February 29, 1952 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Wash ington on Friday, February 29, 1952, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Sproul, Vice Chairman Mr. Evans Mr. Gidney Mr. Gilbert Mr. Leedy Mr. Mills Mr. Powell Mr. Robertson 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. Youngdahl, Chief, Government Finance Section Division of Research and Statistics, Board of Governors Mr. Arthur Willis, Special Assistant, Securities Department, Federal Reserve Bank of New York Messrs. Leach, Young, Bryan, and Earhart, alternate members of the Federal Open Market Committee Messrs. Erickson, Johns, and Peyton, Presidents of the Federal Reserve Banks of Boston, St. Louis, and Minneapolis, respectively Upon motion duly made and seconded, and the minutes of the meeting by unanimous vote, Open Market Committee held on of the Federal November 14, 1951, were approved.
Upon motion duly made and seconded, and by unanimous vote, the actions of the executive committee of the Federal Open Market Committee as set forth in the minutes of the meetings of the executive committee held on November 13-14, 1951, and February 11, 1952, were approved, ratified, and confirmed. Before this meeting there had been sent to the members of the Committee a report of open market operations prepared at the Federal Re serve Bank of New York covering the period November 14, 1951 through February 25, 1952, inclusive. Mr. Rouse presented a supplementary report covering commitments executed on February 26-28, 1952, inclusive, and com mented briefly on both reports. Copies of the reports have been placed in the file of the Federal Open Market Committee. Upon motion duly made and seconded, and by unanimous vote, the transactions in the Sys tem account for the period November 14, 1951, to February 28, 1952, inclusive, were approved, ratified, and confirmed. to the report prepared by Mr. Rouse under Reference was made respect to dealer commissions on transac date of January 23, 1952, with as presented and discussed at the System open market account, tions for 11, 1952. As recommended committee on February the meeting of the executive been sent to the Presidents of the memorandum had at that meeting, copies and for such discussion Banks for their information of all Federal Reserve appear to be desirable. meeting as might at this of the Federal Open None of the members the Presidents of and none of Market Committee who were not members Federal Reserve Banks the comments to make con the Committee had any of was ordered re and it cerning the memorandum, ceived and filed.
At Chairman Martin's request, the Secretary reported on a change in the procedure for forwarding investment schedules pertaining to the System open market account from the Federal Reserve Bank of New York to the Division of Examinations of the Board of Governors currently in connection with the examiners' audit of the System account. Mr. Carpenter stated that this change was made in January of this year with the thought that much of the detailed work of the examiners which hereto fore has been accomplished with borrowed help at the New York Bank during the examiners' audits of the System open market account could be done in the Board's Division of Examinations on a current basis, and that the investment schedules which previously had been set aside at the Federal Reserve Bank of New York for the use of the Chief Federal Reserve Examiner at the time of his examination of the Bank were now being forwarded to the a weekly basis as possible. Members of the Committee Board on as nearly noted the change without objection. Members of the staffs of the Board's Division of Research and Finance then presented an economic Statistics and Division of International slides. At the close of the review, review and outlook illustrated by chart and monetary policies with respect to credit Thomas made a statement Mr. to fiscal and debt management problems. in relation picture was said that the economic remarks, Mr. Thomas In his that this situation at high levels of activity, of approximate balance one
had prevailed for nearly a year during which there had been an important measure of credit restraint, and that there now were in prospect some factors suggesting the possibility of downward readjustments in prices and decreases in some phases of business activity. There are also in prospect, however, a number of factors that would tend to generate inflationary pres sures, particularly the expanding defense program and the continued high level of capital expenditures by business. With the Federal fiscal position shifting from a cash surplus to a sizeable cash deficit which would be at least $4 billion for the calendar year 1952, the Government might need to borrow as much as $10 billion during the second half of 1952 in order to meet the deficit and cover cash redemptions of maturing securities. Mr. Thomas felt that unless individuals and corporations put relatively more of their liquid savings into Government securities and held smaller cash balances, there might need to be an expansion of bank credit, possibly as much as $4 billion, to bring the volume of credit in line with potential demand. This would add to the money supply and be an inflationary in fluence. Under circumstances recently prevailing and in prospect, Mr. Reserve policies of neutrality that continuation of Federal Thomas felt would be particularly appropriate since under those policies monetary and interplay of market forces of restraint or ease results from the credit Reserve intervention. Thus, if and supply with a minimum of Federal demand
