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, July 10, 1962, at 10:00 a.m.

PRESENT:

Mr. Martin, Chairman

Mr. Balderston

Mr. Bryan

Mr. Deming

Mr.

Mr.

Mr.

Mr.

Mr.

Ellis

Fulton

King

Mills

Mitchell

Mr. Robertson

Mr. Shepardson

Mr. Treiber, Alternate for Mr. Hayes

Messrs. Scanlon, Clay, and Irons, Alternate Members

of the Federal Open Market Committee

Messrs. Wayne and Swan, Presidents of the Federal

Reserve Banks of Richmond and San Francisco,

respectively

Mr. Sherman, Assistant Secretary

Mr. Hackley, General Counsel

Mr. Noyes, Economist

Messrs. Brandt, Brill, Furth, Hickman, Koch,

and Willis, Associate Economists

Mr. Molony, Assistant to the Board of Governors

Mr. Cardon, Legislative Counsel, Board of Governors

Mr. Williams, Adviser, Division of Research and

Statistics, Board of Governors

Mr. Knipe, Consultant to the Chairman, Board of

Governors

Mr. Yager, Chief, Government Finance Section,

Division of Research and Statistics, Board

of Governors

Messrs. Hilkert, Heflin, Helmer,

and Francis,

First Vice Presidents of the Federal Reserve

Banks of Philadelphia, Richmond,

and St. Louis, respectively

Chicago,

7/10/62

-2

Messrs.

Sanford, Eastburn, Baughman, Jones, Tow

Coldwell, and Einzig, Vice Presidents of the

Federal Reserve Bank of New York, Philadelphia,

Chicago, St. Louis, Kansas City, Dallas, and

San Francisco, respectively

Messrs. Link and Marsh of the Federal Reserve

Bank of New York and Mr. Litterer of the

Federal Reserve Bank of Minneapolis (Assistant

Vice Presidents)

Mr. Schott, Manager, Foreign Department, Federal

Reserve Bank of New York

Mr. Sternlight, Manager, Securities Department,

Federal Reserve Bank of New York

Upon motion duly made and seconded,

the minutes of the meetings of the Federal

Open Market Committee held on May 29 and

June 19, 1962, were approved.

Before this

meeting there had been distributed to the members

of the Committee a report on open market operations in United States

Government securities covering the period June 19 through July 3, 1962,

and a supplementary report covering the period July 4 through July 9,

1962.

Copies of both reports have been placed in the files of the Com

mittee.

In supplementation of the written reports, Mr. Marsh commented

as follows:

Since the June 19 meeting of the Committee, the money market

has been firmer than in preceding periods as open market operations

have provided somewhat less availability of reserves in conformity

with the directive adopted at that meeting. Market atmosphere was

conditioned by developments in Canada and by a growing feeling

that international developments might require the System, despite

a lagging domestic economy, to move farther in a policy of less

ease. The fact that free reserves fell below $350 million for three

consecutive weeks tended to confirm these views even though the

free reserve figure jumped back to over $400 million in the week

ending July 4; the market has not paid much attention to the latter

figure.

7/10/62

3

Although open market operations were conducted with a view

to achieving a modestly lower

level

availability,

reserve

of

seasonal market factors gyrated widely over the period requiring

the System to supply a massive amount of reserves during the week

ending July 4, ($951 million on balance in that week) with the

result that System holdings of Government securities in the

System Account reached an all-time high of $30,194 million on

July 3, 1962.

The free reserve

statement

current

the

for

figure

week is likely to be well over $400 million due mainly to a much

higher than expected level of float over the past week end;

efforts to reduce the reserve bulge were curtailed because of

the auction of 1-year bills today. The prospects are that the

System will have to sell more securities over the next few days

to absorb reserves in the statement week ending July 18.

Banks generally seem to have had ample reserves with which

to meet new demands for credit and there has been no redundancy

of reserves such as had been the case in earlier periods.

Federal funds rates have held for

the

most part between 2-3/4

and 3 per cent.

The Treasury bill market was subjected to considerable sell

ing pressure around the end of June and the 4th of July holiday

most of which arose from banks adjusting their reserve positions;

sales of bills in the last week or so have been confined largely

to nonbank sources. The Treasury's continued offering of $200

million additional of bills in the regular weekly auctions has

helped to keep pressure on bills and the market has become quite

sensitive to the continued talk about higher interest rates.

Dealers have been cautious in acquiring new supplies of bills, and

in the auction last week the three-month bill rate rose to 2.93

per cent. The massive System purchases of bills last week reduced

dealer holdings substantially but rates again moved up yesterday

as the System sold a substantial amount of bills. In the auction

yesterday the average rate on the 91-day bills was about 2.97 per

cent and on the six-month bills about 3.10 per cent. Preliminary

ideas for the auction today, in which the $2 billion maturing

July 15 bills will be rolled over into a new one-year issue, sug

gest a rate in the neighborhood of 3-1/4 per cent.

The capital markets have reflected the uncertainties over the

international situation with accompanying prospects for a less easy

credit policy and also current rumors that the Treasury would offer

a long-term security either for new cash or in connection with its

August refunding operation. The atmosphere has been quite pessi

mistic and cautious with prices of Government securities declining

continuously after the developments in Canada came to a head.

Yields on most of the longest-term issues have risen well above 4

per cent, the rate on the 3-1/2's of 1990 being about 4.14 per cent

7/10/62

yesterday. This compares with yields somewhat below 4 per cent

which had prevailed for some time previously. Dealer positions in

intermediate- and long-term Government securities have been reduced

to a minimum and market activity has been quite light.

Prices of outstanding corporate and municipal issues have followed

a similar pattern but the supply of new issues has been somewhat re

duced over the past three weeks. The AA-rated Consolidated Edison

issue offered on June 19 at a yield of 4.26 per cent presented an

obstacle to the corporate market as it was overpriced at issue and

remained more than 75 per cent unsold until the syndicate was broken

on July 5. It then traded down about 3 points from the reoffering

price to a yield of about 4.45 per cent, and it is still only par

tially sold at that rate. The question may be asked whether the

capital markets are being seriously inhibited by the less easy

atmosphere in the money market. Inquiries indicate that buyers

have become more cautious and price conscious in view of the recently

developed uncertainties over monetary policy and interest rates.

However, this seems to be more a matter of investor psychology rather

than any lack of funds for investment as prospective buyers are

apparently holding off in expectation of higher rates. As the

calendar of new corporate issues shows only slow growth for the next

few weeks, these markets should be able to take care of themselves in

the shorter run without undue strain and there seems to be no cause

for immediate concern in this area.

The large calendar of new issues

in September may present some problems at that time.

The Treasury's plans for financing are not yet certain but the

prospect is that it will continue to offer $200 million additional

new bills each week through August 16, which will practically complete

the cycle of thirteen weeks at $2 billion each. They are also thinking

of refunding the $7.4 billion mid-August maturities through cash

offerings rather than an exchange, which would permit them to borrow

a moderate amount of new cash, say $1-1/4 billion. This should carry

them through until early in October, at which time they will probably

have to borrow more new cash.

Meetings are being held with market

representatives on July 24 and 25 to discuss the August financing and

the Treasury will probably announce its plans after the close of

business Thursday, July 26.

You will note from the Supplemental Report just put in your hands

that effective July 5 the name of Blyth & Co., Inc., was added to the

list

of firms with which the Trading Desk is authorized to do business.

We have found that the firm is conducting dealer operations in size,

making primary markets, particularly in Treasury bills, and their

financial position and reputation is unquestionable.

They should be

helpful to us in open market operations.

In effect, Blyth will replace

Bartow Leeds on our list

of dealers, as the latter firm was liquidated

after they were unsuccessful in raising new capital following the death

of Mr. Bartow.

7/10/62

-5

In response to Chairman Martin's invitation for comments on the

Manager's report, Mr. Mitchell inquired whether Mr. Marsh felt that in

the three-week period since the last meeting the churning in the market

and other difficulties in making projections caused difficulty in having

operations for the System Account conform to the terms of the directive

issued at the meeting on June 19.

Mr. Marsh responded that he thought in general the tone of the

money market had been approximately what the Committee wanted.

The

market had been somewhat firmer than before the June 19 meeting, which

he believed was indicated to be the Committee's desire.

The bill rate

had pushed up a little and the market's performance--the churning and

the problems created in making projections--apparently had been viewed

as signaling a substantial shift in monetary policy.

However, Mr. Marsh

said that even though the free reserve statistics had fluctuated more

widely than might have been desired, he thought the objectives of the

Committee had been reasonably well carried out during this period.

Mr. Robertson inquired as to whether the rate pattern that had

developed during this period was about what Mr. Marsh felt the Committee

thought should take place, to which Mr. Marsh responded in the affirmative.

This was true of the Federal funds rate and the bill rate; generally

speaking, the pattern of short-term rates had been about what he under

stood the Committee wanted in issuing its directive at the June 19 meeting.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, the open

market transactions in Government securities

during the period June 19 through July 9, 1962

were approved, ratified, and confirmed.

-6

7/10/62

Mr. Brill presented the following statement with respect to economic

developments.

We don't as yet have much data to measure the state of the

economy at midyear, but fragments available suggest that the

economy has lost whatever momentum it had earlier in the spring

1. June figures on manufacturing employment and average hours

worked indicate that the production index either barely held its own

last month or declined somewhat, following an increase of half a point

in May and one and a half points in April. While the comprehensive

man-hour data needed for a precise index calcultion are still not

available, we do know that manufacturing employment barely increased

last month, while average hours worked in manufacturing declined by

two-tenths of an hour, the second consecutive monthly drop.

2.

The unemployment rate edged up slightly in June. Much of

the increase reflected rising uneemployment among adult male workersnot, as many newspaper stories have suggested, the result of an influx

of teenagers.

In fact, the labor force in June didn't show its usual

seasonal rise because fewer school graduates and summer workers were

seeking jobs than had been expected.

This failure of the labor force to show any significant increase

has persisted througout this recovery period. Analysis of population

data and the structure of the labor force suggests that published

figures may miss a large group of potential workers now recorded as

outside the labor force but who would take jobs if there was a more

rapid and substantial increase in economic activity. This "hidden

unemployment" is of particular importance among youths, women of

working age and for some men in the middle age group.

