View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

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, March 27, 1956, at 10:00 a.m.

Mr. Martin, Chairman

Sproul, Vice Chairman
Fulton, Alternate

Messrs. Bryan, Leedy, and Williams, Alternate
Members, Federal Open Market Committee
Messrs. Leach, Irons, and Mangels,

Presidents of

the Federal Reserve Banks of Richmond, Dallas,
and San Francisco, respectively
Mr. Riefler, Secretary
Mr. Thurston, Assistant Secretary
Mr. Vest, General Counsel
Mr. Solomon, Assistant General Counsel
Mr. Thomas, Economist
Messrs. Abbott, Parsons, Roelse, Willis, and
Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Sherman, Assistant Secretary, Board of
Mr. Koch, Assistant Director, Division of Re
search and Statistics, Board of Governors
Mr. Miller, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Gaines, Manager, Securities Department,

Federal Reserve Bank of New York
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Committee
held on March 6, 1956, were approved.

Before this meeting there had been distributed to the members
of the Committee a report of open market operations covering open mar
ket operations March 6 through March 21, 1956, and at this meeting a
supplementary report covering commitments executed March 22-26, in
clusive, was distributed.

Copies of both reports have been placed in

the files of the Committee.
In his comments on the reports, Mr. Rouse stated that the money

market has been tight during the last few days and that the market for
Government securities has been under considerable pressure as a result
of expectations of further demands on it and of tighter credit policy
which had been accompanied by growing uneasiness and strong downward
pressure on prices of intermediate- and long-term Goverment securities.
Distribution and financing difficulties in corporate and municipal
securities have also had an adverse influence on the Government securi
ties market.

Mr. Rouse said that the projections showed net borrowed

reserves holding fairly steady for the next few weeks in a range about
$500 to $600 million and that little

action would be required in the

near weeks ahead unless a marked change in policy was adopted.
In response to a question from Mr. Leach, Mr. Rouse commented
upon loans made by a few large commercial banks in connection with the
recent Treasury refinancing which had assisted in keeping down attri

Mr. Rouse recalled that representatives of both the American

Bankers Association and the Investment Bankers Association had discussed
the responsibilities of banks in a Treasury financing operation, as he



had reported at the meeting on March 6, and that the loans made by a
few of the larger banks in support of the recent Treasury financing
grew out of these discussions.

Mr. Rouse indicated that the number

of banks which had made such loans in support of the Treasury financ
ing through the dealer mechanism was not large, that the rates on such
loans were at 2-3/4 - 3 per cent, and that, in his opinion, this pro
cedure made a noticeable difference in keeping down attrition on the
Treasury's offering.
Upon motion duly made and seconded,
and by unanimous vote, the open market
transactions during the period March 6
through March 26, 1956, inclusive, were
approved, ratified, and confirmed.
Mr. Young made a statement on the current economic picture con
cerning which a staff memorandum dated March 23, 1956,

had been distrib

Mr. Young's statement was substantially as follows:

After mid-1954, economic activity passed swiftly through
a recovery phase into an expansion phase. With the expansion
movement eventually climaxed by near capacity output in many
lines and with some key product markets overpressed with supply
by the fall months of last year, individual sectors of indus
activity commenced to move unevenly and over-all advance
quarter's level of
to decelerate markedly. Judging the first
activity from such broad aggregates as industrial production,
nonfarm employment, gross national product, and foreign trade,
economic advance finally came to a halt, at least temporarily.
The big question for the future is: Will activity hold
on the present plateau, will advance be resumed, or will de
cline set in? Before commenting on this question, the latest
highlight facts need brief review.
The Board's index of industrial production for March may
be tentatively placed at 143, roughly the level it has held
Output of durable goods has been off some; non
since October.
durables output has been about steady; minerals and fuels out
put has been up.

Gross national product is being estimated at $399 billion
for the current quarter compared with 397 in the fourth quarter
of last year, but up about 6 per cent from a year ago.
modest increase in total product from last quarter has re
flected mainly further growth in business fixed capital and in
ventory outlays, in State and local government purchases, and
in consumer expenditures for services.
Consumer goods purchas

ing at retail this quarter has been about stable.
The labor market has continued steady and generally strong,
with sector changes small and offsetting. Average hours of work
at factories are down from their highs of the late fall,
remain a little
above a year ago. Reflecting smaller overtime,
average weekly earnings are down slightly. Unemployment since
last fall has shown little
The scattered wage settle
ments so far this year have been on a more liberal basis than
those concluded early last year.
Construction activity, though under a year ago, has been
only moderately below last summer's record rate. Since non
residential construction has still
been climbing, the construc
tion level reflects solely reduced residential building.
The price situation, which earlier in the year had shown
signs of weakening, has very recently strengthened, with key
price sectors firm to rising. Agricultural prices have been
displaying more than seasonal strength.
Abroad in most industrial countries, consumer and business
demands have continued to grow, though at a slower pace.
dustrial prices abroad in the first
quarter have also been firm
to rising.
Import demands for American industrial products and
U. S. import demands have continued at close to high levels
reached late last year.
Now to brief comment on the central question: Will eco
nomic advance be resumed; will a plateau of activity be main
tained; or is decline in prospect? No unqualified answer is
possible, of course, but most recent symptoms point to re
These include:
sumption of advance.
Much greater than expected plant and equipment ex
penditure plans on the part of business, indeed of all major
lines of business;
(2) Widespread optimism of consumers with respect to
the economic outlook generally and, in particular, with regard
to their own financial position and income prospects;
The maintenance of strength in used car markets,
"satisfactory" seasonal upswing in new automobile sales, and
very strong new truck sales;
Continued capacity operations in steel and other
important industries;

An evident downward adjustment in the rate of
business inventory accumulation from the fourth to the first

(6) Maintenance of housing starts since late fall at a
1.2 million unit rate; a very recent sharply increased volume
of residential and other construction contract awards; and a
generally freer flow of funds into mortgage investment;
Strength of demand in key industrial and agricultural
markets, with the more important price adjustments on the up

(8) Continued rise in economic activity in major indus
trial countries abroad;
(9) The further sharp rise in common stock prices with
out the benefit of much, if any, increase in stock market
The very great strength of business demands for credit

at banks and through the capital markets and the maintenance of
quite high levels of consumer demands for credit.
If the weight of current indication is in the direction of
resumption of advance in activity, the next question to arise
is: At what rate will advance occur and with what effects in
demand pressure on prices? On this question, these points seem
First, any new advance will need time before current
data can produce a showing of momentum. Second, advance in real
terms from the high current levels, with activity in key lines
already close to capacity, will necessarily have to be slow.
Third, with supplies of many materials tight at prevailing
prices, with final product demands showing further expansion,
with labor generally in a strong bargaining position, and with
business psychology on the ebullient side, there is real hazard
of a heavy resort to credit to supplement buying power in the
present, with resulting accentuated demand pressure on prices.
Mr. Thomas made a statement on policy implications in

the present

The statement made by Mr. Thomas was as follows

As suggested by the foregoing description of recent
economic developments, since the last meeting of this Com
mittee, there has been an almost spectacular shift in views
about the economic outlook. This change in viewpoint is
supported not alone by the somewhat surprising statistics
of business and consumer spending intentions, but also by
current market developments and most dramatically by the
These events present
course of events in the credit area.
forebodings for the future.



