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,

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

September 12, 1961, at 10:00 a.m.

Martin, Chairman

Allen

Balderston

Irons

King

Mitchell

Robertson

Shepardson

Swan

Wayne

Treiber, Alternate for Mr.

Hayes

Messrs. Ellis, Fulton, and Deming, Alternate Members

of the Federal Open Market Committee

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

Federal Reserve Banks of Philadelphia, Atlanta,

and Kansas City, respectively

Mr. Young, Secretary

Mr. Sherman, Assistant Secretary

Mr. Kenyon, Assistant Secretary

Mr. Hackley, General Counsel

Mr. Thomas, Economist

Messrs. Baughman, Coldwell, Einzig, Garvy, Noyes,

and Ratchford, Associate Economists

Mr. Rouse, Manager, System Open Market Account

Mr. Molony, Assistant to the Board of Governors

Messrs. Holland and Koch, Advisers, Division of

Research and Statistics, Board of Governors

Mr. Knipe, Consultant to the Chairman, Board of

Governors

Mr. Yager, Economist, Government Finance Section,

Division of Research and Statistics, Board of

Governors

Messrs. Eastburn, Hostetler, Parsons, and Tow,

Vice Presidents of the Federal Reserve Banks

of Philadelphia, Cleveland, Minneapolis, and

Kansas City, respectively

-2

9/12/61

Mr. Anderson, Financial Economist, Federal Reserve

Mr.

Bank of Boston

Stone, Manager,

Securities Department,

Federal Reserve Bank of New York

Mr.

Brandt, Assistant Cashier, Federal Reserve

Bank of Atlanta

Mr. Bowsher, Economist, Federal Reserve Bank of

St. Louis

Chairman Martin noted that Mr. George W. Mitchell, who took his

oaths of office as a member of the Board of Governors and as a member of

the Federal Open Market Committee on August 31, 1961, was today attending

his first

meeting as a member of the Committee.

Chairman Martin also noted that according to his present schedule

he would be absent from the next two meetings of the Committee.

For one

of those two meetings, Vice Chairman Hayes also expected to be absent.

Accordingly, in

the anticipated absence of both Mr.

Hayes and himself,

Chairman Martin suggested that it be understood that Mr. Balderston would

preside at the Committee meeting in question.

it

No objection being indicated,

was so understood.

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Committee

held on August 22, 1961, were approved.

Upon motion duly made and seconded, and

by unanimous vote, Mr. Ernest T. Baughman

was elected to succeed Mr. Mitchell as an

Associate Economist to serve until the election

of a successor at the first

meeting of the

Federal Open Market Committee after February 28,

1962, with the understanding that in the event

of the discontinuance of his official connection

with the Federal Reserve Bank of Chicago, he

would cease to have any official connection with

the Federal Open Market Committee.

9/12/61

Before this meeting there had been distributed to the members

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

August 22 through September 6, 1961,

and a supplemental report covering

the period September 7 through September 11, 1961.

Copies of these

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

In supplementation of the written reports, Mr. Rouse made the

following comments:

Open market operations supplied a large volume of reserves

to the market--$699 million on a delivery basis--since the

last meeting of the Committee. These reserves offset heavy

drains stemming from changes in currency, float, and gold and

foreign accounts.

All of these reserves were supplied through outright

purchases of securities, and by last Wednesday the System

Account portfolio amounted to $27.8 billion--the highest it

has ever been. Of the $699 million increase in System holdings

since the last meeting, $660 million was in Treasury bills.

This brings the bill portfolio to $2,8 billion, $166 million

above the level of last February 17, the day prior to the

beginning of operations outside the short-term area. Our

purchases were partly responsible for bringing bill rates

down to about 2.30 per cent in the case of the 91-day issue.

However, our bill portfolio will decline by $144 million on

Thursday, since we bid in the auction yesterday to run off

our holdings of this week's bills. In addition, if reserve

projections are borne out we will have a sizable amount of

selling to do in the next statement week, but we hope to sell

as many coupon issues as we can, while holding our bills.

These sales should result in higher bill rates, which might

well be helpful in view of our deteriorating international

position. However, as a more general matter, I doubt whether

such higher bill rates can be maintained if free reserves

should remain in the $500-$600 million range.

The approach of the Treasury's financing program, and

later the program itself, were the center of attention in the

market during the recent period. The terms of the advance

refunding are regarded as generous by the market and the

program as a whole has received generally favorable comment.

Although ideas have not yet begun to jell as to how many of

the $7.6 billion of the "rights" outstanding might be exchanged,

9/12/61

there is no reason, barring some unforeseen development, why

the size of the turn-in should not be satisfactory.

I might

point out, in this connection, that in the advance refundings

held last March and September, about 31 per cent of public

holdings of the "rights" were exchanged.

The System's holdings of the two "rights" total $700

million--$562 million of the 2-1/2's of 1965-70 and $138 million

of the 2-1/2's of 1966-71. We hold $10 million of the 3-1/2's

of 1980, $41 million of the 3-1/2's of 1990, and $5 million of

the 3-1/2's of 1998. I see no reason for the System to exchange

any of its holdings of the "rights", and plan no exchange. We

have been informed, incidentally, that Treasury trust accounts,

which currently hold somewhat over $1-1/4 billion of the "rights",

plan to exchange up to $1 billion of such holdings.

The balance of the Treasury's financing program calls for

the raising of $5 billion in cash between now and mid-October.

