grounds that such Treasury borrowings were strictly an emergency
operation.
Chairman Martin said that he had no strong feeling about
the question, although he was inclined to feel that if
this type of
borrowing were to be put on a business basis a rate either 1/4 or 1/2
per cent below the discount rate would be appropriate.
Mr. Rouse commented on the origin of the 1/4 of 1 per cent rate,
stating that when it was established in the 1940s it was with the thought
that the principle of having the Treasury pay a rate of interest should
be maintained.
Several months ago, the question had come up in a discus
sion with Mr. William Heffelfinger of the Treasury and out of that
discussion arose the suggestion that the rate charged on these special
certificates be placed on a more realistic basis.
There was no immediate
need to use the facility, Mr. Rouse said, but a short time ago when it
appeared that the Treasury would need to borrow direct from the Federal
Reserve Banks during December the question was brought up again..
Mr.
Rouse said he thought the suggestion of a rate 1/4 per cent below the
12/3/57
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discount rate was one he would recommend, which he did, and Mr. Riefler
had joined him in the recommendation.
He noted that these were trans
actions between two Governmental bodies and stated that for such trans
actions it seemed appropriate to have a rate slightly different from
that charged private borrowers.
Mr. Hayes added that the Treasury certificates of indebtedness
were comparable to very short-term Treasury bills, which usually sold at
a rate less than the discount rate.
Mr. Vardaman said that in suggesting a rate below the discount
rate, he had in mind the fact that borrowings by the Treasury from the
Federal Reserve were properly considered temporary emergency borrowings.
He suggested that there might be an unwarranted attack on the System if
it
charged the Treasury a rate for emergency borrowings that was charged
private borrowers.
At the same time, he believed that it would not be
realistic to charge only 1/4 of 1 per cent on such borrowings,
consider
ing the general structure of rates now prevailing.
Chairman Martin said that on a strictly business basis, the bor
rowings of the Treasury on the temporary certificates should be at a
lower rate than the discount rate.
of a rate 1/
He felt, therefore, that the setting
or 1/2 per cent below the discount rate could be justified.
Mr. Mills inquired whether there would be any merit to a formula
that would set the discount rate as a maximum on these borrowings by the
Treasury, with a minimum rate being that which applied on the latest
issue of Treasury bills, presuming, of course, that that rate was below
the discount rate.
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12/3/57
Hr. Riefler said that this had been considered.
The only
problem was that before the Treasury reached the point of using
this facility it
usually had made other adjustments such as use of
the Stabilization Fund which forced down the bill rate.
the rate on the latest bill issue were to be used in
it
Thus, if
the formula,
might get us into problems.
Mr. Allen said that he did not think it
made too much dif
ference what rate was charged on these borrowings.
He would go along
with the comments of Mr. Vardaman that the rate should be below that
charged private borrowers,
and he said that an offhand reaction on
his part would have been that the rate charged the Treasury might be
set at, say, 2 per cent,
Mr. Robertson said he thought this was a lot to do about
nothing.
The only importance was from the public relations standpoint.
Regardless of the rate charged, 90 per cent of any earnings that the
System got from such borrowings went to the Treasury and the actual
cost to the Treasury could not be of much importance.
He understood
there had been a time in the 1920s when the rate charged on these
special borrowings by the Treasury was related to the discount rate
and that it
got as high as 4 per cent or perhaps higher.
The System
had not had authority to purchase securities direct from theTreasury
for several years from the 1930s up until 1942.
The rate of 1/4 per
cent was fixed after limited authority for direct purchases was pro
vided in
Section 14 (b) of the Federal Reserve Act in 1942,
and it
had
12/3/57
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remained unchanged since.
Since these direct borrowings by the
Treasury could be termed emergency in nature,
Mr. Robertson thought
there was much to be said for considering that the use of the facility
was for the benefit of the whole country.
Philosophically, he could
not see any reason for any interest charge on such emergency-nature
transactions, although he would not argue against the present 1/4
per cent rate.
He did feel, however, that the direct borrowings
should be kept on an emergency use basis, and he thought the present
charge of 1/4 per cent would help do that.
It represented some charge
to the Treasury, but it was not a market rate and did not put the charge
on a business incentive basis.
Therefore,
his judgment would be to let
the present rate stand since he could not see that it
did any harm or
that a change would do any particular good.
Mr. Thomas commented that when the 1/4 per cent rate on direct
Treasury borrowings was set in the 1940s it was related to the discount
rate in the sense that the discount rate was then 1/2 of 1 per cent and
the System stood ready to purchase Treasury bills at 3/8th of 1 per cent
on option.
Chairman Martin said he thought Mr. Robertson had made the case
for the status quo as well as it could be made,
He did not agree wish
the logic of that case because he believed that the rate should be re
lated to the whole business process. As Mr. Thomas had pointed out,
the history of the rate had been related to the discount rate.
It
seemed to him that some relationship between the rate charged the
12/3/57
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Treasury on direct borrowings and the discount rate was preferable
to the existing procedure.
On the other hand, Mr. Robertson had
eloquently presented the reasons for the status quo.
It should also
be noted that the Treasury was agreeable to a rate that would be 1/4
of 1 per cent below the discount rate.
Commenting further on this
point, in response to a question from Mr. Leach as to whether the
Treasury had actually suggested this arrangement, Chairman Martin
said that he would not go that far but would say that the Treasury
was perfectly agreeable to the proposed change.
Mr. Hayes said that he felt the question was not of great
importance but he rather preferred the procedure of fixing a differ
ential that would move with the discount rate.
If the practice of
charging practically nothing for the use of this facility were extended
along the lines of Mr. Robertson's comments, the question could be
raised as to whether anything done through the Open Market Account
should have a market rate.
On balance, Mr. Hayes thought it preferable
to relate this rate to the discount rate, and a differential of 1/4
per cent below the discount rate seemed as good as any other.
Mr. Shepardson said that it
seemed to him there was sound logic
for putting this rate on a business basis in line with what the Treasury
was doing generally.
There would be justification for putting it
the discount rate, but in
view of the lower rate usually available
at
n
very short-term Treasury bills he thought the differential 1/4 per cent
below the discount rate was logical.
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12/3/57
Mr.
Deming felt the status quo position was preferable.
The quarter per cent rate had applied for ten years and he could
see little reason for changing it
now and possibly stirring up
unnecessary discussion.
During further discussion, Chairman Martin indicated that,
while he did not consider the matter of great importance, he was
willing to take the risk of having to explain the basis for a change
in the rate before a Committee of Congress,
He thought it
if called upon to do so.
could be explained as a reasonable move.
Chairman Martin then noted that the Committee had before it
a recommendation from the Manager of the System Open Market Account
and from the Secretary of the Committee that the rate charged on
special short-term certificates of indebtedness purchased direct from
the Treasury pursuant to paragraph (2) of the Committee's directive
to the Federal Reserve Bank of New York be fixed at 1/4 of 1 per cent
below the discount rate of the Federal Reserve Bank of New York at
the time of such purchases.
The Chair put this question, and the
recommendation was approved, Messrs. Martin,
Chairman, Hayes, Vice Chairman, Allen,
Balderston, Bryan, Leedy, Mills, Shepardson,
and Vardaman voting to approve, and Messrs.
Robertson and Williams voting "no."
Mr. Deming stated that had he been a
member of the Committee he also would have
voted against adoption of the proposal.
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12/3/57
A staff memorandum on Recent Economic and Financial Develop
ments in the United States and Abroad had been distributed under date
of November 29, 1957.
