fomc minutes · March 6, 1961

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, March 7, 1961, at 10:00 a.m.

PRESENT:

Mr.

Martin, Chairman

Hayes, Vice Chairman

Allen

Balderston

Irons

King

Mills

Mr. Robertson

Mr. Shepardson

Mr. Swan

Mr. Szymczak

Mr. Wayne

Messrs. Ellis, Fulton, Johns, and Deming, Alternate

Members of the Federal Open Market Committee

Messrs. Bopp, Bryan, and Clay, Presidents of the

Federal Reserve Banks of Philadelphia, Atlanta,

and Kansas City, respectively

Mr. Young, Secretary

Mr. Sherman, Assistant Secretary

Mr. Kenyon, Assistant Secretary

Mr. Hackley, General Counsel

Mr. Hexter, Assistant General Counsel

Mr. Thomas, Economist

Messrs. Einzig, Garvy, Mitchell, Noyes and

Walker, Associate Economists

Mr. Rouse, Manager, System Open Market Account

Mr. Molony, Assistant to the Board of Governors

Mr. Marget, Director, Division of International

Finance

Messrs. Holland and Koch, Advisers, Division of

Research and Statistics, Board of Governors

Mr. Knipe, Consultant to the Chairman, Board of

Governors

Mr. Yager, Economist, Government Finance Section,

Division of Research and Statistics, Board of

Governors

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Mr.

Petersen, Special Assistant, Office of the

Secretary, Board of Governors

Messrs. Eastburn, Jones, Parsons, and Tow, Vice

Presidents of the Federal Reserve Banks of

Philadelphia, St. Louis, Minneapolis, and

Kansas City, respectively

Mr. Black, Assistant Vice President, Federal

Reserve Bank of Richmond

Mr. Eisenmenger, Acting Director of Research,

Federal Reserve Bank of Boston

Mr. Brandt, Assistant Cashier, Federal Reserve

Bank of Atlanta

Mr. Holmes, Manager, Securities Department,

Federal Reserve Bank of New York

In the agenda for this meeting, the Secretary reported that

advice had been received of the election by the Federal Reserve Banks

of members and alternate members of the Federal Open Market Committee

for a period of one year commencing March 1,

1961, and that it

appeared

the persons would be legally qualified to serve after they had executed

their oaths of office.

Prior to the meeting, each newly elected member

and alternate member had executed the required oath of office.

The

members and alternate members were as follows:

Alfred Hayes, President of the Federal Reserve Bank of New

York, with William F. Treiber, First Vice President of

the Federal Reserve Bank of New York, as alternate member;

Edward A. Wayne, President of the Federal Reserve Bank of

Richmond, with George H. Ellis, President of the Federal

Reserve Bank of Boston, as alternate member;

Carl E. Allen, President of the Federal Reserve Bank of

Chicago, with W. D. Fulton, President of the Federal

Reserve Bank of Cleveland, as alternate member;

Watrous H. Irons, President of the Federal Reserve Bank of

Dallas, with Delos C. Johns, President of the Federal

Reserve Bank of St. Louis, as alternate member;

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Eliot J. Swan, President of the Federal Reserve Bank

of San Francisco, with Frederick L. Deming, President

of the Federal Reserve Bank of Minneapolis, as alter

nate member.

Upon motion duly made and seconded, and

by unanimous vote, the following officers of

the Federal Open Market Committee were elected

to serve until the election of their successors

at the first meeting of the Committee after

February 28, 1962, with the understanding that

in the event of the discontinuance of their

official connection with the Board of Governors

or with a Federal Reserve Bank, as the case

might be, they would cease to have any official

connection with the Federal Open Market Committee:

Wm. McC. Martin, Jr.

Alfred Hayes

Ralph A. Young

Merritt Sherman

Kenneth A. Kenyon

Howard H. Hackley

David B. Hexter

Woodlief Thomas

Robert S. Einzig, George Garvy,

George Mitchell, Guy E. Noyes,

Benjamin U. Ratchford, and

Charls E. Walker

Chairman

Vice Chairman

Secretary

Assistant Secretary

General Counsel

Assistant General Counsel

Economist

Associate Economists

Upon motion duly made and seconded, and

by unanimous vote, the Federal Reserve Bank

of New York was selected to execute trans

actions for the System Open Market Account

until the adjournment of the first meeting

of the Committee after February 28, 1962.

Upon motion duly made and seconded, and

by unanimous vote, the selection by the Board

of Directors of the Federal Reserve Bank of

New York of Robert G. Rouse as Manager of the

System Open Market Account was approved.

Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meetings

of the Federal Open Market Committee held on

January 24 and February 7, 1961, were approved.

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The next item listed on the agenda for consideration was the

review of the Committee's continuing operating policies, as follows:

It is not now the policy of the Committee to support any

pattern of prices and yields in the Government securities

market, and intervention in the Government securities

market is solely to effectuate the objectives of monetary

and credit policy (including correction of disorderly

markets).

Operations for the System Account in the open market, other

than repurchase agreements, shall be confined to short-term

securities (except in the correction of disorderly markets),

and during a period of Treasury financing there shall be no

purchases of (1) maturing issues for which an exchange is

being offered, (2) when-issued securities, or (3) outstanding

issues of comparable maturities to those being offered for

exchange; these policies to be followed until such time as

they may be superseded or modified by further action of the

Federal Open Market Committee.

Transactions for the System Account in the open market shall

be entered into solely for the purpose of providing or

absorbing reserves (except in the correction of disorderly

markets), and shall not include offsetting purchases and

sales of securities for the purpose of altering the maturity

pattern of the System's portfolio; such policy to be followed

until such time as it may be superseded or modified by

further action of the Federal Open Market Committee.

Chairman Martin stated that the Ad Hoc Subcommittee appointed

at the meeting of the Open Market Committee on January 10, 1961, met

yesterday afternoon and had a general discussion.

It was the unanimous

feeling of the Subcommittee that a great deal of conscientious and

excellent work had been done on the study of the continuing operating

policies.

However, since this was such an important matter, it was

felt that it would not be wise to try to hasten to a conclusion.

Therefore, it was the suggestion of the Subcommittee that consideration

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of possible changes in the operating policy statements be tabled in

order that everyone might have an opportunity to review and study

carefully all of the material compiled by the Subcommittee.

The Chairman then turned to Mr. young, who stated that in

preparation for a recommendation by the Subcommittee on the operating

policies the secretariat undertook a draft that was thought to be

consistent with the prevailing thinking.

This draft was sent to the

members of the Subcommittee prior to the meeting yesterday afternoon.

Also,

after consultation with Chairman Martin, the draft was sent to

all Committee members and Presidents not currently serving on the

Committee in order to obtain comments and reaction.

Various comments

and memoranda were received in reply, following which the secretariat

took an inventory of the suggestions and recast the original draft

material.

In doing so, an effort was made to take into account to

the fullest extent possible the suggestions that had been advanced,

not directly then by some manner of rephrasing.

One issue that

remained for decision was whether any revised statements should be

called operating "policies" or operating "rules of practice."

Another

issue was whether the material should be reduced to the fewest possible

statements or whether the material should be kept rather inclusive.

The New York Bank,

for example, had proposed in a memorandum from Mr.

Hayes dated March 1, 1961, that the number of rules be kept to a

minimum.

A further question was whether the authority to engage in

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transactions in longer-term Government securities should be reserved to

the Committee or whether open authority should be given to the Management

of the Open Market Account.

This question, on which the secretariat went

one way and the memorandum from Mr. Hayes went in the other direction,

must be thought through carefully by the Committee and a decision reached.

There was also the question whether it would be desirable that the

Committee's directive to the New York Bank, as the Reserve Bank selected

to execute transactions for the System Account, be divided into a

standing authorization and a current policy directive.

The standing

authorization would contain the detailed instructions for operation of

the System Account that change only rarely, while the current policy

directive would outline the specific monetary objectives to be sought

in open market transactions during the period from the close of the

meeting at which the directive was adopted until the next meeting.

The

secretariat rather leaned toward the view that it would be desirable to

break the directive into these two parts, and generally that view seemed

to have found favor with the Committee members and other Presidents.

However,

at least one member of the Subcommittee felt that in making

the division the Committee should go further and provide a current

policy directive that would include enough specifications to define

quite precisely the range within which the Manager of the Account might

operate until the succeeding meeting of the Committee.

This again was

a matter that the Committee must think through, discuss, and decide.

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Chairman Martin stated that all of the members of the Committee

and Presidents not currently serving on the Committee either had or

would receive all of the draft material mentioned by Mr. Young.