Three weeks ago there were reasons to hope that slacken
ing in some areas would permit anticipated expansion in others

without exerting undue pressures on productive capacity and

the available supply of lendable funds.
Today the big question
is whether all the investment and consumer spending in prospect
can be accomplished without inflationary developments supported

by expansion in the volume and use of credit.

Events of the

past two weeks suggest the possibility that such an expansion
has already begun in a big way.

Loans and investments of banks in leading cities have ex
panded in the past two weeks by what is probably an unprecedented
A preliminary estimate of the total at banks in leading

cities shows an increase of over $2 billion, reflecting increases
in business loans of $1.2 billion, in security loans of $300
million, and in Government securities of $$500 million.


to U. S. Government deposits have exceeded $2 billion in the two
weeks while the usual tax week decline in other demand deposits
was less than the preceding week's increase.

Comparisons with

other recent years are distorted by differences in dates and
also by the fact that the retirement of tax anticipation securi

ties did not fall this year in the same reporting week, but even
allowing for this the differences are striking.
Estimates of member bank required reserves on a weekly aver
age basis have increased by over $400 million in the past two
Projected increases and data for corresponding periods in
other recent years were half as much.
This expansion has been
supported by some System repurchase operations but principally by

additional member bank borrowing at the Reserve Banks, as well as
from other sources.

Borrowing at the Reserve Banks has generally

exceeded $900 million and last Thursday and Friday approached
$1,500 million.
Some increase in credit at this time was to be expected to
cover taxes and other large payments customary around mid-March.
There are indications, however, that some of the bank lending
activity was also directly or indirectly for other purposes.
is likely that tax needs were used as an excuse for borrowing
and that other means of meeting tax payments were utilized less
than might have been expected.
It is true that tax receipts by
the Treasury have been larger than ever before, meeting the most
The large growth in Treasury balances
optimistic expectations.
has been a factor causing both the increase in required reserves
against such deposits held at member banks and the drain on re
serves resulting from increases in Treasury deposits at the
It is striking, however, that other depositsReserve Banks.
built up prior to tax payments--have not yet been reduced cor
Such a decrease may occur and bank credit will
probably be reduced, but the extent of the reduction will be a
matter of concern.



Another cause of the recent bank credit growth has been
the Treasury refunding operation. Whereas this operation had
the appearance of good pricing and successful flotation with
out Federal Reserve aid, it now seems evident that many of the
new securities are being carried on bank credit and some prob
ably by unwilling holders.
Corporate and other holdings of the
maturing issues that were expected to be redeemed to meet tax
and other payments were exchanged instead, and the needed funds
were met by borrowing from banks.
Others were sold to dealers
or to banks and thus called bank credit into use. As a conse
quence, although no direct Federal Reserve support was given the
refunding operation, Federal Reserve credit was tapped. The aid
was acquired through the back door, while the front door was
kept closed and the repurchase window was sparingly used.
Another possibility, difficult to establish statistically
as yet, is that many borrowers sensing the change in the eco
nomic outlook have decided to borrow as soon and as much as
possible. Taking advantage of the tax excuse and leniency con
nected with Treasury financing, they may have actually borrowed
more than necessary for those purposes.
Banks in turn, taking
the same advantages, have supplied these needs and increased
their borrowings at the Reserve Banks.
It is known that capital
markets are threatened with congestion and there are reports of
corporations attempting to cover prospective financing needs by
arranging term loans at banks.
Moreover, with this situation
in view, some of the loans made for tax purposes may not be paid
off promptly in order to retain funds for other purposes.
So far, some of these suggested motivations are based on
conjecture, and cannot be established by current statistics.
The test will come, however, in the near future. If the recent
expansion is mostly for temporary needs, a larger than usual
contraction should follow. It is also possible that the expan
sion that has occurred will itself put banks under restraint
with respect to future extension of credit. If credit does con
tract correspondingly, then no additional restrictive action will
be needed. If, however, credit contraction does not follow, then
undue use of credit will be clearly indicated.
The question that is presented to the Open Market Committee
and particularly to Reserve Bank officials is whether those who
have entered the domicile of Reserve Bank credit through the
sugar or
back door are neighborly callers to borrow a little
whether they will attempt to find lodgement for an extended period.
If they don't leave of their own accord shortly, then there will be
an indication that the credit obtained for temporary purposes--tax
payments and Treasury financing--is being applied to other uses.
Drastic action will then be needed to restore balance and avoid
Perhaps earlier restraining action
inflationary price pressures.
would forestall developments that would later be difficult to

Reserve projections presented assume fairly substan
tial decreases in deposits and required reserves for this
week and next, and a moderate growth along with usual
seasonal variations in subsequent weeks.
These estimates
indicate continuation of net borrowed reserves at a semi
monthly average level of close to $500 million, meaning
member bank borrowings of $800 million to $1 billion, in
the absence of further System operations.
Under the cir
cumstances, it would appear that no additional purchases
would be needed, except perhaps for occational month-end
repurchase contracts.
From a credit policy standpoint, the key to control
seems to rest in member bank borrowing.
Open market opera
tions to force a further increase in the total volume of
member bank borrowing would probably have a little
tional restraining effect under present conditions.
ports now being received as to the locus of member bank
borrowing are not encouraging.
Rather than reflecting
largely temporary borrowing by a changing group of banks,
it seems that the bulk of the borrowing each week is done
by a small number of banks, which have borrowed in most of
the reserve periods during the past three months.
This is
continuous borrowing.
Application of additional restraint
in this area might be adequate to keep the credit situation
in balance.
Scrutiny of individual cases, where it appears
that banks are misusing the borrowing privilege, is certainly
called for, but if exuberance is as wide as appears a rise in
the discount rate is needed.
Chairman Martin suggested that the Committee discuss all

aspects of

the economic and credit situation today in the light of the material pre
sented by the staff and of the developments during the past three weeks.
This should include consideration of the desirability of changing the
wording of clause (b)

of the first

paragraph of the Committee's direc

tive to the Federal Reserve Bank of New York in

terms of whether the

present wording was consistent with the existing situation; consideration
as to whether the discount rate at the Federal Reserve Banks should be
changed now or in the near future; and consideration of the degree of



tightness that should be maintained in the market through open market


would also be desirable to discuss the administrative

problems involved in

connection with borrowings by member banks at

the Federal Reserve Banks.

He then called upon Mr.

Sproul who made a

statement substantially as follows:
1. Practically all of the available data which, of
course, covers the past, shows that there has been a level
ing off of economic activity on a high plateau during the
two and a half months of 1956.
Most of the expectations, confirmed by some impor
tant indicators, however, now suggest that a renewal of
growth in the economy is in prospect, if not in progress.

