December 15, 1959

December 15, 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, December 15, 1959, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Allen Mr. Balderston Mr. Deming Mr. Erickson Mr. Johns Mr. King Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Messrs. Bopp, Bryan, 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. Kenyon, Assistant Secretary Mr. Thomas, Economist Messrs. Jones, Marget, Parsons, Roosa, Willis, and Young, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Molony, Assistant to the 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. Knipe, Consultant to the Chairman, Board of Governors Messrs. Hostetler, Daane, Baughman, Tow, and Wheeler, Vice Presidents of the Federal Re serve Banks of Cleveland, Richmond, Chicago, Kansas City, and San Francisco, respectively

Mr. Coldwell, Director of Research, Federal Reserve Bank of Dallas Mr. Anderson, Economic Adviser, Federal Reserve Bank of Philadelphia Mr. Holmes, Manager, Securities Department, Federal Reserve Bank of New York Mr. Brandt, Economist, Federal Reserve Bank of Atlanta Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on November 24, 1959, were approved. Before this meeting there had been distributed to the members of the Committee a report of open market operations covering the period November 24 through December 9, 1959, and a supplementary report covering the period December 10 through December 14, 1959. Copies of both reports have been placed in the files of the Committee. Mr. Rouse called the Committee's attention to the result of yesterday's regular weekly Treasury bill auction, in which an average issuing rate of 4.535 per cent was established for the three-month bills and an average issuing rate of 4.833 per cent for the six-month bills. Dealer interest was reflected in awards of $337 million of the and $231 million of the six-month bills. Rates three-month bills a decline from the high rates established in the auction reflected the fairly close range between the preceding week, and established in was indicative of a sounder issuing rate and the stop-out the average position than in recent weeks. to say that, as pointed up in the regular Mr. Rouse went on the period since the last meeting written report to the Committee,

of the Federal Open Market Committee was an unusually difficult one for the Account Management. Normally, this period of the year is one where the Account is quite active in view of the seasonal pressures on member bank reserve positions and on the money markets. This year, open market operations over the past three weeks had supplied nearly half a billion dollars in reserves to the market, mainly through the outright purchases of Treasury bills. At the end of the period, however, the Account made a small volume of sales of securities to foreign accounts, thereby preventing additional funds from reaching a market that was already showing signs of ease. In view of easier reserve positions ahead, the Account successfully tendered in yesterday's Treasury bill auction to run off $123 million maturing Treasury bills. If reserve deficits should build up again, it would matter to reverse this through the purchase of Treasury be an easy bills in the open market, considering their current availability. yesterday's awards, and making no allowance for any net Including held about $1.2 billion Treasury bills. sales made yesterday, dealers Operations were considerably complicated this year by the banks to count part of Regulation D, permitting member changes in reserves. As a result of the uncertainty their vault cash as required reserves and the extent to which they as to the distribution of these into the central money market, find their way back promptly would were extremely difficult to interpret. projections of bank reserve data

The Account Management therefore relied even more heavily than usual on the feel of the market as a guide to operations. Towards the end of the period, available data on country bank reserve positions seemed to indicate that the reserves released through the action on vault cash were working their way back into the money centers; reserve projections, therefore, seemed to have become more meaningful. The statistics, however, were still hard to interpret, and the Account Management would appreciate any comments from the Reserve Bank Presi dents concerning their experience with member banks in their districts throughout the country. As mentioned, the Account Management had boen forced to rely to a large degree on the feel of the money market as a guide to operations, but interpretation of the signals given off by the market was by no means easy. While Treasury bill rates reached new high levels during the period, there were many occasions when the money market of easing. There was also evident in the market a showed clear signs growing uncertainty concerning the level of interest rates in early focus the important question of 1960, thereby bringing into sharper whether the usual easing of pressure on bank reserves and the money the year, or whether the after the turn of markets could be expected credit demand due to the seasonal pattern of distortions in the away from the make for a shift production might resumption of steel situation early next year. normal pattern of an easier

Uncertainty in the market concerning the trend of interest rates over the next month or so was reflected in the generally rising Treasury bill rates over most of the period. New high average issuing rates were established in the Treasury bill auctions on November and December 7, and the higher Treasury bill rates spread to other short-term markets with bankers' acceptance rates, commercial paper rates, and finance company paper rates all moving higher. Towards the end of the period, with dividend and tax funds provided for, Treasury bill rates leveled off with the resumption of buying by some corporations, but the uncertainty about the longer-term trend of interest rates was still apparent in the market. The upward pressure on short-term rates also affected the capital markets. Prices of Treasury notes and bonds generally moved lower over the period, although there was only moderate trading in this area of the Government securities market, most of it relating to tax switching. Much of the buoyancy also appeared to have gone out of the market for corporate and municipal securities. The stimulus that these markets received from the successful marketing of the and Telegraph debentures now appeared to have American Telephone and most new issues had tended worn off. Rates had edged upwards portfolios. The largest issue to move slowly out of dealers' million State of California for the period--the $100 scheduled felt that an since the State Treasurer issue--was postponed,

anticipated rate of about 4 per cent was too high. The issue was now scheduled for January The bankers' acceptance market had also been under sub stantial pressure during the past few weeks. Seasonal increase in cotton bills and a growing volume of dollar exchange acceptances, some of them for Cuban and Brazilian account, had come into the market. At the same time, some banks had from time to time been selling acceptances in order to adjust their reserve positions. At the close of business yesterday, dealer portfolios had risen to about $48 million--an unusually high level--and $18 million in repurchase agreements was outstanding against bankers' acceptances. As to the Treasury financing situation, Mr. Rouse stated had asked for consultations on December 29 and 30 that the Treasury about $2-1/2 billion of new money in concerning the raising of of the $2 billion issue of and the method of taking care January on January 15. At the time of original special Treasury bills maturing bills would be rolled over into had been announced that the issue, it was also arranging for Treasury bills. The Treasury 12-month 27, 28, and 29 in Washington on January committees to be advisory of the February 15 maturity. of the refunding for discussion of dealer positions. to the matter Mr. Rouse then turned at this time of build up inventories he said, dealers Ordinarily, pressures on bank relaxation of of some year, in anticipation the

reserves and the money market after the turn of the year, and the Account would normally give them some assistance in carrying these positions. The problem was whether, in view of projections which showed an easier position from now to the end of the year, the usual year-end support should be provided. In response to a question from Mr. Allen, Mr. Rouse stated that the projections of the New York Bank contained no allowance for the runoff of $123 million Treasury bills in yesterday's auction. He also said that he felt some help should be provided the dealers despite the low reserve figures, but that he would appreciate advice from the Committee on this point. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period November 24 through Decem ber 14, 1959, were approved, ratified, and confirmed. memorandum distributed under supplementation of the staff In a statement with respect 11, 1959, Mr. Young presented date of December to economic developments as follows: summarized in report is effectively Today's economic wholesale price averages (1) Stability of four sentences. phase of the present to contrast the middle continues with the middle phase of the 1954-57 cyclical expansion of industrial production upswing. (2) Recovery cyclical is about as expected. (3) from the steel strike setback that our inter data confirm Recent balance-of-payments further and has not deteriorated national position (4) Expansion of strengthened some. probably has abroad continues industrial nations activity in economic to be vigorous.