He then

said that unless there were general comments this morning, he would

suggest that further consideration of the subject be tabled until a

later meeting.

Mr.

Mills said that on reading the secretariat's proposal and

the suggested amendments to it, his reaction had been that the operating

policies should be streamlined and that the flexibility in the operation

of the Account should be focused in the directive given by the Committee

at each of its meetings.

He did not know whether other members of the

Ad Hoc Subcommittee had approached the problem in that way.

However,

it seemed to him that this was a fundamental question that must come up

for decision by the entire Committee.

The Chairman then turned to Mr. Irons, who said that he thought

Mr. Young had presented the issues quite clearly.

It would be desirable

for all of the Committee members to review fully what had been done thus

far, and then the Committee must try to reach a decision.

Chairman Martin pointed out that Mr. Bryan was one of the Com

mittee members originally named to the Ad Hoc Subcommittee.

In Mr.

Bryan's subsequent absence, his alternate on the Open Market Committee

(Mr. Irons) had been asked to participate in the work of the Subcommittee.

Now that Mr.

Bryan had returned, both he and Mr. Irons would be included

on the Subcommittee.

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Mr. Hayes said he had a good deal of sympathy with what Mr.

Mills had said.

seemed to him that the memorandum he (Mr.

had submitted spoke for itself.

Hayes)

In brief, he felt that the broader and

more flexible the statement of operating policies could be, the better

would be in the light of all the present circumstances.

There was

no disposition at all on his part or, he felt sure, on the part of Mr.

Rouse to limit the complete authority of the Committee to change its

mind at each meeting and give whatever instructions it

Manager of the Account.

desired to the

However, the idea of having the briefest possible

continuing policy statement seemed worthy of consideration.

Mr. Balderston commented that a rather specific current operating

directive such as had been suggested by Mr. Irons would be difficult to

prepare immediately at the conclusion of each meeting.

He (Mr.

Balderston)

had sympathy with the need for better communication with the Desk by

some means.

However,

Mr.

Irons' idea were favored, thought would have

to be given to the method of implementing it.

There being no further comments,

was agreed to table the

consideration of the possible changes in the operating policy statements.

Consideration was next given to the continuing authorizations of

the Committee customarily reviewed at the first

meeting in March of each

year, and the actions set forth subsequently in these minutes were taken

concerning the matters that had been listed on the agenda for review at

this meeting.

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It was agreed unanimously that no action

should be taken at this time to amend or

terminate the resolution of November 20, 1936,

authorizing each Federal Reserve Bank to

purchase and sell, at home and abroad, cable

transfers, bills of exchange, and bankers'

acceptances payable in foreign currencies, to

the extent that such purchases and sales may

be deemed to be necessary or advisable in

connection with the establishment, maintenance,

operation, increase, reduction, or discontinu

ance of accounts of Federal Reserve Banks in

foreign countries.

A plan for allocation of securities in the System Open Market

Account on the basis of total assets of the Reserve Banks became effective

September 1, 1953, pursuant to action of the Federal Open Market Committee

at its meeting on June 11, 1953.

This procedure was amended at the meeting

on March 1, 1960, effective April 1, 1960.

Prior to this meeting, there

had been distributed to the members of the Committee (1) a memorandum

from Messrs. Rouse, Manager of the System Open Market Account, and

Farrell, Director of the Board's Division of Bank Operations, dated

February 24, 1961, containing a pro forma reallocation of securities held

in the System Account as of February 1, 1961, and (2) a memorandum from

Messrs. Rouse and Farrell dated February 28, 1961, recommending an amend

ment to the statement of procedure for allocating the System Open Market

Account.

The proposed change in the statement of procedure involved the

fourth paragraph only, which currently read as follows:

Increases and decreases in total amount held in the

Account shall be apportioned on the basis of the ratios

computed for the latest general reallocation.

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Mr. Rouse said that the proposed change, as follows, was intended

to clarify the existing language and did not involve any revision of

current procedure:

The Account shall be apportioned during the ensuing

twelve months on the basis of the total assets ratios

computed for the latest general reallocation after

allowing for any adjustments as provided for in Para

graph 3, unless there shall be further adjustments

described in Paragraphs 5 or 6.

Thereupon, upon motion duly made and

seconded, the procedure for allocation of

securities in the System Open Market Account

adopted pursuant to action of the Federal

Open Market Committee on June 11, 1953, and

amended at the meeting on March 1, 1960, effec

tive as of the April 1, 1960, reallocation, was

further amended, effective as of the April 3,

1961, reallocation, to reflect incorporation of

the change recommended in the memorandum from

Messrs. Rouse and Farrell dated February 28,

1961, it being understood that the reallocation

to be made as of April 3, 1961, would be based

on the ratios of each Reserve Bank's daily

average of total assets to the total for all

Reserve Banks for the period March 1, 1960,

through February 28, 1961.

It was agreed unanimously to continue

the existing authorization for distribution

of periodic reports prepared by the Federal

Reserve Bank of New York for the Federal

Open Market Committee, as follows:

*4.

*5.

*6.

*7.

The Members of the Board of Governors.

The Presidents of the twelve Federal Reserve Banks.

Officers of the Federal Open Market Committee.

The Secretary of the Treasury.

The Under Secretary of the Treasury for Monetary Affairs.

The Assistant to the Secretary of the Treasury working on

debt management problems.

The Fiscal Assistant Secretary of the Treasury.

* Weekly reports of open market operations only.

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10.

11.

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The Director of the Division of Bank Operations of the

Board of Governors.

The officer in charge of research at each of the Federal

Reserve Banks not represented by its President on the

Federal Open Market Committee.

The alternate member of the Federal Open Market Committee

from the Federal Reserve Bank of New York; the Assistant

Vice President of the Federal Reserve Bank of New York

working under the Manager of the System Account; the

Managers of the Securities Department of the New York

Bank; the officer in charge and the Assistant Vice

President of the Research Department of the New York

Bank; and the confidential files of the New York Bank

as the Bank selected to execute transactions for the

Federal Open Market Committee.

With the approval of a member of the Federal Open Market

Committee or any other President of a Federal Reserve

Bank, with notice to the Secretary, any other employee

of the Board of Governors or of a Federal Reserve Bank.

Unanimous approval was given to the

continuation of the authorization to the

Manager of the System Account to engage in

transactions on a cash as well as a regular

delivery basis.

Upon motion duly made and seconded, the

Committee approved, with Mr. Robertson dis

senting, a renewal of the existing authorization

to the Federal Reserve Bank of New York to enter

into repurchase agreements with nonbank dealers

in United States Government securities, subject

to the following conditions:

Such agreements

(a) In no event shall be at a rate below whichever is

the lower of (1) the discount rate of the Federal

Reserve Bank on eligible commercial paper, or (2)

the average issuing rate on the most recent issue

of three-month Treasury bills;

(b) Shall be for periods of not to exceed 15 calendar

days;

within 15 months; and

(d) Shall be used as a means of providing the money

market with sufficient Federal Reserve funds to

avoid undue strain on a day-to-day basis.

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Reports of such transactions shall be included in the

weekly report of open market operations which is sent

to the members of the Federal Open Market Committee.

In the event Government securities covered by any such

agreement are not repurchased by the dealer pursuant to

the agreement or a renewal thereof, the securities thus

acquired by the Federal Reserve Bank of New York shall

be sold in the market or transferred to the System Open

Market Account.

Mr. Robertson dissented on the ground that in his opinion

repurchase agreements are, in fact, not purchases of securities in the

open market, such as the Reserve Banks are authorized by law to enter

into, but instead are loans to dealers at fixed interest rates that

are not related to yield on the securities, and that such loans are

beyond the statutory authority of the Reserve Banks.

He realized that

other members of the Committee considered such purchases legal, but in

view of his doubt as to the legality thereof he believed the repurchase

agreements should not be entered into on a wholesale basis, as they had

been during the past year, but rather should be used only as a last

resort to finance dealers who are unable to obtain loans at reasonable

rates from others in order to aid them in maintaining an adequate market

for Government securities.

Furthermore, he was of the opinion that, for reasons he had

stated many times during the past eight years, nonbank dealers should

not be given preferential treatment by being furnished loans from the

Federal Reserve Bank of New York at lower rates than member banks are

obliged to pay for loans from the same Reserve Bank.

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The Committee approved, with Mr.

Robertson dissenting, a renewal of the

authorization to the Federal Reserve Bank

of New York (last renewed March 1, 1960)

to purchase bankers' acceptances and to

enter into repurchase agreements therefor.

