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, May 5, 1959, at 10:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Balderston, Chairman pro tem

Deming

Erickson

King

Mills

Robertson

Shepardson

Szymczak

Bryan, Alternate for Mr. Johns

Fulton, Alternate for Mr. Allen

Treiber, Alternate for Mr. Hayes

Messrs. Bopp and Leedy, Alternate Members of the

Federal Open Market Committee

Messrs. Leach and Irons, Presidents of the

Federal Reserve Banks of Richmond and Dallas,

respectively

Mr. Riefler, Secretary

Mr. Sherman, Assistant Secretary

Mr. Kenyon, Assistant Secretary

Mr. Hackley, General Counsel

Mr. Solomon, Assistant General Counsel

Mr. Thomas, Economist

Messrs. Jones, Marget,

Mitchell, Parsons, Roosa,

Willis, and Young, Associate Economists

Mr. Rouse, Manager, System Open Market Account

Mr. Molony, Special Assistant to the Board of

Governors

Mr. Koch, Associate Adviser, Division of Re

search and Statistics, Board of Governors

Mr. Keir, Acting Chief, Government Finance

Section, Division of Research and Statistics,

Board of Governors

Messrs. Freutel and Swan, First Vice Presidents

of the Federal Reserve Banks of St. Louis

and San Francisco, respectively

5/5/59

-2

Messrs. Balles, Daane, and Tow, Vice

Presidents of the Federal Reserve

Mr.

Mr.

Mr.

Mr.

Banks of Cleveland, Richmond, and

Kansas City, respectively

Stone, Manager, Securities Department,

Federal Reserve Bank of New York

Anderson, Economic Adviser, Federal

Reserve Bank of Philadelphia

Coldwell, Director of Research, Federal

Reserve Bank of Dallas

Brandt, Economist, Federal Reserve Bank

of Atlanta

The Secretary stated that, since neither the Chairman nor

the Vice Chairman of the Committee was able to be present at this

meeting, it

would be necessary to elect a chairman pro tem.

Upon motion duly made and seconded,

and by unanimous vote, Mr. Balderston was

elected to act as Chairman at this meeting.

It

was noted that Mr.

Freutel, First Vice President of the

Federal Reserve Bank of St. Louis, and Mr.

Swan, First Vice President

of the Federal Reserve Bank of San Francisco, were in

the Board's

building today, and they were invited to attend this meeting in

absence of Mr.

Johns and Mr.

the

Mangels.

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Com

mittee held on April 14, 1959, were

approved.

Before this meeting there had been distributed to the members

of the Committee a report of open market operations covering the

period April 14 through April 29, 1959,

and a supplementary report

covering the period April 30 through May 4, 1959.

Copies of both

reports have been placed in the files of the Committee.

-3Mr. Rouse stated that the money market had remained tight

since the preceding Committee meeting.

The effective rate on

Federal funds dropped below 3 per cent on only one day-last

Tuesday--and that drop reflected a sizeable month-end inflow of

funds from country banks to the money centers.

On Friday that flow

was abruptly reversed and the market tightened substantially further.

In dealing with this persistently tight situation, the System

supplied a total of about $173 million reserves net during the

period since the last meeting.

Treasury bill

holdings were up by

$257 million, while repurchase agreements were down by about $82

million net.

As of last night, however,

$163 million repurchase

agreements were on the books as a result of agreements made on

Thursday and Monday.

Announcement of the Treasury financing last Thursday

occurred against a background of several weeks of deterioration

in the market for Government securities.

At the time of the

announcement, over thirty issues of notes and bonds were priced

to yield more than

4 per cent, and three of these were selling at

a 4.30 per cent basis or higher.

early in

Treasury bill

the period since the last meeting,

response to the reappearance of some demand,

rates moved higher

then moved down in

and by the time of

the Treasury announcement rates had again risen in response to a

tapering off of demand.

With this kind of market situation as a

background, the Treasury's financing program was generally regarded

-4

5/5/59

as the best available solution to a difficult problem.

The market

was particularly surprised to learn that the amount of new cash to

be raised was considerably less than had been anticipated and that

the lesser amount was expected to last the Treasury for the balance

of the current fiscal year.

Preliminary market guesses as to the

rates that would be set on the new April and December Treasury bills

to be auctioned tomorrow and Thursday were in the neighborhood of

3-3/4 - 3-7/8 per cent on the April bill and 3.60 - 3.65 per cent

on the December bill.

The market was probably very pleasantly

surprised this morning to learn that the holders of only $473 million

of the 4 per cent notes of August 1961 (18 per cent of the issue)

had elected to obtain payment of the notes on August 1, 1959.

A few

days ago the market was guessing that between $750 million and $1.5

billion of the issue would be presented; most observers thought that

the minimum would be about $1 billion.

Mr. Rouse then mentioned, as a matter of interest to the

Committee, that the Canadian Government, which was faced this year

with a large cash deficit-estimated at $850 million--and a sharply

rising economy, had announced during the past week two steps to

cover the deficit.

The first was to add $20 million of 182-day

bills to the current bill offering.

by the market,

If

this step should be accepted

the Government proposed to place an additional $20

million of six-month bills over seven additional weeks, which would

-5

5/5/59

provide a total of $160 million cash.

The second step was the

offering of $150 million of Canadian National Railway bonds,

which are fully guaranteed by the Canadian Government.

Since

this issue of bonds broke through the 5 per cent interest rate

level, it

was understandable that the decision to make the offer

ing was a difficult one.

Subscribers were given the choice of a

nine-year bond or an eighteen-year bond at yields of 5.18 and 5.17

per cent, respectively.

These offerings were being made in

the

face of a sharp demand for loans and commercial bank selling of

Government securities which, over the past thirty days, had been

proceeding at a rate of $50 million per week.

Mr. Rouse also reported that Home Loan Bank sources

anticipated a large loan demand for the balance of the year in

view of the current and prospective level of home building and

the slowing down of cash savings at building and loan associations.

This slowing down, in

turn, was attributed primarily to the

prospect for increased prosperity and, to a lesser degree,

in

the stock market.

activity

A sidelight mentioned by the Home Loan Bank

people was that banks covering the areas of New England, New York,

New Jersey, Indiana, Michigan, and Ohio did not need new money at

this time, while the West Coast banks had such needs.

Mr.

Rouse concluded by noting that apparently the low point

of System Account holdings for the year had now been reached and

holdings would move higher over the coming months as normal seasonal

5/5/59

-6

movements in market factors absorbed reserves.

The rate at which

such holdings rose would, of course, depend not only on the pace

of economic advance but also on the future course of Committee

policy.

The reserve projections presented with the supplementary

report of open market operations were indicative of the situation

over the balance of the current month, and the projections were

close to those prepared by the Board's staff.

Mr. Mills referred to Mr. Rouse's comments,

and those

contained in the latest weekly report of open market operations

and the supplementary report distributed this morning, regarding

an inflow of funds from the country banks to the money centers

early last week, followed on Friday by an abrupt reversal of that

flow.

He inquired whether, when a flow occurred from the money

centers to the country banks, the Manager felt that allowance

could appropriately be made to relieve the resultant tightness.

While this was only a temporary phenomenon, it

was a repetitive

occurrence and the impact of the recent shift appeared to have

been quite severe.

It

seemed to him that relief could be provided

for that kind of situation, without disturbing the direction of

System policy, by putting reserves into the market at the point

where the pinch was felt.

Mr. Rouse replied that, as indicated by the report, the

Account Management had met the situation primarily by the use of

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5/5/59

repurchase agreements with dealers, which put funds into the

market immediately.

