November 14, 1951 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the in Washington on Wednesday, November 14, 1951, at 10:05 a.m. PRESENT: Mr. Martin, Chairman Mr. Sproul, Vice Chairman Mr. Gidney Mr. Gilbert Mr. Leedy Mr. Norton Mr. Powell Mr. Szymczak Mr. Vardaman Mr. A. H. Williams Mr. Carpenter, Secretary Mr. Sherman, Assistant Secretary Mr. Vest, General Counsel Mr. Thomas, Economist Messrs. Bopp, Irons, Thompson, Tow, and John H. Williams, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Thurston, Assistant to the Board of Governors Mr. Riefler, Assistant to the Chairman, Board of Governors Mr. R. A. Young, Director, Division of Research and Statistics, Board of Governors Mr. Youngdahl, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Ralph F. Leach, Economist, Division of Research and Statistics, Board of Governors Mr. Arthur Willis, Special Assistant, Securities Department, Federal Reserve Bank of New York Messrs. Hugh Leach, C. S. Young, Bryan, and Earhart, alternate members of the Federal Open Market Committee Erickson and Peyton, Presidents of Messrs. the Federal Reserve Banks of Boston and Minneapolis, respectively First Vice President of the Federal Mr. Attebery, Reserve Bank of St. Louis
Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Comittee held on October 4, 1951, were approved. Upon motion duly made and seconded, and by unanimous vote, the actions of the executive com mittee of the Federal Open Market Committee as set forth in the minutes of the meetings of the executive committee held on September 25 and October 4, 1951, were approved, ratified, and confirmed. A report of open market operations prepared at the Federal Re serve Bank of New York covering the period October 4, 1951 to November 7, 1951, inclusive, had been sent to the members of the committee before this meeting. Mr. Rouse presented a supplementary report covering com mitments executed November 8-13, 1951, inclusive, and commented briefly on both reports. Copies of the reports have been placed in the files of the Federal Open Market Comittee. Upon motion duly made and seconded, and by unanimous vote, the transactions in the System account for the period October 4, 1951 to November 13, 1951, inclusive, were approved, ratified, and confirmed. brought to the attention of this meeting there had been Before of examination of the System open each member of the Comittee a report 24, 1951, made in connection with the regular market account as of August the Federal Reserve Bank of New York and submitted by the examination of The report took no exception for the Board of Governors. examiner in charge and stated that the accounting procedures, to the handling of the account and the degree of care internal control maintained and system of records,
exercised by the Federal Reserve Bank of New York in connection with the System open market account were reviewed and continued to be regarded as satisfactory. Upon motion duly made and seconded, and by unanimous vote, the report was re ceived and ordered filed. Mr. Thomas stated that the economic situation had not changed greatly since the meeting of the Committee on October 4, 1951, and that the situation was still one of equilibrium at a high level of activity. This situation, he felt, was likely to continue during the few next months, but longer-run prospects still pointed toward inflation, primarily because of of Government expenditures in connection with the defense continued expansion said that Government expenditures on a cash basis would program. Mr. Thomas and were expected to equal or exceed total approximately $58 billion in 1951, fiscal 1952 and to reach $84 billion in fiscal 1953, when $80 billion in estimated that during the fiscal year they should begin to level off. He equal expenditures, but that in the 1952 cash receipts would approximately 1953, the deficit was likely 1952 and also in the fiscal year calendar year billion on a budget basis. on a cash basis or $10 to be around $5 billion outlook was for private capital went on to say that the Mr. Thomas construction might level, although housing to continue at a high expenditures supplies of critical depending on from recent levels expected to decline be demand which would as well as upon to find substitutes, and ability materials pressures dur felt that inflationary He by credit restraints. be influenced although consumer the past year, less than in should be next few months ing the
demands might be expected to continue in excess of current output re sulting in some drawing down of inventories of durable consumer goods. In comes probably would continue to grow, reflecting increased economic activity and further advances in wage rates, and savings would have to be large if further inflation were to be avoided, which raised the questions (1) how to keep savings large, and (2) how to attract them into Government securities. As to credit prospects, Mr. Thomas indicated that expansion in the last half of 1951 was running less than in the corresponding period of 1950, and that further growth in the money supply would depend on bank holdings of Government securities and Treasury borrowing from nonbank investors. On the whole, Mr. Thomas felt that savings institutions would have increased funds to invest and smaller acquisitions of mortgages and hence might be buy securities; that corporations might also ing rather than selling Government of Government securities, although purchasing less dur add to their holdings past; and that individuals would have large ing the next year than in the be attracted from institutions and individuals, very savings. If funds could of Government securities should develop. All little need for bank purchases financing for business and be done and still provide adequate of this could there was distributed a with Mr. Thomas' remarks, housing. In connection Product and Income through 1952, pre memorandum, Projection of National under date of November 14, 1951. pared in the Board's offices Martin, Mr. John H. to a question from Chairman In response inflation with a been having a serious the country had Williams stated that that further not be concluded and that it should Federal budget balanced
