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, March 3, 1959,
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Allen
Balderston
Deming
Erickson
Mills
Robertson
Shepardson
Szymczak
Bryan, Alternate for Mr.
at 10:00
a.m.
Johns
Messrs. Bopp, Fulton, and Leedy, Alternate Mem
bers of the Federal Open Market Committee
Messrs. Leach, Irons, and Mangels, Presidents of
the Federal Reserve Banks of Richmond, Dallas,
and San Francisco, respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Jones, Marget, Parsons, Roosa, and
Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Molony, Special Assistant to the Board of
Governors
Mr. Keir, Chief, Government Finance Section,
Division of Research and Statistics,
Board of Governors
Messrs. Ellis, Storrs, Baughman, Tow, and
Walker, Vice Presidents of the Federal
Reserve Banks of Boston, Richmond, Chicago,
Kansas City, and Dallas, respectively
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3/3/59
Messrs. Balles and Einzig, Assistant Vice
Presidents of the Federal Reserve Banks
of Cleveland and San Francisco,
respectively
Mr. Stone, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Anderson, Economic Adviser, Federal
Reserve Bank of Philadelphia
Mr. Brandt, Economist, Federal Reserve Bank
of Atlanta
In the agenda for this meeting,
the Secretary reported that ad
vices of the election by the Federal Reserve Banks for a period of one
year commencing March 1,
1959,
of members and alternate members of the
Federal Open Market Committee had been received and that it
appeared
that they would be legally qualified to serve after they had executed
their oaths of office.
Prior to the meeting, each newly elected
member and alternate member except Mr.
oath of office.
Johns had executed the required
The members and alternate members were as follows
J. A. Erickson, President of the Federal Reserve Bank
of Boston, with Karl R. Bopp, President of the
Federal Reserve Bank of Philadelphia, as alternate
member;
Alfred Hayes, President of the Federal Reserve Bank of
New York, with William F. Treiber, First Vice President
of the Federal Reserve Bank of New York, as alternate
member;
Carl E. Allen, President of the Federal Reserve Bank of
Chicago, with Wilbur D. Fulton, President of the
Federal Reserve Bank of Cleveland, as alternate member;
Delos C. Johns, President of the Federal Reserve Bank of
St. Louis, with Malcolm Bryan, President of the Federal
Reserve Bank of Atlanta, as alternate member;
1/
Mr. Johns executed the oath of office on March 5, 1959.
3/3/59
Frederick L. Deming, President of the Federal Reserve
Bank of Minneapolis, with H. G. Leedy, President of
the Federal Reserve Bank of Kansas City, as alternate
member.
Upon motion duly made and seconded,
and by unanimous vote, the following
officers of the Federal Open Market Com
mittee were elected to serve until the
election of their successors at the first
meeting of the Committee after February 29,
1960, with the understanding that in the
event of the discontinuance of their
official connection with the Board of
Governors or with a Federal Reserve Bank,
as the case might be, they would cease to
have any official connection with the
Federal Open Market Committee:
Wm. McC. Martin, Jr.
Alfred Hayes
Winfield W. Riefler
Elliott Thurston
Merritt Sherman
Kenneth A. Kenyon
Howard H. Hackley
Frederic Solomon
Woodlief Thomas
Homer Jones, Arthur W. Marget,
George W. Mitchell, Franklin
L. Parsons, Robert V. Roosa,
Parker B. Willis, and Ralph
A. Young
Chairman
Vice Chairman
Secretary
Assistant Secretary
Assistant Secretary
Assistant Secretary
General Counsel
Assistant General Counsel
Economist
Associate Economists
Upon motion duly made and seconded,
and by unanimous vote, the Federal Reserve
Bank of New York was selected to execute
transactions for the System Open Market
Account until the adjournment of the first
meeting of the Committee after February 29,
1960.
Upon motion duly made and seconded,
and by unanimous vote, the selection by
the Board of Directors of the Federal Re
serve Bank of New York of Mr. Rouse as
Manager of the System Open Market Account
was approved.
3/3/59
-4
The minutes of the meeting of the Federal Open Market Com
mittee on February 10, 1959 were then presented for approval.
Chairman Martin called attention to the fact that there had been a
change in the voting membership of the Committee since that meeting,
four of the present members having served as alternate members during
the past year.
Some years ago,
he noted, it
had been the practice
to have a meeting of the outgoing Committee in late February of each
year in
order to ratify actions taken up to that time.
However,
Counsel had advised that such ratification (including the approval of
minutes for a meeting of the outgoing Committee) could be done by the
new Committee equally as well as by the old one, and since 1952 this
practice had been followed.
The Chairman said that, while there was
no question as to the appropriateness or legality of the present
procedure,
he was mentioning the point at this time in
order that all
members of the Committee and the Reserve Bank Presidents not currently
serving as members would have in mind the basis for the procedure now
being followed.
Thereupon, upon motion duly made
and seconded, and by unanimous vote, the
minutes of the meeting of the Federal
Open Market Committee held on February 10,
1959, were approved.
Chairman Martin referred to a memorandum distributed under
date of February 25, 1959,
relating to the procedure authorized at
the meeting on March 2, 1955 whereby, in addition to members and
3/3/59
-5
officers of the Committee and Reserve Bank Presidents not currently
members of the Committee, minutes and other records could be made
available to any other employee of the Board of Governors or of a
Federal Reserve Bank with the approval of a member of the Committee
or other Reserve Bank President, with notice to the Secretary.
At the Chairman's suggestion, it
was understood that this
subject would be considered later during this meeting, along with
the question of distribution of the weekly open market report pre
pared by the Federal Reserve Bank of New York and the reports pre
pared by the Manager of the System Open Market Account prior to each
meeting of the Federal Open Market Committee.
At Chairman Martin's suggestion, consideration was then given
to the continuing authorizations or statements of operating policies
of the Committee customarily reviewed at the first
meeting in March
of each year, and the actions as set forth subsequently in these
minutes were taken concerning the matters that had been listed in
the agenda for review at this meeting.
It was agreed unanimously that
no action should be taken at this time
to amend or terminate the resolution
of November 20, 1936, authorizing each
Reserve Bank to purchase and sell, at
home and abroad, cable transfers, bills
of exchange, and bankers' acceptances
payable in foreign currencies to the
extent that such purchases and sales
may be deemed to be necessary or
advisable in connection with the estab
lishment, maintenance, operation, increase,
reduction, or discontinuance of accounts
of Federal Reserve Banks in foreign
countries.
3/3/59
-6
It was agreed unanimously that no
action should be taken at this time to
amend or terminate the procedure for
allocation of securities in the System
Open Market Account, as adopted pursuant
to the action of the Committee on June 11,
1953, it being understood that the re
allocation to be made as of April 1, 1959,
would be based on the ratios of each Reserve
Bank's daily average of total assets to the
total for all Reserve Banks for the period
March 1, 1958-February 28, 1959.
Unanimous approval was given to con
tinuation of the authorization to the Manager
of the System Account to engage in trans
actions on a cash as well as a regular delivery
basis.
The Committee approved by unanimous vote
a renewal of the existing authorization to
the Federal Reserve Bank of New York to enter
into repurchase agreements with nonbank dealers
in United States Government securities, subject
to the following conditions:
1.
2.
3.
Such agreements
In no event shall be at a rate below whichever is the
(a)
lower of (1) the discount rate of the Federal Reserve
Bank on eligible commercial paper, or (2) the average
issuing rate on the most recent issue of three-month
Treasury bills;
(b) Shall be for periods of not to exceed 15 calendar days;
(c) Shall cover only Government securities maturing within
15 months; and
Shall be used as a means of providing the money market
(d)
with sufficient Federal Reserve funds to avoid undue
strain on a day-to-day basis.
Reports of such transactions shall be included in the weekly
report of open market operations which is sent to the members
of the Federal Open Market Committee.
In the event Government securities covered by any such agree
ment are not repurchased by the dealer pursuant to the agree
ment or a renewal thereof, the securities thus acquired by
the Federal Reserve Bank of New York shall be sold in the
market or transferred to the System Open Market Account.
3/3/59
The Committee approved by unanimous
vote a renewal of the authorization to the
Federal Reserve Bank of New York (last re
newed March 4, 1958, and amended December 2,
1958) to purchase bankers' acceptances and
to enter into repurchase agreements therefor.
The authorization was as follows:
The Federal Open Market Committee hereby authorizes the
Federal Reserve Bank of New York for its own account to buy
from and sell to acceptance dealers and foreign accounts
maintained at the Federal Reserve Bank of New York, at market
rates of discount, prime bankers' acceptances of the kinds
designated in the regulations of the Federal Open Market Com
mittee, at such times and in such amounts as may be advisable
and consistent with the general credit policies and instructions
of the Federal Open Market Committee, provided that the aggre
gate amount of such bankers' acceptances held at any one time
by the Federal Reserve Bank of New York shall not exceed $75
million and provided further, that such holdings shall not be
more than 10 per cent of the total of bankers' acceptances
outstanding as shown in the most recent acceptance survey
conducted by the Federal Reserve Bank of New York.
The Federal Open Market Committee further authorizes the
Federal Reserve Bank of New York to enter into repurchase agree
ments with nonbank dealers in bankers' acceptances covering
prime bankers' acceptances of the kinds designated in the
regulations of the Federal Open Market Committee, subject to
the same conditions on which the Federal Reserve Bank of New
York is now or may hereafter be authorized from time to time
by the Federal Open Market Committee to enter into repurchase
agreements covering United States Government securities,
except that the maturities of such barkers' acceptances at the
time of entering into such repurchase agreements shall not
exceed six months, and except that in the event of the failure
of the seller to repurchase, such acceptances shall continue
to be held by the Federal Reserve Bank or shall be sold in the
Such repurchase agreements shall be at the same
open market.
rate as that applicable, at the time of entering into such
agreements, to repurchase agreements covering United States
Government securities.
The Committee approved by unamimous
vote the continuation without change of
the existing authorization for fixing the
rate charged on special short-term certif
icates of indebtedness purchased direct
from the Treasury pursuant to paragraph (2)
of the Committee's directive, whereby such
rate would be 1/4 of 1 per cent below the
discount rate of the Federal Reserve Bank
of New York at the time of such purchase.
The Committee reaffirmed by unanimous
vote the authorization for the Chairman to
appoint a Federal Reserve Bank as agent to
operate the System Account temporarily in
case the Federal Reserve Bank of New York
was unable to function, such authorization
having first been given on March 1, 1951,
and having been renewed in March of each
year since.
The following resolution to provide
for the continued operation of the Federal
Open Market Committee during an emergency
was then reaffirmed by unanimous vote:
In the event of war or defense emergency if the Secretary
or Assistant Secretary of the Federal Open Market Committee
(or in the event of the unavailability of both of them, the
Secretary or Acting Secretary of the Board of Governors of the
Federal Reserve System) certifies that as a result of the
emergency the available number of regular members and regular
alternates of the Federal Open Market Committee is less than
seven, all powers and functions of the said Committee shall be
performed and exercised by, and authority to exercise such
powers and functions is hereby delegated to, an Interim Com
mittee, subject to the following terms and conditions.
Such Interim Committee shall consist of seven members,
comprising each regular member and regular alternate of the
Federal Open Market Committee then available, together with
an additional number, sufficient to make a total of seven,
which shall be made up in the following order of priority
from those available: (1) each alternate at large (as defined
below); (2) each President of a Federal Reserve Bank not then
-9either a regular member or an alternate; (3) each First Vice
President of a Federal Reserve Bank; provided that (a) within
each of the groups referred to in clauses (1), (2), and (3)
priority of selection shall be in numerical order according
to the numbers of the Federal Reserve Districts, (b) the
President and the First Vice President of the same Federal
Reserve Bank shall not serve at the same time as members of
the Interim Committee, and (c) whenever a regular member or
regular alternate of the Federal Open Market Committee or a
person having a higher priority as indicated in clauses (1),
(2), and (3) becomes available he shall become a member of
the Interim Committee in the place of the person then on the
Interim Committee having the lowest priority. The Interim
Committee is hereby authorized to take action by majority
vote of those present whenever one or more members thereof
are present, provided that an affirmative vote for the action
taken is cast by at least one regular member, regular alternate,
or President of a Federal Reserve Bank. The delegation of
authority and other procedures set forth above shall be
effective only during such period or periods as there are
available less than a total of seven regular members and
regular alternates of the Federal Open Market Committee.
As used herein the term "regular member" refers to a mem
ber of the Federal Open Market Committee duly appointed or
elected in accordance with existing law; the term "regular
alternate" refers to an alternate of the Committee duly elected
in accordance with existing law and serving in the absence of
the regular member for whom he was elected; and the term
"alternate at large" refers to any other duly elected alternate
of the Committee at a time when the member in whose absence he
was elected to serve is available.
Unanimous approval was also given
to a renewal of the resolution set forth
below authorizing certain actions by the
Federal Reserve Banks during an emergency:
The Federal Open Market Committee hereby authorizes each
Federal Reserve Bank to take any or all of the actions set forth
below during war or defense emergency when such Federal Reserve
unable after reasonable efforts to be in com
Bank finds itself
munication with the Federal Open Market Committee (or with the
Interim Committee acting in lieu of the Federal Open Market
Committee) or when the Federal Open Market Committee (or such
Interim Committee) is unable to function.
3/3/59
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(1) Whenever it deems it necessary in the light of
economic conditions and the general credit situation then
prevailing (after taking into account the possibility of
providing necessary credit through advances secured by
direct obligations of the United States under the last
paragraph of section 13 of the Federal Reserve Act), such
Federal Reserve Bank may purchase and sell obligations of
the United States for its own account, either outright or
under repurchase agreement, from and to banks, dealers, or
other holders of such obligations.
(2)
In case any prospective seller of obligations of
the United States to a Federal Reserve Bank is unable to
tender the actual securities representing such obligations
because of conditions resulting from the emergency, such
Federal Reserve Bank may, in its discretion and subject to
such safeguards as it deems necessary, accept from such
seller, in lieu of the actual securities, a "due bill"
executed by the seller in form acceptable to such Federal
Reserve Bank stating in substantial effect that the seller
is the owner of the obligations which are the subject of
the purchase, that ownership of such obligations is thereby
transferred to the Federal Reserve Bank, and that the
obligations themselves will be delivered to the Federal
Reserve Bank as soon as possible.
Such Federal Reserve Bank may in its discretion
(3)
purchase special certificates of indebtedness directly from
the United States in such amounts as may be needed to cover
overdrafts in the general account of the Treasurer of the
United States on the books of such Bank or for the temporary
accommodation of the Treasury, but such Bank shall take all
steps practicable at the time to insure as far as possible
that the amount of obligations acquired directly from the
United States and held by it, together with the amount of
such obligations so acquired and held by all other Federal
Reserve Banks, does not exceed $5 billion at any one time.
Authority to take the actions above set forth shall be
effective only until such time as the Federal Reserve Bank is
able again to establish communications with the Federal Open
Market Committee (or the Interim Committee), and such Com
mittee is then functioning.
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3/3/59
By unanimous vote, the Committee
reaffirmed the authorization given at
the meeting on December 16, 1958, pro
viding that System personnel assigned
to the Office of Civil and Defense
Mobilization Classified Location (High
Point) on a rotating basis have access
to the resolutions (1) providing for
continued operation of the Committee
during an emergency and (2) authorizing
certain actions by the Federal Reserve
Banks during an emergency.
Chairman Martin noted that there was being presented to the
Committee for review the resolution adopted on June 21, 1939, request
ing the Board of Governors to cause its examining force in the future
to furnish the Secretary of the Federal Open Market Committee a report
of each examination of the System Open Market Account.
He commented
that the procedure then established had been followed up to the present
time,
that there had been no suggestion for a change, and that it
would
seem appropriate to continue the procedure without change.
There was unanimous agreement that
no action be taken to change the existing
procedure.
Chairman Martin then presented for the approval of the Committee
the following continuing operating policy that had last been reaffirmed
at the meeting on March 4, 1958:
a. It is not now the policy of the Committee to support
any pattern of prices and yields in the Government securities
market, and intervention in the Government securities market
is solely to effectuate the objectives of monetary and credit
policy (including correction of disorderly markets).
