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 19, 1961,
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
at 10:00 a.m.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Irons
King
Mills
Mitchell
Robertson
Shepardson
Swan
Wayne
Fulton, Alternate for Mr. Allen
Messrs. Ellis 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, Garvy, Noyes, and
Ratchford, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Molony, Assistant to the Board of Governors
Mr. Furth, Adviser, Division of International
Finance, Board of Governors
Messrs. Holland and Koch, Advisers, Division of
Research and Statistics, Board of Governors
Mr. Yager, Economist, Government Finance Section,
Division of Research and Statistics, Board of
Governors
Mr. Francis, First Vice President, Federal Reserve
Bank of St. Louis
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Messrs. Coombs, Eastburn, Hostetler, Parsons,
Mr.
Mr.
Mr.
Mr.
and Tow, Vice Presidents of the Federal
Reserve Banks of New York, Philadelphia,
Cleveland, Minneapolis, and Kansas City,
respectively
Willis, Economic Adviser, Federal Reserve
Bank of Boston
Arlt, Assistant Vice President, Federal
Reserve Bank of St. Louis
Stone, Manager, Securities Department,
Federal Reserve Bank of New York
Brandt, Assistant Cashier, Federal Reserve
Bank of Atlanta
Upon motion duly made and seconded,
and by unanimous vote, the minutes of
the meetings of the Federal Open Market
Committee held on November 14 and
December 5, 1961, were approved.
Before this meeting there had been distributed to the members
of the Committee a report of open market operations covering the
period December 5 through December 13, 1961, and a supplemental report
covering the period December 14 through December 18,
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:
Since the last meeting of the Committee, money market
conditions have been relatively easy. Now that the
concentration of pressures on the central reserve city banks
has been relieved with the curtailment of dealer borrowing
needs, we have had more symptoms of ease than we had earlier
with the same level of free reserves. The ready availability
of reserves during the first statement week of the period
resulted in our selling bills in the 91-day maturity area in
order to reduce the resulting downward rate pressure; in one
case we partly offset our sales of bills by purchases of
longer-term issues which happened to be in supply at the time.
In the past few days, there have been less downward pressures
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on bill rates, partly as a result of the sales we have
made but also reflecting the caution which generally
prevails around December 15 when considerable churning
takes place in connection with tax and dividend payments.
It is hard to predict the trend of bill
rates for the eight
remaining business days to the end of the year, but they could
turn down again if the money market becomes easier.
In past
years money has continued in demand up to the last day or two
in relation
of the year, but may not do so this year, i.e.,
to free reserves, if free reserves remain at present levels.
rates will be more acute
More likely, the problem of bill
after the first
of the year when money conditions normally
become easier and short rates tend to decline.
As to the longer-term market, psychology continues to lean
toward higher rates as most developments in the news seem to
point in that direction. Market prices have moved down only
intermittently, however, as activity is very light and the
market is so thin that prices are highly sensitive to influences
of all kinds. Bank tax swapping has been unusually small as
most banks have made this a profit year and are not in a
position to take losses, but a sharp pickup in this kind of
of the year.
activity is expected by the dealers after the first
The corporate and municipal markets have been stronger in
the past few days and yield spreads between corporates and
Governments are quite narrow. In the corporate area the
calendar of forthcoming new issues is very light and dealers
have been able to dispose of a number of recent sticky offerings
by lowering prices, so that their inventories are considerably
reduced. The municipal market is getting a boost from the change
in Regulation Q as we have reports of substantial purchases of
municipal bonds by banks in order to cover the prospective
greater earning needs,
Bankers' acceptances have backed up in dealer portfolios
to the extent of about $104 million, mainly as a result of
increases in other short-term rates and normal year-end
influences. Although dealers raised the acceptance rates by
1/4 of 1 per cent in two steps, they are apparently not greatly
concerned about their positions and expect the situation to
straighten out after the year end; in the meantime, they are
earning a good return on their holdings. They should be able
to take events such as this in their stride as the bankers'
acceptance market has been growing every year.
I should like also to mention that we will probably have a
in the near future. The
new name added to our dealer list
Harris Trust and Savings Bank of Chicago has for some time been
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considering establishing a dealer department and its
directors last week authorized the management to take the
necessary steps. This bank is one of the most active
Midwestern dealers in municipal bonds, and has the
experience and contacts to do a good job in Government
securities.
Thereupon, upon motion duly made and
seconded, the open market transactions
during the period December 5 through
December 18, 1961, were approved, ratified,
and confirmed.
Mr. Noyes presented the following statement with respect to
economic developments:
Most measures of economic activity showed improvement
in November, as weather conditions were nearer the elusive
normal, and industries directly and indirectly affected by
auto strikes returned to full-scale operations. A part of
the month-to-month improvement must be attributed to the
fact that activity in September and October was held back
by special circumstances, but even after allowing for some
spill-over from this source, the November volume is
impressive.
Retail sales were up 3-1/2 per cent--led by a 12 per
cent gain in autos, but other sectors also showed improvement.
Industrial production was up a point in the final calcu
lations, with the prospects for another one or two point increase
in the current month.
New orders for durable goods were up moderately, despite a
big drop in aircraft, and unfilled orders rose further.
One exception among the gains was a drop back to a 1,350,000
annual rate in housing starts. But this series has moved very
erratically since its inception, and little significance should
be attached to a single month's change, one way or the other.
As mentioned at the last meeting, there was a significant
time in over a year,
improvement in unemployment for the first
as the rate dropped from 6.8 per cent to 6.1 per cent. It is
interesting to note, however, that the underlying figures do
not support as significant a month-to-month change as the over
all percentage might suggest. First, it must be borne in mind
that this is a period when actual unemployment normally rises,
and the better showing in November reflects to some extent the
12/19/61
fact that seasonal layoffs were less than normal. Furthermore,
the figure was unquestionably influenced by the substantial
increase in the armed forces, and the fact that fewer women and
teenagers appear to have entered the market for pre-Holiday jobs,
Thus, we cannot assume that the months ahead will necessarily
see a continuation of such rapid improvement, even if aggregate
output continues to expand at relatively high rates.
In terms of gross national product, it now seems likely
that the fourth quarter will equal or exceed the $54O billion
rate that represented the upper limit in projections earlier in
the year. In other words, despite strikes and other temporary
setbacks, the economy as a whole has performed up to the most
optimistic expectations.
This high level of operation has, of
course, affected current expectations, and business optimism
with respect to the outlook for 1962 has picked up considerably
in recent weeks. However, the growing optimism does not seem to
be reflected in dramatic upward revisions of spending plans for
next year. The results of the Commerce-S.E.C. survey of plant
and equipment expenditure plans, announced shortly after the
last meeting, provide an excellent example of the moderation
that seems to prevail within the framework of a generally
Seasonally adjusted expenditures in the
optimistic outlook.
first quarter of 1962 are expected to be up only $600 million
from the current quarter--substantially less increase than might
be associated with normal growth. Similarly, while consumer
buying intentions six months ahead, as collected on a week-to
week basis by Sindlinger, are up somewhat, they are not high in
relation to other recent years.
This leads me again to the observation that, while the
improvement in the economy is widespread, it is proceeding at a
reasonable pace and there are, as yet, none of the signs of
stress and strain that are typical of an inflationary and
nonsustainable boom.
For confirmation or refutation of this tentative conclusion,
it seems to me that price developments provide the best evidence,
Given the fact that the economy has expanded rapidly and evenly
and that it shows every sign of continuing to expand at satis
factory rates, the major question which remains is whether
inflationary price pressures are either present or imminent.
With this thought in mind, I have made some effort to review
not only the recent behavior of the broad indexes of wholesale
and retail prices--which generally cover the period up to
mid-November--but also the current composites on commodity prices
and the developments in specific commodity markets as well.
Relying on the more comprehensive weighted indexes through
November, it seems safe to say that there was no significant
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price movement one way or the other for that month. While
some wholesale prices went up--notably steel scrap--others
went down and most were unchanged. All the various indexes
appear to yield the same conclusion--including, for example,
the index of prices paid by farmers prepared by the Department
of Agriculture, an index that is not often used in general
analysis but which seems in retrospect to have been a pretty
good indicator of the balance of inflationary and deflationary
forces in the economy,
For the period since the beginning of December, one is
forced to rely on less satisfactory composites of commodity
prices of one kind or another. While these do not provide a
comprehensive measure of general price movements and are not
weighted to reflect the relative importance of the components,
it is not unreasonable to assume that they would almost certainly
reflect any broad shift toward inflation or away from it. The
Dow-Jones commodity indexes show spot prices about steady in
December, following a not inconsiderable rise in November. The
futures index has generally declined since early December, The
shifting relationship between spot and future in the last six or
eight weeks would suggest, if anything, the reverse of a spread
ing inflationary psychology; that is, futures were running above
spot prices in October, and they have recently been well below.
The Associated Press 35 key commodity index moved downward from
October to mid-November and has since inched upward a little,
but it is still below the early October level.
A dogmatic conclusion as to whether there has been some
subtle change in the tone of markets in the last week or so is
obviously impossible. The bulk of evidence seems to me to rest
heavily on the side of continued price stability. If some
people are buying in anticipation of rising prices, recent
market behavior suggests there are also plenty of ready and
willing sellers at current levels. Of course, this situation
could change, and change very quickly. The important point
seems to me to be that it still exists in the face of ten
months of vigorous recovery and generally optimistic expectations
as to the future.
To those who allege that a relatively easy
monetary policy has overstayed its welcome in this recovery, a
short reply might be that stable prices are awfully good company.
Mr. Thomas presented the following statement with respect to
credit developments:
Advances in interest rates, which were pronounced in
November, continued during the first half of December. To a
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large extent, these advances may be attributed to customary
seasonal factors and to the transitory effect of sharp
reductions in the greatly extended positions of dealers in
Government securities.
To some extent the rises in rates
have reflected expectations as to future trends, based on
evidences of improved economic conditions, the anticipated
effect of raising the time deposit ceiling, and greater
awareness of persistent underlying forces in the balance-of
payments situation.
The actual basic demand and supply factors in credit
markets and the application of official monetary policies
have not been important contributors to the rise in interest
rates. Credit expansion has been moderate and reserves have
been available in amounts adequate to cover more monetary
expansion than has occurred. Banks have had relatively large
amounts of excess reserves, borrowings at the Reserve Banks
have been small, and rates on Federal funds have actually
declined in the past two weeks.
Yields on Treasury bills and those on the longest-term
Treasury bonds have risen to the highest levels since mid-1960.
Rates on bankers' acceptances and on finance company short-term
paper have been raised. Yields on medium-term Government
securities, however, are generally not as high as they were
at times last summer. Yields on corporate bonds and on
long-term State and local government issues have also
remained below levels of a few months ago. However, some of
the recent new issues of corporate bonds, which were offered
in large amounts in November, have had to be marked down
below original offering prices before they could be
satisfactorily distributed by underwriting syndicates.
Dealers' positions in Government securities, which had
been enlarged by about $2.5 billion, or more than doubled,
from early September to mid-November, were reduced by about
$2 billion in the latter part of November and the first week
These shifts in positions were mostly reflected
of December.
Total
in changes in dealer borrowings at commercial banks.
holdings by dealers were brought back down close to the level
In the past few days they have
of early December last year.
increased somewhat, and they may increase further, as is
Although dealers' positions in longer-term
usual in December.
bills continue larger than at most times in the past year, their
positions in short-term bills are moderate, and holdings of
issues maturing in over a year are now smaller than they were in
December 1960,
Information available as to bank credit developments in
half of December is not adequate to provide a clear
the first
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indication of trends. On the basis of partial data for
December 13, it appears that city banks showed little change
in their holdings of Government securities and a further
decline in loans to dealers in Government securities.
Loans
to other dealers in securities, however, have increased
further, extending a rise that occurred in November and that
reflected an increase in customer debit balances at brokers
to a new high level. Banks also added further to their
holdings of other securities in the first half of December.
Changes in loans to businesses have been relatively small,
considering the imminence of the December tax and dividend
payment period.
U. S. Government deposits at banks have declined to a
relatively low level, while private deposits have shown a
rising tendency, with rather wide week-to-week variations,
On a daily average, seasonally-adjusted basis, it is estimated
that the demand-deposit component of the private money supply
half of December, approximately off
increased in the first
The
setting the decline in the second half of November.
estimated money supply, at $144.4 billion, is about 3 per cent
above the level of a year ago, but only slightly above the
previous peak reached in mid-1959. Time deposits have
increased further. Shares at savings and loan associations
have also increased substantially in recent months and the
total outstanding is about 16 per cent larger than a year ago,
showing about the same rate of increase as time deposits at
banks.
Available information as to liquidity in general indicates
that in the past year consumer holdings of liquid assets have
increased substantially, both in absolute terms and relative to
incomes. At the same time, consumer indebtedness has apparently
not increased as much as income. Thus the financial position of
consumers has improved. Liquidity of businesses, however, may
actually have lessened some, although late information is not
readily available. Nevertheless, with increasing profits and
growing depreciation allowances, cash flows of business promise
to be adequate in the months ahead to finance a large part of
the moderate increase in capital expenditures now planned. With
increased sales, however, these plans might be enlarged, and
working capital needs might also increase,
System action can be highly influential, if not decisive,
in determining the degree of liquidity available to the economy
Bank reserves have continued to be available--as
as a whole.
has been the case for over a year and a half--to support an
expansion in required reserves at an annual rate of 5 per cent.
12/19/61
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Since more of the expansion has occurred in time deposits
than in demand deposits, the annual rate of increase in
total commercial bank credit has exceeded 7 per cent,
Economic activity--or gross national product--has increased
in the past year at about the same rate and is now at a new
high level,
Consideration will need to be given to the question
whether bank credit should continue to be so readily available.
With prospects, as well as capacity, for continued expansion
in economic activity in the months ahead at almost the same
pace as in the past year, some further bank credit and monetary
expansion is surely needed and desirable.
Yet inducements for
speculative tendencies and other excesses in the use of credit
are more likely to develop, and the imposition of some degree
of restraint on the rate of expansion may soon be desirable.
This Committee has the specific responsibility for deciding
what volume of reserves will be made available to banks for
further unrestrained credit and monetary expansion,
Moderation of inducements for banks to expand credit may
be exercised by slowing down the increase in reserves supplied
by System open market operations.
This would involve some
change in the guides to operations from those presently in
force,
Over the past year, System actions have been guided by
the two aims of fostering monetary expansion without reducing
interest rates; the result has been to supply all the reserves
rate was not
wanted by banks as long as the Treasury bill
reduced.
The specific guides have appropriately been free
reserves and short-term interest rates.
Operations under this
policy, along with the economic climate that existed, have
resulted in the credit expansion that has occurred.
To impose some restraint in expansion would call for a
deliberate policy of reducing the amounts of reserves supplied
through open market operations in the future.
If, to meet
credit demands, banks should need or desire reserves in larger
amounts than are supplied, they would have to increase their
This would impose some
borrowings at the Reserve Banks.
The specific guide to operations
restraint on expansion.
should be total reserves--or nonborrowed reserves--rather than
free reserves or interest rates, unless credit demands fall
short of expectations and free reserves tend to accumulate and
to bring down interest rates.
Computation of the staff projections of prospective needs
for reserves to be supplied by open market operations have been
altered to provide for an annual rate of increase of h per cent
in required reserves against private deposits, instead of the
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5 per
cent that has characterized the past year. The 4 per
cent figure would allow for an expansion in demand deposits
of 3 per cent a year and in time deposits of 8 per cent, or
some other combination within or around that range.
Although some slowing down in the growth of time deposits
from the rapid rate of the past year (around 15 per cent)
seems reasonable, yet with a rise in the rates of interest
paid by banks on time deposits, a fairly high rate of
expansion in such deposits is likely to continue. Under the
circumstances, an 8 per cent annual rate of expansion seems
moderate.
If funds are drawn from other savings institutions into
time deposits at banks, there would be some net reduction in
total credit availability because of the reserves that banks
would need to set aside. In this case, reserves should be
made available to cover the additional requirements. To the
extent that the funds are drawn from demand deposits at banks,
reserves would be released and total potential credit expansion
increased.
