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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,


February 11, 1958,


10:00 a.m.

Martin Chairman
Hayes, Vice Chairman

Messrs. Fulton, Irons, Leach, and Mangels, Alter
nate Members of the Federal Open Market Com
Messrs. Erickson, Johns, and Deming, Presidents
of the Federal Reserve Banks of Boston, St.
Louis, and Minneapolis, respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Sherman, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Atkinson, Bopp, Marget, Mitchell, Tow,
and Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Carpenter, Secretary, Board of Governors
Mr. Koch, Associate Adviser, Division of Re
search and Statistics, Board of Governors
Mr. Miller, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Messrs. Gaines and Stone, Managers, Securities
Department, Federal Reserve Bank of New York
Messrs. Roosa, Daane, Abbott, Strothman, and
Wheeler, Vice Presidents of the Federal
Reserve Banks of New York, Richmond, St.
Louis, Minneapolis, and San Francisco,



respectively; Mr. Balles, Assistant
Vice President, Federal Reserve Bank
of Cleveland; Mr. Coldwell, Director
of Research, Federal Reserve Bank of

Dallas; and Mr. Willis, Economic Ad
viser, Federal Reserve Bank of Boston
Before this meeting there had been distributed to the mem
bers of the Committee a report prepared at the Federal Reserve Bank
of New York covering open market operations during the period

January 28 through February 5, 1958, and a supplementary report
covering commitments executed February 6 through February 10, 1958.
Copies of both reports have been placed in the files of the Federal
Open Market Committee.
Reporting on the management of the System Open Market Account
since the last meeting, Mr.

Rouse said that it

had been possible to

maintain an even keel in the market during the period of the Treasury
financing with minimum open market activity.

The New York banks have

been in a relatively tight reserve position for the past few days,
principally as a result of loans to dealers to carry maturing securi
ties that have been exchanged for the new issues.
be delivered on February 14,

The new issues will

and the New York situation should unwind

itself at that time.
On the whole,

the Treasury refunding was successful,



Attrition on the 3-3/8 per cent certificates, the most important

issue in

the exchange was only 5 per cent.

Special circumstances with



respect to interest adjustments and other factors led to somewhat
larger attrition in the case of other "rights."

Both the market

and the Treasury were well pleased at the outcome of the opera

Mr. Rouse said he was surprised that subscriptions for the

long-term 3-1/2 per cent bonds had not been larger; he had expected
an amount above $2 billion rather than the $1.7 billion subscribed

There was some speculation in this issue at first, but that

soon quieted down.

Trading since the books closed reflects good

investor interest.
The problems confronting open market operations in the near
future are related to Treasury operations.

Mr. Rouse reported that

the Treasury had just sold $100 million of gold and had transferred
the proceeds into its balances to avoid reducing these balances be
low a minimum working level, and another $100 million might be trans
ferred into the balance from the sale of gold today in order to meet

Another problem, related to the Treasury financing,

will be the distribution to investor of the $500-$700 million of new
issues taken by the dealers.

However, the dealers had been success

ful in reducing their positions in preparation for the refunding, so
that their total positions are not dangerously large even with the
addition of the new issues.

Finally, Mr. Rouse reported that the

Treasury will soon have to be in the market again to raise new

It now appears that the Treasury will need another $1 bil

lion to see it through the middle of March.

Since the earliest



action by the Senate that can be expected on the increase in the
debt ceiling is

February 19, it

might be assumed that the Treasury

will not be in the market to raise this additional cash before late
February or early March.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during

the period January 28 through February
10, 1958, were approved, ratified, and
At Chairman Martin's request, Mr. Young made a statement on
the economic situation supplementary to the staff memorandum that
had been distributed under date of February 7, 1958.

Mr. Young's

comments were substantially as followss
Up to this point, recession in general activity has

(1) The index of industrial production for January
is given a preliminary estimate of 133, down 3 index
January declines were again gen
points from December.
eral, but greatest in durable goods and durable goods
related industries.
Manufacturers new orders for December showed a
2 per cent drop from November and were down 7-1/2 per
The drop in new orders for durables
cent for the year.
Such orders ran a fifth below a
was especially sharp.
year ago.
Except for retail lines where stocks rose some
what, business inventory liquidation continued in December.
Some liquidation took place at wholesale levels, but
liquidation was mainly concentrated in durable goods
In these lines, liquidation again failed
to keep pace with the decline in sales so that the stock
sales ratio rose further to the highest level in a decade.
Construction activity in January continued at close
to record levels with declines in private activity, except
public utilities, offset by increases in public construction,
especially highways.

The length of the workweek in January declined
to 38.7 hours, the lowest level of the postwar period, and
unemployment from mid-December to mid-January rose by 1.1
million to 4.5 million, or close to the postwar peak of
4.7 million in February 1950. Further declines in employ
ment were general, but especially marked in durable goods
lines. The rise in unemployment among younger men has been
very sharp, and for women only moderate.
Initial unemploy
ment claims, by the latest reports, are still
at very high
Insured unemployment is at a record level.
(6) In January, deliveries of new cars were over a
fifth under both December and a year ago. Dealer stocks
rose 40,000 further to 822,000. Used car sales were up
from December, but ran about 4 per cent under last January.
Used car stocks were little
changed at an eighth higher
than last year. At the beginning of the year, used car
prices, after adjustment for depreciation, were about 12
per cent under midsummer levels and 9 per cent under a
year ago.
Used car prices firmed moderately in January.
Total retail sales over-all for December are now
estimated 2 per cent higher than in November, or double the
increase estimated earlier.
In January, department store
sales declined about 4 per cent from December. Despite
information showing lower department store sales for
January and also very low January sales for new automobiles,
the preliminary Bureau of the Census estimate of total
retail sales for January arrives at a 1 per cent gain in
retail sales over December.
(8) Commodity price levels have not yet shown downturn.
At wholesale, industrial prices continue about a half per
cent higher than in the first half of 1957. Prices of in
dustrial materials have been relatively stable since the
autumn declines, with changes in individual prices off
Prices of processed and fabricated items, which
were still rising in the autumn, have since been fairly
A few cutbacks in selected prices of fabricated
goods have occurred recently and reports of off-list con
cessions on other goods are becoming more numerous in the
Prices of foods and foodstuffs have risen
trade press.
again this winter and are 3 per cent above a year ago.
Livestock prices are close to the high of last summer and
about a fifth higher than last year at this time. The
consumer price index for January is expected to show little
change from December.
quarter GNP per
Preliminary estimates of first
formance are now being made, and these suggest a further



decline of 4 to 5 billion dollars, annual rate, putting
total output back to the 429 billion level of the first
quarter of last year.
(10) December exports were down sharply after two
months of stability to a level 15 per cent under last
year's first
quarter peak average, but imports apparently
held close to levels of preceding months. While economic
developments in Latin America and Asia are on the weak side,
those in Europe continue to manifest steadines.
In addi
tion to steadiness of economic activity, there are other
encouraging developments for Europe--definite signs of
monetary stabilization for France and reconstitution of
monetary reserves of countries under serious strain in the
summer and early autumn, including Britain.
At the outset, we said that up to this point recession
has continued.
In conclusion, on the basis of the latest
economic data and also on the basis of past experience with
contraction periods, we can say that recession is continuing.
Downward adjustment has gained in momentum and signs of level
ing out, or saucering out, are not yet at hand. That point
may not be far off, however.
Past recessions of moderate
severity have involved declines in production averaging about
10 per cent; the decline from August to date has been 8 per
cent. In the past, the phase of decline has typically been
less than a year, and the pattern of decline has been at
rapid and then gradual.
After five months of rapid
decline, the economy should be nearing the phase of gradual
ness. Past cyclical patterns suggest that the upturn phase
when it sets in will not be decisively identifiable as of a
particular month, but will be a phase lasting, at least,
several months and possibly longer. We may, of course, be
surprised at the suddenness, speed, and other characteristics
of revival in economic tendency once a bottom has been
Mr. Thomas next summarized the principal financial developments
in recent weeks as follows:
1. Business loans at city banks were liquidated in
A decrease of
a record-breaking amount during January.
$1.7 billion since Christmas was nearly $1 billion larger
than the December increase. Last year the post-Christmas

