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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, July 8, 1958, at 10:00 am.



Martin, Chairman
Hayes, Vice Chairman
Mr. Mangels
Mr. Mills
Mr. Robertson
Mr. Shepardson
Mr. Szymczak
Mr. Vardaman 1/

Messrs. Allen and Johns, Alternate Members of
the Federal Open Market Committee
Messrs. Bopp, Bryan, and Leedy, Presidents of
the Federal Reserve Banks of Philadelphia,
Atlanta, and Kansas City, respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Daane, Hostetler, Marget, Walker,
Wheeler, and Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Carpenter, Secretary, Board of Governors
Mr. Kenyon, Assistant Secretary, Board of
Mr. Koch, Associate Adviser, Division of Re
search and Statistics, Board of Governors
Mr. Keir, Economist, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Stone, Manager, Securities Department,
Federal Reserve Bank of New York


Withdrew from meeting at point indicated in minutes.



Messrs. Mitchell, Jones, Strothman, and
Tow, Vice Presidents of the Federal
Reserve Banks of Chicago, St. Louis,
Minneapolis, and Kansas City, re
spectively; Mr. Coombs, Assistant Vice
President, Federal Reserve Bank of New
York; and Messrs. Anderson and Atkinson,
Economic Advisers, Federal Reserve Banks
of Philadelphia and Atlanta, respectively
Chairman Martin stated that Mr. Deming, Alternate Member of the
Committee,was on vacation and that in the absence of objection Vice
President Strothman of the Federal Reserve Bank of Minneapolis would
attend the meeting in Mr. Deming's place as an observer.

There being

no objection, Mr. Strothman joined the meeting.
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on June 17, 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 June 17 through
July 2, 1958,

and a supplemental report covering commitments executed

July 3 through July 7,


Copies of both reports have been placed

the files of the Federal Open Market Committee.
Reporting on open market operations since the last meeting, Mr.

Rouse stated that reserve availability has been maintained, with free
reserves averaging between $550 and $600 million.
what higher than in

This figure is

the preceding three-week period, and reflects




primarily the situation in

the Government securities market.

purchases totaled $797 million during the past three weeks,
million bills will run off next Thursday,
issuing rate in yesterday's bill

July 10.

but $184

The average

auction was .93 per cent and the

stop-out was just under 1 per cent,
been in

Rouse reported that the Government securities market has

a poor state in recent weeks,

superficially because of the

heavy volume of speculation in the new 2-5/8 per cent bonds of 1956,
but more fundamentally because of the feeling of investors that
economic conditions are improving and that recovery is


the making.

While there has been a good deal of selling of the new 2-5/8s as well
as of other issues during the past three weeks,

there has been a

notable lack of buying, except on the part of the Treasury (which is
retiring a good part of the 2-5/8s that it




said that the recent sharp declines in Government bond prices were
triggered by the press story that appeared on June 19, stating that
there had been a shift in System policy.

He observed that the de

clines would very likely have occurred in any event and would have
been triggered by something else even if

that story had not appeared.

The Treasury has difficult problems ahead and must make its


next week as to the terms of the forthcoming refunding operation.
Since indications are that the Treasury will have to borrow cash in
August and October, there will be a particularly heavy calendar ahead


unless it


decided to combine the refunding of the called September

issues with the refunding of the August certificates or with the
August cash operation.

Mills observed that he had seen a good many comments

concerning the purchases by the Treasury to cushion the decline in
the bond market and noted that, since there had been no System

the buying by the Treasury had been virtually the only

source of support to the market.

He wondered about the extent of

the overhang of securities remaining in the market, and inquired

this overhang was of such size as to indicate that System pur

chases might at some point be necessary to supplement those of the

Rouse replied that back in May a New York money broker

convinced many that there was a quick profit to be made in participat
ing in

the June refunding operation.

He stated that only small margins

were required against the rights when they were purchased in May,


that larger margins were required after the exchange on June 16.
There has apparently occurred,

in many cases, almost a forced liquida

tion which may now be about completed; such forced liquidation, he
pointed out, was probably a large part of the total liquidation of
the 2-5/8s that has occurred.


Rouse noted that Government securi

ties dealers held large positions--around $2.5 billion-- at the time
of the last meeting,

but that such positions have now been reduced



by somewhat over $1 billion and that a good part of the liquidation
represents 5- to 10-year bonds.

He stated that it

say how much speculation there was in the 2-5/8s.

was difficult to
It had been ex

pected that the exchange into that issue would be in

the neighborhood

of $3.5 to $4 billion, but actually the exchange turned out to be
about $7.4 billion.

Mr. Rouse added that during this period of

sharp price declines in the bond market, there have been comments
that conditions were at times disorderly.

He said that he disagreed.

Rouse concluded his remarks by noting that there have

been wide differences between the reserve projections of the Board
staff and those of the New York Bank.

He reported that the staffs

are working on the problem of developing explanations of such wide
differences in

projections, in

the hope that the estimates will be

more useful to the Committee.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions during
the period June 17 through July 7,
1958, were approved, ratified, and
In supplementation of the staff memorandum distributed under
date of July 3, 1958,

Mr. Young made the following statement on the

economic situation:
Most recent economic intelligence points to better
performance for the economy in this period than observers

anticipated earlier. May and June together have shown
a two-point rise in the index of industrial production
and the present likelihood is that the final record will
show a rise of three points. Total national product for
the second quarter is currently estimated to be at least
modestly higher than in the first quarter.
Whether an abrupt turnabout of activity is taking
place or whether evident improvement merely reflects a
temporary rebound of production too far below consumption
is yet to be determined.
But barring some unexpected jolt
to business and investor psychology, the odds would seem
to favor a better than rebound movement.
Probably the
most important feature of the recent strengthening is
that it is without dominance of improvement in one or two
major areas.
Rather, it represents a composite of small
improvements over a wide range of activities.
The important highlights may be briefly summarized:
Substantial gains in industrial production over May
and June were made by steel, autos, household durables,
textiles, apparel, leather and rubber products, paper and
paper products, coal and petroleum.
For the first time in eleven months, manufacturers'
sales in May were up modestly and the inflow of orders,
although still below shipments, rose moderately. Sales
from inventory continued, so that manufacturing inventory
liquidation was maintained at about the same high rate as
the preceding four months, bringing still closer the point
when inventory buildup would be a stimulus.
Construction activity in dollar volume in June also
showed lift, the first such indication since December.
Residential, commercial, and public (including highway)
construction constituted the strong elements; industrial
construction was off further. Contract awards for these
strong areas were up sharply.
Reflecting improved industrial and construction demands
for labor, initial claims for unemployment compensation have
From May to
stabilized and continued claims have declined.
June, unemployment
7.2 to 6.8 per cent.
employment showed its first gain in 15 months and there were
also employment gains in services, State and local govern
ment, trade, and construction. Hours worked per week in
manufacturing rose both in May and June, the average reaching



39.2 in June compared with 38.3 in April. The increase in
hours worked was widely spread.
Personal income in May rose further and, at $344 billion,
was less than 1 per cent below its peak in August of last year.
Personal income for June is expected to reach a new high.
With improved personal income, retail sales in May rose
slightly further, with all major lines of durable goods show
ing some increase and nondurable sales holding at record levels.
In these circumstances, retail inventories declined further,
although at a slower rate than earlier in the year.
department store sales increased slightly further from May.
New automobile sales in the first twenty days of June
about matched the improved May rate, and used car sales were
even better. With sales strength maintained, both new and
used car stocks declined further.
Continued liquidation of
instalment debt for automobile purchases in May apparently
reflected in part a fairly sharp decline in credit sales.
Credit sales of new cars in that recent month apparently ran
about 57 per cent compared with average credit sales of around
60 per cent for preceding months of this year.
Activity in the housing market continued to pick up in
May and June.
Low and moderately priced new houses required
less time to sell and existing houses also sold somewhat better,
though with some shading of prices.
In response to stronger
demand conditions, and reflecting also the pressure of a grow
ing supply of mortgage funds, mortgage lending by all lenders
has increased.
Mortgage rates are apparently still
Wholesale prices have receded a bit recently, mainly be
cause of lower farm prices, particularly for livestock and
Wholesale prices of industrial products have
been edging off, while prices of industrial materials have
been relatively firm after strengthening in late May and early
While the index of consumer prices rose slightly to mid
May, recent indications for food prices, especially, would
point to no change or slight decline to mid-June.
One big uncertainty in the unfolding situation is the
possibility of cyclical downturn in European business activity
and a new surge of inflationary forces in Latin American and
Far Eastern countries whose export earnings have been cut
For more than a year, industrial cut
back in recent months.
put in major European countries has shown leveling out and
some recent indications suggest the onset of recessionary
drift. But with statistical data less adequate and timely
than in this country, it is difficult to gauge the generality

of these signs.
Certainly there is not yet enough evi
dence to warrant inference that European recession is
likely to become a force affecting adversely U. S. and
world trade developments. At the same time, there is
this hazard and European market developments will need
close watching in the months ahead.
A memorandum on the outlook for Treasury cash requirements
and bank reserves,

prepared by the Board's staff, had been distributed

under date of July 3, 1958.

