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, August 19, 1958, at 10:00 a.m.
PRESENT:
Mr. Martin, Chairman
Mr. Balderston
Mr. Fulton
Mr. Irons
Mr. Leach
Mr. Mangels
Mr.
Shepardson
Mr. Vardaman
Mr.
Treiber, Alternate for Mr.
Hayes
Messrs. Erickson, Allen, Johns, and Deming,
Alternate Members of the Federal Open
Market Committee
Messrs. Bopp, Bryan, and Leedy, Presidents of
the Federal Reserve Banks of Philadelphia,
Atlanta, and Kansas City, respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Solomon, Assistant General Counsel
Messrs. Daane, Hostetler, Marget, Roelse,
and Young, Associate Economists
Mr. Kenyon, Assistant Secretary, Board of
Governors
Mr. Koch, Associate Adviser, Division of
Research and Statistics, Board of
Governors
Mr. Keir, Acting Chief, Government Finance
Section, Division of Research and
Statistics, Board of Governors
Mr. Stone, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Swan, First Vice President, Federal
Reserve Bank of San Francisco; Messrs.
Jones and Tow, Vice Presidents of the
Federal Reserve Banks of St. Louis and
Kansas City, respectively; Messrs. Larkin
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8/19/58
and Baughman, Assistant Vice Presidents
of the Federal Reserve Banks of New York
and Chicago, respectively; Messrs. Willis,
Anderson, and Atkinson, Economic Advisers
of the Federal Reserve Banks of Boston,
Philadelphia, and Atlanta, respectively;
Mr. Coldwell, Director of Research, Fed
eral Reserve Bank of Dallas; and Mr.
Hellweg, Economists Federal Reserve Bank
of Minneapolis
Upon motion duly made and seconded,
and by unanimous vote, the minutes of
the telephone conference meetings of
the Federal Open Market Committee held
on July 15, July 18 (two meetings),
July 21, 22, 23, 24, 25, 30, 31, and
August 1 and 4, 1958, 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 July 29 through
August 13,
1958, and a supplemental report covering commitments exe
cuted August l4 through August 18, 1958.
been placed in
Copies of both reports have
the files of the Federal Open Market Committee.
Reporting on open market operations, Mr. Larkin stated that
developments since the last meeting had been covered in
detail in the
written reports and that he would merely emphasize a few points.
The
redundancy of reserves, which was the principal concern of the Com
mittee at the last meeting,
had been eliminated during the period
through sizable net sales or redemptions of Treasury bills.
Al
though free reserves moved over a wide range on a day-to-day basis,
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8/19/58
they averaged less than $500 million during the past three weeks,
more than $100 million lower than the average of the previous three
weeks.
The money market has been generally less easy than in recent
months, with the Federal funds rate frequently close to the discount
rate.
Conditions in the securities markets,
for themselves.
Mr. Larkin said, speak
Short, intermediate, and long-term rates have risen.
In the past two days there have appeared some signs of relative
stability in the long-term area, but there has been no significant
revival of activity.
Short-term rates continue to rise, most
recently under the impetus of the San Francisco Bank's action in
increasing its discount rate.
The average issuing rate in the
Treasury bill auction yesterday was 1.90 per cent.
Mr.
Larkin called the Committee's attention to the fact that
the Supplementary Report, which had been distributed prior to the
meeting,
contained a page (Exhibit B-4) setting forth the assumptions
underlying the reserve projections of the New York Bank.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period July 29 through August 18,
1958, were approved, ratified, and
confirmed.
In supplementation of the staff memorandum distributed under
date of August 15, 1958, Mr.
Young presented the following statement
on the economic and financial outlook:
8/19/58
We no longer need be tentative about the fact of
domestic economic recovery.
The unfolding data are
abundantly clear. They show vigorous revival--one of
the more robust on record following one of history's
shorter and milder contraction periods.
In industrial countries abroad, the evidence indi
cates that final demand has continued to be fairly well
sustained. In Canada, as here, revival appears to be
under way. In Europe, production trends have been mixed,
with contractions, where occurring, apparently associated
with inventory adjustment. Reflecting cumulative relaxa
tion of inflationary tensions, further declines in
European interest rate levels have occurred in
July and
August.
Recent domestic economic developments
The turnaround in GNP from the first to the second
quarter now appears to amount to just short of one per
cent, and a jump from the second to the third quarter of
at least two per cent appears likely. Personal income
in July was above its August 1957 level, though the June
July rise was partly influenced by one nonrecurring itemback pay of Federal employees.
The Board's index of industrial production through
July has risen at least 7 points, or 6 per cent, from
April, and the odds are large that late data will raise
the amount of advance by two index points. The recovery
in industrial output has been diffused through durable
and nondurable industries as well as through mineral lines.
The rise in durables output since April has been 10 index
points, in nondurables 5 points, and in minerals 5 points.
Construction activity has risen for two months, mainly
reflecting increases in residential building. Contract
awards in July continued close to the high levels of May
and June. Private housing starts in July, rising further
for the fifth successive month, attained a seasonally ad
justed rate close to 1.2 million units. Financing and
selling conditions in residential markets remain on the
stimulative side.
Total business sales in June increased for the third
month, recovering over three months about one-third of the
previous decline. Inventory liquidation also continued in
June for the ninth month, making a total inventory decline
since early autumn of last year of about $5 billion. The
rate of inventory decline in June, however, was more
At
moderate than for any single month since December.
8/19/58
manufacturers, both in June and in May, there was a large
liquidation of finished goods inventory. At retail stores
in June, stocks over-all rose. New orders received by
durable manufacturers have now risen for three consecutive
months, though they still
run below shipments.
While unemployment holds at a rate moderately in excess
of 7 per cent, the labor market has shown additional strengthen
ing through a further increase in nonfarm employment (seasonally
adjusted), a continued decline in the number of employees on
short workweeks, and an additional rise in average hours worked
per week in manufacturing.
Recent wage advances in major
manufacturing industries are being reflected in a slight ad
vance in average hourly earnings, and weekly earnings, reflect
ing both wage rate advances and more hours worked, are rising
slowly.
In assessing the continuing high unemployment rate
in the face of recovery, it needs to be remembered that such
a pattern is not unusual for the early stages of recovery and
that a similar pattern was followed in the recoveries from the
1948-49 and 1953- 5 4 recessions.
The pattern results because
employers wait until average hours of work have increased
before engaging in extensive new hiring and also because
productivity gains in the early recovery phase are typically
very sharp.
Farm income, already considerably improved in the first
half year, promises, on the basis of crop and marketing pros
pects, to be further raised in the months ahead. The August 1
crop report points to a total harvest some 13 per cent above
the 1948-49average and 7 per cent ahead of the large harvests
of the past two years.
In consumer markets, sales continued in July at the level
of May and June-about 3 per cent above the March low and 3
per cent under last summer's high. Gains in sales continued
to be marked at apparel and general merchandise stores, but at
durable goods stores they remained sluggish. Department store
sales in July were 140 per cent of the 1947- 9 average,
compared with 133 per cent in June and the record 144 for August
of last year. In early August, department store sales have
maintained the July level.
Automobile sales in July declined less than seasonally and
yet more improvement is indicated by sales in the first 10 days
of August. With new car stocks in hands of dealers at about
660,000 and with model change-over curtailments in process,
the industry now expects a substantial liquidation of dealer
In view of this
inventory holdings by the end of September.
fourth quarter
the
for
schedules
prospect, industry production
of the
that
to
equal
contemplate a rate of output at least
fourth quarter of 1957.
8/19/58
Preliminary data indicate that outstanding instalment
credit declined again in July after allowance for seasonal
factors. Since January of this year the decline has
totaled about three-quarters of a billion dollars. This is
the largest decline and longest period of decline in the
postwar period.
Total exports in May and June were at a seasonally ad
justed annual rate of $16-1/2 billion, up slightly from
March and April. There was a marked pickup in agricultural
exports between these two periods, some of which apparently
reflected a catching up in Government-financed shipments.
This increase was largely offset by further declines in
exports of metals, machinery, textile manufactures, and coal.
For many of these items, however, the rate of decrease was
smaller than before. In general, the best judgment of the
experts in export markets is that contraction of demand for
U. S. exports has largely run its course. While total import
data beyond May is still
lacking, from such partial informa
tion as is available it would appear that total imports in
June and July have remained close to an annual rate of
$12-1/2 billion, the average rate in the first five months
of the year.
While the average of wholesale prices has been about
stable over the past two months, the average of industrial
commodity prices has risen .7 per cent, mostly since the end
of June, and the average of farm product and food prices has
declined about 2 per cent. Since April, the average of raw
industrial material prices has risen 8 per cent, or about
the same percentage as from March to June in 1954; in both
periods, advance in the price of steel scrap was a main
factor in the price rise. Consumer prices, which rose
slightly further in mid-June, are expected to show either
no change or slight decline at mid-July. With food prices
seasonally lower and a slowing of advance in prices of
consumer services, the August index may show modest decline.
Recent domestic financial developments
Financial markets have been influenced by three lines of
(1) the stream of economic data and corporation reports
news:
indicating that vigorous recovery was under way; (2) indica
tions and rumors that Federal Reserve policy might be shifting
its posture away from ease; and (3) a flow of banking, mone
tary, and Treasury deficit data pointing to a record-breaking
six-month increase in the cash balance position of the economy,
suggesting both monetary validation of post-1955 price in
creases and a financial stage set for an extension of creeping
inflation.
8/19/58
-7-
In these circumstances, further upward yield adjust
ments have occurred for Treasury bonds, corporate bonds,
and municipals.
The additional rise in Treasury yields
has been accentuated, of course, by further liquidation
of speculative holdings. At the close of last week, the
yield on long-term Treasury bonds averaged 3-5/8 per cent
and in the intermediate range the yield was about 3 per
cent. Triple A corporate bond yields had reached about
3-7/8 per cent, and on high-grade municipals the yield
had somewhat exceeded 3 per cent. Partly reflecting
summer underwriting letup and partly reflecting upward
adjustment of market yields, the corporate and municipal
new issue volume has lightened significantly.
