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, August 1, 1961, at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Allen
Balderston
King
Mills
Shepardson
Swan
Wayne
Mr. Johns, Alternate for Mr. Irons
Mr. Treiber, Alternate for Mr. Hayes
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. Young, Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Thomas, Economist
Messrs. Coldwell, Einzig, Garvy, Mitchell, and
Noyes, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Molony, Assistant to the Board of Governors
Mr. Holland, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Knipe, Consultant to the Chairman, Board of
Governors
Mr. Yager, Economist, Government Finance Section,
Division of Research and Statistics, Board of
Governors
Messrs. Hostetler, Jones, and Tow, Vice Presidents
of the Federal Reserve Banks of Cleveland,
St. Louis, and Kansas City, respectively
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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. Anderson, Economic Adviser, Federal Reserve
Bank of Philadelphia
Mr. Black, Assistant Vice President, Federal
Reserve Bank of Richmond
Mr. Brandt, Assistant Cashier, Federal Reserve
Bank of Atlanta
Mr. Hellweg, Economist, Federal Reserve Bank of
Minneapolis
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Committee
held on June 20, 1961, were approved.
In view of certain questions that had been raised following
distribution of the preliminary draft, it
was agreed, at the sugges
tion of Chairman Martin, to defer until the next meeting consideration
of approval of the minutes for the Committee meeting on July 11, 1961,
in order that these questions might be studied further.
Upon motion duly made and seconded,
the action of the Federal Open Market
Committee on July 18, 1961, in approving
the recommendation of the Account Manage
ment that the Account exchange its entire
holdings of 3-1/8 per cent certificates
and 4 per cent notes due August 1, 1961,
for $3,216,150,00 3-1/4 per cent notes
maturing November 15, 1962, and $1,600
million 3-3/4 per cent notes maturing
August 15, 1964; and that $13,800,000
2-3/4 per cent bonds due September 15,
1961, and $5 million 1-1/2 per cent notes
due October 15, 1961, be exchanged for
3-1/4 per cent notes due November 15, 1962,
was approved, ratified, and confirmed.
8/1/61
-3Before this meeting there had been distributed to the members
of the Committee a report of open market operations covering the period
July 11 through July 26,
1961, and a supplemental report covering the
period July 27 through July 31,
been placed in
Mr.
1961.
Copies of these reports have
the files of the Open Market Committee.
Rouse stated that he had returned to the New York Bank
only yesterday from a European trip, but that he and Mr.
Marsh had
prepared a short statement amplifying the aforementioned written re
ports on open market operations.
tially
Mr.
Rouse then presented substan
the following statement:
Since the last meeting of the Federal Open Market Com
mittee, the money market has remained generally easy with
Federal funds trading for the most part around 1 per cent.
At the start of the period prospects were that reserves
would have to be absorbed in the week ended July 19, in part
to offset the usual monthly bulge in float. Projections for
the rest of the period indicated that reserves would have to
be supplied in size. Complicating considerations were the
need for an even keel during the Treasury financing opera
tions and the persistent downward pressures on Treasury bill
rates that assumed increasing importance following the rise
in the British discount rate.
In the first statement week, System holdings of Govern
ment securities were reduced through sales and redemptions
not only to reduce the redundant bank
of Treasury bills,
reserves but also in an effort to head off a decline in
rate dropped
rates. Although the 91-day bill
Treasury bill
below 2.20 per cent, sales of bills were limited to avoid
interference with the Treasury's financing operations and
also because of the need for a large amount of additional
reserves in the following statement week.
rates
At the start of the second statement week, bill
were again under downward pressure and it was evident that
the injection of the large amount of needed reserves would
have to be made to a considerable extent through issues
other than bills-which would take several days to acquire.
Accordingly, buying started on Thursday, July 20, and it
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soon developed that the System was getting an assist from
the large volume of swaps undertaken by banks against pur
chases of the new issues made available by the Treasury.
The System was thus able to buy substantial amounts of
shorter-intermediate securities before the week end of July
Market selling of intermediate issues was augmented
22-23.
after the week end when uncertainties over the international
situation began to appear, culminating in the increase in
the British bank rate on Tuesday and the President's speech
on the Berlin situation that evening. As a result, banks
again shifted their thinking toward shortening up their in
vestment portfolios, in contrast to the willingness to ex
tend maturities which was displayed in the Treasury's
refunding. These events also focused greater attention on
the relationship of our short-term rates to those in other
Against this background, the System continued
countries.
to make purchases outside the short-term area. By Wednesday,
July 26, it was evident that despite these purchases more
funds would have to be provided to meet the reserve require
ments arising from bank acquisitions of new tax anticipation
bills. In order to acquire the volume of securities needed
to provide the reserves, the scope of our purchases was
broadened to include shorter securities, principally notes
and certificates maturing within 15 months.
On Thursday and Friday, July 27 and 28, purchases were
curtailed. The tone of the money market was easy and the
provision of additional reserves at that time would have ag
On the other
gravated the downward pressures on short rates.
hand, projections indicated a need for supplying additional
reserves after the week end. Thus the decision to curtail
operations on Thursday and Friday was made with the expecta
tion that substantial action would later have to be taken to
supply reserves. As anticipated, the money market firmed
yesterday, and the System responded by making repurchase
agreements, at 2-1/2 per cent, and by resuming the purchase
of securities on an outright basis (including the purchase
of bills from foreign accounts).
It should be noted that the System purchases of issues
beyond the short-term area have been to a large extent in
two- and three-year maturities. Offerings of maturities be
yond that range have not been large; in fact, offerings beyond
ten years have been quite scarce. Since most of the purchases
have been made in a falling market, the impact on the market
has been moderate, and the market has been able to adjust
readily to other influences.
It is evident that the very easy money conditions over
the past several weeks have encouraged banks to buy Treasury
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bills, mostly short-term issues.
However, the continued
reserve ease, coupled with other investment factors, has ex
tended the buying out to the 91-day area and has been an
important factor in keeping downward pressure on the 91-day
bill rate. The average rate for 91-day bills in the auction
yesterday w:s 2.30 per cent. I believe the System could ease
its problem with regard to short-term rates by allowing free
reserves to work a little lower, and thus avoid the "sloppy"
condition of this recent period.
The Treasury's recent financing operations have been
eminently successful as commercial banks evidenced a willing
ness to extend their maturities to the three-year 3-3/4 per
cent issue offered in the exchange. The attrition was moderate
and the Treasury can look with satisfaction on the substan
tial amount of debt moved out to the three- and seven-year
area. The auction of the $3.5 billion tax anticipation bills
was equally satisfactory; the average rate in that auction
was 2.49 per cent.
Finally, the favorable atmosphere created by the re
funding has faded due to international developments and the
prospect for greater Government spending and economic activ
ity, which suggest higher interest rates. While the prospects
for an advance refunding in the near future had been good,
the Treasury must now adopt an attitude of "wait-and-see."
Having cleared the decks for the next two months, it will
undoubtedly still be on the alert for opportunities to move
in that direction.
Mr. Rouse added the comment that in talks during his recent
trip to Europe, mostly with central bankers but also with commercial
bankers, he found a continuing and growing distrust about the ability
of the United States to keep its financial house in order.
Without
much doubt, developments last week must have aggravated that feeling.
In making this comment, he did not mean to imply that he had found
evidence of distrust in terms of immediate pressures on the dollar,
but there was a background of "wanting to be shown."
Among those
with whom he talked on this trip, and with whom he had also talked
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earlier in the year, he sensed that the feeling ne had mentioned
was growing,
and this of course had a relationship to the short
term rate situation.
Mr.
Rouse noted, in this connection,
that
any outflow of funds from this country would be unfortunate.
Thereupon, upon motion duly made
and seconded, the open market trans
actions during the period July 11 through
July 31, 1961, were approved, ratified,
and confirmed.
Mr. Noyes presented the following statement with regard to
economic developments:
As background for a summary of the most recent economic
developments, it may be useful to run through some of the
revisions in the National Income and Product accounts re
leased since the last meeting. The revision goes back to
1958, but as it is difficult to follow too many numbers
presented orally, I shall limit these remarks to the most
recent twelve-month pnriod and the broad aggregates.
Economic activity, as measured by GNP, reached a
cyclical high in the second quarter of 1960, estimated at
the time to be $505 billion. It declined to an estimated
$503.5 billion in the third quarter--held at that level in
the fourth quarter, and then dropped again to the cyclical
quarter of 1961. Activity
low of $499.8 billion in the first
increased sharply in the second quarter--and preliminary
guesses as to the extent of improvement were revised upward
You will recall that at the
as the quarter progressed.
last meeting we suggested a figure of $513 billion on the
unrevised basis.
It now appears that the peak in the second quarter of
The decline in
1960 was $506 .4 billion, rather than $505.
the third quarter was to $505.1--in the fourth to $50.5,
and the first quarter low was $500.8 rather than $499.8.
Thus we see that the decline in the third quarter of 1960
was less than originally reported, due in large part to the
fact that personal consumption expenditures were better
maintained and the cutback in inventory accumulation was
less than originally estimated.
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However, the over-all magnitude of the recession was
about the same. Taking it from the second quarter high of
quarter low of $500.8, the revised fig
$506.4 to the first
ures show a decline of $5.6 billion, while the original de
cline from $505 to $499.8 amounted to $5.2 billion--declines
of 1.11 per cent and 1.03 per cent, respectively.
The official estimate, on the new basis, for the second
quarter of 1960 is $515 billion--well above the $506.4 of a
year ago.
Some perspective on this rather striking improve
ment is added if we look at the figures in terms of per
capita real income and product, as was suggested by Governor
Mills at the Board meeting yesterday.
In these terms the
GNP is still
a little
below the 1960 peak, and disposable
personal income was at exactly the same level in the second
quarter of this year as it was a year ago.
Up to last week it was easy to summarize the situation
as one of rapid, but apparently healthy recovery, especially
as the stock market appeared to settle down after its spurt
in the spring months.
Commodity markets--and in fact whole
sale prices generally--showed no evidence of inflationary
Production was rising rapidly,
conditions or expectations.
but the most rapid advances were in industries that had been
operating far below capacity, and there was no evidence that
any important bottlenecks were developing.
Industrial production was back to 110 per cent of the
1957 level in June and a further advance of one or two points
is indicated for July.
Department store sales appear to be recovering from the
slight dip in June--attributed to the weather--and may be at
Consumer credit probably
near record levels for the month.
increased moderately again, following several months of sub
stantial decline.
Employment in both manufacturing and other nonagricul
For
tural lines improved very rapidly from April onward.
workers,
over
both categories together, almost one million
to
payrolls
were
added
change,
and above the normal seasonal
Despite this very rapid
in the three months ending in June.
advance in employment, unemployment remained high, however,
at a seasonally adjusted rate of 6.8 per cent in June, but
it may be that the July figure, to be released shortly, will
show some improvement.
Early reports suggest that about the expected improve
ment in corporate profits took place in the second quarter.
-8
8/1/61
Financial markets were extraordinarily stable despite a very
large volume of financing, both public and private. A week
ago it was hard to escape the feeling that the situation was
a little
too good to be true--and it was.
