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Federal Reserve Bank of St. Louis
PRELIMINARY DRAFT
CONFIDENTIAL
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 Thursday, October 4, 1951 > at 10:05 a.m.
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Federal Reserve Bank of St. Louis
PRESENT: Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Sproul, Vice Chairman
Gidney
Gilbert
Leedy
Norton
Powell
Szymczak
A. H. Villiams
Mr. Carpenter, Secretary
ivir. Sherman, Assistant Secretary
Mr. Thomas, Economist
Messrs. Bopp, Irons, Thompson, Tow, and
John H. Williams, Associate Economists
Mr. Rouse, Manager, System Open Market Account
iir. Thurston, Assistant bo the Board of Governors
Mr. Riefler, Assistant to the Chairman, Board of
Governors
Mr. Ralph A. Young, Director, Division of Research
and Statistics, Board of Governors
Mr. Solomon, Assistant General Counsel, Board of
Governors
Mr. Youngdahl, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Ralph F. Leach, Economist, Division of Research
and Statistics, Board of Governors
Mr. Arthur Willis, Special Assistant, Securities
Department, Federal Reserve Bank of New York
Messrs. Hugh Leach, C. S. Young, Bryan, and Earhart,
alternate members of the Federal Open Market
Committee
Messrs. Erickson, Johns, and Peyton, Presidents of
the Federal Reserve Banks of Boston, St. Louis,
and Minneapolis, respectively.
Mr. Tovnsend, Solicitor, Board of Governors
Mr. J. Marvin Peterson, Director of Research,
Federal Reserve Bank of Minneapolis
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, -2Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
May 17, 1951, were approved.
Upon motion duly made and seconded, and
by unanimous vote, the actions of the executive committee of the Federal Open Market Committee us set forth in the minutes of the
meetings of the executive committee held on
May 7, May 17, June 27, August 8, and August
27, 19$3.5 were approved, ratified, and confirmed.
Before this meeting there had been sent to the members of the
Committee a report of open market operations prepared at the Federal Reserve Bank of New York covering the period May 17 to September 27, 1951,
inclusive. Mr. Rouse cormaented briefly on this report and on a supplementary report covering commitments executed September 23 to October 3,
1951* inclusive, copies of which also were distributed to the members of
the Committee. Copies of both reports have been placed in the files of
the Federal Open Market Committee,
Upon motion duly made arid seconded, and
ty unanimous vote, the transactions in the
System account for the period May 17 to October
3t 1951* inclusive, were approved, ratified, and
confirmed.
Members of the staff of the Division of Research and Statistics
of the Board of Governors then presented a report, illustrated by charts,
covering the economic situation. Following this report, Mr. Thomas made
a. statement on the implications for credit policy in the current economic
outlook in which he said that during the first four months of the new
Federal Reserve policy developments indicated that either the policy was
effective in restraining further credit inflation or that the abatement
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Federal Reserve Bank of St. Louis
10/4/53
of inflationary pressures for other reasons was so great as not to subject
the monetary policy to a rigorous test. Mr. Thomas went on to say that
there was evidence that credit restraints played some part in curbing
inflation, especially in the mortgage market, and that it was likely that
had the change in policy not occurred investment institutions would have
continued to sell bonds to the Federal Reserve with the result that reserves thus created would have moved into the banks and inducement for
credit restraint would have been weakened. Mr. Thomas also said that in
this period the money market functioned on its own, that there was little
or no increase in total Reserve Bank credit, total bank loans and investments, or total deposits, although the private money supply expanded somewhat because of a reduction in Treasury balances. Within the past three
weeks, Mr. Thomas said, the picture had changed drastically and the System
had found it necessary to add nearly a billion dollars to its portfolio,
reflecting temporary factors such as tax payments, the desire of the banks
to avoid borrowing on a statement date, and a lack of enthusiasm for the
new Treasury refunding issues. The increase also reflected seasonal
loan arid currency demands, which would continue during the rest of this
year, and the imminence of new cash borrowing by the Treasury, as well as
prospective large corporate issues. Mr. Thomas felt that Federal Reserve
Open Market purchases at this time, rather than forcing reliance on
borrowing by banks to meet reserve needs and permitting interest rates to
rise, could be justified on the grounds that some of the demands were of
a temporary nature and that strong inflationary tendencies were absent
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at this time.
As for the immediate future, Mr. Thomas said that the large
volume of excess reserves now outstanding (about £>1 billion) and the
low level of borrowing at the Reserve Banks (less than $70 million),
together with a seasonal expansion in Reserve Bank float, should make
it possible that -.11 reserve needs could be met during the remainder of
1951 without any further purchases of securities by the System unless
purchases were needed to assure success of new financing offers by the
Treasury. Mr. Thomas felt that the large increase in the private money
supply that had already occurred and that would continue, together with
growing defense expenditures, might result in a resumption of inflationary
pressures; if this occurred, the System might wish to adopt more positive
measures of restraint. The most promising approach for dealing with the
situation would be for the Treasury to offer securities of a type that
would compete with other demands and attract the available nonbank funds.
Such measures would be even more essential the latter part of 1952 when
Treasuiy borrowing needs probably would be tremendous, and unless those
needed funds could be obtained outside the banking system, Mr. Thomas felt
further sharp growth in the money supply would result and would present a
continuing strong inflationary threat.
There followed a brief discussion of the reports given by members
of the Research Staff and Mr. Thomas, at the close of whicih Mr. Tovnsend
withdrew from the raeeting.
Chairman Martin then referred to a memorandum prepared in the
Board's offices under date of October 3, 1951, on "Treasury Cash Requirements
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and Financing, October-December 1951" and to new financing alternatives
presented in that memorandum, copies of which were distributed among the
members of the Committee prior to this meeting and a copy of which has
been placed in the Federal Open Market Committee files.
In response to a request from Chairman Martin, Mr. Rouse made a
statement concerning prospective Treasury financing needs during the next
few months in which he said that the bill market was congested and was not
in a condition to take additional weekly offerings of regular bills, that
there was no outside demand for long-term Government securities at the
present price level, and that the source of nonbank funds appeared to lie in
the tax liabilities of corporations. He felt, therefore, that the Treasury
might avail itself of the situation in the short-term money market and sell
securities which would be purchased ultimately by corporations for use in
paying tax liabilities in the spring of 1952, when the Treasury could
repay such borrowings.
Chairman Martin then called upon Mr. Thomas who summarized informal
discussions that members of the staff had had with representatives of the
Treasury staff. Mr. Thomas said that, while the discussions were exploratory, it was generally agreed that around 02.5 billion would hs.ve to be
raised by the Treasury to cover the deficit and attrition in refunding of
market issues this fall, that there was rather general agreement this could
not be raised by long-term issues, and that most of the funds available
were funds held by corporations in anticipation of tax payments they would
have to make during 1952,
One of the proposals under consideration, Mr.
Thomas said, was the offering of tax-date bills maturing about March 15
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and Juiie 15, 1952; such bills might mature within a few days after these
tax payment dates but would be acceptable in payment of taxes on March 15
and June 15. Mr. Thomas also commented upon alternative methods of issuing
such securities, stating that some individuals felt they should be issued
at once while others preferred a series of issues coming out over a period
of several weeks,
There followed a discussion of the suggestions made in the staff
memorandum dated October 3, 1951, and of the comments of Messrs. Rouse and
Thomas, including discussion of the terms on which the tax anticipation
bills might be issvied, at the conclusion of which Chairman Martin suggested
that the executive committee be authorized to submit recommendations to
the Treasury concerning both refunding and new financing needs, in the
light of the discussion at this meeting.
This suggestion was approved
unanimously.
Chairman Martin also referred to a report prepared by the System
Research Committee on Government Finance under date of September 23, 1951,
on "How the Defense Bond Program Can Be Strengthened", copies of which had
been sent to the members of the Committee before this meeting. He suggested
that the report be reviewed by the executive committee with a view to
having that committee submit a recommendation to the full Committee. He also
suggested that Mr. Norton be asked to serve with the members of the executive
committee in making this reviev of the savings bond program in view of his
interest in and tentative suggestions concerning a more effective program
for merchandising bonds.
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-7In connection with a discussion of the time for a meeting of the
Federal Open Market Committee at which consideration might be given to
matters which should be taken up with the Secretary of the Treasury before
the end of this year, including the savings bond program, Chairman Martin
suggested that there be a meeting of the full Committee at which Federal
Reserve Bank Presidents who vere not now members of the Committee would also
be present sometime during November 1951.
He added that he had discussed
the question of possible changes in the savings bond program with Secretary
of the Treasury Snyder and that he was under the impression that any recommendations which the Committee might wish to make should be submitted
by the latter part of November,
Following a discussion, it was agreed
unanimously that • study of the savings
bond program should proceed as suggested
by Chairman Martin, and that the next meeting of the Federal Open Market Committee,
at which the Presidents of the Federal Reserve Banks who were not now members of the
Committee would also be present, would be
held on Wednesday, November 14, 1951.
In a. discussion of open market policy, Mr. Powell expressed the
view that the money market, in a variety of ways, was stating the case
that interest rates had definitely risen and if the Treasury was going to
finance without going into the banks it would have to pay the higher rates
that others were willing to pay, Mr, Powell went on to say that this was
the inevitable result of inflationary pressures and the System's attempt
to control them with money market instruments, and, after commenting on
the factors evidencing upward pressure on the level of rates, he suggested
that consideration be given to the question whether it would not be
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necessary to permit interest rates on Treasury borrowings to rise, if
Treasury financing was to be fitted into a situation in which the Open
Market Committee continued to exert pressure against inflation through
the use of open market instruments.
Chairman Martin stated that Mr. Powell had raised a very pertinent
question, that there was a real problem of how effective the System could>
be in a period of deficit financing in attempting to restrain inflation
through open market instruments.
After comments by several Reserve Bank Presidents concerning the
attractiveness of long-term Treasury securities to the average saver at
existing rates, Chairman Martin called upon Mr. John H. Williams who
stated that he shared Mr. Powell's views, that he felt the only way in which
the System could overcome inflation was through raising interest rates and
thus providing a means by which the Treasury could compete for savings. He
felt that this was the way to exert monetary pressure, that it looked as
though the country was getting to the end of the road as far as tax
increases were concerned except perhaps for a general sales tax, and that
the country was confronted with such questions as whether the military program was too large, whether it should be stretched out over a longer period
of time than was now contemplated, whether it should be financed through
use of savings of the country, or whether it would have to be financed by
resorting to bank credit.
Mr. Bopp stated that he did not feel the question was one of a
deliberate raising of interest rates so much as one of letting the demand
for funds force rates up, rather than taking action to prevent a rise.
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-9Mr. Thompson agreed with the comment made by Mr. Bopp, adding
that he felt it was unfortunate that the System was too often identified
with the proposition of raising interest rates whereas the proposition
was basically one of restricting the supply of funds so that those who
wanted credit would have to compete for it, which might mean an increase
in rates.
Mr. Tow said that any increase in interest rates should be a result of monetary policy rather than a deliberate raising of rates, that
the question whether to permit rates to rise was one that would have to be
faced in terms of all factors in the situation at a given time, and that
it was not particularly significant whether such a change was permitted to
occur just after a savings bond sales campaign or at some other time.
Mr. Irons said that the System should not prevent rates from
rising if the forces in the market tended to bring about ?<n increase. He
expressed doubt that the present rates, certainly those paid on savings
bonds, were sufficient to attract savings into Government securities, and
he felt that the System should be affirmative to the extent that it should
not prevent rates from rising.
Mr. Peterson felt that it would be a mistake to concentrate on
the savings bond rate as such and leave longer-term securities out of
consideration.
Mr. Bryan stated that he would like to associate himself strongly
with the general line of thought initiated by Mr. Powell and that he did
not disagree with most of the comments made subsequently. He added that
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Federal Reserve Bank of St. Louis
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it seemed to him that in a considerable part of the postwar world, central
banks had proceeded on an impression that there would be a savings surplus,
whereas, in fact, we had come into a situation where there was a savings
deficit. He commented that he did not see any way by which it was going to
be possible to avoid further inflation unless, in consort with the Treasury, the central banking system could reach a full recognition of the circumstances in the market and permit an adjustment in the level of rates that
would meet the demand. Of the various choices available, Mr. Bryan felt
that the best was to face the rate question over a longer term since this
was the basic problem, rather than the technicalities as to how short-term
financing should be accomplished.
There was a further discussion at the conclusion of which Chairman Martin stated that the problem was one of finding out how to attract
new money into Government securities in the period ahead.
Chairman Martin then referred to the authority given to all
Federal Reserve Banks on March 1, 1950, which was modified on February
8, 1951> and renewed on March 8, 1951> with respect to repurchase agreements
covering short-term Treasury obligations with nonbank dealers in United
States Government securities qualified to transact business with the System
open market account. He stated that question had been raised as to whether
the present authority which gave additional leeway to the New York Bank
for executing repurchase agreeraents should be extended to all Federal
Reserve Banks.
In the discussion that followed, it was stated that the present
authority included the requirement that the rate on such agreements be at
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least 1/8 per cent above the -average issuing rate on the most recent issue
of United States Treasury bills, except that the Federal Reserve Bank of
New York was authorized by the actions of February 8 and March 8, 1951>
to enter into such agreements at a differential of less than 1/8 per cent
above the average issuing rate on United States Treasury bills. The view
was expressed that while this authority would continue to be used
primarily if not exclusively ty the Federal Reserve Bank of New York, it
should be granted to each of the Federal Reserve Banks so that it could
be used in the interest of orderly conditions in the Government securities
market, and that Federal Reserve Banks other than New York should have
the authority in case of an emergency necessitating the transfer of the
execution of open market operations to another Federal Reserve Bank.
Following a discussion, upon motion
duly made and seconded, it was voted unanimously to authorize each Federal Reserve
Bank, in lieu of all similar previous
authorisations, to enter into repurchase
agreements with nonbank dealers in United
States Government securities who are qualified
to transact business with the System open
market account, under the following conditions:
1. Such agreements
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Federal Reserve Bank of St. Louis
a. Are at a rate which will be fixed in fractions of 1/8
per cent and which ordinarily will be not less than
the nearest fraction above the average issiiing rate
on the most recent issue of 3-month Treasury bills
but which at times may be below the average issuing
rate on bills but not more than 1/8 per cent below;
(for example, when the issuing rate on Treasury bills
temporarily may have risen slightly above the existing
repurchase rate);
b. Are for periods of not to exceed 15 calendar days;
10/V51
-12c. Cover only short-term Government securities selling at
a yield of not more than the issuing rate for 1-year
Treasury obligations; and
d. Are used with care and discrimination as a means of
providing the money market with sufficient Federal
Reserve funds as to avoid undue strain on a day-today basis.
2. Reports of such transactions are made to the Manager of the
System Open Market Account to be included in the weekly report of open market operations which is sent to the members
of the Federal Open Market Committee.
3. In the event Government securities covered by any such agreement are not repurchased by the dealer pursuant to the agreement or a renewal thereof, the securities thus acquired by
the Federal Reserve Bank are sold in the market or transferred
to the System Open Market Account.
»,
In taking this action it was understood that a letter would be sent to all
Federal Reserve Banks advising them of
the above understanding.
Reference was made to the decision reached at the meeting of
the Committee on May 17, 1951> with respect to conversion of 2-3/4- per
cent nonmarketable bonds held in the System account into 5 year 1-1/2 per
cent marketable notes. Mr. Rouse stated that following out that action
it would now be appropriate for the System to convert ^500 million of the
2-3/4- per cent bonds into the 1-1/2 per cent notes and that an additional
$500 million should be converted on a similar basis in April 1952 at which
time consideration would also be given to the program for conversion of the
remaining $700 million held in the System account. Mr. Rouse went on to
say that before cariying out the exchange of £500 million at this time, it
seemed desirable to raise the question whether the Committee wished to
make any change in the earlier understanding.
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Federal Reserve Bank of St. Louis
He also said that so far
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as he was concerned in the management of the System account, it would not
matter whether the present understanding was carried out or whether the
conversion was made in some other manner.
Mr. Szymczak suggested that unless there was good reason for
changing the decision reached at the meeting on May 17, it would seem
desirable to proceed on the basis of that action.
This suggestion was approved
unanimously.
It was agreed that the executive committee should be authorised to determine, within the limits of the general direction to be
issued at this meeting by the full Committee to the executive committee,
the basis upon which transactions would be conducted for the System
account in bills and other short-term securities.
It was also agreed that
no change should be made in the existing understanding that operations
in longer-term securities should be conducted with a view to maintaining
orderly market conditions, in the light of the general direction to be
issued to the executive committee at this meeting.
Thereupon, upon motion duly made and
seconded, the following direction to the
executive committee was approved unanimously
with the understanding that the limitation
contained in the direction would include
commitments for the System open market
account:
The executive committee is directed, until otherwise directed by the Federal Open Market Committee, to arrange for such
transactions for the System open market account, either in the
open market or directly with the Treasury (including purchases,
sales, exchanges, replacement of maturing securities, and letting
maturities run off without replacement), as may be necessary, in
the light of current and prospective economic conditions and the
general credit situation of the country, with a view to exercising restraint upon inflationary developments, to maintaining
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orderly conditions in the Government security market, to relating
the supply of funds in the market to the needs of corranerce and
business, and to the practical administration of the account;
provided that the aggregate amount of securities held in the
account at the close of this date other than special short-term
certificates of indebtedness purchased from time to time for the
temporary accommodation of the Treasury shall not be increased
or decreased by more than $2,000,000,000.
The executive committee is further directed, until otherwise
directed by the Federal Open Market Committee, to arrange for the
purchase for the System open market account direct from the Treasury of such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary
accommodation of the Treasury; provided that the total amount of
such certificates held in the account at any one time shall not
exceed $1,000,000,000.
The Secretary stated that he had been advised that the examiners
of the Board of Governors of the Federal Reserve System, in connection
with the regular examination of the Federal Reserve Bank of New York, had
completed an audit of the System open market account and that they had
no objections to raise to the handling of the account. He added that the
customary report of the audit would be distributed among the members of
the Committee in the usual manner*
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Federal Reserve Bank of St. Louis
Thereupon the meeting adjourned.
Secretary.
PRELIMINARY DRAFT
CONFIDENTIAL
A meeting of the executive committee of the Federal Open
Market Committee was held in the offices of the Board of Governors of
the Federal Reserve System in Washington on Thursday, October /+, 1951?
at 12:20 p.m.
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Federal Reserve Bank of St. Louis
PRESENT: Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Sproul, Vice Chairman
Szymczak
A. H. Williams
Powell, Alternate Member
Mr. Norton, Member, Federal Open Market Committee
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Carpenter, Secretary
Sherman, Assistant Secretary
Thoma s, Economist
Rouse, Manager, System Open Market Account
Thurston, Assistant to the Board
of Governors
Riefler, Assistant to the Chairman, Board
of Governors
Young, Director, Division of Research and
Statistics, Board of Governors
Solomon, Assistant General Counsel, Board
of Governors
Youngdahl, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Ralph F. Leach, Economist, Division of
Research and Statistics, Board of Governors
Willis, Special Assistant, Securities Department, Federal Reserve Bank of New York
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the executive committee held on August 27,
1951> were approved.
Upon motion duly me.de and seconded, and
by unanimous vote, the transactions in the
System open market account, as reported to the
members of the committee for the period
September 25 to October 3, 1951, inclusive,
were approved, ratified, and confirmed.
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Thereupon, upon motion duly made and
seconded, the executive committee voted unanimously to direct the Federal Reserve Bank of
New York until otherwise directed by the
executive 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 account, either in the
open market or directly from, to, or with the Treasuiy, as may be
necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view
to exercising restraint upon inflationary developments, to maintaining orderly conditions in the Government security market, to
relating the supply of funds in the market to the needs of commerce
and business, and to the practical administration of the account;
provided that the total amount of securities in the account at
the close of this date shall not be increased or decreased by
more than $1 billion exclusive of special short-term certificates
of indebtedness purchased for the teraporary accommodation of the
Treasury pursuant to paragraph (2) of this directionj
(2) To purchase direct from the Treasury for the System
open market account such amounts of special short-term certificates
of indebtedness as may be necessary from time to time for the
temporary accommodation of the Treasury; provided that the total
amount of such certificates held in the account at any one time
shall not exceed $750 million.
In taking this action it was understood
that the limitations contained in the direction
include commitments for purchases and sales of
securities for the System account.
Question was then raised as to the instructions to be issued
to the Federal Reserve Bank of New York in connection with short-term
interest rates. Mr. Rouse referred to the understanding at the meeting
of the committee on September 25 that, pending completion of the refunding
of the October 15 and November 1 Treasury notes, the bill rate should not
be permitted to increase to a point where it would affect adversely the
1-7/8 per cent rate on the outstanding April 1 and July 1, 1952, issues
of Treasury certificates. He stated that the bill rate was maintained
at 1.65 or less during this period so that it would not impinge on the
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refunding, that the refunding would be completed tocley, and that the
committee might now wish to consider the situation that had been discussed
at the meeting of the full Committee this morning, that is, whether to
permit interest rates to rise in response to the pressures that were
resulting from earlier actions taken to restrict the supply of reserve
funds.
In response to a question from Chairman Martin as to how high
the rates might go, Mr. Rouse stated that on the assumption that there
would be very little additional need for reserve funds to be supplied by
the Federal Reserve System in the immediate future, short-term rates
should not increase greatly above the present level, which was 1.65 per
cent on bills. He felt that the prime rate on commercial loans might
increase to 2-3/4- per cent or even to 3 per cent.
Chairman Martin stated that he did not like the idea of a
pegged bill rate, that the present rates had a necessary correlation with
the Treasury refinancing operation, and that with the end of the present
refinancing operation he felt the System should revert to a period of
watchful activity and not continue to peg the bill rate. There was general
agreement with this position.
