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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 8, 1957, at 10:00 a.m.
PRESENT:

Mr.
Mr.
Mr.
Mr.

Martin, Chairman
Hayes, Vice Chairman
Balderston
Erickson

Mr. Fulton
Mr. Johns

Mr. Mills
Mr. Powell
Mr. Robertson
Mr. Shepardson

Mr. Szymczak
Messrs. Allen, Bryan, Leedy, and Williams, Alternate
Members of the Federal Open Market Committee
Messrs. Leach, Irons, and Mangels, Presidents of the
Federal Reserve Banks of Richmond, Dallas, and
San Francisco, respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Vest, General Counsel

Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Abbott, Hostetler, Parsons, Roelse,
Willis, and Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Carpenter, Secretary, Board of Governors
Mr. Sherman, Assistant Secretary, 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. Bopp, Daane, Mitchell, and Tow, Vice
Presidents, Federal Reserve Banks of
Philadelphia, Richmond, Chicago, and
Kansas City, respectively; Mr. Atkinson,
Economist, Federal Reserve Bank of Atlanta;
and Mr. Walker, Economic Adviser, Federal
Reserve Bank of Dallas

1/8/57
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meetings of the Federal Open Market Com
mittee held on November 27 and December 10,
1956, 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 December 10,

1956, through January 2, 1957, and a supplementary report covering com
mitments executed January 3 through January 7, 1957.

Copies of both

reports have been placed in the files of the Committee.
After commenting briefly on developments in

the Government

securities market, Mr. Rouse presented figures showing changes in
various factors that had affected reserves during calendar year 1956
and the net change in holdings of the System open market account during
the year.

He called attention to the fact that although the net change

in System open market account holdings was small for the year as a whole,
transactions for the account amounted to several billion dollars during
the year.
Chairman Martin suggested that Mr. Rouse provide each member of
the Committee with a summary of the information he had presented, and
it

was understood that this would be done.
Upon motion duly made and seconded,
and by unanimous vote, the open market
transactions during the period December
10, 1956, through January 7, 1957, were
approved, ratified, and confirmed.
A staff memorandum on recent economic and financial developments

1/8/57
in

the United States and abroad had been distributed under date of

January

4, 1957.

At this time Mr. Young made a statement with re

spect to the current business picture as follows:
The economic situation as of this meeting can be sum
marized this way: domestically, strong and still on the
inflationary side price-wise; abroad, partly slackening and
partly steady in Europe and inflationary outside Europe.
Commodity prices, while as always showing diversity of
movement, continue to feature an upward weight according to
the latest information. The average of industrial prices is
up 4 per cent from a year ago while the general average of
all wholesale prices is up 5 per cent. In the industrial
sector, freight rates, finished steel, crude oil, cement,
chemicals, synthetic yarns, carpets, and small household
appliances are among the recent advances.
Among the recent
declines of note are steel scrap, tin, and copper. Farm
products have been steady recently and are 6 per cent higher
than a year ago, with livestock prices a fifth higher.
December industrial production is now estimated at 148,
up one index-point from November, and a further point rise
is now believed possible for January. Output of durables
and minerals has risen further and nondurables activity has
been maintained.
Since late autumn, rising automobile assemblies have
been an important factor in raising industrial output.
Dealer sales have been rising, too, but output has exceeded
sales so that stocks have increased to about 530,000 units
or a fifth below last year-end. While sales of some makes
are sluggish, the total development in automotive markets
to date has been, if anything, on the fairly satisfactory
side from the standpoint of the industry.
Prices of late
model used cars have held steady about 10 per cent above
last year, and the proportion of sales on a cash basis has
shown about the usual seasonal rise following new model
introduction.
With a more active automobile market, instalment credit
outstandings rose about $300 million in November seasonally
adjusted. Automobile paper accounted for $129 million of
the rise. This was the largest monthly increase in auto
mobile outstandings since last March.
Construction activity in the final quarter held close
to record levels. Although new housing starts were off
about a tenth from the fall rate for 1955, the volume of
starts had steadied at about 1 million units annual rate.

1/8/57
Most building materials, except structural steel parts, were
reported in ample supply through the fourth quarter, and con
struction costs showed little further change.
Mortgage underwriting activity has continued in fairly
substantial volume, about the same as in late 1955. Discounts
on FHA and VA loans reached about 4 percentage points by early
December, when the FHA rate was raised to 5 per cent; these
margins of discount still persist on loans coming to the market
at the -1/2 per cent rate. Selling time on new and old houses
in most major markets is about keeping steady.
Employment appears to hold close to record December levels,
but the rate of increase in employment in nonmanufacturing lines
has been moderating for several months and hiring rates in manu
facturing have recently fallen off. Scattered layoffs have been
reported in a diverse group of manufacturing industries, and
unemployment claims appear to be running slightly more than
seasonally for this time of the year. Seasonal variation in
employment data is too irregular for these indications to be
taken as a forewarning of an easing labor market development,
but they do suggest that further changes will bear close atten
tion.
Business inventories for November, the latest month for
which figures have become available, showed a spurt on the up
side to about $750 million. This compares with an average in
crease of $500 million for the preceding twelve months. About

$500 million of the increase was in manufacturing, mainly in
durables; the balance was in distribution, mainly at automobile
dealers. The fourth quarter annual rate -of nonfarm inventory
accumulation is currently estimated at $4.5 billion compared
with an average rate of $3.5 billion for the first three quarters.
New orders in durable manufacturing in November, although
up only moderately, exceeded the record levels of December 1955
and January 1951. Unfilled orders in machinery industries were
up sharply in November (20 per cent) and in primary metal and
fabricated metal industries they were up appreciably (10 per
cent). The rise in unfilled orders for all durable goods
manufacturing was about 17 per cent.
Personal income in November is estimated at $334 billion,
up 6 per cent from a year earlier. With high and still rising
levels of personal income, department store sales for November
and December also ran about this much ahead of last year.
Abroad, it is now clear that in Great Britain and Germany
aggregate demand has been easing off since mid-1956. The impact
of Suez developments has been mainly to give impetus to these
slackening tendencies. This may be the underlying explanation
as to why the Suez crisis had such moderate effect on inter
national commodity prices, aside from petroleum prices and
ocean freight rates.

1/8/57

-5

Elsewhere in Europe, activity continues high and, with
the exception of France, prices are stable, Gasoline ration
ing has, of course, caused a sharp reduction in the demand for
autos.
In conclusion, a comment about GNP and money supply growth
may be in order.
The full year 1956 represented close to capacity
performance for the economy.
On a full year basis, total national
product in current dollars exceeded that for 1955 by about 5 per
cent.
The increase in product in constant dollars was only 2-1/2
per cent.
From the fourth quarter of 1955 to the fourth quarter of
1956, the increase in gross national product in current dollars
was more than 5 per cent, in fact about 5-1/2 per cent, largely
reflecting the spurt this year from the third to the fourth
quarter.
But because of the greater price increase for this
period, the increase in product in constant dollars was still
only 2-1/2 per cent.
The reduced rate of real GNP growth from 1955 to 1956, re
flecting intense utilization of resources, has been met by mone
tary policy through a reduced rate of growth in the privately
held monetary stock. For the full year 1956, the privately-held
monetary stock averaged only 1.3 per cent greater than the full
During 1956 the rate of increase in the money stock,
year 1955.
seasonally adjusted, declined. For the first two quarters, money
stock averaged 1.5 per cent higher than the first two quarters
of 1955. In the third quarter, it averaged .8 per cent higher
In the final quarter, re
than in the third quarter of 1955.
flecting modest relaxation in monetary pressures, it regained
a 1 per cent level over a year ago. There can be little question
that the cumulative effects of slower growth in the privately
held money stock have operated to retard the further expansion
of aggregate demand for goods and services in relation to output
and to damp down inflationary pressures. That they have not
succeeded has been due to a more active use of the existing money
stock. This offset can work for a time, but eventually there is
a limit reached on turnover or activity of money.
Chairman Martin called upon Mr. Thomas for a review of the credit
situation and outlook, and the following statement was made by Mr. Thomas:
Credit developments in the past month have been somewhat
surprising; they have also been significant with respect to
System policy and perhaps ominous in their implications re
garding the underlying forces at work. The magnitude and
nature of credit demands, revealed by the figures as they
have become known, help to explain the continued tightness