At Chairman Martin's request, Mr. Young now
commented on the economic situation as follows:
The economic report at this meeting may be capsulized,
for the picture generally is consistent with that reported
at the last meeting--a moderate downsettling of the economy.
Industrial production continues to sag, especially in
the areas of steel and other metals, equipment and ordnance,
household durables, apparel and textiles, and mining, but
higher automobile output may have kept the Board's index of
industrial production close to the 142 level of October, or
at the worst at 141.
On the other hand, new construction seems to be main
tained, with residential and public utility construction up,
industrial construction down, and commercial and public con
Construction contract awards are hold
struction about even.
ing relatively high for this season of the year, reflecting
especially strength for residential awards. For six months,
relative strength in housing construction has been reflected
in a stabilized volume of housing starts at an annual rate
of about a million units. A point of interest in this con
that costs in residential construction declined
nection is
in October for the second successive month. Financing and
selling conditions for newly built houses continue to show
little change.
Further sag in equipment production and industrial con
struction is closely related to cutbacks in spending deci
sions for business plant and equipment. Information just
available on third quarter capital appropriations of large
manufacturing companies, but not yet made public, shows a
decline in appropriations of almost one-third from a year
ago. This is the second successive quarter showing a sub
stantial decline; second quarter appropriations were down
over a fourth from the second quarter of 1956. While amounts
actually spent for fixed capital by large manufacturing
corporations have been holding at advanced levels, the back
log of appropriations for spending has been declining this
year; at the end of the third quarter, it was an eighth
less than a year ago.
Data have just become available on new orders for
durable goods in October. They show no change from
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September.
Unfilled orders, however, continued to decline
and were 15 per cent under a year ago.
Labor market data show a further rise in unemployment
claims, with the increases fairly widespread geographically,
The mid-November unemployment survey, not yet released, shows
a rise in unemployed substantially more than seasonally, to
about 5.2 per cent, seasonally adjusted, of the labor force.
Although unemployment has been rising the number of markets
reporting a condition of substantial labor surplus has not
yet increased, but there has been a significant shift towards
areas classified as having a moderate surplus situation.
GNP for the final quarter, according to preliminary esti
mates, will show little
change or a moderate decline from the
third quarter.
Personal income in October declined for the
second successive month, due to reduced wage and salary dis
bursements.
The November estimate of personal income may
show a further moderate decline for the same reason.
Preliminary indications, mainly for department stores,
point to some recovery in retail sales after the reductions
of September and October.
Department store sales, however,
are still
well below a year ago.
In automobile markets, the
indications, especially at mid-month, are not encouraging to
producers.
New car sales through the first
20 days of Novem
ber, which cover carry-over '57 models as well as '58 models,
although up from October, ran slightly under a year ago, and
dealer stocks rose appreciably. Used car sales were a bit
above a year ago with used car prices, after allowance for
depreciation, about steady.
The general average of wholesale prices has shown little
change in November, and this has been broadly true of group
components--basic material, fabricated industrial materials
and finished products, and farm products. While the con
sumer price index was unchanged in October, because of off
setting movements of components, the index is currently ex
pected to show rise in November, reflecting higher new car
prices and additional advance in rent and service costs but
stability for other categories.
Data on international trade suggest that the changes
occurring in recent months have been in the direction of
moderating payments imbalances, especially for industrial
Although U. S. exports have fallen sharply from
countries.
spring to early fall, total world trade has evidently con
tracted only moderately in this period.
Evidence just
available confirms that economic activity in most major
industrial countries abroad declined some during the third
quarter. Evidence on the subsequent movement is asyet
unclear.
12/3/57
Mr.
Thomas then made the following statement on recent
financial developments:
Cross currents in economic forces during recent
weeks have precipitated spectacular and often paradoxi
cal developments in financial markets. Public recogni
tion by the System--through the discount rate reductionof the evident economic adjustments, that have lessened
and perhaps removed the threat of inflation for the time
being, was followed by sharp increases in prices of securi
ties.
Stocks, as well as bonds, shared in the rise until
announcement of the President's illness gave pause to the
rise in stock prices.
Analytically, a decrease in the Reserve Banks' dis
count rate would not by itself
be a cause for such sharp
changes in securities markets, particularly when it was
not accompanied by vigorous measures to add to the supply
of reserves.
It
needs to be kept in mind, however, that
to a degree these trends were already beginning to be
evident in the market for Government securities and in
credit demands.
The discount rate reduction was in a
sense a recognition of, and adjustment to, forces already
in operation.
It served as a catalyst in bringing
quiescent forces into action. Investment funds held
awaiting more favorable terms or a clarification of
trends were brought promptly into use.
Investor re
sistance in corporate and municipal bond market, which
had resulted in pressure on prices and accumulations of
inventories in the face of large offerings of new issues,
dissipated rapidly after the discount rate reduction.
Prices of bonds advanced and underwriters were able to
dispose of new issues.
The decline in yields on Govern
ment securities already in process was accelerated.
Yields on seasoned high-grade corporate and municipal
July and those
bonds have declined to the levels of last
than at any
now
lower
are
bonds
Treasury
on long-term
Yields on medium- and shorter-term
time since April.
Treasury issues, which had risen to above 4 per cent
last summer and were generally above long-term yields
for over a year, are now close to the ong-term level.
Yields on Treasury bills, which had been around 3-5/8
per cent during the latter part of October but had de
clined to below 3-1/2 per cent before the discount, rate
reduction, fell to about 3-1/8 per cent.
Bills have
12/3/57
continued available at around this level despite substantial
System purchases.
Seasonal cash needs, and perhaps some
shifting from liquid assets into longer-term holdings, have
been influences moderating the decline in bill yields.
The volume of new security issues in December is ex
pected to continue close to the high average level of the
past year. With the announcement of plans for a record
breaking issue of A.T. & T. convertible debentures in the
early months of next year and in view of prospective State
and local government programs, new issues may continue in
large volume for some time ahead.
As yet there is no in
dication of a decrease in corporate issues that might be
expected to result from the anticipated decline in capital
expenditures.
The Treasury's cash and debt positions are necessarily
confined within the narrow limits fixed by the statutory
ceiling on debt and the minimum needs for a working cash
balance.
As a result of new issues put on the books in
the last few days, the outstanding debt today is very close
to the ceiling, although some slight leeway may be provided
by savings bond redemptions.
The cash balance of about
$3.6 billion, excluding $200 million transferred from the
Stabilization Fund, may be adequate, with the aid of the
Stabilization Fund borrowing, to cover needs for the re
mainder of this month.
It is possible, however, that some
temporary borrowing from the Federal Reserve may be resorted
to at least once during the next week or two.
Some additional cash borrowing by FNMA may be obtained
around the middle of January and somewhat more than $1 bil
The situation will
lion will be needed by early February.
The Treasury faces a
not be comfortable until mid-March.
A most im
large refunding operation early in February.
portant question is when and how to take advantage of the
strong bond market and extend the debt maturities by offer
ing a long-term issue,
Bank credit has continued to decline, contrary to the
usual seasonal tendency at this time of the year. During
the four weeks since October 31, banks in leading cities
showed declines in loans, in holdings of Government securi
ties, and in other securities, amounting to around $200
The total decline of $600 million
million in each case.
compared with increases of approximately the same amount
in November of the two previou years.
Demand deposits adjusted at city banks have been in
creasing during the past three weeks at a somewhat slower
12/3/57
-2D-
pace than in the same period of the two previous years and,
owing to an unusually sharp drop in the first
week of Novem
ber, showed a net decline for the month as a whole. U. S.
Government deposits increased only moderately.
Time deposits
have declined as is usual in November.