The authorization was as follows:

The Federal Open Market Committee hereby authorizes the

Federal Reserve Bank of New York for its own account to buy

from and sell to acceptance dealers and foreign accounts main

tained at the Federal Reserve Bank of New York, at market

rates of discount, prime bankers' acceptances of the kinds

designated in the regulations of the Federal Open Market Com

mittee, at such times and in such amounts as may be advisable

and consistent with the general credit policies and instructions

of the Federal Open Market Committee, provided that the aggregate

amount of such bankers' acceptances held at any one time by the

Federal Reserve Bank of New York shall not exceed $75 million,

and provided further that such holdings shall not be more than

10 per cent of the total of bankers' acceptances outstanding

as shown in the most recent acceptance survey conducted by the

Federal Reserve Bank of New York.

The Federal Open Market Committee further authorizes the

Federal Reserve Bank of New York to enter into repurchase

agreements with nonbank dealers in bankers' acceptances covering

prime bankers' acceptances of the kinds designated in the

regulations of the Federal Open Market Committee, subject to

the same conditions on which the Federal Reserve Bank of New

York is now or may hereafter be authorized from time to time

by the Federal Open Market Committee to enter into repurchase

agreements covering United States Government securities,

except that the maturities of such bankers' acceptances at

the time of entering into such repurchase agreements shall

not exceed six months, and except that in the event of the

failure of the seller to repurchase, such acceptances shall

continue to be held by the Federal Reserve Bank or shall be

at the same rate as that applicable, at the time of entering

into such agreements, to repurchase agreements covering United

States Government securities.

Mr. Robertson voted against the renewal of the authority to

purchase bankers'

acceptances because he felt that the Federal Reserve

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System should encourage the utmost freedom of market forces and there

fore should withdraw from active participation in the acceptance market

in the absence of clear indication that such participation would yield

specific public interest benefits. He was not aware of any evidence

that such benefits had been realized since the authorization was given

to the Federal Reserve Bank of New York in 1955.

Needless to say, he

would oppose the use of repurchase agreements covering bankers'

acceptances not only for these reasons but also for the reasons he had

given for opposing the use of repurchase agreements covering Government

securities.

Mr. Hayes stated that when the acceptance market started in

New York the Federal Reserve System took an active interest in promoting

and helping it. In his opinion the System had a legitimate interest

in doing its part to make that market as broad and sound as possible.

Acceptances, he said, are inherently a desirable medium for operations

by a central bank.

Further, the participation of the Federal Reserve

was such a small fraction of the total of acceptances outstanding that

in no sense could it be said that the Federal Reserve was making the

market.

Mr. Robertson said that he had a fundamental belief in free

markets, with as little

authorities as possible.

intervention on the part of Governmental

The acceptance market was an area where it

was not necessary to intervene.

As he saw it,

the Federal Reserve could

not help but affect the market through its operations, to no good purpose.

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The Committee approved by unanimous vote

the continuation without change of the existing

authorization for fixing the rate charged on

special short-term certificates of indebtedness

purchased direct from the Treasury, pursuant to

paragraph (2) of the Committee's policy directive

to the Federal Reserve Bank of New York, at 1/4

of 1 per cent below the discount rate of the

Federal Reserve Bank of New York at the time of

such purchase.

The Committee reaffirmed by unanimous vote

the authorization for the Chairman to appoint a

Federal Reserve Bank to operate the System

Account temporarily in case the Federal Reserve

Bank of New York is unable to function, such

authorization having first been given on March 1,

1951, and having been renewed in March of each

year since.

The following resolution to provide for

the continued operation of the Federal Open

Market Committee during an emergency was reaf

firmed by unanimous vote:

In the event of war or defense emergency, if the Secretary

or Assistant Secretary of the Federal Open Market Committee

(or in the event of the unavailability of both of them, the

Secretary or Acting Secretary of the Board of Governors of the

Federal Reserve System) certifies that as a result of the

emergency the available number of regular members and regular

alternates of the Federal Open Market Committee is less than

seven, all powers and functions of the said Committee shall be

performed and exercised by, and authority to exercise such

powers and functions is hereby delegated to, an Interim Com

mittee, subject to the following terms and conditions:

Such Iterim Committee shall consist of seven members,

comprising each regular member and regular alternate of the

Federal Open Market Committee then available, together with

an additional number, sufficient to make a total of seven,

which shall be made up in the following order of priority

from those available: (1) each alternate at large (as defined

below); (2) each President of a Federal Reserve Bank not then

either a regular member or an alternate; (3) each First Vice

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President of a Federal Reserve Bank, provided that (a) within

each of the groups referred to in clauses (1), (2), and (3)

priority of selection shall be in numerical order according

to the numbers of the Federal Reserve Districts, (b) the

President and the First Vice President of the same Federal

Reserve Bank shall not serve at the same time as members of

the Interim Committee, and (c) whenever a regular member or

regular alternate of the Federal Open Market Committee or a

person having a higher priority as indicated in clauses (1),

(2), and (3) becomes available he shall become a member of the

Interim Committee in the place of the person then on the

Interim Committee having the lowest priority. The Interim

Committee is hereby authorized to take action by majority

vote of those present whenever one or more members thereof

are present, provided that an affirmative vote for the action

taken is cast by at least one regular member, regular alternate,

or President of a Federal Reserve Bank. The delegation of

authority and other procedures set forth above shall be

effective only during such period or periods as there are

available less than a total of seven regular members and

regular alternates of the Federal Open Market Committee.

As used herein the term "regular member" refers to a

member of the Federal Open Market Committee duly appointed

or elected in accordance with existing law; the term "regular

alternate" refers to an alternate of the Committee duly

elected in accordance with existing law and serving in the

absence of the regular member for whom he was elected; and

the term "alternate at large" refers to any other duly

elected alternate of the Committee at a time when the member

in whose absence he was elected to serve is available.

Unanimous approval was also given to a

renewal of the resolution set forth below

authorizing certain actions by the Federal

Reserve Banks during an emergency:

The Federal Open Market Committee hereby authorizes each

Federal Reserve Bank to take any or all of the actions set

forth below during war or defense emergency when such Federal

Reserve Bank finds itself unable after reasonable efforts to

be in communication with the Federal Open Market Committee

(or with the Interim Committee acting in lieu of the Federal

Open Market Committee) or when the Federal Open Market Com

mittee (or such Interim Committee) is unable to function.

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(1) Whenever it deems it necessary in the light of

economic conditions and the general credit situation then

prevailing (after taking into account the possibility of

providing necessary credit through advances secured by direct

obligations of the United States under the last paragraph of

section 13 of the Federal Reserve Act), such Federal Reserve

Bank may purchase and sell obligations of the United States

for its own account, either outright or under repurchase

agreement, from and to banks, dealers, or other holders of

such obligations.

(2) In case any prospective seller of obligations of

the United States to a Federal Reserve Bank is unable to

tender the actual securities representing such obligations

because of conditions resulting from the emergency, such

Federal Reserve Bank may, in its discretion and subject to

such safeguards as it deems necessary, accept from such seller,

in lieu of the actual securities, a "due bill"

executed by the

seller in form acceptable to such Federal Reserve Bank stating

in substantial effect that the seller is the owner of the

obligations which are the subject of the purchase, that owner

ship of such obligations is thereby transferred to the Federal

Reserve Bank, and that the obligations themselves will be

delivered to the Federal Reserve Bank as soon as possible.

Such Federal Reserve Bank may in its discretion

(3)

purchase special certificates of indebtedness directly from

the United States in such amounts as may be needed to cover

overdrafts in the general account of the Treasurer of the

United States on the books of such Bank or for the temporary

accommodation of the Treasury, but such Bank shall take all

steps practicable at the time to insure as far as possible

that the amount of obligations acquired directly from the United

States and held by it, together with the amount of such

obligations so acquired and held by all other Federal Reserve

Banks, does not exceed $5 billion at any one time.

Authority to take the actions above set forth shall be

effective only until such time as the Federal Reserve Bank is

able again to establish communications with the Federal Open

Market Committee (or the Interim Committee), and such Can

mittee is then functioning.

By unanimous vote, the Committee reaf

firmed the authorization given at the meeting

on December 16, 1958, and continued at the

meeting on March 1, 1960, providing for System

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personnel assigned to the Office of Civil

and Defense Mobilization Classified

Location (High Point) on a rotating basis

to have access to the resolutions (1) pro

viding for continued operation of the

Committee during an emergency and (2)

authorizing certain actions by the Federal

Reserve Banks during an emergency.