There followed a discussion of the recommendations which the
committee might make to the Treasury with respect to new money financing during the next two or three months, during which Mr. Sproul
emphasized that he was concerned that Treasury borrowing be gotten out
of the way as promptly as possible in order that the Open Market Committee might be more free to pursue a credit policy which it felt was
desirable. For this reason, he felt that new money should be obtained
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promptly by the Treasury in the amount of approximately $1,500,000,000
through an issue of tax anticipation bills to mature in March 1952, and to
be acceptable in payment of income taxes on March 15, 195*i»
In this con-
nection, it was stated that there was some indication that members of the
Treasury staff felt it would be preferable to issue a series of tax
anticipation bills, perhaps at the rate of $500 million weekly. In discussing this question, however, it was the consensus that it would be desirable from the standpoint of the System's open market operations to have
the entire refinancing issue announced at one time and to have that done
as promptly as possible. It was a.lso suggested that such an issue could
be purchased initially by banks who would make a secondary distribution,
perhaps at a small loss, to corporations who might wish to secure the bills
for use in meeting tax liabilities next spring.
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Federal Reserve Bank of St. Louis
At the conclusion of the discussion, Mr.
Sproul moved that the committee recommend to
the Treasury that it offer at this time an
issue of tax anticipation bills in the amount
of approximately $1,500,000,000, such bills to
mature in March 1952 and to be acceptable in
payment of income taxes on March 15, 1952.
Mr. Sproul's motion was approved unanimously, with the understanding that a letter
for Chairman Martin's signature would be prepared in the light of the discussions at this
meeting and at the meeting of the full Committee earlier today transmitting the
recommendation and the reasons therefor to the
Secretary of the Treasury.
Secretary's note: In accordance with the foregoing action, a letter and accompanying
memorandum were sent to Secretary of the Treasury Snyder under date of October 5? 1951> reading as follows:
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"After a discussion of the economic outlook and of credit
policies by the Federal Open Market Committee in a meeting with
other Reserve Bank Presidents not now represented on the Committee, the Executive Committee gave consideration to recommendations that it might make to the Treasury with respect to newmoney financing during the next two or three months.
"Of various alternative neans considered, the Executive Committee believes that the best means of obtaining the new funds
needed in this period would be through offering for bids on a
discount basis two issues of Treasury bills to mature within the
week after March 15 and June 15, 1952, respectively. The bills
would be accepted at face value in payment of taxes on the respective tax-due dates. They could be bid for by banks for their own
account or for customers and be paid for by credits to Treasury
tax and loan accounts.
"We would suggest that the first issue of the bills be
offered in an amount of about 1.5 billion dollars, be dated around
October 22, and mature in March. The second issue in an amount to
be based upon needs as they appear at the time could be offered
in the latter part of November. Further discussion with respect to
these recommendations is given in the attached memorandum.
"During the past three weeks, in supporting the recent Treasury refunding operations at a time of other heavy demands on the
money market of a largely temporary or seasonal nature, the Federal Reserve has had to purchase about 1 billion dollars of shortterm Government securities. These transactions, we believe, have
supplied more reserve funds than may be required to meet reasonable credit needs in coming weeks. It will be difficult to absorb
the excess. We would hope, therefore, that you could complete
the first stage of your new-money financing as promptly as
possible."
"Discussion of New Treasury Financing Problem
by Executive Committee, F. 0. M. C., October 4» 1951
"Treasury requirements for new market financing during the
last quarter of 1951 will total between two and three billion
dollars. The prospecti\re Treasury cash surplus during the firnt
quarter of 1952 indicates that most or all of this new borrowing
could be repaid within the fiscal year ending June 30, 1952.
"For its immediate cash financing, the Treasury probably will
need to rely on short-term securities, as there seems little early
prospect of a substantial demand for longer-term issues at current
rates. One or two of the following new borrowing instruments may
be used:
"(1) Further increases in the regular weekly bill
offerings.
"(£) Tax-date bills maturing in March and June 1952.
"(3) Tax-date certificates.
Other certificates or notes.
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"Ths market for regular bills has been saturated, at least
temporarily, by the increases over the past several months. It
would probably not be desirable to use this source for new funds
for the next month or two. It is uncertain what the demand for a
short-term note would be, particularly among nonbank investors,
but it is unlikely that it is very broad at this time.
"Bills or certificates maturing in March and June 1952 would
appear to offer the best possibilities of attracting a maximum of
nonbank money. Such securities should have maturity dates within
a few days after the actual tax payment dates and carry the provision that they could be turned in for payment of taxes on the
preceding tax date. Corporations could be expected to favor such
securities since bookkeeping practices allow them to show taxpayment securities as a reduction in liabilities rather than as
assets, a feature particularly important over the year-end statement period.
"With respect to tax-date certificates, it would be awkward
to name a coupon for 5-month to 8-month securities. With a bill,
no close prejudgment of the market (selling price) for the security
is involved with an issue sold at auction. Actually, it is
likely that the Treasury would get a slightly better average rate
on a bill, since the highest rate accepted for bills would presumably be equal to or perhaps lower than the coupon that would be
needed to sell the same amount of securities.
"Competition for funds on the .-.art of all borrowers is expected to increase in the months ahead. It is considered particularly desirable, therefore, that the Treasury make an early
cash offering in an amount which would cover at least half of its
borrowing needs in the remaining months of the calendar year. Such
an offering, possibly in the amount of 1-1/2 billion dollars,
might be announced on or shortly after October 15• The proposed
bill issue would be in the form of a single maturity falling due
shortly after the March 15 tax date, but receivable for taxes on
March 15 at par.
"A 5-month Treasury bill offered in the amount of 1-1/2
billion dollars would be well received by the market particularly
if payment could be made by the commercial banks through credit
to tax and loan accounts. This arrangement would encourage banks
to underwrite the issue in order to obtain the tax and loan deposits and, while initially some reliance will have to be placed
on bank credit, secondary distributions from bank to nonbank investors would proceed smoothly.
"A large and early offering would have positive advantages
over several smaller issues spaced out over time. With the latter,
there would be a tendency for investors either to defer purchases
or to bid at a high rate, feeling safe in the knowledge that other
offerings would follow.
"When the Treasury goes to the market for the first portion
of this borrowing, it would be desirable to give the investing
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"public some rough indication of the total borrowing expected
during the full period. If this were done, investors would be
able to appraise realistically the total market effect of such
borrowing rather than bidding hesitantly on a portion of the
total with the feeling that unlimited amounts of borrowing must
still be done. It should only be necessary to indicate some
range of total requirements; definite commitments as to dates and
types of borrowing need not be made."
It was agreed that the date for the next meeting would be subject
to call by the Chairman.
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Federal Reserve Bank of St. Louis
Thereupon the meeting adjourned.
Secretary.
REVISFD. DRAFT
CONFIDENTIAL
A meeting of the executive committee of the Federal Open Market
Committee was held in the offices of the Board of Governors of the Federal
Reserve System in Washington on Thursday, April 5> 3951* at 2:35 p.m.
PRESENT: Mr.
Mr.
Mr.
Mr.
Mr.
Martin
Szymczak
Williams
Gidney (Alternate for Mr. Sproul)
Powell (Alternate for Mr. Eccles)
Mr.
Mr.
Mr.
Mr.
Mr.
Sherman, Assistant Secretary
Vest, General Counsel
Thomas, Economist
Rouse, Manager, System Open Market Account
Riefler, Assistant to the Chairman, Board
of Governors
Mr. Youngdahl, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Leach, Economist, Division of Research and
Statistics, Board of Governors
At Mr. Martin's request, Mr. Rouse reviewed developments in the
open market during the period since the books were opened on March 26,
1951j for subscriptions to the Treasury offering of 2-3/4 per cent nonmarketable bonds in exchange for the 2-1/2 per cent restricted issues of
1967-72. During his comments Mr. Rouse stated that in view of the announcement by the Treasury that the books on the conversion would be closed at
midnight on Friday, April 6, 1951> the instructions of the executive committee to the New York Bank would call for operations subsequent to that
time in terms of an orderly market, in the light of the existing direction
from the full Committee to the executive committee and the understanding
with the Treasury as set forth in the minutes of the meeting of the full
Committee on March 1 and 2 and of the executive committee on March 3, 1951.
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Mr. Rouse also said that, in accordance with the informal understanding of
the members of the executive committee on March 30, 1951j $2.5 billion of
System account holdings of the 2-1/2 per cent restricted bonds of 1967-72
had been exchanged for the 2-3/4- per cent nonmarketable bonds, that something over $100 million of restricted 67-72's were now held by the System
account, and that it was probable that more of those securities would be
purchased by the System today and tomorrow, in accordance with the understanding at the meeting on March 13 that they would not be permitted to fall
below 99 during the period of the conversion. Mr. Rouse raised the question
whether the additional holdings of the restricted 67-72's should be converted at the latest possible moment before the subscription books were
closed. He also stated that since sales of Government securities by
dealers on Friday, April 6, would be for delivery on the following business
day, it would not be possible to convert 2-1/2 per cent restricted bonds
purchased on April 6 for the 2-3/4- per cent nonmarketable bonds, and that
he would like to have a discussion of the procedure to be followed in
carrying on operations for the System account tomorrow, as well as on and
after Monday, April 9, when the books would have been closed.
Mr. Szymczak stated that in addition to the two questions mentioned
by Mr. Rouse, consideration should be given to the question when and in
what amounts System holdings of the 2-3/4 per cent nonmarketable bonds
should be exchanged for five-year notes, but that he would prefer to delay
a discussion of that question until next week or later unless Mr. Rouse felt
there was some reason for wanting to have some of the 1-1/2 per cent fiveyear notes in the System account at once.
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V5/51
-3Mr. Rouse replied that the System account now held over $3 billion
of notes which were three months shorter in maturity than those that would
be issued if the 2-3/4- per cent noiunarketable bonds were exchanged at this
time, that there was no need for the System account to have the new notes
at once, and that while the decision to convert the 2-1/2 per cent restricted bonds into 2-3A per cent nonmarketable bonds was for the purpose
of obtaining the 1-1/2 per cent marketable notes, he felt the timing of the
exchange was a major question which might well be considered at the next
meeting of the full Committee in the light of the Treasury's program for
June refundings.
Mr. Martin suggested that, since a meeting of the full Committee
was tentatively scheduled for the week beginning May 14, 1951, a decision
on the timing for the exchange into the 1-1/2 per cent five-year notes be
postponed until that meeting, with the understanding that in the meantime
the members of the executive committee would consider whether the entire
holdings of the 2-3/4- per cent nonmarketable bonds should be exchanged at
one time or whether the exchange should be effected over a period of time.
This suggestion wes approved unanimously.
In response to a question from Mr. Martin as to the understanding
that should be followed in effecting transactions in the System account
tomorrow, April 6, Mr. Rouse stated that, since any 2-1/2 per cent restricted bonds of 67-72 which might be sold on April 6 for delivery on the
next business day could not be converted into the 2-3/4 per cent nonmarketable bonds before the books closed, the System might refrain from operations
in the System account starting tomorrow morning except for the general
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instruction that an orderly market be maintained.
His own view, Mr. Rouse
said, was that in the light of the general understanding with the Treasury
regarding maintenance of stability in the market during the period of the
conversion and of the decision at the meeting of the executive coinmittee
on March 13 not to allow the 67-72!s to go below 99 during the period of
the conversion, it would be preferable to continue to operate tomorrow on
the same basis that had been followed thus far during the conversion period.
This might mean, he said, the purchase of &40 to ^,50 million of the restricted 67-72fs tomorrow, or perhaps more.
There was a discussion of this question during which it was the
consensus that operations for the System account should be carried out on
the same basis as during the rest of the conversion throughout the day on
April 6.
Turning to the question whether present holdings of restricted
bonds of 67-72, and those acquired today and tomorrow, should be converted,
it was suggested and agreed that the remaining amount held at the close
of operations April 6 should be converted to the 2-3/4- per cent nonmarketable
bonds before the books were closed at midnight on that day.
Mr. Martin then raised the question of the direction to be given
to the New York Bank for effecting transactions beginning April 9.
During the ensuing discussion, it was suggested that it was important that there should be a period of relative stability in the market
for at least two weeks preceding the Treasury refunding in the first half
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of June, which would mean that, in carrying out the direction from the
full Committee and in accordance with the understanding that after the
close of the conversion period open market operations would be conducted
with a view to maintaining an orderly market, there would be a period from
about April 9 to about May 10 in which to let the market develop its own
pattern. Mr. Rouse expressed the view that, while operations during that
period would have to be "played by ear", he assumed that the supply of
securities offered for sale would be greater than the demand with the result that prices would decline.
He felt that it would be preferable to
permit such a decline to take place fairly rapidly, but that he would
place orders in such a way that the System account would have the initiative even though it was not operating with any particular price as a goal.
With respect to the level to which the longest-term restricted bonds might
go, Mr. Rouse said that he felt that they might decline to somewhere in
the range of 96—97-3/4-, and that he would contemplate placing orders depending on the volume of offerings but would not expect to buy any of the
67-72's above 98-7/8.
Mr. Gidney expressed the view that it would be desirable to put a
little "starch" in the market so that the decline, if it developed, would
take place slowly and not arouse fears of drastic decline since it would be
his expectation that any substantial, rapid drop in prices would start the
smaller banks and others to wondering whether securities were going to 82
as they had in the early Twenties.
Mr. Williams felt that it would be preferable to have a rapid adjustment to whatever level the mai-ket was going to stabilize at, expressing
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the view that a decline to the level suggested by Mr. Rouse would result
in a good deal of buying for investment accounts.
Mr. Szymcsak said that it could not be determined in advance just
how the market was going to act and that it would be necessary for the
New York Bank to operate within the terms of the instruction to maintain an
orderly market, keeping in touch with the members of the committee by
telephone if necessary.
Mr. Martin then made a statement substantially as follows:
I think we were very successful in the initial stages of
this recent operation. I am not sure that we were quite right
with the 99— 99-1/4- level for the 2-1/2 per cent 67-72's during
the conversion period. They quickly got us down to the point
where they established our firm bottom. That is what we were
trying to get away from and that is what I am concerned about
now. We do not want to let it get established that 96 or 97 or
any other figure is the bottom. We ought to have some point in
mind that sets a reasonable range, but if the price went to
97-1/2, we might want to move up to 97-3/4- aggressively and then
let it go back down to 97-1/4. We should be in the market
actively rather than passively. I think that if we feel that
these levels are approximately reasonable levels, we ought not
be afraid to buy aggessively even if we have to even up our
holdings by reselling. I realize that you can not do the same
thing with bonds that might be done with stocks, but you have
to be aggressive in the operation and you have to get away from
a pin-point peg. I think we must disregard to a certain extent
logic in this situation. We have $152 billion of marketable
Government securities outstanding. We have had a change in
psychology and there has been a lot of hysteria. We want to be
on guard against the possibility of any kind of panic or development which would create a certain amount of unnecessary disturbance. We are making a change that is substantial. The patient
has suffered quite a shock and we do not want it to get worse.
I think you build confidence slowly and, as Mr. Rouse points out,
you have only about five weeks to get ready for the refunding in
June. That is why I feel the System must be in there aggressively helping to make the market.
Mr. Rouse stated that it was his understanding of the existing instruction to the New York Bank that, upon conclusion of the conversion
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offaring, operations in the System account would revert to an orderly
market basis, and that the executive committee agreed that the conclusion
of the conversion would be at the close on Friday, April 6. There was
unanimous agreement with this understanding, and at the conclusion of a
further discussion, it was agreed that, beginning on Monday, April 9> 1951,
the New York Bank would be guided by the existing instruction of the executive committee to maintain an orderly market, it being understood, however,
that the Bank would "play by ear" having in mind that prices would be permitted to decline but that, depending on the pressures that might develop
in the market, it might be necessary to be an aggressive rather than a
passive factor in the market.
Upon motion duly made and seconded, and
by unanimous vote, the action of the members
of the committee on March 29 > 1951> increasing
from $500 million to $1,250 million the
limitation contained in the first paragraph
of the direction issued to the Federal Reserve
Bank of New York on March 8, 1951? authorizing
transactions for the System open market account
was approved, ratified, and confirmed.
In response to a question concerning the limitation in the direction to be issued to the New York Bank, Mr. Rouse suggested that, in view
of the volume of transactions that might develop during the period immediately following the close of the conversion, the limitation in the first
paragraph be increased to $1,750 million.
Thereupon, upon motion duly made and
seconded, the executive committee voted
unanimously to direct the Federal Reserve
Bank of New York, until otherwise directed
by the executive committee:
(1) To make such purchases, sales, or exchanges (including replacement of maturing securities and allowing maturities
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to run off without replacement) for the System account, either
in the open market or directly from, to, or 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 to exercising restraint upon inflationary
developments, to maintaining orderly conditions in the Government security market, to relating the supply of funds in the
market to the needs of commerce and business, and to the
practical administration of the account; provided that the
total amount of securities in the account at the close of March
8, 1951, shall not be increased or decreased by more than
$1,750 million exclusive of special short-term certificates of
indebtedness purchased for the temporary accommodation of the
Treasury pursuant to paragraph (2) of this direction;
(2) To purchase direct from the Treasury for the System
open market account such amounts of special short-term certificates of indebtedness as may be necessary from time to time
for the temporary accommodation of the Treasury; provided that
the total amount of such certificates held in the account at
any one time shall not exceed $750 million.
In taking this action it was understood that the limitations contained in
the direction include commitments for
purchases and sales of securities for the
System account.
Mr. Szymczak referred to an amended motion which he prepared for
consideration by the executive committee, copies of which had been sent to
each member of the committee on April 2, 1951? in which he recommended that
the whole subject of qualified and. unqualified dealers in Government securities be studied by a committee of three members of the executive committee.
He stated that he contemplated that such a study would differ from the report which the full Committee, at its meeting on March 3, requested that
the executive committee arrange for, and that perhaps the study he suggested
should come as a result of a request by the full Committee. He went on to
suggest that, since the matter was not urgent, it be referred to Mr. Martin
with the understanding that he would look into it and, if he felt it
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-9desirable to do so, he might ask some of the members of the executive committee to make an informal study with a view to determining what if any
recommendation should be made to the full Committee. No objection to this
procedure was indicated.
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Federal Reserve Bank of St. Louis
Thereupon the meeting adjourned.
Assistant Secretary.
BOARD OF GOVERNORS
or THE
FEDERAL RESERVE SYSTEM
Office Correspondence
TO
nhairman Martin
From
Mr> Sherman
pate November i, 1951
Subject:
CONFIDENTIAL
Attached hereto are copies of the revised drafts of
the minutes of the meetings of the Federal Open iiarket Committee
and its executive committee held in tfeshington on October U>
195>1> together with a memorandum showing changes in the preliminary drafts. These minutes will be presented for approval
at the next meetings of the committees.
Attachments
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Federal Reserve Bank of St. Louis
Memorandum of proposed changes in the preliminary drafts of the minutes
of the meetings of the Federal Open Market Committee and its
executive committee on October 4» 1951*
(Deletions are shown ty cancelled type and additions by capital letters)
Full Committee, October 4., 1951
Page 6, first full sentence:
Mr. Thomas also commented upon alternative methods of issuing
such securities, stating that some individuals felt they should
be issued at eaee ONE TIME while others preferred a series of issues coming out over a period of several weeks.
Page 7, third paragraph, first sentence;
In a discussion of open market policy, Mr. Powell expressed the
view that the money market, in a variety of ways, was stating
the case that interest rates had definitely risen and if the
Treasury was going to £iHaaee wi^heu'fe geing in%e %he banks SPREAD
ITS REFUNDINGS OVER A TERM OF YEARS IN ORDER TO REDUCE THE SIZE
OF THE ANNUAL ROLL-OVER OF DEBT, it would have to pay the higher
rates that others were willing to pay.
Executive Committee, October 4., 1951
Page 3, last paragraph, first sentence:
There followed a discussion of the recommendations which the committee might make to the Treasury with respect to new money financing
during the next two or three months, during which Mr. Sproul emphasized that he was concerned that Treasury borrowing be gotten
out of the way as promptly as possible in order that the Open Market
Committee might be more free to pursue a e^edit peiiey wkiek it £ei£
was <lesi3?ateie WHATEVER CREDIT POLICY MIGHT BE APPROPRIATE IN THE
LIGHT OF SUBSEQUENT DEVELOPMENTS.
Page A« second and third sentences:
In discussing this question, however, it was the consensus that it
would be desirable from the standpoint of the System's open market
operations to have the entire yefiaaneiHg issue FINANCING PLANS
announced at one time and to have that done as promptly as possible.
It was also suggested that suefe as issue eenld A CONSIDERABLE PART OF
A $1,500,000,000 ISSUE OF TAX ANTICIPATION BILLS V:OULD, IF PAYMENT BY
TAX AND LOAN ACCOUNT WERE ALLOWED, be purchased initially by banks
whe WHICH would make a secondary distribution, perhaps at a small loss,
to corporations who might wish to secure the bills for use in meeting
tax liabilities next spring.
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Federal Reserve Bank of St. Louis
REVISED DRAFT
CONFIDENTIAL
A meeting or the Federal Open Market Committee was held in the
offices of the Board of Governors of the Federal Reserve System in
Washington on Thursday, October 4, 1951* at 10:05 a.m.
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PRESENT: Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Sproul, Vice Chairman
Gidney
Gilbert
Leedy
Norton
Powell
Szymczak
A. H. Williams
Mr. Carpenter, Secretary
Mr. Sherman, Assistant Secretary
Mr. Thomas, Economist
Messrs. Bopp, Irons, Thompson, Tow, and
John H. Williams, Associate Economists
Mr. Rouse, Manager, System Open Market Account
j.'4'r. Thurston, Assistant bo the Board of Governors
Mr. Riefler, Assistant to the Chairman, Board of
Governors
Mr. Ralph A. Young, Director, Division of Research
and Statistics, Board of Governors
Mr. Solomon, Assistant General Counsel, Board of
Governors
Mr. Youngdahl, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Ralph F. Leach, Economist, Division of Research
and Statistics, Board of Governors
Mr. Arthur Willis, Special Assistant, Securities
.Department, Federal Reserve Bank of New York
Messrs. Hugh Leach, C. S. Young, Bryan, and Earhart,
alternate members of the Federal Open Market
Committee
Messrs. Erickson, Johns, and Peyton, Presidents of
the Federal Reserve Banks of Boston, St. Louis,
and Minneapolis, respectively.
Mr. Townsend, Solicitor, Board of Governors
Mr. J. Marvin Peterson, Director of Research,
Federal Reserve Bank of Minneapolis
10/4/51
-2Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
May 17, 1951> were approved.
Upon motion duly made and seconded, and
by unanimous vote, the actions of the executive committee of the Federal Open Market Committee L:S set forth in the minutes of the
meetings of the executive coramittee held on
May 7, Hay 17, June 27, August 8, and August
27, 1951* were approved, ratified, and confirmed.
