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, April 18, 1961, at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Hayes, Vice Chairman, presiding
Allen
Balderston
Irons
Mr. King
Mr. Mills
Mr. Robertson
Mr. Shepardson
Mr. Swan
Mr. Wayne
Messrs. Ellis, Fulton, 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. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Thomas, Economist
Messrs. Einzig, Garvy, and Noyes, Associate
Economists
Mr.
Rouse, Manager,
System Open Market Account
Mr. Molony, Assistant to the Board of Governors
Mr. Koch, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Furth, Adviser, Division of International
Finance, 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
Mr. Petersen, Special Assistant, Office of the
Secretary, Board of Governors
Messrs. Heflin and Francis, First Vice Presidents
of the Federal Reserve Banks of Richmond and
St. Louis, respectively
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4/18/61
Messrs. Eastburn, Hostetler, Baughman, Jones,
Parsons, and Tow, Vice Presidents of the
Federal Reserve Banks of Philadelphia,
Cleveland, Chicago, St. Louis, Minneapolis,
and Kansas City, respectively
Mr. Eisenmenger, Acting Director of Research,
Federal Reserve Bank of Boston
Messrs. Holmes and Stone, Managers, Securities
Department, Federal Reserve Bank of New York
Mr. Brandt, Assistant Cashier, Federal Reserve
Bank of Atlanta
Prior to this meeting there had been distributed to the members
of the Committee the revised drafts of minutes of the Committee meetings
on March 7 and 28, 1961.
In presenting the minutes for approval by the Committee, Mr.
Hayes
said that, while he did not want to labor the matter, he had suggested
upon circulation of the preliminary draft that the minutes of the March 7,
1961, meeting be revised slightly at two places.
However, his suggestions
were not incorporated in the revised draft because they involved some
change in substance,
and he wished to bring them to the Committee's
attention at this time.
On page 4, last paragraph, Mr. Hayes noted, the minutes read:
"Therefore, it
was the suggestion of the (Ad Hoc) Subcommittee that con
sideration 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."
page 8, paragraph 3, they read:
"There being no further comments,
On
it
was
agreed to table the consideration of the possible changes in the operating
policy statements."
* Fourth sentence.
4/18/61
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Mr. Hayes commented that this language seemed to carry the clear
implication that the Committee had not changed the operating policy state
ments, whereas he thought that that was at least doubtful.
Accordingly,
he had suggested that the preliminary draft be revised to state that the
question whether to renew the existing statements of operating policy
or make changes therein had been tabled.
Mr. Balderston stated that if
suggested would not alter in
the change in wording Mr. Hayes had
substance the meaning of the original word
ing in the preliminary draft of minutes, he (Mr.
Balderston) would not
On
wish to consume the time of the Committee by interposing objection.
the other hand,
if
the proposed changes were changes of substance--and
he understood from Mr.
Hayes that they were so intended--then he would
feel that clarification was desirable.
As he understood it,
the question
was whether the Committee had agreed at the March 7 meeting to table the
question of (1) renewing or (2) reviewing the operating policy statements.
If
the word "renew" was used, then it
might be construed that in the
absence of affirmative action on the part of the Committee to renew the
operating policy statements, those statements had been abandoned.
if
However,
the proper word was "review," that would imply that, pending further
action on the part of the Committee,
the statements remained in force,
subject of course to any special authorization such as that approved at the
February 7 meeting and at each meeting since then permitting operations in
longer-term Government securities as well as "swap" transactions.
4/18/61
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In reply to a question by Mr. Robertson, Mr. Hayes said that
specifically his suggestion had been to substitute the following for para
graph 3 on page 8:
"There being no further comments,
it was agreed to table
the consideration of the question whether to renew the existing operating
policy statements or to make changes therein."
The suggested change on
page 4 was of a similar nature.
Mr. Hayes went on to say that, as he had indicated at the outset,
he would be content to have his observations recorded in the minutes of
today's meeting.
While he felt that there was a substantive question in
volved, he doubted whether it could be resolved at this meeting.
Mr. Allen suggested that inclusion of Mr. Hayes' comments in the
minutes of today's meeting would afford the Committee members an opportunity
to review the matter.
Personally, he would prefer to look at the suggested
changes in the context of the minutes as a whole before deciding whether
any change should be made in the March 7 minutes.
Question was raised whether it was the thought of Mr. Hayes that
approval of the March 7 minutes would be deferred, and Mr. Hayes said that
he would have no objection to the approval of the minutes subject to the
inclusion of the comments that he had made.
Mr. Balderston noted that it
might be of assistance to the Committee members in reviewing the matter if
a memorandum were furnished by Mr. Sherman, following which Mr. Shepardson
raised the question whether it would be appropriate to approve the minutes
at this time if it was contemplated that they would be subject to further
4/18/61
-5
consideration.
Mr. Sherman commented, in this regard, that a decision to
make changes in the minutes subsequent to their approval would not be
without precedent.
In further discussion, Governor Mills suggested that perhaps too
much importance was being attached to the matter.
As he understood it, in
effect the operating policy statements were being continued, subject to the
deviations occasioned by the special authorization to conduct operations in
longer-term Government securities, pending such time as the Committee made
a decision with respect to such recommendations for changes in the operating
policy statements as might result from the study currently being made by the
Ad Hoc Subcommittee.
Mr. Hayes agreed that from a practical standpoint no obstacle to
the current program of operations was presented.
He then reiterated that
he would be content to approve the minutes of the March 7 meeting and
merely to have his observations recorded in the minutes of today's meeting.
Mr. Hayes inquired whether there were additional comments, and
Mr.
Wayne said it
was his understanding that what the Committee had done was
to continue the operating policy statements in effect,
subject to the
deviations inherent in the special authorization, which was subsequently
renewed for the period until the following meeting.
The Committee had
tabled consideration of any report from the Ad Hoc Subcommittee that would
lead to reconsideration of the operating policy statements, and thus had
continued the statements in effect.
He felt that the Committee could
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4/18/61
approve the March 7 minutes, with a notation in today's minutes of the
views that had been expressed, and not do violence to what actually
transpired at the March 7 meeting.
Mr.
Shepardson commented that he had not meant to infer by his
previous question that he would not be willing to approve the March 7
minutes as they stood.
He had only wished to raise the question of the
appropriateness of approving those minutes if
it
was contemplated that they
might be changed later.
Mr. Balderston said that the point stated by Mr.
Mills was precisely
the point that he (Mr. Balderston) had attempted to bring out earlier.
ever, he felt that the statement of Mr.
Mills and his own observations were
somewhat at variance with the point originally made by Mr.
Mr.
Robertson suggested that it
How
Hayes.
was important only that the record
show that the operating policy statements had been continued until changed,
and that possible changes therein were under consideration.
Mr.
Hayes commented,
in this regard, that he felt the Committee, in
granting the special authorization covering operations in longer-term
securities, had changed the operating policy statements so radically, not
only as to maturities in which operations were authorized but also as to
swap transactions, that it
was misleading for the minutes to convey the
impression that the statements continued unchanged because consideration
of the statements, and possible changes in them, was tabled.
Mr.
Committee,
Robertson then said that, according to his understanding, the
in granting the special authorization, had authorized an
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-7
exception to the operating policy statements.
This had been done within
the context of those statements, which specify that such exceptions may be
made.
It was in that posture that he thought the statements now stood.
Consequently, he would concur in the suggestion that the March 7 minutes
be allowed to stand in
their present form, with the statement of Mr.
Hayes
included in today's minutes.
Mr.
Swan commented that the changes in the minutes that had been
suggested by Mr.
Hayes appeared to carry the implication that the Com
mittee presently had in effect nothing except the policy directive and
the special authorization covering transactions in longer-term securities.
He did not think that that was the case,
so he would prefer to let
the
minutes stand as drafted.
Mr.
Hayes then suggested that the March 7 minutes be approved, with
the foregoing discussion included in today's minutes.
This contemplated
that if anyone wished to look into the matter at greater length, or to
pursue it
further, he could do so.
Mr.
Hayes also suggested that anyone
reviewing the matter might wish to study the language on page 52 of the
draft minutes for the meeting on March 28.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the minutes
of the meetings of the Federal Open Market
Committee held on March 7 and March 28,
1961, were approved, with the understanding
that the comments of Mr. Hayes regarding the
March 7 minutes would be incorporated in the
minutes of today's meeting.
Before this meeting there had been distributed to the members of
the Committee a report of open market operations covering the period
March 28 through April 12, 1961,
and a supplemental report covering the
period April 13 through April 17, 1961.
Copies of both reports have been
placed in the files of the Committee.
In supplementation of the written reports, Mr. Rouse made the
following comments:
A good degree of ease in the bank reserve picture has been
maintained while at the same time unduly low levels of short
term rates have been avoided. The demand for short-term issues,
especially Treasury bills, has been notably strong in the past
week, the demand coming to a large extent from nonbank sources.
The underlying pressure on the short-term rate was reflected in
yesterday's Treasury bill auction when an average rate of 2.29
per cent was established for the three-month Treasury bill and
an average rate of about 2.46 per cent for the six-month bill.
These rates were about 10 basis points below the rates estab
lished in the auction three weeks ago and 20 basis points below
two weeks ago. Bidding was particularly aggressive for the six
month bill offering, which was for only $400 million, and it ap
peared that many banks were unsuccessful in their customer bids.
With dealer awards small and concentrated, further pressure on
rates would not be surprising. If this buying continues, as
seems likely, even greater System efforts maybe needed to pre
vent short-term rates from declining further to levels which
Activity in foreign
could inspire new outflows of short funds.
accounts at the New York Bank continues heavy, reflecting the
continued activity in the foreign exchange market.
Rates on longer-term issues have not moved much, but there
is mounting evidence that borrowers, both private and public,
are willing to commit at these levels; also, that funds are
flowing into the long-term capital market to meet this demand
despite the inclination of some lenders to hold back for some
what higher rates, which is not surprising in view of the
prospects for better business conditions. Although some recent
capital flotations have moved slowly and there is a fairly
sizable overhang of unsold municipal issues, there is no indi
cation of a serious blockage in this market. It is likely that
some of the stickiness arises from the offering of $300 million
United States Steel Corporation debentures today or tomorrow
which should give a good clue to the capital market. Initial
indications were that it would move well at a rate around
4.55-4.60 per cent.
It now appears that the issue, due in
1986, will carry a coupon of 4-1/2 per cent and will be reof
fered at 99-1/4 to yield 4.55 per cent. A successful deal
should help to clear up the rest of the market, possibly with
some price adjustment.
Our operations in the longer-term market have progressed
smoothly since the last
meeting.
Some dealers continue to talk
about the one-sided artificial state of the long-term market,
but seem to accept our buying as a "fact of life."
Statistics
on dealer volume indicate a substantial volume of trading away
from the System, from which we conclude that comments of that
kind cannot be given too much weight.
The publication of dealer statistics, plans for which were
reported to the Committee at the March 7 meeting, got under way
since we last met without any further complications. Some of
the dealers have already stated that they have found the reports
The press has not yet made as much use of them
to be useful.
as we hope it ultimately will.
May
The Treasury will
be coming to market shortly with its
financing to refund total maturities of $7,752 million, of which
$2,754 million is held by the System Open Market Account. The
Treasury is expected to announce today that holders of the matur
ing issues (excluding the Federal Reserve System) will not be
given pre-emptive rights to the new securities, which should work
The auction of $2
out well in the current market atmosphere.
billion of one-year bills last Wednesday was quite satisfactory.