decline of $1.1 billion was about $200 million larger than
the pre-Christmas increase. Nearly all groups of borrowers
showed decreases, with the sales finance companies showing
the largest decline relative both to other groups and to
previous years.
Bank loans on securities fluctuated widely.
increasing about $600 million in December, they declined by
almost as much in January, but then increased again last
week by over $500 million. These movements reflected
principally loans to dealers in connection with Treasury
financing operations.
Banks have also increased their own holdings of
securities on balance since the end of November--both Govern
ments and others.
Following a substantial increase in
December of about $1.5 billion, city banks reduced their
holdings of Governments by about $500 million in the first
three weeks of January, but in the past two weeks have again
added to their holdings. The net gain for the past ten weeks
amounts to about $1.5 billion, for total investments, com
pared with a small decrease last year.
Total loans and investments increased more in Decem
ber and have decreased less since the turn of the year than
The net result for
they did last year or the year before.
the 10 weeks has been an increase of about $1 billion this
year compared with a decrease of over $1 billion last year.
On balance this year's increase is largely accounted for by
holdings of securities and loans on securities at New York
City banks.
Demand deposits at banks increased seasonally in
Including the
December and declined seasonally in January.
week in February, which showed a sharp drop last year,
the net change in 10 weeks appears to have differed little
from that for the same period last year. United States
Government deposits have declined less this year than they

did last year.
6. Time deposits at city banks, which increased by $700
million in December and January last year, when higher in
terest rates were announced,

advanced even more sharply this

year, showing a growth of over $1 billion. Much of this
growth was in deposits of foreigners at New York City banks.
7. Financing operations by the Treasury have included
some new money obtained smoothly by an increase of $100 mil

lion in each weekly bill issue--now at an end--and the large
scale refunding operation now in process. The latter, as



pointed out, has involved a large amount of switching of
issues, with dealers and banks increasing their positions
and with bank credit brought in to finance dealers.
Attrition in the maturing issues was normal for the
February maturity, but fairly large for April maturities,
particularly the special bill. This indicated the diffi
culty of obtaining maximum exchanges on issues considerably
prior to maturity at reduced interest rates.
Savings bond
redemptions were smaller in January than they have been.
Treasury cash balances, however, have been kept at lower
levels than in many years. The refunding operation will
result in removing over $5 billion of short-term issues
and increasing the medium and long-term issues outstanding
by a similar amount. About $.5 billion more of short-term
issues will be retired in the next two months, but the
Treasury will also have to obtain about $4 billion of
additional cash through borrowing in the same period.
New security issues by State and local governments
are proceeding at record-breaking volume. Some issues
deferred last year are now being brought out.
issues have been about 25 per cent less than in the same
period last year.
Total capital issues in January and
February are about a tenth less than last year's record
figures. Interest in home mortgages is reviving rapidly
and interest rates on mortgages are declining.
9. Short-term interest rates have declined to the
lowest levels since early 1955, while long-term rates have
been somewhat firmer in the past two or three weeks. The
rate structure has been affected by the shift in maturities
of outstanding debt resulting from the Treasury refunding
Some recent purchases of the new securities are
being carried by dealers and will need to be paid for by
the buyers next week. Consequently an appreciable volume
of adjustments remain to be made in the market before the
interest rate structure can be viewed as reasonably settled.
It is possible that bill rates may not remain at their
present low levels, or other rates will decline further.
10. Reserves to cover credit demands have been abundantly
supplied either through market factors or System operations.
Since the last week of November member bank required reserves
have increased by about $100 million, whereas some decline
At the same
might have been expected on seasonal grounds.
time there has been a larger drop in float than was expected.
Reserves have been supplied, on the other hand, by a larger
than seasonal post-Christmas currency return and recently by

a temporary reduction in Treasury balances at the Reserve
Additions to System holdings of Government securi
ties were much larger in December than usual, while the
January decline was smaller than usual with a small net
increase for the 10 weeks, whereas last year there was a
net decrease of nearly $800 million. Some of last year's
reduction was to offset reserve additions resulting from
the $300 million sale of gold to the Treasury by the I.M.F.
Member banks' net reserve positions have shifted from net
borrowed reserves of over $300 million in the last week of
November to free reserves of over $200 million in the past
two weeks, whereas last year net borrowed reserves increased.
11. Projections for the next few weeks, assuming a
normal seasonal pattern for deposits and currency but a
further reduction in Treasury balances and the use of some
of its free gold, indicate that free reserves may fluctuate
around $300 million during February and increase sharply,
though temporarily, to about $700 million in the first
of March, unless offset by System operations. A Treasury
financing operation to raise new cash and build up its
balances at any time during this period would lower these
estimates of free reserve averages.
Mr. Hayes then made the following statement of his views with
respect to the business outlook and credit policy:
Nothing has happened in the last two weeks to change our
There is, as yet, no sign
estimate of the business outlook.
that the recession is nearing an end, and as I stated at the
last meeting, we should probably give major attention in de
termining policy to the unfavorable realities of the present
situation, granted that we may be again confronted, in the
not too distant future, with a resumption of the inflationary
problems faced in the last two or three years.
There are no indications that the process of inventory
liquidation has run its course or that capital expenditures
On the en
are about to stabilize at the present level.
couraging side, consumer spending
spiraling effect of a cumulative recession.
As is often the case, the price situation appears to
be decidedly confused. The generally sideways movement of
wholesale and consumer price indexes may fail to give ade
quate recognition to all of the discounts and markdowns



actually available to consumers as well as to purchasers
of producers' goods. On the other hand, if the price
indices are taken at face value, we find disturbing
evidence of price rigidity at a time when decreasing
business activity should tend to produce some price
In the area of bank credit, the last few weeks have
witnessed a very rapid drop in business loans, while
holdings of investments showed little
change, in con
trast with the sizeable growth in investment holdings
during preceding weeks.
The Treasury's successful financ
ing program, involving some curtailment of the available
supply of short-term investments, contributed to the very
sharp reduction in short-term market interest rates,
while at the same time subscriptions for about $1.7 bil
lion of the new long-term 3 1/2s will mean a significant
reduction in the supply of long-term funds available in
the capital markets.
It is still
uncertain whether, and
to what extent, the Treasury will attempt to raise new
cash during the next few weeks. Until this prospect is
clarified, possibly through action next week by the
Senate on the debt ceiling, we will not know how long it
will be necessary to maintain the "even keel" policy
adopted at the last meeting.
Turning to policy, with reference first
to the dis
count rate, I do not think we need be concerned over the
wide disparity which now exists between the discount rate
and the rates on Treasury bills and other market instru
With borrowing by member banks at a low figure,
in keeping with our current policies, the discount rate
is of limited effect. Even though in general it is
desirable to have the rate maintain reasonably close touch
with the realities of the market, there is no need for any
close correlation from week to week, especially when the
banks are not making active use of the discount window.
Quite apart from the possibility of our having to keep
our "even keel" policy, I would be inclined to leave the
discount rate where it is for the time being.
As for open market operations, I believe that economic
conditions call for continuation of at least the same degree
of ease existing during the past two weeks, during which
period net free reserves have been around the $200 million
It seems well to bear in mind that we should avoid
over-emphasis of free reserves as a measure of ease or
tightness, since the reliability of this kind of measure

may be even less in a period like the present than during



severe credit restraint. During the past two weeks, at
least until the last few days, there have been ample funds
available in the money market, and Federal funds have held
below the discount rate much of the time.
commercial banks in New York and other parts of the country
have added to their holdings of short-term Government secu
rities since credit policy eased, indicating that they have
had more than enough funds to take care of customer loan
demand--and any additional funds we might supply might
result mainly in further buying of short-term Governments

by the commercial banks, rather than in a materially higher
level of free reserves.
Parenthetically, I might point out
that improvements in bank liquidity through the accumulation
of short-term Government holdings are part of the pre
conditioning which the banks need, if they are to be
actively seeking new business credits--but we should not
wish to push this "liquefaction" too far too fast. The
lessons that banks and others have learned in the past few
years with respect to keeping their funds very fully
employed may have created a situation in which smaller
free reserve figures can achieve a given degree of real
credit ease than would have been possible in earlier years.
On the other hand, we should also not overlook the possi
bility that a steady figure for net free reserves might
well conceal a steady shrinkage of bank credit under certain
All of this points to the desirability of our giving
more attention, as I suggested at the last meeting, to the
trends of total reserves and the money supply as important
criteria for monetary policy. While recognizing the pit
falls in using these criteria in any mechanical way, it does
seem to me encouraging to note that total member bank reserves,
which were at or below last year's level during most of
January, have shown small gains over last year during much of
I would hope that this trend would
the past two-week period.
continue, with a gradually widening excess over last year's
The current projections suggest that it may be unneces
sary to do much in the way of open market operations over
the next few weeks. We may have to offset to some extent
the bulge in reserves expected in the week ending February
19th, as a result of very low Treasury balances with Re
serve Banks and an increase in float. However, it is
probably just as well that market factors will be working
The sale of bills in sufficient
in the direction of ease.



