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 Tuesday,

PRESENT:

July 26, 1960,

at 10:00 a.m.

Mr. Martin, Chairman

Mr. Hayes, Vice Chairman

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Balderston

Bopp

Bryan

Fulton

Leedy

Mills

Robertson

Shepardson

Messrs. Allen, Irons, and Mangels, Alternate

Members of the Federal Open Market Committee

Messrs. Erickson, Johns, and Deming, Presidents

of the Federal Reserve Banks of Boston, St.

Louis,

and Minneapolis,

respectively

Mr. Sherman, Assistant Secretary

Mr. Kenyon, Assistant Secretary

Mr. Hexter, Assistant General Counsel

Mr. Thomas, Economist

Messrs. Brandt, Eastburn, Hostetler, Marget,

and Tow, Associate Economists

Mr. Rouse, Manager, System Open Market Account

Molony, Assistant to the Board of Governors

Koch, Adviser, Division of Research and

Statistics, Board of Governors

Mr. Knipe, Consultant to the Chairman, Board

of Governors

Mr. Yager, Economist, Government Finance Section,

Division of Research and Statistics, Board

Mr.

Mr.

of Governors

Messrs. Ellis, Baughman, Jones, and Einzig, Vice

Presidents of the Federal Reserve Banks of

Boston, Chicago, St. Louis, and San Francisco,

respectively

7/26/60

Mr. Garvy, Adviser, Federal Reserve Bank of

New York

Messrs. Parsons and Coldwell, Directors of

Research at the Federal Reserve Banks of

Minneapolis and Dallas, respectively

Mr. MacDonald, Assistant Vice President,

Federal Reserve Bank of Richmond

Mr. Holmes, Manager, Securities Department,

Federal Reserve Bank of New York

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Committee

held on July 6, 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 July

6 through July 20,

1960, and a supplementary report covering the period

July 21 through July 25, 1960.

Copies of both reports have been placed

in the files of the Committee.

With further reference to developments since the Committee meeting

on July 6, 1960, Mr. Rouse made the following comments:

In the period since the last meeting of the Federal Open

Market Committee, the money market has reflected about the same

over-all atmosphere .,; in other recent periods despite the higher

free reserves.

If anything, the money market has been a bit

tighter due largely to the impact of Treasury borrowing operations

with resulting churning and dislocations which created pressures

centering on the New York City banks. The New York banks took

sizable amounts of both the new tax anticipation bills and the

new one-year bills during the period and were called upon to

finance a substantial portion of the enlarged bill holdings of

Although bill rates fluctuated

Government securities dealers.

widely during the period, the swings were less extreme than

previously, relating early in the period to expectations of

higher rates of discount for the two special bill auctions but

in the past week moving up as the dealers found difficulty in

In the last day or two the

reducing their swollen portfolios.

dealers have been able to move bills and yesterday's auction

went quite well, the average rates being 2.40 and 2.70 per cent,

respectively, for 3 and 6-month bills.

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Market expectations have leaned toward easier money or at

least no higher interest rates. The figure of $210 million free

reserves for the statement week ended July 13 inspired considerable

talk of a sharp shift in credit policy toward more ease and some

speculative activity developed. With the publication of the

lower average of $93 million free reserves for the week ended

July 20, the market seemed to place less emphasis on policy

change. Nevertheless, prices of intermediate and long-term

issues continued to move up, with gains in various issues running

to more than a point. The strength in the long-term area has

continued despite growing expectations of an advance refunding

in the area of the 2-1/2 per cent optional or "tap" issues.

Several members of the Committee have been especially

interested in the trend of the total money supply. It is

encouraging to see that so far in July required reserves, total

reserves, and "non-borrowed" reserves have all increased,

suggesting that possibly a modest growth of the money supply is

taking place.

According to the statement issued yesterday afternoon, the

Treasury has made public its plan to do its August refunding

through a cash offering. In addition to the $9.6 billion of

Treasury notes maturing August 15, 1960, $800 million of Federal

National Mortgage Association notes maturing August 23 will be

refunded. However, as against this aggregate of $10.4 billion

maturing issues, the Treasury will only borrow about $9 billion,

relying on its unusually large cash balances for the remainder.

The exact terms of the offering will be announced on Thursday,

with the subscription books opening next week. The cash refunding

technique is a new departure and, as the Committee is aware,

arrangements are being made to permit the roll-over of the $5.5

billion of maturing August notes in the System Account. The

arrangement will be that full allotment will be made on all

subscriptions from States, political subdivisions, or instrumen

talities thereof, public pension and retirement and other public

funds, international organizations in which the United States

holds membership, foreign central banks and foreign states,

Government investment accounts, and the Federal Reserve Banks.

The maturing notes will be accepted at par in payment for the

new securities allotted. This will be consistent with the

understanding reached with the Treasury in May when a cash

refunding was considered. Applying the full amount of the

paydown of about $1.4 billion to the amounts remaining after

allotting the above holders in full should put the new issues

in a very favorable position marketwise. The market is expecting

that the offering will consist of an 11-1/2 month certificate and

a bond, perhaps in the 7-10 year area. If that is the case, the

Manager plans to limit the System Account subscription to the

certificate.

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Finally, I should like to call your attention to the fact

that in addition to the $79.5 million Treasury bills

purchased

in the market yesterday, as reported in paragraph three of the

supplementary report, the Account also purchased $500,000 from

a foreign account for cash.

This purchase was included in the

total

purchases set forth in the written report but was omitted

in the more detailed description of yesterday's operations.

Thereupon, upon motion duly made and

seconded and by unanimous vote, the open

market transactions during the period

July 6 through July 25, 1960, were approved,

ratified,

and confirmed.

Supplementing the staff memorandum distributed under date of July

22, 1960, Mr. Koch made the following statement with respect to economic

developments and related matters:

At the last

meeting of this Committee, I concentrated on

recent economic developments. Since only limited new informa

tion has become available over the past three weeks, and since

numerous questions have been raised about the current inventory

and unemployment situations, I shall say a bit more than usual

about these matters today and only touch base briefly on the

new information.

As for the current economic situation, it looks to me a

weaker today than it did three weeks ago, although part

little

of this seeming weakness can probably be attributed to an inade

Economic activity

quate discounting of the summer doldrums.

continues at a high level, but with sizable amounts of unutilized

plant capacity and labor, and without exhibiting any significant

upward thrust.

As for evidences of weakness,

our industrial production index

in June turned out to be 109 per cent of the 1957 average, as com

pared with 110 per cent in May and 111 per cent in January. The

July figure is

not likely to be any higher and may be a bit

lower.

The seasonally adjusted rate of unemployment, about which I shall

rose to 5.5 per cent in June,

have more to say later,

4.9 per cent in May and from 5.0 per cent a year ago.

up from

No signifi

on the

July

in

place

taking

be

to

likely

cant improvement seems

New

basis of weekly data on claims for unemployment insurance.

orders for durable goods fell off further in June to a new low

for the year, and the unfilled order backlog for these goods

Liabilities

declined to a level near the 1958 recession low.

month, and

of business failures increased very sharply last

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stock prices have declined since early June.

Several of these

signs of current weakness are components of the leading indi

cator series but the significance of short-run movements in

these series for current cycle analysis is by no means clear.

Looking at the brighter aspects of the current economic

scene, the consumer continues to make good news.

Retail sales in

June approached the April record level, and sales for the second

quarter as a whole were 3 per cent above the previous record

level reached in the first

quarter of this year as well as in the

second quarter a year ago.

Department store sales in July appear

to have increased somewhat further. The nation's personal income

increased again in June to a record seasonally adjusted annual

rate of $406 billion, and income receipts correlate closely with

personal consumption expenditures.

Housing starts apparently

ceased their decline in the second quarter, and applications to

the FHA for mortgage insurance, and to the VA for appraisals of

new homes, both barometers of consumer spending on housing, in

creased in June.

Also, net exports continue strong, and State

and local as well as Federal government expenditures are stable

or rising.

Turning now to the special problems I have chosen for some

what lengthier discussion, in the case of inventories our staff

feels that although they are ample, they are not generally high

in relation to sales unless one assumes the imminence of recession.

When one looks at inventory/sales ratios for particular industries,

he finds them high only for industries producing durable industrial

materials like metals, lumber, stone, clay, and glass, and for

auto dealers and other retail

outlets for durable goods.

In most

of these areas, output of the product concerned has been curtailed

substantially since the beginning of the year in an effort to

correct the inventory situation.

In judging the appropriateness of the current level of in

ventories, one has to take account of the fact that there are

many differences between the current economic situation and

that prevailing in the recent past, say in late 1956 and early

Thus, the supply and delivery situation is much easier

1957.

now; industrial prices have not been increasing; the cost of

borrowing has been higher; and techniques have been flowering

Under these

which permit the economizing of inventories.

prospects, there

and

price

sales

dampened

and

with

circumstances

incentive to expand inventories, and businesses

has been little

have been pursuing a cautious policy.

In view of this caution, some part of the recent rise in

inventories can no doubt be considered involuntary, and in

that sense, excessive, but this development in itself has

7/25/60

induced efforts to curb such accumulation.

The seasonally

adjusted monthly rate of accumulation of all durable goods

inventories at manufacturers, for example, was reduced from

almost $700 million in January to an average of less than

$200 million in April and May. Since the end of May, steel

consumption has apparently been well above steel output

and auto sales have remained favorable, suggesting that

whatever excess in current inventories exists in these

lines is likely to be dealt with successfully.

As for unemployment, the sharp jump in the unemployment

rate in June to 5.5 per cent occurred despite an accompanying

rise in total employment.

