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, October 13, 1959, at 10:00 a.m.
PRESENT:
Mr. Martin, Chairman
Mr. Allen
Mr. Balderston
Mr. Deming
Mr. Erickson
Mr. King
Mr. Mills
Mr.
Mr.
Mr.
Mr.
Robertson
Shepardson
Szymczak
Treiber, Alternate for Mr. Hayes
Messrs. Bopp, Fulton, and Leedy, Alternate Members
of the Federal Open Market Committee
Messrs. Leach, Irons, and Mangels, Presidents of
the Federal Reserve Banks of Richmond, Dallas,
and San Francisco, respectively
Mr. Riefler, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Thomas
Messrs. Jones, Marget, Mitchell, Parsons, Roosa,
and Young, Associate Economists
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. Knipe, Consultant to the Chairman, Board of
Governors
Messrs. Ellis, Hostetler, Daane, Tow, and Rice,
Vice Presidents of the Federal Reserve Banks
of Boston, Cleveland, Richmond, Kansas City,
and Dallas, respectively
Messrs. Larkin and Einzig, Assistant Vice Presi
dents of the Federal Reserve Banks of New
York and San Francisco, respectively
-2
10/13/59
Mr. Anderson, Economic Adviser, Federal Reserve
Bank of Philadelphia
Mr. Holmes, Manager, Securities Department,
Federal Reserve Bank of New York
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
September 22, 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
September 22 through October 7, 1959, and a supplementary report cover
ing the period October 8 and 9, 1959.
Copies of both reports have been
placed in the files of the Committee.
Mr. Larkin commented that open market operations had been on a
very limited scale during the period since the last meeting of the Com
mittee.
The System absorbed reserves early in the period mainly through
run-off of Treasury bills that had been arranged prior to the last
meeting.
Later in the period, the System supplied reserves through a
moderate amount of repurchase agreements.
Over the period as a whole,
an increase of $76 million in repurchase agreements slightly more than
offset the decline of $71 million in outright holdings of Treasury bills.
On Friday, October 9, a tender was submitted to run off $60 million of
the maturing October 15 bills held in the System Account so that the
float-induced increase in reserve availability projected for the next
statement week might not be as great as the projections had been
suggesting.
However,
even after allowing for this run-off of bills,
the reserve bulge in the next statement week might be substantial.
10/13/59
-3
The Government securities market, Mr. Larkin said, had been
dominated in
the interval since the last meeting by the overwhelming
response to the new 5 per cent notes.
and in
The response in part reflected,
turn reinforced, the improved market atmosphere that had been
developing throughout the period.
A great deal could be said about
this Treasury financing operation, but it
might be sufficient to note
that total subscriptions amounted to $11 billion, of which $940 million
were paid in full.
small investors,
In attempting to guess how much would come from
the market had estimated figures starting at $300
million and then, as the enthusiasm developed, raised the estimates
to $500 million and then to $750 million.
these estimates.
The actual response exceeded
The rest of the market put on a splendid performance
during the period, except perhaps for the three-month bills.
Prices
were generally firm before the Treasury's announcement of its
cash
issue, then dipped temporarily, and recovered immediately thereafter.
There was only moderate trading in
the market during the period, and
prices of the longer-dated issues rose with virtually no trading at
all.
The 5 per cent notes traded on a when-issued basis as high as
101 and as low as 100-5/8.
The market reaction to the announcement of
the allotments on the Treasury offering on Friday, October 9, was
relatively mild.
initially
The price of the new 5's dropped 1/4 of a point
and some selling did develop, but demand also appeared and
the 5 s recovered 1/8 of a point in
two-way trading,
closing at
10/13/59
-4
100-26/32 bid.
Other issues were little affected by the announcement
of the results of the cash offering.
In Friday's bill auction, the rate on the 91-day Treasury bill
moved up sharply to an average of 4.26 per cent, a new high level.
This
reflected mainly a lack of substantial progress by dealers in moving
the heavy awards of bills they had received in
the previous Monday
auction and a relatively light volume of corporate demand for the
three-month issue.
Corporations at the present time seemed to be
extending the maturity of their holdings and showed preference for the
six-month and longer bills.
established in
The average rate on the six-month bills,
Friday's auction at 4.66 per cent, showed little
from the previous auction.
change
As a result, there was a narrowing of the
spread between the 91-day and the 182-day issues.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the open
market transactions during the period
September 22 through October 9, 1959, were
approved, ratified, and confirmed.
Supplementing the staff memorandum distributed under date of
October 9, 1959,
Mr. Young made the following statement with respect
to economic developments:
The over-all poise of the U. S. economy has been
increasingly obscured by the cumulative impact of the
Indeed, recent major shifts in economic
steel strike.
indicator statistics have largely reflected direct and
indirect effects of that strike.
At the sa.e time, however, there have been other
important economic developments since late spring that
need to be taken into account in appraising the total
situation. These developments, in fact, may hold more
10/13/59
portent for the future than those most immediately associated
with the steel strike. The more important of them merit brief
citation:
(a) More diversity has emerged in the month-to-month
movement of various industry and sector data than was shown
earlier in this cyclical upswing;
(b)
Construction activity has tapered off some as con
struction finance has tightened, and mortgage finance tightening
has now come to an almost critical pass;
(c)
Monetary factors-money supply and velocity-have
shown a flattened trend;
(d) Wholesale commodity price averages have held fairly
steady, with component movements about offsetting;
(e) Market expectations of new commodity price advances
and of profit windfalls therefrom have progressively dampened;
(f)
Investment in bonds vs. equities has made rather
impressive strides towards regaining status,
It cannot be said yet that the danger of inflationary
boom has definitely been overcome, but there is a possibility,
at least, that this has happened.
More positive judgment must
await (a) the steel settlement, (b) assessment of its indus
trial
pricing effects, (c) a test of whether poststrike
inventory scramble and build-up will occur, (d) valuation of
poststrike profit potentials by the stock market, and (e)
indications of foreign reappraisal of our domestic outlook.
In other words, a chain reaction inflationary break-through
could still
occur on the basis of explosive poststrike
On the other hand, there would seem to be less
developments.
of a "likelihood" about such a break-through than prospects
a few weeks earlier might have suggested.
As to specific facts about the current situation:
(1) It now appears that the steel (and copper) strikes
reduced third quarter GNP by $5 to $6 billion, annual rate,
This would bring GNP for the third
or about 1 per cent.
quarter down to something under a $480 billion rate.
Secondary effects of the steel strike have thus
(2)
far been limited because of the large inventory holdings
For the entire economy,
accumulated in anticipation of it.
from a $10 billion
shifted
evidently
inventory accumulation
accumulation or
zero
to
a
quarter
second
the
in
rate
annual
quarter.
third
the
in
decumulation
slight
Industrial production, which declined from 155 in
(3)
back in September another point
in August, fell
149
to
June
and minerals output all
durables,
nondurables,
with
to 148,
strike effects will hit
steel
Secondary
little.
a
declining
if there is a return
even
October,
in
hard
output
industrial
Steel products will not become available
to work next week.
soon enough to prevent a spread of output curtailments
through metal fabricating industries.
10/13/59
-6-
(b) Abstracting the 700,000 workers put out of work by
the steel strike, the labor market has continued to manifest
a fair degree of strength. Unemployment, however, failed to
show its usual seasonal decline in September so that the
unemployment rate rose from 5.5 to 5.6 per cent. Nonfarm
employment over all about held even. Major labor market areas
not directly affected by the steel strike made employment gains,
and this removed 19 markets from the substantial surplus cate
gory.
There were 35 major market areas still
classified in
this category in September compared with 89 so classified in
September 1958 and 24 in September 1957.
(5) With strikes in primary metals curtailing industrial
output, new orders and sales at durable goods manufacturers,
which had declined some in July, fell
sharply (10 per cent
roughly) in August.
The further decline more than offset
strength in nondurable goods lines, so that total manufacturing
sales were down 5 per cent.
The fall-off in durable goods
orders would suggest that fourth quarter expansion in business
plant and equipment expenditures may not attain the earlier
projected volume.
(6)
Total retail sales, which were at a record level in
1 per cent in August and 2 per cent in September.
July, fell
Reduced sales were fairly general, but were more marked for
durable goods stores than others.
Consumer instalment credit expansion in August main
(7)
tained its $6 billion annual rate attained in July. For
September, however, retail sales indications point to some
slackening of growth. Expansion of home mortgage indebtedness,
half year at a record pace, may also
which proceeded the first
Secondary markets for insured and
have slowed some since.
guaranteed mortgages have been under mounting pressure, with
Conventional mortgage rates
discounts continuing to widen.
have risen further, with West Coast quotations recently as
high as 7.2 per cent.
back some from the
In August, U. S. exports fell
(8)
close to the high
still
were
they
but
volume,
July
swollen
late
winter-midspring
the
above
per
cent
some
8
and
rate,
June
the high late
below
little
a
remained
imports
August
level.
balance,
trade
the
in
improvement
that
so
level,
spring
reported earlier for June and July, was extended for another
month.
(9) While some basic materials prices have strengthened
recently, average prices of industrial commodities generally
at levels reached in May.
have continued to change little
changed in recent weeks.
little
been
also
have
prices
Farm
prices has been steady.
wholesale
all
of
average
Thus, the
activity in Europe
business
of
state
(10) The general
continues to be very strong, with advances in industrial
10/13/59
-7-
output widespread and substantial. In Canada, industrial
production leveled out from late Spring through July, but
most recent indications are of resumed advance in Canadian
economic activity.
Memoranda on the outlook for Treasury cash requirements and on
the outlook for member bank reserve positions, prepared by the Board's
staff, had been distributed under date of October 9, 1959.
With further
regard to the current financial situation, Mr. Thomas made the following
statement:
Leveling of economic activity noted in recent weeks and
the passing of mid-September cash needs have been reflected
in a marked lessening of pressures in financial markets.
To
what extent these developments may be attributed to the ef
fects of the steel strike and to what extent restraints on
credit expansion and rising interest rates have been an
influence is a matter for conjecture. In any event, the
need for stringent restraint has lessened--at least for the
present. Early settlement of the steel strike would most
likely rapidly change the situation. The underlying forces
of expansion have by no means run their course and there are
still
risks of speculative commitments and of cost and price
increases that will sooner or later lead to instability.
