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FORTY-FIFTH ANNUAL REJPORT of the BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM COVERING OPERATIONS FOR THE YEAR 1958 30 DIGEST OF PRINCIPAL FEDERAL RESERVE POLICY ACTIONS, 1958 Action Purpose of action Julyearly August Bought a small volume of U. S. Government securities other than shortterm issues and a large amount of securities involved in a Treasury refinancing. Promptly thereafter reduced Treasury bill holdings substantially. To correct disorderly conditions in the Government securities market, to facilitate the Treasury refinancing, and then to recapture the bank reserves created by the earlier securities purchases. August Raised margin requirements on loans for purchasing or carrying listed securities from 50 to 70 per cent of market value of securities. To help prevent an excessive use of credit for purchasing or carrying securities. The volume of credit in the stock market and stock prices were advancing sharply and were at or near the highest levels since World War II. August-eariy September Made little change in holdings of U. S. Government securities. Member bank borrowings increased to an average of more than $400 million in early September. Open market action not taken to offset drains on reserve funds reflecting bank credit and monetary expansion resulting from seasonal factors and the sharp upturn in economic activity. AugustSeptember Raised discount rates from 1% to 2 per cent at all Reserve Banks. To keep discount rates in an appropriate relationship with market rates and to increase the cost of borrowing by individual banks from the Reserve Banks in case of increasing demands for bank credit. October Raised margin requirements on loans for purchasing or carrying listed securities from 70 to 90 per cent of market value of securities. To help prevent an excessive use of credit for purchasing or carrying securities. Late Octoberearly November Raised discount rates from 2 to 2¥:! per cent at all Reserve Banks. To bring discount rates into closer alignment with open market rates. Mid-NovemberDecember Increased system holdings of U. S. Government securities about $900 million, including securities held under repurchase agreement. Member bank borrowings rose to average of $560 million in December. To meet part of reserve needs associated with seasonal factors and a further moderate outflow of gold. Period Period January Tanuary Action Purpose of action Limited net reduction in holdings of U. S. Government securities to $900 million, more than half of which rep· resented securities held under repurchase agreement at end of year. Member bank borrowings declined to an average of $450 million. To ease reserve positions by absorbing only part of the reserves made available by seasonal factors affecting bank reserve positions. Reduced margin requirements on loans for purchasing or carrying listed securities from 70 to 50 per cent of market value of securities. To recognize that dangers of excessive use of credit for stock market speculation had subsided, since stock prices and the volume of credit in the stock market had declined to levels near or below those prevailing at the time of the previous increase in requirements. JanuaryFebruary Reduced discount rates from 3 to 2% per cent at 11 Reserve Banks. February Reduced reserve requirements on demand deposits from 20 to 19¥:! per cent at central reserve city banks; from 18 to 17 Y2 per cent at reserve city banks; and from 12 to 11 ¥:! per cent at country banks, thus freeing an estimated $500 million of reserves. March March Reduced discount rates from 2% to 2 \4 per cent at 11 Reserve Banks and from 3 to 2\4 per cent at one Reserve Bank. Reduced reserve requirements on demand deposits from 19¥:! to 19 per cent at central reserve city banks; from 17Y2 to 17 per cent at reserve city banks; and from 11 ¥:! to 11 per cent at country banks, thus freeing an additional $500 million of reserves. FebruaryMid-April Purchased about $450 million of U. S. Government securities. Member bank borrowings declined further to an average of about $180 million. April Reduced reserve requirements on demand deposits from 19 to 18 per cent (in two stages) at central reserve city banks and from 17 to 16Y2 per cent at reserve city banks, thus freeing a total of about $450 million of reserves. April-May Reduced discount rates from 2\4 to 1% per cent at all Reserve Banks. Mid-April-June Purchased outright about $1.7 billion net of U. S. Government securities. Member bank borrowings declined further to an average of $100 million at the end of June. 31 FEDERAL RESERVE SYSTEM ANNUAL REPORT OF BOARD OF GOVERNORS To reduce further the cost of borrowing from the Reserve Banks and increase further the availability of bank reserves in order to encourage bank credit and monetary expansion conducive to resumed growth in economic activity. To supplement reserve requirement actions in further increasing the availability of bank reserves. To supplement previous actions to encourage bank credit and monetary expansion and resumed growth in economic activity and to offset current gold outflow. 52 ANNUAL REPORT OF BOARD OF GOVERNORS $500 million of free reserves would abet speculation in the Govern ment securities market and create excessive liquidity. Consideration of the foregoing factors resulted in a decision that at this meeting the Committee should make no change in Federal Reserve credit policy and that for the next three weeks no action should be taken to cause the tone of the market to get materially easier or tighter. July 8, 1958 Authority to effect transactions in System Account. No change was made at this meeting in the Committee's directive calling for open market operations with a view, among other things, to contributing further by monetary ease to resumption of stable growth of the economy. Votes for this action: Messrs. Martin, Chairman, Hayes, Vice Chairman, Balderston, Fulton, Irons, Leach, Mangels, Mills, Robertson, Shepardson, Szymczak, and Vardaman. Votes against this action: none. A summary of the economic data presented at this meeting was that performance of the economy in May and June had been better than had been anticipated. The index of industrial production over those two months had risen two points, and final data might show the rise to be three points. Gross national product for the second quarter was currently estimated to be at least moderately higher than in the first quarter. Whether an abrupt turnabout of activity was taking place or whether the extended improvement merely reflected a tem porary rebound of production that had been far below consumption was yet to be determined. However, the odds seemed to favor more than a rebound improvement. An important feature of the recent strengthening was that it repre sented a composite of small improvements over a wide range of ac tivities, rather than dominant activity in one or two areas. One big uncertainty in the situation was the possibility of cyclical downturn in