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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,

PRESENT:

January 26, 1960, at 10:00 a.m.

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

Martin, Chairman

Mr.
Mr.
Mr.
Mr.

Mills
Robertson
Shepardson

Hayes, Vice Chairman 1/
Allen

Balderston

Deming
Erickson
Johns
Mr. King

Szymczak

Messrs. Bopp, Bryan, Fulton, and Leedy, Alternate
Members of the Federal Open Market Committee
Messrs. Leach, Irons, and Mangels, Presidents of
the Federal Reserve Banks of Richmond, Dallas,
and San Francisco, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Thomas, Economist
Messrs. Jones, Marget, Mitchell, Noyes,
and Roosa, Associate Economists

Parsons,

Mr. Molony, Assistant to the Board of Governors
Mr. Koch, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Keir, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Knipe, Consultant to the Chairman, Board
of Governors
Messrs. Eastburn, Hostetler, Daane, Tow, and
Einzig, Vice Presidents of the Federal
Reserve Banks of Philadelphia, Cleveland,
Richmond, Kansas City, and San Francisco,
respectively

1/

Entered meeting at point indicated in minutes

1/26/60
Mr. Larkin, Assistant Vice President, Federal
Reserve Bank of New York
Mr. Coldwell, Director of Research, Federal
Reserve Bank of Dallas
Mr. Holmes, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Brandt, Economist, Federal Reserve Bank
of Atlanta
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on January 12, 1960, were
approved.
Before this meeting there had been distributed to the members of
the Committee a report of open market operations covering the period
January 12 through January 20, 1960, and a supplementary report covering
the period January 21 through January 25, 1960.

Copies of both reports

have been placed in the files of the Committee.
In commenting on developments since the preceding meeting, Mr.
Larkin made substantially the following statement:
Developments since the last meeting of the Committee
have been set forth in the written reports previously
distributed. I would like to emphasize, however, the
sharp drop in short-term interest rates and the substantial
reduction in the System Account holdings that have occurred
since the last meeting. The average three-month Treasury
bill rate in yesterday's auction was, in round numbers,
slightly below 4-1/8 per cent compared with about 4-5/8
per cent two weeks ago. Moreover, I am informed that the
rate has dropped to 4 per cent on the offered side in
The rate on six-month Treasury
trading this morning.
bills was slightly less than 4-5/8 per cent in yester
day's auction as against almost 5 per cent two weeks ago.
This issue may be down to about 4-1/2 per cent in the
This sharp decline in short-term
market this morning.
rates has occurred despite the substantial decline in
System holdings over this period. This decline amounts
to almost $1 billion on a delivery basis over the

1/26/60
two weeks.
Needless to say, there has been a tremendous
demand for Treasury bills.
This demand has stemmed
largely from nonbank investors, including corporations,
public bodies such as States and municipalities, and
also individuals.
Individuals showed a large interest
in the most recent auction of one-year Treasury bills.
The market is now focusing on the approaching
Treasury refunding of over $11 billion February certifi
cates, of which the System holds about one half. Market
expectations point to an optional exchange offering of
two issues--a one-year certificate and a four-five year
note. The rate expectations are in the neighborhood of
5 per cent.
The market for bankers' acceptances has recently been
under less pressure and dealers' portfolios have been
reduced. However, rates on bankers' acceptances have not
followed Treasury bills downward. We have had the strange
situation over the past few days of one dealer having moved
acceptance rates lower by 1/8 per cent, with the other four
dealers declining to follow this move, leaving their bid
rate at 5 per cent.
There is just one further matter that I should like to
call to the Committee's attention, and it has to do with a
technical situation in the Government securities market.
The large scale interest in Government securities on the
part of individuals, which first found real reflection in
the so-called magic fives and other recent high-coupon
obligations, has also resulted in a large number of small
The dealers claim that
transactions executed by dealers.
these transactions have taxed their facilities, which have
been designed over a period of years for wholesale distribu
In
tion, rather than retail distribution in small amounts.
an effort to spread out the amount of back office work, some
of the dealers announced yesterday a new procedure in the
Effective February
handling of so-called small transactions.
1, they will put transactions of less than $25,000 on a
That is, delivery and payment on
skip-day delivery basis.
these small transactions will be made on the second business
day following the execution of the transaction in contrast
with regular, or next-day delivery that has hitherto
prevailed in the market.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period January 12,

January 25,

1960,

through

1960, were approved,

ratified, and confirmed.

1/26/60
During the course of Mr. Larkin's comments, Mr. Hayes joined
the meeting.
The staff economic review at this meeting took the form of a
visual-auditory presentation, the participants in which included
Messrs.

Thomas, Young, Marget,

and Noyes along with Messrs.

Garfield

and Williams of the Board's Division of Research and Statistics.
Subsequent to the meeting, copies of the text of the presentation
and the related charts were distributed to the members of the Committee
and placed in

the Committee's files.

Mr. Noyes opened the presentation with the following statement:
In recent weeks the spotlight of economic news has moved
from the steel strike to the budget.
Certainly the shift
from a cash deficit of $13 billion in fiscal 1959 to an ap
proximate balance this year and the prospect of a substantial
surplus for next year is dramatic. This shift reflects, in
considerable part, important developments in the general
economic situation.
For more than a year after the recession low in April
1958, the physical volume of industrial production rose
rapidly and without interruption to a level in May and June
1959 appreciably above the previous high in 1957. By
December, production was close to the May-June level of 166
and in January output is expected to rise further to about
168.
Taking a quick look at the whole postwar period, we see
that the broad general sweep of industrial production has
been upward--most rapidly during the early postwar years and
the Korean War period--and that this broad upsweep has been
interrupted by three recessions--in 1949, 1954, and 1958.
The Board's recently revised index shows somewhat more growth
than the earlier index, reflecting inclusion of the rapidly

growing utility industries along with manufacturing and

mining, and, more important, upward adjustments based on
study of comprehensive Census data.
The 1958 recession was sharper than those of 1954 and
1949. The subsequent recovery was rapid from the start and

1/26/60

5

only a year and a half after the recession began a new high
was reached.
Part of the rapid rise reflected the laying
in of stocks of steel for some months before the plants
closed down last July--more stocks than anyone guessed at
the time.
During the strike, total industrial production declined
sharply as steel output slowed to a trickle and output
levelled off in most industries not directly affected by the
strike. Housing starts, by summer already edging off follow
ing an extraordinary advance, declined sharply in early
autumn but they recovered part of the decline at year-end.
Nonagricultural employment declined temporarily from highs
reached earlier, and so did retail sales, but they should
turn up this month as autos become more readily available.
Sensitive materials prices, which early in this recovery
period had risen a little
more than in the 1954-55 recovery
period, showed little
change after spring last year. Common
stock prices declined after reaching new highs in early
August, recovered when steel production was resumed in early
November, and most recently have been declining again.
Interruption in economic expansion and uncertainties
concerning prospects during the strike period were reflected
not only in stock markets but in financial markets generally.
After rising moderately in early 1959, the active money
supply--demand deposits and currency--levelled off in late
spring and, except for a temporary advance in July, sub
From spring to autumn,
change.
sequently showed little
turnover of deposits also remained relatively stable, and
In security markets, the strike
then it advanced somewhat.
provided an occasion for investors to re-evaluate profit and
stock price prospects relative to the high returns available
on bonds and other fixed claims. The spread between bond
and stock yields, which had widened considerably over the
first half of 1959, did not increase much after midyear.
Short-term interest rates increased further, partly because
Treasury financing was concentrated in short- and intermediate
term securities.
Now near-capacity output at steel mills is beginning to
ease shortages and is providing steel for expanded output of
Industry officials have
autos and other metal products.
stated that no immediate general increase in steel prices is
expected. The new contract, they estimate, involves increases
in employment costs per manhour of around 3-1/2 to 3-3/ per
cent per year. This increase is substantially below those of
other postwar steel settlements. Also, it appears to be
similar to or somewhat below increases negotiated in

1/26/60

-6

other industries recently. One important change in the
contract is a revision in the escalator clause limiting
sharply the amount of any automatic wage increases to
offset possible cost-of-living increases.
Meanwhile, in Western Europe and elsewhere abroad,
production and consumption have risen to new highs, and
available resources are being utilized more fully, probably
reducing the intensity of foreign competition, which has
been one of the factors tending to limit price advances in
this country.
The presentation continued with discussion of recent develop
ments abroad and their relation to the United States balance of payments,
followed by a review of demand forces operating in the domestic econoy,
price trends and prospects,

the extent of utilization of resources, and

the developing situation in the financial area.
Mr.