Demand deposits
adjusted are apparently smaller now than they were a year ago,
as are Treasury deposits, but time deposits are much larger.
Deposit turnover declined, on a seasonally adjusted basis in
October, and showed a somewhat smaller increase over a year
ago than has been the case in other months of this year.
As a result of slackened growth in bank credit and de
posits, required reserves of member banks failed to show the
customary seasonal increase in November, thus reducing the
projected need for bank reserves.
In addition, reserves were
supplied by a reduction in Treasury balances at the Reserve
Banks (including that of the Stabilization Fund) and by sub
stantial System purchases of bills last week.
Currency in
circulation, however, after lagging somewhat in September
and October, increased a little
more than the normal amount
in November.
Float failed to show the usual seasonal in
crease in mid-November and declined much more sharply in
the last two weeks than was expected, thus exerting a drain
on reserves.
As a consequence of these offsetting influences, net bor
rowed reserves remained above $300 million in the last week of
November.
In other words, member bank reserve positions con
tinued fairly tight, notwithstanding the continued slackening
in credit expansion and the System's efforts to follow a less
Conditions became easier, however, in the
restrictive policy.
The principal shift was a decline in
New York money market.
excess reserves and increase in borrowings at country banks
toward the end of tho semimonthly reserve period.
The cumulative results of the easing measures are, however,
being reflected in member bank reserve positions this week, when
net borrowed reserves are expected to average less than $200
million. If the Treasury continues to keep its balances in the
'including that of the Stabilization Fand) at a
Reserve Banks
low level, net borrowed reserves will continue relatively smal
Projected increases to nearly $S00
during most of DIcPmber.
million next we'kl and to around $600 million in the lant week
of the month could be kept down through repurchase contractr
To provide 'he
or moderate outright purchases in those weeks.
liquidity uu.ally desired at this season, an abundant supply
of reserves will be appropriate.
In January
These nesds, however, will be short-lived.
in required
decreas3
and
currency
of
flow
the seascnr. :trurn
-21
12/3/57
reserves may be expected to release a substantial volume
of reserve funds.
While some part of these will be ab
sorbed by a decrease in float and eventually by restora
tion of Treasury balances to normal amounts, a reduction
of several hundred million dollars in the System's port
folio will be needed to avoid creating excessive temporary
sloppiness in the money market.
While the present situation calls for a lessening of
previous restraints, it would hardly be desirable to let
a normal seasonal decrease in credit and monetary demands
result in building up a large volume of temporarily re
dundant reserves. Only if credit contraction exceeds
usual seasonal amounts should further ease be permitted
to develop. After this month positive measures to supply
additional reserves should not be needed until March.
Chairman Martin said that Mr.
Balderston had suggested that in
the statements to be made by the individual Reserve Bank Presidents,
each include a comment as to whether loan volume had declined in
district and, if
his
so, whether the decrease reflected lessened loan demand
from borrowers or whether it
reflected decisions by banks to curb their
lending or to force the repayment of loans.
The Chairman then called upon Mr.
Hayes.
Mr. Hayes said, in response to the question suggested by Mr.
Balderston, that the experience in the New York District pointed to
both of the factors mentioned as playing a part in the reduction in
loan volume.
The banks certainly had felt a substantially lessened
demand for loans in
the last two or three months, but before that they
had exercised a very considerable control on loan expansion because of
their liquidity position.
Mr.
Hayes thought that the banks had con
tinued to exercise that control.
Most of the banks talked in terms
-22
12/3/57
of restoring their liquidity position as funds became available to them.
He did not think that in the New York District it would be correct to say
that either one or the other of the factors mentioned in Mr. Balderston's
question was mainly responsible for the decrease in loans.
Mr. Hayes went on to present his views on the economic situation
and credit policy as follows:
Since our last meeting the System has surprised the
country and the rest of the world with a sudden overt
signal that our posture with respect to monetary policy
has undergone a substantial change.
Time will tell
whether
the timing and form of this action were the best we could
have chosen.
It had seemed to most of us at the last meet
ing that some preparation in the form of diminished re
straint throug.
open market operations would be advisable
before any change was made in discount rates. However, the
move has been made, and it may well turn out to have been
useful on purely monetary grounds--at least it is now even
clearer than it was three week- ago that the economy is
experiencing a rather broad and general decline, so far very
moderate in degree, but carrying with it some risk of a
cumulative recession.
Confirmation of the business decline is to be found in a
wide variety of statistical measures of current trends, in
cluding figures on employment, average hours worked, personal
income, retail sales, and industrial production. Other
statistical data foreshadowing future levels of activity, such
as reports of new orders, point to a continuation of the decline.
Besides the expected drop in private plant and equipment ex
penditures, which may of course be accentuated by future adverse
psychological factors, I have in mind also the likelihood that
business expectations, the ready availability of goods and the
current level of inventories may lead to some inventory liquida
tion in the next few months. Uncertainties and depleted monetary
reserves in a number of countries point to a decline in exports.
Among the few remaining strong spots in the economy are non
Federal Government expenditures and construction in general.
The greatest uncertainties with respect to the future level
of activity concern consumer spending and Federal Government
As for the first, the Christmas season will provide a
spending.
significant test. Over the next few months the crucial factor,
12/3/57
-3-
apart from the course of personal income, may be the degree of
willingness of consumers to defend their level of living by
means of reduced savings or increased borrowing.
By and large,
consumers are in a strong financial position and may be ready
to reduce their liquid assets and/or to incur further debts,
if their confidence is not shaken. As for Federal spending,
the short-run outlook is for only a mild expansion, but it is
quite possible that over the longer term heavier defense out
lays may involve substantial Government deficits and may give
new impetus to inflationary influences in the economy.
It is evident that intangible elements such as the Russian
satellite development, political uncertainties abroad, and now
the grave question as to the President'shealth, will play a
major and unpredictable role in shaping the future course of
business activity.
Meanwhile, wholesale and consumer prices seem to have
achieved a considerable degree of stability for the time being.
And the latest figures on bank credit offer further evidence of
the pronounced slackening in credit growth as compared with
last year. According to our rough estimates the money supply
at the end of 1957 may be nearly 1 per cent lower than it was
at the end of 1956.
Fortunately our decisions with respect to credit policy
over the coming weeks can be taken with a minimum of considera
tion of the Treasury's problems, since no major cash or refund
ing operation is now in prospect until around February.
It seems to me that the basic uncertainties in the present
situation are so great that any policy based on definite antici
pations of future developments may well prove dangerously wrong.
Accordingly, the most appropriate criterion of policy may be
that of minimum risk, whatever may be the course of economic
On the one hand, I think we should avoid forceful
developments.
action, such as that taken in 1953-54, to flood the economy with
liquidity, for this might easily prove to be a most unfortunate
prelude to a program of heavy defense expenditures and possibly
On the other hand, if we were
renewed inflationary pressures.
to confine our easing of credit policy to the discount rate cut
already made, we would run considerable risk of seeing the
development of an undesirable degree of tightness in the credit
markets at a time when credit demands are slackening appreciably
but when liquidity needs are likely to increase seasonally.
Also there is already some confusion in the market as to the
meaning of the sudden rate cut without a definite easing of
reserve pressures, and for the sake of clarity and consistency
open market policy should be brought into alignment with dis
count rate policy.
12/3/57
I believe there should be enough slackening of restraint
to confirm the System's change of policy,
but the slackening
should not be carried to such an extreme that it would be
difficult or disturbing to tighten the reins again if future
conditions should call for such action. The current target
of about $250 million of net borrowed reserves should now, I
think, become a maximum, and we should work slowly and gradually
over the next few weeks toward the zero mark--with of course the
usual proviso for leeway for the exercise of judgment by the
Manager.