The dealers seemed anxious to stockpile this issue and the Treas
ury received a satisfactory rate.
Mr. Mills asked what weight Mr. Rouse would put on the following
two factors in a situation where Treasury bill yields were under pressure
almost constantly, as they had been since the last meeting.
First, Fed
eral funds were freely available at rates well below the discount rate.
Second, there had been a rather abrupt increase in dealer positions,
especially in bills.
4/18/61
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Mr. Rouse replied that he thought a good deal of weight should be
given the first
factor.
The low rate on Federal funds encouraged the banks
to invest in bills rather than to sell Federal funds.
On the second
point, while there had been a steady increase in dealer positions, he was
not sure how much weight should be given to that factor.
Mr.
Rouse added
that an attempt had been made to find out what had been done with the pro
ceeds from sales of longer-term Government securities.
It
appeared that
they were going largely into municipals and corporate issues rather than
into short-term Governments.
There had not been much net change in the
free reserve situation; one bank apparently was selling and another buy
ing.
In substance, this did not seem to be a factor of great consequence.
Thereupon, upon motion duly made
and seconded, the open market trans
actions during the period March 28
through April 17, 1961, were approved,
ratified, and confirmed.
Mr. Noyes made the following statement with regard to economic
developments:
Concern about the economic situation is now centered around
two related questions: First, how vigorous will the recovery,
which seems clearly underway, turn out to be; and, second, how
vulnerable is it to reverses which might come in the next few
months?
So far, the facts would seem to support the widely held
view that this upturn will be closer to the pattern of 1954
than 1958.
The improvement in business in March was certainly moderateoff a little.
in fact, activity in some sectors continued to fall
However, key factors showed some real improvement. Personal in
come was up $3-1/2 billion; housing starts were up for the third
consecutive month, to a seasonally adjusted annual rate of
Automobile sales improved, and now stocks are not
1,336,000.
4/18/61
-11
abnormally large for this time of the year. Recently unemploy
ment claims have declined more than seasonally, and there are
other indications of moderate improvement in the labor market.
Exports appear to be holding at unusually high levels. The
limited number of leading indicators for which March figures
are available are up again, and final data confirm the strong
February showing of the leading series.
Taken altogether, we can say that we now have some real
gains in output and employment to add to anticipatory and ex
pectational evidence we had a month ago. So far, however,
these signs do not suggest anything more than an orderly and
healthy recovery, with one exception.
Such a pattern of mod
erate recover; is hard to reconcile with the large further
rise that has occurred in common stock prices.
For all its erratic and sometimes apparently irrational
behavior, the stock market reflects the current appraisal of
economic prospects by an important and influential segment of
the business an, financial community.
It is difficult to
justify common stock purchases at present prices on any assump
tion other than a rapid and pervasive recovery. Yet these
purchases are being made in large volume, not only by shoe
string speculators but by large, responsible financial insti
tutions.
This leads us directly to the second of the two questions
which I raised at the outset--how vulnerable is the recovery
to such phenomena as the kind of break that might occur in
stock prices if investor sentiment shifted?
Historically, recoveries appear to be very hardy. While
in each recovery there has been talk of the danger of its being
"nipped in the bud" in its early stages, there does not seem
to be any instance, in modern times, when this has actually
happened. There were two fairly sharp breaks in the upward
trend of stock prices in 1955, which had no noticeable effect
on the pace of recovery in that year. The erratic movement
of stock prices around the turn of the year probably contribu
ted to uncertainty and the hesitation in the economy in early
1956 , but this was after recovery had been underway for more
than a year.
In pointing out that recoveries in the past have shown a
surprising capacity to weather quite large reactions in stock
prices and similar transitory discouragements, I do not mean
to suggest that such developments should be encouraged or
even viewed with equanimity. No one can say where the point
may be, but there is no doubt that stock prices could be bid
up to a level from which the reaction could, in turn, be
Just
large enough to do serious damage to orderly recovery.
4/18/61
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as it has been important to take into account the international
repercussions of a depressed short-term rate it seems to me
that it is now important to consider the possible ramifications
in the equity markets of any aggressive action to depress long
term rates.
In fact, one might raise grave question as to
whether any action which would have the effect of discouraging
investment in fixed income claims, such as bonds and mortgagesand encouraging further the current boom in the stock marketcould be regarded as constructive in the present circumstances.
Quite aside from the broader question of whether opera
tions by the Federal Reserve in longer maturities can and should
be used to promote recovery at certain stages of the cycle, this
seems to be a time, in terms of the over-all economic situation,
when it is singularly appropriate for general credit policy to
concentrate on providing the banking system with the reserves
needed to support orderly recovery and for the System to re
frain from doing anything which might accentuate the situation
in equity markets that already poses a threat to sustained re
covery. In my judgment, any attempt to literally depress the
rate of interest, in any maturity area, could lead to this
latter development.
On the other hand, any indication that
the System might be reluctant to supply the reserves needed
for seasonal expansion and normal growth in bank credit and
money could be equally damaging, since it would lead to wide
spread expectations of increasing rates and a consequent un
willingness to invest in longer-term fixed claims at current
rates. This seems to be clearly one of the times when a
steadying influence from monetary policy, rather than a shift
in either direction, would make the greatest possible contri
bution.
Mr. Allen noted that at the outset of his report Mr. Noyes had
indicated that the current recovery might be closer to the pattern of
1954 than 1958.
recovery as it
He inquired whether Mr.
Noyes had in mind the 1954
continued through 1955.
Mr. Noyes replied that he would not want to go that far at this
stage.
covery.
In his remarks he was speaking more of the initial stages of re
It
was too early to tell
whether the present recovery would
-13proceed into the same kind of vigorous movement that developed in late
1954 and 1955.
In reply to a question from Mr. Wayne, Mr.
Noyes said that the
latest available unemployment figures were for early March, when the
ratio of unemployed to the total labor force was 6.9 per cent,
stantially unchanged from earlier months.
sub
The reference in his
statement was to unemployment claims, which had shown a more than
seasonal decrease in late March and early April.
Mr. Thomas presented substantially the following statement on the
credit situation:
Since mid-March, there have been no significant changes
either in the level or in the structure of interest rates; most
above the lowest levels
rates have generally remained a little
and well below the highest levels of this year.
Total loans
and investments at banks have declined, perhaps somewhat more
than is usual in that period. Aided, however, by a large re
duction in Treasury deposits, the private money supply increased
in the latter part of March and has been maintained at the higher
New
level reached then; time deposits have continued to expand.
corporate capital issues scheduled for April are in exceptionally
heavy volume, and State and local government offerings continue
moderately large, even after withdrawal of one large issue.
Common stock prices have continued to rise to new high levels,
with exceptionally active trading.
Gold movements in or out of U. S. monetary stocks have
There have been large shifts in foreign hold
been negligible.
ings of dollar assets, and there appears to have been some in
crease in official holdings.
Some of these changes reflect the
effects of pressure on sterling, which followed the German and
Netherlands revaluations and involved massive movements of
funds that have been to a considerable extent absorbed by cen
tral bank and governmental cooperative cushioning operations.
Member bank required reserves did not show the decrease in
dicated by seasonal projections in late March and early April,
as the substantial decline in U. S. Government deposits was
counterbalanced by a greater than seasonal increase in other
4/18/6
deposits.
-14
Reserves have been supplied on balance by various
market factors, with wide weekly fluctuations, partly offset
by shifts in Federal Reserve holdings of securities. These
holdings have been reduced on balance since mid-March by a
net amount of over $500 million. In addition to $260 million of
repurchase contracts made and terminated, operations included
gross sales and redemptions of about $850 million of bills and
$250 million of other short-term issues and gross purchases of
$590 million, about equally divided between bills and longer
term coupon issues.
Free reserves have fluctuated between weekly averages of
$430 million and $530 million, with an average of close to $700
million indicated for this week, when float is showing the usual
mid-month rise and liquidity needs are large.
The free reserve
figure for the current week could be reduced somewhat by open
market operations if the System sells today or tomorrow.
In
the next three weeks reserve availability will be substantially
reduced by various market factors, and rather large System pur
chases of securities will be necessary.
Cyclical trends in the supply and use of credit revealed
by newly-constructed seasonally-adjusted flow-of-funds data
have considerable significance for monetary policy determina
tion at this strategic stage. Total funds raised in credit
and equity markets have declined sharply and almost without
interruption since the third quarter of 1959. In the first
quarter of 1961, according to preliminary estimates, this total,
at an annual rate of $32 billion, was about half the exceptionally
high rate reached in 1959. The decline in the total continued
into 1961 notwithstanding a seasonally-adjusted upturn in Fed
eral Government borrowing.
Long-term funds raised by borrowers other than the Federal
Government, after declining sharply from mid-1959 to the second
further decline in the past
quarter of 1960, have shown little
three quarters, but for the past two quarters taken together
they have totaled less than in any six-month period since 1956.
The sharpest decline in the past year appears to have occurred
quarter of 1961 showed
in short-term credit, which in the first
practically no net amount raised for the first time since the
third quarter of 1958. This reflected seasonally-adjusted de
creases in consumer credit and in bank loans to business, offset
A small
by moderate additions to security loans and other loans.
volume of short-term credit demands seems typical of periods
around recession troughs, according to 1958 and 1954 experience.
The principal lenders or investors of funds recently have
Non
been nonbank financial institutions and commercial banks.
financial sectors--principally consumers and businesses--have
-15liquidated holdings of securities on balance but have substan
tially
increased their holdings of fixed-value claims, principally
savings and loan shares and time deposits, thus passing available
funds through financial institutions. This is in contrast to their
behavior in 1959, when high interest yields attracted heavy buying
of securities. Demand deposits have also risen on balance since
mid-1960, showing an annual rate of increase of about 4 per cent.
If economic recovery that now seems to have been resumed is
to continue, much larger amounts of credit will be needed than
have been recently obtained. Records of the past two recessions
show that resumption of credit expansion was initiated princi
pally by increased borrowing of long-term funds, principally by
the Federal Government but also by other borrowers, and that banks
The way it worked was something
were important initial
lenders.
like this: The Federal Reserve was active in supplying reserves
to banks. In the absence of short-term credit demands, the banks
Long-term,as well as short-term, inter
invested in securities.
est rates declined, and long-term borrowers--governments and
corporations--took advantage of the favorable bond market to re
fund or fund their indebtedness or to obtain new funds. Bank
credit and the money supply increased before the upturn began, al
though it was not until later in the recovery advance that short
term borrowing demands expanded.
Owing to the balance-of-payments situation of this country
and the consequent desire to avoid reductions in short-term in
terest rates, reserves have not been as plentifully supplied
this time as in 1954 and 1958 and the discount rate has been
kept at a higher level. The question that is being raised nowpublicly as well as privately--is whether this sort of policy
will provide an adequate stimulus to the credit expansion that
is needed for economic recovery. However the Committee's di
rective may be worded, it is to be expected that an important
task of Federal Reserve policy in the next year will be to
assure the availability of money needed to foster recovery.
The Federal Government will be a net borrower, on a
seasonally adjusted basis, for at least the next five quarters.
Borrowing may not be as large as in 1958 and 1959 and it will
probably not be as heavy in the long-term area, at least in
the early stages, as in those years. Thus short-term credit
might increase somewhat earlier this time, particularly in
view of the lessened liquidity position of banks. Long-term
borrowing by the Government, however, will be essential at
some stage in order to avoid serious debt-management diffi
culties in the future.
