August 18, 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, August 18, 1959, at 10:00 a.m. PRESENT Mr. Martin, Chairman Mr. Allen Mr. Balderston Mr. Deming Mr. Erickson Mr. Johns Mr. King Mr. Mills Mr. Szymczak Mr. Treiber, Alternate for Mr. Hayes Messrs. Bopp, Fulton, and Bryan, Alternate Members of the Federal Open Market Committee Messrs. Irons and Mangels, Presidents of the Fed eral Reserve Banks of Dallas and San Francisco, respectively Mr. Riefler, Secretary Mr. Kenyon, Assistant Secretary Mr. Solomon, Assistant General Counsel Messrs. Marget and Mitchell, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Molony, Assistant to the Board of Governors Mr. Noyes, Adviser, Division of Research and Statistics, Board of Governors Mr. Koch, Associate Adviser, Division of Research and Statistics, Board of Governors Mr. Keir, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Wayne, First Vice President, Federal Reserve Bank of Richmond Daane and Tow, Vice Presidents of the Messrs. Federal Reserve Banks of Richmond and Kansas City, respectively Anderson, Economic Adviser, Federal Reserve Mr. Bank of Philadelphia Mr. Coldwell, Director of Research, Federal Reserve Bank of Dallas
Mr. Gaines, Manager, Research Department, Federal Reserve Bank of New York Mr. Stone, Manager, Securities Department, Federal Reserve Bank of New York Mr. Brandt, Economist, Federal Reserve Bank of Atlanta Chairman Martin noted the attendance of Mr. Wayne in the absence of Mr. Leach, Mr. Tow in the absence of Mr. Leedy, and Mr. Noyes in the absence of Mr. Young. No objection being indicated, Messrs. Wayne, Tow, and Noyes were invited to participate in the meeting. The Chairman then called attention to the fact that Mr. Thurston had relinquished his duties as Assistant to the Board of Governors on July 31, 1959, and that his service as Assistant Secretary of the Federal Open Market Committee therefore automatically terminated. The Chairman also reported that Mr. Solomon had submitted his resignation as Assistant General Counsel of the Federal Open Market Com September 1, 1959, in view of his transfer from the mittee effective Board' s legal staff to the Division of Examinations. Thereupon, Mr. Solomon's resignation was accepted. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on July 28, 1959, were approved. to the members there had been distributed Before this meeting covering the period of open market operations of the Committee a report a supplementary report covering August 12, 1959, and July 28 through Copies of both reports through August 17, 1959. the period August 13 files of the Committee. been placed in the have
Mr. Rouse reported that the money market had remained tight during the period since the last meeting. Reserve positions at re serve city banks had continued under pressure while the New York banks experienced an increase in pressure, as evidenced by the fact that their basic reserve deficiency averaged well over $500 million during the past three weeks. Aggregate borrowings had averaged more than $1 billion for the past two statement weeks, and might well average more than $1 billion in the week ending tomorrow. Borrowings had typically in creased sharply on Friday of each week and had exceeded $1 billion on every Friday since the week ending June Open market operations supplied $29 million reserves on balance over the three weeks. The Account purchased Treasury bills and made some repurchase agreements early in the period, but in the past few days took advantage of opportunities to sell bills and allowed the last of the repurchase agreements outstanding to run off last Thursday. The rate on three-month Treasury bills, which had been running cent in mid-July, moved down to around the at around 3.30 to 3.40 per of the Committee and before the last meeting 3 per cent level shortly last week, when it began to rise under the stayed there until early influence of the additional 91-day bills sold by the Treasury in yesterday's auction program. In with its cash financing connection about where it was 3.42 per cent, on the 91-day bill the average rate where it was at the 42 basis points above mid-July, but about was in one-year bills, on the The six-month and time of the last meeting.
other hand, edged downward through most of the period, and it was only last Thursday that rates on these bills began to increase. At the close yesterday, these bills were at about the same level as at the time of the last Committee meeting, but were considerably lower than in mid-July. As a result of these relative rate changes, the unusually wide spread between the 91-day bills and the six-month and one-year bills had narrowed substantially and the 91-day bill had been brought into a more customary relationship not only with the rate on the other two bills but also with the discount rate. One aspect of the spread between the rates on the three-month and six month bills was that customer tenders submitted by the major New York banks for six-month bills about doubled between the auctions of while customer tenders for the 91-day bills July 27 and August 10, As a result, in the August 10 auction customer fell by 40 per cent. 182-day bills exceeded those for the tenders in New York for the demand which kept the rate by $20 million. Much of the 91-day bills week represented the storm as low as it was until last on short bills for several months. In addition, demand that had been evident cellar about by the steel strike may the liquidation of inventories brought demand for shorter bills. been a source of have over most of and bonds moved higher of Treasury notes Prices and prices set in last Wednesday a technical reaction the period, but resisted this notes of 19 4-3/4 per cent The new moved lower. the issue gained for example, Last Friday, for a time. reaction
nearly 1/ point to close at 101-10/32 bid, while the rest of the market was declining. Yesterday, however, the 4-3/4's turned around and lost 6/32 as the rest of the market continued to decline. Over the period as a whole the 4-3/4's of 1964 gained 3/ point, while prices of other notes and bonds, which until last Wednesday had shown gains in every issue, closed 3/8 point lower to 3/4 point higher. The corporate and municipal bond markets were firm during the early part of the period in reflection of the improved atmosphere of the bond markets generally. In the past few days, however, attention was focused on the growing calendar of forthcoming offerings and this dampened the atmosphere somewhat. Reserve projections of the New York Bank indicate that natural market factors will absorb reserves over the next few weeks and that in the absence of open market operations average net borrowed reserves will increase to over $600 million next week and rise to the $800-$900 million range in the following two weeks. The New York Bank learned that required reserves of country banks had late yesterday afternoon back to July 16. This upward by $43 million extending been revised to be incorporated in the projections was received too late information market operations. Hence report of open attached to the supplementary shown therein should be revised up all net borrowed reserve figures ward by $43 million. Treasury was giving some con Mr. Rouse commented that the which it planned to $200 million new cash to raising the sideration
raise in next week's bill auction by placing an additional $100 million in both the 91-day and the 182-day bills, rather than to place the whole $200 million in the shorter issue, as had been done the past two weeks. However, the Treasury had not yet made a decision on this matter. The Treasury would be out of the market until around October 1, when it would be necessary to raise new money. The Treasury would need this new money by October 9 at the latest. In response to a question by Mr. Balderston with regard to the prospective Treasury situation around the first of November, Mr. Rouse noted that the Treasury had issues maturing November 15 and that the November calendar was complicated by two holidays. He added that the Treasury would have to come back to the market in December for cash, probably about $2 billion. The Treasury might also have to come to the market in January and April, in addition to its refunding operations. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period July 28 through August 17, 1959, were approved, ratified, and confirmed. staff memorandum distributed under date of Supplementing the August 16, 1959, Mr. Noyes presented a statement substantially as follows with respect to economic developments: observers anticipated that we might see Many economic rate of recovery in the third quarter some slackening in the
