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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,


January 28, 1958, at 10:00 a.m.

Martin, Chairman
Hayes, Vice Chairman

Mr. Shepardson
Mr. Szymczak
Mr. Williams
Messrs. Fulton, Irons, Leach, and Mangels, Alternate
Members of the Federal Open Market Committee
Messrs. Erickson, Johns, and Deming, Presidents of
the Federal Reserve Banks of Boston, St. Louis,
and Minneapolis, respectively

Riefler, Secretary
Thurston, Assistant Secretary
Sherman, Assistant Secretary
Hackley, General Counsel
Solomon, Assistant General Counsel

Mr. Thomas
Messrs. Atkinson, Bopp, Marget, Mitchell, Roelse,
Tow, and Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Carpenter, Secretary, Board of Governors
Mr. Koch, Associate Adviser, Division of Research
and Statistics, Board of Governors
Mr. Miller, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Gaines, Manager, Securities Department,
Federal Reserve Bank of New York
Messrs. Ellis, Hostetler, Daane, Rice, and
Wheeler, Vice Presidents of the Federal
Reserve Banks of Boston, Cleveland,
Richmond, Dallas, and San Francisco,
respectively; Mr. Litterer, Business
Economist, Federal Reserve Bank of

Minneapolis; and Mr. Lapkin,
Economist, Federal Reserve Bank
of St. Louis
Mr. Abbott, Vice President, Federal
Reserve Bank of St. Louis (present
through economic presentation
Upon motion duly made and seconded,
the minutes of the meeting of the Federal
Open Market Committee held on January 7,
1958, were approved.
Before this meeting there had been distributed to the members
of the Committee a report prepared at the Federal Reserve Bank of New
York covering open market operations during the period January 7
through January 22, 1958, and a supplemental report covering commit
ments executed January 23 through January 27, 1958.

Copies of both

reports have been placed in the files of the Federal Open Market Com
Mr. Rouse noted that the supplementary report distributed this
morning neglected to mention that the System Account had rolled over
its $136 million of January 30 Treasury bills.

New Treasury bills were

awarded in yesterday's auction at an average rate of 2.20 per cent, and
Mr. Rouse said that the longest outstanding Treasury bills were quoted
this morning at 2.17-2.12 per cent.
Noting that there had been some comments that open market opera
tions had not supplied enough reserves to ease credit and that the System
had done nothing significant except change the discount rate, Mr. Rouse
said that the figures on bank holdings of U. S. Government securities



certainly did not support this contention.

Reporting member banks

increased their holdings of Government securities by almost $1.2
billion between November 13,

1957 and January 15, 1958, including

$600 million of Treasury bills.

Such an increase in bank holdings

of Governments could occur only when banks had the reserves to make
such investments possible.

Rouse said that the tendency for prices of intermediate

and longer-term Government issues to back off a bit in recent sessions
had helped quiet the speculative fever in the market and had provided
a good base for the Treasury's financing.

Also, the reduction in dis

count rates had had the effect of quieting speculation on System action.
Turning to the reserve projections, Mr. Rouse called attention
to differences between the New York estimates, contained in the supple
mentary report, and the estimates prepared by the Board staff.

He said

that the New York estimates implicitly assumed the Treasury balance
would be held at $500 million, although it

was considered unlikely that

the Treasury actually would be able to achieve this level.

The Treasury

balance probably would be lower than estimated during the next few weeks,
and free reserves might be expected to average closer to the Board
staff's estimates than to those shown in the supplementary report.

ample funds should be available in

the Treasury financing,

the money market during

although a demand for repurchase agreements

against "rights" might arise.

If that should happen, Mr. Rouse said



he assumed the Committee would agree that repurchase agreements
should, if


be made during the refunding.

In view of

the ease indicated by the projections, Mr. Rouse doubted that there
would be much demand for repurchase agreements.

Leach asked if

there were any special factors at work

influencing Treasury bill rates, and Mr. Rouse replied that he was
not aware of any.

Demand for Treasury bills from commercial banks,

nonbank corporations,

and others had been strong.

Some holders of

"rights" with near-term needs for funds had been selling "rights"
and shifting into Treasury bills, but there had not been enough of
this type of buying to account for the present level of Treasury bill

Hayes added the comment that one source of supply of Treas

ury bills had been selling by foreign central banks that were shifting
funds into time deposits.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period January 7 through January
27, 1958, were approved, ratified, and
Before this meeting there had been distributed a draft of
letter to Congressman Wright Patman prepared in accordance with the
discussion at the meeting on January 7 as a response to his request
dated December 23,

1957 for preparation of punch cards and summary

tabulations of data of System Account transactions during the period



March 1951 to December 1956.

The draft read as follows:

Your letter of December 23, 1957 requesting that we
prepare punch cards from the data sent to you with my
letter of November 12 was discussed at the meeting of the
Open Market Committee held on January 7, 1958, and again
at the meeting on January 28. The data sent to you earlier
gave the details of each individual transaction for the
System Open Market Account from March 1951 to the end of
1956. Your request also asked that after the punch cards
had been prepared the data be summarized to give daily and
monthly totals of transactions by classes and that we
compute, for each day and each month, the average prices
at which the transactions were effected.
The members of the Open Market Committee had had your
request before them for several days prior to the first
meeting at which it was discussed, together with an estimate
of the cost and time that would be required for our tabula
tion facilities to prepare the material for which you ask.
They are really concerned about this request, not only be
cause of its cost and the time involved but also because it
does not seem to promise to yield meaningful statistics.
Frankly, our research people who have studied the request
have not been able to determine any significant conclusions
that could be derived from these tabulations. The Committee
expressed the view that it would not be appropriate for us
to undertake a task of this extent until there had been a
technical review to determine whether the tabulations
requested would in fact produce information of value. It
also felt that a task of this magnitude should not be under
taken solely on the basis of a request from an individual
member of the Congress, as distinguished from a request by
the full Committee on Banking and currency.
We are wondering whether it would be desirable for
members of your staff and ours or, if you wish, members of
the Banking and Currency Committee and the Open Market Com
mittee to get together for a preliminary discussion of how
we might be most helpful in preparing data that would yield
significant results both for the Committee and for the Fed
eral Reserve. I shall be happy to hear from you further as
to your thoughts along this line.
The letter was approved unanimously
with the understanding that a copy would
be sent to Chairman Spence of the House
Banking and Currency Committee.


Chairman Martin then referred to a letter from Congressman

Abraham J.

Multer dated January 17, 1958 in which he again requested

that he be furnished with the daily reports of dealers'
by days from November 11 through November 15, 1957.


A copy of that

letter and of a draft reply had been distributed before this meeting.
In response to Chairman Martin's request for comments,
Hayes said that it

had occurred to him that it


might be desirable to

add a sentence to the letter that would indicate to the Congressman
that the Committee should not be expected to violate normal business
ethics of the same general character as those applicable to any
confidential relationship between a banker and his customer or a
lawyer and his client.