After holding persistently below 1 per cent during
June and July, the Treasury bill rate moved up from early
August to 1.895 per cent yesterday, with the rise reflecting
both a change in the credit outlook and a larger supply of
short-term securities in the market. Rates on bankers'
acceptances, finance company paper, and commercial paper
have all been marked up sympathetically with the bill rate
movement.
Since the new highs in stock prices and trading activity
that were reached following the hike in margin requirements
late in July, stock prices and trading have edged off somewhat.
Equity investors, however, still cling to inflationary
expectations. The average yield on common stocks late last
week was 3.79 per cent, or slightly below the average yield
on Aaa corporate bonds and slightly above the yield on the
longest Treasury bonds--the 3-1/2 per cent bonds of 1990.
seven months of the year, total commercial
In the first
bank credit has expanded by $7 billion compared with a decline
This is by
of almost $.5 billion in the same period of 1957.
preceding
of
any
far the largest increase for the same months
occurred
than
increase
larger
much
a
also
It is
postwar year.
recovery
early
and
phase
contraction
late
in the comparable
phase of the two preceding postwar cycles.
This large expansion in bank credit has been associated
with the largest increase in cash balance holdings of the
public for any comparable postwar interval, whether reckoned
according to calendar period or according to business cycle
Over the past six months the annual rate of increase
period.
in the total money supply--time deposits plus demand deposits
and currency, seasonally adjusted--has been nearly 12 per
cent. The privately-held active money supply--demand deposits
and currency--has increased at an annual rate in excess of
8 per cent, while the annual rate of increase for time deposits
8/19/58
-8-
alone has attained a peacetime record of 20 per cent.
Some part of the large increase in time deposits must
represent consumer, financial, and business balances
that will likely be withdrawn for spending or investing
in the period ahead, and so will be transferred to the
category of active money and swell further the active
money supply.
The current policy problem
System policy at this juncture is faced with three
pervasive facts: (1) a significant and broadly-spread
revival in productive activity and in incomes; (2) a
pace of, and momentum in, expansion in privately-held
cash balances that is by any historical standard abnormally
high; and (3) an inflationary psychology in financial
markets that could easily spill over into commodity and
real estate markets.
These facts raise a basic question about the kind of
instability problem that System policy has been called upon
to grapple with since last mid-autumn.
In short, just what
sort of cyclical malady has the economy been suffering and
what dosage of monetary medicine has been needed to help
restore economic health?
This is a most perplexing question, but some perspective
on it can be gained by brief comparison with other periods of
significant cyclical contraction since World War I. The
Board's index of industrial production, which is generally
recognized by analysts of economic cycles as a reliable
coincident indicator, can be taken as an effective reference
measure for this historical diagnosis.
Of the eight business cycle contractions occurring over
this span of nearly four decades, the recent contraction was
one of four lasting nine months or less. It was also one of
four contractions in which a decline in industrial output of
less than 15 per cent occurred. It was one of two contractions
taking as few as nine months until significant upturn began.
And it was one of two contractions followed by rebound that
recovered a substantial fraction of preceding decline by the
end of eleven months. Whatever mechanical historical criteria
are used for comparison with past economic contractions, it
seems certain from these data that the 1957-58 recession will
go down in the annals of economic cycles as one of the milder
recession experiences.
This important diagnostic inference as to the nature of
the economy's recent instability problem, together with the
key facts about the current situation mentioned above, point
8/19/58
to only one course for Federal Reserve action under
prospective conditions over the short-term.
That course
of action is one that will temper the rate of expansion
in the money supply. The first step in accomplishing
this objective should be to reduce to zero as rapidly as
possible the net free reserve position of member banks.
On the basis of current projections of reserve changes
by the Board's staff, seasonal factors will be working in
this direction through the Labor Day week end, but they
will need some help from sales by the Open Market Account
to meet a time schedule consistent with the urgency of
the situation.
A larger problem of Federal Reserve decision looms for
the future.
It relates to the rate of monetary expansion
that should be the System target for the autumn and winter
period. Having an eye to the high rates of monetary expan
sion of the recent past, it can be argued justifiably that
the economy's cash balance position is already redundant
and that no further increase in cash balances, other than
of reasonable seasonal dimensions, will be consistent with
sustainable economic development and tolerable stability for
the value of the dollar.
Under this line of reasoning,
appropriate policy would call for allowing more active use
of existing money balances to carry the main load of financing
the increased spending and investing associated with rising
activity and incomes.
On the other hand, it can be argued that the annual rate
of increase in the money supply, seasonally adjusted, over
the balance of the year ought not to fall below 2 to 3 per
cent. This second position is premised on the proposition
that a shift from an 8 per cent rate of increase to a sero
rate might risk curbing recovery and even induce recurrence
of contractive tendencies.
This central problem needs clarification through study
by the Committee's staff and further discussion by the Com
mittee itself. When a conclusion has been reached on the
problem, then a secondary problem will arise as to the
required reserve changes and the reserve need projections
that will be consistent with the monetary expansion target
adopted.
In the meantime, the course of prudence in day-to-day
operating procedures calls for staff reserve need projections,
both at the Board and at the New York Bank, to be on the basis
of seasonal patterns only and to exclude any allowance for
monetary growth. At least, after the extent of monetary
expansion over the past six months, it would seem imprudent
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8/19/58
to premise projections of prospective reserve needs on a
further increase in the money supply at a rate anywhere
close to that recently experienced.
Finally, a word in regard to Treasury financing
prospects.
Available Treasury cash balances plus Septem
ber tax receipts should make it possible to defer further
Treasury cash financing until the third week in October.
At that time, the Treasury will need to borrow as much as
$4-1/2 billion in cash. Another $4 billion will possibly
be needed over the turn of the year, with say $2 billion
borrowed in December and $2 billion in January. These
estimates are necessarily tentative. At this stage, it
is most uncertain how fast Federal cash spending will
actually rise over the months ahead; also, September
and December corporate tax receipts may run higher than
now thought likely.
In response to questions by Mr. Vardaman, Mr. Young said he
thought there were clear signals already of a vigorous recovery
"across the board."
During a period in which there had been a
relatively mild contraction of business activity, followed by business
recovery, there had also been a very rapid expansion of the money
supply.
He did not know of any cycle recorded in
history in
which
the sort of thing occurred that had been experienced in the past six
months.
Asked by Mr.
Vardaman whether he thought that the vigor of
the recovery was such as to warrant a mild contraction of the money
supply, beginning almost immediately,
this would be desirable.
Mr. Young said that possibly
In his statement he had tried to avoid
taking any position and had merely outlined two points of view.
Another possible line of reasoning would be to the effect that
there should be a contraction of the money supply from this point
forward.
In his judgment,
however,
it
would be difficult enough
8/19/58
-11
just to get the rate of expansion slowed down.
Chairman Martin then stated that at this point in the meeting
he would like to make certain observations about the operations of the
Committee.
First, he felt sure that none of the Committee members
liked particularly the succession of telephone meetings that had been
held recently, and it
when it
was his hope that there would not be many periods
would be necessary to follow that procedure.
technical problems of communications,
participation in
it
Because of
was necessary to restrict
the recent series of meetings to those currently
serving on the Open Market Committee, and even so telephone meetings
are not conducive to full interchange of opinion.
The Chairman went on to say that this had been a difficult
period, with events such as the crisis in Iraq that no one could have
foreseen.
Such a situation served to emphasize the confidential
nature of the meetings of the Open Market Committee,
where there is
discussion of all aspects of System policy along lines which he hoped
would at some point be recognized by statutory provisions.
circumstances,
In such
when there are rumors they are sometimes attributed to
the relatively large number of persons participating in the Open
Market meetings,
with the result that there is
about the size of the meetings.
continued discussion
Personally, he did not think that
attendance should be cut down, for in his opinion the advantages
outweigh the disadvantages.
-12
8/19/58
Referring to the San Francisco discount rate action,
Chairman Martin expressed the view that as a general principle
there should be an effort to defer important System decisions
until after the meetings of the Open Market Committee, which
afford an opportunity for full review and discussion of the
current situation.
However,
in
this instance he felt. that the
Board of Governors was correct in
giving its
approval to the rate
increase promptly because rumors appeared almost immediately after
the action was taken in San Francisco,
rumors-and Mr.
If
it
had not been for those
Mangels had expressed the view that they could not
have come from the West Coast-the Board of Governors might have
held up its
action until after this meeting so as to have had the
benefit of the discussion, regardless of its
position in the final
analysis.
The Chairman also noted that when margin requirements were
discussed at the Committee meeting on July 29, there were rumors
within two or three days of possible action in that respect.
While
he did not think that those rumors had a Committee source, never
theless the mere fact that a Committee meeting is
to a certain amount of conjecture and makes it
unusual caution.
He was not unduly concerned,
held gives rise
necessary to exercise
but he considered it
his duty to bring the matter again to the Committee's attention, for
unless matters can be kept within the System family it becomes
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8/19/58
difficult to take any actions and the integrity of the System is
called into question.
Therefore,
it
is
System to keep as clear as possible.
when the Committee reached its
very important for the
In his opinion it
was wise,
unanimous decision on July 18, to
put an announcement on the ticker immediately.
On the other hand,
the System has no commitment to make all of its actions available
to the public as soon as they are taken.
With regard to the discount rate action, the Chairman
recognized that the difficulty of timing was compounded by the
vacation season and its effects on the schedule of directors'
meetings of the respective Banks.
That is one of the problems
encountered in operating a far-flung system and is something to
be kept in mind.
Later in the meeting, he said, Mr. Mangels
would explain the thinking of the San Francisco directors and
present his own views, and he (Chairman Martin) simply wanted to
say in
advance that there was no effort to drum up the support of
the San Francisco directors with respect to a rate increase or to
oppose such an increase.
Putting the problem in broad perspective, Chairman Martin
commented, it is up to each person to do everything in his power
to make the Federal Reserve System work as a system, and the
integrity of the System is something that each person should guard
zealously at all times.
Again, he felt that the Board of Governors
8/19/58
-14-
took the right action in approving the San Francisco rate increase
immediately,
but if there had not been rumors the Board's thinking
might have been to postpone action until after this meeting.
The Chairman then turned to Mr.