The most spectacular and significant recent development
has been the change in the tone of the Government securities
market. Following marked weakness and a pervasive feeling
of fear as to the future that reached an apex around the
middle of September and brought interest rates to new high
levels for 30 years, buying has appeared in the market and
interest rates have turned down or stabilized. To a sub
stantial degree the severe tightening was due to pressures
resulting from attempts of holders of Treasury securities
to obtain cash to meet usual large liquidity needs around
mid-September. When this period had passed, pressures
relaxed, as might have been expected. Retirement of Septem
ber tax bills reduced the supply of short-term securities in
the market.
An important factor in the change, however, was the
Treasury financing offering. By offering a long note at
an attractive rate, the Treasury drew savings into the market
in large amounts and also made possible a reduction in
10/13/59
demands on the short-term market.
As a consequence both
sectors of the market responded favorably.
It is significant that the September-October develop
ments corresponded in many respects to those of June-July.
Both included large quartely cash demands for taxes and
other payments that exerted temporary pressure in the bill
market. These pressures were later reversed as the funds
flowed back to the market.
Both included large Treasury
cash financing operations, which the market feared in
prospect but which were effected with unexpected smoothness
when the Treasury offered new high and attractive rates on
its
offerings.
One possible difference between the two periods was that
in July large financing needs for the Treasury still lay ahead,
whereas after the October operation the future task will be
much lighter.
The mid-year Budget Review, indicating the
prospect for a balanced budget in this fiscal year, provides
the basis for concluding that cash financing needs for the
next eight months will be relatively light and will be more
than offset by other debt retirement in the period.
Three
cash issues of $2 billion each, in addition to refunding
operations, may suffice. To provide securities to retire the
excess of tax receipts in June, half or more of the new issues,
in addition to the one now being offered, will need to mature
in that month. An additional offering will be needed to
complete the cycle of bills maturing quarterly. Further exten
sion of public debt maturities, which presents a formidable
task, may need to be effected through refunding issues rather
than through new cash offerings.
study.
That task deserves some
These cash borrowing needs could prove to be larger than
estimated.
Expenditures might be larger than have been allowed
for in the budget estimates; prolonged strikes might reduce
incomes and profits and lower tax receipts; or heavy net
redemptions of savings bonds could bring an added drain on
the cash.
Any bias in the estimates is probably toward attain
ment of a surplus; it is less likely that the surplus will be
greater than that there will be a deficit.
Capital market financing by corporations and by State and
Yields on
local governments was relatively light in September.
high-grade issues rose during September to new high levels.
Moderate increases in offerings of new securities are expected
in October, and some rather large issues are scheduled for
offering later this year. Reports also indicate that a sizable
volume of private placements and of term loans at banks is being
Common stock prices declined in September, trading
arranged.
activity has been lighter, and stock market credit has declined.
This may be attributed to some extent to the higher interest
rates and a growing tendency by investors to shift to bonds.
10/13/59
-9-
Residential mortgages are being written in very large
volume.
There are indications, however, of a leveling off
and perhaps reduction in new commitments for future acquisi
tion of mortgages.
Interest rates on mortgages continue to
rise. Consumer credit is expected to continue to expand at
a rapid pace and may result in heavy demands on the capital
market, particularly if finance companies find difficulty in
obtaining loans at banks,
Bank loans have continued to expand at a substantial,
though not unprecedented, pace. Seasonal borrowers have
shown rather substantial increases. Public utilities have
also borrowed heavily at banks. Loans to processors of metals
and metal products have shown a decline, which might be
attributed to the steel strike, but decreases frequently occur
at this time of the year--perhaps reflecting in part auto-model
changeovers. Bank loans to finance companies declined in
September after increasing in July and August. Consumer loans
at banks, however, have increased rather steadily, as have
real estate loans.
Bank loan expansion at city banks since mid-year has been
largely offset by reductions in bank holdings of securities,
which continued at a substantial pace in September. Country
banks, however, showed only a small decrease in their holdings
of Government securities in September and a net increase for
the third quarter as a whole, in addition to a substantial
loan expansion.
As a net result of the loan expansion and the decrease
in holdings of securities, total loans and investments of all
commercial banks showed little change in September and a moderate
increase since June. A large part of the growth has been ac
companied by an increase in United States Government deposits
at banks. Time deposits have increased only moderately. The
money supply-demand deposits and currency--which increased
more than seasonally in July, showed seasonally-adjusted
declines in August and September. On balance, there has been
little growth in the money supply--seasonally adjusted--since
March. On a daily average basis, the total is about 2 per
cent larger than a year ago and 4 or 5 per cent larger than
in the third quarter of 1957.
In the first half of October, Treasury deposits have been
sharply reduced, but they will be increased again in the next
week as payments are made on the new financing, and then drawn
down until the latter part of November. The effects of these
cash shifts on private deposits remain to be seen. In view of
public participation in the new note issue, there should be a
drain on private deposits, with
heavier than usual initial
less bank credit creation. The subsequent course of events
10/13/59
10--
will depend on the strength of other demands for credit, the
pressure on banks to continue to liquidate Government securi
ties to meet these needs and hold down their own borrowings,
and the public's desire to add further to their holdings.
Reserves have been supplied in recent months to meet
seasonal and other temporary demands for bank credit and money.
Except for temporary variations, member bank borrowings at the
Reserve Banks have averaged around $1 billion, with net
borrowed reserves close to $$00 million. Banks have met loan
demands by selling securities, which have been absorbed by
nonbank buyers.
Thus it may be said that the restrictive policy
has been effective in checking expansion in the money supply,
although the public's liquid asset holdings have increased
through the purchase of Government securities--both from the
banks and from new issues.
At the same time, turnover of demand deposits has shown
little
change since last spring.
This would appear to indicate
that the increase in the public's liquid asset holdings,
principally short-term Government securities, has not been
accompanied by a further acceleration in the use of existing
Question may be raised whether the prolonged
cash balances.
postwar trend toward increasing monetary velocity is reaching
has not
its zenith. The rate is approaching, but still
reached, the high level that prevailed in the late 1920'sthe latest period comparable with the present.
To meet customary seasonal needs for currency and required
or no
reserves, without increasing existing restraints, little
further addition to bank reserves will be needed until the end
of October. In the course of November about $500 million or
more of additional reserves will be needed and another $400
In
half of December.
million should be supplied in the first
January the reverse flow will amount to over $1 billion.
In view of the current slackening in the expansion of
economic activity and in view of the apparent flow of savings
into Government securities, question may be raised as to
whether as much restraint is needed as has been applied. Some
resumption in the growth of bank credit and the money supply
may well be appropriate. There is a risk, however, in supplying
additional reserves that the increased credit will go into
consumer loans and into financing more speculative or longer
term commitments than banks should be engaged in under current
The danger would become particularly
or prospective conditions.
buying or other activities
inventory
of
spurt
a
great in case of
strike. The situa
steel
the
of
cessation
a
follow
that might
order to be alert
in
watching
careful
bears
tion is one that
some modera
present
the
for
if
restraint
to any need for more
for
prospect
likely
most
The
appropriate.
tion is considered
not
if
that
elements,
unsustainable
on
based
1960 is a boom,
restrained will lead to a recession in 1961.
-11Mr. Marget commented substantially as follows with respect to
the United States balance of payments:
It seems to be an unfortunate characteristic of some
topics of discussion that once they make the newspaper
headlines, confusion becomes worse confounded. That was
true, certainly, of the matter of international gold
movements, when our gold outflow was at its peak last year.
Now that our balance-of-payments situation has made the
headlines, as a result of Secretary Anderson's speech at
the Annual Meeting of the International Monetary Fund two
weeks ago, the same kind of thing seems to be happening.
On the one hand, there has been talk--in the New York
Times the Sunday before last, and, a few days later, in
Walter Lippmann's column--of how the deficit in the balance
of payments has not only been "persistent", but has been
"growing."
On the other hand, the Times itself, just a week earlier,
had published an article in which it cited some unnamed
"officials" of the U. S. Government as believing that if the
rate of recent improvement in our exports keeps up, "it is
reasonable to expect next year's exports to come close to or
reach $20 billion. At that level... the payments deficit
would be reduced sharply or eliminated." And the London
Economist said virtually the same thing at about the same
time
"While Mr. Anderson's sense of concern, if
not alarm, is obviously genuine, it should be
pointed out that a number of other experts inside
It
and outside the government do not share it.
is entirely possible to estimate conservatively
that American commercial exports next year will
reach the $20 billion level; at this point the
payments deficit would probably be so small as
to be negligible."
Who is right? As usual when one finds such categorically
contradictory views on what should be matters of fact, neither
has a sound basis of fact.
The extremely pessimistic view, to begin with, which talks
"growing," has been
of our balance-of-payments deficit as still
out of date since June of this year, when our imports stopped
increasing and our exports began to show a marked improvement.
The extremely optimistic view, on the other hand, which
looks forward to a $20 billion level for commercial exports
for next year, at which point "the payments deficit would
probably be so small as to be negligible," is based upon
10/13/59
-12-
hopes, which may or may not come to be realized; it certainly
does not represent anything that deserves to be called a
"conservative estimate." What has happened to our balance
of payments since June of this year does, indeed, justify a
revision of those projections which assumed that the second
half of this year would show a continued deterioration. This
is true, for example, of the projection produced under the
auspices of the National Foreign Trade Council, which fore
cast a balance-of-payments deficit for this year of $4.5
billion, as against a deficit of $3.
billion last year.
But our figures for gold and dollar movements in July to
September of this year (though they are still
incomplete)
would suggest that the over-all balance-of-payments deficit
for that period was still
in the neighborhood of $4 billion
seasonally adjusted annual rate. That is still
a long way
from the average deficit of $1.5 billion that we ran from
The change in direction in our balance-of
1950 to 1957.
payments deficit that seems to have occurred in June is
certainly to be welcomed, but there is no reason why it
should lead us to suppose that our problems with respect to
our balance of payments have ceased to exist.
Mr.
Treiber presented the following statement of his views with
respect to the business outlook and credit policy:
The steel strike is the most important factor in the
current economic situation. It is now having an important
Increasing shut-downs
impact on steel using industries.
and resultant unemployment are in prospect if steel produc
tion is not resumed promptly.
As the effects of the steel strike have spread, it has
become increasingly difficult to assess the underlying
strength of the economy. While there have been declines in
a number of statistical indicators, one may properly con
clude, we believe, that there has not been a significant
weakening in the basic strength of the economy.