This June development empahsizes

the fact that a continuing high level of unemployment for

this phase of the business cycle is one of the most worrisome

aspects of the current economic situation.

As a matter of

fact, when one looks at a chart of the rate of unemployment

over the past decade, it is not difficult to see in the

configuration a striking step-up effect, with a somewhat

higher rate of unemployment occurring in the prosperous

phase of each of the last

three business cycles.

Turning back to the June figures, perhaps half or more of

the one million increase in the unemployed can be explained by

This

the usual seasonal influx of students seeking employment.

First, the

year's influx was larger than usual for two reasons.

week in which the survey was taken occurred somewhat later than

normal and consequently found more teenagers out of school and

Second, it also reflected a longer-run upward

looking for work.

trend in the teenage population which is not adequately taken

account of in the seasonal adjustment factors.

But even after taking these considerations into account,

there remained a greater than seasonal rise in adult unemploy

The current level of adult unemployment is per

ment in June.

It reflects both the

haps 600,000 persons higher than in 1957.

growth in the number of middle-aged women in the labor force and

lower employment levels in manufacturing, mining, construction,

and transportation.

On a somewhat more pleasant, even if less significant note,

total unemployment rates usually reach their seasonal high in

June and then decline each month until the seasonal low is reached

If changes over the next four months were to be

in October.

influenced only by seasonal factors, total unemployment would

decline from 4.4 million persons in June to 3.1 million in

This decline would not, of course, affect the seasonally

October.

adjusted rate of unemployment.

7/26/60

-7

Since this is my last substitute appearance before this

Committee for the present, let me indulge in a concluding

personal comment on the relevance of current economic develop

ments for monetary policy. Assuming the evidence that is

accumulating is not solely due to the summer doldrums, we

may be facing another period of limited economic growth. In

such a situation, a further easing of monetary policy would

seem to hold little

hazard. There may be more question,

however, as to how much a further easing in monetary policy

in itself would contribute to a speeding up of growth.

Staff memoranda on the outlook for member bank reserve positions

and on the outlook for Treasury cash requirements had been distributed

under date of July 22, 1960.

With further reference to the current financial situation, Mr.

Thomas presented the following statement:

In financial markets during July, the most striking develop

ments have been a further decline in long-term interest rates

along with a sharp drop in stock prices. Credit demands are not

particularly vigorous and may have slackened somewhat. Whether

these movements are indicative of the true state of the underlying

economic situation or merely the views or uncertainties that exist

in the minds of market participants remains to be seen. The

review of economic developments gives some basis for the conclusion

that the changes reflect real and not imaginary influences.

The decline in stock prices in the past two weeks has so far

been the largest since the early weeks of this year, when the drop

started from a higher level and extended over a longer period.

Price averages are again close to the low level reached early in

March. Volume of trading has also declined from the fairly high

levels reached in late May and in June when prices were rising,

but some drop in activity often occurs in July. These movements

can be explained as the result of a growing realization that

corporate profits have not increased commensurately with stock

prospect for enough

prices in recent years and have little

increase to provide adequate returns at current prices.

Yields on long-term Treasury bonds, which declined sharply

in June, have fallen further this month and are now lower than at

any time since 1958. Corporate bond yields have declined only

moderately, and those on State and local government issues have

continued firm, reflecting the recent large volume of new issues

7/26/60

and the increase in dealer inventories. The calendar for new

issues, however, indicates some seasonal falling off in the

weeks ahead and dealers seem content with their holdings.

Yields on medium-term Treasury securities have declined below

those on long-term issues and are likewise at the lowest levels

since late 1958. This may reflect the prospect that the Treasury

might reduce the supply of such issues by advance refunding or at

least will not have to increase the supply as it did in the past

year or more.

Treasury bill rates, which declined sharply in June,

have been steady or higher this month, particularly in the longer

term issues. This change in trend reflects in part additions to

the supply of longer-term bills by offerings in July. It may also

reflect the effect of an increase in dealer holdings of the longer

term issues of bills to a relatively high level. Banks also have

increased their bill holdings in the past three weeks. Thus

market absorption of the longer bills is yet to come.

Results of the Government's budget for the fiscal year just

ending and prospects for the year beginning indicate that the

dramatic shift from large deficit to moderate surplus has probably

been completed.

Indications are that the cash surplus for fiscal

year 1961, though somewhat larger than that for the past ficcal

year, will be no greater than for the current calendar yearbetween $2.5 and $3 billion. Seasonal borrowings needed in the

last half of this calendar year, however, are much less than

those for the same period last year, largely because of the build

up in the Treasury cash balance to an exceptionally high level

The Treasury is in a position to retire

at the end of June.

debt on balance in August. With the present state of the market,

it could also effect an advance refunding operation into long

term securities sometime soon without exceeding the interest

rate ceiling.

Bank credit continues to show little tendency to expand.

The record for the first half of this year now reveals that

total loans and investments of all commercial banks, which

declined more than usual in the first quarter of this year,

increased in the second quarter about in accord with the usual

seasonal pattern. City banks showed a larger decrease in the

first quarter and also a larger increase in the second quarter

than did banks outside leading cities, according to estimated

data for the latter. In fact, at the banks outside leading

cities there seems to have been a net decline in total loans

and investments for the first half of the year as a whole,

whereas some increase is usual; loans increased about as usual,

but these banks continued to reduce their holdings of U. S.

City banks

Government securities in the second quarter.

with their loans

along

Governments,

of

holdings

their

increased

in the second quarter, after showing marked declines in both

quarter.

during the first

7/26/60

-9

The position of banks outside the cities is also indicated

by the sustained level of borrowings at Reserve Banks by country

member banks during the first half of the year, in contrast to

the sharp reduction in the borrowings of city banks during the

period. There are also some regional differences in this respect

that may be significant.

Explanation for these differences

between city and other banks and their significance is not clear.

They may relate to the change in the Treasury position. When

the Treasury has a deficit and is a substantial net borrower,

funds seem to move from the large cities to smaller places through

out the country. A Treasury surplus, however, accompanied by

debt retirement and particularly by a build-up in the Treasury

cash balance, tends to draw funds from all areas. Perhaps as

the Treasury reduces its balance and needs to borrow during

the months ahead, the funds will become more widely distributed

away from financial centers.

Partial data for city banks for the first three weeks of

July show a marked increase in total loans and investments,

reflecting bank purchases of the new Treasury bill offerings.

Loans on Government securities also increased as banks helped

to finance the larger additions to dealer holdings. Business

loans, in contrast, declined, as did real estate and other loans.

These types of loans all increased during the same period of

1959. Data for other years, however, indicate that some decrease

in business loans is customary for the period, though perhaps

not as large as that occurring this year. Loans to finance

companies changed little

in the three weeks, in contrast to

declines in other recent years except 1959.

Deposits at city banks, after increasing more than season

ally in June, show no pronounced trend during the first three

weeks of July. Daily average data for all member banks show a

further increase, seasonally adjusted, in the first half of July

U. S. Government deposits increased further at the

over June.

time of the cash financing but are now in the process of declining

too early to determine whether these

It is still

rather sharply.

Treasury payments are going to enlarge private deposits or to

provide funds to be used to reduce loans or purchase Government

securities from banks.

Banks have needed additional reserves in July to meet the

increase in required reserves related to Treasury financing, to

cover a larger and more prolonged than usual currency drain

early in the month, and to cover an accelerated gold outflow.

These needs have been covered by an increase in the System port

folio of about $400 million. Most of these purchases were

made, however, at the beginning of the month, and later large

7/26/60

-10

reserve needs were covered by the post-holiday return flow of

currency and the mid-month float increase. There were some

reductions in System holdings.

The supplies and the needs did

not mesh completely and many banks found it necessary to borrow

at times from the Federal Reserve and to purchase Federal funds.

The money market continued to have a feeling of pressure, not

withstanding the maintenance of an average level of free reserves

of close to $100 million or more.

Seasonal factors will necessitate supplying rather sub

stantial amounts of reserves during the next two statement weeks,

in addition to those already provided by operations in the

last few days.

In the middle weeks of August reserves will

become available from the usual float increase and from a

reduction in Treasury tax and loan accounts which will result

in a decline in required reserves.

At the end of August and

early in September reserve needs will increase and again be

followed by a temporary increase in reserve availability in

mid-September and a drain at the end of the month.

In summary, reserve demands, though erratic, will mount

on balance during the remainder of the year. The projections

presented allow for a gold drain of about $100 million a month,

which would build up to a substantial amount by the end of

the year. They make no allowance, however, for any more than

seasonal growth in the money supply.

A number of important decisions will need to be made in

One question to be faced is whether in

the period ahead.

supplying reserves some allowance should be made for greater

than seasonal growth in the money supply. In view of the

moderate pace of economic activity and the clear evidence of

lack of speculative or inflationary tendencies, not to mention

the possibility of undue slackening, a strong case can be made

If credit demands

for making reserves more freely available.

do not expand accordingly, such a policy would probably result

in further interest rate declines, but that result should not be

feared under the circumstances.

Decision also has to be made as to how these reserve needs

will be supplied--whether entirely through open market operations

adjusted to the weekly variations in reserve needs or whether

some reserves shall be made available through release of vault

cash, together with alterations in reserve requirement percentages.

It may be desirable, in order to foster moderate credit

expansion, to increase somewhat the average amount of free

reserves and permit member banks to reduce borrowings somewhat

further. Perhaps free reserves of as much as $200 million

would be appropriate until there is evidence of credit expansion.

7/26/60

-11

In view of the wide spreads that have again developed

between bill

rates and the discount rate, which make banks

more reluctant to borrow for temporary reserve adjustments,

and particularly in view of the reduced liquidity position

of banks which makes it difficult for them to obtain reserves

by selling bills, consideration may also need to be given

to a further reduction in the discount rate.

