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A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve System
in Washington on Tuesday,


September 25, 1956, at 9:30 a.m.

Martin, Chairman
Hayes, Vice Chairman

Mr. Johns
Mr. Mills
Mr. Powell
Mr. Robertson

Mr. Shepardson
Mr. Szymczak
Mr. Vardaman
Mr. Fulton, Alternate
Messrs. Bryan, Leedy, Treiber, and Williams,
Alternate Members, Federal Open Market
Messrs. Leach, Irons, and Mangels, Presidents
of the Federal Reserve Banks of Richmond,
Dallas, and San Francisco, respectively
Mr. Harris, First Vice President, Federal Reserve

Bank of Chicago
Mr. Riefler, Secretary
Mr. Vest, General Counsel
Mr. Thomas, Economist
Messrs. Abbott, Parsons, Roelse, Willis, and
Young, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Carpenter, Secretary, Board of Governors
Mr. Sherman, Assistant Secretary, Board of
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
Before this meeting there had been distributed to the members
of the Committee a report covering open market operations during the

period September 11, 1956 through September 19, 1956,

and at this

meeting a supplementary report covering commitments executed Septem
ber 20 through September 24, 1956, was distributed.

Copies of both

reports have been placed in the files of the Committee.
Upon motion duly made and seconded,
and by unanimous vote, the open market
transactions during the period September
11, 1956 through September 24, 1956, were
approved, ratified, and confirmed.
Mr. Young presented a review of the current business picture

substantially the following form:
Today's report is essentially a repeat of what was re
ported at the last meeting--general strength of expansive
forces throughout the economy, with demands pressing against
supplies in many sectors, and some further rise in wholesale
Suez Canal developments are by now exerting tightening

strains on world shipping and resulting in some supply cur
tailments in international commodity markets. The longer the
situation remains critical, the greater the effects on supply
conditions for petroleum and other products, on the supply of

ocean shipping and ocean freight rates, and on international
markets generally.
Indications of realignment of activities toward better
domestic-international balance and indications of moderation
of inflationary pressures continue to be registered in most
current data available for United Kingdom and Germany.
contrast, inflationary pressures continue to be dominant in
For the United States, the most recent readings from the
data record show the following:
Total national product in the third quarter is now esti
mated at an annual rate in current prices of $414 billion, up
$6 billion or 1-1/2 per cent from the preceding quarter, and
$17 billion or 4-1/2 per cent from a year ago. All of the
major categories of final product purchases are up, with con
sumption expenditures showing the greatest rise over the year.
From the second to the third quarter, business fixed invest
ment and Federal Government purchases of product accounted for
two-fifths of the output rise.



Industrial output in September seems likely to reach
142 or 143.
Activity in metal producing and consuming lines
is up. Nondurable lines, however, are showing diverse move

ment, with the result that change in nondurables output will

be small up or down.
New auto sales have been off further this month but
ahead of output, reduced for model changeover, so that stocks
have been cut back further, though somewhat less than the
industry had hoped for. Sales and stocks of used cars also
have declined further this month. Used car prices, after
allowance for depreciation, have continued upward, however,
suggesting underlying strength of demand in the used car
Household durable goods output and sales have continued
at the advanced rate of the summer months. Department store
sales this month are remaining a little under last month but
the month's record should still hold close to August high of
128, perhaps at 126-27 of the 197-9 average. Retail sales
generally in August ran 4 per cent ahead of last year, so that
preliminary indications for September suggest that this gain
will about be maintained.
The rate of consumer credit expansion as reported last
time has slowed considerably, particularly reflecting smaller
extensions and higher repayments on automobile paper. Recent
terms data show some further rise in the proportion of new car
contracts written at the long end of the maturity range.
Revision of the Board's consumer credit statistics, being
made for its requested study of this subject, show an upward
adjustment in level of $2.4 billion, divided about half and
half instalment credit and noninstalment credit. Automobile
instalment credit outstanding will be the only downward revi
sion, amounting to $850 million.
Construction activity is apparently maintaining record
rising. Housing starts
levels, with construction costs still
for August were up slightly, and mortgage lending on residential
properties continues to maintain a monthly rate not far under

the high monthly rate of the first three quarters of last year.
Discounts in secondary markets of FHA mortgages appear to be
averaging 3 per cent or about the same as in the late spring of
1953 when discounts were unusually large. Last week the Housing
Administrator took several actions to ease credit conditions for
the construction and purchase of homes. The actions will have
both supply and demand effects for mortgage markets, but for
credit markets generally their net effect is on the demand side.
Labor market trends are in the pattern of other recent
months, with strength and weakness correlating with those in
productive activities. Average hours of work have continued
about stable.



Total farm output is now expected to about equal that
of last year. Output of livestock and their products will
be at a new high; crop output will be somewhat under last
Unfavorable weather conditions in some regions will
again make for unevenness in farm prosperity.
Wholesale commodity prices have continued to rise and
in mid-September were 4-1/2 per cent higher than in mid-1955.
Industrial prices are on average about 6-1/2 per cent higher.
After rising about 2 per cent from early spring levels,
consumer prices decreased slightly from July to August,
Further advances are expected, however, over autumn months.
A General Comment:
Business Week one week ago raised
the question as to whether the economic picture is really a
picture of inflation, suggesting that, because this year's
money supply increase has been small, we have the anomaly of
too little money chasing too many goods. It is true that the
money supply increase has been modest this year--at just under
a 1 per cent annual rate thus far. With the fall expansion
now expected, the rate for the year should be just under 2 per
Such an increase would be about a percentage point
under this year's real increase in national product, i.e.,
increase in GNP at constant prices.
Over the past five years the percentage increase in real
national product has averaged 3.3 per cent per year. This
average annual rate of increase was about the same as that for
the money supply over this five-year period.
The rise in prices of commodities and services this year
has been sufficiently general to indicate that aggregate de
mand in markets has been pressing against aggregate supply.
Thus far the higher prices have been paid so that money has
been available to support the prices asked. In other words,
money has not been too scarce or in the wrong hands; the
accumulated stock from past monetary growth has been enough,
despite the slower growth this year, to finance transactions
at a somewhat higher level of prices. Activation of balances
in excess of transactions and precautionary needs has partly
made this possible, but activation of money balances is to be
expected when interest yield and other incentives to use money
are rising and confidence in the future is high.
The slower growth in the money supply this year is to be
attributed in part to Federal Reserve policy. That policy
since 1951 has been geared to counter-cyclical objectives in
the short-run and orderly growth at sustained high levels of
activity without inflation over the longer-run. Counter
cyclical monetary policy calls for braking pressure on monetary
growth and tightening pressure on the liquidity positions of
individuals, businesses, and financial institutions when



aggregate demand is pressing against aggregate supply.
pressure is essential to combat inflationary dangers and to
curb financial overcommitment.
When aggregate demand is
falling short of the economy's resource capacity to supply
goods and services, counter-cyclical monetary policy calls
for liberal expansion in monetary resources and financial
liquidity generally.
If the System were pursuing in this period a monetary
policy geared to some mechanistic or constant rate of in
crease in the money supply, it would be operating in an un
stabilizing way under present conditions.
It would be adding
to the money holdings and liquidity of the public without
regard to attitudes toward and actions in spending money and
making forward commitments and without regard to price trends
in markets.
It would be feeding inflationary pressures at a
time when they were tending to accelerate and thus would be
abdicating responsibility for a stable value for the dollar.