of this year. These predictions were based in part on the assumption that the rapid pace in the first half was due in some measure to inventory accumulation in anticipation of the steel strike (or a settlement involving price increases) and in part on the assumption that the major impact of the fiscal 1959 deficit fell in the first half of this calendar year. Some also expected that the very high rate of con struction, especially in the residential sector, would not be maintained. For the time being, there appears to be little support for these expectations. But as the quarter progresses it will become increasingly difficult to tell whether the move ments in most of our measures of activity reflect the steel strike, the shifting winds of international politics, or some basic change in the economic situation. The two-point decline in the index of industrial pro duction in July can easily be accounted for by the steel strike. In fact, we can guess that the index might well have increased by another point or more were it not for the strike and related developments. Actually, the index lost 3-1/2 points due to the decline from prestrike levels of activity in steel, coal, and ore, but we must recognize that to some extent those levels were artificial in that they related to the prospect of the strike. It now appears that gross national product for the second quarter will be almost $485 billion--about a billion more than was generally anticipated. Construction has been well maintained, and the 1,350,000 seasonally adjusted annual rate of housing starts in July came as a surprise to many who had anticipated that the large volume of building earlier in the year and increased tightness in the mortgage market would show up in a reduced level of starts by this time. All the evidence to date indicates that consumer demand, supported by substantial consumer borrowing, is con tinuing at very high levels. The most recent data on auto sales, for the first ten days of August, are up again from the reduced rate in early July. In the first full week of August, sales were 9 per cent above a year ago, which department store is especially significant because of the extraordinarily high that prevailed at that time. level continues, and if the personal visits If the steel strike the heads of state add further to the back and forth among coexistence, we shall certainly see expectation of peaceful economic activity. Then of these measures of declines in some the underlying situation be difficult to judge whether it will also reflect some strong, or whether these declines is still demand pressures that have slackening in the mounting the year to date. characterized
For the moment, it seems clear enough that the drop in production is more than accounted for by the strike and the reaction in the stock market is primarily attributable to a re-evaluation of the international situation. Hence, all indications are that the underlying situation at present is one of strong and broadly based demands. At the same time, abstracting from the possible effect of whatever strike settlement is ultimately agreed upon and the possibility of renewed international tension, the immediate outlook for continued price stability appears to be very good. The fairly tight position maintained in recent months with respect to credit availability, coupled with the fact that the Congress has shown less zest for many types of expenditure than was expected, appears to have so tempered the burgeoning demands in the economy as to hold them generally within the limits of our rapidly expanding output of goods and services. In fact, the first half of 1959, and perhaps the first three quarters, may well appear in retrospect as a period in which markets, influenced by well-timed and courageous action in the field of both monetary and fiscal policy, performed their traditional function of directing resources to their most efficient uses, within the framework of reasonable over-all price stability. Mr. Koch made substantially the following statement with respect to financial developments: Having just returned from four weeks of vacation, I should be listening rather than talking today. But perhaps it will be of some interest to you to relate the main impressions of the current financial situation that strike one who has been away from the scene for a time. Looking first at our most immediate field of interest, and money, I am struck most by the heavy and bank credit Loan growth at city banks since persistent loan demand. midyear has been larger than in the comparable period of any postwar year except 1950, when loans expanded sharply following the outbreak of hostilities in Korea. This followed a record $5-l/4 billion loan recent growth increase at all commercial banks in the second quarter, high second quarter in per cent more than the previous was due in part, of course, to the build-up 1955. This inventories in anticipation of in metal and metal product are just entering the usual strike. Moreover, we the steel build-up in business loans at banks, reflecting seasonal autumn needs for funds. harvest and other
As to the recent heavy loan demand on banks, I am impressed by the importance of the consumer in these demands. Strong consumer borrowings are reflected not only in the sharp increase in the instalment loan portfolios of banks but also in their real estate loan growth and in the heavy borrowing of finance companies. Despite the large increase in bank loans thus far this year, the active money supply has been held to a seasonally adjusted annual rate of growth of 3-1/2 per cent when measured by end-of-month figures, lower when measured by daily average figures. It changed little in May and June and then increased sharply, $1.4 billion, in July-a month in which banks initially bought practically all of the $5 billion of new Treasury bills. Deposits at city banks have declined thus far in August, in the main due to special and seasonal factors. Growth in deposits has been kept moderate in recent months because banks have sold substantial amounts of Government securities at their higher yields to nonbank investors. This development, in turn, has reflected the increased pressure on bank reserve positions, as well as the higher loan to deposit ratios of banks today compared with those of similar periods of other recent economic expansions. Turnover of bank money is also up sharply, reflecting tighter credit conditions and higher interest rates. The seasonally adjusted annual rate of turnover of demand deposits at leading cities outside financial centers is currently not per cent above its trough in the recent recession but only 15 above its peak in the previous upswing in the also 7 per cent third quarter of 1957. too, by the hesitation in the stock market I am struck, strength, or at least absence of further and the related Even before the sharp drop a week weakness, in bond markets. ago yesterday, stock prices had been drifting lower. They per cent below the peak reached are still, however, only 2-1/2 day in August. Although the recent on the first trading described as a "technical adjustment", decline has been generally reactions in the stock be expecting some we should probably to price ratios as dividend and earnings market with current low as they are. markets has no doubt been improved tone in bond The recent events in the stock market, but associated to some extent with adjustments from the over undoubtedly reflected the it has also securities to the Treasury's in markets for fixed-yield reactions
earlier poor debt and cash position, to fears of further inflation, and to expectations of large prospective private and municipal demands for credit and capital. It has also reflected seasonally low new offerings of securities by corporations and State and local governments, and an assurance that there could be no additional long-term Treasury offerings with the 4-1/4 per cent interest ceiling. Yields on out standing bonds of all types are currently down 5 to 10 basis points from their recent peaks, and interest rates on most shorter-term obligations are also down from recent highs. There is a feeling developing in financial markets that pressures on interest rates and bond yields may be beginning to reassert themselves, but this feeling has not yet been reflected in most of the available financial statistics. Three-month Treasury bill yields, however, which had fallen to less than 3 per cent, have increased to a level only slightly below rediscount rates. A correlated impression of one who has been away is the better cash and debt position in which the Treasury finds itself today as compared with only four weeks ago. That was before the recent highly successful refunding and just after the two large issues of bills had been auctioned at high rates of interest. Last week's $1 billion issue of March tax anticipation bills went at 3.72 per cent, and the Treasury is expected to be out of the market until October. Some of these impressions suggest a pause in financial developments in recent weeks. It is extremely difficult, however, to appraise what part of any pause that may have was due to the steel strike, to the usual summer occurred lull, and to what may be transitory international events. To my mind, no signs in recent financial developments the continuation of a vigorous economic upswing. contradict as to the immediate problem facing open market Finally, Board's staff reserve table distributed to operations, the this is broadly confirmed by the you this morning shows--and also furnished to you this morningNew York Bank's figures to drain a considerable volume that market factors are likely over the next two weeks. from the banking system of reserves rise in required reserves resulting This is due mainly to the of the recently auctioned Treasury from initial bank purchases and to the usual well as other credit expansion, bills as Assuming no change in credit decline in float. late-month the next two weeks to maintain over policy and a desire borrowed reserves of the the level of net approximately could be met by repurchase this seasonal drain recent past, to persist, except since it is likely agreements. However,