Thomas concluded the presentation with a statement sub

stantially as follows:
Recovery in production and employment from strike levels
has been rapid and a new high for gross national product of
nearly $500 billion is expected for the first quarter of 1960.
Unquestionably it will go higher before the year is over. It
could approach a level as high as $520 billion by the end of
the year without placing undue strains on available resources.
A major question is whether the expansion will be sustainable
or whether it will go so fast and so far as to bring about
widespread advances in prices and important imbalances in the
economy with unfortunate consequences later.
A question of particular concern to this group is: How
much credit will be needed to permit adequate expansion to
prevent the development of unsustainable
occur and still
credit commitments? Growth in the money supply since last
spring has been limited in part by Federal Reserve actions.
At the same time monetary needs were held down by influences
growing out of the strike and the gradual wearing down of
cash balances that had been built up in excess of current
transaction needs in 1958. Velocity of money increased early
in the year and again at the end of the year.
In addition, higher interest rates have brought forth a
substantial volume of funds for lending from nonbank sources
so that credit supplies in the aggregate have been exceptionally

1/26/60

-7

large.
Much of the nonbank lending and investment has been
in liquid form representing what are in effect money substi
tutes. Considering the financial and business situation
generally, it seems likely that demands for bank credit will
again increase and if expansion proceeds moderately and in
an orderly manner, it might occur without resurgence of price
increases and speculative developments such as often character
ize this stage of cyclical expansion.
But this prospect is
not assured.
The postwar period as a whole has seen economic activity
and prices of goods, services, and capital assets under strong
demand pressure, This pressure was fed by an exceptional
supply of bank deposits and other liquid assets at the end of
the war and a continuing large flow of credit. It was ac
companied by diminishing fear of unemployment and of
incurrence of debt by consumers and businesses, and of
financial losses from sharp economic reverses. As each
postwar recession proved short-lived and moderate, many
people came to believe that rapid growth in the economy was
assured, and that creeping inflation was almost inevitable.
In 1960 we may again be faced with cumulative expansion
in demand and strong upward pressures on prices. Unlike 1956,
when auto production and housing starts declined while business
capital expenditures were rising sharply, 1960 may be a year
when rapid business inventory accumulation, expanding business
fixed capital outlays, rising net exports, and strong consumer
preference for new cars may all hit with great force at once,
while residential building may level off or decline only a
little.
If this should happen, demand pressures on industrial
capacity margins and existing supplies may be intensified,
bringing about resurgence of inflationary price tendencies and
also revival of speculative investment in capital assets other
than fixed-income obligations. While the margins of unused
capacity and unutilized manpower available to meet such re
inforced demand pressures are larger now than in 1954-55, these
not very great.
margins are still
These margins of capacity could be eliminated rather
quickly if monetary and other financial conditions were to
permit a concentrated surge of demand to develop and to
Last year the money
encourage inflationary expectations.
and by the end of the year was lower
supply increased little
relative to GNP than at any other time in the postwar period,
higher than in the 1920's.
although still
last year, there was
While the money supply rose little
a rise of 6 per cent in the rate of money turnover and there
was a substantial further increase in holdings of other liquid

1/26/60

-8.

assets.
The higher velocity of money enabled the economy to
transact a larger volume of business with little
increase in
money balances, while the increase in holdings of other liquid
assets indexed a growing volume of funds invested in a form
permitting ready transfer to other uses if inflationary
expectations are resumed.
Conceivably, however, the view in financial markets that
has generally prevailed in recent years might not be resumed.
The higher interest rates and the abnormal shift in relation
ships between bond and stock yields might bring about a re
evaluation of the capitalized value of income from capital
assets. Moreover, it might turn out that the economic situation
before the strike was not as expansive, nor our international
payments problem as temporary, as many observers have thought,
and that the strike was in fact a dramatic reflection of
fundamental change in business and financial appraisals of our
domestic and international prospects. If this should prove
to be true, resurgence of activity on the basis of inventory
rebuilding could not be long sustained.
A more hopeful possibility for 1960 than either an
inflationary upsurge or an early reaction is that we shall be
fortunate enough, now that recovery from the strike has been
largely achieved, to have further expansion in demand come
serially instead of all at once. In much of the postwar period,
economic developments have been characterized by this sort of
rolling adjustment rather than by concentrated changes in which
all major sectors move together.
For this year, it would be hoped that inventory accumula
tion, contributing to an initial rise in general activity as
output of autos and other metal products rises, would soon
Such a decline in the rate of inventory accumulation
slow down.
would make available resources for other prospective increases,
including larger consumer expenditures generally, increased
State and local government outlays, continuing expansion in
capital outlays, and increased net exports. A developing
Federal Government surplus should facilitate the financing of
larger expenditures in these areas.
Returning to the question raised earlier, how can bank
credit and money supply changes be geared to permit and foster
the most desirable of these developments? With fiscal policy
contributing to the supply of savings rather than to the demand
for them, the task of monetary policy should be easier in 1960
Treasury debt retirement may reduce some of the
than in 1959.
liquidity in the economy, particularly that of business, whose
larger tax payments will be a factor in the budgetary surplus.
Perhaps some renewed growth in cash holdings will be needed,
although prevailing high interest rates may continue to draw
existing balances into more active use.

1/26/60
It is evident that to date, prevailing restraints on
credit expansion have not been too severe.
Credit develop
ments in December indicated the strength of demands.
It
appears highly likely that in the immediate future credit
demands will be so vigorous as to require continuing restraint
in order to avoid excesses.
Available data for January to
date, however, show an appropriate seasonal reversal in bank
loans and total credit.
In addition, the marked easing in
bill
rates in the face of very heavy System sales indicates
the absence of very strong demand pressures so far. These
developments suggest that additional restraints are not yet
needed.
The feeling of tightness in credit markets seems
to be acute and it is appropriate to consider whether there
is a risk of not supplying the basis for enough bank credit.
Can we continue to rely on growth of savings, increasing
velocity of the money supply, and the willingness of member
banks to increase their borrowings to meet the credit demands
needed to support the amount of expansion in economic activity
that may appropriately occur in the year ahead? The whole
situation at home and abroad is a dynamic one and calls for
the closest scrutiny of current developments in shaping policy
actions.
Mr.

