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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 Wednesday, February 15, 1956,

PRESENT:

Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

at 10:45 a.m.

Martin, Chairman
Sproul, Vice Chairman
Balderston
Fulton
Irons
Leach
Mills
Robertson
Shepardson
Szymczak
Vardaman
Powell, Alternate for Mr. Earhart

Messrs. Erickson and Johns, Alternate Members of
the Federal Open Market Committee
Messrs. Williams, Bryan, and Leedy, Presidents,
Federal Reserve Banks of Philadelphia, Atlanta,
and Kansas City, respectively
Mr.
Mr.
Mr.
Mr.

Riefler, Secretary
Thurston, Assistant Secretary
Vest, General Counsel
Solomon, Assistant General Counsel

Mr. Thomas, Economist
Messrs. Daane, Hostetler, Rice, Roelse,
Wheeler, and R. A. Young, Associate

Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Carpenter, Secretary, Board of Governors
Mr. Sherman, Assistant Secretary, Board of
Governors
Mr. Koch, Assistant Director, Division of Re
search and Statistics, Board of Governors
Mr. Miller, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Marsh, Manager, Securities Department,
Federal Reserve Bank of New York

2/15/56

-2
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
January 24, 1956, were approved.
Before this meeting there had been distributed to the members of

the Committee a report prepared at the New York Bank covering open market
operations January 24-February 8,

1956, and at this meeting a supple

mentary report covering commitments executed February 9-14, 1956, in
clusive, was distributed.

Copies of both reports have been placed in

the files of the Committee.
Mr.
that in

Rouse referred to the forthcoming Treasury refunding and said

informal discussions with Treasury representatives, he had indi

cated the desirability of offering Treasury bills in

exchange for System

holdings of approximately $1 billion of the 1-1/2 per cent notes due
April 1, 1956.

These notes were acquired by the System in

converted $1 billion of its

1951 when it

holdings of the 2-3/4 per cent convertible

bonds of 1975-80, which had been issued at the time of the accord, into
five-year 1-1/2 per cent notes dated April 1, 1951.

Subsequently, the

System had converted an additional $500 million of the bonds into notes
dated October 1, 1951,
1952,

another $500 million into notes dated April 1,

and some $700 million into five-year 1-1/2 per cent notes dated

October 1, 1952.
Upon motion duly made and seconded, and
by unanimous vote, the open market trans
actions during the period January 24 to Febru
ary 14, 1956, inclusive, were approved,
ratified, and confirmed.

2/15/56
A staff memorandum dated February 10, 1956,

reviewing economic

and financial developments had been distributed prior to this meeting,
and at this time Mr.

Young summarized the economic situation as follows:

The present economic situation is characterized by more
diversity of tendency than at any point since the revival in
activity took hold after mid-1954.
Observers committed to a
mechanistic 42-month cyclical hypothesis for business fluctua
tions are disposed to diagnose the current position as one of
cyclical topping, implying that, after perhaps a few months
further of sidewise movement, downward adjustment will be dom
inant. A more optimistic view is that, after a year and a
half of rapid climb, the economy is undergoing a period of
necessary realignment in activities, as those that have gained
most rapidly gear themselves to more sustainable levels of
demand and as other activities that have been slower to revive
and expand, pick up in momentum and penetrate new high ground.
With many industries at very advanced levels of output, this
view must obviously recognize that further expansion in aggre
gate supply and demand can only be at a much slower pace.
In
support of the more optimistic view, it can be said that it is
hard to perceive in the conjuncture of available economic
indicators a formation that would definitely spell downturn.
The arrangement of materials in the staff report makes
clear that the appearance of some easing of the labor market
is perhaps the leading item of economic news. This is indi
cated by some extraseasonal decline in manhours worked, a
modest reduction in weekly earnings in manufacturing, a moderate
decline of employment in a number of durable and non
durable manufacturing lines, a small increase in temporary
layoffs at factories, a counter seasonal rise in claims for
unemployment compensation, and a sharp increase in new jobless
persons.
Preliminary estimates of industrial production for Janu
ary result in an index of 144, about the same as in other
Final data for January may put the index down
recent months.
Activity in most lines has been stable, with a few
to 143.
lines rising and a few receding. At the same time, output of
basic materials such as steel, paperboard, and fuels continues
very strong as does output of producers' goods, while output
of consumer nondurable goods remains well maintained at the very
Except where work stoppages have been
high autumn levels.
important, declines in output have been most marked in the area
of consumer durable goods, where production of household dur
ables has declined since autumn and auto output, beginning in
late December, has been cut back fairly sharply.

2/15/56
Consumer durable goods markets have been showing a mixed
picture. New car sales in January were off about 5 per cent
from a year ago, and, even with reduced output, dealer stocks
rose further to new high levels.
On the other hand, used car
sales in January ran around 6 per cent more than last year, with
little
change in stocks. Used car prices have apparently firmed
significantly since mid-December.
Sales of household durables
at department stores in January were well above a year ago.
Over-all retail sales continue at the high autumn level.
The Board's index of department store sales for January came to
125 per cent of the 1947-49 average, compared with 122 for the
three preceding months.
Consumer instalment credit continues to rise though at a
slackening pace.
hile competition among lenders as to contract
maturities appears to have stabilized, competitive liberaliza
tion of downpayments still
seems to continue. With heavy auto
mobile inventories, dealers are under stronger pressure than at
any time to move passenger cars on a liberal downpayment and
maturity basis. Delinquencies on instalment paper have risen
somewhat over the past two months, but the level remains low
by prewar standards and not high by postwar standards.
In the real estate construction area, value of construc
tion was off further in January, reflecting declines in
residential construction activity. Contract awards in eastern
states continue at an unusually high level, but data for
western states (which are construction permits data) are down.
Housing starts in January were about at the December annual
seasonally adjusted rate, suggesting a halt in the decline in
residential building. Field reports indicate a readier avail
ability of construction and mortgage money and a general clear
ing up of the congestion that has characterized this credit area.
Applications for VA and FHA underwriting were up sharply in
January.
Inventory accumulation picked up in the fourth quarter,
but at least a third of the sizable increase reflected the
For the year inventory rose about
effects of price increases.
$5 billion or about 7 per cent. This was less than the rise in
sales, so that inventory-sales ratios at the year end were
at relatively low levels from an historical viewpoint.
still
Over-all, industrial prices have continued to rise this
Farm prices have recovered
year, though at a slackened pace.
somewhat from their seasonal lows. Price adjustments since the
year end for primary industrial materials and products have been
closely related to adjustments in activity. Most recently,
This has been
changes have been towards firmness or upward.
true of metals, building materials, textiles, crude and fuel

2/15/56

-5

oil, and a few other products.

