August 19, 1958

August 19, 1958 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 Tuesday, August 19, 1958, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Balderston Mr. Fulton Mr. Irons Mr. Leach Mr. Mangels Mr. Shepardson Mr. Vardaman Mr. Treiber, Alternate for Mr. Hayes Messrs. Erickson, Allen, Johns, and Deming, Alternate Members of the Federal Open Market Committee Messrs. Bopp, Bryan, and Leedy, Presidents of the Federal Reserve Banks of Philadelphia, Atlanta, and Kansas City, respectively Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Hackley, General Counsel Mr. Solomon, Assistant General Counsel Messrs. Daane, Hostetler, Marget, Roelse, and Young, Associate Economists Mr. Kenyon, Assistant Secretary, Board of Governors Mr. Koch, Associate Adviser, Division of Research and Statistics, Board of Governors Mr. Keir, Acting Chief, Government Finance Section, Division of Research and Board of Governors Statistics, Mr. Stone, Manager, Securities Department, Federal Reserve Bank of New York Mr. Swan, First Vice President, Federal Reserve Bank of San Francisco; Messrs. Jones and Tow, Vice Presidents of the Federal Reserve Banks of St. Louis and City, respectively; Messrs. Larkin Kansas

and Baughman, Assistant Vice Presidents of the Federal Reserve Banks of New York and Chicago, respectively; Messrs. Willis, Anderson, and Atkinson, Economic Advisers of the Federal Reserve Banks of Boston, Philadelphia, and Atlanta, respectively; Mr. Coldwell, Director of Research, Fed eral Reserve Bank of Dallas; and Mr. Hellweg, Economists Federal Reserve Bank of Minneapolis Upon motion duly made and seconded, and by unanimous vote, the minutes of the telephone conference meetings of the Federal Open Market Committee held on July 15, July 18 (two meetings), July 21, 22, 23, 24, 25, 30, 31, and August 1 and 4, 1958, were approved. Before this meeting there had been distributed to the members of the Committee a report prepared at the Federal Reserve Bank of New York covering open market operations during the period July 29 through August 13, 1958, and a supplemental report covering commitments exe cuted August l4 through August 18, 1958. Copies of both reports have been placed in the files of the Federal Open Market Committee. Reporting on open market operations, Mr. Larkin stated that developments since the last meeting had been covered in detail in the written reports and that he would merely emphasize a few points. The which was the principal concern of the Com redundancy of reserves, had been eliminated during the period mittee at the last meeting, net sales or redemptions of Treasury bills. Al through sizable wide range on a day-to-day basis, though free reserves moved over a

they averaged less than $500 million during the past three weeks, more than $100 million lower than the average of the previous three weeks. The money market has been generally less easy than in recent months, with the Federal funds rate frequently close to the discount rate. Conditions in the securities markets, Mr. Larkin said, speak for themselves. Short, intermediate, and long-term rates have risen. In the past two days there have appeared some signs of relative stability in the long-term area, but there has been no significant revival of activity. Short-term rates continue to rise, most recently under the impetus of the San Francisco Bank's action in increasing its discount rate. The average issuing rate in the Treasury bill auction yesterday was 1.90 per cent. Mr. Larkin called the Committee's attention to the fact that Report, which had been distributed prior to the the Supplementary B-4) setting forth the assumptions meeting, contained a page (Exhibit projections of the New York Bank. underlying the reserve Thereupon, upon motion duly made seconded, and by unanimous vote, and open market transactions during the July 29 through August 18, the period and approved, ratified, 1958, were confirmed. distributed under of the staff memorandum In supplementation following statement presented the 15, 1958, Mr. Young date of August and financial outlook: on the economic

We no longer need be tentative about the fact of domestic economic recovery. The unfolding data are abundantly clear. They show vigorous revival--one of the more robust on record following one of history's shorter and milder contraction periods. In industrial countries abroad, the evidence indi cates that final demand has continued to be fairly well sustained. In Canada, as here, revival appears to be under way. In Europe, production trends have been mixed, with contractions, where occurring, apparently associated with inventory adjustment. Reflecting cumulative relaxa tion of inflationary tensions, further declines in European interest rate levels have occurred in July and August. Recent domestic economic developments The turnaround in GNP from the first to the second quarter now appears to amount to just short of one per cent, and a jump from the second to the third quarter of at least two per cent appears likely. Personal income in July was above its August 1957 level, though the June July rise was partly influenced by one nonrecurring itemback pay of Federal employees. The Board's index of industrial production through July has risen at least 7 points, or 6 per cent, from April, and the odds are large that late data will raise amount of advance by two index points. The recovery the in industrial output has been diffused through durable and nondurable industries as well as through mineral lines. The rise in durables output since April has been 10 index in nondurables 5 points, and in minerals 5 points. points, activity has risen for two months, mainly Construction increases in residential building. Contract reflecting continued close to the high levels of May awards in July housing starts in July, rising further and June. Private attained a seasonally ad for the fifth successive month, close to 1.2 million units. Financing and justed rate markets remain on the selling conditions in residential stimulative side. June increased for the third Total business sales in about one-third of the over three months month, recovering also continued in Inventory liquidation previous decline. a total inventory decline the ninth month, making June for $5 billion. The of last year of about since early autumn however, was more decline in June, rate of inventory December. At single month since than for any moderate

manufacturers, both in June and in May, there was a large liquidation of finished goods inventory. At retail stores in June, stocks over-all rose. New orders received by durable manufacturers have now risen for three consecutive months, though they still run below shipments. While unemployment holds at a rate moderately in excess of 7 per cent, the labor market has shown additional strengthen ing through a further increase in nonfarm employment (seasonally adjusted), a continued decline in the number of employees on short workweeks, and an additional rise in average hours worked per week in manufacturing. Recent wage advances in major manufacturing industries are being reflected in a slight ad vance in average hourly earnings, and weekly earnings, reflect ing both wage rate advances and more hours worked, are rising slowly. In assessing the continuing high unemployment rate in the face of recovery, it needs to be remembered that such a pattern is not unusual for the early stages of recovery and that a similar pattern was followed in the recoveries from the 1948-49 and 1953- 4 recessions. The pattern results because employers wait until average hours of work have increased before engaging in extensive new hiring and also because productivity gains in the early recovery phase are typically very sharp. Farm income, already considerably improved in the first on the basis of crop and marketing pros half year, promises, pects, to be further raised in the months ahead. The August 1 crop report points to a total harvest some 13 per cent above average and 7 per cent ahead of the large harvests the 1948-49 of the past two years. markets, sales continued in July at the level In consumer of May and June-about 3 per cent above the March low and 3 summer's high. Gains in sales continued per cent under last general merchandise stores, but at to be marked at apparel and remained sluggish. Department store durable goods stores they July were 140 per cent of the 1947- 9 average, sales in and the record 144 for August compared with 133 per cent in June store sales have In early August, department of last year. maintained the July level. less than seasonally and Automobile sales in July declined by sales in the first 10 days yet more improvement is indicated of dealers at about new car stocks in hands of August. With curtailments in process, and with model change-over 660,000 liquidation of dealer now expects a substantial the industry In view of this by the end of September. inventory holdings for the fourth quarter production schedules prospect, industry to that of the output at least equal a rate of contemplate fourth quarter of 1957.

Preliminary data indicate that outstanding instalment credit declined again in July after allowance for seasonal factors. Since January of this year the decline has totaled about three-quarters of a billion dollars. This is the largest decline and longest period of decline in the postwar period. Total exports in May and June were at a seasonally ad justed annual rate of $16-1/2 billion, up slightly from March and April. There was a marked pickup in agricultural exports between these two periods, some of which apparently reflected a catching up in Government-financed shipments. This increase was largely offset by further declines in exports of metals, machinery, textile manufactures, and coal. For many of these items, however, the rate of decrease was smaller than before. In general, the best judgment of the experts in export markets is that contraction of demand for U. S. exports has largely run its course. While total import data beyond May is still lacking, from such partial informa tion as is available it would appear that total imports in June and July have remained close to an annual rate of $12-1/2 billion, the average rate in the first five months of the year. While the average of wholesale prices has been about stable over the past two months, the average of industrial commodity prices has risen .7 per cent, mostly since the end of June, and the average of farm product and food prices has declined about 2 per cent. Since April, the average of raw industrial material prices has risen 8 per cent, or about the same percentage as from March to June in 1954; in both advance in the price of steel scrap was a main periods, factor in the price rise. Consumer prices, which rose further in mid-June, are expected to show either slightly or slight decline at mid-July. With food prices no change slowing of advance in prices of seasonally lower and a August index may show modest decline. consumer services, the Recent domestic financial developments have been influenced by three lines of Financial markets of economic data and corporation reports news: (1) the stream was under way; (2) indica indicating that vigorous recovery Reserve policy might be shifting tions and rumors that Federal (3) a flow of banking, mone away from ease; and its posture deficit data pointing to a record-breaking tary, and Treasury balance position of the economy, six-month increase in the cash of post-1955 price in both monetary validation suggesting for an extension of creeping and a financial stage set creases inflation.