Hayes presented the following statement of his views with

respect to the business outlook and credit policy:
In general I think we can find encouragement in the
economic developments of the past two weeks, granted that no
firm judgment of the outlook can be based on so short a
Business has continued to improve, but at a moderate
period.
rate, while there have been fewer signs of strain in the
credit and capital markets than there were a few weeks ago.
Most of the recent improvement in business may be looked
on as the natural result of the steel settlement and the
rapid recovery of both output and deliveries in that industry.
It looks now as if steel inventories would be pretty well
Meanwhile, there
replenished within the next three months.
for automobiles
demand
of
buoyancy
the
to
are some doubts as
fears
and for consumer durables in general; and the initial
of inflationary results of the settlement are giving way to
The
some extent to increased talk of price competition.
stock market has been losing ground, with same continuing
more
disposition on the part of investors to give a little
The decline in housing starts may lessen,
attention to bonds.
for a time at least, the pressures for long-term funds.
I realize that it would be quite premature to conclude
that the threat of a boom, supported by inflationary credit

1/26/60

-10-

growth in 1960, has been removed.
There is a tendency at
this season of the year for business attitudes to be less
buoyant than at other seasons, and there is also a general
tendency for interest rates to move lower. We shall have
to watch carefully developments of the next few weeks and
months to see whether the present moderate tendencies are
merely seasonal; but at least there is more hope than in
some time that Federal Reserve policies of the last eighteen
months are beginning to show results, with strong support
now from the prospective budget surpluses.
The most recent data on bank credit suggests some slight
slowing in January of the vigorous expansion of loan demand
witnessed in December. As we have noted before, the money
supply showed almost no growth in 1959, but if we average the
results of 1958 and 1959 we find a more or less "normal"
growth for the two-year period. The banks are of course much
less liquid than at the start of the two-year period. It is
harder to judge the present degree of liquidity of the non
bank sector, with larger corporate holdings of short-term
governments offsetting to some extent the clearly reduced
liquidity in terms of bank deposits alone. All things
considered, I would hope that the seasonally adjusted money
supply could be allowed to expand moderately in the next
few months but within the general framework of our policy
of credit restraint.
Perhaps we should give some attention
to the desirability of a slight growth in total reserves, on
a seasonally adjusted basis, along the lines of Mr. Bryan's
and Mr. Johns' comments at the last two meetings.
For the next two weeks I would think that open market
operations should be directed toward maintaining about the
same degree of pressure on the money market and on bank
reserves. We should probably guard against interpreting
lower Treasury bill rates as an accurate measure of reduced
money market pressure, in view of the large part played in
the Treasury market by corporate funds and the fact that
the banks as a whole remain in a very tight position. As
usual, I would hope that the Manager would be given ample
leeway in carrying out the general policy of maintaining
the approximate existing degree of restraint.
No change in the directive seems to be called for. The
same reasons which led to our decision at the last meeting to
valid.
take no action on the discount rate are of course still
While last Thursday's one per cent increase in the British
bank rate may have a considerable influence on the flow of
short-term funds between the United States and Europe, I don't
think that it calls for any offsetting move on our part in the
near future. There will be an opportunity to reconsider the

1/26/60

-11

rate question after completion of the Treasury's February
refunding, by which time we shall have the advantage of
broader evidence of economic and credit developments
following the strike settlement, Meanwhile the decline
in market rates of interest has brought the discount rate
into better alignment with our open market policy as
reflected in market pressures and the level of market
interest rates. The System is now in a good strategic
position from which to move if we find that we must deal
with inflationary credit demands as we get further into
1960. For the time being, watchful waiting would seem to
be our best course.
Mr.

Erickson reported that the First District business situa

tion continued to show improvement.

Although year-end figures were

not yet available on production, construction, or employment, the
Business Week survey for 1959 indicated that New England had an
increase in personal income of 7.8 per cent over 1958, which was
higher than the national average.

However, according to the Depart

ment of Commerce survey figures for the three previous years, the New
England area was slightly under the national average.

The December

survey of mutual savings banks indicated a deposit increase of 5.1
per cent, the lowest year-ago comparison since February 1958.

From

that point, the comparisons rose to almost 7 per cent in October 1958,
but since then there had been a decline each month in the rate of
increase.

Even so, the rates of gain had not dropped to the low point

of the previous boom period of 1957.

During the past two weeks,

district banks were moderate sellers of Federal funds and there was
slightly greater use of the discount window.

Borrowings during this

period averaged $5 million higher than in the previous period, due
primarily to borrowing by some of the larger city banks.

1/26/60

-12
Mr.

Erickson indicated that he would not favor a change in

the discount rate or in the policy directive at this time.
open market operations,

As to

he would continue to maintain the same degree

of restraint, neither easing nor increasing restraint in any way.
Mr.

Irons said that following a moderate strengthening in

December, which resulted in making 1959 a record year, Eleventh
District developments in early January indicated further moderate
growth.

The banking situation appeared to be a little

in the preceding few weeks.

tighter than

District banks lost deposits rather

sharply during the first three weeks in January, there was some
decline in loans, perhaps about seasonal, and heavier member bank
borrowing reflected increasing use of Federal Reserve credit by
three or four of the larger banks.

Whereas borrowings had pre

viously been running about 5 or 6 per cent of the System total,
during the past two weeks they were in the range of 10 to 12 per
cent.
Mr. Irons thought that he detected a few straws in the wind
indicating increasing concern among businessmen and bankers with
respect to consumer credit.

A scattering of letters and comments

from country bankers and officers of a few of the larger banks
revealed some concern about the rapid growth of such credit.
Mr.

Irons said that he was quite satisfied with open market

operations during the past two weeks.

Taking into consideration

all factors, including the imminent Treasury financing and interest

1/26/60

-13

rate developments,

he favored continuing to maintain the status quo

as nearly as possible, with no change at this time in the discount
rate or the policy directive.

In open market operations,

he would

continue to maintain about the same degree of restraint, with the
Manager of the Open Market Account given sufficient leeway to meet
situations as they might arise in the market.

He was hopeful that

there would be no increase in the degree of restraint; if

it

were

necessary to have deviations, he would prefer that they fall on the
side of easing.
Mr. Mangels commented that there had been no particularly
unusual developments in the Twelfth District in the past two weeks.
The research people thou ght they sensed some modification of the
feeling of optimism that had existed earlier with respect to a
general business boom during the coming year.

However, district

employment in December was higher than in November, when enployment
was already at record levels.
the Pacific Coast States,
late summer of 1957.

4.4

The December rate of unemployment in
per cent, was the lowest since the

For the first two weeks in January, district

reporting banks showed a $450

million increase in demand deposits

but a drop in time deposits of $266 million, mostly out of savings
accounts at California banks.

The decline represented 3.2 per cent

of total savings deposits as of the end of 1959, whereas the banks
had expected that they might lose as much as 10 per cent.

Most of

the funds appeared to have gone into Government securities and into

1/26/60

-14

savings and loan associations now paying dividends at the rate of
4-1/2 per cent.

As of the end of the year, savings and loan associa

tions were borrowing almost $700 million from the Federal Home Loan
Bank of San Francisco, but they repaid between $200 and $300 million
by January 15.

The repayments were made principally out of new money

obtained from savings deposits at commercial banks and from payoffs
of outstanding loans.

Reporting banks showed a loan decline of

nominal amount in the first two weeks of the year and sold Government
securities to the extent of $150 to $160 million; the decline in loans
was about half as large as during the same period in 1959.
of Federal funds were running about twice the rate of sales.

Purchases
Borrow

ings at the Federal Reserve Bank increased in the first three weeks
of 1960,

and were about three times as large as during the comparable

period of 1959, averaging $115 million per day.

Whereas borrowings

normally run from 3 to 4 per cent of the System total, during this
recent period they reached 13 per cent of the System total.

Some

of the borrowing by city banks reflected the substantial loss of
savings deposits.
Mr. Mangels said he continued to feel that there should be no
change in the discount rate at the present time.

