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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, D. C., on Tuesday, June 13, 1950, at 2:15 p.m.
PRESENT:

Mr. McCabe, Chairman

Mr. Sproul, Vice Chairman
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

Davis
Draper
Eccles
Erickson
Peyton
Szymczak
C. S. Young
Mr. Morrill,

Secretary

Mr. Carpenter, Assistant Secretary
Mr. Thomas, Economist
Messrs. Peterson, Stead, and John H.
Williams, Associate Economists
Mr. Rouse, Manager, System Open Market
Account
Mr. Thurston, Assistant to the Board
of Governors
Mr. Riefler, Assistant to the Chairman,
Board of Governors
Mr. Sherman, Assistant Secretary
Mr. Ralph Young, Director, Division of
Research and Statistics, Board of
Governors
Mr. Youngdahl, Chief, Government Finance
Section, Division of Research and
Statistics, Board of Governors
Mr. Arthur Willis, Special Assistant,
Securities Department, Federal Reserve
Bank of New York
Messrs. Williams, Gidney, Gilbert, and Leedy,
alternate members of the Federal Open Market
Committee
Messrs. Leach, McLarin, and Earhart, Presidents
of the Federal Reserve Banks of Richmond,
Atlanta, and San Francisco, respectively
Mr. Wurts, Assistant Vice President, Federal

Reserve Bank of New York

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6/13/50

Upon motion duly made and sec
onded and by unanimous vote, the
minutes of the meetings of the Fed
eral Open Market Committee held on

February 28 and March 1, 1950, were
approved.
Upon motion duly made and sec
onded and by unanimous vote, the
actions of the executive committee
of the Federal Open Market Committee
as set forth in the minutes of the
meetings of the executive committee
held on March 1, April 12, and May

3, 1950, were approved, ratified, and
confirmed.
Before this meeting there had been sent to each member of the
Committee a copy of a report of open market operations prepared at
the Federal Reserve Bank of New York covering the period from March 1,
1950,

to June 7, 1950, inclusive.

Mr. Rouse commented briefly on this

report and also on a supplemental report covering commitments executed
for the System account during the period June 8 to June 12, 1950,
inclusive.

Copies of both reports have been placed in the files of

the Federal Open Market Committee.

Upon motion duly made and sec
onded and by unanimous vote, the
transactions in the System account
for the period February 28, 1950,
to June 12, 1950, inclusive, were
approved, ratified, and confirmed.
Chairman McCabe reported briefly on developments since the
last meeting of the Committee referring particularly to the letter
sent to the Secretary of the Treasury, pursuant to action of the

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6/13/50

executive committee of the Federal Open Market Committee, under date
of May 25, 1950, a copy of which had been sent to each member of the
Committee.

He stated that up to the present time no reply to that

letter and no comment with respect to the recommendations contained
in it had been received from the Treasury Department.
There followed a discussion of the relationship of Treasury
financing to System credit policy during which Mr. Sproul made a
statement substantially as follows:
System credit policy is restricted to a modest policy
so far as money rates are concerned. The older method of
substantial changes in rates is not practicable or necessary
in this situation. Since our policy must be a modest one,
it should be a timely and flexible one. We have tried to
base policy in the past on the whole situation and not on
one or a few indicators. There has been no change in our
policy since we changed last fall from a policy of ease
to one of neutrality. Meantime there has been a sub
stantial change in the economic situation, in business
sentiment, in private capital expenditures, in inventory
accumulation, and in prices. On the other hand, bank
credit has declined about seasonally during the spring,
and the Federal Reserve Banks and commercial banks have
moved about $3 billion of Government securities into

nonbank hands. There is the question which was discussed
during the spring of whether, in order to maintain the
economy at a sufficiently high level of production to
absorb the increasing labor force, we have to keep some
element of stimulation in it.
If we were convinced that we are experiencing a
balanced expansion in durable and nondurable goods we would
need to do nothing about it. But I do not think we are
having a balanced expansion. It is based too much on a
high level of activity in housing and automobiles, aided
by too easy terms for mortgage financing and consumer
credit. In these circumstances, the contribution of a
modest credit policy should be to try to restrain a too
rapid increase until the whole economy is in better

6/13/50

-4

balance. That calls for a firming of short-term
rates by 1/8 per cent as soon as the Treasury's

July 1 financing is out of the way. There should
be some further decline in prices of long-term
Governments and if we come to a situation when
we are faced with the decision whether to let
long-term bonds go below par, I would let them
go below par. The situation is very different
from the one existing the last time we faced this
question.
The Treasury needs for new money have been
reduced to about $1.8 billion for the fiscal year
with only a small amount needed in the third
quarter of this calendar year.

