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 22, 1961, at 10:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Allen

Balderston

Irons

King

Mills

Robertson

Swan

Wayne

Treiber, Alternate for Mr. Hayes

Messrs. Ellis, Johns, and Deming, Alternate Members

of the Federal Open Market Committee

Mr. Bryan, President of the Federal Reserve Bank of

Atlanta

Mr. Young, Secretary

Mr. Kenyon, Assistant Secretary

Mr. Hackley, General Counsel

Messrs. Coldwell, Garvy, Noyes, and Ratchford,

Associate Economists

Mr. Rouse, Manager, System Open Market Account

Mr. Molony, Assistant

Mr. Holland, Adviser,

Statistics, Board

Mr. Knipe, Consultant

Governors

to the Board of Governors

Division of Research and

of Governors

to the Chairman, Board of

Mr. Hilkert, First Vice President, Federal Reserve

Bank of Philadelphia

Mr. Hickan, Senior Vice President, Federal Reserve

Bank of Cleveland

Messrs. Eastburn, Baughman, Jones, Parsons, and

Tow, Vice Presidents of the Federal Reserve

Banks of Philadelphia, Chicago, St. Louis,

Minneapolis, and Kansas City, respectively

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Mr. Willis, Economic Adviser, Federal Reserve

Bank of Boston

Messrs. Holmes and Stone, Managers, Securities

Department, Federal Reserve Bank of New York

Mr. Brandt, Assistant Cashier, Federal Reserve

Bank of Atlanta

Mr. Runyon, Economist, Federal Reserve Bank of

San Francisco

Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meetings

of the Federal Open Market Committee held on

July 11 and August 1, 1961, were approved.

Before this meeting there had been distributed to the members

of the Committee a report of open market operations covering the period

August 1 through August 16, 1961, and a supplemental report covering

the period August 17 through August 21, 1961.

Copies of these reports

have been placed in the files of the Federal Open Market Committee.

Mr. Rouse presented substantially the following statement in

supplementation of the written reports:

As indicated in the written reports, the money market has

been firm during the greater part of the period since the last

meeting, largely in reflection of a persistent tendency for

free reserves to concentrate in country banks. In the past

few days the money market has eased as free reserves increased,

and the market may ease further--despite our large sales of

yesterday--if country banks move large amounts of funds toward

the money centers with the approach of their reserve settlement

date tomorrow.

The market has been influenced by the same background

factors that were affecting the market at the time of the

last meeting.

The major influences continue to be rising

business activity and the prospective budgetary deficits

associated with the accelerated defense program.

These

factors, together with the reduced free reserve levels of

the August 2 and August 9 statement weeks--due, as you will

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remember from the weekly reports, to the necessity of deal

ing with unmanageable numbers--led to a feeling in the market

that the System may already have made at least a slight move

away from the degree of ease that had been maintained in

recent months. This feeling, which was partly reversed by

the appearance of free reserves of $547 million last week, in

turn played a role in the increase in yields that occurred

during the period. In the case of three- and six-month

Treasury bills, these yield increases amounted to about 20

basis points. The average rates in yesterday's auction, for

example, were 2.50 per cent and 2.79 per cent, against average

rates of 2.30 and 2.56 three weeks ago. Incidentally, dealer

awards of six-month bills in the auction yesterday amounted to

only $27 million as a large New York bank won $250 million of

the six-month issue on a bid at a single price. Dealer awards

of the three-month bills were about normal at $342 million.

Looking ahead, there will be a heavy schedule of Treasury

The Treasury is con

financing over the balance of the year.

sidering a $2 billion cash issue shortly after Labor Day, and

is also contemplating an additional cash issue toward the end

of September.

Also, the possibility of an advance refunding

In October, the Treasury

in this period cannot be ruled out.

will have to roll over the $1.5 billion maturing annual bills,

and it looks as though an additional $500 million cash will be

raised at that time. The Treasury will announce tomorrow that

it will raise an additional $100 million in the regular bill

auction next Monday (thus bringing the total amount of that

auction to $1.7 billion); and it is likely that the Treasury

will raise an additional $200 million through two regular

weekly bill auctions in October, which will bring all issues

maturing within three months to $1.7 billion. Finally, the

Treasury will be announcing in late October the terms of its

November refunding, and following that there will be another

billion or two of new cash to raise before the end of the year.

The 1/8 per cent increase in bankers' acceptance rates

last Thursday reflected in part expectations on the part of

dealers in acceptances of an increase in the supply of these

obligations that would be coming into the market. With

summer loan demand not especially robust, and with Treasury

rates well below acceptance rates earlier in the summer,

bill

there had been a tendency for accepting banks to hold the

bills they had accepted as investments rather than to sell the

bills into the market (indications are that the amount of

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acceptances involved is about $750 million). There have been

recent indications, however, that these banks will move their

acceptances into the market as their loan demand picks up,

and the increase in supply from this source would come at a

time when the volume of acceptances would be increasing

seasonally in any case.

Thereupon, upon motion duly made and

seconded, the open market transactions

during the period August 1 through August

21, 1961, were approved, ratified, and

confirmed.

Mr. Noyes presented the following statement with regard to

economic developments:

You will recall that at the last meeting I reported that

it was too early to tell whether the heightened international

tensions, and the steps proposed by the Administration to deal

with them, might impair what seemed otherwise to be an exceed

ingly satisfactory recovery. Most of the statistical informa

tion that has become available since the last meeting still

relates to the period prior to the President's July 25th address,

and, of course, the recent developments in Berlin. It confirms

that recovery was proceeding at a rapid rate, but generally

without overtones of an inflationary character.

Despite its rapid increase to a new record rate of 112

in July, production remained well below capacity levels. Both

the consumer and wholesale price indices were generally steady,

and even sensitive industrial materials leveled out after a

2-1/2 per cent rise early in the recovery period.

New orders at durable goods manufacturers rose further in

July, especially for aircraft and electrical machinery. Sales

also rose, but remained below new orders, thus adding to the

backlog of unfilled orders.

Further information on labor market developments confirms

the earlier observation that employment has been expanding

rapidly by any historical standard, but that even so the level

of unemployment has remained near the recession high.

Total retail trade was down 1 per cent in July, due

largely to a 5 per cent decline in the automotive group, which

is probably related to the earlier model changeover this year,

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Consumer spending for housing and durable goods as well

as consumption items and services has, of course, risen as

the recovery has progressed, but it has shown less than a

typical upsurge for this stage of the cycle. For example,

while industrial production has increased 10 per cent from

the February low, retail sales are up only 1-1/2 per cent.

Furthermore, buying intentions, as measured by surveys taken

in mid-July, appeared to be relatively weak. The Board

Census survey showed some slight improvement in auto demand,

as compared to a year ago, but nothing of substantial pro

portions, while expressed intentions to buy houses and most

household durable goods continued to lag behind relatively

depressed year-ago levels.

One independent survey, of untested reliability, has

shown a dramatic decline in combined buying plans for housing

and durables throughout the whole first half of 1961, to well

below year-ago levels.

This absence of strong demand in any important area of

consumer expenditure is in sharp contrast to the two preceding

recoveries. You will recall that in 1954-55 the strong surge

in automobile purchases by consumers played a key role in the

early stages of recovery, and that residential housing played

a similar part in the 1958 recovery.

It is especially difficult to generalize about an area

where the normal problems of economic analysis are overlaid

with special conceptual difficulties, as they are in the case

of consumers' attitudes toward spending and saving. Neverthe

less, this area commands attention in the present circumstances.

All of the evidence seems to suggest that, up to the present,

consumers have been willing--in fact, even anxious--to devote

a large part of their increasing incomes to saving, in the form

of debt repayment and the acquisition of financial assets,

rather than increased current consumption or the accumulation

of physical assets.

There is evidence of this development in the flow of funds

accounts. Most striking perhaps is the growth in so-called

fixed value redeemable claims--savings accounts, savings bonds,

and the like. Using rough, but conservative, estimates for the

second quarter of this year, it appears that for the twelve

months ended June 30, consumers' holdings of such claims

increased by over $17 billion--$8.2 billion in the second half

of 1960, and $8.9 billion in the first half of this year.

This far exceeds any previous twelve-month period on record.

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At the same time, while they are above the very low rate

of growth in late 1957 and 1958, consumers' financial liabil

ities have expanded less than in other recent periods. The net

increase in financial investment for the consumer sector; that

is, their acquisitions of assets less their increase in liabilities,

was about $3 billion in the first half of the year. While there

is, of course, no single or simple explanation of these develop

ments, the fact that the $17 billion increase in fixed value

redeemable claims that I mentioned is twice the amount for the

preceding twelve months suggests the extent to which the infla

tionary psychology of late 1959 has been liquidated.

It is an interesting sidelight that our data also do not

seem to support the commonly held view that there has been a

substantial increase in holdings of equity securities by the

public at large in recent months. Our estimates are too rough

to be precise, but it appears that the increase in outstandings

was just about matched by the increase in institutional holdings.

For whatever reasons, people in the United States do not

seem to have been behaving as if they expected inflation, up to

the end of July--and there is not yet any evidence that they have

shifted their behavior since then. The one private intentions

survey I mentioned does show a rise in buying plans since the

President's address, but not to extraordinary levels. Department

store sales are likely to be down, if anything, from July to

August--although up, of course, from a year ago.

There is no

doubt that expectations of inflation can be created, and created

quickly, but it does not seem that the deed has yet been done.

Mr. Holland presented the following statement on financial

developments:

As has already been indicated, the signs of business recovery

continue to be strong and broadly spread throughout the economy.