There was unanimous agreement that no

action be taken to change the existing

procedure, as called for by the resolution

adopted June 21, 1939, requesting the Board

of Governors to cause its examining force

to furnish the Secretary of the Federal

Open Market Committee a report of each

examination of the System Open Market Account.

Chairman Martin then referred to a memorandum distributed with

the agenda under date of March 1, 1961, relating to the procedure

authorized at the meeting of March 2, 1955, whereby,

in addition to

members and officers of the Committee and Reserve Bank Presidents not

currently members of the Committee,

minutes and other records could be

made available to any other employee of the Board of Governors or of

a Federal Reserve Bank with the approval of a member of the Committee

or other Reserve Bank President, with notice to the Secretary.

The

most recent list of persons so authorized (exclusive of secretaries

and records and duplicating personnel),

as shown by the Secretary's

records, was attached to the March 1 memorandum.

Chairman Martin asked whether anyone wished to raise a question

with respect to the existing procedure,

and no questions were heard.

Accordingly, it was agreed unani

mously that no action should be taken at

this time to amend the procedure authorized

on March 2, 1955.

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At this point Chairman Martin said that he wished to make the

following statement.

As indicated by the minutes of the meeting of the

Committee on February 7, 1961, it was clearly the understanding that no

statement would be released in connection with the decision of the

Committee to authorize operations in longer-term Government securities.

However, a statement was released on February 20, 1961, coincident with

the first operations under the Committee's authorization.

He merely

wanted to say that although he had cooperated with the Management of

the System Account in the issuance of the statement, it

was his

(Chairman Martin's) decision that the statement should be issued.

It was not until the last minute that one could be sure whether or

not a statement seemed advisable, but in view of developments that

occurred between the date of the Committee meeting and the initial

he thought the majority would have

transactions for the System Account,

supported him in the action taken.

At the same time, he did not want

anyone to have the impression that the Manager of the Account was in

any way acting on his own in making the announcement on February 20;

whatever responsibility there was in the matter attached to him (Chairman

Martin) and not to the Manager of the Account.

Mr. Rouse said that he would like to share some of the responsi

bility for issuance of the statement.

essential to make such a statement if

dealers,

to them.

His thought had been that it was

individual dealers, groups of

or other parties were not to have special advantages accruing

3/7/61

-20-

Before the meeting there had been distributed to the members of

the Committee a report of open market operations covering the period

February 7 through March 1, 1961, including a brief review of the period

since December 7,

1960.

A supplemental report covering the period March 2

through March 6, 1961, had also been distributed.

Copies of both reports

have been placed in the files of the Committee.

In supplementation of the written reports, Mr. Rouse commented

as follows:

Since the last meeting of the Federal Open Market Com

mittee a month ago, money and reserve conditions have been

generally comfortable except immediately before and after

the Lincoln day weekend when the situation was aggravated by

the sizable cumulative deficit accumulating against the New

While we have had some help

York banks over the weekend.

from unexpectedly high levels of float as a result of bad

weather and the airlines strike, the System has been able

to add reserves when they were most needed without putting

undue downward pressure on short-term rates. Except for

the past few days, Treasury bill rates rose over the period,

partly because the System found it possible to avoid

purchases of Treasury bills by supplying reserves when

needed through repurchase agreements and through purchases

of other than short-term issues. Here again, the System

had some help from (1) the announcement by the large New

York banks of their plans for issuing time certificates of

deposit to corporations, which would tend to create compe

tition for Treasury bills; (2) the early expectations of a

poor bill market until after the March tax date, which now

by the way have given way to a more optimistic view; and

(3) the growing feeling that the System's new policy of

operating in a broader range of issues would mean higher

(or at least no lower) short-term rates. Over the past few

working days, however, bill rates have again come under

downward pressure, and sales of short-term securities have

been required to keep this from getting out of hand. The

reserve impact of these sales has been more than offset by

purchases of other securities. Throughout the period

sizable purchases of bills for foreign accounts were kept

off the market by selling bills from the System Open Market

Account.

3/7/61

-21

It is too early to tell what effect the upward revalu

ation of the Deutsche mark and the guilder will have on

international money flows, and how these flows may affect

foreign central bank activity in the Treasury bill

market.

There was considerable churning in international money

markets yesterday. We can only hope that the net result

will be to reinforce the recent improvement in the United

States balance of payments, but it is becoming increasingly

clear that international flows of funds will continue to be

of great concern to us, and to monetary authorities abroad,

for some time to come.

These and other varied operations all evidenced the

high degree of flexibility needed for carrying out the

diverse objectives of current open market policy. So far

as money conditions and short-term rates are concerned,

the System's activities seem to have achieved a fair

measure of success without causing undue disruption or

confusion in the money and securities markets.

As to the special operations in longer-term issues,

we have tried to keep the Committee as fully informed as

possible about our operations and the atmosphere in which

they have been conducted through the special reports that

have been distributed to you. The initial stages of this

program have been carried out with reasonable success from

the standpoint of market repercussions, which have been

remarkably mild so far in view of some of the dire pre

dictions. Dealers responded to the first purchases in a

routine manner and appear to have accepted the fact of

System operations in longer-term issues as something they

can learn to live with. Despite this, there has been, and

still

remains, a great deal of confusion and misunderstanding

which has not yet been dispelled.

At this point what the market needs more than anything

is a chance for the furor to die down so that dealers and

investors generally can get a better understanding of what

the System is trying to accomplish in its operations outside

the short-term area. A great deal has been said and written

about the operations, much of it misleading and ranging from

Some progress has been made in

inaccurate to grossly false.

encouraging a more moderate attitude in the market, especially

among the dealers, but only with time, patient explanation,

and further experience can the market arrive at a proper

evaluation of the newly created operating conditions.

3/7/61

-22-

The new approach requires a great deal of flexibility at

the Desk and we have had to play pretty much by ear, gaining

valuable experience as we went along.

The lack of dealer

position figures for individual dealers has been a real handi

cap and a request for them has been held in abeyance in the

hope that frequency distribution data may prove to be an

adequate substitute.

Between now and the next meeting of the Committee, it is

quite likely that the Treasury will formulate and announce

three financing operations:

(1) a junior advance refunding,

probably from bonds maturing in 1962 into the 6 to 7 year area

(It should be pointed out that this operation is still doubt

ful and should be treated as confidential.); (2) a new cash

financing; and (3) a rollover of April 15 bills. Although the

publicity over the System's efforts to raise short-term rates

and to lower long-term rates might be expected to reduce the

advantages of an advance refunding to the holder of the out

standing issues involved, conditions are still reasonably

favorable for an operation of this kind and the Treasury has

been advised to go ahead with it. If the usual "even keel"

is to be maintained during this operation, the System will

probably have to face some additional difficulties and dilemmas,

particularly in the period surrounding the March 15 tax date

when there will be considerable churning in the securities and

money markets.

At the instance of Mr. Mills, there was a brief discussion of

the prospect of use of the direct borrowing authority by the Treasury

around the mid-March tax date, and Messrs. Rouse and Thomas stated

reasons why in their opinion it was unlikely that the Treasury would

have occasion to resort to that authority.

Mr. Robertson stated that he would like to make certain comments

at this point.

First, it

seemed to him that, despite all the words that

had been used, the System had actually engaged over the past few weeks in

a pegging operation in respect to the Treasury bill

rate, as indicated by

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3/7/61

the fact that sales were made by the Account yesterday at a time when

in his opinion purchases would have been in order.

He felt that System

operations could not be construed in any way other than an effort to

put a floor under the rate on bills.

Second, on two occasions during

the past few days the Manager of the Account had engaged in swap trans

actions in the short-term area.

Even recognizing the broad authority

granted to the Manager by the Committee at the February 7 meeting, Mr.

Robertson did not understand that authority for such transactions was

included.

The minutes contained reference to the swapping of long and

short securities, but both of the operations to which he referred involved

swaps in the short-term area, which in his opinion went beyond the

authority of the Manager except if specifically authorized by the

Committee.

Third, in his opinion the operations of the Desk during the

past period had not been enough in the direction of ease, especially

during the past week.

He realized that his position favored going

further than the Committee consensus, but he did not feel that the

operations of the Desk had supplied enough reserves even to be in accord

with the consensus.

In reply to a question, Mr. Rouse stated that obviously he would

disagree with the comment of Mr. Robertson regarding recent operations,

and that he would stand on the reports that had been rendered to the

Committee.

