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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, June 18, 1957, at 10:00 a.m.
PRESENT: Mr. Martin, Chairman




Vice Chairman

Messrs. Fulton, Irons, Leach, and Mangels, Alternate
Members of the Federal Open Market Committee
Messrs. Erickson and Johns, Presidents of the Federal
Reserve Banks of Boston and St. Louis, respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Sherman, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Thomas, Economist
Messrs. Atkinson, Bopp, Marget, Mitchell, Roelse,

and Tow, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Koch, Assistant Director, Division of Research
and Statistics, Board of Governors

Mr. Gaines, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Williams, Assistant Director, Division of Re
search and Statistics, Board of Governors
Mr. Daane, Vice President, Federal Reserve Bank
of Richmond; Mr. Einzig, Assistant Vice
President, Federal Reserve Bank of San
Francisco; Mr. Balles, Assistant Vice Presi
dent, Federal Reserve Bank of Cleveland;
Mr. Walker, Economic Adviser, Federal Reserve

Bank of Dallas; and Mr. Hastings, Economist,
Federal Reserve Bank of St. Louis



Chairman Martin stated that while Mr. Ralph Young, Associate
Economist for the Committee, was in

Europe it was contemplated that

the economic review which Mr. Young usually presented at meetings of
the Committee would be given by Messrs. Williams, Noyes, or Koch of
the Division of Research and Statistics of the Board of Governors.
He suggested that they be invited to attend the meetings and there
was no indication of disagreement with this suggestion.
At this point Mr. Williams, Assistant Director of the Division
of Research and Statistics of the Board of Governors, entered the room.
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on May 28, 1957, 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 March 5 through
June 11, 1957, as well as a supplementary report covering commitments
executed June 12 through June 17, 1957.

Copies of both reports have

been placed in the files of the Federal Open Market Committee.
Mr. Rouse reported that reserve positions had worked out just
about as projected at the last meeting of the Committee.
reserves averaged $572 million in
$44 6 million in

Net borrowed

the week ended May 29, slipped to

the June 5 week as the Treasury's balance dipped briefly,

and were $570 million in the week of June 12.

The composition of the

reserve statistics changed significantly during these three weeks.



Member bank borrowing increased to a range of $1-1/4 billion in
contrast with $900 million or so a few weeks ago.

At the same

time, some of the reserve tightness shifted to the New York banks,
affecting the money market and the market for short-term Government
The additional three weeks of tight money market conditions
had tended to have a cumulative effect on the securities markets,
Rouse said.

He described the Government securities market as being

a very tender condition.

Price declines had been orderly, but the

market background was one of real nervousness.


new issue rates in

Meanwhile, the increase

the capital market had gone on apace; yesterday

an A-rated utility issue was brought to market at a reoffering yield
to investors of 6 per cent.

Market rates of interest on U. S. Govern

ment securities had not adjusted fully to the rising new issue rates,
but they touched new lows yesterday, with the 2 -1/2's of 1961 and
1963 quoted to yield above 3.80 per cent and the 1-1/2's of 1962 at
a yield of 3-7/8 per cent.

Dealers reported that there really had

been no market during the rapid price markdown; it was only necessary
for potential sellers to indicate an intention to sell in order to
move prices 1/8 of a point or so lower. Mr. Rouse also noted that
in recent days there had been increased attempts to liquidate Govern
ment securities, these coming from smaller insurance companies,
savings banks, and, increasingly, from commercial banks.

The new

issue of Treasury bills auctioned yesterday was awarded at an average



rate of 3.404 per cent, another new high but nonetheless a lower rate
than many dealers had expected;

dealers were awarded only slightly

more than $300 million of the new bills.

With respect to the rapid

interest rate adjustment that had occurred in recent weeks,

Mr. Rouse

remarked that a report had reached him from a private source that some
underwriting houses were approaching bankruptcy because of the losses
they had taken in recent unsuccessful issues; however, he said that
his check of this report showed that while some losses had been sizable
the report that there was danger of bankruptcies just was not so.
Mr. Rouse added that discussion in market circles on the course
of interest rates had been influenced recently by discussion of the
possibility of an increase in the prime rate and/or the discount rate.

the leading New York banks had decided, at least for the

time being, to wait for the Reserve Banks to increase discount rates
before they moved on their prime rates.
Turning to the Treasury's financing problem,

Mr. Rouse pointed

out that the Treasury faced both a new money and a refunding operation.
Mr. Burgess, Under Secretary of the Treasury,

had called him on two or

three occasions to discuss the program, but the last time they spoke
he (Mr.

Burgess) was still

It was probable,

not clear on the course he should follow.

however, that the cash offering would consist of be

tween $2 and $4 billion of a March 1958 tax anticipation issue.


Treasury had not invited the Investment Bankers Association and American
Bankers Association committees to sit

in on the discussions of the cash



financing, but they had been invited for preliminary discussions on
the refunding.


Rouse mentioned that one dealer had recommended

that the refunding be a cash operation, with 100 per cent allotment
to holders of the "rights."
attrition in this way.

The Treasury would attempt to avoid


a possible legal problem for the

Federal Reserve System which he would discuss with Mr. Hackley might
arise under this suggestion, i.e.,

whether a subscription by the

System on the proposed terms would constitute an exchange or a cash

The proposed plan would call for payment through Tax

and Loan Account for that portion of the new issue subscribed in


and the funds to redeem securities not presented in payment for the
new issues would have to come from calls upon existing balances.

under this plan the borrowing in

early July would have to

be large enough to cover the cash redemptions on the maturing issues.

Rouse noted that the proposed plan also had certain tax advantages

claimed for it

that might make it

more attractive to investors.

At the conclusion of his remarks,

Mr. Rouse told the Committee

that the report on fiscal agency relations between the Federal Reserve
Bank of New York and the Treasury,

requested at the May 7 meeting,

would be ready for mailing to the members of the Committee in about
ten days.
Chairman Martin supplemented Mr. Rouse's comment with the
statement that Under Secretary Burgess had called him on the telephone

late yesterday afternoon to say that he was contemplating a $3
billion March tax anticipation issue, to be sold at auction, the
announcement to be made on Thursday or Friday of this week.
The Chairman went on to comment that he felt the Account
Management had kept the market in good shape during this period
and that it looked as though we would go into this Treasury financ
ing without having had the market ease perceptibly imediately before
the offering.
Mr. Rouse said that he was afraid that the situation would be
come slightly easier next week, but he did not think there was much that
the Account could do about such a development.

Upon motion duly made and seconded,
and by unanimous vote, the open market
transactions during the period March 5
through June 17, 1957, were approved,
ratified, and confirmed,
Chairman Martin called upon Mr. Williams of the Board's staff,
who made a statement on the economic situation substantially as follows:
Over-all economic activity is continuing its slow but
persistent rise from the record levels reached last winter.
Broad dollar value measures, such as the gross national
product, are reflecting both higher average prices and
small further gains in real output. Total activity has
been expanded by further extension of the capital goods
boom, steady increases in service activities, a very high

level of exports, and further growth in Federal, State and
local government outlays.
Meanwhile, business has been following a cautious
inventory policy. In physical volume, a shift from sub
stantial accumulation of inventories to small liquidation
was registered in the first quarter. Inventory liquidation
is apparently continuing in the current quarter. Reflecting
the change in inventory policy and other developments,

selective downward adjustments have been going on in
industries producing such products as household durable
goods and automobiles. These, in turn, have contributed
to lower output of steel and some other materials. These
various adjustments have been reflected in a decline in
the index of industrial production from 146 in February
to 143 in May. At the May level, however, the index was
2 points higher than in May and June last year.
Very recently--in late May and early June--there were
signs of some firming up of production in key industries.
Steel production rates have risen slightly, auto assemblies
have increased contra-seasonally, and output of some house
hold durable goods seems to have been picking up. These
developments indicate a probability that the index of indus
trial production for June will hold at the May level.
The general level of wholesale prices advanced slightly
from mid-May to mid-June to a new high, as prices of farm
products and foods increased further. Prices of industrial
commodities continued to show little
change from the level
which has prevailed since February. Price changes for basic
industrial materials have been mixed. In recent weeks, zinc
and lead prices have decreased while prices of steel scrap
have advanced sharply again. Consumer prices have been con
tinuing their steady rise and in May were estimated to be
nearly 4 per cent higher than a year earlier.
Taking account of changes in the physical measures of
activity and in prices, it is now anticipated that the
balance of forces will result in a further rise in the gross
national product in the current quarter. The gain is likely
to be moderate, amounting perhaps to a seasonally adjusted
annual rate of about $3 billion. If realized, this would
bring gross national product to $430 billion, or higher.
This level would represent a rise of about $22 billion, or
5 per cent, from a year earlier.
Higher prices and living costs are contributing directly,
through escalator clauses, and otherwise, to higher wage rates.
At factories, wage rates have risen further this year but hours
of work are lower and overtime pay is less. Average hourly
earnings at $2.06 in May were only 1 cent higher than at the
end of last year and weekly earnings have declined. At the
same time, output per manhour has been rising rapidly as fur
ther growth and modernization of industrial capacity have
facilitated more efficient operations.
Throughout th recent period of rolling adjustments at
very high levels, businessmen have been consistently opti
mistic in their plans for the future. An optimistic attitude

been reflected recently in

further increases in stock

market prices to new highs for the year.