With continued expansion in economic activity, some
moderate increase in demand deposits would presumably be
needed. Allowance for reserves to be supplied through open
market operations to meet a growth rate of 3 per cent in demand
deposits, along with an increase of 8 per cent in time deposits,
should be a reasonable minimum. Any additional needs or wants
could be obtained through member bank borrowing at the Reserve
Banks. Under the economic climate likely to prevail in the
next year, banks would probably be willing to borrow for such
purposes.
To carry out a policy of providing reserves for moderate
expansion while restraining excesses, System operations would
need to be conducted more directly toward regulating the total
supply of reserves, with less emphasis on free reserves,
Interest rates would move in accordance with the volume and
strength of credit demands relative to reserves available. In
view of current economic prospects, the reserve availability
suggested might be expected to result in a moderate rise in
short-term interest rates. If credit demands become vigorous,
the rise would be more pronounced and more general.
Mr. Furth presented the following statement with respect to the
international financial position of the United States:
The international financial position of the United States
has not changed much for the last three weeks, and certainly
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not for the better. The November deficit in the balance of
payments, even if it is adjusted for transactions that do
not affect the basic balance, is at least as large as, and
quite possibly larger than, the October figure of $450 million,
and available fragmentary data for the first
half of December
indicate a continuation of the November trend. The second
half of the month will bring the usual seasonal respite.
In
fact, the year-end payments of foreign countries to the U. S.
Treasury may be larger than usual if the Germans make this
month their first payment under a new agreement designed to
lighten the burden of our foreign military expenditures.
Neither has there been any drastic change in economic
conditions abroad. Our export prospects may have improved a
little in view of a continued upswing in a few major industrial
countries, including Germany and Japan, in which previous
reports had indicated an end of the boom.
The most promising international financial development,
apart from the agreement with Germany on military expenditures,
has been an agreement among the major industrial countries,
scheduled to be ratified later this week by the Executive Board
of the International Monetary Fund, under which the resources
of the Fund will be replenished, mainly (if not exclusively) to
provide for the possibility of a large U. S. drawing. U. S.
participation in this agreement will require action by the
Congress, as the U. S. has promised to contribute $2 billion to
these resources, although at present the possibility of the IMF
running out of dollars seems remote. While the agreement does
nothing to correct the U. S. balance-of-payments deficit, it
would help to defend the dollar against a sudden crisis.
Unfortunately, the procedures needed to activate the replenish
ment of IMF resources will be more complicated and time
consuming than originally envisaged. The agreement, therefore,
would not remove the need for a first line of defense through
central bank cooperation.
In response to a question, Mr. Furth said that according to
statistics compiled by the Council of Economic Advisers, it appeared
that approximately three-fourths of this country' s foreign aid program
(recently at an annual level of about $3.6 billion) was reflected in
subsidized exports.
Thus, perhaps $2.7 billion out of total exports of
about $20 billion could be regarded as subsidized,
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Mr. Hayes presented the following statement of his views with
respect to the business outlook and credit policy:
In the interest of brevity and in view of the fact that
we met only two weeks ago, I shall say very little about the
domestic business and credit situation. Recent data on
increased production, retail sales, business spending plans,
and residential construction, and reduced unemployment, all
point to a good business expansion, but without any signs of
over-exuberance--although there is a possibility that hedging
against a steel strike may lead to an abnormally rapid build-up
in steel inventories. The November statistics on total bank
credit and on bank deposits were quite satisfactory, and bank
liquidity is still ample despite a small decline last month.
Unfortunately the balance-of-payments situation appears
even less favorable than at the last few meetings. The deficit
of $550 million in November was about $100 million higher than
in October--and if we exclude subscription payments to the
International Development Association and the Inter-American
Development Bank, the November deficit of $490 million contrasts
with $340 million in October and about $300 million on the
average in the third quarter. It looks as if the fourth
quarter might easily show a deficit of $5 to $6 billion (annual
rate), while the figure for the year as a whole, exclusive of
special debt repayments, may be as high as $3 billion. The
excellent export figure for October provides only very moderate
comfort in the light of these statistics, for it points to a
heavy outflow of capital, which is probably continuing. I was
disturbed by press reports to the effect that high Administra
tion officials expect a $2 to $2-1/2 billion deficit in 1962.
I understand that the poor showing for the current quarter is
causing considerable apprehension among foreign central bankers
and other officials. Furthermore, as the foreign exchange
markets become more fully aware of the deterioration of our
position, we can expect more or less serious speculative
reactions. In these circumstances, it seems to me essential
that our Government have as a firm objective a very sharp cut
in the over-all balance-of-payments deficit next year, perhaps
to around $1 billion.
With the growing strength of the domestic economy reducing
the risks of unfavorable repercussions of a move to somewhat
less ease, I think we can well afford to give greater weight
now to international considerations. I would like to see the
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90-day bill rate maintained close to the upper level of the
2-1/2 to 2-3/4 per cent range we have been seeking; and a
Federal funds rate in this neighborhood also seems desirable.
In view of the psychological effects of the commercial banks'
prompt reaction to the Board's move with respect to
Regulation Q, and in view of the churning and seasonal
pressures characteristic of the next couple of weeks, we may
well be able to achieve these goals without reducing average
free reserves much below $500 million; but I would be quite
prepared to see them around $400 million if this should prove
necessary to keep adequate pressure on the bill rate. There
might even be some positive advantage in breaking away from
the $500 million figure which has unfortunately become some
thing of a fetish in the minds of many observers. Continued
use of the special authorization should prove helpful over the
next few weeks.
While there isno need to change the discount rate, I
should like to repeat the suggestion we made in mid-November
with respect to the directive--a suggestion which now seems all
the more appropriate in view of the substantially more cheerful
domestic outlook and the further deterioration in the
international situation. My suggestion would be that the words
"to encouraging credit expansion" be replaced with the words
"to providing reserves for further credit expansion," thus
making clear that we no longer believe it is necessary to push
so hard to enlarge the credit base. At the same time I would
substitute the phrase "giving special attention to international
factors" for the present phrase, "giving consideration to
international factors."
In reply to a question, Mr. Furth said that recent deposits of
U, S.
dollar funds by U. S. companies with Canadian banks, which relend
these funds through their New York agencies in the U. S. money market,
had exerted an influence on the balance-of-payments figures for November,
although these funds actually never left the U. S. economy.
Abstracting
such transactions, the November deficit might have been closer to $400
million than $550 million.
However, a $400 million deficit would still
be in the neighborhood of the October figure.
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Mr. Hayes said it was his understanding that the amount of
short-term funds going to Canada was in the neighborhood of $100-$150
million, monthly rate.
In his judgment, this did not differ essentially
from a short-term capital outflow to any other country.
Mr. Bryan said that all of the charts of Sixth District
activity were pointing upward, with the exception of department store
sales, and many of them spectacularly.
Even the department store sales
figures were contradicted by broader measures of retail sales.
One
principal series that was moving down represented improvement, namely,
the decline in insured unemployment.
For some time, Mr. Bryan recalled,there had been a feeling that
the Committee ought to be watching for a sharp change in the economic
situation.
He felt that the Committee was now alerted.
Total reserves
in November were well above the long-term 3 per cent trend line, about
$250 million, and in his opinion total reserves were the appropriate
measure at the present time.
Not only had reserves been in ample supply,
perhaps in excessive supply, but the banking system seemed to be
reasonably liquid and capable of financing a satisfactory expansion.
In the light of that circumstance, he believed that the System ought to
supply reserves merely in accordance with seasonal variations and an
extraordinarily modest growth factor, if any.
He certainly would not
put that growth factor at over a 3 per cent annual rate.
The country
might run into a boom that would cause the System, later on, to be
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12/19/61
compelled to clamp down on the brakes severely, and he believed it
would be better to tighten gradually at the present time.
Free
reserves should be allowed to fall where they would in the light of
the total reserve situation, handled in the way he had suggested,
and the System should be prepared to think shortly of an increase in
the discount rate.
Mr.
Bopp said that the Third District unfortunately was not
moving up spectacularly, and not nearly as well as the country as a
whole.
Turning to the national economy, he commented that if
the
current movement continued, excess capacity could be wiped out
relatively quickly, with resulting pressure on prices.
however, there appeared to be no stresses or strains.
thinking in
At the moment,
Therefore,
terms of the period immediately ahead, he felt that a
continuation of existing policy would be appropriate.
He would not
change the directive or the discount rate at this time, and he would
renew the special authorization covering operations in longer-term
securities.
Mr. Fulton reported that Fourth District business indicators
were uniformly steady or on the plus side, now that steel was in
production not only for automotive takings but inventory building.
On
the whole, however, the improvement in the District was occurring at a
gentle pace.
The rate of employment had been affected favorably by
continuation of good weather conditions.
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12/19/61
Mr. Fulton expressed the view that the present level of
bill
rates was satisfactory and that the System should continue to
supply reserves,
supplied.
although not in the quantities that they had been
He would favor free reserves of around $450-$500 million if
that would yield about the present level of bill
rates.
change the directive or the discount rate at present,
He would not
and he would
continue the special authorization.
Mr. Mitchell expressed agreement with the comments of Messrs.
Bopp and Fulton, although in his opinion this might be a good time to
change the directive.
He indicated that he would subscribe to the
changes in the directive recommended by Mr.
Hayes.
Mr. King suggested bearing in mind that the country was
experiencing a fairly heavy Holiday buying season, following a year in
which consumers had been quite restrained in
their purchasing.
He did
not think that the Committee should hasten to change policy merely on
the basis of the Holiday buying spree.
Rather, it
should wait until
January or February 1962 and see whether the pace of spending continued.
In the absence of a change in policy, he saw no real merit in
changing
the words of the directive at this particular time, since that might
only cause specualtion and misinterpretation when the Committee's
policy record was published.
If
that would be a different matter.
the Committee actually changed policy,
12/19/61
-17
Mr.
Shepardson commented that economic activity appeared to
be experiencing a considerable upturn.
King had suggested,
This might reflect, as Mr.
largely a Holiday boom, but in his opinion a
general upturn was occurring.
He was pleased by the staff suggestion
that the growth rate of total reserves be slowed down to a 4 per cent
rather than a 5 per cent target.
Personally, he would be inclined to
feel that the growth factor could well be reduced to 3 per cent.
With
a change in the target for growth, it would seem to him that the change
in the directive suggested by Mr. Hayes would be appropriate.
It was
important that attention continue to be given to the bill rate, and he
felt the objective should be to hold the bill rate in the upper part
of the 2-1/2 - 2-3/4 per cent range.
Mr. Robertson said he found himself in general agreement with
Mr. Bryan's comments.
The Committee had been alerted, and the time
had come to switch directions and start trending,
toward a less easy position.
However,
ever so slowly,
He would not urge any considerable shift.
he would suggest that the Committee take its sights off of
free reserves and bill rates, and merely be more restrictive in the
amount of additional reserves provided.
This being his view, he would
doubt the wisdom of changing the directive at this time.
Mr. Mills said that he had been struck by the staff's lyrical
panegyric on economic prospects and the possible development of
monetary policy.
His own comments would be more elegiac, but in
12/19/61
-18-
keeping with Mr. Bryan's reasoning, and would offer concrete
proposals to accomplish definite purposes.
Mr. Mills then presented
the following statement:
Any further policy actions to attempt to obstruct a
groundswell strengthening in interest rates will court
future difficulties arising from spreading confusion in the
securities markets and a growing speculative and inflationary
ferment that is gradually taking hold in the market places.
As I have repeatedly stated, recognition of basic economic
developments and the adoption of a suitable monetary and
credit policy is long overdue. Fortunately, the difficult
December tax and dividend payments period has been passed
without market incident and the way is now clear to move to
a monetary policy that will moderately restrain the further
expansion of bank credit so as to allow only for some
accommodation for bank financing of the Treasury's imminent
As far as bank loans are concerned, ample
cash financing.
leeway is available for increasing that sector of credit by
substituting loans for investments in U. S. Government
securities that are presently held in bank portfolios in a total
amount that carries inflationary implications. In the process
of replacing U. S. Government securities with bank loans, the
resulting upward pressure on interest rates will help to confirm
an upward movement that has already been in evidence in the
weekly Treasury bill auctions and throughout the entire list
of U. S. Government securities.
In view of the Treasury's approaching cash financing and
subsequent refunding operations, it is vitally important that
the securities markets be conditioned in advance to a somewhat
higher level of interest rates. Therefore, although it would
be technically preferable to wait for the new year before
asserting a tighter monetary policy, the short time before the
Treasury's January financing leaves no choice but to move now
toward confirming Federal Reserve System approval of a higher
Having done so, market participants
interest rate structure.
will be able to bid for the Treasury's new offering after some
experience with higher rates, and with confidence that completion
of the Treasury's nearby financing operations will not be
followed immediately by a System policy action induced tightening
of the money market and a consequent reduction in the prices of
U. S. Government securities. Presumably, a further lapse of time
would then be unavoidable before any additional overt policy
actions for influencing higher interest rates could be undertaken.
12/19/61
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Patently, time is of the essence in reorienting the
existing monetary and credit policy in the direction of
moderate restraint. The kind of monetary policy contemplated
would also serve to fix short-term interest rates in the
United States at a level that might be high enough to attract
foreign investment and possibly encourage a return flow of
gold. However, what I consider as having been an unpardonable
delay in pursuing that objective has permitted distrust in the
exchange value of the U. S. dollar to grow and will consequently
vitiate counter offensive interest rate efforts to stem the
loss of gold from this country. Reliance on collective
central bank and International Monetary Fund actions to protect
the U. S. dollar should have been reserved for secondary
emergency application and not suggested for continuing use, in
that public notice of resort to these media will be regarded
by cynical investors as acts of desperation and not as curatives
to temporary problems of international currency imbalances.
The discount rates of the Federal Reserve Banks should be
raised to 3-1/2 per cent at the time that market rates will have
adjudged the appropriateness of such action. Conventional
treatment should be accorded any disorderly market conditions
that may develop in the U. S. Government securities market.
Renewal of the special authority to operate outside of Treasury
bills is in order, except that transactions should be limited
exclusively to U. S. Government securities within a maturity of
two years.
Mr. Wayne said that the level of short-term rates in recent weeks
seemed to him fortunate and appropriate.
While that level was some 25
or 30 basis points above the level prevailing six weeks ago, it
still
was low enough to encourage a growth of bank credit sufficient to allow
business expansion to continue and at the same time was high enough not
to encourage the outflow of short-term funds.
This higher level of
rates had been caused by several factors, perhaps the most powerful of
which, since the preceding Committee meeting, had been the effects of
the change in Regulation Q upon expectations.
One enigma facing the
Committee was the continuing effects of this change in the Regulation.
12/19/61
-20
With respect to the domestic economy, Mr. Wayne said he felt,
as he had for some time, that there were no clear indications of any
need to lessen ease.
At the same time, however, business expansion
apparently had acquired enough momentum so that it could continue even
with the higher rates that had prevailed recently.
For the next three
weeks, he would favor putting primary emphasis on the bill rate.
He
would not want to see that rate fall below 2-1/2 per cent and would
like to see it move in the range between 2-1/2 and 2-3/4 per cent.
If
the effects caused by the change in Regulation Q should decline or wear
off, then the large return flow of currency and the small seasonal
decline in
interest rates that normally begin early in January might
allow the bill
rate to be maintained at the desired level with somewhat
smaller free reserves than in recent weeks.
If that should happen, it
would afford an opportunity to lower free reserves well below the $500
million level to which the market seemed to attach so much importance.
The next few weeks would seem to be an appropriate time to carry out
such exploratory operations if conditions should make them possible.
Mr. Wayne concluded by saying that he would not favor changing
the discount rate and that he would renew the special authorization.
Some revision in the directive might be desirable, and he was favorably
disposed toward Mr. Hayes' recommendations.
Mr. Clay noted that economic information that had become avail
able since the Committee meeting two weeks ago gave confirmation to the
-21
12/19/61
widespread economic advance that appeared to be under way.
It
seemed
to be essentially the type of development that had been hoped for, and
one that the System should encourage to continue in order for the
economy to reach a desirable level of activity. Moreover, price
developments were favorable, and private demands for credit were moderate,
Clay felt that monetary policy should remain
Accordingly, Mr.
essentially unchanged.
