FOMC Minutes

A meeting of the Federal Open Market Committee was held in

the offices of the Board of Governors of the Federal Reserve System

in Washington on Tuesday,

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

January 7, 1958,

at 10:00 a.m.

Martin, Chairman

Hayes, Vice Chairman

Allen

Balderston

Bryan

Leedy

Mills

Robertson

Shepardson

Szymczak

Williams

Messrs. Fulton, Irons, Leach, and Mangels, Alternate

Members of the Federal Open Market Committee

Messrs. Johns and Deming, Presisents 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, Bopp, 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 Walker, Vice Presidents of

the Federal Reserve Banks of Richmond and

Dallas, respectively; Messrs. Balles and

Einzig, Assistant Vice Presidents of the

Federal Reserve Banks of Cleveland and

San Francisco, respectively; Mr. Parsons,

1/7/58

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Director of Research, Federal

Reserve Bank of Minneapolis; and

Mr. Bowsher, Economist, Federal

Reserve Bank of St. Louis.

Chairman Martin referred to the revised drafts of minutes of

the meetings held on December 3 and December 17, 1957,

since these drafts were distributed Mr.

stating that

Fulton had asked that an addi

tional revision be made on page 28 of the minutes for December 17, to

change the word "retail" to "department store" in the second full sen

tence on that page, and that in the absence of objection the minutes

for the two meetings would be approved incorporating the additional

change requested by Mr. Fulton.

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meetings of the Federal Open Market Com

mittee held on December 3 and December 17,

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 17,

1957 through January 1, 1958,

and a supplemental report covering commit

ments executed January 1 through January 6, 1958.

Copies of both reports

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

Mr.

Rouse reported that open market operations and the state of

the market had been covered thoroughly in

the preliminary and supple

mentary reports that had been delivered to the members of the Committee

and that he had little

*

to add.

He did wish to call the Committee's

In typed copy, reference should be

Refers to mimeographed copy.

sentence.

full

33,

fifth

to page

1/7/58

-3

attention to the fact that dealers' positions in Government securities

recently had been running about $1 billion higher than before the dis

count rate change in November.

$1 billion of securities in

above any other supplies.

This suggested that there were about

the market to be distributed, over and

Mr.

Rouse went on to say that he was grate

ful to the Reserve Banks for accelerating the daily wire reports on

bank reserves and float that were approved at the last meeting of the

Committee.

There had been a few problems, but the wires were now

giving an accurate picture of the previous day's reserve balance.

With respect to Treasury financing, Mr. Rouse reported that

the Federal National Mortgage Association planned to announce the

terms of its

$750 million financing later today or tomorrow.

Meanwhile,

the Treasury planned to continue offering an additional $100 million in

each of the four bills auctions in January,

and toward the end of the

month the Treasury planned to announce the terms on its

funding.

Mr.

February re

Rouse said that he knew of no plans for a major cash

financing, but a good many Government agency financing operations were

scheduled for this month.

The Treasury estimated that the net cash to

be raised in the Fanny Mae financing plus the money from the additional

bills would be sufficient to carry them through February.

necessary for the Treasury to sell some of its

were done, it

It might be

free gold, but if

this

planned to transfer the funds to the Stabilization Fund,

which would not affect bank reserves or open market operations.

1/7/58

Mr. Leach asked if the present level of dealer inventories,

with bill rates down to 2-3/

per cent, did not suggest that dealers

are carrying this thing a bit too far.

bill

rates backed up to 2.85 per cent in

dealers acquired another $00

Mr. Rouse pointed out that

the auction yesterday, and

million bills in the auction.

At the

same time, demand for bills was good and dealers reported that they

were selling about $150 million a day.

At this rate, they might be

able to work off their positions without difficulty.

In Mr. Rouse's

opinion, a bill rate 1/8 per cent below the discount rate was all

right; but as Mr. Leach had suggested, a rate 1/

per cent below the

discount rate was going a bit far in view of the supply of bills in

the market.

Of course, he added,

the drop to 2-3/4 per cent occurred

all on one day, when the dealers guessed that Chicago banks would be

bidding heavily for the new bills.

agreed,

Mr. Allen remarked, and Mr. Rouse

that the Chicago banks actually did not bid for or obtain an

unusual amount of those bills.

Thereupon, upon motion duly made

and seconded, and by unanimous vote, the

open market transactions during the period

December 17, 1957, through January 6, 1958,

were approved, ratified, and confirmed.

Chairman Martin referred to the letter from Congressman Wright

Patman dated December 23, 1957 that had been distributed before this

meeting in which Mr.

actions in

Patman requested that the data relating to trans

the System Open Market Account during the period March 1951

1/7/58

-5

to the end of 1956, sent to Mr. Patman on November 12, 1957,be

placed on punch cards and tabulated so as to produce various sum

mary totals of figures by days and months and to compute average

prices for the respective periods at which purchases or sales of

securities were effected.

Chairman Martin suggested that a letter

be written to Mr. Patman informing him of the time-consuming nature

of this task and of the expense that would be involved, that the

Committee was prepared to go forward with such a job upon the request

of the full Committee on Banking and Currency of the House, but that

in the absence of a request from the full Committee it would seem

inappropriate for the System to undertake such a large job of pre

paring data for an individual member of the Congress.

Mr. Hayes stated that this request had been discussed at some

length at the New York Bank and that he was concerned about it

several reasons.

specified in

for

His main concern was that the tabulations of data

the request at hand did not seem likely to provide use

ful information.

Apart from the expense angle, Mr.

Hayes said that

he was disturbed about the handling of such requests which seemed to

put eggs, apples,

and oranges together, in

produce significant results.

a manner that could not

His question was whether it

would not

be preferable to offer, perhaps to the Chairman of the Banking and

Currency Committee,

to cooperate with the Committee in finding out

what the Committee was seeking to know and in trying to help arrive

at a basis for producing meaningful results.

-6

1/7/58

Chairman Martin stated that he thought this point was well

taken and that it should be a part of the letter he had in mind.

His main point, however,

was that a request of this nature should

be from the full Committee on Banking and Currency and that if

that

committee wished to pursue this type of inquiry the Federal Reserve

would cooperate.

It was his impression from Chairman Spence that

the full Committee on Banking and Currency might not wish to support

a continuation of the types of requests that had been received from

Mr. Patman upon numerous occasions in recent months.

Mr. Hayes said that he agreed completely with this approach

and his thought was to make clear that unnecessary labor that went

into preparing meaningless data produced no benefit either for the

Banking and Currency Committee or the Federal Reserve.

Chairman Martin called for other comments on the handling of

this letter, and no additional suggestions were made.

He then sug

gested that the Secretary of the Committee undertake, with the Manager

of the System Account, to prepare a draft of reply to Mr. Patman along

the lines of the discussion with the understanding that when the let

ter was in satisfactory form for dispatch a copy would also be sent

to Chairman Spence.

It

was understood that this procedure would be

followed.

Chairman Martin next referred to a draft of letter to Mr.

Patman in reply to his letter of November 26, 1957 asking for further

information relating to operations of the System Open Market Account

and of dealers in United States Government securities.

reply, prepared in

The draft of

accordance with the discussion at the meeting of

the Committee on December 3, 1957, had been distributed by the Secre

tary on December 27,

and at this meeting a memorandum containing two

suggestions for editorial revisions in the letter were presented and

discussed.

Following the discussion, the letter to Mr. Patman was

approved unanimously in the following form, with the ,nderstanding

that a copy would also be sent to Chairman Spence of the House

Banking and Currency Committee.

Your letter of November 26, 1957 asking for further in

formation relating to operations of the System Open Market

Account and of dealers in United States Government securities

has been discussed at meetings of the Federal Open Market

Committee.

Some of the information you request is not re

ported to the Federal Reserve and hence cannot be furnished

by us.

Some is given to the System Account on a purely

voluntary and strictly confidential basis and hence it is

not within our discretion to transmit it.

Some is available

to the Federal Reserve System because it is fiscal agent of

the United States, and the Treasury, rather than the System,

should be approached for such data. Finally, one major

portion of the data you request could be made available in

the detail you wish only with immense effort. In this case

we suggest an alternative which may serve your purpose

To the extent practicable from the stand

equally well.

point of the amount of work involved, and with proper con

sideration for the confidential nature of some of the data,

the Committee desires, of course, that you be furnished with

information that will be useful in your analysis of System

Your several requests are discussed in

Account operations.

the order in which your letter presented them.

1. Your request for copies of the record of the

amounts of purchases and sales of Treasury bills and the

1/7/58

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prices bid or offered by each dealer for each security on

which the System Account solicited quotations on each day

of trading over the past three years would require an im

mense amount of work, especially since it would be neces

sary to accompany such a record with memoranda explaining

the background of the operations and the reasons for the

actions taken, if you were to obtain an understanding of

the situation reflected by the data. It would appear,

however, that your purpose might be served by having the

information (with the accompanying explanatory memoranda)

for selected dates, rather than for the entire three-year

period.

If this strikes you as practicable and you wish

to select a number of days for each of the three yearssay a dozen days a year--preceding December 31, 1956, we

would have the material prepared for you as promptly as

possible.

You now have the photostatic copies of the

sheets showing transactions, so that you would be in a

position to select days when the Account was active.

2.

Your second request refers to the tabulations

transmitted with my letter of November 12, 1957, showing

each transaction of the System Open Market Account with

each dealer in Government securities from the period of

the Treasury-Federal Reserve Accord in March 1951 to the

end of 1956.

You now ask for similar records of each

transaction of the System Account for the period from the

end of 1956 through June 30, 1957.

