FOMC Minutes

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 Wednesday, July 6,

PRESENT:

1960, at 10:00 a.m.

Mr. Martin, Chairman 1/

Mr. Hayes, Vice Chairman

Mr. Balderston

Mr. Bryan

Mr. Fulton

Mr. King

Mr. Leedy

Mr. Mills

Mr. Robertson

Mr. Shepardson

Mr. Szymczak

Mr. Leach, Alternate for Mr. Bopp

Messrs. Allen, Irons, and Mangels, Alternate Members

of the Federal Open Market Committee

Mr. Johns, President of the Federal Reserve Bank of

St. Louis

Mr. Young, Secretary

Mr. Sherman, Assistant Secretary

Mr. Kenyon, Assistant Secretary

Mr. Hexter, Assistant General Counsel

Mr. Thomas, Economist

Messrs. Brandt, Eastburn, Marget, and Tow,

Associate Economists

Mr. Rouse, Manager, System Open Market Account

Mr. Molony, Assistant to the Board of Governors

Mr. Koch, Adviser, Division of Research and

Statistics, Board of Governors

Mr. Keir, Chief, Government Finance Section,

Division of Research and Statistics, Board

of Governors

Mr. Knipe, Consultant to the Chairman, Board of

Governors

1/

Entered at point indicated in minutes.

7/6/60

-2Mr. Hilkert, First Vice President, Federal Reserve

Bank of Philadelphia

Mr. Hickman, Senior Vice President, Federal Reserve

Bank of Cleveland

Messrs. Mitchell, Daane, and Einzig, Vice Presidents

of the Federal Reserve Banks of Chicago,

Minneapolis, and San Francisco, respectively

Mr. Willis, Economic Adviser, Federal Reserve Bank

of Boston

Messrs. Gaines and Black, Assistant Vice Presidents

of the Federal Reserve Banks of New York and

Richmond, respectively

Mr. Holmes, Manager, Securities Department, Federal

Reserve Bank of New York

Mr. Meigs, Senior Economist, Federal Reserve Bank

of St. Louis

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Committee

held on June 14, 1960, were approved.

Before this meeting there had been distributed to the members of

the Committee a report of open market operations covering the period

June 14 through June 29, 1960, and a supplementary report covering the

period June 30 through July 5, 1960.

Copies of both reports have been

placed in the files of the Committee.

With further reference to developments since the Committee meeting

on June 14, 1960, Mr. Rouse made the following comments:

Since the meeting of the Federal Open Market Committee on

open market operations have been mixed, as the Manage

June 14,

tried to offset the easing effects of the mid-month

ment first

float expansion and then sharply reversed direction to provide

funds to ease a tightening money market. The tightening ini

tially resulted from the concentration of reserve pressures on

the New York City banks following the June 15 tax date when there

were sizable flows of funds to and from New York, and especially

a quick shift of the burden of financing Government security

7/6/60

dealers to the New York banks as corporation repurchase agree

ments expired on the tax date.

Later in the period, funds were

needed to meet the reserve drains associated with the July 4th

holiday. The net effect of these reserve gyrations and off

setting System actions was to maintain a generally easy tone

in the money market.

In the earlier phase, the Desk was able to withdraw funds

readily without resort to the market through sales of Treasury

bills

to foreign accounts and bill

redemptions; but the later

efforts to supply funds through purchases of bills were more

difficult and aggravated the trend toward lower bill

rates.

With this meeting scheduled today and the Treasury auction

tomorrow, it was a most unpleasant surprise to have the weekend

statistics greet us yesterday morning.

Instead of free reserves

of over $100 million for the week, we faced negative free

reserves of $75 million and an enormous accumulated reserve

deficit in New York and a moderate one in Chicago and only two

days left

in the statement week in which to repair the damage.

Treasury balance, required reserves, and float were the principal

offenders.

Fortunately the securities markets were strong enough

to stand it and in the end we were able to make some amends, but

estimate indicates only small free reserves,

this morning's first

if any, for the statement week on average.

The Treasury's offering of $3.5 billion of tax bills for

auction today may eventually relieve some of the downward push

on bill

rates. The prospects are for a successful auction with

substantial bidding by commercial banks interested in the Tax

and Loan credit, with rates mentioned in a wide range of 2.55

per cent to 2.80 per cent.

rate structure,

In another move which will affect the bill

the Treasury in last week's bill auction changed the relation

ship of three- and six-month bills, increasing the proportion of

in the total. As a result, the spread between

six-month bills

rates in Friday's auction widened

the three- and six-month bill

to about 50 basis points.

An interesting new event in the Government securities mar

ket is the offering tomorrow of $19.8 million of District of

Columbia Stadium Bonds, due in 1979, callable in 1970 and after,

which are fully guaranteed as to interest and principal by the

Originally these bonds were estimated

United States Government.

at about $6 million and were to have been fully exempt from

Federal income tax, and several syndicates of municipal dealers

The underlying

were therefore organized for underwriting purposes.

statute was subsequently changed to make the bonds fully taxable,

municipal syndicates are apparently preparing to bid.

but the same

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7/6/60

Some of these syndicates include Government securities dealers.

Had it been set up originally as it turned out, some of the

Government securities dealers would have submitted individual

bids.

Yields around 4.40 per cent to 4.45 per cent are mentioned.

We believe the bonds will be traded in the secondary market as

distinct from other Treasury issues, in the same way as Merchant

Marine bonds which are not widely traded or quoted by Government

securities dealers because of their relatively small size.

Mr.

Leach referred to a statement on page 2 of the report of open

market operations for the period June 14 through June 29, 1960,

which

indicated that by the end of the period under review strong investor

demand,

augmented by System purchases,

and 182-day bills

had brought rates on the 91-day

to 2.14 and 2.58 per cent, respectively.

He also noted

from page 6 of the report that on June 24, with foreign accounts buying

heavily,

it

was decided that a go-around would have an undue impact on

rates and hence System Account purchases

during the day.

dealers on their own initiative

offered by

were limited to bills

He noted further that

had stated that efforts in

Mr. Rouse,

in his oral comments this morning,

the latter

part of this period to supply funds through purchases of bills

were rather difficult

rates.

and aggravated the trend toward lower bill

This seemed to indicate, Mr.

Leach said,

that the buying of bills

unusually strong effect on rates, more so than it

inquired of Mr. Rouse whether it

had had in

had an

the past.

He

would seem advisable at some times to buy

other short-term securities.

Mr. Rouse replied that without question System Account purchases

in the size required had aggravated the downward push on bill

the Desk had tried to conduct its

rates, although

operations so that they would have as

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-5

small an effect on such rates as possible.

He vent on to point out that

the commercial banks held only about $2.5 billion of such securities at

the present time, approximately the same amount as held in the Account

portfolio.

Therefore, banks were now adjusting their reserve positions

through the use of other short-term securities to a considerable extent.

In such circumstances,

he felt that it

would be helpful to deal in short

term securities other than bills on certain occasions.

Vice Chairman Hayes said that Mr. Leach's question was an appro

priate one and that if

bring it

the members of the Committee should see fit

up during the discussion of policy, it

to

would seem quite reasonable

to do so.

Thereupon, upon motion duly made and

seconded and by unanimous vote, the open

market transactions during the period June

14 through July 5, 1960, were approved,

ratified, and confirmed.

Mr. Koch presented the following statement with regard to economic

developments:

Since the chart show presented at the last meeting of this

Committee focused on the course of economic developments over a

somewhat longer period, I shall concentrate my remarks today on

more recent developments and what they suggest about the current

In brief, recent facts confirm our earlier

state of the economy.

judgment that economic activity is continuing at a high, probably

upward momentum.

a record level, although currently showing little

firmer tone in the staff economic memoran

I think I detect a little

dum prepared for this meeting.

Thus, our industrial production index in June will probably

change from the May level of 110 per cent, which was 1

show little

In addition, the leading indicators of

per cent above April.

cyclical change, which were weak early in the year, have strengthened

7/6/60

somewhat since March.

-6

In this connection, however,

it

should

be stressed that recent changes in these indicators have been

small, and they have been shifting erratically from month to

month.

Finally, the gross national product in the second

quarter apparently showed a slightly larger advance over the

first

quarter than had been expected.

This modest raising of our sights on the second quarter

gross national product is due mainly to a somewhat greater

seasonally adjusted annual rate of inventory accumulation than

had been anticipated.

Earlier we had been thinking that the

rate of accumulation might be about $3 billion in the second

quarter, as contrasted with the nearly $11 billion in the first

quarter. Now it looks as if the second quarter rate might have

been in the neighborhood of $5 billion.

Also on the favorable side, retail

sales of automobiles

and consumer goods in general rose in June, following declines

in May.

New orders received by durable goods producers increased

slightly in May, owing mainly to a fairly large gain for aircraft.

Average hours of work also firmed somewhat.