On top of substantial increases in expenditures to fi
nance space exploration and longer-run defense measures, and
general acceptance of the fact that the recommended postal
rate increase is not likely to be enacted, the President has
found it necessary to recommend an increase of $3-1/2 billion
in current defense expenditures, thus substantially increasing
the prospective deficit for the current fiscal year, and re
ducing the possibility of a budget surplus in fiscal 1963.
whether this will be the straw
It is too early to tell
that will convert a rapid, but orderly, recovery into a boom
which will threaten both internal stability and our still
fragile balance-of-payments position. At least, it seems to
have dispelled very rapidly the doubts that were growing in
some quarters about the continuing strength of the recoverydoubts which may have incidentally served a very useful pur
pose in tempering some of the excessive speculative activity
in security markets associated with the early stages of the
recovery.
Fortunately, perhaps, no one has a clear idea as yet of
just what the budget deficit for fiscal 1962 will be. More
important, the President accompanied his recommendations with
a very firm statement regarding his intentions with respect
to the 1963 budget. These factors have certainly tended to
minimize the immediate inflationary expectations and the ur
gency of the need for counter-measures.
As of this moment in time, actual developments do not
seem to call for any change in monetary policy. It would be
foolhardy, however, to ignore the fact that recent events,
both in this country and overseas, have increased the chances
that monetary policy may be required to play a less expan
sive role if we are to protect the integrity of the dollar.
Mr.
Thomas presented the following statement with regard to
credit developments;
Progression of economic recovery brought no striking
credit developments in July prior to the President's state
ment. Subsequently evidences of a changed situation have
appeared in money and securities markets, which are influenced
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by expectations in advance of actual events. Banks had
adequate reserves for credit expansion throughout the
month, and a sizable expansion ensued. Large increases
occurred in bank holdings of Government securities and in
loans on securities, reflecting active bank participation
in Treasury financing operations during the month. Busi
ness loans, including those to finance companies, showed
rather large declines, as is common in July. New capital
issues continued in large volume, although below the high
level of the second quarter.
Private demand deposits appear to have increased by
close to the usual seasonal amount in July, while time
deposits continued to show a large increase. U. S. Govern
ment deposits, which began the month at a high level, moved
steadily down until July 26 and then increased sharply,
showing little net change for the four weeks as a whole.
It appears that the daily average money supply, seasonally
adjusted, was about the same in July as the average that
has prevailed since April.
Money markets remained generally easy during the month,
and short-term money rates tended down, but did not fall
below the lowest levels of the past year. Yields on medium
and long-term Government securities, which had risen fairly
sharply in June, leveled off or declined slightly. Yields
on State and local Government bonds also tended to decline,
while those on high-grade corporate bonds rose at a slower
pace than in May and June. In the past week, following the
President's statement, interest rates have turned up moder
ately. Some of the increase in the last two business days
reflects a tightening of bank reserve positions from the
rather easy situation that has prevailed recently.
Free reserves of member banks were relatively large
during most of July, averaging nearly $580 million. Required
reserves declined slightly, reflecting a substantial decrease
in the reserves needed to be held against U. S. deposits and
a slightly more than seasonal increase in those against other
deposits. Wide fluctuations in market factors affecting the
supply of reserves were broadly counterbalanced by corre
spondingly wide changes in Federal Reserve holdings of
securities. In the current week, reserve availability is
being sharply reduced by a combination of market factors
and by increased required reserves because of the additions
to tax and loan accounts in connection with Treasury financing.
Additional reserves are being supplied by heavy System purchases
of securities, but free reserves are likely to decline to an aver
age of less than $400 million, in the absence of further System pur
chases. Additional purchases will be needed to supply reserves next
week. After that, except for rather wide temporary variations,
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partly related to Treasury accounts, no sustained increase
in System holdings will be needed until November.
As for future System policies and operations, three broad
sets of questions need to be considered:
(1) What would be
required for continued recovery at a reasonable pace? (2)
What will be the effect of the stepped-up defense program?
(3) What may be the effect of the new restraints adopted in
the United Kingdom?
As to the first
question, it appears that continued bank
credit expansion at somewhat more than an average secular
rate of growth will be appropriate until the economy is close
By one rather
to reasonably full utilization of resources.
rough basis of comparison, bank credit expansion during the
1960 recession and early period of recovery compares favorably
Although credit expansion has not been
with that in 1958.
as large in the first half of 1961 as in the first
half of
1958, expansion began somewhat more promptly after the down
turn in 1960 than it did in 1957.
Taking 12-month periods
from close to the peak of activity in 1960 (June) and in 1957
(July), total loans and investments of all commercial banks
increased by $13 billion in the 12 months ending June 1961,
compared with $12 billion in the 1957-58 period--a little
The increase in holdings of
over 7 per cent in each case.
less than $8 billion in
Government securities was a little
each period.
Privately-owned demand deposits have increased more in
the past year than in the 12 months ending July 1958--using
semi-monthly daily averages, $2.5 billion against $1.5 billion.
There has been no increase, however, in the last few months
Time deposits
compared with a steady growth throughout 1958.
increased sharply in both periods, but more so in the past
Thus in
year--$11 billion against $8 billion in 1957-58.
each case bank credit was abundantly available, and the funds
thereby provided found their way into time deposits at banks
to a larger extent than into demand deposits.
On the basis of a longer standard of comparison, it can
be shown that expansion in the money supply has slackened in
recent years to a pace that may be considered inadequate for
a satisfactory rate of growth in theeconomy.* Since 1955,
the computed annual rate of growth in the money supply has
* This view and related developments are analyzed in a memorandum
prepared in the Board's Research Division which has been dis
tributed to the members of the Committee under date of July 31,
1961.
8/1/61
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been only 1 per cent. When time deposits are added, the rate
of growth has been larger, but not as great as same analysts
consider appropriate.
Consideration might also be given to
changes in the public's holdings of liquid assets other than
bank deposits, which have grown somewhat more rapidly than
total bank deposits in the past decade and also increased
sharply in 1959 and again in 1961.
When these are added to
deposits, the rate of growth in the total during the past
year has corresponded closely to the average for the decade
and to the 1958 increase. Since 1955 the increase in the
aggregate of all these assets has been only slightly less
than GNP in current dollars.
In the meantime, the turnover of demand deposits has
increased, as the balances held in checking accounts are
called upon to finance a more rapid rate of increase in trans
actions.
This rate of turnover is now comparable to the level
that prevailed in the 1 9 20's. An important and strategic
question is whether this ratio can be expected to rise further
or whether it will be necessary in the future for holdings of
cash balances to increase more nearly in pace witn expansion
In recent years the rate of growth in GNP has been
in GNP.
Reasons for this retarded rate of
viewed as inadequate.
growth are largely nonmonetary, but any accelerated increase
in GNP would probably need to be accompanied by a greater
This
increase in money than has occurred in recent years.
question must be taken into consideration in the determina
tion of monetary policy.
In any event, it may be concluded that for the immediate
future, continued credit expansion at approximately the pace
of recent months would be appropriate in order to permit fur
An approximation of the amount of
ther economic recovery.
reserves that need to be made available to permit such expan
sion is indicated on the tables that have been presented to
the Committee.
Turning to the possible effect of the projected expan
sion in the defense program upon credit and monetary needs,
be kept in mind that this program and any
it should first
threat of inflation that it may entail do not call for a
slowing down of credit expansion below the rate that would
The amount of reserves to be supplied
otherwise be needed.
in future months should be fully as large as the totals pro
jected in the tables presented, which indicate the probable
This does not mean, of course,
needs for a normal recovery.
that free reserves should necessarily be kept at $550 million.
If credit demands increase and expansion in credit and in
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required reserves exceeds the amounts projected, then banks
should have to borrow to obtain the additional reserves, and
free reserves should decline. But, if monetary expansion and
required reserves fail to come up to the projected amounts,
then free reserves should be maintained at $550 million or
more. Whether more credit and monetary expansion than has
been projected would be desirable may be a question for future
consideration.
The second point to keep in mind regarding the enlarged
defense program is that, taken by itself, the resulting in
crease in Government spending will not place any great burden
on our economic resources.
It is well within the capacity of
allow for considerable increase
the economy to provide and still
in private consumption, as well as in investment needed for
Any measures needed to restrict consump
expanding resources.
tion or allocate resources will depend upon the response of
the private economy. Evidence of that is still
remote.
What is the possible magnitude of the impact on the
economy? The indicated increase in defense expenditures of
less than $3 billion in the next fiscal year is much.less
than the addition made in 1956-57 following the Suez crisis.
When allowance is made, however, for the increase that has
already occurred in defense spending this year, the comparison
will be closer. At this time, moreover, there is more slack
in the economy than there was in 1956.
Yet the prospective Federal budget deficit for this and
other reasons is large and, along with recovery in the private
economy, will probably be a stimulant to private spending.
Altogether the pressure on resources may eventually become
Published official estimates indicate that, after
excessive.
allowing for increased tax receipts expected from expanding
incomes, the deficit in the administrative budget will be
$5.3 billion in fiscal 1962--or about $6 billion if the pro
posed increase in postal rates is not adopted.
Analysis of the estimates of receipts underlying this
figure indicates inadequate allowance for tax refunds and
various miscellaneous receipts that could together amount to
between $1 billion and $1.5 billion. These and other possible
variations could easily produce an administrative budget def
of $8 billion. Various items of expenditure outside the
icit
administrative budget could produce a cash budget deficit of
close to $11 billion, which is a more accurate measure of bor
rowing needs.
These revised budget estimates probably will not signif
icantly change the previous estimates of Treasury borrowing
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needs for the remainder of this calendar year, which will
amount to over $7 billion, in addition to $4 billion already
borrowed in July. The principal difference will be elimina
tion of any debt retirement in the first six months of 1962.
The net increase in the public debt in the entire fiscal year
1962 may be less than the cash deficit, because of the large
Treasury cash balance at the beginning of the year, but never
theless may be as much as $9 or $10 billion. This could have
a materially stimulating effect on the economy.
Some reconsideration may be needed, moreover, of views
as to private borrowing demands during the next few months.
It had been believed that these would be moderate in view of
prospects for corporate sources and uses of funds. The basic
factors are not likely to be greatly changed, but if the new
defense program should alter business views as to inventories
and plant and equipment expenditures, credit demands could
increase. This is a situation that will need careful watching
and more information as to changes in business attitudes and
plans. The trends of home buying and of expenditures for con
sumer durable goods and the credit involved, which had been
thought to be factors that would moderate, rather than stim
ulate, economic expansion, may also accelerate their pace.
Stock market speculation offers another potential element of
instability, although the volume of credit involved is not
likely to be substantial under existing margin requirements.
Until such pressures become evident, however, and ac
tually affect credit demands, there seems to be no occasion
for the adoption of measures of credit restraint.
Some fur
ther expansion is still needed. Restrictive measures at an
early stage could unduly inhibit essential financing of the
If, subsequently, demands
Treasury and of private needs.
are sufficient to threaten credit expansion at a rate that
would exert undue pressures on resources, then the restraint
on expansion can be permitted to operate or be applied by
limiting the availability of reserves.