Each year, pursuant to the requirements of the last

paragraph of section 10 of the Federal Reserve Act, a record

of policy actions taken by the Board of Governors of the Fed

eral Reserve System and by the Federal Open Market Committee,

together with the reasons underlying those actions and the

votes taken in each instance, is made public in the Board's

Until that record is made

Annual Report to the Congress.

public in the Annual Report, which is published in the

spring of each year, the policy directives of the Federal

Open Market Committee are regarded as current and are

It is true that weekly

handled in the strictest confidence.

Federal Reserve Banks

the

of

condition

the

showing

statistics

degree indi

lesser

or

greater

a

to

that

and

published

are

viduals make justments on the basis of those reports as to

My letter of

the policy actions taken by the Committee.

September 10 stated that the Federal Open Market Committee

felt that it would not be proper to divulge information

regarding Committee policy decisions and operations for

the current calendar year. It continues to be the

judgment of the Committee that disclosure of its policy

decisions should come in the manner that has been followed

1/7/58

-9

for many years in carrying out the provisions of section 10

of the Federal Reserve Act, namely, in the Annual Report to

the Congress covering the year most recently ended. For this

reason, it believes that it would not be desirable to furnish

the information regarding operations of the System Account

pursuant to the policy directives issued during any part of

If, however,

the year in which the directives were issued.

you so request, we will undertake to prepare tabulations of

the transactions not only for the first half of 1957 but for

the entire calendar year, to be submitted at substantially

the time the Board's Annual Report is published.

You note that the names of foreign central banks

3.

were deleted from the tabulations transmitted with my letter

of November 12, and you ask why the names of such banks with

which the System Account has traded in the past should be

withheld from the House Banking and Currency Committee.

To be certain that the situation with respect to the

1700 odd pages of tabulations sent with my November 12 letter

is correctly understood, I wish to emphasize that there were

very few deletions from those sheets and that all of the

names appearing on those schedules were names of dealers in

In some instances,

United States Government securities.

However,

those dealers are also domestic commercial banks.

was a

names

retaining

and

the distinction between deleting

in

dealers

and

securities

in

distinction between investors

securities, and there was no intention of distinguishing

between foreign and domestic banks per se.

Transactions between the System Account and dealers are

in a different category from transactions between the System

Account and the Federal Reserve Bank of New York, acting on

behalf of and under instructions from its depositors. In

the first

place, many central banks and international insti

tutions maintain accounts with the Federal Reserve Bank of

New York. Such central bank accounts are operated by the

Federal Reserve Bank of New York on behalf of all of the

Reserve Banks. Transactions for these accounts have

traditionally been held in strict confidence for substan

tially the same reasons that, as a matter of policy, banks

in general hold in strict confidence transactions on behalf

of any of their depositors.

This confidential relationship

between bankers and depositors has been considered to be

especially necessary with respect to operations of foreign

central banks, whose deposits with the Federal Reserve Banks

largely represent monetary reserves of their countries.

Disclosure of such operations would be of interest to many

persons who follow political and economic developments in

1/7/58

-10

foreign countries, but such disclosure might well have

serious repercussions and imperil the confidence that

foreign countries place in the Reserve Banks.

Secondly, you state that you understand that "it is

no secret that the System Open Market Account trades with

foreign central banks, acting at times as agent for such

banks." Actually, this is not strictly correct, and the

relationship to which you refer is not between the System

Account and the foreign banks. The Federal Reserve Bank

of New York acts only upon instructions, specific or

standing, from its foreign depositors in handling their

accounts.

Orders to buy and sell securities are given by

the depositors to the Foreign Department of the New York

Reserve Bank, which in turn transmits them to the Securi

ties Department of that Bank for execution. Such orders

usually are executed by the Reserve Bank in the open mar

ket, but the foreign customers have been notified that

they may be executed with the System Account at the discre

tion of the Manager.

They are carried out with the System

Open Market Account only when the Manager of the Account

so directs for the purpose of coordinating the foreign

transactions with current open market operations that are

being executed pursuant to the directives of the Federal

The initiative in executing trans

Open Market Committee.

actions with the System Account rather than in the market

in no manner lies with the foreign correspondent.

L.

With respect to your request for data from the

daily reports of operations received from United States

Government securities dealers, these reports are furnished

by the dealers on a purely voluntary basis and in the

It would not be within the discretion

strictest confidence.

of the Federal Open Market Committee or the Federal Reserve

Bank of New York to disclose information in connection with

these reports.

5. You also request a tabulation of dealer borrowings

with a breakdown by types, sources of credit, terms, and

Such data are not available to the Management of the

rate.

System Account.

6. The answer to your next request is the same--we

have no data showing dealer financing of their own customers

to carry Government securities. By way of comment, I might

say that it seems highly doubtful that dealers do finance

their customer holdings to any significant extent although

there might be an occasional transaction of that kind. The

dealers have difficulties enough in financing their own

portfolios of Government securities without assuming added

burdens in financing customer holdings.

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7. Finally, you request information concerning

dealer tenders for Treasury bills in the weekly auctions.

In handling tenders in the bill auctions, each Federal

Reserve Bank acts as fiscal agent for the Treasury Depart

ment. A request for data relating to the tenders should,

therefore, be directed to the Treasury Department.

Mr.

Fulton, whose train had been delayed in reaching Washington,

entered the room at this point accompanied by Mr. Balles, Assistant Vice

President of the Federal Reserve Bank of Cleveland.

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

statement on the current economic situation, as more fully reviewed

in a staff memorandum dated January 3, 1958, on Recent Economic and

Financial Developments in the United States and Abroad.

A copy of the

staff memorandum, which had been distributed before this meeting, has

been placed in

the files of the Committee.

Domestically, economic activity continues to be charac

terized by general cyclical recession, comparable in pace of

output contraction to that experienced in the 1948-49 and

1953-54 recessions.

More is known now about the over-all decline in GNP after

Both the dollar and physical volume of

the third quarter.

total product were off about $6 billion, annual rate. Most of

quarter's decline was associated with inventory

the fourth

liquidation, since final purchases of product receded only

moderately.

With inventory liquidation a dominant feature of the past

quarter, declining sales of manufacturing industry were to be

November sales were down 2-1/2 per cent from October,

expected.

with declines widespread among both durable and nondurable

lines. Sales declines outpaced inventory reduction; hence,

stock-sales ratios rose significantly further. New orders on

durable goods manufacturers in November were about the same

as in the preceding two months, but they were well below the

volume of shipments, so that order backlogs were cut back

further.

Industrial production for December, on a seasonally ad

justed basis, is given a preliminary estimate of 137. Declines

1/7/58

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were again widespread, with automobile assemblies this month

working on the downside.

The automobile market generally has been disappointing

to producers, with new car sales off significantly and used

car sales off moderately from a year ago. Recently, used

car prices have slipped back some. Repossessions on instal

ment sales have reached historically high ground and seem

still

to be edging upward.

Other sales at retail, after a slow start in early Decem

ber, apparently picked up sharply in the latter half of the

month. Sales at department stores, seasonally adjusted,

reached a new high, about 1-1/2 per cent above December of

last year and 4 per cent ahead of November.

Construction activity in December continued at about

record levels, with increases in residential construction

again offsetting declines in industrial construction. While

the price situation for newly constructed houses appears to

be fairly firm, recent field reports indicate that prices on

used houses continue to drift downward and also that selling

time on new and used houses has slowed perceptibly. Vacancy

rates, however, continue low and shortages of rental housing

are reported. Although the secondary mortgage market appears

to have bottomed out, no general loosening in the availability

of residential construction or mortgage money has apparently

set in as yet.

Unemployment at mid-December is reported at 3.4 million,

up 200,000 from mid-November.

A continuing high level of new claims filed for unemploy

ment benefits indicates further substantial unemployment rise

since midmonth. For the third week of December, over 550,000

new claims were filed, the highest December figure for the

postwar period. Toward the month end, some 2 million workers,

or 60 per cent more than last year, were receiving unemployment

compensation benefits.

Wholesale commodity markets in December were generally

stable, the average holding about the level prevailing since

midyear. Consumer prices for December are expected to show

some further rise, reflecting further advances in prices of

services and recent increases in retail meat prices.

Available data on international trade indicate that

Whether the decline

further decline occurred in November.

in Western European industrial activity reported for October

Information has only

continued in November is not yet clear.

become available for Germany and for that country activity

was up in both October and November.

1/7/58

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With regard to the economic outlook, an increasing

number of observers seem to be taking the sanguine view

that recession will be mild and its duration not much

longer than midyear. This optimistic viewpoint places

great weight on the following factors; (a) adjustments

in output, inventory, material prices, and manpower

utilization that have already taken place; (b) the re

vived strength of residential construction; (c) the con

tinuing growth of State and local government expenditure;

(d) the prospect for higher armament expenditures; (e) the

strength of consumer demand in the face of declining per

sonal income; and (f) the resistance of European industrial

activity to recessionary tendencies in world trade and in

the U. S. economy. While this view of the outlook may

prove to be a correct one, it would seem premature to

accept it now. More testing of price levels, inventory

holdings, excess margins of industrial capacity, consumption

and housing demands, and international trends would seem to

be called for, as well as a more definite consensus on a

revised national security program, before too firm a commit

ment to any future pattern of economic development is made.

Chairman Martin next called upon Mr. Thomas who made a statement

on recent financial developments substantially as follows:

The picture of the economic situation portrayed by Mr.

Young shows that a lessening of restraints on credit has

been appropriate. In the financial area the response to

the reduction in Federal Reserve Bank discount rates has

been remarkable. It has been followed by two striking fi

nancial developments. The first is the sharp decline in

interest rates and the second is a substantial increase in

bank credit. The two are to some extent interrelated, but

in a sense are conflicting. Both could hardly happen con

temporaneously unless there were an easing of monetary

policy. Hence, they can be largely attributed to the policy

change and are the types of response that would tend to make

the policy effective in "cushioning adjustments and mitigating

recessionary tendencies in the economy."