Treiber, who presented the
following statement of his views on the business outlook and credit
policy
1. Since the last meeting of the Committee here in
Washington there has been some turbulence in the U.S.Se
Government securities market. This week, however, the
market has shown more stability, with little evidence of
liquidation by speculators.
We may be in, however, for
a further downward adjustment in prices and an upward
adjustment in yields in the short-term area.
2.
In the economic area there has been a fairly
widespread improvement in production, accompanied by a
somewhat less general improvement in the employment
situation. There is growing optimism as to the speed
and the extent of the recovery; and there is some concern
over the revival of inflationary tendencies. Nevertheless,
there remains the possibility of serious interruptions to
the recovery.
Important factors that are likely to have a
3.
moderating influence on inflationary tendencies in the
coming months include:
Lower food prices;
(a)
Excess capacity, particularly in important
(b)
areas of primary production;
Larger productivity increase;
(c)
(d) Continued substantial unemployment;
(e)
More moderate wage demands; and
(f) Foreign competition.
4. The Government deficit will be an important
stimulus to the economy, but at the same time it is
giving rise to expressions of concern as to its infla
tionary implications.
5. We are also hearing expressions of concern as
to whether the Federal Reserve may have created too
much liquidity.
Since October 1957 the System's policy of ease
6.
has resulted in a net release of over $3 billion of
8/19/58
reserves to member banks through open market operations
and cuts in reserve requirements. During the remainder
of 1958 the System faces the prospect of supplying further
substantial amounts of reserves to cover
(a)
the normal seasonal credit demands of
business and currency requirements,
(b)
the demands arising out of a cyclical
upturn in business,
(c)
the demands arising out of heavy Treasury
financing, and
(d) quite possibly some further outflow of
gold.
7.
Our easy money policy has promoted a substantial
growth in the money supply, and the heavy demands during
the remainder of the year will increase it further. Yet,
how great is nonbank liquidity? Although various measures
of nonbank liquidity show an improvement in liquidity since
last fall,
they still
indicate that liquidity is considerably
less than it was in 195 4.
8.
Bank liquidity has improved since last fall
but it
is not as great as it was in 1954. As for bank investments,
between October 1957 and June 1958, commercial banks in
creased their total holdings of U. S. Government securities
by almost $7 billion, from $50 billion to $57 billion.
Securities maturing in 5-10 years rose by $8 billion, from
$8-1/2 billion to $16-1/2 billion. Securities in the 1-5
year category declined $2 billion to $24 billion, and securi
ties maturing in less than one year increased only slightly.
As regards Mr. Young's statement concerning the possible
withdrawal of time deposit balances for investment purposes,
the drawing down of some of such balances might be reflected
in a decline in bank investments rather than an increase in
the money supply.
9.
The demand for long-term capital has been high in
1958. Public offerings of corporate and municipal securi
nine months of 1958 are estimated to be
ties in the first
about $1/2 billion more than in the corresponding period
of 1957. This increase, however, is likely to be more
than offset by a reduction in private placements.
10. We are concerned over the recent rapid rise in
long-term yields, especially in view of the current amount
of unemployment. Eighty-two per cent of the decline in
yields that occurred since last November has been wiped
out.
8/19/58
-16-
11. The current unsettlement in the long-term Govern
ment securities market has put a brake on public offerings
of corporate securities and there have been some postpone
ments.
Postponements for an indefinite time due to un
availability of funds or too high rates would be an obstacle
to the further progress of the recovery which is still
in
its early stages. We hope that the present indications of
more stability in the long-term Government securities market
will clear away the hesitation regarding corporate offerings.
12. We believe that the developments in the economy
call for the System to move away gradually from the position
of ease that appeared appropriate while activity was declining.
On the other hand, the situation in the securities markets
calls for a high degree of caution.
13.
We would favor a gradual movement toward reducing
the availability of reserves.
We would want to avoid creating
a severe tightening in the "feel" of the money market and to
avoid perpetuating or intensifying the current weakness in the
longer-term securities market.
In view of the touchy situation
in the Government securities market it would seem well to avoid
a specific target of free reserves.
14. We believe that the directive should be changed to
reflect the interest of the Federal Reserve in promoting the
recovery. We suggest that clause (b) of the directive be
amended so as to call for operations with a view "to promoting
sustainable economic recovery."
15.
We had carefully considered the discount rate of the
Federal Reserve Bank of New York and had concluded that it
should not be changed. We felt that a gradual movement away
from the former degree of ease could and should be made within
the framework of our present discount rate of 1-3/4 per cent.
We looked forward to the opportunity of having a general dis
cussion of the discount rate at this meeting of the Federal
Open Market Committee before any action would be taken on the
rate.
16. At our directors' meetings in the last two weeks we
have had full discussions of the discount rate. At last
Thursday's meeting, we encouraged a discussion of the factors
that might be important in our consideration of the discount
rate not only last week but also over the next month or so.
Our directors were clear in their opinion that there should
be no change in the rate at this time. On the basis of
present facts they saw no reason for considering an increase
in the rate in the next month or so, preferring to await
developments and to pass judgment upon them when they occur.
8/19/58
-17
Mr.
Vardaman inquired of Mr.
Treiber whether he correctly
inferred that the latter would favor keeping the reserve position
and the Government securities market in a posture which would en
courage private offerings.
Mr. Treiber replied in
the affirmative.
He said that he
would favor moving toward less ease, but not moving so fast that
there would be repercussions in
the long-term market.
He hoped
that the long-term market would stabilize and that the corporate
market would then encourage stability in the Government securities
market.
He would want to avoid action on the part of the System
that would press for further adjustments in
in other words,
the long-term market;
avoid action that would disturb any further that
sector of the market.
Mr. Erickson said that in the First District most of the
statistics continued to show improvement.
The revised New England
manufacturing index for June reflected a 3-point increase over May,
while construction contracts had a big month in
first
June and for the
six months of this year were only .4 per cent behind last year.
In residential construction contracts,
strength in multiple-unit dwellings.
employment in
the increase reflected
However,
nonagricultural
June was down 4.3 per cent from last year.
the most recent report only two areas in
the district were con
sidered areas of substantial unemployment,
additional areas were added to the list.
Up to
but in
July three
Department store sales
-18
8/19/58
had spurted since the fourth of July and the ensuing weeks
reflected a 9 per cent increase; for the year to date depart
ment store sales were 2 per cent behind last year.
The latest
consumer credit survey, which includes 16 large banks that originate
a large percentage of the consumer credit in the district, showed
that the percentage of long-term automobile contracts was down for
the first
time since January,
from 42 to 40 per cent.
Bank's discount window had been used relatively little
The Reserve
until the
last three days of last week, when there were borrowings by seven
fairly large banks, most of them in the larger cities of the
district.
Turning to monetary policy, Mr. Erickson said he was happy
that the System had been able to eliminate redundant reserves as
rapidly and as easily as it
had.
He agreed with Mr. Young that the
System should get free reserves down to zero as quickly as possible
without creating too much tightness in the market.
His own feeling
would be to bring free reserves down and to increase the discount
rate sometime after Labor Day.
The Reserve Bank's Board of Directors
was to meet next Monday and he did not know what the directors would
decide.
He noted, however, that in the First District there has
not been as much business improvement as in the San Francisco
District.
The policy directive should be changed and he would
suggest "with a view to fostering stable economic growth and
8/19/58
-19
maintaining conditions in the money market to encourage recovery
and prevent unsustainable expansion."
Mr.
Irons said that in the Eleventh District there had not
been any very significant changes in the last three weeks.
Economic
activity was moving along at about the same high level as he had
reported previously.
In July, department store sales were above
June; sales for the month ran only a little
below the record July
of the previous year and August was showing further improvement,
with sales about 3 per cent above the same period a year ago.
The
employment picture had not shown much change in terms of the number
of employed or unemployed, but there had been an increase in hours
worked in manufacturing and also an increase in wages paid.
The
construction picture was very good, and he believed that July was
a record month for the period in which the series on value of
construction contracts awarded has been maintained.
picture also was good.
rain, but it
was still
The agricultural
There had been warm weather and not too much
a favorable picture.
Cotton output in
Texas
was expected to be well over 4 million bales, which led him to
observe that the changes that have taken place in yield, acreage,
and production are rather amazing.
For example,
with last year, acreage would be down roughly 14
duction up roughly 10 per cent.
comparing this year
per cent and pro
Comparison with a ten-year average
showed acreage down 50 per cent and larger total production.
The
-20
8/19/58
situation with respect to other agricultural crops also was
favorable.
Mr. Irons said that the banking picture in the district
showed little
strong.
change, with the demand for loans apparently fairly
As against a year ago, there had been a 30 per cent in
crease in time deposits and an increase of about 9 per cent in
demand deposits.
Like Mr. Young,
he felt that a good part of the
time deposit money must represent funds waiting to be spent and
that it
Mr.
did not just represent genuine savings in time accounts.
Irons went on to say that the position of the banks in the
district seemed to be adequately liquid.
There had not been much
borrowing at the Reserve Bank, although in the last two or three
days a couple of the larger banks had come to the discount window.
It appeared that they might be moving out of Federal funds and
borrowing at the Reserve Bank.
After stating that the general picture in
one of high level strength, much as it
months,
the district was
had been for the past several
Mr. Irons turned to the oil industry and said that the
authorities had increased allowables to 11 days in
July.
The indi
cations were that the allowables, when next set, probably would move
up another day,
and that possibly they would continue to move up.
He was not sure that the oil industry was out of the woods,
for he
had always felt that the import situation was the key factor and
-21
8/19/58
that problem had not yet been solved.
In any event, however,
there was a movement toward higher allowables.
With reference to policy, Mr.
Irons said he felt that the
System should continue to move away from the degree of ease that
had prevailed.
He would like to see free reserves eliminated,
although without any shock treatment since one could not overlook
at any time the uncertain situation in the Government securities
market.
It
was a market that, in his opinion, should not be
subjected to shock one way or the other.
He had rather thought
in terms of a steady reduction of ease to the point of getting out
of free reserves and bringing the banks in to the discount window
for needed reserves.
This would contemplate holding additions to
reserves down to those necessary to meet purely seasonal needs.
Mr. Irons said that prior to the San Francisco action he
had been thinking of a discount rate change as the next policy move,
probably in
September.