In these circumstances, further upward yield adjust ments have occurred for Treasury bonds, corporate bonds, and municipals. The additional rise in Treasury yields has been accentuated, of course, by further liquidation of speculative holdings. At the close of last week, the yield on long-term Treasury bonds averaged 3-5/8 per cent and in the intermediate range the yield was about 3 per cent. Triple A corporate bond yields had reached about 3-7/8 per cent, and on high-grade municipals the yield had somewhat exceeded 3 per cent. Partly reflecting summer underwriting letup and partly reflecting upward adjustment of market yields, the corporate and municipal new issue volume has lightened significantly. After holding persistently below 1 per cent during June and July, the Treasury bill rate moved up from early August to 1.895 per cent yesterday, with the rise reflecting both a change in the credit outlook and a larger supply of short-term securities in the market. Rates on bankers' acceptances, finance company paper, and commercial paper have all been marked up sympathetically with the bill rate movement. Since the new highs in stock prices and trading activity were reached following the hike in margin requirements that prices and trading have edged off somewhat. late in July, stock investors, however, still cling to inflationary Equity on common stocks late last The average yield expectations. or slightly below the average yield week was 3.79 per cent, slightly above the yield on the on Aaa corporate bonds and 3-1/2 per cent bonds of 1990. longest Treasury bonds--the of the year, total commercial In the first seven months compared with a decline has expanded by $7 billion bank credit of 1957. This is by $.5 billion in the same period of almost for the same months of any preceding far the largest increase increase than occurred It is also a much larger postwar year. contraction phase and early recovery in the comparable late preceding postwar cycles. phase of the two has been associated in bank credit This large expansion holdings of the increase in cash balance with the largest whether reckoned postwar interval, public for any comparable to business cycle calendar period or according according to rate of increase six months the annual Over the past period. plus demand deposits deposits money supply--time in the total been nearly 12 per seasonally adjusted--has and currency, deposits money supply--demand active The privately-held cent. in excess of at an annual rate increased and currency--has for time deposits rate of increase the annual 8 per cent, while

alone has attained a peacetime record of 20 per cent. Some part of the large increase in time deposits must represent consumer, financial, and business balances that will likely be withdrawn for spending or investing in the period ahead, and so will be transferred to the category of active money and swell further the active money supply. The current policy problem System policy at this juncture is faced with three pervasive facts: (1) a significant and broadly-spread revival in productive activity and in incomes; (2) a pace of, and momentum in, expansion in privately-held cash balances that is by any historical standard abnormally high; and (3) an inflationary psychology in financial markets that could easily spill over into commodity and real estate markets. These facts raise a basic question about the kind of instability problem that System policy has been called upon to grapple with since last mid-autumn. In short, just what sort of cyclical malady has the economy been suffering and what dosage of monetary medicine has been needed to help restore economic health? This is a most perplexing question, but some perspective on it can be gained by brief comparison with other periods of significant cyclical contraction since World War I. The Board's index of industrial production, which is generally recognized by analysts of economic cycles as a reliable coincident indicator, can be taken as an effective reference measure for this historical diagnosis. Of the eight business cycle contractions occurring over this span of nearly four decades, the recent contraction was nine months or less. It was also one of one of four lasting in which a decline in industrial output of four contractions occurred. It was one of two contractions less than 15 per cent months until significant upturn began. taking as few as nine followed by rebound that was one of two contractions And it fraction of preceding decline by the recovered a substantial mechanical historical criteria of eleven months. Whatever end with past economic contractions, it are used for comparison 1957-58 recession will these data that the seems certain from cycles as one of the milder down in the annals of economic go recession experiences. to the nature of inference as important diagnostic This together with the instability problem, the economy's recent mentioned above, point about the current situation key facts

to only one course for Federal Reserve action under prospective conditions over the short-term. That course of action is one that will temper the rate of expansion in the money supply. The first step in accomplishing this objective should be to reduce to zero as rapidly as possible the net free reserve position of member banks. On the basis of current projections of reserve changes by the Board's staff, seasonal factors will be working in this direction through the Labor Day week end, but they will need some help from sales by the Open Market Account to meet a time schedule consistent with the urgency of the situation. A larger problem of Federal Reserve decision looms for the future. It relates to the rate of monetary expansion that should be the System target for the autumn and winter period. Having an eye to the high rates of monetary expan sion of the recent past, it can be argued justifiably that the economy's cash balance position is already redundant and that no further increase in cash balances, other than of reasonable seasonal dimensions, will be consistent with sustainable economic development and tolerable stability for the value of the dollar. Under this line of reasoning, call for allowing more active use appropriate policy would of existing money balances to carry the main load of financing the increased spending and investing associated with rising activity and incomes. On the other hand, it can be argued that the annual rate in the money supply, seasonally adjusted, over of increase the balance of the year ought not to fall below 2 to 3 per cent. This second position is premised on the proposition rate of increase to a sero that a shift from an 8 per cent risk curbing recovery and even induce recurrence rate might of contractive tendencies. needs clarification through study This central problem discussion by the Com Committee's staff and further by the has been reached on the mittee itself. When a conclusion will arise as to the then a secondary problem problem, and the reserve need projections required reserve changes be consistent with the monetary expansion target that will adopted. the course of prudence in day-to-day In the meantime, for staff reserve need projections, operating procedures calls Bank, to be on the basis and at the New York both at the Board any allowance for patterns only and to exclude of seasonal after the extent of monetary monetary growth. At least, would seem imprudent six months, it over the past expansion

to premise projections of prospective reserve needs on a further increase in the money supply at a rate anywhere close to that recently experienced. Finally, a word in regard to Treasury financing prospects. Available Treasury cash balances plus Septem ber tax receipts should make it possible to defer further Treasury cash financing until the third week in October. At that time, the Treasury will need to borrow as much as $4-1/2 billion in cash. Another $4 billion will possibly be needed over the turn of the year, with say $2 billion borrowed in December and $2 billion in January. These estimates are necessarily tentative. At this stage, it is most uncertain how fast Federal cash spending will actually rise over the months ahead; also, September and December corporate tax receipts may run higher than now thought likely. In response to questions by Mr. Vardaman, Mr. Young said he thought there were clear signals already of a vigorous recovery "across the board." During a period in which there had been a relatively mild contraction of business activity, followed by business recovery, there had also been a very rapid expansion of the money not know of any cycle recorded in history in which supply. He did the sort of thing occurred that had been experienced in the past six Mr. Vardaman whether he thought that the vigor of months. Asked by such as to warrant a mild contraction of the money the recovery was Mr. Young said that possibly supply, beginning almost immediately, he had tried to avoid be desirable. In his statement this would had merely outlined two points of view. taking any position and to the effect that would be line of reasoning Another possible the money supply from this point there should be a contraction of it would be difficult enough In his judgment, however, forward.

just to get the rate of expansion slowed down. Chairman Martin then stated that at this point in the meeting he would like to make certain observations about the operations of the Committee. First, he felt sure that none of the Committee members liked particularly the succession of telephone meetings that had been held recently, and it was his hope that there would not be many periods when it would be necessary to follow that procedure. Because of technical problems of communications, it was necessary to restrict participation in the recent series of meetings to those currently serving on the Open Market Committee, and even so telephone meetings are not conducive to full interchange of opinion. Chairman went on to say that this had been a difficult The in Iraq that no one could have with events such as the crisis period, situation served to emphasize the confidential foreseen. Such a Market Committee, where there is of the meetings of the Open nature policy along lines which he hoped discussion of all aspects of System provisions. In such be recognized by statutory would at some point sometimes attributed to there are rumors they are circumstances, when in the Open number of persons participating the relatively large there is continued discussion with the result that Market meetings, not think that he did meetings. Personally, the size of the about his opinion the advantages be cut down, for in attendance should outweigh the disadvantages.

Referring to the San Francisco discount rate action, Chairman Martin expressed the view that as a general principle there should be an effort to defer important System decisions until after the meetings of the Open Market Committee, which afford an opportunity for full review and discussion of the current situation. However, in this instance he felt. that the Board of Governors was correct in giving its approval to the rate increase promptly because rumors appeared almost immediately after the action was taken in San Francisco, If it had not been for those rumors-and Mr. Mangels had expressed the view that they could not have come from the West Coast-the Board of Governors might have held up its action until after this meeting so as to have had the benefit of the discussion, regardless of its position in the final analysis. The Chairman also noted that when margin requirements were discussed at the Committee meeting on July 29, there were rumors within two or three days of possible action in that respect. While those rumors had a Committee source, never he did not think that mere fact that a Committee meeting is held gives rise theless the amount of conjecture and makes it necessary to exercise to a certain unduly concerned, but he considered it unusual caution. He was not his duty to bring the matter again to the Committee's attention, for within the System family it becomes unless matters can be kept

difficult to take any actions and the integrity of the System is called into question. Therefore, it is very important for the System to keep as clear as possible. In his opinion it was wise, when the Committee reached its unanimous decision on July 18, to put an announcement on the ticker immediately. On the other hand, the System has no commitment to make all of its actions available to the public as soon as they are taken. With regard to the discount rate action, the Chairman recognized that the difficulty of timing was compounded by the vacation season and its effects on the schedule of directors' meetings of the respective Banks. That is one of the problems encountered in operating a far-flung system and is something to in mind. Later in the meeting, he said, Mr. Mangels be kept of the San Francisco directors and would explain the thinking Martin) simply wanted to his own views, and he (Chairman present to drum up the support of that there was no effort say in advance to a rate increase or to Francisco directors with respect the San oppose such an increase. Chairman Martin problem in broad perspective, Putting the do everything in his power it is up to each person to commented, as a system, and the Reserve System work to make the Federal each person should guard System is something that integrity of the the Board of Governors Again, he felt that at all times. zealously