Thomas summarized the principal recent financial developments

as followss
1. Heavy demands have continued in capital markets,
but there has been better absorption by the market of new
issues at the higher rate level reached in the latter part
of August.
Yields on corporate securities have tended to rise
slightly further and yields on municipals have been more
stable, as have yields on long-term Treasury bonds.
Treasury bill yields, following a spurt at the time
of the discount rate increase, declined somewhat and then
rose again to a new high level of slightly less than 3 per
cent. (The average yield on the latest issue of Treasury
bills was 2.985 per cent.)
Stock prices have declined over 5 per cent on the
average from the peak reached early in August, with trading
at a relatively low level. There has been a marked decrease
in bank loans on stocks and bonds, reflecting some decline
in debit balances of margin customers and perhaps some de
crease in financing of dealers' inventories, as well as some
shifting of loans from banks in leading cities to other banks.
For the fiscal year to date, Treasury cash income has
been about $1 billion larger and cash outgo a little smaller
than a year ago. Net borrowing has, therefore, been less than
last year. The Treasury balance declined somewhat more in the
first half of September than had been expected, wing largely
to a lag in tax receipts, but in the last few days cash has



been flowing in more rapidly. The balance now is in excess
of $4-3/4 billion, excluding gold. This should be adequate
to meet needs until after the middle of October. Total
borrowings of about $3 billion may be needed between mid
October and mid-December.
Total loans and investments of member banks in lead
ing cities have declined by about $200 million during the past
month, compared with an increase of $300 million in the
corresponding period of 1955. Business loans increased by
about the same amount during the latest period as a year ago,
but other types of loans and investments increased less or
declined more than last year. Since mid-year, total loans
have increased less than half a billion, compared with a rise
of more than $1-1/2 billion in the similar period of 1955.
However, holdings of Government securities have declined by
about $1 billion less this year than last, and changes thus
far during the third quarter of 1956 have been in total loans
and investments closely similar to those of the third quarter
of 1955. It would seem that difficulty in selling Governments
or unwillingness to sell them may be having the effect of
restraining bank lending.
The principal differences between changes in business
loans since mid-year and those in the same period last year
have included increased loans this year to the petroleum and
chemical groups (reflecting largely the Trinidad oil purchase)
and to commodity dealers, while there have been large decreases
this year in loans to metal and metal products manufacturers
and to sales finance companies, compared with little
last year. Construction loans by banks have shown little
change since the middle of 1956 whereas last year they in
creased by about $60 million during the third quarter.
would be helpful to know whether the complaints of severe
restrictions on credit reflect actual curtailment in credit
extensions or only limitations on further expansion,, and
whether regular lines of credit are being unduly squeezed.
The actual loan expansion has been above average.
8. Demand deposits increased moderately in the first
three weeks of September following a greater than usual de
cline in August.
The annual rate of turnover of demand deposits has
been about 8 per cent above that of a year ago.
10. Availability of bank reserves has increased in the
last two weeks, reflecting a greater than usual mid-month in
crease in float and post-Labor Day return flow of currency
partly offset by System sales of securities. This purely
temporary increase in reserves has had little effect on the



money market or on the attitude of banks toward extending
11. Following a moderate drain on reserves this week,
there will be a further sharp reduction next week and net
borrowed reserves may be expected to average around $500

million unless offset by System operations. While addi
tional drains on reserves during ctober will be moderate,
total reserve needs will increase by over $1-1/2 billion
by mid-December, including allowance for growth of 3 per
cent a year and for customary seasonal factors.

Thomas concluded his statement by noting that the total

expansion in

credit of all

types had been somewhat less this year than

last, reflecting principally decreases in the Federal debt and a much
slower rate of increase in

consumer debt.

Demand for credit continues

strong, however, particularly from business, and the expansion would
be greater if

the funds were available.

Banks are supplying almost

as much credit as last year and the principal savings institutions
are providing a little


Corporations seem to be borrowing more,

but they are lending less through purchases of Government securities.

Although the money supply is increasing only moderately, the increased
turnover of existing money and the rising tendencies of commodity
prices indicate that further additions to the money supply would be

In the fourth quarter of this year, the already heavy

demands for credit will be reinforced by the usual seasonal factors
and by cyclical recovery in

the automobile and metal industries.

Recent credit policies and other influences seem to have
resulted in

considerable restraint by lenders in

demand, Mr. Thomas said.

the face of strong

It seems doubtful whether excessive credit



expansion has taken place, but at the same time the restraint on
credit does not appear to have been unduly severe.

While continued

restraint is clearly needed, it appears that the recent degree of
credit restraint may be about adequate.

This would suggest net

borrowed reserves averaging around $300 million, with fluctuations
up to $500 million.

Mr. Thomas noted that the immediate problem

was how to facilitate the Treasury's forthcoming financing in a
difficult period, without supplying reserves that might be diverted
in undue amounts to other uses.

While most of the needed reserves

might be immediately supplied through variations in float, it was
Mr. Thomas' belief that current policy would have to be sensitive
to the reaction of the market and to broader developments and
attitudes throughout the economy.
Chairman Martin said that he would introduce the discussion
this morning by reporting that at a meeting with Secretary of the
Treasury Humphrey and Under Secretary of the Treasury Burgess last
Wednesday, he and Mr. Balderston explored with them the apprehensions
they have with respect to the forthcoming Treasury financing.


man Martin said that he believed their apprehensions were very real
and that he had assured Messrs. Humphrey and Burgess that the Fed
eral Open Market Committee would consider the problem the Treasury
was facing at its meeting today.

The Chairman expressed the hope

that all of those present at the meeting would bear this situation
in mind in their comments.



Chairman Martin then called upon Mr. Hayes who made a state
ment substantially as follows:
The rebound in economic activity since the end of
the steel strike has been even more rapid than was expected
To a large extent, the great strength of the busi
ness picture reflects a record level of capital formation,
but consumer spending has also been very well maintained.
2. The latest data on residential construction includ
ing a slight reported rise in private housing starts in
August, do not lend support to widely publicized statements
that a substantial decline is likely to be precipitated by
lack of adequate mortgage credit.
It is interesting to note
that officials of major insurance companies feel that suffi
cient mortgage money is available to permit maintenance of
the current rate of housing starts without real difficulty.
The steps taken last week by the Federal Government to ease
mortgage credit seemed ill-advised,
3. With wholesale prices rising almost without inter
ruption since the end of June, the vigor of the current
economic expansion points to some danger of renewed specula
tive building of inventories, although there is as yet little
evidence that this has commenced.
4. For the immediate future, continued expansion in
employment and production and further upward pressure on
prices seem likely. The coming season of heavy retail demand
will provide some test of the degree to which consumer resist
ance may limit the present tendency toward higher consumer
Total bank loans have risen considerably in the last
six weeks, and business loans have more than accounted for
all of the increase. The capital markets have recently shown
some indications of stabilizing.
Successful marketing of a
sizable volume of new issues perhaps suggests that the short
age of capital funds may be less acute than many observers had
thought. Credit restraints, while tending to dampen incentives
for overly rapid capital expenditures as well as for speculative
inventory accumulations, have not resulted in undue curtailment
of either business or consumer spending.
expecting that the Treasury will have to
6, We are still
It is
borrow at least $3 billion between now and mid-January.
our view that it would be preferable to defer part of this cash
borrowing until December, when the results of the exchange of
certificates maturing on December 1 will be known, and when it
will also be clearer to what extent funds will be needed to
meet unusually large redemptions of F and G savings bonds,
part of the program,
will be advantageous to carry out the first