Mr. Hayes added that he had no strong feeling

on this point and that he was mentioning it with the thought that
those who had drafted the letter might give consideration to such an
It was agreed that further considera
tion would be given to the inclusion of a
sentence such as Mr. Hayes had suggested
and that when the letter was in form
satisfactory to the Chairman, it would be

sent to Mr. Multer.
Secretary's note:

The letter pre

pared for Chairman Martin' s signature was

sent to Mr. Multer in the following form
under date of January 28, 1958, with a
copy to Chairman Spence of the House Bank
ing and Currency Committee:
Your letter of January 17, 1958, acknowledging mine
of January 15 in which I furnished the names of dealers in



Government securities with whom the System Open Market Ac
count transacts business, refers again to your November 22
request for daily reports of dealers' operations for Novem
ber 11 through 15, 1957. You state that after further con
sideration you believe we should furnish you with the
individual daily reports that most of the dealers have
submitted voluntarily, in the strictest confidence.
I am sure you understand that the furnishing of these

daily reports by dealers is really voluntary and is in no

sense a condition to their doing business with the System
In my letter of December 17, I stated that it
would not be within the discretion of either the Federal
Open Market Committee or the Federal Reserve Bank of New
York to disclose information contained in these reports of
dealers. That letter also suggested that, if you wished to
do so you could, of course, direct your request for informa
tion on dealers' operations to the individual dealers
concerned, and their names were given in the letter sent to
you on January 15.
The Open Market Committee continues in the view that
the nature of the daily reports of individual dealer positions,
as well as the confidential basis on which such reports are
received by the Federal Reserve Bank, leaves no discretion as
to our revealing their contents. I can only reiterate my
earlier suggestion that you might go directly to the dealers
with your request for information on their operations on the
days you specify.
At this point, members of the Board's staff presented a review
of the current economic situation illustrated by chart slides.


of the script of the presentation as well as of the charts were dis
tributed following the meeting, and a copy has been placed in the
Committee files.
After presenting a review and analysis of developments during
the past few years and particularly during the year 1957, the review
concluded with the following statement:
Declining activity in the economy during recent months
may be traced primarily to an adjustment in the capital goods

area. Installation of much new capacity eased the supply
situation enough so that buyers for some time have not
needed to protect themselves by accumulating inventories
and recently have been able to reduce inventories. In some
lines, with final demands as well as inventory demands off,
current capacity is proving greater than is needed at this
time and there is much discussion of widespread overcapacity
as a result of a capital goods boom. Only time will tell
how transient or long-lived this phase may be. It may be
noted, however, that capacity is built to meet demand at
seasonal and cyclical peaks with some margin to spare and
that operation well below 100 per cent of capacity is usual
in most lines of activity.
While readjustment in the capital goods area may take
considerable time, readjustment of inventories often occurs
fairly quickly. Both types of readjustment are to be found
in the present situation. The timing of any shift from the
recent downward movement depends partly on how important
changes may be in other demands, including consumer demands,
State and local government demands, defense demands, and
foreign demands. In some fields, easing of credit restraints
in effect during the period of high activity and rising prices
will tend to maintain and possibly to strengthen demands.
Various built-in stabilizers will cushion declines in income
and tend to maintain consumption.
But business policies will need to be adjusted to chang
ing demands in order to keep markets for their products and
maintain output. It cannot be assumed that the necessary
adjustments will be made quickly or will meet immediate
It needs to be remembered that economic decline has
acquired a definite momentum and that further decline in
production, employment, and activity is in prospect. It
appears likely that the production index for January will
be down 2 or 3 points from December and about 8 per cent
from a year ago. Unemployment claims have continued to
increase. Also the price structure is getting under supply
pressure at various points, and such pressures may increase
before they relax.
Demands for bank credit, while difficult to judge, seem
to be showing a slackening drift, partly reflecting liquida
tion of dealers' positions in Government securities financed
with bank credit in December, as well as a larger than seasonal
decline in business loans. The free reserve position that has
been attained by member banks with easing credit position has
thus far been of moderate size and monetary expansion has not



yet been resumed. Prospects are that in the absence of
offsetting actions by the System, free reserves will ex
pand further in coming weeks in part from a further
seasonal decline in deposits and in part because the
squeeze on Treasury cash balances will release reserves.
Some of these may be absorbed by System operations as
money markets become easier. But continuation of at
least the present degree of reserve availability would
seem appropriate until there are indications of monetary
At the conclusion of the review, Mr.

Abbott and the members

of the Board's staff who had entered the room to assist in the presen
tation withdrew,

Hayes next made the following statement on the economic

situation and credit policy.
The underlying movement of the economy seems more un
favorable now than at the time of our last meeting. Thus,
while it is still
true that there is a wide variety of
possible ways in which the recession might develop, the
most realistic evaluation of these possibilities suggests
some further aggravation of the downward movement before
contracyclical influences and policies have had time to
take effect. In determining policy, we should probably
give major attention to the unfavorable realities of the
present rather than to possible resumption of an infla
tionary threat in the future.
The recent steep declines in production, employment
and average hours worked, reflects primarily a turnabout
in inventories from accumulation to liquidation--and the
fact that the latest available inventory-sales ratios were
near their peak indicates that this recessionary
Private outlays on
influence may continue for some time.
plant and equipment have just commenced a decline which is
likely to carry much farther--although many of the effects
of the prospective drop have already been felt in the way
of reduced new orders. A number of reports of permanent
plant shut-downs are suggestive of a real cyclical adjust
ment process rather than of a mere inventory adjustment.
However, there is some evidence of weakening of consumer



This is a factor which could of course repre
sent the key to the future intensity and duration of the
recession. Residential construction seems less likely now
than we had previously thought to give strong support in
the coming months. For what it may be worth, it is interest
ing to note that industrial production is now at about the
same level as at the bottom of the 1953-54 recession, if
allowance is made for a long-term upward trend of perhaps
3 per cent per annum.
We are at the threshold of rising Federal expenditures
and deficits--with a cash deficit of $4.5 billion or more in
view for calendar 1958. The Treasury's revenue estimates in
the Budget message appear to be much too optimistic. It is
clear that Federal spending and tax policies will exert an
increasingly strong influence on the course of the recession.
But we can't count on this as a near-term remedy for the
worsening business situation.
Bank credit has contracted more rapidly in the last four
weeks than a year ago (when the shrinkage was very substantial).
The New York banks generally speak of loan demand as well sus
tained, but this may be a local or temporary phenomenon,
reflecting some involuntary inventory accumulation as well as
corporate efforts to improve liquidity--and perhaps some re
course to bank borrowing in anticipation of a further decline
in long-term rates.
In view of the likelihood of a Treasury cash offering
coming on top of the large refunding scheduled for early
February, we shall probably have to give close attention to
the Treasury, in connection with our own policies, until
about the end of February.
The general economic situation clearly points to a need
I think the need
for further easing of credit availability.
is accentuated by the fact that economic conditions in several
major foreign countries are showing less strength and are
increasingly vulnerable to any major deterioration in business
conditions in the United States. Furthermore it is desirable
as a matter of public policy that the Federal Reserve System
should appear to be bending every effort toward resisting
The recent discount rate reduction by
cumulative recession.
nine of the Reserve Banks should be of some value in providing
another signal to the public that we are moving in the direction
I say this even though I had considerable
of greater ease.
qualms over the procedural aspects of the rate cut, in the sense
that I would have preferred to see the Federal Open Market Com
mittee have an opportunity for thorough discussion of the
subject before action was finalized, in view of the near
unanimity at our last meeting on the desirability of deferring
discount rate action until a later date.



