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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 Wednesday, June 23,

1954 at 10:00 a.m.

Mr. Martin, Chairman
Mr. Sproul, Vice Chairman

Mr. Bryan
Mr. Leedy

C. S. Young
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Bopp, Mitchell, Rauber, Roelse, Tow,
and R. A. Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Carpenter, Secretary, Board of Governors
Mr. Sherman, Assistant Secretary, Board of
Mr. Youngdahl, Assistant Director, Division of
Research and Statistics, Board of Governors
Mr. Hexter, Assistant General Counsel, Board of
Mr. Gaines, Securities Department, Federal
Reserve Bank of New York
Mr. Miller, Economist, Government Finance Section,
Division of Research and Statistics, Board of

Messrs. Leach, Fulton, Johns, and Earhart, Alternate
Members, Federal Open Market Committee
Messrs. Erickson, Powell, and Irons, Presidents of
the Federal Reserve Banks of Boston, Minneapolis,
and Dallas, respectively.
Chairman Martin stated that subsequent to the meeting on March


advice was received of the election by the Federal Reserve Banks



of Atlanta, St. Louis, and Dallas of Mr. Malcolm Bryan as member, and
of Mr. D. C. Johns as alternate member, of the Federal Open Market Com
mittee for the remainder of the year ending February 28, 1955, and that
both had executed the customary oath of office.

The Chairman also

stated that Mr. Bryan had suggested that Earle L. Rauber be elected as
associate economist of the Committee.
The election of Mr. Bryan as a member
of the Federal Open Market Committee for
the remainder of the year ending February
28, 1955, and of Mr. Johns as an alternate
member, was noted, and, upon motion duly
made and seconded, and by unanimous vote,
the election of Mr. Rauber to serve as an
associate economist of the Federal Open
Market Committee until the election of his
successor at the first
meeting of the Com
mittee after February 28, 1955, was approved.
These actions were noted and approved with
the understanding that in the event of the
discontinuance of their official connections
with the Federal Reserve Banks of Atlanta or
St. Louis, as the case might be, Messrs*
Bryan, Johns, or Rauber would cease to have
any official connection with the Federal
Open Market Committee.
In taking these actions, it was also
understood that Mr. Bryan was selected as an
alternate member of the executive committee
of the Federal Open Market Committee for the
remainder of the year ending February 28,
1955, and that the order in which the alter
nate members of the executive committee would
serve for Messrs. Sproul and Williams would
be Mr. C. S. Young, Mr. Leedy, and Mr. Bryan.
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
March 3, 1954, were approved.


Upon motion duly made and seconded, and
by unanimous vote, the action taken by the
members of the Federal Open Market Committee
on April 15, 1954, in reducing the minimum
buying rate on prime bankers' acceptances
from 1-3/4 per cent, as established by the
Federal Open Market Committee on February
5, 195, to 1-1/2 per cent, effective April
16, 1954, was approved, ratified, and con
Under date of April 16, 1954, there had been sent to each member

of the Federal Open Market Committee a report of an audit of the System
Open Market Account made by the Division of Examinations of the Board of
Governors as at the close of business March 19, 1954, which report had
been submitted to the Secretary of the Committee under date of April 12,
1954 in accordance with the action of the Federal Open Market Committee
at its meeting on June 21, 1939.

Chairman Martin inquired whether any of

the members of the Committee wished to comment on the report.
Without objection, the audit report
referred to was noted and accepted.
Upon motion duly made and seconded, and
by unanimous vote, the actions of the execu
tive committee of the Federal Open Market
Committee as set forth in the minutes of the
meetings of the executive committee held on
March 3, March 16, March 30, April 13, April
27, May 11, May 26, and June 8, 1954, were
approved, ratified, and confirmed.
Before this meeting there had been sent to the members of the
Committee a report of open market operations prepared at the Federal Re
serve Bank of New York covering the period March 3 to June 18, 1954,

At this meeting there was distributed a supplementary report



covering commitments executed June 21 and 22, 1954.