Before this meeting there had been sent to the members of the
Committee a report of open market operations prepared at the Federal Reserve Bank of .New York covering the period way 17 to September 27, 1951,
inclusive. Mr. Rouse commented briefly on this report and on a supplementary report covering commitments executed September 23 to October 3>
1951* inclusive, copies of which also were distributed to the members of
the Committee. Copies of both reports have been placed in the files of
the Federal Open Market Committee.
Upon motion duly made and seconded, and
by unanimous vote, the transactions in the
System account for the period May 17 to October
3t 1951> inclusive, were approved, ratified, and
confirmed.
Members of the staff of the Division of Research and Statistics
of the Board of Governors then presented a report, illustrated by charts,
covering the economic situation. Following this report, Mr. Thomas made
a statement on the implications for credit policy in the current economic
outlook in which he said that during the first four months of the new
Federal Reserve policy developments indicated that either the policy was
effective in restraining further credit inflation or that the abatement
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of inflationary pressures for other reasons was so great as not to subject
the monetary policy to a rigorous test. Mr, Thomas went on to say that
there was evidence that credit restraints played sorae part in curbing
inflation, especially in the mortgage market, and that it was likely that
had the change in policy not occurred investment institutions would have
continued to sell bonds to the Federal Reserve with the result that reserves thus created would have moved into the banks and inducement for
credit restraint would have been weakened. Mr. Thomas also said that in
this period the money market functioned on its own, that there was little
or no increase in total Reserve Ban}: credit, total bank loans and investments, or total deposits, although the private money supply expanded somewhat because of a reduction in Treasury balances. Vithin the past three
weeks, Mr. Thomas said, the picture had changed drastically and the System
had found it necessary to add nearly a billion dollars to its portfolio,
reflecting temporary factors such as tax payments, the desire of the banks
to avoid borrowing on a statement date, and a. lack of enthusiasm for the
new Treasury refunding issues. The increase also reflected seasonal
loan and currency demands, which would continue during the rest of this
year, and the imminence of new cash borrowing by the Treasury, as well as
prospective large corporate issues. Mr. Thomas felt that Federal Reserve
Open Market purchases at this time, rather than forcing reliance on
borrowing by banks to meet reserve needs and permitting interest rates to
rise, could be justified on the grounds that some of the demands were of
a temporary nature and that strong inflationary tendencies were absent
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at this time.
As for the immediate future, Mr. Thomas said that the large
volume of excess reserves now outstanding (about $1 billion) and the
low level of borrowing at the Reserve Banks (less than $70 million),
together with a seasonal expansion in Reserve Bank float, should make
it possible that -.11 reserve needs could be met during the remainder of
1951 without any further purchases of securities by the System unless
purchases were needed to assure success of new financing offers by the
Treasury,
Mr. Thomas felt that the large increase in the private money
supply that had already occurred and that would continue, together with
growing defense expenditures, might result in a resumption of inflationary
pressures; if this occurred, the System might wish to adopt more positive
measures of restraint. The most promising approach for dealing with the
situation would be for the Treasury to offer securities of a type that
would compete with other demands and attract the available nonbank funds.
Such measures would be even more essential the latter part of 1952 when
Treasury borrowing needs probably would be tremendous, and unless those
needed funds could be obtained outside the banking system, Mr. Thomas felt
further sharp growth in the money supply would result and would present a
continuing strong inflationary threat.
There followed a brief discussion of the reports given by members
of the Research Staff and Mr. Thomas, at the close of whidh Mr. Townsend
withdrew from the meeting.
Chairman Martin then referred to a memorandum prepared in the
Board's offices under date of October 3? 1951* on "Treasury Cash Requirements
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and Financing, October-December 1951" and to new financing alternatives
presented in that memorandum, copies of which were distributed among the
members of the Committee prior to this meeting and a copy of which has
been placed in the Federal Open Market Committee files.
In response to a request from Chairman Martin, Mr. Rouse made a
statement concerning prospective Treasury financing needs during the next
few months in which he said that the bill market was congested arid was not
in a condition to take additional weekly offerings of regular bills, that
there was no outside deraand for long-term Government securities at the
present price level, and that the source of nonbank funds appeared to lie in
the tax liabilities of corporations. He felt, therefore, that the Treasury
might avail itself of the situation in the short-term money market and sell
securities which would be purchased ultimately by corporations for use in
paying tax liabilities in the spring of 1952, when the Treasury could
repay such borrowings.
Chairman Martin then called upon Mr. Thomas who summarized informal
discussions that members of the staff had had with representatives of the
Treasury staff. Mr. Thomas said that, while the discussions were exploratory, it was generally agreed that around £2.5 billion would have to be
raised by the Treasury to cover the deficit and attrition in refunding of
market issues this fall, that there was rather general agreement this could
not be raised by long-term issues, and that most of the funds available
were funds held by corporations in anticipation of tax payments they would
have to make during 1952. One of the proposals under consideration, Mr.
Thomas said, was the offering of tax-date bills maturing about March 15
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and June 15, 1952; such bills might mature within a few days cfter these
tax payment dates but vould be acceptable in payment of taxes on March 15
end June 15. Mi. Thomas also commented upon alternative methods of issuing
such securities, stating that some individuals felt they should be issued
£*t one time while others preferred a series of issues coming out ever a
period of several weeks.
There followed a discussion of the suggestions made in the staff
memorandum dated October 3, 1951, £.nd of the comments of .-lessis. Rouse and
Thomas, including discussion of the teras on which the tax anticipation
bills might be issued, at the conclusion of which Chairman Martin suggested
that the executive committee be authorised to submit recommendations to
the Treasury concerning both refunding ;:.nd new financing needs, in the
li£ht of the discussion at this meeting.
This suggestion was approved
unanimously.
Chairman Martin also referred to a report prepared by the System
Research Committee on Government Finance under date of September £8, 1951,
en "How the Defense Bond Program Can Be Strengthened", copies of vhich had
been sent to the members of the Committee before this meeting. He suggested
that the report be reviewed by the executive committee with a view to
having thet committee submit a recom lend&.tion to the fuj.1 Committee, he also
suggested that rir. Norton be ayjted to serve with the members of the executive
committee in making this review of the savings bond program in view of his
interest in end tentative suggestions concerning a more effective program
for merchandising bonds.
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Federal Reserve Bank of St. Louis
10A/51
-7In connection with a discussion of the time for a meeting of the
Federal Open Market Committee at which consideration might be given to
matters which should be taken up with the Secretary of the Treasury before
the end of this year, including the savings bond program, Chairman Martin
suggested that there be a meeting of the full Committee at which Federal
Reserve Bank Presidents who were not now members of the Committee would
also be present sometime during November 1951.
He added that he had dis-
cussed the question of possible changes in the savings bond program with
Secretary of the Treasury Snyder and that he was under the impression that
any recommendations which the Committee might wish to make should be submitted by the latter part of November.
Following a discussion, it was agreed
unanimously that a study of the savings bond
program should proceed as suggested by Chairman Martin, and that the next meeting of the
Federal Open Market Committee, et which the
Presidents of the Federal Reserve Banks who
were not now members of the Committee would
also be present, would be held on Wednesday,
November 14-, 1951.
In a discussion of open market policy, Mr. Powell expressed the
view that the money market, in a variety of ways, was stating the case
that interest rates had definitely risen and if the Treasury was going
to spread its refundings over a term of years in order to reduce the
size of the annual roll-over of debt, it would have to pay the higher
rates that others were willing to pay. Mr. Powell went on to say that
this was the inevitable result of inflationary pressures and the System's
attempt to control them with money market instruments, and, after commenting on the factors evidencing upward pressure on the level of rates, he suggested that consideration be given to the question whether it would not be
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necessary to permit interest rates on Treasury borrowings to rise, if
Treasury financing was to be fitted into a situation in which the Open
Market Committee continued to exert pressure against inflation through
the use of open market instruments.
Chairman Martin stated that Mr. Powell had raised a very pertinent
question, that there was a real problem of how effective the System couldbe in a period of deficit financing in attempting to restrain inflation
through open market instruments.
After comments by several Reserve Bank Presidents concerning the
attractiveness of long-term Treasury securities to the average saver at
existing rates, Chairman Martin called upon Mr. John H. Williams who
stated that he shared Mr. Powell's views, that he felt the only way in which
the System could overcome inflation was through raising interest rates and
thus providing a means by which the Treasury could compete for savings. He
felt that this was the way to exert monetary pressure, that it looked as
though the country was getting to the end of the road as far as tax
increases were concerned except perhaps for a. general sales tax, and that
the country was confronted with such questions as whether the military program was too large, whether it should be stretched out over a longer period
of time than was now contemplated, whether it should be financed through
use of savings of the country, or whether it would have to be financed by
resorting to bank credit.
Mr. Bopp stated that he did not feel the question was one of a
deliberate raising of interest rates so much as one of letting the demand
for funds force rates up, rather than taking action to prevent a rise.
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Federal Reserve Bank of St. Louis
10A/51
-9Mr. Thompson agreed with the comment made by Mr. Bopp, adding
that he felt it vas unfortunate that the System was too often identified
with the proposition of raising interest rates whereas the proposition
was basically one of restricting the supply of funds so that those who
wanted credit would have to compete for it, which might mean an increase
in rates,
Mr. Tow said that any increase in interest rates should be a result of monetary policy rather than a deliberate raising of rates, that
the question whether to permit rates to rise was one that would have to be
faced in terms of all factors in the situation at a given time, and that
it was not particularly significant whether such a change was permitted to
occur just after a savings bond sales campaign or at some other time.
Mr. Irons said that the System should not prevent rates from
rising if the forces in the market tended to bring about e.n increase. He
expressed doubt that the present rates, certainly those paid on savings
bonds, were sufficient to attract savings into Government securities, and
he felt that the .System should be affirmative to the extent that it should
not prevent rates from rising.
Mr. Peterson felt that it would be a mistake to concentrate on
the savings bond rate as such and leave longer-term securities out of
consideration.
Mr. Bryan stated that he would like to associate himself strongly
with the general line of thought initiated by Mr. Powell and that he did
not disagree with most of the coiuments made subsequently. He added that
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it seemed to him that in a considerable part of the postwar world, central
banks had proceeded on an impression that there would be a savings surplus,
whereas, in fact, we had come into a situation where there was a savings
deficit. He commented that he did not see any way by which it was going to
be possible to avoid further inflation unless, in consort with the Treasury, the central banking system could reach a full recognition of the circumstances in the market and permit an adjustment in the level of rates that
would meet the demand. Of the various choices available, Mr. Biyan felt
that the best was to face the rate question over a longer term since this
was the basic problem, rather than the technicalities as to how short-term
financing should be accomplished.
There was a further discussion at the conclusion of which Chairman Martin stated that the problem was one of finding out how to attract
new money into Government securities in the period ahead.
Chairman Martin then referred to the authority given to all
Federal Reserve Banks on March 1, 1950, which was modified on February
8, 1951 > and renewed on March 8, 1951 > with respect to repurchase agreements
covering short-term Treasury obligations with nonbank dealers in United
States Government securities qualified to transact business with the System
open market account. He stated that question had been raised as to whether
the present authority which gave additional leeway to the New York Bank
for executing repurchase agreements should be extended to all Federal
Reserve Banks.
In the discussion that followed, it was stated that the present
authority included the requirement that the rate on such agreements be at
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least 1/8 per cent above the average issuing rate on the most recent issue
of United States Treasury bills, except that the Federal Reserve Bank of
New York was authorized by the actions of February 8 and March 3, 1951*
to enter into such agreements at a differential of less than 1/8 per cent
above the average issuing rate on United States Treasury bills. The view
was expressed that while this authority would continue to be used
primarily if not exclusively "by the Federal Reserve Bank of New York, it
should be granted to each of the Federal Reserve Banks so that it could
be used in the interest of orderly conditions in the Government securities
market, and that Federal Reserve Banks other than New York should have
the authority in case of an emergency necessitating the transfer of the
execution of open market operations to another Federal Reserve Bank.
Following a discussion, upon motion
duly made and seconded, it was voted unanimously to authorise each Federal Reserve
Bank, in lieu of all similar previous
authorizations, to enter into repurchase
agreements with nonbank dealers in United
States Government securities who are qualified
to transact business with the System open
riarket account, under the following conditions:
1. Such agreements
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Federal Reserve Bank of St. Louis
a. Are at a rate which will be fixed in fractions of 1/3
per cent and which ordinarily will be not less than
the nearest fraction above the average issuing rate
on the most recent issue of 3-month Treasury bills
but which at times may be below the average issuing
rate on bills but not more than 1/8 per cent below;
(for example, when the issuing rate on Treasury bills
temporarily may have risen slightly above the existing
repurchase rate)|
b. Are for periods of not to exceed 15 calendar days;
10/4/51
-12c. Cover only short-term Government securities selling at
a. yield of not more than the issuing rate for 1-year
Treasury obligations; and
d. Are used with care and discrimination as a means of
providing the money market with sufficient Federal
Reserve funds as to avoid undue strain on a day-today basis.
2. Reports of such transactions are made to the Manager of the
System Open Market Account to be included in the weekly report of open market operations which is sent to the members
of the Federal Open Market Committee.
3.
In the event Government securities covered by any such agreement are not repurchased by the dealer pursuant to the agreement or a renewal thereof, the securities thus acquired by
the Federal Reserve Bank are sold in the market or transferred
to the System Open Market Account.
In taking this Action it was understood that £-. letter would be sent to all
Federal Reserve Banks advising them of
the above understanding.
Reference was made to the decision reached at the meeting of
the Committee on May 17, 1951^ with respect to conversion of 2-3/4- per
cent nonmarketable bonds held in the {System account into 5 year 1-1/2 per
cent marketable notes. Mr. Rouse stated that following out that action
it would now be appropriate for the System to convert v500 million of the
2-3/4- per cent bonds into the 1-1/2 per cent notes and that an additional
$500 million should be converted on a similar basis in April 1952 at which
time consideration would also be given to the program for conversion of the
remaining $700 million held in the System account. Mr. Rouse went on to
say that before carrying out the exchange of $500 million at this time, it
seemed desirable to raise the question whether the Committee wished to
make any change in the earlier understanding. He also said that so far
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as he was concerned in the management of the System account, it would not
matter whether the present understanding was carried out or whether the
conversion was made in some other manner.
Mr. Szymezak suggested that unless there was good reason for
changing the decision reached at the meeting on Hay 17, it would seem
desirable to proceed on the basis of that action.
This suggestion was approved
unanimously.
It was agreed that the executive committee should be authorised to determine, within the limits of the general direction to be
issued at this meeting by the full Committee to the executive committee,
the basis upon which transactions would be conducted for the System
account in bills and other short-term securities.
It was also agreed that
no change should be made in the existing understanding that operations
in longer-term securities should be conducted with a view to maintaining
orderly market conditions, in the light of the general direction to be
issued to the executive committee at this meeting.
Thereupon, upon motion duly made and
seconded, the following direction to the
executive committee was approved unanimously
with the understanding that the limitation
contained in the direction would include
commitments for the System open market
account:
The executive committee is directed, until otherwise directed by the Federal Open Market Committee, to arrange for such
transactions for the System open market account, either in the
open market or directly with the Treasury (including purchases,
sales, exchanges, replacement of maturing securities, and letting
maturities run off without replacement), as may be necessary, in
the light of current and prospective economic conditions and the
general credit situation of the country, with a view to exercising restraint upon inflationary developments, to maintaining
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orderly conditions in the Government security market, to relating
the supply of funds in the market to the needs of commerce and
business, and to the practical administration of the account;
provided that the aggregate amount of securities held in the
account at the close of this date other than special short-term
certificates of indebtedness purchased from time to time for the
temporary accommodation of the Treasury shall not be increased
or decreased by more than |2,000,000,000,
The executive committee is further directed, until otherwise
directed by the Federal Open Market Committee, to arrange for the
purchase for the System open market account direct from the Treasury of such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary
accommodation of the Treasury; provided that the total amount of
such certificates held in the account at any one time shall not
exceed $1,000,000,000.
The Secretary stated that he had been advised that the examiners
of the Board of Governors of the Federal Reserve System, in connection
with the regular examination of the Federal Reserve Bank of New York, had
completed an audit of the System open market account and that they had
no objections to raise to the handling of the account.
He added that the
customary report of the audit would be distributed among the members of
the Committee in the usual manner.
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Federal Reserve Bank of St. Louis
Thereupon the meeting adjourned.
Secretary.
REVISED DRAFT
CONFIDENTIAL
A meeting of the executive committee of the Federal Open
Market Committee was held in the offices of the Board of Governors of
the Federal Reserve System in Washington on Thursday, October 4, 1951,
at 12:20 p.m.
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Federal Reserve Bank of St. Louis
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Sproul, Vice Chairman
Szymczak
A. H. "Williams
Powell, Alternate Member
Mr. Norton, Member, Federal Open Market Committee
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Carpenter, Secretary
Sherman, Assistant Secretary
Thoma s, EC onomi s t
Rouse, Manager, System Open Market Account
Thurston, Assistant to the Board
of Governors
Riefler, Assistant to the Chairman, Board
of Governors
Young, Director, Division of Research and
Statistics, Board of Governors
Solomon, Assistant General Counsel, Board
of Governors
Youngdahl, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Ralph F. Leach, Economist, Division of
Research and Statistics, Board of Governors
Willis, Special Assistant, Securities Department, Federal Reserve Bank of New York
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the executive committee held on August 27,
1951, were approved.
Upon motion duly mp.de and seconded, and
by unanimous vote, the transactions in the
System open market account, as reported to the
members of the committee for the period
September 25 to October 3, 1951, inclusive,
were approved, ratified, and confirmed.
10/4/51
-2Thereupon, upon motion duly made and
seconded, the executive committee voted unanimously to direct the Federal Reserve Bank of
New York until otherwise directed by the
executive 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 account, either in the
open market or directly from, to, or 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
to exercising restraint upon inflationary developments, to maintaining orderly conditions in the Government security market, to
relating the supply of funds in the market to the needs of commerce
and business, and to the practical administration of the account;
provided that the total amount of securities in the account at
the close of this date shall not be increased or decreased by
more than $1 billion exclusive of special short-term certificates
of indebtedness purchased for the temporary accommodation of the
Treasury pursuant to paragraph (2) cf this direction}
(2) To purchase direct from the Treasury for the System
open market account such amounts of special short-term certificates
of indebtedness as may be necessary from time to time for the
temporary accommodation of the Treasury; provided that the total
amount of such certificates held in the account at any one time
shall not exceed $750 million.
In taking this action it was understood
that the limitations contained in the direction
include commitments for purchases and sales of
securities for the System account.
Question was then raised as to the instructions to be issued
to the Federal Reserve Bank of New York in connection with short-term
interest rates, Mr. Rouse referred to the understanding at the meeting
of the committee on September 25 that, pending completion of the refunding
of the October 15 and November 1 Treasury notes, the bill rate should not
be permitted to increase to a point where it would affect adversely the
1-7/8 per cent- rate on the outstanding April 1 and July 1, 1952, issues
of Treasury certificates.
He stated that the bill rate was maintained
at 1.65 or less during this period so that it would not impinge on the
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refunding, that the refunding would be completed today, and that the
committee might nov wish to consider the situation that had been discussed
at the meeting of the full Committee this morning, that is, whether to
permit interest rates to rise in response to the pressures that were
resulting from earlier actions taken to restrict the supply of reserve
funds.
In response to a question from Chairman Martin as to how high
the rates might go, Mr. Rouse stated that on the assumption that there
would be very little additional need for reserve funds to be supplied by
the Federal Reserve System in the immediate future, short-term rates
should not increase greatly above the present level, which was 1.65 per
cent on bills. He felt that the prime rate on commercial loans might
increase to 2-3/4 per cent or even to 3 per cent.
Chairman Martin stated that he did not like the idea of a
pegged bill rate, that the present rates had a necessar;/ correlation with
the Treasury refinancing operation, and that with the end of the present
refinancing operation he felt the System should revert to a period of
watchful activity and not continue to peg the bill rate. There was general
agreement with this position.
There followed a discussion of the recommendations which the
committee might make to the Treasury with respect to new money financing during the next two or three months, during which Mr. Sproul
emphasized that he was concerned that Treasury borrowing be gotten out
of the way as promptly as possible in order that the Open Market Committee might be more free to pursue whatever credit policy might be appropriate in the light of subsecuent developments. For this reason, he felt
that new money should be obtained promptly by the Treasury in the amount
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of approximately $1,500,000,000 through an issue of tax anticipation bills
to mature in March 1952, and to be acceptable in payment of income taxes
on March 15, 1952. In this connection, it was stated that there was some
indication that members of the Treasury staff felt it would be preferable
to issue a series of tax anticipation bills, perhaps at the rate of
$500 million weekly.
In discussing this question, however, it was the
consensus that it would be desirable from the standpoint of the System's
open market operations to have the entire financing plans announced at one
time and to have that done as promptly as possible. It was also suggested
that a considerable part of a |1,500,000,000 issue of tax anticipation
bills would, if payment by tax and loan account were allowed, be purchased
initially by banks which would make a secondary distribution, perhaps at
a small loss, to corporations who might wish to secure the bills for use
in meeting tax liabilities next spring.
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Federal Reserve Bank of St. Louis
At the conclusion of the discussion, Mr.
Sproul moved that the committee recommend to
the Treasury that it offer at this time an
issue of tax anticipation bills in the amount
of approximately $1,500,000,000, such bills to
mature in March 1952 and to be acceptable in
payment of income taxes on March 15, 1952.
Mr. Sproul's motion was approved unanimously, with the understanding that a letter
for Chairman Martin's signature would be prepared in the light of the discussions at this
meeting and at the meeting of the full Committee earlier today transmitting the
recommendation and the reasons therefor to the
Secretary of the Treasury.
Secretary's note: In accordance with the foregoing action, a letter and accompanying
memorandum were sent to Secretary of the Treasury Sriyder under date of October 5, 1951, reading as follows:
10A/51
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" After a discussion of the economic outlook and of credit
policies by the Federal Open Market Committee in a meeting with
other Reserve Bank Presidents not now represented on the Committee, the Executive Committee gave consideration to recommendations that it might make to the Treasury with respect to newmoney financing during the next two or three months.