If the steel companies and the unions do not resolve
their deadlock soon, the atmosphere of continuing un
certainty could seriously damage the underlying strength
Should a settlement be
of business and consumer demand.
reached soon, a renewed upsurge in over-all activity seems
And, of course, if the terms of settlement are
likely.
inflationary, the ramifications will certainly be widespread.
While September witnessed a further increase in bank
credit, the rate of expansion was not as rapid as in the
10/13/59
-13-
preceding months.
A sharp decline in security loans was
accompanied by a less brisk growth of business loans.
The banks have continued to liquidate U. S. Government
securities at a substantial rate, thus reducing total loans
and investments.
Consumer credit continued to expand in August, although
at a somewhat slower rate than the record upsurge of July.
Consumer credit bears watching. General credit controls have
limited effect on the expansion of consumer credit.
If con
sumer credit continues to expand rapidly, the possibility of
direct controls will need consideration.
There has been increased public interest in intermediate
and long-term Government securities, and a resultant decline
in the yield on those issues.
On the other hand, public
interest in short-term issues has lessened.
The yield on
three-month Treasury bills awarded in the auction last Friday
reached an all-time high.
The Treasury is halfway through its current $4 billion
cash financing.
One financing operation is hardly finished
By the end of this month the Treasury
before there is another.
will launch a refunding operation, and next month it will
probably announce plans to raise perhaps $2 billion in cash.
The money market has continued tight. In the fourth
quarter of the year seasonal factors will put further pressure
on bank reserves.
The present business uncertainties counsel a Federal Re
serve policy of marking time over the next three weeks.
The
general strength of the economy, the relatively well-sustained
likely prospect that
demand for bank credit, and the still
settlement of the steel strike will be followed by a period of
rapid recovery and expansion, all suggest that a firm rein be
kept on credit availability. At the same time, circumstances
do not call for any action to increase the degree of credit
restraint, whether through open market operations, changes in
the discount rate, or changes in the directive.
Especially in the light of the high short-term interest
rates, it would seem unnecessary to seek to offset the tempo
rary bulge in reserves that may arise in the next statement
week from the mid-October large increase in float. If there
is a settlement of the steel dispute within the next three
weeks, the Management of the System Account will have to be
particularly alert to possible repercussions in the financial
markets.
Mr. Bopp commented substantially as follows with regard to Third
District economic developments and monetary policy:
10/13/59
-14-
The "fabulous 5's" certainly have cast doubt on the oft
repeated statements that the rate of interest isn't
of much
significance to savers or that there is something inherently
wrong with Government bonds.
In the Third District five per
cent apparently pulled savings "out of the ground," from under
the mattress, and from every type of savings institution. To
use a phrase from the Radcliffe Report, the five per cent
coupon seems to have been a "change of gear." We had 6,287
subscribers whose fully paid subscriptions totaled $50 million.
The total number of subscribers was 6,957, for an aggregate of
$412 million.
In the Third District, the secondary effects of the strike
have not snowballed as much in the last few weeks as earlier
anticipated.
Indirect unemployment has increased only moderately
in the past three weeks--about 7,500. Most of these newly idled
were in metals and metal products manufacturing.
A few locali
ties have been hard hit. In Johnstown, Pennsylvania--a
chronically depressed area--about one-fourth of its prestrike
employment has been idled by the strike; in the Allentown
Bethlehem-Easton area about 10 per cent have been idled. In
some of the harder hit areas, the effects of the strike are
spreading to other economic sectors such as retail sales and
In the Philadelphia Metropolitan
electric power consumption.
evidence as yet that the adverse
Area, however, there is little
Factories closely dependent
effects of the strike are spreading.
on steel estimate they have sufficient inventories to last well
into or even beyond October.
The unemployment situation in the district continues to
In September two major labor market
show moderate improvement.
areas--Philadelphia and York--were raised from Classification D
(6 per cent to 8.9 per cent unemployed) to C (3 per cent to 5.9
One minor area was removed from the substantial
per cent).
However, five major and 11 minor areas remain
surplus list.
in the substantial surplus classification. New unemployment
claims in Pennsylvania, although up somewhat in the last few
weeks, are well below a year ago and are running at about the
1957 level.
Weekly changes in department store sales have been erratic
Sales for the past four weeks were 3
in the past few weeks.
per cent below, and for the year-to-date 5 per cent above, last
year.
Automobile sales declined seasonally in August and
preliminary data for Philadelphia indicate the same trend in
September; however, sales were well above a year ago.
10/13/59
-15-
Construction contract awards in August were 13 per cent
below a year ago, all major categories showing declines, but
the total for the year-to-date was 7 per cent above last year.
There was little
change in total loans of district
reporting banks in the three weeks ending October 7.
Increases
in security loans and loans to consumers were largely offset by
reductions in loans to business firms and nonbank financial
institutions.
Banks continued to liquidate securities, and
total investments of reporting banks were nearly $350 million
below a year ago.
All categories of deposits decreased but the
total decline was less than in the same period last year.
The basic reserve position of the large Philadelphia banks
has been somewhat easier during the past three statement weeks;
the daily average deficiency has ranged around $50 million as
compared to $70 to $85 million in the first part of September.
These banks met their deficiencies by selling securities,
borrowing from the Reserve Bank, and purchasing Federal funds.
Their daily average borrowing from the Reserve Bank during the
past three weeks ranged from $26 million to $38 million.
Borrowing from the Reserve Bank by country banks rose from a
daily average of $4 million to $11 million in the latest week.
As to monetary policy, I find it difficult to make a
recommendation even for three weeks.
This difficulty arises
from what appears to me to be an incipient divergence between
basic forces and anticipations-or psychology.
Basically, it seems to me that economic developments and
current Treasury financing call for no change in the next three
weeks.
On the other hand, a rapid change to pessimism concerning
prospects for the fourth quarter, including diminished consumer
and other demands for credit, could result in a rapid advance
in the prices of Government bonds and speculation in the Novem
ber rights that might cause us difficulty.
My uncertainty arises from the volatile nature of anticipa
One reason for the present level of interest rates is
tions.
the anticipation of further inflation. The System has been
Should it be
trying to curb that anticipation for a long time.
be
appropriate.
would
curbed, a lower level of rates
If, however, a decline in rates, in turn, is interpreted as
meaning that the System will ease credit markedly at the first
sign of adverse developments, we may end up by reinforcing the
judgment that in the long run inflation is the more likely
prospect.
Thus, changing anticipations may lead to wide and frequent
movements in bond prices, unwarranted by basic developments and
thus harmful in their effects.
My tentative conclusion is that the Manager of the Account
should have considerable leeway in terms of reserve positions
-16
10/13/59
and interest rates but should endeavor to maintain the
present degree of restraint in terms of the total feel
of the market. I would not favor a change in the directive
or in the discount rate.
Mr. Fulton characterized the prolonged steel strike as represent
ing a serious situation, adding that many users of steel were understood
to be getting into desperate straits.
Plants had been swapping inven
tories and substituting types and gauges of steel, but these possibilities
were now becoming exhausted.
There had been many layoffs of workers, and
the layoffs would become cumulative if the strike should continue for
even another week.
After reviewing reports concerning the tenor of representations
before the Presidential board of inquiry, Mr. Fulton said it
was believed
that the steel workers would go to work if the provisions of the
Taft-Hartley law were invoked,
they would engage in
to the mills, it
although there was the possibility that
slowdown or delaying tactics.
If
the men returned
seemed possible that production might rise to around
50 per cent of capacity within about a week, barring slowdown tactics,
but after that the improvement of production might be slower because of
damage to the furnaces and other factors.
were so empty in
production it
In any event, the pipelines
certain types of steel that regardless of the rate of
would be some time before manufacturers could obtain
satisfactory supplies.
Also, there apparently would be problems with
regard to the shipment of ore.
In the Cleveland harbor, there were
now 10 or 12 ore boats waiting to be unloaded, but it
is
customary for
the crews to take other jobs during the winter and some crew members
10/13/59
-17
reportedly already had taken other employment.
Therefore, although
there were rather large stockpiles of ore, the prospects for hauling
them down were rather dim, aggravated by the limited capacity for
transportation of ore by rail.
While neither management nor labor
favored the invoking of the Taft-Hartley Act, management was at
least willing to have it
invoked.
If the strike should resume after
the 80 days provided by the Act, Congress would be back in session,
and it
seemed possible that legislation unwelcome to both labor and
management might be enacted.
Mr. Fulton went on to say that the glass container industry
was now crippled by strike, which closed off an alternative for
industries marketing their products in containers.
Rather surprisingly,
even in the hardest hit steel communities, the rate of delinquencies in
loan repayments thus far was not excessive.
Fourth District employment
declined about 5 per cent in July and August, a period of the year when
employment normally rises about 1 per cent.
Department store sales had
slipped somewhat, particularly in steel towns, but for the year to date
were still 6 per cent above last year.
Reflecting sustained demand for
loans, banks had been selling investments to accommodate borrowers but
borrowing from the Reserve Bank had not been excessive.
Mr. Fulton expressed the view that the Desk had been doing a
good job with open market operations and said he was not concerned
that a little
ease may have crept into the picture from time to time.
He felt that the Manager of the Account should be given a wide degree
10/13/59
-18
of latitude and that the general feel of the market, as it
existed recently, should be continued.
in
had
He would not favor a change
either the discount rate or the directive at this time.
Mr.
King referred to an observation by Mr.
effect that the current leveling-off trend in
Thomas to the
several areas of the
economy could represent either the results of the steel strike or a
natural leveling-off process that would have taken place regardless
of the strike.
extent the latter
by Mr.
It
was his guess that the situation reflected to some
process.
The analysis of monetary policy presented
Bopp reflected his own thinking, and he subscribed to that
analysis entirely.
It was Mr. King's feeling that the steel strike was likely to
play havoc with the economy before it was settled.
The strike involved
matters of principle that were being argued vigorously on both sides
and it seemed possible, therefore, that negotiations could drag out
for a long time.
Also, as Mr. Fulton pointed out, if the Taft-Hartley
Act were invoked, it
would take some little
time before the mills could
get back to substantial production, and the lack of enthusiasm on the
part of the workers was bound to be felt
even though no instructions
were given for slowdown.
In spite of this serious situation, Mr. King expressed the hope,
as to monetary policy, that the present degree of restraint could be
maintained.