The decline in interest rates, which is probably the

sharpest on record for so short a period, has been widespread

in the open markets for money, i.e.,in yields on securities

and open market paper, but has not yet been reflected in what

may be called the administered rates--bank loans to customers

1/7/58

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and mortgages. Yields on outstanding long-term bonds are

back to approximately the lowest levels of last February

but still

generally above levels prevailing before mid

1956.

Thus it is difficult to say that rates are low by

any postwar standards, though they were not high relative

to the 1920s.

The sharpest declines have occurred in yields of those

issues that had previously risen most--particularly medium

term U. S. Treasury securities and State and local Government

issues. There was some hesitation in the declining tendency

during the mid-December period of heavy liquidity needs, but

only bill rates showed any increase and that was short-lived.

These changes in prices and yields of securities have

been due more largely to anticipations rather than to any

actual change in basic demand and supply factors. In this

sense they may be speculative.

To some extent savings held

idle awaiting investment have been put to use in recognition

of the view that interest yields had reached a peak and would

fall. To a large degree the buying of securities has been

based on bank credit.

Since mid-November city banks have

increased their holdings of Government securities by about

1.5 billion, of other securities by $300 million, and their

loans on securities by nearly $700 million. Much of the

increase in security loans has been to dealers in Government

securities, which have also borrowed from other sources, in

cluding $600 million in repurchase contracts at the Federal

Reserve Bank. Outright purchases in the System Account also

increased by over $l00 million.

As a result of the increases in holdings of securities

and in loans on securities, accompanied by a substantial

seasonal rise in commercial loans, total loans and invest

ments of banks in leading cities increased by over $2.9 bil

lion in the five weeks ending December 31, using partial

This is twice the increase

figures for the latest week.

shown in the corresponding period of each of the two pre

vious years. While much of the increase may be attributed

to seasonal factors, the marked turnaround from the contra

seasonal declines shown in October and November is striking.

Much of it is no doubt to be attributed to a changed climate

of viewpoint. A large portion of the increase in bank hold

ings of securities and also in dealer positions has been in

Treasury bills, which have helped to meet the seasonal

liquidity demands, while the growth in other issues, which

may be considered as speculative, has been much less though

substantial.

Issues of new securities continued in fairly substantial

volume during December, although the calendar was light during

1/7/58

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the holiday period. A heavy volume of issues is scheduled

for January.

Many of the funds supplied by the increase in bank credit

have gone to build up Treasury balances and it appears likely

that the private money supply failed to show the usual seasonal

growth in December. It is difficult, however, to draw definite

conclusions as to money supply figures around the end of the

year because of the wide variations that can result from dif

ferences in reporting days. Figures for the four weeks ending

December 25, for example, show a much smaller increase in de

mand deposits adjusted at city banks than for the period end

ing December 26 last year, but preliminary figures for the

five weeks ending January 1 show a much larger increase than

in last year's period ending January 2. Deposits are generally

drawn down before Christmas, increase sharply in the subsequent

week, and are drawn down again in the early days of January.

It seems most likely that the money supply will have shown

a net decline for the year 1957. Yet the build-up of Treasury

deposits in December, which is not usual for that month, may

supply the basis for a shift of funds to other deposits in the

next few weeks when the Treasury balance will be sharply re

Some of the funds, however, may be used to reduce loans

duced.

at banks.

If banks have adequate reserves, they will probably

endeavor to maintain the total of their loans and investments.

In brief, recent policies have established the basis for main

taining the privately-owned money supply, even though the re

sult has not yet been attained.

In the first half of January the total cash balance of

the Treasury will probably be reduced from about $3.6 billion

to $1.5 billion, notwithstanding continued new borrowing of

$100 million a week on Treasury bills and the obtaining of

nearly $200 million of cash from the new FNMA issue. Add.

tional borrowing and perhaps the use of the Treasury's free

gold will be needed around the middle of Februaryto keep the

balance from falling much below the $1.5 billion level. Be

cause of debt ceiling limitations, not much borrowing will

be possible until the middle of February, then about $1 bil

lion of new borrowing may be sufficient to hold the line until

the end of March, although at times in the early part of

February and again in March occasional borrowing on special

certificates from the Federal Reserve may be needed. The

amount of such special borrowing could be reduced by the use

of free gold or the willingness of the Treasury to let its

balance decline further.

In the six weeks ending January 1, the System supplied

over $1 billion of reserves through open market operations,

-16including $600 million of repurchase contracts. Reserve

needs due to the seasonal currency expansion were fully

as large as, if not a little in excess of, seasonal esti

mates, and the increase in required reserves was larger

than had been projected. Net borrowed reserves were reduced

during the course of December to negligible amounts in the

last two weeks. Member bank borrowings remained close to

$700 million, while excess reserves increased to that level.

It may be said that the System supplied abundant reserves

and that they were put to use through credit expansion.

Estimates of member bank needs for the next few weeks

based on an assumption of the changes in Treasury balances

that have been indicated and on normal seasonal changes in

money in circulation, private deposits, and other factors,

show the abundant availability of reserves usual for the

early weeks of the year.

Some of these will be absorbed by maturities of out

standing repurchase contracts of about $400 million this

week and next.

Beginning in the third week of January banks

would have free reserves of $100 million or more, unless

absorbed by reductions in System holdings of bills through

sales or runoffs at maturity.

Free reserves would rise to well over $700 million in

February and March, if the Treasury borrows from the System

on special certificates in the amounts indicated or permits

its balance at the Reserve Banks to decline below $500 million.

Bills held in the System account now amount to about $900

million. Sales of $100 million will be needed this month to

reduce free reserves to around zero. Additional sales would

be required to reestablish net borrowed reserves and particu

larly to offset any special borrowing by the Treasury in

February and March. It appears that sales of half a billion

and more at times can be made without exerting restraint on

the credit situation.

If the recent attempts by banks to maintain credit

volumes should come to an end and bank credit should decline

more than seasonally, then excess reserves should be per

mitted to accumulate. The Treasury bill rate, and other

money rates, would decline further. In that event, in

order to encourage banks to make any temporary reserve ad

justments through borrowing rather than through credit

liquidation, a further reduction in the discount rate would

be appropriate.

Chairman Martin noted that we were approaching the time of year

when the Committee would be making the annual review of its several

1/7/58

-17

continuing operating policies and techniques.

He felt it would be

appropriate to report this morning on the progress that had been

made by the Special Committee appointed to study Mr. Mills' sug

gestion at the meeting on January 8, 1957, that the increment in

the System Open Market Account during the year 1956 be converted

into longer-term securities.

As recorded in

the minutes of the

meeting on March 5, 1957, the Special Committee (Messrs.

Hayes,

Martin,

Allen, Balderston, Erickson, and Szymczak) had been authorized

to broaden its

study to include a review of all of the operating pro

cedures that had been presented in

the report of the Ad Hoc Subcom

mittee as discussed at the meeting on March 4 and 5, 1953, with the

exception of the matters relating to the housekeeping aspects of

that report.

In so far as the Special Committee was concerned,

Chair

man Martin said that thus far it

had made very little

was hoped, however,

met again on January 28, 1958, it

that when it

would come to grips with the problems it

event,

it

progress.

had been studying.

It

In any

was the Chairman's view that there should be a complete

discussion of the problems the Special Committee had been studying

at the time of the meeting in March when the new members of the

Federal Open Market Committee elected by the Federal Reserve Banks

for the year beginning March 1, 1958,

assumed their duties.

anticipation of that, Chairman Martin suggested that it

In

now be under

stood that a meeting of the Federal Open Market Committee would be

1/7/58

-18

held on Tuesday,

January 28, 1958, that the meeting following that

would be scheduled for Tuesday,

February 11,

1958, and that the

meeting at which the members of the Committee would be changed be

scheduled for Tuesday,

March 4,

1958, with the understanding that

the afternoon of that day and as much of Wednesday,

March 5, 1958,

as might be necessary be devoted to meetings of the full Committee

for the purpose of discussing the matters contained in the Ad Hoc

Subcommittee report and the current operating procedures and techniques

for the System Open Market Account.

Mr.

Leedy said that if

a Federal Open Market Committee meeting

was held on February 11, a meeting of the Conference of Presidents

would be held on February 10, 1958.

Chairman Martin also referred to the report that had been

received by the Federal Reserve Bank of New York from the New York

Clearing House Association (the so-called Temple Report) dated

October 22, 1957,

copies of which had been distributed to members

of the Federal Open Market Committee by Mr.

November 15,

1957.

Hayes under date of

This report, he noted, was an indirect outgrowth

of the recommendations contained in

the Ad Hoc Subcommittee's report,

and he suggested that Messrs. Riefler,

Thomas,

Rouse,

and Roelse be

requested to review the report of the New York Clearing House Associa

tion with a view to having a preliminary discussion of its contents

at the meeting of the Federal Open Market Committee to be held on

-19

1/7/58

Tuesday, January 28, 1958.

this with Mr.

The Chairman noted that in

discussing

Hayes, the latter had suggested the possibility of

including a representative of the Treasury Department on this staff

committee but that he (Chairman Martin),

after discussing the matter

with Secretary of the Treasury Anderson, felt that it

would be wiser

for the Open Market Committee to come to grips with the problem dis

cussed in the Clearing House report before bringing in a Treasury

representative.