3/3/59
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Upon motion duly made and
seconded, and by unanimous vote,
the foregoing statement of policy
was reaffirmed.
There was also presented for the consideration of the Com
mittee the following continuing operating policy that had last been
reaffirmed at the meeting on March 4,
1958:
b.
Operations for the System Account in the open
market, other than repurchase agreements, shall be
confined to short-term securities (except in the cor
rection of disorderly markets), and during a period of
Treasury financing there shall be no purchases of (1)
maturing issues for which an exchange is being offered,
(2) when-issued securities, or (3) outstanding issues
of comparable maturities to those being offered for
exchange; these policies to be followed until such time
as they may be superseded or modified by further action
of the Federal Open Market Committee.
Mr.
Hayes recalled that at the meeting on March 4,
1958, he
had stated that while he would not vote to approve the statement in
its
present form, he would vote to approve a similar statement if
it
included the qualifying phrase "as a general rule" after the word
"shall" in
line.
the second line and after the word "shall" in
However,
the fifth
the other members of the Committee were not disposed
at that time to make those changes.
Mr. Hayes said that, without going into the merits of the
matter, he continued to have the same reservations as a year ago.
There was no acute problem, but he had not changed his view that
there should be more flexibility in
the statement.
-13-
3/3/59
Thereupon, upon motion duly made
and seconded, the foregoing statement
of policy was reaffirmed, Mr. Hayes
voting "no" for the reason he had
indicated.
There was next presented for consideration the following
continuing operating policy:
c.
Transactions for the System Account in the open
market shall be entered into solely for the purpose of
providing or absorbing reserves (except in the correction
of disorderly markets), and shall not include offsetting
purchases and sales of securities for the purpose of
altering the maturity pattern of the System's portfolio;
such policy to be followed until such time as it may be
superseded or modified by further action of the Federal
Open Market Committee.
Mr. Hayes noted that at the meeting on March 4,
1958, he had
also expressed a reservation concerning this statement of policy.
He
had then taken the position that he would vote to approve the state
ment if
it
were amended to substitute the word "primarily" for the
word "solely" in
the second line and if
the qualifying phrase "as a
general rule" were inserted after the word "shall" in the fourth line.
He would also have been agreeable to alternative wording as suggested
by Mr.
Bopp at that meeting.
Some change along the lines he had then
suggested would be satisfactory to him, but he still
dissented from
the present wording and would prefer not to vote for the statement in
its
existing form.
Chairman Martin inquired whether any others wished to record
dissent from the existing wording of either this policy statement or
3/3/59
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the preceding one,
and there was no indication of such a desire.
Thereupon, upon motion duly
made and seconded, the foregoing
statement of policy was reaffirmed,
Mr.
Hayes voting "no".
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 February 10
through February 25, 1959, and a supplementary report covering the
period February 26 through March 2, 1959.
have been placed in
Copies of both reports
the files of the Federal Open Market Committee.
Mr. Rouse stated that the money market had been generally firm
over the past three weeks.
Tendencies toward ease developed on a few
days despite the generally tighter statistical reserve position, but
these were met by sales of bills.
during the past three weeks and $43
Nearly $300 million bills were sold
million were redeemed, much more
than offsetting a net rise of about $67 million in
ments.
repurchase agree
The principal matter of interest over these weeks was the
Government securities market, which had given a good account of itself.
Good nonbank demand brought recent new issues to premium quotations
and carried bill
rates down by 20 to 30 basis points before demand
dried up last week.
This demand disappeared very quickly, and bill
rates rose sharply on Tuesday and Wednesday.
bills were a factor in
The System's sales of
the performance of the bill
market early last
3/3/59
week,
-15
but not the main factor.
Rates moved downward again at the
end of the calendar week, reflecting the investment of part of the
proceeds of the recent Chicago-O'Hare Airport bond offering.
rates in
the bill
month bill
Mr.
Average
auction yesterday were 2.82 per cent for the three
and 3.11 per cent for the six-month bill.
Rouse went on to say that after the reserve projections
attached to the supplementary report on open market operations had
been prepared yesterday, word was received of a downward revision,
dating back to February 1, in
the level of required reserves.
This
meant that each net borrowed reserve figure shown in those projections
should be reduced by $43 million.
Mr. Rouse noted that the markets for corporate and municipal
bonds had had a good tone and that the calendar of new corporate
issues had been light.
In the case of two recent corporate offerings
the Duquesne Lighting and Illinois Bell Telephone issues-underwriter
bidding was strong and resulted in
relatively low reoffering yields:
4.25 per cent on the Duquesne issue and 4.32 per cent on the Illinois
Bell Telephone issue.
Neither issue afforded much protection against
early call, and thus far not more than 20 per cent of either offering
had been distributed.
In the municipal market an issue of $103.5
million New Housing Authority bonds went very well at yields up to
3.60 per cent in
tax-free interest.
In general, better feeling was
evident in the corporate and municipal markets.
Looking ahead, the
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3/3/59
principal problem would be Treasury financing, for it
appeared that
the Treasury would have to be in the market frequently during the
balance of this year.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period February 10 through March 2,
1959, were approved, ratified, and
confirmed.
Chairman Martin then turned to Mr. Young, who made a statement
on the economic situation supplementary to the staff memorandum dis
tributed under date of February 27, 1959.
Mr. Young's comments were
substantially as follows:
We can summarize the economic situation about as follows:
(1) Each month productive activity shows further
gain, with accompanying improvement in income,
employment, and labor market conditions.
(2) Consumer and business spending continues ir
regular advance, with slow but steady strengthen
ing of investment-type buying.
(3) Each successive survey of consumer and business
expectations shows mounting optimism and also
steady spread of inflationary expectations.
Industrial prices, led by prices of industrial
(4)
with the
materials, maintain upward tilt,
average of wholesale prices held stable only
by declining prices of farm products.
(5) Continuing investor confidence in high levels
of stock prices increasingly points to a stock
market really in orbit.
(6) Successive reports from foreign industrial
countries are confirming an onset of upward
swing in activity for them.
In short, the picture is one of budding inflationary boom.
Total national product for the first quarter is estimated
at $464 billion, up $10 billion or 2-1/2 per cent from the fourth
quarter.
3/3/59
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With the gains evident for February in output of steel,
aluminum, copper, construction materials, and producers'
equipment, the February index of industrial production should
rise at least one index point and possibly two points, with a
one to two point further rise in the index likely for March in
view of the elimination of work stoppage influences in glass
and autos.
At present writing, a first
quarter average for the
industrial production index of 145 seems more than a possibility;
indeed, we now regard it as a likelihood.
The value of real estate construction put in place in Feb
ruary, seasonally adjusted, fell
off slightly from January,
reflecting declines in nonresidential construction. Also,
housing starts in January, seasonally adjusted, fell back from
1.3
million to 1.35 million units.
Contract awards and trade
reports, however, continue to indicate strong construction
activity and the recent bulge in FHA applications and VA
appraisal requests more than likely foreshadows maintenance
for the present of high level housing starts.
Further gains in employment in trade, State and local
government, and steel and related industries, along with
continued high employment in construction, suggest further
moderate strengthening of the labor market.
Judging from
unemployment claim figures, however, which have about moved
seasonally, no large dent has been made since mid-January in
the unemployment lump.
The results of three expectational surveys, recently
The first
becoming available, carry portents for the future.
is the NICB-Newsweek survey of new manufacturing appropriations
It shows for the fourth
for plant and equipment expenditures.
quarter a significant turnaround in these appropriations by
durable goods industries.
The second is the Dun and Bradstreet survey of businessmen's
It
January.
expectations for the near-term future, taken in late
shows the highest level of business optimism regarding sales and
Although the majority of businessmen
profits since late 1955.
still expect their own prices to show little change, the survey
reports a significant further jump in expectations of rising
prices.
The third survey is the Board's survey of consumer expecta
Preliminary data from this survey
tions, plans, and finances.
expect general business con
consumers
of
cent
show that 55 per
ditions to be good in 1959, compared with 32 per cent in 1958
About 61 per cent
and about 60 per cent in the period 1955-57.
7 per cent in
with
compared
1959,
in
to
rise
prices
expect
of
proportion
The
1953-54.
in
cent
per
1958 and about 16
3/3/59
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consumers reporting income increases and improved financial
positions over the preceding 12 months rose somewhat from
early 1958 to early 1959 but remained slightly below the
1957 proportion, while the proportion expecting further
income increases during 1959 reached a new high.
Consumer plans to purchase houses are considerably higher
than in 1958 and about the same as the previous peak in 1955-56,
and consumers plan to spend a record amount for the houses that
they purchase.
They plan to buy about the same number of auto
mobiles as in other recent years, but plans are for fewer new
cars and more used cars than in any recent year except 1958.
Prospective purchasers of new cars plan to buy more expensive
cars than in other recent years, but purchasers of used cars
expect to spend somewhat less. Consumer plans to make housing
additions and repairs rose to a new high, but plans to purchase
household goods showed little
change.
In conclusion, the following observations may be pertinent.
The economy has now about attained the preceding cyclical high
in industrial production and is exceeding it in terms of aggre
gate output of goods and services.
As expansion continues,
business demands for fixed capital and for stock may be expected
to gain in strength. It is at this stage of the cycle that
upward pressures typically start to mount on costs and wholesale
prices of products other than farm products and foods.
In the 1949-50 recovery, average industrial prices did not
show any significant advance until industrial production was
In the 1951-55 expansion,
far above its November 198 peak.
industrial prices did not show significant rise until the July
This pattern of cyclical
1953 production peak had been exceeded.
advance in industrial prices is not uniquely associated with the
post-World War II period; it has been characteristic of cyclical
experience through modern history.
This year, the response of industrial prices to increasing
demands has been at least as prompt and as strong as in the two
Increases have been fairly wide
preceding postwar expansions.
spread, encompassing finished products as well as materials.
Such a development-- though not atypical--is disturbing in
sizable
For one thing, unemployment is still
several respects.
the
at
than
larger
is
and at 6 per cent of the labor force
Second, pro
comparable phase of the two preceding cycles.
last year;
substantial
were
ductivity gains in manufacturing
rose
profits
corporate
and
some;
declined
unit labor costs
Third,
end.
year
by
levels
sharply to close to prerecession
as yet
means
no
by
abroad--are
and
pressures on capacity--here
some
to
rate
operating
steel
the
in
rise
acute. The sharp
extent reflects precautionary buying against a possible strike
3/3/59
-19
rather than any corresponding increase in final demands for
steel products. Finally, the whole climate, including that
of the stock market, savors of an inflationary psychology
taking form well ahead of inflationary boom but capable of
inducing it.
In other words, the economy appears poised for a price
runup in anticipation of real pressures from actual demands
for labor and for goods.
In an optimistic climate and on
the basis of financial resources now in being, such a runup
could be validated in markets for a time, but the costs in
ensuing instability would be high.
Mr.
Balderston asked Mr. Young for his view as to whether the
rate of improvement since the business turnaround in
April of last
year had been typical and also for his view as to whether the supposed
letdown in February was real.
Mr. Young replied that the pattern up to this point in
terms
of output of goods and services had been just about typical when
measured against the record of business cycles going back into the
last century, which showed that in periods of advance of output there
tended to be recurring changes of pace.
At first
the pace would be
rapid, then would slow down a bit, and then pick up a bit
before
reaching a level from which further gain tended to be difficult and
slow in coming.
There had been quite a bit of comment in February
about future prospects,
with a good many qualifying observations and
some skepticism expressed about forces that would carry expansion
forward, but it seemed to him that this kind of observation was rather
typical in
an expansion period.
The source of the expansion movement
was never clear until the expansion had gone very far; then one could
3/3/59
see in retrospect where those forces came from.
matter of a little
here and a little
Actually, it
was a
there, which together added up
to a lot.
A staff memorandum on the outlook for Treasury cash require
ments had been distributed under date of February 27, 1959.
further reference to credit developments,
With
Mr. Thomas made a statement
substantially as follows:
Credit developments so far in 1959 have been
characterized by relatively light credit demands from
business--both long-term and short-term--but large
demands from governments--Federal, State, and local.
Individuals' borrowings against mortgages seem to be
continuing in large volume and consumer credit, after
increasing more than seasonally in the late months of
1958, showed substantially less than the usual seasonal
contraction in January and probably also in February.
Business loans at city banks have contracted approxi
mately the usual seasonal amount since the end of the year,
although somewhat less than in the same period last year.
Increases may begin, however, if inventory buying expands.
Bank loans on securities have shown a larger decline this
New corporate issues
year than in the two previous years.
of securities have been in much smaller volume so far this
year than in the same period of other recent years. New
issues by States and local governments, however, offered
or scheduled for offering this month total only about 10
per cent less than the unusually large volume of last
quarter. A large volume of new issues by
year's first
scheduled for future
State and local governments is still
offering.
The Federal Government borrowed over $5.5 billion in
two months, while redeeming about $3.0 billion
the first
After retiring tax anticipation
of debt obligations.
securities maturing this month, the debt will show a net
decline of only about three-quarters of a billion dollars,
compared with decreases of $2-1/4 billion and $1-3/4 in
the same quarter of the two previous years. Moreover, in
3/3/59
-21-
the next quarter the Treasury will have a net cash deficit,
necessitating further borrowing, in contrast to surpluses
that have been customary in other years.
In the aggregate, total loans and investments of com
mercial banks seem to have declined by at least the usual
seasonal amount-if not more-in the first
two months of
this year.
Not only have loans contracted, but bank holdings
of U. S. Government securities have also declined, notwith
standing that the contra-seasonal net borrowing by the Treasury
has been principally in the short-term market.
Banks have
subscribed for the issues offered for cash, but they have sold
securities in the market or redeemed maturing issues in larger
aggregate amounts than their subscriptions.
The money supply has declined by about the usual seasonal
amount for the year to date. In contrast to this time last
year, when they were increasing sharply, time deposits have
shown little
change this year.
Nevertheless, over-all liquidity
of the economy has evidently continued to expand.
Adding to the
rapid growth in demand and time deposits that occurred in 1958,
nonbank holders have considerably increased their holdings of
short-term Government securities in recent weeks.
Purchases of securities, largely by nonbank investors,
have been responsible for the improved tone of the Government
securities market since the conclusion of the latest Treasury
financing operation. Holdings by dealers, as well as by banks,
have been reduced in the past few weeks. Yields on Government
securities have declined from the record high levels reached
around the middle of January, with the sharpest decreases in
medium-term issues. Rates on short-term issues also declined,
in the 3-months bills, as investors
with sharp drops at first
sought liquidity in view of uncertainty as to the course of
longer-term rates, but later the decrease spread to the 6-months
bills and then to other short-term issues. In the past week
short-term rates have risen somewhat, as mid-March cash needs
approach, but longer-term issues have continued firm.
Greater strength in securities markets has developed,
although there has been some further tightening in the reserve
position of banks. In February net borrowed reserves of all
member banks averaged about $60 million, as indicated by
revised figures, which show that country banks' required
reserves have been less than had been estimated. Nevertheless
excess reserves at country banks have declined to a somewhat
lower level than is customary. Reserve city banks have
New York City banks, on the other
continued relatively tight.
hand, have had somewhat more comfortable reserve positions in
3/3/59
-22-
recent weeks than earlier in the year.
Transactions in
Federal funds have been particularly large in recent weeks,
indicating considerable variation in the distribution of
available reserves.
It should be kept in mind that market interest rates are
still
high relative to the level of member bank borrowing and
to the discount rate, as compared with previous periods.
They
appear also to be high in view of the absence of an increase,
seasonally adjusted, in total bank credit.
Estimates of reserve needs for the next few weeks indicate
that net borrowed reserves may continue below $100 million
until the latter part of the month, if changes in deposits and
currency, as well as in other reserve factors, show the customary
seasonal variations. Estimates prepared by the New York Reserve
Bank indicate a much larger volume of demands on reserves during
the next three weeks.
The major reason for this difference is
an implication of a larger increase in deposits and currency
than is assumed in the estimates of the Board's staff.