Until the market has had time to observe our open market
activities and to recognize this gradual confirmation of our
discount rate move, it might be well to avoid any further
overt signal, such as a cut in reserve requirements or in
margin requirements, however desirable such reductions may
be at some time in the next few months.
Mr.
Johns said that the reaction to the discount rate change had
proved that some of the fears that he expressed at the meeting three weeks
ago about the possibility of adverse reaction to what he then thought was
too large a decrease in the rate were unfounded.
and the psychological reaction had been good.
Those fears were wrong
Taking into account the
fact that there was some justifiable delay in executing the policy directive and carrying out the consensus arrived at at the meeting three
weeks ago that there should be a moderating in the- pressures on bank
reserves, Mr. Johns said he was gratified to see that that policy would
become evident within the next few weeks.
He would like to see the
moderating of pressures on bank reserves continued through a slow and
easy and gradual change.
With respect to the question Mr. Balderston had asked, Mr. Johns
said he would prefer to supply the answer when he had more complete information on the Eighth District.
Business loan figures in the Eighth
District seemed a little though not significantly stronger than the
12/3/57
-25-
figures for the nation. His impression was that the behavior of loans
in that area was due largely to slackening of loan demand.
Banks had
been rather careful about screening loans for some time and at the
moment, Mr. Johns said, he was not certain whether they had changed
their policies since the discount rate action in mid-November.
He had
an indirect report that in the eastern part of the district the change
in discount rate had produced a considerable bulge in demands for loans,
but he was somewhat skeptical of the accuracy of that report.
Experience
in St. Louis and other parts of the district did not indicate that there
had been a change in lending policy because of the discount rate change
reduction, and Mr. Johns said that he was inclined to believe that the
report to which he referred was a fishing expedition seeking to find out
what the policies of the Federal Reserve System would be in the future.
Mr. Bryan said that the Sixth District was showing rather extraordinary differences in tendencies in different figures.
was up pretty sharply.
Unemployment
Steel production was down rather radically, and
one of the most dramatic figures--that for new plants--was down 75 per
cent compared with a year ago.
On the other hand, contract awards and
some other indicators showed equally large changes in the other direction.
The over-all picture was difficult to analyze but, Mr. Bryan said, his
impression was that in the national picture pressures were easing and
perhaps in total the situation was moving downward.
In answer to Mr. Balderston's question, Mr. Bryan said that the
larger banks were still
under pressure from loan demand.
This showed
12/3/57
-26-
in the loan figures and in borrowings from the Reserve Bank.
As for policy, Mr. Bryan said that there obviously had been a
sudden and dramatic change in the public posture of the System.
He
was inclined to believe that that change was associated with a shift
in the economic climate and was justified.
However, he was content
for the moment not to go forward with any further dramatic moves and
he would associate himself with the views expressed by Messrs. Hayes
and Johns in that respect.
He thought we faced very grave dangers.
On the economic side there was the danger that we may have misinterpreted a minor adjustment as a major one and that the policy change
might create further dislocations in an economic system that in his
opinion already was pretty badly distorted.
The other danger was the
one Mr. Hayes had mentioned, that developments largely in the Governmental field might put the country under savage inflationary pressures
in the not too distant future.
that the System might imagine it
change than it had done.
There were other dangers also.
One was
had done more by the discount rate
So far, it
had only aided the securities markets.
This aided large borrowers who had access to these markets, but so far as
Mr. Bryan could see the general public depending on bank credit had not
benefited, although he made it
action taken.
Mr. Bryan also thought we faced a very grave problem in
the use of our instruments, if
slide rapidly.
clear he was not complaining about the
the economic situation should slide and
This was a preliminary to saying that, if the economic
12/3/57
-27-
system should slide, Mr. Bryan did not believe that the open market
instrument was the ideal way to handle the situation.
Mr. Williams reported that Third District business trends were
mixed.
This meant weakness was developing instead of strength.
Depart-
ment store sales in October were below September as well as last year.
For the ten months, however, department store sales in the Philadelphia
District were 1 per cent ahead of last year.
Inventories at the end of
October were 7 per cent above September but the increase was less than
usual.
A 3 per cent gain in value of inventories from a year earlier
reflected price increases.
New automobile registrations were 13 per
cent ahead of October 1956 but in the first ten months of this year were
7 per cent below a year ago. Registrations in Philadelphia in the first
three weeks of November were up 20 per cent from the previous month and
45 per cent from a year ago.
Construction activity was relatively strong
with total awards 6 per cent above the first ten months of last year.
Preliminary data for October showed a small decrease in both employment
and earnings in manufacturing.
Business loans were up recently by about
the same amount as a year ago.
Compared with last year, the total showed
little change, since a decline in business loans over the year-period
had been offset by an increase in loans on securities.
With respect to Mr. Balderston's question, Mr. Williams said he
had the feeling that there had not been restraint on loans in recent weeks.
One banker had reported that he was taking advantage of this opportunity
to improve the quality mix of his portfolio.
12/3/57
-28For the next few weeks,
Mr. Williams felt that open market
operations should be directed toward preventing any real tightness
and yet should retain moderate restraint.
He cited a net borrowed
reserve figure somewhere between $150-$200 million, with a bill rate
range of 3 to
3.15
per cent.
Mr. Fulton said that the steel industry in the Cleveland District
had shown a very substantial drop from the rather high rate of operations
that had existed and that it was very unhappy.
There had been a working
off of backlogs and new orders had diminished.
Unemployment was up but
large layoffs in some industries to some extent were being counteracted
by developments in automotive suppliers and in the automotive industry
itself, which had been putting quite a number of men previously laid off
back to work.
Retail sales were about the same as last year and Mr.
Fulton thought there would be a pretty good Christmas season.
It ap-
peared that inventories were being worked down to a minimum level and
production in many industries was at the minimum needed to supply current sales.
Consumers of steel appeared to be using more steel than
they were ordering.
Mr. Fulton thought it
possible that a scarcity of
goods could develop at some point that would result in fast ordering.
Automobile credit terms seemed to be deteriorating, with a larger percentage of sales having 36 months maturity than was the case earlier.
In response to Mr. Balderston's question as to loan demand, Mr.
Fulton said that business loans had declined in seven out of nine
-29-
12/3/57
preceding weeks.
It was reported that this was largely due to lack of
demand and again it might relate to the inventory situation he had
referred to.
The reduction in the discount rate had given a psychological
fillip to the general public, but Mr. Fulton did not think it
had had an
effect on the businessman who was not ordering and who was trimming his
sails.
Plants that were under way would be completed but others would
be laid on the shelf to be looked at later.
In speaking of policy, Mr. Fulton expressed the view that nothing
dramatic should be done, believing that through open market operations
and repurchase agreements the situation could be kept in fairly good
shape.
The present amount of net borrowed reserves seemed appropriate.
In response to a question from Mr. Vardaman, Mr. Fulton said that it was
expected that the steel industry would run around 70 per cent of capacity
during the current quarter and that the current month would show about
the lowest point in operations.
Beginning next quarter there should be
a pick up.
Mr. Shepardson said it
seemed to him that, while there were in-
dications of some further turn down in some areas, we still had the
factors that had been mentioned which might lead to upward forces in
the next few months.
He thought it
which would tip the balance.
difficult to tell at this stage
Recalling the comment that Mr. Young had
made that costs in residential construction declined in October for the
second successive month, Mr. Shepardson noted a report in the newspapers
12/3/57
-30-
this morning of a proposal by a leader of the AFL-CIO Building and
Construction Trades Department for a moratorium on demands for wage
increases during 1958 as a step toward stabilizing wage gains and
sustaining full employment through increasing production.
