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, December 5, 1961, at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Irons
King
Mills
Mitchell
Robertson
Shepardson
Swan
Wayne
Fulton, Alternate for Mr. Allen
Messrs. Ellis, Johns, and Deming, Alternate
Members of the Federal Open Market Committee
Messrs. Bopp, Bryan, and Clay, Presidents of the
Federal Reserve Banks of Philadelphia, Atlanta,
and Kansas City, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. 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. Furth, Adviser, Division of International
Finance, Board of Governors
Mr. Knipe, Consultant to the Chairman, Board of
Governors
Mr. Yager, Economist, Government Finance Section,
Division of Research and Statistics, Board of
Governors
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Hickman, Senior Vice President, Federal
Reserve Bank of Cleveland
Messrs. Coombs, Eastburn, and Tow, Vice Presidents
of the Federal Reserve Banks of New York,
Philadelphia, and Kansas City, respectively
Mr. Anderson, Financial Economist, Federal
Reserve Bank of Boston
Mr. Holmes, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Brandt, Assistant Cashier, Federal Reserve
Bank of Atlanta
Mr. Abbott, Adviser, Federal Reserve Bank of
St. Louis
Mr. Litterer, Assistant Vice President, Federal
Reserve Bank of Minneapolis
Mr.
Before this meeting there had been distributed to the members of
the Committee a report of open market operations covering the period
November 14 through November 29, 1961, and a supplemental report covering
the period November 30 through December 4, 1961.
Copies of both reports
have been placed in the files of the Committee.
In supplementation of the written reports, Mr. Rouse made the
following comments:
As the written reports have indicated, the money market
was quite firm up to the Thanksgiving weekend, with Federal
funds at the 2-3/4 - 3 per cent rate on most days. After
that weekend conditions eased a bit, particularly at the close
of the statement week ended last Wednesday. The important
change in the money market during the period reflected the
change in the position of the Government securities dealers
over the period since we last met.
Early in the period,
dealers were using nearly $4-1/2 billion in credit, of which
This was about
$2.6 billion was being supplied by the banks.
$2 billion more credit than was being utilized a year ago.
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The credit bulge stemmed from the dealers' underwriting
of the Treasury's November refunding operation and their
support of the au:tion of the strip of Treasury bills. As
you may remember, they were awarded something over $500
million of the $800 million involved in that auction. The
pressure of dealer financing was, of course, felt mainly by
banks in the major financial centers and was fully reflected
in the money market. The technical position of the dealers
was in far better shape towards the close of the period:
Dealers had reduced their use of credit from $4-1/2 billion
to about $3 billion, of which banks were supplying $1.3
billion. Their positions were still large, particularly in
Treasury bills over 92 days, where the reduction has been
small. Nevertheless, they are far more manageable from the
standpoint of financing their "carry".
The market has tended to be somewhat nervous, as is
probably inevitable in a period following such a large
Treasury refunding operation with an environment of improving
business conditions, deteriorating balance-of-payments develop
ments, and considerable uncertainty as to whether there has
been a shift in monetary policy. As a result, the market has
been especially susceptible to new developments and to rumors
of them. We have had more than our fair share of these over
the past three weeks.
First of all, there was the newspaper story--Slevin in
the Herald Tribune--of excessive speculation in the Treasury
refunding, which led to a flurry of activity early in the
period but which was set to rest by Treasury statements about
the absence of speculation and by statements attributed to
both the Treasury and the System that there had been no change
in monetary policy. This was followed about a week later by
the announcement of a $300 million gold loss during the week
of November 22, and by rumors of a still greater loss in the
following week. Finally, the news of the change in Regulation
Q broke over the past weekend, with many in the market inter
preting this move as an indication that the System has concluded
that generally higher interest rates are inevitable. The decline
in market prices yesterday was quite sharp, and it seems evident
that the market is questioning whether it is experiencing a
major adjustment in rate relationships which will gradually be
come more clearly defined over the coming weeks.
During the period, the three-month Treasury bill rate moved
within a 2-1/2 - 2-5/8 per cent range. In yesterday's auction,
--
12/5/61
average issuing rates of 2.625 per cent and 2.87 per cent
were set for three-month and six-month Treasury bills,
respectively, the highest level since October 10, 1960.
Dealer awards were not heavy and, as might be expected, the
major impact in this area of the change in Regulation Q
appears to have been felt by the longer bills. However, as
indicated in the supplementary report, the weekend announce
ment again focused attention on the further improvement of
the economic outlook and in the likelihood that System policy
might have to be tightened. This of course affected all
maturity areas of the Government securities market.
With the market so susceptible to new developments, it
is difficult to predict what the immediate future holds in
store. One would expect that the usual year-end churningparticularly with no December tax anticipation bill outstand
ing--would keep the money market firm and put pressure on
short-term interest rates. Although dealers have reduced
their inventories substantially, as I mentioned earlier,
they are scarcely in a position, given all the environment,
to absorb readily heavy selling by corporations to meet tax
and dividend payments.
There is one other thing. As you all know a new positionthat of Deputy Under Secretary for Monetary Affairs--has
recently been created at the Treasury. Dewey Daane has moved
into the new spot and has been replaced as Assistant to the
I should like to ask the Committee
Secretary by Frank Morris.
to approve the addition of the Deputy Under Secretary for
Monetary Affairs to our distribution list for the weekly
report of the Manager of the System Account.
Without objection, the addition of
the Deputy Under Secretary for Monetary
Affairs to the distribution list
was
approved.
Thereupon, upon motion duly made and
seconded, the open market transactions
during the period November 14 through
December 4, 1961, were approved, ratified,
and confirmed.
Mr. Noyes presented the following statement with respect to
economic developments:
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I think a relatively brief report on the economic
situation is in order this morning. Data that have sub
sequently become available generally confirm the impression
of developments in October reported to you by Mr. Koch at
the last meeting. At the same time, we have practically no
firm figures yet for November, but we should have a good
many of them in time for the meeting two weeks from today.
Regarding October, we do know now that the 1 or 2 point
advance in the index of industrial production, that Mr. Koch
mentioned, rounded out at one point-the figure was 113.1,
to be exact. This means that only .4 of 1 per cent further
advance would carry the index to 114 for November--an
increase that is practically assured on the basis of weekly
data already available.
The more likely possibility seems
to be that the index for November will gain 2 points, round
ing to 115, although this is by no means assured.
The steel production and auto schedules already announced
for December suggest that the chances are for further gain
this month--perhaps another point.
One way or another it
seems a good bet that the index will be up to 110 by year end.
Another October figure that has recently become available
is the over $100 million expansion in consumer credit, and
there seems to be every indication that it will be followed
by a further increase in November, in view of the high rate
of auto sales last month.
Further improvement at the retail level is also indicated
by department store sales, which we are now estimating at 153
for November--up two points from October.
Manufacturers' sales and orders were both up about 2-1/2
per cent in October--maintaining the margin of orders over
sales that has
developed since mid-year. Inventory accumula
tion in October continued at about the third-quarter rate.
The new series on housing starts has been very erratic
and it would be a mistake to place much emphasis on the 1.4
million annual rate figure achieved in October--but it is fair
to say that it supports the steady upward trend that has been
The
apparent behind the month-to-month ups and downs.
Department of Commerce has estimated that housing starts in
1962 will be up 8 per cent--from an estimated rate of 1.3
million in 1961 to 1.4 million in 1962.
I have just been able to get the November unemployment
It shows a sub
figure, scheduled for release this Thursday.
stantial decline--about 1/2 of 1 percentage point on a seasonally
adjusted basis--for the first time in a year.
12/5/61
With these strong developments in the current figures,
I find it reassuring rather than disturbing that recent
surveys of consumer buying intentions for the coming six
months do not show much gain over year-ago levels. The
Quarterly Survey conducted by Census for the Board in mid
October showed that plans to buy new automobiles in the next
six months were about the same as a year ago. Plans to buy
major household durables were down, and housing and used auto
purchase plans just a little
higher.
I have not been able to get any specific information
about the results of the Commerce-SEC Survey of plant and
quarter.
The people
equipment expenditure plans for the first
who are presently tabulating the data seem to feel the figure
if at all, from the current quarter, however.
will be up little,
If true, this also suggests the absence of underlying pressures
working in the direction of excessive or unsustainable expansion.
I have much the same reastion to the recently released
report of the National Association of Purchasing Agents, which
indicates that while orders are up, the uptrend lacks "zip."
In my judgment, the prospects for sustained expansion and price
stability would not be enhanced by much more zip than is
evident in the current data.
This leads me to the concluding observation, which perhaps
should have come earlier in this brief report, that prices
have continued substantially unchanged--as increases and reduc
tions in wholesale prices since mid-October appear to have just
about offset one another. The 1/10 of 1 per cent increase in
consumer prices in October was largely attributable to the
seasonal outback in price concessions by auto dealers. As you
will recall, however, list prices of the new models are
substantially unchanged.
While the continuation of some downdrift in industrial
wholesale prices for a month or two beyond the low point of a
cycle is not unusual, it is unprecedented for such prices to be
lower after 9 months of vigorous recovery. This major differ
ence alone is a sufficient basis for caution in drawing
parallels between this and other cyclical upswings. Both with
respect to its implications for the prospective course of
events and the timing of policy actions designed to promote
sustainable growth, this long sought-after price stability
poses questions that are unique in the postwar period.
12/5/61
Mr. Thomas presented the following statement with respect to
credit developments:
Analyses of bank credit developments and liquidity
availabilities during the past year support the conclusion
that Federal Reserve operations have had the results,
whether or not expressed as policy aims, of providing
reserves to meet practically all credit and liquidity
demands without lowering the level of interest rates. The
results have been (1) an expansion in total required
reserves at a rate of about 5 per cent a year, supporting
increases of 3 per cent in demand deposits and 14 per cent
in time deposits and a 7 per cent increase in total loans
and investments of commercial banks; and (2) relative
stability of interest rates at between 2-1/4 and 2-5/8 per
cent for 3-month Treasury bills and just under 4 per cent
for long-term Treasury bonds. Although expansion in the
money supply has been less than that in GNP, the increase
in total liquidity has been commensurate. Yet over-all
liquidity is not large by historical standards. Interest
rates stayed at higher levels than during previous reces
sions, but short-term rates are lower than at the correspond
ing stage of previous periods of recovery, while the current
level of long-term rates is comparable to, or perhaps even
higher than, that in similar previous periods. Potentials for
further expansion in the economy indicate the need for
continued increases in bank credit and the money supply, with
little or no advance in long-term interest rates, until
speculative tendencies or other excesses become evident.
Turning to the immediate situation, although the pace of
economic expansion appears to have accelerated somewhat in
November, the rate of bank credit and monetary expansion may
have slackened, following a pronounced increase in September
and October. Reserves were made available as the month pro
gressed in amounts adequate for continued bank credit increases,
but they were not as fully utilized. Nevertheless, money
markets were relatively tight until the end of the month, and
interest rates generally rose somewhat.
Some upward pressure on interest rates is to be expected
at this time of the year when credit and liquidity needs are at
a seasonal maximum. Monetary transactions are large, and the
shifting of funds from one use to another places strains on
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the banking system. Reflecting these shifts, borrowing
by individual member banks was frequent even though member
banks as a group had an increase in excess reserves during
November. In addition there were sizable operations in
Federal funds among banks.
An important special influence on money markets in
November, as pointed out by the report of the Account
Management, grew out of the exceptionally large shifts in
dealers' positions. Dealers, who had earlier built up
rather large positions in longer-term bills, partly in
connection with Treasury offerings, added on a sizable volume
of short bills offered in a strip by the Treasury in mid
November, and also took on through market acquisitions considerable
amounts of the new medium- and longer-term issues involved
in the refunding.
In addition they showed a seasonal, or
greater than seasonal, increase in their long-term repurchase
contracts.
As a consequence, dealers' commitments and borrow
ings had risen to an exceptionally high level by mid-November.
They were subsequently reduced with exceptional rapidity and
by the beginning of December were back close to the level of
early October. In most categories, however, positions are
still much larger than a year ago, and the task of meeting
the large December liquidity needs, which usually requires a
large increase in dealers' positions, still lies ahead. In
any event, they are now much better prepared to meet this
task than they were three weeks or a month ago.
Reflecting market pressures, Treasury bill yields rose
in the latter part of November to or slightly above previous
peaks reached at various times of seasonal pressures during
the past 15 months. Yields on medium- and long-term Treasury
issues also rose, but generally did not quite reach earlier
peaks recorded this year. Under the pressure of a sizable
volume of new issues, offering rates on new issues of corpor
ate bonds have been raised somewhat and market yields on
State and local government bonds have risen. At the same time,
yields on seasoned high-grade corporate bonds declined somewhat
in November. Averages of common stock prices rose to new high
levels in November, but have tended to level off during the
past two weeks. Trading on the stock exchange has been in
large volume.
New capital issues by corporations continued in compara
tively large volume during November and are expected to be
substantial in December.
