March 3, 1959 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, March 3, 1959, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Allen Mr. Balderston Mr. Deming Mr. Erickson Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Bryan, Alternate for Mr. Johns Messrs. Bopp, Fulton, and Leedy, Alternate Mem bers of the Federal Open Market Committee Messrs. Leach, Irons, and Mangels, Presidents of the Federal Reserve Banks of Richmond, Dallas, and San Francisco, respectively Mr. Riefler, Secretary Mr. Thurston, Assistant Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Solomon, Assistant General Counsel Mr. Thomas, Economist Messrs. Jones, Marget, Parsons, Roosa, and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Assistant to the Board of Mr. Molony, Special Governors Chief, Government Finance Section, Mr. Keir, Division of Research and Statistics, Board of Governors Ellis, Storrs, Baughman, Tow, and Messrs. Vice Presidents of the Federal Walker, Banks of Boston, Richmond, Chicago, Reserve Kansas City, and Dallas, respectively
Messrs. Balles and Einzig, Assistant Vice Presidents of the Federal Reserve Banks of Cleveland and San Francisco, respectively Mr. Stone, Manager, Securities Department, Federal Reserve Bank of New York Mr. Anderson, Economic Adviser, Federal Reserve Bank of Philadelphia Mr. Brandt, Economist, Federal Reserve Bank of Atlanta In the agenda for this meeting, the Secretary reported that ad vices of the election by the Federal Reserve Banks for a period of one year commencing March 1, 1959, of members and alternate members of the Federal Open Market Committee had been received and that it appeared that they would be legally qualified to serve after they had executed their oaths of office. Prior to the meeting, each newly elected member and alternate member except Mr. Johns had executed the required oath of office. The members and alternate members were as follows J. A. Erickson, President of the Federal Reserve Bank of Boston, with Karl R. Bopp, President of the Federal Reserve Bank of Philadelphia, as alternate member; Alfred Hayes, President of the Federal Reserve Bank of New York, with William F. Treiber, First Vice President of the Federal Reserve Bank of New York, as alternate member; Carl E. Allen, President of the Federal Reserve Bank of Chicago, with Wilbur D. Fulton, President of the Federal Reserve Bank of Cleveland, as alternate member; Johns, President of the Federal Reserve Bank of Delos C. with Malcolm Bryan, President of the Federal St. Louis, Reserve Bank of Atlanta, as alternate member; Johns executed the oath of office on March 5, 1959. 1/ Mr.
Frederick L. Deming, President of the Federal Reserve Bank of Minneapolis, with H. G. Leedy, President of the Federal Reserve Bank of Kansas City, as alternate member. Upon motion duly made and seconded, and by unanimous vote, the following officers of the Federal Open Market Com mittee were elected to serve until the election of their successors at the first meeting of the Committee after February 29, 1960, with the understanding that in the event of the discontinuance of their official connection with the Board of Governors or with a Federal Reserve Bank, as the case might be, they would cease to have any official connection with the Federal Open Market Committee: Chairman Wm. McC. Martin, Jr. Vice Chairman Alfred Hayes Riefler Secretary Winfield W. Assistant Secretary Elliott Thurston Assistant Secretary Merritt Sherman Assistant Secretary Kenneth A. Kenyon General Counsel Howard H. Hackley Assistant General Counsel Frederic Solomon Economist Woodlief Thomas Associate Economists Arthur W. Marget, Homer Jones, Mitchell, Franklin George W. Robert V. Roosa, L. Parsons, and Ralph Parker B. Willis, A. Young duly made and seconded, Upon motion the Federal Reserve by unanimous vote, and was selected to execute Bank of New York System Open Market for the transactions of the first until the adjournment Account February 29, the Committee after meeting of made and seconded, Upon motion duly selection by vote, the and by unanimous the Federal Re of Directors of the Board Mr. Rouse as of New York of serve Bank Market Account the System Open Manager of was approved.
The minutes of the meeting of the Federal Open Market Com mittee on February 10, 1959 were then presented for approval. Chairman Martin called attention to the fact that there had been a change in the voting membership of the Committee since that meeting, four of the present members having served as alternate members during the past year. Some years ago, he noted, it had been the practice to have a meeting of the outgoing Committee in late February of each year in order to ratify actions taken up to that time. However, Counsel had advised that such ratification (including the approval of minutes for a meeting of the outgoing Committee) could be done by the new Committee equally as well as by the old one, and since 1952 this practice had been followed. The Chairman said that, while there was no question as to the appropriateness or legality of the present mentioning the point at this time in order that all procedure, he was of the Committee and the Reserve Bank Presidents not currently members serving as members would have in mind the basis for the procedure now being followed. Thereupon, upon motion duly made and seconded, and by unanimous vote, the of the meeting of the Federal minutes Open Market Committee held on February 10, were approved. 1959, distributed under referred to a memorandum Chairman Martin authorized at to the procedure 25, 1959, relating date of February to members and 1955 whereby, in addition meeting on March 2, the
officers of the Committee and Reserve Bank Presidents not currently members of the Committee, minutes and other records could be made available to any other employee of the Board of Governors or of a Federal Reserve Bank with the approval of a member of the Committee or other Reserve Bank President, with notice to the Secretary. At the Chairman's suggestion, it was understood that this subject would be considered later during this meeting, along with the question of distribution of the weekly open market report pre pared by the Federal Reserve Bank of New York and the reports pre pared by the Manager of the System Open Market Account prior to each meeting of the Federal Open Market Committee. At Chairman Martin's suggestion, consideration was then given to the continuing authorizations or statements of operating policies reviewed at the first meeting in March of the Committee customarily and the actions as set forth subsequently in these of each year, the matters that had been listed in minutes were taken concerning the agenda for review at this meeting. It was agreed unanimously that no action should be taken at this time to amend or terminate the resolution 20, 1936, authorizing each of November to purchase and sell, at Reserve Bank abroad, cable transfers, bills home and of exchange, and bankers' acceptances in foreign currencies to the payable that such purchases and sales extent may be deemed to be necessary or in connection with the estab advisable operation, increase, lishment, maintenance, discontinuance of accounts reduction, or Reserve Banks in foreign of Federal countries.
It was agreed unanimously that no action should be taken at this time to amend or terminate the procedure for allocation of securities in the System Open Market Account, as adopted pursuant to the action of the Committee on June 11, 1953, it being understood that the re allocation to be made as of April 1, 1959, would be based on the ratios of each Reserve Bank's daily average of total assets to the total for all Reserve Banks for the period March 1, 1958-February 28, 1959. Unanimous approval was given to con tinuation of the authorization to the Manager of the System Account to engage in trans actions on a cash as well as a regular delivery basis. The Committee approved by unanimous vote a renewal of the existing authorization to the Federal Reserve Bank of New York to enter into repurchase agreements with nonbank dealers in United States Government securities, subject to the following conditions: 1. Such agreements (a) In no event shall be at a rate below whichever is the lower of (1) the discount rate of the Federal Reserve Bank on eligible commercial paper, or (2) the average issuing rate on the most recent issue of three-month Treasury bills; (b) Shall be for periods of not to exceed 15 calendar days; Government securities maturing within (c) Shall cover only 15 months; and a means of providing the money market (d) Shall be used as with sufficient Federal Reserve funds to avoid undue strain on a day-to-day basis. of such transactions shall be included in the weekly 2. Reports which is sent to the members report of open market operations of the Federal Open Market Committee. covered by any such agree 3. In the event Government securities ment are not repurchased by the dealer pursuant to the agree ment or a renewal thereof, the securities thus acquired by York shall be sold in the Reserve Bank of New the Federal or transferred to the System Open Market Account. market
The Committee approved by unanimous vote a renewal of the authorization to the Federal Reserve Bank of New York (last re newed March 4, 1958, and amended December 2, 1958) to purchase bankers' acceptances and to enter into repurchase agreements therefor. The authorization was as follows: The Federal Open Market Committee hereby authorizes the Federal Reserve Bank of New York for its own account to buy from and sell to acceptance dealers and foreign accounts maintained at the Federal Reserve Bank of New York, at market rates of discount, prime bankers' acceptances of the kinds designated in the regulations of the Federal Open Market Com mittee, at such times and in such amounts as may be advisable and consistent with the general credit policies and instructions of the Federal Open Market Committee, provided that the aggre gate amount of such bankers' acceptances held at any one time by the Federal Reserve Bank of New York shall not exceed $75 million and provided further, that such holdings shall not be more than 10 per cent of the total of bankers' acceptances outstanding as shown in the most recent acceptance survey conducted by the Federal Reserve Bank of New York. The Federal Open Market Committee further authorizes the Federal Reserve Bank of New York to enter into repurchase agree dealers in bankers' acceptances covering ments with nonbank acceptances of the kinds designated in the prime bankers' Open Market Committee, subject to regulations of the Federal on which the Federal Reserve Bank of New the same conditions be authorized from time to time York is now or may hereafter Committee to enter into repurchase by the Federal Open Market United States Government securities, agreements covering acceptances at the maturities of such barkers' except that the agreements shall not of entering into such repurchase time the event of the failure and except that in exceed six months, shall continue such acceptances of the seller to repurchase, or shall be sold in the Federal Reserve Bank to be held by the shall be at the same Such repurchase agreements open market. entering into such at the time of rate as that applicable, United States agreements covering agreements, to repurchase Government securities.
The Committee approved by unamimous vote the continuation without change of the existing authorization for fixing the rate charged on special short-term certif icates of indebtedness purchased direct from the Treasury pursuant to paragraph (2) of the Committee's directive, whereby such rate would be 1/4 of 1 per cent below the discount rate of the Federal Reserve Bank of New York at the time of such purchase. The Committee reaffirmed by unanimous vote the authorization for the Chairman to appoint a Federal Reserve Bank as agent to operate the System Account temporarily in case the Federal Reserve Bank of New York was unable to function, such authorization having first been given on March 1, 1951, and having been renewed in March of each year since. The following resolution to provide for the continued operation of the Federal Open Market Committee during an emergency was then reaffirmed by unanimous vote: In the event of war or defense emergency if the Secretary or Assistant Secretary of the Federal Open Market Committee (or in the event of the unavailability of both of them, the Secretary or Acting Secretary of the Board of Governors of the Federal Reserve System) certifies that as a result of the emergency the available number of regular members and regular Federal Open Market Committee is less than alternates of the seven, all powers and functions of the said Committee shall be performed and exercised by, and authority to exercise such powers and functions is hereby delegated to, an Interim Com mittee, subject to the following terms and conditions. Such Interim Committee shall consist of seven members, each regular member and regular alternate of the comprising Market Committee then available, together with Federal Open number, sufficient to make a total of seven, an additional be made up in the following order of priority which shall at large (as defined available: (1) each alternate from those Federal Reserve Bank not then (2) each President of a below);
either a regular member or an alternate; (3) each First Vice President of a Federal Reserve Bank; provided that (a) within each of the groups referred to in clauses (1), (2), and (3) priority of selection shall be in numerical order according to the numbers of the Federal Reserve Districts, (b) the President and the First Vice President of the same Federal Reserve Bank shall not serve at the same time as members of the Interim Committee, and (c) whenever a regular member or regular alternate of the Federal Open Market Committee or a person having a higher priority as indicated in clauses (1), (2), and (3) becomes available he shall become a member of the Interim Committee in the place of the person then on the Interim Committee having the lowest priority. The Interim Committee is hereby authorized to take action by majority vote of those present whenever one or more members thereof are present, provided that an affirmative vote for the action taken is cast by at least one regular member, regular alternate, or President of a Federal Reserve Bank. The delegation of authority and other procedures set forth above shall be effective only during such period or periods as there are available less than a total of seven regular members and regular alternates of the Federal Open Market Committee. As used herein the term "regular member" refers to a mem ber of the Federal Open Market Committee duly appointed or elected in accordance with existing law; the term "regular alternate" refers to an alternate of the Committee duly elected in accordance with existing law and serving in the absence of the regular member for whom he was elected; and the term "alternate at large" refers to any other duly elected alternate of the Committee at a time when the member in whose absence he was elected to serve is available. Unanimous approval was also given to a renewal of the resolution set forth below authorizing certain actions by the Federal Reserve Banks during an emergency: hereby authorizes each Open Market Committee The Federal all of the actions set forth Bank to take any or Federal Reserve when such Federal Reserve during war or defense emergency below efforts to be in com itself unable after reasonable Bank finds Committee (or with the the Federal Open Market munication with Federal Open Market in lieu of the Committee acting Interim Committee (or such Federal Open Market or when the Committee) is unable to function. Interim Committee)
(1) Whenever it deems it necessary in the light of economic conditions and the general credit situation then prevailing (after taking into account the possibility of providing necessary credit through advances secured by direct obligations of the United States under the last paragraph of section 13 of the Federal Reserve Act), such Federal Reserve Bank may purchase and sell obligations of the United States for its own account, either outright or under repurchase agreement, from and to banks, dealers, or other holders of such obligations. (2) In case any prospective seller of obligations of the United States to a Federal Reserve Bank is unable to tender the actual securities representing such obligations because of conditions resulting from the emergency, such Federal Reserve Bank may, in its discretion and subject to such safeguards as it deems necessary, accept from such seller, in lieu of the actual securities, a "due bill" executed by the seller in form acceptable to such Federal Reserve Bank stating in substantial effect that the seller is the owner of the obligations which are the subject of the purchase, that ownership of such obligations is thereby transferred to the Federal Reserve Bank, and that the obligations themselves will be delivered to the Federal Reserve Bank as soon as possible. Reserve Bank may in its discretion (3) Such Federal purchase special certificates of indebtedness directly from amounts as may be needed to cover the United States in such the general account of the Treasurer of the overdrafts in of such Bank or for the temporary United States on the books Treasury, but such Bank shall take all accommodation of the at the time to insure as far as possible steps practicable acquired directly from the that the amount of obligations together with the amount of United States and held by it, and held by all other Federal such obligations so acquired not exceed $5 billion at any one time. Reserve Banks, does set forth shall be take the actions above Authority to Federal Reserve Bank is such time as the effective only until with the Federal Open able again to establish communications and such Com (or the Interim Committee), Market Committee mittee is then functioning.
By unanimous vote, the Committee reaffirmed the authorization given at the meeting on December 16, 1958, pro viding that System personnel assigned to the Office of Civil and Defense Mobilization Classified Location (High Point) on a rotating basis have access to the resolutions (1) providing for continued operation of the Committee during an emergency and (2) authorizing certain actions by the Federal Reserve Banks during an emergency. Chairman Martin noted that there was being presented to the Committee for review the resolution adopted on June 21, 1939, request ing the Board of Governors to cause its examining force in the future to furnish the Secretary of the Federal Open Market Committee a report of each examination of the System Open Market Account. He commented that the procedure then established had been followed up to the present time, that there had been no suggestion for a change, and that it would seem appropriate to continue the procedure without change. There was unanimous agreement that no action be taken to change the existing procedure. Chairman Martin then presented for the approval of the Committee operating policy that had last been reaffirmed the following continuing at the meeting on March 4, 1958: a. It is not now the policy of the Committee to support in the Government securities pattern of prices and yields any the Government securities market market, and intervention in of monetary and credit to effectuate the objectives is solely policy (including correction of disorderly markets).
