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 Wednesday,

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

November 4, 1959, at 10:00 a.m.

Hayes, Vice Chairman, presiding

Allen

Balderston

Deming

Erickson

Johns

King

Mills

Robertson

Shepardson

Szymczak

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, Economist

Messrs. Jones, Marget, Mitchell, Parsons, Roosa,

and Young, Associate Economists

Mr. Rouse, Manager, System Open Market Account

Mr.

Mr.

Mr.

Koch, Associate Adviser, Division of

Research and Statistics, Board of Governors

Keir, Chief, Government Finance Section,

Division of Research and Statistics, Board

of Governors

Knipe, Consultant to the Chairman, Board of

Governors

Messrs. Ellis, Hostetler, and Daane, Vice Presi

dents of the Federal Reserve Banks of Boston,

Cleveland, and Richmond, respectively

Mr. Einzig, Assistant Vice President,

Reserve Bank of San Francisco

Federal

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11/4/59

Mr.

Coldwell, Director of Research, Federal

Reserve Bank of Dallas

Mr. Anderson, Economic Adviser, Federal

Reserve Bank of Philadelphia

Mr. Stone, Manager, Securities Department,

Federal Reserve Bank of New York

There had been distributed to the members of the Committee a

preliminary draft and a revised draft of minutes of the meeting of the

Committee held on October 13,

1959.

Mr. Hayes referred to that portion of the minutes covering dis

cussion of a memorandum prepared by a staff study group under date of

September 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.

After noting that

he was not present at the October 13 meeting, Mr.

Hayes said that upon

reading the minutes he felt there was some ambiguity as to what action

was intended by the Open Market Committee regarding the suggestion

relating to the formulation and initiation of a new program of

statistics collection from all Government securities dealers.

the minutes,

From

he said, he was not clear as to whether the Committee

really reached a decision to go ahead on an experimental basis with

the proposed collection of Government securities market statistics,

including data on the trading volume and position of dealers.

Mr. Hayes went on to say that when he discussed this matter

before the October 13 meeting with Chairman Martin and Under Secretary

of the Treasury Baird, he (Mr.

Hayes) had the feeling that the desire

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11/4/59

was to map out the program before jumping to a decision as to who

was to collect these statistics.

Personally, Mr. Hayes said, he

had some fairly strong views--and perhaps others did also--as to

what was needed by the Desk and as to whether the Desk should have

access to the figures collected from the dealers.

changing a procedure that had now been in

Therefore, before

effect for many years, he

felt that the Committee ought to be clear as to what it

was doing.

His suggestion would be that the matter be discussed further at

another meeting of the Committee when the Chairman was present.

Also, before such a further discussion he would like to submit to

the Committee members the reasoning of the New York Reserve Bank

as to the merits of the proposal.

Mr. Hayes said that he would not suggest disapproval of the

October 13 minutes.

In his judgment,

however, the question to which

he referred had not been fully clarified and deserved additional

time and discussion.

Mr. Balderston said he had the feeling that it was important

not to delay this matter unduly because of the interest of the Congress

in

the joint study of the Government securities market.

However, in

view of the fact that Mr. Hayes was not present at the October 13

meeting, it seemed appropriate to Mr. Balderston that Mr.

Hayes' views

on the matter be laid before the members of the Committee between now

and, say, the next Committee meeting,

so that the matter might be put

on the agenda for further discussion at that time.

11/4/59

Mr. Shepardson said that he thought the matter was presented

quite fully by Mr. Young at the October 13 meeting.

He also noted

that discussion of the suggestions presented in the staff memorandum

was reflected in

several pages of minutes.

The general tenor of the

discussion at that meeting seemed to him clearly to indicate a desire

on the part of the Committee that Mr. Young go ahead with an experi

mental approach.

In order that the matter might not be left in an

uncertain status, he (Governor Shepardson) had made the comment

reflected on page 55 of the minutes, in which he stated his under

standing that the term "on an experimental basis" meant that Mr. Young

and his associates would go forward on an experimental basis and that

an indication of Committee assent to the program for collection of

statistics would constitute authorization for Mr. Young to proceed

on such basis.

As recorded in the minutes,

there was no indication

Young had added that

of disagreement with this understanding,

and Mr.

the experimental steps would be taken in

cooperation with the Desk.

Mr.

Shepardson said he had assumed, therefore,

that the matter was

clear and that Mr. Young would begin taking experimental steps.

Mr.

in

Hayes then commented that the New York Bank was proceeding,

cooperation with Mr.

Young, to produce a memorandum on what the Desk

wanted from the dealers and why the information was needed.

seem feasible, Mr.

Hayes said,

It

did not

to go ahead with the actual collection

be collected.

of statistics until there was a decision as to what should

11/4/59

-5

Mr. Shepardson agreed, but he added that the question

related to where the initiative and responsibility should lie.

As he had understood it,

the action of the Committee at the

October 13 meeting was to authorize Mr. Young to take the initiative

in proceeding with an experimental approach.

Mr.

Hayes responded that to him the ambiguity arose out of

the fact that the New York Bank was now proceeding, in cooperation

with Mr. Young,

on a study of what statistics were to be collected.

He did not see how it

would be possible to proceed with the actual

collection until the aforementioned information had been entirely

analyzed.

Mr. Shepardson then suggested asking Mr.

understanding,

Young for his

and Mr. Young commented that there appeared to have

been some misunderstanding as to what came out of the discussion

at the October 13 meeting.

The way the matter stood at present was

that the Desk was proceeding with the preparation of two memoranda.

One of these would deal with the general question of what statistics

would be desirable from the standpoint of the System and the Treasury,

and also the public.

The other memorandum was to contain a detailed

schedule for the collection of statistics.

Mr. Young said he thought that the question of how to proceed

needed some clarification; that is, whether it should be left that

what

the New York Bank would proceed with its studies and then see

the two memoranda would show,

or whether the planning program should

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11/4/59

be placed in

the hands of a committee of Reserve Bank, Board, and

perhaps Treasury representatives.

The program would be a complicated

one in various respects, including the problem of relationships with

the dealers and the problem of launching the program of statistics

in an appropriate public relations setting.

There would also be the

problem of obtaining the sanction of the Budget Bureau because the

proposed statistics would take on a different aura from the standpoint

of the Federal statistics program and would have to be collected under

the provisions of the Federal Reports Act.

saying that the staff would do its

Mr. Young concluded by

best to implement whatever procedure

the Committee might decide upon.

Mr. Hayes inquired of the Committee members as to their feeling

regarding his suggestion for a full review of the matter at the next

meeting.

Such a procedure,

he noted, would give the Committee members

an opportunity to see the memoranda being prepared at the New York

Reserve Bank.

In this connection, Mr. Rouse stated that the first

was the more important of the two and that it

memorandum

was almost ready.

The

second memorardum also was in course of preparation and might be ready

within about a week.

Mr. Balderston asked Mr. Young for his opinion as to whether

further consideration of the matter in the manner proposed by Mr.

Hayes would interfere unduly with the progress of the study and with

relationships between the System and the Congress.

11/4/59

-7

Mr. Young responded that the System was under some pressure

from the Congress to proceed as expeditiously as possible.

At least

that was the commitment made to the Joint Economic Committee for

resolution of the whole problem.

was now in

process,

However,

considering the work that

to carry the matter over until the next Committee

meeting probably would not be a handicap to the general program, and

in

any event it

going ahead.

was necessary to know how the matter stood before

He was not sure, however, whether the suggested procedure

would permit an adequate technical review of the New York Bank's pro

posals before the matter was submitted to the Open Market Committee.

This was a highly technical subject and some confusion might develop

if

the matter was submitted to the Committee prematurely.

technical staff should first

The

give the matter some thought in collabora

tion with the technical staff of the Treasury.

Therefore, if

memoranda were submitted directly to the Committee, it

the

would seem

desirable that discussion of them at the next meeting be of a

preliminary character and subject to review.

Mr. Hayes commented that it

Bank to discuss the memoranda in

was the intent of the New York

detail with Mr. Young and his staff

and also with the Treasury.

Mr. Rouse said he had had in

mind that the first

would be worked over with Mr. Young and with Mr.

This was in

memorandum

Mayo of the Treasury.

accordance with his understanding that there would be a

working over at the technical level of the general ideas submitted

to the Committee.

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11/4/59

Mr. Young commented concerning the necessity of "feeling

our way along."

Review at the technical level should make it

possible by the next Committee meeting to be a little

the issues; that is,

clearer on

to know what disturbed people, how such questions

could be resolved, and how to devise a mechanism that would make sense.

The program could then go forward in a cooperative way.

Mr. Rouse commented that the proposed procedure seemed clear

and satisfactory to him.

Mr.

Robertson said he had thought that the whole matter was

settled at the last Committee meeting by authorizing Mr. Young to go

forward, which meant merely that Mr. Young was to get started.

How

ever, any time that a Committee member wished to come forward with

suggestions he should feel free to do so, and the program no doubt

would have to be varied from time to time.

It would not be desirable

to hold up the staff group but any Committee member should be free to

make comments from time to time.

He would have no objection to the

proposed procedure.

Mr. Shepardson said that his remarks had been directed

particularly to the question referred to on page 51 of the minutes

of the October 13 meeting; namely, the question of an appropriate

assignment of responsibility for the collection and analysis of

the statistics proposed to be collected.

Considerable discussion

followed the presentation of that question at the October 13 meeting,

and he had thought he sensed from the trend of the discussion that

11/4/59

-9

there was sentiment for assigning this responsibility to the

Research Division of the Board.

as his understanding,

Therefore, he had stated this

and as reflected in the minutes there was

no disagreement with that understanding or with Mr.

observation about proceeding in

other words, he (Mr.

Young's added

cooperation with the Desk.

In

Shepardson) had thought that there was a clear

cut assignment of responsibility.

Mr. Hayes replied that he thought the reference to proceeding

in

cooperation with the Desk was not entirely clear; the addition of

those words left

his mind.

some ambiguity as to the assignment, at least in

Some of his associates who were present at the October 13

meeting felt there was some question whether the minutes reflected

the full discussion, and they suggested that the nature of the discus

sion may have made it

If

difficult for all of the comments to be recorded.

the Committee felt definitely that the action suggested by Mr.

Shepardson was the action taken, it

would be easy to confirm that

action at the next Committee meeting.

suggested,

was desirable,

for the Committee to be sure it

and facts and that it

Mr.

It

Mr. Hayes

had all the background

did not reach a conclusion prematurely.

Shepardson inquired whether Mr.

Hayes referred to the

background and facts for determining what might be done or for

determining the assignment of responsibility for moving ahead, to

which Mr. Hayes replied that it

seemed agreed that the study of

what statistics the Committee might want was moving ahead,

in

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11/4/59

cooperation between the Board and the New York Bank and with the

thought of bringing in the Treasury as fast as possible.

felt that Mr.

Mr. Hayes

Young's comments supported his own view that it

not possible to go out and collect statistics until it

was

was clear

what statistics the Committee actually wanted to collect.

Mr.

Shepardson then stated that, as he understood it, the

immediate question was whether the Committee intended to assign a

primary responsibility for moving ahead with this program.

This

did not represent delineating what statistical program ought to be

developed,

for that would come forward later.

of this kind, it

However, in a program

seemed to him--and he thought it

was the intention

of the Committee--that primary responsibility for leadership in

initiating and pushing the matter along in

desirable.

While Mr.

a coordinated way was

Young made no recommendation at the October 13

meeting other than to present the various alternatives as to where

the initiative and responsibility for leadership might lie, he (Mr.

Shepardson)

understood, and had so stated, that it

be the opinion of the Committee that it

seemed to him to

wanted the Research Division

of the Board to assume the leadership of the program.

Mr. Hayes responded that this was where he found some

ambiguity; that is,

between the question of leadership of the

program and the question of what was to be collected and who was

going to be collecting agent from the dealers.

in

There was a distinction

this respect that he thought worthy of consideration.