Now for a brief run-down of recent domestic specifics: (1) The November index of industrial production is estimated to be up one index point to 148 relative to 1947-49 as 100; the October index, it should be noted, was revised downward to 147 on the basis of information just available. With full-scale output in steel and steel-dependent industries restored in December, the December index should rebound by five or more index points. Indicative of prospects for industrial output in the months ahead is the auto industry's first-quarter assembly schedule at an 8 to 9 million car rate. (2) At an outlook conference of homebuilders here in Washington last week, the consensus forecast was for 1,200,000 housing units in 1960. This was practically on the nose for the seasonally adjusted housing start rate for November which was released yesterday. of new model autos, the acute shortage (3) Reflecting November dealer deliveries of domestic new cars fell to rate of 4.6 million. This compares 374,000, or an annual with an annual rate of 5.7 million as an average of preceding months. November used car sales were off a little from were also used car prices, but both used car October, as sales and prices were well ahead of a year ago. sales were off one per cent from (4) November retail but only because of the sharp decline in automotive October, sales gains were widespread. In early sales; in other lines, department store sales were showing a continued December, small advance over November. showed anothcr credit in October (5) Consumer instalment of the rise in automobile with over half $500 million increase, credit. goods lines rose new orders in durable (6) Sales and goods inventories declined in October and durable moderately $1 billion below end-of further to a level over substantially in total business inventories The October decline July holdings. of $300 million compared with a cutback to $500 million amounted inventories may have While total business in September. must surely be in November, they somewhat further declined again in December. increasing expenditures and equipment business plant (7) Third-quarter to the latest targets according of earlier projected fell short are also for prospects survey, and fourth-quarter Commerce-SEC total of such The earlier projections. fall below a short and the most however, rising cyclically, is still expenditures the first quarter. rise through points to further recent survey as the steel rose moderately employment (8) November on balance. The workers to jobs settlement returned strike

employment rise was concentrated in durable goods industries; in nondurable lines, employment about held even. (9) November hourly earnings of production workers in manufacturing were almost 3 per cent higher than a year ago. Weekly earnings were up very little, however. In the present economic cycle, manufacturing wage rates have not shown the tendency towards accelerating rise that they did through the comparable phase of the last cycle. (10) With steel industry negotiations at a standstill, the Steelworkers Union has intensified bargaining efforts with other industries. Copper and can industry settlements provide for an 8 cent an hour wage increase for 2 and 3 years, respectively, plus fringe benefits worth more than 4 cents an hour per year. Mr. Marget commented as follows with respect to the United States balance of payments: When I last reported to the Committee, I suggested that there are two types of error against which we should be on our guard, so far as developments with respect to our balance of payments are concerned. "One is the error of supposing that no adjustment is taking place in our balance of payments; the other is the error of supposing that the adjustment is taking place so rapidly and certainly that we no longer have a balance-of-payments problem, and that we therefore have no need to frame our policies with reference to what is happen ing in that area." I am still very firmly of the view that both of these errors are to be avoided. If, this morning, I stress particularly the desirability of avoiding the second error--which, for brevity, I shall call the danger of excessive optimism--it is precisely because the latest news we have with respect to balance-of-payments developments that is, as far as it goes, encouraging. You may recall my pointing out, last time, that the we had with respect to the improve evidence that we thought the trade picture in the third quarter of this year ment of in the figures for our over-all was not being reflected as measured by the total gold deficit in the third quarter outflow. Fortunately, the September trade figures and dollar that I reported last time were encouraging, in that they the pick-up in foreign demand to give evidence of continued has been apparent since June of this for our exports which of the maintenance of a gold year, so that the explanation rate as high as $4 billion-- and dollar outflow at an annual

which was also the rate for the second quarter--had to be sought in some of the nontrade items, such as capital movements and aid transactions. Nevertheless, one would have felt much more comfortable if the improvement in our trade picture had been more clearly reflected in the figure for the over-all deficit in terms of the total international movement of gold and dollars. From this standpoint, it is of considerable interest to see what is shown by figures for gold and dollar movements in October, which were not available when I made my last report to the Committee. Instead of showing the kind of steady increase in foreign and international gold and dollar holdings resulting from transactions with the United States which has been the source of our concern for so many months now, these foreign and international holdings actually declined in October by $159 million. October, indeed, was the first month in about two years to show a substantial decline in foreign holdings of gold and dollars. It is true that this figure includes the repayment of $250 million by the United Kingdom to the Export-Import Bank, but it is also true that, even excluding this payment, net transfers to foreigners in October were less than one-third of the monthly average for the last 1-1/2 years. Unfortunately, the November figures on foreign accounts with commercial banks are not yet available. December trans fers of gold and dollars to foreigners, however, are always small, owing largely to the receipt of year-end payments on our postwar loans to the United Kingdom and France. If the November market figures should turn out to have been as favorable as those for October, net transfers for the current quarter would probably be negligible, and total transfers for 1959 might even fall below last year's the calendar year $3.4 billion. This would, of course, be a much total of total of $4.5 billion which was forecast better result than the that met a few months ago under the auspices of by the group and better even than the the National Foreign Trade Council, has figured in most of the more total of $4 billion which recent forecasts. to show the kind of the trade figures continue Moreover, which we have been hoping. slow, improvement for steady, if a general leveling off in our imports There has, in fact, been has been reflected in and this leveling off after May-June, and steel--in which the areas--such as automobiles some of to maintain our as to our ability has been expressed doubt exports. In September Similarly with competitive position. annual rate some at a seasonally adjusted October they ran and

11 per cent above their February-April low ( a rate of expansion considerably faster than that experienced during the previous cyclical upswing in exports in 1953-54), and they also included increases in areas in which doubt has been expressed about our competitiveness. There were increases of more than 20 per cent, for example, in exports of autos and trucks, textile manufactures, and agricultural products, while exports of machinery and of chemicals also rose by more than 10 per cent. This is certainly encouraging news, as far as it goes. It does mean that the processes of adjustment in the inter national accounts seem to be working, as we said they would work if the right policies were followed. That, after all, is the key proviso. At the moment, the outlook is for the kind of expansionist pressure in the economies of our trading partners which will facilitate further adjustment if we succeed in keeping comparable pressures from getting out of bounds in our own economy. There is plenty of room for a reasoned optimism that our international accounts can be brought into closer balance, on the assumption that we follow policies calculated to bring about that result; there is no room for a fatuous complacency that would ex pect this result to come about in any case, regardless of the degree of fiscal and monetary responsibility that we choose to show in dealing with the problems that face us. Mr. Thomas made the following statement concerning financial developments: As was to be expected, interest rates rose in the of November and early December. Short and latter part generally went above the high levels reached medium rates but some of the long-term rates have not in September, their September levels. Yields on outstanding reached had not participated in the October corporate bonds, which decline, have not increased particularly, and and November local government bonds have also not averages for State and had declined substantially since risen, although they of corporate bonds, however, have September. New issues municipal offerings have at higher rates. Some been sold for sale have and amounts available moved fairly slowly Within the past week, interest rates, increased. rates, have shown some tendency particularly short-term to level out.

Some rise in interest rates, particularly at short-term, was to be expected at this time because of the pressures of seasonal liquidity needs. The large corporate and other non bank holdings of short-term Government securities and other paper, held in lieu of cash balances, means that pressures develop in these markets whenever cash needs mount. Such needs are always temporarily large in December. It is likely also that the rapid expansion of steel operations in the past few weeks has created some additional credit demands, follow ing the comparative lull during the fall months. Another factor of uncertain magnitude given prominence in market discussion is the anticipation of a renewed cyclical rise in interest rates during 1960 in view of the expected high level of economic activity. Stock prices, after moving within a narrow range for three months, have risen in the past three weeks to near the highs reached last summer. System operations have been a moderating factor in interest rate movements as reserves have been supplied in adequate amount to meet customary seasonal needs. The in the money market in the past week may steadier tone reflect the satisfaction of current liquidity needs, aided in part by System actions. In the next few weeks there will be cross currents in affecting the money market and the course of the factors Seasonal relaxation of pressures is to be interest rates. October, the passing of the seasonal expected. As in July and cash needs should bring to an end the temporary rise in rates, already have done so. Short-term interest rates and may rising in December. A decline in January after nearly always present in other recent years factor of easing this year not bill, which will reduce the of a December tax is the redemption to meet taxes or for other corporations to raise funds need for purposes. be offset in January, however, will This latter influence, new cash borrowing by in anticipation, by and perhaps earlier need to be raised $1.5 billion will Treasury. At least the the sale of additional (presumably through early in January be obtained later will have to and more cash June tax bills) of the and also refunding These operations, in the month. 15 and of the very bills maturing January quarterly special tend to keep the maturity, will February certificate large next two months. for the a state of uncertainty market in for inventory build-up demands--from business Other credit and from capital expenditures, for increased and gradually as well purchases, mounting automobile to finance consumers financing and for mortgage strong demands as the continued