in the amount of about $1.5 billion, as soon as possible,
both for technical reasons and in order to give the Fed
eral Reserve System greater freedom of action. We hope
that announcement of the terms of the new financing will
be made around the end of September or in early October.
The underlying tone of the money market has been
consistently tight in the last week or two despite the sharp
reduction in net borrowed reserves resulting from unexpectedly
large float figures and from large swings in Treasury receipts
and payments.
Heavy excess reserves have been concentrated at
the country banks whereas banks in New York and other large
cities have continued in a fundamentally tight position. The
steady upward trend of bill rates has reflected this condition,
as has the persistent difficulty of Government securities
dealers in financing their positions.
8. In the absence of System account action, net borrowed
reserves may average around $500 million during most of October,
according to our latest projections.
This is a difficult time for the Treasury to be coming
to the market and we cannot overlook our responsibilities for
providing the necessary stable market atmosphere and whatever
reserves may be needed to permit the banks to do their part in
a successful program. We therefore feel that the Manager of
the Account should try to keep the degree of restraint, as
indicated by the feel of the market, about where it has been in
the last weeks, until the Treasury financing has been completed.
Open market operations should be timed so as to be of maximum
assistance to the Treasury.
10. Following the completion of the Treasury financing, we
should probe cautiously toward greater restraint by limiting
open market purchases and forcing the banks to have recourse to
the discount window for some part of their seasonal reserve re
This view is based on our belief that the System
can go further in its efforts to resist inflation without creat
ing a serious credit shortage that might prove disruptive to the
A course of action which would bring about a
general economy.
sustained increase in member bank borrowing would, of course,
affect the administration of Regulation A. What is a reasonable
use of the discount window depends upon all the facts of the
case, including the extent to which, pursuant to conscious Fed
eral Reserve policy, open market purchases are retarded with the
expectation that more of the reserves needed by member banks
At the meeting of the Presidents'
will be obtained by borrowing.
Conference tomorrow the Presidents are planning to discuss the
subject of continuous borrowing; I trust that we will have a



full discussion of the administration of Regulation A in
the light of Federal Reserve credit policy. We do not have
in mind any radical change of discount policy or any notifi
cation to member banks that the window will be open wider or
for longer periods.
It does seem appropriate, however, to
contemplate larger borrowings by individual banks in relation
to their required reserves, more frequent borrowing, and
borrowing for somewhat longer periods.
In our view it is too early to consider whether
further discount rate changes are desirable, but we feel
equally that it would be a mistake to reduce reserve require
ments against time and savings deposits at this time. A
reduction in requirements would give the wrong kind of signal
to the market and would tend to undercut the continued useful
efforts of bankers to subject loan applications to a most
careful screening process.
Publicized reactions to last week's
White House announcement of measures to ease mortgage credit
are illustrative of the confusion which may be caused by such
Furthermore, a disproportionate part of reserves
released would go to country banks, which have not been sub
ject to the same degree of reserve pressures as the city banks.
12. The widespread statements to the effect that tight
money is harming small business suggests the desirability of
our trying to find out as much as we can of the factual back
ground on this subject. We would recommend that the Board
consult with the Council of Economic Advisers as to whether
the latter
might conduct a survey of experience of the Small
Business Administration with claims of unsatisfied needs for
credit and of the possible help, if any, which the System
We also be
might properly give in dealing with such needs.
lieve that the System could do more in the way of assembling
pertinent statistics on small business loans extended by
member banks, as well as general information on the types
of needs indicated in loan applications, reasons for in
ability to obtain loans, etc. We would do well to be fore
armed in view of the criticism which has already been
directed at the System in this connection and which may be
directed at us in the future.

Erickson said that conditions in

very strong in

the New England area were

every sector excepting textiles.


that reserves for country banks were adequate, he noted,

was evident
and he also

stated that discounts at the Boston Bank had been much smaller in



amount recently.


Erickson referred to the meeting of stock

holders of the Boston Bank to be held this fall.

One of the mem

ber banks that had total loans in excess of 70 per cent of its
deposits and which was feeling the competition for deposits from
savings and loan associations had submitted a resolution for con
sideration at the stockholders meeting which urged an increase in
the present limitation of 2-1/2 per cent in

the maximum permissible

rate of interest that might be paid on time and savings deposits
under Regulation Q.
Mr. Erickson said that he would not change the directive of
the Open Market Committee at this time nor would he change the dis
count rate.

He agreed with Mr. Hayes' comments as to the Treasury

financing and the degree of restraint that should be continued until
that financing was out of the way, adding that as soon as the financ
ing was completed the System should probe to see whether further
tightening steps were necessary.

Irons said that conditions in the Dallas District continued

strong with no sign of any lessening of activity in any area.
agricultural employment was reaching a new high every month.


tion contract awards had improved within the last few weeks largely
because of a pickup in residential contracts.

While he had heard

complaints of a lack of mortgage funds it was difficult to run down
such complaints, and he cited a circular letter recently distributed



by a mortgage lender in Houston indicating that the firm had mortgage
funds to place and was seeking outlets.
still dependent on more water.

Agricultural conditions are

It was probable the district would

have a fairly good cotton crop, although production would be 7 or 8
per cent down from a year ago.

Demand for bank credit continued very

strong with most of the increase in loans over the past year being in
the commercial and industrial categories.
up a little

Some banks were tightening

on construction loans.

As to credit policy, Mr.

Irons felt that under present condi

tions the degree of restraint observed during the past three weeks was
entirely appropriate and should be continued consistent with creating
a stable condition for the Treasury's financing.
of the way the System might want a little
upon developments.

After that was out

further restraint, depending

He would not favor any overt action at this time

such as an increase in

the discount rate and certainly no reduction

in reserve requirements.

Irons said he was not sure that he understood Mr.

proposals for a possible easing of discount policy, but he (Mr.


would rather see essential and necessary open market operations carried
out with a maintenance of discount policy consistent with the terms of
Regulation A, because he believed that changes in the general rules
for administering discount policy would cause difficulty if
made because of variations in needs for credit.

they were


Mr. Mangels said that, except for the lumber industry in

the Pacific Northwest, Twelfth District activities continued to
show the expansion that had been evident for some time.
had continued to improve,

with gains reported in Oregon and Washington

despite the dampening effects to the lumber industry.
larly was showing gains in
a whole,


productive activity.

Oregon particu

For the district as

unemployment was very low and probably near the lowest point

since the end of World War II.
important elements in


Mangels noted that one of the

sustaining activity in

the Twelfth District

was the fact that 84 per cent of prime military aircraft contracts
during the six months ending in
located in

March 1956 were awarded to firms

California and Washington.

Bank loans continued to increase during the most recent
period and all

indications were for a continued heavy demand for

Borrowings at the Reserve Bank have been quite nominal

recently, with only three banks discounting for a total of less
than $2 million.

Mr. Mangels said that some of the directors of

the San Francisco Bank recently suggested that there be brought
up for discussion the question whether the Bank should issue a
statement that there would be no objection to member banks' coming
to the discount window.

Another suggestion was that a voluntary

credit restraint program on the part of bankers themselves might
discourage the use of bank funds for long-term credit purposes.



Mr. Mangels said that his recommendation as to credit policy to be
followed during the next two weeks would be to continue the existing
program and degree of restraint.

He would not reduce reserve require

ments and thought there was no occasion to change the discount rate at
this time.
of banks in

Powell said that there had been a decline in

the Ninth District although city banks were experiencing

a seasonal rise in

loans for carrying crops.

what lower than a year ago.

Banks were in

balances maintained by banks in
increases in

total loans

Total loans were some

a comfortable position and

other areas had been rising.

retail trade were being accompanied by a rise in

ings by retailers.

Employment was high.


Mr. Powell said that the

Ninth District was not in a condition that would require more restric
tive activities on the part of the monetary authorities than now exist.
Mr. Harris commented on the new automobile outlook to the ef
fect that dealer inventories of 1956 model cars were low, that the
industry was extremely optimistic about the outlook for sales of the
1957 models which were about to be introduced, and that it hoped there
would be enough credit available to finance the anticipated increase
in sales of automobiles during the coming model year.
On the general business picture, Mr. Harris said that there
was solid strength throughout the Midwest with a reported pick up in
farm income adding to the optimism resulting from new automobile model


of funds.

Credit demands were pressing hard on available supplies
However, weekly reporting member banks in the Chicago

District had not shown a net expansion in business loans such as had
characterized New York and the nation as a whole during the past three

partly because the Chicago banks had not participated sub

stantially in

the sharp increases in loans to the petroleum industry

or to commodity dealers.