Upon motion duly made and seconded, and by unanimous vote, the foregoing statement of policy was reaffirmed. There was also presented for the consideration of the Com mittee the following continuing operating policy that had last been reaffirmed at the meeting on March 4, 1958: b. Operations for the System Account in the open market, other than repurchase agreements, shall be confined to short-term securities (except in the cor rection of disorderly markets), and during a period of Treasury financing there shall be no purchases of (1) maturing issues for which an exchange is being offered, (2) when-issued securities, or (3) outstanding issues of comparable maturities to those being offered for exchange; these policies to be followed until such time as they may be superseded or modified by further action of the Federal Open Market Committee. Mr. Hayes recalled that at the meeting on March 4, 1958, he had stated that while he would not vote to approve the statement in its present form, he would vote to approve a similar statement if it included the qualifying phrase "as a general rule" after the word "shall" in the second line and after the word "shall" in the fifth line. However, the other members of the Committee were not disposed at that time to make those changes. going into the merits of the Mr. Hayes said that, without continued to have the same reservations as a year ago. matter, he not changed his view that problem, but he had There was no acute be more flexibility in the statement. there should
Thereupon, upon motion duly made and seconded, the foregoing statement of policy was reaffirmed, Mr. Hayes voting "no" for the reason he had indicated. There was next presented for consideration the following continuing operating policy: c. Transactions for the System Account in the open market shall be entered into solely for the purpose of providing or absorbing reserves (except in the correction of disorderly markets), and shall not include offsetting purchases and sales of securities for the purpose of altering the maturity pattern of the System's portfolio; such policy to be followed until such time as it may be superseded or modified by further action of the Federal Open Market Committee. Mr. Hayes noted that at the meeting on March 4, 1958, he had also expressed a reservation concerning this statement of policy. He had then taken the position that he would vote to approve the state to substitute the word "primarily" for the ment if it were amended if the qualifying phrase "as a "solely" in the second line and word after the word "shall" in the fourth line. general rule" were inserted wording as suggested have been agreeable to alternative He would also the lines he had then Some change along Mr. Bopp at that meeting. by he still dissented from satisfactory to him, but suggested would be vote for the statement in and would prefer not to the present wording its existing form. wished to record whether any others Martin inquired Chairman statement or either this policy wording of from the existing dissent
the preceding one, and there was no indication of such a desire. Thereupon, upon motion duly made and seconded, the foregoing statement of policy was reaffirmed, Mr. Hayes voting "no". 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 February 10 through February 25, 1959, and a supplementary report covering the period February 26 through March 2, 1959. Copies of both reports have been placed in the files of the Federal Open Market Committee. Mr. Rouse stated that the money market had been generally firm over the past three weeks. Tendencies toward ease developed on a few days despite the generally tighter statistical reserve position, but these were met by sales of bills. Nearly $300 million bills were sold during the past three weeks and $43 million were redeemed, much more than offsetting a net rise of about $67 million in repurchase agree ments. The principal matter of interest over these weeks was the Government securities market, which had given a good account of itself. Good nonbank demand brought recent new issues to premium quotations bill rates down by 20 to 30 basis points before demand and carried demand disappeared very quickly, and bill dried up last week. This Wednesday. The System's sales of rose sharply on Tuesday and rates of the bill market early last bills were a factor in the performance
week, but not the main factor. Rates moved downward again at the end of the calendar week, reflecting the investment of part of the proceeds of the recent Chicago-O'Hare Airport bond offering. Average rates in the bill auction yesterday were 2.82 per cent for the three month bill and 3.11 per cent for the six-month bill. Mr. Rouse went on to say that after the reserve projections attached to the supplementary report on open market operations had been prepared yesterday, word was received of a downward revision, dating back to February 1, in the level of required reserves. This meant that each net borrowed reserve figure shown in those projections should be reduced by $43 million. Mr. Rouse noted that the markets for corporate and municipal bonds had had a good tone and that the calendar of new corporate issues had been light. In the case of two recent corporate offerings the Duquesne Lighting and Illinois Bell Telephone issues-underwriter was strong and resulted in relatively low reoffering yields: bidding issue and 4.32 per cent on the Illinois 4.25 per cent on the Duquesne afforded much protection against Bell Telephone issue. Neither issue per cent of either offering thus far not more than 20 early call, and In the municipal market an issue of $103.5 had been distributed. bonds went very well at yields up to million New Housing Authority better feeling was interest. In general, per cent in tax-free Looking ahead, the and municipal markets. evident in the corporate
principal problem would be Treasury financing, for it appeared that the Treasury would have to be in the market frequently during the balance of this year. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period February 10 through March 2, ratified, and 1959, were approved, confirmed. Chairman Martin then turned to Mr. Young, who made a statement on the economic situation supplementary to the staff memorandum dis tributed under date of February 27, 1959. Mr. Young's comments were substantially as follows: We can summarize the economic situation about as follows: (1) Each month productive activity shows further gain, with accompanying improvement in income, employment, and labor market conditions. (2) Consumer and business spending continues ir regular advance, with slow but steady strengthen ing of investment-type buying. of consumer and business Each successive survey (3) expectations shows mounting optimism and also steady spread of inflationary expectations. prices, led by prices of industrial (4) Industrial materials, maintain upward tilt, with the average of wholesale prices held stable only by declining prices of farm products. in high levels investor confidence (5) Continuing of stock prices increasingly points to a stock market really in orbit. reports from foreign industrial (6) Successive are confirming an onset of upward countries swing in activity for them. inflationary boom. the picture is one of budding In short, first quarter is estimated product for the Total national per cent from the fourth up $10 billion or 2-1/2 at $464 billion, quarter.
With the gains evident for February in output of steel, aluminum, copper, construction materials, and producers' equipment, the February index of industrial production should rise at least one index point and possibly two points, with a one to two point further rise in the index likely for March in view of the elimination of work stoppage influences in glass and autos. At present writing, a first quarter average for the industrial production index of 145 seems more than a possibility; indeed, we now regard it as a likelihood. The value of real estate construction put in place in Feb ruary, seasonally adjusted, fell off slightly from January, reflecting declines in nonresidential construction. Also, housing starts in January, seasonally adjusted, fell back from 1.3 million to 1.35 million units. Contract awards and trade reports, however, continue to indicate strong construction activity and the recent bulge in FHA applications and VA appraisal requests more than likely foreshadows maintenance for the present of high level housing starts. Further gains in employment in trade, State and local government, and steel and related industries, along with continued high employment in construction, suggest further moderate strengthening of the labor market. Judging from unemployment claim figures, however, which have about moved seasonally, no large dent has been made since mid-January in the unemployment lump. The results of three expectational surveys, recently becoming available, carry portents for the future. The first is the NICB-Newsweek survey of new manufacturing appropriations for plant and equipment expenditures. It shows for the fourth quarter a significant turnaround in these appropriations by durable goods industries. is the Dun and Bradstreet survey of businessmen's The second taken in late January. It for the near-term future, expectations business optimism regarding sales and shows the highest level of Although the majority of businessmen profits since late 1955. their own prices to show little change, the survey still expect a significant further jump in expectations of rising reports prices. Board's survey of consumer expecta The third survey is the and finances. Preliminary data from this survey tions, plans, general business con of consumers expect show that 55 per cent ditions to be good in 1959, compared with 32 per cent in 1958 1955-57. About 61 per cent about 60 per cent in the period and with 7 per cent in to rise in 1959, compared expect prices proportion of in 1953-54. The about 16 per cent 1958 and
consumers reporting income increases and improved financial positions over the preceding 12 months rose somewhat from early 1958 to early 1959 but remained slightly below the 1957 proportion, while the proportion expecting further income increases during 1959 reached a new high. Consumer plans to purchase houses are considerably higher than in 1958 and about the same as the previous peak in 1955-56, and consumers plan to spend a record amount for the houses that they purchase. They plan to buy about the same number of auto mobiles as in other recent years, but plans are for fewer new cars and more used cars than in any recent year except 1958. Prospective purchasers of new cars plan to buy more expensive cars than in other recent years, but purchasers of used cars expect to spend somewhat less. Consumer plans to make housing additions and repairs rose to a new high, but plans to purchase household goods showed little change. In conclusion, the following observations may be pertinent. The economy has now about attained the preceding cyclical high in industrial production and is exceeding it in terms of aggre gate output of goods and services. As expansion continues, business demands for fixed capital and for stock may be expected to gain in strength. It is at this stage of the cycle that pressures typically start to mount on costs and wholesale upward prices of products other than farm products and foods. recovery, average industrial prices did not In the 1949-50 advance until industrial production was show any significant 198 peak. In the 1951-55 expansion, far above its November did not show significant rise until the July industrial prices This pattern of cyclical peak had been exceeded. 1953 production is not uniquely associated with the advance in industrial prices characteristic of cyclical II period; it has been post-World War experience through modern history. of industrial prices to increasing This year, the response and as strong as in the two has been at least as prompt demands have been fairly wide expansions. Increases preceding postwar products as well as materials. encompassing finished spread, disturbing in though not atypical--is Such a development-- is still sizable one thing, unemployment respects. For several larger than at the the labor force is at 6 per cent of and cycles. Second, pro phase of the two preceding comparable were substantial last year; ductivity gains in manufacturing profits rose some; and corporate labor costs declined unit by year end. Third, to prerecession levels sharply to close by no means as yet and abroad--are pressures on capacity--here rate to some the steel operating sharp rise in acute. The a possible strike buying against reflects precautionary extent
rather than any corresponding increase in final demands for steel products. Finally, the whole climate, including that of the stock market, savors of an inflationary psychology taking form well ahead of inflationary boom but capable of inducing it. In other words, the economy appears poised for a price runup in anticipation of real pressures from actual demands for labor and for goods. In an optimistic climate and on the basis of financial resources now in being, such a runup could be validated in markets for a time, but the costs in ensuing instability would be high. Mr. Balderston asked Mr. Young for his view as to whether the rate of improvement since the business turnaround in April of last year had been typical and also for his view as to whether the supposed letdown in February was real. Mr. Young replied that the pattern up to this point in terms of output of goods and services had been just about typical when measured against the record of business cycles going back into the last century, which showed that in periods of advance of output there changes of pace. At first the pace would be tended to be recurring rapid, then would slow down a bit, and then pick up a bit before further gain tended to be difficult and reaching a level from which had been quite a bit of comment in February slow in coming. There observations and with a good many qualifying about future prospects, that would carry expansion expressed about forces some skepticism was rather this kind of observation to him that but it seemed forward, the expansion movement The source of an expansion period. typical in then one could gone very far; expansion had until the was never clear
see in retrospect where those forces came from. Actually, it was a matter of a little here and a little there, which together added up to a lot. A staff memorandum on the outlook for Treasury cash require ments had been distributed under date of February 27, 1959. With further reference to credit developments, Mr. Thomas made a statement substantially as follows: Credit developments so far in 1959 have been characterized by relatively light credit demands from business--both long-term and short-term--but large demands from governments--Federal, State, and local. Individuals' borrowings against mortgages seem to be continuing in large volume and consumer credit, after increasing more than seasonally in the late months of less than the usual seasonal 1958, showed substantially contraction in January and probably also in February. Business loans at city banks have contracted approxi mately the usual seasonal amount since the end of the year, although somewhat less than in the same period last year. Increases may begin, however, if inventory buying expands. Bank loans on securities have shown a larger decline this years. New corporate issues year than in the two previous have been in much smaller volume so far this of securities year than in the same period of other recent years. New by States and local governments, however, offered issues for offering this month total only about 10 or scheduled unusually large volume of last per cent less than the A large volume of new issues by year's first quarter. is still scheduled for future State and local governments offering. over $5.5 billion in Government borrowed The Federal while redeeming about $3.0 billion the first two months, After retiring tax anticipation of debt obligations. will show a net month, the debt maturing this securities of a billion dollars, decline of only about three-quarters decreases of $2-1/4 billion and $1-3/4 in compared with the two previous years. Moreover, in the same quarter of
the next quarter the Treasury will have a net cash deficit, necessitating further borrowing, in contrast to surpluses that have been customary in other years. In the aggregate, total loans and investments of com mercial banks seem to have declined by at least the usual seasonal amount-if not more-in the first two months of this year. Not only have loans contracted, but bank holdings of U. S. Government securities have also declined, notwith standing that the contra-seasonal net borrowing by the Treasury has been principally in the short-term market. Banks have subscribed for the issues offered for cash, but they have sold securities in the market or redeemed maturing issues in larger aggregate amounts than their subscriptions. The money supply has declined by about the usual seasonal amount for the year to date. In contrast to this time last year, when they were increasing sharply, time deposits have shown little change this year. Nevertheless, over-all liquidity of the economy has evidently continued to expand. Adding to the rapid growth in demand and time deposits that occurred in 1958, nonbank holders have considerably increased their holdings of short-term Government securities in recent weeks. Purchases of securities, largely by nonbank investors, have been responsible for the improved tone of the Government securities market since the conclusion of the latest Treasury operation. Holdings by dealers, as well as by banks, financing reduced in the past few weeks. Yields on Government have been have declined from the record high levels reached securities of January, with the sharpest decreases in around the middle Rates on short-term issues also declined, medium-term issues. first in the 3-months bills, as investors with sharp drops at as to the course of sought liquidity in view of uncertainty the decrease spread to the 6-months longer-term rates, but later issues. In the past week bills and then to other short-term as mid-March cash needs rates have risen somewhat, short-term issues have continued firm. approach, but longer-term markets has developed, strength in securities Greater tightening in the reserve there has been some further although reserves of all In February net borrowed position of banks. million, as indicated by averaged about $60 member banks country banks' required which show that revised figures, been estimated. Nevertheless been less than had reserves have to a somewhat banks have declined reserves at country excess Reserve city banks have level than is customary. lower banks, on the other New York City relatively tight. continued positions in comfortable reserve had somewhat more hand, have