of the market and the maintenance of interest rates at a
high level notwithstanding System operations that supplied
so large a volume of reserve funds that member bank borrow
ings were the smallest in nearly 18 months. The results,
moreover, raise questions as to the appropriateness of System
operations under the circumstances. This is the third time
in the past year that a moderate relaxing of the limitations
on reserves has been followed by a spurt in the rate of
credit expansion.
System operations, in accordance with the revised directive,
were designed to meet expected heavy liquidity needs of this
period due to seasonal and special international factors. They
have in effect been conducted so as to prevent any increase in
restrictive pressures beyond those previously applied and have
probably relaxed pressures somewhat. It was believed that be
cause of their reduced liquidity positions, banks might be
reluctant to supply these rather large credit needs if to do
so entailed much borrowing.
The heavy tone of the market pre
vailing in these weeks and the continued rise in yields to new
Thus
high levels, it was believed, reflected this reluctance.
System operations were guided by the "feel of the market" and
the level of money rates rather than by the level of net borrowed
reserves.

Continued tightness in the money market and declines in
bond prices to new low levels reflected heavy pressures on
Money in circulation showed a somewhat greater
credit markets.
than usual seasonal increase and put some drain on reserves.
Required reserves, reflecting bank deposit expansion, showed a
larger than projected increase. Federal Reserve float, although
continuing at a high level, did not increase as much as had
been projected and thus provided fewer reserves. System pur
chases of securities and acceptances more than covered these
increased demands and provided for an actual reduction in member
bank borrowing.
System open market operations exceeded both earlier pro
jections of needs for this period and records of previous years.
Holdings of Government securities and acceptances--both outright
and through repurchase contracts--increased in November and
December by over $1.3 billion, compared with $800 million in
Member banks borrowings at the Re
the same period last year.
serve Banks declined and at times were below the level of ex
cess reserves, whereas in December 1955 net borrowed reserves,
averaged about
although lower than in earlier months, still

$250 million.
Yet the money market continued tight. Bank credit develop
ments, as now revealed by available statistics, indicate that

1/8/57
the reason for the continued pressures on the market was
probably very heavy credit demands rather than, or in addition
to, reluctance on the part of banks to borrow or reduce their
liquidity.
Total loans and investments at banks in leading cities in
the four weeks ending December 26 increased by $1.7 billion$300 million more than in the same period of 1955 and much
greater than in December of any other recent year.
Loan in
creases were particularly large in the two middle weeks. Both
this year and last, banks also added about half a billion to
their holdings of Government securities, reflecting in part a
Treasury offering of tax anticipation securities, which was not
as large this year as last. Projections had made an allowance
for this financing.
Business loan expansion, which since mid
year had been at a slower pace than in 1955, in December was
nearly 40 per cent greater than a year ago and three or four
times as large as in most other recent years. While much of
the expansion represented seasonal borrowing by sales finance
companies, increases were fairly widespread. Other types of
loans also increased in December.
This spurt in business borrowing in December probably re
flects the effect of the reduced liquidity of businesses, which
had to borrow more than usual to meed end-of-year financial needs.
It remains to be seen whether this increase represents an addi
tion to credit which will continue or whether it is a temporary
spurt that will be followed by a corresponding decline.
In the
week ending January 2, there was a much larger decrease in loans
than occurred a year ago, but as compared with earlier years the
decrease in commercial loans was not unusually large and the net
growth for the past five weeks continued to be larger than a
It will take a larger decline in loans than usual in
year ago.
January to offset the effect of the December increase.
Reflecting the bank credit expansion, demand deposits and
currency appear to have shown a slightly greater than seasonal
increase in December, following a seasonally-adjusted increase
While the demand deposit expansion at city banks
in November.
was less than last year, time deposits showed a larger increase
than usual. Interbank balances have also shown a very large
increase in the past five weeks, perhaps indicating an expansion
The expansion of demand deposits
in deposits at country banks.
adjusted and currency for the past year as a whole was only about
1 per cent, but demand deposit turnover has increased by about
8 per cent, and the time deposit growth amounted to 4-1/2 per cent.
These developments illustrate the difficulty of relying upon
the feel of the market and the level of interest rates as criteria
for System operations. If credit demands are excessive the money

1/8/57

-8-

market is likely to be tight and interest rates will tend to
rise. To attempt to relieve such tightness means facilitating
the expansion. The same risk can arise from relying on a
particular figure of net borrowed or free reserves as a guide,
but in this situation that guide was not used and net borrowed
reserves declined. It is, of course, not possible to know
whether smaller open market purchases by the System and thus a
higher level of member bank borrowing would have reduced the
volume of credit expansion that actually occurred. Nor can it
be known whether any seriously undesirable results would have
ensued if a more restrictive policy had been followed.
In any event, developments of the period do indicate that
credit demands continue to be vigorous and if not curbed might
readily become excessive. This course of events is similar to
those that occurred last March and last June, when restraints
were relaxed somewhat, partly because of seasonal needs and
partly in those cases because of what were thought to be indi
cations of an easing of demand pressures.
They were both
accompanied by renewed credit expansion.
Current developments and prospects, as already described,
do not give any indication of slackening demands.
The economy
continues to operate at close to capacity limits with prices
tending to rise. The calendar of new capital issues for January
points to a volume of corporate financing of over a billion
dollars for the third month in a row and for about half a billion
of new issues by State and local Governments--above last year's
monthly average and approximately that of 1955.
If these funds
can be obtained with little
use of bank credit and be used in
part to pay off bank loans, as is expected, these issues might
permit some curtailment in bank credit. Such a possibility,
however, would not appear to call for any move to relax re
straint on the banks until the curtailment becomes evident.
Some slackening of demands on the short-term money market
may be expected during the first half of the year, as corpora
tions accumulate funds for tax payments and as surplus receipts
are later used by the Treasury to retire debt. Prospects point
It is un
to a substantial public debt retirement this year.
certain whether corporations will be able to improve their
impaired liquidity positions or whether they will need to in
If relaxation of demands
crease borrowing to meet tax payments.
fails to develop this year, then need for continuation of a
restrictive policy will be indicated.
Customary seasonal factors might be expected to bring about
a reduction of about $400 million in required reserves and $1
The reserves
billion in currency during the four January weeks.
thus released may be partly absorbed by a decrease of nearly
$500 million in float and other factors plus over $500 million

1/8/57

-9

from withdrawal of repurchase contracts and the run-off of
this week's bills in the System portfolio. These changes
would still leave a net free reserve position of about $300
million in the last week of the month. Return to a net
borrowed reserve position for member banks of $200 million
or more would require further reductions in System holdings
of around $500 million. Run-offs of the next two bill
maturities of $330 million would not be adequate to absorb
that amount of reserves. In February some further decline
in required reserves would be normal and if continued re
straint seems appropriate a further reduction in System
holdings would be appropriate.
These estimates assume rather substantial seasonal de
clines in float and in required reserves. If float fails to
decline as much as indicated, additional sales would be appro
priate. If required reserves fail to decline by the pro
jected amounts, then credit contraction would be less than
the usual pattern. This would suggest need for a policy of
greater restraint and an increase in net borrowed reserves
and would presumably be accompanied by a rise in interest
rates.