He would prefer not to err on the side of ease.
Although
he would favor supplying such reserves as necessary to meet seasonal
10/13/59
-19
needs, he would not care to give the impression of any change in
policy, especially on the side of ease.
Mr.
Shepardson expressed the opinion, in view of the existing
uncertainties,
that this was a period in which it
to mark time and not to make any change in policy.
would be appropriate
He questioned
somewhat any suggestion that the Desk not try to offset the rather
marked drop in negative free reserves projected for next week, because
a failure to offset might be regarded as an indication of easing that
was not intended.
By this he did not mean to say that restraint should
be increased, but he wondered if
the projected decrease in net borrowed
reserves was not a wider swing than would be justified.
Mr. Robertson expressed agreement with Mr. Shepardson's view
that this was a time to sit
could turn in
still
either direction.
and watch, because the situation
As Mr.
Bopp suggested, a depressant
psychological attitude could develop rapidly but, on the other hand,
there could be an upward surge.
It
might even be possible that between
this date and the next scheduled meeting of the Open Market Committee
there would have to be a special meeting of the Committee.
In the
interim, however, he felt that the current degree of restrictiveness
should be maintained.
He agreed with Mr. Shepardson that the Desk
should attempt to offset, at least to some extent, the projected
decrease in net borrowed reserves in
public.
In other words,
order to avoid misleading the
he would do whatever was necessary to
10/13/59
-20
indicate that the System was maintaining its
existing position.
Mr. Mills commented that when the discussion turned to
maintaining the existing degree of restraint or temporarily standing
still,
he was disturbed by the thought that the rigid maintenance of
a high level of net borrowed reserves tended to produce a relentless
contraction of banking resources,
beginning to be felt
in
the effects of which were only now
full force.
In his thinking, everything in
the economic discussion suggested the kind of moderating of System
policy that he had advocated on earlier occasions,
Mr. Mills then
read the following statement:
The Federal Reserve System's most pressing problem is
to discover the means of extricating the economy
from the
delayed effects of a contractive monetary policy that is
identified by a high level of negative free reserves and
which has only now come into full view in the sharp reduc
tion that is taking place in the money supply and in the
dead center position that has been reached by commercial
bank loans and investments.
Whereas a more moderate policy
of credit restraint has, in my opinion, long been in order,
even a slight shift in policy under present conditions
threatens the possibility of promoting an upward movement
in the prices of U. S. Government securities that would be
Public
out of line with any easing of reserve pressure.
response to the Treasury's current offering of five per
cent notes and a sympathetic strengthening in prices
of U. S. Government securities
over the entire list
testifies not only to the investment attractiveness of
this issue, but also to what might be the explosive market
effects if the Federal Reserve System should supply reserves
too freely.
Any solution of the problem that would not provoke an
distortion in the structure of interest rates
artificial
demands a cautious approach in shaping the supply of
reserves and expanding the availability of credit.
Fundamentally, the present situation that is symbolized
10/13/59
-21-
in the response to the Treasury's five per cent note
involves a public reorientation in the choice of in
vestment outlets in favor of the Treasury and at the
expense of previous investment positions.
Whether
this kind of process can go on without starving some
deserving field of investment remains to be seen.
What is happening gives dramatic effect to what I
understand is the theory of evolving a monetary policy
that has as its objective equating the supply of and
demand for investment funds through an interest rate
that will attract all available idle funds into the
investment market.
In the light of present experience,
however, the mechanical result of implementing such a
policy is to limit the money supply to a level that, as
represented by the total volume of commercial bank loans
and investments, will compel the banks to desist from
any new creation of bank credit and to confine their
activities to substituting existing loans for invest
ments or vice versa. In effect, this process seemingly
contemplates that new capital formation shall depend
exclusively on savings without any intermediary assist
from commercial bank created credit, and espouses
Irving Fisher's proposal for "100%money." Although it
is obvious that the ineluctable results of the monetary
policy that the Federal Reserve System has been following
are not intended, the dangers to economic growth and
stability implicit in such a policy cannot be overlooked.
Newly created commercial bank credit under proper central
bank control is an essential solvent to economic progress,
and it is because of that truism that current System
policy should be judiciously moderated so as to prevent
the reserve pressures that have been built up from barring
the commercial banking system from its normal and accepted
functions.
Mr. Leach reported that although the Fifth District economy re
mained strong in most major lines of activity, the continuing steel strike
was having increasing effects.
The textile industry continued in a strong
position, while in the furniture industry production and shipments were
both establishing new records for recent years.
Cigarette production
continued to expand, assuring that 1959 output would be 3 per cent or
10/13/59
-22
more above the previous record.
Reflecting the widening effects of
the continuing steel strike, man-hours worked in manufacturing in
dustries, especially primary and fabricated metals, had been declining
at a quickening rate, coal production remained at reduced levels, and
retail
trade was showing further weakness.
whole, cash receipts of farmers in
change from last year.
For the district as a
1959 seemed likely to show little
A recent survey of selected bankers indicated
that farm costs and the need for capital improvements had continued to
increase, resulting in a growing demand for credit and weakening in
cash reserve position of farmers in
some areas.
the
The heavy pressures on
district member banks had eased somewhat since the last meeting of the
Committee,
as indicated by a slackening loan demand, a slowdown in
reduction of investments,
the
a much lower level of borrowings from the
Reserve Bank, and net sales of Federal funds by banks active in
this
market.
In view of the increasingly adverse effects of the steel strike
on the economy and uncertainty as to the time and nature of settlement,
Mr.
Leach felt that it
restraint at this time.
would be a mistake to increase the intensity of
On the other hand, he did not believe the
current economic situation called for a change of policy in the direction
of ease.
Aside from the economic situation, Treasury financing con
siderations suggested that there be no tightening or easing for the
time being.
change in
He would therefore favor no change in
the directive, no
the discount rate, and no appreciable change in
the degree
10/13/59
-23
of pressure being maintained.
He would continue to resolve doubts
on the side of ease and make reserves readily available to take care
of seasonal needs.
Mr. Leedy reported signs of leveling off in some sectors of
the Tenth District economy.
Construction contracts awarded in August
were 11 per cent below the year-ago level, marking the third consecu
tive month in which such awards were below the corresponding month of
1958.
An important factor in the two most recent months had been the
lower level of residential construction awards.
Since June, the
cumulative total of such awards had fallen from 33 per cent above last
year to a margin of only 19 per cent above.
It was residential con
struction that had kept total district awards ahead of 1958; other
types of construction were down more than 7 per cent for the 8-month
period.
Insured unemployment in States of the district for the first
part of September was little changed from the previous month.
Depart
ment store sales also showed a leveling off, and in the past four weeks
averaged only slightly better than a year ago.
On a cumulative basis,
department store sales were about 7 per cent above last year.
Total
loans of reporting member banks were virtually unchanged during the
past few weeks with commercial and industrial loans declining slightly;
investments were down slightly from three weeks ago, and demand deposits
in September also declined.
While there were increases in both business
and Government deposits, decreases in interbank deposits more than offset
those gains.
10/13/59
-24
Turning to policy, Mr. Leedy expressed concurrence in the
thought that during the period immediately ahead the System should
engage in watchful waiting, with emphasis on the word watchful.
The
longer the steel strike continued, the greater seemed the possibility
that public psychology and sentiment might change rather rapidly, and
the cumulative effects of the strike must be taken into account.
Nevertheless, he subscribed to the view that the System should not
undertake any easing of reserve positions as matters stood at the
moment.
On the other hand, he would favor responding to seasonal needs
readily, and he certainly would undertake to see that no further tighten
ing occurred.
If the target was to be missed, he would be inclined to
undershoot it slightly.
Mr. Allen presented the following comments on economic and
financial developments in the Seventh District
Aside from the accumulating effects of the steel strike,
there appears to be little evidence that the underlying
strength of business in the Seventh District has waned in
recent weeks. Aggregate employment and trade are holding
near pre-strike levels, and credit demands for business, real
estate, and consumption purposes remain vigorous. Wholesale
and retail merchants are preparing for a high level of fall
and holiday business. The only important exception to this
picture appears to be in the field of residential construction
where lenders have sharply curtailed new commitments. But
overall, there seems to be general agreement that an upsurge
in general business activity will develop upon conclusion of
the strike.
The immediate effects of the strike thus far have not
been important. The number of persons receiving unemployment
compensation in our major cities is only slightly higher
-25than it was when the strike began. Aside from Gary, only
4,500 Chicago area workers have been laid off because of
steel shortages through the first
of October--a small
number in a city which has about one million manufacturing
workers.
In Detroit automobile assemblies have not been far
from pre-strike programs.
General Motors says it can main
tain scheduled assembly until October 31; Ford and Chrysler
until November 15.
But the cumulative effects are another matter. Before
the strike passenger car assembly in the fourth quarter was
estimated at 1,900,000 cars. As of October 1 it was believed
that steel shortages to come meant that 400,000 cars must be
deducted from the 1,900,000 figure, and that for each October
week of the strike the anticipated quarterly total must be
reduced by another 125,000, or by 500,000 plus if the steel
strike continues through October.
Thus it seems certain that, even if steel operations
begin very soon, automobile assembly plants will operate at
reduced schedules or will have shut-down periods during the
balance of the year.
At a recent meeting of this Committee I reported that
one of our important steel companies had told us that, follow
ing the end of the strike, they would reach 60 per cent of
capacity by the end of one week and would be close to capacity
production by the end of two weeks.
We inquired of the same
company a few days ago and they gave us the following revised
estimates which are on a weekly production average--a slightly
crews will go to
They assume that the first
different basis.
work on October 15.
First week--average 32 per cent of capacity
Second week--average 74 per cent of capacity
Third week--average 88 per cent of capacity
Balance of 1959--average 95 per cent of
capacity
Putting those figures together, they say they would average 86
per cent of capacity from October 15 to December 31, and they
think that other companies could do about the same, with some
allowance for those producing a greater percentage of cold
rolled steel.
Loan demand in the Seventh District remains fairly strong.
Total loan growth during the third quarter at our weekly re
porting banks totaled 6 per cent against 3 per cent for all
reporters in the country, with part of the difference reflecting
the fact that security dealers have obtained a larger portion
of their financing in recent weeks from banks in our area where
reserve pressures had not been as severe as in New York.