Credit was being extended to seasonal

borrowers and increases in loans were going largely to food, liquor,
and tobacco processors, to commodity dealers, and to trade and textile

Mr. Harris said that loans to trade and commodity dealers by

Chicago banks since mid-year had been greater than in the correspond
ing period of 1955 while loans to food processors and textile manu
facturers had been somewhat slower than they were last year.
credit policy, Mr. Harris said he still

As to

felt that the economy was

showing strength and that the present restrictive credit policy should
be continued.


it was his view that some consideration should

be given through open market operations to accommodating the new

Treasury financing and that this should be done very soon so that the
effects on the market could have been observed before the Treasury's
announcement was made early in


Mr. Leedy said there had been further deterioration in certain
areas of the Tenth District because of the continued drought, conditions

some parts of the District being the worst since 1934.

He also called



attention to increasing evidence of attempts on the part of banks

located in other districts, notably in New York, to place loans
with banks in the Tenth District, particularly where the borrowers
were customers of both the out-of-district and Tenth District banks.
Mr. Leedy went on to say that the economic background pre
sented at this meeting called for continued pressure on reserves.
Until the Treasury financing was out of the way, however,
mittee could do nothing in

the Com

the way of additional restraint.

A pro

gram that would maintain stability through the Treasury financing
was called for, and Mr. Leedy said he hoped the Treasury would give
serious consideration to dividing its

new financing into two offerings,

rather than doing it





this were done and the balance

of the financing were delayed until December,

Mr. Leedy suggested the

possibility of providing some reserves through a reduction in reserve
requirements of central reserve city banks.

He emphasized, however,

that this thought was contrary to his feeling as to the need for
continued pressure,

and he would be opposed to any action which would

run the risk of confusing the situation such as might result from a
reduction in

reserve requirements.

He also was opposed to a change

in discount rate or to making any attempt to encourage use of the
discount window.

There might be some probing in the direction of

having increased use made of the discount window, as suggested by


but this would be as a result of a lack of a supply of



reserves and a compelling need for more reserves, rather than any
change in the policy of administering the discount window,
Mr. Leach said there had been little change in the economy
of the Fifth District since the preceding meeting of the Committee,
adding that the textile industry had not yet received the hoped for
orders for the fourth quarter but that the rest of the economy con
tinued quite strong.
Mr. Leach suggested that policy for the immediate future
should be considered in terms of the exigencies of Treasury financ
ing and in terms of current economic developments.

An even keel in

open market operations obviously was called for, and current and
prospective economic conditions called for maintenance of the same
degree of restraint that the Committee had been aiming at for several

Any effort to achieve an increased volume of discounts through

increased pressure on the money market would result in more restraint
than was needed in these circumstances, Mr. Leach said.

He did not

mean that it was inappropriate for banks to seek funds through the
discount window to meet seasonal needs, but the Committee should bear
in mind the fact that member banks entered this season with average
borrowings close to $1 billion, and in talking about putting reserves
into the market through the discount window the Committee should
realize that the result would be quite different from what it would
be if

borrowings at the discount window were not now around a billion





Leach thought the System would have to furnish most

of the reserves needed this fall through open market operations un
less it were to permit the situation to tighten up, which he did not
think should be done.

He also noted that a majority of the member

banks in the Fifth District had not borrowed from the Reserve Bank
in more than a quarter of a century, and that many others had
borrowed only a few times over the past twenty-five years.
borrowing increased it

Thus, if

would come from a small hard core of borrowing

some of which would be of the "continuous borrowers" group.
Mr. Leach also reported an inquiry from a large construction

firm regarding the possibility of borrowing $25 million from the
Federal Reserve Bank of Richmond under section 13b for the purpose of
financing defense housing construction.

The Richmond Bank explained

to the firm that apart from technical reasons as to why such a loan
probably would not be eligible, it

would be inconsistent for the

Reserve Bank to make a loan of the type which commercial banks would
ordinarily make but which they were unable to make at this time be
cause of the restrictive credit policy.
Mr. Vardaman said that he could see no occasion for changing
the general policy the Committee had been following, that he would
not change the discount rate at this time,
change reserve requirements in

and that he would not

the foreseeable future.

Banks should

be assured that the discount window was available for legitimate



normal seasonal borrowing.

Mr. Vardaman felt there was a panicky

fear, particularly among small businessmen, that money was not

He believed money was available but at higher interest

rates, and that banks were being super-selective.

Such a condition

would always exist in the private enterprise system and he would
dislike any effort on the part of banks to organize a voluntary
credit restraint program at this time.

The psychological effect

of such a program would be dangerous, and the political effects
might be fatal in view of the feelings of small business.
Mr. Vardaman said he thought the Committee's program could
be carried out through the open market.

He would like to see the

Treasury proceed with a $3 billion financing in October, feeling
that this would be preferable to carrying some of it over to December.
He would, of course, leave this to the judgment of the Treasury ex

The less the Federal Reserve said and the more it did in the

way of assuring people that money was available and that the discount
window was available for legitimate use, the more likely the situation
was to work itself out satisfactorily.
Mr. Mills said that it seemed to him that the System continued
to face the problem of how to carry on a policy of credit restraint
that would stop short of making credit truly unavailable and would also
eschew adding momentum to trends that could come to an unfortunate

He expressed the opinion that some of the points raised in



the discussion as matters of grave concern might, in fact, contain

built-in elements of credit restraint that aid and abet System policy
at this time.

For example, with respect to the commercial banks,

where the objective of System policy is to put pressure on financial
liquidity, that end is in part achieved because the present high
level of their loans, as compared to their deposits, is of itself a
restraining factor in that bank managements hesitate to permit their
further expansion.
Similarly, the reduction in business liquidity that has been
responsible for the increase in deposit turnover cannot but instill
caution in managements and work against overexpansionist thinking.
All told, considering the results obtained from the liquidity approach
of System policy, Mr. Mills doubted that either the status of bank
loans or deposit turnover.deserved as much concern at this time as
has been voiced.
As to trends, unless checked,the steady decline in the prices
of stocks and the contributing factor of a continuous withdrawal of
bank credit on stocks may give momentum to influences that can have
unhappy consequences.
the credit situation, it

Taking into account these various factors in
was his view that for the short run the

System should aim its actions at the lower side of the negative $300
millions of free reserves mentioned by Mr. Thomas, and preferably at

around a negative $200 millions.

With the new Treasury financing

less than three weeks off, the time left for the System to act to



steady bank reserve positions and in that way to contribute to
stability in the U. S. Government securities market and to assist
the Treasury is

very short.

System could best signal its

He felt that during this period the
intentions of providing adequate

reserves and of stabilizing the U. S.

Government securities market

by supplying new reserves slightly in advance of a crying need for
their injection.

Such actions should serve to attract a proper

volume of commercial bank subscriptions to the Treasury's offering
and give confidence that having subscribed,
immediately tighten reserve positions.


the System would not
would be important to

create a reserve climate under which the commercial banks could re
distribute the securities they acquired over a reasonable length of
time and without loss.
As recent experience has demonstrated that commercial banks
and market operators are well aware of the temporary reserve in
fluences of changes in the volume of float and the size of Treasury
balances, it was Mr. Mills' belief that the process of making reserves
available in support of the Treasury financing should be largely
positive in

character and without undue reliance on float to "float"

the Treasury's new securities and the consequent risk of giving the
market an erroneous impression of the System's intentions.

Robertson said that if


were not for the Treasury

he would be urging a more restrictive policy than the


Committee had been following.

We were nowhere near the point of a

too restrictive policy, and the Committee would be making a very
serious mistake if


eased the situation too quickly and too much

the face of the Treasury financing.


was essential for the

moment to retain the degree of restraint that had been maintained
for the last few weeks so that no one would be misled as to the
System's real intentions, which were to fight inflation and to main
tain stability.


the System should do everything it

to make the Treasury financing a success.


