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MINUTES OF MEETINGS of the FEDERAL ADVISORY COUNCIL 1954 MINUTES OF MEETINGS of the FEDERAL ADVISORY COUNCIL February 14-16, 1954 May 16-18, 1954 September 19-21, 1954 November 14-16, 1954 OFFICERS AND MEMBERS OF THE FEDERAL ADVISORY COUNCIL For the Year 1954 OFFICERS: President, Edward E. Brown Vice President, Robert V. Fleming Director, Henry C. Alexander Director, Geoffrey S. Smith Director, George Gund Secretary, Herbert V. Prochnow EXECUTIVE COMMITTEE: Edward E. Brown Robert V. Fleming Henry C. Alexander Geoffrey S. Smith George Gund MEMBERS: William D. Ireland Henry C. Alexander Geoffrey S. Smith George Gund Robert V. Fleming Wallace M. Davis Edward E. Brown W. W. Campbell Joseph F. Ringland Charles J. Chandler George G. Matkin John M. Wallace District No. 1 District No. 2 District No. 3 District No. 4 District No. 5 District No. 6 District No. 7 District No. 8 District No. 9 District No. 10 District No. 11 District No. 12 1 BY-LAWS OF THE FEDERAL ADVISORY COUNCIL ARTICLE I. OFFICERS The Officers of this Council shall be a President, Vice President, three Directors and a Secretary, all of whom, except the Secretary, shall also serve as the Executive Committee. ARTICLE II. PRESIDENT AND VICE PRESIDENT The duties of the President shall be such as usually pertain to the office; in his absence the Vice President shall serve. ARTICLE III. SECRETARY The Secretary shall be a salaried officer of the Council, and his duties and compensa tion shall be fixed by the Executive Committee. ARTICLE IV. EXECUTIVE COMMITTEE The Executive Committee, as indicated in Article I of the by-laws, shall consist of the President, Vice President, and the three Directors. ARTICLE V. DUTIES OF THE EXECUTIVE COMMITTEE It shall be the duty of the Executive Committee to keep in close touch with the Board of Governors of the Federal Reserve System and with their regulations and promulgations, and to communicate the same to the members of the Council, and to suggest to the Council, from time to time, special matters for consideration. The Executive Committee shall have the power to fix the time and place of holding its regular and special meetings and methods of giving notice thereof. The Executive Committee shall have full power, as officers of the Council, to act for the Council between meetings of the Council. Minutes of all meetings of the Executive Committee shall be kept and such minutes or digest thereof shall be immediately forwarded to each member of the Council. A majority of the Executive Committee shall constitute a quorum, and action of the Committee shall be by majority of those present at any meeting. ARTICLE VI. MEETINGS Regular meetings of the Federal Advisory Council shall be held in the City of Washington on the third Tuesday of the months of February, May, September and November of each year, unless otherwise directed by the Executive Committee. A preliminary meeting of the Federal Advisory Council shall be called by the Sec retary in accordance with instructions to be given by the President of the Council. Special meetings may be called at any time and place by the President or the Execu tive Committee, and shall be called by the President upon written request of any three members of the Council. ARTICLE VII. ALTERNATES In the absence of the regular representative of any Federal Reserve District, the Board of Directors of the Federal Reserve Bank of that District may appoint an alternate. The alternate so appointed shall have the right to be present at all the meetings of the Council for which he has been appointed. He shall have the right to take part in all discussions of the Council but shall not be entitled to vote. ARTICLE VIII. AMENDMENTS These by-laws may be changed or amended at any regular or special meeting by a vote of a majority of the members of the Federal Advisory Council. February 14, 1954 3 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL February 14, 1954 The first and organizational meeting of the Federal Advisory Council for the year 1954 was convened in Room 1028 of the Mayflower Hotel, Washington, D.C., on February 14, 1954, at 2:17 P.M. Present: William D. Ireland District No. 1 Henry C. Alexander District No. 2 Geoffrey S. Smith District No. 3 George Gund District No. 4 Robert V. Fleming District No. 5 Wallace M. Davis District No. 6 Edward E. Brown District No. 7 District No. 8 W. W. Campbell District No. 9 Joseph F. Ringland District No. 10 Charles J. Chandler District No. 11 George G. Matkin District No. 12 John M. Wallace Secretary Herbert V. Prochnow Mr. George Gund was elected Chairman pro tem and Mr. Herbert V. Prochnow, Secretary pro tem. The Secretary pro tem stated that communications had been received from the twelve Federal Reserve banks, certifying to the election of their respective representatives on the Council for the year 1954. The following officers were nominated and unanimously elected: Edward E. Brown, President Robert V. Fleming, Vice President Henry C. Alexander, Director Geoffrey S. Smith, Director George Gund, Director Herbert V. Prochnow, Secretary On motion, duly made and seconded, the salary of the Secretary was fixed at $3,000 annually. On motion, duly made and seconded, the Council approved the by-laws, copies of which are a part of these minutes. The Secretary presented his financial report for the year 1953, which had been audited by Mr. Irving E. Carlson, Assistant Auditor of The First National Bank of Chicago. The report was approved and ordered placed on file. A copy of the report is attached and made a part of these minutes. 4 r On motion, duly made and seconded, the printed minutes for the meetings of the Council held on February 15, 16, 17, 1953; May 17, 18, 19, 1953; September 13, 14, 15, 1953; November 15, 16, 17, 1953; and the mimeographed notes of the meeting held November 15, 16, 17, 1953, copies of which had been sent previously to the members of the Council, were approved. On motion, duly made and seconded, a resolution was adopted authorizing the Secretary to ask each Federal Reserve bank to contribute $450.00 toward the secretarial and incidental expenses of the Federal Advisory Council for the year 1954, and to draw upon it for that purpose. President Brown stated that the Council has been drawing upon each Federal Reserve bank for $350.00 annually since 1934, but because of increasing costs it was dif ficult for the Council to operate within this limited budget. He added that the matter of increasing the amount to $450.00 would be presented to the Board at the forthcoming joint meeting with the Council. A complete list of the items on the agenda for the meeting and the conclusions of the Council are to be found in the Confidential Memorandum to the Board of Governors from the Federal Advisory Council, which follows on pages 8 and 9. The meeting adjourned at 5:42 P.M. HERBERT V. PROCHNOW Secretary 5 REPORT OF THE SECRETARY OF THE FEDERAL ADVISORY COUNCIL For the Year Ended December 31, 1953 Balance on hand, December 31, 1952.............. $ 7,389.61 Salaries....................................... $3,000.00 Conference Expense........................ 750.78 Printing and Stationery.......... 436.00 Postage, Telegrams and Telephone...................... 4.56 Balance on hand, December 31, 1953............... 7,398.27 $11,589.61 A c c p s s m p ritQ ___ 12 Federal Reserve Banks.. 