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, July 7, 1959, at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Allen
Balderston
Deming
Johns
King
Mills
Shepardson
Szymczak
Bopp, Alternate for Mr. Erickson
Messrs. Bryan, Fulton, and Leedy, Alternate
Members of the Federal Open Market Comittee
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. Molony, Special Assistant to the Board
of Governors
Mr. Koch, Associate Adviser, Division of
Research and Statistics, Board of
Governors
Mr. Keir, Chief, Government Finance Section,
Division of Research and Statistics,
Board of Governors
Mr. Latham, First Vice President, Federal
Reserve Bank of Boston
Messrs. Daane, Baughman, Tow, and Rice, Vice
Presidents of the Federal Reserve Banks
of Richmond, Chicago, Kansas City, and
Dallas, respectively
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Messrs. Marsh and Einzig, Assistant Vice
Presidents of the Federal Reserve
Banks of New York and San Francisco,
respectively
Mr. Anderson, Economic Adviser, Federal
Reserve Bank of Philadelphia
Mr. Stone, Manager, Securities Department,
Federal Reserve Bank of New York
The Chairman noted that Mr. Erickson was absent but that
Mr. Latham was in
Presidents'
the building today to attend a meeting of the
Conference.
There being no objection, Mr. Latham was
invited to attend the meeting and entered the room.
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on June 16, 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 June 16 through July 1, 1959,
and a supplementary report cover
ing the period July 2 through July 6, 1959.
have been placed in
Copies of both reports
the files of the Committee.
Mr. Marsh stated that operations to maintain an even keel in
the money market within an atmosphere of over-all restraint had been
generally successful.
The money market remained generally tight,
with the effective rate on Federal funds at 3-1/2 per cent, except
for three days when the New York money market eased, reflecting an
accumulated excess of funds and the effects of proceeds of redemptions
of tax-anticipation Treasury bills which ended up in New York.
The
money market had been particularly tight during the past few days,
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primarily because of tighter reserve positions of New York City
banks that lost reserves to other parts of the country after the
end of the month.
Open market operations had supplied $338 million of reserves
net on a commitment basis since the date of the last Committee meet
ing.
Outright holdings of Treasury bills in the System Open Market
Account were up by $311 million, while repurchase agreements out
standing increased by $27 million net; new agreements were put on
during the period but were almost matched by maturities and withdrawals.
Looking ahead, additional reserves would have to be supplied to cover
the increase in reserve requirements on Thursday, July 9, and the
following Thursday,
July 16, as a result of payment for the new issues
of Treasury bills.
The amount of reserves needed was uncertain and
would depend on the amount of the new issues that moved out of bank
into nonbank hands by the payment dates, a development which was
very difficult to measure.
Interest in
the Government securities market,
focussed on the new Treasury financing.
Mr. Marsh said,
The total of $5 billion
Treasury bills offered was larger than had been expected by the mar
ket, producing considerable caution in the first auction last
Wednesday,
July 1.
Initial rate ideas for the March tax
ill
auctioned on that day were below 4 per cent but moved higher as
the auction approached,
and the result was an average rate of 4.07
per cent with the stop-out at 4.14 per cent.
Commercial banks were
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-
willing to take the March bill
against tax and loan account credit
but only on a wide scale of prices since they were doubtful as to
how long they could hold the bills.
There was fairly active
secondary trading in the new March bills at rates around
per cent.
4.25 - 4.30
Dealers expected a good continuing interest in that issue
but the market was cautious and pessimistic about the auction of
July bills tomorrow.
Banks were even more uncertain of their ability
to hold the July bill
and feared that corporations would not be buying
those bills as rapidly as the March bills.
Some banks were consider
ing tendering at a high rate with the idea of holding the bills and
selling other securities to meet tax and loan account calls.
auction ideas ranged out to 4-1/2 per cent on the tail
4-1/4 per cent for the average.
Early
and as low as
The poor prospect for the auction
of July bills was aggravated by the results of yesterday's auction
for regular Treasury bills.
Interest for both long and short bills
was light, resulting in an average rate of 3.26 per cent for 91-day
bills and 3.96 per cent for 182-day bills, with a long tail
on both
issues and awards to dealers of $402 million 91-day bills, or a total
of $587 million.
adjustment in bill
Mr.
This result probably would produce another upward
rates and higher rate ideas for tomorrow's auction.
Marsh went on to say that the significance of these
events for the Treasury was serious, since the bottom of the barrel
appeared to have been reached.
If
the Wednesday auction for the
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July bills should result in
per cent, it
an average rate between
4.30 and 4.40
would mean a secondary market well over 4-1/2 per cent.
This latter rate, in turn, if
converted to a true yield basis, would
mean 4-3/4 per cent for a one-year interest-bearing certificate.
This rate, of course, related to the Treasury's August refunding and
to the cash borrowing that the Treasury would undoubtedly have to
undertake in mid-August to pick up attrition on the refunding.
The
Treasury probably would have to come back to the market early in
October for additional cash, leaving only a small open period between
operations.
Mr.
Marsh pointed out that the problems he had described
were mainly in the short-term market--the area in which the Treasury
was forced to borrow--and that the balance of the market had acted
reasonably well.
There had been gradual upward adjustments in
longer-term rates but no drastic price declines, despite the
probability that commercial banks would have to sell more inter
mediate issues over the balance of the year as loans increased.
For the record, Mr. Marsh noted that legislation raising
the public debt ceiling had been passed by Congress and signed by
the President, but with a limit less than the Treasury expected,
and that no bill to eliminate the interest rate ceiling on Treasury
bonds had yet been reported out by the Ways and Means Committee.
It
seemed clear, he said, that the System Account would have
to buy Treasury bills in
the next day or so to provide reserves
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needed on Thursday,
July 9, as a result of the Treasury's
financing operation.
The chances were that the Desk would
decide to buy those bills sooner rather than later in view of
the unsatisfactory state of the Treasury bill
market and the
imminence of the Treasury's next financing operation, that is,
the auction tomorrow.
Upon motion duly made and
seconded, and by unanimous vote,
the open market transactions during
the period June 16 through July 6,
1959, were approved, ratified, and
confirmed.
Supplementing the staff memorandum distributed under date
of July 2, 1959,
Mr. Young made a statement substantially as follows
with respect to recent economic developments:
Economic activity domestically continues its vigorous
expansion. Industrial production for June has apparently
advanced further; as a preliminary guess, to 154 per cent
of the 1947-49 average.
GNP estimators are much more
certain than earlier that the second quarter GNP will be
quarter in both current
up $10 billion from the first
dollar and constant dollar terms.
Consumer demands are evidently still
expanding, par
Sales of new cars, domestically
ticularly for durable goods.
produced and imported, are estimated at close to 600,000
units for June, or a seasonally adjusted annual rate of 6.6
million. Sales of household durables, which in May had
For the second quarter
leveled off, again expanded in June.
as a whole, sales of these goods are expected to be 3 per
cent ahead of the first quarter and 9 per cent higher than a
year earlier. Sales of all goods at department stores are
apparently running slightly ahead of May sales, and second
quarter sales are estimated to have reached new record
levels, some 8 per cent ahead of last year's second quarter.
Expanding consumer demand has been fed in recent months
by rapid expansion of consumer instalment credit. The
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April-May increase represented an annual rate in excess of
$5 billion. While outstanding automobile credit has been
expanding rapidly in recent months, it has not yet re
attained the rapid expansion rate set in 1955.
Seasonally adjusted new orders at durable goods
manufacturers fell
off by 4 per cent in May after rising
40 per cent from February 1958 to April of this year. Over
half of the decline represented a drop in orders for primary
metals; the balance was concentrated in electrical machinery
and aircraft.
Thus, the decline was accounted for by lines
in which new orders had undergone a rapid run-up earlier
this year.
Manufacturers' inventories continue to build up at a
rapid pace. The May increase was $ 4 00 million, compared
with $600 million each in the two preceding months and a
$500 million pace of build-up earlier. Altogether,
manufacturers' inventories have now regained half of the
recession liquidation.
Construction activity again eased off in June from
earlier higher and record levels.
For the past three months,
the value of new construction has declined about 2/3 per
cent a month.
Public construction and private residential
construction both fell off in June; private industrial and
commercial construction, however, rose further, the latter
to a new high. Some increases in urban vacancy rates have
been reported recently, both for rental housing projects
and for office buildings.
Labor market developments have continued to show strength,
but June gains in employment were probably smaller than in
Also, the seasonal influx of students, summer
April or May.
workers, and graduates has been operating to lift the number
of job seekers. The seasonally adjusted unemployment rate is
expected to show little, if any, change. Continued unemploy
ment claims are still running higher than in comparable months
of 1956 and 1957; new claims, although close to 1957 levels,
remain somewhat above levels of 1956. A matter of some social
interest is the large number of currently unemployed persons
without previous work experience--about 1/6 of the unemployed
work force and substantially more than in the comparable 1950
This large fraction reflects
and 1955 recovery months.
emphasis in rehiring of previously laid-off workers.