Last Thursday the Desk made $80 million

of repurchase agreements and yesterday it

amount.

made about the same

Later in the day the Desk made about $30 million more

repurchase agreements to deal with the situation.

Mr.

Mills then asked Mr. Rouse whether he felt any

compunctions if the result was a return of temporary ease and

perhaps a reduction of net borrowed reserves below the levels

indicated by Committee objectives.

Mr. Rouse responded that he tended to be guided principally

by the feel of the market within the limits of a fairly broad range

of net borrowed reserves.

repurchase agreements, if

dealing in bills.

while it

He would have no hesitation about making

necessary, nor would he refrain from

He noted that the inflow and outflow of funds,

took place regularly twice a month, did not necessarily

take place on the same days.

Upon motion duly made and seconded,

and by unanimous vote, the open market

transactions during the period April 14

through May 4, 1959, were approved,

ratified, and confirmed.

Mr.

Young made a statement on the economic situation,

supplementary to the staff memorandum distributed under date of

May 1, 1959, substantially as follows

5/5/59

On the domestic side, today's report is again one of

strongly expanding demands, rising productive activity,

advancing prices at wholesale, and strongly optimistic

business and financial expectations.

Internationally,

with activity in key industrial countries showing pickup

and the balance of payments positions of material

supplying areas improving, it seems reasonable to infer

that a general upturn in world output and trade is now

setting in.

U. S. exports, however, have not as yet

given sign of recovery, so that U. S. balance of payments

forces still

favor accumulation of foreign dollar assets.

As to key facts,

GNP for the first

quarter is estimated to have reached

an annual rate of $465 billion. Increases were widespread,

embracing durable, nondurable and service lines; only net

exports of goods and services declined.

Industrial production in April rose at least one index

point further. Considering the wide spread of increases, an

index advance of two points is quite within the range of

possibilities.

Auto markets recently have been quite strong, at a 6

million annual rate for domestic and imported new cars

together. Prices for late model used cars were about 15 per

cent higher than a year ago, and used car sales were also

this percentage greater.

Sales of household durables remained

close to a record rate. With demands for consumer durables at

high levels or expanding during the first

quarter, outstanding

consumer instalment credit rose sharply-by the largest

quarterly amount since 1955.

New orders for manufactured durables in March, seasonally

adjusted, were the highest for any month since the end of 1956.

The gain over the preceding month was 1 per cent, which

followed a rise of 7 per cent in February. Gains were made by

all industries except steel, and the total of gains more than

offset a substantial percentage decline in steel orders.

Unfilled orders of durable manufacturers have now risen

impressively for three successive months.

Higher new orders in durable lines were accompanied by a

The

sizeable 2 per cent rise in sales to all manufacturers.

sales gain, of course, was largest for durables.

Construction activity in April continued strong, though

Commercial activity rose,

from February.

dipping a little

Residential

but other types of construction were off a little.

housing markets and financing continue active at very high

levels, with mortgage interest levels firm.

-9Labor market data, though limited for the recent

interim, point to further strengthening of demands for

manpower.

The principal evidence consists of a fairly

striking April decline in new claims for unemployment

benefits, to levels about the same as in corresponding

weeks of 1957 and 1955.

The total of insured unemploy

ment also declined significantly.

Industrial commodity markets have continued to show

an upward tilt.

The April rise for the industrial price

average was at an annual rate of about 3 per cent. Since

mid-1958 the rise has been about 2.5 per cent.

Recent

price advances have been numerous among the more demand

sensitive raw materials, but price markups of finished

industrial products have also been gaining in frequency.

Wholesale prices of farm products increased a little

in April, reflecting mainly seasonal contraction in livestock

marketing.

Expanding consumer demand for meats and other

foods has also been a factor in firmer prices in farm product

markets.

Altogether, the economic expansion in process appears

thoroughly robust, with many earmarks of developing infla

tionary boom. At an earlier meeting this spring, we observed

that the economy might soon enter a phase of strongly

inflationary price trends. Recent news, international as

well as domestic, confirms that such a phase has probably

now been entered.

Accordingly, the risk that inflationary

trends may get ahead of System policy is no longer a future

threat; on the contrary, it is a present danger.

Supplementary to the staff memoranda on the outlook for Treasury

cash requirements and the outlook for member bank reserve positions

distributed under date of May 1, 1959, Mr. Thomas made a statement on

financial developments substantially as follows:

Pressures on financial markets increased during April.

This trend seems to reflect expanding monetary and credit

demands incident to the continuing advance in business

activity rather than limitations on the supply of credit.

Demands on long-term capital markets have been moderate,

but bank loans have increased more than seasonally and banks

-10have also been endeavoring to distribute U. S. Government

securities taken on in the April 1 financing.

Loans to business by city banks showed little

change in

April following a sharp increase in March. Consumer instal

ment credit has increased more rapidly this year than in any

year since 1955. Mortgage demands continue large and real

estate loans at banks also have increased more than at any

time since 1955.

The stock market has risen to new high

levels and stock market credit continues to increase.

Under the circumstances, interest rates have tended to

rise further. Yields on outstanding corporate bonds rose

during April and new issues have generally sold in the market

at yields above original offering rates. U. S. Treasury

bonds have risen, with several issues yielding around 4-1/4

per cent.

Treasury bill yields increased in the first half

of April and that on the 3-month bill rose above 3 per cent for

a few days.

Subsequently they declined somewhat, as nonbank

demand for bills appeared, and dealers, as well as banks,

were able to reduce their positions.

The 6-month bills

showed similar movements, reaching a peak of around 3-3/8 per

cent. The new January bill continued close to a 3.60 per

cent yield or higher.

Available data clearly indicate that the money supply

has shown a seasonally adjusted expansion during the past

This is shown not only by single date

two or three months.

figures but also by available half-monthly daily averages.

Figures for demand deposits adjusted at all member banks for

half of April show a seasonally adjusted increase

the first

of somewhat more than $1 billion since the latter part of

February. Wednesday figures for city banks indicate a

further increase during the last half of April. Currency

in circulation this year has declined by fully $200 million

The growth in the money supply has been

less than usual.

accompanied by an increase in the turnover of deposits--a

combination that occurred also in the early part of 1955.

In addition to the growth in private deposits, Treasury

balances are close to a billion dollars larger than had

previously been projected for this period. After increasing

in the next two weeks, Treasury balances will decline sharply

half of June and then increase again in the last

in the first

half as a result of quarterly tax receipts, which will more

than offset retirement of tax bills.

The improved Treasury cash position and prospects for

future tax receipts above earlier estimates are reducing

Treasury borrowing needs, as explained in a memorandum

-11previously distributed.

The present operation may take

little

over $500 million net after allowing for attrition.

After the current financing operations have been completed,

the Treasury will not have to return to the market for new

cash until early July.

In late June the Treasury will

retire a $3 billion tax anticipation issue and July borrow

ing will be only a little

larger than that. Some additional

borrowing may be needed in August to cover attrition, and

another tax anticipation issue of $1.5 billion will be retired

in September.

For the five months May to September, inclusive,

there is likely to be only a small net increase in the public

debt of around half a billion dollars.

Banks' reserve positions have tightened in the past

month because of the larger than expected increase in required

reserves, the failure of currency in circulation to decline,

and a resumption of the gold outflow. Float, on the other

hand, has continued larger than was expected.

Some reserves

have been supplied on balance by System open market operations.

Member bank borrowings have remained close to $700 million on

the average and excess reserves have averaged about $450 mil

lion, after revision for a higher level of required reserves

at country banks than was originally estimated.