In fact, an indication of a change in System
policy so soon after confirmation of the upward movement in activity,
following the lull of early fall,
be realized, would be unfortunate.
and with substantial gains still
Within the framework of the same
basic policy, the Committee should continue its
Treasury bill
problem,
to
watchfulness of the
rate with reference to the international flow-of-funds
No change seemed called for in the discount rate.
In whatever
form the directive might be adopted at today's meeting, there would
seem to be no need to alter the substance of the (b) clause of the
present directive, and the authority to operate in longer maturities
should be continued.
Mr, Deming commented that both the nation and the Ninth District
seemed to be closing out 1961 on notes of economic exuberance.
from the balance of payments and a still
there appeared to be little
Aside
high level of unemployment
but good economic news for the nation.
In the District, only the continuing effects of farm drouth and
depressed iron mining marred the business picture.
In November,
city
-22
12/19/61
bank business loans showed only the usual seasonal drop,
while the
dollar volume of country bank loans rose more than in any previous
November since World War II.
Both of these developments were in
sharp contrast to the record of the previous four to five months.
It
remained to be seen whether they represented merely a temporary
reaction or more permanent strength,
Mr. Deming then referred to analyses made by the Minneapolis
Bank concerning the amount of credit expansion that would be consonant
with current economic developments.
From them he concluded (1) that
in this thrust the broadly-defined money supply had been permitted to
increase significantly more in relation to the gain in gross national
product than in the two previous thrusts, and (2)
that bank loans could
increase significantly more than they had so far without putting any
great pressure on the banking system.
Therefore, it seemed to him that
credit policy could move into a posture of less ease without much
danger of producing an aborted boom.
The position of the dealers had
improved significantly, so there would seem to be no great danger of
producing market knots by reducing credit ease.
The balance-of-payments
position argued for a less easy credit policy, and he believed it was
now time to move gently but more positively toward such a policy.
Specifically, he would favor a policy prescription of less ease
and would implement it
with a program keyed to total reserves, with
allowance for a four per cent growth rate, as indicated by the staff
12/19/61
-23
memorandum.
He would like to abandon free reserves as a policy guide,
expecting free reserves to move lower if
credit demand should press
harder against available reserves--either because of public or private
credit demand--but not attempting deliberately to push them lower.
This policy, he believed,
should call for a change in the directive.
He would not favor a change in
the discount rate at this time, and he
would renew the special authorization.
Mr. Swan said that from the comments already made, with which
he was in agreement,
the country seemed to be experiencing a fairly
substantial business expansion while at the same time there had been
no significant strains and pressures on resources and prices.
Also,
although this could be ascribed to market processes rather than specific
policy actions, there had been some increase in the short-term rate
structure.
This, he thought, was a good thing.
in the face of the still
However,
rather moderate credit demands,
this situation,
seemed to him
to imply a need for no more than a very slight further tightening in the
if
next three weeks,
to 2-3/4 per cent.
the bill rate in
any change at all.
Already the bill rate was close
While he agreed that it
would be desirable to keep
the upper part of the 2-1/2 - 2-3/4 per cent range, he
did not feel that the System ought to do anything to push the rate up
further until market forces moved in that direction,
if
they did.
While
free reserves might not necessarily have to be looked at as a definite
guide,
he thought it
quite possible that they might be around $450 million,
-24
12/19/61
rather than above $500 million, in the weeks ahead even with the bill
rate around present levels.
In the circumstances, Mr. Swan said, he would not change the
discount rate at this time.
As to the directive,
he liked the word
"providing" rather than "encouraging" when referring to further credit
expansion.
In one sense,
in the past several weeks.
that reflected what had been gradually emerging
However, he would not be inclined to substitute
"special attention" for "consideration" of international factors.
He
would continue the special authorization.
Mr.
Irons said he felt
the economy had clearly moved out of the
recovery stage into an expansionary stage.
If one traced the movement
that had taken place from the trough of recession to the present time,
he would see that most major economic indicators showed rather substantial
growth.
It seemed to Mr. Irons a satisfactory growth.
Further, the
movement of the economy during the past few weeks perhaps made credit
policy formulation a little
easier; both the expanding domestic economy
and the international situation suggested a moderate firming of policy.
Although he would not advocate strong overt action,
market to firm moderately.
His thinking would be in
he would permit the
terms of a bill
rate near or at the upper limit of the prevailing range,
rate in
a Federal funds
the same area, and some increase, perhaps, in member bank borrow
ing according to seasonal demands.
in substantial amount.
$400 million.
He would not provide additional reserves
The result might be a free reserve level of around
12/9/61
-25
What he had in mind, Mr.
Irons said, might be characterized as
a gradually shifting policy rather than a shifting policy.
In fact, it
seemed to him that over the past several weeks the Committee,
without
so stating, had been more or less shifting from active encouragement of
credit expansion to a slightly firmer policy.
He would not favor a
change in the discount rate at this time, he would like to see interest
rates move up a bit if the market moved them up, with no deliberate
forcing action on the part of the System, and he would continue the
special authorization covering operations in longer-term securities.
Mr. Irons went on to say that, while he did not know whether
there would be any opoortunity, in
the process of absorbing reserves
in the weeks ahead he would not be averse to doing a little bit of
absorbing outside the bill area, if market conditions permitted, just
to let
it
be known that the special authorization was not a one-way
street under all circumstances.
He had believed at the past couple of
meetings that a change in the directive would be appropriate,
feeling
that although there may have been no perceptible shift, enough shading
away from the posture of a few months ago had occurred to indicate some
change in policy.
it,
He indicated that while he did not feel strongly about
he would prefer a change in
York suggestion.
At year end,
the directive and would accept the New
he felt that the Committee must expect
the Account Manager to be influenced by the tone and feel of the market.
-26
12/19/61
To sum up,
however,
he would lean in the direction of permitting the
market to firm itself
in
a little,
in
light of the forces that were now
operation.
Mr.
Ellis said he thought the preponderance of evidence confirmed
the view that business expansion was proceeding satisfactorily.
England,
as elsewhere,
sales, new orders,
employment and income were rising.
stimulated by monetary policy.
In New
and inventories were up, and
This expansion apparently was being
As he looked over the figures, he was
impressed by the fact that much of the money supply increase had occurred
since last summer; that in the past few months the increase had been
more rapid than earlier in
the year.
Member banks, with a liquid asset
position substantially above any fourth quarter level for at least the
past eight years, apparently were in
credit demands without difficulty.
a position to meet prospective
Given that situation, the question
was whether the System should continue to support business expansion
through monetary ease in the absence of evidence of an abuse of credit
facilities.
Speculation was not evident except perhaps in
steel inventories,
prices were relatively stable,
the case of
there was unused labor
and plant capacity, and prices were not yielding to upward pressures.
Nevertheless,
he would favor a shading toward a lessening of monetary
ease; in other words,
a reduction of pressure on the accelerator.
Continuation of a monetary policy developed to combat recession seemed
questionable at a time when economic expansion was well under way.
In
12/19/61
-27
fact, the System may already have overstayed its position of ease.
In
his view, monetary policy should precede a change in prices rather than
view them as good company.
In January and February, Mr. Ellis pointed out, the Treasury
would be undertaking first a new cash offering and then a refunding,
and any change in Federal Reserve policy would have to come before those
operations were in process.
He liked not only Mr. Thomas'
the situation but also Mr. Hayes'
possible exception.
analysis of
prescription of policy, with one
There was now a short-term rate differential, on
a covered basis, in favor of New York as against London,
while the System should be vigilant, it
Accordingly,
might no longer be necessary
to exercise the same degree of restraint in the bill market.
In looking
at participation figures, he was a little concerned that in some recent
weeks the Federal Reserve's proportion of total dealer transactions in
securities other than bills had been quite large.
Therefore, he would
suggest relying primarily on bill transactions and to a lesser extent
on transactions in other securities.
However, he would not be averse
to accepting the suggestion of Mr. Irons.
If there was a chance to sell
securities other than bills without dominating that part of the market,
that would be agreeable to him.
Mr.
Ellis concluded by saying that if
changed in the way Mr.
the directive should be
Hayes had suggested he would expect bill rates
to be in the upper part of the 2-1/2 - 2-3/4 per cent range, Federal
12/19/61
-28
funds to be close to the bill rate, and free reserves to be nearer
million than $500 million.
$00
He would not change the discount rate
until short-term rates moved up further.
Mr. Balderston said he found the analysis presented by Mr. Thomas
persuasive.
The time had come,
of policy.
as possible it
would let
or restraining process.
to be,
appeared,
He would hope, however,
change gradually, that it
it
it
it
for a shift in
that the Committee would make the
would not take overt actions,
and that insofar
the market take the initiative in
If
the direction
the tightening
the consensus of the meeting was as he judged
would seem proper to reflect that consensus in
a change in
the directive.
Mr. Baughman, who was called upon by the Chairman at this point
in the absence of Mr. Allen, reported that business activity in the
Seventh District was about as described at the December 5 meeting, with
automobiles and steel continuing in
steel companies in
the limelight.
It
was reported by
the District that orders were coming in
at a rather
spectacular rate, and comments were heard of plans for some kind of
allocation program if
year.
the present rate of orders continued into next
Sources in the auto industry indicated that reported sales for
November were somewhat overstated, but that this was being made up in
the reporting of sales for December.
In other words the pickup in
November was not as great as previously reported.
officials in
Department store
the District were feeling mildly distressed because sales
-29
12/19/61
in this type of retail outlet compared relatively unfavorably with
sales nationally and compared with two years ago.
There was no
the
evidence from the data on bank loans of any substantial pickup in
demand for loans.
However,
in interviews with loan officers, several
had indicated recently that some evidence of a strengthening of loan
demand was beginning to appear.
Mr.
Francis, who was called upon in the absence of Mr. Johns,
said he would align himself with those who had expressed a desire for
a 3 per cent annual rate of growth in total reserves over the next few
weeks.
Such a rate would be somewhat greater than the rate of growth
of total reserves in the comparable periods of the 1954-55 and the 1958-59
business cycles,
and this, he thought, would be appropriate.
Chairman Martin recalled that at the past several meetings he
had prefaced his comments by saying that he thought System policy was
evolving satisfactorily.
He continued to think so.
He questioned
whether the situation had really come to the point where a significant
change of policy was required.
His thinking was a little at variance
with some of the comments made today, for a couple of reasons.
First,
although he was not against tightening, he would like to see the market
itself do the tightening.
The factor of strong loan demand was not yet
in the picture; the banks were still hoping and still talking about it,
but it
had not yet really appeared.
Also, the period around the end of
the year was in his opinion about as poor a time as could be selected to
12/19/61
-30
make any overt change in policy or even imperceptible changes.
He
would hope that the System would not get itself in the position, follow
ing the increase in the maximum permissible interest rates on time and
savings deposits, of being charged with causing the commercial bank
prime rate to be increased at this particular juncture.
If market forces
produced this result, that would be a different thing, and he thought
that they would.
Accordingly, believing that the market would tighten
on its own accord, he saw no gain in taking overt action.
Seasonal
pressures had moved the bill rate up recently, quite apart from System
activities, but shortly after Christmas the rate would start trending
downward.
In the light of international conditions,
he would hope that
the Committee could concentrate on not letting the bill rate slide off
seasonally.
That might require some activity that would lead to a lower
level of free reserves.
Only when it was clear that the forces of the
market had tightened would he be prepared to go along with an increase
in the discount rate; there must be a conditioning period prior to such
an increase.
Despite the prospective Treasury financing, the January 9
Committee meeting would in his thinking be a much better time to determine,
in light of the seasonal return flow of currency, whether to absorb more
than usually would be the case, or less.
Chairman Martin noted that there had been some comments during
the go-around about the special authorization covering operations in
longer-term securities, and that this led into the question of the
12/19/61
-31
Committee's operating procedures, which had been scheduled for discussion
at this meeting.
The Committee might want to arrive at a consensus on
policy for the next three-week period, renew or modify the existing
policy directive, and renew the special authorization, but it might
prefer to discuss first the statements of operating policy and the form
of the directive.
The Chairman commented, in this connection,
that everyone had
given much thought to the question of operating procedures,
as indicated
by the numerous comments and suggestions that had been received by the
Secretary.
In his own thinking, he said, he was more or less persuaded
by the position of those who had suggested termination of the three
statements of operating policy which referred to the objectives of
monetary and credit policy, the confining of operations for the System
Account generally to short-term securities, and the preclusion unless
expressly authorized by the Committee of transactions for the purpose
of altering the maturity pattern of the System's portfolio by means of
offsetting purchases and sales of securities.
climate existed at the present time,
A difficult public relations
and he was inclined to believe that
a changing of words in the statements of operating policy would be subject
to more misinterpretation than abandonment of those statements.
A case
could be made that the operating policy statements had been virtually
essential in
the transition from a pegged market to a free market in
Government securities, and that for the first
five years or so of a free
12/19/61
-32
market they were almost necessary to the reconstitution of the
Government securities market.
Since that time, however, there may
have been a real question whether the depth, breadth, and resiliency
of the market was being furthered or not by the existence of these
provisions.
There were still some schools of thought that fed
material to the press on the subject of the depth, breadth, and
resiliency of the market.
One or two writers tended to pick up this
line, and various people in the market fostered it.
Whether they were
right or not, he did not know; there was some question in his mind.
However, the market seemed to be getting along all right at present.
Possibly, of course, the System eventually would have to take over
the market in entirety, but the System had been operating in it
reasonably successfully.
This he did not think that any thoughtful
person could properly deny.
One might have various predilections, the Chairman observed.
However, he felt that it would subject the Committee to less risk of
misinterpretation simply to take the position that the special
authorization for operations in longer-term securities was given in
February of this year, the Committee had experimented over the balance
of the year, the Committee had not come to any clear conclusions, and
the Committee would endeavor for a while, at least, to get along on
the basis of having meetings at three-week intervals, at each of
hich
it would establish a directive to the New York Reserve Bank and a
framework within which open market operations were to be conducted.
12/19/61
-33
The Chairman noted that the Committee had been giving a great
deal of latitude and leeway to the Account Manager.
The Committee had
considered various possibilities for giving more specific instructions.
In his opinion the Committee must give the Manager a certain amount of
latitude, but it
might be,
as time went on, that a more satisfactory
method of issuing instructions could be evolved.
There seemed to be
almost a unanimity of opinion today in wanting to give up the concept
of free reserves as a guide, yet it
was not easy to give up that
concept because the public had gotten so attached to it.
was driving at was that if
of operating policy, it
The point he
the Committee should terminate the statements
could start over again with a clean sheet of
paper.
The suggestion had been made,
Chairman Martin noted, that the
Committee might experiment with having the Committee Secretary, the
Account Manager, and the Committee Economist sit down immediately
following each meeting to draft a current economic policy directive,
which would be submitted within the next day or so to the Committee
members for comment and would be finally approved at the following
meeting of the Committee.
This would place a heavy burden on the
staff, and an additional burden on the Committee.
However,
it
probably was not feasible for a large group of people to draft a
directive around the table at each meeting.
12/19/61
-34
Also, the Chairman said, it was necessary to face the fact
that the drafting of the Committee's policy record entries was again
about six months in arrears.
That was not a good position for the
Committee to be in, and some procedure should be worked out whereby
the preparation of the policy record entries would be kept current.
The Chairman said that he thought the Committee was fairly
close together today in its views on policy for the forthcoming period,
although there were some questions of emphasis.
There were some who
would not want to make any change in the degree of ease at this
particular time.
He (Chairman Martin) certainly would not want any
aggressive easing or aggressive tightening.
He was concerned about
the bill rate, and about the handling of the market in such manner as
to minimize overt actions in light of the pressures that he thought
were going to develop.
After commenting on certain developments in corporate finance
that might have been contributing to the moderateness of loan demand at
this particular juncture, the Chairman commented that he would have no
objection to changing the policy directive in the manner suggested by
Mr. Hayes.
Mr. Balderston made the comment at this point that although he
did not want to anticipate the discussion of operating procedures, it
might be, as the Chairman had intimated previously, that the Committee
would like to consider making, effective with this meeting, a change
12/19/61
-35
in the form of the directive,
If
this was so, perhaps the considera
tion of the revised clause (b) suggested by Mr. Hayes should be
deferred.
There ensued a discussion of the procedure tnat it
would seem
advisable to follow at this meeting, during which the Chairman referred
to material that had been distributed to the Committee by its
This included, under date of December 8,
Secretary.