An unusually large portion of the
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December financing will consist of private placements, rather
than public offerings. New bond issues by State and local
governments were also large in November, though not up to
earlier estimates for the month, as one large issue was de
ferred. Issues scheduled for December are in much smaller
aggregate volume than in November, though somewhat more than
in December of 1960 and 1959.
Cash raised in past financing operations, together with
December tax receipts, will cover Treasury cash needs during
December. A new financing operation to raise $2 to $3 billion
will be needed early in January. The Treasury will be limited
in its borrowing during the months ahead by the debt ceiling
and may at times find it necessary to operate with a lower
Current estimates of receipts and expenditures
cash balance.
indicate an over-all net balance of receipts and expenditures
for the remainder of this fiscal year, but borrowing will be
needed to cover retirement of maturing tax bills in March
and June.
Total loans and investments of city banks showed only a
small increase during the five weeks ending November 29.
Holdings of Government securities and loans on Governments to
dealers declined by a substantial amount, while other loans
and investments increased about as much as in the same period
The increase in business loans was
of any other recent year.
only moderate and that in loans to finance companies very
small, but loans to other financial institutions, those on
real estate, other loans to consumers, and holdings of other
securities by city banks all increased by relatively sizable
amounts. These changes would indicate that, in the absence
of business loan demand in amounts adequate to use funds
available, banks are seeking other uses for their funds.
or no expansion in
Deposits at banks showed little
Private demand deposits seem to have declined on
November.
a seasonally adjusted basis, resulting in a decrease in the
money supply for the month. There was little change in U. S.
Government deposits on balance for the five weeks as a whole,
though some fluctuations within the period. Time deposits
with savings deposits
in the aggregate changed but little,
continuing to increase while other time deposits declined.
Some net withdrawal of time deposits usually occurs in November.
As a result of the slackened growth in deposits, following
the sharp increase in October, required reserves of member banks
did not show the customary seasonal increase in November. They
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remained, however, close to the projected expansion level of
5 per cent per annum since February. Total reserves, after
a sharp decline in the first week of the month, increased
more than required reserves and continued slightly above the
projected level. Reserves were abundantly supplied by
System operations in amounts adequate to offset drains from
other factors, to cover seasonal needs for required reserves,
and to provide for some expansion. Free reserves rose from
the temporary low average of $385 million in the first week of
the month to a preliminary estimate of $569 million in the
last week.
Estimates of reserve drains during the current week indi
cate that, in the absence of further System operations, total
reserves available are likely to decline by more than the
estimated seasonal amount. At the same time required reserves
may decline less than seasonally, and net free reserves may
fall to below $500 million. There are, however, some elements
of uncertainty in the estimates, and the level of reserves may
turn out to be somewhat larger than indicated.
During the remainder of December, many of the factors
affecting the availability of reserves will show very wide
variations, which on balance will be largely offsetting but are
difficult to estimate with any degree of precision and can at
times have significant net effects on reserve availability.
Operations therefore will need to be adjusted to current market
developments and tone. Although net changes in System holdings
may be relatively moderate for the remainder of December, there
are likely to be large reserve demands in the first week or
ten day of January, particularly if a Treasury cash financing
operation occurs at that time. After that, the post-holiday
return flow of currency and usual seasonal liquidation of bank
credit will release large amounts of reserves, aggregating
close to $1.2 billion by the latter part of February.
Thus, although System operations during the next two
months will necessarily be very large, they will mostly cover
purely temporary variations in the availability of and the
Cyclical factors will be small relative to
need for reserves.
these wide temporary fluctuations.
Since economic expansion seems to be progressing satis
factorily, with no evidence of speculative tendencies in the
use of credit or of excess liquidity, it seems appropriate to
continue the policy of making reserves available for further
credit and monetary expansion, abstracting from seasonal
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variations.
Because of the international balance-of-payments
situation, it may continue to be desirable to avoid causing
a decline in interest rates. However, if economic expansion
continues, with commensurate credit demands, the avoidance of
interest rate declines, while still
permitting moderate
monetary expansion, may cease to be a problem.
Mr. Furth presented the following statement on the balance of pay
ments:
Preliminary reports on the U. S. balance of international
payments for November suggest that the deficit, as calculated
by the decline in U. S. official holdings of gold and con
vertible foreign currencies plus the increase in foreign
official and private liquid dollar claims, was again in the
neighborhood of $400 million, nearly the size of the October
and September deficits.
In October, the deficit was caused to a large part by an
extraordinary transaction (the U. S. subscription to the Inter
American Development Bank of $110 million) and by an outflow of
short-term U. S. funds, mainly to Canada, movements which are
not customarily considered part of the so-called basic deficit.
In November, there was another extraordinary transaction (the
U. S. subscription to the International Development Associa
tion of $62 million); but available data do not yet permit any
estimate of the volume of short-term dapital movements.
Economic developments abroad likely to affect U. S. exports
continue to follow the line discussed in previous reports.
There has been a definite downturn in the United Kingdom, and
the upswing seems to have lost momentum in some countries of
Continental Europe, and according to reports not as yet sup
ported by statistical evidence, also in Japan. Developments
in Canada were similar to those in the U. S. domestic economy.
International capital movements still are dominated by
the continued flow of funds to the United Kingdom, not only
from this country but also from Continental Europe. The re
sulting increase in U. K. reserves has induced the United
Kingdom to repay nearly 30 per cent of its recent drawing
from the International Monetary Fund, and to purchase a sub
stantial amount of gold from the U. S. Treasury, This gold
transaction in turn has led to some unrest on European foreign
exchange markets.
12/5/61
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Last week saw bear attacks on the dollar (in Germany)
and on sterling, as well as a bull attack on the Italian
lira
on rumors of a lira appreciation. While these flurries
soon died down, they indicate the nervousness of the inter
national financial community.
The London gold price was maintained at a few cents be
low the level of $35.20 that has prevailed in recent months.
Mr.
Hayes presented the following statement of his views on the
business outlook and credit policy:
It seems to me that the domestic business and credit
situation remains about what it was three weeks ago. The
more complete statistics now available for October, together
with such fragmentary data as we have for November, support
the impression of a continuing strong, but not overly exuber
ant, expansion.
Sentiment appears to have swung further in
the direction of optimism. As we compare the course of
business since the February trough with the two preceding
postwar recoveries, we find roughly comparable trends in
production, manufacturers' sales, and personal income; but
in retail sales, despite the good gain in October, there is a
considerable lag as compared with the earlier upswings. Since
the key to the pace of further business expansion may well lie
in the area of consumer outlays, it is not particularly en
couraging to note that the most recent survey of consumer buy
ing intentions shows little change as compared with earlier
this year, or a year ago. On the other hand, the very fact
that consumer expenditures have not risen as rapidly as
personal income certainly suggests a favorable atmosphere for
a higher rate of buying in the future.
The prospect of an upward movement in business expendi
tures for plant and equipment has found some further confirma
tion in the N.I.C.B. third-quarter survey of capital appropria
tions in manufacturing. Residential construction appears to
be holding up well.
It is interesting to observe the role of the Federal
Government with respect to the entire spending outlook.
Although defense spending is rising, the Government is
unquestionably making a very strong effort to limit the rise
next year and to achieve economies elsewhere in the interest
of a balanced budget in fiscal 1963. At the same time, the
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Administration hopes to stimulate private capital spending
through this very restraint in Government outlays and
through special tax incentives.
Whether these good intentions
can be put into practical effect of course remains to be seen.
The price situation in general remains rather satisfactory.
Both sensitive commodity prices and the broader wholesale price
index are below their levels at the trough of the recession in
contrast with increases in the comparable periods of the two
preceding postwar recoveries. It wouldn't be surprising, how
ever, to see some signs of price strength in the months ahead
for cyclical reasons.
There is perhaps a basis for mild
uneasiness in the fact that consumer prices of goods other
than foods have been moving up moderately.
Despite the drop in the unemployment rate in November, the
unemployment problem obviously remains severe.
It is interesting to compare changes in commercial bank
credit since the February trough with earlier postwar cycles.
We find that whereas total loans and investments increased to
about the same extent as in 1958 and 1954-55, total loans
However,
lagged somewhat behind 1958 and far behind 1954-55.
a closer examination suggests that this loan showing is less
disturbing than might be inferred from the current complaints
of various New York bank lending officers. It is well to
remember that b usiness loans rose in the recent recession
period, whereas they had declined in the two preceding reces
sions. Also, the relative levels of various interest rates
have encouraged a larger proportion of borrowing outside of the
banks, and corporations appear to have larger internal funds
relative to their investment needs than in the earlier periods.
The banks remain highly liquid, and both the money supply
and total liquid assets held by the public have been showing
substantial gains. Such gains have not been excessive in re
lation to the strong business upswing of recent months.
Unfortunately the balance-of-payments position has not
improved at all since our last meeting and has probably
deteriorated further. The rate of deficit since July has been
far higher than we can afford to contemplate for many months
ahead, if confidence in the dollar is to be preserved.
Although the Administration is taking effective steps to reduce
the net drain of military expenditures abroad, measures along
these and related lines may be fully offset by an adverse
trend in the trade balance induced by the relative timing of
A great deal will
cyclical business swings here and abroad.
12/5/61
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depend on the willingness of American business and labor
to take seriously the vital need for keeping down costs
and exporting more, and on the rapidity with which
appropriate moves to step up export volume can become
effective.
The $300 million gold outflow of two weeks ago has
fortunately not led to any convulsive movements in the gold
and foreign exchange markets.
However, it has undoubtedly
increased the general feeling of uneasiness about our balance
of payments which was already widespread in European countries.
Various press articles abroad placing erroneous interpretation
on the Government's recently announced movements with respect
to silver have not improved this atmosphere. The dollar re
mains in a delicate position.
It is not easy to tailor a suitable monetary policy to
fit this complex pattern of circumstances. The domestic sit
uation would seem to call for no appreciable change in policy.
On the other hand, there seems to be enough strength in the
outlook and enough liquidity available so that we need not be
unduly solicitous about maintaining free reserves as high as
they have recently been. It has been interesting to note that,
according to our calculations, total reserves have lately been
running somewhat above the Board staff's suggested target of a
5 per cent rate of gain over the February level. Also, if
expansion continues we must sooner or later break down the
increasingly widespread notion that we are wedded to a $500
million free reserve target.
The level of short-term interest rates must remain a
matter of deep concern to the Committee. Even though the
present differential between our bill rate and the U. K. bill
rate is negligible on a covered basis, we cannot be completely
indifferent either to the uncovered spread or to the psycho
logical value of maintaining a reasonably firm rate level here.
Fortunately a combination of circumstances, including heavy
dealer positions in bills and the attendant pressures on the
money market, Treasury emphasis on short-term financing, and
the imminence of the usual December period of seasonal pressures,
has brought about a considerable firming of bill rates without
any change in monetary policy. I would hope that a continuation
of similar "natural" influences would sustain bill
rates for
the next two weeks with a minimum of effort on our part.
Clearly we should do everything we can to prevent the 90-day
rate from falling below the 2-1/2 - 2-3/4 per cent range, and
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if it should prove necessary to let free reserves drop to
around $400 million to accomplish this I would have no ob
jection, It would be preferable if the rate were to move
closer to 2-3/4 than 2-1/2. There is perhaps reason to
hope that last Friday's announcement with respect to time
and savings deposit interest rates may help to bring about
fairly firm bill rates. I think we should welcome the
Board's move on several counts, and especially because of
the longer-run beneficial effects it may well have on our
balance of payments and the gold outflow.
Unless the Treasury intends to attempt another advance
refunding in the near future, it could be argued that any
real change in policy we might have in mind for the next few
months might best be accomplished in the very near future,
before the Treasury must again come to the market for cash in
January and for a major refunding in February. However, on
balance, I am inclined to feel that we should pass up this
opportunity in the hope that market conditions, together with
the recent revision of Regulation Q, will operate in the
direction of our rate objective, with the possibility that we
may have to lower our free reserve figures slightly to assist
in this process. It would probably be best to avoid any
overt move at least until we have had a chance to observe the
market effects of the revision of Regulation Q and to avoid
exaggerated expectations of a tightening of credit. The
avoiding of an overt move on our part seems especially justi
fied at a time when the dealers will probably continue to be
under considerable pressure in any case and when this factor,
together with normal seasonal influences, could easily make
for considerable market instability. Thus it would appear
that the feel of the market shouldbe aparticularly important
criterion for the next two weeks, with ample leeway for the
It would seem advisable
Manager to exercise his best judgment.
to make no change in the discount rate or directive at this
time.
I am inclined to think that unless we can see genuine and
substantial progress in the next few weeks toward reducing the
balance-of-payments deficit by nomonetary means--an area in
which the Administration apparently feels rather optimisticwe may well have to consider decidedly overt moves in the area
of monetary policy within the fairly near future. We would be
in a better position to make such moves, if and when necessary,
if there had previously been some gradual firming of market
-16
12/5/61
rates.
Finally, I do not think we should dismiss from
our minds the possibility that our balance-of-payments
difficulties could bring on a serious situation.