Optimistic expectations are characteristic of expressed
consumer intentions with respect to spending, of business
projections of capital expenditures for plant and equipment,
and of those who express themselves through the purchase of
common stocks.
These optimistic expectations, among other things,
must be assuming that the decline in residential building

has ended, that the automobile industry will soon have pro
duction and consumption balanced at what are still high
levels, that inventory accumulation is moderate and healthy,
and that the agricultural situation will at least be no more
of a drag on the economy in 1956 than it was in 1955.
4. While the resumption of the upward movement of 1955
seems to be coming more quickly than had been expected, there
fore, there is yet nothing very concrete to show that we are
faced with a revival of inflationary pressures, which we don't
want, rather than with a renewal of economic growth, which we
do want. There is no new dynamic force in sight which might
be expected to push the economy beyond a sustainable rate of
growth in the immediate future. In fact some of the forces
which pushed the economy toward the limits of its then capacity
in the fall of 1955, such as the rapid net expansion of con
sumer instalment credit and mortgage credit, the rapid build
ing up of inventories, and the pressure of demand from the
rest of the free world, which was also experiencing a wide
spread boom, seem less likely to strain our resources than
And these resources, too, will be expanding as the
in 1955.
labor force grows and new plant and equipment come into



Meanwhile the demand for bank credit continues
strong, and the banks quite generally report some ration
ing of credit to borrowers even though their loans have
recently increased enormously, partly for special reasons.
In the money centers the banks have been meeting some of
their own needs for reserves by substantial intermittent
borrowing from the Federal Reserve Banks.
Now that it
seems more likely that the next move in the business situa
tion is to be up instead of down, there appears to be no
relief in sight from this situation, and the banks may find
it necessary to make a more fundamental adjustment in their
positions, which would involve further sales of securities
to offset a possible continued increase in loans. We have
the makings of a difficult situation, here, for the imme
diate future.
The banks have already reduced their liquidity
position so greatly as to make it likely that further adjust
ments will have much greater effect on the money market than
in the past. At the same time it is reported that some of
the current demand for bank credit is developing out of the
temporary, or short and intermediate term, requirements of
business for capital expansion programs, which it is diffi
cult to finance in a capital market which is showing some
signs of congestion. We want to try to prevent an undue use
of bank credit in the capital market, but under present
congested conditions, an attempt to force a quick adjustment
of this situation might mean we would have a real party on
our hands which would go beyond anything we want or intend.
6. One mitigating factor, over time, is that the Fed
eral budget is expected to show a cash surplus of around $5
billion in calendar 1956 whereas in 1955 it was just about
in balance, so that there will be less call on the banks
And it also seems reasonable to expect
from this source.
that the rate of growth of consumer borrowing and mortgage
borrowing from the banks will slacken as compared with last
7. The blackest cloud on the further horizon, perhaps,
continues to be the possibility of a run-up in prices growing
out of immediate short supplies as in the metals and some
other industrial materials, and out of expectations of labor
settlements which will further increase costs and induce in
dustry to try to pass on these increased costs in the form
of higher prices. Competitive forces may help to keep this
movement somewhat in check, but it is likely to pose a dif
ficult problem for credit policy if we again appear to be
approaching the general limits of productive capacity.
8. We don't need to borrow too much trouble from the
future, however, to formulate policy for the next three weeks.



Having maintained a steady checkrein on the supply of credit
while the economic machine was slowing down to a fast trot,
with only shifts in emphasis to mark changes in our estimates
of the current situation, our policy now shows signs of be
ginning to bite more deeply as renewed economic growth be
comes more likely. It would seem appropriate in these cir
cumstances to test the forces of demand for credit by letting
them press against the existing supply of reserves.
would involve a slight further shift of emphasis toward re
straint without, at this stage, attempting to reinforce that
restraint by committing ourselves to the forecast that infla
tion is inevitable unless we act vigorously, and it would also
rule out an increase in the discount rate at this time.
Mr. Erickson said that conditions in New England remained good.
In Massachusetts,


February, new automobile registrations were 6 per

cent below February of last year, but used car registrations were up 10
per cent.

Construction awards in February were 12 per cent above a year

Recent snow storms would affect figures which would cover the latter

part of March.

Bank loans have increased, Mr. Erickson said, but member

banks recently have not been borrowing very much at the Reserve Bank.

Erickson suggested that the Committee should "lean more heavily

against the wind" and increase net borrowed reserves by whatever amount
was necessary to maintain pressure.
an increase in

At this time, he would not recommend

the discount rate but would observe the situation and be

prepared to consider such an increase depending upon developments.

Mr. Irons said that the situation in the Dallas District was
very strong.

There was a great deal of optimism and some feeling was

developing that an inflationary movement was occurring.

Both bankers

and nonbankers with whom he talked had suggested we might be having a
"bubble on the boom."

Their comments reflected more than confidence,



showing some apprehension concerning developments.

Until recently,

there had been "continuous borrowing" at the Dallas Bank, Mr.


said, and the Bank had had discussions with several member banks who
had been discounting quite continuously.
had declined fairly sharply.


Recently, such borrowings

Irons stated that it

did not help

the Reserve Bank's position to have the Federal Advisory Council
continuously coming back from its

meetings with the Board, having

made the suggestion to the Board that the discount window should be
kept open at the Reserve Banks and not having had any indication that
the Board or anyone else felt that the discount window should be closed
a little

once in

a while.

There was a feeling on the part of some of

the directors that so long as banks had Government securities, they
should be able to borrow at the Reserve Bank regardless of the purpose
of the borrowing.


expressed by Messrs.

Irons said that he would lean to the view

Young and Thomas in

and credit situation.

He felt

commenting on the economic

the Committee should maintain pressure

and should resolve doubts on the side of restraint and even increase
change in


Irons said that he would not be ready to recommend a

the discount rate today but that he would give much more

consideration to it

than he would have three weeks ago.

Mangels said that the situation on the Pacific Coast was

much the same as three weeks ago and paralleled the picture given by
Messrs. Young and Thomas in most respects.

Developments since the

previous meeting confirmed that the economy was moving on the up-side.



The employment picture was somewhat better than in
and January; residential construction now is



on a better level than

toward the close of 1955; retail sales continue at a higher level than
the high level of a year ago; and automobile sales in

January and Feb

ruary were slightly below a year ago but have increased in recent

Bank credit demand is

are loaned up.

very heavy, Mr.

Mangels said, and banks

They are even more selective now than they were a

month ago in the kinds of loans they will make.
have increased a little
tural loans is


Real estate loans

but the aggregate of industrial and agricul
Despite this, borrowings at the Reserve Bank

continue on a modest scale--in February,

they were the lowest since

last July--and there has been no occasion to talk with banks in the
Twelfth District about continuous borrowing.

Mr. Mangels did not

think the economy was yet showing signs of getting out of hand.


creases in wholesale prices have not been reflected in inflationary
advances at the retail level.
the way,

With the Treasury financing out of

some of the recent borrowings at banks may be expected to

be reduced as the April 15 tax date passes.


