FOMC Minutes

A meeting of the Federal Open Market Committee was held in

the offices of the Board of Governors of the Federal Reserve System

in Washington on Tuesday,

PRESENT:

January 26, 1960, at 10:00 a.m.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Mr.

Mr.

Mr.

Mr.

Mills

Robertson

Shepardson

Hayes, Vice Chairman 1/

Allen

Balderston

Deming

Erickson

Johns

Mr. King

Szymczak

Messrs. Bopp, Bryan, Fulton, and Leedy, Alternate

Members of the Federal Open Market Committee

Messrs. Leach, Irons, and Mangels, Presidents of

the Federal Reserve Banks of Richmond, Dallas,

and San Francisco, respectively

Mr. Young, Secretary

Mr. Sherman, Assistant Secretary

Mr. Kenyon, Assistant Secretary

Mr. Thomas, Economist

Messrs. Jones, Marget, Mitchell, Noyes,

and Roosa, Associate Economists

Parsons,

Mr. Molony, Assistant to the Board of Governors

Mr. Koch, Adviser, Division of Research and

Statistics, Board of Governors

Mr. Keir, Chief, Government Finance Section,

Division of Research and Statistics, Board

of Governors

Mr. Knipe, Consultant to the Chairman, Board

of Governors

Messrs. Eastburn, Hostetler, Daane, Tow, and

Einzig, Vice Presidents of the Federal

Reserve Banks of Philadelphia, Cleveland,

Richmond, Kansas City, and San Francisco,

respectively

1/

Entered meeting at point indicated in minutes

1/26/60

Mr. Larkin, Assistant Vice President, Federal

Reserve Bank of New York

Mr. Coldwell, Director of Research, Federal

Reserve Bank of Dallas

Mr. Holmes, Manager, Securities Department,

Federal Reserve Bank of New York

Mr. Brandt, Economist, Federal Reserve Bank

of Atlanta

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Com

mittee held on January 12, 1960, were

approved.

Before this meeting there had been distributed to the members of

the Committee a report of open market operations covering the period

January 12 through January 20, 1960, and a supplementary report covering

the period January 21 through January 25, 1960.

Copies of both reports

have been placed in the files of the Committee.

In commenting on developments since the preceding meeting, Mr.

Larkin made substantially the following statement:

Developments since the last meeting of the Committee

have been set forth in the written reports previously

distributed. I would like to emphasize, however, the

sharp drop in short-term interest rates and the substantial

reduction in the System Account holdings that have occurred

since the last meeting. The average three-month Treasury

bill rate in yesterday's auction was, in round numbers,

slightly below 4-1/8 per cent compared with about 4-5/8

per cent two weeks ago. Moreover, I am informed that the

rate has dropped to 4 per cent on the offered side in

The rate on six-month Treasury

trading this morning.

bills was slightly less than 4-5/8 per cent in yester

day's auction as against almost 5 per cent two weeks ago.

This issue may be down to about 4-1/2 per cent in the

This sharp decline in short-term

market this morning.

rates has occurred despite the substantial decline in

System holdings over this period. This decline amounts

to almost $1 billion on a delivery basis over the

1/26/60

two weeks.

Needless to say, there has been a tremendous

demand for Treasury bills.

This demand has stemmed

largely from nonbank investors, including corporations,

public bodies such as States and municipalities, and

also individuals.

Individuals showed a large interest

in the most recent auction of one-year Treasury bills.

The market is now focusing on the approaching

Treasury refunding of over $11 billion February certifi

cates, of which the System holds about one half. Market

expectations point to an optional exchange offering of

two issues--a one-year certificate and a four-five year

note. The rate expectations are in the neighborhood of

5 per cent.

The market for bankers' acceptances has recently been

under less pressure and dealers' portfolios have been

reduced. However, rates on bankers' acceptances have not

followed Treasury bills downward. We have had the strange

situation over the past few days of one dealer having moved

acceptance rates lower by 1/8 per cent, with the other four

dealers declining to follow this move, leaving their bid

rate at 5 per cent.

There is just one further matter that I should like to

call to the Committee's attention, and it has to do with a

technical situation in the Government securities market.

The large scale interest in Government securities on the

part of individuals, which first found real reflection in

the so-called magic fives and other recent high-coupon

obligations, has also resulted in a large number of small

The dealers claim that

transactions executed by dealers.

these transactions have taxed their facilities, which have

been designed over a period of years for wholesale distribu

In

tion, rather than retail distribution in small amounts.

an effort to spread out the amount of back office work, some

of the dealers announced yesterday a new procedure in the

Effective February

handling of so-called small transactions.

1, they will put transactions of less than $25,000 on a

That is, delivery and payment on

skip-day delivery basis.

these small transactions will be made on the second business

day following the execution of the transaction in contrast

with regular, or next-day delivery that has hitherto

prevailed in the market.

Thereupon, upon motion duly made

and seconded, and by unanimous vote,

the open market transactions during

the period January 12,

January 25,

1960,

through

1960, were approved,

ratified, and confirmed.

1/26/60

During the course of Mr. Larkin's comments, Mr. Hayes joined

the meeting.

The staff economic review at this meeting took the form of a

visual-auditory presentation, the participants in which included

Messrs.

Thomas, Young, Marget,

and Noyes along with Messrs.

Garfield

and Williams of the Board's Division of Research and Statistics.

Subsequent to the meeting, copies of the text of the presentation

and the related charts were distributed to the members of the Committee

and placed in

the Committee's files.

Mr. Noyes opened the presentation with the following statement:

In recent weeks the spotlight of economic news has moved

from the steel strike to the budget.

Certainly the shift

from a cash deficit of $13 billion in fiscal 1959 to an ap

proximate balance this year and the prospect of a substantial

surplus for next year is dramatic. This shift reflects, in

considerable part, important developments in the general

economic situation.

For more than a year after the recession low in April

1958, the physical volume of industrial production rose

rapidly and without interruption to a level in May and June

1959 appreciably above the previous high in 1957. By

December, production was close to the May-June level of 166

and in January output is expected to rise further to about

168.

Taking a quick look at the whole postwar period, we see

that the broad general sweep of industrial production has

been upward--most rapidly during the early postwar years and

the Korean War period--and that this broad upsweep has been

interrupted by three recessions--in 1949, 1954, and 1958.

The Board's recently revised index shows somewhat more growth

than the earlier index, reflecting inclusion of the rapidly

growing utility industries along with manufacturing and

mining, and, more important, upward adjustments based on

study of comprehensive Census data.

The 1958 recession was sharper than those of 1954 and

1949. The subsequent recovery was rapid from the start and

1/26/60

5

only a year and a half after the recession began a new high

was reached.

Part of the rapid rise reflected the laying

in of stocks of steel for some months before the plants

closed down last July--more stocks than anyone guessed at

the time.

During the strike, total industrial production declined

sharply as steel output slowed to a trickle and output

levelled off in most industries not directly affected by the

strike. Housing starts, by summer already edging off follow

ing an extraordinary advance, declined sharply in early

autumn but they recovered part of the decline at year-end.

Nonagricultural employment declined temporarily from highs

reached earlier, and so did retail sales, but they should

turn up this month as autos become more readily available.

Sensitive materials prices, which early in this recovery

period had risen a little

more than in the 1954-55 recovery

period, showed little

change after spring last year. Common

stock prices declined after reaching new highs in early

August, recovered when steel production was resumed in early

November, and most recently have been declining again.

Interruption in economic expansion and uncertainties

concerning prospects during the strike period were reflected

not only in stock markets but in financial markets generally.

After rising moderately in early 1959, the active money

supply--demand deposits and currency--levelled off in late

spring and, except for a temporary advance in July, sub

From spring to autumn,

change.

sequently showed little

turnover of deposits also remained relatively stable, and

In security markets, the strike

then it advanced somewhat.

provided an occasion for investors to re-evaluate profit and

stock price prospects relative to the high returns available

on bonds and other fixed claims. The spread between bond

and stock yields, which had widened considerably over the

first half of 1959, did not increase much after midyear.