The question of a steel settlement or strike remains a
major industrial uncertainty for the period immediately ahead.
While little progress in the steel negotiations has been re
ported, it is rumored that the union is now prepared to scale
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down its demands to an increase of about 3 or 4 per cent,
or roughly 10 to 12 cents an hour. This is about in line
with the recent settlement in the paper industry which
provided a 3 per cent general wage increase for next year
and a 4 per cent increase for the following year.
The average of all wholesale prices has changed little
in recent months.
Averages of both industrial commodities
and farm products have been stable at levels reached earlier,
with industrial commodities up 2-1/2 per cent and farm
products down 5 per cent from the spring of 1958. Upward
pressures on prices have recently become fairly pronounced,
it is reported, for some processed industrial materials and
for such finished products as furniture, carpets, and apparel.
The consumer price index, which edged up slightly in
April and May, is expected to show a further slight rise for
June.
United States exports rose moderately in April and again
The April increase reflected some rise in machinery
in May.
shipments but the May increase was accounted for entirely by
larger agricultural exports. Imports also increased in May,
The annual rate of both
with the increase quite sharp.
exports and imports was about even-close to $16 billion.
Continuing deterioration in the balance of payments was
reflected in further large net transfers of gold and dollars,
amounting to from $ 4 00 to $500 million in rounded figures,
excluding transfers to the International Monetary Fund.
In industrial countries abroad, expansion in economic
activity has become more widespread and has gathered momentum.
This extension of industrial revival abroad is clearly
benefiting materials-supplying countries, and thus is working
indirectly as well as directly to strengthen markets for
On the other hand, grievous financial
United States products.
instability in several important Latin American markets con
tinues to work as a partial obstruction to improvements in
United States shipments southward.
With respect to prospects ahead, domestic economic
advance has now reached a point where some slowdown is to be
expected. Three major expansive influences have probably
now passed their maximum strength--residential construction,
inventory accumulation, and gains in industrial productivity.
Consumer spending continues to enlarge and business capital
expansion may now gather momentum. These will undoubtedly
suffice to keep the economic advance proceeding, but at a
It is worth noting that the margin
slackening rate of gain.
of unused industrial capacity for producing industrial
materials and finished goods is probably significantly wider
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than it was at a comparable point in the preceding economic
cycle.
This implies both more margin for further cyclical
expansion of output and more supply restraint on upward
price pressures than experienced in the last economic cycle.
In any case, we may hope so.
Mr. Thomas presented a statement on financial developments as
follows:
At the last meeting of this Committee, the general
consensus as to System operations was expressed as "feeling
that the prevailing policy of restraint should be continued"
and that the System should follow a firm and steadfast
course and give no evidence of easing. The record of credit
developments during June indicates that the policies
followed were appropriate and perhaps also effective in
accomplishing desired objectives.
Money markets have been under pressure because of
continued vigorous credit demands.
Loans at city banks
during the past five weeks increased more than in the same
period of any other year.
At the same time bank deposits
declined or failed to show any more than the usual seasonal
increase.
The restricted availability of bank reserves
made it necessary for banks to reduce their holdings of
securities by unusually large amounts in order to obtain
funds to make loans. Banks also maintained a high level
of borrowings throughout the period, which kept them
under restraint.
On the basis of preliminary estimates, it appears
that the money supply, seasonally adjusted, showed no
increase in June, following only a small increase in May.
For the first
half of the year the growth was at an annual
rate of about 2 per cent, and for the past twelve months
For member banks alone, the semimonthly
it was 4 per cent.
daily average figures of demand deposits adjusted, after
allowance for seasonal variations, declined in the first
half of June, and tentative estimates for the second half
indicate a further decrease to around the level of the
early weeks of this year.
It
Credit expansion during June was fairly general.
was pronounced in business loans at banks, particularly
to sales finance companies, in capital market borrowing
by State and local governments, in mortgages (at banks as
well as at other lending institutions), and in consumer
credit (also substantial at banks).
Bank loans on
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securities showed only a small increase.
The Treasury, on
balance, was a supplier of funds to the economy in June.
The surplus, resulting from June tax receipts, was exceeded
by retirement of debt, including tax bills used to cover
income tax payments.
In July, however, new borrowings of
$5 billion will exceed the cash deficit and net retirements
of savings bonds.
Credit demand pressures, together with limitations on
the availability of reserves, have resulted in further
interest rate increases.
Long-term interest rates have shown
little
further change since mid-June, except for a pronounced
rise in yields on municipal bonds reflecting the large volume
of recent new issues in this area. The sharpest increases
have been in yields on issues maturing in from six months to
about five or six years, reflecting in part additional
Treasury offers of bills in the 6- to 12-month area. On the
basis of actual effective yield to purchasers of the new
bills, it may be said that the one-year rate is now about
4-1/2 per cent. Issues in the 4- to 6-year area are selling
at higher yields. At the same time yields on 90-day bills
have actually declined, as a result of the desire of
purchasers to maintain liquidity, together with a reduction
in the current supply of issues in this area through redemption
of tax bills in June.
The further pronounced increases in interest rates, to
gether with the leveling out of the money supply, might raise
some question as to whether current credit policies are unduly
restrictive, or might at least induce complacency as to the
effectiveness of these policies in restraining expansion.
Before any such views are accepted, however, the situation
needs further analysis.
place, as already pointed out, demands for
In the first
credit from the private sector are so great that any increased
availability of reserves would be quickly transmitted into
additional credit and an increase in the money supply. Funds
for such demands as banks now meet are obtained by selling
Government securities and thus absorbing other supplies of
The rise in interest rates
funds without creating new money.
is an evidence of these demand pressures. Any attempt to
prevent rising rates would result in further credit and
monetary expansion.
Another reason why the slackening or halt in the money
supply expansion is no reason for complacency or relaxation
of restraints is that the economy in general remains very
liquid because of the growth in liquid assets other than
demand deposits and currency, i.e.,in various forms of
money substitutes. Although the growth in time deposits at
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commercial and mutual savings banks has slackened in the
past year, it is still at least normal and the total
amount outstanding is quite large. Shares in savings and
loan associations have recently shown an accelerated
increase. In addition, savings and loan associations are
borrowing from the Home Loan Banks to expand mortgage loans
even more rapidly than their savings shares, and the funds
for the purpose are being raised by the Home Loan Banks in
the short-term market.
Of prime importance as a medium of liquidity has been
the increase in holdings of short-term Government securities
by nonbank investors. The increase in the public debt in
the past year, and also in the past two and three years, has
been in issues maturing in less than five years, with a
large part in the one-year maturity area. Although bank
holdings of Government securities have declined sharply in
recent months and are now only a little larger than in 1957
and 1956, it cannot yet be said that the financing of the
deficit has been entirely noninflationary.
Many of the
securities are held as liquid assets--as money substitutes
not as the investment of savings.
The bulk of the increase
in the debt has been absorbed by corporations and by
miscellaneousinvestors, which probably view their holdings
as liquid assets.
Although business holdings of liquid
assets have increased, more recently their less liquid
assets such as receivables and inventories have also been
rising, as have their current liabilities, and their
liquidity ratios are now declining.
Businesses may soon
need to draw upon their liquid assets in order to finance
further expansion.
The task of getting the large liquid holdings of
lies
securities absorbed into the savings structure still
ahead. It will continue to be a major problem of refunding,
even after the total outstanding debt ceases to expand. It
remains to be seen what level of interest rates will be
required to accomplish the desired funding of this large
floating debt. In any event the rate must be established
by the market as effort is made to accomplish a refunding
and not be predetermined on arbitrary standards. This
country now faces a problem that has created serious
difficulties in many other countries in handling a large
floating debt.
In the meantime, the existence of these money substi
tutes which can be shifted more or less readily in the
market lessens the needs for the creation of additional
money in the narrower sense of demand deposits and currency.
Such shifts facilitate increases in the activity of existing
7/7/59
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money.
The task of the System is to guard against the
creation of additional money that will provide an undue
stimulus to the economy. Until there is evidence of
inadequate growth in output and employment or of a broad
weakening in commodity prices, restraint on expansion of
bank credit will be in order. The degree of restraint
that has prevailed during the past month would seem to
be about the right amount; it probably does not need to
be tightened under the circumstances, nor should it be
lessened.