Country member banks' reserve positions have shown a

tendency to tighten, with excess reserves averaging around

$400 million and borrowings about $200 million. This tighten

ing has apparently resulted from an expansion in their credit,

on a seasonally adjusted basis, rather than from a loss of

Reserve city banks as a group have been persistent

reserves.

borrowers of over $300 million, although there have been

relatively few individual banks that might be classified as

continuous borrowers.

Projections based on customary seasonal changes, to

gether with a continuing moderate gold outflow, indicate a

further substantial tightening of bank reserve positions in

It would seem appropriate

the absence of System operations.

to provide reserves to cover customary seasonal needs, as was

Some question may be raised about

done Friday and yesterday.

offsetting the gold outflow, which reflects influences with

respect to competitive pricing of goods and to money market

developments that might call for a tightening of credit

restraints.

Evidence that there has been monetary expansion, after

adjustment for seasonal variations, at a rate which should

not be continued, would indicate that System restraints

Member banks probably should be

have not been adequate.

required to obtain some of the additional reserves desired

through an increase in their borrowings at the Reserve Banks.

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5/5/59

Since the current Treasury financing will result in

little

net increase in outstanding debt, if banks do

initially increase their holdings, they should be kept

under pressure to reduce them as Treasury deposits are

drawn down.

If loan expansion continues, banks should

offset the increase by sales of Government securities.

If net expansion occurs, banks should be required to

borrow the reserves needed to support it and discount

rates should be increased.

The discount rate ought to

be kept above yields on 90-day Treasury bills, particularly

since the latter are low relative to other rates in the

money market.

Mr.

Balderston made reference to the outflow of gold from the

United States and then called upon Mr. Marget, who said one might take

the position that the outflow was still a balance of payments phenom

enon.

During the first

quarter of this year there had been a rather

substantial accumulation of dollar balances by foreigners, and the

United States balance of payments showed a sizeable deficit.

The

recent resumption of the gold outflow possibly could be explained by

the fact that the foreign countries obtaining dollars happened to be

countries that preferred to take the additions to their reserves in

the form of gold rather than dollar holdings.

still

The United States was

faced with the problem of adjustment of its

and until equilibrium was restored it

outflow of gold would continue.

balance of payments

must be expected that some

In these circumstances,

the things

called for by the domestic situation were the same as those called

for by the international situation.

Mr.

in

Mills suggested that the increasing level of activity

the United States had had the effect of fostering a higher rate

5/5/59

-13

of imports.

At the same time, as economic activity in Western

Europe--and the United Kingdom in particular-gained momentum,

it

would seem reasonable to expect that the pressures on the

facilities of those countries would be such as to necessitate

increasing their imports in

supplies.

order to replenish inventories and

A reason for the improvement in United Kingdom gold

reserves might be found in

the tendency of prices of raw materials

to rise in the dominions and colonies, which would produce an in

flow of hard currencies to the United Kingdom.

would produce an improvement in

At some point this

the reserves of the colonies and

dominions such as to enable them to relax their import restrictions.

Mr. Mills concluded by saying that he had been rather alarmed at

the piecemeal character of much of the recent discussion relating

to the international position of the United States.

Mr. Marget agreed and said that the processes outlined by

Mr. Mills created hope that adjustment of the United States balance

of payments would come about through an increase in exports,

Nevertheless, the latest figures showed that there was as yet no

upswing.

While there always tend to be lags, it was important

that the United States be in a position to take advantage of the

anticipated demand for exports from foreign sources.

He trusted

Mr. Mills was right about foreign countries removing their remaining

import restrictions on durable goods.

The United States must be

5/5/59

-14

competitive,

and it

would be hoped that other countries might

give the United States a chance to show that it

was competitive.

With the growing strength abroad and the hoped-for relaxation of

import restrictions, there seemed no reason to be pessimistic

about the United States balance of payments,

although it

would

take some time for adjustment to come about.

Mr.

Thomas commented that he thought there might be reason

to be pessimistic.

The net result of attempts in

this country to

validate our wage and price policies through monetary expansion

could succeed only if

we could inflate the whole world.

Germany

and the Netherlands and some other countries had indicated that

they were not going to be inflated.

If

the United States con

tinued to try to maintain employment and high prices by increasing

the money supply, expanding credit, and extending fiscal operations,

the result might be to price United States goods out of world markets.

If

countries such as Germany and the Netherlands and others neutralize

the reserves they obtain and do not permit them to be reflected in

their own price levels,

the United States might fail

adjustments that would be necessary to maintain its

Mr.

to obtain the

exports.

Treiber then made a statement of his views on the busi

ness outlook and credit policy substantially as follows:

As Mr. Young pointed out in his report, business

activity has continued its steady forward progress,

marked by peak housing and other consumer demand, by

peak industrial production, and by high performance

Commercial bankers

of a variety of other indices.

-15expect a growing demand for loans. It is good news to

hear these reports of gaining business strength. While

there has been some increase in inventories, particularly

in steel and automobiles, a rebuilding of inventories is

necessary to support the rising level of activity at a

time when inventory-sales ratios are near record lows.

Unemployment is still high, although probably declining.

Rising production should increase employment.

Plant and equipment expenditures constitute perhaps

the area of greatest potential expansion. Recent data are

optimistic. The latest McGraw-Hill survey, issued in mid

April and based on opinions obtained in March, indicates a

7 per cent rise between 1958 and 1959. This compares with

a 4 per cent increase projected by the Commerce-SEC survey

issued in mid-March and based on opinions obtained in

January and February.

Two-thirds of the expansion projected

for 1959 is for modernization rather than for additional

capacity. The good reports of corporate income that have

been coming through for the first

quarter of 1959 may

stimulate capital expenditures.

Over-all price indices have been relatively stable, yet

There

the underlying price situation is not entirely serene.

are warning signals in the movement of some of the components

of the indices. A decline in farm prices and a general world

wide weakness of raw material prices have kept the leading

indices in check. The consumer price index continued without

In April

change in March only because food prices declined.

and May food prices normally rise for seasonal reasons, and

during the spring months we cannot count on the offsetting

effect of food prices. Prices of manufactured articles have

been rising slowly despite the existence of a fair amount of

unused industrial capacity.

We are entering a critical period in wage negotiations.

Wage settlements in basic industries, such as steel, set a

If wage

pattern for wage adjustments in other businesses.

increases on average exceed average increases in productivity,

there will be a resultant pressure on costs which is likely

The

to have an adverse effect on the price structure.

cost-price push is an important threat to price stability.

Once this push gets snowballing, the effectiveness of

monetary policy is impaired.

The Treasury deficit is another area of potential

inflationary pressure. The banks are expected to buy new

issues of Government securities as part of the underwriting

It is important also that the banks dispose of

process.

the securities they thus acquire, or other securities, so

-16as to avoid an increase in the money supply (as commonly

defined) arising out of Government deficit financing.

So

far this year the banks have been able to sell to nonbank

purchasers more Government securities than the banks have

acquired. We will want to watch carefully the trend of

bank security holdings from here on. We are particularly

concerned over the risk that nonfinancial corporations may

become net sellers of Government securities during the

fall and winter months.

While there are inflationary possibilities lurking in

the shadows, they are not sufficiently imminent, in our

opinion, to call for an immediate increase in monetary re

straint.

The Treasury is now in the midst of a large refunding

and cash operation, with the new securities to be issued

next week.

Market stability is called for not only through

Thus,

the issue date but for a reasonable period thereafter.

Treasury operations call for the continuation of an even-keel

policy during the period between now and the next meeting of

the Federal Open Market Committee.

