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Federal Reserve Bank of St. Louis
FEDERAL R E S E R V E BANK OF NEW YORK
NEW Y O R K 45,
RECTOR
N.Y.
2-57OO
May 12, 1955
Personal and Confidential
Hon. Wm. McCa Martin, Jr.
Board of Governors of the
Federal Reserve System,
Washington 25, D. C.
Dear Bill:
As requested, I am sending you herewith a copy of the notes
which I used, including the proposal I placed on the table, at the meeting
of our Special Committee on the Organization of the System Open Market
Account. My objective, in this proposal, is to try to avoid unnecessary
changes in the existing organization while, at the same time, taking
cognizance of the dissatisfaction expressed by some members of the
Federal Open Market Committee concerning the method of selection of
the Manager of the System Open Market Account and the lines of authority
and responsibility between the Federal Open Market Committee and the
Manager.
At our meeting I suggested that the present organization
of the Account is the result of a process of evolution, and that its virtues
should not be abandoned because of its defects or its lack of complete
logic, - unless we can be sure, or reasonably sure, that whatever might be
substituted for it would not have greater defects, some of which could only
become apparent over time. Those who set up the present organization,
and it was mainly the work of competent draftsmen at the Board of Governors,
were aware of the history of development of open market operations, and tried
to fit the new organization and procedures into that line of development,
having in mind the requirements of the law, as amended, which also
attempted to build on what had gone before. The law, I have always thought,
contemplated institutional (Federal Reserve Bank) responsibility for
operations in the open market as distinguished from Federal Open Market
Committee responsibility for open market policy, and this is consistent
with other important organizational arrangements within our regional
Federal Reserve System.
If it is believed that the climate of opinion has changed to
such an extent as to require adjustments in our open market organization
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Federal Reserve Bank of St. Louis
FEDERAL RESERVE BANK OF NEW YORK
2
Hon. Wi? McC. Martin, Jr.
5/12/55
which depart from this thesis, we may well have to consider seeking
confirmation of this belief by legislative action.
Yours Faithfully,
Allan Sproul
Enclosure
P.S.
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Federal Reserve Bank of St. Louis
On Tuesday, May 24, I am already scheduled to attend
a meeting of the Committee on the History of the Federal Reserve
System at Brookings Institution at 12:45 o'clock p,m. This will
mean that I shall not be available for meeting of our special
committee until, say, 3 o'clock that afternoon.
Special Committee
F.O.M.C. 5/10/55
AS
Confidential
Have tried to set down our terms of reference, growing out
of the debate at the meeting of the Federal Open Market Committee on
March 2, 1955 with some comments of my own along the way*
1.
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Federal Reserve Bank of St. Louis
(a)
As a matter of formal status the Manager of the System Open
Market Account to be made more directly responsible to the
Open Market Committee as a whole«
(b)
Special committee to bring back concrete proposals for
perfecting structural and operating organization that will
best implement policies of FOMC.
Conclusion by special committee that no change should be
(c)
made in present relationship definitely would be outside its
terms of reference. Anyone who voted for the motion setting
up the special committee voted with that understanding*
(d)
Whatever recommendation the special committee makes will be
presented for consideration of the full committee which may revise,
accept or reject the recommendation.
(e)
Sponsor of motion setting up special committee might be
persuaded before full committee is through, that it is not
feasible to get a better arrangement, but wanted to register his
dissatisfaction with the present arrangement. If full committee
decides we don't want to make any changes, we shall at least
have studied the problem carefully and have decided on the basis
of such study to retain the status quo*
-2-
Special committee is therefore charged with bringing before the
full committee one or more alternates to present structural
arrangements and operating organization of the FOMC» Those
who voted for the resolution setting up the special committee are,
at this stage, committed to the finding that present arrangements
are unsatisfactory*
Those who voted against the resolution are not
committed to this finding, but are charged with seeing if something
better than the present arrangements can be devised.
3.
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Federal Reserve Bank of St. Louis
We are all charged with the knowledge, as brought out in the
presentation of the motion setting up the special committee, that
there are no personalities involved in this matter, that change is not
dictated nor suggested by political considerations or political pressures,
and that the situs of the accounts operations is not involved*
The defects of present arrangements, as claimed in the debate which
resulted in the appointment of the special committee, are
(a)
The FOMC has a basic and positive responsibility for the
selection of individuals who administer the System Open
Market Account, Our present arrangements do not permit
us to discharge that responsibility adequately.
The Manager of the Account should not be reporting to the
Board of Directors of the New York bank either directly or
through the President of the New York bank.
(He doesn't
report to the directors of the New York bank, either directly
or indirectly, on open market operations other than to present
figures of past transactions, as published, and get approval of
-3-
New York bankrs execution of these transactions and participation
in them.)
(c)
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Federal Reserve Bank of St. Louis
Not considered proper that Manager of the Account, because he is
also Vice President of the New York bank should be in a position where
he might have to resist pressure to report operations that directors of the
bank may wish him to report, (This is a lypothetical problem, which does
not exist in fact. Directors of Federal Reserve Bank, in accepting
designation of New York bank as Federal Reserve Bank charged with
executing transactions for FOMC, also accepted prohibition against
their receiving or seeking to receive other than published information
on operations of System Open Market Account.)
Donrt want operational responsibility limited to the New York bank or
to Manager of the Account* The whole committee must be really
responsible, (I would submit that you can l t have twelve managers of
the Account - at some point and in some way the policy-making body
has to transmit operational authority to an executive, institution/or
individual or both*)
Relationship of Manager of Account to the Chairman of the FOMC.
(1)
If someone had wanted to expose me as Chairman, as being
responsible for operations and ideas I did not believe in, it
would have been perfectly possible for him to do so when I first
came over here* (But is that not the position of any member of the
FOMC at times? It has been the position of the Vice Chairman
of the Committee for a good many months past. We must
remember that we are a committee made up of twelve
individuals and that the Chairman is only first among equals.
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Federal Reserve Bank of St. Louis
-4-
We operate on the basis of the decisions of the majority
of the Committee,)
(2)
Personally, the Chairman did not feel he could order the
Manager of the System Open Market Account, even in a
minor way,$without going through the President of the
New York bank first* (But that is a matter not of persons
nor of individuals, but of institutional responsibility versus
individual or personal responsibility^ which I stressed in the
committee discussions. The committee can order the
Federal Reserve Bank of New York and the Manager of the
Account to carry out open market operations in any legal way
it wishes. But certainly executive authority over the Manager
of the Account cannot be exercised by each of twelve members
t
of the FOMC acting individually, and to transfer such authority
to the Chairman of the committee would be going much further
than the transfer of authority to an executive committee which
has been and is now under question.) |
(3)
What would be the position of the Chairman of the FOMC if the
individual selected to manage the System Open Market Account
proved to be a cantankerous individual who wanted to build an
empire for himself as Vice President of the Federal Reserve Bank
of New York. (Well, I presume his position would be that he would
take up the matter with the FOMC and proceed to get rid of the
Manager,
Which brings up the next point,)
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Federal Reserve Bank of St. Louis
-5-
( 4)
Even though the by-laws of the Committee state that the
Manager of the System Open Market Account serves at the
pleasure of the Committee, the fact is that the Committee
does not have that discretion, except in very special
circumstances, because of the way in which the Manager of
the Account is selected by the New York bank, subject only
to the approval of the FOMC* (Which brings us back to the
first point of the indictment, that present arrangements do not
permit the individual members of the FOMC to discharge
adequately their basic and positive responsibility for the
selection of the Manager of the Account„)
(5)
As I see it, that is the only point of substance. It would seem
to me that this special committee should have placed before it
various ways for selecting the Manager of the Account and, as
a matter of formal status, making him more directly responsible
to the FOMC, Its members should then have time to study these
various methods and to compare them with the present method, and
one with another* It should also have a meeting with the directors
of the New York bank to ascertain what their views may be since
any change from the present method would affect the New York
bank* Then the special committee should meet again to discuss
v
the various methods it has considered and to see if it could
agree on one as being preferable for recommendation to the FOMC.
(6)
For my part, while reserving the right to advocate the retention
of the present organization when we go back to the full committee, and without committing the New York bank, because
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Federal Reserve Bank of St. Louis
-6-
I have not discussed this with my directors, I want to
throw something like the following into the hopper;
(a)
Prior to each annual reappointment of the present
Manager of the Account, a meeting of member
representatives of the FOMC and the Board of
Directors of the New York bank be held to discuss
the appointment, so that a process of joint consultation before appointment -will be established,
(b)
If and when it becomes necessary to appoint a new
Manager of the Account, a list of possible appointees
containing the suggestions of members of the FOMC
and of the Board of Directors of the New York bank
to be prepared and their qualifications studied by
member representatives of the FOMC and the Board
of Directors of the New York bank,
Those who survive
this preliminary examination of qualifications would
then be interviewed by the joint committee.
The joint committee would be charged with agreement
on a candidate, who would then be named Manager of the
Account, by the Federal Reserve Bank of New York as the
bank chosen to execute transactions for the System Open
Market Account, subject to the approval of the FOMC»
(d)
There would be reaffirmation of the provision of the
by-laws of the Committee that the Manager of the
i
Account serves at the pleasure of the Committee, which
with the change in method of selection, would remove
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Federal Reserve Bank of St. Louis
-7-
whatever basis there is for feeling that the Committee
does not in fact retain that power,
(e)
Such an arrangement would preserve the desiratie
ingredient of institutional responsibility for execution
of policy, which is an ingrained part of the Federal
Reserve System, and would avoid the probable necessity
of seeking legislation to make more radical changes in
present practice « At the same time, it would make
the Manager of the Account more directly responsible
to the FOMC and would improve the structural and
operating organization of the Committee,
June 6, 195$
Memorandum!
to
Heabers of federal Op*n Market
Gcwiaittee Special Ccwdttee
Subjects
Management of
«* System Qpea
Market Account
Fro» J. L. Robertson
The Federal Reserve Act sapowsrs the Federal Open Market
mittec to "adept ... regulations relating t* tiie opea-«arket traasaettc»8w «Ut the federal i«ssrre Banks, aad requlrts the Eeserre Baaks to
participate in open market operations *ia aeeordaoe* with the dtireeUoa
of and regalatioBS adopted by the Ccewittee".
la vieif of the taroad dlssretiea ttais conferred, the Cossaittee
lawfully could prescribe for the £yste» Open Market Accowit al«»et aiqr
organizatioaal or ^housekeeping*1 pattern that nas not patently unreason
able or capricious. However, o^r present consideratiioa of practical al
ternatives seems to hsv© narrowed to three t
1* the Commit tee coold have its policies executed tirou^
a separate C^en Market CoRmittee managerial staff A having no
other ftmeticsis, located in ' ashingtoa.
2.
Ifee CcNssdttee eoold have its policies executed through
« Manager of the System C^en Market ^oeomt, appointed by and
responsible solely t® the Open Market Cowalttee, but located
ia a Federal Reserve Bank designated arm tine to Us* by the
Committee.
3* the Coiwftittee cotild continue the present arrangement
of having the Manager be m officer of the federal ieserve
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Federal Reserve Bank of St. Louis
Bank of Sew York, but the annual appointment of tfcs Kaaagsr
would be handled through a joint committed of members of the
rOMC and directors of the Federal Reserve Bank of Sew lork.
As I tea it, the first of these alternatives would establish
most definitely (short of new legislation) the »independence8 of the
Committee's operations and their divorcement from the operations of any
particular Reserve Bank. Hie second alternative is that suggested ia
Mr. Martin's memorandum of May 10, 195$* 7he third is the possibility
mentioned in Mr* Sproul's meRorsndKaa of the same date.
1.
Separate Oftpp Market Cornedttee staff located in Washington,
"If we had * clean sheet of paper to write upon*, as President *dlson
said, this alternative ndght have greater appeal,
the majority of the
Committee have their offices in Washington, and the presence of the Manager
(whose position might be merged with that of the Committee's Secretary)
and his immediate staff in Washington would encourage those members to
have frequent direct contacts with the Manager, thereby enhancing their
wasrataading of day-to-day operations and the staff's understanding of
the Committee's policies. It is probable that such close and continuous
contact between a m*4<a*l^ <& the Oowdttee and the Managerial staff would
increase ths effectiveness of the Committee in its performance of one of
the Reserve System's most important functions and would result i« the
System Account's transactions reflecting more precisely the Committee's
current policies and objectives.
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Federal Reserve Bank of St. Louis
- 3It night also be contended that the existence of * separate
•n Market Committee staff sad the location of that staff in Cashing*
™
ton would make fer mere "detached* Account operations. Washington is not
a great money center and the thinking of ta* staff iaovitably wo«ld b«
based mowi t^c«i ©bJ*etiT« «eoae«ie faets md less «pon toe "feel11 of tae
Martot, which is boa^ lo ejatreise greater force tfeen Ae staff is legated in a great Money market and Is in frequent eoataet *dth the people
1*0 GonsUiate the market. In other «©rds, by shifting to Washington all
Open Market CosBsittee operations ea&ept the mechanic&1 perfonianc© of
market transactions, we could mtn'imixe the possible influence of people
other than waabers of the Ccassitte© end its staff*
there are cogent argtswmts against this alternative, however*
In the first place, management of the System Aecowit always has been
centered in Sew fork Cltgr. Against this historical background, a shift
of location to Washington might be interpreted as indies ting a laok of
confidence in the How York Heserre Bank's handling of this work, which is
not the ease, Sttoh public mis understanding might be detrimental in more
ways than one, and should be avoided mLess the counterbalancing benefits
«r* very clear*
An sv«n stronger ergwent against the Washington-staff proposal is sis^ly a denial of the contention that the Committee's operations necessarily are most effective when based solely on "objective11
statistical data. It is plausibly contended by some that, although the
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Federal Reserve Bank of St. Louis
making of monetary policy calls for detaclnant from day-to-day market
influences, central-bank operations can achieve maxlmuR effectivenees
and minimal disturbance only if they are conducted on the baaia of
first-hand and up-to-the-minute knowledge of currant happenings In the
nation's chief soaey market. Washington la certainly not the beat
pUee In uhlch to obtain sseh last-*inute knowledge and "feel"! without
doubt the prime location for this ptirpoce today la Hew fork City, *hich
la still o«r principal *oney market*
2* Separate Manager of the gy a teat Open Market Account located
in a deaignated Reaenre Bank. It aeena to »« that this is the nab of
the changes auggeeted by Wr. Martin* Its objective would be to aectre
the benefits of an operating Manager concerned solely with execution of
fCMQ policies, nhils avoiding the =i is advantages, previously mentioned,
of a shift of physical location to -ashington. If this alternative is
adopted, the Co»dttee*s deciaion presviab^r wuld be couched la teras
of location "in a Federal Reaenre Bank to be deeigjiated from time to tUw
by the Comittee*. For the foreaeeable future, probably, the designated
beak »s«l*i be the Federal i**erva Bank of lew fork, but ti*s suggested
fern of resolution aight have i^ye^loglcal ^tie by enhancing the aenae
of the n>NC staff that it 1* not a ft«rt of a particmlar Federal Eeaerve
lank, ^it 10 only pl^nicaiay situated there, for oonvenience, and at the
please of the Oojwilttee.
fo some extent, o«r jmrfjose wKild be to give
to the Manager and ambers of his .Uf f a relationship comparable to that
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Federal Reserve Bank of St. Louis
-5of the District Chief National Bank Examiner* who maintain their office
in Reserve flank buildings* for reasons of efficiency and convmiisnee,
without being considered in any sense a part of the Heserve Banks.
In «y view, tfes chief value of Mr. Kartin1* proposal is that
it will tend to incr*a«e th« iJJwlihood that, in all circwataaea*, th«
•aaagavont of th« %»tan Opan Market Account will r*fl*et precisely and
a«lu»iv»ly the policies of the Comittaa. Bat to taka full aovantaga
of auch orgaaisatlonal chsngas, the Cowsdttaa mmt be datermined * and
wuat carry out ita datarmination - that diractives to th« Manager will
be More definite and abaolute than haa been the ease generally in the
p&at. It might well require more frequent meetings of the Comittee, aa
a reatilt of which relatively narrow ranges of operations would be prescribed. Under this procedure, the Manager's functions might consist of
observing the Market and economic factors generally, preparing economic
information and vi»ws for suialssion t o the Conaittee, and devising
mechanics and techniques of orders to the Q^xm Market Desk of the deiignated Federal ^»erve Bank which will effectively earry out the specific
directives of the Oo»dttee.
Ae an illustration, let us asatsaa, putting aside other standards and criteria for the moaent, t^at the Gowaittee in September 1955
decides to aalntain a free-reserve level of 1100 million to $200 Million. At that ti»e, free reserves happen to be in the neighborhood of
$&0 mlUion. In these circumstances, the Manager would act as promptly
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Federal Reserve Bank of St. Louis
.6 -
as possible without undue market disturbance to sell some $50 million
of bills (or perhaps SUO million or |60 million) j in other words, ordinarily the Manager would take the adnJunsa action necessary to bring
the situation within the limits prescribed by the Committee but would
keep the Cownittee informed of changes in economic environment or trends
which might warrant a change in the instructions.
Necessarily, the Manager would also act promptly to offset other
factors affecting the level of free reserves, such as money in circulation, Treasury deposits, float, and gold movements, but such action would
be taken only when one or more of those factors resulted in a level of
free reserves which was above or below the prescribed range* For example, in tiie situation outlined above, no action by the Manager would
be called for by a subsequent increase of |?0 million in money in circi*lation (other factors not changing), since the resulting level of free
reserves - approximately |120 million - would still be within the range
contemplated by the Committee's current directive*
fo sum up the foregoing, it seems to me that a decision by
the Committee to maintain closer contact with the management of the Open
Market Account may be no more than a matter of form unless it is coupled
with a regular practice of making that contact effective through directives which are definite and quantitative as well as philosophical and
qualitative*
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Federal Reserve Bank of St. Louis
* ?3* Cantlocation of groaoat srran|«»eaU, except thai ^ana^ar
nottld b« appoinUd throo&h Joint action of the CogBelttot and the Mo*
York HftMrve B*ak« IMa appaart to bs tha oaaoaoo of «*». SprouPa aaggoatlea* fo tho extent that It give* th® CosBdtta* a more *fiaetiv*
volet la th» selection and roappolnteoot of the Manager and at&ff, It
1» a »or* in th« dar«eUoa d*m4 •drl«mbl« by « m«4oritar of the COR•iitM. ieiMnrwr, It 3««ra» aa «ai»c««8&riljr llwiUd «ff*tteuitiQ& of ti»
pnooipU that ti» nanig^ent ot Hi* Opm Hwrk*t Aeeomt s&euld b* r«•pooaibl* »ol«l3r to tii« Oemltt**. To the exteiit tHftt a^r Raa«rre B*akt
aft otich, partieip«t«« iia tha s«I*ct4on of th« Manager, 4indod r«apon»ibiUty aoooaaarUy roaiii^, partl@«Xarly becanao th» Maaagor and teia ataff
ve^Xd feo pi^ieaUy isoatoii iat and ijwwllat«^ ocaipansatod ^, th« Eo»
aanra Bank whlefe had a ttaaauro @C eoa^rol OTOT tHair tonure and porqalattoa.
ta brioff my roaetlwa la ^tat Mr. SpromX'a 14oa dots aot go far
oaoagji in a ^in^tlaa of eaOTqrl^ ni^ t^i Cowtlttot1* ob^oetlv* In tida
i^lMwt, iliieh la to have an 0»oa te«k«t managerial staff that looka only
to tfeo Oowtltto* for eoatrol and approval, proirldad tliat thia obJactlTo
earn b« attainod nl^mt loaa ®r th« praetteal b«ma^ of the proaoat arraa^aaat and wltlicmt erostlmg any orrontooa lapr«a«l<m of lala»a-cy»ta«
toafllet or c««ittoa aiwatlafaottoa with the manner i* *&& tha c^
»itta« polielM hwro boen eanrlod omt la tte paat. (In tfela ooaaactiQB,
C «^al^ ptrhapa ratios P^ oaslorataking ttot tho floral «©«*rra laak
of Son fork, thrown lt» tradiag ilaok, proamably would ^oitiaaa to bo
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Federal Reserve Bank of St. Louis
,
the agency throu^i which actual open market transactions would take place.
li» relationship between tiie Mew fork Bank1* trading desk a&4 tl*e Qsen
Market Account Manager would be comparable to tlie relationship of the
desk and the treasury repartasnt in oonneetion with Ireasury open market
transactions.)
Allocation of aalariea and eyaense*. I do not feel any importance should be attached to the immediate source of the eo«pen»ation of
the Manager and his staff*
It 1« difficult to believe that a nan of the
caliber required for this petition wild b* affected by the aire\»itanee
ttiat hi§ aalary check* were dram by a certain Reeerve lank or by the
ioard of Governors, particularly since h© would know that the mltimate
aooree of his conpensation would be the Eeeerve Systev generally, via proration among the iieserve Banks.
Howeverf in the event the OoMaittee feels this phase of the natter iff not negligible, it will be recalled that the Committee** aeneral
Counsel is of the opinion that the Board of Governor* could employ person*
needed for the Oonnittee1* staff at salaries specified by the Committee5
accordingly, this procedure appears to be available if the conitta* concludes that technical "eRployaent" of the Manager ty the Board is preferable to hi* 9»aloy*eno Igr a particular H$*erve Bank.
Conclusion. It appears to me that, having due regard to the history and prusent status of the System's Open Wariest procedures, changea
along the lines submitted by Mr. Martin are beat calculated to achieve oar
objectives in this area, provided the Committee effectively utilites the new
arrangement by providing the Account Manager with more definite (and probably
«ore frequent) directives than has been our practice in the pa*t.