Underlying business confidence also has been shown by
the latest Commerce-SEC survey of plans for plant and equip
ment outlays.
This survey indicates a rise in fixed capital
spending through the third quarter. At $37.9 billion, the
seasonally adjusted rate of such outlays would be $2 billion,
or 6 per cent, higher than in the third quarter of last year.
Construction activity in May rose further to a new record
level, with increases reported in most types of nonresidential
construction. Outlays for residential building were off
further but, more importantly, new housing starts in May rose
to an annual rate of 990,000 units, the highest in several
Consumers continue generally confident as personal in
comes have risen further to a level 5 per cent above a year
Total retail sales rose slightly in May with sales of
automotive dealers showing the first
rise since last December.
New car sales were especially strong in the latter part of
May and in early June apparently were holding up well. Used
car sales and prices have been continuing strong. Instalment
credit outstanding increased $200 million further in April,
on a seasonally adjusted basis, and a rise of somewhat similar
magnitude is likely for May.
Unemployment is relatively low and has shown mainly sea
In May, at 2.7 million, it was about
sonal changes this year.
Nonfarm employment also has shown
the same as a year earlier.
mainly seasonal changes this year and in May was 770,000 larger
The stability in the nonfarm total reflected
than in May 1956.
growth in nonmanufacturing activities offset by declines in
manufacturing employment.
Abroad, economic activity has continued at very high levels
in recent months, with further expansion taking place in major
Upward pressures on prices have generally
European countries.
persisted although indexes of both wholesale and retail prices
in several industrial countries were relatively stable through
In recent weeks new
four months of the year.
the first
measures have been taken in a number of countries to restrain
inflationary pressures, and credit restraints have been
generally maintained or tightened further.
Chairman Martin next called upon Mr. Thomas for a review of recent
credit and financial developments,

and Mr.

Thomas presented the following


Recent developments in financial markets present a test
of the effectiveness of monetary policy to curb inflation in



the face of strong credit demands and large and widespread
public debt holdings.
We are still
experiencing the con

sequences of the liquidity built up in the war and early
postwar periods.
Slowing down of the expansion in bank
credit, particularly in bank loans, compared with the two
previous years, may be taken as an indication of the re
straining effect of credit policies.
Demand deposits and
currency have shown only a moderate rate of growth for the
past two years.
On the other hand, the liquidity imparted
to the economy by prior increases in deposits and by the
large holdings of marketable and redeemable Government
securities has permitted a continued growth in the turn
over of money.
Demands for goods and services, as well as
for money, have continued to press upon available resources,

and retail prices and wages still show rising tendencies.
Attempts to raise cash by liquidating Government securi

ties, represented by shifts in ownership and by cash redemp
tions of maturing and redeemable issues, which necessitate
frequent Treasury borrowing, have put a great strain on the
Government securities market. In a situation of large in
vestment demand in excess of the supply of savings, together
with restraint on bank credit expansion, the Government
securities market bears the ultimate brunt of the demand
pressures. For the Federal Reserve to offset the effect of
these pressures by coming to the support of that market would
have the effect of supplying indirectly to the money market
in general the funds that it has been the intent of policy
to deny.
Expansion of bank loans has unmistakably slowed down this
year, compared with the high record of the two preceding years,
and has been somewhat below the average for the corresponding
At the same time the offsetting decline
period of other years.
in bank holdings of Government securities has been much less
Total loans and investments
than in the two previous years.
of banks have probably shown a slightly smaller decline than
the half-year average for previous periods, although precise
seasonal measures are difficult to compute.
Demand deposits and currency have increased at an annual
rate of a little over 1 per cent in each of the past two
Time deposits have shown a much larger
twelve-month periods.
increase this year than in other recent years, reflecting

some shift from demand deposits.

The turnover of demand

deposits has continued to increase, showing an expansion of
nearly 5 per cent in the past twelve months on top of an
increase of 7 per cent in the preceding year. Performance
of the economy indicates that, while monetary growth has



been moderate, it has been fully adequate, and perhaps
more than adequate, for the economic activity that we
can have on the basis of existing resources.
Business corporations continue to raise large amounts
of funds through public offering of securities and private
placement of long-term loans with nonbank lenders.
appears that new capital issues in June will equal a record
figure of $1.4 billion, bringing the half-year total also
to a new record of over $6.5 billion. These offerings are
being made at higher and higher yields.
In many cases,
underwriters have been unable to move issues at the prices
at which they were offered. As a result of pressures on
capital markets interest rates and bond yields on existing
issues have risen to or above the high levels reached last
December and January.
In the face of the weakening market, some planned issues
by States and local governments have been curtailed or deferred,
and the total volume of such issues reduced somewhat. Borrow
ing on home mortgages has declined from the high records of
previous years. The large backlog of loans from banks on
warehoused mortgages has been reduced somewhat.
In the aggre
gate, total expansion of private credit, including that of
State and local governments, has probably been somewhat less
than in 1956 and much less than in 1955, but the United States
Government has released fewer funds through debt retirement
than it did last year.
Recently prices of common stocks and stock market activity
have increased again. This rise has ominous implications.
Yields on stocks at current prices and dividend rates--averaging
about 3.8 per cent for high-grade issues--are low relative to
long-term interest rates. Prospects for higher profits and
dividends, in the face of the wage-price squeeze, are not bright,
Further rises in stock
even with rising prices for products.
prices in the face of this situation may be interpreted as an
indication of an inflationary climate of opinion--of widening
acceptance of the idea that inflationary trends will continue.
Increases in farm land values may have a similar implication.
It is in this sort of climate that Treasury debt-management
and Federal Reserve credit policies for the near future have to
During the half year about to end, the Treasury
be determined.
has had a cash surplus of about $9 billion, which is $2.5 bil
The Treasury
lion less than in the same period of last year.
has had to meet redemptions of securities, including tax
anticipation issues, savings bonds, and attrition in maturing
issues, aggregating more than $13 billion--$4 billion more
than a year ago. Thus, the Treasury has borrowed new money
in the market amounting to nearly $6 billion this year,



compared with no new borrowing last year, and has shown a
smaller increase in its cash balance. In the next half year,
the Treasury deficit may be slightly larger than in the same
period of 1956, and cash redemptions of securities are likely
to continue greater and could be very much greater if there
should be a wave of redemption of savings bonds. New money
borrowing may well equal $10 billion or more, compared with
gross borrowing of $7.5 billion in the same period last
year. These amounts include offerings to replace maturing
tax bills, as well as attrition in other maturing issues,
redemptions of savings bonds, and the deficit. Maturing
issues to be refunded, including tax bills now outstanding,
exceed $25 billion for the July-December period, of which
$14.4 billion are held by the Federal Reserve.
The Treasury's task is to offer securities with yields

and terms that will attract funds from other uses.


rates will need to be higher than those previously offered.
The task of Federal Reserve policy is, while making possible
bank underwriting of occasional Treasury issues, to avoid
supplying the over-all economy with additional reserves in
amounts that will encourage inflationary expansion. To the
extent that bank holdings of Government securities increase,
the seasonal growth in other types of bank credit should be
smaller. Over-all monetary expansion must be kept within
moderate bounds if further inflation is to be avoided.

This can probably best be accomplished by making it
necessary for banks to borrow substantial amounts in the

aggregate-perhaps as much as $1 billion at the Federal
Reserve, unless this should prove unduly restrictive.


serves might be supplied in sufficient amount to keep borrow

ings down to this level as long as credit expansion continues
moderate. Should expansion accelerate on the basis of in
creased bank borrowing from the Federal Reserve, then a dis
count rate increase to as much as 3-1/2 per cent would be in
The record of the past three months indicates that the
tighter policy followed, while restraining in its effect, has
not been too restrictive. Monetary expansion has continued
and it is evident that rising interest rates have reflected
the pressure of strong credit demands. Under the existing
conditions and attitudes, it is clear that a firm policy of
restraint should be continued.