recent weeks than earlier in the year. Transactions in Federal funds have been particularly large in recent weeks, indicating considerable variation in the distribution of available reserves. It should be kept in mind that market interest rates are still high relative to the level of member bank borrowing and to the discount rate, as compared with previous periods. They appear also to be high in view of the absence of an increase, seasonally adjusted, in total bank credit. Estimates of reserve needs for the next few weeks indicate that net borrowed reserves may continue below $100 million until the latter part of the month, if changes in deposits and currency, as well as in other reserve factors, show the customary seasonal variations. Estimates prepared by the New York Reserve Bank indicate a much larger volume of demands on reserves during the next three weeks. The major reason for this difference is an implication of a larger increase in deposits and currency than is assumed in the estimates of the Board's staff. There is a reasonable basis for uncertainty and differences of judgment as to the course of deposits at this time. Treasury tax and loan accounts will no doubt decline sharply in the next two weeks and the subsequent increase from tax receipts will be less than usual because of the large amount of tax anticipation certificates to be retired. The question is whether other deposits will increase as much as or more than usual prior to tax payments and decline less later. Businesses have smaller tax liabilities this month than in other years and relatively larger holdings of tax anticipation securities, as well as other short-term securities and fairly good-sized deposit balances. They should not need, therefore, to build up balances by borrowing or selling securities to banks in the same amounts as in other years. It would follow also that business deposits might not decline as much as usual when taxes are paid. Over a period of four or five weeks, the net result should conform to the usual seasonal pattern. If it then System operations may need to be adjusted does not, accordingly. What will actually happen, however, is still a So far, no reason for a shift in matter of conjecture. System policy moves is indicated. the type of development that This situation illustrates might be expected to occur at other times this year when large cash payments are being made. It poses a problem with respect appear that the economy has ade to System policy. It would to finance further expansion. Under the quate liquidity circumstances further growth in the money supply may be
unnecessary for some time, or at least not until there is evidence that monetary needs may be unduly retarding growth. Pressures upon the money market and upon banks may be expected to develop when the public finds it necessary to draw upon time deposits, or liquidate securities, or borrow at banks in order to obtain addi tional cash. It would appear that there are no such pressures at present. The System, however, should be prepared to resist them if they should arise to a degree that endangers stability. Restraints can be applied by making it necessary for banks to borrow any additional reserves desired and by having a discount rate that is close enough to market rates to penalize any such borrowing. It would probably be advisable to establish such a rate even before the need arises, particularly since the Treasury financing schedule limits the periods when an increase in the rate would be possible even though appropriate for other reasons. to a question about the expectations for Treasury In response Mr. Thomas referred to the information contained in the financing, 1959. He went on to say that the memorandum dated February 27, staff through addition to the raising another $100 million Treasury was he understood, might continue bill offering and that this, March 12 indicated that the weeks if necessary. Estimates for a number of and whatever was not $4 billion in April, would need about Treasury offerings would have to be obtained through obtained through the bill in May and there be a refunding operation means. There would other cash was raised on how much in June, depending be cash needs might in May. wanted to that the Treasury said he understood Mr. Rouse 18th or 19th of March, committees on the consult with its advisory
with a view to making an offering the following week and obtaining payment March 30 or 31. The Treasury would again consult its advisory committees during the week of April 19 on the refunding operation and presumably would make a fairly early offering after that. It was understood that the Treasury probably would come to market in May, and he felt it would have to borrow in June because of large demands in the first week of July. Chairman Martin said that Mr. Rouse had accurately outlined information given to him (Chairman Martin) by Secretary Anderson and Under Secretary Baird. The Treasury hoped to announce the next would then anticipate a schedule such as financing March 19 or 20 and with a little leeway on either side. Mr. Rouse had outlined, that what had been thought of as the April Mr. Hayes commented a little and finalized at was to be moved ahead financing apparently or 19 days between that would leave a gap of 18 the end of March. This date and the next financing. program for June was un Martin commented that the Chairman the Treasury would likely than not that However, it was more certain. to the market in June. have to come of his views on following statement then made the Mr. Hayes and credit policy: the business outlook System faces a very to me that the Since it seems to the discount this time with respect hard decision at
rate, most of my remarks will be directed toward an attempt to summarize the issues involved in that decision as I see them. First, as to the business outlook: This is much the same as at out last meeting, with business expansion likely to continue at a moderate rate. At this juncture it is not possible to gauge accurately how the year's pattern of business activity may be affected by the current distortion in the steel industry and by the steel strike, if it eventuates. While retail sales have been very satisfactory, there is no evidence that consumers are really in an enthusiastic buying mood. Business sentiment is guardedly optimistic, probably more "guardedly" than in the past month or two; and neither the demand and supply situation nor recent price developments suggest an inflationary atmosphere. (For example, the nonfood component of the consumers price index declined in January for the first time in a year.) Last week our directors, discussing the business situation, were unanimous in an appraisal along these general lines, stressing the absence of any noticeable expansion in plant and equipment spending programs and the probable continuance of conservative inventory policies in most industries for some months to come. They were encouraged by the recent sharp gains in productivity, and the consequent upward trend of profits, but they saw no early solution to the serious unemployment problem. in this business picture that There seems to be nothing which could be interpreted as would warrant any overt move of more intensive credit restraint. Nor do recent indicative changes support such an action. The behaviour of bank credit year, both in city banks and in the business loans so far this a whole, has been anything but exuberant; banking system as total loans and investments of city banks and the decline in line with the average of recent years. has been about in the prospect for vast additional It is only when we view cash financing by the Treasury through the remainder of 1959, in the way of excessive growth with all that this could imply for concern and we find real cause money supply, that of the area. We now discount rate for action in the perhaps cause borrowed by the Treasury billion must be that $5 to $6 estimate $15 billion in the end of June, and about between now and the try to encourage Obviously we should half of the year. second through the banks, acting smooth flow of the new securities a holders. Fortunately the hands of nonbank as underwriters, into months, aided by taking place in recent this process has been The already occurred. rates which has rise in interest the will of themselves to the market continual excursions Treasury's
tend to push short-term market rates higher over the remainder of the year. The question is whether we should anticipate this tendency by moving the discount rate up promptly to 3 per cent, thus serving notice of our determination to prevent the Treasury's program from causing a dangerous expansion of the money supply--or whether to delay action until a further rise in market rates has established a clearer case for a technical adjustment of this magnitude to bring the discount rate into line. Our problem has not been made easier by the tendency for 90-day Treasury bill rates decline to during the past month, as temporary excess funds have sought investment in the shortest instrument--for unfortunately the market still tends to look at the 90-day Treasury bill rate as the short-term market rate, whereas if they were to look rather at a complex of short-term rates, including the 6-month bill, they would find a wider spread above the 2-1/2 per cent discount rate. At their meeting last week our directors discussed the pros and cons of a rate change at great length. I tried to present the arguments on both sides as objectively as possible, in order to get a very free expression of views in this pre liminary discussion. I would say that all of the directors approached the problem with an attitude of extreme caution; and that the majority were averse to a rate increase, primarily it would be unwise to "rock the boat" because in their judgment is proceeding satisfactorily but with very few when recovery overtones. Fears were expressed as to the bad inflationary at a time when the country is concerned psychological effect unemployment. Fear was expressed that over continuing heavy rate increase might trigger a prime rate increase a discount recovery--although one of would be damaging to further which doubted whether the prime rate would our banker-directors of greater loan demand than follow us at once in the absence that a rate increase It was also suggested is now in evidence. to the Treasury's financing not be looked upon as helpful might at best; that we should be reluc problem, which is difficult for arguing that the Fed is tant to give Congress grounds charges on the national debt, causing a sharp rise in carrying really to blame; and fiscal policy which is when it is faulty a discount rate very hard time "selling" might have a that we discount rate to bring the a technical adjustment rise as of the absence of a market rates, because closer in line with expressed by one The thought was very clear-cut disparity. continue to funds will probably that corporate industrialist of new Treasury issues, abundant for the purchase be reasonably probable absence profits and the high level of because of the
of any upsurge in inventory or plant and equipment expendi tures. Another director questioned whether nonbank buying would be greatly stimulated by a higher discount rate. I pointed out that the opportunities for rate action are likely to be few and far between for the remainder of this year; that if we failed to act within the first two weeks of March, the earliest next opportunity might be well along in April. However, there was general reluctance on the part of our directors to make a move sooner than might be desirable on economic grounds, merely because we fear an excessive growth of the money supply at some future date and because we expect Treasury financing to inhibit discount rate action during late March and much of April. Most of the directors would lean toward awaiting the development of clear cut reasons for apprehension before moving the rate. I confess that I am greatly puzzled as to what is the right solution to this problem. I suspect that the impact of the Treasury's vast financing program will in any case bring about an upward trend in short-term interest rates during the coming months. Thus the early establishment of a 3 per cent rate might conceivably be looked upon as a technical adjust ment to a rate level which, if not actually here today, is to arrive in the near future; and it would have very likely to this country and to the the advantage of demonstrating world our awareness of the threat inherent in deficit to defend the value of the financing and our determination any increase in the discount rate dollar. If, as I believe, should be regarded by us and ex under present conditions as a technical adjustment, it would be plained to the public be one of the first Banks to act. helpful for New York to same time I share some of the doubts of our But at the better if the timing of the directors and would feel much not tending to "rush" us in our Treasury's program were some considerable difficulty decision. I would anticipate on the rate this week or our directors to act in persuading as well to defer action Perhaps it would be just next. of April, even though the the second or third week until be shorter than we would at that time will open interval which might be like. A second alternative, ordinarily the System as a is preferred by if early action indicated to 1/4 per cent the rate increase would be to limit whole, only a technical adjustment make it clear that in order to how the other Presidents I would like to hear is intended. before making up my own and the Governors view this problem recommend to our directors. mind as to what to
With respect to open market policy, I would not like to see any conscious move toward greater restraint but would expect the pressure of Treasury financing to bring about some increase in Treasury bill rates and would not interfere with such a trend. I think the directive might well be left as it is. Mr. Erickson said that upon his return from South America he had reviewed economic developments with his staff and that the acceler ated pace of activity evident several weeks ago did not seem to have carried through in the month of February, for improvement nationally and in the First District appeared to have proceeded at a much milder pace than before. First District production, employment, construction, and department store sales were up slightly compared with the same period last year, while savings deposits were not increasing as much as last year. During the last two weeks there had been greater use of the discount window by country banks than last year; 50 banks were borrowing on one particular day. of the minutes of the last two Committee meetings, From a reading the System was confronted with a Mr. Erickson said, it appeared that the pros and cons, he would question of timing. Balancing difficult or the discount rate at this doing nothing on the directive lean toward the time of the next Committee to see what happened by time, waiting rate in April. In acting on the discount meeting, and then possibly of restraint even lean on the side operations, he would open market than indicated. reserve figures higher net borrowed though that produced
Mr. Erickson then commented briefly on his trip to South America during which he visited eight central banks. Mr. Irons said that he viewed the over-all economic situation about as Mr. Young had pointed it up in his statement. There was con tinuing strength and continuing gradual expansion in most of the major indicators of economic activity. He could not see very clearly the reasons for some of the lessening of optimism among economists that had been reported in the press recently. As Mr. Young had said, it was difficult to tell just what triggered recovery, for it was usually a lot of little things accumulating into an expansive force which first broadens recovery and then extends gradually into a general expansion of economic activity. by saying that the Eleventh District Mr. Irons continued national pattern, with gradual strengthen seemed to be following the level of activity. Retail trade was holding up well ing at a high was showing gradual improvement. and nonagricultural employment but refining had declined somewhat, oil production was up a bit, Crude refineries which was at one of the large large part to a strike due in had sustained some setback, The aircraft industry settled yesterday. result of the Defense Depart the Dallas area, as the particularly in missiles, and it manned aircraft to of emphasis from ment's shift off by the first might be laid many as 6,000 workers that as appeared laid off of those already substantial number However, a of June.
had moved to other places and recruiters from other sections of the country were now working in the Dallas area. Agriculture had been doing fairly well. Eleventh District business loans, Mr. Irons said, had increased a little more than last year, but generally the banking trends were close to the usual seasonal movement. There was not much borrowing from the Reserve Bank, and very little on the part of country banks. Larger banks were tending to use Federal funds rather than borrow from the Reserve Bank. Turning to open market operations, Mr. Irons expressed the view that in the last three weeks the Account Manager had done about the right sort of job; he had maintained a reasonable degree of restraint in the face of some large shifts in statistics, a mal distribution of reserves, and other disturbing factors. The discount rate was the difficult problem right now and probably the decision on it would have something to do with what open market policy should be. open market policy should maintain the degree of In his opinion, with any doubts resolved on the re restraint that had prevailed, of restraint should be consistent with strictive side, and the degree appropriate to the discount rate structure. an interest rate structure there was not too strong a demand only the banking picture, Viewing rate. The economic situation an increase in the discount indicated for of further inflation were well and possibly the seeds was going along
being sown, but at the moment the situation did not seem too pressing. However, if no move on the discount rate were made now, the System might be barred from moving in the reasonably near future, for it had been the position of the Committee that whenever the Treasury got near to coming into the market the status quo should be maintained. On balance, therefore, he would favor taking advantage of the present opportunity to increase the discount rate to 3 per cent. He agreed with Mr. Hayes that it would be desirable for the New York Bank and a number of other Banks to move together, but a matter of a week did not seem to make too much difference. While he wished that the System could move on the rate whenever it desired without regard to the situation, in view of the current ground rules the System Treasury itself and take advantage of whatever opportunities were must adapt presented to it. West Coast business activity had shown Mr. Mangels said that January. Construction was particularly moderate expansion during further increase. Insured unemploy reflecting a general strong, with payrolls per cent, there was a rather to January declined 8 ment from December Department store lumber continued strong. for copper, and heavy demand and automobile sales strong through February sales were relatively was not quite as The agricultural situation showed small gains. numbers of livestock as a whole; large as for the country favorable conducted without were being many cases operations on feed and in were
profit or even at a deficit. For the three weeks ended February 18, bank loans increased somewhat, with half of the increase in real estate loans, but in general loan demand was rather light and for the next three to five months no heavy demand for bank credit was expected. The banks reported no great demand for loans to pay taxes. Demand deposits and time deposits fell during the period mentioned, and district banks were beginning to feel somewhat pinched for funds. The particular bank he referred to at the last Committee meeting had now indicated to its branches that they should be more selective in making real estate loans. The large banks on the West Coast had been net borrowers of Federal funds, but use of the discount window was scattered and intermittent. Regarding policy, Mr. Mangels saw no reason to change the degree of restraint existing at present. On the discount rate, he was somewhat uncertain. There had been a full discussion of the meeting of the San Francisco Bank's executive committee rate at the the five directors present were quite last Wednesday and four of opposed to an increase at the present time. Comparing definitely 23, 1958, the effective date of the the situation today with October the directors noted that total employ last San Francisco increase, total unemployment had risen, the ment had increased only slightly, indexes had increased only slightly, and wholesale and consumer price City bank loans and investments was about the same. the money supply at certain Reserve 2-1/2 per cent an increase to The Board approved * at San Francisco was the effective date on October 23, 1958; Banks November 6, 1958.