inflation from Government spending would necessarily be avoided by any par ticular combination of taxes and suitable offerings of Treasury securities. Mr. Williams said that he was coming to feel increasingly that the military program might be too large and might be moving too rapidly. Chairman Martin stated that, as reqested at the meeting of the full Committee on October 4, the executive committee met yesterday afternoon for the purpose of considering the memorandum prepared under date of September 28, 1951 by the Research Committee on Government Finance on how the defense bond program could be strengthened. The executive com mittee was in general agreement with the study, Chairman Martin said, and recommended that the report with minor revisions on pages 6 and 9 be sent to Secretary of the Treasury Snyder with a letter which would state that while the Committee felt that the problem was an important one and should have prompt consideration, it had come to no final conclusion as to the steps that should be taken and that it would be glad of an opportunity to discuss the matter with Treasury representatives or to be helpful in any other way that it could. The reason for emphasizing prompt consideration, he said, would be that the Committee recognized that there were limitations bond drive could be started, that the present drive on when a new savings end, that the results of the drive had not been too was just coming to an take time to obtain funds and personnel and successful, and that it would otherwise to revitalize the savings bond program. he had discussed the matter Martin went on to say that Chairman
ith Secretary Snyder this morning, expressing to him in general the views of the executive committee, and that, while Secretary Snyder was thoroughly receptive to any ideas for improving the savings bond program, he emphasized that he was in the "middle of the stream" at the moment, noting such prob lems as going to Congress for the necessary funds to finance the program, and the desirability of consulting with the savings bond field staff if there were to be a change in the program in order to have the benefit of their suggestions concerning both the type of bond and changes in sales technique that might make it more effective. Chairman Martin then asked for comments by all of the members of the Committee and the other Presidents of Federal Reserve Banks who were well as Mr. Attebery. Various ideas were expressed, including present as savings bond program was a smaller part of the suggestion that although the financing, it was important not only in a the total problem of Government effect and as a means of but in terms of its psychological dollar sense investors that otherwise would go into inflationary attracting funds of small effort should be made to work It was suggested that a thorough channels. with the business community program through collaboration out an effective in savings bonds, par agreed that changes otherwise. It was generally and also in the over-all for early years but in redemption schedules ticularly the bonds more competitive in order to make be highly desirable yield, would method of selling the and that a revitalized outlets for savings, with other series were since the present light of developments needed in the bonds was as to whether savings views were offered in 1941. Differing first issued
bonds should be made eligible as collateral for loans, at least to a limited extent, and as to the merits of marketable as compared with nonmarketable bonds. With respect to the suggestion in the memorandum prepared by the Research Committee on Government Finance that some form of tax exemption for small holdings of savings bonds would make them more attractive, dif ferent views were also expressed, some feeling that tax exemption was objec tionable in principle while others felt that a program which would have a neg ligible effect on tax revenues would be desirable if it served to make savings bonds more attractive as a medium for investment of savings which were accumulating at a rapid rate. During the discussion Mr. Sproul commented that an attempt should savings bond program from the longer-term debt not be made to separate the management program, that both were necessary parts of a general program Government, and that the raise the funds needed to finance the designed to now do the same thing for marketable Federal Open Market Committee should to savings bonds, i.e., work out securities that it had done with respect terms of improving the debt market financing in a program for long-term calendar year in the funds in the next and getting the needed schedule debt management and credit policy. would best fit the needs of sound way that on the basis of which be made of that problem that a study should He felt with respect to the debt manage could be made to the Treasury suggestions latter part of 1952. during the policies to be followed ment suggested that Mr. Sproul of the discussion, At the conclusion presented by Chairman committee as of the executive the recommendation
Martin earlier in the meeting be adopted, i.e., that the memorandum pre pared by the Research Committee on Government Finance, revised to include changes suggested by Mr. Youngdahl at the meeting of the executive commit tee, be transmitted to Secretary of the Treasury Snyder with a letter in a form which he outlined. Upon motion duly made and seconded, and by unanimous vote, Mr. Sproul's suggestion was approved with the understanding that the letter should be sent in a form satisfactory to Messrs. Martin and Sproul. In connection with Mr. Sproul's proposal that a study be made of the problem of long-term market financing, Chairman Martin suggested that the Research Committee on Government Finance be asked to make this study also, and that Mr. Thomas be requested to work with the Committee. Mr. Sproul added a further suggestion that the Presidents of the Federal Reserve Banks make inquiries in their respective districts as to the prospects for available long-term funds and possible solutions of the problem of long term market financing and that they send whatever information they might on Government Finance for its use in be able to develop to the Committee making the study. Upon motion duly made and seconded, the above suggestions were approved unanimously, the understanding that since the problem with of debt management was primarily a Treasury Presidents in making their responsibility, the would make it clear that the Federal inquiries Open Market Committee was merely seeking the could get in order to be as help best advice it as possible in finding a solu ful to the Treasury tion for this problem.