I believe we should now move forcefully in the area of
open market operations to assure that the pressures on credit,
money, and liquidity appropriate to the previous period of
restraint are completely eliminated. Recently we have sought
and achieved modest free reserves ranging from zero to around
$200 million. This has been only minimally adequate. It has
not been enough to remove the general feeling of tightness in
the banks, particularly in the principal money centers. To
the extent that we continue to look on net free reserves as a
suitable target, I think we should set a range of perhaps $200
million to $400 million. We should always keep in mind, though,
that this kind of measure involves a sort of circular reasoning,
and that we might find ourselves successfully maintaining this
target while total reserves and the total money supply were
Therefore I would urge emphatically that, as
suggested by Malcolm Bryan at the last meeting, we try to devise
a new type of guide for open market policy under present condi
tions that will focus attention on the total reserve base and
the money supply rather than on the amount of free reserves.
The System's actions to date have not gone far enough to pro
vide for a year-to-year increase in the money supply, and it
is probably true that the illiquidity and pressure on money and
credit consciously engendered by the System when policy was
restrictive are still restraining elements in the economy. Our
policy should be directed at supplying sufficient reserves in
coming weeks and months to establish a clear upward trend in
the reserve base and the money supply on the basis of year-ago
Net free reserve targets would be of secondary
interest in the achievement of this primary objective.
If the Committee agrees on such a policy, steps should be
taken in this direction promptly in the way of moderate out
right bill purchases today and tomorrow, prior to the Treasury
After the announcement, the policy could be
implemented through liberal extension of repurchase agreements
against "rights". Later, these repurchase agreements could be
replaced at maturity with outright purchases if necessary to
establish the growth pattern of bank reserves suggested above.
Alternatively, an appropriate occasion for the release of re
serves through a reduction in reserve requirements may be
provided if the Treasury is enabled through an increase in
the debt ceiling to do major cash financing.
I believe that no change in the directive is called for
at this time.



Mr. Erickson said that conditions in the Boston District
followed the national trend but in some categories the First District
seemed to be worse off.

Manufacturing employment continued to decline

and insured unemployment, which had been increasing steadily since

was 59 per cent greater at the week end of January 4

than a year earlier.

Initial claims for unemployment benefits for

the week of January 11 were 42 per cent ahead of last year.


December figures for construction contracts were not available some
other indications indicated that they were up from a year ago.
November shoe employment was down 11 per cent and the district's
percentage of national output had gone from 33.8 to 31.8.

The pre

Christmas pickup in department store sales was continuing and the
week of January 18 was the sixth in a row to show a gain over the
previous year.
12 per cent.

Sales in the four weeks ending January 18 were up
New automobile registrations in November were 5 per

cent ahead of a year earlier but for the eleven months were 4 per
cent behind.

At the year-end, deposits of mutual savings banks were

almost 5 per cent ahead of last year and reports indicated that they
had been increasing since January 1.
Mr. Erickson noted that the Boston Bank had reduced its dis
count rate to 2-3/4 per cent yesterday.

He had been giving some

thought to the Committee's directive and suggested that clause (b)
might be changed to read "to cushioning adjustments and mitigating



recessionary tendencies in the economy, by maintaining ease in the
money markets."

The purpose of this change would be to have some

reference to ease in the directive.

As far as open market operations

were concerned, Mr. Erickson said that he agreed with Mr. Hayes and
would hope that free reserves would get up to $300 million before
the Treasury financing.

Irons reported very little

change in Eleventh District

business activity which continued at a high level.

There was some

evidence of adjustments but they had not been marked.

The agricultural

situation was more promising than for some time because of favorable
moisture conditions.

The petroleum industry continued to have supply

problems which were not entirely domestic but which involved to a
considerable extent imports.

Little change in the confidence factor

was apparent during the past three weeks, Mr.

Irons said, but business

men, bankers, and others with whom he talked for the most part seemed
to feel that there was a somewhat better tone than three to five months
With respect to policy, Mr.

Irons noted that the Dallas Bank

was one of three that had not yet reduced its discount rate below 3
per cent.

It was inevitable that this would be done,

he said, al

though from discussion with some of the directors he thought it
be with some reluctance.


Mr. Irons said that he disagreed with the

position indicated by Mr. Hayes in that he thought a wholly adequate
degree of availability of reserves had been achieved during the past



three weeks.

The Committee should not point aggressively toward

further ease, but with the Treasury financing in the offing should
maintain the status quo.

There had been a great deal written and

said to the effect that the System had not increased availability
of reserves commensurate with the discount rate changes, but Mr.
Irons felt that if rates meant anything they would not be where
they are if

the System had not done so.

On the money supply question, Mr. Irons said he was inclined
to think that its

failure to increase during 1957 resulted partly

from a matter of definition.

There had been a very large increase in

time and savings deposits and part of this was a shift out of demand
To the extent that occurred, it


might be significant in

explaining the failure of the statistics of the money supply to in
crease as much as might actually have been the case.
Mr. Irons said he hoped that the Committee would not move
toward further ease at this time, that it

would hold about where it

This would be necessary in view of the Treasury financing in

the offing,

He would not favor any further definite moves,

not during the next two-week period.


To the extent that free reserve

figures might be cited, he would not wish to see them move up to the

million range.

He realized the System Account was on the

firing line and that there must be some leeway given to the Manage
ment of the Account to try to operate in the light of the feel of



the market, but personally he hoped the Account would hold the situa
tion as it now prevailed.
Mr. Mangels said that the San Francisco Bank's analysis of
the money supply situation led to the same conclusion indicated by
Mr. Irons, namely, that the conversion of demand deposits into time
deposits had been instrumental in holding down the statistics of
expansion in

the money supply during the past year.

Business activity in the Twelfth District continued somewhat
on the down side, Mr. Mangels said,

although the rate of decline had

Spokane and Portland had been classed as substantial labor

surplus areas and 12 other cities were classed as slight surplus labor

Preliminary employment figures for December showed no change

from November and there had been no more than usual seasonal increase
in unemployment.

Automobile registrations were up slightly from a

year ago and some dealers anticipated a fairly good spring pickup.
Department store sales and construction showed slight declines.


production was down from November and 16 per cent below December a year
ago, although the year 1957 showed a 5-1/2 per cent increase compared
with 1956.

The lumber situation in

the Northwest was mixed and while

there was a degree of optimism, there were also factors suggesting

Some 500 small mills had closed since July 1 and another

LOO were expected to close, all of those being of the marginal type.
Most larger lumber producers were showing a profit.


-16Bank loans declined in the past three weeks by the same amount

as a year ago with declines in all categories excepting brokers' loans.
Banks report that they are giving closer attention to loan portfolios
but there was no evidence of collection difficulties on outstanding

There had been some talk of a reduction in the rate paid by

banks on savings deposits because of the decline in profits.


had also been considerable speculation in the press and on the part
of bankers regarding the level of reserve requirements, Mr. Mangels
said, and he had been asked to express the hope that requirements
would be reduced.