Industry reports indicate that

a general rise in steel prices is still
under active considera
tion by the industry; also that a further rise in crude and
fuel oil may take place.
Abroad, economic activity continues at close to capacity
rates. It is still
rising in most European countries, but in
recent months the rate of rise has slowed down considerably.
European metal markets appear to maintain strength.
In a
number of countries, restraints on credit expansion have been
significantly tightened in recent months.
The latest information for U. S. foreign trade (for Decem
ber) shows that exports and imports have continued at the high
levels reached early last year.
Mr. Sproul commented that Mr. Young's report conveyed the im
pression of a changing tone in
of letting-up on expansion;

the economy, from one of strength to one

the mixed picture was what might be expected

in a period of topping-out a rise.

He also said that comments from the

building industry tended to give the impression that it

was being hurt

more than was actually the case by the decline in private housing
starts; in reality, the picture was not a weak one,

as some comments

from the industry seemed to indicate.
Mr. Young agreed that the picture was a mixed one although he
felt

that on balance it

weakness.

showed more in

the way of strength than of

The picture for the building industry definitely is not one

of weakness either in housing or industrial construction, he said; it
is

characterized by critical shortages of some materials with a good many

price pressures.
Mr. Williams said that on the basis of discussions held during
the past few days with economists from several important industrial
firms and commercial banks in

the Philadelphia District, the picture

presented was one of optimism regarding the outlook for at least the
first

half or three-quarters of this year.

-6

2/15/56

Mr. Leach noted Mr. Young's comment that there was weakening
in the labor market and inquired whether this came largely from the
automobile industry.
Mr. Young responded that the weakening was more general,
though the automobile industry was the largest element with its

al
cutbacks

in employment and working hours both by automobile manufacturers and
parts suppliers.
Mr.

Some nondurable goods lines also were showing easing.

Thomas said that the review presented by Mr.

Young and

the picture brought out by the questions asked by Messrs. Sproul,
Williams, and Leach might be taken as indicating that activity had
reached a ceiling and was leveling off as a result of internal adjust
ments.

It

seemed probable that the danger of a push through the roof,

with a subsequent fall to the ground, had been averted at least for
the present.

The prospect of staying close to the ceiling was promibing,

however. The downward adjustment in automobile production and sales,
together with at least a leveling off of building activity, was re
leasing resources that might be absorbed in other industries sufficiently
to keep a high level of activity but still

prevent it

becoming too high.

Mr. Thomas expressed the view that a general decline may be avoided,
but it
ment in

was necessary to be alert to the possibility of such a develop
case the automobile situation were to become more serious than

was now expected,

or in

case it

should lead to declines in other areas.

Mr. Thomas went on to say that the leveling off in
activity had been reflected in

the credit situation.

economic

He presented figures

2/15/56

-7

showing that total bank credit and the money supply had shown about the
customary decline for this time of year and that the decline had been
somewhat larger than a year ago.

The money supply is

1-1/2 per cent above a year ago.

Commercial loan contraction this year

now only about

has resulted largely from refunding finance company paper, taking it
out of banks and placing it

privately with insurance companies.

Business

loans in nonseasonal industries this year have continued to rise more
than last year, indicating some continued business demand for funds
during recent weeks.
After commenting on the increased offerings of new capital
issues after a period of slack and on recent stock market fluctuations,
Mr. Thomas pointed out that money rates had declined somewhat, despite
a tightening in

bank reserve positions since the year-end.

This paradox

may be explained by the strong nonbank demand for securities, together
with the reduced holdings of short-term securities by banks, which are
more inclined to borrow rather than sell their longer issues.

After

pointing out that current reserve projections indicated the likelihood
of some increase in net borrowed reserves, Mr.

Thomas said that in

light of information available with respect to the economy,

the

there seemed

to be no need for increasing the degree of restraint at the present time.
If

such a need should develop, restraint might be effected by increasing

the discount rate,
more reserves.

rather than by making it

necessary for banks to borrow

On the other hand, Mr. Thomas said, developments might

2/15/56

-8

indicate a need for less restraint than at the present time, but market
behavior indicates that the current level of member bank borrowing is
not putting too much pressure on the market.

Net borrowed reserves of

around $400 million or less with the existing discount rate might pro
vide a position which would be appropriate for a high level of economic
activity without ebullience.
Mr. Balderston noted that Mr. Thomas had not mentioned the forth
coming Treasury financing, to which comment Mr. Thomas responded that
the Treasury financing was scheduled for sometime early in March and
that this would be one of the reasons why the Committee might not wish
to have the reserve pressures built up as much as the projections indi
cated they would be in

the absence of action by the Committee.

Chairman Martin then called upon Mr. Sproul who made a statement
substantially as follows:
1. This seems to be a period of cross currents in eco
nomic activity, and of some healthy readjustment where the
upward surge of 1955 carried production beyond presently sus
tainable levels. The economy as a whole still appears to be
strong, however, with neither inflationary nor deflationary
forces in the ascendant.
2.
It is in this kind of period that the time lags in our
statistical data, added to the gaps which always exist in such
data, make us more than usually dependent on what people
actually in business are hearing and seeing-in other words,
the "feel" of the situation among businessmen and bankers,
The directors of Reserve Banks
and among their customers.
should be able to make a special contribution to policy formation
under these circumstances.
3.
As we see it at New York business plans for capital
impressively strong and consumers are
expenditures are still
continuing to buy goods and services at a pretty fast clip,

2/15/56
although consumer instalment credit may be less of a prop to
consumer purchasing power than it was in 1955. Employment is
high for the season, and the presence of a considerable number
of marginal workers in the labor force provides some cushion
against an increase in real unemployment. Inventories have
grown somewhat, but so large a part of the increase has been in
automobiles as to make interpretation of the figures dependent
upon what happens in the automobile business this spring, a
story which won't be told for another month or two. Prices are
showing some of the same cross currents as business. There is
the possibility of another cost-price push upward as the new
minimum wage goes into effect, and as labor contracts in impor
tant industries are rewritten, but these influences may be
balanced by reduced pressure of demand for some materials and
curtailment of overtime working schedules. The agricultural
situation is not expected to be more of a depressant than it
has been, and the effects of our foreign trade and of Govern
ment spending upon the domestic economy do not seem likely to
change markedly. There is no evidence, as yet, of any general
slackening of demand for bank credit. In the aggregate the
banking figures are behaving about as might be expected at this
season of the year, with some repayment of business loans and a
substantial decline in total loans and investments. Finally
the Federal cash budget is in a period of substantial surplus
this half year, which means that bank credit will not be drawn
into the economy in support of a Federal deficit.
This sort of estimate of the situation, which paren
4.
thetically seems to be supported by the action of the stock
market, suggests to me that this is not the time for a major
credit policy move, in either direction, whether of open market
operations or discount rate. Both the data we have and our
"feel" of the situation confirm me in the opinion, however,
that we were right in our modest move toward slightly less
restraint in the directive we issued at our last meeting. We
no longer need the pressure of increasing resistance to strong
expansionary forces, and inflationary developments, which moulded
credit policy in 1955. At the same time the immediate course of
the economy is not clear enough to justify more than this minor
move toward relaxation of pressure, particularly since market
anticipations of an easier credit policy are already beginning to
outrun the facts. If we add further action to market anticipa
tions right now, we could quickly have more ease than we desire.
5. Such a policy would seem to fit in with the Treasury's
immediate financing needs which will involve the refunding of
about $9 1/2 billion of securities maturing March 15 and April 1.
Only $4 1/2 billion of these maturities are held away from the