One factor in the situation that has elicited some

discussion and question is the renewed gold outflow. It is

evidently due in some part to a movement of capital attracted

by higher interest rates in other markets.

It is doubtful

that the movement for this reason alone will be sufficiently

large to justify failure to adopt a monetary policy called

for by domestic considerations.

Such a decision would be

appropriate only if a righter policy were essential to bring

about more fundamental adjustments that may be needed to

keep our international payments in balance.

Under existing

circumstances, it is doubtful that such a policy is needed

or desirable. The adjustments that should be made lie mostly

outside the financial area, they seem to be in process, and

they will take a long time to complete.

Mr. Marget presented the following statement with respect to

the United States balance of payments:

A week ago today there was a meeting of a group of

technicians who assemble at fairly regular intervals for the

purpose of forecasting probable developments in the U. S.

This is the Balance of Payments Group

balance of payments.

of the National Foreign Trade Council. The group is generally

very highly regarded, and I think rightly so, since it

includes virtually all the individuals of standing, inside and

outside Government circles, who are working continuously on

the problem. All the more reason, however, for prefacing a

report on the current forecast of this group as to what is

likely to happen to our balance of payments for the rest of

the calendar year with a report on how accurate their fore

casts have turned out to be in the recent past.

The first thing to be said about the forecasting record

is that it really hasn't turned out to be very accurate so

This is not

far as the concrete figures are concerned.

said in criticism--if for no other reason, because there is

no other comparable group I know of who have done any better.

conclusion, I think, should therefore be rather

The first

one of humility with respect to this business of forecasting

7/26/60

or "projecting," in the field of balance-of-payments projections,

as in the field of economic forecasting generally.

One does

the best one can; but one retains, it is to be hoped, a saving

sense of awareness that one might, after all,

turn out to be

wrong.

The second comment to be made about the forecasting record

is that, during the period to which I have reference, the

forecasts erred almost invariably on the side of pessimism:

that is,

the balance of payments almost invariably turned out

better than the forecast said it would.

Specifically, for

example:

the forecast of the Group for the calendar year 1959as I duly reported to this Committee at the time--was for a

balance of payments deficit of $4.5 billion. Actually,

as you know, it turned out to be around $3.8 billion.

The third comment I should like to make about the

forecasting record may throw some light on why, during

this particular period, the errors seemed so consistently

on the side of pessimism.

My comment is simply this. Quite

apart from differences in temperament and the kind of bias

which may derive from nothing more basic than a general

conviction that observers are likely to be less bitter

in their

comments if a pessimistic forecast goes wrong than they are

likely to be if an optimistic forecast goes wrong, most

"forecasts" and "projections" tend to assume that what has

been happening

ill

continue to happen, simply because the

factors that will make for change are not yet discernible.

part

Thus, in calendar 1959, what was happening in the first

of the year was that our balance of payments was deteriorating:

as you know, in the second quarter it reached a low of a

Taking into account the

deficit of $5 billion, annual rate.

relatively better performance of the first

quarter of last

year,

the projection of $4.5 billion for the calendar year 1959, as

against the $3.4 billion

deficit realized in calendar 1958,

really amounted to a missing of the turn for the better which,

the fog which the steel strike created at the time,

despite all

we now see occurred around mid-year in 1959, while we were still

telling us that

belatedly receiving the delayed statistics

deteriorating.

our balance-of-payments position was still

This was no longer true, of course, by January of this

first

year, when the Balance of Payments Group made its

At the time, one was a little

projection for calendar 1960.

of precision which was given by the

amused by the air

announced figure for the projection--$2.9 billion; but the

around $3 billion,

general order of magnitude was clear enough:

as against the $3.8 billion deficit realized in calendar 1959

deficit realized in calendar 1958, the

and the $3.4 billion

7/26/60

-13

first of the big deficit years.

The latest projection of the

Group for calendar 1960 represents a further revision down

ward of the expected deficit: it is now expected to be

around $2.5 billion, instead of around $3 billion as forecast

last January.

It is interesting to observe--apropos, at least, of my

comment on how projections in economics tend to assume that

what has been happening will continue to happen--that this

figure of $2.5 billion is just about the level, in terms

of annual rate, at which our balance-of-payments deficit will

probably turn out to have been running for the first half of

the current calendar year. But it is much more interesting,

I think, to ask just what part of the earlier projection

went wrong. What was it that had not been adequately foreseen?

Mainly, it would appear, the degree of improvement in our

exports. The January forecast had, to be sure, assumed an

appreciable rise in our exports above the $16.2 billion level

realized in 1959, to a figure just over $18 billion. Actually,

however, by April and May of this year our exports had reached

a seasonally adjusted annual rate of around $19-1/2 billion.

It will be interesting to see whether the new projection for

1960, at $18.8 billion (again it is easy to be amused at the

degree of precision suggested by that decimal figure) will

also turn out to have been on the somewhat pessimistic side,

particularly in view of the replies to one of the questions

circulated to National Foreign Trade Council members before

the meeting, according to which over a third of the respondents

reported that they had already revised upward their expectations

with respect to their company's exports in the course of the past

half year, while fewer than one-tenth had revised their expec

tations downward.

But I have said enough, I think, about the perils of fore

casts and projections in the field of balance-of-payments figures,

as throughout the field of economic statistics, to make it clear

that I am not prepared to substitute a private guess as to the

actual magnitudes that are likely to be realized in 1960 for the

collective guess of this able and extremely well-informed group

I do think that the record of adjust

of expert specialists.

ment in our balance of payments that we have had since the low

point in the second quarter of last year--from a merchandise

export surplus of zero to the current annual rate of around $3.5

billion--is ground for a reasoned optimism as to developments

in the near future, particularly if the cyclical constellation

as between this country and abroad continues to remain as

favorable to the improvement of our trade position as it seems

to be likely to on the basis of present evidence. But in the

7/26/60

-14

end the basis for optimism here, as in any field involving

economic policy, is not so much what the statistics

of the

moment happen to show as it is a belief in the efficacy of

market processes in bringing about adjustment, provided that

our policies are such as to favor, and not hinder, the working

of those market processes.

Danger comes when this proviso with

respect to policy is forgotten. To judge by the degree of

adjustment we have had thus far, the proviso has not yet been

forgotten.

But the adjustment itself

is still

very far from

being complete.

Mr.

Hayes presented the following statement of his views on the

business outlook and credit policy:

This is unquestionably a period of low visibility

with respect to the business outlook. While there has

been little

change in the statistical

position of the

economy in the last

three weeks and business activity

continues strong in most sectors, there has been a marked

deterioration in business sentiment.

This reflects such

factors as the lag in new orders, the dwindling orders

backlog, a considerable involuntary accumulation of

inventories, and signs of a squeeze on profits--besides

concern over domestic and international political develop

ments.

The steady 10-day decline in stock prices may be

considered both a contributory cause and a reflection of

this growing disappointment with business prospects.

Purchases of final users actually increased from the

first

to the second quarter (according to the preliminary

GNP estimate made by the Council of Economic Advisers).

The trend of consumer buying is favorable but not

exuberant.

Construction may have bottomed out, and aggre

gate Government expenditures are more likely to rise than

But despite these factors,

to decline in the coming months.

and in view of the fact that the rate of inventory accumu

lation will probably decline further, there seems to be less

and less likelihood of a strong new forward surge in the

The prospect appears to be for an economy moving

economy.

along on a high plateau, but with a considerable volume of

unemployed human and physical resources.

There is more encouragement to be found in bank credit

which suggest that our policy of relaxation

statistics,

Although

over the last

six months is beginning to bear fruit.

7/26/60

-15

the banks' liquidity is still

very low and their loan-deposit

ratios exceptionally high, bank borrowings have been sharply

reduced and the banks are no longer being forced to liquidate

Government security holdings rapidly in order to meet loan

demands. Demand for business loans and for total loans has been

running a little

behind seasonal expectations; but total bank

credit (loans and investments) showed a larger growth in the

second quarter than in any recent year, whereas the comparison

with earlier years was unfavorable in the two preceding quarters.

As for the money supply, the rise in June was accomplished in

spite of the fact that Government deposits remained at a very

high level. The potential for a further money supply increase

is strong as Government deposits are drawn down from present

levels. Over the year ended June 30, the money supply would

have shown virtually no decrease ha, it not been for a $2

billion rise in Government deposits.

In contrast with the money supply itself, other nonbank

liquid assets declined in May after increasing for many

months. This, together with the possibility that the

improved Federal budget may lead to further declines, suggests

that we may not be able to rely in the future as much as we

have in recent months on upward flexibility in the velocity

of money, accompanied by an increase in the volume of money

substitutes, to permit rising over-all expenditures on goods

Under these circumstances it would become all

and services.

the more important to encourage a rise in bank credit and

the money supply. It is distinctly encouraging to note that

during the last few weeks total reserves, nonborrowed reserves,

and required reserves rose substantially more than in the same

period in recent years other than 1959. And if free reserves

are kept around their present level, I would expect nonborrowed

reserves to drop much less in the first three weeks of August

than in recent years.

It seems to me that we are fully justified in maintaining

a policy tilted toward ease, symbolized by free reserves of

$100 to $200 million, with any errors on the side of ease

and with ample leeway to the Manager to take into account the

feel of the market. Another way of expressing this objective

would be to instruct the Manager to provide reserves a little

in advance of seasonal needs.

Although I feel very considerable concern over the still

unsolved balance-of-payments problem, I believe that this

problem runs much deeper than the mere flow of short-term

funds in response to rate differentials; and while I would

hope to avoid any forcing of interest rates to still lover

7/26/60

-16

levels, in the final analysis we should give priority to

the needs of the domestic economy.