took the right action in approving the San Francisco rate increase immediately, but if there had not been rumors the Board's thinking might have been to postpone action until after this meeting. The Chairman then turned to Mr. Treiber, who presented the following statement of his views on the business outlook and credit policy 1. Since the last meeting of the Committee here in Washington there has been some turbulence in the U.S. Se Government securities market. This week, however, the market has shown more stability, with little evidence of liquidation by speculators. We may be in, however, for a further downward adjustment in prices and an upward adjustment in yields in the short-term area. 2. In the economic area there has been a fairly widespread improvement in production, accompanied by a somewhat less general improvement in the employment situation. There is growing optimism as to the speed and the extent of the recovery; and there is some concern over the revival of inflationary tendencies. Nevertheless, there remains the possibility of serious interruptions to the recovery. 3. Important factors that are likely to have a moderating influence on inflationary tendencies in the coming months include: (a) Lower food prices; Excess capacity, particularly in important (b) areas of primary production; (c) Larger productivity increase; (d) Continued substantial unemployment; More moderate wage demands; and (e) (f) Foreign competition. The Government deficit will be an important stimulus to the economy, but at the same time it is of concern as to its infla giving rise to expressions tionary implications. of concern as also hearing expressions 5. We are may have created too whether the Federal Reserve to much liquidity. 1957 the System's policy of ease 6. Since October release of over $3 billion of has resulted in a net

reserves to member banks through open market operations and cuts in reserve requirements. During the remainder of 1958 the System faces the prospect of supplying further substantial amounts of reserves to cover (a) the normal seasonal credit demands of business and currency requirements, (b) the demands arising out of a cyclical upturn in business, (c) the demands arising out of heavy Treasury financing, and (d) quite possibly some further outflow of gold. 7. Our easy money policy has promoted a substantial growth in the money supply, and the heavy demands during the remainder of the year will increase it further. Yet, how great is nonbank liquidity? Although various measures of nonbank liquidity show an improvement in liquidity since last fall, they still indicate that liquidity is considerably less than it was in 19 4. 8. Bank liquidity has improved since last fall but it is not as great as it was in 1954. As for bank investments, between October 1957 and June 1958, commercial banks in creased their total holdings of U. S. Government securities by almost $7 billion, from $50 billion to $57 billion. Securities maturing in 5-10 years rose by $8 billion, from $8-1/2 billion to $16-1/2 billion. Securities in the 1-5 declined $2 billion to $24 billion, and securi year category maturing in less than one year increased only slightly. ties As regards Mr. Young's statement concerning the possible withdrawal of time deposit balances for investment purposes, down of some of such balances might be reflected the drawing in bank investments rather than an increase in in a decline the money supply. capital has been high in 9. The demand for long-term corporate and municipal securi 1958. Public offerings of months of 1958 are estimated to be ties in the first nine than in the corresponding period about $1/2 billion more is likely to be more increase, however, of 1957. This a reduction in private placements. than offset by the recent rapid rise in We are concerned over in view of the current amount long-term yields, especially cent of the decline in Eighty-two per of unemployment. November has been wiped occurred since last yields that out.

11. The current unsettlement in the long-term Govern ment securities market has put a brake on public offerings of corporate securities and there have been some postpone ments. Postponements for an indefinite time due to un availability of funds or too high rates would be an obstacle to the further progress of the recovery which is still in its early stages. We hope that the present indications of more stability in the long-term Government securities market will clear away the hesitation regarding corporate offerings. 12. We believe that the developments in the economy call for the System to move away gradually from the position of ease that appeared appropriate while activity was declining. On the other hand, the situation in the securities markets calls for a high degree of caution. 13. We would favor a gradual movement toward reducing the availability of reserves. We would want to avoid creating a severe tightening in the "feel" of the money market and to avoid perpetuating or intensifying the current weakness in the longer-term securities market. In view of the touchy situation in the Government securities market it would seem well to avoid a specific target of free reserves. 14. We believe that the directive should be changed to reflect the interest of the Federal Reserve in promoting the recovery. We suggest that clause (b) of the directive be amended so as to call for operations with a view "to promoting sustainable economic recovery." 15. We had carefully considered the discount rate of the Federal Reserve Bank of New York and had concluded that it should not be changed. We felt that a gradual movement away from the former degree of ease could and should be made within the framework of our present discount rate of 1-3/4 per cent. We looked forward to the opportunity of having a general dis cussion of the discount rate at this meeting of the Federal Open Market Committee before any action would be taken on the rate. 16. At our directors' meetings in the last two weeks we have had full discussions of the discount rate. At last Thursday's meeting, we encouraged a discussion of the factors that might be important in our consideration of the discount last week but also over the next month or so. rate not only in their opinion that there should Our directors were clear at this time. On the basis of be no change in the rate no reason for considering an increase present facts they saw month or so, preferring to await in the rate in the next upon them when they occur. developments and to pass judgment

Mr. Vardaman inquired of Mr. Treiber whether he correctly inferred that the latter would favor keeping the reserve position and the Government securities market in a posture which would en courage private offerings. Mr. Treiber replied in the affirmative. He said that he would favor moving toward less ease, but not moving so fast that there would be repercussions in the long-term market. He hoped that the long-term market would stabilize and that the corporate market would then encourage stability in the Government securities market. He would want to avoid action on the part of the System that would press for further adjustments in the long-term market; in other words, avoid action that would disturb any further that sector of the market. Mr. Erickson said that in the First District most of the continued to show improvement. The revised New England statistics index for June reflected a 3-point increase over May, manufacturing contracts had a big month in June and for the while construction of this year were only .4 per cent behind last year. first six months contracts, the increase reflected In residential construction dwellings. However, nonagricultural strength in multiple-unit cent from last year. Up to in June was down 4.3 per employment in the district were con report only two areas the most recent but in July three of substantial unemployment, sidered areas store sales to the list. Department areas were added additional

had spurted since the fourth of July and the ensuing weeks reflected a 9 per cent increase; for the year to date depart ment store sales were 2 per cent behind last year. The latest consumer credit survey, which includes 16 large banks that originate a large percentage of the consumer credit in the district, showed that the percentage of long-term automobile contracts was down for the first time since January, from 42 to 40 per cent. The Reserve Bank's discount window had been used relatively little until the last three days of last week, when there were borrowings by seven fairly large banks, most of them in the larger cities of the district. Turning to monetary policy, Mr. Erickson said he was happy that the System had been able to eliminate redundant reserves as rapidly and as easily as it had. He agreed with Mr. Young that the System should get free reserves down to zero as quickly as possible without creating too much tightness in the market. His own feeling would be to bring free reserves down and to increase the discount rate sometime after Labor Day. The Reserve Bank's Board of Directors and he did not know what the directors would was to meet next Monday in the First District there has He noted, however, that decide. improvement as in the San Francisco not been as much business should be changed and he would District. The policy directive growth and stable economic a view to fostering suggest "with

maintaining conditions in the money market to encourage recovery and prevent unsustainable expansion." Mr. Irons said that in the Eleventh District there had not been any very significant changes in the last three weeks. Economic activity was moving along at about the same high level as he had reported previously. In July, department store sales were above June; sales for the month ran only a little below the record July of the previous year and August was showing further improvement, with sales about 3 per cent above the same period a year ago. The employment picture had not shown much change in terms of the number of employed or unemployed, but there had been an increase in hours worked in manufacturing and also an increase in wages paid. The construction picture was very good, and he believed that July was in which the series on value of a record month for the period construction contracts awarded has been maintained. The agricultural was good. There had been warm weather and not too much picture also rain, but it was still a favorable picture. Cotton output in Texas well over 4 million bales, which led him to was expected to be the changes that have taken place in yield, acreage, observe that example, comparing this year are rather amazing. For and production down roughly 14 per cent and pro with last year, acreage would be with a ten-year average roughly 10 per cent. Comparison duction up production. The cent and larger total acreage down 50 per showed

situation with respect to other agricultural crops also was favorable. Mr. Irons said that the banking picture in the district showed little change, with the demand for loans apparently fairly strong. As against a year ago, there had been a 30 per cent in crease in time deposits and an increase of about 9 per cent in demand deposits. Like Mr. Young, he felt that a good part of the time deposit money must represent funds waiting to be spent and that it did not just represent genuine savings in time accounts. Mr. Irons went on to say that the position of the banks in the district seemed to be adequately liquid. There had not been much borrowing at the Reserve Bank, although in the last two or three days a couple of the larger banks had come to the discount window. that they might be moving out of Federal funds and It appeared borrowing at the Reserve Bank. that the general picture in the district was After stating strength, much as it had been for the past several one of high level the oil industry and said that the months, Mr. Irons turned to allowables to 11 days in July. The indi authorities had increased set, probably would move that the allowables, when next cations were possibly they would continue to move up. up another day, and that the woods, for he industry was out of not sure that the oil He was key factor and situation was the felt that the import had always