Mr. Hayes then made a statement on the business and credit situa
tion and on credit policy, and his comments are set forth below.



The business situation has changed very little
our last meeting. While it continues basically strong,
especially in the area of demand for final products, most
measures of physical activity suggest either a sideways or
a slight downward movement.
I have in mind such items as
the Federal Reserve index of industrial production, total
manufacturing employment, and average hours worked per week.
There has been no significant progress in the country's real
output now for more than six months; and most statistical
data foreshadowing future levels of business activity are less
favorable than those reflecting current activity. Hence the
trend of physical activity seems more likely to be downward
than upward for at least the next two or three months.
I am impressed especially by the rather convincing
evidence that the investment boom is cresting out, S.E.C.
figures on estimated total plant and equipment expenditures,
seasonally adjusted, show only a slight gain from the second
to the third quarter, and this may be more than accounted for
by the price element. At the same time, plant and equipment
expenditures of manufacturing concerns are expected to decline.
Data on new orders and unfilled orders for durable goods,
industrial construction awards and machinery orders all point
in the same direction.
Somewhat paradoxically these developments coincide with
continued business optimism marked by some signs of speculative
attitudes, particularly in the stock market, which appear to
suggest considerable acceptance of the thesis that further
inflation is inevitable despite our best efforts.
In the area of prices, the last three weeks have witnessed
some pronounced cross-currents, with strength in meat and steel
scrap prices for example, and continued weakness in non-ferrous
metals. While wholesale prices have stabilized for the moment,
this stability, such as it is, is clearly jeopardized by the
prospective increases in steel prices and freight rates.
Thus on balance
sumer prices have been steadily edging upwards.
the price situation still seems to contain serious inflationary
Credit demands remain strong both for business capital out
lays and short-term business needs--as well as for housing and
other consumer purchases--but present pressures are more pro
nounced in the capital markets than in the shorter term lending
field. There has certainly been no reflection to date in the
capital markets of the apparent "cresting out" of plant and
equipment expenditures, but it would be natural to expect a
Bank loan expansion con
considerable lag in any such effect.
tinues to run well below
As the Chairman pointed out at the last meeting, the
Treasury's financing problems over the next few months are

-13grave enough to call for very careful attention by the

Federal Reserve System.

Not only is the Treasury faced

with the need to borrow $10 to $11 billion cash between
now and the end of the year, including perhaps $4 billion

in the very near future, but they also must handle large
refunding operations in August and October--and in the
background is the fear that the rising level of interest
rates will bring accelerated savings bond redemptions.
Coming to the question of credit policy, it seems to
me that a sideways or slightly declining business trend,
with some prospect of further weakening, clearly suggests
that credit restraint should not be intensified. But at
the same time, the continuing threat of upward price pressures
and the speculative attitudes to which I have referred indi
cate that it would be unwise to reduce the degree of restraint
we have been maintaining. I do think it worth while pointing
out that in time we may be confronted with a serious dilemma
if prices continue to rise while utilization of material and
labor resources remains level or moves downward. With the
projections pointing to net borrowed reserves of nearly $900
million in the week of July 3rd and more in the following
week, with no allowance in either case for reserves required
to support bank purchases of the new Treasury offering, it
seems clear that sizable purchases of bills will be necessary
in the near future. It would be my judgment that in view of
the acute unsettlement in the bond market and the tightness
in the money market, and in view of the general business
situation already discussed, it would be quite unwise to
increase pressures by forcing the banks to borrow a major
part of the reserves needed for this Treasury underwriting.
The success or failure of the August Treasury refunding will
be greatly influenced by the policies we follow with respect
Thus it is my opinion that we should
to this cash operation.
be ready to provide, through open market purchases, most of
the reserves needed for the midyear period and the bank
underwriting operation.
As for the amount of our purchases, there may be more
than usual danger in adhering too closely to a specific target
for net borrowed reserves, such as $500 million, in the period
The imminence of the very large Treasury
under discussion.
transactions, together with seasonal influences, might call
for even larger purchases than the projections suggest in
order to prevent increased tightness. On the other hand, it
is possible that the day to day open market purchases of bills
during the period of strain may have sufficient market effect
so that a somewhat higher figure for net borrowed reserves



would bring no real increase in tightness.

It seems to me

that the Manager should be accorded considerable leeway to
guide his operations by the "feel of the market." As for
timing, the open market purchase program should probably
commence about a week from now, when the bank reserve posi
tion is expected to tighten rapidly, and should proceed with
some consistency and regularity.
In the New York Bank we have given careful consideration
to the questions raised at the last meeting concerning the
discount rate and to the reasons advanced at that time for the
possible desirability of considering an increase. It seems to
me inevitable that an increase in the discount rate would be
looked upon as a signal that we believe a more severe policy
of restraint than the one we have been following is now in
order. There is nothing in the business and credit situation,
in my view, to warrant such a signal, nor is there evidence
that member banks generally are attempting to profit by the
present differential. The other argument which has been ad
vanced for consideration of a rate increase is that it might
accelerate the current rate adjustment in the capital markets
and thus encourage an equilibrium interest rate structure on
which the Treasury could base its financing. I think it would
be preferable to keep the discount rate as a drag or anchor
upon the short-term end of the rate structure while natural
forces of supply and demand are bringing an adjustment in
longer term rates. An increase in the discount rate would
tend to move short-term market rates higher, thus narrowing
the gap between long and short-term rates, whereas there are
real advantages in maintaining a broad gap in order to improve
the Treasury's chances of accomplishing a funding operation,
which it is to be hoped will include an appropriately priced
medium term issue. Furthermore, there is always the chance
that a higher discount rate might have the effect, on balance,
of prolonging the upward adjustment of capital market rates.
All this leads me to conclude that a discount rate change at
this time would be definitely disruptive.
I think that the wording of the directive might appropri
ately be retained in its present form.
Mr. Johns' statement of his views, next presented, was substan
tially as follows:
At the meeting of the Federal Open Market Committee on

May 28 the question arose whether the time had arrived for a
change in the discount rate in an attempt to control more



effectively a recalcitrant inflation as well as to facili
tate the forthcoming Treasury financing.
Present indications are that business activity will
continue close to current levels in coming months, with
majority opinion expecting an upturn in the fourth quarter
but with no strong influences for either upward or downward
movement in view.
Capital market demands are likely to
remain heavy though possibly easing somewhat from the first

half year. Assuming no lessening of Federal Reserve pressure
on bank reserves, interest rates have probably not completed
their adjustment to increased demands for funds.


prices are not completely stabilized, their upward movement
has been slowed and wholesale prices have shown little change
in the past two or three months. Barring a strong resurgence
of demand from some quarter of the economy, a possibility not
supported by present evidence in my opinion, upward price
movements in coming months seem likely to be small.
By main
taining present reserve pressures and permitting interest
rates to work toward an equilibrium level, the System con
tinues to exert strong and perhaps even increasing anti
inflationary influence. As I view this situation, it is one
which calls for continuing restraint but which does not in
dicate clearly a need for further tightening at this time.

This conclusion is not a denial of possible need for such a
move later in the year.
It is likewise difficult to make a clear case for a
higher discount rate as a ministration to the Treasury.
support of an upward move it is argued that, insofar as a
higher discount rate would tend to raise market rates, it
would discourage other borrowers and thus facilitate Treasury
security placement. Moreover, with a higher discount rate
the System could presumably with less reluctance inject re
serves and permit borrowing for security purchases.
alternative point of view, however, would hold that the
Treasury's financing problem, while serious, is one of
selecting an appropriate price which would be consistent
with temporary underwriting by the System.
It seems almost certain that the System must assist the
Treasury in its coming financing.
I think this should be
done without pique and that such action can be defended, not

as a bailing out of the Treasury, but as a move in the public
interest. System action should, however, be conceived and
executed as temporary underwriting, assisting the market to
effect permanent lodgment of the new securities as expedi
tiously as the circumstances permit, but providing reserves
only for such period as may be reasonably necessary.

continued restraint on reserves through open market opera
tions and discounting, this underwriting service can surely
be executed as readily at the present discount rate as at a
higher one.
The Federal Reserve System now enjoys, as some are wont
to say, "independence within government." I hold this inde
pendence valuable because I believe it serves the public in
terest better than any probable alternative status. But this
independence will be preserved only if it is used responsibly.
In the presence of a clear case for a higher discount rate,
the responsible act is to raise the rate. But if no clear
case can be made, as I believe it can not at present, raising
the rate might appear as flaunting our independence.
Such a
step would lay us open to more blame than we can properly be
held responsible for. In view of Congressional hearings, the
forthcoming Treasury financing and the change in top Treasury
management, the timing for such action could hardly be worse.
Moreover, I fail to perceive any necessity for acting, regard
less of relevance to real affairs, in order to preserve the
right to act.
Indeed, the ultimate result in that event may
be opposite to that intended.
In conclusion, I see no clear case at present for a rise
in discount rate on economic grounds, or on the grounds of
In opposition are the ramifica
assistance to the Treasury.
tions of tightening at an inauspicious time. Hence my recom
mendation that no change be made in the discount rate at this
However, since inflationary pressures have not dimin
ished and may strengthen later in the year, I believe the
present degree of pressure on reserves should be maintained.
Mr. Bryan said that the situation in the Sixth District was very
clearly one of great economic strength.
situation in

There had been a reversal of the

manufacturing employment which for four months had been

going down but which had now headed upward.