Short-term interest rates increased further, partly because

Treasury financing was concentrated in short- and intermediate

term securities.

Now near-capacity output at steel mills is beginning to

ease shortages and is providing steel for expanded output of

Industry officials have

autos and other metal products.

stated that no immediate general increase in steel prices is

expected. The new contract, they estimate, involves increases

in employment costs per manhour of around 3-1/2 to 3-3/ per

cent per year. This increase is substantially below those of

other postwar steel settlements. Also, it appears to be

similar to or somewhat below increases negotiated in

1/26/60

-6

other industries recently. One important change in the

contract is a revision in the escalator clause limiting

sharply the amount of any automatic wage increases to

offset possible cost-of-living increases.

Meanwhile, in Western Europe and elsewhere abroad,

production and consumption have risen to new highs, and

available resources are being utilized more fully, probably

reducing the intensity of foreign competition, which has

been one of the factors tending to limit price advances in

this country.

The presentation continued with discussion of recent develop

ments abroad and their relation to the United States balance of payments,

followed by a review of demand forces operating in the domestic econoy,

price trends and prospects,

the extent of utilization of resources, and

the developing situation in the financial area.

Mr.

Thomas concluded the presentation with a statement sub

stantially as follows:

Recovery in production and employment from strike levels

has been rapid and a new high for gross national product of

nearly $500 billion is expected for the first quarter of 1960.

Unquestionably it will go higher before the year is over. It

could approach a level as high as $520 billion by the end of

the year without placing undue strains on available resources.

A major question is whether the expansion will be sustainable

or whether it will go so fast and so far as to bring about

widespread advances in prices and important imbalances in the

economy with unfortunate consequences later.

A question of particular concern to this group is: How

much credit will be needed to permit adequate expansion to

prevent the development of unsustainable

occur and still

credit commitments? Growth in the money supply since last

spring has been limited in part by Federal Reserve actions.

At the same time monetary needs were held down by influences

growing out of the strike and the gradual wearing down of

cash balances that had been built up in excess of current

transaction needs in 1958. Velocity of money increased early

in the year and again at the end of the year.

In addition, higher interest rates have brought forth a

substantial volume of funds for lending from nonbank sources

so that credit supplies in the aggregate have been exceptionally

1/26/60

-7

large.

Much of the nonbank lending and investment has been

in liquid form representing what are in effect money substi

tutes. Considering the financial and business situation

generally, it seems likely that demands for bank credit will

again increase and if expansion proceeds moderately and in

an orderly manner, it might occur without resurgence of price

increases and speculative developments such as often character

ize this stage of cyclical expansion.

But this prospect is

not assured.

The postwar period as a whole has seen economic activity

and prices of goods, services, and capital assets under strong

demand pressure, This pressure was fed by an exceptional

supply of bank deposits and other liquid assets at the end of

the war and a continuing large flow of credit. It was ac

companied by diminishing fear of unemployment and of

incurrence of debt by consumers and businesses, and of

financial losses from sharp economic reverses. As each

postwar recession proved short-lived and moderate, many

people came to believe that rapid growth in the economy was

assured, and that creeping inflation was almost inevitable.

In 1960 we may again be faced with cumulative expansion

in demand and strong upward pressures on prices. Unlike 1956,

when auto production and housing starts declined while business

capital expenditures were rising sharply, 1960 may be a year

when rapid business inventory accumulation, expanding business

fixed capital outlays, rising net exports, and strong consumer

preference for new cars may all hit with great force at once,

while residential building may level off or decline only a

little.

If this should happen, demand pressures on industrial

capacity margins and existing supplies may be intensified,

bringing about resurgence of inflationary price tendencies and

also revival of speculative investment in capital assets other

than fixed-income obligations. While the margins of unused

capacity and unutilized manpower available to meet such re

inforced demand pressures are larger now than in 1954-55, these

not very great.

margins are still

These margins of capacity could be eliminated rather

quickly if monetary and other financial conditions were to

permit a concentrated surge of demand to develop and to

Last year the money

encourage inflationary expectations.

and by the end of the year was lower

supply increased little

relative to GNP than at any other time in the postwar period,

higher than in the 1920's.

although still

last year, there was

While the money supply rose little

a rise of 6 per cent in the rate of money turnover and there

was a substantial further increase in holdings of other liquid

1/26/60

-8.

assets.

The higher velocity of money enabled the economy to

transact a larger volume of business with little

increase in

money balances, while the increase in holdings of other liquid

assets indexed a growing volume of funds invested in a form

permitting ready transfer to other uses if inflationary

expectations are resumed.

Conceivably, however, the view in financial markets that

has generally prevailed in recent years might not be resumed.

The higher interest rates and the abnormal shift in relation

ships between bond and stock yields might bring about a re

evaluation of the capitalized value of income from capital

assets. Moreover, it might turn out that the economic situation

before the strike was not as expansive, nor our international

payments problem as temporary, as many observers have thought,

and that the strike was in fact a dramatic reflection of

fundamental change in business and financial appraisals of our

domestic and international prospects. If this should prove

to be true, resurgence of activity on the basis of inventory

rebuilding could not be long sustained.

A more hopeful possibility for 1960 than either an

inflationary upsurge or an early reaction is that we shall be

fortunate enough, now that recovery from the strike has been

largely achieved, to have further expansion in demand come

serially instead of all at once. In much of the postwar period,

economic developments have been characterized by this sort of

rolling adjustment rather than by concentrated changes in which

all major sectors move together.

For this year, it would be hoped that inventory accumula

tion, contributing to an initial rise in general activity as

output of autos and other metal products rises, would soon

Such a decline in the rate of inventory accumulation

slow down.

would make available resources for other prospective increases,

including larger consumer expenditures generally, increased

State and local government outlays, continuing expansion in

capital outlays, and increased net exports. A developing

Federal Government surplus should facilitate the financing of

larger expenditures in these areas.

Returning to the question raised earlier, how can bank

credit and money supply changes be geared to permit and foster

the most desirable of these developments? With fiscal policy

contributing to the supply of savings rather than to the demand

for them, the task of monetary policy should be easier in 1960

Treasury debt retirement may reduce some of the

than in 1959.

liquidity in the economy, particularly that of business, whose

larger tax payments will be a factor in the budgetary surplus.

Perhaps some renewed growth in cash holdings will be needed,

although prevailing high interest rates may continue to draw

existing balances into more active use.

1/26/60

It is evident that to date, prevailing restraints on

credit expansion have not been too severe.

Credit develop

ments in December indicated the strength of demands.

It

appears highly likely that in the immediate future credit

demands will be so vigorous as to require continuing restraint

in order to avoid excesses.

Available data for January to

date, however, show an appropriate seasonal reversal in bank

loans and total credit.

In addition, the marked easing in

bill

rates in the face of very heavy System sales indicates

the absence of very strong demand pressures so far. These

developments suggest that additional restraints are not yet

needed.

The feeling of tightness in credit markets seems

to be acute and it is appropriate to consider whether there

is a risk of not supplying the basis for enough bank credit.

Can we continue to rely on growth of savings, increasing

velocity of the money supply, and the willingness of member

banks to increase their borrowings to meet the credit demands

needed to support the amount of expansion in economic activity

that may appropriately occur in the year ahead? The whole

situation at home and abroad is a dynamic one and calls for

the closest scrutiny of current developments in shaping policy

actions.

Mr.

Hayes presented the following statement of his views with

respect to the business outlook and credit policy:

In general I think we can find encouragement in the

economic developments of the past two weeks, granted that no

firm judgment of the outlook can be based on so short a

Business has continued to improve, but at a moderate

period.

rate, while there have been fewer signs of strain in the

credit and capital markets than there were a few weeks ago.

Most of the recent improvement in business may be looked

on as the natural result of the steel settlement and the

rapid recovery of both output and deliveries in that industry.