volume to retain the present $200 million level of
free reserves might, at least temporarily, affect
the distribution of reserves and create unwanted
pressures in the central money market. My recommenda
tion would be, therefore, that we view $200 million of
free reserves as a rough minimum figure during the
next few weeks, but that the Manager be given leeway
to offset only as much of the expected reserve bulge
as is necessary to avoid significantly easier money
market conditions, while stopping short of a volume
of selling that might tighten the market. Movements
in New York reserve positions and in short-term market
rates of interest would also be used by the Manager as
important guides in maintaining a steadily easy tone
in the money market.
For the time being, I think the directive may be
left unchanged, although at some point I would hope
that we might give official recognition to a wish to
encourage growth in the money supply as an offset to
economic recession.

Johns said that Eighth District banks seemed to be well

supplied with reserves.

Except at the Memphis Branch, where an

unusual cotton situation had thrown upon the banks demands for loans
which are not customary at this time of year, there was almost no
discounting at the St. Louis Bark.

For the first

time in a con

siderable period banks are in a mood to welcome applications for
loans and soon may aggressively be seeking loans.

If it were not

for the even keel policy which the Committee adopted two weeks ago
and which he believed should be continued, Mr. Johns said that
perhaps he would be somewhat more generous in supplying reserves,
and he might think that the Bank should begin to consider another
reduction in discount rate.

However, he assumed the even keel

policy would make such action inappropriate at the present time,



and he thus favored continuing about the present position.

Bryan said that he had not receded from the view that,

while recent Committee policy had been in the right direction, it
had been inadequate.

From mid-November to February 5 the net change

in total reserves in the banking system amounted to only $34 million
on a daily average basis.

In Mr.

Bryan's opinion, this had been

seriously inadequate in a period of recession.
Mr. Williams reported that recession continued in the
Philadelphia District.

Manufacturing employment continued to

decline and there was a substantial labor surplus.


store sales were holding up well, but automobile registrations
were off in

January following an increase in December as compared

with a year earlier.

Construction awards in December were about

12 per cent below a year ago.

Business loans were down 4 per cent

from last year, when they were relatively low.

Member bank borrow

ings presently were only a fifth of the year-ago level.
Mr. Williams said that recession at the national level,
both in magnitude and pervasiveness,

suggested consideration of a

further change in the discount rate in the near future if this
movement should continue.

At present, his view was that free

reserves should be continued at about the existing level.

Fulton said that a Fourth District businessman had

characterized the present situation with the comment that it



seemed to be stabilizing on a low plateau.

Unemployment appeared

to be leveling off. Claims for benefits continued to rise but at
a lesser rate than for some time.

Liquidation of inventories con

Steel operations in the Pittsburgh area were up slightly

during the past week but in the Cleveland section had declined to

per cent of capacity reflecting lowered operations at pipe mills

which had suffered severe cancellations for steel for gas pipe lines.
Heavy construction was holding up fairly well, but residential con
struction had declined largely for seasonal reasons.


department store sales were down from the strong December level,
sales during the past four weeks had approximated last year's

Business loans at banks had been reduced 50 per cent
Banks were in

more this year than last.

and were looking for term loans again.

an easier reserve position
Mr. Fulton said that in view

of the leveling off of the decline, he felt the discount rate should
stay where it


and that the reserve position of banks should be

maintained about where it

has been during the past two weeks.


Manager of the System Account should be given latitude to meet any
situation that might arise.

Shepardson said that Mr.

Young's report indicated clearly

that the economy had not reached the bottom of the recession yet.
was concerned as to what part the System should play in bringing
about an upturn.

Recalling the comments at the preceding meeting




regarding the lack of growth in the money supply and Mr. Irons'
suggestion that in 1957 the shift from demand to time deposits
affected the statistics, Mr. Shepardson said that the change in
velocity of money over the past year also was of significance.
At his request, the staff had prepared some figures which indicated
that, while demand deposits adjusted had risen by only .5 per cent
in 1957, the product of deposits times turnover had risen consist
ently over the past several years.

In 1957,

this increase amounted

to 7 per cent compared to a range of 6.4 per cent to 8.6 per cent

the previous five years.

Mr. Shepardson said that it

did not

seem to him in light of these figures that the slowdown in growth
of demand deposits had necessarily resulted in an inadequate growth
in the effective money supply essential to supporting normal growth
in the economy.

He wondered what would be accomplished by a f urther

relaxation of credit at this time, adding that in his view there
was considerable doubt that such a move would be desirable in terms
of the long-run objectives of growth and stability.
on this comment,


In elaborating

Shepardson made a statememt substantially as

evidence of inability to obtain
First, there is little
credit to meet legitimate needs of business. On the con
trary, there is increasing evidence that banks and other
lending institutions are in a position to meet such needs
and are anxious to do so.
Second, it is difficult to identify desirable types
of expenditure which might be stimulated by increased



credit availability or lower credit cost at this juncture.
Encouragement by easier credit for further business plant
and equipment expenditure at this time, even if it were
possible, would be highly questionable in the light of the
current relationship between capacity and final takings.
Furthermore, this is one of the areas where costs have
increased at a comparatively rapid rate and are still
high levels. For example, wholesale prices of machinery
and motive products, as measured by the B.L.S. index are
still at about 150 per cent of the 1947-9 average--an all
time high.
While there may be isolated instances of needed State
or local expenditure programs that are still being post
poned in the hope of more favorable financing, I am doubtful
that further credit ease at this juncture would bring forth
any substantial increase in this type of expenditure.
I see no reason to suppose that further easing of
credit conditions generally would bring about a constructive
increase in the availability of credit to consumers for
durable goods purchases and thus stimulate consumer expendi
tures in this area.
Current evidence indicates that such
credit is readily available on as liberal terms as prudent
lending policy would permit.
The one area where further credit ease might provide
an important stimulus is in construction--especially in the
residential sector. Activity here is already being stimu
lated by an increased availability of funds from savings
Further easing of the
banks and insurance companies.
general credit situation would undoubtedly increase the
interest of these institutions, and of commercial banks and
savings and loan associations, in both completed mortgages
and commitments to take mortgages generated in the coming
building season. While building activity arising from
increased credit availability and lowered credit cost might
provide an added cushion in the months ahead, I am impressed
by the possibility that over-building, at this juncture,
might result in an excess supply of houses priced beyond the
means of the bulk of potential buyers.
Building costs are still near their all time highs and,
as the Chairman has pointed out from time to time before
Congressional committees, they have risen more rapidly in
the postwar period than most other costs. In the same period
builders have geared their operations and expectations to the
very high rate of family formation and a large backlog of
In this climate, the ready availability of mortgage



funds at low rates--perhaps even low enough to activate
a last spurt in the VA program--could encourage builders

to start more houses than could be sold at the high prices
present costs dictate.
All this seems to me to argue strongly in favor of a
cautious and moderate policy so far as the Federal Reserve
is concerned. This is certainly not a time when the bank
ing system should be squeezed for liquidity and I want it
to be perfectly clear that I am not urging any reversal
of the present policy, which has permitted a considerable
increase in liquidity, both at banks and other financial
institutions. I also recognize that to some extent the
current ease in credit markets may be due to seasonal in
fluences and that some action on the part of the Manage
ment of the Account may be necessary to maintain the
present degree of ease in the weeks ahead. I have no
objection to such action, but I do not feel that addi
tional ease--beyond that which has prevailed in the last
two weeks--is necessary or desirable at this time.
Mr. Shepardson said that he would not favor a change in the
discount rate at the present time and that, with the usual leeway
being given to the Manager of the System Account, he would suggest
that we should aim at holding about the present level of reserves
during the next three weeks.
Mr. Robertson stated that in his view we should retain the
status quo in

our credit policy for the immediate future at least,

and since in his opinion this would be in accord with the majority
view, he requested the privilege to insert in

the record the follow

ing comments prepared to substantiate his conclusion, together with
the right to re-enter the discussion in the event the majority view
was not in accordance therewith.
his statement is

set forth below:

This privilege having been granted,



Let me say at the outset that my remarks today should
not be interpreted as a criticism of past policy or action,
even though I have not agreed with all recent aspects of
such policy and action as it has developed. Rather, my
remarks today assume our current position and are addressed
to the most appropriate next steps forward.
To state my conclusion before my arguments, it is for
the retention of the status quo in our credit policy, for
the immediate future at least, rather than for an intensifi
cation of our already rapid easing actions. I reach this

conclusion for the following reasons:
In the first
place, we have already achieved, or are
in the process of achieving, through actions already taken,
the lion's share of the contribution that credit easing
action can make in a recession. This has been clearly
indicated by such developments as the very dramatic de
clines in market interest rates, the greater availability
of all types of capital as well as credit, the re-emergence
of many previously postponed security issues of business
corporations and State and local governments, and the
reduction in mortgage discount rates.