At the Dallas Bank there is no regularly
scheduled meeting of the Board of Directors in August, and it
is
not the practice of the Bank to change the discount rate at a
meeting of the executive committee,
act last week.
so there was no opportunity to
If there had been a directors' meeting the vote might
have been close, even assuming that the directors would not have
known what happened at San Francisco.
In view of the San Francisco
action, he would personally be inclined to move in the same direction
-22
8/19/58
quite soon, which would, of course, necessitate a special meeting
of the Board of Directors.
While he did not know that the directors
would do, he was inclined to think that it would be desirable under
the circumstances for the directors to have a discussion quite
promptly.
The alternative would be to wait until the next regular
directors' meeting in September and in view of his appraisal of the
economic situation he would lean toward more prompt action.
Continuing, Mr. Irons said that he did not have any figure
in mind with respect to reserves but that, consistent with conditions
in the Government securities market, he would like to get away from
free reserves to a neutral position or a position of bringing member
banks in to the Federal Reserve Banks for borrowing.
As to clause
(b) of the policy directive, he would like to suggest "to fostering
conditions in the money market conducive to balanced economic
recovery and growth."
In his view, it
should now be the objective
of the Committee to foster sustainable growth by a balanced economic
recovery.
Mr. Mangels reported that conditions in
indicated continued improvement.
the Twelfth District
He had mentioned in the past, per
haps too often, the plight of the lumber industry, but today the
lumber people seemed to have their problems behind them and there was
a better feeling.
a reduction in
This resulted from an increase in
construction and
the inventories of distributors, as a result of which
-23
8/19/58
orders were greatly in excess of production and prices had in
creased recently at the rate of about $2 a week.
The price of
fir lumber was now $70 per thousand compared with $60 in April
and a high of $80 some time back.
There was some feeling that
perhaps prices had gone up too much in too short a period of time,
but possibly there would be another $5 increase before the end of
September.
The lumber producers were in a position to accept, if
they wished, more orders than they could fill 90 days ahead, but
they were refusing them.
There were some rumors to the effect that
the unions might call a strike unless their demands were met.
Turning to other areas, Mr. Mangels said that July and early
August figures indicated that recovery had proceeded further in the
district, with agriculture and construction the two strongest factors
in the economy.
In the first five months of 1958 farmer income was
up 11 per cent over last year and in three States it was up over 20
per cent.
Only in Utah did farmer income show a decline.
In general,
agricultural conditions throughout the district were good except in
the northwest which was beginning to feel the need of rain.
Continuing his review of the Twelfth District, Mr. Mangels
said that the weekly average of heavy construction awards in July
was 146 per cent higher than in July 1957; public awards were up
sharply and private awards were up about 300 per cent.
In the
residential field, requests in July for VA appraisals were up
8/19/58
-24
75 per cent and the FHA figure was up 100 per cent from a year ago.
The FHA figure would have been higher except for budget limitations
which prevented the organization from staffing up to process the
increased number of requests for appraisals.
on the West Coast is
One potential problem
the large increase in the percentage of resi
dential construction in
the form of multiple housing units where a
number of vacancies are beginning to be noticed.
Mr. Mangels said that steel production for the month of
July as a whole declined, but toward the end of that month and in
early August improvement was shown.
The demand for aluminum had
increased substantially and Kaiser expected to expand its
tions considerably.
opera
The copper industry also was improving, with
one closed mine having been reopened and another large producer
having increased the work week from four to five days.
Petroleum
operations were at 75 to 80 per cent of capacity, about 5 points
less than the national average.
Defense spending was increasing
and ordnance plant employment in the area was at the highest level
at which it
had ever been.
Aircraft employment was stabilizing;
Boeing had received large jet orders from American Airlines and
had something better than two years'
orders ahead.
Over all,
employment was increasing, having been up .6 per cent in
June.
This figure, incidentally, was equal to the average monthly increase
in
the boom year 1955.
The improved employment situation was
8/19/58
-25
beginning to be reflected in the operations of the Reserve Bank,
with turnover increasing and more difficulty being experienced in
obtaining certain kinds of employees.
In the financial field, Mr. Mangels said, total bank loans
declined during the past three weeks although increases again were
shown in real estate and agricultural loans.
deposits in
In this period demand
the Twelfth District increased about $105 million, which
was about equal to the increase of all reporting banks nationally,
and the time deposit increase in the three weeks was about three
times as great as in
the similar 1957 period.
An analysis of bank
debit figures showed for July an increase of 3 per cent over a year
ago; for the first seven months of 1958, bank debits showed a 1.4
per cent increase over 1957.
The Reserve Bank's check volume in
July was at an all-time high point, while the percentage of return
items to the total was somewhat less than a year ago.
Reports from
some banks indicated that they were continuing to go out aggressively
for real estate mortgages and instalment credit loans,
not expect any great increase in
but they did
outstanding loans at year end,
probably not more than 5 per cent above the present level.
The banks
in the district were in a relatively easy position, with sales of
Federal funds about double the volume of purchases, and borrowings
from the Reserve Bank continued to be nominal except for one sub
stantial one-day borrowing by a San Francisco bank.
8/19/58
-26
Mr. Mangels said that although free reserves had been at
high levels in
the recent period, he sensed that they were not
indicative of the degree of tightness that had existed in the market.
In other words, the market had been somewhat tighter than the free
reserve figure would indicate.
After referring to the reserve pro
jections for the next three weeks, as distributed at the beginning
of this meeting, he said it
was his feeling that the System should
proceed somewhat gradually in
reducing free reserves, perhaps
shooting at between $200-$400 million in the ensuing period.
would not want to make too big a jump too quickly.
He
With reference
to bank liquidity, he said an analysis by the San Francisco Bank
indicated that the loan-to-deposit ratios of the larger banks in
the district were lower now than they had been for 1-1/2 years or
longer, but higher than in periods prior to 1956.
Since August
1957 the reporting banks had increased their holdings of securities
by $1.2 billion but holdings of bills had actually declined between
that date and the present so the banks would not have any large
supply of funds available this year from the run-off of securities.
If
there should be a sharp rise in
that it
credit demand,
he anticipated
would not be long before the availability of bank credit
was greatly diminished,
resulting in higher loan rates.
With reference to clause (b)
of the policy directive, Mr.
Mangels suggested wording along the lines of that contained in the
-27
8/19/58
San Francisco Bank's wire to the Board of Governors concerning
the discount rate action, namely,
"to contributing to the con
tinuance of sound monetary conditions essential to a sustainable
recovery."
At this point Mr.
Mangels commented on the circumstances
surrounding the action taken by the San Francisco Board of Directors
on August 13 in establishing a discount rate of 2 per cent.
He said
that when he went into the meeting he had no idea that such action
would be taken.
Following the usual presentation of the economic
and financial picture by an officer economist of the Bank, there
was a question and answer period, after which he (Mr.
Mangels)
summarized developments in the money and securities markets in the
past couple of weeks.
In doing so, he outlined reasons for and
against consideration of a discount rate change in a manner not
greatly different from the normal procedure.
His own feeling at
the time was that, although there might be some reasons for a change,
the action could just as well wait until September because there
would be clear sailing through August and most of September from
the standpoint of Treasury financing.
However,
the Chairman of
the Board of Directors then called for discussion and it
developed
that every one of the seven directors present favored an increase
in the discount rate.
into two parts.
The question, therefore, resolved itself
First, what should the increase be, and second,
8/19/58
-28
when should it be effective?
A motion was made and seconded that
the discount rate be increased by 1/2 a percentage point and this
generated some further discussion following which an amendment to
the earlier motion was offered and it was unanimously agreed to
establish a rate of 2 per cent, effective upon approval by the
Board of Governors.
Mr. Mangels said that in
favoring a change in
the discussion a number of factors
the rate were presented by the directors.
First,
there was the contemplated Federal budget deficit, estimated to be
as much as $13 billion.
moved up from 44
1
in
Second, the average of stock prices had
February to 510 at the time of the meeting, and
this had occurred during a period when earnings reports of corpora
tions were very poor.
This may be an indication of the beginning
of a flight from the dollar and the purchase of equities as a hedge
against inflation.
Third, the price level had increased about 3
per cent in the past 12-month period, which led the directors to
ask what would happen to the price level in
conditions under an easy money policy.
a period of improved
Fourth, it
was noted that
labor demands for more pay than might be considered justified were
again beginning to develop on the West Coast.
directors recognized that unemployment was in
Fifth, while the
excess of 5 million,
they believed that the situation would become better when the auto
mobile industry improved,
that this improvement would be felt in
8/19/58
-29
related industries, and that there would be increased employment
for the purpose of stepping up production to replenish reduced
inventories.
Most of all, the directors sensed a feeling on the
part of consumers that inflation is
increase rather than decline.
here and would more likely
They believed that if
enough people
fell into this state of mind it would have a major detrimental
effect on the economy.
The directors felt that the Federal Reserve
System should indicate its
that it
part.
should let
willingness to combat inflationary forces;
the public know that it
In the directors'
was willing to do its
opinion, the System should "lean against
the wind before the tornado blows."
Mr. Mangels concluded his com
ments by saying that reactions to the discount rate change from the
press, bankers,
Mr.
and the public had been quite favorable.
Deming said that the Ninth District as a whole was doing
well, the only weak spot continuing to be the mining areas.
tive record crop production was the brightest spot.
Prospec
The wheat crop
was almost a record and was of very high quality, while barley and
soy beans would be at new records and corn was very good.
Livestock
production would be close to last year's record, with relatively
favorable prices.
Altogether, total district farm income should
approach the 198 high, and if it
did the stimulating effects would
be felt throughout the district.
There had been some further improve
ment in
nonagricultural employment,
hours worked,
and weekly earnings.
-30
8/19/58
Construction also continued to show strength,
and in general it
was an optimistic picture.
Turning to the national scene, Mr. Deming said that Mr.
Young's review, the staff economic review, and the Minneapolis
Bank's own analysis all pointed to a sharper rebound from the
recession than had been expected a short time ago.
They pointed
to at least incipient inflationary developments accompanied by
continuation of a fairly high level of unemployment.
For a period
of time, however, increased efficiency and unemployment might act as
some brake against making the incipient inflationary developments real.
