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, January 10, 1961, at 10:00 a.m.

PRESENT:

Mr. Martin, Chairman

Mr. Balderston

Mr. Bopp

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Bryan

Fulton

King

Leedy

Mills

Robertson

Shepardson

Szymczak

Treiber, Alternate for Mr.

Hayes

Messrs. Lesch, Allen, Irons, and Mangels, Alternate

Members of the Federal Open Market Committee

Messrs. Erickson and Johns, Presidents of the Federal

Reserve Banks of Boston and St. Louis, respectively

Mr. Young, Secretary

Mr. Sherman, Assistant Secretary

Mr. Kenyon, Assistant Secretary

Mr. Hexter, Assistant General Counsel

Mr. Thomas, Economist

Messrs. Brandt, Eastburn, Marget, Noyes, 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

Mr.

Mr.

Governors

Mr. Yager, Economist, Division of Research and

Statistics

Mr. Wayne, First Vice President, Federal Reserve

Bank of Richmond

Mr. Hickman, Senior Vice President, Federal Reserve

Bank of Cleveland

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Messrs. Ellis, Baughman, Jones, Parsons, Coldwell,

and Einzig, Vice Presidents of the Federal

Reserve Banks of Boston, Chicago, St. Louis,

Minneapolis, Dallas, and San Francisco,

respectively

Mr. Garvy, Adviser, Federal Reserve Bank of New

York

Mr. Stone, 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

November 22, 1960, were approved.

Under date of December 16, 1960, there had been sent to each

member and alternate member of the Federal Open Market Committee, and to

each President not currently a member of the Committee, a copy of the

report of audit of the System Open Market Account made by the Division of

Examinations of the Board of Governors as at the close of business

October 21, 1960.

The report, which has been placed in the Committee's

files, was submitted to the Secretary of the Committee under date of

November 30, 1960, in accordance with the action of the Federal Open

Market Committee at its meeting on June 21, 1939, as reaffirmed most

recently at the meeting on March 1, 1960.

Chairman Martin inquired whether any of the members of the Com

mittee wished to comment on the report, and there was no indication to

such effect.

Accordingly, the audit report was

noted and accepted without objection.

Before this meeting there had been distributed to the members of

the Committee a report of open market operations covering the period

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December 13, 1960, through January 4, 1961, and a supplementary report

covering the period January 5 through January 9, 1961.

Copies of both

reports have been placed in the files of the Committee.

In supplementation of the written reports, Mr. Rouse commented

as follows:

The past four weeks have witnessed pervasive ease in the

money market.

At the same time, short-term interest rates have

not been unduly depressed.

The rate on three-month Treasury

bills, for example, moved no lower than 2.16 per cent during

the period despite the fact that open market operations pro

vided a large volume of reserves toward the close of the year.

With short-term rates remaining relatively stable, there does

not seem to have been any strengthened incentive to transfer

short-term funds to other markets.

The spread between the

British bill

rate and the Treasury bill

rate here on a covered

basis has fluctuated from slightly below 1 per cent to a high

of around 1.20 per cent in favor of British bills. We cannot

measure accurately the actual shift of short-term money in

response to interest rate differentials, but we have the

impression that relatively little

has taken place recently.

The sizable foreign purchases of gold in the past two or three

very much

weeks point up the fact that this problem is still

with us.

These recent purchases, it appears, represent in

good part a conversion of existing assets rather than an

accumulation of new assets.

The year-end pressures that normally make it difficult

to keep the money market easy over the approach to the year

Federal funds have traded well

end have been mostly absent.

below the discount rate through most of the period and bill

rates have fluctuated within a narrow range. While foreign

accounts and some corporations have liquidated bills, these

sales seem to have been about offset by demand from banks

and other corporations. We see some evidence that banks are

putting their ample surplus reserves to work in Government

securities to a greater extent, and in some cases are under

taking a modest amount of maturity extension. However, the

attitude of investors in fixed income securities generally

is clearly one of caution.

Funds were injected through open market operations

mainly by way of repurchase agreements, mostly at 2-3/4 per

cent in order to compete with other sources of funds and to

encourage the dealers to leave the contracts on the books.

Through this measure it has been possible to avoid outright

market purchases of Treasury bills even though the contracts

have not remained on the books as long as we would have liked.

We did, however, purchase some Treasury bills from foreign

accounts. Earlier in the period reserves were absorbed through

sales not only of bills but also of short-term securities other

than bills. Most of these sales were made to the International

Monetary Fund, which was investing the proceeds of its recent

sale of gold to the Treasury.

Prices in the Government securities market moved generally

upward over most of the period, but underwent sizable declines

in the past few days. These declines reflect renewed doubts

as to the duration of the business recession and more active

discussion of the gold outflow as a symptom of our unfavorable

balance of payments--developments which have occurred against

the background of the heavy positions accumulated by dealers.

Total dealer positions reached a peak of $3.8 billion, an all

time high. These positions, which were largely in short-term

issues, include securities held under long-term repurchase

agreements. Although dealer holdings have subsequently been

reduced, they are still at a level that could be troublesome

in the event of some unforeseen development, such as a marked

worsening in the international situation.

The Treasury is again facing new financing operations,

first in the roll over of the January 15 bills through an

auction tomorrow, which we expect will be routine. The next

operation will be the refunding of the February 15 maturities,

which presents some problems, such as whether to refund through

a cash offering or through the normal exchange technique, and

also whether to attempt a further extension of maturity at

this time. The problem of maturity is a difficult one, since

there are already outstanding about $11 billion of securities

maturing in February 1962.

These decisions, of course, will

be made by the incoming Treasury team, but with the advice and

counsel of the outgoing team to the extent that it is wanted.

As I have noted in previous reports to the Committee, the

market for bankers' acceptances continues to grow. Both in

October and November the total of acceptances outstanding

surpassed the previous high established some thirty years ago,

and there is some likelihood that the December figures, when

they become available, will show further growth. Toward this

past year end the dealers in acceptances were called upon to

absorb larger amounts of these obligations than ever before.

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But in the easy money market conditions prevailing they have

been able to handle this large volume of acceptances without

strain and to market them in orderly fashion to a wider assort

ment of domestic buyers than at any time in the past.

Mr.

Erickson referred to the very large holdings of Government

securities by dealers and asked how those holdings would be handled if

the

demand anticipated by the dealers did not materialize and the System was

not in a position to put reserves in the market.

Mr. Rouse replied that the major problem, in view of the shortness

of the maturities held, was the availability of credit to enable the dealers

to carry the securities.

If

credit should not be available and the dealers

had to look for buyers, that would obviously have an effect on market rates.

Thereupon, upon motion duly made

and seconded, the open market transactions

during the period December 13, 1960, through

January 9, 1961, were approved, ratified,

and confirmed.

A staff memorandum on recent economic and financial developments

had been distributed under date of January 6, 1961.

With further reference

to economic developments, Mr. Noyes presented the following statement:

One business, at least, is booming--that of vivisecting

the economy, diagnosing its ills, and prescribing remedies.

This year the page upon page of newsprint devoted to current

and prospective economic developments seems high, even after

allowance for the normal seasonal peak.

In these circumstances,

it is difficult to say anything that does not sound like a warmed

over version of yesterday's headlines.

Very little

that actually occurred in December can be cited as

concrete evidence of a change in the down-drift that has generally

characterized economic developments since last summer.

Nevertheless,

for reasons that are hard to pin down, there does seem to have been

a slightly more optimistic tone in most economic analyses in the

past few weeks, and the stock market has reflected this improved

sentiment.

It has also been evident in the form of less optimistic

appraisals of the future course of Government securities prices.

1/10/61

The gross national product appears to have held about even in

the fourth quarter--certainly the change from the second quarter

level of $505 billion in either the third or fourth quarter is

hardly significant. Industrial production was off at least a pointand probably two--in December, bringing the decline from July to

around 6 per cent. Unemployment rose further to a seasonally

adjusted rate of 6.8 per cent--an 8 per cent increase. Prices of

sensitive materials continued to decline, and the average of all

wholesale prices also drifted down a little. Steel scrap, one of

the few exceptions, recovered somewhat from the very low level

prevailing earlier in the winter.

The performance of department store sales, which just equalled

last year's records for the Christmas season, was mildly disappoint

ing in that it was derived from substantially expanded facilities,

and sales per outlet were generally down.

Total retail trade was

down 1.3 per cent.

Perhaps one reason for the improved sentiment is the spreading

realization, as people study the aggregate data, that so far the

reductions in output are fully accounted for by shifts in inventory.

In fact, final takings of goods and services have continued to

increase, rising by more than $3 billion in the third quarter, and

at least as much in the fourth. It is an easy step from this to the

conclusion that the process of inventory liquidation may be almost

complete and that, as business shifts back--first to lower rates of

decumulation than the estimated $4 billion in the fourth quarter,

and then to re-accumulation--conditions could improve quite rapidly.