It appears now that the Treasury will not have to come

This will

to the market again until the last week of June.

afford an opportunity for Federal Reserve action following

the next meeting of the Committee, if action then seems

Assuming a further gathering of momentum in

appropriate.

business activity and a further development of potential

inflationary pressures, it would be well between now and

the next meeting of the Committee to consider the kind of

directive suggested by the developing situation, the extent

to which a more restrictive credit policy may be in order,

and the methods of implementing such a policy if it appears

to be called for.

At the present time we would favor (a) no change in the

formal directive; (b) no change in the discount rate; and (c)

the conduct of open market operations so as to continue to

maintain about the present degree of restraint, giving

primary attention to the behavior of the money market and

the rates of interest in the market.

Mr. Freutel reported that the economic status of the Eighth

District, as measured by employment data and other indicators of

industrial activity,

up,

especially in

continued to show improvement.

Employment was

durable goods occupations in the metropolitan areas.

5/5/59

-17

Steel production reached 97 per cent of capacity in

April, up one

per cent from March, and most other indicators of economic activity

also rose, only crude oil and coal output showing slight declines.

Farm operations throughout the district were generally on schedule

for the season; for the most important crops, prospective acreage

was greater than last year but below the average for the preceding

ten years.

Cash receipts from farm commodity marketings were some

what higher the first

two months of this year than last, principally

because of the greater carry-over in tobacco marketings.

Average

prices for major farm commodities were approximately 5 per cent

below year-ago prices.

Total deposits at weekly reporting banks fell

cent over the past month, Mr. Freutel said.

about 5 per

Time and savings

accounts rose slightly, but demand balances of individuals and

businesses,

government, and banks were down.

In the face of this

drain, reporting banks lowered their cash balances and increased

their borrowings,

funds market.

both from the Reserve Bank and in

the Federal

A moderate contraseasonal rise in loans was more

than offset by a substantial net reduction in security portfolios.

Business loans contracted about seasonally, but consumer and real

estate loans rose.

In recent weeks, both member bank borrowing and

the reserve deficiency reports indicated somewhat greater pressure

on country banks than had obtained over the past year.

Country

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5/5/59

member bank borrowing showed a significant increase for this

period of the year, both in terms of total advances and number

of banks borrowing.

in

Similarly,

there had been a notable increase

the number of reserve deficiencies at country member banks.

Mr.

Bryan stated that the Sixth District economic picture

was almost identical with the composite national picture, although

perhaps a little

stronger.

Nonfarm employment and manufacturing

employment both were up and retail trade was strong.

Bank debits,

demand deposits adjusted, and currency likewise were up on a

month-to-month basis, and construction contract awards had

spurted.

Manufacturing payrolls and average weekly work hours were up, while

insured unemployment was down.

Mr.

Bryan said he agreed with the economic presentation

made by Mr. Young and the financial presentation made by Mr. Thomas.

He had little

to add except to say that he thought there was grave

danger of allowing the money supply to increase at a rate that could

not be sustained without inflation.

He did not believe that System

policy had been particularly restraining.

Mr.

business.

Bopp reported continued improvement in Third District

Manufacturing employment rose contraseasonally in March,

with virtually all of the 1 per cent gain over February in the

durable goods industries, principally primary metals and transporta

tion equipment.

Average weekly earnings in the durable goods

5/5/59

-19

industries were nearly 3 per cent above February,

reflecting

increases in hours worked and in hourly earnings.

ment claims in

New unemploy

Pennsylvania had moved irregularly and were close

to the 1957 level; continued claims, although still

above 1957,

were declining steadily and were well below the level of a year

ago.

Unemployment remained high--8.8 per cent of the district's

labor force being out of work in March compared with 6.4 per cent

nationally and 9.6 per cent in

March of last year.

Construction

activity was especially strong, total contract awards in March

being 47 per cent above a year ago compared to 23 per cent nationally.

The March increase was accounted for primarily by residential and

public works construction.

For the first

quarter, total contract

awards were about one-third above a year ago, reflecting principally

a sharp rise in

Mr.

residential construction.

Bopp went on to say that steel mills in

the Philadelphia

region were operating at 96.5 per cent of capacity in

week; however, the rate in

than in

the latest

the past three weeks was somewhat lower

the previous three weeks.

Department store sales for the

four weeks ended April 25 were unchanged from a year ago but were

7 per cent higher for the year to date.

Total loans and investments of Third District weekly

reporting banks had declined substantially in

the past three weeks.

Loans were up slightly, increases in real estate and "other" loans

being only partly offset by a small decline in business loans.

-20

5/5/59

Securities holdings dropped nearly $80 million, all types of

securities being included in the decline.

The substantial increase

in holdings of Governments in the week ending April 1, presumably

reflecting allotments of the new Treasury issues of that date, had

been more than wiped out by reductions in the following four weeks.

There was little

change in deposits.

Reserve pressures on the large Philadelphia banks had

moderated significantly in

the past three weeks; the daily average

basic reserve deficiency dropped from $72 million to less than $10

million in

the latest week.

Borrowing by these banks from the

Reserve Bank dropped from a daily average of $63 million to $18

million in

the latest week.

Purchases of Federal funds by

Philadelphia banks were relatively small throughout the period,

and in

the latest week those banks were net sellers on balance

time since mid-January.

for the first

Country bank borrowing

from the Reserve Bank increased moderately to a daily average of

$12 million in

Mr.

the latest week.

Bopp expressed the opinion that, in view of the current

Treasury financing,

keel in

the Committee should aim at maintaining an even

the next three weeks.

He would give more consideration to

sensitive rates, such as the Federal funds and bill

rates, and to

other indicators of the tone of the market than to the level of

net borrowed reserve figures.

He would like to see the Federal

funds rate at the discount rate, and the market rate on three

month bills a little

higher than at present, if

that could be

5/5/59

-21

accomplished without upsetting the Government securities market.

While he would not favor a change in the discount rate or the

directive at this time, he would want to give consideration to

changes after the Treasury financing was completed.

Mr.

Fulton commented that today marked the opening of

wage negotiations in

the steel industry and reported in some

detail on union demands and company attitudes which led to the

conclusion that a prolonged strike might occur this summer.

The

timing of any strike was conjectural, however, because the workers

might elect to work for some time without a contract and then strike

later in

the year when such a move would have greater economic impact.

Although inventories had been built up, it

appeared that they were

still somewhat slim, particularly at smaller users.

In any event,

orders for delivery after July 1 were small, indicating relatively

poor third quarter operations whether or not a strike developed.

The steel companies looked for about a 60-day strike at the outside

and seemed determined,

at least at present,

to hold out for a wage

agreement that would not result in a substantial price increase

for steel.

The industry was also finding concern in shipments of

foreign steel into the United States at prices favorable to those

for the domestic product.

In

the machine tool industry, Mr.

orders were now coming in,

level.

Fulton said that new

but at only about half the pre-recession

Residential building contracts for the first

quarter were

5/5/59

-22

up 20 per cent over a year ago, and nonresidential construction

was up 7 per cent, but heavy engineering contracts were down 8

per cent.

levels.

Department store sales were up 6 per cent from year-ago

Unemployment was gradually decreasing but was still

sub

stantial, with the concentration largely among unskilled workers.

The mills and heavy industries had been moving into an overtime

basis rather than take on new employees.

Mr.

drop in

Fulton went on to say that there had been a considerable

total deposits of Fourth District weekly reporting banks for

the year to date.

A shifting from savings to demand deposits served

to give the money supply a boost.

Actually, however,

the conversion

of time deposits, which accumulated quite rapidly last year, would

indicate that they were not truly time deposits and that they really

should never have been deducted from the money supply.