-10-

2/15/56

Federal Reserve Banks, but a relatively large part of these hold
ings are in the hands of nonbank investors.
If a large pro
portion of these holders want cash at maturity, we shall need a
firm "rights" and "when issued" market in order to avoid a situa
tion such as that which caused an attrition problem last November
December.
We are likely to have it, if the general business and
credit situation and our policy are not such as to create appre
hension about the future course of interest rates and the avail
ability of funds, and if the prospective reduction in the supply
of short Governments during the March-June period brings in a
considerable nonbank demand for the new issue.
That, plus the
fact that the Treasury's cash position is now more comfortable
than it was in December, should mean that we would not have to
face the dilemma of conflicting aspirations and needs which we
had to face at the time of the last financing.
I would like to
reinforce, here, what Mr. Rouse said about the possibility of
the Treasury issuing a strip of bills in exchange for the 1 1/2
per cent notes of April 1, 1956 of which we hold the bulk. So
long as we are committed to the present practice of dealing only
in Treasury bills, except on special occasions, I think our
portfolio of bills is getting pretty small, not just in the
aggregate but in terms of the various maturities we hold for
trading purposes.
6.
I would suggest an open market program, operating under
our present directive, which aims at the maintenance of our
present position. That involves somewhat less restraint than in
the fall of 1955 and means that we should seek definitely to
prevent serious and continued stringency in the money market.
As rough guides to such a policy, along with the feel of the
market, net borrowed reserves of $200-400 million, average mem
ber bank borrowing in the $750 million to $1billion range, and
Treasury bill rates an eighth to a quarter below the discount
Just as we let seasonal increases
rate would seem acceptable.
in demand for credit press against the supply, and thus stiffen
restraint in the autumn, we have now let a seasonal slackening
in demand for credit show up in some lessening of restrictive
pressure.
7. We shall have to be ready, of course, to meet whatever
kind of situation which might arise as a consequence of announce
ment by the President of his political intentions, but that we
cannot anticipate now.

Mr. Erickson said that conditions still
District.

remained good in the Boston

Nonagricultural employment was up in December from November.

Construction awards in January were 27 per cent ahead of last

year even

-11

2/15/56

though residential awards were down 7 per cent.

Retail sales in Janu

ary were not good because of weather but more recently had been ahead
of last year.

As to credit, Mr. Erickson cited a recent comment by

a representative of a large bank in New England to the effect that
that bank's condition was tighter at present than at any time in
It

1953.

was Mr. Erickson's view that there should be no change in the dis

count rate and no change in the Committee's directive at this time.
He would not go as far as Mr. Sproul in

suggesting net borrowed re

serves down to $200 million; but he would go to around the $400 million
level.
Mr.

Irons said that conditions in

the Dallas District were

mixed, but he had the impression the plus signs outbalanced the nega
tive signs.
increase in

The petroleum industry was strong and there had been an
construction awards in

January, particularly in new housing.

Other industries were operating about as fully as they had been for
several months.
tail

Most employment changes were seasonal in nature.

Re

trade had been running about the same as a year ago, having

leveled off.

However, it

was difficult to judge trade activity closely

because some shopping days probably had been lost recently as a result
of storms.

There was probably a little

more optimism in

the agricul

tural area as a result of the recent 15 to 18 inch snow fall in
Panhandle section of Texas.

the

In a recent series of meetings over the

State of Texas, demand for bank loans had been described as being as
strong as at any time, if

not stronger.

Bankers were keeping this in

-12

2/15/56

check only by careful and regular selection of loans on their part,
plus the credit restraint policy of the Federal Reserve which was hav
ing an effect.

Discounts at the Reserve Bank were running fairly high

and were tending to be continuous with the pressure from loan demands.
City banks were trying to make adjustments in
at the discount window.
lean a little

On the whole,

their reserve positions

Mr. Irons said that he would

to the plus side and would hope the Committee could keep

about the degree of pressure that it

has maintained.

He would not

now favor any change in discount rate or open market operations.
Mr. Erickson, he would lean a little

Like

more to the higher side of Mr.

Sproul's suggested range of $200-400 million of net borrowed reserves
than to the lower side of the range.
and bill

He would hope that money rates

rates would continue to have about the present relationship

to the discount rate.
Mr. Powell noted that the Ninth District was still
winter weather.

having mid

There was no evidence at this time of which way business

would move during the coming year.

He had no reason to suggest any

change in Committee policy from that recently followed and would cast
his vote for continuing operations without much change one way or the
other.
Mr. Leedy said that the elements of strength in the economy still
may outweigh slightly the elements of weakness.

Accordingly, there

appeared to be no reason for relaxing the degree of pressure the Com
mittee had been attempting to apply in

the market.

Certainly there was

2/15/56

-13

no reason for any change in discount rate.

Mr. Leedy said he felt

to be entirely on the safe side, the Committee might insert in

its

that,
in

structions to the Manager of the System Account the requirement that
if

errors were made,

bit.

However,

they be made on the side of relaxing pressure a

reports of the performance of the stock market this

morning following the announcement of doctors that the President could
be a candidate for reelection provided no reason to be leaning in that
direction.

Mr. Leedy thought the immediate reaction to this report

might indicate that difficulties would be built up for the Committee
if

an announcement came promptly that the President had decided not

to be a candidate.

It

was too early to decide on Committee action in

that event, but Mr. Leedy said that he would apprehend the need for
some fast and extensive footwork at that time.

The general policy to

which he would subscribe at the present time was to continue operations
as carried on since the preceding meeting of the Committee.
Mr. Leach said that there was ample evidence in
trict

of continued economic strength.

the Fifth Dis

At the meeting of the Board of

Directors of the Richmond Bank last Thursday, two directors (one from
the head office and one from the Charlotte Branch) who were leaders in
the furniture industry reported that the industry is
far as midyear and that production for the year is
substantially above 1955.

sold ahead as

expected to run

Similarly, another director reported that

the cotton textile industry as a whole is

sold ahead well into the second

2/15/56

-14

quarter, that the industry is

continuing to operate on a three-shift

six-day basis, and that the cotton textile business generally is
best it

has been since Korea.

also show strength.