One area of demand that was of major importance in sustaining

3.

economic expansion earlier in the year--consumer buying--appears to

have slackened somewhat in June. Auto sales were 7 per cent below the

May rate and department store sales were also

own on the month.

While

not conclusive, these data suggest that retail sales, which had edged

downward in May, probably declined further in June.

4.

Reduced business spending for inventories also is currently

limiting the rise in activity. Inventories increased at a declining

rate in April and again in May; in June, there was likely either no

net addition to business stocks or perhaps a small decline.

The using

up of steel supplies accumulated in the pre-strike-settlement period

accounts for much of the slowing, but in May there was also a halt to

accumulation of inventories by nondurable goods producers, and only

moderate accumulation at the wholesale and retail level. For the

quarter as a whole, business additions to inventories are estimated

at less than

half the rate in the first quarter.

7/10/62

5. A special McGraw-Hill survey conducted in late June indicates

that business plans for capital spending this year continue at about

the levels indicated in earlier surveys. In one sense, this may be

regarded as a favorable factor, in that the stock market break has not

apparently depressed business spending intentions. It can hardly be

considered a bullish factor, however, for the level of spending im

plied by the survey would represent less of a rise over the balance

of the year than the increase in the year to date, rather than the

accelerating trend typical of sustained recovery and expansion.

Turning to the few bright spots in the economic picture, the

dollar value of construction put in place continued strong, rising

further in June to a new high after an appreciable advance in May.

Because of the way the figures are calculated, some of the June in

crease in activity merely reflects the rise in housing starts reported

in earlier months. Nevertheless, the reported increases in activity

were so widespread among types of construction as to suggest real

strength in this area, with financing ample and, at least for FHA

mortgages, available in May at lower cost than earlier in the year.

We don't know yet the effects on mortgage financing of the more

recent developments in money and capital markets.

Some solace may also be found in the reduced rate of business

inventory accumulation noted earlier. As a result of these reductions,

while sales have continued to rise moderately, stock/sales ratios now

are low. For all businesses combined, the inventory/sales ratio at the

end of May was the lowest since the spring of 1959, and by the end of

June were probably even lower. This suggeststhat if there is a pickup

in demand, it is likely to be transmitted promptly to the productive

processes without having to go through an extended period of using up

surplus supplies.

The question is what will provide the stimulus to maintain demands.

Some stimulation could be generated within the private economy. Most

surveys report that while consumer confidence has deteriorated somewhat,

consumer buying plans are still

strong, even after the market break.

If it is sustained, consumer demand could induce more optimism on the

part of business, leading perhaps to some restocking of inventories and

to at least maintenance of present capital spending plans.

The Federal Government is also likely to provide some stimulation,

even in the absence of dramatic tax cuts or new spending plans.

It may

not be generally realized how large a shift in the direction of fiscal

Seasonally adjusted figures

restraint has occurred in recent months.

on Federal cash flows show a shift from a cash deficit of about $12

billion (annual rate) in the first

quarter of the year to a near

balance between receipts and expenditures in the second quarter--a

bigger quarterly shift by far than any that occurred in 1959-60.

In

part, the shift reflected larger than anticipated collections of in

dividual nonwithheld income taxes; in part, also, it resulted from a

7/10/62

shortfall in cash spending. If receipts and payments move closer

to Budget expectations in the third quarter, the Government would

then be again running a fairly large cash deficit.

Altogether, if one takes favorable assumptions with respect

to consumer buying and business response, plus a return to fiscal

stimulation in the magnitude now scheduled, we might see further

slow expansion in total GNP.

It would hardly be enough, however,

to provide a growth rate in the economy sufficient to reduce signif

icantly the large volume of underutilized resources. Failing some

additional strong stimulus, it seems most likely that we will drift

through the summer without significant increases in over-all activity,

and with a creeping up in the rate of unemployed workers and unemployed

productive facilities.

Mr. Koch presented the following statement with respect to credit

development s;

A principal feature of financial developments since the slight

modification of monetary policy adopted at the June 19 meeting has

been the steady firmness in the money market. The 3-month Treasury

bill rate has increased from a little over 2.6 per cent to over 2.9

per cent. Federal funds have traded at the 3 per cent discount rate

most of the time, and member bank borrowing from the Reserve Banks

has increased moderately to a daily average of around $140 million.

Interest rates charged Government security dealers by New York City

banks have ranged from about 3 to 3-1/2 per cent, although dealers

have usually been able to obtain considerable financing outside New

York City at more attractive rates.

Bond yields have also risen. This first was apparent in muncipal

securities beginning about six weeks ago. In recent weeks the rise

has been most marked in the case of new corporate issues. The recent

yield rises in the capital markets reflect in part the firmer short-term

rate structure. They suggest the need to watch capital market develop

ments carefully lest the moderately less easy monetary policy contribute

significantly to a lower volume of new security financing and investment.

Free reserves averaged $365 million in the three weeks ending

July 4, as compared with $440 million in the preceding three weeks.

In the current week and lasting through most of the month, market

forces, particularly a rise in float and a return flow of holiday

currency from circulation, will provide the banking system with

several hundred million dollars of reserves.

Required reserves are

also likely to drop as large Treasury balances are drawn down.

Some

of the easier reserve position resulting from market forces will be

absorbed by the redemption of System held bills in the weekly auction

7/10/62

-9

and by the maturing of the remaining outstanding

agreements with the System, but others will have

open market sales of securities. After the week

longer term reserves will need to be provided by

dealer repurchase

to be absorbed by

ending July 25, some

appropriate System

open market action.

what the recent change

obviously too early to tell

It is still

in policy has meant, either internationally or domestically when it

comes to reserve expansion, bank credit and capital availability,

and liquidity developments.

Outstanding bank credit did increase

appreciably in June, and the increase was concentrated in loans

rather than in investments.

Moreover, the loan increase was well

distributed among most of the various types of loans. Business

demand for bank financing, however, has continued quite moderate.

Outstanding bank credit in July and August,

in contrast to June,

is

likely to show a much less pronounced advance, as the very high

Government balances are drawn down, even though some of these

balances continue in existence in private hands.

Capital market financing, particularly by corporations, was

also in substantial volume in June. Corporate June financing was,

however, significantly less than had been anticipated earlier, as

the sharp decline in stock prices led to the postponement of several

large convertible bond and common stock issues and a sharp reduction

in the number of small stock issues publicly sold. In recent trading

sessions, stocks have risen in price, and effective today margin

requirements for stock market credit are reduced from 70 to 50 per

cent. This reduction was made in recognition of the sharp reduction

in such credit in recent weeks and an abatement in speculative

psychology in the market.

In the second quarter as a whole, the total demand for funds-

short-term as well as long-term, Government as well as privatedeclined rather sharply to about a $50 billion seasonally adjusted

annual rate. In the first quarter, it had been $60 billion and in

the fourth quarter of last year $65 billion. The recent drop was

due mainly to a decline in Federal financing and to lower business

borrowing to pay for additions to inventory.

Turning from credit and capital availability to liquidity,

the seasonally adjusted money supply in late June was slightly

from the beginning

above its late May level. It was down a little

of the year and about 2-1/4 per cent above a year ago. Turnover of

demand deposits outside New York declined slightly in May, but is

still

averaging about 8 per cent above a year ago.

The recent slower growth of the narrowly defined money supply

has reflected in part the sharp buildup in Treasury balances. In

late June and early July, these balances amounted to almost $9.5

billion, as tax receipts exceeded, and Government spending fell

7/10/62

-10

short of, expectations; as the weekly bill

offerings were increased;

and as funds were acquired through the sale of special certificates

to foreign countries.

As these large Government balances are drawn

down, the money supply will increase even without further bank credit

expansion.

According to our figures, the Treasury could now probably

satisfy its cash needs until mid-September, by continuing to increase

the weekly bill

issues by $200 million until the end of the cycle

in mid-August, and then by picking up another billion or so in a

cash financing of its August maturities.

Turning back to liquidity, time and savings deposits of com

mercial banks have recently been increasing at about the late 1960

1961 rate, that is, about 12 to 13 per cent a year, as compared with

the 25 to 30 per cent rate characteristic of the months immediately

following the change in Regulation Q. Total liquid assets, season

ally adjusted, declined a bit in May. In the second quarter as a

whole, these assets rose at a considerably slower rate than earlier,

due mainly to the reduced flow of time deposits to commercial banks

and lower private holdings of short-term Government securities.

I should like to conclude my comments by taking a little

longer-run look and by referring to the table I passed out to you

this morning. It is a capsule summary of the effects of monetary

policy thus far this year, that is essentially the policy that

prevailed prior to the last meeting. It summarizes effects whether

you consider them to be shown mainly by reserve availability,

liquidity growth, credit availability, or interest rates.

My reading of the table is that monetary policy in the first

half of 1962 comes out with a pretty good record assuming that the

domestic economy needed stimulation and that the outflow of capital

abroad was not unduly promoted. Most measures of credit availa

bility and liquidity have increased more rapidly than economic

activity, but not much more rapidly. The growth in bank reserves

seems reasonable, considering the changed composition of deposit

liabilities. Longer term interest rates declined until recently,

Finally, a policy

whereas shorter term ones have risen somewhat.

for

a

longer period of

and

continuously

of monetary ease followed

time during this expansion than in previous ones does not seem to

me to have produced either exceptionally aggressive bank lending

or investing, or the creation of an excessive amount of liquidity

in the economy.

Mr. Furth presented the following statement on the U. S. balance

of payments and related matters:

The international scene still shows a paradoxical situation:

our balance of international payments has been in a rather satis

factory state; but the dollar had further weakened on international

exchange and gold markets.

7/10/62

-11

This weakness has been accompanied by a wave of market

rumors.

Dollar weakness and dollar rumors feed on each other,

and as Mr. Roosa pointed out in his report to the NAC staff the

other day, the rumors are likely to become more vicious with the

approach of the annual meeting of the International Monetary

Fund in September.

In the intervening period, the task of

avoiding a speculative bear raid on the dollar will be as

important as the continuing task of improving our underlying

balance of payments.

Our international deficit completely disappeared in May,

and according to preliminary figures also in June. Consequently,

transfers of gold, foreign convertible currencies, and liquid

dollar assets to foreigners dropped to about $200 million in

the second quarter, only one-third of the figures for the first

quarter and for the quarterly average of 1961.