1961, a collation of comments
received from eleven Reserve Bank Presidents on the draft standing
rules and directives of the Open Market Committee that had been
circulated under date of September 6,
1961; a check list
of specific
issues raised in response to the September 6 drafts; and a version of
the September 6 draft of standing rules that incorporated editorial
and minor substantive changes suggested by Committee members and
others, and considered by the Secretariat to be noncontroversial.
Also, under date of December 13, 1961, there had been distributed to
the Committee a revised draft of continuing authority directive to the
Federal Reserve Bank of New York.
Chairman Martin then suggested that the next order of business
be a go-around of comments on the basis of the material that had been
distributed, and it
was agreed that this procedure would be followed.
Accordingly, the Chairman first
called upon Mr. Hayes,
who
stated that he had a great deal of sympathy with what the Chairman had
said about the desirability of getting away from the formal statements
-36
12/19/61
of operating policy.
He was inclined to agree with the thought that
perhaps the best disposition of the matter would be to abandon the
operating policy statements.
If that were done, he noted, there would
be the question of what to do about publicizing the matter.
Certainly,
there ought to be a clear statement in the policy record of the Open
Market Committee concerning the reasons for the action.
In the thought
that it might be helpful, the New York Bank had drafted some language
for this purpose and would transmit it to the Secretary for consideration.
Continuing, Mr. Hayes said it seemed to him, as it apparently
did to the Chairman, that at the time the Federal Reserve was getting
away from pegging the prices of Government securities the statements
of operating policy probably served a useful purpose.
However, times
and circumstances change, and the greater frequency of meetings of the
Open Market Committee had altered the situation somewhat.
As he had
said many times, he was concerned that the existence of the operating
policy statements might put the Committee in a box.
The Committee ought
to have a concern for a well-functioning Government securities market,
but he did not think that this concern should ever be built up to a
point where it took precedence over the primary responsibility for the
formulation of monetary policy.
There were new problems in the
international field that might make flexibility even more important in
the future.
Whether one liked it not, there were going to be serious
international problems to cope with for some time to come, and this
prospect alone suggested maximum flexibility of action.
-37
12/19/61
If
the Open Market Committee should decide to terminate the
operating policy statements, Mr. Hayes said, it
might nevertheless
be a good idea to state for the record that the Committee believed
in certain basic principles; for example, that it
had no intention
of returning to a system of pegging and that, although it
was a
legitimate function of the central bank to have an interest in
interest rates, they should reflect the decisions of market forces,
Also, it
should be made clear in explanatory material that there would
be no change in the Committee's policy of conducting open market
operations during periods of Treasury financing in such manner as to
change as little
as possible prevailing money market conditions.
occurred to him that it
It
might be desirable to have explanatory material
on reasons for dropping the operating rules not only in the policy
record but in the Federal Reserve Bulletin.
carefully worked out,
The language should be
and the full Open Market Committee should have a
chance to review any explanatory statement before it
was finalized.
Turning to the directive, Mr. Hayes expressed agreement with
the proposal for a separation of the directive, as it now existed,
into a continuing authority directive and a current economic policy
directive.
He had no changes to suggest in the draft of continuing
authority directive that had been distributed most recently by the
Secretary.
As to one question raised by that draft, it
was his
opinion that the continuing directive should authorize the purchase,
-38
12/19/61
under repurchase agreements with nonbank dealers, of United States
Government securities having remaining maturities of 24 months or
less, rather than the 15 months or less that had been specified in
an earlier draft.
Mr.
Hayes noted that the Open Market Committee had tried to
use clause (b) of the present directive both as an instruction to the
New York Bank and as the basis for its published policy record.
In
his opinion the form of directive that had been used was deficient in
both respects.
It had been necessary to develop alongside clause
(b) a consensus of each meeting as a guide to the Desk.
This consensus,
and not the broad statement in clause (b), really provided the guide
to the Management of the Open Market Account in conducting open market
operations during the ensuing period.
It would be his suggestion, in
effect, that the consensus become the current policy directive.
Further, the shortcomings of clause (b) as a vehicle for communicating
to the Congress and the public had been pointed up in memoranda from
Messrs. Knipe and Broida of the Board's staff and in the recent report
of the staff of the Joint Economic Committee.
The major cause of the
deficiency was that clause (b) was so general and compressed in form
that it could not reflect many subtle shifts of emphasis in the
development of policy. To overcome this deficiency, he would favor
experimentation along the lines that the Chairman had mentioned.
Along these lines the New York Bank in its
memorandum of
12/19/61
-39
November 3,
1961, had suggested that provision be made for the
adoption, for each meeting,
of what it
of general policy position.
had referred to as a statement
The inclusion of such a statement in the
policy record, along with the current policy directive, would help to
provide an adequate record showing the Congress and the public what
the Committee's policy had been and how it
had developed.
As to the current policy directive, Mr. Hayes said he believed
it
would be a mistake to try to include quantitative guides.
Generally
speaking, he felt that the directive should be in terms of more ease or
less ease,
When appropriate,
reference might perhaps be made to items
such as the bill rate or the feel of the market, but he would avoid
making the directive a quantitative measure having any degree of
strictness.
That would be likely only to create new difficulties for
the Committee.
As to the procedure for developing such a directive, Mr. Hayes
felt that the Committee could properly request the Secretary of the
Committee,
the Manager of the Open Market Account,
and perhaps the
Committee Economist to get together after each meeting, draft a
directive couched, generally speaking,
in terms of more or less ease,
together with a draft statement of operating rationale, and submit the
draft promptly, say the following day, using leased-wire transmittal
in
the case of the Reserve Bank Presidents.
obtain comments and approval,
The Secretary then could
and the approval could be ratified at
-40
12/19/61
the next Committee meeting.
He would favor the idea of getting
approval promptly, while the matter was still
fresh in the minds of
the Committee.
Mr.
Balderston said he had been impressed by the careful
thought reflected in the letters from the Presidents.
Also, although
the members of the Board had not submitted letters or memoranda, they
had been in touch with the Secretary and had submitted ideas to him.
In view of the work and analysis that had preceded this meeting, he
would personally be prepared to move ahead on the basis of the latest
revised draft of continuing authority directive that had been distributed
by the Secretary and on the basis of the suggestion of Chairman Martin
that the statements of operating policy be terminated.
In order to provide a focus for the discussion, Mr. Balderston
said he would propose that the current form of directive to the New
York Bank be abandoned and that instead there be two separate directives.
The first would be a continuing authority directive in the form distributed
by the Committee Secretary under date of December 13, 1961.
The second
would be the current economic policy directive, which would be drafted
after each Committee meeting by the Secretary,
Manager of the Open Market Account.
promptly, within the
the Economist, and the
The draft would be forwarded
day if possible, for confirmation by the voting
members of the Committee.
The current directive then would be in such
form as to be included in the Annual Report of the Board of Governors
to the Congress.
12/19/61
-4l
Mr. Ellis expressed agreement with the proposal outlined by
Mr.
Balderston.
He recalled having expressed in
his written comments
on operating procedures the feeling that the operating policy statements
might best be left in suspense and that the Committee should operate
as it
had for approximately the past nine months.
As to the continuing
authority directive, he agreed with the draft distributed under date
of December 13, 1961,
Mr. Hayes had suggested that the continuing
directive should authorize the purchase of Government securities,
under repurchase agreement, having remaining maturities of 24 months
or less.
He (Mr. Ellis) had suggested in his letter 18 months or less,
but this was not too important and he had no strong feeling.
Ellis said he had been impressed by the Committee's
Mr.
difficulty in using clause (b) both to reflect changes in the economic
situation,
as the Committee saw them,
emphasis of monetary policy.
and to reflect shifts in the
He did not think that both things could
be done adequately in one phrase.
Therefore, he was anxious to see the
Committee develop a current economic policy directive that would permit
it
to recognize changes in the effect of credit policy, as applied to
the economy,
and also to state how the Committee wished open market
operations to be conducted in
the ensuing period.
A move in the
direction he had in mind would be aided by the separation of the
continuing authority directive and the current economic policy
directive.
-42
12/19/61
Mr. Ellis said he would like to suggest again that it might
be helpful for the Committee to have before it at each meeting some
suggested language for the current economic policy directive.
This
would provide a pattern for the discussion around the table in much
the same way that Mr. Balderston's proposal had provided a background
against which comments could be made during the discussion now taking
place.
Accordingly, he would suggest asking the staff to prepare in
advance of each meeting one or two versions of a current economic
policy directive.
He was pleased with the suggestion that a final
directive be drafted immediately following each meeting by the
Committee Secretary.
In summary, Mr. Ellis said, any move that the Committee might
make to separate the continuing authority directive and the current
economic policy directive in such manner that the latter could fulfill
the two purposes he had mentioned would in his opinion be desirable.
Mr.
Irons commented that he could see the problems involved
in the development of statements of operating policy that would be
generally acceptable at this time, as contrasted with the conditions
that prevailed when the existing statements were first adopted.
At
that time there was need for operating policy statements that were
rather rigid and restrictive.
Conditions had changed, however, and
there was now a need for greater flexibility.
As between a rigid
statement of operating policies that would limit the Committee's
12/19/61
-43
flexibility and abandonment of such rules, he would lean toward the
latter course.
In his written comments on an earlier draft of
standing rules that had been distributed by the Secretary, he had
suggested broadening them in a few places to cover what it seemed to
him the Committee had actually been doing.
His concern was illustrated
by the statement in the draft of standing rules dated December 8,
1961,
that "open market operations are conducted to supply or absorb bank
reserves consistent with the credit and monetary needs of the United
States, in the light of both the domestic economy and international
developments."
Such a statement might have been appropriate when the
statements of operating policy first went into effect, but he questioned
whether it was appropriate now.
The Committee had engaged in
operations for other purposes arising out of the international situation.
As he had said, as between a rigid statement and no standing rules at
all, he thought that he would favor the latter.
This would, of course,
throw an increased burden on the Committee at each meeting, for it
would have to decide, in effect, what the rules were going to be until
the next meeting.
As far as the continuing authority directive to the New York
Bank was concerned, Mr. Irons said that basically he was not sure that
he saw much difference in the need for such a directive and the need
for standing rules.
In other words, he was not sure that there was
too much reason for having a continuing authority directive to the
12/19/61
-44
New York Bank.
too rigid.
There might be times that such a directive would be
If there was to be a continuing authority directive,
however, he would not object to authorizing purchase of Government
securities, under repurchase agreement, having remaining maturities of
either 18 months or less or 24 months or less.
Turning to the current economic policy directive, Mr. Irons
noted that it
had been felt for public relations purposes that such a
directive was a good thing to have.
it
He did not think personally that
was necessary, with the Account Manager sitting in the meetings and
hearing the full discussion.
case to an outsider.
However, it was hard to make a convincing
This led him to favor a current policy directive
that would be fairly specific; he did not think that he would favor a
directive couched just in terms of more or less ease.
Figures were not
too good either, but it would seem better to have a few figures than
for the Committee to become involved in arguments about whether there
should be more or less ease.
He did not know whether the Committee
actually could do much better than it had done.
The directive would
simply represent a boiling down of all that had been said around the
table.
Possibly, however, there would be some public relations value
in composing and approving a current policy directive for each meeting.
Mr. Irons said he would not favor the suggestion that the staff
be requested to submit draft language for the directive in advance.
He felt that this might have a poor public relations effect.
Instead,
the directive ought to be developed out of the discussion at the
12/19/61
meeting.
-45
In going around the table, the Committee ought to arrive
at a decision as to what the current policy directive should be for
the period ahead.
Then, although he was not sure that the procedure
would work effectively, the Committee might authorize the Secretary,
the Manager of the Open Market Account, and perhaps some other staff
person or persons to put down, not in one or two pages but in two or
three paragraphs,
some coverage of the economic situation, along with
the consensus on policy for the period ahead.
Mr.
Swan recalled that in
his written comments he did not argue
specifically for elimination of the statements of operating policy.
Since that time, however, he had found himself questioning some points
in
the draft of standing rules that had been distributed.
The draft
was well drawn, but if it was a matter of choice between what had been
drafted and having no operating policy statements,
he would favor the
He would not want to create an impression that the
latter course.
Committee was, so to speak, amending its
constitution.
As an example
of the questions he would have regarding the standing rules, as drafted,
he noted that the most recent draft would state that "although
operations in
United States Government securities are ordinarily
conducted in short-term issues, the Committee may authorize transactions
in all maturities when desirable because of economic or financial
conditions,"
It
would be his preference to turn the statement around
and say that "operations may be conducted in all maturities,
but
-46
12/19/61
ordinarily are conducted in short-term issues."
were carried further, it
would result in
If
that thinking
a choice between a very
general set of standards and the elimination of the statements of
operating policy.
If
they were eliminated,
then as Mr. Hayes had
mentioned, there were a few principles that he would like to have
on record somewhere.
At the same time, he would not want to have
so many documents that it
Therefore,
if
he wondered if
would be difficult to keep track of them.
the operating policy statements were to be eliminated,
some basic principles such as he had in mind might
not be incorporated in
the continuing authority directive.
Mr. Swan said he would favor having a separate continuing
authority directive.
He would have no quarrel with the draft
distributed under date of December 13, 1961, except that in it
there appeared at several places the words "except as otherwise
authorized,"
and he questioned the inclusion of such language.
Mr. Swan went on to express the view that the Committee
might be running into the danger of trying to accomplish too much
in the current economic policy directive, and possibly confusing
this directive and the policy record.
He wondered about the
possibility of hindsight criticism of the current directive if
was too detailed, yet the purpose of a directive is
to direct.
The directive should reflect what was now expressed in
consensus,
and if
the
some quantitative measures were included, he
it
12/19/61
-47
did not think that that would be objectionable.
This would
provide a more sensible directive, and one that would avoid the
criticism that the Committee's directives did not mean anything.
Therefore,
although the directive should not be too elaborate, he
would not hesitate to include same quantitative expressions and
provide a true directive rather than a review of the economic
situation.
On the manner of formulation of the directive, Mr. Swan
indicated that he would be concerned about having one or several
draft directives prepared in
to criticism.
advance.
This procedure might lead
While he doubted that the specific wording of the
directive could be hammered out around the table at each meeting,
he felt that the directive could be drafted after the meeting,
distributed, and approved quickly enough so that it
be a directive for the succeeding three weeks.
If
would actually
the steps he
had mentioned could be completed by the day following the meeting,
he would consider such a schedule satisfactory.
The preparation of the directive should not be confused with
the writing of the policy record entry, Mr.
record entries should be written separately.
of course, if
Swan noted.
It would be desirable,
the Committee could receive drafts of the policy
record entries promptly, and reach agreement on them.
that it
The policy
He assumed
would be intended that the policy record would be
-48
12/19/61
published only in the Annual Report of the Board of Governors,
but he felt that the release of some kind of information more
frequently than once each year would be desirable,
What he would
have in mind would be a rather extensive discussion, and not the
same thing as the policy record prepared for purposes of inclusion
in
the Annual Report.
Mr. Mills said that it
was his disposition to be slow to
change and that he would leave substantially as they stood both
the present directive and the statements of operating policy.
The directive was valuable,
as the public and persons in
life had become accustomed to it.
academic
Clause (b) of the directive was
of special importance because changes in it
reflected the judgments
of the Committee and the direction of policy in a very important
and desirable way.
If the Committee went over to an amorphous
general policy, it
would be too easy for the Committee to hide
behind generalities and not give a clear report to the Congress
on what it
had done and the reasons.
As to the statements of
operating policy, they might best stand in
their present form,
with continuation of the special authorization covering operations
in
intermediate- and longer-term Government securities,
except that
in his opinion the terms of the special authorization should be
modified.
statement:
In this connection, Mr. Mills presented the following
12/19/61
-49
From observing the results of conducting open market
operations in U. S. Government securities other than
Treasury bills, matured conclusions have been reached:
(a) Operations in longer-tern securities, in
particular long-term bonds, have been harmful rather
than helpful and should be discontinued.
(b) Operations in short-term securities of maturities
of two years or less have had limited success in
achieving the objectives sought after and could be
continued experimentally for another year.
The objections to operating in longer-term securities
focus on the false market expectations and damaging
consequences that have resulted from these transactions.