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Federal Reserve Bank of St. Louis
I
R
FEDERAL R E S E R V E BANK OF NEW YOR
NEW YORK 45, N.Y.
RECTOR
2-57OO
Personal and Confidential
Hon. Wm. McC. Martin, Jr.,
Board of Governors of the
Federal Reserve System,
Washington 25, D. C.
June 8, 1955
Chairman,
Dear Bill:
Enclosed are my notes for the meeting of the Special
Committee of the Federal Open Market Committee held on June 6, 1955,
which I was asked to send to the members of the Committee.
It seems to me that the deliberations of the Special
Committee would be furthered if the alleged defects of the present
arrangements with respect to the conduct of open market operations,
directed by the Federal Open Market Committee, could be set down in
black and white in some orderly manner and distributed among the members
of the Committee prior to its next meeting. We could then reexamine these
alleged defects and compare them with the possible defects of alternative
proposals, none of which, it can be assumed, will be perfect. So far,
most of what we have concerning the alleged defects of the present structural
arrangements are scattered statements made in oral discussion,
I also think it would be helpful to the Committee to have the
benefit of counsel's consideration of the problem of employment of a Manager
of the System Open Market Account by the Federal Open Market Committee.
It has been my understanding that it is the opinion of counsel that there would
be certain practical difficulties attendant upon trying to change present
arrangements without legislation, that the matter is open to some troublesome
questions, and that the most clean cut method and the only method that would
be certain of avoiding various practical difficulties would be to obtain legislation. If the problems with which we are struggling are as important as
has been suggested, and if understanding of our procedures by the Congress
and by the public is one objective of the proposed changes, a clean cut method
of effecting these changes would seem to be desirable. And yet, I would
assume, that no one of us wishes to go before the Congress on a matter of
this sort at this time if it can be avoided.
Yours
Allan Sproul
P.S,
I suppose that the preparation of such a list of alleged defects of present
arrangements, as I have suggested, would fall naturally to you since it was
largely upon your insistence that the present Sp£0ial Committee was appointed and
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A.sfa'
Federal Reserve Bank of St. Louis
Confidential
Special Committee, FOMC
6/6/55
AS
1.
In terms of the proposal presented by the Chairman at our last
meeting ("Status of Manager of System Open Market Account" May 10, 1955) what we are now discussing is vastly more important
than the form of appointment of the Manager of the System Open
Market Account, or his status vis-a-vis the Federal Open Market
Committee. We are now involved in the whole problem of the
purpose and functioning of the arm of the Federal Reserve System
in the principal national and international money market of the country.
Perhaps this was inevitable in our assignment, although it goes well
beyond what was discussed when that assignment was given to us.
In any case, it demands the greatest objectivity, the least personal
bias, and the most thorough study we are able to give to it. It is in
that way that I have tried to analyze the proposal of the Chairman,
Briefly I donlt think it would work well, and I don't think it would be
desirable from the standpoint of the Federal Reserve System, the
Federal Open Market Committee or the Federal Reserve Bank of
New York»
2»
The analogy. Suggested that what is now proposed is somewhat
comparable to the Chairman of the Board and Federal Reserve Agent
of pre-1935.
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Federal Reserve Bank of St. Louis
(a)
Office of the Chairman of the Board and Federal Reserve
Agent was a statutory one and there was provision in the
statute for method of fixing his compensation. Proposed
office of Manager of System Open Market Account not provided
by statute and there is real question as to whether statute
intended Federal Open Market Committee, which was derived
from earlier forms of open market committees, to have a paid
staff and to direct, in this way, the detailed operations of
Federal Reserve Banks in the open market. There is pretty
clearly a question about payment of the salary of the Manager of
the Account as proposed. The statute provides a specific method
of payment of compensation by Federal Reserve Banks to
directors, officers, and employees, and the proposed Manager
and his staff would be none of these. Under the proposal the
Federal Reserve Bank of New York would be drawing its chec
to pay salaries and expenses to be determined by another body,
without legislative sanction.
(b)
The old style Chairman of the Board and Federal Reserve Agent,
as a director of the Bank, had statutory responsibilities relating
to the administration of the Bank and its affairs, quite apart from
his responsibilities to the Board as Federal Reserve Agent.
There was an attempt to tie him into both the Board and the Bank.
The present proposal attempts to avoid this straddle, but it would
be inherent in the situation created. In many if not all cases the
original arrangement with respect to the Chairman of the ^oard
-2-
and Federal Reserve Agent was a continuing source of friction
and administrative difficulty at the Federal Reserve Banks, at
least until one man had assumed the dominant position, whatever
the ambiguities of the law.
(c)
In my judgment what has been suggested with respect to the
Manager of theSystern Open Market Account cannot find a happy
forerunner in the old arrangement with respect to the Chairman
of the Board and Federal Reserve Agent, but the comparison
does point to the sources of administrative and operational friction
which are the likely outcome of such arrangements, and raises a
real question as to whether legislative action would be necessary
to accomplish what is suggested.
3.
So much for the analogy. Now to concentrate on the substance of the
proposal* In my opinion it has three fundamental and overlapping
weaknesses. One is its substitution of individual responsibility for
institutional responsibility. The second is its attempt to separate and
segregate open market operations directed by the Federal Open Market
Committee, from all other forms of central banking operations in the
central money market of the country.< The third is the impetus it would
give to administrative friction, and the obstacles it would place in the
way of executive recruitment, training and development,
4*
In the discussion of thit problem which took plac« at the meeting of the
Federal Open Market Committee in March, I expressed certain views on
institutional versus personal responsibility and I need not repeat them here*
The present proposal tries to retain some semblance of institutional
responsibility. It aims to make use of the necessary facilities of the
Federal Reserve Bank of New York, but to shift operational direction of
part of those facilities into the hands of a separate Manager of the System
Opsn Market Account. This is not the kind of institutional responsibility
I have talked about and which I think is an integral part of our regional
reserve system* To preserve the kind of institutional responsibility I
think is necessary, the directives of the Federal Open Market Committee and its Executive Committee should run to the Federal Reserve
Bank of New York, as they do now, and the Federal Reserve Bank
as an institution must be responsible for carrying out those policy
directives; not merely responsible for the mechanics of transactions
directed by an outside Manager of the System Open Market Account.
The latter arrangement shifts the main burden of responsibility from
an institution to an individual.
5.
The deeper but related defect of the proposal lies in its narrow definition
o f the functions of the Manager of the System Open Market Account and in
its attempt to separate his operations from the operations now performed
by the Federal Reserve Bank of New York, as the Federal Reserve Bank
representing the .System in the principal money market of the country.
The money market is not a collection of wat<sr-tight compartments which
can be separated la this way, and the responsibilities of the System in
the money market are no less resistant to such separation. The System's
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Federal Reserve Bank of St. Louis
.3-
responsibilities in that market are all inter-related. They include,
among other things, not only open market operations for System
Open Market Account, but loans made by the New York Reserve Bank
to money market banks, the analysis and careful monitoring of the
reserve position of the money market banks, the consultative handling
of Treasury depositary arrangements, the substantial transactions
funneled through the Hew York Bank for investment accounts of the
Treasury, and the large operations undertaken for the account of
foreign central banks and governments. These are a principal part
of the complex of forces which, as they affect the flow of funds into and out
of the banking system, and the residual settlement of reserve needs at the
money center, have to be administered consistently with one another
and with the policy directives of the Federal Open Market Committee,
if the central banking system is to do its job* The operations of the
Federal Reserve Bank of Hew York which .are not under the direction
of the Federal Open Market Committee cannot arbitrarily be separated
from the open market operations which are directed by the Federal
Open Market Committee, without serious loss of effectiveness. To
cite but one example our operations for System Account (outright
purchases and sales) totaled $4,257 million in 1954 and our operations
in Government securities for others (purchases and sales) totaled
$3,895 million. All of these operations need unified direction.
It is not too much to say, in fact, that the new proposal would
threaten to destroy the coordination of money market instruments that
has evolved over the past forty years, and been used by the Federal
Reserve Bank of Hew York, as an institution acting for the whole
Federal Reserve System, both in fulfilling the System's responsibilities
in the money market, and in accordance with the general directives of
the federal Open Market Committee. To be most effective the
coordination must be centered in the institution, and in men working
as a team within the institution, so that without loss of motion, or the
need to pass through separate channels of authority, all or any of the
several instruments available to the Bank, in any of itscapacities, can
b e brought to bear on the problem *
The common use of one trading desk for the mechanics of open
market operations, as proposed, and assuming as we must the best will
in the world on both sides, would still not achieve maximum coordination
of operating decisions made by two separate entities having authority in
two separate areas. This would seem to be an obvious lesson of
administrative experience, Hor could relations with all of the various
factors in the market be maintained on a coordinated basis if there were
dual controls at the Federal Reserve Bank. It would be possible under
present arrangements, of course, to indicate to dealers the origin of
orders which we place with them, but I question whether even this is
desirable as a matter of central banking practice and whether we would
be justified in giving such information to individual dealers when it is
not available to the whole market.
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Federal Reserve Bank of St. Louis
-4-
A stated reason for the suggestions contained in the proposal
is to eliminate an "anomalous situation'1. I should say that the proposed
arrangement would create a more anomalous situation and one less
easily explainable to the Congress or to the public than what we now
have,
6*
X need not say much about the third weakness of the proposal. I have
already mentioned it - the tendency to administrative friction and the
weakening of executive recruitment, training and development* In
my opinion* it would probably create an unsustainable administrative
situation and would certainly be charged with a high friction potential.
You may say the present operational structure has that also, but it is
the product of long historical evolution. We have learned to live with
it, and it shouldn't be put aside in the interest of a new scheme whose
defects we can only imagine, particularly if our real objectives can be
achieved in some other way.
On the matter of recruitment, training and development, we
would have two lesser jobs taking the place of one key job. Lesser men,
over the years, would be attracted to these jobs. One of the jobs, that
of Manager of the System Open Market Account, would be outside the
regular orbit of System organization and operation, a bob-tailed
thirteenth Federal Reserve Bank. As has happened often in the past,
there might be long periods when the System Account would be inactive,
when the Manager of the Account would lose that touch with the whole
money market (not just the Government securities market) which can come
only from participating in actual transactions, and when the making of
studies and writing of reports would not be enough to maintain interest
and keep faculties sharp. Similar difficulties would face the small staff
of a separate Manager; lack of sufficient continuity, breadth and scope
of operations to insure suitable recruitment, training and development,
because of an invisible wall between the Manager and his staff and the
staff of the i ederal Reserve Bank of Hew York.
The possibility of adequate high level coverage also enters
here. That coverage needs to have depth, to take account of
administrative requirements and vicissitudes of health. Under the
present institutional arrangement the Manager of the Account is backed
up by the President of the Bank who is a member of the Federal Open
Market Committee^ the First Vice President who is an alternate member
of the Federal Open Market Committee, as well as by the Manager's own
subordinate staff. A separate Manager would have only a small
subordinate staff, presumably of lesser caliber than the Manager
himself, and high level coverage in depth through an institutional chain
of command would be lacking.
?.
Would not be so free to condemn what has been suggested in this
proposal, if I did not think real objectives of the Federal Open Market
Committee could be attained in other ways.
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Federal Reserve Bank of St. Louis
.5*
The matters of concern which seemed to underlie the discussion
of the Federal Open Market Committee at its March meeting w*e:
(a)
The method of appointment of the man who serves, in effect,
as chief operating officer of the Committee in carrying out
the institutional responsibilities assigned to the Federal
Reserve Bank of New York by the Committee.
(b)
The fact that expenses relating to open market operations
carried out under direction of the Committee are not reviewed
by the Committee before they are incurred, and are not clearly
anddrectly shared by all of the Federal Reserve Banks, with
the possible implication that he who pays the piper may call
the tune.
(c)
The place of the Federal Reserve Bank of New York in the
Federal Reserve System, Whether or not the assignment to
the bank of responsibility for the open market operations
directed by the Committee, along with all of its other duties
and responsibilities, doesn't upset the balance among national
and regional representation in policy formation which is essential
for good central banking in this country*
To try to remove or allay these concerns, which have grown, at least
in part, out of past shortcomings, I suggest an extension of the tentative
proposals I submitted at our last meeting.
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Federal Reserve Bank of St. Louis
Prior to each annual reappointment of the present Manager of
the Account, the Assistant Vice President and the two Managers
of the Securities function of the Federal Reserve Bank of New York,
a meeting of member representatives of the Federal Open Market
Committee and the Board of Directors of the Federal Reserve
Bank of New York be held to discuss the appointments so that a
process of joint consultation, before appointment by the Bank and
approval by the Committee, would be established while retaining
the institutional responsibility of the Federal Reserve Bank of
New York.
If and when it becomes necessary to appoint a new Manager of
the Account, a list of possible appointees containing the suggestions of members of the Federal Open Market Committee and
of the Board of Directors of the Federal Reserve Bank of New York
would be prepared and their qualifications studied by member
representatives of the Federal Open Market Committee and the
Board of Directors of the New York Bank. Those who survive
the preliminary examination of qualifications would be interviewed
by the joint committee. This committee would be charged with
agreement on a candidate who would then be named Manager of
the Account by the Federal Reserve Bank of New York subject to
the approval of the Federal Open Market Committee.
9*
(c)
Whenever it is proposed to make changes in the incumbents
now serving as Assistant Vice President, and as Managers in
the Securities function of the Federal Reserve Bank of New
York, the changes could be discussed with the member
representatives of the Federal Open Market Committee on the
joint committee before actual transfers are made.
(d)
There could be re affirmation of the provision of the by-laws of
the Federal Open Market Committee that the Manager of the
Account serves at the pleasure of the Committee which, with
the change in the method of selection, should remove whatever
basis there is for feeling that the Committee does not in fact
retain that power if needed. If the power were exercised, the
tenure of the principal assistants of th Manager, of course,
would come up for review.
(e)
In accepting the designation of the Federal Open Market Committee as the Federal Reserve Bank selected to execute transactions
for System Open Market Account, and in assuming the end responsibility for the appointment of the Manager of the System Open
Market Account, subject to the approval of the Federal Open
Market Committee, the directors of the Federal Reserve Bank
of New York would continue to commit themselves (as they have
in the minutes of the Bank in the past) to the understanding
that the Manager of the Account would not be expected to and
should not report to them on operations of the Account, other
than to present the facts and figures of past transactions,
which are regularly published, such transactions to be ratified
and approved.
Budget and Allocation of Expenses
(a)
At the same time that the total budget of the Federal Reserve
Bank of Hew York is prepared, a separate budget relating to
open market operations to be carried out under the direction
of the Federal Open Market Committee would be prepared and
sent to the members of the Federal Open Market Committee
for their review and suggestions. As submitted, or later revised,
this budget would, of course, be part of the total budget of the
bank which is finally passed upon by the Board of Governors.
(b)
The expense of operations carried out for the Federal Open
Market Committee under the budget would be allocated among
the twelve Federal Reserve Banks,at appropriate intervals and
in accordance with an acceptable formula of allocation such
as has been used in connection with other System matters.
(c)
A statement of performance under the budget including
comparison of expenditures with estimates - would be submitted to each member of the Federal Open Market Committee
after the end of the year.
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Federal Reserve Bank of St. Louis
-7*
10.
The position of the New York Bank In the Federal Reserve System has
always been a matter of some political suspicion and some internal
friction, beginning with the steps leading up to the establishment of
the System and the establishment of district boundaries, and continuing
up to the present day. It appears to be an inescapable fact growing out
of the economic and political geography of the country, as well as out of
the structure of the System. There will probably always be a problem
of keeping Washington, New York, and the rest of the System in properly
balanced relationship. We might as well face it. But both analysis and
experience should teach us that the problem can't be solved by one-shot
cures. And we shouldn't attempt to solve it by chipping away the powers
of the Federal Reserve Bank of New York and weakening its ability to
do its job as an arm of the Federal Reserve System, without, at the same
time, adding to the total powers of the System or strengthening its
capacity for effective performance of its duties. The answer, which
will probably never be complete, lies rather in an attempt by all
c oncerned to study continuously and discuss fully the policy implications
of action which may be contemplated or taken under changing economic
conditions. In the area of those open market operations which are
under the direction of the Federal Open Market Committee, the steps
which the Federal Reserve Bank of New York has recently taken to
improve the character and quality of its reports to the Committee, and
the suggestions which it has made for further improvement of communications between the Management of the Account and the Committee,
seem to me to indicate the direction to be followed in ameliorating
this problem.
I cannot accept the assumption that the change which the
Chairman's proposal suggests inthe structure of our open market
arrangements would not have serious repercussions on the position of
the Federal Reserve Bank of New York. I believe that it would cast
doubt on the performance of the Federal Reserve Bank of New York,
a doubt which some in the market have sought to create and exploit
for their own reasons. And by casting doubt on the performance of the
New York Bank we run a serious risk of damaging the prestige of the
whole Federal Reserve System. This is a hazard which should be risked,
if there is warrant for charging the New York Bank with failure to
meet its responsibilities. This charge has not beenmade. / The hazard
could be risked, I suppose, if there were no other way of meeting the
concern of some members of the Federal Open Market Committee with
p resent arrangements. In my opinion, however, whatever real basis
there is for concern about these arrangements can be met by the adjustments which I have suggested.
11.
To summarize
(a)
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Federal Reserve Bank of St. Louis
The experience of the Federal Reserve System with a
full-time Chairman of the Board and Federal Reserve
Agent does tot recommend the adoption of similar
arrangements with respect to tte Manager of the ^ystem
Open Market Account and his immediate staff. It led to
administrative difficulties, internal friction, and the eventual
dominance of one side of the dual monarchy over the other.
In addition, the adoption of a similar arrangement with
respect to the Manager of the System Open Market Account
and his Immediate staff, as proposed, would seem to require
legislation, if "practical difficulties11 and "troublesome
questions "are to be avoided.
(b)
In essence, even though not in appearance, the proposal would
substitute Individual responsibility for institutional responsibility
in an operational matter. Institutional responsibility Is a part
of the fabric of our Federal central banking system, with Ita
division of most powers between policy making bodies at the
center and operatioid units at the regional Federal Reserve Banks.
(c)
The proposed segregation of duties of the Manager of the Account
and the Vice President of the Federal Reserve Bank of New York
In charge of its Securities function would be an attempt to divide
something which, in terms of central bank operation in the
principal national and international money market of the country,
is Inseparable. There are two aspects to the principal task of the
Federal Reserve Bank operating In this money market*
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Federal Reserve Bank of St. Louis
One aspect of the job Is to keep the money market functioning
smoothly from day to day and week to week so that temporary
flows of funds Into and out of the market, from whatever cause,
will not tie knots in the market and cause trouble for the whole
economy. The other aspect of the job is the more dramatic one
of Influencing the general trend of bank reserves and money
market conditions in accordance with the overall policies adopted
by the Federal Open Market Committee which are, In turn, part
of the general credit policy of the whole Federal Reserve System,
whether that be ease, neutrality or restraint In all of their
various manifestations.
These two aspects of one task Involve, at various times,
the discount window, transactions for Treasury accounts/ the
consultative timing of Treasury calls on depositaries, transactions
for foreign governments or central banks, and transactions for
International accounts, all of which should be fitted In with
transactions executed for the Federal Open Market Committee.
The key Individual part In discharging this responsibility of th*
central banking system of the country. In N«w York, Is played
by the Vice President In charge of the Securities function of the
Federal Reserve Bank of New York. The Institutional responsibility
Is that of the Federal Reserve Bank of New York acting in behalf
of the Federal Reserve System. It is claiming a great deal for
cooperation and coordination to Insist that the job could be done
better under th© proposed division of responsibility between an
institution and an Individual. The operations of the Federal
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Federal Reserve Bank of St. Louis
-9-
Reserve Bank, wholly as Bank, are inextricably tied in, it
seems to me, with the special open market operations
directed by the Federal Open Market Committee which are
now executed by the Bank. To try to separate them, and to
try to operate them under two heads, cannot help but lead
to a loss of effectiveness and efficiency of our whole central
banking mechanism*
(d)
The separation of one key job into two lesser jobs, over time,
would attract lesser men, and the division of responsibility
and authority between two men would create more internal
administrative and operational friction than we now have. The
separation of the Manager of the System Open Market Account
from the Federal Reserve Bank of New York would also weaken
the senior coverage in depth which can now be provided for
transactions undertaken for System Open Market Account.
Conclusion; It is not necessary to create these hazards, run these
risks, whittle down the position of the Federal Reserve Bank
of Hew York, nor weaken the effective functioning of our
regional central banking system, in order to relieve the real
concern of those within the System who have doubts about our
present arrangements, and to rebut the attacks of those outside
the System who, for political, or other reasons have been
trying to create a schism between Washington and New York between New York and the rest of the country.
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Federal Reserve Bank of St. Louis
FEDERAL RESERVE BANK OF RICHMOND
R I C H M O N D ! 3, V I R G I N I A
<r
June 8, 1955
PERSONAL AND CONFIDENTIAL
The Honorable Wm. McC. Martin, Jr.
Board of Governors
of the Federal Reserve System
Washington 25, D. C.
Dear Bill:
In accordance with the suggestion made at the
meeting of the Special Committee on Monday, I enclose a
copy of the notes I used at the meeting.
Hugh Leach
June 4-, 1955
HL
Notes Prepared for Use at the Meeting of the Special Committee
of the Federal Open Market Committee at Washington on June 6, 1955
The existing organization of the Open Market Committee appears
awkward but it has worked well in practice.