that problem had not yet been solved. In any event, however, there was a movement toward higher allowables. With reference to policy, Mr. Irons said he felt that the System should continue to move away from the degree of ease that had prevailed. He would like to see free reserves eliminated, although without any shock treatment since one could not overlook at any time the uncertain situation in the Government securities market. It was a market that, in his opinion, should not be subjected to shock one way or the other. He had rather thought in terms of a steady reduction of ease to the point of getting out of free reserves and bringing the banks in to the discount window for needed reserves. This would contemplate holding additions to reserves down to those necessary to meet purely seasonal needs. Mr. Irons said that prior to the San Francisco action he had been thinking of a discount rate change as the next policy move, probably in September. At the Dallas Bank there is no regularly scheduled meeting of the Board of Directors in August, and it is of the Bank to change the discount rate at a not the practice executive committee, so there was no opportunity to meeting of the had been a directors' meeting the vote might act last week. If there that the directors would not have have been close, even assuming In view of the San Francisco what happened at San Francisco. known to move in the same direction he would personally be inclined action,

quite soon, which would, of course, necessitate a special meeting of the Board of Directors. While he did not know that the directors would do, he was inclined to think that it would be desirable under the circumstances for the directors to have a discussion quite promptly. The alternative would be to wait until the next regular directors' meeting in September and in view of his appraisal of the economic situation he would lean toward more prompt action. Continuing, Mr. Irons said that he did not have any figure respect to reserves but that, consistent with conditions in mind with market, he would like to get away from in the Government securities or a position of bringing member free reserves to a neutral position Federal Reserve Banks for borrowing. As to clause banks in to the he would like to suggest "to fostering (b) of the policy directive, conducive to balanced economic conditions in the money market view, it should now be the objective recovery and growth." In his by a balanced economic sustainable growth of the Committee to foster recovery. in the Twelfth District reported that conditions Mr. Mangels in the past, per He had mentioned continued improvement. indicated industry, but today the often, the plight of the lumber haps too them and there was problems behind to have their lumber people seemed construction and an increase in This resulted from a better feeling. a result of which as of distributors, in the inventories a reduction

orders were greatly in excess of production and prices had in creased recently at the rate of about $2 a week. The price of fir lumber was now $70 per thousand compared with $60 in April and a high of $80 some time back. There was some feeling that perhaps prices had gone up too much in too short a period of time, but possibly there would be another $5 increase before the end of September. The lumber producers were in a position to accept, if they wished, more orders than they could fill 90 days ahead, but they were refusing them. There were some rumors to the effect that the unions might call a strike unless their demands were met. Turning to other areas, Mr. Mangels said that July and early August figures indicated that recovery had proceeded further in the district, with agriculture and construction the two strongest factors in the economy. In the first five months of 1958 farmer income was up 11 per cent over last year and in three States it was up over 20 per cent. Only in Utah did farmer income show a decline. In general, agricultural conditions throughout the district were good except in the northwest which was beginning to feel the need of rain. Continuing his review of the Twelfth District, Mr. Mangels said that the weekly average of heavy construction awards in July higher than in July 1957; public awards were up was 146 per cent awards were up about 300 per cent. In the sharply and private July for VA appraisals were up residential field, requests in

75 per cent and the FHA figure was up 100 per cent from a year ago. The FHA figure would have been higher except for budget limitations which prevented the organization from staffing up to process the increased number of requests for appraisals. One potential problem on the West Coast is the large increase in the percentage of resi dential construction in the form of multiple housing units where a number of vacancies are beginning to be noticed. Mr. Mangels said that steel production for the month of July as a whole declined, but toward the end of that month and in early August improvement was shown. The demand for aluminum had increased substantially and Kaiser expected to expand its opera tions considerably. The copper industry also was improving, with mine having been reopened and another large producer one closed week from four to five days. Petroleum having increased the work 80 per cent of capacity, about 5 points operations were at 75 to Defense spending was increasing than the national average. less area was at the highest level plant employment in the and ordnance employment was stabilizing; it had ever been. Aircraft at which American Airlines and large jet orders from Boeing had received orders ahead. Over all, better than two years' had something up .6 per cent in June. increasing, having been employment was monthly increase to the average was equal figure, incidentally, This situation was The improved employment boom year 1955. in the

beginning to be reflected in the operations of the Reserve Bank, with turnover increasing and more difficulty being experienced in obtaining certain kinds of employees. In the financial field, Mr. Mangels said, total bank loans declined during the past three weeks although increases again were shown in real estate and agricultural loans. In this period demand deposits in the Twelfth District increased about $105 million, which was about equal to the increase of all reporting banks nationally, and the time deposit increase in the three weeks was about three times as great as in the similar 1957 period. An analysis of bank debit figures showed for July an increase of 3 per cent over a year ago; for the first seven months of 1958, bank debits showed a 1.4 per cent increase over 1957. The Reserve Bank's check volume in July was at an all-time high point, while the percentage of return items to the total was somewhat less than a year ago. Reports from indicated that they were continuing to go out aggressively some banks and instalment credit loans, but they did for real estate mortgages great increase in outstanding loans at year end, not expect any the present level. The banks more than 5 per cent above probably not in a relatively easy position, with sales of in the district were volume of purchases, and borrowings funds about double the Federal except for one sub continued to be nominal from the Reserve Bank by a San Francisco bank. stantial one-day borrowing

Mr. Mangels said that although free reserves had been at high levels in the recent period, he sensed that they were not indicative of the degree of tightness that had existed in the market. In other words, the market had been somewhat tighter than the free reserve figure would indicate. After referring to the reserve pro jections for the next three weeks, as distributed at the beginning of this meeting, he said it was his feeling that the System should proceed somewhat gradually in reducing free reserves, perhaps shooting at between $200-$400 million in the ensuing period. He would not want to make too big a jump too quickly. With reference to bank liquidity, he said an analysis by the San Francisco Bank indicated that the loan-to-deposit ratios of the larger banks in the district were lower now than they had been for 1-1/2 years or longer, but higher than in periods prior to 1956. Since August banks had increased their holdings of securities 1957 the reporting by $1.2 billion but holdings of bills had actually declined between that date and the present so the banks would not have any large funds available this year from the run-off of securities. supply of If there should be a sharp rise in credit demand, he anticipated that it would not be long before the availability of bank credit was greatly diminished, resulting in higher loan rates. With reference to clause (b) of the policy directive, Mr. wording along the lines of that contained in the Mangels suggested

San Francisco Bank's wire to the Board of Governors concerning the discount rate action, namely, "to contributing to the con tinuance of sound monetary conditions essential to a sustainable recovery." At this point Mr. Mangels commented on the circumstances surrounding the action taken by the San Francisco Board of Directors on August 13 in establishing a discount rate of 2 per cent. He said that when he went into the meeting he had no idea that such action would be taken. Following the usual presentation of the economic and financial picture by an officer economist of the Bank, there was a question and answer period, after which he (Mr. Mangels) summarized developments in the money and securities markets in the past couple of weeks. In doing so, he outlined reasons for and against consideration of a discount rate change in a manner not greatly different from the normal procedure. His own feeling at the time was that, although there might be some reasons for a change, just as well wait until September because there the action could August and most of September from would be clear sailing through of Treasury financing. However, the Chairman of the standpoint then called for discussion and it developed the Board of Directors present favored an increase every one of the seven directors that resolved itself The question, therefore, in the discount rate. what should the increase be, and second, into two parts. First,

when should it be effective? A motion was made and seconded that the discount rate be increased by 1/2 a percentage point and this generated some further discussion following which an amendment to the earlier motion was offered and it was unanimously agreed to establish a rate of 2 per cent, effective upon approval by the Board of Governors. Mr. Mangels said that in the discussion a number of factors favoring a change in the rate were presented by the directors. First, there was the contemplated Federal budget deficit, estimated to be as much as $13 billion. Second, the average of stock prices had moved up from 44 in February to 510 at the time of the meeting, and this had occurred during a period when earnings reports of corpora tions were very poor. This may be an indication of the beginning of a flight from the dollar and the purchase of equities as a hedge against inflation. Third, the price level had increased about 3 per cent in the past 12-month period, which led the directors to ask what would happen to the price level in a period of improved an easy money policy. Fourth, it was noted that conditions under than might be considered justified were labor demands for more pay on the West Coast. Fifth, while the again beginning to develop directors recognized that unemployment was in excess of 5 million, when the auto would become better that the situation they believed would be felt in that this improvement industry improved, mobile

related industries, and that there would be increased employment for the purpose of stepping up production to replenish reduced inventories. Most of all, the directors sensed a feeling on the part of consumers that inflation is here and would more likely increase rather than decline. They believed that if enough people fell into this state of mind it would have a major detrimental effect on the economy. The directors felt that the Federal Reserve System should indicate its willingness to combat inflationary forces; that it should let the public know that it was willing to do its part. In the directors' opinion, the System should "lean against the wind before the tornado blows." Mr. Mangels concluded his com ments by saying that reactions to the discount rate change from the bankers, and the public had been quite favorable. press, Mr. Deming said that the Ninth District as a whole was doing to be the mining areas. Prospec well, the only weak spot continuing was the brightest spot. The wheat crop tive record crop production was of very high quality, while barley and was almost a record and was very good. Livestock new records and corn soy beans would be at to last year's record, with relatively production would be close farm income should total district favorable prices. Altogether, effects would if it did the stimulating 198 high, and approach the further improve had been some There the district. be felt throughout and weekly earnings. employment, hours worked, ment in nonagricultural