Moreover, it is generally recognized that credit easing
actions take time before they achieve their full effective
ness, that is, before they achieve their maximum impact on
Why not give our previous
spending and investing decisions.
before rushing into
further rapidly easing actions?
My fears regarding further rapidly easing actions stem
from a feeling that such action not only would not add
materially further in assisting recovery, but also that it
might very well lead to credit maladjustments and over
commitments that would actually delay the development of a
Unduly sharp and rapid
healthy and sustainable recovery.
changes in interest rates and capital values produce
speculative developments that disturb rather than settle
financial markets and distort rather than promote economic
In fact, to my mind, overeasing now could so
contribute to misguided financial decisions that it would
enhance the likelihood of the economy having to go through
a protracted period of severe liquidation and structural
realignment before it recovers.
My plea for retention of the existing degree of credit
and monetary ease is based also on the firm view that our
longer-run inflation problem is still very much with us. I
am greatly concerned that we are not getting the price ad
justments that are so necessary before a healthy recovery



can set in.
And I feel very strongly that the economic
situation this spring should be such as to insure sound
and sustainable wage contracts rather than one that en
courages business management to accede to wage demands
that are in excess of gains in productivity.
It seems to me that we would all do well to examine
carefully the economic road that England is taking today.
She seems to be facing her all important wage problems
and the longer-run adjustment of demands to resources in
a much more direct and potentially effective manner than
we are.

To conclude, I would strongly urge that we continue
to maintain a free reserve position of banks at approxi
mately the recent level and that no further action on
discount rates be taken. Although discount rates are for
the moment out of line with Treasury bill and other short
term market rates of interest, I regret the very rapid
decline in such short-term market rates that has occurred
recently and that we have facilitated by our open market
operations. If we maintain our present credit posture,
however, I feel that rates will re-attain an alignment
which to my mind would be more consistent with our aim
of contributing to monetary and credit developments in a
way that will maximize the possibility of achieving a
firm and vigorous recovery once needed readjustments have
There are no important basic reasons why the discount
rate should be moved immediately in line with existing
lower market rates. For the time being the 2-3/4 per cent
rate will do no great harm. As long as money seems to be
relatively easy in the market, as it has been in recent
weeks, with free reserves available to the banking system
and Federal funds generally quoted at much below 2-3/4 per
cent, the 2-3/ per cent discount rate is not an effective
rate in terms of the market and the banking community. In
the 1953-54 easy money period, the discount rate generally
lagged behind the Treasury bill rate and the spread between
these two rates was much wider than during the following
tighter money period. The availability of funds during
such periods is a more important consideration than the
level of this key rate. Furthermore, an additional dis
count rate drop at the moment might cause unwarranted
concern over the economic condition of the nation.
On the other hand, there are reasons why serious
consideration should be given to moving the discount rate



down in the not too distant future so as to be more in
line with market rates. If the economy turnsaround and
begins to boom again later in the present year, there
is something to be said for having the discount rate at
that time in close proximity with existing market rates
so that upward adjustments could be made not only rapidly
but, if necessary, in quite large jumps so as to be
effective in resisting inflationary pressures.

Mills said that between now and the next meeting of the
development of Systtm policy would have to be shaped

against two almost conflicting factors.

On the one hand, there was

evidence of accelerating momentum to the deflationary tendencies in
evidence, while on the other hand it
the first

quarter of each year is

vitality and obscure visibility.


known from experience that

always a period of low economic
There is

a possibility that as

spring opens up economic activity will revive.

As of today, how

the acceleration of deflationary tendencies is

problem and it


the overriding

necessary to shape System policy against that

To do so requires the Committee to look on public

attitude and psychology as an economic factor rather than as a
general outside influence and to be alert to the fact that in the
public view, the System has lagged in providing reserves and thereby

giving the kind of encouragement that derives from making addi

tional reserves available to the commercial banking system.
that reasoning,

Mr. Mills said it


would be his thought that the

Committee should allow natural factors to assert themselves over
the next three weeks and permit the supply of positive free reserves



to range around the $300 million level.
to that position it

ruary l4

However, before moving

would be advisable to wait until after Feb

or 15 to see if the windup of the Treasury's financing

operation had resulted in a marked easing of the reserve positions

of central reserve city banks and an easy tone in the money market.
If so, a further increase in the supply of positive free reserves
could be deferred.
Mr. Mills said he shared the concern suggested in Mr. Hayes'
comments that a too free supply of reserves, although initially de
sirable to encourage the commercial banks to strengthen their
liquidity positions, could ultimately force a reduction in


level of interest rates to a point that would cause the banks to
extend the maturities of their security holdings in order to main
tain their earnings, and in doing so to impair rather than improve
their liquidity.

Problems from such a development could arise at

such later date as the System found it

necessary to reverse its

credit policy and the comercial banking system was then caught
with a depreciation in the value of its holdings of U. S. Govern
ment and other securities at the same time that a deterioration

economic conditions had left a substantial portion of its loans

in a relatively frozen position.

Notwithstanding those potential

difficulties, Mr. Mills said, he felt that the psychological situa
tion should be taken into account in the Committee's policy formu
lation and that the level of positive free reserves should be



permitted to rise above the $200 million figure.
Mr. Leach said there was little

additional information

on economic conditions in the Fifth District since the preceding

but the most recent data on unemployment,


and production indicated no diminution in the downward tread of
economic activity.
Mr. Leach went on to say that he felt very stronglyperhaps as strongly as one can feel about such things--that
inflation is

our long-run problem and that we may be fighting

it again in the not too distant future.
not our immediate problem.

However, inflation is

There has been a definite recessionary

movement in the economy for some time and the end is not in sight.
Under a flexible monetary policy, Mr.

Leach said, the Committee's

posture should be consistent with the state of the economy.


him, this meant that reserve availability should be increased
somewhat further as soon as this could be accomplished without
interfering with the Treasury financing.

Such ease as we had in

1954 when free reserves ranged from $600 to $800 million and the
bill rate fluctuated around 3/

of 1 per cent would be far more

ease than the current situation called for and would create grave
risks for the future.

At this time,

he was thinking in terms of

a degree of ease consistent with free reserves in the $300-$350
million range.

To advance beyond such a range under existing



circumstances might merely drive down short-term interest rates
without real benefit to the economy.

The Committee now had an

even keel policy during Treasury financings, and this policy would
prevent the Committee from adding to reserves for the time being.

he wished that free reserves were a little higher than

at present, and in

carrying on operations he would be as easy as

we could be without upsetting the principle of an even keel during
the Treasury financing.

Any action should be in

the form of an

easing of reserve availability rather than use of the discount
rate at this time.
in the

Leedy said that there had been no change of significance

Tenth District since the preceding meeting.

On the assumption

that operations during the next three weeks should not differ much
from what they had been during the past few weeks,

Mr. Leedy said he

would favor letting the natural forces that were operating to ease
reserve positions have fairly full play with free reserves in the
$200-$300 million range.

He would watch yields on short-term

obligations feeling that largely they should be permitted to find
their own adjustment.

He would not favor a program of providing

much additional ease if it would indicate that the Committee might
be contributing to a substantial further lowering of yields on
short-term obligations.