It must not only put

reserves directly into the market but perhaps it should use repurchase
agreements to a greater extent than before.

It might be necessary to

make some kind of commitment to dealers on the repurchases.
Mr. Robertson said that he was troubled by the suggestion for
encouraging use of the discount window.

This should be a facility

available at all times, but its use should not be encouraged.


Robertson agreed with the idea of probing toward greater restraint
through forcing banks to the discount window after the Treasury
financing was out of the way, but his belief was that the discount
window would be used automatically if
market was not adequate.

the amount of reserves in the

The System would get into deep water if


encouraged the use of the discount window.
Turning to the Treasury financing, Mr. Robertson said that the
Open Market Committee had no business urging any view on the Treasury



as to the type of financing it

should do.

It was proper to give the

Treasury views but not to urge views since Treasury financing was a
matter for the Treasury to decide.
the reserves necessary to make it

He would go overboard in providing
possible for the Treasury to do its

financing in a way that would not upset the restrictive credit policy.

Mr. Shepardson said be agreed largely with the views expressed
by Mr.



seemed to him that expansive tendencies were

in the ascendency and that while the System had accomplished

something it

had not achieved what it

credit policy.

might through the proper use of

For that reason, he thought the Committee should look

ahead to the possibility at a later period after the Treasury financ
ing was out of the way of taking further action on the restrictive

He was very much concerned about the need for maintaining

stability of the dollar.

Although he recognized the immediate problem

of the Treasury financing which called for maintaining a condition
that would favor a successful financing to the extent that was con
sistent with the Committee's policy, he would dislike any action that
indicated undue loosening of reserve positions of banks for the pur
pose of taking care of the Treasury's financing problem.
course might necessitate the System's coming back a little

Such a
later with

further restrictive measures.

Shepardson referred to the use of the discount window,

stating that he thought Mr. Leach had made a point on continuous
borrowers that deserved consideration; that is,

that the continuous



and excessive borrowing appeared to be concentrated in

a few banks.

The time to correct that situation was not when the banks were in
situation where they needed assistance, but it


would be very un

fortunate to do anything that would further aggravate the problem
of continuous borrowing on the part of a few banks.
even during the period of the Treasury financing,

For that reason,

banks should not be

invited to use the discount window because that might make it


difficult to get back to a better basis later on.

Fulton said that in

the steel and allied lines, which were

of major importance in the Cleveland District, activity was at the
highest rate on record with steel output in the Cleveland-Loraine area
running at 107 per cent capacity.

Many products were in tight supply

and there was an insistent and great demand for them.

Some users of

steel who had been carrying up to a forty-day supply before the strike
had now reduced inventories to about a twenty-day supply because they
felt able to operate on almost a hand-to-mouth basis under the terms

of the new wage agreement. Mr. Fulton noted that the price of steel
scrap had been very high and he also stated that additional wage ad
justments were expected, which would be followed by further price in
creases for steel and steel products.

Demand for bank loans in

Cleveland District had continued very active.


Some banks had reported

that insurance companies were not seeking mortgage loans at present
but mortgage money seemed to be forthcoming at a price.


was affected by a killing frost last week, but farm income for the



Fourth District would be quite satisfactory for this year as a whole.
Mr. Fulton said that he felt we had been laggard in the degree
of restraint on industry.

No major plans for plant expansion had been

set aside, and the consensus was that higher interest rates had not
deterred the majority of industrial borrowers.

For the immediate

future, Mr. Fulton felt that the existing degree of restraint should
be maintained with no signal that the System would relax during the
rest of this year.

In fact, a little later in the year it might be

desirable to add further restraint.

The discount window at the

Cleveland Bank had been following a course indicated by the directors
of the Bank, Mr. Fulton said, which was to keep the window open and
to make money available at a price with the thought that if the price
was not sufficient it should be increased as a deterrent to excessive
use of the discount facility.
Mr. Williams said that the economy of the Third District was
active at a high level and that it was difficult to draw a sharp
picture of changes over the past two weeks.

If consumer and seasonal

demands were added to plant expansion activities, it was evident that
the area was in for sharp pressure on facilities during the near

Demand for bank credit in the Third District had shown an

interesting shift, Mr. Williams said, because of the pressure put
on banks through administration of the discount window.

He recalled

his earlier remarks that there was a hard core of borrowing city banks
in the Philadelphia District.

There had been discussions with these



banks as a result of which they had shifted from the discount window
to the Federal funds market.

There was some evidence, however,

total borrowings of the banks were reaching a plateau.

The Philadelphia

Bank had asked for daily information from these city banks,
supplied it without reluctance,
prove useful.


which had

and he thought this information might

As to country banks, Mr. Williams reported a discussion

with what he termed a flagrant borrower who had been using the dis
count facility at a fairly high level during much of the past three

This banker had expressed his philosophy of banking and dis

cussed his individual problems,

after which he inquired of the Reserve

Bank officers what they thought he should do.

Mr. Williams cited this

as an indication of the type of situation that might develop with
individual administration of the discount window among borrowing banks
of the district.
Mr. Williams said that he detected a psychological change in
the public's attitude in the Third District in that everybody was now
conscious of tightness.

Within the past week several questions had

arisen as to whether small business was being hurt by current credit

Mr. Williams said he had been assured by banks that small

business was getting a ratable share of whatever credit was available;
banks had taken the position that it

would not be good business for

them not to take care of the small business concerns needing credit
and entitled to it.


there was a vocal group that could be

expected to keep this question alive.



Mr. Williams also reported that Vice President Bopp of his
Bank had met a few days ago with a group of fifty-five business
executives who held policy making positions with their firms.


fourth of these were from oil companies, one-fourth from heavy
industry, one-fourth from light industry, and one-fourth were from
service, finance, and other activities.

Mr. Bopp posed the question

whether their forward planning contemplated any recession in economic
activity during the next three years and not a single one of the fifty
five executives felt there would be a recession of greater severity
than that of 1954, and none of them were taking into account the
possibility of a greater recession.

Mr. Williams said he thought this

was typical of the Third District.
With respect to current policy, Mr. Williams said the Committee
should hold the restraint line at the existing degree but it

should be

especially sensitive to the problems facing the Treasury, and it would
be desirable for System representatives in conversations with bankers
to take a position that would influence them in favor of the Treasury's
Mr. Bryan said that no significant changes in the Sixth District
economy had taken place during the past two weeks.

He said that he

shared the general feeling that the System must maintain at the present
time a posture of restraint.

However, he was very much concerned about

the whole question of maintaining that restraint when the Government
of the United States must be in the market, and when it might face a



very difficult situation.

He was also somewhat afraid the open market

instrument might not work the way the Committee contemplated as a means
of aiding the Treasury.

The banking system had in effect acquired a

condition reflex, Mr. Bryan said, and he was beginning to suspect that
the reflex was starting to wear off and that simply supplying some
reserves through float or through the open market to aid the Treasury
financing might not prove sufficient.

Mr. Bryan said he noted that

the idea he had expressed at the meeting two weeks ago of doing some
thing in the way of reducing reserve requirements had not met with
unanimous support at this meeting, but he still

thought the idea had

some merit particularly in the light of what he thought would be the
reactions to open market operations at the present time.
that in

He noted

order to get a 2 per cent growth in reserves by the end of

this year it would be necessary to supply approximately a billion
dollars of additional funds, and he could not quite see how supplying
half of this sum through a reduction in reserve requirements would be

In fact, it

might have some substantial advantages at

the present time as a means of assuring the banks that they were not
going to come into the market and aid the Treasury financing and then
be confronted with heavy losses immediately afterwards on the secondary
distribution of the securities.

However, Mr. Bryan said that he did

not know that he could argue too strongly for the reduction in reserve

He shared many of the views that Mr. Mills had expressed

and felt that the points Mr. Mills had emphasized should not be forgotten
by the Committee.



