FOMC Minutes
A meeting of the Federal Open Market Committee was held
in
the offices of the Board of Governors of the Federal Reserve
System in Washington on Tuesday, August 18, 1959, at 10:00 a.m.
PRESENT
Mr. Martin, Chairman
Mr. Allen
Mr. Balderston
Mr. Deming
Mr. Erickson
Mr. Johns
Mr. King
Mr. Mills
Mr. Szymczak
Mr. Treiber, Alternate for Mr. Hayes
Messrs. Bopp, Fulton, and Bryan, Alternate Members
of the Federal Open Market Committee
Messrs. Irons and Mangels, Presidents of the Fed
eral Reserve Banks of Dallas and San Francisco,
respectively
Mr. Riefler, Secretary
Mr. Kenyon, Assistant Secretary
Mr. Solomon, Assistant General Counsel
Messrs. Marget and Mitchell, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Molony, Assistant to the Board of Governors
Mr. Noyes, Adviser, Division of Research and
Statistics, 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. Wayne, First Vice President, Federal Reserve
Bank of Richmond
Messrs. Daane and Tow, Vice Presidents of the
Federal Reserve Banks of Richmond and Kansas
City, respectively
Mr. Anderson, Economic Adviser, Federal Reserve
Bank of Philadelphia
Mr. Coldwell, Director of Research, Federal
Reserve Bank of Dallas
8/18/59
-2Mr.
Mr.
Mr.
Gaines, Manager, Research Department,
Federal Reserve Bank of New York
Stone, Manager, Securities Department,
Federal Reserve Bank of New York
Brandt, Economist, Federal Reserve Bank
of Atlanta
Chairman Martin noted the attendance of Mr. Wayne in
of Mr.
Leach, Mr.
Tow in
absence of Mr. Young.
the absence of Mr.
Leedy,
and Mr. Noyes in
No objection being indicated,
and Noyes were invited to participate in
the absence
Messrs. Wayne,
the
Tow,
the meeting.
The Chairman then called attention to the fact that Mr. Thurston
had relinquished his duties as Assistant to the Board of Governors on
July 31, 1959, and that his service as Assistant Secretary of the Federal
Open Market Committee therefore automatically terminated.
The Chairman also reported that Mr.
Solomon had submitted his
resignation as Assistant General Counsel of the Federal Open Market Com
mittee effective September 1, 1959, in view of his transfer from the
Board' s legal staff to the Division of Examinations.
Thereupon,
was accepted.
Mr.
Solomon's resignation
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on July 28, 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
July 28 through August 12, 1959, and a supplementary report covering
the period August 13 through August 17, 1959.
have been placed in
the files of the Committee.
Copies of both reports
8/18/59
-3Mr. Rouse reported that the money market had remained tight
during the period since the last meeting.
Reserve positions at re
serve city banks had continued under pressure while the New York banks
experienced an increase in
pressure, as evidenced by the fact that their
basic reserve deficiency averaged well over $500 million during the past
three weeks.
Aggregate borrowings had averaged more than $1 billion
for the past two statement weeks, and might well average more than $1
billion in
the week ending tomorrow.
Borrowings had typically in
creased sharply on Friday of each week and had exceeded $1 billion on
every Friday since the week ending June 3.
Open market operations supplied $29 million reserves on balance
over the three weeks.
The Account purchased Treasury bills and made
some repurchase agreements early in
the period, but in the past few
days took advantage of opportunities to sell bills and allowed the
last of the repurchase agreements outstanding to run off last Thursday.
The rate on three-month Treasury bills, which had been running
at around 3.30 to 3.40 per cent in
mid-July, moved down to around the
3 per cent level shortly before the last meeting of the Committee and
stayed there until early last week, when it
began to rise under the
influence of the additional 91-day bills sold by the Treasury in
connection with its
cash financing program.
the average rate on the 91-day bill
was in
In yesterday's auction
was 3.42 per cent, about where it
mid-July, but about 42 basis points above where it
time of the last meeting.
was at the
The six-month and one-year bills, on the
-4
8/18/59
other hand, edged downward through most of the period, and it
was
only last Thursday that rates on these bills began to increase.
At
the close yesterday, these bills were at about the same level as at
the time of the last Committee meeting,
than in
mid-July.
but were considerably lower
As a result of these relative rate changes, the
unusually wide spread between the 91-day bills and the six-month and
one-year bills had narrowed substantially and the 91-day bill
had
been brought into a more customary relationship not only with the
rate on the other two bills but also with the discount rate.
One
aspect of the spread between the rates on the three-month and six
was that customer tenders submitted by the major New York
month bills
banks for six-month bills about doubled between the auctions of
July 27 and August 10, while customer tenders for the 91-day bills
fell
by 40 per cent.
tenders in
As a result, in
the August 10 auction customer
New York for the 182-day bills exceeded those for the
91-day bills by $20 million.
on short bills as low as it
Much of the demand which kept the rate
was until last week represented the storm
cellar demand that had been evident for several months.
In addition,
the liquidation of inventories brought about by the steel strike may
have been a source of demand for shorter bills.
Prices of Treasury notes and bonds moved higher over most of
the period, but a technical reaction set in
moved lower.
last Wednesday and prices
64
resisted this
The new 4-3/4 per cent notes of 19
reaction for a time.
Last Friday, for example, the issue gained
8/18/59
-5
nearly 1/
point to close at 101-10/32 bid, while the rest of the
market was declining.
Yesterday, however, the 4-3/4's turned around
and lost 6/32 as the rest of the market continued to decline.
the period as a whole the 4-3/4's of 1964 gained 3/
Over
point, while
prices of other notes and bonds, which until last Wednesday had
shown gains in
every issue, closed 3/8 point lower to 3/4 point
higher.
The corporate and municipal bond markets were firm during the
early part of the period in reflection of the improved atmosphere of
the bond markets generally.
In the past few days, however, attention
was focused on the growing calendar of forthcoming offerings and this
dampened the atmosphere somewhat.
Reserve projections of the New York Bank indicate that natural
market factors will absorb reserves over the next few weeks and that
in the absence of open market operations average net borrowed reserves
will increase to over $600 million next week and rise to the $800-$900
million range in the following two weeks.
The New York Bank learned
late yesterday afternoon that required reserves of country banks had
been revised upward by $43 million extending back to July 16.
information was received too late to be incorporated in
the projections
attached to the supplementary report of open market operations.
all
This
Hence
net borrowed reserve figures shown therein should be revised up
ward by $43 million.
Mr. Rouse commented that the Treasury was giving some con
sideration to raising the $200 million new cash which it
planned to
-6
8/18/59
raise in
next week's bill
auction by placing an additional $100
million in both the 91-day and the 182-day bills, rather than to
place the whole $200 million in the shorter issue, as had been
done the past two weeks.
However, the Treasury had not yet made a
decision on this matter.
The Treasury would be out of the market
until around October 1,
money.
when it
would be necessary to raise new
The Treasury would need this new money by October 9 at
the latest.
In response to a question by Mr.
Balderston with regard to
the prospective Treasury situation around the first
of November, Mr.
Rouse noted that the Treasury had issues maturing November 15 and
that the November calendar was complicated by two holidays.
He
added that the Treasury would have to come back to the market in
December for cash, probably about $2 billion.
also have to come to the market in
to its
The Treasury might
January and April, in
addition
refunding operations.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period July 28 through August 17,
1959, were approved, ratified, and
confirmed.
Supplementing the staff memorandum distributed under date of
August 16,
1959,
Mr. Noyes presented a statement substantially as
follows with respect to economic developments:
Many economic observers anticipated that we might see
some slackening in the rate of recovery in the third quarter
8/18/59
-7-
of this year. These predictions were based in part on the
assumption that the rapid pace in the first half was due
in some measure to inventory accumulation in anticipation
of the steel strike (or a settlement involving price increases)
and in part on the assumption that the major impact of the
fiscal 1959 deficit fell
in the first
half of this calendar
year. Some also expected that the very high rate of con
struction, especially in the residential sector, would not
be maintained.