As Mr.

Young

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11/4/59

had pointed out, it

was understood that the initial memorandum on

what statistics were needed was being done at the New York Bank.

That, Mr. Hayes said, was his understanding with Chairman Martin,

and the Chairman so indicated at the meeting with the Treasury.

It was also understood that there would be constant consultation

with the Board and the Treasury.

Mr. Hayes then said that the matter could be taken up again

at the next Committee meeting without prejudicing anyone's position.

He felt that the question should be clarified in order to go ahead

constructively.

Mr. Allen said that his understanding of the action taken at

the October 13 meeting was the same as Mr. Shepardson had stated.

He

also agreed with Mr. Robertson that there was no reason why any Com

mittee member could not submit his thinking at any time and that such

views should be taken into consideration by the Committee.

However,

it was quite clear to him that the situation at the October 13 meet

ing was as Mr. Shepardson had stated.

Mr. Hayes then suggested approval of the minutes of the

October 13 meeting, with the understanding that the discussion today

would be incorporated in the minutes of today's meeting.

He asked

whether any member of the Committee would object, and Mr. Shepardson

said he would have no objection if the procedure would not involve

undue delay.

Mr. Shepardson then turned to Mr. Young, who commented

that the New York Bank was proceeding with the two aforementioned

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11/4/59

memoranda and that until these memoranda were available as a basis for

exchange of ideas,

it

did not seem feasible to move ahead further.

Thereupon, upon motion duly made

and seconded, and by unanimous vote, the

minutes of the meeting of the Federal

Open Market Committee held on October 13,

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

October 13 through October 28, 1959, and a supplementary report covering

the period October 29 through November 2, 1959.

Copies of both reports

have been placed in the files of the Committee.

Mr.

Rouse commented that open market operations had supplied

$82 million of reserves net to the market on a delivery basis during

the period since the last meeting of the Committee.

However, this

relatively small figure obscured the fact that the volume of open

market operations was quite large and represented a substantial expan

sion of activity over the preceding period.

weeks,

bills

for example,

During the past three

the Account sold or redeemed $205 million Treasury

and purchased $195 million.

In addition, $270 million new

repurchase agreements were made, while agreements totaling $175 mil

lion matured or were withdrawn.

Of the $400 million gross purchases

and sales of Treasury bills outright over the past three weeks,

$250

million, or over 60 per cent, represented transactions with foreign

accounts.

11/4/59

-13

The outcome of the heavy volume of open market operations

during the past three weeks was a generally steady degree of pressure

on bank reserve positions.

As noted in the written reports to the

Committee, Federal funds were at 4 per cent on nearly every day of

the period, and dealer lending rates generally moved in a narrow

range of 4-1/3-4-3/4 per cent, although in the past few days most

New York banks had been quoting a rate of 5 per cent on new loans.

The latter was a surprising development at the onset of Treasury

financing and at a time when the basic reserve position was lighter

than it

had been for some weeks.

The explanation might be that the

liquidity positions of the New York banks were under particular

pressure.

The rising trend of prices for Treasury notes and bonds which

was evident at the time of the last meeting was reversed toward the

end of October.

Through October 23,

prices had risen by as much as

1-3/4 points, but losses ranging to 1-6/32 were subsequently sustained.

The reversal of the rising trend of prices apparently reflected

two major factors.

steel situation.

The first,

and perhaps most important, was the

The settlement of the strike with Kaiser and other

small producers generated optimism concerning the possibility of an

early general settlement; on the other hand, the statements by the

major steel companies of their determination not to settle on the

formula used in

the Kaiser agreement,

and also the questions raised

by the union's challenge of the constitutionality of the Taft-Hartley

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11/4/59

Act, gave rise to pessimism concerning an early settlement.

Further

more, the approach of the Treasury's refunding operation--the second

of the major factors noted above--created the usual uncertainties as

to what would be offered and how the market would react to the new

issues.

In this atmosphere, trading activity was noticeably reduced

as both buyers and sellers tended to move to the sidelines and await

development s

The Treasury's announcement of the terms of the refunding

was well received, and the market regarded the 4-3/4 per cent rate

for one year and 4-7/8 per cent for four years as adequate.

Both

the rights and the when-issued securities traded at a premium on

Friday and Monday, and a successful outcome of the refunding was

anticipated.

Mr. Rouse then stated that he would like to mention to the

Committee a technical problem that arose in

connection with the

repurchase agreements made last Monday and how the Desk had handled

it.

This technical problem involved rights that came into the market,

which dealers had positioned, and which they placed in repurchase

agreements with the New York Bank.

Since today was the final day for

the exchange, the dealers must make up their minds by tonight as to

how they would split their holdings of rights between the new one-year

issue and the new four-year issue.

To the extent that the rights were

exchanged for the longer security, the New York Bank would be holding

a four-year issue under repurchase agreement tomorrow.

Accordingly,

11/4/59

-15

the Bank informed the dealers when the repurchase agreements were

made that on Thursday they would in effect have to substitute new

collateral for the rights which they had exchanged into the four

year note.

Mr. Rouse inquired whether anyone wished to comment on

this technical problem.

Mr. Allen inquired as to the total amount in which rights

were held under repurchase agreements,

and Mr.

he did not have the exact amount; however,

$9

Rouse replied that

the New York Bank made

million of repurchase agreements on Monday,

mostly against rights.

Mr. Mills commented that this was a problem with which the

dealers were thoroughly familiar by virtue of earlier experience.

this particular occasion, he believed it

On

would be a mistake to change

the precedent already established and to afford a temporary relief

against rights to the four-year notes in the form of repurchase

accounts.

If

his opinion,

that were done, the dealers would unquestionably, in

expect the same sort of treatment on future occasions

and the Open Market Committee would have destroyed the precedent

that was now well established.

Mr.

Thomas remarked that if

the Open Market Account made a

reasonable amount of funds available in

the market the dealers should

be able to obtain financing outside the Federal Reserve.

Mr. Rouse

indicated that this was correct.

Mr. Rouse then turned to another problem.

was at the Treasury last week for meetings in

He said that he

connection with

arriving at a decision as to the terms of the refunding.

At a time

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11/4/59

when he and Mr. Balderston were in

Under Secretary Baird's office a

phone call was received from the Secretary of the Treasury, who raised

a question with respect to.how the System would exchange the $5 bil

lion of securities maturing November 15 that were held in

the Open

Market Account portfolio.

Mr.

from Texas,

Balderston commented that the Secretary, who was calling

said it

was immaterial to him, as Secretary of the Treasury,

what the decision might be.

Mr.

Balderston felt

was completely sincere in that statement,

that the Secretary

although he (Mr.

could see some impact upon future Treasury financings.

went on to say, however,

and in the early fall

that in

Balderston)

The Secretary

discussions on the Hill last summer

it was pressed home to him by many Congressmen

of the so-called "liberal" school that the Federal Reserve was

doctrinaire and inflexible.

The Secretary said it had occurred to

him that the System might wish to use such occasions as were presented

to make the record clear that it

was not doctrinaire,

decisions did not involve any sacrifice of principle.

provided those

Mr.

Balderston

said his reply to the Secretary was to the effect that this was a

matter that should come before the Open Market Committee as a whole.

The Committee, he had added, was meeting this morning in time to

make a decision on the exchange.

Mr.

what mixed.

Balderston went on to say that his own feelings were some

On the one hand, he appreciated the thought that the

Secretary had expressed.

The Secretary, he felt, was deeply concerned

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ll/4/59

about the attacks on the System that might come when Congress

reconvened and seemed anxious that the System not overlook

opportunities to demonstrate that it was not dogmatic in

positions it held.

the

On the other hand, the last time such action

(to split an exchange between two issues) was taken the Committee

had a more valid reason than now seemed to be the case.

At that

time the Committee acted in order to assist the Treasury's layout

of its program, and that would seem to be a complete enough explana

tion for anybody.

If the Committee should instruct the Desk to

exchange the $5 billion of securities held in

the Open Market Account

portfolio for $4 billion of one-year certificates and $1 billion of

four-year notes, he felt that the Committee should have in mind a

The Secretary apparently had

good monetary policy explanation.

raised the question because of his interest in the System and had

done so with an accompanying statement that the decision was

immaterial to him from the Treasury's point of view.

Mr.

Balderston

suggested that there might be individual comments on the point raised

by the Secretary during the go-around at this meeting.

Mr. Hayes agreed that it

would be desirable to have comments

on this point during the go-around.

He then inquired whether members

of the Committee's staff had comments at this time.

Mr. Riefler asked what it

would mean if

the System should

take some of the four-year notes simply for the sake of indicating

to the Congress that it

was not doctrinaire.

Such a move, the

11/4/59

-18

practical effect of which would be nothing more than to make the

Open Market Account portfolio somewhat less liquid, might cause

some people to think that the System had attempted to do something

for the long-term market when actually it

had not.

Persons abroad

would be likely to interpret the move as an attempt to bolster the

dollar.

Mr. Thomas suggested that an exchange of part of the maturing

securities into the four-year note would involve a sacrifice of prin

ciple.

Such a move, however, would have little practical effect.

Aside from the maturing certificates, the Open Market Account port

folio contained about $2.5 billion of bills and over $11 billion of

other securities maturing in not more than one year.

Mr.

Consequently,

Thomas said, it was just a question of whether the Committee

wanted to give up a principle or not.

Mr. Robertson inquired whether the first problem on repurchase

agreements referred to by Mr. Rouse was considered settled, and Mr.

Hayes responded that he had been going to raise the same question.

Mr. Rouse had indicated what was said to the dealers and the matter

would rest that way unless the Committee felt that the position should

be changed.

Mr. Robertson then said that he agreed completely with Mr.

Mills.

If an established principle were to be changed, he would not

change it in the middle of the stream.

11/4/59

-19

Mr. Hayes asked if

and it

there were further comments on this point,

developed that there was unanimous agreement with the position

expressed by Mr.

Mills.

Mr. Rouse inquired whether it

would be appropriate to raise

this question at the annual organization meeting of the Open Market

Committee next March, and Mr.

would be proper,

Robertson expressed the view that this

although he doubted whether any decision at that

time to change the current policy would be appropriate if

the Account

was again in the middle of a situation similar to that described

today by Mr.

Rouse.

Mr. Hayes agreed with the thought that the general question

could properly come up for discussion by the Committee at an appro

priate time.

and

the

the

ber

and

Thereupon, upon motion duly made

seconded, and by unanimous vote,

open market transactions during

period October 13 through Novem

2, 1959, were approved, ratified,

confirmed.

Under date of October 14, 1959, there had been sent to each

member and alternate member of the Federal Open Market Committee,

and to each President not currently a member of the Committee, a copy

of the report of audit of the System Open Market Account,

made by

the Division of Examinations of the Board of Governors as at the

close of business August 21, 1959.

in

The report, which has been placed

the Committee's files, was submitted to the Secretary of the

-20Committee under date of September 30, 1959, in accordance with the

action of the Federal Open Market Committee at its

meeting on June

21, 1939, as reaffirmed at the meeting on March 3, 1959.

Vice Chairman Hayes inquired whether any of the members of

the Committee wished to comment on the report, and there was no

indication to such effect.

Accordingly, the audit report was

noted and accepted without objection.

Supplementing the staff memorandum distributed under date of

October 30, 1959, Mr. Young made the following statement with respect

to economic developments:

In introductory comment to last meeting's report, the

point was made that prospects ahead appeared less weighted

than earlier towards inflationary boom and more weighted to

a poststrike period of high-level expansion, featuring more

active competitive play of demand and supply and a tolerable

stability of wholesale and consumer price levels.

Indica

tions pointing to this prospect are to be found in underlying

cyclical and financial forces shaping developments; that is

to say, they represent indications discernible despite the

steel strike.