While this
leader might not be speaking for labor generally, Mr. Shepardson hoped
there would not be any easing of the situation that would cause a
cessation of this kind of thinking on the part of labor organizations.
It seemed to him that the Committee would be well advised in the next
two weeks to continue to hold about the present situation.
Mr. Robertson said that he agreed with Mr. Shepardson.
It
seemed to him that the System had exaggerated the situation we were in,
believing as he did that the action taken in lowering the discount rate
was wrong.
He felt that the Committee should now hold the situation
where it is, but if a recession started in, we should definitely consider
using open market operations.
For the time being he would not be in
favor of any further moderation of pressures.
In fact, he would be in
favor of less moderation than had already occurred.
Mr. Mills said that from now to the end of the year there were
valid reasons for following a cautious policy in providing reserves,
particularly so that they would not become so freely available as to
create a sloppy market and force prices of United States Government and
other securities up so strongly as to cause other reaction that from
the standpoint of the Committee's policy should be avoided.
A
12/3/57
-31-
plausible conception for a reserve policy to the end of the year might
be to tie it to the movement of loans in the "leading cities."
If the
loan trend continued down, it could be regarded as representing an
easing in the availability of credit, and overt action in aggressively
providing reserves would not have the urgency that was true of recent
years when bank loans rose progressively around the end of the year.
However, in following the movement of loans in leading cities, the
Committee should make allowances for tax borrowings and other corporate
financing activities that necessitate resort to bank lines of credit.
By making a comparison with last year in the movement of borrowings for
tax purposes and the movement of finance company loans into the banks,
and assuming that the weight of that movement would not be as strongly
upward as a year ago, a picture of the underlying movement of bank loans
might be obtained.
Mr. Mills said it was hard to believe that credit
in any area of the country was not comfortably available now, although
varying in degree of availability from section to section, and for that
reason the injection of reserves in amounts that would not find an immediate and justifiable loan use could possibly result in undesirable
securities market distortions.
Central reserve city bank areas were
feeling the greatest impact of the liquidation of commercial and industrial loans.
Mr.
Mills' belief was that a target for negative free reserves
of around $200 million would not be far off and no concern need be felt
if
the level should rise even to $250 million.
However, if last year's
12/3/57
-32-
experience was repeated, tightness might occur that would be entirely
unrelated to the statistical position of negative free reserves and
it might become necessary to supply reserves more liberally than is
presently indicated.
Going beyond the immediate, Mr. Mills thought that the most
important financial problem faced was a tendency for required reserves
to shrink.
That tendency was presumably a reflection of the abatement
in the demand for loans in major centers and the actual liquidation of
loans in those areas.
In the long run this meant that at some point
the System might be faced with a decision as to how it should meet a
potential shrinkage in the money supply, particularly whether a moderate
shrinkage in the money supply was desirable or whether it
would be in-
consistent with conditions that favor a stable economy and foster growth.
If after the turn of the year it
was found that there was a contraction
of loans of more than seasonal magnitude, a case could be made for pro-
viding reserves more liberally on the grounds that the commercial banks
would be recasting their ideas as to the employment of their resources,
and if reserves then were freely available they might find their way
into increased investments in both public and corporate securities.
Such actions could have a beneficial effect in moving the prospective
supplies of new securities on to the market,
at a time when the System
might wish to encourage that kind of financing as a stimulant to
slackening activity in the areas affected by capital financing programs.
12/3/57
-33For the time being, Mr. Vardaman said, he certainly did not
feel the Committee wished any more overt action.
he felt strongly that it
At the same time,
should point open market operations toward
less restraint and toward convincing the public of the Committee's
recognition of the trend.
He would go along with Mr. Hayes' goal
and he urged that the Desk play by ear.
He agreed with Messrs. Fulton
and Bryan that up to now the System's action had been simply a gesture,
in that he did not think the discount rate reduction had affected the
ideas of the public or businessmen, either large or small.
Mr. Vardaman
said that he would go along with changing the directive to insert the
word "continued" ahead of the word "moderating" in clause (b) of paragraph 1.
He would favor not over $100 million of net free reserves
and preferably would move closer to zero.
Mr. Leach said that the past three weeks had served to confirm
earlier evidences of a small but widespread downturn in Fifth District
economic activity.
Mining employment in West Virginia dropped slightly
from September to October and in October was 4.2 per cent below the
corresponding month last year.
Industry forecasts indicated that
bituminous coal production in the first quarter of 1958 would be down
slightly from 1956 and 1957.
Cotton cloth prices had moved up slightly
in the past two weeks, almost entirely because of the recent rise in
cotton prices.
However, there was no evidence of any change
fundamental problems of the industry.
n the
Contrary to the usual seasonal
12/3/57
-34-
rise in October, nonagricultural employment in the two Virginias and
the two Carolinas dropped from September to October with the major
portion of the losses occurring in manufacturing industries.
Mr. Leach said that Fifth District agriculture had been hard
hit this year in contrast with the good showing of other parts of the
country.
Harvesting of most district crops was nearing completion,
and despite somewhat improved yields it was obvious that cash receipts
from crops would be far below last year.
and grains were all substantially down.
Flue-cured tobacco, cotton,
Tobacco cash receipts would
drop $170 million, and a cotton crop two-thirds of the size of that
of 1956 would likely bring $40 million less than last year's crop.
One brighter--but not very bright--spot in the Fifth District
economy to which Mr.
Leach referred was the furniture industry, where
production apparently turned up somewhat in October as employment increased slightly and sales showed some improvement.
Seasonal expansion in business loans in the Fifth District has
been below last year's experience, Mr. Leach said, but not as much below
as has been true of the country as a whole.
As to Mr. Balderston's
question, one reason for the smaller expansion of loans in the Fifth
District this year had been the smaller needs for credit for moving
crops, particularly tobacco.
The reserve position of member banks
continued rather tight and borrowings from the Richmond Reserve Bank
were slightly larger now than in recent weeks and larger than at this
12/3/57
-35-
period a year ago.
Member banks still say they are experiencing
demands from customers for loans.
Mr. Leach also commented that
when the discount rate went up, the banks told their customers that
was why their interest rates were increased.
Now that the discount rate
had been reduced, the banks were hooked.
In general, Mr. Leach thought the Committee's policy should not
be so easy as to impede salutary adjustments that were taking place in
the economy or to provide redundant reserves that could lead to sloppy
markets and lay the basis for expansion of inflationary forces when
they recur, something that he was sure would come about at some time.
Consistent with this view, he did not think the System should make bank
reserves substantially easier at the moment.
He believed, however,
that
some further easing in reserve pressures would be appropriate because of
the widespread change that has taken place in the economy and the relatively light seasonal demand for bank loans.
He noted that member bank
borrowings in November averaged $800 million, slightly higher than a
year ago when the Committee's objective was one of restraining inflationary
developments.
thought it
If the present directive were to be continued--and he
should be--it seemed clear that there should be a further
moderation of reserve pressures.
The moderation should be gradual,
and at the end of the next two weeks he would like to see conditions
consistent with a benchmark of $100 million net borrowed reserves.
12/3/57
-36Mr.
Leedy commented first on Mr.
Balderston's question,
stating that, as he had reported previously, loans in the Tenth
District since mid-year had moved opposite to those nationally.
There actually had been a growth in loans in the district since
the end of June, and total reporting member bank loans had shown
about double the volume of growth since mid-1957 that they had shown
in the corresponding period of 1956.
