FOMC Minutes
A meeting of the Federal Open Market Committee was held in
the offices
of the Board of Governors of the Federal Reserve System
in Washington on Tuesday,
PRESENT:
December 17,
1957,
at 10:00 a.m.
Mr. Martin, Chairman
Mr. Hayes, Vice Chairman
Mr. Allen
Mr. Bryan
Mr. Leedy
Mr.
Mr.
Mr.
Mr.
Mr.
Mills
Robertson
Shepardson
Szymczak
Williams
Messrs. Fulton, Irons, Leach, and Mangels, Alternate
Members of the Federal Open Market Committee
Messrs. Erickson and Deming, Presidents of the Federal
Reserve Banks of Boston and Minneapolis, respectively
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Riefler, Secretary
Thurston, Assistant Secretary
Sherman, Assistant Secretary
Hackley, General Counsel
Solomon, Assistant General Counsel
Thomas, Economist
Messrs. Atkinson, Bopp, Marget, Mitchell, Tow,
Mr.
Mr.
Mr.
and Young, Associate Economists
Rouse, Manager, System Open Market Account
Carpenter, Secretary, Board of Governors
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. Ellis, Hostetler, Daane, Roosa, and
Wheeler, Vice Presidents of the Federal
Reserve Banks of Boston, Cleveland,
Richmond, New York and San Francisco,
respectively; Mr. Parsons, Director of
Reasearch,
Federal Reserve Bank of
Minneapolis
and Mr. Walker, Economic
Adviser, Federal Reserve Bank of Dallas
12/17/57
-2Chairman Martin stated that the minutes for the meeting of
the Committee held on December 3, 1957, were not being presented for
approval at this time because the members had not all had an oppor
tunity to review the preliminary draft and suggest changes.
However,
he noted revised pages of the minutes for the meeting held on Novem
ber 12, 1957,reflecting the discussion of those minutes at the meeting
on December 3 had been distributed.
The Chairman inquired whether all
members of the Committee had had an opportunity to read these revised
pages and whether there was any suggestion for further change.
None
of the members indicated that they wished to suggest further changes
in these minutes.
Thereupon, upon motion duly made
and seconded, the minutes of the meet
ing of the Federal Open Market Committee
held on November 12, 1957,were approved.
Before this meeting there had been distributed to the members
of the Committee a report prepared at the Federal Reserve Bank of New
York covering open market operations during the period December 3
through December 11, 1957, and a supplemental report covering commit
ments executed December 12 through December 16, 1957.
Copies of both
reports have been placed in the files of the Federal Open Market Com
mittee.
Mr. Rouse reported that dealer positions and the funds required
to finance those positions had built up to a high figure.
About $1.8
12/17/57
-3
billion of Government securities were now held by reporting dealers,
exclusive of about $300 million of securities out on special repur
chase arrangements.
Positions had fluctuated in the neighborhood
of a billion dollars prior to the discount rate change, but the
Treasury financing in
holdings of bonds,
the last half of November added to dealer
notes, and certificates.
able to work off those positions,
Before the dealers were
a large volume of tax swapping
developed involving switches from shorter to longer maturities, and
a large part of the short securities brought into the market on this
swapping had remained in
dealer positions.
The bulk of dealers
financing had fallen on the New York banks, Mr. Rouse said, with the
result that their basic position moved from a surplus a week or so
ago to a deficit of about $400million by Friday, December 13.
The December liquidity need that centered on the New York banks
and on dealer positions had created a tight situation in theshort-term
Government securities market, Mr
Rouse stated, and Treasury bill rates,
which had fallen below the discount rate, had been rising during the
past few days.
The new bill
rate of almost 3.15 per cent.
auctioned yesterday went at an average
Dealers were awarded more than $300
million of the new bills, which was in addition to the 3/4 of a billion
dollars of bills that they already held.
Mr. Rouse said it
was clear
that the Government securities market had a distribution problem ahead;
moreover, the past record showed that dealer positions would tend to
12/17/57
-4
build up further over the next two weeks.
Mr. Rouse went on to say that reports from the capital market
after the change in the discount rate suggested that market supplies
of Government,
cleared up.
It
corporate,
and municipal securities were quickly
seemed likely, however,
that these markets were
giving an appearance of greater strength than they actually possessed.
Some of the buying that had driven interest rates so rapidly lower
had represented "one-shot money," and some buying reflected dealer
takedowns of new securities for speculative purposes.
it
He thought
interesting to note that, while bank loans on securities other
than U. S. Governments had not increased since the discount rate
change, neither had they been reduced, and loans on Governments had
increased.
Turning to the matter of Treasury financing, Mr. Rouse
reported that the only firm information he had was that the Treasury
planned to continue adding $100 million to each of the next five
weekly bill issues, and it also planned to roll over the $570 million
of maturing Fanny May notes through the Federal Reserve Banks in
January.
At the conclusion of Mr. Rouse's report, Mr. Allen asked for
an explanation of the remark that the Treasury would roll over the
FNMA notes through the Federal Reserve Banks.
Mr.
Rouse replied that
these are mortgage liquidation notes and that the offering and dis
tribution of these securities is
handled through the Reserve Banks.
12/17/57
-5
Mr. Erickson suggested that nonbank investment demand for short
term Governments ordinarily built up after the year end so that
the present large dealer positions might be worked down then, to
which Mr. Rouse replied that this was the typical seasonal pattern.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period December 3 through Decem
ber 16, 1957, were approved, ratified,
and confirmed.
At Chairman Martin's request, Mr. Young summarized in the
statement presented below the current economic situation, which had
been more fully reviewed in
a staff memorandum dated December 13,
1957, on Recent Economic and Financial Developments in the United
States and abroad.
A copy of the staff memoranduim
which had been
distributed before this meeting, has been placed in the Committee
files.
In recent reports to the Committee,
I have used the
words "down-settling" to characterize the drift in over
all activity.
In the light of recent information, general
economic recession now appears to be the most appropriate
description.
Industrial production for October has been placed one
index point lower than earlier reported, namely, at 141
instead of 142, and for November the preliminary estimate
is 139, or down three index points in a month and five
index points from the September level of 144.
Declines
in October
were
fairly widespread, including durable
nondurable, and mineral sectors, and preliminary informa
tion suggests that a pattern of fairly widespread decline
In durable goods output,
was repeated in November.
November auto assemblies were a strong factor on the up
side, but not strong enough to offset the minuses.
A
resistant sales market in November is resulting in some
what reduced assembly schedules for December.
12/17/57
A second bit of news justifying a characterisation
of general recession is that relating to business plant
and equipment expenditures. The latest Commerce-SEC survey
projects a spending rate for the first quarter of 1958 five
per cent under the current quarterly rate. This either
means that the decline in such spending, projected by the
McGraw-Hill survey, is coming faster than earlier antici
pated, or that the downward adjustment in plant and equip
ment is destined to be greater than the McGraw-Hill survey
implied.
Inventory developments in October constitute a third
item of evidence pointing to general economic recession.
Liquidation in total business inventories in October was
at $4.5 billion annual rate, almost entirely concentrated
in durable goods lines.
Business sales in October fell off
faster than inventory liquidation so that the over-all stock
sales ratio rose, reaching the highest level since the spring
of 1954.
Stock ratios have become particularly high in
durable goods lines at manufacturing levels.
Judging from
data that ordinarily correlate closely with changes in busi
ness inventory holdings, November also was a month of over
all inventory liquidation.
Reports from the labor market also point to general
recession. Reductions in employment from mid-October to mid
November were widespread and sizable in nonmanufacturing as
well as manufacturing, and unemployment rose to 3.2 millionabout half a million higher than a year earlier.
On a
seasonally adjusted basis, uemployment reached approximately
5 per cent of the civilian labor force, or the highest rate
since late 1954.
Since mid-November, initial
unemployment
compensation claims filed have continued to run well ahead
of a year ago.
The length of the work week in manufacturing
dipped further in November and at 39.2 hours was a full hour
less than a year ago; reductions occurred in both durable
and nondurable lines.
Reflecting easing employment conditions, personal income
From
was off again in November for the third successive month.
the seasonally adjusted annual rate of $347 billion in August,
the November rate was down about $3 billion. Reduced personal
income was apparently of some influence in retail trade, which
fell one per cent each in both October and November, with
declines concentrated in durable goods lines. Declining per
sonal income is also thought by some to be a factor in Decem
ber retail markets, although bad shopping weather and transit
strikes in some major metropolitan areas are also obvious
12/17/57
-7-
factors in
disappointing sales for this season of the year.
The declines in output, employment, and activity evi
dent in recently reported data imply a fourth quarter reduc
tion in over-all performance of the economy, as measured by
GNP.