It needs to be recognized, of course, that settlement

of the strike, after so long and so sharp a curtailment of

output, could release demand forces strong enough, given a

disrupted metals supply situation, to produce a quick run-up

in activity and prices, a run-up having characteristics

superficially inflationary. We are inclined to interpret

most recent data reflective of basic trends, however, as

supporting further our last meeting's interpretation. In

other words, a poststrike run-up in activity, accompanied by

inflationary symptoms, seems likely in the present perspective

to be a self-limiting danger, in the nature of a temporary

bulge.

As to the most recent news from the economic statistics

front, there are various fresh items--estimates and facts--to

be reported. As regards the estimates:

-21(1) At the beginning of this week, the number of

industrial workers idled by the steel strike is estimated

to have exceeded 900 thousand and by the week end is

expected to exceed 1 million.

(2)

Latest available information continues to confirm

our earlier estimate of a further decline of industrial pro

duction in October of 2 index points. Strike settlement

could permit some rebound in November, but with steel pipe

lines emptied the total index recovery would probably be

modest.

(3) Even with early strike settlement, fourth quarter

revival in GNP will probably be moderate, with the second

quarter level of $485billion little

more than regained.

(4) The projected fourth quarter increase in business

plant and equipment expenditures is now placed below earlier

estimates by a significant margin.

The forthcoming projec

tions of increase in plant and equipment expenditures for

1960 over 1959 are also expected to fall below earlier guesses

and well below the actual increase from 1955 to 1956.

(5) Reflecting the impact of the steel strike and the

automobile industry change-over in the third quarter, pre

liminary estimates of third quarter corporate profits yield

figures somewhat below $46 billion, down about a seventh

from the second quarter level. With present partial output

of steel metal and steel fabrication and even with full

recovery of such output by the year end, fourth quarter

corporate profits can hardly be estimated now at much higher

than third quarter profits.

(6) Third quarter seasonally adjusted income of farm

operators has been estimated at a $9.5 billion rate, down

over a fourth from the high third quarter level of a year

ago. Reduced cash sales and lower Government payments

resulting from termination of the acreage reserve of the

soil bank plus higher cash expenses account for the decline.

Fourth quarter realized income of farmers is estimated to be

at a higher rate but estimates for the year 1959 as a whole

indicate that farm realized income will fall about $2 billion

below last year's $13 billion.

With regard to recently reported facts:

(1) Consumer demands for autos in early October were

very strong, suggesting for the month a seasonally adjusted

annual sales rate of 6.9 million units. Sales of other

consumer durable goods--furniture, television, and household

appliances--were apparently maintained at advanced rates

reached earlier. Moderate gains in department store sales

from September to October suggest continuing strength in

consumer demands for nondurables as well as durables.

11/4/59

-22-

(2)

Reflecting consumers' willingness to finance

purchases with credit, consumer instalment credit in

September rose a further $485 million on a seasonally

adjusted basis, thus about sustaining the $6 billion

annual rate of expansion reached in July and August.

(3)

Manufacturers' sales of durable goods in September,

seasonally adjusted, showed little

change from the reduced

August level which was a tenth below June sales, but sales

of nondurable manufacturers were close to the early summer

record.

(4) Manufacturers' inventories again declined in

September, with inventory reduction in the durable goods

sector only partly offset by rise in inventories at non

durable manufacturers. Partial data point to little

September change in distributors' inventories.

(5)

Construction activity in September, seasonally

adjusted, fell

again to an annual rate of $53 billion. This

level was about 5 per cent lower than the record attained

earlier this year, but better than 7 per cent higher than a

year earlier. Housing starts at 1.3 million plus units,

annual rate, while below the spring peak, were in largest

number for any September on record. Early October residential

construction plans of builders, as reported by FHA field

offices, were only moderately less optimistic than a year ago.

Average interest rates on conventional mortgages early in

October were reported by FHA to have reached a postwar high

of 6.10 per cent; in the West, the average rate was reported

at 6.5 per cent, with placement fees in individual cases

bringing the effective rate to borrowers even higher.

(6) U. S. exports in September showed further marked

pickup, but the reported figures may be swollen by the

September

anticipation effects of the longshoremens' strike.

import data are not yet reported.

(7) Strong expansion in economic activity continues to

characterize foreign industrial nations, especially in Western

Europe and in Japan.

Strengthening of activity abroad, as well as con

(8)

tinued underlying strength of demands in domestic markets,

have been making for firm-to-rising prices for most basic

On the other hand, there continue to

industrial materials.

increases for fabricated materials

price

be few reports of

products. Average prices of all

industrial

and finished

wholesale have now been about stable

at

industrial commodities

of 1955--a roughly comparable

autumn

In the

for five months.

industrial prices

cycle--average

economic

phase of the last

month.

per

cent

per

.5

of

were rising at a rate

11/4/59

-23Mr. Thomas presented the following statement with regard to

the current financial situation:

Financial markets are still

in a transition stage.

Following heavy pressures of over-all demands for funds

during the preceding year, moderating of pressures began

in late September and continued to characterize these

markets until the past week. At this stage, it is not

possible to judge whether this easing reflects a change

in trend or a passing phase.

Yields on U. S. Government securities maturing from

about 6 months on out to many years have declined further

in the past three weeks, although during the past week

there have been some upward adjustments.

In some medium

and long-term issues declines in yields offset all or

most of the increases that occurred in August and

September. Although the longer Treasury bills have shown

marked declines in yields from the September peaks,

90-day bills have continued to fluctuate around 4 per

cent or higher, and all bill yields are three-fourths of

a percentage point higher than they were in late July

and early August.

Other short-term issues are also

well above levels of that period.

Yields on State and local government issues have

also declined in recent weeks, but relatively not as

much as U. S. Treasury bonds.

Corporate bond yields

have shown little

or no decline from peaks reached at

the end of September. Common stock prices, after

declining in the latter half of September, have been

steadier in October, with some increase in trading

activity. There are some indications of increased in

terest in bonds on the part of investors, because of the

higher yields on bonds than on stocks, as well as because

of uncertainty as to current and future corporate profits.

Current estimates indicate that profits before taxes, which

reached a high level of $$2.6 billion annual rate in the

second quarter, may have been below $46 billion in the third

quarter, with the possibility of little recovery in the

fourth quarter. Next year's outlook is dimmed by the

possibility of labor disturbances and settlements that will

lead either to rising prices or lower profits-or both.

However, no pronounced tendency toward a shifting of

investments is as yet apparent.

New capital issues continue in moderate volume and

have moved rather well at rates of over 5 per cent.

11/4/59

-24-

Short-term issues by Federal agencies have been fairly

large, but also have been well absorbed at rates of

5-1/8 per cent or higher. The mortgage market continued

tight. Although the volume of mortgage transactions is

large, commitments for future mortgages are becoming more

difficult to obtain. Discounts on mortgages have continued

to increase.

In October the Treasury successfully floated two cash

offerings of about $2 billion each, including a 5 per cent

note of nearly 5-year maturity and a June tax anticipation

bill at an average yield of 4.78 per cent. The bill

promptly sold in the market at a lower rate, contrary to

the usual experience with such issues subscribed for by

banks to obtain tax and loan accounts. The current refund

ing operation, which may effect an exchange of over $5

billion of issues held outside the Federal Reserve-a larger

amount than had been anticipated--for 1-year certificates

and 4-year notes, appears to be promising a successful

conclusion. The Treasury will apparently need another $2

billion of cash in late November and a similar amount in

January, but the exact amounts will depend on attrition in

the exchange offering and the extent to which tax returns

may be affected by the steel strike.

Payment for the two new cash issues within one week

was effected with little evidence of strain in the market.

Moderate amounts of the issues were taken by banks

particularly those outside of New York-but for the month

as a whole these takings-at least at city banks--were

largely offset by earlier and subsequent sales of

securities. Nonbank investors, therefore, continue to be

the principal source of funds for the Treasury borrowing.

At banks in leading cities--according to partial

figures for October 28--total holdings of Government

securities increased slightly in October, while loans

and other securities declined moderately, giving a net

Usually loans

decline in total loans and investments.

change,

Commercial loans showed little

increase in October.

while loans to finance companies declined by a substantial

amount--perhaps more than seasonally. Loans to brokers and

dealers in securities, real estate loans, and other loans

These figures would seem to indi

showed small increases.

cate some slackening--at least partly seasonal--during

October in consumer credit expansion, which has been very

large in recent months. The maintenance of business loans

in the face of a probable further decline in inventories

may indicate that borrowers are holding on to credits

11/4/59

previously obtained.

The continued increase in nonbank

holdings of Government securities supports this supposition.

Demand deposits at city banks increased on balance

during October, while United States Government deposits

declined after fluctuating considerably during the month.

Time deposits declined by over $250 million during the

month, reflecting decreases in interbank deposits as well

as in those of others.

These withdrawals may be associated

with purchases of the new Treasury issues.

Currency in

circulation has shown somewhat less than the usual seasonal

increase in recent weeks.

The growth in private demand

deposits at city banks was close to the seasonal pattern,

but it is not yet possible to obtain a good measure of

money supply changes for October because of the absence of

data for country banks, which usually show a rather large

increase in that month.

Reserves needed to support Treasury financing operations,

which were somewhat smaller than had been expected, were more

than amply supplied by an unusually large and prolonged mid

month increase in float. System holdings of Government

securities were actually reduced and in addition member bank

borrowings declined. Net borrowed reserves were little

over

$300 million in that week, but subsequently rose to nearly

$500 million. Currency and required reserves increased less

than had been projected in October, but the figure for

required reserves for the latter part of the month is still

uncertain.

In the current statement week, the System has again

been purchasing securities to supply seasonal reserve needs.

Operations have exceeded $350 million, including repurchase

contracts, some of which mature during the week.

These

operations should be sufficient to meet needs for the next

two weeks.

In the four weeks from mid-November to mid

December, about $800 million of reserves may need to be

supplied.

In January approximately $1 billion should be

absorbed.

In view of the leveling out--and perhaps easing-of

demand pressures on money and credit markets, and prevailing

uncertainties as to the future turn of events and effects of

the steel strike, there is no need for any tightening of

Nevertheless,

restraints on credit expansion at this time.

strong and the longer-run

since basic forces are still

outlook is for a resumption of expansion--probably at an

occasion for positive

accelerated pace--there is little

action toward easing the money market by increasing the

availability of reserves in excess of usual seasonal needs.

-26

11/4/59

Should credit and monetary demands fall below the

seasonal pattern, as appears to have been the case

in the past month, some moderate easing might safely

be permitted to develop.

In further comments, Mr. Thomas summarized views on the

longer-run business outlook, particularly as it might affect the

demand for credit, that were expressed at a meeting of the Conference

of Business Economists held last week in New York City.

Mr. Johns then inquired of Messrs. Young and Thomas whether

there was any substantial difference in their views on the state of

the economy and the economic outlook.

Mr. Young replied that there were probably shades of dif

ference.

boom,

He had used the word "boom," but not "strong inflationary

whereas Mr. Thomas referred to "expansion," which could mean

a strong expansion.

He (Mr. Young) did not want to be committed to

the position that the forthcoming period would not be expansionary,

but he did feel that the current developments pointed less in the

direction of an inflationary boom than was earlier considered likely.

In his comments at the October 13 Committee meeting he had enumerated

a number of factors that seemed to suggest a revised outlook, and

those factors had been reinforced by other information that had come

to light since then.

These data included the McGraw-Hill survey,

which seemed to point to somewhat smaller plant and equipment

expenditures than previously envisaged.

In substance, he did not

feel that he and Mr. Thomas were very far apart.

11/4/59

-27

Mr. Thomas said he was apprehensive concerning the develop

ment of unsustainable elements in the economy that might lead to a

recession.

Whether these were called inflationary or not depended

on one's definition.

He would prefer to use "unsustainable" rather

than "inflationary."