Therefore,

he was not sure the money supply had increased to the extent indi

cated statistically under a definition that excluded time deposits.

Mr.

Fulton said he would like to see about the same feel in

the market continue for the next three-week period.

He would prefer

to see what was happening in the wage negotiations in the steel

industry before making any move toward further tightening.

not favor a change in

at this time,

the discount rate or in

He would

the policy directive

and in his opinion the Desk had done a good job in

maintaining a feel of tightness in

the market.

Mr. King indicated that he did not wish to comment at this

meeting.

5/5/59

-23

Mr.

economists,

Shepardson commented that current reports from

as well as reports generally, were indicative of

an upturn in business throughout the country.

The nation

seemed to have passed the point of recovery and to be on the

verge of substantial expansion.

The divergent trends within

the over-all price index gave him real concern, for the country

had come through a recession with a continual upward trend in

basic nonfood prices and it

appeared that the forthcoming wage

negotiations were apt to set the stage for further acceleration.

He was also concerned about the line of thinking which held that

as long as wage increases did not exceed productivity the situa

tion might be all

right.

This, he felt, was a fallacy, and he

saw no basis for agreement with the idea that wages should take

all

of the increased productivity.

As he saw it,

to accept such

a view would mean automatically accepting the idea of inflation.

With respect to foreign competition, he noted that there had been

a period when business seemed receptive to the building up of

international trade.

Recently, however, there seemed to have

been almost a reversal of that position, as suggested by resolu

tions adopted at the recent meeting of the United States Chamber

of Commerce which envisaged such things as quotas and higher

tariffs.

This was particularly disturbing when one thought of

the gold movement discussed earlier in

this meeting.

Unless

5/5/59

-24

United States industry got on a competitive basis and stayed

there, the international trade picture might become worse.

All of these things, Mr. Shepardson said, led him to

the conclusion that the System must begin to think about a

policy of more drastic restraint.

difficulty of doing very much in

the Treasury financing.

In saying this, he realized the

the immediate future in view of

At the same time, it

seemed to him that

the System should be keenly aware of the situation that loomed

ahead and be making preparations for early action.

Even during

the period immediately ahead, pressure should be kept fully as

great as it had been recently; to use an oft-repeated phrase,

errors, if any, should be made on the side of tightness.

He

would like to see such further tightness applied as could be

applied within the framework of avoiding a disturbance to the

Treasury financing,

looking to development of further restraint

as soon as feasible.

Mr. Robertson said he agreed with Messrs. Shepardson and

Bryan that the dangers of inflation today were much greater than

generally realized.

He did not think that System policy had been

sufficiently restrictive, and he saw grave danger, not only in

the near future but in the longer run, that United States industries

would price themselves out of the market.

Mr. Treiber that little

ahead.

However, he agreed with

could be done during the period immediately

It was regrettable,

he thought,

that the Open Market

-25

5/5/59

Committee had its

hands tied by Treasury financing operations

for such a large part of the year.

In his opinion, one of the

major problems facing the Committee was to work out some method

whereby the Committee would have a freer swing.

While he did

not have the solution, this was something that would have to be

worked out or inflationary developments would get ahead of the

System.

Mr. Robertson stated that he would continue to maintain

pressure as fully as possible without disturbing the Treasury

financing.

The Committee should keep its

thoughts focused on

the need for further restriction, and by this he meant real

restriction.

At its

next meeting the Committee should work toward

much greater restriction despite Treasury financing problems that

might come up after the middle of June.

tone and try to work in

The System must set the

keeping with that tone, which, in turn,

must be in keeping with the inflationary dangers now present.

Mr. Mills said that the money supply,

as a quantitative

economic factor and indicator, had come to be bandied around

more and more frequently in the discussions of the Committee

without deciding, perhaps,

should be viewed.

Mr.

in what perspective the money supply

Thomas had pointed out that the absolute

level of the money supply at any particular date was not necessarily

a guide to its

influence on the economic situation.

been discussed was the rate of increase in

What had not

the money supply

-26

5/5/59

relative to the increase in gross national product, stated in

terms of constant dollars.

As he recalled, the staff economic

review submitted to the Committee in

advance of this meeting

mentioned a 2-1/2 per cent increase in the money supply during

1959 to date, and a 2-1/2 per cent increase, when considered in

relation to the level of current economic activity, might or

might not be a matter of serious concern.

Personally, he doubted

that it was a matter of serious concern or that it would be wise

for the System so to strain monetary policy as to attempt to

defeat and finally counteract what was probably a normal growth.

As might be surmised, Mr. Mills said, his position with

regard to System policy was in serious contradiction to the positions

taken in the comments around the table thus far at this meeting.

To

submit his own views in as concise a form as possible, he then read

the following statement

My objections to a Federal Reserve System monetary

and credit policy that, in my judgment, is unnecessarily

and unwisely restrictive still

stand. Inasmuch, however,

as it will be necessary to supply new reserves about May

12 in support of commercial bank subscriptions through

their Tax and Loan Accounts to the Treasury's April 15,

1960 special bill,

and as reserves may also be supplied

through the process of attrition on maturing Treasury

issues, a ready-made means is available for unobtrustively

relaxing reserve pressures, but not to the degree that

would impede a prompt redistribution of the new issues

of U. S. Treasury securities that the commercial banking

If an orderly trans

system is now expected to acquire.

ference of commercial bank holdings of old and new

purchases of U. S. Government securities into other forms

of loans and investments is to be accomplished in order

-27that the legitimate demand for commercial bank loans

may be serviced, the Federal Reserve System must

cease and desist from a policy which, by maintaining

a constantly rising level of negative free reserves,

is touching off a spiral of contractive credit forces,

the results of which would only come to light in their

true state after the effects of the injection of new

reserves attendant upon the Treasury's financing

operation had worn off. Avoidance of excessive pressure

on the supply of reserves can accomplish a desirable

redistribution of U. S. Government securities out of

the commercial banking system within a reasonable

length of time while also allowing room for the com

mercial banks to absorb the seasonal demand for credit

that is now a tangible prospect.

If, on the contrary,

in order needlessly to restrain any growth in the

money supply, Federal Reserve System policy denies

elbowroom to the commercial banking system in which

to expand their loans and investments, harmful con

sequences to the U. S. Government securities market

can be anticipated when the commercial banks are forced

to liquidate U. S. Government securities so as to make

good their lending obligations to their customers.

Under such circumstances, the destructive influence of

constantly falling prices for U. S. Government securi

ties can lead to disorderly market conditions whose

correction might defeat the very policy purposes that

have been sought after.

I would oppose an increase in the discount rate

at the present time, in that the logic for such an

increase would have to derive from market reactions

to a Federal Reserve System monetary and credit policy

that I cannot approve.

Mr. Leach reported that the economy of the Fifth District,

paced by its

leading manufacturing industry, textiles, continued

to expand through April.

Total nonfarm employment had now passed

pre-recession peaks in two States, though for the district as a

whole it

was still

1 per cent short of that level.

Recent gains

5/5/59

-28

in manufacturing manhours continued in

seasonally adjusted first

March, to bring the

quarter increase to 3 per cent.

The textile industry was demonstrating impressive contra

seasonal strength in

practically all

of its

orders, production, and shipments in

divisions.

Furniture makers apparently

had a good spring market, and the lumber industry continued to

expand employment and output.

in

The darkest spot continued to be

West Virginia, which showed little

coming its

or no progress in

over

severe problem of coal mining unemployment.

At the last meeting of the Committee, Mr.

Leach recalled,

he reported data on borrowings of Fifth District banks which

seemed to indicate that monetary policy was having a more wide

spread tightening effect in the first

the first

quarter of 1957.

quarter of 1959 than in

April data showed that this continued

to be true and that the difference was widening.