for brief periods, on into the fall as a result of the working of seasonal factors, it might well be met by outright purchases of securities. Mr. Marget commented as follows with respect to the United States balance of payments: At the last meeting of the Committee, after having reported the sobering news of a projection for a balance of-payments deficit this year considerably larger than the already large deficit of last year, I reported the late arrival of an estimate of U. S. exports in June; and I suggested that it was barely possible that these figures might turn out to be the first significant evidence of that turn upward in our exports for which we have been hoping. At that time we did not have any details as to the nature of this increase in exports. Now that we have these details, we can ask whether they are or are not such as to encourage an optimistic view as to a possible turn in our balance-of-payments position. The answer is that, as far as they go, they do support an optimistic view. To begin with, the June rise was not the kind of export rise we had been having through May. This earlier and slower rise was concentrated in agricultural commodities, and was largely related to U. S. surplus disposal programs; this hardly brought much encouragement to those of us who were particularly about our competitive position in concerned the field of manufactures. But in June there was a significant and widespread increase in nonagricultural exports-the first such increase since the export decline began two and a half years ago. the distribution of the improvement within Secondly, the range of nonagricultural exports was such as to suggest lost our ability to compete in some that we have not yet has been expressed. The fields about which some pessimism case of coal, for example, the exports of which did drop sharply again in June, is not a proof of our noncompetitive and land coal in Europe ness: we know that we can produce than many European producers can sell it, and more cheaply some months ago when that proof of this was provided up discriminatory restrictions in particular, put Germany, yet been removed. What S. coal which have not against U. was the pickup in the striking, on the other hand, is vehicles, which included of such things as motor exports
advances in the exports of trucks, tractors, and automobile parts, together with some increase in passenger cars. As the written report of the staff points out, exports of trucks and tractors were up about one-third as compared with a year earlier, and automobile parts were up by a fifth. Having reported this much, which I would certainly call good news as far as it goes, I hasten to point out that it still doesn't go very far. In the first place, it is only one month that has shown this degree of improvement. The months to come are those that will tell the story. Secondly, the kind of turning point for which we have been hoping has not yet been evidenced in the post-June figures for the international movement of gold and dollars, which is, after all, the reflection of the magnitude of our over-all balance-of-payment deficit., though it must be said that the more recent increase in the deficit, as so measured, large though it is, is still somewhat less than it was expected to be on the basis of the forecast of a $4.5 billion deficit for the whole year. Finally, as I suggested at. the last meeting of the Committee, even if we have in fact begun to see the turn in our export performance, we still have a very long way to go before we get our foreign accounts into balance. On the most optimistic basis possible, our balance-of-payments problem is likely to continue to be with us for some time to come. the following statement of his views on Mr. Treiber presented business outlook and credit policy: the strong despite the The business situation remains price trends in most markets month-old steel strike, while have continued steady. Federal Reserve District some 31,000 In the Second of these are in the are on strike; 23,000 steel workers the steel strike, area. Presumably reflecting Buffalo the three weeks in Buffalo during store sales department from the cor only 1 per cent 8 were up through August sales in the District last year, while responding weeks The steel strike apparently were up 6 per cent. as a whole outside the Buffalo in the District had little effect has market areas major labor of the District's area. Four in July and show lower unemployment to were reclassified in the District market areas no major labor there are now cent or more. of 9 per as having unemployment classified on the optimism District indicate about the Reports from next few months. over the outlook and employment business
Bank credit has been expanding throughout the country. There has been a strong demand for bank loans widely dis tributed among different types of borrowers; this has been especially true as to all types of consumers. So far, the steel strike appears to have had little effect on business borrowing. Bank investments rose by only $250 million in July in connection with the Treasury's $5 billion cash financing; in early August bank investments were reduced by more than that amount. Demands in the capital market have been surprisingly light this summer. There are, however, signs of at least a seasonal building up of new capital market issues in the next few months. Although the money market has continued tight, the yield on Treasury bills tended to move lower until a week ago. The impact of the new Treasury financing has since helped to turn short-term rates around. Yields on three-month bills have risen to a point well above what they were three weeks ago. When the steel strike is settled, a new burst of expan sion is likely. And we may expect an upward pressure on prices. The intensity of the pressure will depend on the length of the strike and the nature of the settlement. At this stage the steel strike is an important uncertainty. Another factor that must be borne in mind is the public spotlight in which we now find Federal Reserve policy as the Congress and the Administration struggle with legislation to remove the limitation on the maximum rate of interest on U. S. Government bonds. Whatever action is taken by the System will be subjected to critical public analysis and will be evaluated particularly in the light of the steel strike. While a further tightening of credit restraint may well be called for in the near future, immediate overt does not seem appropriate. We would not recommend action a change in the discount rate or in the directive at this does seem to us, however, that it is desirable time. It for the System to move toward greater restraint through market operations. If current reserve projections open are borne out, this aim might be accomplished to a large by allowing market factors to absorb reserves. extent This would primarily be a matter of the Manager feeling the tightening is too severe, reserves could his way. If be supplied "reluctantly" to meet a part of the expanding needs. said that the latest available statistics on pro Mr. Erickson trade in the First District employment, and duction, construction,
continued to present a favorable picture and that the steel strike had thus far had little impact. Most steel users reported sufficient inventories to last for a few weeks. Industrial production in the district rose in June, although not as much as nationally, while construction was strong, being 8 per cent ahead of last year and 27 per cent ahead of 1957. The cumulative figure for the first six months of this year was 15 per cent higher than last year, and the picture was strongest in residential construction, 37 per cent ahead of last year. All of these comparisons were more favorable than the national figures. Employment improved in June, as compared with May, mostly in construction, trade, and services, but compared with a year ago the greatest improvement was in manufacturing. This improvement had led to the upward classification of labor areas; six areas formerly classified as having unemployment of 9 per cent or more were reclassified, in July there were no such areas in the district. with the result that to be good, although not as strong as nationally. Retail trade continued reported that the July survey of mutual savings Mr. Erickson one bank paying interest of 3-3/ per cent, 29 paying banks showed paying 3 per cent. per cent, and 13 30 paying 3-1/4 3-1/2 per cent, the interest rate on conventional The survey also showed that and New Hampshire was 5 per cent, mortgages, generally, in Boston cent. These levels it was 5.5 per the rest of the district while in in many other than those prevailing be somewhat lower appeared to of the country. sections