There is a reasonable basis for uncertainty and differences
of judgment as to the course of deposits at this time. Treasury
tax and loan accounts will no doubt decline sharply in the next
two weeks and the subsequent increase from tax receipts will be
less than usual because of the large amount of tax anticipation
certificates to be retired.
The question is whether other
deposits will increase as much as or more than usual prior to
tax payments and decline less later. Businesses have smaller
tax liabilities this month than in other years and relatively
larger holdings of tax anticipation securities, as well as
other short-term securities and fairly good-sized deposit
balances.
They should not need, therefore, to build up
balances by borrowing or selling securities to banks in the
It would follow also that
same amounts as in other years.
business deposits might not decline as much as usual when
taxes are paid. Over a period of four or five weeks, the net
result should conform to the usual seasonal pattern. If it
does not, then System operations may need to be adjusted
accordingly. What will actually happen, however, is still a
matter of conjecture. So far, no reason for a shift in
System policy moves is indicated.
This situation illustrates the type of development that
might be expected to occur at other times this year when large
cash payments are being made. It poses a problem with respect
to System policy. It would appear that the economy has ade
quate liquidity to finance further expansion. Under the
circumstances further growth in the money supply may be
3/3/59
-23
unnecessary for some time, or at least not until there
is evidence that monetary needs may be unduly retarding
growth. Pressures upon the money market and upon banks
may be expected to develop when the public finds it
necessary to draw upon time deposits, or liquidate
securities, or borrow at banks in order to obtain addi
tional cash.
It would appear that there are no such pressures at
present.
The System, however, should be prepared to
resist them if they should arise to a degree that endangers
stability. Restraints can be applied by making it necessary
for banks to borrow any additional reserves desired and by
having a discount rate that is close enough to market rates
to penalize any such borrowing.
It would probably be
advisable to establish such a rate even before the need
arises, particularly since the Treasury financing schedule
limits the periods when an increase in the rate would be
possible even though appropriate for other reasons.
In response to a question about the expectations for Treasury
financing, Mr. Thomas referred to the information contained in the
staff memorandum dated February 27, 1959.
He went on to say that the
Treasury was raising another $100 million through addition to the
March 12 bill offering and that this, he understood, might continue
for a number of weeks if necessary.
Estimates indicated that the
Treasury would need about $4 billion in April, and whatever was not
obtained through the bill
other means.
offerings would have to be obtained through
There would be a refunding operation in May and there
might be cash needs in June, depending on how much cash was raised
in May.
Mr. Rouse said he understood that the Treasury wanted to
consult with its
advisory committees on the 18th or 19th of March,
-24
3/3/59
with a view to making an offering the following week and obtaining
payment March 30 or 31.
The Treasury would again consult its
advisory
committees during the week of April 19 on the refunding operation and
presumably would make a fairly early offering after that.
It
was
understood that the Treasury probably would come to market in May,
and he felt it
in the first
would have to borrow in
June because of large demands
week of July.
Chairman Martin said that Mr. Rouse had accurately outlined
information given to him (Chairman Martin) by Secretary Anderson and
Under Secretary Baird.
The Treasury hoped to announce the next
financing March 19 or 20 and would then anticipate a schedule such as
Mr.
Rouse had outlined, with a little
leeway on either side.
Mr. Hayes commented that what had been thought of as the April
financing apparently was to be moved ahead a little
the end of March.
and finalized at
This would leave a gap of 18 or 19 days between that
date and the next financing.
Chairman Martin commented that the program for June was un
certain.
However, it
was more likely than not that the Treasury would
have to come to the market in
June.
Mr. Hayes then made the following statement of his views on
the business outlook and credit policy:
Since it seems to me that the System faces a very
hard decision at this time with respect to the discount
3/3/59
-25
rate, most of my remarks will be directed toward an attempt
to summarize the issues involved in that decision as I see
them.
First, as to the business outlook: This is much the
same as at out last meeting, with business expansion likely
to continue at a moderate rate. At this juncture it is not
possible to gauge accurately how the year's pattern of
business activity may be affected by the current distortion
in the steel industry and by the steel strike, if it eventuates.
While retail sales have been very satisfactory, there is no
evidence that consumers are really in an enthusiastic buying
mood. Business sentiment is guardedly optimistic, probably
more "guardedly" than in the past month or two; and neither
the demand and supply situation nor recent price developments
suggest an inflationary atmosphere.
(For example, the nonfood
component of the consumers price index declined in January for
the first
time in a year.) Last week our directors, discussing
the business situation, were unanimous in an appraisal along
these general lines, stressing the absence of any noticeable
expansion in plant and equipment spending programs and the
probable continuance of conservative inventory policies in
most industries for some months to come. They were encouraged
by the recent sharp gains in productivity, and the consequent
upward trend of profits, but they saw no early solution to the
serious unemployment problem.
There seems to be nothing in this business picture that
would warrant any overt move which could be interpreted as
indicative of more intensive credit restraint. Nor do recent
bank credit changes support such an action. The behaviour of
business loans so far this year, both in city banks and in the
banking system as a whole, has been anything but exuberant;
and the decline in total loans and investments of city banks
has been about in line with the average of recent years.
It is only when we view the prospect for vast additional
cash financing by the Treasury through the remainder of 1959,
with all that this could imply in the way of excessive growth
of the money supply, that we find real cause for concern and
perhaps cause for action in the discount rate area. We now
estimate that $5 to $6 billion must be borrowed by the Treasury
between now and the end of June, and about $15 billion in the
second half of the year. Obviously we should try to encourage
a smooth flow of the new securities through the banks, acting
Fortunately
as underwriters, into the hands of nonbank holders.
this process has been taking place in recent months, aided by
the rise in interest rates which has already occurred. The
Treasury's continual excursions to the market will of themselves
3/3/59
-26-
tend to push short-term market rates higher over the remainder
of the year. The question is whether we should anticipate this
tendency by moving the discount rate up promptly to 3 per cent,
thus serving notice of our determination to prevent the
Treasury's program from causing a dangerous expansion of the
money supply--or whether to delay action until a further rise
in market rates has established a clearer case for a technical
adjustment of this magnitude to bring the discount rate into
line. Our problem has not been made easier by the tendency
for 90-day Treasury bill rates to decline during the past
month, as temporary excess funds have sought investment in
the shortest instrument--for unfortunately the market still
tends to look at the 90-day Treasury bill rate as the short-term
market rate, whereas if they were to look rather at a complex
of short-term rates, including the 6-month bill, they would
find a wider spread above the 2-1/2 per cent discount rate.
At their meeting last week our directors discussed the
pros and cons of a rate change at great length. I tried to
present the arguments on both sides as objectively as possible,
in order to get a very free expression of views in this pre
liminary discussion. I would say that all of the directors
approached the problem with an attitude of extreme caution;
and that the majority were averse to a rate increase, primarily
because in their judgment it would be unwise to "rock the boat"
when recovery is proceeding satisfactorily but with very few
Fears were expressed as to the bad
inflationary overtones.
psychological effect at a time when the country is concerned
Fear was expressed that
over continuing heavy unemployment.
a discount rate increase might trigger a prime rate increase
which would be damaging to further recovery--although one of
our banker-directors doubted whether the prime rate would
follow us at once in the absence of greater loan demand than
It was also suggested that a rate increase
is now in evidence.
as helpful to the Treasury's financing
upon
might not be looked
at best; that we should be reluc
difficult
is
which
problem,
for arguing that the Fed is
grounds
Congress
give
tant to
causing a sharp rise in carrying charges on the national debt,
when it is faulty fiscal policy which is really to blame; and
that we might have a very hard time "selling" a discount rate
rise as a technical adjustment to bring the discount rate
closer in line with market rates, because of the absence of a
The thought was expressed by one
very clear-cut disparity.
industrialist that corporate funds will probably continue to
be reasonably abundant for the purchase of new Treasury issues,
because of the high level of profits and the probable absence
3/3/59
-27
of any upsurge in inventory or plant and equipment expendi
tures. Another director questioned whether nonbank buying
would be greatly stimulated by a higher discount rate.
I pointed out that the opportunities for rate action
are likely to be few and far between for the remainder of
this year; that if we failed to act within the first
two
weeks of March, the earliest next opportunity might be well
along in April. However, there was general reluctance on
the part of our directors to make a move sooner than might
be desirable on economic grounds, merely because we fear an
excessive growth of the money supply at some future date and
because we expect Treasury financing to inhibit discount rate
action during late March and much of April. Most of the
directors would lean toward awaiting the development of clear
cut reasons for apprehension before moving the rate.
I confess that I am greatly puzzled as to what is the
right solution to this problem. I suspect that the impact of
the Treasury's vast financing program will in any case bring
about an upward trend in short-term interest rates during the
Thus the early establishment of a 3 per cent
coming months.
rate might conceivably be looked upon as a technical adjust
ment to a rate level which, if not actually here today, is
very likely to arrive in the near future; and it would have
the advantage of demonstrating to this country and to the
world our awareness of the threat inherent in deficit
financing and our determination to defend the value of the
dollar. If, as I believe, any increase in the discount rate
under present conditions should be regarded by us and ex
plained to the public as a technical adjustment, it would be
Banks to act.
helpful for New York to be one of the first
But at the same time I share some of the doubts of our
directors and would feel much better if the timing of the
Treasury's program were not tending to "rush" us in our
decision. I would anticipate some considerable difficulty
in persuading our directors to act on the rate this week or
Perhaps it would be just as well to defer action
next.
until the second or third week of April, even though the
open interval at that time will be shorter than we would
ordinarily like. A second alternative, which might be
indicated if early action is preferred by the System as a
whole, would be to limit the rate increase to 1/4 per cent
in order to make it clear that only a technical adjustment
I would like to hear how the other Presidents
is intended.
and the Governors view this problem before making up my own
mind as to what to recommend to our directors.
-28
3/3/59
With respect to open market policy, I would not like
to see any conscious move toward greater restraint but
would expect the pressure of Treasury financing to bring
about some increase in Treasury bill rates and would not
interfere with such a trend.
I think the directive might
well be left as it is.
Mr.
Erickson said that upon his return from South America he
had reviewed economic developments with his staff and that the acceler
ated pace of activity evident several weeks ago did not seem to have
carried through in the month of February,
for improvement nationally
and in the First District appeared to have proceeded at a much milder
pace than before.
First District production, employment,
construction,
and department store sales were up slightly compared with the same
period last year, while savings deposits were not increasing as much
as last year.
During the last two weeks there had been greater use
of the discount window by country banks than last year; 50 banks were
borrowing on one particular day.
From a reading of the minutes of the last two Committee meetings,
Mr.
Erickson said, it
appeared that the System was confronted with a
difficult question of timing.
Balancing the pros and cons, he would
lean toward doing nothing on the directive or the discount rate at this
time, waiting to see what happened by the time of the next Committee
meeting, and then possibly acting on the discount rate in April.
In
open market operations, he would lean on the side of restraint even
though that produced higher net borrowed reserve figures than indicated.
3/3/59
-29
Mr.
Erickson then commented briefly on his trip to South
America during which he visited eight central banks.
Mr.
Irons said that he viewed the over-all economic situation
about as Mr.
Young had pointed it
up in
his statement.
There was con
tinuing strength and continuing gradual expansion in most of the major
indicators of economic activity.
He could not see very clearly the
reasons for some of the lessening of optimism among economists that
had been reported in
the press recently.
Young had said, it
just what triggered recovery,
was difficult to tell
a lot of little
As Mr.
for it
was usually
things accumulating into an expansive force which first
broadens recovery and then extends gradually into a general expansion
of economic activity.
Mr. Irons continued by saying that the Eleventh District
seemed to be following the national pattern, with gradual strengthen
ing at a high level of activity.
Retail trade was holding up well
and nonagricultural employment was showing gradual improvement.
Crude oil production was up a bit, but refining had declined somewhat,
due in
large part to a strike at one of the large refineries which was
settled yesterday.
particularly in
The aircraft industry had sustained some setback,
the Dallas area, as the result of the Defense Depart
ment's shift of emphasis from manned aircraft to missiles, and it
appeared that as many as 6,000 workers might be laid off by the first
of June.
However,
a substantial number of those already laid off
3/3/59
-30
had moved to other places and recruiters from other sections of the
country were now working in
the Dallas area.
Agriculture had been
doing fairly well.
Eleventh District business loans, Mr. Irons said, had increased
a little
more than last year, but generally the banking trends were
close to the usual seasonal movement.
There was not much borrowing
from the Reserve Bank, and very little
on the part of country banks.
Larger banks were tending to use Federal funds rather than borrow from
the Reserve Bank.
Turning to open market operations, Mr. Irons expressed the
view that in the last three weeks the Account Manager had done about
the right sort of job; he had maintained a reasonable degree of
restraint in
the face of some large shifts in
statistics, a mal
distribution of reserves, and other disturbing factors.
The discount
rate was the difficult problem right now and probably the decision on
it
would have something to do with what open market policy should be.
In his opinion, open market policy should maintain the degree of
restraint that had prevailed, with any doubts resolved on the re
strictive side, and the degree of restraint should be consistent with
an interest rate structure appropriate to the discount rate structure.
Viewing only the banking picture, there was not too strong a demand
indicated for an increase in
the discount rate.
was going along well and possibly the seeds
The economic situation
of further inflation were
3/3/59
-31
being sown, but at the moment the situation did not seem too pressing.
However,
if
no move on the discount rate were made now,
the System
might be barred from moving in the reasonably near future, for it
had
been the position of the Committee that whenever the Treasury got near
to coming into the market the status quo should be maintained.
balance,
therefore, he would favor taking advantage of the present
opportunity to increase the discount rate to 3 per cent.
with Mr.
On
Hayes that it
He agreed
would be desirable for the New York Bank and
a number of other Banks to move together, but a matter of a week did
not seem to make too much difference.
could move on the rate whenever it
While he wished that the System
desired without regard to the
Treasury situation, in view of the current ground rules the System
must adapt itself
and take advantage of whatever opportunities were
presented to it.
Mr.
Mangels said that West Coast business activity had shown
further moderate expansion during January.
Construction was particularly
strong, with payrolls reflecting a general increase.
ment from December to January declined 8 per cent,
heavy demand for copper,
Insured unemploy
there was a rather
and lumber continued strong.
Department store
sales were relatively strong through February and automobile sales
showed small gains.
The agricultural situation was not quite as
favorable as for the country as a whole; large numbers of livestock
were on feed and in many cases operations were being conducted without
3/3/59
-32
profit or even at a deficit.
For the three weeks ended February 18,
bank loans increased somewhat, with half of the increase in real
estate loans, but in general loan demand was rather light and for the
next three to five months no heavy demand for bank credit was expected.
The banks reported no great demand for loans to pay taxes.
Demand
deposits and time deposits fell during the period mentioned, and
district banks were beginning to feel somewhat pinched for funds.
The particular bank he referred to at the last Committee meeting had
now indicated to its branches that they should be more selective in
making real estate loans.
The large banks on the West Coast had been
net borrowers of Federal funds, but use of the discount window was
scattered and intermittent.
Regarding policy, Mr. Mangels saw no reason to change the
degree of restraint existing at present.
was somewhat uncertain.
On the discount rate, he
There had been a full discussion of the
rate at the meeting of the San Francisco Bank's executive committee
last Wednesday and four of the five directors present were quite
definitely opposed to an increase at the present time.
the situation today with October 23, 1958,
Comparing
the effective date of the
last San Francisco increase, the directors noted that total employ
ment had increased only slightly, total unemployment had risen, the
wholesale and consumer price indexes had increased only slightly, and
the money supply was about the same.
*
City bank loans and investments
The Board approved an increase to 2-1/2 per cent at certain Reserve
Banks on October 23, 1958; the effective date at San Francisco was
November 6, 1958.
3/3/59
-33
showed a 1-1/2 per cent increase,
and the rate of borrowing from
the Federal Reserve Bank was not substantially different.
Treasury bill
While
rates went up in the past few days, they had been
somewhat below the October level, and commercial paper and bankers'
acceptance rates showed no change.
Rates on finance company paper
and loans to Government securities dealers were up, but call loans
on stock had not changed in rate.