The immediate task ahead is to provide first
the
reserves temporarily needed for bank underwriting of the
new Treasury bill issues being sold this month. A large
part of these needs has been met by System operations in
the past week, but some further purchases will evidently
be appropriate during the next week. After that, opera
tions may be relatively small or negligible until late
August, when another Treasury financing is scheduled, and
in September when holiday currency needs and seasonal credit
demands will have to be accommodated.
At the request of the Chairman, Mr. Marget commented substantially
as follows with respect to the balance of payments situation:
I would only emphasize a few of the conclusions to be
drawn from some of the figures presented by Mr. Young.
The main one is that although gold outflow continues to be
markedly less than it was at this time last year (in June,
for example, foreign countries bought only about half as
much gold as they did in June 1958), the figures for gold
and dollar outflow-over a billion dollars in the second
quarter--suggest that our balance of payments performance
is still very disappointing. This is confirmed by our
In May, for example,
direct figures for exports and imports.
the value of our exports was not significantly greater than
In that month, in other words,
the value of our imports.
our "export surplus," in one sense of the term, virtually
vanished. If this were to continue, it would mean that most
of our private capital export and our aid programs would
result in an equivalent outflow of gold and dollars. One
hopes that this will not in fact continue; but the truth
is that the improvement in our over-all balance of payments
for which we have been hoping has not yet put in an
appearance.
7/7/59
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Mr. Hayes presented a statement of his views on the busi
ness outlook and credit policy substantially as follows:
The current business picture continues decidedly
strong, but there is as yet no evidence of a run-away
boom.
The mild spottiness which has shown up here and
there in recent statistics-notably a decline in new
orders and a levelling off of construction awards,
housing starts, and inventory accumulation--is to be
expected after many months of rapid advance.
While the steel strike threat represents a major
uncertainty, there is little
likelihood that it could
cause more than temporary hesitation in the upward
business movement.
Current estimates of steel inven
tories suggest that the accumulation in the first
half
of this year has not been as large as the steel-using
industries had sought to achieve and that inventories
are significantly below those of mid-1956. Thus a
prolonged shutdown would presumably pinch more severely
than in 1956, and the poststrike rebound could be even
sharper than in that year.
Retail sales are running about 10 per cent ahead
of a year ago, whereas personal income is about 7 per
cent ahead.
The sharper gain in consumption appears
to be mainly an outgrowth of more active use of consumer
credit rather than any fall-off in savings in terms of
liquid assets. On a seasonally adjusted basis, the May
increase in total consumer credit was at an annual rate
of $6.5 billion, just about equal to the rise for the
full year 1955.
It seems to me that the trend of
consumer credit from here on will bear very close
watching.
Export figures for May showed some improvement,
possibly reflecting economic gains abroad-but with
imports also up, there was no appreciable change in the
aggregate of gold sales and additions to foreign dollar
holdings.
encouragingly steady,
The price indices are still
but there is no ignoring the possibility that stronger
pressure may be building up in various industries either
because of demand nearing capacity limits or because of
diminishing productivity gains and a consequent growing
Fortunately there are powerful offsetting
cost push.
influences, including monetary and fiscal restraint,
some continuing progress in productivity, the discipline
of foreign competition, and keener public awareness of
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the need to curb inflationary pressures. The steel
settlement can of course have a crucial influence on
general price trends.
Turning to bank credit developments, we find bank
loans continuing to expand vigorously in May and June.
The increase in total loans at all commercial banks in
May was again a postwar record for the month. Again
the gains were spread among business, consumer, and real
estate loans. With the banks continuing to liquidate
holdings of Government securities rapidly in the past
two months, the gain in the money supply has been held
to modest proportions--an annual rate of about 2-1/2
per cent in May and in the first 5 months of 1959.
Growing bank illiquidity contrasts with improving
liquidity of corporations and possibly even of consumers,
despite the sharp upward trend of consumer credit.
A full schedule of Treasury financing will complicate
our policy decisions over the coming months. It is now
expected that some $2 billion of cash must be borrowed
before mid-August, in addition to the sizable August re
funding to be announced later this month. Thus it will
be at least 5 or 6 weeks before we are faced with a so
called "free period" for credit policy.
It seems to me that the healthy tone of the economy
and the ebullience of credit demands provide ample
justification for the present degree of credit restraint.
However, I would not like to see any intensification of
the restraint in view of the major steel uncertainty as
well as the Treasury situation. For the next three weeks,
therefore, I think we should pursue our present policy,
with the usual leeway for the Manager to be guided by the
feel of the market. By the same token there should be no
change in the discount rate or in the directive.
Over the longer term, I can see the possibility of
serious policy problems arising, for example, if corpora
tions should be unable to keep on absorbing the continuing
flow of additional short-term Treasury offerings, and
particularly if they should begin to liquidate Government
securities on balance. Moreover, the Treasury's financing
operations are forcing progressive upward adjustments of
This trend may lead to
short-term market interest rates.
a further rise of the prime rate, especially if the yield
on long Treasury bills rises above the 4-1/2 per cent
mark, and may also eventually make a discount rate change
imperative even if the "free period" for action on our
part is not as long as we should like. That, however,
is a problem for consideration at some future meeting.
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Mr. Irons said that the Eleventh District economic situation
continued strong, the only problem area being in
dustry.
Allowables in
the petroleum in
Texas had been cut back to nine days for July,
and he did not anticipate a substantial or quick increase.
Stocks
were still large, particularly some product stocks, and it appeared
that the oil industry was likely to continue to have problems for
some time.
While there had been a slight tapering off in residential
building, construction was still
moderate and might be temporary.
high.
In all
The current declines were
other areas, including
employment and retail trade, the advance in
activity had continued,
and at a rather substantial rate.
Loan demand, Mr. Irons said, was extremely strong and had
been developing at a time when bank loan ratios were already high.
An increasing amount of borrowing from the Reserve Bank was being
noted.
Until about two weeks ago, the Dallas Bank's share of total
member bank borrowings had been around 3 to 3-1/2 per cent, but more
recently it
had increased to about 7 per cent of the System total,
with rather steady and increasing borrowing on the part of the
larger city banks.
Deposits had been rising a little.
Another
development of concern to the district banks was the recent increase
to 4 per cent in
associations.
the rate of dividends paid by savings and loan
Some bankers felt that in the circumstances they
should be permitted to pay more than 3 per cent on time and savings
deposits, while others would not care to pay more.
As yet, it
was
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7/7/59
possible to gauge the effect of the action by the savings and loan
associations.
An indication of tightness in the position of the
banks was the fact that there was already some borrowing at the
Reserve Bank by West Texas banks in
of the cotton crop.
connection with the financing
Usually, those banks would begin to borrow
around the end of July or the first
of August, and then continue
to borrow steadily or intermittently until about the first
October.
of
In summary, the banks in the Eleventh District were not
very liquid at the present time, whereas nonbanking corporations
seemed to have a high degree of liquidity.
Among businessmen there
was general optimism as to the advance of economic activity, with
perhaps a tinge of concern that the situation might get beyond
control.
As to policy, Mr.
Irons said that the period just ahead
seemed likely to be a difficult one, as did the longer-run period.
Continuation of the present degree of restraint seemed appropriate
in terms of the economic situation, and he did not see how greater
restraint would be feasible at present in view of Treasury operations
in
On the other hand, one could not justify relaxation on
prospect.
an economic basis, for any tendency to ease would quickly find the
reserves made available put to effective use in
of credit.
It
further expansion
seemed desirable to continue the present policy
with considerable leeway given to the Manager of the Account, who
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7/7/59
should try to avoid an appreciable change in
Mr.
the degree of restraint.
Irons agreed with Mr. Hayes that there might be substantial
problems over the next few months due to the Treasury situation and
heavy credit demands.
Mr.
Mangels said that, although there were variations between
industries, most recent Twelfth District figures reflected a continua
tion of advance in
unemployment in
over-all economic activity.
At the end of May,
California stood at 4.2 per cent; while the percent
ages were somewhat higher in
Oregon and Washington,
respectively, improvement was noted in both States.
5.4 and 6.8
Retail trade
continued to increase and automobile sales continued at high levels.
For the past three weeks,
Mr. Mangels said, Twelfth District
bank loans increased $160 million, spread over all
categories of
loans, while Government security holdings were down $112 million.
Loan demand was very strong and was expected to continue strong
through the remainder of this year.
Considerably more emphasis was
being placed by the management of banks in
instructions to their
loan officers to be more selective with respect to applications,
although one large bank indicated that the volume of real estate
loans had about reached a peak.
Demand deposits showed virtually
no change during the past three weeks, while savings deposits were
up.
One large bank reported that the June increase in
accounts was the largest in its
history.
savings
Borrowing at the Reserve
7/7/59
-18
Bank had been rather consistent and at times quite heavy, although
borrowings fell to a total of $44 million last Thursday.