After the Open Market Committee had reached some

tentative basis for its

views as a Committee,

taken up with the Treasury and after that, if

the report might be

it

seemed desirable,

there could also be meetings with the dealers in Government securi

ties at which representatives of both the Treasury and the Federal

Reserve would be present.

Mr. Hayes said that his reason for suggesting that the Treasury

be brought into the analysis of the Temple Report at this stage was

that he understood this report dealt largely with the subject of

financing of dealers in

banks.

United States Government securities by the

He had not thought of the Temple Report as having grown out

of the Ad Hoc Subcommittee report but understood that it

was the

result of a request by former Secretary of the Treasury Humphrey,

made on the occasion of a meeting in New York at which Mr.

Humphrey

had indicated that he did not think the banks were doing their part

in

financing dealers.

Mr.

Hayes said he did not feel strongly on

-20

1/7/58

the question, but he had been inclined to think it would be desirable

to have Treasury representatives participate in the discussion of the

Temple Report.

Chairman Martin said that, to clarify the point as to the

origin of the Temple Report, Secretary Humphrey's suggestion at a

meeting of the Clearing House Association in New York was a direct

result of a conversation that he (Chairman Martin) had had with the

Secretary on the report of the Ad Hoc Subcommittee.

this point with Mr. Humphrey recently.

talked with Mr.

Mr.

He had cleared

Humphrey subsequently

Sproul and the suggestion that resulted in the forma

tion of the Temple Committee later was made at a Clearing House dinner

which the Secretary attended.

Mr. Hayes said that he had not been aware that the background

included the Ad Hoc Subcommittee report; in any event, he said he

agreed it

would be desirable for the entire Open Market Committee to

go into the details of the Temple Report.

Returning to the Chairman's

earlier reference to the January 28 meeting of the Special Committee,

Mr. Hayes said there was some question whether the full report by the

staff committee that had been studying the facts of the experience

with present operating procedures would be available by January 28,

although Mr.

report.

Roelse was trying to expedite the completion of that

(This staff committee, which was appointed at the meeting

of the Federal Open Market Committee on May 23, 1956,

pursuant to a

suggestion made by Mr. Sproul at the meeting on May 9, 1956, consisted

1/7/58

-21

of Mr. Harold V. Roelse, Chairman; Mr. Tilford C. Gaines, Secretary

Mr.

J. Dewey Daane; Mr. Robert Holland; and Mr. Donald C. Miller,

with Mr. Riefler as Secretary of the Federal Open Market Committee

expected, ex officio, to keep in touch with the committee's work.)

Chairman Martin said that, while this was a point to be con

sidered, his suggestion was that the whole subject be moved out from

the Special Committee that had been considering it to the full Open

Market Committee by the time of the meeting in March when the new

members would assume their duties.

He felt that the report of the

staff committee on experiences with operating procedures could be

sufficiently summarized by January 28 to permit at least a preliminary

discussion of the subject at that time.

After further brief discussion, it was understood that the

program suggested by Chairman Martin would be followed and that at

the meeting of the Federal Open Market Committee on January 28 there

would be a preliminary discussion of the report submitted by the New

York Clearing House Association, while at the time of the meeting to

be held on March 4, 1958, the members of the Committee and the Presi

dents of the Federal Reserve Banks who were not members of the Com

mittee would plan to be in Washington on both March 4 and March 5

in order to permit a full discussion of the matters that had been

under study by the Special Committee appointed pursuant to Mr. Mills'

suggestion at the meeting on January 8,

1957.

1/7/58

-22Chairman Martin then turned to the discussion of the cur

rent economic situation and credit policy, and Mr. Hayes made a

statement of his views substantially as follows:

It is now clear that the current recession is at

tributable largely to a decline in business plant and

equipment expenditures, aggravated by an inventory cycle.

What is not clear, however, is whether these influences

are likely to spread to consumer spending and thus to

produce a cumulative recession. There is uncertainty as

to the probable speed of inventory adjustment, particularly

by manufacturers. There is also much uncertainty as to the

amount and timing of the expected increase in defense

spending--although it does not seem probable that this will

be a significant factor for several months at least. We

should recognize the wide range of possible ways in which

the recession may develop, and we would doubtless be

prudent to assume that the next upturn may be a fairly

long way off--to be preceded either by a continuing gradual

decline or perhaps by a sideways movement after the current

decline has run its course.

I shall not try to enumerate the various statistical

developments on which these conclusions are based. Most of

the recent data have been discouraging, but consumer spend

ing in the Christmas season was well sustained and showed a

less adverse reaction of consumers to bad news than might

have been feared. Apparently one of the so-called "built

in stabilizers"--the tendency of transfer payments to off

set much of the effect of greater unemployment and shorter

hours--has been a significant sustaining influence.

Price developments in the last month or two have been

disappointing, in that the upward trend has reasserted it

self after several months of relative stability and in

spite of the general slackening in business activity.

Bank credit has expanded more rapidly in the last three

or four weeks than a year ago, thus reversing, at least

temporarily, the typical pattern of recent months. For one

thing, the growth in business loans was almost as large as

last year--possibly because during periods of seasonal

pressure, such as tax dates and the year-end, the present

low level of corporate liquidity forces a relatively heavy

borrowing program, whereas during other recent periods in

which corporations have had no unusual disbursements to

make, the lower level of business activity and prospects

than a year ago has been controlling. There is also a

1/7/58

-23

possibility that expectations of a further decline in long

term rates may have induced some corporations to shift back

to bank borrowing temporarily in the hope of obtaining still

lower rates later on, and that this shift may have been

facilitated by some easing in bank lending policies. Another

factor making for additional bank loans has been the very

high level of dealer inventories of Government securities,

with greater recourse to banks, especially in New York, and

less to non-banking corporations for financing the additions

to these inventories. Bank holdings of Government securities

have recently increased much more sharply than last year.

Nevertheless, the total money supply at the year-end was

probably about 1% less than at the end of 1956.

We are again approaching a time when our policies will

have to take account of the Treasury's financing activities.

Apart from the FNMA issue to be offered this week, I have in

mind the very large refunding to be announced probably a few

days after our next meeting--with the possibility of an

announcement of a new cash financing. Our forecasts of

Treasury receipts and expenditures make it seem more than

ever essential that the debt limit be raised by several bil

lion dollars at the earliest opportunity.

As for monetary policy, the System is faced with diffi

cult decisions as to how fast it should push the easing of

credit and as to the most appropriate sequence of use of the

various instruments of policy.

Clearly the present recession

calls for a general policy directed toward assuring an ade

quate volume of credit for all potential borrowers with

economically sound credit needs.

This policy would be con

sistent with the evidence that business recession exists and

that it may become more severe during 1958.

To the extent

that the quest for liquidity by banks and others affects the

supply of and demand for credit, it might be necessary for

the System to lean somewhat more heavily on the side of

easier money than would otherwise be the case to achieve any

given effect on the economy. On the other hand, we should

stop short of injecting so much liquidity into the economy

that it would be hard to recapture restraint if inflation

should emerge again as the major problem--and we should

also avoid creating a sloppy money market or a needlessly

low structure of interest rates that would have adverse

longer-run effects on savings and on investment returns.

I think that our policy should be directed toward

further relaxation of restraint on bank reserves and the

money market and that open market operations should be

It might be appropriate to think of

used to this end.

zero net borrowed reserves as an initial benchmark, with

1/7/58

free reserves of perhaps 100 or 200 million later in the

month, especially if our actions to absorb excess reserves

result in tight conditions in the money market. We should,

I believe, from this time forward avoid any weekly averages

showing net borrowed reserves, although daily deviations in

that direction need not be avoided. As long as the weekly

averages show net borrowed reserves, our policy can be

interpreted as one of still maintaining a restrictive credit

policy in some degree. This could be accomplished simply by

failing to push outright bill sales as aggressively later in

January as would be necessary to fully offset market factors

making for greater reserve availability. Present projections

suggest that after the run-off of repurchase agreements modest

outright sales should suffice.

As for the discount rate, I recognize that if any change

is to be made within the next few weeks, it should be done

fairly promptly to avoid confusion in connection with the ex

pected Treasury financing program. However, I feel strongly

that the recent reduction in the discount rate has already

led to a downward adjustment of market rates that, if any

thing, has proceeded too rapidly, and I can see no benefit

from our taking aggressive action at this juncture to drive

them down further. I think there is no cause for concern if

the Treasury bill rate should stay well below the discount

rate, especially during January when seasonal factors are

acting as a strong depressant of the bill rate. In my

judgment it would be best to leave the discount rate un

changed at this time. If economic conditions should continue

to worsen and should later justify a lower rate, a reduction

could be effected in February or March after the Treasury is

out of the market.

We have had occasion recently to review in the New York

Bank the question whether margin requirements under Regula

tions T and U might appropriately be reduced. It is our

opinion that the present 70% requirement is abnormally high

and that a prompt reduction to 50% would be justified both

in terms of recent stock market performance and the use of

stock market credit, and in terms of general credit policy.

I think there is wide acceptance of the view that re

serve requirements are unduly high and that some reduction

would be in order at such time as it would be consistent

with our general monetary policy. A suitable opportunity

may present itself after the return flow of funds to the

banking system early in the year has run its course. I

would suggest that the Board of Governors give consideration

at that time--assuming that recessionary tendencies are then

-25.

1/7/58

still dominant--to a reduction in reserve requirements,

including some reduction in the present geographical dif

ferences in requirements, especially between central re

serve city and reserve city banks. While some such move

would seem desirable per se, I would also hope that progress

might soon be made in reaching general agreement on a new

and more equitable over-all system of reserve requirements.

Mr. Johns said there was little for him to report from the

Eighth District that differed materially from the national picture ex

cept for the deterioration in cash farm income in certain portions of

the district, particularly parts of Missouri and Arkansas.