An important recent development observable in the labor

field is that the increase in industrial wages has slowed down

markedly to a pace significantly slower than in earlier periods

This tendency toward smaller wage in

of high level activity.

by the recent settlement for operating

creases is illustrated

This settlement involved

employees in the railroad industry.

a wage increase of 4 per cent over a two-year period and a

discontinuance of the esclator clause.

In the price field, wholesale prices declined slightly in

May and early June, as lower prices of industrial items and some

farm products more than offset higher prices for processed foods.

Consumer prices, on the other hand, increased slightly further in

In May, they were

May following a somewhat larger rise in April.

The recent rise in consumer

1.9 per cent higher than a year ago.

prices has reflected the continuing upward trend in prices for

services and a somewhat more than seasonal increase in food prices.

It is of interest to note that increasing tensions in the

international situation as a result of the collapse of the summit

talks and anti-U. S. feelings being expressed in several foreign

countries have thus far apparently not had any appreciable effect

This conclusion is supported

on price and inventory developments.

but also by recent views expressed by pur

not only by statistics

chasing agents.

Turning to the less favorable side of the economic picture,

claims for unemployment compensation, a leading

in June initial

labor market indicator, rose slightly on a seasonally adjusted

7/6/60

-7

basis. The level of unemployment, around 5 per cent, continues

high for the current phase of the business cycle. Steel mill

operations have declined further, falling from 71 per cent of

capacity in May to an average of 60 per cent in June and to

53 per cent last week.

The seasonally adjusted rate of total construction outlays

declined in June and was 7 per cent below the all-time high

reached in May last year. Although private housing starts held

steady in May, additional reports have appeared of surplus housing

in scattered areas.

Defaults on home loans and foreclosures on

nonfarm real estate have also been rising but, it should be noted,

both still

represent a small proportion of new mortgage lending or

debt outstanding.

Finally, the latest National Industrial Conference BoardNewsweek quarterly survey of appropriations for plant and equipment

spending by major manufacturing companies has been interpreted as

indicating that although outlays will continue strong throughout

this year, some softening may develop early next year.

Thus, although economic activity continues fairly high, un

certainty about its future course is widespread.

Some observers

talk of the imminence of cyclical contraction; others of what Mr.

Fulton so graphically characterized as "deteriorating stagnation"

a meeting or so ago.

On the other hand, still

other observers

take heart in at least certain aspects of the reduced current

rate of increase in economic activity. They feel that the generally

orderly adjustment from the unsustainably high rate of inventory

accumulation early in the year and the avoidance of speculative

imbalances and excesses generally associated with the culmination

of a boom have strengthened the chances for a more sustained period

of prosperity.

During the course of Mr. Koch's remarks Chairman Martin entered the

meeting and assumed the Chair.

In response to a question by Mr. Balderston, Mr. Koch said that the

volume of inventory accumulation was still

relatively moderate in comparison

with sales, and that the increase had been somewhat less than during the

comparable period of the previous business cycle.

Recent increases had been

concentrated in finished goods inventories, but the inventory situation was

in better shape than in the similar phase of other postwar cycles.

7/6/60

-8

Mr. Thomas then made the following statement with respect to

financial developments:

The past four weeks have been a period of large and

varied seasonal pressures on money and credit markets.

These were due at first

to usual June tax, dividend, and

other settlements and then to holiday currency demands.

Treasury financing operations and rather large shifts of

foreign funds added to the complications.

Viewing the period as a whole in perspective, bank

reserve positions were kept relatively easy by large-scale

Federal Reserve operations and money rates remained low.

Yet pressures were felt

in the market. Around the middle

of the month when temporary liquidity demands were at their

maximum, Treasury bill

rates increased somewhat.

Dealers

took on a very large volume of Government securities, mostly

bills,

and increased their borrowings.

Banks had to supply

much of these credit needs and at the same time meet loan

demands of businesses and finance companies customarily

heavy at that time.

Required reserves increased substantially.

Reserves were supplied temporarily by a sharp increase in float.

System operations--mostly runoff of maturing billsMember bank borrowings

actually absorbed reserves in that week.

increased, although on balance the banks continued to show net

Most of the excess, however, was at country

free reserves.

banks, while city banks, where the credit demands centered,

Federal

had to increase their borrowings at the Reserve Banks.

funds were less readily available than they had been.

two weeks of June, loans and investments at

In the last

week banks sharply re

In the latest

city banks were reduced.

duced their borrowings--both from the Federal Reserve and from

This easing was aided by a resumption of Federal

others.

Reserve purchases, which have continued on a large scale this

rates again turned down,

Treasury bill

week.

The month of June was characterized by a sharp drop in

interest rates to the lowest levels since early 1959.

Except

rates are lower than at

for the summer of 1958, Treasury bill

any time since early 1956. Yields on medium- and long-term

issues also declined in June but not as much as short-term

rates, and they generally continue above any levels reached

before 1959.

This decline in interest rates reflects the easing reserve

position of banks and the reduction in Federal Reserve discount

rates that occurred in June, as well as the more fundamental

7/6/60

-9

forces that had been in process earlier.

These include

principally the changed position of the Federal budget

from large deficit to small surplus, moderation of private

credit demands, the lessened fear of inflation, and the

shift

of the public's liquid asset holdings from cash to

securities.

Credit demands in June were moderately large.

New

capital issues both by corporations and by State and local

governments--totaling $1 billion or more each--were larger

than in any other month of 1959 and 1960.

The aggregate

for the first

half of the year, however, was less than in

the two previous years.

Offerings by finance companies,

however, have been much larger this year than in those

years.

Borrowings at banks by finance companies, though

somewhat less than last

year, appear to have exceeded those

of most other recent years, both in June and for the year

to date.

Loans to other businesses by city banks, although

moderately large in June, were not as great as in most other

recent years.

The same may be said of total loans at city

banks.

These banks showed a further small decrease in their

Total

holdings of U. S. Government securities during June.

loans and investments increased more than in June of 1959,

1956, and 1955, though much less than in 1957 and 1958.

It appears that both demand and time deposits increased

somewhat more than seasonally during June.

It is unlikely,

however, that the rise was sufficient to offset the sharp

Treasury balances at

drop in the money supply during May.

banks continued at a high level and are expected to be main

tained in the weeks ahead generally above the levels of last

year.

The Treasury's borrowing needs in the next half year

will be much smaller, with less frequent financing operations,

than in the same period of 1959 and 1958.

System operations in the past few days should be more

than sufficient to cover any normal seasonal reserve needs

for the next three months, except for temporary variations.

The question to be considered is how much additional stimulus

It is doubtful whether banks will be called

should be provided.

or should be encouraged to expand loans

willing,

be

upon, will

by much more than customary seasonal amounts in the months

In view of the current level of business inventories

ahead.

and the liquidity position of businesses, loan demands may not

Loans have already increased at a

be particularly heavy.

loan-deposit ratios are such as to

bank

and

fairly good rate

Encourage

serve as some restraint on banks in seeking new loans.

ment for greater loan expansion might lead to speculative or

7/6/60

-10

unsustainable commitments, although in the present economic

climate this does not seem likely to be a serious threat.

Supplying banks with additional reserves in excess of

usual seasonal needs or likely loan demands would enable

them to reduce borrowings or increase their holdings of

Government securities--or at least cease their liquidation

of such holdings.

Since the Treasury will

be a seasonal

net borrower in the months ahead and bank deposits should

expand seasonally, some increase in total

bank credit is to

be expected.

One question is whether the public generally will

want to

discontinue or reduce its

recent proclivities for economizing

on cash and increasing holdings of securities.

Unless this

trend changes, additions to bank reserves and attempts by banks

to expand their holdings of securities may result in further

declines in short-term interest rates. Unless credit demands

strengthen, it may be difficult

to effect a greater than seasonal

expansion in the money supply without some further reduction in

interest rates.

Mr.

Marget made the following statement with regard to the United

States balance of payments:

In the six weeks that have elapsed since I last

reported

to this Committee on developments in our trade position, we

have received the full

trade figures for April and the pre

liminary figures for May.

These figures--to borrow the adjective

used in one of the newspaper comments on them--are "heartening."

First,

there is our export performance:

the critical

area,

of us who wish to see a solution of our bal

certainly, for all

ance-of-payments on expansionist, rather than contractionist,

lines.

On a seasonally adjusted basis, exports in April and May

This rate was

averaged an annual rate of more than $19 billion.

about 4 per cent above the average for the first

quarter of this

year and 23 per cent above the low of a year earlier; indeed, it

was the highest rate since the middle of 1957, a year in which we

ran an over-all surplus in our balance of payments.

Moreover, al

lack details on exports for May, the breakdown for

though we still

April showed that the rise in exports was spread widely over major

Thus, although the largest increase over the

commodity groups.

past year has been in agricultural products, mainly reflecting

higher cotton shipments, the falling off in cotton exports since

early this year has been more than made up by the increased

In April,

foreign demand for U. S. nonagricultural products.

7/6/60

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for example, the largest increases were in the very area

in which most concern had been expressed about our ability

to maintain a competitive position--in machinery and equip

ment (particularly transport equipment)

and in metals (par

ticularly steel).