For the time being, there appears to be little support
for these expectations. But as the quarter progresses it
will become increasingly difficult to tell whether the move
ments in most of our measures of activity reflect the steel
strike, the shifting winds of international politics, or some
basic change in the economic situation.
The two-point decline in the index of industrial pro
duction in July can easily be accounted for by the steel strike.
In fact, we can guess that the index might well have increased
by another point or more were it not for the strike and related
developments. Actually, the index lost 3-1/2 points due to
the decline from prestrike levels of activity in steel, coal,
and ore, but we must recognize that to some extent those levels
were artificial in that they related to the prospect of the
strike.
It now appears that gross national product for the second
quarter will be almost $485 billion--about a billion more than
was generally anticipated.
Construction has been well maintained, and the 1,350,000
seasonally adjusted annual rate of housing starts in July came
as a surprise to many who had anticipated that the large volume
of building earlier in the year and increased tightness in the
mortgage market would show up in a reduced level of starts by
this time. All the evidence to date indicates that consumer
demand, supported by substantial consumer borrowing, is con
tinuing at very high levels. The most recent data on auto
sales, for the first ten days of August, are up again from the
reduced rate in early July. In the first full week of August,
department store sales were 9 per cent above a year ago, which
is especially significant because of the extraordinarily high
level that prevailed at that time.
If the steel strike continues, and if the personal visits
back and forth among the heads of state add further to the
expectation of peaceful coexistence, we shall certainly see
declines in some of these measures of economic activity. Then
it will be difficult to judge whether the underlying situation
is still strong, or whether these declines also reflect some
slackening in the mounting demand pressures that have
characterized the year to date.
-8-
8/18/59
For the moment, it seems clear enough that the drop in
production is more than accounted for by the strike and the
reaction in the stock market is primarily attributable to a
re-evaluation of the international situation. Hence, all
indications are that the underlying situation at present is
one of strong and broadly based demands.
At the same time,
abstracting from the possible effect of whatever strike
settlement is ultimately agreed upon and the possibility of
renewed international tension, the immediate outlook for
continued price stability appears to be very good.
The
fairly tight position maintained in recent months with
respect to credit availability, coupled with the fact that
the Congress has shown less zest for many types of expenditure
than was expected, appears to have so tempered the burgeoning
demands in the economy as to hold them generally within the
limits of our rapidly expanding output of goods and services.
In fact, the first
half of 1959, and perhaps the first
three quarters, may well appear in retrospect as a period in
which markets, influenced by well-timed and courageous action
in the field of both monetary and fiscal policy, performed
their traditional function of directing resources to their
most efficient uses, within the framework of reasonable
over-all price stability.
Mr. Koch made substantially the following statement with respect
to financial developments:
Having just returned from four weeks of vacation, I
should be listening rather than talking today.
But perhaps
it will be of some interest to you to relate the main
impressions of the current financial situation that strike
one who has been away from the scene for a time.
at our most immediate field of interest,
Looking first
bank credit and money, I am struck most by the heavy and
Loan growth at city banks since
persistent loan demand.
midyear has been larger than in the comparable period of
any postwar year except 1950, when loans expanded sharply
following the outbreak of hostilities in Korea. This
recent growth followed a record $5-l/4 billion loan
increase at all commercial banks in the second quarter,
40 per cent more than the previous high second quarter in
This was due in part, of course, to the build-up
1955.
in metal and metal product inventories in anticipation of
the steel strike. Moreover, we are just entering the usual
seasonal build-up in business loans at banks, reflecting
harvest and other autumn needs for funds.
8/18/59
-9-
As to the recent heavy loan demand on banks, I am
impressed by the importance of the consumer in these
demands. Strong consumer borrowings are reflected not
only in the sharp increase in the instalment loan
portfolios of banks but also in their real estate loan
growth and in the heavy borrowing of finance companies.
Despite the large increase in bank loans thus far this
year, the active money supply has been held to a seasonally
adjusted annual rate of growth of 3-1/2 per cent when
measured by end-of-month figures, lower when measured by
daily average figures.
It changed little
in May and June
and then increased sharply, $1.4 billion, in July-a month
in which banks initially bought practically all of the $5
billion of new Treasury bills. Deposits at city banks have
declined thus far in August, in the main due to special and
seasonal factors.
Growth in deposits has been kept moderate in recent
months because banks have sold substantial amounts of
Government securities at their higher yields to nonbank
investors. This development, in turn, has reflected the
increased pressure on bank reserve positions, as well as
the higher loan to deposit ratios of banks today compared
with those of similar periods of other recent economic
expansions.
Turnover of bank money is also up sharply, reflecting
tighter credit conditions and higher interest rates. The
seasonally adjusted annual rate of turnover of demand deposits
at leading cities outside financial centers is currently not
only 15 per cent above its trough in the recent recession but
also 7 per cent above its peak in the previous upswing in the
third quarter of 1957.
I am struck, too, by the hesitation in the stock market
and the related strength, or at least absence of further
weakness, in bond markets. Even before the sharp drop a week
ago yesterday, stock prices had been drifting lower. They
however, only 2-1/2 per cent below the peak reached
are still,
trading day in August. Although the recent
on the first
decline has been generally described as a "technical adjustment",
we should probably be expecting some reactions in the stock
market with current dividend and earnings to price ratios as
low as they are.
The recent improved tone in bond markets has no doubt been
associated to some extent with events in the stock market, but
it has also undoubtedly reflected the adjustments from the over
reactions in markets for fixed-yield securities to the Treasury's
8/18/59
-10-
earlier poor debt and cash position, to fears of further
inflation, and to expectations of large prospective private
and municipal demands for credit and capital.
It has also
reflected seasonally low new offerings of securities by
corporations and State and local governments, and an assurance
that there could be no additional long-term Treasury offerings
with the 4-1/4 per cent interest ceiling. Yields on out
standing bonds of all types are currently down 5 to 10 basis
points from their recent peaks, and interest rates on most
shorter-term obligations are also down from recent highs.
There is a feeling developing in financial markets that
pressures on interest rates and bond yields may be beginning
to reassert themselves, but this feeling has not yet been
reflected in most of the available financial statistics.
Three-month Treasury bill yields, however, which had fallen
to less than 3 per cent, have increased to a level only
slightly below rediscount rates.
A correlated impression of one who has been away is the
better cash and debt position in which the Treasury finds
itself today as compared with only four weeks ago. That was
before the recent highly successful refunding and just after
the two large issues of bills had been auctioned at high
rates of interest. Last week's $1 billion issue of March
tax anticipation bills went at 3.72 per cent, and the Treasury
is expected to be out of the market until October.
Some of these impressions suggest a pause in financial
It is extremely difficult,
developments in recent weeks.
however, to appraise what part of any pause that may have
occurred was due to the steel strike, to the usual summer
and to what may be transitory international events.
lull,
To my mind, no signs in recent financial developments
contradict the continuation of a vigorous economic upswing.
Finally, as to the immediate problem facing open market
operations, the Board's staff reserve table distributed to
you this morning shows--and this is broadly confirmed by the
New York Bank's figures also furnished to you this morningthat market factors are likely to drain a considerable volume
of reserves from the banking system over the next two weeks.
This is due mainly to the rise in required reserves resulting
bank purchases of the recently auctioned Treasury
from initial
bills as well as other credit expansion, and to the usual
late-month decline in float. Assuming no change in credit
policy and a desire to maintain over the next two weeks
approximately the level of net borrowed reserves of the
recent past, this seasonal drain could be met by repurchase
However, since it is likely to persist, except
agreements.