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3/7/61

Mr. Robertson then inquired whether the Committee had contemplated

swap transactions in the short-term area, to which Chairman Martin replied

that he had thought that at the February 7 meeting the Committee more or

less gave the Account Manager broad authority. The Committee was seeking

empirical evidence, and if it was going to obtain that evidence the Desk

would have to engage in the necessary transactions.

Mr. King noted that Mr. Robertson had referred to a pegging

operation, which term generally carried with it the connotation of

inflationary practice.

In this instance, however, the effort was to

maintain a bill rate higher than might otherwise have developed through

market forces.

If this was a pegging operation, at least it was for a

purpose different than that usually suggested by the use of the term.

Mr. Szymczak commented that current circumstances indicated

why it was not feasible for the Committee to attempt to give precise

instructions to the Account Management in terms of day-to-day operations.

Particularly in view of the diversity of current objectives, the Manager

must have latitude to be guided by the feel of the market; he could

hardly be expected to operate under detailed instructions.

It was not

the intent of the Committee to engage in a pegging operation or to do

anything except maintain a free market.

However, the Committee was

attempting to provide reserves to help the domestic economy while at

the same time endeavoring to refrain from pushing the short-term rate

down because of the problem of the balance of payments.

-25

3/7/61

Mr. Robertson said current operations appeared to constitute

an effort to push the short-term rate up, and Mr. Szymczak replied that

he thought this was not necessarily the case.

Although the short-term

rate might go up, the System had no particular level in mind.

Mr. Robertson then commented that the argument,

carried to

an extreme, would suggest abolishing the Open Market Committee and

authorizing the Manager of the Open Market Account to proceed in his

own judgment and discretion.

There followed comments on the statement issued by the Manager,

at the Chairman's direction, on February 20, 1961, regarding the extension

of System operations into the longer-term area.

Mr. Balderston stated that as one who spoke at the February 7

meeting against the issuance of a statement but who urged extreme care

in dealing fairly with all interested parties, he wished to say that his

view regarding the issuance of a statement changed completely between

February 7 and February 20 in the light of events that transpired.

sequently, he was pleased that the statement was issued.

Con

The issuance of

the statement avoided the possible criticism that certain parties may

have been favored by being given an opportunity not available to others.

Mr. Szymczak stated that he considered the statement appropriately

phrased and that he agreed wholeheartedly with the decision to issue it.

Mr. Robertson, who had indicated at the February 7 meeting that

he would favor the issuance of a statement if,

contrary to his own view,

-26

3/7/61

the Committee decided to authorize operations in the longer-term area,

stated that he was pleased to observe that members who originally opposed

the issuance of a statement had since that time experienced a change of

sentiment.

Chairman Martin said he would like to make this observation.

felt sure that it

would be better for the System if

could limit its

operations to supplying and absorbing reserves and say that its operations

had nothing to do with interest rates.

do that.

However,

was not possible to

In talking with critics, he had found it difficult to discuss

the question of pegging, which Mr.

purist terms.

Robertson had properly brought up, in

Some people outside the System who were opposed to the idea

of pegging nevertheless felt that the System ought to provide some

guidance in the market occasionally.

The Treasury was issuing quantities

of securities from time to time which unquestionably exerted an influence

on the rate level.

Therefore, while it certainly would be easier for

the System if it could say that it was simply going to supply and absorb

reserves and have nothing to do with interest rates, the influence exerted

by the mere supplying and absorbing of those reserves within the framework

of the various factors at work in the market was an influence that must

be borne in mind.

He did not pretend to know the answer, but he felt it

was necessary to keep an open mind.

In his view, there was no question

but that the activities in which the System was currently engaged could

lead to pegging.

The Committee should watch developments carefully and

study all aspects of the matter.

-27

3/7/61

Thereupon, upon motion duly made

and seconded, and by unanimous vote,

the open market transactions during

the period February 7 through March 6,

1961, were approved, ratified, and

confirmed.

Mr. Noyes presented the following statement with regard to economic

developments:

In the late winter and early spring of 1957, when industrial

production and wholesale prices leveled out--while consumer prices

and business capital expenditures were continuing to set new records

some observers chose to describe the situation as a "tired" or

"fading" boom.

The same adjectives might be applied to the recession in the

late winter and early spring of 1961. While it is still with us,

the downturn seems to have lost momentum.

As the current quarter progresses, there is an increasing

probability that gross national product will be down moderatelyless than one per cent. In February, industrial production appears

to have just about held even--or perhaps declined by one point--we

will know in a few days. In any case, it seems unlikely that it

will decline further in the current month. The rate of inventory

liquidation has leveled and may actually be falling--the book value

of manufacturers' inventories declined by only $100 million in

January, as compared to a monthly average of $350 million in the

fourth quarter. New orders held about even, after several months

of decline. Business capital expenditure plans, as reported in

the Commerce-SEC survey released yesterday, show a decline of only

three per cent for the year, and a small rise from the first to the

second half. Recent surveys of consumer confidence and buying

intention have generally been interpreted as optimistic--despite

some continued weakness in expressed intentions to buy houses and

household durables.

Department store sales have had their ups and downs, as

storms this winter have been more frequent and have seemed to hit

the weeks that were clear a year ago, but the 147 index for February

suggests demand is at least well maintained. The so-called leading

indicators produced a strong showing in January, as more than half

of them registered gains. Of all the current data, only the

continuing lag in automobile sales and the persistence of a high

level of unemployment are disturbing. The latter, of course,

usually lags as business turns up, and the former is widely

attributed to the unusually severe winter in many areas.

3/7/61

-28

I might add here that we have just received the figures on

unemployment for February, which are to be released this afternoon.

The actual number of persons unemployed rose to 5.7 million, which

yields a seasonally adjusted annual rate of 6.8 per cent. This is

0.2 per cent above January, but the same as December. Our technicians

feel that the apparent decline in January is attributable to problems

of seasonal adjustment and that, in fact, the seasonally adjusted

level has remained about the same for the three months.

There are always many good reasons to qualify any appraisal of

economic prospects--but there are fewer now than usual. In terms

of past experience, almost all the signs point to an increase in

economic activity in the coming quarter. Of course, it would be

useful to know more, but there is really very little

evidence, short

of an upturn itself, that one could ask for that is not already at

hand, to support the prognosis of a favorable shift in the balance

of economic forces.

If one feels that monetary policy should attempt to anticipate

changes in business, either for the better or the worse--then the

present situation might properly be interpreted as calling for a

shift in policy. As I have just suggested, it is unlikely that we

shall have any more convincing evidence than we have now that we

are approaching a turning point until after the turn has in fact

occurred.

Having said this much, I should like to go a little further,

to add that it does not seem to me that the situation I have

reported calls for any lessening of the degree of ease presently

prevailing in credit markets. While some progress has been made

there is less liquidity than at the end of other postwar recessions

and there is more idle manpower and more idle capacity. The risk

of a runaway boom that would take up the slack in the economy and

generate serious inflationary pressure quickly seems very small

indeed.

The situation in none of the more volatile areas of expenditureinventory accumulation, business capital outlays, residential con

struction, or consumer durable goods purchases--seems conducive to

the early generation of excessive demands on available resources.

Governmental expenditures--Federal, State and local--will undoubtedly

increase, but the magnitude of the increase in the months immediately

ahead will be moderate. The danger from this source, if a danger in

fact develops, will come later.

In brief, developments in the last four weeks appear to confirm,

rather than modify, the conclusion presented at the last meeting

that we shall see some further decline in the current quarter,

followed, in all likelihood, by a gradual recovery.

Mr. Thomas presented the following statement on the credit

situation:

In February short-term interest rates tended to rise, while

long-term interest rates declined. Stock prices rose to new high

levels on exceptionally active trading. Bank reserve positions

were somewhat tighter than they had been in January, although in

the latter part of the month the persistence of float at a higher

level than usual served to increase free reserves at least temporarily.

Total loans and investments of city banks, which declined much less

than usual in January, fluctuated rather widely in February, with no

pronounced trend. The seasonally adjusted money supply, which increased

considerably during January, was at a higher level in February then at

any time in over a year, but showed little further growth in the course

of the month.

Diverse movements of interest rates in February may no doubt be

attributed to some extent to Federal Reserve operations and to the

effects on market participants of System and Administration statements

as to aims. There were other factors, however, some of which may be

transitory. In the short-term area, for example, dealers have con

siderably reduced their positions in Treasury bills from the large

holdings accumulated in December and early January. City bank holdings

of bills, which had previously increased, were also reduced in February.