Satisfaction with this result is tempered by the suspicion

that much if not all of the improvement was due to the extra

ordinary shift in the flow of funds between the United States

and Canada. If we could assume that this influence was small,

our adjusted deficit would be not much more than half of last

year's rate, adjusted for extraordinary receipts.

But if we had

to assume that the bulk of Canada's reserve losses was our gain,

the adjusted deficit would be right back at the $3 billion annual

rate that has dogged us for the past four years.

This uncertainty makes it even more difficult than at other

times to forecast the development of our international payments

for the current quarter.

During the summer, our current balance

is seasonally weak, largely because of the volume of foreign

travel; on the other hand, we are scheduled to receive this

month extraordinary payments of $475 million from France and

Italy. These payments should offset the reflux of funds to

Canada expected for the current quarter.

As to the underlying economic factors, our trade balance

in April-May again showed a surplus close to $5 billion annual

rate. Continued strength of demand in most foreign industrial

countries, together with the continued slow rate of domestic

recovery, permit the expectation that this surplus will be

maintained in the foreseeable future.

The great unknown factor affecting both current and capital

accounts is the future of our economic and financial relations

with Canada. A reflux of volatile funds and a resumption of

normal investments is virtually certain unless the recent

stabilization efforts collapse. Moreover, the recent Canadian

actions are designed to reduce imports into Canada, and this

means mainly imports from the United States. They are equally

designed, however, in the long run to reduce the dependence of

the Canadian economy on inflows of foreign investment capital,

7/10/62

-12-

and this means to an even larger extent inflows from the United

States. We cannot tell

whether or not the reduction in our exports

will eventually be offset by that in our outflows of investment

capital.

On foreign exchange markets, the dollar has been weak

against all continental European currencies, most recently

also against the German mark.

In itself,

this development is

not surprising: our recent balance of payments equilibrium

has been the result of a surplus in relation to Canada and a

corresponding deficit in relation to the rest of the worldwhich presumably means mainly a deficit in relation to

Continental Europe. The countries that lost reserves were

mainly countries that keep their reserves largely in dollars;

the countries that gained reserves were those most eager to

convert dollar accessions into gold.

Thus, our balance of

payments position involved the danger of a gold drain in spite

of over-all equilibrium.

This danger has been magnified by recent market nervousness

here and abroad. Reports about large withdrawals of European

capital from the New York stock market are inconsistent with

presently available U. S. data; but there can be no doubt about

the flow of funds, of whatever origin, out of dollars into

European currencies and especially into Swiss francs. This

flow apparently reached particularly large dimensions last

week. And part of these funds in turn are being converted

into gold through the London market. The price of gold was

driven up to $35.12 and the Bank of England had to spend most

or all of its gold-pool "kitty" accumulated earlier this year

in order to prevent the price from rising further.

Any large drain on our gold stock, however, would come

from the accumulation of dollars by Continental European

central banks rather than from the London gold market. Our

first-semester deficit of $800 million was reflected in net

gold sales and in net increases in foreign liquid dollar

claims of $400 million each.

Claims of international institu

tions rose by $500 million so that claims of foreign countriesapart from claims arising out of our swap transactions--actually

declined.

But official holdings of three major gold-reserve

countries--France, Netherlands, Switzerland--rose nearly $600

million.

On Thursday, French official dollar holdings will be

reduced by debt prepayments of $350 million to the United States

and Canada, and by a gold purchase of $100 million. These

transactions should wipe out France's "excess" dollar holdings.

On the other hand, the flow of funds to Europe probably has

increased official dollar holdings of Switzerland alone by

7/10/62

-13-

more than $100 million. Since the beginning of the month, the

U.S. Treasury has sold $50 million of gold, half of it to

Switzerland. The remaining increase in European dollar

holdings likely to be presented for conversion into gold

may be roughly estimated at $300 million.

This figure is large but not unmanageable.

Market

rumors nothwithstanding[sic],

there is thus no reason to expect

spectacular gold losses if--and this is an important

qualification--if further dollar flows to Europe can be kept

within reasonable limits.

Mr. Treiber presented the following statement with respect to the

business outlook and monetary policy:

Economic activity appears to be in a period of hesitation

both statistically and psychologically. Although gains con

tinued to be widespread in May and June, increases in a number

of broad measures were smaller than in preceding months.

Declining steel production associated with a reduction in

steel inventories continued to exert a drag on industrial

production generally, while retail sales edged down slightly.

Construction, however, especially residential construction,

continued strong. This was also true of automobile production

until the interruption by a strike at a Ford parts plant in

June. Prices continue relatively stable.

The economy's performance this year has been basically

good although not as good as had been hoped for at the beginning

of the year. Little progress, however, has been made in reducing

unemployment.

Whether or not the stock market's behavior will lead to

cutbacks in the spending plans of consumers and businesses is

a major element of uncertainty. Surveys of consumer and business

spending plans provide some reassurance but cannot be considered

conclusive.

Loan volume at weekly reporting banks strengthened in June,

except for "other security loans", which declined as stock prices

plummeted. Particular strength was shown by loans to nonbank

financial institutions and by real estate loans. Bank investments,

particularly in "other" securities, were relatively strong in June.

Thus, total bank credit advanced markedly, exceeding the gains in

the corresponding periods of all recent years except 1958.

The banks have adequate liquidity. They are in a position

to meet the credit needs that may arise in the course of a further

advance in business activity.

7/10/62

-14

Today the Treasury is auctioning $2 billion of one-year

Treasury bills to refund a similar quantity of bills maturing

July 16.

In a couple of weeks the Treasury will be announcing

its plans to refund $7-1/2 billion of notes maturing August 15.

It now appears that no major new cash borrowing will be needed

for the balance of the summer, particularly if the Treasury

continues to add to the weekly bill

offerings and if the Treasury

conducts its August refinancing on a cash basis, taking in some

extra money in the process.

The international position of the United States remains

precarious as doubts about the international strength of the

dollar continue to be expressed in many places.

The latest

statistics on our over-all payments deficit continue to be

very good, but much of this favorable showing reflects the

pronounced weakness of the Canadian dollar in the first

three

weeks of June.

For the second quarter of 1962 it now seems

probable that, thanks to the Canadian situation, our over-all

deficit may be less than $1/2 billion, seasonally adjusted

annual rate, compared with $1.9 billion in the first

quarter.

Now that the Canadian position is being stabilized, our capital

accounts with Canada are bound to deteriorate over the coming

months as the leads and lags turn around in favor of Canada

and as Canadian borrowers come to our markets.

Fortunately, in the third quarter we expect some large

European debt prepayments; this will certainly help the

statistics for this quarter.

On the other hand, we continue

to feel tae pressure of foreign borrowing operations--both

long-term and short-term--in the New York market, and we seem

to face a growing nervousness, both at home and abroad, as to

the dollar's long-run outlook. In part this is based on

skepticism with respect to the Government's attitude toward

business and the attractiveness of business investment in this

country. There is also growing uncertainty as to probable

fiscal policy moves aimed at stimulating the economy, and

uncertainty as to how such moves will be meshed with monetary

policy.

While the domestic outlook evidences a number of

uncertainties. I think that the policy of monetary ease that

we have been following has done about all it can in making

a sound contribution to domestic acivity.

Our international

position, and particularly doubts over the dollar's long-run

outlook, is an increasing cause of concern.

It is important

that monetary policy make a maximum contribution toward the

restoration of international confidence in the dollar.

To

do so, monetary policy must be flexible and adjustable to our

international needs

7/10/62

-15-

I hope that over the next three weeks we will retain the

gains achieved in monetary policy in the last few weeks.

I

think it would be desirable for the three-month Treasury bill

rate to be generally in the range of 2-7/8 - 3 per cent, and

for Federal funds to be in the range of 2-3/4 - 3 per cent.

With such a money market climate, free reserves might be in

the range of $300-350 million. I see no reason to change

the policy directive, nor would I suggest a change in the

discount rate at this time.

Mr. Bryan presented a statement substantially as follows:

Latest economic trends in the Sixth District are mixed.

Many of our figures have gone down, as for example, money

supply, bank loans, department store sales, and bank debits,

among others.

Nonetheless, judging from nonfarm employment,

manufacturing employment, average weekly hours, and similar

broader and more fundamental indices, it seems to me that the

Sixth District is continuing a slow-paced increase in economic

activity. As I see it, that situation is essentially similar

to the nation for the period for which we have comparable

figures.

As for policy, I could not at the last meeting vote with

the majority, partially because I had perceived the figures

from last December and January as exhibiting a mild tightening

in reserve positions, and I was unable to see how we could

proceed on a restraining policy more subtle than we have been

doing: a subtle approach to restraint that I was in fact

advocating in saying that I thought no change was in order.

Likewise,

it seemed to me that the appearance of great ease

in the monetary system arose from the probability that our

interest rate structure, toward which we have been feeling

our way for many years, had at long last produced a supply of

savings equal to the demand for them.

Now, I cannot find myself quarreling in any essential

way with our policy, but my equanimity arises only because

we have supplied reserves in amounts that have gone beyond a

three per cent growth rate (measuring by total reserves), which

I have thought for sometime exceeded a growth rate appropriate

Indeed, our latest daily averages, both for

to our situation.

June and thus far for July, show adjusted and unadjusted total

reserves moving further upward beyond a three per cent trend

line.

-16

7/10/62

With regard to the future I should like to pose four

These questions trouble

questions without attempts at anwswers.

me deeply. I do not imply that these questions cannot be

answered or will not be answered over time; what I am saying

is that I do not know the answers.

1.

Is it reasonable to assume that an adjustment in

values as massive as has been exhibited in the equity markets,

here and abroad, can occur without at the same time supposing

that these adjustments will have equally massive effects?

I ask this question under the general canon of logic that

the effect is proportionate to the cause.

2. How can we expect to make a decisive contribution to

the balance of payments problem when the decisive and not self

correcting elements of that problem, to wit, military expenditures

and grants-in-aid, are not amenable to the interest rate instrument

that we are using?

3. How are we to assume that we can, with the interest rate

instrument, curtail American investment abroad, the while not

curtailing it domestically?

4. How are we, in the end, to reconcile fiscal policy and

monetary policy?

For many years, now, we have had an essentially simple

pattern of eentral bank action in the Federal Reserve System.