8/18/59
-11-
for brief periods, on into the fall as a result of the
working of seasonal factors, it might well be met by
outright purchases of securities.
Mr.
Marget commented as follows with respect to the United
States balance of payments:
At the last meeting of the Committee, after having
reported the sobering news of a projection for a balance
of-payments deficit this year considerably larger than the
already large deficit of last year, I reported the late
arrival of an estimate of U. S. exports in June; and I
suggested that it was barely possible that these figures
might turn out to be the first
significant evidence of
that turn upward in our exports for which we have been
hoping.
At that time we did not have any details as to
the nature of this increase in exports.
Now that we have
these details, we can ask whether they are or are not
such as to encourage an optimistic view as to a possible
turn in our balance-of-payments position. The answer is
that, as far as they go, they do support an optimistic
view.
To begin with, the June rise was not the kind of export
rise we had been having through May. This earlier and slower
rise was concentrated in agricultural commodities, and was
largely related to U. S. surplus disposal programs; this
hardly brought much encouragement to those of us who were
concerned particularly about our competitive position in
But in June there was a
the field of manufactures.
significant and widespread increase in nonagricultural
such increase since the export decline
exports-the first
half
years ago.
began two and a
Secondly, the distribution of the improvement within
the range of nonagricultural exports was such as to suggest
that we have not yet lost our ability to compete in some
fields about which some pessimism has been expressed. The
case of coal, for example, the exports of which did drop
sharply again in June, is not a proof of our noncompetitive
ness: we know that we can produce and land coal in Europe
more cheaply than many European producers can sell it, and
that proof of this was provided some months ago when
Germany, in particular, put up discriminatory restrictions
against U. S. coal which have not yet been removed. What
is striking, on the other hand, was the pickup in the
exports of such things as motor vehicles, which included
8/18/59
-12
advances in the exports of trucks, tractors, and automobile
parts, together with some increase in passenger cars. As
the written report of the staff points out, exports of
trucks and tractors were up about one-third as compared with
a year earlier, and automobile parts were up by a fifth.
Having reported this much, which I would certainly call
good news as far as it goes, I hasten to point out that it
still
doesn't go very far. In the first
place, it is only
one month that has shown this degree of improvement.
The
months to come are those that will tell
the story. Secondly,
the kind of turning point for which we have been hoping has
not yet been evidenced in the post-June figures for the
international movement of gold and dollars, which is, after
all, the reflection of the magnitude of our over-all
balance-of-payment deficit., though it must be said that the
more recent increase in the deficit, as so measured, large
though it is, is still
somewhat less than it was expected
to be on the basis of the forecast of a $4.5 billion
deficit for the whole year. Finally, as I suggested at.
the last meeting of the Committee, even if we have in fact
begun to see the turn in our export performance, we still
have a very long way to go before we get our foreign accounts
On the most optimistic basis possible, our
into balance.
balance-of-payments problem is likely to continue to be with
us for some time to come.
Mr.
Treiber presented the following statement of his views on
the business outlook and credit policy:
The business situation remains strong despite the
month-old steel strike, while price trends in most markets
have continued steady.
In the Second Federal Reserve District some 31,000
steel workers are on strike; 23,000 of these are in the
Buffalo area. Presumably reflecting the steel strike,
department store sales in Buffalo during the three weeks
through August 8 were up only 1 per cent from the cor
responding weeks last year, while sales in the District
as a whole were up 6 per cent. The steel strike apparently
has had little effect in the District outside the Buffalo
area. Four of the District's major labor market areas
were reclassified to show lower unemployment in July and
there are now no major labor market areas in the District
classified as having unemployment of 9 per cent or more.
Reports from about the District indicate optimism on the
business and employment outlook over the next few months.
8/18/59
-13-
Bank credit has been expanding throughout the country.
There has been a strong demand for bank loans widely dis
tributed among different types of borrowers; this has been
especially true as to all types of consumers.
So far, the
steel strike appears to have had little
effect on business
borrowing.
Bank investments rose by only $250 million in
July in connection with the Treasury's $5 billion cash
financing; in early August bank investments were reduced by
more than that amount.
Demands in the capital market have been surprisingly
light this summer.
There are, however, signs of at least
a seasonal building up of new capital market issues in the
next few months.
Although the money market has continued tight, the yield
on Treasury bills tended to move lower until a week ago. The
impact of the new Treasury financing has since helped to turn
short-term rates around. Yields on three-month bills have
risen to a point well above what they were three weeks ago.
When the steel strike is settled, a new burst of expan
sion is likely. And we may expect an upward pressure on
prices.
The intensity of the pressure will depend on the
length of the strike and the nature of the settlement. At
this stage the steel strike is an important uncertainty.
Another factor that must be borne in mind is the public
spotlight in which we now find Federal Reserve policy as
the Congress and the Administration struggle with legislation
to remove the limitation on the maximum rate of interest
on U. S. Government bonds. Whatever action is taken by
the System will be subjected to critical public analysis
and will be evaluated particularly in the light of the
steel strike.
While a further tightening of credit restraint may
well be called for in the near future, immediate overt
action does not seem appropriate. We would not recommend
a change in the discount rate or in the directive at this
time. It does seem to us, however, that it is desirable
for the System to move toward greater restraint through
If current reserve projections
open market operations.
are borne out, this aim might be accomplished to a large
extent by allowing market factors to absorb reserves.
This would primarily be a matter of the Manager feeling
If the tightening is too severe, reserves could
his way.
be supplied "reluctantly" to meet a part of the expanding
needs.
Mr. Erickson said that the latest available statistics on pro
duction, construction, employment,
and trade in
the First District
8/18/59
-14
continued to present a favorable picture and that the steel strike
had thus far had little
impact.
Most steel users reported sufficient
inventories to last for a few weeks.
district rose in June,
Industrial production in
the
although not as much as nationally, while
construction was strong, being 8 per cent ahead of last year and 27
per cent ahead of 1957.
The cumulative figure for the first
six
months of this year was 15 per cent higher than last year, and the
picture was strongest in
of last year.
residential construction, 37 per cent ahead
All of these comparisons were more favorable than the
national figures.
Employment improved in
June, as compared with May,
mostly in construction, trade, and services, but compared with a year
ago the greatest improvement was in manufacturing.
This improvement
had led to the upward classification of labor areas; six areas formerly
classified as having unemployment of 9 per cent or more were reclassified,
with the result that in
July there were no such areas in
Retail trade continued to be good,
Mr.
the district.
although not as strong as nationally.
Erickson reported that the July survey of mutual savings
banks showed one bank paying interest of 3-3/
per cent, 29 paying
3-1/2 per cent, 30 paying 3-1/4 per cent, and 13 paying 3 per cent.
The survey also showed that the interest rate on conventional
mortgages,
generally, in Boston and New Hampshire was 5 per cent,
while in the rest of the district it
was 5.5 per cent.
These levels
appeared to be somewhat lower than those prevailing in many other
sections of the country.
8/18/59
-15
Turning to questions of policy, Mr.
would recommend no change in
favor a change in
Erickson said that he
the directive and that he would not
the discount rate.
As to open market operations
for the next two weeks, he would leave it
to the Manager of the
Account to judge the feel of the market and to keep that feel as
tight as it
had been.
He would supply reserves reluctantly and
resolve any doubts on the side of restraint.
Mr.
Irons reported that the economic picture in the Eleventh
District continued to be one of strength, although there had been
some leveling off, perhaps attributable to the summer lull.
Depart
ment store sales in
July, while well above a year ago, were slightly
under June totals.
In the petroleum industry, production and
refining both edged a bit lower, pulling the industrial production
index down slightly.
While the stock position in
industry had perhaps improved a little,
would be no increase in
allowables in
possibly even into October.
important factor.
measured in
it
the petroleum
seemed likely that there
the district in September,
or
The steel strike as yet was not an
Employment was strong and rates of unemployment,
terms of percentage of the labor force, continued to
run appreciably below the national figures.
picture also was one of strength.