By the end of the year it seems clear that the market has
come to regard operations in bonds and other longer-term
U. S. Government securities as patent efforts to support
the market rather than as a means of influencing interest
rates.
The obvious fact that long-term securities acquired
by the System Open Market Account have been very largely
retained sustain the market's belief and give rise to the
complain that abstention from supporting purchases is
allowing the market to drift uncontrollably.
All in all,
the System's longer-term securities transactions have set
the stage for a full-fledged pegging operation that will
ultimately burst from its chrysalis full-grown, unless
discontinued promptly. Any economic benefit to the flow
of funds that is inherent in longer-term operations is so
obscure at best that the disadvantages of engaging in this
speculative attraction far outweigh any presumed advantages.
The limited success achieved from operating in short
term securities attaches largely to the influence such
transactions have had in holding up the short-term interest
Even in this
rate structure for balance of payments reasons.
respect, the benefits obtained may have been illusory to the
extent that System Open Market Account short-term transactions
outside of Treasury bills have interfered with and delayed
market adjustments inevitably required to reflect the
changing character of economic, domestic, and international
However, further experimentation
financial developments.
in open market operations in short-term U. S, Government
securities is a reasonable attempt.
The great objection to System open market operations
in both long- and short-term U. S. Government securities,
other than Treasury bills, is that they have the effect of
impairing the usefulness of the U. S, Government securities
12/19/61
-50
market as a sounding board for recording economic and
financial movements that should be recognized by appro
priate monetary and credit policy treatment.
Operations
confined to Treasury bills previously permitted the market
to reflect the economic responses that monetary and credit
policy formulation must take into account.
In the light of the background outlined, the general
wording of the directive to the Manager of the System Open
Market Account should not be changed nor should the
operating procedures be altered, other than to allow
continued operations in short-term U. S. Government securities
up to maturities of a two-year maximum.
Mr. Mills asked that there be recorded in the minutes his
dissent from the implementation of policy according to the consensus
of this meeting, as that consensus was suggested earlier by Chairman
He also would dissent from the change proposed by Mr. Hayes
Martin.
in the wording of clause (b) of the directive, for he did not think
that it
reached the nub of the situation.
Mr. Mills then withdrew from the meeting,
Mr. Deming expressed the view that the Committee should
abandon the statements of operating policy and that this action
should be accompanied by an explanatory article setting forth the
reasons.
He would hope that such an article could include what
might be termed a broad-gauged explanation as to how a central bank
operates.
As he had said in his written comments, he did not see
how the Committee could rewrite its
operating policy statements
without the disadvantage of having to explain the changes.
he would favor elimination of the stated operating policies.
Therefore,
-51
12/19/61
As to the current policy directive, Mr. Deeming said his
thinking would start with the premise that the major difficulty
had resulted from lack of adequate current explanation of what
the Committee was doing rather than from a lack of explanation to
the Desk.
In his belief, there was need for a quarterly article
in the Federal Reserve Bulletin stating authoritatively what the
System had been trying to do.
This article would not need to be
official in the sense of being signed by the Open Market Committee,
but it
should be authoritative.
the practice followed in
This would conform generally to
many other countries.
As to the content of the current policy directive, Mr,
Deming suggested that it be relatively simple so that the directive
could be voted upon rather easily.
If the directive included a lot
of specifics, it might be difficult to come to any agreement.
He
would not have any particularly strong objection to writing a
directive at this juncture in terms of total reserves, but he
would not necessarily want to continue on that basis over a period
of time.
If
there could be an improvement in public understanding
about what the directive meant and how it was voted upon, then he
thought it
could be constructed in rather simple terms.
The most
feasible procedure might be to cast the directive in terms,
generally speaking, of more or less ease or about the same degree
of ease.
12/19/61
-52
Mr. Deming said he would endorse Mr. Hayes'
suggestion
for a statement of general policy position, which would put a
little
flesh on the bones of the current policy directive.
statement need not be long; it
Mr. Hayes had submitted.
If
This
could be as brief as the samples
the Committee could vote on a
relatively simple current policy directive, and there was also a
statement of general policy position, he felt that its
record would
be in reasonably good shape.
Mr. Deming indicated that he was quite satisfied with the
draft of continuing authority directive that had been distributed
under date of December 13, 1961.
He had no strong feeling on
whether the continuing directive should authorize the purchase of
securities, under repurchase agreement, with maturities of 15
months or less or 24 months or less.
As to procedure, he suggested
that the continuing directive could be adopted at each meeting of
the Committee.
In the alternative the continuing directive could
remain outstanding until the Committee wanted to change it.
In
any event, he saw no need for inclusion of the phrase "except as
otherwise authorized" at several places in
If
the Committee wanted to make a change in
the draft directive.
the directive,
that
could be done at any meeting,
With respect to the mechanics of drafting the current
policy directive, Mr. Deming expressed the view that it
was highly
12/19/61
-53
important that the drafting be done promptly and that action by
the Committee be taken as quickly as possible.
He would prefer, if
possible, that this action be taken on the day that the Committee
met.
In many cases, he thought, the drafting of the directive would
not be too complicated.
Where the drafting was complicated, there
might be difficulties involved in attempting to obtain approval by
mail or wire,
In his opinion, therefore, the Committee should try
to have a relatively simple current policy directive and a statement
of general policy position drafted during a recess following the
first part of each Committee meeting, with the thought that in most
cases the Committee could reconvene after lunch and take action.
Mr. Clay noted that he had stated in his written comments
that he would prefer to continue to have standing rules covering
open market operations.
His basic reason was that he thought the
Committee must consider around the table the hard
broadening the scope of its standing rules.
problem of
He felt definitely
that the Committee should adopt a more flexible approach, not only
in view of the balance-of-payments problem but also the problems
of the internal economy.
To face the need for a more flexible
approach, he had thought that perhaps it would be a good idea for
the Committee to apply itself to a broadening of the standing rules.
On the other hand, the proposition of a more flexible approach
-54
12/19/61
perhaps was agreed upon generally.
On that assumption, he would
say that the statements of operating policy were put into effect
under conditions different from those now existing, that the Committee
did not really need them in
its
continuing operations,
and that he
would be willing to abandon them.
Mr. Clay expressed the view that a continuing authority
directive along the lines of the most recently distributed draft
might well be in
he felt
order.
As to the separate current policy directive,
that this was going to require quite a bit of experimentation
on the part of the Committee.
Many terms were used in
discussion
that had different shades of meaning to each individual.
In time
the Committee might arrive at a better ability to communicate its
instructions to the Desk, but there would no doubt be a difficult
period involved.
to attempt it;
Nevertheless,
he felt
that the Committee ought
the Committee ought to try to give the Desk somewhat
more definitely an indication of its
feelings.
Perhaps,
also, the
Committee should experiment with a procedure such as had been
suggested by Mr. Deming.
it
This could involve some difficulties,
but
might well be worth while.
Mr. Wayne said that he would favor the continuance of
standing rules, for the reason that rules actually would exist
whether the Committee formally adopted them or not.
He recognized
the difficulty of operating under such rules and would prefer in theory
12/19/61
-55
to abandon them.
However, the Open Market Committee was an agency
of such importance that before long he felt it would be called upon
by some committee of the Congress to state its principles.
he felt that it would be better if
might be called standing rules.
Thus,
the Committee had something that
These could provide for alternative
methods of operation to the extent feasible.
Mr. Wayne indicated that he concurred in the suggestion
that it would be desirable to publish an authoritative article
quarterly on the direction in which policy was moving and the
reasons.
He also concurred in the suggestion that the staff might
be requested to prepare some possible language for a current policy
directive in advance of each meeting of the Committee as the basis
for discussion.
Today both Mr. Noyes and Mr. Thomas had made
suggestions in their statements regarding the policy that might
be appropriate for the period ahead, and he saw no difficulty
in asking the staff to spell this out in words that could be used
as a basis for discussion.
Mr. Wayne also indicated that he would favor a separate
continuing authority directive, which seemed to him essential
from the standpoint of the New York Bank.
As to the current
economic policy directive, he felt differently from some of his
colleagues.
In his opinion the directive was valuable primarily
from an historical standpoint and not as the basis on which the
Open Market Account was managed, and it should be so written.
-56
12/19/61
Mr. Robertson said he was inclined to agree generally
with the view that there were going to be standing rules of some
kind in any event.
There could be formally-adopted
standing rules,
or the various rules could be dealt with at each meeting of the
Committee,
but there must be some rules or the Committee would be
abdicating its responsibility by turning the whole job over to the
Management of the Account.
The "rules," of course,
into the continuing authority directive.
could be put
In either way, i.e.,
using standing rules or incorporating them into a continuing
authority directive,
the objective of greater flexibility could
be achieved.
Mr. Robertson expressed agreement with the suggestion
that there be a separation of the continuing authority directive
and the current policy directive.
As to the latter, it
seemed to
him that the Account Manager should not be asked to share in the
responsibility for the drafting,
on the theory that it
would be
inappropriate for the person to whom the directive was directed
to participate in formulating it.
Instead,
the drafting ought to
be done by the Committee Secretary, with the assistance and advice
of such other Committee staff as the Secretary might desire to use.
The current policy directive would be a reflection of the consensus
reached by the Committee at each meeting,
and in his opinion it
would be unwise to have the confirmation of the directive delayed
12/19/61
-57
for three weeks.
Consequently, he agreed that the drafting of
the directive should be done promptly and that action on the
directive should be part of the Committee's job before each meeting
adjourned.
Mr. Robertson also expressed the view that the Committee's
operating rules, whether they were contained in standing rules or
in the continuing authority directive, ought to achieve as much
flexibility as seemed desirable.
In his opinion that flexibility
had been achieved in the drafts of standing rules and continuing
authority directive tnat had been distributed to the Committee.
while there were parts of the drafts with which he would not agree,
he thought they did achieve flexibility.
As he saw it,
there must
be some rules with respect to matters such as swap transactions,
pegging operations, and the conduct of open market operations
during periods of Treasury financing,
As drafted, the continuing
authority directive would permit transactions in
securities of any
maturity.
To that he would object simply because,
was aware,
he had objected to the so-called
as the Committee
"Operation Nudge."
In
this connection, Mr. Robertson presented the following statement:
The so-called "Operation Nudge" has not been successful
in achieving the twin goals of pushing up short-term rates
If the operation had
and pushing down long-term rates.
been pursued to the extent necessary to achieve those twin
The deleterious
goals, its defects would now be obvious.
effects of such operation upon the long-term market for
Government securities will became more apparent when the
12/19/61
Treasury seeks--as it some time must--to extend the maturity
pattern of the Federal debt by attempting to sell long-term
securities for cash or in exchange for maturing securities.
Furthermore, while it is possible for the Federal Reserve
to acquire long-term securities during a period such as 1961,
when Treasury financing was chiefly short-term, without
immediately and clearly impeding Treasury operations, the
sale of such securities by the Account would present real
problems.
Such selling action on our part would not only
absorb long-term funds from the limited supply, but would
also aggravate the uncertainties which already plague the
long-term market, weakening its supporting structure and
attenuating its appeal to investors.
I cannot foresee any time, when monetary policy would
be calling for the sale of securities to absorb reserves,
that such longer-term securities could be sold from the
Federal Reserve's holdings without impairing the ability
of the Treasury to lengthen the maturity pattern of its
publicly held securities.
This would be unfortunate, in
view of the real need for the Treasury to achieve a more
manageable maturity distribution of the public debt,
For these reasons, I believe the special operation"Operation Nudge"--should be terminated forthwith.
In further comments,
Mr. Robertson said he felt that the
Committee ought to reserve in its rules the right to change them
at any meeting for any purpose.
transactions.
directive,
some form.
There should be a rule on swap
That might be included in
the continuing authority
with greater flexibility, but it
should be there in
With respect to repurchase agreements, he would
continue to object to making loans in the guise of repurchase
agreements to nonbank dealers at lower rates than loans could be
made to member banks.
the Committee wanted.
However, the rule could be as flexible as
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12/19/61
Mr.
Shepardson said that in general he would favor the
suggestion that the Committee do away with the statements of
operating policy.
made a point.
However, he thought that Mr.
Robertson had
On some matters there were guidelines, written or
unwritten, that would continue to be in everyone's mind.
future time it
might be desirable to try to reformulate some
general principles,
or another.
At some
for there must be some guidelines in one form
In his opinion, however,
the difficulty involved in
trying to explain changes in the statements of operating policy at
this time would be greater than the difficulty involved in terminat
ing those statements.
With regard to the continuing authority directive, Mr.
Shepardson said he would agree with the suggestion that the
Committee take a look at the directive at each meeting,
it
might not want to make any change.
directive,
he thought it
even though
As to the current policy
important that the Committee try to develop
more of an explanation than it
had heretofore made.
He would have
in mind a directive that would provide some basis for explanation
to people outside the System and that also would be an effective
instruction to the New York Bank.
A point that impressed him was
that the Committee had a responsibility to give the New York Bank
and the Account Manager some instruction that both the Account
Manager and the Committee could check on reasonably.
For that
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12/19/61
reason he would feel that the current policy directive should be
expressed more definitely than in terms of greater or lesser ease.
Recognizing the difficulty of using target figures,
it
seemed to
him that the Committee would have to develop something tangible
enough so that the Committee, the Account Manager, and the general
public could appreciate what was being done.
today the kinds of figures used in
As had been suggested
the directive could be changed
from time to time depending on the prevailing circumstances,
but
he was inclined to feel that some figures should be included.
Further, he would like to have the directive incorporate a summary
statement of basic economic conditions.
The directive should be
prepared promptly, and he would be inclined to favor a procedure
under which the Committee would recess and reconvene after lunch
to adopt the current policy directive.
Mr.
King said that the arguments for and against discarding
the operating policy statements seemed to him very nearly in
balance.
He could convince himself either way without difficulty.
In his opinion, however,
there would be an adverse psychological
effect from dropping the statements of operating policy entirely
at this time.
Accordingly, with emphasis on the psychological
effect that he foresaw, he would prefer to retain the standing
rules and broaden them as necessary.
Although he was not entirely
happy with that conclusion, it was the conclusion to which he felt
that he must come.
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12/19/61
Mr. King indicated that he would favor the adoption of a
continuing authority directive.
As to the current policy directive,
he said that he had always been dissatisfied with the (b) clause in
the present form of directive.
He would hope that the Committee could
use some quantitative guides, with variations from time to time.
As
to procedure, he concurred in the suggestion that the whole process
of drafting and adopting the current policy directive should be
completed before each Committee meeting adjourned.
Mr. Mitchell said he had been impressed by the comment that if
the Committee did not have formal statements of operating policy, it
would nevertheless have some kind of rules, possibly by inadvertence.
If an article was published in the Federal Reserve Bulletin, perhaps
that would be the new dogma.
Personally, he would want to have a set
of standing rules,
As to the continuing authority directive, Mr. Mitchell indicated
that he would have no objection to any of the suggestions that had been
made on that score.
As he saw it, the current economic policy directive
was the crux of the problem.
The views of the Committee members might
be stated in all kinds of ways, but the Manager had to leave each
meeting with an impression of what the Committee wanted.
The
Chairman tried to lighten that burden by stating a consensus, yet the
Account Manager could not help but be influenced by what had been said
around the table.
For example, for the past several meetings he
12/19/61
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(Mr. Mitchell) had said that he would not rock the boat, that he
would avoid creating any impression of a change in monetary policy.
In his opinion that was enough of a directive under existing
conditions.
When it
came to figures,
every man sitting around the
table would tend to use whatever figures he liked, and there might be
some question as to the importance of these quantitative suggestions.
It was important, he thought, to have the interpretation of the
consensus put down in black and white promptly, and the Committee
should remain in session until the job of adopting a current policy
directive had been completed.
On the matter of attempting to state the reasons why the
directive had been adopted, Mr. Mitchell commented to the effect that
he would consider this an extremely difficult job, particularly if
was expected to be completed within a short period of time.
it
Time was
needed to think the matter over and look at the record of the meeting,
On the other hand, the instruction to the Account Management had to be
determined immediately.
In his opinion, the Account Manager should
participate in the preparation of the directive because it was his
understanding of what the Committee had been saying that really counted.