I have not discussed the other new influence that has
been brought into the situation during the past week in a
dramatic manner, namely, the British measures of restraint.
To the extent that
These will be discussed by Mr. Young.
they tend to cause a flow of funds abroad because of interest
rate differentials, care may be needed to avoid keeping our
rates too low. Increases in domestic credit demands accom
panying recovery or induced by the new defense program may
be sufficient to prevent this problem from arising.
-14Mr. Young presented the following statement on balance-of
payments and related developments,
particularly in the light of meetings
last week in Paris in which he participated:
Significant balance-of-payments changes for major
countries from the first to the second quarter were:
(a) A moderate increase in the over-all U. S, deficit,
excluding debt prepayments;
(b) A significant reduction in the basic deficit in
Britain's external balance but a worsening of its
global balance because of a large short-term
capital outflow;
(c)
A strengthening of the surplus in France's basic
balance, supplemented by a sizable short-term
capital inflow;
(d) A continuing large surplus in Germany's basic bal
ance, moderated in recent weeks by liquidation of
foreign holdings of German securities and otherwise
offset in part by some short-term capital outflow;
(e)
A further inflow of short-term money into the Swiss,
Dutch and Italian money markets.
These balance-of-payments developments for key currencies
were reviewed at length in a three-day international discus
sion in Paris last week--one day in the meeting of the OEEC
Working Party 3 and two days in a meeting of the OEEC Economic
Policy Committee.
The Working Party 3 meeting concentrated its attention
on the German surplus particularly.
Many deeply probing ques
tions were directed to the German delegation concerning the
adequacy of the program for dealing with and correcting Germany's
surplus position.
Main points of criticism related to:
(a)
Whether Germany's internal correction in terms of
rising wages, other costs and prices was proceeding
fast enough?
(b) Whether Germany was not offsetting apparently lib
eral monetary policy by a too tight fiscal policy,
with Federal Government and Laender Government fis
cal surpluses piling up in idle Bundesbank balances?
(c) Whether Germany's monetary policy was per se suffi
ciently expansive?
(d) Whether Germany was exerting enough downward pres
sure on long-term interest rates and doing enough
otherwise to encourage long-term capital exports?
And
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(e) Whether Germany was stepping up aggressively
enough its participation in foreign aid and
development?
The answers given were, of course, defensive:
(a) That Germany was in a boom, with three or four
job openings for every worker seeking employment;
(b) That the boom had reached a slackening-off stage, and
this would shortly become reflected in the current
external balance;
(c)
That wages, other costs and prices were rising, with
the wage rise proceeding currently at a rate about
three times that occurring in manhour productivity;
(d) That credit and capital demands were so strong it
was difficult for monetary policy to press down
further short- and long-term interest rates without
giving up all control of bank credit expansion and
the money market;
(e) That German business concerns were now shifting bor
rowing from foreign to domestic sources;
(f) That the Berlin crisis was now inducing liquidation
of foreign holdings of German securities as well as
affecting tourist trade adversely;
(g)
That the fiscal surpluses of German governmental
units were not too large and that in any case were
needed to keep inflationary pressures within bounds;
(h) That Germany's revaluation required time to work out
corrective effects;
(i) That Germany's efforts to expand foreign lending and
foreign aid and development were proceeding as rap
idly as practicable; and
That Germany couldn't be asked by its trading partners
(j)
to press inflation too fast and too far because of
inflationary apprehensions of the German people and
because of Germany's position as a buffer and as a
stable free economy example as regards Russia.
These responses of the German delegation were not altogether
persuasive to many Working Party participants and the Germans
were asked to convey to their Government the anxiety of other
delegations about the continuing large German surpluses on ex
Specifically, the hope was expressed that the
ternal account.
German Government could take further steps, without undue in
flationary impact, to reduce Germany's current external sur
Some
pluses and even convert them for a time into deficits.
further aggressive addition to monetary liquidity, the elimina
tion of fiscal surpluses, and measures to increase foreign
-16lending and to expand foreign aid were highlighted as de
The German delegation
sirable steps under the circumstances.
falling on countries
responsibility
in its turn emphasized the
experiencing balance-of-payments deficits to intensify steps
to correct their own deficit situations.
Other discussions of Working Party 3 related to recent
balance-of-payments developments for the U. S. and France.
These tended to be subordinated to a more general issue sug
by the discussion of German developments, namely,
gested first
the precise nature of the mechanism for correcting balance
of-payments disequilibria under modern conditions of currency
convertibility internationally. Since this issue carried over
into the following two-day discussion of the Economic Policy
Committee, it merits special comment here.
The challenge facing the Economic Policy Committee, it
was suggested, was to decide upon the "rules of the game" for
modern-day convertibility and then to see that member countries
adhered to the rules. The problem arose because, in the post
war world, there are new constraints on the policies that
Full employment philosophy,
national governments can pursue.
widely accepted today, excludes acceptance of large and per
The strength of labor unions,
sistent deflation of demand.
furthermore, precludes any broad-scale reduction in wage
Then, too, the dangers of a wage-cost spiral make
levels.
governments hesitant to foster wage increases in excess of
Finally, governments have become com
productivity gains.
mitted to general price stability as essential for greatest
efficiency in employing resources and for greatest equity in
distributing income.
For convertibility to be maintained, it was argued, sur
plus countries must allow external surpluses to be registered
in internal inflation, i.e., surplus countries must import
inflation, while deficit countries must allow deficits to be
reflected in deflationary tendencies, i.e., must import de
flation. These developments need only be relative. But,
because of rigidities that characterize modern economies, it
is important to recognize explicitly the inevitabilities of
the needed financial adjustment and to reenforce necessary
If relative
corrective tendencies by deliberate policies.
adjustment is too slow and too inadequate, convertibility
Correction of disequilibria, it was urged,
will break down.
needs to be accomplished in a reasonable time.
Various delegates took exception to this doctrine and
pointed out that there was much that could be done by govern
ments to correct balance-of-payments disequilibria without
8/1/61
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relative inflation or deflation.
Much room exists, it was
alleged, for governmental action to influence the composition
of demand.
Deficit countries could encourage export competi
tiveness, curb imports, and avoid capital outflow and surplus
countries could discourage exports, encourage imports, and
curb capital inflow. More study of these alternatives and
ways to accomplish them on a temporary basis, it was held,
was needed.
A summary report about such a discussion is
necessarily
inadequate, but it suffices to indicate that a basic problem
exists, to which solution must be found if recurrent exchange
rate adjustment and realignment is to be avoided. Naturally,
this particular discussion was inconclusive. But it did open
up the subject and there were various expressions favorable
to further and more intensive attention to it at subsequent
meetings.
It remains to be seen how far exploration of the
"rules of the game" for modern-day convertibility can be
carried and developed into operational form through inter
national discussions of governmental officials.
In the end, there were some delegates who contended
that governments must retain their ability to alter their
exchange values as an alternative to other courses of action.
Other delegates, however, argued that, with industrial coun
tries so much richer and liquid funds so much more ample and
more mobile, the entire international system had become ultra
sensitive and responsive to exchange rate changes.
Hence,
recurrent exchange rate alteration was no longer a tolerable
alternative to a system of fixed exchange rates with relative
inflation and deflation the central reliance for international
adjustment.
Discussion of this problem in the Economic Policy Com
mittee preceded discussion of the British program to correct
its cumulative external disequilibrium. This latter discus
sion had to await the Chancellor's announcement of its con
tents on Tuesday afternoon. The first order of business at
Wednesday's meeting, therefore, was a detailed review and
defense of the British program by the British delegation.
Since the substance of the program is now well known, it is
enough here to comment on points especially stressed by the
British.
The program comprises six main restraints:
Restraint on income-generated demand through
(1)
higher taxes that bear most heavily on con
sumption, plus restraint on demand financed
through bank and insurance company loans through
higher interest rates and reduced availability
of credit;
8/1/61
-18
(2)
Restraint on wage increases in both the public
and private sectors. In the private sector, such
restraint is at first
to be voluntary and coopera
tive, but as soon as practicable, it will be re
enforced by more formal governmental steps;
Restraint on public expenditures overseas and
(3)
on private foreign investment;
(4) Restraint on internal public expenditures and
increased reliance by nationalized industries
on internal financing of investment expansion;
(5) Restraint on dividend increases by business
corporations at governmental request; and
(6) Restraint, so far as possible, on restrictive
and monopolistic trade practices.
The program, while focused on the short term, has longer
term aspects, especially as to public expenditures, wage policy,
Regarding public expenditures,
and taxation of capital gains.
the British intend that they shall become a declining propor
tion of GNP, thus in effect renouncing a role for government
expenditures in promoting economic growth. Some continuing
mechanism of public policy to keep wage increases in line
Taxation of capital
with productivity gains is to be sought.
gains, to be introduced with the next Budget, will be a per
manent step; its objective in part is to placate the trade
unions and encourage their cooperation in a governmental wage
policy.
The bank rate increase, it was explained, was a neces
sary shock effect action, intended to put an abrupt curb on
speculative tendencies in equity and real property markets,
to discourage additional inventory build-up, to restrain fur
ther consumer instalment buying by supplementing restrictive
credit terms with higher finance charges, and to bring to a
It
halt the outflow to foreign markets of short-term funds.
was categorically stated that, when evidence has accumulated
that the higher bank rate has done its work, it will be re
The British emphasized that they sought to avoid re
duced.
liance on an inflow of "hot money" to help solve their balance
of-payments problem, even temporarily.
It was to be expected, the British explained, that the
gilt-edge market would react further to the bank rate change.
The market, however, was in a strong technical position. It
would soon benefit from the restraints on bank advances re
sulting from the increase in the Special Deposits percentage
and the directive to the banks and insurance companies to
8/1/61
-19
limit loans to productive uses domestically and for export
and especially to avoid advances to finance equity and
property speculation.
In addition, the instalment credit
effects of the action to limit credit availability, together
with suspension of the subsidy to home purchase finance and
the restraints on stock market and property speculation,
will tend to divert the flow of personal savings to fixed
income securities.
Finally, it was emphasized that the
program is geared to produce an increase in the volume of
personal and corporate savings, and that the gilt-edge market
would benefit directly and indirectly from this too.
One
gathered the impression from this overly-complete diagnosis
of prospects for the gilt-edge market that some foreign
buying in the gilt-edge sector, if it were not too short
term-gain motivated and hot, would be entirely welcome.
British comment on their IMF drawing and its role
was appropriately brief.
It was indicated by the discus
sion that some part of a drawing would go to repay central
bank credits originating in the so-called Basle agreements,
but that at least the Swiss credits would be extended for
the time being.
Many questions were asked of the British by other
delegations, reflecting to be sure some degree of skepticism
as to the adequacy of the program, as to the hazards that
were being run through its monetary policy features, and as
to the political capability of the British Government to
carry it through. These questions were all well handled by
the British delegation, but whether all skepticism was dis
solved remains a question.
Incidentally, a confidential
report just received from Frankfurt suggests that skepticism
as to the potential effectiveness of the British program
pervades the first
reaction of informed German business and
banking circles.
The balance of the Economic Policy Committee's discussion
consisted of various individual country reports.
Of these,
only two merit special comment.