In times of recession--all recessions have been mild in the

postwar period--we have been prompt to ease reserves, to

lower interest rates, and thus to encourage borrowing and

investment. In times of boom we have pursued an opposite

course. I am troubled to know the pattern of our future

actions when our balance of payments and our fiscal problems,

not of our making, sit like ghosts at the table with us.

Mr. Fulton said that there seemed to be a pervasive attitude of

gloom among many businessmen of the Fourth District, particularly in the

heavy industry area.

This was a feeling that we had had whatever boom

there was going to be and that the economy was topping out and would

decline after the fourth quarter of the year.

The reasons for this were

attributed to the attitude of the Administration as interpreted by business

men, to the profit-squeeze which was a very real thing, and to the stock

-17

7/10/62

market decline.

Mr. Fulton went on to say that industrial output seemed

to be going along pretty well except in steel.

In the latter industry,

plant modernization plans that had been on the board for some time would

be consummated because these were necessary for steel to improve its

competitive position and to lower its costs.

In industry generally,

companies were gradually working off excess inventories.

Steel companies

were maintaining stocks higher than usual so that they could make immediate

deliveries to consumers.

There was no indication, however,

stocks of any kind either among dealers or retailers.

of accumulating

There was no feeling

that price adjustments were imminent in any line and as a consequence

consumers were holding the lowest possible stocks.

Automobile sales took a nosedive in June and department store

sales were also considerable lower in that month, although for the year

to date they totaled 3 per cent higher than a year ago.

Unemployment has

worsened on a seasonally adjusted basis, Mr. Fulton said, the improvement

that had occurred up to June of this year having disappeared.

Construction

activity is still high in relation to a year ago, but considerably lower

in the fourth District than in the nation as a whole.

Bankers have about decided that there will not be a sudden increase

in loan volume this year.

As a consequence, they have been lengthening

maturities on real estate and consumer credit loans and on certain securi

ties in an attempt to increase income.

All in

all

the District seemed to

bear out the feeling that the economy has been topping out and that it

no substantial vigor left to carry through the balance of the year.

has

7/10/62

-18

Mr.

Fulton said that he was quite pleased with the results of

monetary policy during the past three weeks.

had been good,

The firmness in the market

but he would dislike to see the 91-day bill

rate increased

to a point where it would cause pressure for an increase in the discount

rate.

For the next three weeks, he would maintain the degree of firmness

of the past three weeks,

would not change the discount rate, and would

use the short-term money rate as the guiding factor.

The Manager of the

Account should have such latitude as he needed in order to maintain the

short-term rate at or no higher than the present discount rate.

With reference to the directive, Mr.

Fulton noted that the last

sentence as approved at the June 19 meeting spoke of "providing a somewhat

smaller rate of reserve expansion."

This might still

be applicable, he

said, but since available free reserves had come down considerably in

this period, he felt it

appropriate to change the wording and suggested

something along the lines of wording that would provide for a rate of

reserve expansion comparable to that of the past three weeks and which

would preserve a moderately firm tone in the money markets.

Mr.

Mitchell presented a statement as follows:

Monetary policy is still on the Scylla-Charybdis course

but I fear the lesser of these two perils is causing us to veer

dangerously. No where in informed circles, and especially in

this Committee, can there be any doubt that the overriding

objective of U.S. economic policy is to keep the U.S. economy

strong and expanding. Here, at any rate, we are committed to

use every means at our disposal to do this by creating an

environment in which consumption and investment decisions of

citizens,businessmen, and investors will, in the main, direct

7/10/62

-19-

and determine the allocation of economic resources. Monetary

policy, its critics to the contrary, is notable for the pervasive

ness and impersonality of its effect and for its unique role in

a free economy--and ours, I should add, is an economy that is

far freer than any in Western Europe--no doubt I may as well say,

in the World.

The latest intelligence on the state of the economy is

disquieting. Concern about the slow rate of economic expansion

has given way to a fear in many circles that the expansion will

not continue. At best, industrial production was unchanged in

June. Unemployment rose slightly and disguised unemployment,

taking account of the slow increase in the labor force, rose more.

Part of the difficulty lies in the steel inventory adjustment,

but nondurable inventories also lag. More important, final demands

in May and June were sluggish, so sluggish as to offset the

favorable impact on economic activity that might have been expected

from the relatively high level of housing starts and auto sales.

Retail sales fell slightly in May and, according to indications

from department stores and auto dealers, declined further in June.

When the record is in we may have some instances of appallingly

poor performance. The disappointing prospects for plant and

equipment expenditures have been confirmed by recent surveys, and

we can no longer lean on the hope that, as in the past, the

surveys might have understated the prospective increase in capital

outlays. These indications of sluggish consumer and business

demand in large part pre-date the recent stock market decline.

The evidence is not clear yet but we are certainly in danger

of experiencing another abortive recovery, as in 1959-60; at

best we may have a disappointingly small rate of expansion.

There is, therefore, a clear need for a stimulative monetary

policy.

It is

not responsive to our obligations to urge fiscal

policy measures on the Administration. These matters are out

of our hands. Though monetary policy certainly needs to take

fiscal policy into account, there is no justification in the

present circumstances for a tighter monetary policy on the

basis of a possible later easing of fiscal policy. It is

after the effects of fiscal action are clear that the impli

cations for monetary policy should be assessed.

For the present, therefore, monetary policy should be

moving toward greater ease. The economy is in need of greater,

not less, stimulation than it needed a few months ago.

And,

quite apart from the economic rationale for greater ease, the

Committee ought to reconsider its present posture: in the

face of an apparent worsening in the outlook for economic

expansion, right on the heels of the largest stock market

decline in the postwar period, and at a time when, for whatever

-20

7/10/52

reasons, the balance of payments is showing improvement, the

Committee is on record as having moved toward a less easy

monetary policy.

I have said that the domestic economic situation calls

for greater ease. The only basis for qualifying this policy

prescription, from the domestic viewpoint, would be a showing

that monetary ease had been pursued so far and so long that

it would be useless to expect further easing to do any good.

Are we near that point?

The first and simplest answer to this question is that,

if interest rates mean what we have always thought they mean,

we have not carried monetary ease too far. Bill yields have

been maintained above 2-1/2 per cent. If the public were

excessively liquid, borrowers of short-term funds would not

have to pay 2-1/2 to 3 per cent to attract funds.

Has bank credit expansion been excessive? On a

seasonally adjusted basis, commercial bank credit increased

about $9 billion in the first

half of this year, as compared

with about $7-1/2 billion last year and over $12 billion in

the first half of 1958.

In interpreting this year's credit

expansion, it is essential to be clear on the effects of the

change in Regulation Q. What the advance in time deposit

rates did was to increase the relative importance of commercial

banks as financial intermediaries.

The public was induced by

the increase in rates to hold more of its financial assets at

commercial banks and less of its assets elsewhere.

For example,

the public purchased fewer municipal securities and put more

funds into time deposits at commercial banks. This in turn

made it necessary that the banks purchase an equivalent amount

of municipals, if State and local borrowers were not to go

begging. The alternative would have been a rise in interest

rates and a contractionary effect on the economy. As we know,

this did not happen, for banks bought municipals aggressively.

My point is that much of the increase in bank assets this year

reflects this shift in the flow of funds, toward commercial

banks as intermediaries, all as a result of the advance in

rates on time and savings deposits.

If we interpret the entire

credit expansion as having been stimulative, we overlook this

important structural shift in the channels of finance.

On the basis of this analysis plus observation of interest

rate levels, I find no support for the view that ease has been

carried too far.

And, the needs of the economy are such that

further ease is called for.

In the present state of financial markets,

even the slight

move away from ease in recent weeks had a significant and

unfortunate repercussion. The actions of the Canadian authorities,

-21

7/10/62

plus the lower free reserve levels here, have caused a sizable

advance in both short- and long-term yields.

Corporate new issue

yields have risen almost 20 basis points and caused a syndicate

break-up involving a large and important issue.

This congestion

in the market and rise in yields came at a time when the volume

of new issues and the prospective calendar was quite light. It

was the result therefore of psychological factors on the demand

side, including a reaction to the apparent tightening in monetary

policy. If such reactions continue, they are bound to cause

further advances in interest rates, which will also spread to

the mortgage market.

The need therefore is for heavier open market purchases by

the System, to establish a higher free reserve level. I would

permit bill yields to decline somewhat from their present level

to perhaps 2-1/2 per cent, without fear of undue capital outflows.

This would help to put further downward pressure on longer term

yields. If bill

yields fall too rapidly or too far, I would concen

trate System open market purchases in the intermediate-term area.

Mr. Mitchell went on to say that while he did not pretend to qualify

as expert in European psychology with respect to the balance of payments

situation he would coment thereon in the light of his recent trip to Europe

believing that some of the best and most accurate impressions are the

unconditioned pristine ones.

He found confidence in the dollar and U.S. policies to maintain

its

present relationship to gold very high among central bankers.

Moreover,

this confidence was not blind or unreasoned but based upon an understanding

of current economic, fiscal, and monetary problems and alternatives.

Among

commercial bankers generally, there was less confidence but there was also

less wisespread understanding of the basic issues.

Confidence was lowest

among those international bankers and financial concerns whose economic

interest is

served by high yields on very liquid assets.

7/10/62

-22

In his view the role of higher short-term interest rates in favorably

affecting the balance of payments was being overstressed in the determination

of monetary policy in the United States.

There are, in fact, only two

broadly based money markets, New York and London; and in both the United

States and Great Britain domestic considerations make lower short-term rates

advantageous.

Raising short-term rates here might only force a reaction in

London to neutralize that action to the disadvantage of the British economic

situation as well as that of the United States.

Moreover, he continued,

many of those who urge that the monetary authorities use their power to

raise short-term rates are persons or institutions, here and abroad, who

stand to increase their earnings from 10 to 20 per cent by a rise in the

price of their services.

Mr. Mitchell praised the efforts of Federal Reserve personnel who

have been establishing closer relationships with European central bankers.

They have, he said, established a rapport and an atmosphere of trust and

confidence with this group that is not too different from that which is

typical within the Open Market Committee.

ment.

This was a notable accomplish

The concrete evidences of monetary cooperation are now established

and he felt that they would become increasingly important to all countries

as they experience the vicissitudes of balance of payment surpluses and

deficits in the future.

