Full text of Papers of Allan Sproul : [FOMC 12/13/55]

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FOMC
AS

First, I would like to say that I think it is desirable that there be
further study and discussion of the relation between credit policy
and debt management, not on the narrow basis of the recent Treasury
financing and our purchase of when-issued securities in connection
with that financing, but taking account of the vhole area of this
relationship. This is a matter which has had some discussion in the
Federal Open Market Comaittee, and which it was understood would be
the subject of further stu^T by theambers* In pursuance of this
objective* the Federal Reserve Bank of Hew fork has recently prepared
and distributed one memorandum on the subject and 1 would tope others
would be moved to consider it further so that we soy develop a basis
for conversations with the Treasury on the broadest possible grounds.
So far as our recent purchase of when-issued securities is con­
cerned, I have detected in sone of the coaments which have been aade
a seaming reversion to the idea that the directives which the Committee
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has adopted fro* time to time are a form of Mosaic law, rather than an
experiment, as they were described by the Chairman at the hearings of
T

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^— fetorHanders subcommittee of the Joint Committee on the Economic
Report. But by the terms of Committee action they are only valid until
superseded by other action of the Ccswittee, which was done in this
case under circumstances which recommended such action to a majority
of the Committee* I do not think, myself, that this will mislead the
market. One of ray concerns has been that the longer we went without
deviation from the general principle adopted by the Committee, the
more likely it would be that when we did have to deviate it would be
taken as a sign that a situation had developed which was more dangerous
and critical than actually was the case, and that this would mislead
the market*

What has happened, as I see it, is that the principle adopted by
the Ccsnmittee, until superseded, was put to a real test when question
arose as to the success of an appropriately priced Treasury refunding,
plus cash financing, at a time when a restrictive credit policy was being
followed. It was decided that it would be consistent with our primary re­
sponsibility for credit policy to take account of our secondary responsi­
bility for coordination of that policy with debt management, in so far as
possible. This is not at all a ccraaltment or precedmt for "bailing out"
the Treasury eveiy time it cones to the market and cm whatever terms. 1
continue to hold the view, of course, that under conditions of credit
restriction when the Treasuzy has to come to market for large refundings,
and when it is also faced with the necessity of some cash borrowing, it
Is unlikely that the market will always be able to make the massive re­
adjustments which are necessary within the short period of the Treasury* a
offering}

some fora of underwriting of part of the transaction is likely

to be necessary*
On the question of whether a statement should be issued about our
reoent purchase of when-issued securities, I am of two minds. Fundamental­
ly. I am of the opinion that we oast allow our actions to speak for them­
selves, particularly in view of the difficulty of phrasing a brief
official statement which will adequately represent the views of all members
of the Committee, each one of whoa may have arrived at a decision by
a different route, and because of the likelihood of misinterpretation of
such statements no matter how carefully they may be worded. 1 have noted,
however, that what we do here often seems to reach the press and the
Government Bond services by one route or another, and 1 think that the
pressure for information concerning these purchases may be very great.
In the circumstances, 1 raiBe the question as to whether it would not be

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better to agree oil an official explanation to be added to oar public
condition statements this week, to whieh all questions could be referred,
I «

with the understanding that no one here would content oa the purchases
In any other way* So that you might consider this alternative, I hart
written out a possible explanatory note*
■The statement this traek indicates purchases
of $167 million certificates of Indebtedness for System
Open Market Account. Although it has for some time been
the policy of the Federal Open Market Coiemitte© to avoid
purchases of when-issued securities during a Treasury
financing, the Committee decided, In this instance, that
such purchases were consistent with its overriding aim of
providing reserves to the banking system In accordance with
the objectives of credit policy.*