Mr. Ellis expressed agreement with the view that the consumer
was the major question mark in the recovery movement at the present
time.
felt
However, to judge from the current evidence in New England, he
it must be concluded that the doubts were being resolved favor
ably, for consumer spending was rising markedly.
In this connection
he cited statistics on department store sales, which showed substantial
recent gains, and noted a consensus among department store operators
that the Christmas trade was going to be most satisfactory.
were reported adequate to meet the demands.
Stocks
Also, reports from dealers
as to automobile sales were very satisfactory.
While current registra
tion data were not available, evidence of good sales could be found in
bank financing figures.
Thus, accepting the reservation that one could
not be sure how long the current trend of consumer spending would
continue, it seemed that this question mark in the analysis of economic
recovery was being resolved.
Manufacturing activity was expanding,
mostly in the durable goods sector, and manufacturing employment showed
a modest year-to-year gain for the first time since August 1960.
Improvement in
the unemployment picture was reflected in the most recent
figures on initial
unemployment compensation claims as well as total
claims, the latter being down substantially from year-ago levels.
12/5/61
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Credit conditions reflected both the recovery in business
and the monetary policy of ease.
Demand deposits were up considerably
from year-ago levels and were holding at the peak, while time deposits
showed steady growth.
Loan-deposit ratios were a shade higher than a
year ago and several points above the national average.
was still
somewhat disappointing,
Loan demand
and city banks were shifting to
Government securities in the one-to-five-year category.
During the past
10 weeks District banks had been net sellers of Federal funds,
and
increasingly so.
Turning to policy, Mr.
Ellis said that clearly the posture must
continue to be one of monetary ease in support of the recovery.
However,
it seemed illogical to continue the same degree of ease that had been
considered appropriate for the past 10 months.
If the recovery continued
and gained further momentum, it could logically be anticipated that
credit demands would strengthen and the market would tighten itself.
reaction would be to let it do so.
His
While he would provide reserves for
seasonal needs and steady growth, he would settle for something less
than a 5 per cent annual rate of increase in total reserves.
He would
allow free reserves to fall, banks to borrow some reserves, and rates to
rise as the market tightened itself.
Mr. Ellis suggested that this would be a good time to have a
two-part directive, for that would permit the Committee to record the
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12/5/61
changes in economic conditions and a gradual shading in the degree of
encouragement given to credit expansion.
needed, but less of it.
Encouragement was still
However, pending further discussion of the
form of the directive, it
would probably be best to leave the existing
directive unchanged.
As to targets, Mr. Ellis suggested total reserves steadily
expanding, perhaps at a 4 per cent rate after seasonal adjustment, free
reserves in the $400-$500 million range, the bill rate in
range as recently (above 2-1/2 per cent),
close to the bill rate.
about the same
and the Federal funds rate
He would renew the special authorization cover
ing operations in longer maturities.
Mr.
Irons reported that business conditions in the Eleventh
District were showing satisfactory progress.
The industrial production
index rose to a record high in October, and additional gains seemed to
have occurred in November.
November,
December.
Petroleum output showed a modest gain in
and a nine-day allowable basis had been established for
Employment conditions were improving and could be said to
be fairly strong.
Unemployment had declined further; in Texas, at
4.4
per cent of the labor force, the rate dropped below the year-ago level
for the first
time in 1961.
There was strength in construction activity
during October, and department store trade appeared quite satisfactory.
The agricultural picture continued to be good.
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12/5/61
As to the banking picture, loans had continued to move up and
investments declined a little
more than the increase in loans.
Federal
funds purchases had increased but sales moved up more, so on balance
purchases were further below sales than three weeks ago.
Borrowing
from the Reserve Bank was negligible, with no borrowing on a number of
days.
Reserve positions seemed satisfactory.
Deposits rose a little
during the past three weeks, demand deposits being down a bit and time
deposits up.
Generally speaking, Mr. Irons said, there was a good feeling as
to the outlook, and optimism prevailed regarding the Holiday trade
volume.
Turning to policy, Mr. Irons said that all things considered he
was rather well satisfied with the way things had moved during the past
three weeks,
He would be inclined to recommend pretty much a continuance
of the policy that had been followed during that period.
the System
At some point
would need to be firmer, but it did not seem necessary to
anticipate that point when there was no real evidence of speculative or
inflationary developments.
Prices were stable, there was unused capacity,
and there was an unemployment problem nationally that probably would
continue for some time.
In terms of targets, Mr.
Irons said he continued to feel that
close attention should be given to the rate structure in light of the
12/5/61
-20
international situation.
He would suggest a bill rate in the 2-1/2-
2-3/4 per cent range, with Federal funds about in the range that had
prevailed.
He would make reserves available freely to meet seasonal
requirements, but beyond that he would be inclined to lean on the side
of firmness rather than on the side of ease.
As to the level of free
reserves, he would suggest the general area of $400-$450 million.
In
summary, for the next two-week period he would continue pretty much the
existing policy, with doubts resolved on the side of firmness.
This
was not the time to change the discount rate, and he did not feel
strongly regarding the directive.
It
could certainly be continued for
two weeks, although he felt there was some merit in the language
suggested by Mr.
Treiber at the November 14 meeting, which would have
denoted a modest shift in the emphasis of policy.
the special authorization covering operations in
Mr.
He would continue
longer maturities,
Swan reported that the business situation in the Twelfth
District had contirued to improve.
In October,
nonagricultural
employment in the Pacific Coast States rose further, and the rate of
unemployment declined to the national average for the first
the entire recovery.
in November,
time during
Loan demand apparently continued to show strength
and the larger banks had been rather substantial net buyers
of Federal funds, although this was related primarily to the situation
at one bank.
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12/5/61
Mr. Swan then commented on a recent conference on the business
situation and outlook which was attended by some 20 businessmen
representing a wide variety of interests throughout the District. The
participants seemed quite optimistic, perhaps somewhat more so than it
had been thought they might be, and it was the consensus that the
economy would continue to register fairly substantial gains through all
of 1962.
extent.
Some rise in prices was envisaged, but only to quite a moderate
As to unemployment,
the participants felt that there would be
some decline but that by the middle of 1962 unemployment would still
somewhere in the 5 to 6 per cent range.
be
They anticipated an increase
in plant and equipment expenditures, perhaps somewhat more than the 4
per cent indicated by the recent McGraw-Hill survey, but no striking
increase.
There was quite a definite feeling that inventories would be
rather closely associated with sales; there seemed to be no desire to
speculate in terms of potential price increases or other factors.
The
participants were most hopeful regarding consumer spending, much more so
than various recent surveys suggested.
One factor cited in support of
this view was the apparent desire of consumers to buy at the top of the
price range in which they were interested.
For example, there was a
tendency for those interested in compact cars to want many accessories.
Turning to policy, Mr. Swan said it
seemed to him there was a
continuing expansion in the business situation, considerably stronger
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12/5/61
than in
August and September but certainly not at what might be
characterized as an excessive rate.
He agreed that the Committee
should continue to follow in general terms a policy of maintaining
sufficient ease to encourage further credit expansion in support of
recovery.
However,
in the past several weeks there had been a clear
indication of some firming,
as the result of market developments rather
than any positive changes in policy.
in recent weeks,
Taking into account developments
including the revision of maximum interest rates under
Regulation Q, and considering the seasonal pressures that lay ahead, he
did not think it
was necessary to worry too much about sufficient firm
ness being maintained,
it
at least in the immediate future.
might seem paradoxical,
he felt
that it
In fact, though
might be possible to have,
on
the one hand, somewhat higher levels of free reserves and, on the other
hand, somewhat higher bill
rates.
quantify, he foresaw that in
While he found it
difficult to
the period just ahead bill
rates might run
around 2.6 - 2.75 per cent with free reserves around or somewhat above
$500 million.
He agreed with Mr. Hayes'
making any overt change in
analysis of the reasons for not
policy at the moment.
This would imply no
change in the discount rate or the directive, and he would continue the
special authorization.
Mr. Deming said, with respect to recent developments in the Ninth
District, that through October iron ore shipments from Lake Superior
12/5/61
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ports totalled 48 million tons, 25 per cent less than the 64 million
tons shipped through October last year.
Mining employment in Minnesota
in October also was 25 per cent smaller than a year earlier.
Cash farm
income continued to lag last year's figures as a result of the summer
drouth.
Industrial electric power use in October was 5 per cent ahead
of a year earlier; bank debits were 12 per cent larger than in October
1960; and "help wanted" ads in Upper Midwest metropolitan newspapers were
ahead of year-ago levels for the first time this year (plus 9 per cent).
District personal income in September and October increased at rates
approaching the national average after lagging in the summer.
Non
agricultural employment finally passed year-earlier levels in October,
Sentiment among downtown retailers for the Christmas season was
only moderately optimistic, Mr. Deming said, but new retail outlets were
showing good sales records and total retail sales should be quite good.
A new type of retail outlet, a combination food store and department
store called the super center, had made its appearance in the Twin Cities.
The operators noted that within two years 54 stores of somewhat similar
type would be in operation in the Cities, and within 10 years they
believed that a very high proportion of retail sales would be made in
such stores.
There was some question as to whether official retail sales
figures fully represented the presence of such outlets and consequently
a feeling that the official retail sales figures might understate the
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12/5/61
volume of consumer takings at the present time.
He had some belief
that such was the case in the Twin Cities area; he merely raised this
point as a question with respect to the nation.
Banking developments in the District continued to run counter
to those in the nation, with loan demand remaining relatively weak.
District banks had employed their increasing funds in investments,
particularly in
short-term Government securities.
ratios were significantly lower than a year ago,
Their loan-deposit
or even three months
ago, and their ratios of short Governments to deposits were significantly
higher.
Borrowings from the Reserve Bank were very small.
In
short,
the banks were far more liquid today than seemed likely even six months
earlier.
Looking at the national economy, Mr.
Deming said it
seemed to
him that the economy had moved back into high gear in recent weeks.
He wished to say again that if
this movement continued, he would have
difficulty in characterizing the upswing as modest.
While unutilized
resources of men and machines continued to run higher than in
upswings,
some other
and while wholesale prices and those for sensitive materials
showed continued stability, the very fact of movement farther away in
time from the trough argued that the period of no or low pressure was
shortening, perhaps more rapidly than now seemed likely.
Bank credit
expansion and growth in the money supply seemed to be proceeding
satisfactorily.
12/5/61
-25
Mr. Deming said that although he would favor a mild firming
of monetary policy, for the two-week period immediately ahead it might
be better to do nothing and let the market digest the recently
announced change in Regulation Q.
Looking farther ahead, it would
seem desirable to move toward a position of somewhat less ease.
In
the existing kind of situation, with market forces tightening things up,
he felt strongly that the free reserve guide might be quite treacherous.
He preferred to look at total reserves,
3 or
4
with an allowance for growth of
per cent and allowance for seasonal needs,
as a guide to policy.
This, he thought, would produce a lower level of free reserves.
It
would almost imperceptibly exert some dampening influence on undue
exuberance in the economy and on bank credit expansion.
He saw no reason
to change the directive or the discount rate, and he would continue the
special authorization.
Mr. Baughman reported that business activity in the Seventh
District had continued to improve, with the strengthening demand for
autos and trucks playing a key role.
Consumer purchases of goods other
than automobiles probably were rising only slowly, if at all, and total
loans at District banks had declined somewhat in recent weeks.
However,
employment was continuing to improve and new orders for steel had risen
sharply,
-26
12/5/61
Retail deliveries of new automobiles in November,
were at a record high for the month.
nationally,
Industry spokesmen were increas
ingly optimistic and had raised their estimates of sales and increased
production schedules.
While employment in
the industry was rising,
efforts would be made to avoid hiring workers for temporary periods;
this might cause large amounts of overtime.
More than half of the
nation's assembly plants were now on six-day schedules.
Production of passenger cars in the fourth quarter was now
estimated (by some analysts in the industry) at 1,800,000--3 to 4 per
cent above the corresponding period in 1960.
The same volume was pro
jected for the first quarter of 1962 and a somewhat larger volume for
the second quarter.
in the first
If these estimates should be realized, production
half of next year would be about 3,800,000 units, or 40
per cent higher than in
the first
half of 1961.
It
was estimated that
the inventory of new cars, 701,000 on November 20, would rise only to
750,000 at year-end.
Both heavy and light trucks had been selling well.
One large
producer reported sales recently at the highest rate since World War II.
Production was running about 13 per cent above the rate a year ago.
While steel production in
the nation was virtually unchanged
from mid-October through November at just over 2 million tons a week,
production in the Chicago area, and particularly in Detroit, rose in
12/5/61
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November and it
now appeared that output would rise quite sharply
in December and January.
A large volume of new orders had been placed
during the past two weeks, especially by auto manufacturers, but orders
from other industries had risen also.
increase in their business,
Steel warehouses reported an
indicating that small users of steel were
buying more actively.
Manufacturers of farm machinery reported that current sales
were improved from the depressed level in the summer,
planning for larger production and sales in
year.
and they were
1962 than in the current
Manufacturers of construction machinery in the District were not
participating in the current rise in new orders for durable goods.