Our assignment is to devise
a more logical type of organization which will function in a way comparable
to the existing organization.
Particular attention is to be given to the
formal status of the Manager of the Account with a view to making him more
directly responsible to the Open Market Committee as a whole.
As I see it, the key point is institutional versus individual responsibility for operations in the open market.
Should the directives of the Execu-
tive Committee be addressed to the Federal Reserve Bank of New York or to the
Manager of the Account? In this connection it should be remembered that it
is never practicable to draw a fine line between policy and operations.
At
the moment, I see no convincing case for the retention of institutional responsibility for operations as a principle and I believe it could be abandoned
without legislation. I would not, however, suggest amendment or modification
of existing institutional responsibility unless some other type of equally
efficient organization can be devised. Changes in relationships between the
Open Market Committee and the Federal Reserve Bank of New York and the financial community should be held to a minimum.
Chairman Martin has presented a plan under which directives of the Executive Committee would be addressed to the Manager of the Account rather than to
the Federal Reserve Bank of New York. This would place primary responsibility
for operations upon an individual rather than an institution. In other
respects the proposal would apparently keep the New York bank "in the picture"
as much as practicable. In Item 6 of the Chairman1 s plan it is stated, "The
Manager would, of course, report to the Vice Chairman of the Federal Open
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Federal Reserve Bank of St. Louis
- 2Market Committee as well as to the Chairman and other members." It is
clearly impracticable for the Manager to maintain continuous contact with
all twelve members of the Open Market Committee, and it is my understanding,
drawn from Chairman Martin1 s comments at the first meeting of the Special
Committee, that there is no intention to change the present practice under
which the Manager is in continuous consultation with the Vice Chairman of
the Open Market Committee with respect both to interpretation of instructions
and conduct of operations. To me, it is important that this be understood.
Two provisions, or sets of provisions, in the Chairman1s plan merit
careful study by the Special Committee —
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Federal Reserve Bank of St. Louis
(a) Both the Manager of the Account and the Trading Desk would maintain contacts with dealers. How would this work in practice?
Would the dealers and money market banks talk freely with both?
¥ould the Manager of the Account have the "feel" of the market
as he now does? Who would discuss with the Treasury the timing of
calls on tax and loan accounts? How would purchases and sales by
the Federal Reserve Bank of New York for the Treasury, foreign
central banks, and member banks be coordinated with open market
purchases and sales? Who would keep in close contact with the
money desks of the money market banks?
Some of these questions
are more important than others, and there are probably other pertinent
questions that have not been mentioned.
(b) The plan contemplates full cooperation on the part of the Federal
Reserve Bank of New York in supplying technical, financial, and
economic data to the Manager of the Account. Would this present
serious problems to the New York bank?
For one -who lives in Richmond it is difficult to answer satisfactorily
the questions listed above or to appraise the probable reaction of the financial community to the Chairman1s plan without first obtaining the views
of the President and directors of the Federal Reserve Bank of New York.
Mr. Sproul1 s letter of May 12, 1955 and his memorandum dated May 10,
1955 have been read with interest. His proposal that the Manager be appointed
by a joint committee of the Open Market Committee and the directors of the
Federal Reserve Bank of New York would make the Manager more directly responsible to the Committee, but I think the Special Committee should attempt to
develop alternative recommendations.
The Special Committee has an important assignment, and, as previously
indicated, I should like to have the views of the New York bank on the questions
listed under (a) and (b) above before arriving at any definite conclusions.
Regardless of any other changes which may be proposed, I think it would
be desirable for all expenses incurred in open market operations to be shared
by the twelve Reserve banks.
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Federal Reserve Bank of St. Louis
FEDERAL RESERVE BANK
OF DALLAS
WATROUS H. IRONS
PRESIDENT
June 13,
Mr. Wm. McC. Martin, Jr.
Special Committee of the
Federal Open Market Committee
Board of Governors of the
Federal Reserve System
Washington, D, C.
Dear Bill:
In accordance with our understanding at the meeting on June 6, 19^5 of the special committee of the Federal
Open Market Committee, I am enclosing a memorandum reflecting
the statement which I made at that meeting.
As my statement indicates, it is a tentative position, because I feel that there may be important operating
problems and possibly legal problems - although I do not feel
so strongly on the latter point - which the committee has not
resolved as of this timec I supuose such tasks as those will
become the next order of business of the committee.
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With cordial regards,
Sincerely yours,
Watrous H, Irons
•
Confidential Memorandum
June 13, 1955
To: Special Committee of
Federal Open Market Committee
From: Watrous H« Irons
/H
Subject: Summary of statement June 6, 1955 - on Status
of Manager of the Open
Market Account
My tentative inclination with respect to the status and responsibility of the Manager of the System Open Market Account is toward the
proposal submitted by Chairman Martin on May 10, 1955, but with certain
modifications and one major reservation. The basic problem facing us seems
to resolve itself into a decision to accept - with possible modifying amendments - one or another of the three broad alternatives which have been suggested in Governor Robertson's statement of June 6, 1955o At this time my
thinking is toward his second or middle-course approach, which involves the
proposal outlined in Chairman Martin's memorandum referred to above,,
Chairman Martin's proposal would place the selection of the
Manager and the Assistant Manager of the Open Market Account, and such
subordinates as seem desirable, solely with the Federal Open Market Committee*
The Manager would serve at the pleasure of the Committee at a
salary fixed by the Committee, and would concern himself solely with the work
of the Committee; his staff would also serve at salaries fixed by the Open
Market Committee and would concern themselves solely with the work of the
Committee. The Account would be located in the Federal Reserve Bank of
New York,
Chairman Martin's recommendation raises certain questions in my
mind. While I believe, on the basis of my present legal understanding,
that the Open Market Committee could directly select a Manager and his
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Federal Reserve Bank of St. Louis
subordinates, making them solely responsible to the Committee, I have
serious doubts regarding the desirability of building up an additional
and entirely separate staff outside of the Reserve banks and the Board
of Governors. At this point in the special committee's discussion, I do
not object to the Committee appointing the Manager and Assistant Manager
of the Account or to the proposal that those persons shall be solely
responsible to the Federal Open Market Committee. I also believe it should
be possible administratively for the Account to be operated in the New York
Federal Reserve Bank and the Manager of the Account be responsible to the
Open Market Committee rather than the New York Federal Reserve Bank* In
my judgment, the Account certainly should be located in the Federal Reserve
Bank of New York, I believe, however, that the Manager and the Assistant
Manager of the Account should be serviced by the existing technical, operating, and research staffs of the New York Federal Reserve Bank, the other
Federal Reserve Banks to the extent desired, and the Board of Governors.
Therefore, in addition to those provisions of Chairman Martin's recommendations listed under "Action by the Federal Reserve Bank of New York" I would
add the following items:
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Federal Reserve Bank of St. Louis
(1) To provide the Account with the necessary technical
operating staff and facilities to enable the Manager of the
Account to conduct the Account's operations on a day-to-day
basis. Furthermore, the Federal Reserve Bank of New York, the
other Federal Reserve Banks and the Board of Governors should
cooperate fully with the Manager in supplying such technical
financial, and economic data as may be needed by him in the
- 3-
discharge of his responsibilities to the Federal Open Market
Committee.
(2) To maintain for the Account records of transactions
affecting the Account, and other records that may be required
in connection with the operations of the Account.
To utilize further the existing technical and research staffs
of the System, I think it would be desirable for the associate economists
of the Federal Open Market Committee to report biweekly their impressions
of the economic situation and its implications for credit policy to the
economist of the Federal Open Market Committee, so that these reports,
together with any other information available to him might be used in the
preparation of a report which he would submit biweekly to the members of
the Federal Open Market Committee. The Manager of the Account, with the
approval of the Chairman of the Open Market Committee, should have the
authority to call upon the research department of the Board of Governors
or of sny Federal Reserve Bank for such reports, studies, and other economic information as he may deem necessary*
A second modification or clarification that I would recommend
in Chairman Martin's proposal relates to the day-to-day contact of the
Manager of the Account with members of the Federal Open Market Committee,,
It seems to me that any proposal should clearly state the lines of contact,
for there would surely be many occasions when the Manager of the Account
would feel it necessary to have immediate, informal contact and discussion
with appropriate members of the Committee. The Manager would not be in a
position to consult with the officers and directors of the Federal Reserve
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Federal Reserve Bank of St. Louis
-kBank of New York as such, because of his responsibility directly and
solely to the Federal Open Market Committee. Two alternatives might be
considered in connection with this problem.
(1) Between meetings of the Federal Open Market Committee (which, in my judgment, should be monthly or more
frequently if necessary) the Manager should maintain contacts - daily or as frequently as he may consider necessary with the Chairman and/or Vice Chairman of the Open Market
Committee, and, in unusual circumstai ces, with such other
members of the Committee as he may deem compelling, (or
alternatively) (2) With an Executive Committee of the Federal Open
Market Committee, composed of the Chairman and the Vice
Chairman of the Open Market Committee, and the Vice Chairman of the Board of Governors.
I believe that some such more or less definite lines of contact must be
spelled out in order to avoid confusion and misunderstanding.
It is also recommended in Chairman Martin's proposal that the
Manager of the Account would concern himself solely with open market
matters and that there would be, in addition, a vice president of the
Federal Reserve Bank of New York who would have charge of fiscal agency
operations, foreign agency operations, the securities department, the
trading desk, and other functions which are now assigned to the officer
who is the Manager of the System Account*
I am particularly impressed with the statement presented in
Mr, Sproul's memorandum of June 6, 19^5 relating to this problem*
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Federal Reserve Bank of St. Louis
Operations in the money market "outside" of the Account are very substantial and obviously exercise an influence upon conditions in the
market* To separate these two major substantial groups of operations
without meeting the problem in some way by coordination of action to
obtain a desired unified result might well lead to serious difficulties*
At the moment I see considerable danger in a system that would involve
two more or less uncoordinated lines of approach to the money market
involving very substantial sumso
This particular feature of Chairman
Martin's proposal involves my major reservation,.
In summary, at this stage and subject to modification of views
as a result of further discussions and consideration, I would tentatively
support Chairman Martin's proposal provided ways could be found (1) to
avoid the creation of an additional technical, operating, research staff
solely associated with and responsible to the Open Market Account and,
in a sense, outside of the Federal Reserve banks and the Board of Governors; (2) that a satisfactory direct day-to-day line of contact could be
worked out between the Manager of the Account and the appropriate officials
or members of the Open Market Committee; and (3) that the problem of two
major and vitally important approaches to the money market could be reconciled and coordinated in such a way as to assure the maximum possibility
of achieving at any time the desired unified effect and objective in the
money market.
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Federal Reserve Bank of St. Louis
BOARD DP GOVERNORS
OF TH^
FEDERAL RESERV£ SYSTEM
Office Correspondence
Xo
Chairman Martin
Date juiy i,
Subject:
Mr. Riefler
CONFIDENTIAL (FR)
Attached is a copy of the preliminary draft of the minutes
of the meeting of the Federal Open Market Committee held on June 22,
195?5>» It will be appreciated if you will review the draft and advise
not later than Thursday, July 7, whether you have any changes to
suggest.
The minutes of the meeting of the Federal Open Market Committee held on May 10 were approved in the form sent to you on May 23,
The minutes for the meeting of the executive committee held on June 6
were approved in the form sent to you on June 20, 195>5»
Attachment
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PRELIMINARY DRAFT
CONFIDENTIAL (FR)
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 Wednesday, June 22, 1955, at 9:30 a,m.
PRESENT: Mr. Martin, Chairman
Mr. Sproul, Vice Chairman
Mr. Balderston
Mr. Earhart
Mr. Fulton
Mr. Irons
Mr. Leach
Mr. Mills
Mr. Robertson
Mr. Shepardson
Mr. Vardaman
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Federal Reserve Bank of St. Louis
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Vest, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Daane, Hostetler, Rice, Roelse, Wheeler,
and R. A. Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Carpenter, Secretary, Board of Governors
Mr. Sherman, Assistant Secretary, Board of
Governors
Mr. Koch, Assistant Director, Division of
Research and Statistics, Board of Governors
Mr. Miller, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Gaines, Securities Department, Federal
Reserve Bank of New York
Messrs. Erickson, Johns, Powell, and C. S. Young, Alternate
Members of the Federal Open Market Committee
Messrs. Williams, Bryan, and Leedy, Presidents of the
Federal Reserve Banks of Philadelphia, Atlanta, and
Kansas City, respectively.
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
May 10, 1955> were approved.
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Upon motion duly made* and seconded, and
by unanimous vote, the Wfcaons of the executive committee of the Federal Open Market
Committee as set forth in the minutes of the
meetings of the executive committee held on
May 10, May 2U, and June 6, 1955, were approved, ratified, and confirmed.
Before this meeting there had been sent to the members of the Com-
mittee a report of open market operations prepared at the Federal Reserve
Bank of New York covering the period May 10 to June l5> 1955, inclusive, and
at this meeting there was distributed a supplementary report covering commitments executed June 16-21, 1955. Copies of both reports have been placed
in the files of the Federal Open Market Committee«
Mr, Rouse noted that the only change reflected in the supplementary
report distributed at this meeting was a reduction of $2,351,000 in the amount
of acceptances held by the Federal Reserve Bank of New York under the existing authorization of the Committee. Mr. Rouse said that he felt the market
was aware of the fact that there would be a substantial contraction in the
volume of reserves between now and the end of this month. There would, however, be some addition to funds in the market as a result of maturing tax
anticipation notes.
In connection with the forthcoming Treasury financing, Mr. Rouse
said that there was considerable discussion in the market as to where the
reserves which would be necessary to support the financing would come from
and whether such reserves would be provided "freely" or "reluctantly".
Another topic being discussed, he said, was the current administration of
the discount function at the Federal Reserve Banks, there being considerable
gossip to the effect that the discount window was "practically closed, a la
1953"• Mr. Rouse stated that while this was gossip, he felt it should be
reported to the Committee since the comments persisted,
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I,
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-3Upon motion duly made and seconded,
and by unanimous vote, the open market
transactions during the period May 10
to June 21, 1955, inclusive, were approved,
ratified, and confirmed.
Chairman Martin referred to the suggestion that he had made at the
meeting on March 2, 1955 that consideration be given to abolishing the executive committee of the Federal Open Market Committee and that the matter be
placed on the agenda for discussion at this meeting.
He went on to say that
his thinking had net changed very much since March, that he considered the
Open Market Committee to be the heart and core of the Federal Reserve System,
and that the experience of the last few months gave further indication of
the desirability of having the full Open Market Committee take the responsibility for decisions not only of policy but also as to open market operations. It was Chairman Martin's view that there was merit in abolishing the
executive committee. He recognized, however, that there might be another
side to the question, and he wanted to be sure that adequate time was given
for consideration of the question, especially if any of the members of the
Committee or other Federal Reserve Bank Presidents had doubts as to the
desirability of such action.
Chairman Martin then referred to the letter distributed by the
Secretary under date of May 10, 1955, which transmitted a draft of proposed action of the Federal Open Market Committee abolishing the executive
committee,prepared by Mr, Vest, and he requested that Mr. Vest outline the
changes that would be necessary in the event the executive committee were
abolished.
Mr. Vest made a statement in which he said that if the Federal
Open Market Committee should determine to abolish the executive committee
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lt would seem necessary to make certain changes in (l) its Regulation relating
to Open Market Operations of Federal Reserve Banks, as amended June 19, 1952;
(2) the Rules on Organization and Information of the Federal Open Market
Committee, adopted effective September 11, 19l|6; (3) the Rules on Procedure
of the Federal Open Market Committee, adopted September 11, 19U6, and (U)
the by-laws of the Federal Open Market Committee, as amended March 1, 1952,
It would also seem desirable, Mr. Vest said, that the Committee take action
to adopt as its own actions and authorizations any currently effective
actions and authorizations of the executive committee now outstanding, and
he called attention particularly to the draft of proposed action which had
been distributed to the members of the Committee on May 10, 1955»
Mr. Vest further stated that if the executive committee should be
abolished there should be a directive from the full Committee to the Federal
Reserve Bank of New York providing the same authority as was now provided
through the directives of the full Committee to the executive committee and
of the executive committee to the New York Benk. In commenting on such a
directive, Mr. Vest stated that he had prepared a draft which was substantially the same as the existing directive from the executive committee
to the New York Bank but which would omit the existing clause (c) of the
full Committee's directive to the executive committee, which clause provided
that the executive committee should arrange for transactions with a view,
among other things, "to correcting a disorderly situation in the Government
securities market". Mr. Vest explained that the reason for omitting that
clause from the draft of directive from the full Committee to the New York
Bank was because, under the terms of the action of the full Committee at its
meeting on March U, 1953, intervention to correct a disorderly situation in the
Government securities market could be initiated only upon the affirmative
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vote of the executive committee after the existence of a situation seeming
to require correction had. come to its attention through notice from the
Manager of the Account or otherwise —- even though it was recognized at
that meeting that, in the event of an emergency such as an international
crisis, it might not be possible to canvass all members of the executive
committee before initiating such intervention.
It was Mr. Vest's thought
that, in view of this existing policy of the Federal Open Market Committee,
it would not be appropriate to include in the directive to the New York
Bank as agent an instruction to arrange for transactions with a view to
correcting a disorderly situation in the Government securities market.
Mr. Vest stated that if the executive committee were to be
abolished, it would be in accord with the spirit of the Administrative Procedure Act and desirable to publish in the Federal Register appropriate
notices of the changes in the Rules on Organization and Information and in
the Rules on Procedure, which had been published in the Federal Register
in 19W, as well as to publish the Regulation Relating to Open Market Operations of the Federal Reserve Banks, as revised.
Chairman Martin said that in the event the executive committee were
to be abolished his thought was that meetings of the Open Market Committee
in the future generally should be held at intervals of three weeks instead
of two weeks, as had been the case with meetings of the executive committee
during recent years.
Mr. Sproul stated that he assumed there was no substantial legal
question involved in the proposal to abolish the executive committee.
The
executive committee has been legally constituted and could be legally continued, which meant that the Committee was left with the question whether to
\
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continue the executive committee as a matter of administrative appropriateness,
efficiency, and convenience. Mr. Sproul then made a statement substantially
as follows:
I am overlooking - or at least disregarding - the reiterated
charge of Congressman Patman that Congress gave this great power
of directing open market operations of the Federal Reserve Banks
to twelve men, the twelve men gave it to five, the five gave it
to one, and it ended up in the hands of Wall Street. I continue
to cling to the belief that we shouldn't change our organizational
structure in order to try to accommodate ourselves to the attacks
of the Congressman.
Now, under present arrangements, with members of the full committee who are not members of the executive committee invited
to attend meetings of the executive committee, we have been having
what are in effect meetings of the full Committee every two weeks.
This has proved to be possible and desirable and it might be said
to clinch the argument that our present command over time and space
makes the executive committee no longer necessary. Nevertheless,
I think there is something to be said for keeping an executive
committee in being as an administrative t echnique, even t hough
our bi-weekly meetings (or our meetings every three weeks as suggested) become meetings of the full Committee in name as well as in
fact, and the executive committee meets only on call. There may
be times when it will be desirable to have a properly constituted
body which can be assembled in a matter of hours, not to make policy
but to refine policy made by the full Committee on its way to the
management of the Account, as in case of disorderly markets. And
there may be emergency situations in which such a properly constituted body would be in a position to make policy, temporarily,
in behalf of the full Committee on something better than an ad hoc
basis.
It has been suggested, I know, that such situations can be met,
when necessary, by a few telephone calls, but I have never had
much confidence in this method of reaching committee decisions
except on routine matters* When something more than routine consent
is the business at hand, a telephone canvass is no substitute for
a face-to-face meeting at which ideas can be developed and debated,
and the reaction of your associates to those ideas can be observed
and taken into account. A telephone canvass depends too much on
who asks the question and how he asks it,,
I am left with the feeling - and it is no more than that - that
we would be giving up something we may want or need if we abolish
the executive committee. I would prefer to have our present biweekly meetings (or meetings every three weeks) of the executive
committee changed into meetings of the full Committee, but to have
the executive committee kept in being, for possible use in special
circumstances to sort out issues as between top policy and spot
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policy, and in emergency conditions temporarily to make top
policy. In other words, I do not think we have to abolish
the executive committee in order to try to make sure that the
full Committee accepts and discharges its responsibilities under
the law, and there may be occasions when those responsibilities
can be better discharged if an executive committee is kept in
existence.
If -one executive committee is abolished, we should certainly
have in mind the continuance of such meetings as this, at least
four times a year, when all parts of the System are brought together to discuss matters of broad policy and important operations*
And there should be better preparation for these meetings, in terms
of a carefully prepared agenda and necessary background documents
available well in advance, and more time allowed for deliberation
and discussion, even though we take one or two days to iij
instead of half a day0
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-8Mr. Leach said that, as a member of the full Committee and of the
executive committee since March 1 of this year, he had been impressed by
the fact that almost all members of the full Coirimittee had attended each
of the meetings of the executive committee held during the past three
months.
On the basis of this experience, it seemed to him practicable to
have meetings of the full Committee frequently, and he had come to the
conclusion that there was no real need for an executive committee. If the
executive committee were abolished, Mr. Leach felt that, as Mr# Sproul had
suggested, there should continue to be at least four major meetings of the
Federal Open Market Committee a year at approximately quarterly intervals
at which all of the Presidents of the Reserve Banks would be present when
policy matters could be fully discussed. He also suggested that attendance
of voting members at meetings of the Open Market Committee scheduled at
more frequent intervals, such as every three weeks as suggested by Chairman
Martin, might be aided if the groups of three Federal Reserve Banks (such
as the Boston, Philadelphia, and Richmond Banks) were to elect two alternate
members, instead of only one as is now provided.