Thus far, however, this renewed business expansion has had little

counterpart in accelerated demands upon the financial system. Loan

demand, while perhaps not quite as soft as in some earlier months,

has nevertheless lacked the vigor usually associated with this

Such bank credit expansion as has

stage of cyclical expansion.

occurred has been chiefly in purchases of Federal and municipal

securities, the usual recessionary pattern. The trend of the

money supply has been phlegmatic at best, with net deposit expansion

being channeled by the public into time deposits. About the only

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aspect of financial markets which has responded to recent economic

events has been the pattern of interest rates, and even here the

response has appeared to be more a product of adjustments in

expectations than of change in current needs for, and supplies

of, funds.

Since the last meeting of the Committee, the predominant

movement of yields on U. S. Government securities has been

upward, as the market continued to reappraise the interrelated

implications of the improved economic outlook, the higher defense

expenditures triggered by the Berlin situation, and the antici

pation of new and larger Treasury borrowing. Such upward rate

movements were reinforced, particularly in the short end, by the

reduced free reserve pattern of the banking system in the first

part of August. Toward the middle of the month, however, first

in longer-term issues and then in the short-term market, some

buying interest appeared and yields recovered a portion of their

preceding advance.

In part, this recovery may also have been

technical. In any event, it was fostered by the easier bank

reserve position which became apparent after midmonth.

Other securities markets were more quiet in tone, with yields

on seasoned corporate and municipal issues showing modest net

changes. New issue flotations in the corporate market were

quite light, as is often true in August. In the municipal

market, what first appeared to be a fairly large volume of financing

scheduled for the month assumed more moderate dimensions with the

cancellation of more than half of the large California package

of bond issues.

At banks, both business loans and total loans declined less

in July than in some earlier years, but in part this reflected

the weaker increases during the preceding June, with its tax

Over June and July

date and other special financial influences.

combined, total bank loans were up only $400 million, the smallest

rise in recent years, while business loans appeared unchanged net.

This lack of net change in business loans did offer a slight

contrast to the small net contraction reported in the summer

months of the recession years of 1958 and 1960. Something of

this same pattern also has appeared to continue in the city bank

reports for the last three weeks, with the advent of the period

of seasonal rise in these credits. Business loans were up some

$200 million, substantially more than last year's recession-slowed

advance, although less than in the same season of earlier years.

Sales finance companies borrowed a substantial sum from city banks

during these weeks.

This increase was more than offset, however,

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by large retirements of securities loans, both those secured

by Governments (which had bulged over the Treasury financing

dates) and those for purchasing and carrying common stocks and

other securities.

City bank holdings of Government securities have declined

since late July, and banks have sold bills amounting to roughly

one-third the amount taken up at the time of the sale of tax

anticipation bills last month. On the other hand, average

portfolio maturities of these banks were lengthened appreciably

by their sizable exchange of maturing issues for the over one-year

notes offered by the Treasury on August 1. Over-all, bank credit

at city banks has declined since the last week in July. This has

been matched by drops in both privately-owned and Government

demand deposits. Time deposit totals have shown some further

advance thus far in August.

The daily average money supply, seasonally adjusted, is

estimated to have dropped $100 million in the second half of July

and an additional $4OO million in the first half of August. This

decline brings the money supply back roughly to the average level

for March and only 1-1/2 per cent above the figure for a year

ago. Time deposit totals were estimated to have increased as

much, seasonally adjusted, in the first half of August as the

money supply declined. This continues the strong growth trend

shown in the time deposit component in recent months, and imparts

an annual rate of growth on the order of 5 per cent to the total

of money supply plus time deposits since last winter.

Because of the sharp parallel recovery in national output,

however, both the ratios to GNP of money supply and money supply

plus time deposits have undergone declines.

The recent contraction in the money supply developed in

conjunction with reduced ease in bank reserve positions. Free

reserves ranged downward toward the $400 million mark in the

first two reserve weeks in August, before recovering to levels

in the $550-600 million range in the last statement week and the

current week. The reserve decline of early August was partly a

reflection of reserve absorption to support deposits created in

the Treasury cash financing, and partly also a reflection of large

market drains of unforeseen dimensions and of market additions

to funds which did not materialize in the full amounts anticipated

and allowed for in System operations. As a consequence, available

reserves declined even though System open market operations

supplied a net $734 million of reserves, on a weekly average

basis, to the market over the last four weeks.

Data for the

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last complete reserve week of August show actual reserves falling

over $150 million short of the total projected in the staff

memorandum as necessary in order to meet seasonal needs, to

cover Government and interbank deposit changes, and to provide

an annual growth factor of 5 per cent in the reserve base.

The weeks immediately ahead of us will call for heavy

injections of reserves by the System. Market factors are expected

to drain large amounts of reserves in the next two weeks,

including the Labor Day holiday, necessitating net additions of

Federal Reserve credit of about $575 million to maintain free

reserves unchanged.

This reserve injection by the System will

need to be reversed in the mid-September weeks. Required

reserves are expected to increase substantially later in

September, reflecting net expansion in both private and U. S.

Government deposits, Smaller net increases are projected for

October and November, followed by the usual large expansion in

required reserves in December.

Total reserves would need to increase by about $1.1 billion

from now to the end of the year to provide for projected seasonal

increases in required reserves plus a 5 per cent expansion of

private deposits and the maintenance of excess reserves at around

$600 million. This increase would include $155 million needed to

make up the short-fall of current total reserves below projected

levels. During this period market factors may be expected to

alternate between supplying and draining reserves in large

volume, although they may supply about $400 million of reserves

on balance through the end of the year. Most of the net expansion

in reserve needs will require System action, as is usual in this

part of the year.

The question arises as to the ability of the market to

absorb System purchases of securities in the dimension implied

by these projections without a resulting undesirably low bill

rate.

Some offsetting upward pressure in the short-term rate

structure will be created by prospective Treasury financings.

Earlier this summer the Treasury had announced that its financing

for the remainder of the calendar year would range between $5 and

$6 billion. The latter figure now appears to be more appropriate

and could be exceeded, inasmuch as present projections suggest a

Treasury cash deficit of as much as $9 billion for fiscal 1962.

Present tentative plans call for the Treasury to provide for its

remaining 1961 cash needs in several trips to the market, as

Mr. Rouse has outlined, beginning with an announcement shortly

after Labor Day.

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8/22/61

As this prospective schedule suggests, the Treasury will be

contributing some pressure upon the short-term market this fall.

But this Treasury schedule poses other problems for the Federal

Reserve, since it provides only a few short gaps, chiefly in

October and December, during which System policy could be altered

without risking adverse consequences for debt management operations.

Even the range for immediate adjustments in reserve availability

is limited, since it would be desirable to move into an "even

keel" reserve position by early September.

Thus, in contemplating immediate reserve recommendations,

attention must be given as well to shortly attaining levels of

reserve availability which would be appropriate for some span of

Looking ahead to the fall, thoughts of appropriate monetary

time.

policy for that stage of economic recovery may be influenced by

anticipated lags in the effect of monetary actions. Depending

upon the strength of expected developments, the possibility might

be raised of early monetary action, in order to forestall the

ramification of maintained monetary ease and prevent its spreading

well beyond the spans of time for which it would be regarded as

appropriate.

On this point, however, it might be noted that the

documented evidences of lags in monetary effects pertain primarily

to markets for capital goods, in which considerable slack for

Lags are much less apparent

future expansion currently exists.

in the financial markets, and probably least apparent of all in

the short-term interest rate structure, If, therefore, the

concerns of monetary policy through the end of the year are with

potential problems which could be dealt with by upward short-term

rate adjustments, anticipatory actions in this direction by the

System would not seem to be required.

Mr. Young presented the following statement regarding the

United States balance of payments and related matters:

Major international financial markets continue in a highly

sensitive state, reflecting in part investor disquiet over the

Berlin crisis and in part a lack of firm confidence in the future

relation of international currency values.

The Berlin crisis generated a large flow of funds from

The main beneficiaries of the

Germany into other currencies.

outflow of funds were not the reserve currencies but rather

Switzerland, the Netherlands, France, and Italy. The most recent

news from European markets indicates some quieting of financial

8/22/61

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fears. This is attributed to market response to last week's

show of strong U. S. position, with the concurrence of other

NATO powers, regarding a Berlin settlement.

The British program of financia retrenchment has apparently

halted the flight of funds from sterling, but there are few signs

yet of a large reflow to London.

While the spot pound has

strengthened some, the forward discount on sterling has widened,

thus offsetting the incentive effect of the higher short-term

yields in London.

British bond yields, which rose sharply

following the discount rate increase, have since declined

moderately but hold at a level close to that for Treasury bills.

The high British bond yields, it is reported, have been attracting

some, though not large, foreign buying.

Recent developments regarding the U. S. balance of payments

can hardly be described as cheering.

Preliminary data on gold

and dollar transfers to foreigners for July would indicate a July

payments deficit about twice the monthly rate of deficit for the

second quarter.

The July deficit reflects in part temporary and

seasonal influences, but over-all payments tendencies would

suggest a real worsening of the U. S. deficit position.

Imports, as shown by June data, are beginning to rise, as

they should be expected to do in a period of vigorous cyclical

recovery.

On the other hand, exports in June were up only a little

and there is small hope for much rise above recently prevailing

levels over the balance of the year. With the trade balance thus

tending to deteriorate, the main area for compensating payments

adjustment would have to be the long-term capital outflow.

Balance-of-payments data for the first

two quarters of the year

fail to show any contractive tendency in the long-term capital

outflow, although such contraction might be expected on cyclical

grounds.

Currently available data, moreover, give no indication

that this outflow is presently tending to abate.

It may be concluded, therefore, that the short-run outlook

for the U. S. balance of payments is one of continuing and somewhat

worsening deficit, with the deficit for the whole year possibly in

the neighborhood of $2 billion. In addition, payments flows among

European nations are currently altering the ownership of foreign

dollar deposits, particularly in the direction of ownership likely

to convert them into gold.