Construction also continued to show strength, and in general it was an optimistic picture. Turning to the national scene, Mr. Deming said that Mr. Young's review, the staff economic review, and the Minneapolis Bank's own analysis all pointed to a sharper rebound from the recession than had been expected a short time ago. They pointed to at least incipient inflationary developments accompanied by continuation of a fairly high level of unemployment. For a period of time, however, increased efficiency and unemployment might act as some brake against making the incipient inflationary developments real. Mr. Deming commented that a recent tabulation of profits reports of 21 fairly large Twin Cities firms yielded some interesting results. Leaving aside the railroads and an air line and public utilities, reports of the twelve industrial firms included in the tabulation showed that eight had far better profits in the first half the like period of 1957 even though three of them had of 1958 than substantially lover sales. One company ran about even with 1957; profits which were far better than those two showed second quarter year's levels; and the quarter and approached last of the first that it had experienced a was a special case in remaining company that there had been a basic conclusion was severe strike. One and if the efficiency and productivity rapid increase in rather further improve the increase, this should level of sales should

profits situation. It certainly might act to inhibit price in creases to some degree over the shorter run. In other words, the cost-price push would tend not to operate so intensively. Mr. Deming said that he was not as convinced as some others appeared to be that the economy had gotten into an excessively liquid position. This comment was particularly true of the banks because of the increase in long-term security holdings and the rapid downward movement in the prices of those securities. One large bank had been borrowing at the discount window the past week and it was a bank that normally would be most reluctant to borrow. He felt, like Mr. Treiber, that the rapid upward movement of yields and the unsettled conditions in the market might tend to slow things down a little bit. While recovery had been swift and probably would continue, it might not continue at as fast a pace, and the pressure of price increases in the next few months might not be as strong. Therefore, the System might have a little more time to put on the brakes than would other wise be the case. Mr. Deming agreed that free reserves should move toward zero, but he did not think that the System would have to move them to zero in the next three weeks. Looking at the reserve projections which had been distributed at this meeting, he felt that it would be reasonable to let reserves stay about where pro without severe System action jected if this could be accomplished to the directive, he favored the in the next three weeks. As suggestion of Mr. Irons.

Turning to the discount rate, Mr. Deming said that a meeting of the Minneapolis Board of Directors was held last Thursday and that after careful consideration of the whole picture the directors came to the conclusion that a rate change probably would be desirable some time in the future. Primarily because of the state of the securities market, however, they concluded that a rate change would not be desirable as of the date of the meeting. There would not be another regularly scheduled directors' meeting for two weeks. With the San Francisco action, the argument about shock to the Government securities market had obviously disappeared and the directors might now feel that it was appropriate to take discount rate action. However, he would not expect the directors to act until a week from Thursday at the earliest. Mr. Allen said that in the Seventh District there was in creasing confidence that the business decline ended in the second the strength of the recovery in the district was quarter. However, as a whole. For example, the less evident than in the nation district's employment situation deteriorated more than in the nation highs of last year and had recovered less. As of June, since the employment was 4.l per cent below last year total nonagricultural nation and down 6.8 per cent for the five Seventh District for the August 3, new claims for unemploy States. In the five weeks ended States other than Iowa were ment compensation in all district

substantially greater than the average for the United States as a whole; the increase over 1957 was from 55 to 75 per cent compared with 37 per cent for the nation. Also, department store sales nationally had been surpassing the excellent record of last year in recent weeks, and in the four weeks ending August 10 a 2 per cent increase was reported. In the Seventh District, however, department store sales were 3 per cent below 1957 during this period. All of the large district centers participated in this decline. Similarly, construction contract awards nationally were very strong in May and June. For the United States as a whole, June saw an 18 per cent increase in awards which brought the six-month total approximately equal to last year. In the Midwest, however, contract awards in June only equaled last year, and for the first six months of the was off 12 per cent. Loan demand continued to be year the Midwest weak, partly because of continued heavy sales of capital issues, and net liquidation of business loans continued at a faster pace as a whole. For both the district the Midwest than in the country in in borrowing by metals manufacturers and the nation, the reduction the total decline. With a the largest portion of accounted for banks had acquired relatively loan reduction, Seventh District sharper in the nation. From than banks elsewhere more Government securities period of the August exchange August 6, including the mid-July through Seventh District anticipation certificates, 1-1/2 per cent tax and new

banks added $373 million, or almost 9 per cent, to their Government portfolios. This expansion, of course, occurred mostly in the first week in August when the Treasury issued $3.5 billion of tax anticipa tion certificates. In addition to these newly issued securities, Chicago banks had continued to add to their holdings of Treasury bills. Bill portfolios of Chicago reporting banks on August 6 were almost as high as just prior to the pre-tax assessment date peak late in March. New York banks added relatively much less to their bill holdings and banks outside these two cities had shown little change in their holdings of bills. Mr. Allen commented that the Detroit area was worthy of mention because of its importance and because it was so hard hit. Unemployment 285,000 in July, or 18.6 per cent, and would increase in there reached manufacturers still expected to August and September. The automobile of a 400,000 new car inventory, as attain their October 1 target 10. Of the 400,000, 300,000 would be 1958 against 635,000 on August of the labor negotiations now in their fifth models. The outcome of wide speculation. The Michigan was, of course, the subject month that the unions were attempting to newspapers left the impression where more liberal supplemental unemployment develop an atmosphere basis for settlement. might serve as a principal benefits his concern about infla Mr. Allen said, although Therefore, situation vis-a-vis the Seventh District persistent as ever tion was as

that of the nation made him less eager to move rapidly from a position of monetary ease than he would otherwise be. As for the discount rate, he believed that the Chicago Bank's Board of Directors would prefer to act coincidentally with, or after, several of the other Banks, again because of the district's relatively less favorable business situation. At the present time the matter of reserves seemed to him more important than the discount rate and in his judgment the situation country-wise warranted a further, but not drastic, reduction of the free reserve position. He would suggest a goal for the next three weeks of $100 $300 million of free reserves, with the exact level to be left to the discretion of the Desk. In this connection, he noted that the reserve projections distributed at this meeting would be in con formity with what he had suggested. As to the directive, Mr. Allen it might be possible to just leave out clause (b) completely. said that that clause (b) was needed, he would lean If it were felt, however, by Mr. Irons than to any of the other more to the language suggested suggestions. Tenth District there continued Leedy stated that in the Mr. from a more favorable level vigorous recovery starting to be signs of appeared that in agriculture the country. It now than the rest of in the district. The to be set this year new records were going was estimated to in the area, which is most important wheat crop,

be about twice as large as last year's crop. Also, the construction picture was particularly strong, with the figures indicating an in crease of 11 per cent for the first six months of this year as compared with the similar period in 1957. Nonfarm employment con tinued to show some improvement, although the level was still below last year. As to department store sales, figures for the last four weeks reflected an increase of 5 per cent above a year ago; for the year to date sales were 1 per cent above last year. Mr. Leedy said he had been greatly surprised at the progress that the Management of the System Open Market Account had been able to make in the elimination of redundant reserves. It seemed to him that a remarkable job had been done in this respect. The problem immediately ahead, he said, had been pointed out by Mr. Young, namely, the matter of the very large additions to the money supply. Personally, respond to seasonal needs but beyond that he would certainly he would to the money supply. He would not subscribe to any further additions be used to a considerable extent to expect the discount window to new level of interest rates needs. Even with a supply seasonal would be possible to make some progress emerging, he assumed that it of free reserves, but he would further reduction of the level toward System to create further difficulties want the operations of the not or attempt to, that System He would make sure, for the Treasury. Government securities problems in the would not present operations

market or, for that matter, in the capital markets generally. Rather, the System should be feeling its way along and, to the extent possible, bring about a reduction in the level of free reserves. In saying this, he had no particular figure in mind as a target for free reserves. As to the policy directive, Mr. Leedy said that the very simple statement for clause (b) suggested by Mr. Treiber was quite close to language that he had drafted himself. He would suggest "with a view to fostering sustainable economic recovery." This would recognize the fact that the country was still in a recovery stage and would permit the Committee later to make some change in clause (b) referring, perhaps, to economic growth. Mr. Leach said that Fifth District economic developments in recent weeks had been decidedly favorable. Furniture manufacturers reported improved shipments in July, sales of lumber mills had in creased and higher demand levels were expected, and construction contracts had shown a sharp pickup. Department store sales were near the record levels of last August, cotton textile prices had remained firm, and higher levels of activity had reduced unemployment. Crop conditions had improved further and farm income for 1958 would likely level of last year. Sentiment in the be much better than the low prospects was almost universally more Fifth District as to business of inflation widespread. So far, however, favorable, with predictions

predictions with respect to price increases seemed to be reflected primarily in increased interest in common stock and decreased in terest in fixed income obligations. There was little evidence that business and consumer buying had been materially affected. Beginning his comments with respect to policy, Mr. Leach said he was surprised at the timing of the discount rate increase at San Francisco. While he had been advocating for some time less ease with a lower level of free reserves, and while he had expected a discount rate change before long, he told his directors last Thursday that he thought an increase in the rate would be premature. At that time, he was feeling rather pleased about the rapidity with had recaptured redundant reserves and moved into a which the System reserves, with $300-$400 million million range of free $400-$500 forecast for the week ending tomorrow. The position of the Richmond he said, probably would not have been different if they directors, about the change in the rate at San Francisco. had known the weeks immediately ahead Mr. Leach said that Continuing, further actions to con good opportunity to take seemed to provide a would be out The Treasury presumably inflationary pressures. tain less need to worry about October and there was of the market until market of Government securities effects on the the possible adverse well aware that the market was reserves, for level of free a lower lessened the the current upturn The vigor of policy had shifted.