At least one aspect of the present inventory situation suggests

caution in assuming that liquidation will be reversed at an early

date. Manufacturers, especially in the durable goods industries,

have unquestionably liquidated a substantial amount of inventory,

both of raw materials and of finished goods. There is no indication

that a similar adjustment has already occurred at the retail level,

however, and some signs that, in fact, inventories have continued

to accumulate. Notably, we know that dealers' inventories of new

cars rose slightly further in December from the already advanced

November level. Production cut-backs of uncertain duration to

correct this situation have already been announced. A similar, if

less dramatic, situation exists in the case of other durable

Despite widespread price cuts and promotions, stores

goods.

to

have made little progress in reducing their stocks of

appear

This is

hard goods or apparel in the second half of 1960.

illustrated by the department store data, which show that stocks

increased 5 per cent from May to November, compared with declines

of 5 to 6 per cent in comparable periods in other postwar cycles.

Thus, it appears that there is room for--and undoubtedly pressure

for--a cut-back in retail stocks, which could act as a drag on

-7production for some time to come, even if we assume that inventory

adjustment at the manufacturers' level is nearly complete.

On the other hand, even if inventory liquidation increases

further, say to as much as $6 or $7 billion in the current

quarter, it appears unlikely that gross national product will go

much below the $500 billion mark. Without any new action,

Government expenditures for goods and services will increase by

at least $2 billion in the current quarter; net exports will

probably be well maintained, and there is no sign of any abate

ment in the upward trend of personal expenditures for services,

which has continued throughout the postwar period. These will

more than offset increased inventory liquidation of the amount

suggested, and declines from the already depressed levels of

producer and consumer durable expenditures, and in construction,

should not be much more than seasonal. Thus, the most plausible

immediate prospect seems to be for more of the same--a very small

down-drift in aggregate spending, a somewhat larger slipping off

in industrial production, and a sizable further increase in

unemployment. Beyond this, it is easy to fabricate assumptions

which will produce either an upturn or a further decline, but

there is very little factual basis for one or the other.

Certainly, it is hard to find any evidence which could be said

to provide sufficient basis for a dramatic shift in monetary

policy at this juncture.

If this analysis of the current situation sounds vaguely

familiar to those who read the report of Professor Samuelson's

task force, I can only say that I started with a clean sheet of

paper and a firm resolution to try to say something fresh and

illuminating. The facts of the matter seem to be--to quote

directly--that there is no reason for either "hasty improvisation

or doctrinaire reversal of policies."

Mr. Thomas presented a factual review and analysis of recent

trends and the present state of liquidity in the economy, pointing out

their significance for fiscal, debt management, and monetary policies.

He pointed out that, after increasing by record amounts in 1958 and 1959,

the total volume of principal liquid assets held by the nonbank public

increased less in 1960 than in other years of the past decade or more.

There was a small decrease in the money supply and in nonbank holdings of

1/10/61

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short-term Government securities, but a very large expansion in fixed-value

redeemable assets.

The ratio of total liquid asset holdings to gross

national product had declined considerably in the post-war period, with

but few interruptions, and in 1960 was below the previous low level

recorded in 1957.

In view of this decline in liquid assets and the current state of

slack in the economy, some stimulation to increasing liquidity would be

appropriate.

The likelihood of deficits in the Federal Government budget

in the next year, necessitating an increase in the public debt, together

with the large volume of Government securities maturing in each of the

next five years, would provide ample opportunity for increasing liquidity

through debt-management policies that permit some shortening of the average

maturity.

In fact,

sizable longer-term issues might also need to be

offered to avoid undue increases in liquidity and the creation of diffi

cult debt-management problems for the future when less liquidity may be

appropriate.

With respect to monetary policies, it was pointed out that they had

been directed for some time toward fostering expansion in bank credit and

the money supply.

Although the response had been slow, bank liquidity

had improved somewhat and during December there was an unusually large

increase in bank loans and investments.

The money supply increased some

in December, but most of the increase recently had been in time deposits.

With reference to immediate Federal Reserve operations, Mr.

Thomas suggested that the principal question was how much of the reserves

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1/10/61

released through the remaining seasonal decline in demands for reserves

should be absorbed and how much should be left as a stimulus to credit

expansion.

Free reserves had declined in the past week and would

presumably average less than $500 million in this statement week.

During the following three weeks large amounts of reserves would

probably be released by seasonal decreases in required reserves and in

currency in circulation, partly offset by declines in float and a con

tinued gold outflow, as well as by a runoff of outstanding repurchase

contracts at the Federal Reserve.

There could be further System sales of nearly $400 million and

still

leave free reserves of over $600 million while providing a level of

total reserves adequate to cover normal changes in the money supply.

Free

reserves of over $600 million would probably give sufficient leeway and

stimulus for some growth above normal, without danger of excessive ease

in the money market.

Mr. Marget presented the following statement with respect to the

balance of payments and related matters:

I regret to report that, since my last report to this

Committee on October 25, there has been a development with

respect to gold outflow which is disquieting. The reason

for this is not only, or even primarily, the level of the

gold outflow. That level has, to be sure, become uncomfortably

high since October: from an October level of $280 million,

which was bad enough, gold outflow rose in November to $490

million, and in December (if we leave out the special sale of

$300 million in gold to the United States by the International

Monetary Fund) it was $440 million. For the first week in

January, the figure was also very high: $130 million.

-10What is disquieting about this is not the mere fact of

the large increase in the rate of outflow, but the nature of

the forces lying behind this increase. Up to last November,

it was possible to say that, despite our balance-of-payments

difficulties, there was no evidence of a "flight from the

dollar," in the sense of a significant conversion of dollar

balances by the holders of those balances into gold. Our

proof of this was the level of those dollar balances them

selves. As long as these dollar balances not only failed to

show any significant decrease, but actually continued to

increase, it was impossible to argue that a "run" on the

dollar was occurring.

But the situation in this respect changed suddenly in

November. After an increase in foreign liquid dollar holdings

in October of $160 million, these holdings in November showed

a decrease of $470 million. We do not yet have the complete

data on foreign liquid dollar holdings for December.

But what we

do have is information indicating beyond question that a number

of foreign monetary authorities which up to now have refrained

even (unlike a country such as Great Britain, for example) from

converting into gold new accretions of dollars, are not only

converting, or are planning to convert, such new accretions of

dollars into gold but have been converting, or are planning to

convert, a considerable portion of their existing dollar

holdings into gold.

I do not wish to seem unnecessarily alarmist about this.

For one thing, in some cases--those of Peru and Argentina, for

example--the increase in the ratio of gold holdings to dollar

holdings does represent a reversion to practices followed by these

countries over extensive periods in the past.

For another thing,

even a country's announced intention to convert into gold may be

subject to change, or at least to a rate of implementation which

would not create serious difficulties for us. There is the case

of Japan, for example, which up to now has been content to retain

its dollar holdings instead of converting them into gold. On Decem

ber 20, the Japanese Finance Minister, in reply to an interpellation

in Parliament, stated that the Government of Japan wished to increase

the ratio of gold in Japan's reserves from the present 14 per cent

to 30 per cent "following the example of other countries." This

would mean, in the case of Japan alone, an increase in gold

purchases of $350 million above what would have been expected on

the basis of balance of payments considerations alone. The

Minister added, however, that he was "in no hurry to purchase gold

right now"; and we have had subsequent communications indicating

that there is a strong element among the Japanese which is vigorously

-11-

opposing the indicated change in gold policy and is proposing

that if, for internal political reasons, the Japanese Government

feels it necessary to convert some of its dollar holdings into

gold, it should do so only at a rate not exceeding, say, $10

million a month.

But if one should not be unnecessarily alarmist about

this new development with respect to gold outflow, neither

can one afford to be complacent about it.

There can be no

doubt that we are now confronted by a new development. It

is, moreover, the kind of development which could very easily,

and very quickly, feed on itself, in precisely the way in

which a run on a bank can feed on itself. There is no use

looking off in another direction and saying that this could

not possibly happen, when in fact it may be happening under

our very eyes.

It is one of the paradoxes of the current situation that

nothing has happened with respect to our basic balance-of

payments position which would warrant a sudden loss of

confidence in the dollar on the part of foreign monetary

authorities. On the contrary, it can be argued (as it is in

fact argued on page 26 of the current staff report on recent

economic developments prepared for this Committee) that, at the

very time when the gold drain has been accelerating, our deficit

on current and long-term capital transactions combined (leaving

out of account, that is, only short-term capital movements,

which by definition may be regarded as reversible) was running

at a seasonally adjusted annual rate of under $1 billion. We

have to keep on reminding ourselves, to be sure, that this

improvement in our basic position, which owes so much to the

improvement in our exports that brought our trade surplus to

a seasonally adjusted annual rate of around $6 billion in

October-November, has greatly profited from the favorable

cyclical constellation that has been prevailing as between

the United States and its principal trading partners. But

the fact remains that we have been able to effect this

improvement in our basic international position by means of

a basically "liberal" commercial and financial policy, while

maintaining, at the same time, a very considerable degree of

flexibility in our domestic monetary policy; and we have been

able to do this because of the strength of our reserve position

in terms of gold. It would be a very serious matter indeed if

both the liberal foundations of our international commercial

and financial policies for bringing our international accounts

into balance and the degree of flexibility which we have been

able to maintain in our domestic monetary policy were to be

shaken by so rapid a deterioration in our reserve position,

1/10/61

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as the result of gold losses due to a loss of international

confidence in the future of the dollar, that we should have

no alternative to a policy of contraction, on both the inter

national and domestic fronts, which would be the very opposite

of what may be called for by the basic economic facts of both

the international and the domestic situations.