borrowing demands should turn out to be less than the supply of savings available for investment, the money market should be relatively easy and there would be little occasion for the System to try to prevent the ease from occurring. On the other hand, should combined borrowing demands from Government and private sources exceed the supply of savings and call for much bank credit expansion, a tighter market should be expected unless the Federal Reserve intervenes to supply reserve funds. Only in case forces of recession or inflationary pressures become overwhelming should there be need for positive and vigorous action by the System to operate against the trend of borrowing demands, Mr. Thomas felt, and principal reliance should be placed on member bank borrowing as a means of obtaining ad ditional reserves. With respect to financing the prospective deficit, Mr. Thomas stated that it was impossible to provide easy credit for Government without at the same time making easy credit available to private borrowers. There should be a positive program of debt management aimed at attracting nonbank funds to meet the deficit. An improved savings bond program and offerings of other securities attractive to individuals would be needed to attract savings into Government securities. on credit seemed unnecessary at While additional restrictions that relaxation of restraints was present, Mr. Thomas expressed the view in readiness to restrain any for and measures should continue not called
resumption of inflationary tendencies. Following Mr. Thomas' comments, Mr. Powell stated that it ap peared that during 1951 an important measure of restraint had been exercised by the public through its willingness to save at a high rate but that if the public were to resume spending at a substantially higher rate during coming months, upward pressure on prices would be renewed. Under these circumstances, Mr. Powell asked what the Committee might do in the field of monetary and credit policy to offset the increased spending. Mr. Thomas commented that in that situation vigorous action to reduce the supply of funds would be desirable. Mr. Sproul stated that he felt it was possible to place too much emphasis on the role of consumer spending. He also said that while consumer restraint in spending had been an important factor in the relative price stability over the past year, it was his opinion that no small part of the willingness of consumers to save reflected a belief that measures were being or might be taken to preserve the purchasing power of the dollar, and that if consumers continued to believe appropriate measures in that direc there would be a continuation of savings. On the other tion would be taken fiscal and debt management and the public began to feel that proper hand, if monetary policies were not being pursued and that there was a likelihood of to save would be reduced. Mr. renewed inflationary movements, the incentive prescribed by Mr. Thomas--vigorous that in that case the remedy Sproul said
action to reduce the supply of funds--would not be easy to apply. Whatever the reasons, Mr. Sproul said, it was becoming increasingly apparent that the country would not have an adequate fiscal policy in that there would be a large Federal deficit at a time when the budget should be balanced. In the field of debt management, the Treasury faced a need for substantial borrowings to finance the deficit during the last half of the calendar year 1952, at the same time that it would be almost constantly in the market with refunding opera tions. This may well preclude a vigorous credit policy, so that if the public does not continue to save a difficult problem will be presented. Under these circumstances it was Mr. Sproul's view that it is necessary to begin immedi ately to pursue a bold, vigorous program for obtaining funds from nonbank sources wherever possible and that both an improved savings bond program and a more effective program of sales of Government securities to nonbank investors would be needed to accomplish this purpose. The problem ahead appeared to him to be a very difficult one which could be quite intractable in terms of an adequate credit policy if there were not a complementary problem of debt management. Chairman Martin commented that he felt some encouragement could by the Treasury in connection with its be found in the program undertaken difficulties outlined by he did not minimize the March refunding although Committee should take advantage comments. He felt that the Mr. Sproul in his certificates to work out a to the refunding of the July of the period prior
further program with which to attack the problem. In this connection, he referred to the memorandum on Government Financing in 1952 prepared by the System Research Committee on Government Finance under date of January 25, 1952, copies of which were sent to all members of the Committee before this meeting, and at his request Mr. Youngdahl summarized the comments appearing in that memorandum on pages 17-23 regarding types of long-term securities that might be offered by the Treasury. Following Mr. Youngdahl's statement, Mr. Sproul said that he felt that, even under existing circumstances, a long-term unrestricted marketable bond was preferable to a nonmarketable convertible issue, as it would be the means by which the Treasury could raise the largest amount of long-term funds from nonbank sources at the lowest cost. While there were risks in undertaking long-tern financing in the situation which faces us, he felt that they were the financing in a manner that would not be inflation necessary in order to do ary and that would avoid greater risks of doing an unsatisfactory job of that prices of existing issues would attracting nonbank funds. He recognized decline would be limited by the willing decline but felt that the extent of the loss. He thought this sort of market existing holders to sell at a ness of the effects of long-term financing preferable to trying to cushion adjustment said, would establish Such issues, he convertible issue. by a nonmarketable rates and short- and long-term connection between undesirable mechanical an without full real who might buy a trap for the investor in effect be would, He also said such and penalties of liquidation. izetion of the conditions