However, as soon as it

the light of the Treasury's operations,

could be done in

he would permit the natural

forces to have free play moving toward the upper end of the $200-



$300 million free reserve range.

He would make no change in the

discount rate for the present.

Mr. Allen said that business in the Seventh District had
declined further in the past few weeks although the pace of decline
may have slackened in some sectors.

The level of unemployment con

tinued below the U. S. average in all Seventh District States
excepting Michigan.

District department store sales after showing

up relatively well in
ended January 25.

preceding weeks slumped sharply in

the week

Although steel production continued at a

depressed level, Mr. Allen said that some observers felt that the
firming of the price for steel-making scrap might indicate that
the bottom had been reached in

steel output.

However, he did not

feel sure that inventory liquidation had reached the point where
increased production would soon be required to maintain the current
rate of steel consumption.
With respect to automobiles,


Allen reported that sales

did not show the usual pick-up during the last ten days of January.
Average daily sales rate in

the first

10 days of January was 14, 6 57,

during the second 10 days l4,653, during the last 10 days 14, 6 7 2 ,
and for the month as a whole l4,661 or 22 per cent below January
of 1957.

Production continued well ahead of sales and it


as though there would have to be a cutback from the schedule of
112,000 cars a week.

Inventories of new cars in



on January 31 totaled 822,000 compared with 726,000 a month



Dividing the inventories on January 31 by average daily

sales during January indicated a 56-day supply of cars in dealers'
Declines in

loans at Seventh District banks in recent weeks

more than offset deposit declines,

Mr. Allen said, even to the point

of permitting some increase in security holdings.

None of the large

district banks had been using the discount window and only one was
now a regular buyer of Federal funds.

The others were regular

The situation suggested continued ready availability of

bank reserves, Mr. Allen said, and this left him where he was two
weeks ago when he expressed the view that we should not move further
in the direction of ease unless and until we felt that the economy
was in a downward spiral which would continue for some time.


did not feel that we were in such a spiral and would prefer that
the Committee tread water to judge better the impact of the current
degree of ease before making further moves in that direction.


considered that position defensible among other reasons because
of the substantial decline in market rates which had occurred over
such a short period.

Thus, his conclusion was that for the next

three weeks we should stay where we now are.

Deming said that a mild slide in employment and produc

tion continued in the Ninth District but that there had not been an
acceleration of the downturn.


crosscurrents in the



national economic picture bothered him more than usual.


prices staying where they were and with retail trade holding
at a high level, he did not have much concern about a progressive
downward spiral.

On the other hand, he found it

more difficult to

be complacent about 1-1/2 million of unemployed.
Mr. Deming went on to say that it

seemed to him the banks

had been using the funds generously supplied in the market to reach
for a degree of liquidity that he had not realized they would reach

He had underestimated how tight they felt last fall.



peared that they had been using the reserves coming to them to
provide more liquidity and that the reserves had not made them much
more responsive to new loans.

They seemed comfortable facing the

loan decline that had taken place thus far, and there was no dispo
sition on their part to look for more real estate loans or more
consumer credit loans.

This indicated that while the banks had

received additional reserves the amount had not been adequate to
loosen loaning.

Perhaps in the long run the Committee would not

wish to increase ease, but in the short run he was convinced that

should be somewhat easier than it

had been.

He found himself

somewhat closer to the positions of Messrs. Hayes,

Bryan, and Mills

than to the positions expressed by others, although he recognized
the danger of providing greater ease at present.
would think that it
advance somewhat,



might be well to let the level of free reserves

perhaps as Mr.

Mills suggested by not trying to



offset the natural forces.

Free reserves of $300 million plus

would not bother him at all.
Mr. Mangels said that no important statistics had become
available since the preceding meeting to change the picture given
at that time.

He had then reported that Twelfth District employ

ment appeared to have shown only the seasonal changes in December,
but final data becoming available indicated a slight decline during
that month with total employment at the end of December 3/l0ths
of 1 per cent lower than a year earlier.
the worst of the adjustments in


appeared that most of

the aircraft industry had now been

This also seemed to be true in the lumber industry and there

was some slight indication of an uptrend,
improved during the spring.

particularly if


Steel production had declined during

January and was 7-1/2 per cent lower than a year ago.


production had been cut back because of a lack of demand.


ment store sales in January were down 3 per cent from December.
Automobile registrations in December were up from November but
were below December 1956.

Both demand and time deposits figures

had increased recently but loans since the beginning of the year
had declined by four times as much as in January 1957.
decline came in business loans.

Nominal borrowings were reported

at the Reserve Bank and local banks were still
Federal funds.

The largest

net sellers of

There was some feeling in the investment departments



of banks that the bill

rate would not go to over 2 per cent in the

near future.
On the whole, the economy was still operating at a high
level, Mr.

Mangels said, with adjustments having taken place and

more adjustments to come.

These, however, seemed to be of a

beneficial character and there had been an increase in productivity
with a reduction in waste and inefficiency.

Mr. Mangels thought

that it might well be that we were not far from an upward surge in
the growth pattern, and if

too much ease were indicated by the

System some of the adjustments taking place might be discouraged
with the result that subsequently there might be a decline more
precipitous than if the adjustments were now continued.



said he had been happy with the recent rise in the bill rate and,
looking ahead, he would assume that free reserves in the $200 mil
lion range would be about right.

There should be no change in the

Committee's directive and he had no comment to make on the discount

Irons said there had been little

that he had reported two weeks ago.
about as he did at that time.

change in the picture

With respect to policy, he felt

He would like to see no further easing.

He believed the availability of reserves had been quite adequate and
that this was reflected in the rate structure in the market.


would suggest continuation of about the same policy that the Com
mittee had been following in the past two to three weeks, and he



would certainly not wish to move in


the direction of further

was obvious that there should be no move in the op

posite direction.

He would have no suggestion of a change from

the 2-3/4 per cent discount rates prevailing at most Reserve Banks.
Net free reserves in the $200 million range would seem to be all

He would not favor any aggressive action either by the

Open Market Committee or by means of a change in reserve require
ments to provide additional reserves to the market.
with the comments Mr.

He was pleased

Mills had made about letting market factors

have their influence, but he would not wish to see that carried to
the point that would result in
now existed.

additional ease beyond that which

Mr. Irons also commented that while there had been

reference to an even keel during the Treasury financing, his position
would be the same even if the Treasury were not in the picture.
would still


come to the conclusion that he had expressed, namely,

that there should be no further easing at this time.
Mr. Erickson said that the recession in business in the
First District continued without any particular evidence of either
acceleration or lessening.

Last week one of the Boston Bank's

outside men reported that he had been told that four machine tool
manufacturers were re-hiring men, while one was reducing the number
of work hours.


Erickson said that the Boston Bank had checked

with two of the larger firms.

One reported that orders for machinery

December were substantially down from October and November and



that January was no better, but that the industry as a whole might
show some improvement.

The other concern reported that the slow

down of new orders for defense products up until the first
December had been reversed.


Department store sales in the first

five weeks of 1958 were 3 per cent ahead of last year.

In the

survey of consumer credit, the data from 177 lenders made up of

finance companies,

and credit unions, showed a drop in

outstandings in December of $1.8 million despite a 7.9 per cent
rise in

extensions between November and December.

This was the

time that outstandings had dropped since the series was

started in 1956.
he felt

Mr. Erickson said that for the next three weeks

that there should be no change in discount rates and that

free reserves might be continued in

the $200-$300 million range.

Szymczak said that he still

felt as he had two weeks

ago that the downturn would come to an end during the second quarter
of the year and would show a leveling off or a slight upturn in


the decline should continue, that would add to the

problems of the System.

We could not disregard four to five million

On policy, for the present he would continue about what

the System has been doing, but he would allow the market to add to free
reserves up to the $300 million level or a little

bit more.

He was

sorry that the discount rate could not be reduced at this time.
had been hoping that it


could be reduced to 2-1/2 per cent but this

seemed impossible at present.

Therefore he would continue the



policy the Committee had been following, allowing the market to
provide reserves.

Balderston said that it

now seemed clear to him that

the depression involved more than an inventory adjustment.
was consumer debt that inhibited buying,

excess capacity,

profit squeeze and cost-price maladjustment.

and a

One could hope that

no new increase in wages and price rises of pervasive type would
occur this spring although that might be a vain hope.


managements and union officials would exhibit the needful restraint
was yet to be seen, he said.