The heart of the current problem, then, is the restoration

and maintenance of that international confidence in the dollar

which, if the evidence that has been accumulating since October

in the field of gold movements is to be taken as a portent,

has begun to be shaken.

It is not for me to undertake to

specify all the elements that may have entered into the

pessimistic appraisals with respect to the future of the

dollar that obviously underlie these new developments in the

Since, however, there are some voices

matter of gold movements.

(very much in the minority, I must say) which do not exempt

Federal Reserve policy from bearing a part of the responsi

bility, I should like to quote what has been said recently on

this matter by the Managing Director of the International

Monetary Fund, Mr. Per Jacobsson, who is in as close touch

with the sentiment of foreign monetary authorities as any

body, and who has gone very much further than most observers

in attributing our balance-of-payments troubles to the internal

financial policies -- specifically the fiscal policy -- pursued

in 1958:

"I would say, for my part," he declared in a speech

delivered on November 17, "that the easing of credit

conditions recently undertaken by the Federal Reserve

In view of

System has been the proper policy . . ..

the sharp increase of exports over imports of merchan

dise, it seems to me that balance of payments considerations

ought not to stand in the way of the proper measures which

should be taken for internal reasons, especially as the

transition from an inflationary psychology to the

expectation of more stable prices will insure greater

attention to costs." And again on December 13 last:

"I think that, in the present state of activity, the

authorities can well permit the continuation of fairly

easy money, and also take steps to stimulate activity,

especially in the depressed areas, provided the measures taken

do not lead to cost increases or hamper the essential adjust

ments of the free market."

The proviso, quite obviously, is of very great importance

indeed; and there is hardly likely to be dissent from it in

principle from any quarter. But what will be watched, in the

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weeks ahead of us, will be not so much formal statements of

principle as the policy actions actually undertaken. The

nature of the gold movements that have been under way since

October is a vivid reminder of what can happen if the policy

actions undertaken by the United States in the immediate

future are such as to undermine, instead of strengthening,

foreign appraisals of the future of the dollar. We can

ignore that reminder only at our peril.

Mr. Treiber presented the following statement of his views on the

business outlook and credit policy:

Economic activity continues its sluggish course.

So far,

there are no signs of snowballing downward momentum.

Nor is

there evidence of a revival near at hand. A further contraction

of modest proportions seems the most likely near-term course.

The greatest downward factor has been the shift from

inventory accumulation to inventory liquidation.

Final demands

have held up fairly well, receding a bit in the case of business

and consumer demands but rising in the case of Government and

net export demands.

To date, the downturn has been milder than in comparable

periods of other postwar recessions. Unless business senti

ment and consumer sentiment take a decided turn for the worse,

there is a good possibility of an upturn by midyear.

However,

even if such an upturn does develop, there remains the important

question as to the vigor of the upturn and its ability to make

significant inroads into our idle manpower and productive

capacity.

Changes in the fiscal situation of the Federal Government

are already having some effect on the business outlook. Govern

ment income has been less than that estimated earlier in the

year. It now looks as if there will be a modest cash deficit

for the fiscal year ended June 30, 1961, whereas the official

estimates made twelve months ago indicated a budgetary surplus

of several billion dollars. The latest projections do not take

into account any increase in spending or reduction in taxes that

may possibly be voted by the new Congress.

Bank credit in December showed a strong rise. Much of

it, however, was caused by heavy borrowing by Government

securities dealers and finance companies as well as by

business concerns around the mid-December tax and dividend

dates. There has been some evidence recently of modest bank

purchases of intermediate-term Treasury issues.

-14December was marked by a moderate easing of congestion

and strengthening of prices in the long-term capital markets.

So far, bank purchases of longer-term securities have been on

too modest a scale to have had any great effect in reducing

long-term rates, but if such purchases continue they could

develop into an important factor tending to reduce long-term

rates.

In general, however, an attitude of caution pervades

the bond markets.

The balance-of-payments situation continues to be highly

sensitive. The amount of United States exports in November

was gratifying. We continue, however, to lose gold. The

loss of gold in November was offset considerably by a

reduction that month in foreign liquid dollar holdings in

the United States, suggesting that the over-all balance of

payments may be coming into better balance.

The recent declines in short-term rates in some financial

centers abroad have been helpful to us. It seems reasonable

to assume that the decline in interest rates abroad has been

a factor in the tapering off of the outflow of short-term

United States funds. Yet the rate gap remains wide enough

so that we cannot relax our concern about any downward

pressure on our own short-term rates.

The recent heightening of tensions in various parts of

the world, and the approaching change-over in our own national

Administration, add further to the sensitivity of the current

situation. Thus, it is highly important that everyone con

cerned with our country's financial policies show a determination

to preserve the soundness of the dollar.

We think that the domestic economic situation calls for a

continuation of the current policy of credit ease, but that it

is of overriding importance to avoid any substantial decline

in short-term interest rates, particularly the rate with

respect to three-month Treasury bills. Such a reduction

would tend to encourage the transfer of short-term funds to

foreign markets and thereby worsen our balance-of-payments

problem.

We think it would be unwise to change the discount rate

We think

and that there is no need to change the directive.

it desirable to seek to maintain about the same degree of

ease as has existed in the period since the last meeting

The feel of the market as to the degree

of the Committee.

of ease is more important than the level of free reserves.

For example, it would seem more meaningful to aim at a

sufficient supply of reserves so that Federal funds are

usually available somewhat under the discount rate.

-15

1/10/61

The problem of promoting monetary expansion while avoid

ing a downward pressure on short-term rates is a difficult

one.

Long-term rates are most important for investment

spending; short-term rates are most important for foreign

balances. We must continually strive for a flexible policy

that will serve best our various interrelated goals. To

this end, it may become desirable for the System to sell

short-term securities and to buy securities of other

maturities that are in supply in the market.

I am not

suggesting that we undertake such a program between now

and the next meeting, but I do suggest that all of us

continue to study the ways in which our practices can

best meet the new problems confronting us.

Mr. Erickson reported that on balance economic activity in the

First District continued to reflect the easing tendencies that had been

evident in recent months.

The New England production index was up one

point in November to 116, but it

year.

was still

three points below the previous

Except for the General Electric strike, the index might well have

been higher in October than in November.

The December survey of New

England purchasing agents was markedly poorer than other recent surveys

of that group.

Electric output, however, reached new highs in the weeks

ended December 17 and December 24.

In November, nonagricultural employ

ment was slightly lower than in the previous month, and the figure was

only .1 of one per cent higher than in November 1959.

ment was still

year.

Insured unemploy

running more than 30 per cent in excess of the previous

Turning to construction, however, the picture was brighter.

in November were 24 per cent ahead of November

of 11 per cent in October.

For the first

Awards

1959, following an increase

11 months of the year, awards

were down 4 per cent from the previous year, reflecting a substantial

1/10/61

-16

reduction in awards for public works and utilities.

Nonresidential

construction was up 14 per cent and residential construction was down 4

per cent, the latter figure being much less than the national average.

As to retail trade, business for the Christmas season was 3 per cent

higher than in 1959.

Although two more shopping days were included this

year, these were offset by a blizzard which lasted more than two days.

For the year, the District finished 2 per cent higher than in 1959, which

was better than the national average.

Automobile registrations were still

running well ahead of year-ago figures.

Mr. Erickson went on to say that as of December 28 weekly reporting

banks in the District showed an increase in commercial loans of about the

same proportions as nationally,

In the past four weeks District banks

were sellers of Federal funds more often than they were buyers.

The

discount window was used very little.

Mr. Erickson said that in view of the national situation and the

international situation he would make no change in the discount rate or

in the directive.

He suggested that the instructions to the Desk be

about the same as those given at the previous Committee meeting, which

would envisage an easy situation but not excessive ease.

He hoped that

Federal funds would sell under the discount rate and that the short-term

Treasury bill rate would remain somewhere around the present level.

Mr. Irons reported that there had been no particularly significant

developments in the Eleventh District.

Conditions were continuing to

1/10/61

-17

follow about the same trend that the District had been experiencing,

both in terms of comparisons with the preceding month and in comparison

with national figures.

Most of the movements were within a range of 1

to 2 per cent from the preceding month or from year-ago figures.

trade was good, better than people thought it

or two in

Christmas

would be in the first

week

December, but almost any statistical comparisons could be

presented depending on the definition of the length of the Christmas

season.

Employment had shaded off a bit

ment was up a little,

in the past month,

and unemploy

with about 5 per cent of the labor force unemployed

in December The petroleum situation had shown some slight improvement.

In general, the economy was moving along about as it had been, with

perhaps a very slight trend downward but nothing startling in any area

of activity.

Turning to banking, Mr.

easy.