Mr. Mangels went on to say that if any such action

were taken it would be his hope that it might be tied to an expansion
in the deferred availability schedule to three days rather than the
present two-day maximum which he believed to be unrealistic.


consumer price indexes for San Francisco and Los Angeles moved to a
record high in December and this was a factor that had been considered
by the directors in not acting to reduce the discount rate a week ago.
Mr. Mangels said that he would go along with the views ex
pressed by Mr. Irons and maintain the existing level of restraint.
An overly aggressive attitude on the side of ease would not stimulate
Federal spending and it

was questionable how much it

had stimulated

plant and equipment expenditures or consumer spending.

Lower interest

rates probably would increase State and local government expenditures.
On the other hand, more ease might create an impression of distress



and panic.

His view would be to maintain a firm hold on the present

situation, proceed slowly, and if free reserves ran around $200 to
$300 million that would be about right.
Chairman Martin said that the comments by Messrs. Irons and
Mangels on the money supply were valuable and he suggested that Mr.
Thomas highlight this topic.
Mr. Thomas said that the preliminary monthly figures on the
money supply to be published soon would show a substantial decrease
for the year 1957 that for fortuitous statistical reasons would not
be representative of the actual change for the whole year.

The reason

was that the figures relate to the last Wednesday of the month, which
in 1957 fell on December 25 and thus required the use of December 24
data, on which date deposits were considerably smaller than on Decem
ber 31, for which figures will ultimately be published.

For this

reason the figures should not be used as a measure of the results of
credit developments and monetary policy.

He agreed with Mr. Irons

and Mr. Mangels that allowance should also be made for the shift to
time deposits.
Mr. Deming said that there had been little change in the
Ninth District situation during the past three weeks.

Conditions had

continued to ease off a little on the industrial side reflecting as
much as anything inventory liquidation.
falling off in

There had been a gradual

employment and the total currently was fractionally


under the year-ago level.

Unemployment was up quite strongly.


Minnesota employment bureau now estimated the peak of unemployment
would come in March.

Deming said there had been some comment recently with

respect to a steady deterioration in the situation in western Montana.
He had visited the section a week ago and said it
show further deterioration.

was not expected to

The copper industry had been weak for a

long time and he saw no new factor in that picture.
were a little

Lumber people

more optimistic than earlier but not much more so.


lack of acceleration in the down trend of the Ninth District was ac
counted for by the strong agricultural situation.
The directors of the Minneapolis Bank in making no change in
the discount rate at that Bank at their most recent meeting thought
that it

might be desirable to signal that the Ninth District picture

did not seem as black as in the rest of the United States.
for credit continued quite strong.

Minneapolis banks reduced the

prime rate yesterday because of competitive reasons,
they felt a decrease in


credit demand.

not because

As to open market policy, Mr.

Deming said he would be inclined to go along with the views expressed
by Messrs.

Irons and Mangels for the ensuing two weeks and to have

the System Account hold the level of free reserves about where it
at present,


namely, around $200 million.

Mr. Allen said that Seventh District economic activity ap
parently had not declined as much as in some other areas.


ed workers covered by compensation who were receiving benefits had



risen to 6.8 per cent in the nation but the figure was below the
national average in four of the five States of the Seventh District.
In the fifth State, Michigan, the figure was 10.2 per cent, where
unemployment in

mid-January was estimated at 320,000 persons, the

highest since 199.

Department store sales continued to be a bright

spot and in the two weeks ending January 18 showed a 3 per cent gain
over the comparable 1957 week.

Automobile manufacturers were now

anticipating sales of 5.1 to 5.3 million cars in 1958.
Mr. Allen went on to say that he had attempted to get a
measure of the steel inventory situation in

the automobile industry

and was told that the industry had 475,000 tons of steel over and
above normal inventory,

enough to make 250,000 cars at 3,800 per car.

This represented two weeks steel above normal requirements which he
did not feel was a large amount.

Nationally, there were 17 million

tons of finished steel on hand compared with normal inventory of 16

million tons minimum and 24 million tons maximum.
the present inventory was near the normal minimum.

In other words,
Current psychology

might cause the figure to drop below the normal minimum to 12 or 13

million tons.
Referring to savings, Mr. Allen said that they were continuing
but that the rate might be slowing because of falling income.
adjusted inflows declined from October to November in the three
personal savings media, but they were still above September.



-20Chicago central reserve city banks had an average basic net

surplus position in the period ending January 22, the first such
situation in many months.

This resulted from a decline in loans and

from liquidation of Government securities, not from deposit gains.
There had been almost no use of the discount window recently by large
district banks and the number of country banks borrowing had also

Allen then turned to monetary policy,

stating that he

doubted that between now and February 11 there would be a change in
any discount rate.

He then made a statement substantially as follows:

It will not be news to anyone here when I say that
the reduction to 2-3/
per cent, in Chicago as well as
elsewhere, was not what would have happened had I had
the sole decision.
I will repeat that price stability
is still
number one with me and I do not feel that the
Committee's actions of the past several months have made
the contribution which they might have made in that di
rection. Of course that is a minority opinion and I
respect the judgment of the majority. Further, I recog
nize that monetary policy has a delayed reaction and that
at least some believe that, although two years of restraint
failed to halt price inflation in 1956 and 1957, major
I hope that they are
price adjustments are in the offing.
But I would feel that we had a better chance of
winning out against inflation if our easing policy were not
I was not here in 1953 but I
proceeding so rapidly today.
know that some who were here have suggested that this Com
mittee moved too fast and did not allow sufficient time
for fundamental economic adjustments to take place. In
my judgment we are at a critical point, and if we believe
that monetary policy can be used to fight the wage-price
My idea of the way to
spiral this is the time to use it.
use it is to slow up in our movement to an easier policy.
I am fearful that we are not only validating recent price
increases (to use Mr. Young's words of a year ago which



many of us applauded), but that we may also be contributing
to a climate which will bring further price increases in
the not too distant future. I realize that the recession
can and may develop to the point where every vehicle of
easier monetary policy should be utilized. But in my judg
ment inflation is still
the major problem at this time.

Allen then reported on a visit to Detroit yesterday,


that the members of the Detroit Branch Board did not seem pessimistic.
He also spent part of the afternoon with an official of a large auto
mobile company and he was pessimistic.

After giving figures of produc

tion and sales estimates and of dealer stocks, Mr.

Allen said that the

quarter production estimate of 1,500,000 cars seemed doubtful.

Also, used car prices were not holding up well; for the first time in
many years price increases on new cars were not being reflected in used
car prices.

Further, dealers'

margins are lower and are discouraging.

In evaluating automotive production for 1958, Mr. Allen said that it
should be remembered that (1)

from here on production will be less

than sales or at least will be lower after the labor contracts are
settled, and (2)

this year we will import more cars than we export.

He reported that the industry wished to end 1958 with lower stocks

the hands of dealers than at the start of the year.
With reference to trucks, Mr.

was worse than with automobiles.