Therefore,
the directors felt
that there was not much in the statistics to justify a discount rate
increase at this time.
If,
however,
other Reserve Banks acted before
the next meeting of the San Francisco directors (March 11), he felt
that the latter would go along.
There might be some question whether
a 1/2 per cent increase would be in order or whether a 1/4 per cent
increase would present a more logical basis for action.
Mr.
Mangels concluded by saying that he considered the policy
directive satisfactory.
Mr.
Deming said that business sentiment in the Ninth District
continued to indicate a measure of optimism, tempered by the fact
that most of the available current indicators had registered no
particular advance either in
January or February.
While a case
might be made that the rate of recovery had slackened somewhat since
December,
in
the strong winter seasonal trend almost obscures real trends
the Ninth District, there had been a more severe winter this year
than usual, and this was thought to be the factor that had produced
3/3/59
-34
such slowdown as seemed apparent.
With a high level of work in
prospect, actual construction work had been delayed by an unusually
deep frost line, and it
also appeared that the lake ore shipping
season would be delayed because the ice was very thick and the boats
probably would not be able to get in
the other side of the picture,
about in
or out as early as usual.
On
employment and banking were moving
line with normal seasonal developments and agriculture was
continuing to show strength.
The 12 per cent gain in farm income in
1958 apparently was carrying over into 1959, thus far, and prospects
for farm machinery sales were good for the coming year.
Bank deposits
were up and demand for bank credit was running roughly according to
the usual seasonal pattern.
Mr. Deming said that, like others who had already expressed
themselves,
he had a degree of uncertainty in his mind as to the
proper current course of credit policy.
He felt that open market
operations had been about right, he would like to see them continued
in
about the same way,
and the directive seemed to him adequate.
With respect to the discount rate, the arguments regarding the ques
tion of an increase at this time had been presented pro and con.
balance,
however,
the argument for making a change at this time
because the System might be blocked in the future seemed to him
persuasive.
While he doubted whether the Minneapolis directors
would object strenuously to a recommendation to change the rate
On
3/3/59
-35
upward, neither did he feel that they would take action at this time
with any great enthusiasm.
Due to personal situations, it
would be
impossible to have a meeting of the board of directors before Friday,
March 13,
the date of the next scheduled meeting.
Mr.
Allen said that notable developments in recent weeks on
the plus side appeared to be the rapid increase in
logs and the continued evidence of strength in
buying.
On the other hand,
steel order back
consumer income and
the rate of new auto deliveries remained
slower than many had anticipated and unemployment continued fairly
substantial.
Seventh District steel companies were operating at
effective capacity,
but analysis indicated no appreciable rise in
steel inventories in
the hands of users in
was some increase in
February.
January.
There probably
Department store sales in
the district
were running spectacularly ahead of last year and were excellent by
any standard; when the record for February was in,
it
might be found
that such sales exceeded the record month, August 1957.
Continuing,
autos in
the first
Mr.
Allen said that deliveries of American-made
40 days of 1959 averaged only a little
16,000 per selling day,
more than
a rate equal to about 5 million on an annual
basis, but Detroit experts were still
estimating that 5-1/2 million
American-made passenger cars would be sold in 1959.
They expected
1959 production to be around 5-3/4 million, with the difference
going into export and inventories.
The peak production quarter would
3/3/59
-36
be the present one,
automobiles,
at 1,600,000 plus.
a sample of Seventh District member banks indicated a
substantial stretch-out in
January 1957,
maturities in
the past two years.
In
only 8 per cent of all contracts were for periods in
excess of 30 months; in
and in
As to installment terms on
January 1958 the proportion was 22 per cent;
January of this year it
was 47 per cent.
New claims for unemployment compensation for the first
weeks of 1959 in
six
the Seventh District States were from 22 to 42 per cent
lower than last year, compared with a drop of 17 per cent nationally.
Except for Iowa, however,
7 per cent in
Indiana to 50 per cent in
period two years ago.
fiscal and its
these claims were substantially higher (from
Michigan) than in the comparable
The Michigan situation, including both its
unemployment difficulties, would doubtless continue to
receive a good deal of national attention in the months ahead.
1958, unemployment in
During
Michigan averaged 14 per cent of the labor force
and local experts did not expect the situation to improve in 1959.
The situation was the result of a number of factors--decline in
work, labor-saving capital expenditures,
defense
a continuing shift of industry
to other States, and a tendency to use overtime rather than to hire
additional workers.
Loans and investments of Seventh District reporting banks
declined $93 million in
the three weeks ended February 18, with almost
3/3/59
-37
all of the decline in
Government securities.
The banks showed
stronger business loan demand relative to both 1957 and 1958 than
did reporting banks throughout the nation; most business categories,
led by metals firms, were borrowing more than last year.
Use of the
discount window by country banks had been heavy recently by standards
of recent years, with 63 country banks borrowing in
February.
the first
half of
A large number of the borrowing banks were in the cattle
feeder area.
Mr.
Allen said that he would not suggest any change in the
policy directive and that he would like to see the operations of the
Desk continue about as they had been, with any doubts resolved on the
side of restraint.
Mr.
Irons.
As to the discount rate, he rather agreed with
There should be coordination of the implements of monetary
policy and consideration of that one factor would call for an increase
in
the rate.
As to the magnitude of increase, he would favor 1/2 per
cent or nothing.
As to timing, if the System were completely free
his own preference would be to do nothing for a couple of weeks, or
perhaps as long as four weeks, a view in which he perhaps was in
fluenced largely by his feeling that it would be difficult to get the
Chicago directors to act unless there was unity of action throughout
the System.
Some of the directors, he noted, had in mind the unemploy
ment situation in the Detroit area.
the interval in
However, he did not know whether
April would be long enough to provide assurance that
discount rate action could be taken in
that period, and if
it
was
-38
3/3/59
necessary to gamble-as it appeared might be the case--he would
guess that business would continue to improve to such an extent
as to suggest acting now on the rate.
Mr. Leedy said that, contrary to the national pattern,
business loans at Tenth District banks had been receding at only
a fraction of the rate of decrease that occurred last year.
All
categories of borrowers except wholesalers had either been borrowing
more or repaying less than in the preceding year.
The reserve posi
tion of the country banks in particular had been tighter recently
due to a greater than seasonal run-off of deposits, especially
interbank deposits.
This had been accompanied by strong demand for
credit at the discount window, and borrowings at the Kansas City
Bank were running about 16 per cent of total member bank borrowings.
Mr. Leedy stated that district retail sales through the latest
report period were 11 per cent ahead of the year-ago level, compared
with a gain nationally of 9 per cent.
Livestock interests, including
cattle, sheep, and hog producers, were being hurt by lower prices,
and inventories in
each category showed a substantially higher increase
from last year than for the country generally.
Another factor, as far
as the economy in the agricultural areas of the district was concerned,
was the recent announcement by the Department of Agriculture of lower
support prices for the spring planting crops.
3/3/59
-39
Turning to policy matters, Mr. Leedy felt that the time was
here for the System to move on the discount rate.
In fact, as indi
cated by discussion at recent Committee meetings, he had felt that
there should have been an increase earlier, although he was cognizant
of the difficulties that had existed for some time in making an
adjustment.
His own reasoning was based more on the economic situa
tion than on the change in the interest rate structure.
The review
of economic conditions at this meeting seemed to him to underline
the great and developing strength of the economy,
and there was also
the important matter of public psychology that had been asserting
itself in
the stock market.
For these reasons,
as he had indicated
at the last Committee meeting, he would hope that the effect of a
discount rate increase would not be undercut by any effort to make
it appear as solely a technical adjustment.
He felt that the market
was expecting a rate increase; if it were not made in the period
immediately ahead when the road was clear, the System might be mis
leading the market.
The System had been charged before with pulling
the rug from under investors immediately following a Treasury financing,
and such a charge might be made again if the rate were changed in the
rather short period available following the next Treasury financing.
Mr. Leedy suggested that the Account Management continue to
attempt through open market operations to maintain a level of $100
million of net borrowed reserves, with some variation around that
-40
3/3/59
figure.
He would not endeavor to increase that figure materially
at this point and instead would rely on an adjustment of the discount
rate.
The discount rate change, if
made, should be an increase of
1/2 per cent.
Mr. Leach recalled that at the February 10 meeting of the
Committee he said that although some recent data on the Fifth District
economy were disappointing, it appeared that over-all business activity
was still
moving forward.
Economic reports now becoming available
made it clear that the district economy was continuing to expand.
Seasonally adjusted nonfarm employment showed widespread increases in
January, with the total up 0.6 per cent, while manufacturing man-hours
showed broad and sizable December to January increases, particularly
in
durable goods industries.
the recent wage increases in
After a period of uncertainty following
the textile industry, it
that at least a part of the increase in
now appeared
cost in this highly competitive
industry would be passed along in higher product prices.
A possible
break with the hand-to-mouth policy long adhered to by textile buyers
was indicated by the general interest being shown in
third and fourth
quarter business and by the advance orders placed by some buyers for
those periods.
Cigarette production reached an all-time seasonally
adjusted high in December and probably improved further in January,
while the furniture manufacturing industry reported January and
February as "terrific" months, with high-level profitable operations
under way.
Bituminous coal production was at a better rate than at
-41
3/3/59
the bottom of the recession but still seemed low in view of current
steel production rates and improved industrial operations.
Utility
demand had been weak enough to cause discussion of price reductions
and efforts at freight concessions as a defense against shifts to oil.
Mr. Leach said he was conscious of the fact that discount rate
action had not kept pace with open market operations, primarily due
to Treasury financing considerations, at least in recent weeks.
There
would now be a breathing period before the next Treasury financing,
and he felt that the System should take advantage of it to increase
the rate to 3 per cent.
seemed probable that it
While the bill
rate was now only 2.81, it
would soon be higher because of prospective
Treasury and other demands for funds.
His chief concern was about the
possibility that a discount rate increase might be interpreted as a
move toward more restraint than was intended.
Although he believed
that a confirmation of present restraint, or even slightly greater
restraint, would be in order, he would not want to signal a substantial
intensification.
He would be happier if action could be taken when
the bill rate was higher than at present, but he would not care to
delay action beyond March 12, by which day more than half of the
Reserve Banks had directors' meetings scheduled.
some of the reservations expressed,
While he shared
he felt that the time was here
when discount rate action should be taken.
Mr.
Mills said he detected a problem in the conduct of System
monetary and credit policy that happily was in an incipient stage at
3/3/59
present but which, if unattended,
consequences.
could spread out with serious
He then presented the following statement:
In setting objectives and appraising the effects of
monetary and credit policy, the time has come to give
prime consideration to the results of sighting policy
actions at sustaining some predetermined level of nega
tive free reserves over a lengthy period of time.
The
unhappy experience of last year, when $500 millions of
positive free reserves were set as a continuing goal of
policy actions, was reflected in a supercharged growth
in the money supply.
Similar results may occur in
reverse if some level of negative free reserves is
consciously maintained by policy actions for a continuous
period of time, in that the ultimate effect on the money
supply of maintaining any fixed level of reserves seems
to be comparable to the results obtained from compounding
interest. This is true because the commercial banks must
adjust their positions to whatever level of reserves is
set by Federal Reserve System policy actions, and in doing
so under existing conditions of a negative level of free
reserves the consequence is to set up a cumulative force
contracting the outstanding volume of commercial bank
The fact that the volume of discounts at the
credit.
Federal Reserve Banks has not risen in proportion to the
pressure that has been exerted by System policy actions
on the supply of reserves offers proof to this theory by
indicating that the commercial banks restrain their credit
operations in response to System policy rather than expand
their loans and investments, all of which is in accordance
with the dictated principle that Federal Reserve Bank
discounts should be temporary in character.
As long as the Federal Reserve System is intermittently
supplying reserves to sustain commercial bank Tax and Loan
Accounts on the occasion of U. S. Treasury financings, the
contractive pressures of a negative level of free reserves
serve the worthwhile purpose of compelling commercial bank
divestment and redistribution of U. S. Government securities
acquired from Treasury offerings and preventing an unwanted
However, when the time should
expansion of bank credit.
Treasury financing is no longer
to
support
come that reserve
the case, the full effect of
now
is
as
needed as frequently
of maintaining a constant
policy
System
a Federal Reserve
come into play and a
would
reserves
free
level of negative
3/3/59
-43-
deleterious contraction of the money supply would set in.
As this is a process that only takes place over a period
of time, it is not immediately apparent, but by the same
token can be safeguarded against well in advance by
appropriate prophylactic actions.
Applying the theory thus submitted to the present
situation suggests that care be taken to avoid a rigid
posture of maintaining a continuous level of negative free
reserves, both because of the overly contractive influences
inherent in such a policy and because complacent commercial
bank adjustment to an unchanging Federal Reserve System
policy tends to accelerate its effects beyond those in
tended.
Inasmuch as the System's present policy is in
itself persistently contractive, any greater pressure is
unnecessary and might be unwise. In fact, the occasional
appearance of positive free reserves over a weekly reporting
period should not be shunned in that no real relaxation in
pressure would have occurred and a variation from constancy
could be psychologically desirable for the banking and
investment fraternity to observe.
A 3 per cent discount rate as an alignment with a cor
responding structure of market interest rates is to be
desired, especially for its influence toward making the
United States money market more attractive for the invest
ment of foreign funds and thus acting as a check against
the future outflow of gold. However, if the ground swell
of economic developments continues to indicate a lessening
in the demand for commercial bank credit and long-term
capital, together with an ample supply of investment funds,
it may become necessary to fall back from a 3 per cent
discount rate. Furthermore, heed should be paid to the
natural influences tending to relax credit tensions by
whatever moderation of Federal Reserve System policy can
be made without lowering the guards against forces making
for a renewed wage-price spiral or loosening such grip as
it is possible to hold over speculative fervor in the stock
market.
In further comments,
Mr.
Mills suggested bearing in
mind that
the pressure of a constant level of net borrowed reserves evokes a
response that compels the commercial banking system to contract loans
and investments.
If,
in
the process of that contraction, the banks
3/3/59
-44
were to restore their reserve positions, with some margin of excess
reserves,
and if
reserves,
the commercial banks in
the System then proceeded to extinguish the excess
turn would have to respond by
contracting their outstanding credits.
There would be set in force
a cycle of restrictive influences such as to hold the threat of
boiling down the money supply to a point that would be inconsistent
with the economic growth and resurgence of economic activity that,
within its
limitations, it
was the purpose of the System to foster.
Mr. Robertson said it
seemed to him that the economy was
moving upward very rapidly, especially if
one looked at the whole
picture through the glasses one should have on in
a period of the year when an observer is
January and February,
apt to be misled.
As a matter
of fact, there seemed to be inflationary overtones all through the
Therefore,
picture.
if
the System failed to take advantage of every
opportunity to adopt a more restrictive position, it
might find
itself in the sad position of one who waits and weeps.
the impending Treasury financing operations,
In view of
he felt that the System
should move toward a more restrictive position rather fast.
While
he did not have in mind becoming startlingly more restrictive, he
would like to see net borrowed reserves in the neighborhood of $200
million by the date the decisions on the next Treasury financing
were made.
With respect to the policy directive, Mr.
he saw no need for a change of any kind.
Robertson said that
He realized that a change in
3/3/59
the discount rate would originate at the respective Reserve Banks.
For his own guidance,
however,
he had set down some of the aspects
of the economic situation that seemed to him to provide a basis for
increasing the rate at this time.
He then read the following state
ment:
The principal aspects of the economic situation which
justify an increase in Federal Reserve Bank discount rates
at this time:
1. General economic activity has recovered to above
the level of the peak reached in 1957, with further expan
sion in process. Although unemployment is still larger than
is desirable, the lag in this area is due to improvements in
productive efficiency, which provide the basis for further
advances in output and in over-all levels of living.
2. The general level of commodity prices has been
stable or rising slightly, notwithstanding declines in prices
of farm products and the increased productivity of industry.
This is because prices of finished industrial products have
continued to advance, reflecting in large part rising wages,
but also to some extent increased profits.
3. Continuation of such price increases might build
up buying resistance on the part of domestic, and particu
larly foreign buyers and endanger the sustainability of
economic growth.