Loans,

past month,

Irons said the situation was clearly

investments, and deposits rose rather substantially in the

and when the call report figures had been added up he thought

they would be appreciably above the previous year.

As was true nationally,

there had been a substantial increase in time deposits.

Borrowings from

the Reserve Bank during December and early January were negligible.

District banks had been net sellers of Federal funds, with net sales

larger than during the preceding month.

Mr. Irons said he supposed, in view of economic conditions, that

it

would be appropriate to continue to follow a policy of ease and to be

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1/10/61

sure that reserves were adequate to enable the banking system to meet any

reasonable requirements imposed upon it.

This situation appeared to

have prevailed during the past 3 or 4 weeks, and he would suggest

continuing the present policy, although perhaps a little less aggressively.

He would think twice before deviating on the side of ease, and it would

be his preference to maintain free reserves in the area of $500-$600

million rather than $600-$700 million.

He shared the apprehensions

expressed by Messrs. Marget and Treiber regarding the international

situation.

The time might be getting nearer when more consideration

would have to be given to that problem and there would have to be a shift

in the direction of policy to narrow the rate differential, but he did not

think that such a point was yet at hand.

rate more in

He would like to see the bill

a range from 2-1/4 to 2-1/2 per cent, preferably the upper

part of that range.

The Federal funds rate should be below the discount

rate, but not much below.

In summary, Mr.

Irons said, he would try to avoid aggressively

pushing reserves into the market.

The domestic situation called for a

policy of ease, but not a policy of very aggressive ease, especially when

tied to an international problem which continued to discourage him more

than the domestic situation.

count rate.

He would not favor a reduction of the dis

In fact, he could almost find arguments for an increase,

although he was not at the point of making such a proposal at the moment.

He saw no reason for a change in the directive.

1/10/61

-19

Mr. Mangels reported that the over-all business picture in the

Twelfth District had not changed much in recent weeks.

A substantial

pickup in department store sales during the last two weeks in December

was sufficient to offset somewhat depressed conditions in the first part

of the month, with the result that sales figures for the five-week period

ending December 31 were about 3 per cent better than the previous year.

Automobile sales in California for the first week in December showed a

25 per cent increase over the daily average in November, and the November

figures were about 11 per cent higher than in the same month of the previous

year.

Steel production, at a little over 50 per cent of capacity, was

better than the national average.

about

In November, total construction was

7 per cent above the figure for the previous year, most of the

increase being accounted for by public works and utility contracts.

On

the darker side, lumber production reached a new low in November, and

orders in that month were lower than for any other month of 1960 except

January.

Unemployment in the Pacific Coast States in November was at the

rate of 6.6 per cent; this figure reflected a slight improvement from 6.8

per cent in October, but it

11 years.

was the highest November rate for the past

On the other hand, civilian employment in Pacific Coast States

was at an all-time high level in November.

Mr. Mangels said that demand deposits of District banks had increased

somewhat and that time deposits were up considerably, with a rather substantial

increase in

savings deposits,

in December.

Total bank credit showed the

1/10/61

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largest increase of the current year in December, with loans up more than

$200 million and Government securities holdings up more than $250 million.

In the past week or so, sales of Federal funds by District banks were about

double the amount of purchases.

The December interest rate survey of short

term business loans showed an average rate of 5.31 per cent, compared to

5.4 per cent in

September and 5.57 per cent in December 1959.

About one

third of the dollar amount of the loans covered by the survey were made

at the prime rate of 4-1/2 per cent, as against one-fourth in

September,

but the rate reductions were confined largely to loans in excess of

$100,000.

There had been practically no borrowing at the discount

window.

Mr. Mangels recalled that it

was mentioned at the December Com

mittee meeting, and again today by Mr. Thomas, that loan-deposit ratios

of banks continued to be high.

City banks in

He noted that the average for New York

December was 68.1 per cent, against 68.6 per cent in

November, while outside of New York City the average was 59.5 per cent

compared with 61.2 per cent in

November.

Over the past few months the

decline of ratios had been small, and banks therefore probably were not

looking aggressively for increases in their loan portfolios.

circumstances,

it

Under these

and in order to provide a slightly greater degree of ease,

would be his thought that the Desk should absorb less than the amount of

reserves that would become available in the forthcoming period.

He would

try to maintain an easy tone in the market and to keep net free reserves

in the range of $600-$700 million.

The present directive seemed

1/10/61

-21

satisfactory, particularly in its reference to the international situation,

and there seemed to him to be no need to change the discount rate.

Mr. Allen said that in the Seventh District a slow, gradual decline

in

economic activity seemed to have continued.

Official employment data

available through November showed reduction in virtually all lines of

manufacturing,

and fragmentary data available from other sources indi

cated that the trend had continued.

Further reduction of automobile

production schedules meant that unemployment would increase in

January,

particularly in Michigan.

Automobile production schedules for January called for 489,000

units, Mr.

less.

Allen reported, although private estimates were 450,000 or

That would compare with 522,000 produced in December.

Car

production of 6,700,000 in the year 1960 represented the second best

year in history, but saleswise the total of 6,143,000 cars was the

third best year.

Opinions obtained by the Detroit Branch suggested

that 1961 sales might fall

were more optimistic,

it

to 5,600,000.

Although others in

Detroit

seemed rather certain, in the light of sub

stantial inventories, that 1961 production would be well below that of

1960, which did not brighten the employment outlook.

Department store sales in the Seventh District showed a gain of

3 per cent over 1959 in the four weeks ended December 31.

In the last

week of the year the new index of steel production was 75 in Chicago and

68 in Detroit, compared with 59 for the nation.

Three mail order houses

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1/10/61

had announced that their spring and summer catalogs contained price cuts,

one stating that its

prices averaged 2.4 per cent below last year and

were the lowest since 1955.

Farm income in the District in

substantially higher than in 1959,

and it

1960 was

appeared that 1961 income

would be close to that of 1960.

Mr. Allen went on to say that the use of bank credit by business

remained below normal.

At District weekly reporting banks, loans to

commercial and industrial borrowers in December were down $60 million,

time since 1957 that these banks had reported a reduction in

the first

business loans in the last month of the year.

banks, both demand and time, rose in

Deposits by reporting

December; this had been the case

for smaller banks throughout the last half of the year.

Data on bank

reserves and borrowing indicated that reserve availability was still

quite large.

Mr. Allen commented that the picture in the Seventh District,

which he had attempted to summarize,

was a mixed one.

were favorable as well as unfavorable factors.

Certainly there

Reserve availability, the

particular concern of the System, seemed adequate at this time to support

a substantial increase in bank credit.

For the time being, Mr.

Allen said, he failed to see that a

change in monetary policy was called for or would contribute to an

improvement in economic activity.

changes in

Therefore, he would not advocate

the discount rate, the directive,

or the degree of ease.

1/10/61

-23

Mr. Leedy said that because of the importance of the winter wheat

crop in the Tenth District the condition of the growing wheat exerts a

psychological effect over a widespread area.

The December report showed

that the condition of the wheat was from good to excellent, although 1961

production was estimated at about 12 per cent less than the very large

crop harvested in 1960.

Snow and cold weather had slowed the use of

wheat pasture in parts of the District, but generally there was adequate

grazing for cattle and sheep.

Because of abundant feed supplies, a

considerable number of livestock had been withheld from the market.

Also, some sales of livestock, as well as last year's crops, had been

deferred to the current year for tax purposes, and as a result cash

receipts from farm marketings in District States during the fall months

were below the previous year.

Seasonally adjusted nonfarm employment

was unchanged from October to November, the latest month for which figures

were available.

Following the trend that existed throughout most of 1960,

there was a slight decline in manufacturing employment, but this was offset

by a rise in nonmanufacturing employment.

The cutbacks in defense contracts

to the aviation industry were a factor contributing to the lower level of

manufacturing employment.

Apparently there would be some further decline

in manufacturing employment in the early part of this year due to layoffs

that had been announced by automobile company assembly plants.

The volume

of construction was lower during the first 11 months of 1960; the figures

for December were not yet available.

While increases in construction

1/10/61

-24

contracts started after July, these were mainly due to nonresidential con

tracts and to the continued high level in the public works segment.

In

December there was a significant increase in department store sales which

continued through the end of the year, with the result that the year wound

up on the plus side, although only by about 1 per cent.

Turning to the banking developments in the District, Mr.

Leedy

said that loan demands failed to suggest any great strength in the business

segment during December.

However,

reporting member banks did increase

substantially their portfolios of Government securities in the maturity

range of less than five years.

At the end of the year total deposits

of reporting member banks were about $170 million higher than at the

end of 1959, with more than half of the increase --

around $94 million -

in time deposits.

As to policy, Mr. Leedy said it seemed to him that in the period

until the next meeting the Committee should undertake to see that further

easing in reserve positions did not occur.

Although the statistics did

not seem to lend much support to the optimistic psychology which appeared

to have developed quite recently, nevertheless that was a factor that

could not be ignored.

As long as the Federal funds rate was moderately

below the discount rate, and as long as the bill

rate fluctuated in a

range as high as 2-1/2 per cent, he would not be too much concerned.