The recent increase in housing starts and developments
in the mortgage market point to the possibility of some in
crease in the supply of mortgages, although perhaps there
4/18/61
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also the expansion will not be as great as in 1958-59.
Long
term offerings by State and local governments are likely to
continue as large as the availability of funds will permit,
and the recent increase in corporate offerings may be a pre
cursor of greater activity in that area.
How much bank credit should be supplied to finance re
covery? It should be at least enough to provide for cash
balances that will be wanted and perhaps a little
more to
stimulate investment.
Money supply needs are difficult to
measure.
Ever since the war, money supply has not expanded
as much as national product, but the present ratio--at about
28 per cent--is close to the low level of the 1920's. Can any
further downward drift be expected? Most current projections
indicate that GNP might expand to around $530 billion by the
end of 1961 or early 1962, an increase of 6 per cent from the
current level but still
not adequate for complete recovery.
Similar increases occurred in about the same length of time
in 1954 and 1958 and were accompanied by increases of 3 or 4
per cent in the money supply. Will such a relationship be
adequate this time?
An increase of 6 per cent in the money supply would
amount to over $8 billion. Assuming it all occurred in the
deposit component, divided between member and nonmember banks
in the present ratio, this would require close to $1 billion
additional reserves by late this year or early 1962, or about
$100 million a month. Allowing for the possibility that
monetary needs of recovery will not be so large, or for some
reduction in free reserves as expansion occurs, perhaps
an average of $70 million a month would suffice.
It seems likely that the gold outflow will not be resumed
on any significant scale. The seasonal increases in required
reserves and in currency demands will require large amounts of
Federal Reserve credit later in the year, but not much during
the next five or six months. In the process of offsetting the
wide temporary variations in factors affecting reserves, net
additions to Federal Reserve credit of at least $60 or $70 mil
lion a month should be made available in the course of the next
few months. Much larger amounts will be needed in the last
three or four months of the year.
To what extent can additional reserves be supplied without
causing a decline in interest rates or otherwise inducing a
resumption of the gold outflow? Although pressure of sensitive
capital movements has shifted from the dollar to the pound, the
situation is by no means settled. The Germans are evidently
endeavoring to follow policies that will tend to keep down in
terest rates in their markets and also undertaking to make
-17payments both to the United Kingdom and to this country that
will help to alleviate balance-of-payments difficulties.
The
export and import experience of this country has been remarkably
favorable.
Nevertheless the situation has precarious possibilities.
The very large volume of funds that moved out of London and the
counterbalancing official holdings of dollars and sterling pre
sent threats to the reserves of the key currency countries.
Continued high rates of economic activity in Western Europe and
Japan and the delicate balance-of-payments situation of the
United Kingdom will tend to limit any decline in interest rates
abroad.
Recovery in this country will probably result in an in
crease in our imports and a narrowing of our favorable trade bal
ance. There seems to be little
prospect for much, if any, re
duction in our foreign aid and military payments. Maintenance
of a balanced position requires that the capital flight not be
resumed.
Credit demands and expectations incidental to economic re
covery, however, might be expected to reduce pressures toward
declining interest rates. It should now be possible to embark
upon a program of supplying additional reserves for credit and
monetary expansion without the risk of reducing interest rates.
The more serious danger than the balance-of-payments one, may
be that failure to make adequate reserves available will unduly
retard recovery in this country. Interest rates will be largely
determined by the strength of credit demands here and abroad;
the delicate task of monetary policy will be to meet the credit
demands of the domestic economy without inducing a flow of
Economic recovery in this country should make
credit abroad.
that task easier than it has been.
Mr.
Hayes presented the following statement of his views on the
business outlook and credit policy:
The statistical evidence is
increasingly strong that the
bottom of the recession has been reached and that an upturn is
either close or actually occurring. Business and consumer senti
On the other hand, the
ment seem to support the same conclusion.
judgment as to
a
firm
basis
for
any
not
provide
do
statistics
the strength of the recovery; and as yet there are no indica
tions that a vigorous upturn is in the making. Even if the
improvement were to be sharper than now expected, the gap be
tween present total employment and a moderately full employment
of the labor force could not be closed for a long time.
-18The business improvement has shown itself in a wide variety
of statistical series, such as personal income; retail and manu
facturers' sales; new orders; automobile sales, production and
inventories; steel production; average hours worked in industry;
housing starts; and merchandise exports. Also, it was of in
terest to note that eight out of nine of the National Bureau's
"leading indicators" were rising in February.
As for bank credit, according to preliminary weekly re
porting member bank figures for March, business loans showed a
more or less normal expansion, and, in contrast with earlier
expectations, tax borrowing was heavy. The relatively weak per
formance of total loans may be attributed in good part to the
rather sharp contraction in loans to security dealers and fi
nance companies, which in turn can be explained by special fac
tors affecting these areas. The timing of Treasury redemptions
and new financing was largely responsible for a drop in invest
ments and in total bank credit. The significance of corporate
behavior during the tax period this year is not clear, but it
may well be that medium and smaller sized corporations, which
are probably the more important element in tax borrowing, were
not as liquid as had previously been thought; whereas larger
corporations were apparently sufficiently liquid to be able to
avoid a substantial selling of Goverrment securities as has
been customary in the comparable tax period in most recent years.
It is gratifying to observe that the money supply rose sub
stantially in March, despite the drop in total bank credit; and
that the rise in the money supply between the second half of
December and the second half of March has been at the annual
rate of 4 per cent, as against only about 1-1/2 per cent from
late June to late December. Money supply plus time depositsand also total nonbank liquid assets--have behaved much better
than in the two previous recessions and reached new highs at
the end of February. During the last half of 1961 the money
supply should receive an unusually strong impetus from the Treas
ury's relatively heavy prospective cash borrowing program. It
is also gratifying to note various signs that capital funds
more freely into the corporate, munici
have been flowing a little
pal, and mortgage markets.
I feel some concern over the recent performance of the stock
market, with very high activity concentrated particularly in low
priced speculative issues. Figures on stock market credit in March
are not yet available, but this whole area would bear close watch
ing, in view of the possible adverse effects of a sharp reversal
in the stock market boom.
Turning to policy, I think the business situation clearly
suggests the need for a continued policy of monetary ease. The
-19very fact that we have, fortunately, avoided a flooding of
reserves and extremely low short-term interest rates during the
recession means that the banks are on a rather firmer rein than
during previous recessions and that we can therefore well afford
a policy of continued ease. At the same time, the international
position of the dollar is in very delicate balance.
We are all, of course, gratified by the favorable develop
ment of our merchandise trade and some other elements in the
balance of payments. We should not forget,however, that the
improvement in the statistical situation as well as in foreign
confidence in the dollar may be attributed in good part to the
development of special technical arrangements, as well as to
Exposed as I
more effective cooperation among central banks.
am to continuous contacts with foreign exchange markets and with
the thinking of foreign bankers, businessmen, and government of
ficials, I continue to be impressed by the fact that the dollarand our ability to defend it--continues on trial. While it is
true that we had no significant changes in the gold stock in the
last few weeks, it is equally true that the dollar remains at the
Under these circum
floor on most international exchange markets.
stances, it remains imperative that short-term interest rates be
held in the present range or even a bit higher. I had this point
brought home to me strongly during my conversations in Basle with
a number of central bankers who have tried very hard, and are
still trying, to reduce interest rate differentials by bringing
their own rates down, even though purely domestic considerations
would suggest the exact opposite course.
When additional reserves are supplied through open market
operations over the next three weeks, I would hope that they
could be injected, where possible, through purchase of longer ma
turities; and that when additional reserves are not needed, upward
pressure on short rates may be exerted through sales of short
term securities, and equivalent purchases of longer maturities.
It seems to me that the Manager should be given ample leeway to
carry out such a program while maintaining roughly the same de
gree of monetary ease that has prevailed in recent weeks.
With the continuation of existing policy on reserves and in
terest rates, the discount rate should be left as it is. I also
believe that the directive should be left unchanged; and that any
future change in the directive should probably await both more
definite indications as to the vigor of the business recovery and
a substantive change of policy.
further ahead, in the event that the economy
Looking a little
does expand appreciably, pressure from political sources for lower
interest rates may continue at the same time that the capital mar
kets themselves are creating new upward pressures on rates. With
4/18/61
-20
the Federal Government now expected to come to market more often,
and for substantial amounts, together with the prospect of growing
corporate and municipal demands for funds, interest rates could
easily move up significantly in the next few months. The System
should aim, in these circumstances, at moderating interest rate
increases until business recovery has made sufficient headway; and
we should work to prevent the upward ratcheting of interest rates
based on expectations alone. Such a policy objective would tend to
keep interest rates more closely consistent with the underlying forces
of supply and demand and the basic condition of the economy.
With respect to the possibility of higher margin requirements,
there are good arguments on both sides of the question. A token
increase of, say, 5 per cent, might be worth considering as a cau
tionary signal and a logical follow-up to the warning given to the
market by Mr. Funston a few weeks ago.
On the other hand, the re
cent pattern of stock market credit does not seem to call clearly
for a change in margins, even though March may show a larger in
crease in credit than recent months, and there may be some question
whether a symbolic change of this kind in margin requirements would
be within the spirit of the law. There is also some risk that a
rise in margin requirements might reinforce expectational influences
tending to push up interest rates. I don't know just what the right
answer is, but it would seem useful for the Board to give the matter
careful consideration.
Mr. Francis reported that Eighth District business developments ap
peared to have paralleled those in the nation quite closely.
Improvement
was seen in some of the indicators, while weakness continued in others.
Steel production had been reflecting improvement each month; in April to
date, weekly average output was 19 per cent over January, compared with a
gain nationally of 15 per cent.
Department store sales in March were above
the average of the previous four months, and were at about the May 1960 level.
The agricultural situation was relatively strong.
Cash farm receipts had
been substantially higher this year than during the comparable period of
1960; in the first two months of the current year they were 16 per cent
above the year-ago level and about 8 per cent above 1959.
The District
4/18/61
-21
was experiencing a rather late spring and some concern had been expressed
on that account, but there was adequate moisture and prospects were good.
On the weaker side, residential construction contract awards during
January and February were 15 per cent below the same period in 1960,
compared with a 4 per cent decline nationally.
The District employment
situation continued to be sticky, with nonagricultural employment in the
major metropolitan areas,
combined, having been down in
from the all-time high but also from the year-ago level.
February not only
The largest
declines were in Louisville and St. Louis, and little Rock was the only
major area showing even a slight increase in total employment over last
year's level.
Unemployment was at a high level in all of the major labor
markets, with three of the five major areas being classified in March as
areas of substantial labor surplus.
Insured unemployment edged down in
March and early April, but was substantially higher than at this time
last year or in 1959.
However, the present unemployment level was under
that of April 1958 in all parts of the District except St. Louis, where
frequent layoffs in the automobile industry affected the situation.
In
St. Louis, unemployment was approximately the same as at the trough of
the 1957-58 recession period.
Turning to the banking situation in the District, Mr. Francis
said that total deposits were down slightly in March, while total credit
at member banks,
month.
seasonally adjusted, was virtually unchanged during that
Total credit, seasonally adjusted, for the first quarter of the
current year increased at an annual rate of about 7.6 per cent.
Borrowing
4/18/61
-22
from the Reserve Bank was quite modest; only one bank, in the Memphis
cotton market, was at the discount window regularly.
Mr. Bryan presented substantially the following statement:
It is increasingly clear that the economy is at least in the
bottoming-out stage of its current recession. Indeed, my personal
opinion is that the direction of the economy has already turned.