Other leading industries in the district

Employment continues high, and trade-other than

automobiles-continues at record levels.
situation as pictured in

The national economic

the staff review presented this morning ap

pears to be more mixed than the situation in
Leach said.

the

Nevertheless, he was not in

of restraint at this time.

the Fifth District, Mr.

favor of further lessening

Now that the unusual demand in the market

resulting largely from the Ford and Illinois Turnpike financing is
over he would expect interest rates to be above recent levels.

Mr.

Leach said that he would think that the desired degree of restraint
could be maintained with net borrowed reserves somewhat less than the
recent average of $400 million.
In response to a question from Mr. Thomas as to how much the
high levels of activity in

Fifth District industries reflected the

imminent increase on the minimum wage rate, Mr. Leach said that he
thought this had had its
it

influence last fall but that he did not think

explained current high levels of activity, and it

was not a reason

for lessening the degree of restraint at the present time.
In response to a question from Mr. Vardaman as to whether the
high levels of furniture production were based on firm, noncancellable
orders, Mr. Leach said that orders for furniture could be cancelled.

2/15/56

-15

The high level of operations reflected the current views of leaders of
the industry who, he said, were quite optimistic.

They think they will

get business which otherwise might be going into purchases of auto
mobiles.

With the furniture industry and cotton textile industry

at high level operations (synthetic textiles are not operating at as
high levels relatively speaking) and with coal mining and cigarette
manufacturing activities up, Mr. Leach could see no reason from the
standpoint of the Fifth District for a policy of credit ease.

He

could see a mixed situation in the country as a whole but would not
suggest a program of ease at the present time.
Mr. Vardaman said he would go along strongly with the idea that
the Committee not make any outward change in wording of its

directive.

He would like to emphasize what Mr. Sproul had said, particularly about
the anticipations which seemed to be abroad that the Committee was going
to lessen its

restraints.

To encourage that idea by any overt action

or word would be unfortunate.

However,

in view of the forthcoming

Treasury financing and the political situation resulting from the Presi
dent's decision, Mr. Vardaman said that he would also emphasize what
Mr. Sproul had said about the necessity of the Reserve Bank presidents
and directors keeping a close feel of the situation, and of the need
for "playing our hunches" by ear.

Mr. Vardaman thought that if the

President announced he would be a candidate for reelection there would
be a terrific resurgence in the economy and the Committee should be
alert to preventing the inflation which might result from such an

2/15/56

-16-

announcement.

On the other hand, if the President announced that he

would not run,

there would probably be a deep sag temporarily, but

that such a sag would also be followed by a strong upswing and the
Committee should also be prepared to prevent the inflation which might
result from that resurgence.

For the moment,

he would play along with

about the present reserve situation, but would not want it
tighter.

made any

In detail, he would suggest net negative reserves of between

$200-300 million.
Mr. Mills made a statement substantially as follows:
It seems to me that we have come far enough into the year
to pick up the color of the business community's thinking.
Even after taking account of the conflicting economic data
which have been presented and which are essentially historical,
the color of thinking in the financial and business world as
well as economic prospects, as I see them, are not as bright
as they were.
If that is the case, we should consider adapt
ing System policy to the community's thinking and to the
planning and decisions likely to stem therefrom.
Stronger
prices for United States Government, municipal, and corporate
securities have seemingly developed from a genuine investment
demand, an investment demand that should be welcomed and not
discouraged.
Therefore, it would be a mistake to interfere
with the tendency of bond prices to rise. To do so would
risk losing track of the availability-of-credit factor in the
present credit outlook.
Mr. Erickson mentioned the tight
loan position of a bank in his district, and I gather there
are many similar cases throughout the banking world.
If the
present degree of credit pressure--which is signified by a
level of negative free reserves approximating $400 million
was thought to be appropriate, I believe that we should have
deplored rather than have felt equanimity at the temporary
Moreover,
increase above that level, even though accidental.
on the basis of current estimates, negative free reserves
may rise again to the $500 million level. With that prospect
in mind a good case can be made for supplying some new reserves.
As one way to do so, reserves released through reductions in
required reserves might no longer be absorbed as they have been
until now.
Put in another way, if bank loans contract further

-17

2/15/56

along with a reduction in bank deposits, any leeway in the
marginal repayment of loans could reasonably be allowed to
serve as a foundation for making new bank loans whose creation
would be further supported by the reserves made available
through the lower required reserves referred to. In that con
nection it appears from the reports made around this table
that, by and large, loan demands are for legitimate purposes.
If those loan demands are made with the help of adequate re
serves simultaneously with a strong market for United States
Government securities backed by a genuine investment demand,
the combined result should be to improve the actual liquidity
as well as the sense of liquidity of the commercial banks
at a time that such encouragement is desirable. It seems to
me that we should let well enough alone and bring negative free
reserves by very gradual and almost imperceptible steps to the
$300 million level, or possibly lower. In doing so, neither
control of the market nor an appropriate degree of credit
restraint need be sacrificed.
Mr. Robertson said that it seemed to him that, since the last
meeting, money market conditions had been easier than he had contem
plated they would be and easier than most of the members of the Com
mittee contemplated at that meeting.

The Committee had given the

Manager a free hand to operate as he saw fit

and no member of the Com

mittee was in a position to criticize the Manager,

and he did not

intend to do so even though he disagreed with some of the operations
carried out since the meeting.
With respect to the future, Mr. Robertson said that it

seemed

to him that the economy was showing some weaknesses at the moment.
However,

there still

were indications of price rises and of possibili

ties of inflationary pressures.

In his view, during the next three

weeks the Committee should direct the Manager of the System Account
to maintain at least the present degree of pressure in the market.

He

2/15/56

-18

would not measure this by a single indicator such as the volume of free
reserves but would include such factors as changes in
and the general tone of the market.

interest rates

The Manager should be directed

to take appropriate steps to see that interest rate levels did not
decline but, if

anything, rise slightly.

Mr. Robertson said that he

felt the Committee should maintain a position of firmness now, not
only because of economic conditions but because of the Treasury refund
ing which was in
next meeting.

the offing and which might be announced before the

He would hope that the April 1 maturities would be re

placed with bills although that was a decision that rested with the
Treasury.

He felt

that the Committee should now move to tighten the

market rather than to wait until one or two days before the Treasury

made a decision as to what its announcement would be.

He would make no

change in the discount rate at this time or in margin requirements,
nor would he change the Committee's general directive in any respect.
Mr. Robertson went on to say that he felt the Committee should
go further than this in view of the Treasury refunding that would occur
shortly and take appropriate steps to notify the Treasury (1) that it
hopes there will be no occasion during the next refunding for a
repetition of the November support actions; (2) that the Treasury cannot
count on us for support of that nature save in exceptional circumstances;
and (3) that in the Committee's opinion attrition in a refunding is

to

be expected and that even a large amount does not necessarily denote a
failure but merely indicates the need for other steps to complete the
financing,

e.g., by the auction of additional bills to make up the dif-

2/15/56

-19
In response to an inquiry from

(Mr.