He described

this deterioration, which had resulted largely from a decline in income

from the cotton crop, as of intense local interest and as having little

national significance, though it does have some.

It had affected the

local banks, which were not receiving pay-offs of last year's loans.

With respect to Committee policy, Mr. Johns said that he was

in substantial agreement with the views expressed by Mr. Hayes.

While

he continued to be reluctant to make policy recommendations in terms

of net borrowed reserves, Mr. Johns said that these figures did have

some value and that a target such as Mr. Hayes had suggested would

seem appropriate to him.

More importantly, however, he would be

reluctant to see interest rates react from their downward trend and

move upward, and he would recommend that open market operations be

conducted so as to prevent that happening.

He would not wish to give

any impression that policy was tightening even a little, but he was

not now prepared to say that policy should be significantly easier,

although he might have a different view at the next meeting of the

-26

1/7/58

Committee.

For the present, he would like to hold about where we

are and if this meant zero or some positive free reserves this would

be satisfactory.

He would not wish to have interest rates move up.

Mr. Bryan said that since the preceding meeting of the Com

mittee there had been a further rise in insured unemployment in the

Sixth District.

The agricultural situation seemed to be worsening

with the arrival of new figures showing cash receipts from farm

marketings down 34 per cent as against the same time a year ago.

Deposits at agricultural banks in rural areas in

the district cur

rently were well below last year and the year to year comparisons

were becoming increasingly unfavorable.

Agricultural banks in

Sixth District would have a heavy farm loan carryover,

the

Mr. Bryan

said, with further increases in loans collateralled by real estate.

District production, trade, and financial developments, however, do

not suggest a rapid acceleration of the present recessionary movement

in the nonfarm economy.

With respect to national policy, Mr.

Bryan said that the ab

sence of clear, further economic deterioration would hardly appear

to justify any policy of "pulling all the stops" at this time.

Ac

cordingly, he would not favor any further downward revision of the

discount rate; and, although he believed the System should be alert

to every opportunity to reduce reserve requirements,

he could not

urge such a policy in the light of the seasonal factors now operating.

1/7/58

-27-

After commenting that no further change in the Committee's directive

seemed needed at this time, Mr.

Bryan continued his statement sub

stantially as follows:

At the same time, I believe that the reserve position

of the banking system needs to be eased through Open Market

policy. We end the year with total reserves actually less

than or negligibly different from what they were at the

same time last year.

The meaning of this situation is that

the American banking system is less or at best no more able

to support a deteriorated economy than it was at the end of

1957, when we were faced with the boom. If allowance be

made, as I believe it must be made, for a growth factor in

the economy, then the reserve situation is in my judgment

quite unsatisfactory.

Accordingly, it would seem to me to be wise policy not

to attempt an entire offset of seasonal factors tending to

ease bank reserve positions. On the contrary, I would like

to see the Open Market instrument operated in such fashion

as would give us positive total-reserve comparisons when

measured against year-ago dates. Such a policy would mean

that we would not be primarily concerned with security

market yields--certainly not be frightened by "sloppy money"and pay little

or no attention to free reserves.

I would like

to see the situation allowed naturally to ease itself, even

if, just for a figure, the bill rate drifted to 2.50 or below.

At such a figure, I would be inclined to make sales and to

review, in another few weeks, what our total reserve position

on the year-to-year figures may prove to be in the light of

our actions.

In advocating such an objective and method of action, I

believe that it has certain advantages in avoiding dangers:

It brings us back to a basis of action compatible

(a)

with our Continuing Statements of Operating Policy, which

must shortly be reviewed again;

(b) It avoids what I consider the grave danger that

an increase in free reserves may occur, not because the credit

situation has bettered but because the economic situation has

worsened;

(c) It avoids the hazard of sales based on estimated

magnitudes at a time when, aside from our usual difficulties

of estimation, the meaning and extent of market factors

seasonally affecting bank reserves are both especially

elusive;

-28(d) It will avoid what I regard as the greatest of

all dangers, namely, that we will underestimate the effects

of the present illiquid position of the American banking

system and thus cause us ourselves to be satisfied with a

policy inadequate to the task of making the banking system

a dynamic factor in economic recovery.

In closing this statement I would like to say that our

policy in the month of December seems to me to have been

correct in trending the free reserve position downward

towards zero. But I note that it has been inadequate in

making any measurable impact on member bank borrowing, only

a moderate impact on bank liquidity as measured by excess

reserves, and I am disturbed by the fact that most of our

policy in December has been effected by repurchase agreements.

I doubt that repurchase agreements, while a useful in

strument, have any important function as an expression of

monetary policy in combatting economic recession. At the

moment, about the only beneficial effect that I can see in

RP's is in permitting dealers to carry inventories, and it

is arguable that that permission, when carried to the extent

that we have used it, actually conceals from us the tightness

of the monetary situation and entices us into thinking that

we have done more to ease than we actually have.

Mr. Williams said that a single sentence summary of his report

was that business activity continued to slow down.

summary,

Contrary to this

department store sales during the four weeks of December were

five per cent higher than a year earlier, and for the first eleven

months of the year the total showed an increase of one per cent.

Factory employment continued a downward trend.

Unemployment in

the

State of Pennsylvania had been rising reflecting in part a seasonal

trend.

spring.

Employers were not expecting this trend to change before early

Automobile registrations were running below last year.

banking and finance,

earning assets and deposits rose in

In

the three

weeks ending December 25 and business loans were up in this period

with most of the increase accounted for by sales finance companies

-29-

1/7/58

and utilities.

Borrowings from the Reserve Bank were about the same

as a year ago.

The continuing slowdown in business activity indicated to Mr.

Williams that some further easing of open market policy would be de-

sirable.

He would view as an appropriate target for policy during the

next three weeks a program that would keep the long-term bill rate at

about 2.8 per cent with member bank borrowings in the $400-$500 million

area and net free reserves perhaps around $100 million. Any tightening,

even temporarily, should be avoided.

There should be no change in the

discount rate at this time.

Mr. Fulton said that there was a pronounced feeling of disappointment in the heavy industries of the Cleveland District at this

time regarding orders and production.

at about

The steel industry was operating

50 per cent of capacity, which was uneconomic.

Orders for pipe

which had been sold out into 1960 had practically disappeared through

cancellations.

Oil companies were not buying because of restricted

production and they were also waiting for cheaper money.

Warehouse in-

ventories of steel were high at present, whereas users of steel generally

had low inventories.

No upturn, either in the steel industry or in the

machine tool industry, was looked for in the immediate future, and it

probably would be the fourth quarter of 1958 before such upturn developed.

Unemployment was noticeably higher, but department store

sales during the Christmas season were very good.

Loan demand was

holding up although banks now anticipate a gradual diminution in their

1/7/58

-30-

loan totals during the next several months.

Collections were being

well maintained except in the case of wholesale loans to automobile

dealers.

There was talk of real estate money becoming more avail-

able, but portfolios were quite full.

Contracts on new automobiles

for thirty-six months or longer were a substantially smaller per-

centage of the total than had been the case earlier.

Pessimism seemed to be outrunning business at this time. Mr.

Fulton said, the same as optimism earlier had outrun the statistics.

His conclusions as to policy were that the discount rate should not

be changed,

that the Open Market Committee should maintain as near

zero free reserves as possible,

of ease.

and that it should err on the side

Some positive free reserves would be appropriate.

Mr.

Fulton would also like to see the bill rate a little under the discount rate.

Mr.

Shepardson said that Mr. Fulton had covered a good deal

of his opinion.

Certainly there were many indications of some further

down drift in business.

tively high level.

On the other hand, we were still

at a rela-

It could not be expected that year after year we

would continue to make higher records, Mr. Shepardson said, and he

was not disturbed at some little down drift.

There was a good deal

of uncertainty as to the Government's program and other spending

programs and, with that uncertainty, it would be unwise to make other

moves that would indicate a further easing of credit.

Noting that Mr.

Hayes had made a statement regarding the effects of changes in

1/7/58

-31-

interest rates on future savings,

Mr.

Shepardson said that he would

not wish to see interest rates drop to a point that would retard

improvement in the volume of savings.

In view of the situation as he observed it

and at the risk

of seeming to be a "stick-in-the-mud," Mr. Shepardson said that he

would not wish to see the Committee ease the situation materially

further.

He thought the target that had been mentioned of free re-

serves around the zero level should be adequate.

been a material drop.

There had already

This would mean, Mr. Shepardson said, that he

would not favor a change in discount rate at this time or any material

further increase in free reserves.

The zero target would seem appro-

priate.

Mr. Robertson then made a statement substantially as follows:

Since our last meeting, when I cautioned the Committee

against easing too fast--believing

that there exists a

danger of exaggerating adjustments at a high level of economic activity into a major recession--we have seen a continuation of downward movements in some areas. The index

of industrial production has moved down two points to 137,

gross national product dropped by a $6 billion annual rate

figure below the third quarter level (though in fairness,

one must point out, as did the staff in its memorandum to

the Open Market Committee, that this drop from $439 billion

to $433 billion is largely attributable to a shift from a

moderate rate of inventory accumulation in the two preceding

quarters to a modest liquidation (the word "modest" is my

own), and unemployment has increased.

At the same time we have witnessed increases (1) of

department store sales in December (to a new high), (2) of

consumer prices (.45%), (3) in bank credit (exceeding that

of December last year), (4) in residential construction

(close to the level of late '56), (5) in consumer installment

credit, (6) in rents, and (7) in outlays for construction.