The principal question now facing us is, how do we manage the re
serve position of the banking system in a recovery?
During a considerable part of last year, I was saying that we
were permitting the total reserves of the banking system to diminish
much too far below any proper approach to a long-term trend, judged
either historically or upon a reasoned approach to the growth needs
of the economy. At our meeting three weeks ago, in indicating a
considerable sympathy with the point of view Mr. Allen had suggested,
I was making precisely the same point fundamentally, but in response
to an opposite set of facts. That is, I was trying to say that in
the recovery phase of the business cycle we should strive to manage
the reserve position of the banking system with a great deal more
precision, and with a steadier hand, so to speak, than we have in
past business cycles.
The record of our handling of reserves in past business cycles
is that we have permitted reserves to fall far below a trend line,
whether we judged the trend on the basis of historicity or rationale;
then we have overstayed our position of great ease, so that total
reserves have gone far above any reasonable trend. In order
that we may refresh our minds on this point I am presenting
again a postwar chart of reserves. 1/
However, at our last meeting the same point was implicit
in the chart presented by Mr, Balderston. Clear in that chart
were the tremendous fluctuations in the free reserve position
of the banking system--half a billion plus to half a billion
minus, often in the space of a few months. Likewise clear in
the chart presented by Mr. Balderston was the jarring effect
of these large movements on the growth rate in the money supply,
effects that cannot, in my opinion, be justified on any basis
related to long-run considerations: the need of a growing
economy, growing both in population and transactions, for a
growing money supply.
As I view the record, we have tended to overstay our position
of tightness and to be too tight, and then to overstay our position
of ease and to be too easy. I am not particularly critical of the
record because we have been going through a decade of massive
readjustments in response to the excess liquidity produced by the
1/
A copy of the chart is attached to these minutes.
-23war years and massive readjustments in interest rates throughout
the whole scale from short to long. I do not believe that anyone
would have the prescience necessary to do much better than we
have done. At the same time, I am saying that from here on we
need a steadier hand at the wheel. We will have zigs and zags,
of course; but I believe that we will be wise if we make every
endeavor to dampen down the amplitude of the zigs and the zags.
What has happened in the past, as I see it, is that by
overstaying a posture of great ease, we have been compelled,
finally, to clamp down hard, just in time to get credit for
producing the ensuing recession. Be that as it may, no such
argument is needed for the point I am making. The amplitude of
the fluctuations in the reserve position of the banking system,
as our Chairman and others of my colleagues have heretofore noted,
has caused both short and long rates to fluctuate in an even
greater amplitude. They have behaved like a bronco with a bee
in his ear. Partly, that has been attributable to what I have
called the massive readjustment of rates in the postwar period.
But can anyone doubt that the result has in some measure been
produced by our own rather unsteady handling of banking reserves?
Can anyone doubt that the amplitude of these fluctuations has had
a debilitating influence on the intermediate and long market? Can
anyone doubt that the failure of the long market to respond to the
System's recent posture of ease in the degree that we would have
liked, and with the precision of arbitrage and timing that we might
have expected, is in some part attributable to the third-degree
burns that the long investor has thrice suffered in recent years?
As I now see the situation, we are confronted by certain
major considerations:
The total reserve figure is back practicallyshy a mere couple of hundred million--to its long
term trend line.
We may expect, whether fast or slow, some influ
ence of business recovery in expanding bank credit;
and, in any event, we are rapidly approaching the
second half of the calendar year in which demands
for bank credit will increase.
We will have large Government borrowing in the
second half of this calendar year, some part of
which must be provided for by an expansion of bank
credit, which in turn must be in some part supported
by an increase of bank reserves.
Our present posture of ease has produced a
reasonable adjustment in long rates, considering
all circumstances, and is now producing an adjust
ment in mortgage rates.
Our actions have produced large excess reserves;
large free reserves; and the liquidity of the banking
system has been greatly improved, as can be attested
by a single figure, the prodigious increase over the
past year of nonborrowed reserves, an increase extend
ing far beyond any seasonal considerations; and non
banking liquidity has also increased.
In the light of these circumstances, I believe we will mis
handle the situation if we force additional reserve ease on the
banking system. Indeed, speaking in terms of total reserves and
of a period covering several months, I can presently see no cause
whatever for doing more than adjusting to seasonal variations with,
perhaps, a slight growth element; but I wish here to recall that
the growth factor on any trend basis would certainly not be over
$50 million a month, a minuscule figure. In terms of free reserves
and of the next three weeks, I notice that the blue book gives us
a free reserve base of $492 million for what is called the present
base period--the daily average for the three weeks ending April 12.
I cannot but believe that this figure is ample, and, if I were to
give an instruction in terms of free reserves, I could see no reason
for advocating, speaking on a daily average basis for the next three
weeks, any increase in free reserves as measured by the $492--say
$500--million of the present base period.
The fact is. I think we must be alert in the coming weeks to
any indications that the level of free reserves should be adjusted
downward. If we are not so alert, we may again find ourselves being
misled by the free reserve figure. All we need to do is to keep on
with a constant level of free reserves through a period of expanding
credit demands--each time required reserves go up, supplying the
additional amounts necessary to maintain the level of free reservesand we can run the total reserve figure and the money supply figure
out through the roof.
Mr. Bopp said that business in the Third District seemed to have
declined as far as it was going to in this recession.
no evidence of a vigorous rebound.
However, there was
Steel production had increased, but
not sensationally; construction, particularly of homes, showed little
improvement; carloadings were rising, but remained low; all labor force
indicators pointed to a continuance of unemployment at nearly the highest
levels of the postwar period; and department store sales, after a good
4/18/61
-25
start, had dropped below 1960 totals.
Manufacturers still
maintained
they would spend less for plant and equipment this year than in 1960.
The banking picture did not yet indicate any upturn in business
activity.
Loans had been relatively stable since early February, and
bank reserve positions appeared to be fairly easy.
Reserve city banks
had not borrowed at the discount window and actually had been lending
some Federal funds.
Their basic reserve position was about in balance.
Some country banks had been borrowing for special localized reasons.
In his view. Mr. Bopp said, policy should remain the same as it
had been for the past several weeks.
Developments and prospects in the
economy did not justify any departure from that position.
If
any departure
were to occur inadvertently, he would prefer that it be on the side of
more ease.
In view of occasional congestion in capital markets and
cessation of the gold outflow, he felt that a slightly greater degree
of ease could be permitted with safety.
If this were to mean rather
plentiful amounts of free reserves or somewhat lower bill
time to time, he would not be disturbed.
rates from
But essentially he recommended
no change from present policies and no change in the discount rate.
Pending some more fundamental decision concerning the directive,
Mr. Bopp felt that a change in the wording of the present directive would
be desirable.
In the past few meetings, it had been suggested that recog
nition be given to the start of the recovery period.
In his view, such a
change would be purely for purposes of the historical record and would
4/18/61
-26
imply no change from current policy.
However, this would seem to be about
the last opportunity to make such a change without the Committee appearing
to be unduly slow in recognizing the new developments in the economy.
In
this connection, he referred to the statement on page 14 of the staff
memorandum on recent economic and financial developments, distributed
before this
meeting, that incomplete data for March and fragmentary data
for early April suggested that cyclical recovery had begun.
mittee believed a change in
the directive would be desirable,
suggest the following wording for clause (b):
If
the Com
he would
"to encouraging economic
recovery and increased employment opportunities, while continuing to take
into consideration current international developments."
If such a change were made, Mr. Bopp said, he thought the policy
record should note that until
recently the Committee had been concerned
with arresting the recession, that for some weeks evidence of recovery had
been emerging, that with the present amount of economic slack there was no
immediate threat of inflation, and that the Committee continued to be con
cerned about the high level of unemployment and the international situation.
The record should also note that in many of these respects the Committee
was approaching this
recovery period differently from the similar period
in 1958.
Mr.
Fulton said that although Fourth District indicators reflected
over-all business improvement,
Activity was rising, but slowly.
the improvement was still
quite limited.
At a recent meeting of business economists,
4/18/61
-27
the participants reported an improvement in
orders in their respective
businesses, and increased production was anticipated a little
had been a moderate decline in unemployment,
later.
There
at least as measured by new
insurance claims, but in the main the reductions were in only about seasonal
proportions.
A substantial labor surplus remained in the larger cities; 14
of the District's 15 major labor market areas were classified in the sub
stantial labor surplus category, along with 38 of the smaller labor market
areas.
The volume of building had expanded in Cincinnati and Cleveland;
this sector of activity was beginning to look up, but there was nothing in
the way of vigorous improvement as yet.
The weakness noted recently in
department store sales was felt to be largely the result of cold and dismal
weather.
Auto sales had brightened considerably, but they were still
to 25 per cent below last year.
20
In steel, persons in the industry were
stating that the decline bottomed out in
January and February, with some
upturn in March as the result of minimum inventories in the hands of custo
mers and the general seasonal pattern.
increased in relation to tonnage,
running out of steel.
In March the number of orders
indicating that more users were actually
Although the auto industry was still
lagging in
taking tonnage, the industry was no longer deferring deliveries.
In the rubber industry, inventories of tires were at their highest
point, reflecting somewhat the anticipation of a strike as the labor agree
ments, except as to wages,
were up for review.
the hands of the mills were high, and it
As to iron ore, stocks in
appeared probable that only about
-28
4/18/61
half as much ore would move down the Lakes this year as last year.
As to
paper and paperboard manufacturing, the growth rate was stated to be about
2 per cent, against an expected growth rate of about 5 per cent.
A lot
of production in finished forms was in the hands of retailers and whole
salers, and that would have to be moved before manufacturers ordered more
containers.
All in all, Mr.
Fulton said, the Fourth District was slowly seeing
the light of some recovery.
As to policy, Mr. Fulton said he would not wish to change the dis
count rate or the directive at this time.
In his opinion the Committee had
overstayed the time for a change in the directive, and the present wording
seemed to fit
a recovery period about as well as it
into a recession.
did the period of going
He concurred with the view that System posture as to the
availability of credit should continue to be about as at present.
saw it,
As he
the current signs of recovery should not be regarded as a signal
for the System to reduce the supply of reserves available to the banking
system.
Instead, reserves should be supplied as needed, and without stinting.
The Account Manager should be given every opportunity to accomplish the
objectives of the Committee in all sectors of the market.
Mr. King stated that Mr.
Bryan's appraisal of policy in the past,
including the results of that policy, and his suggested philosophy for the
future coincided closely with his (Mr.
King's) own thoughts.
It was that
very philosophy that had whetted his interest in the Federal Reserve System
-29
4/18/61
a number of years ago, and he would endorse, he believed, everything that
Mr.
Bryan had said.
had been made by Mr,
While he also agreed generally with the suggestion that
Noyes about remaining steady in the boat, he believed
that such pressures as might develop in the short-term market could be
tolerated to the extent of a slight decline in the bill rate.
While he
would not suggest any substantial relaxation of the policy that had pre
vailed, he felt that it
would be possible to allow the short-term rate to
reflect market forces and seasonal forces without disturbing anyone unduly.
In making this comment,
he was not unmindful of the point brought out by
Mr. Hayes that the System should remain cognizant of the cooperation this
country was receiving from friendly foreign sources but, as he had said,
he did not believe that any relatively insignificant change in the short
term rate would be unduly disturbing.
Mr. King noted that he had been in the habit of suggesting free
reserve targets in terms of fairly wide ranges.
decided to state a specific target.