"Of various alternative neans considered, the Executive Committee believes that the best means of obtaining the new funds
needed in this period would be through offering for bids on a
discount basis two issues of Treasury bills to mature within the
week after March 15 and June 15, 1952, respectively. The bills
would, be accepted at face value in payment of taxes on the respective tax-due dates. They could be bid for by banks for their own
account or for customers and be paid for by credits to Treasury
tax and loan accounts.
"We would suggest that the first issue of the bills be
offered in an amount of about 1.5 billion dollars, be dated around
October 22, and mature in March. The second issue in an amount to
be based upon needs as they appear at the time could be offered
in the latter part of November. Further discussion with respect to
these recommendations is given in the attached memorandum.
"During the past three weeks, in supporting the recent Treasury refunding operations at a time of other heavy demands on the
money market of a largely temporary or seasonal nature, the Federal Reserve has had. to purchase about 1 billion dollars of shortterm Government securities. These transactions, we believe, have
supplied more reserve funds than may be required to meet reasonable credit needs in coming weeks. It will be difficult to absorb
the excess. We would hope, therefore, that you could complete
the first stage of your new-money financing as promptly as
"Discussion of New Treasury Financing Problem
by Executive Committee, F. 0. M. C., October /;, 1951
"Treasury requirements for new market financing during the
last quarter of 1951 will total between two and three billion
dollars. The prospective Treasury cash surplus during the firnt
quarter of 19^2 indicates that most or all of this new borrowing
could be repaid within the fiscal year ending June 30, 1952.
"For its immediate cash financing, the Treasury probably will
need to rely on short-term securities, as there seems little early
prospect of a substantial demand for longer-term issues at current
rates. One or two of the following new borrowing instruments may
be used:
"(1) Further increases in the regular weekly bill
offerings.
"(i) Tax-date bills maturing in March and June 1952 •
"(3) Tax-date certificates.
"(4.) Other certificates or notes.
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"Ths market for regular bills has been saturated, at least
temporarily, by the increases over the past several months. It
would probably not be desirable to use this source for new funds
for the next month or two. It is uncertain what the demand for a
short-term note would be, particularly among nonbank investors,
but it is unlikely that it is very broad at this time.
"Bills or certificates maturing in March arid June 1952 would
appear to offer the best possibilities of attracting a maximum of
nonbank money. Such securities should have maturity dates within
a few days after the actual tax payment dates and carry the provision that they could be turned in for payment of taxes on the
preceding tax date. Corporations could be expected to favor such
securities since bookkeeping practices allow them to show taxpayment securities as a reduction in liabilities rather than as
assets, a feature particularly important over the year-end statement period.
"With respect to tax-date certificates, it would be awkward
to name a coupon for 5-month to 8-month securities. With a bill,
no close prejudgment of the market (selling price) for the security
is involved with an issue sold, at auction. Actually, it is
likely that the Treasury would get a slightly better average rate
on a bill, since the highest rate accepted for bills would presumably be equal to or perhaps lower than the coupon that would be
needed to sell the same amount of securities.
"Competition for funds on the ^art of all borrowers is expected to increase in the months ahead. It is considered particularly desirable, therefore, that the Treasury make an early
cash offering in an amount which would cover at least half of its
borrowing needs in the remaining months of the calendar year. Such
an offering, possibly in the amount of 1-1/2 billion dollars,
might be announced on or shortly after October 15. The proposed
bill issue would be in the form of a single maturity falling due
shortly after the March 15 tax date, but receivable for taxes on
March 15 at par.
"A 5-nionth Treasury bill offered in the amount of 1-1/2
billion dollars would be well received by the market particularly
if payment could be made by the commercial banks through credit
to tax and loan accounts. This arrangement would encourage banks
to underwrite the issue in order to obtain the tax and loan deposits and, while initially some reliance will have to be placed
on bank credit, secondary distributions from bank to nonbank investors would proceed smoothly.
"A large and early offering would have positive advantages
over several smaller issues spaced out over time. With the latter,
there would be a tendency for investors either to defer purchases
or to bid at a high rate, feeling safe in the knowledge that other
offerings would follow.
"When the Treasury goes to the market for the first portion
of this borrowing, it would be desirable to give the investing
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"public some rough indication of the total borrowing expected
during the full period. If this were done, investors would be
able to appraise realistically the total market effect of such
borrowing rather than bidding hesitantly on a portion of the
total with the feeling that unlimited amounts of borrowing must
still be done. It should only be necessary to indicate some
range of total requirements; definite commitments as to dates and
types of borrowing need not be made."
It was agreed that the date for the next meeting would be subject
to call by the Chairman.
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Federal Reserve Bank of St. Louis
Thereupon the meeting adjourned.
Secretory.
REVISED DRAFT
CONFIDENTIAL
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, D. C., on Wednesday, January 31, 1951, at 10:00 a.m.
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Federal Reserve Bank of St. Louis
PRESENT: Mr.
Mr.
Mr.
Mr.
Mr.
Mr,
Mr.
Mr.
Mr.
Mr.
Mr.
McCabe, Chairman
Sproul, Vice Chairman
Eccles
Erickson
Evans
Norton
Peyton
Powell
Szymczak
Vardaman
C. S. Young
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr,
Mr.
Mr.
Carpenter, Secretary
Vest, General Counsel
Thomas, Economist
Rouse, Manager, System Open Market
Account
Thurston, Assistant to the Board of
Governors
Riefler, Assistant to the Chairman,
Board of Governors
Sherman, Assistant Secretary, Board
of Governors
R. A. Young, Director, Division of
Research and Statistics, Board of
Governors
Youngdahl, Chief, Government Finance
Section, Division of Research and
Statistics, Board of Governors
R. F. Leach, Economist, Division of
Research and Statistics, Board of
Governors
Arthur Willis, Special Assistant,
Securities Department, Federal
Reserve Bank of New York
Upon motion duly made and seconded, and by
unanimous vote, the minutes of the meeting of the
Federal Open Market Committee held on November 27,
1950, were approved.
1/31/51
-2Upon motion duly made and seconded, and by
unanimous vote, the actions 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 November 17 and
27 and December 27 were approved, ratified, and
confirmed.
Mr. Rouse presented and commented upon a report of open market
operations prepared at the Federal Reserve Bank of New York covering the
j.-r-riod from November ,'.7, 1950 to January 24, 1951» inclusive, and a supplementary report covering commitments executed from January 25 to January 30, 1951> inclusive. Copies of both reports have been placed in the
files of the Federal Open Market Committee.
In commenting on the reports, AT. House stated that late last
week the volume of offerings of the longest restricted 2-1/2 per cent
Treasury bonds increased and that demand for such bonds was not sufficient
to absorb the supply, with the result thet approximately £30 million of
bonds were purchased for the System account in accordance with the policy
approved at the meeting of the Committee on November *:7, 1950. In view
of the increase in selling, Mr. Rouse said, he conferred informally with
Chnina&n rlcCr.be and *ir. Sproul and it was felt that no change should be
made in the existing policy, i.e., that the longest-terra restricted bond
would not be allowed to decline beyond a point slightly above par, end
th^t an orderly market would be maintained. Mr. house went on to say
that early on tfondey afternoon of this week the price of the longest
lestricted bonds was allowed to decline 1/32 of a point to par and 21/32,
and the.t shortly he received a telephone call from Mr. Bartelt, Fiscal
Assistant Secretary of the Treasury, who stated he had talked with the
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Secretary of the Treasury about purchase of the longest bonds for trust
accounts of the Government, and asked Mr. Rouse's view about the Treasury
giving the New York bank as fiscal agent of the United States an order to
purchase such bonds at par arid 22/32. Mr. Rouse said he replied that in
the past such orders had always been given to the Bank for execution at
the market and that the market was par and 21/32, and that he would not
be Interested in having an order on any other basis. Subsequently, Mr.
Rouse said, Mr. Bartelt called him on the telephone again and read the
following telegram which was being sent to Mr. Sproul by the Secretary
of the Treasury:
"As fiscal agent of the United States, you are authorized
and requested to purchase for account of the Postal Savings
System not more than two hundred million dollars Treasury bonds
December 1967-72 at par and 22/32nds, plus commission, at such
times when open market purchases are not made at this price for
open market account."
Mr. Rouse added that yesterday purchases of the December 196772 Treasury bonds at par and 22/32, plus commission, pursuant to the wire
from the Secretary of the Treasury totalled $32,4.00,000 and that $500,000
June 67-72's were purchased for the System account at par and 21/32. He
also outlined the reasons for the recent increase in market rates on
bankers' acceptances.
Upon motion duly made and seconded, and by
unanimous vote, the transactions in the System
account for the period November 26, 1950 to
January 30, 1951, inclusive, were approved, ratified, and confirmed.
Chairman McCabe then called upon Mr. Sproul who made a statement substantially as follows:
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Federal Reserve Bank of St. Louis
1/31/51
Chairman i-icCabe and 1 met with the Secretary of the Treasury
on January 3> 1951* The Secretary had indicated that it wou3.d be
desirable for us to have frequent conversations end discussions
about debt inane. gement and credit policy in the light of the existing situation and we immediately sought this meeting. Mr. Bartelt,
Fiscal Assict&nt Secretary of the Treasury, was also present. Ue
mede it clear to the Secretary that there had been no meeting of
the Federal Open Market Committee since November 27, that we were,
therefore, talking with him as individuals, and that it was expected
we would have a full and free exchange of views so that we could,
at a subsequent meeting of the Federal Open Market Committee, discuss what coordinated policy of credit and debt management could be
developed. I had some notes which I had made beforehand and made
a statement to the Secretary based on those notes. I said there
is danger that:
1. Vie will try to pet mobilization anr rearmament wholly as a byproduct of a continuing peace-time business boom. This is the
tempting idea of increased ..'reduction, increased national incore, and increased Government revenues, which will take care
of our civilian end military needs without civilian sacrifice
and Government borrowing. It would relieve the pressure for
cuts in nondefense Government expenditures and for some reduction in civilian consumption. Resilience and expansive power
of our economy is great, but time is a controlling factor. The
economy Is already stretched and the necessary increases in
production can't be expected in 1951 even if work hours are
increased, the number of vorkers expanded, and normal productivity gains are obtained. An inflationary stimulus under such
circumstances would raise prices not production.
2. Reliance will come to be placed too largely on direct controls,
and stern resolves about fiscal and credit policy will be forgotten. Both kinds of controls nov appear to be needed, but
the exemption of agricultural prices and softness toward wage
increases, weaken direct controls, which will fail, in any case,
unless backed by strong fiscal and credit measures.
3. T-7e won't tax enough and in the right places (in order to cut
com consumer purchasing power not savings) and we won't have
the wisdom or the power to apply credit controls effectively.
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Federal Reserve Bank of St. Louis
Admittedly, too high taxes may dull incentive or may themselves become inflationary, through union pressure for higher
wages or corporate action to raise prices, or lowered managenent interest in cost control. It is not likely, however, that
the necessary tax increases to meet Government expenditures
during the calendar year 1951 will breach these points.
1/31/51
-5Admittedly, credit controls, by themselves, cannot wholly
check inflationary pressures when other strong forces are working to increase costs and prices, but we must do all we can to
hold down the money supply, arid that means we should use general
or quantitative controls which affect interest rates, as well as
selective controls. The next six months, while the Treasury
will be largely out of the market, offer the best chance to get
our house in order, through general credit measures. After that
the requirements of credit policy and Government financing needs
- refunding and new money - may be in conflict and financing
needs will take precedence.
4-.
Looking ahead to tremendous armamarit expenditures over a period
of years, and talking about plans and appropriations instead of
cash outlay, we may lose sight of the fact that the problem is
still of manageable proportions, as of the year 1951. If we
hit an annual rate of Government, spending for defense of $45
billion by the end of calendar 1951, the cash deficit on the
basis of present tax rates (omitting the just passed excess
profits tax) would still be only about $6 billion. It is too
early to dismiss pay-as-you-go as merely a pious proposal, and
to talk of tremendous deficit financing, and of a frozen pattern
of interest rates to hop up the Government security market.
It is in the light of these present dangers, arid in preparation for meeting the more difficult longer term problems of
financing full scale mobilization or war, that near term policy •
should be determined.
5.
If present inflationary advances in the credit sector continue,
as it appears they may during the next few months, further
action to restrict the availability of bank reserves would be
in order. Whether this is accomplished through open market
operations or further power (and use of that power) to increase
reserve requirements, or both, it must have some influence on
interest rates to be effective. This would impose a further
marginal tightening in the availability of credit, and it would
permit the Federal Reserve System to offer additional resistance to the unloading of shorter term securities on the Open
Market Account. In terms of longer range objectives, it would
also move us closer to a horizontal yield curve, which will
tend to "pin in" existing holders of Government securities and
prevent playing of the pattern of rates in the period of renewed
deficit financing which may lie further ahead.
6. The immediate problem of debt management is in the area of long
term rates, and includes the problem of maturing savings bonds
and the sale of new savings bonds.
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1/31/51
-6The lesson to be learned from the financing of the last
war is that long term financing at rates which won't hold up
in the market, without Federal Reserve support, is to be
avoided. This suggests a slightly higher rate than 2-1/2
per cent for long term financing. The attraction of a slightly
higher yield (almost regardless of maturity), particularly for
institutional investors facing actuarial income requirements,
could effect a significant diversion of new investment funds
into new Treasury issues. Such investors will not, of course,
neglect attractive alternative private investments, but the
competitive position of Treasury offerings would be greatly
improved, having in mind the desire of these investors to find
the safest lodgment for their funds consistent with their
actuarial requirements.
In a technical sense, also, the Treasury will face a problem unless it offers a higher long term rate. The fact that
present outstanding restricted issues running only 17 years to
call date, have to be heavily supported, suggests strongly that
no net sales of new securities of longer maturity, at the same
rate, would be possible. Nor would it be desirable, in terms
of orderly debt management to place any more new bonds within
this 17 year period.
In terms of immediate as well as longer term debt management, as well as credit policy, this suggests that if market
pressures continue the price of outstanding restricted bonds
of 1967-72 be allowed to decline to par, or only slightly above,
so that they may stand on their own feet as soon as possible,
so that forced injections of reserve credit into the banking
system may be stopped, and so that the ground will be prepared
for the long term financing which lies ahead. Never before has
the Treasury faced unknown new borrowing requirements in the
face of a very large outstanding debt. If it is to obtain new
money from long term investors rather than merely effect a
churning about in old holdings it must break away from old
patterns. The only way to reduce switching of outstanding
securities into new Treasury offerings will be through Treasury
action to set a higher long term rate, and through removing
the premium on the longest term outstanding restricted bonds.
In the long run debt management (as well as credit policy) must
be judged by the success of new offerings in attracting savings.
Mere switching out of old issues into new, with actual requirements being met, indirectly, by bank money carries an explosive
charge of inflationary pressure that could disrupt all other
Government efforts to control inflation.
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-7-
7. Savings bonds. vSince 1951 marks the beginning of substantial
maturities of savings bonds, methods of encouraging retention
and stimulating further sales will have to be worked out very
soon. Terms on this type of security, sold to the general
public, cannot practicably be changed except infrequently;
consequently changes worked out in 1951 should be designed to
meet requirements for some years ahead.
A System Committee lias been working on this problem for
some time, and has now been directed by the Federal Open Martcet
Committee to discuss its ideas with the Treasury staff. It is
hoped that out of these consultations will come recommendations
which the Committee can promptly submit to you. So far as
thinking has gone it suggests among other things that terms of
present E bonds be revamped, and that individuals be offered,
in automatic extension of existing holdings and for cash, a
bond which will return about 1/2 of 1 per cent more if held to
maturity.
In addition to improving the terms of savings bonds, it
seems to me only slightly less important to revitalize the savings bond sales organization, and to provide it with sufficient
appropriated funds to do an aggressive, all-out selling job.
Consumer incomes will continue to rise in excess of currently
available goods, we won't tax away the whole of the excess, and
we must attract some of this excess into savings or it will
express itself in higher prices, thus undermining the whole
savings bond program.
8. This is a program for the immediate future, which also looks
ahead to the time when large Government deficits may make necessary a fixed pattern of Government financing and some recourse
to the banking system to meet the Government's needs. At that
time we shall need to have at least three things:
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Federal Reserve Bank of St. Louis
(a) A method of bank financing which will cut down or
eliminate the leverage in the fractional reserve system; short
term rates then in effect need not be the rates applied to bank
borrowing, which may well have to be fixed, arbitrarily, at
some lower level.
(b) A long term bond which will attract new investment
funds (other than individual) and. which will take care of itself
in the market under ordinary conditions. It may be that some
form of compulsion will become necessary in this area, also,
to assure continued holding.
1/31/51
-8(c) A savings bond which will attract and hold individual
savings. The possibility of a refundable tax - or compulsory
saving - should be again explored.
In preparing for this longer term program we should continually keep in mind that it may (we hope) lack the stimulus
of actual war, and that it may be of indefinite duration. Ve
must avoid, in so far as possible, doing those things which
have been excused during past wars as the lesser of the evils
which temporarily we faced.
The Secretary listened very attentively to what we had to say,
but gave back to us no comparable outline of his thinking on debt
management or credit policy. I certainly left the meeting with the
clear understanding and expectation that this was the first of a
series of frequent consultations in which we would get his views
which we would be able to report back to this Committee, and then
present to him our thinking in the form of views of the Committee,
rather than as individual members of the Committee, and how those
views might be adapted to whatever debt management program might
be developed.
Chairman McCabe then made substantially the following statement:
Following that discussion we brought up the report prepared>
by the staff on the Series E savings bond program and asked the
Secretary how he would like to have that handled; whether he would
like to hr-ve the Federal Open Market Committee consider the matter
and make a recommendation, or to have the staff report as it was.
He suggested that we send the staff report to Mr. Bartelt and let
him discuss it with their staff, after which he would determine
whether he wanted a definite recommendation from us. In the course
of a few days the staff did send over the very comprehensive memorandum on the study of the Series E savings bond program. Mr.
Bartelt called and asked if he and Mr. Graham, Assistant Secretary
of the Treasury in charge of Savings Bonds, could come over and
talk with us. They came over on Tuesday, January 16, and Mr. Thomas,
Mr. Riefler, Mr. Young, Mr. Youngdahl, and I sat down to lunch with
them with the full expectation they would discuss all features of
the program. Mr. Graham spent most of the time at lunch trying to
sell us on how well the E Bond campaign was going over and the success they were meeting throughout the country. We commented generally on the E Bond campaign, and then Mr. Bartelt asked about the
advisability of having savings bonds made eligible as collateral
for loans. They told us their staff report was on the Secretary's
desk awaiting final approval from him. In that situation, there
was nothing to discuss since, so far as they were concerned, their
recommendations were on the Secretary's desk. That was on Tuesday,
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-9-
January 16. On Thursday, January 18, the Secretary made his speech
in New York to the Board of Trade in which he outlined the program
for acvings bonds. There certainly was not any constructive discussion of the program with us, since they told us early in the conversation at that luncheon meeting the sixteenth that their report was
on the Secretary's desk.
Previous to that meeting and to our talk with the Secretary on
January 3> I had received a communication from the President. This
was early in December - the President telephoned me at my home about
an article that had appeared in The New York Herald Tribune on December 1, 1950, which daid that there was "open speculation as to
whether the Federal Reserve is again undercutting the (Treasury)
.I'inencing," and that it was "obviously risking another huge shakeout of long holdings such as that which followed the Christmas
package of downward peg adjustments some years ago." That article
seemed to have upset the President very much. He mentioned the
fact that he hoped we would stick rigidly to the pegged rates on
the longest bonds. I to.ld him the dangers of that. Fortunately,
I had right at my fingertips information about the restricted bonds
that we had purchased and told him who the principal sellers of
those bonds were. I said. I could not understand why we would sit
there with such a high premium and allow the life insurance companies
to unload on us at such a handsome profit. Following that telephone
conversation, the President wrote me a note on December 4 and said
he was enclosing the article which he had called me about on the
telephone. This letter read aa follows:
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Federal Reserve Bank of St. Louis
"I am enclosing you the article to which I referred in my
telephone conversation with you Friday night.
"It seems to
one and that
fectly plain
York Bankers
me that this situation is a very dangerous
the Federal Reserve Board should make it perto the open market committee and to the New
that the peg is stabilized.
"I have succeeded in getting the Treasury to appreciate
the fact that we should have our obligations financed on
longer terms than has been the case generally but, if the
Federal Reserve Board is going to pull the rug from under
the Treasury on that, we certainly are faced with a most
serious situation, because we are going to have an immense
amount of Federal financing in the next six months.
"I hope the Board will realize its responsibilities and
not allow the bottom to drop from under our securities.
If that happens that is exactly what Mr. Stalin wants,"
1/31/51
-10-
I replied to the President in a personal and confidential
letter on December 9 as follows:
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Federal Reserve Bank of St. Louis
"As you can imagine, your telephone call a few days
ago and your subsequent letter of December 4 gave me
great concern because I was distressed that you should
have another problem added to the many critical ones
before you.
"The newspaper clipping to which you referred had
not been previously called to my attention. I would not
have considered it of special significance because it is
such a distortion of the facts. We suspect that it was
written by a man who we know makes a practice of baiting
the Federal Reserve and creating an appearance of controversy. You can rest assured, that we are fully conscious
of the magnitude of the financial problems that face us,
and that we will do all in our power to insure the successful financing of the Government's needs.
"You will recall that I mailed you a copy of my letter of October 30 to John Snyder in which I outlined the
policy to be pursued by the Open Market Committee in
accordance with the assurance which I previously gave to
you and John in your office on October 26.
"Ve heartily subscribed to the Treasury's latest
refunding announcement and I assured John Snyder that the
Open Market Committee would do everything possible to
make it a success. I told him that we might have to pur-chase between 2 billion and A billion dollars of the new
issue before the refunding was completed, but that we
were prepared to do it. I told him further that we would
make every attempt to sell an equivalent amount of other
securities in our portfolio in order to try to offset
purchases. Excess of purchases over sales would tend to
increase bank, reserves. The creation of additional bank
reserves in a period like this only adds more fuel to the
fire of inflation. We have conducted our operations in
strict accord with the policy which I outlined to you and
John.