Apparently there was going to be a chore of absorbing reserves,

and he

would prefer to make sure that the System absorbed enough rather than

1/10/61

-25

to operate in the other direction.

He would not make any further change

so far as System action was concerned.

Mr. Leach reported that in the closing weeks of 1960 business

activity in the Fifth District was marked by small but general and wide

spread declines, with only a few elements of strength and stability.

Both

employment and man-hours in manufacturing, seasonally adjusted, were down

in November and reached their lowest points of the year.

products was still

Demand for textile

slow and the mills remained on shortened schedules.

Inventories continued to accumulate and backlogs had dwindled, while

prices had eased further and were down substantially from a year ago.

New orders for lumber had continued to lag behind production and ship

ments, and extended holidays were scheduled to keep output closer to

demand.

Bituminous coal production during the first

half of December

was 25 per cent below the comparable period a year earlier even though

foreign shipments were higher.

included the following:

The few elements of strength and stability

Employment in construction had been steady for

the past six months at a level somewhat above that of a year earlier.

Contract awards for residential construction in November indicated that

activity in that area might be turning up after a long decline.

ment in the fields of finance,

or rising slightly.

Employ

services, and Government had been steady

Cash receipts from farming in the District for the

year 1960 were up 7 per cent from 1959 due to higher yields on smaller

acreage and better prices, with most of the gain occurring in tobacco,

the marketing season for which ended in December.

1/10/61

-26

The position of District member banks had eased further, Mr. Leach

said.

Since the Committee meeting in December, business loans of weekly

reporting banks had expanded less than seasonally, and total investments

had continued their contraseasonal rise.

The increase in investments

since the end of August had now reached nearly 11 per cent, well above

the rise during any recent year, with most of the increase occurring in

Government securities maturing in less than one year.

Borrowings at the

discount window had averaged only $2.5 million the past four weeks, less

than for any four-week period since 1952.

District banks remained large

net sellers of Federal funds.

With respect to policy, Mr. Leach said he continued to believe

that easing actions taken by the System since the decline in business

activity began last spring had been timely and sufficient.

Monetary

policy seemed to him to have already made its full contribution, barring

a greater deterioration in economic conditions than now appeared likely.

In view of the sizable expansion in time deposits, he was not as much

concerned as some appeared to be about the failure of the money supply

to expand more rapidly.

Banks should not be expected to make loans in

the absence of legitimate loan demand, and apparently under existing

conditions substantial amounts of demand deposits were being transferred

into time deposits because of unwillingness of the holders to spend.

During the past year the seasonally adjusted money supply decreased 0.9

per cent while time deposits were rising 8.2 per cent.

Of course, there

1/10/61

-27

are sound reasons for excluding time deposits from the definition of the

money supply, but one should not lose sight of the fact that the money

supply plus time deposits increased by 2 per cent while the money supply

itself was decreasing 0.9 per cent.

For the forthcoming period, Mr.

Leach indicated that he would

favor maintaining substantially the same degree of ease as in recent weeks,

taking care to mop up the reserves that appeared because of seasonal

reasons so as to avoid greater ease and a decline in

short-term rates.

He saw nothing to be gained by lower short-term rates, and something could

be lost.

He would be opposed to any lowering of the discount rate at

this time, and he saw no reason to change the directive.

Mr. Mills commented that over the period of each calendar year

the deliberations of the Open Market Committee shift their focus from one

economic and financial area to another, but inevitably decision-making

is tied to the interpretation of statistics that represent past events.

On occasions, therefore, decision-making will lag behind the events that

are rushing to a conclusion.

Mr. Marget's cogent discussion of the

balance-of-payments problem was based on events that had occurred

recently and were occurring currently, and they suggested that the focus

of the Committee's thinking and policy-making should shift drastically

from the domestic scene to the international scene.

The interpretation

that he (Mr. Mills) would place on policy thinking in recent times was

that it

represented in effect an attempt to poultice over cracks in the

domestic economy through the application of a monetary policy of ease at

-28a time when it

was quite probable that the cyclical trend of events could

not be responsive to monetary policy.

An evidence of that fact was the

situation which found the rate for Federal funds running consistently

below the discount rate, which would signify to him that funds were

piling up in the money market centers and were not being put to employ

ment by the recipient banks for reasons that had been repeatedly expressed,

most recently by Mr. Irons.

Looking strictly at the domestic scene, there

seemed to be little reason to follow a policy of continued monetary ease

or to attempt to maintain a level of net free reserves that was futilely

ignoring the responsibility on the part of the banks to expand the

resources placed at their disposal.

In his view, it

would be much more

in order to permit the reserve positions of the banks to tighten to a

degree that would find the short-term interest rate moving up from its

present artificially low level to a more realistic level which would be

conducive to checking the outflow of funds and possibly reversing it.

Mr. Mills commented that his own approach was a more heterodox

one than that of Mr. Irons.

The latter's approach dealt with the situation

more gingerly, whereas in Mr. Mills'

view the economic affairs of the

country had reached a point where it

became necessary to use monetary

policy as a surgical scalpel to correct dramatically a very difficult

international financial situation.

He would not go into the means by

which he would apply that scalpel because a sensitive area was involved

that deeply concerned the Treasury, bat he wished to call to the Committee's

1/10/61

-29

attention that in the press yesterday and this morning there were notices

that the President-elect was calling today on the Secretary of the

Treasury.

He also called attention to the fact that the New York

Chamber of Commerce, a responsible body, had issued a statement of its

concern about the international financial climate.

The point he was

leading up to was that it was a serious responsibility of the Federal

Reserve Banks and of the members of the Board of Governors to take into

account first

the international situation and to consider what definite steps

should be taken that would be most conducive to a more harmonious inter

national financial picture.

Mr. Robertson said that he too was concerned about the remarks

that had been made this morning concerning the international situation,

especially to the extent that they touched upon diminution of confidence

in the stability of the dollar.

It

seemed to him that the major contri

bution the Open Market Comittee could make today toward increasing the

confidence of the world in the stability of the dollar would be to follow

a policy that would do whatever was possible to reverse the trend of the

economy in this country.

The failure of bank lending rates to go down

was an indication that the System had not moved fast enough or far enough,

and the same thing was true with respect to long-term rates.

Consequently,

he would favor moving toward a greater degree of ease than yet achieved.

He would be much more reluctant to absorb reserves that would come into

the market over the next few weeks than others around the table had

1/10/61

-30

indicated; he would favor permitting a greater abundance of reserve availa

bility in the hope that this would have an effect in reversing the economic

trend.

This, he felt, was the real way in which System policy could be

effective.

If

the System adhered to what he regarded as the short-sighted

view of over-emphasizing the short-term Treasury bill

rate because of the

international situation and the outflow of funds, that outflow might in

fact be prolonged.

bill

In his opinion, it

would be much better to let the

rate go lower and turn the economic picture around.

He also would

indicate to the world the position of the Board of Governors and of the

Federal Reserve System by reducing the discount rate.

Continuing, Mr. Robertson said that since this was the beginning

of a new year he wished to express the hope, first, that in 1961 the Desk

would adhere to the rulings of the Committee, until they were changed,

regarding the use of repurchase agreements at lower than the discount rate

by using such agreements sparingly rather than at every opportunity.

Second, he hoped the Desk would refrain from offsetting every temporary

fluctuation in float merely to maintain a statistical free reserve figure.

The result of attempting to offset those fluctuations was not to change

the economic picture or the effective reserve structure of the country

but merely to subsidize the dealers who profit from the handling of

purchase and sale transactions.

Mr. Robertson said he saw no reason to change the policy directive

which, in its present wording, could be implemented in the manner he had

suggested.

In fact, the directive appeared to call for such a policy.

1/10/61

-31

Mr. Shepardson said it

was facing a situation that it

period of time.

It

seemed to him the economy of the country

had been due to face for a considerable

was beginning to be realized that there is

ference between a seller's market,

a dif

such as had existed for about twenty

years, and a buyer's market which is

the constructive type of marked for

a healthy sustained growth of the economy.

While some of the adjustments

were painful, nevertheless wholesome adjustments were taking place.

With reference to the considerable amount of current discussion

regarding depressed areas and the relief needed for them, Mr.

Shepardson

related a report that had come to his attention regarding the situation

in the Wheeling, West Virginia, area where a group of labor people had

decided that jobs at reasonable wages were better than no jobs at exorbi

tant wages and had started to try to rebuild industrial activity through

positive action to assure stability of the labor force.

only a single incident, it

receiving was wholesome.

While this was

seemed to him that the publicity it

was

He did not believe that flooding the market

with money at this time to try to stimulate loans which borrowers and

lenders obviously did not consider desirable would do any good.

it

Instead,

seemed to him that a posture of not constituting a restraining influence

represented as much as the System could do to assist the domestic economy.

In addition, the international situation was of increasing importance.

For these reasons he aligned himself with those who would not favor

further ease.

As a matter of fact, he would be inclined to go along with

the view that somewhat less ease than now prevailed might be appropriate.

1/10/61

It

-32

seemed to him that this was not a time to change the discount rate and

that there was no need to change the directive.