This came as no surprise to the market, except perhaps for the

size of the June tax anticipation bill, which some had expected

would be larger than $2.5 billion. The Treasury indicated to

the press that except for the possibility of borrowing small

amounts from time to time, the program announced last Thursday

may be sufficient to meet the Treasury's cash needs for the

remainder of the calendar year. Whether events will turn out

this way depends upon a number of factors, including the

Treasury's decision as to whether it will handle the $7 billion

Even if

November 15 maturity on a cash or an exchange basis.

additional cash financing this year is avoided, indications

are that the Treasury will be in the market shortly after the

new year begins. Our own projections, for example, show a

need for about $3 billion in new cash by mid-January. The

heavy schedule of Treasury financing over the balance of the

year thus affords only brief intervals for overt policy action

by the System.

In response to a question, Mr. Rouse said there should be a period

in the latter part of October when the Treasury financing schedule would

permit overt policy action if the System so desired.

There might also

be such a period in the Thanksgiving-Christmas area.

Chairman Martin said he thought the only completely clear period

might be in late October.

November 2, if it

The Treasury apparently could delay until

wished, the announcement on its

November refunding.

-5

9/12/61

Mr. King inquired concerning the yields available under the terms

of the advance refunding,

to which Mr. Rouse replied that the cost of the

extension to the Treasury would be in

the range of 4-1/4 to 4-3/8 per cent.

The yield to the present holders of securities eligible for exchange would

be in the area of 4.16 to 4.20.

Thereupon, upon motion duly made

and seconded, the open market trans

actions during the period August 22

through September 11, 1961, were

approved, ratified, and confirmed.

Mr. Noyes presented the following statement on economic developments:

Economic developments, such as current movements in things

like retail sales, production, employment, and prices, seem

relatively unimportant in the total complex of events of recent

weeks. The resumption of bomb testing in Russia, the continued

tension in Berlin, the labor negotiations in the automobile

industry, and the prospects for a price increase in steel all

seem to loom much larger than the fact that unemployment remained

at 6.9 per cent of the labor force, department store sales were

substantially unchanged from July to August, production was

probably up another point on the index, or that wholesale prices

have continued their sidewise movement, as consumer prices rose,

due largely to an increase in food costs. Even our estimate of

GNP for the current quarter, at around $527 billion, seems stale

as Government officials and others focus attention in their

public statements on such figures as a $54O billion GNP by year

end, or $575 billion by the end of next year. The Federal

deficit for fiscal 1962 even seems to have become yesterday's

news as public discussion focuses more and more on whether we

are likely to achieve the balance predicted by the President

and the Secretary of the Treasury for fiscal 1963.

While it goes without saying that one must avoid being

unduly influenced by the dead hand of the past, it is equally

important not to lean too heavily on projections and forecastsno matter how carefully contrived--in shaping current policy.

It is perfectly proper to speculate on the future course of

economic events and to project, either by highly technical

mathematical manipulations or long practice, past experience

into the future.

For some sorts of policy planning, estimates

-6

9/12/61

However, it takes

or projections of this kind are unavoidable.

only a little familiarity with the heroic assumptions involved

to make clear that it is futile to speculate now as to whether

or not a GNP of $575 billion in the fourth quarter of 1962 is

"inflationary", and it certainly would be foolhardy to be

influenced in current policy formation one way or the other

by such an exercise.

All this is by way of a rather lengthy prologue to, and

apology for, a very brief and undramatic report on current

Frankly, there is nothing in current data, most

developments.

of which relates to the month of August, which calls for

modification of the earlier generalization that the recovery

has progressed rapidly, carrying almost all indicators to above

their previous peaks but without evidence of excessive exuberance.

Some stimulation from added defense expenditures appears to be

just about offset by a lower level of consumer spending than

might ordinarily be expected at this stage of the cycle.

In addition to the facts about production, employment,

prices, and retail sales that I have already mentioned, further

evidence of this rough balance can be found in the rise of both

exports and imports in July, in the Commerce - S.E.C. report,

released today, rf a very moderate upward revision of plant

and equipment expenditure plans, and in the strong but not

atypical behavior of manufacturers sales and orders.

The likelihood that labor negotiations in the automobile

industry will be settled without a prolonged strike adds to

the stability o the current situation, whatever the longer

In addition to the

run implications of the settlement may be.

wholesale and consumer price indexes already mentioned, sensitive

industrial material prices have shown little change recently.

Consumer credit outstanding, which declined in July, appears

likely to decline again in August.

At the same time,

the Treasury has announced,

as was antici

pated, a program to borrow over $5 billion of cash in the next

month or so. looking further in the financial area for clues,

the situation is much the same, with bank credit expansion just

about seasonal. Stock prices have been fluctuating in a rela

tively narrow range, after their rapid run-up in the spring and

early summer, With the money supply remaining almost constant,

seasonally adjusted demand deposit turnover has declined a little

since May, which is quite unusual for a period of vigorous

expansion in

GNP.

One might argue, on the one hand, that were it not for the

increasing stimulus provided by the public sector, the recovery

might be less vigorous--perhaps even in jeopardy. On the other

hand, it is argued that the vastly increased liquidity of the

economy, especially in the hands of consumers, constitutes a

9/12/61

sort of powder keg of potential spending, which could be

touched off by a very slight shift in peoples' psychological

attitudes.

My point, in summary, is that up to the present

time there is no evidence to suggest that stimulus from public

sector will be withdrawn, or even reduced, nor of a dramatic

increase in consumers' spending or expressed intentions to

spend. Hence, it appears that the precariously balanced

upward movement in the economy, which has prevailed for some

months, is being maintained.

Mr. Koch presented the following statement on credit developments:

Outstanding commercial bank loans and investments

This followed a large increase

declined somewhat in August.

in July, due in the main to Treasury financing operations.

The course of bank credit developments over the summer months

is always greatly affected by the size and timing of Treasury

financing operations, since loan demands normally show little

seasonal change on balance.