Commercial and industrial loans
had increased about a third more this year than in the same period
last year.
By and large, this growth represented the seasonal pattern.
The increased loans largely were to food manufacturers, trade firms,
and commodity dealers.
In one category--loans to farmers, particularly
loans on cattle--the growth had been the largest since 1953.
This
year's excellent pasture conditions had resulted in considerable demand
for feeding cattle.
At $109 million, these loans were the highest since
the spring of 1953.
Borrowings by member banks last week reached a
postwar peak of $131 million, Mr. Leedy said, and as he had commented
at the preceding meeting, a considerable part of this represented loans
to banks in Oklahoma because of the loss of deposits from that State
in connection with the assessment of intangibles as of the end of
November.
Even after washing that out, however,
there had been an
increase in loans because of other large demands.
Regarding policy, Mr. Leedy said that since Mr. Johns had confessed that he was mistaken as to what the effect might be of a discount
12/3/57
-37-
rate reduction as large as the one that had been made in November, he
also wished to confess that he was badly mistaken as to what he suspected the effect of such a reduction might be.
Mr. Leedy recalled
that he had thoughtsuch a reduction would involve the risk of contributing further to deterioration in business sentiment, but he could
not have been more wrong.
The result indicated that the factor of
sentiment still had a great deal of strength and he had misjudged the
fragile nature he thought it might have.
It seemed to Mr. Leedy that,
having taken this step, the Committee should now give notice through
the weekly report of net borrowed reserves that the pressure on reserves was being relaxed.
He noted that the report distributed this
morning showed an estimate of a net borrowed reserve position of $165
million for the current week.
He thought that for subsequent weeks
borrowed reserves should not exceed that figure.
He would establish
very definitely that the Committee was trending downward in net
borrowed reserves.
Beyond that, and pending a meeting two weeks from
now, he would suggest no further change in policy.
Mr. Allen said that the decline nationally in business activity
was evident in virtually all Seventh District centers except Michigan,
which was an outstanding exception.
Automobile production was projected
at 620,000 units in November compared with 580,000 in the same month
last year, an increase of 7 per cent, but The Wall Street Journal this
morning indicated that because of a work stoppage actual production has
12/3/57
-38-
been about the same.
The State employment services in the Seventh
District reported almost universally that the number of manufacturing
jobs this fall was less than had been anticipated.
market, however,
manual worker.
The easier job
was confined for the most part to the unskilled
Department store sales and scattered reports on other
retail trade have compared unfavorably with last year in recent weeks,
Mr. Allen said.
In the four largest cities of the Seventh District,
sales during the first three weeks of November on a seasonally-adjusted
basis were off 8 to 11 per cent from August levels.
Some stores had
reported that the final week of November had been encouraging.
Available data do not yet suggest an appreciable upturn in
liquid savings, Mr. Allen said, but he felt that such an upturn was
taking place because consumer income was now running well above last
year whereas retail purchases were lower.
Mid-west farm income
prospects had been dimmed somewhat as a result of wet weather which
hampered the harvesting of corn and soy beans.
Those crops had been
under snow in a considerable part of Iowa and elsewhere,
content had been too high for storage.
and moisture
One result of this might well
be the feeding of cattle and hogs to heavy weights so that corn could
be used before spoiling.
This could defer current marketings but could
cause substantial pressure when these animals are marketed after the
turn of the year.
Since midyear, the reduction in business loan outstandings
has been greater in the Seventh District than in the nation generally,
12/3/57
-39-
Mr. Allen said.
For the entire country, business loans dropped 2.3
per cent between June 27 and November 20, in Chicago they dropped 4.4
per cent, and in Milwaukee 3.4 per cent.
As to Mr. Balderston's ques-
tion, Mr. Allen was sure that the decline in business loans was generally a voluntary reduction on the part of borrowers.
One of the
very large banks indicated a little more than a month ago that it
had
changed its lending policy as a result of the economic picture. (This
bank had been an extremely aggressive lender for many years.)
The
result was that its loans had stopped going up, but it had not shared
in the actual reduction experienced in the Seventh District and the
nation.
In Chicago, where deposits are virtually unchanged, banks have
offset the decline in business loans by increases in their security
holdings.
Mr. Allen also reported that interviews with commercial
finance companies in the Chicago area revealed that most of those firm
were in a position to increase their business loans substantlally but
that demand for funds had been reduced.
In fact, they were speaking
of a shortage of customers.
Reverting to the automobile situation, Mr. Allen reported
finished car inventories on November 20 totaled 660,000, of which
175,000 were 1957 models.
The industry does not seem to be disturbed
by the size of the 1957 model inventory, but it is disturbed by the
fact that the daily sales rate in the second 10 days of November was
16,840 compared with 17,993 in the first 10 days of the month. A
decline in sales rate at this time of year is unusual, Mr. Allen noted,
besides which current production is geared to a daily sales rate of
12/3/57
-40-
18,000 plus.
Sales in the second 10 days of November also were of in-
terest because of the distribution among the various manufacturers.
General Motors' sales were 50 per cent of the total, Ford 30 per cent,
and Chrysler 14-1/2 per cent.
Ford and Chrysler officials were dis-
appointed and General Motors enthusiastic.
The General Motors'
showing
was due chiefly to the good reception accorded the Chevrolet.
Mr. Allen stated that he had been on the telephone hookup with
the Desk during the past week, when net borrowed reserves had been
higher than the Committee had suggested,
Desk could have come any closer than it
existed.
but he did not know how the
had under the conditions that
He thought that the goal for net borrowed reserves in the
next two weeks might well be around $250 million.
Mr.
Deming said that yesterday he sat with a group of Twin
City businessmen in an economic conference and that almost without
exception these men felt that the slide-off in the economy would con-
tinue through the first half of 1958.
They noted that the downward
drift in the Northwest had been less than for the nation as a whole,
and they believed that the outlook for that area was better than for
the nation.
This reflected basically the strong agricultural year the
Ninth District had had and the belief that the outlook for lumbering
and mining at present was brighter than it had been for some time.
Recent statistics pointed to some increase in weaknesses in certain
lines.
Retail sales were off from last year's level, and there had
been some layoffs in both larger and smaller industrial plants.
Bank
12/3/57
-41-
loans were down and deposits showed less than the usual seasonal gain.
With respect to Mr. Balderston's question, Mr. Deming said that
the figures showed that the city banks experienced a decline this past
few weeks of $25 million in their loans, compared with a decline of
$15 million last year.
Country banks showed an increase of $5 million
this year, whereas last year they increased $15 million.
These figures
reflected primarily a decline in demand for loans, but this was not
anything that the banks were resisting very strongly and they had not
been going out to replace the loans.
Mr. Deming also reported that
real estate loans had gone up and that banks seemed willing to make
more real estate loans because basically demand for other credit had
fallen off.
Housing seemed to be showing real strength, Mr. Deming said,
with figures for the Ninth District showing a 3 per cent gain in
October in the number of housing permits.
Builders were expecting a
pretty good year in 1958.
On credit policy, Mr. Deming said that he agreed that a target
of around $150-$200 million of net borrowed reserves would be appropriate.
Mr. Mangels said that the Twelfth District continued to have
a somewhat mixed picture.
Over-all activity continued on the down
side, but there were a couple of bright spots.
The important lumber-
ing industry in the Pacific Northwest was showing increases in production and in employment,
although the increases had not been very
12/3/57
-42-
large and operations were still
well below year-ago levels.
Con-
struction had shown strength with residential awards in October up
10 per cent and nonresidential awards up 25 per cent from September.