With further reference to financial

Mr. Thomas made the following statements

Since the last meeting of the Committee, the most
striking financial development has been the severe pres
sure on the Treasury bond market.
This rather spectacular
episode and its causes have been described in written
reports submitted to the Committee by the staff and by
the Manager of the Account.
These events contain lessons
not only for speculators and for the Treasury, but also
for Federal Reserve policy.
It is evident that the underlying factors were the
very large commitments in Treasury bonds made by temporary
holders, many for pure speculation, induced by expectation
of further declines in interest rates, and the attempt to
close out these commitments at a time when the money market
was under severe pressure because of exceptionally heavy
These liquidity demands were
seasonal liquidity demands.
absence of a maturing
larger than usual
Treasury tax anticipation security, together with the
additional cash raised by the Treasury through a long
term bond issue.
The Treasury's deposit balances increased to over
$9 billion. Funds to make payments to the Treasury were
raised largely by the sale of Treasury securities
particularly the new 2-5/8 per cent bonds--or by calling
loans that had been made to dealers to carry large amounts
of securities they had purchased earlier as rights. The
Bank loans to
effect on bank credit was phenomenal.
businesses increased only moderately but their holdings
of securities and loans on securities showed exceptionally
Total deposits at banks also increased
sharp increases.
sharply, as did their required reserves.

In the three weeks ending June 18, total loans and
investments at banks in leading cities increased by $3.9
billion, of which $2.5 billion came in the third of these
weeks. In the next week there was a smaller decline than
usual. Altogether in the four weeks ending June 25 the
net increase was over $3.7 billion, many times more than
in the corresponding period of other recent years.
The pressure of these exceptionally heavy credit demands
came mostly through the U. S. Government securities market.
Business loans increased by little over a half a billion dol
lars--much less than in other recent years. Holdings of
Government securities by these banks increased by $1.5 bil
lion, holdings of other securities by nearly $500 million,
and loans on securities by about $1.0 billion; these items
have generally declined or shown little change in June of
other recent years.
Most of these funds went to enlarge Treasury balances,
which increased by $3.8 billion in four weeks at these city
banks, and by $4 billion at all banks to the exceptional
total of over $9 billion. In the corresponding weeks of
the three previous years, U. S. Treasury deposits had
fluctuated widely but showed little net change for the
period as a whole. Time deposits at banks continued to
increase at a fast pace--about half a billion dollars at
weekly reporting banks alone. Demand deposits of businesses
and individuals rose sharply in the first three weeks of June
but subsequently declined equally sharply, reflecting the
large tax payments in cash in the absence of a maturing tax
anticipation security, as well as cash payments for nonbank
The total for all banks
purchases of the new Treasury bonds.
in June probably showed a contraseasonal decline estimated
at half a billion dollars.
Meeting these exceptional credit demands has called for
In the five
exceptional amounts of Federal Reserve credit.
weeks ending July 2, System open market operations have sup
billion of reserve funds. About half of
plied about $l.
this amount covered currency demands of $350 million and a
gold outflow of $300 million. Most of the remainder--over
$660 million--was added to member bank required reserves.
This has been one of the largest monthly increases in
required reserves on record. Free reserves of member banks,
which declined from over $550 million in the latter half of
May to less than $50 million in the first half of June,
increased to a level of close to $600 million in the past
three weeks, including the current week.



Notwithstanding this large addition to the reserve
supply, interest rates rose under the pressures of the
vigorous credit demands.
The Treasury bill rate in
creased somewhat from the low level of around 5/8 per
cent reached at the end of May to about one per cent
in the third week of June.
After declining somewhat,
the rate has again approached one per cent in the last

few days. The Treasury bond market was notably weak
under the influence of the closing out of speculative

commitments, and yields rose by nearly l/4 of a percentage
Yields on corporate and municipal bonds showed

somewhat more moderate increases, while new issues moved

Yet the market continued to absorb a substantial

volume of new issues, particularly when the long-term
Treasury bond is included.
This episode raises many questions about recent System
policies and more particularly about appropriate policies
for the near future.
In the first
place, it needs to be kept in mind that
System policies have made possible the provision of very
large amounts of credit to the economy during the past
five to seven months.
Total loans and investments of
commercial banks increased by probably as much as $12
billion from the end of January to the end of June--much
more than ordinarily occurs within a whole year--even
though this period has been one in which there is usually
To be sure, one third of
or no seasonal growth.
this growth occurred in June and is presumably largely
This temporary aspect is an important con
sideration for future policy to be discussed later.
This credit expansion has resulted in a growth in
required reserves of nearly $1.2 billion, which, together
with a currency drain of half a billion and a gold out
flow of $1.4 billion, called for exceptionally large
additions to reserve availability. Reserves were suppliod
by reserve requirement reductions aggregating $1.5 billion
and by System open market operations of $2 billion.
In addition to the temporary character of the large
June increase, another important qualification of the
recent bank credit growth has been pointed out by some
That is that the bulk of it reflects a
funds and savings from U. S, Government
securities and perhaps other assets to time deposits at
banks, attracted by rates paid on such deposits in contrast



to the lower market yields on securities.
From January
to May commercial bank and Federal Reserve holdings of
U. S. securities increased by about $6 billion, while
holdings of other investors declined by about $5 billion.
In this same period time deposits at commercial banks
increased by $5 billion, and those at mutual savings banks
increased by nearly $1 billion. It cannot be assumed,
however, that all of these changes, though similar in
amount, reflected a direct shift from Governments to time
Some of the funds obtained from the sale of
Government securities went into other uses, and some of
those that moved into time deposits no doubt came from
demand deposits, thus slowing down the growth in demand
Even if only one-tenth represented the latter
shift, the amount is not an insignificant addition to
demand deposits.
A substantial part of the growth in bank credit also
has gone into deposits of the United States Government, as
already pointed out, and has not been added to available
funds of business and individuals. The growth amounted
to $3 billion from January to the end of May and another
Most of this is temporary.
$4 billion was added in June.
Demand deposits adjusted have declined by nearly $2
billion since January, but the normal seasonal decline
for this period would be about $4.5 billion. Hence, not
withstanding the large growth in time and U. S. Government
deposits, demand deposits adjusted have increased by close
to $2.5 billion in five months, an annual rate of growth
If some allowance were made for a
of nearly 6 per cent.
shift to time deposits, the effective increase in active
In any event the
demand deposits would be even greater.
growth in
increase shown is by
a period of
For purposes of System policy, the significant point
is that a very large amount of liquidity has been supplied
If demand deposits adjusted show no more
to the economy.
than the usual seasonal expansion for the rest of the year,
the net growth for the year would be over 2-1/2 per cent,
even without allowance for any shifting into time deposits.
It may be said, moreover, that in many respects time
deposits are more liquid than holdings of Government securi
ties in that they are payable at face value and would not
have to be converted into cash through market offerings
that might be made difficult by a changed monetary policy.