"Actually we have purchased more than 2.5 billion
dollars of the maturing issue in support of the Treasury
refinancing. In addition, we have continued to buy longterm 2-1/2 per cent restricted bonds in the narrow range
of from 23/32 to 26/32 above par. Since November 22 we
have made a net increase in our portfolio of well over
1/31/51
-11'bne billion dollars. We hope to sell enough Government
securities in the coming weeks to offset the effects these
purchases have had on bank reserves.
"You CL.n see from these figures that we have faithfully followed the policy as outlined to you.
"It is our view that moderate fluctuations in price
in response to market forces serve a useful purpose and
help to maintain public confidence. Our feeling is that
too rigidly pegged prices of securities encourage greater
selling by investors. Our experiences over the past
several months, in which we have had both rigid pegs for
an extended period and slight fluctuations on the longterm restricted bonds, have convinced us that a moderate
degree of flexibility is preferable. Since the end of
November, covering the period when the subscription books
to the new Treasury refunding issue were open, we have
maintained a fixed buying price for the long-term
restricted bonds.
"I would prefer not to take up with the Open Market
Committee the question of notifying the New York bankers
of a. fixed peg until I have had an opportunity fully to
discuss with you the possible adverse consequences of
su;;h an action.
"I expect to be in Birmingham, Alabama, and Chicago
until December 15. I will be pleased to see you either
on Friday, the 15th, or Monday, the 13th, if either of
those dates is convenient to you. I can assure you that
in the meantime our operations will be directed toward
maintaining stability in the market."
I told the President I was leaving to be away for several
days but would like to come over and see him the next week, and
I did see him on December 18. I took over to him the complete
day-to-day record of our performance — what had happened to
the volume of transactions during that period when the peg was
held rigid and what had happened during the period when prices
had dropped one or two thirty-seconds. There was nothing in
the figures to indicate that we purchased more bonds when the
price dropped than when the peg was rigidly maintained. I
went over this in great detail with him and I got the feeling
that he had confidence in what we were doing.
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-12-
Then on Wednesday, January 17, 1951 > I met at the White
House with the President and the Secretary of the Treasury,
at the President's request of the day before, and when I
returned to the office I dictated the following memorandum of
our conversation:
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Federal Reserve Bank of St. Louis
"On Wednesday, January 17, 1951, the President asked
me to meet with John Snyder in his office at 10:4-5 a.m.
The President opened the conference by saying that he was
concerned about the market for Government securities and
wanted to take this opportunity to discuss with John and
me what might be done as he wanted us all in complete
accord on the policy to be pursued, particularly in connection with the long-term 2-1/2 per cent restricted bonds
He said, 'You know that my chief concern is the maintenance of the 2-1/2 per cent rate on these bonds.'1
"I expressed surprise at this statement because I
said that we had had a veiy clear understanding at the
last meeting of the three of us and that following that
meeting I had written a memorandum, and asked the President if he recalled it. He said he did and thought that
meeting was worth while. He said that yesterday he was
thinking about the subject again, mentioned it to John
Snyder, and .suggested that the three of us get together
again.
"I said that I still did not understand his concern
because the market was behaving very well and that our
chief concern was the volume of restricted bonds which
we were having to buy from insurance companies and savings
banks as the purchase of these bonds resulted in the creation of reserves in the banks, which were very inflationary as the demand for bank credit was exceptionally strong,
I then related several instances of bank credit expansion.
"John Snyder spoke up and said he was quite happy
with the way the market had been handled recently and that
thore was no complaint about our operations. John said
that his interest was to have a clear understanding about
the maintenance of the 2-1/2 per cent rate and that it
was his strong feeling that the sooner we let the public
know that the 2-1/2 per cent rate was going to be maintained, the better.
"I said that since the Treasury will not need any
new funds before the middle of the year that it did not
seem to me that he had much of an immediate problem. He
replied that he might want to offer some long-term bonds
before the middle of the year if he could find a propitious time to make an offer, that his idea was that the
rate should be 2-1/2 per cent. I said that there was
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Federal Reserve Bank of St. Louis
-13some doubt about the market taking a 2-1/2 per cent issue
for a. twenty-five or thirty-year bond and that thought
had already been expressed, to John. He said he was thoroughly convinced in his own mind that the 2-1/2 per cent
rate would be acceptable if the market could be stabilized
and some of the uncertainties removed.
"I remarked again that I did not know what we were
concerned about because everything, to my mind, seeiaed to
be under control. The President reiterated his former
statement, namely, 'I have been concerned about maintaining confidence in Government securities and wanted to make
sure that we were in agreement about our ideas of maintaining the 2-1/2 per cent rate,1
"Snyder, at one point, interjected the thought that
since he was making an announcement with regard to the E
Bonds, it would materially add to the sale of the E Bonds
if the public felt that the 2-1/2 per cent rate was being
maintained.
"On two or three occasions I reiterated the thought
that I did not see what we were concerned about. I went
into some detail to tell the President about the long-term
securities we hava had to absorb, arid when I had finished,
Snyder said, 'If you had not jiggled the market the way
you did a few months ago, you would not have had to absorb
so many bonds from the insurance companies.1 He further
said, 'I think that most of the securities you have been
called upon to absorb have been the result of market uncertainty. '
"Throughout the interview, I was under the impression that we were talking about current operations and
maintaining the 2-1/2 per cent rate on the outstanding
points. I did not give any consideration to a public announcement on possible 2-1/2 per cent bonds to be issued
in the future.
"I was shocked to read the account of Snyder1s speech
in New York the following day as he did not mention the
speech in our conference with the President, nor did he
tell us that he was going to make a public announcement."
On January 19, 1951, I added this note:
"The President told me today that he did not know
about the New York speech or the proposed announcement.
I think that the New York speech was very cleverly worded
in its references to the President and to me, as the wording indicates that he consulted with us and then made his
decision, and there is a strong inference that we concurred
in the announcement. The President may have concurred in
1/31/51
-U"his mind, or privately, but I was not asked to concur in
the public statement.
"Before seeing the President this morning, I conferred with Governors Szymczak, Evans and Norton about
the points that I would raise with the President regarding the Sriyder speech, and it was the strong advice of
Governors Evans and Norton that I not raise an issue regarding it. Governor Szymczak felt that I should make
my position clear.
"In my conference with the President this morning I
devoted most of the time to a discussion of my memorandum
to Charlie Wilson on inflation controls. Then at the end
of the interview I spoke of my astonishment in reading
the account of Snyder's speech and. ssid that it was most
unfortunate that he did not tell us of his intention to
make the speech and the announcement which he proposed to
make. I said 1 followed the policy of checking with the
interested parties before the Federal Reserve made a public announcement, and in this instance 1 felt strongly
that he should have checked the announcement with us,
particularly since he used the President's name and my
name. The President said he thought I was right and that
he would speak to John about it.
"The President commended me highly for the way in
which I cooperated with Government officials. He said
he could, offer no criticism of our actions. He told me
also that he would have a conference shortly with Charlie
toilson on the memorandum and that he was very much impressed
with the recommendations. He seemed to be greatly concerned about inflation."
Yesterday the ¥hite House called and said that the President
would like to meet with the full Federal Open Market Committee
today at four o'clock. I thinK that we might give consideration
here to the question of what the President might possibly wish to
say to us and what would be our reply. 1 would assume, without
having anj^ knowledge of it, that he will talic about the Government bond market and that he will make a very strong appeal to
the Federal Open Market Committee to back up the statement of
the Secretary of the Treasury in New York on January 18.
Mr. Gilbert, alternate for Mr. Davis, joined the meeting at this
point.
Chairman HcCabe stated that there were three possible alternative
positions that the Federal Open Market Committee might take:
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Federal Reserve Bank of St. Louis
1/31/51
-15(1) Assure the President that the Committee would literally carry
out the program announced by the Secretary of the Treasury on January 18 of
maintaining the 2-1/2 per cent long-term rate on existing and new issues of
securities for the period of the emergency.
This program would be made
known to the public so that it would be known that the Committee was acting
in response to a specific request of the President during the emergency.
(2) Assure the President that the Committee would cany out the
letter and spirit of the announcement of the Secretary of the Treasury with
the reservation, however, that if changing economic conditions warranted a
different course of action, the Committee would make known its views to the
Secretary of the Treasury and the President and urgently request that a conference be held in which the policy announced by the Secretary and agreed
to by the Committee would be modified. This procedure would also be publicly announced.
(3) If the views that might be expressed by the President were
diametrically opposed to those of the Committee, the members of the Committee could resign.
It was Chairman McCabe's view that the Committee should thoroughly
discuss these alternatives.
In response to an inquiry the Chairman made the following additional comment:
Miss Barrows, Secretary to Mr. Connelly, who is Secretary to
the President, called yesterday to say that the President was very
anxious to meet with the Federal Open Market Committee today at
four o'clock. I asked if the meeting was to be "on the record".
She transferred me to Mr. Connelly, who said he assumed it would
be on the record but that he would send a note to the President,
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-16-
I said I thought the President should give careful consideration
to this point and to any statement that might be made to the press
regarding the meeting because it was very unusual for the Committee to meet with the President c-.nd it was important that the President be prepared for the comments that might be made on the meeting.
I said it might be desirable if I could have a few minutes with
the President before the meeting with the Federal Open Market Committee, and Mr. Connelly suggested that I come over before four
o'clock. I do not know how the meeting originated r<nd I do not
know whether the Secretary of the Treasury will be there.
In this connection, there were distributed two memoranda prepared
ty Mr. Thomas under date of January 30, 1951> with respect to debt management and credit policy, and a memorandum on the Outlook for Bank Reserves
and Treasury Cash Requirements, also dated January 30. Copies of these
memoranda have been placed in the files of the Federal Open Market Committee.
There followed a general discussion in the light of the Committee's
responsibility under the law, of the possible positions that it might take at
the meeting with the President.
In this discussion Mr. Sproul expressed the
view that apparently the Secretary of the Treasury was not satisfied with the
commitments that had been made by the Federal Open Market Committee, particularly its letter of October 30, 1950, and that it looked as if he had gone
to the President, expressing the viei. that he could not get a clearly satisfactory understanding with the Committee and that he vould like to have the
President call the members of the Committee in and obtain assurances of the
policy to be followed.
There was also a discussion of the comment that had appeared in the
press recently concerning Mr. Eccles1 testimony before the Joint Committee on
the Economic Report on January 25, 1951, and of a call that Senator O'Mahoney,
Chairman of the Joint Committee on the Economic Report, had made
to Chairman
McCabe yesterday with respect to Mr. Eccles1 having appeared before the Committee at the request of Senator Taft. Mr. Eccles stated that Senator Taft
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Federal Reserve Bank of St. Louis
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-17-
had reouosted that he appear before the Committee, that he accepted, that his
acceptance had nothing to do with whether Chairman McCabe appeared, that Chairman HcCabe had
said nothing to him about appearing in his place, and that he
mado it clear in his opening comments before the Committee that he had not been
requested to represent the Bo^.rd.
Mr. Sproul then referred to the three possible courses of action
that Chairman McCabe had suggested and stated thst he vould add a fourth. He
said that the first suggestion would leave the Federal Reserve with nothing to
do in the field of general crec.it controls as a means of getting the financial
mechanism in order for a full mobilization and a possible war, and that in the
present situation the second alternative would be equally bad. Under either
alternative, although the Federal Reserve could impose certain selective credit
controls, such controls would not do the main job Congress had given the System
to do; in terms of the importance of the matter to the Federal Reserve and to
the nation, the most important job was to maintain public confidence in the real
value of the dollar and the Government credit and not in a fixed interest rate
or in fixed prices of Government securities. He stated, therefore, that it would
be his feeling that in the future, as in the past, the Federal Reserve should
seek to ads.pt its policy to the needs of the Government and the Treasury, but that
that did not mean the System should go right down the line in supporting a policy
determined and set in the Treasury and announced publicly without consultation.
He went on to say that he felt the System would have to maintain some flexibility
in the short-term rate and that it might be necessary to consider a higher rate on
long-term Government issues if that was found necessary to make them acceptable
to the public.
He added that he hoped, before the Treasury made a decision with
respect to a new long-term issue, there would be an opportunity for the Committee
to review the matter with the Secretary, particularly since he (Mr. Sproul)
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seriously doubted whether the market would accept new long-term issues at the
2-1/2 per cent rate announced tsy the Secretary on January 18 without heavy support by the Federal Reserve. Mr. Sproul said that if nothing could be accomplished along this line he did not believe resignation of the Committee to be
a real alternative, since it would be an admission of failure or inability to
carry out our statutory responsibilities, without giving the Congress an opportunity to review our performance and to express its will. A fourth and better
alternative, he said, would be to go to Congress and ask for a new set of rules to
govern the Federal Reserve System because it could not continue on the present
course which involved either continued open conflict with the Treasury or complete abdication of the responsibility of the members of the Federal Open Market
Committee,
Mr. Peyton raised the question whether it was necessary at this
time to make a decision on the statement that would be -iiade to the President
or whether it would not be better simply to attend the meeting as requested, to
listen, and subsequently to consider any suggestions the President might make.
It was suggested, however, that in view of the fact that the President might be
expected to inquire t..s to the views of the Committee concerning support of
the program announced by the Secretary of the Treasury on January 3.8, it would
be desirable to explore at this meeting the response that should be made to
that question.
In the course of the discussion, Chairman McCabe read the letter
sent by the Committee to the Secretary of the Treasury under date of October 30,
1950, in which it was stated that the Committee was in complete agreement that
under present conditions it was necessary to protect the 2-1/2 per cent rate
(par) on the longest-term Treasury bonds now outstanding but that if further
inflationary or market forces should develop at ony time in the future which
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would mske it necessary for the Committee to reconsider that decision, it
vrould feel it desirable and compelling to seek the Secretary's counsel.
Chairman McCabe stated that he felt it was this statement that was giving
the Secretary concern, in that it appeared that the Secretary would like to
be assured that c.ny deficits that might grow out of the defense program during the next few years would be financed on the basis of a 2-1/2 per cent
Ions-term interest rate, regardless of whether the market would support such
a rate,and that the Secretary felt that the Federal Reserve should commit
itself to purchasing securities to whatever extent was necessary to maintain
such a rate. The Chairman went on to say that the drop of 1/32 of u point in
the price of the long-term restricted bonds on Monday of this week to which
Mr. Rouse referred earlier in this meeting was, in his opinion, the thing
th-.t ag-iin had made the Secretary of the Treasury uneasy as to the procedure that would be followed by the Federal Open Market Committee and that
undoubtedly this was the reason for the President's request for the meeting
this afternoon.
While the discussion was in progress, Mr. Thurston stated it had
just been announced on the ticker that the Federal Open Market Committee
would meet with the President at four o'clock.
At the end of the discussion Chairman McCabe suggested that the
stai'f prepare a draft of statement which might be used to present the views
of the Federal Open Market Committee to the President and that the Committee
ifieet again after lunch to consider the draft.
This suggestion was approved unanimously.
Thereupon the ueeting recessed and reconvened at 2:25 p.m. with
the same attendance as at the close of the morning session.
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-20The Secretary read the draft .of
statement that had been prepared
in accordance with the discussion at the morning session.
A copy of the
draft has been placed in the files of the Federal Open Market Committee.
In the course of a lengthy discussion of the statement, Mr. Vardaman said
that he would make hip views known to the President and would state that
the Committee, having been requested to fo!3.ow a course by the Secretary of
the Treasury and by the President, had no alternative but to follow that
course; that, in a period such as the present, the members of the Board
ceased to be civilian officers of the Government, and that he would be
guided by whatever request was made by the President as Commander-in-Chief.
H« then requested the Secretary to read the following statement which he
had presented to the Board of Governors on January 30, 1951:
"It is iriy understanding that Chairman McCabe was invited to
appear, on behalf of this Board, before the Committee on the
Economic Report and that Chairman O'Mahoney announced at the opening of the hearing when Governor Eccles testified, that Governor
McCabe was unable to attend because of illness and absence from
the city and that Governor Eccles would appear in his place. In
spite of Governor Eccles' statements that he was speaking for himself personally and not for the Board, the impression seems to be
that he was, unofficially at least, expressing the Board's opinion.
"As a Board member 1 had no notice that the Chairman had been
officially requested to appear before this committee. If I had
had such notice I would have urged that the Chairman or some spokesman for the Board appear before the committee and make a statement
substantially as follows.
"'The Federal Reserve Board has made its recommendations
to the Secretary of the Treasury in connection with the interest rate on short-term Government obligations and also with
reference to the interest rate and maturities on funding and
refunding bonds. In the exercise of his statutory authority
and obligation, the Secretary has not thought it wise to follow all of the suggestions made by this Board in connection
with these matters. Acting in his official capacity, as the
spokesman for the Government, the Secretary has announced a
financing program, and this Board has nothing further to say
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"bn the questions involved other than to state quite firmly
and clearly that the Board will support to the fullest extent of its authority the program as officially promulgated
by the United States Treasury.
11
'Whenever it is in line with its statutory authority
to do so, the Board will advise with the Secretary on all
matters relating to the management of the public debt or
any other questions which he may desire to discuss. But it
should be clearly understood that under our constitutional
framework and present statutory laws, the management of the
public debt is the responsibility of the Secretary of the
Treasury, and this Board will support him to the utmost of
its ability in his officially declared programs and actions.
"'We believe the duty of this Board to be to make its
ideas available and known in council, but not to make such
ideas prevail and the Board will act in accordance with this
belief in the present situation.'
"Under no circumstances should this Board be guilty of endeavoring to bring outside pressure to bear in an effort to have its
way,
"It is ray intention to offer a motion in the meeting of the
Board on Tuesday, the 30th, to request the Chairman to maice a public
statement similar to the above, on behalf of this Board at the
earliest appropriate moment."
Mr. Sproul expressed the view that Mr. Vardaman's proposed statement would make the Federal Reserve System a bureau of the Treasury and, in
the light of the responsibilities placed on the System by the Congress,
would be both impossible and improper.
Other members of the Federal Open
Market Committee indicated agreement with this view.
It appeared during the discussion that it would not be possible
to perfect a statement before the meeting with the President and it was
suggested that no formal statement be taken to the White House and that the
Chairman be authorized to speak for the Committee, his statement to be in
the light of the discussion at this meeting arid the letter sent to the
Secretary of the Treasury under date of October 30, 1950.
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It was agreed unanimously that this procedure
would be followed and the meeting recessed at 3:28 p.m.
1/31/51
-22Following the meeting with the President, the meeting reconvened
in executive session at 4.:50 p.m. with only the members of the Committee
present. At 5:50 p.m., Messrs. Carpenter, Vest, Thomas, Rouse, Thurston,
Riefler, Sherman, R. A. Young, Youngdahl, and Leach were called into the
meeting.
The Chairman reported that the members of the Committee had
agreed that Mr. Evans should prepare a memorandum of the meeting of the
Committee with the President which, after such changes as Mr. Sproul might
suggest, would be circulated to the other members of the Committee for
comment and approval.
Secretary's note: This statement
prepared by Mr. Evans and approved
by the individual members of the
Committee, was as follows:
"The full Federal Open Market Committee met with President
Truman in the Cabinet Room shortly after 4:00 p.m. on Wednesday,
January 31* 1951• Chairman McCabe had met with the President
in his office a few minutes earlier and came into the Cabinet
Room with him. The President shook hands cordially with everyone
present.
"The President stated that during the past few weeks he had
met with many groups in Government because he wanted them to know
the seriousness of the present emergency and to ask for their
full assistance and cooperation. He stated that the present
emergency is the greatest this country has ever faced, including
the two World Wars and all the preceding wars.
"He gave a brief sketch of the difficulty of dealing with the
Russians and said they had broken 3<- parts of the agreements
entered into at Cairo, Potsdam, and Yalta. He mentioned that these
agreements, among other things, provided for a unified Germany,
unified Poland, cooperation with Nationalist China, and a unified
Korea, which would select its own Government by democratic process.
Be stated that the Americans provided Nationalist China with about
3-1/2 billion dollars of war equipment, much of which Chinese
generals and other leaders disposed of to the Communist forces.
He characterized the Nationalists as being the most corrupt government in history.
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He stated that General Eisenhower's report to the Cabinet
today, after his visit to 12 North Atlantic countries, emphasized
the seriousness of the situation but that the General believed
Europe has the will to rearm and resist with our help. He mentioned some figures about the number of troops involved, in support of his statement that the emergency is very serious indeed.
"The President emphasized that we must combat Communist
influence on many fronts. He said one way to do this is to
maintain confidence in the Government's credit and in Government
securities. He felt that if people lose confidence in Government
securities all we hope to gain from our military mobilization,
and war if need be, might be jeopardized. He recalled his wartime experience when he bought Liberty bonds out of his soldier's
pay. When he returned from France and had to sell his bonds to
buy clothes and other civilian things, he got only $80 or a little
more for his hundred dollar bonds and later they were run up to
$125. He said he did. not want the people who hold our bonds now
to have done to them what was done to him.
"He stated that most politicians would not ask for higher
taxes prior to election bub that he had vetoed a reduction in taxes
before election and won anyway. If it had not been for that irresponsible reduction in taxes, he said, the Federal budget would
have been in balance all these years. He stated that he wanted to
levy all the taxes necessary to pay the cost of the defense effort,
which he felt would be between 100 and 120 billion dollars over the
next few yearn. He stated that he had just met with the Congressional leaders and asked for 16-1/2 billion dollars in taxes and
that he expected to get this in two bites—a quick tax bill yielding about 10 billion and the other 6-1/2 billion to come after
more careful study. He wanted us to understand that he is doing
all he can on the tax front to combat inflation.
"The President gave each member of the Committee a copy of
•The Federal Budget in Brief. He expressed the opinion that the
budget had been pared to an irreducible minimum. He said that he
had participated in the preparation of 16 budgets and felt he was
competent to judge and understand them. Maybe something could, be
cut out but it would make a hole in the defense effort and that he
would not do.
"The President said that he felt we had done a good job and
wanted us to continue to do a good job in maintaining the financial
structure of the country. He further stated that he had had a
number of conferences with our Chairman but this was his first
opportunity to meet and talk with the entire Committee. He made
no mention of recent discussions with the Treasury.