Business borrowing from banks, however, the most volatile

element in the loan portfolio, normally begins to pick up in

August and early September, and this year's rise has thus far

less.

been of about seasonal proportions or possibly a little

The heavy seasonal borrowers like food processors, commodity

dealers, and trade outlets are beginning to come into the

banks.

One aspect of the business loan picture that has struck

me these last few months has been the large amount of gross

new borrowing despite the relatively moderate change in the

net volume of loans outstanding.

Whereas many firms are

borrowing from banks, a large number of others are repaying

bank debt, to some extent in the case of the larger firms

with the proceeds from security financing. This large

volume of gross new business borrowing from banks probably

reflects in part the larger than seasonal increase in

inventories that has occurred since March.

Turning to the capital markets, new corporate bond

financing fell off sharply in August, more than would have

The September calendar has also

been expected seasonally.

been light so far, but it is expected to pick up later in

Stock financing in recent months has been low

the month.

in dollar volume but high in number of participants, indi

cating the increased availability of equity money to smaller,

and possibly newer, concerns. New municipal and mortgage

financing has continued in fair volume throughout the summer

months.

9/12/61

As for the nation's liquidity, the money supply, narrowly

defined to include only currency and demand deposits, changed

The rise in

in August for the fifth straight month.

little

time and savings deposits at commercial banks, particularly

that in time certificate form, slackened slightly in August

after having maintained a sharp 15 per cent seasonally adjusted

annual rate of increase earlier in the summer.

You may also

have noted that withdrawals in savings and loan associations

were particularly heavy in July, the latest month for which

such data are available, and that outstanding shareholdings

declined for the first

time in several years. Withdrawals

are normally heavy in July, however, so on a seasonally

adjusted basis the drop merely meant that the rate of growth

of savings and loan shareholdings dropped off somewhat.

Insofar as the liquidity of financial institutions is

concerned, I was struck, on reviewing financing developments

again after several weeks away from the data, by the recent

sharp increase in the secondary reserves of commercial banks,

by which I mean their holdings of Government securities matur

ing under a year. The ratio of these holdings to deposits has

increased to over 12 per cent, up sharply from earlier in the

year and now at the highest level since mid-1954.

Entering as we are on a period of at least 18 months of

large-scale Treasury financing, a large part of which will of

necessity have to be in short-term form, the liquidity of

commercial banks would likely increase considerably further

in coming months unless bank credit expansion is restrained.

In that case, somewhat higher short-term interest rates would

no doubt be needed to induce a larger volume of nonbank invest

The loan-deposit

ment in short-term Government securities.

ratio of all commercial banks considered as a group continues

only two percentage

quite high and at 55 per cent is still

points below its recent high reached in the middle of last year.

Turning to bank reserve positions, free reserves averaged

about $475 million last week after three weeks during which

they approximated $550 million. Last week was a week of low

float, however, so the lower free reserve average was accompanied

by as easy money market conditions as had characterized the

earlier weeks.

In terms of total reserves, or more precisely seasonally

adjusted reserves available for private deposit expansion, the

situation has not changed materially over the three weeks since

the Committee last met. Such reserves have shown practically

no change on balance over this period, averaging about $19.2

billion in both of the weeks ending August 16 and September 6.

9/12/61

Looking ahead, the projections of both the staff of the

Federal Reserve Bank of New York and that of the Board suggest

free reserves between $550 and $600 million again this week.

In the following two weeks, market forces, unless their effect

is offset by System action, would tend to increase such reserves

markedly, mainly as a result of the mid-month rise in float,

Only in the final week of the coming interval between meetings

of this Committee will the Desk be likely to have to supply

reserves to the banking system. Late in September and early

in October, market forces, including payment for purchases of

the new tax anticipation bill,

could utilize as much as $700

million of bank reserves.

In considering what open market operations would be most

appropriate for this Committee to adopt for the coming three

week period, it is of relevance to note that since mid-June and

possibly since even earlier in the spring, we have experienced

a rather sustained, if slight, downdrift, or at least sidewise

movement, in most broad banking and money measures, that is,

in total commercial bank credit outstanding, total deposits,

money supply narrowly defined, and total reserves regardless

of how defined. This has happened with average weekly free

reserves varying in a range of between $400 and $600 million,

with the feel of the market being generally quite easy, and

with the Federal funds rate below two per cent most of the

time.

On the face of it, these developments might call for

some further easing in policy in the weeks immediately ahead.

Two circumstances have to be weighed before reaching such

a decision. In the first place, international developments

are in a state of crucial flux, domestic economic conditions

are on a steady rise, and Government fiscal policy is adding

Seasonal private

materially to exansionary market forces.

loan demands and Government short-term borrowing will be

potent factors for bank credit and monetary expansion through

out the rest of the year, particularly in the next few weeks.

These developments all call for caution in easing credit and

monetary policy further at this time.

Secondly, the fact that the Treasury will be in the market

with new cash and refinancing ventures throughout the entire

three-week period prior to the next meeting of the Committee

normally calls for maintaining an even keel in monetary policy.

Some slight easing action, however, has occasionally been

followed in periods of Treasury financing in the past and such

action would not likely be either unfair or misleading to market

participants or the Treasury if adopted currently.

All this adds up in my mind to maintaining the status quo

in open market policy over the next three weeks, but being

9/12/61

especially alert to the fact that market developments,

particularly on the expansionary side, could develop quite

suddenly, thus requiring prompt re-evaluation of the

appropriateness of current policy.

Mr. Young presented the following statement on the balance of

payments and related matters:

The disturbingly large transfer of gold and dollars from

the United States to foreigners in July, reported to you at

the last meeting, now appears to have been mainly accounted

for by temporary factors.