That conversion has already been made. Finally the large
volume of U. S. Government deposits will be drawn down
and the funds become available to the public for additions
to deposits or payment of debt. Bank credit has already
been provided to build up those balances; it does not have
to be provided again.
Projections of reserve needs for coming months, pre
sented by the Board's staff, are based on the assumption
that as the Treasury reduces its deposits the funds will
be used, in effect, partly to reduce bank credit and partly
to make additions to the money supply of no more than usual
seasonal amounts. On this basis total deposits at banks
and correspondingly total loans and investments should
decline substantially in the next two months. Increases in
September and October would be less than the previous decline.
These figures allow for additional Treasury cash financing in
August and October, but on balance over an extended period
Treasury borrowing should add only temporarily to the cash
needs or cash supply of the economy.
Other factors, including possibly a moderate further gold
outflow, are expected to exert some drain on reserves. When
allowance is made for them, as well as for normal monetary
needs, these projections imply that to avoid further increases
of more than normal seasonal amounts to the liquidity of the
economy, System holdings of Government securities should be
reduced by more than $600 million in July.
If this were done,
moderate increases at the end of August and in October, at
times of Treasury cash financing, would be appropriate. In
the last two months of the year substantial operations would
be needed for seasonal purposes.
It should not be assumed that these indicated operations
would result in the credit developments projected. The
strength of credit demands and the desires of the public for
If credit
cash holdings will also be determinant factors.
demands are stronger or if banks should be more active in
putting funds to use, expansion could be greater. If free
reserves were maintained at a high enough level, such might
be the result. On the other hand, reserves might be sup
plied but not be put to use. For these reasons, the ulti
mate test of policy is not the level of free reserves
provided, but the response as reflected in credit develop
Projections presented by the Federal Reserve Bank of
New York pose the problem facing the Committee in another



and highly significant manner.
If I understand correctly,
they are based on the assumption that the maintenance of
free reserves at the current level will be a stimulus to
credit expansion, which in turn will require additional
These estimates predicate a growth in total
deposits of all member banks of $6.6 billion in the next
18 weeks--on top of the expansion that has already occurred
in June.
Some $5 billion of this increase would be in
demand deposits, and the projected increase in required
reserves exceeds $800 million. If Treasury tax and loan
accounts are reduced, as they presumably will be, by over
$4 billion, the resulting growth in other demand deposits
would be close to $9 billion. The normal seasonal growth
for this period is about $2.5 billion.

To make possible this result and maintain free reserves
at $500 million, the System would have to add about $1 bil

lion to its portfolio in the next 18 weeks--much of it in
The Board's staff projection, which may be said to
indicate minimum requirements, would call for little
change in System holdings for the period as a whole.
It is useful to have a projection of this sort as a
warning as to where policies might lead. Two questions
Is it reasonable to expect that
need to be considered:
the public's monetary desires will be so large or that banks
will want to expand their loans and investments by any such
amount if free reserves are maintained at above $500 million;
Does the System want to follow a policy that will en
courage or make possible such a result?
The experience of June is an example of the pitfalls
that may be encountered in following a path of forcing down
interest rates and stimulating credit commitments regardless
Resulting speculative excesses may lead
of current needs.
to crises that in turn raise demands for relief measures.
Is economic recovery aided by such false and temporary move
the liquidity of the economy already
ments? Finally, isn't
more than adequate to support recovery for a long time ahead?
Mr. Hayes presented the following statement of his views on the
business outlook and credit policy:
Business activity during the second half of June sug
While the downtrend
gests a mixture of diverse movements.
least, there are
has been arrested



no convincing indications of an incipient recovery. The
immediate outlook is for a summer in which economic indi
cators will move in both directions, perhaps showing as
many losses as gains, and expansionary tendencies may not
show their force until the fourth quarter at the earliest,
A good many of the encouraging elements in the last
few weeks have been connected with Government activity.
Thus the record level of construction awards for May was
in large part attributable to gains in the public sector;
manufacturers' orders improved primarily in the area of
defense contracts; and personal income was sustained to
a considerable extent by higher transfer payments. Higher
Government salaries and other payments will be increasingly
helpful in June and July, especially in the latter month
when retroactive salary payments and extension of unemploy
ment insurance will accentuate this tendency. Finally,
much of the price strength for certain metals in recent
weeks reflects Government policies with respect to tariffs
and stockpiling.

Contrary to earlier expectations, inventory liquidation
by manufacturers in May apparently proceeded at the same high
On the other hand, consumer
rate as earlier in the year.
spending has continued to hold at a very satisfactory level,

with June retail sales apparently almost as good as those of
May. Consumer credit in May did not continue the decline of
the preceding months, as noninstalment credit rose more than
instalment credit diminished.

In general, price developments in recent weeks, especially
in industrial raw materials, have reflected the improvement in
business sentiment, although no predominant trend has been

Farm prices have continued their downward tendency

of the last month or two, with the result that the over-all
wholesale price index for June will probably be lower than for
The consumer price index has apparently stabilized.
Such corporate profits data as are available for the
first quarter make poor reading and cast renewed doubt on
the performance of the stock market. With dividends well
sustained, the shrinkage of retained earnings helps to ex
plain the continuing heavy corporate demand for long-term
financing at a time when plant and equipment expenditures
are declining.
In considering policy for the next few weeks, we should
have in mind not only the general business outlook but also
the important prospective Treasury financing operations and,
closely interrelated with both of these factors, the degree



of restoration of liquidity which has been already ac
complished and that which should be our goal in the next
few months.
With respect to the Treasury, terms of the major
August refunding are due to be announced next week, and
the exchange will have been effected by the time of our
next meeting.
In the present disturbed atmosphere of the
Government bond market, there is some danger that the
capital market in general might not be as encouraging to
new investment as we would like to see it over the coming
In addition to the refunding, our calculations
suggest that the Treasury will have to raise some $2.5
billion of cash by early September at the latest, and
possibly by early August.
Over the last six months of
1958 cash financing may total about $8 billion, with the
commercial banks doubtless taking a major proportion of
this amount.
As for bank and nonbank liquidity, June witnessed an
important further increase in bank holdings of securities
and continued growth in nonbank holdings of liquid assets.
Loans and investments of all commercial banks rose by $4
billion in the four weeks through June 25, with securities
and security loans accounting for most of the rise. By
the month-end, security holdings of all commercial banks
were roughly $10 billion above the level of last October,
while loans had increased only slightly.
Since mid-May
loan-deposit ratios of New York banks have averaged around
58 per cent as against 66 per cent early last October, with
the comparable ratio for banks outside New York dropping
from 55 per cent to 51 per cent. Yet it is worth noting
at a higher level than in any
that these ratios are still
recent period prior to 1956 and are ten percentage points
or more above the 1954 lows. While the increase in money
supply has been rapid in the last few months, the present
If we compare
level is about equal to that of a year ago.
other highly
the sum of the money supply,
find a rise
liquid holdings
the third
in nonbank
quarter of 1958, and this
quarter of 1957 and the first
Total re
trend probably continued in the second quarter.
quired reserves (after adjusting for changes in required
reserve ratios) are now running close to $1 billion ahead
of last year. All of these measures taken together suggest
that we have achieved a gratifying improvement in liquidity,
wholly appropriate to a period of recession--but they also



suggest that we might begin to think about future moves
to damp down this growth of liquidity, especially if
business should fare reasonably well in the coming months.
Turning to specific credit policy, I would hope that
we could achieve a de-emphasis of the free reserve figure
as an objective of monetary policy. We have often talked
about this in the past, and we have not had much success
in getting away from this measure--but I believe we should
give increasing attention ourselves to the underlying
statistics on money supply and other liquidity measures,
and we should try to get the market and the public to give
them increasing attention.
Substantial free reserves should be maintained as a
stimulus to recovery, at least until we see a more imminent
risk than is now visible of excessive liquidity developing
in the economy--but this does not rule out the desirability
of some cautious probing toward slightly lower levels of
free reserves than we have seen recently, provided we can
do so without causing too much disturbance in the capital
I am troubled over the basic dilemma of trying
to stimulate recovery through additional investment while
at the same time avoiding the creation of too much liquidity.
I would hope that we could keep free reserves at $500 million
or less in the next three weeks, subject to the usual reserva
tions as to the distribution of reserves and the feel of the
market. At the same time it is highly desirable that we
avoid any action that would be likely to set off a trend
toward higher long-term interest rates or to create a public
impression of a basic change in credit policy. Admittedly
this poses a delicate problem for the Management of the
Account for the next three weeks.
I can see no need at this time for a change in discount
rates or in the directive.
Mr. Irons said it seemed to him that the national picture, as
presented by Mr.


Young, continued to indicate improvement and was en

appeared that more and more factors were pointing to

the up side and that there was an accumulation of small movements
indicative of a gradual development of strength in

the economy.


the Eleventh District, Mr. Irons said, conditions continued about as



they had been, with activity at quite a high and stable level.
The petroleum situation was gradually showing improvement, with
the stock situation better and prices a little firmer as the stock
situation improved.

Allowables had been moved up to nine days in

June and possibly there would be further gradual increases.


was some feeling that allowables might move up to eleven or twelve
days by the latter part of the year, which would represent a marked

Irons said that the agricultural situation in the dis

continued to be very favorable, with rains at the right time

and the crop outlook good.
June it

Retail trade was holding up well; in

was just a shade under the very high level of June a year
In the banking picture, recent call report data showed an in

crease somewhat in excess of $650 million from the roughly comparable
date of a year ago in total deposits of weekly reporting banks, and
more than half of this increase was in time deposits. There had
been reports of a shifting out of Treasury bills into time deposits
by corporations and others,

and apparently there was quite a strong

demand on the part of holders of funds to get into time deposits
at a favorable interest rate.