Chairman Martin noted that this was the first meeting of the
Committee during 1957, and he suggested that it would be appropriate
to comment on any phase of operations of the Federal Open Market Com
mittee as they had developed over the past year.

Chairman Martin

first asked that Mr. Hayes express his views on the economic and
financial situation, together with his suggestions as to credit policy
that might be followed, and Mr. Hayes made a statement as set forth
below:
1. The business situation is essentially unchanged
since our last meeting. While the trend of the economy
upward, and no significant weaknesses developed
is still
in December, the upward thrust of the economy seems to be
losing its momentum. We believe that the capital expendi
ture boom is probably leveling off, and that despite the
outlook for higher government expenditures there is no
factor of expansion on the horizon capable of providing
the same degree of upward impetus experienced during the

1/8/57

-10-

past two years. Furthermore, any appraisal of our domestic
situation must be tempered or hedged by the implications of
the international situation with respect to trade, prices,
and investment the world over.
2.
In some industries there is evidence that capacity
has been raised to a level adequate to meet all foreseeable
demands.
The decision to terminate the accelerated deprecia
tion program may also act as a retarding influence on further
expenditures in steel and other industries.
The downward
trend of corporate profits is not conducive to further increases
in capital expenditures above present record levels, especially
as the deteriorating liquidity position of corporations makes
financing from internal sources increasingly difficult if cash
dividends are to be maintained.
Other signs of a leveling off
of plant outlays include a decline in machinery orders in
November below a year ago, lagging brass orders, and weakness
in steel scrap and copper prices.
3.
Retail sales in December were quite satisfactory.
Housing activity appears to have stabilized around the level
of 1,050,000 starts.
It is still
too early to judge the auto
mobile industry's prospects for the current model year. Con
sumers are in a strong financial position, although the large
automobile manufacturers speak of greater availability of
consumer credit as a necessity for a successful auto year.
4.
Prices are giving a mixed performance.
Some important
increases have been announced, including higher prices for steel
"extras," cement, and electrical appliances, as well as freight
rates.
On the other hand, average wholesale prices changed
very little
in December, and the rise in the cost of living in
November was less than in some recent months.
5.
Demands for bank credit increased in December, with the
rise in business loans for the final quarter very close to the
high figure of a year earlier.
Seasonal loan repayments began
in the first
week of January, but it is quite possible that a
quarter
net increase in bank loans will again occur in the first
1957.
Although it is very hard to gauge the probable extent
of
of borrowings in March for tax purposes, most signs point to
another high figure--perhaps not quite as large as in [illegible]

1956.
6.
Long-term capital needs of corporations are very heavy.
Nearly $1.1 billion of corporate offerings are scheduled for
January, as against a total of some $600 million actually sold
in January of last year. Part of this heavy volume represents
issues deferred during 1956; part of it also reflects the
The capital
attempt to rectify inadequate liquidity positions.
markets are now more than ever assuming a critical position in
Their functioning will also affect sub
the business outlook.
stantially the demand for bank loans.

1/8/57

-11-

7.
It will be necessary for the System to take into
consideration the heavy refunding requirements of the Treas
ury throughout most of the first
half of 1957.
8.
In view of the signs of some leveling off of the
economy, the serious problems faced by the capital markets,
and the Treasury's crowded financing schedule, we believe
that Federal Reserve credit policy should be directed toward
preventing credit restraint from becoming unduly severe.
Although it would be desirable to avoid a net free reserve
position, this factor should not weigh as heavily as the
"feel of the market" from day to day.
A program of reducing
the System's bill
holdings is now in order, supplementing
the seasonal run-off of repurchase agreements, and we would
give preference to redemptions over outright sales whenever
possible; both should be handled flexibly and cautiously.
As we appraise the situation, it would be desirable to allow
seasonal influences to continue to exert a gradual downward
pressure on Treasury bill rates toward the 3 per cent level.
At all times the state of the capital markets should be a
primary factor in judging the desirability of bill sales or
redemptions.
9. We would be opposed to any increase at this time in
the discount rate.
While it has been suggested that a rise
in the rate might be "realistic" and help "clear the air,"
we would rather see the disparity between the discount rate
and market rates lessened through a seasonal tendency of
market rates to decline.
Such a trend would be much more
helpful to the capital markets, in our view, than any rise
in the discount rate, which could have seriously damaging
effects.
10.
We suggest that the directive to the Federal Reserve
Bank of New York be changed to read approximately as follows
"(b) to restraining inflationary developments in the interest
of sustainable economic growth, while avoiding undue pressures
in the money, credit, and capital markets." We feel that the
Committee should register its awareness of the possibility of
unduly severe restraint inherent in the current low level of
corporate liquidity and in the capital financing program which
It is our view that the market should not be
lies ahead.
hindered in meeting the demands for capital that have not
already been discouraged by the tightness of credit and the
level of interest rates. We would not wish to impose such
severe restraints upon capital formation as to impede further
sound expansion of the economy's productive capacity.
Mr.

Johns commented on the difficulties at this particular time

of coming to a definite conclusion as to what credit policy should be but

1/8/57

-12

said that, on balance,
still

inflationary in character.

of potential weakness:
in

he felt that the forces in the economy were
There were, however,

indications

sales of new model automobiles were not strong

the St. Louis District, and banks that customarily financed auto

mobile dealers were not receiving the expected number of financing
arrangements.

Nevertheless,

Mr.

Johns felt that there was little

evidence that consumers would not spend their current large incomes.
On the credit situation, Mr.

Johns said that he would not move

toward relaxation at this time; rather, the degree of restriction that
was in effect up to early December, when there was some relaxation to
help meet year-end developments, should be restored.
be done was another question.

Mr.

How this should

Johns said that he would prefer

that the discount rate not be increased at this time and that an
attempt be made to get back to the degree of restraint that existed
early in December through use of open market operations.
brought about net borrowed reserves in
if

If

the System

the range of $0-200 million and

borrowings from the Reserve Banks were $500 million or somewhat more,

that might bring the condition he would like to see.
that he would not object to a change in

Mr.

Johns said

the directive such as Mr.

Hayes

had proposed although he would be quite content to leave it in its
present form for the time being.
Mr.

Bryan said that economic conditions in

the Sixth District

did not differ sufficiently from the national review that had been

1/8/57

-13

presented to warrant a detailed statement.
situation, Mr.

On the over-all economic

Bryan felt there were indications that before long we

might well reach a turning point and a slowing down in

economic activity,

although any conclusion on this was speculative at the moment.
present,

the upward and inflationary pressures were decidedly in

ascendency,

Mr.

Bryan said,

and it

At
the

was his conclusion that there should

be no relaxation in the general policy of restraint that the Committee
had been following.
increase in
Mr.

While he was not certain that there should be any

the degree of restraint contemplated by the general policy,

Bryan felt that doubts should be resolved on the side of restraint

rather than relaxation.

He would attempt to prevent a decline in the

interest rate structure and would be inclined to keep the bill rate
well above the existing discount rate.

Mr. Bryan also said that at the

moment he would not change the discount rate but would pursue a policy
of watchful waiting for the next two or three weeks in an attempt to
determine whether the situation warranted an overt and dramatic upward
movement in

that rate, which he thought might well occur.

As to criteria

for open market operations, Mr. Bryan did not think free reserve figures
were particularly useful at the present time and he doubted that mem
ber bank lending activities could be used as a guide during the next
few months.