The head of the Swiss delegation (the Swiss Minister of
Finance) restated that the Swiss Government was not giving
consideration to a revaluation of the Swiss franc and did not
think that the Swiss national interest could be served in any
The head of the Canadian
way whatsoever by revaluation.
delegation, after an extended review of recent Canadian exchange
rate action, intimated that the Canadians might be willing to
consider moving from a floating to a fixed rate, once an ac
ceptable exchange rate had been established by market forces.
Other discussion of the Economic Policy Committee related
The life of
to the future of the two extant Working Parties.
-20
8/1/61
Working Party 2 on differential rates of economic growth
and on forces making for such differentials was extended
to June 1962; that of Working Party 3 on monetary and fis
cal policies as they impinge on balance-of-payments equi
libria was extended to the end of this year. These formal
extensions of life were accompanied by some general dis
cussion of the further usefulness of the two working parties,
especially as groups to study and foster appropriate govern
mental policies, and it was the consensus that the whole
matter of continuation of activity be reviewed again at the
fall meeting of the Committee.
In summarizing the report
he would make to the OEEC Council, the Chairman of the
Economic Policy Committee stated he would suggest that the
two working parties be regarded as continuing adjuncts to
the Economic Policy Committee's organizational arrangements.
Mr.
Treiber presented the following statement of his views on
the business outlook and credit policy:
Since the last meeting of the Committee there have been
three developments of special significance for monetary pol
icy:
First: The progress of the economic recovery has been
confirmed by numerous economic indicators.
Second: The President of the United States has requested
substantial additional expenditures for defense,
with a resulting increase in the prospective
Federal Government deficit.
Third: Recent U. S. balance-of-payments developments
have been disappointing and the British have
taken action which may stimulate short-term
capital outflows from this country.
On the whole, the economy seems to be rising at about the
As ex
same rate as it did following other recent recessions.
pected, the rate of expansion in June and July was not as great
Employment, income, sales, indus
as in the preceding months.
trial production, and construction all continue to move up.
At the same time, prices continue to be stable and there is a
good deal of unused resources, both men and capital. The high
level of unemployment continues to be a knotty problem.
Total bank credit has increased substantially as the banks
have acquired large amounts of Treasury securities as a result
of the Treasury's recent financing program. Business loans
and other bank loans strengthened somewhat in July following
8/1/61
-21-
a relatively weak showing in June. There were heavy repay
ments of loans to sales finance companies in June, a typical
pattern for early recovery.
In addition, probably some of
the proceeds of the large amount of capital issues floated
in the second quarter were used to reduce bank loans. As
the Treasury expands its borrowing in the coming months and
spends the money, a rise in the money supply and a rise in
bank reserves may be expected. The general liquidity posi
tion of the economy is good.
The money market has been quite easy. During the period
just ended, free reserves have averaged about $560 million,
compared with an average of about $525 million in the pre
ceding period. Other money market indices have reflected
greater ease. Federal funds have been freely available, with
the rate in the 1 to 1-1/2 per cent range during most of the
period, dropping below 1 per cent on several occasions.
The impact of a sizable Federal budget deficit, including
the additional defense expenditures now proposed, could be
pronounced by the end of the year. The military program
taken by itself, however, is not likely to put a serious
strain on the economy's resources. The chief effect will
be to call manpower into uniform and to increase the output
of conventional weapons that can be produced without much
expansion in present plant capacity.
The inflationary impact lies more in a possible change
in business and consumer outlook regarding potential short
ages and future prices. The administrative deficit for the
fiscal year ended June 30, 1962, has been estimated by the
Administration to be about $5 billion. The cash deficit
could be about $10 billion. Concern is being expressed at
home and abroad as to the magnitude of the prospective defi
cit. The proposed increased Federal deficit constitutes a
potential danger to the stability of the economy and confi
As yet, however, the extent of the
dence in the dollar.
danger cannot be adequately evaluated. As the Federal Gov
ernment adds the stimulus of greater deficit spending to the
domestic economy, there is less need for a policy of monetary
ease and low short-term interest rates that might adversely
affect our international financial relations. As of today,
however, the recent budgetary developments call for increased
alertness rather than an actual change in monetary policy.
The United States continues to have a stubborn balance
of-payments problem and our international financial situation
The over-all U. S. balance of payments
is quite sensitive.
in the second quarter will apparently show a surplus of $700
8/1/61
-22-
million at a seasonally adjusted annual rate.
Leaving out
the German debt prepayment, however, there was a deficit of
$1.6 billion at an annual rate. This is a $400 million in
crease from the first
quarter deficit rate despite the de
cline in short-term capital outflows from $2.0 billion to
The loss seems to be explained by a sharp
virtually zero.
increase in outflows of medium- and long-term capital.
Exports declined in the second quarter and the outlook for
the next few months is no brighter. The austerity program
in Britain can be expected to cut into our exports, and
shipments to Canada may be adversely affected by recent
Canadian measures.
Imports remain a question but with re
The emergence of
covery at home they may tend to move up.
a sizable deficit in the United States budget may be in
terpreted abroad as a weakening of sound fiscal policy and
thus ultimately lead to more gold losses.
The higher interest rates now in effect in Great
Britain will be an added inducement for funds to leave
this country. With a 7 per cent Bank rate in England and
a British Treasury bill rate between 6 and 7 per cent,
American investors in British Treasury bills with full
foreign exchange protection can obtain a higher yield
(now about 1/4 per cent better) than that on a comparable
If the British pro
investment in U. S. Treasury bills.
in
sterling is restoredgram is successful and confidence
on sterling
discount
forward
be--the
and we hope it will
will probably decline, and there will be an incentive to
More immediately,
move funds abroad without exchange cover.
the higher interest rate on sterling loans in London may
cause corporations with international operations to shift
their borrowing to the United States and to use the bor
rowed dollars in their international operations. We may
expect an increasingly strong outward pull on short-term
funds from this country to Europe unless our own short-term
rates move up considerably in the interim. The pull will
be not only from Britain but even more importantly from
the Continent. If business here recovers vigorously, of
course, our rates will probably rise. There is no guarantee,
however, that the level of U. S. rates required to check the
export of capital will coincide with the level considered
appropriate from a domestic viewpoint.
The domestic business and credit situation still calls
for a policy of monetary ease. On the horizon, however, are
If enlarged defense
factors that bear careful watching.
-23
8/1/61
expenditures and related private spending result in an
upsurge of activity with inflationary aspects, we may
have to modify our policy of basic monetary ease sooner
than we would otherwise have done.
In the coming period undue ease should be avoided.
The level of free reserves is important but it is only
one of several factors to be considered. We think that
the so-called "feel" of the market is especially important.
Too low money market rates, such as the Federal funds rate
and rates on dealer loans, should be avoided.
For almost a year the rate on three-month Treasury
bills has been within the range of 2-1/8 to 2-5/8 per cent.
During most of the time the effective range has been 2-1/4
to 2-1/2 per cent. We think that the rate should continue
within this range, but that in the light of both domestic
and international developments it is highly desirable that
the rate be in the upper rather than in the lower part of
the range.
This seems desirable even if at the expense
of a somewhat lower level of free reserves.
Observers abroad are watching us closely. They are
likely to interpret excessive ease here, particularly as
rate, as indicative of
symbolized by a low Treasury bill
an unwillingness or inability on the part of the United
States to take the steps necessary to assure the sound
ness of the dollar.
We believe that the discount rate should not be
changed, that there is no need to change the directive,
and that the authority to engage in transactions in longer
term securities should be continued.
Mr.
Ellis reported that in New England business activity was
continuing its recovery.
predominant tone,
Recovery rather than expansion was still the
although the stage of the cycle had been reached
where some new records were being posted.
For example, manufacturing
output seemed about ready to overtake year-ago levels.
It
should be
noted, of course, that the mere reaching of year-ago levels was some
what less than fully satisfactory.
The regional shoe industry, which
accounts for one-third of national output, had been affected adversely
8/1/61
-24
by the early date of Easter.
The industry experienced a greater
than seasonal drop in April.
Activity continued below year-ago levels
in May, but in
late May retail sales began to improve and this stimu
lated some pick-up in orders from the factories.
Construction was
being stimulated by activity in the residential category in recent
months, with the result that the cumulative contract total for the
first
half of the year was up 2 per cent,
equal to the national rate.
On the other hand, nonresidential construction was running 7 per cent
behind year-ago levels.
Unemployment was down slightly in
June.
Incomplete data for the District indicated that although employment
had increased for four successive months,
.6 per cent below last year's levels.
the total remained about
At no time during this cyclical
decline did total employment fall as much as one per cent behind year
ago levels,
so not much recovery was necessary to surpass those levels.
New claims for unemployment compensation were now down to normal
seasonal levels.
Retail trade statistics suggested that New England consumers
were buying department store products somewhat more aggresively than
consumers in the nation at large.
Registrations at private summer
camps were running one per cent behind year-ago levels, while agency
camps (those supported by public funds) showed gains in
enrollments.
July and August
With better weather, tourist trade had improved recently.
8/1/61
-25
Some resort area banks credited the delayed tourist season
with delaying the normal June-July gain in
causes, however,
deposits.
Whatever the
demand deposits were weak, with July totals down
from the June average and below seasonal expectations.
also had weakened, with business loans in
the first
time this year in the District.
Loan demand
July below a year ago for
Nevertheless,
loan-deposit
ratios of weekly reporting banks averaged 65.2 per cent, this figure
being identical with a year ago and some 5 percentage points above
the average ratio for the United States.
secondary reserves,
The banks had built up
and borrowing from the Federal Reserve Bank had
virtually dried up.
Turning to policy considerations on a national basis, Mr.
Ellis commented that the most significant change in the economic out
look had been the rapid emergence of the stepped-up defense prepared
ness program, with its
ramifications in terms of consumer expectations,
public psychology, and business reactions as well as its
direct impact
in terms of the placing of orders and subsequent increase in
tures.
expendi
He agreed with those who felt that the most likely prospect
was for a rapid and vigorous surge in business activity during the
forthcoming fall and winter.
utilization of resources,
it
However,
in view of the present under
would appear that an expansion of activity
could carry a considerable distance and for a considerable period of
8/1/61
-26
time without severe inflationary impact.
If
this was correct, it
would appear that the proper course of policy for the present would
be to continue to encourage bank credit expansion in support of
greater economic activity.
Mr. Ellis expressed the view that the present directive was
probably still
acceptable,
but that the Committee would soon have to
recognize that the economy was passing through a period when the
forces of recovery were developing into forces of expansion.
fore, a suitable change in
would seem appropriate.
There
the directive at some forthcoming meeting
Also in the light of recent developments in
the United Kingdom, which might stimulate some outward flow of capital
from this country, it was necessary again to consider the appropriate
ness of avoiding downward pressure on short-term rates.
This sug
gested the desirability of continuing the present practice of operating
in all maturities in
supplying reserves.
For the next three weeks,
Mr. Ellis said, he would make no
change in the directive, he would supply reserves liberally to en
courage credit expansion, he would recommend no change in
the discount
rate, and he would continue the special authorization covering opera
tions in longer-term securities, along with the present pattern of
operations under that authorization.