Preliminary estimates for the fourth quarter now place
GNP as down 1 per cent or $4 to $5 billion, annual rate, from
the third quarter--the first decline in three years.
Wholesale price changes have been fewer and smaller in
recent months than earlier, so that the average of wholesale
prices has been showing little
change.
There are two schools
of thought on this development.
One is that wholesale com
modity demands over-all, though contracting some, continue
strong enough to support current wholesale price levels,
particularly with the appreciable downward adjustments that
have already occurred in primary materials prices. The other
school questions the sensitivity of existing price indexes,
particularly for the area of finished goods, and wonders
whether pressures of competitors to sell are not resulting
in under-the-counter concessions and discounts, not yet
registered in price quotations recorded for price index
making.
In any case, the price situation is not clear, as
has been the case at other points of turn in business condl
tions, and close scanning of market price developments will
be called for in the period ahead.
In markets for consumer goods, prices of meats have been
rising again, and there have also been price advances for new
autos, some appliances, and apparels These advances, together
with further price risesfor services and rents, probably
spell some further modest rise in the consumer price index for
November, and possibly for December too, following a pause in
October.
Abroad, contractive developments in economic activity
appear fairly clear in Canada, but in industrial countries of
Western Europe the indications of recently available data are
mixed. Aggregate industrial production in this area declined
slightly from the second to the third quarters and apparently
further in October.
Recent international trade data seem to
But mone
show more indications of decline than expansion.
tary policies in important countries of Western Europe con
tinue on the relatively restrictive side, suggesting that
inflationary dangers and balance of payments disequilibria
are still
given heavy weight in the highest councils of
financial policy. In other areas of the FreeWorld, problems
are diverse, but the significant facts all point to a much
slower pace of advance in physical activity than earlier, an
-8.
12/17/57
with reduced levels of raw material prices, some reduction
in the current value of the national trade for various
countries supplying such materials.
While contractive tendencies have recently been domi
nant in this country and in Canada, with leveling out
tendencies abroad, it is important to remember that levels
of activity generally are still
high. Whether recession
domestically will be moderate and short-lived, and inter
nationally limited or relatively confined, cannot be fore
told at this stage.
The major problem of this cyclical
topping and recession seems to be digestion of new capacity
to produce rather than of absorbing too optimistic inven
tory accumulations.
This may make considerabledifference
in the nature and duration of this cyclical adjustment.
However, underlying forces of economic growth and techno
logical advance still appear to be very strong, and these
forces can be counted on to moderate theadjustment process.
There was a brief discussion of Mr. Young's comments,
particu
larly of gross national product and of the relationship between inven
tories and gross industrial production, after which Chairman Martin
called upon Mr. Thomas, who then sumarized recent financial develop
ments, which also had been reviewed in the staff memorandum of Decem
ber 13.
During his comments,
Mr. Thomas referred to an additional
memorandum on the Outlook for Treasury Cash Requirements and Bank
Reserves which had been sent to members of the Committee under date
of December 13.
Financial markets in the past two weeks have continued
to adjust to the conflicting forces of the more or less
psychological impacts of the discount rate reduction and the
changed economic outlook on the one hand and the realities
of the current money market situation on the other.
The decline in interest rates in the past month has
probably been the sharpest on record. Yields of some bonds
have declined as much in this brief period as in several
Within the past week however, the bond
months in 1953.
market has tended to level out, and some yields have risen.
12/17/57
Bill yields, after dropping to below the discount rate, have
firmed and are now closer to 3-1/8 per cent. The stock mar
ket has been generally weak.
Among the current realities that have helped to check
the decline in interest rates are (1) the continued fairly
substantial volume of new issues of securities; (2) the usual
mid-December liquidity demands, which result in offerings of
Treasury bills and increases in bank loans; (3) distribution
of the latest new Treasury issues; (b) the $100 million in
crease in the weekly Treasury bill
offering; and (5) the
exceptionally large positions of dealers in Government securi
ties. Holdings by dealers, which were already heavy, have
been increased to such high levels that dealers are now hesi
tant about buying more offerings and are having difficulty in
financing their positions.
These are all temporary factors that have little
signifi
cance with respect to broader trends but which exert immediate
pressures on the market. While some slowing down in the pre
cipitate rate of decline in interest rates may be desirable
these temporary forces need not be permitted to create road
blocks to prompt adjustment of markets to the broader factors.
If a serious downturn in economic activity is to be avoided,
funds should be freely available for potential borrowers who
would put them to use.
Review of estimates of Treasury needs indicates the like
lihood of somewhat larger borrowing demands from that source
during the next few weeks than had been anticipated. An addi
tional $100 million each of the next six weekly bill issues
will probably not be adequate to meet cash needs of the
Treasury, and as much as $1 billion more may have to be
Our latest estimates, revised in light
borrowed in February.
of the current business downturn and trend of expenditures
indicate an excess of cash expenditures over receipts of
about $1 billion for the current fiscal year, compared with
a cash surplus of $3 billion shown in the official budget
The calendar year estimates are
review of last October.
also for a deficit of $1 billion in 1958, after a $2 billion
surplus in 1957, and $5.5 billion surplus in 1956.
This shift from surplus to deficit results principally
Prospective receipts show
from increased expenditures.
moderate increases over past results, although they fall
These results and prospects
short of previous forecasts.
show how much the Treasury position is shifting from an
anti-inflationary posture to a stimulating or at least
sustaining one for the economy.
They present problems,
12/17/57
-10-
however, for the Treasury with respect to the debt limit
and the timing of borrowing operations.
The Treasury also
faces the problem of longer-run significance of taking ad
vantage of the strong bond market to extend maturities of
the debt, This is particularly important in view of pro
spective and perhaps growing deficits.
Banking figures for the past two weeks show a shift
from contraction to expansion.
This shift reflects in part
bank subscriptions for the new Treasury issues in the week
of December 4 and in part seasonal loan demands to meet
December liquidity requirements by businesses, both financial
and nonfinancial.
Using partial data for December 11, it ap
pears that total loans and investments of banks in leading
cities, excluding interbank loans, increased by about $1-1/4
billion in the past two weeks compared with only about $300
million in the same two weeks last year.
Commercial and industrial loans at these banks increased
by nearly $300 million in the latest two weeks, compared with
Bank
over $400 million in the same weeks last year.
a little
loans to dealers in securities increased by nearly $300 mil
lion this year, against a rise of only $70 million in the same
period last year. This difference reflects not only the Treas
ury financing this year but the exceptionally large positions
and borrowing needs of dealers in Government securities.
Re
porting banks' holdings of Government securities increased by
$600 million and those of other securities by over $100 mil
lion compared with decreases aggregating $270 million in the
same period last year.
Demand deposits adjusted at reporting banks have shown a
seasonal increase in the past two weeks, but by a much smaller
The additional bank loans and invest
amount than last year.
ments have gone in part to maintain Treasury deposits, which
were being sharply reduced at this time last year. In Novem
ber demand deposits adjusted showed less than the usual
seasonal increase, only partly offset by a more than seasonal
increase in currency in circulation. The total money supply
is about one per cent less than a year ago.
A particularly significant development in November was
a decline in the seasonally adjusted annual rate of turnover
of demand deposits at banks outside New York. The rate of
turnover has now declined to about the same level as a year
Thus it can no longer be said that increased turnover
ago.
has offset the effect of a decrease or lack of growth in the
supply of money.
System operations in late November and early December
and a reduction in Treasury balances at the Reserve Banks
12/17/57
have supplied a substantial volume of reserves to meet
seasonal needs.
Net borrowed reserves have generally
averaged close to or below the $200 million level,
In
the course of the past week, however, there has been
considerable demand for reserves, due in part to a sharp
increase in required reserves resulting from credit ex
pansion, as well as to the usual currency needs. The
tone of the money markets has shifted from ease to tight
ness. Although the expected large seasonal increase in
float may supply a substantial amount of reserves this
week and next, some additional aid in financing dealer
positions and supplying reserves to cover liquidity needs
seems to be appropriate. Larger amounts will be needed
in the week after Christmas, as float declines. Most of
these funds might be supplied through repurchase con
tracts.
In January, reserves will be abundantly available
from the seasonal return flow of currency and reduction
in required reserves.
The System account might be re
duced by as much as $600 million plus any amounts added
in the next three weeks.
If net borrowed reserves are
kept close to the zero level, additional purchases of
about $500 million may be needed this month and sales of
$1 billion or more would be appropriate in January.
Chairman Martin said that it was obvious that we had had an
interesting month since November 17.
This morning the usual go-around
would start with Mr. Hayes and would be followed with statements by
Mr. Erickson and others.