4. Maximum sustainable growth in economic capacity
requires a moderately large volume of investment, financed
The current course of economic events is
out of savings.
favorable for investment and in addition the government will
Adequate savings to cover
continue to be a heavy borrower.
these demands should be encouraged. Hence, the present
situation calls for a relatively high level of interest
rates.
5.
Current conditions are conducive to the undertaking
Advances in stock prices and
of speculative commitments.
in real estate values are indications of these trends. Credit
should not be too readily available for financing such com
mitments, which are threats to economic stability.
6. Resumption of a belief in the inevitability of
inflation encourages borrowing and discourages lending.
3/3/59
-46
These attitudes may be expected to cause interest rates to
rise. Rising rates should not be resisted by making Federal
Reserve credit available at low rates, but should be per
mitted to occur in order to set up correctives to the in
flationary tendencies.
7.
Expansion of bank credit last year was at a rate
that was more rapid than necessary for sustained economic
growth at a level consistent with reasonably full utilization
of resources. The money supply during the past year in
creased at a rate of 3-1/2 per cent and is adequate for
further growth at turn-over rates that have prevailed in
previous periods of prosperity. In addition a 10 per cent
growth in time deposits has augmented the liquidity of the
economy.
Expansion of bark credit has thus not only helped
to finance the recovery of consumption and investment but
has established the basis for further growth.
8.
Although some slowing down in the rate of bank
credit and monetary expansion has occurred in recent weeks,
the general liquidity of the economy has continued to in
crease as the public has used available funds to acquire
short-term Treasury securities in large amounts.
9. Any further tendencies toward bank credit expansion
should necessitate increased borrowing of reserves by member
banks at discount rates that are kept in touch with market
rates. Additional reserves may be supplied through open
market operations when deemed appropriate for further sustain
able growth, but only after a higher level of member bank
borrowing and higher discount rates have been established.
much further below pre
10. Discount rates are still
vailing open market short-term rates than is usual or
appropriate in a period of economic expansion. They should
be brought more closely into line with the market.
11. If action is not taken now, the timing of pro
spective Treasury financing operations may preclude the
opportunity to take any action for several months.
Mr. Robertson also commented that although there was a period in
April when discount rate action possibly could be taken, the System would
be faced with those problems that arise from taking such action too soon
before or after a Treasury financing operation.
that the dangers involved in
to warrant the risk.
Accordingly,
he felt
failing to act at this time were too great
If the System failed to act, it
might be in
a
3/3/59
-47
position where it would regret not having the discount rate at an
appropriate level from which to work in trying to offset the forces
that he thought were developing.
After expressing agreement with the views stated by Mr.
Robertson, Mr. Shepardson said it seemed to him that at this season
of the year one was likely to worry about things not moving quite as
fast as desired and to fail to take account of the slackening inherent
in
the winter season.
The continuing pressure on wages and prices
concerned him a great deal.
While much concern was being expressed
about unemployment, he felt that it
would be corrected more effectively
by price adjustments to stimulate demand than by putting out more
funds in
the hope of creating employment when there was not the con
sumer demand.
of income.
At present, he noted, there was a high consumer level
Thus,
there was money to spend but only as consumers spent
the money for goods and services would there be a real incentive for
the expansion of productive facilities.
felt
With those things in mind, he
that the System should keep up with the procession rather than
wait for historical evidence.
to move toward a little
In his opinion,
it
was highly important
more restrictive level than had prevailed.
Reports recently had indicated that the feel of the market was not
quite as tight as the statistical figures would indicate,
felt night be desirable.
or as he
Hence, along with early action on the
discount rate, he would favor moving toward somewhat greater restraint
through open market operations.
3/3/59
-48
Mr.
Fulton said that steel continued to make the news from
the Fourth District.
This week the mills were expected to produce
the largest amount of steel ever produced in
one week.
Some mills
were booked solid through June and customers were clamoring for
delivery.
In a recent survey of purchasing agents, almost half of
the respondents said that they were acquiring inventories,
not only
steel but other lines, so as to avoid being embarrassed if a strike
occurred this summer and also because inventories had been low.
On
the other hand, the respondents did not want to guess at operations
for the second half of the year.
In contrast to the steel industry,
the machine-tool industry was rather dismal.
Backlogs were a little
over three months but the amount of tools shipped was quite small.
The automobile industry was now rebuilding to some extent rather than
buying new machine tools, and other industries could follow the same
alternative.
With further reference to district developments, Mr. Fulton
said that department store sales since the first of January were 3
per cent above the year-ago level.
Contract awards were up for
residential and other types of construction.
The bad feature con
tinued to be the unemployment situation, which had not changed
substantially.
Mr.
Manufacturing employment had not increased in total.
Fulton said that although he shared Mr. Hayes'
reserva
tions as to increasing the discount rate, he did not believe that
3/3/59
-49
any change should be labeled a technical adjustment.
A discount rate
change was an indication of Federal Reserve policy and it
would be,
and possibly should be, considered as overt action on the part of the
System.
He noted that some time ago financial writers were speaking
of the probability of a discount rate increase and the market was
conditioned to it.
Recently,
press articles had indicated that the
rate might not change for some time, no particular reasons being
advanced except that the System had not acted according to earlier
expectations.
He agreed that this was an appropriate time to increase
the discount rate, adding that the System might not for some time
have another opportunity as clear cut as at present.
The fact that
a 3 per cent rate would be slightly above the bill rate seemed to
him only incidental because it appeared almost inevitable that the
rate would rise whether or not the discount rate was increased.
bill
Corporations having funds in
the form of bills were likely to cash
them for the purpose for which they acquired them, which was liquidity,
in
order to pay for inventories being acquired and taxes.
Noting that
the next meeting of the Cleveland directors was scheduled for March 12,
Mr. Fulton expressed the conclusion that within the next week the
discount rate should be increased to 3 per cent.
He also indicated
that he was quite satisfied with the Committee's policy directive as
it
stood.
Mr.
good.
Bopp said that Third District department store sales were
The employment situation remained the big cloud in the district,
-50
3/3/59
with incomplete data for January showing unemployment at 11 per
cent of the labor force, a somewhat higher rate than a year ago.
The chief banking development had been an exceptionally large loss
of deposits by Philadelphia banks.
As a result, the banks had been
running large and increasing basic reserve deficiencies which, to an
increasing extent, they had been meeting through the Federal funds
market rather than through borrowing at the Reserve Bank.
Mr.
Bopp
said he regretted that short-term market rates had eased from their
mid-January levels.
of 1/2 per cent in
If
they were still
at those levels, an increase
the discount rate could be made as a technical
adjustment, but at present market rates such an increase might be
interpreted as more than a technical adjustment.
He did not feel
this could be justified on purely economic grounds in
the light of
current rates of output relative to capacity in terms of both
facilities and labor force.
This led him to raise whether it
not be desirable under similar circumstances in
might
the future to pay
more attention to short-term rates in open market operations, even
if
this involved concurrent sales of short securities and purchases
of other securities to meet possible problems of reserve availability.
Mr. Bopp expressed the view that the System should act with
unity on the discount rate and said that on this basis he would be
prepared to recommend an increase of 1/2 per cent to the Philadelphia
directors.
He was not sure, however,
whether he could convince them
3/3/59
-51
of the appropriateness of such an increase in the light of current
market rates.
They were to meet this Thursday, as were the New York
and Chicago directors,
and in view of the Third District unemployment
situation he would not want Philadelphia to be the only Bank to
announce an increased rate.
The policy directive seemed to him
satisfactory.
Mr.
Bryan said that recovery was continuing and, although
there was nothing immediately explosive or ebullient, the situation
had the earmarks of developing into an inflationary boom at some time.
He was at the point of believing that the System should exercise more
restraint but that, because of the factor Mr.
Bopp had mentioned, it
should not move overtly on the discount rate until it
the short-term market.
Since late in
had prepared
January a considerable volume
of net borrowed reserves had been attained, but the monetary situation,
as measured by some criteria, had actually eased.
cent in mid-January,
the three-month bill rate had gone down to the
present levels and only recently had it
tightening.
From around 3 per
begun to show signs of
Even the longer rates had eased.
In the circumstances,
his inclination was to use the forthcoming period to take advantage
of natural forces in
the market that might tighten rates, including
a tightening of the short bill rate above 3 per cent.
Mr.
Bryan went on to say that his views were probably influenced
by the fact that action by the Atlanta Bank to increase its
discount
-52
3/3/59
rate at this time would probably require great persuasion on his
part.
It
would have to be done subsequent to action by the New
York, Chicago,
and other Banks on the tag-along theory.
On two or
three occasions, he had tried with limited success to explain to the
directors the matter of a technical adjustment of the discount rate
to open market rates.
At the moment,
one of the big problems was to
get into the public mind the relationship between fiscal policy and
the value of Government securities.
A 1/2 per cent discount rate
adjustment now might draw a veil between this relationship and attract
to the System the criticism that in his judgment was bound to come.
In all the circumstances,
he would favor moving quickly during the
forthcoming period to use the open market instrument in such a way as
to increase short-term market rates.
If
that were done, it
might be
possible to use the brief interval in April to change the discount
rate, but if
the System went into that period with a bill rate only
slightly above or at the discount rate of 2-1/2 per cent, it
not make a move.
On the other hand, if
the bill
could
rate were above 3 per
cent at that time he felt that a move on the discount rate could be
made.
Mr. Szymczak said that the lack of rapidity of the recovery,
particularly at this time of year, and the situation with respect to
unemployment and the Treasury bill
rate did not suggest tightening on
the part of the System through open market policy or the discount rate.
3/3/59
-53
However, with the Treasury coming to market quite soon, and again
in the following month, for a large amount of money, if
the discount rate is
therefore, is
Mr.
to be taken it
action on
should be taken soon.
That,
his position at this time.
Balderston suggested that confusion in people's minds
because of the psychology of the moment did not appear warranted
by the facts.
Personal income was 3 per cent above the peak of
August 1957 and the index of industrial production may have attained
in
the month of February the peak reached in
the summer of 1957.
In
short, at a rather early stage of the recovery the country was already
back to the top of the previous movement.
Using that to give him
perspective, he had the feeling that the System ought to take at
once any overt action it was going to take, and make the action
decisive so that people would know where the System stood.
He would
be inclined to delay use of open market operations for further re
straint until the banking situation made the need apparent.
Corpora
tions were now very liquid and this obviously had an impact on the
bill
However,
rate at the moment.
just as soon as those corporations
used their liquidity for the payment of tax bills and accumulation of
inventory they would return to the commercial banks for credit and
the demand would be heavy.
Then the member banks would be coming to
the Federal Reserve as the lender of last resort.
yet unforeseen, he felt
borrowed reserve figure.
At some time, as
there would be a need to increase the net
What he was doing in his own mind was to
3/3/59
-54
attempt to separate the Federal Reserve action that would make the
front pages and which he felt should be taken soon, namely, an in
crease in the discount rate in
the amount of 1/2 per cent, from the
more delicate and less obvious actions through the open market which
could be taken just as appropriately at a later time.
Chairman Martin commented that when it
came to critical
periods the problem was always one of struggling for logic and it
was not possible to meet all of the requirements that all would like
to have.
Mr. Irons,
game, which in
for example, had spoken about the rules of the
fact were forced on the System, first
by a pegged
Government securities market and now by a large Treasury deficit.
The System's problem would be much easier if it
were not for such
factors.
It
was at a time like this, the Chairman said, that the
System must face up to the complexities of its
organization.
While
there might be some question whether the System was organized properly,
it
was necessary to work with what existed and not with what some
would like the situation to be.
directors'
As a general rule, Reserve Bank
meetings were spread over a period of weeks,
and there
would not be a conjunction unless the Board set the meeting dates
for every Federal Reserve Bank.
From time to time in the past, the
System had relied on the New York Bank or some other Reserve Bank
3/3/59
-55
to act as a leader to pull the thing together, but at present the
situation was difficult because there would be different judgments,
as in fact there were around the table today.
In his own judgment,
now called for an increase in
Chairman Martin said, the economic factors
the discount rate.
tions were sufficiently clear in
Easter sales expecta
marketing circles today to warrant
enthusiasm regarding the business picture.
He would not attempt to
evaluate the steel situation in the light of the strike possibility,
but the Wall Street Journal today reported operations at the highest
point in
this in
the history of the country in terms of tonnage output,
spite of auto sales that were disappointing.
and
The point of
concern to him, the Chairman continued, was the very real problem
with respect to the sale of Government securities.
The System had
not acted decisively or clearly enough to be a real asset to the
Government securities market during the last six or seven months.
In his opinion, it would have been preferable to increase the
discount rate before the last Treasury financing instead of having
newspapers talking about whether the System would or would not act
on the rate at an appropriate time.
calling for judgment,
Now there was again a period
but he questioned whether there would actually
be a period as long as three weeks in April within which the System
would be free to act.
In the circumstances,
the point Mr. Leedy had made
about "pulling the rug" became a very difficult problem.
and he believed also at succeeding meetings,
A year ago,
he had pointed out that
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3/3/59
it was easier to go down than up; the System tended to pull itself
together on the down side more quickly than on the up side.
As Mr.
Bryan had brought out, the critical problem at the moment was to
relate fiscal policy and the financing of the Government debt.
How
ever, the System, which earlier had deferred raising the discount
rate principally because of the fact that the Treasury was in the
market, now had before it the question of not doing what it would
have done previously except for the Treasury financing.
Chairman Martin continued by expressing the view that the
System either must face up to its responsibilities or take the position
that monetary policy could not work in an environment like the present
and that it
was necessary to look for other controls to meet the situa
tion effectively.
He doubted the advisability of eliminating monetary
policy as a part of the aggregate and saying that under certain condi
tions it
could not work.
the market or what Mr.
What Mr.
Bryan said with respect to preparing
Bopp said regarding the short-term rate was
another way of approaching the matter.
To a large extent, however,
the Committee must depend on the Desk for administration of prescribed
policy, since obviously the Committee as a whole could not supervise
the activities of the Desk on a day-to-day basis.
the point made by Mr.
ills,
With reference to
he noted that the nature of the System
organization was such as to produce a tendency toward inflexibility.
To put it
another way,
there was a tendency to fall into the status
quo pattern rather automatically.
The job was to try to keep out of
3/3/59
-57
that pattern and to maintain flexibility to the extent possible,
for the System must not get frozen into a pattern and stay there.
On the discount side, for example,
it
would be possible to go down
as well as up if circumstances should warrant.
Returning to the Treasury's problem, Chairman Martin again
commented that a matter of judgment was involved.
However, he
questioned whether there would be any practical way of taking overt
action through April or May, or possibly even June.
There ought to
be some reasonable period of even keel before the Treasury went to
market in
order that all
of the misinterpretations coming from a
discount rate action at this time might be gotten out of the way and
the market could assess the action.
Therefore, the earlier the action
was taken the better it would be, particularly since business straws
in the wind were likely to compound the problem for the Treasury.
the discount rate were increased on March 5,
If
effective March 6, there
would be a period of two weeks for market adjustments.
If there were
another period of uncertainty as to whether the Federal Reserve would
act on the rate, with some commentators saying that it should act and
some saying that the Federal Reserve was being dictated to by the
Treasury, it seemed to him that the System would have abdicated any
role except passive acceptance of the course of the market.
In
essence, what he was saying was that in his judgment the organization
of the System was on trial in periods like the present.
It was a
question whether in the limited periods available for action a
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3/3/59
situation like this could be explained to Reserve Bank directors in
twelve different cities, none of whom had all of the information
available to the Open Market Committee.
The problem was one of pulling
the System together so that the decision would be clear cut, whether it
be right or wrong, for one could not fiddle with markets such as now
existed.
In his view the Government securities market had been badly
damaged by the fiddling of the last few months, and that was a matter
for which the Federal Reserve had some responsibility.
Where the
matter would end up he did not know, but personally he would like to
see those Banks whose directors were to meet on Thursday of this week
take action on the discount rate and dispose of the matter, for he
felt that this would be better for the System, even realizing that
many misinterpretations would be placed on the action.