4,200.00 $11,589.61 Chicago, Illinois February 1, 1954 To the Federal Advisory Council: I have audited the books, vouchers, and accounts of the Secretary of the Federal Advisory Council for the year ended December 31, 1953, and certify that the above statement agrees therewith. Respectfully, THE FIRST NATIONAL BANK OF CHICAGO (Signed) Irving E. Carlson Assistant Auditor 6 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL February 15, 1954 At 10 A.M., the Federal Advisory Council reconvened in Room 1028 of the May flower Hotel, Washington, D.C., with the President, Mr. Brown, in the Chair. Present: Mr. Edward E. Brown, President; Messrs. William D. Ireland, Henry C. Alexander, Geoffrey S. Smith, George Gund, Robert V. Fleming, Wallace M. Davis, W. W. Campbell, Joseph F. Ringland, Charles J. Chandler, George G. Matkin, John M. Wallace, and Herbert V. Prochnow, Secretary. The Council reviewed its conclusions of the previous day regarding the items on the agenda, and sent to the Secretary of the Board of Governors the Confidential Memorandum which follows on pages 8 and 9, listing the agenda items and the conclusions reached by the Council. The Memorandum was delivered to the Secretary of the Board of Governors at 12:30 P.M. on February 15, 1954. The meeting adjourned at 12:10 P.M. HERBERT V. PROCHNOW Secretary 7 CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON FEBRUARY 16, 1954 1. The Board would like to have the comments of the members of the Council on the prospective business and economic situation during the next six months and the probable volume of bank loans during the period. What are the principal reasons for the large reduction in bank loans since the turn of the year? There are some differences in the prospective business and economic situation in the various Federal Reserve districts, but the major economic trends are essentially similar. The rapid rate of inventory accumulation in the first half of 1953 came to an end in the final quarter of the year. Virtually all categories of goods are now in full supply, and most businesses are endeavoring to reduce inventories. A leveling off of the present economic downtrend, or any upturn in over-all business activity, will depend largely upon when the present liquidation of inventories ends. The increase in unemployment, especially in manufacturing, is reflecting itself in lower payrolls, Carloadings are down considerably, which results in the postponement of purchases of equipment and of other capital expenditures by the railroads. A generally expected lower automobile production is an additional factor emphasizing the probable continuance of the present downturn through the first half of 1954. Retail sales recently have shown some decline, but generally they have held up well. Should the demand for goods, especially as expressed in consumer buying, markedly decline, the rate of business downturn would accelerate. Over-all new construction, despite some decline in residential building, has held up well, and is a strong factor in sustaining business. The members of the Council expect business activity to continue to decline in the first half of 1954. There is at present no significant evidence either of a leveling off in the rate of the present downtrend, or of the rate of decline increasing sharply or spiraling. The large reduction in loans since the turn of the year is the outgrowth of a number of economic forces in addition to those which normally result in a seasonal decline in bank credit. A year ago, inventories were being substantially increased, whereas they are now being reduced. Early last year, business also was more active and required more bank credit. Lower agricultural and livestock prices, compared to a year ago, have like wise lessened the demand for loans. Present low interest rates are causing some large borrowers to refund short-term bank credit into long-term loans. A minor factor in the reduction of bank loans has been the termination of the excess profits tax. Some business concerns borrowed more freely than normally to increase their tax base. This incentive no longer exists. In view of the probable continuance of the downtrend in business activity in the first half of 1954, members of the Council anticipate a further decrease in the volume of 8 bank credit for commercial, industrial and agricultural purposes, and no increase in total of other types of loans. 2. What are the views of the Council with respect to the System’s credit policy since the preceding meeting of the Council? Does the Council have any sugges tions as to what the System’s policies should be in the months immediately ahead? Does the Council foresee a situation in the near future which would call for a reduction in the discount rate or a further reduction in reserve requirements? The members of the Council believe that the Open Market operations of the System since the preceding meeting of the Council and through the greater part of January were helpful to the economy. The Council appreciates the difficulties which confronted the Open Market Committee in January as a result of the exceptionally heavy flow of currency to the banks, the unusually large contraction in loans, and the substantial increase in float because of weather conditions. However, since the latter part of January, Open Market operations seem to the members of the Council not to have been timed as effec tively, nor to have produced results as satisfactory, as on other occasions in recent months. At a time when bank loans are decreasing, the Council is of the opinion that it would be proper policy to sell bills to an amount approximately offsetting the decline in loans. The action of the Open Market Committee in the latter part of January seemed to be in accord with this viewpoint. The policy later of accumulating bills despite the decline in loans was the principal factor in the bill rate going to yields which the Council believes represent undesirable cheap money. The Council would like to reiterate the views it expressed in November that the danger of disturbing the economy by making money unduly and artificially cheap is as great as the danger of restricting business by too high interest rates, and a consequent reduction in the use of credit. The members of the Council believe that with business continuing to decline, an easy money policy making credit readily available to desirable borrowers at reasonable rates is advisable. However, we reiterate that the economy should not be disturbed by making money unduly and artificially cheap. The Council is sharply divided in its opinion as to whether the recent reduction in the discount rate was desirable. However, the Council is of the belief that there is no situation foreseeable in the near future which would call for a further reduction in the discount rate. The large majority of the Council does not foresee a situation in the near future which would call for a further reduction in reserve requirements. 9 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL February 15, 1954 At 2:15 P.M., the Federal Advisory Council convened in the Board Room of the Federal Reserve Building, Washington, D.C., with the President, Mr. Brown, in the Chair. Present: Mr. Edward E. Brown, President; Messrs. William D. Ireland, Henry C. Alexander, Geoffrey S. Smith, George Gund, Robert V. Fleming, Wallace M. Davis, W. W. Campbell, Joseph F. Ringland, Charles J. Chandler, George G. Matkin, John M. Wallace, and Herbert V. Prochnow, Secretary. Dr. Arthur Marget, Director of the Division of International Finance of the Board of Governors of the Federal Reserve System, and members of his staff discussed International Conditions. A summary of the comments was sent to the members of the Council by Dr. Marget. The meeting adjourned at 3:35 P.M. H E R B E R T V. P R O C H N O W Secretary 10 MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM February 16, 1954 At 10:33 A.M., a joint conference of the Federal Advisory Council and the Board of Governors of the Federal Reserve System was held in the Board Room of the Federal Reserve Building, Washington, D.C. Present: Members of the Board of Governors of the Federal Reserve System: Chairman Wm. McC. Martin, Jr.; Governors M. S. Szymczak, R. M. Evans, James