Mrt Leedy said there was only one phase of the proposal that gave
him concern. This was the question whether abolishment of the executive
committee would mean that the Presidents who served in rotation but who
were not currently members of the Committee might be placed further out of
touch with the work of the Committee than has been the case in the past,
If the practice were continued of having four meetings a year of the type
now held, at which policy matters were fully discussed, the proposed change
might have no effect^ However, if policy actions might be taken at each
of the meetings suggested at three week intervals, and if the Reserve Bank
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Presidents not serving on the Committee were not to be given an opportunity
to participate in these meetings, Mr. Leedy's concern was that some Presidents would not be kept as closely in touch with the work of the Committee as they would like to be and as they ought to be. „
Chairman Martin said that Mr.LeedyTs question came as a surprise
since it had never occurred to him that the quarterly meetings of the type
held in the past at which all of the Presidents were in attendance would
be abolished.
Nor had it entered his mind that any President would not
feel welcome to attend any meetings of the Federal Open Market Committee
that might be held in the future, if he wished to do so and felt that he
could do so. His proposal, the Chairman said, was intended to give everybody more participation rather than less participation than they might have
had in the past in all the decisions of the Open Market Committee. He did
not have in mind abolishing in any way the responsibilities of the Open
Market Committee or the responsibilities or participation of any of the
persons connected with it.
Mr. Leedy responded that he was plad to hear Chairman Martin's
statement, adding that he was not opposed to the proposal to abolish the
executive committee and that his concern had been that the Presidents not
serving on the Committee have an opportunity to be in attendance at meetings
where major matters of policy might be considered.
Mr. Balderston said that on at least one occasion during the past
spring he felt the executive committee did not take the action that was
indicated at the time simply because it was inhibited from doing so—it
did not have the power of the full Committee. He had the feeling, he said,
that had the full Committee been meeting the timing of Committee actions
might have been better than it was. Mr. Balderston said that he was concerned
about being too late and about not acting on time.
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Federal Reserve Bank of St. Louis
He was very strongly in
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favor of Chairman Martin!s suggestion that the executive committee be
abolished and of Mr, Sproul's proposal that the thorough-going Quarterly
reviews of the economic and credit situation and of policy and operating
matters be continued at the time of the meetings of the Conference of
Presidents.
Mra Robertson said that he felt the executive committee was no
longer needed in view of improved communication and transportation facilities,
The holding of freouent meetings of the full Committee would in no way
detract from the need for continuing the thorough-going quarterly reviews
of the situation when all Reserve Bank Presidents were in Washington, since
it would be impossible to expect that all Reserve Bank Presidents could
attend all Open Market meetings held at three week intervals,
Mr. Robertson
also suggested that the point mentioned by Mr, Leedy might be covered by
providing specifically that all Presidents of the Federal Reserve Banks
should be present at meetings of the Open Market Committee,
Mr, Vardaman stated reasons why he felt it was desirable to abolish
the executive committee, including particularly the fact that he believed
such action would bring the Reserve Bank Presidents closer to the consideration of open market matters and make them more available for consideration
of such matters* Mr, Vardaman also said that he was sympathetic to
Mr. Leach's suggestion that all Reserve Bank Presidents not currently
members of the Committee he elected to serve as alternate members,
Mr. Johns said that he had much the same feeling as that expressed
by Mr, Leedy, Under present procedure, when he was a member of the Committee he considered that he was expected to attend all quarterly meetings of
the Committee and he did not let anything take precedence over that
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obligation. This was different, he felt, from merely being "welcome" or
"invited" to be present if he wished to be. If he were expected to be
here, he would be here every three weeks; but he would like to have a more
specific and definite understanding than was indicated by Chairman Martin's
suggestion that all Presidents would be "welcomed" at the meetings.
Chairman Martin said that there was the statutory problem: there
were only twelve who could vote on open market matters*
He did not see how
the Committee could compel others to attend the meetings. It could invite
but could not "expect" the others to attend frequent meetings if they had
no vote. Thus, a President who was not actually a statutory member of the
Committee should not feel under compulsion to attend the meetings, and he
noted that the President-members had alternates so that the Committee could
have a full representation even when some of the President-members could
not attend. It was important, he said, that each voting member be present
at each meeting if possible or that he be represented by his alternate.
Mre Johns commented that those who were not members of the Committee had been called upon to vote and required to vote on a matter before
the Committee and, in response to Chairman MartinTs ouery, he said he
referred to the Chairman's reauest at the meeting held on March 2, 195»5,
that all Reserve Bank Presidents vote on the question of a study to review
the structural and operating organization of the Federal Open Market
Committee, The vote of the non-members was not a legally binding vote,
Mr, Johns said, but they had been requested and expected to vote on the
proposed study.
Chairman Martin said that when he made the request to which Mr,
Johns referred, he did not have any objection to any of the Presidents not
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-12voting if they preferred not to do so. However, he then thought the
proposal was of such importance that each President should have an opportunity to express himself if he cared to do so.
Mr. Earhart said he was in favor of abolishing the executive committee and having the meetings as needed of the full Committee. He could
see, however, that at times some of the President-members might find it
very difficult to be present at meetings held every three weeks, and he
raised the Question as to the procedure to be followed in ascertaining
whether the alternate for the President could attend.
Mr» Riefler explained the existing procedure under which all Committee members were advised in advance of meetings and if any indicated
they would be unable to attend, the Secretary promptly communicated with
the alternate to ascertain whether he could attend.
Mr* Earhart noted that under the by-laws
Later in the meeting,
whenever any member of the Com-
mittee representing Federal Reserve Banks shall find that he will be unable
to attend a meeting of the Committee, he shall promptly notify his alternate
and the Secretary of the Committee in writing or by telegram, and upon receipt of such notice the alternate shall advise the Secretary whether he
will attend such meeting.
Mr0 Williams stated that the difficulties foreseen in adopting
Chairman Martin's proposal seemed to him to be inherent in any change.
Under the circumstances, he thought there ought to be some experimentation
with the proposal,
Mr. Balderston said that he thought the best answer to the question
raised by Mr, Leedy and Mr, Johns was that the Presidents were wanted at
the meetings of the Federal Open Market Committee if their arrangements in
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their individual districts permitted them to attendj they need not feel
compelled to attend, but they should feel that they were useful and that
it was desired that they attend if they could do so,
Mr. Sproul said that he thought the question went beyond the point
discussed. In the past, there has been an organization which has met when
all the Presidents were present in Washington and at which meetings there
had been major discussions of the economic and credit situation and of
policy and operating matters. Out of these discussions, the whole System
moved as a body. Under the existing proposal, it would now be possible
(although it was not a likelihood) that less than the whole System would
make major moves of policy. In the situation which Mr. Balderston had
described when he felt the executive committee had failed to act because
it was inhibited, he had indicated that had all twelve members of the
Open Market Committee been present, a major change of policy might have
been made without the other Federal Reserve Bank Presidents participating
in its consideration or knowing that it was being considered. Mr. Sproul
felt that the difficulty could be overcome if, whenever consideration was
to be given to any major change in policy, all Reserve Bank Presidents
were advised of the meeting and arrangements were made for them to be
present without regard to other commitments they might have.
Chairman Martin said it was apparent that the quarterly meetings
of the type held in the past should not be abolished. However, there were
still only twelve votes and there could be only twelve votes on policy at
those quarterly meetings»
Everything possible should be done to broaden
the responsibility and the participation of all of the Presidents in these
discussions. It was not always possible to say in
advance when a major change in policy might be considered, however, and
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Chairman Martin suggested that there was a responsibility on each individual
President and on each member of the Board of Governors to keep himself
sufficiently current with the situation and with the possible need for
changes that might arise so that each individual might sense when a major
policy question was likely to come up.
Mr. Johns suggested that a President might think he was keeping
himself informed but he might not, as an individual, see the necessity for
taking an action which another person would have in mindo
In order to
keep abreast of developmentss Mr» Johns felt it would be necessary, in his
case at least, to be present at every meeting in order to know when changing
conditions might call for consideration of major policy changes.
Chairman Martin agreed with Mr, Johns and added the comment that
this responsibility devolved upon each President and each member of the
Board of Governors.
Mr. Robertson suggested that in the future the Secretary of the
Committee inform each Reserve Bank President as well as each member of the
Board of Governors as fully as possible in advance of each meeting of all
matters that might come up for consideration.
Chairman Martin stated that he felt it important for all members
of the Board and all Reserve Bank Presidents to be more abreast than they
have been at times in the past of developments which might affect policy.
This was the objective and purpose of his suggestion for abolishing the
executive committee.
There were cases in which Congressmen and others felt
that "islands of responsibility" developed in the System, not only at the
New York Bank but at other places.
Chairman Martin said that in his
judgment there had been some validity to some of these criticisms, and
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there had been some cases in which "islands11 had developed in the System.
This was a problem which should be kept before the Board and all Reserve
Bankse There also had been times, he said, when he felt that not all of
the Board members or the Presidents had participated in discussions of
System matters to the extent that would be desirable»
This could be
improved. It was Chairman Martin's belief that everything possible should
be done to improve the understanding and participation of all parts of the
System in carrying out its responsibilities,
Mr. Sproul said that he agreed wholly with the objective stated
by Chairman Martin. If there have been "islands" in the System, they
have not been due to organization, however, but due to concentration of
interests, or to the zeal which some had shown for participation in this
heart and core of the System to which the Chairman had referred,,
Mr, Mills said that the discussion this morning indicated a little
hesitation among the Presidents of the Federal Reserve Banks on whether
the proposed abolition of the executive committee would accomplish the
objective which Chairman Martin had in mind of promoting the concept of
the Federal Reserve through the broadest possible participation in problems
that arise within the System. This was largely because of the difficulty
which the Presidents would have in attending all meetings of the full Committee which would be scheduled at approximately three week intervals. If
this was a correct assumption, Mr, Mills said, there had already been much
progress made through having meetings of the executive committee at two
week intervals to which alternate members of the executive committee were
invited. Under this arrangement the quarterly meetings of the full Committee with all of the Reserve Bank Presidents in attendance allowed full
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discussion of policy natters,, Mr. Mills noted that Mr, Vest had indicated
that if the executive committee were abolished it would be necessary to
publish a statement regarding that change in the Federal itegister—
a change in the administrative program which might or might not be lasting.
Mr. Williams had pointed out that the plan would be experimental, and
Mr, Mills raised the Question whether the experiment could be accomplished
within the present framework of the Open Market Committee's organization.
If Open Market meetings were held at intervals of three weeks and all
Presidents were invited to attend and found it possible to attend, the
executive committee would be abolished as a de facto procedure but not
de jure. The proposal could be experimented with without eliminating the
executive committee entirely, and Mr. Mills said that he had in mind the
difficulties that might arise in the event of an emergency and the development of a disorderly market where a decision to act to correct such a situation had to be made by the Committee. In such an event, the smaller the
group necessary for making such a decision, the more likely that the
decision could be reached promptly and the necessary corrective action
brought to bear. If the executive committee were thus retained in the
manner suggested by Mr, Mills, the decision as to correcting a disorderly
market situation could be allowed to remain in the executive committee.
Chairman Martin said he had given a great deal of consideration
to the question Mr* Mills raised.
It seemed to him that the Committee had
been experimenting in various ways for two or more years, trying to get
more participation on the part of those connected with the operation. He
did not believe any purpose would be served by continuing on an ad hoc
basis without facing up to the question of the Committee's problems.
Chairman Martin referred to the responsibilities of the Federal Reserve System.
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stating that he felt these responsibilities just the same as other Board
members and Presidents do and that he believed the best procedure was to
get all of those problems before the group. There had been discussions
as to whether individuals were welcome at the desk at the New York Bank
and whether they were welcome to attend meetings here at the Board if they
were not statutory members of the Open Market Committee. His view was
that the time had come to make a decision and not to engage in halfway
measures. He wanted to see whether there was some way of eliminating
some of the difficulties that had shown up in the past. Chairman Martin
said that Mr. Mills was correct in feeling that some of the Presidents
expressed concern regarding his proposal for abolishing the executive
committee, but he personally had no concern. He felt this course should
be followed not only on a de facto basis but as a matter of recognized
change, Mr, Sproul had indicated the view quite sincerely that the
structure of the organization was working
on a sound basis, and Chairman
Martin said he recognized Mr. Sproul might be correct in this view.
However, his own feeling was that the present structure had difficulties
which the Committee should try to eliminate.
Mr* Johns said that he would not wish to be misunderstood. He
was not reluctant to come to a meeting of the Federal Open Market Committee every three weeks and he would not feel unwelcome to attend such
meetings even though not a statutory member of the Committee, if
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Chairman Martin's proposal were to be adopted. He wished to make it
clear that if the proposal was adopted he would plan to attend all meetings
that were called., unless something uncontrollable intervened to prevent
his attending* Mr. Johns went on to say, in response to a question from
Mr, Robertson, that he had obtained a fully satisfactory answer to the
question he had posed earlier this morning*
Mr. Robertson suggested that it would be desirable to give all
Reserve Bank Presidents an opportunity to express themselves on the matter*
Chairman Martin stated that he would be glad to have this procedure
followed with the understanding that if any of those who were not members
of the Committee did not care to express views on the proposal, they need
not feel called upon to do so*
He then asked for expressions of
opinion on the proposal to abolish the executive committee, and all of
the members of the Committee who were present as well as the Reserve Bank
Presidents indicated that they would favor the proposed action, except
that Mr* Mills stated that he would do so with reluctance, and Mr. Bryan
stated that he would prefer not to express a view although he would not
wish to be understood as indicating opposition to the proposal.
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-3 9Thereupon, upon motion duly made
and seconded, the Federal Open Market
Committee approved by unanimous vote
the following actions:
(1) That the Regulation of the Federal Open Market Committee relating to Open Market Operations of the Federal Reserve Banks, as amended effective June 1°> 1952, is hereby
further amended effective immediately as follows: (i) by
striking out all of subsection (e) of section 2 of such regulation and all of section 5 thereof3 and (ii) by appropriately
renumbering subsequent sections of the regulation**
(2) That the Rules on Organization and Information of the
Federal Open Market Committee adopted effective September 11,
19i|6, are hereby amended effective immediately as follows:
(i) by striking out all of section 3 of such rules and by appropriately renumbering the subsequent sections thereof, and
(ii) by striking out the words "or its Executive Committee "
in the first sentence of subsection (c) of the existing section 6 thereof,
(3) lhat the Rules on Procedure of the Federal Open
Market Committee adopted effective September 11, 19U6, are
hereby amended effective immediately as follows: (i) by
striking out the words "to its Executive Committee or" in
the next to the last sentence of section 2 of such rules,
(ii) by striking out the words "under the direction of the
Executive Committee" in the last sentence of section 2 thereof, and (iii) by striking out "or its Executive Committee" in
section £ of such rules.
(ij.) That the by-laws of the Federal Open Market Committee as amended March 1, 195»2, are hereby further amended effective immediately as follows: (i) by striking out the words
"and the minutes of all meetings of the Executive Committee
held since such meeting" in paragraph 1 of section 7 of Article I of such by-laws, (ii) by striking out the word "both"
and the words "and the Executive Committee" in the last
sentence of section 3> of Article II thereof, (iii) by striking
out all of Article III thereof and renumbering Article IV as
Article
(5>) That all actions taken, resolutions adopted, and authorizations granted heretofore by the executive committee,
which are still in effect, are hereby adopted by the Federal
Open Market Committee as its actions, resolutions, and authorizations as fully and effectively as if they had been
originally taken, adopted, or granted by the Federal Open
Market Committee and are continued in effect until such time
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as they may be rescinded or modified by the Federal Open Market
Committee. Any presently existing authority of, or instruction
to, any Federal Reserve Bank or the Manager of the System Open
Market Account which is derived from action taken by the Executive Committee pursuant to authority conferred upon the Executive Committee by the Federal Open Market Committee is continued
in effect, subject to the same terms end conditions as now apply
to such authority or instruction, until rescinded or modified by
the Federal Open Market Committee. Any matter heretofore requiring action by the Executive Committee must hereafter be acted
upon by the Federal Open Market Committee. Any and all powers,
authorities, obligations, and responsibilities heretofore conferred upon the executive committee by the Federal Open Market
Committee are hereby rescinded.
In taking these actions, it was
understood that notices of the changes
in the Rules on Organization and Information and in the Rules of Procedure
would be published in the Federal Register, and that the amended regulation relating to open market operations would
be published in full in the Federal Register,
In response to a question from Mr. Shepardson, Chairman Martin
stated that as a part of the action abolishing the executive committee,
it would be understood that the Secretary hereafter would notify all
members of the Federal Open Market Committee and all other Presidents
of the Federal Reserve Banks of all meetings of the Committee. He also
stated that it was hoped that all members of the Committee and all other
Presidents would be able to attend such meetings in the future.
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Secretary's Note: In accordance with this
understanding, Section 2 of Article I of the
by-laws of the Federal Open Market Committee
was changed to eliminate the former provision
that alternate members were not entitled to
attend meetings of the Federal Open Market
Committee except in the absence from a meeting
of the member for whom such alternate is
elected. The by-laws as amended effective
June 22, 19% are as follows:
'
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-21ARTICLE I. MEMBERS
Section 1, Organization - Prior to the first meeting of
the Committee following March 1 each year, each member of the
Committee representing the Federal Reserve Banks shall cause a
record of his election and of the election of the alternate to
serve in his absence to be forwarded to the Secretary of the
Committee. If any question be raised as to the election or
eligibility of such member or alternate, the Committee shall
determine such question before permitting such member or alternate to participate in the meetings*
Section 2t Alternates - In the event a member is absent
from a meeting of the Committee, his alternate, in attending
the meeting, shall have the same status as the member for whom
he is serving.
Section 3. Oath - Each member of the Federal Open Market
Committee and each alternate shall take the same oath of office
as that required by the Constitution for officers of the United
States.
Section U. Quorum - Seven members (including alternates
present and acting in the absence of members) shall constitute
a quorum for the transaction of business; but less than a quorum
may adjourn from time to time until a quorum is in attendance»
Section 5• Meetings - The Committee shall meet in Washington,
D. C. at least four times each year and oftener if deemed necessary.
Meetings shall be held upon the call of the Chairman of the Board
of Governors of the Federal Reserve System or at the request of
any three members of the Committee. Notices of calls by the Chairman to other members shall be given by the Secretary. Requests of
any three members for the calling of a meeting shall state the time
therefor and shall be filed in writing or by telegram with the Secretary who shall forthwith notify all members of the Committee in
writing or by telegram. When the Secretary shall have sent notices
to all members of the Committee that a meeting has been requested
by three members and of the time therefor, a meeting shall be
deemed to have been called. Whenever any member of the Committee
representing Federal Reserve Banks shall find that he will be unable to attend a meeting of the Committee, he shall promptly
notify his alternate and the Secretary of the Committee in writing
or by telegram, and upon receipt of such notice the alternate shall
advise the Secretary whether he will attend such meeting*
Section 6, Conduct and Deliberations - the proceedings, deliberations, discussions, and actions of the Committee, except as
required by law and except as authorized by the Committee, shall
be strictly confidential, and no information shall be released
except as authorized by the Committee and in the annual report
required to be made to Congress by section 19 of the Federal
Reserve Act as amended.
Section ?• Order of Business - The following shall be the
order of procedure to be followed at meetings of the Committee:
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1. The Secretary shall present the minutes of the
last meeting of the Committee,
2. The Manager of the System Open Market Account
shall make his report of all operations of the System
Open Market Account occurring since the preceding meeting.
3. The Committee Economist shall make his report*
U. The Committee shall then consider open-market
policies.
By a majority vote of members present, the Committee may
adopt a different order of business for any particular meeting.
ARTICLE II. OFFICERS
Section 1. Chairman and Vice Chairman of the Committee At its first meeting on or after March 1 of each year the Committee shall elect a Chairman and a Vice Chairman to serve until the
first meeting on or after March 1 of the next year. The Chairman
of the Committee shall preside at all meetings thereof and shall
perform such other duties as the Committee may require. The Vice
Chairman shall perform the duties of the Chairman in the absence
of the Chairman.
Section 2. Sejcretary and Assistant Secretary - At its first
meeting on or after March I of each year the Committee shall elect
a Secretary and an Assistant Secretary to serve until the first
meeting on or after March 1 of the next year. It shall be the
duty of the Secretary to keep minutes of all meetings of the Committee and a complete record of the action taken by the Committee
upon all questions of policy relating to open-market operations
and he shall record the votes taken in connection with the determination of open-market policies and the underlying reasons
assigned therefor. He shall have custody of such minutes and
records and shall perform such other duties as the Committee may
require. In the absence of the Secretary of the Committee, the
Assistant Secretary shall act as Secretary pro tern.
Section 3. Economist and Associate Economists - At its first
meeting on or after March 1 of each year, the Committee shall elect
an Economist to serve until the first meeting on or after March 1
of the next year. The Committee shall also from time to time, as
it may decide, elect one or more Associate Economists. The Economist shall prepare for the use of the Committee and present to it
such information about business and credit conditions as will assist the Committee in the determination of open-market policies,
and shall perform such other duties as the Committee may require,
Section U. General Counsel - At its first meeting on or after
March 1 of each year the Committee shall elect a General Counsel
and an Assistant General Counsel to serve until the first meeting
on or after March 1 of the next year. It shall be the duty of the
General Counsel to furnish such legal advice as the Committee may
require. In the absence of the General Counsel, the Assistant
General Counsel shall act as General Counsel pro tern*
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Section 5. Manager of the System Open Market Account - The
Committee shall select a Federal Reserve Bank to execute transactions for the System Open Market Account. Such Bank shall
select a Manager of the System Open Market Account who shall be
satisfactory to the Committee. He shall serve at the pleasure
of the Committee and shall attend all meetings of the Committee.