One could not yet be certain that the

upward creep of prices and wages had been halted.

The dilemma of

substantial unemployment was already here and its future extent
and duration could not now be determined.


Balderston's guess

would be that the imprudent decisions of 1955 and 1956 and the
resultant waste and inefficiency would take considerable time to
overcome and that the depression would last until inventory shrink
age, price adjustments, and sales programs had taken care of some
of the excess capacity.

If, therefore, we must contemplate a

depression of unknown length and severity, the question was what
should be done.
Mr. Balderston's preference was for the use of tax reduction
to place substantial funds of specific amount in the hands of indi
viduals but on a one-shot basis that he hoped would be controlled


as to amount.

He was speaking of action to be taken by the

Congress in terms of payroll deductions.
not next year but right now.

This he would do

This action would permit monetary

policy to be held back for a more propitious time.

In the interim,

monetary policy would be used only to facilitate the adjustments
but not to force so much reserves on the banks as to induce
speculation and to bid up bond prices unduly.
and bank liquidity needed to be rebuilt.

However, corporate

Free reserves of about

1/4 to 1/3 of a billion dollars would be conducive to this, Mr.
Balderston thought, and would help to soften the harshness of the
downward adjustment.

The current discount rates seemed to him

appropriate for the moment, and he would not change the Committee's
directive or the level of reserves at the present time.
Chairman Martin said he was not going to discuss tax policy
or make a prediction on the time when the recession would end, but
considering the fact that the Ides of March were approaching it
seemed to him that the group was surprisingly optimistic.

He thought

that we might well expect at this time of year a great deal of

This was being indicated by some of the comments of

members of the Congress.

It was difficult to distinguish between

pure politics and the real situation, but this did not minimize
the importance of having 4-1/2 to 5 million of unemployed persons.
As to the views expressed this morning, the Chairman said
that there seemed to be a surprising agreement in the comments made.



His own view was that the policy the Committee had been following
was about right and that the results had been about as much as
could have been anticipated in putting the posture of the System
where it

should be.

The people who had been thinking that the

System was wrong on the tight money policy now were spending their
time saying that the System had lagged in easing too little or too

He did not think these commentators were entitled to too

much consideration in taking such an approach.

It might be neces

sary at a later time, if there were clear indications that the
recession was spiraling, to do something more drastic than had
been done to date, but it did not seem to him at the moment that
that was the case.

He questioned some of the comments on the

discount rate, stating that it really did not mean too much at the
present time.

There had been two downward adjustments recently

and borrowings continued to lag.

If one wanted to be completely

technical, perhaps it would have been desirable to have gone to a

or 2-1/2 per cent discount rate rather than to 2-3/4 per cent,

but it was his view that the System should be extremely careful at
the present time about making greater difficulties by taking too
many actions that were not effective.

Quite aside from the Treasury's

problem, if the discount rate were to be changed at the moment it
might indicate that the situation was worse; it might be construed
as a sign of panic and desperation on the part of the System and it
probably would not achieve any constructive results.

This should be



borne in mind in using any of the instruments of System policy.
The problem of reserve requirements which would be discussed
later today at the joint meeting of the Presidents and the Board
was one which must be considered carefully.

If the System re

quested legislation in this field, that would be construed as a
move toward reducing reserve requirements.
Chairman Martin said that during the next three weeks he
would favor doing just about what the Committee has been doing
during the past three weeks.

He liked the views Mr. Leach had

expressed in indicating that we might follow an "even keel policy
tipped on the side of ease."

He did not believe we could measure

the degree of ease closely and he recognized that the Manager of
the System Account would have to use his judgment.

He would not

wish to have any sizable increase in reserves develop but would
think that the $200-$300 million range that had been mentioned
and which was close to where we were at the moment would be about
right and would be about as close as we could come to a consensus
of the comments given in the go-around today.

He also gathered

that no change was desired in the Committee's directive.

In re

sponse to Chairman Martin's question as to whether any of the
members of the Committee differed with this statement, no comments
were made, and he suggested, therefore,

that the Committee reaffirm

the directive to the New York Bank without change, with the



understanding that operations would be carried on along the lines
of the foregoing comments.
Mr. Rouse stated in response to the Chairman's question
that he understood that policy would be continued with the same
objective toward which the System Account had been aiming its
operations during the past two weeks.
Thereupon, upon motion duly made
and seconded, the Committee voted
unanimously to direct the Federal Re
serve Bank of New York until otherwise
directed by the Committee:
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 cushioning
adjustments and mitigating recessionary tendencies in
the economy, and (c) to the practical administration of
the account; provided that the aggregate amount of
securities held in the System Account (including commit
ments 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 accommodation of the

Treasury, shall not be increased or decreased by more
than $1 billion;
To purchase direct from the Treasury for the
account of the Federal Reserve Bank of New York (with
discretion, in cases where it seems desirable, to issue
participations to one or more Federal Reserve Banks)



such amounts of special short-term certificates of
indebtedness as may be necessary from time to time
for 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;
To sell direct to the Treasury from the
System Account for gold certificates such amounts
of Treasury securities maturing within one year as
may be necessary from time to time for the accomooda
tion of the Treasury; provided that the total amount
of such securities so sold shall not exceed in the
aggregate $500 million face amount, and such sales
shall be made as nearly as may be practicable at the
prices currently quoted in the open market.

At this point Mr. Leonard, Director of the Board's Division
of Bank Operations,

entered the room.

Chairman Martin referred to the report submitted by the System
Committee for the Study of Float dated December 16, 1957, and to the
preliminary comments regarding that report made by Mr. Robertson at
the meeting on December 17, and he requested that Mr. Robertson now
review the recommendations contained in that report.
Mr. Robertson stated that the reports of the System Committee
dated May 31, 1957,and December 16, 1957, and the April 19, 1957,
report of its Subcommittee,

submitted four basic questions or recom

These were:
How should float fluctuations affect open market
This question is before the Open Market
Committee today.


What should be the role of the Federal Reserve Banks
in the check collection process?


-37This is a major policy question for the Re
serve Banks and the Board. The Presidents'
Conference should be asked for a recommenda
tion on this.

Change in time schedules to provide a maximum of 3
day instead of 2-day deferment.
This is an important question because, for one
thing, any such change would absorb approxi

mately $100 million reserves.

Here again, the

Presidents' Conference should be asked for a

A review of operating practices, with a view to
action leading to reduction of float and greater
uniformity of operating practices within the System.
While some of the findings and conclusions in
this area might depend upon the decision as to
the role of the Federal Reserve in the check
collection process, the Subcommittee on Col
lections might start promptly to formulate
some tentative conclusions.
There should be no delay in making this review,
which could lead to improved practices, in
creased efficiency, and a more realistic
collection system. The review also might
demonstrate, of course, that there is no
possibility of improvement in these respects.

Mr. Robertson went on to comment in detail on these basic

His statement was substantially as follows:

On the question of how should float fluctuations
affect open market operations, the Committee's report
of December 16, 1957 recommended that the Open Market
Committee determine the following policy questions raised
in the Committee's report of May 31:
1. Are float fluctuations sufficiently large and
frequent to seriously and adversely affect
administration of credit policy and open market
Could float fluctuations be disregarded except
in periods of major seasonal changes, such as
Decem er-January?



Apart from fluctuations as such, should the
Federal Reserve System nevertheless take action
to reduce the ever-increasing average level of
float? Why? If so, what action should the
System take to offset the resulting loss in
member bank reserves?