District
banks were substantial net purchasers of Federal funds last week,
and it
was estimated that net purchases this week might be around
$500 million.
Some bankers had commented recently to the Reserve
Bank that they must sell more Government securities, although they
did not like to sell because of the losses involved.
Mr. Mangels indicated that he concurred in the views expressed
by Messrs.
Hayes and Irons with respect to open market operations
during the coming three weeks.
Mr.
in
Deming reported that the upswing in economic activity
the Ninth District continued strong.
Employment continued to
improve, with the June level estimated to have passed the prerecession
high, although unemployment,
well above 1957 figures.
been strong in
because of labor force growth, remained
Retail sales, including automobiles,
recent weeks,
had
electric power consumption was up
sharply, farm cash receipts were running about 5 per cent ahead of
last
year, and the general business tone was one of optimism.
Actually, the optimism among businessmen seemed to have grown much
stronger in
however,
the past couple of weeks.
There was some evidence,
that the rate of economic growth in the district might
slacken in
the third quarter, with agricultural income becoming
less favorable relative to a year ago and the pace in mining and
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7/7/59
construction activity settling down a little.
There was evidence,
too, that Federal Government expenditures in the district might
lessen somewhat as present large contracts were fulfilled.
Drought
over much of the district this spring had practically insured that crops
would be smaller than last year; rainfall and temperatures from now
on would have to be better than average to insure a normal crop in
1959.
General rain across the district in
late June came just in
time to check serious soil moisture deficiencies in much of the area.
Mr.
and country,
Deming said that Ninth District member banks, both city
continued to lose liquidity during May,
more rapidity than had been the case nationally.
apparently with
In June, the ratio
of loans to deposits continued to rise at city banks.
A more rapid
proportionate increase of loans than of deposits had raised the ratio
at the city banks, while at the country banks a decline of deposits
coupled with additional loans caused the ratio to rise.
Mr.
Deming commented that he had no difference of opinion
with the prescription for policy stated by those who had spoken thus
far.
Mr. Allen stated that Seventh District businessmen continued
quite optimistic.
A recent roundup of views by a large district bank
indicated that expectations in most lines were even more optimistic
at midyear than last December, the exception being petroleum, for
which the appraisal was revised from "good" to "fair."
Employment in
7/7/59
-20
the Chicago area continued to strengthen,
one evidence being the
amount of advertising for "help wanted."
The lineage of such ads
in
four major newspapers in
June showed an increase for the sixth
consecutive month and was 131 per cent above the recession low in
April 1958.
This situation was reflected in
being experienced by the Reserve Bank in
the increasing difficulty
recruiting acceptable
employees for clerical jobs.
One large steel company estimated
production for the country at
6
4 million tons during the first
half
of 1959, and at 51 to 53 million tons during the second half if
was no strike.
there
The estimated total for the year of about 116 million
tons would compare with 85 million tons in 1958 and 112 million tons
in 1957.
Consumer credit,
role in
the retail
Mr. Allen said, was playing an important
trade picture, as indicated in
from the Board's staff.
the memorandum
The personal "overdraft" credit lines
offered by an increasing number of banks appeared to be popular,
one large Chicago bank reporting that it
had $500,000 outstanding
three weeks after inauguration of the plan.
The average line of
credit granted was close to $2,000, while the average amount
borrowed was around $700.
greatly in
Residential construction activity varied
the Seventh District.
Chicago area during the first
Building permits issued in
the
five months were up 54 per cent over
early 1958, but Milwaukee's gain for the same period was only 5 per
cent.
For the first
increase.
four months, Detroit showed a 33 per cent
7/7/59
-21
Mr. Allen went on to say that recent district banking data
reflected strengthening demands for credit by businesses and indi
viduals, with a continued tendency for the impact to fall somewhat
more heavily on banks outside the central money markets.
still
There was
no evidence of sustained reserve pressure at the large money
market banks.
The basic reserve deficit of the Chicago central
reserve city banks had not been unusually large and had improved
in the past two weeks.
purchases.
Last week, sales of Federal funds exceeded
Borrowing at the Chicago Reserve Bank by reserve city
and country banks had varied little over the past few months, but
two large Chicago banks indicated recently that their own accommoda
tions to country banks had reached the point where they were telling
country member banks that they should do their borrowing at the
Reserve Bank.
tight.
This, of course, had happened before when money was
When it was easy,
the large city banks in the district urged
the country banks to borrow from them on attractive terms.
Mr. Allen said he was glad that Mr. Thomas had set forth the
reasons why System policy should not be considered unduly restrictive
and that he found himself in
agreement.
All things considered, how
ever, he felt that the degree of restrictiveness had been sufficient.
Like those who had already spoken, he believed that it
should be
continued at about the same level.
Mr. Leedy reported that Tenth District conditions continued
to be favorable.
The district wheat harvest was nearing completion,
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7/7/59
with an estimated yield 23 per cent less than last year, when the
crop was unusually large.
This meant that this year's crop would
be about 25 per cent greater than the average of the past 10 years.
Pasture and range conditions remained satisfactory except in
area west of the Continental Divide.
a small
Cattle slaughter was below last
year's levels, indicating a continuation of the rapid build-up of
cattle numbers that was now becoming the subject of some comment
within the livestock industry.
further improvement,
all
The unemployment picture showed
States in
the district except Missouri
registering levels of insured unemployment as of June 13 below
those recorded three weeks earlier.
ment in
all
The rates of insured unemploy
of the States were below the national average.
In May,
construction contract awards were 27 per cent above last year, but
for the first
five months of the year contract awards reflected
exactly the same percentage of increase as for the nation as a whole.
During the four weeks ended June 27,
and for the year to date,
department store sales were 10 per cent above year-ago levels; during
the period since the first
of this year only the Seventh and Twelfth
Districts showed increases equal to or in
excess of that in
the
Tenth District.
Mr.
Leedy went on to say that Tenth District banks continued
to experience an extremely heavy demand for credit, largely in the
business and consumer loan categories but with considerable strength
also in
real estate loans.
This had been true both at weekly
7/7/59
-23
reporting banks and at country member banks, with strong demand
also
for agricultural loans at the country banks.
There had been some
liquidation of investments, including Government securities, but
analysis of the principal borrowers at the Reserve Bank indicated a
reluctance to liquidate Government securities on account of price
declines.
Average daily borrowings at the Reserve Bank continued
high and were slightly over $124 million during the three weeks ended
July 1,
compared with $118 million in
Mr.
the three weeks ended June 10.
Leedy said that he had no variation to suggest from the
views already expressed as to policy.
situation, it
Furthermore,
Because of the Treasury
appeared that the System was pretty well boxed in.
the economic picture seemed to indicate that the policy
the System had been following was the proper one for the period
immediately ahead.
During the course of Mr. Leedy' s comments, Chairman Martin
was called from the room.
Mr. Leach stated that the broad advance of business activity
was continuing in the Fifth District.
Further over-all gains in
nonagricultural employment and manufacturing man-hours were achieved
in
May despite slight declines in West Virginia, where insured
unemployment was already the highest in
the nation.
In the rest of
the board.
the district, increased job openings occurred almost across
for a shorter
The annual vacation shutdown of the textile industry,
period than in
the last two years, found mills with substantial
7/7/59
-24
backlogs of unfilled orders, low inventories, and firm or rising
cloth prices.
Substantially increased appropriations for textile
plant and equipment reflected the improved situation and prospects
in
the industry.
rose sharply in
New orders received by district furniture makers
May,
and reports of the June furniture market
indicated continued improvement.
to a peak for the year in
the first
Bituminous coal production rose
three weeks of June and was
slightly higher than a year earlier, although well under the
comparable period of 1957.
Bank loan demand, which had been strong
in recent months, was as strong or stronger in
June.
Daily average
borrowings from the Richmond Reserve Bank continued to increase in
June and were at the highest level of any month since December 1952.
Mr.
Leach said that he saw no reason for an immediate move
toward further restraint and that he felt
clearly called for an even keel policy.
of the present degree of restraint was in
Mr.
the Treasury financing
This meant that continuation
order.
Mills said that, as he viewed it,
there were two con
trasting ways of interpreting the economic material submitted by
the staff.
place in
The first
way was to regard the pause that had taken
the upward movement of some economic factors as a natural
development stemming out of the earlier expansive push upward.
The second way was to regard that pause as the result of cumulative
pressures that had been initiated earlier by System policy actions
and would tend to accelerate unless there was some modification of
-25
7/7/59
policy.
Personally, he leaned toward the second interpretation.
He
was of the opinion that at this juncture, when the Treasury had
already been to the market and would come to the market again to
morrow, and those operations demanded the injection of reserves in
support of commercial bank tax and loan accounts, an opportunity was
afforded to modify unobtrusively the penetration of System policy and
the pressure that had been applied to restrict credit.