There was an indication that builders were going into the new year
with a feeling that the strength in construction would continue.
Mr.
Mangels said he had not yet noted any decrease in costs of construction
although it was hoped that such decreases would show up. Automobile
sales in September were 21 per cent ahead of a year ago, and in
California October registrations were 4 per cent above September.
Department store sales were down in both October and November, and the
total for the year to date showed practically no change.
employment showed little change.
Over-all
In manufacturing, employment was
down, reflecting conditions in the aircraft industry.
However,
develop-
ment of the Thor missile program should improve employment in that in-
dustry in Southern California.
Bank loan figures, about which Mr. Balderston had asked, showed
an increase of $69 million during the three weeks ending November 20,
Mr. Mangels said.
This was less than half the increase shown in the
preceding year in this period.
From June 1 to November 20 of this year,
loans had increased only a third as much as a year earlier.
Demand for
had been.
Banks were
loans was continuing but not as intensively as it
still
willing to make loans where credit risks were good.
posits had increased in the past three weeks,
Demand de-
but time deposits had
12/3/57
-43-
declined reflecting withdrawals of Christmas savings funds.
Most of
those funds were going into the spending stream, Mr. Mangels said,
but various industries were not too optimistic about the outlook,
feeling that by the middle of next year there would be a lower level
of activity than at present.
However, the consensus was that by the
end of the third quarter of 1958 there would be an upturn.
It was
expected that there would be a continuation of high level Government
expenditures and high consumer expenditures.
Mr. Mangels said that it
seemed to him that in the present
situation we might be facing not much more than an extension of the
decline in the rate of growth.
No projects that he knew of, which were
economically justified, had been deferred because of a lack of funds
or because of cost.
If additional funds were supplied too freely, they
might be put to speculative uses.
His thought would be that for the
next two weeks net borrowed reserves in the $200-$250 million range
would be just about right, with the maximum leeway to be given to the
Manager of the System Account in carrying out Committee operations.
Mr. Irons said that changes in the Eleventh District had been
small during the past few weeks and rather mixed.
On the whole,
district was continuing to show a high level of activity.
the
Department
store trade seemed to be running below last year in the first half of
November,
but in the last few days it had shown signs of spurting up.
It was difficult to point to the significance of some of the changes
12/3/57
-44-
that had taken place in the past three or four weeks,
but Mr. Irons
thought that on balance there had been no real net change.
attitude of confidence certainly had not been shattered.
The
He did not
find people pessimistic although they were reasonably cautious.
Mr. Irons referred to Mr. Balderston's question stating that,
unlike the picture in the nation, demand for bank credit in the
Eleventh District had continued strong.
Virtually all bankers with
whom he talked referred to this factor.
Figures of reporting member
banks had been consistently running ahead of the pattern of a year
ago.
Commercial and industrial loans in the last two weeks of Novem-
ber had shown a rise of $30 million compared with a rise of $15
million in the corresponding period a year ago, while since last June
the increase had been $62 million this year compared with $37 million
in 1956.
strength.
Total loans showed the same pattern: one of continuing
Bankers state that the demand for loans is there.
Mr. Irons
said he did not know whether bankers were being more selective--they
say they are always selective--but his opinion was that the degree of
selectivity now did not differ much from what it was three months ago
or six months ago.
Banks are meeting demands if they can.
There had
been fairly steady and at times strong discounting at the Reserve
Bank, with discounts having run to $53 million, a figure higher than
that usual for Dallas.
Mr. Irons reported that one of the large banks
with a 65 per cent loan ratio,
which had not borrowed for over a year,
45-
12/3/57
had come in periodically in the past three or four weeks because
its loans were going up.
This banker had indicated that he felt
these were loans that should be made.
He also had indicated a
willingness for certain types of loans to increase, and in the case
of automobile credit he indicated that if he could get the money,
he would make the loans to move the cars.
Mr. Irons expressed the
opinion that if the banks were put in a position where they had the
liquid funds, they would find a way to use them, and he thought the
economic situation in the Eleventh District was strong enough to
offer the opportunity.
On matters of general policy, Mr. Irons said that now that
the System had decided to move to a three per cent rate structure,
he hoped it would retain as much restraint as was consistent with
that level of rates as contrasted with the 3-1/2 per cent level that
existed previously.
He was more interested in the short-term rates
than in any given amount of net borrowed reserves.
He hoped that
the Federal funds rate would not drop below the discount rate and
that the bill rate would be kept in the 3 - 3.15 per cent area.
Be-
cause of the discount rate action, he felt that the System had to
indicate that, as it saw the situation, some such rate structure was
more appropriate, and his feeling was that operations should point
toward that end.
The System should avoid putting funds into the
market too freely, should be cautious in supplying funds, and should
be more concerned with the movement of rates.
Mr. Irons said he did
12/3/57
-46-
not believe that the Committee should give any weight whatsoever
to influencing net borrowed reserves so that they would come out
at a figure that would indicate that the System had eased.
He did
not believe the net borrowed reserve figure was much good anyway,
but because the System had eased credit it
around the 3 - 3.15 per cent level.
should have a bill rate
This should be the guide rather
than some predetermined figure of net borrowed reserves.
Mr. Balderston said that the change in the discount rate
last month seemed to him now to have been fortunately timed.
Since
that change had given a signal to the business community in the only
way the System could appropriately speak out, it would seem that the
Committee ought to select as a target for open market operations a
figure slightly lower than the $200 million of net borrowed reserves
He favored a target of $100-$200 mil-
that was achieved a year ago.
lion, with a bill
rate kept near the discount rate.
This morning's report by Mr. Young of a heavy increase in
unemployment to a level of
5.2
per cent brought before the Committee
afresh a problem that had been quiescent for a time,
said, but a problem which might be before it
months.
r. Balderston
continually in future
It was his belief that the problem of unemployment would be
discussed in and out of Congress and would be something that would
concern the System greatly.
It would not be easily solved. He felt
that excess capacity, which had appeared in a number of industries,
12/3/57
-47-
would not disappear quickly.
As an example, it would take time to
find use for the aluminum that would carry the rapidly increasing
capacity for aluminum production.
He reported a conversation with
an industrialist last evening who was happy that his firm was nearing
the end of an $80 million expansion program.
He was happy because
the consulting service that advised him as to prospective automobile
sales indicated a figure of
5.3
million cars for 1958.
In short,
this industrialist felt that he had all the capacity he could use
for the predictable future.
Mr.
Balderston said he suspected that
the strong feeling expressed by this industrialist might be held by
many other manufacturers.
On the other hand, Mr.
Balderston noted that there was in
prospect a sharp increase in Government spending at the Federal level
and also indication of increased spending at local and State levels.
There also were in prospect wage advances next year, some of them
Whether automatic or
automatic and some to be freely negotiated.
not, these threatened price stability.
Consequently, he favored
such continuing restraint as would avoid pushing out reserves that
would be either not used or used improperly.
Chairman Martin said that he found himself almost completely
in agreement with Mr. Hayes'
summary this morning.
He thought the
System had done the right thing.
He believed it was essential to
change the posture of the System.
He was not afraid of using the
word:
he thought we were in a recession.
But that did not mean
12/3/57
-48-
that he thought it was an alarming situation.
Chairman Martin said
he had based all of his thinking during the past year on the view
that when inflation gets ahead of us, as this inflation did, it
would be most unnatural if some adjustments were not required in
the economy.
He thought those adjustments were taking place and
in a different form than in 1953 and 1954.
In his view, there was
no comparison now with what we had then in the congestion of inventories.
Plant and capacity also were on an entirely different basis
at that time than today.