showed a 1-1/2 per cent increase, and the rate of borrowing from the Federal Reserve Bank was not substantially different. While Treasury bill rates went up in the past few days, they had been somewhat below the October level, and commercial paper and bankers' acceptance rates showed no change. Rates on finance company paper and loans to Government securities dealers were up, but call loans on stock had not changed in rate. Therefore, the directors felt that there was not much in the statistics to justify a discount rate increase at this time. If, however, other Reserve Banks acted before the next meeting of the San Francisco directors (March 11), he felt that the latter would go along. There might be some question whether a 1/2 per cent increase would be in order or whether a 1/4 per cent increase would present a more logical basis for action. Mr. Mangels concluded by saying that he considered the policy directive satisfactory. Mr. Deming said that business sentiment in the Ninth District continued to indicate a measure of optimism, tempered by the fact that most of the available current indicators had registered no either in January or February. While a case particular advance of recovery had slackened somewhat since might be made that the rate seasonal trend almost obscures real trends December, the strong winter in the Ninth District, there had been a more severe winter this year to be the factor that had produced than usual, and this was thought
such slowdown as seemed apparent. With a high level of work in prospect, actual construction work had been delayed by an unusually deep frost line, and it also appeared that the lake ore shipping season would be delayed because the ice was very thick and the boats probably would not be able to get in or out as early as usual. On the other side of the picture, employment and banking were moving about in line with normal seasonal developments and agriculture was continuing to show strength. The 12 per cent gain in farm income in 1958 apparently was carrying over into 1959, thus far, and prospects for farm machinery sales were good for the coming year. Bank deposits were up and demand for bank credit was running roughly according to the usual seasonal pattern. Mr. Deming said that, like others who had already expressed had a degree of uncertainty in his mind as to the themselves, he course of credit policy. He felt that open market proper current had been about right, he would like to see them continued operations the directive seemed to him adequate. in about the same way, and With respect to the discount rate, the arguments regarding the ques time had been presented pro and con. On tion of an increase at this a change at this time the argument for making balance, however, the future seemed to him might be blocked in because the System the Minneapolis directors While he doubted whether persuasive. to change the rate strenuously to a recommendation would object
upward, neither did he feel that they would take action at this time with any great enthusiasm. Due to personal situations, it would be impossible to have a meeting of the board of directors before Friday, March 13, the date of the next scheduled meeting. Mr. Allen said that notable developments in recent weeks on the plus side appeared to be the rapid increase in steel order back logs and the continued evidence of strength in consumer income and buying. On the other hand, the rate of new auto deliveries remained slower than many had anticipated and unemployment continued fairly substantial. Seventh District steel companies were operating at effective capacity, but analysis indicated no appreciable rise in steel inventories in the hands of users in January. There probably was some increase in February. Department store sales in the district were running spectacularly ahead of last year and were excellent by any standard; when the record for February was in, it might be found that such sales exceeded the record month, August 1957. Continuing, Mr. Allen said that deliveries of American-made days of 1959 averaged only a little more than autos in the first 40 a rate equal to about 5 million on an annual 16,000 per selling day, still estimating that 5-1/2 million basis, but Detroit experts were be sold in 1959. They expected passenger cars would American-made million, with the difference to be around 5-3/4 1959 production production quarter would and inventories. The peak going into export
be the present one, at 1,600,000 plus. As to installment terms on automobiles, a sample of Seventh District member banks indicated a substantial stretch-out in maturities in the past two years. In January 1957, only 8 per cent of all contracts were for periods in excess of 30 months; in January 1958 the proportion was 22 per cent; and in January of this year it was 47 per cent. New claims for unemployment compensation for the first six weeks of 1959 in the Seventh District States were from 22 to 42 per cent lower than last year, compared with a drop of 17 per cent nationally. Except for Iowa, however, these claims were substantially higher (from 7 per cent in Indiana to 50 per cent in Michigan) than in the comparable period two years ago. The Michigan situation, including both its fiscal and its unemployment difficulties, would doubtless continue to receive a good deal of national attention in the months ahead. During of the labor force 14 per cent in Michigan averaged 1958, unemployment and local experts did not expect the situation to improve in 1959. of a number of factors--decline in defense The situation was the result expenditures, a continuing shift of industry work, labor-saving capital to use overtime rather than to hire to other States, and a tendency additional workers. District reporting banks and investments of Seventh Loans 18, with almost three weeks ended February $93 million in the declined
all of the decline in Government securities. The banks showed stronger business loan demand relative to both 1957 and 1958 than did reporting banks throughout the nation; most business categories, led by metals firms, were borrowing more than last year. Use of the discount window by country banks had been heavy recently by standards of recent years, with 63 country banks borrowing in the first half of February. A large number of the borrowing banks were in the cattle feeder area. Mr. Allen said that he would not suggest any change in the policy directive and that he would like to see the operations of the Desk continue about as they had been, with any doubts resolved on the side of restraint. As to the discount rate, he rather agreed with Mr. Irons. There should be coordination of the implements of monetary policy and consideration of that one factor would call for an increase in the rate. As to the magnitude of increase, he would favor 1/2 per cent or nothing. As to timing, if the System were completely free his own preference would be to do nothing for a couple of weeks, or a view in which he perhaps was in perhaps as long as four weeks, be difficult to get the by his feeling that it would fluenced largely there was unity of action throughout Chicago directors to act unless he noted, had in mind the unemploy the System. Some of the directors, he did not know whether the Detroit area. However, ment situation in assurance that long enough to provide in April would be the interval and if it was taken in that period, action could be discount rate
necessary to gamble-as it appeared might be the case--he would guess that business would continue to improve to such an extent as to suggest acting now on the rate. Mr. Leedy said that, contrary to the national pattern, business loans at Tenth District banks had been receding at only a fraction of the rate of decrease that occurred last year. All categories of borrowers except wholesalers had either been borrowing more or repaying less than in the preceding year. The reserve posi tion of the country banks in particular had been tighter recently due to a greater than seasonal run-off of deposits, especially interbank deposits. This had been accompanied by strong demand for credit at the discount window, and borrowings at the Kansas City Bank were running about 16 per cent of total member bank borrowings. Mr. Leedy stated that district retail sales through the latest per cent ahead of the year-ago level, compared report period were 11 with a gain nationally of 9 per cent. Livestock interests, including cattle, sheep, and hog producers, were being hurt by lower prices, showed a substantially higher increase and inventories in each category generally. Another factor, as far from last year than for the country areas of the district was concerned, as the economy in the agricultural of Agriculture of lower announcement by the Department was the recent prices for the spring planting crops. support
Turning to policy matters, Mr. Leedy felt that the time was here for the System to move on the discount rate. In fact, as indi cated by discussion at recent Committee meetings, he had felt that there should have been an increase earlier, although he was cognizant of the difficulties that had existed for some time in making an adjustment. His own reasoning was based more on the economic situa tion than on the change in the interest rate structure. The review of economic conditions at this meeting seemed to him to underline the great and developing strength of the economy, and there was also the important matter of public psychology that had been asserting itself in the stock market. For these reasons, as he had indicated at the last Committee meeting, he would hope that the effect of a discount rate increase would not be undercut by any effort to make it appear as solely a technical adjustment. He felt that the market was expecting a rate increase; if it were not made in the period immediately ahead when the road was clear, the System might be mis leading the market. The System had been charged before with pulling the rug from under investors immediately following a Treasury financing, charge might be made again if the rate were changed in the and such a rather short period available following the next Treasury financing. continue to that the Account Management Mr. Leedy suggested to maintain a level of $100 through open market operations attempt variation around that reserves, with some million of net borrowed
figure. He would not endeavor to increase that figure materially at this point and instead would rely on an adjustment of the discount rate. The discount rate change, if made, should be an increase of 1/2 per cent. Mr. Leach recalled that at the February 10 meeting of the Committee he said that although some recent data on the Fifth District economy were disappointing, it appeared that over-all business activity was still moving forward. Economic reports now becoming available made it clear that the district economy was continuing to expand. Seasonally adjusted nonfarm employment showed widespread increases in January, with the total up 0.6 per cent, while manufacturing man-hours showed broad and sizable December to January increases, particularly goods industries. After a period of uncertainty following in durable in the textile industry, it now appeared the recent wage increases of the increase in cost in this highly competitive that at least a part passed along in higher product prices. A possible industry would be long adhered to by textile buyers with the hand-to-mouth policy break in third and fourth interest being shown indicated by the general was by some buyers for the advance orders placed business and by quarter reached an all-time seasonally those periods. Cigarette production improved further in January, high in December and probably adjusted reported January and manufacturing industry while the furniture profitable operations months, with high-level February as "terrific" rate than at was at a better coal production under way. Bituminous
the bottom of the recession but still seemed low in view of current steel production rates and improved industrial operations. Utility demand had been weak enough to cause discussion of price reductions and efforts at freight concessions as a defense against shifts to oil. Mr. Leach said he was conscious of the fact that discount rate action had not kept pace with open market operations, primarily due to Treasury financing considerations, at least in recent weeks. There would now be a breathing period before the next Treasury financing, and he felt that the System should take advantage of it to increase the rate to 3 per cent. While the bill rate was now only 2.81, it seemed probable that it would soon be higher because of prospective Treasury and other demands for funds. His chief concern was about the possibility that a discount rate increase might be interpreted as a move toward more restraint than was intended. Although he believed of present restraint, or even slightly greater that a confirmation in order, he would not want to signal a substantial restraint, would be be happier if action could be taken when intensification. He would but he would not care to rate was higher than at present, the bill day more than half of the beyond March 12, by which delay action While he shared meetings scheduled. Banks had directors' Reserve the time was here expressed, he felt that some of the reservations rate action should be taken. when discount in the conduct of System said he detected a problem Mr. Mills an incipient stage at that happily was in monetary and credit policy
present but which, if unattended, could spread out with serious consequences. He then presented the following statement: In setting objectives and appraising the effects of monetary and credit policy, the time has come to give prime consideration to the results of sighting policy actions at sustaining some predetermined level of nega tive free reserves over a lengthy period of time. The unhappy experience of last year, when $500 millions of positive free reserves were set as a continuing goal of policy actions, was reflected in a supercharged growth in the money supply. Similar results may occur in reverse if some level of negative free reserves is consciously maintained by policy actions for a continuous period of time, in that the ultimate effect on the money supply of maintaining any fixed level of reserves seems to be comparable to the results obtained from compounding interest. This is true because the commercial banks must adjust their positions to whatever level of reserves is set by Federal Reserve System policy actions, and in doing so under existing conditions of a negative level of free reserves the consequence is to set up a cumulative force contracting the outstanding volume of commercial bank credit. The fact that the volume of discounts at the Banks has not risen in proportion to the Federal Reserve by System policy actions that has been exerted pressure offers proof to this theory by on the supply of reserves banks restrain their credit indicating that the commercial rather than expand response to System policy operations in all of which is in accordance their loans and investments, that Federal Reserve Bank with the dictated principle discounts should be temporary in character. Reserve System is intermittently As long as the Federal bank Tax and Loan to sustain commercial supplying reserves of U. S. Treasury financings, the Accounts on the occasion level of free reserves pressures of a negative contractive compelling commercial bank worthwhile purpose of serve the U. S. Government securities redistribution of divestment and preventing an unwanted offerings and acquired from Treasury when the time should of bank credit. However, expansion financing is no longer reserve support to Treasury come that the full effect of as is now the case, needed as frequently a constant policy of maintaining Reserve System a Federal play and a would come into negative free reserves level of
deleterious contraction of the money supply would set in. As this is a process that only takes place over a period of time, it is not immediately apparent, but by the same token can be safeguarded against well in advance by appropriate prophylactic actions. Applying the theory thus submitted to the present situation suggests that care be taken to avoid a rigid posture of maintaining a continuous level of negative free reserves, both because of the overly contractive influences inherent in such a policy and because complacent commercial bank adjustment to an unchanging Federal Reserve System policy tends to accelerate its effects beyond those in tended. Inasmuch as the System's present policy is in itself persistently contractive, any greater pressure is unnecessary and might be unwise. In fact, the occasional appearance of positive free reserves over a weekly reporting period should not be shunned in that no real relaxation in pressure would have occurred and a variation from constancy could be psychologically desirable for the banking and investment fraternity to observe. A 3 per cent discount rate as an alignment with a cor structure of market interest rates is to be responding for its influence toward making the desired, especially money market more attractive for the invest United States ment of foreign funds and thus acting as a check against of gold. However, if the ground swell the future outflow continues to indicate a lessening of economic developments commercial bank credit and long-term in the demand for an ample supply of investment funds, capital, together with to fall back from a 3 per cent it may become necessary heed should be paid to the discount rate. Furthermore, tending to relax credit tensions by natural influences Federal Reserve System policy can whatever moderation of guards against forces making be made without lowering the or loosening such grip as renewed wage-price spiral for a fervor in the stock to hold over speculative it is possible market. in mind that suggested bearing Mr. Mills In further comments, evokes a net borrowed reserves level of of a constant the pressure contract loans system to commercial banking compels the response that the banks of that contraction, If, in the process and investments.