These include an extra large

outward capital movement, a reduced trade surplus, reflecting

especially a big, contraseasonal rise in imports, and the

seasonal increase in tourist expenditures.

It is all too easy to over-emphasize and over-rationalize

the temporary causes of any swing in our payments balance from

the less adverse to the more adverse, and to conclude that the

payments balance is really not so grievous a problem after all.

The fact of the matter is, however, that our background is one

of a decade of sizable deficits and, in consequence of the

cumulation of these deficits, a diminishing margin of monetary

reserve protection. Accordingly, any swing from smaller to

larger deficit, even if temporary, must be viewed with concern.

At the same time, the balance-of-payments situation must

not be allowed to get out of focus. According to very prelim

inary indications of the New York Reserve Bank's flash report

on U. S. transfers of gold and dollars to foreigners for August,

the U. S. balance of payments for the latest month must have

been in close balance. Projection for September and the

remaining months of this year is nothing but guesswork. As of

the moment, our best guesses suggest further deficit, but not

of alarming size unless aggravated by adverse confidence

developments that activate outflows of short-term funds.

The reduced trade surplus mentioned above was the result

of a rise in imports more than offsetting a marked recovery in

exports. Imports on a seasonally adjusted basis rose a full

16 per cent, the largest rise in any single month in the postwar

period. It seems doubtful that a rate of increase of this size

can be sustained. Exports also rose significantly on a seasonally

adjusted basis, and regained a $20 billion annual rate, about

$1/2 billion higher than in April and May.

The demand situation

continues favorable in Europe and elsewhere for U. S. exports,

and while the gains ahead may fall well behind those of imports,

they should still

contribute positively to holding down our

balance-of-payments deficit.

9/12/61

-11-

It is too early, of course, to evaluate the recent

measures taken by the United Kingdom to correct its chronic

deficit in its basic balance of payments. The spot pound

has strengthened considerably but the forward pound remains

at a sizable, though moderately reduced, discount. In July,

the trade deficit decreased modestly further, but mainly

because of reduced imports.

In August, curbs on outward

capital flows showed signs of taking effect. In addition,

the IMF drawing strengthened U. K. reserves and made evident

to those short of sterling the risks in their positions. In

August, some inflow of investment funds and reflow of short

term funds to London apparently occurred to take advantage

of the high levels of British interest rates.

The wage pause that the British are endeavoring to

enforce is of particular interest. So far, its strict

enforcement has been limited to the public sector and to the

minimum wage categories of the private sectors which have to

have Government approval.

A major test looms up later this

year when wage claims for railway and mining workers in the

public sector and for the engineering trades in the private

sector will come to a head.

In August, the monetary reserves of Germany continued

the decline which had set in in July. Since the basic

balance on current and recorded long-term capital account

remains in surplus, the main influence appears to be the

withdrawal of foreign funds invested in Germany on a short

term or on a speculative investment basis.

The Bundesbank, despite the outflow of foreign funds,

has pressed ahead with an easy, or still easier, monetary

policy. Comparable money rates recently have either been

as low or only moderately higher than in the U. S. Meanwhile,

commodity prices in German wholesale and retail markets have

remained fairly stable, but wage costs have been showing

marked increase--about twice that of the increase in labor

productivity.

The French accumulation of gold and foreign exchange

reserves has been on an ascending scale--amounting to nearly

Since the trade

seven months.

$900 million for the first

account has been in approximate balance or moderate surplus,

an exceptional capital inflow and, more recently, better than

usual tourist receipts appear to provide the explanation.

Because of the large foreign exchange accumulation, the French

authorities repaid in August the remaining debt to the

European Payments Union creditors amounting to a little

over

$300 million.

9/12/61

-12-

Resurgence of Canadian economic activity and decline in

Canadian unemployment is now well confirmed by current economic

data.

In recent months, the Bank of Canada has aggressively

promoted easy credit conditions, including active purchasing

Bond yields have been

in the long-term sector of the market.

held stable at just under 5 per cent and money rates have

declined to levels close to those in New York.

In the meantime,

monetary expansion has attained a pace that appears very rapid

by Canadian historical standards--an annual rate of 15 per cent

or so.

The Canadian dollar has been showing only slight

variation around the level of 97 cents.

Apparently this level

has been holding without official support. At the bargain rate

for Canadian dollars, there has apparently been active buying

of Canadian securities by Americans.

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

business outlook and credit policy:

Since the last meeting of the Committee the international

This development implies

political situation has worsened.

still further increases in spending for defense. It increases

the possibility of a more rapid step-up in business and con

sumer spending; it increases the possibility of the emergence

So far, however, there is no

of a speculative psychology.

discernible evidence that the trend of the economy or of public

psychology has changed significantly.

While the over-all expansion of economic activity is

continuing at a healthy rate, there are no clear signs of an

lagging and

Consumer spending is still

acceleration in pace.

surveys of consumer buying intentions point to a continued

cautious attitude. Business inventory building appears to be

moderate and in line with the current stage of the business

cycle, and there is nothing in current loan data or in reported

inventory plans to suggest a very rapid inventory build-up in

operating

The economy is still

the immediate period ahead.

considerably below capacity in terms of both labor force and

physical plant.

What is the probable trend of prices? The increases in

July in the consumer price index and the wholesale price index

were dominated by seasonal advances in the prices of food and

farm products, and do not seem to reflect a sudden shift in

the forces of supply and demand.

The expansion in over-all

economic activity that now appears in prospect is unlikely to

9/12/61

-13-

create any strong and general price pressures from the demand

side in the immediate future. Yet we cannot be complacent

about prices. There is the highly important question as to

whether there will be a strong upward push on prices from the

cost side, resulting from wage increases in the steel and

auto industries and other wage increases growing out of wage

negotiations in other industries.