Indeed, the exports of machinery and

equipment were well above even the peak rates recorded in

the peak-export year 1957.

Secondly, our import performance has been such as to

contradict the expectations of those who have suggested that

any gain in our exports was likely to be offset, or more than

offset, by a corresponding increase in our imports, so that

we were not in fact likely to achieve the sizable surplus in

our current accounts which we need in order to keep our over

all balance of payments in equilibrium if we are to continue

to maintain a large program of foreign aid and foreign invest

ment.

Actually, our imports, while they have been fluctuating

erratically from month to month since last

December, have, if

anything, fallen somewhat since that time.

In April and May,

for example, they averaged $15 billion at an annual rate:

about the same as in the first quarter of this year, but 3 per

cent below the average for the fourth quarter of last year.

And again the distribution of imports has been such as to en

courage the hope that some success is attending our efforts to

face up to the new competitive situation in the world which some

of us feel is the basic reason for the existence of our balance

of-payments problem altogether. Certainly cyclical factors, and

special factors such as last year's steel strike, as well as

longer-term "competitive" factors lie behind the heavy concentration

of the decline, in our imports, of steel and other metals, with

steel imports down about one-third below last year's fourth-quarter

But it is surely evidence of an improvement in our com

average.

petitive position that the imports of new automobiles should also

be significantly down from the fourth quarter, and that in May

they should have been as much as one-fourth below the level of a

year earlier.

With exports slowly, but steadily, increasing, and with im

ports showing, if anything, a slight decline, the result can only

have been an increase in our trade balance; and in fact the figures

for April and May do show an improvement in that trade balance by

more than $1/2 billion at an annual rate. But there has not been

a comparable improvement in the figure which we take as a measure

of movements in our over-all balance of payments: namely, the

figure for the international movement of gold and dollars. On

the contrary, it would appear--though the data for May are still

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incomplete--that,

despite the increase in our export

surplus of $1/2 billion, annual rate, in our trade

account, we were still

running an over-all balance

of-payments deficit close to the first-quarter seasonally

adjusted annual rate of $2.8 billion.

The explanation, quite obviously, lies in capital

movements--including,

of course, such movements as have

been induced by the widening of the spread between the

interest rates prevailing in

the respective monetary

centers. But the rest of the evidence, surely, is such

as to indicate that, if matters continue to go as they

have been going, this is something that we can take easily

in stride. Gold movements, for example, while they amounted

in the second quarter of this year, at $85 million, to

somewhat more than they were in the first quarter, were

$300 million less than the purchases of foreign countries in

the second quarter of 1959; and these, in turn, were con

siderably lover than they had been in 1958, the year of

massive gold-outflow ($2.3 billion) which first awakened

the country to the existence of its balance-of-payments

problem. What will be decisive, in fact, for the future

will be the extent to which we can continue to provide

evidence of adjustment in the most intractable part of our

balance-of-payments problem: namely, the trade part. It

was in the trade sector that our balance of payments showed

its greatest deterioration; it is in the trade sector that

we find the most encouraging evidence of movement in the

direction of adjustment. It has been the improvement in the

trade sector that has offset the otherwise "unfavorable"

movements in the capital sector; it will be to further improve

ment in the trade sector that observers, including the foreign

holders of dollar balances, will look for evidence that the

policies being followed in the United States, including its

monetary policy, are consistent with that attainment of balance

in our international accounts to which we stand committed.

Mr. Hayes presented the following statement of his view, on the

business outlook and credit policy:

It seems to me that we are on the right track with respect

to monetary policy and that for the time being patience and

steady nerves are called for above all else.

There is nothing in the business situation to suggest that

the recent discount rate action was premature or that it is

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likely to need to be reversed in the near future.

On the

other hand, while recent business statistics are only mildly

encouraging, they do point to the likelihood of some modest

expansion in the second half of the year.

Consumer spending is the most hopeful source of this

second-half improvement, and in this connection it is encourag

ing that the disappointing May performance of retail

sales

now seems attributable mainly to the late date of Easter

rether than to a weakening of demand.

In the construction area, easier availability of mortgage

funds suggests that an upturn in residential construction may

be in the making--although this stimulus may be less effective

than it has been in similar situations since World War II be

cause the demand for and supply of housing are now clearly in

closer balance than in many years.

With the prospect of con

tinued strength in private nonresidential construction and an

improved outlook for the highway building program, total

construction should be an element of strength in the second

half.

Nonfarm wholesale prices experienced an unusually sharp

drop in May, and the wholesale price index as a whole may

show a decline for June.

The recent small rise in consumer

prices appears of relatively minor significance, attributable

as it is very largely to seasonal food price changes.

As for bank credit developments, the growth of business

loans slackened somewhat in June after a performance in the

earlier months of the year roughly comparable with the experience

of earlier expansion years.

However, while the tax period failed

to bring forth any particularly sharp rise in business loans,

there was a very marked gain in both security loans and loans

to finance companies.

The inference is that corporations have

been turning less to their banks for tax funds than to the dis

position of short-term government securities, including those

held under repurchase agreements, and finance company paper.

Total loans at weekly reporting banks showed a strong increase

three weeks of June, and with security holdings

in the first

total bank credit scored a sizable gain.

changing very little,

During the same period required reserves have risen by about

$350 million, or substantially more than in any recent year of

business expansion,

New municipal financing has been exceptionally heavy in the

While this has caused some indigestion in

past three weeks.

underwriting circles, there has been no basic weakening of bond

The corporate new issue market has been relatively quiet.

prices.

Stock prices are somewhat higher than three weeks ago.

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The outstanding economic characteristics of the period

ahead are likely to be ample productive capacity, an unemploy

ment ratio of around 5 per cent, and better balance between

the supply of and the demand for investment funds. Resumption

of inflationary pressures in the current period of expansion

has become a steadily less likely prospect.

On the other hand,

we cannot overlook the sharp divergence of business conditions

here and in Europe, and the difficult question as to what extent

European monetary policy measures and financial developments may

require review and adjustment of our own domestic credit policy.

All in all, it would seem appropriate to continue the

relatively easy policy we have been following for the past month

or so. As brought out in Mr. Gaines t

memorandum already distrib

uted to the members of the Committee, recent data suggest that we

are now getting the growth in the reserve base that we have wanted,

and it appears likely that the money supply also turned upward in

June.

This is all to the good.

However, I feel strongly that at

a time like the present, when the evidence does not clearly support

the need for easier money and lower interest rates, the possibility

that there may be adverse effects on the balance of payments from

lower domestic short-term interest rates should be given some

weight.

In addition to movements of funds to Germany for other

reasons, some short-term funds are moving out of the United States

in response to present rate differentials--and while these move

ments have not resulted thus far in an appreciable outflow of gold,

we must keep in mind possible effects both here and abroad if such

a flow were to develop on a substantial scale.

I am concerned over the prospect that the sizable open mar

ket operations needed to supply reserves through the remainder of

rates even lower than they now

the year are likely to drive bill

are if operations continue to be restricted to bills.

Perhaps the next few months represent a period when the

Manager might appropriately be given greater leeway in the selection

It

of securities than the Committee has usually accorded him.

seems to me that if he were permitted to operate freely throughout

the short-term area, instead of confining his attention to bills,

he could acquire those maturities which happened to be available

and might minimize the impact on short-term rates of any actions

I might add that since commercial banks

aimed at the reserve base.

have been relying to a considerable extent on short-term securities

for their money market adjustments, there is a

other than bills

very logical basis for our broadening the scope of our operations

It would help us to adjust our operations in

in this direction.

order to deal with the paradox of a relatively tight commercial

banking system side by side with relative ease in the nonbank sector.

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I think the discount rate and the directive should be

unchanged.

left

Mr.

Irons said that conditions in the Eleventh District were not too

much different from three weeks ago, although perhaps the shading was toward

a little

more strength.

The situation was relatively favorable,

taking into

consideration the drag of the petroleum situation and some cutting back in

defense expenditures at aircraft plants.

in

June and retail

Department store sales improved

sales generally were a little

better,

they were running somewhat below the figures of 1959.

were 3 or

4 per cent above a year ago.

although cumulatively

New car registrations

Production of crude oil was still

running about 8 per cent below a year ago,

and this was having an effect

on drilling, which was off 15 or 20 per cent, but refining was up.

ment was above last

year,

Construction was a little

Employ

and unemployment was around 4.5 per cent in Texas.

above a year ago.

Upon adding up all

of these

factors,

one came out somewhere within 2 to 3 per cent of the record high

levels.

The agricultural outlook had improved lately.

While the rainfall

was excessively heavy in some parts of the District, on the whole the

situation was quite favorable.

Mr.

Irons said that in

the past three weeks District banks had a

fairly substantial increase in deposits and a fairly sizable increase in

loans.

He thought there was some tendency on the part of bankers to feel

that their positions were easing a bit.

chased in

Federal funds were not being pur

as large amounts as had been the case.

