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A meeting of the Federal Open Market Committee was held
in the offices of the Board of Governors of the Federal Reserve
System in Washington on Tuesday, December 15, 1959,
PRESENT:

at 10:00 a.m.

Mr. Martin, Chairman
Mr. Hayes, Vice Chairman
Mr. Allen
Mr. Balderston
Mr. Deming
Mr. Erickson
Mr. Johns
Mr. King
Mr. Mills
Mr. Robertson

Mr. Shepardson
Mr.

Szymczak

Messrs. Bopp, Bryan, Fulton, and Leedy, Alternate
Members of the Federal Open Market Committee
Messrs. Leach, Irons, and Mangels, Presidents of
the Federal Reserve Banks of Richmond, Dallas,
and San Francisco, respectively
Mr. Riefler, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Thomas, Economist
Messrs. Jones, Marget, Parsons, Roosa, Willis,
and Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Molony, Assistant to the Board of Governors
Mr. Koch, Associate Adviser, Division of Research
and Statistics, Board of Governors
Mr. Keir, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Knipe, Consultant to the Chairman, Board of
Governors
Messrs. Hostetler, Daane, Baughman, Tow, and
Wheeler, Vice Presidents of the Federal Re
serve Banks of Cleveland, Richmond, Chicago,
Kansas City, and San Francisco, respectively

12/15/59

-2
Mr. Coldwell, Director of Research, Federal
Reserve Bank of Dallas
Mr. Anderson, Economic Adviser, Federal
Reserve Bank of Philadelphia
Mr. Holmes, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Brandt, Economist, Federal Reserve Bank
of Atlanta
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
November 24, 1959, were approved.
Before this meeting there had been distributed to the members

of the Committee a report of open market operations covering the period
November 24 through December 9, 1959,

and a supplementary report

covering the period December 10 through December 14, 1959.
both reports have been placed in

Copies of

the files of the Committee.

Mr. Rouse called the Committee's attention to the result of
yesterday's regular weekly Treasury bill

auction, in which an average

issuing rate of 4.535 per cent was established for the three-month
bills and an average issuing rate of 4.833 per cent for the six-month
bills.

Dealer interest was reflected in awards of $337 million of the

three-month bills and $231 million of the six-month bills.

Rates

established in the auction reflected a decline from the high rates
established in the preceding week, and the fairly close range between
the average issuing rate and the stop-out was indicative of a sounder
position than in

recent weeks.

Mr. Rouse went on to say that, as pointed up in
written report to the Committee,

the regular

the period since the last meeting

12/15/59

-3

of the Federal Open Market Committee was an unusually difficult one
for the Account Management.
where the Account is

Normally,

this period of the year is

one

quite active in view of the seasonal pressures

on member bank reserve positions and on the money markets.

This year,

open market operations over the past three weeks had supplied nearly
half a billion dollars in reserves to the market, mainly through the
outright purchases of Treasury bills.
however,

At the end of the period,

the Account made a small volume of sales of securities to

foreign accounts, thereby preventing additional funds from reaching
a market that was already showing signs of ease.

In view of easier

reserve positions ahead, the Account successfully tendered in
yesterday's Treasury bill auction to run off $123 million maturing
Treasury bills.

If reserve deficits should build up again, it

would

be an easy matter to reverse this through the purchase of Treasury
bills in the open market, considering their current availability.
Including yesterday's awards,

and making no allowance for any net

sales made yesterday, dealers held about $1.2 billion Treasury bills.
Operations were considerably complicated this year by the
changes in

Regulation D, permitting member banks to count part of

their vault cash as required reserves.

As a result of the uncertainty

as to the distribution of these reserves and the extent to which they
would find their way back promptly into the central money market,
projections of bank reserve data were extremely difficult to interpret.

12/15/59

-4

The Account Management therefore relied even more heavily than usual
on the feel of the market as a guide to operations.

Towards the end

of the period, available data on country bank reserve positions seemed
to indicate that the reserves released through the action on vault
cash were working their way back into the money centers; reserve
projections,

therefore,

statistics, however,

seemed to have become more meaningful.

were still

The

hard to interpret, and the Account

Management would appreciate any comments from the Reserve Bank Presi
dents concerning their experience with member banks in

their districts

throughout the country.
As mentioned, the Account Management had boen forced to rely
to a large degree on the feel of the money market as a guide to
operations, but interpretation of the signals given off by the market
was by no means easy.
during the period,

While Treasury bill

rates reached new high levels

there were many occasions when the money market

showed clear signs of easing.

There was also evident in the market a

growing uncertainty concerning the level of interest rates in early
1960, thereby bringing into sharper focus the important question of
whether the usual easing of pressure on bank reserves and the money
markets could be expected after the turn of the year, or whether the
distortions in

the seasonal pattern of credit demand due to the

resumption of steel production might make for a shift away from the
normal pattern of an easier situation early next year.

12/15/59

-5
Uncertainty in the market concerning the trend of interest

rates over the next month or so was reflected in
Treasury bill

rates over most of the period.

rates were established in

the Treasury bill

and December 7, and the higher Treasury bill
short-term markets with bankers'

the generally rising

New high average issuing
auctions on November 30
rates spread to other

acceptance rates,

commercial paper

rates, and finance company paper rates all moving higher.

Towards

the end of the period, with dividend and tax funds provided for,
Treasury bill

rates leveled off with the resumption of buying by

some corporations,

but the uncertainty about the longer-term trend

of interest rates was still

apparent in the market.

The upward pressure on short-term rates also affected the
capital markets.

Prices of Treasury notes and bonds generally moved

lower over the period, although there was only moderate trading in
this area of the Government securities market, most of it
tax switching.

relating to

Much of the buoyancy also appeared to have gone out

of the market for corporate and municipal securities.

The stimulus

that these markets received from the successful marketing of the
American Telephone and Telegraph debentures now appeared to have
worn off.

Rates had edged upwards and most new issues had tended

to move slowly out of dealers'

portfolios.

The largest issue

scheduled for the period--the $100 million State of California
issue--was postponed,

since the State Treasurer felt that an

12/15/59

-6

anticipated rate of about

4 per cent was too high.

The issue was

now scheduled for January 13.
The bankers'

acceptance market had also been under sub

stantial pressure during the past few weeks.

Seasonal increase in

cotton bills and a growing volume of dollar exchange acceptances,
some of them for Cuban and Brazilian account, had come into the
market.

At the same time, some banks had from time to time been

selling acceptances in

order to adjust their reserve positions.

At the close of business yesterday, dealer portfolios had risen to
about $48 million--an unusually high level--and $18 million in
repurchase agreements was outstanding against bankers'
As to the Treasury financing situation, Mr.

acceptances.

Rouse stated

that the Treasury had asked for consultations on December 29 and 30
concerning the raising of about $2-1/2 billion of new money in
January and the method of taking care of the $2 billion issue of
special Treasury bills maturing on January 15.
issue,

it

At the time of original

had been announced that the bills would be rolled over into

12-month Treasury bills.

The Treasury was also arranging for

advisory committees to be in Washington on January 27,

28,

and 29

for discussion of the refunding of the February 15 maturity.
Mr.

Rouse then turned to the matter of dealer positions.