Copies of both

reports have been placed in the files of the Federal Open Market Com

During a brief comment regarding the reports, Mr. Rouse stated

that the System account had had to be in the market intermittently
since the last meeting of the full Committee, primarily during the two
periods of heavy Treasury tax collections.

Mr. Rouse also expressed

the view that the operations had been such as to keep average reserves
of member banks in line with the wishes which had been indicated in the
directives issued by the full Committee and the executive committee.
He further stated that there had been such a decline in short-term
money rates that the money market had lost the use of both the discount
and the repurchase facilities at their existing rates for carrying
securities and, as a result, adjustments of reserve positions had been
handled by sales of short-term securities and inter-bank borrowing.


had worked quite well except for a few days when reserves had dropped
suddenly and substantially, at which times the money market had shown an
atmosphere of tightness that was not warranted by the basic reserve posi
Upon motion duly made and seconded,
and by unanimous vote, the transactions in
the System account for the period March 3
to June 22, 1954, inclusive, were approved,
ratified, and confirmed.
Members of the Board's staff then entered the room for the pur
pose of assisting in

presenting a review of the economic situation and the

credit outlook, illustrated by chart slides.

Mr. Wheeler, Vice President



of the Federal Reserve Bank of San Francisco,

also entered the room

at this point.
Following presentation and discussion of the review, members
of the staff who had entered the room for the purpose indicated withdrew,
as did Mr. Wheeler.

Copies of the script of the review were sent to the

members of the Committee following the meeting.
Chairman Martin suggested that there be a discussion at this
point of the general policy of the Federal Open Market Committee.


noted that the Committee had had a policy of "active ease" and he called
attention to the discussions of the executive committee at meetings held
since last March,

as recorded in minutes of those meetings, which indi

cated there had been some difference of opinion as to the degree of ease
that should be maintained in the money market under the general policy.
Chairman Martin asked that each of the members of the Committee as well
as the Presidents not currently members of the Committee express their
views as to the appropriateness of the policy of active ease, and as to
the degree of ease that should be sought in carrying out the policy.
Mr. Sproul was of the view that during the period since the last
meeting of the full Committee,

and as brought out by the presentation

this morning of the economic and credit situation, the contribution of
monetary and credit policy during the past three months had been as
nearly in accordance with the needs of the situation as the Committee
could have hoped to have it.

The Committee had maintained active ease

in a way that had facilitated and made possible the financing of business,



both short-term and longer-term needs, in the productive areas of the
economy and in the areas of capital equipment and housing, without intro
ducing such sloppiness in

the market as would either raise concern as to

the Committee's outlook for the credit and business situation or cause

distortions in the credit and capital markets,

Mr. Sproul thought that

the Committee's policy had been carried out so as to have about the
right amount of ease.

There was still

some uncertainty as to the pros

for the course of business, unemployment,

and prices, and he felt

that the policy which the Committee had been following was the one that
should be continued, with the Committee remaining alert to changes that
might occur in the business and credit situation.

Mr. Sproul also said,

response to a question from Chairman Martin, that it

seemed to him

even more so since the reduction in reserve requirements of member banks

announced by the Board on Monday of this week-

that any further re

duction in the discount rate of the Federal Reserve Banks at this time
would be a waste of ammunition which might possibly be useful later on.
He felt that the System could well afford to observe the working out
of the effects of this reduction in

reserve requirements before giving

further consideration to another decrease in the discount rate.
Mr. Szymczak thought that no reduction in the discount rate was
called for at this time.

He felt that the Open Market Committee's policy

this year had been very helpful insofar as monetary policy could be
effective in

stimulating recovery, and that it

had not been overdone

either on the side of causing excessive ease or too little





Szymczak stated that he would prefer, however,

that the System encourage

the use of repurchase facilities during certain periods by greater flexi
bility in the rates on repurchase contracts.
Mr. Robertson felt that the policy of the Open Market Committee
as carried out by the executive committee had been almost perfect this

He would not tinker with the discount rate presently.

free reserves,

As to

Mr. Robertson felt that the level the Committee had

adhered to recently-in the $400-$700 million area without, however, a
fixed limit-had been satisfactory and he would not deviate from the
policy recently followed by the Committee.
Mr. Williams suggested that the Committee should "play by ear"
rather than attempt to prepare a score at this time.