It looks now as if steel inventories would be pretty well

Meanwhile, there

replenished within the next three months.

for automobiles

demand

of

buoyancy

the

to

are some doubts as

fears

and for consumer durables in general; and the initial

of inflationary results of the settlement are giving way to

The

some extent to increased talk of price competition.

stock market has been losing ground, with same continuing

more

disposition on the part of investors to give a little

The decline in housing starts may lessen,

attention to bonds.

for a time at least, the pressures for long-term funds.

I realize that it would be quite premature to conclude

that the threat of a boom, supported by inflationary credit

1/26/60

-10-

growth in 1960, has been removed.

There is a tendency at

this season of the year for business attitudes to be less

buoyant than at other seasons, and there is also a general

tendency for interest rates to move lower. We shall have

to watch carefully developments of the next few weeks and

months to see whether the present moderate tendencies are

merely seasonal; but at least there is more hope than in

some time that Federal Reserve policies of the last eighteen

months are beginning to show results, with strong support

now from the prospective budget surpluses.

The most recent data on bank credit suggests some slight

slowing in January of the vigorous expansion of loan demand

witnessed in December. As we have noted before, the money

supply showed almost no growth in 1959, but if we average the

results of 1958 and 1959 we find a more or less "normal"

growth for the two-year period. The banks are of course much

less liquid than at the start of the two-year period. It is

harder to judge the present degree of liquidity of the non

bank sector, with larger corporate holdings of short-term

governments offsetting to some extent the clearly reduced

liquidity in terms of bank deposits alone. All things

considered, I would hope that the seasonally adjusted money

supply could be allowed to expand moderately in the next

few months but within the general framework of our policy

of credit restraint.

Perhaps we should give some attention

to the desirability of a slight growth in total reserves, on

a seasonally adjusted basis, along the lines of Mr. Bryan's

and Mr. Johns' comments at the last two meetings.

For the next two weeks I would think that open market

operations should be directed toward maintaining about the

same degree of pressure on the money market and on bank

reserves. We should probably guard against interpreting

lower Treasury bill rates as an accurate measure of reduced

money market pressure, in view of the large part played in

the Treasury market by corporate funds and the fact that

the banks as a whole remain in a very tight position. As

usual, I would hope that the Manager would be given ample

leeway in carrying out the general policy of maintaining

the approximate existing degree of restraint.

No change in the directive seems to be called for. The

same reasons which led to our decision at the last meeting to

valid.

take no action on the discount rate are of course still

While last Thursday's one per cent increase in the British

bank rate may have a considerable influence on the flow of

short-term funds between the United States and Europe, I don't

think that it calls for any offsetting move on our part in the

near future. There will be an opportunity to reconsider the

1/26/60

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rate question after completion of the Treasury's February

refunding, by which time we shall have the advantage of

broader evidence of economic and credit developments

following the strike settlement, Meanwhile the decline

in market rates of interest has brought the discount rate

into better alignment with our open market policy as

reflected in market pressures and the level of market

interest rates. The System is now in a good strategic

position from which to move if we find that we must deal

with inflationary credit demands as we get further into

1960. For the time being, watchful waiting would seem to

be our best course.

Mr.

Erickson reported that the First District business situa

tion continued to show improvement.

Although year-end figures were

not yet available on production, construction, or employment, the

Business Week survey for 1959 indicated that New England had an

increase in personal income of 7.8 per cent over 1958, which was

higher than the national average.

However, according to the Depart

ment of Commerce survey figures for the three previous years, the New

England area was slightly under the national average.

The December

survey of mutual savings banks indicated a deposit increase of 5.1

per cent, the lowest year-ago comparison since February 1958.

From

that point, the comparisons rose to almost 7 per cent in October 1958,

but since then there had been a decline each month in the rate of

increase.

Even so, the rates of gain had not dropped to the low point

of the previous boom period of 1957.

During the past two weeks,

district banks were moderate sellers of Federal funds and there was

slightly greater use of the discount window.

Borrowings during this

period averaged $5 million higher than in the previous period, due

primarily to borrowing by some of the larger city banks.

1/26/60

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Mr.

Erickson indicated that he would not favor a change in

the discount rate or in the policy directive at this time.

open market operations,

As to

he would continue to maintain the same degree

of restraint, neither easing nor increasing restraint in any way.

Mr.

Irons said that following a moderate strengthening in

December, which resulted in making 1959 a record year, Eleventh

District developments in early January indicated further moderate

growth.

The banking situation appeared to be a little

in the preceding few weeks.

tighter than

District banks lost deposits rather

sharply during the first three weeks in January, there was some

decline in loans, perhaps about seasonal, and heavier member bank

borrowing reflected increasing use of Federal Reserve credit by

three or four of the larger banks.

Whereas borrowings had pre

viously been running about 5 or 6 per cent of the System total,

during the past two weeks they were in the range of 10 to 12 per

cent.

Mr. Irons thought that he detected a few straws in the wind

indicating increasing concern among businessmen and bankers with

respect to consumer credit.

A scattering of letters and comments

from country bankers and officers of a few of the larger banks

revealed some concern about the rapid growth of such credit.

Mr.

Irons said that he was quite satisfied with open market

operations during the past two weeks.

Taking into consideration

all factors, including the imminent Treasury financing and interest

1/26/60

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rate developments,

he favored continuing to maintain the status quo

as nearly as possible, with no change at this time in the discount

rate or the policy directive.

In open market operations,

he would

continue to maintain about the same degree of restraint, with the

Manager of the Open Market Account given sufficient leeway to meet

situations as they might arise in the market.

He was hopeful that

there would be no increase in the degree of restraint; if

it

were

necessary to have deviations, he would prefer that they fall on the

side of easing.

Mr. Mangels commented that there had been no particularly

unusual developments in the Twelfth District in the past two weeks.

The research people thou ght they sensed some modification of the

feeling of optimism that had existed earlier with respect to a

general business boom during the coming year.

However, district

employment in December was higher than in November, when enployment

was already at record levels.

the Pacific Coast States,

late summer of 1957.

4.4

The December rate of unemployment in

per cent, was the lowest since the

For the first two weeks in January, district

reporting banks showed a $450

million increase in demand deposits

but a drop in time deposits of $266 million, mostly out of savings

accounts at California banks.

The decline represented 3.2 per cent

of total savings deposits as of the end of 1959, whereas the banks

had expected that they might lose as much as 10 per cent.

Most of

the funds appeared to have gone into Government securities and into

1/26/60

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savings and loan associations now paying dividends at the rate of

4-1/2 per cent.

As of the end of the year, savings and loan associa

tions were borrowing almost $700 million from the Federal Home Loan

Bank of San Francisco, but they repaid between $200 and $300 million

by January 15.

The repayments were made principally out of new money

obtained from savings deposits at commercial banks and from payoffs

of outstanding loans.

Reporting banks showed a loan decline of

nominal amount in the first two weeks of the year and sold Government

securities to the extent of $150 to $160 million; the decline in loans

was about half as large as during the same period in 1959.

of Federal funds were running about twice the rate of sales.

Purchases

Borrow

ings at the Federal Reserve Bank increased in the first three weeks

of 1960,

and were about three times as large as during the comparable

period of 1959, averaging $115 million per day.

Whereas borrowings

normally run from 3 to 4 per cent of the System total, during this

recent period they reached 13 per cent of the System total.

Some

of the borrowing by city banks reflected the substantial loss of

savings deposits.

Mr. Mangels said he continued to feel that there should be no

change in the discount rate at the present time.

He was rather pleased

that the level of net borrowed reserves turned out to be somewhat lower

than the goal seemingly indicated at the January 12 Committee meeting.

He would not recommend any substantial increase in net borrowed

reserves, preferring to regard $400 million as a ceiling for the next

1/26/60

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two weeks, and he would favor no change in the policy directive at

this time.

An influence reflecting itself in his comments was the

fact that the Treasury was coming into the market.