In the light of these circumstances, and barring uncertain

repercussions of an unforeseeable mishap in overcoming the Berlin

crisis, we must be prepared in the months ahead to see some

further reduction in the U. S. monetary gold stock. A resumed

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gold outflow of moderate volume should not be alarming as long

as renewal of large outflows of volatile funds is avoided and as

long as there remain good grounds for belief that real progress

is being made towards better basic equilibrium in international

payments

Mr.

Treiber presented the following statement of his views with

respect to the business outlook and monetary policy:

On the domestic scene, the economy continues to move forward.

Industrial production has attained a new high. Consumer spending

is moderate in the light of record personal income.

So far,

prices have continued relatively stable, but there are a few

signs of upward pressures. We are moving from a period of

recovery into one of expansion. Nevertheless, there is a good

deal of unused resources, both men and plant capacity, and the

high level of unemployment continues to present a challenge.

Bank credit has been expanding moderately with some signs of

renewed strength discernible during the last week or so.

Business

loans made by banks this year have been offset by a larger than

usual amount of repayments, presumably as the result of the sale

of large amounts of refunding capital issues by the borrowers.

Viewed in this light, the record of business loans by banks has

been good. We may expect substantial bank credit expansion during

the remainder of the year not only because of the increased

seasonal need for bank loans but also because of large borrowing

The general liquidity position of

by the Federal Government.

the economy is good.

In the period since the last meeting of the Committee the

money market has been less easy than in preceding periods, but it

has not been tight. In the preceding period the unexpected

confluence of several market factors brought about a condition

Conversely, in the last couple

of greater ease than was expected.

of weeks several market factors worked in the opposite direction

more than was expected.

More Federal Government spending seems to be in prospect,

throwing the budget more out of alignment and requiring more

People are raising questions here and abroad

Treasury borrowing.

as to the potential danger of the prospective deficit spending to

economic stability and confidence in the dollar. As greater

deficit spending further stimulates the domestic economy, there

will be less need for a policy of monetary ease.

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Within the next few weeks, possibly before the next meeting

of the Committee, the Treasury may announce new cash borrowing

and perhaps also an advance refunding.

The latter would afford

the Administration an opportunity to underline its concern for

fiscal responsibility in a period of a rising deficit. Since

the Treasury will need to borrow shortly, it is desirable to avoid

upsetting developments in the securities markets in the next few

weeks.

Our international financial position has been deteriorating.

Our balance of payments is worsening.

In the first

quarter of

the year we did well, but since then the deficit has progressively

widened despite heavy outflows of funds from London. Our trade

surplus has declined as exports have fallen off and imports have

increased. With further economic expansion at home, imports are

progress toward a

likely to rise further. We have made little

Failing

long-run solution to our balance of payments problem.

that, we continue to be vulnerable to shifting winds of sentiment

which could eventuate in a substantial demand upon us for gold.

The demand for gold has been increasing and the price of

The

gold has been rising gradually in the London gold market.

price at the fixing on Friday was the highest since February.

Some of the demand is due to international political tensions.

The aggravation of these tensions will likely raise the demand

Climbing gold prices stimulate specula

further.

for gold still

tion. Some European central banks are concerned about the

possibility of a run-up in the price of gold such as occurred

last October. They fear that such a development would be

step toward the devaluation of the dollar

interpreted as a first

People abroad are watching carefully

and other currencies.

developments in the United States. They are watching our monetary

policy and fiscal policy, and especially the way in which we

It behooves us as a nation to do

handle the Federal deficit.

everything we can to promote sound policies and to demonstrate

to the world our resolution in this respect.

calls for

The domestic business and credit situation still

to the

however,

alert,

be

must

We

ease.

of

monetary

a policy

possibility that stepped-up defense spending and related expansion

in private spending may place excessive pressures on the price

Large wage increases

structure and endanger economic stability.

growing out of wage negotiations now under way or in the offing

could also put pressure on prices. The international picture also

calls for continuing alertness. We should seek to avoid any

substantial decline in short-term interest rates.

8/22/61

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We believe that in the coming period the System should

continue to follow about the same monetary policy it has in the

last period.

Doubts should be resolved on the side of less ease.

The so-called "feel" of the market is especially important.

It

would seem desirable that the effective rate on Federal funds be

a bit below the discount rate, ranging between 2 per cent and

3 per cent, perhaps averaging about 2-1/2 per cent. We think

that it is desirable that the rate on three-month Treasury bills

continue within the range of 2-1/8 to 2-5/8 per cent which has

been in existence for about a year.

In the light of both domestic

and international conditions it is desirable that the rate be in

the upper part of the range.

We believe that the authority to engage in transactions in

longer-term securities should be continued and that the discount

rate should not be changed. At the last meeting of the Committee

it was suggested that the time was approaching when a change in

the directive would be in order. As we move now from recovery

into expansion, we think a change would be appropriate, and we

suggest that clause (b) be revised so as to read as follows:

"to encouraging credit expansion so as to promote fuller

utilization of resources, while guarding the international

position of the dollar."

Mr. Johns commented that Mr. Holland had covered in such detail

the facts pertaining to the behavior of reserves, total and otherwise,

in the recent past as to permit proceeding at once to what seemed a

reasonable conclusion; namely, that total reserves had not been expanding

rapidly enough to allow for the continued expansion of total deposits

at about a 5 per cent annual rate.

The rate of expansion of total

reserves had been so slight recently that bank credit expansion had

been dependent to some extent, perhaps primarily, on a decline in

reserves of about $80 million in the past four weeks.

excess

He would not

want to depend on a further redaction of excess reserves as a basis

8/22/61

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for continued deposit expansion; therefore, he would suggest that the

Committee be diligent about increasing total reserves in

an adequate

amount to continue deposit expansion at at least the rate that had

prevailed since March.

He had some doubt whether it

could be assumed

that the rate of expansion of time deposits would long continue.

this doubt proved valid, he thought it

If

was unquestionably true that

the System would have to provide more reserves in order to support an

expansion in demand deposits,

recent months.

and there had been no such expansion in

In the circumstances, he was inclined to recommend

that total reserves be increased about in line with the staff projection

set forth in the memorandum that had been distributed under date of

August 18,

more particularly in the column of total reserves projected

found in table 3 of that memorandum.

weekly increment in

This would include a $15 million

order to provide for expansion in demand deposits

adjusted and time deposits at an annual rate of 5 per cent, and it

would also make up the short-fall of total reserves that had occurred

recently.

With alternating periods of about two weeks each in which

the projections contemplated the necessity of buying heavily, then

selling heavily, and then buying heavily again, it

appeared that there

should be possibilities of catching up the short-fall without dire

repercussions in

the market, and he would like to see this done.

8/22/61

-16Mr.

Johns said that he would not recommend a change in the

discount rate at this time.

Although he had not come to this meeting

prepared to argue for a change in the directive, he was attracted to

the suggestion made by Mr. Treiber and thought it

was a good one.

Mr. Bryan said there had been no developments in the Sixth

District that seemed worthy of a detailed report at this time.

The

District seemed to be going along about the same as indicated by the

national figures, and in any event only fragmentary new data had

become available since the August 1 meeting.

As to the national picture, it

going ahead.

seemed that the recovery was

It also seemed that the $542 million figure of free

reserves reached in the most recent statement week was one that would

permit credit expansion.

However,

as he saw it,

the situation actually

had tightened rather substantially in a couple of the weeks of the past

period.

He did not believe that at the moment a tightening in the

money situation could be justified; therefore, he would suggest aiming

for free reserves between $550 and $600 million.

Such a range, he

thought, would be compatible with a more than seasonal increase in the

total reserve figure.

Mr.

Bryan said he saw no reason for changing the discount rate

at this time.

As to the directive, he would have no objection to

8/22/61

-17

changing it

in the manner that had been suggested, but he was not sure

there was any real point in making such a change.

Mr. Hilkert reported that the pace of recovery in the Third

District had quickened in

recent weeks.

Construction contract awards

were now moving up at about the same rate as nationally, steel

production had increased,

manufacturing,

along with output in most lines of

and goods were selling well at retail.

In July, total

bank credit at District banks increased, with loans showing no

significant change but investments rising.

been little

change.

More recently there had

Reserve positions of District banks were easy.

Reserve city banks had been net sellers of Federal funds, and country

bank borrowing at the discount window continued to be small.

Mr. Hilkert's appraisal of the national business picture was

that, in

brief:

(1) the rise in business activity was broad-based

and was continuing at a good pace; (2)

large number of unemployed,

excess plant capacity, a still

and keen competition, both domestic and

foreign, provided fairly strong restraint on any important upward

movement of the price level; and (3)

although evidence of inventory

building and anticipatory buying was not yet seen, the stepped-up

defense program and growing international tension had added fuel which,

if

sparked by a resurgence of inflation psychology, could lead to a

boom and rising prices.

8/22/61

-18

Mr. Hilkert expressed the view that recent business and

financial developments did not call for any change in monetary policy

for the next three weeks.

Rising market rates and lower free reserves

indicated some tightening in the past three weeks,

and he would favor

maintaining about the same general degree of ease as had prevailed

during this period.

More specifically, he would like to see the Federal

funds rate comfortably below the discount rate, market rates at about

the present level, and, if

consistent with these two objectives,

reserve positions in the same general range as during the past three

weeks.

He would favor continuation of the authority to conduct open

market operations in intermediate and longer-term securities.

the recent rise in intermediate and long-term rates, it

it

With

appeared that

might be desirable to supply some of the reserves, when needed,

through purchases of the longer maturities.

He would not favor changing

the discount rate nor would he suggest a change in the directive at

the present time.

Mr. Hickman reported that after some hesitation caused by

vacation shutdowns in the Fourth District, most economic indicators

now showed a resumption of the economic expansion evident since last

spring.