Ordinarily, he said, dealers build up inventories at this time of
the year, in

anticipation of some relaxation of pressures on bank

-7

12/15/59

reserves and the money market after the turn of the year, and the
Account would normally give them some assistance in carrying these
positions.

The problem was whether, in view of projections which

showed an easier position from now to the end of the year, the usual
year-end support should be provided.

In response to a question from

Mr. Allen, Mr. Rouse stated that the projections of the New York
Bank contained no allowance for the runoff of $123 million Treasury
bills in yesterday's auction. He also said that he felt some help
should be provided the dealers despite the low reserve figures, but
that he would appreciate advice from the Committee on this point.

and
the
the
ber
and

Thereupon, upon motion duly made
seconded, and by unanimous vote,
open market transactions during
period November 24 through Decem
14, 1959, were approved, ratified,
confirmed.

In supplementation of the staff memorandum distributed under
date of December 11,

1959, Mr. Young presented a statement with respect

to economic developments as follows:
Today's economic report is effectively summarized in
four sentences. (1) Stability of wholesale price averages
continues to contrast the middle phase of the present
cyclical expansion with the middle phase of the 1954-57
cyclical upswing. (2) Recovery of industrial production
from the steel strike setback is about as expected. (3)
Recent balance-of-payments data confirm that our inter
national position has not deteriorated further and
Expansion of
(4)
probably has strengthened some.
economic activity in industrial nations abroad continues
to be vigorous.

12/15/59
Now for a brief run-down of recent domestic specifics:
(1) The November index of industrial production is
estimated to be up one index point to 148 relative to 1947-49
as 100; the October index, it should be noted, was revised
downward to 147 on the basis of information just available.
With full-scale output in steel and steel-dependent industries
restored in December, the December index should rebound by
five or more index points. Indicative of prospects for
industrial output in the months ahead is the auto industry's
first-quarter assembly schedule at an 8 to 9 million car rate.
(2) At an outlook conference of homebuilders here in
Washington last week, the consensus forecast was for 1,200,000
housing units in 1960.
This was practically on the nose for
the seasonally adjusted housing start rate for November which
was released yesterday.
(3) Reflecting the acute shortage of new model autos,
November dealer deliveries of domestic new cars fell to
374,000, or an annual rate of 4.6 million. This compares
with an annual rate of 5.7 million as an average of preceding
from
November used car sales were off a little
months.
October, as were also used car prices, but both used car
sales and prices were well ahead of a year ago.
(4) November retail sales were off one per cent from
October, but only because of the sharp decline in automotive
sales; in other lines, sales gains were widespread. In early
December, department store sales were showing a continued
small advance over November.
Consumer instalment credit in October showed anothcr
(5)
$500 million increase, with over half of the rise in automobile
credit.
(6) Sales and new orders in durable goods lines rose
moderately in October and durable goods inventories declined
substantially further to a level over $1 billion below end-of
July holdings. The October decline in total business inventories
amounted to $500 million compared with a cutback of $300 million
While total business inventories may have
in September.
declined somewhat further in November, they must surely be
increasing again in December.
(7) Third-quarter business plant and equipment expenditures
short of earlier projected targets according to the latest
fell
Commerce-SEC survey, and fourth-quarter prospects are also for
The total of such
a short fall below earlier projections.
expenditures is still rising cyclically, however, and the most
recent survey points to further rise through the first quarter.
November employment rose moderately as the steel
(8)
The
strike settlement returned workers to jobs on balance.

12/15/59
employment rise was concentrated in durable goods industries;
in nondurable lines, employment about held even.
(9)
November hourly earnings of production workers in
manufacturing were almost 3 per cent higher than a year ago.
Weekly earnings were up very little,
however.
In the present
economic cycle, manufacturing wage rates have not shown the
tendency towards accelerating rise that they did through the
comparable phase of the last cycle.
(10) With steel industry negotiations at a standstill,
the Steelworkers Union has intensified bargaining efforts
with other industries. Copper and can industry settlements
provide for an 8 cent an hour wage increase for 2 and 3 years,
respectively, plus fringe benefits worth more than 4 cents an
hour per year.
Mr. Marget commented as follows with respect to the United States
balance of payments:
When I last reported to the Committee, I suggested that
there are two types of error against which we should be on
our guard, so far as developments with respect to our balance
of payments are concerned. "One is the error of supposing
that no adjustment is taking place in our balance of payments;
the other is the error of supposing that the adjustment is
taking place so rapidly and certainly that we no longer have
a balance-of-payments problem, and that we therefore have no
need to frame our policies with reference to what is happen
very firmly of the view that
ing in that area." I am still
both of these errors are to be avoided.
If, this morning, I
stress particularly the desirability of avoiding the second
error--which, for brevity, I shall call the danger of
excessive optimism--it is precisely because the latest news
that we have with respect to balance-of-payments developments
is, as far as it goes, encouraging.
You may recall my pointing out, last time, that the
evidence that we thought we had with respect to the improve
ment of the trade picture in the third quarter of this year
was not being reflected in the figures for our over-all
deficit in the third quarter as measured by the total gold
Fortunately, the September trade figures
and dollar outflow.
that I reported last time were encouraging, in that they
continued to give evidence of the pick-up in foreign demand
for our exports which has been apparent since June of this
year, so that the explanation of the maintenance of a gold
and dollar outflow at an annual rate as high as $4 billion--

12/15/59

-10-

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

-11-

12/15/59

11 per cent above their February-April low ( a rate of
expansion considerably faster than that experienced
during the previous cyclical upswing in exports in
1953-54), and they also included increases in areas in
which doubt has been expressed about our competitiveness.
There were increases of more than 20 per cent, for example,
in exports of autos and trucks, textile manufactures, and
agricultural products, while exports of machinery and of
chemicals also rose by more than 10 per cent.
This is certainly encouraging news, as far as it goes.
It does mean that the processes of adjustment in the inter
national accounts seem to be working, as we said they would
work if the right policies were followed.
That, after all,
is the key proviso. At the moment, the outlook is for the
kind of expansionist pressure in the economies of our trading
partners which will facilitate further adjustment if we
succeed in keeping comparable pressures from getting out of
bounds in our own economy.
There is plenty of room for a
reasoned optimism that our international accounts can be
brought into closer balance, on the assumption that we
follow policies calculated to bring about that result;
there is no room for a fatuous complacency that would ex
pect this result to come about in any case, regardless of
the degree of fiscal and monetary responsibility that we
choose to show in dealing with the problems that face us.
Mr.

Thomas made the following statement concerning financial

developments:
As was to be expected, interest rates rose in the
Short and
latter part of November and early December.
medium rates generally went above the high levels reached
in September, but some of the long-term rates have not
reached their September levels. Yields on outstanding
corporate bonds, which had not participated in the October
and November decline, have not increased particularly, and
averages for State and local government bonds have also not
risen, although they had declined substantially since
New issues of corporate bonds, however, have
September.
Some municipal offerings have
been sold at higher rates.
moved fairly slowly and amounts available for sale have
Within the past week, interest rates,
increased.
particularly short-term rates, have shown some tendency
to level out.