Section 6. Filling Vacancies - At any meeting the Committee
may fill any vacancy in the office of Chairman, Vice Chairman,
Secretary, Assistant Secretary, Economist, Associate Economist,
General Counsel, or Assistant General Counsel.
ARTICLE III.
AMENDMENTS
These by-laws may be amended at any meeting of the Committee
by a majority vote of the entire Committee.
Mr. Vest inquired whether, in approving the abolishment of the executive committee, the Committee also approved the revisions in the form of
directive heretofore issued to the Federal Reserve Bank of New York, which
revisions he had outlined earlier this morning in describing the changes
that would be necessary if the executive committee were abolished, including
the omission from the revised directive of the clause formerly in the full
Committee's directive to the executive committee relating to action to be
taken to correct a disorderly situation in the Government securities market.
Chairman Martin responded that it was understood by the Committee's
vote that the revised directive outlined by Mr. Vest earlier during the
meeting was approved as to form, as the directive to be issued later during
this meeting by the Committee to the agent Bank.
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Secretary's Note: In view of the action of
the Federal. Open Market Committee abolishing
the executive committee at this meeting, members of the executive committee individually
indicated to the Secretary their approval of
the minutes of the meeting of the executive
committee held on June 6, 1955 in the revised
forra in which they were distributed on June 20,
1955-
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-2UMr. Riefler stated that a question recently was raised by a mem-
ber of the executive committee who did not expect to attend a meeting of
that committee whether, in the absence of himself and the associate economist from that Bank, it would be appropriate to have another member of his
staff (an economist) attend a meeting of the executive committee as an observer. Mr. Riefler said that after discussing the matter with Chairman
Martin, it was agreed that the question of the extent to which observers
should be invited to attend meetings of the Federal Open Market Committee
should be discussed at this meeting*
Mr. Sproul said that if a member of the committee made an express
request that a member of his staff attend a specific meeting, it might be
desirable to permit such attendance as a means of preserving as much continuity in attendance at meetings of the committee as was possible. However, Mr. Sproul questioned the advisability of extending unduly the size
of the meetings since there was a tendency for them to grow into "town
meetings" and the larger the number in attendance, the less likely that
the discussions would be of the character that discussions at open market
meetings should be.
Chairman Martin commented that this was the approach he took to
the suggestion.
He thought the burden of responsibility should fall on
the individual members of the Committee and the other Reserve Bank Presidents to attend the meetings or to have their alternates present if it
came to voting on matters before the Committee. Chairman Martin also
noted that the larger the number of persons attending meetings, the more
difficult it became to maintain the confidential nature of the discussions
and actions.
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Mr. Young said that he would not be in favor of having staff
members brought into the meetings as observers and that in his view
continuity of attendance could be preserved through attendance of the
members of the Committee, the other Reserve Bank Presidents, and the
associate economists.
Mr. Fulton expressed a somewhat different view, stating that
it would be helpful to have different members of the staff know how
meetings were conducted. He did not think this should be a regular
practice but felt there were advantages to be gained by having observers present occasionally.
Following a discussion, Chairman Martin
suggested, and it was agreed, that in the
light of the comments made at the meeting, it
be understood that as a general practice observers would not be permitted to attend meetings of the Federal Open Market Committee, It
was also understood that this was not intended
to restrict a President from giving members of
his staff access to necessary documents on the
basis of the broad responsibility that the individual President might feel for keeping himself and his staff informed.
Chairman Martin then called upon Mr. Vest for comment on a
memorandum distributed under date of June 2, 1955 with respect to
possible changes in the wording of the directive from the Federal
Open Market Committee, discussed at the meeting on May 10, 1955*
The memorandum reviewed the changes in wording which had been discussed at that meeting and suggested alternative language that might
be used in the event the directive were to be changed. It stated,
however, that it was the consensus of the staff that it would be
preferable not to make a change in the form of the directive in the
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iramediate future unless some further change of policy of the Committee
should make necessary a change in the directive0
During the ensuing discussion, several members of the Committee
indicated that they felt the alternative wording presented in Mr. Vest's
memorandum of June 2 would be preferable to that now in the directive,
but that they would not be disposed to make a change solely for the
purpose of modifying language. Chairman Martin commented that the question was largely a matter of "tidying up" wording, that he did not have
a strong feeling en the question, but that his judgment would be that
while the revised wording would improve the language of the directive
it would be preferable not to make a change unless some further change
of policy of the Committee was being made.
Some additional changes in language were also suggested during
the discussion, and Chairman Martin commented that he felt it was not
practicable to draft language for a directive in meetings of this size.
At the conclusion of the discussion, it was agreed that the rsvised language outlined in Mr. Vest's memorandum should not be incorporated in the
directive at the present time but that it would be considered whenever a
change in policy made some change in the wording of the directive necessary.
Chairman Martin next referred to a memorandum from the Secretary
with respect to suggested revisions in several continuing operating policies
of the Committee as proposed by Mr0 Robertson at the meeting on March 2,
19% which was sent to the members of the Committee under date of June 3f
195>5»
At his request, Mr* Robertson commented upon the changes which he
would propose b.e made in the continuing operating policies of the Committee,
noting that his changes were intended to be changes of language which would
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clarify the intent of the Committee in its continuing statements of policy
relating to support of Government securities, intervention in the Government securities market, operations in the short-end of the market, operations during a period of Treasury financing, and operations for the purpose
of providing or absorbing reserves. Chairman Martin then called upon Mr*
Sproul who made a statement substantially as follows:
I am sure that you will all understand that I continue to
be opposed to anything which tries narrowly to limit System or
Open Market Committee responsibility solely to the volume of
bank reserves, that I continue to oppose our renunciation of
all or any transactions directly related to security issues
involved in Treasury financings and the prohibition of swaps,
and that I oppose the limiting of our transactions to short
term securities, preferably bills.
Whatever suggestions I have to make concerning Governor
Robertson's proposed wording of our directives with respect
to continuing operating policies are, therefore, relatively
minor and probably gratuitous, since I probably will have to
vote against the whole resolution,
Mr. Sproul then suggested some changes in language which he felt
might be desirable if the revision proposed by Mr. Robertson were to be
acted upon.
Chairman Martin stated that he hesitated to have language of
policy statements changed without having given an opportunity for all
members of the Committee to study the suggested changes carefully.
It
was his view that the proposal made by Mr. Robertson as well as the suggestions made by Mr. Sproul should be made available to all members of
the Committee before they were called upon to vote on a change*
Mr, Sproul said that he agreed with the position taken by Chairman Martin, that he felt it was desirable to have time to study the proposed language of the statements of operating policies, and that it was
not practicable for the Committee as a whole to draft language in meetings
such as this*
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Following further discussion, Chairman
Martin's suggested procedure was approved
unanimouelyo
6/22/55
-28At the meeting on March 2, 1955> Mr. Robertson made a statement with
respect to the use of repurchase agreements in which he proposed that their
use be continued where considered advisable, not as a supplementary technique
in the regulation of credit, but for the purpose of enabling dealers in Government securities to maintain broad and ready markets. His statement suggested
that this procedure be utilized in a manner similar to rediscount operations—
an open window for carrying dealers at rates preferably above but in no event
below the discount rate—in order to assist them in sustaining a closer and
more continuous market.
Under this arrangement, dealers should feel assurance
that the facility was always available to them within reasonable limits, as
the discount window is open to member banks.
Chairman Martin noted that it had been understood that Mr* Robertson's
proposal would be considered at this meeting, and he then called upon him to
make such supplementary remarks as he felt were desirable in connection with
his suggestion.
Mr, Robertson said that he continued to have grave doubts as to the
legality of the repurchase instrument and as to its efficacy in providing or
absorbing reserves in the market.
He had the feeling, he said, that the same
results could flow from thoroughly legal instruments, such as cash transactions in Government securities.
The major point with respect to repurchase
agreements, he said, was that they were for the purpose of aiding dealers in
making markets for Government securities, and this he thought could be done
much more efficiently if the Federal Reserve Banks made a completely impersonal arrangement similar to that followed in discount policy.
Mr, Mills said that he had two questions regarding Mr. Robertson's
proposal.
First, the purpose of repurchase agreements, he said, was to
supply reserves to the market through a device other than general open market
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operations.
This being the case, the judgment as to when those reserves should
be provided properly should rest with the management of the System account.
The initiative for providing or absorbing reserves should lie with the System,
Mr. Mills said, rather than with individual dealers whose reasons for seeking
repurchase agreements might not necessarily coincide with the objectives of
System policy. Secondly, Mr. Mills said that an arrangement such as Mr.
Robertson proposed was objectionable in that through it the System would in
a sense be granting limited membership in the Federal Reserve System to the
dealers.
He did not feel this would be warranted.
Mr. Bryan said that he was sympathetic to Mr. Robertson's proposal.
As he had observed the use of repurchase agreements, the instrument did not
have the purpose of a monetary policy instrument for adding to or detracting
from reserves. It was a device that could give some assurance to the Committee
that it did not get a rate that went far beyond the intentions of the Committee
in periods of tightness.
Thinking of the discount rate as the considered System
policy, Mr. Bryan said that he felt the System might use the repurchase agreement at some penalty rate above the discount rate, knowing that so long as it
was above the discount rate dealers would scramble otherwise to obtain funds
before resorting to the repurchase agreement. Mr. Bryan said that he had
tended to view the instrument in this manner rather than as an instrument of
monetary policy. If it was an instrument of monetary policy, he doubted >.
whether it was a good one.
Chairman Martin said that he was sympathetic to the view expressed
by Mr. Bryan as well as that of Mr. Robertson, but that he thought there were
problems of administration of a proposal such as Mr. Robertson had made and
such a change in policy should not be embarked upon without thorough study.
Chairman Martin said that he preferred impersonal dealing to personal dealing
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at all times, and that this was one of the problems the Committee should be
studying continuously. He then called upon Mr, Sproul for an expression of
his views,
Mr. Sproul made a statement substantially as follows:
1, I disagree with Governor Robertson's general view that repurchase agreements should not be used as a supplementary technique
in the regulation of credit but should be used for the purpose of
enabling dealers to maintain broad and ready markets. I think that
they have a real place and purpose as a supplement to more general
credit controls and cannot now be used to enable dealers to maintain
broad and ready markets,
2, Dealers are not now prevented from making broad and ready
markets by an absolute shortage of funds. They can all borrow up
to the prudent limits any lender would set in relation to capital,
Hhat they would like to have is assured access to funds at lower
rates so that they would always, or nearly always, have a profit
on the "carry" of their securities in position. No central bank
can give such assurance without also giving up its initiative in
credit control, and there is no warrant in law or in fact for
such a relinquishment to enable dealers to make broader markets.
3, The risk of conflict with the initiative of the central
bank and with general credit control admittedly depends in degree
on just how the proposal was developed in practice: at one extreme^
if it were to be an open window but always at a penalty rate there
would be little or no risk because there would be little or no use
of the privilege. At the other extreme, if it were to be an open
window at rates always favorable to making a profit on the "carryw
it would make the market broader by floating it in a sea of Federal
Reserve credit, no matter what general credit policy might be. In
between these extremes,that is, with a variable rate used to promote or retard repurchase agreements at our initiative, you would
only be substituting rate variation for present quantity (and rate)
variation which we now use.
h. The analogy with member bank borrowing is, I think, misleading. The discount window is open as a privilege not a right,
there are no credit lines to be drawn on at will, and the suggestion that member banks should borrow free3y and continuously to
enable them regularly to carry part of their assets has usually
been frowned upon,
5. Broadly speaking, dealers now make broad markets and carry
longer positions when they see prospects of rising prices, and
narrow markets and small positions when they see prospects of
falling prices.
In general, there are only two kinds of situations
when a dealer1 s borrowing needs exceed or seem to him to exceed the
limit of funds available to him.
(a) When he has become overextended in relation to his capital,
(b) When the money market has tightened and individual
banks are reluctant to borrow at the Federal Reserve
Bank in order to advance additional funds to the dealer.
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¥e certainly would not want to step in to relieve the first situation,
and to relieve the second, whenever it represented an intended result
of credit policy, would be partially to nullify that policy,, When
the tightening is temporary and not an intended result of credit
policy, the present use of the repurchase agreement is effective and
appropriate as a supplement to outright open market operations and the
discount window.
6. If our markets were differently organized, the situation of
the dealers might be improved* In the London market for example,
short term dealer portfolios can generally be carried at a profit,
whereas here they must normally expect some loss on the "carry" of
short-term securities and try to make it up on the spread between
their bid and asked quotations and on fluctuations in prices when
their guesses as to future price movements are correct* To reproduce
the London situation even in part would mean that our money market
banks ordinarily would have to lend to dealers on short-term securities
at lower rates than are now available, that they would vary these rates
from day to day in line with changes in their reserve position, and
that the dealers would come to us only as a lender of last resort and
at a penalty rate when there is temporarily a shortage of available
funds in the market„ They would then be able to average out their
occasional losses, when borrowing at the penalty rate, with their
usual profits and would presumably be encouraged to carry larger
positions and to make broader markets. It would be desirable to
study further whether and how such an institutional change in our
markets might be brought about. Short of that, I do not see what
Governor Robertson's proposal has to offer.
Mr. Bryan said that Mr. SproulTs statement made an orderly argument
in so far as he could follow the statement orally, and he suggested that
copies be distributed for further consideration.
Chairman Martin said that it would be understood that Mr» Sproul's
statement would be made available to all members of the Committee in writing,
and that further study would be given to the matter at a later meeting.
Before this meeting there had been sent to the members of the Committee a memorandum from Mr0 Riefler dated June 20, 1955> giving a list of the
persons to whom minutes and other records of the Federal Open Market Committee had been made available, as indicated by reports made to the Secretary
pursuant to the authorization given at the meeting on March 2, 1955. A copy
of this memorandum has been placed in the Committee's files*
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-32Mre Riefler stated that the memorandum was distributed because he
felt it would be of interest to the members of the Committee and the other
Federal Reserve Bank Presidents to know how extensively minutes and other
Committee records were being made available under the authorization given
last March, which provided that any member of the Committee or any other
Reserve Bank President could make such records available to any employee
of the Federal Reserve System in his judgment, provided he notified the
Secretary of those to whom the records were made available*, Mr, Riefer
noted that in the reports some Federal Reserve Banks indicated by name
secretaries and files personnel handling such records, while others did not
so indicate* Mr0 Riefler also called attention to the fact that at some
Federal Reserve Banks minutes of open market meetings were made available
to virtually no one outside the President's office, whereas at other Reserve
Banks such minutes were available to several persons«
i
Prior to this meeting there had been sent to the members of the
Committee alternative drafts of a letter to be sent by Chairman Martin to
the Comptroller General of the United States with respect to the request
made by the Chairman of the House Committee on Government Operations that
the General Accounting Office make an audit of the Board of Governors, the
Federal Open Market Committee, and the Federal Reserve Banks and their
branches, and at this meeting a revised draft of letter was distributed.
At this point, the meeting recessed for fifteen minutes, reconvening
at 11s 1*6 a.m. with the same attendance as at the beginning of the recess.
After discussion, the letter to Mr.
Campbell, as changed at this meeting, was
approved in the following forms
"This letter refers to our previous correspondence with respect
to the request you received from Chairman Dawson of the House Committee on Government Operations that the General Accounting Office
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make an audit of the Board of Governors, the Federal Open Market
Committee, and the Federal Reserve Banks and their branches for the
period January 1, 1953 to December 31j 1951i«
"In my letter to you of April 20, I stated that since the proposal represented an important departure from long established
practice, with far-reaching implications, we would consult as
promptly as possible with the Federal Open Market Committee, which
is a statutory entity, and with the chairmen,, and presidents of
the Federal Reserve Banks» In the interim we have done so, and the
Board has given further consideration to this request. In addition,
I have had two meetings with Chairman Dawson regarding the matter.
"At the outset I thijnk it should be clearly understood that the
question before us is not whether the Board, the Federal Open Market
Committee, and the Reserve Banks should be audited,, They are
audited in accordance with standard practices and exacting procedures,
and reports of these audits are available to the appropriate Committees of Congress,, For the past three years the Board has furnished
the reports of the audits made of its accounts to the House and Senate
Banking and Currency Committees* Last year the Board also sent the
reports of examination covering the five years 19^9-1953 of the twelve
Federal Reserve Banks and branches, as well as the audit of the Federal
open market account to the House Banking and Currency Committee where
they could be examined by all members of the Congress who wished to
see them. The Board stands ready at all times to make reports of
audits of its own operations, as well as the reports of examination
of the Reserve Banks and the audits of the Federal open market account,
available to appropriate Committees of Congress0
"The matter of a separate audit by the Comptroller General presents
a different question, and we believe that in the light of the statutes,
legislative history, and explicit expressions of Congressional intent,
the Board, in the absence of an express directive from the Congress,
could not lawfully acquiesce in a separate audit made by your office.
"Chairman Dawson*s request that you audit the Board, the Federal
Open Market Committee, and the Reserve Banks is predicated upon section
53(b) of Title 31 of the United States Code, which was enacted as a
part of the original Budget and Accounting Act, dated June 10, 1921.
This Act provides in part that the Comptroller General 'shall make such
investigations and reports as shall be ordered by either House of
Congress or by any committee of either House having jurisdiction over
revenue, appropriations, or expenditures0! The context of section 53
seems to us to relate clearly to public funds appropriated by and
expended in accordance with the directions of Congress«
"When the General Accounting Office was established in 1921, no
exception was made with respect to the Federal Reserve Board. Accordingly, the accounts of the Board, but not those of the Reserve Banks
and their branches, were audited for a number of years by the Comptroller General. However, in the Banking Act of 1933 Congress terminated
the authority of the Comptroller General in this respect. That Act
amended section 10 of the Federal Reserve Act to provide explicitly
that funds of the Board,, which are derived from assessments on the
Federal Reserve Banks, T'shall not be construed to be Government funds
or appropriated moneys. It provided further that 'The Board shall
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-31*determine and prescribe the manner in which its obligations shall be
incurred and its disbursements and expenses allowed and paid,.*' The
reports of the Senate and House Banking and Currency Committees on
this amendment stated that its purpose was to leave 'to the Board
the determination of its own internal management policies0 *
"During the enactment of the Government Corporation Control Act,
in 19l£, Congress gave consideration as to whether or not the Federal
Reserve Banks should be brought within the purview of that Act, so as
to be audited by the General Accounting Office*, Congress did not include the Federal Reserve Banks within that Act0 At the hearings before the Senate Committee on Banking and Currency on the bill Sek69,
which became the Government Corporation Control Act, Mr.5 Frank H.
Weitzel, attorney for the General Accounting Office, testified on behalf of the Comptroller General to the effect that Federal Reserve
Banks should not be made subject to the bill for the reason that they
were supervised very closely by the Boardo
"As you know, there is a bill (H»R. 26^3) pending in the present
Congress which would provide for an audit by the Comptroller General
of the Board, the Reserve Banks, and the Open Market Committee0 A
similar bill was considered but not reported by the House Committee
on Government Operations in the last Congress, These measures
were predicated, apparently, on the assumption that, if such an audit
is to be undertaken, it should be authorized by an Act of Congress,
"You may be assured of our desire to cooperate at all times with
your office, as well as with the Committees of Congress., but in the
light of the statutes and expressions of legislative intent we feel
we must adhere to the conclusion stated above*
"I have assured Chairman Dawson that, if it meets with his
approval, we would welcome an opportunity to appear before his Committee in order to present the important policy considerations
which are raised by this proposal beyond the legal aspects of the
matter dealt with in this letter,"
Secretary's note: The letter was sent
by Chairman Martin to Mr, Campbell,
Comptroller General of the United
States under date of June 22, 195>5>> with
a copy to Chairman Dawson, Chairman of
the Committee on Government Operations
of the House of Representatives*
Members of the staffs of the Board's Division of Research and
Statistics and Division of International Finance entered the room at this
point for the purpose of assisting in the presentation of an economic
and credit review, illustrated by chart slides* A copy of the script of
the review has been placed in the Committee's files, and copies were sent
to all members following the meeting.
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-35The review indicated that economic activity is continuing to rise
from record levels, with expansion activated by private spending.
Credit
demands are very strong* Gross national product in the current quarter
is now estimated at an annual rate of $377 billion— up £7 billion from
the first quarter of this year and also $7 billion above the second quarter
of 1953*
Industrial production in May reached a new high of 138—15 points
above the 195ij low and 1 point above mid-1953*
Some further increase
appears to be occurring in June* A striking feature of the recent period
has been stability in broad averages of commodity prices, despite sharp
expansion in output.
"While industrial capacity and manpower resources, on the whole,
are being used fairly intensively and while some materials are in tight
supply, the degree of utilization of the country's resources—with some
exceptions—is not as intensive as in the spring of 1953«
Since then,
there have been two years of growth in the labor force, in productivity,
and in capacity.
In the spring of 1953, however, activity was leveling
off, whereas this spring it has been advancing.