Mangels expressed

the view that under present circumstances the Committee should con
tinue substantially the policy it

has been following with perhaps

some slight emphasis on the restraint side rather than toward ease.
At the moment,

he would not see an occasion to propose an increase

in the discount rate.
Mr. Powell said that the Ninth District was coming out of a
severe winter with expectations for a large volume of building, good



automobile sales, good farm equipment sales, and considerable
strength in

the entire economy.

by expansion in bank credit.

This situation was being supported

Farm income is

down and bank deposits

are moving to other areas but bank loans are rising in spite of
those factors.

Mr. Powell said that he would support the view that

the discount rate might be increased as a restraining influence on

the boom that is developing.

The modest rise that might be made in

the rate would not be harmful to any part of the economy, he felt,
but would be a signal that the Federal Reserve thought the boom was
being resumed, and that it
into inflation.


rather than late in
this sort.
as it



could not go much farther without running

Powell thought that the System should move early
increasing the discount rate under conditions of

waited for several weeks and if

seems to be developing, it

the boom continued

would become more difficult to apply

effective restraints, whereas a modest rise in

the discount rate fairly

promptly would represent a move to keep the boom under control.
Mr. Leedy said that conditions in
fered somewhat from those in

other parts of the country and did not have

so many plus signs or so much optimism.

the Kansas City District dif

The district had participated

the increase in bank loans, but a considerable part of these have

been in

areas where agriculture has suffered and is

ing has not been widespread among banks in


the Tenth District.


review presented by members of the staff gave cause for concern, Mr.
Leedy felt, and if

conditions continued to move in the direction



reported, the Committee might be faced again with real inflationary

For the time being, he would not suggest an increase in

discount rate, although he felt
short time.

this might be in the picture in a

Public psychology seems to be pressing rather severely,

Leedy said, and this was a delicate point that could be disturbed

quite easily.

Mr. Leedy also said he thought no change need be made

at this time in the directive to be issued to the New York Bank.
Pending the next meeting of the Committee, his preference would be to
watch developments and, short of disrupting the market for United
States Government securities, to let

the reserve position of banks

tighten as loan demand increased and other market factors brought
added pressure.
Mr. Leach said that the Fifth District economy continued to
move sideways at a very high level of activity.
revision in

The recent upward

the SEC-Commerce estimates of business capital outlays

for 1956 seems reasonable in

the light of current announcements of

planned industrial expansions within the district.
these estimates,

The revision in

the continued strength of loan demand, the further

edging up of many prices, and especially the renewed public confidence
that he sensed seemed to warrant a policy of at least as much restraint
as we have had in

recent weeks and perhaps a little


At the same

time, Mr. Leach said that he did not see sufficient concrete evidences
of speculative developments or undue expansion that would justify an
announced tightening of Federal Reserve credit policy in the form of


a discount rate increase.

He thought that that might well come be

fore too long but did not feel the time for such an increase had yet


Mr. Leach

went on to say that the Richmond Bank recently

had visited several of the more persistent borrowing member banks for
the purpose of discussing the situation with them, particularly as to
their plans for the next year.

The Bank had been doing this somewhat

gradually but felt that this was the time for resumption of these

Mr. Vardaman said that he had been thinking in
possible advisability of an increase in

terms of the

the discount rate.


listening to the comments made thus far this morning, he was less
certain that such an increase was needed at the moment,

His present

thinking would be along the lines suggested by Mr. Leedy which would
include no change in

the discount rate at the moment but would let

the restrictive factors in the situation bring about increased tight
ness of their own volition.
Mr. Mills next made a statement which was substantially as

Two significant statements came out of the comments
that prefaced the general discussion we are now carrying
was Mr. Rouse's report of an attitude of
on. The first
gloom and possibly some fear and concern in the market.
The second was Mr. Thomas' statement regarding the growth
of bank loans, increasing use of the discount window, and
the inflationary potential that lurks in that situation.
From these two statements, it would seem that as a problem
of policy thinking we must endeavor to reconcile the
psychological attitude toward the market with the necessi
ties of the economic situation, and particularly the very



rapid growth of bank loans, in a manner that will main
tain a proper degree of pressure on reserves and a limita
tion on the availability of credit. As Mr. Leedy mentioned,
this must be done without risking a disruption in the market
for U. S. Government securities.
It has been my observation over the past several months
that as long as negative free reserves have averaged around
$300 million symptoms of rather acute deterioration in the
money market have occurred only on occasions when there has
been an abrupt increase in their level above $300 million
either temporarily or continuously.
That may be coincidental.

However, to the extent that the theory holds water, we might

be wrong to be too passive and to allow the market and the
reserve positions of banks to tighten against themselves.
Instead, we might better think in terms of bringing the level
of negative free reserves up to the $400 or $500 million level
through a more gradual process and, in doing so, keep the
"feel" of the market and bring relief if we should find our
actions too severe. Such a condition would be reflected in
new concern on the part of the commercial banks for their
liquidity and an inclination to deny credit which should be
extended. All of this adds up to a policy of moving ahead
To support that position, I point to the fact
that the reserves introduced into the market during the last
two days through direct purchases of Treasury bills and re
purchase agreements had an immediate and salutary effect on
This improvement was not justified by any
market sentiment.
factual evidence of a shift downward in the level of negative
judicious help to
In other words, a little
free reserves.
the market at this time may prove necessary to carry it along
until the level of negative free reserves can be brought up

to $500 million.
As to the discount rate, in my opinion, an increase might
be too disturbing until the sense of uncertainty in the market
has been alleviated and there is a better understanding of the
trend of economic events. An increase in the discount rate
should be seriously considered, but when there is a better per
ception on the part of the general public of such a necessity.

Robertson said that he was glad that decisions on monetary and

credit policy in

times like this were made by a Committee rather than by

any one individual.
but he felt it

He had not always agreed with the group decisions

clear that over the several years during which he had been



a member of the Committee, the decisions made by the group were much
better than those of any one individual.

He was more and more im

pressed by the thought that had gone into these decisions.
Mr. Robertson went on to say that his view on the current situa
tion differed somewhat from the view expressed earlier but that he was
not confident that his view was more nearly correct than would be the
composite view that would be reached in

the course of the discussion.

He then made a statement substantially as follows:
As our economic report this morning has clearly indi
cated, the evidences of strength in the business situation
have snowballed since our last meeting.
It now seems clear
to me that our job in the coming weeks and months is going
to be to try to curb overconfidence, speculation, and infla
tion rather than to stimulate recovery.
First came the news of our most recent consumer finances
survey, showing great consumer confidence and widespread plans
to purchase homes and consumer durable goods.
Then came the
report of the survey of business plans for plant and equipment
expenditures, which indicates a spectacular rise of 22 per
cent in spending this year over last. In addition, the latest
available information points to an end to the decline in two
major weak spots in the economy, namely, housing and auto
Recent data on building contract awards and applica
tions for mortgage insurance to the FHA and VA are strong and
Automobile sales are
much higher than earlier expectations.
now showing a vigorous seasonal increase.
In the field of prices, too, every time one looks at
the daily press these days he sees more announcements of price
increases, from raw materials to finished products, from steel
scrap to tin cans, from raw copper to building materials, and
The only broad area
from freight rates to laundry services.
exists is in agriculture, and even
where price weakness still
there, there are signs that the decline may be coming to a
Undoubtedly, any new farm legislation would be a prop
the wage-price spiral
All in all,
to farm prices and incomes.
Large wage and price
is showing definite signs of new life.
increases appear inevitable in steel, and these are likely to
spread to other basic industries.