This led him to believe the time

deposit movement was something to be watched carefully for it


contain a fairly substantial amount of funds which could prove to
be "hot money."

Loan demand in the district was good, Mr. Irons

said, with loans up over a year ago.


As to policy, Mr.

Irons said it

seemed to him from a study

of the available figures that the problem over the next few weeks
would be one of avoiding too great an availability of reserves.
The projections, he noted, indicated fairly easy reserve positions.

Also, it appeared that the expansion in the money supply might be
substantial, with a shifting of funds into private hands from the

so that the problem was likely to be one of guarding

against too great expansion and too much liquidity rather than the

The Treasury would be in

the market almost continually,

or at least several times in any event, over the next few months
and it

might be necessary to make a decision between the tighter

credit policy required by the unfolding economic situation and
support of the Treasury.


Irons felt that it

would be a mistake

to permit an ease to develop that could not be sustained as condi
tions moved ahead over the next month or so, and he did not feel
that anything would be gained by such a course.

Altogether, the

circumstances indicated that the Management of the Account was
going to have a difficult time.

The use of judgment and a feel

of the market would be required in

trying to restrain further

availability of reserves and hold a checkrein to the extent possible.
Mr. Irons concluded by saying that he would not favor a
change in

any of the implements of System policy such as the dis

count rate or reserve requirements.

That point, he felt, had been



passed for the time being.
Mr. Mangels said that the Twelfth District had experienced
about the same degree of improvement as reported nationally.


reports indicated a little better than seasonal inprovement, both in
new orders and production, in May and early June,

and there had been

an increased demand for plywood, accompanied by a price advance.
Residential construction was holding up very well; in May it was
reported that residential construction contracts were at the highest
point since 1956.

However, nonresidential construction awards had

declined slightly from April and early May figures.

Steel produc

tion, which was up early in June, declined by the end of the month
and the decline was expected to continue in July because there had
been forward buying in anticipation of a price increase.


of the freight tax at the end of July had resulted in efforts to
defer shipments.
Agriculture in the district was progressing favorably, Mr.
Mangels said, with the fruit and vegetable canning industry looking
forward to good prospects.

The inventory carryover was not as large

as in 1956 or 1957 and some improvement in profit margins was ex
pected this year.
crease in

Employment had been rising, and the slight in

manufacturing employment was significant because previously

there had been uninterrupted declines for the past ten or twelve

On the other hand, unemployment had increased slightly.



There continued to be cutbacks in aircraft employment in Southern
California but this was offset to some extent by gains in other

At the Boeing plant in Seattle, employment in May was

around 63,000, a figure 2,500 higher than a year ago.


automobile sales in May were below the 1957 level, in California
they were up somewhat in April.
were available, it

In other States from which reports

was indicated that May sales were about the same

as those for April, whereas normally a little

decline might be

Department store sales showed little

change in

May from

the preceding month.
Mr. Mangels continued by saying that for the three-week period
which ended June 26, loans at banks in the Twelfth District were up

million, which included an increase of $30 million in real estate


Time deposits continued to rise, the increase of $1 6 4 million

more than offsetting the decline of $156 million in demand deposits.

Mangels recalled that at the last meeting of the Committee he had

reported indications of a possible reduction in
on savings deposits.

the rate of interest

As the end of June approached, however,


banks found that savings and loan associations were not going to
reduce the dividend rate so they decided, rather reluctantly, not to
change the savings deposit interest rate.

With one or two exceptions,

the banks had announced that they were going to keep the rate until
the end of this year.

There was practically no borrowing from the



Reserve Bank by member banks,

and Federal funds transactions were

running at somewhat lower than normal levels, with purchases slightly
exceeding sales.
In terms of the over-all situation, Mr. Mangels said that the
principal question seemed to be whether the present indications of
encouraging developments in business were going to persist and bring
about actual recovery.

Even if the most optimistic expectations

were realized, however, he felt that rather substantial unemployment
must still be expected at the end of the year.
As far as monetary policy was concerned, Mr. Mangels ex
pressed the view that the Management of the Account had done an
excellent job under trying conditions.

He agreed with Messrs. Hayes

and Irons that the System ought not to liberalize its attitude and pro
vide more ease.

As to free reserves, he had in mind a level some

where around $500 million, and he would have no objection if the
level were to drop somewhat below that figure.

The System, he felt,

should not be influenced too much toward extending its position of
ease because of the Treasury financing ahead, but the Account Manage
ment must continue to have some degree of discretion in its operations
for there was another three-week period ahead which would not be easy.
In conclusion, Mr.

Mangels referred to the meeting of the

San Francisco directors to be held tomorrow and said he was quite
sure that the directors would not be inclined to make any change

the discount rate.


Mr. Allen said that the Seventh District continued to

provide a contrast between the farm and industrial sectors.


conditions remained favorable over most of the district, with
pasture conditions in

Michigan and Wisconsin having been improved

by rains and moisture very good in

the corn belt.

Hog prices had

continued to increase and were nearly 20 per cent above a year ago,
but farmers reported plans for substantially increased production
which, if


prices next spring.

should bring about a sharp drop in hog

In the industrial sector,

the district con

tinued to run behind the nation in most respects.
of employment,

In the matter

for example, the larger centers continued to register

less satisfactorily than the country as a whole, and Chicago and
Flint had been reclassified by the Labor Department to reflect
worsening conditions.

District experience in construction and

housing starts likewise was running behind that of the nation,
and builders and lenders in the residential field in both the
Chicago and Detroit areas expected a second half generally resembling
Department store sales for the district for the four weeks

the first.

ending June 21 were 6 per cent below a year ago compared with a drop
of about 2 per cent nationally.

Allen observed that the practice of scheduling vacation

shutdowns and interruptions for model changeovers in July and Augusta practice common in

the automobile business and growing in other



industries--added to the difficulty of estimating whether or not
this was a period of recovery from recession.

It was understood

that the automobile people planned unusually low production for
the third quarter--680,000 cars--but their sales were better in

While official figures were not available,

estimated that

informed sources

00,000 cars were retailed during the month of June,

which meant that this was the best month so far this year,
27 per cent below June 1957.


Unofficial estimates placed the June

30 inventory of unsold new cars at around 695,000, while the figure
last year was 735,000.

With that inventory figure and with the low

production program for the third quarter,


would not take much of

a sales performance to reduce inventories to quite a modest level
by the first

of October.

The target for that date was 400,000 and

could be achieved by a daily sales rate of 12,500 through the

third quarter.


the daily rate were that of June--16,000--the

inventory on October 1 would be down to 143,000.
The large Chicago banks,

Mr. Allen said,

had been in

an easy

While moving to improved reserve positions the Chicago

and also those in Detroit, had continued to enlarge their

holdings of Treasury bills and the volume of bills held by those
banks had more than doubled in the last four weeks.

At the same

time, loans against securities had not increased relatively as
much in

the banks of the district as in the country as a whole.


Turning to policy, Mr. Allen said he agreed with those

who had already spoken at this meeting.

He felt that System

policy had amply accommodated commerce and industry and that
"hewing to the line" was indicated.
free reserves as a gauge,

While he disliked to use

those who had spoken thus far had

mentioned a level around $500 million.


With this he agreed, even

meant sales out of the System portfolio in the next few weeks.

In his opinion, the System should stick to its
too much about the Treasury.
fortunate if
which it


trade and not worry

The Treasury, he felt, would be very

could borrow longer-term at anything like the rates

had been paying.

With most people feeling that this is


inflationary age, and with the record of inflation over the past
ten years, it

would be remarkable if

the Treasury could stay near

those rates.
Mr. Leedy said that the Tenth District continued to do
better than the nation generally.

The winter wheat crop had worked

out about as forecast and the district would have a near record

Last week was the peak of the harvest and conditions were


With something like 2,000 cars on the track, there had

been a short strike of workers at the terminal elevators in Kansas
City, but fortunately the strike was quickly settled.

Wheat yields

per acre were reported to be quite high and the quality of the wheat



was satisfactory, although the protein content was a little
than that of last year's crop.
wise were reported to be in

Other crops in


the district like

excellent condition and the same kind

of report was prevalent as to pastures and ranges.
situation with regard to farm income in

The favorable

the district, which he had

previously reported to the Committee, continued to show up as
additional monthly figures became available.

Cash farm receipts

for the first

four months of the year were 19 per cent higher than

for the first

four months of last year, compared with an increase

of 7 per cent nationally.
slightly higher than in

Department store sales for June were

June of last year and for the first


of the year sales were virtually unchanged from the same period of

Mr. Leedy went on to say that nonfarm employment continued
to improve in the district in May.