In April 1959

the average number of banks borrowing from the Federal Reserve

Bank of Richmond was 36, compared with 23 in April 1957, and the

daily average amount of their outstanding borrowings was $52

million, compared with $34 million in

April 1957.

District banks

that participate in the Federal funds market purchased almost

three times as much Federal funds in April 1959 as in April 1957.

Further evidence of the tightness now prevailing among

Fifth District member banks could be found in

the extent of

5/5/59

-29

security depreciation in the portfolios of member banks examined

since the first of the year.

Of 1953 banks examined, 117 had

depreciation as of the date of examination exceeding 5 per cent

of their total capital accounts,

70 had depreciation in

excess

of 10 per cent, and 13 had depreciation over 20 per cent.

Pre

sumably, depreciation was now even larger because of the recent

decline in

markets for fixed obligations,

A test check indicated

that most banks had more depreciation now than at the corresponding

time in 1957.

While completely comparable figures were not available for

the United States, Mr. Leach noted that national figures showed

average daily borrowings of all reserve city and country banks

from the Reserve Banks as high in April 1959 as in

April 1957 even

though the net borrowed reserve figure in April 1959 averaged about

$240 million compared with $505 million in

April 1957.

All of this

led him to believe that the lending decisions of member banks out

side of New York and Chicago were currently subject to as much or

more pressure than at this time in 1957,

when the Committee's

directive was aimed at restraining inflation and aggregate net

borrowed reserves were much greater.

This pointed up the wide range of possible effects that

might stem from a given level of net borrowed reserves, Mr. Leach

said, but it

did not mean that he would advocate any change in

5/5/59

-30

over-all restraint.

He agreed substantially with the appraisal

by Mr. Young and Mr.

Thomas of the condition of the economy and

the danger of inflation.

However, he thought the Committee should

bear in mind the danger that sizable additions to the total amount

of net borrowed reserves under the existing distribution pattern

might cause more pressure at reserve city and country banks than

desired.

For the period immediately ahead, an even-keel policy

was clearly called for by the current Treasury financing.

policy directive was getting out of date, if

and if

it

The

was not already,

the present trend should continue the Committee might want

to consider a change in

the directive at the next meeting.

Mr. Leedy stated that Tenth District agricultural conditions

remained favorable except in

southwestern Oklahoma and parts of New

Mexico, where severe drought conditions prevailed.

had retarded the development of pasture,

feeding of livestock in

Cold weather

necessitating supplemental

some areas, but cattle slaughter remained

relatively low, which indicated that the producers were continuing

to expand livestock numbers rapidly.

Nonfarm employment in March

was 3 per cent above the year-ago level and the current district

employment level, allowing for seasonal factors, appeared to be

at least as high as at the mid-1957 peak.

Construction showed

considerable strength, with awards for the first

cent higher than in

quarter 11 per

the comparable period last year, and residential

5/5/59

-31

construction awards were 50 per cent higher.

Through April 25,

department store sales increased 10 per cent over last year, a

higher rate of increase than in any district except the Twelfth.

Continuing the district summary, Mr. Leedy said that thus

far this year there had been an actual growth in business loans,

in other loan categories there was considerable strength, and in

investment portfolios, also, there had recently been some increase.

Apparently, some bank purchases in connection with the April 1

financing had not yet been liquidated.

In the past few days member

bank borrowing reached a level a little higher than $100 million,

far more than the district's proportionate share of total borrow

ings.

Thus, it

seemed that System policy had been operating in

the Tenth District with greater force than in

most other districts.

As to policy for the period immediately ahead, Mr. Leedy

subscribed to what had been said many times around the table this

morning, that is,

that the Committee could do no more than maintain

an even keel in view of the Treasury financing.

circumstance, it

Except for that

seemed to him the statistics showed every reason

for the System to be moving further in

the direction of restraint.

The thinking beyond the period immediately ahead should be in terms

of more restraint on reserves and possibly an increase in the

discount rate at a time not far in the future.

In view of the

changes that had occurred since the policy directive was first

adopted, he felt that a revision would be indicated at the time

of the next Committee meeting.

-32

5/5/59

Mr. Mitchell stated that both statistical evidence and

opinions pointed to a rather steady rise in the trend of activity

in

the Seventh District.

A number of cases were noted where

cautious optimism had changed into confident assurance of moving

into a high level of activity.

Furthermore, the improvement was

not confined to sections badly hit a year ago.

debits in

For example, bank

Iowa communities this year were running about 14 per

cent higher than last year.

Department store sales in

eastern

Michigan had been especially strong, considering the bad showing

a year ago, and sales in Chicago were up though not so favorably

on a comparative basis.

The unemployment situation continued to

improve throughout the district,

and it

appeared that Chicago

might move into a higher labor classification at the time of the

next announcement by the Department of Labor.

On the financial side, Mr.

Mitchell said that the expansion

more

of business loans since last summer continued to be a little

vigorous than in

the comparable 1954-55 period.

During the period

August 1958 through April 1959, business loans increased about

7-1/2 per cent, compared with a 5 per cent increase in 1954-55.

At Chicago banks, the expansion was more than 6 per cent and

elsewhere in the district the increase was even greater.

growth of time deposits in

less than in

the first

any quarter of 1958,

The

quarter of this year was

and the rate of growth of

5/5/59

-33

savings account balances in the major cities had declined

steadily since last October.

an increase in

Detroit banks had announced

rates on time deposits and there was speculation

that Chicago banks would go to a 3 per cent rate on savings

accounts.

Mr. Deming reported that business activity in the Ninth

District continued to exhibit a stronger than seasonal upturn.

Construction was particularly strong and iron ore production was

going along at a fast pace.

While total nonagricultural employ

ment was improving rather slowly, employment in construction and

mining in

March was up 5 per cent and 9 per cent, respectively,

from year-ago levels.

It

was anticipated that April figures would

show further sharp improvement,

especially in iron ore mining

Other indications of economic vitality were an upsurge in department

store sales and in

March.

bank debits, the latter being up 15 per cent in

Farm income, too, continued to run higher than a year ago.

While it seemed likely to stay on the plus side during the first

half of this year, the longer-range farm outlook was not too good

at the moment due to a severe spring drought over much of the

district.

Unless there was lots of rain soon, 1959 small grain

production would be much less than last year.

Current loan demand was strong, Mr.

for commercial and industrial loans.

Deming said, particularly

The rise in

business loans at

5/5/59

-34

city banks from mid-February (the seasonal low) to mid-April was

twice as large as in

1958 and one-third more than in

1957.

In

general, the recovery in the Ninth District was proceeding on a

satisfactory basis.

Little evidence of speculative activity was

seen locally and if

it

were not for the drought, the district

would feel quite comfortable at the moment.

With respect to monetary policy, Mr. Deming said that he

had no reason to disagree with the analyses presented by Mr.

and Mr.

Thomas and tended to concur in Mr.

the international competitive situation.

Thomas'

Young

feeling about

Generally, then, he felt

that the course of monetary policy should be moving toward a more

restrictive posture.

At the same time, he was quite concerned

about the rate picture in

the Government securities market and the

problems facing the Treasury in the future.

He found it

difficult

to press for action that would seem to force the Treasury to con

fine its

financings even more to very short-term securities, for

such a policy would be self-defeating from the System's point of

view.

This dilemma did not bother him greatly for the next

three

week period, since an even-keel policy seemed called for during

that period.

Beyond that time,

He agreed with Mr.

however, it

bothered him very much.