from State and local governments--may be large in the aggregate. Expanding economic activity and rising in terest rates in foreign money markets may also be an influence toward high rates in this country now that freer movement of liquid funds between such markets is feasible. Over an extended period of time, current savings, stimulated by prevailing high interest rates, may prove adequate to meet the credit demands. Substantial retire ment of Federal debt that begins in March should release funds for other uses. Whether or not borrowing demands are likely to be so concentrated into the next three months as to exceed the available supply of lendable funds and cause further increases in interest rates remains to be seen. Should they do so, there would also be pressures on other resources and tendencies toward rising commodity prices. Little can be gained by attempts to supply funds to keep interest rates from rising under such circum stances. There is a possibility, however, and perhaps even a likelihood, that credit markets may be well balanced in the months ahead and that interest rates may now show further increases. Currently, credit demands have not been excessive in the aggregate. New capital issues by corporations and by State and local governments were in moderate volume in November and are continuing moderate in December. Total loans and investments of commercial banks actually declined in November. This is an unusual development and is due in part to absence of Treasury cash financing in that month. Yet, when partly estimated figures for city banks for the next two weeks, which include Treasury financing, are added, the totals are still moderate. In the six weeks, total loans at city banks increased less than usual, while business loans increased by close to the usual seasonal amount. Holdings of securities showed a net decline for the period. Country banks likewise showed little change in total loans and investments during November, although increases have occurred in most previous years. The money supply, after declining for three months, showed a slightly greater than seasonal increase in November, but the further rise at city banks in the first two weeks of December was much smaller than usual. Time deposits declined, as is usual in November. U. S. Govern ment deposits also declined. However, nonbank holdings of liquid assets in the form of Government securities increased

further as banks reduced their holdings. Turnover of demand deposits outside financial centers, which like the volume of deposits had been relatively steady since last spring, increased in November. Although the money supply is only about 1 per cent higher than a year ago, turnover for the past three months has averaged about the same period last year. 7 per cent more than in Reserves have been supplied to meet customary seasonal needs for currency and credit during recent weeks in part through System purchases of securities and acceptances and in part through the release of vault cash and the new allowance for remittance drafts. The actual amount supplied through releasing vault cash will not be known until reports are received from member banks for the reserve periods. The reaction of the banks to such a source of funds can be detected only from market action. It would appear, as Mr. Rouse has pointed out, that utilization of the existing reserves, while slow at first, has been felt at least to some extent in the market. Currency demands, which conformed closely to the usual seasonal pattern in November, appear to have shown a larger than usual increase in the first half of December. Required reserves, on the other hand, have shown a somewhat smaller than seasonal increase, owing in large part to allowance for remittance drafts. Current estimates of required reserves, however, are still preliminary and subject to revision. In the next two months, Federal Reserve operations will be primarily concerned with the large scale money market adjustments characteristic of the season. It will also be necessary to maintain conditions that will not interfere unduly with the series of Treasury financing operations. This does not mean, of course, that special efforts should be undertaken to protect Treasury financing from the effects of competing credit demands. The course of these other demands will need to be watched carefully. Seasonal reserve needs appear to have been fully met by operations to date. Further needs may be covered by the usual large mid-December float increase now due to begin. From now on, System operations will need to be directed toward absorbing reserves, although action can be gradual and moderate, as liquidity needs normally continue large during the last half of December. In the first three weeks of January the System portfolio would have to be reduced by nearly $1 billion if net borrowed reserves are restored to the $500 million level.

In January, the System should begin to be alert to developments in the private credit area. In view of the prospects for a high level of economic activity in the months ahead, strong and vigorous monetary and credit demands may soon become evident. A considerable flow of funds can be effected through the shifting of nonbank holdings of short-term securities. Banks, moreover, under the pressure of demands from customers, may be willing to increase their borrowings to obtain needed reserves. These sources of funds provide cushions that could mitigate the restraining effects of any restrictive policies the System may want to adopt. Under all the circumstances, there seems to be greater danger in too little, rather than in too much, restraint. Mr. Hayes presented the following statement of his views with respect to the business outlook and credit policy: In my judgment the Committee faces difficult decisions today and early next year, despite the fact that there have been no startling recent developments and that the business outlook is rather satisfactory. Essentially the problem we must resolve is whether we are in danger of exerting too restrictive an influence on credit and the money supply in view of the extent of existing unused resources in the and the need to encourage further gradual expansion. economy First, as to the business situation: Most general business indicators seem likely to reach or exceed previous records in the near future. Consumer buying is being sup ported by a growth rate for consumer credit which may, if bring a need for re-examination it persists for many months, of selective consumer credit control. On of the whole area construction is declining nationally the other hand, housing District), and there is as yet no (although not in our for inventories. The latest evidence of a general scramble plant and equipment expenditures suggest SEC estimates on expected earlier. Granted an uptrend than had been less of suggests the survey of appropriations that the most recent larger capital spending ahead, possibility of substantially margins between capacity and it may be significant that output are now considerably wider than in 1955. divergence between exhibits a situation still the price prices. There is wholesale and consumer the movement of rise in the price for concern in the inexorable indeed cause

of services, in the cost-push implications of many recent wage settlements, and in the possible upward pull on prices exerted by the business boom in Europe. On the other hand, current prices in general do not reveal any great upward pressure. Longer-range concern over inflationary threats may well be partly responsible, together, of course, with business optimism, for the persistent recent gains in stock prices, and it would be highly regrettable if these fears should undermine such improvement as we have seen in the last few months in foreign confidence in the dollar. Since the last meeting the rebound in business loans from the October lull seems to have become more pronounced. There is widespread expectation of greater-than-seasonal loan demand early next year, as the effects of the steel strike wear off. Bank liquidation of Government and other securities was heavy in November, causing a drop in total loans and investments in contrast with increases in 1955, 1956, and 1958. At the same time, loan-deposit ratios reached new highs both in and outside of New York. Treasury financing operations, both past and prospective, have had much to do with the uneasy state of the money and capital markets in the past three weeks. Commencing with the expected announcement of a cash offering around the end of this month, the System will be confronted with almost con tinuous Treasury operations through most of January and February. In deciding on credit policy at this time, I think we must recognize that the economy is still operating well below capacity without any strong upward price pressures from the demand side and that further sound business expansion is much to be desired. Frankly, I am wondering whether the level of interest rates attained at the peak last week would, if sustained, be appropriate and healthy at this stage of the expansion. It is true that the rate bulge was due in large part to seasonal pressures and Treasury activities, but there is apprehension in the market that the usual January relief from money-market not occur this year. On this point we can pressures may only await developments. But I can see some risk that the cumulative effects of the tight check on the growth of the money supply and the low liquidity of the banks may un necessarily impede the current economic expansion. we should certainly avoid Under these circumstances tightening of credit, and, while the present any further be maintained, any doubts of restraint should general degree

arising from day to day should be resolved on the side of ease. With statistics on net borrowed reserves still per haps somewhat less meaningful than usual, in view of the new vault cash provisions, I think the "feel" of the market should be the principal guide for the Manager, and I think he should have ample leeway at this period of seasonal pressures and uncertainties as to the pattern of credit demands resulting from the strike. It seems to me that the Committee might well focus its attention on the level of market rates and consider whether the recent peak rates, if they should recur and persist, might suggest undue and undesirable pressures. The behavior of member bank borrow ing over the next few weeks should also provide a useful measure of such pressures. I would think it quite unwise to consider any change in the discount rate at this time, for we should be reluctant to validate the recent rate bulge to the extent that it may have reflected purely temporary pressures--and with respect to more lasting pressures, I think we should move cautiously and review the whole picture early next year. Even if a discount rate increase should then seem desirable, as a practical matter action might have to be deferred until completion of the Treasury's January and February financing. Incidentally, be made for delaying the date of the next Com a case might mittee meeting until January 12, in view of the fact that by 5 the market will have had hardly any time to evaluate January capital pressures following the year end and the credit and long New Year's week end. the directive, I would like to find a way at the As for year end to show that we are concerned over whether the of continued restraint may have become cumulative effects sufficient for a time. I hope we will find that we can, undue risk on the price front, permit gingerly and without supply over the period ahead, some further growth in the money may be partly offset usual seasonal loan contraction when the the effects of steel stagnation reviving credit demands as by to find suitable wording But I have not been able wear off. be inclined to leave the directive for all of this, and would with the suggestion though I am not unsympathetic as it is, Mr. Mills at the last two meetings. as to wording offered by industrial production that the New England Mr. Erickson said July, August, and September, fairly constant during index, which remained survey of New England October. The November three points in dropped