While we do not know the full import of the proposed

arrangements between the United Auto Workers and American

Motors Corporation and General Motors Corporation, the

settlements related to pay seem generous.

Increased fringe

benefits add importantly to costs as do increases in direct

wage rates,

The total increases seem to be well above the

average improvement in productivity throughout the economy.

Increases of such size tend to lead to increases in wage rates

in other industries regardless of the extent to which produc

tivity in those industries may have increased; this is of

special significance for the service industries.

It seems

to me that the cost of living is bound to rise unless some

of the benefits of increased productivity are shared with

consumers through some reduction in prices or improvement in

quality of manufactured goods. The prospects of such sharing

are dim. Public and Government pressures in this direction

would be welcome.

The bank credit picture has changed little in recent

weeks. The large drop in August in loans and investments at

the weekly reporting member banks was associated with a large

drop in bank holdings of United States Government securities

and security loans--a logical aftermath of the upsurge in

July in connection with large Treasury borrowing.

In contrast,

business loans showed only moderate strength.

Consumer loans

and loans to finance companies increased somewhat in August.

Bank liquidity continues to be satisfactory.

The recently announced Treasury financing will result in

increased bank loans and investments, and in due course the

newly created deposits will find their way into the private

spending stream. The Treasury's advance refunding has been

favorably received; it has been viewed as tangible evidence

of the desire of the Treasury to pursue a conservative debt

management program. Since the Treasury is now engaged in a

large and complex financing program, an "even keel" in the

money market is desirable.

While international political and military tensions have

been increasing, our international financial position has been

deteriorating.

Our trade surplus has declined greatly compared

with the first quarter of 1961. With further economic expansion

9/12/61

at home and less ebullient economic activity abroad, our

imports are likely to rise much more quickly than our exports.

Our balance-of-payments problem is as serious as ever. We

have two major jobs to do and several minor ones.

As a

country we must strive with all our power to keep our costs

down; success in this respect will promote stability at home

We must persuade the more developed

and strength abroad.

countries of the western world to assume a larger portion of

expenditures abroad for defense and economic aid. The solution

will not come soon; it will not come easily. Meanwhile, we are

vulnerable to substantial demands upon us for gold.

Since the last meeting of the Committee the price of gold

has risen further in the London gold market, attaining about

$35.20 per ounce. As international political tensions increase,

the demand for gold is likely to rise further.

Capital flows

between foreign centers may increase the demand upon us for

gold if the receiving country follows the practice of keeping

a larger portion of its reserves in gold than does the country

no great monetary

experiencing the outflow. While there is still

incentive to move funds from New York to London on a covered

interest arbitrage basis, the advantage in such a movement may

increase. As the British succeed in their present stabilization

program--and we hope they will--there will be increased incentives

to move funds from New York to London on an uncovered basis. A

year of exploratory negotiations on possible ways to strengthen

the international financial system has pointed up the many com

Confidence, especially international

plexities to be resolved.

confidence, is a fragile flower. We must be constantly alert

so to conduct our monetary and fiscal affairs that we provide

no basis for those abroad to raise questions regarding the

ultimate soundness of the dollar.

A policy of monetary ease is still

called for. At the

same time there is an intensification of the need for alertness

to developments that may call for a shift in policy. The risk

that economic expansion will falter has receded further while

the danger of rapid deterioration in the international financial

position of the United States has increased.

Thus it is even

more important now than it was a few weeks ago to pay special

attention to international considerations and resolve doubts on

the side of less ease.

Higher short-term interest rates should be encouraged.

The rate on three-month Treasury bills, the bellwether of short

term interest rates, is now below 2-3/8 per cent, the midpoint

of the 2-1/8-2-5/8 per cent range that has existed over the last

year. We think that domestic and international developments make

9/12/61

-15

it desirable that the rate be in the upper part of that range.

A rise in the Federal funds rate also seems appropriate. 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. To

achieve these results, less attention should be given to the

precise level of free reserves.

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.

Nor would we suggest a

change in the directive, which was revised at the last meeting

of the Committee.

Mr. Ellis said the few available statistics for August on business

conditions in the First District suggested that the recovery was proceeding.

However, the trend could not be characterized as vigorous.

According to

the statistics, there had been an interruption of the recovery trend in

July; production figures declined and despite higher electric power output

the level was below that of a year earlier.

The textile industry appeared

to be coming to life, with civilian demand strengthening and military

procurement rising, while shoe production was running 5 per cent below

1960.

Slower sales had caused some factories to hold back price increases,

but it

was still

hoped that sales would be strong in the fall.

A large

newsprint producer who had been looking for an opportunity for some time

to increase prices so as to catch up with wage increases now found his

competitive position affected by the decline in

to construction, July is

the Canadian dollar.

As

usually a weak month in New England and this

year had been no exception, with the total down 13 per cent from a year

ago.

Total nonagricultural employment,

seasonally adjusted, rose slightly

in July and about matched year-ago levels, but most manufacturing industries,

9/12/61

-16

along with transportation and public utilities, were employing fewer

people than a year earlier.

Consumer spending was fairly good, with

auto sales fair and department store sales quite vigorous.

The

latter had exceeded year-ago levels in all but one week since May.

Perhaps the District's recovery movement was showing up

best in the financial statistics, Mr.

Ellis said.

For the year to

date, business loans at weekly reporting banks were up about 4 per

cent compared with a decline of 2 per cent for the country as a

whole.

The level of total deposits had held about even during the

past four months, with the result that the average loan-deposit ratio

was up two points from 64 to 66 per cent, whereas the comparable ratio

for the country as a whole showed a drop of two points to 60 per cent.