12/15/59

-12-

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

12/15/59

-13-

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

12/15/59
further as banks reduced their holdings.
Turnover of
demand deposits outside financial centers, which like
the volume of deposits had been relatively steady since
last spring, increased in November.
Although the money
supply is only about 1 per cent higher than a year ago,
turnover for the past three months has averaged about
7 per cent more than in the same period last year.
Reserves have been supplied to meet customary
seasonal needs for currency and credit during recent
weeks in part through System purchases of securities
and acceptances and in part through the release of
vault cash and the new allowance for remittance drafts.
The actual amount supplied through releasing vault cash
will not be known until reports are received from member
banks for the reserve periods.
The reaction of the banks
to such a source of funds can be detected only from market
action. It would appear, as Mr. Rouse has pointed out,
that utilization of the existing reserves, while slow at
first, has been felt at least to some extent in the market.
Currency demands, which conformed closely to the usual
seasonal pattern in November, appear to have shown a larger
half of December.
Required
than usual increase in the first
smaller
a
somewhat
have
shown
other
hand,
reserves, on the
than seasonal increase, owing in large part to allowance for
Current estimates of required reserves,
remittance drafts.
preliminary and subject to revision.
however, are still
In the next two months, Federal Reserve operations will
be primarily concerned with the large scale money market
adjustments characteristic of the season.
It will also be
necessary to maintain conditions that will not interfere
unduly with the series of Treasury financing operations.
This does not mean, of course, that special efforts should
be undertaken to protect Treasury financing from the effects
The course of these other
of competing credit demands.
demands will need to be watched carefully.
Seasonal reserve needs appear to have been fully met by
operations to date. Further needs may be covered by the
usual large mid-December float increase now due to begin.
From now on, System operations will need to be directed
toward absorbing reserves, although action can be gradual
and moderate, as liquidity needs normally continue large
three weeks
In the first
during the last half of December.
of January the System portfolio would have to be reduced by
nearly $1 billion if net borrowed reserves are restored to
the $500 million level.

12/15/59

-15-

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

12/15/59

-16-

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

12/15/59

-17-

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

The November survey of New England

12/15/59

-18

purchasing agents showed that 52 per cent expected no substantial
change in

production, while 35 per cent expected an increase and

13 per cent a reduction.

The 13 per cent compared with 18 per cent

the previous month, while the 35 per cent compared with 13 per cent
in

October and 51 per cent in August.

The Dodge reports showed a

4 per cent drop in construction contracts in October, the fourth
consecutive month that a decrease was reported.

For the first ten

months of this year, there was an increase of two per cent compared
with last year, the increase being less than the national average.
Residential construction had been slipping in recent months,

but for

the year the figure was still 21 per cent ahead of the preceding year,
this gain being slightly higher than the national average.

Employment

was up two per cent compared with the previous year, not as much as
nationally.

Electrical machinery, including electronics, was the

fastest growing industry in

the district from the standpoint of

employment, while no gains were found in primary metals,
transportation,

or public utilities.

below the national average; however,

foods,

Department store sales were
the 11 days after Thanksgiving

showed a better sales picture than the similar period a year ago.
District banks reporting Federal funds transactions were net sellers
through November, but they had been net buyers since the first
December.

of

There had been more active use of the discount window

during the past three weeks than during the previous six or nine
weeks.

Last Friday was the largest day in

to borrowing by Boston banks.

some time, due primarily

12/15/59

-19
Mr.

Erickson said that he would suggest no change in

discount rate or in
operations,

the directive.

the

With regard to open market

he felt that the Desk had done a good job in the past

three weeks,

considering all of the factors with which the Desk had

to contend.

Recognizing those factors,

he would recommend that the

Account Manager be given considerable latitude to maintain the same
degree of restraint, without tightening at all.
Mr.

Irons reported that Eleventh District activity was at a

high but relatively stable level.
had been some increase in

During the past few weeks there

strength, but nothing sensational.

oil production and refiningwere
somewhat,
up

Crude

along with department

store sales, while employment had improved seasonally.

Estimates

placed cash farm income for this year at about last year's figure,
which meant a lower net income due to the increased cost of doing
business.
increase in

The construction picture showed some improvement,

with an

nonresidential construction offsetting a slight decline

in residential construction.

District banks did not appear to be

experiencing the seasonal deposit increase that would normally be
expected during the fourth quarter of the year.

In fact, deposits

of weekly reporting banks had held steady for most of the year.
Loan totals also were quite stable, with no significant increase in
the past few weeks.

There had been no substantial increase in

borrowing at the Reserve Bank, but there was rather substantial use

12/15/59

-20

of Federal funds on the part of some of the larger city banks; in
contrast with the banks in

Houston and San Antonio, those in the

Dallas area were rather steady net buyers of Federal funds.

On the

whole, the Eleventh District situation was one of high-level activity,
without substantial change in either direction.

While attitudes were

generally optimistic, there was a considerable degree of uncertainty
reflecting questions such as those with respect to the steel negotia
tions,

the rapidity of further upward movement in business activity,

interest rate levels,

and Treasury problems during January and

February.
Mr.

Irons said that he would not favor a change in

rate or in the policy directive at this time.

the discount

As to open market opera

tions, he realized that the past three weeks had been difficult,
particularly with the vault cash action added to other factors that
were in

the picture.

He would like to see about the same degree of

restraint maintained that had been achieved prior to the past three
weeks, when signs of easing began to appear at times.
understandable in

the circumstances,

While this was

he felt that the deviations had

tended to be on the side of ease rather than restraint, and he would
be cautious about deviating in
to maintain a firm restraint in

that direction.

Instead, he would try

the market, and possibly even deviate

on the side of firmness rather than run the risk of creating ease at
this time.

While he would hope that deviations could be avoided, he

realized that that was probably not possible.

The statistics might

-21

12/15/59

not always be too meaningful, and the people on the firing line
must have considerable leeway in maintaining a situation consistent
with what the Committee talked about in a general way.
Mr. Irons said he would feel that, as Mr. Hayes had suggested,
there might be merit in holding the next Committee meeting on January
12, 1960, rather than January 5; the earlier date would provide only

a short interval following the Holiday Season and the long New Year
week end.
Mr. Mangels said that the resumption of steel production had
generated some improvement in the Twelfth District in early December.
Otherwise, the changes that were evident arose primarily from seasonal
factors.

There had been some increase in the demand for lumber to

build up wholesale and retail inventories.
prices firmed; plywood rose from $6
some margin for producers.

As a consequence, lumber

to $68 a thousand, thus providing

Announcement last week by three savings

and loan associations in the San Francisco area that, effective

January 1, 1960, they would increase their dividend rate from 4 per
cent to

-1/2 per cent had resulted in considerable publicity on the

radio and in the press.

The banks were asked whether they would seek

an increase in the maximum rate payable on savings deposits, and
savings and loan sources had been saying in their own meetings that
they hoped to get a substantial amount of funds to enable them to
expand their real estate loans rather extensively.

The banks estimated

that, after interest credits were given at year end, they might lose

-22

12/15/59

10 per cent of their time deposits, which would be quite a sub
stantial factor and would require a period of adjustment.

The

money might not come back, and in any event there would be a
period when the funds were out of the banking system.
While there had been some decrease in the level of net
borrowed reserves, Mr. Mangels felt that the statistics tended to
understate the degree of tightness in the market.