Steel output was back by mid-August to the highest levels

since mid-June,

and outbound freight shipments at Pittsburgh and

Cleveland had recently moved ahead of year-ago figures, whereas they

-19

8/22/61

lagging for the nation as a whole.

were still

weather and stronger industrial demand,

As a result of warm

electric power output had risen

sharply, and on a seasonally adjusted basis had averaged higher in

major centers than at any time this year.

Recent changes in bank credit in the District had been dominated

by the July Treasury financing,

as banks continued to liquidate bills

acquired in the last week of July.

an easy reserve position,

Banks generally appeared to be in

as indicated by the low level of borrowings

from the Reserve Bank, although net purchases of Federal funds had

increased in recent weeks.

Commercial and industrial loans of weekly

reporting banks expanded by about $12 million in the three weeks

ending August 16,

about twice the expansion indicated in

the comparable

period a year ago, but the general belief among bankers in the District

was that the expansion this year will be no more than seasonal.

Despite recent improvements,

Mr. Hickman said, there was

widespread evidence of excess capacity and high-level unemployment in

the Fourth District.

Since the District is

dominated by the heavy

industries, output usually contracts more sharply during recessions

than in the nation as a whole, and this had been true in the recent

recession.

Similarly, the recovery from recession lows is usually

sharper than in

the nation, since the District starts from a lower

8/22/61

base.

-20

The recent advance in the Fourth District had conformed to this

pattern, but there was still

some way to go before previous cyclical

peaks were regained.

Using 1957-59 as a base, steel output was still

about 5

percentage points below the national average, and was lagging particu

larly in the Youngstown and Pittsburgh areas.

Manufacturing employment

also had exhibited the cyclical sensitivity of the District and the

slower rate of recovery.

Manufacturing employment declined by about

12 per cent between May 1960 and March 1961, against a decline of only

6 per cent nationally.

By June 1961, the United States had regained

about half of the decline, while Fourth District employment had

recovered only one quarter.

Despite the lagging pace of the recovery thus far, Fourth

District economists and businessmen were optimistic for the fourth

quarter and looked for further improvement in the first half of 1962.

Steel ingot production (20 million tons in the first

quarter of this

year and 25 million tons in the second quarter) would exceed 25 million

tons in the third quarter, a good showing in view of the seasonal

weakness normal for this period, and would come close to 30 million

tons in the fourth quarter, with the greatest strength exhibited toward

the end of the year.

There was talk of a price increase in the steel

industry after wages were adjusted upward on October 1, but feelings

-21

8/22/61

were mixed as to whether a general upward price adjustment could be

made to stick at this stage of the cycle.

It was perhaps indicative

that the automotive industry was still buying steel on a hand-to-mouth

basis.

In conclusion, Mr. Hickman said that District automotive

economists continued to look for production and sales of U. S. built

cars of about 5-1/2 million this year, with total sales (including

foreign) of 5.9 million; and they were predicting total sales in 1962

of about 6.5 million, roughly comparable to the performance in 1959.

The higher level of disposable personal income projected for 1962 was

a plus factor for the automotive industry, but sales expectations were

tempered somewhat by the relatively small number of cars three to five

years old now on the road.

Cars in that age group are the best

candidates for trade-ins, and the small number now in this age group

might retard sales next year.

Mr. King presented the following statement with regard to System

operations in longer-term securities:

It appears that the System has, if for the present only,

accomplished its purpose of helping slow the gold flow through

purchases of longer-term securities instead of bills. The bill

rate has remained slightly above two per cent, and I believe

our departure from the "bills only" policy helped reduce

downward pressure on the bill rate. This being the case and

with the past three weeks' upward trend of the bill rate in

mind, it seems this might be an appropriate time to cease

operations under the special authorization to the Manager of

8/22/61

-22

the Account. I do not mean that I would terminate the

authorization now, nor does this imply that it might not be

reactivated within the next few weeks or months, possibly

for selling as well as buying.

As an advocate of a more flexible approach than the

"bills only" policy afforded, it seems to me that we have

no need at the present time to supply reserves through

purchases other than bills.

Disengagement at this time would in no way repudiate

our policy of the last six months, nor would it make us appear

unsure of ourselves.

Rather, it would indicate that we are

decisive and have no fear of being bold when circumstances

warrant boldness. What better evidence of flexibility could

anyone have than to be flexible in two directions instead of

only one?

I believe it would not be desirable to make an announcement

if this action is taken. If we did, it might be necessary in a

few months to make another announcement that we were re-entering

the long-term market to buy or to sell. To state now that we

are getting out and to possibly reverse our statement in the

next few months would be difficult for many to understand.

Our

withdrawal would become obvious in a matter of weeks, and I

believe it would be better to let the financial community

Action in this manner should have

draw its own conclusions.

a healthy effect on our domestic financial community as well

as on those abroad who have an interest in our decisions.

In further comments, Mr. King said the rise in the bill rate

and the tone of the market as reflected by the Federal funds rate

suggested somewhat less ease than he believed desirable.

What he had

believed the Committee was intending to do was to stay where it was,

but in fact it had moved toward less ease.

His vote would be to move

back to about the degree of ease that prevailed during July and to

resolve doubts on the side of ease.

A level of free reserves ranging

8/22/61

-23

from $500 to $600 million would seem to him appropriate.

He would not

recommend a change in the discount rate at this time.

As to the directive, Mr. King indicated that he would be

inclined toward no change at this time, even though the suggested

language might be perhaps more appropriate to the existing circumstances

than the present language.

The figures, he noted, did not suggest that

there had been any great success in meeting the objective, as stated

in the current directive, of encouraging the expansion of the money

supply.

However, he questioned whether the omission of the pertinent

words would serve any particular purpose at this stage.

He would be

inclined to leave them in the directive rather than to have readers of

the policy record speculate that the System had given up on that score.

Mr. Robertson expressed the view that the recent record of the

Committee in providing reserves had hardly been in keeping with the

existing directive, which provided for encouraging expansion of bank

credit and the money supply.

Therefore, he felt that the directive

should be changed or, in the alternative, that the Committee should

change its policy and its instructions to the Desk.

He had found

himself concerned, upon returning to his office yesterday, about the

degree of tightness that seemed to have developed in the first part of

August, with free reserves averaging $401 and $435 million, respectively,

in two of the statement weeks.

When he reviewed the record, however,

8/22/61

-24

he found himself unable to criticize the Desk; instead, he thought the

record indicated that the Committee ought to be more specific in its

instructions to the Desk.

Also, he realized that some of the tightening

had been caused by conditions that could not be completely controlled

by the Desk.

Still he felt that the amounts of reserves that had been

supplied were inadequate to meet the present directive or to meet the

needs of the economy.

Robertson suggested that the System should be acting now,

Mr.

while it

still

had latitude for action, to increase the money supply.

Because of the Treasury operations, there would only be short periods

in which the System would be uninhibited during the balance of the

year.

Accordingly, for the next period he would suggest striving

toward a level of free reserves from $550 to $600 million.

first

two weeks that would create what he thought would be a condition

of ease adequate to implement the existing directive,

directive,

the suggested

or alternative wording that he intended to suggest shortly.

During the third week there would be a rise in float.

it

During the

Thereafter, if

seemed desirable, free reserves could be dropped slightly to a

level, perhaps in

the $500 million range, that could be held during

the Treasury financings in September and October and perhaps over the

major part of November and December.

8/22/61

-25

Mr. Robertson then suggested, though not with the thought of

proposing action at this time, the advisability of keeping watch on

developments in the stock market so that margin requirements could be

increased, if

necessary, rather than to permit any increased activity

or speculative tendencies in the stock market to swerve the policy of

monetary ease too far toward tightness.

He saw no such indications

today, but there had been earlier, and he felt that an eye should be

kept on the situation.

Mr. Robertson also suggested that care be exercised to see

that the international situation did not panic the System into adopting

a tighter policy than called for by the domestic situation.

At the

moment he saw no immediate prospect of inflationary developments;

although there were potentials, there continued to be a large amount

of unutilized manpower and productive capacity.

As to the directive, Mr. Robertson expressed the view that the

time had come to recognize the change in

directive was first

adopted.

economic conditions since the

While he was not opposed to the language

suggested by Mr. Treiber, he would like to suggest alternative wording;

namely, that clause (b) be amended to provide for operations looking

toward the maintenance of economic growth and monetary stability

adequate to meet the tensions and strains arising out of the prevailing

international situation.

In making this suggestion, he was trying to

8/22/61

-26

indicate the great need to maintain confidence in

the dollar and to

act in a manner that would recognize the existing strains and tensions.

In his opinion, this kind of language probably could not be carried in

the directive too long, because tensions and strains vary.

felt it

However, he

was desirable to amend the directive from time to time in the

light of changing conditions, whether international or domestic.

Turning to System operations in longer-term Government securities,

Mr. Robertson made the following statement:

I feel compelled to turn again to the issue of our opera

tions in longer-term securities. These operations pose serious

problems, and they cannot be resolved by avoiding discussion of

them.

Consider the environment in which these operations are

being conducted. Interest rates have risen, and prospects for

continuing increases in rates are cited in all quarters. In

such circumstances it is difficult for the market, even when

operating without Government intervention, to carry through

orderly adjustments of prices which will keep supply and

If Federal Reserve purchases of

demand factors in balance.

longer-term securities intrude upon these market adjustments,

they are likely to hold prices at an unviable level at which

the System will be the only substantial buyer.

Around this table, on a number of occasions, critics of

the special operation (myself included) have endeavored to

express the logic of adverse market effects which could flow

from these activities. Let me call to your attention this

morning some of the concrete evidences of such ill effects

which have begun to emerge.

Some Government securities dealers tell

us that it is

becoming common practice for them, whenever they are offered

longer-term bonds by a customer, promptly to make a correspond

ing offer to the Desk.