There had been a reversal in

manufacturing payrolls also, which, after three months of decline,
now moving upward.


Steel mills were operating closer to capacity than

for the nation as a whole.

Construction contract awards for 1957

through April were substantially ahead of last year and much more
sharply up than in the nation.

Sixth District automobile sales were up



more than nationally and more than seasonally.

Bank loans in the

district had increased and the increase had come at country banks
rather than at the larger city banks.
at a very high level.

All in all,

Member bank borrowings were

Mr. Bryan described the situation

as one of apparent great economic strength.
On the national picture, Mr.

Hayes and to some extent Mr.

Johns, particularly Mr. Hayes, had

urged that we might be cresting out.
Mr. Bryan felt that if

Bryan said that he understood that

While this might be happening,

we were to rely on what we see rather than what

we think we may see, the national situation was one of great strength
and at the same time one of great danger.

Putting the problem in


of what we now see, Mr. Bryan said that he felt we were seeing the
frittering away of a very priceless heritage of the Government of the
United States,

namely the confidence of the American people in the

integrity of the American dollar.

That frittering away of a priceless

heritage was going on rapidly and to an alarming degree.



reported that at the meeting of the directors of the Atlanta Bank
last Friday Chairman Mitchell polled the eight members of the board
and the four members of the branch boards who were present on the
question of how many of them believed that the American dollar would
be worth substantially less in five years'
to this point said that they regarded it
American dollar would depreciate.



All 13 men who spoke

as a certainty that the
Bryan felt that this was a

measure of the extent to which confidence in

the integrity of the


dollar had declined.

Mr. Bryan said that he felt that there was an objective test
of the degree of the decline in the confidence of the American dollar
if we measured the level of stock prices as Mr. Thomas had reported
on the basis of net earnings as against present interest rates.


he said, were evidently moving to stocks purely and simply

because they felt they could protect their dollar in
protection was possible.

so far as such

He reported that in Atlanta purchase of

buildings was being urged on investors, regardless of current yield,
on the basis that funds put into buildings, because of increasing

building costs, would yield a substantial capital gain in a very few

He felt

that this widespread and mounting distrust of the

stability of the dollar was going to make the Treasury problem extremely
difficult as time went on.

If we were dealing with policy in the pri

vate economy only and if, as a central bank, we were faced with an

economic situation as he had described it, and if we were not con
fronted with the fact that the Government was a continuous and necessi
tous borrower, then the case for further restriction would be, in his
opinion, conclusive.

Faced with the Treasury's problem, however, Mr.

Bryan said that he did not know what was the part of wisdom.
Mr. Williams said the high level economy of the Third District
showed few signs of further ebullience although there was nobasis for

Department store sales in

three of the four weeks ending



June 8 were somewhat below the same period last year.

For the four

week period they were 1 per cent below a year ago but for the year

to date were 2 per cent above.

Appliance sales in the Philadelphia

area for the first four months of this year were sharply below last
year, with sales of refrigerators and vacuum cleaners off about one

half; home freezers, ranges, and water heaters one-fourth; and air
conditioners, clothes dryers, and washers only slightly below last year.
Automobile sales continued to lag behind last year with registra
tions in Philadelphia County during May 2 per cent below April and 22 per
cent below May a year ago.

Factory employment in

the district in

durables and nondurables industries was down slightly in April.
of the April decrease was in
electrical machinery.


textiles, transportation equipment,and

Average hours worked per week were unchanged.

The consumer price index for Philadelphia turned down in
Williams said,


April, Mr.

following four successive months of small increases.

The local index for April was 3 per cent above a year ago, compared
with a four per cent increase nationally.
Mr. Williams reported that a decline in housing starts and a
shift to the construction of higher priced homes along with tight
money characterized the housing market in

the Third District.


ing sales caused mary builders to cut back starts as early as last fall.

Demand for new houses was slow, and prospective buyers were shopping
around before making a decision.

Housing starts in the price ranges

below $15,000 had dropped most, reflecting extreme difficulty in



obtaining VA financing and an increase in the price of land.


struction of medium- and higher-priced homes had been fairly well

The home builders association of Philadelphia recently

signed a three-year contract providing for a total wage increase of
30 cents an hour by 1959.

Sales of old houses had slackened, Mr.

Williams reported, largely because asking prices had been too high.
Rental property demand was strong and many real estate agents reported
a shortage of listings for both houses and apartments in desirable
Mr. Williams went on to say that mortgage money was reported
slightly easier since the turn of the year, mostly for FHA loans.
Funds for conventional mortgages with a third down payment and an in
terest rate of 5-1/2 to 5-3/4 per cent were readily available.


ventional mortgages on new homes with a somewhat larger down payment
and prime risks were available at a slightly lower rate.

FHA mortgages

were reported to be gaining in favor with lenders.
There had been little

change in the earning assets of district

reporting banks in the past three weeks,

Mr. Williams said.


in business loans in the last half of May were more than offset by an
increase in the first

week of June.

Holdings of Government

had fluctuated from week to week but had changed little
weeks as a whole.


for the three

District banks lost deposits, the decline for the

three weeks amounting to $24

million or nearly 1 per cent.


Philadelphia banks stepped up their purchases of Federal funds during



the past three weeks.

Member bank borrowing at the Reserve Bank was

also at a considerably higher level.

With reference to policy, Mr.

Williams said that viewing the situation on the basis of the indicators
that he had cited, he did not feel that any change in
count rate or in

the degree of pressure was indicated.

Fulton described activity in

mixed trends.

either the dis

the Fourth District as showing

Layoffs in three cities had caused them to be classed as

moderate labor surplus areas.

Unemployment for the district as a whole

was quite low but there were indications that a shortening of the work
week was occurring, and that, of course, did not get in to the unemploy
ment figure.

Foundaries particularly were having a short work week, with

orders down in

the automotive field and for air conditioning.

industry had a little

The steel

pickup during the past week but this was looked

upon as transitory and it
during July materially.

was expected that operations would be down
The industry felt

that this recent pickup was

because of a substantial reduction in inventories of manufacturers who
had been cutting up more steel than they had been ordering for some time,
particularly in

the automotive field.

The automobile industry was now

manufacturing ahead of sales and later in
back very materially,
extraordinarily high.

the year would have to cut

Mr. Fulton felt, unless inventories were to be
Retail sales of automobiles had not been holding

up well and were running somewhat less than a year ago.

Demand for business loans was still very active, Mr. Fulton re
ported, but this was not for inventory purchases or for speculation in




There had been an increase in member bank borrowing.

Mr. Fulton noted Mr.


report that banks were not arbitraging

the discount rate against the short-term rate, but he stated that
on checking with certain banks in the Fourth District they had ad
mitted that this practice was being followed.
Mr. Fulton said that he was not certain about the advisability
of an increase in the discount rate at this time.

The statistics would

indicate that this would be an appropriate move but there were other
factors in the business picture that made him question the advisability
of immediate action.

He made it

clear, however, that he did not feel

there was any widespread weakness in the industrial picture at this
time and that any letdown at present might be an adjustment for the
summer doldrums.
strong economy.

In the fall,

he expected that there would be a very

For that reason he would not want any relaxation of

present credit policy.

This policy had been appropriate, and a fine

degree of restraint now existed.

He would not relax no. would he in

crease the restraint.
Turning to Treasury financing,

Mr. Fulton said he hoped that

the Treasury could be forthright enough to get its

new money through

an issue of long-term bonds and pay the price necessary.