purchasing agents showed that 52 per cent expected no substantial change in production, while 35 per cent expected an increase and 13 per cent a reduction. The 13 per cent compared with 18 per cent the previous month, while the 35 per cent compared with 13 per cent in October and 51 per cent in August. The Dodge reports showed a 4 per cent drop in construction contracts in October, the fourth consecutive month that a decrease was reported. For the first ten months of this year, there was an increase of two per cent compared with last year, the increase being less than the national average. Residential construction had been slipping in recent months, but for the year the figure was still 21 per cent ahead of the preceding year, this gain being slightly higher than the national average. Employment was up two per cent compared with the previous year, not as much as nationally. Electrical machinery, including electronics, was the fastest growing industry in the district from the standpoint of while no gains were found in primary metals, foods, employment, transportation, or public utilities. Department store sales were national average; however, the 11 days after Thanksgiving below the sales picture than the similar period a year ago. showed a better transactions were net sellers banks reporting Federal funds District been net buyers since the first of through November, but they had of the discount window had been more active use December. There six or nine during the previous three weeks than during the past the largest day in some time, due primarily weeks. Last Friday was borrowing by Boston banks. to

Mr. Erickson said that he would suggest no change in the discount rate or in the directive. With regard to open market operations, he felt that the Desk had done a good job in the past three weeks, considering all of the factors with which the Desk had to contend. Recognizing those factors, he would recommend that the Account Manager be given considerable latitude to maintain the same degree of restraint, without tightening at all. Mr. Irons reported that Eleventh District activity was at a high but relatively stable level. During the past few weeks there had been some increase in strength, but nothing sensational. Crude oil production and refining were up somewhat, along with department store sales, while employment had improved seasonally. Estimates placed cash farm income for this year at about last year's figure, which meant a lower net income due to the increased cost of doing business. The construction picture showed some improvement, with an increase in nonresidential construction offsetting a slight decline in residential construction. District banks did not appear to be experiencing the seasonal deposit increase that would normally be expected during the fourth quarter of the year. In fact, deposits of weekly reporting banks had held steady for most of the year. were quite stable, with no significant increase in Loan totals also the past few weeks. There had been no substantial increase in borrowing at the Reserve Bank, but there was rather substantial use

of Federal funds on the part of some of the larger city banks; in contrast with the banks in Houston and San Antonio, those in the Dallas area were rather steady net buyers of Federal funds. On the whole, the Eleventh District situation was one of high-level activity, without substantial change in either direction. While attitudes were generally optimistic, there was a considerable degree of uncertainty reflecting questions such as those with respect to the steel negotia tions, the rapidity of further upward movement in business activity, interest rate levels, and Treasury problems during January and February. Mr. Irons said that he would not favor a change in the discount rate or in the policy directive at this time. As to open market opera he realized that the past three weeks had been difficult, tions, the vault cash action added to other factors that particularly with to see about the same degree of were in the picture. He would like that had been achieved prior to the past three restraint maintained at times. While this was of easing began to appear weeks, when signs that the deviations had the circumstances, he felt understandable in restraint, and he would of ease rather than tended to be on the side Instead, he would try about deviating in that direction. be cautious and possibly even deviate restraint in the market, to maintain a firm ease at risk of creating than run the firmness rather on the side of could be avoided, he he would hope that deviations this time. While The statistics might that was probably not possible. realized that

not always be too meaningful, and the people on the firing line must have considerable leeway in maintaining a situation consistent with what the Committee talked about in a general way. Mr. Irons said he would feel that, as Mr. Hayes had suggested, there might be merit in holding the next Committee meeting on January 12, 1960, rather than January 5; the earlier date would provide only a short interval following the Holiday Season and the long New Year week end. Mr. Mangels said that the resumption of steel production had generated some improvement in the Twelfth District in early December. Otherwise, the changes that were evident arose primarily from seasonal factors. There had been some increase in the demand for lumber to build up wholesale and retail inventories. As a consequence, lumber plywood rose from $ to $68 a thousand, thus providing prices firmed; some margin for producers. Announcement last week by three savings and loan associations in the San Francisco area that, effective January 1, 1960, they would increase their dividend rate from 4 per cent to -1/2 per cent had resulted in considerable publicity on the radio and in the press. The banks were asked whether they would seek an increase in the maximum rate payable on savings deposits, and savings and loan sources had been saying in their own meetings that they hoped to get a substantial amount of funds to enable them to expand their real estate loans rather extensively. The banks estimated that, after interest credits were given at year end, they might lose

10 per cent of their time deposits, which would be quite a sub stantial factor and would require a period of adjustment. The money might not come back, and in any event there would be a period when the funds were out of the banking system. While there had been some decrease in the level of net borrowed reserves, Mr. Mangels felt that the statistics tended to understate the degree of tightness in the market. In his view the market had been tightening quite substantially during the past couple of weeks, Thus far the vault cash action apparently had not aided a great deal. In the Twelfth District only 40 of 200 banks had benefited, and in no case was the amount of benefit substantial. While the System should be careful to maintain sufficient restraint to avoid serious inflationary pressures, he felt it should also be careful--perhaps more so--to avoid undue tightness that might have an adverse effect on general business conditions. Already, he noted, there were a number of reports from banks that they were calling loans in rather substantial amounts, and this might ultimately have harmful effects. Therefore, without changing the directive and without any general change in policy, he would give consideration to operating during the forthcoming period with less restraint than had prevailed during the past three weeks. As to the discount rate, he noted that the current level of bill rates was causing some speculation as to whether a change was imminent. While he did not think that a change should

be made now, he felt that the matter deserved some consideration at a time when the System had a green light. Mr. Deming, who participated in the morning telephone calls during the past three weeks, commented that he had built up much sympathy for the Desk in the light of the difficult statistical situation that prevailed. Turning to the Ninth District, he said that trends, relative to national trends, in the past several weeks had continued to reflect the lesser gains in the district, a situa tion which he believed would continue for the next few months. Perhaps the best single indicator presently available for the district was nonagricultural employment, which in October was only slightly (0.3 per cent) ahead of a year ago in contrast to a 2.4 per cent gain for the national series. The Reserve Bank had been working on the development of personal income data but so far only Minnesota. On a seasonally adjusted basis, total had figures for in that State in October was $200 million below the personal income representing a drop of 3 per cent. Banking data June and July highs, picture and also demonstrated some liquidity showed about the same deposits at the close of November and money tightness. Total loss with much of the loss appreciably from a year earlier, were off the same time, total loans past few weeks. At concentrated in the four-fifths of the were down by strongly; total investments were up meant little to district banking, loan rise. The vault cash release added by this action. About 25 per with only $3 million in reserves

cent of the country banks were affected, mainly in the northern mining areas. A check of Treasury bill tenders before and after the release showed no appreciable change in amounts tendered for by banks that had received some benefit from the vault cash release. What had happened to correspondent bank balances was not known as yet, but conversations with city bankers indicated that they saw no inflow of funds. With respect to the iron ore situation, Mr. Deming commented that warmer weather in December had helped the shipping picture and that it now looked as though a total of 42 to 43 million tons of ore would be shipped from the Lake Superior region this season. While somewhat better than the estimate a month ago, this would be 20 per cent less than last year's poor record. More importantly from a national standpoint, however, analysis of stocks and shipments from all sources now indicated that ore supplies should not bottleneck steel production, although the margin might be thin by next April thinner at interior steel plants than at those in and might be points. It was understood that the Pittsburgh and more easterly which had been somewhat more American Iron Ore Association, was revising its estimates concerning ore shipments, pessimistic upward. Deming said that the the national scene, Mr. With regard to upswing from the strike pointed to a vigorous statistics and tone continued to be concerned However, he induced lows in activity.

about the unemployment figures, particularly those relating to long-term unemployment, and also about the data on the money supply and liquidity. These seemed to him to indicate less danger of unsustainable expansion and more danger that too tight a monetary policy could inhibit real growth. Accordingly, he would not like to see any further tightening. He would prefer to have errors made--if they had to be made--on the side of ease, and he would not object to backing away mildly from the existing degree of pressure. He was not quite sure how to measure the level of pressure at this time but was inclined to agree with Mr. Hayes that perhaps interest rates could afford a better guide at present than they might at some other time. Mr. Deming felt that the wording for the policy directive suggested by Mr. Mills at the last two meetings perhaps represented more nearly what the Committee was doing at this time than the present directive. However, he was not sure that he would want to make enough change in policy to warrant a change in the directive. Mr. Allen made substantially the following comments with respect to Seventh District developments: viewpoint of industry, the business outlook From the in the Seventh District continues highly optimistic. been said, national surveys indicate a First, as has all types of capital spending. The 1960 increase in almost produces at least one-third of the nation's Seventh District in that area support the capital goods. Our contacts will be booming in the expectation that these industries with present order backlogs no worse than good coming year, in many. There is one in any category and excellent is unlikely to increase exception--petroleum refining--which capital expenditures in 1960.