While data were not yet complete,

it appeared that further seasonal gains in nonmanufacturing activities
were widespread.

Also, manufacturing employment in most of the States

of the district had increased slightly.

Although employment levels

were running substantially below last year's figures, insured un
employment continued to fall in response to the seasonal upturn in
nonfarm jobs so that in mid-June it was about 15 per cent lower
than a month earlier.

By States, the range had been from 4.9 per

cent in Missouri and Oklahoma to around 3 per cent in

the other



States, which compared with the national figure of around 6.4 per

Construction contractsawarded in the district in May were

one-fifth higher than a year ago,

with substantial gains in

major types of construction; for the first


five months of the year

the total of construction awards was about 8 per cent above the
similar period for last year.

The banking picture in the district

conformed generally to that which had been reported for the country.
There had been an increase in

all major categories of loans over

the last three weeks, with tax borrowing the principal reason for
the expansion in business loans.

Deposits were up, reserve positions

easy, and the reserve city banks had been supplying some funds to
the Federal funds market.
As to policy, Mr. Leedy said he subscribed to what had been
said previously at this meeting.
pressed, they were quite uniform.

As he understood the views ex
He felt that the System had gone

far enough in providing ease in bank reserve positions and, as Mr.
Hayes had suggested, there might be some probing for a lower level
of free reserves.

He also subscribed to what had been said about

the course which should be pursued in the event of a conflict
between the System's objectives and those which would best serve
the Treasury.

Should conflict necessitate a choice, he would follow

a course that would give precedence to effective monetary policy.



Leach said that in

recent weeks some of the major

Fifth District economic indicators had remained unchanged but
many had shown improvement.

The recently announced pay increase

of 10 per cent for Federal employees retroactive to January was
expected to provide a substantial stimulus to consumer spending
because military installations and the presence of the Nation's
Capital combine to give the district nearly one-fifth of total
Federal civilian employment within the United States.

While there

had been little

change in

tract awards in

May showed a substantial increase over April, as

the textile industry, construction con

well as over May a year ago, to provide the most optimistic note.
There were others, however.
noticeably in

Bituminous coal production improved

May and June; cigarette production was up; lumber

production was at a good level; department store sales were doing
well; employment had stabilized or shown gains in most areas; and
insured unemployment rates had fallen, though the rate for West
Virginia was still

above 13 per cent.

Turning to credit policy, Mr. Leach expressed the view that
despite the continuing signs of improvement in economic conditions

would clearly be premature to think in

present policy of ease at this juncture.
that there should be a change in


terms of abandoning the
He believed, however,
Further additions to

the liquidity of the banking system and the economy should be



avoided as far as practicable because they would serve no useful
economic purpose and would make the future task more difficult.
While the System must, of course, supply the reserves needed for
the Treasury's deficit financing,

this inevitably would add sub

stantially to liquidity in the months ahead and made it

all the

more important to avoid unnecessary additions in so far as pos


he felt, should be the Committee's objective under

current economic conditions.

Although he realized that such an

objective would be extremely difficult to attain in view of
Treasury financing,

the unsettled condition of the Government

securities market, and the importance which the market and the
public now attach to changes in the level of free reserves,


economic conditions might continue for some time without substantial
change and he thought that the System should gradually back down
from the $500-$600 million level of free reserves as market condi
tions and Treasury financing permitted.
Mr. Leach said that although he could not tell
would do with additional reserves,

what banks

bankers are paid to invest

money and he could not imagine that they would let reserves lie



serves until the bill

appeared that they would use additional re
rate was lower than at present.

He felt that

the Committee should get away from free reserves as too important
an indicator of policy and that it

must get away from the present



level of free reserves.




could not do better

than $500 million until the next Treasury financing, and any shift
should be made gradually without attracting too much attention.
While the Committee could continue to use the same policy
directive, Mr.

Leach noted that there had been quite a change in

conditions and prospects since that directive was adopted on
March 5.

He suggested, therefore, that the following language

might be considered for clause (b):

"to contributing by monetary

ease to resumption of stable growth of the economy without creating
excessive liquidity."

It was dangerous,

he felt, to keep allowing

liquidity to increase.

Vardaman said that national psychology was such, and

the national economy as reported here too unsteady and uneven to
tolerate without undue disturbance any change in Federal Reserve
policy to the tight side.


the System should continue

about as is--around $500 million free reserves--and hope to de
emphasize any fixed amount of free reserves at some future date.
Excessive liquidity in

the money market should be avoided if

possible, but not at the risk of a change to a pattern of tighten
ing money.

He would not change clause (b) of the policy directive

at this time.

Mills said that the explanation by Mr.

mechanical results of System policy in

Thomas of the

past weeks raised in his



mind the thought that the Committee had allowed itself to work
on a treadmill when, by attempting to reach some set level of
free reserves, an expansion in bank loans and investments was
generated that had produced the dangers and the difficulties
seen by Mr. Thomas in overliquidity.
he sensed was felt by Mr.

He shared the concern that

Thomas, and also by Messrs. Leach and

Irons, which suggested that temporarily the development of System
policy should be concerned predominantly with financial rather
than economic factors.

In so doing, an attempt should be made to

reduce the System's portfolio of Treasury bills,

However, in

setting that objective--and without doubt it should be a System
objective--there was also the quite different question of what
could be realistically accomplished.

This involved whether it

would be possible for the System to educate and condition the
investment fraternity to a policy that would not contemplate
continuing injections of reserves and whether it would be possible
to accustom the market to some reduction in reserves.

Because the

objectives to be sought would entail difficult problems, a great
deal of latitude would have to be vested in the Manager of the
Account t

judge the feel of the market so that in seeking a more

moderate policy in the provision of reserves he would not in the
process create alarm in the market or unduly impair the Treasury
in its

financing problems,

which must have very first

the development of System policy.




Robertson said that he shared the views expressed

at this meeting with regard to excessive liquidity.

By vigorously

trying to establish ease, he felt that the System had gotten into
a situation from which it

could not easily extricate itself.


his opinion, the System should start moving toward tightness
faster than indicated by the comments around the table--as fast
as possible without unduly upsetting the market--and it

should pay

more attention to the formulation of monetary policy in line with
the economic situation than to the objectives of the Treasury or
any special interests.
For the next three weeks,
ought to avoid pushing ease, in

Mr. Robertson said, the Committee

fact should restrict it,

and in the

absence of any better criterion he would use free reserves as a
target and try to move toward $400 million.

This would not be an

ironclad target but one with flexibility on either side depending
on conditions that prevailed during the period.

He would work with

as much vigor toward reducing the ease which had created excessive
liquidity as had been shown in bringing about a condition of ease.

Robertson went on to say that he was favorably inclined

toward the suggestion for amendment of the directive.

He thought

that a change in the directive would not be misunderstood.

would be a very slight signal, a little

the Account in


flag for the Manager of

carrying on activities during the next three-week


Mr. Shepardson said that his views were very much like

those expressed by Mr. Robertson.

It was his impression that

the Committee had been aiming at free reserves on the lower side
of $500 million rather than the upper side, and consequently he
was a little disturbed when the level of free reserves got as
high as it did.

In his opinion, System policy should be moving

back toward a little less ease.
Mr. Shepardson said he was rather concerned about some of
the comments one heard and read regarding the lack of investment in
plant and equipment for he did not see what was gained in trying to
push additional investment of that kind at a time when there was a
surplus of plant capacity.

He also questioned the advisability of

efforts to encourage increased demand for goods and services by
means of easier consumer credit terms which might further impede
needed price adjustments.

Adjustments now going on in many

businesses seemed to be increasing efficiency and cutting out some

There were also some indications of price adjustments,

and those things were all to the good.
This meant to him, Mr. Shepardson said, that the System
should not be in the position of trying to push too fast on recovery
and that necessary adjustments should be allowed to take place and
work through.
perhaps it

While he had reviewed the directive and felt that

should be amended,

he had not developed any specific




It appeared to him that the language suggested by Mr.

Leach might not be inappropriate.
In summarizing,

Mr. Shepardson said that he would like to

see monetary policy a little
suggested that it

less easy than it

had been.


might be time for a change in the directive,

particularly to eliminate the word "further" in clause (b), as
mentioned by Mr.

Irons at recent meetings of the Committee.

Fulton said he could only describe conditions in the

Fourth District by saying that the economy was quite soggy.


present there were no developments of such a nature as especially
to engender a hope that the fourth quarter would be better than

On the agricultural side, crops and prices were good and

farmers were buying cautiously,

but in the industrial sector there

were further layoffs of workers,

particularly in the machine tool

and heavy electrical industries.