danger of monetary actions checking further recovery. In his opinion, the System should continue to move toward less ease as rapidly as market conditions might permit. Under present condi tions he hesitated to mention a benchmark for free reserves but he would expect them to move downward rather sharply. Obviously, the policy directive should be changed and there were a number of ways in which that could be done. He would like to recognize in the directive that complete recovery had not yet come about and, after giving thought to whether the directive should incorporate reference to inflationary pressures at this time, he had concluded to suggest "to accommodating further recovery and avoiding the pressures." Whether it was desirable development of inflationary pressures at this time or to wait until to mention inflationary He did not see the need to later reflected a matter of judgment. further recovery but only to refer to fostering or promoting accommodating it. by saying that as of the Mr. Leach concluded his remarks special meeting of the to initiate any moment he did not intend not intend to that he did which meant Bank's directors, Reserve with respect to the to the directors make any recommendation held a week from meeting to be until the regular discount rate next Thursday. three weeks of the next that in terms Vardaman said Mr. be zero reserves should goal for free him that the seemed to it

to $300 million, if in fact a target could be fixed. This would contemplate always leaving to the Desk the widest discretion to act on the basis of the feel of the market. In his opinion, the discount rate action of the San Francisco directors was most timely and had had a good effect. He felt that it was fortunate that the entire System did not move at one time. As it was, the San Francisco situation set people to thinking a little bit. Mr. Vardaman said he believed that the frame of mind of the buying public was ahead of the statistics. The accumulation of savings suggested to him that the buying public was rather in the race runner awaiting the starting gun; in fact, some posture of a had already started. Very possibly there would be an all-out run in the early fall and culminating for goods and services beginning business. As nearly as one in heavy Thanksgiving and Christmas that shock treatment was feel that way, he felt definitely could in preparation therefor the late fall, and to be advisable in going begin the necessary tightening the System would now he hoped that from anything like should be a retreat Certainly, there process. toward tightness. ease and a tendency it would be thought that Mr. Vardaman As to the directive, that the event, he hoped (b). In any to drop clause possible be clearly interpreted that it could would be such language used the money supply in the expansion of as a desire to regulate

proportion to bona fide movements in the economy. Mr. Shepardson said the reports clearly indicated that there was under way a very healthy recovery which could be approaching the explosive stage. With that in mind, he considered it important for the System to make decisions now in the light of the situation that it was apt to face. Like others at the table, he had been surprised and pleased at the rapid recovery of redundant reserves, for at the last meeting of the Committee there was a good deal of question as to how much could be done in the ensuing three weeks. It was fortunate, he said, that it had been possible to handle the matter so expeditiously. However, the Committee was still confronted by redundant reserves to the extent of the excess money supply reported He would hope that the Account Management might be by Mr. Young. bring down free reserves to a much lower level at a faster able to rate than some persons seemed to contemplate. In making this comment, he was not unmindful of the references made to tightness in the and this was a matter which must be considered care money market, however, the System had gotten into some difficulty fully. At times, to what was considered tight because of a little more sensitiveness justified, and the System had market than perhaps was ness in the in view of that seeming putting reserves into the market continued for the System to that it would be necessary tightness. He felt sensitive to not be too and that it should a little pressure exert

some feeling of tightness. If the System was not careful, it might find that the "horse had gotten the bit in his teeth" when it came to exerting pressure, so it would be better to put on a little pressure at this time. Admittedly, no one would want to exert such pressure as to throw the recovery movement into a tailspin, but it seemed necessary to use more pressure than had been exerted to date. Personally, he would favor moving free reserves downward faster than the projections distributed at this meeting would indicate. He would like to get to zero within a three-week period. Mr. Shepardson expressed the opinion that the discount rate action at San Francisco was fortunate and said he would hope that in the succeeding days there would be further actions in support of that position. Like Mr. Vardaman, he felt it was a good thing that the action was not "across the board," but he would hope that those boards of directors in the best position to justify similar action would move fairly soon. As to the directive, Mr. Shepardson said he had somewhat the as Mr. Leach. He rather liked Mr. Leach's suggestion about same views foster further recovery for it seemed the lack of need to promote or and need only be accommodated. He that recovery was well on the way the directive, with some reference of that kind in would favor language inflationary pressures. to possible

Mr. Fulton reported that the Fourth District was beginning to see a little more light than previously. As attested by statistics which he mentioned, steel production was creeping upward. He added, however, that the rates mentioned were still not nearly what production would be in a really vigorous recovery. The imponderable in the situation was the automotive industry which had not been ordering steel to the extent expected; possibly this could be attributed to anticipation of a work stoppage due to a strike in the industry. Nevertheless, there had been some ordering due to over-reduction of inventories. Turning to the mining and industries, ore he noted that only 66 per cent of the ore boats were in comission this year so that the tonnage pulled down would be substantially below last year. In the machine tool industry, there had been a little upturn but shipments were still exceeding orders, which meant in orders were being further drawn down. Bituminous coal tonnage that backlogs last year. As to the employ per cent from the same date was down 42 recently. In the not changed very much conditions had ment picture, unemployment and areas of major there were twelve Fourth District which represented no change 28 areas of substantial unemployment, month of June may have months. However, the the last couple of in been some There had to unemployment. in regard the low point been had in undoubtedly and productivity the work week of lengthening of the district. in the plants creased

Continuing, Mr. Fulton said that construction contracts had increased sharply in June and July and mortgage loans at banks were at an all-time high. To date this year, department store trade was still 4 per cent under last year, while sales of automobiles were about 30 per cent below last year. Over all, the Fourth District was participating rather slowly but definitely in the upturn in business. Hopes for the last quarter of the year were still good, with most industries looking forward to improvement both in sales and manufacturing levels. Mr. Fulton expressed the view that free reserves should be reduced to zero as soon as possible commensurate with the tone of the market and without upsetting the market. The Desk, he felt, should be commended for having reduced free reserves to the extent that it had, particularly in view of the large amount of securities that the System had been forced to purchase. Turning to the discount rate, he said he believed it would be the feeling of the Cleveland that no change should be made until there was a little directors in the district and evidence that more evidence of greater activity had been at low points were working up some of the industries that such a large amount of As long as there was to higher production. might feel that it would the district, the directors unemployment in fact, he considered it to be increased. In not be well for the rate September unless on the rate in would be done probable that nothing

there was a substantial improvement over existing conditions in the district, that is, a degree of improvement beyond that which now appeared to be in prospect. Mr. Fulton expressed agreement with others who had suggested that clause (b) of the policy directive might be eliminated. In such event, however, the words "without inducing inflation" should be added to clause (a) so that that clause would read "to relating the supply of funds in the market to the needs of commerce and business without inducing inflation." That would seem to be exactly what the System was trying to do. Mr. Bopp presented substantially the following statement: Improvement in business activity in the Third District is proceeding at a slow pace. There was a small contraseasonal rise in manufacturing employment in June, including both durables and nondurables industries. The total, however, was still 8 per cent below June of last year. Average hours worked and average weekly earnings were also somewhat higher in June. Preliminary data for ten of the district's 14 labor-market areas, however, indicate a seasonal decline in manufacturing employment in July. Employment was below June in seven of the areas, only three showing small increases. Construction activity in the Third District has not held up as well as nationally. Contract awards in June were 2 per cent above a year ago, much below the 18 per cent nationallya rise in public works. For the first and reflected entirely half of this year, district contract awards were 8 per cent as compared to only 1 per cent nationally. below last year the prospect of a large Treasury Incipient recovery, have inspired widespread belief deficit, and price increases another round of unabated inflation. that we are entering of inflation seems to be confirmed by General anticipation and bond markets. On the other recent behavior in the stock and the vigor and are over 5 million unemployed, hand, there seems to have emerged are as yet speed of the recovery which

unknown. These developments raise the question of how much emphasis we should give to the threat of inflation and how much to fostering recovery from the recession. Although the inflation psychology which has mushroomed in recent weeks is cause for concern, I do not believe in flation is our primary problem in the immediate future. First, recent price markups do not necessarily presage a resurgence of inflation. In 1954, for example, wholesale prices of a number of products, such as metals, industrial materials, building materials, and rubber, began rising before midyear but the index for all commodities other than farm and foods was fairly stable until mid-1955. Second, prices of services and foods--important factors pushing up the consumer price index since early 1956--were unchanged in June, indicating that the upward trend in these prices may be leveling off. Third, unemployment and unused plant capacity should be a strong deterrent for some time to rising prices. Fourth, an upward surge of credit, such as accompanied the 1954-1955 recovery, has not as yet emerged. Finally, inflation psychology is based largely on anticipations. Sentiment as to business prospects is volatile and could again change quickly should incipient recovery prove to be illusory or proceed more slowly than presently anticipated. On the other hand, too many unemployed and too much idle capacity are real, not anticipated, conditions. For the im mediate future, further recovery is a more pressing problem than the threat of inflation. Consequently, I believe our immediate objective should be to maintain credit and money-market conditions conducive to recovery. In doing so, however, we should be unusually careful not to create a degree of ease and liquidity that would aggravate the threat of inflation or contribute to inflationary tendencies. In the present state of the economy, I believe that the risk of contributing significantly to by a policy intended to encourage recovery is less inflation of impeding recovery through restrictive action than the risk to deal with anticipated inflation. are already too high, particularly as Long-term rates capital expenditures are one of the soft spots in the economy. on long-term Governments and AAA corporates are nearly Yields the beginning of recovery in the 1 per cent higher than at anything to put addi 1954. I would not do latter part of favor some lesser ease there, but I would tional pressure that can be achieved. in the short-term area--if