K. Vardaman, Jr., A. L. Mills, Jr., and J. L. Robertson; also Mr. S. R. Carpenter, Secre tary, and Mr. Merritt Sherman, Assistant Secretary of the Board of Governors. Present: Members of the Federal Advisory Council: Mr. Edward E. Brown, President; Messrs. William D. Ireland, Henry C. Alexander, Geoffrey S. Smith, George Gund, Robert V. Fleming, Wallace M. Davis, W. W. Campbell, Joseph F. Ringland, Charles J. Chandler, George G. Matkin, John M. Wallace and Herbert V. Prochnow, Secretary. President Brown stated that the Council had adopted a resolution authorizing the Secretary to ask each Federal Reserve Bank to contribute $450.00 toward the secretarial and incidental expenses of the Federal Advisory Council for the year 1954 and to draw upon it for that purpose. He added that this represents an increase of $100.00 annually over recent years, but that the Council has felt the increase necessary in view of rising costs. President Brown suggested that the Secretary of the Board advise the Secretary of the Council of the Board’s views on the suggested increase. Chairman Martin replied that the Board will advise the Council of its views. (Each of the twelve Federal Reserve banks later reported approval of the $450.00 contribution of each bank for the secretarial and incidental expenses of the Federal Advisory Council for the year 1954.) President Brown read the first item on the agenda and the conclusions of the Council as expressed in the Confidential Memorandum to the Board of Governors from the Federal Advisory Council, as printed on pages 8 and 9 of these minutes. The President of the Council then read the second item on the agenda and the conclusions of the Council as expressed in the Confidential Memorandum previously mentioned. President Brown added that he knew of no probable business expansion or development that was being held back because of tight money. An extended discussion on this item, participated in by members of the Council and the Board, followed. U Chairman Martin stated that the meeting had been very helpful to the Board. The meeting adjourned at 1:10 P.M. H E R B E R T V. P R O C H N O W Secretary 12 NOTE: This tra n sc rip t of the Secretary’ s notes i s not to be regarded as complete or n e c e s s a r ily e n tir e ly accurate. The transcript i s f o r th e sole use of the members of the F e d e r a l A d v iso ry C o u n c il, The concise o f f i c i a l m inutes f o r the entire year are printed and d is t r ib u t e d l a t e r . H .V .P . The S e c r e t a r y ’ s notes on the meeting of the F e d e r a l A d v is o ry Council on February l U , 195U> at 2 :1 7 P . M . , i n Room 1028 of the Mayflower H o t e l , W ash ing ton , D .C . A l l members of the F e d e r a l A d v iso ry Council were present. George Gund was e le cte d Chairman pro tem and Herbert V . Prochnow was elected Secretary pro tem. The S e c r e ta r y pro tem stated that communications had been received from the twelve Fed eral Reserve Banks, c ertify in g to the election of their respective r e p re sen tativ e s on the Council for the year 195U* On m otion, duly made and seconded, the by-laws were approved. The fo llo w in g o f f ic e r s were nominated and unanimously elected: Edward E . Brown, President R o bert V . Flem ing, Vice President Henry C . A lexander, Director Geoffrey S . Smith, Director George Gund, Director Herbert V . Prochnow, Secretary On m otion, duly made and seconded, the salary of the Secretary was f i x e d at $ 3 ,0 0 0 annually* The Sec re tary presented his fin a n c ia l report for the year 1953 which had been a u d ite d b y M r . Ir v in g E . Carlson, A ssista n t Auditor of The F ir s t N atio nal Bank o f C h ic a g o . The report was approved and ordered placed on file. I t w i l l be p r in t e d and attached to the formal prin te d m inutes. A m otion was adopted au thorizing the Secretary to increase the amount to be drawn upon each F ederal Reserve Bank from $3 50 to $U50 for the sec r e t a r i a l and in c id e n t a l expenses of the Federal Advisory Council for the year 195U* The amount of $ 3 5 0 was fi x e d i n 193U, and because of increasing costs i t i s d i f f i c u l t fo r the Council to operate w ith in this lim ite d b u d g et. P r e s id e n t Brown stated that he would present the matter to the Board at th e j o i n t meeting w ith the C ou n cil. The November C o u n cil, C o u n cil, Council approved the Secretary’ s notes for the meeting of 15- 17, 1 9 5 3 * The p rin te d minutes for a l l the 1953 meetings of the copies o f w hich had been sent p revio usly to members of the also were approved. - 2 - ITEM I THE BOARD WOULD LIK E TO HAVE THE COMMENTS OF THE MEMBERS OF THE COUNCIL ON THE PROSPECTIVE BUSINESS AND ECONOMIC SITUATION DURING THE NEXT S IX MONTHS AND THE PROBABLE VOLUME OF BANK LOANS DURING THE PE R IO D . WHAT ARE THE PRINCIPAL REASONS FOR THE LARGE REDUCTION IN BANK LOANS SINCE THE TURN OF THE YEAR? ________ Brown reads Item I and asks each member of the C ouncil fo r his v ie w s. Brown says th a t perhaps I r e l a n d , as a new member, may p re fe r to have mem bers who have p r e v io u s ly served on the Council comment f i r s t * A l e x a n d e r * B u sin e ss i s down in the Second D i s t r i c t . Unemployment has been i n c r e a s in g , and there has been a s ig n ific a n t increase i n the claims fo r unemployment in suran ce* A number of l i n e s o f business are d e c lin in g , in c lu d in g t e x t i l e s , f u r n it u r e , and the women’ s garment in d u s tr y . Alexander b e lie v e s th a t the b u s in e s s downturn i s ac celerating somewhat. Commercial b u i l d i n g , p u b l ic u t i l i t y , and school construction are u p . R e s id e n tia l con struction i s down. I n Ja n u a ry , over-all construction was u p . Bank loans are down, and i n New York C it y commercial loans o f banks dropped sharply after the f i r s t of the y e a r , because o f decreased busin ess a c t i v i t y . Banks are also f e e l i n g the com petition of other le n d e r s . The volume of com m ercial paper o utstan ding is near an all-time h ig h . Some short-term bank loans are b e in g r e fu n d e d on a long-term b a s is because of attrac tiv e i n t e r est r a t e s . The term ination of the excess p r o fit s tax has probably also lead to some d e c lin e i n loans* A lexander fe e l s somewhat more p essim istic than he f e l t at the November m eeting of the Council and even more pes sim istic also th an he f e l t at the f i r s t o f this y e a r . W ith ste e l operating at a r a t e of 7U p e r c e n t, i t in d ic a t e s that some companies are running above th at f i g u r e , b u t i t also means that some are below that f i g u r e . There may be some p ickup i n b u sin e ss in the Sp ring , but no major economic force seems to be i n evidence w hich would keep business from d eclining fu rth e r or g iv e i t a turn upward. Brown asks whether commercial paper is going into the hands of non bank b u y e r s . A le x a n d e r r e p l ie s th at non-bank buyers are purchasing commercial paper and they i n c l u d e , among o th ers, larg e corporations, endowment funds and p e n s io n f u n d s . depend Sm ith . B u sin e ss continues to decline in the T h ir d D i s t r i c t . Employ ment i s down about 3 per c e n t. Department stores sales are up s l i g h t l y . R e t a il e r s expect good sales th is Spring because of the la t e E a s t e r . Com m ercial and i n d u s t r i a l constructio n is expected to be up in the d is t r ic t compared to a p o s s i b l e decline over the country. The trend i n the d is t r ic t irill in a lar g e m easure on p u b lic psychology and the w illin g n e s s of the con sumer to s p e n d . Bank loans are down somewhat, la r g e ly because o f the d e cline i n the l a t t e r p art of l a s