Mortgage money was reported to
be available at a bit higher prices,
below national average figures.
In construction the
with the levels still
somewhat
The agricultural situation was very
8/18/59
good,
-16
the situation in
statistics.
the fields appearing even better than the
To summarize, while there may have been a bit of
leveling off, perhaps due to the summer lull
or the petroleum
situation, most of the indicators were holding at a high level.
With respect to banking, Mr. Irons said that reserve
positions were tight and bankers were talking continually of an
unusually strong demand for credit.
They stated that they were
being selective and could easily increase their loans further if
they had the wherewithal to do so.
Various kinds of consumer lending
had advanced sharply and some seasonal demand was now beginning to
show up in the loan picture.
There had not been much change in
the
rate of borrowing at the Reserve Bank over the last three or four
weeks; with the exception of an occasional day or two, discounts
were running close to 5 per cent of the System total.
Turning to policy, Mr.
Irons said he found himself in agree
ment with the statements made by Messrs. Treiber and Erickson.
Mr.
Mangels said that the Twelfth District picture was similar
to that described by Mr.
concerned.
Treiber as far as over-all production was
No serious effects of the steel strike were seen as yet
and general business activity did not appear to have been dampened
down.
Two major labor market areas had been removed from the severe
unemployment classification, leaving only a few smaller areas still
classified as critical.
Exclusive of the steel strike, some 60,000
persons were on strike at present within the district, but worker
-17
8/18/59
income nevertheless was at a high point, some 10 per cent higher
than in mid-1957.
This was reflected in a greater increase in
department store sales in the Twelfth District than for the nation
as a whole.
Auto sales were holding up well.
Instalment credit had
been increasing quite rapidly, and banks appeared to be stretching
out repayment terms, but delinquencies were considerably lower than
a year ago.
Residential construction was declining, and agricultural
income was expected to be somewhat less than last year due to lower
prices and higher costs incurred by farmers.
Mr. Mangels went on to say that demand deposits showed a
modest increase during the past three weeks.
While total time
deposits were down, savings deposits increased $1 84 million.
Bankers
were commenting on the tightness of money and indicated that they were
being selective, yet loans increased more than $300 million in the
three-week period.
The banks had been selling Government securities
somewhat more rapidly in the Twelfth District than elsewhere; only
2.3 per cent of the total portfolios of district banks was in bills
as compared with 9.3 per cent for the nation as a whole.
Mr.
Mangels saw no compelling reason why restraint should be
increased at this time.
The Treasury financing was still
in the
picture and the effects of past restraint were beginning to take a
strong bite.
In a number of cases,
banks were declining loan
applications from substantial customers.
Exclusive of those on
strike, approximately 5 per cent of the labor force was unemployed
-18
8/18/59
and some excess productive facilities were still
weeks,
Mr.
available.
In two
Mangels suggested, the Committee might be able to evaluate
better the seriousness of the effects of the steel strike.
cluded by saying that he would favor no change in
He con
the policy directive
and that he saw no occasion to change the discount rate at this time.
Mr.
Deming reported that some adverse effects of the steel
strike were beginning to be seen in
the Ninth District, but that so
far they had been confined almost exclusively to the iron ranges.
The longer the strike lasted, the more severe these effects would be
on the ranges.
Early settlement of the strike probably was more
important to that section than to any other, the mines being highly
seasonal in
in
activity.
By and large, rainfall continued inadequate
large areas of the district, and the August crop estimates showed
an even more unfavorable comparison with a year earlier than did the
July 1 estimates.
South Dakota, in
particular, had been hard hit.
Bank loan demand continued to be very strong, Mr. Deming said.
Loan-deposit ratios were high by any recent past standards and had
shown more growth so far this year than in the nation generally.
banks, however,
passed.
City
seemed to feel that the peak of pressure may have
Country bank loans fell slightly in
the most recent half
month period, but the prospective need to carry over a larger than
normal volume of farm loans due to drought, plus cattle feeding
requirements,
seemed likely to keep country bank loans higher than
usual for the balance of this year.
8/18/59
-19
As to policy, Mr. Deming expressed agreement with Mr. Mangels.
He would prefer to see no increase in the pressure on reserves, and he
saw no particular reason to change the discount rate or the directive
at this point.
Mr. Allen said that the underlying economic picture remained
strong and relatively unchanged in
men were thinking in
the Seventh District.
Some business
terms of a leveling off of activity late this year,
and it seemed reasonable to expect a slowing of the rapid expansion that
had been experienced.
But assuming settlement of the steel strike in
the reasonably near future,
no evidence was seen at this time of any
basic change in the general business picture.
The automobile manufacturers,
Mr.
Allen said, felt that pro
duction lines could run on present inventories of steel until October
15.
By this, they meant that they would be able to run at scheduled
rates, which contemplated lower production during the change-over
In August, production of 260,000 cars was expected as against
period.
sales of around 460,000, which would reduce inventories 200,000.
Another reduction of at least 150,000 in
September was contemplated.
Thus the high inventory of 965,000 cars on August 1 should be reduced
on October 1 to about 600,000-still a full figure under normal
conditions but perhaps not excessive (as a matter of business judgment)
considering that the duration of the steel strike was an uncertain
quantity.
Reporting banks in the Seventh District had shown a steady
loan expansion since mid-July in all categories except loans on
8/18/59
-20
securities.
Moreover,
the increases in business, real estate, and
finance company loans were considerably greater at Seventh District
banks,
in the three weeks ended August 5, than at reporting banks
for the nation as a whole.
However,
heavy net sales of Government
securities, largely the short-term issues acquired in
July cash financings,
the Treasury's
more than offset the loan growth.
pressures on district banks had not been severe.
Thus,
reserve
The basic position
of Chicago central reserve city banks was not as good as a month ago,
but it
was less tight than two months ago.
District reserve city
banks continued to sell Federal funds on balance and their borrowings
at the discount window had been reduced,
little
while country banks showed
change in position.
Mr.
Allen saw no reason to change the directive at this time.
The Chicago Board of Directors was to meet the day after tomorrow-the
only meeting prior to the next meeting of the Open Market Committeeand he expected to recommend no change in
the discount rate, largely
because a major industry was on strike and the strike might last a
Some months hence,
long time.
mistake in
he might feel that he had made a
judgment and should have urged a rate increase at this
time, but in
any event another Chicago directors'
meeting was to be
held on September 3, by which time the picture might be clearer.
With reference to the operations of the Desk, he would not change
the direction followed in
recent weeks.
However,
he agreed with
8/18/59
Mr.
-21
Erickson that doubts should be resolved on the side of restraint.
Mr. Wayne said that the situation in the Fifth District was
similar to that reported for the nation as a whole.
The only effects
of the steel strike were those clearly to be expected:
some 30,000 workers in
the layoff of
the Baltimore area, spreading unemployment in
the bituminous coal mining regions, and the layoff of some workers
by the coal-moving railroads.
Otherwise,
the strike appeared to have
had no appreciable effect on the level of economic activity, and there
was no evidence of any change in
throughout the district.
the optimistic sentiment evident
The rate of increase in loan totals had
slackened somewhat since the date of the last Committee meeting;
loans were no longer rising at a pace as fast as indicated by the
national figures or as fast as they had previously in
the district.
This suggested that some of the demand was being resisted by banks in
a tight reserve position or that the situation had moved back into a
somewhat more normal pattern for reserve city banks.
Earlier in the
year, some banks were called upon to make good on outstanding lines of
credit that had been in existence for years, but unused, and some of
this might now be moving back.
With respect to policy, Mr. Wayne indicated that his views
were similar to those expressed by Mr.
Mr.