Borrowing from the Reserve

7/6/60

-16

Bank, relatively high on some days,

to $28 million.

on average was fluctuating around $25

A number of smaller banks in the agricultural sections

were borrowing for seasonal purposes and probably would be borrowing for

another couple of months.

Mr. Irons went on to say that, on the basis of his contacts,

the

attitude of businessmen seemed neither highly optimistic nor highly

pessimistic.

They were looking for a little more improvement in the last

half of the year, but not much difference.

On the other hand, they were

not anticipating any sharp decline, even in the oil industry.

On the

whole, the District showed relatively favorable conditions at this time.

There would be the summer doldrums, as always, but that could not be avoided

and should not be a cause for panic.

Mr. Irons said that in view of current uncertainties and the state

of business activity, he would maintain about the same degree of ease that

had been the Committee's objective.

He would favor a moderate amount of

free reserves, somewhere around $50 million.

While he would lean toward

providing reserves to meet seasonal requirements, he would not force ease

on the market aggressively through open market operations.

He would avoid

tightening and, as he had said, provide for seasonal requirements, but

avoid pushing up the amount of free reserves.

In the process of maintaining a given amount of free reserves, Mr.

Irons noted, there was the possibility of providing additional ease con

tinually; if

the free reserves made available were used, the provision of

7/6/60

-17

more to maintain a given amount of free reserves might mean a continuous

easing.

This he would avoid.

He would take no overt action, no definite

action that would point one way or the other, and instead would try to

continue to fluctuate around a neutral position.

He would not favor

changing the discount rate or the directive.

Mr. Mangels said that latest available figures showed Twelfth

District employment down .2 per cent, while unemployment, which had been

running a little

less than 5 per cent, increased to 5.5 per cent. Employ

ment had declined in the lumber and aircraft industries as well as in food

processing plants in California and the Northwest.

Also, there had been

a cutback in Government employment of about 10,000 persons upon the com

pletion of the census-taking.

Construction in May was up 5 per cent from

April, but was down 17 per cent from a year ago; total construction contracts

for the year to date were 6 per cent below the 1959 period.

Steel production

was at 66 per cent of capacity for the month of June but was down to 63 per

cent in the latest

week.

The industry seemed to think that in the next

month or two there might perhaps be some upswing in production, because

final use was in excess of shipments from the mills.

was still

in the doldrums, with production below new orders and shipments

being made from inventories.

in

Prices had stabilized, but at a low level,

some cases virtually at the break-even point.

In agriculture,

had been too much rain and cold weather in Washington,

Utah,

The lumber industry

Oregon,

there

Idaho,

and

while in Nevada there was a shortage of irrigation water and some

7/6/60

-18

reservoirs were already depleted.

down yields of wheat and barley,

was still

Dry weather in California was holding

although in the irrigated areas there

a sufficient water supply.

situation was still

In California the farm labor

uncertain, with the unions continuing their efforts

to organize the farm workers.

This might have a detrimental effect on

the peach and tomato canning crops.

Department store sales for the four

weeks ended June 27 were about 5 per cent below a year ago, while auto

sales in

California for the first

two weeks in June were below May, which

in turn was 15 per cent below April.

Mr. Mangels said that loans of District banks increased somewhat

in the four weeks ended June 22, although real estate loans were down $41

Demand deposits increased slightly, and time deposits were up

million.

nominally.

There was an $85 million increase in savings deposits, but

bankers in California were much concerned about what might happen in the

first

ten or fifteen days of July following the crediting of interest at

the end of June.

With savings and loan associations advertising 4-1/2 per

cent and 4-3/4 per cent dividends on share accounts,

the banks were antici

pating quite a substantial drop in savings deposits.

Borrowing from the

Reserve Bank was nominal, mostly borrowing by country banks.

City banks

were quite active in the Federal funds market, with transactions in rather

large amounts.

Mr.

Mangels said that the observation in the Twelfth District was

one of a pattern of increasing weakness in economic activity, although there

7/6/60

-19

were no clear signs of a general turndown.

look conference,

it

was the consensus of the 18 participants that there

probably would be little

activity in

At the recent business out

change from the present level of business

the near future.

They did not expect that present areas of

weakness would be expanded, but they saw nothing in

the picture that

would increase the over-all pace of business activity in the Twelfth

District area.

Banks were still

for credit and felt

being selective in

reviewing applications

that their positions were tight.

They were concerned

about loan-deposit ratios.

Mr. Mangels felt

reserves in

would be helpful if

excess of seasonal needs.

the suggestion of Mr.

Treasury bills

it

In

the System were to supply

doing so, he would go along with

Hayes that the Desk try to stay away somewhat from

because of the present low bill

rates.

Mr.

Mangels also

suggested that the Board might give further consideration to the release

of additional vault cash.

He would like to see net free reserves some

where above $100 million, perhaps as high as $200 million.

He saw no

occasion to change the discount rate or the directive.

Mr. Allen said that developments of the past three weeks had not

been helpful to him in

trying to make out the underlying business trend.

All things considered, particularly the low rate of activity in

steel,

the economy seemed to be doing pretty well on the whole, but with summer

here it

appeared that it

might be necessary to wait for several weeks to

determine whether business was moving decidedly one way or the other.

7/6/60

-20

Retail trade in the Seventh District area was on the

satisfactory but spotty,

marketings in

the first

same period of 1959.

highest level in

Mr. Allen said.

whole

Cash receipts from farm

five months were about 2 per cent below the

However, hog prices had increased recently to the

a year and a half,

and a further rise was expected by

the end of the summer because the spring pig crop was 16 per cent below

that of last

year.

Mortgage lending terms in the Chicago area had shown

no signs of easing, and that appeared to have been the case nationally.

However, an analysis of the supply and demand for long-term funds suggested

that rate cuts might be in prospect.

large as last

lower.

Savings had been running about as

year, but the demand for long-term money was substantially

Nevertheless,

spokesmen for the savings and loan associations

were insisting that mortgage rates would hold firm, just as commercial

bankers were denying that there was any likelihood of an early reduction

in the prime rate.

Mr. Allen went on to say that automobile sales for the last ten

days of June were estimated at around 26,000 per day, which would be very

good,

below the same period of 1959,

but a little

and would mark the first

time this year that daily sales had fallen below year-ago levels.

duction for the first

Pro

six months was approximately 3,800,000 and sales

about 3,200,000, accounting for the high inventory of more than 1,000,000

cars on June 30.

Production was currently being reduced,

expected to be the low month.

and August was

Estimates were that 1,140,000 cars would

7/6/60

-21

be made in

the third quarter and 1,600,000 in

figures to the first

the fourth.

half, the year's production would be 6,540,000, or

17 per cent more than the 5,594,000 total for 1959.

to note, however,

Adding those

It

seemed important

that the forecasts called for less auto production in

each of the remaining quarters than was achieved in

either the first

or

the second quarter of the year.

In

the field of monetary policy, Mr. Allen said he concluded that

it would be advisable to mark time for the present.

trend of business activity was not clear.

was in process.

For one thing, the

Furthermore, Treasury financing

He would not favor changing the discount rate or the

directive.

Mr. Leedy said that conditions in

tended to be favorable.

the Tenth District on balance

The winter wheat harvest was nearing completion

and it now appeared that production this year would be even higher than

was estimated by the Department of Agriculture as of the first

During the first

lower than last

of June.

four months of this year cash receipts of farmers were

year.

However,

with the improvement in the wheat situation,

better pasture and range conditions,

and a volume of cattle marketings

sufficiently large to offset the lower level of prices,

it

appeared that

during the second half of this year cash receipts would be larger than

during the last

half of 1959.

Mr. Leedy went on to say that the District employment situation

was better than at this time last year, notwithstanding a strike against

7/6/60

-22

construction contractors in the Kansas City area that had resulted in

about 17,000 unemployed.

Except for Kansas,

each State in the District

showed a higher level of employment than last year.

Department store

sales during the latest reporting period were about 5 per cent above the

corresponding period of last

year,

although the cumulative figure for the

year to date was about 2 per cent under last year.

District banks had experienced an increase in demand and time

deposits, Mr. Leedy said.

There had also been an increase in business

loans recently, although the rate of growth in those loans this year was

somewhat lower than last

year.

Mr. Leedy said that in view of the Treasury financing he assumed

that an even-keel policy would be followed in the period immediately

ahead.

He assumed there would be some need for supplying additional

reserves incident to the financing,

but beyond that, and beyond supplying

what might be needed in the way of seasonal requirements,

it

seemed to

him that the System should not be pushing funds into the market.

bill

rate, and the way it

watched carefully,

The

had been trending, was something that should be

and the fact that the Federal funds rate during the

recent period got to such a low level was another factor that should be

taken into account.

about accomplished

In brief, it

what it

period immediately ahead, it

seemed to him that the Committee had

desired to bring about at this time.