He was rather pleased

that the level of net borrowed reserves turned out to be somewhat lower
than the goal seemingly indicated at the January 12 Committee meeting.
He would not recommend any substantial increase in net borrowed
reserves, preferring to regard $400 million as a ceiling for the next

1/26/60

-15

two weeks, and he would favor no change in the policy directive at
this time.

An influence reflecting itself in his comments was the

fact that the Treasury was coming into the market.
Mr. Deming reported that at a recent meeting of steel ware
house executives in the Twin Cities it

was generally agreed that

shortages of structural steel were disappearing rapidly and all types
of steel stocks in

the region might be rebuilt nearer the beginning

than the end of the second quarter.
still

Cold-rolled sheets and bars were

short and manufacturers buying directly from mills still

encountered difficulty in getting enough of specific types of steel,
but even this picture seemed to be changing rapidly.

District sales

managers of automobile manufacturers who serve most of the Ninth
District from the Twin Cities also met recently, and it was reported
that stocks of new cars at dealers had built up more rapidly than
anticipated.

Most of the participants reported that January sales

thus far were well below quotas, and there was talk of special
promotions in February.

The used car market was dull.

Minneapolis and St. Paul Builders Exchanges,

Managers of

who serve the Ninth

District, reported that building plans filed with them in January
indicated a high level of nonresidential construction activity in
the first half of 1960, probably higher than in the comparable
period of 1959.
Mr.

Deming pointed out that the seasonal high in unemployment

in the Ninth District comes in the early part of the year.

Estimates

1/26/60

-16

by the Minnesota Department of Employment suggested a somewhat
lower level of unemployment in

January,

February,

and March 1960,

than in

the same months of 1959, and a substantially lower level

than in

the first

quarter of 1958.

Nevertheless,

it

was anticipated

that unemployment would be 20-25 per cent larger than in the same
high months of 1956 and 1957.
low,

Farm operations were at a seasonal

but moisture conditions were better and the snow pack in the

Montana mountains was large.

Although cash receipts from marketings

continued to run well behind a year earlier, the gap had narrowed
somewhat,

apparently reflecting seasonally large cattle movements

at favorable prices.

Farm machinery dealers and distributors

expected sales to be off from 1959 levels by one-third to one-half
in

the areas hit by last summer's drought,

to even in

other sections.

and from one-fourth off

Farm land prices showed some signs of

leveling off.
Mr.

Deming recalled having reported at the January 12 meet

ing that at the close of 1959 district bank loans were up and de
posits and security holdings down as against a year earlier.
said that in

He

1959 loan-deposit ratios rose from 46 to 58 per cent

at city banks and from 42 to 46 per cent at country banks, giving
a total

district

ratio of 50 per cent at the end of 1959,

highest since 1932.

the

Borrowings from the Reserve Bank and from other

sources were quite heavy throughout the year, particularly in the
second half; during this period total loans at district city banks

1/26/60

-17

rose less than half as much as at all city banks and business loans
actually declined in contrast to a national gain.

These points

underlined Mr. Deming's feeling that Ninth District banks lost sub
stantial liquidity in 1959.
however,
in

In the first two weeks of January,

city banks showed deposit gains in contrast to the experience

early 1959.
Turning to policy, Mr. Deming said that the phrase "watchful

waiting," as used by Mr. Hayes, represented about what he would sug
gest for the next two weeks.

He would favor no change in the discount

rate or in the policy directive at this time, and he would like to see
open market operations conducted as close to the pattern of the past
two weeks as possible.

Any deviations, in his opinion, should be on

the side of ease, and there should be no further tightening.
Mr.

Allen made the following statement with respect to Seventh

District developments:
The stronger bond market and the weaker stock market
do not appear to reflect a deterioration in general busi
ness sentiment in the Seventh District. January is
expected to show a further increase in total output and
employment to new records on a seasonally-adjusted basis.
General merchandise sales appear to have continued strong
Housing permits in the Chicago area improved
in January.
relatively in December in that they were only 13 per cent
less than in the year-earlier month in contrast to a 55
per cent drop in November.

However, automobile sales are regarded as disappointing.
The daily sales rate for the second 10 days of January, not
yet available, is thought to have been up about 10 per cent
from the 16,900 rate of the first 10 days, still considerably
below the hoped-for figure. Unless sales improve before
long, production cutbacks seem certain.

1/26/60

-18

Sales of new farm machinery declined in the last
quarter of 1959 compared with the same period in 1958,
but some of our manufacturers of such machinery continue
to expect a very satisfactory year in 1960.
The contraction of loans at weekly reporting banks
has been less in the Seventh District than in other parts
of the country.
Loans at our banks in the first two weeks
of January were down only half as much as last year, where
as in other districts they have dropped twice as much as
last year. Our banks have continued to liquidate Government
securities and holdings of Treasury bills by Chicago money
market banks are nominal.
That is understandable with the
reserve positions of the Chicago central reserve city banks
under pressure.
On the other hand, our reserve city and
country banks are in an improved position and their use of
the discount window has declined. Only 56 out of more than
900 country member banks borrowed in the period ended January
13, the fewest since early October.
Mr.

Allen said that in the absence of untoward developments, he

would favor continuing through the next two weeks the policy agreed upon
by the Committee at its

January 12 meeting.

He would favor no change in

the discount rate or the policy directive at this time, and he would
endeavor to maintain approximately the same degree of restraint that
had prevailed during the past two weeks.
Mr. Leedy reported severe winter weather in the Tenth District
during the past ten days or two weeks,
the entire area.

For agriculture,

with a snow cover over virtually

this was on balance a healthy situa

tion, particularly for winter wheat.

As in neighboring districts,

there had been less liquidation of loans this year than in the
comparable period of 1959, this being particularly true with respect
to the business loan category.

In that category,

however, there was

smaller growth late last year than throughout the nation generally.

1/26/60

-19

As in the San Francisco District, there had been a decline in savings
deposits at Tenth District banks.
of a clamor for an increase in

One might have expected something

the maximum permissible rate of interest,

but in the Tenth District there had been no such clamor.

Presumably

the banks were hopeful of tax equalization legislation to improve
their competitive position vis-a-vis the savings and loan associations.
Mr.

Leedy said he subscribed to the comments made previously

at this meeting that favored continuing the policy of the past two

weeks.
Mr.

Leach reported that Fifth District business conditions

had shown continuing expansion,

with little

or no evidence as yet that

the expansion was being sparked by speculative activity.

The textile

industry continued to be an important element of strength; orders had
been booked into the second half of the year, and even beyond in
some instances.
in years,

The outlook for the furniture industry was the best

with unfilled orders at the highest level ever reached.

A

preliminary estimate indicated that district cigarette production in
December set a new record for a single month; the fact that cigarette
consumption continued to increase faster than population augured well
for the future growth of the industry.

Bituminous coal production in

the closing weeks of 1959 established new production highs for the
year.

Mr. Leach said that Fifth District member banks ended the
year 1959 in

a much tighter position than a year earlier.

Loans

1/26/60

-20

were up 12 per cent, security holdings were down 8 per cent, and
the loan-to-deposit ratio advanced 5 percentage points.

He was

convinced from talking with bankers and from seeing instructions
issued to loan officers in State-wide institutions that System
policy was pinching at most of the sizable banks.

Borrowings

from the Reserve Bank this month, averaging around $20 million,
were no higher than in corresponding periods of the last two years,
but this was due in large part to certain actions taken by the
Reserve Bank in
window.

recent weeks in the administration of the discount

Although district banks reported that thus far they had

not seen too much increase in the way of loans to build up inventories,
they expected it.

This was one of the factors making them feel that

they were in a tight position.
As to policy, Mr. Leach expressed the view that the imminent
Treasury financing clearly called for maintaining an even keel.
would not want to be any tighter at the moment,
Treasury financing was not in the picture.
policy was biting to about the right extent.

however, even if

As he saw it,

He
the

System

The System was in a

good position to wait and not get any easier or tighter at the
present time.
Mr.