The Chairman noted that this probably would
be the last meeting to be held during 1957, and he suggested that it
would be appropriate to take a look at clause (b) of the first para
graph of the Committee's directive to the Federal Reserve Bank of
New York.
might be,
However unsatisfactory the language of the directive
it was the medium by which the Committee reported its
policy actions to the Congress.
The Chairman said that he had given
consideration to the present wording of clause (b) and had discussed
12/17/57
it
-12
with Mr.
Riefler, who had suggested that the clause might appro
priately be changed to provide for transactions with a view "to
cushioning adjustments and promoting recovery in
maintaining an ample volume of bank reserves."
the economy by
The Chairman went on
to say that he had no brief for any particular wording and that the
wording Mr.
Riefler had suggested might not be in
order, but it
was
his view that the directive should receive attention in the comments
to be made by the individual members of the Committee.
He then
called upon Mr. Hayes.
Mr.
Hayes expressed his views on the economic and credit situa
tion as follow
New economic data available since our last meeting tend
to confirm the developing recession, which now extends over
a fairly broad range of industries, although it is still
very moderate in intensity.
The decline in industrial pro
duction during the past two months now appears to have been
greater than was indicated previously.
Stoel output has
slipped further, and automobile production, which reached a
high level in November, is scheduled for some reduction this
month and may have to be cut further if an excessive accumula
tion of inventories is to be avoided. The figures in the
November Commerce-SEC survey of plant and equipment expendi
tures suggest a more pronounced over-all decline in 1958
than the 7 per cent drop indicated earlier by the McGraw
Unemployment now exceeds 5 per cent of the
Hill Survey.
labor force, while average weekly hours worked in manu
facturing dipped sharply again in November and may decline
further in December.
Business inventories declined in October for the first
time in three years, and although this was due largely to a
temporary reduction in new car stocks prior to introduction
of the new models, manufacturers' inventories also showed a
small reduction. Even after this decline, the ratio of
manufacturers' inventories to sales reached a new high since
early 1954.
12/17/57
-13-
Revised retail sales data for October are a little
better than had been suggested by the preliminary report
given at our last meeting. Department store sales showed
moderate improvement in November, but automobile sales
were disappointing.
It may be some time before a clear
appraisal of the volume of Christmas buying becomes pos
sible, but the general atmosphere at the moment is not
especially encouraging.
Data for all member banks for the three weeks ending
December 4 confirm the pronounced lag in business loans
which has characterized the second half of 1957.
Much of
this lag is attributable to smaller borrowings by sales
finance companies, but a number of other industry groups
have shown smaller borrowings or greater repayments than
a year ago.
In contrast with bank loans, bank investments
rose much more in the last three weeks than a year ago,
mainly because of sizable purchases of the new Treasury
issues.
Since the last meeting we have made some informal
checkings with the large New York banks on the causes of
reduced loan volume and have found that it is attributed
largely to lessened inventory pressures and some actual
inventory liquidation, as well as to some shift of demands
to the capital markets. A lesser factor may be the
tightening of loan standards initiated some months ago,
which in many cases has gained momentum just as demands
were tending to drop off. Most loan officers feel that
business loan demand continues to slacken, although no
in any spectacular degree, and the banks still feel "tight"
in view of their high loan-deposit ratios.
The latest
weekly loan figures for New York banks show a considerably
greater gain both in business loans and in security loans
than a year ago, but this may represent only a repetition
of the experience in previous tax periods this year.
Already the recession, such as it in, has forced a con
siderable revision of our estimates of Treasury revenues, so
that we now expect only a very small cash surplus, if any,
for fiscal 1958, It appears that $1 to $2 billion of cash
will probably have to be raised early in February, or per
above the amount to be
haps even in late January.and
realized in the next few weeks from the $100 million in
crease in the weekly bill issue. We would think it highly
desirable that the debt ceiling be increased in January to
leave enough leeway for this cash financing.
The sharp declines in market interest rates which were
the most dramatic result of the discount rate cut and which
were commented upon at the last meeting, have carried a
12/17/57
good deal further in the past two weeks.
New issue rates
on high grade utility bonds are about 5/8 to 3/
of a per
centage point below the level of September and October,
while market yields on Treasury bonds are down as much as
one full percentage point from the peak of late October.
This rapid readjustment of rates has been based in large
part on psychological reaction to the shift in System
policy rather than upon the actual steps the System has
taken to release reserves.
It has, of course, been aided
by a temporary lull
in new security issues and the con
tinued lag in bank loans.
Banks have been led to lengthen
maturities, and institutional investors have mobilized
available funds to buy longer-term corporate and Treasury
securities.
With borrowers able to sell new capital issues
easily and at lower interest rates, the availability of
credit has been improved in a very real sense.
These effects of the discount rate cut, taken together
with the moderate lessening of pressures on bank reserves,
suggest that the Committee has achieved the objective sought
at the last two meetings, i.e.,
an effective change in policy
toward less severe credit restraint. With respect to long
term interest rates, the results have exceeded our anticipa
tions, and the rapidity of the rate decline may have made
the market vulnerable to unfavorable news or disappointed
expectations.
To some extent investment demand has been
borrowed from the future, and with a heavy calendar of new
in view, the flow of
corporate and public financing still
savings may well prove insufficient to support the present
In that event, there might be disturbing
rate structure.
repercussions in the money and capital markets which might
require, at some stage, further System action to encourage
bank investment and lending.
We should be on our guard to prevent a turn toward
tightening over the year-end period. Certainly the steadily
worsening business situation provides justification for our
countenancing an easier credit atmosphere than we might
have sought a month or so ago.
I think we should try to avoid creating the impression
that the System is moving rapidly to a policy of "active
ease," but at the same time we should avoid creating the
impression that we are doing nothing "real" to ease credit.
I would urge that the level of net borrowed reserves be
allowed to drift somewhat lower and perhaps approach the
zero level in January, provided of course that we give
attention also to interest rate developments and the tone
If current projections are anywher near
of the market.
12/17/57
-15
accurate, only moderate outright purchasing may be
required in the next three weeks, repurchase agree
ments being used to cope with most of the projected
bulge in net borrowed reserves for the week ending
January 1.
As for the directive, this is our last opportu
nity to change the wording and have the change in
eluded in the published record for 1957. I would
feel better if that record reflected a more frank
recognition that we have encountered a recession
and that our policies are being molded accordingly.
I would therefore suggest that clause (b) be re
written as follows: "to mitigating recessionary
tendencies in the economy."
Mr. Erickson said that most of the statistics for the
First District continued to move downward.
He also reported
that at the meeting of directors of the Boston Bank yesterday,
two of the directors who are machine tool builders and who have
been pessimistic for several weeks were much more pessimistic,
and their pessimism influenced their views on the national situa
tion.
Manufacturing employment in the Boston District during
October was 4 per cent below October a year ago, New England
indexes of industrial production showed decreases during October,
and department store sales recently had been disappointing.
mobile registrations in
Auto
September and October were ahead of last
year, but dealers report that sales slumped badly in November.
The only hopeful thing in the picture was construction which, in
October, was ahead of Septembe
this year and of October last year,
mostly because of increases in public works and nonresidential
construction.
For ten months of this year as compared with last
12/17/57
-16.
residential construction was 3 per cent ahead, due primarily to
multiple-unit housing.
As to policy, Mr.
Erickson would make no change in the
discount rates at this time but he felt some change in
of the Committee's directive would be desirable.
the wording
His preference
would be for wording such as Mr. Riefler had suggested.
In the
open market, we were coming to the usual year-end developments,
and he would be inclined to leave operations pretty much to the
judgment of the Manager of the System Account.
borrowed reserves around zero, that would be all
If this meant net
right with him.
Mr. Erickson said that when Governor Balderston was in
Boston last week he attended a meeting at which there was a review
of discount operations.
It
was Mr.
the System's posture had changed, it
Erickson's view that even though
should continue to watch the
discount window for continuous borrowing, and Governor Balderston
had suggested that at this meeting there be a discussion concerning
use of the discount window.
Mr. Irons said that conditions in the Dallas District had
shown some tapering.
Agricultural conditions were not as favorable
as a month or six weeks ago because weather conditions had delayed
getting crops in.
Reporting on a spot check made yesterday, Mr.
Irons said that construction was continuing to move upward slightly
and the outlook among those in the building industry was favorable
although cautious.
Construction was expected to increase slightly
12/17/57
-17
rather than sharply, but builders anticipated a small boom in
residential activity, particularly in houses in the $8,000-$l4,000
bracket.
There also were reports of improvement in the availability
of mortgage money.
Employment recently had declined slightly whereas
normally a seasonal gain was expected at this time of year. Depart
ment stores estimated that holiday business might about equal last
year's. Total bank loans dropped off in the three weeks ending
December 11, Mr. Irons reported, reflecting a decline in commercial
and industrial loans.