Mills said that in
Erickson.
following the discussion today and
the discussions at previous Committee meetings,
he detected a tendency
-22
8/18/59
to use as the measure and criterion of the effectiveness or in
effectiveness of Federal Reserve System policy the expansion of
commercial bank loans.
There appeared to be an inclination to
doubt the effectiveness of System policy in
rise in
such loans.
On the other hand, if
view of the continued
one focused his thinking
on the total of commercial bank loans and investments, which he
believed was the correct measure and criterion on which to fix
policy actions,
one noted a substantial divestment of Government
securities from commercial bank portfolios,
a movement which was now
tending, to a degree, to spread to other types of securities.
This
suggested to him that System monetary and credit policy had been more
restrictive than might seem to be the case from surface indications;
that is,
from looking only at the movement of loans.
Mr. Mills then
read the following statement:
There is
it
nothing in
the economic situation as I see
that would justify any change in the views that I have
expressed on the System's monetary policy at previous
There are
meetings of the Federal Open Market Committee.
certainly no reasons that I can find to commend intensifying
the restrictiveness of the System's present policy. On the
contrary, a more moderate monetary policy, in my opinion,
In any event, there are two redeeming
called for.
is still
policy that has been pursued which
the
monetary
in
elements
of as severe restrictiveness
development
the
prevented
have
over the availability of credit as would otherwise have
been the case:
The periodic injections of additional reserves that
1.
have been made on the occasions of Treasury financing opera
tions have tended to relieve the build-up of reserve pressures.
The higher average level in the volume of Federal
2.
Reserve Bank discounts that is now in evidence has derived
8/18/59
-23-
from an increasing amount of continuous borrowing, which
in effect has added to the supply of reserves on a rela
tively permanent basis and has thereby offset in part the
pressure on commercial bank reserve positions that System
policy actions would have otherwise exerted.
It is not improbable that a problem resides in the
discount situation at the Federal Reserve Banks, in that
under current conditions of leniency towards continuous
member bank borrowers, the repayment of outstanding
discounts in effect implies a complete reversal of System
monetary policy from restriction to ease. Should that
course of developments ensue, the change in policy in all
probability would have been dictated by the need of
alleviating a slackness in economic conditions that had
been induced in part by the earlier severity of a Federal
Reserve System monetary policy that had restricted the
availability of credit.
A more moderate monetary and
credit policy would conceivably avoid the undesirable
economic and monetary effects that reside in pushing
System policy actions to extremes of either monetary
tightness or ease, in consequence of which abrupt policy
reversals are then necessitated.
Mr. King commented that the factors bearing on the question of
a change in
monetary policy at this time had been so well pointed out
that there seemed no need to elaborate upon them.
In his view, the
situation was under good control at present and the economy was in a
healthy state.
The policy that had been followed seemed adequate,
and be did not feel that greater restraint would be likely to produce
desirable results at the present time.
Accordingly, he would favor
no intensification of the prevailing degree of restraint.
The un
certainty as far as the steel strike was concerned represented, in
his view, an important factor to be considered, and he felt that the
System must await further developments along that line before reassessing the situation.
-24
8/18/59
Mr.
Fulton's report on the steel strike indicated that little
progress was being made in labor-management negotiations,
that the
strike perhaps would continue for some time, and that the provisions
of the Taft-Hartley Act might ultimately be invoked.
The unions
reportedly were not permitting maintenance workers to go into the
plants to reline furnaces in need of repair, which would mean a
further delay of perhaps as much as thirty days,
the strike, in
getting the furnaces in
after settlement of
shape for full production.
It
appeared that inventories in the hands of manufacturers using steel
were adequate thus far.
Steel warehousemen, who had stocked up
substantially, indicated that to date there had been no increase in
their normal orders for steel and that there was no imbalance of
inventories.
In fact, it
appeared that inventories probably would
be quite adequate for some time to come.
Steel men believed that the
industry was now getting substantial moral support from the public
and they were heartened by the recent action of the House of
Representatives in
passing a strong labor bill.
One factor in
picture was the possibility of a dearth of iron ore later in
season; after the mills got into operation, it
the
the
might be that sub
stantial shortages of ore would necessitate shipping by rail,
a more
expensive operation than shipping over the Great Lakes.
Mr.
Fulton said that other factors in
economy were quite favorable.
the Fourth District
Department store sales had not been
8/18/59
-25
affected by the steel strike; only in the Wheeling, West Virginia,
area did they fail
to show an increase during the past week.
Depart
ment store sales were at an all-time high, thus following the trend
noticed during previous steel strikes, when such sales continued to
increase in
most parts of the district.
Machine tool orders in the
past month were at the highest level since mid-1957, reflecting an
underlying urge to improve the conditions of plants.
Total construction
figures were down a bit, largely as the result of heavy engineering
contracts being considerably under last year.
Mr. Fulton recalled that following the steel strike in
1952,
a surge occurred which carried the whole economy abruptly to higher
levels.
While he did not believe that a change in the discount rate
should be made at this time, it
seemed advisable to be alert to the
possibility of a similar surge occurring and getting out of hand.
Therefore, he did not believe that the System should allow any ease
to creep into the picture.
Instead, he would maintain about the
same degree of restraint as had prevailed during the past several
weeks.
If
any ease were allowed to creep in,
he saw a considerable
danger, with the surge that seemed likely to follow the end of the
steel strike, that prices might rise promptly.
Mr.
Bopp reported that the steel strike thus far had had only
limited secondary effects in the Third District.
In Pennsylvania,
the strike had idled nearly 170,000 steel workers and as of last week
indirect unemployment in
the State totaled nearly 40,000, an increase
-26
8/18/59
of about 20,000 in the past three weeks.
unemployment was in
manufacturing,
mining, railroads, metals,
and construction.
metal product
On the basis of preliminary data
for eight major labor market areas,
declined in July.
Most of the secondary
manufacturing employment
However, the decline was less than seasonal and
percentagewise was somewhat less than for the country as a whole.
Four major labor market areas were reclassified in
reductions in
were still
July, reflecting
the percentage of the labor force unemployed, but there
seven substantial labor surplus areas, with six per cent
or more unemployed.
New unemployment claims in Pennsylvania had
declined seasonally, despite a sizable number of claims filed by
workers indirectly idled by the steel strike.
There was as yet no
evidence of any significant effect of the strike on consumer buying.
Department store sales registered good gains in
the past two weeks;
sales for the past four weeks were four per cent above a year ago
and for the year to date were seven per cent higher.
Mortgage credit
had become tighter since midyear, with the supply decreased because
of a smaller net inflow of savings and the high yields on long-term
securities.
Some lenders were only meeting previous commitments,
and the others were more cautious about future commitments.
The
rates on conventional loans were mostly 5-3/4 and 6 per cent.
Mr. Bopp stated that total credit of district reporting banks
declined during the past three weeks.
Total loans and business loans
8/18/59
-27
were virtually unchanged, but holdings of securities decreased.
Liquidation of Government securities in the past few weeks had
more than offset increases that occurred at the time of the Treasury's
two new offerings in
the first
part of July.
The large Philadelphia
banks continued to have a substantial basic reserve deficiency,
daily average being $86 million in
weeks.
the
two of the past three reserve
Daily average borrowing by those banks from the Reserve Bank
ranged from $24 million to $36 million and net purchases of Federal
funds from $18 million to $49 million.
declined somewhat.
Borrowings by country banks
Third District member bank borrowing ranged
from 4 to 5 per cent of the System total.
Mr.
Bopp said that he would not favor a change in the discount
rate or in the policy directive at this time.
He felt that the Desk
should try to maintain an even keel but resolve doubts on the side of
restraint.
Mr. Bryan commented that there did not seem to have been any
developments in the Sixth District such as to warrant a conclusion
that there had been any considerable change in the general uptrend.
Nonfarm employment and manufacturing employment continued to increase,
and department store sales were well above a year ago.
unfavorable comparison against a year ago was in
tracts.