Mr. Johns then stated that the ultimate question for decision

was whether a change in policy was indicated.

Mr. Thomas replied that he thought neither he nor Mr. Young

would so conclude, to which Mr. Young added that the implication of

his statement, on the basis of the things covered in it,

certainly no tightening was indicated for the time being.

need to watch developments unfold a little

was that

He saw a

longer before making a

change in policy and felt that the position taken by the Committee

at the last meeting was about right.

Mr. Marget then presented the following comments on the United

States balance-of-payments situation:

At the last meeting of the Committee, I reported that our

figures for the outflow of gold and dollars--which we take

as the measure of the over-all deficit in our balance of

payments--showed an outflow during the third quarter of

around $4 billion, seasonally adjusted annual rate; and I

suggested that this was better than what had been implied

by the projection, produced some months ago under the

auspices of the National Foreign Trade Council, of an

over-all deficit for the calendar year 1959 of $4.5

billion.

But, even apart from the fact that a deficit of $4

a very sizeable deficit, there was a

billion is still

special reason for being concerned about that figure of

11/4/59

-28-

a $4 billion deficit annual rate for the third quarter.

The reason was this: that the gold and dollar outflow

for the second quarter of this year had also been at

an annual rate of $4 billion-so that there was no net

improvement in the over-all deficit as between the two

quarters-despite the fact that our trade figures,

particularly in the crucial field of exports, had been

showing an improvement since June. Without the trade

figures for September, which were not available when I

last reported to this Committee, one had to speculate as

to which of two possibilities was the more probable:

(1) Had there been a change in the non-trade items

(such as capital movements and aid transactions) which

offset the improvement in the trade figures since June?

Or (2) had there been a serious deterioration in the

trade picture in September, sufficient to offset the

trade gains of the earlier months since June? From

many points of view, this second possibility was the

more disturbing; because, even though one was prepared

to make some allowance for the distorting effects of the

steel strike, such a deterioration in the trade picture

would have cast doubt on whether the movement toward

balance in

our international accounts, which we hoped had

begun, in the critical field of exports, in June of this

year, was really under way at last.

We now have the trade figures for September. It is

comforting to report that they continue to give evidence

of the pickup in foreign demand for our exports which has

been evident since June of this year. Indeed, the export

figures for September are so good that the Department of

Commerce has suggested that they may have stolen some

exports from the following month.because of the speeding

up of ship departures in September in anticipation of the

shipping strike that was then threatening.

Next month's figures will tell us something about this.

In the meantime, it remains true that we have to guard

against two types of error with respect to developments in

our balance of payments that are more widespread than they

ought to be. One is the error of supposing that no adjust

ment is taking place in our balance of payments, particularly

in the vital field of exports; the other is the error of

supposing that the adjustment is taking place so rapidly

and so certainly that we no longer have a balance-of-payments

problem, and that we therefore have no need to frame our

policies with reference to what is happening in that area.

-29An over-all balance-of-payments deficit at an annual rate

of $4 billion is still

a very sizeable deficit indeed; the

deficit will still be a sizeable one if it is reduced to

the level at which it was last year-$3.4 billion-which,

after all, was more than twice the average level of the

deficits in the years 1950 to 1956, when the competitive

situation in world trade was much less intense than it is

now.

It cannot be reiterated too often: our trade position

does seem to be improving; but it still has a long way to

go.

Mr. Hayes presented the following statement of his views on the

business outlook and credit policy:

Analysis of the business situation for the purpose of

determining credit policy presents unusual difficulties at

this time because of all the uncertainties of the steel

strike.

The strike has begun to exert a seriously dis

ruptive and cumulative impact on over-all production, employ

ment, and income; and these effects seem likely to spread

further in the next three weeks regardless of strike develop

There seems, at least in our District, to have been a

ments.

perceptible change in business sentiment since our last meeting.

Resumption of the business expansion after the end of the strike

generally expected, but there are growing doubts as to

is still

the vigor and duration of the expansion.

On the whole, the declines in over-all business indices

such as those for orders, sales, production, and employment

reported to date, do not appear too large to be attributed

entirely to the strike. The decline in gross national product

in the third quarter was more than accounted for by a $9.5

billion drop in the annual rate of inventory accumulation.

Although construction activity is leveling off for reasons

independent of the strike and there have been declines in some

time series which usually lead turning points in business,

the over-all picture suggests that the underlying forces of

An area of some uncertainty is

strong.

expansion are still

the outlook for plant and equipment expenditures, but the

seems to be clearly upward.

direction of such outlays still

Because current business statistics will, for some time to

come, be largely dominated by factors related to the strike,

it will probably be hard to assess the underlying general

business trend in the coming weeks.

11/4/59

-30

Consumer expenditures have been better sustained than

personal income, while the ratio of savings to disposable

income has dropped to the lowest level since mid-1955.

Moreover, consumer credit has continued to expand at a rate

which can hardly go on indefinitely.

Thus the expansionary

effect of such credit is likely to diminish in the period

ahead; and strikers and other workers laid off because of

the strike have been given an opportunity to defer various

payments of debt and have thus been anticipating future

buying power to a considerable extent.

Recent price developments have not been encouraging.

Farm prices were responsible for a higher wholesale index

in September, and the daily index was rising through October;

while food and services were responsible for a higher consumer

price index in September. On the more hopeful side, we can

find some positive elements in the Kaiser settlement in that

the wage increase seems to be more moderate than those of

recent years and the contract establishes machinery for

company-level consideration of the broader problem of sharing

the benefits of further productivity gains, with the consumer

apparently included among the beneficiaries.

Earlier hopes

of a radical turning point in the pattern of inflationary

wage settlements no longer seem justified, but there is still

a chance that the industry's wage settlement will not be high

enough to justify a general increase in steel prices in the

next few months.

Pressure on the capital markets has abated considerably

in the last few weeks, and an improving bond market psychology

has been helped both by strike considerations and by the

Treasury's recent financing success.

Bank loans of all commercial banks continued to grow

rapidly through September, with a strong showing especially

for business loans, consumer loans, and real estate loans.

Fragmentary data for October are more mixed and point to a

loan increase considerably smaller than in October 1955.

With continued liquidation of Government securities by the

banks, total loans and investments were pretty stable through

The money supply shows an annual rate

September and October.

of increase of only about 1/2 per cent for the year 1959 to

date--sharply below the 1955 gain--although some allowance

should be made for the fact that Government deposits are now

at a relatively high level.

There will be few weeks between now and the year-end when

our policies will not have to take account of Treasury financ

ing operations either in prospect or recently completed. Cash

offerings are now expected late this month and in January.

The System faces the difficult task of devising a credit

policy which is appropriate to the unusual economic pattern

-31indicated for the next three weeks but which will not give

rise to harmful results over the longer run. Unquestionably

we should take no action that might add to the existing

strain on business firms and complicate the process of

adaptation to the effects of the strike. Were it not for

the danger of creating false expectations which might be

abruptly reversed if a firmly restrictive policy became

necessary after the strike is over, I would lean toward a

measurable easing of restraint for the next few weeks.

However, recognizing the danger of being "whipsawed," I

think the aim of policy should be to preserve a feeling of

stability in monetary and credit conditions and to assure

that there will be ample availability of funds for seasonal

credit needs.

Such a policy is indicated on general economic

grounds as well as to preserve an "even keel" for some period

following this week's Treasury refunding operation. I would

hope the Manager would be given ample leeway to focus more

on interest rates and the feel of the market than on any

specific level of net borrowed reserves.

I would not be

disturbed if net borrowed reserves should swing fairly widely

in the attainment of these aims, but I would not like to see

the weekly average rise above $500 million.

The present directive is not ideally adapted to conditions

faced in the next three weeks--but since any change now might

be subject to misinterpretation, I would prefer to leave it as

Certainly the discount rate should be left alone in

it is.

this very fluid situation. It is quite possible that as events

unfold we may find it necessary to meet in advance of the

regular three-week interval to consider a changed business

outlook.

Reverting to our informal discussion here some weeks ago

as to the desirability of implementing the new vault-cash

legislation during this period of seasonal credit needs, I

should like to point out that projections suggest a need for

about $400 million additional reserves in the week ending

December 2, and for another $200 million in the ensuing week

ending December 9. I recognize, however, that there are

important complications that must be taken into account.

One other matter which I should merely like to note in

passing is the absence of any stand-by powers whereby the

System could reimpose selective controls on consumer credit,

if this should be deemed necessary. While the expansion to

date of consumer credit does not necessarily give cause for

alarm, I feel that as a System we should at least be studying

this area in view of the time that would be required for any

enabling legislation.

11/4/59

-32

With regard to Mr. Rouse's question about the

exchange of securities, I do not feel that it is vital

but I would be inclined to think that if the System

took, say, $1 billion of the 4-year notes and $4 billion

of the one-year certificates, that would be helpful to

monetary policy in the long run.

Mr. Erickson reported that economic activity in the First

District was continuing to hold up quite well considering the back

ground of the steel strike and the seasonal lull in some industries.

The impact of the steel strike, direct and indirect, was still rela

tively slight in the district.

The New England index of production

for October was down only one point from June.

New England purchasing agents showed that

The October survey of

3 per cent expected an

upward trend of production, which compared with 49 per cent in the

September survey and 51 per cent in August, which was the peak figure.

In September, construction contracts were down 16 per cent, this

being the third consecutive month in which construction contracts

were down.

However,

for the first nine months of this year construc

tion contracts were up 2 per cent, with residential construction

still

25 per cent ahead of the first nine months last year.

There

was a seasonal gain in nonagricultural employment in mid-August to

mid-September, although somewhat less than a year ago.

Department

store sales fluctuated widely during the four weeks ended October 24,

due probably to weather conditions more than anything else, but they

still

followed pretty much the same four weeks last year.

October 24,

On

commercial and industrial loans of reporting member banks

11/4/59

-33

were $24 million lower than the peak reached on September 30.

The Reserve Bank discount window had been used less during the

last three weeks than for some period of time.

The September

survey of mutual savings banks revealed an increase in deposits

of 5.8 per cent over September of last year, which was less than

the year-to-year increases had been running earlier.

Real estate

loans were up 10 per cent, and there had been further shifts at

mutual savings banks toward paying higher rates of interest on

deposits.

Mr. Erickson went on to say that investors in the First

District took $62 million of the so-called "magic fives" in the

recent Treasury financing.

Comments had appeared in the press

regarding the effect on mutual savings banks in the New York area,

and the Boston Bank made a check of the effect in the mutual savings

banks in its district.

In the smaller communities and cities there

apparently had been little effect, and in Hartford and Providence

only a slight effect.

The two largest mutual savings banks in

Boston have interest payment dates falling on October 5 and October

15, so it might have been expected that they would be affected more

than otherwise.

However,

the information obtained indicated that

these banks probably had withdrawals of somewhere between $1 million

and $1-1/2 million.

Since the latest Committee meeting the Boston Bank had held

its fall business roundup, and at that time most of the participants

11/4/59

-34

expected the steel mills to be back in operation by the end of

October.

On that assumption, they were reasonably optimistic

about the business outlook. Estimates of gross national product

at the end of next June averaged $503.5 billion, while guesses

on the index of industrial production averaged 160.

It was

expected that 4.8 per cent of the labor force would be unemployed,

that the wholesale price index would stand at 120.1, and that the

consumer price index would stand at 126.

Over the years, Mr.

Erickson noted, the estimates of this group had been on the con

servative side.

Turning to policy, Mr. Erickson expressed the view that the

Committee should continue to mark time, with no change in the discount

rate or the directive.

As to open market operations, he agreed with

Mr. Hayes that the Account Manager should be given latitude.

He

would not increase the existing degree of restraint, and he would

try to let any errors fall on the side of ease.