Banks report demand for credit, particularly
for consumer credit, continues strong.
Both banks and department
stores have indicated that collections continue good.
Conditions
in the petroleum industry might be a little better than indicated
by some of his recent reports, Mr. Irons said, because of cold
weather that had cut into fuel oil stocks and because of cutbacks
in
production.
On the whole,
the situation in
the Dallas District
was tending in the same directior as in the country as a whole,
although probably not to the same extent.
but a recognition that adjustment
level.
No one was expecting a
material decline expected.
He found no pessimism
were taking place at a very high
largeupsurge, but neither was a
background there was a feeling
among businessmen and bankers that deterioration in the Treasury
position moving from a surplus into a deficit
ing effect.
might have a sustain
-18
12/17/57
Mr. Irons said he had been pleased with the handling of
the System Account during the past two difficult weeks.
He had
hoped it would be possible to come close to a rate structure appro
priate to a 3 per cent discount rate, and this had been done with
bill rates fluctuating around 3 per cent.
The market had not been
unduly tight but neither had it been excessively easy; there had
been about as much restraint as could be expected under a 3 per
cent rate structure.
Mr.
Irons would hope that in the next three
weeks the account could operate similarly.
He did not think that
industrial production would be gotten up by pumping in the money.
He still thought the prices of Government securities might in the
future pose some problems that would not have been present if
had not risen as sharply as in the past few weeks.
prices
He hoped the
System would continue to provide reserves that would be reflected
by rate conditions and structure around the 3 per cent discount rate.
He would give considerable leeway to the Manager of the System Account
and would expect him to operate by feel almost on a day-to-day basis,
However,
excessive ease should be avoided because that would come
back to plague us if a too easy situation were created.
Mr. Irons said he did not like the directive that the Com
mittee had.
action.
It seemed to him that it
forced continued cumulative
He would prefer to leave out any reference to moderating
pressures on bank reserves or to assuring adequate reserves and
12/17/57
-19
would change clause (b) of paragraph 1 more along the lines Mr.
Hayes had suggested so as to call for operations with a view "to
maintaining conditions in the money market that would tend to
mitigate recessionary tendencies."
Mr. Mangels said that the Twelfth District picture con
tinued mixed with further moderate declines in production.
ment store sales were somewhat disappointing.
Depart
Automobile sales had
been holding up pretty well but dealers report considerable price
cutting with substantial effect on profit margins on both 1957 and
1958 models.
Preliminary information on employment in California
and Washington suggested no change in November from October but
insured unemployment was up 80 per cent from November 1956.
Agri
culture was in pretty good shape with large wheat and apple crops
but with prices down.
The California and Arizona cotton crops were
very good with yields of 1,000 to 1,100 pounds to the acre or about
2-1/2 times the national average.
up well.
Construction figures were holding
Twelfth District bank loans during the past two weeks had
declined slightly and an analysis of 28 reporting member banks showed
that loans of 12 of these on December 4 of this year were below a
year ago, while 16 were higher.
One large San Francisco bank had
expressed the view that demand for loans, particularly for business
loans, was somewhat less than it had been, and payoffs were being
made in December instead of January.
Other San Francisco banks
report continuing demand for business loans and expect no more than
12/17/57
-20
a seasonal decline after the year-end.
Demand deposits had de
clined recently contrary to the national picture, but savings
deposits had increased three times as much as in 1956.
Borrowings
by member banks from the Reserve Bank were nominal.
Mr.
Mangels thought the next few months probably would con
tinue to show the business situation deteriorating,
but the worst
might be over so far as expectations were concerned.
Adjustments
were occurring and, while there was full recognition of the present
situation, he sensed some degree of optimism so far as the picture
for 1958 was concerned.
His thinking would be that open market
operations should aim for around $100 million of negative free re
serves, certainly not over $200 million, during the next few weeks.
He had in mind changing clause (b) of paragraph (1) of the Com
mittee's directive to call for operations with a view "to regulating
the supply of bank reserves so as to foster sustainable growth in
the economy without inflation."
However,
for the record he thought
the suggestion by Mr. Hayes was preferable to the one he had had in
mind.
Mr. Deming said that national statistics pointed to a down
turn still
reflected imperfectly in
the Ninth District.
Certainly
the slope of the decline was more pronounced at the national than
at the district level.
November nonfarm employment in
was down 18,000 from October,
the district
somewhat greater than seasonal.
Manu
facturing employment was off 6,000, mostly contraseasonal, with
12/17/57
-21
declines in most categories.
On the other hand, construction
employment had dropped by less than the usual amount.
Mr. Deming
recalled that he had mentioned before that the Ninth District
seasonal high in
February.
little
unemployment usually comes in
This coming winter, it is
earlier, to be higher,
late January or
now expected to occur a
and to last longer.
Bank debits in November were 2 per cent less than a year
earlier, Mr.
cent.
Deming said, and department store sales were off 5 per
In the week of December 7, however,
department store sales
were even with the comparable week of 1956 for the first
time since
late October.
the Twin
New passenger automobile registrations in
Cities in November were 11 per cent higher than last year and were
running about 3 per cent ahead of last year in the first ten days
of December.
Banking figures show continuation of the recent trend with
smaller than usual deposit gains or higher than usual losses, Mr.
Deming said.
Loans also had declined in the Ninth District.
Deming said that he had looked
Mr.
further into the question of demand
for commercial bank loans since the December 3 meeting and that the
reduced loans reflected a diminished demand more than commercial
bank policy.
ments.
However,
the banks were not unhappy with these develop
The easier credit picture was being reflected in
easier
mortgage credit with one Twin City bank now actively interested in
12/17/57
FHA loans.
-22
Local insurance companies seemed to be fairly well
loaned up and Mr. Deming anticipated it would be well into 1958
before this situation changed, but large outside companies had
begun to be more active in this field.
The brightest part of the
picture in the Ninth District continued to be agriculture, Mr.
Deming said, with the condition of livestock, the cattle feed
situation, and the winter range situation all good.
Most corn
and soybeans were now out of the fields and there would be little
loss from standing in fields over the winter.
wet corn which reduced its
There was considerable
storage value and its
ness of the crop had slowed up cash income flow.
price, and the late
Mr. Deming cited
one other bright spot, noting that iron ore shipments this year were
7 million tons larger than last.
One of the large mining farms was
scheduling more developmental work this year than it
did last year,
pointing to another good year in 1958.
Mr,
Deming said that he agreed it
would be well to change
the wording of the Committee's directive but would lean toward that
suggested by Mr. Hayes,
more than any of the other suggestions.
He
had no special target for net borrowed reserves but believed the
level should tend down from that aimed at during the past three weeks,
and he would leave to the Manager of the Account the determination
of the precise level.
Mr. Allen said that retail trade in
made a poorer showing in
the Seventh District
November than in the country as a whole.
12/17/57
-23
For the week ending December 7, however, district stores were off
3 per cent, compared with 5 per cent for the nation.
Automobile
production schedules for December were reduced from 620,000 to
580,000.
Mr.
It was too early to talk about total production for 1958,
Allen said, but a leading figure in
the industry had expressed
himself privately last week to the effect that sales for the year
1958 would not exceed
5.5 million cars.
Despite poor sales cur
rently, production was continuing at a good pace and the industry
would not be surprised to show finished car inventories close to
800,000 units by January 1, and the feeling in Detroit was that
this figure might rise to a million early in
1958.
The reason for
this expectation was usually expressed as fear of the labor negotia
tions which would take place in the spring and the possibilities of
serious strikes at that time or before.
Mr. Allen reported on a meeting of business economists held
at the Chicago Bank on December 11.
The steel people then expected
production in 1958 to total 109 million tons, 52 million in the first
half of the year and 57 million in
the second half.
This would com
pare with an estimated total of 113 million tons in 1957.
radio, and TV people reported inventories to be in
no evidence of panic selling or price slashing.
Appliance,
good shape with
Telephone company
expenditures were expected to be about the same in 1958 as in 1957,
both in
Illinois and in the nation.
Food sales were holding up well
12/17/57
-24
and food chains expected to add more stores in 1958 than in 1957.
Agricultural machinery sales were expected to be as good in 1958
as in 1957 or slightly better.
crease nationally in
Housing expected a 10 per cent in
new starts.
Mr. Allen reported that the easier money conditions had
shown up in
reduced borrowings by Seventh District money market
banks, but other district banks had shown increased borrowings
with evidence that loan growth was continuing at the smaller banks.
A survey of loans in
the Seventh District in October brought out the
disturbing factor that during July-October,
more than 20 per cent of
instalment loans on new automobiles had maturities of more than 30
months.