Robertson that some kind of solution to this

problem had to be worked out, but he did not see the solution at

this moment.

5/5/59

-35

Mr.

Swan reported that Twelfth District business activity

continued to move forward at a rapid pace, with particularly high

rates of activity in

construction, trade, and services.

Employ

ment was up in March, with manufacturing and construction leading

the way,

and a further rise in

April was indicated.

craft industry a slight declining trend in

in

the State of Washington in March,

increase in

California.

States declined in

In the air

employment continued

but that was offset by an

The rate of unemployment in the Coastal

March to 4.6 per cent, retail sales continued

strong, and automobile sales were continuing to rise.

weeks the district's

capacity,

In recent

steel mills had been operating at close to

and many of the mills appeared to be booked virtually

to capacity through the month of June.

for lumber, the March cut in Douglas fir

With the mounting demand

prices proved to be

short-lived and was succeeded recently by another price increase.

Construction activity advanced sharply in March, with residential

construction reflecting a particularly marked increase.

appeared as though this trend would continue,

were heavy in

March.

It

for FHA applications

The recent McGraw-Hill survey of plant and

equipment spending plans indicated a somewhat greater increase in

the Twelfth District for 1959 than for the country as a whole.

In further comments,

Mr. Swan said that district weekly

reporting banks had recently experienced a sharp loan increase,

substantially more than for the corresponding weeks last year and

-36

5/5/59

three times the rate of increase reflected by the national series.

In previous months,

real estate loans had been the major source

of strengh,

the most recent period gains in business and

but in

consumer loans became increasingly important.

there was only a nominal decline in

ties.

At the same time,

holdings of Government securi

Demand and time deposits rose, but by a somewhat smaller

amount than a year ago.

As to Federal funds,

the major district

banks showed a slight excess of sales over purchases last week and

about the same position was anticipated this week.

However,

almost

all of the offerings were accounted for by one large San Francisco

bank.

Mr.Irons stated that Eleventh District conditions reflected

the trend indicated nationally.

He agreed with Messrs.

Young and

Thomas that growing and broadening strength was to be seen in

national activity, with expansion reflected in aggregate demand,

consumer expenditures, inventory accumulation, revised plans for

capital goods expenditures, and surprisingly large corporate profits.

Growing confidence had been particularly noticeable in the Eleventh

District.

No longer were businessmen, bankers,

and others expressing

concern about recovery and the possibility of a slackening; they

were now confident that business was going to expand substantially

and that their problems would be those associated with expansion

rather than recovery or regaining lost ground.

In the district,

-37

5/5/59

most segments of activity were at record or near-record levels,

including department store trade, construction, housing, employ

ment,

and industrial production.

One area with some uncertainties

was agriculture, where prospects were affected by adverse weather

in some sections.

However, planting was now coming along and

agricultural activity was increasing.

the petroleum industry, which still

refining.

Another uncertain area was

had problems,

particularly in

Final product stocks were building up, probably to an

excessive amount, but refining was continuing at a high level.

Allowables in Texas for May had been increased by one day to a

total of 12 days, which meant a further increase in crude production.

On the financial side, Mr.

were strengthening in

Irons said that credit demands

the district, with particular strength in

consumer loans, business-type loans, and loans to sales finance

companies.

Some liquidation of Government security holdings was

taking place and a strong increase was noted in deposits of indi

viduals, partnerships,

and corporations.

All bankers with whom he

had talked were referring to a very strong loan demand, and it

was

expected to be even stronger in the last quarter of the year.

The

banks, particularly the city institutions, were moving into the

period of seasonal upturn in loan demand with loan ratios that

already were high.

unusually heavy,

Demand for Reserve Bank discounts had not been

although some large city banks were borrowing on

5/5/59

-38

a one-day basis.

The impression was gained that some of the city

banks that had not borrowed for a long time might be feeling out

the Reserve Bank in

view of the prospect of heavier loan demand.

Mr. Irons said that both the national and Eleventh District

economic picture pointed toward an increase in the degree of re

straint now being maintained rather than any relaxation.

He

realized the problem posed by the Treasury financing and the im

practicability of doing anything overt in the next three weeks.

However, he hoped that the Account Management would not be con

cerned too much by the level of net borrowed reserves.

The key

was in the distribution and allocation of reserves and the total

picture might be more confusing than meaningful.

He hoped that

the Federal funds rate would be at the discount rate and felt

that the Account Manager should be governed in

his operations by

his sensitivity to the market and the feel of the market.

He would

attempt to maintain at least the present degree of restrictiveness

and would consciously and actively avoid any lessening.

policy directive appeared to be getting out of date, it

in

Since the

might be

order to review the directive for possible change at the next

Committee meeting.

If the present trend should continue and the

outlook three weeks from today was the same as at present, he

felt that it

would be appropriate to give consideration to taking

overt action to move toward greater restraint.

5/5/59

-39

Mr.

in

Erickson reported that business continued to improve

the First District and that the New England production index

showed increases in

textiles, paper, leather, and primary metals.

While construction awards in

ago,

the first

March were 9 per cent below a year

time a year-to-year comparison had been on the

minus side since May of last year, there was a $28 million utility

award in March 1958 and no award of comparable size in March of

this year.

ahead of last

Residential construction contracts were 14 per cent

year.

As compared with a year ago, nonagricultural

employment was up, but not as much as for the country as a whole.

Employment recovery had been most pronounced in

the durable goods

field, but a number of other industries were still employing fewer

people than a year ago.

Department store sales continued at a rate

5 per cent above last year.

An end-of-March survey showed deposits

at mutual savings banks 6-1/2 per cent higher than a year ago and

real estate balances 10 per cent higher.

Last year's record ski

business was exceeded in the season just concluded.

The Boston Reserve Bank last week held its semi-annual

Business Outlook Conference, with economists from universities,

business, and financial institutions participating, and as usual

the participants were asked to make certain predictions.

gross national product in

As to

the last quarter of this year, the

estimates ranged from $475to $493 billion,

annual rate, with a

5/5/59

-40

median of $48 3 billion, while the predictions for the industrial

production index in December ranged from 148 to 155, with a median

of 151.

By and large, the economists were optimistic, but they

were concerned about the stock market, competition of foreign

producers, the position of the Treasury, and money rates.

In view of the Treasury financing, Mr. Erickson saw no

option for the next three weeks except to maintain the prevailing

degree of restraint, leaving it

judge the feel of the market.

facts pointed out by Mr.

to the Manager of the Account to

While he was concerned about the

Thomas and others, at the same time one

could not overlook the views presented by Mr. Mills.

It was his

feeling that the next meeting of the Committee might be one of

the most important for a long time.

Mr.

Szymczak said it

was obvious that the System could not

do anything different from what it

next three weeks.

is

doing at present during the

In view of the developments in the economy, it

was quite natural that one would like to step up the degree of

restraint.

policy in

However,

it

was not possible to exercise monetary

a vacuum, for other considerations must be taken into

account whether one liked them or not.

As Mr. Mills had indicated,

one of the most important and vital parts of the picture at the

present time was the condition of the Government securities market,

and the condition of that market was a part of the System's

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5/5/59

responsibility.

The fact that the Government securities market

was in the doldrums must be of immediate concern to the System.

Another consideration in the picture at present, and a vital one,

was the Federal Government deficit, and the question whether or

not there would be another deficit made the problem even more

difficult.

Likewise,

vital concern.

the balance of payments situation was of

Whether or not United States industries had priced

themselves out of the market, the fact remained that a lot of

dollars were going out of the country and this contributed to the

difficulty in

ment was still

formulating monetary policy.

high and that was a matter of concern whatever the

causes might be.