Whether this

would be politically feasible was a matter of judgment, but if


Treasury were to do that he felt that the System could give assurance
that the discount rate would be held where it


at present.

He felt

that an extension of the term of the debt would relieve pressures on
the Treasury in the money market.


Mr. Shepardson said that Mr. Bryan had expressed views on

the point that was giving him greatest concern.

Granting that some

uncertainty was indicated by the information available on various
activities and that there were some weak spots in the economy, Mr.
Shepardson felt

that the country had a very serious problem in


apparently growing acceptance of the idea that further inflation was

This was a matter of primary concern to the Committee.

For this reason, it

had seemed to him that the Committee should be

endeavoring to exercise further restraint.

The present time and the

next three months presented a period of normal lessening of activity
at this season.


however, the Federal Reserve were to take this

as an indication of a trend and if



any way were to relax on

pressure, it might put itself

in a difficult position for what was

widely expected in the fall.


should continue to keep itself
that later problem.


Shepardson felt

that the Committee

a strong position for dealing with

He said that he had come into this meeting feeling,

as he had indicated at the previous meeting, that this might be the
time for closing the gap between the discount rate and the short-term

He was well aware of the argument Mr. Hayes had presented, and

he was concerned about the possibility that Mr. Fulton had mentioned
of banks taking advantage of the gap between the discount rate and
the short-term rate.

It seemed to Mr.

Shepardson that if

the System

did not move on the discount rate at this time there would be an



increasing burden on the Federal Reserve Banks to police the discount
windows carefully and in a way to minimize what had been described as
"complacent borrowing."

He was not certain what the System should do

on the discount rate at this time, but if it did not move the rate up
ward he felt that the Reserve Banks must face the problem of policing

Generally speaking, he said that he would favor maintaining

present restraint fully and not letting the pressure drop below the
existing degree.
Mr. Robertson said that it

seemed to him that there was con

siderable unanimity in the views that had been expressed this morning.
If there was a difference, he would align himself with the views ex
pressed by Messrs.

Bryan, Fulton, and Shepardson.

It seemed to him

that the economy was extremely strong, and the inflationary potential
was the thing that needed to be watched.

The Committee should avoid,

as he felt the desk had marvelously avoided, getting into the area of
nervousness in the market.

We should not be panicked and we should

maintain the existing tightness.

He would dislike very much to see any

reduction in the degree of tightness during the next week.

He differed

from Mr. Bryan to the extent that he was firm in his view that the Com
mittee should maintain fully the degree of tightness that had existed

His only qualification of this statement was that conditions

must be tempered in the light of the Treasury's needs, but this should
be done to the minimum extent and the Committee should avoid coming to
the Treasury's assistance any more than was essential.


At the moment,

Mr. Robertson said that his feeling on the

discount rate differed from that expressed at the preceding meeting.
He felt that the System should not increase the discount rate at this

time but it should be in position to police the discount window
vigorously in the event the tendency indicated by Mr. Fulton became

In summary, Mr. Robertson said he would maintain as fully as

possible the degree of tightness that had existed in the recent past,
and he felt the account should avoid letting the reserve position be
eased during the next week.
Mr. Mills said that every statement that had been made this
morning had brought out very clearly that the Federal Reserve System's
monetary and credit policies could not be disassociated from the
Treasury's debt management problems, and particularly at this time.
The statements also had brought out that it

was incumbent on the Fed

eral Reserve to develop means that would harmonize monetary and credit
policy with the Treasury's debt management operations.
problems were emphasized very clearly in

The Treasury

the staff memorandum on the

outlook for Treasury cash requirements and bank reserves dated June 17,

This memorandum showed that commencing in

Treasury would come to the market in
January and February 1958.

July, on estimate, the

each month of 1957 and on into

The same report, on estimate, also reached

the conclusion that on the Treasury's August refunding attrition on its
publicly held obligations might reach 20 per cent.

Such attrition, Mr.

Mills said, in effect returns to the market for investment in higher



yielding public and private long-term obligations funds that had
previously been invested in long-term Treasury obligations.
is undesirable, for under present conditions it


throws the Treasury

back on the short-term market to make good the attrition and in doing

so is placing an almost intolerable burden on that market.

Mr. Mills

said that the discussion this morning had disclosed contrary views
regarding System policy which he felt should be discussed.

His own

views to a degree followed those voiced by Mr. Fulton and in a sense
were expressive not of what ought to be done but of what might be done.
In explanation, Mr. Mills then read a paper as follows:
The principal national financial issue that presently
involves Federal Reserve System policy is a growing con
between public and private demands on the supply of
The public interest requires that the
investment funds.
issue be resolved on the side of the public need for in
vestment funds. To do so necessitates that supremacy be

given the Federal Treasury's needs for funds, and in the
process of doing so a quieting influence can be thrown
over inflationary forces in the economy.
To achieve this purpose means that, first and fore
most, the inviolate credit standing of the Treasury's
obligations should be maintained and exalted as being the
keystone in the arch of all public and private obligations.
The approach to this objective obviously requires the
Treasury to fulfill the obligations imposed upon it by the
To do so, therefore, recognizes that
will of Congress.
claim on the supply
the Treasury has and must assert a first
Inasmuch as frequently re
of available investment funds.
curring demands on the money market by the Treasury are dis
concerting and have been conducive to an undesirable piling
up of short-term Treasury obligations, it is necessary for
the Treasury to go to the market with a moderately sized

issue of long-term Treasury bonds.

In doing so, the claims

of public and private bodies for the supply of available
investment funds will have to give way to the first
of the Treasury on the market.



The assertion of the Treasury's claim on the supply of

long-term investment funds can be expected to strike some
degree of consternation among all other claimants on the
supply of investment funds, but once whatever market un
settlement that first occurred has passed, normal rational
ization of the propriety of the Treasury's policy and analysis
of the breadth of the remaining supply of investment funds
will cause some claimants for such funds to defer their claims,
in the process of which the pressure of the expenditure of
private funds throughout the economy will be alleviated.
Inasmuch as Treasury expenditures cover programs already
largely in effect, they are not believed to have the same
economic impact as the expenditure of other types of public
funds and of private funds destined to create entirely new
The policies of the Federal Reserve System are, of course,
closely allied and should be integrated with the type of Treas
ury financing program recited above.
A first
step toward that
end would be an increase in the discount rate at the Federal
Reserve Banks to 3-1/4 per cent in recognition of a trend in
interest rates that has already been established. An increase
in the discount rate could be expected to clear the atmosphere
of the markets and to assist in bringing about a general
It is to be
stabilization in the interest rate structure.
regretted that an increase in the discount rate at the Federal
Reserve Banks was not made at least two weeks ago, inasmuch as
such action now taken will have been robbed of some of its
surprise effects and also will have occurred at a time of
of U. S. Government securi
extreme price softness in the list
ties and will be embroiled in the atmosphere attendant upon
the hearings now commencing under the guidance of the Senate
Finance Committee. These difficulties, however, should not be
allowed to stand in the way of discount rate action.
Inasmuch as an increase in the discount rate at the present
time can be expected to be interpreted not only as an action
toward interest rate alignment but also as an indication of a
severely restrictive Federal Reserve System monetary and credit
policy, it is essential that the System concurrently indicate
that although credit restraint will be continued, there is no
intention to make it so severe as to restrict unduly the credit
To that
granting activities of the commercial banking system.
end, System action during the transition period, during which
the markets will adjust to a change in the discount rate, should
be to moderate rather than to increase pressure on bank reserves.
It would, therefore, be desirable to allow net borrowed reserves
to remain in the lower range of $500 million over the coming
reserve week and for the System open market account to show no
change in its holdings of directlyowned Treasury bills.



This type of action would give some indication to the
financial community that the Federal Reserve System was not
setting out on a still more restrictive credit policy and
that reserves would be forthcoming in reasonable volume to
meet the seasonal needs of the commercial banks for extend
ing bank credit. It is particularly important that some
indication of such System intentions be given promptly now
that the pressure on reserves is reaching increasingly into
the activities of reserve city banks and country banks who
have not been accustomed to operating under reserve disci
pline of this character and who, unless forearmed with the
knowledge that they will be supplied with reserves in
reasonable volume for seasonal purposes, might take alarm
and especially because of the fact that they are locked by
depreciation into their holdings of longer term U. S. Govern
ment securities and are consequently fully aware of their
impaired liquidity.
In a nutshell, the kind of fiscal and monetary policy
that has been outlined envisages that the proper aims of
the Treasury to lengthen the maturities of its obligations
and to maintain the inviolate quality of such obligations
will be made to serve the ends of Federal Reserve System
monetary and credit policy in a way that will relieve the
System of any need of pressing its policy of credit re
straint to a point that would undesirably limit an equitable
distribution of the available supply of credit. The kind of
Federal Reserve System policy outlined has in mind that
specific objectives will be set and sought after and that
the System will consequently avoid any form of makeshift
policy that is guided only by vague generalizations.