However, on neither

domestic nor international grounds do I think it advisable

to reduce the discount rate any further for the time being.

An increased willingness and ability of the banks to lend

represents our major goal, and this can be attained better

through affecting their reserve position than by cutting

the discount rate.

The imminence of the Treasury's refunding

announcement also points to the wisdom of deferring any

consideration of a lower discount rate until the next meeting.

The tight reserve position of country banks and the

reduced liquidity of banks in general might appropriately be

dealt with through a further release of vault cash and

through a reduction in central reserve city requirements.

By reducing the need for open market purchases, such measures

might minimize downward pressure on bill

rates.

It might be

well to announce in advance a schedule of reserve requirement

changes to provide for seasonal expansion of credit in

the autumn and to avoid any seeming change of policy in the

midst of the Presidential campaign.

I see no need to make any change in the directive at

this time.

Mr.

Hayes also presented a statement,

of open market operations in

as follows,

on the question

other short-term securities in addition

to bills:

I read with a great deal of interest the staff analysis

of July 13 of the suggestion made by several people, including

Open Market Committee meeting, and

myself, at the last

elaborated upon in a memorandum subsequently distributed by

the New York Bank, that the Committee authorize the Account

to conduct open market operations in other short-term

It seems to me, however,

securities in addition to bills.

that the staff analysis answers questions that were not

raised, for I do not suggest that a major proportion of open

market operations required during a given period in any

substantial size be conducted in securities other than bills.

Yet this is apparently what the staff analysis assumes the

proposal to have been, as indicated at several points

throughout the analysis and as further indicated quite

sentence of the conclusion on page 7,

explicitly in the first

7/26/60

-17

which says that "Under existing circumstances System

purchases of certificates or notes rather than bills

to

supply reserves for seasonal needs in any substantial amount

would seem inadvisable."

The staff analysis reviews many points about the long

run, ultimate effects of large-scale purchases of securities

other than bills. While I do not agree with many of those

points, I do not propose to debate them here, first because

they have been debated many times before, but most importantly

because our suggestion was addressed not to the ultimate

effects of large-scale operations in securities other than

bills,

but rather to immediate advantages to be gained

through limited operations in such securities under certain

kinds of conditions.

Specifically, we had in mind that, as on many occasions

in the past, there will be periods when the market supply

of bills

is temporarily scarce, and to supply all reserve

needs at such times through purchases of bills would tend

to drive bill

rates sharply lower.

We have in mind that

if on such occasions there is available in the market a

supply of other short-term securities--and this is often

the case--it would seem to make good sense to avoid

concentrating all our purchases in bills, and to purchase

some amount of these other securities in addition to bills.

Furthermore, there is no reason to assume that other short

term securities, which would be purchased in modest amounts

on such occasions, could not be sold in modest amounts on

other occasions when we wished to absorb reserves and when

the market was showing a good demand for such issues,

as is usually the case in the early part of the year. They

may also be allowed to run off in reasonable amounts at

maturity. We do not have to roll over total holdings of

certificates or notes any more than we do Treasury bills.

Moderate run-offs of such securities, in addition to

outright sales under appropriate conditions, should be

quite in order.

Our suggestion is thus a modest one, and indeed fits

quite well the language of the conclusion stated on page 8

"Purchases of securities other than

analysis:

of the staff

to cover seasonal needs might be undertaken if

bills

purchases were made in relatively moderate amounts and only

were temporarily stronger than usual and

at times when bills

in case similar securities would be sold to absorb releases

of reserves in January and February or at other times." Our

the language of the staff analysis in

suggestion also fits

7/26/60

-18.

the second part of paragraph 8 on page 6: "To be sure, it

would be appropriate to conduct System operations in other

securities so as to avoid adding to market distortions due

to temporary influences.

If operations in other securities

than bills

are conducted with this point in mind they need

not be harmful and might be beneficial, but they would

probably be relatively small and in any event should be

reversed at times to avoid a gradual distortion of the

portfolio."

This,

Mr.

again, is what we have in mind.

Johns made a statement substantially as follows:

I am gratified to observe that in the week ended July 20

total reserves of member banks, on a seasonally adjusted basis,

were $300 million more than in the five preceding weeks.1/

This increase put reserves for the moment back to the level

where they were at the beginning of the year. This was, in

my opinion, in accord with the action of the Committee on

May 24 when the directive was changed to provide for "fostering

sustainable growth in economic activity and employment by

providing reserves needed for moderate bank credit expansion."

I entertain the hope that this new level of reserves will not

be permitted to fall

off and that continued growth will be

achieved.

The trend of business and employment conditions is, and

has been, I think, such that we have need of stimulative or,

if you will, less restrictive monetary policy and policy

In order to stimulate economic activity I think

action.

we need to increase reserves and the money supply. With

respect to the money supply, it appears that there was an

increase in June, but the figure at the end of June, about

$138 billion, was well below the figure of $139.5 billion

It was also below

at the end of April and the end of March.

the $140 billion of early in the year, and below the $141

summer

In the period from last

billion of a year ago.

year the money supply was declining at

through March of this

Since March, the decline

a rate of about 2 per cent a year.

has been at a rate of about 3 per cent a year.

It seems to me especially desirable to increase reserves

and money in view of recent developments with respect to near

The amount of U. S. Government

monies or liquid assets.

1/

In deriving these figures, we used our own seasonal adjust

ment; although it differs somewhat from those of the Board's

staff and the Atlanta Bank, the differences are not significant.

7/26/60

-19

securities maturing within one year, held by the public, which

rose so rapidly during much of 1959, increased little

after

the beginning of this year, declined greatly in May, and, I

expect, declined again in June.

The public's holdings of

total liquid assets, which increased rapidly from mid-1958 to

mid-1959, have risen but moderately in 1960, and most recently

have declined.

In mid-August the Treasury has a $9.6 billion

issue maturing, of which about $4.0 billion is held outside

the Federal Reserve System and Government investment accounts.

Expected lengthening of maturities of the Federal debt

incident to this refunding would of course reduce further the

public's holdings of close-money substitutes. Considering

all this, it seems to me that proper economic stabilization

policy calls for a somewhat greater supply of money than

might otherwise be considered appropriate.

The turnover of money, which increased so greatly in the

first

part of this year, now appears to be rising at a much

slower rate, if at all. Possibly, it may be said that a

decline in reserves and money was appropriate when near monies

and velocity were increasing rapidly, but, if the growth of

near monies and the increase in velocity have greatly slackened,

it may be imperative that we strive to bring about growth of

reserves and money.

During the second quarter of 1960 the Federal Government

operated at a cash surplus of about $4.4 billion. By

contrast, in the April-June quarter of 1959, there was a cash

deficit of about $0.4 billion. In view of the magnitude of

this shift, which is a significant depressing factor on

economic activity, it would seem to me appropriate that

monetary policy actions be more expansionary than would

otherwise be necessary.

Interest rates on money market instruments have declined

sharply in recent months, it is true, but this need not cause

us concern in view of the current lack of ebullience in the

business situation. The decrease has probably reflected a

contraction in the demand for borrowed funds, chiefly by the

Had the monetary authorities not permitted

Federal Government.

the money supply to contract, or, if they had increased the

supply moderately, interest rates might have fallen even

further. I question the System's taking a position of

deliberately dampening the downward adjustment of market rates

of interest at a time when business activity is not ebullient

and total demands for credit are slackening.

After all, the recent and current levels of interest rates

Despite

are not particularly low when viewed in perspective.

quite high to borrowers.

declines, interest rates are still

7/26/60

-20-

Current rates on long-term Government, corporate, and municipal

bonds, as well as on mortgages, are higher than at any time

between 1945 and 1959.

The prime bank rate has not been changed

from the peak rate of 5 per cent reached last fall.

It seems

to me that interest rates might well be permitted to adjust to

an even lower level than has occurred up to now.

Coming back to the increase of reserves which took place

last week, I observe that it was similar to the increase which

took place at the time of the Treasury financing in April. At

that time the loss of total reserves which had occurred since

January was largely restored, but attrition was subsequently

resumed and continued until early July.

I hope that now there

will not be another such attrition, but rather some further

increase.

I hope we ill not let some preconceived notion

of a level of member bank borrowing or of free reserves deter

us from maintaining the level of total reserves which we have

achieved or from continuing to increase reserves.

The difficulty of getting and keeping an increase in

reserves and money in recent months has been the greater,

I think, because of a penalty discount rate.

Since the

cost of borrowing from us has been greater than the return

on liquid short-term assets, banks have had a motive to

avoid borrowing from us.

Accordingly, borrowings from

Reserve Banks have continued to decline and this has been

Even now we might

an offset to our open market purchases.

somewhat arrest the decline of borrowing and enable further

open market purchases to increase reserves if we were to

reduce the discount rate substantially, e.g., by one

percentage point, to 2-1/2 per cent.

But if we do not reduce the discount rate, we can

maintain our new reserve level and achieve a further

still

increase in reserves and money if we have the resolve to

Borrowings have recently been about $400 million.

do so.

If they were to decline to $150 million, a figure which has

been about the seemingly irreducible minimum since the

accord, open market purchases of about $250 million would

be necessary to prevent total reserves from declining

Purchases beyond that would probably increase

further.

reserves, and I propose that if such purchases are necessary

to maintain an increase in total bank reserves they should

be made.

Not only do I believe that recent and current business

and employment conditions call for monetary expansion, but

I believe it may be that the failure of reserves and money

to increase during the past year may have a cumulative

effect upon the economy which we are yet to feel in full.