Mr.
Swan reported that employment in the Pacific Coast States
reached a record high in
June and that the rate of unemployment fell.
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8/1/61
On a seasonally adjusted basis, however, unemployment was somewhat
over 7 per cent.
Although the Twelfth District did not suffer as
severely as the nation in
1960 and early 1961, as was also true in
the previous postwar recessions, it had lagged behind the nation in
recovery, in
terms of employment at least, for the first time in any
postwar recovery.
This lag in
a sense was not general.
seemed to arise primarily out of special circumstances,
Rather, it
including
the continuing decline in aircraft employment and the slow recovery
in
residential construction, which had a particular impact in
the
District in view of the importance of that area of activity in
past.
the
However, there were now definite indications of improvement
in the prospects for home building in the District and the outlook
for heavy engineering construction, in terms of several major projects,
was quite favorable.
Department store sales in June rose considerably
beyond both May 1961 and June 1960, and the gains continued into July.
District banks were still in a relatively easy position, and
there was only nominal borrowing from the Federal Reserve Bank.
While the demand for bank loans continued to be quite weak, some of
the large banks had indicated that they were anticipating a strong
demand within the next month or so.
To the extent possible, they
were arranging their investment portfolios so as to be able to ac
commodate the anticipated demand.
8/1/61
-28
Turning to policy, Mr. Swan commented that the available
statistics did not yet reflect the impact of recent international
developments and the announced plans for increased defense spending
on business and consumer expectations.
The outlook was for a com
bination of Treasury needs for funds which might be intensified in
the months ahead and a possible increase in private demands for
credit over and above those that might have been expected from the
normal process of recovery.
This raised the prospect of some con
siderable tightening of credit markets in the not too distant future.
In view of the uncertainties in the international picture, and also
the availability of excess manpower and plant capacity, he would
certainly not advocate significantly less ease for the next three
weeks.
It
did seem to him, however,
that the Committee should be
considering carefully the possibility of a definitely less easy
situation developing in the months ahead.
For the period immediately
ahead, he would only go as far as to suggest that it would be de
sirable if the bill rate did not go below 2-1/4 per cent and instead
remained in the 2-1/4--2-1/2 per cent range.
Also, he would suggest
a free reserve target from $550 million down to $500 million, rather
than $550 million up to $600 million.
These were hardly significant
changes; possibly he was only saying in effect that the Account
Management should not resolve doubts on the side of ease to quite
the same extent as in recent weeks.
In supplying reserves, he felt
8/1/61
it
-29
would be quite desirable to purchase securities in
mediate area, so far as possible, rather than bills.
the inter
Therefore,
he
would favor continuing the special authorization covering operations
in longer-term securities.
Although he would not suggest - change
in
the discount rate or the directive at this time, he felt, like
Mr.
Ellis, that the Committee might want to consider a change in
the directive before too long.
Also, if
the recent reaction in the
stock market should continue, with a further increase in
the flow
of credit into that area, it seemed to him that at some point the
Board of Governors might want to give consideration to a possible
increase in margin requirements.
Mr. Deming commented that the most significant Ninth District
economic development this summer had been the persistence of drouth
over much of the area.
The dry weather had been centered in
the
spring wheat producing areas of the western part of the Dakotas and
eastern Montana, but the drouth extended into adjacent grazing areas
As of mid-July, only southeastern
and also into northern Minnesota.
South Dakota and the southern third of Minnesota were free from drouth
damage to crops.
Since mid-July,
fairly widespread showers had occur
red over the District, which had given temporary relief, but they came
too late for the small grain crops.
North Dakota had been hardest
hit by the dry weather, with less than 50 per cent of last year's
production of small grains expected.
In Montana,
a 25 per cent
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8/1/61
reduction in
all wheat was indicated on July 1.
All things con
sidered, cash income from District crops in 1961 might be reduced
by one-fourth to one-third from last year.
farm marketings during the first
Total cash income from
half of the year appeared likely
to have exceeded the same period a year ago, but cash income might
fall behind during the second half, perhaps by as much as 15 to 25
per cent.
Farm income,
he noted, comprises about 12 per cent of
total District income.
Some communities in the hardest hit drouth areas were al
ready noting or anticipating the economic effects of smaller crop
marketings.
Farm machinery sales,
as well as retail sales, were
reported slow, and the processing and handling of the smaller crop
would reduce employment and activity to a greater extent in the
period ahead.
However, in spite of the reduced crop production prospects
and a lack of vigorous activity in the iron ore mining areas, the
over-all District economy as of midyear was in reasonably good shape.
Nonagricultural employment increased 1.3 per cent from May to June
in Minnesota,
and unemployment declined from 6.6 per cent to 5.8
per cent of the labor force.
However,
in two major nonagricultural
activities--mining and railroading--employment in 1961 was running
about 33 per cent below five years ago, meaning a reduction of 35 to
8/1/61
-31
40 thousand jobs.
Also, although personal income in the District
was up from a year ago by almost precisely the same percentage as
nationally, there had been no gain since the beginning of the year,
actually some little decline, while nationally there had been a
rise in the past six months.
On the financial side, both deposits and loans at District
member banks at midyear exceeded year-earlier figures, with substan
tial gains in time deposits.
Loan totals, however, had shown little
change for the past seven months.
Turning to policy, Mr.
Deming said he could do no better
than borrow the thought expressed by Mr. Treiber:
that it
would be
well to operate with increased alertness over the forthcoming period,
and perhaps the next two or three succeeding periods.
reason to change the discount rate at this time.
He saw no
As to the directive,
in the light of recent developments in Europe he would suggest the
possibility of inserting the word "increased" before "consideration"
in the phrase of clause (b) now reading:
to international factors."
change as important.
"while giving consideration
However, he did not regard this possible
He would be inclined to aim at keeping free
reserves about where they had been, he would favor renewing the
special authorization covering operations in longer-term securities,
and he would suggest operating substantially in the longer-term area
to avoid pressure on the bill rate.
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8/1/61
Mr. Allen reported that Seventh District businessmen and
economists remained optimistic about the continuance of the economic
uptrend into 1962.
The nature of additional defense spending, in
particular concentration on conventional arms, strengthened that
optimism, for it meant that District participation in the defense
program would again increase after a long decline which began in 1953.
Retail sales were edging upward,
in
the nation, but the record was spotty.
July 23,
in
the Seventh District as
In the four weeks ended
for instance, department store sales in Chicago increased
4 per cent over a year ago, whereas Detroit showed no change and
Milwaukee,
Indianapolis,
and Grand Rapids experienced declines.
In Detroit, Mr. Allen said, automotive management now seemed
less optimistic about concluding negotiations without a strike,
whereas he had reported a few weeks ago that they felt that a strike
might well be avoided.
Based on his experience in the area, he
would say that the change in mood was characteristic of this stage
in
an important negotiation.
Automobile sales spurted in mid-July,
as reported in the staff review.
All major manufacturers would be
down completely by tomorrow for model changeover,
and not more than
150,000 1962 models were expected to be built in August.
That would
be barely enough to supply dealer showrooms, which was regarded as a
matter of union leverage in the negotiations.
8/1/61
-33
The employment situation in the District continued to im
prove.
In July new claims for unemployment compensation were slightly
below the year-ago level, continuing a trend underway since the start
of the year.
It was becoming obvious that, according to precedent,
the Seventh District had benefited more from the recovery than the
rest of the nation, just as it declined more in the recession.
As to agriculture,
cash receipts from farm marketings in
Seventh District States in the first half of the year were 6 per
cent higher than last year, compared with a 3 per cent increase for
the entire country.
trict,
Crop conditions were good over the entire Dis
and grain yields promised to be at a record level.
The high
yields reflected not only good weather but also retirement of the
poorest land in the 1961 feed grain program.
With the conclusion of the sessions of the State legislatures,
it
was apparent that spending by State governments would rise sub
stantially in the year ahead.
Approved budgets indicated increases
in outlays which varied from a high of 26 per cent in Illinois to a
low of 8 per cent in
Iowa.
District weekly reporting banks showed a further decline in
loans during July, with a reduction of about $100 million in commer
cial-industrial,
finance company, and consumer loans for the three
weeks ended July 19, partially offset by a rise in
loans on securities.
8/1/61
-34
Substantial additions to Government security portfolios had been
mainly in the under-one-year category, with the bill inventories
of reporting banks in Chicago now $700 million, far above bill
holdings at any time in recent years.
In the area of monetary policy, Mr. Allen said he found
himself favoring, with a degree of apprehension in the light of the
greatly improved state of business and the forthcoming impetus of
increased governmental expenditures, continuance for the next three
weeks of that degree of ease which the Committee had fostered for
many months now.
He was agreeable also to continuing the directive
without change, although the word "recovery" in clause (1) (b) no
longer seemed appropriate.
On the other hand, the reference in the
directive was to "the forces of recovery," and he would not urge a
change at this meeting, although he could easily be persuaded other
wise.
He felt that the special authorization should be withdrawn,
for reasons he had heretofore stated.
Mr. Clay commented that System operations in securities other
than short-term issues since February 20, 1961, had given rise to the
question of criteria by which transactions in longer-maturity issues
should be guided.
The question had been brought into current focus
by the July 7 memorandum of the Federal Reserve Bank of New York, in
which it
was suggested that a third criterion be added to the two
then being employed by the Desk.
The suggestion offered in the New
8/1/61
-35
York memorandum was "that operations outside the short-term area
should be undertaken on those occasions when congestion appears to
be developing in
the capital markets or when market expectations
as to the future course of rates seem to be having clearly exaggerated
effects,"
This proposal was formulated in the light of conditions
now confronting the Open Market Committee.
to examine its
However,
it
seemed well
implications under more general conditions.
There were times when it
might be desirable to reduce long
term rates of interest and thus stimulate spending even though con
gestion was no problem in the capital markets.
There were other
times when a limited degree of congestion in the capital markets
was desired in the interest of restricting investment spending and
should not be offset by policy actions.
Similarly, expectations of
market participants as to the future course of rates might result in
desirable as well as undesirable effects on the cost and availability
of credit,
and only in the latter case would corrective action be
called for.
It would appear to him, then, that the criterion for System
operations in
in
intermediate and longer-term issues should be stated
terms broader than those suggested in
the New York memorandum.
In stating the various criteria by which open market operations were
to be conducted, the Committee should give consideration to whether
existing long-term rates were appropriate for attaining the Committee's
8/1/61
-36
economic objectives.
The Account Manager should then be given as
one of his instructions that of making purchases or sales of securi
ties looking toward the desired impact on longer-term rates.
Manifestly, no one had a magic formula for determining the
level of long-term rates that would be appropriate at any given time.
The necessity of making this judgment was not avoided, however, by
selecting a variable such as free reserves by which to guide open
market operations.
This variable has no direct relation to the ex
penditure decisions of the public nor is
it
availability of credit to private borrowers.
a reliable guide to the
To be given meaning
ful interpretation as a measure of monetary restraint or stimulus,
it
must first
be translated into terms that measure or reflect its
implications for the cost and availability of credit, including the
level of long-term interest rates.
Turning to the posture of monetary policy for the period
immediately ahead, Mr.