Mr. Deming reported that at a recent meeting of steel ware

house executives in the Twin Cities it

was generally agreed that

shortages of structural steel were disappearing rapidly and all types

of steel stocks in

the region might be rebuilt nearer the beginning

than the end of the second quarter.

still

Cold-rolled sheets and bars were

short and manufacturers buying directly from mills still

encountered difficulty in getting enough of specific types of steel,

but even this picture seemed to be changing rapidly.

District sales

managers of automobile manufacturers who serve most of the Ninth

District from the Twin Cities also met recently, and it was reported

that stocks of new cars at dealers had built up more rapidly than

anticipated.

Most of the participants reported that January sales

thus far were well below quotas, and there was talk of special

promotions in February.

The used car market was dull.

Minneapolis and St. Paul Builders Exchanges,

Managers of

who serve the Ninth

District, reported that building plans filed with them in January

indicated a high level of nonresidential construction activity in

the first half of 1960, probably higher than in the comparable

period of 1959.

Mr.

Deming pointed out that the seasonal high in unemployment

in the Ninth District comes in the early part of the year.

Estimates

1/26/60

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by the Minnesota Department of Employment suggested a somewhat

lower level of unemployment in

January,

February,

and March 1960,

than in

the same months of 1959, and a substantially lower level

than in

the first

quarter of 1958.

Nevertheless,

it

was anticipated

that unemployment would be 20-25 per cent larger than in the same

high months of 1956 and 1957.

low,

Farm operations were at a seasonal

but moisture conditions were better and the snow pack in the

Montana mountains was large.

Although cash receipts from marketings

continued to run well behind a year earlier, the gap had narrowed

somewhat,

apparently reflecting seasonally large cattle movements

at favorable prices.

Farm machinery dealers and distributors

expected sales to be off from 1959 levels by one-third to one-half

in

the areas hit by last summer's drought,

to even in

other sections.

and from one-fourth off

Farm land prices showed some signs of

leveling off.

Mr.

Deming recalled having reported at the January 12 meet

ing that at the close of 1959 district bank loans were up and de

posits and security holdings down as against a year earlier.

said that in

He

1959 loan-deposit ratios rose from 46 to 58 per cent

at city banks and from 42 to 46 per cent at country banks, giving

a total

district

ratio of 50 per cent at the end of 1959,

highest since 1932.

the

Borrowings from the Reserve Bank and from other

sources were quite heavy throughout the year, particularly in the

second half; during this period total loans at district city banks

1/26/60

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rose less than half as much as at all city banks and business loans

actually declined in contrast to a national gain.

These points

underlined Mr. Deming's feeling that Ninth District banks lost sub

stantial liquidity in 1959.

however,

in

In the first two weeks of January,

city banks showed deposit gains in contrast to the experience

early 1959.

Turning to policy, Mr. Deming said that the phrase "watchful

waiting," as used by Mr. Hayes, represented about what he would sug

gest for the next two weeks.

He would favor no change in the discount

rate or in the policy directive at this time, and he would like to see

open market operations conducted as close to the pattern of the past

two weeks as possible.

Any deviations, in his opinion, should be on

the side of ease, and there should be no further tightening.

Mr.

Allen made the following statement with respect to Seventh

District developments:

The stronger bond market and the weaker stock market

do not appear to reflect a deterioration in general busi

ness sentiment in the Seventh District. January is

expected to show a further increase in total output and

employment to new records on a seasonally-adjusted basis.

General merchandise sales appear to have continued strong

Housing permits in the Chicago area improved

in January.

relatively in December in that they were only 13 per cent

less than in the year-earlier month in contrast to a 55

per cent drop in November.

However, automobile sales are regarded as disappointing.

The daily sales rate for the second 10 days of January, not

yet available, is thought to have been up about 10 per cent

from the 16,900 rate of the first 10 days, still considerably

below the hoped-for figure. Unless sales improve before

long, production cutbacks seem certain.

1/26/60

-18

Sales of new farm machinery declined in the last

quarter of 1959 compared with the same period in 1958,

but some of our manufacturers of such machinery continue

to expect a very satisfactory year in 1960.

The contraction of loans at weekly reporting banks

has been less in the Seventh District than in other parts

of the country.

Loans at our banks in the first two weeks

of January were down only half as much as last year, where

as in other districts they have dropped twice as much as

last year. Our banks have continued to liquidate Government

securities and holdings of Treasury bills by Chicago money

market banks are nominal.

That is understandable with the

reserve positions of the Chicago central reserve city banks

under pressure.

On the other hand, our reserve city and

country banks are in an improved position and their use of

the discount window has declined. Only 56 out of more than

900 country member banks borrowed in the period ended January

13, the fewest since early October.

Mr.

Allen said that in the absence of untoward developments, he

would favor continuing through the next two weeks the policy agreed upon

by the Committee at its

January 12 meeting.

He would favor no change in

the discount rate or the policy directive at this time, and he would

endeavor to maintain approximately the same degree of restraint that

had prevailed during the past two weeks.

Mr. Leedy reported severe winter weather in the Tenth District

during the past ten days or two weeks,

the entire area.

For agriculture,

with a snow cover over virtually

this was on balance a healthy situa

tion, particularly for winter wheat.

As in neighboring districts,

there had been less liquidation of loans this year than in the

comparable period of 1959, this being particularly true with respect

to the business loan category.

In that category,

however, there was

smaller growth late last year than throughout the nation generally.

1/26/60

-19

As in the San Francisco District, there had been a decline in savings

deposits at Tenth District banks.

of a clamor for an increase in

One might have expected something

the maximum permissible rate of interest,

but in the Tenth District there had been no such clamor.

Presumably

the banks were hopeful of tax equalization legislation to improve

their competitive position vis-a-vis the savings and loan associations.

Mr.

Leedy said he subscribed to the comments made previously

at this meeting that favored continuing the policy of the past two

weeks.

Mr.

Leach reported that Fifth District business conditions

had shown continuing expansion,

with little

or no evidence as yet that

the expansion was being sparked by speculative activity.

The textile

industry continued to be an important element of strength; orders had

been booked into the second half of the year, and even beyond in

some instances.

in years,

The outlook for the furniture industry was the best

with unfilled orders at the highest level ever reached.

A

preliminary estimate indicated that district cigarette production in

December set a new record for a single month; the fact that cigarette

consumption continued to increase faster than population augured well

for the future growth of the industry.

Bituminous coal production in

the closing weeks of 1959 established new production highs for the

year.

Mr. Leach said that Fifth District member banks ended the

year 1959 in

a much tighter position than a year earlier.

Loans

1/26/60

-20

were up 12 per cent, security holdings were down 8 per cent, and

the loan-to-deposit ratio advanced 5 percentage points.

He was

convinced from talking with bankers and from seeing instructions

issued to loan officers in State-wide institutions that System

policy was pinching at most of the sizable banks.

Borrowings

from the Reserve Bank this month, averaging around $20 million,

were no higher than in corresponding periods of the last two years,

but this was due in large part to certain actions taken by the

Reserve Bank in

window.

recent weeks in the administration of the discount

Although district banks reported that thus far they had

not seen too much increase in the way of loans to build up inventories,

they expected it.

This was one of the factors making them feel that

they were in a tight position.

As to policy, Mr. Leach expressed the view that the imminent

Treasury financing clearly called for maintaining an even keel.

would not want to be any tighter at the moment,

Treasury financing was not in the picture.

policy was biting to about the right extent.

however, even if

As he saw it,

He

the

System

The System was in a

good position to wait and not get any easier or tighter at the

present time.

Mr.

Mills said he was puzzled about the slight flavor in

today's discussion that veered toward stimulating some increase in

the money supply but in the same breath recommended a monetary policy

of status quo.

He was unable to reconcile the two objectives,

1/26/60

-21

because to maintain the status quo policywise apparently would

produce a level of negative free reserves somewhat in excess of

$500 million for the current reserve week.

Therefore,

as illus

trated by the figures, maintenance of the status quo obviously

would mean no relief from the pressures that the commercial banking

system and the economy in general had been subjected to by System

monetary and credit policy.