In his view the

market had been tightening quite substantially during the past couple
of weeks,
great deal.

Thus far the vault cash action apparently had not aided a
In the Twelfth District only 40 of 200 banks had benefited,

and in no case was the amount of benefit substantial.

While the System

should be careful to maintain sufficient restraint to avoid serious
inflationary pressures, he felt it

should also be careful--perhaps

more so--to avoid undue tightness that might have an adverse effect
on general business conditions.

Already, he noted, there were a

number of reports from banks that they were calling loans in rather
substantial amounts, and this might ultimately have harmful effects.
Therefore, without changing the directive and without any general
change in policy, he would give consideration to operating during
the forthcoming period with less restraint than had prevailed during
the past three weeks.

As to the discount rate, he noted that the

current level of bill rates was causing some speculation as to whether
a change was imminent.

While he did not think that a change should

12/15/59

-23

be made now, he felt that the matter deserved some consideration
at a time when the System had a green light.
Mr.

Deming, who participated in the morning telephone calls

during the past three weeks,

commented that he had built up much

sympathy for the Desk in the light of the difficult statistical
situation that prevailed.

Turning to the Ninth District, he said

that trends, relative to national trends, in the past several weeks
had continued to reflect the lesser gains in

the district, a situa

tion which he believed would continue for the next few months.
Perhaps the best single indicator presently available for the
district was nonagricultural employment, which in

October was only

slightly (0.3 per cent) ahead of a year ago in contrast to a 2.4
per cent gain for the national series.

The Reserve Bank had been

working on the development of personal income data but so far only
had figures for Minnesota.
personal income in

On a seasonally adjusted basis, total

that State in

October was $200 million below the

June and July highs, representing a drop of 3 per cent.

Banking data

showed about the same picture and also demonstrated some liquidity
loss and money tightness.

Total deposits at the close of November

were off appreciably from a year earlier, with much of the loss
concentrated in the past few weeks.

At the same time, total loans

were up strongly; total investments were down by four-fifths of the
loan rise.

The vault cash release meant little

with only $3 million in

to district banking,

reserves added by this action.

About 25 per

-2 4

12/15/59

cent of the country banks were affected,
mining areas.

A check of Treasury bill

mainly in

the northern

tenders before and after

the release showed no appreciable change in

amounts tendered for

by banks that had received some benefit from the vault cash release.
What had happened to correspondent bank balances was not known as
yet, but conversations with city bankers indicated that they saw no
inflow of funds.
With respect to the iron ore situation, Mr.

Deming commented

that warmer weather in December had helped the shipping picture and
that it

now looked as though a total of 42 to 43 million tons of ore

would be shipped from the Lake Superior region this season.

While

somewhat better than the estimate a month ago, this would be 20 per
cent less than last year's poor record.
national standpoint,

however,

More importantly from a

analysis of stocks and shipments from

all sources now indicated that ore supplies should not bottleneck
steel production, although the margin might be thin by next April
and might be thinner at interior steel plants than at those in
Pittsburgh and more easterly points.

It was understood that the

American Iron Ore Association, which had been somewhat more
pessimistic concerning ore shipments, was revising its

estimates

upward.
With regard to the national scene, Mr. Deming said that the
statistics and tone pointed to a vigorous upswing from the strike
induced lows in

activity.

However,

he continued to be concerned

12/15/59

-25

about the unemployment figures, particularly those relating to
long-term unemployment,
and liquidity.

and also about the data on the money supply

These seemed to him to indicate less danger of

unsustainable expansion and more danger that too tight a monetary
policy could inhibit real growth.
see any further tightening.

Accordingly,

he would not like to

He would prefer to have errors made--if

they had to be made--on the side of ease,

and he would not object to

backing away mildly from the existing degree of pressure.

He was

not quite sure how to measure the level of pressure at this time
but was inclined to agree with Mr.

Hayes that perhaps interest rates

could afford a better guide at present than they might at some other
time.

Mr.

Deming felt that the wording for the policy directive

suggested by Mr.

Mills at the last two meetings perhaps represented

more nearly what the Committee was doing at this time than the
present directive.

However,

make enough change in

he was not sure that he would want to

policy to warrant a change in

the directive.

Mr. Allen made substantially the following comments with
respect to Seventh District developments:
From the viewpoint of industry, the business outlook
in the Seventh District continues highly optimistic.
First, as has been said, national surveys indicate a
1960 increase in almost all types of capital spending. The
Seventh District produces at least one-third of the nation's
Our contacts in that area support the
capital goods.
expectation that these industries will be booming in the
coming year, with present order backlogs no worse than good
There is one
in any category and excellent in many.
exception--petroleum refining--which is unlikely to increase
capital expenditures in 1960.

12/15/59

-26-

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

12/15/59

-27
Mr.

Allen considered the outlook so obscure that the System

must wait on the discount rate even though it was out of line with
other money rates.
serious thought in

However, he felt the discount rate must be given
January.

While he would not mind changing to the

phraseology suggested by Mr.

Mills for the directive, he would prefer

to do nothing at this time.

On the general picture, he found himself

in

agreement with the comment of Mr.

was in

too little

Thomas that the greater danger

rather than too much restraint.

also in agreement with what Mr.

Irons had said.

Therefore, he was

He would neither

propose nor favor deviations on the side of ease.

Instead, he would

try to stay just about as at present and hope for a clearer picture by
the time of the next Committee meeting.
Mr.

Leedy said that Tenth District conditions had not changed

materially in

the past three weeks,

although there had been some

improvement in the employment situation since the end of the steel
strike.

The three General Motors assembly plants in the Kansas City

area had recalled all of their furloughed workers and had indicated
that they might employ additional workers before the end of the year.
Loan expansion continued at district weekly reporting banks, with
expansion of credit to finance retail trade one of the most notable
developments in business loan demand this year.

The increase in this

type of loan at reporting banks through November was roughly $35
million, whereas the largest previous increase,

in 1955, was in

neighborhood of $21 million for the full year.

Judging from

the

12/15/59

-28

department store data, the increased percentage of sales on an in
stalment basis had apparently been a factor, along with expansion
of sales, in

increasing the demands of retailers for credit.

With

the yield on Treasury bills having risen sharply above the Federal
funds rate, a few larger banks in

the district that customarily sell

Federal funds were diverting part of their excess reserves to the
bill

market.
As to policy, Mr.

Leedy said that the distortions due to the

end-of-year situation and the imminence of Treasury financing opera
tions suggested to him doing nothing more than the System had been
doing.

Accordingly,

he aligned himself with those who felt that it

would be advisable to continue the degree of restraint at which the
Committee had been aiming, but which may not have been fully ac
complished in

the past few weeks.

He agreed with the view that

errors on the side of ease should be avoided.

Except for the

end-of-year period and the uncertainty with respect to the steel
negotiations,

he felt that the Committee ought to be thinking of

increasing restraint as well as moving on the discount rate.
seemed to him there was such strength evident in

It

the economy and in

the projections for next year that the System need not be too much
concerned about the possibility that it

was dealing with a delicate

situation which might be triggered adversely by firm and positive
action.

Even if

the System should overshoot the mark, he did not

believe that would seriously impair the developing expansion that

-29seemed to be under way.