Mills said he was puzzled about the slight flavor in

today's discussion that veered toward stimulating some increase in
the money supply but in the same breath recommended a monetary policy
of status quo.

He was unable to reconcile the two objectives,

1/26/60

-21

because to maintain the status quo policywise apparently would
produce a level of negative free reserves somewhat in excess of
$500 million for the current reserve week.

Therefore,

as illus

trated by the figures, maintenance of the status quo obviously
would mean no relief from the pressures that the commercial banking
system and the economy in general had been subjected to by System
monetary and credit policy.

He felt personally that operations in

the current reserve week, although they fulfilled the directive
given by the Committee at the January 12 meeting, had produced
pressure against reserves that was undesirably severe.
Mr. Mills said he concurred with those who had commented
that they would not favor an increase in the discount rate at this
time.

He believed, however, that the Committee should give some

careful general thinking to possible, though unlikely, developments
in the international position of the United States that would follow
in the wake of the Bank of England's bank rate increase,

and the

discount rate increases effected recently in Sweden, Denmark, and
Western Germany.

The concern he felt did not attach so much to

the reasons that occasioned those increases as to what was perhaps
a fundamental downward break in the stock market.
continued,

and if

it

should widen, it

If that trend

was possible that there would

be a very substantial liquidation of foreign investments that had
until now been placed in the market.

If that should occur, the

question would immediately arise as to whether those funds would

1/26/60

-22

be repatriated or whether conditions in the United States would be
such as to encourage their reinvestment here in short-term United
States Government securities or other eligible liquid investments
of high quality.
Mr. Mills then said that he would like to place before the
Committee a redical line of thinking that could be disputed over the
weeks to come but perhaps might be in a direction in which the System
would at some point find it

advisable to consider moving.

Accordingly,

he presented the following statement:
Premature action to raise the discount rate at the
Federal Reserve Banks as a defensive measure to hold
foreign funds in the United States would be a mistake.
The domestic situation calls for a more moderate, rather
than a more restrictive, monetary policy, and if the
discount rate were raised, the increased pressure that
presumably would be exerted on commercial bank reserve
positions by System actions taken to make the higher
rate effective could seriously dislocate the economy.
For that matter, there are no fully persuasive reasons
to believe that the English and West German financial
situations are so robust as to encourage a repatriation
of funds out of the United States solely to obtain
Therefore, an attempt to
higher investment returns.
anticipate an outward movement of foreign funds from
this country by Federal Reserve System actions on the
discount rate would probably be regarded as lack of
confidence in the dollar on our part and, as a result,
could produce the very outflow of funds whose prevention
had been aimed at.
Acceptance of this reasoning contemplated that
Federal Reserve System policy would not recognize the
increase in the Bank of England's rate at this time.
If, after a waiting period, there was tangible evidence
of the movement of funds out of the United States in
volume, the discount rate at the Federal Reserve Banks
should be raised dramatically from 4 per cent to 5 per
cent or 5-1/2 per cent as a signal that our financial

1/26/60

-23-

authorities were taking a firm hold of the situation
and were prepared to take whatever further measures
might be necessary in order to protect the integrity
of the dollar as the world's key currency.
Response
to such actions could be expected to dissipate any
concern felt
about the dollar abroad and to reverse
whatever outward movement of funds was then in progress.
If, in the course of these events, an anti-cyclical
easier monetary policy should be called for by a deteriora
tion in domestic economic conditions, the Federal Reserve
System should be able to take technical actions that would
continue the emergency-raised level of the discount rate
at the Federal Reserve Banks at the same time that the
availability of credit was expanded substantially.
Maintenance of the emergency discount rate would signify
that our financial authorities had every intention to
defend the international integrity of the dollar while
they were simultaneously seeking to stimulate the economy
with easier credit conditions, whose effects would
prevent the "exoort" abroad of recessionary influences
in this country.
These seemingly conflicting objectives
would be attained by increasing the supply of reserves
needed to expand bank credit by encouraging member banks
to discount heavily at the Federal Reserve Banks.
Notice
would be given that under existing conditions the prohibi
tions against continuous borrowing would be suspended.
Accordingly, the supply of reserves would be increased
through a major expansion of member bank discounts, but as
they would have been made at the emergency high discount
rate, the purposes for which it had been established would
Moreover, as it would be necessary for the
be preserved.
member banks to recover the high cost of their Federal
Reserve Bank discounts, they could be expected to charge
relatively high rates to their borrowers, thereby tending
to produce a structure of interest rates appropriate to
In the process of adaptation to
encouraging investment.
a massive use of member bank discounts, Federal Reserve
System open market policy actions would be necessary from
time to time to offset temporary shortages or surpluses in
the supply of reserves occasioned by fluctuations in the
use of the Federal Reserve Bank discount windows and so
that a predetermined level of reserves could be maintained.
Attention should be paid to the fact that liberal
discount privileges at the Federal Reserve Banks should call
forth a flow of advances on intermediate- and long-term U. S.
Inasmuch as such
Government securities as collateral.
advances would be made at the par value of U. S. Government

1/26/60

-24

securities trading at a discount, the effect on the market
should be favorable at a time when market strength would be
psychologically desirable.
Furthermore, an improvement in
the U. S. Government securities market that was engendered
by the knowledge that banks were being relieved of pressure
to sell securities in order to finance new loans and
investments would also strengthen the receptiveness of the
market to whatever sales the System Open Market Account
might see fit to make from time to time. A further factor
that would redound to improved market sentiment for U. S.
Government securities would be that any letdown that should
occur in business conditions would witness an automatic
increase in corporate liquidity, together with a correspond
ing incentive for corporations to invest in high quality
short-term investments.
Mr. Robertson expressed agreement with the policy of watchful
waiting referred to by several of the Committee members.

He thought

that quite obviously this was not the time to change the discount
rate or the policy directive.

However,

he would not align himself

with those who felt that this was a time for easing.

Instead, it

seemed to him that the situation called for maintaining as even a
keel as possible.
Mr. Shepardson commented on a meeting yesterday in Chicago
which was attended by institutional lenders in agriculture, particu
larly those lending on farm mortgages.

The price of farm land, he

noted, had been on a rising trend almost without interruption and
almost uniformly across the country for several years.

However, in

the last quarter of 1959 there had apparently been a definite change.
The sentiment of the group that met yesterday, which included
representatives of most of the major insurance companies, the farm

1/26/60

-25

credit agencies, and the American Bankers Association, indicated at
least a leveling off of prices, and in many areas a significant down
turn.

Demand for the very top-level farms-those that had been sought

as investments by "Main Street farmers"--appeared almost to have
vanished; prices on such farms were reported to have fallen off $150
to $200 an acre from the levels of $600 to $700 an acre that prevailed
six months ago.
in

Also, there had been a drop of $50 to $100 an acre

some of the lower-priced farm land; in the wheat country of

Montana,

land that sold previously at around $250 an acre was reported

to be selling in a range from $125 to $150.

A number of those at the

meeting said that whereas they heretofore were lending freely on the
appraised value of land without too much regard to the owner's opera
tions and without looking closely at his operating statement to see
where the funds for repayment were coming from, they were now cutting
down or refusing entirely loans that did not show from the operating
statement a good probability that the operator would be able to pay
them down from funds accruing out of his operations.

In addition,

several persons mentioned the increasing reluctance of banks to
extend term credit on equipment and livestock purchases, with the
result that some of those applicants were now coming to the mortgage
lenders to get term credit.

