June 19, 1952 FOMC Minutes

FOMC minutes

way as to prevent the further deterioration of the purchasing power of the dollar. The immediate policy question to be raised is how much bank credit expansion--and, specifically, how much Reserve Bank credit expansion--can we really afford to tolerate this year? Turning to open market operations, Chairman Martin raised the question whether there should be any change in the Committee's existing policy of neutrality, under which market forces of supply and demand are permitted to have their effect with a minimum of System intervention except to the extent necessary to promote orderly market conditions. Mr. Sproul then commented briefly as follows: The reception accorded the cash offering of new 2-3/8 per cent five-year Treasury bonds reflects fever rather than health in the patient. There appear to be two primary dangers in the current situation. The first of these is the confirmation of opinion held by some at the Treasury that there is no such thing as market deter mination of prices and yields on Government securities and that the Treasury and the Federal Reserve System can and should make the market. In that view, Treasury borrowing becomes a simple, crude process of deposit creation by the banking system closely akin to printing money. The second danger is the risk that the market will assume as it has, and be confirmed in its assumption that the Treasury and the Federal Reserve System are reverting to the wartime practice of giving reserves to commercial banks in amounts necessary to make each Treasury financing a complete success and to assure an advance in the price of each new issue subsequent to its offering, if not facilitating repeated offerings at rising prices. The large sub response to the new 2-3/8 per cent bonds of 1958 means scription and the true resources of the sub little regarding the true needs interest in the new Commercial banks have a definite scribers. lack the reserves (apart from their creation by the bonds but their needs. For the most part, Federal Reserve System) to fill "free riding" under nonbank investors represents the response from selling the issue profitably at an early taken largely in the hope of depreciation. The current economic and date without risk of price

market situation suggests the wisdom of keeping a close check rein on credit without committing the System to a policy which would suggest that it was concerned either with the development of in flation or deflation at this time. In terms of open market operations that would mean allowing the market to adjust itself with a minimum of positive assistance from the System open market account while, at the same time, encouraging commercial banks to meet reserve needs through rediscounting rather than extending direct aid to them through open market transactions. A collateral result would be to eliminate some of the profit from "free riding" operations by speculative subscribers to the 2-3/8 per cent bonds. It appears that many investors must relearn the meaning of a free market. It would seem wisest to reaffirm the current policy of neutrality and to continue efforts to encourage the banks to seek reserves through the discount window. Chairman Martin suggested that in the absence of objection the Com policy, and none of the members of the Committee mittee reaffirm its existing indicated disagreement with this suggestion. Thereupon, upon motion duly made and the following direction to the execu seconded, tive committee was approved unanimously with the understanding (1) that the limitation contained direction would include commitments for in the the System open market account; and (2) that if the authority contained in Section 14(b) of the Federal Reserve Act to purchase securities from the Treasury were not extended directly the authority given in the beyond June 30, 1952, paragraph of the direction would terminate second on that date: until otherwise directed committee is directed, The executive for such trans to arrange Open Market Committee, by the Federal either in the open System open market account, actions for the purchases, sales, the Treasury (including market or directly with and letting matu of maturing securities, exchanges, replacement necessary, in the as may be off without replacement), rities run and the general economic conditions current and prospective light of exercising restraint with a view to of the country, credit situation conditions in maintaining orderly developments, to upon inflationary

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 accommodation of the Treasury; provided that the total amount of such certificates held in the account at any one time shall not exceed $2,000,000,000. It was agreed that the next meeting of the Committee tentatively held some time during the week commencing September should be scheduled to be 22, 1952. Mr. Sproul stated that in view of the fact that John H. Williams, of New York and presently an to the Federal Reserve Bank Economic Adviser from active service effec of the Committee, would retire associate economist at the New York Bank, he only as a consultant tive June 30, 1952, continuing Vice President of the Fed that Harold V. Roelse, (Mr. Sproul) would recommend of the Federal an associate economist New York, be elected Reserve Bank of eral 1952 to succeed Mr. Williams. effective July 1, Open Market Committee duly made and upon motion Thereupon, vote, Mr. Roelse and by unanimous seconded economist, to serve was elected an associate successor at the of his until the selection the Committee after February first meeting of

28, 1953, with the understanding that in the event of the discontinuance of his official connection with the Federal Reserve Bank of New York he would cease to have any official connec tion with the Federal Open Market Committee. Thereupon the meeting adjourned. Secretary.