The problem of the directive was an important matter from the stand
point of public relations and also from the standpoint of the Committee's
dealings with the Manager of the Account.
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12/19/61
Mr. Fulton said that he would favor abandoning the statements
of operating policy on the premise that they were conceived at a time
when the System had stopped pegging the price of Government securities
and at a time when the Open Market Committee was utilizing an executive
committee.
He noted that the opening paragraph of the proposed
continuing authority directive would authorize and direct the Federal
Reserve Bank of New York, to the extent necessary to carry out the
current economic policy directive, to do certain things.
If any
unusual circumstances developed, they could be brought to the attention
of the Committee by the Account Manager, and the Committee could write
a prescription every three weeks, if it wished, to change the methods
followed up to that time.
Therefore, he would approve the continuing
authority directive in the form of the draft distributed under date of
December 13 and abandon the statements of operating policy.
Mr. Fulton indicated that he would favor a form of current
economic policy directive that would include a brief reference to the
economic atmosphere and then an instruction to the Management of the
Open Market Account.
In his opinion the staff presentations made to
the Committee at the beginning of each meeting could be translated
into brief form for presentation to the Committee at the time of each
meeting.
Then the Chairman could draw a conclusion regarding policy
from the comments made around the table.
With that background, he did
not feel that it should be too great a burden for the Secretary to
12/19/61
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develop language that the Committee could agree upon before the
meeting adjourned as an instruction to the Account Management.
Mr. Bopp said that he would favor elimination of the statements
of operating policy.
He was impressed by the suggestion that an
explanation be given concerning the reasons why the statements were
initially adopted, why they were being eliminated, and what should not
be inferred from their elimination.
Such an explanation could also
refer to certain basic principles under which the Committee operated,
including the maintenance of an even keel during periods of Treasury
financing.
With regard to the draft of continuing authority directive, Mr.
Bopp indicated that he would favor elimination of the phrase "except as
otherwise authorized" on the theory that the Committee could make such
changes from time to time as it
desired.
With regard to the current
economic policy directive, he envisaged that it might begin with a
brief discussion of the economic environment, with the thought that
growing out of that discussion would come the instruction to the
Account Management.
He would hope that different words might be used
in the directive at almost every meeting; in his opinion the Committee
had tended to keep clause (b) of the present directive unchanged for
too long a time.
He was somewhat concerned, however, that the Committee
might get itself into a box if it
specific quantitative targets.
emphasized in the directive any
The directive should be stated in terms
12/19/61
-65
of goals that the Account Manager could reasonably be expected to
achieve.
On occasions the Committee might want to refer to some
quantitative target or to indicate that the Manager should pay more
attention than usual to some factor such as the bill rate.
Generally
speaking, however, while it was nice to be precise, he had some
concern about the results of using quantitative targets.
As to timing,
he noted that the directive would not actually be a directive until it
had been voted on by the Committee.
Therefore, this should be done as
part of the Committee's job at each meeting despite any inconvenience
involved.
Mr. Bryan said that the two statements most nearly reflecting
his own general philosophy were those of Messrs. Mills and Robertson.
In regard to the statements of operating policy, he noted that the
comment had been made several times that they had been evolved as a
response to a special situation peculiar to the Federal Reserve System.
In some ways that was a true statement; one could argue, therefore,
that they were no longer necessary.
The statements of operating policy,
however, referred to a number of matters, some important and some
relatively unimportant.
In his opinion they should be considered not
merely as a response to a particular situation in the Federal Reserve
System, but in some sense as a sort of self-admonition, including an
admonition to bear in mind one of the classical canons of central
banking that nearly everyone had violated from time to time, to the
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12/19/61
injury of self and country.
The canon to which he referred was that
a central bank should deal only in paper of short term and of
unquestioned goodness.
Accordingly, in the operating policy statements,
the Committee indicated that it
would deal in the securities that were
most nearly the equivalent of cash.
adhered to rigidly, but it
This rule need not always be
must be adhered to generally.
The Bank of
England had violated this canon from time to time, to the injury of
itself and its
country,
and so had the Bank of France.
During the
1920's the Federal Reserve System had gotten itself into trouble,
and its
country also, because the Reserve Bank discount windows were
making capital loans under the guise of discounting eligible paper.
Thus,
the statements of operating policy were something more than an
ad hoc response to a particular situation.
With regard to the current policy directive, Mr. Bryan said he
agreed with the view that the directive should not be a command,
a target.
only
Moreover, the directive, even as a target, would be meaning
less if applied to so short a period as a week.
From time to time
various quantitative guides in the field of reserves might have
considerable importance,
importance.
and at other times they might have less
Essentially, however, it would be unfair to the Account
Management and to the Agent Bank to issue a directive in terms of means
that were not at their command.
12/19/61
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The meeting then recessed and reconvened at 2:30 p.m. with
the same attendance as at the conclusion of the morning session
except that Mr. Mills was present and Mr. Bryan was not present.
Chairman Martin raised for consideration the question of
procedure from this point.
After some discussion, Mr. Balderston said
that, as he had indicated earlier, be would be willing to put in the
form of a motion a proposal that the Committee terminate the three
statements of operating policy that had existed since 1953, discontinue
the use of the existing form of policy directive,
adopt a continuing
authority directive in the form of the draft distributed by the Com
mittee Secretary under date of December 13, 1961, and agree to the use
of a current economic policy directive, which would be prepared and
acted upon in connection with each meeting of the Committee.
Question was raised whether this should be understood to mean
that the Committee would not have any formalized standing rules,
Mr. Balderston replied that this was correct.
that, as he understood it,
and
Chairman Martin commented
the continuing authority directive would be
essentially the statement of standing rules.
Mr.
Hayes noted, however,
that although the draft of continuing authority directive dated
December 13, 1961, would refer to certain mechanical details relating
to operations for the Open Market Account, it
would not embrace the
subjects now covered in the statements of operating policy.
If he
understood correctly the effect of Mr. Balderston's proposal, the
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12/19/61
material embraced in the statements of operating policy, or at least
most of it, would be eliminated.
was correct.
Chairman Martin replied that this
However, the continuing authority directive could be
amended at any time by the Committee to include any of the matters
now covered in the statements of operating policy, or other matters,
if the Committee so desired.
In effect, the Committee would be
starting over again with a new base.
There followed further references to the content of the draft
of continuing authority directive dated December 13,
1961, and the
effect of having to vote for or against so inclusive a motion as had
been outlined by Mr. Balderston.
Certain members of the Committee
indicated that they would favor parts of the proposal, but not others,
and that they would prefer to have an opportunity to vote on a
different basis.
Mr. Shepardson then moved that the three statements of operating
policy, reaffirmed most recently at the meeting on March 22, 1960, be
terminated, and this motion was seconded by Mr. Balderston.
These
statements of operating policy read as follows:
a. It is not now the policy of the Committee to support
any pattern of prices and yields in the Government securities
market, and intervention in the Government securities market
is
solely to effectuate the objectives of monetary and credit
policy (including correction of disorderly markets).
b.
Operations for the System Account in the open market,
other than repurchase agreements,
term securities (except in
markets),
shall be confined to short
the correction of disorderly
and during a period of Treasury financing there shall
-69-
12/19/61
be no purchases of (1) maturing issues for which an exchange
is being offered, (2) when-issued securities, or (3) out
standing issues of comparable maturities to those being
offered for exchange; these policies to be followed until
such time as they may be superseded or modified by further
action of the Federal Open Market Committee.
c. Transactions for the System Account in the open
market shall be entered into solely for the purpose of
providing or absorbing reserves (except in the correction of
disorderly markets), and shall not include offsetting
purchases and sales of securities for the purpose of altering
the maturity pattern of the System's portfolio; such policy to
be followed until such time as it may be superseded or modi
fied by further action of the Federal Open Market Committee.
In discussion of the motion, Mr.
whether it
Irons raised the question
was the sense of the motion to terminate the statements of
operating policy, as such,
or to say that the Committee would not have
any standing rules.
Chairman Martin replied that adoption of the motion would mean
the termination of the statements of operating policy as such.
However,
the proposed continuing authority directive could in his opinion
properly be called a rule.
on its
What it
might be called later would depend
possible growth,
Mr. Shepardson said he had assumed, in making his motion, that
an appropriate explanatory article would be developed for publication
concerning the discontinuance of the operating policy statements.
This
would be in accord with the suggestion that had been made earlier
during this meeting.
Chairman Martin then indicated that the voting on the motion
would be with the understanding that if
the operating policy statements
12/19/61
-70
were terminated, such an article would be prepared for publica
tion,
There being no further questions,
the Chairman called for
a vote and the motion was carried.
Votes for this action: Messrs. Martin,
Hayes, Balderston, Irons, Mitchell, Shepardson,
Swan, and Fulton. Votes against this action:
Messrs. King, Mills, Robertson, and Wayne.
Messrs.
Bopp, Clay, Deming, and Ellis indicated that if
they
had been members of the Committee at the present time they would have
voted for the motion.
The Committee then turned to the draft of continuing authority
directive to the Federal Reserve Bank of New York that had been
distributed under date of December 13, 1961, and agreement was reached
on certain changes in the draft.
The first
change was to specify that
the Federal Reserve Bank of New York was authorized to buy United
States Government securities with maturities of 24 months or less at
time of purchase from nonbank dealers for the account of the Reserve
Bank under agreements for repurchase of such securities in
calendar days or less.
(The number of months had not been inserted
in the December 13 draft.)
all
15
The second change was to eliminate,
at
places where they appeared in the draft of continuing authority
directive, the words "except as otherwise authorized."
The third
change was to eliminate the word "best" from the portion of the draft
directive which stated that the Federal Reserve Bank of New York was
12/19/61
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authorized to buy or sell United States Government securities in the
open market for the System Open Market Account at best market prices.
A motion then was made by Mr. Hayes, and seconded by Mr.
Balderston, that the following continuing authority directive to the
Federal Reserve Bank of New York be adopted, effective immediately:
1. The Federal Open Market Committee authorizes and
directs the Federal Reserve Bank of New York to the extent
necessary to carry out the current economic policy directive
adopted at the most recent meeting of the Committee:
(a) To buy or sell United States Government
securities in the open market for the System Open
Market Account at market prices and, for such Account,
to exchange maturing United States Government securi
ties with the Treasury or allow them to mature without
replacement; provided that the aggregate amount of
such securities held in such Account (including forward
commitments, but not including such special short-term
certificates of indebtedness as may be purchased from
the Treasury under paragraph 2 hereof) shall not be
increased or decreased by more than $1 billion during
any period between meetings of the Committee;
(b) To buy or sell prime bankers' acceptances in
the open market for the account of the Federal Reserve
Bank of New York at market discount rates; provided
that the aggregate amount of bankers' acceptances held
at any one time shall not exceed $75 million or 10 per
cent of the total of bankers' acceptances outstanding
as shown in the most recent acceptance survey conducted
by the Federal Reserve Bank of New York;
(c) To buy United States Government securities with
maturities of 24 months or less at the time of purchase,
and prime bankers' acceptances, from nonbank dealers for
the account of the Federal Reserve Bank of New York under
agreements for repurchase of such securities or acceptances
in 15 calendar days or less, at rates not less than (a)
the discount rate of the Federal Reserve Bank of New York
at the time such agreement is entered into, or (b) the
average issuing rate on the most recent issue of 3-month
Treasury bills, whichever is the lower.
2. The Federal Open Market Committee authorizes and
directs the Federal Reserve Bank of New York to purchase directly
from the Treasury for the account of the Federal Reserve Bank of
12/19/61
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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 indebted
ness as may be necessary from time to time for the temporary
accommodation of the Treasury; provided that the total amount
of such certificates held at any one time by the Federal
Reserve Banks shall not exceed $500 million,
No further discussion being requested, the Chairman called for
a vote and the continuing authority directive was adopted.
Votes for this action: Messrs. Martin,
Hayes, Balderston, Irons, King, Mitchell,
Shepardson, Swan, Wayne, and Fulton. Votes
against this action: Messrs. Mills and
Robertson.
Messrs. Bopp,
Clay, Deming, and Ellis indicated that if they had
been members of the Committee at this time they would have voted for
adoption of the continuing authority directive.
Mr. Robertson stated that he had voted against the adoption of
the continuing authority directive for several reasons.
First, he
objected to the inclusion of the authority to buy United States
Government securities from nonbank dealers under repurchase agreements
at rates that could be lower,
in certain circumstances,
discount rate of the New York Reserve Bank.
than the
Second, he objected on the
ground that the continuing authority directive did not include certain
rules within which the Management of the Open Market Account must
operate on behalf of the Open Market Committee.
Specifically, the
document did not include any directive to the effect that open market
operations were to be conducted primarily to supply or absorb bank
12/19/61
-73
reserves; it
did not limit open market operations to short-term
securities and instead permitted operations in Government securities
of any maturity; and it
contained no restriction against conducting
operations for the purpose of supporting any pattern of prices or
yields in the Government securities market.
Also, the continuing
authority directive contained no language specifying that during
periods of Treasury financing open market operations were to be
conducted in such manner as to change as little
money market conditions.
as possible prevailing
Finally, the continuing authority directive
contained no prohibition against swap transactions (offsetting purchases
and sales of securities for the purpose of altering the maturity pattern
of the System's portfolio).
Secretary's Note: Later in the
meeting, Mr. Robertson requested that
the statement he had presented during
the morning session on operations in
intermediate- and longer-term securi
ties also be regarded as a part of the
explanation of his dissenting vote.
The Chairman inquired of Mr. Mills whether he wished to include
any comments in
the record concerning his vote on the motion, and Mr.
Mills replied that comments in explanation of his position had been
presented by him at this morning's session.
There followed a brief discussion, in light of a question raised
by Mr. Thomas, which brought out that certain special authorities most
recently reaffirmed by the Committee at its meeting on March 7, 1961,
12/19/61
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such as the authorities in
respect to repurchase agreements and
bankers' acceptances, continued in existence and were not terminated
by the action of the Committee terminating the three operating policy
statements.
Mr. Hayes noted in
this connection that at some subsequent
meeting, if it were found that some of the special authorities needlessly
duplicated what was in the continuing authority directive, the Committee
could terminate those authorities if it so desired.
The discussion then turned to the content of the current
economic policy directive and the procedure envisaged for its preparation
and adoption.
Mr. Hayes suggested that the consensus as to policy, in whatever
form it might be stated by the Chairman and accepted by the Committee,
constitute the basis of the current policy directive.
He also suggested
initiating a procedure whereby the Secretary of the Committee, the
Account Manager, and the Economist of the Committee would formulate a
general statement of policy position giving the rationale underlying the
consensus and that this statement, in draft form, be distributed to the
members of the Committee for vote by wire or mail.
The consensus,
however, should be voted upon before the adjournment of the meeting.
Chairman Martin stated that the consensus today was not as clear
as it had been on a number of occasions.
However, he thought the
consensus was clearly not to become easier and instead, perhaps, to
trend in the direction of slightly tighter monetary conditions,
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12/19/61
although without any overt change in policy, with emphasis placed on
maintaining the Treasury three-month bill
rate in the range of 2-1/2
2-3/4 per cent.
Mr. Hayes inquired whether the consensus did not favor keeping
nearer the upper part of the 2-1/2 - 2-3/4 per cent range,
to which
Chairman Martin replied that he would say there was some inclination
to keep nearer the upper portion of the range.
The Chairman then inquired whether the members of the Committee
agreed that the consensus was as he had stated it.
Mr. Shepardson referred to the suggestion that had been made by
several persons during the meeting that the target for further growth
of total reserves be reduced fron an annual rate of 5 per cent to 4 per
cent, or even as low as 3 per cent.
considered a tightening.
He inquired whether that would be
Chairman Martin commented that he would prefer
to say a "trending," and after some discussion Mr.
Shepardson said that
he would not interpret the suggested reduction of the growth target for
total reserves as a tightening.
Mr. Hayes suggested that this might be
regarded as a trend toward a bit tighter situation, and Chairman Martin
suggested that it
might be referred to as a trend toward a less easy
situation,
Mr. Thomas commented that this discussion illustrated the
problem involved in using the word "tightening."
what credit demands developed.
Much would depend on
In his statement this morning he had
12/19/61
-76-
been suggesting that the Committee indicate that it
would supply
through open market operations the amount of reserves that would be
adequate for a certain amount of growth in total reserves and let the
market decide whether or not there would be a tightening.