In this situation

there should be no embarrassment to the Treasury
in such firming of interest rates as we are
talking about. Such a policy would contemplate
breaking a 1-1/4 per cent one-year rate early in
July. It would be an indication of policy to the
money market and would facilitate some downward
movement of prices in the long-term market. It
should be followed quickly by some increase in
discount rates which would be a signal to the whole
financial community and to the public that there
has been a change in our policy in the light of
the changed business and credit situation. We
should continue to press for the Treasury getting
additional money so far as possible from nonbank
investors. In the circumstances, it makes no
difference whether the money comes from a marketable

or a nonmarketable bond but we should emphasize
the desirability of it coming from nonbank sources.

In the ensuing discussion Mr. C. S. Young raised the question
whether an increase in margin requirements would be desirable in
view of recent rises in prices of stocks and stock market activity.
Chairman McCabe stated that the Board had considered this
matter at a meeting this morning and that it had come to the con
clusion that no change in margin requirements was desirable at this

6/13/50
time.

-5
At his request there were distributed copies of a confidential

memorandum prepared in the Division of Research and Statistics of the
Board of Governors under date of June 8, 1950, with respect to the
question of margin requirement policy.

There then followed a visual presentation of the economic
situation by members of the staff of the Board's Division of Research
and Statistics.
Following the visual presentation, Mr. Thomas made a statement
regarding what the analysis signified in terms of Federal Reserve
policy.

He stated that recent developments appeared to have many of

the aspects of a boom, that a substantial volume of business capital
expenditures had been taking place and some contraction might now be
expected, that increased consumer buying of consumer durable goods and
housing was proceeding at a rate which probably would not be sustained,
and that rises in prices of an unexpected and most alarming character
had taken place during the last four months.
said, had taken place in real estate,

Credit expansion, he

consumer credit, and the stock

market at a rate more rapid than at any other time in the postwar period,
and if business credit should increase even at a seasonal pace the
overall expansion would be almost unprecedented.

Mr. Thomas also

said that, reflecting the policy of selling Government bonds from the

System account, bank credit in U. S. Government securities had con
tracted thus far this year, that that had had a stabilizing influence,

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6/13/50
but that if

the trend should be reversed accompanying a continuation

of the expansion of credit in other fields there would be cause for
alarm.

He added that the rise in prices of real estate and commodities

of the type now occurring and under conditions now existing was a
clear indication of an unhealthy situation, and the expansion in
credit had been sufficiently broad to justify the use of general
quantitative powers of credit restraint without emphasis on selective
credit controls.
After discussing existing limitations on Federal Reserve
actions, Mr. Thomas suggested policies which might be considered by
the Committee.

These included the purchase of short-term securities

more reluctantly with consequent rises in short-term rates after
July 1, an increase in the discount rate of the Federal Reserve
Banks, a recommendation to the Treasury that new money to finance
the Government deficit be obtained through the issuance of a non
marketable bond,

and that securities maturing in September be

refunded with an intermediate-term bond.

He added that sales of

long-term bonds for the System account probably should be discontinued
in the event the Treasury issued a nonmarketable long-term bond and
that in the event of a decline in bond prices the policy of the
System should be to maintain orderly markets but avoid rigid support
of prices.
There followed a discussion of the economic situation during

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6/13/50

which Mr. John H. Williams stated that he felt the present offered
an almost unparalleled opportunity for the System to do something to
follow up the statement issued by the Federal Open Market Committee on
June 28,

1949, as there might never be a time when we could act with

less embarrassment to the Treasury.

For reasons which he outlined,

he felt that nothing would be as well understood by the public or
carry as much conviction as an increase in the discount rate.
Mr. Stead suggested the possibility that the estimates of
employment were on the optimistic side and that in the next few months
we might experience some increase in unemployment.
not be serious in relation to total employment,
pressures for steps to counteract that trend.

it

While this might
might result in

A related subject, he

said, was the indication of lower agricultural production resulting
from insect infestation which would reduce farm income, and a third
weakness was the rate of increase in consumer and mortgage credit
which indicated that we are sustaining a high level of consumer
expenditures and incomes by a rapid increase in consumer credit.
These points made him more inclined to question whether the present
upsurge could be sustained.
Mr. Peterson questioned whether there was sufficient optimism
in the whole economy to sustain an accelerating boom for any length
of time.