"Chairman McCabe thanked the President for receiving us and
indicated that we all share his concern for the maintenance of the
Government credit. He stated that although the support of the
Government bond market was something in the nature of an extracurricular activity for the Federal Open Market Committee, it had
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performed this service for the past nine years or more and had done
a very good job. He stated that the Committee had always carefully
weighed its responsibilities to the Government and to the general
economy as veil arid, that these are statutory responsibilities which
it could not assign, if it would.
"The President interjected that he was familiar with that but
wanted the Committee to continue its good work during the defense
period. He emphasized that he was speaking of the defense period
only.
"Chairman McCabe referred to the fact that in the last few
days the Government bond market had gone up a few thirty-seconds
and then had come down a few thirty-seconds, which he considered to
be a proper market operational technique. The President said he
would not undertake to discuss details of that kind, that he was
principally concerned with maintaining the confidence of the public
in Government securities as one way of presenting a unified front
against Communism. He did not indicate exactly the details of what
he had in mind, but he reiterated that we should do everything
possible to maintain confidence in the Government securities market.
The Chairman outlined concisely some of the responsibilities with
which we were charged, principally to promote stability in the
economy by regulating the volume, cost and availability of money,
keeping in mind at all times the best interests of the whole economy.
The Chairman turned to the members of the Federal Open Market
Committee and said the President could depend on everyone in the
group to do what they could to protect the Government credit.
"Chairman McCabe stated that with a group of men such as those
composing the Federal Open Market Committee (and with responsibilities in conjunction with those of the Treasury) there would, of
course, be differences of opinion as to just how the best results
could be obtained. The President nodded, indicating that he understood this. The Chairman suggested the following procedure—that
we consult frequently with the Secretary of the Treasury giving
him our views at all times and presenting our point of view strongly,
and that by every means possible we try to reach an agreement. If
this could not be accomplished, he (the Chairman) would like to
discuss the matter with the President. The President said this
was entirely satisfactory and closed the meeting on the same note
as it was opened—namely, that he wanted us to do everything possible to maintain confidence in the credit of the Government end
in the Government .securities market and to support the President
of the United States in achieving this end.
"The Chairman stated at the end of the meeting that he presumed
that any statement concerning this meeting would be made by the
President. The President said he would have no objection to our
making a statement and thought that it might be a good thing. The
Chairman then asked him what would be the general nature of the
statement and he said it can be said that we discussed the general
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•femergency situation, the defense effort, budget and taxes, and
that he had stressed the need for public confidence in the Governmentf s credit. He said further that he would be talking to the
press the next morning and that he would be prepared to answer any
questions that might be raised. Since the President indicated
that he would be discussing it with the press, the Chairman said
he felt it would be best for us not to issue any statement to the
press at this time. The President did not seem to be particularly
concerned about whether or not a statement was issued. The press
conference scheduled for the following morning was canceled because
of General Eisenhower's appearance at the Capitol. The White House
press secretary gave the press the following statement which
appeared on the ticker about noontime:
'"Washn - A P - The Federal Reserve Board has
pledged its support to President Truman to maintain the
stability of Government securities as long as the emergency lasts.
"'White House press secretary Joseph Short announced
this today, saying there have been reports of differences
of opinion between the Treasury and the Federal Reserve
Board.
'"This is to quiet those rumors - Short said.
"'Members of the Federal Reserve Board conferred with
Mr. Truman yesterday - Secretary of the Treasury Snyder
did not attend the meeting.1
"A little later the following statement appeared on the
ticker:
"'Washn - A P - A Treasury spokesman said the White
House announcement means the market for Government securities will be stabilized at present levels and that these
levels will be maintained during the present emergency.'"
Chairman McCabe stated that as he understood it, the action taken
by majority vote during the executive session was that the market on the
long-term restricted bonds would be held at par and 21/32 until the nextmeeting of the Federal Open Market Committee, which was to be called for
Tuesday, February 13, 1951.
Mr. Sproul said his understanding of the action was that the Committee would continue in effect until the meeting on February 13 the existing policy with respect to the purchase of long-term restricted bonds which
would mean that, if the Treasury discontinued its support purchases of the
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long-term restricted bonds, the price might decline below par and 21/32.
In the ensuing discussion it was understood that the action taken
in the executive session by majority vote was as stated by Mr. Sproul.
Chairman McCabe expressed strongly the view that until the Committee had had an opportunity to determine what its over-all policy was to be,
it would be a mistake to allow the price of long-term restricted bonds to
decline further.
Mr. Sproul suggested that the general direction to be issued to
the executive committee be in the same form as that presently in effect but
that the limitation in the first paragraph of the direction be reduced from
$3 billion to $2 billion.
Thereupon, upon motion duly made and
seconded, the following direction to the
executive committee was approved unanimously
with the understanding that the limitation
contained in the direction would include
commitments for the System open market account.
The executive committee is directed, until otherwise directed
by the Federal Open Market Committee, to arrange for such transactions for the System open marKet account, either in the open
market or directly with the Treasury (including purchases, sales,
exchanges, replacement of maturing securities, and letting maturities run off without replacement), as may be necessary, in the
light of current and prospective economic conditions and the general credit situation of the country, with a view to exercising
restraint upon inflationary developments, to maintaining orderly
conditions in the Government security market, to relating the supply of funds in the market to the needs of commerce and business,
and to the practical administration of the account; provided that
the aggregate amount of securities held in the account at the close
of this date other than special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of
the Treasury shall not be increased or decreased by more than
$2,000,000,000.
The executive committee is further directed, until otherwise
directed by the Federal Open Market Committee, to arrange for the
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purcha.se for the System open market account direct from the Treasury of such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held in the account at any one time shall not exceed
$1,000,000,000.
It was also agreed that the understanding with respect to the rates
at which short-term securities should be purchased arid sold for the System
account, reached at the meeting of the Committee on October 11, 1950, should
continue in effect with the further understanding that in accordance with
the letter sent to the Treasury following the meeting on October 30, 1950,
the executive committee, for the time being, would not permit the rate on
new securities maturing within one year to rise above 1-1/2 per cent.
With reference to the replacement of maturing Treasury bill holdings, it was agreed that the present understanding should continue unchanged,
and that the executive committee should be guided by what would be required
in the light of current conditions in the money market to carry out the general credit policy of the Federal Open Market Committee.
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Thereupon the meeting adjourned.
Secretary
SECRET
C
0
P
Y
BOARD OF GOVERNORS
of the
FEDERAL RESERVE SYSTEM
Washington
OFFICE OF THE CHAIRMAN
February 7, 1951
The Honorable John W. Snyder,
Secretary of the Treasury,
"Washington, D. C.
Dear John:
Following the meeting of the Federal Open Market Committee with
the President on January 31, at which the President expressed the
wish that the Committee provide support to the Government securities
market during the emergency period, the Committee has considered what
policies might be advisable in the immediate future. We should like
to discuss with you at an early date a coordinated credit policy and
debt management program which would assist in the highly important
fight against inflation and improve public confidence in the market for
Government securities. "^ would suggest as a basis for that discussion
a program along the following lines:
(1)
The Federal Reserve, for the present, would purchase
the longest-term restricted Treasury bonds now outstanding in amounts necessary to prevent them from
falliiig below par.
(2)
If substantial Federal Reserve support of the longestterm restricted bond is required, you would be prepared
to announce that at an appropriate time the Treasury
would offer a longer-term bond with a coupon sufficiently
attractive so that the bond would be accepted and held
by investors. It would be announced that outstanding
long-term restricted bonds would be exchangeable for the
new bond and that the new bond would be offered for cash
subscription by non-bank investors on a basis to be
determined.
We should like to discuss with you possible features
for the new bond that would remove or reduce the need
for Federal Reserve support of the market in the future«
(3) For the purpose of restricting the creation of bank
reserves through sales of short-term securities to the
Federal Reserve, particularly by banks, the Committee
would keep its purchases of such securities to the
minimum amounts needed to maintain an orderly money
market*
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SECRET
SECRET
The Honorable John W. Snyder
-2~
Under this policy, banks would be expected to obtain
needed reserves primarily by borrowing from the Federal
Reserve Banks. If demands for expansion of bank credit
and bank reserves should continue, short-term interest
rates presumably would adjust to a level around the discount rate o
This is the time to inaugurate the suggested program. It appears
that the Treasury will not need any financing either for new funds or
for refunding until next summer. It is important that rate adjustments
be made before that time so that your large refunding and new money
financing in the second half of this year may be carried out smoothly
and successfully without undue support by the System.
Only through policies such as these can restraint on credit ex«pansion be exercised in the degree that is so necessary to avoid con»tinued erosion of the purchasing power of the dollar and to maintain
the strength of our economy in this critical period. Both the Treasury
and the Federal Reserve have a vital interest in this objective.
We hope that we may have an early opportunity of discussing this
matter with you.
With warmest regards,
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Sincerely,
/s/ Tom
<,
Thomas B. McCabe,
Chairman
MAID OP GOIfitlOHS
OF THE roBULL UKSftfB Sf8T£*
^jr dear Hr* ^residents
Ion as President of the United States and we as Members of
the federal Open Market Consdttaa ha^e unintentionally bean drawn into
a falsa position before the American public — you as if you were
aoMsittlan us to a policy which we believe to b* cratra*y to itoa* no
all truly desire and we as if we were questioning your word or defying
your wishes as the chiof eaceentive of the country in this critical
period* *e would betray our duty to the country as wall as to you if
we failed to do all in our power to clear up these Misunderstandings*
la your recant Meeting with us you clearly stated as your objecti a one which underlies Federal Reserve operations — the maintenancs of confidence in the integrity of the dollar and therefore in
Osfsrnsmnt seenrltico* In your recent economic report to the Nation
you saids "if inflation continues to gain cuw,lative force it will
waltiply the cost of the defense program* It will undermine production,
destroy confides**, gssjsrstt friction ami economic strife, ispalr the
value of the dollar, dissipate the value of savings and impose an
intolerable burden upon fixed income groups* this mast net happen**
we pgspose to do all in our power to prevent it happening*
1st are dedicated to the preservation of the purchasing power of the
dollar* Any policy which eats away this purchasing power — which
increases the cost of living — at the earn© tins and to the sane degree
tmrteimlnm confidence in the credit of the United States* The credit
of the United States Governs*** ia the final analysis rests with the
American people* It depends upon the public's villinfnieps to bay and
hold Government securities,
Hie heart of the problem which confronts us is thief Hew oaa
we stop the decline la the wirchasinf power of the dollar? Hew can we
curb the dangerously rising tide of credit which is adding to the
eountvy's supply of dollars at an unprecedented rate? How can we arrest
the flight of dollars into hedges against inflation when the supply of
dollars is grewiag so fast? How can we best encourage people to hold
and increase their savings and to spend less so long as inflationary
dangers threaten?
Hthout confidence in sound financial management, this flood
of newly created dollars in the for* of credit cannot be controlled.
It will overwhelm whatever price* wage, and similar controls, Including selective credit measures, that sjsy be contrived* This problem
was not present in the mobilisation period preceding fterld fcar IX*
Then the country had an abundancevt>f unused slants,materials, and man*
power* Savings had been depleted* Liquid assets were low and the
public did not fear rising prices or shortages of ^oods and therefore
did not anticipate the possibility of inflation*
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Today our yum*m* aad our responsibility i» with the basic
problem of benk reserves i&ich continue to generate a rising tide of
money, la the face of existing inflationary pres*-&res there is no
effective my of stejwdnf this tide that will not reflect itsolf in
interest rates* It merely confuses the issue to charge that the Open
Market Committee favors hijrJher interest rates tar so. Vie favor the
lowest rate of interest OB Government securities that will cause true
investors to btqr and hold those securities*
Today's inflation is not due to deficit financing bjr the
Government* It is due to mounting civilian sapsjmUtm IHI larrdy
financed directly or indirectly tqr sale of Govwrament securities to
the federal Reserve* Ion have taken a courageous aad forthright stand
basis. If the addiUoBal taxes **Ve* y** «*»» iiiiiiiiiiiaiii are emmeted*
little or no new Govoramsat borrowinf will be needed* The experience
of the past year, however, has clearly demonstrated that a balanead
budget alone cannot step inflation* fee shall still need to deal with
iationary threats arising from civilian spending based largely upon
the present excessive money supply, augmented by the liquidation of
fleismmsnt securities bgr the banks and other holders*
It continues to be, as it has always been, the policy of the
federal Reserve %stem and of its Federal Open Market Committee to
adapt credit policy to the needs* and requirements of the Ooveramaat
as wall as of the country* Oar support of Treasury financing in tine
of war and in time of pease has riven clear proof of this policy*
However, in inflationary times like these our buying of
Government securities does not provide confldenee. It underlines
confidence* the inevitable result is ^ore sad moro money aad cheeper
and cheeper dollars* This weans less aad less public confidence* «r«
JVesident, you did not ask us la eur recent meetinf to eoiHLt oarselves
to continue oa thin dangerous road* Sash a course would seriously
weaken the financial stability of the Onited States and encourage a
further flight from money into goods* It would not be consistent with
oar responsibility to tho Congress aad to the people of this country
to follow such a proprran.
la your meeting with us you mentioned the experience of
returned veterans sad other small holders with Liberty Bends after
Horlc! tone I* As you know, the Savings Bonds of today are specifically
designed to avoid a repetition of this experience* the Liberty Bonds
were marketable securities subject to market fluctuation* ia price*
Taeso fluctuations were eateossi^e following World war I, particularly
beetnse * large volume of Liberty loads wore not purchased out of
amviafs but with bank*borrowed funds. Later msay of these were dumped
oa the market to repay loans* As a result, in the absence of any pro*
vision for support to maintain orderly conditions in the »»arket, they
reacted ercvssivtly ia price.
The Ssjviars Bonds of today, unlike Liberty Bonds
of fcorld
r
War 1, are redeemable oa demand at specified values* lne holder of
Saving* i*o»is need not be e<sicerni»<! with market fluctuations because
ho will always got back dollars h« has put into such bonds with a
stated amount of interest.
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la our open wurket operations we are concerned only with
the marketable i*<rues, which are largely held ty banks, other financial institution*, and experienced market-vice corporate and in*
dividual investors, fee have maintained, and plan to continue to main*
tain, orderly conditions in these issues* Them holders are aeeurtoaed
to changes IB prices of securities and to shifting their investments
in order to take advantafe of More profitable opportunities, today
they are able to sell their Governaent bonds to the Federal Reserve
at a preaduiR, ifcereas the owners of Sarinrs ond*, in which savings
of the Bass of the people are invested, Must accept * iover interest
return if they redeem their bonds before Maturity.
la accordance with osir assurances to you, *e shallseek to
work out tdth the Secrctaiy of tl^ Tmasnry as promptly as possible
a proj»rai i*iich is practicable, fees .ble and adequate In the light of
th* defense e»ergency, nhich will safeguard and usintalii public confidence in the valves of outstandiBf Government bonds, and which at
the sane time will protect the pwokssinr power of the dollar*
iinally, at this critical tine, itien the cooperation of
every one is desperately needed, we sincerely trust that the decision!?
vhich are made will be for the best interests of the people of the
United States.
(signed) TOM
the President,
the fchite House.
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
REPORT OF OPEN MARKET OPERATIONS TO MEETING OF FEDERAL OPEN
MARKET COMMITTEE AT WASHINGTON, D0 C, MAY 17, 1951
COVERING COMMITMENTS EXECUTED FROM MARCH 8, 1951 TO MAY 11, 1951, INCLUSIVE
The period since the Federal Open Market Committee last met has been one of
"basic readjustment to the new debt management and credit policies introduced immediately following the Committee meeting on March 2, 1951. The two official announcements
made on March 4 laid the groundwork for a more complete orientation of open market
operations to the needs of the general business and credit situation and marked the
start of a new phase in postwar open market policy. These were:
(a) The Treasury's announcement of an innovation in debt management
procedures in the form of a new type of nonmarket issue to be
offered late in March and early in April on an exchange basis
to holders of outstanding bank restricted marketable bonds callable in 1967, and
(b) The joint and simultaneous announcement by the Secretary of the
Treasury and the Chairman of the Board of Governors and of the
Federal Open Market Committee of the Federal Reserve System of
a " . . . full accord with respect to debt management and monetary policies to be pursued in furthering their common purpose
to assure the successful financing of the Government's requirements and, at the same time, to minimize monetization of the
public debt".
The full implications of the new policy were slow to be grasped, although
they were understood to presage a greater, although indeterminate, amount of market
freedom. Initially, there was general uncertainty among investors as to the meaning
of this Treasury-Federal Reserve System agreement. Later, reactions were paced by
developments in the market as fixed support was relinquished in a series of steps related to the exchange operation, and as the market was left more completely to react
to the natural forces of demand and supply in accordance with the new criteria of open
market policy. In its more tangible form the readjustment to the new market situation
was apparent in the sharp and fairly sustained, but orderly, decline in prices of
Treasury bonds, particularly the long-term maturities. Losses for the period from
March 7 "to May 11 ranged up to 3 26/32 points in the case of the long-term restricted
Treasury bonds; at the close of business on May 11 the 2 1/2 per cent bond of December
1967-72 was quoted at 96 29/32 (slightly above the low of 96 24/32 reached on May 9)
to yield 2.69 per cent to maturity, an increase in yield of 23 basis points.
The System withdrew immediately from the market for bank-eligible Treasury
obligations following the March 4 announcements cited above but fixed support of longterm Treasury bonds was relinquished less rapidly and the adjustment in this area of
the market was effected with a view to facilitating the Treasury's exchange offering.
After three days of rigid support at 100 22/32 for the bank-restricted bonds of 1967-72,
the System temporarily withdrew from the market and, following a rapid price adjustment,
those issues steadied at or several 32nds above par encouraged by modest support purchases by the System on March 9. But the market was still under pressure and the
declining trend was soon resumed. After a second sizable mark down in quotations
immediately following the disclosure of further details on March 13 with respect to the
Treasury's exchange offering, the System re-entered the market extending fixed support
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Federal Reserve Bank of St. Louis
for the two longest restricted issues at 99 2/32 and at related, "but less rigid,
quotations for other issues. That support was maintained until April 6, 1951 when
the "books on the Treasury's exchange offering were closed. Thereafter, fixed support
for the long-term Treasury "bonds was abandoned and the market entered a period in
which a further price decline took place as dealers groped for a point of stabilization under the guiding influence of modest scale purchases by the System Account,
more in keeping with the new market freedom.
These developments with respect to prices and yields were accompanied by
significant changes in the portfolios of many institutional investors, reflecting an
increasing emphasis on liquidity. The start of the period was featured by heavy sales
of long-term Treasury bonds and an almost complete lack of buying interest. At first,
the supply centered in the 2 1/2's of June and December 1967-72 but later, as support
was revised downward, the supply broadened in terms of issues. Thereafter, until the
closing of the books on the Treasury's exchange offering on April 6, restricted bonds
remained in continuous supply with the volume of offerings varying considerably from
week to week. In general, offerings in that period originated with the following
three main sources:
1.
Sellers who were moving out of Government securities,
2.
Sellers who had been getting a long-term rate on short-term
funds and were now forced by developments to pursue a more
prudent investment policy, and
3.
Sellers who were going into cash or short-term Treasury
obligations temporarily in the hope that they could get
back later in the long-term Government bonds on a more
favorable basis.
On March 5> 6 and 7 (just before the period under review) the Federal Reserve
System and Treasury investment accounts bought a total of $6l6,000,000 2 1/2 per cent
bonds of June and December 1967-72 in maintaining a market bid of par 22/32 for those
bonds in accordance with an agreed procedure. From March 8 through April 6 the supply
of restricted bonds which reached the market was almost exclusively absorbed by the
Federal Reserve System which purchased a total of $739*246,000 various restricted
issues (including $46,467,000 from dealer positions). The bulk of these purchases
was made in support of a market bid of 99 2/32. An additional $15,000,000 2 1/2 per
cent restricted bonds of 1966-71 and 1964-69 were bought during this period against
the sale of longer term restricted issues.
With the completion of the exchange on April 6 the System abandoned fixed
support of restricted 2 1/2's of June and December 1967-72 at 99 2/32 and of other restricted bonds at related prices. There followed a brief period of hesitancy but it
was soon clear that despite the conversion of $13.5 billion of Treasury bonds (including $5.6 billion by Treasury accounts and Federal Reserve Banks) from marketable bank
restricted debt to nonmarketable debt in the form of the new 2 3/4 per cent bonds of
1975-80 that a point of stabilization had not yet been reached. The downward trend
was again resumed on April 9 in a thin and inactive market as buyers preferred to remain on the sidelines and some sellers, who failed to liquidate at higher levels,
undertook to dispose of part or all of their holdings. The steady erosion in quotations at this time reflected basically the availability of long-term bonds from life
insurance companies, a number of which were reported to be potential but ready sellers
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Federal Reserve Bank of St. Louis
to the extent that bonds could be successfully placed with investors. Only small
amounts of bonds from that source were actually marketed as quotations moved lower in
the period April 6 to April 20 but the knowledge that an indeterminate supply was
overhanging the market made quotations extremely sensitive to actual offerings from
other more aggressive sellers. The latter consisted of a miscellaneous group of nonbank investors who, for the most part, were liquidating in relatively small lots. A
large proportion of those offerings reached the market through unqualified dealers,
brokers, and Stock Exchange houses which, at times, were insistent in their efforts
to sell. For a time, potential buyers which had earlier been expected to enter the
market on a scale down in price failed to appear and, in most cases, were reported to
have revised their plans in view of the continuing price decline. To maintain order
in the market by enabling dealers to make good their bids at declining prices the
System purchased a total of $76,453,000 restricted Treasury bonds between April 7 and
April 20.
Late in April purchases of $12,000,000 restricted bonds were made for a
Treasury account against the sale of a like amount of long-term partially tax-exempt
bonds. At about this time, the declining trend appeared to have run its course, at
least temporarily, and quotations for long-term Treasury bonds turned upward as buyers,
regaining some confidence in the market, either initiated deferred buying programs or
began to replace bonds previously sold at higher prices. At the same time, the changed
market psychology lessened the urge for investors to sell. Prices firmed and advances
ranged up to as much as three quarters of a point for some of the intermediate and long
maturities. Insurance companies, however, availed themselves of this opportunity to
liquidate long-term Treasury bonds against other commitments and succeeded in moving an
appreciable amount of bonds while the demand lasted. Toward the close of the period an
easier tone developed reflecting continued availability of bonds from institutional
sources and a temporary satiation in the demand, and orderly market purchases were resumed after an eight-day period in which the market maintained itself without aid from
System Account. On May 9 the longest-term Treasury bonds reached 96 3/4 (yield of
2.70 per cent) before the steadying influence of System purchases checked the lower
trend. From May 3 through May 11, 1951a total of $33^620,000 restricted Treasury
bonds were purchased for the System Open Market Account; in addition, $1,000,000 restricted Treasury bonds were bought for a Treasury account against the sale of a like
amount of partially tax-exempt bonds.