Steel had experienced a little

upswing during the past month but that had now subsided and nothing
much was looked for until August when the automobile companies would
take delivery on some sheet steel.

There was apprehension about

acceptance of the new models by the public and it was understood
that the automobile people were not going to inventory much in
the line of steel or parts until the extent of acceptance had been


the new models did not go over well, there would

be a substantial downturn in all industries allied with the auto
motive industry.

Construction in the Fourth District was not up



as in some of the other districts; residential construction had
a slight revival but then a relapse.

Over all, therefore, there

was nothing to forecast a sharp upturn, at least from present
indications in the Fourth District.

Fulton said he subscribed to the thinking that the

System had gone a little

far in supplying reserves and that free

reserves were on the high side at a level of $600 million.


he envisaged at the last meeting, he said, was a top of around
$500 million.

Despite the relatively slow state of conditions

the Fourth District, he felt that more firmness could be brought

into the picture rather than to keep reserves as high as at present
and thus contribute to a basis for inflation.

He would like to see

the word "further" eliminated from clause (b) of the directive
because the directive would then state more clearly the current
attitude of the Committee, at least to judge from the expressions
around the table at this meeting,

but he had no convictions about

the rest of the language.

Bopp said that he interpreted the national data a little

bit less optimistically than most of the others at this meeting and
that his interpretation was influenced only in part by developments
in the Third District, which were rather on the gloomy side.

Bopp then made substantially the following statement:

The Manager of the Account has done an outstanding
job under trying circumstances in a period marked by

extraordinary complexity and unanticipated develop
One important complicating factor was that the
market saw signals the System did not intend to give.
This raises the age old question of whether we can
give clearer signals--particularly to correct a market
My own view is that direct opera
tions in the longer sector of the market at such
strategic times would be the most effective way for
the System to signal its intentions.
If we move to the short sector, relatively wide
spreads between the discount rate and short-term rates
in the open market are likely to lead to periodic mis
interpretation. Persistence of a wide spread may be
interpreted as indicating that the System believes
market rates are too low or that it will not resist
some tightening in the market.
Under these circum
stances, a rise in short-term market rates, especially
if accompanied by a reduction in the net free reserve
position of member banks, may be interpreted as a move
ment away from an easy money policy.
Since it is so difficult to estimate the magnitude
of necessary "defensive" operations, which comprise the
largest volume of purchases and sales, open market opera
tions are not well adapted to give unmistakable signals
At the present time, to give a clear
to the market.
signal to the market that the policy of ease is being
maintained, I would recommend a reduction of 1/2 per
cent in the discount rate. An ancillary but not un
important advantage of this move is that it would put
us in better position to give a clearer and earlier
signal when a change in the direction of policy is
I wish to report that we had extensive discussion
of economic and financial developments at the meeting
There was agree
of our Board of Directors on Thursday.
in a recession and that the
ment that we are still
probabilities of a sharp snapback by August or September
are extremely small. In terms of the economic and
financial merits of the case, the directors were dis
posed to vote a reduction in the rate, but in the light
of this early meeting of the Federal Open Market Committee
and of my own recommendation--which parenthetically was
influenced by the decisions at the last meeting of this



Committee--they were willing to renew the existing

rates on Thursday--but with a divided vote.
It is possible that they may take the initiative
to establish a lower rate at the next meeting of the
In concluding his comments, Mr. Bopp said he realised that
his views on the discount rate placed him distinctly in the minority
around the table.
Mr. Bryan said that the Sixth District was experiencing
almost exactly the same trends and changes in figures as the nation.
On the basis of the year-to-year comparisons, the district had shown
lesser declines than the country as a whole, but rather curiously
recent month-to-month comparisons were more favorable for the nation
than for the Sixth District. Some of this apparently could be ex
plained by the recent improvement in durable goods of the kind not
manufactured in the Sixth District.
Turning to the national economic picture, Mr. Bryan said
that he had almost completely changed his views in the last three

It seemed to him that there was being accumulated a good

deal of evidence that the country was going through this recession
with much the same sort of rolling adjustment that had taken place
before the postwar period, and there was little evidence of ac
cumulating recessionary tendencies.

Bryan said; namely,

He had only one reservation,

that the country was not yet in a vigorous

recovery and there was still

a possibility that the economy might

be experiencing sort of a false bottom.


As to policy, Mr. Bryan recalled that earlier he had been

an advocate of further ease but said that he had now reversed him

Looking at the total picture on a year-to-year basis, and

making adjustments for the difference in reserve requirements,


now concluded that the System had done an ample job of providing

Even the money supply figures, however taken, suited him a

good deal better than they did earlier.


he could not

find a basis for advocating further ease and he was rather sympathetic
to the idea that the System should avoid further ease.


there were one or two things that the Committee might keep in mind.
First, there was evidence of considerable congestion in the capital
markets for a variety of reasons,

not all of them due to the false

signal of a change in System policy or to the speculation in Govern
ment securities,

and there was going to be a heavy calendar in July.

Also, the Treasury at some point must come in

for cash.


he had come to the conclusion that there might very well be con
siderable tightening in

the capital markets unless the System

maintained a fair degree of ease.

By this he meant continuing just

about what the System had been doing and maintaining a level of free
reserves in the neighborhood of $500 million for the next three-week

Bryan went on to say that a discount rate change at the

present time would seem to him to be a mistake,

for it

would contain



the grave danger of conveying to the public a message precisely
opposite to that which the System wanted to convey.
words, it

In other

might be interpreted as meaning that the System had no

confidence in the current more toward recovery.

As to the directive,

he would be inclined to support striking the word "further" from
clause (b).

Johns recalled that he had been among the small minority

who argued for further ease at recent Committee meetings but said
that he did not desire to make those arguments again because his
position had changed somewhat.

At this juncture he was inclined to

agree that the System should not actively pursue a policy of further

Mr. Hayes had suggested that it

might be appropriate to do

some cautious probing of a lower free reserve level, if
that could be done without repercussions,

and Mr.

and when

Johns said that

he was inclined to agree, although he had reservations as to whether
this could be done without repercussions.

He felt

that the System

should not signal any change of policy at this time and that certainly

should not encourage a trend toward higher long-term rates.


he had been on vacation since the last Committee meeting, he had re
viewed open market operations from the reports of the New York Bank,
and this review led him to conclude that operations in the Account
during the last three weeks had been thoroughly satisfactory.
as he had said, he felt that it


would be premature at this time to



signal any change in policy, on the other hand be did not wish to
repeat the arguments he made at the last two meetings regarding a
reduction in the discount rate since he agreed with Mr. Bryan that

a change in the rate might be misinterpreted.
Turning to the policy directive, Mr.

Johns said he would not

object to eliminating the word "further", but that he had reserva
tions about using the word "excessive* in the clause suggested by

Leach because the Committee ought not to give the impression

that it

or its

Agent Bank or the Manager of the Account were given

to excesses.

In substance, Mr. Johns said, he would like to continue
about as at present for the next three weeks.

Szymczak said that he has favored a reduction of the

level of free reserves.


he was fully aware of the fact

that the Treasury would be in the market for a considerable period
of time, and he was concerned also about the situation with respect
to all issues, Government,

corporate, and municipal.


although he hoped there would be some signs of an upswing in the
fourth quarter, the doldrums of the summer months were ahead.
In a further explanation of his views, Mr.

Szymczak said

that the System, having provided reserves--perhaps too many--up
to this point,

should try to vary the reserve position of the banks,

not only because of the excessive liquidity that had developed but



also because the market gets accustomed to having a certain volume
of free reserves available.

He was mindful of what Mr.

Mills had

pointed out, however, and he would adopt a realistic point of view
with the Treasury coming into the market.
As to the directive, Mr.

Szymczak said that although he

would not recommend a change, on the other hand he would not object.

Balderston inquired of Mr. Rouse whether,

if the Treasury

went into the market shortly, its needs could be reconciled with a
reduction of $600 million in the System Account portfolio.
Mr. Rouse replied that as of the moment it did not appear
likely that this could be done.

However, the projections refine

themselves from week to week and the Account might not be faced
with the same problem that appeared to exist today.

In this con

nection, he observed that $184 million of bills would run off this
week, another $150 million would mature next week, and a similar
amount the week after that.

At present the Account was faced with

a nasty situation in the market, prices had dropped noticeably this
morning, and in that kind of atmosphere it was not possible for him
to give a categorical answer to Mr. Balderston's question.


situation this morning, he said, did not seem to have any relation
ship at all to reserves, and the same thing had been true the last
two weeks.

In other words, the availability of reserves seemed to

have no effect marketwise.