were to restore their reserve positions, with some margin of excess reserves, and if the System then proceeded to extinguish the excess reserves, the commercial banks in turn would have to respond by contracting their outstanding credits. There would be set in force a cycle of restrictive influences such as to hold the threat of boiling down the money supply to a point that would be inconsistent with the economic growth and resurgence of economic activity that, within its limitations, it was the purpose of the System to foster. Mr. Robertson said it seemed to him that the economy was moving upward very rapidly, especially if one looked at the whole picture through the glasses one should have on in January and February, an observer is apt to be misled. As a matter a period of the year when overtones all through the of fact, there seemed to be inflationary failed to take advantage of every picture. Therefore, if the System position, it might find to adopt a more restrictive opportunity and weeps. In view of sad position of one who waits itself in the operations, he felt that the System the impending Treasury financing rather fast. While restrictive position move toward a more should more restrictive, he in mind becoming startlingly he did not have in the neighborhood of $200 like to see net borrowed reserves would on the next Treasury financing million by the date the decisions were made. said that Mr. Robertson the policy directive, With respect to that a change in of any kind. He realized no need for a change he saw
the discount rate would originate at the respective Reserve Banks. For his own guidance, however, he had set down some of the aspects of the economic situation that seemed to him to provide a basis for increasing the rate at this time. He then read the following state ment: The principal aspects of the economic situation which justify an increase in Federal Reserve Bank discount rates at this time: 1. General economic activity has recovered to above the level of the peak reached in 1957, with further expan sion in process. Although unemployment is still larger than is desirable, the lag in this area is due to improvements in productive efficiency, which provide the basis for further advances in output and in over-all levels of living. 2. The general level of commodity prices has been stable or rising slightly, notwithstanding declines in prices of farm products and the increased productivity of industry. This is because prices of finished industrial products have continued to advance, reflecting in large part rising wages, but also to some extent increased profits. such price increases might build 3. Continuation of up buying resistance on the part of domestic, and particu larly foreign buyers and endanger the sustainability of economic growth. 4. Maximum sustainable growth in economic capacity large volume of investment, financed requires a moderately of economic events is of savings. The current course out in addition the government will favorable for investment and to be a heavy borrower. Adequate savings to cover continue encouraged. Hence, the present these demands should be high level of interest situation calls for a relatively rates. conditions are conducive to the undertaking 5. Current in stock prices and commitments. Advances of speculative of these trends. Credit estate values are indications in real for financing such com not be too readily available should which are threats to economic stability. mitments, belief in the inevitability of 6. Resumption of a and discourages lending. encourages borrowing inflation
These attitudes may be expected to cause interest rates to rise. Rising rates should not be resisted by making Federal Reserve credit available at low rates, but should be per mitted to occur in order to set up correctives to the in flationary tendencies. 7. Expansion of bank credit last year was at a rate that was more rapid than necessary for sustained economic growth at a level consistent with reasonably full utilization of resources. The money supply during the past year in creased at a rate of 3-1/2 per cent and is adequate for further growth at turn-over rates that have prevailed in previous periods of prosperity. In addition a 10 per cent growth in time deposits has augmented the liquidity of the economy. Expansion of bark credit has thus not only helped to finance the recovery of consumption and investment but has established the basis for further growth. 8. Although some slowing down in the rate of bank credit and monetary expansion has occurred in recent weeks, the general liquidity of the economy has continued to in crease as the public has used available funds to acquire short-term Treasury securities in large amounts. 9. Any further tendencies toward bank credit expansion should necessitate increased borrowing of reserves by member banks at discount rates that are kept in touch with market rates. Additional reserves may be supplied through open market operations when deemed appropriate for further sustain able growth, but only after a higher level of member bank borrowing and higher discount rates have been established. rates are still much further below pre 10. Discount short-term rates than is usual or vailing open market expansion. They should in a period of economic appropriate more closely into line with the market. be brought is not taken now, the timing of pro 11. If action operations may preclude the spective Treasury financing opportunity to take any action for several months. that although there was a period in Mr. Robertson also commented be taken, the System would action possibly could April when discount rate such action too soon that arise from taking faced with those problems be Accordingly, he felt financing operation. or after a Treasury before at this time were too great in failing to act that the dangers involved it might be in a failed to act, risk. If the System to warrant the
position where it would regret not having the discount rate at an appropriate level from which to work in trying to offset the forces that he thought were developing. After expressing agreement with the views stated by Mr. Robertson, Mr. Shepardson said it seemed to him that at this season of the year one was likely to worry about things not moving quite as fast as desired and to fail to take account of the slackening inherent in the winter season. The continuing pressure on wages and prices concerned him a great deal. While much concern was being expressed about unemployment, he felt that it would be corrected more effectively by price adjustments to stimulate demand than by putting out more funds in the hope of creating employment when there was not the con sumer demand. At present, he noted, there was a high consumer level of income. Thus, there was money to spend but only as consumers spent the money for goods and services would there be a real incentive for the expansion of productive facilities. With those things in mind, he felt that the System should keep up with the procession rather than wait for historical evidence. In his opinion, it was highly important to move toward a little more restrictive level than had prevailed. Reports recently had indicated that the feel of the market was not quite as tight as the statistical figures would indicate, or as he felt night be desirable. Hence, along with early action on the discount rate, he would favor moving toward somewhat greater restraint through open market operations.
Mr. Fulton said that steel continued to make the news from the Fourth District. This week the mills were expected to produce the largest amount of steel ever produced in one week. Some mills were booked solid through June and customers were clamoring for delivery. In a recent survey of purchasing agents, almost half of the respondents said that they were acquiring inventories, not only steel but other lines, so as to avoid being embarrassed if a strike occurred this summer and also because inventories had been low. On the other hand, the respondents did not want to guess at operations for the second half of the year. In contrast to the steel industry, the machine-tool industry was rather dismal. Backlogs were a little over three months but the amount of tools shipped was quite small. The automobile industry was now rebuilding to some extent rather than buying new machine tools, and other industries could follow the same alternative. With further reference to district developments, Mr. Fulton said that department store sales since the first of January were 3 per cent above the year-ago level. Contract awards were up for types of construction. The bad feature con residential and other to be the unemployment situation, which had not changed tinued employment had not increased in total. substantially. Manufacturing he shared Mr. Hayes' reserva Mr. Fulton said that although he did not believe that increasing the discount rate, tions as to
any change should be labeled a technical adjustment. A discount rate change was an indication of Federal Reserve policy and it would be, and possibly should be, considered as overt action on the part of the System. He noted that some time ago financial writers were speaking of the probability of a discount rate increase and the market was conditioned to it. Recently, press articles had indicated that the rate might not change for some time, no particular reasons being advanced except that the System had not acted according to earlier expectations. He agreed that this was an appropriate time to increase the discount rate, adding that the System might not for some time have another opportunity as clear cut as at present. The fact that the bill rate seemed to rate would be slightly above a 3 per cent him only incidental because it appeared almost inevitable that the rate would rise whether or not the discount rate was increased. bill in the form of bills were likely to cash Corporations having funds they acquired them, which was liquidity, them for the purpose for which acquired and taxes. Noting that order to pay for inventories being in directors was scheduled for March 12, the next meeting of the Cleveland that within the next week the Mr. Fulton expressed the conclusion to 3 per cent. He also indicated discount rate should be increased policy directive as satisfied with the Committee's that he was quite it stood. store sales were Third District department Mr. Bopp said that the big cloud in the district, employment situation remained good. The
with incomplete data for January showing unemployment at 11 per cent of the labor force, a somewhat higher rate than a year ago. The chief banking development had been an exceptionally large loss of deposits by Philadelphia banks. As a result, the banks had been running large and increasing basic reserve deficiencies which, to an increasing extent, they had been meeting through the Federal funds market rather than through borrowing at the Reserve Bank. Mr. Bopp said he regretted that short-term market rates had eased from their mid-January levels. If they were still at those levels, an increase of 1/2 per cent in the discount rate could be made as a technical adjustment, but at present market rates such an increase might be technical adjustment. He did not feel interpreted as more than a grounds in the light of could be justified on purely economic this relative to capacity in terms of both current rates of output to raise whether it might and labor force. This led him facilities circumstances in the future to pay not be desirable under similar market operations, even short-term rates in open more attention to of short securities and purchases involved concurrent sales if this of reserve availability. to meet possible problems of other securities should act with that the System expressed the view Mr. Bopp he would be that on this basis rate and said unity on the discount per cent to the Philadelphia an increase of 1/2 prepared to recommend convince them whether he could not sure, however, He was directors.
of the appropriateness of such an increase in the light of current market rates. They were to meet this Thursday, as were the New York and Chicago directors, and in view of the Third District unemployment situation he would not want Philadelphia to be the only Bank to announce an increased rate. The policy directive seemed to him satisfactory. Mr. Bryan said that recovery was continuing and, although there was nothing immediately explosive or ebullient, the situation had the earmarks of developing into an inflationary boom at some time. He was at the point of believing that the System should exercise more restraint but that, because of the factor Mr. Bopp had mentioned, it should not move overtly on the discount rate until it had prepared market. Since late in January a considerable volume the short-term but the monetary situation, borrowed reserves had been attained, of net eased. From around 3 per measured by some criteria, had actually as bill rate had gone down to the cent in mid-January, the three-month begun to show signs of and only recently had it present levels had eased. In the circumstances, Even the longer rates tightening. period to take advantage was to use the forthcoming his inclination might tighten rates, including in the market that of natural forces above 3 per cent. the short bill rate a tightening of were probably influenced to say that his views Mr. Bryan went on its discount Bank to increase by the Atlanta fact that action by the
rate at this time would probably require great persuasion on his part. It would have to be done subsequent to action by the New York, Chicago, and other Banks on the tag-along theory. On two or three occasions, he had tried with limited success to explain to the directors the matter of a technical adjustment of the discount rate to open market rates. At the moment, one of the big problems was to get into the public mind the relationship between fiscal policy and the value of Government securities. A 1/2 per cent discount rate adjustment now might draw a veil between this relationship and attract to the System the criticism that in his judgment was bound to come. In all the circumstances, he would favor moving quickly during the forthcoming period to use the open market instrument in such a way as rates. If that were done, it might be to increase short-term market in April to change the discount possible to use the brief interval that period with a bill rate only rate, but if the System went into rate of 2-1/2 per cent, it could slightly above or at the discount bill rate were above 3 per the other hand, if the not make a move. On the discount rate could be time he felt that a move on cent at that made. lack of rapidity of the recovery, Mr. Szymczak said that the with respect to of year, and the situation at this time particularly suggest tightening on bill rate did not and the Treasury unemployment the discount rate. policy or open market the System through the part of
However, with the Treasury coming to market quite soon, and again in the following month, for a large amount of money, if action on the discount rate is to be taken it should be taken soon. That, therefore, is his position at this time. Mr. Balderston suggested that confusion in people's minds because of the psychology of the moment did not appear warranted by the facts. Personal income was 3 per cent above the peak of August 1957 and the index of industrial production may have attained in the month of February the peak reached in the summer of 1957. In short, at a rather early stage of the recovery the country was already back to the top of the previous movement. Using that to give him perspective, he had the feeling that the System ought to take at once any overt action it was going to take, and make the action decisive so that people would know where the System stood. He would to delay use of open market operations for further re be inclined until the banking situation made the need apparent. Corpora straint this obviously had an impact on the tions were now very liquid and just as soon as those corporations rate at the moment. However, bill and accumulation of the payment of tax bills their liquidity for used banks for credit and return to the commercial inventory they would would be coming to Then the member banks demand would be heavy. the At some time, as lender of last resort. Federal Reserve as the the increase the net be a need to he felt there would yet unforeseen, mind was to in his own he was doing figure. What borrowed reserve
attempt to separate the Federal Reserve action that would make the front pages and which he felt should be taken soon, namely, an in crease in the discount rate in the amount of 1/2 per cent, from the more delicate and less obvious actions through the open market which could be taken just as appropriately at a later time. Chairman Martin commented that when it came to critical periods the problem was always one of struggling for logic and it was not possible to meet all of the requirements that all would like to have. Mr. Irons, for example, had spoken about the rules of the game, which in fact were forced on the System, first by a pegged Government securities market and now by a large Treasury deficit. The System's problem would be much easier if it were not for such factors. It was at a time like this, the Chairman said, that the up to the complexities of its organization. While System must face there might be some question whether the System was organized properly, with what existed and not with what some it was necessary to work to be. As a general rule, Reserve Bank would like the situation of weeks, and there were spread over a period directors' meetings set the meeting dates unless the Board would not be a conjunction time to time in the past, the Federal Reserve Bank. From for every some other Reserve Bank New York Bank or had relied on the System
to act as a leader to pull the thing together, but at present the situation was difficult because there would be different judgments, as in fact there were around the table today. In his own judgment, Chairman Martin said, the economic factors now called for an increase in the discount rate. Easter sales expecta tions were sufficiently clear in marketing circles today to warrant enthusiasm regarding the business picture. He would not attempt to evaluate the steel situation in the light of the strike possibility, but the Wall Street Journal today reported operations at the highest point in the history of the country in terms of tonnage output, and this in spite of auto sales that were disappointing. The point of concern to him, the Chairman continued, was the very real problem with respect to the sale of Government securities. The System had not acted decisively or clearly enough to be a real asset to the Government securities market during the last six or seven months. it would have been preferable to increase the In his opinion, Treasury financing instead of having discount rate before the last about whether the System would or would not act newspapers talking there was again a period an appropriate time. Now on the rate at but he questioned whether there would actually calling for judgment, April within which the System as long as three weeks in be a period Mr. Leedy had made the point to act. In the circumstances, would be free problem. A year ago, rug" became a very difficult about "pulling the had pointed out that meetings, he also at succeeding and he believed
it was easier to go down than up; the System tended to pull itself together on the down side more quickly than on the up side. As Mr. Bryan had brought out, the critical problem at the moment was to relate fiscal policy and the financing of the Government debt. How ever, the System, which earlier had deferred raising the discount rate principally because of the fact that the Treasury was in the market, now had before it the question of not doing what it would have done previously except for the Treasury financing. Chairman Martin continued by expressing the view that the System either must face up to its responsibilities or take the position that monetary policy could not work in an environment like the present and that it was necessary to look for other controls to meet the situa tion effectively. He doubted the advisability of eliminating monetary of the aggregate and saying that under certain condi policy as a part not work. What Mr. Bryan said with respect to preparing tions it could the short-term rate was market or what Mr. Bopp said regarding the matter. To a large extent, however, another way of approaching the for administration of prescribed must depend on the Desk the Committee as a whole could not supervise since obviously the Committee policy, basis. With reference to of the Desk on a day-to-day the activities that the nature of the System made by Mr. ills, he noted the point produce a tendency toward inflexibility. organization was such as to into the status to fall there was a tendency it another way, To put to keep out of The job was to try pattern rather automatically. quo