Mr.Vardaman as to whether he

Robertson) felt that the Committee should now increase the degree

of tightness in

the market, Mr. Robertson responded in the affirma

tive, stating that he personally thought that the degree of tightness
now was on the low side.

It

was his view that the Committee should

now start to raise the level of firmness,
ness would be appropriate,

if

it

felt increased firm

and not wait to do so until shortly before

the Treasury decided upon its

financing.

Mr. Shepardson said that the picture was a mixed one.

His

feeling, he said, was in line with that expressed by Messrs. Erickson
and Irons as to the position he would look forward to in the period
ahead.
Mr.

Fulton said that the Cleveland District was still

enjoying

a very high level of economic activity and expected no particular
slump.

Some layoffs have occurred in the automobile industry, and

deliveries of some orders for steel and components have been pushed
back.

These, however, were not cancellations.

For the latter

part of

the year, expectations for the automobile industry were high; the coal
industry also was very active with the largest coal mining company
reporting that its

production was sold out for this entire year.

should be no relaxation at this time in
he said, adding that a little

the existing degree of pressure,

more relaxation may have taken place

since the Committee met on January 24 than was intended.
should not let
situation.

There

the market gain the impression that it

The Committee

was easing the

2/15/56

-20
Mr. Williams noted that the Committee was making policy for

only three weeks.
turn has come,
but it

is

There have been some misgivings as to whether the

and there is

still

a strong economy.

should be made in
Mr.

some evidence of softening in the economy,
For the present, he felt

no change

the Committee's policy.

Bryan said there was nothing in the Atlanta District's

economy or financial picture that would indicate a judgment different
from that already expressed as to the outlook.

His feeling was that

this was not the time for an overt policy decision.

Mr. Bryan said that

he too was influenced by the fact that the Committee was making deci
sions for brief intervals.
is

softening.

We may have a situation in

which the economy

If that proves to be true, he thought the evidence of

the softening would be found in employment and related figures perhaps
as quickly as anywhere.
very carefully.

If

Accordingly, he would watch employment figures

unemployment begins consistently to pile up, he

would revert to a policy of supplying reserves on the basis of some
growth factor that was calculated as rationally related to a full em
ployment economy.
Mr.

Bryan also said that he was impressed with Mr. Thomas'

comment on the small growth of the money supply over the past year.

He

felt that a radical slackening in the rate of growth of the money supply
would, if

it

Mr.

has not already done so, restrain the economy.
Johns said that he was quite well satisfied with the Com

mittee's failure to get the degree of restraint it

had last November.

He

-21

2/15/56

did not think the Committee had stopped too far from that level.
the next meeting of the Committee,

Until

he would continue as at present.

He said he had not conceived the program for the next three weeks as
being one of progressive easing.
Mr. Johns also referred to a telegram which he and some of the
other Reserve Bank Presidents had received from Mr. Balderston last
Friday asking for information with respect to collection of accounts
of implement and other merchants in agricultural areas, and he stated
that he was prepared to comment on it.
Chairman Martin indicated that he was not familiar with this
inquiry.

Mr. Mills described the reason for the request, stating that

Mr. Hauge of the White House Staff had met with a farm group a few
days ago and that the group had informed him that collection of retail
accounts was slow in agricultural communities.

The group also repre

sented that bank accommodations were becoming difficult to obtain, not
only on the part of individuals but also on the part of merchants who
were experiencing slow collection of their receivables.
said that Mr. Hauge felt

Mr. Mills

that this was in the area of the System's

credit responsibilities and that telegrams were sent to a number of
the Reserve Banks last

Friday asking that they be prepared to report on

this situation at today's meeting.
Mr. Johns said that he had found nothing in

the Eighth District

to support the charge that collections were slowing down significantly.
In southern parts of the District-Arkansas,

for example-collections by

-22

2/15/56

merchants were reflecting the fact that farmers have more money than is
customary at this time of year because they had extraordinarily good
crops last year.

Even in northern parts of the District there is no

indication of any significant decline in collections.
tions are reported to be off a little,

Where collec

reporters were quick to point

out that this was not because farmers were not paying their bills.
Mr. Johns concluded his statement by saying that he could find no
evidence of failure on the part of banks to accommodate merchants in
agricultural areas according to usual standards.
Mr.

Irons stated that the situation in the Dallas District was

substantially the same as that described by Mr. Johns.
Mr. Leedy said that while collections from farmers had slowed
a little

in

the Tenth District, this was in areas where income had

fallen severely.

In most cases income and other liquid assets have

been such as to confirm the general picture given by Mr. Johns.
Mr.

Szymczak said that it

in both directions in

was apparent there were forces going

the economy at the present time.

During the next

few weeks, he would follow a policy slightly less restrictive than the
one the Committee was following last November.
borrowed reserves might be in

He suggested that net

the $200-$300 million range.

Mr. Balderston said he hoped the Committee might urge the
Treasury informally to issue another billion dollars of bills in its
forthcoming financing.
Bank, Mr.

As to the Committee's directive to the New York

Balderston was puzzled as to how the desk could learn the

2/15/56

-23

consensus of this Committee if it abstained from any figures, as had
been urged by Mr.
single figure is

Robertson.

He shared the feeling, he said, that no

reliable enough to reflect the consensus; on the other

hand, words alone would not seem adequate.

Mr.

Balderston said that

his thinking was that the present position should be held through
the Treasury's financing, unless an announcement by the President
forced a departure from that.
below the discount rate.

He would like to see a bill

rate slightly

He did not know what level of negative free

reserves would be compatible with that objective although he expected
a minus $400 million would reflect his view.
member bank borrowings to suggest.

He had no figure of

He did feel, however,

that the Com

mittee lacked an adequate means of communication with the desk that
was sufficiently concrete to give the desk a clear indication of the
Committee's decisions.

He had no suggestions to offer as to language

that would accomplish this.
Chairman Martin said that he thought it

obvious from the dis

cussion that no member of the Committee really wished to change the
wording of the directive that was adopted at the January 24 meeting.
He had great sympathy with the desk, as he had pointed out previously,
he said.

He did not believe the Committee could use figures or

estimates as measures of tone or color.

Chairman Martin went on to say

that the Committee seemed to be more or less evenly divided, with a fine
degree separating most of the views.
important degree.

He did not think this a very

His own view of the discussion at

the last meeting

-24

2/15/56

was that the Committee then agreed that the trend of operations should
be in the direction of ease rather than of restraint.
had been so imperceptible that it
talking about.

was only a shading the Committee was

His judgment was that this was the best posture for

the System to be in at this particular juncture,
adding that it

He thought this

might wish to reverse its

take overt action.

the Chairman said,

position very drastically and

For the present, Chairman Martin believed that the

best position for the Committee to be in was to be trending in the
direction of ease.

He recognized that this view was not the same as

that suggested by Mr. Robertson.
that, since the last meeting,
whole.