Whether or not monetary policy could do anything

about that situation, it

Thus,

Furthermore, unemploy

was still

a factor to be reckoned with.

although the System did not have a clean sheet upon which to

write, it

must continue to try to do the best job possible with

monetary policy.

Under present circumstances,

Mr.

Mills'

statement

presented a problem that must be considered because the Government

securities market was an immediate problem and one which was

difficult of solution, as attested by some of the statements made

in

connection with the current Treasury-Federal Reserve study.

As indicated by the comments of Messrs. Leach and Leedy,

Mr. Szymczak said, the System could hardly hope to deal with the

distribution of reserves.

With the instruments available, the

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5/5/59

best it

could do was to proceed in

a manner that would lead

toward stability and offset tendencies toward inflation.

At

the next Committee meeting, he would suggest discussion of the

discount rate, the policy directive, and a study of possible

alternative methods of dealing with inflationary trends, especially

at times when Treasury operations preclude System action.

The last

mentioned problem would, of course, require much study in order to

come forth with an answer.

Mr. Balderston summarized the views expressed at this meet

ing by saying that the consensus appeared to favor (1) continuing

the present degree of restraint in order to preserve an even keel

until an appropriate date following the current Treasury financing,

(2)

moving toward greater restraint as soon as possible thereafter,

and (3) continuing the present policy directive until the next

Committee meeting and at that time considering a possible revision.

In order to facilitate discussion, Mr. Balderston suggested that

the members of the Committee who favored a revision of the directive

at the next meeting submit draft wording to the Secretary of the

Committee, so that the latter might present alternative proposals

at that time.

It had been his feeling on previous occasions that

the drafting of language at a Committee meeting was difficult and

time-consuming.

Mr.

Balderston then said that he would now depart from his

effort to state the consensus and present his own view, which was

5/5/59

-43

that the System ought to move toward greater restraint during the

third week of the period between now and the next Committee meeting.

If

the payment date for the current Treasury financing was May 15,

he would not think it

As he saw it,

unfair to tighten in the week ending May 27.

that would not pull the rug from under those who

acquired securities in the present financing operation because

they would have a few days in which to distribute their inventories.

At the same time, the System would not lose that week in moving

toward a tighter position.

Consequently, his own thinking departed

somewhat from the consensus of those who had spoken previously at

this meeting.

He would not wait until the next meeting for the

Desk to tighten appreciably.

Mr.

Balderston noted from the reserve projections that in

the week ending June 3 it

was anticipated that net borrowed reserves

would increase by some $200 million.

This meant that there would

be some tightening of an automatic nature of which the Committee

could take advantage.

nature a little

Personally, he would be inclined to nudge

and try to anticipate that effect.

He then turned

to Mr. Rouse and asked whether the latter saw an imperfection in

his suggestion.

Mr. Rouse responded that the Committee would be pulling

the rug from under the money market if it did not provide enough

time for distribution of the Treasury securities.

With the

5/5/59

-44

financing operation to be completed only on May 15, he felt that

this would mean maintenance of the even keel policy possibly until

the next Committee meeting.

Mr. Thomas inquired what reason there was to think that the

banks would have a large amount of securities to distribute.

In

view of cash redemption of maturing bills and certificates, the net

addition probably would be not over $500 million.

In the circum

stances, he suggested that the distribution might largely take care

of itself.

Mr. Rouse agreed that there was a chance of this but added

that he would hope not to have a positive instruction to do what

Mr. Balderston had suggested.

Mr. Balderston said this was the reason he had stated the

consensus before presenting his own view, and Mr. Rouse responded

that perhaps what Mr. Balderston had suggested would be possible.

If it were, he felt sure the Committee would like to see it done.

However, he (Mr.

Rouse) would not care to have a positive instruc

tion to start tightening at a fixed time regardless of what might

develop.

Mr.

Balderston said he agreed with that completely.

Mr. Rouse then commented that one payment date would be

May 11, while the second payment date (May 15) would be for $1.5

billion of tax anticipation bills.

be sought after at first

The latter, presumably, would

by business corporations.

At this time,

5/5/59

-45

it was hard to offer an opinion on the distribution of whatever

might be offered for the 1-1/4 per cent certificates.

In response to a question by Mr.

Balderston, Mr. Rouse

said he considered the policy directive adequate in its

present

form.

Mr. Robertson said that, as he understood the exchange

between Messrs.

Balderston and Rouse, there was no instruction

to Mr. Rouse to begin tightening on May 21.

However, if

things

should just happen to work out right, it would be possible to

tighten during the week beginning on that date.

Mr. Rouse replied that this was his understanding.

Mr.

Bryan said he agreed fully with Mr. Balderston's state

ment of the consensus of the meeting.

Certainly, it

was the

unanimous view that an even keel policy should be maintained until

the Treasury financing was out of the way.

However, he did not

Should it

know precisely what was meant by an even keel policy.

be measured by net free reserves, net borrowed reserves, the feel

of the market, or the intuition of the Account Manager?

Mr.

Rouse replied that he thought it

things mentioned by Mr.

was a mixture of the

Bryan.

Mr. Robertson said that the matter should not be left on

a basis which suggested that the exact figure of net borrowed

reserves was the criterion.

In the present instance,

certainly,

the criterion had to be the feel of the market.

If

there was any

difference of opinion on that score, he felt Mr. Rouse should under

stand it.

Mr.

Rouse said he understood the instruction to be to carry

on as during the past three weeks.

There were no exact figures in

dicated, although he would take into consideration a band of figures.

If

net borrowed reserves got as high as $300 million, or much under

$100 million, he would wonder whether the Desk was doing its

properly,

Therefore,

job

but he would be guided primarily by the feel of the market.

he felt that he had been correct in

saying to Mr.

that an even keel involved a mixture of the things Mr.

Bryan

Bryan had

mentioned, all within the scope of the general instruction given

by the Committee.

Thereupon, upon motion duly made

and seconded, the Committee voted

unanimously to direct the Federal Re

serve Bank of New York, until otherwise

directed by the Committee:

(1) To make such purchases, sales, or exchanges

(including replacement of maturing securities, and

allowing maturities to run off without replacement) for

the System Open Market Account in the open market or,

in the case of maturing securities, by direct exchange

with the Treasury, as may be necessary in the light of

current and prospective economic conditions and the

general credit situation of the country, with a view

(a) to relating the supply of funds in the market to

the needs of commerce and business, (b) to fostering

conditions in the money market conducive to sustainable

economic growth and stability, and (c) to the practical

-47administration of the Account; provided that the

aggregate amount of securities held in the System

Account (including commitments for the purchase or

sale of securities for the Account) at the close of

this date, other than special short-term certificates

of indebtedness purchased from time to time for the

temporary accommodation of the Treasury, shall not

be increased or decreased by more than $1 billion;

(2)

To purchase direct from the Treasury for

the account of the Federal Reserve Bank of New York

(with discretion, in cases where it seems desirable,

to issue participations to one or more Federal Re

serve 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 Re

serve Banks shall not exceed in the aggregate $500

million.

With reference to the comments that had been made suggesting

discussion of the possibility of some overt action at the time of

the next Committee meeting, Mr.

Balderston said he supposed that

the Presidents would not wish to discuss that possibility with

their directors in

the meantime.

However,

if

such a discussion

took place three weeks from today and an overt action was favored,

he felt

that the System ought to be prepared to move rather deci

sively and expeditiously,

It

and as a unit to the extent possible.

was agreed that the next meeting of the Federal Open Mar

ket Committee would be held on Tuesday,

Secretary

The meeting then adjourned.

May 26, 1959, at 1000 a.m.