Turning to questions of policy, Mr. Erickson said that he would recommend no change in the directive and that he would not favor a change in the discount rate. As to open market operations for the next two weeks, he would leave it to the Manager of the Account to judge the feel of the market and to keep that feel as tight as it had been. He would supply reserves reluctantly and resolve any doubts on the side of restraint. Mr. Irons reported that the economic picture in the Eleventh District continued to be one of strength, although there had been some leveling off, perhaps attributable to the summer lull. Depart ment store sales in July, while well above a year ago, were slightly under June totals. In the petroleum industry, production and both edged a bit lower, pulling the industrial production refining index down slightly. While the stock position in the petroleum industry had perhaps improved a little, it seemed likely that there would be no increase in allowables in the district in September, or October. The steel strike as yet was not an possibly even into factor. Employment was strong and rates of unemployment, important force, continued to of percentage of the labor measured in terms In construction the below the national figures. run appreciably was reported to Mortgage money also was one of strength. picture levels still somewhat prices, with the at a bit higher be available situation was very figures. The agricultural below national average
good, the situation in the fields appearing even better than the statistics. To summarize, while there may have been a bit of leveling off, perhaps due to the summer lull or the petroleum situation, most of the indicators were holding at a high level. With respect to banking, Mr. Irons said that reserve positions were tight and bankers were talking continually of an unusually strong demand for credit. They stated that they were being selective and could easily increase their loans further if they had the wherewithal to do so. Various kinds of consumer lending had advanced sharply and some seasonal demand was now beginning to show up in the loan picture. There had not been much change in the rate of borrowing at the Reserve Bank over the last three or four weeks; with the exception of an occasional day or two, discounts were running close to 5 per cent of the System total. Turning to policy, Mr. Irons said he found himself in agree the statements made by Messrs. Treiber and Erickson. ment with said that the Twelfth District picture was similar Mr. Mangels as over-all production was by Mr. Treiber as far to that described No effects of the steel strike were seen as yet concerned. serious did not appear to have been dampened and general business activity from the severe areas had been removed Two major labor market down. few smaller areas still leaving only a unemployment classification, of the steel strike, some 60,000 classified as critical. Exclusive district, but worker present within the were on strike at persons
income nevertheless was at a high point, some 10 per cent higher than in mid-1957. This was reflected in a greater increase in department store sales in the Twelfth District than for the nation as a whole. Auto sales were holding up well. Instalment credit had been increasing quite rapidly, and banks appeared to be stretching out repayment terms, but delinquencies were considerably lower than a year ago. Residential construction was declining, and agricultural income was expected to be somewhat less than last year due to lower prices and higher costs incurred by farmers. Mr. Mangels went on to say that demand deposits showed a modest increase during the past three weeks. While total time savings deposits increased $1 4 million. Bankers deposits were down, and indicated that they were commenting on the tightness of money were increased more than $300 million in the being selective, yet loans selling Government securities The banks had been three-week period. District than elsewhere; only more rapidly in the Twelfth somewhat banks was in bills total portfolios of district 2.3 per cent of the the nation as a whole. with 9.3 per cent for as compared should be reason why restraint Mangels saw no compelling Mr. was still in the The Treasury financing at this time. increased to take a were beginning of past restraint picture and the effects were declining loan of cases, banks bite. In a number strong of those on Exclusive customers. from substantial applications labor force was unemployed 5 per cent of the strike, approximately
and some excess productive facilities were still available. In two weeks, Mr. Mangels suggested, the Committee might be able to evaluate better the seriousness of the effects of the steel strike. He con cluded by saying that he would favor no change in the policy directive and that he saw no occasion to change the discount rate at this time. Mr. Deming reported that some adverse effects of the steel strike were beginning to be seen in the Ninth District, but that so far they had been confined almost exclusively to the iron ranges. The longer the strike lasted, the more severe these effects would be on the ranges. Early settlement of the strike probably was more important to that section than to any other, the mines being highly seasonal in activity. By and large, rainfall continued inadequate in large areas of the district, and the August crop estimates showed an even more unfavorable comparison with a year earlier than did the July 1 estimates. South Dakota, in particular, had been hard hit. Bank loan demand continued to be very strong, Mr. Deming said. Loan-deposit ratios were high by any recent past standards and had shown more growth so far this year than in the nation generally. City banks, however, seemed to feel that the peak of pressure may have fell slightly in the most recent half passed. Country bank loans need to carry over a larger than month period, but the prospective normal volume of farm loans due to drought, plus cattle feeding country bank loans higher than seemed likely to keep requirements, usual for the balance of this year.
As to policy, Mr. Deming expressed agreement with Mr. Mangels. He would prefer to see no increase in the pressure on reserves, and he saw no particular reason to change the discount rate or the directive at this point. Mr. Allen said that the underlying economic picture remained strong and relatively unchanged in the Seventh District. Some business men were thinking in terms of a leveling off of activity late this year, and it seemed reasonable to expect a slowing of the rapid expansion that had been experienced. But assuming settlement of the steel strike in the reasonably near future, no evidence was seen at this time of any basic change in the general business picture. The automobile manufacturers, Mr. Allen said, felt that pro duction lines could run on present inventories of steel until October they would be able to run at scheduled 15. By this, they meant that rates, which contemplated lower production during the change-over of 260,000 cars was expected as against period. In August, production sales of around 460,000, which would reduce inventories 200,000. reduction of at least 150,000 in September was contemplated. Another of 965,000 cars on August 1 should be reduced Thus the high inventory a full figure under normal on October 1 to about 600,000-still (as a matter of business judgment) conditions but perhaps not excessive steel strike was an uncertain the duration of the considering that quantity. the Seventh District had shown a steady Reporting banks in except loans on mid-July in all categories loan expansion since
securities. Moreover, the increases in business, real estate, and finance company loans were considerably greater at Seventh District banks, in the three weeks ended August 5, than at reporting banks for the nation as a whole. However, heavy net sales of Government securities, largely the short-term issues acquired in the Treasury's July cash financings, more than offset the loan growth. Thus, reserve pressures on district banks had not been severe. The basic position of Chicago central reserve city banks was not as good as a month ago, but it was less tight than two months ago. District reserve city banks continued to sell Federal funds on balance and their borrowings at the discount window had been reduced, while country banks showed little change in position. Mr. Allen saw no reason to change the directive at this time. The Chicago Board of Directors was to meet the day after tomorrow-the only meeting prior to the next meeting of the Open Market Committeeand he expected to recommend no change in the discount rate, largely because a major industry was on strike and the strike might last a months hence, he might feel that he had made a long time. Some mistake in judgment and should have urged a rate increase at this directors' meeting was to be time, but in any event another Chicago time the picture might be clearer. held on September 3, by which to the operations of the Desk, he would not change With reference However, he agreed with followed in recent weeks. the direction
Mr. Erickson that doubts should be resolved on the side of restraint. Mr. Wayne said that the situation in the Fifth District was similar to that reported for the nation as a whole. The only effects of the steel strike were those clearly to be expected: the layoff of some 30,000 workers in the Baltimore area, spreading unemployment in the bituminous coal mining regions, and the layoff of some workers by the coal-moving railroads. Otherwise, the strike appeared to have had no appreciable effect on the level of economic activity, and there was no evidence of any change in the optimistic sentiment evident throughout the district. The rate of increase in loan totals had slackened somewhat since the date of the last Committee meeting; loans were no longer rising at a pace as fast as indicated by the national figures or as fast as they had previously in the district. This suggested that some of the demand was being resisted by banks in a tight reserve position or that the situation had moved back into a more normal pattern for reserve city banks. Earlier in the somewhat to make good on outstanding lines of year, some banks were called upon for years, but unused, and some of credit that had been in existence this might now be moving back. to policy, Mr. Wayne indicated that his views With respect expressed by Mr. Erickson. were similar to those that in following the discussion today and Mr. Mills said he detected a tendency previous Committee meetings, the discussions at