Mr. Mitchell concluded by stating that he would shift the emphasis

of monetary policy in the next three weeks toward greater ease, avoid any

implication of discount rate change, and amend the Committee's directive to

7/10/62

-23

strike the inference that bank credit expansion has been adequate, or more

than adequate (last sentence of first paragraph), and make changes consistent

with such a posture in the last clause of the second paragraph.

Mr. King suggested that the only question to be decided by the

Committee today was that it should do about the wording of the directive.

Mr. Treiber had suggested that there was no need for a change in the directive

but his (Mr. King's) view was that if no change were made the Committee

would be approving a policy that would take on a cumulative effect if it

was renewed.

If, in fact, the Manager of the Account had carried out the

June 19 directive--and Mr. King said he believed this had been done to

a reasonable degree--the Committee should take that action as a benchmark

and should not risk having the directive call for a cumulative progression

of the policy adopted three weeks ago.

For this reason, he would subscribe

to changes in the last part of the directive more or less as indicated by

Mr. Fulton's proposal.

Mr. Shepardson said he could see no significant change in the economy

during the past three weeks that would call for a policy change from that

adopted at the June 19 meeting.

He did not think it necessary or desirable

to apply that policy on a cumulative basis, but he would favor continuing

about what was aimed at in the policy adopted on June 19 when the Committee

shifted toward slightly less ease than previously.

Mr. Robertson said he agreed with everything Mr. Mitchell had said.

On the basis of the economic

information presented to the Committee at

this meeting and at the Jme 19 meeting, it was his opinion the June

7/10/ 6 3

meeting had been precisely the wrong time for adopting a tightened

monetary policy.

He believed that the results since that meeting had

already begun to show up and, in his opinion, the action at the June 19

meeting should be reversed and the Committee should adopt a policy in keeping

with the bad economic information before the Committee today.

Mr. Mills said that in his opinion the reasoning that was followed

in agreeing to the policy adopted at the June 19 meeting argued even more

persuasively for continuing that policy further at this time.

national balance of payments problems were still

The inter

with us with a vengeance,

and the mild counteroffensive that was adopted in credit policy on June 19

certainly deserved further implementation.

Speaking further of credit policy, Mr. Mills said that when it

comes to the use of the terms "ease" or "restriction," a policy that seeks

a level of around $350 millions of free reserves can in no sense be con

sidered restrictive.

That amount of free reserves provides a basis for

credit expansion which over many years of Federal Reserve history has

allowed for ample or perhaps too large an expansion of credit, with

ultimate unsatisfactory repercussions.

What possibly has happened is

that the market and participants in the market have been spoiled by a very

long and protracted period during which the System has injected new reserves

into the commercial banking system.

Now, in consequence, even the very

mild, very modest shift that has been made in policy has brought question

ing on the part of the market and the financial community as a whole.

7/10/62

-25

While we are now in a summer period of lull and where the prospects for

new capital issues coming onto the market indicate that the volume will

be comparatively small for some weeks to come,

Mr. Mills felt that an

excellent opportunity was afforded to the System for letting policy simmer

and for permitting the market and the financial

community to become

accustomed again to the very mild change that has occurred--one which may

not have been sufficient to mark the counteroffensive against the balance

of payments problem that may be shortly called for.

availability, Mr. Mills said it

In terms of credit

was difficult to believe that a volume of

free reserves such as has been available signals anything but adequate

credit availability to the economy, especially in view of the fact that

both the commercial banking system and business concerns have the ability

to shift and interchange their assets to more constructive purposes when

the opportunities for doing so have become apparent.

When it gets to the field of intangibles and business psychology,

Mr. Mills said that it was very important to bear in mind the fact that

any change in policy at this time toward greater ease would undoubtedly

be regarded as weakness and vacillation on the part of the Federal Reserve

System and would be destructive of the faith and confidence in the System's

steadfastness in attempting to carry through a policy even in the face of

outside criticism.

In concluding his remarks, Mr.

Mills referred to an article in

morning's New York Times which commented on Congressional criticism of

this

Federal Reserve policy and charged that the rise in the level of free

-26

7/10/62

reserves during the latest week to a figureof $419

millionwas deliberately

designed as a System retreat from such criticism.

Mr. Wayne reported that current business activity in the Fifth

District had continued to improve gradually.

Seasonally adjusted bank

debits, nonfarm employment, and factory manhours reached new historical

highs in May.

Employment gains were quite general and, according to a

panel of District business leaders, continued in June along with a slight

further extension of the factory workweek.

The May rise in manhours,

however, was a blend of divergent trends: nondurables gained on balance

despite losses in food and tobacco, while cyclically sensitive durables

declined slightly as a group in spite of a sharp gain in machinery.

Qualifying factors were also present in the recent survey to which he had

referred, Mr. Wayne said.

Of particular note was the change in new orders

from increases that were still widespread six weeks ago to slight decreases

during the past three weeks.

future with reduced optimism.

Also, respondents again appraised the immediate

About two-thirds anticipated no immediate

change, substantially the same proportion that held this view three weeks

ago, but those expecting a decline increased from 15 per cent to 27 per

cent.

Preliminary reports indicated that some crops, particularly tobacco,

in several counties of eastern North Carolina may have sustained serious

damage as a result of recent torrential rains and high winds.

In the three

weeks ended June 27 District weekly reporting banks continued to show

substantial increases in real estate and all other loans.

7/10/62

-27

On policy, Mr.

Wayne said that he was becoming increasingly concerned

over the domestic outlook.

Witness the trend in

new orders of durable manu

facturers, the most recent report of the National Association of Purchasing

Agents, the slow rise in industrial production, the increase in unemployment,

and the continued drop in contract awards, to mention a few items.

These

may not signal a downturn, he said, but he would not expect them to behave

much differently if a recession were imminent.

As a result, he wished even

more than he had three weeks ago that he could urge further easing--or at

least no additional tightening.

He did not believe, however, that the

international situation gave the Committee this much latitude.

In the

face of the heightened speculation in gold and the likelihood of capital

outflows to Canada, he thought the policy adopted at the last meeting should

be continued.

For the three weeks ahead, he suggested action to maintain a

bill rate near three per cent, realizing that this opened up the question

of a change in the discount rate--a move that he was not yet willing to risk

in view of the probable adverse domestic impact.

however, that it

He was prepared to argue,

might be proper some time in the near future for the bill

rate to move gently above the discount rate even though this might occasion

increased discounting prompted by rate differentials.

an unorthodox recommendation,

If

this seemed like

the response was that these are unusual times.

The Committee must be prepared to accept new policy combinations if policy

is to make its maximum contribution to the solution of the present dilemma.

Mr. Clay said that once again monetary policy had to be formulated

on the basis of the requirements of both the domestic economy and the inter

national balance of payments.

Developments in the domestic economy clearly

-28-

7/10/62

did not call for any tightening of credit and upward movement of interest

rates.

On the contrary, the domestic economy showed further evidence month

by month that it

needed added stimulus rather than restraint.

Accordingly,

he felt that the Committee could not very well support the view that monetary

policy had done all that it

could do or needed to do for the domestic economy

and that now policy could be tightened without any negative impact on do

mestic economic activity.

In a domestic situation that continued to fall

short of a satisfactory performance,

it

could not be assumed that at some

point the contribution of monetary policy had been completed and that policy

could be reversed without detrimental effects.

If,

in the Committee's view, monetary policy must be tightened because

of international payments considerations, Mr. Clay felt

that this action must

be supported on the premise that the international aspects are so critical

as to require credit tightening despite its

economy.

negative impact on the domestic

It was difficult to judge accurately just what are the full

ramifications of the international balance of payments problem, he said,

although there was no denying that it

constituted a serious problem to which

this country must continue diligently to apply itself.

to indicate, however,

Reports would seem

that substantial progress was being made toward

improvement in the basic situation.

Mr.

Clay noted that in recent weeks the shift in the Committee's

policy had led to a lessening in the degree of credit ease and to a higher

level of interest rates.

While other factors may have played a role, the

Committee's operations and the expectations created by those operations had

had a pronounced impact on the money and capital markets throughout the

-29

7/10/63

maturity

He

structure.

hoped that this credit tightening action would not

be carried further. The upward movetment in longer-term interest rates was

particularly disturbing to him in termsof its potential effect on economic

activity.

In keeping with this view on

recommended

monetary

policy, no change was

in the Federal Reserve Bankdscount rate.

Mr. Clay said that he coould go all the way with Mr.

In conclusion,

Mitchell's position,

except for Mr. Mills' point that the Committee might be charged with

vacillation.

This,

however, should not prevent corrections of any over

playing of the hand during the past three weeks.

Mr. Scanlon reported that industrial production and employment

leveled off in May and June in the major centers in the Seventh District.

Cotinued declines in steel had been accompanied by smaller reductions in

some

other lines.

Retail

sales, after rising somewhat in May, declined in

June; one large retailer of ladies clothing reported the poorest June in

at least eight years, with business off 10 per cent

from May.

Mr. Scanlon said that the Chicago Bank's contacts with academic and

business economists revealed wide acceptance of the view that the economy

was heading for a period of very slow growth for the remainder of the year.

Projections by these economists of Gross National Product for 1962 now

commonly were on the order of $560 billions or less.

Much emphasis was

placed on the lack of expansive forces in the economy; the uptrends in

autobiles and defense outlays were believed to have had their main effect.

Business outlook statements made at a recent forumby a number of executives

of large firms headquartered in the Midwest expressed mixed views, Mr. Scanlon

7/10/6

-30

said, raging from

moderately optimistic in the case of consumer and capital

goods producers to outright pessimism in the case of representatives from

the real estate and railroad industries.

The agricultural outlook was good, and farm income in 1962 was

expected to be moderately higher in the Midwest and in the nation.

Crop

prospects were excellent as a result of favorable weather conditions.

Cattle

prices had been holding somewhat above last year, and smaller than expected

spring and fall pig crops suggested that hog prices would remain reasonably

favorable.

Credit demands at District banks appeared to be consistent with

current business trends.

During the three weeks ending June 27, business

loans at weekly reporting banks rose, but at an appreciably slower pace

than in comparable periods of the last three years.