issues would take control of the debt structure out of the hands of the Treasury because it would not know whether it had a thirty-year or five-year obligation outstanding. He added that, although the convertible issue offered by the Treasury last year was a desirable means of meeting the problem confront ing the Treasury and the System at that time, the issue should not be further imbedded into the debt structure and should not be recommended to the Treasury as a way out of the dilemma of getting long-term funds as a supplement to an improved savings bond program. Riefler, Assistant to the Chair During Mr. Sproul's statement Mr. Board of Governors, joined the meeting. man, of the advantages of marketable and There was a further discussion inquired if the members of issues during which Chairman Martin nonmarketable those expressed by Mr. Sproul. had any views that differed from the Committee suggested that the mem Chairman Martin comments were made whereupon No further presented in the memorandum continue to study the problem bers of the Committee that the full Committee Research Advisory Committee, prepared by the System a copy of the memorandum committee in sending the action of the executive ratify considering the advised that, after the Treasury be Treasury, and that to the that use of a marketable Market Committee agreed the Federal Open memorandum, the use of a nonmarket preferable to rate would be at a competitive security later this financing operations Treasury long-term issue in able convertible year.
There was also a discussion of other questions relating to Treasury financing including possible new money financing during May of this year and question was raised as to whether the Treasury might find it desirable to use tax anticipation bills similar to those issued in the fall of 1951. There was also a discussion of whether payment for such bills, if issued, should be permitted through credit to tax and loan ac counts of banks or whether they should be sold only to corporations (in cluding banks) which might use them in payment of their own taxes. Chair man Martin said that these were matters in which the Committee should work closely with the Treasury. Mr. Sproul expressed the view that, if possible, it would be desirable not to go to the market for new money in May or June of this year, particularly since large refinancing operations would become neces sary in July and new money financing would be necessary during the second half of this year. If it should become necessary for the Treasury to money before the end of June, Mr. Sproul suggested the possible obtain new Federal Reserve System to purchase direct from use of the authority of the short-term certificates of indebtedness for the temporary the Treasury accommodation of the Treasury. that the question of a recommendation Chairman Martin suggested relating to Treasury financing on this point and other matters to the Treasury ratify the trans that the Committee to the executive committee, be left on Government Financing in 1952, to the Treasury of the memorandum mission
and that the Treasury be informed that the Committee would favor long-term financing by means of a marketable issue rather than a nonmarketable con vertible issue. This suggestion was approved unanimously. Chairman Martin then referred to a memorandum dated February 25, 1952, with respect to the establishment of rates on purchases of bankers' acceptances which had been sent to all members of the Committee together with an opinion by Mr. Vest concerning the establishment of such rates by the Federal Open Market Committee. At the Chairman's request, Mr. Carpenter reviewed the circumstances which gave rise to the memorandum, stating that when the currently effective buying rates for acceptances were increased by the Federal Reserve Bank of New York in December 1951 in accordance with a rise in dealers' rates, some of the other Reserve Banks, instead of establishing a schedule of currently effective rates, presented to the Board of Governors for approval an increase to 1-7/8 per cent in their authorized minimum buying rate. As a result of discussions was agreed that consideration should be given at that time, he said, it to the procedure to be followed in the future. at this meeting that the matter be referred to the Chairman Martin suggested it submit a recommendation at committee with a view to having executive the next meeting of the full Committee.
This suggestion was approved unanimously. There followed a general discussion of open market policy during which Chairman Martin commented upon the possible need for additional bank credit to carry inventories incident to rescheduling of defense production. At the conclusion of the discussion it was unanimously agreed that no change should be made in the Committee's current policy of neutrality in the market under which market forces of supply and demand are permitted with a minimum of System intervention except to the to have their effect extent necessary to promote orderly market conditions. Thereupon the meeting adjourned. Secretary.