European business activity and of a new surge in inflationary forces in the Latin American and Far Eastern countries. However, the evidence at this time did not warrant the inference that European recession was likely to become a force affecting adversely United FEDERAL RESERVE SYSTEM 53 States and world trade developments, although it was apparent that developments in those markets would require dose observation in the months ahead. On the financial side, the most striking development since the June 17 meeting had been severe pressure on the Treasury bond market. The underlying feature had been the large commitments in Treasury bonds made by temporary holders, many for pure speculation, in duced by expectations of further declines in interest rates, and the attempt to close out those commitments at a time when the money market was under adverse pressure because of exceptionally heavy seasonal liquidity demands. This had called for exceptional amounts of Federal Reserve credit, and the increase in required reserves in the five weeks ending July 2 had been one of the largest on record for a period of that length. System open market operations had supplied $1.4 billion of additional reserve funds, and purchases of Govern ment securities for Treasury investment accounts had been made, not withstanding which interest rates rose. The Treasury bond market had been notably weak under the influence of the dosing out of spec ulative commitments, and yields on such securities had risen sharply. In addition to the present disturbed atmosphere of the Government bond market, it was noted that important Treasury financing opera tions were in prospect between this and the next meeting of the Committee. While some members of the Committee felt that the likelihood of a rapid upturn in economic activity argued for less ease, the Com mittee reached the conclusion that, on balance, there should be no change in policy at this time and that the directive should be renewed in its existing form calling for continued monetary ease. July 18, 1958 Authority to effect transactions in System Account. The Federal Open Market Committee authorized the Federal Re serve Bank of New York to purchase for the System Open Market Account in the open market this afternoon $50 million or less of Government securities at the discretion of the Manager of the System Open Market Account on scale wherever the Manager deemed it appropriate in order to steady the market. 54 ANNUAL REPORT OF BOARD OF GOVERNORS FEDERAL RESERVE SYSTEM Votes for this action: Messrs. Martin, Chairman, Hayes, Vice Chairman, Balderston, Fulton, Irons, Leach, Shepardson, and Szymczak. Mr. Vardaman, who was not present at the meeting, when informed of the action stated that he concurred. Votes against this action: Messrs. Mills and Robertson. temporizing and fluttering around the edges of the market with minor purchases at this time. As the System Account was starting to put this authorization into effect, further developments in the market caused the Manager of the Account to report (again by telephone conference) that he would now have to call the market disorderly. After consideration of the Manager's detailed report covering these developments, the Commit tee approved by unanimous vote the action set forth in the second paragraph of this entry, which authorized the purchase of Govern ment securities in the open market, without limitation. It was under stood that the authorization was made for the purpose of cor recting a disorderly market and included the purchase of "rights" and when-issued securities, purchase of which was precluded during a period of Treasury financing under one of the Committee's contin uing policies, last renewed at the meeting on March 4, 1958. In taking this action, the Committee also authorized the immediate re lease of an announcement reading as follows: Authority was granted to the Federal Reserve Bank of New York to purchase for the System Open Market Account in the open market, without limitation, Government securities in addition to short-term Government securities. Votes for this action: Messrs. Martin, Chairman, Hayes, Vice Chairman, Balderston, Fulton, Irons, Leach, Mills, Robertson, Shepardson and Szymczak. Mr. Vardaman, who was not present at the meeting, when informed of the action stated that he con curred. Votes against this action: none. The action set forth in the first paragraph of this entry was taken at a meeting of the Federal Open Market Committee, held by tele phone conference in the early afternoon of July 18, and was based on a report by the Manager of the System Open Market Account that a condition was developing in the Government securities market which, in his judgment, was close to a disorderly condition although it had not yet actually reached that point. His recommendation was that purchases of securities during the afternoon of $50 million or less be authorized for the purpose of steadying the market. After consider ing the recommendation in the light of the existing conditions in the market and of the Committee's continuing operating policy providing that open market operations shall be "solely to effectuate the objec tives of monetary and credit policy (including correction of dis orderly markets)," the Committee authorized the purchase of Gov ernment securities as indicated. Messrs. Mills and Robertson voted against this authorization on the ground that at this time no one contended the market was dis orderly and therefore there was no basis for intervention. In addi tion, they felt that the proposal to enter the market on a limited basis (as distinguished from action sufficiently massive to do the job) was unwise and would do very little to restore confidence in the market. Furthermore, they felt that if later there should be a disorderly mar ket, the correction of it would have been seriously handicapped by 55 In view of conditions in the United States Government securities market, the Federal Open Market Committee has instructed the Manager of the Open Market Account to purchase Government securities in addition to short-term Government securities. July 23, 1958 Authority to effect transactions in System Account. The Committee authorized the Federal Reserve Bank of New York to engage in a transaction that would include an offsetting purchase and sale of securities in the amount of $30 million for the purpose of altering the maturity pattern of the System's portfolio. Votes for this action: Messrs. Martin, Chairman, Hayes, Vice Chairman, Balderston, Fulton, Irons, Leach, Mangels, Mills, Robertson, Shepardson, Szymczak, and Vardaman. Votes against this action: none. The purpose of this action, taken during a telephone conference meeting, was to permit the System Account to complete a specific transaction for a foreign account in a manner that would result in adding to the amount of System Account holdings of Treasury bills that would mature on July 31, 1959. Thus, the Committee would be
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