7/26/60

-21-

There is opinion to the effect that monetary action may act

with a lag of varying and uncertain length. While this

idea may not be so well established or precise as to have

great weight in our decisions, I think it needs to be borne

in mind.

Reserves and money have declined for a year.

If

there is anything to the lag idea, we may discover later

that we have been more restrictive than we thought we were

being or wanted to be.

This, I think, furnishes a further

consideration arguing for bringing about some monetary

expansion.

Certainly, I see no reason for any fear that the

increase of reserves last

week was too great or that moderate

bank credit expansion, in accordance with the directive,

should not continue to be our policy objective.

Mr.

Bryan presented substantially the following statement:

The Sixth District is still

operating at a high level of

economic activity, but considerable diversity of movement is

exhibited by various economic indicators, with few, if any,

showing much strength in upward thrust.

Borrowings from the

Federal Reserve Bank remain disproportionately high, although

commercial bank loans indicate a stable to declining trend,

and bank investments are being rapidly liquidated.

It can

only be concluded that the banking situation in the District

is far from easy.

If there is banking ease anywhere in the

country, the Sixth District is not the place.

As for the national scene, it seems obvious that the

economy is still

operating on a high plateau and has thus

far shown a remarkable facility

for taking some massive

adjustments in stride.

It seems equally obvious that the

economy is not currently in a boom-like phase of an

expansion cycle.

Indeed, we are bound to note that nearly

all

of our expanding statistical

measures have in recent

months been recording diminishing rates of change.

Many

others have recorded figures well below the peaks of the present

We may note in one

cycle or are below year-ago comparisons.

or the other category: manufacturing employment, department

store sales, bank debits, construction contracts, construction

employment, money supply, average hours worked, industrial

production, new orders; and, to the same tenor, we have

insured unemployment and unemployment as a per cent of the

labor force at levels that are substantially above a year

ago.

All of these figures, plus many others, add up to the

conclusion that the economy is presently underemployed, both

with respect to manpower and material; and, in recalling that

the present expansionary cycle is now old when measured by

7/26/60

-22

historical precedent, we must bear in mind, I think, the quite

real possibility that the underemployment of manpower and

material might get worse before it gets better.

In my judgment, no dramatic measures of policy are now

called for; and, in order to reduce the chances that dramatic

policy measures might later on be required at some tragic

point in time--say middle October--I believe, as has been my

view at recent meetings, that we should steadfastly adhere to

the intention expressed in our current, recently changed

directive, wherein we recorded our considered intention of

fostering:

".

. . sustainable growth in economic activity and

employment by providing reserves needed for moderate

bank credit expansion. . ."

That is what we have done in a modest way and that is

what I believe we should continue to do.

Now, since the resultant of Account actions and market

factors is a reserve figure, I will try to state a figure that,

with appropriate allowance for the practical administration of

the Account, would seem to me--as of now but subject to

modification as the meetings of the Committee roll around--a

reasonable level of total reserves to aim for. This effort to

state a figure will at least--or, rather, it would if the effort

became general around the table--have the merit of assisting

the Account Management in understanding verbally-expressed

intentions of the Committee without the Account Management's

presently necessary resort to exhausting exercises in intuition,

revelation, and auto-suggestion.

I start with a daily average of total reserves for June of

$18,294 million (revised). Thus far in July we have attained a

daily average figure of approximately $18,511. Last year in

August the daily average of total reserves was $18,613, a

difference of roughly $100 million of reserves between present

levels and August levels of last year. I can see no reason in

the present state of the economy and the present banking situ

ation for our heading in this August for a daily average of

total reserves less than the same figure last August, so that

the first component of the target figure I would assume to be

reasonable would be an addition of, roughly, $100 million of

reserves to our present level of approximately $18,511 million.

Then, I believe we should have a component for the secular

expansion of the economy, say $47 million--at a 3 per cent

annual rate. This brings me out with a reasonable daily

average target of $18,658 million for August.

I wish to express congratulations and appreciation to the

Board's staff for the recently-issued seasonal adjustment

figures on total reserves. Atlanta will hereafter use the

7/26/60

-23

Board's figures rather than its own series. We are glad that,

vhile there are some conceptual differences between the Atlanta

series and the Board's series, the figure differences are

essentially small and do not affect significantly any conclusions

that might be made regarding the recent reserve situation.

Mr. Bopp said there was little new to report from the Third

District.

Business activity continued much the same as it had been

recently; one of the Reserve Bank directors characterized it

at a high level.

Employment was looking a little

unemployment picture still

was not good.

as sluggish

better, but the

New claims for unemployment

compensation were above 1959 and 1958, and continued claims were above

1959.

So far as the banking situation was concerned, there had been

some suggestion of slightly reduced pressure on reserve positions, and

some evidence of a slow upswing in the total of loans and investments.

However, Philadelphia banks were still

under considerable pressure as

to their basic reserve position.

Mr. Bopp expressed the view that on balance there was less danger

of a renewed burst of inflation than of continuation of the current lull

or a turn downward.

Therefore, he said, he would favor a slightly greater

provision of reserves.

As to the discount rate, he rather wished the

System were operating under a procedure similar to that discussed by

Mr. Knipe in recent papers whereby the discount rate would be lower with

out the necessity of an overt move.

Under existing procedures, however,

he would go along with a reduction after the current Treasury financing

was out of the way.

He would not change the directive.

7/26/60

-24

Mr. Fulton said there was little of a happy nature in the Fourth

District that he could report.

The expected increase in steel orders

had not yet materialized, and the date when it might materialize was

being pushed further ahead into the year.

In fact,

it

appeared that

the year might end before any real improvement actually got under way.

Buying on the part of the auto industry had not made its appearance as

yet.

An increasing variety of quality steel was being shipped abroad,

but on the other hand imports of the garden variety were still running

at the rate of 4.5 to 5 million tons a year.

The outlook for use of steel

by the auto industry in 1961 was not too heartening on the basis of

confidential estimates of production and in the light of the anticipated

higher proportion of compact cars.

Steel prices had begun to soften in

terms of discounts to distributors and charges for extras being waived.

One manufacturer of steel pipe had notified its

customers that it

would

carry substantial inventories of all sizes and types and would promise

delivery in four days.

Wage costs in the steel industry were to go up

between 10 and 11 cents an hour in December,

no increase in prices at that time,

and probably there would be

so the effect on profits would be

substantial.

Mr. Fulton went on to say that shipments of the machine tool

industry were now in excess of the volume of new orders, which suggested

that a new look was being taken by many of those who had contemplated

plant and equipment expansion.

The stock market decline had had an effect

on the decisions of businessmen, and there were indications that plant

7/26/60

-25

and equipment expenditures were being postponed, or at least scaled down,

in the light of adequate capacity at the present time.

Mr.

Fulton said that the unemployment situation in the District

had worsened.

Insured unemployment had increased sharply and

contraseasonally in the past few weeks, while total employment had

increased less than expected.

Electric power output for industrial use

had slipped further below a year ago.

New car

sales, which were running

well earlier in the year, had continued to slip back in comparison with

a year ago.

Department store sales were well maintained, but sales of

consumer durables were in the doldrums.

Summarizing, Mr.

to be heartened.

Fulton said there seemed to be little

about which

In his view, there had been an actual deterioration in

the economy that must be faced by the Open Market Committee.

seemed every reason to expand the reserve base, and he felt

should be done as quickly as possible.

There

that this

In his opinion, the easing of

the banking situation should come more through reduction of reserve

requirements than through purchases of bills

in

the open market because

of the pressure that would otherwise be put on bill

rates.

Also, the

sooner bank reserve positions were eased, the less would be the prospect

of having to make massive moves later in the year because of having

waited.

He would be favorable to reducing the amount of pressure on the

banks by making available to them reserves in greater quantity than the

Desk had been providing.

He thought it

would be appropriate to reduce

the discount rate, which was out of touch with the bill

rate and had

7/26/60

-26

been for some time.

This might also have a favorable effect on bringing

down other money rates.

Mr.

Shepardson noted the comments that had been made about the

low visibility at the present time.

He suggested that this was inherent

in the season of the year and that the situation was aggravated in an

election year.

Thus, the difficulty of trying to estimate what might

happen in the future was compounded.

Some factors admittedly were not

too favorable, for example, the underemployment of both manpower and

material, and everyone would like to see some improvement in that situation.

Mr. Shepardson said he had been concerned over a period of time

that when there was some easing of inflationary pressures and movements

there had been a failure to obtain desirable corrections.

However, in

the present situation he felt that some corrections were being achieved.

For instance, Mr. Fulton had mentioned certain unofficial price adjust

While there had not been much change in list

ments.

prices, he (Mr.

Shepardson) had seen several accounts of fringe adjustments in prices,

and he felt this indication of response to market forces of supply and

demand was constructive.

Also, Mr. Thomas had mentioned adjustments in

the stock market in terms of price-earnings relationships,

might not be a bad thing in the long run.

and this

Such factors tended to dampen

the prospect of further inflationary pressures in the foreseeable future.

Thus,

it

seemed to him that the System could properly provide for some

further growth in the availability of reserves.

most appropriate method was,

The question of the

of course, a matter of concern.

7/26/60

-27.

As to the discount rate, Mr.

Shepardson said it

had been correctly

stated that the rate was technically considerably out of line.

it

seemed to him that it

would be well to defer any discount rate action

until after the Treasury financing, at which time it

to consider a change.

might be desirable

The directive seemed appropriate and he would

not favor any change in

Mr.

it.

Robertson said it

seemed to him that in the light of the

economic picture System policy had been about right recently.

since it

However,

However,

seemed fairly evident that inflationary tendencies were dormant

for the most part, he agreed with those who suggested that the System

could afford to move further in the direction of ease without untoward

results.