Mr. King said he had little faith in the ability of monetary

policy to reverse the present economic trend.

He believed that business

was awaiting the actions of the new Administration and the new Congress,

and this view had been strengthened in recent conversations with knowledgeable

members of the business community.

Businessmen were watching the situation

carefully and the domestic economic trend would be based largely on the

decisions that were made.

Internationally, people also would be watching

the new Congress and the new Administration closely.

Mr. King went on to

say that he had frequently scoffed at pessimists and had watched them turn

out to be wrong.

However, he believed that a point had been reached where

it would be a dangerous course to be optimistic and to be wrong.

In his

own view, and on the basis of comments by people with whom he had talked,

this year would probably be a year of drifting--some might call it

sliding--during which some contradictory indicators would be seen.

Activity might start up for a while and then slow down in some sector of

the economy, while activity in another sector might go down and then

level off.

Frankly, he was concerned.

He did not feel that there

could be any decisive movement upward, for the factors that would make

such a movement possible did not appear to be present.

The operating

budgets of business concerns were being cut, in some instances with which

he was familiar, and profit margins were expected to be lower than in 1960.

It appeared to him that an era had been entered in which it would be

1/10/61

-33

necessary to learn to live without inflation.

A restraint was imposed

automatically by international conditions, and it probably would have

arisen at about this point regardless of monetary policy.

In his opinion

this was a time when the System ought to be willing to explore all avenues

as objectively as possible.

It was a time to overcome lethargy and to

explore, at least, any new avenues without formulating conclusions in

advance.

Mr. King expressed the view that the money market should continue

to have a feel of relative ease.

He wished to align himself with the

views of Messrs. Irons, Mills, and Shepardson and of others who had spoken

in the same vein.

One of the things that would be needed in the year

ahead was statesmanship on the part of commercial bankers, and he hoped

that this quality would be found.

He hoped that it would be possible to

have some improvement in longer-term rates, but that seemed to lie within

the province of the commercial banks.

If there should be some improve

ment, the System might undertake a reinforcing effect to assure, to the

extent possible, that the bill rate did not recede from its present level

and, as time went on, that the rate worked into somewhat higher ground.

Although he did not believe it was feasible to ask the Desk to aim at any

particular level, he hoped that over the forthcoming period the trend

could be upward.

If there was to be any change in the discount rate, he

was inclined to feel that it

should be upward.

An increase might not do

-34

1/10/61

any great harm, but it would tend to deter any improvement that might be

hoped for in the longer-term rates of the commercial banks.

he would leave the discount rate unchanged.

Therefore,

He supposed that free reserves

probably would fluctuate fairly widely, but he would leave operations to

be guided principally by the feel of the market, keeping a tone of relative

ease.

In his opinion the availability of more money was not going to solve

the present dilemma.

Basically, Mr. King said, the pendulum had swung over the years

from a position of too much power on the one hand to a position of too

much power on the other hand.

Specifically, he had in mind increases

in wages which were artificial because they did not recognize any real

increase in output.

For the Government at this time to indicate to

businessmen and particularly to world bankers that it still thought it

could legislate prices would be an unfortunate situation.

that he had just talked about influencing the bill

certain direction.

He realized

rate to move in a

In fact, however, the System does operate in the bill

market; the purposes of the Federal Reserve call for operating in that

field.

Therefore, he did not feel that any contradiction was necessarily

involved.

Mr. Fulton said that most Fourth District business barometers had

sagged to their lowest points of 1960 at the end of the year.

The sluggish

ness of automobile sales possibly was due to bad weather toward the end of

the year; for the year as a whole, sales were 8 per cent above 1959.

1/10/61

-35

Department store sales barely measured up to the 1959 total for Christmas

season, although sales for the year were about 2 per cent ahead of the

previous year.

Construction had held up fairly well throughout the

year, with the strength largely in the commercial sector.

industries, the picture was far from bright.

For heavy

Steel orders thus far in

January were about 5 per cent above December, but that month was marked by

the closing of the mills over a long holiday, with the result that December

was an extremely low period.

Although some orders were coming in to fill

low inventories, by and large the situation was very spotty.

The auto

mobile companies were cutting back on orders now on their books and

were deferring deliveries.

Furthermore, foreign steel was now beginning

to come in in greater quantity and at lower prices.

If foreign economies

turned down and steel production was not fully used, United States producers

expected that there would be cut-rate competition in greater volume.

also were a problem.

Wages

There had been one wage increase in December,

according to contract, and another was due next October.

This would

increase costs to the extent that a price rise seemed inevitable, which

in turn would further weaken the competitive position of the industry.

Mr. Pulton then commented briefly on a talk given in Cleveland

last night by Mr. Per Jacobsson, Managing Director of the International

Monetary Fund, who emphasized the relationship between costs of American

and European producers.

Mr.

Jacobsson said in effect that if

the cost of

1/10/61

-36

United States goods was watched closely, the competitive situation would

to a great degree take care of itself.

United States producers must be

realistic about their costs, and the elements going into them would have

to be controlled carefully.

In further comments on the steel situation, Mr.

Fulton said that

the outlook for this year was not too good.

It

was expected that production

would be about the same as in 1960, that is,

approximately 100 million

tons, with some hope that by the fourth quarter production might get up

to an annual rate of about 120 million tons.

Producers were faced with

the fact that modern mills had now been erected throughout the world

with United States funds.

These mills would be operating with low-cost

labor, but they would be turning out good steel.

Moreover,

less steel

was being used per unit in the manufacture of automobiles and appliances.

With reference to the new index of steel production, Mr. Fulton

noted that the index used 1957-59 as a base period.

There was a recession

in 1958 and a long strike in 1959, so the base figure was only about 97

million tons a year, or about 1.86 million tons a week, compared with

actual capacity of about 150 million tons per year at present.

There

fore, although a national average of 73.1 for the latest week would at

first seem to reflect a fairly good situation, in fact production was

very low.

As to the foundries, which are regarded as a good indicator of

the future, Mr.

Fulton said he had been told that the trend of production

1/10/61

-37

could be called sideways, but only because it

could not get much lower.

Again, foreign competition was part of the picture.

Some materials could

be laid down in Chicago via the St. Lawrence Seaway for a lower price

than the foundries in

Chicago could make them.

The unemployment situation in the Fourth District was getting

worse, Mr.

Fulton said.

Nine major labor market areas were now classified

as having a substantial labor surplus as against six in July.

The latest

available report did not include Cleveland, which by now was undoubtedly

in that category.

In a recent survey of employers,

40 per cent of the

respondents expressed the opinion that there would be no change in

employment in the first

quarter, 30 per cent expected a decline, and

only 14 per cent expected improvement.

The layoffs in the auto industry

had affected the District directly because of the many parts made in Ohio

and Pennsylvania.

Summarizing, Mr. Fulton said that the Fourth District outlook was

not good.

Nevertheless,

he wished to associate himself with the view of

Messrs. Mills and Shepardson that an increase in ease would do nothing

for the economy except to make money rates sloppy, a situation that in

his opinion would not be desirable at this time.

It would not encourage

banks to lend; their high loan totals were the factor that established

their policy.

Neither would increased ease encourage people to buy.

Accordingly, he felt that this was a time to hold steady, with about the

same degree of ease, or a slightly firmer tone,

in order to protect a

bill rate of approximately 2-1/4 to 2-1/2 per cent.

any change in the discount rate or in the directive.

He would not recommend

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1/10/61

Mr. Bopp said there was nothing in the Third District to give

cause for much hope.

The unemployment situation was particularly

disturbing; since last spring new and continued claims for unemployment

compensation had risen steadily, and they exceeded the high level reached

in 1958.

However,

fairly well.

spending, although showing sluggishness, had held up

A late spurt brought department store sales for the Christmas

season to a level 2 per cent above 1959; for the year as a whole,

were about even with 1959.

sales

District banks had been experiencing increases

in loans and investments and in deposits recently, and their reserve positions

were reasonably comfortable.

Mr. Bopp indicated that he would not favor a change in the directive

or in the discount rate.

As to open market operations, he would recommend

He was hopeful that the

continuing along essentially the same lines.

Federal funds rate would be consistently below the discount rate and

that the bill

rate would stay at about the level presently prevailing.

With respect to the longer run, Mr.

Bopp commented that the ease

that had been achieved did not seem to have permeated the markets as much

as one would like, particularly the longer-term market, and at times the

money centers outside of New York seemed to experience considerable tight

ness.

In 1954 and 1958 the System reacted to similar developments by

flooding the market with funds, hoping that if

sufficient funds were injected

they would slop over to the long-term market.

There had been some second

thoughts on that policy.

However,

the present situation did raise the

1/10/61

-39

question whether it

might not be possible to be somewhat selective in

putting funds into the market.

Possibly, for example, reserves might be

provided at an appropriate time by a reduction of reserve requirements for

central reserve and reserve city banks rather than entirely by the purchase

of bills.

Diverse developments in the long-term market and in some areas

of the country during a period when generally easy conditions prevailed led

one to wonder whether something could not be done in the areas where one

would like to see something happen.

Mr.