Clay noted that the business news of recent
weeks contained encouraging signs that recovery in economic activity
had been more rapid than one might earlier have anticipated.
Though
a considerable volume of unused labor and capital resources remained
to be productively employed,
progress in
tunities had been made since the first
should continue in the months ahead.
opening up employment oppor
quarter,
and this development
The probable increase in defense
expenditures occasioned by recent international developments would
8/1/61
-37
make an added contribution to this end, particularly since the
character of the proposed outlays was likely to benefit durable
goods industries in which ample resources were available for in
creasing real output.
Mr.
Clay suggested that monetary policy for the immediate
future should be directed toward maintaining the present degree of
ease in the money and capital markets until the response of the
private sector to the expected increase in
could be appraised.
Federal expenditures
Such a course of action implied continuing
transactions in longer-term securities geared to the objective of
maintaining present levels of long-term rates.
It
also meant such
additional transactions in short-term securities as might be neces
sary to continued expansion of bank credit and bank deposits at a
seasonally adjusted rate comparable to that prevailing during the
first
half of this year.
If
the injection of reserves necessary to
meet this latter condition could not be accomplished by purchase of
Treasury bills
without reducing the bill
rate below recent levels,
purchases of intermediate or longer-term issues should be undertaken
for this purpose also.
In conclusion, Mr.
tion covering operations in
Clay expressed the view that the authoriza
longer-term securities should be renewed,
and that no change appeared to be called for either in
directive or in the discount rate.
the Committee's
-38
8/1/61
Mr. Wayne said that Fifth District business activity appeared
to have continued the improvement that occurred in the second quarter.
Like the New England area, however,
the District was certainly in
period of recovery rather than expansion.
a
By mid-June seasonally ad
justed nonagricultural employment had risen 1.5 per cent from the re
cession low, slightly less than the rise of 1.7 per cent for the United
States as a whole.
Manufacturing manhours had risen 6.8 per cent com
pared with a gain of 6 per cent nationally.
Total manufacturing man
hours had regained 71 per cent of their recession decline, but some
fairly important industries, including metals, furniture, lumber,
and food processing,
had recovered less than 45 per cent of their
losses by mid-June.
A cross-section of industrial leaders contacted in
a survey
last week reported further increases in new orders, backlogs,
ments, employment, and average workweek.
ship
Business loans, however,
were weaker than usual at this time of year, and the banks were in
an easy position.
Such borrowing as there was at the Reserve Bank
seemed of a purely routine seasonal nature.
the first
Farm cash receipts for
five months of the year were above last year.
In general,
it might be said that grass-roots contacts indicated moderately op
timistic views.
As to textiles, leaders in the industry felt that
the agreement reached at the Geneva International Textile Conference
in July would result in some restriction of imports in the months ahead.
8/1/61
-39
Mr. Wayne said that he could see no justification for any
change in System policy in the next three weeks.
The economic up
swing was apparently continuing at about the same rate as in pre
vious recovery periods, but unemployment was still
high, plant
capacity was still not fully utilized, and most prices were either
stable or drifting downward.
As others had pointed out, however,
there were two significant uncertainties in the picture.
The first
was the impact of proposed defense spending, not only directly but
on expectations.
Second, there were the recent foreign developments,
particularly in the United Kingdom.
outflow of capital,
The stage might be set for an
and a British drawing on the Internatiohal Mone
tary Fund might trigger such a movement.
Nevertheless,
until the
effects of the factors he had mentioned could be better gauged,
he felt that maintenance of the present degree of ease was the most
appropriate posture for monetary policy.
After stating that he would not recommend a change in the
directive at this time, Mr. Wayne said he had been a little
concerned
at recent Committee meetings regarding the emphasis placed from time
to time on the failure of the money supply, as narrowly defined,
to grow.
in
In his view, the Committee should concentrate on changes
total liquidity rather than the money supply.
It
appeared to
him that total liquidity had increased fast enough in recent months
to foster adequate recovery despite the smallness of the rise in
8/1/61
-40
the money supply.
If more demand deposits were needed, time deposits
could have been converted.
Therefore, he would not favor additional
ease to encourage an increase in the money supply.
Instead, he would
favor a range of free reserves from $550 million down to $500 million,
with particular emphasis on the international situation and on the
bill rate at this time.
Mr. Mills commented that there could, of course, be different
reactions to the remarks that had been made at this meeting up to this
point.
Hiw own interpretation was that there seemed to be a groping
to find a monetary and credit policy that would continue to encourage
bank credit expansion, while at the same time skirting the danger of
generating subsequent inflationary pressures.
He feared it
amounted
to wishful thinking to believe that a policy of that sort could be
realized.
Instead, it should be acknowledged that monetary and credit
policy must anticipate events, in order to avoid having to take over
corrective actions later.
For the purpose of outlining a policy that
he felt would be proper at this particular juncture, Mr. Mills then
read the following statement:
Whether Federal Reserve
policy should aim at forcing
in order to stimulate growth
whether policy sights should
System monetary and credit
an expansion in bank credit
in the money supply or
be guided by movements in
the short-term interest rate structure are in effect the
issues that are open for debate at today's meeting of the
In the light of neartime
Federal Open Market Committee.
experience, it has been demonstrated clearly that in the
8/1/61
-41
absence of an aggressive demand for commercial bank
credit, the possibility of promoting an increase in the
money supply from that source is limited and, consequently,
judicious financing of the Treasury's deficit through the
commercial banking system continues to be the most eligible
medium for promoting the expansion of bank credit, with an
assist from monetary and credit policy. Several occasions
have already exhibited the support to commercial bank
credit expansion that resides in the financing of new is
sues of U. S. Treasury securities with the commercial banks.
At longer range, the problem presumably will prove to be
how to decelerate Federal deficit financing through the
commercial banking system in the prospect of a rising de
mand for private credit as economic activity increases in
both its private and public sectors--all to the end that
troublesome inflationary pressures will not take root.
Under the circumstances recited, it is clear that any
concern about the need of pumping up the money supply can
be set aside by the System Open Market Committee and its
attention turned to developing a monetary and credit policy
geared to movements in the short-term rate of interest.
Examination of the levels of free reserves pertaining over
many weeks past, with their correlation to the auction rates
on new 90-day issues of U. S. Treasury bills, suggests that
whereas a high level of free reserves undoubtedly exerts
some expanding influence on bank credit, a relatively low
level of free reserves does not force the interest yield
on 90-day Treasury bills unduly upward.
Such being the case
and considering the status of international short-term
interest rates, it appears desirable to bring down the level
of free reserves from the high points which they have re
cently reached and so as to exert a reasonable but not ex
cessive upward pressure on the short-term interest rate
Actions taken to that end should be productive
structure.
of an interest rate structure consistent with current and
prospective national and international economic developments,
at the same time that measures taken to force-feed the money
supply, with the attendant danger of setting the stage for a
future inflation, will have been avoided. As far as the
money supply is concerned, judicious Treasury deficit fi
nancing through the commercial banking system will remain as
the obvious vehicle for promoting such further increase in
the money supply as is demanded by rising economic activity.
A Federal Reserve System monetary and credit policy con
forming to the reasoning outlined recommends bringing down
-42
8/1/61
the level of free reserves below current highs by gradual
disengagement from the System Open Market Account's port
folio of longer-term U. S. Government securities, which
holdings have recently been augmented substantially.
It
is recommended that the special authorization for operations
outside of the Treasury bill sector should be renewed, but
on the above basis of a reduction in the holdings of such
securities.
Mr. Shepardson said it
seemed to him that all of the economic
reports indicated a continuing expansion of activity, slower in
some
areas, possibly, than in some others, but generally an upward trend.
In the circumstances,
change in
the recently announced defense program and the
the international situation gave real pause from the stand
point of considering just where things were going to go.
He agreed
with those who had indicated that the Committee should perhaps not
be overly concerned about the lack of expansion of the money supply,
narrowly defined.
Since there appeared to be a continuing growth in
total liquidity, which the forces of the Government spending program
seemed likely to enhance, he questioned whether it was necessary to
wait and see what was going to happen.
It
was known definitely that
there was going to be a prompt expansion in military supplies and
military manpower, and this would have both a real and a psycholog
ical effect.
A review of the reserve projections, Mr. Shepardson noted,
would indicate that to maintain the prevailing level of free reserves
it would be necessary to supply reserves shortly in considerable
quantity, followed by reverse action.
This was an appropriate
8/1/61
-43
occasion,
he felt, not to try to supply all of the indicated reserves,
but rather to let the level of free reserves fall to within the $500
$550 million range.
In his opinion, in fact, free reserves had been
at a higher level than necessary or desirable for the past three
weeks.
Accordingly,
he concurred in the view that free reserves might
be allowed to trend downward somewhat,
as to constitute a restraining action.
although without going so far
A failure to meet the full
indicated need for reserves in the period immediately ahead would also
ease the problem with respect to short-term rates, and he felt the
Committee should be concerned about such rates.
To the extent that
it was possible, consistent with the objectives he had mentioned, to
reduce System activity in longer-term securities, that would in his
opinion be desirable.
He did not feel that the Committee should
disengage completely from such operations, but he did feel that the
Committee should take advantage of opportunities to reduce its activi
ties in the longer-term area.
He would not favor changing the directive
or the discount rate at this time.
Mr.
King said he would hope that the Desk might lean in the
direction of supplying reserves through the purchase of bills, even
though some drop in the bill rate might occur.
Even though mindful
of the international considerations that had been discussed, he saw
no need for deliberate action designed to push the bill rate higher.
He agreed with the idea of accepting a lower free reserve level, in
the next week or so at least.
Therefore, he would not make purchases
8/1/61
-44
in the longer-term area simply in order to provide free reserves
in the vicinity of $500-$600 million.
Even if free reserves were
in the neighborhood of $400-$450 million, he would prefer to refrain
from operations in the longer-term area to any great extent over the
next three weeks.
He would not suggest any change in the discount
rate or the directive at this time.
Mr. Fulton said that Fourth District economic recovery,
after coming along quite strongly through the month of June, had
slowed down in July, reflecting among other things a number of sea
sonal factors such as holidays, vacations,
and auto changeovers.
Reports from the metalworking industries indicated that it was dif
ficult to project the course of activity for the rest of the year.
However,
expectations were generally for a good fourth quarter, with
activity going into next year at an accelerated rate.
Certain prod
ucts of the foundries were being taken well, but the railroads were
not buying and the auto manufacturers had not been placing orders
in quantity.
lower in
Steel manufacturers reported that their orders were
July than in June, that deliveries scheduled for August were
lower than for July, and that the automotive people just were not
ordering.
However,
the hope was for a good fourth quarter and for
going on into 1962 at an increased rate.
There seemed to be no sig
nificant inventory accumulation on the part of any of the users of
either basic materials or finished steel.
In the staff review
8/1/61
-45
distributed prior to this meeting, it
been a considerable turnaround in
was indicated that there had
inventory accumulation.
However,
those with whom he talked maintained that their customers just did
not seem to be accumulating inventory beyond working levels for
their own operations.
steel industry, as in
The profit squeeze was a real problem in
some other industries,
the
and until business got
considerably better the mills were not going to get into any rea
sonably profitable operation.