In other words,
the reserves that must now be supplied might very well be left at the
disposal of the commercial banking system for a longer period than
had been permitted heretofore as a means of granting some relief from
the pressures that System policy actions had generated.
Along those lines, Mr. Mills said, he was concerned by the
fact that the marginal increment in the total volume of Federal Re
serve credit outstanding, as compared with a year ago, could be
accounted for by an increase in borrowings at Federal Reserve Banks.
He could not believe that that was an entirely healthy situation,
particularly when there appeared to be a growing trend toward con
tinuous borrowing.
This raised the point that if
Regulation A,
Advances and Discounts by Federal Reserve Banks, was to be adhered
to as a guide by both the Reserve Banks and the commercial banks,
it would be necessary at some point to police the borrowings of
the banks more strictly than in the past.
Where reliance was being
placed on the reserves obtained through borrowings at the Reserve
-26
7/7/59
Banks as the basis for such expansion of Federal Reserve credit
as had been permitted, the question that arose in his mind was
whether the time had not come when some portion of the reserves
provided through the discount window should be provided, in
substitution, by the provision of reserves through open market
operations.
Unless such a course was followed, there was a
possibility that the commercial banks would be compelled to divest
themselves of Government securities even more rapidly, which would
be to the detriment of the stability of the Government securities
market.
Therefore, as he had indicated, it
was a matter of concern
to him that reliance was being placed on the discount window as
the source of such reserves as had been supplied up to this point.
Mr.
question in
Mills said that this raised one further theoretical
his mind, which had to do with the discussion of
administered prices in
fields.
the industrial, commercial,
and commodity
Where supply and demand were the two factors that in
their interaction expressed the over-all level of interest rates,
it
must be borne in
that is,
mind that in controlling the supply of credit,
the availability of credit, the System was in
a sense
administering a price for credit.
The System has the last voice, Mr. Mills pointed out, in
influencing the rate of interest that conditions all credit opera
tions throughout the entire economy.
That was a factor the System
-27
7/7/59
must face up to at the present time.
The pressure of System policy
and a continuing divestment of Government securities out of com
mercial bank portfolios would tend toward further deterioration of
the Government securities market and would deter investment on a
larger scale on the part of investors who, he was convinced, would
come into that market if
there was a semblance of stability in
price of Government securities and in
the
the trend of interest rates.
At this point Chairman Martin returned to the room.
In further comments, Mr. Mills said that the type of System
policy pronounced through the Desk at the present time would, as he
saw it,
compel a further divestment of Government securities out of
commercial bank portfolios in
order to provide funds with which the
banks might meet the loan demands they were now facing.
As Mr.
Hayes
and others had pointed out, a period was now being entered when there
would be a pronounced seasonal demand for credit, a legitimate
demand that the System had historically satisfied through the pro
vision of reserves.
It was his firm belief that this seasonal demand
for credit must and should be met through supplying reserves by way
of open market operations,
and that a fortunate opportunity had
presented itself, because of the Treasury financing operations, to
supply reserves without creating the impression that there had been
any major change in the direction of System policy.
This policy
should continue to be one of restraint, but restraint expressed in
a less pronounced degree than had been true in the past several weeks.
-28-
7/7/59
Mr. Shepardson said there was a basis, of course, for the
point of view Mr.
Mills had expressed.
His own feeling, however,
was to the contrary and was in
line with the views expressed thus
far by others who had spoken.
The economic situation as presented
this morning seemed quite clear, being one that reflected the
continuing pressures of expansive growth.
and the problem of Treasury financing, it
In view of those pressures
appeared that there was
nothing to be done at the moment other than maintain the current
degree of restraint.
While he agreed with Mr. Hayes that there
might be a changed situation within the next few months,
moment he would suggest no change in
Mr. King said it
present time in
at the
the present degree of restraint.
was his opinion that the moderation at the
certain of the forces of economic activity that had
been increasing reflected the restrictiveness of monetary policy.
In his opinion, the restrictiveness applied up to the present time
had been desirable and in
an appropriate amount.
On the other hand,
he did not believe that greater restraint would be appropriate at
this time.
An even keel policy, with net borrowed reserves at a
level of about $500 million, seemed to him the best policy to follow
for the immediate future.
He had the feeling that too many changes
in policy on the part of the Open Market Committee and the Board of
Governors were generally undesirable from the standpoint of the
public, which he felt
alarm.
It
tended to view frequent changes with some
was his view that to fix a policy and continue it
as
long as possible contributed to stability more than frequent changes,
7/7/59
-29
and with that in mind he would approach a change in policy with
more concern than some others might approach it.
contacts and observation, it
was now under considerable,
From personal
was his opinion that the economy
and he felt
desirable, pressure.
The
fact that the increase in the money supply since last December had
been limited to about 2 per cent offered an indication that System
policy was having the desired effect.
With the growth in
supply having been limited to that extent, it
the money
appeared to him
appropriate to continue the present policy.
Mr. Fulton reviewed developments in connection with the wage
negotiations in the steel industry and referred to the principal
issues at stake.
work stoppages,
capacity.
He noted that, despite some wildcat strikes and
operations currently were at about 83 per cent of
In the rubber industry, notice had been given by the
union that the current contract would be opened up for negotiation
on the first of August, and negotiations in the aluminum industry
also were scheduled for August.
With regard to steel inventories,
it
had been said that the auto industry was carrying its
in
the form of approximately 900,000 new cars.
strike in
the steel industry, it
inventory
In the event of a
appeared likely that the automobile
manufacturers would close up rather quickly for the model change
over period.
Construction in
the district was at a rate about 8
per cent below year-ago levels, with the decrease accounted for
largely in
heavy engineering contracts.
Also, a lot of things
7/7/59
-30
that were in
progress last year and early this year, such as road
construction, had now been completed.
had leveled off, although still
Residential construction
at quite a high rate.
was gradually moving downward, although there were still
Unemployment
a few areas,
including the coal regions, with substantial unemployment.
Retail
trade was at a level about 8 per cent above last year and autos were
selling quite well, about 30 to 35 per cent above last year.
A
tendency was noted toward lengthening of terms.
Mr.
Fulton went on to say that total deposits at weekly
reporting banks in
year.
the district were almost 5 per cent under last
This, together with the intensive demand for loans, had
placed considerable strain on the banks.
The Reserve Bank had
talked with member banks that were getting into a continuous
borrowing position, and the rate of borrowing at the Reserve Bank
had tapered off recently.
Borrowings were presently only about 7
per cent of the System total, whereas earlier they had been running
from 12 to 14 per cent of the total.
Mr. Fulton regarded the present degree of restraint as
appropriate and felt that it should be continued.
However, he
thought a look should be taken to see where the Federal Reserve
would want to be when fall came; that is,
to see whether it might
be appropriate to consider an increase in the discount rate, a move
which he noted had sometimes been made in the months of August and
7/7/59
-31
September in past years.
For the present, he believed it would be
appropriate to maintain the present degree of pressure and to leave
leeway for interpretation with the Desk.
Mr. Bopp said that developments in the Third District were
similar to those reported for the nation as a whole.
unemployment continued at a
Although
omewhat higher level than nationally,
recent developments as to employment and unemployment were favorable,
reflecting widespread improvement among durable and nondurable goods
industries and also from a geographical standpoint.
Every area in
the district had shown some improvement, although in some cases the
improvement was from a position of considerable weakness.
Total
construction contracts were down a bit, the decline being almost
exclusively in nonresidential construction and in utilities.
The
market for new homes continued to be good but appeared to be weakening
somewhat.
The typical rate on conventional mortgages had now advanced
to 5-3/4 per cent and high grade VA-guaranteed mortgages written under
the terms of the new legislation permitting higher rates were ex
pected to sell at about a 3 point discount.
While there was a
strong demand for credit, reserve city banks were under less pressure
than last week.
As to policy, Mr.
Bopp said that he also would favor con
tinuing the present degree of restraint.
in
He would favor no change
the discount rate or in the policy directive.
-32
7/7/59
Mr. Bryan said there appeared to be nothing in the Sixth
District that needed to be commented upon at this time, for
developments were similar to those reported from other parts of
the country.
The demand for credit at commercial banks and at the
discount window was heavy.
Continuing, Mr.
Bryan said he found himself convinced that
System policy had been exerting a considerable effect.
He gathered
as much from comments of bankers and from some of those who had
endeavored to borrow.
In talking recently with a reserve city bank
that had been a rather large and persistent borrower at the discount
window,
he was told that the bank's executive committee had met that
morning and turned down all
it.
Upon inquiry,
it
of the 14
loan applications presented to
was indicated to him that if
the bank had been
in better supply of funds, probably about half of the applications
would have been approved.