t year* Since January, loans have held up f a i r l y w e l l * Smith expects loans w i l l tend to d ecline i n the months ahead. G und. T here may be some seasonal pickup in loans i n the Sp ring , but loans over- all w i l l probably tend to d e c lin e . In vento ries are coming down. Gund reports that h is bank has experienced a g a in of $58 m illio n in savings sin c e they in c r ea s e d the savings rate from one per cent to 2 per c e n t. The r a is e in rates has been very h e lp fu l. Savings c e r tific a te s have not worked out very w e l l fo r those banks which t r i e d them. The -3 c loth ing industry has not been good, but seems to be experiencing some r e covery, The coal in d u s tr y has d i f f i c u l t problems* The downward d r if t i n b usin ess w i l l probably continue at le a s t u n til J u l y and may be concentrated mostly i n d u rab le s. The automobile output cannot very w e ll reach the 1953 le v e l o f production u n t il the dealer stocks are worked down* The demand fo r s t e e l does not look too good* Construction g enerally appears quite favorable* There w i l l be less demand for bank loans to b u i l d in v e n t o r ie s , and loans w i l l probably continue to decline* F le m in g * Th ere i s a general downward trend i n bank lo a n s , which have d e c lin e d more than they did a year ago* However, to tal bank lo a ns are s t i l l above a year ago* The cotton t e x t ile industry continues to de c lin e . Demand deposits are down s lig h t ly , but savings deposits are u p . Department store sale s have generally decreased, but very recen tly they have gone up somewhat above a year ago. Automobile sales are down, and farm income is lo w er. There i s very l i t t l e unemployment. Bank loans w i l l continue to decrease i n volume, but there may be some seasonal pickup i n the S p r i n g • D avis states that his d is t r i c t is probably b e tte r than the w o rst, but perhaps not as good as the b e st d i s t r i c t . The tobacco crop produced le s s income, cotton more, and r ic e and peanuts about the same. The psychology i n country towns i s b e tte r th an i t was a year ago, and i t has improved in recent m onths. I t is not too easy fo r farmers to switch from cotton to other crops. There i s l i t t l e unemployment i n h is d i s t r i c t . C onstruction continues h ig h . There i s not much shrinkage i n the to tal volume o f bank lo a n s . Most o f the larg e banks showed an increase i n loans at the end of the y e a r , compared to a y ear ag o . Off- shore o i l development should show considerable a c t iv it y t h i s y e a r . Davis be lie v e s that most banks i n the d i s t r i c t w i l l be able to l e n d about as much as they w ish to th is y e a r . Cam pbell. Business a c t i v i t y , g e n e ra lly , i s down i n the Eighth D i s t r i c t ^ I n d u s t r i a l production has d e c lin e d . Department store sales have d ecrea sed . Unemployment rose in January. There has been a severe drought, but m oisture conditions have improved somewhat, except i n some areas* The volume of bank loans has declined more than se aso n ally . The demand f o r lo a n s i n the Memphis area is good, r e fle c t in g the demand fo r cotton l o a n s . I t w i l l be d i f f i c u l t fo r farmers to switch from cotton to other crops. D eposits are up over the d is t r i c t . Campbell expects a good demand fo r l o a n s , but not as strong as la s t y e a r . R in g l a n d . Business a c t i v i t y i n the Ninth D i s t r ic t has been r e l a t iv e ly good. A g r ic u lt u r a l loans are o ff some but not s e r io u s ly . A g r ic u lt u r a l p r ic e s have shown improvement. The hope is that a g r ic u l ture has seen th e worst of i t . The m illin g people who are w e ll d i v e r s i f i e d are g etting along quite w e l l . The construction ind ustry looks good. The outlook for r e s id e n t ia l housing is f a i r , but commercial and p u b lic construction should be comparatively good. Department store sales are u p . The lab o r market is e a s ie r . Bank deposits w i l l probably decline some. Loans are about even with a year ago because banks have obtained Commodity C redit p ap e r. In stallm ent loans are down. Savings deposits have in c r e a s e d . , an volume w ill probably d e c lin e . 10 C h a n d le r . The Tenth D is t r ic t is an ag ricu ltural d i s t r i c t . The w inter wheat crop i s b etter than it was a year ago. I f th e re i s s u f f i c i e n t m oisture, the crop should be reasonably good. The c attle sit u a t io n has been quite un usual, and i t is remarkable that there were not more d is t r e s s e d s it u a t io n s . Unemployment is not s e r io u s . O il - a production i s down i n some areas but up i n oth ers. R e s id e n tia l con struction is o f f , b u t commercial construction is u p . Department store sales are down since the f i r s t of the y e a r . Bank loans have not d e clin e d as much r e c e n t ly as in other d i s t r i c t s , because this d is t r i c t had a de crease i n loans e a r l i e r . Deposits are o f f . I f m oisture conditions are s a t is fa c t o r y , there sh ou ld not be a serious decline i n lo a n s . M a t k in . The b u s in e s s adjustment i s continuing in the Eleven th D is tric t. Except fo r a g r ic u ltu r e , most of the adjustment i s i n in v e n to ry . Prices have been reason ab ly s ta b le . Reduction i n inventories has been making good p r o g r e s s . . B u s in e s s a c t iv it y i s a t a r e la t iv e ly h ig h l e v e l , but the economic fo r c e s i n operation are somewhat d e fla tio n a r y . A g ricu l ture seems to b e more s t a b l e , w ith some improvement i n p r i c e s . Some fu rth e r adjustm ents may take p lace i n th e economy, b u t there i s at present no conclusive eviden ce that the downward trend w i l l a c c e le ra te . There w i l l p rob ab ly be a f u l l seasonal d ecline i n lo a n s , or perhaps a l i t t l e more than th at i n the f i r s t s i x months of 195U* W allace. C a l i f o r n i a employs twice as many non- agricultural workers as there are i n th e other s ix states i n that d i s t r i c t . The prim ary m etals, p a p e r , s h i p b u i l d i n g , ordnance, lumber and plywood, are among the f ie ld s of b u s in e s s w h ic h are d e c l in in g . There has been considerable strength i n r e s i d e n t i a l co n stru ctio n . Department store sales are down. Consumer c r e d it i s o f f . Demand deposits are low er, b u t time deposits are up. The s te e l p la n ts i n the d is t r ic t expect to operate at near c a p a c ity this y e a r . The c a tt le s it u a t io n i s somewhat b e t t e r . The wool in d u s tr y is having problems because of competition w ith sy n th e tic s. There w i l l be some major re d u c tio n s i n m ining w ages. Loans w i l l probably decrease. A g r ic u lt u r e , m in in g , and m anufacturing may be moving close to the bottom. ' The downward b u s in e s s trend does not seem at present to be a c c e le r a tin g . Ir e la n d . New En gland o ffe r s no exception to the general de clin e i n busin ess over the coun try. However, the d e cline in the F i r s t D i s t r ic t started e a r l i e r than i t d id in other parts of the U n ited S t a t e s . T h is d is t r ic t has had a downward t r e n d for some months and much of i t may be over f o r them. There were more cotton spin dle hours i n 1953 than i n 1 9 5 2 . From the standpoint of employment, durables now balance non-durables, and exceed them i n d o l l a r s . Commitments for construction are heavy. D e p a r t ment store sa le s are u p . New car r e g is tr a tio n s e sta b lish e d a record i n 1 9 5 3 , and December 1 9 5 3 car r e g is tra tio n s were ahead of any December i