Having settled, at least for the time being, on free reserves as a policy guide, the FOMC had to identify one or more instruments that it could use to expand or contract the size of the System Open Market Account according to the policy decisions of the Committee. Bills sufficed for operations of a modest size (no more than about $200 million) intended to remain in place for several weeks, but they were not liquid enough for larger operations expected to be quickly reversed. As a result, and in the face of strenuous objections from some Committee members, the Committee came to rely on repurchase agreements when it wanted to sterilize transient fluctuations in autonomous factors.

Describes the increasing scale and scope of open market operations as the Open Market Desk at the New York Reserve Bank sought to moderate fluctuations in the Federal funds rate attributable to bank reserves management practices. Innovations in System repo operations included relaxation of the maturity limit on repo collateral, introduction of back-to-back repos (where the Desk financed repo collateral that primary dealers sourced from their customers), introduction of repos on federal agency debt, and the development of matched sale-purchase agreements to drain transient increases in reserves.

Describes the transition from an interval of non-inflationary growth at the beginning of the decade to the first appearance of what would later become a virulent inflation. Start/stop efforts to rein in inflation led to more volatile interest rates and growing Federal Reserve impatience with its commitment to maintaining an “even keel” during Treasury offerings.

Reviews the growing conflict, in 1955, between the Fed’s commitment to support Treasury offerings priced at market levels with its desire to avoid direct support of Treasury offerings.

Reviews the further development of defensive repo operations and the Committee’s continuing struggle with supporting Treasury offerings priced at market. After one particularly troubled offering, in May 1957, the Secretary of the Treasury threatened to undertake what would have been, for all intents and purposes, Treasury operations aimed at managing bank reserves. The threat passed but the memory lingered as a reminder that the Treasury was not without resources.

Sets the stage, previewing how the Accord of March 3, 1951, produced a sharp break in the conduct of open market and Treasury debt management operations and how institutional practices like “bills preferably,” the active use of repurchase agreements in open market operations, the extension of open market operations to coupon-bearing debt, and the advent of regular and predictable auction sales of coupon-bearing debt came about during the next quarter century.