Vardaman said that Messrs. Hayes and Johns had expressed sub

stantially the views he held regarding the situation.

Johns that the System must let it

He agreed with

be known without any question that

reserves to meet the normal seasonal requirements would be available.
As to the discount rate, Mr. Vardaman said that he could not approve an
increase at this time in

view of the information available to him and

his interpretations of that information and his impressions of what was
going on throughout the country.

He could not now see a justification



for an increase in the discount rate in the foreseeable future.

there should be disciplining at the discount windows of

the Federal Reserve Banks.

Mr. Vardaman went on to say that he

would not attempt to discuss Mr. Mills'
without studying it

carefully, but in

deeply thought out paper

principle he was inclined

to think that he would disagree with the conclusions suggested in
the paper.

He did not quite agree with the report that Mr.

had given as to economic conditions in the Atlanta District.
seemed to him that the public was in


a very doubtful frame of mind.

He did not think there was any question, however,
was a flight from the dollar.


but that there

He could not see how at this time an

increase in the discount rate would do anything other than to add to
a potentially panicky feeling.

In sum, Mr. Vardaman said that he

would continue the existing policy.

Leach said that the Fifth District provided no signs to

justify an expectation of an immediate change in over-all activity.
There was some evidence of improvement in the textile industry, but
reports continued that the furniture industry was somewhat over
inventoried at all levels.

A survey of district automobile dealers

indicated that, contrary to the national picture, less than one-third
had better sales in May than in April.
As to open market policy, Mr.

Leach said that he thought we

had recently been as tight as we could have been without running too
much risk.

This had had his approval because he had been increasingly



concerned about creeping inflation.

He believed that we should con

tinue to follow a policy of maintaining as much restraint as we
reasonably could, and for the immediate future he was thinking in
terms of a level of net borrowed reserves of around $500 million.
At this time, however,

the feel of the market was more important

than at other times, he said.

The Committee should not let the

Treasury financing cause an increase in borrowing.



worked out, we would be called upon to put in reserves, but at the
same time Mr. Leach felt that the System should be as tight as it
could in these circumstances.
In spite of the strong demand for credit, which had led to
an increase in market rates, Mr. Leach said that he thought it
be inappropriate to increase the discount rate at this time.
seen no evidence in

He had

recent loan figures or in conversations with Fifth

District bankers that the use of bank credit to satisfy long-term
capital needs was increasing.

Moreover, he would be fearful of

possible adverse effects on the unsettled securities market of an in
crease in the discount rate, particularly in view of the forthcoming
Treasury financing.
Mr. Leach added that, as far as the Fifth District was con
cerned, the existence of an undesired spread between the bill rate
and the discount rate had not resulted in

an increase in member bank

In the week just before the longest bill rate last rose

above the discount rate (the week ended May 22), borrowings at the



Richmond Bank averaged $44 million. In the most recent week
(June 12), they averaged $38 million.

The evidence of these

figures was corroborated by his knowledge of the individual banks
accounting for the bulk of the borrowing.

There was no evidence

that there was any tendency for the banks in the Fifth District
to take advantage of the spread between the discount rate and the
short-term rate.
Mr. Leedy said that there had been continued improvement in
the moisture situation in the Tenth District since the preceding

It was now clear that the prolonged drought had been pretty

well wiped out except in a few limited areas.

Moisture had caused

some delay in planting of crops and had caused some replanting and in
early harvests had had adverse effects, but the net had certainly been
on the plus side.

This was of great significance because of the

importance of agriculture in the Tenth District.
As to open market policy, Mr. Leedy said that in the next
three weeks he felt the Committee should be particularly concerned
about the Treasury's problem, that is its financing for $3 billion
of new money which was to be done against the background of the
lowest level in the Government securities market since the early

He had understood Mr. Mills to say that he believed the

Committee should operate in the market in the light of the Treasury's
requirements as the overriding factor at this time.
that he would not subscribe to this view.


Mr. Leedy said

seemed to him that the



Committee's obligation was primarily to the economy and secondarily
to the Treasury.

To the extent that it

just the needs of both, and in

could do so, it

this period ahead it

should ad

might have to

temper its primary, overriding responsibility to the Treasury's

He would subscribe to what Mr. Hayes had said as to

market operations,

attempting to keep the same degree of tightness

toward which operations had been directed in recent weeks, but with
out either easing or tightening the situation.

This would require

considerable latitude for the Management of the System Account in
the light of the needs of the Treasury in this financing period.

Mr. Leedy said that he would not in this period adjust the
discount rate.

Mr. Mills'

suggestion that such a course

might have

a settling effect on the Government securities market would, in Mr.
Leedy's opinion, run too great a risk.

His inclination would be

that such action might be taken as the signal of an intent to in
crease the pressures on reserves.

He would not now suggest what

might be done later with respect to an increase in

the discount rate.

He had the feeling, however, that whether the System liked it

or not,

it might be approaching a time when some increase might be necessary.

Mills said that he wished to correct any impression that

his remarks may have left that he believed that the Federal Reserve
System should underwrite the success of a Treasury offering by inter
vening in

the market.

In his opinion, the System had established and



followed appropriate operating policies during periods of Treasury

At such times,

however, he also felt

that the Treasury

was entitled to finance under a proper market climate and that
supplying the minimum background reserve assistance necessary to
creating such a climate should be a purpose of System policy.


the creation of a market climate does not involve direct market
intervention by the System, Mr.

Mills felt

that it

would be con

sidered only remotely as a form of underwriting and then only in
the sense that decision making by market operators as to the extent
and in

what manner they participated in

the Treasury offerings had

been made easier.
Mr. Leedy said that he had not had the impression earlier
that Mr. Mills held the view he had first

thought he had stated, and

he was glad to have this clarification.

Mr. Allen said that optimism among Seventh District business
men had not diminished in the past three weeks.
more widespread.

If anything, it was

Most statistical measures continued to indicate a

high level of activity. Worthy of notice was the fact that on June 3
voters in Chicago and in Cook County approved plans for a

l l twenty

three bond proposals on the ballot totaling $208 million. This was
in addition to authority which the City of Chicago already had for
borrowing $250 million for various projects,
works, and parking facilities.

such as airports, water

Plans for offerings of bonds were not



yet definite but tentatively it

was planned to sell around $130

million in the current calendar year, and $85 million in 1958 or
1959, with most of the proceeds earmarked for construction.
Automobile production apparently would hold up better in
July and August than had been expected, Mr. Allen said.
assemblies had been fewer each month than in

Since March,

the preceding month.


June they would be about 500,000 compared with 531,000 in May and
6 40,000

last January at the high point.

privately that assemblies in

Industry sources indicated

July and August would be at the June rate

of 500,000 per month and that September would drop to 300,000.


would give 1,300,000 for the third quarter, compared with a million
assembled in the third quarter of 1956, and it

would mean assemblies

for the nine months of 1957 of 4,700,000 compared with 4,200,000 in
the first

nine months of 1956.

New models would be introduced in

October and November or earlier, if possible, which explained the
low output anticipated for September.

The industry did not intend

to pare inventories as sharply as last year, Mr. Allen said, and

contemplated that an inventory of 600,000 to 650,000 of 1957 and

1958 models would be on hand October 1 of this year, compared with
00,000 a year earlier.

Dealer inventories on June 1 were close to

the figure of a year ago (796,000 this year against 820,000 on June 1,


Mr. Allen said that his friends in the industry felt that 1957

calendar year

roduction would be swelled by an inventory

200,000 cars, depending on acceptance of General Motors'

rise of
1958 models.



In 1956, about 200,000 cars were sold out of inventory.

Thus, if

1957 sales only equal 1956, production could run 6,200,000 cars
compared with 5,800,000 last year.
Business loans at Seventh District banks rose $48 million in
the first five months of 1957, Mr. Allen reported, compared with a
decline for the nation of roughly $200 million.
largely due to two kinds of borrowers

The difference was

first, commodity dealers whose

seasonal repayments resulted in an important minus in the five-month
national total are less important in the Seventh District, and second,
metals firms which had been a strong borrower group so far this year
are important in the Seventh District total.

Nevertheless, borrowing

by member banks at the Chicago Bank discount window had in recent

for a change,

represented less rather than more of the district's

normal percentage of total discounts.