The only
construction con
Loans of district commercial banks continued to rise, at a
more rapid rate than nationally, and demands at the discount window
had increased sharply.
Member bank borrowing was now running from
-28
8/18/59
9 to 12 per cent of the System total, substantially in
Atlanta Bank's usual proportion.
excess of the
The Reserve Bank was getting a good
deal of continuous borrowing and there would have been more had it
been for some rather vigorous collection efforts.
not
The steel strike had
not as yet had any major impact in the Sixth District, but the strike,
if long continued, must inevitably have its
effect.
With regard to policy, Mr. Bryan said that he was sympathetic
with the views expressed by Mr.
Mangels and seconded by Mr. Deming.
While he could see no reason for easing, neither could he see any
convincing reason for further tightening at this time.
The economic
situation, though strong, did not at the moment seem to be in
a wild
Also, he felt that the System, unless careful, could
boom stage.
tighten reserves in
the next few months a little
more than they should
be tightened from the standpoint of allowing for some reserve growth.
A chart on effective reserves over a long period of years indicated
that at present effective reserves,
seasonally adjusted, were on the
trend line, and that therefore they would go under the trend line in
the next few months unless the System was careful to allow some re
serve growth.
Consequently, he would try to maintain about the
present degree of restrictiveness,
one which he thought was justified,
but he would be inclined to resolve any doubts slightly on the side
of ease.
Mr.
Johns said that as the cotton-picking season approached
in the southernmost parts of the Eighth District he had become
-29
8/18/59
somewhat apprehensive about the ability of most, if
not all,
of the
cotton-financing banks to accommodate the usual loan demand without
recourse to the discount window for greater amounts and for longer
continuous periods than had generally been felt appropriate.
appeared that a number of these banks,
It
having already accommodated
loan demands from other sources, were in
a worse position than usual
to effect adjustments as the cotton loan demand developed.
If
the
Reserve Bank should be somewhat stingy with reserves at the discount
window and the member banks were forced to reject loan applications
by regular cotton customers,
on the Reserve Bank.
the blame would undoubtedly be placed
He was not at all sanguine about the ability
of the banks to make asset adjustments necessary or obtain all the
assistance necessary through correspondent relationships.
As to policy, Mr.
with Mr. Bryan.
Johns said he was inclined to agree generally
He was not willing to give a clear signal of intensifi
cation of restraint, but neither would he like to give a signal of
A period of the year was approaching when it
relaxation.
would be
necessary to supply some reserves and he would hope they could be
supplied in
intended.
such a way as not to suggest a relaxation that was not
If
possible, he would hope that this operation could be
carried out so perfectly there would be no serious errors,
certainly
no errors that would permit short-term interest rates again to soften.
Mr.
Szymczak commented that on the basis of the optimistic
picture reported by Messrs. Noyes and Koch, one could say that the
8/18/9
-30
System should tighten somewhat at this point.
However, there were
three uncertainties that argued against tightening at this time.
These included the situation with respect to the pending legislation
on interest rate ceilings, the optimism expressed for peace by heads
of state and the current international negotiations, and the uncertainty
as to when the steel strike would be settled.
Therefore, he could
recommend nothing for the moment but continuation of the present open
market policy.
He would not favor a change in
the discount rate at
this time.
Mr.
Balderston commented that he continued to be worried
about "water in
the brakes."
Even though bank liquidity had de
creased, corporate liquidity appeared very great, and there had been
a striking increase in
If
deposit turnover outside of New York City.
the time should come when restraint needed to be applied vigorously,
he feared that central bank control would be found to have diminished.
At this time,
however, he would not change the discount rate because
of the facts already mentioned.
He would favor continuance of the
present degree of restraint, leaning toward the side of restraint
in
the manner Mr.
Treiber had suggested.
Chairman Martin summarized the meeting by saying that the
majority clearly favored maintenance of the status quo, with no
change in
the discount rate or in
the policy directive at this time.
One or two who had spoken were slightly on the side of ease, but
this was offset by others who were somewhat on the side of further
restraint, so the situation tended to balance out.
8/18/59
-31Chairman Martin noted that the Open Market Committee was to
meet again in two weeks, at which time data might be available that
would be helpful in
clarifying the situation.
The Chairman then suggested that the policy directive be
approved in its present form, and no dissenting comments were heard.
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 restraining
inflationary credit expansion in order to foster sustain
able economic growth and expanding employment opportuni
ties, 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
indebteeness 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.
8/18/59
-32
Chairman Martin noted that a bill authorizing the President,
for a period of three years,
to eliminate the interest rate ceiling
on Treasury bonds had been tentatively approved by the House Ways
and Means Committee by a 15-10 vote, with a watered down "sense of
the Congress" amendment relating to debt management and monetary
policy.
In commenting on the proposed amendment in its
present
form, Chairman Martin said that, despite the recent vote within the
Committee, it
remained a matter of concern to him that little
appeared to have been made in
progress
explaining the role of interest rates.
He expressed the view that all of those around the table had a real
job confronting them in endeavoring to explain the role of interest
rates in the economy and why short-term Treasury financing was not
perhaps better than long-term financing.
At the Chairman's request, Messrs. Treiber and Rouse then
summarized for the Committee's information the hearings held by the
Joint Economic Committee in
New York City on August 5, 6, and 7,
which were directed principally toward the functioning of the
Government securities market.
In this connection, Mr. Treiber also
commented briefly on a visit made by Congressman Patman, a member of
the Joint Committee, to the Federal Reserve Bank of New York during
the course of the three-day hearings.
At this point Chairman Martin reverted to the proposed
interest rate ceiling legislation and read an announcement that
had just come over the ticker which stated that the Ways and Means
8/18/59
-33-
Committee had reversed its
earlier action and by a vote of 14 to
11 had tabled the proposed bill
and put the legislation off the
docket for consideration until the next session of Congress.
In
this connection, the Chairman again remarked that the real problem
seemed to revolve around the need to explain fully the role of
interest rates in
the economy.
With a transmittal memorandum dated August 7, 1959,
the Secretary sent to the members of the Committee and
the Presidents not currently serving thereon a memorandum
prepared by Vice President Holland of the Federal Reserve
Bank of Chicago analyzing, from the point of view of a
Reserve Bank officer with responsibility for the discount
function, the problem involved in the relationship of
member banks to the discount window of the Federal Reserve
Banks in connection with the underwriting of new Treasury
issues. The memorandum stated that some commercial
bankers had observed to the Treasury that their relation
ship to the discount window inhibited them from under
writing new Treasury issues; the subject therefore was to
be included on the agenda for discussion at this meeting
in view of its close relationship to open market policy
as well as to administration of the discount window.
The tenor of Mr. Holland's memorandum was to the effect
that bank underwriting operations should ordinarily be
planned in such a way as to involve no net loss of
reserve funds to the underwriting institutions; that
underwriting operations of judicious size entered into
on such a basis might be regarded by the Reserve Banks
as part of the regular banking business of the commercial
banks involved; and that in instances where extraordinary
market or Treasury actions tended to upset anticipated
schedules of liquidation and payment, underwriting banks
might appropriately be accommodated by the Reserve Banks
under the same general standards and limitations applied
in assisting banks to meet any other kind of unexpected
reserve pressure temporarily pending adjustments.
In the course of introductory comments,
Chairman Martin said
that Under Secretary of the Treasury Baird had become rather disturbed
8/18/59
-34
by comments on the part of commercial bankers in
the July bill
connection with
issue that went at a rate of 4.72 per cent.
Many
banks that normally bid for bills passed up the issue entirely
and put in
Mr.
no bids.
In the temporary absence of Chairman Martin,
Baird had discussed the subject with Mr.