With some reduction in reserve availability in the first

half

of the month, many member banks needed to borrow in the Federal

funds market and occasionally at the Reserve Banks. The discount

rate of 3 per cent no doubt serves to prevent much decline in bill

rates. Even during the extremely easy reserve periods of 1954 and

rate generally remained within 3/4 of a

1958 the 3-month bill

percentage point below the discount rate. With similar amounts of

rates were much lower than they are now

free reserves, bill

because the discount rate was lower.

The further decline in long-term rates may be attributed in

Yields on long-term bonds by each

part to seasonal factors.

major issuer group, after declining in the first eight months of

last year, rose contra-seasonally from August until December.

Declines in these yields from December to the last half of February

less than the usual seasonal decrease.

appear to have been a little

The largest decline occurred in corporate bonds, and this may be

due in part to the small volume of new issues in this area. Yields

on State and local government bonds have remained relatively firm,

reflecting a moderately large volume of new issues and the

accumulation of unsold offerings in dealers' inventories.

3/7/61

-30-

It may be noted that, contrary to a popular impression, the

decline in yields on long-term U.S. Government bonds from the peak

reached in January 1960 has been approximately as large as the

declines from previous peaks to lows in the two previous recessions.

Also, the spread between yields on 3-month Treasury bills and the

average yield on long-term Treasury bonds has widened less in the

past year than it did in the 1957-58 decline in interest rates. In

other words, long-term yields have declined as much as bill yields

relative to the previous period of decline.

Total loans and investments at city banks, following a less

than seasonal decline in January and a substantial increase in the

week of February 1, which was due largely to the special Sears

transaction, showed little net change in the four weeks ending

March 1 (as indicated by partial data for the latest date).

Ordinarily some decline occurs in February. There have been

rather wide variations in recent weeks. Increases in loans to

business and to sales finance companies during February were

roughly in accord with seasonal trends. Loans to dealers in

Government securities, which had been rather large in January,

declined in February. Holdings of Government securities also

declined, but holdings of other securities showed a sizable

increase. City bank holdings of Treasury bills were reduced.

Reflecting in part the effect of the Treasury refunding operations

and the approach to maturity of outstanding issues, the banks'

holdings of certificates also declined, but their holdings of notes

and bonds maturing within one year increased by almost as much as

the decrease in bills and certificates. Holdings of notes and

bonds maturing in over a year continued to decline, notwithstanding

the shift in the maturity of the new issue.

Demand deposits adjusted at city banks declined by about

seasonal amount in February, after declining less

usual

the

than seasonally in January. Time deposits continued to show

a greater than seasonal increase. U.S. Government deposits

also increased substantially.

The daily average, seasonally

adjusted money supply continued to increase in the first half

of February and preliminary data indicate the possibility of a

slightly higher average for the second half of February--the

highest level in over a year. Most of the recent increase,

however, had already been attained by early February. Weekly

further growth since that time.

data indicate little

The recent leveling out of monetary growth is reflected

in the figures for member bank required reserves relative to

projections on the basis of the usual seasonal pattern. After

declining substantially less than usual through the week of

February 1, changes in required reserves fell below the pro

jected levels during the next three weeks, but then rose,

according to preliminary data, in the week of March 1.

3/7/61

-31

Total reserves were maintained in the three weeks ending

February 22, in part through a somewhat larger volume of

member bank borrowing than had recently been customary, and

were kept up in the week of March 1 primarily by the continu

ation of float at a higher level than expected. All of these

differences, however, were too small to be of any great

significance. If they have any particular import, it is that

there was little or no further monetary expansion after the

beginning of February.

In this current statement week and the next, some $500

million of additional reserves will need to be supplied in order

to meet current needs and maintain free reserves at close to

$600 million. The experience of the last two months indicates

that a free reserve level of over $600 million is conducive to

credit expansion, while a level below $500 million may not be.

Projections of reserve needs around the middle of March are

unreliable because of variations in the timing of large tax

payments and float. In any event liquidity needs are substantial

at thattime and reserves should be abundantly available. Sub

stantial amounts will probably be supplied through the midmonth

increase in float, and System operations, after supplying

reserves in the first

half of the month, might be reversed

somewhat to absorb some reserves in the last half.

To meet seasonal needs, only moderate increases in the

Federal Reserve portfolio will be needed on balance during the

second quarter of the year, with the usual intramonth

variations. These estimates allow for a continued gold drain

of $25 million a week; if this should not develop, System

action to supply reserves may need to be negligible except for

the intramonth operations. To foster credit growth, however,

an additional $50 million or more a month might be needed.

Demands in credit markets in the months ahead might be

expected to require more bank reserves than are allowed for in

these projections. As indicated in the memorandum on the

Treasury cash outlook given to the Committee, even with

moderate economic recovery Treasury borrowing needs will be much

larger during the remainder of this year than they were last

year, and those during the last six-months may be as much as

$9 or $10 billion, exceeding borrowings in the corresponding

periods of 1958 and 1959.

In order to indicate the possible nature and magnitude of

demands on the credit system, the Board's staff has made some

projections of sources and uses of credit on the basis of

stated assumptions as to economic recovery.

Net borrowing

by State and local governments is likely to increase and to be

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3/7/61

larger this year than in any previous year. The increase in

home mortgages is now running less than in 1959 and 1960 but

might be expected to increase in the last half of the year.

Corporate borrowing--both at long- and short-term--will

probably continue to be smaller than in other recent years.

Total expansion of all types of credit in 1961, under

such assumptions, would be similar in amount to 1960 and 1957,

but less than in 1955, 1958, and 1959. The commercial banking

system will probably be called upon to supply a somewhat larger

portion of these credit needs this year than last, principally

through additions to holdings of securities, and more than in

any other year except 1958. The expansion in bank credit

may occur with only a moderate increase in loans.

Such

expansion in bank credit would be needed to provide for a

resumption of expansion in the money supply, which showed

little growth in 1959 and 1960. In addition, time deposits

at commercial banks will probably continue to increase at

close to last year's rate. Consumers may be expected to

increase their additions to deposit-type assets, as well as

their claims on insurance and pension reserves, but might

reduce their holdings of securities.

Liquid assets of

corporations, which declined last year, might be expected to

increase moderately this year in holdings both of cash balances

and of Government securities.

This pattern of financial development would call for

an increase in bank reserves of well over half a billion

dollars in the course of the year--or an average of about

$50 million a month in excess of usual seasonal needs.

These reserves would need to be supplied by Federal Reserve

credit, and any gold outflow would necessitate additional

amounts of Federal Reserve credit. Hence, to finance

economic recovery the System should supply somewhat more

If the projected

reserves than the usual seasonal needs.

credit demands develop, the availability of reserves in

such amounts would not cause a decline in interest rates,

but would be needed to prevent too sharp an increase.

In reply to a question by Mr. Mills regarding the weight that

should properly be given to seasonal interest rate movements as an

element of economic analysis, Mr.

Thomas agreed that such data must

be studied carefully, that they represented merely a rough indication

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3/7/61

of the nature of the situation, and that the broad movements over

longer periods tended to be more accurate guides.

Mr. Marget then presented the following statement on inter

national financial developments:

Last Saturday the German government announced an appreci

ation of the mark. This was closely followed by a comparable

announcement by the Netherlands government with respect to the

guilder. According to one line of thinking which has become

fairly widespread, these actions should be regarded as events

of very great importance for the United States balance of

payments.

For, according to this thinking, the deficit in

the United States balance of payments has not only been--as,

in a sense, every dificit must be--a reflection of the

surplus in the balance of payments of certain other countries,

of which Germany was the most notable, but has been the

result basically of a wrong set of foreign exchange rates.

In particular, the German over-all surplus was alleged to

be the result of an undervaluation of the mark. Correct

that undervaluation and the German surplus would disappear,

and with it the United States deficit, and therefore all

the balance-of-payments problems of the United States.

It would be pleasant to believe that the matter is as

simple as this. Unfortunately it is not. It might be well,

therefore, to review the argument of those who, while they

insisted that the decision with respect to the foreign

exchange rate of the mark was basically one for the Germans

themselves to make, and while they did not regard the prospect

of an appreciation of the mark as necessarily portending

disaster, nevertheless refused to accept the suggestion

that it was in this direction that we must seek salvation

of the international payments system in general, and of the

United States balance of payments in particular.

In the first place, it was known that the extent of the

supposed "under-valuation" of the mark, as calculated by those

Germans who themselves favored an appreciation of the mark,

was very small--around 5 per cent, according to these Germans

themselves. And in fact the announced appreciation has been

of this order. Given any reasonable degree of flexibility in

profit margins, it is difficult to believe that a change of

this magnitude will so seriously affect the competitiveness

of German industry as to destroy the German surplus at one

stroke. On the other hand, it will be interesting to see

3/7/61

-34

what effect the announcement of this small degree of appreci

ation will have on those movements of capital which have been

so largely affected, in recent years, by expectations of an

appreciation of the mark.