Department store sales had improved somewhat,
a year-to-date basis they were 2 per cent below last
although on
year.
While
the volume of construction was quite good, the situation was spotty
throughout the
District.
for by Government money,
A large part of the volume was accounted
Federal,
State,
Loans at District banks fell
or municipal.
during July, with the only sub
stantial demand coming from those preferring to take term loans
rather than to go to the capital markets.
These included smaller
companies that probably would not have ready access to the capital
markets.
As to policy, Mr. Fulton said that he would not recommend a
change in
the discount rate and that the directive seemed reasonably
satisfactory for the immediate future.
Although he would renew the
special authorization covering operations in
longer-term securities,
he would align himself with those who had expressed the hope that ac
tivity
in
longer-term issues might be minimized.
It
occurred to him
-46
8/1/61
that the System might be getting into a rather difficult position
by virtue of trying to maintain a level of rates in the bill market
which in turn encouraged banks to buy bills.
It
seemed almost self
defeating to sell bills and purchase longer-term securities if
the
banks then acquired the bills because the rate was attractive,
for
the yield thereby was again depressed.
He had a feeling that a
lesser volume of free reserves might assist in maintaining the bill
rate,
and relieve the System of what it
tain the short-term rate structure.
felt to be its
Therefore,
duty to main
he would feel that
$500 million of free reserves should probably be the maximum.
put it
another way,
To
an easier position than one reflected by a maxi
mum of $500 million of free reserves should not be encouraged.
Mr. Bopp said that business continued to improve in the
Third District, but at a more sluggish rate than in the nation gen
erally.
This was evident whether one looked at the business or the
financial statistics.
It was noted that for the past seven weeks
there had been no further expansion of time deposits.
As to policy, Mr. Bopp said that he would favor continuing
about the same degree of ease that had been maintained.
not favor a change in the discount rate or in
He would
the directive at this
time, and he would renew the special authorization covering opera
tions in longer-term securities.
The expanded defense program might
mean that the Committee would have to take another look at the situa
tion, but this did not apply to the next three weeks.
8/1/61
-47
Mr. Bryan said that he had come to this meeting as devoid
of convictions, possibly, as at any time he could recall.
If one
were to look at the present economic situation and the extent of
recovery purely upon the basis of the figures that had been presented,
an excellent case could be made for continuing present System policy
more or less indefinitely.
However, when one had to take into ac
count the prospect of an increased Federal deficit, the repercussions
of that deficit in the private sector of the economy, and the inter
national situation, ne became quite uncertain as to the proper pos
ture of System policy.
Mr. Bryan commented that he was sympathetic
with those who had suggested the need for alertness to avoid getting
again into an inflationary situation, and that he had sympathy with
the remarks of Mr. Mills.
There were a couple of questions, Mr. Bryan said, that troubled
him considerably.
First, much emphasis seemed to have been placed
upon the management of monetary policy in relation to balance-of
payments difficulties.
In this connection, he wished to revert to
a point that he had made before, namely, that those difficulties
were not created by monetary policy and instead derived from other
elements of national policy.
While monetary policy might make some
contribution to remedying those difficulties, he felt the System
should not cherish the illusion that any major contribution to their
solution by means of monetary policy was possible.
Also, he was
8/1/61
-48
troubled by the feeling that because of the British situation the
System must take what might be called a manipulative approach to
short-term rates.
The British were undertaking what was largely a
classical adjustment to their problem.
To the extent that the System
took a manipulative approach to short-term rates,
the British in
it
was saying to
effect that the System wished to make no contribution
to the amelioration of their situation.
He had considerable doubt
whether that would be a wise or morally correct posture.
Mr. Bryan concluded by saying that if
he had to suggest a
target for free reserves at the present time, he would suggest tending
in a downward direction to something like $500 million, rather than
the $575 million average of the past four weeks or the $600 million
average of the past three weeks.
Mr. Johns reported that business activity in the Eighth Dis
trict had been showing improvement, as it had elsewhere.
As in the
nation, more strength had been shown in the District in the output
of durable goods than in the output of nondurables.
Coal production
had increased moderately in recent weeks, but crude oil production
had risen only slightly.
Major cities in the District had experienced
a decline in the percentage of the labor force unemployed during May
and June, in contrast to the constant rate of unemployment in the
nation as a whole, and the situation improved further in early July
8/1/61
-49
according to indications from available weekly data and from out
look reports.
Construction activity was improving somewhat more
rapidly in the District than nationally.
Financial developments had been quite similar to those in
the rest of the nation.
Total loans and investments had grown, and
loan demand was somewhat stronger than over the nation as a whole.
The growth of deposits had been primarily in the time category, and
borrowing from the Reserve Bank had been nominal.
On the whole, agricultural developments were satisfactory.
Soy bean prospects were quite good; the expected production coupled
with higher support prices pointed to increased returns.
there were mixed reports concerning the cotton crop.
As usual,
Acreage was
up in all the major producing areas except southeastern Missouri,
but it was possible to get almost any kind of report about the con
dition of the crop.
There was general agreement that the crop was
a little late, but on the whole the major producers seemed to hold
fairly optimistic views.
Yield prospects for feed grains were gen
erally good, but acreage was down substantially.
Tobacco producers
reported the outlook to be quite promising, with production estimates
up about 8 per cent.
In general, it was expected that cash farm in
come in the District might be up significantly from last year, al
though farmers were quick to warn that the crops were not yet har
vested and that optimistic reports involved assumptions of good
weather and other favorable conditions.
-50As to policy, Mr. Johns said he was inclined to align him
self quite closely with the views of Mr. Ellis.
With reference to
the staff memorandum of July 28 on member bank reserves, he found
it gratifying to observe that the increase in reserves held against
deposits other than U. S.
Government deposits increased in the four
weeks ended July 26 rather closely in conformity with the pattern
projected in the July 7 staff memorandum.
In the projections shown
in column three of table 3 of the current memorandum, there was built
in a weekly increment for expansion of demand deposits adjusted and
time deposits at an annual rate of about 5 per cent.
Although he
had suggested three weeks ago some additional increment, he would
be disposed at this time to accept the $15 million weekly increment.
This meant that he believed there should continue to be modest in
creases in total member bank reserves.
He saw no need to change the
discount rate or the directive at this time.
Mr. Balderston said that he would not recommend changing the
directive until it was clear from the index of industrial production
and other indices that the economy had moved onto higher ground.
He
would favor extending the special authorization covering operations
in longer-term securities.
As to policy for the next three weeks,
he wished to associate himself closely with the views expressed by
Mr. Johns.
He would prefer to speak in terms of total reserves rather
8/1/61
-51
than free reserves, since the time might come this fall when mem
ber banks would return to the Reserve Bank discount windows and
increase their borrowings.
Until and unless defense and other Gov
ernment spending created speculative exuberance,
it
was his view
that the Open Market Committee should be guided by the staff pro
jections of total reserves.
This figure, which was about $19.4
billion for the week ended August 23, incorporated an allowance
for growth at an annual rate of about 5 per cent in privately held
demand and time deposits.
The projections, he noted, had been fol
lowed almost precisely since February.
memorandum on the money supply and its
As shown by Mr.
Eckert's
close relatives that had
been distributed prior to this meeting, the money supply plus time
deposits of commercial banks had been expanding at an annual rate
of close to 6.5 per cent since December and 5 per cent since February.
Although the lack of growth in the active money supply was of con
cern to him, the money supply would undoubtedly respond in time if
the Committee adhered to the target of total reserves set forth in
the staff projections.
When borrowers desired more bank credit, the
banks would increase their discounting.
Thus, free reserves would
be reduced automatically if the Committee continued to adhere to the
total reserve projections.
Chairman Martin commented that all things considered it
seemed to him the economy was in a surprisingly healthy condition.
8/1/61
-52
He was impressed today by the appearance that the Committee's thinking
on policy was probably gradually turning.
of the word "groping" was appropriate,
way policy is
He thought Mr.
because that is
developed within the System.
Mills'
use
really the
In his view, real prog
ress was being made at the present time.
The Chairman then said that Secretary of the Treasury Dillon
had asked him if
he would make the observation to the Committee that
the Secretary hoped the Federal Reserve would not be too gloomy about
the budget.
The Chairman felt that this statement,
and the fact that
the Secretary had authorized his making it, had some significance.
It should be taken into consideration by the Committee that the
Secretary was concerned about the budgetary problem, and likewise
the President.
There had been many gloomy estimates, and talk of a
deficit of $8 to $10 billion, but the Secretary seemed to feel there
was a good chance that the deficit could be held closer to the $5
billion area.
This was a hopeful factor, and one that the Committee
ought to have in mind.
Chairman Martin emphasized at this point that in a turning
or transition period it
was necessary to be particularly careful
that System actions did not encourage unnecessary comment and specu
lation about what might be going to happen.
difficult thing to avoid.
This was of course a
The System had been through this a number
8/1/61
-53
of times in the past decade, and almost every time there had been
slips.
In the circumstances,
he did wish to bring out that it was
necessary to try to guard against such slips to the fullest extent
possible.
Chairman Martin said he happened to feel personally that at
this juncture it would be better to resolve doubts on the side of
tightness, whether speaking in terms of free reserves or total re
serves, but without any significant change in policy being evidenced
by the level of either free reserves or total reserves.
This was
about as close a concept as could be developed, he realized, but it
would then be possible to see what unfolded.
Chairman Martin also expressed the view that there was an
inclination to place too much emphasis on the money supply problem.
Without question, he thought, sufficient money was around at the
present time, and the money supply figures would be galvanized al
most overnight when a real demand for money occurred.
He did not
mean to suggest that the System should be niggardly in supplying
reserves, but he did mean that the System ought to be putting it
self in the best possible position.
It was obvious from the go-around today, the Chairman con
tinued, that there was no inclination to change the discount rate
and no general desire to change the directive.
There had been some
discussion of the special authorization covering operations in longer-
8/1/61
-54
term securities,
but it
appeared that with one exception the mem
bers of the Committee did not desire to withdraw the special authori
zation.
The Chairman went on to say in the latter connection that he
was glad the Account Management had acted as it
did over the past
three-week period.
judgment and had
The Management had used its
made substantial purchases beyond the one-year area.
it
He felt that
was desirable to get some experience and to obtain all the in
formation possible about what was involved in this experience before
arriving at any definitive conclusions.
Today,
however, he would
certainly side with those who felt that the System should reduce
its
activity in
the longer-term area to the extent that that could
On the other hand, he would like to leave discretion with
be done.
the Account Management.
Chairman Martin suggested that it
would be advisable to try
to find out where the proceeds of some of the System purchases went;
to try to analyze the market and find that out.
He had talked with
a number of people who said they knew positively that certain securi
ties were sold to the Account and the proceeds immediately invested
in
bills.
good if
The special operations would not seem to accomplish much
that was true.
Therefore, he felt that in evaluating the
special operations the Committee should try to get as much informa
tion as possible about the securities that were acquired and what
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was being done with the proceeds of those purchases.
While this
was a difficult question, it was something of real importance in
any longer-range evaluation.