All this adds up to strength, great strength, in our
business situation-strength that calls for the firm appli
cation of monetary restraint if we are to avoid a substantial

general price rise and to avoid bringing discredit to the
role of credit and monetary policy in a practical program of
economic stabilization.
Consequently, it is my opinion that this Committee should
move toward greater restraint through open market operationstoward maintaining an even larger volume of net borrowed re
serves--than we have aimed toward during the past few weeks.
In addition, I think we should immediately start thinking in
terms of an increase in the discount rates in order to flag
the danger inherent in the prevailing boom psychology. As to
the Committee's directive, certainly we should eliminate to
day the reference to our taking into account deflationary
tendencies in the economy.
Mr. Shepardson said that Mr. Robertson had expressed views essen
tially the same as his.

He felt that there were indications on the up

side which definitely overbalanced any precautionary attitudes that might
have been apparent on the part of business or the public a short time

He recalled the period in

1955 when pressures were building up and

when the Committee looked for more positive evidence of the need for re
straining actions than seemed apparent at the time.
mittee saw that evidence, it
have acted.


was a little

Shepardson said that it

By the time the Com

behind the time when it

seemed to him the indications

were sufficiently strong now to warrant more restrictive action.
decline in




loans extended by member banks were to develop along the lines

mentioned as a possibility by Mr.



might justify deferring a

decision to take action on the discount rate at this time.



Shepardson felt that an indication on this point would be had before
the next meeting of the Open Market Committee.

Therefore, the Committee



should have very clearly in mind the possibility for needing an adjust
ment in

the discount rate within the next week or two, rather than

carrying the matter over until after the next meeting of the Committee.

Shepardson said that he would also like to see a change in clause


of the Committee's directive to the New York Bank,

so as to elimi

nate the instruction that operations should take into account anyde
flationary tendencies in the economy,

since he did not believe that

such an instruction was appropriate under existing circumstances.
Mr. Fulton said that the Cleveland District was still
blast, that there was no discernible letup in
see no possibility of such a letup.

going full

activity, and that he could

He was concerned particularly by the

great expectations of business for plant and equipment expansion during
the coming year, and he described the extreme optimism reflected at a
meeting of Cleveland businessmen which he attended last evening.
attitude was encouraging still


further plans for increases in capacity.

These plans were so vast, he said, that if the capital issues for financ
ing them were put into the market, there was bound to be great additional
pressure on materials, wages,


and other elements in

the economy.

Fulton observed that every time net borrowed reserves were permitted

to drop to around the $100 million level, the result was that corpora
tions were encouraged to come in

to the market for more funds.

He said

that he concurred strongly with the view expressed by Mr. Powell that
an increase in the discount rate would be desirable at this time with
out any undue delay.

One effect of this, as suggested by Mr. Thomas,



would be to deter new capital issues which were now being put out in
such large volume under the favorable rate conditions that exist.


Fulton also said that he thought the Committee's directive should be
changed in the manner already suggested during this meeting.
Mr. Williams stated that actual and prospective activity is
strong in

the Philadelphia District.

He presented the results of a

recent survey showing that capital expenditures now in prospect for
1956 were some 24 per cent ahead of the expenditures that were anticipated
in a similar survey made in the fall of 1955, and 16 per cent ahead of
actual outlays in the district during that year.

It was evident that

the attitude of businessmen had changed markedly since the fall survey,
Mr. Williams said.

He also referred to borrowing among member banks

the Philadelphia District, stating that there is

steady borrowers:

a hard core of

out of 560 banks, 7 have accounted for about three

fourths of the borrowings at the Philadelphia Bank since last July.
The Bank had talked with four of these member banks, and Mr. Williams
said they were fully aware of the dangers in the situation.

While he

might be skeptical of their capacity to cease to be steady boarders,
he would hesitate at the moment to increase the discount rate.


three weeks from now perhaps something should be done to discipline the
banks by way of the price route.
Mr. Bryan said that the staff of the Atlanta Bank had presented
nothing that differed in

any significant way from the material that had



been furnished to the Committee by Messrs. Young and Thomas regarding
the economic and credit situation.

In talking with directors of the

Atlanta Bank and others, Mr. Bryan said that he personally had been
impressed with the extent of the excitement that seems to be prevail
ing regarding the business outlook.

He could not find any one, even

in the textile industry, who was not looking forward to the prospect
with a great deal of anticipation.

He noted that he had taken the view

in the past that the System should not take actions until it

saw indica

tions of the need for such actions in the information available to it.
At this time, he felt that we had seen enough.

We are getting into a

situation in which the extraordinary excitement and the extraordinarily
rapid increase in wage rates and wage costs make one of two things in
evitable: (a) there would be a substantial advance in prices, in which
event the System would have to furnish the money to carry on the economy
at a new high price level--an inflated level, or (b) the System would
refuse to furnish the money to support that advance, in which case un
employment would be created and consumers would be unable to take the
products of industry off the market.
the System had no choice now.
country has had it,

Mr. Bryan said that he thought

Easy money, or money as easy as the

should be out.

He doubted the wisdom of merely

letting the market tighten against an existing money supply.


would cause more difficulty in his opinion than another course, in
consequence of which it was his view that at this moment the System
should move overtly in the direction of restraint.

The only remaining



question was how to move and by what instrument.
juncture, Mr. Bryan said that he believed it

At this particular

would be preferable to

make clear to the banking system at the present time in

no uncertain

terms that the replenishment of their reserves at the discount window
was going to cost more money than it

had been costing.

He felt that

this would be a better course that would produce less convulsion than

the System waited and later on nudged the banks by increasing open

market pressures.

He would favor an increase in the discount rate

quickly, although it
a little


was not important whether that was done today or

As for the Committee's directive, he would eliminate

the reference to carrying on operations so as to take into account
deflationary tendencies in the economy.

Johns said that in the Eighth District business conditions

appeared to differ from those reported nationally in two significant

both on the weaker side.

First, contract awards were running

behind the national rate; second, the employment picture was not as good
as in

the country as a whole because of layoffs that have taken place

both in private industry and because of cancellation of some prime
defense contracts which have resulted in

the district.

layoffs by defense subcontractors

Except for these factors Mr. Johns said that the Eighth

District picture was about as reported nationally.


Johns also com

mented on the interpretations being given to the latest survey of con
sumer purchasing intentions.
"strength and optimism."

He was not so sure that the survey was all

On the contrary,

the country might be in or


near the end of a boom in

consumer spending.