He thought it

advisable to do so through open market operations,

in the absence of other System actions to provide reserves,

to a point

where the banking system as a whole could show a free reserve position

in the neighborhood of $200 or even $250 million during the next three

week period.

in

He hoped that this would be done on a gradual basis and not

a way that would seem to indicate backing and filling

without rhyme or

reason; rather that the System was moving steadily toward an easier, but

moderately easier position.

This would seem to be in line with the

outstanding directive, and therefore the directive would not need to be

changed.

Mr.

Robertson suggested that serious consideration should be

given to moving the discount rate down so that it

in line with the bill

rate,

would be more nearly

and thus preclude any sense of reluctance on

7/26/60

-28

the part of banks in borrowing to meet loan demands.

Since the discount

rate was out of line with other market rates, there was an encouragement

for banks to meet their needs through other means, with less desirable

effects than would flow from use of the discount mechanism.

Then too, if

the economy, which now seemed to be moving on a high plateau, should begin

to move forward in the fall on a basis which indicated a resumption of

inflationary tendencies,

the System should have the discount rate in such

a position at that time as to permit upward adjustments to be made not

only rapidly but, if necessary, in quite large jumps so as to be effective

in resisting inflationary pressures.

In other words, this would seem to

be a time in which the System could get into a position from which it

could effectively use adjustments of the discount rate.

However, since

Treasury financing plans involved an announcement on Thursday of this

week, with payment on August 15, it

was unlikely that any discount rate

action could be taken before then.

Accordingly, it would appear that the

System should wait until after the financing had been completed and move

on the rate at the appropriate time thereafter.

Mr. Mills said he believed the Committee could take reasonable

satisfaction from the results of policy actions in recent weeks.

Those

actions had, of course, been through the open market and, such being the

case, they had focused their effects on the money market banks.

Those

effects had been particularly evident in the picture of the central

reserve city banks, who had been able to expand substantially their

7/26/60

-29

holdings of United States Government securities and to increase their

loans to a degree, while at the same time experiencing an increase in

their deposits.

An important collateral effect of recent policy actions

had been to bring back as participants in the Government securities

market a considerable number of banks who, due to tightness of their

positions, previously had been foreclosed from that type of participation.

Now they were again factors in the market, and they were a stimulating

and stabilizing market influence at a time when such influences were

needed.

The question that arose, Mr. Mills said, was whether, in moving

toward a further injection of reserves into the commercial banking

system, it

would be inadvisable to be too aggressive in moving in that

direction through the open market.

The question was whether, as had

happened in the past, the injection of reserves through open market

purchases at a time like this would not reflect itself too largely in an

interest rate reduction rather than in an expansion of bank loans.

With

the economy apparently sliding off from earlier levels, and with banks

continuing to have high loan-deposit ratios and obviously having become

reluctant lenders until they have worked themselves into a position of

improved liquidity both by adding investments in Government securities

and curtailing loan commitments,

it was quite probable that further

stimulating injections of reserves through the open market could,

undesirably, drive short-term interest rates down to an unrealistically

7/26/60

-30

low level.

This would perhaps hold back the adjustment which would come

through more moderate actions and which, in due course, might be expected

to work into a lower rate structure in the long end of the market and

bring about whatever stimulus might come from long-term borrowing at

lover rates.

Question had been raised, Mr. Mills noted, whether the actions

taken to this point in supplying reserves could be expected to permeate

from the money market banks into the reserve city and country bank

categories and serve as a stimulus to the expansion of loan and investment

positions.

There was persuasive logic in the point that had been

raised that when the Treasury comes into a surplus position, this has a

centrifugal influence on the money supply and tends to draw funds out

of the more remote areas to the central areas.

extended, in the light of recent experience,

This logic could be

to conditions where, with

a slackening of business activity, there is a tendency toward reduction

of borrowings on the part of the more important industrial and commercial

entities.

If those entities should reduce their loans--and there was

some indication that this was occurring--very probably the effect in the

near future, as it

had been in the past, would be to draw funds out of

the more remote areas of the country into the money market banks.

If

there

was substance to that reasoning and one could not expect a permeation of

reserves and a movement of deposits brought about by open market operations

to flower out into the reserve city and country bank areas in the same way

7/26/60

-31

that beneficial effects were induced by actions in past weeks to inject

reserves into the money market, with effective results on money market

banks, the application of that same kind of reasoning would give at

least a foundation for arguing that action in supplying reserves to reserve

city and country banks should preferably take the form of some type of

adjustment in their reserve requirements.

Mr. Leedy said there had been one important local development

in the Tenth District in the past three weeks; namely, settlement of the

paralyzing construction strike in the Kansas City metropolitan area.

he had previously reported, about 17,000 workers were involved.

As

During

the first five months of the year, total District residential and non

residential construction awards were down about 20 per cent from last year,

some of this having been due to the strike.

However, public works and

public utility construction showed an increase of about 50 per cent over

the same period last year.

Mr. Leedy went on to say that the winter wheat harvest had about

been completed.

As forecast earlier, production was estimated to be

about 20 per cent greater than last year.

affected materially by the harvest.

Country bank deposits had been

Figures of the country banks for the

period were not yet available, but interbank deposits at weekly reporting

banks rose $130 million during the two weeks ended July 13, and were about

$100 million above the peak Wednesday figure in June.

Loan demands had

remained moderate in the past three weeks; real estate and consumer loans

7/26/60

-32

showed little

change, and a slight increase in business loans was counter

balanced by a reduction in loans to nonbank financial institutions.

Borrowings of weekly reporting member banks had declined sharply with the

pickup in their deposits and had reached the lowest level on a reporting

date since January.

Department store sales during the four weeks ended

July 16 showed a 3 per cent increase, perhaps reflecting the harvest in

some part, but sales since the first of the year continued under the same

period last year, the cumulative figure being 1 per cent.

Mr. Leedy said he assumed that for the period between now and

the next meeting the so-called even-keel policy would be required in view

of the Treasury financing.

However, he subscribed to the view that, to

the extent it could be done, additional reserves should be injected into

the banking system.

In view of the fact that free reserves had reached

a level around $200 million, he would surmise that some figure in that

area might be regarded as maintenance of an even keel.

He subscribed to

what Mr. Mills had said about the matter of injecting reserves through

an adjustment of reserve requirements.

In his opinion, this should be

given serious consideration, along with some further adjustment in the

use of vault cash.

For the time being, it

seemed to him that no change

in the discount rate was called for, although he would assume that unless

the picture should change the System would want later to give some

consideration to a further downward adjustment.

Mr. Allen reported that Seventh District department store sales

in the four weeks ended July 16 were 2 per cent higher than a year ago,

7/26/60

-33

compared with one per cent for the nation.

This showing

was regarded as

favorable because sales of last year were at a high level and thus far the

summer had been relatively cool.

The higher temperatures of the past week

were said to have provided a strong stimulus to sales.

Prospects for crop

production were not as favorable as in other recent years because of cold,

wet weather.

The only exception was Indiana, where the corn prospects

were excellent.

On the other hand, cash receipts for farm marketings in

May were substantially higher than last year and brought total cash

receipts for the first five months to slightly above last year's figures in

each State in the District.

New claims for unemployment compensation in

the six weeks ended July 9 were 48 per cent above last year in Seventh

District States, compared with 24 per cent for the nation.

With respect to automobiles, Mr. Allen said that a few assembly

lines had stopped the 1960 model run.

Most lines would be down by August 15,

and production of 1961 models would start shortly thereafter.

On July 10,

inventories were 1,056,000 cars, not far below the record high in June.

The drive now was to clean up the stocks of 1960 cars and, based on sales

and production forecasts in Detroit, it was hoped that inventories on

October 1 would be down to 780,000 cars, divided 255,000 in 1960 models

and 525,000 in new models.

Mr. Allen commented that rates on home mortgage loans in the

Chicago market began to show definite signs of easing in June.

Two of the

largest lenders reported 1/4 point reductions in their rate schedules

7/26/60

toward

-34

the end of the month.

Loans equal to 80 per cent of appraised value

were being offered at 6 per cent, 75 per cent loans at 5-3/4 per cent, and

50 to 60 per cent loans at 5-1/2 per cent.

however,

The most active demands,

were in the low down payment categories.

The trend toward lower rates might act as a stimulus to home build

ing, Mr. Allen noted.

For the first

five months of 1960, home building

permits were below last year by 21 per cent in the Chicago area, 23 per

cent in Detroit, 5 per cent in Indianapolis, and 32 per cent in Des Moines.

Milwaukee reported a 6 per cent increase.

Business loans had again shown three consecutive weeks of decline

in the weekly reporting banks.

Chicago banks reported a net decline of

$46 million by business borrowers in the period ended last Wednesday, the

biggest single week's drop since the fall of 1958.

The large banks as a

group continued to show a substantial basic deficit position, but the group

figures are heavily affected by a large increase of bill holdings by one

dealer bank.

Mr. Allen said that although he would not favor changing either

the discount rate or the directive at this time, he would suggest that

monetary policy in the next three weeks trend in an easier direction, with

the goal for net free reserves in the area of $200 to $300 million.

Mr.

Deming said that contrasting trends in the Ninth District added

up to a somwhat better average picture, particularly in relation to a

year ago and in relation to the country

as a whole.

In both cases, however,

7/26/60

-35

these developments must be viewed as favorable only when qualified by

recognition that the District entered a weakened economic situation about

this time last year and that the rate of expansion nationally had weakened

somewhat.

The District had about caught up with the nation, partly because

the national picture was not as exuberant, and showed gains against last

year partly because last year in the District was not so good.

At the same time, the favorable developments should not be mini

mized, Mr. Deming said.

