December 2, 1958 FOMC Minutes

FOMC minutes

to develop and promote it because of its importance to United States foreign trade activities. The question whether System participation promoted that market or not was a somewhat different one and he was not sure of the answer. Mr. Rouse said it had been his observation that System participa tion was a helpful factor in the development of the market, and Chairman Martin stated that this would be his guess also. In this connection, Mr. Hayes referred to certain portions of the memorandum (pages 7 and 8) bearing on that question. He said he found it difficult to accept the argument that one must choose between the two objectives Mr. Allen had mentioned, for he considered it possible to marry them effectively by operating on a little larger scale than heretofore. The acceptance very materially in the last four years, which suggested market had grown appropriate in 1955 had little merit at the that a dollar limitation Mills that there should be some present time. He agreed with Mr. that should be put in his only question was whether limitation and might want to come were, the New York Bank of dollars. If it terms grow further. If the acceptance market to the Committee should back total market, there a percentage of the were in terms of the limitation However, he did if the market changed. need to come back would be less of great importance. point as regard this not in the use of that the growth he was convinced Mr. Allen said from trends in money last few years resulted credits in the acceptance and the prime rate low, that when money was easy rates. He recalled

the management of the larger commercial banks favored other forms of credit as against acceptance credits. When money was tight, however, there was pressure to make more use of acceptance credits. In sub stance, he felt that the use of acceptances was influenced in an important way by the policies of the larger banks, as formulated in the light of money rates. Mr. Hayes cited the growth in the total volume of acceptances since 1950 and observed that the dollar volume based on foreign trans actions had gone up considerably and still represented the largest part of the acceptance market. Mr. Thomas stated that Mr. Allen's comments tended to support the view that acceptances were an important and part of the money system, adding that it was a desirable thing flexible the type of interplay that Mr. Allen brought out. Mr. Allen if they had commented that his remarks had so indicated. the feasibility of the Chairman Martin said that he questioned mentioned by Mr. Hayes, for it was his feeling that marriage operation dropped if there was an attempt to juggle one ball or the other would be operations were of a residual He also noted that acceptance both of them. inquired whether the of the System. He then nature from the standpoint by which the limitation through a compromise might be resolved problem $50 million to $75 million, with would be increased from the present to the Com would come back New York Bank that the the understanding mittee if necessary.

12/2/58 -5h There followed a discussion during which Mr. Robertson raised questions with respect to the soundness of those portions of the memorandum previously cited by Mr. Hayes, with regard to the need for and results of Federal Reserve participation in the acceptance market. Mr. Hayes commented that a commercial bank, knowing the Federal Reserve was in the market, tended to feel that the market had an element of strength which would not be present if reliance were placed entirely on a small dealer operation. Mr. Robertson expressed doubt whether Federal Reserve participation beyond a figure such as $10 or $25 million was necessary to accomplish such a purpose. He also referred to daily unfilled demands for acceptances. At this point Chairman Martin again suggested the solution to which he had referred earlier, namely, an increase to $75 million in the limitation on the amount of acceptances that might be held by the Federal Reserve Bank of New York at any one time. Mr. Shepardson commented, with reference to Mr. Hayes' state that if the limitation were raised to ment about the need for leeway, that there would not be an immediate $75 million it should be understood to take care of if it were to provide latitude increase to the ceiling fluctuations. that the $50 million Mr. Rouse mentioned In this connection, that it was not until for some time and had been in effect limitation the matter was occurred that acceptance volume increase in a rapid

brought back to the Committee. Mr. Hayes commented that it had been the general policy to leave some leeway within the outstanding limita tion. A vote was then called for on the proposal to increase the limitation on bankers' acceptances that the New York Bank may purchase and hold at any one time from $50 million to $75 million, with the understanding that the matter would be brought back to the Committee if the Manager of the Account so desired should the limitation be approached. Upon motion duly made and seconded, this proposal was approved. On this action, Messrs. Martin, Hayes, Fulton, Irons, Leach, angels, Mills, and Szymczak voted to approve, while Mr. Robertson voted "no". Mr. Shepardson did not vote. Mr. Allen indicated that, if he were a member of the Committee , for the reasons he had indica ted he would have voted against the increase during the discussion. In this connection, Mr. Robertson stated that he was thoroughl y market and that his vote of promoting the bankers' acceptance in favor should not be construed otherwise. of the Federal Open Market that the next meeting It was agreed on December 16, 1958, at 10:00 a.m. Committee would be held The meeting then adjourned. Secretary