This view, he felt, was reenforced by the

public psychology that seemed to exist on every hand.

In summary,

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

Leach noted that there was now an open

period in the Treasury financing schedule and that the discount rate

12/15/59

-30

was somewhat out of line with other short-term rates, especially
the 90-day bill rate.

He recalled, however, that Treasury bill

rates usually peak seasonally about this time in December and then
decline.

Under present circumstances,

it

seemed to him that System

policy should be one of continuing to hold a tight rein, pending
developments,

rather than to pull the reins even tighter or move in

the direction of ease.
directive that

Mr.

While he rather liked the wording for the

Mills had proposed at the two most recent Com

mittee meetings, he did not think it
change in

was a good time to make any

the directive which would suggest a change in policy.

there was to be no change in
In summary,

If

policy, he would not change the directive.

he would not favor a change in the directive, in the dis

count rate, or in

the degree of pressure now exerted by open market

operations.
Mr.

Mills said he wished to return to his plea for a System

monetary policy of moderate restraint over the expansion of bank credit
as compared to a policy of relatively severe restriction.

In that

connection, he believed that the mechanical aspects of System policy
operations in

recent weeks,

free reserves,

had been in

as measured by the level of negative
the right direction and were appropriate

to the economic circumstances portrayed to the Committee by Messrs.
Young,

Marget,

and Thomas.

Moving into a new year, he saw a need to

look further afield than the next meeting of the Committee and to

12/15/59

-31-

probe into the relatively obscure economic future.

Accordingly,

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

12/15/59

-32

real growth in the gross national product at the same
time that accumulated incomes are largely diverted
toward the repayment of debt rather than toward ex
pansive expenditures involving the additive of newly
created credit.
In my belief, Federal Reserve System
monetary and credit policy for the foreseeable future
should aim at moderate restraint over the expansion
of credit.
Mr. Mills said that he would not favor an increase in the
discount rate.
in

He wished to propose again to the Committee a change

the directive so that clause (b) would read "to fostering sustain

able economic growth and expanding employment opportunities while
guarding against inflationary credit expansion."
With respect to the question raised by Mr. Rouse regarding
dealer positions, Mr.

Mills said it

would seem that the Desk could

give reasonable help to the dealers and the market in

the latter days

of this month, but on a reluctant basis and bewaring of "crocodile
tears."
Mr.

Robertson said he found himself in

ment with Messrs.

Irons, Allen, Leedy,

almost complete agree

and Leach.

It

seemed to him

the strength of the economy was such that one could not afford to be
easing off at this time.
be holding steady,

Instead, he felt that this was a time to

notwithstanding the fact that this might result

in problems for the System during the Treasury financing period in
January.

By holding steady he did not mean making all

on the side of ease.
he felt

that it

of the errors

During his tenure as a member of the Committee,

had usually been the tendency to lean toward ease

12/15/59

-33

when the Committee wanted to hold a steady course.

Therefore,

he

would suggest that errors be on the side of restraint in the hope
of maintaining an even keel.

In saying this, he did not mean to

criticize the operations of the Desk during the past three weeks;
this had been a difficult time with the vault cash release added to
other factors.

Nevertheless,

he felt that it

had been more customary

to veer on the side of ease rather than restrictiveness,
see no justification in

easing at this time.

If

anything, he felt

that the Committee ought to be pushing as hard as it
steady, firm rein.

could to hold a

The policy that the System had been following

appeared to be beginning to bite, and it
more severely, if

and he could

should, perhaps a little

the System was going to curtail what he thought

was in the offing, namely, boom conditions.
change in the directive.

He would not favor a

A case could be made for increasing the

discount rate, but it was not a sufficiently good case to cause him
to urge an increase.
Mr. Shepardson said he could not add much to what Mr.
Robertson had said.

The end-of-year situation, the easing that

normally follows after the first

of the year, and the fact that

Treasury financing was to be in

the picture a good part of the

next two months all tended to make it difficult to take a tighter
hold at this time.

However, since he foresaw a burgeoning of

activity after the turn of the year, he felt that the System should
maintain as firm a grip on the situation as possible.

Because of

12/15/59

-34

the inadvertent but apparently inevitable slippage when attempting
to maintain the prevailing degree of restraint, he would suggest,
like Governor Robertson,

that any errors be on the side of restraint.

With reference to the point mentioned by Mr.

Mills, he felt

that all

should be somewhat concerned about the extent of credit expansion.

As

he saw it, the best way of meeting the problem would be to maintain
the existing degree of restraint.

Since the System probably would

want to go farther rather than turn back if

things picked up after

the turn of the year, and since the System might be retarded in facing
that situation because of Treasury financing activities, it

seemed to

him necessary to maintain as tight a position as possible at the
moment.

In summary, he would recommend no change in policy or in

the

discount rate, and he would like to maintain the full degree of market
restraint that now existed.
Mr. King said he felt that System monetary and credit policy
was definitely having a desirable effect on the economy,
much effect as it

about as

should for the country's good in the long run.

He

expressed agreement with the degree of restraint that had been main
tained up to the past three weeks.

These three weeks had been

difficult and he would be inclined to forget about them.
period ahead,

he would consider it

In the

desirable to liquidate enough of

the System portfolio to maintain the restraint that existed prior to
the past three weeks.

He would not consider it

wise to fix any amount

of securities to be disposed of, and felt that this should be decided

12/15/59

-35

upon according to the feel of the market.

He would not favor a

change in the directive or the discount rate at the present time.
Mr. Fulton said that about the only thing he could report
on the steel situation was that steel was being produced at a high
rate.

Fourth District mills were operating at approximately 97 per

cent of capacity,
per cent.

which was above the national average of about 95

On or about January 7, a vote would be taken under the

provisions of the Taft-Hartley Act to determine whether the latest
proposal of the steel companies would be accepted by the workers;
probably it

would not be accepted.

If

not, and if

nothing else were

done, the strike would resume around the 27th of January.

The

companies were standing on an offer that would provide a package of
30 cents over a three-year period, this being about the extent of
the improvement factor in

steel production.

The union was now follow

ing the technique of seeking agreements with the other industries
served by it.

Both the can and the copper industries had already

signed up, and it

appeared that the aluminum industry would enter

into a contract containing a package similar to that agreed upon
between Kaiser and the union in regard to that company's steel workers.
The price of aluminum was lowered about two years ago because of over
capacity, lack of orders, and imports of aluminum.

The industry felt

that the current price was too low, and with a wage increase one could
look forward to a possible price adjustment.

There was no expectation

of a sudden inflow of steel orders or any real pressure for deliveries

12/15/59

-36

in the first

quarter of next year.

that were not expected,

Steel was coming in in quantities

unusually large quantities in

Warehousemen were getting adequate supplies,
certain types of inventories.

some cases.

although not always in

In the event of resumption of the

steel strike, close-downs on the part of steel users were likely to
be rather rapid and widespread.
Continuing his comments on the Fourth District, Mr. Fulton
said that construction was 11 per cent under last year, while depart
ment store sales were 7 per cent above a year ago.

Although there

was considerable pressure on the banks for credit, the increase in
loans had been gradual and bankers did not expect a surge of demand.
Member banks had not been coming to the discount window to an in
ordinate extent.
Mr.