As of July 1, the official estimates for the 1960

District small grain crop were excellent.

Much of the winter wheat had

since been harvested or was in process of being harvested.

Spring wheat

production might be cut back by a developing drouthy situation since

July 1, but total wheat production should be at near-record levels in most

areas.

The 1960 District wheat crop on July 1 was estimated at 3

per cent

above that of last year, with oats and flax production up an estimated 48

per cent.

This situation, along with favorable livestock marketings this

summer and fall,

might soon, if

it

had not already, push farm income to the

plus side compared with the year-ago statistics.

to business generally.

In fact,

This would be a stimulus

some of the economic data just becoming

available for June and early July showed modest improvement.

store sales in Minneapolis, for example,

Department

in the four weeks ended July 9,

were up 6 per cent from the comparable period a year earlier.

United States, the figure was a plus 2 per cent.

For the

7/26/60

-36

District employment in June also showed a healthy improvement, and

the number of insured unemployed dropped from 35,134 in May to 25,527 in

June.

This latter comparison represented a greater improvement from May

to June than for the country as a whole.

Personal income in Minnesota

during June showed a 4.4 per cent gain from a year earlier, and farm

income in May was only about 5 per cent less than a year ago.

In previous

months of 1960 the decline from year-ago levels was substantially larger,

ranging up to a minus 15 per cent in February.

The major depressing developments of recent weeks were associated

with iron ore mining.

A Reserve Bank visitor who had just returned from

extensive calling in the iron range reported greater pessimism than he had

encountered in a long time, and the reasons were not hard to find.

Ore

shipments in June were smaller than in May for the first time since prewar

days, except for 1952 when there was a strike.

in July and August.

They were likely to be down

Presently, there were 45 ore carriers laid up, out of

a total fleet of 232.

The District banking picture seemed to be getting somewhat easier

at last.

The seasonal deposit upswing finally seemed to be developing,

borrowing from the Reserve Bank had fallen fairly sharply, and loan-deposit

ratios showed some slight improvement.

Turning to credit policy, Mr.

This was quite a welcome development.

Deming said it

summer doldrums had been with us a bit too long.

seemed to him that the

Thus, he felt that the

7/26/60

37

weight of evidence argued for further ease in monetary policy.

this might be accomplished,

Perhaps

as had been suggested, by attempting to

anticipate some of the seasonal needs and supplying reserves more freely

through open market operations.

Perhaps it

would be well to prepare to

take some action via further release of vault cash.

In any event, he

would like to see further ease--accomplished undramatically but accomplished

effectively.

As to the discount rate, Mr.

ings.

It

was as much as,

when action last was taen

or more,

Deming stated that he had mixed feel

out of touch with the bill

to reduce it.

He felt

rate now than

the current rate did

exercise a more restrictive effect than he would like, and he could argue

that it

should be reduced now.

At the same time, with the Treasury finane

ing coming up, he had some question about action now, and on balance he

believed he would prefer to wait for a bit.

He saw no reason to change the

directive at this time.

Mr. Mangels said there was little

evidence of an increase in

Twelfth District business activity in the past three weeks, while there

were some signs of a slackening pace in several areas.

The unemployment

picture was not very good, with unemployment at the highest level since

1958.

Perhaps this was due to the large influx of teenagers into the labor

force and the situation was temporary, but in June unemployment figures

were 5.6 per cent in California, 7 per cent in Oregon, and 7.8 per cent in

-38

7/26/60

Washington.

Lumber production was down further, and steel production was

at the rate of 57 per cent of capacity in the second week of July, although

one mill in Utah was operating at 95 per cent.

Turning to the banking picture, Mr. Mangels reported that loans

declined in the three-week period ended July 13 and that, while the total

decline was not large, there were decreases in all categories except for

modest increases in agricultural loans, loans to sales finance companies,

and loans to Government securities dealers.

increased about $166 million.

Holdings of securities

Bank deposits had gone up for seasonal

reasons, and there also had been some unexpected increases because of the

run-off of bills held by customers which were redeemed at maturity.

the District, savings deposits increased about $39 million.

For

The expected

loss of savings deposits in California apparently did not materialize to

the extent that the bankers thought it might.

For the first six days of

July, losses were about $200 million, approximately half as large as those

suffered in the same period in January.

District banks were net sellers

of Federal funds in rather substantial amount, while borrowings at the

Reserve Bank were nominal, the average for the two weeks ended July 19

being under $2 million per day.

Mr. Mangels said that for reasons others had indicated, he could

go along with extension of further ease in the coming period.

Free

reserves of $200 million, $250 million, or even $300 million would be

acceptable to him.

He felt that a change in the discount rate should not

7/26/60

-39

be made at the present time because of the Treasury financing, but that at

the first

rate.

clear period consideration should be given to a reduction in the

He regarded the directive as satisfactory.

Mr. Irons said there had been little

trict during the past three weeks.

change in the Eleventh Dis

The pattern was not too dissimilar

from the national pattern, except that the factors affecting the District

might be somewhat different from those affecting other parts of the

country.

In general, economic activity was moving along sideways at a

high level.

There was, of course, some question as to how long a side

ways movement might prevail, but at the moment most of the major economic

indicators except those directly associated with petroleum were within a

couple of percentage points, plus or minus, from record levels.

Mr. Irons reported evidence of less restraint on the position of

District banks than had prevailed a few periods back.

During the most

recent period there was a decrease in loans, an increase of holdings of

Government securities, and a net increase in bank credit.

Borrowings from

the Reserve Bank had been averaging about $25 million, a bit lower than

they had been.

The use of Federal funds by large city banks was con

siderably lower than it

had been running earlier.

Mr. Irons said he did not detect reluctance on the part of banks to

use the discount window.

The country banks needing to borrow were borrowing,

and he had heard of no reluctance.

Some large city banks that were using

7/26/60

-40

the Federal funds market might be doing so to protect their position at

the discount window.

Mr.

Irons went on to say that the psychology and attitude of

bankers and businessmen with whom he had had contact recently was certainly

not one of pessimism.

It was a sort of acceptance of an attitude that

during times like these, with all of the various factors that are at play,

there is

a period of watchful waiting and cautiousness.

The general feeling

was that there would be a slight increase over the months ahead, perhaps in

the fourth quarter.

There was no attitude of rank optimism or real

pessimism.

Turning to policy, Mr. Irons said he came out a little

in degree than those who had spoken thus far.

differently

He was quite satisfied with

open market operations during the past three weeks.

The Desk had made

some reserves available and had followed a moderate and cautious approach.

He would much prefer to continue in that manner during this period of

unsatisfactory outlook insofar as forecasting was concerned.

was low because of many factors,

The visibility

and at a time when visibility was low he

would not be inclined to take off in either direction.

Instead, he would

prefer to follow the basic policy that had been followed, permitting a

moderate increase in bank credit and a moderate increase in bank reserves.

For the period immediately ahead, he would favor no change in the discount

rate or in the directive.

When one talked of going to free reserves of

$200 million or even $300 million, that to him (Mr.

Irons) was more than

7/26/60

-41

a moderate and cautious approach, and he would rather stay around $100

million.

He would prefer to permit funds to move into reserves cautiously

and moderately, while meeting seasonal requirements.

While errors might

be on the side of ease, he certainly would avoid anything in the nature

of aggressiveness.

If

free reserves should be moved up to $250 million or

$300 million, he felt that this would be taken by the market as a clear

change in policy.

In summary, Mr. Irons said his thinking was in terms of a cautious

relaxation of reserve pressures, and that he would avoid being aggressive.

He would meet seasonal requirements,

and if it

seemed desirable to err a

little on the side of ease he would be agreeable to that.

However, the

Treasury would be in the picture during the next three weeks; August 15

would be the settlement date, and the Treasury was attempting a new form

of financing.

cautious.

Therefore, for the time being, he would be careful and

To go a little

beyond seasonal needs, if necessary, would be

all right, but he would not favor anything that could be construed as a

basic change in policy.

Mr. Erickson noted that several expressions had been used around

the table to describe the current situation and that Mr. Ellis, at

yesterday's meeting of the directors of the Boston Bank, had used the

phrase "coasting uphill" in referring to the situation in the First

District.

Mr. Erickson went on to say that there were still

factors in the District picture.

many favorable

The New England production index, which

-42

7/26/60

held at 117 in February, March, and April, rose to 119 in May, while every

week this year electric power production had been ahead of last year, when

allowance was made for weeks with holidays.

Department store sales in

June were 4 per cent above last year; in the four weeks ended July 16,

they were 5 per cent ahead.

ahead of last

year.

New car registrations in May were 18 per cent

As to nonagricultural employment,

the monthly

year-to-year comparison had narrowed since the first of this year, but

the situation was still

fairly close to the national picture.

Insured

unemployment in July was higher than last year, but not as high as

nationally.

Construction contracts through May were lower than nationally,

but residential construction was better than nationally.

Turning to the June survey of mutual savings banks,

Mr. Erickson

said that year-to-year comparisons of deposits are made monthly.

The

year-to-year improvement reached a high point of 6.5 per cent in February

1959 and the figure then decreased until May of this year, when it stood

at 4.4 per cent.

figure for this one month might not be too significant,

first

While the

In June the improvement was 4.5 per cent.

it

did mark the

turnaround.

In the past three weeks, Mr. Erickson said, District banks were

net purchasers of Federal funds.

Boston and country banks,

ratio

Commercial loans were higher, both at

than at the first

of the year.

The loan-deposit

for Boston banks had risen from 60 per cent at the first

of the year

7/26/60

-43

to 63 per cent in July, and for country banks the ratio had risen from 56

to 58 per cent.

In July to date, District banks had used the discount

window less than in other months, the average being less than $10 million.