If the speculative fraternity

becomes convinced that this is the final answer on the question

of the appreciation of the mark, then perhaps we shall have

peace in this area for a while, and we may even see some

reflow to the United States of funds that went abroad on the

expectation of a German appreciation.

But if the smallness

of the degree of appreciation convinces the speculators that

it can be regarded only as a first

instalment on a much larger

degree of exchange adjustment, it is anything but clear that

we shall have the peace that we have been seeking in this

field.

It must be said, however, that, if the step was to be taken

at all, it was well to take it at this time, when our new

Administration's repeated statements of its determination to

defend the dollar at its present parity have apparently served

to reestablish confidence in our currency.

For one of the dangers

inherent in an emphasis upon the necessity for an appreciation of

the currency of surplus countries is that it encourages an obvious

counter-argument that could have very disconcerting consequences:

namely, that if it is the exchange rate that is at fault, it is,

after all, just as reasonable to insist that the deficit countries

correct the situation by depreciating their exchange rates

as it is to insist that the surplus countries appreciate theirs.

It may very well happen, indeed, in the days immediately

ahead of us, that the very smallness of the degree of appreci

ation of the mark may lead speculators to precisely this view

with respect to the exchange rate of the British pound, and

thereby intensify speculative pressure on the pound considerably

beyond what was to have been expected in any event as the

result of the clear weaknesses in the basic position of sterling,

which have until very recently been masked by the very capital

movements that have masked the undeniable improvement in the

basic balance-of-payments position of the United States. It is

to be hoped that this improvement in our basic position, together

with the unequivocal commitments of our new Administration, may

spare the United States a similar back-lash of speculative

sentiment consequent upon the action by the German and Dutch

authorities; but on this we shall have to wait and see.

The second reason why some have felt that it was wrong to

put all emphasis upon the desirability of appreciating the mark,

in particular, as a way of solving the balance-of-payments

problems of the United States is really independent of the extent

3/7/61

-35

of the appreciation involved. For there is the further issue

of the sharing of burdens by the Western alliance: in the

fields of development assistance, on the one hand, and a

contribution to the joint military effort, on the other.

The Germans, to be sure--and, for that matter, a very con

siderable proportion of the Western financial community,

including its central bankers--have persistently denied that

there is any connection whatever between a country's balance

of-payments position and its ability to contribute to inter

national efforts in the field of development assistance and

joint defense. I cannot take the time here to go over the

relevant arguments in detail. But surely one thing is

certain: and this is that if a country is to provide a

net amount of development assistance, for example, it must

Otherwise there

have a surplus in its balance of payments.

would be nothing to transfer as assistance to the recipient

countries. The difficulty with Germany, in this respect,

was not that it had a balance-of-payments surplus, a good

part of which was going to the less-developed countries;

the difficulty was that it had not shown itself willing to

finance that surplus, with the result that it acquired a

very large amount of monetary reserves from countries which,

in one way or another, were financing this development

assistance. If, now, the effect of an appreciation of the

mark were to destroy the German suprlus, as some commentators

have suggested is likely to be the case, we should still be

left to face the problem of who is going to provide the

development assistance and the means for military expenditures

abroad, which certainly makes part of our balance-of-payments

problem. It is for this reason that the United States

Government, while it has maintained an attitude of neutrality

on the subject of the advisability of an appreciation of the

mark per se, has made it very clear that it does not regard

an appreciation of the mark as in any sense a substitute for

those measures, in the field of development assistance and

military burden-sharing, which it regards as reasonable to

expect from Germany as a member of the Western alliance.

If Germany does not take the necessary measures in these two

fields, the additional burdens will fall upon us; and no

amount of sophistication can get around the fact that these

additional burdens would seriously aggravate our balance-of

payments problem.

And there is a

be extremely unwise

balance-of-payments

governments, in the

final, and decisive, reason why it would

to rely for the solution of our own

problem wholly upon the actions of other

field of exchange-rate policy or in any

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3/7/61

other field.

is always fair to ask of surplus countries

that they follow, in the field of trade and aid, those policies

which are characterized collectively as "good creditor policies."

But to go beyond this, and to insist, or imply, that nothing

can be done by the deficit countries to get their own inter

national accounts in balance and keep them in balance is a

position whose inherent absurdity is matched only by its

possibilities for a fatal weakening of moral fiber in the

field of national policy-making. We have indeed made great

progress toward a balancing of our international accounts

since the low point of the spring of 1959; and our own policy

actions have undoubtedly played a role in the achieving of

that progress.

If this slight adjustment of the German and

Dutch exchange rates turns out, without adverse consequences

otherwise, to help along the process of adjustment in our basic

position, well and good; but it will still

be true that the

future of the United States balance of payments, and all that

hangs on its, will depend fundamentally upon our own actions:

and specifically, and prosaically, on the degree of success

we attain in pursuing those policies, in all fields, which will

keep us competitive in the markets of the world and here at

home.

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

business outlook and credit policy:

Economic activity has continued to decline moderately, as

indicated by January statistics and fragmentary data for February.

There is no sign of a speed-up in the recession. On the other

hand, although the decline in some series slowed and there was

an actual upturn in others, this evidence is too fragmentary to

Some

warrant a judgment that the bottom has been reached.

indications of improvement in February, as in department store

and automobile sales, may have been attributable largely to the

weather. Consumer buying intentions point to a more favorable

outlook than could be supported by current statistics, and like

wise business sentiment seems more buoyant than actual business

spending.

There is no way of knowing whether inventory liqui

On the one hand, manufacturers have

dation has run its course.

apparently stopped liquidating purchased materials and goods in

However, the inventory position of finished goods (both

process.

manufacturers' and retail) remains rather heavy.

Continuing stability in commodity prices has contrasted with

the considerable rise in stock prices. The latter development

may not be entirely a healthy one and may perhaps reflect fears

3/7/61

-37

of future inflation as much as optimism on the business outlook.

Nevertheless, the stock price rise in itself probably constitutes

a stimulus to greater consumer and business spending.

The latest statistics on bank credit and bank reserves are

Total loans and investments at weekly reporting

again encouraging.

member banks recorded a sizable gain in February--a much stronger

showing than in most recent years--and the comparison is favorable

even if we adjust for the inclusion in February figures of a $1.1

billion sale of receivables by Sears Roebuck to the company's

banks.

The larger New York banks generally expect their loans

to hold up well or to rise somewhat in the coming months, in

contrast with declines during the corresponding period of 1958.

Total reserves of all member banks, on a seasonally adjusted

basis, rose substantially in February to surpass the 1960 high

set in November (the gain above the April 1960 low being at an

annual rate of 6 per cent); and required reserves, adjusted,

reached a record high in February.

There is also considerable cause for gratification in

recent developments having to do with the dollar and the balance

I am thinking of such items as the sharp reduction

of payments.

in the gold outflow, the drying up of demand and sharp price

drop in the London gold market, and the preliminary statistics

pointing to the virtual cessation of the outward flow of short

term capital in January and February. However, this improvement

is threatened by the atmosphere of uncertainty following the

German and Dutch revaluations, and it could easily be upset by

any one of a variety of developments casting doubt on our

willingness and ability to follow through on the statements and

actions responsible for the improvement.

Even though the business outlook is not especially

encouraging, the fact that the trend is no worse than in the

past few months and that we may even be seeing some faint

signs pointing to recovery suggests that we can afford to

continue about the same policy we have been following, without

any effort to ease further. On the other hand, the banks should

continue to be given sufficient reserves to meet all reasonable

demands--and incidentally, with the likelihood of continuing

serious unemployment even after an uptrend gets well under way,

it would seem appropriate to contemplate continuing a relatively

easy policy for a longer period than may have been desirable

in earlier post-war business recoveries.

Since we have made only a beginning (if a rather gratifying

one) toward remedying our balance-of-payments position and the

problem of confidence in the dollar, the level of short-term

interest rates must continue to be a matter of primary concern

It seems to me that policy in the next three

to the Committee.

weeks should be directed mainly to preventing any decline in

3/7/61

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bill

rates and preferably to encouraging some further rise.