I do not favor raising the discount rate at the present. I think the national level of unemployment and of other un used resources is too high to add further at this time to the pressures that have already developed in the money and capital markets. Although monetary policy cannot deal effectively with structural and geographic imbalances, un employment is still fairly widespread in the Third District, as throughout the country. Of 13 major labor markets, only 3, with 12 per cent of our labor force, are classified as high as "C". Four are classified "F" as having substantial labor surplusses; in addition, 8 minor markets are classified as "F". I would revise the directive to reflect more accurately the changes that have occurred since it was adopted. It is important, I believe, that the wording of the directive indicate that the System has two objectives: (a) to foster recovery, and (b) without encouraging inflationary develop ments. A suggested wording for clause (b) of the directive maintaining conditions in the credit and money markets is "to will promote recovery without encouraging inflationary that I appreciate that this is easier to put into developments." a directive than to carry out in operations. for this meeting he had been Mr. Bryan said that in preparation few questions. The first question trying to answer in his own mind a Sixth District, and on the was proceeding in the was whether recovery must be in the affirmative. The basis of the statistics the answer was proceeding in the nation. was whether recovery second question Young's statement that himself with Mr. Here he wished to associate thesis that reserve with Mr. Young's and also was proceeding recovery ample to support the money supply are entirely supplies and the rate, he had on the discount possible action Regarding recovery. faring in comparison District had been how the Sixth asked himself and of year-to-year from the standpoint as a whole with the nation

month-to-month statistics. Mr. Bryan then cited a number of statistical comparisons on both bases from which, he said, it seemed clear that if a case could be made for a change in the discount rate on the basis of either national or district policy, then a case could be made for such a change in the Sixth District. With regard to general policy, Mr. Bryan said that he thought the System had performed well in the past three weeks. While he had strongly advocated the elimination of redundant reserves at the last meeting, he did not think at the time that this could be effected as expeditiously as the Desk had actually been able to do it. The effects of the increase in margin require ments and the increase in the discount rate at San Francisco were, to the good. Those actions publicly announced in his opinion, all regard to reducing free reserves and the System's concern. With the discount rate, it seemed to him that the only question increasing was one of timing. If it were felt desirable to reduce the supply of the discount rate, then the or to make changes in free reserves possible repercussions these the better so that whatever earlier have ample time to adjust had in the capital markets would changes to recommend at it was his inclination themselves. Accordingly, committee a Bank's executive of the Reserve next week's meeting present a That might discount rate. in the per cent increase 1/4 future it seemed for the immediate districts, but for other problem

to him that there was a very genuine difference as between districts and that possibly no harm at all would be done by having different discount rates in the various districts. Mr. Johns said that although many comments had been made this morning with which he found himself substantially in agreement, he thought that he would like to align himself more closely with the comments of Mr. Bopp than with any of the other statements. As else where, he said, the accumulating evidence of recovery was being observed in the Eighth District, and with those developments he was gratified for this was precisely what the System had been seeking. However, he was not yet convinced of the inevitability of inflation in the immediate future. As a matter of fact, he was inclined to characterize what some had called inflationary psychology as an inflationary psychosis. There had been a significant rise in interest rates and there was some opinion to the effect that this rise had occurred too rapidly and too sharply. Without attempting an opinion on those points, nevertheless it was his view to express premature--and therefore not advisable--to add that it would be to the magnitude and the speed of through Federal Reserve policy He was quite aware of the necessity for monetary this adjustment. aware of the fact that there flexible and he was also policy to be the System and from within, some criticism, both from outside had been policy at the end of of change of monetary concerning the slowness

the 1953-54 recession. His thought at this time would be to construe flexible monetary policy as not meaning premature change but as im plying a firm resolve to be just as resolute as the circumstances require when the evidence is clear that there is a need for change in policy. Mr. Johns said that he would favor a gradual tailing-off of the free reserve position. However, he said that he did not look with favor on a discount rate change at this time and that he so indicated to the St. Louis directors at their meeting last Thursday. Obviously, the discount rate would have to be considered again by the directors a week from next Thursday. His present inclination was toward requesting the Chairman of the Board of Directors to convene a special meeting of the directors at that time because at the St. Louis Bank the directors almost unanimously feel that a rate change should be considered by the full board of directors. However, he was not sure that he would recommend a change in the rate. On the at the directors' meeting last week and in basis of the discussion of the directors since the action on view of conversations with some he was not at all sure whether, of the San Francisco Bank, the part rate, the directors would go recommended a change in the even if he along with such a recommendation. said that he would Mr. Johns regard to the directive, With had been made a number of suggestions in it and that favor a change liked best the Of them, he be quite happy. with which he would

suggestion made by Mr. Irons. Mr. Balderston recalled that it was just a year ago when the System took an action that has been debated ever since, namely, action to increase the discount rate to 3-1/2 per cent. Therefore, it seemed to him appropriate to secure a view of the present picture in relation to the picture a year ago when the System was fighting inflation with all of the restraint that it could impose. It also seemed appropriate because the period ahead had been left clear for monetary policy by the Treasury. A year ago, Mr. Balderston pointed out, unemployment was at a level of three million, or about 4.6 per cent, while today it stood at 5.3 million, or 7.3 per cent. Thus, the unemployment situation was considerably worse now, and that fact ought not to be forgotten. Possibly the country might have to live for some time with more unemployment than would be found desirable. Continuing with his comparison, Mr. Balderston recalled that a year ago the com prime rate was 4-1/2 per cent and the System was raising mercial bank to 3-1/2 per cent to narrow the differential. At the discount rate Congressional discussion was reflecting the popular revulsion that time this August the Congress was going against Government spending, while behind of perhaps $12 billion. Spending home leaving a budget deficit in view of the recovery movement. was not only excessive but ill-timed must elapse and that convened, half a year the next Congress Before the System handled its in terms of how period might be fateful responsibilities.

Mr. Balderston said he would be the last one to urge on the Administration or the Congress the adoption of controls of a selective character. To him, they were inimical to everything the System held dear and should be used only in dire emergencies. However, the country appeared to need the educational value of a great debate concerning how to avoid unemployment without inflation or, more precisely, how to keep unemployment in check without infla tion. Unless that educational process was complete, he did not believe that Congress would come back to Washington in a frame of mind that would make for prudent policy decisions. However, if this education could be given, perhaps the new Congress would convene in a mood to bring Governmental spending in rein. Balderston said, this placed an abnormal In the meantime, Mr. more of a burden than it should burden upon monetary policy-probably it could not be expected to discharge be expected to bear and one that expect. Fortunately, the the country seemed to with the success that to leave a clear path for its affairs so as Treasury had arranged also, there would two months. Fortunately, policy for about monetary absence of off which, in the of credit a seasonal tightening be dollars of one-half billion absorb about action, would setting System with the working along forces were certain natural Thus, reserves. System.

Mr. Balderston said he subscribed to a good deal of what Mr. Vardaman had said. In the face of a fiscal policy which was almost frightening and in the face of a mass psychology that was even more frightening, the Federal Reserve System must take action that the country could understand in reliance upon the common sense of the general public. He said that he was pleased about the action taken by the San Francisco Bank, and he expressed the view that the posture of a split discount rate was not unbecoming at the moment. He would favor the wiping out of free reserves as fast as that could be done smoothly. In the face of a situation such as he had attempted to describe in his comments, the System should be starting on a policy of restraint and it could not do that with free reserves in the picture. Therefore, free reserves should be brought down to zero at the earliest possible moment. He did not care particularly how the directive was worded as long as the System took the actions that he considered right. Chairman Martin prefaced his comments by saying that it was a good thing to have differences of opinion expressed within the Com to illuminate the pboblems with which the mittee because they tend position, he said that he wanted is dealing. As to his own Committee Reserve Bank of with the thinking of the Federal to associate himself on the discount rate. From the standpoint of timing, San Francisco action until after for delaying the have been said something might but he Market Committee, of the Open at this meeting the discussion

was not certain that this was a very important matter. The System was dealing with what Mr. Johns had aptly described as an infla tionary psychosis as well as inflationary psychology, and the System could never hope to be popular in conducting monetary policy; whenever it was popular, the System probably was not doing its job properly. At the same time, one could not expect to do too much when budget decisions, debt management, and fiscal policy are all in the picture along with monetary and credit policy. The System, he said, did not create the recession that started a year ago. In his opinion the discount rate actually should have been raised much earlier in 1957 but, because the Treasury was in the market virtually every month, the System went along from month to month during a frustrating period of Treasury-Federal Reserve relationships until the discount rate in a technical decision at a finally it raised inflation was being reaped. In when some of the harvest of time there were now more than five million his judgment, the reason that extent that inflation dominated was to be found in the unemployed last few years. Monetary policy the economy in the course of the there were severe budget flip-flops, its part to restrain but did flip-flop in the defense budget. including a complete stand up and be the System had to said that The Chairman could not ignore an inflationary in these things. It counted Mr. Bryan had inflationary psychology. any more than psychosis