The New England average was influenced somewhat by the fact that one

large bank had a ratio of 71 per cent.

While the growth of total

deposits was disappointing, demand deposits had been doing well.

Even since the April peak for the nation, they had continued to grow

in New England.

The monthly survey of mutual savings banks indicated

that 11 out of the 80 banks in

the survey reduced their average mortgage

lending rate by 1/4 per cent from June to July.

Turning to policy, Mr. Ellis said the reports from the Account

Manager indicated that the Desk had succeeded in

when it

weathering a period

was necessary to supply large quantities of reserves without

upsetting the market or interest rate levels.

Staff projections for

9/12/61

-17

the next three weeks suggested that offsetting actions of the kind

undertaken in the past period would have to be reversed to avoid

developing an excessive degree of ease during the Treasury financing

period.

He felt that the Committee had established a satisfactory

and correct stimulative policy and degree of ease, and that it

should

endeavor to maintain the status quo during the ensuing three-week

period.

This would mean preserving the current targets with respect

to total reserves, as shown in the staff projections,

free reserves at existing levels.

and maintaining

In his opinion it would be desirable

to maintain contact wth the longer-term market, and therefore he would

renew the special authorization.

He saw no need to change the directive

or the discount rate at this time,

Mr.

Irons noted that, according to current reports, the Eleventh

District was sustaining considerable damage from Hurricane Carla.

for this developmert, however,

along fairly satisfactorily.

Except

conditions in the District had been moving

Various measures,

such as industrial

production, employment, and petroleum production and refining, were

all moving upward on a satisfactory and sound basis.

There had been

an increase in retail trade recently, perhaps reflecting to some degree

anticipation of the Texas sales tax that became effective the first of

September.

The damage caused by the hurricane seemed certain to run

into large figures; the rice crop probably had been wiped out.

A good

part of the cotton narvest was probably in, but there seemed some

-18

9/12/61

likelihood of heavy damage to the citrus crop.

However, agricultural

conditions in the western part of the State hadbeen good and the

cotton situation in

the southern plains area was favorable.

As to District banking developments,

in gross loans,

gain in

there had been an advance

some liquidation of investments,

deposits, both demand and time.

and a fairly substantial

From the standpoint of liquidity,

the condition of the banks was about the same as it

was virtually no borrowing from the Reserve Bank.

had been, and there

Federal funds trans

actions had been showing an excess of purchases over sales for District

banks as a whole, but the situation in Houston was completely different

from that in

Dallas,

the Houston banks being consistent sellers and the

Dallas banks consistent buyers.

Turning to policy, Mr. Irons expressed himself as satisfied with

developments during the past three-week period.

In his opinion, neither

current or prospective economic developments suggested a need for further

easing, and the Treasury was in

the market.

Therefore,

he would recommend

continuing about the same degree of ease that had prevailed, with any

deviations on the side of mild firmness rather than additional ease.

This would suggest a bill rate in

the range of 2-3/8 - 2-1/2 per cent,

with the Federal funds rate running from about 2-3/4 per cent down to

about 2 per cent and free reserves in

the area of $450-$500 million.

He would favor continuing the special authorization covering operations

in longer-term securities,

and he would not recommend a change in

discount rate or the directive.

the

9/12/61

-19

Mr.

Swan said that he found few, if

any, significant changes

in the Twelfth District data that had become available since the

previous Committee meeting.

Nor did there seem to have been any

significant change in business attitudes in the District since that

time.

On balance,

there appeared to be some continuing improvement,

but it was not notably vigorous.

In brief, there had been little or

no intensification of the gradual upward movement.

ment moved up a little

In August, employ

in California, the only State in the District

for which August figures were yet available, and based on employer

hiring schedules a slightly more than seasonal increase in employment

might be expected in September.

There was no particular evidence of pressure on the availability

of bank credit at the major District banks, Mr.

Swan said.

The banks

seemed to have funds to offer, and borrowing from the Reserve Bank had

been negligible.

On the other hand, during the past few weeks two

large savings and loan associations in San Francisco found themselves

much tighter than they had anticipated due to a somewhat lesser flow of

funds from their shareholders during the summer and some pickup in the

demand for real estate credit.

unexpected development,

This was indicated to have been a rather

and he was not prepared to say whether it

was

of general significance.

As to policy, Mr. Swan said he recognized the various possibilities

of some increase in credit demands that might have to be checked.

It

-20

9/12/61

seemed to him, however, that at the moment these remained only

possibilities.

One indication of such a development would be a surge

in consumer spending, but no such surge had occurred as yet.

He

recognized also that the effects of fiscal policy in all probability

would be expansionary in

immediately ahead,

the several months ahead.

however,

As to the period

even apart from the fact that the Committee

would be circumscribed by the Treasury financing program, he saw no

reason for positive action to change monetary policy in

of tightening.

Instead, it

the direction

seemed to him that the Committee should

continue about the present policy.

To him, that would mean a bill rate

from 2-1/4 to 2-1/2 per cent and free reserves ranging from $500 to

If doubts arose, they might be resolved on the side of

$550 million.

less rather than more ease.

He would recommend no change in the discount

rate or the directive, and he would continue the special authorization.

Mr.

Deming said that a brief statement of recent Ninth District

economic developments would be "more of the same."

mining,

Except for iron

general nonagricultural activity was moving about in

the nation.

line with

In July, District nonfarm personal income was 4.1 per cent

ahead of July 1960, about the same as the national gain of

,.2 per cent.

On the other hand, District agriculture continued to suffer from the

effects of drought and net farm income in July was 6.5 per cent below

a year earlier.

Thus the District gain in total personal income from a

year ago had been only 2.8 per cent against the national gain of 4.2 per

cent.