His inclination would be to use interest rate considera

tions as a guide.

Mr.

Bryan concluded his statement with the remark

that he would prefer to make no change in

the Committee's directive

at the present time, not because he was opposed to a change but be
cause of the difficulty of explaining it.

1/8/57

-14
Mr. Szymczak pointed out that Mr. Hayes' suggestion for a

change in the directive was partly for the purpose of eliminating a
reference to seasonal conditions that had existed as the year-end
approached,

and Messrs.

comments on a change in

Bryan and Johns both indicated that their
the directive would not apply to a removal

of the reference to seasonal factors no longer present.
Mr. Williams said there was little to report regarding develop
ments in the Third District economy except that the spurt in

department

store sales just before Christmas had resulted in bringing the sales
total for the month up quite sharply.

He reported conversations re

garding monetary policy with bankers in the Third District, stating
that there were many compliments on the present restrictive policy and
few complaints.

Bank earnings were good and banks generally were ap

preciative of the System's efforts to explain monetary policies.

In

Philadelphia, demand for credit was regarded as strong for the coming
year.

Mr. Williams reported a discussion at the most recent meeting

of the directors of the Federal Reserve Bank of Philadelphia, at the
conclusion of which it

was clear that the directors would prefer to

defer taking action on the discount rate at this time.

However,

Williams felt that they would move to increase the rate if,
result of System-wide discussion and decision, it
that an increase was called for.

Mr.

as a

was the consensus

He also stated that the Discount

Committee of the Philadelphia Bank felt that a case could be made
for an increase in

the rate but that such action should be taken only

1/8/57

-15

after System-wide discussion and achievement of a consensus.

Mr.

Williams' personal view was that any errors in carrying out open
market operations should be on the side of restraint during the next
few weeks.

Judgments of businessmen were preponderantly on the

optimistic side and the System should be taking that factor into con
sideration.
Mr. Fulton said there were still no pessimists in the Cleveland
District.

Bankers expected small loan reductions during the first

quarter of the year with considerable increase in March for tax borrow
ing.

Bankers also reported that money rates were not a deterrent to

borrowing demands, he said, and they observed little restraint on the
part of seekers of credit.

A few contemplated capital expenditure

programs had been postponed but where plans had actually been completed,
projects were going ahead.

Automobile credit extensions for new cars

were largely on a 36-month basis.

Inventories were causing little or

no apprehension, although in the case of cold-rolled steel items ware
house stocks were somewhat heavy because takings by the automobile
industry had not been as large as anticipated.

The coal industry,

which had been depressed, was now making satisfactory profits.

High

tobacco prices were providing good incomes to farmers in tobacco areas.
Steel operating rates would be lower during the first quarter of this
year than in the last quarter of 1956, owing to increased capacity.
Banks would tend to use any reserves they might receive to make addi
tional loans, Mr.

Fulton said, and his general view was that the

Committee should get back to a significant degree of restraint.

To

1/8/57

-16

this end, he suggested that clause (b) of the Committee's directive
be amended to call for operations with a view "to restraining infla
tionary developments in the interest of sustainable economic growth,
with due regard for the orderly functioning of the capital markets."
Mr. Shepardson suggested that during the past year the Com
mittee had been unduly "skittish" about making its policy too restrictive,
with the result that it had not quite achieved its objective.

He felt

that the economic and credit reviews and other information presented
at this meeting brought out clearly the fact that inflationary forces
were still in the ascendency.

The Committee should try to recover

promptly at least the degree of restraint that existed a month ago,
getting back during the next two or three weeks to a negative free
reserve figure, and bringing about increased borrowing at the Federal
Reserve Banks.

Mr.

Shepardson also felt that not later than the next

meeting serious consideration should be given to an increase in the
discount rate.

As to the directive, his preference would be to

eliminate that part of clause (b) appearing after the word "growth"
and not to make the insertion suggested by Mr.
Mr.

Hayes.

Robertson said that he agreed with the views expressed by

Mr. Shepardson.

He was glad that the Committee's policy over the past

year had been as restrictive as it
not been more restrictive.

had been and was sorry that it

Having in mind the information brought

out by the economic review and the extent to which the dollar had

had

1/8/57

-17

depreciated during the past year, he wondered whether the System was
not partly responsible for the rise in the price level. While he did
not think monetary policy could be used to offset all factors that had
given rise to the price advances, Mr. Robertson suggested that the Fed
eral Reserve was responsible in part for having permitted certain factors
to develop.

For example, wage increases out of line with increases in

productivity might have been tempered by a more restrictive policy at
times.

He felt that at times the Committee had erred unduly on the

side of ease.

In suggesting that policy should have been more restric

tive, Mr. Robertson said that he felt the Committee had been unduly
fearful that actions it
that it

might take would result in

a depression and

had feared this result more than the danger of upward move

ments in prices.
With respect to actions to be taken during the next few weeks,
Mr.

Robertson felt that although the boom might be topping out, there

was not sufficient evidence to warrant any relaxation in credit re
straint at this time.

By the next meeting and perhaps before the

System should be giving serious consideration to an increase in
discount rate.

the

As to the Committee's directive, Mr. Robertson said

he could see no good reason for not taking out the reference to seasonal
factors that had been put in the directive on November 27, 1956, in
anticipation of the year-end pressures; the matter did not seem to him
to be important, so long as the directive was not changed in a way that

1/8/57

-18

would indicate any intent to relax.
Mr. Mills said that in

considering the System's monetary and

credit policy, he would like to take Mr. Thomas' comments as a point
of departure for diverting the discussion into less conventional
channels than had been followed thus far.

Referring to Mr. Thomas'

mention of the rapid December rise in bank loans, he pointed out that
we could not tell now what contraction would follow that rise.

It

was known, however, that during December the System supplied a very
substantial amount of new reserves and that theoretically the effect
of that injection of reserves through the process of arbitrage might
have been expected to have tended to stabilize the prices of inter
mediate and long-term U. S. Government securities.

The fact that

this did not occur suggested that the time may have come for the
Committee to reorient its ideas from the policy that it had been
properly following over the past two years.
In Mr. Mills' judgment, there would seem to be a problem of
credit availability, not in the area of commercial bank credit, but
rather a problem of credit availability in the capital markets.

This

raised the question of the System's responsibility to the capital
markets.

While he did not believe this to be a primary responsibility,

he did feel that there was a secondary responsibility for the System's
policy to work to the benefit of the capital markets where actions
could be taken that were not in conflict with the general System
policy objectives of credit restraint.

To that end, he cited that

1/8/57

-19

the money supply had increased 1.3 per cent during 1956 and that such
an increase, related to economic growth factors,

had seemingly been

followed by an increase in the size of the System's portfolio.

There

fore, considering the abnormally strong demands on the capital markets
and the insufficient supply of savings with which to meet those demands,
Mr. Mills proposed that thought be given by the Committee to converting
the past year's increment in the size of the System's portfolio from
Treasury bills into longer-term U. S. Government securities.

He ex

plained that the process of implementing such a plan would, of course,
have to be gradual and as necessity dictated.

He also pointed out that

such a conversion would not raise a future problem of how the U. S.
Government bonds thus acquired for the System's portfolio might sub
sequently be disposed of without causing investor misunderstanding of
the Committee's policy intentions, inasmuch as they would represent
permanent increases in the size of the System's portfolio, whose long
run growth is anticipated.
Mr. Mills foresaw that a helpful result of this plan under
present conditions would be to remove the overhang of U. S. Government
bonds pressing on the market and in so doing allow the offsetting
equivalent to become available for investment in the capital markets.
In turn, an improved market psychology could be expected, which of
itself would check the fall in bond prices and attract to the bond
market savings whose investment had been deferred awaiting more stable

1/8/57

-20

market conditions.