By this means dealers check to see if

the bonds can be passed to the System, before they themselves

will buy any substantial amount.

Thus, System Account buying,

and the prices at which it is or is not done, have become an

immediate market influence.

8/22/61

-27-

Statistics reported by dealers indicate that private

buying interest in the long-term Government market has shrunk

drastically. Buying of over-10-year issues by commercial banks

and nonbank investors, which was averaging nearly $10 million a

day in the latter part of 1960, dropped to a $7 million average

in the first

quarter of this year, to under $4 million in the

second quarter, and to only $24. million thus far in this

quarter, barely one-fourth of the rate less than a year ago.

In the weeks around the turn of this month, precisely when the

last System purchases of any consequence were made in this

area, total purchases of over-10-year issues by nonbank

investors dwindled to an average of only $100,000 a day. To

be sure, current figures could be expected to be lower than

average because of the season of the year and the stage of the

cycle.

However, after all reasonable allowance for these

finds the decline in

factors is made, I think one still

investor demand proceeding to such low levels as to display

a baleful influence from Operation Nudge.

If there were some major offsetting advantages being

obtained through our purchases of long-term securities, perhaps

there would be some grounds for arguing that the Committee

should risk the ill effects I have mentioned. But there are

no clear economic gains which are being realized.

system

purchases of long-terms in recent months have been so modest

as to have had no reserve effects of consequence.

Our entire

special purchases of issues maturing in beyond 10 years have

aggregated only $79 million. If, alternatively, we had

endeavored to provide this amount of reserves through bill

purchases, it is inconceivable that any perceptible further

downward movement in bill rates would have resulted; yet this

is the rationale on which we undertook the special operation.

In summary, our continuing to buy dribbles of long-term

issues cannot be justified on the grounds of the balance-of

payments situation, the need for additional reserve inlets, or

any salutary influence exercised on the market.

I think we

would be well advised to recognize this evidence produced by

our own operation, and accordingly to withdraw the special

authorization to the Account Management to deal in long-term

securities.

feel that prompt cessation of the whole

Although I still

special operation would be the wisest course, I am aware of the

desire on the part of some members of the Committee that

disengagement be a gradual process. In keeping with that

8/22/61

-28

desire, I suggest that the Committee begin by returning to the

initial standard set last February in barring Account operations

in securities maturing beyond 10 years. It is to operations in

the over-10-year area that the arguments I have expressed

earlier apply most strongly. Avoiding future System purchases

in this truly long-term sector would be a good beginning, and

it would lay the foundation for progressively further limitation

later as, in the Committee's view, conditions make it appropriate.

Mr. Mills suggested that the Open Market Committee hark back in

its

thinking to its

fundamental responsibility--providing an adequate

base of credit availability to the commercial banking system--and that

it

avoid straying off into other areas and citing objectives on

extraneous points as the criteria for policy-making.

He noted that in

the past a tendency to tie policy judgments to some specific level of

positive or negative free reserves had been criticized, and it seemed

to him that at the present time the Committee should think twice and

avoid taking a new sighting based on some projected level of total

reserves as the correct answer to policy-making.

It

also seemed

desirable to remember that an occasional tightening in the market should

not throw forebodings and fears into the policy-makers in

situations

when the supply of reserves remains sufficient to develop and preserve

an adequate base of credit availability.

He suggested that in

such

circumstances the Committee should not be either impatient or appre

hensive that it

is

had fallen into error and should remember that there

a lag in time before the market can become acclimated to a lower

8/22/61

reserve position.

-29

The policy considerations that would tie into the

kind of reasoning he had outlined were set forth in the following

statement, which Mr. Mills then read:

It is never easy to foresee economic developments from a

summer mid-point of seasonal slackness in activity. Despite

that fact, a fair estimate of the present position of the

economy might be that to date the strength in the recovery

movement has been more on the side of production than

consumption and, therefore, the test to be met during the

fourth quarter of the year is whether enough economic power

has been generated at the level of production to carry over

into a measure of consumption sufficient to move the expanding

plant output into final hands and in that way to insure

lasting recovery.

A Federal Reserve System monetary and

credit policy suitable to this kind of economic situation

would supply the commercial banking system with sufficient

reserves to permit the further expansion of commercial bank

credit.

Such a policy, in supplying only enough reserves to

permit an expansion of commercial bank credit truly evoked

by natural market demands, would avoid the mistake of forcing

reserves onto the commercial banks in a superfluous quantity

that would result in dragging down the interest yields on

U. S. Treasury bills at a time when international considerations

demand a Treasury bill rate high enough to hold foreign

investment funds in the United States. Moreover, oversupplying

reserves at a time of international financial tensions could

lead to the impression abroad that the United States was

embarking on inflationary programs that would tend to weaken

the purchasing power of the dollar. Adoption of the policy

recommended would also take into account the fact that under

present conditions, the rapid growth occurring in time deposits

must be related to the lesser rate of growth that has occurred

in the money supply as conventionally defined. The present

justification for taking time deposits into partial context

with the conventional money supply is that the growth in time

deposits is in part a reflection of a slack demand for commercial

bank credit, which demand, if it should come to life rapidly,

would be accompanied by a conversion of time deposits into

more highly charged economic factors having an inflationary

bias. It is consequently advisable to combine in view the

8/22/61

-30

growth of the money supply and time deposits as being the

foundation on which a massive expansion of commercial bank

credit has been built in the past year, whose structural

components, in being susceptible to variation and exchange

as between the commercial banks and other lenders, are fully

adequate to accommodate the growth needs of the economy.

In essence, the kind of monetary and credit policy now

called for is one of moderation that will encourage reasonable

commercial bank credit expansion and, in so doing, avoid the

mistakes of the recent past in overdoing both the supplying

and withdrawing of reserves which so disturbed the state of

the money markets.

To allow reserves to be supplied inordinately

at this time would be inadvisable for the reasons previously

mentioned, and also because the appearance of a high level of

positive free reserves could lead to investor expectations of

a steady rise in the prices of U, S. Government securities

which, in turn, could incite harmful speculative activity.

No change is necessary in the discount rate and continuation

of the special authority is recommended on the basis that it

will be used when practicable to reduce the System Open Market

Account's portfolio in securities other than U. S. Treasury

bills. It is suggested that subsection (b) in the directive

issued to the Federal Reserve Bank of New York be revised to

read, "to permitting an expansion of bank credit that will

serve as a propelling force to the momentum of economic

recovery without producing unstabilizing influences in the

field of the foreign exchanges."

Mr. Wayne said that the upward course of business activity in

the Fifth District had apparently gained a broader footing in the past

three weeks.

Employment and man-hours were continuing to rise,

In

the textile industry, cost increases were expected to create a difficult

profit situation this fall, and in anticipation there had been small

but general price increases.

Thus far, demand seemed strong enough to

sustain the higher prices and activity had continued at encouraging

levels, although this was due in part to Government buying and the

8/22/61

-31

placing of orders in

anticipation of price rises.

The lumber industry

seemed rather pessimistic, but a rising level of construction contract

awards was noted.

In a recent check, Reserve Bank contacts commented

favorably on such items as manufacturers'

of profit expectations, and retail trade.

orders,

shipments,

In summary,

the trend

the Bank's

contacts were generally optimistic about the outlook for the remainder

of the year.

Continuing,

Mr. Wayne said that business and other loans at

District banks had been unusually strong in the past three weeks and

that the agricultural outlook was for further improvement.

Early sales

of tobacco were marked by price increases above last year.

District

banking developments,

other than as noted previously, had been fairly

routine, with gross loans following about the same pattern as in 1958

and investment portfolios moving slightly downward.

The larger banks

had continued to be heavy sellers of Federal funds and there was little

use of the discount window.

Turning to policy, Mr. Wayne commented that developments of

note had occurred in two areas.

had shown further deterioration.

increase in

First, the balance-of-payments position

Second, there was the substantial

short-term rates, especially the three-month bill

rate.

Although recognizing that monetary policy could make only a limited

contribution to the solution of the balance-of-payments problem,

-32

8/22/61

Mr. Wayne noted that the System must be alert not to aggravate the

situation.

The market causes of the sharp rise of interest rates were

not entirely clear, but possibly the situation reflected a misinter

pretation of System policy by the market.

in free reserves in

The relatively sharp drop

the early part of the month,

unanticipated and uncontrollable market factors,

which reflected mainly

seemed to have been

interpreted by the market to mean that the System might be reducing

the degree of ease.

Perhaps it

was only natural that the market should

be looking carefully for such evidence at this time.

In any event,

however, the condition could feed upon itself unless System actions in

the weeks ahead clearly indicated no reduction in the degree of ease.

In Mr. Wayne's view, there was no valid basis for tightening

at this particular stage,

Retail sales lacked vigor, prices remained

quite stable, and business orders showed only normal increases.

the circumstances, he felt that any further rise in

would be unwarranted,

In

short-term rates

and in fact might be harmful, unless there were

more signs of inflationary forces or speculative influences,

and he

would favor a policy that would not encourage any further increase in

such rates.

In fact, he would not be disturbed if short-term rates

tended slightly downward.

amount of reserves in

It

would be necessary to inject a substantial

the near future,

and he would be inclined to

inject those reserves through the purchase of bills, if

possible,

8/22/61

-33

unless there was some significant shift in market conditions in the

meantime.

The staff estimates of reserve needs seemed appropriate to

him, and he felt

that a level of free reserves around $550 million

would be desirable.

After stating that he would not recommend a change in

the

discount rate at this time, Mr. Wayne turned to the directive and said

that he was inclined to endorse the change proposed by Mr.

Treiber.

he would favor renewing the special authorization covering operations

in longer-term securities.

Mr. Tow commented that nonfarm employment in the Tenth District

reflects the predominance of nondurable goods employment in the region.