pointed the problem up very well in his comments at the last meeting of the Committee. At the present, there had been an increase in personal income, housing starts--financed in large part through FHA money-were increasing, and production had recouped one-third of its total decline in a period of three months. The System had to take note of those things, and the System had let the increase in the money supply run away from it. The commentators and the public, he noted, were prone to say that the System started a recession when it raised the discount rate to 3-1/2 per cent, and now they would say that the System was starting another recession when it raised the discount rate to 2 per cent. Chairman Martin said that, as Mr. Young had pointed out in the expansion in the money supply had been proceeding his comments, rate. Some of this expansion had repercussions at quite a strong at an unfortunate time and com in the Government securities market at that point. Now the System did pounded the Treasury's problem would have to go to the time because the Treasury not have too much and under present conditions new money in early October market for reserves for it could have to supply some System would probably the However, the present atmosphere the Treasury financing fail. not let the market, unfortu taken place in that had required the adjustments nate as they were. said, that in a way forgotten, Chairman Martin It must not be easier to for it is much easy money, bias toward is a distinct there

go down than up. When the System moves down everyone applauds, and then little notice is given to the further actions taken so that the System tends to get enamoured of moving in that direction. Then, when the System has to move in the other direction, it is not so easy and the System runs into more resistance. The Chairman expressed the view that the Secretary of the Treasury and Under Secretary Baird were acting in exemplary fashion. They were not happy about some of the things that had occurred, they were just as concerned as the System about the major current problems, and they wanted to do whatever possible to assist. At the same time, when the System was talking about further reductions in reserve re quirements, there was no resistance from the Treasury. Continuing, Chairman Martin said that at present there was a maelstrom of maladjustments. This situation was reflected in Congress, and it might be that the System was going to have a very hard time in In saying this, he was not talking the next session of the Congress. alone. Mr. Balderston, he said, had referred about monetary problems It might be stated in other ways, to the need for a great debate. in the area of political put it, the principal problem but, however one bank in relation to the Treasury. was the role of the central science System was in the Federal Reserve world-wide and This problem was try to exert what leadership of it, so the System must the center of mopping up the to move in the direction it could. It ought

excess reserves that were not being used before the time came when there would be virtually no opportunity for the System to do anything. At present, there was some opportunity to move toward lower levels of free reserves. He again wished to express the opinion that the San Francisco Bank's action was justified and that the Board of Governors had been justified in approving the higher discount rate. It was his hope that other Reserve Banks would move ahead on the rate. It would be his view that those who did not move were wrong, although he could understand that conditions in each district must be considered. In talking about recovery, Chairman Martin said, it is necessary to put the matter in longer-range perspective. If inflation should be again, it might be that the number of unemployed would gin to develop reduced to four million, or some figure in that range, be temporarily of unemployment for a long time to but there would be a larger amount really get a head of steam up, unemploy come. If inflation should million and that would rise to ten million or fifteen ment might that had been placed on the destroy all of the emphasis completely that in a recent resolution enterprise. He noted role of private should order the had stated that the Congress Senator Proxmire means of controlling inflation," Reserve to study "other Federal today. His own judgment, a prevalent attitude and that suggested usefulness of as to the said, might be incorrect the Chairman average person today monetary and credit policy. To the monetary

policy had again become discredited. Chairman Martin said that he had recently been watching public reactions closely and that the general reaction of the average man was along the lines of: "You did the best you could in 1955 and 1956 but prices continued to go up. Therefore, why not just have easy money and avoid frustrations"? That was the major public relations problem confronting the System, and the System was not going to win any friends by failing to face up to what it could do. A great many people, including some foreign central bankers, had begun to worry about the epansion of the money supply in which the System was engaged, particularly when this was placed in the perspective of a budget deficit which might of $12 billion and no real tempering of expenditures. be in excess contrived to produce a potentially dangerous These circumstances situation. He was not sure that there was not an element of truth said in effect: "You have acted with courage, in one article which last chance." It might be is the Federal Reserve System's but this public and that the be explained to the problem could not that the subordinate to the Treasury. bank eventually would become central way jeopardize its position should not in any However, the System that were involved. to assume the risks failing to have courage by a decline in should be for if there certainly a risk, There was be blamed for it. the System would business this fall

Chairman Martin went on to say that he understood fully the apprehension that Mr. Bopp had expressed very well with respect to unemployment, idle capacity, and the capital markets. All of those factors should be of major concern to the Committee but they should not prevent the Committee from trying to mop up idle money or from trying to the best of its ability to highlight the nature of the outlook. Incidentally, he noted, there were some people who took heart when the San Francisco action was announced. Chairman Martin said he did not think that the System had faced in recent years anything like the present problem, whether it be called an inflationary psychosis or inflationary psychology. He did not know how to deal with the specifics of the problem except by moving in the right direction within the System. When the Treasury was forced to go to the market in October, the System was not going have to take into ac dramatically for it would to be able to move requirements and the Treasury probably would count the Treasury's Also, there was the wage-cost have a very difficult situation. bank's problem. all the central was not at push which the Chairman said the discussion at this meeting, Summarizing majority to move on the part of the indicate a desire it appeared to fair to say, and, it seemed lower free reserves direction of in the This market. securities the Government disrupting without seriously which the Account it was a problem to do, and not be easy would

Management must face. However, the reserve projections were moving materially in that direction, so without too much pressure the Management might be more or less able to meet the wishes of the majority by moving along with the projections. The Management should not be tied to any specific figure of free reserves because the Com mittee had found out how vulnerable it was when it set up a specific target. The fears often expressed by Mr. Irons in that respect had been vindicated. Turning to the directive, Chairman Martin said that almost any of the suggestions that had been made would be acceptable as far as he was concerned. Mr. Young, he said, had suggested "to tempering the rate of expansion of the money supply." This wording would have directed specifically to what the Committee the advantage of being was doing. Chairman Martin of Mr. Young's suggestion, During a discussion that language "and possible to add to that it would be pointed out phrase that or any similar economic recovery" fostering sustainable was Young's suggestion merit in Mr. favor. The Committee might the problem. System's immediate meet the that it would of the Committee was the view whether it Irons inquired Mr. to expand. money supply wanted the weeks it next three over the that that the he commented were heard, indications negative When several expansion further to suggest would seem by Mr. Young proposed wording

of the money supply. In response, Chairman Martin suggested that the proposed wording was designed to leave the Account Management some latitude in its operations. Mr. Balderston said that the concept he would like to see embodied in any directive for the next three-week period would be something like "to adjusting the money supply to the constructive needs of the economy." At a time like the present he felt that this was especially important. Mr. Shepardson noted that it had been suggested by some of those around the table that it might be possible to eliminate clause (b) of the directive and to add to clause (a) a few words such as "without inducing inflation." In further discussion of alternate possibilities, Mr. Treiber commented that he was not sure how a directive such as "tempering the would work out in practice. of the money supply" rate of expansion of outlining the climate more in terms thought of the directive He had the Account Management was to operate. in which repeated his Mr. Irons then of the Committee, At the request in the fostering conditions was "to (b) which for clause suggestion and growth." recovery economic to balanced conducive money market was inclined he upon consideration that he indicated Subsequently, "and growth." the words to delete be preferable it would feel that to

With reference to the comments that had been made about wanting to avoid any disruption of market conditions, Mr. Shepardson said he considered it important that this not be interpreted to mean that no pressure would be exerted, for he felt that the System must exert some pressure to obtain the desired results. On this point, Mr. Balderston remarked that he would be unhappy if the System did not get rid of free reserves by the time of the next Open Market meeting. Martin pointed out that the Committee did not appear Chairman it was unanimous with regard to be unanimous in that view. However, Committee wanted to be moving It was clear that the to the trend. reserves by the time of of the elimination of free in the direction the next meeting. level of free reserves conceivably a zero Mr. Larkin said that and, if so, that three-week period in the next might be achievable that was the He inquired whether become the target. presumably would sense of the Committee. anyone would he did not think replied that Chairman Martin if it of free reserves a zero level reaching toward quarrel with was achievable. was the objective did not think that he Irons remarked Mr. any not like pinpointing zero. He did get back to to necessarily in his because $500 million, zero or it was whether fixed figure,

opinion the System only got into difficulty by trying to specify any particular figure, no matter what it was. Mr. Larkin then stated that he thought he understood the sense of the meeting. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Re serve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (including 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 fostering conditions in the money market conducive to balanced economic recovery, and (c) to the practical administration of the Account; provided that the aggre gate 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 indebted ness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; direct from the Treasury for the (2) To purchase 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 as may be necessary from time to time for indebtedness accommodation of the Treasury; provided the temporary total amount of such certificates held at that the time by the Federal Reserve Banks shall not any one exceed in the aggregate $500 million.

that the next regular meeting of the Committee It was agreed 9, 1958, at 10:00 a.m. be held on Tuesday, September would the meeting adjourned. Thereupon Secretary

Source

Also: Record of Policy Actions