In the same period of 1956,
only six per cent of auto
mobile sales were on contracts with maturities of more than 30
months.
Mr.
Allen said that he would lean to a great deal that Mr.
Irons had said about monetary policy.
notable easing in the next three weeks.
He would not like to see any
Mr. Young had pointed out
that despite the recessionary tendencies, business was still at a
very high level.
Mr. Allen thought he would not feel comfortable
until there had been some reflection of adjustments in the retail
price situation.
The sooner this came, the better, and until then
he would not favor conditions easier than those of the last few
weeks.
With respect to the Committee's directive, Mr. Allen said
12/17/57
-25
he was inclined to Mr. Hayes' suggestion. He would like to get
back to a more general statement of policy rather than to try to
be so specific in the directive.
Mr. Leedy said that the Tenth District level of employment
was higher than a year ago, but there had been a recent reduction
in
employment both in manufacturing and in nonmanufacturing.
sales for the year to date were about the same as in 1956,
October sales had been running behind last year.
spot in the Tenth District was in
agriculture,
Retail
but since
The one bright
Mr. Leedy said.
The
weather recently had been favorable for harvesting the balance of
the corn and Milo maize crops.
It
did not appear that earlier expecta
tions of sizable losses of corn and maize because of wet weather would
develop.
The winter wheat crop was in
fine pasture.
excellent condition and making
Prices of important agricultural products of the
Tenth District were encouraging.
Banking statistics for the Tenth District continued contrary
to the national picture.
Loans had grown more since mid-1957 than
in the previous year, particularly industrial and commercial loans.
Cattle loans had been increased sharply at country banks because of
favorable pastures and abundant feed.
Mr.
window,
Leedy turned to the availability of credit at the discount
stating that in the Tenth District he would not wish to give
any indication that the discount window was not open at this time.
12/17/57
-26.
Some bankers were more or less chronic borrowers,
and efforts to
correct that tendency might be intensified after the year end,
but as a general proposition he did not think it
appropriate to
now apply general restraints to the use of the discount window.
As to credit policy, Mr. Leedy said that the survey this morning
confirmed that the country was in a recession.
For the next three
weeks he thought net borrowed reserves should trend downward with
a benchmark of zero.
After the first
of the year,
would be confronted with a softening of reserves,
did not wish any tightness to exist in
next few weeks.
the Committee
but Mr. Leedy
the money market during the
The Management of the Account should watch care
fully the performance of the market and,
to the extent that it
could do so without setting off another round of increases in
prices of Government securities,
borrowed reserves.
it
should trend downward in
net
Mr. Leedy said that he felt that the wording
of the directive should be changed and he would go along with
general wording rather than trying to pinpoint the actions to be
taken.
Either the first
proposal Mr.
Mr.
half of Mr.
Riefler's statement or the
Hayes had made would be suitable.
Leach said that reports of the past two weeks left
doubt that the downturn in the Fifth District economy,
no
like that
in the nation, was widespread and continuing, although it was still
moderate.
At the Richmond Bank's Directors' meeting last week,
12/17/57
-27
directors representing key industries in
the district were all
gloomy as to the short-term outlook.
With respect to the discount window, Mr. Leach said he
thought both the law and the Board's regulation had established
principles as to appropriate and inappropriate uses of this facility.
These principles should not vary from month to month,
and member
banks must operate within those limitations, making such adjustments
as become necessary.
The System had several policy tools, Mr. Leach
said, but the discount window was not one of these.
Present economic conditions make appropriate further modera
tion of reserve pressures,
Mr. Leach said.
This moderation should be
gradual and the System should carefully avoid the creation of sloppy
markets.
More aggressive action than in
recent weeks might well have
caused an even more precipitate run-up in Government securities prices
than had taken place.
Mr. Leach said he believed the System was now
in a position to bring about reserve availability more nearly in
line with economic conditions and the discount rate action.
quently, it
Conse
would seem appropriate by the end of the next three weeks
to attain conditions consistent with zero net borrowed reserves.
However,
in view of the uncertainty in
rapid run-up in
the market consequent to the
prices and year-end strains, he thought that more
than the customary emphasis should be placed on the feel of the
market.
As to the directive,
Mr. Leach thought this a good time
12/17/57
-28
to change the wording.
Either the proposal by Mr. Riefler or that
by Mr. Hayes would be appropriate,
although Mr. Leach leaned toward
"mitigating recession" rather than "promoting recovery" at this time.
Mr. Mills said that the policy recommendations made by Mr.
Hayes fitted rather closely his own policy reasoning.
That would
mean that reserves through the year-end would be supplied as freely
as necessary comfortably to carry the money market and the banks
over the year-end hurdle.
After the end of the year, there was
some question in his mind whether the Committee should have a con
scious purpose in bringing negative free reserves down to the zero
level.
It
could be preferable to take advantage as far as possible
of the natural factors in the market that would tend to bring about
that end and purpose.
Mr. Mills said he,
too, had reservations about any magic
residing in monetary policy as far as supplying reserves in
vas concerned; that is,
quantity
as to their efficacy in turning around the
adversely shifting economic situation.
His feeling would be that
to free reserves in too great abundance would merely work toward
rising market prices of U. S.
Government securities and falling
yields and would have the effect of stampeding commercial banks
into a movement to extend their maturities which in
turn
would
further aggravate the yield results on the down side at the same
time that it
tended to impair the liquidity of commercial banks
12/17/57
-29
at a time when their liquidity in the longer run might best be
improved.
That being the case, he would feel quite strongly that
the Management of the Open Market Account should have complete
discretion in regulating the supply of reserves and should be
governed to a considerable degree by the feel of the market.
Mr. Mills doubted very much that banks would be inclined
to expand their loans substantially at the present time or that
they were apt to find the sort of demand, commencing with the new
year, that would invite them to expand their loans materially.
Mr.
Mills said he shared the opinion regarding the operation of the
discount window that had been expressed by Mr. Leach and others and
believed that the Board's Regulation A allowed ample latitude to
meet individual situations of member banks.
He believed the dis
count window was not intended to be the primary agency for providing
reserves and, as a device having only a secondary place in
the re
serve orbit, the general reserve treatment applied to member banks
should be through open market operations or by timely adjustments
in reserve requirements.
Mr.
Robertson said that again he found himself pretty much
in agreement with Messrs.
Irons and Allen.
It
seemed to him that
the plus and minus factors in the economy had been well set forth
by Mr.
Young.
At the moment,
he thought that the minuses had it
and this was perhaps most dramatically shown by the declines in the
12/17/57
-30
index of industrial production and in Gross National Product, and
by the increase in
unemployment.
However,
Mr.
Robertson thought
there was great danger in overlooking the plus factors.
to remember that we are still
sale prices still
on a very high plane, he said.
Consumer prices are not only not declining but
are showing positive signs of advancing.
being reduced and is
still
Consumer borrowing is
not
increasing at the rate of increase pre
vailing over the past year.
ago.
Whole
are very high, higher than a year ago, and show no
signs of declining.
high.
We have
Demand for long-term funds is
still
Demand for houses continues strong--3 per cent above a year
Inventories are still
In sum, Mr.
high, though being reduced somewhat,
Robertson was not impressed with the severity of the
declines thus far, and he felt that it
was necessary to add to these
and other plus signs the prospect of deficit financing by the Govern
ment.
Mr. Robertson said that all of this led him to believe that
the Committee might be magnifying an adjustment at a high level into
a drastic recession.
It would be unwise to flood the market with
reserves, he said, and it
the reins in
was still
case this team which is
suddenly lurch forward.
necessary to have a firm hold on
now backing up a little
should
This did not mean we should maintain a tight
position, but neither did it mean we should adopt an easy one. Mr.
Robertson thought that an easy situation could start the upsurge of
inflation all
over again.
We are in
a different position than in
12/17/57
-31
the 30's, when "easy money" had little
effect, he said, because
the growth factors are much stronger than they were then,
He
thought the influence of easy money could be very effective today,
as contrasted with the 30's, and that now we could "push on a string."
Mr.
Robertson also said that he thought that a lower volume of
activity, such as we now have, called for a lower volume and velocity
of money.
His view would be to hold an even hand on credit policy
and to be ready to move either way.
made it
This period more than many
necessary to watch the situation very carefully because the
Committee might have to move very fast.
he would not object at all
If
activity were to go down,
to easing, but he thought the Manager of
the System Account was in better position than the Committee member
to determine day-to-day needs, keeping in mind that the position he
(Mr.
Robertson) would like to see was an even keel as of the moment.
Mr. Robertson also said he thought the Manager of the Account had
done a good job of handling the account over the past two weeks.
would like to have no obvious change unless there was a change in
conditions.
Mr. Robertson said he too thought the directive of the Com
mittee should be changed.