The review also presented projections of requirements for bank
reserves which indicated that something over $l-3/ii billions of additional
Federal Reserve credit will be required during the rest of 1955- About
$700 million of reserves would need to be provided during the next two
weeks to cover seasonal and holiday currency requirements as well as the
usual end-of-month decline in float. With the release of reserves by
passage of July h holiday demands, there should be adequate reserves to
cover the requirements of Treasury financing and most other demands until
the last quarter of the year without further System operations, except for
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-36temporary periods such as around Labor Day, The remaining $L billion of
reserves would be needed mostly during October and between Thanksgiving
and Christmas*
The means by which the additional Federal Reserve credit is supplied
in the next few months will influence the tone of credit markets and perhaps
the nature of developments, the review said«
The strong economic situation,
the delicate balance of psychological forces in current financial markets,
the obvious desirability of avoiding public misunderstanding of System
policy at this time, and the timing factor of when the reserves are
needed all seem to point to open market operations, rather than reserve
requirement reduction* Some additional borrowing by member banks may
be appropriate, depending on the strength and nature of credit demands*
Vigorous demands for credit, particularly if of a speculative nature,
may call for the restraint of increased member bank borrowing, and
such restraint could be reenforced if necessary by a further rise in
the discount rate.
The meeting then recessed for lunch and reconvened at l?i$ p»m,
with the same attendance as at the beginning of the morning session
except that Messrs, Hostetler, Rice, and Wheeler, were not present.
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-37Chairman Martin referred to the economic review presented before
lunch, stating that it was his belief that the economy was in the midst
of prosperity.
In making this comment, he said, he was not unaware that
there was some unemployment and that in some segments of the community,
such as in coal mining areas, there were technological shifts taking place
affecting employment. He also noted that in the farm area there were
problems which "marred" the general pattern somewhat. However, he felt
that this was the most prosperous period the country had ever been in.
Chairman Martin referred to the statement made by Mr. Sproul at a recent
meeting of the executive committee at which he cautioned the Open Market
Committee that credit policy was not solely responsible for the level of
business activity. The Chairman stated that he felt this was an excellent
point to bear in mind. However, he felt that the psychology of prosperity
had not been built up to a point where there was a very real element of
danger that monetary and credit policy might produce a situation of undue
optimism. Chairman Martin said that it would be desirable today to review
discount rate policy, money supply policy, and reserve requirement problems,
all in the light of the forthcoming Treasury financing. He referred to the
projections of reserve funds prepared by the staff, indicating what the
need for additional reserves would be in coming weeks, and he also noted
that as far as operations for the System account were concerned there
recently had been a tendency (through no fault of anyone) for the volume
of free reserves to be reflected on the "easy" side of the zero-to-^100
million range plus or minus, rather than on the down-side of that range.
If ever there had been a period when it would have been desirable to have
had free reserves ranging lovrer than the projections, this would have been
the time, Chairman Martin said. The Committee was now faced with a period
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-38-
in which it would have to supply reserves to meet seasonal requirements,
to meet growth in the economy, and to assist in the Treasury's financing.
He likened the present situation to one in which a driver of an automobile
was going up a hill and as the .grade increased found it necessary to
increase pressure on the accelerator: it was a question how much more
reserves should be supplied in order to maintain the existing situation.
Chairman Martin then called upon Mr. Sproul who made a statement substantially as follows:
1. As shown in the reports this morning and as we have
all observed, I think, there is continued growing strength in
the economic situation at high levels of production and employment. This warrants a feeling of satisfaction, tempered by
the fact that activity has been supported by rapid expansion
in consumer and mortgage credit on easy terras, and by the
likelihood that prices, after two years of stability, may now
break out on the up-side, due to pressure from costs and anticipation of price rises by businessmen and consumers.
2. Ijith continued strength in the economy at the highest
levels yet reached, some evidence has developed of a nearer
approach to full utilization of existing plant, equipment, and
manpower than in the recent past, but there still appears to
be some leeway for increased production and increased productivity, in a highly competitive economy, to counteract these
cost-price influences in part. Restraint from the credit side
can be helpful but not controlling in such a situation. The
pressure of existing credit restraint will increase as demand
for credit increases in coming months, and we shall have to be
alert from here on to the need for further restraint; to signs
of price and credit inflation. Such signs would include rapid
growth of credit to finance inventories, indications of speculative buying in anticipation of price increases, further rapid
growth of consumer credit, another speculative surge in the
stock market, and in general the development of super boom
psychology.
3. Even if the rate of growth in the economy should be less
in the third quarter of 1955 than in past two or three quarters,
the great breadth of the present upward movement, including
nondurable and durable goods, suggests that whatever slackening
in automobile production and whatever levelling off of housing
activity may take place during next three months will be largely
offset by a continued push upward in other areas. The recent
upward revision of prospective business expenditures for capital
equipment, the continued high level State and local expenditures,
and the continued evidence of economic strength in many foreign
countries, and the general air of optimisim, reinforce this view.
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k* The Treasury picture is largely unchanged. It will
have to issue around 9 or 10 billion of new securities during
last half of the calendar year, though not all of this is net
borrowing. Some 2 or 3 billion will be in replacement of
redeemed savings notes, attrition on maturing issues, and to
redeem CCG certificates and maturing issue loans. Treasury
borrowing, most of which will presumably be at short term and
much of which will have to be done through the banks, will require the addition of reserve funds to the bank pool. It
carries possible inflationary elements which will have to be
guarded against.
5. Private demands for bank credit during the remainder
of the year are also expected to be substantial, after a contraseasonal rise during the first half of the year. Seasonal
needs and some growth needs will require additional reserve
credit, particularly as many banks would appear to have approached or reached the limit of possible shifts of short
term securities to nonbank investors, in order to make way
for increased loans. The total amount of reserves needed to
maintain existing credit conditions, without relaxation of
present restraint, is estimated to be in the neighborhood of
2 billion.
6. It now appears that these combined reserve needs growing out of private demands and Treasury borrowing can be met
by open market operations supplemented by an increase in discounting at the Federal Reserve Banks. Most of the increase in
member bank borrowing this year has been at country and reserve
city banks; there is still room for further borrowing and for
this kind of pressure to be felt more largely at the central
reserve city banks. This would afford a measure of insurance
against a too free dispensation of reserves through open market
operations.
7. Our primary task is to provide the reserves needed by
a prosperous growing private economy, and our secondary task
is to provide the reserves needed to facilitate unavoidable
Treasury financing so that it will neither absorb funds needed
by the private economy nor be the vehicle for an excessive
credit expansion. This will mean treading a pretty narrow
path between too little and too much. Open market operations
are convenient for the main part of the task, but the finer
adjustments both in terms of reserves provided and in terms
of keeping the right amount of pressure on the reins can come
from seasonal use of the borrowing privilege. An increase in
member bank borrowing, in the aggregate, should be welcomed,
as seasonal needs develop. 17e should be ready to meet reasonable demands at the discount window. T e should also be ready
to increase the discount rate when the business and credit
situation suggest it and the Treasury's financing schedule
permits it. Continued pressure on the banks and an enlarged
supply of short term Government securities should result in
a rising trend of short term interest rates, which could set
the stage for another increase in the discount rate either
after the Treasury's July-August cash financing or before its
October cash financing.
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-UOChairman Martin inquired of Mr. Sproul as to his views regarding
Mr. Rouse's comment at the beginning of this meeting concerning gossip
in some parts of the money market to the effect that the discount window
at the Reserve Bank was "closed a la 195.3" •
Mr. Sproul stated that it was difficult to understand this feeling, that whenever the question had been brought up the response was
that there was no practice in the Federal Reserve Banks that -would lead
to gossip of the sort indicated.
I,Ir. Sproul said that he had no reason,
to doubt that the feeling did exist, however, and that in some way the
impression had gotten around that the Federal Reserve was not going to
welcome borrowers at the discount window this year.
Chairman Martin said that this was an important point to bear
in mind. He did not believe that the System could dissipate the gossip
by a statement; it would have to do it by the actions taken at the
discount window.
Mr. C. S. Young stated that in Chicago he had observed the same
feeling as that indicated by I.Ir. Rouse, and Mr. Erickson made a similar
comment with respect to the Boston District.
Mr. Johns said that in the Eighth District he thought there was
no misunderstanding with banks about administration of discount policy
when discussions were on the basis of a specific situation.
However,
when discussions were in general terms, there had been an impression,
perhaps growing out of the recent revision of Regulation A, of doubt
as to whether discount policy had changed.
Mr. Bryan expressed the view that, in part, member banks wished
to misunderstand discount policy. He had had occasion, he said, to
talk with several banks in the Atlanta District recently about their
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situations and, despite the care used in discussing the matter with
them, some had "gone out and gossiped" to the effect that the Federal
Reserve did not wish to take care of member banks at the discount
•(window this year.
Mr. Robertson commented that he thought it would be possible to
over-emphasize the feeling reported to exist and that the System might
well find that actions taken to correct the feeling might result in
promoting the idea that the discount window was "wide open."
Chairman Uartin said, that Mr. Robertson had made a good point
and that, as indicated before, he felt the best procedure was for each
Reserve Bank President to use his judgment in trying to clarify discount
policy as the occasion arose, and not to make any concerted drive in this
directione
Turning to operations for the System Open Market Account, Chairman Martin inquired of Lir. Sproul whether his view was that the Committee
should continue to try to maintain free reserves ranging froiu zero to
"jilOO million, plus or minus.
Ivlr. Sproul responded that his thought was that the Committee
should maintain its existing policy, which he had not thought was
refined down to a ,,,100 million range from zero. Rather, he had thought
that the range might be wider than that in either direction, so long as
it did not conflict with existing policy and the volume of free reserves
beyond the ',,100 million range did not last for more than a very temporary
period. Mr. Sproul thought that, in addition, the Committee would now
have to pay more attention to member bank borrowing and more attention
to movements in market rates, rather than looking primarily to free
reserves as its single guide.
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-U2i,2r. Leach said that he thought there should be no change in
existing policy but that it would be satisfactory to him if there was
a little more tightness than had existed in recent weeks.
He felt that
the objectives discussed at the June 6 meeting of the executive committee
were right but that the degree of tightness that had existed had not
quite conformed to those objectives. Mr. Leach said that free reserves
should not be the sole guide and he would rather achieve the result with
a little more tightness than had been apparent recently.
Mr. Earhart and LIr. Sproul both concurred in Mr. Leach's statement.
Chairman Martin stated that one of the questions was whether to
supply reserves during the period of the forthcoming Treasury financing
freely or reluctantly.
He felt that the Committee should not mislead
the Treasury into thinking that it was going to pour reserves in to
support the Treasury financing.
On the other hand, he would not indicate
that the Committee would be reluctant to supply the reserves needed, but
that they should be supplied on the basis of current needs. He felt this
could not be measured by the words "tightness11 or "ease" and he realized
how difficult it was to maintain a market situation in line with the
Committee's objectives when there was such a small supply of Treasury
bills in the market.
Mr. Mills said that he was thoroughly sympathetic at the present
time with the point of view of increasing restraint but that such an
increase in restraint would be difficult to attain
Treasury's forthcoming financing.
at the time of the
There should be some minimum amount
of free reserves in the market at the time of the Treasury financing, he
said, to serve as a lubricant which would facilitate the operations of
dealers in meeting their own requirements and to assist others during
the Treasury
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Federal Reserve Bank of St. Louis
financing. Unless there was such a volume of free reserves,
-U3Mr. Mills felt there would be a distinct possibility of another refunding
with heavy attrition, and the impression might be created that the Federal
Reserve was so intent on its own policy that it was indifferent to the
needs of the Treasury. This would be more likely to occur if the open market meetings were to be set three weeks apart commencing with this meeting,
If the market could have some lead from the Federal Reserve as to the
minimum amount of reserves that would be in the mar 1st, it might serve
the System's purposes as well as the needs of the Treasury more effectively,
Mr. Rouse said that there had been a statistical appearance of
greater ease than actually existed in the market.
Both in New York City
and outside, reports indicated that individual banks felt their situation
was tighter recently than it had been earlier. Mr. Rouse felt that within
the next three weeks market needs for reserves would be in the magnitude of
one-half billion to $700 million, and the bulk of the buying of bills to
meet that need would have to be done prior to the probable announcement of
the Treasury financing during the week of July lu
Buying by the Federal
Reserve in advance of the announcement would be reassuring to the market,
Mr. Rouse said, even though the volume of free reserves did not make for
a "flush" situation: the mere addition of such reserves would be taken
as an indication that the System was going to "see the Treasury through".
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-UUChairman Martin said this was very encouraging. He felt that
both the statistics and psychology of the situation needed to be considered.
In response to a question from Mr. Leach, Mr. Rouse expressed
the view that bills or other short-term securities would be available to
enable the System account to buy what was needed during the next three
weeks, and he did not think such purchases would have an undue influence
in decreasing interest rates during that period.
In response to a request of Mr. Robertson, Mr. Thomas stated
that there were arguments both for and against a reduction in reserve
requirements as a way to meet the need for additional reserves during
the period of the Treasury financing. Such a reduction would have a
psychological effect. It would place in many banks free reserves which
they would not use in connection with the Treasury financing and thus
those banks would be free to use the reserves in making loans of a
less desirable and more speculative character. Mr. Thomas also felt
a reduction in reserve requirements would be interpreted as a step
toward ease and for the purpose of facilitating the Treasury financing, regardless of what the Committeefs current general policy might
be.
If the reserves were provided through open market operations^
presumably they would not be furnished until the pressures were reflected in the market. Further, by providing the reserves through
open market operations, a smaller volume might be furnished, depending upon how the situation developed.
Chairman Martin said that since the meeting of the executive
committee early in June, he had given a great deal of consideration
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-W-
to the ways in which reserves might be provided. He felt there was
no way of making a reduction in reserve requirements so that it v;ould
not be misinterpreted; such a reduction would compound the talk of
ease. Banks had been advocating a reduction in reserve requirements
for some time and there had come to be a tendency to expect such a
reduction. Chairman Martin went on to say that following the executive
committee meeting on June 6 he, Mr. oproul, and Mr. Balderston talked
with Treasury officials about the matter of providing the reserves
that would be needed this summer«
Mr. Balderston said that he felt a reduction in reserve requirements would put funds into the market in the wrong place, in the wrong
way, and at the wrong time. It -would be completely misunderstood. It
would add to the System's difficulties in trying to maintain a degree
of "restraint" and still put reserves into the market to meet the
various needs that would arise this summer and fall.
Mr. Robertson said that he felt the Committee should be more
restrictive than it had been. He would be much happier if it could
maintain a greater degree of restraint than had been maintained
recently, without jeopardizing the Treasury financing program.
Chairman Martin said that there appeared to be agreement that
the existing policy should be continued, and the question was one of
how to implement that policy. He then called upon Mr. Rouse for suggestions regarding the instructions to be issued to the New York Bank,
and Mr. Rouse indicated that the limitation in the first paragraph of
the directive be set at $1 billion -rather than the existing
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$750 million, in view of the purchases that would be necessary during
the next three weeks.
It was also noted that the directive to be issued
to the New York Bank by the full Committee would be in the form presented
by Mr, Vest earlier in this meeting in connection with the discussion
of the abolishment of the executive committee.
A copy of the revised
form of directive was distributed at this point.
Chairman i... art in suggested that, in issuing the foregoing instruction, all members of the Committee bear in mind Mr. Mills' point that
Committee members keep in touch with the situation and be available in
the event it was necessary to communicate with them regarding developments during the next three weeks.
Mr. Mills inquired -whether the understanding that operations
would be confined to short-term securities, preferably bills, continued
in effect, and Chairman I'lartin stated that this 7/as correct.
Mr. Robertson suggested that the directive to be issued by the
full Committee to the New York Bank provide that the Federal Reserve
Bank of New York shall not enter into repurchase agreements at a rate
below the discount rate of the Federal Reserve Bank of New York.
This proposal was discussed briefly and, at Chairman Martin's
suggestion,it was agreed that it
should be held over for consideration
at the next meeting of the Committee.
Mr. Balderston inquired whether the directive would give authority
to the Manager of the System Account to take into account the rate of speed
at which the economy was moving in providing reserves during the next few ureeks*
His view was that the public should understand that the
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o£ business justified a higher discount rate than now existed and that
if the Treasury financing were not to take place in the immediate future^
it would be appropriate to increase the discount rate to 2 per cent at
once.
However,, the System had to take into account the Treasury financ-
ing problem,
Mr. Bryan said this was closely allied to the problem that
was bothering him regarding the apparent consensus of the Committee.
He felt that the situation needed some restraint.
He felt the discount
rate had not been made effective as a restrictive device because the
System had permitted the going rate in the short-term market to be at
times substantially below the discount rate and never quite up to
it.
He wondered, therefore, if it would be appropriate to begin feeding
reserves to the market before the short-term rate had gotten up to the
discount rate,
Chairman Martin commented that the short-term rate was a
product of circumstances largely beyond the System's control at the
present time, in view of the short supply of Treasury bills in the
market.
Mr, Sproul said that he did not think the Committee should
look upon the provision of reserves during the next few weeks as "pouring
gasoline on the fire".
They were to maintain the existing measure of
restraint- as nearly as possible in view of prospective overall needs.
If the situation continued to need restraint, as now seemed likely,
an increase in the discount rate could again be considered when the
Treasury financing was out of the way. With respect to Mr. Bryan1s
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comment about not putting rev^erves into the market until the short-term rate
had moved up, Mr* Sproul felt that in the light of the Treasury financing
and the attitude existing in the market, it would not be wise to try so
precisely and with such a high degree of refinement to say when the
System account should begin to put in reserves. If the full Committee
were to attempt to do this, it would run a real risk of causing a misunderstanding of System policy and of having the Treasury financing turn
out to be a failure, with the result that the whole policy the Committee
was pursuing might be lost.
It might be consistent with policy to have
the short-term rate go up, but Mr. Sproul said that as he saw it there
was no great need to have the rate go up within the next two weeks; it
could be expected to go up with the increased seasonal demands, with
the growth demands, and with the other factors that may be anticipated
during the period immediately aheade
In response to a question from Mr. Robertson as to whether
this was the time to consider an increase in the discount rate, Mr.
Thomas said that this raised the question of rate relationships.
It
was a question of a reasonable relationship between the rate at which
the System would buy bills, the rate at which it would make repurchase
agreements on bills, and the discount rate. The discount rate is a
penalty rate and the general approach was that banks should try to make
their adjustments in reserve position through the bill market before
borrowing at the Reserve Bank as a general rule. Also, if a policy
of not making repurchase agreements below the discount rate were to
be adopted one might raise the question in terms of rate relationships
why the System would purchase any bills below the discount rate.
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-U9Mr. Bryan said that he was not suggesting a precise relationship
between rates but that he questioned whether the System, on its own
initiative, should make massive additions to reserves in advance of a rise
in the short-term rate. He felt that it would be desirable if the System
account were a little reluctant about large infusions of reserves at this
time.
Mr. Thomas stated that the projections indicated it would be
necessary for the System account to purchase at least a half billion
dollars within the next ten days.
After further brief discussion, Chairman Martin inquired whether
there was objection to approval of the directive to be issued by the full
Committee to the New York Bank in the form presented by Mr. Vest earlier
in the meeting with a limit of $1 billion for the first paragraph.
Thereupon, upon motion duly made and seconded, the
Committee voted unanimously 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 fostering growth
and stability in the economy by maintaining conditions in the money
market that would avoid the development of unsustainable expansion,
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 cose 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
$1,000,000,000;
2. To purchase direct from the Treasury for the account
of the Federal Reserve Bank of New York (with discretion, in cases
where it seems desirable, to issue participations to one or more
Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for
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Federal Reserve Bank of St. Louis
6/22/55
.jo.
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 $500,000,000;
3« To sell direct to the Treasury from the System account
for gold certificates such amounts of Treasury securities maturing
within one year as may be necessary from tir-e to time for the accommodation of the Treasury; provided that the total amount of such
securities so sold shall not exceed in the aggregate $500 million
face amount, and such sales shall be made as nearly as may be practicable at the prices currently quoted in the open market.
Chairman Martin stated that with the abolishment of the executive
committee he had in mind that meetings of the full Committee hereafter would
be scheduled at intervals of three weeks. He suggested that the next meeting
be set for 10:ii5 a.m. on July 12, 1955, and that it tentatively be understood that meetings also would be held on Tuesdays, August 2, August 23, and
September 13, 1955.
Mr* Leach suggested that the practice which had been followed
in connection with meetings of the executive committee in the past of
distributing to the members of the Committee a staff report on the
economic and credit situation be continued for meetings of the full
Committee in the future. He felt the report was of more value if it
could be received in advance of the meeting so that the Reserve Bank
Presidents had an opportunity to review the report of the Board's staff
and compare it with information available in the individual districts
before the meeting.
Chairman Martin stated that this procedure would be continued
in the future.
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Federal Reserve Bank of St. Louis
Thereupon the meeting adjourned.
Secretary.
Jtaly 6, 195$
MSKGfUUDQHs
f»
Members of Special Committee of
the Federal Open Market Committee
Ret Management of the
System Qpen Market Account
from J, L. Roberta on
The objective of the Special Committee is to devise an acceptable
procedure for achieving closer and more direct contact between the FOMC
and the management of the System Open Market Account, $hen m began our
consideration of this problem, I felt that the solution might be the employment ©f a Manager who was physically located in Washington and who
was not an employee of a Federal Reserve Bank.