Today, however, he had
Although he realized that it
would not
be reasonable to expect the Account Management to meet such a target pre
cisely, nevertheless, in order to indicate the volume of additional reserves
that he thought should be supplied to the market,
he would suggest a figure
of $575 million.
Turning to the discount rate,
any change at this time.
Mr.
King said he would not recommend
The discount rate seemed relatively unimportant
as long as the Federal funds rate continued considerably under 3 per cent,
4/18/61
as it
-30
had during the past three weeks, and the only real effect of a change
in the discount rate might be to disturb many people.
Mr. King commented that many people had been misled by stock market
developments in the past, and this would probably also be true in the future.
One could easily come to the conclusion that he could understand the trend of
events by watching the stock market closely.
In Mr. King's opinion, however,
a person could be led into serious error if he attached too much importance
to the recent rise in the stock market as an indication that business was
about to expand with great vigor.
Many highly optimistic appraisals of
current business indicators had come to his attention, but he noted that
business failures were still
at a high level.
To single out one area of
activity, he mentioned that since the beginning of the current calendar year
the lumber business in a part of the country with which he was familiar had
experienced several turns of sentiment depending on the volume of orders on
the books, with the most recent indication being on the pessimistic side.
This situation, he felt, might be quite indicative of developments in many
other businesses.
Mr. King concluded by saying that he found himself in agreement with
the change in the directive suggested by Mr. Bopp.
Mr. Shepardson stated that he found encouragement in the signs of
gradual economic upturn.
gradual.
He hoped that the upturn would continue to be
One of the unfortunate aspects of the previous recession and
upturn was the precipitate nature of the reversal, which occurred before
-31
4/18/61
it was possible to achieve the corrections that one would normally hope for
at such a phase of the business cycle.
He was also encouraged by the
reports indicating that the balance-of-payments situation seemed to have
improved somewhat,
but there still appeared to be a delicate balance.
With reference to the promotion of sustainable economic growth, Mr.
Shepardson commented that some fundamental adjustments appeared to be taking
place gradually.
them to work out.
More were needed, and there should be an opportunity for
This did not mean that he would want the System to be in
a position of restraining recovery and growth.
At the same time, however,
he questioned whether this was an appropriate time for the System to be
pushing too hard, in contrast to affording an opportunity for some of the
other forces in the economy to develop in a manner that would assure
longer-run sustainable growth. Therefore, he would continue the present
degree of ease, which in his opinion was adequate.
The situation in the
money market did not seem to be restrictive, if one could judge by the
Federal funds rate.
Looking at the general availability of credit and
the growth of the money supply and near-money substitutes, it appeared
to him that the System was in a good position, and he would favor main
taining free reserves in a range indicative of a continuation of the
present degree of ease; that is,
$500 million plus or minus.
He saw no
reason to change the discount rate, and he would not be inclined to favor
a change in the directive.
4/18/61
-32
Mr.
policy.
Robertson said that he continued to feel critical of monetary
In his opinion, System operations had been entirely too tight to
carry out the language of the policy directive.
The significant fault he
saw in the analysis of Mr. Bryan was that the latter's long-term program
would start with what he (Mr. Robertson) considered an inadequate volume of
total
reserves at the present time.
In his own analysis, the System should
have been easier up to this point, and the current volume of total reserves
was not adequate.
Mr.
Robertson repeated that he would like to see monetary policy
easier than it
was at present.
He felt
that a mistake had been made in
over-emphasizing the international aspects of the situation, particularly
the importance of holding up the short-term rate.
He would agree with Mr.
Bopp to the extent of sharing the latter's
view that doubts should be
resolved on the side of ease.
Robertson's)
In
his (Mr.
opinion, that
should be a minimum requirement, for he regarded this as a time when there
could be further injections of reserves without upsetting the applecart.
In his view the Committee could go a long way toward correcting some of
the mistakes of the past by taking advantage of what might well be its
last
clear chance to increase the volume of reserves before a real upswing
in the economy took place.
The upswing, he thought, was likely to be more
rapid than most of those who had spoken thus far had suggested.
In
terms of free reserves, Mr. Robertson said he would favor a
level in the neighborhood of $600 million, and that he would not be con-
4/l8/61
-33
cerned if the figure went as high as $650 million.
He would not attempt
to offset the natural increase in reserves that was going to occur next
week to the extent that had been suggested.
It
would be possible, he
thought, to move up to $600 million, or even $650 million, without too
much of an impact on rates anywhere along the line.
In any event, it
would not be of concern to him if the bill rate went down somewhat.
Mr. Robertson expressed agreement with Mr. Bopp that this was a
time when the policy directive should be changed.
There had been a change
in the economic outlook, and the directive should not be the same during
an upswing as during the preceding downswing.
that Mr.
The language for clause (b)
Bopp had suggested seemed to him satisfactory.
If
those specific
words were not used, however, he would favor some other phrase that would
indicate that the Committee was trying to encourage economic recovery.
Mr. Robertson also said that he would not favor a change in the
discount rate at this time, because he thought the point when such action
should have been taken had passed.
In his opinion the discount rate
should have been reduced several months ago.
However,
this was not the
time to risk changing the rate because psychological reactions would be
adverse.
If the rate were changed, the System would appear to be showing
less confidence in the recovery movement than he would like to display.
Mr. Mills commented that the economic intelligence reaching the
Board and the Committee gave clear and substantive indications of a
recovery.
However,
it
remained to be seen whether the recovery was more
4/18/61
-34
than seasonal or whether it
doldrums without relapse.
would be vigorous enough to survive the summer
To correlate monetary and credit policy with
that estimate of the outlook, it
was his opinion that the reserve climate
that had been developed over the past several weeks was appropriate to the
economic circumstances.
Judging from the trend of Treasury bill yields,
the trend of the Federal funds rate, and the increase in the money supply,
the System's objectives were being realized.
The System, he thought,
had
provided a lead to the financial community that, with a lag, should produce
greater effects than were apparent at the present time.
In that connection,
Mr.
Mills observed,
it
was welcome to hear
belated attention being given to the extremes of System policy in previous
years in moving between tightness and ease.
He felt
the System should be
wary at the present time about attempting to repair the damage that resulted
from what he considered an overly restrictive policy a year or two ago,
one which forced an untimely contraction in
the money supply.
To substi
tute for that policy one of extreme ease could produce evils of great
consequence.
Accordingly,
it
seemed to him that at the present time a
level of net free reserves averaging around $500 million was adequate,
or perhaps more than adequate,
The presumption that it
for the existing economic circumstances.
might be more than adequate went again to the
matter of recognizing the leverage that resides in
maintaining a given
level of positive free reserves or negative free reserves.
implied that at any time the level fell
below the target,
Such a policy
reserves would
4/18/61
-35
be restored to the original target.
This produced the kind of leverage,
up or down, that had resulted in the inequities of recent years in
monetary and credit policy, and it
System
provided an object lesson as to what
should be avoided in the future.
Mr. Mills said that he would not recommend a change in the discount
rate at this time.
Also, looking at the hazy economic horizon, he would
feel that the policy directive should likewise be left unchanged at the
present time.
Mr. Wayne reported that favorable trends in business activity
were clearly gaining in the Fifth District.
predominant.
Thus,
it
In some sectors they were
appeared that the economy of the District had turned
the corner and that a slow but steady recovery was beginning.
Manufacturers
reported moderate improvement in new orders, and the work week was stable
or rising.
in March,
Insured unemployment declined a little
more than seasonally
and bank debits showed steady improvement except in West Virginia
There were encouraging signs of strengthening in the building and the
lumber industries.
tile
Construction activity was fairly stable, and some tex
markets had strengthened slightly.
However, there were also some
elements of uncertainty, as, for example, with respect to bituminous coal.
As to banking developments,
Mr. Wayne said that most types of busi
ness loans had been rising more than seasonally in recent weeks.
banks appeared to be in a relatively easy position, however,
District
and seemed
able to accommodate increases in credit demand with no difficulty.
4/18/61
-36
With respect to the national situation, Mr. Wayne said he was
impressed by the extent to which economic data for February showed stability
or some improvement.
The data for March showed continued improvement,
in most cases but rather general and widespread.
small
There seemed to have been
no major development of an unfavorable nature except the failure of
unemployment to decline.
He was led to the conclusion that the low mark
of business activity had been reached and that the country might be in the
first month of recovery.
However, it
was always possible to be mistaken,
especially at a time of seasonal rise.
As to policy, Mr. Wayne advocated continuance of the degree of
ease that had prevailed for the past six weeks.
in
the discount rate at this
time,
and he still
He would not favor a change
considered the international
situation sufficiently precarious to require continued consideration.
He
agreed with Mr. Bopp's suggestion for a change in the wording of the direc
tive, and with Mr.
Bopp's reasoning in
regard to the explanation for such
a change.
Mr.
Clay noted that recent economic developments lent support to
the view that the low point of the recession was behind us.
Ahead lay the
unknown configuration of the recovery and the goal of an economy employing
its
resources more fully than during the last
Under these circumstances,
upswing of the business cycle.
the task of the Federal Reserve System continued
to be that of conducting monetary policy with a view to encouraging economic
expansion, and this objective called for a continuation of the policy of
monetary ease.
4/18/61
-37
In view of the international flow-of-funds problem, it appeared to
him essential that open market operations be so conducted that the Treasury
bill
rate would remain within the range of recent weeks.
But it
also
appeared that with resource utilization at low levels and with interest
rates high in comparison with other recessions, appropriate policy involved
more than supplying some given volume of reserve funds without depressing
the Treasury bill
rate.
It
called for an added endeavor to bring about lower
interest rates in the intermediate and longer sectors of the maturity struc
ture, with the expectation that those developments would be reflected in
other credit and security markets.
At times when the System had been free to allow the short rate to
decline, intermediate and long-term rates had been brought down during a
recession through the shift in investor demand toward longer maturities as
the shorter rates declined under the joint impact of open market operations
in Treasury bills and of greater reserve availability.
During the current
episode, that type of development had been impeded by the System's desire
to prevent the Treasury bill rates from falling too low in view of the inter
national flow-of-funds problem.
At the present time, then, the System had
the added burden of attaining its
objective in the longer maturity sectors
of the market without being free to encourage this development through
lower short-term rates.
Preventing premature tightening of the longer end of the market
would in
itself serve a useful purpose, Mr. Clay commented, but the System
4/18/61
-38
should endeavor to do more than that.
Insofar as this could not be done
in the course of making necessary additions to reserve funds, the Federal
Open Market Committee should undertake additional operations by offsetting
purchases of longer maturities with sales of shorter maturities.
Mr. Allen said he felt there was no longer any question that the
economy touched bottom early this year and had since been moving gradually
upward.
Based on what had happened in previous periods of recovery, he
expected that the durable goods industries of the Seventh District would,
as a group, make larger gains in the months ahead than would general business.
Steel production had risen since February and sources in the industry
expected the trend to continue through June, probably through the year.
steel production index, nationally, rose from 75 in December to 88 in
April, at which time the rate was 92 in Chicago and 100 in Detroit.
machinery, both production and sales were continuing to increase.
The
early
In farm
Inventory
liquidation might be continuing on balance, but it was probably nearing an
end.
The Purchasing Agents of Chicago had just issued a report that orders,
production, and hiring were now on the uptrend.
Chicago housing permits
issued during the first quarter were up nearly 30 per cent from last year,
according to figures from one authority.
The Detroit Branch had provided a table covering the years 1955 to
1961 which showed, first,
the average daily sales rate of domestically made
automobiles for the period January 1 to April 10 in each year.