Accordingly, he shared with Mr. Mills the
general feeling that perhaps some of the barely visible slowdown in
the rate of economic growth had been the result of System policy, and
it
seemed to him that the System must be alert against overdoing
restraint.
While the evidences of slowdown at the moment did not
seem to him to warrant any notable relaxation of restraint, he
believed that the System could very well keep the money supply
growing at some modest rate, perhaps around 2-1/2 per cent.
He
agreed with Mr. Thomas that under present circumstances any
additional reserves would promptly be converted pari passu into an
7/7/59
-33
increase in
the money supply, but he felt that the System must be
careful not to contribute to a crisis in
Mr.
Government finance.
Johns commented that he had reviewed developments in the
Eighth District rather infrequently at Committee meetings, not because
the district was colorless but because it
seemed to present almost a
scale representation of the behavior of the national economy.
With
respect to policy, Mr. Johns said he found himself in agreement with
the view that existing policy should be continued for the next three
weeks.
If
he correctly understood Mr.
Thomas, he would agree with
him that maintenance of existing policy should not be taken to mean
that the forces of demand now at work in
the economy should be
prevented from bringing about or resulting in
interest rates.
If
some further rise in
that situation occurred, he was inclined to think
that the rise in rates should be permitted.
Hayes and others who,
He would agree with Mr.
although recognizing that a discount rate change
at this time would be premature,
nevertheless felt that it
would be
prudent to be alert to the fact that the time might not be too distant
when it
would be necessary to take a look at the discount rate.
Mr. Latham stated that the general picture in the First
District looked good.
The pickup in business had canceled a good
part of the recession losses and in
beyond prerecession levels.
2
some segments had now expanded
Nonresidential building contracts were
4 per cent above a year ago and residential contracts up 46 per
cent.
Nonagricultural employment continued its
recovery trend in
7/7/59
-34
May, with manufacturing employment recording its
since 1950.
week in
In all
best April-May gain
six Northeastern states, the average factory work
May exceeded 40 hours, with weekly earnings at record levels
except in
Maine,
store sales in
were still
and electric output continued to expand.
May registered a
5
Department
per cent gain over a year ago but
behind the 1956 and 1957 rate.
Inventories at department
stores reflected a modest rise, credit transactions had been on the
increase, and collection ratios were off slightly.
Consumer instalment
credit was up, with 175 reporting lenders showing a 19 per cent increase
in
new credit in
May over a year ago.
Commercial and industrial loans
outstanding on July 1 were 10 per cent above a year ago and slightly
Nondurable goods manufacturers were making a
larger than in
1957.
good showing.
Shoe manufacturers were having an excellent year, with
retail
inventories at low levels,
and even the textile mills were
surprised by an order volume which would limit to some extent the
vacation shutdowns this year.
Mr. Latham reported that more and more bankers were expressing
concern about their continued ability to meet increasing credit demands.
In most cases, this concern was attributable to a reluctance to
liquidate securities on which there was substantial depreciation.
Another factor, particularly in
the vacation areas, was the delay in
deposit buildup as the result of an extremely wet spring.
Although
member bank borrowing was running approximately three to four times
greater than a year ago, it
was not as heavy as in
1957,
7/7/59
-35
Mr. Szymczak commented that he had little to add to what had
already been said at this meeting.
A slowup in certain sectors might
tend to stabilize the economy and prevent an inflationary trend.
However, two things were particularly important, as mentioned by Mr.
Mills.
First, the Government securities market apparently would go
through a most difficult period in July and August.
was the matter of borrowing by member banks.
Second, there
As he saw the picture,
the System would have to provide some reserves in the period ahead
in
order to continue its
present policy.
He would favor maintaining
policy about as at present, but he would keep looking at the over
all
picture, including the Government securities market and discounting
at the Federal Reserve Banks.
Mr.
Balderston said that to the extent System measures of the
money supply were accurate,
some comfort might be derived from the
fact that since last December the increase in the money supply
apparently had been at the annual rate of about 2 per cent and not as
large as estimated earlier by certain financial writers.
The most worrisome of our problems relate to Treasury
financing and the state of the bond market, Mr. Balderston said.
Between now and next January there seemed to be no period when
monetary policy would not affect Treasury financing operations
directly.
In that period it
appeared that the Treasury would have
to borrow at least $7 billion net, and that it
chiefly in
the short end of the market.
would have to borrow
This would cause short-term
7/7/59
-36
interest rates to continue to rise, which in turn would create an
inducement for corporation treasurers and others to pull down demand
deposits because the opportunities for short-term investment would
be so attractive.
Thus, the System was likely to be under severe
pressure during the next six months due to a combination of seasonal
demand for credit from private industry and the need for funds on the
part of the Federal Government.
As to the next three weeks, Mr.
Balderston said that he would favor continuing the present degree
of restraint.
Chairman Martin said that this would appear to be an easy
meeting from the standpoint of the Chair because obviously there
was no desire to change the directive or System policy. While he
could just let it go at that, he desired to express himself in
terms of the broader problem.
From the minutes of the preceding Committee meeting, which
he had been unable to attend, he noted that comments had been made
by several persons to the effect that any errors should be on the
side of restraint rather than ease.
Errors this time, he suggested,
ought to be on the side of ease rather than restraint, although he
would not want to see policy changed at all.
He felt that he would
not be discharging his responsibility unless he indicated to the
Committee that he felt the Government securities market was in a
critical state.
Here he was not talking about ghosts but about the
7/7/59
-37
actual situation, a situation complicated by the fact that every
move on the part of the System was being watched closely at the
present time.
The last thing he would want to suggest,
the Chairman said,
would be to ease System policy simply to obtain legislation to
eliminate the interest rate ceiling on Treasury bonds and to increase
the rates on savings bonds.
He had been under personal pressure
recently to indicate that the Federal Reserve might ease its
but he had not given an inch.
policy
However, looking at the pressures
over which no one has control, he felt it necessary to be careful
that the System did not conduct itself
in
a deliberate action to nettle people.
Interest rates were now a
major issue politically.
They might be made a national issue in
1960 or during the next few months,
sure whether it
a way that might look like
and at the moment he was not
would be possible to get a bill
rate ceiling through Congress.
on the interest
Again he emphasized that he was not
suggesting an easing of policy, but he thought the System must be
careful not to overdo the matter of restraint at a time when the
money market had a real bite in it.
The dealers, he noted, obtained
around $580 million of Treasury bills in
the auction yesterday,
so
they would be almost out of commission as far as the next bill was
concerned.
Some people in the market were now talking in
terms of
a rate of 5 per cent and the Treasury, which had been hoping for a
rate of 4-5/8, now knew the rate would be 4-3/4 or perhaps even
7/7/59
-38
4-7/8.
This situation was something to give one pause, and develop
ments were taking place in
an explosive way.
these movements always seemed to come.
That was the way that
In view of current short-term
market rates, the discount rate was way out of line and the System
was not in a position to change it
at this time.
Thus,
it seemed the
better part of prudence and wisdom for the System not to overplay its
hand on the side of tightness and for the Desk to be careful, in
maintaining an even keel, to supply reserves in such a way that the
System could not be accused of being niggardly.
In substance, he felt
that the current period was more critical than many people realized.
Referring again to the matter of interest rates, Chairman
Martin repeated that this was a big issue, as was the manner in which
the Federal Reserve conducted itself.
Personally, he was proud of
and he did not intend
the way the System had been conducting itself,
to give an inch in
of policy.
the way of making commitments regarding an easing
However, he did not want the System to be in
where people might say that if you gave it
ell.
an inch it
a position
would take an
At the moment the System was in the midst of a struggle to
prevent a writing of policy into the law, and if
bulge in
rates the System would be in
there was some big
danger of being accused,
although perhaps falsely, of having influenced the market.
Chairman Martin then referred to the saying he had used on
other occasions that the iron which breaks is
not as strong as the
7/7/59
-39
steel which bends.
In the present situation, neither the Desk nor
any other party could appraise precisely the pressures in
the market;
therefore, the Desk should be careful not to get in the position of
forcing the market unduly in order to maintain a given position during
a period that was acute and serious.
The consensus of the meeting, the Chairman noted, was clearly
for no change in policy and for no change in the directive.
consensus he concurred.
however,
With that
As to the technical operations of the Account,
he felt that extreme care should be exercised to see that the
System was supplying reserves during this period in a way that would
not subject the System to the criticism that it
was trying to make
things more difficult than necessary for the Treasury.
speaking, it
In a manner of
was a case of wanting to win the war, and the System
would not wish to put itself in the position of gaining one small
point at the risk of losing the war.
If
one could clearly determine
what the precise degree of tightness or ease might be, that was one
thing, but certainly no one around this table could gauge the situation
quite that accurately.