Fulton commented that several Cleveland directors

represented companies that had established plants abroad.
last directors'

At the

meeting there was some discussion as to the present

and potential effect of the establishment of such plants on employ
ment in

the United States.

One director reported that the cost of

tooling a new plant in Europe was only about 25 or 30 per cent of
the cost in the United States.
plant in

Another reported that workers at a

Japan were receiving for one day what American workers

would receive in

one hour.

The general feeling was that considerable

production was being lost to foreign plants established for the

12/15/59

-37

purpose of dealing in the countries concerned and also for the
purpose of shipping certain products back to the United States.
The directors expressed concern about profits of United States
corporations from the standpoint of whether such companies would
be able to compete with respect to ordinary run-of-the-mine products
manufactured abroad.
Mr. Fulton did not feel that an increase in the discount rate
at this time would be appropriate in view of the possibility of a
resumption of the steel strike.

He aligned himself with those who

would retain a firm hand on bank reserves and, if

possible, recapture

the posture of restraint that existed prior to the relaxation which
occurred incident to the release of vault cash.
directive in

its

directive is

indicative of a change in policy.

He would leave the

present form under the premise that a change in

into a box by relaxing at this time if
activity after the first

the

In order not to get

there should be a surge of

of the year, he felt that a firm hand was

necessary.
Mr.

Bopp said that developments in

the Third District did not

differ sufficiently from national developments to merit any particular
comment.

Steel operations were at 102 per cent of capacity, and

district banks seemed to be under more pressure than banks throughout
the country as a whole.
Despite the fact that, as the last three weeks had shown, data
on reserves are not the only measure of restraint, Mr.

Bopp felt that

12/15/59

-38

these data should be as good as possible.

Therefore, the Philadelphia

Bank planned to collect daily information on deposits and related
items from member banks.

The banks were to be asked to report on a

prescribed form which would be sent to the Reserve Bank with the cash
remittance letter.

The Reserve Bank would process the data by machine

tabulation, and at the end of each reserve computation period each
member bank would receive a report showing its position.
project was experimental,

While the

the Reserve Bank was optimistic that it

would work out well.
Mr. Bopp said that he would favor continuing the present
degree of restraint.

He would be inclined to emphasize interest

rate levels rather more than the level of reserves during this
period.

He would not recommend any change in the discount rate or

the directive.
Mr.

Bryan said that at the Atlanta directors'

meeting last

week the reports of branch directors and comments of the group seemed
to indicate a great deal of optimism.

He was puzzled as to whether

to rely on such reports or on the statistics, for the latter tended
to show a spotty situation, with no evidence of great boom in the
Sixth District.

Nonfarm employment was up only slightly, manufactur

ing employment and department store sales were down, bank debits were
down significantly, demand deposits and currency had declined, and so
on through the statistical series.

Construction contracts were about

12/15/59

-39

20 per cent under a year ago.
Mr. Bryan commented that district member banks were borrowing
heavily from the Reserve Bank.

Borrowings had been running rather

regularly at over 15 per cent of the System total, whereas a figure
of about 5 per cent would normally be indicated.
know just what the cause of the borrowing was,

While he did not

some of it

seemed to

reflect the fact that loan totals in the district had gone up a little
more rapidly than loans throughout the nation while the liquidation of
investments had been more reluctant and considerably slower.

The

Reserve Bank was encountering a number of continuous borrowing situa
tions.
As to policy,
with Mr.

Mills who,

if

Mr. Bryan said he wished to associate himself
he understood correctly, approved a policy of

restraint but had some fear that the System might overdo it
a deflationary situation.

If

and produce

there was no objection, Mr. Bryan wished

to introduce into the record a chart and three tables which he felt
had a bearing on a point he had made in the past, namely, that a
situation appeared to be approaching in which the matter of the growth
factor in reserves should have serious consideration.

He felt that

the System was now at that point, rather than approaching it,
was willing to let the chart and tables speak for themselves.

and he
He

also would like to introduce them because of his conviction, as stated
from time to time, that one of the pertinent problems of the System
and the Open Market Committee is to find a means by which instruction

12/15/59

-40

can be given in

quantitative rather than qualitative terms.

He said

that he might wish to refer to the chart and tables at some later
time for the purpose of furthering that discussion.
There being no objection, it was understood that the chart
and tables referred to by Mr. Bryan would be made a part of the record
of this meeting.1/
Mr. Johns expressed concurrence in

the comment by Mr. Thomas

that the greater danger was in too little rather than too much re
straint.

It

appeared reasonable to expect that the demand for credit

would rise greatly relative to savings in view of the expected
behavior of inventories and other factors including consumer credit.
It

also seemed likely that the velocity of money would resume an

upward course.

Therefore,

if inflationary deposit creation was to be

avoided, he was of the opinion that bank credit expansion must be
quite limited and that high interest rates--possibly increases--must
be expected.

In the circumstances,

he would avoid any relaxation of

restraint and even the appearance of relaxation.

He was impressed

by the fact that the discount rate was unusually low in

comparison

to the level of other short-term interest rates, that this situation
had persisted,
10 days.
However,

1/

and that the spread had widened in the past week or

Therefore,
if

he tended to favor an increase in

an increase was not to occur, he still

Copies are attached to these minutes.

the rate.

felt confident

12/15/59

-41

that restraint upon unwarranted credit expansion could be exercised
through appropriate open market actions.
change in the directive at this time.

He would not suggest any

With regard to the question

of dealers' positions raised by Mr. Rouse, he concurred in the answer
given by Mr. Mills.
Mr.

Szymczak said that he had little to add to the discussion.

He was impressed by the statements of Messrs. Mills and Bryan, if for
no other reason than that he felt study was indicated regarding various
means of measuring System judgments on policy.

In his opinion, policy

could hardly be changed at this time in view of the fact that the
Treasury was about to go into the market and would stay in the market
almost continuously for some time.

In these circumstances, he would

continue the policy that the System had been pursuing.
Mr. Balderston said that Mr. Bopp had encouraged him greatly
by advancing the suggestion for measurement of money supply changes
in

the Third District.

statement of the day.

This,

he felt, might be the most significant

He would not want to change the directive until

policy was changed, and he would not favor changing the discount rate
until after the Treasury financing had been completed.

By that time

more might be known about the steel situation and also about the
prospect of excessive movements in the economy.

Between now and the

next Committee meeting, he would favor retaining a firm position
because he feared that errors on the side of ease might deceive many
people, including the Committee.

The time was not far off when the

12/15/59

-42

building of inventories could be resumed again as steel supplies
became available,

and he anticipated that loan pressures would be

enhanced.
Chairman Martin said the impression he had of the money
market at the moment,

in the light of today's discussion, was that

what the System did would not really make too much difference.
During the discussion he had endeavored to keep a check of the views
expressed,

and on the basis of this tally it

would seem difficult

for the Account Manager to have any real indication as to whether
the Committee favored more ease or more restraint.

However,

while

one or two who had spoken seemed to favor a slight basic change in
policy toward less restraint, he felt that the majority favored a
steady policy.
The Chairman then stated that he would like to make one or
two comments about the year as a whole which related to the present
situation.