He felt personally that operations in

the current reserve week, although they fulfilled the directive

given by the Committee at the January 12 meeting, had produced

pressure against reserves that was undesirably severe.

Mr. Mills said he concurred with those who had commented

that they would not favor an increase in the discount rate at this

time.

He believed, however, that the Committee should give some

careful general thinking to possible, though unlikely, developments

in the international position of the United States that would follow

in the wake of the Bank of England's bank rate increase,

and the

discount rate increases effected recently in Sweden, Denmark, and

Western Germany.

The concern he felt did not attach so much to

the reasons that occasioned those increases as to what was perhaps

a fundamental downward break in the stock market.

continued,

and if

it

should widen, it

If that trend

was possible that there would

be a very substantial liquidation of foreign investments that had

until now been placed in the market.

If that should occur, the

question would immediately arise as to whether those funds would

1/26/60

-22

be repatriated or whether conditions in the United States would be

such as to encourage their reinvestment here in short-term United

States Government securities or other eligible liquid investments

of high quality.

Mr. Mills then said that he would like to place before the

Committee a redical line of thinking that could be disputed over the

weeks to come but perhaps might be in a direction in which the System

would at some point find it

advisable to consider moving.

Accordingly,

he presented the following statement:

Premature action to raise the discount rate at the

Federal Reserve Banks as a defensive measure to hold

foreign funds in the United States would be a mistake.

The domestic situation calls for a more moderate, rather

than a more restrictive, monetary policy, and if the

discount rate were raised, the increased pressure that

presumably would be exerted on commercial bank reserve

positions by System actions taken to make the higher

rate effective could seriously dislocate the economy.

For that matter, there are no fully persuasive reasons

to believe that the English and West German financial

situations are so robust as to encourage a repatriation

of funds out of the United States solely to obtain

Therefore, an attempt to

higher investment returns.

anticipate an outward movement of foreign funds from

this country by Federal Reserve System actions on the

discount rate would probably be regarded as lack of

confidence in the dollar on our part and, as a result,

could produce the very outflow of funds whose prevention

had been aimed at.

Acceptance of this reasoning contemplated that

Federal Reserve System policy would not recognize the

increase in the Bank of England's rate at this time.

If, after a waiting period, there was tangible evidence

of the movement of funds out of the United States in

volume, the discount rate at the Federal Reserve Banks

should be raised dramatically from 4 per cent to 5 per

cent or 5-1/2 per cent as a signal that our financial

1/26/60

-23-

authorities were taking a firm hold of the situation

and were prepared to take whatever further measures

might be necessary in order to protect the integrity

of the dollar as the world's key currency.

Response

to such actions could be expected to dissipate any

concern felt

about the dollar abroad and to reverse

whatever outward movement of funds was then in progress.

If, in the course of these events, an anti-cyclical

easier monetary policy should be called for by a deteriora

tion in domestic economic conditions, the Federal Reserve

System should be able to take technical actions that would

continue the emergency-raised level of the discount rate

at the Federal Reserve Banks at the same time that the

availability of credit was expanded substantially.

Maintenance of the emergency discount rate would signify

that our financial authorities had every intention to

defend the international integrity of the dollar while

they were simultaneously seeking to stimulate the economy

with easier credit conditions, whose effects would

prevent the "exoort" abroad of recessionary influences

in this country.

These seemingly conflicting objectives

would be attained by increasing the supply of reserves

needed to expand bank credit by encouraging member banks

to discount heavily at the Federal Reserve Banks.

Notice

would be given that under existing conditions the prohibi

tions against continuous borrowing would be suspended.

Accordingly, the supply of reserves would be increased

through a major expansion of member bank discounts, but as

they would have been made at the emergency high discount

rate, the purposes for which it had been established would

Moreover, as it would be necessary for the

be preserved.

member banks to recover the high cost of their Federal

Reserve Bank discounts, they could be expected to charge

relatively high rates to their borrowers, thereby tending

to produce a structure of interest rates appropriate to

In the process of adaptation to

encouraging investment.

a massive use of member bank discounts, Federal Reserve

System open market policy actions would be necessary from

time to time to offset temporary shortages or surpluses in

the supply of reserves occasioned by fluctuations in the

use of the Federal Reserve Bank discount windows and so

that a predetermined level of reserves could be maintained.

Attention should be paid to the fact that liberal

discount privileges at the Federal Reserve Banks should call

forth a flow of advances on intermediate- and long-term U. S.

Inasmuch as such

Government securities as collateral.

advances would be made at the par value of U. S. Government

1/26/60

-24

securities trading at a discount, the effect on the market

should be favorable at a time when market strength would be

psychologically desirable.

Furthermore, an improvement in

the U. S. Government securities market that was engendered

by the knowledge that banks were being relieved of pressure

to sell securities in order to finance new loans and

investments would also strengthen the receptiveness of the

market to whatever sales the System Open Market Account

might see fit to make from time to time. A further factor

that would redound to improved market sentiment for U. S.

Government securities would be that any letdown that should

occur in business conditions would witness an automatic

increase in corporate liquidity, together with a correspond

ing incentive for corporations to invest in high quality

short-term investments.

Mr. Robertson expressed agreement with the policy of watchful

waiting referred to by several of the Committee members.

He thought

that quite obviously this was not the time to change the discount

rate or the policy directive.

However,

he would not align himself

with those who felt that this was a time for easing.

Instead, it

seemed to him that the situation called for maintaining as even a

keel as possible.

Mr. Shepardson commented on a meeting yesterday in Chicago

which was attended by institutional lenders in agriculture, particu

larly those lending on farm mortgages.

The price of farm land, he

noted, had been on a rising trend almost without interruption and

almost uniformly across the country for several years.

However, in

the last quarter of 1959 there had apparently been a definite change.

The sentiment of the group that met yesterday, which included

representatives of most of the major insurance companies, the farm

1/26/60

-25

credit agencies, and the American Bankers Association, indicated at

least a leveling off of prices, and in many areas a significant down

turn.

Demand for the very top-level farms-those that had been sought

as investments by "Main Street farmers"--appeared almost to have

vanished; prices on such farms were reported to have fallen off $150

to $200 an acre from the levels of $600 to $700 an acre that prevailed

six months ago.

in

Also, there had been a drop of $50 to $100 an acre

some of the lower-priced farm land; in the wheat country of

Montana,

land that sold previously at around $250 an acre was reported

to be selling in a range from $125 to $150.

A number of those at the

meeting said that whereas they heretofore were lending freely on the

appraised value of land without too much regard to the owner's opera

tions and without looking closely at his operating statement to see

where the funds for repayment were coming from, they were now cutting

down or refusing entirely loans that did not show from the operating

statement a good probability that the operator would be able to pay

them down from funds accruing out of his operations.

In addition,

several persons mentioned the increasing reluctance of banks to

extend term credit on equipment and livestock purchases, with the

result that some of those applicants were now coming to the mortgage

lenders to get term credit.

Where there were outstanding mortgages

at favorable rates compared with the present market,

almost all of

those present reported that whenever an adjustment or extension of

borrowing, particularly in the form of term credit, was requested,

they were

adjusting the rate upward.

In most cases lenders were

1/26/60

-26

requiring the new rate to be on the basis of a complete renegotiation.

Many participants reported no significant resistance to higher rates

from borrowers seeking to purchase additional holdings to increase

their units.

In summary,

it

appeared that there had definitely been

a turn in farm land prices and that more careful consideration was

being given to the earning capacity of the farmer in extending credit.

From the standpoint of the increasing cost-profit squeeze faced by

agriculture, it

seemed fortunate that prospective borrowers were

getting a more realistic appraisal of what land was worth.

Mr. Shepardson agreed that this was a period in which the System

should be watching developments closely.

For the period immediately

ahead, he would favor maintaining the status quo as nearly as possible.