The 4 per
cent growth rate that he had mentioned was after allowance for seasonal
variations.
Whether interest rates would rise or the money market would
tighten would depend on whether credit demands pressed against the
available supply of reserves.
Chairman Martin then said it
seemed to him that it
for the Committee to use some reference to the bill
would be wiser
rate than to specify
quantities of reserves for growth or to specify something in
the money supply.
He did not believe that it
terms of
would be feasible to try
to pin down such factors.
Following additional discussion, Chairman Martin restated his
conception of the consensus of this meeting.
As he saw it, the consensus
was along the lines of concentrating on a bill
rate in the upper part of
the range of 2-1/2 - 2-3/4 per cent and trending toward a slightly less
easy monetary condition, without overt action.
Chairman Martin inquired whether there was disagreement on the
part of members of the Committee with his statement of the consensus,
and no comments to such effect were heard.
The Chairman then called for a vote on the implementation of
policy according to the stated consensus.
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12/19/61
Of the members of the Committee, Messrs. Martin, Hayes, Balderston,
Irons,
Shepardson,
Swan, Wayne,
and Fulton voted for the implementation
of policy along such lines, while Messrs.
King, Mills, Mitchell,
and
Robertson voted in the negative.
Messrs.
Bopp,
Deming,
and Ellis indicated that if
they had been
members of the Committee at this time they would have voted for the
implementation of policy according to the consensus, while Mr. Clay
indicated that he would have voted in the negative.
Mr. Robertson stated that he opposed the implementation of policy
according to the consensus on the basis that he did not believe in tying
monetary policy to the bill rate.
Mr. Mills stated that he had dissented because the policy would
not be as strongly restraining as he believed conditions required.
He
added that at every juncture where there had been some tendency toward
even a modest tightening, that tightening had not occurred; at the first
shadow of any market disturbance, the Committee had turned and moved in
the other direction.
Mr. King said that his dissent was largely on the basis that he
thought this was the wrong time for any trend in
ease.
In his opinion it
the direction of less
would be wiser to wait until after the Holiday
shopping period was out of the way.
He felt, however, that a month or
a month and a half from now he would be likely to come to the same
conclusion as the majority of the Committee.
12/19/61
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Mr. Mitchell said that his dissent was on the ground that he
did not think this was the right time to start tightening.
Mr.
Clay said he did not believe that this was the time to
start even a slight movement toward tightening.
In further comments on the policy reflected in
Chairman Martin said that he did not view it
the consensus,
as representing a tightening.
Mr. Swan said he would regard it as reflecting essentially a continuation
of what had been going on, and Mr. Hayes suggested that it reflected a
slight change of emphasis.
Mr. Balderston referred to a "deceleration
of acceleration."
The Chairman then commented that the next matter for consideration
would appear to be the question of writing a current economic policy
The question was whether to request the
directive to the New York Bank.
Secretary, the Account Manager,
and the Economist to draft a directive
that would reflect the consensus.
Mr. Robertson made the suggestion that such a procedure might be
instituted at the next meeting, when the staff would be better prepared.
Mr.
in effect,
Hayes said he would interpret this suggestion as contemplating,
that the Committee would reinstate clause (b)
temporarily.
went on to bring out that his earlier suggestion on procedure had been
that the Committee adopt the consensus as the current policy directive,
and that it
cause to be prepared following the meeting a statement of
general policy position.
Unless the Committee had those two things
He
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12/19/61
together, he felt that it
would not have proper evidence to report to
the Congress what it had done.
Mr. Robertson then clarified that his suggestion would be, for
the purpose of this one meeting, to take out clause (b) of the old
directive and insert language that would fit
in with the statement of
the consensus.
Mr. Shepardson noted that today's meeting presumably would be
the last meeting of the Committee during the current calendar year.
this morning's session there had been interjected,
mination of policy for the forthcoming period,
procedures.
In his opinion it
At
prior to the deter
a discussion of operating
might be better to conclude the action
on policy today according to the procedure that had been in existence
at the beginning of the meeting.
For this meeting, in other words, the
Committee would issue a directive the same way that it
had in the past.
The new procedures could then become effective with the first meeting
of the Committee in the new year.
Mr.
Balderston said he had been concerned about the impression
that the Committee's published policy record had made on the academic
fraternity and other sophisticated groups.
He had been hopeful that
this year the Committee could adopt a new set of directives that would
be more intelligible to those who had enough interest in
Reserve System to read the Annual Report of the Board.
the Federal
He would like
the report this year to put the Committee s best foot forward.
-80
12/19/61
Mr. Hayes noted that the consensus of this meeting had been
agreed upon by the Committee.
It would be his suggestion that the
Committee now ask the Secretary to transmit a statement of policy
position to the members of the Committee, with the thought that this
could then be approved and embodied in the directive.
Chairman Martin commented that such a procedure would seem to
raise the question of taking another vote, and Mr.
Hayes responded that
the purpose of the so-called statement of policy position would be to
present the reasons why the Committee had come to the consensus that
had been agreed upon.
Those who did not favor the policy expressed in
the consensus presumably would not agree with the statement of policy
position.
Chairman Martin then inquired whether such a procedure would
be generally agreeable to the majority of the Committee,
no comments to the contrary.
and there were
Accordingly, Chairman Martin stated that
it would be understood that the procedure would be along such lines.
The Secretary would have to do the best that he could by way of
experimentation and the Committee would have to consider the problem
in detail at its next meeting.
Mr. Sherman commented that it would appear that the vote on
implementation of the consensus, as stated by the Chairman, was the
policy action of the Committee at this meeting.
would go into the policy record.
That vote was what
-81
12/19/61
No difference of opinion with this comment was indicated.
Mr. Shepardson then moved that, beginning with its next meeting,
the Committee follow a procedure whereby promptly after the morning
session of each meeting the Secretary,
Market Account,
the Manager of the System Open
and the Economist would prepare,
bearing in mind the
suggestions as to content expressed during today's discussion, a draft
of current economic policy directive on which the Committee would act
before the meeting adjourned.
This motion was seconded by Mr. Balderston.
In discussion of the motion, Mr.
Swan said he understood that
the statement to be drafted would be more limited in
scope than the entry
that would subsequently be prepared for inclusion in the Committee's
policy record.
In reply, Mr. Hayes called attention to the draft statements of
general policy position that had been submitted with the New York Bank's
letter of November 3, 1961.
In substance, the statement he envisaged
would be a brief resume indicating why the Committee reached the conclusions
that were embodied in the consensus.
Such a statement would indicate the
factors to which the Committee had given weight, and what it
was trying
to stress.
Mr.
Swan said he would not object to the contemplated procedure,
He had simply been wondering how much substance it
incorporated in
the proposed statement.
was envisaged would be
12/19/61
-82
Chairman Martin replied that he would have in
much substance into the statement as feasible.
mind getting as
He went on to say that
those who dissented from the consensus would have their votes recorded
in the minutes of the particular meeting.
The statement of the majority
position on policy would then be drafted by a group consisting of the
Secretary,
the Account Manager,
and the Economist.
Mr. Robertson suggested that there might be a situation where
the Secretary, Economist,
themselves.
and Account Manager would not agree among
The Account Manager, he said, certainly should understand
exactly what was involved and should be fully consulted.
also should be fully consulted.
However,
The Economist
the responsibility for the
drafting should be placed with the Secretary.
There should never be an
occasion where no draft was submitted simply because the group could
not reach agreement.
Mr.
Mitchell noted that the principals would be at hand, and
Chairman Martin said it
bring in
some draft.
would be expected that the staff group would
He agreed,
however, that the responsibility for
placing a draft before the Committee should be centered in
even though other staff members would be involved in
the Secretary,
the drafting process.
There being no further discussion, the Chairman called for a vote
on the motion as to procedure made by Mr.
Shepardson,
and the motion was
carried, Messrs. Martin, Hayes, Balderston, Irons, King, Mitchell,
Robertson,
motion,
Shepardson, Swan, Wayne,
and Mr.
and Fulton voting in
Mills voting against it.
favor of the
12/19/61
-83Messrs.
Bopp,
Clay, Deming,
and Ellis indicated that if they
had been members of the Committee at this time they would have voted
in favor of the motion.
Mr. Mills stated that a favorable vote on his part would not
have been consistent with his position, expressed earlier during this
meeting, favoring retention of the form of policy directive that had
been used up to this time.
Chairman Martin turned to Mr. Rouse at this point and inquired
whether there were any prospective developments in
which he would like to comment,
the period ahead on
and Mr. Rouse indicated that he had no
comment.
Secretary's Note: Pursuant to the procedure that had
been agreed upon for this meeting during the foregoing
discussion, the Secretary, the Account Manager, and
the Economist subsequently drafted a current economic
policy directive to the Federal Reserve Bank of New
York which the Secretary transmitted to the members of
the Committee, who were asked to indicate their
approval or disapproval of the wording, including an
indication as to which of two alternates they would
prefer for the last clause of the first sentence in
the second paragraph (see directive below). On the
basis of the replies received, certain minor changes
were made in the draft, On December 21, 1961, the
Secretary advised the President of the Federal Reserve
Bank of New York by telegram that at the meeting of
the Federal Open Market Committee on December 19, 1961,
the Federal Reserve Bank of New York had been author
ized and directed, until otherwise directed by the
Committee, to execute transactions for the System Open
Market Account in accordance with the following current
economic policy directive:
It is the current policy of the Committee to permit further
bank credit and monetary expansion so as to promote fuller
12/19/61
utilization of the economy's resources together with money
market conditions consistent with the needs of both an
expanding domestic economy and this country's international
balance-of-payments problem.
To implement this policy, operations for the System Open
Market Account shall be conducted with a view to providing
reserves for bank credit and monetary expansion (with allowance
for the wide seasonal movements customary at this time of the
year), but with a somewhat slower rate of increase in total
reserves than during recent months. Operations shall place
emphasis on continuance of the three-month Treasury bill rate
at close to the top of the range recently prevailing. No
overt action shall be taken to reduce unduly the supply of
reserves or to bring about a rise in interest rates.
The votes recorded on the foregoing directive
were the same as those recorded during the meeting
concerning the implementation of policy according
to the consensus, as stated by Chairman Martin.
However, Mr. Hayes and Mr. Swan, while voting for
the above current economic policy directive,
indicated they would have preferred, as the language
sentence in the
of the last clause of the first
second paragraph, "but with a slight shift in
emphasis in the direction of less ease."
At this point Mr. Hexter, Assistant General Counsel, joined the
meeting.
With reference to the question of Federal Reserve operations in
foreign currencies, Chairman Martin noted that there had been distributed
to the members of the Committee copies of a letter addressed to him under
date of December 18, 1961, by the Secretary of the Treasury.
This letter
had been obtained as the result of discussions with the Secretary that he
had undertaken in accordance with the authorization given to him at the
Committee meeting on December
5, 1961. The text of the letter referred
to by the Chairman was as follows:
12/19/61
As you know, I have been much interested in the work
of the Open Market Committee and its staff in exploring the
possibility of Federal Reserve operations in and holdings
of selected convertible foreign currencies. The proposal
which has been developed seems to be highly constructive.
The Treasury, relying upon the Federal Reserve Bank of
New York as fiscal agent, has experimented with foreign
currency operations and holdings over the past nine months,
with very useful effects on the functioning of the foreign
exchange markets and desirable effects in safeguarding the
international value of the dollar. During this short period,
our recently attained convertible international payments
system has been going through its first
real test. From
time to time, we have had to deal with unusual payments flows
of quite some size, occasioned in part by uncertainty about
the relationship of currency values.
I share the view of many European financial leaders that
we must not allow these volatile flows of funds to undermine
the international financial mechanism we have all struggled
so hard to rebuild during postwar years. As you are aware
from last week's press announcement regarding the IMF, we
have just negotiated an important supplement to the Fund's
resources to help us deal with any developing disequilibrium
in balance of payments relationships among the larger industrial
countries that threatens an impairment of the monetary system.
While the IMF special resources arrangement will be a
major reinforcement of the world's payments system, we must not
overlook other means of keeping that system convertible,
efficient and sustainable. Operations along lines in which
the Treasury's Stabilization Fund has experimented are one of
these means.
In view of its limited resources, the Fund's foreign
currency operations have necessarily been on a pilot basis.
In my opinion, these pilot activities justify the belief that
operations carried out on a broader and more adequate scale
will be beneficial to the functioning of exchange markets and
to the pivotal role which the dollar plays in them.
At the same time, it is important to recognize that such
operations can best be conducted by the central bank because
only the central bank can make the prompt smooth adjustments
In view of the established
that are called for domestically.
responsibility that central banks have for sound and stable
monetary conditions, the world's financial community is
naturally looking to them to play an active role in maintaining
It is surely a proper central banking
a sound payments system.
12/19/61
-86
function to engage in temporary operations that will help
to buffer and moderate tendencies towards volatile flows
of funds. Over the longer period, the very existence of a
central banking capability for coping promptly and effectively
with volatile flows can give confidence to international
traders and investors, and further the orderly evolution of
international market processes.
If the Federal Reserve decides to undertake foreign
currency operations, the Treasury and the Federal Reserve will
both need to recognize in advance, of course, that they will
have to feel their way; that effective methods of operations
and effective working relationships between them can only be
worked out gradually; and that they need to learn together the
best ways of carrying our mutual responsibilities for a sound
dollar internationally. In such an effort, the Treasury on its
part would naturally want to avoid impinging on the independence
of the Federal Reserve System within the Government.
If the Open Market Committee decides to consider its current
proposal further, we will need to consult together on the details
of any division of responsibilities between the Treasury and the
Federal Reserve.
I realize that the Committee might be hesitant to embark
on operations in hich it has not engaged since the establish
ment of the Stabilization Fund under the Gold Reserve Act of
1934. If the Committee should be interested in the opinion of
the Treasury's General Counsel regarding the statutory
provisions governing foreign exchange operations by Government
agencies, or if the Committee desires to obtain some statutory
clarification of these provisions, the Treasury's legal staff
will be ready to cooperate with yours.
It would be helpful if questions about the Committee's plans
in the foreign currency field could be resolved before our legis
lative program for the next session of the Congress has to be
submitted. Before final activation, of course, any specific
proposal will need to be reviewed and discussed with the National
Advisory Council in accordance with the provisions of the Bretton
Woods Agreements Act.
In view of the current sensitivity being shown by the foreign
exchange markets to the balance of payments problem of the United
States, it is desirable to make progress in this matter as rapidly
as is feasible.
In closing, I might add that, according to my information,
foreign currency operations by the Federal Reserve on a broader
basis than those pioneered by the Stabilization Fund would be
welcomed by other central banks.
12/19/61
-87
Chairman Martin commented that, the letter having been
received, it
it
now appeared to be up to the Committee to decide whether
wanted to go forward with the matter at this juncture,
wished to delay further, or whether it
proposal,
whether it
wanted to turn down the
That was where the matter stood at the moment.
The Chairman
called attention particularly to the portion of the letter in which the
Secretary of the Treasury said he realized that the Open Market
Committee might be hesitant to embark on operations in which it
had not
engaged since the establishment of the Stabilization Fund under the Gold
Reserve Act of 1934 and that if
the Committee should be interested in
the opinion of the Treasury's General Counsel regarding the statutory
provisions governing foreign exchange operations by Government agencies,
or if
the Committee desired to obtain some statutory clarification of
these provisions, the Treasury's legal staff would be ready to
cooperate with the legal staff of the Federal Reserve.
If
the Committee wished to go forward witn this matter, the
Chairman said,
it
would seem to him that it
ought to authorize the
legal staff of the Committee to work with the legal staff of the
Treasury on something that would bring to the attention of the House
and Senate Banking and Currency Committees the problem with respect to
statutory clarification of the Federal Reserve's authority to deal in
foreign currencies in the manner proposed.
logical and orderly procedure.
That would seem to be the
First, however,
the Open Market Committee
-88
12/19/61
ought to decide whether it wanted to go forward with this matter
at all.
His own thinking, the Chairman said, was that in
view of world
conditions at the present time the Federal Reserve should be prepared
to deal in foreign exchange.
The rationale for such operations had
been set forth quite clearly in
a memorandum from Mr.