He felt the re

duction in reserve requirements should be observed carefully and that
for the present the general policy the Open Market Committee had been
following should be continued.

Bryan said that he had no quarrel at this point with the

policy of the Open Market Committee or the way in which it

had been

carried out by the executive committee but that from time to time he
was puzzled as to just what Committee policy was driving at.

He wondered

whether there was full understanding of the criteria being used in con
nection with open market operations.
the concept of 'free

For example, he questioned whether

reserves" was a better guide than total reserves,

and he was not certain just what the executive committee had in mind in
talking about "sloppy" conditions in the money market.

Mr. Bryan also



referred to the study being carried on of the discount rate and discount
rate mechanism,

stating that he felt the System was handling the discount

mechanism badly and was not getting the proper use out of it

by leaving

the rate at such a penalty level as now existed,
Chairman Martin called on Messrs. Thomas and Rouse for comment
on the use of free reserves as a guide to System operations and the sig
nificance of committee discussions of a "sloppy" money market.
Mr. Thomas felt there could be a difference of opinion as to
whether free reserves or total excess reserves or the volume of member
bank borrowing offered the best guide to System policy.

He believed that

an amount of free reserves of about $700 million was close to the minimum
necessary for a condition of active ease,

but was not sure that if

reserves rose much above the $800-$900 million range it
difference with respect to credit expansion.


would make any

When excess reserves rose

above that level and member banks were out of debt, there was the likelihood
of a sloppy market in which funds were "chasing each other around the

Unless monetary ease stimulated new demand for credit, it


meant having idle funds in the market or a sloppy money market,

Rouse suggested that free reserves indicated that the banking

system was out of debt to the Federal Reserve,

and as soon as that

situation developed there tended to be funds "chasing themselves around
the market." The Banks had become accustomed to keeping funds fully

as had nonbank corporations, by placing them in the short-term
Mr. Rouse felt that in determining whether there was a sloppy

money market it

was of importance to know whether banks felt it




to invest their funds in the short-term market.
Mr. Sproul suggested that the concept of free reserves as a guide
to credit policy involved leaving the banks with a feeling of ability to
meet credit demands without strain and with some awareness of what the
Committee s policy was with respect to credit availability. It

allows the

banks to run without checkrein and lets the capital markets know there

no present or prospective likelihood of credit restraint. The term

sloppy money market involved the question where further injections of
reserves would bring about or help bring about further credit demands
that would stimulate production and employment,

or whether they would

only generate increases in demand deposits and reductions in money market
rates of interest without any stimulating effect on the economy.

As to

the discount rate, Mr. Sproul saw no way, under a policy such as the
Committee had been following, with its

effects in reducing short-term

open market rates, of getting away from having the discount rate appear
to be a penalty rate in relation to open market rates.
whether the discount rate had been or now is

He questioned

a penalty rate in terms

of the use of Federal Reserve credit, which would be where the penalty
would lie.
Mr. Leedy felt

that the open market policy that had been followed

recently had worked well and had been appropriate during this period.
thought the Committee had been correct in

erring on the side of ease

rather than tightness but expressed the view that a time might be ap
proaching when the Committee would wish to "steer a little

closer to




the shore".

Mr. Leedy said that he would not, however,

wish to have

the Committee s actions give any real indication of a change in the
policy it

had been following.

As to the discount rate, Mr. Lee


he had not been too happy about the latest reduction because he had
not felt

that the time was quite appropriate for it,
Mr. C. S

ductions in
duction in

Young said that he had been very pleased with the re

the discount rates in April and May as well as with the re
reserve requirements announced this week.

market policy and the executive committee's actions in
had been excellent this spring.

He felt that open
carrying it


The only thing that worried him, he

said, was that there seemed to be more optimism about business conditions
than he could justify on the basis of observations in the Chicago area.
Mr. Young cited reports of heavy inventories of durable goods as an
unfavorable factor in the business outlook and stated that there were
a number of soft spots in the business situation in the Seventh Federal

Reserve District.

