June 19, 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 Washington on Thursday, June 19, 1952, at 10:20 a.m. PRESENT: Mr. Martin, Chairman Mr. Sproul, Vice Chairman Mr. Bryan Mr. Earhart Mr. Evans Mr. Hugh Leach Mr. Mills Mr. Powell Mr. Robertson Mr. Szymczak Mr. Vardaman Mr. C. S. Young Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Vest, General Counsel Mr. Thomas, Economist Messrs. Wheeler and Ralph A. Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Sherman, Assistant Secretary, 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. Willis, Special Assistant, Securities Depart ment, Federal Reserve Bank of New York Mr. Craft, Technical Consultant Gidney, and Johns, alternate members Messrs. Erickson, of the Federal Open Market Committee Messrs. Williams, Leedy, and Gilbert, Presidents of the Federal Reserve Banks of Philadelphia, Kansas City, and Dallas, respectively of the Federal Reserve Clark, First Vice President Mr. Bank of Atlanta
Upon motion duly made and seconded, and by unanimous vote, the minutes of the meetings of the Federal Open Market Committee on February 29 and March 1, 1952, were ap proved. Upon motion duly made and seconded, and by unanimous vote, the actions of the execu tive committee of the Federal Open Market Committee as set forth in the minutes of the meetings of the executive committee held on March 1, April 4, April 21, May 9, and May 23, 1952, were approved, ratified, and con firmed. Before this meeting there had been sent to all members of the Committee a report of open market operations prepared at the Federal Re serve Bank of New York covering the period February 29, 1952 to June 13, 1952, inclusive. At this meeting, Mr. Rouse presented and commented briefly on a supplementary report covering commitments executed on June 16, placed in the files of of both reports have been 17, and 18, 1952. Copies the Federal Open Market Committee. Upon motion duly made and seconded, and the transactions in the by unanimous vote, System account for the period February 29 to June 18, 1952, inclusive, were approved, ratified, and confirmed. of the executive to a recommendation Martin referred Chairman and transmitted to all meeting on April 21, 1952 committee adopted at its the Federal Open May 7, 1952, that under date of of the Committee members to issue a continuing executive committee authorize the Market Committee to purchase special Reserve Banks to the Federal formal authorization
certificates of indebteness direct from the Treasury, from other Federal Reserve Banks, or from the System open market account when such purchases would facilitate the handling of the Treasury balances on Saturdays or holidays when the Federal Reserve Bank of New York is closed and another Federal Reserve Bank is open. The reasons for the recommendation were set out in the minutes of the meetings of the executive committee on April and April 21, 1952, as well as in a memorandum from Mr. Rouse dated April 17, 1952, copies of which had been sent to each member of the Committee before this meeting. During a discussion of the recommendation, Mr. Rouse suggested that if the authorization were given it be made clear that it would apply when the Federal Reserve Bank of New York was closed and any other Reserve Bank or branch was open. Thereupon, upon motion duly made and seconded, and by unanimous vote, the Committee authorized each Federal Reserve Bank, during such period as the executive committee of the Federal Open Market Committee may permit, to purchase special certificates of indebtedness of the United States, under arrangements made with the Federal Reserve Bank of New York, di rectly from the Treasury, from another Federal Reserve Bank, or from the System open market account, when such purchases will facilitate the handling of the Treasury's balances on Saturdays or holidays when the Federal Reserve Bank of New York is closed and another Federal Reserve Bank or branch is open; provided that the amount of such special certificates held by all of the Federal Reserve Banks for their own account as a result of such purchases,
together with the amount of such special certificates purchased directly from the Treasury and held in the System open market account, shall not exceed at any one time the total amount of such special certificates authorized to be held under the then current authorization of the executive committee to the Federal Reserve Bank of New York for the System account. Chairman Martin then referred to recommendations of the executive committee adopted at its meeting on April 21, 1952 regarding bankers' acceptances, a copy of which was sent to each member of the Committee on May 7, 1952. The recommendations included the proposal that section 8 of the Regulation of the Federal Open Market Committee be amended to read as follows: "SECTION 8. OTHER OPEN MARKET OPERATIONS "Subject to directions of the Committee and the following conditions, each Federal Reserve bank may engage in open-market operations other than the purchase or sale of Government securities: "(1) Each Federal Reserve bank, as may be required from time to time by the Committee, shall report all such trans actions to the Secretary of the Committee. "(2) Only acceptances and bills of exchange which are of the kinds made eligible for purchase under the provisions of Regulation B of the Board of Governors of the Federal Reserve System may be purchased: Provided, That no obliga tions payable in foreign currency shall be purchased or sold for the account of the Federal Reserve bank except directions of the Committee. in accordance with and warrants of notes, revenue bonds, "(3) Only bills, States, counties, districts, political subdivisions, or which are of the kinds made eligible for municipalities the provisions of Regulation E of the Board purchase under System may be purchased. of the Federal Reserve of Governors "(4) No Federal Reserve bank shall engage in the pur or sale of cable transfers for its own account except chase with the directions of the Committee." in accordance