Where there were outstanding mortgages

at favorable rates compared with the present market,

almost all of

those present reported that whenever an adjustment or extension of
borrowing, particularly in the form of term credit, was requested,
they were

adjusting the rate upward.

In most cases lenders were

1/26/60

-26

requiring the new rate to be on the basis of a complete renegotiation.
Many participants reported no significant resistance to higher rates
from borrowers seeking to purchase additional holdings to increase
their units.

In summary,

it

appeared that there had definitely been

a turn in farm land prices and that more careful consideration was
being given to the earning capacity of the farmer in extending credit.
From the standpoint of the increasing cost-profit squeeze faced by
agriculture, it

seemed fortunate that prospective borrowers were

getting a more realistic appraisal of what land was worth.

Mr. Shepardson agreed that this was a period in which the System
should be watching developments closely.

For the period immediately

ahead, he would favor maintaining the status quo as nearly as possible.
Mr. King made several references to material in the economic
presentation given at this meeting, including the portion dealing

with the position and trend of corporate earnings in relation to
earnings during past periods of recession.

He indicated that he

would be interested in studying this portion of the presentation
further.

While he did not feel that the country was close to a

general recession, he did feel that it
to one all the time.

was moving nearer and nearer

With reference to comments in

the presentation

regarding the possibility of a change in public expectations with
respect to inflation, he noted that Mr. Larkin had mentioned the

increasing number of individuals going into Government securities.
It was encouraging to him that more individuals and smaller concerns

1/26/60

-27

were going into Government securities for this would give them an
increased stake, so to speak, in the United States, a development
which would be healthy.

Mr. Shepardson's remarks on farm land prices

also seemed to him an indication that the public was turning toward
an expectation of less inflation.
last week, he (Mr.
apprehension.

At the livestock show in Denver

King) felt that he detected quite a bit of

He thought it

healthy that people throughout the

country were actually a little doubtful about a boom developing to
the extent that one had been talked about and more or less expected
earlier.

During the steel strike, he said at Committee meetings

that he did not think the steel strike was a major dent in the
economy or that there would be a wild boom following settlement of
the strike, and he was still of that opinion.

He was inclined to

discount some of the reported optimism on the part of businessmen,
for they naturally desired to be optimistic, and he was more inclined
to think about such things as the portions of the chart show relating
to the downward trend of corporate earnings.
Mr.

King said that he would not suggest any change in policy

at this time and instead would favor continuing on an even-keel
basis.

He realized that it

was almost asking the impossible to

request the Account Management not to make any errors on one side
or the other.

Thus,

if

it

came to resolving doubts, he would prefer

to resolve them on the side of ease.

This was the first time he

had made this suggestion, but he believed the System was in a

1/26/60

-28

position where it should not do anything to dampen the possibility
of the economy going forward and achieving the greatest possible
sound growth.

Since there was some doubt as to how much growth

would or would not be sustainable, he would err on the side of
allowing growth, particularly in view of the encouraging indication
that people did not appear to be talking inflation as much as they
had earlier.

This feeling was apt to manifest itself in the actions

of the legislative bodies.

In summary, this might be the big break

that the System had been looking for in terms of a change in public
sentiment.
Mr. Fulton stated that the pace of Fourth District business
activity was quite brisk.

The steel mills were putting out a lot

of material that was being taken and used; inventory building was
going on apace.

After describing the results of an election held

at a steel company that did not enter a contract with the union on
the terms of the general settlement,

Mr.

Fulton went on to say that

Fourth District building activity had increased sharply since the
first

of the year, while the increase in department store sales was

greater than the national average.

Auto sales were brisk throughout

the district, and there seemed to be the prospect of a good year.
Bank loans had declined, but not to the same extent as last year,
thus bearing out the earlier statements of bankers that they did
not expect any substantial decline and that loan demand, which was
quite strong, would take up any slack.

Consumer credit and mortgage

1/26/60

-29

credit were both in great demand.

While member banks were borrowing

somewhat more heavily, borrowings were running at only 6 to 7 per
cent of the System total, as against the 10 per cent that might be
regarded as proportionate for the district.

As to expectations,

businessmen appeared to have no apprehensions about the first half
of this year but were wondering what would happen in the second half
when steel inventories again became adequate.
Mr. Fulton agreed with the view that neither the discount rate
nor the directive should be changed at this time.

He did not have the

feeling that any substantial downturn in business was impending.

The

expectation of businesses appeared to be to spend substantial sums
for improved equipment and for promotion of their products; in general,
businessmen were acting as though the economy was booming, which he
thought it

In these circumstances, he would continue the degree

was.

of pressure that had been maintained recently and not err too much on
the side of ease.
it

was not in

That could become cumulative, and in his opinion

the best interests of the System to trend constantly

into an easier position.
Mr.
trends in

Bopp reported that Third District business and financial

recent weeks were similar to those of the nation.

Steel

mills in the Philadelphia region were operating at 102 per cent of
capacity, which was moderately above the 95 per cent rate nationally.
The secondary effects of the strike on employment had about
disappeared; in

Pennsylvania, secondary unemployment existed to a

1/26/60

-30

measurable extent in only one industry, metal products.

There was a

fractional increase in district manufacturing employment from Novem
ber to December according to preliminary data, and total employment
was 3 per cent higher than a year ago.

New unemployment claims in

Pennsylvania had been moving seasonally in the past two weeks but
were substantially below the levels of both 1958 and 1959.

District

department store sales had been strong; sales for the past four weeks
were 12 per cent above last year's high level.

Automobile sales in

Philadelphia showed the effect of the shortages in December; according
to preliminary data, they were more than one-third below a year earlier.
The large Philadelphia banks had been under somewhat greater reserve
pressure in

the past few weeks.

Their daily average basic reserve

deficiency was $68 million as compared with $47 million in the pre
vious two weeks, and the increased pressure was reflected in their
total borrowings.

Daily average borrowings from the Reserve Bank

rose from $36 million to $65 million.

Country banks also increased

their borrowings from the Reserve Bank from $9 million to $16 million.
Total borrowing by district member banks was 8.8 per cent of the
System total in the latest week compared with 6.4 per cent and 4.4
per cent, respectively, in
Mr.

the preceding two weeks.

Bopp expressed the view that although the time might

come, perhaps this year, when the Committee would want to modify the
even-keel policy during Treasury financings, that would be only if
economic developments clearly were in the direction of rapid

1/26/60

-31

expansion.

He did not see such a development at this point.

Accordingly, he favored continuing the present degree of restraint,
with no change in the directive or the discount rate.

Mr. Bryan said he could see nothing in the Sixth District
developments that appeared to be of great significance as against
major national trends.

The latest figures showed activity still

going up, but they were definitely related to national trends.
Most of the time in the past few years the district had seemed to
grow at rates greater than the national growth rate, but it appeared
that this might be coming to at least a temporary halt.

District

banks appeared to be very illiquid, and borrowing from the Reserve
Bank continued at levels disproportionate to reserve resources.

The

latest figures showed that district borrowings were more than 16 per
cent of the System total, against the figure of about 5 per cent that
would be indicated on the basis of total reserve positions.

It was

being found necessary to call some of the loans on the instalment
plan.

The round-up of the economic situation at the most recent

directors' meeting seemed slightly less enthusiastic than it

had

been in other months, with one director quite definitely pessimistic
as to the outlook in his line of business.
After referring incidentally to certain statistics ccmpiled
by private sources which seemed to cast some doubt on the future course
of business, Mr. Bryan said that he sensed a real shift in inflationary

1/26/60

-32

psychology.

This was noticeable in the situation with regard to land

prices that had been discussed by Mr.

Shepardson.