Allen said that the situation

Truck production in the first

quarter of 1958 will be 10 per cent below last year.
situation is

not as bad as in the case of automobiles,

The inventory
but the

industry estimates that both sale and production of trucks this year
will be lower than in any year since 1946.



Allen also referred to facility expenditures by the

automobile industry,

stating that about $840 million would be spent

during 1958 representing completion of 1955 and 1956 programs.


this amount is

well below 1957 and 1956 expenditures and somewhat

below 1955,

exceeds 195


and earlier years.

that facility expenditures in

Present estimates are

1959 will be below $500 million and in

1960 below $350 million.

Leedy said that Tenth District conditions were similar to

those reported for the Ninth and Eleventh Districts-a little
favorable than for the country generally.
favorable to ideal.


The crop situation continued

Unemployment was up less than nationally and ap

peared to be following the seasonal pattern, but at a level slightly in
excess of last year.

Department store sales continued up during January.

Loan repayments since the year-end had been slightly greater than last

There had been a sharp increase in

deposits but,

contrary to

Rouse's report, banks did not appear to have employed their funds

in buying Government securities but had kept them in the Federal funds
With respect to policy, Mr.


said he continued to feel

that the System program for the period immediately ahead should be to
provide further ease in

the money market.

He had no criticism of the

Management of the System Account but considered it

unfortunate that

in two of the three weeks since the preceding meeting there had been
a small minus reserve position.

The report presented this morning



indicated free reserves would be around $230 million next week.

Leedy said that, as Mr.

should see to it

Hayes indicated, the System Account

that reserves were further supplied to the market.

Published figures from now through the period of the Treasury financ
ing should not show net free reserves less than the projection of
around $225 million.
Mr. Leedy said he also shared Mr. Hayes' feeling as to pro
cedural aspects of recent rate changes.

He felt the change was proper

and he was gratified that there had been opportunity for the Reserve
Banks to consider their discount rates in advance of action by the
Board of Governors on the Philadelphia Bank's rate.

However, he

thought the procedure followed indicated we were not acting as a
System and that it would have been better if other Reserve Banks
could have been a party to the action.
With respect to Mr. Mangel's suggestion on reserve require
ments, Mr. Leedy said he assumed nothing of that sort would be seriously
considered until after the Treasury financing was completed.

If the

System attempted to do too much too quickly the actions could contribute
to deterioration of public psychology.

One of the directors of the

Kansas City Bank had indicated as much in commenting on the reduction
in the discount rate so soon after the reduction in margin requirements.
As to Mr. Erickson's suggestion on the directive, Mr. Leedy
thought that the present wording really implied the ease that Mr.



Erickson thought might be spelled out.

As a general proposition he

preferred not to specify in the directive the exact method of attain
ing an objective.
Summing up, Mr.

Leedy said that he would do more than had been

done in the recent past toward bringing case and he certainly would
not do less.

with all the difficulties of attempting to estimate the

level of reserves, he would make certain that the errors were on the
side of ease rather than of creating any tightness.
Mr. Leach said that the Fifth District economy was operating
at a lower level than he reported three weeks ago, but there had been
no material change in the rate of decline.

The long Christmas shut

down of cotton mills apparently did not suffice to adjust mill inven
tories to current demand and further curtailment of production might
be necessary.

Mills were being ground by the rising costs of good

quality raw cotton and inability to raise mill prices.


sales were expected to be off sharply during the first

quarter of 1958 from the high first

quarter of 1957.

Furniture dealers

reported some easing of terms to stimulate retail sales.

Price cutting

had been noted in the district's coal market, and premium prices for
export coal had disappeared.

Cigarette manufacturing and shipbuilding

had continued strong, Mr. Leach said, noting that about 80 per cent of
all cigarettes produced in

this country were made in

the Fifth District

and that the industry was one of the district's most stable.


revival of the cancer scare, cigarette producers had had record sales



last year, and the outlook for production and profits this year was
quite satisfactory.

Shipbuilding companies reported that some new

orders had been canceled and repair business had declined, but busi
ness on hand currently is greater than was handled in 1957.
Agricultural income must be considered a factor of considerable
weakness, Mr. Leach said.

Fifth District tobacco farmers, who produce

two-thirds of the tobacco raised in America, were in the worst position
they had been in for many years.

Cotton growers received one-third

less for their 1957 crop than their 1956 crop.

Fifteen to twenty per

cent of the 1957 peanut crop was still stacked because of excessive
moisture with damage increasing daily.
damaged because of weather.

Other crops also had been

Livestock growers had held their own.

Mr. Leach said that most, if not all, of the larger banks in
the Fifth District had reduced the prime rate.

Many bankers report

that loan demand is still strong and they expect not only to make
rate reductions down the line with reluctance but also to attempt to
reduce the number of customers entitled to the prime rate.

Aside from

strong loan demand, another important factor in the reluctance of
banks to reduce rates is worry about a prospective profits squeeze.
Bankers point out that rates of interest paid on time and savings
deposits have increased in recent months as have salaries.


loans declined during January at about the same rate as a year ago.
Mortgage lenders indicate a noticeable increase in availability of
mortgage funds and a softening of rates.


-26In view of economic and credit developments, Mr. Leach said

that he thought the easing of reserve availability during the past
three weeks was clearly appropriate.

The reduction of the discount

rate at Philadelphia was unexpected at the Richmond Bank and was an
important factor in the decision of that Bank to reduce its


Recalling that at the January 7 meeting he had spoken in behalf of
more reserve availability, Mr.

Leach said he was glad that an average

of $170 million of free reserves was achieved during the week ended
last Wednesday and that the figure for this week would probably be
around $200 million.

He would prefer a somewhat higher average but

thought the Committee should maintain an even keel because of the
forthcoming Treasury financing.

Doubts should be resolved on the

side of ease.
For the information of the Board, Mr. Leach said that since
the American Bankers Association put on a program for reducing reserve
requirements, his Bank was receiving more and more requests for modifi
cation of the method of computing required reserves and particularly
for lowering requirements.
Mr. Mills said he was especially interested in Mr. Hayes' bold
and persuasive proposal for aggressively adding to the supply of reserves.
However, he would differ from Mr.

Hayes and others taking that position

that they apparently had not taken account of the fact that action

as vigorous as that suggested would have a major impact and an un
settling effect on the interest rate structure that could undo the



advantages sought for.

All told, Mr. Mills said, his policy reasoning

was closely in line with the views expressed by Mr.

Irons and other

presidents who had taken that same general position.
Mr. Mills suggested that System policy actions in the near
future might profitably be guided by the composition of what could be
called the supply of "floating reserves," that is, the supply of re
serves provided through private initiative and represented by the
combination of Federal funds and the reserves supplied by discounts
at the Federal Reserve Banks.

Previously, it might be said, the

major part of the supply of "floating reserves" had originated from
Federal Reserve Bank discounts with Federal funds providing the
marginal part of the total supply.

That situation has now been

reversed and Federal funds are the major source of the supply of
"floating reserves."