Mr. Deming commented that a recent tabulation of profits
reports of 21 fairly large Twin Cities firms yielded some interesting
results.
utilities,
Leaving aside the railroads and an air line and public
reports of the twelve industrial firms included in the
tabulation showed that eight had far better profits in the first
half
of 1958 than the like period of 1957 even though three of them had
substantially lover sales.
One company ran about even with 1957;
two showed second quarter profits which were far better than those
of the first
quarter and approached last year's levels; and the
remaining company was a special case in that it
severe strike.
had experienced a
One basic conclusion was that there had been a
rather rapid increase in efficiency and productivity and if
the
level of sales should increase, this should further improve the
8/19/58
-31
profits situation.
It
certainly might act to inhibit price in
creases to some degree over the shorter run.
In other words,
the cost-price push would tend not to operate so intensively.
Mr. Deming said that he was not as convinced as some others
appeared to be that the economy had gotten into an excessively liquid
position.
This comment was particularly true of the banks because of
the increase in long-term security holdings and the rapid downward
movement in the prices of those securities.
One large bank had been
borrowing at the discount window the past week and it
normally would be most reluctant to borrow.
was a bank that
He felt, like Mr. Treiber,
that the rapid upward movement of yields and the unsettled conditions
in
the market might tend to slow things down a little
bit.
recovery had been swift and probably would continue, it
While
might not
continue at as fast a pace, and the pressure of price increases in
the next few months might not be as strong.
Therefore,
the System
might have a little
more time to put on the brakes than would other
wise be the case.
Mr. Deming agreed that free reserves should move
toward zero, but he did not think that the System would have to
move them to zero in
the next three weeks.
Looking at the reserve
projections which had been distributed at this meeting, he felt
that it
would be reasonable to let reserves stay about where pro
jected if this could be accomplished without severe System action
in
the next three weeks.
suggestion of Mr. Irons.
As to the directive, he favored the
8/19/58
-32
Turning to the discount rate, Mr. Deming said that a
meeting of the Minneapolis Board of Directors was held last
Thursday and that after careful consideration of the whole picture
the directors came to the conclusion that a rate change probably
would be desirable some time in the future.
Primarily because of
the state of the securities market, however, they concluded that
a rate change would not be desirable as of the date of the meeting.
There would not be another regularly scheduled directors'
for two weeks.
meeting
With the San Francisco action, the argument about
shock to the Government securities market had obviously disappeared
and the directors might now feel that it
discount rate action.
However,
was appropriate to take
he would not expect the directors
to act until a week from Thursday at the earliest.
Mr. Allen said that in the Seventh District there was in
creasing confidence that the business decline ended in the second
quarter.
However, the strength of the recovery in the district was
less evident than in the nation as a whole.
For example, the
district's employment situation deteriorated more than in the nation
since the highs of last year and had recovered less.
As of June,
total nonagricultural employment was 4.l per cent below last year
for the nation and down 6.8 per cent for the five Seventh District
States.
In the five weeks ended August 3,
ment compensation in
all
new claims for unemploy
district States other than Iowa were
8/19/58
-33
substantially greater than the average for the United States as a
whole; the increase over 1957 was from 55 to 75 per cent compared
with 37 per cent for the nation.
Also, department store sales
nationally had been surpassing the excellent record of last year in
recent weeks, and in
the four weeks ending August 10 a 2 per cent
increase was reported.
In the Seventh District, however, department
store sales were 3 per cent below 1957 during this period.
the large district centers participated in this decline.
All of
Similarly,
construction contract awards nationally were very strong in May and
June.
For the United States as a whole,
June saw an 18 per cent
increase in awards which brought the six-month total approximately
equal to last year.
In the Midwest, however, contract awards in
June only equaled last year, and for the first
year the Midwest was off 12 per cent.
six months of the
Loan demand continued to be
weak, partly because of continued heavy sales of capital issues,
and net liquidation of business loans continued at a faster pace
in the Midwest than in the country as a whole.
For both the district
and the nation, the reduction in borrowing by metals manufacturers
accounted for the largest portion of the total decline.
With a
sharper loan reduction, Seventh District banks had acquired relatively
more Government securities than banks elsewhere in the nation.
From
mid-July through August 6, including the period of the August exchange
and new 1-1/2 per cent tax anticipation certificates,
Seventh District
8/19/58
-34
banks added $373 million, or almost 9 per cent, to their Government
portfolios.
This expansion, of course, occurred mostly in the first
week in August when the Treasury issued $3.5 billion of tax anticipa
tion certificates.
In addition to these newly issued securities,
Chicago banks had continued to add to their holdings of Treasury bills.
Bill portfolios of Chicago reporting banks on August 6 were almost as
high as just prior to the pre-tax assessment date peak late in
New York banks added relatively much less to their bill
banks outside these two cities had shown little
March.
holdings and
change in their
holdings of bills.
Mr. Allen commented that the Detroit area was worthy of mention
because of its
importance and because it
there reached 285,000 in
August and September.
July,
was so hard hit.
Unemployment
or 18.6 per cent, and would increase in
expected to
The automobile manufacturers still
attain their October 1 target of a 400,000 new car inventory,
against 635,000 on August 10.
models.
Of the 400,000, 300,000 would be 1958
The outcome of the labor negotiations now in
month was,
of course,
newspapers left
as
the subject of wide speculation.
their fifth
The Michigan
the impression that the unions were attempting to
develop an atmosphere where more liberal supplemental unemployment
benefits might serve as a principal basis for settlement.
Therefore,
Mr.
Allen said, although his concern about infla
tion was as persistent as ever the Seventh District situation vis-a-vis
8/19/58
that of the nation made him less eager to move rapidly from a
position of monetary ease than he would otherwise be.
As for
the discount rate, he believed that the Chicago Bank's Board of
Directors would prefer to act coincidentally with, or after,
several of the other Banks, again because of the district's
relatively less favorable business situation.
At the present
time the matter of reserves seemed to him more important than the
discount rate and in
his judgment the situation country-wise
warranted a further, but not drastic, reduction of the free reserve
position.
He would suggest a goal for the next three weeks of $100
$300 million of free reserves, with the exact level to be left to
the discretion of the Desk.
In this connection, he noted that the
reserve projections distributed at this meeting would be in con
formity with what he had suggested.
said that it
If
it
As to the directive, Mr. Allen
might be possible to just leave out clause (b) completely.
were felt, however, that clause (b) was needed, he would lean
more to the language suggested by Mr. Irons than to any of the other
suggestions.
Mr. Leedy stated that in the Tenth District there continued
to be signs of vigorous recovery starting from a more favorable level
than the rest of the country.
It
now appeared that in agriculture
new records were going to be set this year in
wheat crop, which is
the district.
The
most important in the area, was estimated to
-36
8/19/58
be about twice as large as last year's crop.
Also, the construction
picture was particularly strong, with the figures indicating an in
crease of 11 per cent for the first
six months of this year as
compared with the similar period in 1957.
Nonfarm employment con
tinued to show some improvement, although the level was still
last year.
below
As to department store sales, figures for the last four
weeks reflected an increase of 5 per cent above a year ago; for the
year to date sales were 1 per cent above last year.
Mr. Leedy said he had been greatly surprised at the progress
that the Management of the System Open Market Account had been able
to make in the elimination of redundant reserves.
that a remarkable job had been done in
It
this respect.
seemed to him
The problem
immediately ahead, he said, had been pointed out by Mr. Young,
the matter of the very large additions to the money supply.
namely,
Personally,
he would respond to seasonal needs but beyond that he would certainly
not subscribe to any further additions to the money supply.
He would
expect the discount window to be used to a considerable extent to
supply seasonal needs.
Even with a new level of interest rates
emerging, he assumed that it
would be possible to make some progress
toward further reduction of the level of free reserves, but he would
not want the operations of the System to create further difficulties
for the Treasury.
He would make sure, or attempt to, that System
operations would not present problems in
the Government securities
8/19/58
-37
market or, for that matter, in the capital markets generally.
Rather,
the System should be feeling its
way along and, to the
extent possible, bring about a reduction in
reserves.
the level of free
In saying this, he had no particular figure in mind
as a target for free reserves.
As to the policy directive, Mr.
Leedy said that the very
simple statement for clause (b) suggested by Mr.
close to language that he had drafted himself.
Treiber was quite
He would suggest
"with a view to fostering sustainable economic recovery."
would recognize the fact that the country was still
in
This
a recovery
stage and would permit the Committee later to make some change in
clause (b) referring, perhaps, to economic growth.
Mr. Leach said that Fifth District economic developments in
recent weeks had been decidedly favorable.
Furniture manufacturers
reported improved shipments in July, sales of lumber mills had in
creased and higher demand levels were expected, and construction
contracts had shown a sharp pickup.
Department store sales were near
the record levels of last August, cotton textile prices had remained
firm, and higher levels of activity had reduced unemployment.
Crop
conditions had improved further and farm income for 1958 would likely
be much better than the low level of last year.
Sentiment in the
Fifth District as to business prospects was almost universally more
favorable, with predictions of inflation widespread.
So far, however,
-38
8/19/58
predictions with respect to price increases seemed to be reflected
primarily in
terest in
increased interest in
fixed income obligations.
common stock and decreased in
There was little
evidence that
business and consumer buying had been materially affected.
Beginning his comments with respect to policy, Mr. Leach
said he was surprised at the timing of the discount rate increase
at San Francisco.
While he had been advocating for some time less
ease with a lower level of free reserves, and while he had expected
a discount rate change before long, he told his directors last
Thursday that he thought an increase in the rate would be premature.
At that time, he was feeling rather pleased about the rapidity with
which the System had recaptured redundant reserves and moved into a
$400-$500 million range of free reserves, with $300-$400 million
forecast for the week ending tomorrow.
The position of the Richmond
directors, he said, probably would not have been different if they
had known about the change in the rate at San Francisco.
Continuing, Mr. Leach said that the weeks immediately ahead
seemed to provide a good opportunity to take further actions to con
tain inflationary pressures.
The Treasury presumably would be out
of the market until October and there was less need to worry about
the possible adverse effects on the Government securities market of
a lower level of free reserves, for the market was well aware that
policy had shifted.
The vigor of the current upturn lessened the
-39
8/19/58
danger of monetary actions checking further recovery.