1/7/58

-32-

In addition, both demand deposits and time deposits in-

creased in commercial banks during the year--e.g., time

deposits increased $5.5 billion in '57 as compared with

$2.2 billion in '56.

This does not add up to an entirely one-sided picture,

but rather one of adjustments with recessionary tendencies.

None of us wants a recession, let alone a depression-not even to purge us of our past sins of inflation. No one

wants to see people unemployed. We should cushion economic

adjustments and mitigate recessionary tendencies in the

economy in order to avoid undue unemployment, among other

things.

But we should do so with an eye to the future--a

future which, in my opinion, will present for us inflationary

problems of a magnitude greater than those of the last decade.

Any action we take should be so contrived as to preclude

(if possible) (1) the feeling on the part of industry that we

will provide all the money necessary to enable it to pass on

to the consumer the amount of additional costs resulting from

wage negotiations (as has been the case in the past), and (2)

a feeling on the part of the people as a whole that we (the

Federal Reserve) are so fearful of a recession that we will

panic at the first

sight of one and yet go to any length to

put a floor under each succeeding inflationary rise, irrespective of the cause. No one will admit that that is what

we are doing or what we have done in the past. Certainly we

did not have that intention.

But we should be aware and try

to avoid that result.

Put another way, in dealing with a business recession

of questionable magnitude and duration, we should not take

our eyes completely off the long-term problem of inflation.

We must remember that today there are in the economy many

built-in stabilizers which will tend to mitigate the severity

For example, there

and consequences of economic slide-offs.

was a time when unemployment even at present levels would

have meant much more economically than it does today; witness

the fact that two million of the unemployed are receiving

unemployment benefits in dollars.

In walking the tight rope between inflation and depression the monetary authority must not have too strict a

criterion of success. A very few months ago we were "fighting inflation." If there has been some pause in the necessity

for the fight, possibly we should feel gratified rather than

frantically taking steps to bring back the conditions we were

so recently fighting.

This Committee needs to guard against being unduly influenced by statements of economists in the public press.

1/7/58

-33-

These people feel impelled to say something whether they have

anything to say at all and are subject to mob hysteria. They

are particularly dangerous at this time of year when they feel

especially impelled to say something about the forthcoming

calendar year. It may be important to keep our eyes on the

current facts rather than on forecasts which have a very poor

historical record.

If rising prices be looked upon as an indicator of excessive total demand and falling prices as an indicator of

inadequate demand, we see as yet no indication of a need for

change in monetary policy. Neither wholesale prices as a whole

nor consumer prices have declined.

In the light of the foregoing, plus my personal belief

that the present recession is not nearly as serious as many

economists and many writers portray it, and that the economy

will turn around more rapidly than many seem to think, my

counsel would be to maintain an even keel position, neither

to increase nor to diminish the degree of tightness or ease

which is presently being maintained with respect to bank

reserves.

I am not urging that we take a backward step--one can

never undo what has been done--but merely that we do not move

further in the direction of ease until and unless we are more

certain than I am that the increased availability of money

resulting therefrom will be used for the positive purpose of

cushioning recessionary tendencies rather than merely for the

purpose of facilitating speculation in government bonds, the

price of which has been drastically affected by our previous

actions.

Mr. Mills said that in his opinion the admirable exposition that

Mr. Thomas had given of the movement of reserves, the level of Federal

Reserve Bank discounts,

and the changes in the composition of commercial

bank assets could be taken as a proper guide for near-run System policy.

In that connection,

he pointed out that negative free reserves had been

reduced from an average of $464 million last September to where there

were positive free reserves at present.

This was concrete evidence that

the Federal Reserve System had made credit available in adequate quantities for the economy's needs and had also developed a supporting climate

1/7/58

-34-

to the November reduction in the discount rate.

It could be important in policy formulation, Mr. Mills suggested,

to bear in mind the System's experience that there is a very

definite lag from the time reserves are made more freely available

until the time that their effects begin to work through the structure

of commercial bank lending and investment activities and on through

the general economy.

On that thesis,

and emphasizing that the month

of December always produced marked temporary fluctuations in the de-

mand for bank credit that cloud the credit picture, the System's

earlier actions might not be reflected fully before probably the

latter part of this month.

It could then become apparent that the

effect of the System's previous actions had produced a greater degree

of credit ease and maneuverability for the comercial banking system

than the actual reserve figures before us might themselves indicate.

Mr.

Mills cited the over-all willingness

to retain U.

of commercial banks

S. Government securities in the face of a rather high

level of borrowings at the Federal Reserve Banks as a development

that gave promise of what should be the ultimately sustaining effects

of the System's actions on the money supply.

run off rather rapidly in January, it

If bank loans should

would then be in order to

supply reserves so as to encourage commercial banks to expand their

investments in U. S. Government securities and hence to nourish the

money supply.

In accordance with his reasoning, Mr. Mills felt that if

free reserves were held at around the zero level, they would be

1/7/58

-35-

adequate to maintain the money supply and to permit reasonable

freedom in commercial bank loan and investment activities.

On

that basis, he also thought that the interaction of the supply

of reserves on interest rates might positively confirm an interest

rate structure by the end of the month that had not been colored

by the speculative factors that have influenced interest rate

movements in recent weeks.

If it was then reasonable to believe

that the general interest rate structure had stabilized at a level

below the present 3 per cent discount rate, a further quarter per

cent reduction in the discount rate might be considered.

Mr. Leach said that the Fifth District economy continued in

a recessionary movement.

Production of textiles was curtailed in

December, with shutdowns at Christmas of as much as a week. Prices

in the hosiery industry continued on the weak side, and it was apparent that further elimination of production facilities must occur

before the industry would be on a solid footing.

Bituminous coal

production in the district for the four weeks ended mid-December was

8 per cent under the previous four weeks and 12 per cent under a year

ago.

Declining employment and hours worked and increased unemploy-

ment claims corroborated signs of weakness in individual industries.

Further corroboration was to be found in the behavior of business

loans of district reporting member banks which had increased $20

million during the last four weeks of 1957, compared with $50 mil-

lion in the corresponding period a year earlier.

-36-

1/7/58

Mr.

Leach went on to say that in such a recessionary period

as Mr. Young had described there should be no doubt as to the System's

posture.

He favored a flexible credit policy and he felt we had one.

Such a flexible policy should find expression in easier credit condi-

tions.

Interest rates have declined sharply, Mr. Leach noted, and

if they were the sole indicator of credit conditions one might say that

the System had eased sufficiently. The decline in rates had clearly

outrun reserve availability, however, and some further easing in reserve positions seemed appropriate.

He did not know how long the

recession would last or how severe it would become, but he had the

definite impression that more easing would be required and he saw

some advantages in increasing reserve availability at this time rather

than later.

Mr. Leach said that he was not talking about much more

ease, but as a bench mark he suggested $150 million of free reserves,

and he would favor moving to this position well in advance of the

forthcoming Treasury financing.

While he advocated a little more

easing in the reserve position of member banks,

he wished to make it

Mr. Leach said that

clear that he would not want the System to be

excessively easy and thus to compound the problems of the future

when we would again be combatting inflationary pressures.

He could

see no need to change the Committee's directive at this time, and he

would not favor a reduction in the discount rate now.

Mr. Leedy said that a few developments in the Tenth District

were contrary to the national trend.

Tenth District cash r eceipts

1/7/58

-37-

from farm marketings were up slightly this year over 1956, in contrast

to the small decline in the nation.

The explanation for the rise in

the Tenth District was to be found in cattle marketings: increased cash

receipts from livestock marketings had more than offset a decline in

returns from crops.

There had been a marked reduction this year in the

Soil Bark Program and winter wheat acreage seeded was 26 per cent

higher than a year ago with a preliminary crop estimate 49 per cent

higher.

In banking developments district business loans continued to

rise in the last few weeks of 1957.

The reserve position of banks

improved materially and borrowings from the Reserve Bank were reduced.

Unemployment in the Tenth District had continued to rise but the rate

seemed to be significantly lower than the national rate.

Department

store trade during the Christmas season was higher than in 1956.

As for System policy, Mr. Leedy felt that a program of ease

should be continued in the period ahead although the System Account

should offset the accumulation of reserves that would result from

the seasonal developments this month.

The aim should be for something

better than a zero reserve position and should continue on the plus

side, but the System should not contribute to any further sharp

decrease in interest rates.

The large holdings of Government securi-

ties dealers indicated some speculative activity in anticipation of

a further decline in interest rates.

Mr. Leedy felt that before too

1/7/58

long it

-38might become necessary to reduce the discount rate, but he

would not suggest a change at this time.

Mr. Allen said that the development most worthy of mention

at this time was in the retail trade field.

Preliminary data in-

dicated an upsurge in buying in the last few weeks before Christmas

which carried sales for December well above the same month in 1956.

This was true not only in major Seventh District cities but in the

United States as a whole.

While these preliminary figures covered

only one economic area, they indicated a change in direction for

the first time in four months and showed that the American people

at this point were not frightened to the extent of curtailing expendi-

tures.

Mr.

Allen noted that leading figures in the automobile in-

dustry were reducing their 1958 production estimates downward in

their public utterances, and he said that the downward reductions

were even greater when they were speaking privately.

One leading

figure in the industry said privately last week that before the

winter was over General Motors would undoubtedly cut production as

Ford and Chrysler already had done.

This individual had expressed

the belief that the automobile business could improve by the end of

the year if the Federal Reserve and Walter Reuther would relax, and

he did not expect Mr. Reuther to relax.

Mr. Allen said that Seventh

District information on automobile credit differed from the situation

1/7/58

-39-

found by Mr. Fulton, with reports from Seventh District bank lenders

indicating a further softening in terms during November.