Whether the economy

would be rescued from that for a long period of time by the obvious
bulge in

plant investment could not be determined at this time.

With respect to borrowing at the Reserve Banks, Mr. Johns said that
as reported by Mr. Erickson for the First District, borrowing in the
Eighth District had been down to the $4 or $5 million level recently.
There were very few borrowers, and these were smaller banks, borrowing

smaller amounts.

A few weeks ago the St. Louis Bank had had

occasion to discuss the matter of borrowing with one of the larger

and there had been a marked change in

that picture recently.

Mr. Johns went on to say that he did not intend to play down the im
portance of the optimistic implications of the survey of consumer


The group working with him at the St. Louis Bank had had

an abrupt change of mind within the past three weeks, to the extent
that the one member, who three weeks ago thought a decrease in
discount rate might be called for, now felt
be in order.


that an increase might

Mr. Johns said that he was not a member of that group

but that these shifts in view brought out the rather dramatic change


The consensus of the St. Louis group was that the time

had not come to increase the discount rate, but that the time has come
to begin thinking about increasing it.
favor such an increase.

Three weeks from now they might

Mr. Johns said that at this time he would be

inclined to resolve doubts on the side of further restraint, but with
out a change such as an increase in discount rates would indicate.



Mr. Szymczak said that we have a situation due to the tax
period that occasions caution, as had been indicated by Mr. Mills,
in tightening the pressures on the money market.
potential growth in

At the same time,

the economy, whether natural or inflationary,

suggested that the Committee look at negative free reserves and allow
them to increase.

The Committee should also look at borrowings at

the Federal Reserve Banks and see whether banks are borrowing for
capital purposes or for purposes for which the discount window is

Mr. Szymczak did not think this was a question of opening

or closing the discount window.


was a question of the purpose of

borrowings and where the funds were going.
crease in the discount rate, if

In his opinion, an in

it comes, probably should not come

until after the tax period was passed; i.e.,

around the middle of


Balderston said that early in

the year he had the feeling

that the economy was moving sideways and that the Committee's directive
should reflect what seemed to be the possibility of a topping off of
the rise.

At that time it appeared that the advance was decelerating.

Now, Mr. Balderston said he sensed a strong wind blowing, one that the
Committee could not ignore.

In his judgment it

was time to change the

Committee's directive to the Agent Bank and he felt

that the official

record should indicate the recognition by the Committee of the strong
wind to which he and others had referred.

He suggested that clause (b)

of the first paragraph of the directive which now provides that opera
tions shall be with a view"to restraining inflationary developments in



the interest of sustainable economic growth while taking into account
any deflationary tendencies in the economy" should be changed; for


might read "to protecting long-term growth and stability

in the economy by curbing clear inflationary developments."
As a second point, Mr. Balderston said that he felt the time
had come to use the price of money more effectively.

He noted Mr.

remarks about a hard core of borrowers at the Reserve Banks

who have been borrowing about three-fourths of the total amount dis

He felt something very constructive had been accomplished

by talking with some of these banks, with the result that some of
them recently had been borrowing less.

However, in

Mr. Balderston's

view the time had come to supplement open market operations by a change

the discount rate which would be not only an increase in

the rate

at which member banks get their accommodations from the System, but
which would be reflected in the rates charged by the member banks.
His preference would be for action to increase the discount rate as
expeditiously as could be managed in

the various districts where the

officers and directors considered such action appropriate.
Mr. Balderston's third point had to do with the matter of


The time lags against which the System must work impressed

He now wished the System had acted sooner and more vigorously

last year when certain commitments were being made by businessmen
that were now showing up in
other ways.

But it

business loans, price increases, and in

would be a defeatist attitude for the System to



argue that those commitments having been made, it

to influence wage and price movements.
a price-spiral now in the making.

cannot take action

In his view, the country has

There was the freight rate increase

which was having a pervasive effect throughout the economy there was
the increase in the minimum wage rate which was having an effect in
many of the Southern areas.

As price rises take place during the

coming months, they will tend to be built into the economy in a way
that will be detrimental.

Mr. Balderston said that he felt the System's

action should be decisive enough to cause businessmen to realize the
danger of a wage-price spiral and not to abdicate when they face wage
negotiations this spring and summer in the way they would if they felt
they could simply increase their prices and continue to sell the goods.
He hoped that labor unions would appreciate the dangers of a wage-price

Translating this to the discount rate, Mr. Balderston said

that he would be sympathetic to an increase of 1/2 per cent, to a 3
per cent level, as one which would meet the needs of the economic
situation better than an increase of 1/4 per cent to the 2-3/4 per
cent level.
Chairman Martin said that these "go-arounds" on conditions
did not commit anyone and were simply a means of exchanging information.
Before he started his comments on the situation, he would like to re
iterate the remarks that Mr.

Robertson had made concerning the value

of group judgments and decisions.

More and more these meetings showed



the nature of the System in the technique of composite judgments,
difficult as it


to achieve them.

He himself had been one of

the chief offenders in stating at times that he wished the System
had been more vigorous or had done something different than it


We could always do better in hindsight, the Chairman said, and it
was easy to lapse into an attitude, from the market standpoint, of
saying "I knew the market was going up."

This was emphasized at a

meeting that he and Mr. Sproul attended last Friday at which a critique
of Federal Reserve policy during the past two years was given. Chair
man Martin said that he agreed in hindsight with what that speaker said
in emphasizing the need for action by the System sooner than it had
been taken.
was that it

His reason for mentioning this, Chairman Martin said,
was easy for a person to convince himself that he had been

right and the others wrong,
In thinking of the group as a whole, the Chairman remarked that
one of the problems in arriving at group decisions was the attitude or
approach that individuals took.

Over a period of time we come to know

that some of us lean to "hard money" and some lean to the "easy money"
There are some who lean more to the status

view, and some are neither.

quo and some who lean to experimentation.
ourselves as individuals.
vious meetings,

Each of us ought to analyze

As he had gone through the minutes of pre

he had noticed these tendencies on the part of dif

ferent individuals, and these were things that had to be weighed in

arriving at a group judgment.



There was also a great problem, Chairman Martin said, in
dealing with the psychological factors.

There were times when

psychology might be the overriding influence in the market.


a situation like that develops, it is necessary to make a judgment
on the market.
In the present situation, Chairman Martin said that in his
opinion an increase in the discount rate might have less effect on
the market than if

the Committee permitted the market to tighten un

duly along the lines on which it

pure judgment.

had already been moving.

This was a

It might be, as Mr. Sproul had suggested, that an in

crease in the discount rate would incite a party which would be more
of a party than was wanted; but the System might incite that party
also by a "dribbling" method of letting the market tighten on itself
while expecting or wondering about an increase in the discount rate.
Chairman Martin went on to say that he thought it obvious
that the Committee did not have a clear position at this meeting such
as it

had, for example,

last November.