He leaned definitely toward Mr. Hayes'
suggestion but would not be averse to a combination of that with
Mr. Riefler's suggestion so as to have clause (b) of paragraph 1
call for operations with a view to "cushioning adjustments and to
He
12/17/57
-32
mitigating recessionary tendencies in the economy.
With respect to the discount window, Mr. Robertson said
he agreed almost completely with the comments by Mr. Leach.
Mr. Shepardson said his story had been told three times
this morning.
Robertson.
He agreed completely with Messrs. Irons, Allen, and
There had been some downward trends but he thought the
emphasis should be on the fact that we were still
at a high level.
We have been striving for some time for adjustments.
the process of getting some adjustments.
We are in
Mr. Shepardson said he
would go along with what had been said about maintaining restraint.
He presumed of course that the System was going to provide needed
reserves, but he felt
rein.
it
should keep a taut rein without a straining
So far as the Committee's directive was concerned, he leaned
toward having clause (b) short and for not getting into shades of
emphasis.
He would take the first
part of Mr.
Riefler's suggestion
under which clause (b) would be changed to call for operations that
would "cushion adjustments in the economy."
Mr.
Fulton commented that for some time he had been on the
hard money side of the group.
He noted that the steel, machine tool,
and other basic industries which were of large importance in the
Cleveland District had shown rapid deterioration within the past few
weeks.
It was surprising, he said, how this slowdown had become
cumulative.
There was more pessimism in the Cleveland District
12/17/57
-33
than had been reported for any other district so far this morning.
There had been a prevalence of cutbacks in new orders and also in
delivery schedules, which were being stretched out as needs of
industry were being revamped.
Steel mills of the district were
all operating below 70 per cent of rated capacity.
was down from a year ago.
Coal production
There were 13 areas in the district
classed as "moderate" labor surplus areas, meaning that from 3 to
6 per cent of the labor supply was unemployed,
and there were 11
areas classed as "substantial" labor surplus areas, meaning that
more than 6 per cent of the labor supply was unemployed.
Department
store trade had been running below a year ago as had bank debits.
Perhaps this was a classic recession brought on by an excessive
capital goods boom and increased capacity which could not now be
used, Mr. Fulton said.
Many manufacturers believed that this down
turn probably would be more severe and longer in duration than the
1953-1954 recession.
In the auto industry, the guessing was that
not more than 5.2 million passenger cars would be manufactured this
year.
In the next quarter there would be curtailment of production
in the automotive field so as to avoid too unwieldy inventories for
dealers.
Bank loans had been declining largely as a result of in
ventory liquidation, but in
the past week there had been a jump
presumably because of tax borrowing.
Mr.
Fulton said he felt
the Committee should be moving toward
zero free reserves, not dramatically or rapidly,
but constantly.
This
12/17/57
-34
would give relief that he felt was needed.
The Cleveland Bark had
been administering the discount window in accordance with the Board's
regulation, Mr. Fulton said, and he felt this should not be a source
of reserves except, as the regulation indicated, for an adjustment of
the immediate needs of banks.
He would like to see the Committee's
directive changed and leaned strongly toward the wording suggested
by Mr. Hayes or, as an alternative, the first phrase of the sugges
tion made by Mr. Riefler.
Mr. Williams said that the materials he had gathered for
this meeting corroborated what Mr. Young had presented on the economic
situation, and he would not repeat except to mention a few specific
instances to sharpen the picture.
Department store sales had slumped
during the past two weeks but store officials were now expecting
dollar volume for this year to total about the same as in 1956.
Sentiment among seven business economists from whom information had
been obtained on Third District business trends could be summarized
as "murky weather and a falling barometer," Mr. Williams said.
There
was a general line of pessimism perhaps the most discouraging aspect
of which was the decline in incoming orders.
The gimmicks that had
been tried for stimulating business had not succeeded.
In general,
no serious decline in total output was expected, although currently
the business economists were quite
pessimistic.
This perhaps re
flected an inability to see any stimulus that would lift
within the next few months.
output
12/17/57
-35
After citing comments of a number of the individual busi
ness economists,
off in
Mr. Williams said that bankers expected some fall
loans but not too great a decline.
Some large bankers had
been paring their loans on a selective basis as a matter of policy.
To some extent the reduction in
outstanding bank loans since mid
summer of this year reflected the use of proceeds of new securities
sales.
Mr.
Williams also mentioned a report of a moderate increase
in demand for home loans, although it was expected that total loan
demand would decline seasonally or possibly somewhat more than
seasonally in the first part of 1958.
With respect to monetary policy, Mr.
that the bill
Williams said he felt
rate should be around a 3 per cent rate structure.
The reserve position of banks should not be eased enough to en
courage any boom in the Government securities market, although re
serves ought to be available.
On the proposed rewording of the
directive, Mr. Williams thought there was a little
favor of the suggestion Mr.
Hayes had made.
to be said in
The suggestion of Mr.
Riefler incorporating the words "to promote recovery in the economy"
would seem to call for positive action, and Mr.
Williams felt
that
for the present the Committee should be playing by ear.
Mr.
Bryan said that his only comment specifically on the
Sixth District related to the severe freeze that had occurred since
the preceding meeting,
and which had caused great damage to vegetable
12/17/57
-36
crops and citrus groves in Florida.
This would cause a reduction
in Florida agricultural income, but Mr.
district as a whole it
Bryan thought that for the
would not be a particularly severe factor.
The over-all appraisal of the situation, he said, was that the
Atlanta District was still
ward tilt
in
operating at a high level, but the down
the district's economy was becoming,
over all,
more
pronounced.
With respect to national policy, Mr.
Bryan then made a state
ment substantially as follows:
It appears that we are confronted with a problem of
adjusting policy to an immediately current and deteriorat
ing economic situation, at the same time facing the fact
that the longer-run economic problem may still be one of
an inflationary bias in the economy. The latter problem
is complicated by a question to which we do not now, and
probably cannot for a number of months, know the answer,
namely, the impact of an almost certainly increased
national defense outlay. The latter problem becomes very
complex to my mind because we cannot now know the amount,
manner of financing, or timing of the increased defense
outlay.
In this situation, it seems to me that our wisest
course is to adapt policy to the currently available
The greater danger, it seems to me, would
economic data.
lie in attempting to adjust monetary policy to elements
of national policy that, at the moment, are indeterminate
and hypothetical.
Monetary policy, I believe, can play its most effec
tive role in a downturn if monetary ease is injected during
the early stages of a downward movement rather than after a
recession is well under way and its effects are accumulative.
On the basis of that thought, I am of the opinion that the
minimum adequacy to the
System's policy has had, at best,
developing situation.
Thus far, the System has added to banking reserves in
The
amount over and above the seasonal drain.
modest
a
12/17/57
-37-
amount has been insufficient to affect even prime rates
at commercial banks, let alone the general structure of
bank rates. Among bank borrowers it has affected only
the relatively few that have rates tied to the discount
rate.
Thus rates in the capital markets have dropped sub
stantially but more as a result, it seems to me, of
seasonal factors, speculative activity, rumors, and ex
pectations rather than as a result of System action to
make funds actually more available. I suspect the price
rally in the capital markets has been too rapid and in
supportable for long, unless the System actually moves
to increase the availability of bank reserves. I would
regard a situation in which there were a capital market
reversal, or ease simply by an accumulative weakening of
the economic situation, to be dangerous at this time.
I attach great significance to the fact that, as of
November 27, the private money supply (demand deposits
and currency) was 0.4 per cent below its level a year
ago. Total member bank reserves in November averaged
1.1 per cent below the average of November 1956.
What is happening, therefore, is that in the face
of a now clearly perceptible economic downturn, our ef
fective policy, whatever our intentions, has been to
allow a reserve base providing for no growth whatever
in the economy.
I believe it clear that the continua
tion of such policy must finally be an important causa
tive factor in promoting a serious recession.
Accordingly, I would advocate at this time the use
of the Open Market instrument to provide for the remainder
of December an amount of reserves clearly greater than
those required by the year-end increase of loans and cur
rency drain.
Mr. Bryan went on to say that the Committee's directive was
clearly not appropriate to the present situation.
the suggestion that Mr. Riefler had made.
He would favor
In response to a question
from Chairman Martin, Mr. Bryan said that he was not prepared to
state a figure to be used as a benchmark for net borrowed reserves
but that he certainly would tend downward towards zero.
12/17/57
-38
Mr. Szymczak said that Mr. Bryan had delivered his speech.
He thought the Committee would be back during the second quarter
of next year doing the reverse of what it was now doing, but he
favored what was now being done.
As for the discount window, its
use should be in accordance with the Board's Regulation A. As for
the amount of reserves to be provided by the Open Market Account,
he would provide reserves as permitted by the tone of the market,
rates, and other factors in moving downward toward zero net borrowed
reserves.