The pro-

portion of long-term contracts was continuing to increase, and available data on collections suggested a further rise in delinquents.

After pointing out that for the country as a whole business

loans of weekly reporting member banks had risen 3.4 per cent in 1957

compared with 18.1 per cent in 1956, Mr. Allen said that in the Seventh

District, the increase was 4.6 per cent in 1957 compared with 20.6 per

cent in 1956. While business loan growth had been slow, investments

in Governments and other securities and loans on securities had taken

up the slack, at least at the large banks.

In December, total credit

growth at weekly reporting banks for the entire country amounted to

$2.4 billion, $700 million more than a year ago, while in the Seventh

District the net increase was only slightly above December 1956.

While on the subject of banks, Mr. Allen stated that from time

to time during the past year several of the Reserve Bank Presidents had

told him that policing of their discount windows had been made more difficult by complaints on the part of their larger banks that one of the

large Chicago banks was a continuous borrower.

Mr. Allen said that if

as appeared likely that bank did not borrow or buy Federal funds today

or tomorrow, it

would mean that for four consecutive periods it

would

not have borrowed or purchased Federal funds, but on the other hand

had sold Federal funds in substantial amounts.

1/7/58

-40Turning to the question of Committee policy, Mr. Allen said

he was still much concerned about the increase in consumer prices.

He did not think this Committee or its actions had caused that rise

and he did not think the Committee could take actions which would

eliminate the other factors that had caused it,

but he considered

this rise so much more important than anything else that he would

not like to see the Committee take any action that would contribute

to a further rise in consumer prices.

He would go along with the

comments of several others in that he would dislike any further

easing of the situation.

At the preceding meeting, the Committee

had decided on a target of zero negative free reserves and he would

like to continue with that target.

Mr. Deming said that a lazy downward drift continued to

characterize the Ninth District economy.

There was no evidence that

this downtrend had quickened in the past few weeks.

ments reflected the general economic situation.

somewhat easier.

Banking develop-

Credit had become

The largest savings bank in the district had reduced

its rate on conventional mortgages and in general mortgage money was

more available.

As to prospects, Mr. Deming said that the farm picture was

bright:

winter conditions had been good and the outlook for the

winter wheat crop was excellent.

Present estimates indicated a

wheat crop in Montana 31 per cent larger than in 1957.

Mr. Deming

also reported two other developments which he thought worthy of note.

1/7/58

-41-

First, one major manufacturing concern which had furloughed its

workers called a substantial number back earlier than had been

expected at the time the furlough began. Another major concern

now contemplated something less in the way of layoffs than had

been expected.

The second factor that he thought worthy of note

was that the largest bank in the district, which was organized

along divisional lines, had just finished its divisional roundup

on loan prospects, and the conclusion was that the total loan increase in the first part of 1958 would be as great as in the first

part of 1957.

Mr. Deming added the comment that this bank's

management suspected the total result even though it did not particularly question the divisional estimates.

On the policy side, Mr. Deming said he also felt that the

interest rate movement had gone a little too far a little too fast.

Consequently he would not follow a policy at this immediate time

aimed at or resulting in an even lower rate structure.

not like an immediate change in the discount rate.

He would

However,

he

believed that open market operations should be conducted so as to

leave a small positive free reserve level.

If the downturn in

rates that we had seen thus far represented more adjustment than

would normally have been expected as a result of credit action, a

positive free reserve position would not be inconsistent with no

further decline in rates.

Mr. Mangels said that basically the Twelfth District was

not as pessimistic as reports indicated for some other areas.

The

1/7/58

-42-

district had been experiencing a continuation of activity on the down

side,

but there was some indication of modification in the downward

movement although no firming was yet apparent.

been overemphasized,

activity was still

The downtrend may have

he said, noting that in general the level of

high even in some of the weaker areas.

favorable factors,

As to un-

Mr. Mangels noted reductions in nonagricultural

employment because of layoffs in the aircraft and related defense

industries, adding that probably there would be further reductions.

This had been mainly from natural attrition and lack of replacement

of workers rather than from wholesale layoffs.

the district were at 79 per cent of capacity.

Steel operations in

Mining companies had

reduced production, some by lowering hours worked and others by

reductions in the number of persons employed.

In November, building

permits declined from October and were below a year earlier.

On the

favorable side, Mr. Mangels reported that between October and November

there was no change in unemployment in the district.

For the first

time in four years there had not been a seasonal increase in prices

of Douglas fir lumber and one large plywood manufacturer had just

announced a $2.00 a thousand reduction in prices.

On the whole,

Mr.

Mangels said that the lumber industry in the Northwest was considerably

more optimistic at present than it had been a year ago about the next

year's outlook.

Department store sales in December were at the

December 1956 level.

Automobile sales were holding up fairly well,

and agriculture was in very good shape although prices were down

1/7/58

-43-

somewhat.

The shipbuilding industry in both the Pacific Northwest

and in southern California had shown considerable improvement.

With respect to banking, Mr.

Mangels noted that a year ago

bankers did not know too well what their borrowers' requirements

would be and were conservative in their attitudes.

Now they feel

they have adequate loanable funds and are in position to take care

of their customers in meeting expected demands during the next 30 to

60 to 90 days.

One large San Francisco bank was now planning to

expand its real estate mortgage portfolio by $15 to $20 million in

the coming year.

Pressure for loans was not nearly as great as a

year ago according to some reports, Mr. Mangels said, although banks

expect that the total outstandings will stay fairly close to the

existing level.

There was some talk of a reduction in the prime

rate within the next 30 days and large corporations were currently

operating on a hand-to-mouth basis, hoping to take advantage of any

reduction that might come.

Although there were indications that there might be a little

further slowdown, Mr. Mangels said that the problem seemed to him

to be whether further credit ease would be constructive in the overall situation or whether the injection of more funds would merely

generate speculation. His feeling was that the System should be

cautious in supplying additional reserves; he would keep the free

reserve level around zero but would prefer small amounts of negative

free reserves rather than to have positive free reserves.

He would

-44-

1/7/56

make no change in the discount rate at this time, and he thought the

Committee's directive was satisfactory in its present form.

Mr. Irons' appraisal of the national situation was that there

had been further tapering off.

This had been reasonably moderate in

amount and the picture was not showing signs of cumulating.

more in the nature of a rolling adjustment.

It was

He could see no disturb-

ing dangers of an accumulating movement as of the moment.

As for the Eleventh District, the confidence quotient was not

on the pessimistic side.

A substantial majority of businessmen with

whom this had been discussed in the past few days anticipated that

1958 would be a better year than 1957.

A minority of perhaps 25 to

30 per cent anticipated a less satisfactory year.

Most businessmen

reflected a cautious optimism for the coming year.

Those who were

quite pessimistic were usually ones who were suffering substantial

paper losses in the stock market, Mr. Irons noted, or ones who

recently had traveled east of the Mississippi River.

Eleventh District department store sales in 1957 were 2 per

cent ahead of 1956.

Employment in December was above a year ago and

above November but the increase was not as much as it had been a year

ago.

what.

The number of insured unemployed had continued to increase someConstruction activity had been maintained at a high level

throughout 1957 and in December was 25 per cent ahead of November.

Mortgage bankers were optimistic and felt that funds would be more

available in the next year than they had been in the past year.

1/7/58

-45-

Residential builders were particularly optimistic as to the outlook

for $10,000-$12,000 houses.

be improvement in 1958.

The oil industry felt that there might

Agriculture was in reasonably good shape.

In summary, Mr. Irons found the outlook good or better in most areas.

Banks were in a strong position and expecting strong loan demand.

Deposits were up as of the most recent call date except in Dallas

where a decline was shown because banks did not do so much windowdressing this time.

Mr. Irons went on to say he did not mean to be

painting a picture of another boom in the offing,

but his was not a

pessimistic report as had been indicated for some other parts of the

country.

Recent changes in the defense program were beginning to be

felt with new orders having been received by Dallas District firms

within the last ten days.

Mr. Irons said he would not advocate pressing ease or shifting further in the direction of ease at this time.

Neither would he

like to see a change in the discount rate or in reserve requirements

in the immediate future, although he recognized it might be a diffi-

cult three or four week period.

He had been satisfied with the

degree of restraint achieved in the past three weeks, and he would

hold a steady hand for the next three weeks, hoping that about the

same degree could be continued for the present.

operate on the feel of the market.

The Desk should

If possible, he would like to

see the short-term interest rate structure somewhere around the

1/7/58

-46-

discount rate.

He agreed with the statements of Messrs. Robertson

and Mills on that point.

Mr. Szymczak said that he felt the Federal Reserve had been

pursuing the correct policy and that it should continue to pursue

that policy, leading to zero free reserves and, as required, to a

small amount of positive reserves.

He did not think there should be

a change in reserve requirements at this time.

He did not think the

Open Market Committee should move too fast because it would be disturbing to the interest rate structure and to the market, but it should

not tighten up on the policy that it had been pursuing recently. With

respect to margin requirements, Mr. Szymczak thought it would be de-

sirable for the Board of Governors to undertake a discussion of that

subject at an early date with the view to finding out whether this

was a time for any change as had been mentioned by Mr. Hayes.

Mr.

Szymczak also said that he thought eventually the discount rate should

be changed but that we were foreclosed from any such move for several

weeks.

For the long-run, Mr. Balderston would like to see the money

supply increasing again as an aid to fostering economic growth.

This

goal seemed to him to become more important as deposit turnover declined.

The problem, however, centered in the timing of actions to

achieve this objective.

The dilemma was that on the one hand the System should prevent the forces of recession from accumulating or from feeding on

1/7/58

-47-

each other, especially in view of our adverse position in the cold

war.