Then it
projected sales for the year on the basis of the sales during that early
4/18/61
period.
-39
Next, for the years 1955 through 1960, it compared the projections
with actual sales for those years.
Lastly, it
showed the discrepancies
between the projections and the actual results.
It was interesting to note
that the average discrepancy for the six years was only 2.5 per cent.
If
sales from January 1 to April 10, 1961, were projected through the year
1961, the figure for total 1961 sales would be 4,899,000, considerably
less than actual sales in any of the preceding six years except 1958, when
sales were only 4,298,000.
Projected
Annual Sales
Actual
Annual Sales
15,957
19,701
17,467
4,899,000
6,068,000
5,362,000
6,142,000
5,485,000
1958
13,965
4,287,000
4,298,000
-0.3%
1957
1956
19,482
20,319
5,981,000
6,238,000
5,824,000
5,838,000
+2.7%
+6.9%
1955
23,638
7,257,000
7,375,0 0 0
-1.6%
Year
1961
1960
1959
Average Daily Rate
Jan. 1 - Apr. 10
Discrepancy in
Projection
-1.2%
-2.2%
Mr. Allen reported that no evidence of a pickup in loan demand had
been found as yet.
From March 15 through April 5, outstanding loans at
Seventh District reporting banks declined $66 million compared with $46
million a year ago, with most of the decline in business loans.
The report
ing banks had continued to reduce their holdings of intermediate and long
term Government securities, but their holdings of "other securities,"
presumably tax exempts, had risen by almost $100 million over the last
month.
Not surprisingly, there was an absence of reserve pressures on the
larger banks.
The net deposit and reserve drains on Chicago banks over the
4/18/61
-40
April 1 tax date were smaller than usual; last week those banks were net
sellers of Federal funds for the first time since September, and sellers in
larger amounts than at any time for at least many years.
Mr. Allen recalled that at the March 28 meeting he suggested the
importance of giving timely evidence in operations to the Committee's sense
of the business situation.
It now appeared certain that the economy was
experiencing a move upward, gradual thus far, in fact so gradual that there
had been no pickup in net loan demand and bank reserves were in sufficient
supply to support a substantial increase in loans and investments.
Under
the circumstances, he favored going along for another three weeks "about as
we have since the last meeting."
He would prefer that the net free reserve
figure stay around $500 million, or, if a choice must be made, that it be
less than that figure rather than more.
He would not change the discount
rate or the directive, although he did not feel strongly about the directive.
It might not have been obvious from his choice of words, Mr. Allen added,
but he was in agreement with the position stated by Mr. Bryan.
He was glad
that Mr. Bryan had used more erudite and persuasive language than his own.
Mr. Deming said there was little new to report about general economic
developments in the Ninth District, except that the moisture situation had
improved appreciably in recent weeks and that the outlook for iron mining
activity in 1961 was quite bleak.
It seemed highly likely that ore ship
ments from the Range in 1961 would be smaller than in either 1959 or 1960,
and might be as small as in some of the prewar years.
Aside from the mining
4/18/61
-41
sections, and one or two other small areas, however, the general
picture was fairly good and improving.
So far this year, District banking developments had been mixed,
with no clearcut trends indicated.
In January, loans at city banks
declined far more than seasonally; in February they rose contraseasonally;
in March they declined by almost the same amount as they rose in
March 1960.
this year.
At country banks,
loans had been growing rather steadily
As he had noted at the March 28 meeting, the seasonal
decline in deposits apparently reached its
low earlier this year;
deposits were now above year-ago levels by 6 per cent at city banks
and 4 per cent at country banks.
With these loan-deposit developments,
bank liquidity positions had varied; in general,
city bank loan-deposit
ratios had improved so far this year, while those in country banks
had remained about the same.
And, except for the peaks attained in
the spring of 1960, loan-deposit ratios at both classes of banks were
now significantly higher than at any time in the 1950's; 4 and 6
points higher at city and country banks,
at the peaks in
respectively, than they were
1957.
This situation led him to believe that monetary policy could
well afford to, and in fact should, aim at providing somewhat more
liquidity to the banking system.
He would not want to press liquidity
upon the banks, but he would think, along the same lines as indicated
4/18/61
-42
by Mr. Thomas, that the System could continue to pursue, perhaps
increase slightly,
its
program of supplying ample reserves.
To
accomplish this purpose, and at the same time avoid undue declines
in short rates, would require, as he saw it, that considerable latitude
continue to be given to the Manager of the Account.
the Account has done very well.
So far, he thought
He would hope that growing recovery
would make the job easier insofar as interest rates were concerned,
and thus permit the furnishing of adequate reserves without so much
danger of rate declines at the short end and with more opportunities
to hold down rate advances at the longer end.
Mr.
Deming commented that he had listened with interest to the
remarks made by Mr. Bryan and, in a general way,
Mr. Bryan's cautions should be heeded.
believed that
As he saw it, however, there
was far less danger this time than in previous post-war recovery
periods in continuing a policy of ease after recovery had begun.
In
other words, he did not see the problem at present as one of "overstaying"
the market,
but rather as one of being sure of not "understaying" it.
Thus,
Mr.
Deming said, he would hope that the System could
continue to operate in
a $500-$600 million range of free reserves.
would not change the discount rate.
With respect to the directive,
he had considerable sympathy for Mr.
Bopp's suggestion,
He
particularly
if the policy record could be made to show that such rewording reflected
4/18/61
-43
more a recognized change in the state of the economy than a change in
the direction of policy.
Mr. Swan reported that some further indications of improvement
had been seen in the Twelfth District in the past three weeks.
However,
they were not particularly vigorous, and they were still somewhat
scattered. On the unfavorable side, the unemployment situation was
still quite unsatisfactory. On the favorable side, conditions in
steel, copper, and lumber improved in March. Orders for Douglas fir
rose in March, but there was no attempt to expand production commensurately
with the increase in orders.
Therefore, unfilled orders increased
rather rapidly, and there was some reduction in inventories at the
mills.
Nonresidential construction was strong, and new car registrations
in California were up substantially in the first half of March from the
first half of February.
The large banks of the District appeared to be in quite an easy
position. They had been net sellers of Federal funds for several weeks,
and last week they were net sellers on a somewhat larger scale.
It
was indicated that they expected to be able to continue in that position
during the current week.
Loans at weekly reporting member banks declined
in the three weeks ended April 5, as in most other areas.
However, a
small sample of large banks indicated a noticeable pickup in business
loans, this being the first time in many months that such comments had
been made.
Savings deposits continued to rise in the week ended
4/18/61
-44
April 5, which included the quarterly interest date, compared with a
drop a year ago.
Turning to policy, Mr. Swan said it seemed to him necessary to
bear in mind that the vigor of the upturn, if an upturn was in prospect,
was still
much in question.
While he had no major disagreement with
the policy of the past three weeks, he continued to feel that the
Committee should try to be a little
the opportunity arose.
It
easier than it
had been whenever
appeared to him that the Committee could
well attempt to increase total reserves somewhat.
In saying this, he
recognized the point made by Mr. Bryan regarding the ultimate result
of maintaining a constant level of free reserves.
Like Mr.
Deming,
however, he felt that in the present climate the situation was very far
from going through the roof.
In summary, he would favor a slightly
easier position, even though that might mean for some period of time
an increase in free reserves toward the $600 million level.
As to the
short-term rate, while he realized the importance of guarding against
any abrupt decline, he would not be worried about fluctuations around
the 2-1/4 per cent level.
He saw no reason why it was necessary to
exert pressure to move the bill
In conclusion, Mr.
rate up from present levels.
Swan said he would not argue for any overt
change in policy, such as a change in the discount rate, at this time.
However, he agreed with Mr. Bopp's suggestion regarding the directive,
4/18/61
if
-45
such a change could be qualified by an explanation of the fact that
no appreciable change in policy was involved.
Mr. Irons stated that conditions in the Eleventh District had
not shown much change.
There had been mixed movements within the
District, but any changes that had occurred were minor.
In effect,
this was a continuation of what had been going on for some time; the
Eleventh District did not have too much trouble throughout the recession,
with activity holding at levels not far from where it had been earlier.
Nonagricultural employment was holding steady, and the unemployment
figures were remaining quite steady.
at present for unemployment benefits.
There were fewer initial claims
The industrial production index
had moved pretty much in line with crude oil production; that is,
a bit in February and up a bit in March.
If
down
there should be a cutback
in crude oil production in April or May, the index might again drop a
bit, but the other elements in it
were quite stable.
Construction was
increasing about seasonally, and department store sales to the first
April were about 2 per cent above the previous year.
Easter business was not much above a year ago.
of
However, the
There would probably
be a decline in days allowable on crude oil production, which now stood
at 9, having been dropped from the figure of 10 that prevailed for one
month.
4/18/61
-46
During the past three weeks, figures of reporting banks showed
that loans were down slightly, while demand deposits, time deposits,
and investments were up.
District banks had been net sellers of
Federal funds, with the weekly average running about $300 million on
the buying side and $400 million on the selling side.
Dallas banks
were doing the buying, and Houston banks the selling.
There was no
borrowing of any significance from the Reserve Bank.
In short, there
was no evidence of tightening in the banking situation that was causing
any trouble.
Loan demand showed a little drop in the past three weeks,
but in general there was not much change.
Mr.
Irons said that the District was expecting a gradual increase
in business activity.
Conditions in agriculture looked quite promising.
There was a cautious optimism on the part of businessmen; they were
not too unhappy about what was happening, but they were looking for
some slight improvement.
Mr. Irons commented that he was rather well satisfied with
Account operations during the past three weeks.
reserves had been adequate.
In his judgment,
The money market had reflected some
degree of ease, and with loan demand lagging somewhat, the liquidity
position of the banks was slightly better than it had been.
The rate
structure seemed reasonably satisfactory and had been fairly stable in
spite of some strong forces that were at work during the past period.
-47
4/18/61
The System, it
appeared, might be making some progress toward the
objectives of current policy; namely, to keep the short-term rate up
and the long-term rates down.
While long-term rates had not been
nudged far, there were signs of an increased flow of funds into the
long-term market,
and at the same time reserves had been quite adequate.
Mr. Irons suggested continuing to maintain about the degree
of ease at which the Committee had been aiming.
As to free reserves,
he noted that his own thinking had been a little lower than that of
some others.
At present he would like to see free reserves in the
range of $400-$500 million, giving recognition to the point made by
Messrs. Bryan and Mills that the very process of maintaining free
reserves, with replenishment as reserves were used. could produce
expansion.
In his view, free reserves in the area he had mentioned
would avoid a restrictiveness that would be damaging.
Mr. Irons also commented that in this recession the bill rate
had not been driven down to 5/8 per cent and the discount rate had not
been reduced to 1 per cent.
Therefore, the System would not have so
far to go to get back to what might be regarded as normal levels.
Thus, it might develop that the caution exercised in protecting the
short-term rate structure would turn out to have had some blessings
in disguise.
Also, there was a difference in the liquidity position
of the banks as compared with earlier recessions.
As he recalled the
-48
4/18/61
1954 period, and the antirecessionary measures taken by the System,
it
subsequently took some eight months before the banks became illiquid
enough for System measures of restraint to exert any appreciable effect,
but that would not be so this time.
In summary, Mr.
Irons suggested that it
might be desirable to
proceed in terms of meeting seasonal growth and necessary demands
rather than to pump in reserves too fast.