The executive committee also recommended that: "A. Each Federal Reserve Bank be authorized to purchase prime eligible bankers' acceptances in the open market from banks and financially responsible experienced dealers and to hold such acceptances in its own portfolio. "B. The minimum buying rate on such prime eligible bankers' acceptances shall be fixed by the Federal Open Market Committee at this time at 1-3/4 per cent, subject to change from time to time by the Committee in order to carry out its policies. "C. The effective rates at which a Federal Reserve Bank may purchase bankers' acceptances shall be not less than the minimum buying rate and shall be specified from time to time by the manager of the System Open Market Account in the light of market conditions and developments and in accordance with any directives or limitations prescribed by the full Committee or the executive committee for the purpose of carrying out the current policies of the Federal Open Market Committee. Any change in on bankers' acceptances shall be prompt the effective buying rates Account to the Federal Open reported by the Manager of the ly Market Committee." Vest reviewed the reasons for At Chairman Martin's request, Mr. and for the other recommendations amendment to the regulation the proposed purchases of prime eligible executive committee concerning made by the rates on such acceptances. and setting of bankers' acceptances duly made and seconded, Upon motion vote, the recommendations and by unanimous the executive committee as set forth of above were approved. of the scope study ad hoc committee on the Mr. Craft reported that satisfactory market, stating securities of the Government and adequacy with securities the discussions and that during being made was progress been a fairly 9 there had since June taking place that had been dealers detailed outof the on the basis comments developed pattern of consistent
line which had been prepared by the subcommittee for the express purpose of securing comments from dealers in Government securities. Mr. Craft added that the subcommittee was considering the possibility of preparing an appro priate type of outline to be sent to some of the larger investor groups such as insurance companies, savings banks, and State funds, with the thought that their comments could be obtained largely by mail rather than by asking that individuals come to Washington for discussions. Mr. Vardaman raised the question whether copies of statements made by securities dealers during discussions with the subcommittee might be made available to all Committee members from week to week, and Chairman Martin commented that it was contemplated that a report would be submitted to all members of the Committee as promptly as possible, that it did not reports, and that he expected the sub seem feasible to prepare interim to submit a written report until some committee would not be in a position would mean about 90 days from the time the study time in September which commenced. of the Board's Division of this point members of the staff At Finance entered the and Division of International Research and Statistics situation and credit review of the economic was presented a room and there by chart slides. outlook, illustrated out the implications Mr. Thomas pointed concluding this review, In economic recent and prospective indicated by Reserve policy for Federal
developments. He indicated that there are favorable prospects for contin uation of an economic situation of approximate balance at a high level of activity but the maintenance of such a balance may require even greater reliance on general monetary restraints, particularly in view of the relaxation of selective and voluntary measures. Prospects for the second half of 1952 are for substantial cash borrowing by the Treasury while private credit demands may be only slightly less than last year even with relatively stable prices. Although savings and the accumulation of liquid funds may continue large, it will be necessary for the Treasury to adopt vigorous measures to attract available funds into Government securities and for the Federal Re the availability of bank reserves, if undue expansion of serve to restrict The intermediate financing in process and bank credit is to be avoided. tax anticipation bills, together with moderately subsequent offerings of bonds, may be adequate to meet the favorable results from the new savings needs might be adequately supplied needs. Increased reserve Treasury's with dealers, with and repurchase agreements through member bank borrowing This would mean by the System. purchases of securities a minimum of direct tend to become If credit demands of tight money markets. the continuation rate might be appropriate. increase in the discount excessive, an briefly on Martin reported review, Chairman the economic Following to the cash the response received concerning he had information preliminary the books were 1958, on which bonds of per cent Treasury of 2-3/8 offering
opened for subscription on Monday, June 16. He stated that it appeared that the offering had been oversubscribed more than three times, that subscriptions from nonbank investors apparently exceeded the amount of the offering of $3,500, 000,000, and that the total allotment would have to be expanded in order to provide any minimum allotment to commercial banks. There followed a general discussion of the Treasury financing, during which Mr. Evans called the Committee's attention to the fact that since the war the Federal Open Market Committee has had several objectives in mind: 1. To refinance the public debt so that a larger proportion would be in long-term securities in the hands of nonbank investors. 2. To prevent further accumulation of Government securities by banks. 3. To reduce bank loans in order to retard inflation. Mr. Evans pointed out that these objectives have not been attained. Up to the present time the refinancing of the debt with long-term securities has not been effectively attempted and the average maturity of the public debt has shortened. Banks have increased their loan portfolios to an all-time high. Commercial banks are once more interested in purchasing Government securities and they are available to them. Mr. Evans suggested that the Committee give careful thought to its statutory responsibilities and conduct its open market operations in such a
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.
Also: Record of Policy Actions·Minutes of the Executive Committee, April 4, 1952·Minutes of the Executive Committee, April 21, 1952·Minutes of the Executive Committee, May 9, 1952·Minutes of the Executive Committee, May 23, 1952·Minutes of the Executive Committee, June 6, 1952·Minutes of the Executive Committee, June 19, 1952