This appeared to result from

somewhat less borrowing by Seventh District banks and more borrowing

by banks in other districts.
Mr. Allen then referred to the discount rate, stating that he
had come to the same conclusion that had been indicated by most of the
others this morning but perhaps on a different basis.

All of us have

sympathy with the Treasury's problem, he said, but if he felt that the
System's responsibility in combating inflation through monetary policy
indicated an increase in the discount rate, he would be for it.


ever, he did not believe such action was required at this time in order
to carry out the System's responsibility.

He reported that one of the



largest Chicago banks had informed him a few days ago that there had
been discussions emanating from New York of an increase in the prime
rate but that that particular Chicago bank indicated that it


have nothing to do with such a move at this time.


feeling was that if the prime rate were increased,

the System would

have no option but to increase the discount rate.

However, at this

Allen's personal

time he felt there was no need to take that action.

Mangels reported a recent meeting of the branch managers

of one of the large San Francisco branch banks at which the consensus
was that the general situation was quite spotty, with business falling
off in the country areas outside San Francisco in northern California,
and with merchants complaining about the decline in


On the

other hand, the usual sources of information indicated little


in the general economic picture on the West Coast in the past three

There had been little change in employment or in trade, and

farm prices in

May were about the same as in April.

were down 16 per cent in April from March,

but during the first

months of 1957 they were 2 per cent above 1956.
showed a slight upward movement in May.

Automobile sales

Lumber production

Steel mills were operating

at about capacity.
Twelfth District banks were losing deposits,


Mangels said,

although loans during the past three weeks ending June 5 were up about
$5 million, compared with the $300 million decline for all reporting
banks in

the country.

One of the member banks reported an unusual



loan demand from national concerns.

There were also reports of

corporations selling bills to meet dividend requirements, and he
added that the California State Treasurer had sold a large volume
of bills in order to obtain road building funds and that city
treasurers were also selling bills to obtain cash. Contrary to
other reports that he had been giving for some time past, Twelfth
District banks in recent days had been net buyers of Federal funds
rather than sellers.

Member bank borrowing at the Federal Reserve

Bank had been at quite high levels and last week reached a four
year peak since early in 1953, except for a brief period late in

There had been no indication that banks were taking advantage

of the differential between the discount rate and the bill rate.
Borrowing had been distributed between city banks and country banks
although city banks predominated.
Mr. Mangels reported disturbing comments from banks that they
were letting their Government securities run off and that they would
not be interested in subscribing to a new offering.

He also reported

an unfortunate development in which the Superintendent of Banks of the
State of California had recently suggested to banks under his super
vision that they might consider setting up a depreciation account on
Government securities, and while this had now been straightened out,
it had caused concern to the banks to which such letters had been
written and to other State banks.
On the over-all, Mr. Mangels said that there appeared to have
been some easing of the pressures recently and that the economy was



showing more stability than in the past, with over-all demand and

supply in somewhat better balance.

He thought that pressure on

prices would be less this year than last.

Mr. Mangels said that

he agreed with Messrs. Hayes and Leedy as to the discount rate.
Any change now in the rate might be indicative of a more restrictive
policy in the future than the Committee might wish to indicate.


was Mr. Mangel's view that the Committee should maintain restraint
but with flexibility for the Manager of the System Account to avoid
an increase in the degree of restraint at this time.

If anything,

he would modify restraint slightly taking into consideration the
needs of the credit situation.
Mr. Irons said that over-all conditions in the Dallas District
had not changed much in the past three weeks.
a sidewise movement of genuine strength.

The economy was still in

There had been recent improve

ment in retail and department store sales, which had lagged in
agricultural employment was up each month to new records.
for agriculture was much better than in past years.
durable goods sales were down somewhat in



The outlook

Automobile and

the last month, although so

far as automobile sales were concerned for the year to date they were
9 per cent ahead of a year ago despite the slight decline the past month.
Petroleum allowables and production had been reduced reflecting a

supply-demand relationship, but total output was still very large.

Irons reported that bank loans during the past three weeks

declined more than a year ago,

the decline occurring in all




except for a small increase in real estate loans.
investments were up.

Bank deposits and

Pressure on bank reserve positions had not in

creased, and Mr. Irons said that it was not intense.

There was not

a great deal of borrowing and discounts at the Dallas Reserve Bank
had not increased.

He felt sure that there were no cases of banks

borrowing from the Dallas Bank to arbitrage the rate differential.
Borrowing was mostly by the smaller banks and in

small amounts.

the whole, the Dallas District reflected a high-level,


fairly stable

economy as far as figures went.
When we moved out of the figures and into impressions, Mr.
Irons said that the feeling of confidence seemed strong.


seemed quite sure that the last quarter of the year would be a good

As Mr. Bryan had indicated, Mr. Irons said that he found a strong

tendency in the Dallas District to accept and to be reconciled to more


The feeling was that if the rise in prices were kept to an

increase of two or three per cent a year, that would be pretty good,
but businessmen were anticipating a continuing inflationary movement.
When businessmen got into that frame of mind, it was a factor of

danger, Mr. Irons said.

He personally was perplexed.

He had the

feeling that the System had not been tight enough in its policy, and
if he had only to consider the economic situation, Mr. Irons said
that he would still take that position.

However, he was becoming

increasingly disturbed by the present situation in
securities market.

the Goverment



Mr. Irons went on to say that perhaps there was a remote
chance that what was regarded as a secondary responsibility of the
System might, through force of events, become a primary responsibility.
For that reason, considering what was ahead for the Treasury and in
view of the present situation in the Government securities market, he
would be reluctant to intensify restraint at this time.

The System

should modify its position somewhat on the basis of day to day develop
ments in the Government securities market.


had a real responsibility

with respect to the Treasury's situation, he said, and we were at the
point where that would be a factor limiting the extent to which the
System could push the policy of restrictiveness.

It was one thing to

say that the Treasury should go to the market and price its securities
at what was necessary to get the money, Mr.

Irons said, but that would

have a whole series of effects and he doubted whether the System could
be so orthodox in a realistic view of the market.

He stated that

whereas earlier in the year he had favored causing banks to borrow to
obtain reserves to facilitate Treasury financing, in the current situa
tion he believed the System should provide reserves through open market
operations to be sure that banks were in a position to do what was
Summing up the situation, Mr. Irons said he would not favor
changing the discount rate at this time, although technicaly and
theoretically it

ought to be raised.

would be justified in increasing the

Perhaps later on the Sysem

At present, he would try



to maintain as much restraint on bank reserve positions as was

practicable but consistent with an alertness and an awareness to
the situation in the Government securities market.

It might be

wise to go a step further than the System would go strictly on the
basis of monetary policy in order to avoid letting the market become
disorderly, rather than waiting for it to develop into disorder and
then having to correct the situation at a greater cost than if dis
order were prevented.

Mr. Irons felt that the Manager of the System

Account must be very alert to the behavior of the market, to the
attitude of the market, and to the feel of the market.

Since addi

tional reserves would be required, it might be appropriate to put
funds into the market if the Management of the Account felt that
conditions warranted such action on the basis of the attitude in the
Mr. Erickson said that conditions in New England did not differ
materially from those nationally or from those reported for other

Nonagricultural employment in April was up, and average

hourly earnings were still tending up.

Automobile sales continued well

below last year.

Shoe production was up from last year, when it had

been excellent.

Department store sales were not good during the first

week of June.
Mr. Erickson recalled that last year country banks used the
discount window at the Boston Bank actively in May and June.

This had

been repeated this year, with very active discounting by country banks.



In each recent period several banks had borrowed for the first
in a considerable period.


So far as he could see, Mr. Erickson found

no evidence of any bank taking advantage of the differential between
the discount rate and the bill


As to policy for the next three weeks, Mr.
himself with Mr. Hayes.

Erickson aligned

He would not increase restraint and he would

not recommend an increase in the discount rate, nor would he suggest
a change in the Committee's directive.
we were entering in

He agreed with Mr. Hayes that

the next three weeks a very difficult period.


would be necessary to rely more than recently on the feel of the market.


became necessary to supply reserves during these weeks, Mr.

Erickson said he hoped they would be supplied through direct purchases
rather than through repurchase agreements or through the discount window.

Szymczak indicated that he concurred in general with the

comments of Messrs.

Johns, Hayes,

and Vardaman.

The practical situation

was indicated by the projections of negative free reserves for July and

August, he suggested, which indicated that there would be a continuous,
fairly high level of borrowed reserves during that period.