He felt the Committee should not try to pinpoint a

level of free reserves to be maintained and would not be concerned if they
rose somewhat above the $700 million level.

Mr. Young also expressed the

hope that the discount rate would not be relegated to a minor role as an
instrument of credit policy.
Mr. Vardaman stated that he had no comments other than to express
approval of the recent reduction in

reserve requirements,

and that he

concurred largely with the suggestion made by Mr. Bryan regarding a



study to determine what were the best criteria for measuring the
effects of open market operations.

Mr. Vardaman added that he would

favor maintaining at least $800 million of free reserves in the money
market for the present.
Mr. Mills expressed reservations regarding the program followed
by the executive committee this spring.

Accepting the policy of active

ease, the question was what the degree of ease should be and how it
should be translated in the form of open market operations.

Mr. Mills

thought that the executive committee had erred by being preoccupied with
the state of

the market and the market's reaction to the adequacy and

availability of reserves, and in doing so it

had lost sight of the fact

that open market policy is more than a policy that affects the securi
ties market:



an instrument of national economic policy.


Mills felt the Open Market Committee had a responsibility to achieve broader
economic effects than those on which he felt the executive committee
had been concentrating during the past few months.

During the latter

part of May and early June free reserves had not been at a level to ac
complish this broader economic purpose, he said, but during the past two
weeks free reserves had, through fortuitous circumstances,

risen above

the $500 million level which had been taken as satisfactory, and as they
rose there was an immediate response to the more freely available reserves
in the form of a better tone in the market and a stronger range of prices
in the Government securities market.

Along with that, there had been

a reduction in loans on securities at reporting member banks and a



movement of these securities from the loan portfolio where they had
gotten congested, out to private investors,

Mr. Mills felt that the

Committee was now perhaps able to do more effective work than would be
possible if it looked exclusively to the markets and allowed the amount
of reserves in the market to drop too low.

He stated that the banks

and the investment market were very sensitive to actions by the Federal
Reserve System and that every time there had been a hint of tightness,
even temporary, there had been a suggestion that System policy had
changed-something that had a very dampening influence on the situation.
If the Committee could have a policy that was reassuring to the invest
ment and financial community without providing excesses, that would
represent a highly desirable situation.
Mr. Leach stated that, while he was not a member of the executive
committee, he felt the program followed this spring had been just about

Banks have known that they could get more reserves if they

needed them for expanding loans and Mr. Leach did not feel that banks
had turned down any legitimate demands for credit.

To him, that appeared

to be more important than the level of free reserves.

Mr. Leach noted

that his views were about the opposite from those expressed by Mr. Mills.
He did not feel the System was warranted in just making money "easy";
the responsibility of the Committee might be to keep conditions from
being too easy, if

estimates of needed reserves proved to be wrong.

Mr. Earhart said that he had no criticism to offer of the Open
Market Committee's policy and only praise for the way in which that



policy had been carried out this spring.
would not recommend a change in it

As to the discount rate, he

at the present time.

However, he

was much interested in the study being made of the discount rate
mechanism and felt the System had allowed the discount rate at times,
including perhaps the present, to get out of touch with the policies
indicated by the Open Market Committee.

A discount rate a little


in line with market rates might avoid in some measure some of the tight
ness that developed in the market from time to time by making banks
more willing to borrow during temporary periods of tightness.


Earhart would not be inclined to change the existing policy of the Open
Market Committee for the present.
Mr. Earhart thought it


sloppiness developed in the market,

would be reflected in a further reduction in the

bill rate and he saw no objective to be gained by bringing about that
Mr. Johns said he would be pleased if
for the present the policy it

the Committee continued

has been following, remaining alert to any

needs that might arise for variations or change in such policy.

He had

no intention of recommending to the directors of the St. Louis Bank a
change in the discount rate for the present,
views expressed by Messrs.