While one could

analyze that development on the basis of a reappraisal of earning
power, he felt that it also reflected to a considerable extent a
shift from the psychology that had made people willing to buy farm
land, regardless of income prospects, as an inflationary hedge.

It

was his impression that the country was in a situation of great
economic strength but certainly not of unlimited boom, and he believed
there was danger of a rather extensive and perhaps abrupt shift in
psychology that might change things in a substantial way in the equity
markets.

As to the discount rate, he certainly would not want to take

any action at this time.
Mr. Bryan then referred to the chart on reserves that he had
placed in the record of the Committee meeting on December 15, 1959,
and in that connection made the following statement:
At this time, having been favored once before by
permission to place a chart in the record, I would like
permission to place in the record the same chart (but
with additional information) and a related chart. The
among other things, shows the seasonally un
first,
adjusted figures as well as the seasonally adjusted
The second chart shows
figures previously presented.
certain growth rates from points related, in two cases,
to Comittee changes in the Committee directive and, in
one case, December, our last full month of experience.
At this time, moreover, if the Chairman and my
colleagues will bear with me, I would like to begin an
experiment in drawing an instruction to the Desk in
quantitative terms, based on total effective reserves.
In making this attempt it would seem fair to me to say
that in the period from June 1958 through December 1959

1/26/60

-33-

we essentially allowed no growth in total reserves, a policy
justified as a mopping-up operation because we had previously
effected a very large excess, based upon a long-run trend
line, in the growth of reserves.
The justifiable mopping-up
operation seems to me to be completed.
We are now confronted with a situation of great economic
strength, but not immediately a situation of unlimited boom.
Accordingly, I would conclude that a policy of restraint
is still justifiable. But I would also conclude that the
time has come when we should allow some growth of reserves.
Such a growth of reserves should in my judgment be less than
the 3.6 per cent reserve-growth of the postwar period, for
it is clear that such a rate of growth has permitted an
undesirable degree of inflation in the postwar period and,
I would conclude, is inappropriate to a period of great
economic strength.
Thus I would suggest that the rate of growth in total
reserves that we contemplate for the time being be at 2 per
cent.
Translated into concrete terms this would put the total
reserve figure, seasonally adjusted, at something over
Since it would hardly be appro
$18,700,000,000 for January.
priate to ask the Desk to attain such a precise figure on a
daily average basis, I would also suggest that there be a
certain plus or minus latitude to the goal stated. Just as
a suggestion, I would think we might well say that we are
aiming for a total reserve figure, on a daily average basis,
between $18,650,000,000 and $18,750,000,000. This would
allow latitude for the Desk to adjust to conditions in the
money market as they develop, and, at the same time, would
give us a quantitative instruction centered on a slow and
restraining growth rate in total reserves.
In suggesting such a goal I should say that in January,
through Wednesday of last week, we have had daily average
This has put actual
actual reserves of $19,059,000,000.
total reserves in January well above the figure that would
have been indicated by a 3.6 per cent trend line, and, up
to last Wednesday, above the 3.6 per cent trend line even
on a seasonally adjusted basis.
The result has been a definite easing in the money
market--if we are to be permitted to measure such easing
by the objective test of rates. Thus, in suggesting a goal
for daily average reserves in January, the goal suggested,
although it calls for a restraining rate of growth in the
total reserve position, does not permit what I would regard
as the excessive rate of growth that, up to last Wednesday,

1/26/60

-34

had been permitted in the total reserve figure.
Let me make clear that I am not asking that the
Committee adopt the suggestion that has been made. I
am merely experimenting--and hope that the Committee
will permit me to experiment from time to time in the
future--to determine whether the total reserve concept
represents a practicable foundation on which the Com
mittee could base instructions (a) in quantitative and,
thus, in measurable terms; (b) in terms of a phenomenon,
namely total reserves, that are determinable by the
Reserve System even after the influence of items not
determinable by the System; (c) avoid qualitative
terminology as represented by such indefinable terms
as tone, feel, ease, tightness, and so on; and, at the
same time, (d) leave the Desk with sufficient latitude
to accommodate itself to the practical administration
of the Account and to conditions as they unfold from
meeting to meeting.
The Chairman stated that the material presented by Mr. Bryan
would be taken under study.
Mr.

1/

Johns said he found nothing in Eighth District statistics

that was particularly significant.

In the past two weeks, he had

endeavored to find out whether in the business community of the
district there were many "reluctant optimists."

Outside the agri

cultural sector, which deserved special consideration, he had
or no evidence of flagging optimism.

discovered little
plantation owners,
enthusiastic.

and operators were,

Farmers,

of course, not wildly

They contemplated continued high costs, if

not

steadily rising costs, and the price picture was uncertain.

For

some reason, as yet unexplained, member bank borrowing had risen
sharply in the past week and stood at $108 million at the end of

1/

Copies of the two charts referred to by Mr. Bryan are attached
to these minutes.

1/26/60

-35

the week.

This represented not only rather large increases in

borrowing by reserve city banks but also some increase on the part
of country banks.

It

appeared, at least in St. Louis and Memphis

and to a lesser extent in Louisville, that city banks were not
feeling very easy.

At Memphis it

also appeared necessary to face

again the condition that cotton loan demand was becoming steady and
constant throughout the year rather than seasonal.

This probably

meant that the Reserve Bank had some work to do on the problem of
member bank borrowing in
Mr.
Hayes'

the southern reaches of the district.

Johns said that while he would like to go along with Mr.

concept of watchful waiting, as he understood that concept,

he would be inclined to keep a rather firm and steady hand on monetary
policy.

He would suggest truly watchful waiting, moving neither in

one direction nor the other.
After commenting that the papers presented by Messrs.

Mills

and Bryan deserved study, Mr. Szymczak expressed the view that at
the present time there was nothing in

the economy appearing to

require a basic change in monetary policy.

In his opinion, however,

the seasonal situation required some easing of the position of the
banks.

He pointed out that this season of the year is

apt to be

rather dull, and that some easing therefore might be helpful.
the other hand, since the economy was still

On

on the expanding side

and he felt that this would continue, he would favor no fundamental

1/26/60

-36

change in

monetary policy.

contradictory,

While these views might at first

he pointed out that it

is

seem

not feasible to change

basic monetary policy on a month-to-month or quarter-to-quarter
basis.

Instead,

the Committee must look at monetary policy on an

over-all, long-range basis.
changing its

If

the Committee was continually

record, that would be hard to explain either outside

or within the System.

With this explanation, he would recommend no

change in basic policy and some easing through open market operations.
Mr.

Balderston said he was fearful that the Committee members,

in reading the stock market figures from day to day,
get carried away by the pessimism that is
two months of the calendar year.
in

might tend to

to be expected in the first

He expected February to be a month

which there would be a lot of pessimistic expressions; when it

came to March he was not sure.

He had been told of some companies

being advised by their counselors not to approach the capital markets
in

January and February because the Treasury was at the trough, so

possibly it

might be found that resort to the capital markets in

March would be as heavy as in

March 1956.

In short, he had a

suspicion that the System might wake up from this period of pessimism
to find the recovery in full swing from March onward.

Because of his

hope that the System would not be pulled off base, he would suggest
maintaining an even-keel policy, with no easing.
Chairman Martin expressed the view that, unless the Committee
was certain it

wanted to make a change,

the even-keel philosophy

1/26/60

-37

ought to prevail during a period of Treasury financing, and such a
period was imminent.
The Chairman then said it
meeting that no change in

seemed clearly the consensus of this

the policy directive or the discount rate

was called for at this time and that the Desk should come as close to
perfection as it
Mr.

could in adhering to an even keel.