All in all, Mr. Mills felt that the Committee

should look carefully into the question of reorienting its policy
along these lines, and he also called attention to the fact that
the adoption and judicious use of such a policy could prove to be
a preventive to possible disorderly market conditions and a need
for more drastic actions.

Simultaneous action by way of reducing

the System's holdings of Treasury bills and increasing its holdings
of U. S. Government bonds suggested itself as the most practical way
for effectuating such a policy which actions would not, of course,
stand in the way of the System's current withdrawal of whatever
amount of reserves is needed to exert an appropriate degree of credit
restraint on the commercial banking system.
Mr. Mills concluded by saying that he felt there should be no
change in the discount rate at the present time and that a rephrasing
of the directive along the line suggested by Messrs. Hayes and Fulton
would be acceptable.

He also suggested that it might be desirable to

have another meeting of the Committee two weeks hence rather than
three weeks from today.
Mr. Leach said that the Fifth District economy continued to
show strength in its basic industries.

Cotton textile order backlogs

were shrinking but current production was being well maintained.
Bituminous coal output was expected to continue at a high rate.

Ship

yards, boosted by the tanker construction program, were showing peacetime

1/8/57

-21

highs in orders.

On the less optimistic side, synthetic textiles

were weak and contract awards were not holding up as well in the
Fifth District as in the rest of the country.
Mr. Leach went on to say that he could see no indications of
weakness at the national level that would justify a relaxation in the
basic policy of restraint.

Now that the year-end needs were behind

us, the Committee should take action to recapture the reserves that
were supplied in the closing weeks of 1956. Mr. Leach did not suggest
any figure of net borrowed reserves as an objective, but he expressed
the view that an appropriate policy would bring about an increase in
borrowing from the Reserve Banks and disappearance of free reserves
from the weekly reports.

Changes in bank loans and in the capital

markets should be observed carefully during the next few weeks. No
change should be made in the discount rate at this time but by the
time of the next meeting there might be reasons why a change in that
rate would seem desirable.

Mr. Leach said that he felt it necessary

to eliminate from clause (b) of the directive the reference to seasonal
factors and his preference would be to eliminate all the clause except
the direction to restrain inflationary developments in the interest
of sustainable economic growth.

He said that he did not agree that

the Reserve System had no responsibility for price increases resulting
from nonmonetary factors, it

being his feeling that the System should

attempt to hold down such increases regardless of the fact that
pressures might cause prices to rise.

1/8/57

-22
Mr. Leedy said that the President's forthcoming visit to the

drought area might focus attention on that section of the Tenth
District in a way that would create the impression that conditions
were worse than they really are.

While the situation was distressing,

Mr. Leedy felt that the outlook for income during the next year was
not particularly bad.

As to credit policy, he suggested that the Com

mittee regain the tightness that existed before the year-end additions
to reserves were made.

It

was apparent from the projections that sizable

open market operations would be required to bring about an appropriate
degree of tightness.

Mr. Leedy said he would not subscribe to the view

that the Committee attempt to work down the bill

rate, his feeling being

that the primary objective should be to bring the reserve position of
banks under pressure.

Bill rates should be allowed to go where they

would, so long as conditions remained orderly.
not recommend a change in
directive,

Mr. Leedy said he would

discount rate at this time.

he agreed that the reference to seasonal factors that had

applied before the year-end should be eliminated,
not to substitute anything in
Messrs.

As to the

its

but he would prefer

place along the lines suggested by

Hayes and Fulton.
Mr. Allen said that Seventh District business remained strong.

Manufacturing employment was at a high level even though it

high as a year ago at most automotive factories.

was not so

Agriculture was con

tinuing to show improvement, but Mr. Allen pointed out the prospect of
increased acreage of corn plantings during 1957 with subsequent increase
in hog production.

1/8/57

-23
Seventh District banks have not shared fully in the growth

of business,

Mr.

Allen said,

the relatively small rise in

Seventh

District loans reflecting the fact that the metal and metals products
and sales finance industries were of great importance in

that region.

Automotive and farm implement areas were the only parts of the district
having much in
utilities

the way of unused resources.

Despite the fact that the

and chemical companies in particular would probably borrow

more money in

1957 than in

of a leveling off in

1956, Mr. Allen said that there were signs

capital expenditures.

On the other hand, infla

tionary factors seemed as strong as ever and his view was that at least
the current degree of restraint should be maintained.

Mr. Allen said

that he had not understood that the Committee had changed its policy
in

late November or early December in directing operations to meet

year-end pressures.

He would not change the discount rate at this

time and, while he did not object strongly to the suggested change in
the Committee's directive made by Mr.
expressed by Mr.

Leedy that it

Hayes,

he concurred in

the view

would be sufficient merely to eliminate

the clause that had been inserted in November relating to seasonal
factors.
Mr. Powell said that the Ninth District was benefiting somewhat
from higher prices for agricultural products; this was bringing marked
improvement in the farmers'

position and might result in increased pur

chases of such items as farm implements during 1957.

Nonresidential

building continued active while residential building had declined

-24

1/8/57
somewhat.

There were fewer unsold completed houses at the present

time than there had been a few months ago, but builders were pro
jecting a lower level of building operations for the next year.
With respect to the banking situation, borrowings from the
Minneapolis Reserve Bank by city members had started to increase but
country banks were not borrowing heavily either at the Reserve Bank
or in

the Federal funds market.

Mr. Powell said that he would concur

in the proposed deletion of the latter part of clause (b) of the Com
mittee's directive.
In response to the Chairman's invitation for additional comments
on the Committee's operations,

Mr.

Powell said that he hoped that during

the coming year the Committee would have an opportunity to reappraise
its

open market objectives and performances.

He would like to see a

study of the nature of the price increases that had been occurring and
the share of responsibility the System had for those price increases.
It should also consider whether some of the price increases in the case
of agricultural products were desirable.

Mr. Powell said he would also

like to see an appraisal of the extent to which price increases in
industry had been caused by previous wage increases, and it

might be

desirable to study the magnitude of wage increases being proposed for
the current year and their possible effects.

Another factor that might

be studied would be the effect of the capital boom on business volumes
and the effect on prices of substitution of machinery for human labor.

1/8/57

-25
Mr. Mangels said that in the Twelfth District there had been

a continuation during the past month of the modest expansion that had
been experienced during most of 1956.

Employment showed a greater than

normal increase in November although insured unemployment claims rose
slightly in November reflecting the close of the canning season.

Mr.

Mangels felt there was a possibility of further expansion in employment
in 1957 with the completion of a number of plants that had been under
construction in the past year.

There had been a substantial increase

in total construction during 1956, primarily in the nonresidential

segment. Lumbermen expected some pickup in demand this spring but 1957
demand was not expected to exceed that of 1956.
Bank loans in the Twelfth District increased during December
at about the same rate as in the country as a whole, Mr. Mangels said,
although the Twelfth District increase for 1956 was about 14 per cent
compared with an increase of 11 per cent in the national total.

Bankers

feel there will continue to be good demand for credit during 1957.
Borrowings at the Reserve Bank have been nominal recently.

In general,

Mr. Mangels felt that we were entering another period of increased
pressure on banks for credit, and this would hold true despite any
modifications in business plans for capital expansion.

A factor that

might have an influence in the Twelfth District was the recent in
crease to 3 per cent generally in rates to be paid on savings deposits,

with the indication that banks might try to make more loans as a means
of helping to pay the increased interest costs.

1/8/57

-26
As to credit policy, Mr. Mangels felt there should be some

tightening in the program of restraint although this should not be
excessive.