Bryan said that in the Sixth District nothing dramatic was

happening in the economic field.

deterioration.

The figures still

showed a slow, steady

None of them seemed to be worsening significantly, but most

of them were deteriorating a little

more than the comparable national figures.

In the nation, as in the District, a slow deterioration seemed to be in

process.

It could be argued on a variety of hypotheses that the economy

was nearing a turn-around, but this remained hypothetical and at present

one must face the fact of deterioration.

One could also argue on a

variety of other hypotheses that the economy was going to slide faster.

Continuing, Mr. Bryan said he had been reviewing System policy

over the past year and, in the light of that review, trying to make up

his mind what the System ought to do.

It

seemed that there had been

several significant developments in the past year.

The System had largely

gotten the commercial banks out of debt, there was now a practical minimum

of borrowing, and the banks had built up their excess reserve position.

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1/10/61

There had been a rather dramatic shift in free reserves from the beginning

of the year to the present time, and since mid-year total reserves had

gone up rather dramatically.

In his opinion, that was all

the System had not gone too far.

to the good and

On the other hand, while he had made a

number of criticisms in the early part of the year, he could not find any

essential criticism in what had been done over the year as a whole, particu

larly in the second half.

Mr.

Bryan said he had again taken a look at the longer-run situation

in respect to reserves.

Unadjusted reserves were just a little

above the

long-run 3 per cent trend line, and on a seasonally adjusted basis reserves

were not significantly below the line.

Therefore, he found himself reasonably

satisfied with the System's posture at the present time and he had the feeling

that nothing dramatic needed to be done.

The policy he would advocate was

one of "staying where we are" and very slowly and very modestly adding a

little

to the reserve supply to permit the banks to provide for the normal

and natural growth factor that is

connection, Mr.

necessary in the economy.

In this

Bryan referred to a staff memorandum, distributed under

date of January 9,

1961, presenting tables designed to provide the Committee

a set of data that might serve as a test of past performance and a guide

to operations in

the immediate future.

he would be delighted if

For the next three weeks, he said,

the figures could be attained that had been

projected, although he would add to those reserves something very modest,

perhaps $50 million, as a growth factor.

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1/10/61

Turning to the international situation and the balance of payments,

Mr.

Bryan said he shared the feelings of alarm that had been expressed about

the situation.

However,

he was afraid that one could reach some erroneous

conclusions as to how the System ought to respond.

last time the System reacted in its

As he recalled, the

policy decisions primarily because of

foreign developments was when England went off the gold standard in 1931.

At that time, with unemployment constantly increasing and with every element

in the domestic economy calling for ease, the System responded by tightening

in order to protect the gold supply.

He was correct, he believed, in

that every student of that action had concluded that it

blunder.

saying

was a catastrophic

Before beginning to respond to the international situation by

means of monetary policy, he hoped the System would keep clearly in mind

that it

was errors in other fields, not in monetary policy, that had created

the balance-of-payments difficulties.

While abroad recently he had had

discussions with bankers of a high degree of sophistication who must be

aware daily of money flows, money rates, and exchange rates.

Never once

had one of them mentioned American monetary policy as a source of weakness

of the dollar, while matters such as foreign aid and the budgetary program

were mentioned many times.

Mr.

One could easily be led into great difficulty,

Bryan said, if he thought that by the use of monetary policy the System

could correct a situation that it

had not created and that it

could not

fundamentally and basically correct.

Mr. Johns said he did not claim to have an answer to the manifestly

hard dilemma with which the System was now confronted.

On the one hand

1/10/61

-42

there was the unsatisfactory state of the domestic economy, while on the

other hand there was a disquieting balance-of-payments situation and outlook,

with perhaps new evidence of deterioration in the confidence of the world

in the dollar.

To help his own thinking, Mr. Johns said, he had been trying

to consider what it might be appropriate to do, in light of the domestic

situation, if there were no balance-of-payments problem or if one were not

aware of a problem, as may have been the case in the not too distant past.

On that basis it

seemed to him one might well come to the conclusion that

the unsatisfactory state of the economy, as to which there seemed to be

almost uniform agreement, reflected a situation in which the banks and the

public at large still had unsatisfied liquidity desires.

While the banks

had done a good deal to repair their feelings of illiquidity, it was not

possible to say as yet that they had altogether corrected that feeling.

True,

the banks had paid off a good deal of debt to the Federal Reserve,

and they had accumulated more excess reserves than they had held for some

time.

Even so, however,

they seemed unwilling to commit their reserves,

or any significant part of them, to loans where the opportunity was afforded;

or failing that, as would be rather typical at this stage of the cycle, to

commit their reserves to significant amounts of investment.

As to the

liquidity desires of the public, which he thought were present and indicated,

it was not quite clear how those desires were to be satisfied unless there

was some significant expansion of bank credit.

Unless those desires were

satisfied, it seemed to him that the public would be likely to seek to

1/10/61

repair its

-3

feeling of illiquidity by further curtailing expenditures, and

that meant more recession.

On this premise--and he was still abstracting

the other problem--it seemed to him that the monetary authorities should

seek to supply reserves which would repair the banks' feeling of illiquidity

and dispose them to bring about some expansion of bank credit, thereby to

satisfy the liquidity desires of the public and to make the public more

favorably disposed to consumption and investment.

Having said that, he

came back to the realities of the situation, for there was a very real

balance-of-payments problem.

As to what extent that problem circumscribed

or even immobilized monetary policy, he did not have the answer.

it

seemed to him that in the long run it

would not be desirable,

the balance-of-payments problem, to prolong the recession.

In a way

considering

However, he

found himself favorably disposed to the suggestion that at this juncture

the country should rely primarily on fiscal policy.

Even though he had

some reservations about the efficacy of an easy fiscal policy and a tight

monetary policy, he would like to see fiscal policy used as quickly as

possible.

Pending the time, however, when fiscal policy could begin to

take effect, it occurred to him that monetary policy ought to be moving

cautiously and judiciously in the direction of repairing the feeling of

illiquidity which he thought still

pervaded the banking system and the public.

If fiscal policy and monetary policy were both delayed until there had

been a substantial deterioration in the economy, and particularly in

unemployment and employment,

the result might be more deterioration and

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1/10/61

perhaps ill-advised fiscal maneuvers that would come back later to haunt

everyone.

Therefore, he could not bring himself to believe that the time

was here for monetary policy to become restrictive; he would prefer to

indicate that the System would not permit the reserve position of the

banking system to deteriorate.

In this connection, he had thought in

terms of some modest increment of reserves, in the hope that it

would be

possible without too much delay to bring about an expansion of bank credit

and, on the part of the public, a more favorable disposition toward con

sumption and investment.

While he hesitated to suggest a figure, the $50

million increment suggested by Mr. Bryan for the next three-week period

seemed reasonable.

Mr.

Szymczak expressed the view, in the light of everything that

had been discussed at this meeting, that monetary policy had been about

right.

However, he thought it

would be desirable to explore further how

fiscal policy, debt management, and monetary policy could best fit together

in a period when there was a balance-of-payments problem.

The possibility

of operating in other areas of the Government securities market had been

mentioned, and he would like to see that explored by the staff so the

Committee might have a look at it.

a new look each time it

After all, the Committee should take

met and had a new situation facing it.

After referring the recent developments that had been mentioned by

Mr. Marget with regard to conversion of dollar balances into gold,

1/10/61

-45

Mr. Szymczak said that regardless of whether monetary policy alone could

do anything to relieve the problems related to the balance of payments,

debt management, fiscal policy, and monetary policy, working together,

should be able to do something to contribute to confidence in the dollar.

His suggestion, therefore, would be exploration by the staff and the

preparation of a paper for the Committee.

Mr. Balderston said that to him the policy followed by the Open

Market Committee during the past year seemed in retrospect to have been a

sound one.

For at least ten months the System had been pressing reserves

gradually on the commercial banks,

been done to date.

and he had no regrets about what had

At the December meeting he had urged the Committee to

continue to press reserves on the banks, with the thought that the banks

would either lend or invest.

At present it

seemed to him one might well

feel that the System had given the economy a full shot in

time being, that it

the arm for the

had supplied the reserves that could be used con

structively for a revival of the economy.

As to the gold outflow, Mr. Balderston commented that there seemed

to have been a fundamental change in the situation.

For many months the

gold outflow was only a part of the total deficit, but now it

appeared from

the available figures that the gold outflow was greater than the deficit.

If

dollar holdings were declining at a time when the gold outflow was still

large, that meant that the outflow currently was due in part to conversion

of dollar balances into gold, not only by private individuals but by

1/l0/61

-46

foreign central banks.

In view of that critical situation it

seemed to

him that the gold outflow needed to be given just as much emphasis in one's

thinking as the domestic problem.

He shared, of course, the view that

the System must not attribute more to monetary policy than it

He remembered, for example,

merited.

the British experience in 1955 when monetary

policy was saddled with more of a load than it

could carry in the absence

of fiscal support.

Therefore, he agreed that monetary policy alone could

not turn the tide.

It would take the support of the Treasury and especially

of the Congress.

However, he felt the time had come to stop pressing

reserves aggressively upon the banks.