that pattern and to maintain flexibility to the extent possible, for the System must not get frozen into a pattern and stay there. On the discount side, for example, it would be possible to go down as well as up if circumstances should warrant. Returning to the Treasury's problem, Chairman Martin again commented that a matter of judgment was involved. However, he questioned whether there would be any practical way of taking overt action through April or May, or possibly even June. There ought to be some reasonable period of even keel before the Treasury went to market in order that all of the misinterpretations coming from a discount rate action at this time might be gotten out of the way and the market could assess the action. Therefore, the earlier the action was taken the better it would be, particularly since business straws in the wind were likely to compound the problem for the Treasury. If on March 5, effective March 6, there the discount rate were increased weeks for market adjustments. If there were would be a period of two as to whether the Federal Reserve would another period of uncertainty that it should act and with some commentators saying act on the rate, being dictated to by the the Federal Reserve was some saying that System would have abdicated any Treasury, it seemed to him that the of the market. In acceptance of the course role except passive judgment the organization was that in his what he was saying essence, It was a like the present. on trial in periods the System was of for action a periods available in the limited question whether
situation like this could be explained to Reserve Bank directors in twelve different cities, none of whom had all of the information available to the Open Market Committee. The problem was one of pulling the System together so that the decision would be clear cut, whether it be right or wrong, for one could not fiddle with markets such as now existed. In his view the Government securities market had been badly damaged by the fiddling of the last few months, and that was a matter for which the Federal Reserve had some responsibility. Where the matter would end up he did not know, but personally he would like to see those Banks whose directors were to meet on Thursday of this week take action on the discount rate and dispose of the matter, for he felt that this would be better for the System, even realizing that would be placed on the action. He would be many misinterpretations to express his (Chairman Martin's) personal glad if Mr. Hayes were Directors for he would like them to the New York Board of judgment Certainly, if a move he thought about the situation. to know what business situation were to on the discount rate and the were made but that was the risk that the System would be blamed, collapse, failed to move when it had knowledge of must be run. If the System in a position of it might be financing ahead, the difficult Treasury it to adjust the presented to taken the one opportunity not having the market. In alignment with closer to a realistic discount rate just one bill there was not be noted that it should this connection, of short that the aggregate correct to say felt it was rate, and he for a long time. above 3 per cent close to or rates had been term
Mr. Thomas commented that throughout 1956 the bill rate was consistently below the discount rate. A bill rate 1/8 or 1/4 per cent below the discount rate with net borrowed reserves around $100 million was more normal than otherwise. If the discount rate were moved to 3 per cent, there might not be any rise in the longer bill rate. Chairman Martin then said, with respect to the problem of technical adjustment, that certainly the more logical situation was for the discount rate to be slightly above the going rate. He doubted that the System would want to abdicate its responsibility for policy in the absence of such a relationship. He felt reasonably clear in that the System should not wait; rather, he thought that his own mind to the world clearly where it stood. the System should express he was not particularly concerned Chairman Martin said that to open market operations. While he at this juncture with respect neither would he care to see any would not want to be inflexible, Instead, he would prefer to overt easing in the level of reserves. side of restraint. At the same time, if have doubts resolved on the not want actively to were made he would a discount rate adjustment meant a greater degree to grow that the change permit the conviction of restraint on reserves. that he by stating the meeting then summarized The Chairman should be the policy directive agreement that all to be in understood
continued without change. The majority would favor an increase in the discount rate to 3 per cent at the earliest possible moment. The consensus seemed to be to maintain about the same level of re straint as at present, with any doubts on the part of the Account Management resolved on the side of restraint. He then asked whether there were any comments on this summary. Mr. Hayes commented that he doubted whether recent articles in the New York and Washington papers about System policy being in a state of suspended animation had exerted much effect on the trend of market rates, for the main factor had been heavy buying by nonbank investors. He also had some reservations about the idea that simply because the System thought a discount rate of 3 per cent was right a couple of months ago, was ready to move, but was inhibited by the Treasury financing, that meant per se that the System should feel the same way now. The fact was that credit demands had been more modest the beginning of the year; at least, that was the than any foresaw at way he interpreted the economic comments today. The Committee was always entitled to re-evaluate the situation at every meeting, and of mind. Further, he had a little various factors might cause a change disposition on the part of some members of feeling about the apparent developments. While there the Committee to anticipate business of reasoning that recovery was going to appeared to be a general line up and that there was going to be a sharp price rise, practically speed
no evidence of this had appeared as yet. The question was whether the situation justified a really overt move, and he did not think that it did. The System was always in the position of having to take chances, and he was inclined to feel that the chances involved in waiting for the 18 or 19 day period in April were no greater than those involved in the possibility of something going wrong by moving to 3 per cent right now. He liked the idea of the System moving together but not the idea of the New York Bank moving ahead of most of the other Banks. Chairman Martin commented that he had meant to bring out that the New York, Philadelphia, and Chicago Banks were the only ones with directors' meetings scheduled for this week. To this, Mr. Hayes responded that the public might not realize the situation; if a move were made, he would prefer to have most or all of the Banks move at one time. that the System was not organized in Chairman Martin replied At times in the past it had relied on the money market that manner. the last few years the money market bank bank for leadership, but in to make it clear that the leader. He also wanted often had not been to move now that anyone was committed not intended to imply he had should have moved earlier. had felt that the System simply because some should move now, for he happened judgment was that the System His own even though there for such action, the situation called to think that relations standpoint. from the public would be some difficulties
There had been such difficulties when the San Francisco Bank first moved to 2 per cent last August and there were some difficulties when the discount rate was raised to 2-1/2 per cent. However, subsequent events had vindicated both increases, and in his judgment they would also vindicate a move to 3 per cent at this time. Mr. Hayes commented that the New York directors would meet on the 5th of March and on the 12th, and that the latter date would have the advantage of permitting a closer coordination of timing with the other Reserve Banks. Chairman Martin responded that it would also have some dis advantage. The date would be closer to the date when the Treasury would next come to market, and discount rate action then would cause that much more ferment. Earlier, there had been discussion about the possibility of moving around the 19th or 26th of February, but the action had been deferred in order to provide a little more breathing had experienced in its refunding what was spell because the Treasury as a failure. From the standpoint of both the regarded publicly that the earlier discount rate action Treasury and the market, he felt better it would be. it were going to be taken--the was taken--if of whether the New York remarked that he was thinking Mr. Hayes other Banks. He felt to act ahead of the would be willing directors they would be reluctant. quite sure the meeting dates some discussion concerning There followed at the suggestion during which, boards of directors, of the respective
of Mr. Allen, it was understood that the statements made by Messrs. Thomas and Young this morning would be reproduced and copies made available to the members of the Committee and other Reserve Bank Presidents today. With reference to comments that had been made about the recent stability of the price index, Mr. Shepardson commented that although the aggregate index might be showing little change, it was hard to ignore the news of increases in prices and wages appearing in the papers almost daily. These increases, he noted, would ultimately show up in the index. The comment was made in this regard that nevertheless the index had been on a plateau for some time. Chairman Martin then inquired whether there were any other comments, and none appearing, he suggested that the directive to the New York Bank be renewed in its present form. He also commented that there were certain to be rumors crystallizing on Thursday and caution far beyond the usual degree should be observed, that to calling any special meetings of directors. particularly as Thereupon, upon notion duly made and seconded, the Committee voted unanimously to direct the Federal Bank of New York until other Reserve wise directed by the Committee: such purchases, sales, or exchanges (1) To make (including replacement of maturing securities, and to run off without replacement) allowing maturities
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 sustainable economic growth and stability, and (c) to the practical administration of the Account; provided that the aggregate amount of securi ties 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 indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; (2) To purchase direct from the Treasury for the 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 of indebtedness as may be necessary from term certificates time for the temporary accommodation of the Treasury; time to provided that the total amount of such certificates held at by the Federal Reserve Banks shall not exceed any one time in the aggregate $500 million. the next meeting of the Federal Open Market It was agreed that March 24, 1959, at 10:00 a.m. Committee would be held on Tuesday, Chairman, Mr. Young made a statement with At the request of the Reserve study of the regard to the status of the joint Treasury-Federal After reviewing the personnel assigned Government securities market. Reserve Bank of the Board, and the Federal key roles by the Treasury, study had been absorbed those engaged in the York, he said thus far New the program of consultations, in planning questionnaires, principally discussed the process. He next working papers in and getting the present form noted that in their and of the questionnaires evolution
more work than had first been contemplated would be involved for the Reserve Banks with respect to collection, tabulation, and compilation procedures. Planning and instruction documents would be finished as soon as possible with a view to avoiding any greater imposition on the time of Bank personnel than neces sary. As to the consultations, the general public relations document had been drafted and was now under consideration. In addition, Treasury and System staff assignments, which he outlined, had been completed for the respective working papers and for other assignments. Mr. Young concluded with the comment that in all of the staff discussions up to this point a very fine spirit of cooperation had been exhibited. commented that apparently good progress was Chairman Martin was enthusiastic about the work being made and that the Treasury being done. then recessed and reconvened at 1:45 p.m. with The meeting and alternate members of on the part of members the same attendance Reserve Bank Presidents as at the morning the Committee and other Messrs. Riefler, Sherman, From the staff of Committee, session. and Rouse were present.
The meeting of the Federal Open Market Committee reconvened at 1:45 p.m. with the following in attendance: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Allen Mr. Balderston Mr. Deming Mr. Erickson Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak 1/ Mr. Bryan, Alternate for Mr. Johns Messrs. Bopp, Fulton, and Leedy, Alternate Members of the Federal Open Market Committee Messrs. Leach, Irons, and Mangels, Presidents of the Federal Reserve Banks of Richmond, Dallas, and San Francisco, respectively Mr. Riefler, Secretary Mr. Sherman, Assistant Secretary Mr. Rouse, Manager, System Open Market Account Chairman Martin said that the purpose of this session was to discuss the problem of the number of persons attending meetings of the Federal Open Market Committee and having access to its records. It came about as a follow-up to the discussion that had taken place after the regular session of the Committee's meeting on January 27, 1959, at he had reported on a recent investigation into alleged leaks which time of information regarding certain decisions of the Board of Governors, withdrew during the discussion. 1/ Mr. Szymczak
the investigation having been made by representatives of the Senate Permanent Subcommittee on Investigations, of which Senator John L. McClellan is Chairman. The Chairman went on to say that since January 27, some individual members of the Committee or Reserve Bank Presidents had spoken to him on this subject and one or two sugges tions for a change in procedure had been made to him, but he had no idea of the general thinking of the group concerning the present procedure. It had occurred to him that, if the present procedure were to be changed, a possible means of dealing with the question would be to follow the present procedure at each meeting up through the presentation of the economic and credit reviews by Messrs. Young and Thomas, after which there would be a session limited to the and their alternates, the Presidents not members of the Committee of the Committee, the Secretary and an Assistant currently members of the System Account. In that limited Secretary, and the Manager and comments on policy and the discus session, the regional reviews to a policy decision would take place. sion leading that the Committee desired Chairman Martin said Continuing, and independent judgment the way of useful comment to get as much in same time it but at the its decisions, possible in reaching as was that there were against a charge its procedure wished to safeguard had access to or who at Committee meetings many people present so arrangement from the constituted an unsound its decisions that it
standpoint of possible leaks of information. A review of the present list of those having access to minutes of the Committee might be used by a critic to convey the impression that too many persons had access to Committee records. The Chairman went on to say that Mr. Fulton had made a suggestion to the effect that the Reserve Bank economists might meet separately prior to the meeting of the Federal Open Market Committee. In his (Chairman Martin's) opinion, this would not be desirable for reasons that he stated. He then suggested that each of those present express his views on the general problem, and he called first upon Mr. Bryan. Mr. Bryan said that to his mind the problem was an extra ordinarily important one. It was necessary to define the terms of the problem before the Committee could arrive at a correct solution. He then made a statement substantially as follows: 1. The problem needs to be approached as a value judgment, appraising risks against gains. 2. A fundamental in the situation, as I see it, is the temper of the times. The temper is such that public men and institutions are not innocent until proved guilty but are guilty until they can prove themselves innocent. The attack on public men and institutions by scandal mongering and allegations of scandal everywhere masquerades as patriotism. The degradation of the public taste is now such masquerades are generally accepted at so great that face value. We can expect no letup in the attacks. We can expect no letup because it is to the political or monetary self On the political side, attacks interests of our attackers. such as the Federal Reserve System on public institutions
are, generally speaking, politically cost free and are thus indulged in whenever they promise even the slightest possible advantage. This situation partly proceeds from a fundamental and irremediable defect in our constitutional arrangements, which relieve a member of the legislative branch of responsi bility for utterances on the floor and, in practice, relieve him of responsibility off the floor of the legislative assembly. On the monetary side, there is quite evidently a profit to be gained by the press in scandal-mongering and the allegation of scandal. As one distinguished publisher has said to me simply, "It sells papers." Then he went on to say that the press could not be made responsible in this country because it has succeeded in cutting down the libel laws and the interpretation of libel to such an extent that, practically speaking, they are unavailable to any public man or institution. Much more could be said on this subject. But the point is sufficiently made that the System can expect mounting and in creasingly savage attack not merely upon its policies, wherein a host of thoughtful men will arise to defend us, but upon allegations of wrongdoing and scandal, wherein we can rely only upon ourselves and our ability to prove our innocence. 3. The point that we must have firmly in mind and keep hold of is that these scandal-mongering attacks will not be related to facts or to our actual innocence. They will be related, instead, to the political or monetary self-interest of the attackers. We must, in my view, have clearly in mind the fact that our task is not only that of being innocent. Our task is also that of proving our innocence. Unless we approach our current problem with a completely cynical under standing of this point, then in my judgment we are going to arrive at erroneous conclusions. point to be realized is that under our 4. The next present organization and procedure the number of people of decisions is so great that involved in the knowledge the task of proving our innocence is impossible--note that the knowledge of decisions and I am distinguishing between the decision-making process. the problem, I the light of these circumstances 5. In of many informed minds is to preserve the participation think, reorganize our procedure process but to in the decision-making in order to: clearly within the certain that we are (a) make statute; and,
(b) reduce dramatically the number of people who have knowledge of actual current decisions at the time they are made; and, (c) handle the materials of the Committee under such security regulations, or such noncurrent status, as materially to reduce the possibility of unauthorized use or to make such knowledge and possible use of little or no significance. The advantage of (a) would be that, by staying as strictly within the statute as possible, we would materially reduce the profitability of merely whimsical attack. If we stay clearly within the statute, or its necessary and unavoidable implica tions, we rest on the solid foundation of the legislative branch's own considered decision; and we give ourselves the enormous advantage that is gained by anyone in an argument when he can cite on his side the fact that, "The law says..." By staying clearly within the statute, we practically assure ourselves that debate on a change of the legislative branch's previously considered decision will be on a much higher level of policy than will be true if we are accused of taking ad vantage of the law's silences. On the other hand, if we take advantage of the law's silences, without clear necessity, then we immensely increase the difficulties of our defense, either by ourselves or by those who are our admirers and advocates. For such reasons, which could be greatly extended and il lustrated, I believe it extraordinarily important that we give a strict interpretation to the statute and the clear implications of the statute, and that our use of the statute's silence, when it exists, rests upon paramount necessity. The advantage of (b) is that it would materially improve our chances of proving our innocence as against charges of leaks and scandal--which is the prime and overriding requisite in my judgment. The advantage of (c) is the same. The handling of the operating procedures of the Open Mar and the minutes and other materials that it ket function, necessarily produces, with a rigid sense of responsibility, generally regarded, both by our critics inside and would be branch, as a necessary extension of outside the legislative under the statute. our more narrowly defined responsibilities my approach to the 6. In specific terms, accordingly, Market Committee would be as follows organization of the Open think that only those who As for the Presidents, I (a) alternate members should be present at are members and This would be either entirely within the the meetings. so completely within the clear necessity of statute, or (for orderly continuity of the Committee's the statute of membership) as to be work at the annual change-over essentially beyond criticism.