Some further improvement in employment in
the District was
indicated by reports on hiring intentions, with most of the prospective
gains being in the automotive and electrical equipment industries.
Chicago newspapers the "help wanted" ads,
In
seasonally adjusted, had
risen somewhat in recent months, but the lineage was still
below the
level of early 1960.
The evidence on consumer spending for goods other than automobiles
in the Seventh District was not conclusive.
the four weeks ending November 25,
while 4
Department store sales in
per cent above the correspond
ing period in 1960 (when sales were depressed somewhat),
have risen less than seasonally.
appeared to
Data on bank time deposits,
savings
-28
12/6/61
and loan shares, and E and H bonds in the District had given no
indication recently of a rise in spending relative to saving.
The harvesting of corn and soybeans had been delayed in some
areas because of muddy fields but crop losses were not expected to be
widespread. The favorable level of farm income and reduced purchases
of feeder cattle in the eastern Corn Belt had reduced the demand for
agricultural credit in most of the District below the year-ago levels,
In the western portion of the District, however, cattle feeding was
being expanded and the volume of new agricultural loans made by member
banks was about one-fourth above the volume last fall.
Total loans at District weekly reporting member banks,
after
rising in September and October, declined $21 million in the three weeks
ended November 22.
Paydowns of commercial-industrial and security loans
were only partly offset by modest increases in loans on real estate and
loans to consumers and to financial institutions.
The basic deficit of Chicago central reserve city banks was
reduced from about $190 million in the week ended November 8 to $90
million for the week ended November 29, and probably had improved
further in recent days.
The modest improvement in position was due
mainly to sales of Treasury bills and partly to a decline of loans.
Aside from one large bank that borrowed at the discount window over the
Thanksgiving holiday, Chicago banks had covered their reserve needs
12/5/6l
-29-
largely by borrowing Federal funds.
In other major District cities,
banks remained in easy reserve positions.
The leading banks in
Detroit, Milwaukee, and Indianapolis had continued to lend substantial
amounts in the Federal funds market, and these banks,
for the most
part, had not reduced their holdings of securities.
Mr. Clay commented that the economic developments of recent
weeks had been encouraging in that they had indicated a resumption of
the upward movement of economic activity.
the movement was not yet apparent,
The underlying strength of
Moreover, the developments had a
long way to go in terms of aggregate demand, the level of industrial
production, and the employment of manpower and other resources before
attaining a satisfactory level of economic activity.
Accordingly, what
ever encouragement might be derived from recent developments was not
justification for a change in monetary policy to a lesser degree of
ease.
Rather, the state of the domestic economy continued to call
for a monetary policy that would encourage credit expansion with a view
to promoting the fuller utilization of resources--a policy essentially
in line with that of recent months,
The international balance-of-payments situation remained a
problem, Mr. Clay noted, as it
probably would for a long time to come.
Action to deal with the basic problem was urgently needed, and it was
to be hoped that such action would be successfully pursued by those in
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12/5/61
a position to deal with it.
The Open Market Committee had been
concerned with the threat of speculative developments against the
dollar resulting from the balance-of-payments
situation.
In an
endeavor to ameliorate that threat, the Committee had maintained the
Treasury bill rate at a level that would be reasonably favorable
relative to comparable interest rates abroad,
to be in
order.
It
Such action continued
must be recognized, however,
that policy action
designed to meet the international situation by maintaining higher
interest rates tended to reduce monetary ease and the stimulus provided
to the domestic economy.
Thus,
such action must either be defensible
in terms of domestic needs or the effect on the domestic economy should
be offset by other means.
At the November l4 meeting of the Committee,
Mr. Clay recalled,
it was suggested that the emphasis of monetary policy be shifted so as
to give greater weight to international factors and less weight to the
domestic economy, and it
was further suggested that the Committee's
directive be changed accordingly.
Adoption of this change in monetary
policy would be a step in the direction of less monetary ease and pre
sumably would be predicated on a judgment that domestic developments no
longer required the stimulus of monetary expansion to the same degree
as heretofore.
Domestic developments to date and the requisite expansion
in economic activity did not appear to support this premise.
If,
on the
12/5/61
-31
other hand, the need to give greater weight to international factors
was advanced on the ground that they merited greater consideration
even though domestic factors were somewhat subordinated, such an approach
would appear to be unnecessary as well as inappropriate in terms of the
domestic situation.
To the extent that the maintenance of the Treasury
bill rate at the proper level for international considerations might
interfere with the appropriate monetary policy for domestic purposes,
reserve objectives should be attained by conducting operations in
longer maturities to the extent necessary.
Domestic objectives should
not be sacrificed in order to maintain the desired Treasury bill rate,
Accordingly, Mr. Clay recommended that the Committee renew the
directive in its present form.
No change was required in the discount
rate, and the special authorization for operating in longer maturities
should be continued.
Mr. Wayne reported that business recovery in the Fifth District
had accelerated since the preceding meeting of the Committee, but
probably not as much as in the country as a whole.
As to business
sentiment, a recent survey by the Reserve Bank showed general improve
ment.
The respondents expected increases in manufacturers' new orders
and shipments, although those were already doing well.
They also fore
saw further gains in factory employment and hours of work, but there
were somewhat divergent views with regard to the outlook of profits.
12/5/61
-32
The farm outlook was favorable.
District money market banks had been
net sellers of Federal funds, and borrowings from the Reserve Bank
were at minimum levels.
Prior to last Friday, Mr. Wayne said, it
had seemed to him
that this might be an appropriate time to review monetary policy.
However,
he felt that it
would be advisable to let the market digest
the effect of the new maximum rates established pursuant to Regulation
Q and not to add further pressure.
He would let the feel and general
tone of the market be the principal controlling factor.
He would be
somewhat reluctant to attempt to suggest a free reserve goal.
However,
if the level of free reserves should be somewhat less than it had been,
out of necessity to maintain the bill rate in the range of 2-1/2
2-5/8 per cent, he would accept the lower levels.
He would not change
the discount rate or the directive at this time, and he would renew the
special authorization.
Mr. Mills said that in his view the Committee's immediate
objective should be to focus attention on the supersensitive state of
the Government securities market and the foreign exchange markets
rather than on domestic economic developments.
His comments today would
be confined to Government securities market considerations and would be
frankly critical.
Mr. Mills then presented the following statement:
The following is quoted from the November 30th issue of
the Bankers Trust Company's "Monetary Indices":
12/5/61
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"There is some evidence that the Federal may want
to ease this seasonal squeeze. A generous amount of
free reserves has been maintained in the banking
system this week. They averaged $569 million, the
largest since September 27. However, this easier
condition must be continued in order to permit the
market to absorb some of the expected selling due in
the next two weeks."
Monetary and credit policy-making has been reduced to
a sad state of affairs when outside parties can presume to
dictate policy actions and when newspaper articles declaim
ing a change of policy or new losses of gold can seriously
unsettle the market for U. S. Government securities. The
prodigal policy actions that have been taken since the last
meeting of the Committee, and before, are to blame for this
unfortunate situation in which the initiative for policy
decisions has been lost to the market.
A kindly Providence may see the rest of the year through
free from the dangers that are inherent in a policy that has
over-emphasized the importance of increasing the money supply
and which has largely disregarded the necessity of utilizing
the monetary weapon to combat our adverse balance-of-payments
problems. In the meanwhile, the perils of permitting a
continuously high level of free reserves will be mitigated by
the need of affording market relief over the December tax,
dividend payment, and window-dressing periods. Needed
reserves should be supplied as far as possible through direct
open market purchases of U. S. Government securities that
will serve to reduce the unwieldy positions of the U. S.
Government securities dealers, and actions should be avoided
that would tempt the dealers back into a new speculation in
U. S. Government securities via the avenue of a favorable
interest carry on their positions.
It is to be hoped that control over the market can be
regained after the turn of the year when it is customay to
withdraw reserves, and that the initiative will pass back to
the System Open Market Committee. A resumption of actions at
that time that would produce excessive credit ease through the
failure adequately to withdraw surplus reserves, or through
renewed support of the long end of the U, S. Government securi
ties list, would be steps along the path toward price pegging
and toward again making the Federal Reserve Systen an "engine
of inflation." It can also be hoped that whatever is done in
the sphere of international monetary and fiscal affairs between
now and the new year will bear fruit and thereby lighten the
12/5/61
-3l
responsibility of the Federal Reserve System in the
balance of payments sector of finance.
Stock market speculation, abetted by the use of
funds withdrawn by nonfinancial holders from investment
in U. S. Government securities that have in turn gravitated
into commercial bank portfolios, and an incipient upward
price excitement in the commodity markets are sensitive
economic areas that are subject to the current Federal
Reserve System monetary and credit policy which must be put
under strict surveillance.
Mr. Robertson said that since there was still
unemployment and no evidence,
a high rate of
at least that he could detect, of specu
lative or inflationary tendencies, he could see no basis for changing
the direction of policy at this time.
He was becoming increasingly
wary of overstaying the policy of ease, but not so much so he would
want to change policy at this particular juncture.
when the System would have to make a change,
and it
The time would come
should keep its
sights set on opportunities for gradual and inconspicuous shadings of
policy.
For the next two weeks, however, he would stay put.
Mr. Shepardson said he had somewhat the same concern that
Mr. Mills had expressed.
However,
his analysis at this time was almost
identical with the analysis presented by Mr. Deming, and he would
follow the policy suggested by Mr. Deming.
Mr. King said that he would agree substantially with the state
ments of Messrs. Swan and Deming, which he interpreted as essentially a
ratification of the suggestions made by Mr.
Thomas.
The points made
about natural tendencies in the market at this time of the year were
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12/5/61
good ones.
time,
He would not like to see any material tightening at this
and for that reason would suggest a free reserve target in the
area of $500-$525 million.
Mr. Mitchell said that Mr. Clay's remarks expressed his own
views precisely with regard to the relationship between foreign and
domestic considerations and also the need for monetary expansion.
The
prescription for the immediate future had, he believed, been quite
well expressed by Mr. Thomas.
It did not seem to him that this was a
period when the free reserve level was a very practical target; the
Committee should be more concerned about the trend and level of short
term rates and the feel of the market.
The Desk should be instructed
to accommodate itself to the churning in the market that was in sight
for the next few weeks, and protect itself as well as possible.
It
seemed especially important to him to avoid, as far as possible,
speculation about a change in policy at this time.
Nothing would be
more destructive to Committee objectives than to get a speculative
upheaval in motion.
The position of the dealers today was much
sounder than a month ago, and he would not want to see them get into a
position that reflected speculation that monetary policy was going to
be changed.
With regard to last week's change in Regulation Q, Mr. Mitchell
said he gathered from some press comments that because interest costs
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12/5/61
could be raised, certain bankers felt it would now be appropriate
for yields to move up in response to market forces or Federal Reserve
action.
This, he thought, was not the right kind of speculation to
encourage.
Therefore, he came back again to the policy prescription
that the System ought to be careful to avoid encouraging the specula
tive reaction that would result if people thought there was going to
be the kind of change in monetary policy that had occurred at roughly
this juncture in previous expansions.
In concluding comments, Mr. Mitchell noted that the satisfactory
expansion of the money supply had been due in part to the accommodating
effect of Treasury financing operations.
If it
had not been for that
factor, the curve probably would have been different.
As to the
business situation, he remarked that the evidence of improvement was
still largely tentative from a statistical standpoint.
The improvement
in psychology seemed to be outrunning the statistics, and he felt this
deserved consideration in the formulation of monetary policy.
Mr.
Fulton said that business activity in the Fourth District
appeared to have shaken off much of the August-September setback and
currently was veering to the upside.
New car sales were high in
November and showed more than a seasonal increase.
Department store
sales had risen appreciably above the comparable period last year, with
indications of a good Christmas season.
Electric power output had
12/5/61
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shifted slightly to the upside, but the sluggishness of this index
indicated the slowness of recovery in the District.
Unemployment
figures were showing a slight upturn because of seasonal factors.
In the steel industry, orders in the past week had been the
largest in two years, but they were for January or later deliveries.
November deliveries were no better than October, and December would be
only slightly better.
In the first half of 1962, however, production
would be going into high gear.
Production last week was up nationally
about 2 per cent from the previous week, indicating that the mills were
beginning to increase their own inventories in anticipation of later
deliveries, predominantly to the automotive field.
The industry looked
for production of about 105-110 million tons in 1962 against 97-98
million this year.
Users of steel would be stocking inventories in
anticipation of a strike that seemed inevitable at the end of next June;
the industrial production index might be affected by this unusual
circumstance, and it should be kept in mind that it was a temporary
phenomenon.
The first half of 1962 might be of boom proportions and
the second half down very considerably.
After discussing further the prospects of inventory accumulation
in anticipation of a steel strike, Mr. Fulton said that in 1962 the
automobile companies expected to sell about 6.3 million domestic cars
and 1.2 million trucks, with foreign imports about 300 thousand.
However,
12/5/61
-38
their schedules for the first quarter called for production of
around 1.8 million cars,
a very high figure that would suggest about
a 7 million car year.