The cumulative effects of the restraining actions of the

past year were still with us, he said, and banks were very conscious
of the restrictive program.

On the Committee's directive, Mr. Mangels

would prefer to delete the reference to seasonal factors appearing in
clause (b) without addition of any other words.

He would make no

change in discount rate at this time but he felt it almost inevitable
that if conditions continued as at present, serious consideration would
have to be given to such an increase within the next few weeks.
Mr. Irons said that the statements by Messrs. Young and Thomas
had described his impression of the general economic situation, that
is, it was one of real strength with relatively full utilization of
our resources and with an inflationary threat continuing.

Conditions

in the Dallas District did not differ significantly from national
conditions.

Banks did not seem to be under pressure and were not

borrowing much from the Dallas

Reserve Bank.

Demand for 1957 model

automobiles had not yet shown up as particularly strong.
Mr. Irons felt the Committee should recapture more or less
the degree of restraint it

was achieving in mid-November before opera

tions were modified for the closing weeks of the year and in the light
of developments in the capital markets.

At that time the thought was

that while restrictive policy of the Committee continued in effect, the
probable margin of error in

administering the policy should be kept on

1/8/57

-27

the side of ease.

Mr. Irons stated that during the past month or so

it had appeared, at times, that prime consideration was being given
to the state of the capital markets; reserves were supplied more
liberally than would otherwise have been the case, with a consequent
lessening of pressure on bank reserve positions.

Now, he felt that

the probable margin of error should be shifted to the side of tight
ness and that prime consideration should be given to the developing
economic and credit situation, while still

observing conditions in

the Government securities market closely toward the end of preventing
any real disorder from developing in the market.

This would not mean

a policy of contraction, but a restoration of a somewhat greater degree
Mr.

of restraint.

Irons said under such a policy he would anticipate

a higher level of net borrowed reserves, a Treasury bill rate in the
3-1/

per cent area with no attempt on the part of the System to bring

down the bill

rate toward the discount rate, and an increase in member

bank borrowing.

If

member bank borrowing increased materially under

such a program, it might become desirable to increase the discount
rate but he would prefer that it not be increased at this time.

The

question could be considered very seriously at the next meeting of
the Committee.

Mr. Irons said he would favor changing the Committee's

directive but he questioned the desirability of trying to pinpoint
minute changes.

His preference was that the directive indicate in

broad terms the policy, and that any more detailed comments for the

1/8/57

-28

benefit of the Management of the Account appear in the record of the
discussions in the meetings.

Specifically, Mr. Irons would like to

see clause (b) of the directive restored to the wording used before
it was changed at the meeting on November 27, 1956.

He questioned

whether the Committee should give primary attention to the capital
and securities markets in the directive but this did not indicate a
reluctance to have the Committee and the Account Management observe
the capital markets carefully.
Mr. Erickson said economic conditions in the First District
were still strong although the upward impetus was not as strong as
it had been a few months ago.

Textile mills were not in as strong a

position as they were last summer.

In fact, a large textile operator

with mills in a number of New England cities had last week announced
a three-day week, blaming the curtailment on Japanese competition.
Automobile registrations in October and November 1956 were well below
the corresponding months of 1955.

A representative of the Ford Motor

Company had called the Boston Bank by telephone from Detroit to in
quire about conditions in

the automobile trade in New England.

He

said that he was also going to contact all of the Federal Reserve
Banks.

Mr. Erickson said that he had the same impressions regarding

the outlook for bank loans as those given by Mr. Fulton in his comments.
He recommended no change in

the discount rate at this time and would

use open market operations to recapture the restraint that existed
last November.

Mr. Erickson felt the directive should be changed to

1/8/57

-29

eliminate the reference to seasonal factors no longer present and he,
too, would prefer that clause (b) of the directive be made to read as
it

had prior to the change at the meeting on November 27.

Mr. Erickson went on to say that, considering all the non
recurring factors, at least he chose to consider them nonrecurring,
that had affected the situation during the past year, such as the
President's illness, the steel strike, and developments in the Middle
East, he felt the Open Market Committee and the Account Management
had done a very good job.

He did not feel, as Messrs. Shepardson and

Robertson had indicated, that the Committee had not done a good job.
It might be that the difference in views was a matter of degree, Mr.
Erickson said, adding the comment that hindsight was better than fore
sight.
Mr. Szymczak said that he felt an excellent review had been
presented by Messrs. Young and Thomas.

The important consideration

for monetary policy during the first half of 1957 would be the Treasury,
which would have to come to the market several times.
to the extent possible,

He felt that,

the Committee should return to the policy it

was pursuing prior to the shift in
whether this could be done at once.

December,

although he did not know

To the extent that the Management

of the System Account was unable to sell bills, it should allow matur
ing bills to run off.

If

conditions in

the money market seemed to

require more reserves at times, the Account Management could make re
purchase agreements readily available.

If the degree of tightness

1/8/57

-30

that prevailed last November and early in December were restored, it
would inevitably bring a change in the discount rate.

Mr.

Szymczak

felt that demand for credit would continue strong and the discount
rate would have to be considered eventually although he would not to
day recommend a change.
Mr. Szymczak referred to Mr. Mills' comments, which he described
as a proposal for a study of the subject of swaps since, if
were to reduce bill
term Treasury bonds,
Mr.

the account

holdings and replace them with intermediate or long
the operation would be about equivalent to a swap.

Szymczak said he would recommend the Committee undertake a study

such as Mr.

Mills had proposed.

He felt the Committee had a responsi

bility to the capital market, although he questioned whether that
should be written into the Committee's directive or otherwise appear
in

the record of policy actions.
As to the directive, Mr. Szymczak said that it seemed necessary

to eliminate the reference to seasonal factors that had been put in last
November because of anticipated developments up to the year-end.

While

he had no strong objection to the proposals made by Messrs. Hayes and
Fulton, his preference would be to return clause (b) to the form in
which it

appeared prior to the change on November 27.
Mr.

Balderston stated that he would delay action on the discount

rate until there had been an increase in member bank borrowings.

Such

an increase should be forced by returning to a greater degree of re
straint through the withdrawal from the market of all of the $1,300

1/8/57

-31

million that had been put in during November and December.

The heavy

calendar of capital securities during the weeks ahead and the expecta
tion of a large increase in bank loans prior to the March tax date
prompted Mr. Balderston to suggest that the Committee adopt a firm
posture at once, one that would serve notice on both lenders and
borrowers that the System was opposed to the use of short-term credit
for long-term purposes.

He also favored eliminating that part of

clause (b) of the Committee's directive that had been added at the
meeting on November 27.
Chairman Martin said that, as Chairman of the Board, he had
received a good many comments recently to the effect that the System
had been very lucky in
apart."

1956 but that in

Personally, however,

1957 it

would "really fall

he had felt more encouraged about the

System in the last few months than at any time since he had been
associated with it.

This was because of the way in which each Board

Member and Reserve Bank President was "pulling his weight and thinking
for himself."

As long as the Open Market Committee was active and

working and aware of the problems as indicated in discussions such as
this morning's, the Chairman said he questioned very much whether the
System need worry a great deal.
Referring more specifically to the statements made during this
meeting,
session.

the Chairman said that he felt this had been an impressive
He mentioned several suggestions that he felt were especially

helpful and stated that the discussion regarding the directive and

-32

1/8/57

what it should or should not contain also had been useful. While he
had no firm feeling about the question, there was some advantage in
having the directive reflect modest changes from time to time as a
means of indicating that the Committee was alert to changing conditions,
and active in

adjusting its

operations.