In my opinion, the presence of the nonmember, non alternate presidents cannot be defended on the basis of the statute. I do not believe that their presence can be defended on the basis of necessity for orderly continuity of the Committee's work. I do not believe that their presence can be defended on the ground of mustering the total intellectual resources of the System in the process of decision-making; for I think it clear that several other devices could be utilized that would quite as effectively muster for the use of the Committee the opinions of the nonmember, nonalternate presidents. Indeed, I believe that a considerable case could be made out for the idea that it would be wise to have some of the presidents standing a little aside and a little independent of the group discussions out of which decisions are currently taken. There is, to be sure, an advantage to group discussion and group evaluation of differences in points of view and emphasis. On the other hand, there is some advantage in having some of the Presidents uninfluenced by the group discus sions and group evaluations, arriving at their evaluations by more independent procedures; and I would deem this advantage considerable for two reasons. First, the Presidents by their almost constant preoccupations with current monetary affairs, are among the country's better critics and commentators on policy, and they are practically speaking the easiest current and most properly accessible to the FOMC on current problems, so that a measure of independence in the judgments of some of value. Second, the Governors, the them could well be of great President members and alternate members of the Committee, to the officers of the Committee would still gether with some of represent a diversity in points of be a group large enough to emphasis, and a balanced evolution of a group view, oral this connection, the absent Presidents judgment. Moreover, in deprived of participation in the decision-making would not be at meetings: they means other than their presence process by knowledge of taken or only be deprived of immediate would impending decisions. certainly a necessity of the As for staff, it is (b) involve a mech of the FOMC must that the work statute and decisions and recording its deliberations anism for and legal advice. for professional economic, does it contribute any necessary, nor in my view It is not which is the important the decision-making process, thing to be extensive staff for there to that we must preserve, value arrived at. Accordingly, decisions currently knowledge of actual would be as follows: as to staff, my approach
(1) The economists of the President members and alternate members of the FOMC can very well have their responsibility for briefing their Presidents, as now, on the economic developments in their several Districts and nationally, and of considering with their Presidents the various policy factors entering into decisions. There could be no objection, I feel, to their being present at the economic and financial presentations made to the FOMC. I believe, however, that they should with draw once general discussion starts and decisions are either taken or impending decisions forecast. (2) There can be, as I see it, no objection to the Board's staff participating in the same way--and perhaps there should be a few exceptions made, but very few, for individuals whose presence at the entire meeting is deemed important. Certainly anyone remaining at the entire meeting, I believe, if not a member or alternate member of the Committee, should be an officer of the Committee. (c) As for the production of minutes of meetings in the offices of the Board of Governors, it seems to me that the procedure ought to be under rigid, written controls with at least an annual procedural checkup. (1) As for the Banks that are not represented on the Committee, I believe the minutes should not Open Market go to them until the minutes are noncurrent. Just how a time lag should be involved I do not know. The much of important thing is that there should be enough of a lag decisions have already resulted in action, either that in published statistics or in revealed or foreshadowed action by the Banks that are members or discount rate alternate members of the FOMC. to the Banks that forwarding of minutes (2) As for the are represented as members or alternate members on the FOMC, done promptly as at present, but I I think that could be the minutes should be rigidly believe that access to to the President and his associate economist confined file to such associate released from a security and a charge-in and charge-out system economist only upon of the President personally. by and under control initialed be released to of course, under regulation, They could, others when they are noncurrent. wires or the daily in detail not considered (3) I have However, as is suffi of the Account Management. reports put them under rigid control, ciently indicated, I would on the side of are to be made, errors, if errors making than lax procedure. rigid rather
The advantages of (c), (1), (2), and (3) are to be found in reducing radically the number of persons currently informed of decisions at the time they are taken. There is, however, an incidental advantage of considerable importance. I believe there is a mine of information to be had from analyzing the System's weekly statement, loan statistics, money rate trends, and so on. I believe that if some of the System's personnel, economists and Presidents alike, were working these mines a little more assiduously we would find the effort vastly rewarding; and, if the easy out of simply being "in the know" were removed from time to time as the Committee's membership changed, some of us might be tempted to do a little more pick and-shovel work in an effort to find out precisely what the System was doing. I guess I should speak personally on this point, but I think a little more pick-and-shovel work would strengthen my own intellectual muscles a good deal, for on a good many occasions I have found that when I got to reviewing statistics I had quite a different impression of System policy than I received from the 'round-the-table discussions of what we were doing or thought we were doing. 7. The foregoing discussion simply indicates an approach and omits many items of detail. There is one major point on which I will not evoke much sympathy and will not argue at length. I believe that the mechanism for fixing the discount rate should be altered and the power to fix the discount rates for the several Banks should be placed either in the Board of Governors or in the Federal Open Market Committee. The present mechanism was wholly logical when it was established; but in my view it is anachronistic, does not correspond either to the economic facts or the mechanistic facts of rate determination, is frequently embarrassing, and is destined sooner or later to lead us into grave difficulties. or worse, we now have a national money market For better and a national monetary policy. The discount rate should be with our other instruments, and the men operated in harmony having responsibility for the other instruments should not be of responsibility for the discount able to avoid the assumption rate. connection with the local Boards The important thing in of the Federal Reserve Banks is in keeping an of Directors who, by their questions, assist in making the able body of men officers of those banks look alive presidents and executive bring to the banks and, by their training and experience,
points of view and information of vast use for policy deci sions. It is not important, and provocative of great mis understandings, to leave the actual legal responsibility of fixing the discount rate in the hands of the local Boards of Directors. 8. The point of view adopted in these notes leads to Draconian measures. Such measures are herein suggested not because of any natural liking for them but because I believe them to be of paramount necessity in view of the temper of the times and indicated, in any event, by a logical and necessary interpretation of our statutory responsibilities. Mr. Bopp said that his approach differed somewhat from that of Mr. Bryan. First, he felt it important that everyone having access to open market information be a person whose integrity was beyond ques tion. There was also the matter of judgment, and if there was ever any doubt about an individual's judgment, regardless of the level of his position or his responsibility, there would be no option but dis missal. Second, a sense of participation in the open market process was important in terms of morale. Third, in terms of training, access to pertinent information was of value and this would include the opportunity to observe and listen to discussions at these meetings. Therefore, Mr. Bopp said, he would be inclined to retain the present procedure even if there were difficulty in defending it. He felt that leaks or threats of leaks would persist regardless of the number meetings or having access to the records. of persons involved in the Mr. Fulton said that he had been disturbed by the number of persons that had been present at meetings during the decision-making
process. He would agree that a number of Mr. Bryan's points would be helpful if adopted. He would be quite inclined toward the sug gestion that members of the staff who did not participate in the decision-making discussion withdraw from the meetings prior to that portion. Mr. Shepardson said that he, too, was inclined to agree with much of the procedure suggested by Mr. Bryan. It was not clear to him just how much the training of persons who did not participate in the policy discussion was furthered by having them present throughout the meetings, and he was inclined to agree that it might be better for them to withdraw after the economic review was presented. Mr. Shepardson said that he would not agree, however, with the suggestion that the Reserve Bank Presidents who were not currently members or alternates of the Committee should withdraw prior to the decision-making discus of the minutes, Mr. Shepardson said that sion. As to the availability would be that after a limited period-perhaps a few weeks his feeling minutes and other records could be after a meeting--access to the working on open market matters. In general, defended for those persons that the Committee should take every possible pre his feeling was minimize opportunities for eliminate or at least to caution to such as had arisen on some occasions in the past. criticism had stated a he thought Mr. Bryan Robertson said that Mr. where he did not to do was to state case. All he needed very good
agree. He did not think this an "open and shut" matter on either side. It was a matter of weighing the means by which the Committee could accomplish the job before it with the least amount of justifiable criticism regarding leaks. This meant that the Committee must be able to justify to itself its procedures for letting others than members of the Committee have access to information. With respect to the Presidents who were currently not members of the Committee, he completely disagreed with Mr. Bryan's suggestion for having them withdraw from the meeting prior to the policy decision process. Any advantages from such a procedure would be greatly outweighted by the advantage of having them present for the purpose of maintaining con tinuing familiarity with open market information from month to month and year to year. With respect to the staff, Mr. Robertson felt that all members should be treated exactly alike regardless of whether they were from the Board's staff or the Banks, What he meant was that if staff members from the Banks were to withdraw after the economic review, the same procedure should apply to those who were staff members from the Board. It could be argued that there were advantages to be gained from having the staff withdraw, Mr. Robertson felt, in a more independent view than if they were present that they might have His conclusion was that it would be during the policy discussions. for each Reserve Bank to be represented at every meeting, preferable were unable to be present, then one and if the President of a Bank
other member of the Bank's staff (an alternate member of the Committee, a First Vice President, an economist, or some other person) should be there so that that Bank would have a first-hand contact with what went on at the meetings. With respect to access to minutes and reports, Mr. Robertson said he was not bothered. The more that persons working on open market problems were familiar with this material, the better the advice avail able to the Committee and the Presidents was likely to be. The minutes did not usually reach the members of the Committee for a week or ten days after a meeting, and it seemed to him that their availability offered little danger of leaks, He would continue to make available to the members of the staff at the Reserve the minutes of the meetings and he noted that every one of the persons now Banks and at the Board, had been vouched for by a member of the on the list for such access Mr. Robertson said he did not Board or by a Reserve Bank President. adopt the suggestion that was ready at this time to think the System for the dis a change in responsibility Mr. Bryan had made regarding not now favor it. count rate and he would comment that he also thought Robertson later added the Mr. of the Committee and that no member should be an understanding there the Committee should meetings of who attended none of the Presidents of a Reserve with the directors open market decisions discuss any his view the board present, but in be the case at Bank. This might
of directors of a Reserve Bank should not have access to any of the open market information that was not made available to the Committee's staff. Mr. Mills said he did not know how the Committee was going to resolve all the different shades of opinion coming out of this discussion. His own view would be to accept the procedure suggested by Mr. Bryan, with several modifications. The first of these would be that all of the Reserve Bank Presidents should attend the open market meetings. He felt there would be no good reason for them to bring with them their economists, if the economists had access to the proceedings of the meeting at a later date and were available for consultation with the Presidents at that time. However, excluding the Bank economists from the meetings should not, in his opinion, be extended to excluding the officers of the Committee from the Board's staff who were elected at the regular meeting. That would eliminate of the associate economists as officers of the Committee the election the officers to the Secretary and Assistant and would limit Director of Research, and the the Economic Adviser, the Secretaries, General Counsel. Mr. Mills said that General Counsel and Assistant regarding the minutes, that they he felt rather like Mr. Robertson were distributed to the dam, and when they represented water over there would be no and members of the Committee the Presidents value and for their educational them to others objection to opening
interim guidance between meetings, it being understood that this would be done with discretion and by limiting access rather rigidly. As far as the discount facility was concerned, Mr. Mills' view would be quite different from that of Mr. Bryan. He had a strong feeling that this was the heart of the Federal Reserve System, and the merit of its decentralized organization rested on director participa tion. The essence of that participation was deliberating in the discount rate decisions. While this produced rough spots, his belief was that the advantages of preserving the present system immeasurably outweighed the disadvantages. Mr. Leach said that he thought all of the Presidents should be invited to attend the open market meetings. He felt that, if he had not been in attendance at meetings in recent years, he would have been at a considerable disadvantage in not having had the benefit of these discussions, especially on some occasions when he went to his directors with certain recommendations. He did not feel too strongly about the present arrangements for the staff to attend, but he did feel that each President needed to have some person in his Bank with whom he could freely discuss open market matters and to whom the minutes would be available. It seemed reasonable to him that each President should bring one economist with him to the meetings, including that part The Committee could operate without concerning policy discussions. but there was an advantage to a having the economists present, talk with his economist about Bank President to be able to Reserve
all aspects of the meetings, and it certainly kept the economist on his toes and interested in what was going on. For his part, Mr. Leach said he would undertake to defend that arrangement, which he believed to have much advantage, although he would agree that the Committee could operate on a more restricted basis. As to the minutes, he was inclined to feel that some time limit might be placed on making them available. For example, it seemed to him that after three months there was very little danger in making the minutes available to the members of the staff now having access to them. Mr. Leedy said that he felt strongly that the Reserve Bank Presidents should attend the meetings of the Open Market Committee even when they were not members. A President would be tremendously handicapped if he did not have that privilege. As to material dis tributed, he would divide that into the minutes and other data. He would be in favor of limiting access to the minutes to the man who accompanied the President to the open market meetings, and he could see no need to make them available currently to others, although there would be no objection to making them more widely available after a time. As to the materials, other than minutes, Mr. Leedy said he could see no reason to limit their distribution more than attendance at these meetings, the Committee was now done. As to to be talking about seven persons, since five Associate seemed from the Banks as Committee officers. Economists had been selected were to come to the meetings, Mr. Leedy said If the economists
he felt they should be privileged to attend the meetings throughout. He would doubt the value of their making the trip to Washington merely to be present at the preliminaries. If attendance were limited to one economist from each Reserve Bank (and Mr. Leedy thought there should be one man who attended regularly rather than to have rotation), and if the Reserve Bank President had the responsibility to see that there was no violation by the man who accompanied him of the rules with respect to dissemination of information, there would as a practical matter be no exposure to the kind of thing the Committee was attempting to guard against. Like Mr. Leach, he felt it of value to have a man on his staff with whom any aspect of the open market operation might be discussed. He thus came out pretty much in the same position as Mr. Bopp. He would eliminate making the minutes available to the rather long list of persons who now appeared to have access to them and would make them available to one man at each Reserve Bank who was selected to work with the President, and to bring that man to the meeting he should if the President wished be permitted to attend the meeting throughout. Allen said that Mr. Mills had expressed substantially Mr. the associate economists personally doubted whether his feeling. He that there was not much meetings. He also felt should attend the only for the economic an economist come to Washington value in having with the men on discussing these problems review. While he enjoyed
his staff, he believed their opinions were of more value if they were given on the basis of their own analysis, rather than after listening to the reports at the meeting. In sum, Mr. Allen said that he did not think the economists should be at the meetings, and he definitely felt that all of the Reserve Bank Presidents should attend. At the Chicago Bank the list of persons having access to the minutes was small, and he would favor letting them see the minutes when they were distributed about a week after the meetings. Mr. Deming said that he came out close to the position indicated by Mr. Mills. He started from a somewhat different basis than that indicated by Mr. Bryan. The charges of leaks seemed to cluster more around the discount rate than open market operations, Mr. Deming noted, adding that some 300 persons had some knowledge of a discount rate matter and an almost impossible task was faced to cut down that number in view of the structural organiza in trying when it was suggested that a half dozen tion of the System. Thus, from the forty odd persons who attended an persons be eliminated open market meeting, there was not much to talk about. Mr. Deming was much training value from the stand said he could not say there the Bank in either reading the minutes point of the economic staff of or sitting in on the deliberations. He of an open market meeting, no strong point in bringing a man into Washington agreed there was he felt that it was presentation. However, just for the economic