He would be
glad if Mr. Hayes were to express his (Chairman Martin's) personal
judgment to the New York Board of Directors for he would like them
to know what he thought about the situation.
Certainly, if a move
were made on the discount rate and the business situation were to
collapse, the System would be blamed, but that was the risk that
must be run.
If the System failed to move when it had knowledge of
the difficult Treasury financing ahead, it might be in a position of
not having taken the one opportunity presented to it to adjust the
discount rate closer to a realistic alignment with the market.
In
this connection, it should be noted that there was not just one bill
rate, and he felt it was correct to say that the aggregate of short
term rates had been close to or above 3 per cent for a long time.
3/3/59
-9
Mr. Thomas commented that throughout 1956 the bill rate was
consistently below the discount rate.
A bill
rate 1/8 or 1/4
per
cent below the discount rate with net borrowed reserves around $100
million was more normal than otherwise.
If
the discount rate were
moved to 3 per cent, there might not be any rise in the longer bill
rate.
Chairman Martin then said, with respect to the problem of
technical adjustment,
that certainly the more logical situation was
for the discount rate to be slightly above the going rate.
that the System would want to abdicate its
in
the absence of such a relationship.
He doubted
responsibility for policy
He felt reasonably clear in
his own mind that the System should not wait; rather, he thought that
the System should express to the world clearly where it
stood.
Chairman Martin said that he was not particularly concerned
at this juncture with respect to open market operations.
would not want to be inflexible,
While he
neither would he care to see any
overt easing in the level of reserves.
Instead, he would prefer to
have doubts resolved on the side of restraint.
At the same time, if
a discount rate adjustment were made he would not want actively to
permit the conviction to grow that the change meant a greater degree
of restraint on reserves.
The Chairman then summarized the meeting by stating that he
understood all to be in
agreement that the policy directive should be
3/3/59
-60
continued without change.
The majority would favor an increase in
the discount rate to 3 per cent at the earliest possible moment.
The consensus seemed to be to maintain about the same level of re
straint as at present, with any doubts on the part of the Account
Management resolved on the side of restraint. He then asked whether
there were any comments on this summary.
Mr. Hayes commented that he doubted whether recent articles
in the New York and Washington papers about System policy being in
a state of suspended animation had exerted much effect on the trend
of market rates, for the main factor had been heavy buying by nonbank
investors.
He also had some reservations about the idea that simply
because the System thought a discount rate of 3 per cent was right a
couple of months ago, was ready to move, but was inhibited by the
Treasury financing,
same way now.
that meant per se that the System should feel the
The fact was that credit demands had been more modest
than any foresaw at the beginning of the year; at least, that was the
way he interpreted the economic comments today.
The Committee was
always entitled to re-evaluate the situation at every meeting, and
various factors might cause a change of mind.
Further, he had a little
feeling about the apparent disposition on the part of some members of
the Committee to anticipate business developments.
While there
appeared to be a general line of reasoning that recovery was going to
speed up and that there was going to be a sharp price rise, practically
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-61
no evidence of this had appeared as yet.
The question was whether
the situation justified a really overt move,
that it
did.
take chances,
The System was always in
and he did not think
the position of having to
and he was inclined to feel that the chances involved
in waiting for the 18 or 19 day period in April were no greater than
those involved in
the possibility of something going wrong by moving
to 3 per cent right now.
He liked the idea of the System moving
together but not the idea of the New York Bank moving ahead of most
of the other Banks.
Chairman Martin commented that he had meant to bring out that
the New York, Philadelphia, and Chicago Banks were the only ones with
directors'
meetings scheduled for this week.
To this, Mr.
Hayes
responded that the public might not realize the situation; if
a move
were made, he would prefer to have most or all of the Banks move at
one time.
Chairman Martin replied that the System was not organized in
that manner.
At times in
the past it
bank for leadership, but in
had relied on the money market
the last few years the money market bank
often had not been the leader.
He also wanted to make it
clear that
he had not intended to imply that anyone was committed to move now
simply because some had felt that the System should have moved earlier.
His own judgment was that the System should move now,
for he happened
to think that the situation called for such action, even though there
would be some difficulties from the public relations standpoint.
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3/3/59
There had been such difficulties when the San Francisco Bank first
moved to 2 per cent last August and there were some difficulties when
the discount rate was raised to 2-1/2 per cent.
However,
subsequent
events had vindicated both increases, and in his judgment they would
also vindicate a move to 3 per cent at this time.
Mr. Hayes commented that the New York directors would meet
on the 5th of March and on the 12th, and that the latter date would
have the advantage of permitting a closer coordination of timing with
the other Reserve Banks.
Chairman Martin responded that it
advantage.
would also have some dis
The date would be closer to the date when the Treasury
would next come to market, and discount rate action then would cause
that much more ferment.
Earlier,
there had been discussion about the
possibility of moving around the 19th or 26th of February,
action had been deferred in order to provide a little
spell because the Treasury had experienced in its
regarded publicly as a failure.
but the
more breathing
refunding what was
From the standpoint of both the
Treasury and the market, he felt that the earlier discount rate action
was taken--if it
Mr.
were going to be taken--the better it
would be.
Hayes remarked that he was thinking of whether the New York
directors would be willing to act ahead of the other Banks.
He felt
quite sure they would be reluctant.
There followed some discussion concerning the meeting dates
of the respective boards of directors,
during which, at the suggestion
3/3/59
of Mr.
-63
Allen, it
Messrs.
was understood that the statements made by
Thomas and Young this morning would be reproduced and
copies made available to the members of the Committee and other
Reserve Bank Presidents today.
With reference to comments that had been made about the
recent stability of the price index, Mr.
Shepardson commented that
although the aggregate index might be showing little
change, it
was
hard to ignore the news of increases in prices and wages appearing
in the papers almost daily.
These increases,
he noted, would
ultimately show up in the index.
The comment was made in this regard that nevertheless the
index had been on a plateau for some time.
Chairman Martin then inquired whether there were any other
comments,
and none appearing, he suggested that the directive to
the New York Bank be renewed in its
present form.
He also commented
that there were certain to be rumors crystallizing on Thursday and
that caution far beyond the usual degree should be observed,
particularly as to calling any special meetings of directors.
Thereupon, upon notion duly made
and seconded, the Committee voted
unanimously to direct the Federal
Reserve Bank of New York until other
wise directed by the Committee:
To make such purchases, sales, or exchanges
(1)
(including replacement of maturing securities, and
allowing maturities to run off without replacement)
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3/3/59
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 sustainable economic growth
and stability, and (c) to the practical administration of
the Account; provided that the aggregate amount of securi
ties held in the System Account (including commitments for
the purchase or sale of securities for the Account) at the
close of this date, other than special short-term certificates
of indebtedness purchased from time to time for the temporary
accommodation of the Treasury, shall not be increased or
decreased by more than $1 billion;
To purchase direct from the Treasury for the account
(2)
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.
It was agreed that the next meeting of the Federal Open Market
Committee would be held on Tuesday, March 24,
At the request of the Chairman, Mr.
1959, at 10:00 a.m.
Young made a statement with
regard to the status of the joint Treasury-Federal Reserve study of the
Government securities market.
key roles by the Treasury,
After reviewing the personnel assigned
the Board, and the Federal Reserve Bank of
New York, he said thus far those engaged in the study had been absorbed
principally in planning questionnaires,
the program of consultations,
and getting the working papers in process.
He next discussed the
evolution of the questionnaires and noted that in
their present form
3/3/59
-65
more work than had first
been contemplated would be involved
for the Reserve Banks with respect to collection, tabulation,
and compilation procedures.
Planning and instruction documents
would be finished as soon as possible with a view to avoiding
any greater imposition on the time of Bank personnel than neces
sary.
As to the consultations,
the general public relations
document had been drafted and was now under consideration.
In
addition, Treasury and System staff assignments, which he outlined,
had been completed for the respective working papers and for other
assignments.
Mr.
Young concluded with the comment that in all of
the staff discussions up to this point a very fine spirit of
cooperation had been exhibited.
Chairman Martin commented that apparently good progress was
being made and that the Treasury was enthusiastic about the work
being done.
The meeting then recessed and reconvened at 1:45 p.m. with
the same attendance on the part of members and alternate members of
the Committee and other Reserve Bank Presidents as at the morning
session.
From the staff of Committee,
and Rouse were present.
Messrs.
Riefler, Sherman,
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3/3/59
The meeting of the Federal Open Market Committee reconvened
at 1:45
p.m. with the following in
attendance:
Mr. Martin, Chairman
Mr. Hayes, Vice Chairman
Mr. Allen
Mr.
Mr.
Mr.
Mr.
Balderston
Deming
Erickson
Mills
Mr. Robertson
Mr. Shepardson
Mr. Szymczak 1/
Mr. Bryan, Alternate for Mr. Johns
Messrs. Bopp, Fulton, and Leedy, Alternate
Members of the Federal Open Market
Committee
Messrs. Leach, Irons, and Mangels, Presidents
of the Federal Reserve Banks of Richmond,
Dallas, and San Francisco, respectively
Mr. Riefler, Secretary
Mr. Sherman, Assistant Secretary
Mr. Rouse, Manager, System Open Market
Account
Chairman Martin said that the purpose of this session was to
discuss the problem of the number of persons attending meetings of the
Federal Open Market Committee and having access to its
records.
It
came about as a follow-up to the discussion that had taken place after
the regular session of the Committee's meeting on January 27,
1959, at
which time he had reported on a recent investigation into alleged leaks
of information regarding certain decisions of the Board of Governors,
1/
Mr.
Szymczak withdrew during the discussion.
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3/3/59
the investigation having been made by representatives of the Senate
Permanent Subcommittee on Investigations, of which Senator John L.
McClellan is
January 27,
Chairman.
The Chairman went on to say that since
some individual members of the Committee or Reserve Bank
Presidents had spoken to him on this subject and one or two sugges
tions for a change in procedure had been made to him, but he had
no idea of the general thinking of the group concerning the present
procedure.
It
had occurred to him that, if
the present procedure
were to be changed, a possible means of dealing with the question
would be to follow the present procedure at each meeting up through
the presentation of the economic and credit reviews by Messrs. Young
and Thomas, after which there would be a session limited to the
members of the Committee and their alternates, the Presidents not
currently members of the Committee, the Secretary and an Assistant
Secretary,
and the Manager of the System Account.
In that limited
session, the regional reviews and comments on policy and the discus
sion leading to a policy decision would take place.
Continuing, Chairman Martin said that the Committee desired
to get as much in the way of useful comment and independent judgment
as was possible in reaching its decisions, but at the same time it
wished to safeguard its procedure against a charge that there were
so many people present at Committee meetings or who had access to
its
decisions that it
constituted an unsound arrangement from the
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3/3/59
standpoint of possible leaks of information.
present list
A review of the
of those having access to minutes of the Committee
might be used by a critic to convey the impression that too many
persons had access to Committee records.
The Chairman went on to say that Mr. Fulton had made a
suggestion to the effect that the Reserve Bank economists might
meet separately prior to the meeting of the Federal Open Market
Committee.
In his (Chairman Martin's) opinion, this would not be
desirable for reasons that he stated.
He then suggested that each
of those present express his views on the general problem, and he
called first
upon Mr.
Bryan.
Mr. Bryan said that to his mind the problem was an extra
ordinarily important one.
It was necessary to define the terms of
the problem before the Committee could arrive at a correct solution.
He then made a statement substantially as follows:
1. The problem needs to be approached as a value
judgment, appraising risks against gains.
2.
A fundamental in the situation, as I see it, is
The temper is such that public
the temper of the times.
men and institutions are not innocent until proved guilty
but are guilty until they can prove themselves innocent.
The attack on public men and institutions by scandal
mongering and allegations of scandal everywhere masquerades
as patriotism. The degradation of the public taste is now
so great that such masquerades are generally accepted at
face value.
We can expect
We can expect no letup in the attacks.
no letup because it is to the political or monetary self
On the political side, attacks
interests of our attackers.
on public institutions such as the Federal Reserve System
3/3/59
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are, generally speaking, politically cost free and are thus
indulged in whenever they promise even the slightest possible
advantage.
This situation partly proceeds from a fundamental
and irremediable defect in our constitutional arrangements,
which relieve a member of the legislative branch of responsi
bility for utterances on the floor and, in practice, relieve
him of responsibility off the floor of the legislative
assembly.
On the monetary side, there is quite evidently a
profit to be gained by the press in scandal-mongering and the
allegation of scandal. As one distinguished publisher has
said to me simply, "It sells papers." Then he went on to say
that the press could not be made responsible in this country
because it has succeeded in cutting down the libel laws and
the interpretation of libel to such an extent that, practically
speaking, they are unavailable to any public man or institution.
Much more could be said on this subject. But the point is
sufficiently made that the System can expect mounting and in
creasingly savage attack not merely upon its policies, wherein
a host of thoughtful men will arise to defend us, but upon
allegations of wrongdoing and scandal, wherein we can rely
only upon ourselves and our ability to prove our innocence.
The point that we must have firmly in mind and keep
3.
hold of is that these scandal-mongering attacks will not be
related to facts or to our actual innocence.
They will be
related, instead, to the political or monetary self-interest
We must, in my view, have clearly in mind
of the attackers.
the fact that our task is not only that of being innocent.
Unless we
Our task is also that of proving our innocence.
approach our current problem with a completely cynical under
standing of this point, then in my judgment we are going to
arrive at erroneous conclusions.
4.
The next point to be realized is that under our
present organization and procedure the number of people
involved in the knowledge of decisions is so great that
the task of proving our innocence is impossible--note that
I am distinguishing between the knowledge of decisions and
the decision-making process.
In the light of these circumstances the problem, I
5.
think, is to preserve the participation of many informed minds
in the decision-making process but to reorganize our procedure
in order to:
make certain that we are clearly within the
(a)
statute; and,
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(b)
(c)
reduce dramatically the number of people who
have knowledge of actual current decisions
at the time they are made; and,
handle the materials of the Committee under
such security regulations, or such noncurrent
status, as materially to reduce the possibility
of unauthorized use or to make such knowledge
and possible use of little
or no significance.
The advantage of (a) would be that, by staying as strictly
within the statute as possible, we would materially reduce the
profitability of merely whimsical attack. If we stay clearly
within the statute, or its necessary and unavoidable implica
tions, we rest on the solid foundation of the legislative
branch's own considered decision; and we give ourselves the
enormous advantage that is gained by anyone in an argument
when he can cite on his side the fact that, "The law says..."
By staying clearly within the statute, we practically assure
ourselves that debate on a change of the legislative branch's
previously considered decision will be on a much higher level
of policy than will be true if we are accused of taking ad
vantage of the law's silences. On the other hand, if we take
advantage of the law's silences, without clear necessity, then
we immensely increase the difficulties of our defense, either
by ourselves or by those who are our admirers and advocates.
For such reasons, which could be greatly extended and il
lustrated, I believe it extraordinarily important that we
give a strict interpretation to the statute and the clear
implications of the statute, and that our use of the statute's
silence, when it exists, rests upon paramount necessity.
The advantage of (b) is that it would materially improve
our chances of proving our innocence as against charges of
leaks and scandal--which is the prime and overriding requisite
The advantage of (c) is the same.
in my judgment.
The handling of the operating procedures of the Open Mar
ket function, and the minutes and other materials that it
necessarily produces, with a rigid sense of responsibility,
would be generally regarded, both by our critics inside and
outside the legislative branch, as a necessary extension of
our more narrowly defined responsibilities under the statute.
6. In specific terms, accordingly, my approach to the
organization of the Open Market Committee would be as follows
As for the Presidents, I think that only those who
(a)
are members and alternate members should be present at
This would be either entirely within the
the meetings.
statute, or so completely within the clear necessity of
the statute (for orderly continuity of the Committee's
work at the annual change-over of membership) as to be
essentially beyond criticism.
3/3/59
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In my opinion, the presence of the nonmember, non
alternate presidents cannot be defended on the basis of
the statute. I do not believe that their presence can be
defended on the basis of necessity for orderly continuity
of the Committee's work. I do not believe that their
presence can be defended on the ground of mustering the
total intellectual resources of the System in the process
of decision-making; for I think it clear that several other
devices could be utilized that would quite as effectively
muster for the use of the Committee the opinions of the
nonmember, nonalternate presidents.