In the

was his view that the Committee need not

attempt to supply additional funds other than those required to see that

the Treasury financing was accomplished and seasonal needs were met.

7/6/60

-23

Mr. Leach reported that there had been ups and downs in recent

business developments in various industries and areas of the Fifth

District but no indications of any fundamental departure from the high

levels that had prevailed since April.

Indicative of aggregate strength

in May was the slight rise in manufacturing man-hours,

seasonally adjusted,

to the highest total in 12 months and the maintenance of non-agricultural

employment, also seasonally adjusted, at the record level reached in the

preceding month.

The prosperous cotton textile industry had lately gained

strength in one of its weaker areas--industrial fabrics.

On the other

hand, the furniture industry, which did a record business during the first

five months of the year, had suffered a definite slowdown marked by shrink

ing retail sales and a slow pace in factory orders.

The widespread lumber

industry faced slow summer prospects after a spring which lacked the usual

seasonal liveliness.

Cigarette consumption continued its upward trend, and

contract awards for new construction were holding up well.

Projects in

process for expanding and modernizing business and public facilities were

contributing significantly to employment and income in the District.

Positions of the larger District banks seemed to have eased some

what since the June 14 Committee meeting, Mr. Leach said.

investment liquidation had slowed a little,

The rate of

borrowings at the discount

window had dropped, and money market banks had been net sellers of Federal

funds.

The less rapid decline in country bank borrowings from the Reserve

Bank suggested, however, that the slight easing at reserve city banks had

not yet spread to country banks.

7/6/60

-24

With respect to policy, Mr. Leach said the easing actions that

had been taken seemed to be having desirable effects, and he thought it

would be advisable to mark time for the next three weeks.

It was hardly

possible that the System could add to reserve availability without

affecting interest rates, and he saw nothing to be gained through forcing

short-term rates even lower.

Moreover,

the Treasury financings that had

been announced called for an "even keel" during the major part of the

period.

He would not recommend a change in the directive or in the

discount rate.

latter's

The question he asked Mr. Rouse at the conclusion of the

report this morning indicated that he had been thinking about

the advisability of buying short-term securities other than bills.

reasons for such a change had been given by Mr. Hayes.

The

Mr. Leach knew

of no convincing reason why the Committee should not modify its practice

in the light of changed conditions.

Mr. Mills said that in weighing the reports presented to the

Committee at this meeting he had tried to strike a balance sheet of the

plus (favorable) and minus (unfavorable) factors that were working through

the economy.

In doing so, he added a postscript to the balance sheet to

give effect to the personal attitudes of those who believed that the economy

was moving sideways through an intermediate business cycle and those--if

there were those like himself--who believed the economy was commencing to

move downward from the peak of a major business cycle.

In striking that

balance sheet, he found the most generally accepted position would be that

7/6/60

-25

the economy was idling in neutral, without any forward thrust, which raised

a question as to what the function of monetary and credit policy should be

in such a situation.

about where it was,

Personally, he believed that the System should stay

supplying reserves to a degree that would allow a

comfortable working of the commercial banking mechanism by way of a

modest volume of free reserves.

While it

would be desirable to accomplish

that purpose without unduly disturbing the interest rate structure on the

downside, he could find in his thinking no reason to liberalize the authority

of the Desk to operate in other than bills.

In the immediate offing there

would be a substantial addition to the supply of bills in the market, and

the Board of Governors had available to it

directly the supply of reserves if it

the means for influencing

saw occasion to do so.

As to policy in the immediate future, Mr. Mills said that looking

at the projections of the movement of reserves and being conscious that,

as Mr. Rouse had put it,

they could and had in the recent past gone awry,

he felt that the reserves necessary to support the commercial banks in

their acquisition of the tax bills being auctioned today might well be left

at their disposal.

A mechanism was afforded for providing reserves for a

definite purpose that could be permitted to remain in the banking structure,

in support of the money supply, without having to take further overt moves

to sustain the supply of reserves.

count rate or the directive.

He saw no occasion to change the dis

7/6/60

-26

Mr. Robertson said he saw nothing in the economic picture to

warrant any change in present policy which,

in his opinion,

nearly on the right mark as one could get it.

gestion of Mr.

was as

He agreed with the sug

Irons that the Committee should not permit its

policy

to result in forcing reserves into the picture, but he saw nothing in

the next three weeks that would bring about such a situation.

quently,

he would adhere to present policy.

directive,

Conse

He would not change the

nor would he take any overt actions.

Mr.

Shepardson said that,

since he was just back from a trip

to Europe, his view of the domestic situation was confined largely to

the staff

reports.

He felt,

position at the moment in

and the level of activity,

been effective,

however,

that the System was in

a fortunate

the light of the general state of the economy

current and prospective.

System policy had

and he saw no reason to change at the moment.

He agreed

with the suggestion that the System limit its supplying of reserves to

those needed to meet seasonal requirements.

light

of recent contacts overseas,

Also, particularly in the

he would agree wholeheartedly with

the idea of avoiding action that would push short-term market rates

down further,

for he saw no particular purpose to be served by that

at this time.

He would recommend no change in present policy or in

the directive.

Mr.

King said he agreed with those who foresaw little

improvement in general economic activity during the last

year.

or no

half of the

The business community was preoccupied with the coming elections

7/6/60

-27

and the direction in which the country might go as a result, and in his

opinion the economy was likely to stay during this period in the kind of

stagnation to which Mr. Fulton had referred at a recent meeting.

economy was not quite stagnant, but it

The

had been in the doldrums pretty

much throughout the year.

Mr. King also said that he did not think any purpose would be

served by pushing short-term rates lover.

The comments about supplying

additional reserves puzzled him somewhat; he did not think the question

was so much one of supplying reserves as whether, if ease should develop,

it

ould be mopped up through open market operations.

Personally, he

would favor free reserves from $100 million up to $300 million, and

allowing the free reserve figure to fluctuate to a considerable extent.

If there was any mopping up, he felt that it

saw it,

should be modest.

As he

the question for the next three weeks was principally whether

the System should sell securities.

side of disposing of relatively little

He would cast his own vote on the

from the Account protfolio and

permitting free reserves in the $100 to $300 million category, for he

felt that this would contribute most to not upsetting the precarious

balance of the economy.

Mr. Fulton reported a widespread feeling of uneasiness in the

Fourth District, even among those businesses operating at fairly high

rates.

The fact that the steel industry was operating at depression

levels at present had an effect on other industries and also an effect

7/6/60

-28

on the employment and unemployment situation.

holiday,

This week,

in view of the

the mills elected in many instances to close and give paid

vacations to their workers.

The order books in both the steel industry

and the machine tool industry were reported to be disappointing, and

shipments were larger than new orders.

A principal question was how

long the auto industry could manufacture cars out of inventories that

were supposed to be limited a little

did not order metal this month,

while back.

If

the auto industry

any improvement was going to be delayed

substantially because the mills must pour steel this month to make

delivery in August.

Tin plate was still

going well, but the canning

companies were requiring the mills to carry inventories.

One heartening

factor was that some cold-rolled strip and some sheet steel was being

exported to Europe; some English and German auto manufacturers were

buying limited quantities,

Appliances were in more than adequate

supply and some plants had closed down to work off inventories of

consumer goods.

The employment situation was not good, particularly

in the steel centers.

week,

The mills reported many workers on a four-day

and consideration was being given to cutbacks in supervision,

which was almost a last resort action.

Mr. Fulton said that retail sales were being maintained in

fairly good shape.

New car sales were quite brisk in June and depart

ment store sales were above last year by about 3 per cent.

Building

activity had declined somewhat from the high level reached in May.

7/6/60

.29

Mr.

Fulton

went

on to say that borrowings from the Reserve Bank,

which had been running considerably below last

year, at only about 2 or

3 per cent of the System total, had increased recently.

He noted that

total borrowings from the System were being maintained at around $400

million, which in his opinion was a little

high for a period in which

the Federal Reserve was trying to inject some ease into the reserve

situation.

banks.

Loan demand was reported to be strong at most District

The demand was heavy for capital improvement loans and there

was a fair-sized volume of term loans for which the banks

themselves previously.

There was a fair

had committed

demand for mortgage loans.

The

statement was heard that the rate situation was not the real deterrent to

the sale of houses; rather, that there was a situation of overbuilding in

some areas and that people wanted less costly houses.

Mr. Fulton expressed the view that the need for reserves that he

felt

existed should be met by the System, and he added that he would be

inclined to favor releasing some additional vault cash to be counted as

reserves.

It

seemed to him that the Desk had been striving to be quite

precise in maintaining a free reserve figure of around $50 million.

would be favorable to a greater fluctuation in

that figure,

He

feeling that

$50 million should be regarded as a minimum rather than a maximum and

that free reserves should be allowed to go as high as $150 million, with

fluctuations between that point and $50 million.

ness in

A result of the precise

trying to maintain a figure of $50 million also had been pressure

-30on bill

yields on various days when the Desk felt

reserves.

necessary to supply

To repeat, he believed that $400 million of borrowings,

had been quite consistent,

in

it

somewhat greater volume,

was too high,

and he would furnish reserves

feeling that the current hesitancy needed an

indication that the System would supply all

mately required.

which

the reserves that were legiti

He would not favor changing the discount rate or the

directive.