to use as the measure and criterion of the effectiveness or in effectiveness of Federal Reserve System policy the expansion of commercial bank loans. There appeared to be an inclination to doubt the effectiveness of System policy in view of the continued rise in such loans. On the other hand, if one focused his thinking on the total of commercial bank loans and investments, which he believed was the correct measure and criterion on which to fix policy actions, one noted a substantial divestment of Government securities from commercial bank portfolios, a movement which was now tending, to a degree, to spread to other types of securities. This suggested to him that System monetary and credit policy had been more restrictive than might seem to be the case from surface indications; that is, from looking only at the movement of loans. Mr. Mills then read the following statement: There is nothing in the economic situation as I see it that would justify any change in the views that I have expressed on the System's monetary policy at previous meetings of the Federal Open Market Committee. There are that I can find to commend intensifying certainly no reasons the System's present policy. On the the restrictiveness of a more moderate monetary policy, in my opinion, contrary, for. In any event, there are two redeeming is still called that has been pursued which elements in the monetary policy of as severe restrictiveness prevented the development have as would otherwise have the availability of credit over been the case: reserves that injections of additional 1. The periodic Treasury financing opera on the occasions of have been made of reserve pressures. to relieve the build-up tions have tended volume of Federal level in the The higher average evidence has derived that is now in Reserve Bank discounts
from an increasing amount of continuous borrowing, which in effect has added to the supply of reserves on a rela tively permanent basis and has thereby offset in part the pressure on commercial bank reserve positions that System policy actions would have otherwise exerted. It is not improbable that a problem resides in the discount situation at the Federal Reserve Banks, in that under current conditions of leniency towards continuous member bank borrowers, the repayment of outstanding discounts in effect implies a complete reversal of System monetary policy from restriction to ease. Should that course of developments ensue, the change in policy in all probability would have been dictated by the need of alleviating a slackness in economic conditions that had been induced in part by the earlier severity of a Federal Reserve System monetary policy that had restricted the availability of credit. A more moderate monetary and credit policy would conceivably avoid the undesirable economic and monetary effects that reside in pushing System policy actions to extremes of either monetary tightness or ease, in consequence of which abrupt policy reversals are then necessitated. Mr. King commented that the factors bearing on the question of a change in monetary policy at this time had been so well pointed out that there seemed no need to elaborate upon them. In his view, the situation was under good control at present and the economy was in a healthy state. The policy that had been followed seemed adequate, did not feel that greater restraint would be likely to produce and be desirable results at the present time. Accordingly, he would favor degree of restraint. The un no intensification of the prevailing as the steel strike was concerned represented, in certainty as far and he felt that the factor to be considered, his view, an important along that line before remust await further developments System assessing the situation.
Mr. Fulton's report on the steel strike indicated that little progress was being made in labor-management negotiations, that the strike perhaps would continue for some time, and that the provisions of the Taft-Hartley Act might ultimately be invoked. The unions reportedly were not permitting maintenance workers to go into the plants to reline furnaces in need of repair, which would mean a further delay of perhaps as much as thirty days, after settlement of the strike, in getting the furnaces in shape for full production. It appeared that inventories in the hands of manufacturers using steel were adequate thus far. Steel warehousemen, who had stocked up substantially, indicated that to date there had been no increase in their normal orders for steel and that there was no imbalance of inventories. In fact, it appeared that inventories probably would be quite adequate for some time to come. Steel men believed that the industry was now getting substantial moral support from the public heartened by the recent action of the House of and they were labor bill. One factor in the Representatives in passing a strong of a dearth of iron ore later in the picture was the possibility it might be that sub after the mills got into operation, season; shipping by rail, a more shortages of ore would necessitate stantial over the Great Lakes. expensive operation than shipping in the Fourth District said that other factors Mr. Fulton had not been store sales favorable. Department were quite economy
affected by the steel strike; only in the Wheeling, West Virginia, area did they fail to show an increase during the past week. Depart ment store sales were at an all-time high, thus following the trend noticed during previous steel strikes, when such sales continued to increase in most parts of the district. Machine tool orders in the past month were at the highest level since mid-1957, reflecting an underlying urge to improve the conditions of plants. Total construction figures were down a bit, largely as the result of heavy engineering contracts being considerably under last year. Mr. Fulton recalled that following the steel strike in 1952, a surge occurred which carried the whole economy abruptly to higher levels. While he did not believe that a change in the discount rate should be made at this time, it seemed advisable to be alert to the possibility of a similar surge occurring and getting out of hand. Therefore, he did not believe that the System should allow any ease to creep into the picture. Instead, he would maintain about the same degree of restraint as had prevailed during the past several weeks. If any ease were allowed to creep in, he saw a considerable danger, with the surge that seemed likely to follow the end of the steel strike, that prices might rise promptly. Mr. Bopp reported that the steel strike thus far had had only limited secondary effects in the Third District. In Pennsylvania, workers and as of last week idled nearly 170,000 steel the strike had nearly 40,000, an increase in the State totaled indirect unemployment
of about 20,000 in the past three weeks. Most of the secondary unemployment was in mining, railroads, metals, metal product manufacturing, and construction. On the basis of preliminary data for eight major labor market areas, manufacturing employment declined in July. However, the decline was less than seasonal and percentagewise was somewhat less than for the country as a whole. Four major labor market areas were reclassified in July, reflecting reductions in the percentage of the labor force unemployed, but there were still seven substantial labor surplus areas, with six per cent or more unemployed. New unemployment claims in Pennsylvania had declined seasonally, despite a sizable number of claims filed by workers indirectly idled by the steel strike. There was as yet no evidence of any significant effect of the strike on consumer buying. Department store sales registered good gains in the past two weeks; past four weeks were four per cent above a year ago sales for the seven per cent higher. Mortgage credit and for the year to date were with the supply decreased because become tighter since midyear, had savings and the high yields on long-term of a smaller net inflow of were only meeting previous commitments, securities. Some lenders commitments. The more cautious about future and the others were 5-3/4 and 6 per cent. loans were mostly rates on conventional reporting banks total credit of district Mr. Bopp stated that and business loans weeks. Total loans the past three declined during