Short and early medium-term Treasury bonds were also under selling pressure
and moved lower during much of the period in line with the longer maturities. By the
end of March, quotations for those issues, influenced in part by a tight money market
situation late in the month, had declined to a point which raised the question as to
whether the Treasury would exercise its option to call the 2 per cent Treasury bonds of
1951-53 on May 15 for payment September 15 or allow them to run to maturity. This
caused a changed attitude with respect to various taxable bonds callable in 1951 and
1952. Offerings of those issues from both banks and other investors increased as quotations approached, or reached, the par level late in March. Market pressure at that time
was increased by insurance company efforts to liquidate a substantial amount of taxable
issues callable in 1952 in preference to long-term maturities in view of the market
situation that existed for the latter bonds. At the same time uncertainty over the outlook for a call limited buying interest at or above par. The longer-term Treasury notes
were quiet throughout the greater part of this period and tended, in some measure, to
resist the price adjustment which occurred in nearby maturities of callable taxable
bonds largely because of their fixed maturity and their tax status as a discount obligation. There was, however, a substantial volume of swapping between issues, for tax
purposes. A firmer market for short and intermediate bank-eligible securities in the
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Federal Reserve Bank of St. Louis
fourth week of April, reflecting in part easier money market conditions, "brought
temporary shift in sentiment, strengthening the belief that the 2 per cent bonds
1951-53 might be called. However, as money tightened late in April and early in
quotations turned easier and sentiment with respect to the Treasury's intentions
sponded accordingly.
a
of
May
re-
On May 8 the Treasury disclosed that the 2 per cent bonds callable
September 15, 1951 "would not be called for payment on that date and a further modest
readjustment in rates followed in quiet trading. Inasmuch as the decision to pass the
call on the 2 per cent bonds of 1951-53 had been discounted to some extent, the market
adjustment was more orderly and moderate than might otherwise have been the case.
System Account purchases of bank-eligible Treasury bonds and long-term Treasury notes
for the period under review totaled $114,485,000 (including $21,135,000 from dealer
positions) and were effected at the end of March in the interest of maintaining an
orderly market.
Funds realized from support purchases of restricted Treasury bonds early in
March created a demand for short-term Treasury obligations as sellers of long-term
Treasury bonds sought a temporary haven for their funds, pending the development of a
more settled bond market. This buying was enlarged by outright purchases on the part
of other nonbank investors and banks, a large part of which represented the temporary
investment of new capital funds recently raised by a utility company. (The System
Account supplied $100 million short-term Treasury notes against that buying.) Yields
for short-term Treasury obligations tended to decline until the third week in March
when commercial banks became substantial sellers of short-term Treasury obligations to
adjust their reserve positions in response to a tighter money market arising out of
the passing of the March 15 tax date. Since the nonbank demand was insufficient to
absorb the increased selling, dealers backed away from offerings coming into the market
and rates on ninety-one day Treasury bills moved above the 1 1/2 per cent level, rising
by 17 basis points to 1.53 per cent bid in the course of the week ending March 26. In
these circumstances, the System found it necessary to enter the market as a buyer in
order to clear it of offerings which were being pressed for sale, purchasing
$172,200,000 Treasury bills and $29,500,000 short-term Treasury notes at this time.
By the close of the month the money market eased and the supply contracted
except for continued selling, originating with Chicago banks which were disposing of
Treasury bills bought earlier in connection with the April 1 personal property tax in
Cook County. Those offerings enjoyed a ready market and were taken by nonbank investors
and other banks, especially those located in New York City. In the ensuing three weeks
a generally good two-way market characterized the short section of the list. Banks,
however, showed some hesitancy and caution in investing available funds and, in some
cases, were inclined to maintain a somewhat wider margin of excess reserves as a matter
of policy. On the other hand, there was a sizable but intermittent demand, especially
for Treasury bills, coming from a variety of nonbank investors which were either buying outright or investing the proceeds of (a) market financing and (b) sales of longterm Treasury bonds prompted by the continuing uncertainty in that section of the market,
Sales for System Account of $103,500,000 bills and $85,100,000 short-term notes were
made in the market at this time. In addition, there was a $4,000,000 shift between note
issues. A tighter money market situation at the close of the period brought net liquidation by commercial banks, accompanied by a rise in market rates for short-term issues,
especially Treasury bills which went to a new high at 1.62 per cent bid on Friday,
May 11.
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Federal Reserve Bank of St. Louis
Up until the last fev days covered "by this report, the rise in rates was
somewhat restrained "by the continuing demand for short Treasury obligations on the
part of nonbank investors and the preference of some banks to adjust reserve positions
through borrowing at the Federal Reserve Bank in place of selling short-term Government
securities at prevailing prices.
During the period under review the Federal Reserve Bank of New York purchased
from dealers, subject to resale within 15 days, at 1 3/4 per cent interest for the period
held a total of $170,500,000 Treasury bills, $10,900,000 Treasury notes due in 1951, and
$33,000,000 short-term bonds. By the close of business May 11, the dealers had repurchased all of the securities bought by the Federal Reserve Bank under these repurchase
agreements with the exception of $50,000,000 Treasury bills and $25,000,000 Treasury
bonds called for payment June 15, which were still held under unexpired contracts.
PRICES AND YIELDS
Since the March 8-9 meeting of the Federal Open Market Committee prices of restricted Treasury bonds have declined 3 11/32 to 3 26/32. Most of the longer restricted
2 1/2$ bonds currently yield about 2.70$ (to maturity) as compared with about 2.45$ (to
call date) at the start of the period. Maximum losses in the bank-eligible section were
3 5/32 for the 2 3/4s of 1960-65 and 2 25/32 for the 2 l/2s of September 15, 1967-72.
At the close of business on May 11 market quotations for three-month Treasury
bills were 1.62$ bid - 1.54$ asked, as compared with 1.39$ bid - 1.34$ asked on March 7,
a rise in the bid of 23 basis points.
Details of changes in prices and yields for Treasury bonds and the long notes
are given in Exhibit "C".
FACTORS AFFECTING NEEDS FOR FEDERAL RESERVE CREDIT
Factors affecting needs for Federal Reserve credit, the net change in the
amount of Federal Reserve credit, and the estimated change in the excess reserves of
all member banks during the period under review are shown in the following table:
(in millions of dollars)
Factors affecting needs for F. R. credit
Currency circulation
Treasury operationb
Treasury deposits
Treasury cash
Treasury currency
Gold and foreign account operations
Gold
Foreign
Other factors affecting reserve balances
Estimated member bank required reserves
3/7/51
5/9/51
27,219
27,315
767
1,298
4,643
- 272
+ 10
+ 4
21,951
855
935
18,373
21,755
894
997
18,236
- 196
- 39
Total
22,595
Federal Reserve credit
U. S. Government securities*
22,179
Loans, discounts and advances
211
Other Federal Reserve credit
836
Total
23,226
Estimated excess reserves
631
* Delivery basis.
# Includes $100,000,000 of special borrowing.
23,109
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Federal Reserve Bank of St. Louis
495^
1,308
4,639
Changes
(+) or (-)
reflect effect
on excess reserves
22,544
426
736
23,706
597
- 258
- 235
- 62
+ 137
- 514
+ 365
+ 215
- IPO
+ 480
-
34
TRANSACTIONS IN UNITED STATES GOVERNMENT SECURITIES
The total of United States Government securities held* by the Federal
Reserve System at the close of business on May 11, 1951, together with changes
from the holdings of March 7, 1951, reported to the meeting of the Federal Open
Market Committee on March 8 and 9, are shown in the following table:
(In thousands of dollars)
System Open
Market Account
Treasury Bills
Treasury Notes:
To 1 year
1 - 5 years
Treasury Bonds:
Part. Tax-Exempt
Tax.-Bank-Eligible
Tax.-Restricted
Investment Series
Sub-total
Purchases
Sales
Redemptions
172,200
103,500
764,048
±
277,783
33,500 189,100
10,850
103,635
864,319
15,000
1,184,504 307,600
Net
Change
Exchanges
Holdings
5/11/51
-
695,348
814,824
+
155,600
10,850
11,344,060
3,568,073
+ 103,635 1,700,460
-2,713,848 -1,864,529 2,189,571
+2,713,848 +2,713,848 2,713,848
764,048 ±2,991,631 + 112,856 22,330,836
F. R. B. of N. Y.
Treasury Issues
under Repurchase
Agreement:
Treasury Bills
Treasury Notes
Treasury Bonds
Sub-total
Total Federal
Reserve System
170,500
120,500
10,900
10,900
50,000
50,000
33,000
8,000
25,000
25,000
214,400
139,400
75,ooo
75,000
1,398,904
447,000
187,856
22,405,836
764,048
±2,991,631
+
Included in the above transactions are purchases of $769,000 2 l/2$> Treasury
Bonds of December 15, 1967-72 executed on March 8, 1951, under the authorization dated
March 2, 1951, ^ut not reported to or approved at the meeting of the Federal Open
Market Committee on March 8 and 9°
At the meeting of the Federal Open Market Committee on March 8 and 9, the
minimum reserve ratio was reduced from 35 per cent to 30 per cent. Consequently,
when the adjustment in System Open Market Account holdings of Treasury bills was effected on Wednesday, March 14, those banks which had previously been below the 35 per
cent minimum were able to take back their full participations, without going below the
new 30 per cent minimum. Subsequently, further adjustments in Treasury bills were effected when the ratios of some of the banks dropped below the revised minimum and when
improved reserve ratios permitted the restoration of the participations of those banks,
Unless otherwise noted, holdings in this report reflect all commitments executed
through the close of business on the dates indicated.
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Federal Reserve Bank of St. Louis
Maturity Distribution of System Account
The maturity distribution of the System Open Market Account holdings,
classified according to date on which issues become due or callable, on March 7,
1951 and May 11, 1951, and the net changes between those dates are shown in the
following table:
(In thousands of dollars)
Holdings 3/7/51
Amount
Per Cent
Holdings 5/11/51
Amount
Per Cent
Net Change
Amount
Per Cent
Due or Callable:
Within 15 days
16 to 90 days
91 days to 1 yr.
Over 1 yr. to 5 yrs.
54,300
1,432,072
12,242,785
4,428,723
Over 5 yrs. to 10 yrs.
Over 10 years
.2%
6.5
55-2
19-9
986,700
337,225
4,153,377
8,479,207
4,436,766
.2$
18.7
37-9
19.8
+ 282,925
+2,721,305 +12.2
-3,763,578 -17-3
+
8,043 - 0.1
4.4
1,031,904
6.4
45,204
+ 2.0
3,073,400
13.8
3,892,357
17-0
+ 8l8,957
+
+ 3-2
22,217,980
100.0$
22,330,836
100.0$
+ 112,856
System Account Earnings
The net changes in the System Open Market Account earning rate and earnings
on an annual basis since the last meeting are shown in the following table;
Total Portfolio
Earning Rate
Earnings on an Annual Basis
System Account Portfolio
3/7/51
5/11/51
Net Change
1.5812$
$
351,315,728
$22,217,980,000
1.6694$
$
372,801,083
$22,330,836,000
+
0.0882$
+ $ 21,485,355
+ $112,856,000
1-5939$
$
330,078,225
$20,707,808,000
1.6769$
$
360,8l6,177
$21,516,012,000
+
0.0830$
+ $ 30,737,952
+ $808,204,000
Interest-Bearing Securities
Earning Rate
Earnings on an Annual Basis
System Account Portfolio
Profits Realized
Profits of $14,023 and losses of $400,347 resulting in a net loss of $386,324
were realized on securities sold from the System Open Market Account during the period
under review. Net profits for the calendar year 1950 amounted to $36,895,755 and for
the calendar year 1951 "to date there has been a net loss of $1,684,986.
Market Value of Portfolio
The appreciation or depreciation of the System Open Market Account holdings
of notes and bonds, as measured by the difference between book values and market bid
quotations is as shown below:
March 7, 1951
Appreciation (+)
or
Holdings #
Depreciation (-)
Notes
Bonds
$15,063,883,000
5,591,775,000
-$32,973,009
+ 1,703,776
May 9, 1951
Appreciation (+)
or
Holdings #
Depreciation (-)
$14,912,133,000
6,592,379,000
-$66,039,208
- 86,093,795*
* Includes depreciation on the non-marketable 2 3/4$ bonds of 1975-80 representing the
difference between par value and the book value amounting to $9,752,043 on May 9,
# Delivery basis.
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Federal Reserve Bank of St. Louis
8
BANKERS ACCEPTANCES
Bankers dollar acceptances outstanding increased further during February
and March, 1951 to $478,590,000 but declined during April 1951 to $455,904,000.
The decrease for the month of April, which is considered seasonal, amounted to
$22,686,000. The amount outstanding at the close of April 1951, was 93 per cent
higher than April 1950. The import classification increased during the year by
$130,349,000 and the export classification by $63,819,000.
Since the beginning of March, 1951, when conditions were last reported
to the Committee, the acceptance market in New York has continued to be moderately
active. Dealers' purchases of bills have averaged about $20,000,000 per week during
the period. Following uncertainty in the market with curtailed demand during the
morning of March 6, acceptance dealers advanced their rates early that afternoon by
1/8 per cent for all maturities.
No change was made in Federal Reserve Bank of New York currently effective
buying rates.
Present rates are:
Dealers' Rates:
Bid
1 to 90 days
91 to 120 days
121 to 180 days
1 3/4$
1 7/8$
2$
Asked
Unindorsed
Indorsed
1 5/8%
I9/16%
1 3/4$
1 11/16$
1 7/8$
1 13/16$
Federal Reserve Bank of N. Y,
Currently Effective Minimum
Buying Rates
1 to 90 days
91 to 120 days
121 to 180 days
Sales Contracts
Trade Bills
1 3/4$
1 7/8$
2$
1 3/4$
2$
After this increase in dealers' rates the demand improved, and has since
continued good, with one or two minor exceptions during periods of tight money.
Toward the end of the period even such conditions have not curtailed the good
demand. At the close of May 11, dealers' portfolios had declined to approximately
$196,000, all being held by one dealer.
On March 27 the Federal Reserve Bank of New York purchased for its own
account, from a member bank, $1,996,476.70 of bankers acceptances, all of which
have since matured. This was the first such purchase since September 26, 1947.
It is believed that the selling bank made this sale in order to determine if we
would buy and at what rate. Other operations of the Federal Reserve Bank of New
York in bankers acceptances from March 2 through May 11, 1951 were as follows:
Purchased for the accounts of foreign correspondents
Received for the account of a foreign correspondent
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Federal Reserve Bank of St. Louis
$48,740,220„25
7,715,975=69
9
FOREIGN BILLS
There were no open market operations in foreign "bills at this Bank "between
March 7 and May 11, 1951.
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Federal Reserve Bank of St. Louis
EXHIBITS
The following Exhibits are attached°
"A-l"
"A-2"
"A-3"
"A-4"
) - Authorizations of the Executive Committee under which
)
operations subsequent to those reported to the March 8
)
and 9> 1951> meeting have been conducted.
)
"B"
-
System Open Market Account Holdings of Government
Securities.
"C"
-
Prices and yields of Treasury bonds and long term notes.
Robert G. Rouse, Manager,
System Open Market Account
Exhibit "A-l"
MARKET AUTHORIZATIONS GIVEN TO FEDERAL RESERVE BANK OF NEW YORK
BY EXECUTIVE COMMITTEE OF FEDERAL OPEN MARKET COMMITTEE
MARCH 2, 1951 AND COMMITMENTS AND OPERATIONS
THEREUNDER THROUGH MARCH 8, 1951
1l) To make such purchases, sales, or exchanges (including replacement of
maturing securities and allowing maturities to run off without replacement) for
the System Account, either in the open market or directly from, to, or 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 to exercising restraint upon inflationary developments, to maintaining orderly conditions
in the Government security market, to relating the supply of funds in the market
to the needs of commerce and business, and to the practical administration of the
Account; provided that the total amount of securities in the Account at the close
of this date shall not be increased or decreased by more than $1 billion exclusive
of special short-term certificates of indebtedness purchased for the temporary
accommodation of the Treasury pursuant to paragraph (2) of this direction.
Commitments
Purchases:
Sales:
Redemptions:
Exchanges:
*
$200,769,000*
20,000,000
Leeway under Authorization
Purchases:
Sales and Redemptions:
$ 819,231,000
1,180,769,000
23,800,000
Includes $7^9^000 not reported to or approved at the meeting of the Federal Open
Market Committee on March 8 and 9> 1951*
(2) To purchase direct from the Treasury for the System Open Market Account
such amounts of special short-term certificates of indebtedness as may be necessary
from time to time for the temporary accommodation of the Treasury; provided that the
total amount of such certificates held in the account at any one time shall not exceed $750,000,000.
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Commitments
Exhibit "A-2"
MARKET AUTHORIZATIONS GIVEN TO FEDERAL RESERVE BANK OF NEW YORK
BY EXECUTIVE COMMITTEE OF FEDERAL OPEN MARKET COMMITTEE
MARCH 8, 1951 AND COMMITMENTS AND OPERATIONS
THEREUNDER THROUGH APRIL 5, 1951
(l) To make such purchases, sales, or exchanges (including replacement of
maturing securities and allowing maturities to run off without replacement) for
the System Account, either in the open market or directly from, to, or 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 to exercising restraint upon inflationary developments, to maintaining orderly conditions
in the Government security market, to relating the supply of funds in the market
to the needs of commerce and business, and to the practical administration of the
Account; provided that the total amount of securities in the Account at the close
of this date shall not be increased or decreased by more than $500 million* exclusive of special short-term certificates of indebtedness purchased for the temporary
accommodation of the Treasury pursuant to paragraph (2) of this direction.
*
Increased to $1,250 million by Executive Committee on March 29Commitments
Purchases:
Sales:
Redemptions:
Exchanges:
$1,027,999,000
115,000,000
80,274,000
2,529,570,000
Leeway under Authorization
Purchases:
Sales and Redemptions:
$ 417,275,000
2,082,725,000
(2) To purchase direct from the Treasury for the System Open Market Account
such amounts of special short-term certificates of indebtedness as may be necessary
from time to time for the temporary accommodation of the Treasury; provided that
the total amount of such certificates held in the account at any one time shall
not exceed $750,000,000.
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Federal Reserve Bank of St. Louis
Commitments
Exhibit "A-3"
MARKET AUTHORIZATIONS GIVEN TO FEDERAL RESERVE BANK OF NEW YORK
BY EXECUTIVE COMMITTEE OF FEDERAL OPEN MARKET COMMITTEE
APRIL 5, 1951 AND COMMITMENTS AND OPERATIONS
THEREUNDER THROUGH MAY 7, 1951
(l) To make such purchases, sales, or exchanges (including replacement of
maturing securities and allowing maturities to run off without replacement) for
the System Account, either in the open market or directly from, to, or 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 to exercising restraint upon inflationary developments, to maintaining orderly conditions
in the Government security market, to relating the supply of funds in the market
to the needs of commerce and "business, and to the practical administration of the
Account; provided that the total amount of securities in the Account at the close
of March 8, 1951 shall not "be increased or decreased by more than $1,750 million
exclusive of special short-term certificates of indebtedness purchased for the
temporary accommodation of the Treasury pursuant to paragraph (2) of this
directiono
Commitments
Purchases:
Sales:
Redemptions
Exchanges:
$1,160,165,000
307,600,000
564,521,000
2,991,631,000
Leeway under Authorization
Purchases;
Sales and Redemptions:
$1,461,956,000
2,038,044,000
(2) To purchase direct from the Treasury for the System Open Market Account
such amounts of special short-term certificates of indebtedness as may be necessary
from time to time for the temporary accommodation of the Treasury; provided that
the total amount of such certificates held in the account at any one time shall
not exceed $750,000,000=
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Federal Reserve Bank of St. Louis
Commitments
Exhibit "A-4"
MARKET AUTHORIZATIONS GIVEN TO FEDERAL RESERVE BANK OF NEW YORK
BY EXECUTIVE COMMITTEE OF FEDERAL OPEN MARKET COMMITTEE
MAY 7, 1951 AND COMMITMENTS AND OPERATIONS
THEREUNDER THROUGH MAY 11, 1951
(l) To make such purchases, sales, or exchanges (including replacement of
maturing securities and allowing maturities to run off without replacement) for
the System Account, either in the open market or directly from, to, or 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 to exercising restraint upon inflationary developments, to maintaining orderly conditions
in the Government security market, to relating the supply of funds in the market
to the needs of commerce and business, and to the practical administration of the
Account; provided that the total amount of securities in the Account at the close
of March 8, 1951 shall not be increased or decreased by more than $1,750 million
exclusive of special short-term certificates of indebtedness purchased for the
temporary accommodation of the Treasury pursuant to paragraph (2) of this
direction.