Chairman Martin expressed the thought

the program had worked out well on the

He regretted the anticipations that had appeared in

the news

papers of an easing of System policy; perhaps he had contributed to
this by his testimony before the Joint Committee on the Economic Report
with his comments regarding "feel" of the situation.
said that it

Chairman Martin

was difficult to answer some of the questions that had been

presented to him in

such a way as to avoid repercussion.

he could at the time.

He did the best

He recognized that the interpretation that would

be put on any remarks that might be made would depend on what the writer
wished to say.
Summing up, Chairman Martin said that for the next few weeks
he would favor moving in

the direction of $200 million of negative

free reserves and whatever tone developed out of that.

The $200-$400

million level Mr. Sproul had suggested was entirely agreeable to him.

2/15/56

-25

He would not worry if negative free reserves got up to $400 million
or, for that matter, to $500 million if the tone and shading of market
developments showed a trend in the direction he had indicated.

Chairman

Martin concluded by suggesting that the Committee renew the directive
to the New York Bank without change in the language from that approved
at the preceding meeting, and that it assume the Manager of the System
Open Market Account would do the best he could to carry out that in
struction.

He did not think a vote on this would be useful but thought

that we should try to operate with no significant change and with no
overt action in either direction, but to let the tone of the market
develop pretty much on its own within the limit of this general di
rective.

He then asked that Mr. Rouse comment on the program as he

contemplated it would work out from an instruction such as he had out
lined.
Mr. Rouse said that it

seemed to him a majority of the Committee

was distinctly of a mind to continue the situation as it has existed.

In looking ahead, there was a temptation to lean against the expecta
tions in the market.

Mr. Rouse thought that the expectations now in

the market would bring about the easier situation Messrs. Martin and
Sproul had spoken of.

In the past three weeks an attitude had developed

which had resulted in a trend toward an easier situation and this might
come about again even though the figures of negative free reserves were
to rise to the $500-$600 million level.

2/15/56

-26
Mr. Vardaman said he would emphasize comments by Messrs.

Leach, Fulton, and Sproul regarding orders on the order books.

These

could be most deceiving and should be watched most carefully.

He also

agreed with Mr.

Bryan's suggestion that figures of unemployment should

be observed closely.
Mr. Robertson said that if he were in the position of the Manager
of the System Account,
Committee wished.

he would have some doubt as to what it

was the

He thought Chairman Martin over-stated the con

sensus by giving the impression that the trend should be on the easier

side.

Mr. Robertson did not believe that this represented the general

thinking of the Committee, and he did not think Mr. Rouse should be
in a position of uncertainty as to the Committee's views.

Mr. Robertson

said he thought the majority view of the Committee was that the same
degree of firmness be maintained during the next three weeks that had
existed during the past three weeks.
Mr. Rouse said that he had gotten the impression that the
majority of the Committee would wish negative free reserves around the
$400 million level.

Chairman Martin had expressed the idea of a trend

toward a somewhat lower level, and Mr. Sproul had suggested the $200-$400
million range.

Most other comments indicated a continuance of about

the same level, Mr. Rouse thought.

However, most of the comments

recognized that over the past three weeks there had been a tendency
toward an easier atmosphere,

and Mr.

Rouse believed a similar situation

would be brought about again over the next three-week period.

2/15/56

-27
Mr. Robertson suggested that the Manager of the Account could

lean against the market's expectations of ease.
Mr. Rouse responded by stating that if net borrowed reserves
were constant at around $400 million, he would think the matter of ex
pectations would be fairly well taken care of.
Chairman Martin stated that he wished to make certain that the
record differentiated his personal views from what he thought appeared
to be the consensus of the Committee.

It

was his personal position

that he was referring to when he suggested net borrowed reserves at the
$200 million level.

He doubted whether any purpose would be served

by taking a vote on the question of whether a $200 million or a
$400 million net borrowed reserve level was desired, or on whether
the Committee wanted operations to lean against the expectations of
the market.

The Manager would have to judge from day to day how opera

tions should lean at the time,

and it

would only confuse him if

the Committee tried at this time to pinpoint any particular course of
operations.
Mr. Robertson said he was not advocating that the Committee
pinpoint operations to a specific figure, but he was advocating that
it

pinpoint operations to a degree of firmness without any relaxation.

He thought the Committee should have a preconceived notion of what it
expected in the way of tone in

the market.

He did not advocate $400

million or $300 or $200 million or any other figure of net borrowed
reserves.

2/15/56

-28
Mr. Vardaman stated thathe interpreted Mr. Robertson's remarks

as suggesting a policy of stiffness in operations, to which Mr.
Robertson responded that he felt the Committee should maintain at least
the same degree of firmness that it
would move to greater tightness.

had before and, if anything, he

He recognized that in taking this

position he differed from the views expressed by others.
Mr. Vardaman stated that as far as he could recall, the con
sensus of the meeting was to continue about where we are now without
permitting any greater tightness.
Mr. Robertson indicated concurrence except that there should be
nothing on the side of relaxation.
Mr. Bryan said that he would like to comment on the point that
had been raised by Messrs.

Robertson and Balderston, that is,

the mat

ter of conveying instructions of the Committee to the Manager of the
System Account in
tives.

terms that would be understandable as policy direc

While he did not believe it

was too important at this particular

time because the differences indicated were minor in

shading, he sug

gested that the time would come when there would be differences of
opinion in

the Committee which were important,

and if

an instruction

could not be given to the Manager of the System Account in

clear terms

the Committee would find itself in real difficulty.
Chairman Martin stated that he would not disagree with this
general statement, adding that this was a problem that the Committee
had been struggling with for at least four years.

He knew of no way

2/15/56

-29-

of defining tone.

He welcomed any suggestions as to how to make clearer

the intentions or wishes of the Committee,
had expressed himself on this point.
there were further comments,

and he was glad Mr. Robertson

He then suggested that unless

the Committee renew its

directive to the

New York Bank without change and with emphasis on the point that there
should be no significant change in policy.
Thereupon, upon motion duly made and
seconded, the Committee voted unanimously
to direct the Federal Reserve Bank of New
York until otherwise directed by the
Committee:
(1) To make such purchases, sales, or exchanges (including
replacement of maturing securities, and allowing maturities to
run off without replacement) for the System open market account
in the open market or, in the case of maturing securities, by
direct exchange with the Treasury, as may be necessary in the
light of current and prospective economic conditions and the gen
eral 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 restraining inflationary developments in the
interest of sustainable economic growth while taking into ac
count any deflationary 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 commitments 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;
(2) To purchase direct from the Treasury for the account
of the Federal Reserve Bank of New York (with discretion, in
cases where it seems desirable, to issue participations to one
or more Federal Reserve Banks) such amounts of special short
term certificates of indebtedness as may be necessary from time
to time for 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;
(3) To sell direct to the Treasury from the System account
for gold certificates such amounts of Treasury securities

2/15/56

-30-

maturing within one year as may be necessary from time to
time for the accommodation of the Treasury; provided that the
total amount of such securities so sold shall not exceed in
the aggregate $500 million face amount, and such sales shall
be made as nearly as may be practicable at the prices cur
rently quoted in the open market.
No suggestion was made for change in
or in

the repurchase authority

the statement of conditions previously in effect.
Thereupon, the following authorization
was approved by unanimous vote
The Federal Reserve Bank of New York is hereby authorized
to enter into repurchase agreements with nonbank dealers in
United States Government securities subject to the following

conditions:
1.