10/13/59
-26
Loan concentration appears greatest at our largest banks,
which banks have been borrowing more at the discount window
and through the Federal funds market, whereas the volume of
country bank borrowing has dropped markedly, as has the num
ber of borrowers.
Continuing,
Mr. Allen said that, while flexible monetary policy
called for detecting any change in
economic conditions as quickly as
possible, he agreed with the views expressed to the effect that the
System should mark time for the next three weeks and that the Account
Management should attempt to maintain about the current degree of re
straint.
If
possible, the Desk should avoid a very low figure of net
borrowed reserves in
the next statement week,
concerned on that point.
but he was not greatly
He recalled another week recently when the
net borrowed reserve figure was lower than usual and the market
apparently understood that the situation was attributable to a
temporary increase in float.
At this point Mr.
Treiber commented, in amplification of his
previous statement on the anticipated temporary bulge in reserves,
that he felt the Desk should try to maintain the current feel of the
market.
For that purpose some offsetting might be necessary, but it
did not appear that any vigorous action would be required.
Mr.
ments in
Deming said that he was not happy about economic develop
the Ninth District.
The steel strike and the month-long
copper strike had hurt activity in primary metals significantly and
the secondary effects had been growing steadily.
While secondary
-27
10/13/59
unemployment was still
week.
relatively small, it
was increasing week by
Coupled with a decline in cash farm income in August to a
level 17 per cent below a year ago, the situation added up to a
noticeable slowing down in the pace of economic activity.
One bright
spot was that there had finally been some moisture in the form of rains
and snow so that the district was going into the winter with somewhat
better soil moisture conditions.
up in
Fifty-nine ore boats were now tied
the Duluth-Superior harbor, and ore could begin moving in a
couple of days if
however,
the strike was settled.
With the best of luck,
the ore shipping season was not likely to extend beyond mid
December.
Under the most favorable conditions, as much ore could be
moved in 1959 as was moved in 1958, but 1958 was about 40 per cent
below the good years of the postwar period.
first
time in
In September, for the
several years, bank clearings in
the Twin Cities
declined from a year earlier, which might or might not be a develop
ment of significance.
Mr.
Deming said that if he were to suggest a policy prescription
based solely on Ninth District developments,
easing, not because he thought it
immediate expansion of activity in
he would suggest some
could accomplish much in the way of
the face of declining farm income
and effects of the steel and copper strikes, but because it
to be generally appropriate.
While the national picture was brighter
than the Ninth District picture, it
restraint and, on balance,
would seem
hardly warranted any increase in
might argue for a very mild backing away
10/13/59
-28
from the present level of restraint.
To accomplish this, he would be
inclined to meet seasonal demands for reserves with little
reluctance but not go beyond that.
or no
As he saw it, this represented no
significant difference from the views expressed by Mr. Bopp and others
who advocated a policy of watchful waiting, with no appreciable de
parture from the present degree of restraint.
Mr. Mangels said that such changes as had appeared in
District economy were of a minor nature.
Employment, personal income,
new car sales, and department store sales were still
somewhat higher
than a year ago, but the rate of unemployment was increasing.
unemployment stood at 4.8 per cent,
the Twelfth
In August,
an increase of .3 per cent over July,
and it seemed likely that the September figures would show a further
increase.
Construction awards declined 7 per cent from July to August,
the principal reduction (25 per cent) being in nonresidential construc
tion.
This had exerted an effect upon the lumber industry, and there
had been some further easing of lumber prices.
In the three-week
period ended September 30, bank loans increased $148 million, with the
largest increase in
business loans.
During the same period, real estate
loans increased $27 million but there was no change in
week ended September 30.
such loans in
the
Two large San Francisco banks had raised their
rates on conventional mortgage loans to 6-1/2 per cent and one bank had
now established a pattern on FHA loans of 20 per cent down and a 20-year
maturity, as contrasted with the previous pattern of 15 per cent down
and a 25-year maturity.
Consumer credit expansion was somewhat less in
10/13/59
-29
August than in
July and there were reports of increasing delinquencies.
Member bank borrowings at the Reserve Bank were quite nominal, with no
loans outstanding on some days.
Net sales of Federal funds by district
banks showed a marked decline, indicating a possible tightening of the
liquidity position of banks, and they sold $173 million of securities.
Mr. Mangels was inclined to agree with those who felt there
should be no increase in restraint at this time.
He would not be too
unhappy if there should be some change in the total amount of net
borrowed reserves for he thought it
would be healthy to have some
moderation for a temporary period.
The persistency of a given figure
of net borrowed reserves had perhaps exerted a somewhat greater tighten
ing effect than the Committee wished to exert.
During the forthcoming
period, the banks would feel the effect of withdrawals from savings
accounts that had been made to purchase the 5 per cent Treasury notes,
and a $2 billion offering of tax anticipation bills was to be made
tomorrow.
All things considered, he would recommend no increase in
restraint and his personal preference would be to go somewhat on the
side of ease, with no change in basic policy.
Mr.
Irons reported that Eleventh District conditions continued
to be about as they had been for the part 4 to 6 weeks.
mentioned at recent meetings,
As he had
the district was operating at a high
level but with a tendency toward some tapering off from the earlier
rate of increase.
In various areas,
such as trade and agriculture,
the levels of activity were very high and the outlook favorable, while
10/13/59
-30
the problems of the steel strike had not yet exerted a marked effect
and unemployment figures continued below the national average.
did not seem to be much change in
There
attitudes and no traces of pessimism
appeared to be creeping into the picture.
On the financial side,
loans continued to move up slightly and the reserve positions of banks
were firm.
Borrowing from the Reserve Bank was running about as it
had been in
the recent past, and district banks were net borrowers
of Federal funds.
Mr.
Irons stated that he would endeavor to maintain as nearly
as possible the policy of the past three weeks.
There appeared to be
a mixture of uncertainties and other problems resulting from the steel
strike and from the gradual effectiveness of a restrictive monetary
policy, as reflected in
the trend of the money supply.
While he felt
that the Manager of the Account should observe the color, feel, and
tone of the market closely, he would not be greatly disturbed if,
during the ensuing period, there should be a little
the picture,
and he felt
that the Desk should tend to make any errors
on the side of less restraint.
restraint, if
necessary,
less restraint in
It
should be possible to recapture
rather quickly and easily in view of the
strong seasonal demands now building up.
Mr. Erickson reported that business activity in the First
District was holding up fairly well, with the steel strike not having
too much effect.
The New England manufacturing production index for
August was down 1 per cent from June, which compares with a drop of
10/13/59
-31
4 per cent in the national production index.
The September survey
of New England purchasing agents revealed that 49 per cent of the
respondents expected an upward movement in production, compared
with 51 per cent in the August survey.
In August, construction
contracts were 22 per cent under August of last year, which was an
unusually good month.
For the first 8 months of the year they were
up 5 per cent compared with the corresponding period last year.
The
fall follow-up survey of New England manufacturers showed that they
expected to spend for plant and equipment 13 per cent more than they
had expected to spend last spring, which would mean an increase of
15 per cent over expenditures in 1958.
The expenditures, however,
were primarily for equipment rather than plant.
Nonagricultural
employment was up in August from July, but the increase was not as
great as the increase from June to July, while insured unemployment
for the 9-week period ending September 11 was down 24 per cent.
As
to labor market areas, two showed an improvement in classification.
During the past three weeks, there had not been as heavy use of the
discount window, either in terms of the number of discounts or dollar
volume,
but in the first nine months of 1959 borrowings totaled $1-1/h
billion more than in 1958 and $147 million less than in 1957.
As to policy, Mr. Erickson felt that the System should mark
time, with no change in the directive or the discount rate.
In open
market operations, he would leave latitude to the Account Management,
10/13/59
-32
hoping that the situation might be handled as well as during the
past few weeks, with any errors on the side of less restraint rather
than more.
He would not be disturbed if net borrowed reserve figures
were somewhat lower than the Committee had been looking for recently.
Mr.
Szymczak expressed the view that the time had not come
for a change in
policy.
However,
in
view of the uncertainties
mentioned at this meeting, he felt that the time might have arrived
for the System to got into position if
a change should be indicated.
Somewhat lower net borrowed reserves therefore would not be disturb
ing to him.
For the next three weeks, he would suggest easing
somewhat the pressure on reserves,
not to the extent of changing
policy but allowing reserve positions to determine their own level.
Mr.
at
the moment he would continue the present degree of restraint.
However,
Mr.
Balderston commented that since the visability was low
he wished to call attention to certain cautions.
First,
Treiber had referred to the rapid buildup of consumer credit,
and this was a matter that seemed to him to demand the attention of
the System during the months ahead because of the possibility of a
repetition of 1955, with some accentuation due to the newly developed
revolving credit plans of stores and the check credit plans of banks.
Second, there was the admonition of Mr. Bopp that the System not
get pulled off base, as he (Mr.
Balderston) felt
that it
was by the
Suez crisis, by permitting the shifting of public psychology to
10/33/59
blind it
in
-33
to the real economic situation.
As an analyst observed
a recent issue of Barron's, the sophisticated public would be
watching with great care to see whether or not the Federal Reserve
was shifting policy.
Also, there was the adverse balance of payments
situation, which he supposed would result in an additional outflow of
gold,
and the fact that foreign bankers would be alert to the posture
of the Federal Reserve during the steel strike and afterward.
the circumstances, if
In all
the System did not stand firm and got pulled
off base by what he regarded as a temporary change in
he believed that this would be regretted later.
public psychology,
In particular, if
the
steel strike should come to an end, he had the feeling that the System
should be prepared for a sharp upswing in business.
That, of course,
was the major uncertainty of the moment.
Chairman Martin commented that an interesting feature of the
discussion today was the relatively small amount of attention paid to
the Government securities market aside from remarks concerning the
success of the 5 per cent notes.
Actually, there was still
a very
real Treasury financing problem, one certainly not solved by a single
5 per cent issue.
It
should be remembered that the Open Market Com
mittee had a general policy of marking time during periods of Treasury
financing,
and in
one sense. there would be a Treasury financing
tomorrow with the sale of $2 billion of tax anticipation bills.
Furthermore,
he understood it
to be the Treasury's intention to
announce the terms of the November refunding on or about October 29.
10/13/59
-34
In short, he did not feel that the Government financing position
was in any way clear as yet.
Chairman Martin went on to say that as of the date of the
last meeting the Committee favored, generally speaking, very moderately
less pressure and no additional restraint.