were virtually unchanged, but holdings of securities decreased. Liquidation of Government securities in the past few weeks had more than offset increases that occurred at the time of the Treasury's two new offerings in the first part of July. The large Philadelphia banks continued to have a substantial basic reserve deficiency, the daily average being $86 million in two of the past three reserve weeks. Daily average borrowing by those banks from the Reserve Bank ranged from $24 million to $36 million and net purchases of Federal funds from $18 million to $49 million. Borrowings by country banks declined somewhat. Third District member bank borrowing ranged from 4 to 5 per cent of the System total. Mr. Bopp said that he would not favor a change in the discount rate or in the policy directive at this time. He felt that the Desk should try to maintain an even keel but resolve doubts on the side of restraint. Mr. Bryan commented that there did not seem to have been any in the Sixth District such as to warrant a conclusion developments that there had been any considerable change in the general uptrend. manufacturing employment continued to increase, Nonfarm employment and were well above a year ago. The only and department store sales was in construction con against a year ago unfavorable comparison banks continued to rise, at a tracts. Loans of district commercial the discount window and demands at rate than nationally, more rapid bank borrowing was now running from had increased sharply. Member
9 to 12 per cent of the System total, substantially in excess of the Atlanta Bank's usual proportion. The Reserve Bank was getting a good deal of continuous borrowing and there would have been more had it not been for some rather vigorous collection efforts. The steel strike had not as yet had any major impact in the Sixth District, but the strike, if long continued, must inevitably have its effect. With regard to policy, Mr. Bryan said that he was sympathetic with the views expressed by Mr. Mangels and seconded by Mr. Deming. While he could see no reason for easing, neither could he see any convincing reason for further tightening at this time. The economic situation, though strong, did not at the moment seem to be in a wild boom stage. Also, he felt that the System, unless careful, could tighten reserves in the next few months a little more than they should from the standpoint of allowing for some reserve growth. be tightened A chart on effective reserves over a long period of years indicated effective reserves, seasonally adjusted, were on the that at present would go under the trend line in trend line, and that therefore they the System was careful to allow some re the next few months unless try to maintain about the Consequently, he would serve growth. one which he thought was justified, present degree of restrictiveness, on the side any doubts slightly inclined to resolve but he would be of ease. season approached said that as the cotton-picking Mr. Johns he had become Eighth District parts of the in the southernmost
somewhat apprehensive about the ability of most, if not all, of the cotton-financing banks to accommodate the usual loan demand without recourse to the discount window for greater amounts and for longer continuous periods than had generally been felt appropriate. It appeared that a number of these banks, having already accommodated loan demands from other sources, were in a worse position than usual to effect adjustments as the cotton loan demand developed. If the Reserve Bank should be somewhat stingy with reserves at the discount window and the member banks were forced to reject loan applications by regular cotton customers, the blame would undoubtedly be placed Reserve Bank. He was not at all sanguine about the ability on the adjustments necessary or obtain all the of the banks to make asset through correspondent relationships. assistance necessary he was inclined to agree generally to policy, Mr. Johns said As give a clear signal of intensifi He was not willing to with Mr. Bryan. to give a signal of neither would he like of restraint, but cation when it would be of the year was approaching relaxation. A period hope they could be and he would to supply some reserves necessary that was not not to suggest a relaxation in such a way as supplied could be hope that this operation If possible, he would intended. no serious errors, certainly there would be carried out so perfectly again to soften. interest rates permit short-term that would no errors basis of the optimistic that on the Mr. Szymczak commented say that the one could Noyes and Koch, by Messrs. picture reported
8/18/9 -30 System should tighten somewhat at this point. However, there were three uncertainties that argued against tightening at this time. These included the situation with respect to the pending legislation on interest rate ceilings, the optimism expressed for peace by heads of state and the current international negotiations, and the uncertainty as to when the steel strike would be settled. Therefore, he could recommend nothing for the moment but continuation of the present open market policy. He would not favor a change in the discount rate at this time. Mr. Balderston commented that he continued to be worried about "water in the brakes." Even though bank liquidity had de creased, corporate liquidity appeared very great, and there had been a striking increase in deposit turnover outside of New York City. If the time should come when restraint needed to be applied vigorously, he feared that central bank control would be found to have diminished. time, however, he would not change the discount rate because At this already mentioned. He would favor continuance of the of the facts leaning toward the side of restraint present degree of restraint, in the manner Mr. Treiber had suggested. by saying that the summarized the meeting Chairman Martin of the status quo, with no majority clearly favored maintenance at this time. or in the policy directive in the discount rate change the side of ease, but spoken were slightly on One or two who had the side of further were somewhat on by others who this was offset to balance out. situation tended so the restraint,
Chairman Martin noted that the Open Market Committee was to meet again in two weeks, at which time data might be available that would be helpful in clarifying the situation. The Chairman then suggested that the policy directive be approved in its present form, and no dissenting comments were heard. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Re serve Bank of New York until otherwise directed by the Committee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to restraining inflationary credit expansion in order to foster sustain able economic growth and expanding employment opportuni ties, and (c) to the practical administration of the Account; provided that the aggregate amount of securities held in the System Account (including commitments for the purchase or sale of securities for the Account) at the close of this date, other than special short-term certificates of 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 in cases where it seems desirable, to issue discretion, participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of as may be necessary from time to time for indebteeness the temporary accommodation of the Treasury; provided of such certificates held at any that the total amount time by the Federal Reserve Banks shall not exceed one in the aggregate $500 million.
Chairman Martin noted that a bill authorizing the President, for a period of three years, to eliminate the interest rate ceiling on Treasury bonds had been tentatively approved by the House Ways and Means Committee by a 15-10 vote, with a watered down "sense of the Congress" amendment relating to debt management and monetary policy. In commenting on the proposed amendment in its present form, Chairman Martin said that, despite the recent vote within the Committee, it remained a matter of concern to him that little progress appeared to have been made in explaining the role of interest rates. He expressed the view that all of those around the table had a real job confronting them in endeavoring to explain the role of interest rates in the economy and why short-term Treasury financing was not perhaps better than long-term financing. At the Chairman's request, Messrs. Treiber and Rouse then summarized for the Committee's information the hearings held by the Joint Economic Committee in New York City on August 5, 6, and 7, which were directed principally toward the functioning of the market. In this connection, Mr. Treiber also Government securities by Congressman Patman, a member of commented briefly on a visit made Committee, to the Federal Reserve Bank of New York during the Joint the course of the three-day hearings. point Chairman Martin reverted to the proposed At this an announcement that legislation and read interest rate ceiling that the Ways and Means over the ticker which stated had just come