He would not be

disturbed if net borrowed reserves fluctuated more than they had

recently. His views on policy were expressed on the assumption that

the steel mills would resume operations shortly as the result of

negotiations or under the provisions of the Taft-Hartly Act.

If,

however, the mills were not opened in the next week or two, he felt

that the Committee might want to meet earlier than the next scheduled

meeting, that is,

to hold a meeting in two weeks instead of three.

-35

11/4/59

With regard to the exchange of System Account securities in

the Treasury refunding, Mr. Erickson said that he had no fixed

opinion but would not object to putting up to $1 billion into the

four-year notes.

He thought it might be well to do that in order

to show some flexibility, and such a move would not interfere with

over-all monetary policy.

In recent years the Open Market portfolio

had sometimes contained less than the present quantity of obligations

maturing in one year or less, and additional holdings were due to

move into that area shortly.

Mr. Irons reported that conditions in the Eleventh District

were moving along on a sort of plateau at the high level reached

some two or three months ago.

had been little

Speaking in the over-all sense, there

change during the past three-week period.

Most

indices were at high levels and a few had moved up slightly.

Un

employment was running about 4.1 per cent of the labor force, compared

with a higher national figure, and some cities were substantially

under 4.1 per cent.

Crude oil production was running quite steadily

at recent levels, while department store sales showed little

being up a little

in

October but not substantially.

change,

The agricultural

situation was favorable; a very large cotton output was expected.

Range conditions were expected to be good and cattle were doing all

right.

As elsewhere,

strike and its

there was some hesitancy due to the steel

consequences,

but inquiries continued to produce the

comment that the strike had not had too much effect upon manufacturing

11/4/59

-36

industries or upon economic activity in the district.

A check of

thirteen major steel-using manufacturers revealed few curtailments

or labor layoffs attributable to the strike.

due principally to local conditions,

Instead, layoffs were

such as a strike in the con

struction industry in a particular city, or to institutional industry

problems.

General Motors had pretty well closed up its plant outside

Dallas and Ford was beginning to cut back.

Also, a number of manu

facturing firms reported that they would have to close down if

strike continued as long as the end of November or December.

the

The

strike appeared to have caused no change in capital investment

programs and no great surge of demand for bank credit was expected

when the strike was over.

Continuing his comments on district developments,

said that credit demand may have been down a little

not significantly.

Similarly, it

Mr. Irons

recently, but

might be up somewhat during the

next three weeks but not enough to mean anything.

The picture had

been moving along on that basis since the middle of June or July.

The seasonal movement this year appeared to be a little

usual and demand was probably a little

slower than

While borrowing

less marked.

from the Reserve Bank was not heavy, those district banks engaging

in

Federal funds transactions were now net borrowers.

Mr.

Irons sensed from discussions in the district a little

less conversation at the moment about tight money.

In financial

circles there appeared to be an attitude of watchful waiting to

11/4/59

-37

see what might happen.

The insurance companies were doing pro

motional work in the form of an anti-inflation campaign that had

been drawing some public interest and publicity.

In view of the economic picture in the Eleventh District,

which he felt was not too different from that in the nation as a

whole, Mr. Irons said that he would recommend no change in basic

policy.

He would not try to bring about any less restraint, but

rather to maintain about the degree of restraint that had prevailed

in the past few weeks.

If there should be any deviations, he would

prefer that they be on the side of ease, looking on any such

deviation, however, as an inadvertent heppenstance rather than a

deliberate attempt to ease.

little

He would not be too disturbed if

a

ease should remain in the market, but he would not allow it

to accumulate to any great extent.

He agreed that the Account

Manager should have leeway to maintain about the same degree of

pressure on reserve positions.

He was not particularly concerned

about the level of net borrowed reserves, particularly at the

present time; he was concerned much more about the level of interest

rates and other conditions in the market that the Account Manager

might sense.

He did not expect much of significance to happen in

the next three weeks even if

If it

were settled, it

the steel strike should be settled.

might be possible to see better the shape

of things to come, but he would not expect any significant change

in the near future.

or the directive.

He would favor no change in the discount rate

11/4/59

-38

On the question raised regarding the refunding, Mr. Irons

said he did not feel strongly about the exchange of System Account

holdings.

However, he would prefer to take the one-year certifi

cates and not allocate $1 billion to the four-year notes.

no good reason to do otherwise.

He saw

To take some of the four-year

securities would not mean being less doctrinaire; it

would not make

much difference from the standpoint of monetary and credit policy

and would seem like an attempt to fool somebody.

While he would be

willing to deviate from a policy of rigidity, he would like to have

a good reason that could be explained, and a decision to take some

of the four-year notes could not be explained on grounds that it

connoted a flexible policy.

Accordingly, although he would not feel

too strongly on the matter, he would prefer not to split the exchange.

Mr. Mangels reported that a recent meeting of the California

State Governor's Business Advisory Council had produced several items

of interest that might be regarded as straws in the wind.

A repre

sentative of insurance companies reported that at a recent Chicago

meeting the insurance industry had agreed to spend a substantial

amount for advertisements in 400 United States newspapers against

inflation, while a representative of the automobile industry reported

that General Motors Acceptance Corporation was planning to gear its

1960 operations to estimated sales of between 6.2 and 6.5 million

cars.

it

The Food Machinery and Chemical Corporation reported that

had sufficient steel to last for the remainder of this year; it

-39

11/4/59

also indicated that for the past year it

plants in

had been establishing

foreign countries to meet competition in markets outside

the United States.

This company's recent domestic expansion had

been in areas outside California because of considerably higher

labor costs in that State than in

other areas, with the result

that San Jose, where a large part of the company's production

facilities were located, would more and more become a research

and development center.

A representative of the aircraft industry

forecast that total aircraft employment in California would continue

to decline for the next two years.

One factor was an increase in the

complexity of defense items and their cost, thus reducing the physical

volume of production; there was also a reduction in airframe construc

tion resulting in increased manufacturing of defense hardware outside

Further, most of the aircraft companies had reached the

the State.

peak of production of commercial airliners and all would reach that

peak early in 1960.

Nevertheless,

this participant in the conference

was optimistic because of engineering,

found in

the aircraft industry in

employees in

degrees in

California, it

scientific, and technical skills

California.

Of 240,000 aircraft

was said that 18 per cent had college

engineering or science and that another 18 per cent were

technicians.

Regarding the Kaiser steel settlement, Mr.

was at first

Mangels said it

hoped that the start-up period might take only about

11/4/59

-40

ten days.

Then it

was found that there had been extensive damage

to open-hearth furnaces and it

now appeared that it

would be at

least a month before sizable shipments could be made.

weeks, it

For three

appeared that operations probably would only average

about one-third of capacity.

Mr. Mangels also reported that

residential construction in August was up 9 per cent over July.

He felt,

however, that this was a temporary bulge and did not

represent a change in

trend.

Lumber output in September and

October was at a rather high level despite lower prices and reduced

demand.

In agriculture, heavy crop marketings brought returns 5 per

cent above a year ago in spite of lower prices.

The response to the

new-model automobiles had been favorable but dealers were limited in

their stocks of both 1959 and 1960 cars.

Department store sales

continued to be somewhat above the figures of a year ago, both on a

month-to-month and on a cumulative basis, but the rate of improve

ment had declined somewhat.

In

September, unemployment in the

district increased to 5 per cent.

On the financial side, Mr.

Mangels said that during the

three-week period ended October 21, bank loans were up $43 million,

with $26 million of this increase in

loans to retail traders.

Of

this increase, $17 million occurred in the week of October 21,

principally because of a loan to one large retail firm for accounts

receivable financing.

Security holdings of reporting banks were up

$47 million, demand deposits were up $91 million, but time deposits

-41

11/4/59

were off $38 million although savings accounts increased $50 million.

For the first

time in

ten weeks,

district reporting banks last week

were net purchasers of Federal funds.

continued quite nominal.

Borrowings at the Reserve Bank

The average ratio of borrowings to reserve

requirements in September was .4 per cent.

With respect to policy, Mr.

the views expressed by Mr.

Mangels said that he agreed with

Hayes and that he would not favor changing

the directive or the discount rate at this time.

As to the exchange

of System Account securities, Mr. Mangels said he agreed with Mr.

Irons.

In the absence of a factor such as existed when the earlier

partial exchange into longer-term securities was made, he felt the

Committee would be well advised to stay in short-term securities.

However, he would have no strong objection to taking $1 billion of

the four-year notes.

Mr. Deming said that Ninth District economic indicators

continued to lag those for the nation.

This reflected the lack of

iron and copper mining activity and a weak agricultural situation.

He recalled having said at the preceding Committee meeting that if

the steel strike ended promptly there would be 17 million tons of

potential iron ore production for the balance of this year.

the potential was down to 10 million tons.

Now

The Soo lock closing

had been announced for December 12; thus after that date no ore

boats would go down the lakes.

Rail shipments of ore could not

11/4/59

-42

and would not be large.

In western Montana the copper mining strike

was continuing, causing Anaconda to toy with the idea of closing its

mining operations for an indefinite period if

soon.

As yet, however,

there was no settlement

this was not regarded as a serious proposal.

Mr. Deming said that the uncertainty in

the national scene

plus the forthcoming Treasury financing seemed to argue for no change

in basic policy at this time, although he would go along with any

deviations being made on the side of ease.

In his view it would be

inappropriate to change the discount rate or the directive at this

time.

With respect to the exchange question, he agreed with Messrs.

Irons and Mangels since he did not see how the Committee could

demonstrate any more flexibility or a less doctrinaire approach to

open market operations by splitting the take-up of the exchange

issues.

Therefore,

although he did not feel strongly on the matter,

he would favor exchanging entirely into the one-year issue.

Mr. Allen made substantially the following comments with

respect to Seventh District developments and with respect to

monetary policy:

Despite the steel strike, and its impact on the

automobile industry, the employment situation in the

Seventh District cannot yet be termed bad. Our cities

as a group make a far more satisfactory picture than

Through the

that of the rest of the nation as a whole.

first

three weeks of October there was surprisingly

rise in unemployment compensation claims in

little

The number of new claims

Seventh District States.

was less than during the

combined

for the five States

Of course we expect the situation

same period last year.

to worsen rapidly, but thus far it has not deteriorated

at the pace expected.

11/4/59

Farm income has declined in the District, with the

decline greatest in the Corn Belt States--understandable

with hog prices 25 - 30 per cent lower than last year.

However, the large crop of feed grains should boost farm

income in the last quarter, and our country banks which

have suffered a drop in demand deposits are hoping to see

that trend at least arrested.

Bank loan growth has slowed in the past month; in fact

total loans of weekly reporting District banks declined $30

million in the first three weeks of October. Security hold

ings, on the other hand, show that acquisition of the June tax

bills and, to a lesser extent, the 5 per cent notes, more than

offset the net reduction in holdings of Governments earlier

in the month. These recent acquisitions, in the eyes of

some of our banks whose basic reserve positions should not

encourage any increase in loans or investments, are justified

under the guise of helping the Treasury. And the improvement

in the bond market is not proving to be a discouraging factor;

rather, it makes continued help for the Treasury a more

necessary and a more pleasant so-called duty and administra

tion of the discount window more difficult.

We are impressed, or perhaps the right word would be

depressed, by the number of wage settlements coming to our

attention which call for substantial wage increases in the

neighborhood of 20 cents or more per hour--most of them to

be effective over a period of not more than two years. It is

a question as to how effective monetary policy can be

still

in combating these inflationary influences but they strongly

suggest to us that the present is no time to contemplate an

On the other hand, in the light of the lower

easier policy.

level of business activity, however temporary it may turn out

to be, I am not disposed to recommend a more stringent policy

at this time.

Consequently, I would favor endeavoring to

continue the current degree of restraint for another three

As to the exchange, I would favor sticking to the

weeks.

shorter securities.

Mr. Leedy stated that there had been no significant changes in

the Tenth District since mid-October.