In his
opinion, the System should continue to move toward less ease as
rapidly as market conditions might permit.
Under present condi
tions he hesitated to mention a benchmark for free reserves but
he would expect them to move downward rather sharply.
Obviously,
the policy directive should be changed and there were a number of
ways in which that could be done.
He would like to recognize in
the directive that complete recovery had not yet come about and,
after giving thought to whether the directive should incorporate
reference to inflationary pressures at this time, he had concluded
to suggest "to accommodating further recovery and avoiding the
development of inflationary pressures."
Whether it
was desirable
to mention inflationary pressures at this time or to wait until
later reflected a matter of judgment.
He did not see the need to
refer to fostering or promoting further recovery but only to
accommodating it.
Mr. Leach concluded his remarks by saying that as of the
moment he did not intend to initiate any special meeting of the
Reserve Bank's directors, which meant that he did not intend to
make any recommendation to the directors with respect to the
discount rate until the regular meeting to be held a week from
next Thursday.
Mr. Vardaman said that in
it
terms of the next three weeks
seemed to him that the goal for free reserves should be zero
-40
8/19/58
to $300 million, if in fact a target could be fixed.
This would
contemplate always leaving to the Desk the widest discretion to
act on the basis of the feel of the market.
In his opinion, the
discount rate action of the San Francisco directors was most timely
and had had a good effect.
He felt that it was fortunate that the
entire System did not move at one time.
As it was, the San Francisco
situation set people to thinking a little bit.
Mr. Vardaman said he believed that the frame of mind of the
buying public was ahead of the statistics.
The accumulation of
savings suggested to him that the buying public was rather in the
posture of a race runner awaiting the starting gun; in fact, some
had already started.
Very possibly there would be an all-out run
for goods and services beginning in the early fall and culminating
in heavy Thanksgiving and Christmas business.
As nearly as one
could feel that way, he felt definitely that shock treatment was
going to be advisable in the late fall, and in preparation therefor
he hoped that the System would now begin the necessary tightening
process.
ease
Certainly, there should be a retreat from anything like
and a tendency toward tightness.
As to the directive, Mr. Vardaman thought that it would be
possible to drop clause (b).
In any event, he hoped that the
language used would be such that it
could be clearly interpreted
as a desire to regulate the expansion of the money supply in
-41
8/19/58
proportion to bona fide movements in the economy.
Mr. Shepardson said the reports clearly indicated that there
was under way a very healthy recovery which could be approaching the
explosive stage.
With that in mind,
he considered it
important for
the System to make decisions now in the light of the situation that
it was apt to face.
Like others at the table, he had been surprised
and pleased at the rapid recovery of redundant reserves, for at the
last meeting of the Committee there was a good deal of question as
to how much could be done in the ensuing three weeks.
fortunate, he said, that it
so expeditiously.
It was
had been possible to handle the matter
However, the Committee was still confronted by
redundant reserves to the extent of the excess money supply reported
by Mr.
Young.
He would hope that the Account Management might be
able to bring down free reserves to a much lower level at a faster
rate than some persons seemed to contemplate.
In making this comment,
he was not unmindful of the references made to tightness in the
money market,
fully.
and this was a matter which must be considered care
At times, however, the System had gotten into some difficulty
because of a little
more sensitiveness to what was considered tight
ness in the market than perhaps was justified, and the System had
continued putting reserves into the market in
tightness.
exert a little
He felt
that it
view of that seeming
would be necessary for the System to
pressure and that it
should not be too sensitive to
- 12
8/19/58
some feeling of tightness.
If
the System was not careful,
find that the "horse had gotten the bit in
to exerting pressure, so it
pressure at this time.
it
his teeth" when it
might
came
would be better to put on a little
Admittedly, no one would want to exert such
pressure as to throw the recovery movement into a tailspin, but it
seemed necessary to use more pressure than had been exerted to date.
Personally,
he would favor moving free reserves downward faster than
the projections distributed at this meeting would indicate.
He would
like to get to zero within a three-week period.
Mr. Shepardson expressed the opinion that the discount rate
action at San Francisco was fortunate and said he would hope that in
the succeeding days there would be further actions in
position.
Like Mr.
Vardaman, he felt
it
support of that
was a good thing that the
action was not "across the board," but he would hope that those
boards of directors in
the best position to justify similar action
would move fairly soon.
As to the directive,
same views as Mr.
Leach.
Mr.
Shepardson said he had somewhat the
He rather liked Mr.
Leach's suggestion about
the lack of need to promote or foster further recovery for it seemed
that recovery was well on the way and need only be accommodated.
He
would favor language of that kind in the directive, with some reference
to possible inflationary pressures.
8/19/58
-43
Mr.
Fulton reported that the Fourth District was beginning
to see a little more light than previously.
As attested by statistics
which he mentioned, steel production was creeping upward.
He added,
however, that the rates mentioned were still not nearly what production
would be in a really vigorous recovery. The imponderable in the
situation was the automotive industry which had not been ordering
steel to the extent expected; possibly this could be attributed to
anticipation of a work stoppage due to a strike in
Nevertheless,
the industry.
there had been some ordering due to over-reduction
of inventories.
Turning to the mining and ore industries, he noted
that only 66 per cent of the ore boats were in comission this year
so that the tonnage pulled down would be substantially below last
year.
in
In the machine tool industry,
orders but shipments were still
there had been a little
exceeding orders, which meant
that backlogs were being further drawn down.
Bituminous coal tonnage
was down 42 per cent from the same date last year.
ment picture,
upturn
As to the employ
conditions had not changed very much recently.
In the
Fourth District there were twelve areas of major unemployment and
28 areas of substantial unemployment, which represented no change
in the last couple of months.
been the low point in
However,
the month of June may have
regard to unemployment.
There had been some
lengthening of the work week and productivity undoubtedly had in
creased in
the plants of the district.
8/19/58
-44
Continuing,
Mr.
Fulton said that construction contracts
had increased sharply in
were at an all-time high.
trade was still
June and July and mortgage loans at banks
To date this year, department store
4 per cent under last year, while sales of automobiles
were about 30 per cent below last year.
Over all, the Fourth District
was participating rather slowly but definitely in the upturn in
business.
Hopes for the last quarter of the year were still
good,
with most industries looking forward to improvement both in sales
and manufacturing levels.
Mr. Fulton expressed the view that free reserves should be
reduced to zero as soon as possible commensurate with the tone of
the market and without upsetting the market.
The Desk, he felt,
should be commended for having reduced free reserves to the extent
that it had, particularly in view of the large amount of securities
that the System had been forced to purchase.
Turning to the discount
rate, he said he believed it would be the feeling of the Cleveland
directors that no change should be made until there was a little
more evidence of greater activity in the district and evidence that
some of the industries that had been at low points were working up
to higher production.
unemployment in
As long as there was such a large amount of
the district, the directors might feel that it
not be well for the rate to be increased.
would
In fact, he considered it
probable that nothing would be done on the rate in September unless
8/19/58
-45
there was a substantial improvement over existing conditions in the
district, that is,
appeared to be in
Mr.
a degree of improvement beyond that which now
prospect.
Fulton expressed agreement with others who had suggested
that clause (b) of the policy directive might be eliminated.
event,
however,
In such
the words "without inducing inflation" should be added
to clause (a) so that that clause would read "to relating the supply
of funds in the market to the needs of commerce and business without
inducing inflation."
That would seem to be exactly what the System
was trying to do.
Mr. Bopp presented substantially the following statement:
Improvement in business activity in the Third District is
proceeding at a slow pace.
There was a small contraseasonal rise in manufacturing
employment in June, including both durables and nondurables
industries. The total, however, was still 8 per cent below
June of last year. Average hours worked and average weekly
Preliminary data
earnings were also somewhat higher in June.
for ten of the district's 14 labor-market areas, however,
indicate a seasonal decline in manufacturing employment in
July. Employment was below June in seven of the areas, only
three showing small increases.
Construction activity in the Third District has not held
up as well as nationally. Contract awards in June were 2 per
cent above a year ago, much below the 18 per cent nationallyand reflected entirely a rise in public works. For the first
half of this year, district contract awards were 8 per cent
below last year as compared to only 1 per cent nationally.
Incipient recovery, the prospect of a large Treasury
deficit, and price increases have inspired widespread belief
that we are entering another round of unabated inflation.
General anticipation of inflation seems to be confirmed by
recent behavior in the stock and bond markets. On the other
hand, there are over 5 million unemployed, and the vigor and
speed of the recovery which seems to have emerged are as yet
8/19/58
-46-
unknown.
These developments raise the question of how
much emphasis we should give to the threat of inflation
and how much to fostering recovery from the recession.
Although the inflation psychology which has mushroomed
in recent weeks is cause for concern, I do not believe in
flation is our primary problem in the immediate future.
First, recent price markups do not necessarily presage a
resurgence of inflation. In 1954, for example, wholesale
prices of a number of products, such as metals, industrial
materials, building materials, and rubber, began rising
before midyear but the index for all commodities other
than farm and foods was fairly stable until mid-1955.
Second, prices of services and foods--important factors
pushing up the consumer price index since early 1956--were
unchanged in June, indicating that the upward trend in these
prices may be leveling off.
Third, unemployment and unused
plant capacity should be a strong deterrent for some time
to rising prices.
Fourth, an upward surge of credit, such
as accompanied the 1954-1955 recovery, has not as yet emerged.
Finally, inflation psychology is based largely on anticipations.
Sentiment as to business prospects is volatile and could again
change quickly should incipient recovery prove to be illusory
or proceed more slowly than presently anticipated.
On the other hand, too many unemployed and too much idle
capacity are real, not anticipated, conditions.
For the im
mediate future, further recovery is a more pressing problem
than the threat of inflation.
Consequently, I believe our immediate objective should
be to maintain credit and money-market conditions conducive
In doing so, however, we should be unusually
to recovery.
careful not to create a degree of ease and liquidity that
would aggravate the threat of inflation or contribute to
In the present state of the economy,
inflationary tendencies.
I believe that the risk of contributing significantly to
inflation by a policy intended to encourage recovery is less
than the risk of impeding recovery through restrictive action
to deal with anticipated inflation.