The consensus this morning
appeared to favor watchful waiting and marking time.
Actually, what
the Committee was talking about was a very small degree of pressure or
lack of pressure on the part of the Desk measured in
terms of the color,
feel, and tone of the market.
The Chairman then referred to a memorandum distributed to the
Committee over his signature on October 9, 1959, which stated that in
order to help tighten up the facts of votes on policy decisions in
open market meetings,
he proposed to take the following formal steps
at each meeting after the go-around.
First, the Chair, as at present,
would guide the discussion to a statement of the consensus.
Second,
the Chair would call for a record vote on the policy indicated by the
consensus.
Third, the Chair would call for a vote on the directive to
be issued to the Agent Bank formally instructing that Bank to execute
transactions for the Open Market Account in
ing of the directive.
accordance with the word
While the substance of the suggested procedure
did not differ from what had been understood to be the significance
of the vote on the directive over the years, it
was intended to make
a more complete record and resolve any question whatever as to whether
the Committee actually voted on the policy decisions as well as on the
directive.
10/13/59
In pursuance of the procedure suggested in
the memorandum,
Chairman Martin said that he proposed to call for a vote on the policy
indicated by the consensus of watchful waiting and marking time, and
that anyone who so desired could record a vote in disagreement.
Chairman made it
The
clear that this procedure was being undertaken this
morning on an experimental basis and that he would consider it desirable
to review the procedure at a later date.
Mr. Mills said that his position would be different from the
consensus, although to a minimum degree, for he felt there should be
some relaxation of pressure.
The current troubles, he said, derived
from past actions and could not be corrected easily or quickly.
Instead, there must be a gradual shift, commencing at the present time.
In response to a further inquiry as to the difference between his posi
tion and the policy indicated by the consensus,
Mr. Mills said that, as he understood it,
to the left,
or perhaps it
as stated by the Chairman,
his position would be somewhat
should be referred to as the right, of the
consensus.
At this point the Chairman suggested going back to determine
clearly the consensus.
As he had stated it
previously, the consensus
favored watchful waiting and marking time over the period of the next
three weeks.
He then stated that in
the absence of objection that
would be regarded as the consensus or majority position.
No expressions of disagreement with the statement of the con
sensus were heard.
10/13/59
-36
Chairman Martin then
suggested
that the Committee proceed
to a vote on the policy indicated by the consensus,
of Mr.
Mills whether the latter desired to vote in
and he inquired
the negative.
Mr. Mills responded that his vote would be in the negative,
if
there was to be a vote, with his vote explained by the comments
that he had just made.
Chairman Martin then raised the question whether, in the
Committee's opinion, it
would be desirable procedure to take a formal
vote on the policy indicated by the consensus,
adding that there had
not been a great deal of time to study the memorandum of October 9,
that he had thought of the procedure as one to be followed on an
experimental basis, and that if
there was any feeling that this was
the wrong way to proceed, time should be taken to think the matter
through.
Mr.
Mills, it
Deming said that, as he understood the position of Mr.
would call for more of a change in
own position.
He (Mr.
Deming) would like to see a very mild backing
away from the present degree of restraint.
or three-week period,
in
the next two
so watchful
In essence, his was a very fine shade of
He would not be as strong as Mr. Robertson and not quite
as much "to the left
between.
However,
nothing could be done anyway,
waiting did not bother him.
difference.
policy than would his
or right" as Mr.
In the circumstances,
Mills,
but rather somewhere in
he was not sure that he should go on
10/13/59
-37
record in disagreement with the policy indicated by the consensus.
As he saw it,
however, the difference was not sharp enough to do so.
Mr. Allen observed that everyone had agreed that the Chairman's
expression of the consensus was correct.
He suggested that perhaps it
would be sufficient to stop there, because the shades of opinion ex
pressed by members of the Committee would be shown in the minutes of
the meeting.
On this point, Mr. Riefler commented that the law calls for a
statement of votes in the policy record.
It had heretofore been assumed
that a vote on the directive was a vote on policy, and that anyone feel
ing strongly enough would vote in the negative.
However, this had been
challenged, it having been suggested that there was not any real vote
on the policy indicated by the consensus.
The procedure proposed in
the October 9 memorandum would provide an opportunity for any Committee
member who wanted to record a negative vote so to express himself,
while anyone willing to go along with the consensus would vote in the
affirmative.
Mr. Robertson commented that in the past the policy had varied
within the limits of the directive, which is stated in broad terms, and
consequently the suggestion that there be a vote on the consensus seemed
to him a good rule to follow.
In this way there could be compliance with
the statutory directive calling for an indication in the policy record
of where individual Committee members stood.
This did not mean that a
slight deviation in views would require a member to record a negative
10/13/59
vote,
-38
for no two people were likely to agree completely.
But a
negative vote could be recorded whenever a member's views differed
importantly enough for the member to record himself in
to the policy as stated in
Mr.
opposition
the consensus
Balderston said that he thought Mr. Robertson had touched
upon a vital point.
He noted that the views of the individual Com
mittee members tended for the most part to come into the room with
them,
except to the extent that they reflected views expressed by
persons who had spoken earlier during the meeting.
today's meeting the views of Messrs.
For example, at
Treiber and Bopp were presented
at the outset of the discussion and had already been prepared, whereas
the views expressed by the Chairman came at the end of the meeting
after he had heard the other members of the Committee.
Mr. Balderston
said he had always felt that the consensus should express the policy
wishes of the Committee as a whole, but that there were occasions
when a member might wish, even after hearing the other members,
express himself as favoring a change in
to the consensus.
to
direction of policy contrary
Over the years, he had wondered whether the Chair
ought not to put the policy to a vote.
The practical difficulty was
that of stating the issue in such a way as to call for affirmative
and negative votes, for there tended to be a spectrum of views rather
than sharp issues.
However,
if
a member felt that his views were
fundamentally at variance with the consensus,
fact.
he could record that
10/13/59
-39
Mr. Szymczak commented that Mr. Mills' position had been
different from that of the majority of the Committee for some time.
At present Mr.
Mills' views on policy for the forthcoming period
were quite similar to his own, but Mr. Mills had arrived at that
point from a different background.
However,
Mr.
Mills responded that this was essentially correct.
if
there was to be a vote on the policy stated in the
consensus,
he felt that his vote would have to be contrary to the
consensus in
Mr.
order to give a foundation to his earlier thinking.
Irons commented at this point that, although not at
present a member of the Open Market Committee, he favored the idea
of a record vote on the policy indicated by the consensus and did
not think that the problem should be too difficult.
it
would be desirable for the elected members,
In his opinion
as a matter of record,
the
to vote at each meeting with respect to both the policy stated in
consensus and the directive.
In response to an inquiry by the Chairman, Mr. Mills again
stated that he thought his position was distinctive enough to cause
him to vote against the policy stated in
the consensus, with the
understanding that the minutes would reflect his qualifications.
The Chairman then inquired whether any other member of the
Committee desired to vote against the policy indicated by the consensus
or against the continuation of the existing directive to the New York
Bank, and there was no such indication.
In this connection,
Mr.
Mills
-40-
10/13/59
commented that, having voted against the policy indicated by the
consensus, he would vote for the continuation of the existing
directive.
Thereupon, upon motion duly made
and seconded, the policy indicated by
the consensus, as stated earlier by
the Chairman, was approved, Mr. Mills
voting "no" for the reasons he had
stated.
Upon motion duly made and seconded,
the Committee then voted unanimously to
direct the Federal Reserve Bank of New
York until otherwise directed by the
Committee:
(1)
To make such purchases, sales, or exchanges (in
cluding 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
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;
To purchase direct from the Treasury for the
(2)
account of the Federal Reserve Bank of New York (with
discretion, in cases where it seems desirable, to issue
participations to one or more Federal Reserve Banks) such
amounts of special short-term certificates of indebtedness
as may be necessary from time to time for the temporary
accomodation 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.
-41
10/13/59
In reply to an inquiry by the Chairman, Mr. Larkin stated
that he had no question to raise on the basis of the discussion at
this meeting or the actions taken by the Committee.
In view, however,
of the difficult circumstances at the present time and the various
shadings of opinion expressed around the table today, he concurred
in Mr. Robertson's observation that there might be reason for another
meeting of the Open Market Committee before the date of the next
scheduled meeting.
In the event of the development of unusual circum
stances resulting from the steel strike, for example, the Management
of the Account might want to come back to the Committee for new instruc
tions.
Chairman Martin then referred to the maximum rates of interest
payable on time and savings deposits under the Board's Regulation Q,
Payment of Interest on Deposits.
He said that the matter had been
before the Board for some time and that it would be helpful if the
Board might have the reactions of the Reserve Banks for its guidance
in further consideration of the problem.
There follows a summary of the comments made in response to
Chairman Martin's request.
Mr. Treiber--The New York Bank still deemed it important
that there be an increase in the maximum rates on time de
posits, particularly from the standpoint of time deposits
owned by foreign banks, including especially foreign central
banks, which look upon the time deposit as a money market
instrument providing an alternative use of funds. If one
looked at the time deposit as a money market instrument,
the rates payable on such deposits could probably fluctuate
considerably, and there would appear to be merit in a higher
10/13/59
-12-
ceiling for time deposits than savings deposits. He would be
mildly against an increase in the maximum rate of interest
payable on savings deposits.
Mr. Erickson--The problem of foreign-owned time deposits
is not of significance to banks in the First District, and he
had heard nothing in recent months from the commercial banks
of the District about a possible increase in the maximum
rates on time and savings deposits.
If, however, the maxima
were to be adjusted, he felt that the adjustment should apply
for savings accounts as well as time deposits. As to the
necessity for an increase, he would like to be sold on the
idea a little
more than he was at the present time. In this
connection, relatively few banks in the First District were
now paying the maximum rate of 3 per cent on savings deposits.
Mr. Irons--A month of two ago he had some inquiries about
an increase in the maximum rate. At that time it was his
opinion that it would be preferable not to increase the maxi
mum rates on time deposits or savings deposits, since that
might cause some difficulty and problems for the System. He
would not favor raising maximum rates on time certificates
and leaving the rate unchanged on savings deposits, for he
In substance, his
felt
that this also would cause problems.
thought would be to mark time and make no change at the
moment.
Mr. Mangels--This was now a hot subject on the West Coast.