n four y e a r s . Th ere was very l i t t l e decline in loans in Ja n u a ry , although loans had d e c lin e d i n th e previous months. Ir e l a n d does not expect a serious d e c lin e i n loans i n the months immediately ahead. Brown. The s itu atio n i n the Seventh D is t r ic t i s about the same as i n the r e s t o f th e country. Business a c t iv it y has decreased f o r s ix months, b u t th e re are no conclusive in d ic atio n s that the d e c l i n e i s serio usly a c c e le r a tin g or that i t may be a s p ir a l d e c lin e . However, the down-trend i s c o n t in u in g , and there is no evidence that i t i s l e v e l l in g off. Car lo a ding s are down considerably so that ra ilro a d s w i l l not order new c a r s . The auto in d u stry is s u ffe r in g from overproduction. R e t a il sales have h e l d up w e l l . New housing construction i s down over the d istric t. Brown expects some decrease in t h e volume of bank lo a n s . M a il order sales are o f f , p rim arily i n du rab le s. M a il order time c re d it paper is down. The reason fo r the p r in c ip a l d ecline i n loans is the reduction i n in v e n t o r ie s . Most categories of goods are in ample supply. The end of the excess p r o f i t s tax has probably resulted in some loan red uctio n. Loans -5 are down and w ould have decreased even further i f the banks did not have the Commodity C r e d it p a p e r . Brown thinks the e ffe ct of the M ills Plan on loans w i l l not be l a r g e . The C oun cil may state to the Board that there are some variations in the p r o s p e c tiv e business and economic outlook from d istric t to d is t r ic t , but the p r i n c i p a l economic trends are s im ila r. Business ac tiv ity w i l l probably d e c lin e i n the n e x t s i x months. The decrease in business has been f a i r l y constant i n the l a s t s ix months. There is no evidence either of a l e v e l l i n g o f f i n the downward trend, or of a sharp increase i n the rate o f d e c l i n e . One o f the p rin cip al questions is whether the reduction in in v e n to rie s w i l l sh o rtly come to an end and be follow ed by a renewal of b u y in g . A t the p resent tim e, almost a l l categories of goods are i n f u l l sup p ly , and the tendency is to reduce inventories. A' year ago, inven to ries were b e in g s u b s t a n t ia lly inc rea sed. Long-term financing is now p o s s ib le , w it h more fav o rab le rates than were offered a year ago and this accounts f o r some re d u c tio n i n short-term lo a n s. Lower prices for agricu l tural commodities have reduced loan volume. A minor factor in the loan reduction has been the term ination of t h e excess p rofits t a x . Some companies probablir borrowed more f r e e ly than normal to increase their tax b ase , and th e re i s no sim ilar in c e n tiv e t h is y e a r . Brown states that the a g r ic u ltu r a l surplus problem is one of the most serious confronting the economy. The members of the Council may wish to discuss this problem w ith the B o a r d . ITEM I I WHAT ARE THE VIEWS OF THE COUNCIL WITH RESPECT TO THE SYSTEM*S CREDIT POLICY SINCE THE PRECEDING MEETING OF THE COUNCIL? DOES THE COUNCIL HAVE ANY SUGGESTIONS AS TO WHAT THE SYSTEM’ S POLICIES SHOULD BE I N THE MONTHS IMMEDIATELY AHEAD? DOES THE COUNCIL FORESEE A SITUATION IN THE NEAR FUTURE WHICH WOULD CALL FOR A REDUCTION IN THE DISCOUNT RATE OR A FURTHER REDUCTION IN RESERVE REQUIREMENTS?____________________________________ ___ Brown reads Item I I press t h e i r v ie w s . and asks the members of the Council to ex- -6 - F le m in g S ep tem b e r. t r a c e s t h e d e v e lo p m e n ts in t h e m oney m a rk et s i n c e l a s t Brown. The System has been buying on balance rather than s e llin g in connection w ith i t s Open Market operations. Brown thinks the Open Market Committee should have sold s e c u r it ie s . Alexander b e lie v e s that business may be d e clin in g a l i t t l e more than it was e a r l ie r t h is y e a r , although i t i s not i n a s p ir a l. Whatever monetary to o ls the Board has should be use d . However, Alexander thinks the Federal* s use o f i t s instruments of control has been sloppy. He thinks the Federal should be able to manage the market more closely i n r e la tio n to the needs o f the m arket. The general idea of having an easy money policy i s good, but the execution has been poo r. The Federal was correct in reducing the rediscount rate and in in d ic a t in g that i t was following a p olicy o f easy money. The rediscount rate i s now more i n l in e with the t ill r a t e . The b i l l rate i s too low . Rates other than the prime rate have been e asy . Banks are looking for lo a n s . Alexander b e lie v e s the prime rate should be reduced, and he thinks i t w i l l b e . The com petition of other lend ers and the r e fin an c in g of short-term loans into longer-term loans, because of a t t r a c t iv e r a t e s, make a reduction in the prime rate d e s ir a b le . W it h a d e c l in in g economy, the prime rate should be reduced. Alexander also b e lie v e s that consideration should be given to the p o s s i b i l i t y of red ucing bank re se rv e s. Fleming asks whether a reduction i n bank reserves would not re su lt in furth er p r e ssu re on the prime r a t e . A lexan d er agrees that i t might put further pressure on the prime rate, but i t would also give the banks more money to lo a n . M a tk in . I s the prime rate being cut in some p laces without an announcement of a reduction? A lexan d er s ta te s that he has heard these rumors, but h is bank has not cut the r a t e . Brown. (Off- the- record comments on the prime r a t e ) . Ire la n d . He b e lie v e s that a move in the d ir e c tio n of e asie r money is d e s i r a b l e . He t h in k s a 2>\ p er cent prime rate cannot be h e l d . Even a 3 p e r cent r a te does not compete w ith the commercial paper r a t e . Brown comments th a t he can see no excuse fo r a b i l l rate of . 9 0 . F le m in g . (Off- the- record comments). He “would not favor a reduction in reserve requirem ents i n the immediate f u t u r e < > Smith agrees w it h the easy money p o l i c y , but he t h in k s the b i l l rate is too l o w . He could see no good reason for reducing the rediscount r a t e . He b e lie v e s th e banks have a supply-demand s it u a t io n w ith loans d e c l i n i n g , and the r e s u lt w i l l b e that the prime rate w i l l d e c l i n e . Smith doubts whether a re d u c tio n i n reserve requirem ents would be d e s i r a b l e . Gund sta te s that he would not fav o r a reductio n i n reserves in the near f u t u r e . Gund asks what w i l l be done i f there i s a tig h te n in g of money on March 1 5 . W i l l the Board a g a in ease the money market? -7 - Ringland believes the fluctuation in rates has been too great, Fleming. (Off-the-record comments). Alexander* (Off-the-record comments). Chandler, The recent rediscount ra te reduction i s an accomplished fact, but no further reduction in this rate and no reduction in reserve requirements are desirable at present, Ireland believes loans in his district w ill hold about where they Fleming thinks any Spring increase -will be temporary. are, Matkin is against a reduction in reserve requirements and in the rediscount rate now. He believes the bill rate of ,9 0 i s too low* Dav is, Where did the idea originate that a cheap rate is necessary to economic recovery? We have had high rates of interest i n periods of economic growth. He believes the b i l l rate is too low and the Federal should not do any more to cheapen money* The costs of operating banks are high, and bank earnings are not adequate to build the desired reserves* Fleming* Money has been too easy since Christmas, Money should be available to a ll