Long-term rates are already too high, particularly as
capital expenditures are one of the soft spots in the economy.
Yields on long-term Governments and AAA corporates are nearly
1 per cent higher than at the beginning of recovery in the
I would not do anything to put addi
latter part of 1954.
tional pressure there, but I would favor some lesser ease
in the short-term area--if that can be achieved.
8/19/58
-47
I do not favor raising the discount rate at the present.
I think the national level of unemployment and of other un
used resources is too high to add further at this time to
the pressures that have already developed in the money and
capital markets.
Although monetary policy cannot deal
effectively with structural and geographic imbalances, un
employment is still
fairly widespread in the Third District,
as throughout the country.
Of 13 major labor markets, only
our
labor
force, are classified as
3, with 12 per cent of
high as "C". Four are classified "F" as having substantial
labor surplusses; in addition, 8 minor markets are classified
as "F".
I would revise the directive to reflect more accurately
the changes that have occurred since it was adopted. It is
important, I believe, that the wording of the directive
indicate that the System has two objectives: (a) to foster
recovery, and (b) without encouraging inflationary develop
ments. A suggested wording for clause (b) of the directive
is "to maintaining conditions in the credit and money markets
that will promote recovery without encouraging inflationary
developments." I appreciate that this is easier to put into
a directive than to carry out in operations.
Mr. Bryan said that in preparation for this meeting he had been
trying to answer in his own mind a few questions.
The first question
was whether recovery was proceeding in the Sixth District, and on the
basis of the statistics the answer must be in the affirmative.
The
second question was whether recovery was proceeding in the nation.
Here he wished to associate himself with Mr. Young's statement that
recovery was proceeding and also with Mr. Young's thesis that reserve
supplies and the money supply are entirely ample to support the
recovery.
Regarding possible action on the discount rate, he had
asked himself how the Sixth District had been faring in comparison
with the nation as a whole from the standpoint of year-to-year and
-4 8
8/19/58
month-to-month statistics.
Mr.
Bryan then cited a number of
statistical comparisons on both bases from which, he said, it
seemed clear that if
a case could be made for a change in the
discount rate on the basis of either national or district policy,
then a case could be made for such a change in the Sixth District.
With regard to general policy, Mr.
thought the System had performed well in
Bryan said that he
the past three weeks.
While he had strongly advocated the elimination of redundant
reserves at the last meeting,
he did not think at the time that
this could be effected as expeditiously as the Desk had actually
been able to do it.
The effects of the increase in margin require
ments and the increase in
in
his opinion, all
the discount rate at San Francisco were,
to the good.
the System's concern.
With regard to reducing free reserves and
increasing the discount rate, it
was one of timing.
Those actions publicly announced
seemed to him that the only question
If it were felt desirable to reduce the supply of
free reserves or to make changes in
the discount rate, then the
earlier the better so that whatever possible repercussions these
changes had in
themselves.
the capital markets would have ample time to adjust
Accordingly,
it
was his inclination to recommend at
next week's meeting of the Reserve Bank's executive committee a
1/4 per cent increase in the discount rate.
That might present a
problem for other districts, but for the immediate future it
seemed
8/19/58
-49
to him that there was a very genuine difference as between districts
and that possibly no harm at all would be done by having different
discount rates in
Mr.
the various districts.
Johns said that although many comments had been made this
morning with which he found himself substantially in agreement,
he
thought that he would like to align himself more closely with the
comments of Mr. Bopp than with any of the other statements.
As else
where, he said, the accumulating evidence of recovery was being
observed in the Eighth District, and with those developments he was
gratified for this was precisely what the System had been seeking.
However,
in
he was not yet convinced of the inevitability of inflation
the immediate future.
As a matter of fact, he was inclined to
characterize what some had called inflationary psychology as an
inflationary psychosis.
There had been a significant rise in
interest rates and there was some opinion to the effect that this
rise had occurred too rapidly and too sharply.
Without attempting
to express an opinion on those points, nevertheless it
that it
was his view
would be premature--and therefore not advisable--to add
through Federal Reserve policy to the magnitude and the speed of
this adjustment.
He was quite aware of the necessity for monetary
policy to be flexible and he was also aware of the fact that there
had been some criticism, both from outside the System and from within,
concerning the slowness of change of monetary policy at the end of
-50
8/19/58
the 1953-54 recession.
His thought at this time would be to construe
flexible monetary policy as not meaning premature change but as im
plying a firm resolve to be just as resolute as the circumstances
require when the evidence is
clear that there is
a need for change
in policy.
Mr. Johns said that he would favor a gradual tailing-off of
the free reserve position.
However,
he said that he did not look
with favor on a discount rate change at this time and that he so
indicated to the St. Louis directors at their meeting last Thursday.
Obviously, the discount rate would have to be considered again by
the directors a week from next Thursday.
His present inclination
was toward requesting the Chairman of the Board of Directors to
convene a special meeting of the directors at that time because at
the St. Louis Bank the directors almost unanimously feel that a rate
change should be considered by the full board of directors.
he was not sure that he would recommend a change in the rate.
However,
On the
basis of the discussion at the directors' meeting last week and in
view of conversations with some of the directors since the action on
the part of the San Francisco Bank, he was not at all sure whether,
even if he recommended a change in the rate, the directors would go
along with such a recommendation.
With regard to the directive, Mr.
favor a change in it
Johns said that he would
and that a number of suggestions had been made
with which he would be quite happy.
Of them, he liked best the
-51.
8/19/58
suggestion made by Mr. Irons.
Mr. Balderston recalled that it
was just a year ago when the
System took an action that has been debated ever since, namely, action
to increase the discount rate to 3-1/2 per cent.
Therefore, it
seemed
to him appropriate to secure a view of the present picture in relation
to the picture a year ago when the System was fighting inflation with
all
of the restraint that it
could impose.
because the period ahead had been left
the Treasury.
It
also seemed appropriate
clear for monetary policy by
A year ago, Mr. Balderston pointed out, unemployment
was at a level of three million, or about 4.6 per cent, while today
it
stood at 5.3 million, or 7.3 per cent.
Thus, the unemployment
situation was considerably worse now, and that fact ought not to be
forgotten.
Possibly the country might have to live for some time
with more unemployment than would be found desirable.
with his comparison,
Mr.
Continuing
Balderston recalled that a year ago the com
mercial bank prime rate was 4-1/2 per cent and the System was raising
the discount rate to 3-1/2 per cent to narrow the differential.
At
that time Congressional discussion was reflecting the popular revulsion
against Government spending, while this August the Congress was going
home leaving a budget deficit behind of perhaps $12 billion.
Spending
was not only excessive but ill-timed in view of the recovery movement.
Before the next Congress convened, half a year must elapse and that
period might be fateful in terms of how the System handled its
responsibilities.
8/19/58
-52
Mr.
Balderston said he would be the last one to urge on
the Administration or the Congress the adoption of controls of a
selective character.
To him, they were inimical to everything
the System held dear and should be used only in dire emergencies.
However,
the country appeared to need the educational value of a
great debate concerning how to avoid unemployment without inflation
or, more precisely, how to keep unemployment in
tion.
check without infla
Unless that educational process was complete,
he did not
believe that Congress would come back to Washington in a frame of
mind that would make for prudent policy decisions.
However,
if
this education could be given, perhaps the new Congress would convene
in a mood to bring Governmental spending in rein.
In the meantime,
Mr. Balderston said, this placed an abnormal
burden upon monetary policy-probably more of a burden than it
should
be expected to bear and one that it could not be expected to discharge
with the success that the country seemed to expect.
Treasury had arranged its
Fortunately, the
affairs so as to leave a clear path for
monetary policy for about two months.
Fortunately, also, there would
be a seasonal tightening of credit which, in the absence of off
setting System action, would absorb about one-half billion dollars of
reserves.
System.
Thus,
certain natural forces were working along with the
8/19/58
-53
Mr.
Balderston said he subscribed to a good deal of what
Mr. Vardaman had said.
In the face of a fiscal policy which was
almost frightening and in the face of a mass psychology that was
even more frightening, the Federal Reserve System must take action
that the country could understand in
of the general public.
reliance upon the common sense
He said that he was pleased about the action
taken by the San Francisco Bank, and he expressed the view that the
posture of a split discount rate was not unbecoming at the moment.
He would favor the wiping out of free reserves as fast as that could
be done smoothly.
to describe in
his comments,
of restraint and it
Therefore,
In the face of a situation such as he had attempted
the System should be starting on a policy
could not do that with free reserves in
the picture.
free reserves should be brought down to zero at the earliest
possible moment.
He did not care particularly how the directive was
worded as long as the System took the actions that he considered right.
Chairman Martin prefaced his comments by saying that it was a
good thing to have differences of opinion expressed within the Com
mittee because they tend to illuminate the pboblems with which the
Committee is
dealing.
As to his own position, he said that he wanted
to associate himself with the thinking of the Federal Reserve Bank of
San Francisco on the discount rate.
From the standpoint of timing,
something might have been said for delaying the action until after
the discussion at this meeting of the Open Market Committee,
but he
8/19/58
-54
was not certain that this was a very important matter.
was dealing with what Mr.
The System
Johns had aptly described as an infla
tionary psychosis as well as inflationary psychology, and the
System could never hope to be popular in conducting monetary policy;
whenever it
properly.
was popular, the System probably was not doing its
job
At the same time, one could not expect to do too much
when budget decisions, debt management, and fiscal policy are all
in the picture along with monetary and credit policy.
The System,
he said, did not create the recession that started a year ago.
In
his opinion the discount rate actually should have been raised much
earlier in
1957 but, because the Treasury was in the market virtually
every month, the System went along from month to month during a
frustrating period of Treasury-Federal Reserve relationships until
finally it
raised the discount rate in
a technical decision at a
time when some of the harvest of inflation was being reaped.
In
his judgment, the reason that there were now more than five million
unemployed was to be found in the extent that inflation dominated
the economy in
did its
the course of the last few years.
Monetary policy
part to restrain but there were severe budget flip-flops,
including a complete flip-flop in
the defense budget.
The Chairman said that the System had to stand up and be
counted in
these things.
It
could not ignore an inflationary
psychosis any more than inflationary psychology.