Commitments
Purchases:
Sales:
Redemptions;
Exchanges:
$1,183,735,000
307,600,000
764,048,000
2,991,631,000
Leeway under Authorization
Purchases:
Sales and Redemptions;
$1,637,913,000
1,862,087,000
(2) To purchase direct from the Treasury for the System Open Market Account
such amounts of special short-term certificates of indebtedness as may be necessary
from time to time for the temporary accommodation of the Treasury; provided that
the total amount of such certificates held in the account at any one time shall
not exceed $750,000,000=
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Federal Reserve Bank of St. Louis
Commitments
Exhibit "B1
SYSTEM OPEN MARKET ACCOUNT HOLDINGS OF GOVERNMENT SECURITIES
AND CHANGES RESULTING FROM COMMITMENTS EXECUTED
MARCH 8 TO MAY 11, 1951 INCLUSIVE
(in thousands of dollars)
Treasury Bills
Holdings
5/11/51
Purchases
Sales
Redemptions
Net
Changes
814,824
172,200
103,500
764,048
8l6,470
97,350
9,500
6,000
+
3,500
934,675
1,827,283
13,800
4,517,900
3,136,582
19,000
5,000
2,700
+
+
19,000
2,300
89,000
91,400
Exchanges
- 277,783 - 695,348
Treasury Notes to 1 yr ,
Due
"
"
"
7/
7/
7/
8/
10/
1/51-"B"
1/51-"CM
1/51-"DM
1/51
1/51
" 10/15/51
" H/ 1/51
Sub -Total
11,344,060
89,000
91,400
-
-
-
33,500 189,100
-
-
- 155,600
Treasury Notes 1-5 yrs ,
Due 3/15/54
11
3/15/55
12/15/55
244,650
89,800
3,233,623
Sub -Total
P.T.E.Treas.Bonds
Taxable Treas, Bonds
Bank Eligible
12/15/51-55
1952-53
3/15/52-54
6/15/52-54
6/15/52-55
12/15/52-54
3/15/56-58
9/15/56-59
9/15/67-72
Sub -Total
Restricted
6/15/59-62
12/15/59-62
6/15/62-67
12/15/63-68
6/15/64-69
12/15/64-69
3/15/65-70
3/15/66-71
6/15/67-72
12/15/67-72
Sub -Total
Investment Series
Total Holdings
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Federal Reserve Bank of St. Louis
5,200
5,650
+
+
5,200
5,650
3,568,073
.
10,850
+
10,850
8,200
755,325
47,400
461,900
96,700
297,600
1,000
43,200
+
+
1,000
43,200
400
+
400
31,700
12,493
18,290
2,552
6,493
18,290
2,552
+
+
+
+
31,700
6,493
18,290
2,552
1,700,460
103,635
+
103,635
319,849
693,765
56,610
119,485
129,000
233,116
488,350
27,249
5,665
5,210
12,485
75,500
47,516
146,950
63,207
226,025
254,512
100,407
27,926
21,063
_
—
.
15,000
-
15,000
-
—
—
+
27,249
+
5,665
+
5,210
+
12,485
+
75,500
+
47,516
+ 146,950
+
63,207
-1,422,349 -1,196,324
-1,291,499 -1,051,987
-2,713,848 -1,864,529
2,713,848
+2,713,848 +2,713,848
22,330,836 1,184,504 307,600 764,048 ±2,991,631 + 112,856
2,189,571
864,319
_
Exhibit "C!
PRICES AND YIELDS OF TREASURY BONDS AND NOTES
Yield
Bid Price
Change since
May 11, 1951
Taxable-Bank Eligible
2
<
1952-53
2
12/15/51-55
2 1/2
3/15/52-54
2
6/15/52-54
2 1/4
6/15/52-55
2
12/15/52-54
1 3/8 3/15/54
1 1/2
3/15/55
1 3/4 12/15/55
2 1/2
3/15/56-58
2 1/4
9/15/56-59
2 1/2
9/15/67-72
Taxable-Restricted
2 1/4% 6/15/59-62
2 1/4 12/15/59-62
2 1/2
6/15/62-67
2 1 / 2 12/15/63-68
2 1/2
6/15/64-69
2 1/2 12/15/64-69
2 1/2
3/15/65-70
2 1/2
3/15/66-71
2 1/2
6/15/67-72
2 1/2 12/15/67-72
Partially Tax-Exempt
2 3/4$ 6/15/51
3
9/15/51-55
2 1/4 12/15/51-53
2
6/15/53-55
2 1/4
6/15/54-56
2 7/8
3/15/55-60
2 3/4
9/15/56-59
2 3/4
6/15/58-63
2 3/4 12/15/60-65
March 7, 1951 May 11, 1951 March 7,1951
99.31 +
99.22
100.19
99.27
100. 5
-
.17
.6
.14
99.15
- .13
- .18
- .23
- .26
- .28
- .31
- 1.18
- 2.25
97. 2
97. 0
97.24
97. 8
97. 0
96.30
96.28
96.26
96.28
96.29
- 3.12
- 3.H
- 3.27
- 3.19
- 3.17
- 3.17
- 3.18
- 3.20
- 3.26
- 3.25
99.25
98. 5
98. 2
98.22
101.24
100. 3
2.01$
2.07
1.78
2.05
2.10
2.06
2.05
2.03
2.05
2.12
2.23
2.53
109. 6
+
.7
- .19
- 1. 4
- 1.23
- 3. 5
1.93
1.93
2.33
2.55
2.19
2.55
2.20
2.34
2.42
2.45
2.46
2.47
2.47
2.45
2.45
2.67
2.70
2.71
2.71
2.71
2.71
2.69
2.69
1.23
101.22
103. 2
105.15
106.16
107.30
1.65$
1.71
1.72
1.78
1.80
1.80
1.76
1.79
1.85
1.23
1.23
1.18
1.23
1.15
1.18
1.18
1.34
1.29
1.41
1.33
1.48
1.56
1.71
1.36
1.39
1.32
Figures after decimals represent 32nds of a point.
Note:
Premium yields have been calculated to the first call date; for prices at a
discount yields have been figured to the final maturity date.
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Federal Reserve Bank of St. Louis
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
Xo
Chairman Martin
From
Mr» Carpenter
Date February 21, 1952.
Subject:
CONFIDENTIAL
Attached is a copy of the revised draft of the minutes
of the meeting of the executive committee of the Federal Open
^arket Committee held in Washington on February 11, 19>2, together
with a memorandum showing changes in the preliminary draft.
These minutes will be presented for approval at the
next meeting of the committee.
Attachments
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Federal Reserve Bank of St. Louis
Memorandum of proposed changes in the preliminary draft of the minutes of
the meeting of the executive committee of the Federal Open Market Committee
on February 11, 1952
(Deletions are shown by cancelled type and additions by capital letters)
Page 6, second full paragraph, second sentence:
He said that action could be taken to absorb any reserves that might tend to
accumulate, that IT TJAS TO BE HOPED THAT individual banks s-keuM WOULD adjust
their reserves by borrowing RATHER THAN BY SALE AND PURCHASE OF GOVERNMENT
SECURITIES, and that open market operations should be used to maintain orderly
conditions AND TO RELIEVE EXCESSIVE STRAIN in periods of sharp market movements.
Page 7? last paragraph, first sentence:
There was a discussion of the rate at which an intermediate issue should be
offered during which Chairman Martin outlined the tentative views CONCERNING
THE APPROACHING FINANCING which the Secretary of the Treasury had expressed
to him in recent conversations.
Page 8, second full paragraph, third sentence:
Chairman Martin raised the question how important it was to tipge-T.ha^-view
witk-«*e-$Fea&ttiy PRESS THE TREASURY TO CONSIDER MT OFFERING OF AN INTERMEDIATE
BOND IN EXCHANGE FOR THE MRCH 15 MATURITY.
Page 8, last paragraph, first sentence:
After a further discussion of the COUPON rate a& which an intermediate issue
should be-e££e?e4 CARRY, in exchange for the March 15> bonds, it was suggested
that a 6-ryear bond might be offered at 2-3/8 per cent and, if there were
question whether that rate would be adequate, an alternative course would be
a 6-8 year bond at a 2-1/2 per cent rate.
Page 9? first full paragraph, first sentence:
At the conclusion of the discussion, it was agreed that a draft of letter to
the Secretary of the Treasury be prepared which would incorporate IN GENERAL
TERMS the above suggestions FOR AN INTERMEDIATE TREASURY BOND and ^HICH would
also suggest that the April 1 certificates be refunded into a new certificate
issue.
Page 10, first paragraph, first sentence;
The suggestion was also made that if the Treasury were agreeable it might be
desirable FOR IT to call in representatives of life insurance companies for
the purpose of discussing with them the problem of forward commitment of their
funds.
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Federal Reserve Bank of St. Louis
REVISED DRAFT
CONFIDENTIAL
A meeting of the executive committee of the Federal Open Market
Committee vas held in the offices of the Board of Governors of the Federal
Reserve System in Washington on Monday, February 11, 1952, at 2:00 p.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Sproul, Vice Chairman
SzyiQczak
Williams
Evans (alternate member)
Mr.
Mr.
Mr.
Mr,
Mr.
Mr.
Mr.
Mr.
Mr.
Carpenter, Secretary
Thomas, Economist
Vest, General Counsel
Rouse, Manager, System Open Market
Account
Thurston, Assistant to the Board of
Governors
Riefler, Assistant to the Chairman,
Board of Governors
Young, Director, Division of Research
and Statistics, Board of Governors
Youngdahl, Chief, Government Finance
Section, Division of Research and
Statistics, Board of Governors
Arthur "Willis, Special Assistant,
Securities Department, Federal Reserve
Bank of New York
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting of the executive committee held on November 13 and 14, 1951? were approved.
Before this meeting, there were sent to the members of the executive
committee copies of a report prepared at the Federal Reserve Bank of New
York of open market operations during the period November 14, 1951 to February 6, 1952, inclusive.
The members of the committee had also been fur-
nished copies of a supplemental report prepared at the New York Bank covering
operations on February 7 and 8, 1952.
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Federal Reserve Bank of St. Louis
Mr. Rouse commented briefly on the
2/11/52
-2-
reports and, in response to an inquiry from Mr. Evans, on the situation in
the long-term market, Copies of the two reports have been placed in the
files of the Federal Open Market Committee.
Upon motion duly made and seconded, and
by unanimous vote, the transactions in the
System open market account for the period
November 13, 1951 to February 8, 1952, inclusive, were approved, ratified, and confirmed.
At the meeting of the executive committee on November 13, 1951» it
was agreed that material should be prepared which would provide answers
to questions which might be raised during the forthcoming hearings before
the Patiaan Subcommittee with respect to profits of United States Government securities dealers who were qualified to do business with the Federal
Reserve Banks for the System open market account.
In response to that
agreement, Mr. Rouse prepared a memorandum under date of January 23, 1952,
relating to the basis upon which commissions had been paid to Government
security dealers on transactions for the System account and the aggregate
amounts paid to the dealers during the past four calendar years. A tabulation attached to the memorandum indicated that during the years 194-8 to
1951? inclusive, dealers had been paid commissions in the total amount of
approximately $6.8 million on total purchases and sales for System, account
in the sa;,ie period of almost $95 billion.
In a brief discussion of the
commissions being paid on System transactions at the present time, Mr. Rouse
stated that the existing authority to the New York Bank with respect to such
payments was entirely adequate but that if the System should move into a
period where large sales of bonds became desirable, he would want to recommend that the executive committee authorize some increase in commissions.
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Federal Reserve Bank of St. Louis
2/11/52
-3j\t the conclusion of the discussion, upon
motion duly made and seconded, and by unanimous vote, it was agreed that copies of the
memorandum should be sent to the Presidents of
all Federal Reserve Banks for their information and for such discussion at the next
meeting of the Federal Open Market Committee
as appeared to be desirable.
Mr. Thomas then presented a statement of the current economic situ-
ation and the outlook for the months ahead. Ke indicated that the current
estimates of the forthcoming defense expenditures, calling for an increase
of about $20 billion in the next year over the present annual rate, to*el her with a continued large volume of business capital expenditures,
could be attained with little or no decrease in private expenditures, except for construction. Inflation, therefore, might be avoided if consumers maintain the recent nigh level of personal savings.
He also commented on possible Treasury cash requirements for that
period, stating that the preliminary estimates made by the staff indicated
that there would be no need for new funds during the first half of the year,
that the Treasury would, have to borrow funds in the aggregate amount of
approximately $13 billion during the last half of 1952, but that for the
calendar year as a whole the net increase in the debt would be approximately
$6 billion and for the fiscal year 1953 the increase would amount to approximately £'d.$ billion. It is likely that these estimates, although below those
of the President's budget, racy still be larger than will actually be experienced.
He added that the types of securities to be offered by the Treasury
should be aimed at attracting avaij.able funds outside of the banking system.
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Federal Reserve Bank of St. Louis
2/11/52
-4-
Ari analysis was being prepared (which would be available for the forthcoming meeting of the Open Market Committee) which would give information on
the funds that might be available for investment in Government securities
in this period. It appeared from preliminary estimates, he said, that
business capital expenditures would be larger in 1952 .than in 1951 and that
net new capital issues might run as high as $6.8 or $7 billion, that the
increase in the dollar volume of mortgages outstanding might be approximately $2.5 billion less in 1952 than in 1951, that State and local governments would borrow somewhat less in 1952 than in 1951 > and that business
short-term borrowing on balance should be smaller in 1952 than in the
previous year.
He thought consumer credit would increase very little, if
at all.
Mr. Thomas made the further statement that the sources of funds included I'.arge amounts of personal savings, that some of these funds would go
into other uses, but that a revision of the savings bond program might
attract more of these directly into Government securities.
Of the total
amount of institutional funds of around $10 billion, $5 billion might be
expected to go into corporate securities and $5 billion into mortgages, and,
while insurance companies and savings banks might continue to sell Government securities, other institutional investors would be buying them on
balance, and net sales by these groups all together should be very small.
The question was whether more of these funds could be attracted into Government securities and away from other investments by appropriate offerings of
securities, possibly with some advance commitments.
It was thought,Mr.
Thomas said, that the commercial banks might have to buy some Government
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Federal Reserve Bank of St. Louis
2/11/52
-5-
securities, but that the amount of bank purchases might be small or might
be avoided altogether.
In accordance with the action taken at the meeting of the Federal
Open Market Committee on November 14., 1951» the Fesearch Committee on
Government Finar ce
had. prepared a memorandum on the subject of Government
financing in 1952 which had been sent to the members of the executive committee with a memorandum dated January 29, 1952, from Mr. Thomas. The
Research Committee memorandum included a discussion of (1) the type of tax
anticipation securities that might be offered to attract the large corporate
accruals expected to develop next fall as a result of the Mills plan, (2)
the task of refunding securities maturing in 1952 with particular reference
to the .first half of the year, (3) further suggestions regarding the savings
bond program, and (/+) means of attracting funds of institutional investors
including techniques for encouraging advance commitments or allocations of
expected funds to Treasury securities and the types of long-term securities
that might be offered.
Copies of the memorandum hed been distributed to
the members of the executive committee and the discussion of Treasury
financing at this meeting was in the light of the information contained in
the memorandum.
Chairman Martin commented on the problem of Treasury financing in the
months ahead in the light of (1) the refunding of approximately $30 billion
of maturing securities, (2) the new money needs of the Treasury, and (3) the
$24- billion of issues which are callable this year.
In this connection, he raised the question whether the two issues of
2 per cent bonds and the one issue of 2-1/4 per cent bonds which were
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Federal Reserve Bank of St. Louis
2/11/52
-6-
callable in June 1952 should be called, and stated that if the issues were
to be called public notice would have to be given by the 15th of this
month.
It was the unanimous view of the members of the committee that the
three issues should not be called.
In commenting on this point, Mr. Sproul stated that it appeared that
the economy would continue to move sidewise for some months ahead, and that
there would be no material change in the need for bank reserves in that
period, which would indicate that credit policy should be designed to keep
a check on reserves without either easing or tightening the credit situation.
He said that action could be taken to absorb any reserves that might tend to
accumulate, that it was to be hoped that individual banks would adjust their
reserves by borrowing rather than by sale and purchase of Government securities, and that open market operations should be used to maintain orderly
conditions and to relieve excessive strain in periods of sharp market movements.
He added that the last half of the year, when inflationary pressures
might be renewed and the Treasury would be borrowing in the market, might
be a particularly difficult time and that every effort should be made to
attract into Government securities the large savings accumulations that
rrvoarcd to be likely and thus avoid bank financing of the debt as much as
possible.
It was his view also that the exchange offering in the forthcoming
financing should include an intermediate issue in the range beyond 5 years,
that maturities of new issues of short-term Government securities should be
consolidated wherever possible, that the Federal Open Market Committee should
press for a revamping of the savings bond program, and that financing during the second half of 1952 should include an issue of bonds with a
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Federal Reserve Bank of St. Louis
2/11/52
-7-
maturity of 30 years or more which would be competitive with other securities in attracting available funds.
In the circumstances, it vas his suggestion that the Treasury offer,
in exchange for the $1.0 billion of 2-1/2 per cent bonds called for redemption on March 15, an intermediate issue which might be in the 6-7 year
range with a coupon of 2-3/8 per cent or in the 8-9 year range with a
coupon of 2-1/2 per cent. He did not believe that adequate preparation had
been made to permit the use of a long-term issue at this time. An intermediate security, he said, would involve little risk to the Treasury because the amount of the refunding was small, and would have the advanta.ge
of anticipating the availability for bank purchase of issues which would
become eligible beginning next Hay and for which there may be a fairly
strong bank demand in the absence of other offerings.
While the market was
still concerned about higher rates and might feel that a better opportunity
was to be found in bonds that shortly would, become eligible for bank
purchase, he felt that a step in the direction of lengthening the maturity
of the debt at this time would involve a minimum of risk with maximum
advantage both from the standpoint of debt management and credit policy,
and that if that risk were not taken the problem of financing would become
more and more difficult. With respect to the $9-5 billion of certificates
maturing on April 1, it was Mr. Sproul's view that they should be refunded
with a new certificate and that it would not be vise to include an intermediate issue in the exchange offering.
There was a discussion of the rate at which an intermediate issue
should be offered during which Chairman Martin outlined the tentative views
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Federal Reserve Bank of St. Louis
2/11/52
-8-
concerning the approaching financing which the Secretary of the Treasury had
expressed to him in recent conversations.
Various possibilities for the March 15 and April 1 refunding were
mentioned including a single issue of certificates. The opinion was expressed that if an intermediate bond were included in the offering for the
April 1 certificates it would be necessary to limit the amount of certificates that could be exchanged into the new bond so that the success of the
offering would not be endangered by uncertainty as to the amount of the
new bend that would be outstanding.
It was agreed that there might be an advantage in doing the March 15
and. April 1 refunding as of i4arch 1. It was also felt, however, because of
the need for reducing the volume of outstanding short-term debt and because
of the interpretation which would be placed upon such a course by the
market, that it would not be desirable to combine the March 15 and April 1
refunding into a single certificate.
Chairman Martin raised the question
how important it was to press the Treasury to consider an offering of an
intermediate bond in exchange for the March 15 maturity.
It was the con-
sensus of the members of the committee that it was important to begin to
move some of the existing short-term debt into longer maturities, that the
M£M"?h 15 maturity would provide an opportunity to make that beginning with
little risk, and that this point should be stressed in conversations with
the Treasury.
After a further discussion of the coupon rate which an intermediate
issue should carry, in exchange for the March 15 bonds, it was suggested
that a 6-year bond might be offered at 2-3/8 per cent and, if there were question whether that rate would be adequate, an alternative course would be a
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Federal Reserve Bank of St. Louis
2/11/52
-9-
6-8 year bond at a 2-1/2 per cent rate. A further suggestion was made that,
in order to afford the market an opportunity to adjust to the new offering,
a preliminary announcement be made to be followed later by a definitive
announcement in which the maturity and coupon rate on the new issue would
be given.
At the conclusion of the discussion, it was agreed that a draft of
letter to the Secretary of the Treasury be prepared which would incorporate
in general terms the above suggestions for an intermediate Treasury bond and
which would also suggest that the April 1 certificates be refunded into a new
certificate issue.
Chairman Martin referred to the very difficult problems of Treasury
financing that would be faced later in the year and in the ensuing discussion it was agreed that a copy of the memorandum prepared by the System
Research Committee on Government Finance should be sent to the other members
of the Federal Open Market Committee and the Presidents of the Federal Reserve Banks who were not members of the Committee and that the whole problem
of financing during the remainder of the calendar year should be considered
at the meetings of the Federal Open Market Committee to be held on February
29 and March 1, 1952.
Mr. Young stated that the Division of Research and Statistics of the
Board of Governors had prepared, a memorandum on the sources and uses of
funds of life insurance companies and that the memorandum might be helpful
in the discussions of the Federal Open Market Committee.
It was agreed
unanimously that a copy of the memorandum should be sent to all members of
the Federal Open Market Committee and to the Presidents of Federal Reserve
Banks who were not members of the Committee for their information in
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connection with the discussion at the forthcoming meetings.
The suggestion was also made that if the Treasury were agreeable it
might be desirable for it to call in representatives of life insurance
companies for the purpose of discussing with them the problem of forward
commitment of their funds.
Chairman Martin raised the question whether a copy of the memorandum
prepared by the Research Committee on Government Finance to which reference
was mr.de earlier in this meeting should be sent to the Treasury, and it was
agreed unanimously that a copy should be sent with the statement that it was
a preliminary memorandum on which the members of the Federal Open Market
Committee had reached no conclusions bub would bo discussed at a meeting of
the Committee later this month.
There was unanimous agreement that the general direction issued to
the Federal Reserve Bank of New York at the last meeting of the executive
committee should be renewed without change.
Thereupon, upon motion duly made and
seconded, the executive committee voted
unanimously to direct the Federal Reserve
Bank of New York until otherwise directed
by the executive committee:
(1) To make such purchases, sales, or exchanges (including replacement of maturing securities and allowing maturities
to run off vrithout replacement) for the System account, either
in the open market or directly from, to, or 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 to exercising restraint upon, inflationary developments, to
maintaining orderly conditions in the Government security market,
to relating the supply of funds in the market to the needs of commei-ce and business, and to the practical administration of the
account; provided that the total amount of securities in the account at the close of this date shall not be increased or decreased
by more than $1 billion exclusive of special short-term certificates of indebtedness purchased for the temporary accommodation of
the Treasury pursuant to paragraph (2) of this direction;
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';• (2) To purchase direct from the Treasury for the System
open mrrket account such amounts of special short-term certificates of indebtedness as may be necessary from time to time for
the temporary accommodation of the Treasury; provided that the
total amount of such certificates held in the account at any one
time shall not exceed $750 million.
In taking this action it was understood
that the limitations contained in the direction incluae commitments for purchases and
sales of securities for the System account.
It was agreed unanimously that there should be no change in the
understanding reached at the meeting of the executive committee on November 14 that in carrying out operations for the System account, pursuant
to the direction set forth above, the Federal Reserve Bank of New York
should be guided by the understanding that operations in both short-term
and long-term securities were to be conducted for the purpose of maintaining
an orderly market and that the points previously fixed below which longand short-term issues would not be allowed to decline had been abandoned.
It was understood that the next meeting of the committee would be
subject to call by the Chairman.
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Thereupon the meeting adjourned.
Secretary.
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