Mr.

Hilkert commented substantially as follows:

Business in the Third District has shown little

improvement.

Employment is not encouraging; there has been a noticeable slack

ening of department store sales; production of durable goods is

off; and carloadings have declined.

Hours worked in manufacturing plants in May showed wide

spread drops in comparison to the equivalent period of 1959.

The

May figures are better than those for April, but this is partly

because manufacturing employment decreased.

Unemployment claims,

both new and continued, have leveled off at rather high totals

since early in 1960.

The steel rate

are not encouraging.

Production statistics

Electric power consumption

is down to 61 per cent of capacity.

The increase was entirely in plants

increased slightly in May.

Durable goods producers in May con

producing nondurable goods.

sumed less power than in April, and 6 per cent less than in May

Pennsylvania Railroad's freight carloadings (Philadelphia

1959.

region) have been under last year's figures for many weeks.

Construction contract awards, after rising sharply in April,

dropped again in May, so that for five months in 1960 awards in

by slightly more than is true

our District are under 1959 totals

for the nation.

Department store sales declined more than seasonally in May,

There have been

half of June.

and remained low through the first

two weeks, however.

increases in the last

In contrast to the somewhat sluggish business situation, our

Loan demand is strong and banks

fairly tight.

banks are still

Reserve city banks have been

heavily.

fairly

have been borrowing

in the Federal funds market; country banks have been more frequent

visitors at our discount window.

7/6/60

Despite the somewhat pessimistic appearance of current

business and some continuing tightness in the banking picture,

we would be inclined not to make further moves toward ease at

the present time. This is apart from the fact that a Treasury

financing operation is now in process. Actions already taken

seem sufficient to carry us through the current and prospective

period of uncertainty. After the summer lull,

we should be in

better position to see the effects of recent actions and to

appraise the need for further steps.

We would be inclined toward no change in the directive,

the present degree of ease,

or the discount rate.

Mr. Bryan presented a statement on Sixth District developments and

on monetary policy substantially as follows:

Sixth District business activity in May and early June

seems to have held at a high level.

Non-farm employment has

increased slightly to a new record, and unemployment has

declined further. Construction activity is up a bit; and

department store sales, which have been at a record in early

June, suggest continued strength in retail sales. Either

weakness in business loan demand--which does not seem to be

the case--or continuing tightness in the banking situation is

indicated by the fact that the District's business loans have

recently been less than usual for this time of year; and total

loans and investments have resumed a declining trend.

As we see the national picture, there is

still

no sign of

exuberant boom or of general downturn. But it is necessary to

note that unemployment remains uncomfortably large, with steel,

airplane, oil, appliance, furniture, and other industries under

going difficult adjustments.

Meanwhile, business spending prospects

less rosy. The problem of policy, as we see it,

seem a little

lies in determining what to do when the business situation is not

so robust as to give rise to inflationary consequences if there

were further monetary ease, nor so anemic as to threaten prompt

collapse if no further ease is forthcoming. The situation is the

more complicated by recent foreign monetary moves in particular

and the posture of our balance of payments problem in general.

change

As matters stand, my own inclination is to make little

in my policy views as of the last meeting.

That is,

I believe we

should work for a slow, steady increase in the reserves available

to the banking system. I believe this is necessary because of

the economic situation and because of the lagged effects of mone

tary policy. But I also believe that we should, at least for the

present, strive to effect the reserve increases so slowly, gently,

7/6/60

-32

and steadily that we give no indication of panic, produce,

if possible, no speculative movement in investment asset

values, and do not drive short rates to the ridiculous

and obviously unsustainable low levels that have character

ized other easing cycles of monetary policy.

Now, in line with my previously expressed opinion that

such qualitative language is of little

use to the Desk, I

will try to put an opinion in more interpretable, quantitative

terms.

The total

reserve figure for June, on a daily average

basis was $18,289 million.

That figure represented a modest

increase in total

reserves and non-borrowed reserves, and

permitted approximately the same modest increase in required

reserves.

The policy has been in the right direction, I feel

sure, and in an entirely defensible amount.

For July, then, I would suggest that we head for a

reserve target consisting of the June daily average figure,

plus a seasonal of $110 million, plus, in view of the unemploy

ment and non-boom characteristics of the economy, an additional

That would bring me out with a target for July of

$50 million.

$18,449 million on a daily average basis.

Of course, it will have been noticed that I have advocated

for the present a policy of modest, steady increments in total

we

reserves and, at the same time, have exhibited concern lest

rates down to an unsustainable low--a low that

drive short bill

might be alarming abroad and, perhaps, equally unfortunate at

In this situation, I believe we should have recourse to

home.

"only."

"usually" but by no means to bills

a policy of bills

For it will also have been noticed that in setting my reserve

target of 160 million additional reserves for July, I have

a 110 million

carefully differentiated between two components:

seasonal and $50 million of what I have been calling, for want

of a better name, a growth factor--perhaps better called a pro

vision of reserve base for the secular expansion of the economy.

Such a reserve base for the secular expansion of the economy

is, as I see the matter, a fraction of total reserves having a

far, far greater aspect of permanence than reserves supplied for

Accordingly, I would urge

seasonal or other temporary purposes.

that we go, for such component of our purchases, well beyond the

91-day bill

if

that should be necessary to avoid rate-cutting

competition with other purchasers of that instrument.

Mr.

Johns said he and his associates in St. Louis believed that the

current rate of economic activity,

although high and perhaps not showing

notable signs of softness or weakness, nevertheless was below an attainable

7/6/60

-33

and sustainable rate consistent with price stability.

conclusion,

activity.

In arriving at this

due weight was given to many factors and indicators of economic

Some indication of a potential for a higher rate of activity was

found in the relatively high rate of unemployment,

the slow rate of growth

in the labor force, and gains in output per worker since the last recession.

Also, capacity in mining, manufacturing,

more than ample.

In

and transportation appeared to be

spite of this, however,

a policy had been followed by

the Federal Reserve for several months, until recently, that permitted

deposits and total bank credit to contract.

This was a policy that would

be appropriate for checking an expansionary movement which threatened to

be unsustainable.

Since that did not appear to be the case,

it

seemed to

follow that open market operations should carry out, as and when they could,

the mandate contained in the policy directive to supply reserves needed for

moderate bank credit expansion.

Mr. Johns commented that he was arguing for moderate bank credit

expansion, not for drastic measures.

If his remarks

at previous meetings

had been construed as favoring drastic actions, he wished to make clear

that they were not so intended.

He had thought that he was speaking

within the framework of the directive calling for moderate bank credit

expansion.

Mr.

Johns went on to say that he would not attempt to place any

numbers on this objective.

He was gratified at the appearance of a turn

around in the reserve position and, perhaps hopefully, in the money supply.

7/6/60

-34

He merely would like to make sure that this continued, and perhaps at a

slightly accelerated rate.

At a meeting some time ago,

and in another

context, he had spoken of his desire for some exploration of the possi

bility

that the System might supply what in that context were referred

to as growth reserves by at times going outside the bill

market.

Having

held that view, he was now well disposed toward the suggestion that

when

the System wanted to supply reserves, and when aggressive attempts to

buy bills would force the yields down further than might be considered

desirable, the possibility be explored of buying securities other than

bills.

Mr. Johns added that he had been concerned about the suggestion

that the Federal Reserve could not take steps to increase total bank

credit because of possible depressive effects on interest rates and conse

quent capital movements having adverse effects on the balance-of-payments

situation,

hear it

and especially our gold position.

implied that the gold position is

It

was of concern to him to

so precarious that the System

can not afford to pursue an appropriate internal monetary policy.

fore, he was comforted when,

if

he understood correctly,

Mr.

in effect that such gold movements could be taken in stride.

said it

There

Marget said

Mr.

Johns

was his opinion they should be taken in stride and observed that

such gold movements are not relatively significant as compared to develop

ments in

is

our foreign trade position,

so important.

to which healthy growth in the economy

7/6/60

-35

Mr.

Szymczak commented on the degree of preparation and fore

thought evident in the presentations at this and other recent meetings of

the Open Market Committee.

He went on to say that he would not recommend

any change in policy at this time, but that there were two matters worthy

of consideration.

The first involved the possibility of Account operations

in short-term securities other than bills,

when that might seem desirable.

well be left

if

and when there should be times

This was a matter that in his view

might

to the judgment of the Manager of the Account and the Chairman

of the Committee.

Second,

he felt

that the time had come for the Board of

Governors to consider further the question of releasing additional vault

cash to be counted as reserves,

along with other actions having to do with

the legislation on reserve requirements that was enacted last

year.