Mills inquired whether the Chairman would care to qualify

his statement of the consensus with an indication as to whether errors
should fall

on the side of ease or of tightness.

He (Mr.

Mills) had

detected a trend of sentiment during the go-around in favor of moving
to errors on the side of ease, but he had not attempted to keep count
and did not knew whether that was the majority view.
Mr.

Szymczak commented that his position was related to what

the Desk had been doing during the past two weeks.
Following comments by Mr. Larkin on open market operations in
relation to changes in

the level of net borrowed reserves during the

past period, Chairman Martin said that operations of the Desk seemed
clearly to have been intended to maintain an even keel.
whether the Committee,

in

a situation where its

He doubted

thinking was in

the

direction of further restraint, would want to make the Treasury's
problem more difficult by saying that doubts should be resolved on
the side of tightness.
of deliberateness.

It

The question, he suggested, involved a matter
was desirable to express shades of differences,

1/26/60

-38

but he questioned whether there was any precise way of defining them.
The Desk, he observed, already has enough difficulties.
The Chairman again expressed the view that it

ought to be the

intent during a period of Treasury financing, unless the Committee
wanted to make a fundamental change in

its

policy,

complicate nor help the Treasury's problem.

to try neither to

Rather,

it

should be the

aim to give the Treasury as closely as possible a fair test of the
market.
Mr.

Shepardson suggested that this would mean maintaining as

nearly as possible the degree of restraint at which the Committee had
been aiming.
Mr.

Mills said that this was what bothered him, and that he

could see where the Management of the Account might have serious
difficulties.

During the first

surmised that more by accident,
in

two reserve weeks of the year, he
because of natural factors operating

the market, than by deliberate design, the degree of restraint,

as measured by net borrowed reserves, dropped into the $400 million
range.

Then in

the past week net borrowed reserves were brought up,

consistent with the Committee directive, to around $500 million.
these circumstances,

the Desk might find it

the Committee's meaning was; whether, if
increase the supply of reserves,
increase or move against it

difficult to sense what

natural factors tended to

the Desk should permit that

deliberately and bring net borrowed

reserves to some higher level.

In

1/26/60

-39
Mr.

Larkin said that the lower net borrowed reserve figures

were inadvertent; the Desk was just trying to keep up with the
changing situation in

the market.

Mr. Hayes commented that some of the remarks made at this
meeting pointed up the danger of placing too much emphasis on the
net borrowed reserve figure.

The Committee had talked from time to

time about not paying quite so much attention to that figure, but
nevertheless there was an inclination to give it
attention.

perhaps too close

Personally, he did not feel that the Committee should

ever define its

objective in

terms of one figure, because it

was

necessary to think about various elements in the situation.

The

fact that the Account sold a large volume of securities in a week
was important,

to his mind, and represented an important offset

to the fact that net borrowed reserves wound up at a somewhat lower
level.
bill

Among other things, the Desk must consider the feel of the

market and the feel of the banks, along with what was being

said by the banks and others.
in

It

was not a game that could be played

terms of one figure.

Chairman Martin said this was quite a valid point.

He went

on to say that he had not detected in the go-around any desire to
change the existing policy by design.
talking about a trend.

While it

Instead, the Committee was

was true that some would prefer

more ease, he felt the spirit of the even-keel philosophy vis-a-vis
the Treasury should be that the Desk would not consciously make

-40

1/26/60

errors on the side of ease or of restraint.

The Treasury financing

would not involve a very lengthy period, and it

was directly ahead.

He would prefer this morning that the Committee renew the current
directive and let
Mr.

it

go at that.

Mills said that he again wished to submit his proposal

that clause (b) of the directive be changed to provide for "fostering
sustainable economic growth and expanding employment opportunities
while guarding against inflationary credit expansion."
Mr.
was more in

King commented that the intent of his previous remarks
the direction of avoiding errors on the side of tightness

than resolving doubts on the side of ease.
Mr. Larkin said that as he caught the sense of the meeting,
it

was more important to avoid further tightness than to resolve

doubts on the side of ease.
In

reply, the Chairman said to Mr.

Larkin that, to sum up,

the Committee wanted the Desk to be "perfect."
Mr.

Larkin commented that he felt the suggestion of Mr.

deserved further consideration and that it

Bryan

would be studied at the

New York Bank.
Chairman Martin concluded the discussion by stating his
understanding that, with one dissent, the Committee desired to
renew the existing directive in its
comments were heard in

present form, and no dissenting

response to this statement.

1/26/60

-41Thereupon, upon motion duly made
and seconded, the Committee voted, with
Mr. Mills voting "no", to direct the
Federal Reserve Bank of New York until
otherwise directed by the Committee:

(1)
To make such purchases, sales, or exchanges (in
cluding 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
restraining inflationary credit expansion in order to foster
sustainable economic growth and expanding employment
opportunities, and (c) to the practical administration of
the Account; provided that the aggregate amount of securities
held in the System Account (including 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.
Observing first

that the Treasury had not discussed the matter

with him, Chairman Martin referred to the holding by the System Open
Market Account of approximately $5.5 billion of the $11.363 billion
issue of Treasury certificates of indebtedness maturing February 15,
1960.

If

the Treasury should offer in

exchange the choice of a

1/26/60

-42

shorter and a longer issue, he pointed out,

this would present the

question whether the System should subscribe entirely to the shorter
issue.

If

that course were followed, it

might appear as though the

Treasury had priced the issue for the convenience of the System.
The Chairman said he felt

that the Treasury probably expected

the Federal Reserve to go to the short end of the market.
looking at the matter from the management standpoint, it

However,
was his

feeling that the Account might well take 1/3 of the exchange in
longer issue and 2/3 in
the bulk.

When it

the

the shorter issue as a means of dividing

got to a point where the Federal Reserve held as

much as $5.5 billion in

any one issue, this made a pretty big load.

The broad problem was one that the members of the Committee should
be studying; he had referred at the January 12 meeting to the matter
of the 2-1/2 per cent bonds of 1961.

As far as he could see, the

Committee would not be violating any principle if
the subscription in

the forthcoming exchange,

it

wished to split

and he therefore wished

to put the matter on the table for consideration.
Mr. Hayes said that he had not studied the matter in

detail,

but he liked the general idea of splitting the exchange.
Mr.

King recalled that the Committee recently had a similar

question before it

and decided to stay on the shorter side.

Since

that time he had studied the problem further and, in the light of
such study, he felt

that his preference would have been different.

He would heartily endorse the plan suggested by Chairman Martin.

1/26/60

-3
The Chairman commented that this was not a vital matter

but he thought it

would make some sense to split

the subscription.

Mr . Mills commented that this would have the advantage,
also,

of showing variation in

the System's thinking.

the System would be moving out on the longer side,
occasions it
Mr.
in

This time

while on other

had moved from long to short.
Mills then moved that a splitting of the subscription

the manner suggested by ChairmanMartin be approved,

and Mr.

Johns seconded the motion.
Thereupon, the motion was put to
a vote and was approved unanimously.
It

was agreed that the next meeting of the Federal Open

Market Committee would be held on Tuesday,

10:00 a.m.
The meeting then adjourned.

February 9,

1960, at

Effective Reserves

Correction of seasonal factors

made: January 1, 1960

(Monthly averages of daily figures)

19.

Janur

Po

T

P

a:

o

11yli

op doll,

1.0

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s

urplus
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1a.5

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I

Reserve surplus
$490 million
8

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1960

1959

1958

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Milliaas of dollars

.
SReserve

deficit.
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18.55
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January 1960

l99s
.LLIe.

lreast

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method o computati n deaoolbed on reverse Side.

19&

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19

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19

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

_

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Fpr August
1958, June 1959, and December1959
as Starting Points

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