The secondary effects of the steel

strike on employment in the district had not yet been particularly great.

However,

projections indicated that if the strike should continue beyond

the middle of November there would be a sharp increase in unemployment.

11/4/59

-44

With respect to policy, Mr.

Leedy said he was in

with the views that had been expressed thus far.

accord

He was somewhat

surprised that the System had been able to get along as well as it

had over the past period in

following the policy that had been set.

In the light of the forthcoming Treasury financing and economic

conditions generally, he saw no reason for an immediate change in

policy.

Accordingly,

he would favor continuing the present policy.

As to the exchange, he would find it

difficult to assign a convincing

reason for splitting the System's subscription between the longer

and the shorter maturities.

given a good account of itself

The Government securities market had

recently and the reasons that existed

earlier for making a departure from the usual practice did not seem

to have weight at the present time.

As he understood it,

the

Secretary of the Treasury had indicated that the matter was immaterial

from the Treasury's standpoint and also had suggested that the System

should not be expected to sacrifice any principles.

Therefore,

Mr.

Leedy said, he would go along with others who had expressed the view

that it

would be preferable to take the entire amount in

the shorter

term issue.

Mr.

Leach made substantially the following comments:

While the most noticeable effects of the steel strike

concentrated in certain industries in Maryland

are still

and West Virginia, its impact on the District economy is

Probably the most tangible evidence

definitely spreading.

decline in man-hours worked

continuing

of this is in the

Despite the strike, however,

industries.

in manufacturing

11/4/59

activity in leading industries, such as textiles, chemicals,

furniture, and cigarettes continues at a very high level.

Employment generally is only slightly below the peak 1959

levels established prior to the strike.

Rising cloth prices and lower cotton prices have further

strengthened the textile outlook, and profits are at their

highest level in many years. Producers report large order

backlogs with production of print cloths substantially sold

into the second quarter of 1960. Finished goods inventories

are abnormally small. The industrial chemical industry in

West Virginia is reportedly running at peak capacity.

Furniture production and shipments are increasing from their

near-record levels. Cigarette production is running 6 per

cent above 1958, which was a record year in this industry.

Pressures on District banks were eased somewhat during

most of October as evidenced by a less than seasonal loan

demand, a very low level of borrowings from the Federal

Reserve Bank, and sales of Federal funds. During the past

week, however, member banks borrowed more heavily from the

Reserve Bank and shifted from sales to purchases of Federal

Contrary to the situation in the Dallas District,

funds.

as reported, I hear comments about tight money everywhere I

go.

The current refunding and prospective Treasury borrow

ing seem to preclude any real change in policy during the

The steel situation cannot be settled

next three weeks.

but the adverse effects of the

measures,

monetary

through

It seems that this

increasing.

are

the

economy

on

strike

development should be given some recognition under a

flexible monetary policy and be reflected in the policy

Perhaps we could agree that seasonal needs for

record.

Certainly

reserves should be met somewhat more readily.

all doubts should be resolved on the side of ease. I would

not favor a change in the directive or a change in the

discount rate at this time.

With respect to the exchange, I do not have a strong

I like to be flexible but know of no good reason

opinion.

to take any of the four-year notes.

Mr. Mills said he would like to restate his position that the

System would be well advised to move cautiously toward a less re

strictive credit policy.

He was increasingly clear in his own mind

11/4/59

that the economy was passing through a period of rather drastic

adjustment.

While that adjustment was being made, the System was

tending to make its projections and to determine policy against a

momentum of past events reflected in statistics that were no longer

reliable.

Accordingly, the recommendation that he would make first

would be to revise the policy directive by changing clause (b) to

read "to fostering sustainable economic growth and expanding employ

ment opportunities while guarding against inflationary credit expan

sion."

To go further into the reasoning that brought him to this

position, Mr. Mills read the following statement:

There are strong advocates of the theory that an

effective monetary policy can only overcome the lag in

its impact on economic events if such events are antici

pated well in advance of their occurrence and appropriate

countermeasures then undertaken. The most active

proponents of this theory lay greatest emphasis on the

importance of formulating a monetary and credit policy

that will act as a backfire against an anticipated

outburst of inflationary pressures, and in practice are

apparently prepared to take the risk that the policy

actions which they support may miscalculate the future

and induce deflationary pressures.

Whether it is within the capacity of the human mind

to read the future accurately and to conduct a monetary

policy adapted to an assumed future course of events is

open to argument. In any event, however, forecasting,

when translated into the formulation of monetary and

credit policy, should give as much weight to possible

deflationary as to inflationary developments, and doubt

should at least be resolved on the side of a middle of

the road policy. At the present time, future uncertain

ties are strong enough to argue for a monetary and credit

policy that will lessen the degree of restraint over

credit expansion that is implicit in the level of

negative free reserves that is presently imposed on the

commercial banking system. The cumulative effects of

11/4/59

-47-

current policy actions may already have curtailed a

normal seasonal expansion of commercial bank credit

that may account for the easing that has occurred

in the demand for bank credit which, in turn, can be

put to policy advantage by permitting its moderating

effects to be reflected in an improvement in bank

liquidity.

A lessened demand for bank loans as transposed

into an increase in bank holdings of U. S. Treasury

bills should not be thwarted by the maintenance of a

severely restrictive monetary and credit policy.

Instead, the gradual modification of current policy

that has been made automatically possible in the

slackened demand for bank credit should be reinforced

further by lightening the pressure on bank reserves

to the extent that whatever divestment of recently

acquired U. S. Government securities banks may find

necessary in order to meet other legitimate credit

demands can proceed unhurriedly and without subjecting

the U. S. Government securities market to depressive

Implementation of such a policy

price influences.

conforms to the belief that the economy can only be

freed from the lagging and cumulative downward effects

of past System policy actions if the level of negative

free reserves is slowly reduced. A cautious modifica

tion of policy should be possible of accomplishment with

out major repercussions on the prices of U. S. Government

For that matter, any risk of instigating a

securities.

speculative upward movement in the prices of U. S.

Government securities that is inherent in a modification

of existing Federal Reserve System monetary and credit

policy is outweighed by the greater risk that its

continuation will in due course have so severely limited

the availability of credit as to require a drastic

policy reversal. If that should be the case and liquidity

is then forced into the economy by policy actions as an

antidote, the stage will have been set for a new and

immoderate swing in the Federal Reserve System's policies.

With regard to the exchange,

Mr. Mills said he wished to align

himself with those who would exchange into the one-year maturity.

Mr.

Robertson said that despite the scholarly presentation

of economic factors and judgments by Messrs. Young and Thomas the

11/4/59

-48

future-even the short-term future--was so uncertain in his own

mind that he could see no justification for a change of policy.

In saying this, he hoped that the System would do nothing toward

lessening of restraint.

He had felt for a long time that the

System was not being tight enough.

In recent weeks, he had the

feeling that perhaps he might have been wrong and that the policy

had been just about right and was beginning to take effect.

week, however, he was not sure this was the case.

would recommend staying just about still,

diminution of restraint.

Last

At present he

with no intentional

This posture, he felt, was needed as a

starting point to deal with the situation as it unfolded following

settlement of the steel strike.

He would not change the directive

or the discount rate at this time.

As to the exchange,

he would

also align himself with the majority of those who had spoken.

He

did not think that the System would eliminate the charge of being

doctrinaire by a change in

the usual policy which had no apparent

reason and which would not actually indicate flexibility.

Mr. Shepardson noted the high degree of uncertainty at the

present time as to future trends.

Because of that situation, it

seemed to him highly desirable for the System to maintain its

present position.

He felt the Committee should not overlook the

comments by Mr. Allen regarding the wage settlements that had been

taking place and that it

seemed reasonable to expect would be

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11/4/59

reflected sooner or later in

prices reported by Mr.

price adjustments.

Young was still

another matter of concern.

As System experience would indicate, it

than to tighten.

The movement of

is

always easier to ease

Therefore, while there might be adverse effects

of the strike that would retard the movement of the economy most

generally expected in the months ahead, he felt that the System

would be well advised to maintain its

developments made themselves clear.

present position until further

Accordingly, he would maintain

the present degree of restraint giving appropriate leeway to the

Manager of the Account to measure the effect of that restraint.

would not favor changing the directive or the discount rate.

the exchange,

Mr.

As to

Shepardson noted the statement that no particular

reason had been advanced for changing the usual policy.

it

He

However,

had also been implied that there was no particularly strong

argument against deviation.

If

the latter was true and if

might be some beneficial psychological effect in

would see no harm in

there

some quarters, he

splitting the System's subscription to take

on the order of $4 billion of the one-year securities and $1 billion

of the four-year securities.

Mr.

King said he saw no reason to rejoice in the fact that

the steel settlements already made were perhaps less inflationary

than the ones entered into a few years ago.

The settlements made

thus far probably were going to be inflationary to some extent.

One might delude himself into thinking that wage increases in the

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11/4/59

vicinity of 20 cents an hour were not particularly inflationary, Mr.

King said, but they sounded

uite inflationary to him unless they

were coupled with other things that the steel industry had been try

ing to achieve.

He did not know that any of those things had been

achieved and gathered that they probably had not.

Mr. King expressed the view that the degree of restraint in

force had been desirable and adequate.

tainties,

In the face of current uncer

he would give no evidence to the public of a change in

policy one way or the other, although he would feel that the Account

Manager should have leeway to do as he thought proper in

uncertain period.

this

With respect to the reference that had been made

to the possibility of another Committee meeting before three weeks,

Mr. King said he could not conceive of any development taking place

so fast as to necessitate a special meeting.

He would think that a

meeting at the normal time probably would be adequate to take what

ever action might be necessary.

in its

He would favor leaving the directive

present form and making no change in

this time.

the discount rate at

With regard to the exchange, he would not take the

longer-term security.

The Committee probably was justified in

acting

to authorize a split earlier this year when the Government securities

market was under considerably more pressure than at present, and if

the market developed more pressure at some time in the future he

might again favor such a decision.

At the present time, however,

the market seemd to be doing quite well and appeared to have turned

a hill

that it

had to climb.

-51

11/4/59

Mr.

Fulton reported that the steel strike had exerted

profound effects in

the Fourth District.

Unemployment was now

rising rapidly, as evidenced by the fact that General Motors,

the largest employer in the Cleveland area, had practically shut

down its

operations.

Inventories in

the hands of steel customers

were lower now than had been thought possible.

Further, there was

the concern that the strike had lasted so long that an actual

permanent loss of tonnage demand had occurred.

This year it

was

expected that the figures would be about 95 million tons of

production against projections of 115 million tons, which left

residue of 20 million tons not produced.

It

a

was feared that about

Also, there had

25 per cent of this loss would be irretrievable.

been an unknown amount of damage to the equipment and furnaces by

reason of their lying idle this long,

and it

was not anticipated

that much tonnage would be turned out for the first

weeks,

two or three

particularly since the mills had shipped practically every

thing on the floor before the strike.

was tight.

There were ore boats still

In addition, the ore situation

in the Cleveland harbor with

no place to go, there was a limited time remaining for pulling ore

down, and many crew members had gotten other employment.

While it

might be possible to squeak through the coming spring, it

would be

necessary to have some high cost ore brought in

by rail.

agreement with Kaiser read quite well on the surface:

hour in

fringe benefits the first

The

10 cents an

year, and then the cost admitted

11/4/59

in

-52

the second year would be about 9-1/2 cents.

maintained that if

it

However,

steel men

the same package were accepted by the older mills

would cost those companies about 19 cents an hour the first

and then the other 9-1/2 cents.

year

There was great pressure on the

part of the union for the companies to accept that kind of settlement

but without doubt such a settlement would mean a significant increase

in the price of steel.

offers,

each one a little

The steel companies reportedly had made three

better than the preceding one,

but the

union apparently had made no counter-offer after the original proposal.