The banks in that area do not have too much in the way of
foreign time deposits but their structure is quite heavily
For example, Bank of America
weighted with savings accounts.
National Trust and Savings Association has a larger dollar
amount of time (including savings) deposits than it has of
demand deposits. A number of comments had been made to the
Reserve Bank concerning the question of the maximum rates, and
it appeared that bankers would oppose any increase by a margin
The situation in Southern California
of at least three to one.
was perhaps more acute than elsewhere because savings and loan
associations had increased their rate to 4 per cent and were
As a result the commercial banks
now talking of 4-1/2 per cent.
had lost a considerable amount of savings deposits. There was
now afoot within the California Bankers Association a movement
to determine whether the Association should ask for an increase
in the maximum rate on savings deposits, but he doubted whether
this would come to pass. With reference to time deposits, it
seemed to him that it would be unfortunate to show a preference
for deposits of foreign banks and that the reaction would be
10/13/59
-43-
bad.
Perhaps this problem could be resolved to some extent
by extending the maturity schedule for time certificates and
permitting a higher rate on longer maturities that would be
applicable to all such certificates.
While the public would
be anxious to have an increase in the savings deposit rate,
savings deposits were still
increasing, which indicated that
perhaps depositors were not too concerned about the rate
differential.
On the other hand, there were some heavy with
drawals from savings accounts to purchase the 5 per cent notes
recently offered by the Treasury.
An increase of only 1/2 per
cent would not be adequate to provide maximum competition with
savings and loan associations.
In his opinion, no change
should be made at this time in the maximum rates on either
savings deposits or time deposits.
Mr. Deming--The bankers did not want the ceiling rate on
savings deposits increased but they were getting more competi
tion from savings and loan associations.
The bankers tended
to find themselves in an inconsistent position, with higher
rates on loans and not on savings deposits.
They would really
like to have legislation enacted keeping savings and loan
associations and savings banks from increasing their rates.
He suspected there was no way of making a case that would be
understandable around the country for paying more interest on
foreign time deposits than on other time deposits, but he felt
that there ought to be some latitude. Mr. Mangels' suggestion
perhaps would not meet the problem of foreign-owned deposits,
for what was wanted was the ability to pay higher rates on
maturities within the existing schedule.
Mr. Allen--In his judgment the maximum rates should not
He was not sufficiently familiar
be changed in any respect.
with the arguments of the New York banks about foreign time
deposits to be certain on that point. However, based on his
experience some years ago, he was not persuaded of the validity
of the case.
Mr. Leedy--The maximum rates should be increased on both
time and savings deposits.
There had been a marked change in
the level of interest rates generally since the present ceiling
was fixed and recognition should be given to that fact. The
While some
commercial banks, by and large, would not like it.
of them were suffering from competition from savings and loan
that most of the banks would prefer to
associations, he felt
This did not
avoid interbank competition for savings accounts.
appear to him to be a valid argument, and he felt that banks
now paying the ceiling rate should have the advantage of an
10/13/59
-44-
additional area of discretion with respect to their own
rates.
Basically, there was probably a difference between
savings and time deposits, and in the light of the situa
tion with respect to foreign accounts, he would consider
it proper to make a distinction. In the Tenth District,
a large number of banks were believed now to be paying
the ceiling rate on savings deposits.
Mr. Leach--Comments from bankers that had come to his
attention were opposed to an increase in the maximum rate.
Many banks in the District were not paying as high as 3 per
cent.
He would not be in favor of any increase in the
maximum rate at this particular time.
If an increase were
granted only with respect to time deposits, there seemed
likely to be an adverse public reaction.
Mr. Fulton--To his knowledge only one bank in the Fourth
District had expressed any desire for a change in the maximum
rate.
If the banks could obtain legislation to keep savings
and loan associations from increasing their rates, they would
be satisfied to stay where they were. Quite a number of
District banks were now paying the maximum rate on savings
deposits, and the consensus would be to stay at that rate.
If there were any change in the maximum rates, the change
should be across the board rather than for specific types of
deposits.
Mr. Bopp--A large majority of the banks in the Third
District would be opposed to any increase in the ceiling.
In Pennsylvania, the State Banking Department has authority
with regard to the maximum rate payable on savings deposits
and no member bank may pay higher rates than allowed by the
State authorities. The increase to 3 per cent was made only
after long discussion, and it did not appear likely that the
State would increase the maximum rate further. Outside of
Philadelphia and perhaps one or two other centers, very few
banks were now paying the maximum rate.
Chairman Martin concluded the discussion by stating that the
comments of the respective Presidents had been helpful to the Board.
With a memorandum from Mr. Riefler dated October 5, 1959, there
had been transmitted to the members of the Open Market Committee a
10/13/59
-45
memorandum prepared by a staff study group under date of Septem
ber 28, 1959, setting forth an inventory of areas for possible
administrative action growing out of the recent Treasury-Federal
Reserve study of the Government securities market.
did not represent study group recommendations.
The items listed
Instead, they repre
sented a study group identification of matters that ought to receive
policy level attention and decision.
Chairman Martin commented that in company with Messrs. Hayes,
Riefler, Larkin, and Young, he had discussed the areas for possible
administrative action, as reflected by the memorandum, with Treasury
representatives last week.
He then turned to Mr. Young for comment
on the respective items.
Mr. Young first
discussed the possibility of a joint letter
from the Secretary of the Treasury and the Chairman of the Board of
Governors to the President of the New York Stock Exchange formally
transmitting the final study of "An Organized Exchange or a Dealer
Market," together with the joint statement of the Secretary of the
Treasury and the Chairman of the Board of Governors reporting the
findings of the Government securities market study to the Joint
Economic Committee.
The letter would call particularly to the
attention of Exchange officials the comments in
the joint statement
on the auction market problem and would suggest that the Exchange
might wish to pursue further its
own studies of the subject and of
the facilities for Government securities transactions that it
appropriately and economically provide.
might
10/13/59
-46
Mr. Young then explained the reasons why it
seemed appro
priate to send such a letter to the Stock Exchange and there ensued
a discussion based on that explanation.
Mr. Treiber said that he
interpreted Mr. Young's remarks as meaning that the letter would
include a statement that the Federal Reserve could not go along
with the conditions which the Exchange had proposed for promoting
an auction market; Mr. Young agreed.
It was agreed unanimously by
the Committee that there would be no objection to such a procedure.
Mr. Young then turned to a series of suggestions,
in
as set forth
the staff memorandum, with a view to obtaining more adequate informa
tion about the Government securities market.
The first
suggestion
contemplated early initiation by the Treasury of a revised ownership
survey program with the object of a more adequate coverage,
meaningful breakdown of the present "other holder" category,
prompter availability of data.
a
and
The second suggestion contemplated the
formulation and initiation of a new program of statistics collection
from all
Government securities dealers at the request of the Secretary
of the Treasury, the Board of Governors, and the Federal Open Market
Committee.
Respondents would be advised that the statistics col
lection would be followed, after a testing period, by such public
release on an aggregate basis as might be deemed appropriate by the
Treasury and the Federal Reserve System jointly.
Mr.
Young also mentioned at this point two other suggestions
along the same general lines.
The first
contemplated a request to
10/13/59
-47
nonreporting dealers for historical volume, position, and credit
figures for the entire postwar period, the reporting pattern to
be consistent with that used by dealers already supplying such
information to the New York Reserve Bank Trading Desk on a confi
dential basis.
The expense of compiling this historical information
would be assumed by the System if nonreporting dealers objected to
the burden imposed upon them on the grounds of cost.
The second
suggestion contemplated a request to all dealers by the Secretary
of the Treasury, the Board of Governors,
and the Federal Open Market
Committee for dealer permission to make historical data in aggregate
form covering the postwar period available for public information.
These items were suggested by the recent interest of theJoint
Economic Committee in obtaining such historical data, Mr. Young said,
noting that appropriate historical series on the Government securities
market should be made available for public information at the System's
initiative, thus obviating the embarrassment of future requests of
the kind made by the Joint Economic Committee.
With respect to the suggestions relating to historical data,
Mr. Young pointed out that in connection with the recent problem of
obtaining such data for the use of the Joint Economic Committee one
nonreporting dealer, Aubrey G. Lanston & Co.,
was not inclined to
cooperate because of the cost to the firm of putting the back data
in required form and because of the general inconvenience and staff
10/13/59
48
time that would be necessary because the records were now in
storage.
After reference to the apparent desirability of having
historical data of this kind available for various purposes,
including the use of students, Mr. Young pointed out that the
Joint Economic Committee, through its
agreement that the System, in
staff, was pressing for an
setting up the proposed program of
statistics, would carry the information back through the postwar
period so that market patterns before the Treasury-Federal Reserve
accord could be studied along with those after the accord in
of volume and dealer positions.
terms
The question, he said, was whether
the Open Market Committee would like to instruct the staff to go
forward with this program for gathering records.
There was also
the question whether the Committee saw any strong objection to
absorption by the System of the cost to Aubrey G. Lanston & Co. of
obtaining back figures for inclusion in
the statistical series.
Because of the basis on which this firm had declined to submit the
back figures, he noted, it could hardly refuse if its cost was
reimbursed.
Chairman Martin commented that it
should be mentioned that
the Treasury was not happy about the proposal for reimbursement.
He
added that he sympathized with that point of view in principle, but
that there were unusual considerations in
this particular situation.
10/13/59
-49
Mr.
Treiber noted that Mr.
Hayes indicated last Friday
the view that he would not be inclined to pay such costs, and the
Chairman verified this statement,
adding that Mr.
Hayes went along
with the Treasury.
Question was raised as to the estimated expense involved, to
which Mr.
Young replied that he did not know, that it
might be quite
a job to reconstruct the records, and that the cost possibly might
be in
the neighborhood of as much as $25,000.
Mr. Young then confirmed Chairman Martin's understanding that
no commitment had been made to the Lanston firm, although inquiry had
been made as to whether the firm would be willing to take a look at
the records in
storage to ascertain the state of the records and the
availability of tally sheets as well as tickets.
Mr.
Fulton commented that questions relating to System expendi
tures had been raised from time to time and that any absorption of cost
on behalf of the Lanston firm was likely to become known, to which
Chairman Martin replied by saying that the request for the data under
discussion had grown out of a special Congressional investigation of
a situation in
the Government securities market that all
not occur again.