Summarizing, the Chairman said he merely wished to present the
matter to the meeting on the basis that he would not like to see any
change in the directive or in
System policy, but that he would like,
for want of a better phrase, to have any errors made on the side of
ease during the period of Treasury financing.
Mr. Hayes said that he was able to agree very easily with the
Chairman's point of view.
The Treasury had a most perplexing problem
7/7/59
-40
and must have the System's sympathetic attitude.
The Chairman's
suggestion, he said, was helpful in that connection.
Mr. Hayes then called upon Mr. Marsh for a statement with
regard to latest market developments,
and the latter reported having
been advised that the market had reacted sharply to yesterday's bill
auction.
For the auction tomorrow, the market was now talking of an
average issuing rate between 4.50 and 4.75 per cent.
This could put
the rate for a one year certificate as high as 5 per cent, allowing
for the difference between the discount rate on bills and true yield.
Mr. Marsh said this was something of a shock to him for he had not
thought that the market would take it
quite that hard.
Possibly the
reaction represented somewhat of a swing in the direction of over
and the views expressed might be somewhat extreme.
compensating,
However, they were such as to warrant definitely making any errors
of judgment on the side of ease.
Chairman Martin again injected a plea for that type of opera
tion, adding that he had talked last night with several people who
were well acquainted with the market and that there had been a real
shock in yesterday's Treasury auction.
System was in
In short, it
another critical period, one where it
to say that the situation would simply go away.
certainly not in
latitude in
financing.
appeared that the
was not possible
While he was
favor of easy money, he was in favor of a reasonable
open market operations during the period of Treasury
7/7/59
-41
Mr.
Szymczak said that he agreed wholeheartedly.
understood it,
Mr.
As he
Mills had stated the case just about the same
way, although Mr. Mills had added also the factor of seasonal
demands for credit.
Mr. Shepardson commented that he was one who at recent
Committee meetings had suggested that doubts be resolved on the
side of tightness.
today,
However,
in view of the situation that existed
he felt that a degree of caution on the other side was
justified and he would take no exception to the type of operation
suggested by the Chairman.
Chairman Martin then stated that, unless there was objection,
the policy directive would be issued to the New York Bank in
present form.
its
With no change in policy, he proposed that the Committee
agree that errors would be resolved on the side of ease during the
period of Treasury financing.
No objections were heard in
response to this statement by
the Chairman.
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:
To make such purchases, sales, or exchanges
(1)
(including replacement of maturing securities, and allow
ing maturities to run off without replacement) for the
System Open Market Account in the open market or, in the
7/7/59
-42
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 restraining inflationary credit
expansion in order to foster sustainable economic growth
and expanding employment opportunities, and (c) to the
practical administration of the Account; provided that
the aggregate amount of securities held in the System
Account (including commitments for the purchase or sale
of securities for the Account) at the close of this date,
other than special short-term certificates of indebtedness
purchased from time to time for the temporary accommodation
of the Treasury, shall not be increased or decreased by
more than $1 billion;
(2)
To purchase direct from the Treasury for the
account of the Federal Reserve Bank of New York (with
discretion, in cases where it seems desirable, to issue
participations to one or more Federal Reserve Banks)
such amounts of special short-term certificates of
indebtedness as may be necessary from time to time for
the temporary accommodation of the Treasury; provided
that the total amount of such certificates held at any
one time by the Federal Reserve Banks shall not exceed
in the aggregate $500 million.
At the request of the Chairman, Mr. Young commented on the
status of the Treasury-Federal Reserve study of the Government
securities market.
He noted that the material that had been distributed
to the members of the Committee and the Presidents not currently serving
on the Committee would constitute the first segment of the study; that
is,
the results of the consultations that had been held and a technical
study of the advantages of a dealer market versus an auction market in
Government securities.
This latter study was directly in
response to
questions raised by Senator Douglas at hearings of the Joint Economic
Committee earlier this year.
The Treasury, he noted, was interested
7/7/59
in
-43
having this pair of papers published in
advance of the hearings
by the Joint Economic Committee dealing with the subject of the
Government securities market which were to be held later this month.
To carry out such a schedule, it
would be necessary to send the
documents to the printer Friday evening of this week, which meant
that any suggestions would have to be received not later than
Thursday afternoon or Friday morning.
Chairman Martin then stated that any comments should be sent
direct to Mr. Young.
It
was agreed that the next meeting of the Federal Open
Market Committee would be held on Tuesday,
July 28, 1959, at 10:00 a.m.
7/7/59
-44
At this point (12:00 noon) the Chairman called for a session
of the Committee at which attendance would be limited to the following:
Mr. Martin, Chairman
Mr. Hayes, Vice Chairman
Mr. Allen
Mr. Balderston
Mr. Deming
Mr.
Johns
Mr. King
Mr.
Mr.
Mr.
Mr.
Mills
Shepardson
Szymczak
Bopp, Alternate for Mr. Erickson
Messrs. Bryan, 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.
Latham, First Vice President, Federal Reserve Bank
of Boston
Mr.
Marsh, Assistant Vice President, Federal Reserve
Bank of New York
Chairman Martin referred to the discussion at the afternoon
session of the meeting of the Federal Open Market Committee on March 3,
1959 concerning possible changes in procedures with respect to attendance
at meetings of the Committee and distribution of minutes and other
Open Market materials.
distributed (a)
Under date of July 2, 1959, the Secretary had
a memorandum from Mr.
Hayes dated June 11, 1959
regarding proposed changes in internal "security" arrangements,
(b) a
7/7/59
-45
memorandum from Mr.
procedures in
Deming regarding access to information and
handling Open Market and other information relating
to Federal Reserve policy, and (c) a memorandum from the Secretary
reviewing the procedures regarding attendance at Open Market meetings
and distribution of materials during the period 1936 to 1959.
Chairman Martin also noted that the Secretary had distributed under
date of July 6, 1959 a memorandum summarizing in
tabular form positions
indicated at the afternoon session on March 3, 1959 with respect to
attendance at Open Market meetings and access to Open Market minutes
and other materials.
He stated that it
appeared that the largest
group had appeared to favor a position that would continue substantially
the present procedure with respect to attendance at meetings and access
to materials.
He added the comment that this did not resolve the
question, and he felt it
would be desirable to attempt to arrive at
an understanding at this meeting as to the procedure to be followed
in
the future.
The Chairman then commented that his own views as to attendance
at meetings and access to materials had not changed from those ex
pressed at the meeting on March 3, 1959, although he had tried to keep
an open mind in
that meeting.
considering other suggestions that had been made at
By and large it
still
seemed to him that the advantages
of substantially the present procedure outweighed the disadvantages
both from the standpoint of operations of the Committee and from the
7/7/59
-46
standpoint of developing management personnel within the System.
His view in
this respect was not unalterable and he would be glad
to have a discussion of the several alternatives that were mentioned
in
Mr. Riefler's memorandum of July 6.
He then called upon Mr. Johns
for his comments.
Mr.
Johns noted that he was not present at the March 3 meeting,
at which the principal discussion of this subject had taken place.
He
had not availed himself of the privilege of submitting a memorandum on
the basis of what he had read in the minutes of that meeting, but had
he been present, he would have taken a position at that time, and he
now took such a position, favoring Alternative D of Mr. Riefler's
July 6 memorandum regarding attendance at Open Market Committee meetings;
that is,
he would continue substantially the present procedure, recog
nizing that some minor changes might be introduced.
Mr.
Johns said
that he shared Chairman Martin's view completely that the advantages
of the present procedure outweighed any possible disadvantages that
might be thought to exist.
Mr. Hayes stated that, having expressed his views in
his memo
randum of June 11, 1959, he would not go into the details of his
reasoning,
but that in
his memorandum he had taken a position which
he believed to be identical with the position indicated by Chairman
Martin as well as that of Mr.
Johns.
Personally, he believed the
advantages of the present procedure greatly outweighed any risks,
7/7/59
-47
and he would dislike to see any substantial change in this procedure.
Messrs.
Irons, Leach, and Szymczak indicated that they took
the same position as that already indicated.
In response to a question by Mr.
Szymczak as to whether he
wished to have a formal vote on the matter, Chairman Martin stated
that he did not want to limit discussion of the subject and that he
would be glad to hear any other comments regarding the procedure
under discussion.
Mr.
Balderston stated that this was not a question of choosing
between black and white
but he responded favorably to Mr. Hayes'
sug
gestion that the persons attending these meetings constantly give
attention to the care with which Open Market records, including minutes,
memoranda,
both in
and telegrams of daily telephone conversations were handled
the Board's offices and at the Reserve Banks.