Thomas dated
December l4, 1961, copies of which had been distributed to the
Committee.
A good case,
Chairman Martin thought, could be made that
the central bank was the proper agency to handle such operations.
If
an attempt was going to be made to deal with volatile flows of funds,
the System must be prepared to operate somewhat like the Open Market
Committee in
the Government securities market.
would be helpful to all concerned if
on this matter today because it
the necessary relationships.
forward.
In his opinion,
it
the Committee could move forward
would take time to work out some of
In his opinion,
the Committee should go
However, he would now throw the matter open for discussion.
Chairman Martin then turned to Mr.
Hayes,
who said that he
would not take a great deal of time today because he had spoken on the
subject at previous Committee meetings.
In brief, he would like to
express concurrence in the memorandum from Mr. Thomas,
which provided
a general rationale for the kind of activity under consideration.
was a fact, Mr. Hayes noted, that this type of operation fell,
generally speaking,
within what were considered central banking
It
-89
12/19/61
operations in most of tte major countries of the world.
Therefore,
it was quite logical to feel in principle that this was an area of
operations on which the Federal Reserve System should embark.
Mr.
Hayes said he was satisfied that the Federal Reserve did
have legal authority to conduct such operations.
Personally, he would
be ready to move forward on the basis of Mr. Hackley's opinion.
At
the same time, he could see distinct benefits in obtaining statutory
clarification from the Congress.
From where he sat,
it was rather
hard for him to judgewhat length of time would be involved in
such clarification.
etting
The question, therefore, was whether to proceed
while getting such authorization from the Congress or to wait until it
had been obtained.
He would agree that it
would be appropriate to
enter into discussions with the Treasury's legal staff and to take up
with appropriate parties the question of how statutory clarification
might best be secured.
he had some feeling that the
Nevertheless,
sooner the System embarked on this activity the better it
from a purely pract cal point of view,
in that the
would be
resources of the
Stabilization Fund were quite limited.
Recognizing the need, he thought
that the System would be derelict if
failed to move reasonably
promptly.
However.
it
he was willing to leave to the chairman the
decision on how promptly that ought to be done in relation to the new
legislation that would be sought.
Mr.
Ellis said that the memorandum from Mr. Thomas had provided
an underlying rationale more appealing to him than the earlier discussions,
-90
12/19/61
which were based to a substantial extent on methodology and legal
relationships.
He noted that the proposal had not been presented to
the Committee as a matter of great urgency.
If
the matter was not one
of great urgency, he felt that in the longer run the System would be
on sounder footing if
it proceeded carefully and undertook to obtain
some statutory clarification, as suggested in the letter from the
Secretary of the Treasury.
The appropriate procedure, it seemed to
him, would be to follow the course indicated by the portion of the
letter to which particular reference had been made by Chairman Martin.
This suggested that the Committee should authorize Counsel to enter
into discussions with the legal staff of the Treasur, with the objective
of obtaining a statutory definition of responsibility, so that System
operations could get off on the right foot.
Mr.
Irons said that with the receipt of the Secretary of the
Treasury's letter, his earlier questions had been partly answered.
He
would favor proceeding with the proposal on the oasis of the procedure
suggested in the Secretary's letter, namely, that the legal staffs of
the Federal Reserve and the Treasury get together and work out the
details of statutory clarification.
Mr. Swan indicated that he agreed with the views expressed by
Messrs. Ellis and Irons.
Looking further ahead, he would think in terms
of following the plan set forth in the revised draft papers from the
staff that had been distributed to the Committee under date of December 12,
12/19/61
1961.
-91
This set of documents met the objections that he had previously
expressed. 1/
Mr. Deming said that he would regard operations in foreign currencies
as a proper activity for the central bank if
be obtained.
statutory clarification could
He had several relatively minor points regarding the techno
calities of the staff documents, and if agreeable he would set those forth
in a letter.
Chairman Martin indicated that it
would be appropriate to submit
those comments by letter.
Mr. Clay said that he would favor moving forward to obtain statutory
clarification.
1/
The revised draft papers embodied several suggestions made at the
Committee meeting on December 5, 1961. The proposed instructions of
the Open Market Committee regarding open market transactions in foreign
currencies (Paper No. 2) contained an amended enumeration of purposes
of such transactions, and a sentence had been added stating expressly
that the operations should not be used to obscure basic changes in the
U. S. balance of payments. The proposal to establish a subcommittee of
the Open Market Committee had been eliminated; instead the Chairman and
Vice Chairman of the Committee and the Vice Chairman of the Board would
be authorized, within guidelines issued by the Committee, to set maximum
amounts for individual currency holdings and exchange rate limits, to
review and approve understandings between the New York Bank and foreign
central banks, and to take action in emergencies when the decision of
It was made clear that the
the Committee coula not be sought in time.
Committee would be continuously provided with fall information on
transactions.
The guidelines for open market operations in foreign
currencies (Paper N.o. 4) would now be issued by the Committee itself;
and the pertinent section had been amended to eliminate reference to
seasonal and cyclical swings and thus make it clear that System trans
actions should aim only at moderating or cushioning the effects of
unusual payments swings.
The proposed explanatory paper on the aims and
scope of System foreign exchange operations had been amended to conform
to the changes in the two aforementioned papers. In addition, Mr. Hackley
had submitted a new paper (Paper No. 7) embodying suggestions for possible
statutory clarification of the System's authorit to engage in foreign
exchange operation..
12/19/61
-92
Mr. Wayne likewise expressed the view that the legal staff of
the Federal Reserve should be authorized to work with Counsel for the
Treasury to obtain statutory clarification.
In view, however,
of the
phraseology of the Secretary of the Treasury's letter and the opinion
of the Committee's General Counsel that the Federal Reserve had statutory
authority to engage in foreign exchange operations,
ne would be willing,
if time was of the essence, to proceed with such operations while seeking
statutory clarification.
Mr.
Mills said that he would proceed with the proposal.
as he had brought out at the December 5 meeting,
However,
the mechanism was
experimental and he had serious misgivings as to whetner the operations
in
foreign currencies would work out to the benefit of the Federal Reserve
System.
Those misgivings went back very importantly to the System's
experience in
operating outside the bill market in
This operation was to nave been experimental, but it
into a permanent procedure,
Government securities.
had now developed
one that in his opinion nad not worked out
to the general good.
Mr. Robertson expressed the view that the subject was of such
importance as to warrant thorough analysis by the Congress to determine
what it
would want the Federal Reserve to do.
favor exploration of the matter,
Consequently,
as contemplated in
letter, with a view to seeking legislation.
he would
the Secretary's
He hoped that the matter
would be presented not as an effort to obtain authority to do something
-93
12/19/61
that the Federal Reserve thought was right but in
let
the Congress determine,
arguments, whether it
the meantime,
such manner as to
after weighing all of the facts and
wanted the Federal Reserve to do the job.
he would suggest that prudence be exercised in
In
conversa
tions with outside parties.
Mr.
Shepardson commented that he was not entirely clear about
the degree of urgency of the proposed activity.
Secretary of the Treasury, in
to the current sensivity
He noted that the
one portion of his letter, had referred
being shown by the foreign exchange markets
to the balance-of-payments problem of the United States and the desirability
of making progress in
this matter as rapidly as feasible.
He would certainly
favor the proposal that Federal Reserve and Treasury Counsel meet with a
view to exploring the matter and developing appropriate proposed legislation.
However,
it
was not clear to him whether there was a feeling on the part
of the Secretary of the Treasury that the situation was of such urgency as
to warrant moving ahead prior to Congressional action.
case, he would favor moving ahead.
If
If
such was the
the matter was not regarded as
urgent, however, he thought it would be preferable to proceed by the
legislative route before any operations were undertaken.
Chairman Martin replied that he could not speak for the Secretary
of the Treasury or the under Secretary for Monetary Affairs.
however,
He expected,
that both of them would share the view of Mr. Hayes that the
Federal Reserve ouht to go ahead without legislation.
On the other hand,
-94
12/19/61
he was not entirely convinced that there was enough to be gained to
justify giving up the exploration that needed to be carried out between
Federal Reserve and Treasury Counsel on matters such as the division of
responsibilities.
It might be, of course,
that there would be a crisis
at any time, but this was difficult to predict.
From the standpoint of
obtaining general understanding of this problem, he would feel much
better to have the matter explored with the Treasury in terms of division
of responsibilities and in
terms of obtaining Congressional support.
his opinion, that would be better than jumping the gun.
In
The Treasury
had experimented in this field through Stabilization Fund operations,
but the effectiveness of those operations was open to some doubt.
the Treasury felt that they had been highly successful,
While
there was a
division of opinion within the financial community.
Mr. Hayes commented that there was no such division of opinion
in
foreign central banking quarters,
that that was a different story.
to which Chairman Martin replied
There was no doubt about the matter
from the standpoint of international monetary cooperation.
Mr.
Shepardson then stated that he thought Chairman Martin had
answered his question.
As he (Mr.
Shepardson) had stated, he would
favor exploration of the matter with Treasury Counsel.
He would only
go ahead with operations on the existing basis if there was information
that the problem was more urgent than seemed to him probably was the
case.
-95
12/19/61
Mr. King said that he would favor proceeding with exploration of
the matter with Treasury Counsel in the manner outlined in the Secretary's
letter.
He added that the Chairman's thoughts, as the Chairman had just
expressed them,
coincided with his own.
In
his opinion,
this would be
the greatest responsibility that the System would have voluntarily under
taken since he began his service as a member of the Board of Governors.
If
he were a member of the Congress and the Federal Reserve,
of a pressing need,
Banking and Currency
in the absence
undertook such an operation without having asked the
Committees to consider the matter, he felt that such
a procedure might incur his wrath.
Accordingly, he
thought that the
matter should be carried forward along the lines suggested in the letter
from the Secretary of the Treasury.
book and proceed,
but in
In
he would ignore the rule
the absence of a crisis
along the lines that had been suggested.
if
a crisis
It
he would move forward
was important,
he thought,
the position was taken that the Federal Reserve was the proper agency
to conduct such operations, that the System be sure it took complete
control of the operations.
In this
the present System organization--and
connection,
he had some doubt whether
he would not advocate any rearrangement
of the organization--lent itself to the control of such operations.
theless,
he would hold that doubt in
abeyance and
tory discussions with Treasury Counsel.
proceed with the explora
Absent a crisis, he would like to
be recorded against undertaking any operations in
such time as statutory c.arification was obtained.
cross bridges ahead of time.
Never
foreign currencies until
He would not want to
-96
12/19/61
Chairman Martin commented that if
likely in the near future, it
it
was felt that a crisis was
was not particularly logical to say that
the Federal Reserve should wait for the crisis to occur.
Instead, the
System ought to be acquiring some currencies in order to be in a position
to deal with the crisis.
That was a valid point.
However, there could
be many differences of opinion on how soon a crisis might occur, whether
one would occur, and whether the proposed operations in
foreign currencies
would be the most effective means by which to handle such a crisis.
Mr.
Mitchell said he was encouraged that the Chairman had talked
with the Secretary of the Treasury.
As he read the Secretary's letter,
the Treasury wanted the Federal Reserve System to undertake these operations.
However, a crisis did not exist at present.
There was no way of knowing
when a crisis might occur, but the evidence that a crisis was imminent
did not seem strong.
Therefore,
There seemed to be time to develop legislation.
he would consult with the Treasury and develop,
as rapidly as
possible, draft legislation that was satisfactory to the Federal Reserve.
It would be advisable, he thought, for whoever was conducting these
negotiations with the Treasury to report back to the Committee regularly,
even between meetings, as to the kind of program tnat was under consideration.
For example,
he was not sure whether the plan would contemplate Federal
Reserve holdings of foreign securities.
Mr. Young replied that this would be contemplated under draft
legislation.
Under the present plan, without legislation,
be contemplated.
it would not
12/19/61
-97Mr.
Mitchell then said that he was in favor of moving ahead and
that he felt
the matter should be pushed forward as hard and as fast as
possible.
Mr.
Fulton stated that he would be in favor of proceeding in
accordance with the suggestion in
the Secretary's letter.
He would
dislike to see the System get into an operation of this kind before the
Congress had unequivocally given the System the authority and had expressed
the opinion that the Federal Reserve was the agency to do the job.
Exploration with the Treasury seemed to him highly desirable, with a
view to seeking legislaticn on a unified basis.
Mr. Bopp expressed agreement with the comments made by Mr. Fulton.
Mr.
Balderston said that he would like to see two steps taken
concurrently.
The first
would be consultation between the legal staffs
of the Treasury and the Federal Reserve,
the Secretary of the Treasury.
guidelines in
directive in
as suggested in
the letter from
The second would be the development of
this area that would correspond to the continuing authority
the domes,.:c area.
Then,
as soon as Congress gave the green
light, the System would be in a position to begin operations in foreign
currencies without further discussion and delay.
Mr.
Balderston also referred to the point, previously mentioned,
that the System might be ineffectual in meeting a crisis if
until the crisis actually occurred.
precautionary measure,
For this reason he felt
it
waited
that, as a
action should be taken promotly to acquire currencies
12/19/61
-98
of key countries.
At various times of the year such currencies could
be obtained advantageously despite the fact that this country was now
in a deficit situation.
Mr.
in
Balderston commented that the aggregate of dollars spent
the acquisition of foreign currencies would be small relative to
the amounts placed in
spending abroad.
foreign hands in the form of investing and
Protective steps should be taken before a crisis
occurred,
as illustrated by this year's experience of the United
Kingdom.
Had sterling been bought for the Federal Reserve System's
portfolio when it
was low in price last spring, perhaps it
would not
have been necessary for the United States to sell the United Kingdom
$300 million of gold in November.
Chairman Martin stated that on the basis of the comments that
had been made,
it
appeared that the sentiment favored going forward
with the proposal by autnorizing consultation with the legal staff of
the Treasury, as suggested in the Secretary's letter.
After referring
to the point that had been raised about initiating foreign currency
operations in advance of a crisis, the Chairman indicated that he would
like to clarify his own position.
He thought that the proposed operations
in foreign currencies would be a very desirable activity.
however,
He also thought,
that the System ought to be very careful about giving the idea
that these operations were going to solve fundamental problems.
be recognized,
for example,
that if
It should
the Federal Reserve had held $300
12/19/61
-99
million of sterling the British might have taken the gold anyhow.
Further,
the British might not have taken the steps toward a solution
of their payments problem that they took in
know such things for certain.
the interim.
In any event, however,
No one could
either in the
Government securities market or in the foreign exchange market, it
still
necessary to deal with fundamentals.
was
One must not be misled into
thinking that any of these ideas, good as they were, were going to solve
the whole problem.
The problem was not that simple.
On the other hand,
every practical device should be used.
With reference to Mr. Balderston's comment about the need for
working out a directive for foreign currency operations similar to the
continuing authority directive in
the domestic area, Mr. Hayes said he
felt that this had largely been done.
The Secretary of the Committee
had been working along tnose lines for some time.
The only point he
would like to add to the discussion was that he thought the Treasury
should review carefully
the documentation concerning the details of the
proposed operations to see whether it
saw anything wrong.
The advice of
the Treasury on the technical aspects of the proposal should be obtained.
Chairman Martin said he understood from today's discussion that
Counsel would be authorized to refer any of the documentation to the
Treasury for review.
He agreed that the staff had done a good job in
putting this material together.
Further, there had been excellent
cooperation on the part of the Treasury.
It was only at the December 5
12/19/61
-100
Committee meeting that he was authorized to discuss the subject with
the Treasury, and the letter since received from the Secretary was in
his opinion a good letter.
It
provided a satisfactory basis on which
to proceed without impairment of the position of either the Treasury
or the Federal Reserve.
No disagreement with the comments of Chairman Martin was
indicated.
At the conclusion of the discussion, the legal staff of the
Committee was authorized to confer with the legal staff of the Treasury
for the purposes suggested in the letter from the Secretary of the
T
reasury.
It
was agreed that the next meeting of the Open Market Committee
,ould be held on Tuesday, January 9,
1962.
The meeting then adjourned.
Secretary
Cite this document
Federal Reserve (1961, December 18). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19611219
@misc{wtfs_fomc_minutes_19611219,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1961},
month = {Dec},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19611219},
note = {Retrieved via When the Fed Speaks corpus}
}