On the other hand, Mr. Balderston felt that the economy could

scarcely have purged itself of the wastes that had emerged from 19551956.

This would be true even if the current recession were just an

inventory recession.

It was his belief, however, that the causes of

the present difficulties extended beyond inventory imbalance and in-

cluded excess capacity, compounded by foreign difficulties.

In addi-

tion, wage negotiations in the coming months should be conducted in

a noninflationary atmosphere without the illusion on either side as

to the possibility of wage increases being passed on as price increases.

Moreover, the sudden change in interest rates may have

brought on expectations that the System would not wish to foster.

Mr. Balderston favored no change of discount rates and a zero

target for negative free reserves for the immediate future.

posed, however,

He sup-

that as in January of 1957 the free reserves would be

substantial during the January return flow of funds, whatever the

Account Management tried to do.

Chairman Martin said he thought the go-around had posed the

problems for the Committee very clearly.

degrees.

We were dealing in small

The Chairman regretted again that we had gotten into the

use of net borrowed reserve figures.

We talked about zero, $50,

$100, and $150 million, but under present conditions he thought

these figures were quite meaningless.

He agreed with Mr. Szymczak

-48-

1/7/58

that the Committee had been pursuing the correct policy, and he

certainly did not want any additional ease at the moment, but he

also did not want to see the policy we had been following vitiated.

That would confuse the public by making them think that the System

might be returning to a tighter policy than had been followed in

recent weeks.

Mr.

Balderston had pointed up this problem.

Mr. Leach

had expressed the feeling that we probably would get to an easier

position.

Chairman Martin said he would not put it in figures, but

if we were pursuing a correct policy his personal preference would be

to err on the side of ease rather than tightness, and he thought that

would be consistent with the present position.

The Chairman suggested that the Committee should also bear in

mind the projections with respect to the Treasury.

While we could not

forecast what the future would hold, there seemed to have been a resurgence of confidence around the end of the year.

When he came through

New York last week he observed a resurgence of confidence--even an im-

pression that there might be a boom--because deficit financing of the

Federal Government might become a factor soon.

Some of the stock

market operators had turned their sights around, although the Chairman

said that he personally thought they were wrong.

In this connection, Chairman Martin suggested that all of those

connected with the Committee should study the reports of the British

Bank Rate Tribunal on the alleged leak very carefully.

Events were

moving very rapidly and the System could be subjected to sudden

1/7/58

-49-

pressure to reduce the discount rate when the Treasury was about to

go to the market.

The only consistent position for the Committee,

he felt, was to try to maintain a reasonably even keel during a period

of a Treasury financing.

The Federal Reserve must be very careful to

do what it could to protect the bankers who were on the boards of

directors of the Reserve Banks from being in a position of having

inside information that could be used in this type of a market.

This

applied to margin requirements also. We must realize that speculators

can profit or appear to profit if a leak or a charge of a leak gets

out.

He believed the best way to handle this situation would be to

think of this in terms of an even keel for the System, even though

there might be violent forces of gloom or the reverse, in the period

of the Treasury financing which was not too far off.

The Chairman's reason for highlighting this point was that a

It

number of the comments this morning had projected policy forward.

could be argued that it would have been better not to have changed the

directive at the November meeting of the Committee before the last

Treasury financing and to have tried to maintain about the same money

market conditions during the period of the financing as before.

How-

ever, we had done what seemed necessary, and what he was saying now

was that it was necessary to bear in mind the Treasury's problem in

the light of what had ensued at that time.

He felt it very fortunate

that we did not have a British bank rate leak, considering the people

who were roaming around Washington at that time.

He did not think we

1/7/58

-50-

could approach the Treasury financing without realizing that these

movements come very sharply and quickly.

With further reference to Committee credit policy, Chairman

Martin said he recalled no one suggesting a change in the directive

at this time.

In implementing policy, he would be disposed to follow

what he took to be the views of Messrs. Hayes, Leach, and Bryan, although he did not wish to pinpoint a figure.

He thought there should

be positive free reserves because this seemed to be the only consistent

position.

However, he would not want free reserves to be so positive

as to indicate that the Committee was actively pursuing a more easy

policy than it

had been pursuing to date.

The Chairman said that he

recognized this was a difficult order to give to the Manager of the

System Account in the light of the magnitude of funds floating around.

He then asked for other suggestions

as to the matter of degree and how

to clarify the Committee's views, calling specifically on Mr. Rouse for

his comments on operations.

Mr.

Rouse said that both the Board's projections and those of

the New York Bank indicate that this period should not be as difficult

as last year.

As of now, it looked as though the reduction in the

System Account would have to be in the range of 1/4 to 1/2 billion

dollars, largely through runs-offs rather than through sales, in order

to maintain about the current position.

The projection of average

free reserves for this statement week was shown as plus $30 million,

but during the week the range might be from negative $300 million to

1/7/58

-51-

as much as positive $330 million.

Mr. Rouse said he thought the

Desk could operate along the lines the Committee desired.

Mr. Allen noted that the Chairman had made the point that

we should maintain an "even keel" during the Treasury financing.

He inquired whether this indicated that, since we had eased up a

little for some time, we should continue to ease.

Chairman Martin said this was not quite what he had in mind.

What he was trying to say was that if there was to be additional ease,

it had to come in the next couple of weeks on the positive side rather

than waiting until after the Treasury financing was announced, or

perhaps until the meeting to be held on January 28.

Things are moving

very quickly, he noted, and it might be that by January 28 a majority

of the Committee would want to change the directive.

He did not think

we could make a change at that time in view of the Treasury financing.

If he were carrying on the operation, he would operate with a little

more positive reserves in the next couple of weeks but thereafter he

would be moving toward an "even keel" right straight through the

Treasury financing.

Mr. Allen said that he did not disagree, and he inquired as to

how long the Chairman had in mind for this period of the Treasury

financing.

Chairman Martin responded that he thought it would be

necessary to consider the period from the time of the Treasury's an-

nouncement of the refunding to several days after payment for the

securities, and he asked Mr. Rouse for his views.

1/7/58

-52Mr. Rouse said that he thought it

a week or 10 days after the payment date.

would be necessary to allow

There was a certain amount

of underwriting that would have to be done, and this should be the

minimum period to allow for distribution of these securities to be

completed.

He went on to say that he thought the Treasury announce-

ment on the refunding might come about February 1 and the new financing

announcement might be simultaneous with the refunding.

Mr. Hayes commented that he thought the Committee had a pretty

free rein for the next couple of weeks.

Chairman Martin said he might be overly sensitive, but since he

might be up on the Hill at any time during the next couple of months he

thought it very important not to be in a position of having taken decisions on actions to be taken in the future.

In view of the specula-

tive nature of this period, it was not only very important to avoid any

leaks but also situations subject to leak.

Mr. Leach remarked that, in effect, we were fixing policy for

the next five weeks,

and Chairman Martin replied that it

amounted

pretty much to that.

Mr. Allen said that he would go along with making free reserves

available in the plus $100 million area during the next two weeks,

trary to what he had said earlier.

con-

However, he questioned whether at

this time the Committee wished to determine that it will neither add

to nor subtract from reserves in the period following our next meeting.

1/7/58

-53Mr. Hayes suggested that the "even keel" of January 28 would

be to stay where we were at that time.

Mr. Shepardson said that this was not the way he had understood the Chairman's statement.

His impression was that the Chairman

had in mind a line or a direction for continuing ease.

Chairman Martin stated that this was not what he intended.

This could not be measured precisely,

he said, but he did not think

that during the Treasury financing the Committee should be either

increasing or decreasing the degree of ease.

Mr. Shepardson inquired whether the Chairman felt that between

now and the Treasury financing announcement there should be some further

easing and, if

so, whether it

was correct that he would rather do it

now than two or three weeks later.

Chairman Martin stated that this was correct.

in a moderate way,

He would rather,

continue the policy we were now pursuing by having

moderate positive reserves.

He did not wish to cite a figure, but he

did not think this was a status quo period.

The return flow of currency

started too many eddies in the stream and he thought that we were dealing

with a rushing torrent.

Turning specifically to the Committee's directive and instructions to the Account,

Chairman Martin said that it

was clear that all

agreed there should not be a change in the directive at this time.

thought that the Manager of the System Account could be given some

further guidance with respect to operations in this periods and he

He

1/7/58

-54-

suggested that the majority appeared to be on the side of slight

positive reserves.

This was not a very firm majority, however, and

if the question were put to a vote it might be by a majority of only

one or two.

He questioned whether this was the type of thing that

the Committee should be voting on but he had no desire to keep any-

body from putting anything into the record to express his views.

He

noted that the minutes would show the statements that the individuals

had made during the meeting.

Mr. Hayes stated that he thought the System Account could

operate along the lines of the Chairman's comments.

Mr. Robertson said that he would like the record to show that

he was in complete agreement with respect to maintaining an "even keel"

during the Treasury's financing operations.

The comments he had made

heretofore would go to the immediate future; he would not ease off in

the next two weeks.

Chairman Martin stated that he thought that this had been a

good go-around and that if there were no further comments the directive

would be approved in its present form.

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 (including replacement of maturing securities, and allowing

maturities to run off without replacement) for the System

open market account in the open market or, in the case of

maturing securities,

by direct exchange with the Treasury,

1/7/58

-55-

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;

(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;

To sell direct to the Treasury from the System ac(3)

count 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.

The Chairman noted that the next meeting of the Committee would

be held on Tuesday, January 28, to be followed by a meeting on Tuesday,

February 11.

On March 4, the Committee would meet at the time the

newly-elected members assumed their duties and would plan to stay over

on March

5.

Thereupon the meeting adjourned.

Secretary