Balderston, and the
Secretary of the Treasury later participated also.
suggested that it
The Chairman
might be well for the System not only to review
the Holland memorandum and be thinking on the broad problem but
also, perhaps,
to invite Mr. Baird to meet with the Open Market
Committee before coming to a final decision.
the possibility of inviting Mr.
He made it
clear that
Baird was his own idea and one on
which he had not yet reached a conclusion.
In further comments,
Chairman Martin said the problem was one that went to the Board's
Regulation A and therefore was,
System on a continuing basis.
in
a sense,
a problem before the
In view of Mr. Mills' work in
con
nection with the revision of Regulation A several years ago, the
Chairman called upon him for the first
Mr.
comments.
Mills said he thought the Holland paper was ably prepared
and that the conclusions in it
were correct.
noted, to separate scrambled eggs.
It
is
not possible, he
The proceeds of member bank dis
counting move into the same reserve pool as the proceeds of other
transactions.
The System, he observed, customarily supplies reserves
to support Treasury tax and loan account operations on the occasion
of Treasury financings, and in his view this really answers the
8/18/59
-35
problem, because it
is
then up to the initiative and discretion of
the member banks as to whether or not to turn to the discount window
for temporary support of their acquisitions of newly-issued Treasury
securities if
they have any occasion to do so.
Thereafter, it
be
comes the responsibility of the Federal Reserve Banks to determine
whether discounts originating at such a time are such as to become
subject to criticism and to require policing.
The Chairman then turned to Mr.
Balderston, who said that on
the occasions when he talked with the Under Secretary, during one of
which the Secretary joined in
defensive.
the discussion, he found himself on the
After he had explained the System's traditional role in
relation to Treasury financings--the one that had been followed since
the time of the ad hoc subcommittee report at least-the question
was asked whether he felt that the Treasury had paid too much for the
money borrowed on the occasion of the second of the two large July
bill
auctions.
The price, it
was noted, was higher than had been
anticipated by financial writers only a few days before.
It
was
pointed out that the rate had risen by 1/4 per cent and then receded
again to about the anticipated level.
Mr. Balderston said he felt there was one point, at least,
on which the System possibly might be vulnerable; namely, a possible
lack of consistency among the twelve Federal Reserve Banks.
He
simply was not sure whether the administration of the discount window
was consistent or not.
-36
8/18/59
Mr. Balderston explained that the Under Secretary had no
criticism of what the Open Market Committee did through the Desk
in
connection with Treasury financings.
However,
some bankers on
the Government Borrowing Committee had indicated that they felt
unable to participate in
the second bill
of the discount window.
In all
auction because of a fear
honesty, Mr. Balderston said, he
did not feel he could say that there was no basis in
any district
for claiming that the commercial banks could not help the Treasury
with the second auction because of fear of the window.
Mr.
it
Balderston went on to say that after these discussions
occurred to him that it
would be helpful to have the views of a
Reserve Bank lending officer who was on the firing line.
with Mr.
Allen's consent, Mr.
Consequently,
Holland had written down his thinking
on the subject and also had spent several hours with him (Mr.
Balderston) and members of the Board's staff.
His own tentative reaction, Mr.
Balderston said, might be
colored by the discussions with the Secretary and Under Secretary.
However,
in
trying to examine the System's position, he was inclined
to wonder whether the System should not perhaps take a fresh look
to see whether the discount window could be used to facilitate
or possibly in
addition to, what the
Treasury financing in
lieu of,
Desk had been doing.
He then read the following comments,
indicating
that they were subject to revision in the light of what might be
said in
further discussion of the matter:
8/18/59
-37-
It has been the practice of the Open Market Committee
to adjust bank reserves before, during, and after a Treasury
financing in such manner as to preserve what is called an
"even keel." To me this phrase connotes no greater ease or
tightness at the end of the financing period than at the
beginning, with the supplying of only such additional
reserves during the period as will take care of the addi
tional drain on reserves caused by the financing itself.
Theoretically the amount of such reserves required would
be 18 per cent of the amount of a cash financing taken by
the banks.
The additional reserves that we have been supplying in
this fashion get used in part to support additional lending.
This approach through the open market instrument might be
likened therefore to the shotgun approach. In contrast
would be the use of the rifle to inject into the C banks,
which do the bulk of the Treasury underwriting, additional
reserves through the use of the discount window. It could
be urged, I suppose, that this approach would require the
injection of fewer additional reserves to accommodate a
financing than is needed by the present method if it is
true that some of those now supplied become diverted to
uses other than Treasury financing.
The central question is whether the officers who
administer the discount windows can make reasonably sure
that the additional reserves supplied to underwriting banks
to lubricate a Treasury financing by maintaining an even
keel can in fact be recaptured when the financing period is
This reasoning would seem to narrow the issue to the
over.
question as to whether the officers who administer the
discounting function can manage the additional reserve
supply as effectively as the Desk. The latter commands
our admiration for the skill with which it frequently
succeeds in preventing undue ease or tightness by observing
the feel of the market. Nevertheless, it can scarcely
be said that the Open Market Account has control that is
To the extent that the additional reserves
precise.
supplied have gone into additional lending the net
borrowed reserve figure will rise and this gauge of open
market operations may signify, falsely, that the reserves
do not need to be recaptured.
In short, Mr.
Balderston said, his conclusion at the moment
was that the System ought to reexamine its
practices to the end that
8/18/59
it
-38
could either provide a satisfactory explanation of its
practices
to the Treasury or else modify those procedures.
Mr.
it
Johns inquired whether the Treasury's indication that
could not understand what the System did reflected a lack of
understanding generally or was related specifically to administration
of the discount window in
tions.
relationship to Treasury financing opera
When Mr. Balderston replied that the latter appeared to be
the case, Mr.
Johns inquired whether the remarks attributed to
commercial bankers went so far as to allege that any bank desiring
to serve as an underwriter had been denied credit or whether the
commercial bankers appeared to fear that, having received credit at
the discount window,
they might be asked to repay before disposing
of the securities they had underwritten.
Mr.
Balderston replied to
the effect that the latter situation apparently was closer to the
one that the bankers had suggested.
Mr.
Johns then expressed the view that this was a case
where the Federal Reserve was being made the "whipping boy," and
Mr.
Bryan and others indicated agreement.
Mr. Treiber said that the New York Bank agreed generally
with the conclusions in
Mr. Holland's memorandum.
The simple fact
that a member bank subscribed to a new Treasury issue was not
regarded, by itself,
Federal Reserve Bank.
as a proper reason for borrowing from the
However,
in
combination with other factors,
8/18/59
it
might justify borrowing.
-39Mr. Treiber then read the following
statement:
The problem arises when a member bank subscribes
for and acquires more securities than it is justified
in holding as an investment in the light of its reserve
position. When a member bank acquires such securities
it may properly be expected to dispose of the securities
or other assets as promptly as practicable in the light
of all the facts of the case, including current Federal
Reserve policy and the condition of the Government
securities market.
Although the word "underwriting" is frequently used
in reference to such a subscription by a bank to a new
issue of Government securities, there is not a true under
writing as that term is customarily used in the securities
business.
The goal of the so-called underwriting, so far
as the U. S. Treasury is concerned, is to assure immediate
purchases of the new Government security when it is
offered by the Treasury. It is generally immaterial
whether the member bank sells the new issue or some other
issue already in its portfolio. If the bank sells
Government securities in the same total amount as the
amount of the new security purchased by it, the under
writing is accomplished.
It does not matter whether the
bank involved is a large bank or a small bank.