It seemed inevitable that steel prices were going to be raised,
Mr. Fulton continued.
There would be an effort made by the unions to
get the same type of settlement as with the automobile companies.
If
that were obtained, the cost to the steel companies would be substantially
more, however, because of the differential in the basic wage rate,
Also, part of the settlement with the auto companies included almost a
guaranteed annual wage,
and because of the ups and downs in the steel
industry such an arrangement would be quite costly.
Further, the mills
had to operate at about 70 per cent of capacity to realize a gain from
their new and improved facilities, and they had not been doing that
well.
Except for the first
half of 1962, prospects did not augur well
for such a level of production.
As to employment,
the operating rate
would be maintained with fewer men because of the large investments the
companies had made, so that even at a higher rate of production not
much of the unemployment would be relieved.
There was less and less
need for common labor, machines having taken over much of that type of
work.
As to policy, Mr. Fulton expressed the opinion that reserves
should be supplied to accommodate most of the requirements for credit.
12/5/61
-39
In the Fourth District there had not been a recovery to former levels.
Unemployment was still
high and the prospective improvement in activity
in the steel industry during the first part of next year could be
termed illusory because it would be in contemplation of a strike.
While he would like to see the bill rate in about the 2-1/2 - 2-3/4 per
cent range, which would assist in preventing a large drop in the rate
following the January return flow of currency, he felt that events
taking place in the field of labor rates and cost pushes were something
that monetary policy could not control,
that could affect the economy adversely.
If monetary policy interfered,
Therefore, he would not be
too concerned about price movements resulting from those factors in
formulating policy.
Until credit demands of individuals and corpora
tions increased actively, no overt action should be taken to restrict
credit,
In
other words,
he would not choke off credit until evidences
of abuse became apparent.
He would not change the discount rate, and
he would leave the directive in its present form, for the present at
least.
He would renew the special authorization.
Mr. Bopp said that despite the continuing improvement in business
in the Third District, as well as nationally, he would be inclined not
to make any major change in policy until evidence of the strength of the
expansion and its inflationary implications, if any, became clearer
and until the change in Regulation Q was absorbed.
Moreover, this was a
12/5/61
-40
period when unexpected tightening could easily develop, and the
market would seize on any major deviation in reserve figures and
other indicators as an indication of a change in policy.
While he
certainly would not be in favor of more ease and would not want
short-term rates to decline significantly, he believed that approximately
the present degree of ease should be maintained.
He would continue the
present discount rate, the directive, and the special authorization.
Mr.
Bryan said there was nothing significantly different in
Sixth District from the national figures,
the
with perhaps one exception,
namely, that District city banks seemed to be experiencing a somewhat
sharper increase in business loan demand in November.
Continuing, Mr. Bryan said that, although not wholly on the
same grounds, he was generally sympathetic to the point of view expressed
by Mr. Mills.
He believed that the System would be running into danger
if it tried to feed the boom-and he thought it was a boom, with some
structural defects that were causing unemployment--by pressing
reserves on the banking system.
As he saw it, the System had made, by
and large, the contribution that it might be expected to make to
recovery.
rate.
Total reserves were above the long-term 3 per cent growth
In the circumstances, his inclination would be to meet seasonal
needs and to reduce the projection of desirable growth in total reserves
from a 5 per cent annual rate to some lesser figure, perhaps 3 or4
12/5/61
-41
per cent or something in that range.
He agreed with the view that
the free reserve situation was especially treacherous at the present
time.
He would let the free reserve figures fall where they might,
after allowing for a seasonal adjustment in total reserves and a very
small growth factor.
Mr.
Bryan said he wished very much that in the next few months
the market could be detached from its preoccupation with the free
reserve figures.
He did not know how that could be done, but he be
lieved that this preoccupation had become dangerous at the present time.
What he feared, Mr.
Bryan said, was an international situation that
would require the System to take large and overt monetary actions in
order to try to correct a situation for which it
was not responsible.
Accordingly, he would favor a gradual shifting of posture.
Mr. Johns said the position he had come prepared to express
today was very much along the lines he had expressed three weeks ago.
In order to be as brief as possible, he would say simply that he would
be prepared to adopt almost without change the statement made by
Mr. Deming,
Mr.
which in turn included most of what had been said by
Ellis and by Mr.
Bryan.
He was inclined to believe that the rate
of increase of reserves and money that had occurred,
since August, was too rapid.
say in the period
In saying that, he did not overlook the
fact, as disclosed in the staff memorandum on member bank reserves,
12/5/61
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that there had been some fluctuating of that rate in the most recent
weeks.
For the immediate future, he would suggest that the rate of
increase of reserves and money be at no more than a 5 per cent annual
rate and in all probability something less.
Although he did not
propose to state what would be exactly the right rate, he would not
quarrel with 3 or 4 per cent.
In his opinion this was a situation in
which the Committee must be most attentive to the decisions made by
others, including the demands made upon banks by their customers and
the decisions of bankers with respect to lending and investing.
The
Committee should be prepared to alter its course quickly if necessary.
Mr. Johns also said that he would like to underscore the
caveats that had been expressed regarding the treacherous nature of the
free reserve target in the present circumstances.
He was aware of the
preoccupation of commentators and others with the free reserve figures.
However, if the current economic movement should continue, there was no
escape from the fact that free reserves were going to decline if
Federal Reserve followed an appropriate monetary policy.
the
How to get
rid of the preoccupation with the free reserve figures, he did not
know, but it should be done.
Mr.
Johns commented that if the resurgence of business activity
continued, with intensification of the demands for credit, the inevita
bility of rising interest rates must be recognized.
He would not do
12/5/61
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anything to prevent that from occurring,
If bill rates rose to the
area of 3 per cent, he felt that the System should be prepared to
give prompt consideration to an increase in the discount rate.
Mr. Balderston said that he had two observations of a technical
nature.
First, the chart appended to the staff memorandum on member
bank reserves afforded a person who had been out of the country for a
period a quick view of what had happened in the way of open market
operations.
He found that chart satisfactory,
Second, on the third
page of the New York Bank's report on open market operations there
appeared a comparison of actual total reserves with the "target" figures
found in column 3 of table 3 of the memorandum from the Board's staff,
which were based on a 5 per cent annual growth rate.
This comparison
provided an indication of the degree of coordination between the policy
decisions of the Committee and the implementation of those decisions
by the Desk.
As to the next two weeks, Mr. Balderston said he found himself
in sympathy with the position expressed by Mr. Swan.
In view of the
seasonal character of the period, he felt that the Committee's goal,
expressed in free reserves, might somewhat be higher than otherwise.
For reasons that had been mentioned around the table, including the
recent change in maximum rates on time and savings deposits and the
unsettlement in the Government securities market, this was no time for
12/5/61
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any overt change in policy.
In order to continue the existing policy,
he would suggest free reserves of $475 million for the week ending
December 13 and $550 million for the week ending December 20, this
differentiation being made in
light of the point brought out over the
last few months that the target for a high float week should be some
what higher than for a low float week.
Chairman Martin said he subscribed to the view that it
desirable to de-emphasize the free reserve figures.
would be
The market's
preoccupation with those figures had been a handicap for a long time,
and he hoped some means of de-emphasis could be found.
The Chairman went on to say that he thought the market was
setting the pace for the System at the present time.
there would be lower levels of free reserves,
interest rates,
however,
if
as a result of market forces.
His view was that
and probably higher
It
would be unfortunate,
the System created those higher rates or lower free reserve
levels at the present time.
The System had been pursuing a policy that
had been effective; whether the policy of ease had been extended longer
than would have been desirable was another question.
far, however,
Having gone this
the Committee should be very certain, before taking overt
action to lower the level of free reserves or to raise interest rates,
that market forces had been the generating factor.
In June, he
recalled, he had thought that market forces were going to create a
12/5/61
-45
situation such as now appeared about to occur, but there was no
follow-through.
Possibly there would be none now.
In any event, he
felt that the System should not fight a declining free reserve level
when it
was trying to pursue approximately the same policy that it
been pursuing.
had
This could not be put in terms of either total or free
reserves accurately.
However, there should be a posture that the
System had been contributing all it
could to the growth and develop
ment of the economy, without producing inflation, but that the System
had not taken upon itself the role of changing interest rates or the
reserve pattern.
A problem of judgment was involved, but in essence
this was where he came out.
Chairman Martin then said that by and large he felt the
Committee was rather close together today.
The consensus was clearly
for no change in the directive or the discount rate.
A majority
favored no change in the general over-all policy of supplying reserves
until the next meeting of the Committee,
A minority favored some
slight reduction of the pressure to keep up the level of reserves.
By and large, however, it seemed to him that the Committee favored
reaffirming the policy that it
had been pursuing for the past three
weeks for another two-week period.
At this point the Chairman asked Mr. Rouse whether he would
like to make any comments on the problem in the market as he saw it,
12/5/61
-46
to which Mr. Rouse replied that he thought it would be necessary to
play by ear to a large extent in the light of developments.
reserve picture appeared to be adequate.
period of continuing float, he felt
The
Since there would be a long
the comment made by Mr.
Balderston
was not as appropriate as under normal conditions.
Chairman Martin said he understood that the Committee favored
continuing the special authorization covering operations in
maturities,
with one dissent,
longer-term
and there was no comment to the contrary.
As to general policy, he inquired of Mr. Mills whether the latter
wished to dissent and Mr. Mills replied in the negative,
he thought the general policy was correct.
stating that
It was not by his own choice
but by necessity that he agreed with it.
The Chairman inquired whether anyone wished to place further
views on record at this point, and there was no such indication.
Thereupon, upon motion duly made and
seconded, it was voted unanimously to
direct the Federal Reserve Bank of New York
until otherwise directed by the Committee:
(1) To make such purchases, sales, or exchanges (includ
ing replacement of maturing securities, and allowing maturities
to run off without replacement) for the System Open Market
Account in the open market or, in the case of maturing
securities, by direct exchange with the Treasury, as may be
necessary in the light of current and prospective economic
conditions 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,
12/5/61
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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 s 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.
The Committee then 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
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,
Hayes, Balderston, Irons, King, Mills,
Mitchell, Shepardson, Swan, Wayne, and Fulton.
Vote against this action: Mr. Robertson.
At this point Mr. Hexter, Assistant General Counsel, entered the
room.
Referring to the subject of Federal Reserve operations in foreign
currencies,
Chairman Martin noted that since the discussion at the
Committee meeting on November 14,
certain additional material had been
-48-
12/5/61
distributed.
This included a new set of the previously distributed
staff documents relating to foreign currency operations, the revisions
having been mainly editorial.
Also,
in addition to the letter from
Mr. Wayne referred to at the November 14 meeting,
letters from Messrs.
Fulton and Swan had now been distributed.
The Chairman then turned to Mr. Young for introductory remarks
to a general discussion of the subject.
Mr. Young said that this was a serious problem for the System
and a difficult one,
widely.
views on which would necessarily differ rather
He wished to direct his introductory remarks to the broad
problem as he saw it,
Mr. Young then made substantially the following
comments:
What the Western world has been striving for since the
war is the reestablishment of a stable world payments system
with major currencies inter-convertible at negligible cost
and risk. That objective has been pursued because such a
system would enable international trade and investment de
cisions to be freed of currency risk, and this in turn would
promote both economic efficiency and economic growth in which
all would share.
But the convertibility we have attained has been subject
to volatilities, and appears susceptible to vulnerabilities,
and the public has become sensitive to these matters. Curing
of these problems takes time, especially since they arise
partly out of an uncertain equilibrium of the Western alliance
and the financial costs for the United States of maintaining a
reasonable semblance of Western unity, including unity with the
outer and less developed areas.
We are now in a critical phase, with the risk that gains
made will be lost. A breakdown in the payments system would be
a major setback, recovery from which would take years. The
12/5/61
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number one danger is that of a confidence fission; once set
off, the chain reaction would have to run its course. The
only solution is to brace the foundations of the payments
system wherever possible and feasible, so that public confi
dence in it will recover and gain strength.
The major steps in bracing the foundations at this time
are two. The first
is the IMF borrowing arrangement,
The
second is extension of central bank cooperation--with Federal
Reserve participation--to deal with the developing problem
before resort to a Fund drawing or borrowing.
The problem is nonpartisan, At stake in the end is the
faith and credit of the United States Government, because a
dollar of stable international value is the external symbol
of this faith and credit. An enduring solution will have to
be along nonpolitical lines, and its administration will have
to be as free of political bias as it is practicable to make
it.
Some financial risks are involved, but these are small
in terms of the stakes,
The plan for foreign currency operations emphasizes counter
seasonal and perhaps cyclical aspects of the problem because
experience shows that it is at points of seasonal and cyclical
strain that market doubts and protective actions become acute.
Reactions in exchange markets to uncertainty are volatile but
not necessarily speculative in the invidious sense of the word.