Such agreements
(a)
In no event shall be at a rate below which
ever is the lower of (1) the discount rate
of the Federal Reserve Bank on eligible com
mercial paper, or (2) the average issuing

rate on the most recent issue of three-month
(b)
(c)

(d)

2.

3.

Treasury bills;
Shall be for periods of not to exceed 15
calendar days;
Shall cover only Government securities matur

ing within 15 months; and
Shall be used as a means of providing the
money market with sufficient Federal Reserve

funds to avoid undue strain on a day-to-day
basis.
Reports of such transactions shall be included in the
weekly report of open market operations which is sent
to the members of the Federal Open Market Committee.
In the event Government securities covered by any
such agreement are not repurchased by the dealer
pursuant to the agreement or a renewal thereof, the
securities thus acquired by the Federal Reserve Bank
of New York shall be sold in the market or transferred
to the System open market account.
Chairman Martin referred to the action taken by the Committee

on November 30, 1955 authorizing the purchase of not to exceed $400

2/15/56

-31

million of 2-5/8 per cent Treasury certificates on a when-issued basis
and to the suggestion that this subject be considered prior to the
next Treasury financing in

terms of the general policy that the Com

mittee wished to follow.
Mr.

Robertson suggested that steps be taken to re-establish an

understanding of the Committee's policy on whether it
securities involved in a Treasury financing.

should purchase

In his view, the Com

mittee should advise the Treasury along the lines suggested in his
statement earlier in this meeting.

He felt that some such statement

was necessary because of the implications of recent statements by
Secretary of the Treasury Humphrey and Under Secretary of the Treasury
Burgess in which they indicated an expectation of support from the
Federal Reserve in

connection with debt management problems.

Chairman Martin described discussions which he and Mr. Balderston
had had with the Secretary of the Treasury recently in which the sub
ject referred to by Mr.

Robertson had been reviewed.

Chairman Martin

added the comment that in his view Secretary Humphrey's testimony be
fore the Joint Committee on the Economic Report regarding the rela
tionship between debt management and monetary policy was very satis
factory.
Mr.

Balderston noted that Secretary Humphrey had commented in

his testimony that he could subscribe 100 per cent to the views ex
pressed by Chairman Martin at the time he appeared before the Senate
Banking and Currency Committee in
a member of the Board.

connection with his renomination as

-32-

2/15/56

Chairman Martin said that he thought the problem before the Com
mittee was to make certain whether there had been any basic change in
the Committee's operating policy, and he called upon Mr.

Sproul for com

ments.
Mr. Sproul then made a statement substantially as follows:
1.
It seems to me that Governor Roberston's memorandum
on our purchases of when-issued securities in connection
with the December financing of the Treasury, reverts to the
pronouncements of the Ad Hoc Subcommittee report instead of
to the action which was actually taken by the Federal Open
Market Committee on this subject, and oversimplifies the
specific experience with which it deals.
2.
I make the first
statement because his memorandum left
out the concluding and saving clause in the action of the Fed
eral Open Market Committee "that this policy be followed until
it is superseded or modified by further action of the Federal
Open Market Committee."
Whether or not such supersession or
modification was permanent or temporary, and I took it to be
temporary in November, this clause and subsequent statements
had, I thought, removed the idea that the commandment had
been chiselled in stone and could only be sandblasted out.
3.
I make the second statement because the November

incident cannot be considered in isolation, but should be con
sidered as the cumulative result of a situation in which the
Treasury had had to come to the market frequently for refunding
and for new money, while we were pursuing a policy of increas
ing credit restraint.

4.

During 1955 the Treasury-and it is a Treasury as

fully committed to the maximum possible separation of debt
management and credit policy as we are likely to get-found it
necessary to make substantial and increasing underwriting
purchases out of its own funds to aid in the market digestion
There was no pegging of prices, but under
of its offerings.
writing assistance was needed, as I think it must always be
when the market has to attempt to make adjustments to such
No dealer group
large offerings in the space of a few days.
have
the necessary
does
it
nor
underwriting
can provide such
incentives to do so in the case of a Treasury financing.
Nor did we stand aside in the earlier financing of 1955.
We regularly adopted a policy of maintaining an "even keel"
immediately before, during and after a Treasury financing even
though it might mean a temporary halt in a policy of tightening

2/15/56

-33-

credit which we intended to pursue.
There was coordination
of debt management and credit policy on an ad hoc basis, al
though our rules of operation prevented advance planning of a
concerted approach.
5.
Governor Robertson seems to say all right, let the
Treasury handle its own underwriting problems, and if attrition
on its offerings is too great, it can make it up by a quick
resort to additional cash financing, with perhaps an inter
mediate dip into direct borrowing from the Federal Reserve
Banks.
There are at least two major risks involved in this
attitude:
(a) One of these risks is that a less cooperative Treasury
might acquire a bad habit of stage managing the market
for its offerings, with possible or probable outright
collisions with credit policy. I do not think we want
to push the Treasury too far in that direction, lest we
find we have abdicated a central banking responsibility

and been saddled with Treasury dominance.

Consultation

and coordination is better.
(b) The second risk rises out of the fact that credit policy
itself
is at stake in these operations and may be
jeopardized by Treasury attempts to do the job alone
under all
circumstances.
At times, when the System has
been following a policy of increasing credit restraint
for a period of months, and when a major cause of market
uncertainty is market doubt over the timing and the
severity of further System action, credit policy is
involved in helping the market to establish sustainable
equilibrium levels of trading at a time of Treasury
financing. We, as well as the Treasury, had a responsi
bility in November to provide some resistance to a de
terioration of market psychology which could have gone
far beyond the bounds of intended credit policy. Subse
quent action of the market for the securities offered in
December indicates that we had a temporary aberration on
our hands, not a longer term trend and not a price mis
calculation by the Treasury.
6.
The alternatives to what actually was done are not too
They were to buy Treasury bills in whatever amounts
alluring.
might have been needed to change the tone and anticipations of
the market, or arrange with the Treasury to run down its balances
We
and then to borrow directly from the Federal Reserve Banks.
with
around,
a
market
had some experience with trying to turn
purchases of bills, when expectations have gotten out of hand
as in May 1953, and I think that in November 1955 such purchases
in the amounts which might have been needed would have thrown our
credit policy much further out of whack than what we did in the
when-issued market.