Employment prospects in industry, therefore, appear bright for early 1960. Although secondary layoffs are still occurring in steel-using industries, recalls are outnumbering new layoffs. Automobile production will step up rapidly now that all assembly plants, effective with the middle of this week, will be rolling. A record number of passenger cars are scheduled for assembly in the first quarter of 1960, which should restore conditions of fairly full employment even in our hardest hit cities, Detroit and Flint. Our farmers have less reason to be pleased with the outlook. The parity ratio for agricultural commodities in November fell to 77, the lowest level since before World War II. Average prices for agricultural commodities dropped 2 per cent in the month ending November 15 and were cent below a year earlier. Prices paid by farmers 7 per were slightly above the preceding month. Corn picking in Iowa, and in localized areas elsewhere in the District, has been hampered by bad weather, and there is still 10 crop to be picked, compared with an to 15 per cent of the average of 5 per cent at this date in previous years. Our financial economists, and our bankers too, expect higher interest rates in the next few months. They point to a probable need for funds to carry higher business in ventories and receivables and to the forthcoming require and otherwise, Loans of ments of the Treasury, refundings larger banks are beginning to reflect the pre-Christmas our credit demands, but and corporate tax-and-dividend-period our weekly reporting banks has been so far the expansion at year ago and with banks in other mild compared both with a One.factor is that metals industries parts of the country. to reduce borrowings. But our bankers have continued in the next two weeks. loans to increase expect business unevenly but on the whole Reserve pressures have shifted less severe in the Seventh appear to have been somewhat effects of the new than elsewhere. The uncertain District somewhat hard to evaluate. cash rule make the situation vault reserves will go that the newly created Our data indicates areas. to banks in industrialized primarily cash is in cent of the reserve-eligible Eighty per of this in urban centers areas, half banks in metropolitan State. The a relatively highly industrialized of Michigan, Michigan is also a factor. of branch banking in prevalence District's central per cent of the more than 70 In number, reserve-eligible cash, reserve city banks have reserve and country banks. per cent of our only 35 as against

Mr. Allen considered the outlook so obscure that the System must wait on the discount rate even though it was out of line with other money rates. However, he felt the discount rate must be given serious thought in January. While he would not mind changing to the phraseology suggested by Mr. Mills for the directive, he would prefer to do nothing at this time. On the general picture, he found himself in agreement with the comment of Mr. Thomas that the greater danger was in too little rather than too much restraint. Therefore, he was also in agreement with what Mr. Irons had said. He would neither propose nor favor deviations on the side of ease. Instead, he would try to stay just about as at present and hope for a clearer picture by the time of the next Committee meeting. Mr. Leedy said that Tenth District conditions had not changed materially in the past three weeks, although there had been some improvement in the employment situation since the end of the steel strike. The three General Motors assembly plants in the Kansas City area had recalled all of their furloughed workers and had indicated that they might employ additional workers before the end of the year. Loan expansion continued at district weekly reporting banks, with expansion of credit to finance retail trade one of the most notable developments in business loan demand this year. The increase in this type of loan at reporting banks through November was roughly $35 million, whereas the largest previous increase, in 1955, was in the neighborhood of $21 million for the full year. Judging from

department store data, the increased percentage of sales on an in stalment basis had apparently been a factor, along with expansion of sales, in increasing the demands of retailers for credit. With the yield on Treasury bills having risen sharply above the Federal funds rate, a few larger banks in the district that customarily sell Federal funds were diverting part of their excess reserves to the bill market. As to policy, Mr. Leedy said that the distortions due to the end-of-year situation and the imminence of Treasury financing opera tions suggested to him doing nothing more than the System had been doing. Accordingly, he aligned himself with those who felt that it would be advisable to continue the degree of restraint at which the been aiming, but which may not have been fully ac Committee had few weeks. He agreed with the view that complished in the past be avoided. Except for the errors on the side of ease should with respect to the steel period and the uncertainty end-of-year ought to be thinking of he felt that the Committee negotiations, rate. It moving on the discount as well as increasing restraint economy and in evident in the was such strength to him there seemed not be too much the System need next year that for the projections with a delicate it was dealing possibility that about the concerned firm and positive adversely by might be triggered situation which he did not the mark, should overshoot if the System Even action. that expansion the developing impair would seriously that believe

seemed to be under way. This view, he felt, was reenforced by the public psychology that seemed to exist on every hand. In summary, his recommendation would be to continue until the next Committee meeting the same degree of pressure that the Committee had intended to apply in recent weeks. Mr. Leach commented as follows with respect to Fifth District developments: Following a high-level plateau, Fifth District industry and trade have apparently renewed their upward movement. The Southern Furniture Market was reported to be extremely good, with the placement of forward orders continuing to build up an already substantial backlog which currently exceeds last year by about 50 per cent. Textiles continue in their most favorable position in recent years with forward buying carrying into the fourth quarter of 1960 and mill inventories very low. Bituminous coal production has increased appreciably since the resumption of steel output. A considerable amount of construction of new commercial facilities in progress and planned promises a supply of new opportunities in the months ahead. Indications the District point to increasing employment, within spending, a continuing strong demand for income, and District products, and added impetus for major Fifth production from abnormally low inventories. is less favorable. The The outlook for farmers income is sharply down relative level of agricultural good year. Through which was an unusually to 1958, 4, gross returns on flue-cured tobacco, our December 3 per cent from the crop, are down about largest money similar period last year. have been heavy since Pressures on District banks borrowings from the meeting. Average daily our last since the first of Bank of Richmond Federal Reserve in any similar period been higher than December have in the last six years. there was now an open Mr. Leach noted that As to policy, discount rate and that the financing schedule in the Treasury period

was somewhat out of line with other short-term rates, especially the 90-day bill rate. He recalled, however, that Treasury bill rates usually peak seasonally about this time in December and then decline. Under present circumstances, it seemed to him that System policy should be one of continuing to hold a tight rein, pending developments, rather than to pull the reins even tighter or move in the direction of ease. While he rather liked the wording for the directive that Mr. Mills had proposed at the two most recent Com mittee meetings, he did not think it was a good time to make any change in the directive which would suggest a change in policy. If there was to be no change in policy, he would not change the directive. In summary, he would not favor a change in the directive, in the dis count rate, or in the degree of pressure now exerted by open market operations. Mr. Mills said he wished to return to his plea for a System monetary policy of moderate restraint over the expansion of bank credit as compared to a policy of relatively severe restriction. In that connection, he believed that the mechanical aspects of System policy operations in recent weeks, as measured by the level of negative free reserves, had been in the right direction and were appropriate to the economic circumstances portrayed to the Committee by Messrs. Moving into a new year, he saw a need to Young, Marget, and Thomas. the next meeting of the Committee and to look further afield than