As to the directive, he thought the wording suggested by
Mr. Riefler more realistic than the others.
He would accept the
recommendation of Mr. Hayes because he thought it meant exactly what
Mr. Riefler had proposed,
but he thought Mr. Riefler's represented a
more realistic approach.
Chairman Martin noted that this was the last meeting of the
year 1957,
and he said that he hoped the Committee would forgive
him for taking this opportunity to make a few comments not specifically
germane to what was at hand.
Christmas time always made him cheerful,
and perhaps anything cheerful that he said at this time should be
discounted because it
might be Christmas cheer.
In preparation for this meeting, Chairman Martin said that he
had read the minutes of the meetings held during this period a year
ago.
He had tried to review his thinking at that period,
and it
was
very easy to rationalize oneself into thinking that he had a position
12/17/57
-39
that he had not expressed at the time.
However,
he really was more
optimistic at present than he was at this time a year ago.
This did
not mean that he did not think we were going to have a very difficult
Congressional session, and there were many problems ahead for which
the answers were not apparent.
He recalled, however, that a year
ago his thinking was along the line that there were so many chickens
of inflation getting loose around the yard that it looked as though
we would get into a hopeless situation and the chickens would all
come back to roost at the same time.
These chickens of inflation
are coming home to roost now, the Chairman said, but he did not
think they were coming back in
a way that would make it
completely
hopeless to keep the henhouse in order.
Chairman Martin said that all of us would differ over the
usefulness of money and credit policy.
At the moment, he thought we
were dealing in minor differences around the table.
was quite clear.
serves.
His own position
He was on the side of moving towards zero free re
This seemed to him consistent and he believed that it would
not create a sloppy money market.
There was a recognition around
the table of the problems of the Manager of the System Account and
a general view that he should be given the maximum
carrying on operations.
with the Federal Reserve,
latitude in
The Chairman recalled his first
Christmas
when a very difficult period developed.
That had not been a happy experience from his point of view, but
12/17/57
-40
he said that he learned a great deal at the time and he was con
vinced that the Manager of the System Account should be given all
the latitude possible at this particular time of year.
The Chairman said that he differed with the suggestions that
had been made that the Committee
keep an even keel because he did not
think we could keep an even keel at this time.
had to proceed in an orderly manner with its
direction, or it
The Committee either
policy and trend in
would not proceed at all to make its
one
words and its
policies meaningful.
Chairman Martin said he wished to say a word again about
posture.
In the early stages of this year, from the time the Fed
eral budget got out of hand and it
became clear that we were in an
on-again-off-again budget and that inflation was getting ahead of
us, the thing that had worried him most was that it
appeared that
the System was the only instrument of Government that was fighting
inflation.
This could be over-stated, but by July of this year the
System had gradually assumed in the eyes of the public the position
that it
was the only agency fighting inflation.
Despite the judg
ment that the System's efforts might not be very important in the
whole picture, there could be a tendency to underestimate the forces
of the System.
During the past summer, Chairman Martin said he was quite
worried that the System might get into the role of being a crusader
12/17/57
-41
against inflation and that it would not be able to reverse its
posture in time to make a general contribution to economic policy.
Now, he thought that perhaps by an accident of the economy, the
System's posture had been reversed in the nick of time.
that the diagnosis of an illness was important.
He thought
He did not think
that what the System was now doing was in the nature of giving a
hypodermic but rather was more in the nature of a sedative.
thought a hypodermic was needed, he woul
If he
be in favor of a different
approach from that we had taken.
He also questioned whether our situation was similar to
that of 1953.
He thought that the deficit financing that might be
in the offing would not be an important factor at the moment.
It
might become so later, but for the moment any effects from that
source were pretty minor.
financing effective it
He noted that in order to make deficit
would be necessary to let contracts and to
know where to spend the money if, when a downturn was on us, it
was to have a major effect.
It would take time to spend on such
projects, and this was where economic planners got into difficulty:
they would have ideas and they would have projects, but the timing
gave difficulty.
What he wanted to say at the moment was that it
was very important for the System to have the right posture.
It is
true that we have been telling the public for a long time that just
the situation we are now facing was bound to appear, and it is true
12/17/57
-42
that the System has encouraged some of the adjustments that are now
occurring.
Some of these adjustments had to come, and the Chairman
thought they were coming and would come very quickly in the discount
markets.
He noted that there wer
quoted and unquoted prices and
expressed the view that the price adjustments in
the offing might
become very dramatic.
A major concern was also with borrowed money,
Chairman Martin
said, because the likelihood of some scandal occurring was increased
when borrowed money was involved.
He did not refer to a scandal in
dishonesty but he illustrated his thought by citing the building of
a $200 million operation with $25,000 of capital and the weaknesses
that were likely to result but which did not appear until the operation
got into trouble.
abusiness forecast, the Chairman
Without making
reiterated that it seemed to him that the posture of the System must
be very clear at this time if
it
was
to fulfill
to minister to the patient in every way it
to unemployment,
desirable.
It
the role of wanting
could,
of not contributing
and of not taking the line that unemployment was
might be that unemployment was inevitable. the Chair
man said, but the Federal Reserve should never lose sight of the fact
that the man who is
unemployed is
in a special category.
Here we
come to the crucial problem of the "haves" and the "have nots."
man who has been out beating the bushes and who can not sell is
different category from those who, for example,
The
in
are in Government
a
12/17/57
-43
service.
There was a crucial problem in
this particular area and
it involved noblesse oblige.
There were differences among the members of the Committee,
the Chairman noted, and it
was healthy to have such differences.
Minority views should be encouraged at all times throughout the
System although the System should try to develop a policy and to
have that policy criticized and subjected to testing.
it
very important that the Committee bear in
mind,
He thought
however, that
there must be a positive, constructive approach on the part of the
Federal Reserve System regardless of whether the public blamed it
or criticized it.
So far as diagnosing the patient, there were
those chickens coming home to roost, Chairman Martin said.
opinion, they were the chickens of inflation.
It
the inflation got out of hand to the extent that it
eral Reserve was not without blame,
but it
was too bad that
did.
did the best it
with money and credit policy under all circumstances.
Chairman Martin said he believed it
however,
In his
The Fed
could
At this time,
terribly important
that the posture of the System be one of sympathy and of wanting to
help the patient.
At the same time,
it
should not be a policy of
softness.
Chairman Martin concluded his statement with the comment
that it
appeared that the Committee today came out with the majority
taking the line, with which he agreed,
This would call for a change in
that Mr.
clause (b)
Hayes had presented.
of the wording of the
12/17/57
-44
directive to be issued to the New York Bank which might be accomplished
by a combination of the individual suggestions as proposed by Mr.
Robertson, so as to have the clause call for "cushioning adjustments and
mitigating recessionary tendencies.
Chairman Martin said he thought
the majority of the Committee to be in
favor of a moderate reserve trend
toward zero, although he recognized that minority dissents on the parts
of Messrs.
Mr.
Allen, Irons, Robertson, and Shepardson had been indicated.
Shepardson said that to clarify his position, he had stated
that he believed the Committee should hold a taut rein on the situation
but he had also said he would change the wording of the directive to
call for cushioning the adjustments that were taking place.
This would
imply that the Committee's operations would make some adjustments in
the reserve position of banks.
Chairman Martin then inquired whether, in
was concerned,
so far as the directive
there was any member of the Committee who would disagree
with changing the wording of clause (b)
of paragraph 1 of the directive
to call for operations with a view, among other things,
adjustments and mitigating recessionary tendencies in
"to cushioning
the economy."
None of the members of the Committee indicated that they would dissent
from the adoption of this wording.
Chairman Martin also inquired whether any of the members of the
Committee would differ with the summary statement that he had made that
a majority favored a moderate trending toward zero free reserves.
12/17/57
-45
Mr.
rein,
Shepardson said that he had suggested maintaining a taut
but he would not take exception to the statement to which Chair
man Martin had just referred.
Mr.
Irons said that he would indicate a mild dissent to trending
toward zero free reserves.
Mr.
Robertson said that the Chairman's summary covered his views.
Chairman Martin suggested that in the absence of other comments
it
would be understood that the directive with the revised wording agreed
upon would be approved and the summary that he had given of the views of
the Committee would be accepted.