Chairman Martin then referred to a memorandum on Treasury cash requirements, prepared by Messrs. Thomas, Youngdahl, and Leach under date of November 9, 1951, copies of which had been sent to all members of the Committee before this meeting. He stated that the executive committee would be glad to have comments from any member of the full Committee concerning the recommendation that should be made to the Treasury as to the refunding of approximately $1,100,000,000 of partially tax exempt bonds called for payment on December 15, 1951. No suggestions were offered, other than those contained in the memorandum referred to above, and it was agreed unanimously to continue the understanding at the last meeting of the Committee that the executive committee would be authorized to submit recommendations to the Treasury concerning both refunding and new financing needs. Chairman Martin stated that toward the end of November a recom mendation would be made to the Treasury, in the light of conditions exist the time, with respect to the December refunding. ing at It was agreed unanimously that there should be no change in the present understanding that the executive committee would determine, within the limits of the general direction to be issued at meeting by the full Committee to the executive this upon which transactions should committee, the basis the System account in bills and be conducted for other short-term securities. operations should be con of the basis upon which In a discussion to the existing under Mr. Rouse referred in longer-term securities, ducted orderly market operations committee that in conducting standing of the executive
the Federal Reserve Bank of New York would not permit the longest-term restricted Treasury bonds to decline below 96-3/4. He also referred to the understanding at the meeting of the full Committee on October 4, 1951, that operations in longer-term securities should be conducted with a view to maintaining orderly market conditions. It was his view that in the light of existing conditions it should be the policy of the Committee to conduct its operations on the basis of the accord reached with the Treasury last March and that if long-term bonds should decline below 96-3/4 in response to market influences they should be allowed to do so as long as the movement was an orderly one. There was unanimous agreement with Mr. Rouse's statement and it was agreed that the executive committee would be guided accord ingly. In a discussion of policy that might be applied to operations of the year when there would be an easing of the money after the turn market resulting from a substantial return flow of currency from circula it was the unanimous view of the Committee that tion and other factors, the executive committee to direct sales of it would be appropriate for as freely as possible to withdraw securities from the System account the market and at the same time to maintain an orderly reserves from market. motion duly made and Thereupon, upon direction to the seconded, the following committee was approved unanimously executive that the limitation with the understanding would include com in the direction contained System open market account: mitments for the
ll/14/51 -11- The executive committee is directed, until otherwise directed by the Federal Open Market Committee, to arrange for such transactions for the System open market account either in the open market or directly with the Treasury (including purchases, sales, exchanges, replacement of maturing securities, and letting maturities run off with out replacement), as may be necessary, in the light of current and prospective economic conditions and the gen eral credit situation of the country, with a view to exercising restraint upon inflationary developments, to maintaining orderly conditions in the Government security market, to relating the supply of funds in the market to the needs of commerce and business, and to the practical administration of the account; provided that the aggregate amount of securities held in 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 $2,000,000,000, The executive committee is further directed, until otherwise directed by the Federal Open Market Committee, to arrange for the purchase for the System open market account direct from the Treasury of such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accom modation of the Treasury; provided that the total amount of such certificates held in the account at any one time shall not exceed $1,000,000,000. Chairman Martin referred to the drafts of replies to two questions the Subcommittee on General Credit Control and Debt Management addressed by on the Economic Report to the Subcommittee) of the Joint Committee (Patman copies of which had been Federal Open Market Committee, Chairman of the before this meeting, He stated distributed to the members of the Committee glad to have at this time, or to he and Vice Chairman Sproul would be that which any of the any comments or suggestions have submitted in writing, connection with the drafts might wish to make in members of the Committee of replies.
It was agreed that the next meeting of the Committee would be call by the Chairman and that in the absence of unforeseen subject to not be called until after the first of the developments a meeting would New Year. Thereupon the meeting adjourned. Secretary.
Also: Record of Policy Actions·Minutes of the Executive Committee, November 14, 1951