Mr. Balderston said that he shared the views of Mr. Szymczak regarding

the fresh ideas being brought before the meetings of the Open Market Committee

and that he had been impressed with the memorandum from Mr. Gaines to Mr.

Hayes dated June 30, 1960, relating to total reserves and nonborrowed

reserves.

which had been distributed prior to the meeting,

This memorandum,

helped in understanding the views that Mr. Bryan had been presenting to

the Committee.

Mr.

Balderston said that he would not recommend any change in policy

for the next three weeks.

With respect to the suggestion that the Desk

operate on some occasions in

would be the last

short-term securities other than bills,

one to say that the Open Market Committee should be

he

7/6/60

-36

wedded to a doctrinaire policy of bills

ever,

only.

As a practical matter, how

the System already owned about half of the outstanding certificates,

and there were relatively few bills

in the portfolio.

Also, he was impressed

by the fact that during the past year or so the Account portfolio had grown

less liquid; it

seemed that when the System purchased longer securities,

the occasion required,

it

had difficulty in

as

disposing of them.

Mr. Balderston went on to say that the question he wished to raise

concerning the suggestion made at this meeting had to do with the composition

of the Federal debt, which,

he thought,

was a responsibility of the Treasury

rather than the Federal Reserve System.

increase the supply of bills

available in

would be a timely thing to do,

raising money.

If

Treasury.

its

as bills

the market, feeling that this

were scarce and the Treasury was

the Treasury had made every feasible effort to lengthen

the debt, he thought that it

supply of bills

He would like to see the Treasury

would be quite appropriate to increase the

and that this might appropriately be suggested to the

However,

for the System to monkey around with rates through

own actions seemed not only to

assume a burden that properly belonged

to the Treasury but also a rather futile action, because the Treasury,

its

actions since the first

bills.

in

of the year, had greatly reduced the supply of

What the System did in

its

operations was small in comparison,

and

he had some concern about the use of open market operations toward that end.

Having said this, he wished to recall his concern in

the bill

rates fell

through the floor, and he still

the spring of 1958 when

looked at the charts

7/6/60

-37

with unhappiness.

He merely wanted to be sure, in considering the suggestion

made today, that the responsibilities of the Treasury and the System were

not confused.

Chairman Martin said he had little

to add to the discussion, except

to suggest that this was a bad time of the year to be taking soundings on

the economy generally.

One should be careful in July and August, particu

larly with all of the varying views that were going to be heard around the

country, not to make hasty judgments as to what was going to happen.

On

the whole, he saw more to be encouraged about in early July than he had

expected six weeks ago.

There was an underpinning to the economy that

should not be overlooked.

Chairman Martin said he had had no idea that the matter of bills

only, bills usually, or short-term securities,

come up at this meeting.

preferably bills, would

After relating an incident to illustrate his

point, the Chairman suggested that the Committee would not want to get

into a position of debating the matter of "bills only" indefinitely.

was proper to raise the question,

It

of course, and he sympathized with Mr.

Balderston's point about the problem of the Treasury in regard to the

supply of bills.

However, he felt the Committee should recognize that

even in most extreme moments it

should not get into the position that it

was only bills about which we were talking.

If

one were to go to securities

of 18 months or two years or something of that sort, and if

there were

clearly no other securities to be acquired except by really pushing the

7/6/60

bill

-38

rate down,

this was something that ought to be taken into consideration.

At least, that was his own feeling.

charge of being doctrinaire if,

recently,

it

pushed the bill

acquire bills.

The Committee would be subject to the

under extreme conditions such as occurred

rate down to, say,

.5 per cent in order to

This was just an observation.

The Chairman then said that he had

of Mr. Bryan this morning.

sympathy with the presentation

The System ought to try to build the reserve

position steadily, not in the sense of creating easy money but in the sense

of supplying reserves for growth of the economy.

How to do this was a

difficult question, the answer to which was illusive.

the System was making progress in that direction.

he suggested, it

However, he believed

In a period like this,

would seem that errors--although this was not to suggest

that they be made deliberately--could be more on the side of ease than

under other circumstances.

Chairman Martin then said that, within the general framework in

which the Committee had been operating for almost three months,

seemed to be called for at present was to mark time.

the consensus; that is,

all that

This appeared to be

to mark time, within the framework and spirit in

which the Committee was operating today.

What the Committee might want to

do six weeks from now was another question.

Referring to the comments by Mr. Szymczak concerning implementation

of the reserve requirement legislation, the Chairman

were before the Board constantly.

noted that these questions

The Board had discussed them actively in

7/6/60

-39

recent weeks and would continue to discuss them.

He went on to say that

everyone ought to be trying to see how the System could handle the growth

factor in the economy from the standpoint of reserves.

This should be

done in as orderly and intelligent a way as possible.

The Chairman then suggested that, unless there was a disposition

to debate the question of degree, the present directive be reaffirmed and

there be agreement to maintain until the next meeting about the same

general state of operations that had been maintained.

In further discussion it was noted that the directive called for

providing reserves needed for moderate bank credit expansion,

and the

Chairman commented that the question of how to achieve that objective

was difficult.

However,

he thought that the Committee was slowly getting

it.

There were several indications of agreement with this comment,

and

the Chairman added that, like Mr. Johns, he would not want to lose the

ground that had been gained.

it

However,

the Treasury was in the market and

would be necessary to be rather careful about stirring up the market in

either direction.

The Chairman then said that, if

there was no disposition to the

contrary, the present directive would be approved.

Mr. Rouse had any comment,

and the latter

He inquired whether

replied in the negative.

Mr. Hayes said he had no question on the consensus or the directive.

However,

it

was not entirely clear to him what the Committee felt

the leeway

-40

7/6/60

of the Account Manager was in the matter of dealing in

short-term securities

other than bills if a situation existed where operating solely in bills

would have an undesirably strong effect.

He asked whether the Committee

felt that the Manager had this leeway or whether it

was felt the Manager

should come to the Committee for specific instructions.

Chairman Martin said he had always thought this leeway existed.

The Manager could, of course,

confer with members of the Committee if he

had doubts, but the Committee might be criticized for having a doctrinaire

position if

it

did not mean "short-term securities, preferably bills."

Mr. Allen recalled that on one occasion the portfolio of bills got

so low that the Desk sold securities other than bills, and Mr. Robertson

recalled that there had been some discussion of the matter at the meeting

of the Committee before this occurred.

Mr.

Shepardson said he would have

the same understanding as had been expressed by the Chairman, and Mr. Bryan

said this would be his understanding of the matter also.

Mr. Mills said it

should be understood that this indicated a

departure from what had been a general practice, and that presumably such

operations should not be undertaken without consultation.

Otherwise, the

judgment of the Desk would be pitted against what might be conflicting

views among the members of the Committee at the particular time.

If he

were the Manager, he would be loath to go off on a new venture, particularly

under present conditions, on his own authority and initiative.

7/6/60

-41

Mr.

Hayes said the Manager clearly had been loath to do so in

past, and Mr. Mills replied in

to feel that way.

the

terms that he hoped the Manager would continue

Mr. Robertson indicated this was also his feeling.

Reference was made to the possibility of discussion of any such

situation during the morning telephone call, and Mr. Mills observed that

the morning call involved only a tripartite

opinion did not seem broad enough.

discussion, which in his

Mr. Hayes commented that all Committee

members and other Presidents receive a wire on the morning call within a

short time thereafter,

and they would therefore have an opportunity to

express their views concerning any operations beyond the bill

area that

may be contemplated.

Mr.

King commented that according to the reserve projections he

would not envisage the need for a lot

and Mr.

of operations in the next few weeks,

Hayes said that his question had not been raised with particular

reference to the next three weeks but rather with reference to the antici

pated need for reserves during the balance of the year.

Mr.

Hayes then made the comment that he did not feel one could say

that the level of rates was solely the interest of the Treasury and not the

System.

The rates are inevitably affected by what the System does,

and in

his view they are a joint responsibility of the Treasury and the System.

Mr.

Hayes also said that if

there was no objection he would have

distributed to the Committee members and other Presidents copies of a

memorandum prepared at the Federal Reserve Bank of New York under date of

7/6/60

-42

July 5, 1960, with regard to the possibility of open market operations in

other short-term securities in addition to bills.

The memorandum, he

pointed out, would amplify the comments he had made in his statement

this morning.

Chairman Martin indicated there would be no objection to the

distribution of the memorandum.

Thereupon, upon motion duly made and

seconded, the Committee voted unanimously

to direct the Federal Reserve Bank of New

York, until otherwise directed by the Com

mittee:

(1) To make such purchases, sales, or exchanges (including

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 fostering sustainable growth in

economic activity and employment by providing reserves needed

for moderate bank credit expansion, and (c) to the practical

administration 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

terms certificates of indebtedness purchased from time to time

for the temporary accommodation of the Treasury, shall not be

increased or decreased by more than $1 billion;

(2) To purchase direct from the Treasury for the account

of the Federal Reserve Bank of New York (with discretion, in

cases where it seems desirable, to issue participations to one

or more Federal Reserve Banks) such amounts of special short

term certificates of indebtedness as may be necessary from

time to time for the temporary accommodation of the Treasury;

provided that the total amount of such certificated held at

any one time by the Federal Reserve Banks shall not exceed in

the aggregate $500 million.