Mr. Scanlon then reported on discussions during the past week with

a number of major Midwest manufacturers concerning the impact of the tariff

surcharges recently announced by Canada.

uncertain,

was believed that the tariff

it

affect sales of ite.s

While the probable effect was still

increases were large enough to

such as semifinished steel and luxury type automobiles.

Farmmachinery and auto parts for assembly in Windsor--which are important

exports from the Midest--are not subject to tariff

charges, hence producers

of these items would not be affected directly by the tariff charges.

The

effects of the devaluation of the Canadian dollar, however, would be more

widespread.

A construction machinery firm reported that the competitive

position of its

Canadian subsidiary had been improved in third markets in

-31

7/10/62

comparison with the parent company.

A farm

machinery

manufacturer raised

its prices about 5 per cent to offset the effects of the devaluation and

believes that sales were unaffected because of an improvement in crop

prospects in Canada.

Other exporters had not raised prices and were absorb

ing the "cost" resulting from the devaluation.

As to policy, Mr. Scanlon said that the current sluggishness in

economic activity in the presence of what appeared to be rising uncertainty

as to the trend of business indicated that the destic

economy would benefit

from policies that would help to stimulate consumption and investment.

He

recognized that international capital flows must be given due consideration,

but these would not appear to preclude continuation of monetary ease at this

time.

The results of open arket operations for the two weeks immediately

following the June 19 meeting were somewhat more drastic than he had under

stood the

majority of the Committee intended, but in the circumstances

perhaps the Desk had no choice.

He

hoped that actions during the next three

weeks would help to impart a greater semblance of stability to monetary

markets than in recent weeks.

In terms of free reserves, a figure around

400 million dollars would be appropriate.

He would not change the directive

or the discount rate.

Mr. Deming said that the Minneapolis Bank economists summed up

their appraisal of the Ninth District economy last Friday with the state

ment:

"With current agricultural prospects bright, and with expanding

employment and personal income, we find it difficult to be anything but

moderately optimistic about the District at this point in time."

-32

7/10/62

Mr. Deming wished to comment on two points.

The first

of these

was that, in general, the most recent reports about the current situation

based on the Bank's opinion survey cofirmed the economists'

ment he had quoted.

summary state

Somewhat more respondents saw key economic factors

up strongly than was true in the survey taken some six weeks ago.

great bulk of respondents, however, still

The

viewed economic activity as

being up slightly--less than 5 per cent from a year ago.

With respect

to the short-run outlook, the replies from the opinion survey were quite

interesting, Mr. Deming said, when viewed against the answers given at

the end of May and at mid-April.

Two out of three respondents regarded

further improvement as either probable or fairly certain, which represented

a drop from the 75 per cent in that group at the end of May and 87 per

cent in mid-April.

Within this group, however,

there had been a significant

rise in the proportion regarding further improvement as fairly certain

instead of just probable.

The offset showed up in

for stability at present levels.

the group that looked

Only two or three of the Bank's respondents

saw any chance of a decline of activity in the near term.

Mr. Deming's second comment related to banking.

He reported a

continuation into early July of a fairly strong loan demand.

The June loan

increase at country banks in the Ninth District was the largest for any

period since the start of the series in

1947.

been exceeded in only one postwar year--1959.

At city banks the rise had

Demand had been general and

across the board, Mr. Deming said, adding that so far this year total bank

loans in the Ninth District had risen almost 8 per cent.

7/10/62

-33

With respect to credit policy, Mr. Deming said that Mr.

expressed his ideas as to the background for a policy decision.

Mills had

He had

nothing to disagree with in Mr. Mills' analysis and consequently he would

not change the Committee's policy.

He saw no particular reason to change

the wording of the directive, although some slight change along the lines

suggested by Mr. Fulton would not be objectionable.

He would make no change

in discount rate at this time.

Mr. Deming went on to comment that implementation of policy, however,

had given him some concern.

He had a feeling that the brakes had gone on

harder in the two weeks following the June 19 meeting than he had contem

plated would be the case.

He had attributed this to the churning in the

market and the difficulties of making projections of reserves, and, he

would have been prepared to accept the explanation that difficulties in

the estimates and the reaction of the market had made policy somewhat

difficult to carry out in those weeks.

The Manager's report indicated

that that had not been the case, however.

To be specific,

on the basis

of the June 19 discussion he would have thought the Federal funds rate

would have been more often at 2-3/4 per cent than it

at 3 per cent.

He would have thought the bill

quite so far as it

had gone.

Mr.

was and less often

rate would not have gone

Deming said he was talking of small

differences but ones that had continued over a longer period of time

than he thought should have been the case.

To sum up, he was completely

sympathetic with keeping policy just as stated at the June 19 meeting,

but his definition of the implementation would be to keep the Federal

-34

7/10/62

funds rate in the 2-3/4 to 3 per cent range but at least as often at

2-3/4 as at 3 per cent.

Mr. Swan said that Twelfth District conditions were mixed but

relatively satisfactory as compared with the United States as a whole.

Increased uneasiness was apparent in business circles, especially those

close to consumers, looking to the latter part of this year.

been some pickup in

lumber orders and prices, and construction contracts

were up substantially in May.

June.

water.

There had

Department store sales were up in May and

Agricultural prospects were good with ample supplies of irrigation

There had been little

change in the banking picture except for a

somewhat tighter reserve position in the past week or so.

Savings deposits

continued to rise but at a much lesser rate than in the first part of the

year and at a slower rate than a year ago.

In terms of policy, Mr. Swan said that in view of the over-all

situation and the uncertainty that still existed, he personally would have

been happier not to have had the recent tightening in reserve positions.

There certainly was no basis whatever in the domestic picture for any fur

ther tightening.

As to the international situation, he still came up with

a question as to how many of these problems were outside the realm of mone

tary policy and, further, whether the modest tightening the Committee had

been talking about afforded any basis for a counteroffensive such as

Mr. Mills had indicated against the balance of payments problem.

If

the

Committee was talking about the effect of competitive interest rates

in the international area, it

should be talking about much larger increases

7/10/62

-35

than most of the members of the Committee would be willing to accept, given

the total international and domestic situation.

Mr. Swan said that he had some of the same concern that had been

expressed by Mr. Scanlon and Mr. Deming regarding the extent of the shift

in policy in the two weeks immediately following the June 19 meeting.

Perhaps the differences he was talking about were not very significant,

but the extent of the shift that had taken place had raised questions of

further tightening and of the possibility that the banking system would

get into a still

tighter position as a result of a series of very small

moves or developments which of themselves would be very inconsequential,

but which might add up to a total position that would not be satisfactory

and which would reflect an unwarranted tightening in the over-all reserve

situation.

If

the bill

rate should move about 3 per cent even for a brief

period, the pressure of banks for earnings would make administration of

a 3 per cent discount rate extremely difficult, and actions that might be

taken could bring about unexpected reactions.

Assuming that an increase

in the 3 per cent discount rate would be undesirable, Mr. Swan felt that

a three-month bill rate farther below that figure than 2.97 or 2.98 would

cause many to feel much better than if the bill rate were permitted to

approach as closely to 3 per cent.

He was using this as illustrative of

the sort of feeling that had concerned him and was concerning him at the

moment.

Mr.

Swan said that he personally would like to see a little

retreat

from the present policy position, but if there was to be no change in

7/10/62

-36

policy, he would still

like to have the wording of the directive make the

intention of the Committee a little

case with that adopted June 19.

stands, it

clearer than it

If

seemed to him was the

the directive were renewed as it

would imply some further tightening.

now

Therefore, he would hope

for some change in wording, particularly in the last sentence of the direc

tive to make clear that there would be no further tightening.

Mr. Irons said that conditions in the Dallas District were quite

favorable.

Industrial production was up and nonagricultural employment

had increased.

were up.

Construction was at an all

time high; bank credit and deposits

In the country as a whole, the recovery had lost some of its

but activity was still

at a high level.

vigor,

The economy had done quite well in

the past few months in absorbing a number of shocks.

Mr. Irons said that he was satisfied with the policy action taken at

the meeting on June 19 at which he had not been present.

With regard to

current policy, he indicated that he would like to see a continuation of

this slightly firming tendency, permitting short-term rates to drift to

higher levels if

market forces caused the move.

He would not recommend

a deliberate attempt on the part of the Account to force a sharply higher

rate level.

He said that a bill rate ruling slightly below the discount

rate would be satisfactory, but he would not object if the discount rate

were pierced by a small margin and, in fact, would like to see the market

reaction to such a short-term rate level.

Mr. Irons said he was not think

ing of a 3.15 or 3.25 per cent bill rate but something close to the 3 per

cent figure.

A Federal funds rate at 3 per cent would be consistent with

7/10/62

-37

his thinking, more so than one at a lower level, and free reserves in

the market would be around the $350 million figure. He would make no

change in either the directive or the discount rate.

Mr. Ellis said that there was little that he could add to the

economic analysis that had been presented to the Committee, judging from

what had been happening in New England where economic activities did not

differ significantly from recent developments in the national pattern.

Employment was up a shade less than the expected seasonal rise and manu

facturing output was showing a fractional rise. At weekly reporting banks

substantial gains were reported in June.

Mr. Ellis expressed the thought that many economists would agree

that the economy had lost its momentum and that the high point was in the

immediate past or the near future.

He suggested use of the concept of

"elbow room" to explain what the Comittee thought it was doing at the

June meeting. He had thought that there was some elbow room or "room

to aneuver" between the effort to stimulate domestic credit expansion

and the effort to hold down incentives for outward flow of short-term

capital. In moving to close some of this gap the Committee did not

intend to sacrifice its general position of ease.

It was his understanding

that the Committee approved a very small shift in monetary policy and

one that would be only barely visible in the market.

In the subsequent

period, there had been on the one hand a weakening of domestic develop

ments that had led some to expect more from monetary policy. On the inter

national side, there had been a more rapid upward move in rates than he

7/10/62

-38

personally had anticipated from the discussion at the June 19 meeting.

The Manager had put this in terms of a "substantial shift in policy as

interpreted by the market."

Mr. Ellis said that he felt

the Committee certainly should not

aggressively pursue a shift in policy any further.

He came down, then,

to the basic question--whether there was now sufficient ease.

felt that there was sufficient ease at the present time.

available.

He still

Credit is

freely

This led him to the decision that the Comittee should not

change the character of policy at the present time.

It should presage

this from the tone in the market and should continue a ready availability

of free reserves.