Continuing, the Chairman expressed the view that it would
be inadvisable at the present time to place any limitations on the
Management of the Account.
In his opinion the Management had done
well with a difficult problem, and it ought to be free to operate
to the oest of its ability, in terms of policy, in all maturities.
Of course, the Desk should not go overboard--and it had not at any
time to date--in the longer-term area of the market.
Chairman Martin then turned to Mr. Rouse and inquired whether
the latter had any comments to make, particularly in the light of
his recent trip to Europe.
Mr.
previously.
Rouse said he had only the comments that he had made
The questions that had been asked of him about Govern
mental expenditures,
the Federal budget, and related matters were
indicative of a background of concern about possible developments
in
this country over a period of time.
They indicated a feeling
that the United States ultimately would have to resolve the same
questions that the British were trying to resolve at the present time.
Chairman Martin then stated that the consensus favored no
change in the directive at this time and no change in the discount
rate.
The consensus also favored continuing approximately the same
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8/1/61
degree of ease that had been maintained to date, along with renewal
of the special authorization covering operations in longer-term
securities, with the Account Management taking into consideration
the comments that had been made around the table.
Mr.
Shepardson inquired whether the Chairman had intended
to include in his statement of the consensus any reference to the
manner in which doubts should be resolved in the operation of the
Account.
It appeared to him that to this extent there had been a
shift since the previous meeting, when it
had been indicated that
doubts should be resolved on the liberal side.
Chairman Martin responded that this was always a question
with which the Committee must deal.
Management of the Account when it
instructions.
It
He could sympathize with the
came to operating under specific
did not seem to him that there was any particular
reason to take a poll on the degree of distinction made today, al
though he would be perfectly willing to consider it.
There being no indication that a poll was desired, it
was
understood that the Chairman's statement of the consensus would stand
and that the special authorization would be renewed.
The renewal of
the authorization would provide a new limitation of $500 million for
transactions in longer-term securities.
Mr. Rouse commented that purchases of such securities in the
past three-week period had gotten up to
$473 million.
However,
the
8/1/61
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bulk of those purchases were in what he thought of as actually
short-term securities; that is,
more than two or three years.
securities with a maturity of not
As to securities with maturity over
10 years, the purchases were just $36.6 million, a very small pro
portion of the aggregate purchases for the Account.
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 (in
cluding replacement of maturing securities, and allowing
maturities to run off without replacement) for the System
Open Market Account in the open market or, in the case of
maturing securities, by direct exchange with the Treasury,
as may be necessary in the light of current and prospective
economic conditions and the general credit situation of
the country, with a view (a) to relating the supply of
funds in the market to the needs of commerce and business,
(b) to encouraging expansion of bank credit and the money
supply so as to contribute to strengthening of the forces
of recovery, while giving consideration to international
factors, and (c) to the practical administration of the
Account; provided that the aggregate amount of securities
held in the System Account (including commitments for the
purchase or sale of securities for the Account) at the
close of this date, other than special short-term certifi
cates of indebtedness purchased from time to time for the
temporary accomodation of the Treasury, shall not be in
creased or decreased by more than $1 billion;
To purchase direct from the Treasury for the ac
(2)
count of the Federal Reserve Bank of New York (with dis
cretion, 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.
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The Committee then authorized the
Federal Reserve Bank of New York, be
tween this date and the next meeting of
the Committee, within the terms and
limitations of the directive issued at
this meeting, to acquire intermediate
and/or longer-term U. S. Government secu
rities of any maturity, or to change the
holdings of such securities, in an amount
not to exceed $500 million.
Votes for this action: Messrs.
Martin, Balderston, King, Mills,
Shepardson, Swan, Wayne, Johns, and
Treiber. Vote against this action:
Mr. Allen.
Chairman Martin then referred to a memorandum from Mr. Young
dated June 26, 1961, which had transmitted to the members of the
Committee a memorandum dated June 15, 1961, from the Steering Group
of the Government Securities Market Study with respect to dealer
financial statements.
In this memorandum the Steering Group requested
authority to explore more specifically with individual nonbank dealers
the possibility of setting up a more standardized system of financial
reporting along the lines indicated in attachments to the memorandum,
recognizing that considerable effort by way of negotiation would be
required to compose variations arising from the widely different
types of business done by the individual dealer firms.
At the request of the Chairman,
Mr. Young made a brief state
ment to the effect that in pursuance of the program of providing more
adequate and ample information on the Government securities market,
8/1/61
-59
the Steering Group had been looking into what might be done to
improve the financial statements of the nonbank dealers.
After
much work on the part of the staffs of the Board and the New York
Bank,
a plan had been worked out.
ried about as far as it
However, the work had been car
could in this manner,
so the Steering Group
would now like to go out and discuss the problem with individual
dealers.
This was the extent of the authorization requested at
this particular time.
Chairman Martin inquired whether there were any questions
or comments,
and Mr.
Allen said that although he did not feel strongly
one way or the other, he had the general feeling that he would not
like to bother the dealers any more than necessary.
He noted that
at some points the material distributed to the Committee seemed to
indicate that the New York Bank had sufficient information for credit
purposes.
At other points, however, the material appeared to suggest
that for credit purposes it
information.
would be desirable to get this additional
As he had said, he did not feel strongly on the matter,
but he would hate to bother the dealers any more than necessary,
and he would be interested in any comments Mr. Treiber or Mr. Rouse
might care to make.
Mr. Treiber said he thought it was the feeling at the New York
Bank that from the point of view of the institut:on's conducting busi
ness with dealers there was sufficient information available for credit
8/1/61
-60
purposes.
The staff material went on, however, to suggest that
more uniform statements would be helpful for the purpose of credit
analysis to the whole market and might contribute in
some small way
to the maintenance of a sound financial structure among the profes
sionals in the market.
The Government securities business being an
activity where risk exposure can and occasionally does change sharply
from day to day, annual or even quarterly financial statements could
not in and of themselves assure credit-worthiness or financial sound
ness.
The report also noted considerable interest on the part of
some members of Congress and some sectors of the general public for
periodic consolidated balance sheet and income statement information
on the dealer community in the Government securities market, and the
report expressed the view that satisfying such public interest could
contribute to a better understanding of the functioning of the Govern
ment securities market.
Thus, the Steering Group was really thinking
in terms of the over-all credit situation of the country.
There had
been various groups that felt there should be more information, and
the memorandum was directed mainly toward that aspect of the matter.
Mr. Rouse said that, as indicated by Mr. Allen, the New York
Bank did have adequate credit information regarding the dealers in
Government securities.
The statements of the nonbank dealers varied
in form to a considerable extent, but the Bank was able to obtain
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8/1/61
audited statements and interim data, if desired.
This applied not
only to the Bank but also to other customers of the dealers; the
dealers'
statements were readily available.
A customer doing a sub
stantial business with a dealer would want to know the dealer's
financial situation, and that information was available.
The only
reason he saw for going further was that, as indicated in the memo
randum, some members of the Congress had expressed an interest.
The
information was wanted by the staff of the Joint Economic Committee,
apparently,
and possibly by some of the members of the Committee.
Personally, he did not see any other reason for going ahead with
this project.
It would be asking a good deal of the dealers,
and
he did not feel that the System should put itself in the position
of taking the onus upon itself.
Mr. Fulton said that this was his own reaction.
If the New
York Bank was now getting adequate information and the Congress
wanted more, the Congress might be expected to ask for it.
He felt
that the System would be putting itself at the end of a limb if
it
tried to read the mind of the Congress and badgered the dealers to
the extent that it could not have amicable relations with them.
A
request might be looked upon by the dealers as forcing them to com
ply because of their relationships with the System.
Mr.
Johns inquired whether this was not a joint effort of
the Federal Reserve and the Treasury,
take the onus entirely upon itself.
so that the System would not
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8/1/61
Chairman Martin confirmed this statement.
He added that
he thought a good point was being made as to whether the dealers
were being harassed too much.
In point of fact, however, the
dealers had been relieved of a good deal of harassment by virtue
of the manner in which the study of the Government securities mar
ket had been handled by the Treasury and the Federal Reserve.
Mr.
Swan commented that in the longer run there might be
some advantage in doing some further steering,
both from the stand
point of the Federal Reserve and from the standpoint of the dealers.
Therefore,
he would be inclined to favor the current proposal, but
with the understanding on the part of all concerned that this was
in the public interest rather than in the immediate interest of the System.
If
the dealers did not want to go along on that basis, he would not want
to force them, but he felt that it
would be possible to explore the
matter with the dealers without the System taking too much onus on itself.
Mr. Young expressed agreement with what Mr.
was a matter of the public interest.
Swan had said.
This
There had been a good deal of
criticism about the market from time to time,
and in part this criti
cism had arisen because of the inadequacy of information.
The Joint
Economic Committee had asked the assistance of the System in getting
financial statements of the dealers over a number of years.
System was unable to provide the information,
then went out and got the information itself.
The
and the Joint Committee
Thereafter,
one of the
8/1/61
-63
points that the Committee staff was prepared to formalize through
a letter from the Chairman of the Committee was specifically along
these lines; that is,
a request for the development of standardized
financial reporting on the part of the dealers.
However, the Treas
ury and the Federal Reserve indicated to the Committee staff that
they were willing to try to work out something in
the dealers.
If
the matter were to be dropped,
it
cooperation with
was likely that
a letter would be received.
Mr.
Thomas commented that it
mittee that the dealers'
purposes.
However,
had been said to the Joint Com
statements were satisfactory for the System's
the statements were in
such varied forms that
probably nobody but the System could understand them,
and this attempt
to get on an organized basis could be justified from that standpoint.
It was difficult for the System to justify the point of view that it
had enough information, because it
could not present the information
to the Joint Committee when asked.
Mr.
Wayne inquired whether it
was not true that the System
and the Treasury would be approaching the dealers on a cooperative
basis as an alternative to some other approach that the dealers might
like less.
If
so, he saw no reason not to enter into exploratory
discussions.
Chairman Martin and Mr.
Young confirmed that this was the intent.
8/1/61
-64
Chairman Martin also expressed the view that it would be
advisable to go ahead and explore the subject with the individual
dealers.
He would not want to impose an undue burden on the dealers.
However, the System needed all of the information it could get as to
what was going on in the Government securities market.
Some day it
would be necessary to have more information than was available at
the present time.
Chairman Martin then said if,
in the light of this discus
sion, there was no objection, the Steering Group would be authorized
to explore the matter with the nonbank dealers, and no objections
were heard.
The Chairman added the comment that he would not want
the dealers to obtain any impression that the Committee was not taking
this matter seriously because it might involve some added work for
the dealers.
The matter should be explored in a serious manner to
see whether the problem could not be worked out without subjecting
the dealers to undue hardship.
It was agreed that the next meeting of the Committee would
be held on Tuesday, August 22, 1961, and it was understood that the
next succeeding meeting would be scheduled for Tuesday, September 12,
1961.
The meeting then adjourned.
Cite this document
Federal Reserve (1961, July 31). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19610801
@misc{wtfs_fomc_minutes_19610801,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1961},
month = {Jul},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19610801},
note = {Retrieved via When the Fed Speaks corpus}
}