7/6/60

-43

There had been distributed to the Committee copies of a memorandum

from Mr. Rouse dated July 1,

date from Mr. Larkin,

1960, transmitting a memorandum of the same

Assistant Vice President of the Federal Reserve Bank

of New York, concerning System Open Market Account transactions in

year Treasury bills

maturing July 15,

by the Committee on April 12, 1960,

one

1960, under the authorization given

and renewed at subsequent meetings,

to acquire up to $150 million of such bills either by outright purchase

or by swapping other bills.

million of these bills

making a total

Mr. Larkin's memorandum showed that $36.8

had been acquired since the meeting on June 14,

of $134.7 million acquired under the Committee authorization

and total System Account holdings of $148.1 million.

In

commenting on the matter, Mr. Rouse suggested that if

Committee should decide to give similar authority at a later

respect to other issues of one-year bills,

confined to bills

The authorization,

the

date with

the authorization be clearly

that might be acquired by way of "swap" transactions.

in

the form adopted with respect to the July 15 bills,

seemed to limit also the acquisition of such bills

by outright purchase,

thus deterring the Desk, on the basis of such an interpretation,

acquisition of certain one-year bills

from

that were offered yesterday at a

time when it desired to supply additional reserves to the market.

He

added that there appeared to have been no repercussions in the market as

the result of transactions conducted pursuant to the authorization first

given on April 12, 1960.

-44-

7/6/60

In response to a question as to whether he intended to request

authority for the acquisition of other issues of one-year bills, by swap

transactions,

similar to that given with respect to the one-year bills

of July 15, 1960, Mr. Rouse replied in terms of stating reasons why he

would prefer to study developments and wait until the next meeting of

the Committee before determining whether to recommend that such authority

be given.

He indicated that at present it

seemed possible that there

would be no occasion to ask such authority for the acquisition of one

year bills maturing October 17, 1960.

There followed discussion in which reference was made to current

System Account holdings of one-year bills, other than the July 15 bills,

and to the possibility that the Account might be able to acquire such

quantities of those bills as it

actions.

desired without going into swap trans

In this connection, Mr. Rouse stated his understanding that

no special authority from the Committee was needed for the outright

purchase of one-year bills, and there was no indication of disagreement

with this statement.

With respect to the language of the authorization to acquire

July 15 bills first

given on April 12, 1960, which provided for the

acquisition of up to $150 million of such bills either by outright

purchase or by swapping other bills, Mr. Robertson made the comment

that, as Mr. Rouse had suggested, consideration should be given to

7/6/60

-45

phrasing any future authorization with respect to other issues of one-year

bills in such manner that it

would be clear that the Desk was not limited

in acquiring such bills by outright purchase, as opposed to swap transactions.

At the suggestion of the Chairman, it

was then agreed unanimously to terminate,

effective immediately, the authorization

originally given on April 12, 1960, for the

acquisition of one-year bills of July 15,

1960.

Reference was made to a memorandum from Mr. Young,

which had been

distributed under date of July 1, 1960, suggesting that in view of the

initiation of the uniform statistical reporting program in the Market

Statistics Department of the Federal Reserve Bank of New York in May,

it

now seemed appropriate to give further thought to steps that might be

taken looking toward the development of standard accounting practices for

Government securities dealers.

As background, the memorandum pointed out

that with the memorandum of October 5,

1959,

from the Secretary of the

Committee regarding the Treasury-Federal Reserve study of the Government

securities market there

was distributed an inventory of areas for possible

administrative action which suggested certain steps for obtaining more

adequate information about the market,

including:

"Undertake preparation

of recommendations for, or manual of, standard accounting practices for

Government security dealers,

designed to facilitate daily reporting,

minimum cost to dealer respondents,

of needed current statistics and

periodic reporting of dealer's financial and earnings position on

at

7/6/60

-46

standard basis . . ."

Also, the report of the Steering Group dated January

5, 1960, regarding the setting up of a reporting system for obtaining

information about the Government securities market included a statement

that one element of an adequate informational program included the develop

ment of composite financial statements for Government securities dealers

for such public information use as experience shoved to be appropriate.

The report further contained a recommendation that among the reports to

be submitted by dealers there be a statement of financial condition

having standardized content and form, such reports to be submitted

quarterly, but one each year to be certified by an independent firm of

accountants in the case of nonbank dealers.

Copies of such financial

statement reports of nonbank dealers would be available to the Trading

Desk of the New York Bank for the purpose of appraising credit worthiness

and financial standing.

In the course of commenting on the memorandum, Mr. Young noted

that nonbank dealers currently submit reports to the Desk once or more a

year, but not on a standard form, and anyone who might be interested in

studying the market was handicapped by a lack of information in composite

form.

This matter had been the subject of lengthy discussion with the

Treasury in

connection with the study of the Government securities market,

and the Treasury representatives were inclined to feel that this was an

important item.

However,

although the recommendations referred to in the

7/6/60

-47

memorandum were made,

the statistical

the principal concern at the time was with getting

reporting program started and no action was taken on them.

Chairman Martin noted that the matter of devising standardized

accounting practices and reports involved difficult problems.

gested,

however,

He sug

that the Committee might wish to ask the Steering Group

to explore the matter.

This group, which would include Messrs. Young and

Larkin and someone designated by the Treasury to replace Mr. Mayo, who had

resigned from the Treasury staff, would be asked to bring back a recom

mendation for the consideration of the Committee.

The Chairman then turned to Mr. Rouse,

and the latter

said he

would like to reiterate his comments on the subject earlier in the year.

As far as data were concerned,

the Desk was getting audited reports at

least on an annual basis from each nonbank dealer.

standpoint,

therefore,

of the dealers,

and in

there was no problem.

all

the Desk could not deal.

From the credit

The Desk knew the condition

the years there had been no problem with which

In the circumstances,

he did not know for what

reason additional information might be needed by the Desk.

Mr. Rouse then described some of the difficulties that would be

involved in developing standardized reports for the use of all Government

securities dealers.

He also pointed out that the System had no mandate

from the Congress on this matter.

Conceivably,

this was a type of infor

mation that the Treasury might like to have for use in responding to

certain questions that might be raised by Congressional sources,

but

7/6/60

-48

there was a question in his mind regarding the propriety of undertaking a

program such as had been suggested.

Mr. Hayes said he had a good deal of sympathy with the view that

Mr. Rouse had expressed.

He could understand that the Treasury and the

Federal Reserve might be in a stronger position to refute loose statements

if

composite figures for Government securities dealers were available, but

he was impressed by the difficulties that Mr. Rouse had mentioned in

developing standardized practices that would encompass the many diverse

activities of the dealer group, and also he was disturbed about the

interference in an area of free enterprise that would be involved in

developing a system of standardized practices.

If

dealing in Government

securities was as profitable as some were suggesting, he felt that it

would be obvious that there would be more than seventeen Government

securities dealers.

In view of the burden of reporting that the System

had placed on Government securities dealers recently, he felt that it

would be unwise to make additional reporting requests at this time,

particularly in an area where dealer reaction would be apt to be far

less sympathetic.

These factors,

of course, would not preclude the

Committee from asking the Steering Group to look into the problem.

Chairman Martin commented that the Steering Group had done a good

job in putting the statistical program together and that this was a loose

end.

If there was no objection, he proposed that the Committee request

7/6/60

-49

the group,

Mr.

Mayo,

which would include a person designated by the Treasury to replace

to explore the matter further, with the understanding that a memo-.

randum would be brought back to the Committee for consideration.

There being no objection,

it

was agreed to proceed in the manner

suggested by the Chairman.

As an addendum to the foregoing discussion,

the Douglas Subcommittee last

Mr. Young noted that

year sent rather elaborate forms to the

Government securities dealers and obtained certain data covering a period

of ten years.

The Subcommittee now had obtained two university men for

the summer and had assigned them to analyze the data.

It

was understood

that they were to submit a report based on their analysis later this

summer.

It

was agreed that the next meeting of the Federal Open Market

Committee would be held on Tuesday,

July 26, 1960,

at 10:00 a.m.

Chairman Martin noted that according to the usual three-week

schedule,

succeeding meetings of the Committee would be held on August

16 and September 6,

1960.

He suggested, however,

that the meeting which

would normally be held on September 6 be held instead on September 13,

1960, subject to review at the July 26 and August 16 meetings in the

light

of developments that might indicate the desirability of any change.

There was agreement with this suggestion,

and it

was understood

that a meeting of the Conference of Presidents of the Federal Reserve

Banks would be tentatively scheduled for Monday,

September 12,

with a

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7/6/60

meeting of the Board and the Presidents following the Open Market Committee

meeting on Tuesday,

September 13.

The meeting then adjourned.

Secretary