It would have been even lower if there had not been one or two days when

Boston banks could not get Federal funds.

In this connection, Mr.

Erickson said he had found the same sort of situation as Mr. Irons, that

is,

no real reluctance to come to the discount window if the banks needed

funds.

Businessmen also appeared to have about the same point of view as

described by Mr. Irons; all seemed to feel that the fourth quarter of the

year was going to be on the upside.

As to policy, Mr. Erickson said that he considered the directive

entirely satisfactory.

In view of the fact that the Treasury was in the

market, he would favor no change in the discount rate at this time.

By

the time of the next meeting, however, the situation might be more favor

able to a change in the rate.

He felt that the Desk should supply reserves

for seasonal requirements, but that the Desk should,not be too aggressive.

He would favor free reserves somewhere around $200 million.

Mr. Erickson

expressed the hope that, since it would be necessary to provide reserves

later in the year, some part could be made available through adjustment

of provisions relating to vault cash and through a change in the reserve

requirements applicable to central reserve city banks.

Mr. Balderston said it

seemed to him that at the Committee meeting

on July 6 the question was whether the summer slackness represented merely

7/26/60

-44

a pause to refresh the economy or fatigue of greater duration.

The answer

now seemed more clear, despite one's fear of deception on account of the

seasonal summer doldrums.

In his view the decline that one might expect

at this phase of the cycle was now evident and should be countered actively

by such means as were available to the System.

There were fundamental

domestic trends affecting the state of business which might have an effect

for a long time to come.

First, there was the price decline stimulated by

excess productive capacity.

It would tend to bring about continued re

duction in the rate of inventory building, which he suspected by this time

had dwindled to zero.

And very soon there might be an actual decline in

inventories, if that had not occurred already.

Then there was the profit

squeeze stemming from inability to pass cost advances along to the customer.

This, he found, was worrying not only chemical and other manufacturers but

even utility executives.

The profit squeeze would induce more labor saving,

thus aggravating the unemployment problem.

In the face of this situation, which he now believed to be long

lasting and not seasonal, Mr. Balderston said he would favor the following

actions.

First, he would remove the word "moderate" from clause (b) of

the policy directive.

In the preliminary draft of policy record entry for

the Board's Annual Report covering the July 6 meeting of the Committee,

he had found the phrase "marking time", and this was a phrase he did not

like to see in the record.

He did not believe that the Committee's

policy was one of marking time.

This sounded like waiting for the

7/26/60

-45

inevitable, and it was not something he would relish.

Since he did not

believe that the present posture of the Committee was one of trying to

bring about a moderate increase in bank reserves, but rather that the

Committee had been struggling to do better, he would eliminate the word

"moderate" from clause (b) of the directive.

Second, he would adopt a

free reserve target of $250 million, as suggested by some others.

he would reduce the discount rate to 3 per cent.

Third,

In this connection, he

raised the question how long after the close of the books next week on

the pending Treasury financing it would be necessary for the System to

wait if it

desired to take action on the discount rate.

He did not think

anyone would be injured by a decrease in the discount rate as they would

by an increase.

He then asked Mr. Rouse whether dealers might be likely

to receive a windfall if a change in the discount rate were made within a

week or so after the closing of the books.

Mr. Rouse replied that he thought this would depend on the terms

on which the dealers would be allowed to subscribe.

Mr. Balderston had referred to might happen.

in terms of a little

It could be that what

Ordinarily, one would think

time after the delivery date, in this case August 15,

before making a move on the discount rate.

Chairan Martin said he did not propose

the ground that had already been covered.

to cover in his comments

He wished, however, to make the

observation that the adjustents now going on had long been needed and

were necessary if there was to be any real revival of business and any

7/26/60

-46

real improvement in

prospect.

Price adjustments,

and adjustments such as

now taking place in business thinking and speculative psychology,

always painful, he noted.

For example,

are

reference had been made at this

meeting to the price-earnings ratios of common stocks.

It

was fine to say

that the adjustment was a good thing, but anybody who was caught in those

stocks certainly felt terrible today.

say that it

However,

is

From personal experience, he could

a painful period when adjustments long deferred come about.

these adjustments were going on in

an orderly way.

It

might be

that the summer doldrums had been exceeded but, particularly in view of

the long-deferred adjustments,

he was by no means convinced that the

situation was serious.

The Chairman said he was inclined somewhat toward the approach of

Mr.

Irons,

although not to the same degree.

the System be cautious in what it

This approach suggested that

was doing and not show any sign of panic.

The discount rate had been out of touch with market rates,

technically,

for some time; the situation was not new at this meeting.

The Treasury

financing was now right on top of us,

problem for the System.

Assuming,

a situation which always creates a

was possible to

hypothetically, that it

change the discount rate without having to go through the twelve Federal

Reserve Banks and the Board of Governors,

and if

it

had been decided to act

on the rate, the proper time would be tomorrow morning.

not be feasible for the System to act by tomorrow,

act.

The System is

However,

even if

it

it

would

wanted to

caught constantly in this type of thing, the Chairman

7/26/60

.47

noted, and one should not worry about it

unduly.

Since it

was general

policy to take into account Treasury operations, obviously the even-keel

approach was the correct one at the present time.

The Chairman noted that, as Mr. Leedy brought out, free reserves

had already been up to a $200 million average.

If they ran somewhere in

that area, he continued, no one would think that the even keel was being

changed substantially.

It

appeared that the Committee unanimously wanted to trend toward

an easier reserve position, Chairman Martin commented, whether by Mr.

Bryan's formula or some other formula.

He went on to suggest supplying

reserves in an orderly way and maintaining a posture of ease, adding that

when the appropriate time came he felt that the System should not hesitate

to lower the discount rate.

Chairman Martin cautioned about projecting too far into the future

and about being influenced unduly by such things as conversations.

However,

after noting that projections were involved and that one must be careful,

he expressed the view that if the System was going to adjust the discount

rate, it

might be better to do so before September.

The Chairman then commented on reserve requirements,

that he hoped all would study the problem actively.

found himself confused.

saying first

Thus far, he had

As to vault cash, he did not think there was any

real way of measuring what action in that area would do in terms of reserves.

Also, the Board was under a mandate to equalize the reserve requirements of

7/26/60

-48

central reserve and reserve city banks, and this was complicated by the

fact that at the moment,

at least, the greater pressure appeared to be in

the reserve city and country bank sector.

If

it was simply a matter of

trying to supply reserves to the economy, one would look there first.

The problem, the Chairman said, was not easy to handle on a piece

meal basis.

A schedule of actions over a period of time would be

desirable,

and the Board had spent some time on this, but the problem was

not easy.

The Board had not come up with anything as yet that it would

want to try to sell.

A general impression outside the System seemed to be

that this was something that could be turned on and off like a faucet, but

it

it,

was not that simple a problem.

and he did not know whether it

The Board must continue to wrestle with

would be possible to work out a

package operation.

Chairman Martin said he did not think he would want to change the

directive at this meeting, although that was something for the Committee

to consider.

As he saw it,

direction in which it

at the first

the Committee ought to continue trend in the

had been moving.

Its posture ought to be clear, and

opportunity, assuming the present situation continued, the

System should lower the discount rate.

That would be

several weeks away,

the visibility might become greater in the interim, and he did not think

anything precipitate should be done now.

As a matter of fact, he did not

think action would be feasible from a practical standpoint.

The earliest

possible date would be Thursday, which would be when the Treasury announced

7/26/60

its

-49

financing, and action would not be appropriate at that particular

juncture.

The payment date would be August 15, he noted, and there would

be a meeting of the Open Market Committee the following day.

dangerous things to talk about in

These were

a large group, but at the August 16

meeting there would be an opportunity to consider whether a move on the

discount rate would seem desirable.

In the meantime, the Chairman said, it was his view that the

System should be supplying reserves at every opportunity.

the odds were in favor of trending toward ease.

and the trend could be reversed quickly.

If

Certainly,

There was nothing to lose,

there should be a big

upswing in the fall, the problem could be met when it

came.

The Chairman said that he felt the Committee was remarkably

unanimous in

its

thinking this morning.

He then referred again to the

matter of the directive and asked Mr. Balderston whether the latter had

any further comments.

Mr. Balderston said he now thought that perhaps the next meeting

would be an appropriate time to change the directive.

He did not believe

that switching from net borrowed reserves of $200 million to free reserves

of $200 million represented a moderate increase.

However, he was sensitive

to the fact that this was a week of Treasury financing.

Chairman Martin commented that this was one of the things in his

mind as a reason for continuing the present directive.

Mr. Balderston then repeated that he had now concluded that a

change in the directive at the next meeting might be more appropriate.

7/26/60

-50

Accordingly, the Chairman stated that if there was no objection

the directive would be renewed without change.

it

He went on to say that

seemed difficult to provide much more guidance for the Desk on the

volume of reserves than was available from the go-around at this meeting.

He then inquired whether there were other comments regarding the discussion,

and no disposition toward further discussion was indicated.

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

Committee:

(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 securi

ties, 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

term 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.

To purchase direct from the Treasury for the account

(2)

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

cases where it seems desirable, to issue participations to one

or more Federal Reserve Banks) such amounts of special short

term certificates of indebtedness as may be necessary from time

to time for the temporary accommodation of the Treasury;

provided that the total amount of such certificates held at

any one time by the Federal Reserve Banks shall not exceed

in the aggregate $500 million.

7/26/60

-51

It was agreed that the next meeting of the Federal Open Market

Committee would be held on Tuesday, August 16, 1960, and that the

succeeding meeting would be scheduled for Tuesday, September 13, 1960.

The meeting then adjourned.

Assistant Secretary