probe into the relatively obscure economic future. Accordingly, he presented the following statement: In developing Federal Reserve System monetary and credit policy for 1960, in my opinion, the Open Market Committee would be well advised to reset the theme in which policy is formulated. Price inflation and interest rates have been the financial problems with which the System has treated for several years past. However, in retrospect these problems are symptoms, rather than the cause, of the basic difficulty that must be dealt with, and which is credit inflation. Although the term "credit inflation" has gone out of fashion, the fact that a vast credit inflation exists must be reckoned with. The present period of credit inflation can be traced back to the lifting of the World War II economic controls which was followed by a rapid and continuous inflation of private credit and an almost equally rapid inflation of public credit, both of which have carried on through 1959. A doubling of national productive capacity, a rising standard of living, and a far-reaching foreign aid program have all been accomplished within the context of a credit inflation which may now be entering a critical phase in which Federal Reserve System monetary and credit policy may well become the deciding factor as to whether the tangible economic gains of recent years will be preserved or lost. At this crucial time, when the burden of public and private debt and the illiquidity of the commercial bank ing system are matters for serious concern, painstaking judgments must be reached as to how Federal Reserve System monetary and credit policy can be made to con to national economic development in ways that tribute will see a digestion and consolidation of outstanding will lay a secure foundation for debt to a degree that an inflation-free renewal of credit expansion. An seriousness of the present credit alarmist view of the inflation and the adoption of a counteroffensive policy might be expected to so of severe credit restriction credit as to halt economic the availability of choke off growth in its tracks and induce deflation. A more one of reasonable restraint policy would be realistic that would permit that over the expansion of credit that is consistent with measure of credit expansion

real growth in the gross national product at the same time that accumulated incomes are largely diverted toward the repayment of debt rather than toward ex pansive expenditures involving the additive of newly created credit. In my belief, Federal Reserve System monetary and credit policy for the foreseeable future should aim at moderate restraint over the expansion of credit. Mr. Mills said that he would not favor an increase in the discount rate. He wished to propose again to the Committee a change in the directive so that clause (b) would read "to fostering sustain able economic growth and expanding employment opportunities while guarding against inflationary credit expansion." With respect to the question raised by Mr. Rouse regarding dealer positions, Mr. Mills said it would seem that the Desk could give reasonable help to the dealers and the market in the latter days of this month, but on a reluctant basis and bewaring of "crocodile tears." Mr. Robertson said he found himself in almost complete agree ment with Messrs. Irons, Allen, Leedy, and Leach. It seemed to him one could not afford to be of the economy was such that the strength this was a time to Instead, he felt that easing off at this time. that this might result the fact steady, notwithstanding be holding financing period in the System during the Treasury in problems for all of the errors he did not mean making By holding steady January. as a member of the Committee, ease. During his tenure on the side of toward ease to lean the tendency usually been that it had he felt

when the Committee wanted to hold a steady course. Therefore, he would suggest that errors be on the side of restraint in the hope of maintaining an even keel. In saying this, he did not mean to criticize the operations of the Desk during the past three weeks; this had been a difficult time with the vault cash release added to other factors. Nevertheless, he felt that it had been more customary to veer on the side of ease rather than restrictiveness, and he could see no justification in easing at this time. If anything, he felt that the Committee ought to be pushing as hard as it could to hold a steady, firm rein. The policy that the System had been following appeared to be beginning to bite, and it should, perhaps a little more severely, if the System was going to curtail what he thought conditions. He would not favor a was in the offing, namely, boom change in the directive. A case could be made for increasing the but it was not a sufficiently good case to cause him discount rate, to urge an increase. said he could not add much to what Mr. Mr. Shepardson end-of-year situation, the easing that Robertson had said. The the year, and the fact that after the first of normally follows a good part of the was to be in the picture Treasury financing it difficult to take a tighter next two months all tended to make foresaw a burgeoning of time. However, since he hold at this the System should year, he felt that the turn of the activity after Because of as possible. grip on the situation as firm a maintain

the inadvertent but apparently inevitable slippage when attempting to maintain the prevailing degree of restraint, he would suggest, like Governor Robertson, that any errors be on the side of restraint. With reference to the point mentioned by Mr. Mills, he felt that all should be somewhat concerned about the extent of credit expansion. As he saw it, the best way of meeting the problem would be to maintain the existing degree of restraint. Since the System probably would want to go farther rather than turn back if things picked up after the turn of the year, and since the System might be retarded in facing that situation because of Treasury financing activities, it seemed to him necessary to maintain as tight a position as possible at the moment. In summary, he would recommend no change in policy or in the discount rate, and he would like to maintain the full degree of market restraint that now existed. Mr. King said he felt that System monetary and credit policy was definitely having a desirable effect on the economy, about as much effect as it should for the country's good in the long run. He expressed agreement with the degree of restraint that had been main tained up to the past three weeks. These three weeks had been difficult and he would be inclined to forget about them. In the period ahead, he would consider it desirable to liquidate enough of the restraint that existed prior to the System portfolio to maintain it wise to fix any amount weeks. He would not consider the past three felt that this should be decided to be disposed of, and of securities

upon according to the feel of the market. He would not favor a change in the directive or the discount rate at the present time. Mr. Fulton said that about the only thing he could report on the steel situation was that steel was being produced at a high rate. Fourth District mills were operating at approximately 97 per cent of capacity, which was above the national average of about 95 per cent. On or about January 7, a vote would be taken under the provisions of the Taft-Hartley Act to determine whether the latest proposal of the steel companies would be accepted by the workers; probably it would not be accepted. If not, and if nothing else were done, the strike would resume around the 27th of January. The companies were standing on an offer that would provide a package of a three-year period, this being about the extent of 30 cents over factor in steel production. The union was now follow the improvement of seeking agreements with the other industries ing the technique it. Both the can and the copper industries had already served by the aluminum industry would enter signed up, and it appeared that a package similar to that agreed upon into a contract containing to that company's steel workers. Kaiser and the union in regard between about two years ago because of over The price of aluminum was lowered imports of aluminum. The industry felt capacity, lack of orders, and wage increase one could too low, and with a the current price was that There was no expectation price adjustment. forward to a possible look pressure for deliveries orders or any real inflow of steel of a sudden

in the first quarter of next year. Steel was coming in in quantities that were not expected, unusually large quantities in some cases. Warehousemen were getting adequate supplies, although not always in certain types of inventories. In the event of resumption of the steel strike, close-downs on the part of steel users were likely to be rather rapid and widespread. Continuing his comments on the Fourth District, Mr. Fulton said that construction was 11 per cent under last year, while depart ment store sales were 7 per cent above a year ago. Although there was considerable pressure on the banks for credit, the increase in loans had been gradual and bankers did not expect a surge of demand. Member banks had not been coming to the discount window to an in ordinate extent. Mr. Fulton commented that several Cleveland directors represented companies that had established plants abroad. At the last directors' meeting there was some discussion as to the present and potential effect of the establishment of such plants on employ One director reported that the cost of ment in the United States. only about 25 or 30 per cent of tooling a new plant in Europe was reported that workers at a in the United States. Another the cost for one day what American workers plant in Japan were receiving feeling was that considerable one hour. The general would receive in for the foreign plants established was being lost to production

purpose of dealing in the countries concerned and also for the purpose of shipping certain products back to the United States. The directors expressed concern about profits of United States corporations from the standpoint of whether such companies would be able to compete with respect to ordinary run-of-the-mine products manufactured abroad. Mr. Fulton did not feel that an increase in the discount rate at this time would be appropriate in view of the possibility of a resumption of the steel strike. He aligned himself with those who would retain a firm hand on bank reserves and, if possible, recapture the posture of restraint that existed prior to the relaxation which occurred incident to the release of vault cash. He would leave the directive in its present form under the premise that a change in the directive is indicative of a change in policy. In order not to get into a box by relaxing at this time if there should be a surge of of the year, he felt that a firm hand was activity after the first necessary. in the Third District did not Mr. Bopp said that developments from national developments to merit any particular differ sufficiently at 102 per cent of capacity, and comment. Steel operations were under more pressure than banks throughout district banks seemed to be the country as a whole. that, as the last three weeks had shown, data Despite the fact Mr. Bopp felt that measure of restraint, are not the only on reserves

these data should be as good as possible. Therefore, the Philadelphia Bank planned to collect daily information on deposits and related items from member banks. The banks were to be asked to report on a prescribed form which would be sent to the Reserve Bank with the cash remittance letter. The Reserve Bank would process the data by machine tabulation, and at the end of each reserve computation period each member bank would receive a report showing its position. While the project was experimental, the Reserve Bank was optimistic that it would work out well. Mr. Bopp said that he would favor continuing the present degree of restraint. He would be inclined to emphasize interest rate levels rather more than the level of reserves during this period. He would not recommend any change in the discount rate or the directive. Mr. Bryan said that at the Atlanta directors' meeting last week the reports of branch directors and comments of the group seemed to indicate a great deal of optimism. He was puzzled as to whether to rely on such reports or on the statistics, for the latter tended situation, with no evidence of great boom in the to show a spotty District. Nonfarm employment was up only slightly, manufactur Sixth were down, bank debits were and department store sales ing employment declined, and so and currency had demand deposits down significantly, contracts were about series. Construction on through the statistical