The Federal Reserve has a responsibility to aid the
Treasury in the management of the public debt consistent,
of course, with basic Federal Reserve credit policy
objectives. In accordance with this responsibility the
Federal Reserve has customarily supplied the additional
reserves temporarily required by the banking system as a
result of the increase in deposits resulting from the
public sale of a new issue of Government securities for
cash. As such needed reserves are supplied through
open market operations they do not, necessarily, go
directly to the banks which need the reserves; there is
a substantial redistribution of reserves through the
money market and, in due course, those banks that need
reserves tend to get them. Thus, in the case of a
particular member bank, it may find that its purchase of
a new issue increases its reserve requirements and makes
it necessary for the bank to obtain additional reserves
immediately by borrowing; such need, however, should
probably not be extensive, at least for any period of
.-40
8/18/59
time, because of the creation of the additional needed
reserves through open market operations and the distribu
tion of such reserves through the money market.
We concur in Mr. Holland's suggestion that discount
administration should view member bank subscriptions to
new Treasury cash issues as a normal part of the bank's
lending and investment operations for which the bank
should attempt to make provision in scheduling its invest
ment operations and its flow of funds.
In the application
of this general principle there may be circumstances when
a bank subscribing for a new issue may be properly
accommodated by the Federal Reserve under the same general
standards applied in assisting banks to meet temporarily
any unexpected reserve pressure.
Although a bank may be
expected to reduce its holding of Government securities
within a reasonable time after it has subscribed for the
new issue, what constitutes a reasonable time would be
longer if there were continued turbulence in the Govern
ment securities market or disturbance and unsettlement
in the money market.
In the light of these general principles, decision
with respect to the propriety of specific borrowing by
a particular member bank must rest on the judgment of
the Reserve Bank discount officers in the light of all
the facts of the case.
Mr.
Erickson said there was no bank in
could claim it
the First District that
was actually an underwriting bank.
He added that no
member bank during his tenure of approximately 10 years with the
Boston Reserve Bank had raised a question about accessibility to the
discount window in
connection with Treasury financings.
Having been
a commercial banker himself, he agreed heartily with what Mr.
had said.
If
Johns
a member bank did not ask the Reserve Bank about
discount facilities, it
scarcely had reason to complain.
Mr. Erickson
thought that the Holland memorandum was excellent, and he expressed
agreement with what Mr. Mills had said.
-41
8/18/59
Mr. Irons also expressed agreement with the Holland memo
randum.
In the Eleventh District, he said, there were a number of
banks that thought of themselves as underwriters.
On some of the
recent issues, particularly the last tax anticipation issue,
district banks were heavy takers, when measured from the standpoint
of relative size.
Upon receipt of the Holland memorandum, he asked
the Reserve Bank staff to go back several months and compare sub
scriptions for new issues with the borrowings of individual banks
prior and subsequent to the financings.
From this study, he felt
certain no bank in the district could say that it
had been dis
couraged about discounting anywhere near the time of subscription
to a Treasury issue, or that it
had been pressed to get out of debt
to the Reserve Bank within a reasonable period after subscription
to an issue.
No banker had raised the matter with him, Mr.
Irons
said, and no bank that regarded itself as an underwriting bank
had been a borrowing problem.
The few banks that might be called
continuous borrowers were in that category for other reasons and
had not been large subscribers to Treasury issues.
Mr.
Irons saw no important merit to the bankers'
In substance,
complaint,
although he felt the problem had to be considered and an answer
made to the Treasury.
He was inclined to agree with Mr. Johns
that there might sometimes be a tendency to throw the burden onto
the Federal Reserve System when that was not the reality of the
situation.
-42
8/18/59
Mr. Mangels said he would be surprised and disappointed if
any Twelfth District banks were included in those making observa
tions to the Treasury.
Only on rare occasions did the San Francisco
Bank talk to a member bank about its
borrowing program,
and then
only with regard to the cause of the borrowing, the possible duration,
and plans to relieve the need for continuous borrowing.
On the other
hand, there had been occasions when larger banks were encouraged to
subscribe to new Treasury issues that might not otherwise have had a
full degree of success,
continuous borrowers.
even though some of those banks may have been
Mr.
Mangels expressed concurrence in
Mr.
Holland's conclusions but said that two points occurred to him.
First, as the memorandum implied, a program to provide for reserve
needs as a basis for underwriting operations of judicious size was
based on projections of what seemed reasonable in
reserves.
the way of required
Because of differences in the method of preparing the
Board's projection of reserve needs as compared with that of the
New York Bank, this phase of the matter might call for some further
discussion.
Secondly, the question of opening the discount window
specifically to meet underwriting needs would again raise the ques
tion of making advances to Government securities dealers,
either
directly from the New York Bank or indirectly by assuring banks
lending to the dealers of their ability to discount.
Heretofore,
the Open Market Committee had concluded against proceeding in
direction.
that
8/18/59
-43
Mr. Deming said that he had no disagreement with Mr.
Holland's memorandum, which reflected generally the manner in
which the Minneapolis Bank had been operating.
the larger banks in
With respect to
the Ninth District, he said that if
they
borrowed to buy new issues and liquidated the indebtedness within
a reasonable time, the Reserve Bank said nothing.
If
the member
bank continued to borrow and to carry the securities, the Reserve
Bank was likely to say something, and in
essence this was what Mr.
Holland's memorandum contemplated.
Mr. Allen said that his experience, which included rather
close contact with larger underwriting banks,
been said previously at this meeting.
bore out what had
The substance of the matter
was that banks tended to go into a financing when they felt
were going to make some money.
they
Otherwise, they stayed out.
Mr.
Allen raised the question whether too much importance was not being
attached to this matter, although he realized it was necessary to
make an answer to the Treasury.
ment with Mr.
There seemed to be general agree
Holland's conclusions,
and they appeared to reflect
the manner of administration of the discount window throughout the
System.
In the course of further discussion,
gested that it
Chairman Martin sug
was properly of concern to the System if
were making comments to the Treasury.
bankers
The problem could not be
ignored, for eventually it might lead to serious trouble.
He also
-44
8/18/59
noted that in any organization,
including the Federal Reserve System,
there was likely to be a natural inclination to feel that the organiza
tion was right.
Therefore,
it
seemed necessary to go through the kind
of review that had been prompted by the Treasury's questions.
What
ever the facts might be, this was business with which the System must
concern itself
in
order to be able to supply the proper answers.
Continuing the discussion, Mr. Wayne expressed concurrence in
Mr. Holland's memorandum.
people began to think in
He thought it
would be hazardous if
System
terms of treating Treasury needs as an
exception to the principles governing appropriate and inappropriate
use of the discount window.
to provide reserves in
In his opinion,
the most appropriate way
connection with Treasury financings was to
operate through the Desk.
By that process, the reserves reached banks
that were really underwriting banks.
In the Fifth District, there were
no banks that were truly underwriting banks.
Mr.
Bryan said that the Atlanta Bank refrained from making
representations to member banks about borrowing before or after a
Treasury financing and that he could not believe any complaint was
justified as far as the Sixth District was concerned.
He supported
the Holland memorandum for reasons that had already been stated,
including one that was implicit in what Mr. Treiber said.
This
involved asking how one could distinguish between assisting the
Treasury through providing reserves to permit subscription to a new
issue and assisting the Treasury by allowing a bank to hold
-45
8/18/59
investments already in its
portfolio.
There were banks that could
be helped, and the Treasury thus helped also, merely by letting
them keep their current portfolio.
Messrs.
Fulton and Bopp both indicated that they agreed
with the Holland memorandum.
In conclusion, the Chairman responded to a question by
indicating that he would like to consider further, in
the light
of this discussion, the possibility of speaking to the Under
Secretary of the Treasury with regard to his attending a meeting
of the Open Market Committee for additional consideration of the
matter.
It
was agreed that the next meeting of the Federal Open
Market Committee would be held at 10:00 a.m. on Tuesday, Septem
ber 1, 1959.
The meeting then adjourned.
Secretary
Cite this document
Federal Reserve (1959, August 17). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19590818
@misc{wtfs_fomc_minutes_19590818,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1959},
month = {Aug},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19590818},
note = {Retrieved via When the Fed Speaks corpus}
}