It would be his thought to
go along with free reserves in the range of $400-$500 million and see
what the difficulties might be.
He considered the international
situation as of major importance, just as the sustaining of the recovery
was of major importance.
Therefore,
both sides of the street."
he felt that the System must "play
As to the discount rate, he thought that
there should be no change at this time.
Turning to the directive, Mr.
feelings.
On balance, however,
it
Irons commented that he had mixed
seemed to him that the Committee
might get itself in a rather embarrassing position if
some change in the directive at this time.
it
did not make
Essentially, he liked to
think of the directive in terms of stages of the business cycle.
The
economy had gone through the declining phase of the cycle and the
bottoming-out period, and it
now appeared that the economy was beginning
to move into another stage of the cycle.
Accordingly, while he did not
feel too strongly about the matter, he was rather apprehensive about
waiting another three weeks.
If
a change were deferred,
the economy
-49
4/18/61
might be rather well along in the recovery stage before the Committee
got around to making a change in the directive.
It seemed to him, Mr. Irons said, that three things ought to
be recognized in the directive.
First, the Committee wanted to achieve
expansion of the money supply and bank credit consistent with economic
recovery.
Second, it wanted to facilitate, encourage, and stimulate
the forces of recovery.
Third, there were international factors that
gave the Committee cause for concern.
In the current directive and in certain previous directives,
Mr. Irons said, there were some things that he did not like.
First, the
language of the directive tended to center around the desirability of
substainable economic growth,
times.
something that everyone wanted at all
In this respect, therefore, the directive seemed to him rather
meaningless.
employment.
Second, there was the inclusion of specific reference to
In his opinion, there was going to be a substantial amount
of unemployment that monetary and credit policy could not correct.
The
levels might be higher than they had been in the past, and he did not
care to have in the directive an implication that System policy was
directed toward correcting something that he did not think it could
correct.
Mr.
Irons then stated that he would suggest changing clause (b)
of the directive so that it
would call for operations with a view to
4/18/61
-50
encouraging expansion of bank credit and the money supply to contribute
to strengthening the forces of recovery which appeared to be developing
in the economy, while giving appropriate consideration to international
factors.
Mr. Ellis commented that last week the Boston Reserve Bank held
its
semiannual business outlook conference of regional economists.
The
views expressed at that time, he said, reinforced the prediction that
there would be an expansion of gross national product by the fourth
quarter of this year.
The consensus was that the expansion would be
about 5 per cent from the first
to the fourth quarters,
with about half
attributable to personal consumption expenditures.
The business picture in the First District conformed generally
to what had been heard around the table this morning; it
appeared that
the low point of the recession had been reached and that recovery trends
were setting in at the moment.
The New England manufacturing index had
been increasing for the last two months (January and February),
four components of the index increased in February.
and all
The March survey
of New England purchasing agents indicated further production increases
in that month, and the man-hour index rose in February.
Thus, on the
production side, it looked as though the low point of the recession had
been passed.
As to construction contract awards, the trend was obscured
by a poor and probably erratic February performance,
during which month
4/18/61
-51
the figures were down in all major categories.
serious, but the recent trends were mixed.
Unemployment was still
In February, total
unemployment in New England, without seasonal adjustment, was almost
equivalent to the rate for the nation as a whole, yet the First
District did not at present have any of the "F" labor market classifi
cations for which it was quite noted in years past.
Business loans were down slightly in the past three weeks,
Mr. Ellis said, but in general the banking picture was good.
The banks
had adequate reserves, and they were net sellers of Federal funds to a
small extent during the past few weeks.
Demand deposits were rising,
and bill holdings also had turned upward.
There had been a good deal of ease, Mr. Ellis said, and yet bill
rates had not been unduly low.
As to the period ahead, he expressed
the view that it would be desirable to make the most use of credit to
stimulate recovery that was possible without putting undue pressure on
short-term rates.
To him that meant, as he had stated at the March 26
meeting, exploring whether reserves could be used a little more
effectively, with a little more ease than previously.
The System, he
noted, was trying to answer the question whether or not it was supplying
enough reserves to provide for adequate growth, at a time when it had
accepted the limitation on the supplying of reserves that was imposed
by the potential impact on the flow of gold and short-term capital.
-52
4/18/61
He endorsed the suggestion that considerable latitude be given to the
Management of the System Account, and felt that the Desk should probe
toward a little higher level of reserves where possible, again
recognizing the importance of avoiding significant declines in short
term rates.
As to the directive, Mr. Ellis said he felt much the same way
as Mr. Irons; that is, that the directive was valuable to a large
extent in retrospect as a record of the ability of the Committee to
recognize changes in current economic conditions.
was to be changed on such a basis, it
If the directive
probably should be changed now,
and he would favor the language Mr. Bopp had suggested.
Mr. Balderston noted that in the ten months since May 1960 the
active money supply had grown at approximately the same rate as during
the comparable phases of the two previous business cycles.
However,
in the ten months prior to May 1960 the money supply had contracted at
an annual rate of 2.9 per cent.
As he saw it, the problem before the
Committee today remained that of giving such appropriate stimulus to
recovery as was within its
bill
power, without on the other hand driving
rates so low as to cause interest-sensitive funds to flow abroad
or to suggest to observers that monetary policy was not prudent.
Three
weeks ago he suggested that developments warranted some probing efforts
toward increasing the money supply.
Data now available pointed to a
4/18/61
-53
gain in the money supply in March, and if
that trend continued he
would be more confident that the System was helping to foster recovery
through such powers as it
possessed.
tend to vary so greatly that it
However,
the money supply figures
would require a longer period for him
to reach a conclusion as to whether the System was causing the money
supply to rise fast enough to provide adequate liquidity, even if
some
allowance was made for time deposits.
The turn in business may have come, Mr. Balderston said, but
no one could foretell either the rate or the extent of recovery.
The
System was pleasantly surprised in June 1958, he recalled, when the
valley of that recession turned out to be V-shaped.
of the 1961 valley might be was still unknown.
What the contour
However, there was the
absolute certainty that an increasing number of school children would
be coming to working age, and this made it imperative to provide more
It
job opportunities than was the case in past business recoveries.
was not possible for him to appraise whether the recent level of free
reserves would have sufficient cumulative effect to discharge the
Committee's responsibilities as they related to domestic needs.
level of free reserves, if high enough in
That
relation to the phase of
the cycle, bank credit, and the discount rate, might have a greater
cumulative effect the longer it continued.
would.
He thought it probably
However, whether under current conditions a level of free
4/18/61
-54
reserves of $500 million would produce growth in the money supply
seemed uncertain.
Therefore, he would favor pushing the level somewhat
higher through probing actions.
Mr. Balderston said he would consider it a mistake to change
the discount rate at this time in the face of the foreign situation.
However, he would change the directive, and he believed that he would
favor the suggestion of Mr.
Irons.
In conclusion, Mr. Balderston suggested that if time remained
at the end of the meeting the Committee might like to ask Mr. Hayes to
comment informally on his recent trip to Europe, during which he
attended a monthly meeting of the Bank for International Settlements.
Secretary's Note: Other Committee members
having concurred in that suggestion, Mr. Hayes
made brief informal comments at the conclusion
of the Committee meeting.
In summarizing the meeting, Mr. Hayes said that although some
differences of view existed, it
reach a consensus.
probably would not be too hard to
First, however, he felt that it might be appropriate
to deal with the directive.
It appeared that a majority would like to
change the directive, and two specific suggestions had been made.
Mr. Bopp had suggested changing clause (b) to provide that open market
operations should be conducted with a view:
"to encouraging economic recovery and increased employment
opportunities, while continuing to take into consideration
current international developments."
4/18/61
-55
Mr. Irons had suggested:
"to encouraging expansion of bank credit and the money
supply to contribute to strengthening the forces of
recovery which appear to be developing in the economy,
while giving appropriate consideration to international
factors."
As the result of subsequent suggestions, it was agreed for
purposes of discussion to change the language suggested by Mr.
in certain minor respects,
Irons
as follows:
"to encouraging expansion of bank credit and the money
supply so as to contribute to strengthening of the
forces of recovery that appear to be developing in
the economy, while giving consideration to international
factors."
Mr. Hayes noted that the essential difference between the two
proposals was that the suggestion of Mr. Bopp mentioned employment
specifically and did not mention the money supply, while the suggestion
of Mr. Irons mentioned the money supply but not employment.
Mr. Hayes having inquired whether a possibility of compromise
was seen, Mr. Robertson asked Mr. Bopp whether the latter would be
willing to incorporate in his proposal a reference to encouraging the
expansion of bank credit and the money supply.
Mr. Bopp replied that this would be agreeable to him.
He noted
that he was not at present a member of the Committee.
There followed further discussion during which Mr. King
suggested that the proposal of Mr. Irons be left intact in order that
the Committee might decide whether or not it
language for the directive.
wished to accept such
4/18/61
-56
Mr.
Hayes then stated that he would call for a go-around to
determine how many would prefer the language suggested by Mr. Bopp
and how many would prefer the suggestion of Mr. Irons.
he turned to Mr.
First, however,
Rouse and asked whether from the Account Manager's
point of view there would be any substantial preference.
Mr. Rouse
replied that as Manager of the Account it would make no particular
difference which proposal might be adopted.
Mr. Bryan said that he liked the point made by Mr. Irons.
The System could influence credit conditions and thereby encourage
recovery, but the effect on employment was indefinite.
He had been
uneasy about having anything concerning employment in the directive.
Mr.
Fulton stated that he would prefer the language suggested
by Mr. Irons for the same reason.
Mr.
King said he appreciated the danger in
seeming to imply
that monetary policy could resolve the unemployment problem.
But
neither did he like to create the impression that the money supply was
as easy to turn around and move in one direction as the other.
He
added that perhaps he was basing his views somewhat on the manner in
which the directive might be read by less sophisticated persons.
Although he recognized the point Mr. Bryan had made, and found it
persuasive, still he would like to write the directive in terms that
took into account the way the average person might read it.
4/18/61
-57
After the others around the table had expressed their
preference, Mr.
Hayes said it
was clear that the majority preferred
the language suggested by Mr. Irons.
Mr.
Mr.
Hayes then referred to a possible compromise suggested by
Robertson, which would call for operations with a view to
encouraging expansion of bank credit and the money supply so as to
contribute to strengthening the forces of recovery that appeared to be
developing in the economy and increasing employment opportunities,
while giving consideration to international factors.
Mr. Irons said that the question of including a reference to
employment was the only point about which he felt strongly.
He did
not believe, for reasons he had expressed earlier, that the Committee
should indicate in its directive that open market operations were to
be undertaken with a view to increasing employment opportunities.
Mr. Hayes inquired whether anyone who had expressed a
preference for the language expressed by Mr. Irons also would like
to accept the compromise suggested by Mr.
replied affirmatively.
Robertson, and Mr. Deming
Mr. Deming said that he had some sympathy for
the position that the Committee should not include in the directive
language indicating that a direct objective of monetary policy was to
increase employment.
However, in the manner in which the suggestion
of Mr. Robertson was stated, the matter was put more in the nature of
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-58
a hope that increased employment opportunities would result from
achievement of the objectives of Committee policy.
would do no harm and that it
He felt that this
would do some good.
Mr. Bopp said he felt it
was important that a reference to
increased employment opportunities be included in the directive, in
terms of this being one of the hoped-for results of System policy.
The
proposed language, he noted, did not pretend to say that the System
could produce full employment.
Mr. Clay pointed out that a reference to the fostering of
employment was included in the current directive.