He thought this would be accomplished with a $350

million level of free reserves, using that figure as a floor for aims in

operations until the Committee had demonstrated to the market that it

really was not moving to a tighter position than was contemplated by the

small shift in policy on June 19.

growth rate in

allow for a 3 per cent

This would still

reserve availability.

Mr.

Ellis said he also would like

to preserve some elbow room below the 3 per cent discount rate and shared

the views expressed by Mr.

Swan in

this respect.

change in the directive would be desirable.

He thought a minimum

He would eliminate from the

first paragraph the reference to declining stock prices and would change

the second paragraph to specify that operations be conducted with a view

to "providing moderate reserve expansion in the banking system and to

fostering a moderately firm tone in money markets."

-39

7/10/62

Mr. Balderston said he shared the views expressed by Messrs.

Deming, Ellis, Scanlon, and others that the policy adopted by the Committee

on June 19 was one that would continue to increase the reserves supporting

private credit but at a somewhat slower rate.

the operations of the Desk during the interim.

He had no fault to find with

He thought he understood the

problem with which it was struggling and the turmoil that was going on.

But

he was concerned with the posture that the Committee adopted by its action

at the June 19 meeting, an action that may have come right at the peak of

the current expansion.

Mr. Balderston emphasized his concern that the posture that the

Committee then adopted, however right it

be understood.

may prove to be in the long run,

He gathered that the Committee was trying to walk between

less abundant ease and an actual tightening.

Mr. Balderston said.

Words are misleading here,

He had read in the press that the System had

tightened credit, which he believed was not the case.

To be specific in

explaining his thinking, he thought that at the June 19 meeting the

Committee sought to lower the rate of increase in the reserve base for

private bank credit from the 3-1/2 per cent line that the Committee had

actually followed from December to June to some new goal that would fall

between 3-1/2 per cent and zero but certainly not below zero.

The tremendous

buildup in the Treasury balances with member banks had brought about a dis

tortion in this guide, and he thought the Committee would not be able to

tell what road it was really on until after the Treasury balances were

reduded during the coming days.

Only then would it know whether the line

-40

7/10/62

it

was following represented an annual increase at a rate of 3 per cent

or 2 per cent or something else.

Mr. Balderston said that he hoped the public would not get the

impression that the System was zigging when it should be zagging.

In

his opinion, it was very hard to have entered in the record after the

end of this year words as loose as those in the current directive.

He

found the first paragraph of the directive adopted June 19 much more appeal

ing than the one it replaced, and he liked it with the deletion that had

been suggested by Mr. Ellis.

However, he would change the second paragraph

of the directive at this time in order to make it a little more concrete.

He would accept all of what Mr. Ellis had suggested except that he was

concerned about that expression, "a firm tone in the money market."

He

knew what it meant to him, but he was not sure what it would mean to

others.

He thought, however, the Committee could change the last three

lines of the directive to indicate that policy should be directed with a

view to meeting seasonal needs after taking account of the expected decline

in Treasury balances with member banks.

He would also like to see a ref

erence to the steady increase in reserves supporting private bank credit.

He did not believe at this juncture that the Committee should adopt as a

long-run goal an objective that would actually tighten bank credit: the

Committee's objective should be somewhere less than a 3-1/2 per cent growth

rate, but certainly not below zero.

He thought the directive ought to be

changed, and he would accept the wording suggested by Mr. Ellis.

Mr. Francis said that business activity in the Eighth District had

been showing some weakness since May.

Unemployment rose more than seasonally

-41

7/10/62

from May to June and both department store sales and bank debits decreased

after seasonal adjustments.

At banks, on the other hand, business loans

increased sharply from May to June.

Crop prospects were unusually good.

Time deposits continued up, demand deposits were unchanged, and loans rose

sharply while investments increased slightly.

Mr. Hilkert said that economic expansion in the Third District was

continuing but appeared to be losing momentum.

were favorable in May and June.

Labor force developments

Unemployment claims in Pennsylvania con

tinued below the levels of recent years, claims in Delaware showed a

similar pattern, unemployment rates decreased in most areas in May, and

in June reclassification of several labor market areas indicated further

improvement.

Steel production in recent weeks had improved relative to

the nation, electric power consumption was up in May, and construction

On the other hand, manu

contract awards continue to show good gains.

facturing employment and average weekly hours declined slightly in May

for both durable and nondurable industries, and department store sales

slackened in June.

In banking, the most striking development had been the continued

sharp increase in business loans, Mr. Hilkert said, although real estate

loans also had been increasing significantly.

Time deposits were still

rising rapidly and so far this year had increased about as much as demand

deposits had declined.

Over the past several weeks,

at the Reserve Bank had increased somewhat,

borrowed small amounts.

country bank borrowing

and reserve city banks had also

The basic reserve position of reserve city banks

42

7/10/62

had been negative in the recent 3-week period, indicating substantial

Federal funds borrowing; nonetheless,

in the last two weeks the city banks

were net lenders of Federal funds.

Chairman Martin said that, as he had commented at the June 19

meeting, what makes monetary policy interesting is the fact that so many

people have different views with respect to it

prove our points.

Mr.

and none of us can really

Bryan had asked four questions this morning, but

he had not given us any of the answers.

was that monetary policy had done what it

that it had about played itself out.

His own view, the Chairman said,

could to help the recovery and

He went on to say that it was easy

to get into a pattern of activity where we think that, by just easing money

or increasing expenditures or raising a deficit, we can achieve certain

things.

He believed that in time a point was reached where ease played

itself out.

Maybe that was not orthodox, to use Mr. Wayne's expression,

but an unorthodox procedure was required.

The Chairman said he did not think that the Committee was going to

be able to explain anything as clearly as the fact that it had had a very

easy monetary policy, although one less easy since June 19 than it was

before It seemed inevitable that people were going to use words like

"restrictive" and attach them to something such as had taken place in

recent weeks.

Markets would always have some contrasts, the Chairman

said, and at any given time some people would use one word to describe

the situation while others would prefer a different word.

in his own mind of one thing:

He was sure

There had been a great deal of ease and,

-43

7/10/62

using that relative term, lately there had been a little

less ease.

had referred to reserves that would provide for a rate of growth.

Some

He did

not know what growth rate was correct, but he did have confidence in growth.

As to the effect of the recent change in policy, one of the reasons that

had been given for a rally in the stock market was the indication of some

"tightening" in System policy.

This did not prove anything, Chairman Martin

said, but it illustrated how different interpretations could be put on

these things by different people.

As he had indicated before, Chairman Martin said that he believed

the System could be faced with a real crisis between now and the Annual

Meetings of the Bank and Fund in September.

It would be foolish for those

in this room not to be questioning themselves in all respects.

To use

Mr. Ellis' words, the Committee needed some elbow room so that it

could

react in whatever direction was called for.

Chairman Martin said he did not believe the Federal Reserve was

going to achieve anything at the present juncture by ease compounded by

ease.

However,

he certainly did not think the Committee wished to tighten

at this juncture.

The difficulty in writing a directive became more apparent

every time the Committee met.

The Committee was engaging in a delicate

operation. He agreed that, as one looked at the figures and noted the

minimum amounts of free reserves since June 19, one could say that this

had not been a delicate operation. He happened to have gotten more and

more sympathetic with the Desk as he had continued to observe the operation

over the years.

He had come to realize the great difficulties of the

-44

7/10/62

operation, and when he viewed the projections made by the Desk and by

the staff here in Washington and considered the human factors that were

involved and that came into play in these markets, he was convinced that

the Committee was asking for too much in the way of precision in measuring

these results.

It

would have been all

of free reserves instead of $306 in

right to have seen $375 million

one week, but to try to put those

figures together and to bring about the result was, to say the least, an

extremely difficult thing to contemplate.

He was saying that the Committee

should be very careful about thinking that the projections of reserves

could be made too precise.

The staff should continue to strive for the

best precision possible, but the Committee must be aware of the problem

faced.

that it

The same thing was true when it

the Chairman said.

came to language in the directive,

He had gone back and read the minutes of the meetings

many times, as he was sure that the other members of the Committee had

done.

He had read the directives repeatedly, and if one were to read

these without the background of the meetings he could understand how a

person might think they were just words.

This was one of the problems

whenever he was called up to discuss this question before a Congressional

Committee.

one else.

Words could mean one thing to one person and another to any

This was particularly true in

suggested in these discussions.

the shading that sometimes was

For this reason he wanted to reiterate

the things he had said before about the difficulty of writing these

records.

It certainly was not feasible for 19 persons sitting around this

-45

7/10/62

table to draft this kind of a directive in precise language that would

suit all the aims expressed.

if

It might be possible to come nearer to it

the Committee could spend two or three days each time in working on

their expressions, but to some extent that was a question of the best

use of the time of the people concerned.

So far as today's meeting was concerned, Chairman Martin said that

it was certainly evident that nobody wanted the world to think that the

Committee went blithely on as it

had been doing over a long period of

time saying that there was not enough ease.

In his judgment, a fairly

good case could be made that the amount of ease over a period of time had

been misdirected.

That perhaps was true for nonpurpose loans on securities

and loans in the unregulated area where the Federal Reserve was unable

to reach certain credit.

But this was not new and the answer required

legislation, which in the Chairman's opinion would not be easy to get.

As to the wording of the directive, Chairman Martin said that the

phrasing Mr. Ellis had suggested was perfectly all right with him, as

would be the wording along the lines suggested by several other persons.

He thought the present policy was right, and he felt that a clear majority

of the Committee considered that it

applied at the present time and did

not want the situation to get any tighter.

He repeated that this was a

delicate operation, but the international situation was such that, with

the difficulties in the gold market that were familiar to all, and with

the weakness in the dollar abroad, the Committee would be remiss in its

-46

7/10/62

duty if

it

was not showing an awareness of the situation through monetary

policy at this time.

If

the System had to raise the discount rate as a

result of developments in the balance of payments,

foolish in doing so if

it

it

would not look too

had followed the current policy of a little

less

ease.

Chairman Martin said that so far as he personally was concerned he

did not think that additional ease was going to help the economy at this

juncture.

As a matter of fact, he thought it would have the reverse effect.

He had no reason to quarrel especially with others except to say that those

who disagreed with this particular view were,

in his opinion, wrong.