At the same

time, the Treasury's needs would be affecting the situation. Mr.
Szymczak felt that the success of the Treasury's refunding of August
maturities would be indicated to a considerable extent by the degree
of success in its offering of $3 billion of securities for new cash
in the next few days.

The figures showed that the economy was strong,

Mr. Szymczak said, and that it would continue to be strong even though



there were some weaknesses.

Perhaps on the whole this indicated

Mr. Szymczak felt that the Committee would find it

necessary to provide some reserves during the next few weeks by
purchasing bills direct.

This would depend on the situation that

developed in connection with the Treasury's financing.
was not merely one of attrition, he noted, but it

The problem

was the question

of the effect of the offering on the whole Government securities

Summing up, he said that he would not change the wording

of the Committee's directive at this time and he would not change the
discount rate at present.

He agreed that Mr. Mills had a point in

the statement he had made, but he doubted whether it

would be possible

to take that action at this time, his feeling being that if the rate
were increased the result might well be a negative reaction.


Szymczak emphasized that he would take no action that would make
monetary policy more restrictive at this time.
Chairman Martin said that he sat down last night and "talked
to the mirror."

He came to the conclusion that monetary policy was

working at the moment.

The most dramatic evidence of this was that

the markets were actually demonstrating that effective adjustments
The differential between stocks and bonds was

were taking place.
changing every day.

Aside from the broad questions of psychology,

the Chairman said that he believed in the price mechanism enough to
believe that this process was achieving something on a day-to-day
basis and that it

would ultimately prove effective for the economy



as a whole.

A few weeks ago we were not having these adjustments

in the market.

The Committee had been following a restrictive policy

but the market was not actually reflecting that policy in the adjust
ments which are now taking place and which were then being postponed
or vitiated.

That atmosphere had now been dissipated, the Chairman

said, and while he did not know what the adjustment should be, so
far we had had what he considered to be an orderly market. He could
see no real panic in it.
The Chairman felt it unfortunate that some of the so-called
panic in

the present market had been created by politicians, some of

whom were trying to drum up an issue for the 1958 campaign on "tight

The whole world today was more or less agreeing with the

inevitableness of inflation, the Chairman said, and this was a factor
that he had not known how to deal with.

Chairman Martin went on to say that he had great sympathy with
the views that Mr. Mills had expressed but that he had come to the
conclusion that we could not simultaneously increase the flow of re
serves and raise the discount rate effectively under present conditions.
He noted that the Treasury was making an announcement at the end of this

offering securities which would be open for bids next week and for

which payment would be made when we are going into a seasonal demand for


Chairman Martin said that he felt the Committee should give

the Manager of the Account as much latitude in the execution of policy



as consistently could be given, adding the comment that we were in
a period of prosperity as well as of inflation.
The consensus seemed to be fairly clear, Chairman Martin said,
that there should be no change in the directive for the next three weeks
and that we should not deviate from the present general policy but that
we should give the Manager of the System Account whatever latitude was
needed to try to adjust around the feel of the market, recognizing
that in a period such as this net borrowed reserve figures were very
difficult to determine.

He inquired whether there was disagreement

with this statement of the consensus,
of disagreement,

he called upon Mr.

and there being no indication

Rouse for comment.

Mr. Rouse stated that he felt the Chairman had covered the
views correctly.
Chairman Martin then said that this would stand as the consensus
of the meeting, and on that basis the existing directive would be ap
proved without change.
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 restraining inflationary de

velopments in the interest of sustainable economic growth



while recognizing uncertainties in the business outlook,
the financial markets, and the international situation,

and (c) to the practical administration of the account;
provided that the aggregate amount of securities held in
the System account (including commitments for the purchase
or sale of securities for the account) at the close of
this date, other than special short-term certificates of
indebtedness purchased from time to time for the temporary
accommodation of the Treasury, shall not be increased or
decreased by more than $1 billion;
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 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;
To sell direct to the Treasury from the System
account for gold certificates such amounts of Treasury
securities maturing within one year as may be necessary
from time to time for the accommodation of the Treasury;
provided that the total amount of such securities so sold
shall not exceed in the aggregate $500 million face amount,
and such sales shall be made as nearly as may be practicable
at the prices currently quoted in the open market.
Chairman Martin referred to a telegram addressed to him under
date of May 31, 1957, by Congressman Wright Patman, reading as follows:
"I am taking this particular opportunity, presented
by the resignation of Secretary of the Treasury Humphrey
and the nomination of Mr. Robert Anderson to be his suc
cessor, to ask you and the entire Open Market Committee
of the Federal Reserve System to carefully study the
critical financing situation that confronts the incoming
I am asking you as Chairman of the Open Mar
ket Committee and Chairman of the Board of Governors of
the Federal Reserve to carefully weigh the consequencesboth for the Treasury and the Federal Reserve of the
continued refusal of the Open Market Committee to facili
The Treasury is faced with a
tate Treasury borrowings.



"formidable refinancing task in the immediate period ahead.
It is confronted by one of the tightest money markets in
recent times. A repetition of the attrition experienced
by the Treasury on its last refinancing will surely have
critical repercussions throughout the entire bond market.
"The Federal Reserve stands at an historical cross
Its actions will be closely watched by the people
of the country and above all by the Congress of the United
States, whose agent it is.
The time has come for the Open
Market Committee to make a decision. Will the Federal Re
serve be restored to its intended function of providing the
economy with the money and credit necessary to carry on
commerce and trade, and of aiding the Treasury in its borrow
ings at such times as may be necessary, or shall the System
insist on standing aloof, ignoring its responsibilities to
the people and the Government, and let the money market
become the master instead of the servant?
"I fervently hope that you will use your great influence,
Mr. Chairman, with the members of the powerful Open Market
Committee and bring home to them the gravity of the situation
with which the Treasury is now confronted, and the opportunity
for the System to make a wonderful contribution to the country.
I urge you, Mr. Chairman, to recommend that the Open Market
Committee commence purchases of Government bonds until they
are restored to par.
If it is deemed necessary to offset
inflationary credit expansion, there are several alternatives,
including raising reserve requirements and other methods of
immobilizing bank reserves.
The Federal Reserve
"Russia repudiates her bond 100%.
Board representing a majority on the Open Market Committee
is permitting and causing our people who are holding market
able United States Government bonds to be required to accept
12% discount on their bonds if sold today, which is 12%

"This is certainly a national disgrace, and I hope the
Board takes firm, positive action at once to remove this
blight on our economy and the reflection on our great system
of government."
The Chairman stated that this telegram had been placed on the
agenda in

order to make certain that it

would not be overlooked, although

copies had been furnished to all members of the Committee and to all
other Reserve Bank Presidents immediately upon receipt.

His suggestion



was that no action need be taken at this time.

In response to a

question from Mr. Mangels, he stated that the telegram had been
acknowledged by Mr. Balderston as Vice Chairman of the Board while
he (Chairman Martin) was in Europe.
Mr. Hayes stated that he had wondered whether the Chairman
himself might wish to respond further, and Chairman Martin stated
that in

his judgment no further action was needed at this time.
Chairman Martin then referred to the Guides for Emergency

Operations for the Federal Open Market Committee, copies of which
had been distributed to all members of the Committee and to all
Reserve Bank Presidents under date of May 27,


been prepared pursuant to the program contemplated in
the Subcommittee on Defense Planning,

The guides had
the report of

approved at the meeting of

the Open Market Committee on January 10, 1956.

As one of the steps

necessary to implement that program, the Committee at its
on January 24,


1956, requested members of the staff to prepare guides

for open market operations with the understanding that they would be
brought before the Committee for whatever discussion or action the
Committee desired.
job had been done in

Chairman Martin stated that he felt that a splendid
preparing these guides and unless there were addi

tional comments he felt that they should be accepted.

There was no

disagreement with Chairman Martin's suggestion, and it

was understood

that copies would be furnished to all

relocation or records centers,

addition to the copies that had been sent to the Federal Reserve




Chairman Martin inquired of Mr. Robertson whether he had
any comments to make on the program for Operation Alert 1957, and
Mr. Robertson stated that he felt no comment was necessary at this
time since the matter would be discussed at the joint meeting of
the Presidents and the Board this afternoon.
Mr. Vardaman withdrew from the meeting at this point.
Chairman Martin stated that yesterday he had lunch with Mr.
Anderson, Secretary of the Treasury-designate, and that he anticipated
that the System would be very fortunate in its relations with the new

It was agreed that the next meeting of the Committee would be
held at 10:00 a.m. on Tuesday, July 9, 1957.
Thereupon the meeting adjourned.