Disturbance becomes accentuated because participants in inter
national trade and investment, activated by doubts and
In the light
uncertainties, engage in protective operations.
of these actions, the professional bear or bull enters to
capitalize on the situation and to aggravate it,
Various details of the foreign currency operations plan
are debatable, but any final tailoring of the plan can be made
If the Committee
in the light of the Committee consensus.
wishes to consider an approach to operations through amendment
of the Federal Reserve Act, a very preliminary draft of possible
amendment is available for exploratory discussion.
Chairman Martin commented that such doubts as might exist regard
ing the legal basis for System operations in foreign currencies had been
focused clearly in Mr. Hackley's memorandum and in other comments.
In
the event of an emergency the System probably would have a basis on
which it
could act.
However,
the holding of foreign currencies would
12/5/61
-50
place the System in a stronger position to handle an emergency than if
it had to start from scratch, and that would require moving forward in
advance of the emergency, which was something the Committee might or
might not want to do.
The framework had been set up, and he would
suggest that there be expressions around the table.
Messrs. Fulton,
Swan, and Wayne had of course already expressed themselves in writing,
and Mr. Hayes had commented briefly on the proposal at the last meeting.
Mr.
Ellis said he had considerable sympathy with the views
expressed by Messrs.
There was general recognition
Swan and Fulton.
of the problem, he noted, and the concern was with the locus of
responsibility for action to meet the problem.
The question was whether
delegation of that responsibility by the Treasury or the Administration
to the Federal Reserve should not be sought and obtained in writing
before the System undertook any operations without legislative action.
While he saw a need for this kind of activity, he would not want to
proceed until the System had in writing some agreement with the
Treasury as to procedures and the System's degree of responsibility,
both in a geographical context and as to the extent of operations and
objectives.
If
legislation was sought,
it
might be expected that the
legislation would clarify the locus of responsibility, whether in the
Federal Reserve or in the Treasury.
steps should be followed,
but he felt
He was not sure what procedural
it
would be desirable to move in
12/5/61
-51
one of two directions, or perhaps in both directions simultaneously.
The System should negotiate with the Treasury as to what function the
Administration would like to have the Federal Reserve perform and,
perhaps simultaneously, an approach should be made to the Congress for
additional legislation,
Mr. Irons noted that in his study of the problem he had been
looking at the matter from a distance, on a theoretical basis, so to
speak, as contrasted with the position of those who were closer in
touch with the situation.
He would not want to underemphasize the
importance of central bank cooperation or the importance of the problem
under discussion. However, there were certain aspects of the matter
that bothered him somewhat. First, there was the question of the legal
basis for System operations in foreign currencies on the scale envisaged
by suggested holdings in the area of $500 million or perhaps $1 billion.
Recognizing that there could be varying judgments, it seemed to him
upon reading the legal opinion that one could build almost as strong a
case that the System did not have full legal authority, and that it had
not been the intent of Congress to give such legal authority, as it was
to build a case on the other side.
In his opinion this aspect of the
problem ought to be thought out and worked through carefully with the
Treasury and the Administration,
He would like to have the legal
authority given specifically, but he was not sure whether a request
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12/5/61
should more appropriately come from the System or from the Treasury
and the Administration.
Mr.
Irons said he also had been somewhat concerned about the
impression gathered from the staff documents that the range of System
operations would be rather extensive,
including the cushioning of
seasonal and cyclical swings, in contrast with operations to meet
temporary disequilibria.
The impression was given of a continuous
He wondered whether
operation, which he doubted would be desirable.
the proposal contemplated operations to such an extent that the System
would not be permitting market corrective forces to have their place.
In his opinion this point deserved thought and consideration.
Irons said he had some
As to the subcommittee proposal, Mr.
If
qualms although he did not feel too strongly.
the special operations
were directed primarily toward the correction of temporary disequilibria,
he wondered whether such events appeared so suddenly or unpredictably
that the situation was not comparable to operations in the Government
securities market.
In the latter respect it
had been possible to
operate through the full Open Market Committee and the Manager of the
System Account.
Therefore,
his question was whether disorderly conditions
in the foreign exchange market actually developed with such suddenness
as to require a different set-up, one that would involve a significant
delegation of authority to a subcommittee.
If
the subcommittee concept
12/5/61
-53
was used, however, he felt
that the subcommittee ought to report to
the full Committee as frequently and as completely as the Manager of
the Open Market Account reported to the Open Market Committee on
operations in the Government securities market.
Mr. Irons went on to say that he would prefer to have legislation
enacted before any operations were undertaken.
Recognizing, however,
that this might involve a long delay, he raised the question, without
suggesting that he would necessarily favor such an approach, whether it
would be desirable for the System to operate in the capacity of fiscal
agent of the Treasury in respect to foreign currency operations, in
view of the legal background, the uncertainty as to the type of inter
vention in the foreign exchange market that might be required, and the
uncertainty as to the System's basic responsibility. As he saw it,
this was a basic responsibility of the Treasury unless the Congress
assigned the function to the Federal Reserve.
Further,
on at least a
theoretical basis, he raised the question whether the undertaking of
these operations would not bring the System up against problems of the
kind that were essentially State Department problems.
Mr. Deming said he shared the concern that had been expressed
about System operations to cushion seasonal and cyclical swings.
It
had been difficult enough to sort out these matters when dealing with
the domestic economy.
In his opinion, the primary emphasis should be
12/5/61
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upon dealing with temporary imbalances,
lest the System get into a
situation where it was attempting to do something that could not be
done through this kind of operation,
seasonal and cyclical swings,
If
too much emphasis was put on
there might be more risk of overdoing
the System's efforts in this field than if
it
was recognized that some
sort of imbalances of that character would occur in
any event and that
the System ought to deal with temporary disequilibria and not get into
the longer-term area.
As to relations with the Treasury, Mr. Deming said he did not
feel that he would like to conduct operations in a fiscal agent capacity.
However,
the System obviously would have to coordinate whatever it
with the Treasury,
explicitly.
and it
did
would seem advisable to recognize that point
There should be a good understanding with the Treasury,
but the Federal Reserve would have to expect to be coordinated just as
much as the Treasury.
In summary, Mr.
done and that it
Deming said he felt
that this job needed to be
was quite logical for the central bank to do it.
He
shared the concern that had been expressed about the legal basis for
the operation and would prefer a more explicit and clear-cut authoriza
tion in the form of an amendment to the Federal Reserve Act.
He would
hope that this could get the backing of the Administration and that
legislation could be enacted rather quickly.
On the other hand, if the
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12/5/61
situation was very urgent he would go ahead and conduct operations
on the basis of Mr.
a little
Mr.
shaky.
Hackley's memorandum, even though he would feel
While he had the same feeling as expressed by
Irons regarding the subcommittee concept, he was not sufficiently
familiar with foreign exchange operations to judge what organizational
arrangement would be feasible,
Mr,
Clay commented that there seemed to be no prohibition
against the System's entering into activities of the kind under
discussion.
On the other hand,
there was no clear authority for such
operations and no clear evidence of Congressional intent that the
System should have the authority.
There was no doubt in his mind but
that somebody must get into the business.
However,
he would not think
that this was apparent only to the Federal Reserve; it should be
apparent to anyone who was close to international financial affairs.
Mr.
Clay commented that there would be many things to learn.
While the Federal Reserve probably had as much competence to go about
learning these things as any other organization,
involved in undertaking such operations.
there could be dangers
A mistake could be costly to
the reputation of the System.
Mr.
Clay went on to say that he had a basic feeling against
Government agencies taking unto themselves authorities that had never
been specifically granted, except in a true emergency.
In an emergency
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12/5/61
he would have no hesitancy about going ahead on the basis of Mr.
Hackley's memorandum.
However, the emergency did not exist today.
Therefore, he felt that the Congress should be given an opportunity,
and in fact urged, to assign this authority to the agency that in its
wisdom it would choose.
Perhaps the greatest service that the Federal
Reserve could do to the nation at the present time would be to urge the
Congress to go into the problem and consider it.
This would also point
up a number of other problems that must be faced on a national scale.
In summary, he felt that the Federal Reserve should not move forward in
this field at this time except to the extent of urging legislation.
Mr. Mills said he believed that the proposal to operate in
foreign currencies had proceeded to the point that required an affirma
tive or negative decision.
His own decision would be in the affirmative.
He had no great faith that operations of this kind could be conducted
successfully or without serious danger to the independent status of the
Federal Reserve System.
He hoped he was wrong, but the only way to
discover the possible results would be to experiment and he would
experiment along the lines of the proposal as it had been formulated
for the Committee, both as to a subcommittee direction of the operations
and in particular to operate over a short-term, fluctuating period in
the exchanges.
If the experiment moved along to a point where it would
require the System to redress a position it had taken, the System should
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12/5/61
move promptly to do so.
On the other hand, if it was discovered from
experimentation that these operations were performing a useful service,
the System should move more directly into the field. Basically, how
ever, he felt that the System should move.
Delay and reconsideration
of the matter for an indefinite period would not be helpful.
Mr. Robertson said that he would read portions of a memorandum
that he had prepared and would place on file.
However, he wished to
note that his comments were premised on the absence of a crisis.
there should be a crisis, he felt that the System should act.
If
The full
text of the memorandum from which Mr. Robertson then read was as follows:
Section 14(e) of the Federal Reserve Act (12 U.S.C. 358)
authorizes any Federal Reserve Bank (under certain conditions)
"to open and maintain accounts in foreign countries, appoint
correspondents, and establish agencies in such countries
wheresoever it may be deemed best for the purpose of purchas
ing, selling, and collecting bills of exchange and the conduct
of other open market transactions of the kind specified in sec
tion 14 of the Federal Reserve Act..."
I cannot perceive any Congressional purpose (and the
legislative history does not indicate one) of qualifying the
power to establish "agencies" while not qualifying the power
to appoint correspondents or to open and maintain accounts in
foreign countries. However, it may be that the statute could
be so construed, as indicated in Mr. Hackley's memorandum of
November 2, 1961, if it stood naked and one could not look
elsewhere for enlightenment.
As a matter of fact, the statute must have been so con
strued during the late 20's when the Federal Reserve Bank of
New York did open and maintain an account with the Bank of
England which was clearly not for the purpose of "purchasing,
However, it must
selling, and collecting bills of exchange".
criticized on
severely
action
was
that
that
not be forgotten
the floor of the Senate in 1932 by Senator Carter Glass, often
12/5/61
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referred to as the father of the Federal Reserve Act.
He
contended that the actions were contrary to law. Almost
immediately thereafter, in 1933, and while the issue was
hot, the Board advised the New York Federal Reserve Bank
that in its view "...such accounts may be opened and main
tained only for the purpose of facilitating the purchase,
sale and collection of bills of exchange and the conduct of
other open market transactions of the kind specified in
section 14 of the Federal Reserve Act..." In 1934 the Board
reiterated this view, as set forth on page 8 of Mr. Hackley's
memorandum.
Hence, there has been a long continued administrative in
terpretation by this Board of this statute, originally made at
a time, as already noted, when the statute itself and actions
thereunder by the Federal Reserve Bank of New York were under
severe criticism from an extraordinarily interested member of
the United States Senate. Therefore, even if the statute was
originally subject to the interpretation now placed upon it
by the Legal Division, it is extremely doubtful - in view of
this long continued administrative interpretation - that it
would now stand up under public and Congressional scrutiny.
As mentioned in Mr. Hackley's November 2 memorandum,
there are "uncertainties as to the construction of the law"
that is, as to whether the law authorizes Reserve Banks to
open and maintain foreign accounts for the purpose contemplated
by this proposal. In my judgment, these uncertainties are
substantial indeed and some of the arguments to support the
legality of the proposal (such as the "comma" argument) are
subject to grave weaknesses revealed by the memorandum itself.
This grave uncertainty regarding the proposed statutory
interpretation is made even more serious by the fact that the
matter was specifically dealt with by the Board - in the
early 30's - and on that occasion the Board definitely decided
that foreign accounts could not legally be maintained for
such broad purposes, and required the correction of a devia
tion from this principle.
Even if one could accept the interpretation that section
14(e) does not authorize the maintenance of foreign accounts
only for the purpose of dealing in bills of exchange, it does
not follow that the power to maintain foreign accounts - basi
cally an incidental power - can be regarded as an authorization
to exercise the broad policy functions contemplated by the
instant proposal. In other words, even if foreign accounts may
12/5/61
be maintained in connection with functions other than dealing
in bills of exchange, these must be functions that are author
ized by the Federal Reserve Act. Nowhere in the Act can
authority be found for the stabilization function that is the
core of this proposal.
Even if its legality were to be assumed, I think the
proposed action would be highly questionable because it is
inconsistent with explicit Congressional authority. In
creating the Stabilization Fund, Congress made available to the
Treasury the sum of $2 billion for the purpose of "stabilizing
the exchange value of the dollar." Subsequently, in 1945,
Congress reduced the amount to $200 million. For the Federal
Reserve to now attempt to augment that $200 million either by
purchasing foreign exchange from the Stabilization Fund whenever
that fund has been used up or by operating in the same field on
its own (which could be in unlimited amounts if the Board of
Governors and the Federal Open Market Committee so determined)
could be interpreted as circumventing the will of Congress by
making available more dollars for the purpose of "stabilizing
the exchange value of the dollar" than Congress contemplated.