borrowers at reasonable rates. At present there i s no further need for a reduction in the rediscount rate or for a reduction in bank reserves* Brown* The Council may state it believes the Board’ s handling of Open Market operations from the November meeting to the end of the year was effective and satisfactory. The operations since the latter part of January seem to the Council to have been poorly timed and to have produced undesirable re s u lts . At a time when loans were s t il l decreasing, the Council fe e ls the Board’ s policy should have been to continue to sell b ills to an amount approximately offsetting the decline in loans. The Board’ s action in the early part of January seemed to be in accord w ith this view* Later, the Open Market Committee began buying b i l l s a g a in , despite the continuing decline in loans, with the result that the b i l l rate went below one per cent, which the Council believes represents un desirably cheap money. The Council wishes to reiterate the views it ex pressed in November that the danger of disturbing the economy by making money unduly and a r t if i c ia l l y cheap is as great as the danger of re s tr ic tin g business by too high interest rates, and a consequent reduction in the use of credit* The Council believes business is de c lin in g , and a p olicy of easy money is generally desirable* The money market should be made easy, but it should not be made so easy that money becomes unduly and a r t ific ia lly cheap* The Council is divided in it s opinion as to whether the recent reduction in the rediscount rate was desirab le. The Council is of the b e lie f that there is no situation foreseeable in the near future which would call for a further reduction in the rediscount rate. The large majority of the Council does not foresee a situation in the near future which would call for a further reduction in reserve requirements* The Council further believes that Open Market operations should be handled so as to avoid such low rates as now prevail in the b i l l m a r k e t. The meeting adjourned at £:h2 P* M, - 8THE COUNCIL CONVENED AT 1 0 :0 0 A .M . ON FEBRUARY 1 5 , 1 9 5 k $ IN ROOM 1 0 2 8 OF THE MAYFLOWER HOTEL, WASHINGTON, D. C. ALL MEMBERS OF THE FEDERAL ADVISORY COUNCIL WERE PRESENT. The C oun cil prepared and approved the attached C onfidential Memorandum to be sent to the Board of Governors r e lative to the Agenda for the j o i n t m eeting of the Council and the Board on February , 195>U» The Memorandum was d e liv e r e d to Mr. Carpenter, Secretary of the Board of Governors at 1 2 : 3 0 P .M . on February 1 5 , 195U* I t "will be noted that each item o f the agenda i s l i s t e d together w ith the comments of the C oun cil. 16 The m eeting adjourned at 1 2 : 1 0 P.M. CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON FEBRUARY 1 6 , 195U 1, The Board would lik e to have the comments of the members of the Council on the prospective business and economic situation during the next six months and the probable volume of bank loans during the period. What are the p rincip al reasons for the large reduction in bank loans since the turn of the year? There are some differences in the prospective business and econ omic situation in the various Federal Reserve districts, but the major economic trends are essentially similar. The rapid rate of inventory accumulation in the first half of 1953 came to an end in the fin a l quarter of the year. Virtually all cate gories of goods are now in fu ll supply, and most businesses are endeavoring to reduce inventories. A leveling off of the present economic downtrend;, or any upturn in over-all business activity, w ill depend largely upon when the present liq uidatio n of inventories ends. The increase in unemployment, especially in manufacturing, is re flecting it s e l f in lower payrolls. Carloadings are down considerably, which results in the postponement of purchases of equipment and of other capital expenditures by the railro a d s, A generally expected loiter automobile production is an additional factor emphasizing the probable continuance of the present downturn through the first half of 195U. Retail sales recently have shown some decline, but generally they have held up well. Should the demand for goods, especially as expressed in consumer buying, markedly decline, the rate of business downturn would accelerate. Over-all new con struction, despite some decline in residential building, has held up well, and is a strong factor in sustaining business. The members of the Council expect business activity to continue to decline in the fir s t h a lf of 195b. There is at present no significant evidence either of a leveling off in the rate of the present downtrend, or of the rate of decline increasing sharply or spiraling. The large reduction in loans since the turn of the year is the outgrowth of a number of economic forces in addition to those which normally result in a seasonal decline in bank credit. A year ago, inventories were being substantially increased, whereas they are now being reduced. Early last year, business also was more active and required more bank credit. Lower agricultural and livestock prices, compared to a year ago, have like wise lessened the demand for loans. Present low interest rates are causing some large borrowers to refund short-term bank credit into long-term loans. -2A minor factor in the reduction of bank loans has been the term i n a t i o n of the excess profits tax. Some business concerns borrowed more freely than normally to increase their tax base. This incentive no longer exists. In view of the probable continuance of the downtrend in business in the first half of 19514* members of the Council anticipate a further decrease in the volume of bank credit for commercial, industrial and agricultural purposes, and no increase in total of other types of loans. a c tiv ity 2o What are the views of the Council with respect to the System1s credit policy since the preceding meeting of the Council? Does the Council have any suggestions as to what the System’ s policies should be in the months immediately ahead? Does the Council foresee a situation in the near future which would call for a reduction in the discount rate or a further reduction in reserve requirements? The members of the Council believe that the Open Market opera tions of the System since the preceding meeting of the Council and through the greater part of January were helpful to the economy. The Council appreciates the d iffic u lt ie s which confronted the Open Market Committee in January as a result of the exceptionally heavy flow of currency to the banks, the unusually large contraction in loans, and the substantial in crease in float because of weather conditions. However, since the latter part of January, Open Market operations seem to the members of the Council not to have been timed as effectively, nor to have produced results as satisfactory, as on other occasions in recent months. At a time when bank loans are decreasing, the Council is of the opinion that it would be proper policy to sell bills to an amount approxi mately offsetting the decline in loans. The action of the Open Market Com mittee in the latter part of January seemed to be in accord with this view point. The policy later of accumulating b ills despite the decline in loans was the principal factor in the b il l rate going to yields which the Council believes represent undesirably cheap money. The Council would like to re iterate the views it expressed in November that the danger of disturbing the economy by making money unduly and artificially cheap is as great as the danger of restricting business by too high interest rates, and a consequent reduction in the use of credit. The members of the Council believe that with business continuing to decline, an easy money policy