Indeed, I believe that
a considerable case could be made out for the idea that it
would be wise to have some of the presidents standing a little
aside and a little
independent of the group discussions out of
which decisions are currently taken.
There is, to be sure, an advantage to group discussion
and group evaluation of differences in points of view and
emphasis.
On the other hand, there is some advantage in
having some of the Presidents uninfluenced by the group discus
sions and group evaluations, arriving at their evaluations by
more independent procedures; and I would deem this advantage
considerable for two reasons.
First, the Presidents by their
almost constant preoccupations with current monetary affairs,
are among the country's better critics and commentators on
current policy, and they are practically speaking the easiest
and most properly accessible to the FOMC on current problems,
so that a measure of independence in the judgments of some of
Second, the Governors, the
them could well be of great value.
President members and alternate members of the Committee, to
gether with some of the officers of the Committee would still
be a group large enough to represent a diversity in points of
view, oral emphasis, and a balanced evolution of a group
Moreover, in this connection, the absent Presidents
judgment.
would not be deprived of participation in the decision-making
process by means other than their presence at meetings: they
would only be deprived of immediate knowledge of taken or
impending decisions.
(b) As for staff, it is certainly a necessity of the
statute that the work of the FOMC must involve a mech
anism for recording its deliberations and decisions and
for professional economic, and legal advice.
It is not necessary, nor in my view does it contribute any
thing to the decision-making process, which is the important
value that we must preserve, for there to be extensive staff
knowledge of actual decisions currently arrived at. Accordingly,
as to staff, my approach would be as follows:
3/3/59
-72
(1)
The economists of the President members and
alternate members of the FOMC can very well have their
responsibility for briefing their Presidents, as now,
on the economic developments in their several Districts
and nationally, and of considering with their Presidents
the various policy factors entering into decisions.
There could be no objection, I feel, to their being
present at the economic and financial presentations made
to the FOMC.
I believe, however, that they should with
draw once general discussion starts and decisions are
either taken or impending decisions forecast.
(2)
There can be, as I see it, no objection to the
Board's staff participating in the same way--and perhaps
there should be a few exceptions made, but very few, for
individuals whose presence at the entire meeting is
deemed important.
Certainly anyone remaining at the
entire meeting, I believe, if not a member or alternate
member of the Committee, should be an officer of the
Committee.
(c)
As for the production of minutes of meetings in the
offices of the Board of Governors, it seems to me that the
procedure ought to be under rigid, written controls with at
least an annual procedural checkup.
(1) As for the Banks that are not represented on the
Open Market Committee, I believe the minutes should not
Just how
go to them until the minutes are noncurrent.
The
much of a time lag should be involved I do not know.
important thing is that there should be enough of a lag
that decisions have already resulted in action, either
revealed or foreshadowed in published statistics or in
discount rate action by the Banks that are members or
alternate members of the FOMC.
(2) As for the forwarding of minutes to the Banks that
are represented as members or alternate members on the FOMC,
I think that could be done promptly as at present, but I
believe that access to the minutes should be rigidly
confined to the President and his associate economist
and released from a security file to such associate
economist only upon a charge-in and charge-out system
initialed by and under control of the President personally.
They could, of course, under regulation, be released to
others when they are noncurrent.
I have not considered in detail the daily wires or
(3)
However, as is suffi
reports of the Account Management.
ciently indicated, I would put them under rigid control,
making errors, if errors are to be made, on the side of
rigid rather than lax procedure.
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The advantages of (c), (1), (2), and (3) are to be found
in reducing radically the number of persons currently informed
of decisions at the time they are taken. There is, however, an
incidental advantage of considerable importance.
I believe there is a mine of information to be had from
analyzing the System's weekly statement, loan statistics, money
rate trends, and so on. I believe that if some of the System's
personnel, economists and Presidents alike, were working these
mines a little
more assiduously we would find the effort vastly
rewarding; and, if the easy out of simply being "in the know"
were removed from time to time as the Committee's membership
changed, some of us might be tempted to do a little
more pick
and-shovel work in an effort to find out precisely what the
System was doing.
I guess I should speak personally on this point, but I
think a little more pick-and-shovel work would strengthen my
own intellectual muscles a good deal, for on a good many
occasions I have found that when I got to reviewing statistics
I had quite a different impression of System policy than I
received from the 'round-the-table discussions of what we were
doing or thought we were doing.
7.
The foregoing discussion simply indicates an approach
and omits many items of detail. There is one major point on
which I will not evoke much sympathy and will not argue at length.
I believe that the mechanism for fixing the discount rate
should be altered and the power to fix the discount rates for
the several Banks should be placed either in the Board of
The present
Governors or in the Federal Open Market Committee.
mechanism was wholly logical when it was established; but in my
view it is anachronistic, does not correspond either to the
economic facts or the mechanistic facts of rate determination,
is frequently embarrassing, and is destined sooner or later to
lead us into grave difficulties.
For better or worse, we now have a national money market
and a national monetary policy. The discount rate should be
operated in harmony with our other instruments, and the men
having responsibility for the other instruments should not be
able to avoid the assumption of responsibility for the discount
rate.
The important thing in connection with the local Boards
of Directors of the Federal Reserve Banks is in keeping an
able body of men who, by their questions, assist in making the
presidents and executive officers of those banks look alive
and, by their training and experience, bring to the banks
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points of view and information of vast use for policy deci
sions. It is not important, and provocative of great mis
understandings, to leave the actual legal responsibility of
fixing the discount rate in the hands of the local Boards of
Directors.
8.
The point of view adopted in these notes leads to
Draconian measures.
Such measures are herein suggested not
because of any natural liking for them but because I believe
them to be of paramount necessity in view of the temper of
the times and indicated, in any event, by a logical and
necessary interpretation of our statutory responsibilities.
Mr.
Mr.
Bryan.
Bopp said that his approach differed somewhat from that of
First, he felt
it
important that everyone having access to
open market information be a person whose integrity was beyond ques
tion.
There was also the matter of judgment, and if there was ever
any doubt about an individual's judgment, regardless of the level of
his position or his responsibility, there would be no option but dis
missal.
Second, a sense of participation in the open market process
was important in
terms of morale.
Third, in terms of training, access
to pertinent information was of value and this would include the
opportunity to observe and listen to discussions at these meetings.
Therefore,
Mr.
Bopp said, he would be inclined to retain the present
procedure even if
there were difficulty in defending it.
He felt
that leaks or threats of leaks would persist regardless of the number
of persons involved in
Mr.
the meetings or having access to the records.
Fulton said that he had been disturbed by the number of
persons that had been present at meetings during the decision-making
3/3/59
-75
process.
He would agree that a number of Mr. Bryan's points would
be helpful if
adopted.
He would be quite inclined toward the sug
gestion that members of the staff who did not participate in the
decision-making discussion withdraw from the meetings prior to that
portion.
Mr.
Shepardson said that he, too, was inclined to agree with
much of the procedure suggested by Mr.
Bryan.
It
was not clear to
him just how much the training of persons who did not participate in
the policy discussion was furthered by having them present throughout
the meetings, and he was inclined to agree that it
might be better for
them to withdraw after the economic review was presented.
Mr. Shepardson
said that he would not agree, however, with the suggestion that the
Reserve Bank Presidents who were not currently members or alternates
of the Committee should withdraw prior to the decision-making discus
sion.
As to the availability of the minutes, Mr. Shepardson said that
his feeling would be that after a limited period-perhaps a few weeks
after a meeting--access to the minutes and other records could be
defended for those persons working on open market matters.
In general,
his feeling was that the Committee should take every possible pre
caution to eliminate or at least to minimize opportunities for
criticism such as had arisen on some occasions in the past.
Mr. Robertson said that he thought Mr.
very good case.
Bryan had stated a
All he needed to do was to state where he did not
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agree.
side.
He did not think this an "open and shut" matter on either
It
was a matter of weighing the means by which the Committee
could accomplish the job before it
criticism regarding leaks.
to justify to itself its
with the least amount of justifiable
This meant that the Committee must be able
procedures for letting others than members
of the Committee have access to information.
With respect to the
Presidents who were currently not members of the Committee, he
completely disagreed with Mr. Bryan's suggestion for having them
withdraw from the meeting prior to the policy decision process.
Any
advantages from such a procedure would be greatly outweighted by the
advantage of having them present for the purpose of maintaining con
tinuing familiarity with open market information from month to month
and year to year.
With respect to the staff, Mr. Robertson felt that
all members should be treated exactly alike regardless of whether they
were from the Board's staff or the Banks,
What he meant was that if
staff members from the Banks were to withdraw after the economic
review, the same procedure should apply to those who were staff
members from the Board.
It
could be argued that there were advantages
to be gained from having the staff withdraw, Mr. Robertson felt, in
that they might have a more independent view than if
during the policy discussions.
they were present
His conclusion was that it
would be
preferable for each Reserve Bank to be represented at every meeting,
and if
the President of a Bank were unable to be present, then one
3/3/59
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other member of the Bank's staff (an alternate member of the Committee,
a First Vice President, an economist,
or some other person) should be
there so that that Bank would have a first-hand contact with what went
on at the meetings.
With respect to access to minutes and reports,
said he was not bothered.
Mr. Robertson
The more that persons working on open market
problems were familiar with this material, the better the advice avail
able to the Committee and the Presidents was likely to be.
The minutes
did not usually reach the members of the Committee for a week or ten
days after a meeting,
offered little
and it
seemed to him that their availability
danger of leaks,
He would continue to make available
the minutes of the meetings to the members of the staff at the Reserve
Banks and at the Board,
on the list
and he noted that every one of the persons now
for such access had been vouched for by a member of the
Board or by a Reserve Bank President.
Mr. Robertson said he did not
think the System was ready at this time to adopt the suggestion that
Mr.
Bryan had made regarding a change in responsibility for the dis
count rate and he would not now favor it.
Mr. Robertson later added the comment that he also thought
there should be an understanding that no member of the Committee and
none of the Presidents who attended meetings of the Committee should
discuss any open market decisions with the directors of a Reserve
Bank.
This might be the case at present, but in his view the board
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of directors of a Reserve Bank should not have access to any of
the open market information that was not made available to the
Committee's staff.
Mr. Mills said he did not know how the Committee was going
to resolve all the different shades of opinion coming out of this
discussion.
His own view would be to accept the procedure suggested
by Mr. Bryan, with several modifications.
The first of these would
be that all of the Reserve Bank Presidents should attend the open
market meetings.
He felt there would be no good reason for them
to bring with them their economists, if
the economists had access to
the proceedings of the meeting at a later date and were available for
consultation with the Presidents at that time.
However,
excluding the
Bank economists from the meetings should not, in his opinion, be
extended to excluding the officers of the Committee from the Board's
staff who were elected at the regular meeting.
That would eliminate
the election of the associate economists as officers of the Committee
and would limit the officers to the Secretary and Assistant
Secretaries,
the Economic Adviser, the Director of Research, and the
General Counsel and Assistant General Counsel.
Mr.
Mills said that
he felt rather like Mr. Robertson regarding the minutes, that they
represented water over the dam,
and when they were distributed to
the Presidents and members of the Committee there would be no
objection to opening them to others for their educational value and
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-79
interim guidance between meetings,
it
being understood that this
would be done with discretion and by limiting access rather rigidly.
As far as the discount facility was concerned, Mr.
be quite different from that of Mr.
Bryan.
Mills' view would
He had a strong feeling
that this was the heart of the Federal Reserve System, and the
merit of its
tion.
decentralized organization rested on director participa
The essence of that participation was deliberating in the
discount rate decisions.
While this produced rough spots, his belief
was that the advantages of preserving the present system immeasurably
outweighed the disadvantages.
Mr.
Leach said that he thought all
of the Presidents should be
invited to attend the open market meetings.
not been in
He felt that, if
attendance at meetings in recent years,
at a considerable disadvantage in
discussions,
he had
he would have been
not having had the benefit of these
especially on some occasions when he went to his directors
with certain recommendations.
He did not feel too strongly about the
present arrangements for the staff to attend, but he did feel that
each President needed to have some person in
his Bank with whom he
could freely discuss open market matters and to whom the minutes would
be available.
It
seemed reasonable to him that each President should
bring one economist with him to the meetings, including that part
concerning policy discussions.
The Committee could operate without
having the economists present, but there was an advantage to a
Reserve Bank President to be able to talk with his economist about
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all aspects of the meetings, and it
certainly kept the economist on
his toes and interested in what was going on.
For his part, Mr. Leach
said he would undertake to defend that arrangement, which he believed
to have much advantage, although he would agree that the Committee
could operate on a more restricted basis.
As to the minutes, he was
inclined to feel that some time limit might be placed on making them
available.
For example, it
seemed to him that after three months
there was very little danger in making the minutes available to the
members of the staff now having access to them.
Mr.
Leedy said that he felt strongly that the Reserve Bank
Presidents should attend the meetings of the Open Market Committee
even when they were not members.
handicapped if
A President would be tremendously
he did not have that privilege.
As to material dis
tributed, he would divide that into the minutes and other data.
would be in
He
favor of limiting access to the minutes to the man who
accompanied the President to the open market meetings,
and he could
see no need to make them available currently to others, although
there would be no objection to making them more widely available
after a time.
As to the materials,
other than minutes, Mr. Leedy
said he could see no reason to limit their distribution more than
was now done.
As to attendance at these meetings, the Committee
seemed to be talking about seven persons,
since five Associate
Economists had been selected from the Banks as Committee officers.
If
the economists were to come to the meetings,
Mr. Leedy said
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he felt they should be privileged to attend the meetings throughout.
He would doubt the value of their making the trip to Washington merely
to be present at the preliminaries.
If
attendance were limited to
one economist from each Reserve Bank (and Mr. Leedy thought there
should be one man who attended regularly rather than to have rotation),
and if
the Reserve Bank President had the responsibility to see that
there was no violation by the man who accompanied him of the rules
with respect to dissemination of information, there would as a
practical matter be no exposure to the kind of thing the Committee
was attempting to guard against.
Like Mr. Leach, he felt
it
of
value to have a man on his staff with whom any aspect of the open
market operation might be discussed.
in
the same position as Mr.
Bopp.
He thus came out pretty much
He would eliminate making the
minutes available to the rather long list
of persons who now appeared
to have access to them and would make them available to one man at
each Reserve Bank who was selected to work with the President, and
if
the President wished to bring that man to the meeting he should
be permitted to attend the meeting throughout.
Mr. Allen said that Mr.
his feeling.
Mills had expressed substantially
He personally doubted whether the associate economists
should attend the meetings.
He also felt that there was not much
value in having an economist come to Washington only for the economic
review.
While he enjoyed discussing these problems with the men on
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his staff, he believed their opinions were of more value if
they
were given on the basis of their own analysis, rather than after
listening to the reports at the meeting.
In sum, Mr. Allen said
that he did not think the economists should be at the meetings, and
he definitely felt that all of the Reserve Bank Presidents should
attend.
At the Chicago Bank the list
of persons having access to
the minutes was small, and he would favor letting them see the
minutes when they were distributed about a week after the meetings.
Mr. Deming said that he came out close to the position
indicated by Mr.
Mills.
He started from a somewhat different basis
than that indicated by Mr.
Bryan.
The charges of leaks seemed to
cluster more around the discount rate than open market operations,
Mr. Deming noted, adding that some 300 persons had some knowledge
of a discount rate matter and an almost impossible task was faced
in
trying to cut down that number in view of the structural organiza
tion of the System.
Thus, when it
was suggested that a half dozen
persons be eliminated from the forty odd persons who attended an
open market meeting,
there was not much to talk about.
Mr. Deming
said he could not say there was much training value from the stand
point of the economic staff of the Bank in either reading the minutes
of an open market meeting, or sitting in
agreed there was no strong point in
just for the economic presentation.
on the deliberations.
He
bringing a man into Washington
However,
he felt that it
was
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-83
of value for the person advising the President to have current access
to all the material that was available.