Committee had reversed its earlier action and by a vote of 14 to 11 had tabled the proposed bill and put the legislation off the docket for consideration until the next session of Congress. In this connection, the Chairman again remarked that the real problem seemed to revolve around the need to explain fully the role of interest rates in the economy. With a transmittal memorandum dated August 7, 1959, the Secretary sent to the members of the Committee and the Presidents not currently serving thereon a memorandum prepared by Vice President Holland of the Federal Reserve Bank of Chicago analyzing, from the point of view of a Reserve Bank officer with responsibility for the discount function, the problem involved in the relationship of member banks to the discount window of the Federal Reserve Banks in connection with the underwriting of new Treasury issues. The memorandum stated that some commercial bankers had observed to the Treasury that their relation ship to the discount window inhibited them from under writing new Treasury issues; the subject therefore was to be included on the agenda for discussion at this meeting in view of its close relationship to open market policy as well as to administration of the discount window. The tenor of Mr. Holland's memorandum was to the effect that bank underwriting operations should ordinarily be planned in such a way as to involve no net loss of reserve funds to the underwriting institutions; that underwriting operations of judicious size entered into on such a basis might be regarded by the Reserve Banks as part of the regular banking business of the commercial banks involved; and that in instances where extraordinary market or Treasury actions tended to upset anticipated schedules of liquidation and payment, underwriting banks be accommodated by the Reserve Banks might appropriately under the same general standards and limitations applied assisting banks to meet any other kind of unexpected in pressure temporarily pending adjustments. reserve In the course of introductory comments, Chairman Martin said Baird had become rather disturbed that Under Secretary of the Treasury
by comments on the part of commercial bankers in connection with the July bill issue that went at a rate of 4.72 per cent. Many banks that normally bid for bills passed up the issue entirely and put in no bids. In the temporary absence of Chairman Martin, Mr. Baird had discussed the subject with Mr. Balderston, and the Secretary of the Treasury later participated also. The Chairman suggested that it might be well for the System not only to review the Holland memorandum and be thinking on the broad problem but also, perhaps, to invite Mr. Baird to meet with the Open Market Committee before coming to a final decision. He made it clear that the possibility of inviting Mr. Baird was his own idea and one on which he had not yet reached a conclusion. In further comments, Chairman Martin said the problem was one that went to the Board's Regulation A and therefore was, in a sense, a problem before the System on a continuing basis. In view of Mr. Mills' work in con nection with the revision of Regulation A several years ago, the Chairman called upon him for the first comments. Mr. Mills said he thought the Holland paper was ably prepared and that the conclusions in it were correct. It is not possible, he eggs. The proceeds of member bank dis noted, to separate scrambled pool as the proceeds of other counting move into the same reserve customarily supplies reserves The System, he observed, transactions. operations on the occasion Treasury tax and loan account to support really answers the and in his view this of Treasury financings,
problem, because it is then up to the initiative and discretion of the member banks as to whether or not to turn to the discount window for temporary support of their acquisitions of newly-issued Treasury securities if they have any occasion to do so. Thereafter, it be comes the responsibility of the Federal Reserve Banks to determine whether discounts originating at such a time are such as to become subject to criticism and to require policing. The Chairman then turned to Mr. Balderston, who said that on the occasions when he talked with the Under Secretary, during one of which the Secretary joined in the discussion, he found himself on the defensive. After he had explained the System's traditional role in relation to Treasury financings--the one that had been followed since the time of the ad hoc subcommittee report at least-the question that the Treasury had paid too much for the was asked whether he felt of the second of the two large July money borrowed on the occasion The price, it was noted, was higher than had been bill auctions. days before. It was writers only a few anticipated by financial by 1/4 per cent and then receded out that the rate had risen pointed the anticipated level. again to about there was one point, at least, Mr. Balderston said he felt namely, a possible might be vulnerable; the System possibly on which Banks. He Federal Reserve among the twelve lack of consistency the discount window of whether the administration was not sure simply or not. was consistent
Mr. Balderston explained that the Under Secretary had no criticism of what the Open Market Committee did through the Desk in connection with Treasury financings. However, some bankers on the Government Borrowing Committee had indicated that they felt unable to participate in the second bill auction because of a fear of the discount window. In all honesty, Mr. Balderston said, he did not feel he could say that there was no basis in any district for claiming that the commercial banks could not help the Treasury with the second auction because of fear of the window. Mr. Balderston went on to say that after these discussions it occurred to him that it would be helpful to have the views of a Reserve Bank lending officer who was on the firing line. Consequently, with Mr. Allen's consent, Mr. Holland had written down his thinking on the subject and also had spent several hours with him (Mr. Balderston) and members of the Board's staff. His own tentative reaction, Mr. Balderston said, might be colored by the discussions with the Secretary and Under Secretary. However, in trying to examine the System's position, he was inclined to wonder whether the System should not perhaps take a fresh look to see whether the discount window could be used to facilitate in lieu of, or possibly in addition to, what the Treasury financing He then read the following comments, indicating Desk had been doing. in the light of what might be that they were subject to revision discussion of the matter: said in further
It has been the practice of the Open Market Committee to adjust bank reserves before, during, and after a Treasury financing in such manner as to preserve what is called an "even keel." To me this phrase connotes no greater ease or tightness at the end of the financing period than at the beginning, with the supplying of only such additional reserves during the period as will take care of the addi tional drain on reserves caused by the financing itself. Theoretically the amount of such reserves required would be 18 per cent of the amount of a cash financing taken by the banks. The additional reserves that we have been supplying in this fashion get used in part to support additional lending. This approach through the open market instrument might be likened therefore to the shotgun approach. In contrast would be the use of the rifle to inject into the C banks, which do the bulk of the Treasury underwriting, additional reserves through the use of the discount window. It could be urged, I suppose, that this approach would require the injection of fewer additional reserves to accommodate a financing than is needed by the present method if it is true that some of those now supplied become diverted to uses other than Treasury financing. The central question is whether the officers who discount windows can make reasonably sure administer the reserves supplied to underwriting banks that the additional a Treasury financing by maintaining an even to lubricate when the financing period is keel can in fact be recaptured would seem to narrow the issue to the over. This reasoning the officers who administer the question as to whether manage the additional reserve discounting function can Desk. The latter commands as effectively as the supply admiration for the skill with which it frequently our in preventing undue ease or tightness by observing succeeds Nevertheless, it can scarcely the feel of the market. has control that is said that the Open Market Account be that the additional reserves precise. To the extent additional lending the net supplied have gone into reserve figure will rise and this gauge of open borrowed falsely, that the reserves operations may signify, market do not need to be recaptured. conclusion at the moment Balderston said, his In short, Mr. to the end that reexamine its practices System ought to was that the
it could either provide a satisfactory explanation of its practices to the Treasury or else modify those procedures. Mr. Johns inquired whether the Treasury's indication that it could not understand what the System did reflected a lack of understanding generally or was related specifically to administration of the discount window in relationship to Treasury financing opera tions. When Mr. Balderston replied that the latter appeared to be the case, Mr. Johns inquired whether the remarks attributed to commercial bankers went so far as to allege that any bank desiring to serve as an underwriter had been denied credit or whether the commercial bankers appeared to fear that, having received credit at the discount window, they might be asked to repay before disposing underwritten. Mr. Balderston replied to of the securities they had that the latter situation apparently was closer to the the effect one that the bankers had suggested. the view that this was a case Mr. Johns then expressed "whipping boy," and was being made the where the Federal Reserve and others indicated agreement. Mr. Bryan that the New York Bank agreed generally Mr. Treiber said The simple fact in Mr. Holland's memorandum. with the conclusions issue was not to a new Treasury member bank subscribed that a from the reason for borrowing itself, as a proper regarded, by with other factors, However, in combination Federal Reserve Bank.