making credit readily available to desirable borrowers at reasonable rates is advisable. However, we reiterate that the economy should not be disturbed by making money unduly and a rtific ially cheap. The Council is sharply divided in its opinion as to whether the re cent reduction in the discount rate was desirable. However, the Council is of the b e lie f that there is no situation foreseeable in the near future which would call for a further reduction in the discount rate. The large majority of the Council does not foresee a situation in the near future which would call for a further reduction in reserve requirements. -9 THE COUNCIL CONVENED IN THE BOARD ROOM OF THE FEDERAL RESERVE BUILDING, WASHINGTON, D . C . , AT 2 :1 5 P.M . ON FEBRUARY 1 $ , 195 1. ALL MEMBERS OF THE COUNCIL WERE PRESENT. D r . Arthur Marget, Director of the Division of International Finance o f the Board of Governors, and his s t a ff, discussed international c o n d itio n s . A summary of these comments is being prepared b y D r. Marget and w L ll be sent to the members of the Council as soon as i t is prepared. The meeting adjourned at 3 :3 5 P .M . - 10 ON FEBRAUARY 1 6 , 19 5 U , AT 1 0 :3 3 A .M . THE FEDERAL ADVISORY COUNCIL HELD A JOINT MEETING WITH THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM IN THE BOARD ROOM OF THE FEDERAL RESERVE BUILDING, WASHINGTON, D . C . ALL MEMBERS OF THE COUNCIL WERE PRESENT. THE FOLLOWING MEMBERS OF THE BOARD OF GOVERNORS WERE PRESENT: CHAIRMAN MARTIN; GOVERNORS SZYMCZAK, EVANS, VARDAMAN, MILLS AND ROBERTSON. MR. CARPENTER, SECRETARY, AND MR. SHERMAN, ASSISTANT SECRETARY, OF THE BOARD OF GOVERNORS, WERE ALSO PRESENT. Brcrwn inform s th e Board of the organization of the new Council, the names o f the o f f i c e r s o f the Council and the names of the members of the Executive Committee of the Council for 195>U* Brown also brings up the matter o f in c r e a s in g the amount the Council draws on each Federal Reserve bank each y e a r from $ 3 5 0 to $U5>0. He explains that th is amount has not been changed since 1 9 3 b , and increasin g costs make it d if f i c u l t for the C ouncil to hold i t s expenditures w ith in th is lim ited budget. Brown suggests that the Secretary of the Board advise the Secretary of the Council of th e B o a r d 's view s on the suggested in c rea se . M a rtin s ta te s th a t the Board w i l l advise the Council of i t s views. ITEM I THE BOARD WOULD LIKE TO HAVE THE COMMENTS OF THE MEMBERS OF THE COUNCIL ON THE PROSPECTIVE BUSINESS AND ECONOMIC SITUATION DURING THE NEXT S IX MONTHS AND THE PROBABLE VOLUME OF BANK LOANS DURING THE PE R IO D . WHAT ARE THE PRINCIPAL REASONS FOR THE LARGE REDUCTION IN BANK LOANS SINCE THE TURN OF THE YEAR?______________________ ___ _______________ Brown reads Item I and the conclusions of the Council as expressed in the Memorandum to the Board attached. Brown states that the fir s t d is t r i c t b e l ie v e s that much o f the decline in business in that area may be over, as the downward trend began there e a rlie r than it did in other parts of t h e c oun try. A lexander has no conclusive evidence that the d e clin e i s d e e p e n in g , but he thinks there is some indication of i t . The end of th e d e c l i n e w i l l depend i n part upon when inventory liq uid atio n ends. (Off- the- reeord comments on the excess p ro fits t a x ) . M artin asks whether the members of the Council b elieve there w i l l be a so-called Sp rin g r i s e i n business® Brown reports that the members of the Council b elieve there w ill be l i t t l e Sp ring r i s e in b u s in e s s . The decline in bank loans would have been much g r e a t e r , i f the banks had not received the Commodity Credit pap e r. Probably the greatest threat to the economy is in ag ricu ltural surp luses. Brown asks the Board i f i t s members would care to express t h e ir op inion regardin g the business outlook. - 11 Martin states th at he wishes the Board fe lt c e rtain about the future trends of business# He asks what the Council thinks w i l l be the trend i n unemployment. W i l l unemployment r is e sharply? Brown th ink s unemployment w i l l ris e * The members of the C ouncil do not expect a r i s e i n consumer c r e d i t . R e s id e n tia l mortgages w i l l probably also show some d e c l i n e . Loans to brokers may r is e w ith cheap money. The Council expects a d e c lin e i n the volume of bank credit for commercial, in d u strial and a g r i c u l t u r a l purposes, and no over-all increase i n t o ta l of other types of l o a n s . Alexander comments that he i s a l i t t l e more p essim istic than he was at the la s t m eeting o f th e C o u n c il. We must t a lk these problems out frankly among o u r s e lv e s . One b a s is for his concern i s r is in g unemployment. The rayon t e x t i l e b u s in e s s i s not good. Automobile sales are d isa p p o in tin g , and a l l m ajor automobile producers have cut back th e ir production. Alexander b e lie v e s th e problem at present i s g e n e ra lly an inventory situ atio n . E x p e n d itu res for new in d u s t r ia l plan t w i l l probably be good, but o f f somewhat. Over- all construction w i l l probably be reasonably good, but also w i l l p robably be a l i t t l e lo w e r. There i s no great forward expansive fo r c e i n the economy which might a rre st the d e c lin e i n the near future and t u r n the b u s in e s s trend upward. Consumer spending i s holding up w e ll so f a r . There i s some bad p u b lic it y reg ard in g "g h o s t ” towns and le s s e n in g b u s in e s s a c t i v i t y that aggravates the s it u a t io n . Martin requests W allace to express h is views reg ardin g the P a c ific Coast. W a lla c e * The Coast has some sp e cial problem s. I t i s a great raw material a r e a . The non-ferrous m etal b usin ess has experienced r e a l d i f f i c u lt ie s . P a y r o lls i n the copper industry are coming down. The immediate over-all s it u a t io n on the Coast is r e l a t i v e l y good* There is a lag b efore declining b u s in e s s tre n d s in the Ea st have t h e ir e ffe c t s i n the West* Deposits are o f f , except that sav ings are u p . W allace think s the e xtra c tiv e in d u stries need some as s is ta n c e b e fo re the communities where these in d u s tr ie s are prominent d i s i n t e g r a t e . I t would be b e tte r to g iv e assis ta n c e now than to fa c e the problem o f b u il d in g up these in d u s t r ie s la t e r at a higher cost. Ir e l a n d . The d e c lin e i n New England started e a r l i e r and th a t area is fu r th e r alo ng in the downward t re n d . There are some signs the down trend may be l e v e l i n g o f f i n New E n g la n d . Loans have not decreased since January 1 * C otton sp indle hours were greater i n 1 95 3 than i n 1 952* HoweverP New E n gland trends do not n e c e s s a r ily i n d ic a t e the d e c lin e i s about to reverse* Brown asks what the S t a f f of the Board t h in k s of the p resent b u s in e s s s it u a t io n * M artin r e p l ie s that he d o e s n ’ t th in k they have had a S t a f f review of the b u s in e s s outlook fo r th e la s t two w eeks. He does not see any evidence th a t the d e c l in e w i l l s p ir a l* There w i l l be fu r th e r e lim in atio n of waste and incompetence i n the economy* He c it e s the case o f a used car dealer who s a id he had not found an insta nc e where he could not move a car, i f he cut the p r i c e . There i s an u n w illin g n e s s to fa c e problems and to make the adjustm ents needed to produce the h ig h e s t e f f i c i e n c y . Per son ally , M a r t in i s i n c l in e d to be o p tim istic fo r the longer p u l l . (Off- the- record comments). - 12 F lem ing . A turn w i l l come at some point when the economy