In the kind of a situation which bad



prevailed, he just did not know the answer to the question of
reducing the System portfolio.
Mr. Balderston then said that he had asked this question
because of the dilemma pointed out by Mr. Mills and because of hia
own view that Mr.

Irons had correctly described the policy that the

Committee should be following.

As he saw it, the conflict between

those two positions might make policy decisions very difficult

There were evidences of speculative responses both to the

System's monetary policy and to the Governmental spending and stock
piling programs; in

short, the economic field that should have been

irrigated carefully in
to have become flooded.

the last two or three months seemed to him
Looking back, he felt that excessive

liquidity explained the failure of the System's policy of monetary
restraint to become effective early in 1955 and he viewed any
repetition of that situation with great concern.

On the other hand,

it had been pointed out that no matter whether free reserves were
kept above or below $500 million, the level might be regarded as
a signal to the financial community of the System's intentions.
All of this indicated to him how careful the System must be, in
view of the Treasury financing ahead,
market unduly.


not to disturb the bond

appeared that the System should take no overt

action but that, as indicated by Mr.



might be desirable

for a lower level of free reserves as the opportunity permitted.



Balderston said he would not favor a reduction in

discount rate.


He had had the feeling in 1955 that the discount

rate level at that time was too low, and that mistake should not
be repeated.


Neither would he favor a change in reserve require

the directive were changed,

he would not only eliminate

the word "further" but also try to develop some new wording in
place of "stable economic growth" because to him that phrase was
lacking in definition.
Chairman Martin said that he found it
his thoughts on this type of a situation.

difficult to express

In general, however,


was his feeling that the System ought not to push either in the
direction of easing or tightening at this time.

However commendable

it might be in theory to talk about probing, the changes in funda
mentals that occur whenever there is

At such times forces are at work that are bigger than

the System or the Treasury, and if

a turning point may make that

one tries to play with them he

apt to get into serious difficulty.

Chairman Martin said he had found it

to keep his own sense of balance recently.


The week end after

June 19 was one of the worst that he had spent since coming into
the System, with many persons who were stirred up about rumors of
a change in

System policy calling him with various kinds of stories.



Such stories, he observed, are always symptoms of a turning point.

Of course, he did not know for certain whether there actually had
been a turning point but many elements were making for it.


sonally, he was inclined to be optimistic, recognizing that one
should not be prematurely optimistic.

One should recognize the

Treasury's problem at this kind of juncture and keep in mind that
movements in

rates never come gradually, much as that might be

He noted that one person at this meeting still


that the discount rate ought to be reduced, so there was not yet
a unanimity of belief that a clear turning point had developed.
Chairman Martin then commented that in
speculation in

the realm of

which the System and the Treasury must deal there

are many factors to be taken into consideration.
been for the story in



had not

the press on June 19 which suggested that

there had been a change in

Federal Reserve policy, he felt that

there would have been some other story or comment.

He noted from

the comments at the Committee meetings over the past three months
that the views had shifted back and forth in
When it

both directions.

comes to the public putting their money on the line, he
the System must deal with the actual situation as it


The System must try to be right, but the story of the man killed
crossing the street on the green light who was "dead right" seemed
to apply to the situation with which the System was now dealing.


The Chairman said he thought that, if

the System was

going to change policy, some thought should be given to what
happened in

the November 1957 period and the System ought to

do something that would really be clear-cut.

This did not mean

necessarily that there could not be any probing,

and actually

probing had been done in the market over the last ten days or
two weeks.

The whole situation, he reiterated, should be viewed

the light of a fundamental change.

Also, the System ought not

to do anything to create more difficulty for the Treasury than
necessary unless it thought that it was really right, for the
Treasury had real problems and should not be asked to perform a


the System were certain of the basic situation, that

would be one thing.


as Mr.

Robertson had said, the

System probably had contributed to the difficulties of the Treasury
by going overboard in

the direction of easy money,


a turning

point was really here.
In further comments Chairman Martin again said that the
System ought to try to keep its

balance at this time.



wise, he suggested, to give wide latitude to the Manager of the

who had had a difficult period in which to operate.


would not be strongly opposed to taking the word "further" out of
clause (b)

of the directive,

but he recalled that on the eve of a

Treasury financing the Committee changed policy last November and



the change caused about as much trouble as anything that could
have happened.
Treasury in


must be remembered that the problem of the

a period of uncertainty might become impossible if

appeared that the System was contemplating a change in

of policy.

While it

might be, therefore, that a change in the

directive ought to be made, by and large he felt that it
better not to have it

reflect the view of the majority in



would be

appear in the next three-week period for

that would needlessly create problems.

the majority was in


While perhaps he did not

saying that, it

appeared that

favor of only a moderate change in the directive,

Most of those around the table had talked about $500 mil

lion in free reserves and he felt that such a target was all right.

the Manager of the Account was up against the feel, color,

and tone of the market and little

shifts were going to be very

difficult to gauge.
Chairman Martin again stated that the Committee ought to be
extremely cognizant of the difficult position of the Treasury.


the time came to make a definite policy change that was one thing,
but to play around with the market was playing around with fire.
The Treasury had had a difficult problem already with the 2-5/8
per cent bonds and might be saddled with nearly the whole issue,
although that was a matter of judgment.

Vardaman asked Chairman Martin whether he felt that

the difficulty of having the word "further" in

the directive was



serious enough to warrant a change, and the Chairman replied
that he did not think it was a very big point.

In his view,

would be better on balance not to change the directive at


Shepardson commented that although he recognized

the problem involved in

the forthcoming Treasury financing,

there would be a series of Treasury operations throughout the
rest of the year.

He inquired, therefore, whether it was the

Chairman's view that System policy would be frozen during all
of those periods.
Chairman Martin responded that until the System was
certain what its policy ought to be, there would be a difficult

It was the problem of financing a deficit; namely,

whether the money was going to be printed to finance it.


hoped not, but some money probably would have to be printed,
depending on the size of the deficit.

Shepardson commented that he had raised this question

because he was ready to take the position of wanting less ease,
and Mr.

Leach said that in

his view the System ought to stop adding

to liquidity.
Mr. Mills suggested that in a sense Mr.

Leach's position

would represent a confession of error on the part of the System



which it

could be undesirable to incorporate in


the policy di

If excessive ease had been created, he said, the System

had been responsible for it.
In responding,

Mr. Leach referred to the language of the

directive adopted by the Committee in

January 1955 and said it

had never occurred to him that the language carried the implication
suggested by Mr.


He went on to say that he did not want to

emphasize unduly a change in

the directive since he was primarily

concerned with actions.


directive is


interpreted in

the present wording of the

the future, as it

as requiring free reserves in

has been in

the $500-$600 million range,

the past,
he did

not know how the System could escape from furnishing additional re
serves, which in

turn would lead to additions to deposits and short

term investments of banks.

He would like to see no further un

necessary additions to liquidity.

Hayes said he was glad that the Chairman had stressed

the difficulties of the ensuing period.
considered it
change in

Under such conditions he

advisable that the System avoid signaling any overt


Much as he agreed with the desirability of not

having further ease, he felt that it

would be better not to change

the directive at this point.

Irons recalled that he had not spoken at this meeting

in favor of deletion of the word "further" from clause (b) of the
directive and said that he had had a reason; namely, the possible



damage to the Government securities market on the eve of a
Treasury financing.

He thought that the System was wrong in

shifting policy last November just before a Treasury financing
and that it

would be wrong in making any change now.

The matter

could be deferred until there was a little more solid situation
in the Government securities market and a more solid feeling in
people's minds.
Mr. Mangels indicated that he agreed with Mr. Irons, but
Mr. Allen stated that he would favor eliminating the word "further"
from the directive on the basis that the directive would then
reflect better the attitude of the Committee today.
There ensued further discussion of the directive and of
policy in

the period immediately ahead,

following which it


from a show of hands that the majority of those around the table
would prefer not to make any change in the directive at this time.
Consideration then was given to the target that should be
set for free reserves and the difficulties involved in

the use of

any specific figure were again pointed out.
Mr. Hayes suggested that the objective might be stated as
$500 million of free reserves or less.

By this he meant that the

Management of the Account would try to go below the $500 million
figure rather than above it,

but that in

conducting operations in

the Account the Management would recognize all of the implications
of going below $500 million.


Chairman Martin then said that there appeared to be agree

ment on the part of all
must be an element.

that the feel, color, and tone of the market

In terms of the level of free reserves, he sug

gested that "around $$00 million" was probably as well as the matter
could be stated.
In further discussion, Mr.