Johns said that activity at the discount window in


St. Louis District had declined substantially in recent weeks and
virtually all

the borrowing was occurring at present at cotton banks

in the southern part of the district.

This was to be expected at

this time of year and would continue for some weeks.

He noted that

one St. Louis bank that had been approaching the status of a continuous
borrower was now out of debt to the Reserve Bank and that in fact it
recently had been a net seller of Federal funds.

Mr. Johns said he

shared the skepticism expressed by others about attempting to follow
one set of plans with respect to the administration of the discount
window at one time and another set of plans at another time, although
he would not deny that administrative decisions might be tempered
from time to time.

Johns noted a press report regarding loans for small

business and the apparent suggestion that business concerns might
turn to the Federal Reserve for funds which they were unable to obtain
from their usual banking sources.

He doubted that such a procedure

would be appropriate at this time, feeling that it would be wholly
inconsistent for the Federal Reserve Banks to make such loans direct
to business while pursuing the present restrictive monetary policy.
He did, however, share the views expressed by Mr. Hayes as to the
need for accommodating small business with credit and felt that the

System should learn as much about this problem as possible.
Mr. Johns said he was also in agreement with much that Mr.
Mills had said today which brought out the thoughts he attempted to



express at the meeting two weeks ago as to using something other than
net borrowed reserve figures as an indication of the degree of tight
ness in the market.

In suggesting that the System attempt to gauge

restraint by observing the behavior of loans and loan trends, Mr.
Johns said he realized the difficulties of such a procedure and the
lag in available statistics.

He still found nothing to indicate that

the System's pressure was too little and, in fact, there might be some
slight indication that pressure might be a little too heavy in the
present situation, with the Treasury financing undoubtedly requiring
the supplying of some reserves to the market.

Mr. Johns said he felt

the reserves should be supplied without too much reluctance and he
thoroughly agreed with the view that the Treasury would not be able
to carry through its financing satisfactorily on the basis of reserves

that would be supplied through float.
Mr. Szymczak said that he agreed with everything that had been
said on the side of restraint.

Whatever could be done with monetary

and credit measures to restrain the situation should be done.


in order to carry through this program it was necessary to be flexible,
and the System could not afford to be adamant in its restrictive policy.
There was nothing that the System could point to to show clearly that
the existing degree of restraint was "right", now, in the past, or in
the future, whatever policy might be followed.

The System must supply

reserves in the present situation and one of the factors would be the



need of the Treasury in its

expected $3 billion financing.


particular financing was one in which the System must carry through
with the Treasury,

letting it

the financing a success.


be known that it

would assist in making

would have to provide less reserves if

it assumed that attitude, Mr. Szymczak said, than if it assumed an
attitude of too much reluctance.

He also felt that it

would be ap

propriate for the System to suggest to the Treasury the desirability
of issuing more tax bills, partly because the System would find it
helpful in

administering monetary and credit policy to have more bills

in the market.

This could include the use of the tax and loan accounts.

Also, the System could in effect go with the Treasury to Government
securities dealers and assure them beforehand that it

was going to

make repurchase agreements freely available as needed during the


necessary, the System should purchase bills in the

course of the financing.


some $2 billion of tax anticipation

bills could be issued, then the other billion of the anticipated $3
billion could be in
of bills.

the form of an increase in the weekly offerings

By following the course he had suggested, Mr. Szymczak

felt that the System would find it
than otherwise and would be in
policy of credit restraint.
the position that it
in its

necessary to provide less reserves

a better position to continue its

The classical central bank could not take

had nothing to do with the needs of the Treasury

financing; in fact, in

order to be a classical central bank it

was necessary to consider and assist in the Treasury's financing



Balderston said he was as perplexed as others had indi

cated they were by the conflict between the System's obligation to
help the Treasury in its October financing and by its responsibility
for minimizing the price-wage increases that are ahead.

As to the

Treasury financing, he would like to see the Treasury use the occasion
to dispose of some $2 billion of bills that would come due in the
latter part of January when the situation might be more relaxed.


Balderston said he made this suggestion because an eight- or nine
month security would have to be put out at such an attractive yield
as to disrupt the bond market.
As to the System's obligation to help the Treasury between
now and the completion of the October financing, Mr. Balderston said

was very clear that the System would have to supply the reserves

for the financing but this should be done with full awareness of the
fact that we are having a price spiral that will constitute what
Chairman Martin in the past has described as a bubble on the boom.

Balderston then referred to features of the steel wage agreement

and to the possible effect of those provisions on prices as well as
to the possibility of reopening other wage agreements that were not
yet due for renewal.

He also referred to the request of the eastern

railways for a 15 per cent increase in rates on top of the increase
granted last year.

A second freight rate increase within the same

year would be clear evidence of the tendency for a cost-price squeeze
to bring about an accumulating spiraling in prices.

In view of these

-34factors, Mr.

Balderston said that he would have sympathy with the

suggestion that Mr.

Hayes had made that as soon as the Treasury

was out of the way the System should do whatever could be done to
discourage price increases because of the impact on the economy
that such increases would have in the months to come.
Chairman Martin then made a statement substantially as
There is very little
that I can add to the discussion.
I certainly don't want to belabor any points.
I do want to
make an observation that I think we ought to keep in front
of us all the time.
We talk a lot about how much monetary
and credit policy can do and how much it can not do. Ex
officio, I probably get subjected to more calls from the
Hill and from others than most of you and I certainly take
a beating from time to time. It is very easy to get blase'
about criticism and to decide that it is a lot of nonsense.
It is also very easy to be influenced by it. It is a problem
of always keeping balance.
I have been totally unimpressed with the great number of
comments that are being made that the System is heading for
disaster (some of them are perhaps politically motivated),
and the statements that small business is not getting the
credit it needs and that, whatever the cause, the Government
will not be able to permit the Federal Reserve to live in an
ivory tower and continue monetary and credit policy unless
it is more closely connected with the people. I don't have
the slightest concern about that. If we do what is right
and reasonable, it makes no difference what party is in
power or who the individuals are, we will come out all right.
We may be changed from time to time in our structure, but I
am not worried about that.
I emphasized at the last meeting that there were certain
periods when certain things become crucial. I think the
crucial thing at the present time is the Treasury financing.
I don't think it is the degree of restraint: degree is a
very tenuous thing. I don't believe that the degree of re
straint at a given time is the measure of our effectiveness.

That deals in bigger things.
When it comes to evaluating
the money market I am sure all of us have different judg
ments at different times.
That is because of differences
of the market and because of differences in individuals.
All of us have to make our judgments.
I used the word crucial the last time. Again, I say
in my judgment, this is going to be a difficult money mar
ket from now to the end of the year, and it may develop
into a panicky situation--not because people are reasonable,
but because they are unreasonable.
That is what we have to
deal with.
Governor Szymczak touched on my point here at some
length a few minutes ago.
I think we ought to engage in
whatever devices are needed.
I agree completely with
Governor Robertson that we should not tell
the Treasury
the things that ought to be done, but we should give them
our judgments on the market.
If we have a panic in the
Government securities market, we will be saddled with the
responsibility just as much as the Treasury, and we will
at that point probably have to supply a larger amount of
reserves than if we effectuate this financing in a reason
able way.
This is not a plea for any given level of reserves but
I am making a plea that we are dealing with fluctuations and
flexibility. If we are to make errors--we make errors con
tinually, and this is not in any way a criticism of the desk
because the very nature of the problem means that we will
make errors--the errors we make during this period ought to
be on the side of ease rather than on the side of restraint.
To me, that is a matter of common sense.
It has nothing to
do with anything other than an approach to the market, where
we are already under the shadow of two Treasury issues that
I have heard a lot of talk
have not been wholly successful.
from people in the market and from businessmen, many of them
informed people, as to the incompetence of the Treasury and
how, if things had been done differently, they would have
I don't think that is of any concern
come out all right.
We can not run the Treasury. We have
at the present time.
to accept the end result and pick up the pieces there.
At this juncture, I think we ought to bend our efforts
toward resolving the reserve situation on the side of a
clear indication that we are not going to have $600 or $700
million of net borrowed reserves suddenly develop on the up
side, and have it explained by some untoward incident. If
we are going to make a mistake, we ought to have it on the
Also, I think we ought to be extremely careful
side of ease.