Committee should change its

His own view was that the

directive to eliminate the reference to

actions which would take account of deflationary forces.
mittee has had a tendency,

he said, to permit its

The Com

directive to re

main unchanged too long and not to recognize shifts in the economy
with appropriate changes in the wording.


seemed to him that the

directive, which now required that operations take account of defla
tionary forces, was not in

keeping with the majority sentiment



expressed at this meeting.
suggested by Mr.

He thought that wording along the lines

Balderston would be appropriate but he did not think

the precise wording of great importance so long as the Committee had
reached the point where it was resolving doubts on the side of tight


was clear that the consensus at this meeting was unanimous

for moving toward tighter conditions in

the money market.

As to the discount rate, Chairman Martin said that the views
expressed at this meeting indicated that a majority favored waiting
a little

longer before taking overt action through raising the rate.

Personally, he was inclined to take this overt action at an early date,
feeling that it

would create less uncertainty and perhaps be more of a

palliative than if


were delayed while market forces were permitted

to tighten reserve positions.

This was a judgment, and it

should be

recognized that money and credit policy cannot do things with a fine
degree of accuracy and cannot do the whole job.

But over the next

few weeks his thought was that the earlier the discount rate was in
creased, the better.
Chairman Martin noted that Mr. Szymczak had mentioned the tax
payment date in
count rate.

connection with the timing of an increase in

the dis

The Chairman's reason for doubting the use of that as a

guide was that the wage-price spiral that Mr. Balderston had referred
to, and the psychology that seemed to exist, rather frightened him at
the moment.

The Chairman said that he was not impressed with the

catastrophy that might result from a miscarriage in pointing up the



He thought that the tendency of businessmen and consumers

today was sufficiently optimistic so that we were not likely to up
set the canoe by overt action.
could jump around in
having it


In fact, this was a period when one

the canoe and not worry about upsetting it


It was his view that a strangulation procedure of

letting reserve positions tighten from loan and other market factors
might be more disturbing than a prompt increase in the discount rate.
Chairman Martin then referred to the suggested change in
clause (b) of paragraph (1) of the Committee's directive to the New
York Bank and inquired whether any of the members of the Committee

that the change should not be made at this time,

favored a change,

or if


whether they had a preference for wording.

During the discussion of this point, Mr. Sproul made a state
ment substantially as follows:
This turn in the outlook, emphasized today, has come
about very quickly. Just as we have had to revise our
opinions, the commercial banks are now having to consider
what adjustments they are going to make to meet a situation
which they had thought to be temporary but which now shows
signs of being of longer duration. This should mean that
our policy of mild restraint, particularly if it is now
will press harder on the banks than
stepped-up a little,
it has been doing. So far as the capital market is con
cerned this change is already taking place; a substantial
readjustment in rates is going on right now, and there has
been some backing up of issues particularly in the revenue
bond field. In such circumstances, as we know, there is
always the possibility of expectations of difficulty out
running the facts, and making acute what is already a dif
ficult situation. We do not want to precipitate such a
development if we can avoid it.
An even more difficult problem has been referred to
of our running into a cost-price spiral-possibility



growing out of increased wages and other costs which pro
ducers attempt to pass on to consumers.
This might en
counter consumer resistance which would have a dampening
effect on production and employment, or what seems more
likely in the present state of the economy it might generate
an inflationary spiral. In the first case, question could
be raised as to whether it is the responsibility of the
central banking system to make credit easier and cheaper
to obtain in order to try to head off a decline in produc
tion and employment.
The second and more difficult case
would raise questions as to whether the central banking
system should make credit so dear and difficult to obtain
as to cause a decline in production and employment as the
lesser of two evils. We haven't yet had to run head-on into
the philosophy of the Employment Act of 196 to that extent
and it wouldn't be easy, so maybe we had better hope that
some degree of economic responsibility on the part of manage
ment and labor will avoid presenting us the problem in
serious form.
Mr. Williams expressed the view that the System could not dis
claim responsibility under these circumstances.
Mr. Sproul said that he was not suggesting that the System dis
claim responsibility.
exercise it.

To the extent that it

had the power it


But it should face the fact that if we are going to carry

through against the claims of organized labor and the acquiescence of
big business, we are going to have to have a real knockdown-and-drag
out fight as to whether monetary policy is

to be so severe as to bring

on substantial unemployment and reduced income with all

that that

Mr. Johns inquired whether this meant that the System should
do nothing to restrain inflationary developments.

Sproul responded that his statement did not mean that the

System should do nothing.

He was saying that he did not think a



movement of the sort Mr.

Balderston had referred to could be headed

off, under present circumstances,
adopted a very severe policy.

by monetary action alone unless we

He was saying that while we need to

keep reserve positions under restraint, and even more restraint than
we had anticipated a few weeks ago, the Committee would be fooling
itself if


thought that it

could prevent this wage-cost spiral

short of adopting a very severe monetary policy.

Whether the System

would have the assent of the Government and of the public in such a
course seemed to Mr. Sproul to be a real question.

Bryan suggested that the longer the System delayed in

taking restrictive action, the more severe the measures would have
to be.
Mr. Sproul said that he thought this was possible but that
severe action would be required in

any case to stop the wage-cost

He was merely suggesting caution in

assuming that the System

had the answer to the wage-cost spiral.

Vardaman said that Mr. Sproul's warning was quite timely,

In his opinion,


the System moved to such a degree as would be

necessary to stop the wage-cost spiral, it
destruction of the System.

could easily result in the

He thought the System should make its

contribution but should do so with the full realization that it


not have the power or the authority or the responsibility to cure
the whole situation.



Shepardson said that, recognizing that the System did

not have the power without cataclysmic action to stop a wage-price
spiral, certainly it

should be able to exercise some restraint in

the present situation.

He was very much in

accord with the views

Balderston had expressed that some definite action on the part

of the System would strengthen the hands of industry in wage negotia
tions coming up.
but it

He did not think this would stop wage increases,

could have a healthy restraining effect.

Sproul added the comment that he was not suggesting that

the System not do something.

He was arguing that the Committee not

be carried away with grandiose ideas of what it
toward combating a wage-price spiral unless it

might accomplish
moved in a very severe

His view was that we were faced with a much more serious problem

than the tools of the central banking system, alone, could be expected
to control.
Chairman Martin said that he had tried to emphasize this same
point in his remarks:
to achieve all

the Committee could not expect monetary policy

of the task.


the threat of a wage-price spiral

was so strong today that the System would be derelict in its

duty and

obligation if it did not do all that it could do.
Mr. Mills said that he would add the comment that if each
person at this meeting were to return to his desk and carry out the
responsibility set before him, this would mean that in a short time


there would be an increase in

the discount rate, negative free re

serves would rise to the $500 million level or above, and there would
be a widespread effort to consult with member banks about their use
of the discount window.