Therefore, it
brought to a conclusion.
hoped would
seemed desirable that the matter be
While nothing of great value might be
gained, nevertheless the situation represented an intricate problem.
Also, he felt that the Open Market Committee members must know as
10/13/59
-50
much as possible about the Government securities market in
order
adequately to discharge their responsibilities.
With further reference to Mr.
Fulton's comments, Mr.
Balderston made the observation that the Government securities
market is
affected by the public interest and that the System,
including particularly the Open Market Committee,
has a special
responsibility toward that market and the public interest in it.
It
could be argued that the System had been derelict over the years
in not accumulating data of the kind now sought.
If
so, it
could be
argued that, not having required the Lanston firm to provide such
figures heretofore,
the System should not now force the firm to bear
the cost of a rather extensive piece of research.
Mr.
Leach commented that the System rarely asks parties to
go back and provide figures costing a substantial sum.
Therefore,
the request made of Lanston & Co. was not comparable to the ordinary
System request.
The discussion then turned back to the September 28 memorandum,
and Mr. Young referred to the suggestion that recommendations be
prepared for standard accounting practices for Government security
dealers, or that a manual be prepared, designed to facilitate daily
reporting, at minimum cost to dealer respondents,
statistics and periodic reporting of dealers'
positions on a standard basis.
This task, it
of needed current
financial and earnings
was suggested, might
10/13/59
-51
be accomplished by representatives of the American Institute of
Accountants,
accounting,
staffs.
chosen for their expertness in
security market
and senior accountants from Federal bank examination
The expense of the undertaking might be borne by the
Federal Reserve and the manual made available to dealers as a
Federal Reserve service in
the public interest.
It was assumed
that preparation of the accounting standards or manual would be
carried forward with the close cooperation of the dealers.
After Mr. Young outlined the problem involved and the
possible means of meeting it,
Mr. Robertson said he would agree
with the suggestion on the assumption that the dealers would not
be excluded from the preparation of the standards or manual.
Mr.
King suggested that it would seem desirable, as a first step, to
write to the dealers and advise them of the problem so as not to
risk losing their cooperation and support for the project.
Chairman
Martin and Mr. Young agreed with the validity of this suggestion.
Mr. Young then referred to the suggestion in the September
28 memorandum that the Open Market Committee consider the question
of appropriate assignment of responsibility for Government securities
market statistics collection and analysis, for example, to the Open
Market Trading Desk, to the Research Department of the New York
Reserve Bank, or to the Research Division of the Board of Governors.
The thought was expressed in the memorandum that this might require
-52
10/13/59
the creation of a small specialized staff free from other statistical
and analytical assignments.
Mr. Young noted that Mr. Lanston had cited as one reason why
he was unwilling to supply information on his trading volume and
position to the Desk the possibility that such information might be
used by the Desk to trade against him.
Mr. Young stated that he did
not know whether other dealers had any feeling on this point, that
the question was raised in the memorandum without recommendation, and
that the matter was mentioned merely for the Committee's consideration.
Mr. Deming inquired whether this contemplated the possibility
that information collected by the System from the dealers might be
kept from the Desk, and Mr. Riefler responded that there was an indica
tion that the Lanston firm would furnish current data if they were
collected by the Research Department and only aggregate figures were
released outside that department.
Mr. Treiber commented that it would seem logical that the
statistics be collected by the New York Reserve Bank, which is in
the market,
and on a basis whereby any appropriate group in the
System could analyze the statistics and draw conclusions therefrom.
They had been helpful in the operation of the Trading Desk in the
past, and it
to the Desk.
was hard for him to conceive of denying the statistics
In his opinion the Desk could be relied upon to
exhibit the same sense of responsibility as any other unit within
the System.
10/13/59
-53
Mr. Larkin said that the data had been helpful in the
administration of the System Open Market Account and in the
day-to-day operations of the Desk over the years.
He had never
heard of the conflict of interest alleged by Aubrey G. Lanston &
Co. being alleged by other dealers.
In a reply to a question as to whether aggregate figures
would be helpful to the Desk, Mr. Larkin said that ordinarily, in
meeting day to day operational problems, the Desk relied primarily
on the aggregate figures, but that in
connection with repurchase
agreements, the Desk would like to know as much as it
now knew about
individual firms, particularly their exposure.
Mr. Riefler stated that of course the Desk would need the
statement of an individual dealer when it
on a repurchase agreement,
but it
extended credit to him
would not necessarily need
information as to the individual issues held.
Chairman Martin expressed the view that the real question
involved was a matter of principle.
The question was whether the
Desk should be in the position of granting largesse against general
positions in the market, that is,
position where it
position that it
whether the Desk should be in a
would do something for one dealer by virtue of the
knew the dealer had in the market.
Mr. Larkin
stated that since the Desk's transactions were on the basis of best
price, it
was difficult to see how there could be a charge of conflict
10/13/59
-54
of interest.
be in
Chairman Martin went on to say that the Desk must
as defensible a position as possible against charges by
parties outside the System, and in
be left
to be in
unturned.
It
that direction no stone should
was not fair to the Management of the Account
a position where charges could be made against it.
Mr. Robertson suggested the possibility of putting the
statistical collection responsibility on a System basis in
order
to determine what disadvantage would flow from such an arrangement.
Chairman Martin commented favorably regarding this suggestion.
He then suggested that the Committee not take a final position at this
time but that the staff be authorized to experiment with plans along
the lines suggested and bring the matter back to the Open Market Com
mittee for further discussion at a later date.
Mr.
Young then discussed a related matter mentioned in the
September 28 memorandum which concerned provision for spot investor
surveys to supplement intelligence from regular statistical informa
tion, along with the determination of staff assignment therefor.
Such surveys could be employed to explore unusual market situations,
to test the possible emergence of major changes in
market behavior
when other data cast out signals of doubt, and to ascertain investor
preferences with regard to forthcoming offerings.
Mr.
Young said
that there was a question whether this assignment should be in the
Federal Reserve or the Treasury,
that this might be something on
10/13/59
-55
which the Committee would not want to express a view today, and
that, if
desired, the matter could be brought up later.
In this connection, Chairman Martin commented that the whole
program was something on which the Committee must be working con
tinuously and that he solicited the Committee's continuing interest
in
the development of the program.
The problem involved a difficult
and time-consuming process and there were many questions in the area
of developing adequate data.
It
was his suggestion that each Com
mittee member send any thoughts to Mr. Young and keep in constant
touch with the problem because it
was one with which the Comittee
would have to work for a long time to come.
He did not think the
Committee could take a vote on each issue but he believed it
for the System to move forward in
questions in
important
this field, particularly since
this area would undoubtedly arise during the next session
of Congress.
Mr.
Shepardson said it
was his understanding that the term
"on an experimental basis" meant that Mr.
Young and his associates
would go forward on an experimental basis and that indications of
Committee assent with the program for collection of statistics
constituted authorization for him to proceed on that basis.
There was no indication of disagreement with the understanding
as stated by Mr. Shepardson, and Mr. Young added that the experimental
steps would be in cooperation with the Desk.
10/13/59
-56
Mr.
Larkin suggested that there would have to be some
exploration of this program with the dealers to call to their
attention any change in
the figures in
the manner of receiving and processing
question, which currently are supplied to the
Federal Reserve Bank of New York strictly on a voluntary and
confidential basis.
Mr. Young next turned to the section of the September 28
memorandum relating to margin requirements on Government securities.
The first
suggestion was for the preparation and negotiation of a
joint bank supervisory statement relating to minimum margins and
other credit standards which banks ought to adhere to in
extending
credits to others than Government security dealers or banks on
Government security collateral, including repurchase arrangements,
reverse repurchases,
and forward delivery contracts.
authorities joining in
Governors,
Supervisory
such a statement should include the Board of
the Comptroller of the Currency,
the Federal Deposit
Insurance Corporation, and the National Association of Supervisors
of State Banks.
If
such a statement were developed, Mr.
seem desirable,
as indicated in
way of publicizing it
example,
Young said, it
would
the staff memorandum, to find some
to corporation presidents and treasurers, for
through distribution by the Securities and Exchange Com
mission to all
listed corporations.
It
would also be desirable to
10/13/59
-57
send a letter to the New York Stock Exchange requesting review by
the Exchange of its
securities,
flat
5 per cent margin rule on Government
especially the consistency of this rule with margins
that might be recommended in
the joint supervisory statement, and
the Treasury should explore the feasibility of administrative margins
on subscriptions to refunding bond offerings as well as those presently
applied on new cash offerings.
Mr.
Young suggested that some member of the Open Market Com
mittee might be designated to explore in detail the possible scope
of such a joint supervisory statement and the problems in
getting it
negotiated.
Mr. Robertson said he was in
sympathy with the idea, but that
he would emphasize the use of the word "negotiate."
without its
difficulties,
The plan was not
and the supervisory authorities might be
somewhat reluctant to announce standards they could not enforce.
Mr.
Young agreed that this would amount to moral suasion.
Adherence could not be enforced but the statement might do some good.
Chairman Martin stated that he would prefer to leave this
item this morning and asked whether the Committee would be agreeable
to the Chair appointing some member of the Committee for the purpose
referred to by Mr. Young.
No objection to this procedure was heard.
Mr. Young then mentioned the suggestion in
the September 28
memorandum relating to consideration and possible establishment by
-58
10/13/59
the Open Market Committee of financial statement standards to be
required of dealers obtaining repurchase accommodation from the
New York Reserve Bank.
Standards,
the memorandum suggested, should
provide for full disclosure of contingent liabilities on repurchase
account.
The memorandum pointed out that margin standards applicable
to bank repurchase arrangements with others than dealers and banks
would be covered by the joint supervisory statement referred to
earlier.
Chairman Martin suggested that the discussion terminate at
this point,
since this item and the suggestion in
the memorandum for
exploration of an organization of Government security dealers would
require some time.
He expressed the view that the discussion today
had covered sufficient ground for the staff to move forward.
There was agreement with the Chairman's suggestion that the
remaining items in
the staff memorandum be held over for discussion
at another meeting.
It was agreed that the next meeting of the Federal Open Market
Committee would be held at 10:00 a.m. on Wednesday,
Secretary
November 4, 1959.
Cite this document
Federal Reserve (1959, October 12). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19591013
@misc{wtfs_fomc_minutes_19591013,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1959},
month = {Oct},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19591013},
note = {Retrieved via When the Fed Speaks corpus}
}