This was important,

he said,

and he did not think the Committee should underestimate the value of
indicating in

the directive from time to time small shifts in

As to specific changes for the directive,

policy.

Chairman Martin said

he would favor the use of wording such as Mr. Hayes had suggested
although his feeling on this was not strong.

He had received a number

of inquiries from members of Congress within the past few days about
the Government securities market and these indicated the awareness of
the public to the fact that United States Treasury bonds currently were
selling at 88-1/2 or 89.

Some of the calls were along the lines of

inquiring whether the Federal Reserve felt a responsibility for the
market for Government securities.

While clause (a) of the directive

could be taken as recognizing this responsibility, there was some
merit in having a more specific reference in the directive.

There

would be recurring pressure for the Committee to give out more informa
tion on its decisions and operations, the Chairman said, and it would
be desirable to give further consideration to the directive in

the

light of such pressures.
The Chairman went on to say that, having widened the group of
persons attending these meetings, all of us must realize that many

-33

1/8/57

persons have a great interest in knowing the purport of discussions
at open market meetings.

This placed a very special responsibility

on each person attending the meetings to use care in talking with
individuals so as to avoid becoming a source of information regarding
open market discussions.
in anybody,

This did not reflect a lack of confidence

he noted, but was something all of us should bear in mind.

So far as current policy formation was concerned, Chairman
Martin said he felt it important to bear in mind that if the System
were to perform the job it should be doing,

it could not be a one-man

operation or a group operation; decisions could not be made by the
Presidents nor could they be by the Board.
and there must be a consensus of thinking in

There must be a "System"
arriving at decisions.

Chairman Martin said he thought the Committee should avoid as far as
possible taking votes on specific issues and should rely on a procedure
of trying to get a consensus,
in

particularly since discussions were often

terms of degrees and not distinct differences.

It

was not realistic

to try to vote on shades of meaning or color in the market.

He felt

the minutes of the meeting should be used as a guide to the level of
open market operations and that the minutes should reflect the thinking
of the persons at these meetings and a consensus of the views expressed.
To do this, it was necessary at these meetings to go through the
process of expressing views and assessing all the facts.

Chairman

Martin said that he was convinced at the beginning of 1957 that the

1/8/57

-34

essential nature of these meetings should continue to endeavor to
get a consensus of thinking.
Chairman Martin suggested that the Committee might also wish
to consider whether the meetings tended to become too long and whether
it

would be desirable to divide them into two sessions.

While those

attending did not wish to make speeches just for the sake of making
speeches,

he had found no substitute for the procedure that had been

followed of "going around the table" and having each person express
his views.

He hoped,

he said, that this would be done without having

any person feel that an expression of views in

the "go around" would

bind him to that same view or same shade of thinking in trying to
arrive at a consensus.
Chairman Martin said he aligned himself completely with the
comments to the effect that the Committee should recapture the degree
of tightness that existed in
same time, he noted Mr.

late November or early December.

At the

Allen's comment that he had not understood in

November that the Committee contemplated any change of policy, but
rather had adapted that policy to seasonal developments.

Chairman

Martin said that he had not had the idea at the meeting on November
27 or on December 10 that there was any change of policy.

However,

the status quo had been affected by seasonal pressures and it

would

now be desirable to recapture the degree of restraint that was in
volved in

the Committee's operations around the first

The System should put the market to a test, and it

of December.
should take a

1/8/57

-35

careful look at the discount rate; but it
fact that peculiar strains exist in

should not overlook the

the capital markets today,

peculiarities brought about by errors of judgment in the use of
short-term credit for long-term needs, by improper and improvident
plans for plant expansion, and by using tax money for expansion.
There were still

many buildings that had gotten up to the third

floor, so to speak, and for which there still
for their financing.
which would be in

were no real plans

These conditions could produce a situation

the nature of a knot in 1957, and if

that resulted

the repercussions might be great.
The consensus seemed to be that operations should be directed
toward recapturing the degree of restraint that existed early in
December,

Chairman Martin said, always looking at the effects of such

operations on the money market.

None of the members of the Committee

could know whether the boom was tiring, the Chairman remarked,

although

his reading of some 50 year-end business reviews convinced him that the
prognosticators were tiring.
Chairman Martin also referred to the directive, stating that
there seemed to be some difference of feeling on the desirability of
a change.

He reiterated the comment that recognition in the directive

of shifts in

policy had a good deal of merit, particularly at a time

like this when the Committee had completed the first two years of a
restrictive monetary policy during which the capital markets had been
moving against that policy.

Chairman Martin went on to say that he

1/8/57

-36

discussed with Mr. Riefler the question of the directive before
this meeting and that he was prepared to suggest a change in

clause

(b) of the directive to delete the present wording after the word
"growth" and to change it

so that it would read "to restraining

inflationary developments in

the interest of sustainable economic

growth, while recognizing unsettled conditions in

and capital markets."

the money,

credit,

His inclination now was to prefer the wording

Mr. Hayes had suggested, but he did not think the matter of great

importance.

There followed a discussion, in the course of which Mr.

Hayes expressed the view that the wording proposed by the Chairman
was entirely satisfactory.

Out of this discussion came agreement

that clause (b) of the directive should be changed to delete the
words "while recognizing additional pressures in

the money, credit,

and capital markets resulting from seasonal factors and international
conditions," and that it should be restated to read "to restraining
inflationary developments in

the interest of sustainable economic

growth, while recognizing unsettled conditions in the money, credit,
and capital markets and in the international situation."
In response to Chairman Martin's request for comments,

Mr.

Rouse said that he felt he understood the wishes of the Committee.
He referred to comments that had been made during the meeting regard
ing the volume of net borrowed reserves that had existed recently,
stating that he did not construe these comments as indicating un
favorable criticism of the operation of the System account during

-37

1/8/57
the past month.

Mr. Rouse noted that at all times the account had

considered the policy of restraint as still in effect and that the
funds put into the market were only put in in
of restraint.

the light of the policy

He pointed out that on the average there had been

negative free reserves in recent weeks although there had been posi
tive free reserves in the market on a few days.

He felt that it

would

be possible to accomplish a return to the situation that existed in
early December or the latter part of November in

terms of the spirit,

but not perhaps in terms of the figures, of net borrowed reserves.

The

account would, of course, make every effort to carry out the views of
the Committee.
Mr.

In a further comment in response to a question from

Balderston, Mr. Rouse noted that repurchase agreements had already

been brought down to $47 million and he reiterated his statement that
he felt it

would be possible to recapture the spirit although not the

amount of net borrowed reserves that existed early in December.
Mr.

Hayes said that the longer-term Government securities

market had been on the verge of becoming a real problem.

Pressures

of the tremendous offerings that would be coming along could result
in a recurrence of this problem, and Mr. Hayes said that he hoped it
would be understood that if such circumstances developed the System

account could not march bravely ahead and sell a large volume of
Treasury bills regardless of the consequences.

This did not imply,

however, that we would not get back to some degree of negative free

1/8/57

-38

reserves and some increase in borrowing at the Reserve Banks.
Mr.

Hayes then referred to the suggestion made by Mr. Mills

that the System account might operate in securities other than bills,
stating that while the desirability of this could develop during the
next month or two he doubted whether it would become an urgent need.
He did not feel that it had been an urgent need in recent months.

He

would definitely be against doing anything along the lines of Mr.
Mills' suggestion at the present time if

for no other reason than be

cause the market had a distinct feeling that the rule of "bills only"
was an inflexible rule.

Any departure at this time would be subject

to misinterpretation; the market might think either that the System
was worried about a disorderly market or that the Committee had
decided to turn the market around.
there was merit in Mr.

However, Mr.

Hayes believed that

Mills' suggestion, since he (Mr.