The composition of employment was an element of resistance to the

recession and led to the -rerecession level of nonfarm employment being

regained earlier than in the country as a whole.

however,

had resulted in little

This same factor,

change in nonfarm employment in

recent

months--though at a level above that of a year earlier.

The agricultural sector of the Tenth District appeared to be

having a rather satisfactory year.

Farm cash receints in the first

half of the year were well above a year earlier, out at a much reduced

rate toward midyear.

Lower cattle prices were one factor in this

narrowing of the margin over a year earlier.

Another was the rather

widespread speculative holding of wheat off the market.

The winter

8/22/61

-34

wheat crop this year was excellent, even though

ago,

4 per cent below a year

and crop conditions generally were very favorable in the District

at this time,

The performance of the domestic national economy in recent

weeks had been very good, Mr.

Tow felt, especially when account was

taken of price behavior since the beginning of the Berlin crisis this

summer.

While the direction of economic activity might not be in

doubt, the pattern and timing of future developments were more uncertain.

The situation would require close watching, particularly as to indi

cations not yet apparent of strong anticipatory response on the part

of business and consumers.

Mr. Tow noted that the changes in the level of interest rates

since the last meeting of the Committee indicated greater tightness in

the money and capital markets.

In part, this reflected an expectational

response on the part of those markets.

It

also reflected, however,

more restrictive System open market operations, for various reasons

already mentioned at this meeting,

and it

would not appear to him

appropriate to add to this restrictiveness at this time.

felt that the Committee,

for the present,

Rather, he

should provide reserves for

bank credit expansion at a seasonally adjusted rate about in

the first

half of this year.

Or, if

line with

the statement was made in terms

of recent operations or in terms of free reserves,

operations should

-35

8/22/61

be conducted more nearly in

the two previous weeks.

line with the most recent week rather than

In view of the international flow-of-funds

problem, it would seem well to maintain the Treasury bill

the range of recent weeks,

and in

rate within

his view purchases of longer-term

securities should be undertaken to the extent necessary to maintain the

bill

rate within that range.

Accordingly, he felt

that the special authorization with respect

to operations in longer-term Government securities should be renewed,

and without restriction as to maturities.

called for in

the discount rate.

No change would appear to be

While the directive apparently would

need to be changed presently, he did not consider that any particular

importance attached to whether the change was made at this meeting or

the next.

If

a change should be made today, he would be inclined to

favor the New York proposal.

Mr. Allen said the rapidity of the economic upswing had seemed

to him impressive,

more so than to those who were saying that this

year's rise was about in line with those of 1949, 1954, and 1958.

He

believed that those judgments understated the vigor of the uptrend.

Although he agreed that there was more elbow room in the economy, more

potential for expansion,

in

1961 than in

those earlier years, this did

not justify underratirg the movement thus far.

-36

8/22/61

To elaborate in

terms of the Seventh District on what he had

called elbow room, 11 of 23 District centers remained in

the "substantial

labor surplus" class with six per cent or more unemployed.

weeks ended August 12,

In the four

District department store sales were just even

with last year, compared with two per cent higher for the nation.

Steel

production was running below the June level, although production would

increase if auto firms ordered in line with their anticipated fourth

quarter production of 1,800,000 cars,

A fourth quarter of that

dimension would mean total 1961 auto production of 5,600,000 cars,

compared with 6,700,000 in 1960.

The automobile labor contracts would expire next week, Mr. Allen

noted.

The most important information--what the companies would give

and the union take--should become clearer soon.

As of the contract

termination date, August 31, it appeared that about 150,000 1962 models,

an average of five cars per dealer, would be on hand.

Twice that

number, or 300,000, was considered the minimum for so-called proper new

car announcements.

On August 31 there would be 500,000 to 600,000 1961

models on hand.

Bank credit, as shown by the figures of Seventh District weekly

reporting banks,

expanded substantially in July, when acquisitions of

Government securities and increased loans on securities far more than

offset a decline in

other types of loans.

In the two weeks ended

8/22/61

-37

August 9, however, the pattern was reversed.

Total credit declined as

the security loans made in July were paid down and the Government

security portfolios were reduced.

But loans except on securities rose

in this latter period, and Chicago and New York banks reported further

loan growth in the week ended August 16.

Thus the weekly reporting

member bank figures suggested that business loan demand was strengthening,

and it

seemed likely that both seasonal influences and the increasing

pace of business activity would bring a continued uptrend through the

rest of 1961.

Mr. Allen pointed out that it was too early to judge the vigor

of the loan demand he had mentioned.

And there was still the elbow

room in the economy to which he had referred, as evidenced by unused

resources, both human and material.

Under the circumstances he felt

that it would be advisable to carry along for the next three weeks as

the Committee had been doing and continue to supply reserves necessary

to accommodate seasonal credit expansion and maintain about the

existing degree of ease.

He would not change the discount rate.

He

did feel, however, that the time had come to delete the words

"strengthening the forces of recovery" from clause (1)(b) of the

directive.

The suggestions made thus far, particularly those of

Mr. Treiber and Mr. Robertson, seemed to him to imply a responsibility

in the foreign area which the Committee should not accept.

He would

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8/22/61

favor the first

clause of Mr. Treiber's suggestion, "to encouraging

credit expansion so as to promote fuller utilization of resources,"

but he would prefer at that point to use the "while" clause in

existing directive, namely,

factors."

the

"while giving consideration to international

As in the past, he would like to see the special authori

zation discontinued,

and for the same reasons,

Mr. Doming said that he saw no significant change in the Ninth

District economic picture over the past three weeks, which meant that

mixed trends continued.

The drouth had cut and would continue to cut

farm income; at a guess, the cash income loss from the damaged small

grain crops would approximate $350 million, and the effect of this loss

would be felt

over the course of the next twelve months.

also continued weak.

Iron mining

Perhaps the best way to picture this weakness was

to note that the number of small centers with substantial unemployment

increased to 21 in July from 9 in

June.

Most of these were in

the

mining areas, but some were in lumbering and trade centers.

On the other side,

in manufacturing and trade.

there had been continued general improvement

While total nonfarm employment continued

to run behind year-ago levels, manufacturing employment was higher than

a year ago and industrial use of electric power was up.

The net of those contrasting trends in the District could be

expressed in

capsule form through the personal income series.

The

8/22/61

-39

July figure was just equal to the January figure (both seasonally

adjusted),

but it

was 3 per cent ahead of July 1960.

Looking ahead,

some gain could be seen in personal income, but a much smaller increase

than probably would occur in the nation.

In banking,

into August.

and in

a contraseasonal decline in

loans in July continued

This movement was evident in both city and country banks,

each of the States of the District.

showed such a weak loan picture.

No other July since 1946

Relative to a year ago, however,

and country bank loan movements differed.

city

Both total and business

loans of city banks were below comparable 1960 levels, while country

bank total loans were significantly higher than at the same date in

1960.

Deposit behavior had been about normal.

and normal deposit trends,

loan-deposit ratios had improved and general

bank liquidity had improved,

particularly at city banks.

The Ninth District, Mr.

Deming observed, obviously was not

typical of the nation at present.

expanding significantly,

With weak loan demand

was still

of full resource utilization.

But the national economy, while

far from operating under the pressure

On the national evidence, he would

advocate staying "just about where we are" in monetary policy posture

for the next three weeks.

By that, he meant providing reserves adequate

to maintain a free reserve level of about $500-$550 million,

and a

Federal funds rate significantly below the discount rate, while at the

8/22/61

-40

same time continuing to be concerned over the bill rate.

latter point, however,

On this

he would not be worried about a bill

ran somewhat below 2-1/2 per cent.

rate that

He saw no reason to change the

discount rate, nor would he favor discontinuance of the authority to

operate in

longer-term securities.

The foregoing,

Mr. Deming pointed out, was obviously a

continuation of "wait and see."

Consistent with this, he would not

change the directive at this meeting,

although he did agree that the

wording of the present directive seemed somewhat dated.

Mr. Swan commented that the extent of the upward movement noted

in the nation as a whole in July did not seem to have been paralleled

in

the Twelfth District.

He could summarize by noting simply that

nonagricultural employment,

seasonally adjusted,

in the Pacific Coast

States, which represents a major part of total District employment,

appeared to have been down slightly in

a small fractional decline,

July from June.

and to some considerable extent it

related specifically to labor stoppages.

that employment,

This was only

after going up in June,

However,

was

the fact remained

did not increase further in

July, and the drop extended to every major industrial group except

finance and Government.

In the banking picture, Mr.

still

appeared to be quite weak.

Swan said, the demand for bank loans

However,

the large banks were still

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8/22/61

anticipating a pickup in the fall.

The major city banks were under

some pressure in early August, but in the week ended August 16 and in

the current statement week they became net sellers of Federal funds

on a rather substantial scale and seemed to be in a relatively easy

position currently.

Turning to policy considerations, Mr.

Swan said he felt that

one must be cognizant of the inflationary overtones in

situation.

However, they did not seem to be imminent.

the present

The speculative

outlook generated in late July did not seem to have intensified in the

past few weeks.

Consequently, it

seemed to him that the results of

the latest statement week, and apparently the current statement week,

were in accord with the kind of policy that would be suitable for the

period ahead,

period.

rather than the results of the second week of the past

He would recommend aiming at free reserves of about $550

million, with the definite hope that the level would not go below $500

million, and he would not like to see the bill rate above 2-1/2 per

cent.

If

the rate were a little

below that, he would not be concerned.

Reserves would have to be supplied in rather substantial amounts in

the next few weeks, especially the week ending September 6, and it

would seem desirable not to fall as short as in early August.

he recognized that in

somewhat lower in

the first

Although

week of each month reserves tend to be

relation to the previous week or the following week,

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8/22/61

it

seemed to him that the experience in the first two weeks of August

should be given consideration and that it

would perhaps be even more

important in the period immediately ahead than in the past to offset

the factors absorbing reserves,

Mr. Swan stated that he would not favor a change in the

discount rate at this time and that he would favor continuing the

special authorization covering operations in longer-term securities.