In his view the
telephone call could, if
memorandum regarding the 11:00 a.m.
the hands of an agent of one of the financial organizations,
seriously embarrassing to the Committee.
prove
The minutes of the meetings
become less dangerous with the passage of time but in
stages should be closely guarded.
placed in
the initial
While he agreed that the present
procedure was one that unified the System's thinking and helped to
develop staff personnel,
cautions of the type Mr. Hayes had mentioned
in his memorandum should continuously be kept in mind.
might be given to abolishing the list
Consideration
of personnel authorized to have
access to minutes and other Open Market records,
since a list
7/7/59
-48
containing 70 names might be difficult to explain if
submitted to a critical group.
Mr.
it
had to be
Balderston said he was not
suggesting that the individuals who had been given access to minutes
at the proper time no longer have this privilege, but he was sug
gesting that such a large distribution list
for the minutes was
unnecessary.
Chairman Martin stated that he felt the discussion of this
subject had been most useful and that review of the procedure along
the lines suggested by Messrs.
It
Hayes and Balderston was desirable.
was incumbent on everyone participating in
these meetings to
realize that he had a very real responsibility to see that none of
the information was improperly used.
Mr. Leach said that, while he agreed with the continuation
of the present procedures,
he would like to express a different view
as to the relative importance of the minutes of the Committee
meetings.
The minutes represented the official record of the
Committee's discussions and current policy decisions,
he said, and
in his view they should be considered as strictly confidential.
They might well be restricted substantially to those attending a
meeting during the period between that meeting and the following
meeting of the Committee when a new policy--perhaps renewal of the
existing one--was authorized.
It might be acceptable after the
meeting at which the Committee again acted on a policy decision to
leave to the President of the Reserve Bank concerned judgment as
-49
7/7/59
to what access should be given to the minutes at his Bank.
case, it
In that
would not be necessary for the Secretary of the Committee
to continue the present record of those having access.
At Chairman Martin's request,
Mr. Sherman described the
procedure followed at the present time in preparing and distributing
minutes and other materials, noting that one copy of the preliminary
draft of the minutes of each meeting was mailed under double cover as
soon as completed to the President of each Federal Reserve Bank,
except that in the case of New York an additional copy was included
for thealternate member of the Committee at that Bank and another
for the Manager of the Open Market Account.
was made of the revised draft, and all
Similar distribution
materials relating to the
minutes and other Open Market matters were handled on a strictly
confidential basis.
In the Board's offices, the minutes and other
Open Market materials were distributed to the members of the Board,
the official staff members of the Committee,
and to other members of
the Board's staff who attended Open Market meetings.
Mr. Hayes said that he was sympathetic with the suggestion of
Mr.
Leach, but he believed the purpose could be accomplished if
each
President would stress that Open Market materials represented
confidential documents.
His feeling was that the matter of handling
the minutes of a current meeting could be left to the discretion of
the President at each Reserve Bank without trying to put down in
7/7/59
-50
exact terms the procedure that the President should follow even
with regard to the minutes of the latest meeting.
Mr.
Leach commented that his suggestion was intended to
make a better record and to make it
of the Committee to have a list
unnecessary for the Secretary
of persons having access to minutes
containing as many names as at present.
Mr.
Bryan said that he could not agree with the suggestion
that the handling of current Open Market materials should be left
to the discretion of the President of each Federal Reserve Bank.
His view was that the Open Market Committee was a statutory body
and that it
must exercise its
responsibility for control of these
materials.
Mr. Hayes explained that his suggestion was based on the
fact that some of the Presidents were members, that others were
alternate members,
and that each President had a responsibility
equivalent to that of a Committee member by reason of his attendance
at meetings of the Committee.
Mr.
Deming stated that he did not differ with the view that
attendance at meetings should follow the lines indicated, that is,
continue substantially the present procedure.
that it
He believed, however,
might be worth considering having every person who partici
pated in these meetings or who handled Open Market materials given
a full field security investigation.
This would provide at least
one answer to any criticism that might be made of the Committee's
procedure.
7/7/59
-51
Chairman Martin responded that this was a good suggestion
and that he would ask the Secretary to look further into it.
Mr.
Mills said he had a strong belief that Federal Reserve
policy at the right time should be fully open to research analysis
and study and to constructive criticism.
that, if
What he had in
mind was
there were no objection, he would like to give his records
of Open Market materials through calendar year 1957 to the Harvard
Graduate School of Business Administration to serve as source material
on which to develop a better insight into Federal Reserve policy
actions.
Chairman Martin responded that he believed this would be far
too recent a period for which to make such materials available.
There were too many people who were still
an emotional bias who would be involved in
living and who would have
such matters to consider
such a short term.
Mr. Hayes stated that, while he felt there should be strict
handling of current Open Market materials,
historical records.
At some time, in
he felt differently about
his view, it
became suitable
for material to be made available to others for study.
A very strict
control should be invoked over any current policy matter, but at some
time the basis for current policy should be made available for
historical analysis and study.
Chairman Martin stated that he would go along with the sug
gestion made by Mr.
Mills if
he put the date after which materials
7/7/59
-52
would not be made available at, say, 1932.
He was serious in
suggesting this date, he said, adding that he had been asked on
numerous occasions about discussions in
1951 and 1952 regarding
the Treasury-Federal Reserve accord and that anything like this
represented a too-recent period for making available these records.
To make available records of the recent past would inject into
policy considerations an influence that would be undesirable.
However,
he would repeat that records might now properly be made
available for the period up to the year 1932.
Mr. Hayes suggested that the question Mr.
Mills was raising
was a different one from that under consideration.
It
was a matter
that should be dealt with perhaps at another meeting and on the basis
of separate and special considerations.
Mr. Shepardson stated that as far as the current question was
concerned, he was in thorough accord with continuing a program along
the lines of Alternative D in the July 6 memorandum, that is,
continuing substantially the present procedure as far as records and
Open Market Committee minutes were concerned.
He did not think the
present procedure needed to be changed as to either the persons
attending the meetings or accessibility to records.
that a valuable suggestion had been made in
He also felt
trying to distinguish
between what were current records, perhaps from one meeting to
another as Mr. Leach had suggested, and those that were available
7/7/59
-53
for more widespread use.
He could not see that anything would be
lost by restricting the minutes of the most recent meetings as
strictly confidential to the President and his one adviser who
accompanies him to the Open Market meetings until after the next
succeeding meeting.
As far as general knowledge and training
problems were concerned, it
seemed to him that access to Open
Market records after the next meeting of the Committee was quite
sufficient.
As to the total number of persons having access to
records, he doubted that the Committee should be straining at a
gnat on its
top level staff who attended the meetings in view of
the large technical and clerical staff necessarily engaged in
processing Open Market materials.
exercise care in distributing its
He thought the Committee might
current records and would favor a
procedure such as that indicated whereby the current records would
be kept strictly confidential until after the succeeding meetings.
Chairman Martin stated that he gathered that the majority of
those present favored continuation of substantially the procedure
presently being followed with respect both to attendance at meetings
and to access to Committee records, with appropriate minor adjust
ments such as the one Mr. Shepardson had just referred to.
None of
those present indicated a different view.
Mr.
Bopp stated that as a matter of detail if
the telegrams
commenting on the 11:00 a.m. telephone conferences each morning were
to be handled only by persons who had had a full security clearance,
7/7/59
it
-54
would involve full field investigations for a large number of
telegraph operators throughout the System who were not presently
cleared.
These operators were carefully selected and instructed
to treat telegraphic communications in
in
Mr.
a confidential manner, and
Bopp's view this was sufficient for their handling the
11:00 a.m. wire.
Mr.
Johns concurred in
this view, adding that if
exception
were to be taken to the handling of the 11:00 a.m. wire by the
operators there were many other matters that would have to be
investigated on the assumption that the telegraph operators of the
Federal Reserve Banks would not respect confidential data.
Chairman Martin commented that it
to write a regulation of the type that Mr.
his view, this matter had to be in
was extremely difficult
Leach had suggested.
In
large measure one for administra
tive handling by the members of the Committee and other Reserve Bank
Presidents.
He proposed that the Committee dispose of the question
by accepting the alternative that would continue substantially the
present procedure as to attendance at meetings and access to minutes
and other Open Market Committee data, with any minor adjustments
that might be desirable for minimizing legitimate criticism that
could come from the handling of Open Market information within the
System.
In response to a question from Mr. King, he said that this
would include a check of the suggestion for having proper security
clearance for those handling Open Market materials.
7/7/59
-55
There was general concurrence with the Chairman's suggestion,
and it
was understood that the Secretary would proceed to review the
existing procedures in
but that no change in
the light of the discussion at this meeting
the general procedures now followed was
contemplated at this time.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1959, July 6). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19590707
@misc{wtfs_fomc_minutes_19590707,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1959},
month = {Jul},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19590707},
note = {Retrieved via When the Fed Speaks corpus}
}