Further consideration has inclined me to believe that the benefits of having the Manager in New lork and an official of the flew Tork
Reserve Bank may outweigh the disadvantages* Hence I wonder whether we
can eliminate - or at least diminish - the shortcomings of the present
arrangement without changing the status or location of the Manager,
I submit for consideration the possibility that this objective
might be achieved in large measure by altering and expanding the duties
of the Secretary of the FOMC* By virtue of his location in Washington
and the ready availability of daily contact with a majority of the members of the Committee, he is permeated to an exceptional degree with the
^feel* of Committee policies, just as the Manager develops the feel of
the money market through his daily contacts in Wall Street. In the event
of need, the Secretary can quickly and conveniently check his understanding of Committee policies with a majority of the Committee members themselves. Finally, by virtue of his separation from the mechanics of the
money market, the Secretary is in a position to fix his mind almost exclusively on the major objectives of the Committee's current monetary
policies, to a degree that would seem to be psychologically impossible
for the Manager, who is necessarily preoccupied, to a considerable extent, with the practical effectuation of policies.
Accordingly, I suggest an arrangement under which no substantial
transactions shall be entered into by the Manager until he shall have
cleared the proposed action with the Committee's Secretary, as a check
on its conformity with the Committee's current policies. In order to
allow the Manager some necessary leeway, we might decide that, during a
testing period at least, such prior clearance would be called for only
on days when the Manager contemplates transactions of substantial volume say $30 million or $!jQ million.
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Federal Reserve Bank of St. Louis
- 2-
I
The suggested arrangement might strengthen the control of the
Committee over the effectuation of its policies while preserving the
benefits of management located in the prime money market and constituting
a part of the Mew York Reserve Bank as the Committee's institutional
agent. The functions of the two officers would complement each other,
and our operations would benefit from the double check of the Secretary's
intimate daily contact with Committee thinking and his detachment from
direct concern with the practical problems of open market transactions,
in addition to the benefit of the Manager's immediate and continuous
knowledge of market conditions* It seems possible that a plan of this
nature, modified and perfected by trial and error, might develop into an
arrangement combining direct responsibility and control with practical
and efficient operation.
Needless to say, this is in no sense a suggestion that the Secretary take over functions heretofore performed by the executive committee}
those functions will b© performed by the full Committee, in accordance
with our recent decision, the Committee will not be delegating any of
its discretionary powers to its Secretary} his actions in cooperation
with the Manager will be based simply upon his understanding of Committee
policy as it applies to the day's (or hour's) proposed open market transactions* Mor would the Secretary have any authority to direct the Manager
to take any specified action, although he should feel free to initiate
discussion (either with the Manager or with members of the Committee) of
proposals for transactions that seem to him to be in keeping with the objectives of the Open Market Committee. His sole authority in this connection would be to veto any proposed course of action that seemed to him to
be contrary to Committee policy. In all probability this authority seldom
would be exercised. In case the Secretary was doubtful as to the will of
the FOMC, he would be expected to contact all available meirfcers of the
FOMC and ascertain the majority view with respect to the matter in question.
Under the suggested arrangement, the Secretary - like the Manager would report to the Committee regularly on his activities with respeet to
open market operations, including consultations with members of the Committee regarding proposed transactions*
The foregoing proposal would require the Secretary to devote all
of his time to Open Market Committee matters. This seems clearly justified by the importance of our duties in the field of monetary regulation
and the advisability of the closest and most efficient possible coordination of policy decisions with da^-te-day operations. Consequently, the
Secretary should be released from all other duties, although he would
continue to be melee ted by the Open Market CoBwdttee from among the
Board's employees and he would remain on the payroll of the Board of
Governors.
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Federal Reserve Bank of St. Louis
October t$, 19$$
fe
Members of Special lubooasiiittee of
the Federal Open Market Committee
Sub^eett Msaagement of the
Syatirn <^>en Market Account
From J. I*. Robertson
fne past year haft soon the Introduction of proposed legislation
to eboliah the Open Market Committee and to transfer its functions to
the Board of Qcnreracrs, and the Board has received a publicized recommendation that the "executive offices* of the Open Market Committee be
transferred from Mew fork to Washington.
I believe that the isembership on the Open Market Gownittee of five
Federal lesarve Bank Preaidents add® Materially to the etrength of the
Cowtittee and the aoaadaeas of it* ^pwats and operations, fhe question of physical locaticm of the Acoo^mt Manager is a mere doubtful one,
bat I am satisfied that, for the present at least, the disadvantages of
removing the Manager from Hew fork to Washington would outwaigh the possible benefits*
nevertheless, there is some validity ia one idea that tmderlies
the proposals referred to - namely, that it would be desirable for the
*acount Manager to bo M*r* diroetly and exclusively reajKnislble to the
C^» Market Coiawittee than presently is the ease. f^« Job of this Sobcoawittee is to devise a procedure that idU make System Aecouat transaotlons refleot the Cawiittee»s policies as accurately as feasible, whifc
preserving the advantages of having tbs Manager loeat»d jUi iew tork, the
nation's financial eenter.
fo this end I suggest tlie advisability or procoeding in accordance
idth Chairman Hartin f s nei^raad^m of May 10, !££$ ©a ^e ^Status of tte
Hanagar of the System Ofien Hartest Aecount*. Briefly aiMmarised, the
Ohai«ian»s proposal was that the Cesmitts* should select the Manager and
t salary, and that the Manager should devote hinself entirely to
the work of the Coeiadttee and should be responsible solely to ths Goamittee. The Manager and his staff would be on the pay roll of the Hew
Kieral Reserve Baak, but apart fro* such «|*r*eanel* arrangements
ienoe, the Manager and his staff actually would be employees
3<
*?Ut?*V fh® P^ical situs of our Open Market operations would
trm
?J^k* S5 *** *^ Maa
V*n*y
pa to operations would be diof the Hew York Bank, as at present.
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Federal Reserve Bank of St. Louis
TiS?£?£SZ *! ^* *«^
~ 2.
At worst, direct responsibility of the lianagsr to the "enwdttee
(rather than responsibility throttgb m intermediary, the «ew Terk lank)
could hardly qiainifih the responsiveness of the Manager to the Committee's
wishesj at best, the responsiveness of the Manager wo Od be enhanced by
the rsaoval of an tmneeessery link ia the chain between policy formation and operatlone. la other words, it stay be that there is nothing to
be loat and something substantial to be gained by & sore direct relation*
ship between the Manager ana the Committee. As additional benefit of the
Manager'a not being a part of the operating structure of the Mew fork
Federal Reserve iank would be that the Manager would no longer be responsible to, and report to the director a of that Bank, and the possibility of *leaksw in that area wotald be avoided. Utis is not to isply
that such leaks have occwred, out merely that it ia advisable to avoid
any chance of s«eh occurrences if that can 1» aehieTsd without loaa of
other advantages.
'•
Of cotarae, the Manager should have aoeeaa to all pertinent Informa*
tlon and aaterial in the Syatew end the benefit of amy «t«die« which relate to Open Market work. It ia probable that the Manager and hia staff
should undertake the task of training others thrott^iomt the Syatem in
Open Market techniques «o that there would always be a supply of peraona
available to fill vacancies in the staff at all levels.
fne foregoing arrangement would repreaent a long atep la the right
direction, bat in my ©pinion It doea not provide a oonplete anawer to
the queation of how we can eatabHah a mor« appropriate relationship between the %en Market Comieittee and the execution of its policies, therefore, I ai^idt for consideration & refinement along the lines of the anggeatien contained in agr awmorandtai to the Special Committee en «ti£y 6,
195$. Bds refinement involves an expansion of the duties of Ute Co»iiittee's Secretary. As I stated in that vieaorandtiR, by virtue of his location la feasaiagton and the rea% availability of daily contact with a
•ajori^r of the seabert ef the Remittee, the Seoretary Is pemeated to
an exceptional degree with th® "feeP of Ccawittee policies, just as the
Manager develops the feel of fee Honey market throug* his daily contacts
ia Wall Street. In the event of need, the Secretary can quickly and conveniently check his loderauuviing of ^aiittee policies with a *i»4ority
of the Coandttee »enbers thmseives. finaUy, by Tirtua of his soparation fro» the aeehanics of the aoaey iiarket, the Secretary is ia a position to fix his wind alaost excltisivsly oa the aajor objectives of the
com«ittee»s current aonetary policies, to a degree that weald seea to be
psyehol©gle*lly Sj^possible Jfcr the Mwager, who is aeoessarily preoccupied, to a considerable extent, with the practical effectuation of soUcies.
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Federal Reserve Bank of St. Louis
Aoeordiagly, I »*gg*»t m arratigemeat «tfor whieh the Manager of
tit* Aeeo«at and the Committee*a Seoretary ***W ** Jointly reapoaeiblo
idth roapeot to propoeed market actions (or Inaction*}. H*dor tiiio arrangement, t*o men w*U determine utiether proposed traaiaetioaa or inaction* were In accord with current Cemmitto* policy.
If this proposal is agreed0fto in principle, the BQd^ wrg^>
^.IX d«v»l^ «• dtff«r«ii W»*
»tl»»tl«Bi« «r» •ae««uat«rsi« fa* «•••He* of thi proposal U that th* H«ftag«r la t« look to tte Secretary
f«r a elMHOc co M.* ^na»r«t&ndlag ©f C'Jtrrent Go»sitt«« policy «uf whether
projx>*«a tr«a»«etion« woold aoaform to that poll^r.
la all ^rel>abilitr> tt» Soerotwry ordinarily «©al«! a^r«o ^iat tha
KaaAgor'a orotrtw of aarteat tranaactioisn
(or inaction*) for tha day is
in accordance with tha Cowtlttoo9* omrroat objoetliraa. In relatively
fow iaat«neaa, tko Swotary »ight doa^t i^athor ^a program noul<i eoaf«ii to CeaaaiUoa p&U.^. I» that o^ant, ti* Saerotary and Hanagor
would oxoiwago iion» at^ goairally vamld raaoh a«ra«aaat upon a program
for tha day - aithar tfea Ma&agar*a an«gaato4 program cr a »o4ifio&iilon.
In tiia raro saaoa whoa agroonant ooml4 not ba raachod, tha Managor
a«vortholoaa could act on hia owa inttictiv* d«soit« tha c<»itr«ry via*
of tos Storotary* In aneh oases bo^ «am nottld ata^ariia thoir reasoning in noBtoraiida to tho Committee jsaafeora and noold bo oreparad to diaeaaa the iaci^^t at the next Coawittoe nootiag*
fia oaoe of baaie diaagrooiaaat regarding tha adtieability of traita*
aotioi^ of ftufeatanUal also and narkot importance * a eontiageaoy that
adfiht not oeu^r oneo a year * either the Manager or tha Secretary would
have dls<iretiQa to feri^ the natter iaaodiate^ to the attention of tha
*e*feer* of the Ceenittoaf for a^dh action as the nepers might conaider
appropriate. la that rare event, m effort wrold bo made to got in
touah nith all menhera of the Committee, and mot moroly the Chairman or
the membora located ia Waakiagtoii. If iho proolom aeemed to be of mifficiant, iaPortanc«, a afoeial meeting of tin Ceawdtta© wight ba oaUed
Ho deal with it,
I havo outlined theae proeedharsl details simply to show how the
arrangement «mld no*lt, bmt Miey ire of relative iBalgmjfioaaee, fho
@ai»f val^ «e«ld lie is the increased ronpoaoibiUlir of the Secretary
a» 4ay-to-4ay latoiprotor of Oemwittes poll^r and t*te besof it dorived
IT «ia Manager from *mh rogiolar and esaaiateat ©hacks ^oa tl» sotindaeaa of hi* operatione. Sa other words, the program adopted br the
»a»a«or aa a roa^at of hie 4imm»Um with the Saoretary almoat iaovitably »«M fee a program that repreaeated the lAH and ©bjectiTea of
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Federal Reserve Bank of St. Louis
tit* Oo»»itt*e «or* *ff*eti**ly then if th* M«»ag*r d«T*lop*d the pragram
without eaoh daily elftarsae* with *a omeial of *«|ti*i reapmslbtUtir la
close touch *dth e?*ry phase of 3oa»itt*6 thinking.
Ihe suggested arrangeaaat wight, even* Dm th* control of th* Coav
nitt*e o*«r th* «ff**tnatl«i *f ita |>olteU* whil* ^iwwnriag th* benefits
if among euyint l«Q*t«d la tii» prim iftowgr nai%*t« The ftineti<m* of th« two
off le*rs leonld o«mpi«R«at *aoh othsr, find our i^iraUaiis wo^ild benefit
l^«n th« ^ot3b^» cb««k @f HM S»«r«tary»« intiii«t« dsil^r contact %dth COB»itt«e thlntdLag «ad his d«tacN»«nt from tiir«ct eeoewm with th* pr&etieal
probl^is of Opm Hmrk*t trantactians, la addition to th» bea«fit of the
Manager's iiro«diate and eoRttmsoti» teiouladga of aarlcot ecnditi^ss. It
Do«»iblt that a plan of thin natar*, a»4ifl«d aad p«rfo§tad by trial
might d«t«lop ial© an ar; ang«n«nt eoafeialag diraet r««poiuii<taat4T@l ni^i praeUeal a^4 «ffiel«ot 0p*r&ti©af giving ioor«aa«4
that tb* will of ths CoMdttM la eff«@takat«d as pr*ci»»ly aa
poaaibla.
f oragoiag proposal womld raquira y» Saeratary to darvote all of
his til** to Gpw Markat ''«BBdtta« »attara* mis aaams elaarly justified
bjr the ImpwtajKse of o«r dmt4«a In the fialct of «<^«tary regulation and
the adviaaHili^r ef «i« tloaaat and aoat affliiaat possible coordination
af policy d*oi«ioa» with day-to-day oparatieo*. Coosaq^enLli-, tha Saera*
tary should b* released from all othar 4nti»a« although ha would continue
to bt aalaetad by tha Opw Marl»t Coamitto« froa aaoisg tha Board's anployaaa and ha nonld raawia on tit* pay roll of tha Board of >overaora.
It may b* aald mat a atwo*haai4ad« arrangwwnt of this sort a«ea*»
ia ol«aay or ereit smworicaela. 1 aft oaabla to eommr in «ach objsotiana. to bo »w»f aWWal tl Mi fork eao »ato up hi® nisei »or«
rapidly than ha and a oolloagoa in vsshiagton cojld rasoh a joint oomsluaion» How«v«*, th» saeni «rg«wiit oo'sld b« »»4» with rtapoet to tfe» Ss^rfa
Go«rtf or tha at^«rfisio« of aurtbar Stftta baaka, or th« daUbarationa of
tha Opaa M«rk»i Cowmitt^« it«»lf - *a@h to«ld b« exfaditad if thar* nara
r«^eoUir«iy one «N«ti@«f mly oa« s^enriaor (Stata or radar*!}, or ^Oy
©i» 00*«raor ©r Pr«si4aat at th* haad of th« e«s1rel ^tlti^ system. Inparlaaoe aia^ly has shewn that th* loss in **ffi@i*tt$y* tot r*atilt» fren
two *r iiia* or twalv* isan doing nh«t OB® ^M do (as a aaehaaieal »att*r)
i more than eomt«rbalaac*d fey tti* bensf it of a«tia§ ttp®a th* eowpoalt*
J^ftUpwit of a «iltlpl*-«*si&*r organisaO.<m, i^*r* ths ia*vit^2» errors
*f say on* aam*« thinking can b* corrected «M sh*ck»d by th*
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Federal Reserve Bank of St. Louis
Conduct of Open Market Operations of
Federal Reserve System
1.
Our basic position is that the Federal Reserve Bank in the principal
national and international money market of the country,
and the
principal market for Government securities, should continue to be
selected by the Federal Open Market Committee to execute transactions
for the System Open Market Account, in accordance with policies and
directives adopted by the Committee, and in behalf of all of the Federal
Reserve Banks,
2.
Our reasons for attaching the greatest importance to this position are:
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Federal Reserve Bank of St. Louis
First, it is in accord with the federal character of the
System and its general operating procedures. National
credit policies are primarily determined by the Board, of
Governors of the Federal Reserve System and by the
Federal Open Market Committee, and the execution of
these policies is primarily the job of the twelve Federal
Reserve Banks each operating in its own area. By
reason of the financial structure of the country, the Federal
Reserve Bank of New York is the natural and logical Federal
Reserve Bank to execute open market operations for the
Federal Open Market Committee*
Second, it provides institutional responsibility as distinguished
from individual responsibility for the proper execution of the
directives of the Federal Open Market Committee. This
means that the Manager of the System Open Market Account,
in his supervision of open market operations, has the advantage
of the active and continuous collaboration of the President of
the Federal R e s e r v e Bank of New York who is a member of
the Federal Open Market Committee, of the First Vice
President of the Federal Reserve Bank of New York who
is an alternate member of the Federal Open Market Committee,
and of his subordinate staff, all on an institutional basis.
Third, it provides the natural and logical way of keeping
under unified direction the various operations of the Federal
Reserve System in the New York market, all of which
contribute to the proper functioning of the System and to the
succesr of its credit policies. All central banking operations
in the New York market are interwoven - discount operations,
Treasury operations conducted by the New York bank as
-2-
fiscal agent, open market operations conducted for account
of foreign central banks and governments, as well as open
market operations for System Open Market Account. The
money market is not made up of separate compartments
and all of these various kinds of transactions need unified
direction. It would be destructive of money market techniques
ana of the effectiveness of the New York bank, built up over
the life of the Federal Reserve System, to introduce another
arm of the System into the New York market, in the person
of a separate Manager of the System Open Market Account.
Fourth, while it establishes a method of operations which is
wholly responsive to the policies and directives of the Federal
Open Market Committee, a statutory public body, it does not
directly expose the operating arm of the Committee to those
f o r m s of political p r e s s u r e , as distinguished from public
responsibility, which can be destructive of the independence
and operating integrity of our central banking system,
3.
Having stated this basic position, we also recognize that the Federal
Open Market C ommittee has a basic responsibility with respect to the
selection and appointment of the Manager of the System Open Market
Account, and that it is appropriate for the Committee to review its discharge of that responsibility.
While the record of p e r f o r m a n c e , and
•ftie absence of specific criticism of actions of the Account as it has been
managed, suggest that the present method of selection and appointment
of the Manager has worked well in practice, it may be possible to
devise a procedure which will reflect more clearly the authority and
responsibility of the Federal Open Market Committee with respect
to that appointment, and thus abate internal dissatisfaction with
present arrangements and ward off possible external criticism,
political or otherwise.
4.
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Federal Reserve Bank of St. Louis
To promote the mutual objectives of the Federal Open Market
Committee and the Federal Reserve Bank of New York, it is
suggested that:
-3-
5,
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Federal Reserve Bank of St. Louis
(a)
The Federal Reserve Bank of New York continue to be
selected by the Federal Open Market Committee as the
Federal Reserve Bank to execute transactions for
System Open Market Account.
(b)
Before appointing a Vice President of the Securities
function of the Federal Reserve Bank of New York, which
is the function which conducts open market operations,
the directors of the Bank should consult with the Federal
Open Market Committee, and there should be agreement
between the Committee and the directors as to the
appointment.
(c)
The Federal Open Market Committee should then appoint
the same individual as Manager of the System Open Market
Account.
The lines of appointment to the dual job would then be clear, but the
institutional responsibility of the Federal Reserve Bank of New York
would be p r e s e r v e d and the destructive effects of having two arms
or two representatives of the Federal Reserve System operating in
the New York market would be avoided.
BOARD OF G O V E R N O R S
OF THE
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
To
Chairman Martin
From
Mr. Holland
?
Date September 2,
Subject:
CONFIDENTIAL (FR)
Attached is a copy of the preliminary draft of minutes
of the meeting of the Federal Open Market Committee held on
August 23, 1966. You will be advised of any changes made in the
draft.
The minutes of the meeting of the Committee held on
July 26 were approved in the form sent to you under date of
August 11, 1966.
Attachment
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Federal Reserve Bank of St. Louis
BOARD OF G O V E R N O R S
DF THE
FEDERAL R E S E R V E SYSTEM
i
Office Correspondence
To
Chairman Martin
From
J. Herbert Furth
Date
Sub j ect:
September 2,
Comments on The Fundamentals
of a Free Enterprise Economy,
by Stewart P. Coleman.
Mr. Coleman^ paper represents an interesting attempt at
reformulating both the theoretical basis and the practical consequences of "classical" economics. Mr. Coleman wants to reconstruct
a perfectly free competitive economy—with "strict enforcement of
the anti-trust laws" to avert "abuses by business in the monopoly
control of goods and prices," and with the application of the antitrust laws to labor and the enactment of a national "Right to Work"
law to avert "upward pressure on labor rates resulting from labor
monopoly," but without any other government intervention and especially without "government manipulation of fiscal policies"
(page 72).
"Basic Fundamentals"
Mr. Coleman bases his model on the propensities to work
and earn, to buy and consume, and to save and invest (page 1). He
states two fundamental laws regarding those propensitiess
First,
the proportion of the "working force utilized will vary with the
economic variable of the real wages paid per unit of production";
and second, "as per capita real income rises, the proportion of
that income going into consumption will become less and the proportion going into savings will become greater.
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Federal Reserve Bank of St. Louis
The proportion
To:
Chairman Martin
- 2 -
September 2, 1966
going into savings will also tend to increase as the return to be
expected from the investment of savings increases" (page 3).
Both these laws seem to conform to common-sense reasoning
Nevertheless, their validity is extremely doubtful.
Increases in "real wages" indeed may attract some nonworking members of the potential labor force; but they may also
induce some other members to quit work (e.g., wives of working
husbands; children of working parents).
In 1965, when the unem-
ployment rate was 4.6 per cent, the U.S. labor force (relative to
the adult population) was lower by one full percentage point than
in 1958, when the unemployment rate was 6.8 per cent—although
"real" wages (average weekly earnings per worker) had meanwhile
risen by nearly one-fifth.