If there was any hesitancy about supplying the substantial amount of

reserves that would be needed through the purchase of bills because

of excessive pressure on the bill rate, then he would certainly go

into the intermediate-term area to supply those reserves.

With regard to the directive, Mr. Swan said he did not feel

strongly on the matter.

He thought a change would be desirable at

some point, and if the directive were to be changed at this time he

would agree with Mr. Allen's suggestion.

On the other hand, in terms

of timing he would be a little hesitant about making a change at this

particular point, after a period in which some tightness had occurred,

because of the inferences that might be drawn at a later date.

On

balance, therefore, he would be inclined to suggest letting the directive

stand until another meeting.

Mr. Irons said Eleventh District conditions could be summarized

by saying that economic expansion was going on, but not at an excessive

8/22/61

rate,

-43

Probably the picture in the District was not too much different

from the national picture, with most of the major indicators moving

upward.

The components of the industrial production index were up

generally.

Construction activity was good and improving, and one

factor in the picture was the release of highway money that the

Government was going to turn loose a little

ahead of schedule; the

State of Texas was ready to use the money for highways and roads.

Employment had moved up; unemployment,

at 5.5 per cent for the District.

not seasonally adjusted,

stood

Income and trade were up a bit and

the agricultural situation looked quite good.

Thus,

the District

picture was generally satisfactory.

Turning to policy, Mr.

Irons expressed himself as quite pleased

with what had been going on in the past few weeks.

He felt that the

System had been about as nearly right as one could reasonably have

expected.

In his opinion, what had been going on could not be charac

terized as firming or tightness, for he could not associate those

terms with a situation where there was virtually no borrowing at the

Federal Reserve Banks, the Federal funds rate was under the discount

rate, the bill

rate was well under the discount rate, and free reserves

averaged $500 to $550 million.

There might have been a move from

aggressive ease to ease, but the System was still

providing reserves

to the banking system in reasonable accordance with the demand for

8/22/61

loans.

-44

Banks in

the Eleventh District were in a fairly liquid position

and were not borrowing from the Reserve Bank, all

of the recent

borrowing being of a seasonal nature and on the part of

smaller banks.

District banks had been net purchasers of Federal funds, but this was

because of the activity of two banks.

In talking with bankers, he

heard that loan demand was off a little,

but the bankers were not

concerned about being in

a tight position.

They could make loans as

needed because the banks were reasonably liquid.

Mr. Irons commented that three notable forces had developed.

First, there was the improvement in

international situation was still

Third,

the domestic economy.

Second, the

uncertain, with a slight deterioration.

a month-to-month increase in Federal deficit spending had been

occurring.

Each of these forces suggested to him the same sort of

credit policy; namely, less ease.

If they continued,

sooner or later

the System would be moving in the direction of more firmness.

For the

oeriod immediately ahead, however, he would think in terms of continuing

about what had been done, on average,

over the past three weeks.

He

hoped that the Federal funds rate would move at about 2-1/2 per cent,

give or take something, with the bill rate in the area of 2-1/2 to

2-3/8 per cent, and he would watch loans and investments closely to

see what the banks were doing with the funds that the System made

available to them.

He would favor renewing the special authorization

8/22/61

-45

covering operations in longer-term securities, with no specific

limitations placed on the Account Management.

In his opinion the

Committee should leave considerable discretion to the Desk, with the

understanding that the Manager would be governed largely by the feel

of the market.

In summary, Mr. Irons said, he would maintain the status quo

for the time being, watch closely for the rest of the summer period,

and see what developed with the advent of the fall season.

As to the directive, Mr. Irons said he had no strong feeling.

On balance, he would be willing to wait another three weeks, with the

thought that perhaps the suggestions already made, and any others that

might be submitted, could be studied by the Committee Secretary and

blended into a suggestion that the Committee could consider when it

met three weeks hence.

Mr. Ellis commented that the broad upward trend in New England

that he had reported in June may have moderated somewhat in July,

although the July figures were not yet firm enough to be sure.

Some

industries, including apparel, jewelry, and silverware, had not shown

the recovery that seemed typical of the area in general.

Production,

construction, and total employment had yet to regain 1960 levels, so

there was still

a process of recovery in New England rather than a

movement into a period of expansion.

In the past two weeks, in

8/22/61

-46

particular, loans of weekly reporting banks improved noticeably.

Demand

deposits had increased 7 per cent since the start of the year, and

time deposits also had shown some further advance.

were still

District banks

expecting a vigorous loan expansion in the fall and perhaps

they would be selling off some of their short-term Governments.

Mr. Ellis exoressed agreement with the view, stated by

Mr.

Balderston at the August 1 meeting,

that the Committee should

follow total reserves as a basic guideline unless there was some reason

to diverge one way or the other.

The projections that the staff had

presented for the Committee's consideration at this meeting involved

a steady expansion of reserves in

response to cyclical and seasonal

patterns that would obtain in the coming months, and he would accept

the projections as an appropriate goal for policy, especially during

the next three weeks.

He would favor a free reserve target of around

$500 million, resolving doubts on the side of restraint, but with the

hope that there might not be as many doubts as in the past three weeks.

Mr.

directive.

Ellis expressed the view that it

The version proposed by Mr.

was time to change the

Treiber, as amended by Mr.

Allen,

had for him the most appeal; he thought it was something the Committee

could appropriately adopt as a guide.

Mr. Ellis commented that as he looked ahead to the fall and saw

a need to supply $1.1 billion of reserves for seasonal needs, he would

8/22/61

-47

expect that most of them could be supplied through the bill market.

Yet it might be desirable to supply some through participation in the

longer end of the market, and with that in mind he would renew the

special authorization.

In fact, he would want the Desk to continue its

contacts with the longer-term sector of the market so that if it was

necessary to put funds into the market in this manner in the fall, that

would not cause unusual speculation or concern.

He would not recommend

a change in the discount rate at this time.

Mr. Balderston presented the following statement:

Before giving you my views as to the monetary policy

appropriate for the next three weeks, I shall ask you to

bear with me long enough to deal with two matters pertaining

to Committee practices and methods. The first of these is

the pattern of thinking, or the long-term philosophy, that

should guide the Committee's determination of policy actions.

In discussing its decision-making, I shall be using the

language of total reserves, adjusted to eliminate both

Government and interbank deposits, and corrected for

seasonal. I shall then turn to the second matter: the

translation of Committee decisions from the language of

total reserves into that of free reserves, so that the

Committee's instructions to the Desk may be couched in

language that is not only definite, but of practical

usefulness.

The guiding philosophy that I favor for the Committee's

decision-making is to proceed steadily, week by week, toward

whatever goal seems appropriate at the time for the fostering

of recovery and economic growth without inflation. On the

chart that is before you, a consistent pattern of policy

decisions might be guided, for several meetings, by a

straight line like those labeled "5 per cent" and "3 per

cent".1/ The particular phase of the cycle will influence

1/

A copy of the chart is appended to these minutes as Attachment A.

8/22/61

-48-

the Committee's choice of such a guide. The Committee may

follow a certain growth rate for a considerable time, as was

the case for some four months last spring, and then veer

gradually to another guideline considered more appropriate.

The point I am making is that monetary policy should be

flexible but not erratic. To be administered with consistency,

changes in the guideline should not be violent but gradual.

The chart portraying what has actually taken place in recent

weeks indicates to me that the Committee may have changed its

long-run objective from a 5 per cent growth rate to a 3 per

cent growth rate without full realization as to what had

happened, and that since the last meeting the implementation

of Committee policy has resulted in a radical departure even

from the lower growth rate.

If an analogy be permitted, we should have been operating

in recent weeks as if we were driving a truck across the

desert on a straight course toward a goal that we had picked

out in the distance. We should have departed from such a

direct course only to avoid obstacles or depressions in the

sand, and should have waited for any obstacle or depression

to become actually visible before deviating. In short, we

should let the forces of the market indicate when departure

from a direct course is appropriate and necessary.

How can such a guiding philosophy of steady consistent

forward movement toward an agreed-upon goal be brought to

bear upon the Committee's decision-making? Perhaps its

goals and its progress toward them will stand forth in

clearer relief if one cuts through the blurring influence

of changes in Treasury and interbank deposits, and purely

seasonal shifts in privately-owned deposits. These changes

tend to hide what we really care about, namely, the cyclical

expansion of bank deposits in the hands of the nonbank public.

To appraise its performance, the Committee may well ask:

how well have we been doing in providing reserves for these

cyclical needs? The decision-making of recent months may be

appraised by reference to the chart. As mentioned already,

the reserve figures used in it are adjusted to exclude the

effects upon required reserves of changes in interbank and

Government deposits and seasonal patterns in private deposits.

The chart shows the actual movements in total reserves, so

adjusted, since the end of February 1961 compared with two

growth lines. One of these embodies a steady 5 per cent annual

growth rate; the other, a 3 per cent rate. It is not suggested

8/22/61

-49

that either of these percentages represents revealed truth.

They are used simply to compare what we were doing earlier in

the year with our performance in recent weeks.

The line of

actual reserves portrays the vacillating nature of our

provision for cyclical expansion; and, since early July, the

slowing down, and indeed the net contracting, of reserves

made available for such purposes.

We have lost, since the week preceding our last meeting,

the equivalent of 10 weeks' growth at the 5 per cent rate and

over 16 weeks' growth at the 3 per cent rate. Even if the

Committee now resumes the supplying of total reserves in

accordance with a 3 per cent growth line, it would not restore

the $120 million difference between the actual at this moment

and the 3 per cent growth line on the chart.