about any projections or about any talk of what we will
do in the future.
The market will hear ideas of what we
are doing, and if the market gets the idea we are trying
to help the Treasury only to raise the discount rate later
on or to tighten up later on, that becomes an element in
the market.
I think we have to go from week to week or
from period to period without trying to project too far
into the future. Another thing I want to emphasize is
that in my opinion the Treasury is not being unreasonable
at the moment in being apprehensive about this market.
Whether they have always been wise or unwise is a matter
of judgment but they now have a very real problem.
In considering the policy directive, it seems to me
that no one around the table wants to change the directive
at this time.
I don't know how best to word the instruc
tions in terms of the degree of restraint that ought to
be followed. All of us are for following a policy of re
straint. The degree in my own thinking would be as I
have expressed it; we do not want to create a sloppy
money market but nevertheless we have to be alert to the
day to day operations of the money market and we have to
do what we can in supplying reserves and avoiding an im
pression that the Federal Reserve is going to sit by and
be glad to see further restraint develop to bother the
Some people will make comments to that effect
and part of that will be politically motivated. I would
like to have some observations as to how to develop this
very delicate point of what directive to give to the
account, and I would also like to give Mr. Rouse a chance
to comment.

Rouse said that, as Mr.

Thomas had indicated, the Treasury

bill market was a shrinking market at present.

The appetite of busi

ness corporations for bills had been steadily going down for the last
few weeks if

not for a little



Rouse said he agreed with

Chairman Martin that this was a most difficult situation.

Steady addi

tions of reserves through open market operations and maintenance of
the reserve picture about as we have had recently seemed to be the
only procedures that would be in line with the policy indicated by
the Committee.

At the same time, Mr. Rouse said, he was not sure



this would be enough.

He felt

that a Treasury financing of more

than $1-1/2 billion could be done but that the securities might
sell at a discount almost immediately in the light of continued
restraint and the unavailability of reserves.

The amount of re

serves that he could see reason for putting into the market in line
with the Committee's policy would not be sufficient to relieve the
situation in New York or Chicago, Mr. Rouse said, assuming a normal
distribution of the reserves in different parts of the country.


noted that the market in New York this morning was quite tight.


reduction in reserve requirements would cause confusion as to System
policy, Mr. Rouse said, but it was the type of thing that would give
a clear-cut indication to the market in unequivocal terms that the
System was providing reserves to support the Treasury financing.
On the other hand, if reserves were put in through open market
operations in the same atmosphere, he felt the market would continue
to be very sensitive.

He thought that it would be preferable if

the Treasury offered $2 billion of securities rather than $3 billion
at this time, even though it left open another substantial piece of
financing to be done at the end of the year in

a difficult period.

Mr. Thomas said that the Treasury financing in October might
not have as great a repercussion on the market as some of the comments
had indicated since the Treasury would be paying out some $2 billion

funds in



that month because of redemptions of securities.


received $2 billion of cash in the financing, there would still



be no change in the amount of required reserves as a result of the
Treasury financing.
Chairman Martin inquired of Mr.

Leedy whether his comments

indicated he would favor a reduction in reserve requirements in


York and Chicago as central reserve cities only, and Mr. Leedy re
sponded that this was his suggestion.


he did not intend

to suggest that such a reduction should be made at this time but
only on the theory that the Treasury's financing would be divided
into two offerings of $1-1/2 billion each, one to be made in October
and the other in December.
Chairman Martin inquired whether there were any persons present
who favored a reduction in reserve requirements at this time to assist
in the Treasury's financing, and Mr. Bryan indicated that he would favor
such a move.

Mills said that he would give qualified support to such a

reduction on the basis that the System had three weeks in which to
experiment as to what could be done to give stability and confidence
to the market.

Before the end of three weeks,


was conceivable

that the central reserve cities would need the major support of a
reduction in reserve requirements and he felt that in
door should be left

some manner the

open to consider that as a possibility at a later

He would not be in favor of a reduction in

reserve requirements

at this time.
Mr. Hayes stated that notwithstanding the comments Mr. Rouse



had made, he would not support a reduction in reserve requirements

at this time, and Mr. Rouse pointed out that his comment as to the
way the market would interpret a reduction in reserve requirements
was not to be taken as an indication that he favored a reduction in
reserve requirements at this time.

Mr. Hayes continued by saying

that while a reduction in reserve requirements would be very neat
from the standpoint of the Treasury financing, he felt open market
operations were designed to meet any situation where we needed a
temporary easing.

If there was some feeling that a net borrowed

reserve figure around $300 million still


the central reserve

cities dangerously tight for the Treasury's financing period, he
would favor going further in
might seem necessary.
and it

open market purchases to the extent that

This would have to be played by ear, he said,

would not bother him if

the Committee had to go in

in a little

more emphatic way.

Mr. Johns said that he would favor an immediate reduction in
reserve requirements for substantially the reasons stated by Mr. Bryan.
Mr. Harris said that comments made to him in connection with
the Treasury financing pointed out that while the System seemed willing
to make temporary adjustments in

the amount of reserves for a Treasury

financing, the experience was that before the securities could be given

their secondary distribution the System would come along and tighten
up the market in a way that would put the prices of the securities



down and thus hurt the banks or dealers or whoever acquired them,
He felt

that the System must consider the problem further and that,

if it did not reduce reserve requirements, it would have to do some
thing else to reassure the market in connection with the forthcoming
Mr. Bryan said this was the point he had had in mind.

He felt

that the System might receive a bad shock if the banks were not informed

a way that they could understand that the System was going to see

the Treasury financing through.
Chairman Martin said that he thought the Committee should have
in mind the points that Messrs. Harris and Bryan had mentioned.


had been a good deal of pressure on the System to reduce reserve re
quirements at this time, but he doubted that it would be possible to
explain such a move in a way that would avoid confusing the market and
the public.

He felt that all of the suggestions should be explored

but did not think the Committee could work out every detail at this

He referred to the suggestion made by Mr.

account management should have some leeway in its

Hayes that the



Chairman Martin again indicated that he would prefer to have the
Account Manager make his errors on the side of ease rather than re
straint during the period ahead.

He was not asking that Mr. Rouse

intentionally make errors on the side of ease but he was emphasizing
that errors which went in the wrong direction, if

accompanied by

development of a panicky feeling in the market, might lead to the



System's having to supply more reserves than it
in if


would have to put

handled the situation by leaning toward the easy side in

operations at this stage.
Mr. Rouse said that, to carry out the views indicated,


program would contemplate a substantial amount of buying, more or
less steady buying ($200 to $300 million might be adequate).
thought that this procedure,


along with use of repurchase agreements,

might go a considerable distance toward promoting a feeling of under
standing that the System would see the financing through.
tude Mr. Harris had mentioned was the problem, Mr.

The atti

Rouse said, and

he spoke of one bank that had started selling securities that it
acquired in

a Treasury financing before the books on the issue were

He also noted that the Treasury would be faced with a re

funding of $9 billion of maturing certificates on December 1, 1956.
In response to a question from Mr. Mangels as to whether
there would be merit in

setting the next meeting of the Committee

two rather than three weeks hence,
not believe this would help in

Chairman Martin said that he did

the current problem since the Treasury

financing probably would have been announced before October 9.


Chairman was inclined to think that the best way the Committee could
sum up the views expressed at this meeting would be to say that in
general the account management should be given latitude,


with the Committee's directive, to carry on operations in

the light

of the discussion at this meeting.