First, it

was his feeling that the System must be con

stantly on guard against taking itself too seriously.

This comment

applied to the measurement of net borrowed reserves and of degrees
of restraint, or lack of restraint, more than in any other field.
A man from Mars would think, perhaps,
shade of restraint in

the money market the Open Market Committee was

going to make or break the economy in
of time.
it

While that comment,

did have a bearing,

that by exercising a particular

the course of a given period

of course, was facetious, he felt that

12/15/59

-43
Chairman Martin said that he was inclined to look upon 1959

as a satisfactory year for the System, although he felt sure that a
great many people did not agree with System policy, because the
System had maintained a consistent, intelligent, and understandable
course.
that it

This probably was not true in
was true in

In 1959, however,

1957,

1958, and he was not sure

although he believed it

was true in 1956.

the Federal Reserve had maintained a clear enough

policy so that even those who disagreed were able to understand what
the System was trying to do.

He considered this encouraging,

and he

therefore thought of 1959 as a good year for the System.
When it

came to the period immediately ahead, the Chairman

said, he did not know whether it
System conducted itself
too seriously.

It

made a lot of difference how the

as long as the System did not take itself

seemed to him that the money market had a great

many forces that no one could evaluate.

Then, too, there was the

balance-of-payments problem, now complicated by the boom in Europe.
In a boom situation, attitudes with respect to cost-price problems
are different than when a boom is

not in process, and the pricing

mechanism of the world tends to be out of joint.
investment,

including investment abroad,

Attitudes on

had changed markedly in

the course of the last year, and there was today a shifting of
capital all around the world.
Chairman Martin commented that all of these factors exerted
an influence on prices and interest rates.

This was a part of the

12/15/59

-44

ferment going on in

the money market at the end of the year.

he came out was that the System was going well, that it
steady in

Where

should keep

the boat, and that the problem was one of rolling with the

punches at this juncture.

This was not in

Committee should disregard Mr. Mills'
quantity of the money supply.

basic point regarding the

Personally, he did not know just how

to measure the money supply, but Mr.
bringing the matter up.

any sense to say that the

Mills was doing a service in

Like many others, he (Chairman Martin) was

unable to make heads or tails of the money supply on either a
quantitative or a qualitative basis.

For the year as a whole the

increase in the money supply appeared to have been less than one per
cent,

and while he felt that this was more than offset by the increase

in velocity,

he could not prove it.

In other words, while he believed

that the increase in velocity adequately provided for growth he could
not prove this statistically.
of judgment.

This was where one got into the element

One should not go overboard on the money supply question

unless he was certain that the velocity factor was not playing a part.
Personally, he felt that money supply factors in

terms of velocity were

the crucial points that the System must take into consideration at this
time.

For this reason, he was wary about lessening restraint.

the optimism that was now in

With

the picture, the question was not so much

whether the System was going to have a tight rein on the money supply
as one of gauging what the supply ought to be.

12/15/59

-45
After commenting on prevailing public attitudes with respect

to the use of credit, including credit at the consumer level, Chairman
Martin said that this was a difficult problem for the System.

He went

on to say that he felt quite optimistic about the coming period.
one made a list

of the problems with which the System was confronted,

he could tend to get depressed.
not warranted; the problems,
resolved.

If

Indeed, it

However, that kind of depression was

no matter how difficult, could be

was the job of the System to deal with such

problems.
In a further comment,
Mr.

Chairman Martin expressed regret that

Riefler was going to retire at the end of this year.
Summarizing this meeting, the Chairman said that there appeared

to be no question regarding the consensus.
in

the directive,

at this time.

and a change in

There should be no change

the discount rate was not favored

He then inquired whether anyone disagreed with that

statement of the consensus.

When no comments were heard, the Chair

man commented that this would stand as the consensus.
Turning to the question of the policy indicated by the
consensus,

the Chairman said he presumed that Mr.

Mills wished to

reiterate his previous position and have his comments placed in the
record.
After Mr.

Mills replied in

the affirmative,

the Chairman

inquired whether there were others who would like to associate

12/15/59
themselves with Mr. Mills and to have their views similarly recorded.
Hearing no comment to such effect, the Chairman said that this would
cover the vote on the policy indicated by the consensus.
With regard to the directive,

Chairman Martin turned to Mr.

Rouse and inquired whether he saw reason for a change, indicating
that otherwise the directive would be retained in its

present form.

Mr. Rouse said he saw no reason for a change.
Thereupon, upon motion duly made
and seconded, the Committee voted, with
Mr. Mills voting "no," to direct the
Federal Reserve Bank of New York until
otherwise directed by the Committee:
(1) To make such purchases, sales, or exchanges
(including replacement of maturing securities, and
allowing maturities to run off without replacement)
for the System Open Market Account in the open market
or, in the case of maturing securities, by direct
exchange with the Treasury, as may be necessary in
the light of current and prospective economic conditions
and the general credit situation of the country, with a
view (a) to relating the supply of funds in the market
to the needs of commerce and business, (b) to restrain
ing inflationary credit expansion in order to foster
sustainable economic growth and expanding employment
opportunities, and (c) to the practical administration
of the Account; provided that the aggregate amount of
securities held in the System Account (including com
mitments for the purchase or sale of securities for
the Account) at the close of this date, other than
special short-term certificates of indebtedness
purchased from time to time for the temporary accom
modation of the Treasury, shall not be increased or
decreased by more than $1 billion;
To purchase direct from the Treasury for the
(2)
account of the Federal Reserve Bank of New York (with

12/15/59

-47

discretion, in cases where it seems desirable, to issue
participations to one or more Federal Reserve Banks)
such amounts of special short-term certificates of
indebtedness as may be necessary from time to time for
the temporary accommodation of the Treasury; provided
that the total amount of such certificates held at any
one time by the Federal Reserve Banks shall not exceed
in the aggregate $500 million.
Chairman Martin then referred to the suggestion that the next
meeting of the Committee be held on January 12, 1960.

He said he saw

no objection, although the organizational meeting of the Committee
should be held on March 1, 1960, which would fall on a Tuesday.

This

would mean having meetings at two-week intervals at some point.

There

would be some advantage in
because it

deferring the next meeting until January 12

might be possible to get additional information with re

spect to the year-end period.

Accordingly,

the meeting might be set

for that date, at which time the Committee could decide what schedule
it

wished to follow thereafter.
In response to a comment by Mr.

Hayes that an alternative

would be to go four weeks between meetings on some occasion, the
Chairman suggested that in

seemed doubtful

the forthcoming period it

whether the Committee would want to let that long a period elapse.
After further comments,

it

was agreed that the next Committee

meeting would be set for January 12,

1960, at which time the Committee

would decide what to do about succeeding meetings.
however,

It

was understood,

the organizational meeting would be held on March 1, 1960.
Mr.

Hayes commented that several persons at this meeting had

referred to getting back to the posture that existed prior to the

12/15/59

-48

past three weeks,
quite easy.

thus implying that the past three weeks had been

He took strong exception to that view, both from the

standpoint of statistics and the money market atmosphere.

As to

the statistics, he noted that the level of net borrowed reserves had
been higher, on average,

during the past three weeks in

release of vault cash; in

spite of the

fact, the figures might be interpreted to

mean that there had been a tighter position during the last few weeks
than earlier.