In the field of automobiles,

now very flat,

Mr. Fulton said, production was

with only Studebaker and American in

good production.

In a recent conference of business economists held at the Cleveland

Bank,

was indicated that it

it

would take six or seven weeks for the

automobile industry to get back to prestrike levels.

inventories of dealers would be reduced substantially.

With sales high,

It

is

presently

anticipated that 6.5 to 7 million domestic cars will be produced in

1960.

On the brighter side, the rubber industry was overcoming

inventory deficiencies.

Tire stocks were at record lows and the

industry was now building stocks to load up the dealers, a normal

process at this time of year.

be good in 1960.

It was felt that demand again would

The glass industry had not shut down because this

period was being used to rebuild stocks of glass used by the auto

industry.

Plate and window glass had also gotten quite low.

Manufacturers of large appliances recorded that sales were up 19 per

11/4/59

-53

cent over last year and that it

was hard to maintain inventories.

Production was going "out the window" to consumers,

consumers felt that steel would be short and it

to get the appliances later.

perhaps because

would not be possible

Business machines were reported to have

been showing strong sales this year and enough steel reportedly was

available to continue operations through the rest of the year.

In

aluminum, this had been a record year for primary production but

customers found themselves with large inventories.

Orders therefore

had been falling off, with production cut back.

Mr.

not good.

Fulton said that the district unemployment situation was

In Youngstown,

Ohio, for example,

over 25 per cent of the

labor force was out of work due to the effects of the strike upon the

steel industry and allied industries.

Department store sales, how

ever, had been holding up quite well and for the district as a whole

were 6 per cent over last year.

Loans of district reporting banks

declined slightly during the past week, while total deposits increased.

With the exception of the week ended October 28, when country banks

borrowed rather heavily, member banks had not been coming to the

discount window to an unduly large extent.

Borrowings had been

running from 5 to 7 per cent of the national total.

Mr.

Fulton said that he did not believe any relaxation of

policy should take place.

He felt that the Desk had done a good job

and that ample latitude should be given to the Manager of the Account

with a view to maintaining the current degree of firmness in

market.

He would favor no change in

discount rate.

the

either the directive or the

With regard to the exchange, he concurred in the

views expressed by Mr. Shepardson.

The effect on the liquidity of

the Account seemed to be a matter of academic interest, at least

in the small degree that it would be affected by a partial exchange

into the four-year securities.

Accordingly, for the sake of

appearance alone and in the absence of any strong reason for not

doing so, he would consider putting $1 billion in

notes and the balance in

the four-year

the one-year securities.

Mr. Bopp made substantially the following comments:

We have just completed our annual survey of capital

expenditures by manufacturers in the Philadelphia area,

and they are expected to be about the same in 1960 as

expenditures this year. Estimates for 1959 total about

the same as the revised estimates reported in a re-check

last spring, but the total is substantially higher than

for the original estimates made last fall.

Our experience

has been that manufacturers underestimate their expendi

tures during periods of business expansion, the underesti

year of the

mate usually being largest during the first

upturn.

Manufacturers also reported that they expect

change in employment, production, and inventories

little

from the third quarter of this year to the second quarter

Nearly 70 per cent of the firms expect their

of 1960.

inventories to remain about the same, 18 per cent expect

an increase, and 12 per cent a decrease. A re-check

with several of the large firms last week revealed that

their capital expenditure plans have not been affected

so far by the strike.

Idleness caused by the strike increased about 14,000

in Pennsylvania in the past three weeks, according to the

This

Pennsylvania State Department of Labor and Industry.

is about one-third more than the increase in the previous

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11/4/59

three weeks.

Metals and metal products manufacturing

and railroads accounted for most of the newly idled.

Nevertheless, new and continued unemployment claims

have not risen significantly.

I agree that there should be no change in the degree

of restraint, in the discount rate, or in the directive.

With regard to the exchange, I do not feel strongly, since

whatever we do will have no effect on the liquidity of the

economy and the liquidity of the central bank creates no

concern on my part. On balance, however, I would take the

one-year certificates.

Mr.

Johns said he wished to align himself with those who had

stated that they would not vary policy one way or the other at the

present time.

He would like to adopt as his own views the analysis

presented by Mr.

Robertson.

Without arguing the merits of the

exchange question, he would express himself firmly on the side of

exchanging in

Mr.

full into the shorter-term securities.

Szymczak said he felt this was a time when the System

ought to ease somewhat the policy followed through the spring and

summer.

He would not change policy to the extent of changing the

directive,

but he would get ready for a change in

case of develop

ments that might result from the strike and in view of the dampening

of the economy that usually comes after the beginning of the calendar

year.

Developments could snowball into something quite serious.

Accordingly, he would recommend some easing,

to the extent that it

was possible for the Manager of the Account to ease without a change

in

basic policy.

As to the exchange,

it

would have been most un

fortunate had the Secretary of the Treasury requested that the

System take $2 billion or $3 billion of the longer-term securities.

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11/4/59

However, the problem of the Secretary must be borne in mind.

To

the extent that the System could assist in meeting this problem,

he (Mr.

Szymczak) would favor going along and taking some of the

four-year notes, even up to $2 billion, rather than to wait until

the Secretary might ask the System to follow such a course.

Mr.

Balderston said that the central question was the extent

to which the steel strike was resulting in

permanent injury to the

economy as opposed to a mere postponement of the filling of demands.

Between now and the time of the next Committee meeting the impact of

the strike would become more apparent as stocks were exhausted and

workers were laid off.

Already the available data indicated a

reduction of inventories at an annual rate of about $10 billion,

and the situation had begun to be reflected in a lower demand for

business loans.

Turnover of demand deposits outside the principal

financial centers leveled off some five months ago and the increase

in the money supply has been only about 0.5 per cent.

In short,

the strike seemed not only to be pushing part of the boom over into

whatever valley might be ahead but was continuing to a point where

some actual injury to the economy might be evident between now and

Christmas.

As to policy, Mr.

increase in

restraint.

Balderston said that he would favor no

He felt,

however,

that the current degree

of restraint should be continued until the situation clarified

itself.

If

there were to be deviations,

he would hope that for

11/4/59

-57

the immediate future they would be on the lower side.

feel strongly about the exchange.

However,

He did not

he lacked an explanation

as to why the System should take any of the four-year notes.

Consequently, he would stick with the shorter securities.

Summarizing the meeting, Vice Chairman Hayes said that

certainly the overwhelming view expressed today was in favor of no

change in

basic policy.

There had been considerable indication

that the Manager of the Account should have leeway in

that decision.

More comments were in

implementing

the direction of saying that

there should be no increase in restraint or that any deviations

should be on the side of ease, to the extent that there were

deviations,

than there had been comments in

the opposite direction.

In neither direction, however, had the comments been frequent enough

to constitute a majority view.

The consensus,

therefore, favored

no change in basic policy, with ample latitude to the Manager of

the Account in

carrying out that decision.

The consensus also

favored no change in the discount rate.

The Vice Chairman inquired whether there was any disagreement

with this statement of the consensus,

and no comments were heard.

He

then inquired whether any Committee member wished to vote negatively

on the policy indicated by the consensus.

Mr.

Mills stated that his vote should be recorded as contrary

to the consensus.

He added, however, that in his opinion the Committee

was making a serious mistake in voting on this subject and that a

11/4/59

-58

record vote was going to produce comment,

discussion and in

vestigation that would not be helpful to the Federal Reserve

System.

The Vice Chairman then stated that in

the absence of

Chairman Martin he felt the Committee should not revise the

procedure instituted at the last meeting.

Certainly the subject

was open for discussion, and the Committee was only experimenting

with the current procedure.

However,

he would be inclined to

follow, at least for the time being, the procedure that the Chairman

followed at the last meeting.

Mr.

Szymczak commented that his position was not sufficiently

different from the consensus as stated by Mr. Hayes for him to record

a negative vote, although he thought his position was closer to the

individual views Mr. Hayes had expressed earlier than to the con

sensus.

Mr. Hayes likewise commented that his position was not

sufficiently different from the consensus to cause him to vote

against the policy indicated by the consensus.

Mr.

Szymczak then inquired whether the point

Mr.Mills had

raised about voting procedure would not come back for further discus

sion, following which Mr. King asked for clarification on the purpose

of the vote.

In response, the Vice Chairman noted Mr. King's comment that

he thought the statement of the Chair properly set forth the consensus

11/4/59

-59

of the meeting.

However,

the purpose of the vote now being taken

was to determine whether the members of the Committee agreed with

the policy views set forth in the consensus as stated, or whether

any member wished to be recorded as voting in

policy views.

In other words,

opposition to those

this was a vote on the policy to be

followed until the next meeting.

Mr.

King then inquired whether a vote on the policy directive

would not afford a member sufficient opportunity to record himself,

to which Mr. Hayes replied that the opinion had been expressed by

certain members of the Committee that a vote on the directive did

not provide a sufficient opportunity.

Therefore, the Committee was

experimenting with this procedure.

Mr. Shepardson said he had thought that Mr. Mills was one

of those who felt there should be a record vote on the policy indi

cated by the consensus.

Mr. Mills replied in the negative.

His contention, he said,

was that the minutes in the past had recorded a vote that was not

actually taken by poll of the Committee members.

further question, Mr.

In response to a

Mills said his preference would be that a

consensus be reflected, that a vote not be asserted, and that the

minutes be drafted in

polls of opinion.

Mr.

a manner that would indicate the different

The consensus would state the policy.

Szymczak commented that the opinions he had stated would

be recorded in

the minutes and that such a procedure was sufficient

as far as he was concerned.

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11/4/59

Mr.

Mills said this was what he had felt in the past but

that he objected to recording as a vote a consensus of opinions

which on occasions hid a rather wide range of individual policy

views.

The Vice Chairman inquired of Mr. Mills whether he would

advocate the procedure that was followed up until the last meeting

of the Committee.

Mr.

Mills indicated an affirmative response,

except that he

objected to recording a vote that was not actually taken.

Mr.

Erickson said it

would stand as always.

was his understanding that the consensus

However,

within that consensus the opinions

might vary from one extreme to the other.

Mr.

Robertson interjected that the statute called for a vote

on policy.

Mr.

Mills said that he did not recall the exact language of

the statute and that he was not certain that it

contained a mandate

for a vote.

The Vice Chairman then turned to Mr. Hackley for clarification

of the statutory requirement.

does, in

Mr.

Hackley stated that the statute

so many words, require a vote.

He then read the last para

graph of section 10 of the Federal Reserve Act which provides that

the Board of Governors (rather than the Federal Open Market Committee)

shall keep a complete record of the action taken by the Board and by

the Federal Open Market Committee upon all questions of policy relating

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11/4/59

to open market operations and shall record therein the votes taken

in

connection with the determination of open market policies and

the reasons underlying the action of the Board and the Committee

in

each instance.

The paragraph further provides that the Board

shall keep a similar record with respect to all questions of policy

determined by the Board and shall include in its

annual report to

the Congress a full account of the action so taken during the pre

ceding year with respect to the policies determined by it

include in

and shall

such report a copy of the records required to be kept

under the provisions of this paragraph.

Mr. Hackley said that it

was clear, therefore,

from the law

that the vote on any open market policy action taken by the Committee

must be recorded.

Mr.

The question was what constituted such an action.

Hayes agreed that this was the question, adding that

there had been a difference of interpretation in

the past as to

whether the action taken on the directive was the only policy action

taken.

Mr. Riefler commented that it

had always been assumed in

the

past that the action on the Committee's directive constituted the

action on the policy to be carried out during the period between

that meeting and the next one.

However, in the past year or two a

question had been raised regarding this procedure, and the modifica

tion presented by Chairman Martin at the October 13 meeting had

been suggested with the thought that it

would help answer this question.

11/4/59

-62

Mr. Hayes said that if

anyone,

like Mr. Mills, felt that

the Committee was proceeding on the wrong tack it

would be desirable

for that member to give the Committee a memorandum of his views and

to discuss the matter at a future meeting.