In combination, the results of such actions

could be fearsome in their effects upon the psychology of the market
and of the business community.
Chairman Martin commented that if

plans for capital expansion

should turn out to be as large as was now indicated, it

might be de

sirable to give a warning at this stage to the firms planning to use
the capital market for financing such expansion, rather than to wait
until they had gotten into trouble through having made their plans

anticipation of being able to finance the expansion on a lower cost


Sproul said that there had already been a warning.


thought the aim should be to keep bank credit from getting too much
involved in

the capital markets, but the Committee should avoid action

which would cause strain or a crisis in a situation which is

now in

process of substantial readjustment.
Chairman Martin stated that he did not know whether overt
action or permitting the market to tighten further under present
conditions would actually cause more damage to the capital market.
He thought there probably were as many views on this point as there
were individuals at the meeting.



During further discussion, Mr. Leach stated that one of the
main reasons he was not in favor of an increase in the discount rate
immediately was the feeling that had been expressed concerning the
adjustments taking place in the capital market.

At the same time,

he felt that an increase in the discount rate would be the next action
to be taken to apply further restraint.

He did not think it

would be

desirable to try to tighten the net borrowed reserve position further
through open market operations at this time, and would dislike to see
any action taken which would result in a severe shock to the bond
Chairman Martin then turned to the consideration of the Com
mittee's directive to be issued to the Federal Reserve Bank of New York,
stating that he gathered that a number of those present would favor a
modification in

clause (b) of the directive along the lines suggested

by Mr. Balderston.
There followed a considerable discussion of clause (b) of the
directive, at the conclusion of which it

was agreed unanimously to

delete the words "while taking into account any deflationary tendencies

the economy" so that the clause would read "to restraining infla

tionary developments in

the interest of sustainable economic growth.,

In response to a question from Chairman Martin, Mr. Rouse
stated that he would have no suggestion for change in the limitations
contained in the directive.


-37Thereupon, upon motion duly made and
and seconded, the Committee voted unanimously
to direct the Federal Reserve Bank of New
York until otherwise directed by the Com

(1) To make such purchases, sales, or exchanges (includ
ing 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 securi
ties, 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 com
merce and business, (b) to restraining inflationary developments
in the interest of sustainable economic growth, and (c) to the
practical administration of the account; provided that the
aggregate amount of securities held in the System account (in
cluding commitments for the purchase or sale of securities for
the account) at the close of this date, other than special short
term certificates of indebtedness purchased from time to time
for the temporary accommodation of the Treasury, shall not be
increased or decreased by more than $1 billion;
(2) To purchase direct from the Treasury for the account
of the Federal Reserve Bank of New York (with discretion, in
cases where it seems desirable, to issue participations to one
or more Federal Reserve Banks) such amounts of special short
term certificates of indebtedness as may be necessary from time
to time for the temporary accommodation of the Treasury; pro
vided 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 matur
ing 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
Chairman Martin referred to the authorization for repurchase agree

ments, stating that he would suggest that the existing authorization be re
newed and that at the next meeting the Committee consider whether it




to have this authorization come up at every meeting or whether it
should be reviewed at longer intervals, such as at the organizational
meeting of the Committee held in

March of each year.

Thereupon, the following authorisa
tion was approved by unanimous vote:
The Federal Reserve Bank of New York is hereby authorized
to enter into repurchase agreements with nonbank dealers in
United States Government securities subject to the following
1. Such agreements
In no event shall be at a rate below whichever
is the lower of (1) the discount rate of the
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
Shall cover only Government securities maturing
within 15 months; and
Shall be used as a means of providing the money
market with sufficient Federal Reserve funds to
avoid undue strain on a day-to-day basis.
Reports of such transactions shall be included in the
weekly report of open market operations which is sent
to the members of the Federal Open Market Committee.
3. 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 the Federal Reserve Bank of New York
shall be sold in the market or transferred to the
System open market account.
Mr. Leedy stated that as a result of Chairman Martin's comments
at the meeting on March 6, 1956, regarding the desirability of training
additional personnel in

open market matters, he had raised with the

Secretary the question whether it

would be appropriate to mail a copy of

the weekly report of open market operations prepared at the Federal



Reserve Bank of New York to the vice president in charge of the
Denver Branch.

Mr. Leedy said that Vice President Puckett of that

Branch was not assisting him regularly on open market matters but
that he felt it

would be helpful to Mr.

Puckett in

knowledge of the open market operations if
report regularly.


developing more

he could receive the

was Mr. Leedy's understanding that in the past

distribution of this report had been confined to persons actually
assisting the members of the Committee or other Reserve Bank Presidents
in open market matters, and for that reason he had suggested that the
Secretary bring the matter up for discussion.
Chairman Martin stated that he would favor anything which would
assist in

developing the personnel throughout the System that would have

to take over these matters in the future.


was incumbent upon the

members of the Committee to attempt to develop personnel in
He did not see how this could be done satisfactorily if

this manner.

the degree of

restriction on open market material continued to be as great in the
future as he thought it

had been at times in the past.

Mr. Leach stated that he felt

a distinction should be made be

tween distributing the report for informational purposes and distributing

to persons who in

the opinion of a Reserve Bank President or a Com

mittee member should receive the material for educational development.
He did not think the report should be widely distributed for purposes
of general information, but it

would be appropriate to send it

to him

for educational training regardless of whether he was a branch manager



or in some other position.
In response to a question from Mr. Johns, Chairman Martin
stated that no suggestion had been made that minutes be made avail
able to such individuals but that in his view the same general
approach should govern.
Thereupon, it was agreed unanimously
that it would be appropriate for a Presi
dent of a Reserve Bank or a member of the
Committee to request that the weekly open
market report or other open market material
be made available to individuals for train
ing purposes even though such individuals
might not at the time be actively assisting
in connection with open market matters and
regardless of where the individual was
serving within the Federal Reserve System.

In taking this action, it was understood
that the Secretary would be notified of
all such requests.
Chairman Martin referred to Mr. Sproul's memorandum of March 21,

1956, giving his appraisal of certain continuing operating policies of
the Federal Open Market Committee, stating that the memorandum was very
stimulating as well as provocative.

He suggested that all members of

the Committee and other Reserve Bank Presidents study the material care
fully and that a day be set aside for a separate meeting at which this
subject would be considered.

He thought that it

was not desirable to

include consideration of this matter on the agenda within the regular
meeting of the Committee, and it

was his suggestion, therefore, that

the next meeting of the Committee be scheduled for Tuesday, April 17,
1956, with the understanding that the Committee would also meet at



9:30 a.m. on Wednesday, April 18, 1956, for the express purpose of
considering the procedure that it

might wish to follow in re-examining

the continuing operating policies to which Mr.

Sproul had referred.

Mr. Sproul stated that he thought there were two questions

One was the matter of procedure and whether the continuing

operating policies should be adopted annually or whether they should
be considered at each meeting of the Committee.

The other question

had to do with the substance of these statements of operating policy
and the whole present general policy of the Federal Open Market Com
mittee with respect to operating in

the Government securities market.

Sproul said that he thought the first

be considered and a decision reached in

of these questions might
a meeting such as Chairman

Martin suggested for April 18, whereas the second question would re
quire a much longer period of consideration and study.

Chairman Martin stated that he would agree with this view.
Chairman Martin's suggestion for the
meeting to be held on April 17 and 18 was
approved unanimously.
Thereupon the meeting adjourned.