Unfortunately there is not the slightest evidence that
the savings ratio rises with a general increase in real income or
that higher returns on investment measurably increase the savings
ratio.
Detailed investigation of savings trends in the United
States over the past 100 years has failed to discover any significant permanent increase in the savings ratio, despite the rapid
increase in per-capita real income.
In 1965, for instance, the
ratio of personal savings to disposable personal income was
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Federal Reserve Bank of St. Louis
To;
Chairman Martin
- 3 -
September 2, 1966
5,4 per cent-~exactly the same as in 1936; it was lower than in
other peak years of postwar prosperity (7.1 per cent in 1948,
6.7 per cent in 1957) and only negligibly higher than in 1929
(5.0 per cent).
The failure of the savings ratio to respond to an increase
in the national income has puzzled economists for a long time:
individual experience clearly suggests that a substantial rise in
real income leaves not only a larger absolute amount but also a
larger proportion of income free for discretionary use, and thus
also for savings.
But a general rise in real income raises the
standard of living rather than the savings ratio—probably thanks
to the so-called demonstration effect, or in simpler language, to
the desire to keep up with the Jones1.
Luxuries become necessi-
ties (in my own lifetime, this has happened with car ownership,
central oil heating, refrigerators, telephone, radio, television,
water heaters, automatic washers and dryers, dishwashers, garbage
disposals, and it is right now happening with foreign travel); and
once these new luxuries are paid for, the proportion available for
saving remains, for the average household, as small as before (even
though the absolute amount has risen).
For these reasons alone, it is impossible to build a
realistic model of economic society on the "basic fundamentals"
chosen by Mr. Coleman.
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Federal Reserve Bank of St. Louis
To;
Chairman Martin
- 4 -
September 2, 1966
The ratio of prices to wages
Another cornerstone of Mr. Coleman's edifice is "the
ratio of prices to wages (the P/W ratio)" (page 8).
Unfortunately,
this ratio is neither as unambiguous nor as important as the author
believes.
Actually, Mr. Coleman uses that ratio in three different
senses, without clearly distinguishing between the different meanings.
First, the P/W ratio may be applied to an individual
commodity; in this case, a decline in the ratio reduces the profit
margin per unit of commodity but not necessarily the total profits
of the enterprise (or of the economy as a whole) since the effects
on total profits of the decline in the per-unit ratio may be offset
by an increase in the number of units sold.
Actually, this type of P/W ratio has remained remarkably
stable:
some 40 years ago, Professor (now Senator) Douglas, on the
basis of both theoretical reasoning and extensive statistical research, discovered his famous "law," according to which the proportion of returns to capital and to labor in industrial production
tends to remain unchanged in the course of economic development;
and the validity of this law has been well confirmed by later investigations.
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To:
Chairman Martin
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September 2, 1966
Second, the P/W ratio may be applied to the movement of
price and wage-rate indices.
In this case, a decline in the ratio
indicates a rise in "real" wage rates.
This rise in wages may be
associated with a fall in profits but alternatively--and more frequently—with a rise in profits since "real" wage rates tend to be
the higher the greater the productivity of the economy and the
greater therefore prosperity in general (including the profitability of enterprises).
For instance, between 1946 and 1965 this type of P/W
ratio declined in the United States by about one-third as wage
rates (adjusted for overtime and inter-industry shifts; otherwise
the rise would have been even larger) rose by 140 per cent while
wholesale prices increased 55 per cent and consumer prices 60 per
cent.
Over the same period, corporate profits (both before and
after taxes) rose about 200 per cent.
Clearly, neither "real"
nor "nominal" profits were hurt by the decline in the P/W ratio
and the corresponding rise in "real" wages.
Finally, the ratio may be meant to signify the relation
between national income and wages.
Subsuming all non-wage income
under "profits," a decline in this ratio would indeed (by definition) mean a decline in the share of profits in the national income.
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But it again would not mean a decline in total profits
To:
Chairman Martin
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September 2, 1966
(Mr. Coleman should not be blamed for this confusions
both Ricardo
and Marx apparently fell victim to a similar misunderstanding).
For
instance, between 1946 and 1965 the share of labor in total nonagricultural income rose from 70 per cent to 72 per cent; but this
increase did not prevent "real" profits from rising about as rapidly
as "real" labor income since the sharp increase in aggregate national
income (which nearly doubled in terms of constant purchasing power)
completely overshadowed the effect of the modest change in its composition.
Hence, Mr. Coleman is mistaken in believing that a decline
in "the" P/W ratio would lead to a situation "where the incentive
to save and invest would drop to a level where capital would be
available only for the replacement of existing facilities but not
for further expansion" (page 8).
Since a large part of Mr. Coleman's
reasoning is based on this belief (see his discussions on pages 15-19
and 47-50), his conclusions cannot be considered to be theoretically
justified.
The role of credit
Contrary to classical economics, Mr. Coleman believes
that
the use of credit distorts the economy and is responsible for
those economic ills that cannot be attributed to monopolistic behavior of business or labor.
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Chairman Martin
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September 2, 1966
Mr. Coleman views with understandable alarm the rise in
total debt in the United States, from $191 billion in 1929 and
$397 million in 1946 to $1,260 million in 1965.
He believes that
"a substantial mortgage has been placed on industry's markets
which, at the same time, has greatly inflated consumer demand.
Ultimate deflation of this demand will mean that industry will
have over-invested in surplus capacity.
The use of credit to
finance capital expenditures ... is not sound when resorted
to by industry in general as a substitute source of capital for
that which, in general, should preferably be generated from the
operations of industry" (page 25).
There is a core of truth in the author's apprehension,
especially as to the rise in consumer debt.
But Mr. Coleman not
only exaggerates the "burden on the overall economy" resulting
from the increase in total debt; he also exaggerates the difference between equity and debt financing of business.
While the amount of debt outstanding in 1965 was indeed
very large, it represented a slightly lower ratio to gross national
product (185 per cent) than did the amounts outstanding in 1929
(186 per cent) or 1946 (190 per cent).
It is quite true that a
sudden liquidation of that indebtedness would have catastrophic
consequences; but there is no inherent reason for such "deflation"
to occur.
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Tog
Chairman Martin
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September 2, 1966
Moreover, the great bulk of that debt ($810 million)
represented corporate, non-corporate business, farm, and mortgage
indebtedness.
These debts can be considered to be economically
equivalent to "equity" participations (this reasoning was familiar
to the medieval "schoolmen," who used it to defend the legitimacy
of such credits against the condemnation of "usury").
The owner
of an enterprise, farm, or building goes into "partnership" with
the owner of liquid funds (in some common-law jurisdictions, the
mortgage holder rather than the mortgagor is indeed considered to
be the "owner")--with the only difference that the "partner's"
share in the partnershipfs receipts and assets is a fixed sum instead of a ratio, and that the time of the dissolution of the
partnership also is fixed (which incidentally could be the case
in an ordinary partnership, too).
It is quite true (as Mr. Coleman
states) that these arrangements increase the "leverage" for the
owner if profits are high and increase his risk if profits are
low or nonexistent; but this merely means a change in the distribution of gain and loss between the two "partners," which is of
little if any significance to the economy as a whole.
The situation is somewhat different in the case of the
debts of the Federal Government ($270 million), State and local
authorities ($93 million), and consumers ($87 million).
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Chairman Martin
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September 2, 1966
In the case of Federal, State, and local authorities, the
contraction of debt can be understood as a modified form of taxation,
which affects the distribution of the tax burden rather than its
aggregate impact on the economy.
In the case of consumer credit, consumers may indeed be
said to mortgage their future income for present rather than future
consumption.
But since most consumer debt is incurred in connection
with purchases of consumer durables (such as cars), the transaction
can also be interpreted as involving the promise of future payments
for the future services to be derived from the continuing use of
the commodity (in Britain, the legal fiction of "hire-purchase" is
consistent with this interpretation).
Nevertheless, it is bothersome that consumer debt has
recently been rising much faster than consumer income and consumer
expenditures:
that debt represented in 1965 about 20 per cent of
consumer expenditures, as against little more than 8 per cent in
1929.
But this reviewer has for some time been concerned about
that development—which is clearly unsustainable in the longer
run--without sharing Mr. Coleman's theoretical or practical views.
To sum up, there is no good reason for Mr. Coleman to conclude that the rise in debt has reduced "the internal generation of
capital" (in 1965, undistributed corporate profits plus capital
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Chairman Martin
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September 2, 1966
consumption allowances were a healthy $62 billion—in "real" terms
about 3-1/2 times as much as in 1929, representing 9 per cent of
GNP as compared with 7 per cent in 1929); that "the present high
volume of production could have been achieved without incurring
debt" (Mr. Coleman himself expresses the opposite opinion on
page 25, where he concedes that "borrowing has been an important
factor in the development of our economy"); that "with the above
described increasing debt load the U.S. economy is in no position
to withstand the impact of a recession"; or that there is danger
of "the limit of borrowing capacity" being reached (page 26).
Government intervention
No objective observer can doubt that government intervention in economic problems at times hampers rather than promotes
sustainable economic growth; the tendency to protect inefficient
or obsolescent industries against domestic and especially foreign
competition is a flagrant instance.
But Mr. Coleman concentrates
his attack on compensatory fiscal and monetary policies—exactly
that kind of intervention that has been most consistent with the
principles of a market economy and that has been most successful
in practice.
Mr. Coleman believes that the "lowering of interest
rates ... through manipulation of government monetary and
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To:
Chairman Martin
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September 2, 1966
fiscal policies" results "in increasing the burden of interest cost
to industry" and means "a regularly rising price level over the
years as more and more debt is accumulated" (page 28).
Actually,
the "burden of interest cost" as a proportion of national income
is less heavy today than it was before the advent of the "New
Economics": net interest was equal to about 3-1/4 per cent of
national income in 1965, as compared with 5-1/2 per cent in 1929.
In the period 1946-53, it was less than 1 per cent of national
income; the proportion is higher today mainly because after the
Accord of 1951 monetary policies could again be used—in full
accordance with classical economics—to raise interest rates in
times of inflationary pressures.
The upcreep in prices is indeed bothersome; but it
should be remembered that a tendency for prices to increase has
been characteristic of prosperity long before the invention of
the "New Economics."
In the nine-year period 1898-1907--one of
the most prosperous periods in U.S. history—consumer prices rose
27 per cent and wholesale prices 34 per cent (Historical Statistics
of the United States, Series L 36 and L 15); in the nine-year period
1957~66, consumer prices rose 17 per cent and wholesale prices a
mere 7 per cent.
In those two periods the rise in total national
income at current prices was quite similar:
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about 65 per cent in
To:
Chairman Martin
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September 2, 1966
1957-66, and about 67 per cent in the earlier period (Series A 154,
extrapolated from data for 1899-1907).
In "real" terms, the economic
growth was thus substantially more rapid in the later period, and
especially so on a per-capita basis since population rose 19 per
cent in 1898-1907 (Series B 31) but only about 15 per cent in
1957-66.
Apparently, under the "New Economics" economic welfare
has improved more rapidly and at the cost of a considerably less
rapid advance in prices than in the "gold old days,"
Instead of the use of monetary and fiscal policies,
Mr. Coleman recommends in a depression "the lowering of prices in
relation to wages to increase consumption and eliminate
production facilities" (page 31).
inefficient
But it was exactly this type of
deflationary policies that became utterly discredited in 1929-33-and that had not worked very well in previous milder recessions-and therefore led to the emergence of the "New Economics."
Clearly,
there is no assurance that monetary and fiscal policies will always
be able to avert catastrophes like the Great Depression; but their
record over the past 20 years compares favorably with that of any
other type of economic policy ever tried at home or abroad.
Labor policy
Mr. Colemanfs attitude toward the labor problem is colored
by his misconceptions about the importance of "the" P/W ratio.
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To;
Chairman Martin
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September 2, 1966
Contrary to all available data, he believes that in consequence of
the reduction in that ratio (meaning in this case the ratio between
price and wage indices) "not enough capital is provided to maintain
or expand production facilities" and "the share of the proceeds of
production going to capital is so low that the extensive borrowing
referred to above has been resorted to" (page
34).
Mr. Coleman attributes these (nonexistent) consequences
of the decline in "the" P/W ratio to "labor monopoly."
In his
opinion, "the benefits of the increased productivity ... are not
allowed to accrue the overall public in the form of lower prices
to increase overall production and total national real income ....
Instead labor insists that it should receive the entire benefits of
increased productivity .... Had the benefits of increased productivity . . . not been appropriated by labor our overall production today would be greater and distributed on a more equitable
basis" (page 37).
It is difficult to recognize recent developments in the
U.S. economy in this picture.
Actually, the benefits of increased
productivity—although in the form of increased money incomes
rather than of reduced prices—have been shared by virtually all
classes of the economic society.
It is true that recipients of
fixed incomes have been hurt by the price increase while the "active"
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To:
Chairman Martin
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September 2, 1966
members of the economic society, who receive variable incomes
salaries, and wages), have benefited from the change.
(profits,
This inequality
indeed creates hardship in individual cases, and it is one of the main
reasons for demanding that economic policy be conducted in such a way
as to avert even slowly creeping inflation.
But it should be remembered that creeping inflation is not
exclusively attributable to "labor monopoly":
there was no "labor
monopoly" in the years preceding the First World War, when prices
rose much faster than during the past nine years.
Moreover, falling
prices create far greater hardship for the far greater number of
people (farmers, businessmen, home owners) who have to service a
constant debt out of falling receipts.
The period of falling prices
that culminated in the recession of the 'nineties has--in contrast
to the postwar period--not been one of the most prosperous and harmonious episodes of U.S. economic history.
Mr. Coleman is more justified in attacking the price creep
for reasons of the U.S. payments balance.
He rightly asks that "we
restore in all segments of our economy the free unrestricted action
of competitive forces so that we may reduce our costs of production
to a basis where we can meet world competition" (page 73).
It is
not correct to say, however, that "this country is becoming more
and more a high cost island," or that "our competitive costs
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Chairman Martin
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September 2, 1966
disadvantage is further aggravated by excessive taxation and high
interest costs as the result of government manipulation of fiscal
policy" (page 67). Actually, in recent years prices and costs in
the United States have risen considerably less than in most if not
all other industrial countries; taxation in the United States has
not been heavier than in most other industrial countries; and interest rates have been lower than in most of them.
Recommendations
Some of Mr. Colemanfs recommendations are highly valuable.
He rightly suggests "to reduce marginal unemployment (by) the training of marginally unproductive labor" (page 48).
He rightly exhorts
business to follow a policy of "low prices and low profit per unit
rather than restricting volume to bring about high prices and unduly
high profits which create idle capital and unemployment" (page 64).
And he rightly warns labor "that raising wages above normal competitive levels by monopoly control can only result in inevitable inflation and unemployment" (page
74).
But the means Mr. Coleman recommends to achieve these purposes are of dubious value.
It can hardly be expected that "the
strict application of anti-trust laws" (page 75) will bring perfectly
free competition to our basic industries (steel, aluminum, copper,
automobiles, airplanes, railroads, airlines, TV networks, telephone,
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To: Chairman Martin
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September 2, 1966
telegraph, electric power, oil, and many others).
And even if it did,
many instances would remain in which private gains and losses clearly
deviate from social gains and losses:
cases in point.
air and water polution are
Even if the most extreme form of the classical argu-
ments for free enterprise is accepted, the scope of inevitable government intervention is much greater than Mr. Coleman seems to realize.
This is particularly true for fiscal and monetary policy.
Mr. Coleman strongly objects to the present use of such policies but
he does not propose an alternative.
After all, money is, even accord-
ing to the most extreme classical economists, a public rather than a
private matter.
Does Mr. Coleman advocate return to a quasi-automatic
gold standard; or adoption of some automatic rule for money creation
(as proposed by Professor Friedman); or return to the free private
issue of bank notes (as in the period of "wildcat" banking)?
He does
not say.
Similarly, taxation is inevitably a public rather than a
private matter, and every tax burdens some member of the community
for the benefit of others.
Does Mr. Coleman advocate a single
strictly proportional income tax (as proposed by Professor Hayek),
or exclusive reliance on indirect taxes (as apparently proposed by
those who want to repeal the 16th Amendment), or levies on the
States (as under the Articles of Confederation)?
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He does not say.
Tos
Chairman Martin
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September 2, 1966
And what about boom and recession?
Does Mr. Coleman want
public policy to follow a strict laisser-faire policy in the hope
that reasonable behavior of business and labor will avert all inflationary and deflationary danger?
what then?
And if this hope is disappointed,
Mr. Coleman's suggestion to train sub-marginal labor
shows that he is fully aware of the social implications of unemployment; does he wish to leave that problem to the uncertain mercies of
private charity?
He does not say.
There is only one point on which Mr. Coleman is explicit;
his desire to make the anti-trust laws applicable to unions and to
enact a national "Right to Work" law (page 75).
In this instance,
we are fortunately able to draw on extensive experience with the
very legislation Mr. Coleman recommends.
Until quite recently, labor organizations in the United
States were indeed subject to the "common law notions of conspiracy,"
and later to the Federal anti-trust law.
The earliest attempt to
exempt labor unions was made in the Nebraska Anti-Trust Act of 1897;
and this attempt was "deemed unconstitutional
favoritism when the
law first came before a federal court sitting in Nebraska" (Frankfurter and Greene, The Labor Injunction, New York, 1930, page 138).
The Sherman anti-trust act was applied by the courts to "combinations of labor" as early as in 1893 (Frankfurter and Greene, page 8).
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To:
Chairman Martin
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September 2, 1966
That law was also used to pass prison sentences on labor leaders
(e.g., on E. V. Debs in connection with the great Pullman strike of
1894, and on the mild and conservative Samuel Gompers as late as
1911; see Frankfurter and Greene, page 9).
The Clayton Act of 1914 was designed to put an end to the
application of the anti-trust laws to labor, but this purpose was
fully achieved only 19 years later, in the course of the New Deal
legislation.
Hence, until 1914 (and to a large extent in practice
until 1933), the anti-trust laws were indeed made applicable to
labor unions.
Similarly, the "right to work" was fully supported in that
period.
In fact, the right to strike, or even to union membership,
was denied.
A Federal statutory provision as well as State laws
prohibiting discrimination against union members was declared unconstitutional by the Supreme Court in 1911 and 1914, respectively
(Adair v. United States, 208 U.S. 161; Coppage v. Kansas, 236 U.S. 1)
Even after the passage of the Clayton Act, the Fourteenth Amendment
was used to support court action against strikes, and a State law
prohibiting such action was declared unconstitutional by the Supreme
Court in 1921 (Truax v. Corrigan, 257 U.S. 312).
It cannot be said, however, that labor relations in that
period were ideal.
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Strikes were not only numerous--as evidenced by
To:
Chairman Martin
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September 2, 1966
the large number of "labor injunctions" listed by Frankfurter and
Greene (Appendices I - III)--but also tended to be violent—as
evidenced not only by a number of notorious incidents involving
strikers, professional strikebreakers, and security forces, but
also by the emergence of the radical and even anarchistic Industrial Workers of the World in 1905.
Even today, "right to work" laws are in effect in a
number of States,
If there is any evidence that these laws have
served to keep wages in those States closer to the level that would
be reached in a perfectly free labor market, or in any other way to
make labor relations in those States more harmonious or economic
development more rapid, the advocates of a national "right to work"
law have been strangely silent about it.
Or if there is any evidence
that these laws have seriously diminished the legitimate status and
power of labor, the opponents of a national "right to work" law have
been equally silent about it.
The conclusion to be derived from this
mutual silence is that a national "right to work" law would neither
significantly help management nor significantly hurt labor—in short,
that it would not significantly affect the economy and that the issue
is therefore irrelevant.
To sum up, it seems unlikely, to say the least, that a return to the pre-1914 legal status would result in a free competitive
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Tos
Chairman Martin
labor market.
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September 2, 1966
Legislative action might outlaw "monopolistic" labor
unions; but it could no more assure truly equal and free bargaining
between an individual worker and General Motors than it could establish meaningful free competition between General Motors and a mechanic
trying to build an automobile in his backyard,
Conclusions
The main reason for Mr. Coleman^ failure to establish a
valid theoretical basis for economic policy is to be found in his
method of making general abstract statements and then deducing from
these statements concrete policy recommendations.
In doing so, Mr. Coleman is in good company--though not in
the company of the Founding Fathers of classical economics, Adam Smith
and Malthus, who rare careful to base their theories on thorough factual
research.
But like so many others, Mr. Coleman seems to forget that
economics-~in contrast to mathematics--is an empirical science, and
that its laws can therefore be derived only from an analysis of actual
experience.
Experience has shown that economic reality is less simple
than Mr. Coleman seems to assume, and even less simple than it was at
the time of Smith and Malthus.
Mr. Coleman believes that nothing more
is needed to achieve optimal economic behavior of business and labor
than stopping government intervention.
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Actually, the relevant question
To:
Chairman Martin
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September 2, 1966
is not whether or not there is need for government intervention in
the economy but where, when, and how the government should intervene-just as in modern city traffic control the problem is not whether or
not there is need for traffic lights and traffic police but where,
when, and how traffic lights and traffic police should operate.
The "New Economics" has become an important force in economic
policy because, whatever its shortcomings, it has at least recognized
this basic truth.
It can and will one day be replaced by a better
system of economic policy—but only after its opponents become willing
to base their reform proposals on analysis of actual experience rather
than on an imagined world of perfect human behavior.
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@FedFRASER