Mr. King made several references to material in the economic

presentation given at this meeting, including the portion dealing

with the position and trend of corporate earnings in relation to

earnings during past periods of recession.

He indicated that he

would be interested in studying this portion of the presentation

further.

While he did not feel that the country was close to a

general recession, he did feel that it

to one all the time.

was moving nearer and nearer

With reference to comments in

the presentation

regarding the possibility of a change in public expectations with

respect to inflation, he noted that Mr. Larkin had mentioned the

increasing number of individuals going into Government securities.

It was encouraging to him that more individuals and smaller concerns

1/26/60

-27

were going into Government securities for this would give them an

increased stake, so to speak, in the United States, a development

which would be healthy.

Mr. Shepardson's remarks on farm land prices

also seemed to him an indication that the public was turning toward

an expectation of less inflation.

last week, he (Mr.

apprehension.

At the livestock show in Denver

King) felt that he detected quite a bit of

He thought it

healthy that people throughout the

country were actually a little doubtful about a boom developing to

the extent that one had been talked about and more or less expected

earlier.

During the steel strike, he said at Committee meetings

that he did not think the steel strike was a major dent in the

economy or that there would be a wild boom following settlement of

the strike, and he was still of that opinion.

He was inclined to

discount some of the reported optimism on the part of businessmen,

for they naturally desired to be optimistic, and he was more inclined

to think about such things as the portions of the chart show relating

to the downward trend of corporate earnings.

Mr.

King said that he would not suggest any change in policy

at this time and instead would favor continuing on an even-keel

basis.

He realized that it

was almost asking the impossible to

request the Account Management not to make any errors on one side

or the other.

Thus,

if

it

came to resolving doubts, he would prefer

to resolve them on the side of ease.

This was the first time he

had made this suggestion, but he believed the System was in a

1/26/60

-28

position where it should not do anything to dampen the possibility

of the economy going forward and achieving the greatest possible

sound growth.

Since there was some doubt as to how much growth

would or would not be sustainable, he would err on the side of

allowing growth, particularly in view of the encouraging indication

that people did not appear to be talking inflation as much as they

had earlier.

This feeling was apt to manifest itself in the actions

of the legislative bodies.

In summary, this might be the big break

that the System had been looking for in terms of a change in public

sentiment.

Mr. Fulton stated that the pace of Fourth District business

activity was quite brisk.

The steel mills were putting out a lot

of material that was being taken and used; inventory building was

going on apace.

After describing the results of an election held

at a steel company that did not enter a contract with the union on

the terms of the general settlement,

Mr.

Fulton went on to say that

Fourth District building activity had increased sharply since the

first

of the year, while the increase in department store sales was

greater than the national average.

Auto sales were brisk throughout

the district, and there seemed to be the prospect of a good year.

Bank loans had declined, but not to the same extent as last year,

thus bearing out the earlier statements of bankers that they did

not expect any substantial decline and that loan demand, which was

quite strong, would take up any slack.

Consumer credit and mortgage

1/26/60

-29

credit were both in great demand.

While member banks were borrowing

somewhat more heavily, borrowings were running at only 6 to 7 per

cent of the System total, as against the 10 per cent that might be

regarded as proportionate for the district.

As to expectations,

businessmen appeared to have no apprehensions about the first half

of this year but were wondering what would happen in the second half

when steel inventories again became adequate.

Mr. Fulton agreed with the view that neither the discount rate

nor the directive should be changed at this time.

He did not have the

feeling that any substantial downturn in business was impending.

The

expectation of businesses appeared to be to spend substantial sums

for improved equipment and for promotion of their products; in general,

businessmen were acting as though the economy was booming, which he

thought it

In these circumstances, he would continue the degree

was.

of pressure that had been maintained recently and not err too much on

the side of ease.

it

was not in

That could become cumulative, and in his opinion

the best interests of the System to trend constantly

into an easier position.

Mr.

trends in

Bopp reported that Third District business and financial

recent weeks were similar to those of the nation.

Steel

mills in the Philadelphia region were operating at 102 per cent of

capacity, which was moderately above the 95 per cent rate nationally.

The secondary effects of the strike on employment had about

disappeared; in

Pennsylvania, secondary unemployment existed to a

1/26/60

-30

measurable extent in only one industry, metal products.

There was a

fractional increase in district manufacturing employment from Novem

ber to December according to preliminary data, and total employment

was 3 per cent higher than a year ago.

New unemployment claims in

Pennsylvania had been moving seasonally in the past two weeks but

were substantially below the levels of both 1958 and 1959.

District

department store sales had been strong; sales for the past four weeks

were 12 per cent above last year's high level.

Automobile sales in

Philadelphia showed the effect of the shortages in December; according

to preliminary data, they were more than one-third below a year earlier.

The large Philadelphia banks had been under somewhat greater reserve

pressure in

the past few weeks.

Their daily average basic reserve

deficiency was $68 million as compared with $47 million in the pre

vious two weeks, and the increased pressure was reflected in their

total borrowings.

Daily average borrowings from the Reserve Bank

rose from $36 million to $65 million.

Country banks also increased

their borrowings from the Reserve Bank from $9 million to $16 million.

Total borrowing by district member banks was 8.8 per cent of the

System total in the latest week compared with 6.4 per cent and 4.4

per cent, respectively, in

Mr.

the preceding two weeks.

Bopp expressed the view that although the time might

come, perhaps this year, when the Committee would want to modify the

even-keel policy during Treasury financings, that would be only if

economic developments clearly were in the direction of rapid

1/26/60

-31

expansion.

He did not see such a development at this point.

Accordingly, he favored continuing the present degree of restraint,

with no change in the directive or the discount rate.

Mr. Bryan said he could see nothing in the Sixth District

developments that appeared to be of great significance as against

major national trends.

The latest figures showed activity still

going up, but they were definitely related to national trends.

Most of the time in the past few years the district had seemed to

grow at rates greater than the national growth rate, but it appeared

that this might be coming to at least a temporary halt.

District

banks appeared to be very illiquid, and borrowing from the Reserve

Bank continued at levels disproportionate to reserve resources.

The

latest figures showed that district borrowings were more than 16 per

cent of the System total, against the figure of about 5 per cent that

would be indicated on the basis of total reserve positions.

It was

being found necessary to call some of the loans on the instalment

plan.

The round-up of the economic situation at the most recent

directors' meeting seemed slightly less enthusiastic than it

had

been in other months, with one director quite definitely pessimistic

as to the outlook in his line of business.

After referring incidentally to certain statistics ccmpiled

by private sources which seemed to cast some doubt on the future course

of business, Mr. Bryan said that he sensed a real shift in inflationary

1/26/60

-32

psychology.

This was noticeable in the situation with regard to land

prices that had been discussed by Mr.

Shepardson.

While one could

analyze that development on the basis of a reappraisal of earning

power, he felt that it also reflected to a considerable extent a

shift from the psychology that had made people willing to buy farm

land, regardless of income prospects, as an inflationary hedge.

It

was his impression that the country was in a situation of great

economic strength but certainly not of unlimited boom, and he believed

there was danger of a rather extensive and perhaps abrupt shift in

psychology that might change things in a substantial way in the equity

markets.

As to the discount rate, he certainly would not want to take

any action at this time.

Mr. Bryan then referred to the chart on reserves that he had

placed in the record of the Committee meeting on December 15, 1959,

and in that connection made the following statement:

At this time, having been favored once before by

permission to place a chart in the record, I would like

permission to place in the record the same chart (but

with additional information) and a related chart. The

among other things, shows the seasonally un

first,

adjusted figures as well as the seasonally adjusted

The second chart shows

figures previously presented.

certain growth rates from points related, in two cases,

to Comittee changes in the Committee directive and, in

one case, December, our last full month of experience.

At this time, moreover, if the Chairman and my

colleagues will bear with me, I would like to begin an

experiment in drawing an instruction to the Desk in

quantitative terms, based on total effective reserves.