Bryan and Earhart as to inconsistencies in the

management of the discount rate in
credit policy.

although he shared the

relation to other instruments of

Mr. Johns applauded the reduction in reserve requirements

announced this week and expressed the hope that this action by the Board
represented a decision to use changes in reserve requirements more



flexibly in the future than in the recent past.
Mr. Vardaman stated that he agreed almost completely with the
statements made by Mr. Johns.
Mr. Powell said that he had been thinking along lines expressed
by Mr. Johns, and he would endorse strongly the views expressed by Mr.

Mr. Powell stated that banks were short of capital, that their

expenses were high, that they needed more funds for investment, that
the open market account was larger than the System needed, and that
reserve requirements could well be reduced further, perhaps to the
minimum statutory limits, with offsetting sales to banks of securities
from the System open market account.
Mr. Erickson felt that operations in the System account had been
handled almost perfectly in recent months.

He would not reduce the dis

count rate now and would not try to pinpoint any figure of free reserves

to be maintained but would "play by ear" to promote active ease and would
make use of repurchase agreements.
Mr. Fulton felt the practical effects of open market operations
in recent months had been very good.

The rate structure at banks in the

Cleveland District had been well maintained, and there had been no dearth
of lendable funds at banks for use in meeting legitimate credit needs.
The discount rate, he felt, was a weapon that could be used at a more
opportune time than the present.

Mr. Fulton agreed with the views ex

pressed by Mr. Powell that reserve requirements were too high and said
he would favor as an objective their further reduction as rapidly as


Mr. Irons stated that he would take no exception to the policy

of active ease but that he would have some reservations as to the
degree of ease, particularly he would be reluctant to see it
any more active than at present.


With respect to the discount rates

Mr. Irons would be reluctant to see any change at this time.

As to free

reserves, Mr. Irons wondered whether there was not too much emphasis
being put on the sheer volume or availability-of-funds concept and too

weight given to the rate as a factor in the market and as a test

or measure of the results of System policy.

He felt the System may have

shifted too far from looking at the rate as a factor of significance.
At this time, 12:07 p.m., the Committee went into executive
session and all members of the staff withdrew from the room.


lunch, the executive session continued until 3:35 p.m. at which time
members of the staff who were present at the close of the morning session
rejoined the meeting except that Messrs.

Bopp, Mitchell, Rauber, Roelse,

and Hexter were not present.
Mr. Robertson referred to the authority given by the Committee
to each Federal Reserve Bank in
tracts with nonbank dealers in

January 1948 regarding repurchase con
United States Government securities,


renewed and changed from time to time since, and to the statement of
conditions for such agreements as adopted at the meeting on March 4,
1953 which provided that the rate on repurchase contracts be fixed by
the Manager of the System Open Market Account subject to stated limita

Mr. Robertson said that he felt the Manager of the System Open



Market Account should be relieved of the responsibility for fixing
the rate, since it

seemed undesirable to give him the authority and

then not expect him to use it

freely, as had been the case in recent

Mr. Robertson then moved the
adoption of the following author
In lieu of the authority granted with respect to repur
chase agreements at the meeting of the Federal Open Market
Committee on March 4, 1953, the executive committee is hereby
authorized to direct the Federal Reserve Banks, or any of
them, to enter into repurchase agreements with nonbank dealers

in United States Government securities at such time, in such
amounts, and at such rates (or rates ranges) as the executive
committee shall prescribe, subject to the following conditions:
1. Such agreements



In no event shall be at a rate below which
ever is the lower of (1) the discount rate
of the purchasing Federal Reserve Bank on
eligible commercial paper, or (2) the average
issuing rate on the most recent issue of
three-month Treasury bills;
(b) Shall be for periods of not to exceed 15
calendar days;
(c) Shall cover only short-term Government se
curities maturing within 15 months; and
(d) Shall be used with care and discrimination
as a means of providing the money market with
sufficient Federal Reserve funds to avoid un
due strain on a day-to-day basis.
Reports of such transactions shall be made to the
Manager of the System Open Market Account to be
included in the weekly report of open market oper
ations which is sent to the members of the Federal
Open Market Committee.
In the event Government securities covered by any
such agreement are not repurchased by the dealer
pursuant to the agreement or a renewal thereof,
the securities thus acquired by a Federal Reserve
Bank shall be sold in the market or transferred
to the System Open Market Account.