For this, he would limit
minutes access to the President of the Reserve Bank and one economic
adviser.
Also, for the report of open market operations, he would
limit access almost that closely.
For miscellaneous materials such
as the economic and credit review, he could see no particular reason
to place any limitation on distribution within the System.
attendance at meetings,
Mr. Deming said he would be entirely agreeable
to the suggestion made by Mr.
Mills on the grounds that it
the Committee in about as reasonable a position as it
to be in.
As for
would put
could expect
This, together with reducing the number of persons having
access to the minutes and report of open market operations, would cut
to better public relations size.
the list
by Mr.
In response to a question
Hayes, Mr. Deming added the comment that there seemed to him
to be no value in having an economist come to Washington for the
meetings,
except as he could get training by sitting in the meetings
and thus be of greater help to the President in
the future.
He
particularly felt that attendance by the economist only for the
economic presentation would not justify the trips to Washington.
Thus, while he wanted the man advising the President to have access
to all
the material under discussion, Mr. Deming would confine
attendance at meetings so as to exclude all of the associate economists.
3/3/59
-84
Mr. Mangels said that he agreed
described by Mr.
Deming.
with
about the position
He could see no advantage in having a
man come to Washington just to hear the economic and credit review.
As to distributed material, he noted that the wire summarizing the
11:00 a.m. daily telephone call should be treated with as great a
degree of confidence as other open market materials.
However, he
would wish to have the minutes and any of the other open market
materials made available not only to his economist, but also to the
First Vice President of his Bank.
Mr. Irons said that, as for attendance of his economist at
the Committee meetings, he thought it
was probably a matter of
indifference either to the economist or to himself.
that if
He felt strongly
the economist were not going to participate in the entire
open market meeting,
the expenditure for bringing him to Washington
just to hear the economic review
ould not be justified.
Mr. Irons
said that his view on this was partly dependent on whether he would
have the privilege of discussing with his economist when he returned
from an open market meeting any of the matters that had been taken
up.
He did not think the economist should be excluded from access
to information if he was to be expected to serve as an associate
economist.
Quite as important as the minutes was the question of
how freely the President might discuss the matters taken up at
open market meetings with persons with whom he originally consulted
3/3/59
closely.
-85
A President should not operate in
hoped to have an effective working group.
a vacuum if
the System
There was always this ques
tion of how best to use people and how to be secretive and still
full return out of the work.
get
Mr. Irons said he would be inclined to
agree that, on a strict legalistic basis, perhaps Mr. Bryan had the
answer.
However,
even if
that were adopted, he did not think it
would stop the charge of leaks of information upon occasion.
felt it
He
extremely desirable for all of the Presidents of the Reserve
Banks to be continually exposed to the discussions that went on in
open market meetings.
The question boiled down to trustworthiness,
Mr. Irons said, and the System would have to defend that trustworthiness
when called upon to do so.
He could see no basic difference between a
President serving as a member of the Committee in 1959 and not being a
member in 1960.
It
might be noted, Mr. Irons said, that virtually all
of those involved in open market matters were persons who had been
cleared for top secret material on emergency defense operations.
On
balance, he was inclined to agree with what he understood to be Mr.
Bopp's view, with the possible exception that it
was a matter of
indifference whether the economists attended the open market meetings
or not.
Mr.
Erickson said that he felt all
continue to attend the meetings.
If
of the Presidents should
attendance by the economists at
the meetings were to be limited to the presentation of the economic
3/3/59
-86
reviews, he questioned whether this would have enough value to
justify their coming.
If that were done, he would have no objection
to any of the Board staff members sitting in on the meetings even if
the Bank economists did not attend, provided they withdrew at the
time the discussion of policy started.
As for the material sent out
and discussion after the meetings, Mr. Erickson thought this question
should be left largely to the Presidents.
The list of those at the
Boston Bank having access to open market material was one of the
smallest in the System and he had contemplated adding one or two
names to it.
Mr. Rouse said that his general thinking had been much along
the lines expressed by Mr.
Bopp.
There was an educational value to
the present procedure, and since each person designated to attend the
meetings or see material was selected by a Reserve President or a
member of the Board of Governors, he could be considered to be
thoroughly trustworthy.
The point Mr. Irons had mentioned that
virtually all such persons had been fully cleared for security pur
poses seemed to be a good additional test that could be cited.
So
far as attendance at meetings by the associate economists was con
cerned, Mr. Rouse said that if
their presence was limited to the
economic review prior to the go-around at which the Presidents and
Board members reported and commented on conditions and policy matters,
it
might not be worthwhile to have them come at all.
On the other
3/3/59
hand,
-87
so far as the Account Manager was concerned, he felt it
almost essential for him to have the nuances and shades of the
full discussion in carrying out the intent of the Committee.
Mr. Hayes said he found himself in
strong sympathy with
the views expressed by Messrs. Bopp, Irons, and others,
that he was inclined to go a little
farther in
except
that direction.
The problem of leaks was going to be with the Committee always,
and it seemed to him that there was grave danger of exaggerating
it
and of handicapping the Committee in accomplishing its
objective.
The matter of trust was of great importance in
Committee's functioning.
main
the
All of those selected must, of course,
be people who could be trusted, and if
ever
any reason for doubting
a person developed those responsible would take Draconian measures.
Up to that point, Mr.
Hayes felt that each President should have
considerable leeway to consult with persons who might assist him
in this function.
This implied that such persons should be given the
opportunity to see what was going on in the open market meetings.
He felt strongly that all of the Presidents should be at the Com
mittee's meetings, not only because it was vital to them but because
this gave the Committee a better feel of what was going on over the
country and thus helped it in arriving at its decisions.
On the
matter of associate economists, Mr. Hayes said that personally he
felt
there was nothing wrong with the present procedure.
He would
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3/3/59
have thought that any President of a Reserve Bank would want to have
an economist present at the meetings who would get the flavor of what
went on.
In his own experience, it
had been definitely useful to have
an opportunity to discuss matters with a person who had been present
and who knew the whole process of the Committee meetings.
Even though
the economist might later have access to papers including the minutes
of the meetings,
Mr. Hayes doubted that this would serve the same
useful purpose as actual attendance.
In addition, Mr. Hayes said that
he did not believe the Committee should treat the associate economists
from the Reserve Banks any differently from the Board's staff econo
mists.
If
the Board staff members were present, he felt that the
staff members working closely with the Presidents also should be
With respect to the minutes, Mr.
present.
Hayes said that he had
much sympathy with the view expressed by Mr.
Robertson that after a
period of time there was not much danger in making them available to
selected additional persons,
and for this reason he would not be
inclined to change the present procedure.
In short, for the sake of
having a well-trained group of Presidents and senior staff members,
he felt
that there must be reliance on the integrity of the persons
concerned.
In his judgment, the Committee could successfully meet
the problem under discussion without a change in
the present general
procedure.
Mr.
Balderston said that he did not think the Committee had
met the problem in
the past.
There had been an allegation by a
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member of the staff of Senator McClellan's Permanent Subcommittee
on Investigations that in his observation the procedure to guard
against leaks was not sufficiently tight.
His position might seem
reasonable to the uninformed in the light of the distribution of
open market records to a list of 86 persons.
Now that the gist of
this comment had been relayed to the public by two newspaper
columnists, the whole System has been given unfavorable publicity.
Mr. Balderston favored a plan not far different from that suggested
by Mr. Bryan.
He would restrict the actual decision making and
immediate knowledge of those decisions of the Committee on a "need
to know" basis.
He realized that this might seem at first glance to
interfere with the desire to get an adequately trained group through
out the System and also with the desire to have unity within the
System.
The first of these objections did not seem to him valid.
As
to the second, the open market meetings should serve two purposes;
first, for the determination of open market policy, and second as a
System assembly devoted to exchanging views as to district and
national economic affairs and what should be done about them.
ever,
this purpose had been marred somewhat in that it
How
had become
the custom in the go-around to make statements as to recommended
policy along with the reports of economic conditions.
If the
Committee wanted to take rather extreme measures while it was free
to do this on its own, his suggestion would be to have all of the
3/3/59
-90
Presidents attend the meetings while the regional accounts were being
given.
Also,
it
was of great value to be able to discuss at these
meetings all of the instruments of monetary policy including reserve
requirements and discount rates, as well as open market operations.
The procedure that had developed in this respect represented a great
improvement during the past few years and this accomplishment should
not be lost.
When it
came to the actual making of decisions to guide
the Desk for the ensuing three weeks,
Mr. Balderston felt that if
the
Committee wished to have the cleanest answer to any criticism, it
could have the voting members of the Committee go into executive
session at the end of the other discussion.
What he was suggesting
was that the Committee conduct itself just as it
had been doing up
until the last 15 minutes of the meeting and then to have the twelve
individuals who by statute constituted the Committee meet to decide
upon their directive to the Desk.
When this decision had been made
and summed up by the Chairman, it
would be known only to 14 persons-
the 12 voting members plus the Manager of the System Account and the
Secretary of the Committee.
Then, if
there were any leak, only 14
persons could have known what the action had been.
Mr. Balderston
said he also thought something should be done about the large volume
of material that was distributed in
work.
connection with the Committee's
It was true that this material did not offer much danger a
week or so after it
at the time it
had been distributed, but if
was issued, perhaps it
it
were dangerous
should be signed for and placed
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-91
under lock and key as part of the procedure for distributing it.
Mr. Balderston said that he was suggesting that the Committee should
look to its
procedures so that it
would not appear to be as lax as
the comment of the investigator for Senator McClellan's Committee
indicated the Board of Governors appeared to be.
Mr.
Hayes said that he had some difficulty in visualizing
the nature of the executive session of the voting members of the
Committee that Mr.
Balderston had suggested, which he gathered would
be confined to determining the wording of the directive and authoriz
ing its
issuance.
Mr.
Balderston responded that his thought was that any
President or Committee member should stop short in his comments
during the go-around before expressing what he thought the level of
net borrowed reserves should be, that he should leave the final part
of his thinking on the policy decision until the executive session.
Chairman Martin remarked that this would not be an easy thing
to do.
He then invited the other staff members present to express
their views.
Mr. Riefler said that he felt strongly that real benefit
resulted from having each Reserve Bank President attend the open
market meetings,
even though some were not voting members, and from
having each one accompanied by a person with whom he could discuss
any of the matters that came up.
What bothered him was that during
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the past few years the procedure
cept.
The list
had
gone somewhat beyond that con
of those attending the meetings,
and particularly of
those having access to minutes and other Open Market data, had been
expanded considerably,
and he felt that it
a careful review of the list
would be desirable to make
of persons authorized to have access to
Open Market data.
Mr. Sherman noted that since the 30's the Committee had moved
from an extremely limited attendance at meetings and availability of
minutes to the present much extended basis.
with which all
were familiar.
This had been for reasons
Perhaps the swing had gone farther than
was needed to accomplish the purpose, and some cutting back might be
appropriate.
With respect to access to Open Market records,
looked larger than it
was in
practice,
the list
since at least some persons
were listed only because of rare need to see some specific record.
As for the suggestion that circulation and control of the minutes
might be more rigid, Mr. Sherman commented that the existing procedure
could well be reviewed but that a close control of the minutes had
always been followed in
their preparation and distribution.
Chairman Martin then commented that the discussion of this
topic had taken considerable time but that he felt this essential
in view of the question that had been raised.
Whatever the majority
decided was necessary should govern the procedure to be followed in
the future.
Personally, he still
operating procedure was wrong.
was not convinced that the present
Mr.
Bryan had put the case for a more
3/3/59
-93
restrictive procedure as strongly as it
could be put but his
(Chairman Martin's) judgment was that the methods the Committee
had been pursuing were the right ones.
purposes,
This was true for training
for development of information useful to the Committee,
and for other reasons.
He felt that, in general, the Reserve Bank
Presidents were pursuing the right course under the existing system.
It
had been something of a shock to him to find that these procedures
were being criticized.
However,
he had noted that some of those who
attended the meetings and sat on the sidelines took notes of the
discussion.
In his view, this was a mistake.
He felt that only the
person who prepared the official record should make notes during the
meetings.
As to attendance and procedures in
said that it
seemed to him that, from the individual Reserve Bank
President's point of view, it
would be disastrous to go back to the
limitations that had existed in
first
general, Chairman Martin
the past.
He recalled that when he
came to the Board he found that there were at least one or two
Bank Presidents who did not discuss the subject matter of open market
meetings with anyone in
their Banks.
His reaction had been that
those men could not get any real feeling or understanding of the
problems or make a contribution unless they had someone with whom
they could frequently discuss these things on a fully informed basis.
3/3/59
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As to the Reserve Bank directors, all
of us got exasperated at
times with the unwieldy nature of the System.
At times, he wondered
whether the System might be holding out a fraud to the public on
whether there was adequate participation by the directors of Federal
Reserve Banks in System matters.
There was the problem of how to
get the System to pull together, and each individual President had a
problem in knowing what to say to his directors.
The Chairman cited
a comment by one individual director that had come to him from the
outside that indicated a complete lack of understanding of the dis
count mechanism.
He realized that the Presidents had a very difficult
job, but his own view was that if
the Banks were going to get the staff
to participate and to develop, they would go much farther by having
some of them in
at these discussions.
Recognizing that Mr. Bryan had
stated the case for restriction as clearly as was possible, even if
all his suggestions were adopted the charges of leaks would not be
eliminated and their adoption was not going to enable the System to
prove its
to the list
guiltlessness or that it
had not violated its trust.
of persons having access to Open Market records,
Martin said that he thought it
As
Chairman
would be desirable to review it
in
terms of putting on to each President the responsibility for con
sidering carefully the person or persons with whom he wished to
consult on these matters.
such a list,
if
responsibility.
Perhaps it
would not be necessary to keep
the individual Reserve Bank Presidents assumed this
3/3/59
-95
Mr.
Bryan said that as he had listened to the thoughtful
discussion of the problem, he had been impressed by the emphasis
on the advantages from many points of view of the present organiza
tion and procedure.
He shared an appreciation of those advantages
and wished to make clear his hope that they could be preserved to
the greatest extent possible.
At the same time, he would re
emphasize what he believed to be the overriding importance of other
considerations at present.
The discussion had correctly emphasized
the trustworthy character of personnel at all
Federal Open Market Committee matters.
levels dealing with
He shared that emphasis on
trustworthiness but could not agree that it
eliminated a requirement
for far more rigid procedures than the Committee now had.
It
could
be said that the personnel of the System was of extraordinarily high
caliber, but it
in
still
had elaborate audit and examination procedures
order to prove that nothing had gone amiss.
This was done not
merely to protect the Banks but to protect the personnel.
If
the
Banks were at such pains to prove their accounting records were cor
rect and that the cash was all
more important, he asked, in
accounted for, then wasn't it
the System's responsibility for monetary
policy, to go as far as possible in
was well taken.
Mr.
matters could be left
even
proving that no charge of scandal
Bryan also said that he also doubted that these
to the discretion of the Reserve Bank Presidents
as had been suggested during this discussion.
The Federal Open Market
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3/3/59
Committee was a statutory body and he believed it
the better part of
wisdom for the Committee as such to take the responsibility for its
procedure and security regulations.
Mr. Robertson said that he did not think the discussion of this
problem could be pulled together at this session.
view had been expressed, and in
his opinion it
Various points of
was now necessary to
have these views put together by the Secretary and to have the whole
subject reviewed again after all
of those present had had an opportunity
to study the minutes.
Chairman Martin stated that this was his view, and Mr. Bryan
suggested that it might be desirable in the interim to have a small
committee appointed to study the matter and present a recommendation
to the full Committee.
Chairman Martin stated that before doing that he felt it
would
be preferable to have the record of this discussion prepared and dis
tributed, and after all of the members of the Committee and all of the
Reserve Bank Presidents had had an opportunity to review it
and con
sider the subject further, call another meeting for the purpose of
carrying forward the discussion.
There was general agreement with this suggestion.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1959, March 2). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19590303
@misc{wtfs_fomc_minutes_19590303,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1959},
month = {Mar},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19590303},
note = {Retrieved via When the Fed Speaks corpus}
}