For the foregoing reasons, it is my view that the Federal
Reserve System shculd not launch the proposed plan without
specific legislative authorization. I do not think it would
suffice merely to obtain the informal approval of the Chairmen
of the House and Senate Banking and Currency Committees.
As for the merits of the proposal, absent tne question of
legality and the question of circumvention of Congressional
will, it is my view that it would be unwise for two separate
agencies of the United States Government to be engaged in "buy
ing and selling foreign exchange" - even though at the moment
it would appear that harmonious and coordinated action could be
expected. Such a function as this is extremely delicate. It
involves not only tinkering with what up until now has been
regarded as a pivotal currency, around which others have been
It also involves very sensitive international diplomatic
traded.
relationships, with which the Federal Reserve System is not in
The function would seem to be more
the best position to cope.
appropriately one for the Treasury (which Congress has already
designated to handle the problem), for it is a part of the
Executive Branch of the Government and is therefore in a better
position to coordinate its activities with the State Department
Therefore, the best approach to this problem
and the President.
- if a problem it is - would be to submit the entire matter to
Congress for discussion,
12/5/61
Although I would not be opposed to Federal Reserve hold
ing of foreign currency (if the Congress directed or authorized
us to do so) and although I have great sympathy for the view
that foreign countries might be more inclined to hold dollars
as a portion of their official reserves if the United States
Kept part of its official reserves in the currencies of those
countries, I am not convinced that this "inclination" would be
enhanced by expanding their holdings of dollars through swaps
of dollars for their currencies.
The reason for gold outflow in very recent years has been
the result of foreign dollar holdings in excess of what the
foreign countries desire to hold. Hence, they exchange them
into gold, as they are free to do. Would those countries be
any more inclined to hold their dollars and not exchange them
for gold if they were provided with even more dollars by an
arrangement such as is now proposed? I doubt it. Hence, I am
not convinced that the proposed Federal Reserve operations in
foreign currencies would solve the problem. They would merely
camouflage the difficulty, which is one of dealing with the
balance-of-payments problem.
As I understand the proposal, it envisages perpetual in
tervention in the exchange market by the Federal Reserve Bank
of New York for the purpose of offsetting speculative trading
in world currencies and thus endeavoring to maintain stability
in the exchange value of the dollar. If this be so, it seems
to me that the operation could develop some of the same
disadvantages associated with operations to peg prices in the
Government securities market. It can be argued that this
analogy should be discounted on the grounds that the exchange
value of the dollar is already pegged by the Treasury's fixed
buying and selling prices for gold; it may also be said that
the actual aggregate flows of funds through the foreign
exchange markets are ordinarily sufficiently steady and
moderate in size to be offset handily by the System without the
involvement of major amounts of resources. Such comments,
however, overlook some of the damaging influences upon market
performance which can accompany direct interference by the
central bank. If the central bank, with an arbitrary but
changeable judgment backed up by practically limitless resources,
were repeatedly to override private market pricing processes,
the ability and willingness of private participants to make a
market could well deteriorate. The market would give a distorted
picture of the current balance of supplies and demands, and all
interested parties, both private and governmental, would lose
12/5/61
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this up-to-the-minute indicator of the tide of trade and
capital flows.
Concentration of market pressures might be
instigated whenever rumors arose concerning Federal Reserve
interference, particularly with respect to rumors of possible
changes in our buying or selling prices.
We have long eschewed operations for the purpose of
pegging prices in the Government securities market, and (at
least until the past year) have asserted that our operations
should be for the purpose of providing or absorbing bank
reserves in accordance with the needs of the economy, except
where other action is necessary to correct (or possibly prevent)
a disorderly market.
I suspect that all of us would agree that
if a disorderly Government securities market developed, the
Open Market Committee should intervene for stabilization
purposes, even though this might involve temporarily injecting
into the banking system a more than desirable amount of reserves.
Similarly, I suspect that all of us would agree that if a
dangerously disorderly foreign exchange market should develop,
some agency of the Government should step into the breach with
adequate resources to stabilize it,
It is my understanding that this is the very purpose for
which Congress provided the Stabilization Fund. If the amount
of that fund is insufficient, then the Treasury should request
Congress to expand the fund to an appropriate extent - the
sooner the better. If the situation is as serious as is
assumed by those who propose this program to the Committee, then
the Treasury should have no difficulty in persuading Congress to
The law could even be amended to provide the
provide the funds.
Treasury with some specific emergency borrowing authority from
the Federal Reserve as a safeguard against such eventualities.
But in the absence of a disorderly situation, I question the
wisdom of continuous frequent purchases and sales of foreign
currency by any agency - even by the Stabilization Fund - in an
In my judgment this
attempt to offset presumed speculation.
would be more likely to increase speculative activities and
diminish confidence in the dollar than to have the beneficial
effect contemplated by the proponents of the proposed operation.
In the long run, no policy of exchange manipulation is so likely
to restrain unwarranted speculation against the dollar as the
continuing provision or purchase of gold by our Treasury at
$35 per ounce.
There are no gimmicks by which the position of the dollar
It would be unwise to resort
can be maintained in the world.
to devices designed to hide the real problems and assuage their
12/5/61
62
symptomatic effects.
We should ascertain the origin of the
symptoms and hasten to deal with the cause, rather than the
effect.
The United States must practice what it has long
preached about the need for monetary and fiscal discipline.
As a nation, we will not benefit from putting our head in the
sand and engaging in tinkering operations designed to persuade
others to think that a problem does not exist and to convince
ourselves that if we can tide ourselves over the temporary
pain the real difficulty will go away. This nation must face
the underlying problem and deal with it in appropriate ways.
We must develop and adhere to sound policies designed to
eliminate unsustainable deficits in our balance of payments.
Mr.
Shepardson said it
seemed to him the System had enough
leeway under the present statutes to justify taking such action as
might be warranted.
On the other hand, he thought it
would be preferable
to approach the matter from the standpoint of getting specific
legislation.
He was not sure whether such legislation should be sought
by the Federal Reserve or by the Administration.
give its
support, but it
might be preferable if
The System ought to
the request came from
the Administration,
As to the question of handling an emergency, Mr.
said it
Shepardson
was not clear to him, absent any foreign currency holdings,
just how the System could get into the operation.
framework of things,
the acquiring of foreign currencies would seem
only to create further imbalances.
for some agency,
In the present
Also, while he thought it
and perhaps the central bank, to move in
emergency, he would be much concerned if
desirable
in case of an
attempts to counter seasonal
and cyclical influences served to mask the pressure for fundamental
12/5/61
63
corrections.
Many examples of the fallacy of that reasoning had been
seen in other Government policies.
With regard to the subcommittee concept, Mr. Shepardson said
it occurred to him that the approach suggested was the reverse of the
approach that should be followed in this kind of situation.
where many admitted to too little
it
understanding,
In a field
seemed to him that
frequent reporting to and participation by the whole Committee would
Once an understanding of
help to build up the degree of understanding.
supervision of the operations might be delegated
the problem was acquired,
to a subcommittee,
but it would seem wise in
the beginning to provide
for complete reporting to the whole Committee.
Mr. King said that, absent an urgent need, he saw no need to
proceed further with this matter at this time.
He did not think the
Federal Reserve was the proper place for these operations if
to be conducted.
Instead, he felt that a political agency or body would
be the proper place to lodge the responsibility.
said on various occasions,
stage it
they were
could founder.
if
As he had heard it
the System should get into politics at any
In its regular operations, the System of course
touched upon domestic politics and also international affairs to some
extent, but to him an operation in foreign currencies would constitute
an intrusion into an area where the System should not venture.
In a
crisis he would throw the rule book into the desk and proceed in the
12/5/61
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best way possible, but in the absence of a crisis he saw no need for
the System to go further.
recommendations it
The Administration could make whatever
wanted to make on the subject; his own recommendation
would be to put the operation in the Treasury, and he would endorse
the appropriation of money for that purpose.
If the Congress decided
to place the responsibility with the System, the System would have to
live with it.
However, he had some doubt whether the organizational
set-up of the System was suitable to cope with the quick decisions
that would have to be made in this area.
In summary, Mr. King said, he would hope that the Administration
would take whatever action it felt desirable in the way of recommenda
tions to the Congress, and he would hope that the operation would be
placed in the Treasury.
Mr. Mitchell commented that operations in foreign exchange were
a very real issue and one that would become more acute with the passage
of time.
He was not sure to what degree reliance could be placed on
private forces to equilibrate unstabilizing exchange factors.
he was not inclined to go quite as far as Mr. Robertson.
Therefore,
On the other
hand, he was not sure but that the staff proposal went too far in
inferring that a stabilization operation by the System or the Treasury
would be an effective way of dealing with all of the disturbances in
the area concerned.
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On the question of where the responsibility for exchange
stabilization should be lodged, Mr. Mitchell said he was surprised to
see some people who had been saying that the System should exert an
influence on the international payments position through domestic
monetary policy now saying that the System should refrain from
operations in foreign currencies.
He felt that the System must be
prepared to enter into foreign exchange transactions if such operations
could strengthen the dollar.
The primary concern of the Federal
Reserve was with good money and a sound dollar, and the Federal Reserve
was the only agency having that objective as its primary concern.
Treasury was interested, of course, but it had other concerns.
The
If a
sound dollar was the primary purpose of foreign currency operations,
presumably the System would want to insure that such goals as
diplomatic and trade policy were definitely of secondary concern.
Mr. Mitchell stated that he had come to the conclusion, he
thought, largely on the basis of what Mr. Young had said, that if
foreign currency operations were going to be undertaken the Federal
Reserve was the best agency to carry them out.
He noted that it had
been said that the proposed plan was available if an emergency arose.
If this were the case, he saw an obligation to act immediately to call
the matter to the attention of Congress or the Administration.
The
System should not wait for an emergency, but should take this step
12/5/61
-66
immediately.
Accordingly, he would hope that the Committee would
authorize and direct its
Chairman to initiate negotiations with the
Secretary of the Treasury, or whoever else was appropriate,
in
order
to accomplish the drafting of legislation that would achieve the
results about which the Committee was talking.
again came together in
a couple of weeks,
Then, when the Committee
he would hope that something
more or less concrete along this line might be available for
consideration.
Mr.
Bopp said that, like others who had spoken, he was
concerned about the legal basis for System operations in foreign
currencies.
The legal authority was not based on specific provisions
of the law but rather a construction of the statutes.
The System had
at times operated on the basis of construction of the statutes but in
a democratic process it was important, absent an emergency, to have
specific authorization.
Further, he thought it
important to have this
If
they were begun without
authorization before operations were begun.
specific authorization,
there might be some question about the need to
obtain legislation.
Mr. Bopp also said, in terms of the economics of the matter,
that intervention was intervention, whether in the Government
securities market, the foreign exchange market, or wherever it
occur.
He was somewhat surprised that it
might
seemed to be assumed that in
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the foreign exchange market the System could distinguish between
temporary,
seasonal, and cyclical movements.
could not do so in the domestic market.
to agree with Mr. Robertson.
It
had insisted that it
he was not inclined
However,
It was his feeling that intervention in
both types of situations might be necessary,
In terms of the foreign
exchange market, that intervention could be on an exceptional basis,
as in the case of the authorization covering operations in other than
short-term Government securities.
Mr. Bopp said he thought it
was cogent to suggest a significant
difference between the foreign exchange market and the Government
securities market.
The System had supported Government securities
prices in the past and was able to do so because it
create the domestic means of payment.
However,
had the power to
in the foreign exchange
market the value of the dollar could be maintained only so long as there
was adequate foreign exchange and gold to support the price.
country's basic position continued to deteriorate,
it
If this
would ultimately
run out of both gold and foreign exchange.
Mr. Bopp went on to say that he saw no convincing evidence of
need for a subcommittee.
As he read the staff documents, it occurred
to him that the full Committee could issue guidelines as well as
instructions to the management of the special account.
Incidentally,
the proposed guidelines would, without doubt, delegate a great deal of
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authority to the account management.
Perhaps that was necessary.
But if it was, there could be a direct delegation from the Committee
as a whole and he did not see the need for intervention of a
subcommittee.
Mr. Bryan commented that he was impressed by what Mr. Young
had said in his initial statement concerning the efficiency of
convertible currencies.
However, if convertibility was to be maintained,
it would be necessary to pursue domestic policies that did not contravene
such convertibility.
That was a point too often overlooked.
He tended
to believe that at the present time the United States dollar was
headed rapidly in the direction, if it was not there already, of being
a weak currency.
He tended to assume, therefore, that if this country
was to maintain convertibility indefinitely it would have to pursue
domestic economic policies such as to permit the retention of
convertibility.
It would be a tragedy if the world lost any further
confidence in its major reserve currency at the present time.
Mr. Bryan then raised the question whether confidence in the
dollar would be increased by supplying more dollars and holding foreign
currencies.
He felt that the dollars supplied would sooner or later
find their way into short-term obligations of the United States or
would be converted into gold.