He added that he personally



would like the instruction to include a request that any errors
made in

carrying out that program be on the side of ease rather

than of restraint but that the whole operation should, of course,
be consistent with an over-all policy of restraint.


that this was a very difficult program to pursue, he felt that it
was the best the Committee could agree upon in the light of the
discussion at this meeting.
not in

Szymczak said that it

was clear that the Committee was

a position now to say exactly how much assistance would have

to be given to the market in
ing, and for that reason it

connection with the Treasury's financ
would be necessary for the management of

the account and the Committee to "play by ear".
Chairman Martin agreed, adding that he thought there was full
agreement that the Committee should do whatever was consistent with

responsibility to help the Treasury in its

current financing

Mr. Robertson said that he would like to make the additional
suggestion that perhaps this was the kind of situation in which re
purchase agreements should be made available at a rate below the
discount rate in order to aid dealers in helping to make a market
for the issues that would be offered in the Treasury financing, and
he suggested that in

the event the Manager of the Account believed

such authority was needed, he take it upon himself through the
Secretary of the Committee to bring to the attention of the Committee



a request for additional authority.
In response to a question from Mr. Hayes as to whether this

would be of substantial help, Mr. Rouse said that this would depend
on the rate situation, in view of the provision in the existing
authority for repurchase agreements that they be at a rate no lower
than the lower of (1) the discount rate of the Federal Reserve Bank

or (2)

the average issuing rate on the latest issue of Treasury bills.
Chairman Martin said that he thought it

was clear that the

Committee wished to do whatever would be most effective in the way
of helping with the forthcoming issue of Treasury securities, and
Mr. Hayes commented that he knew of no disagreement with that state
change in

Rouse having indicated that he had no recommendation for

the Committee's directive, Chairman Martin suggested that

the Committee approve the directive without change in
language or the dollar limitations in it,
that it

would be carried out in

either the

and with the understanding

the light of the discussion at this

Thereupon, upon motion duly made
and seconded, the Committee voted
unanimously to direct the Federal Re
serve Bank of New York until otherwise
directed by the Committee:
To make such purchases, sales, or exchanges (in
cluding replacement of maturing securities, and allowing
maturities to run off without replacement) for the System
open market account in the open market or, in the case of



maturing securities, by direct exchange with the Treasury,
as may be necessary in the light of current and prospective
economic conditions and the general credit situation of the
country, with a view (a) to relating the supply of funds in
the market to the needs of commerce and business, (b) to
restraining inflationary developments in the interest of
sustainable economic growth, and (c) to the practical ad
ministration 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 Treas
ury, shall not be increased or decreased by more than $1
To purchase direct from the Treasury for the
account of the Federal Reserve Bank of New York (with
discretion, in cases where it seems desirable, to issue
participations to one or more Federal Reserve Banks) such
amounts of special short-term certificates of indebtedness
as may be necessary from time to time for the temporary
accommodation of the Treasury; provided that the total
amount of such certificates held at any one time by the
Federal Reserve Banks shall not exceed in the aggregate
$500 million;
To sell direct to the Treasury from the System
account for gold certificates such amounts of Treasury
securities maturing within one year as may be necessary
from time to time for the accommodation of the Treasury;
provided that the total amount of such securities so sold
shall not exceed in the aggregate $500 million face amount,
and such sales shall be made as nearly as may be practicable
at the prices currently quoted in the open market.
Chairman Martin then referred to the proposal that had been made
by the New York Bank for authority to engage in swaps of Treasury bills
and asked Mr. Rouse whether he had any additional comments to make re
garding the proposal in view of the suggestion that Mr. Robertson had
made at the preceding meeting as to limitations on the authority.
Mr. Rouse stated that he had expressed his feelings at some
length both orally and in memorandum form and that he did not now have



anything to add to his earlier comments.
Mr. Robertson said that he would like to withdraw his sug
gested resolution as presented at the meeting on September 11 be
cause he did not think the Committee should force the management
of the account to accept a resolution of that type.

Since the reso

lution would not serve the purpose that he had had in mind in pro
posing it,

he would prefer to withdraw it and to suggest that the

Committee take no action on the New York Bank's request for authority
to engage in swaps in Treasury bills.
Mr. Hayes said that discussions he had had with his staff
regarding Mr. Robertson's proposed resolution had brought out the
difficulties that would be created by making it
a complete go-around of all
engaging in

necessary to have

dealers every time the System contemplated

a swap transaction.

On the other hand, he thought that

would be quite feasible and desirable if

the System needed some

swaps to remind the market on a given day that it was interested in
swaps and thus to "needle" the market to come to the Bank with what
ever offerings it might have.

He raised the question whether such

procedure would go far enough to meet Mr. Robertson's suggestion.
Mr. Robertson said that this would not go far enough to suit
him; it

would be a device for the purpose of enabling a dealer to

meet the demands of one of his customers,

and he did not think the

account would be accomplishing what was contemplated by the original
suggestion for changing the maturity pattern of the System's portfolio



at its initiative.
Mr. Hayes said that his suggestion did not contemplate that
such an announcement would be made every day but only if

the System

had a particular need for changing the maturity pattern of its

Even then the System would only make such swaps if

the need.



He did not have in mind that the System account would

formally notify everyone in the market of each need for swaps.
In response to a question from Mr. Robertson as to why the
latter procedure should not be followed, Messrs. Hayes and Rouse
responded that such a procedure would not be desirable for the
reasons stated in

the memorandum distributed by Mr. Rouse under

date of September 21, 1956, particularly because it

would tend to

distort the market.
Mr. Erickson inquired whether swaps along the lines proposed
by the New York Bank would be of assistance in the period we are now
Mr. Rouse said he thought such authority probably would be of
assistance although he could not say that it
like to have the authority and thought it
the Manager of the Account in

was crucial.

He would

would be of assistance to

carrying out System policy.

Vardaman said that he had studied this proposal thoroughly

but that he could not support any form of swaps at the present time,
much as he would like to do anything that would facilitate the operation



of the System account at the present.

He added the comment that this

view did not indicate a lack of confidence in

the trading desk but was

a matter of principle and that he felt to engage in

swaps injected a

feature into open market operations which should not be there,
Chairman Martin said that in view of the differences of opinion

would seem best to pass the question for the present time.

He would

make the general observation, he said, that he felt more strongly than
ever the inadequacies of the Government market at the present time,
both as to dealers and as to bankers,

and that in

his opinion the Com

mittee should go further into a study of every aspect of the market.
He cited a comment by the chairman and president of a large bank
recently who stated that he had no feeling of responsibility to the
Government securities market whatsoever,
Martin) felt

a statement which he (Chairman

indicated a lack of proper attitude on the part of a person

that position at a time when we were facing one of the most crucial

Government securities offering in

recent years.

The fact that such an attitude existed, however,

pointed up the

necessity for the System's pursuing a review of the problems that it


been wrestling with and for recognizing that the techniques and the
problems of the Treasury and of the money managers had not found a
solution that was adequate.

Rouse added a comment as to the attitude he understood had

been shown at a recent meeting of a Committee of the New York Clearing

which was described as lacking in

appreciation of the problems



facing the Treasury and the System.
Mr. Hayes said that this matter was very important and one
he had in mind.

The comments that Chairman Martin and Mr. Rouse had

cited were not uniform, he said, and there were bankers who did have
a sense of responsibility.
Mr. Balderston inquired whether any additional authority with
respect to repurchase agreements along the lines suggested by Mr.
Robertson should be given at this meeting, and it

the event Mr.

was understood that

Rouse felt additional authority was needed he would

bring the matter to the attention of the Committee.

was agreed unanimously that the next meeting of the Com

mittee would be held at 10:00 o'clock on Tuesday, October 16, 1956.
Thereupon the meeting adjourned.