Mr. Bryan had
8/19/58
-55
pointed the problem up very well in his comments at the last meeting
of the Committee.
At the present, there had been an increase in
personal income, housing starts--financed in large part through FHA
money-were increasing, and production had recouped one-third of its
total decline in a period of three months.
note of those things,
The System had to take
and the System had let the increase in
money supply run away from it.
the
The commentators and the public, he
noted, were prone to say that the System started a recession when it
raised the discount rate to 3-1/2 per cent, and now they would say
that the System was starting another recession when it
raised the
discount rate to 2 per cent.
Chairman Martin said that, as Mr. Young had pointed out in
his comments, the expansion in the money supply had been proceeding
at quite a strong rate.
Some of this expansion had repercussions
in the Government securities market at an unfortunate time and com
pounded the Treasury's problem at that point.
Now the System did
not have too much time because the Treasury would have to go to the
market for new money in early October and under present conditions
the System would probably have to supply some reserves for it
not let the Treasury financing fail.
could
However, the present atmosphere
required the adjustments that had taken place in the market, unfortu
nate as they were.
It
there is
must not be forgotten, Chairman Martin said, that in a way
a distinct bias toward easy money, for it
is
much easier to
8/19/58
-56
go down than up.
When the System moves down everyone applauds, and
then little notice is given to the further actions taken so that the
System tends to get enamoured of moving in that direction.
Then,
when the System has to move in the other direction, it is not so easy
and the System runs into more resistance.
The Chairman expressed the view that the Secretary of the
Treasury and Under Secretary Baird were acting in
exemplary fashion.
They were not happy about some of the things that had occurred, they
were just as concerned as the System about the major current problems,
and they wanted to do whatever possible to assist.
At the same time,
when the System was talking about further reductions in reserve re
quirements,
there was no resistance from the Treasury.
Continuing,
Chairman Martin said that at present there was a
maelstrom of maladjustments.
and it
This situation was reflected in
Congress,
might be that the System was going to have a very hard time in
In saying this, he was not talking
the next session of the Congress.
about monetary problems alone.
to the need for a great debate.
but, however one put it,
Mr. Balderston, he said, had referred
It
might be stated in
the principal problem in
other ways,
the area of political
science was the role of the central bank in relation to the Treasury.
This problem was world-wide and the Federal Reserve System was in
the center of it,
it could.
so the System must try to exert what leadership
It ought to move in the direction of mopping up the
8/19/58
-57
excess reserves that were not being used before the time came when
there would be virtually no opportunity for the System to do anything.
At present, there was some opportunity to move toward lower levels of
free reserves.
He again wished to express the opinion that the San
Francisco Bank's action was justified and that the Board of Governors
had been justified in
approving the higher discount rate.
It
hope that other Reserve Banks would move ahead on the rate.
was his
It
would
be his view that those who did not move were wrong, although he could
understand that conditions in each district must be considered.
In talking about recovery,
Chairman Martin said, it
to put the matter in longer-range perspective.
gin to develop again, it
If
is
necessary
inflation should be
might be that the number of unemployed would
be temporarily reduced to four million, or some figure in
that range,
but there would be a larger amount of unemployment for a long time to
come.
If
inflation should really get a head of steam up, unemploy
ment might rise to ten million or fifteen million and that would
completely destroy all of the emphasis that had been placed on the
role of private enterprise.
He noted that in a recent resolution
Senator Proxmire had stated that the Congress should order the
Federal Reserve to study "other means of controlling inflation,"
and that suggested a prevalent attitude today.
His own judgment,
the Chairman said, might be incorrect as to the usefulness of
monetary and credit policy.
To the average person today monetary
8/19/58
-58
policy had again become discredited.
Chairman Martin said that he had recently been watching
public reactions closely and that the general reaction of the
average man was along the lines of:
"You did the best you could
in 1955 and 1956 but prices continued to go up.
not just have easy money and avoid frustrations"?
Therefore, why
That was the
major public relations problem confronting the System, and the
System was not going to win any friends by failing to face up to
what it could do.
A great many people, including some foreign
central bankers, had begun to worry about the epansion of the
money supply in which the System was engaged, particularly when
this was placed in the perspective of a budget deficit which might
be in excess of $12 billion and no real tempering of expenditures.
These circumstances contrived to produce a potentially dangerous
situation.
He was not sure that there was not an element of truth
in one article which said in effect:
"You have acted with courage,
but this is the Federal Reserve System's last chance."
It might be
that the problem could not be explained to the public and that the
central bank eventually would become subordinate to the Treasury.
However, the System should not in any way jeopardize its position
by failing to have courage to assume the risks that were involved.
There was certainly a risk, for if there should be a decline in
business this fall the System would be blamed for it.
8/19/58
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Chairman Martin
went
the apprehension that Mr.
to unemployment,
on to say that he understood fully
Bopp had expressed very well with respect
idle capacity,
and the capital markets.
All of
those factors should be of major concern to the Committee but they
should not prevent the Committee from trying to mop up idle money
or from trying to the best of its
of the outlook.
ability to highlight the nature
Incidentally, he noted, there were some people who
took heart when the San Francisco action was announced.
Chairman Martin said he did not think that the System had
faced in recent years anything like the present problem, whether it
be called an inflationary psychosis or inflationary psychology.
He
did not know how to deal with the specifics of the problem except by
moving in
the right direction within the System.
was forced to go to the market in
October,
When the Treasury
the System was not going
to be able to move dramatically for it would have to take into ac
count the Treasury's requirements and the Treasury probably would
have a very difficult situation.
Also, there was the wage-cost
push which was not at all the central bank's problem.
Summarizing the discussion at this meeting, the Chairman said
it
appeared to indicate a desire on the part of the majority to move
in
the direction of lower free reserves and, it
seemed fair to say,
without seriously disrupting the Government securities market.
would not be easy to do, and it
was a problem which the Account
This
8/19/58
-60
Management must face.
materially in
However,
the reserve projections were moving
that direction, so without too much pressure the
Management might be more or less able to meet the wishes of the
majority by moving along with the projections.
The Management should
not be tied to any specific figure of free reserves because the Com
mittee had found out how vulnerable it
target.
was when it
The fears often expressed by Mr. Irons in
set up a specific
that respect had
been vindicated.
Turning to the directive, Chairman Martin said that almost
any of the suggestions that had been made would be acceptable as far
as he was concerned.
Mr. Young,
he said, had suggested "to tempering
the rate of expansion of the money supply."
This wording would have
the advantage of being directed specifically to what the Committee
was doing.
During a discussion of Mr. Young's suggestion, Chairman Martin
pointed out that it
would be possible to add to that language "and
fostering sustainable economic recovery" or any similar phrase that
the Committee might favor.
that it
The merit in Mr. Young's suggestion was
would meet the System's immediate problem.
Mr.
Irons inquired whether it
that over the next three weeks it
was the view of the Committee
wanted the money supply to expand.
When several negative indications were heard, he commented that the
wording proposed by Mr.
Young would seem to suggest further expansion
8/19/58
-61
of the money supply.
In response, Chairman Martin suggested that
the proposed wording was designed to leave the Account Management
some latitude in its operations.
Mr. Balderston said that the concept he would like to see
embodied in any directive for the next three-week period would be
something like "to adjusting the money supply to the constructive
needs of the economy."
At a time like the present he felt that
this was especially important.
Mr. Shepardson noted that it had been suggested by some of
those around the table that it might be possible to eliminate clause
(b) of the directive and to add to clause (a) a few words such as
"without inducing inflation."
In further discussion of alternate possibilities, Mr. Treiber
commented that he was not sure how a directive such as "tempering the
rate of expansion of the money supply" would work out in practice.
He had thought of the directive more in terms of outlining the climate
in which the Account Management was to operate.
At the request of the Committee, Mr. Irons then repeated his
suggestion for clause (b) which was "to fostering conditions in the
money market conducive to balanced economic recovery and growth."
Subsequently, he indicated that upon consideration he was inclined
growth."
to feel that it would be preferable to delete the words "and
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8/19/58
With reference to the comments that had been made about
wanting to avoid any disruption of market conditions, Mr.
said he considered it
Shepardson
important that this not be interpreted to mean
that no pressure would be exerted, for he felt that the System must
exert some pressure to obtain the desired results.
On this point,
Mr.
the System did
Balderston remarked that he would be unhappy if
not get rid of free reserves by the time of the next Open Market
meeting.
Chairman Martin pointed out that the Committee did not appear
to be unanimous in
to the trend.
It
that view.
However,
it
was unanimous with regard
was clear that the Committee wanted to be moving
in the direction of the elimination of free reserves by the time of
the next meeting.
Mr. Larkin said that conceivably a zero level of free reserves
might be achievable in
the next three-week period and, if
presumably would become the target.
so, that
He inquired whether that was the
sense of the Committee.
Chairman Martin replied that he did not think anyone would
quarrel with reaching toward a zero level of free reserves if
it
was achievable.
Mr. Irons remarked that he did not think the objective was
necessarily to get back to zero.
He did not like pinpointing any
fixed figure, whether it was zero or $500 million, because in his
8/19/58
-63-
opinion the System only got into difficulty by trying to specify
any particular figure, no matter what it
was.
Mr. Larkin then stated that he thought he understood the
sense of the meeting.
Thereupon, upon motion duly made
and seconded, the Committee voted
unanimously to direct the Federal Re
serve Bank of New York until otherwise
directed by the Committee:
(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, as may be necessary in the
light of current and prospective economic conditions
and the general credit situation of the country, with
a view (a) to relating the supply of funds in the
market to the needs of commerce and business, (b) to
fostering conditions in the money market conducive
to balanced economic recovery, and (c) to the practical
administration of the Account; provided that the aggre
gate 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 indebted
ness purchased from time to time for the temporary
accommodation of the Treasury, shall not be increased
or decreased by more than $1 billion;
To purchase direct from the Treasury for the
(2)
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.
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8/19/58
It
was agreed that the next regular meeting of the Committee
would be held on Tuesday,
September 9, 1958, at 10:00 a.m.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1958, August 18). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19580819
@misc{wtfs_fomc_minutes_19580819,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1958},
month = {Aug},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19580819},
note = {Retrieved via When the Fed Speaks corpus}
}