In making this attempt it would seem fair to me to say

that in the period from June 1958 through December 1959

1/26/60

-33-

we essentially allowed no growth in total reserves, a policy

justified as a mopping-up operation because we had previously

effected a very large excess, based upon a long-run trend

line, in the growth of reserves.

The justifiable mopping-up

operation seems to me to be completed.

We are now confronted with a situation of great economic

strength, but not immediately a situation of unlimited boom.

Accordingly, I would conclude that a policy of restraint

is still justifiable. But I would also conclude that the

time has come when we should allow some growth of reserves.

Such a growth of reserves should in my judgment be less than

the 3.6 per cent reserve-growth of the postwar period, for

it is clear that such a rate of growth has permitted an

undesirable degree of inflation in the postwar period and,

I would conclude, is inappropriate to a period of great

economic strength.

Thus I would suggest that the rate of growth in total

reserves that we contemplate for the time being be at 2 per

cent.

Translated into concrete terms this would put the total

reserve figure, seasonally adjusted, at something over

Since it would hardly be appro

$18,700,000,000 for January.

priate to ask the Desk to attain such a precise figure on a

daily average basis, I would also suggest that there be a

certain plus or minus latitude to the goal stated. Just as

a suggestion, I would think we might well say that we are

aiming for a total reserve figure, on a daily average basis,

between $18,650,000,000 and $18,750,000,000. This would

allow latitude for the Desk to adjust to conditions in the

money market as they develop, and, at the same time, would

give us a quantitative instruction centered on a slow and

restraining growth rate in total reserves.

In suggesting such a goal I should say that in January,

through Wednesday of last week, we have had daily average

This has put actual

actual reserves of $19,059,000,000.

total reserves in January well above the figure that would

have been indicated by a 3.6 per cent trend line, and, up

to last Wednesday, above the 3.6 per cent trend line even

on a seasonally adjusted basis.

The result has been a definite easing in the money

market--if we are to be permitted to measure such easing

by the objective test of rates. Thus, in suggesting a goal

for daily average reserves in January, the goal suggested,

although it calls for a restraining rate of growth in the

total reserve position, does not permit what I would regard

as the excessive rate of growth that, up to last Wednesday,

1/26/60

-34

had been permitted in the total reserve figure.

Let me make clear that I am not asking that the

Committee adopt the suggestion that has been made. I

am merely experimenting--and hope that the Committee

will permit me to experiment from time to time in the

future--to determine whether the total reserve concept

represents a practicable foundation on which the Com

mittee could base instructions (a) in quantitative and,

thus, in measurable terms; (b) in terms of a phenomenon,

namely total reserves, that are determinable by the

Reserve System even after the influence of items not

determinable by the System; (c) avoid qualitative

terminology as represented by such indefinable terms

as tone, feel, ease, tightness, and so on; and, at the

same time, (d) leave the Desk with sufficient latitude

to accommodate itself to the practical administration

of the Account and to conditions as they unfold from

meeting to meeting.

The Chairman stated that the material presented by Mr. Bryan

would be taken under study.

Mr.

1/

Johns said he found nothing in Eighth District statistics

that was particularly significant.

In the past two weeks, he had

endeavored to find out whether in the business community of the

district there were many "reluctant optimists."

Outside the agri

cultural sector, which deserved special consideration, he had

or no evidence of flagging optimism.

discovered little

plantation owners,

enthusiastic.

and operators were,

Farmers,

of course, not wildly

They contemplated continued high costs, if

not

steadily rising costs, and the price picture was uncertain.

For

some reason, as yet unexplained, member bank borrowing had risen

sharply in the past week and stood at $108 million at the end of

1/

Copies of the two charts referred to by Mr. Bryan are attached

to these minutes.

1/26/60

-35

the week.

This represented not only rather large increases in

borrowing by reserve city banks but also some increase on the part

of country banks.

It

appeared, at least in St. Louis and Memphis

and to a lesser extent in Louisville, that city banks were not

feeling very easy.

At Memphis it

also appeared necessary to face

again the condition that cotton loan demand was becoming steady and

constant throughout the year rather than seasonal.

This probably

meant that the Reserve Bank had some work to do on the problem of

member bank borrowing in

Mr.

Hayes'

the southern reaches of the district.

Johns said that while he would like to go along with Mr.

concept of watchful waiting, as he understood that concept,

he would be inclined to keep a rather firm and steady hand on monetary

policy.

He would suggest truly watchful waiting, moving neither in

one direction nor the other.

After commenting that the papers presented by Messrs.

Mills

and Bryan deserved study, Mr. Szymczak expressed the view that at

the present time there was nothing in

the economy appearing to

require a basic change in monetary policy.

In his opinion, however,

the seasonal situation required some easing of the position of the

banks.

He pointed out that this season of the year is

apt to be

rather dull, and that some easing therefore might be helpful.

the other hand, since the economy was still

On

on the expanding side

and he felt that this would continue, he would favor no fundamental

1/26/60

-36

change in

monetary policy.

contradictory,

While these views might at first

he pointed out that it

is

seem

not feasible to change

basic monetary policy on a month-to-month or quarter-to-quarter

basis.

Instead,

the Committee must look at monetary policy on an

over-all, long-range basis.

changing its

If

the Committee was continually

record, that would be hard to explain either outside

or within the System.

With this explanation, he would recommend no

change in basic policy and some easing through open market operations.

Mr.

Balderston said he was fearful that the Committee members,

in reading the stock market figures from day to day,

get carried away by the pessimism that is

two months of the calendar year.

in

might tend to

to be expected in the first

He expected February to be a month

which there would be a lot of pessimistic expressions; when it

came to March he was not sure.

He had been told of some companies

being advised by their counselors not to approach the capital markets

in

January and February because the Treasury was at the trough, so

possibly it

might be found that resort to the capital markets in

March would be as heavy as in

March 1956.

In short, he had a

suspicion that the System might wake up from this period of pessimism

to find the recovery in full swing from March onward.

Because of his

hope that the System would not be pulled off base, he would suggest

maintaining an even-keel policy, with no easing.

Chairman Martin expressed the view that, unless the Committee

was certain it

wanted to make a change,

the even-keel philosophy

1/26/60

-37

ought to prevail during a period of Treasury financing, and such a

period was imminent.

The Chairman then said it

meeting that no change in

seemed clearly the consensus of this

the policy directive or the discount rate

was called for at this time and that the Desk should come as close to

perfection as it

Mr.

could in adhering to an even keel.

Mills inquired whether the Chairman would care to qualify

his statement of the consensus with an indication as to whether errors

should fall

on the side of ease or of tightness.

He (Mr.

Mills) had

detected a trend of sentiment during the go-around in favor of moving

to errors on the side of ease, but he had not attempted to keep count

and did not knew whether that was the majority view.

Mr.

Szymczak commented that his position was related to what

the Desk had been doing during the past two weeks.

Following comments by Mr. Larkin on open market operations in

relation to changes in

the level of net borrowed reserves during the

past period, Chairman Martin said that operations of the Desk seemed

clearly to have been intended to maintain an even keel.

whether the Committee,

in

a situation where its

He doubted

thinking was in

the

direction of further restraint, would want to make the Treasury's

problem more difficult by saying that doubts should be resolved on

the side of tightness.

of deliberateness.

It

The question, he suggested, involved a matter

was desirable to express shades of differences,

1/26/60

-38

but he questioned whether there was any precise way of defining them.

The Desk, he observed, already has enough difficulties.

The Chairman again expressed the view that it

ought to be the

intent during a period of Treasury financing, unless the Committee

wanted to make a fundamental change in

its

policy,

complicate nor help the Treasury's problem.

to try neither to

Rather,

it

should be the

aim to give the Treasury as closely as possible a fair test of the

market.

Mr.

Shepardson suggested that this would mean maintaining as

nearly as possible the degree of restraint at which the Committee had

been aiming.

Mr.

Mills said that this was what bothered him, and that he

could see where the Management of the Account might have serious

difficulties.