Policy based on those changed circumstances

would contemplate that variations in the volume of Federal Reserve
Bank discounts as related to the volume of Federal funds would be
the critical factor for the Management of the System Open Market Ac
count to follow as a guide as to whether reserves should be supplied
in greater or lesser quantity.

If policy actions were presently

adapted to such a proposition, it was Mr. Mills' guess that a supply
of positive free reserves from $150 million to $200 million would be
called for.

However, he pointed out that due to the lag in obtaining

policy results, it was still too early to know what the eventual
market reaction had been to a supply of positive free reserves ranging


around $100 million.

It was also important, in his reasoning, that

the supply of positive free reserves moving about within the System
should be sufficient to act as a cushion against the disturbing ef
fects of whatever regional shifting in bank deposits might occur be
cause of changing economic conditions in

the respective Federal Reserve

If about the existing supply of reserves was allowed to carry
through the present period of Treasury financing, Mr. Mills felt that

should be possible by the time the Committee next meets to get a

clearer and more definitive picture of the effects of past policy
actions from which a fresh start could be taken.
Mr. Robertson said that he was not as pessimistic as some of
the comments of others indicated.

His views had been expressed well

by Messrs. Allen, Irons, Mangels, and Deming.

In his opinion, the

System had moved too fast in easing and the results had shown up in
psychological attitudes.

Mr. Robertson's fear was that the effect

would be so great that before too long he would be joining with the
majority of the Committee in really easing by reducing reserve require

He hoped this would not be true but was afraid of it.


Robertson said that it seemed to him clearly wrong to ease further at
this time.

He would do what he thought was agreed upon at the pre

ceding meeting, that is, hold an even keel through the Treasury
financing, and he would not ease before that was completed.

As to

the Committee's directive, he would not make a change to indicate



that the Committee was maintaining ease in the money market because

such a change at this time would indicate that it had not been the
case heretofore.
Mr. Shepardson said that, as several others had indicated,
he felt strongly that we should maintain the position we are now in.
He was very much concerned about the price situation.

He did not

think the Committee had explored fully the effects that monetary
policy could have in bringing about corrections and adjustments in

His view was that the Committee had moved fully as far as

was desirable, and perhaps too far, in

adjusting to the Treasury

and this was a time to maintain an even keel.


should be no further indication of change in position either in the
Committee's directive or in the level of free reserves.

Fulton said that he could not subscribe to some of the

optimism as to the short-run nature of the decline.

In the Cleveland

District, it was felt that the downturn was more severe than had yet
been recognized and that it would continue for some time.


district had had a greater deterioration than in some other districts
because of its heavy industry complex.

The steel industry was at 55

per cent of capacity, with the Cleveland area down to 43 per cent.
Coal production was 16 per cent below a year ago.

Carloadings were

There were substantial inventories of steel in warehouses and

in the automotive industry, and those firms were not ordering to the



extent they were cutting up steel.

Machine tool manufacturers had

the lowest dollar amount of new orders in 1957 that had been recorded
for many years and their backlogs were disappearing.

The only bright

spots in the Cleveland District, Mr. Fulton said, were the strong
department store trade and the faily strong construction industry.
Employment was not good, with 7 additional cities having been added
to the substantial labor surplus category in December and January.
Eighteen district cities were now in that group, and 7 others were
classed as moderate labor surplus areas.

Unemployment was very wide

spread because of the letdown in heavy industry.

In the opinion of

businessmen, there was no immediate outlook for an upturn in industries
that might be using steel or ordering machine tools.
District banks had lost funds recently and were in at the dis
count window,

Mr. Fulton said.

He concurred with Mr.

Hayes that re

serve availability should be increased to the $200-$400 million area,
He would prefer to see sufficient funds in the banking system to allow
the Federal funds rate to go below the discount rate.
further easing, Mr.

There should be

Fulton said, feeling that the Committee had been

keeping a too firm hand.
Mr. Williams said that he would like to read into the record
of the Open Market Committee meeting a draft of the minutes covering
the action taken by the Board of Directors of the Federal Reserve
Bank of Philadelphia at the time they voted to decrease the discount



rate of that Bank on January 16, 1958.

He then read the following:

Mr. Bopp read the Board's "National Summary of Busi
ness Conditions" and concluded that, by itself, it indicated
that, except for consumer prices, the downward drift in the
economy was continuing and might be accelerating. These
economic developments would suggest a reduction in the dis
count rate were it not for the situation which confronts
the Treasury in refunding forthcoming maturities. A break
down of the maturities of Government bonds and their
ownership was presented wherein the total was expressed as
$16.75 billion, of which the Federal Reserve Banks hold
$5.8 billion, commercial banks $5 billion, and others $6
billion. While Treasury action is conjectural, it was
pointed out that it is desirable that the Federal Reserve
have an adequate sense of consideration of the problems
involved. It was stated that the banking system as a
whole had net free reserves and that borrowings from the
local Federal Reserve Bank had declined to $22 million.
These observations were supplemented by exchange of
information among the Directors which confirmed the judg
ment that the economy was weakening.
Growing unemployment
and declining personal incomes also were considered. It
was pointed out that the problem of excess capacity presented
a structural problem which might persist beyond 1958.
view was expressed that the Third Federal Reserve District
had been particularly hard hit, that unemployment was in
creasing, and that definitely there was no boom.
The background problem of inflation was reviewed and it
was agreed that it would not seem to be a critical factor in
The relationship be
a present reduction of the bank rate.
tween bank rate and other interest rates was discussed. It
was pointed out that the dramatic decline in rates following
the reduction of Reserve Bank rates in November occurred
because that change came as a surprise to the market.
the present time, on the other hand, the market has been
anticipating a reduction in bank rate and probably has al
ready discounted it to a large degree.
Possible effects on the prime rate were discussed.
There was considerable discussion as to the possible impact
of the reduction on particular sectors of the economy. It
was felt that it would stimulate state and local government
financing, possibly housing, and particularly that it might
ultimately lead to a considerable amount of refunding of
outstanding issues.
During the course of the discussion, President Williams
asked the officer members of the Discount Committee whether



any felt that it would be inappropriate to reduce the rate.
None did.
Considerable sentiment was expressed for the coordinated
use of the several tools at the command of the System to re
tard what was characterized as a growing recession. There
fore, it was felt that the primary concern should be for making
some reduction in the rate effective at an early date and that
there was still
time for the market to adjust before any Treas
ury announcement of terms on its new issues. In this connec
tion, the timing of our local Board meetings was discussed.
Consideration was given to the effect of postponement of
action at this time on freedom and timing of action in the
month of February.
Judgments were evenly divided on whether the decrease in
the rate should be one-quarter of one per cent or one-half of
one per cent. However, after extended discussion, members of
the Board unanimously voted to recommend the smaller decrease.
As to business conditions in the Philadelphia District, Mr.
Williams said that available data continued to indicate a decline in

Department store sales were running below a year ago.


automobile sales were slow, and unemployment was rising as factory em
ployment continued to slide.

There had been a sharp drop in earning

assets and deposits at weekly reporting member banks since the close
of 1957.

Member bank borrowing

was considerably below a year ago.

Mr. Williams went on to say that in his view the business
picture both in the Philadelphia District and nationally pointed toward
a somewhat easier monetary policy.