Precisely the opposite course seemed to
be needed; that is, a supply of less dollars to the international
monetary market.
12/5/61
-69As to the legal aspect of the matter, Mr.
of course concerned from that standpoint.
Bryan said he was
He noted that the balance
of-payments problem had not been created by monetary policy but by
policies of the Administration and of the Congress.
(In
saying this,
he was not referring specifically to the present Administration or
Congress,
for the problem went back a long time.)
Further, he believed
that the fundamental problem could be dealt with only by fiscal and
legislative policies of extreme prudence.
Sometimes, he observed, a
great deal more harm can be done, with good intentions, by intervening
to save the patient some pain than by letting him realize he is
sick.
In this connection he referred to the sterling crisis earlier this
year and the steps that were taken by the British to deal with it.
He asked whether it would have been better for the U. S. to buy
sterling to ease the situation, as the European banks did under the
Basle arrangements, or whether it
was not better for the British to
face up to the problem and take the necessary measures.
The Federal
Reserve System had managed to hold up the bill rate and prevent some
outflow of short-term funds from this country, but he was not certain
that it
had really done the nation a good turn.
It
may have merely
delayed recognition of the painful situation that exists.
Mr. Johns commented, with respect to the legal aspects of the
matter, that he thought counsel had produced a lawyer-like document
12/5/61
-70
which presented the arguments on both sides and came to the position
that System operations in
However, Mr.
foreign currencies would be defensible.
Johns said, he was not so much concerned about the legal
authority of the System to engage in
to be.
When a corporation exceeded its
to ask who would raise a question.
could come only from one source,
America.
this activity as some others seemed
charter powers,
it
was important
In this case the question apparently
namely, the sovereign United States of
The Attorney General might raise a question on behalf of the
Administration, but he would assume that the System would not undertake
the operation without assurance that the Administration was in
agreement with it.
the Congress,
The other source that might raise a complaint was
also representing the sovereign.
did not like what the System did, it
However,
if
the Congress
could take corrective measures.
They might be drastic, but the power was there to take action if the
Congress so desired,
As to whether a need for these operations existed with any
degree of urgency, Mr.
judgment of others.
Johns said that he would have to accept the
If it did, he would suggest going ahead and
perhaps simultaneously or later, as might be propitious, seeking
legislation to clarify the System's authority.
He had real doubt
about the power of the Committee to delegate its responsibilities.
This was an old question; the Committee had settled it
years ago when
12/5/61
-71
it abolished the executive committee.
He was not quite satisfied by
the argument that a subcommitteethat supervised the operations was
not making policy.
The executive committee was abolished because the
Committee became convinced that it was not confining its activities to
administration and instead was actually making policy.
This is almost
inevitably the result, he suggested, when delegations of authority are
made to a small group.
At this point, Chairman Martin turned to Mr. Coombs and inquired
whether the latter had any comments.
In reply, Mr. Coombs said it was clear that many members of the
Committee were concerned over the recommendation in the staff papers to
the effect that System exchange operations should be employed to offset
seasonal and cyclical swings in the balance of payments.
This
recommendation had been interpreted as implying almost continuous
intervention in the exchange markets from the very outset of the
program.
He had personally interpreted this recommendation as a
longer-range objective.
At the present moment, for example, it would
be extremely difficult, if not impossible, to determine with any
accuracy the seasonal and cyclical patterns in this country's balance
of payments, although this might well become possible at some later
date.
In any event, there would be no need to delegate to the manager
the responsibility for deciding on intervention to offset seasonal
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or cyclical pressures; there would be, presumably, plenty of time
for the Committee itself to discuss the pros and cons of intervention
of this nature.
In Stabilization Fund operations, Mr. Coombs noted, the approach
had been almost exclusively centered upon dealing with specific
instances of speculative pressure against the dollar.
In such instances,
intervention in very moderate amount could often nip in the bud
speculative movements which, if allowed to go unchallenged, might
quickly develop into a major attack,
the New York Bank as their agent in
Many European banks that used
the United States exchange market
had operated over the years along these lines with extremely effective
results.
In our own case, the desirability of intervening to restrain
speculative movements might well arise no more than fifteen or twenty
times a year, with possibly lengthy intervals during which no
intervention whatsoever would be required.
On the question whether the foreign exchange market was more
sensitive and volatile than the Government securities market and hence
allowed less time for policy decisions, Mr. Coombs stated that he was
not sufficiently acquainted with the securities market to make a
comparison.
He did know from experience, however, that speculative
pressures could boil up within a matter of minutes in the exchange
market, which was at present in an extremely nervous, if not almost
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jittery, mood as a result of the succession of exchange crises during
the past year.
It
would be desirable to have the resources to deal
with such periodic emergencies,
so that exchange operations could
resist speculative trends before they had gone too far.
The
consequent need for making quick decisions whether or not to intervene
in a given situation was complicated by the necessity of coordinating
any decision on operations with the foreign central bank or banks
concerned.
This problem of coordination was further complicated by
the five to six hour time differential between the United States and
European exchange markets, which might, on occasion, compress the time
available to a matter of minutes.
Mr. Hayes expressed agreement with what Mr. Coombs had said.
He went on to say that he had been much interested in the comments
around the table.
They reflected a healthy and rather profound study
of some of the basic issues involved, which were not simple, clear-cut,
or easy to deal with.
The whole legislative set-up was somewhat fuzzy, Mr. Hayes
noted.
The New York Bank's counsel had reached the same conclusion as
Mr. Hackley; namely, that the System did have sufficient legal
authority.
Like others, Mr.
authority crystal-clear.
Hayes said, he would like to have that
He could see some real merit, if
was going to be in this field to stay, in having a specific
the System
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Congressional authorization.
On the other hand, he would be quite
satisfied to proceed with counsel's opinion as a guide.
As to the roles of the Treasury and the Federal Reserve,
some
of those who commented had suggested that the Stabilization Fund was
set up for this kind of purpose.
Actually, however, the Fund had been
used for a lot of other purposes,
and probably would continue to be
used for such purposes.
It had been used to assist United States
foreign policy in relation to various weaker countries that needed
shoring up, as a kind of an arm of State Department activity.
not sure that it
He was
would be appropriate to have the kind of operation
that the Committee was discussing thrown into that kind of set-up, as
opposed to keeping it in the central bank.
In many foreign countries
this type of operation was pretty much a central bank responsibility.
With respect to the discussion about Federal Reserve efforts
to help prevent destabilizing influences on the currency, Mr. Hayes
said he had been much impressed by Mr. Mitchell's comments.
If the
System did not have a whole-hearted concern for protecting the value
of the dollar, he did not know who would.
Obviously, whatever was
done by the System would have to be done in close concert with the
Treasury.
There had been some discussion as to whether System
operations might not be performed under the direction of the Treasury.
He would shy away from that due to implications in respect to domestic
12/5/61
-75
activities, but it
veto.
should be clear that the Treasury would have a
The System certainly was not going to be doing things in con
ducting foreign currency operations that would run contrary to the
position of the Treasury.
At the same time, the System should and
could arrive at a good written agreement with the Treasury.
the Administration's wishes were concerned, it
So far as
was his clear feeling
from conversations he had had that the present Treasury attitude was
highly receptive to the System getting into this activity.
he had been told that the sooner the System got in,
Treasury would like it.
necessarily feel.
In fact,
the better the
This was not to say how the Congress would
He would suggest further exploration of that aspect.
Mr. Hayes said he sensed a little feeling, which was quite
understandable,
of reluctance to get the System into a new area of opera
There were some risks of loss and of criticism that might be
tions.
dangerous to the System's reputation.
However,
one could not just say
that, because the System had gotten along without these operations thus
far, it
could get along without them now.
While he concurred in the view
that this country must follow proper fundamental policies, in the
present-day world the dollar was not the unique currency that it
was.
once
This country could not just stand aside and let the waves of
activity of other countries wash up against it.
There might be a
tendency to overlook the fact that exchange operations are a reciprocal
12/5/61
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business.
If
this country did not do anything,
would nevertheless be operating freely.
other market forces
Other major central banks
were operating, and operating on the dollar, in ways that affected
this whole question.
Instead of standing aside,
therefore,
he would
like to see this country play a more active role on a cooperative basis.
In summary, Mr. Hayes said, he thought there wasa lot to be said
for undertaking this activity.
the System in
engaging in
Because of the fundamental interest of
the dollar, there was much to be said for the System
the proposed operations,
but in full cooperation with the
Treasury.
As to just how the operations would be conducted, Mr.
Hayes
said he agreed with Mr. Coombs that the basic objective should be to
meet speculative surges as and when they developed.
predicted.
These could not be
He would not advocate any massive building up of holdings
of major currencies at this time; rather, he would suppose that the
only acquisitions of foreign exchange that the System might make in
the near future would be moderate amounts of the currency of those
countries with whom at the moment this country was running favorable
balances.
There was the prospect that in the next few months several
major currencies would be running in
deficit against the dollar,
and
those situations might provide an opportunity to build up holdings that
could be used later.
Further,
certain comments that had been made
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-77
overlooked the importance of forward operations. Mr. Hayes said these
do not put any dollars in foreign hands but on the contrary may take
them out of the market.
Turning to the organizational aspects of the matter, Mr. Hayes
said he had no particular brief for a subcommittee as against a full
Committee operation, except as a means of getting things done quickly.
The more that the full Committee could understand the problems involved
and get thoroughly into them, the better he would like it.
He would be
inclined to agree that the guidelines in large measure could be adopted
by the full Committee; they would be mainly statements of long-range
policy.
On the other hand, if
a question should arise overnight as to
whether certain substantial operations should be conducted, he doubted
that it
would be fair to ask the manager of this activity to take the
responsibility on his own, particularly when a new type of operation
was involved and the System was feeling its way.
Therefore, he felt
there ought to be someone to whom the manager could turn for quick
consultation.
If
it
was practical to get the full Committee together
on a rush basis, he would be glad to favor such an organizational
arrangement,
but he doubted the practicality of it.
Perhaps it
would
be advisable to have some procedure whereby the Committee could delegate
to the Chairman,
or to the same people who would be on the proposed
subcommittee, authorization to enter into operations within stated
amounts
12/5/61
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Mr. Hayes said he did not want to prolong the discussion by
going into too many details.
Personally, he felt that the proposal
under discussion would represent a constructive move and that the
System should proceed along the lines suggested in
the staff documents.
At the same time, he would welcome the addition of concurrent
Congressional authorization.
Mr.
Balderston said he agreed that the proposal before the
Committee provided a mechanism by which the Federal Reserve could help
to meet a crisis.
Although he hoped that the event would not occur,
there was no way of telling whether or how soon such a crisis might
develop.
Since the proposed operation was so close to the function
carried on by the Open Market Committee in domestic affairs, he felt
it
would probably be unwise not to undertake it.
50 years, it
Looking ahead 25 or
would probably seem like an abdication for a committee
that was trying to control the volume of reserves needed by the domestic
economy to have turned over to some other agency the function under
discussion.
its
Accordingly, he would propose that the Committee authorize
Chairman to work out with the Secretary of the Treasury the
necessary arrangements,
and to consult again with the Chairmen of the
Banking and Currency Committees so that they would understand what was
contemplated.
This might lead to introducing legislation.
Having
visualized the possibility of a crisis, he was fearful that failure to
12/5/61
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act might make the System culpable.
that it
The Committee had been advised
had a legal basis for proceeding, even though one would like a
more clear-cut authorization from the Congress.
Therefore, he would
suggest that the Committee authorize the Chairman to proceed with
necessary discussions with the Secretary of the Treasury and with the
proper parties in the Congress.
Chairman Martin stated that it
not united on a good many points.
was clear that the Committee was
However,
he thought the discussion
probably had e overed everything that could reasonably be covered today,
Therefore, he would suggest that the discussion be concluded at this
point and that the sense of the meeting be that he should endeavor to
explore the matter further with the Treasury and then give the
Committee additional comments,
including comments with respect to
legislation or the division of responsibility, at the meeting on
December 19.
After further discussion, it was the understanding that this
was the sense of the meeting,
Chairman Martin then referred to the subject of the Committee's
operating policies and directive,
and to the comments that had been
received following the distribution of drafts with a memorandum from
the Committee Secretary dated September 6, 1961.
The Chairman suggested
that these matters be included on the agenda for discussion at the
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12/5/61
December 19 meeting, with the understanding that it might be necessary
for the meeting to run on into the afternoon, and agreement was
expressed with this suggestion.
In this connection, Mr. Wayne
suggested that in view of the prospective heavy agenda, and since only
a two-week interval between meetings would be involved, summaries of
District economic and financial developments might be somewhat curtailed
at the next meeting, and the Chairman indicated that he concurred.
As indicated by the foregoing discussion, it was understood
that the next meeting of the Open Market Committee would be held on
Tuesday, December 19,
1961.
The meeting then adjourned.
Secretary
/
Cite this document
Federal Reserve (1961, December 4). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19611205
@misc{wtfs_fomc_minutes_19611205,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1961},
month = {Dec},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19611205},
note = {Retrieved via When the Fed Speaks corpus}
}