To what extent does the trading desk attempt

to offset fluctuations in float?
To what extent is the desk expected by the Open
Market Committee to offset fluctuations in float?
The December 16 report stated that there would seem to
be three possible basic approaches:
1. Ignore float as a special factor, base operations
on the general reserve position, and treat changes
in reserves due to float the same as changes due
to other factors.
2. Treat float as a rather special factor, make
allowance for the temporary nature of the swings
in reserves due to fluctuations in float, and at
tempt to offset fluctuations in float or not
depending on the circumstances.
3. Generally ignore changes due to float (except
possibly for such major swings as in December
January) and endeavor to make it understood that
fluctuations in free reserves (or any other aspect
of the reserve position) due to fluctuations in
float have no significance with respect to Federal
Reserve policy. To further such understanding,
the System might release daily figures as to the
amount of float.
Another possibility would be a combination of 2. and 3.,
that is,
4. Plan to offset only unusual fluctuations in float
or those covering longer than usual periods, and
endeavor to make it understood that fluctuations
in free reserves (or any other aspect of the re
serve position) due to fluctuations in float have
no significance with respect to Federal Reserve
To further such understanding the System
might release daily figures as to the amount of
The second basic question that was presented was, what
should be the role of the Federal Reserve Banks in the check
collection process?
What has been the System's role historically? What
is it now? What should it be? Should the System, for
example, take positive steps to reduce the proportion
of total check volume that is collected through the



System's facilities?
A number of the Subcommittee's specific recom
mendations, if followed, would tend in the latter
direction: For example, sponsorship and organiza
tion of regional clearing facilities; a program
designed to channel items payable in other Federal
Reserve cities (interdistrict items) from first
collecting banks directly to correspondent banks
in those cities.
The Reserve Banks, of course, should provide
rapid and efficient check collection service. How
ever, in certain situations, better or at least equally
good service can be provided through other channels.
In such circumstances, the Reserve Banks might well
welcome the use of such other means.
A clear-cut answer to this question as to the
proper role of the Reserve Banks would provide an
important guide to those who may be assigned to study
the specific recommendations of the Subcommittee on
Float and to formulate plans for carrying out those
that appear to be desirable. Pending a definite
answer to this broad policy question, the Presidents'
Conference might well direct its Committee on
Collections and Accounting to begin studying this
The third basic question was whether there should be a
change in time schedules to provide a maximum of 3-day in
stead of 2-day deferment.
This raises an important policy and bank relations
question: After having been on a 2-day maximum defer
ment schedule for several years, should the System now
alter that policy?
It also raises some practical operation problems:
Whether intra-district but inter-zone items should
continue to have 2-day maximum deferment; and what, if
anything, can or should be done about the relatively
large volume of intra-zone items that can not be col
lected in less than 3 days.
Any such change would absorb approximately $400
million reserves (page 10 in the Subcommittee report).
The change could have an important effect on the reserve
positions of some banks, particularly the larger banks
that deposit in big volume. If such a change is to be
made, it might be considered along with any other major
moves affecting either the amount of reserve balances
or the amount of required reserves.
This change is urged by some on the grounds that
the present time schedule is "unrealistic." If the



change is to be made on that basis, the Reserve Banks
might also logically change some of their time
schedules and practices which are equally "unrealistic,'
such as immediate credit for New Orleans items when,
because of clearing house rules, they can not be col
lected until the following day, and the practice at
New York, where immediate credit is given for drafts
drawn on certain nonbanking corporations although the
Bank receives payment for them in clearing house funds
which are not collected until the following day.
The fourth basic question or recommendation was that there
be a review of operating practices, with a view to action lead
ing to reduction of float and greater uniformity of operating
practices within the System.
The Subcommittee's recommendations with respect to
matters coming under this heading are summarized princi
pally on pages 5-8 of the System Committee's report of
May 31.
The Subcommittee's report shows (Chart VI following
page 13) that for the 3-month period covered in the
survey 62 per cent of float was due to items forwarded
for collection (transit float), whereas 38 per cent of
the float was incident to operations at the Reserve
Most of this latter category--about 85 per cent-

was due to holdover.
On page 8 of the program suggested by the System
Committee in its report of May 31, the Committee endorsed
strongly the suggestions of the Subcommittee, summarized
in the following paragraph:
The Subcommittee suggests that the Subcommittee on
Collections (or such other group as may be deemed
appropriate) be charged with the assignment of
studying check collection and other operating
policies and procedures in the various Federal Re
serve offices with a view to (a) drawing up a
reasonably precise statement of principles and
objectives which would be accepted on a System
wide basis, and (b) making recommendations as to
specific operating policies or procedures in
particular offices which lead to the absorption
of float.
The following expression of views of the Subcommittee
seems pertinent:
The Subcommittee has the general feeling that there
should be more uniformity among Reserve offices as to
their basic approach to check collection and other
operations leading to float. It has no wish to see



prescribed rigid and uniform operating practices, but
it does believe that a statement of principles and
objectives could be framed on a System-wide basis.
Further, it believes that were this done, some of the
variation in operating practices and procedures would
Finally, it believes that a close appraisal
of certain of these local practices by a System com
mittee would lead to the elimination of such practices
and to a consequent reduction in float.
(Page 7.)
In this connection, it might be well to ask some
one like John Davis to work with a System committee in
the proposed review and to be responsible for the
The System committees and subcommittees
are made up of men with full-time responsibilities.
assistance, therefore, of someone like John Davis, who
could devote a substantial part of his time to the work
and who could bring to it the viewpoint of one who is
thoroughly familiar with the System but is no longer an
active part of it, could expedite the review and its
translation into action.
The System Committee's report of May 31 contained the fol
lowing paragraphs:
The System Committee suggests that the designated
System authorities, committees, and subcommittees make
careful studies of the suggested program and formulate
specific steps to carry it out. If, however, studies
clearly indicate that it would not be advisable or
feasible to carry out some particular part of the
program, there is, of course, no need to attempt to
formulate steps to do so, but there should be a clear
cut statement of the reasons why that part of the
program should not or can not be carried out.
Upon receipt of the studies called for in the
attached memorandum, the System Committee will proceed
to analyze them and then submit its report. The
System Committee trusts that the various reports re
quested may be received by the end of this coming
The System Committee's report of December 16 concluded
with the following paragraph:
The Subcommittee on the Study of Float made a
thorough study, accumulated much material, and
produced a most worth-while report. That report,
a copy of which you have received, raises a number
The System Committee
of challenging questions.


believes that the benefits of the work already
done should not be lost and that the time is ripe
for the System to make a thoroughgoing review of
its check collection functions and operations.
As a basis for such study, the Committee submits
this report, its report of May 31, and the report
of its Subcommittee.
Returning to the question before the Committee of how float

fluctuations should affect open market operations,
said that his personal feeling was that it

Mr. Robertson

would be desirable to

combine the second and third possible basic approaches that had
been outlined in

the December 16 report.

This would be along the

lines of having the Open Market Committee plan to offset only unusual
fluctuations in float or those covering longer than usual periods.
There should also be an effort to bring about an understanding that
fluctuations in free reserves (or any other aspect of the reserve
position) due to fluctuations in float have no significance with
respect to Federal Reserve policy.

To further such understanding,

the System might release daily figures as to the amount of float.
Mr. Robertson hoped that, whatever the approach decided upon by the
Open Market Committee,


would not throw cold water on the need for

further study of float which was an important System problem and
should be dealt with.

Regardless of whether the decision was to

offset fluctuations in

float through open market operations, the

work already done provided a basis for further studies that would
look toward eliminating as much of the float as possible.



Erickson stated that Mr.

Robertson had given an

excellent summary of the reports submitted by the System Com
mittee for the Study of Float, and by its


On the

question before the Open Market Committee today, he found himself
in the same position as that indicated by Mr. Robertson, that is,
of the three possible basic approaches that the Committee might
take with respect to float, it would seem preferable to combine
the second and third alternatives that had been outlined in the
December 16 report.

This would mean we would try to offset only

unusual fluctuations in float, and there would be an attempt to
make it

understood that fluctuations in

free reserves because of

float had no significance as far as Federal Reserve policy was

Mr. Erickson suggested that Mr.

Rouse might also com

ment as to whether the procedure agreed upon at the December 17
meeting and made effective at the end of December for reporting
by the Reserve Banks of daily figures by telegram to help the New
York Bank in preparing estimates of reserves had improved the
Mr. Rouse said that he had addressed a letter on February 7
to the individual Reserve Banks which said, in effect, that the
figures currently being obtained were much improved over those pre
viously available.

Mr. Rouse also replied to a question by Mr. Leach

as to what changes would result if

the recommendations made by Mr.

Robertson were adopted, stating that a combination of the two



alternatives that Messrs. Robertson and Erickson had said they
favored might present problems in making decisions and it would
seem necessary to allow a fair amount of discretion to the System
Account for dealing with these problems.


he said he would

like an opportunity to study the problem before expressing firm
judgments on how operations might be affected.
Mr. Robertson said that his suggestion was not meant to
bring about immediate changes in

procedure but would require experi

mentation which might take a good many months in order to determine
how operations could be improved.