-21

9/12/61

One indication of somewhat lesser strength in the District than

nationally was to be found in the forecast of the Minneapolis employment

authorities for employment in the Twin Cities area, which showed an

estimated gain of 5,500 jobs from July to November.

In the same period

last year there was no gain, but in 1958 the gain was 12,000 and in the

like period of 1954 the gain was about 18,000.

Mr. Deming commented that the District banking situation remained

about the same as it

had been.

During the past three weeks,

he said, the

Reserve Bank had been doing some intensive work on bank loan prospects

over the balance of 1961.

Loan officers saw loan demand as being no more

than normal during this period,

although some of them believed there might

be some shift to direct bank loans from commercial paper financing.

Thus

far, they saw little borrowing for inventory.

As to policy, Mr. Deming said that for the next three weeks he

felt that quite obviously the Committee should go along on an even-keel

basis.

Even so, however, he agreed with those who had suggested that any

doubts should be resolved more on the side of tightness than additional

ease.

Also, he would agree that the System must be alert to developments.

Particularly during the past three weeks, he had been disturbed by having

heard more and more comments from the people with whom he talked about

the certainty of price increases.

It was being said, for example, that

if one was going to build, obviously that could be done more cheaply now

than two years hence.

Altogether,

there seemed to be more signs in the

air suggesting some increase in belief in the inevitability of more inflation.

-22

9/12/61

While bankers apparently did not foresee any particular increase

in loan demand, Mr.

Deming commented that he did not see how a GNP figure

of $54O billion could be attained by the end of this year without some

increase in bank loans.

Accordingly, he felt that there would be a

strengthening tendency for such loans to increase.

At least, it

would

seem that the rate of bank credit expansion during the latter part of

this year, while perhaps not explosive, might be stronger than generally

expected.

Looking ahead,

whatever it

position, if

therefore,

the System should be alert to do

could so a; to be in a position to move to a more restrictive

necessary, particularly since the periods when there was an

opportunity to move would be limited.

The quality of alertness that had

been mentioned might be even more important in

year than it

would normally.

the latter part of this

As he had said, nowever,

for the next three

weeks there did not seem to be much to do except to proceed along the

same pattern as now being followed,

easier.

although being careful not to be any

He would not recommend changing the directive or discount rate,

and he would favor continuing the special authorization.

Mr. Allen reported that developments the

in

were for the most part, out not altogether,

In the four weeks ended September 2,

Seventh District

of an encouraging nature.

Seventh District department store

sales were 3 per cent higher than last year, an improvement over the

earlier part of the year.

Manufacturers'

shipments of virtually all

types of appliances rose substantially in June and July,

and local

9/12/61

-23

manufacturers advised that this reflected higher consumer sales rather

than inventory building.

in that trend, however,

Furniture manufacturers had not participated

new orders having been substantially below a

year ago throughout the first

seven months.

Reports from the vacation

areas were that spending had been disappointing.

Although total

employment in Seventh District centers was about equal to last year in

July,

employment in

manufacturing was lower in

Most employers expected a moderate increase in

virtually all categories.

September.

District steel makers expected production to reach an annual

rate of 120 million tons in

100 million tons at present.

the fourth quarter compared with about

The talk had been that selective price

increases of 4 to 5 dollars per ton of finished steel would be made

effective after the wage boosts in

price increase in August of 1958,

October.

it

Since the last general

was said that employee costs had

risen $8 per ton, or about 10 per cent, and that effective prices had

declined slightly.

Excellent corn and soybean crops and favorable price trends for

cattle and hogs had improved farm income prospects in the District,

Mr. Allen said.

Turning to automobiles,

he commented that the low sales in

August were attributed to dealer hesitation because of strike possibilities

and to inventory shortages of some models.

On August 31 the stock of new

cars was 663,000--530,000 1961 models and 133,000 1962 models.

It was now

9/12/61

-24

expected that 520,000 cars would be produced in September and 1,800,000

in

the fourth quarter, which would mean total 1961 domestic production

of 5,651,000 automobiles.

The sales forecasts now were 400,000 in

September and 1,600,000 in the fourth quarter, and if

those figures

were realized the year's sales would total 5,581,000--close to the year's

expected production.

Sales of foreign-made cars were not included in

the figures he had quoted, but they were estimated at 375,000 for 1961

compared with 499,000 in 1960.

Seventh District weekly reporting banks showed a relatively

stronger rise in business loans than all such banks in the country,

Over the past three weeks commercial loans at those banks rose $54

million, more than half of the total expansion reported by all leading

city banks together.

This experience was attributable to an increase

in loans to metals firms.

However,

the figures were not large, and

available indicators of bank liquidity suggested that the banks were

in position to handle considerable loan expansion.

banks,

For the money market

short-term liquid assets averaged 20 per cent of deposits compared

with 10 per cent a year ago.

The large Chicago banks had had a basic

surplus position of about $30 million for the past two weeks.

Continuing, Mr. Allen commented that the rise in business

activity was slower in the June-August period than in

the previous three

months, but that this was not surprising for a summer season and there

was much to support the view that activity would continue to rise, and

-25

9/12/61

possibly at a faster pace,

in the remainder of 1961 and in 1962.

the developments which were likely to accompany such an

However,

increase in

activity and which would call for a shift in monetary

policy were not yet in

and for that reason,

evidence,

in

the Seventh District at least,

and also because of the Treasury' s program, he

would favor continuing for the next three weeks that degree of ease

which had prevailed for some time now.

He saw no reason to change the

discount rate or directive and he continued to oppose the special

authorization.

Mr. Clay reported that since midyear, loan volume at Tenth

District weekly reporting banks had shown an increasingly strong

performance.