During the first

surmised that more by accident,

in

two reserve weeks of the year, he

because of natural factors operating

the market, than by deliberate design, the degree of restraint,

as measured by net borrowed reserves, dropped into the $400 million

range.

Then in

the past week net borrowed reserves were brought up,

consistent with the Committee directive, to around $500 million.

these circumstances,

the Desk might find it

the Committee's meaning was; whether, if

increase the supply of reserves,

increase or move against it

difficult to sense what

natural factors tended to

the Desk should permit that

deliberately and bring net borrowed

reserves to some higher level.

In

1/26/60

-39

Mr.

Larkin said that the lower net borrowed reserve figures

were inadvertent; the Desk was just trying to keep up with the

changing situation in

the market.

Mr. Hayes commented that some of the remarks made at this

meeting pointed up the danger of placing too much emphasis on the

net borrowed reserve figure.

The Committee had talked from time to

time about not paying quite so much attention to that figure, but

nevertheless there was an inclination to give it

attention.

perhaps too close

Personally, he did not feel that the Committee should

ever define its

objective in

terms of one figure, because it

was

necessary to think about various elements in the situation.

The

fact that the Account sold a large volume of securities in a week

was important,

to his mind, and represented an important offset

to the fact that net borrowed reserves wound up at a somewhat lower

level.

bill

Among other things, the Desk must consider the feel of the

market and the feel of the banks, along with what was being

said by the banks and others.

in

It

was not a game that could be played

terms of one figure.

Chairman Martin said this was quite a valid point.

He went

on to say that he had not detected in the go-around any desire to

change the existing policy by design.

talking about a trend.

While it

Instead, the Committee was

was true that some would prefer

more ease, he felt the spirit of the even-keel philosophy vis-a-vis

the Treasury should be that the Desk would not consciously make

-40

1/26/60

errors on the side of ease or of restraint.

The Treasury financing

would not involve a very lengthy period, and it

was directly ahead.

He would prefer this morning that the Committee renew the current

directive and let

Mr.

it

go at that.

Mills said that he again wished to submit his proposal

that clause (b) of the directive be changed to provide for "fostering

sustainable economic growth and expanding employment opportunities

while guarding against inflationary credit expansion."

Mr.

was more in

King commented that the intent of his previous remarks

the direction of avoiding errors on the side of tightness

than resolving doubts on the side of ease.

Mr. Larkin said that as he caught the sense of the meeting,

it

was more important to avoid further tightness than to resolve

doubts on the side of ease.

In

reply, the Chairman said to Mr.

Larkin that, to sum up,

the Committee wanted the Desk to be "perfect."

Mr.

Larkin commented that he felt the suggestion of Mr.

deserved further consideration and that it

Bryan

would be studied at the

New York Bank.

Chairman Martin concluded the discussion by stating his

understanding that, with one dissent, the Committee desired to

renew the existing directive in its

comments were heard in

present form, and no dissenting

response to this statement.

1/26/60

-41Thereupon, upon motion duly made

and seconded, the Committee 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

opportunities, and (c) to the practical administration of

the Account; provided that the aggregate amount of securities

held in the System Account (including commitments for the

purchase or sale of securities for the Account) at the close

of this date, other than special short-term certificates of

indebtedness purchased from time to time for the temporary

accommodation of the Treasury, shall not be increased or

decreased by more than $1 billion;

(2) To purchase direct from the Treasury for the

account of the Federal Reserve Bank of New York (with

discretion, in cases where it seems desirable, to issue

participations to one or more Federal Reserve Banks) such

amounts of special short-term certificates of indebtedness

as may be necessary from time to time for the temporary

accommodation of the Treasury; provided that the total

amount of such certificates held at any one time by the

Federal Reserve Banks shall not exceed in the aggregate

$500 million.

Observing first

that the Treasury had not discussed the matter

with him, Chairman Martin referred to the holding by the System Open

Market Account of approximately $5.5 billion of the $11.363 billion

issue of Treasury certificates of indebtedness maturing February 15,

1960.

If

the Treasury should offer in

exchange the choice of a

1/26/60

-42

shorter and a longer issue, he pointed out,

this would present the

question whether the System should subscribe entirely to the shorter

issue.

If

that course were followed, it

might appear as though the

Treasury had priced the issue for the convenience of the System.

The Chairman said he felt

that the Treasury probably expected

the Federal Reserve to go to the short end of the market.

looking at the matter from the management standpoint, it

However,

was his

feeling that the Account might well take 1/3 of the exchange in

longer issue and 2/3 in

the bulk.

When it

the

the shorter issue as a means of dividing

got to a point where the Federal Reserve held as

much as $5.5 billion in

any one issue, this made a pretty big load.

The broad problem was one that the members of the Committee should

be studying; he had referred at the January 12 meeting to the matter

of the 2-1/2 per cent bonds of 1961.

As far as he could see, the

Committee would not be violating any principle if

the subscription in

the forthcoming exchange,

it

wished to split

and he therefore wished

to put the matter on the table for consideration.

Mr. Hayes said that he had not studied the matter in

detail,

but he liked the general idea of splitting the exchange.

Mr.

King recalled that the Committee recently had a similar

question before it

and decided to stay on the shorter side.

Since

that time he had studied the problem further and, in the light of

such study, he felt

that his preference would have been different.

He would heartily endorse the plan suggested by Chairman Martin.

1/26/60

-3

The Chairman commented that this was not a vital matter

but he thought it

would make some sense to split

the subscription.

Mr . Mills commented that this would have the advantage,

also,

of showing variation in

the System's thinking.

the System would be moving out on the longer side,

occasions it

Mr.

in

This time

while on other

had moved from long to short.

Mills then moved that a splitting of the subscription

the manner suggested by ChairmanMartin be approved,

and Mr.

Johns seconded the motion.

Thereupon, the motion was put to

a vote and was approved unanimously.

It

was agreed that the next meeting of the Federal Open

Market Committee would be held on Tuesday,

10:00 a.m.

The meeting then adjourned.

February 9,

1960, at

Effective Reserves

Correction of seasonal factors

made: January 1, 1960

(Monthly averages of daily figures)

19.

Janur

Po

T

P

a:

o

11yli

op doll,

1.0

Fes rve

s

urplus

*655 milln

1a.5

V,

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Reserves

I

Reserve surplus

$490 million

8

D

3

J

M

D

N

defcit

3

ReserveI

J

$474

1960

1959

1958

Each square - $25 mi.llon

illln

r%'t-Reserves Without

'iISurplus in seas. adJ.

reserves from trend

4609 millonen

Saonal Adjtent

Straitht Line Trend

squares

method)

~l$ s!!o (4last

(.6g

per year)

Deebear 1959

Milliaas of dollars

.

SReserve

deficit.

$406 milion

Re8s.erves7:

adJusted

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18.55

18,7

January 1960

l99s

.LLIe.

lreast

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method o computati n deaoolbed on reverse Side.

19&

-

-

c-

.

-

-

.

19

ra-

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18,760

19

Reserve figures are total member bank reserves (monthly averages of

daily figures) adjusted for changes in reserve requirements and for seasonal

influences. No effort was made to remove the expansion potential of total

reserves resulting from shifts in deposits among classes of banks and between

types of deposits subject to different requirements through April 1958.

Method of computation: For May 1958-December 1959, figures used are

actual member bank reserves, adjusted for seasonal influences. Monthly values

of effective reserves for January 1947 through April 1958 (when reserve

requirements were last changed) have been derived by (1) obtaining the ratio

of average required reserves to average deposits subject to legal reserves

for May 1958-April 1959; (2) multiplying actual reserves by the percentage

the above ratio is of the ratio of required reserves to deposits subject

to legal reserves for each specified month; and (3) adjusting the values

Trend based on monthly values January 1947 through

for seasonal influences.

August 1959.

_

Alternate Growth Rates of Effective Reserves

(Seas.

Adj.)

Using Actual Reserve Levels (Seas. Adj.)

Fpr August

1958, June 1959, and December1959

as Starting Points

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