Hayes) had

never believed that the Committee had intended that there should be
an inflexible rule that would have to stand forevermore.
should be restudied from time to time, he said, and it
if

some time in

Perhaps it

would be healthy

the course of the year the matter could be reviewed,

possibly at the time of the annual meeting.
Chairman Martin said that he was glad Mr.

Mills had raised the

question and that the Committee should review the matter.
think it

He did not

urgent at the moment and suggested that the proposal be left

with the understanding that he (Chairman Martin) would try to bring

1/8 /57
in

a suggestion at the time of the next meeting of the Committee as

to how the review proposed by Mr. Mills might be made.

It was under

stood that this procedure would be followed.
Thereupon, upon motion duly made
and seconded, the Committee voted
unanimously to direct the Federal Re
serve Bank of New York until otherwise
directed by the Committee:
(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 developments in the interest of
sustainable economic growth, while recognizing unsettled
conditions in the money, credit, and capital markets and in
the international situation, and (c) to the practical ad
ministration of the account; provided that the aggregate
amount of securities held in the System account (including
commitments for the purchase or sale of securities for the
account) at the close of this date, other than special
short-term certificates of indebtedness purchased from
time to time for the temporary accommodation of the Treasury,
shall not be increased or decreased by more than $1 billion;
(2) To purchase direct from the Treasury for the
account of the Federal Reserve Bank of New York (with
discretion, in cases where it seems desirable, to issue
participations to one or more Federal Reserve Banks) such
amounts of special short-term certificates of indebtedness
as may be necessary from time to time for the temporary
accommodation of the Treasury; provided that the total
amount of such certificates held at any one time by the
Federal Reserve Banks shall not exceed in the aggregate

$500 million;
(3) To sell direct to the Treasury from the System
account for gold certificates such amounts of Treasury

1/ 8/57
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 referred to the memorandum from Mr. Riefler dis
tributed under date of January 1,

1957,

stating that Mr.

Frank Southard,

U. S. Executive Director of the International Monetary Fund, had in
quired whether the Federal Reserve System would see objections to use
by the Fund of some of its gold holdings in meeting prospective draw
ings against the Fund.

Attached to Mr. Riefler's memorandum was a

memorandum from Mr. Southard addressed to the Managing Director of the
International Monetary Fund under date of January 2, 1957, presenting
the reasons for such use of gold holdings, as well as a memorandum from
the Board's Division of International Finance dated January

4, 1957,

providing background information for consideration of the topic.
Chairman Martin said that he had considered this matter and had
come to the conclusion that it

would be desirable for the Committee to

respond to the inquiry by stating that it

would express no views with

respect to the form in which the International Monetary Fund might
choose to draw upon its dollar resources.

This action would be taken,

he indicated, as a means of preserving the utmost freedom to the
International Monetary Fund in meeting its problems and in the hope
that the Fund would inform the Federal Open Market Committee in
of its operations in the American market.

advance

1/8 /57

-41
The Chairman went on to say that he felt the System should

not tell the Fund or any other agency how it should carry out its
responsibilities.

In keeping with this, the System should follow

monetary policies that fitted the circumstances whenever external
factors occurred.

Thus, if the Committee approved the resolution

he was proposing, he would also want it to be understood that the
Committee's operations would be used to offset the influence of the
operations of the Fund in accordance with whatever the Committee's
policy might be.

In this specific case, the System might not have

a sufficient volume of bills to carry through this procedure and
Chairman Martin suggested that if

approval were given to the resolu

tion, the Committee also expressly authorize the Management of the
System Account to sell up to $500 million of Treasury certificates
if it became necessary to do so as a means of offsetting the Fund's
If this were to be done he suggested that the Account

operations.

Management might wish to notify dealers in
noted that if

advance.

Treasury certificates were used it

The Chairman

would be in keeping

with the Committee's general policy of effecting its operations in
short-term securities, preferably bills.
Mr.

Hayes stated that he had given some thought to this question

since receiving Mr.

Riefler's memorandum and that the net result of his

consideration was that he had arrived at essentially the same position
as that stated by Chairman Martin.
With this thought in mind, Chairman Martin said that he would pro
pose adoption by the Committee of a resolution as follows:

1/8/57
RESOLVED,

that the Federal Open Market Committee

express no views with respect to the form in which the
International Monetary Fund chooses to draw upon its
dollar resources.
Upon motion duly made and seconded,
and by unanimous vote, the Committee ap
proved the foregoing resolution presented
by Chairman Martin, with the understanding
that in transmitting the substance of the
resolution to Mr. Southard he would be in
formed that the Open Market Committee ap
preciated having had an opportunity to
know of and consider the proposal.
In taking this action, the Committee
also unanimously approved Chairman Martin's
suggestion that it expressly authorize the
System account to sell up to $500 million
of Treasury certificates if that became
necessary in connection with operations
related to the transactions of the Inter
national Monetary Fund.
Secretary's note: In accordance with
the foregoing action, the following letter
was sent to Mr. Frank Southard, U. S.
Executive Director, International Monetary
Fund, by the Secretary under date of
January 8, 1957:
"The question which you presented informally last week as
to whether the Federal Reserve System would see objections to
the use by the International Monetary Fund of some of its gold
holdings in meeting prospective drawings against the Fund was
discussed today at a meeting of the Federal Open Market Com
mittee. In addition to the members of the Committee, all Re
serve Bank Presidents who are not now members of the Committee
were present.
"At the conclusion of the discussion of the question which
you raised, the Federal Open Market Committee agreed that it
would express no views to the International Monetary Fund with

-43

1/8/57

"respect to the form in which the Fund chooses to draw upon
its resources. This action was taken to preserve the utmost
freedom to the International Monetary Fund in meeting its
problems and in the hope that the Fund will inform the Fed
eral Open Market Committee in advance of its operations in
the American market.
"In taking this action, the Open Market Committee ex
pressed its appreciation for having had an opportunity to
know of and consider your proposal. None of the Reserve
Bank Presidents who are not currently members of the Com
mittee indicated disagreement with the action taken by the
Federal Open Market Committee regarding the proposal."
Chairman Martin stated that in presenting the resolution that
had been adopted, he had in mind that it should be included as a part
of the record of policy actions to be reported to the Congress at a
later date, and there was no disagreement with this suggestion.
Mr. Robertson referred to the authorization for transactions
in

Treasury certificates,

stating his understanding that when the "bills

only" policy was adopted, there was an implication that if

the System

account ran out of bills, its transactions would be conducted in the
next shortest maturity.
Mr. Rouse stated that it

was his understanding that this would

not include certificates now showing rights values but would include
the shortest type of Treasury issues, i.e., certificates, and there was
concurrence in this comment.
In a discussion of the date for the next meeting of the Com
mittee it was agreed to schedule a meeting for Tuesday, January 29,
1957, at 10:00 a.m., it being noted that a meeting of the Conference
of Presidents had tentatively been arranged for January 28 with a joint

1/8/57

-44

meeting of the Presidents and the Board to be held on Tuesday after

noon, January 29.

In taking this action it was understood that if

need arose the Federal Open Market Committee could call an additional
meeting if desirable, to be held by means of a telephone conference
hookup, prior to January 29.
Chairman Martin also called attention to a request that had
been received from the Bureau of the Budget under date of January 3,

1957, for comments on a draft bill "to establish a national monetary
and financial commission."

At his suggestion, there was distributed

to each of the Presidents of the Reserve Banks at this time a copy of
the Budget Bureau's request, along with a copy of the draft bill and
a copy of the Board's reply that had been sent to the Budget Bureau

on January 7, 1957.
Thereupon the meeting adjourned.
Secretary