Loan demand was comparatively weak at District banks,

especially city banks, during the first

half of the year,

although the

recession-induced decline in business and consumer loan volume was not

as pronounced as in the country as a whole.

of weekly reporting banks,

During August, total loans

other than money market and Commodity Credit

Corporation loans, registered the largest increase for the month of any

recent year.

Real estate loans advanced for the fifth consecutive month.

Consumer loans,

however, continued to contract moderately.

Increased

credit requirements of seasonal borrowers appeared to have been the chief

factor in

the rise in business loans.

loans to commodity dealers,

While the largest increase was in

gains were registered in

business loans except trade firms.

all classes of

9/12/61

-26

Mr. Clay characterized developments in the domestic national

economy as continuing to be very encouraging.

weakness in

While the cyclical

credit demand might be over and substantial credit expansion

might appear before the end of the year, bank loans had not yet entered

the period of major cyclical advance.

This was evident from the fact

that the classes of business whose bank indebtedness tends to show the

greatest sensitivity to cycles in

economic activity decreased their

loan volume during August.

In view of the desired expansion in

economic activity and the

needed credit availability for economic expansion, Mr.

it

would be appropriate,

Clay felt that

so far as the private economy was concerned,

for monetary policy to continue in

approximately the same posture as

during the period since the previous meeting of the Committee.

This

policy would provide about the same degree of monetary ease as in the

past three weeks.

it

In view of the international flow-of-funds problem,

also would call for the maintenance of the Treasury bill rate within

the range of recent weeks.

In other words, open market operations that

he would consider appropriate would implement clause (b) of the directive,

as adopted at the August 22 meeting, by "encouraging credit expansion so

as to promote fuller utilization of resources, while giving consideration

to international factors."

The dominant factor during the period ahead,

however, would be the recently announced Treasury financing program.

that reason, the maintenance of what had come to be referred to as an

"even keel" policy was indicated.

This phase of operations need not

For

9/12/61

-27

interfere, however, with the pursuit of the Committee's basic policy

objective of encouraging credit expansion for the private economy.

Mr.

Clay expressed the view that no change was called for in

the discount rate or in

the directive.

He felt that the special

authorization with respect to operations in longer-term securities

should be renewed.

Mr. Wayne said that Fifth District business conditions continued

to improve, with little deviation from the pattern of recent weeks.

Nonfarm employment,

recession high.

seasonally adjusted,

had climbed above the pre

Manufacturing man-hours also had moved up, but fell

short of last season's high.

Textile prices were generally firm, and

the demand for bituminous coal appeared to be a little

by production and shipments.

confidence than previously.

considerable optimism,

ment and trade,

manufacturers'

stronger to judge

Reports from businessmen revealed more

They were appraising the near future with

they commented favorably on the trends of employ

and they reported substantial recent increases in

orders and shipments.

by good growing conditions,

Farmers had been favored generally

and tobacco prices were at record levels.

District banks continued in an easy position, and business loan growth

was stronger than in the nation as a whole.

As to policy, Mr. Wayne expressed the view that the course

followed during the past three weeks had been appropriate.

In the face

of wide swings in market forces, the Desk had done a good job in

close to the targets suggested three weeks ago.

Personally,

holding

he was glad

9/12/61

-28

to see the bill rate decline moderately after the previous rise,

although he would not care to see it

go significantly lower.

Mr. Wayne said he felt that during the past year System policy

had accomplished about all that could have reasonably been expected.

Bank credit had increased something like $13 million during the past

year, which apparently was adequate to meet the needs of the economy.

Over the same period the money supply also increased, but only a little

more than $2 billion.

During the past six years, he noted, the increase

in demand deposits adjusted was only about one-sixth as much as the

increase in bank credit over the same period.

had not remained in

The fact that more deposits

the form of demand deposits seemed to him to indicate

that the public did not need more demand deposits.

It was illogical to

assume that the System could bring about an increase in

by forcing more bank credit on the public unless it

the money supply

was prepared to pay

a price that would be unjustified, particularly in relation to the

international position of the dollar.

The economy was now more liquid

than a year ago, and money could be obtained by reversing the process

that had been going on and converting liquid assets.

In conclusion, Mr. Wayne said that he would not favor changing

the discount rate or the substance of the directive,

and that he would

continue the special authorization.

Mr. Robertson said that both prevailing economic conditions and

the Treasury financing program seemed to dictate an even-keel policy for

the next three weeks.

In the circumstances,

necessary to comment further at this time.

he did not consider it

9/12/61

-29

Mr. Shepardson expressed the view that the general economic

situation called for a continuation of present policy.

On the other

hand, he could not help but be concerned about the present and prospective

levels of Government expenditures and about the continuing and possibly

increasing international tension.

Within the limits imposed by the

current Treasury financing program, it

should lean somewhat toward a little

seemed to him that the Committee

less ease.

Also, it

to changes that could develop on rather short notice.

should be alert

He would favor no

change in the directive at this time.

Mr.

King noted that the balance-of-payments problem was still

could not be solved by monetary policy alone.

serious, but that it

saying this, however,

was not important.

In

he did not mean to infer that the confidence factor

Confidence in

some currency was not only a psychological

necessity but almost a spiritual necessity to an alliance of countries that

believed in free markets.

Any such alliance seemed bound to erode unless

there was some currency in which the countries involved could have reasonable

confidence.

As to current policy, Mr. King expressed the view that a continuation

of the current degree of ease was in order.

of the bill rate in

unnecessary.

He would visualize maintenance

the same area as at present and would consider any rise

Even though prospective selling operations out of the Open

Market Account might produce some tendency in

increase would be as small as possible.

in his opinion be maintained in

that direction, he hoped any

Likewise, free reserves should

the same vicinity as at present.

He thought