Although he was not

present at the last meeting, it was his understanding that the

Committee was proceeding on an experimental basis with the revised

procedure.

In response to a question from Mr.

Martin's letter of October 9, 1959,

the voting procedure,

King regarding Chairman

suggesting a modification in

Mr. Hayes stated that the procedure did not

contemplate a vote on whether the Chair had stated the consensus

correctly,

but rather on whether the Committee members approved

the policy indicated by the consensus.

Mr. Riefler noted that the first

letter

step in

Chairman Martin's

indicated that the Chair would guide the discussion to a

statement of the consensus.

The second step contemplated was a

vote on the policy embodied in

Mr.

the consensus.

Hayes noted that this vote had just been taken and that

one dissent had been found.

Mr.

Johns, who was not present at the October 13 meeting,

said that upon reading Chairman Martin's letter, and even now, he

was a little

confused by the idea that the Committee would have two

policy determinations,

one on the policy indicated by the consensus

and the other on the directive.

He inquired in what respect these

determinations were thought to be different.

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-63

In reply, Mr. Riefler said that the Committee had always

assumed that the vote on the directive to be issued to the Agent

Bank was the vote on the policy to be carried out and that opera

tions must always be within that policy for the period until the

next meeting.

two, and it

This had been challenged within the past year or

had been suggested that the Committee was not really

taking a vote on policy and that the minutes were not truly

reflecting the Committee's decisions on policy.

As a result of

this question having been raised, the procedure suggested in

Chairman Martin's letter of October 9 was devised as a procedure

that would meet the legal requirements for a vote and which would

give an additional chance for any member who wished to do so to vote

against the policy as stated in the consensus.

This was in

addition

to the vote on the directive to the Agent Bank.

Mr.

Johns said it

seemed to him that such a procedure

necessarily involved some sort of admission that there might be a

difference between the directive and Committee policy.

It

also

probably involved a confession that during all the years when the

other procedure was followed the Committee really had not recorded

its

policy decisions correctly.

Mr. Hayes commented that this might be possible but that

another interpretation could be that the directive states policy

in

very broad terms and that this was a step to refine it

definitely within that broad policy.

more

He then inquired of the

11/4/59

-64

Secretary who had challenged the former procedure, to which Mr.

Riefler replied that the question had been raised originally by

Mr. Mills.

Mr. Johns then said that, as he understood it,

Mr. Mills

merely had challenged that the minutes recorded a vote that was

never actually taken.

Mr. Szymczak commented that, in policy matters, no one

can be so precise as to know exactly the proper amount of restraint

to be applied at any particular time.

Therefore, there must be

varying degrees of acceptance of the agreed upon policy.

At this point the Vice Chairman suggested that since Mr.

Mills originally had raised the question on the procedure that

had been followed, it

would be helpful if

Mr.

Mills would submit

a memorandum of his views as to why the procedure instituted at

the October 13 Committee meeting did not meet the objection that

he had raised earlier.

Mr. Mills stated that he would be agreeable to presenting

such a memorandum.

With regard to the policy directive, the Vice Chairman

noted that a suggestion for a change in clause (b) had been made

by Mr.

Mills.

As he recalled, everyone else who mentioned the

directive expressed the view that it should not be changed at this

time.

He then inquired of the Committee whether it

desired to

change the directive in accordance with the suggestion of Mr. Mills.

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11/4/59

Mr.

Balderston observed that Mr. Leach had indicated

some degree of discomfort with the fact that the directive had

not recognized a situation (the steel strike) that was of concern

to the Committee.

While he shared this thought,

actually a change in policy he (Mr.

to change clause (b)

unless there was

Balderston) would not desire

of the directive.

On the other hand, the

directive was going on meeting after meeting with no reflection

of the situation discussed by the Committee.

Mr. Johns expressed the view that the policy record would

explain and distill

the comments that would appear in

regarding the steel strike.

the minutes

Thus, he did not think that in the

policy record that would appear in

the annual report the steel

strike would be overlooked.

Mr. Riefler added the comment that a shift in policy actually

occurred at the meeting on September 22, 1959, when the decision was

made that any deviations should be on the side of ease.

Mr.

Hayes then inquired whether there were other comments

as to wording of the directive, and Mr.

vote "no" on its

Mills stated that he would

present wording.

The Vice Chairman stated that a vote would be recorded as

favoring no change in

dissented.

the policy directive,

except that Mr. Mills

He added that the minutes would reflect the language

suggested by Mr. Mills.

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11/4/59

Thereupon, upon motion duly made

and seconded, the policy indicated by

the consensus, as stated earlier by the

Vice Chairman, was approved, Mr. Mills

voting "no" for the reasons he had

stated.

Upon motion duly made and seconded,

the Committee then voted, with Mr. Mills

voting "no," 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 op

portunities, 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 certifi

cates of indebtedness purchased from time to time for the

temporary accommodation of the Treasury, shall not be

increased or decreased by more than $1 billion)

(2) To purchase direct from the Treasury for the

account of the Federal Reserve Bank of New York (with

discretion, in cases where it seems desirable, to issue

participations to one or more Federal Reserve Banks) such

amounts of special short-term certificates of indebtedness

as may be necessary from time to time for the temporary

accommodation of the Treasury; provided that the total

amount of such certificates held at any one time by the

Federal Reserve Banks shall not exceed in the aggregate

$500 million.

With respect to the exchange of maturing securities now held

in

the System Open Market Account, the Vice Chairman stated that the

11/4/59

-67

majority clearly favored taking the shorter-term securities only.

Therefore, unless someone wished to change his position in

the

light of the go-around, that would stand as the decision.

He in

quired whether anyone wished to change the views that he had

previously expressed and there were no comments to such effect.

The Vice Chairman then noted that four Committee members,

during the go-around, had indicated that they would favor taking

some of the four-year notes.

Mr.

Thomas commented that one reason that might be cited

for taking some of the four-year notes was that there would be a

possible risk of having an outstanding issue held predominantly

by the System.

Conceivably, the result might be that $5 billion

of an issue totaling less than $7 billion would be held by the

System.

Mr. Hayes said that, abandoning his position as Chairman

of the meeting, he was sympathetic to the point Mr. Thomas had

made.

There was an area of doubt and he felt that the Secretary

of the Treasury, in

be happier if

spite of his expression of neutrality, would

the System were to take some of the four-year notes.

Under these circumstances,

Mr.

Hayes said he would take a modest

amount.

Mr.

Shepardson stated that he felt there was a difference

between a general policy against buying longer-term securities in

11/4/59

-68

the market and taking a portion of longer-term securities on exchange.

He would not be in

favor of going into the market and buying longer

term securities but on an exchange the proposition seemed to him

somewhat different.

Mr. Hayes noted that this point had been brought out in con

nection with the refunding earlier this year.

Mr.

Mills then said that he would like to present a basis for

taking the shorter-term securities in

entirety.

last refunding that the System split its

It was only at the

subscription, and that

produced a certain amount of comment in the press.

again split at this time, it

If

the System

might in the eyes of the interested

public seem to be making a change in its

basic policy.

Thus,

the

public might reasonably look forward to a repetition on each similar

occasion when the System held maturing securities.

Mr.

Thomas

recalled two occasions--one last year and one this year--when a

split was made, and Mr.

Mills added the comment that in such

circumstances the System might appear all the more to be falling

into a groove.

Mr. King commented that if

the four-year notes,

the total financing.

its

the System took $1 billion of

that would be a relatively small portion of

If

the Committee were going to depart from

general policy, he would rather depart from it

at a time when

the market was in more trouble than at present and then possibly

take a larger amount of the longer-term issue.

The question

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11/4/59

involved the principle of whether the System was going to go into

the longer-term issue every time.

Mr. Szymczak said he had the reverse feeling.

When the

System patently was going in to help the Treasury, the market

would clearly assign that as the reason.

However, on an occasion

when the Treasury did not appear to need any help, an opportunity

was provided for the System to get away from what could become

dogma.

Mr. Johns noted that in this case the Secretary of the

Treasury had said that he neither wanted nor solicited help and

that he was only thinking of the System protecting itself against

the charge of being doctrinaire.

Mr. Thomas commented that he felt that it might hurt the

Treasury issue for the System to hold some of the longer-term

securities more than it would help.

Mr. Balderston said that in talking with the Secretary of

the Treasury, on an earlier occasion than the one previously

mentioned, he had advanced the hope that the interest rate fixed

by the Treasury would be rich enough to attract buyers so that the

Federal Reserve would not end up by owning the entire issue.

The

point of discussion at that time was the question of a rate of

4-3/4 per cent or 1/8 per cent less.

Mr. Balderston said he

expressed the hope that the offering would be so priced as not

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11/4/59

to fail

in

issue.

In view of the point just made by Mr.

the market, thereby leaving the System with the entire

Thomas,

Mr.

Balderston

asked Mr. Rouse whether there was any indication from the market as

to whether non-Federal Reserve holdings of the one-year security

would be substantial.

Mr. Rouse replied that he thought it

was generally believed

that corporations would go more for the one-year certificate than the

four-year note.

There would be some evidence in

expectations as to rates.

the attrition of

On the whole, however, he felt

that the

System would have ample company in the one-year category.

Mr.

Balderston said that if

this were not the expectation he

would vote to take some of the four-year notes for the reason Mr.

Thomas had advanced.

Thereupon, upon motion duly made

and seconded, it was voted that all of

the $5 billion 3-3/8 per cent certifi

cates of indebtedness maturing on

November 15, 1959, and held in the

System Open Market Account would be

exchanged for the 4-3/4 per cent

certificate maturing November 15, 1960.

On this motion Messrs. Hayes, Erickson,

Shepardson, and Szymczak voted "no" for

the reasons they had stated.

It

was agreed that the next meeting of the Federal Open Market

Committee would be held at 10:00 a.m. on Tuesday, November 24, 1959.

In connection with the date fixed for the next meeting, Mr.

Johns,

speaking as Chairman of the Conference of Presidents of the

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11/4/59

Federal Reserve Banks, noted that a committee consisting of

Governor Robertson, representing the Board of Governors,

and

the members of the Committee on Fiscal Agency Operations, repre

senting the Presidents'

Conference, had been working on problems

relating to the verification and destruction of United States

currency and that a joint meeting of the Board and the Presidents

had been suggested in

order to consider the recommendations that

would soon be made available by the special committee.

inquired whether it

Mr.

Johns

would be agreeable to hold this joint meeting

following the meeting of the Federal Open Market Committee on

November 24, and it

was decided that the joint meeting would be

held at such time.

Mr.

Johns also referred to the fact that the Vice Chairman

of the Board of Governors had referred to the Presidents'

Conference

for comment a letter addressed to him under date of October 30, 1959,

by the Under Secretary of the Treasury with respect to proposed

Federal Reserve Bank participation in

Bonds program during 1960.

Mr.

the United States Savings

Johns raised the question whether

the Presidents should meet on this matter today or following the

meeting of the Federal Open Market Committee on November 24.

After discussion it

if

it

was agreed to follow the latter procedure

developed that this would not involve too long a delay in

replying to the Treasury.

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11/4/59

Secretary's Note: Subsequent to this

meeting, it was decided that the

Presidents would meet later today on

the questions raised by the Under

Secretary's letter.

Mr.

observed,

Johns then noted that if

the usual schedule were

a meeting of the Federal Open Market Committee would

be held December 15,1959.

He inquired whether it

able to schedule a meeting of the Presidents'

would be agree

Conference on

December 14 and 15, and possibly on December 16 depending on the

agenda that developed.

There being no objection, Mr.

Johns stated that the Secretary

of the Conference would be instructed to make plans on the basis of a

meeting of the Presidents'

Conference on the dates mentioned.

The meeting then adjourned.

Secretary