Irons raised the question whether

it would be possible to avoid entirely the use of a target figure for
free reserves.

If a figure is mentioned, he said, there is an in

clination to maintain that figure.

What was wanted, he felt, was

the concept of maintaining an availability of reserves that would
not contribute to excessive liquidity or to a deficiency of funds,
rather than the maintenance of a free reserve figure per se.


suggested that considerable leeway must be given to the Manager of
the Account and that the objective might be put in terms of leaving
it to the Manager to carry out the concept of maintaining an avail
ability of reserves which would not be disruptive to the market.
Mr. Hayes said that he would not disagree except to point
out that the public has grown accustomed to looking at the level of
free reserves.


an attempt to bring about the kind of situation

the Committee would like to see prevail should result in
volume of free reserves,

a smaller

the System might be inviting a very difficult

situation from the standpoint of public reaction to its policy.
Mr. Irons agreed that this was an element that the Account
Management would have to take into consideration.


Mr. Rouse commented that the System was in a box which


would have to get out of at some time by a decisive move.


present he had no suggestion for resolving the problem, but the
Account could try to bring down the free reserve level of the
last couple of weeks.

Pointing out how certain possible actions

could just lead to more complicated situations, he noted that a
reduction of reserve requirements might disabuse the market of its
idea about a shift in policy and that sopping up the reserves
simultaneously would possibly "get us off the hook."

On the other

it might develop to be the secondary thinking that the sopping

up was the essence of the action and that the market had been right
the first time.
The discussion concluded with a statement by Chairman Martin
that he doubted whether the Committee could do any better than to
leave the free reserve target at "around $500 million" and to give
maximum discretion to the Management of the Account at a time like
the present.

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
(including replacement of maturing securities, and
allowing maturities to run off without replacement)
for the System Open Market Account in the open market
or, in the case of maturing securities, by direct



exchange with the Treasury, as may be necessary in the
light of current and prospective economic conditions
and the general credit situation of the country, with
a view (a) to relating the supply of funds in the market
to the needs of commerce and business, (b) to contributing
further by monetary ease to resumption of stable growth of
the economy, and (c) to the practical administration of
the Account; provided that the aggregate amount of securi
ties 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 certifi
cates of indebtedness purchased from time to time for the
temporary accommodation of the Treasury, shall not be
increased or decreased by more than $1 billion;
To purchase direct from the Treasury for the
account of the Federal Reserve Bank of New York (with
discretion, in cases where it seems desirable, to issue
participations to one or more Federal Reserve Banks)
such amounts of special short-term certificates of
indebtedness as may be necessary from time to time for
the temporary accommodation of the Treasury; provided
that the total amount of such certificates held at any
one time by the Federal Reserve Banks shall not exceed
in the aggregate $500 million.

Vardaman withdrew from the meeting at this point.

At the request of Mr. Rouse there had been distributed to
the members of the Committee a memorandum suggesting an increase
from $50 million to $75 million in
holdings of bankers'
New York.

the limitation on outright

acceptances by the Federal Reserve Bank of

On November 27, 1956, this limit was increased to the

lesser of $50 million or 10 per cent of total acceptances outstanding,
as shown by the most recent bankers'

acceptance survey,

and since

that time the New York Bank had held a minimum of about $15.5
million on October 28, 1957,
June 17, 1958.

and a maximum of $45.7 million on

Holdings as of June 30, 1958, were $44,79 ,000.


The memorandum explained that in

York Bank had gradually increased its
by $1 million or more a week,

recent weeks the New

holdings of acceptances

to be consistent with increases

System holdings of United States Government securities.


long as open market policy remained one of maintaining a posture
of ease, acceptance holdings therefore could quickly reach the
limit if

the New York Bank were to continue to coordinate

acceptance activities with other market operations.
Following supplemental comments by Mr. Rouse concerning
the matters referred to in the memorandum, Mr.

Allen commented

that according to his recollection the reason for granting the
present authority was to show friendliness to the acceptance

He recalled that, although he was not at the time a

member of the Committee, he questioned increasing the purchase
authority because it

seemed to him that the way to build up the

market was to get people accustomed to buying acceptances.


the Committee should conclude that holdings of acceptances ought
to be increased proportionately to System holdings of Government
securities, as suggested in

the second paragraph of Mr. Rouse's

memorandum, he would have nothing further to say.
as indicated in



past discussions the purpose of the Committee was

to promote the acceptance market,

he would not agree that increasing

the present limitation would work toward that end.



Mills said that he agreed completely with Mr.



He sensed that the Committee might drift into another

position from which extrication might be difficult due to the New
York Bank's having built up a portfolio of acceptances for open
market purposes rather than to foster the acceptance market as such.
Reports submitted by the New York Bank had indicated repeated in
ability to fill

orders from foreign accounts for bankers'


which puzzled him as to why a portfolio or acceptances was being
developed in

the face of an investor demand for their acquisition.

market conditions are now unsettled,

and as bankers'

acceptances are a vehicle for open market conduct that works on
the edge of the total securities market,


the System must be prepared,

to render assistance to the acceptance market.

Such being

the case, he felt that the limit for acceptance purchases should be
temporarily raised to $75 million as an emergency measure.

Allen said that he had no quarrel with Mr.




he hoped that the New York Bank would meet requests

for acceptances because that seemed necessary to build up the ac
ceptance market.

Hayes commented that the New York Bank could get out of

acceptances very easily within a few weeks.
nothing irreconcilable

He stated that there was

between the two objectives of fostering a

wider acceptance market and conducting acceptance operations in a
manner consistent with activity in

the System Open Market Account.



On the point of helping the acceptance market, he suggested that

was of assistance over a period of time for the New York Bank

to be in

that market, and that the Bank was properly using the

acceptance authority as a money market instrument.

The fact that

customers occasionally were unable to obtain all the acceptances
they wanted did not mean to him that the Reserve Bank should get
out of the market.



was going to be in the market, it

be a more or less reliable factor.



he pointed out,

foreign correspondents want to sell acceptances but the New York
Bank should not be prepared necessarily to take them; rather, it
should be a steady and encouraging factor in

the market.

Mr. Robertson said he was inclined to feel, as he had
before, that the System had no business in this field at all.
When the matter came up previously, he understood that the purpose
of purchasing acceptances would be to show an interest in this area
of financing,

and to participate actively in the acceptance market

seemed to him to be an entirely different thing.
the first

This, he said, was

time he had seen any indication that what the New York

Bank was trying to do was to increase acceptance holdings consistent
with increased holdings of Government securities,

and he could see

no relationship at all between the two types of holdings.

He sug

gested that a moving up of the limitation to $75 million might
result in

and he
substantial control of the acceptance market,



saw no merit in


The trend,

he said, should have been in


other direction, using $50 million not as a target but as
a ceiling.

was his view that holdings of the New York Bank should be reduced

and that competitive factors should be allowed to determine the
extent of acceptance financing.

Hayes said he differed strongly from the view that

holdings of 5 per cent represented control of the market.


of $50 million, he pointed out, represented a much larger share of
the acceptance market when the existing authority was given than it
represented now.
Chairman Martin said he had not changed his own view that
the System should be friendly to the acceptance market.

He would

like to see that market promoted and developed in any way possible.
In view of the differing opinions expressed during this discussion,
he suggested that the topic be held over for another meeting of the

and there was agreement with this suggestion.

There had been distributed at the beginning of this meeting
copies of a letter addressed to Chairman Martin by Congressman
Wright Patman under date of July 2, 1958, in which Mr. Patman referred
to the record previously furnished him showing each transaction in the
System Open Market Account during the period from March 1951 to the
end of 1956 and requested that a similar record be furnished covering
transactions during the calendar year 1957.


Patman noted that



in a letter dated January 7,


Chairman Martin had stated that

the Open Market Committee felt that it

should withhold such informa

tion until after the Board's Annual Report for the year 1957 had been
issued, but offered to supply the data thereafter.
Following a brief discussion, it

was agreed that the informa

tion should be prepared and transmitted to Congressman Patman pursuant
to his request.
At the suggestion of Chairman Martin, Mr.

Riefler, who had

recently returned from England, commented informally on the new
liquidity control system announced in

the House of Commons last week.

Under this relaxation of the British Government's credit control
policy, banks would not have to restrict the total level of their
advances to any given figure after the end of this month.


control of total advances would be retained by normal monetary
measures, reinforced by a new arrangement under which the Bank of
England would,



restrict the liquidity ratio of the

banking system by calling for special deposits.

was agreed that the next meeting of the Federal Open

Market Committee would be held on Tuesday, July 29,
Thereupon, the meeting adjourned.



at 1000 a.m.