it might justify borrowing. Mr. Treiber then read the following statement: The problem arises when a member bank subscribes for and acquires more securities than it is justified in holding as an investment in the light of its reserve position. When a member bank acquires such securities it may properly be expected to dispose of the securities or other assets as promptly as practicable in the light of all the facts of the case, including current Federal Reserve policy and the condition of the Government securities market. Although the word "underwriting" is frequently used in reference to such a subscription by a bank to a new issue of Government securities, there is not a true under writing as that term is customarily used in the securities business. The goal of the so-called underwriting, so far as the U. S. Treasury is concerned, is to assure immediate purchases of the new Government security when it is offered by the Treasury. It is generally immaterial whether the member bank sells the new issue or some other issue already in its portfolio. If the bank sells Government securities in the same total amount as the amount of the new security purchased by it, the under writing is accomplished. It does not matter whether the bank involved is a large bank or a small bank. The Federal Reserve has a responsibility to aid the Treasury in the management of the public debt consistent, of course, with basic Federal Reserve credit policy objectives. In accordance with this responsibility the Federal Reserve has customarily supplied the additional reserves temporarily required by the banking system as a result of the increase in deposits resulting from the public sale of a new issue of Government securities for cash. As such needed reserves are supplied through open market operations they do not, necessarily, go which need the reserves; there is directly to the banks of reserves through the a substantial redistribution in due course, those banks that need money market and, Thus, in the case of a reserves tend to get them. find that its purchase of particular member bank, it may and makes increases its reserve requirements a new issue to obtain additional reserves it necessary for the bank need, however, should by borrowing; such immediately least for any period of not be extensive, at probably
time, because of the creation of the additional needed reserves through open market operations and the distribu tion of such reserves through the money market. We concur in Mr. Holland's suggestion that discount administration should view member bank subscriptions to new Treasury cash issues as a normal part of the bank's lending and investment operations for which the bank should attempt to make provision in scheduling its invest ment operations and its flow of funds. In the application of this general principle there may be circumstances when a bank subscribing for a new issue may be properly accommodated by the Federal Reserve under the same general standards applied in assisting banks to meet temporarily any unexpected reserve pressure. Although a bank may be expected to reduce its holding of Government securities within a reasonable time after it has subscribed for the new issue, what constitutes a reasonable time would be longer if there were continued turbulence in the Govern ment securities market or disturbance and unsettlement in the money market. In the light of these general principles, decision with respect to the propriety of specific borrowing by a particular member bank must rest on the judgment of the Reserve Bank discount officers in the light of all the facts of the case. Mr. Erickson said there was no bank in the First District that could claim it was actually an underwriting bank. He added that no member bank during his tenure of approximately 10 years with the Bank had raised a question about accessibility to the Boston Reserve discount window in connection with Treasury financings. Having been heartily with what Mr. Johns banker himself, he agreed a commercial ask the Reserve Bank about If a member bank did not had said. to complain. Mr. Erickson it scarcely had reason discount facilities, and he expressed memorandum was excellent, that the Holland thought Mills had said. with what Mr. agreement
Mr. Irons also expressed agreement with the Holland memo randum. In the Eleventh District, he said, there were a number of banks that thought of themselves as underwriters. On some of the recent issues, particularly the last tax anticipation issue, district banks were heavy takers, when measured from the standpoint of relative size. Upon receipt of the Holland memorandum, he asked the Reserve Bank staff to go back several months and compare sub scriptions for new issues with the borrowings of individual banks prior and subsequent to the financings. From this study, he felt certain no bank in the district could say that it had been dis couraged about discounting anywhere near the time of subscription to a Treasury issue, or that it had been pressed to get out of debt to the Reserve Bank within a reasonable period after subscription to an issue. No banker had raised the matter with him, Mr. Irons itself as an underwriting bank said, and no bank that regarded problem. The few banks that might be called had been a borrowing were in that category for other reasons and continuous borrowers subscribers to Treasury issues. In substance, had not been large important merit to the bankers' complaint, Mr. Irons saw no had to be considered and an answer although he felt the problem agree with Mr. Johns He was inclined to made to the Treasury. to throw the burden onto might sometimes be a tendency that there the reality of the when that was not Reserve System the Federal situation.
Mr. Mangels said he would be surprised and disappointed if any Twelfth District banks were included in those making observa tions to the Treasury. Only on rare occasions did the San Francisco Bank talk to a member bank about its borrowing program, and then only with regard to the cause of the borrowing, the possible duration, and plans to relieve the need for continuous borrowing. On the other hand, there had been occasions when larger banks were encouraged to subscribe to new Treasury issues that might not otherwise have had a full degree of success, even though some of those banks may have been continuous borrowers. Mr. Mangels expressed concurrence in Mr. Holland's conclusions but said that two points occurred to him. First, as the memorandum implied, a program to provide for reserve needs as a basis for underwriting operations of judicious size was based on projections of what seemed reasonable in the way of required of differences in the method of preparing the reserves. Because Board's projection of reserve needs as compared with that of the the matter might call for some further New York Bank, this phase of question of opening the discount window discussion. Secondly, the underwriting needs would again raise the ques specifically to meet dealers, either to Government securities tion of making advances by assuring banks New York Bank or indirectly directly from the ability to discount. Heretofore, to the dealers of their lending proceeding in that had concluded against the Open Market Committee direction.
Mr. Deming said that he had no disagreement with Mr. Holland's memorandum, which reflected generally the manner in which the Minneapolis Bank had been operating. With respect to the larger banks in the Ninth District, he said that if they borrowed to buy new issues and liquidated the indebtedness within a reasonable time, the Reserve Bank said nothing. If the member bank continued to borrow and to carry the securities, the Reserve Bank was likely to say something, and in essence this was what Mr. Holland's memorandum contemplated. Mr. Allen said that his experience, which included rather close contact with larger underwriting banks, bore out what had been said previously at this meeting. The substance of the matter was that banks tended to go into a financing when they felt they were going to make some money. Otherwise, they stayed out. Mr. Allen raised the question whether too much importance was not being attached to this matter, although he realized it was necessary to make an answer to the Treasury. There seemed to be general agree ment with Mr. Holland's conclusions, and they appeared to reflect the manner of administration of the discount window throughout the System. In the course of further discussion, Chairman Martin sug concern to the System if bankers that it was properly of gested The problem could not be comments to the Treasury. were making trouble. He also lead to serious eventually it might ignored, for
noted that in any organization, including the Federal Reserve System, there was likely to be a natural inclination to feel that the organiza tion was right. Therefore, it seemed necessary to go through the kind of review that had been prompted by the Treasury's questions. What ever the facts might be, this was business with which the System must concern itself in order to be able to supply the proper answers. Continuing the discussion, Mr. Wayne expressed concurrence in Mr. Holland's memorandum. He thought it would be hazardous if System people began to think in terms of treating Treasury needs as an exception to the principles governing appropriate and inappropriate use of the discount window. In his opinion, the most appropriate way to provide reserves in connection with Treasury financings was to operate through the Desk. By that process, the reserves reached banks that were really underwriting banks. In the Fifth District, there were no banks that were truly underwriting banks. Mr. Bryan said that the Atlanta Bank refrained from making to member banks about borrowing before or after a representations he could not believe any complaint was Treasury financing and that the Sixth District was concerned. He supported justified as far as that had already been stated, the Holland memorandum for reasons in what Mr. Treiber said. This including one that was implicit could distinguish between assisting the involved asking how one to a new to permit subscription providing reserves Treasury through allowing a bank to hold the Treasury by issue and assisting
investments already in its portfolio. There were banks that could be helped, and the Treasury thus helped also, merely by letting them keep their current portfolio. Messrs. Fulton and Bopp both indicated that they agreed with the Holland memorandum. In conclusion, the Chairman responded to a question by indicating that he would like to consider further, in the light of this discussion, the possibility of speaking to the Under Secretary of the Treasury with regard to his attending a meeting of the Open Market Committee for additional consideration of the matter. It was agreed that the next meeting of the Federal Open be held at 10:00 a.m. on Tuesday, Septem Market Committee would ber 1, 1959. The meeting then adjourned. Secretary
Also: Record of Policy Actions