2/15/56

-34-

The second alternative would similarly have run the risk
of putting an excessive amount of reserve funds in the market,
but would have left
it to the Treasury to determine the amount
and to do the actual buying.
That is not a real solution. But
if nothing had been done, and if the attrition had been allowed
to run up unchecked, we could have had a further deterioration
of market psychology, with an enlarged need for Treasury cash
borrowing, which in turn might have run into difficulties, and
made it even more difficult to maintain credit policy. Even
after our purchase of "when-issued" certificates, large purchases
of bills, and assurances of repurchase facilities, the cash
offering of $1.5 billion of Tax Anticipation Bills on December 8
was threatened with a very sour reception and it was deemed
necessary to encourage bidding by the banks.
The eventual re
sults looked handsome but without concerted System effort there
might have been a deadlock in the market with serious repercussions
on credit policy. The Treasury would have gotten its money,
but we might have had a fright mentality to contend with over
the difficult year-end period.
7. My own view is that we faced a difficult situation in
November, which involved both the Treasury and the System, and
that since we were going to have to provide reserves to the
market as a matter of credit policy, we could well afford to
depart from our general rule and provide some of these reserve
funds through purchases of when-issued securities, thus co
ordinating our operations with those of the Treasury in performing
an appropriate underwriting function for a large issue, brought
out at the right price but under unusually difficult circum
stances. It is not fair to say that the Treasury was concerned
solely with the surface aspects of a large attrition. It was
concerned with the whole state and behavior of the Government
security market during a Treasury borrowing operation, and with
the consequences of a failure of that operation on future bor
We shared these concerns.
rowing and on all security markets.
8. I do not want to seem to imply that I think everything
the Treasury did and we did in November was perfect, but I think
that, so far as we are concerned, improvement of our performance
would have to rest on a fundamental re-examination of the rules
the Committee adopted in 1953 for its general and ordinary guidance
at times of Treasury financing. These rules have become the
"status quo." They should be re-examined in the light of our
experience with them, and of a re-appraisal of the facts, as
suming that the findings of the ad hoc subcommittee are not to
be considered complete and final for all time, thus relieving
us of further thought about and discussion of the problem. To
proceed to such a re-examination in a constructive way, and to
prepare for further conversations with the Treasury about the

-35-

2/15/56

coordination of debt policy and credit management on a longer
term basis, I think the Federal Open Market Committee should
have a study made by a representative System committee of the
highest caliber, and preferably made up of men who do not seem
to have adopted rigid positions on the question at issue. I
would have in mind, for purposes of illustration not exclusion,
such men as Mr. Miller at the Board and Messrs. Neal, Roelse,
Such a com
Bopp, Daane, Mitchell and Deming at the Banks.
mittee could review the experience of the past four years,
and analyze all aspects of the problem for our consideration.
I would hope and expect that they would avail themselves of
the testimony of those who have had the responsibility for
carrying out the directives of the Federal Open Market Com
mittee during this period, so that their views would not be
crystallized into findings before such testimony had been heard.
In this way we may arrive at some agreed conclusions, repre
senting a fair compromise of whatever divergent views may exist.
Meanwhile, I cannot subscribe to Governor Robertson's view that
a so-called principle was thrown out the window in November
no matter how attractive that disposition of such a principle
Nor would I want to make further representa
might be to me.
tions to the Treasury now, as he has suggested, as to what we
shall or shall not do under all circumstances in the future.
In response to a question from Mr. Robertson, Mr. Sproul said
that he thought the rule against purchases of securities involved in a
Treasury financing was still

the will of the Committee,

thought the Treasury knew this to be the case.

and he also

He would not wish to

go to the Treasury with a statement that the Federal Open Market
Committee would do nothing to assist in the next Treasury financing,
although he did not think the problem would arise in March in
it

the way

did last November.
Mr.

Robertson stated that, as his earlier statement indicated,

he was not suggesting any such absolute statement, admitting of no ex
ceptions.

He was interested, however,

in knowing whether the policy

of the Committee today was the same as before the action taken last

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2/15/56
November,

or whether the action taken at that time superseded the Com

mittee's policy.
Mr. Sproul said that there was no doubt in his mind at the time
of the Committee's action on November 30 that the action represented
an exception to policy rather than a change in policy, and he still
thought that to be the case.
Chairman Martin commented that he thought this was agreed to
by the Committee.

It

could reaffirm now the view that its

action on

November 30, 1955 represented an exception to the general rule it
had been following since 1953.

Chairman Martin said that Mr. Sproul

had done the Committee a service in presenting his statement and in
proposing a re-examination of the policy.

He proposed that Mr.

Sproul's memorandum be made available to all members of the Committee
and that further discussion of his suggestion for a re-examination
of the Committee's policy be deferred until the next meeting of the
Committee, which he suggested be held on Tuesday, March 6, 1956.

There

was agreement with these suggestions.
Mr. Robertson inquired whether Chairman Martin felt that any
further steps should be taken to reiterate to the Treasury the Com
mittee's views regarding Committee operations during periods of
Treasury financing,

and Chairman Martin responded that in his judgment

no more formal steps were needed.
Chairman Martin noted the proposal of the International Monetary
Fund to invest $200 million in United States Treasury bills, and he raised

-37

2/15/56

the question as to what Committee operations should be in the light
of such investment.
Mr.

Rouse stated that it

was expected that the investment by

the Fund in bills would take place over a period of time and that the
amount invested in any one week might run from $10 to $20 million.
It

was his view that System operations could be adapted to these in

vestments without difficulty.
Mr. Sproul suggested that in

executing orders for the Fund it

should be understood that they would be fitted into the policy of the
Open Market Committee in the best way available at the time, and there
was general concurrence in

this suggestion.

Mr. Mills recalled the operating policy of the Federal Reserve
Bank of New York adopted in 1953 whereby transactions for foreign ac
counts in Treasury bills might be at the convenience of the Federal
Reserve Bank of New York and in such a manner as not to interfere with
open market policy.

He suggested that the same understanding would

apply in the case of investments for the Fund along the lines suggested
by Messrs. Rouse and Sproul.
Mr. Sproul agreed with Mr. Mills, and Mr. Rouse stated that the
International Monetary Fund understood that this procedure would be fol
lowed.
Mr. Riefler stated that members of the Committee and its

staff

would shortly receive a volume of excerpts covering open market invest
ment policy during the years 1923-28 and that later on similar excerpts

-38

2/15/56

covering the years 1929 to mid-1931 would be sent to them.
Chairman Martin said that these excerpts had been prepared in
a form in which Committee members could refer to them conveniently
because he had had an opportunity to examine them recently and thought
that it

would be helpful to review the discussions of policy in

years.
Thereupon the meeting adjourned.
Secretary

those