The recent reduction in the discount

rate by several of the Federal Reserve Banks was one step in

Appropriate targets for open market policy in

this direc

the next three

weeks would seem to be free reserves of $100-$200 million, member bank
borrowing of $350-$500 million, and a bill

rate of around 2-1/2 per



cent or less.

Mr. Williams felt that no change was required in the

Committee's directive at this time.
After commenting on the consideration given by the Atlanta
Bank's Directors to the recent decrease in
Bank, Mr.

the discount rate of that

Bryan said that there seemed to be a genuine difference of

philosophy in

the views that had been expressed at this meeting.

the Sixth District, it

seemed clear that the downturn in

tivity was continuing.


economic ac

The movement was not of great magnitude but

there was some evidence of acceleration.
As to the different views expressed this morning, Mr. Bryan
would associate himself almost entirely with those of Mr. Hayes.
System had done much in
reserve availability,

the past three weeks in


the way of increasing

Mr. Bryan said, and after reviewing the basis

for this statement, he added that he did not think the rate situation
would be made disorderly by further supplies of reserves.

Total re

serves during the week of January 22 were 7/l0ths of 1 per cent below
those of a year ago.


although we were confronted with a deterio

rating economic situation, the banking system was now less able to sup
port the economy than it

was a year ago.

This was in contrast with

the policy followed last year when the System was running reserves
substantially in

excess of the previous year, at a time when the

situation was showing minor difficulties in

the economy but no deterio

Demand deposits adjusted and currency were down about 1.4

per cent and even taking account of Mr.


comment on the shift



to time deposits, the increase would be around 1-1/2 per cent.


this point, Mr. Bryan said that he was confident not all of the time
deposits should be included in computing the money supply although
there might be a case for adding some of them in.
Taking all this into consideration, Mr. Bryan said he would
conclude there was about a zero change in the money supply.

In the

face of the discouraging economic situation and considering the
efforts of the economy to grow, he believed there must be a growth
in reserves.

Even though no precise figure on the growth of reserves

necessary to permit a sustainable growth rate in
arrived at, Mr.

Bryan indicated it

the economy can be

might be useful for the Committee

to bear in mind that we would need additional reserves of about $200
million to achieve a 1 per cent growth in reserves, as measured
against a year ago; and if

we wanted to talk in

terms of a 2 per

cent growth factor, the figure would be about $400



Bryan reiterated his earlier statement that he concurred in the
policy views expressed by Mr. Hayes.
Mr. Johns said that a majority of the directors of the St.
Louis Bank requested him at their latest meeting to say to the
Committee that in their opinion the Federal Reserve System had
not supplied reserves to the banking system as it should have done
since the November reductions in discount rates.

It was their

opinion, and one director was most outspoken, that pressure should
have been relieved to a greater extent through use of open market



operations or a reduction in reserve requirements or both.


director expressed the thought that the System had been negligent
in failing to do so, which Mr.

Johns said he interpreted to mean

the director disagreed with the Committee's policy.
made it



clear that in the foregoing remarks he was performing a

reporting function.

Johns went on to say that in going about the Eighth

District during the past few weeks he frequently had been asked
about the proposal to include vault cash in computing required


had been suggested that it

would be most fortunate

and appropriate to get Congressional authority for such action.

Johns said that in making this statement he was again report

ing comments of others but that he shared this view.
Turning to business conditions,


Johns said he was not

able to give an optimistic report as to the Eighth District econony.
Views of businessmen and bankers had a pessimistic tinge.


from some areas caused him to wonder whether the Eighth District
might be contributing more to the decline than he had thought.
Within ten days of the January 7 meeting of the Committee,

he began

to question whether the decisions arrived at at that meeting had been
correct or whether they needed to be changed.

It made no difference

whether there had been a misappraisal of the situation or whether
the situation had changed,


Johns said, but he came rapidly to

the conclusion that further easing was called for and that it




not await the January 28 meeting.

Therefore, when confidential

advice of rate action at the Philadelphia Reserve Bank was re
ceived, the opportunity was promptly and unanimously employed by
the directors of the St. Louis bank to reduce the discount rate.
Mr. Johns said that while he agreed with the expressions of regret
that a change of this kind came up in the interim between meetings
where the action taken differed substantially from an understanding
reached at the preceding meeting, he would be most reluctant to
feel that a changed situation should not be recognized and appro
priate action taken.
With respect to policy for the next two weeks,

Mr. Johns

associated himself completely with the statement by Mr.


He was not convinced that the time had come to insert in the
Committee's directive an express reference to ease because he
thought what had to be done could be done within the present

Szymczak said that during the next two weeks the System

Account could not take action other than through making repurchase
agreements available, but he would recommend that these be used
freely between now and the close of the Treasury financing.
did not see how the Committee could move toward Mr. Hayes'


mendation for a $200-$400 million target for free reserves over
the next two weeks.
Mr. Hayes commented that in making that suggestion he was
thinking of moving within the next couple of days.



Mr. Szymczak said he agreed with the general idea of a $200
$500 million free reserve target, but he would leave the interpreta
tion of the figure to the Chairman of the Open Market Committee.
was really the problem that came up when a change in
was being considered,


the discount rate

he said, because of the consensus of views

expressed around this table on January 7.

In Mr. Szymczak's opinion,

a change in policy of the Committee at the time the Philadelphia Bank
rate was being considered would have been more effective than a change
in the rate, since a reduction of 1/4

of 1 per cent did not have much

He would favor the $200-$500 million range but reiterated

that he would leave the interpretation of the use of this range to
the Chairman of the Committee so that he and the Vice Chairman and
the Manager of the System Account could consult on just how far the
account should go at any given time.

He felt this to be a better

procedure than to call a special meeting or to have a telephone
Mr. Szymczak said he also agreed with Mr. Bryan that reserves
had to be supplied to the market.

A change in

reserve requirements

was not anything that could even be considered and it

would be neces

sary for the System Account to concentrate on open market operations.
As soon as the Treasury financing was out of the way we might be
faced with another reduction in

the discount rate.

Mr. Szymczak

said he hoped the consensus of this Committee would agree with his



suggestion that leeway on reserves on the positive side be left
to the Chairman of the Committee in consultation with the Vice
Mr. Balderston inquired of Mr. Hayes whether, if it were
decided to act to put reserves into the market within the next
few days, that would be known throughout the market in time for
the market to adjust to the Treasury's financing announcement.

Hayes said that he thought it


since it

would be

indicated by the weekly report as of the close tomorrow and would
become public information before the books were opened.
Mr. Rouse said that there had been an acceleration in the
date of the Treasury's program so that at the moment Treasury
officials were trying to make a tentative decision with the thought
of reaching a final decision on their offering tomorrow.


taken by the System Account today or tomorrow would not be in time
to affect that decision.

Balderston said that he had a strong desire to see the

long-term bond the Treasury contemplated offering succeed.


seemed to him that the only appropriate procedure for the Open
Market Committee was to maintain an even keel between now and its
next meeting.

He did not believe in

erring on one side or the

other--the Committee should maintain an even keel.
Chairman Martin said that there were honest differences of
opinion in the views expressed.