Thereupon, upon motion duly made and
seconded, the Committee voted unanimously
to direct the Federal Reserve Bank of New
York until otherwise directed by the Com
mittee:
(1) To make such purchases, sales, or exchanges (in
cluding replacement of maturing securities, and allowing
maturities to run off without replacement) for the System
open market account in the open market or, in the case of
maturing securities, by direct exchange with the Treasury,
as may be necessary in the light of current and prospective
economic conditions and the general credit situation of the
country, with a view (a) to relating the supply of funds in
the market to the needs of commerce and business, (b) to
cushioning adjustments and mitigating recessionary tendencies
in the economy, and (c) to the practical administration of
the account; provided that the aggregate amount of securities
held in the System account (including commitments for the
purchase or sale of securities for the account) at the close
of this date, other than special short-term certificates of
indebtedness purchased from time to time for the temporary
accommodation of the Treasury, shall not be increased or
decreased by more than $1 billion;
12/17/57
46
(2)
To purchase direct from the Treasury for the
account of the Federal Reserve Bank of New York (with
discretion, in cases where it seems desirable, to issue
participations to one or more Federal Reserve Banks)
such amounts of special short-term certificates of in
debtedness as may be necessary from time to time for the
temporary accommodation of the Treasury; provided that
the total amount of such certificates held at any one
time by the Federal Reserve Banks shall not exceed in
the aggregate $500 million;
(3)
To sell direct to the Treasury from the System
account for gold certificates such amounts of Treasury
securities maturing within one year as may be necessary
from time to time for the accommodation of the Treasury;
provided that the total amount of such securities so
sold shall not exceed in the aggregate $500 million face
amount, and such sales shall be made as nearly as may be
practicable at the prices currently quoted in the open
market.
Chairman Martin referred to a draft of letter to Congressman
Abraham J.
Multer that had been prepared in
accordance with the discus
sion at the meeting on December 3 of Mr. Multer's request of November
22, 1957,
ties.
for information on operations of dealers in
Government securi
He noted that the draft reply had been circulated to the members
of the Committee,
and he inquired whether there were any suggestions for
change.
Mr.
Hayes said he had no suggestions for change in the letter.
added, however,
He
that the answer to Congressman Multer raised a question in
his mind as to whether the Committee was getting all
dealers in Government securities that it
the information from
needed for its
own purposes, and
he suggested that consideration might be given to this question by the
Special Committee.
Mr.
He inquired,
Allen said that he had no suggestion for change in
however,
the letter.
whether the information Congressman Multer was
12/17/57
-47
requesting had been disclosed to representatives of Congressman
Patman when they visited the New York Bank recently.
Mr. Rouse stated that he was not at the Bank at the time
Mr. Patman's representatives made their visit but that it was his
understanding that the information was not disclosed to them.
They
were aware before coming to the Bank that Government securities dealers
furnished this type of information to the New York Bank.
Mr. Leedy raised a question as to the sentence in the draft
letter that indicated Congressman Multer might request individual
dealers in Government securities to furnish information that might
assist him in his inquiry and, after discussion as to whether such
a suggestion should be made, it was agreed that the sentence in slightly
revised form should be included.
Thereupon, a letter to Congressman
Abraham J. Multer prepared for Chairman
Martin's signature was approved unani
mously in the following form:
Your letter of November 22, 1957 was taken up at the
latest meeting of the Federal Open Market Committee.
It
was the view of the Committee that, inasmuch as the daily
reports of dealers' operations in U. S. Government securi
ties are furnished by the dealers on a purely voluntary
basis and in the strictest confidence, it would not be
within the discretion of the Federal Open Market Committee
or the Federal Reserve Bank of New York to disclose in
formation received in connection with these reports.
Should you wish to do so, you could of course direct
your request to the individual dealers in Government securi
ties.
Mr.
Robertson referred to the System Committee for the Study of
Float appointed pursuant to the discussion at the meeting of the Federal
-48
12/17/57
Open Market Committee on August 7, 1956 (Messrs.
Robertson, Chairman).
(Mr.
Erickson, Johns, and
At the Open Market meeting on May 7, 1957, he
Robertson) had reported that the Committee on Float had received
a document from its
subcommittee and that it
copies of its report shortly.
expected to distribute
Subsequently, the report of the System
Committee for the Study of Float dated May 31, 1957 was submitted, and
that report was considered by the Conference of Presidents of the Fed
eral Reserve Banks on June 17, 1957.
Mr.
Robertson went on to say
that the System Committee for the Study of Float also had prepared a
report dated December 16, 1957, addressed to "The Members of the Board
of Governors and the Presidents of all
report had been addressed in
Federal Reserve Banks."
that fashion because it
The
referred in part
to policy matters for consideration by the Federal Open Market Com
mittee and in
part to operating matters pertaining to check collection
as such without reference to the impact of float on open market opera
tions.
Mr. Robertson said that the Committee recommended:
That the Open Market Committee determine certain
1.
policy questions listed in the report and give the Manage
ment of the Open Market Account appropriate directives as
to the approach it should take with respect to float; and
2.
That the other studies referred to in the program
submitted with the Committee's report of May 31, 1957, be
made under the direction of the appropriate committees of
the Presidents' Conference.
After stating that the December 16, 1957 report of the System
Committee for the Study of Float would be distributed by the Secretary
12/17/57
-49
of the Open Market Committee in the usual manner, Mr. Robertson said
that in a separate report dated November 14, 1957, the Subcommittee
on Float recommended a change in the information telegraphed daily
by the individual Federal Reserve Banks to the Federal Reserve Bank
of New York to provide the Open Market Account Management with data
on float, reserves, and borrowings.
recommendations,
A draft letter embodying such
which letter would supersede the letter from the
Board of Governors to the Federal Reserve Banks dated August 7, 1957,
was distributed at this point, and Mr. Robertson said that the Com
mittee for the Study of Float recommended that the Board send the
proposed letter promptly, requesting that the revised procedure for
reporting figures be put into effect, if
the figures for Thursday, December 26,
practicable, beginning with
1957.
the proposal for reporting data was still
He went on to say that
experimental although it
had
been cleared with a number of the Federal Reserve Banks and that it
could be changed at any time that a change seemed desirable.
Mr. Mills inquired whether there was any risk that the operating
officers of the Federal Reserve Banksmight feel that they were having
forced on them without previous review a revision in the procedure for
reporting the data concerned, and in response several of the Reserve
Bank Presidents indicated that they did not see any objection to send
ing out the letter
in the proposed form.
Mr. Bryan stated that if
would, of course,
the letter was sent out his Bank
do its best to furnish the information as requested.
12/17/57
However,
-50
he wished to say that he was opposed to this whole approach.
He felt this a typical System mechanism by which we take up little
problems while avoiding fundamental problems.
The fundamental problem
here was the degree to which the Open Market Account should attempt to
adjust its operations to changes in
float and similar influences.
This
was a problem on which the Committee had not come to a decision.
Mr. Robertson said that the Committee for the Study of Float
hoped that the recommendations in its report, which was being distrib
uted by the Secretary,
would result in
having the Federal Open Market
Committee come to grips with this problem at an early date.
Cnairman Martin suggested that the Committee approve the send
ing by the Board of Governors of the proposed letter, with the under
standing that the Federal Reserve Banks would start furnishing the
information in the new form beginning with figures for Thursday,
December 26, 1957,
if
practicable,
and in any event not later than
January 9, 1958.
This suggestion was approved unanimously.
Secretary's Note: The letter was sent
later in the day by the Board of Governors
to the Presidents of all Federal Reserve
Banks except New York, with a copy to New
York. A copy has been placed in the files
of the Federal Open Market Committee.
It
was agreed that the next meeting of the Committee would be
scheduled for 10:00 a.m.
on Tuesday, January 7, 1958.
Chairman Martin referred to the proceedings of the Tribunal
set up by Parliament to inquire into the alleged leakage of information
12/17/57
-51
about the September 19 increase from 5 to 7 per cent in
Bank rate
of the Bank of England.
which com
He noted that the proceedings,
menced at the Church House, Westminster,
ber 2, 1957,
were being reported in
London, on Monday,
detail in
Decem
The Times and sug
gested that they would be of interest to many persons within the
Federal Reserve System because of the problem that was raised of
possible conflicts of interest.
The Chairman also said that the
proceedings before the three-man Tribunal should impress all
of
those attending the Open Market meetings with the necessity for
keeping matters discussed at these meetings completely confidential.
Thereupon the meeting adjourned.
Secretary
Secretary s Note: Chairman Martin then
referred to a wire which he had sent to the
Chairmen of all Federal Reserve Banks on
December 10, 1957, concerning a draft letter
which the Secretary of the Treasury planned
to send to the Small Business Administration
regarding financial problems of small busi
ness, and there followed a discussion of the
views that had been expressed by a number
of the Reserve Banks in reply to the inquiry.
Cite this document
Federal Reserve (1957, December 16). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19571217
@misc{wtfs_fomc_minutes_19571217,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1957},
month = {Dec},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19571217},
note = {Retrieved via When the Fed Speaks corpus}
}