He suggested that there was a feeling of caution among small

businessmen which would dampen the current inflationary boom.

-8

6/13/50

Mr. Evans joined the meeting during the foregoing statements,
having just arrived in Washington from the West.
During consideration of the suggestions that had been made
earlier in the meeting concerning credit policies that might be adopted,
Mr. Sproul stated that in the light of all of the factors in the
situation it

seemed to him that as soon as the Treasury's July 1

refunding was out of the way the System should follow a policy of
bringing about a rise in short-term rates looking to an issuing rate
of 1 3/8 per cent on one-year Treasury certificates in September.
He felt that the increase in short-term rates would be a signal to
the financial community of a change from the policy of neutrality
adopted in the fall of 1949, that to make clear to the public the change
in policy there should also be a prompt increase in the discount rate
of the Federal Reserve Banks probably about mid-July, and that these
actions should be accompanied by continuing to supply long-term bonds
from the open market account although, as suggested by Mr. Thomas,
the release of securities might be modified in the event the Treasury
issued a long-term bond.
bonds,

With respect to prices of long-term Treasury

Mr. Sproul did not think the Committee was now faced with the

problem of whether such securities should be allowed to fall below
par but that he now felt that if

that question should arise during

the next few weeks they should not be supported at par.
Mr. Eccles stated that he felt the first

thing to do was to

make every effort to induce the Treasury to finance the deficit and

6/13/50

-9

if possible to refund some of the maturing securities with funds
obtained from nonbank investors, and that to that end the Committee should
recommend to the Treasury that it

issue as soon as possible a nonmarketable

15-year 2-1/2 per cent bond on a tap basis.

As a part of the program,

he felt that the Committee should do what it

could to increase the short

term rate so that the September and October refunding of the Treasury
would be done on the basis of a 1 3/8 per cent one-year certificate
rate.

He recognized that to be most effective an increase in short

term rates should be accompanied by a rise in the discount rate.

How

ever, he questioned whether the Federal Reserve Banks should increase
the rate as soon as suggested by Mr. Sproul.

Such action, he said,

would increase the spread between the discount rate and the short-term
rate on Government securities which would discourage the use by member
banks of the discount facilities of the Reserve Banks to adjust their
reserve position from week to week.

While he did not anticipate that

long-term bonds would decline to par in the near future, he suggested
that if prices declined to around 100-1/2 the Committee review its
policy before testing the market closer to par.
Mr. Evans said that he did not think at the moment that the

Committee was faced with the problem of allowing long-term securities
to decline below par and that should that question arise there should
be another meeting of the Committee.
Comments of the other members of the Committee and of the

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6/13/50

Presidents of the other Federal Reserve Banks

indicated general

agreement with the suggestion for an increase in short-term rates and
continuance for the time being of the present policy of making long
term bonds available from the System account.
The meeting then recessed and reconvened on Wednesday,

June

14, 1950, at 10:10 a.m. with the same attendance as at the close of
the session on June 13 except that Mr. Thomas was not present.
Chairman McCabe referred to the instructions to be issued to
the executive committee with respect to sales of long-term bonds from
the System account and to the understanding at the meeting on March
1, 1950, that, operating under the general direction issued by the
Federal Open Market Committee to the executive committee, and within
the limits imposed by the terms of Treasury financing and by the
necessity of avoiding a loss of confidence in the long-term Government
securities market, the executive committee would continue to sell long
term securities from the System account unless and until there was a
change in the business situation which made it
that policy.

undesirable to pursue

He suggested that, in the light of the discussion at the

session yesterday afternoon, the executive committee be authorized to
continue to carry out that understanding until the price of the longest
restricted Treasury bond reached 100-1/2, at which time sales would be
discontinued and,

if

the market continued weak, the executive committee

would be authorized to purchase such securities at declining prices as
might be necessary to preserve orderly market conditions.

-11

6/13/50

There was a further discussion of the timing of an increase
in the discount rate at the Federal Reserve Banks and, while it

was the

consensus that the increase should not be made effective until the
short-term market rate increased somewhat, there was no decision on the
question what level in the short-term rate would call for discount
rate action.