w i l l level off* However, i t i s impossible to f i x the time. Department store sales look reasonably good. Evans states that he is in disagreement with many of the previous comments. At the time of Korea, the Secretary of Agriculture asked for expanded p ro d uc tio n. I f agriculture had not expanded, and i f we had had a full- blown w ar, our economy would have had trouble. Farmers expanded their a c t i v i t i e s and increased production. Now the farmers are le ft with the surplus problem, ^any persons felt that the government should take what it ordered in a g r ic u lt u r e , ju s t as it did in weapons. I f the government took these a g r ic u ltu r a l surpluses o ff the market, the remaining problems of a g r ic u ltu r e would not be too g reat. The risk of adverse weather and poor crops i s always great in ag ricu lture. Evans states he has not seen the people i n h is home area as concerned as they are now about the economic futu re. (Off-the-record comments). W allace. What about butter? Evans states that he was talking about the six b asic crops - cotton, wheat, corn, tobacco, rice and peanuts. Butter is in a sense a by-product, and the d airy farmer may have to make a readjustment* Evans mentions the extremely small lo sse s which have been experienced in the past in connec tio n w ith sim ilar ag ricu ltu ral problems. ITEM I I WHAT ARE THE VIEWS OF THE COUNCIL WITH RESPECT TO THE SYSTEM'S CREDIT POLICY SINCE THE PRECEDING MEETING OF THE COUNCIL? DOES THE COUNCIL HAVE ANY SUGGESTIONS AS TO WHAT THE SYSTEM5S POLICIES SHOULD BE IN THE MONTHS IMMEDIATELY AHEAD? DOES THE COUNCIL FORESEE A SITUATION IN THE NEAR FUTURE WHICH WOULD CALL FOR A REDUCTION IN THE DISCOUNT RATE OR A ________ FURTHER REDUCTION IN RESERVE REQUIREMENTS? Brown reads Item I I and the conclusions of the Council as expressed i n the Memorandum to the Board attached. The Council r e a lize s the flow of currency was exceptionally large and this movement probably could not have been fo r e s e e n . The Board also could probably not foresee the exceeding' ly large contraction in lo a n s , but the Council believes that i t would have been ad visab le to follow the policy of sellin g b i l l s to an amount approxi mately o ff s e t t in g the decline in lo a n s. Brown knows of no probable business expansion or development that is being held back because of tig ht money. In the la s t h a l f of January the money market was sloppy. Alexander may w ish to comment la t e r on reserve requirements. Brown thinks p ub licatio n of a reduction in reserve requirements would be widely p ub lic ize d and an unfortunate pub lic reaction might follow . M artin Brown rate. asks for more comments on the rediscount ra te. does not think a rediscount rate of 1 3 /U per cent i s a penalty - 13 Szymczak. It is a penalty compared to the bill rate. C h an dler. b ill rate. Was the change in the rediscount rate influenced by the M artin r e p lie s that as far as he was concerned, the b i l l rate was the only facto r that determined his decision on the rediscount rate. A lso , as fa r as he was concerned, he was not trying to influence the prime rate. Martin then traces the rediscount rate over a period of a year and a h a l f . He agrees that the money market was sloppy, but he does not agree that it was Federal Reserve ’’po lic y '’ to make it sloppy. The Treasury overdraft was lik e w is e one factor that had not been foreseen. (Off-the-record comments). Gund. M a r t in . (Off-the record comments). (Off-the record comments). Sm ith . A l l the large banks are beating the bushes fo r lo a n s, and it is not certain that reducing the rediscount rate under those conditions accomplished anything, especially i f i t was an attempt to make the re discount rate come down to a b i l l rate that is too low. M artin mentions that Senator Flanders advocates more f l e x i b i l i t y in F ederal Reserve operations. R ingland comments that the fluctuations in rates have certainly shown fle x ib ility . M artin agrees. D a vis thinks the situation c alls for a l i t t l e more s t a b ilit y rather than more f l e x i b i l i t y . Money is readily a v a ila b le . For some time to come, u n t il there i s a l i t t l e more sta bility in b usin ess, Davis doubts the wisdom o f having too frequent changes. M artin does not w ish too much change. Alexander believes the change i n the rediscount rate was proper and was a good th in g . However, he thinks the money market in January was messy. We are having some d e flatio n , and that is the time to have an easy money p o l i c y . A llan Sproul has recently made a speech relative to reserve requirements and has commented that on th is subject bankers only have a feeble and sporadic in te re st. Sproul says the whole reserve re quirement program i s outmoded. I f reserve requirements are not to be reduced i n a time o f d e fla tio n , when are they to be reduced? It is b etter to have some change in reserve requirements rather than to depend solely on Open Market a c t i v i t ie s . I f reserves are released in 7 ,0 0 0 b anks, these banks w i l l do a potent job in the market. Alexander does not b e lie v e i n taking too many chances in the present d e c lin e . He leans i n the d ire c tio n o f keeping money read ily a v a ila b le , and he would be a l i t t l e early rather than a l i t t l e late in using the instruments of credit c o n tr o l. He b elieves that even in the foreseeable future some step may advisedly be taken to reduce reserves. The banks w i l l take the s e c u ritie s to the extent that they c an 't place the funds in loans in the economy. - lb Flem ing reviews the history of the money markets since last May when the markets were t i g h t . He commends the Board on i t s action in reducing reserve requirements la s t y e a r . However, ample credit is now av ailab le . I f reserve requirements were now reduced, it -would be headline news that the Board f e l t business was declining more than expected. It might even accelerate the d e c l in e . Fleming sees no useful purpose in reducing bank reserve requirements now. Brown. (Off-the-record comments). Gund agrees w ith Fleming. Sm ith . I t i s dangerous to deal with these matters on a psychological b asis. We now have ea§y money. I t does not seem desirable to take fu r ther steps to make money easy when i t is already easy. Smith could agree w ith A lexan d er only on a policy of reducing bank reserves as i t relates to a long term b a s i s . Cam pbell. Money rates are too low. The Board should use its power i n the futu re so lely to make money available when it is needed. It i s n ’ t needed now. Matkin agrees w ith Fleming, but can see also that Alexander has some merit i n h is comments. Money i s not too easy in h is d is t r i c t . He wishes the banks could earn interest on reserves. He does not favor a reduction in reserve requirem ents at present. Chandler agrees w ith Fleming. Reducing reserve requirements has a greater e ffe c t p u b lic ly than reducing the rediscount rate. A le x a n d e r . The psychological effect is what you want. I f you don’ t reduce reserve requirements in a d e c lin e , when do you reduce them? Szym czak. I s n ’ t the problem inherent in the economy? We do not wish to reduce p r ic e s un less our costs go down f i r s t . In other words, in bank ing we do not w ish to reduce interest rates unless our costs of operating banks are reduced f i r s t . M artin states the meeting has been very helpful to the Board. Brown r e p l ie s th at a l l of us are seeking the same o b jectiv e, which is to s t a b i l iz e b u s in e s s . The meeting adjourned at 1 :1 0 P.M . * # * * * # The next meeting of the Council w ill be held on May 1 6 , 1 7 > and 1 8 , 195b.
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