In concrete terms, he would like to

see the seasonal return flow of reserves mopped up completely, or almost

completely, the yardstick being the Federal funds rate.

He would like to

see that rate at the discount rate, or very little below the discount

rate, with the bill rate as high as it

higher.

had been and if possible somewhat

The System had experienced good fortune in the large accumulation

of bills by the Government securities dealers.

Once they worked out of

that situation, the bill rate would be under pressure, as he had thought

it would be before this time.

In summary, Mr. Balderston said, he believed that the Committee

should not only readjust its policy today but that it should watch

developments during the weeks ahead with extreme care.

He suggested

the possibility of meeting again two weeks from today in order to keep

on top of the problem.

Chairman Martin commented that he had been reviewing the minutes

of the Open Market Committee, which he felt was a desirable procedure

for all members to follow periodically.

Sometimes statements attributed

to him did not have quite the emphasis that he had intended, but this

illustrated the difficulty of conveying all

of the inflections of the

comments that are made during a discussion involving a group of nineteen

men.

Thus, the operation of an account by a large group has some definite

limitations.

However,

slowly, perhaps,

it

also has some merit.

Although sometimes too

at least for his own satisfaction, the discussions of

the Committee do evolve a policy.

that there were advantages,

procedure when working in

On balance, he was inclined to think

as well as disadvantages,

in the current

so complex an area.

Continuing, the Chairman said it

was his conviction at the moment

that the policy of the Federal Reserve ought to be one of remaining steady

in the boat.

With a new Administration coming into office shortly, he

thought that the Federal Reserve should not be moving drastically in either

direction.

In fact,

if

there was ever a time to be steady in the boat,

would seem to be right now.

Having said that, he realized that the System

must face up to the problems at hand.

As had been mentioned a number of

times, monetary policy cannot do everything.

well the 1931 experience,

it

Mr.

Bryan had pointed out

though he (Chairman Martin) wished to point out

one significant difference between that situation and the present,

namely,

that in 1931 there was no question with respect to the credit of the United

1/10/61

States.

48

As he had indicated at previous meetings, he felt that the principal

shadow over the domestic economy was the problem of the balance of payments.

True, that problem arose from a variety of sources,

including foreign aid

and military support programs and primarily, as Mr.

Shepardson had mentioned,

the shift from a seller's to a buyer's market which probably had finally

come to pass.

Chairman Martin went on to say that, as indicated by the discussion

this morning, there was occurring perhaps an evolutionary reappraisal

of System policy.

It is a good thing, he suggested, to have dissenting

views before the Committee rather than to have all of the members think

ing in the same pattern.

In time, perhaps, all

of those views would

coalesce into a policy which would be a better policy than if everyone

just followed along.

The Chairman said he did not think the time had come to increase

the discount rate.

Similarly, he thought it

lower the discount rate at this juncture.

would be irresponsible to

The total problem, which was

more serious than generally appreciated, involved more than an outflow

of gold.

Rather, it

reflected uncertainties in the whole world situation.

For example, there was the situation in the Congo and the Cuban problem,

along with the fact that the pound sterling was not quite as strong as

it might be.

Accordingly, in terms of the gold supply of the world the

tendency of people in many places was to think that the situation might be

heading toward a world economic crisis of some sort.

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1/10/61

Personally, he did not believe that that was going to happen.

Never

theless, it was incumbent upon the System to recognize that it was

possible for people to prefer gold to any currency.

Some leakage of

gold was occurring, reflecting not only uncertainties about the dollar

but about world institutions generally.

The dollar, which had stood out

as a symbol for a long period of time, had now lost some of its

polish.

In his opinion, this was the foremost problem that the new Administration

would have to face, but he hoped that the System would not get too excited

and that it

would feel its

way along in terms of policy.

Chairman Martin then commented on difficulties of phraseology,

pointing out that terms such as "aggressive ease,"

"less aggressive ease,"

and "less easy" all may mean different things to different people.

fore, he could understand the problem of the Account Management.

There

However,

he felt the general consensus today probably was in the neighborhood of

maintaining the status quo and that the majority did not want to move too

much in either direction.

The Chairman said that personally he would not want to appear

to be embarking on a policy of sloppy ease at this moment.

As Mr.

Johns had pointed out, the banks were not quite as liquid as they would

like.

On the other hand they had made great strides in that direction.

The Chairman was not sure that forcing the banks too much toward seeking

loans aggressively would be a service to the people to whom they would

lend the money at the present time.

Profit margins and other business

1/10/61

-50

factors would be under close review.

As noted by Mr. King, probably the

period when productivity and wages had little relationship had come to

an end.

All of these things should be taken into consideration, Chairman

Martin said.

With only a short time remaining before the new Administration

came into office, and in view of the fact that the country was in the midst

of a gold outflow,

in his opinion the Federal Reserve should remain steady.

It was difficult, he suggested, to assess how mild the outflow of gold

actually would be.

In his own mind he saw a certain similarity between

this period and the period of pressure on the bond market in 1951 in the

sense that at that time people were saying each day that there was no real

pressure because only a limited volume of transactions had taken place.

As at that time, however, there were forces accumulating which, unless

properly handled, might lead to real trouble.

the moment,

no one could really correct it

As to the gold problem at

except the incoming Administration.

The Chairman went on to say that he was by no means pessimistic

and that he felt the business picture was perhaps better than generally

realized.

As he had said before, in his view the biggest shadow over it

was the balance-of-payments problem, which exerted an effect in many ways

that were not generally appreciated, including the willingness of banks to

extend credit.

This was something that it

had not been necessary to deal

with in this country for many years, and therefore the problem had drifted

out of the area of serious discussion for a long time.

1/10/61

-51

After referring to the volume of suggestions currently being made

for various courses of action that might be taken in dealing with economic

problems, the Chairman said it was still a fact that the economy was doing

surprisingly well and that there was surprisingly little

real suffering.

This was not to say that there was no suffering among the unemployed,

but

the situation was not one of panic or disaster and the strong points in

the economy should not be ignored.

At this point Chairman Martin referred to the suggestion of Mr.

Balderston that the Open Market Committee meet again in two weeks.

a new Administration shortly to take office,

With

and in view of the fact that

the country was experiencing a continuing gold outflow and a good many

ideas about economic problems were being passed around, he felt that it

would be the part of wisdom for the Open Market Committee to plan to meet

in two weeks and then again after another two-week period.

This would

afford an opportunity for the Committee to be brought up to date on

problems of transition between Administrations, to keep abreast of develop

ments, and to have discussions such as had taken place this morning.

Chairman Martin then commented that no specific change in the

directive had been proposed at this meeting.

He again stated that he

thought the consensus was to hold close to the status quo.

The Chairman inquired of Mr. Robertson whether he would like to

be recorded as dissenting, and the latter replied by expressing agreement

that the consensus stated by the Chairman reflected the majority view.

-52No further comments being heard, Chairman Martin stated that, as

usual, each person's views would be recorded fully in the minutes.

Thereupon, upon motion duly

made and seconded, it was 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 securities, by

direct exchange with the Treasury, as may be necessary in the

light of current and prospective economic conditions and the

general credit situation of the country, with a view (a) to

relating the supply of funds in the market to the needs of

commerce and business, (b) to encouraging monetary expansion

for the purpose of fostering sustainable growth in economic

activity and employment, while taking into consideration current

international developments, and (c) to the practical adminis

tration 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;

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

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

where it seems desirable, to issue participations to one or more

Federal Reserve Banks) such amounts of special short-term certifi

cates 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.

Pursuant to Chairman Martin's suggestion, it was agreed that

the next meeting of the Federal Open Market Committee would be held

in Washington on Tuesday, January 24, 1961, and that the succeeding

meeting would be tentatively scheduled for Tuesday, February 7, 1961.

1/10/61

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Mr.

Johns commented that plans were in process for a meeting

of the Conference of Presidents of Federal Reserve Banks on Monday,

March 6, 1961, with thought that a meeting of the Board and the Presi

dents would be held the following day.

After a brief discussion, it

was understood that this schedule would be continued to be used as a

basis for planning.

At this point all of those present withdrew from the meeting

except the members and alternate members of the Committee, the Reserve

Bank Presidents who are not currently members of the Committee, and

Messrs. Young and Rouse.

During the course of a discussion, Chairman Martin suggested

that the Ad Hoc Subcommittee that had been authorized at the meeting on

May 17, 1951, and which submitted its report under date of November 12,

1952, be reactivated for the purpose of studying certain aspects of open

market operations, with the membership of the Committee increased to

include the Vice Chairman of the Federal Open Market Committee and the

Vice Chairman of the Board of Governors.

With this adjustment the

membership of the reactivated Committee would include, in addition to

Chairman Martin, Messrs. Balderston, Bryan, Hayes, and Mills.

The

Chairman also suggested that Messrs. Young and Rouse be designated to

serve as technical advisers to the Committee.

1/10/61

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This suggestion was approved unanimously, with the understanding

that Chairman Martin would initiate studies by the Committee at such

time as he decided was appropriate.

Thereupon the meeting adjourned.

Secretary