of value for the person advising the President to have current access to all the material that was available. For this, he would limit minutes access to the President of the Reserve Bank and one economic adviser. Also, for the report of open market operations, he would limit access almost that closely. For miscellaneous materials such as the economic and credit review, he could see no particular reason to place any limitation on distribution within the System. As for attendance at meetings, Mr. Deming said he would be entirely agreeable to the suggestion made by Mr. Mills on the grounds that it would put the Committee in about as reasonable a position as it could expect to be in. This, together with reducing the number of persons having of open market operations, would cut access to the minutes and report relations size. In response to a question the list to better public comment that there seemed to him by Mr. Hayes, Mr. Deming added the come to Washington for the be no value in having an economist to by sitting in the meetings as he could get training meetings, except in the future. He greater help to the President and thus be of only for the by the economist felt that attendance particularly the trips to Washington. would not justify economic presentation to have access the President the man advising while he wanted Thus, would confine Mr. Deming under discussion, to all the material associate economists. all of the so as to exclude at meetings attendance
Mr. Mangels said that he agreed with about the position described by Mr. Deming. He could see no advantage in having a man come to Washington just to hear the economic and credit review. As to distributed material, he noted that the wire summarizing the 11:00 a.m. daily telephone call should be treated with as great a degree of confidence as other open market materials. However, he would wish to have the minutes and any of the other open market materials made available not only to his economist, but also to the First Vice President of his Bank. Mr. Irons said that, as for attendance of his economist at the Committee meetings, he thought it was probably a matter of indifference either to the economist or to himself. He felt strongly that if the economist were not going to participate in the entire open market meeting, the expenditure for bringing him to Washington just to hear the economic review ould not be justified. Mr. Irons said that his view on this was partly dependent on whether he would have the privilege of discussing with his economist when he returned from an open market meeting any of the matters that had been taken up. He did not think the economist should be excluded from access to information if he was to be expected to serve as an associate as the minutes was the question of economist. Quite as important how freely the President might discuss the matters taken up at meetings with persons with whom he originally consulted open market
closely. A President should not operate in a vacuum if the System hoped to have an effective working group. There was always this ques tion of how best to use people and how to be secretive and still get full return out of the work. Mr. Irons said he would be inclined to agree that, on a strict legalistic basis, perhaps Mr. Bryan had the answer. However, even if that were adopted, he did not think it would stop the charge of leaks of information upon occasion. He felt it extremely desirable for all of the Presidents of the Reserve Banks to be continually exposed to the discussions that went on in open market meetings. The question boiled down to trustworthiness, Mr. Irons said, and the System would have to defend that trustworthiness when called upon to do so. He could see no basic difference between a of the Committee in 1959 and not being a President serving as a member Mr. Irons said, that virtually all member in 1960. It might be noted, were persons who had been involved in open market matters of those defense operations. On secret material on emergency cleared for top he understood to be Mr. to agree with what balance, he was inclined it was a matter of exception that view, with the possible Bopp's the open market meetings the economists attended indifference whether or not. should all of the Presidents that he felt Erickson said Mr. at by the economists If attendance the meetings. to attend continue of the economic to the presentation were to be limited the meetings
reviews, he questioned whether this would have enough value to justify their coming. If that were done, he would have no objection to any of the Board staff members sitting in on the meetings even if the Bank economists did not attend, provided they withdrew at the time the discussion of policy started. As for the material sent out and discussion after the meetings, Mr. Erickson thought this question should be left largely to the Presidents. The list of those at the Boston Bank having access to open market material was one of the smallest in the System and he had contemplated adding one or two names to it. Mr. Rouse said that his general thinking had been much along the lines expressed by Mr. Bopp. There was an educational value to the present procedure, and since each person designated to attend the meetings or see material was selected by a Reserve President or a member of the Board of Governors, he could be considered to be thoroughly trustworthy. The point Mr. Irons had mentioned that virtually all such persons had been fully cleared for security pur poses seemed to be a good additional test that could be cited. So at meetings by the associate economists was con far as attendance that if their presence was limited to the cerned, Mr. Rouse said at which the Presidents and review prior to the go-around economic and commented on conditions and policy matters, Board members reported at all. On the other to have them come it might not be worthwhile
hand, so far as the Account Manager was concerned, he felt it almost essential for him to have the nuances and shades of the full discussion in carrying out the intent of the Committee. Mr. Hayes said he found himself in strong sympathy with the views expressed by Messrs. Bopp, Irons, and others, except that he was inclined to go a little farther in that direction. The problem of leaks was going to be with the Committee always, and it seemed to him that there was grave danger of exaggerating it and of handicapping the Committee in accomplishing its main objective. The matter of trust was of great importance in the Committee's functioning. All of those selected must, of course, be people who could be trusted, and if ever any reason for doubting a person developed those responsible would take Draconian measures. Up to that point, Mr. Hayes felt that each President should have leeway to consult with persons who might assist him considerable that such persons should be given the in this function. This implied what was going on in the open market meetings. opportunity to see should be at the Com felt strongly that all of the Presidents He vital to them but because because it was meetings, not only mittee's was going on over the a better feel of what this gave the Committee On the at its decisions. helped it in arriving country and thus said that personally he economists, Mr. Hayes matter of associate He would present procedure. wrong with the there was nothing felt
have thought that any President of a Reserve Bank would want to have an economist present at the meetings who would get the flavor of what went on. In his own experience, it had been definitely useful to have an opportunity to discuss matters with a person who had been present and who knew the whole process of the Committee meetings. Even though the economist might later have access to papers including the minutes of the meetings, Mr. Hayes doubted that this would serve the same useful purpose as actual attendance. In addition, Mr. Hayes said that he did not believe the Committee should treat the associate economists from the Reserve Banks any differently from the Board's staff econo mists. If the Board staff members were present, he felt that the staff members working closely with the Presidents also should be present. With respect to the minutes, Mr. Hayes said that he had much sympathy with the view expressed by Mr. Robertson that after a there was not much danger in making them available to period of time and for this reason he would not be selected additional persons, In short, for the sake of to change the present procedure. inclined group of Presidents and senior staff members, having a well-trained on the integrity of the persons he felt that there must be reliance the Committee could successfully meet concerned. In his judgment, in the present general without a change problem under discussion the procedure. think the Committee had said that he did not Mr. Balderston been an allegation by a in the past. There had met the problem
member of the staff of Senator McClellan's Permanent Subcommittee on Investigations that in his observation the procedure to guard against leaks was not sufficiently tight. His position might seem reasonable to the uninformed in the light of the distribution of open market records to a list of 86 persons. Now that the gist of this comment had been relayed to the public by two newspaper columnists, the whole System has been given unfavorable publicity. Mr. Balderston favored a plan not far different from that suggested by Mr. Bryan. He would restrict the actual decision making and immediate knowledge of those decisions of the Committee on a "need to know" basis. He realized that this might seem at first glance to the desire to get an adequately trained group through interfere with System and also with the desire to have unity within the out the first of these objections did not seem to him valid. As System. The should serve two purposes; second, the open market meetings to the and second as a of open market policy, first, for the determination as to district and to exchanging views System assembly devoted be done about them. How affairs and what should national economic in that it had become had been marred somewhat ever, this purpose as to recommended to make statements custom in the go-around the conditions. If the the reports of economic policy along with it was free measures while rather extreme wanted to take Committee have all of the would be to its own, his suggestion to do this on
Presidents attend the meetings while the regional accounts were being given. Also, it was of great value to be able to discuss at these meetings all of the instruments of monetary policy including reserve requirements and discount rates, as well as open market operations. The procedure that had developed in this respect represented a great improvement during the past few years and this accomplishment should not be lost. When it came to the actual making of decisions to guide the Desk for the ensuing three weeks, Mr. Balderston felt that if the Committee wished to have the cleanest answer to any criticism, it could have the voting members of the Committee go into executive session at the end of the other discussion. What he was suggesting was that the Committee conduct itself just as it had been doing up until the last 15 minutes of the meeting and then to have the twelve individuals who by statute constituted the Committee meet to decide upon their directive to the Desk. When this decision had been made and summed up by the Chairman, it would be known only to 14 personsthe 12 voting members plus the Manager of the System Account and the Secretary of the Committee. Then, if there were any leak, only 14 persons could have known what the action had been. Mr. Balderston be done about the large volume he also thought something should said material that was distributed in connection with the Committee's of true that this material did not offer much danger a work. It was but if it were dangerous so after it had been distributed, week or be signed for and placed perhaps it should at the time it was issued,
under lock and key as part of the procedure for distributing it. Mr. Balderston said that he was suggesting that the Committee should look to its procedures so that it would not appear to be as lax as the comment of the investigator for Senator McClellan's Committee indicated the Board of Governors appeared to be. Mr. Hayes said that he had some difficulty in visualizing the nature of the executive session of the voting members of the Committee that Mr. Balderston had suggested, which he gathered would be confined to determining the wording of the directive and authoriz ing its issuance. Mr. Balderston responded that his thought was that any President or Committee member should stop short in his comments during the go-around before expressing what he thought the level of net borrowed reserves should be, that he should leave the final part of his thinking on the policy decision until the executive session. Chairman Martin remarked that this would not be an easy thing to do. He then invited the other staff members present to express their views. Mr. Riefler said that he felt strongly that real benefit resulted from having each Reserve Bank President attend the open some were not voting members, and from market meetings, even though by a person with whom he could discuss having each one accompanied came up. What bothered him was that during any of the matters that
the past few years the procedure had gone somewhat beyond that con cept. The list of those attending the meetings, and particularly of those having access to minutes and other Open Market data, had been expanded considerably, and he felt that it would be desirable to make a careful review of the list of persons authorized to have access to Open Market data. Mr. Sherman noted that since the 30's the Committee had moved from an extremely limited attendance at meetings and availability of minutes to the present much extended basis. This had been for reasons with which all were familiar. Perhaps the swing had gone farther than was needed to accomplish the purpose, and some cutting back might be appropriate. With respect to access to Open Market records, the list looked larger than it was in practice, since at least some persons were listed only because of rare need to see some specific record. As for the suggestion that circulation and control of the minutes rigid, Mr. Sherman commented that the existing procedure might be more could well be reviewed but that a close control of the minutes had always been followed in their preparation and distribution. that the discussion of this Chairman Martin then commented time but that he felt this essential topic had taken considerable been raised. Whatever the majority of the question that had in view to be followed in should govern the procedure decided was necessary that the present still was not convinced Personally, he the future. case for a more Bryan had put the was wrong. Mr. operating procedure
restrictive procedure as strongly as it could be put but his (Chairman Martin's) judgment was that the methods the Committee had been pursuing were the right ones. This was true for training purposes, for development of information useful to the Committee, and for other reasons. He felt that, in general, the Reserve Bank Presidents were pursuing the right course under the existing system. It had been something of a shock to him to find that these procedures were being criticized. However, he had noted that some of those who attended the meetings and sat on the sidelines took notes of the discussion. In his view, this was a mistake. He felt that only the the official record should make notes during the person who prepared meetings. in general, Chairman Martin As to attendance and procedures him that, from the individual Reserve Bank said that it seemed to to go back to the of view, it would be disastrous President's point that when he in the past. He recalled that had existed limitations least one or two that there were at to the Board he found first came of open market the subject matter who did not discuss Bank Presidents had been that Banks. His reaction anyone in their meetings with of the feeling or understanding get any real men could not those with whom they had someone unless make a contribution problems or informed basis. on a fully these things discuss could frequently they
As to the Reserve Bank directors, all of us got exasperated at times with the unwieldy nature of the System. At times, he wondered whether the System might be holding out a fraud to the public on whether there was adequate participation by the directors of Federal Reserve Banks in System matters. There was the problem of how to get the System to pull together, and each individual President had a problem in knowing what to say to his directors. The Chairman cited a comment by one individual director that had come to him from the outside that indicated a complete lack of understanding of the dis count mechanism. He realized that the Presidents had a very difficult job, but his own view was that if the Banks were going to get the staff to participate and to develop, they would go much farther by having some of them in at these discussions. Recognizing that Mr. Bryan had stated the case for restriction as clearly as was possible, even if charges of leaks would not be his suggestions were adopted the all going to enable the System to and their adoption was not eliminated violated its trust. As or that it had not prove its guiltlessness access to Open Market records, Chairman to the list of persons having to review it in it would be desirable Martin said that he thought the responsibility for con of putting on to each President terms he wished to with whom person or persons carefully the sidering be necessary to keep Perhaps it would not consult on these matters. assumed this Reserve Bank Presidents if the individual such a list, responsibility.
Mr. Bryan said that as he had listened to the thoughtful discussion of the problem, he had been impressed by the emphasis on the advantages from many points of view of the present organiza tion and procedure. He shared an appreciation of those advantages and wished to make clear his hope that they could be preserved to the greatest extent possible. At the same time, he would re emphasize what he believed to be the overriding importance of other considerations at present. The discussion had correctly emphasized the trustworthy character of personnel at all levels dealing with Federal Open Market Committee matters. He shared that emphasis on trustworthiness but could not agree that it eliminated a requirement for far more rigid procedures than the Committee now had. It could be said that the personnel of the System was of extraordinarily high caliber, but it still had elaborate audit and examination procedures that nothing had gone amiss. This was done not in order to prove to protect the personnel. If the merely to protect the Banks but pains to prove their accounting records were cor Banks were at such for, then wasn't it even that the cash was all accounted rect and System's responsibility for monetary more important, he asked, in the that no charge of scandal far as possible in proving policy, to go as doubted that these said that he also Mr. Bryan also was well taken. Reserve Bank Presidents discretion of the be left to the matters could Federal Open Market discussion. The during this as had been suggested
Committee was a statutory body and he believed it the better part of wisdom for the Committee as such to take the responsibility for its procedure and security regulations. Mr. Robertson said that he did not think the discussion of this problem could be pulled together at this session. Various points of view had been expressed, and in his opinion it was now necessary to have these views put together by the Secretary and to have the whole subject reviewed again after all of those present had had an opportunity to study the minutes. Chairman Martin stated that this was his view, and Mr. Bryan suggested that it might be desirable in the interim to have a small committee appointed to study the matter and present a recommendation to the full Committee. that before doing that he felt it would Chairman Martin stated record of this discussion prepared and dis be preferable to have the tributed, and after all of the members of the Committee and all of the had an opportunity to review it and con Reserve Bank Presidents had call another meeting for the purpose of sider the subject further, carrying forward the discussion. general agreement with this suggestion. There was Thereupon the meeting adjourned. Secretary
Also: Record of Policy Actions