Mr. Sproul thought the action could be taken about the

middle of July.
Turning to the question of current Treasury financing needs,
Chairman McCabe suggested that he and Mr. Sproul be authorized to
supplement the suggestion contained in the letter to the Secretary of
the Treasury dated May 25, 1950 by urging that the Treasury issue
promptly a nonmarketable bond of the series A type, and that the
question whether there should be a further written communication to
the Treasury be left for determination by himself and Mr. Sproul
following the meeting with the Secretary.
The foregoing suggestion was

approved by unanimous vote.
In considering the general direction to be issued to the
executive committee,

it

was suggested that there be added to the

second paragraph a sentence which would provide that the authority
to arrange for purchases of securities directly from the Treasury
would terminate on June 30, 1950, unless the authority of the Federal
Reserve Banks to effect such transactions was extended by the Congress.

6/13/50

-12-

With respect to the limitations contained in the direction, Mr.
Rouse stated that the present limitations appeared to be satisfactory.
Thereupon, upon motion duly made
and seconded, the following direction
to the executive committee was ap
proved unanimously with the under

standing that the limitations con
tained in the direction would include
commitments for the System open mar
ket account:
The executive committee is directed, until other
wise directed by the Federal Open Market Committee, to
arrange for such transactions for the System open market
account, either in the open market or directly with the
Treasury (including purchases, sales, exchanges, re
placement of maturing securities, and letting maturities
run off without replacement), as may be necessary, in
the light of changing economic conditions and the general
credit situation of the country, for the practical
administration of the account, for the maintenance of
orderly conditions in the Government security market,
and for the purpose of relating the supply of funds in
the market to the needs of commerce and business; provided
that the aggregate amount of securities held in 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 $2,000,000,000.
The executive committee is further directed, until
otherwise directed by the Federal Open Market Committee,
to arrange for the purchase for the System open market
account direct from the Treasury of 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 in the account at any
one time shall not exceed $1,000,000,000. The direction

in this paragraph will terminate on June 30, 1950, unless

the authority of the Federal Reserve Banks to purchase
securities directly from the Treasury is extended by
the Congress.

6/13/50

-13
The policy to be followed in the replacement of System

maturing bill holdings was then discussed and it was agreed unanimously
that no change should be made in the existing understanding that the
executive committee would be guided by what would be required in the
light of current conditions in the money market to carry out the
general credit policy of the Federal Open Market Committee.
In connection with the ranges within which bills and certificates
would be purchased by the Federal Reserve Bank of New York for the
System account,

it

was suggested that the Federal Open Market Committee

continue the existing authority to the executive committee to determine
from time to time the ranges within which such purchases would be
made, with the understanding,

however, that after July 1, 1950, the

upper limit of such ranges would be increased from 1.24 to 1.36 per
cent, and that the authority would continue to be exercised within the
framework of the general credit policy of the Federal Open Market

Committee.
Upon motion duly made and sec
onded and by unanimous vote, this
suggestion was approved.
A draft of a statement of policy
to guide the executive committee in
relation to transactions in long-term

bonds, designed to conform to the
views expressed in the discussions of
the Committee earlier in this meeting,
was presented, and after discussion
was approved unanimously in the follow
ing form:

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6/13/50

Operating under the general direction issued by
the Federal Open Market Committee to the executive
committee, the executive committee is authorized to

continue to sell long-term securities from the System
account unless and until there is a change in the
business and credit situation, or the Treasury issues
new securities to finance the deficit, which would
make it undesirable to pursue the policy further.

Should the price on the longest restricted issue
decline to between 100-1/2 to 100-3/4 the executive
committee would direct only such operations as were
necessary to maintain orderly market conditions
pending a meeting of the Federal Open Market Committee
which would be called promptly to consider, in the
light of the statement approved at the meeting on
June 28, 1949, how far any further decline that would
be brought about by market conditions would be
permitted to go.
It

was understood that the next meeting of the Presidents'

Conference would be held in Boston on September 21 and 22 and that the
next meeting of the Federal Open Market Committee and the joint
meeting of the Presidents and the Board would be held in Washington
on September 27 and 28, 1950, unless developments made it

necessary

to call a meeting of the Federal Open Market Committee before that
time.

Thereupon the meeting adjourned.

Secretary.

Chairman.