Johns said that as the third member of the Committee that

had studied float, he shared the feeling Mr.

Rouse had expressed re

garding the difficulty of combining the two alternatives that Messrs.
Robertson and Erickson felt could be followed in
At the time the float study was started, it

dealing with float.

appeared that fluctua

tions in float were interfering substantially with execution of open
market policy, Mr. Johns said, and it

then seemed to him that the

System needed to get some facts after which it would decide what it
wished to do.

Float was only one of the factors affecting reserve

positions and causing short-run fluctuations, he noted, and he had
come to the conclusion, which was still

tentative, that in the past

we had attempted to do too much in the way of evening out short-run
changes in reserve positions.

He doubted seriously whether the



fluctuations, which the commercial banks might not be able to
identify as to source but which they recognized as temporary,
caused commercial banks to make basic decisions in lending and
investment policies.
the case.

In fact, it now appeared that this was not

In questioning the purpose of the System's attempts to

iron out the short-run positions in reserves,

Mr. Johns said his

tentative opinion was that there was not as much to be concerned
about as had been assumed at the time the study of float was
Turning to the question of the deferred availability
schedule, Mr. Johns said that he would like to see this changed
back to a three-day maximum deferment schedule because he questioned
seriously whether as an incidence to the check collection system the
Federal Reserve should be supplying reserves in the manner caused by
the two-day maximum deferment schedule.

He then reiterated his

general view that the System was trying to do too much with the
open market tool.

Even though the projections of reserves had

been improved as a result of the new procedure for submitting
daily figures, there were still errors, and attempts to offset
fluctuations in reserves resulting from float and other factors by
conducting open market operations in New York and Chicago might
put in

reserves at a time and place when they were not needed or

take them out when they were needed.

In sum, Mr.

Johns had great

reservations about trying to offset these aberrations in float

through open market operations.




Hayes said he was in almost complete agreement with

Robertson on studies to be made.

He agreed that the suggested

studies should be made with a view to the possibility of reducing
float fluctuations.

He would put greatest stress on changing the

deferred availability time schedule which he considered to be the
key operating question.

He leaned not so much to a rigid three-day

time schedule as to abandonment of the rigid two-day schedule,
this study.


Conference Committee on Collections might well pursue
With respect to the role of check collection operations,

Mr. Hayes said he would like to see a committee at work on that
subject and he would like to see something in the way of specific
suggestions to implement the report of the Joint Committee on Check
Collection study that had been gathering dust because of the unwill
ingness of commercial banks to take it

up; he thought it

might be

desirable to consider whether the System should adopt some of the
recommendations of that study,
commercial banks.


even without the endorsement of the

Hayes suggested that if

this meeting felt these studies should be made,

the group present at

could now be

understood that the appropriate committees of the Presidents'
Conference were directed to proceed with the studies.
With respect to the effects of float on open market operations,

Hayes said that it

was clear to him that these fluctuations were

important and that the Committee should try to minimize them.




leaned more toward the second alternative approach by the Committee
than the third.

While he sympathized in some ways with the views

expressed by Mr. Johns,

he still

believed that the swings resulting

from normal float fluctuations could mislead the market.


the Committee should continue to try to offset the major fluctua
tions in float.
Mr. Leedy commented that as far as the procedural aspects
were concerned, the appropriate committees of the Presidents'


ference could proceed with the proposed studies whenever a decision
was reached on whether they should be made.
There ensued a discussion of the alternative approaches that
the Open Market Committee might adopt toward float fluctuations and
of the suggested studies of operating matters by committees of the


In the course of this discussion, Mr.


suggested that a major purpose of the float study would have been
accomplished if

that it


was concluded that float fluctuations were im

was necessary to give them attention, and that it

would be desirable to reduce the amount of float as much as feasible.
On the question as to whether or not it

should be Committee policy

to offset fluctuations in float, Mr. Hayes said he did not think
the Committee yet had enough information to reach a conclusion and
that further studies should be made.
Chairman Martin agreed that considerable progress had been
made in the studies thus far.

At one time, he said, the Committee



thought that float fluctuations were wrecking open market policy,
but it

now could tentatively conclude that that was doubtful.

the same time, it


could conclude that the volume and fluctuations

in float were important and that further study might enable the
System to do something about the problem .

Robertson suggested that an appropriate action at this

time would be for the Federal Open Market Committee to ask the
Manager of the System Open Market Account to consider ways and means
of increasing understanding of fluctuations in float by releasing
daily figures and other information that could properly be given out.
He also suggested that as a part of the immediate program the System
might go on record today as agreeing that studies be continued with
a view to developing recommendations on the three basic questions as
to operating matters, i.e., the role of the Federal Reserve Banks in
the check collection process, the time schedules, and a review of
operating practices looking toward reduction in float and a greater
uniformity in operating practices in

the System.

Chairman Martin inquired whether anyone present disagreed
with the suggestions that Mr. Robertson had just made as a program
for moving ahead,

and none of those present indicated disagreement.

Chairman Martin then stated that these suggestions would be considered
as adopted as the action of the Open Market Committee at this time on
the study of float.


would also be understood that the Presidents'

Conference was in agreement with this procedure and that it




arrange to have the appropriate committees proceed with the operat
ing studies suggested.
Mr. Leonard withdrew from the meeting at this point.
Chairman Martin next referred to the report of the New York
Clearing House Association distributed with Mr. Hayes' letter of
October 22,


and to a memorandum prepared by Messrs. Roelse,

Rouse, Thomas, and Riefler and distributed under date of February 6,

on the Clearing House Study of Interrelations of the Money

Market and the Government Securities Market.

At Chairman Martin's

request, Mr. Riefler commented on the report substantially as follows:
The Clearing House Committee did not come to any con
structive suggestions unless we accept the basic proposition
that corporate financing of dealers through the negotiation
of repurchase agreements by dealers with corporations repre
sents a revision of the banking laws.
The Clearing House
study attacks this practice as illegal in that it in effect
results in the creation of money by nonbanking institutions,
that it provides a figure for payment of interest on demand
deposits and that it represents a practice that is dangerous
to the money system of this country. All of the study's

constructive suggestions turn around acceptance of that
proposition, a proposition which the Staff Committee was not
willing to accept. The staff suggests to the Open Market
Committee, however,

that the charges are so important and

come from such a pre-eminent body that they should not be
It believes, therefore, that the Open
dismissed offhand.
Market Committee may wish to commission the staff to make
an exhaustive study of the charges and to report back to
the Committee at a later date.
Aside from that suggestion, the Staff Committee makes
two general observations on the Clearing House Study.

First, it appears that the money market and the dealer
mechanism is getting along and that there is no crisis to
require overt action. Second, there are two minor sug
gestions made in the Clearing House report which the staff



believes might be accepted, namely, (a) the establishment of a standing money market committee composed of

representatives from the Federal Reserve Bank of New
York and the Clearing House banks to meet two or three
times a year to discuss technical problems and market
practices against the broad background of public
policy, and (b) the release of daily figures covering
aggregate reserves, reserve requirements, and borrow-

ings of New York Clearing House banks.
In response to Chairman Martin's request, Mr. Rouse stated
that Mr.


Riefler had covered the matters in the report as he saw

He and Mr. Hayes had discussed the question of having a

committee such as the Clearing House report suggested and on the

suggestion that daily figures be released he felt as did the other
members of the Staff Committee that this could be done without any
Mr. Allen commented that he had some sympathy with the view
of the Clearing House banks that it was not desirable for business
corporations to be making funds available under repurchase agreements
although his view was based on reasons other than those given in the
Clearing House report.

At the conclusion of a brief discussion of the report, Chairman Martin suggested that the report of the Staff Committee be accepted and tabled for the moment With the thought that further con-

sideration would be given later to what additional study should be
In response to Mr. Riefler's question as to whether this
included authority for the staff to make a study of the Clearing



House report, Chairman Martin stated after some discussion that
he could see no harm in having the staff study the report further.
Chairman Martin noted that the next meeting of the Federal
Open Market Committee would be held at 10:00 a.m. on Tuesday,
March 4, 1958, with the understanding that the meeting would continue during the afternoon of that day and on Wednesday, March 5.
Thereupon the meeting adjourned.