20 per cent under a year ago. Mr. Bryan commented that district member banks were borrowing heavily from the Reserve Bank. Borrowings had been running rather regularly at over 15 per cent of the System total, whereas a figure of about 5 per cent would normally be indicated. While he did not know just what the cause of the borrowing was, some of it seemed to reflect the fact that loan totals in the district had gone up a little more rapidly than loans throughout the nation while the liquidation of investments had been more reluctant and considerably slower. The Reserve Bank was encountering a number of continuous borrowing situa tions. As to policy, Mr. Bryan said he wished to associate himself with Mr. Mills who, if he understood correctly, approved a policy of restraint but had some fear that the System might overdo it and produce a deflationary situation. If there was no objection, Mr. Bryan wished to introduce into the record a chart and three tables which he felt had a bearing on a point he had made in the past, namely, that a situation appeared to be approaching in which the matter of the growth factor in reserves should have serious consideration. He felt that now at that point, rather than approaching it, and he the System was let the chart and tables speak for themselves. He was willing to also would like to introduce them because of his conviction, as stated from time to time, that one of the pertinent problems of the System is to find a means by which instruction and the Open Market Committee

can be given in quantitative rather than qualitative terms. He said that he might wish to refer to the chart and tables at some later time for the purpose of furthering that discussion. There being no objection, it was understood that the chart and tables referred to by Mr. Bryan would be made a part of the record of this meeting.1/ Mr. Johns expressed concurrence in the comment by Mr. Thomas that the greater danger was in too little rather than too much re straint. It appeared reasonable to expect that the demand for credit would rise greatly relative to savings in view of the expected behavior of inventories and other factors including consumer credit. It also seemed likely that the velocity of money would resume an upward course. Therefore, if inflationary deposit creation was to be avoided, he was of the opinion that bank credit expansion must be quite limited and that high interest rates--possibly increases--must be expected. In the circumstances, he would avoid any relaxation of restraint and even the appearance of relaxation. He was impressed by the fact that the discount rate was unusually low in comparison to the level of other short-term interest rates, that this situation the spread had widened in the past week or had persisted, and that Therefore, he tended to favor an increase in the rate. 10 days. not to occur, he still felt confident However, if an increase was 1/ Copies are attached to these minutes.

that restraint upon unwarranted credit expansion could be exercised through appropriate open market actions. He would not suggest any change in the directive at this time. With regard to the question of dealers' positions raised by Mr. Rouse, he concurred in the answer given by Mr. Mills. Mr. Szymczak said that he had little to add to the discussion. He was impressed by the statements of Messrs. Mills and Bryan, if for no other reason than that he felt study was indicated regarding various means of measuring System judgments on policy. In his opinion, policy could hardly be changed at this time in view of the fact that the Treasury was about to go into the market and would stay in the market almost continuously for some time. In these circumstances, he would continue the policy that the System had been pursuing. Mr. Balderston said that Mr. Bopp had encouraged him greatly by advancing the suggestion for measurement of money supply changes in the Third District. This, he felt, might be the most significant statement of the day. He would not want to change the directive until policy was changed, and he would not favor changing the discount rate until after the Treasury financing had been completed. By that time more might be known about the steel situation and also about the prospect of excessive movements in the economy. Between now and the he would favor retaining a firm position next Committee meeting, because he feared that errors on the side of ease might deceive many The time was not far off when the people, including the Committee.

building of inventories could be resumed again as steel supplies became available, and he anticipated that loan pressures would be enhanced. Chairman Martin said the impression he had of the money market at the moment, in the light of today's discussion, was that what the System did would not really make too much difference. During the discussion he had endeavored to keep a check of the views expressed, and on the basis of this tally it would seem difficult for the Account Manager to have any real indication as to whether the Committee favored more ease or more restraint. However, while one or two who had spoken seemed to favor a slight basic change in policy toward less restraint, he felt that the majority favored a steady policy. The Chairman then stated that he would like to make one or two comments about the year as a whole which related to the present situation. First, it was his feeling that the System must be con stantly on guard against taking itself too seriously. This comment applied to the measurement of net borrowed reserves and of degrees of restraint, or lack of restraint, more than in any other field. think, perhaps, that by exercising a particular A man from Mars would the Open Market Committee was of restraint in the money market shade the course of a given period make or break the economy in going to he felt that of course, was facetious, While that comment, of time. it did have a bearing,

Chairman Martin said that he was inclined to look upon as a satisfactory year for the System, although he felt sure that a great many people did not agree with System policy, because the System had maintained a consistent, intelligent, and understandable course. This probably was not true in 1958, and he was not sure that it was true in 1957, although he believed it was true in 1956. In 1959, however, the Federal Reserve had maintained a clear enough policy so that even those who disagreed were able to understand what the System was trying to do. He considered this encouraging, and he therefore thought of 1959 as a good year for the System. When it came to the period immediately ahead, the Chairman said, he did not know whether it made a lot of difference how the System conducted itself as long as the System did not take itself too seriously. It seemed to him that the money market had a great many forces that no one could evaluate. Then, too, there was the balance-of-payments problem, now complicated by the boom in Europe. In a boom situation, attitudes with respect to cost-price problems are different than when a boom is not in process, and the pricing mechanism of the world tends to be out of joint. Attitudes on investment, including investment abroad, had changed markedly in the course of the last year, and there was today a shifting of capital all around the world. Chairman Martin commented that all of these factors exerted This was a part of the on prices and interest rates. an influence

ferment going on in the money market at the end of the year. Where he came out was that the System was going well, that it should keep steady in the boat, and that the problem was one of rolling with the punches at this juncture. This was not in any sense to say that the Committee should disregard Mr. Mills' basic point regarding the quantity of the money supply. Personally, he did not know just how to measure the money supply, but Mr. Mills was doing a service in bringing the matter up. Like many others, he (Chairman Martin) was unable to make heads or tails of the money supply on either a quantitative or a qualitative basis. For the year as a whole the increase in the money supply appeared to have been less than one per cent, and while he felt that this was more than offset by the increase in velocity, he could not prove it. In other words, while he believed that the increase in velocity adequately provided for growth he could not prove this statistically. This was where one got into the element of judgment. One should not go overboard on the money supply question certain that the velocity factor was not playing a part. unless he was felt that money supply factors in terms of velocity were Personally, he into consideration at this that the System must take the crucial points about lessening restraint. With For this reason, he was wary time. question was not so much in the picture, the optimism that was now the going to have a tight rein on the money supply whether the System was supply ought to be. of gauging what the as one