-17Mr. Robertson's motion was put
by the Chair and approved by unani
mous vote.
Mr. Robertson then referred to the following memoranda, copies
of which were distributed before this meeting, relating to bankers







Bankers' Acceptances - Role of Bankers' Acceptances.
March 24, 1954. This memorandum gives background in
formation regarding American acceptance market de
velopment from inception following establishment of
the Federal Reserve System.
Current Problem of System Policy with Respect to the
Bankers' Acceptance Market.
March 25, 1954.
memorandum contains staff suggestions as to steps
the Federal Reserve might take to assist in bringing
about a more freely functioning bankers' acceptance
Bank Acceptances: Present Conditions and Practices.
May 14, 1954. This memorandum was prepared by Messrs.
Hexter and Youngdahl of the staff of the Board of
Governors with a view to presenting factual informa
tion regarding present conditions and practices in
the market for bank acceptances.
Proposal to Purchase Bank Acceptances for Federal Re
serve Account. June 1, 1954. This memorandum from
Governor Robertson raises a number of questions re
garding the proposals contained in the staff memorandum
dated March 25, 1954, referred to under item "2" above,
Memoranda from Mr. Riefler and Mr. Rouse dated June 16,
1954, regarding proposal to purchase bank acceptances
for Federal Reserve account.

He suggested that the Federal Open Market Committee terminate the practice
of establishing a minimum buying rate on bankers' acceptances at this
Chairman Martin stated that he felt such a proposal should not
be acted on without a full discussion unless all members of the Federal
Open Market Committee were satisfied that the action was desirable.


Following a brief discussion, it was agreed unanimously that

no action would be taken at this meeting with respect to the
rate on bankers'

acceptances, with the understanding that the memoranda

referred to above would be given consideration at the next meeting of
the Committee.
In response to Chairman Martin's inquiry regarding instructions
to be issued by the Committee, Mr.

Rouse stated that it

appeared probable

that, as a result of the usual forces and the reduction in reserve re
quirements, there would be a very large volume of free reserves available
during July and August, and he raised the question whether they should
be left there or taken up through permitting some run-off in System
holdings of bills.
Chairman Martin stated that he understood it

to be the sense of

the meeting that the Committee pursue a policy of active ease, recognis
ing that there was a division of thought as to the degree of ease that
would be desirable, this question, however, to be left in the hands of
the executive committee.


was understood, he said, that the full

Committee was not pinpointing any specific amount of free reserves that
should be maintained in the market in carrying out a policy of active

Chairman Martin also said that in the event there were clear

signs of inflation developing, the Committee might wish to change its
policy from one of active ease in which event it

might be desirable to

call a meeting of the full Committee prior to the time the next meeting
ordinarily would take place.
There was unanimous agreement
with Chairman Martin's statement.


-19Thereupon, upon motion duly
made and seconded, the following
directive to the executive commit
tee was approved unanimously.

The executive committee is directed, until otherwise
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, replacement of maturing securities,
and letting maturities run off without replacement), 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 promoting growth
and stability in the economy by actively maintaining a con
dition of ease in the money market, (c) to correcting a dis
orderly situation in the Government securities market, and
(d) 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
The xecutive committee is further directed, until other
wise directed by the Federal Open Market Committee, to arrange
for the purchase direct from the Treasury for the account of the
Federal Reserve Bank of New York (which Bank shall have discre
tion, in cases where it seems desirable, to issue participations
to one or more Federal Reserve Banks) 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 at
any one time by the Federal Reserve Banks shall not exceed in
the aggregate $2,000,000,000.
Mr. C. S.

Young stated that the Conference of Presidents had not

a time for its next meeting although it

had been suggested that it

might be deferred until the time of the American Bankers Association's
annual convention to be held at Atlantic City, New Jersey, October 17-21,



Chairman Martin felt that it would not be desirable to defer

the next meeting of the Open Market Committee until October and there
was agreement with his suggestion that no date be set at this time
but that the meeting be subject to call.
Thereupon the meeting adjourned.