Subject to this overriding objective, I would hope the Manager

would try to preserve about the same degree of ease in the market

as has prevailed in the past few weeks, again as measured by the

feel of the market rather than by any particular level of free

reserves. If, as seems quite possible, it proves necessary to

let free reserves fall well below their recent level in order

to keep bill

rates from going lower, I would be quite prepared

to see this happen.

It is hard to predict just what will be

required in the way of open market operations, since there will

be important cross-currents influencing market rates, including

the usual seasonal dividend and tax pressures around the middle

of the month and the greater scarcity of bills which will follow

redemption of the March tax bills. The Manager may be able to

moderate downward pressures on bill

rates by spreading purchases

along the maturity spectrum, thus making good use of the greater

flexibility which the Committee has authorized him to exercise.

At the same time I hope that the coming three weeks will

provide a further opportunity for cautious probing with respect

to the possibilities for nudging longer-term rates in a downward

direction. The desirability of lower rates to help stimulate

the economy is no less now than it has been. I am very glad

that the Manager has moved with such care and moderation in this

program, and I have no dobut that

[sic]he will continue to do so. I

think the System has made a good start toward demonstrating that

it can operate in intermediate and longer-term governments in a

more or less "routine" fashion, without upsetting the market or

entrapping itself in any sort of pegging operation. But it is

obvious that much more time and much more testing will be needed

before the policies we have adopted can be said to have had a

fair trial--and I believe the Committee agrees that a fair trial

is what we must seek, now that we have set our course.

Incidentally, I feel strongly that many of the press comments

on the new policy have been ill-informed and have been critical on

the basis of gross misinterpretation of our intentions. I would

hope that all parts of the System would share in the important

job of education that must be done if we are to minimize this

critical attitude and provide a reasonably objective atmosphere

in which to carry out our probing operations. Furthermore, I

think it is essential, if our operations outside the short-term

area are to make the maximum possible contribution to the economy,

that the authorization for these operations be as broad as

possible. To allow the public to think that they have been

authorized merely as a "temporary aberration" would be to hobble

their effectiveness from the start, as I believe was explicitly

recognized at our last meeting.

3/7/61

-39

As for the discount rate and the directive, there appears

to be no reason to consider a change at this time.

Mr. Johns reported that within the St. Louis Reserve Bank there

was some feeling that the forces of economic contraction might be losing

some of their energy and that possibly a turnaround in economic activity

might be imminent.

He expressed the hope that it would be possible for

the Committee to continue, as it had been doing recently in modest degree,

to encourage monetary expansion.

In saying this, he wished to emphasize

that he was speaking of expansion in most modest terms; he was not

advocating that the Committee proceed recklessly and in terms of large

increments.

He would hope,

of course, that this could be accomplished

within the interest rate objectives the Committee had adopted, and he

was encouraged to believe that this might be possible.

Mr. Bryan stated that at a briefing session last Friday the staff

of the Atlanta Bank was able to point out a few Sixth District economic

series that had actually turned upward, and there were several others where

the rate of change downward had slowed markedly.

There appeared to be a

prevailing note of optimism on the part of the staff and, except for the

State of Florida, this note of optimism seemed to be fairly general though

out the District.

He shared the staff's feeling that the economy might be

bottoming out, or at least that there was no great danger that the recession

would turn into an accelerating slide.

Turning to policy, Mr. Bryan indicated that, like Mr. Johns,

would favor a continued modest encouragement of monetary expansion.

3/7/61

-40

did not believe that at this stage there was any danger of inducing

inflation by a very modest monetary expansion.

In his view, the

Committee's prime concern should not be the short-term rate, but rather

the encouragement of economic recovery.

important factor, but it

The short-term rate was an

should be of secondary concern.

mittee should get hypnotized by the short-term rate, it

the Com

might easily fall

into errors of policy.

Mr. Bopp stated that, along with the fragmentary glimmerings of

optimism appearing on the national scene,

in the Third District.

there were a few hopeful signs

Steel production had increased a little

weeks and department store sales had improved somewhat,

car loadings.

While unemployment claims were still

recent

as had freight

high, they indicated

that unemployment might not be as severe as in 1958.

In commenting on the monetary situation, Mr. Bopp said that

despite decreases in bank credit and deposits since the beginning of the

year, bank data in the District still reflected the influence of credit

ease.

The declines seemed not to be as pronounced as might be expected at

this time of year.

Reserve city banks had begun borrowing again on a

small scale and country banks continued to borrow.

One reason for the

latter was that State funds for fourth class school districts had been

somewhat delayed and school authorities were forced to borrow from their

local banks.

Mr. Bopp expressed the view that the slight promise of improvement

in the economy was not adequate to support any change in the over-all

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3/7/61

degree of ease.

Attention should continue to be focused on open market

operations in maturities beyond the short-term area.

These had been

handled skillfully and the results thus far were gratifying.

Even this

early in the game, however, it might be well to caution against expecting

too much.

Some of the conditions under which the operations were being

conducted were unfavorable, and the fact that they were necessarily

experimental made it more difficult to achieve the desired results.

market clearly had a "show me" attitude.

The

A second disadvantage was the

stage of the cycle in which the experiment had been begun.

If it turned

out that the operations had a limited effect in lowering long-term rates,

this might not necessarily indicate that similar operations could not be

more successful in an earlier phase of recession when expectations of

lower rates were greater and when, in fact, lower long-term rates might

be more effective in stimulating the economy.

In general, Mr. Bopp said, he would continue the present degree

of ease.

Mr. Fulton reported that in the Fourth District insured unemploy

ment had increased more than seasonally and was widespread.

The

unemployment situation was reflected in the number of cities in the

District, both large and small, that had been classified as areas of

substantial labor surplus.

Coal production had edged down to an all-time

low, and electric power output was substantially below a year ago.

Auto

sales declined in January, and it seemed there was no pick-up in February.

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3/7/61

While department store sales in the past two weeks had been above the

year-ago levels, for the year to date sales were 3 per cent under a year

ago.

The steel industry, Mr. Fulton said, continued in the doldrums.

Orders from the automotive industry were almost nonexistent, and those

orders already on the books were being pushed back for delivery at some

later date.

However, some orders from other users of steel had been coming

in on an emergency basis.

If the steel they wanted was on the dock, a sale

was made; if not, they went elsewhere.

Inventories of steel users apparently

were being kept at minimum levels, and their purchases of steel seemed to

reflect that situation rather than any pickup in orders.

Auto production

was of course at a considerably depressed rate; the dealers were caught in

a profit squeeze, with too much inventory for them to move successfully.

The current feeling in the steel industry was that the automobile situation

would not improve to any great extent until the fourth quarter of the year,

when new models might give a stimulus to sales.

The profit squeeze

continued to be a severe problem in many industries, particularly in the

steel industry, which had another contractual wage increase coming up in

October.

While they were able to absorb the increase last December, they

did not think they could do so next time.

In summary, Mr. Fulton said, the situation in the Fourth District

was far from bright.

Perhaps the most optimistic factor was that although

capital spending plans were somewhat less in dollar amount than last year,

3/7/61

there had been few cut-backs in the planned expenditures.

Also, inventories

of heavy finished goods had been reduced somewhat.

In terms of policy, Mr.

Fulton indicated that he would favor a

continuation of the degree of ease that had prevailed recently.

He was

hopeful that the degree of ease would not be reduced precipitantly,

depriving the market of funds.

thus

He continued to hope that the directive

would be changed to provide for fostering "recovery" rather than "sustain

able growth."

Mr. King said it was tempting to speculate on exactly what stage

of the cycle the economy was in at the present time.

However, this was

clearly not a time to make any significant change in System policy.

After

commenting on the unemployment figures and the significance he attached to

them, Mr.

King said it was quite evident that economic recovery was not yet

in progress.

Consequently, from the point of view of monetary policy he

saw little point in trying to make a case that the recession was bottoming

out or that a turnaround might be near.

Concerning the bill rate, he had

expressed the view in the past that the System could get quite a bit of

mileage out of a bill

rate increase,

and he now felt that the System had

gotten considerable mileage out of the rise of the bill rate that occurred.

As to the experimentation in longer-term securities that the Committee

authorized on February 7, he wished to say for the record that he would have

concurred in that action had he been present at that meeting.

If the

Committee was going to give the experiment a fair chance to succeed, he felt

Cite this document

APA

Federal Reserve (1961, March 6). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19610307

BibTeX

@misc{wtfs_fomc_minutes_19610307,
  author = {Federal Reserve},
  title = {FOMC Minutes},
  year = {1961},
  month = {Mar},
  howpublished = {Fomc Minutes, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/fomc_minutes_19610307},
  note = {Retrieved via When the Fed Speaks corpus}
}