He made no apology for what had



happened since the January 7 meeting.

He had tried at that time

to line up the program in accordance with the situation as it had

He thought there should be no complaints against the

Philadelphia Bank for its
was taken early in

action on the discount rate.

relation to the Treasury financing.

That action

there could have been another Open Market meeting was a System
problem, the Chairman said, pointing out that it

was difficult to

call meetings of a group as large as this on short notice.
Turning to operations,

Chairman Martin said that unless the

Committee wished to abandon the policy it
several years,


had been pursuing for

would have to face up to the fact that it


not be supplying additional reserves to the market during a period
of a Treasury financing but should be trying to maintain an even keel.

it started tampering with that principle, it would find itself in

Chairman Martin noted that the next meeting of the Committee
would be held on February 11 and, while we might have additional
information at that time, he thought it likely the Treasury would be
going to the market shortly thereafter.


although there was a

difference of opinion today, unless the Committee wished to change
the present operating procedures which had been used for a number
of years it

should accept the fact that the Treasury will make an

announcement of its

refunding tomorrow or the next day, that the



books will be open on February 3, 4, and 5, and that payment will be
made the following week.

Under these circumstances,

the Committee

should not be in the market unduly during that period.

The Chairman

stated that he would like to have comments on this point because he
believed it

basic to the approach that had been taken by the Open

Market Committee during the last few years, and he would like to
know whether there was any disagreement with this view.
None of the members of the Committee commented on or indicated
disagreement with the statement by the Chairman.

He then said that




would also seem to him wiser not to change the directive at this


was the consensus that this was the procedure to be followed,

That was the thing that had gotten us into difficulty last

November, he said, when the directive had been changed and we knew that

ultimately would be published and that a change in the wording would

be interpreted as a change in the Committee's policy.

Therefore, un

less there was some drastic reason for doing so, Chairman Martin said

it seemed to him that there should be no change in the directive at
this meeting.

However, in the light of the variety of views expressed

around the table it

would seem appropriate to discuss the wording of

the directive at the meeting on February 11.
Mr. Hayes raised the question whether the Committee could not
do a little

to put additional reserves into the market today.

Chairman Martin said that this was the same discussion that
we had had previously, and he called upon Mr.

Rouse for his comments.



Mr. Rouse said that the Treasury's decision on the financing
would have been made in the light of the current situation and he
did not think that action today could influence that decision.


to repurchase agreements, Mr, Rouse said that he assumed it was
generally understood that their use would add to free reserves.


figures that would be published as of tomorrow could be expected to
show around $200 million of free reserves.


the Treasury's announce

ment was made on Thursday or Friday, the Management of the Account
might well be asked for repurchase money.

On the other hand, Federal

funds today were selling at 2-1/4 per cent and if
be available at that rate in volume,

they turned out to

the System might not be called

on for repurchase agreements in any volume.
Chairman Martin said he would not anticipate that there should
be any change in

the normal procedure for making repurchase agree

ments available, consonant with the present directive and with the
thought of keeping about the present level of reserves during the
period of the Treasury financing.

The period of this financing was

now here.

Robertson said that his understanding was that repurchase

agreements would be used only for the purpose of meeting needs that
might arise and not for the purpose of making a figure of free re
serves, and Messrs. Szymczak, Shepardson, and Allen each made com
ments to the effect that use of repurchase agreements should be in
the usual manner but not for the purpose of making a particular
reserve position.

In response to a question by Chairman Martin, Mr.
commented that if



this turned out to be a huge financing by the

might well come about that the facilities for financ

ing dealers would be deficient and would require making repurchase
agreements available.

If this should happen the Committee should

recognize that free reserves might be larger than intended.
Chairman Martin said he thought it
that it

was understood by everybody

was not contemplated that there would be any change in the

normal approach to a Treasury financing and that operations would be

accordance with the procedures the Committee had been following

for the past several years.

He suggested that it

that the System Account would do its

also be understood

best to maintain an even keel

during the Treasury financing.

He thought all were in agreement on

those points, in which event it

was clear that there should be no

change in the directive today.

He inquired whether anyone questioned

that procedure.

Hayes said that he would like to report that the directors

of the New York Bank wished him to express their feeling that the
System had not done enough in the way of open market operations or

In making this comment,

Mr. Hayes noted that he was simply

reporting the directors' views.
Chairman Martin said that the Committee welcomed and should
have at all times the benefit of the views of the directors through
out the System.

However, the Committee also wished to protect these



directors against a situation such as that which developed
recently at the Bank of England. We should all realize that
this could be a very real problem. We should never get into

the record that the directors of a Reserve Bank were recommend
ing a change in reserve requirements since many directors are

also bankers.

Chairman Martin said that this had come up on

the Hill a number of times and that it raised a very real ques
He was defending all of the Committee members and the


Presidents against the charge of being dominated by the bankers.
The Committee wished to have the views and judgments of each of
the Reserve Bank Presidents, but these should be their own.
Mr. Hayes said that he agreed that we should not indicate
to the directors in

any way knowledge that the Committee members

or the Presidents might have of the likelihood of any change in
System policy.

However, he said he had thought that the directors

should be allowed to cover all phases of Federal Reserve policy in
their discussion and in making suggestions.
Chairman Martin responded that each President should handle
this problem in the way he saw fit.

The Presidents should feel

free to discuss every aspect of System policy in any way they

His point was that each of us should protect the di

rectors from initiating recommendations where their motives could
be questioned.

Responsibility for determining reserve requirements



was specifically placed in the hands of the Board of Governors,
according to statements made to him by several Senators, because
the Congress did not want that authority in

the hands of the

boards of directors of the Federal Reserve Banks.

He reiterated

the views he had expressed before that he thought these Open
Market meetings should be just as free as possible and we should
not hesitate to discuss any of the System problems whether they
be margin requirements, or reserve requirements, or something

At the same time all of us should remember that changes

in the System might come about in the next three or four years
and that director recommendations about reserve requirements
might be the sort of thing that the Congress would criticize
unless the Committee was careful to see that the perspective in
which views were reported was correct.

He did not intend by this

to preclude any director from giving the Committee his views.


was simply trying to have the Committee members recognize that
there was a problem in this area.
Chairman Martin then stated that if

there were no further com

ments the directive would be renewed in its present form with the
understanding that it would be discussed further at the meeting to
be held on February 11 and that operations for the System Account

the meantime would be carried on along the lines of the fore

going discussion.


Thereupon, upon motion duly made
and seconded, the Committee voted unani
mously to direct the Federal Reserve
Bank of New York until otherwise di
rected 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 condi
tions and the general credit situation of the country,
with a view (a) to relating the supply of funds in the
market to the needs of commerce and business, (b) to
cushioning adjustments and mitigating recessionary
tendencies in the economy, and (c) to the practical
administration of the account; provided that the aggre
gate 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 indebted
ness 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 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 currently quoted in the
open market.



Chairman Martin stated that discussion of the New York
Clearing House Report dated October 22, 1957, would be carried
over until the next meeting of the Committee to be held on
Tuesday, February 11, 1958.
Thereupon the meeting adjourned.