He stated that he
would like to find a way of easing that reference out of the directive.
However, he was not sure whether this was an appropriate time.
At the request of the Chair, a poll was then taken on the
question whether to include in the directive a reference to employment,
in the manner suggested by Mr. Robertson.
From this poll it
developed
that of the members of the Committee, Messrs. Hayes, Balderston,
Robertson, and Wayne favored the inclusion of such a reference, while
Messrs. Allen, Irons, King, Mills, Shepardson, and Swan did not favor it.
Accordingly, it
was understood that the majority of the Committee preferred
not to include in clause (b) of the directive the suggested reference to
the encouragement of increased employment opportunities.
Mr. Hayes next inquired whether any member of the Committee
wished to be recorded as voting against the directive in a form in which
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-59
clause (b) would be phrased in the manner suggested by Mr. Irons,
subject to the minor editorial changes that had been agreed upon.
Mr. King said that he did not want to record a dissent.
As be
had brought out earlier, however, this was material that would be read
by the public when the record of Committee policy actions was published.
Further, he supposed that the directive, as adopted today, would
probably remain in effect for some time.
In these circumstances, he
raised the question whether it was felt that the directive was
appropriately phrased to fit prospective developments in the national
economy.
During a brief discussion that ensued, Mr. Irons commented that
he thought the Committee would be well advised to avoid getting itself
in a box at this time insofar as the language of the directive was
concerned.
Mr. Hayes then said that he took it the directive, as proposed,
would be unanimously approved, and no dissent was indicated.
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 (includ
ing 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
4/18/61
-60
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 expansion
of bank credit and the money supply so as to contribute to
strengthening of the forces of recovery that appear to be
developing in the economy, while giving consideration to
international factors, and (c) to the practical administra
tion 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 ac
count of the Federal Reserve Bank of New York (with discretion,
in cases where it seems desirable, to issue participations to
one or more Federal Reserve Banks) such amounts of special
short-term certificates of indebtedness as may be necessary
from time to time for the temporary accommodation of the
Treasury; provided that the total amount of such certificates
held at any one time by the Federal Reserve Banks shall not
exceed in the aggregate $500 million.
Mr. Hayes said it
seemed quite clearly the consensus to continue
substantially the same policy that had been in effect during the last
period or two.
This meant continuing to maintain approximately the
same degree of ease, with some attention given to short-term rates, and
with leeway given to the Manager of the Open Market Account to accomplish
these purposes.
He inquired whether there was any disagreement that
this was the consensus.
In view of a question raised by Mr. Robertson, Mr. Hayes called
for a poll of the members of the Committee as to the accuracy of his
statement of the consensus.
From this poll it developed that
4/18/61
-61
Messrs. Balderston, Robertson, and Swan favored increasing the degree
of ease while Messrs. Hayes, Allen, Irons, King, Mills, Shepardson, and
Wayne favored continuing to maintain substantially the present degree
of ease.
It being clear, therefore, that the consensus favored maintaining
the existing degree of ease, Mr. Hayes inquired whether any member of
the Committee wished to be recorded as dissenting from the policy
indicated by the consensus, and Messrs. Balderston, Robertson, and Swan
stated that they wished to be recorded as dissenting.
Secretary's Note: Mr. Robertson subsequently
submitted the following statement for inclu
sion in the record of the meeting in explana
tion of his dissent:
Mr. Robertson voted against the decision to implement
the directive by maintaining about the same degree of ease
in the money market as in the past. He felt that to continue
to supply reserves to the banking system only in the amounts
that had been made available in recent weeks would not be
adequate to encourage or support credit and monetary
expansion needed for economic recovery at a rate that would
be desirable and possible.
The risk that additional reserves might cause a decline
in short-term rates and encourage a movement of funds from
this country with a loss of gold, Mr. Robertson believed,
was likely to be much less than it had been in the past.
There had been a resurgence of confidence in the future of
the dollar, the lack of which had been an important cause
of the earlier flight of funds from this market; interest
rates in some foreign markets had been lowered; and the
balance-of-payments problem and the outflow of gold had been
alleviated. Moreover, economic recovery and expectations of
such a recovery might be expected to bring about a rising
trend in interest rates, or at least act as a damper on further
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4/18/61
decline. Additional reserves, therefore, would not be likely
to cause an undue decline in interest rates, but might instead
be needed to prevent an undue rise. Failure to supply adequate
reserves for monetary expansion might retard recovery with
undesirable economic consequences for the early return to
fuller utilization of human and material resources.
Mr. Hayes then referred to the question of renewing the
outstanding special authorization for operations in longer-term United
States Government securities.
This authorization,
originally given by
the Committee on February 7, 1961, was renewed on March 28 in a form
that removed the previous restriction against operations in
having a maturity longer than 10 years.
securities
Accordingly, on March 28 the
Federal Reserve Bank of New York had been authorized, between that date
and the next meeting of the Committee, within the terms and limitations
of the directive issued on March 28, to acquire intermediate and/or
longer-term United States Government securities of any maturity, or to
change the holdings of such securities,
in an amount not to exceed $500
million.
Messrs. Allen and Robertson stated that they would dissent from
renewal of the outstanding authorization, for the reasons that they had
stated at previous meetings, most recently on March 28, 1961.
In this connection, Mr. Robertson raised the question whether
any method was apparent by which it
would be unnecessary to record a
dissent at each Committee meeting as long as the special authorization
was continued.
Mr. Hayes commented that the original action of the
4/18/61
-63
Committee on February 7 contemplated that the Committee would review
the special authorization at each meeting and determine whether to
renew or amend it.
Mr. Robertson agreed and indicated that in the
circumstances there would seem to be no alternative to recording his
dissent at each meeting.
Mr. Rouse commented that in the Committee's policy directive,
which had just been adopted in amended form by unanimous vote, there
was a provision 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, should not be
increased or decreased by more than $1 billion.
covering operations in
The special authorization
longer-term securities contained an authority,
within the terms and limitations of the directive, to acquire intermediate
and/or longer-term United States Government securities, or to change
the holdings of such securities, by an amount not to exceed $500
million.
He suggested that the portion of the policy directive to
which he had referred be augmented so as to specify that holdings of
intermediate and/or longer-term United States Government securities
were not to be increased or decreased by more than $500 million.
As
reasons for this suggestion, he stated that the proposed addition to
4/18/61
-64
the policy directive would satisfy the auditors working on the Open
Market Account and that it would make the people who do the actual
purchasing and selling of securities for the Account a lot happier.
Mr. Hayes commented that the incorporation of the suggested
language would make it
the $1 billion figure.
clear that the $500 million figure came within
In addition, inclusion of a more rigorous
statement of the special authorization in the policy directive would
serve to avoid any possible misunderstanding on the part of the auditors.
There followed a discussion during which it
was brought out
that reference to actions taken on the special authorization as well as
on the policy directive would be made in the record of policy actions
of the Committee.
In other words, actions on both the special
authorization and the policy directive, including the votes, would be
included in the public record.
Mr. Sherman said that he would see no objection, from the
standpoint of stating the substance of the authority given by the
Committee, to incorporating in the directive language such as that
suggested by Mr. Rouse.
It might be desirable to have an explicit
statement that the $500 million figure pertaining to operations in
longer-term securities was within the $1 billion total limitation,
although that did not seem essential.
The record could be made clear
that the authority for operations in longer-term securities would
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4/18/61
continue to be a special authorization, and if the Committee should
change this special authorization the language that Mr. Rouse proposed
could be dropped from the directive or modified in whatever way was
appropriate.
Mr. Sherman noted that it would, of course, be necessary
to explain the reasons for any change in wording of the directive in
the policy record to be published in the Board's Annual Report.
Also,
if this addition were made to the directive, Messrs. Allen and Robertson
presumably would wish to be recorded as voting against the directive,
at least as far as this portion was concerned.
With reference to the last comment by Mr. Sherman, Mr. Robertson
said he would wish to be recorded as voting against the directive for
the reason indicated, if
only in that respect.
Mr.
Rouse's suggestion should be adopted, but
Mr. Allen indicated that he would prefer to leave
the suggested language out of the directive.
Mr.
Wayne raised the question whether there was any opinion that
the suggested change was necessary or desirable from a legal standpoint,
and there was no indication to such effect.
However, Mr. Rouse again
stated that the proposed change in the directive would be for the
purpose of avoiding any misunderstanding on the part of the auditors,
and that the personnel engaged in the purchasing and selling of
securities for the Account would like it,
Mr. Robertson commented that it would be possible to conform
the wording of the special authorization with that of the policy
4/18/6l
-66
directive without incorporating in the policy directive the suggestion
of Mr.
Rouse, following which Mr. Hayes commented that the Committee
might be reluctant to change the wording of the special authorization
because it had taken action originally in that manner and since that
time had twice renewed the special authorization on the same basis as
far as the particular wording in question was concerned.
observed that if
Mr. Robertson
the special authorization had been adequate for the
period to date, it would appear that it might also be adequate from
this
point forward.
Mr.
might be advisable to afford
Hayes then suggested that it
the Committee an opportunity to think further about the suggestion of
Mr.
Rouse and to bring the matter up again at the next Committee meeting.
After others indicated concurrence,
Mr.
Wayne suggested that before the
next meeting there be distributed to the Committee a memorandum on the
matter which would include a
statement of the reasons why it
was felt
desirable that language such as proposed be incorporated in the policy
directive.
There was agreement with this
understood that Messrs.
Sherman,
Hackley,
suggestion, and it
was
and Rouse would prepare such
a memorandum for the Committee.
Thereupon, the Committee authorized the
Federal Reserve Bank of New York, between
April 18, 1961, and the next meeting of the
Committee, within the terms and limitations
of the directive issued at this meeting, to
4/18/61
-67
acquire intermediate and/or longer-term U. S.
Government securities of any maturity, or to
change the holdings of such securities, in
an amount not to exceed $500 million.
Votes for this action: Messrs. Hayes,
Balderston, Irons, King, Mills, Shepardson,
Swan, and Wayne. Votes against this action:
Messrs. Allen and Robertson.
Mr. Hayes inquired of Mr. Rouse whether the latter had any
further comments or questions in the light of the discussion at this
meeting, and Mr. Rouse replied in the negative.
It
was agreed that the next meeting of the Federal Open Market
Committee would be held on Tuesday, May 9, 1961.
Secretary's Note: For the reason discussed at a
brief meeting of the Board members and Presidents
that followed the Open Market Committee meeting,
it was agreed that the May 9 Committee meeting
would be held at 9:00 a.m.
It
was pointed out that if
Committee meetings were held at
three-week intervals, the meeting after May 9 would fall
on Tuesday,
May 30, which would be a holiday at most Federal Reserve Banks.
After
discussion, during which reference was made to preliminary arrangements
that had been made for meetings of the Presidents'
Conference and the
Trustees of the Retirement System during the period June 19-21, it
was
agreed that meetings of the Open Market Committee would be tentatively
scheduled for Tuesday, June 6, and Tuesday, June 20.
The meeting then adjourned.
AssistantSecretary
Series
-B
Reserves
Bank
Member
Total
oard
Averages
of
Figures)
Daily
(Monthly
Billions
Dollars
of
1961
March
Millions of Dollars
Line:
Trend
19.273
Reserves Unadjusted
March 1961.
Cite this document
Federal Reserve (1961, April 17). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19610418
@misc{wtfs_fomc_minutes_19610418,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1961},
month = {Apr},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19610418},
note = {Retrieved via When the Fed Speaks corpus}
}