After commenting on prevailing public attitudes with respect to the use of credit, including credit at the consumer level, Chairman Martin said that this was a difficult problem for the System. He went on to say that he felt quite optimistic about the coming period. If one made a list of the problems with which the System was confronted, he could tend to get depressed. However, that kind of depression was not warranted; the problems, no matter how difficult, could be resolved. Indeed, it was the job of the System to deal with such problems. In a further comment, Chairman Martin expressed regret that Mr. Riefler was going to retire at the end of this year. Summarizing this meeting, the Chairman said that there appeared to be no question regarding the consensus. There should be no change and a change in the discount rate was not favored in the directive, He then inquired whether anyone disagreed with that at this time. When no comments were heard, the Chair statement of the consensus. man commented that this would stand as the consensus. question of the policy indicated by the Turning to the presumed that Mr. Mills wished to consensus, the Chairman said he comments placed in the position and have his reiterate his previous record. affirmative, the Chairman replied in the After Mr. Mills who would like to associate whether there were others inquired

themselves with Mr. Mills and to have their views similarly recorded. Hearing no comment to such effect, the Chairman said that this would cover the vote on the policy indicated by the consensus. With regard to the directive, Chairman Martin turned to Mr. Rouse and inquired whether he saw reason for a change, indicating that otherwise the directive would be retained in its present form. Mr. Rouse said he saw no reason for a change. Thereupon, upon motion duly made and seconded, the Committee voted, with Mr. Mills voting "no," to direct the Federal Reserve 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 restrain ing inflationary credit expansion in order to foster sustainable economic growth and expanding employment opportunities, and (c) to the practical administration of the Account; provided that the aggregate amount of securities held in the System Account (including com or sale of securities for mitments for the purchase the Account) at the close of this date, other than certificates of indebtedness special short-term to time for the temporary accom purchased from time shall not be increased or modation of the Treasury, by more than $1 billion; decreased direct from the Treasury for the (2) To purchase account of the Federal Reserve Bank of New York (with

discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the aggregate $500 million. Chairman Martin then referred to the suggestion that the next meeting of the Committee be held on January 12, 1960. He said he saw no objection, although the organizational meeting of the Committee should be held on March 1, 1960, which would fall on a Tuesday. This would mean having meetings at two-week intervals at some point. There would be some advantage in deferring the next meeting until January 12 because it might be possible to get additional information with re Accordingly, the meeting might be set spect to the year-end period. date, at which time the Committee could decide what schedule for that it wished to follow thereafter. a comment by Mr. Hayes that an alternative In response to meetings on some occasion, the would be to go four weeks between period it seemed doubtful suggested that in the forthcoming Chairman that long a period elapse. would want to let whether the Committee the next Committee was agreed that comments, it After further time the Committee 12, 1960, at which be set for January meeting would meetings. It was understood, what to do about succeeding would decide on March 1, 1960. would be held meeting however, the organizational at this meeting had that several persons Mr. Hayes commented prior to the that existed to the posture to getting back referred

past three weeks, thus implying that the past three weeks had been quite easy. He took strong exception to that view, both from the standpoint of statistics and the money market atmosphere. As to the statistics, he noted that the level of net borrowed reserves had been higher, on average, during the past three weeks in spite of the release of vault cash; in fact, the figures might be interpreted to mean that there had been a tighter position during the last few weeks than earlier. This was confirmed by the general feeling of the banks and also the fact that short-term rates moved up quite sharply and averaged well above the preceding three weeks. On all counts, there fore, he dissented from the view that the situation was any easier during the past three weeks. Mr. King said his comment had been intended to go to the point that the situation prior to the past three weeks presented a clearer picture and was less subject to controversy. Accordingly, suggested eliminating the past three weeks as a benchmark. he had staff then withdrew and the The members of the Committee Committee went into executive session. the Chairman advised that Following the executive session of the Federal Ralph A. Young as Secretary Committee had elected the E. Noyes as Associate Economist, Market Committee and Guy Open effective January 1, 1960. The meeting then adjourned. Assistant Secretary

7 D . D 3 D 3 J7 D 3 D J D J D .7 D J D 3 D D 19r7 1948 1919 1950 1951 1952 95 1954 955 1956 1957 1958 1959 Hote: .sbed avSa Indicate re:3ons O Oor5ing to ref are-=* dates ot Kstionsl Bureu ct Eonm'it Rzea&rcb. P - P-Peak; - Troogh. Last Mont plotted: Kovber 1959 Trend 1 exhibits an amuni hgroJth of 3.6 percent per year.

TABLE I COMPOUNDED ANNUAL GROWTH RATES OF EFFECTIVE RESERVES (Percent changes, base year to terminal year) Base Terminal Year Year 1947 1948 1949 (11 mos.) 1947 x 1.8 1.0 2.0 2.6 3.2 1948 x x 0.2 2.0 2.9 1949 x x x 3.9 4.3 4.6 4.1 4.3 4.1 1950 a xa a 4.6 5.0 4.2 1951 x x x x x 5.4 4.0 4.3 4.0 3.5 3.1 1952 x x x x x x 2.6 3.8 3.5 3.0 2.6 3.4 3.2 1953 x x x x ax x 5,0 4.0 3.1 2.6 3.6 3.3 1954 a x a a x x x x 3.0 2.2 1.9 3.3 3.0 1955 x x a a x x X x x 1.3 L.3 3.3 3.0 1956 a x ax x xa a a a 2.0 4.3 3.6 1957 a x x x x x x x x x a 6.6 4.7 1958 x x x x x x x x x x x X 2.1 1959 x x x x x x x x x x X x x *Reserve figures exhibited in Table I and the chart on effective reserves are total member bank reserves (monthly averages of daily figures) adjusted for changes in reserve requirements and for seasonal influences. No effort was made to remove the expansion potential of total reserves reculting from shifts in de posits among classes of banks and between types of deposits subject to different requirements. of computation: For May 1958-November 1959, figures used are actual Method for ceeaonal influences. Monthly values of effective member bank reserves, adjusted (when reserve requirements were last January 1947 through April 1958 reserves for the ratio of average required reserves have been derived by (1) obtaining changed) for Hay 1958-April 1959; (2) multi average deposits subject to legal reserves to ratio is of the ratio of re by the percentage the above plying actual reserves subject to legal reserves for each specified month; quired reserves to deposits the values for seasonal influences. and (3) adjusting

TABLE II COMPOUNDED ANNUAL GROWTH RATES OF THE U. S. ECONOMY (Percent changes, base year to terminal year, of GNP in 1954 dollars) Base Tere-'nsl Year Year 1947 1948 1949 1950 1951 1S52 (3 tra.) 1947 x 3.9 1.8 4.1 4.9 4.6 4.6 3.7 4.2 4.0 1948 x x -0.2 4.1 5.2 4.8 4.7 3.6 1949 x x x 8.7 8.1 6.5 6.0 4.4 5.0 4.6 4.3 3.5 3.8 1950 x x x x 7.5 5.4 5.1 3.4 4.3 3.9 3.6 2.9 3.3 1951 x x x x x 3.4 3.9 2.0 3.5 3.2 3.0 2.2 2.8 1952 x x x x x x 4.4 1.3 3.6 3.2 2.9 2.0 2.7 1953 x x x x x x x -1.7 3.1 2.8 2.6 1.6 2.4 1954 x x x x x x x x 8.2 5.1 4.0 2.4 3.2 1955 x x x x x x x x x 2.1 2.0 0.5 2.0 1956 x x x x x x x x x x 1.8 -0.2 2.0 1957 x x x x x x x x x x x -2.3 2.1 1958 x x x x x x x x x x x x 6.7 1959 x x x x x x x x x x x x x

TABLE III COMPOUNDED ANNUAL GROWTH RATES OF PRICE INFLATION (Percent changes, base year to terminal year, in Consumer Price Index) Base Terminal Year Year 1947 1948 1949 1950 1951 1952 1953 (10 mos.) 1947 x 7.6 3.2 2.5 3.8 3.5 3.1 2.7 2.3 2.2 2.3 2.4 2.2 1948 x x -1.0 0.0 2.6 2.5 2.2 2.2 1.6 1.5 1.8 1.9 1.7 1949 x x x 1.0 4.4 3.7 3.0 2.4 2.0 1.9 2.1 2.2 2.0 1950 a x x x 8.0 5.1 3.6 2.8 2.2 2.1 2.3 2.3 2.1 1951 x x x x x 2.3 1.5 1.1 0.8 0.9 1.3 1.5 1.4 1952 x x x x a x 0.8 0.6 0.3 0.6 1.2 1.4 1.3 1953 x x x x x x x 0.3 0.0 0.5 1.2 1.5 1.4 1954 x x x x x x x x -0.3 0.6 1.5 1.8 1.6 x x x x 1.5 2.5 2.6 2.1 1955 x x x x x x x x x x x 3.4 3.1 2.3 1956 x x x x x x x x x 2.7 1.7 x x a x x x x x x x x 0.7 x x x x x 1958 x x x x x x x x x x 1959 x x x x x

Source

Also: Record of Policy Actions