He believed very firmly in the growth factor
that Mr. Mangels had mentioned.
The overcapacity he was talking about
was temporary, he said, and growth comes very quickly in this country.
However,
he did not think that eliminated the fact that we have a great
deal of indigestion in plant and capacity because of the degree to
which inflation got ahead of us.
He was inclined to think we will not
get the same response to monetary ease at this time that we got in
1954, even assuming that we were to throw reserves in with the reckless
abandon that we did then.
He thought the foreign situation also was
entirely different today, and this was a factor that the Committee
should bear in mind.
Having given a clear signal, the Chairman said that he thought
the System ought not be supplying reserves ad infinitum. He did not
think there was any need for additional reserves at the moment, although there were some places where the banks could put them out.
he had found a great many places where he was convinced the bankers
But
12/3/57
-49-
were more bearish than some of the economists and were very anxious
to clean house in some of their loans.
They wanted to blame the
Federal Reserve for that action, just as at times they blamed the
Federal Reserve for restraint when they felt it would be desirable
for them to be more generous in their lending.
The Chairman said
that he thought sentiment in business circles was bad now and was
likely to grow worse, although he believed there would be good business during the Christmas period.
He agreed with Mr. Irons' comment
on the net borrowed reserves figures and expressed the wish that the
Committee had never used them.
a benchmark.
However, they had come to be used as
Chairman Martin said that his view was that we should
be moving to a lower level of net borrowed reserves.
would depend on feel and color in the market.
How much lower
He did not wish any
overt move that would make it appear that the System was trying to
flood the market with reserves, but he did want it clear that the
System was moving to prevent any knot.
He could see no need for
changing the Committee's directive at this time.
He thought that
Mr. Hayes had made a clear statement of the majority view.
There
were differences of view around the table, he said, noting that Mr.
Robertson would rather have no moderation of pressures, and that at
the present time it appeared that Mr. Shepardson leaned in that direction.
His own view was that the management of the System Account
ought to continue moderately to moderate the pressures on reserves.
12/3/57
-50-
Mr. Allen noted that the projections of the New York Bank
indicated net borrowed reserves of $164 million for the week ending
December 4.
Assuming the directive was to be renewed in its present
form, he inquired whether that action would mean that net borrowed
reserves should be moved below that figure.
Chairman Martin said he was assuming that that figure was
a rather rough estimate.
During the past three weeks,
net borrowed
reserves had not gotten down to the level discussed at the meeting
on November 12.
As Mr. Allen had pointed out, he agreed that the
Desk had performed beautifully during the past three weeks.
It
would be faced with a tightening problem during the next few weeks.
What we were dealing with was a general prospectus within which the
Desk would have to operate.
Mr.
Leach said that if the present directive were renewed,
he felt there had to be some further easing in the reserve position.
Chairman Martin said that this was his view and he thought
it
was the consensus or the majority opinion that we should move in
that direction.
Mr.
Leach emphasized that he did not wish to change the
wording of the directive at all.
He simply wished to point out
that if the directive was adopted in its present form, it meant
that there should be some moderation from the position we were in
today.
12/3/57
-51Mr. Mills said that presumably we were thinking about the
distribution of reserves.
The run-off of loans was in the money
market banks that are located in the financial centers that get
the first benefit of open market operations.
Therefore, if reserves
were supplied to moderate the situation, those reserves might concentrate in the areas that need them least and they might not move
to the country bank areas which, judging from statistics, are not as
comfortably supplied.
If that should be the case, undue ease might
be felt in the money markets, with repercussions on the prices of
Government securities and other market instruments.
Chairman Martin said that he knew of no real way of meeting
that situation. He thought it necessary to give the maximum latitude
to the Manager of the System Open Market Account who then had to do
the best he could with feel and color of the market.
Mr. Irons said he was not sure that the directive would
require any further moderation in the reserve position if renewed
in its present form.
The directive called for a change in the light
of the discussion at the November 12 meeting,
when the Committee was
moving from a restrictive to a less restrictive policy.
During the
past three weeks there had been some moderation in restraint.
The
fact that the directive would read "by moderating the pressures on
bank reserves" if renewed in its present form would not, in his
opinion, mean that we would have to move further during each period.
12/3/57
-52Mr. Hayes expressed the view that the Committee established
its statement of policy at each meeting.
If this was correct, he
would interpret the renewal of the present directive as calling for
some moderation from where we are at the time of the renewal.
Mr. Irons responded that if this were done over and over,
at some point we would reach a point where we had "moderated" to a
very excessive degree.
Mr. Johns said that in the past the Committee had not attempted to state the degrees of restraint in its directive, but
whether we were on the side of restraint.
He thought the discussion
was making a very literal definition of the word "moderating."
Mr. Vardaman said that in order that there might be no misunderstanding, it might be desirable for Messrs. Robertson and
Shepardson to state exactly what they would like to see done.
Mr. Robertson said that the Chairman's summary had covered
his dissenting view.
Mr.
Shepardson said that he had made the statement that he
thought the Committee should continue about the present degree of
restraint,which in line with the comments by Mr. Rouse he would take
to be a somewhat moderated position from that contemplated at the
last meeting.
Chairman Martin said that we could play with these words too
much.
He thought we were talking about trends and he had put Mr.
12/3/57
-53-
Shepardson in the category of leaning some in the direction of having
no moderation in pressures.
He inquired whether the Committee would
be reasonably happy with the summary conclusion as he had stated it.
In response to a question from Mr. Robertson as to whether
it was necessary to readopt a directive at this meeting, Chairman
Martin said that he thought this was necessary.
In further response
to Mr. Robertson's question as to how the phrase "by moderating the
pressures on bank reserves" appearing in clause (b) of paragraph (1)
of the directive was to be interpreted, Chairman Martin said that
he thought the correct interpretation should be that this called
for a continued moderating of pressures on bank reserves.
Mr. Hayes said that he thought it would mean that we were
to move to a somewhat lower level of pressure than in the period
since the preceding meeting of the Committee.
Mr. Robertson said that this was his interpretation also
and that on that basis he would find it necessary to dissent from
the action renewing the present wording of the directive.
Thereupon, upon motion duly made
and seconded, the Committee voted to
direct the Federal Reserve 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
-54-
12/3/57
case of maturing securities, by direct exchange with the
Treasury, as may be necessary in the light of current
and prospective economic conditions and the general
credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of
commerce and business, (b) to fostering sustainable growth
in the economy without inflation, by moderating the pressures on bank reserves, 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 in-
creased or decreased by more than $1 billion;
(2)
To purchase direct from the Treasury for the
account of the Federal Reserve Bank of New York (with
discretion, in cases where it seems desirable to issue
participations to one or more Federal Reserve Banks) such
amounts of special short-term certificates of 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 s 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.
Votes for this action: Mr. Martin,
Chairman; Mr, Hayes, Vice Chairman;
Messrs. Allen, Balderston, Bryan, Leedy,
Mills, Shepardson, Vardaman, and Williams.
Vote against this action: Mr. Robertson.
Mr. Robertson stated that his reasons for dissenting were the
same as those stated previously for dissenting from the wording of the
directive adopted at the meeting on November 12.
12/3/57
-55It was understood that the next meeting of the Committee
would be held at 10:00 a.m. on Tuesday, December 17, 1957, and that
tentatively the following meeting would be held at 10:00 a.m. on
Tuesday,
January 7, 1958.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1957, December 2). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19571203
@misc{wtfs_fomc_minutes_19571203,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1957},
month = {Dec},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19571203},
note = {Retrieved via When the Fed Speaks corpus}
}