Now I turn to the problem of translating policy decisions

expressed in total reserves into the language of free reserves.

Such translation cannot be precise. It is affected by the

rate at which bank deposit expansion proceeds, and this in

turn by the impact upon bankers of customer demands, ease of

reserve positions, and appraisals of the future course of

events.

The best that can be done is to rely upon norms

derived from experience.

Since the end of February, the

free reserve figures associated with weeks of net monetary

expansion have averaged about $54O million.

Thus the market

place supplies a crude measure of the free reserves needed

for private monetary expansion during an average week.

But in reality, weekly conditions differ from the average.

Some refinement of this measure is called for to deal with

those weeks containing bulges in float. Generally speaking,

a dollar of reserves supplied by float has a less expansive

effect than a dollar of reserves from other sources.

For

example, during the weeks of net monetary expansion since the

end of February, the free reserve figure characterized by high

float averaged $625 million; in weeks without a float bulge,

$80 million, or a difference of $145 million. (In contrast,

there have been other high-float weeks within this period that

have been associated with net monetary contraction, even though

the free reserves of these weeks averaged about $520 million.)

At long last I add my view as to policy for the next

three weeks.

To promote moderate monetary expansion between

now and our next meeting, I recommend a target of about $500

million for the two-week interval ending September 6, and

above $600 million for the week ending September 13 when the

8/22/61

-50

If pursued

reserve figures will be more influenced by float.

for perhaps 6 weeks, these targets should restore total

reserves (adjusted) to the 3 per cent growth line portrayed

in the chart.

They have been stated in round figures to

avoid "false accuracy," like that introduced when the value

of pi is carried out to many places, even to 3.1416, when

some figure in the computation, such as the price of copper,

Nonetheless, I am deeply concerned

can only be approximated.

that the course of action determined by the Committee should

be clear cut and should be adhered to as closely as possible

by the Desk.

In further comments, Mr. Balderston said that he would favor

renewing the special authorization covering operations in longer-term

securities.

He would be inclined not to change the directive at this

meeting, with the thought that perhaps some study between now and the

next meeting might save time in determining the actual wording.

change at this moment seemed to him relatively unimportant,

A

although

he recognized that wording along the lines suggested was probably more

appropriate to the current situation than the present language.

Chairman Martin commented that he felt rather good about the

way monetary policy was developing.

current year, it

Upon reviewing the minutes for the

seemed to him a policy was gradually evolving that

would be understandable to the country and effective in helping the

economy.

A year ago at this time, he recalled, he had entertained some

doubt as to whether those factors were at work.

The Chairman said that it

appeared to him that almost all of

those who had spoken this morning were in favor of continuing about the

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8/22/61

same degree of ease that had prevailed, although some questions as to

the way to achieve that degree of ease had crep

into, the discussion.

The shades of opinion expressed today seemed really to center around

the fact that although the System might be moving, in its thinking, in

the direction of a more restrictive policy, tre Committee had not yet

arrived at the point where it wanted to be more restrictive.

That, he

thought, was about where the discussion had cone out,

Chairman Martin commented, in this connection, that the point

had been made well this morning about giving the Desk more precise

instructions than in the past.

The Committee had not yet arrived at

the means of fully achieving that objective, and it

to continue work on the matter.

would be necessary

The minutes of this meeting ought to

be read carefully, and everyone should study wether

any better means

could be devised of stating the Committee's instructions to the New

York Bank.

Upon reading through the minutes of past meetings and then

reading the directives, he must admit to a degree of

ympathy with some

of the criticisms that had been made by persons outside the System.

Unless one had the benefit of the full flavor of the Committee discussions,

it must be rather difficult to analyze the decision-making process.

As to the immediate question of a change in the directive, the

Chairman expressed the view that the first part of Mr. Treiber's

suggested wording for clause (b)--to encouraging credit expansion so

8/22/61

-52

as to promote fuller utilization of resources--probably was more

appropriate to the present situation than the language of the existing

directive.

The Chairman added that he was favorably inclined toward

Mr. Allen's suggestion for retaining the words "while giving consideration

to international factors," since those words would not put the Committee

in the guise of alone being able to defend the integrity of the dollar.

Chairman Martin inquired whether such a change would be

favored or whether it

was the consensus that the Committee should hold

the matter in abeyance, with the thought of perhaps obtaining additional

suggestions.

Mr. Mills moved the adoption of a revised directive in the

form mentioned by Chairman Martin,

and Mr. Robertson seconded the

motion.

Chairman Martin then inquired whether anyone would wish to

vote against a directive containing such language,

and there were no

indications to that effect.

Accordingly, it was voted unanimously

to direct the Federal Reserve Bank of New

York until otherwise directed by the

Committee:

(1) To make such purchases, sales, or exchanges (including

replacement of maturing securities, and allowing maturities

to run off without replacement) for the System Open Market

Account in the open market or, in the case of maturing

securities, by direct exchange with the Treasury, as may be

necessary in the light of current and prospective economic

8/22/61

-53-

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

credit expansion so as to promote fuller utilization of

resources, 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 certificates of

indebtedness purchased from time to time for the temporary

accommodation of the Treasury, shall not be increased or

decreased by more than $1 billion;

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

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

cases where it seems desirable, to issue participations to one

or more Federal Reserve Banks) such amounts of special short

term 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.

Turning to the question of the special authorization for

operations in longer-term securities,

everyone,

Chairman

Ma

rtin said he felt that

both the proponents and the dissenters, would have to continue

to work on the matter and study the available data.

A memorandum from

the New York Bank had been prepared for the Committee,

pursuant to a

suggestion at the August 1 meeting, attempting to trace the proceeds

of sales of longer-term securities to the System Account.

This

memorandum had given the Committee some basis to go on, but there was

still a lack of real experience on which to make definitive judgments.- /

I/

The reference was to a memorandum from Mr. Rouse dated August 18,

1961, and an attached memorandum of August 11 from the New York

Bank's Market Statistics Department.

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8/22/61

Personally, he felt that it

the discretion it

would be a mistake to remove from the Desk

now had under the current authorization.

toward the position that it

He leaned

was not necessary under present conditions

that the bill rate be maintained at present levels at all costs.

He

saw no reason why the bill rate could not fall to 2-3/8 or even 2-1/4

per cent, if need be, provided the Account could obtain bills without

seriously upsetting the market.

However,

he saw no reason at this

point for the Committee to get itself back in the box, in which it had

been for so long,

that it

of being inflexible to the extent of taking a position

would not deal across the board even though the deals, when

available across the board, were in reasonable relation to the market.

Everyone, he noted, could take the currently available data and read

it

differently.

Mr. Robertson, for example,

had interpreted the

information in the memoranda from the New York Bank a little

than he would have interpreted it,

have read the memorandum correctly.

differently

but he (Chairman Martin) may not

In any event, he felt that

everyone should study and evaluate data of this kind very carefully.

He had been talking to a number of people in the market, and there were

evidently some difficulties in the special operation, but he had not

reached the point where he would want to make a judgment.

would prefer to keep an open mind.

Instead, he

He felt, certainly, that the

Committee ought to renew the special authorization at the present time

8/22/61

-55

and continue the discretion placed in the Manager of the Account.

At

the same time, the Manager should understand that the intent was not

just to engage in

holding the bill

operations in

longer-term securities for the sake of

rate up to any preconceived level.

That, he thought,

was essentially where the majority of the Committee stood this morning.

In response to a question from the Chairman, Mr.

that his position, as stated earlier during

to terminate the special authorization,

operations under it

King clarified

, e meeting, had not been

but rather to disengage from

for the time being.

Chairman Martin then inquired whether it

Committee would renew the special authorization,

Robertson dissenting.

was agreed that the

with Messrs.

Allen and

and there were no comments to the contrary.

Accordingly, the Committee authorized

the Federal Reserve Bank of New York, between

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 securities of any maturity,

or to change the holdings of such securities,

in an amount not to exceed $500 million.

Votes for this action: Messrs. Martin,

Balderston, Irons, King, Mills, Swan, Wayne,

Votes against this action:

and Treiber.

Messrs. Allen and Robertson.

It

was agreed that the next meeting of the Committee would be

held on Tuesday, September 12,

1961.

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8/22/61

Chairman Martin commented that he would be leaving shortly

after the date of the next meeting to attend the Fund and Bank meetings

in Vienna, and in those circumstances, particularly, he thought it

might be useful to put on the agenda for general discussion at the

September 12 meeting the subject of Federal Reserve holdings of foreign

currencies.

He noted that there had been distributed to the members

of the Committee and the Presidents not currently serving on the

Committee copies of a memorandum from Mr. Young dated June 16,

(as corrected June 26),

1961

along with a memorandum dated June 16 from

Mr. Furth of the Board's staff, and that there would also be distributed

copies of a letter dated July 21, 1961, from the Federal Reserve Bank

of New York commenting on Mr. Young's memorandum.

The meeting then adjourned.

Secretary.

TOTAL RESERVES AVAILABLE TO SUPPORT PRIVATE DEPOSIT EXPANSION, SEASONALLY ADJUSTED

ACTUAL VS. 5 PER CENT AND 3 PER CENT ANNUAL GROWTH RATES, MARCH I - AUGUST 16, 1961

BILLIONSOF

DOLLARS

19.5

5 PER CENT

_____

ANNUAL GROWTH RATE

SINCE MARCH 1

,19.

"19.3

ACTUAL--

19.2

3 PER CENT

ANNUAL GROWTH RATE-----

--- 19.0

90.

------------

is

..

1

8

15

MAR.

22 29

5

12

19 26

APR.

9

189

--

3

10

17

MAY

24 31

188

7

14

21

JUNE

28

5

12

19 26

JULY

2

9

16 23 30

AUG.

6

13

20 27

SEPT.