This was confirmed by the general feeling of the banks

and also the fact that short-term rates moved up quite sharply and
averaged well above the preceding three weeks.

On all counts,

there

fore, he dissented from the view that the situation was any easier
during the past three weeks.
Mr. King said his comment had been intended to go to the
point that the situation prior to the past three weeks presented a
clearer picture and was less subject to controversy.

Accordingly,

he had suggested eliminating the past three weeks as a benchmark.
The members of the Committee staff then withdrew and the
Committee went into executive session.
Following the executive session the Chairman advised that
the Committee had elected Ralph A. Young as Secretary of the Federal
Open Market Committee and Guy E. Noyes as Associate Economist,
effective January 1, 1960.
The meeting then adjourned.
Assistant Secretary

13

12

7

D

19r7
Hote:

.

D

1948
.sbed avSa

3
1919

3
1950

J7
1951

D

3
1952

D

J
95

D

J
1954

D

.7

D

955

O Oor5ing to ref are-=* dates ot Kstionsl Bureu ct Eonm'it Rzea&rcb. P
Kovber 1959
Trend 1
exhibits an amuni hgroJth of 3.6 percent per year.

Indicate re:3ons

Last Mont plotted:

D

J

D

1956
-

P-Peak;

3
1957

-

Troogh.

D

D
1958

1959

TABLE I
COMPOUNDED ANNUAL GROWTH RATES OF EFFECTIVE RESERVES
(Percent changes, base year to terminal year)

Base
Year

1947

1948

1949

1950

Terminal Year
1952 1953 1954

1951

1955

1956

1957

1958

1959

(11 mos.)
1947

x

1.8

1.0

2.0

2.6

3.2

3.1

3.4

3.3

3.1

2.9

3.3

3.0

1948

x

x

0.2

2.0

2.9

3.5

3.3

3.6

3.5

3.2

3.0

3.4

3.3

1949

x

x

x

3.9

4.3

4.6

4.1

4.3

4.1

3.7

3.4

3.8

3.6

1950

a

xa

a

4.6

5.0

4.2

4.4

4.1

3.7

3.3

3.8

3.6

1951

x

x

x

x

x

5.4

4.0

4.3

4.0

3.5

3.1

3.7

3.5

1952

x

x

x

x

x

x

2.6

3.8

3.5

3.0

2.6

3.4

3.2

1953

x

x

x

x

ax

x

5,0

4.0

3.1

2.6

3.6

3.3

1954

a

x

a

a

x

x

x

x

3.0

2.2

1.9

3.3

3.0

1955

x

x

a

a

x

x

X

x

x

1.3

L.3

3.3

3.0

1956

a

x

ax

x

xa

a

a

a

2.0

4.3

3.6

1957

a

x

x

x

x

x

x

x

x

x

a

6.6

4.7

1958

x

x

x

x

x

x

x

x

x

x

x

X

2.1

1959

x

x

x

x

x

x

x

x

x

x

X

x

x

*Reserve figures exhibited in Table I and the chart on effective reserves
are total member bank reserves (monthly averages of daily figures) adjusted for
No effort was made
changes in reserve requirements and for seasonal influences.
to remove the expansion potential of total reserves reculting from shifts in de
posits among classes of banks and between types of deposits subject to different
requirements.
Method of computation: For May 1958-November 1959, figures used are actual
Monthly values of effective
member bank reserves, adjusted for ceeaonal influences.
reserves for January 1947 through April 1958 (when reserve requirements were last
changed) have been derived by (1) obtaining the ratio of average required reserves
to average deposits subject to legal reserves for Hay 1958-April 1959; (2) multi
plying actual reserves by the percentage the above ratio is of the ratio of re
quired reserves to deposits subject to legal reserves for each specified month;
and (3) adjusting the values for seasonal influences.

TABLE II
COMPOUNDED
ECONOMY
S.
U.
THE
OF
RATES
GROWTH
ANNUAL
(Percent
to
year
base
changes,
terminal
GNP
of
year,

in 1954

dollars)
Base
Year

1947

1948

1949

1950

1951

Tere-'nsl Year
1S52 1953 1954

1955

1956

1957

1958

1959

tra.)

(3
1947

x

3.9

1.8

4.1

4.9

4.6

4.6

3.7

4.2

4.0

3.8

3.2

3.5

1948

x

x

-0.2

4.1

5.2

4.8

4.7

3.6

4.3

4.0

3.7

3.1

3.4

1949

x

x

x

8.7

8.1

6.5

6.0

4.4

5.0

4.6

4.3

3.5

3.8

1950

x

x

x

x

7.5

5.4

5.1

3.4

4.3

3.9

3.6

2.9

3.3

1951

x

x

x

x

x

3.4

3.9

2.0

3.5

3.2

3.0

2.2

2.8

1952

x

x

x

x

x

x

4.4

1.3

3.6

3.2

2.9

2.0

2.7

1953

x

x

x

x

x

x

x

-1.7

3.1

2.8

2.6

1.6

2.4

1954

x

x

x

x

x

x

x

x

8.2

5.1

4.0

2.4

3.2

1955

x

x

x

x

x

x

x

x

x

2.1

2.0

0.5

2.0

1956

x

x

x

x

x

x

x

x

x

x

1.8

-0.2

2.0

1957

x

x

x

x

x

x

x

x

x

x

x

-2.3

2.1

1958

x

x

x

x

x

x

x

x

x

x

x

x

6.7

1959

x

x

x

x

x

x

x

x

x

x

x

x

x

TABLE III

COMPOUNDED ANNUAL GROWTH RATES OF PRICE INFLATION
(Percent changes, base year to
terminal year, in Consumer Price

Index)

Base
Year

1947

1948

1949

1950

1951

Terminal Year
1952 1953 1954

1955

1956

1957

1958

1959

(10 mos.)
1947

x

7.6

3.2

2.5

3.8

3.5

3.1

2.7

2.3

2.2

2.3

2.4

2.2

1948

x

x

-1.0

0.0

2.6

2.5

2.2

2.2

1.6

1.5

1.8

1.9

1.7

1949

x

x

x

1.0

4.4

3.7

3.0

2.4

2.0

1.9

2.1

2.2

2.0

1950

a

x

x

x

8.0

5.1

3.6

2.8

2.2

2.1

2.3

2.3

2.1

1951

x

x

x

x

x

2.3

1.5

1.1

0.8

0.9

1.3

1.5

1.4

1952

x

x

x

x

a

x

0.8

0.6

0.3

0.6

1.2

1.4

1.3

1953

x

x

x

x

x

x

x

0.3

0.0

0.5

1.2

1.5

1.4

1954

x

x

x

x

x

x

x

x

-0.3

0.6

1.5

1.8

1.6

1955

x

x

x

x

x

x

x

x

x

1.5

2.5

2.6

2.1

1956

x

x

x

x

x

x

x

x

x

x

3.4

3.1

2.3

1957

x

x

a

x

x

x

x

x

x

x

x

2.7

1.7

1958

x

x

x

x

x

x

x

x

x

x

x

x

0.7

1959

x

x

x

x

x

x

x

x

x

x

x

x

x