The Chairman then inquired as to whether the members of the

Committee wished to make some change in wording of the directive that would

maintain the same policy as that adopted at the June 19 meeting, with the

clear understanding that it did not favor any further tightening than had

been achieved recently.

While the specific wording of the directive might

vary so far as he was concerned,

Chairman Martin said that he did not think

it feasible to try to spell out in precise terms how the policy of the

Committee should be implemented.

At his request, Mr. Sherman then presented

a directive that would have deleted from the opening paragraph any reference

to declining stock prices and which would be changed to incorporate in the

second paragraph the wording that had been suggested by Mr. Ellis in his

comments as follows:

To implement this policy, operations for the System Open

Market Account during the next three weeks shall, to the extent

consistent with the behavior of financial markets, be conducted

with a view to providing a[strikeout]somewhat rate

[/strikeout]

of

smaller

MODERATE

reserve expansion in the banking system [strikeout]than

in recent months [/strikeout]

and to

fostering a moderately firm tone in money markets.

7/10/62

After several of the members of the Committee had indicated that

wording was acceptable to them, as was the clarification of policy in

dicated in Chairman Martin's statement in the preceding paragraph, the

Chairman inquired whether any of the members of the Committee wished to

vote against its adoption, and Messrs. Mitchell and Robertson stated they

would dissent.

Thereupon, upon motion duly made

and seconded, the Federal Reserve Bank

of New York was authorized and directed

until otherwise directed by the Committee

to effect transactions for the System Open

Market Account in accordance with the

following economic policy directive:

It is the current policy of the Federal Open Market Committee

to permit the supply of bank credit and money to increase further,

but at the same time to avoid redundant bank reserves that would

encourage capital outflows internationally. This policy takes

into account, on the one hand, the gradualness of recent advance

in economic activity, the availability of resources to permit

further advance in activity, and the unsettlement of financial

On the other hand, it gives recognition to the bank

markets.

credit expansion over the past year and to the role of capital

flows in the country's adverse balance of payments.

To implement this policy, operations for the System Open

Market Account during the next three weeks shall, to the extent

consistent with the behavior of financial markets, be conducted

with a view to providing moderate reserve expansion in the

banking system and to fostering a moderately firm tone in money

markets.

There had been distributed to the Committee a report from the

Special Manager of the System Open Market Account regarding System and

Treasury operations in foreign currencies and on foreign exchange market

7/10/62

-48

conditions for the period June 19 through July 4,

1962,

as well as

a supplementary report for the period July 5 through July 9,

1962.

Copies of these reports have been placed in the files of the Federal

Open Market Committee.

Chairman Martin called upon Mr.

Sanford for comments on foreign

exchange market conditions and System operations during the period since

June 19, and Mr.

Sanford made a statement substantially as follows:

Throughout the period since the Federal Open Market Com

mittee meeting of June 19, the dollar has been weak against the

European Continental currencies; it has been on or close to the

floor in terms of the Swiss franc, French franc, guilder, lira,

and Belgian franc and more recently has sagged against the DM,

though remaining above the floor. On the other hand, the dollar

shows a net advance, in terms of the pound.

In the special case

of the Canadian dollar, this currency is now being quoted some

what above its

par of $0.92-1/2, whereas three weeks ago it was

at its lower support price.

Turning first to the Swiss franc, the strength in that

currency relative to the dollar has resulted in substantial

intervention by the Swiss National Bank, whose reserves in

creased $100 million in the two weeks ended June 30 and $57

million since that time through Monday, July 9.

Using part

of the dollar gain, the Swiss National Bank purchased $25

million of gold from the United States on July 5.

Several

factors have contributed to the inflow of funds into Switzer

land: (1) market uncertainties related to the Canadian exchange

crisis and the decline in world stock markets; (2) the re

patriation of Swiss funds for mid-year window dressing; and

(3) nervousness arising from the recurrent rumors of an impending

United States gold embargo.

Going to the French franc,

only brief easing late in

June from its ceiling position occurred on market expecta

tions that the French franc portion of Canada's International

Monetary Fund drawing would be converted into dollars in the

market; this did not materialize as the drawing was converted

At this point, I would mention

directly by the Bank of France.

that the Bank of France has given us preliminary notice of a

considerable package of transactions to be effected on July 12.

Included are: (1) the prepayment of nearly $300 million of debt

to the Export-Import Bank and of $62 million to Canada, and

7/10/62

-49-

(2) the purchase of about $110 million of gold from the

United States to be added to French reserves.

The Italian lira had a brief decline in the early part

of the reporting period, which was caused by a moderate out

flow of funds after the Italian Government announced its

intention to nationalize the electric power industry.

But

with seasonal influences exerting their

pressure, the lira

was soon back to its

ceiling and, after

consultation with

the Italian authorities, a total of $8 million in lire

has

been sold by the Bank of Italy

for Treasury account.

Such

sales (from Treasury Borrowings of lire) are designed to

absorb dollars which would otherwise flow into official

Italian hands and increase Italy's potential gold demands.

We

have been informed that the Italian Government will prepay $178

million of debt to the United States, sometime in July or August.

The other currency that I would comment on especially now

is the Deutsche mark.

That currency was already advancing as

the period opened, principally because of repatriation of funds

by German banks to counter stringent liquidity conditions in

Germany and to acquire domestic assets for mid-year balance

sheet purposes.

The Bundesbank purchased a sizable amount of

dollars, and further upward pressure on the mark appeared likely.

Discussions with the Bundesbank indicated to us that any further

strengthening of the mark might best be met by intervention in

Accordingly, the System sold a

New York as well as Frankfurt.

total of DM 18 million in the period between June 20 and June 25.

On Thursday.

Up to this time, the DM did not go above $.2506-1/2.

July 5, however, a very rapid advance in the rate occurred in

Frankfurt, before the opening of the market in New York. This

(1) with all the other

rapid rise was attributed to two factors:

Continental currencies at or near their ceilings, the DM had

become the cheapest European currency to acquire, and (2) there

appeared to be occurring some extraordinary flow of funds into

Germany,

for the purpose of acquiring a new Federal Republic

Again in consultation with

Issue of 6-1/2 per cent securities.

the Bundesbank we sold a total of DM 19 million on Thursday,

July 5, DM 6.5 million on Friday, and DM 18 million yesterday,

July 9. At the close Friday in New York, the DM was quoted at

$0.2509-1/4 whereas it had been as high as the equivalent of

$0.2511-5/16 in Frankfurt; and on Monday, July 9, it was quoted

in New York at $0.2512-5/8 before the System entered the market

at an early hour and closed at $0.2512-1/8, as compared with the

equivalent of $0.2513 at its highest point in Germany. Today,

early reports from Germany place the DM at about our closing

level last night. These operations were aimed at preventing erosion

7/10/62

-50

of the rate structure such as might have occurred if there

had been no intervention.

Sterling fluctuated between $2.8092 and $2.8098 until

June 25, when it was adversely affected by reported sales

by Continental holders in order to acquire Canadian dollars

to cover short positions in that currency.

After this dip,

the rate held around $2.8085 until the last few days, when

it has declined to around $2.8055, owing in part to reported

The covered interest arbitrage

flows from sterling into DM's.

differential, figured in terms of Treasury bills, is virtually

nil at this time (July 9).

The massive demonstration of United States and other

foreign cooperation extended to Canada was generally well

received both in Canada and abroad and put an immediate end

to the heavy attack on the Canadian dollar. While the exchange

rate has advanced to above par and the Bank of Canada reportedly

has on occasion gained some dollars in moderating the upswing

in the rate, only a slight reversal has been evident in the

adverse pattern of commercial "leads and lags" that previously

In addition to Bank of Canada market intervention

developed.

on both sides, the U. S. Treasury has purchased some moderate

amounts of Canadian dollars, both to meet future requirements

and to assist the Canadian authorities in their support oper

ations. A forward market for Canadian dollars has reappeared

and the three-month forward Canadian dollar has been quoted

at a discount of about 2.00 per cent per annum. With Canadian

Treasury bills at about 5.35 per cent and United States bills

at 2.90 the covered interest arbitrage differential in favor

of Canada is about 0.44 per cent per annum. Some short-term funds

have on occasion been reported flowing into Canadian Treasury

bills and finance paper.

Transactions consummated for System Account during the

period since June 19 include:

1. The acquisition of Belgian francs equivalent of

$50 million under the reciprocal swap arrangement

previously approved by the Federal Open Market Com

Such Belgian francs are on deposit with the

mittee.

Societe Nationale de Credit a l'Industrie, carry the

guarantee of the National Bank of Belgium, and earn

interest at 2-3/4 per cent, the same rate that the

Treasury pays on the special certificate of indebt

edness held by the Belgians.

2. The acquisition of Canadian dollars equivalent

of U. S. $250 million under the reciprocal swap

arrangement previously approved by the Federal Open

Such Canadian dollars are held

Market Committee.

7/10/62

-51

in a money employed account with the Bank of Canada

and are earning interest at the rate of 2 per cent,

the same rate that the Treasury pays on the special

certificate of indebtedness held by the Canadians.

3. Sales of DM 61-1/2 million, (equivalent in

dollars is $15-1/4 million), as previously reported

to this meeting.

The Chairman suggested that, unless there was objection, the

Committee ratify and confirm the transactions in foreign currencies since

June 19, as reported by Mr.

Sanford and as presented in the written reports

submitted to the Committee.

Mr. Ellis stated that he had no objection to ratification of such

transactions but that he would like to have a discussion later during the

meeting of certain aspects of the foreign currency operations.

Thereupon, upon motion duly made

and seconded, and by unanimous vote, the

System transactions in foreign currencies

during the period June 19 through July 9,

1962, were approved, ratified, and confirmed.

Mr. Sanford stated that he had just received over the telephone a

report and some recommendations from Mr. Coombs, who had returned to New

York from Europe last night.

presented by Mr.

The substance of Mr.

Coombs'

comments as

Sanford was as follows:

The European exchange markets are being swept by

recurrent rumors that the U. S. is drifting towards

devaluation, a gold embargo, exchange controls, or similar

drastic measures. Much of the anxiety has apparently been

generated by the stock market decline which has revived

memories of the 1929-33 experience, while widely publicized

reports of developing antagonism between the Administration

and the business Community have weakened foreign confidence

still

further. The London gold market has been subjected to

heavy buying pressure with demand during June running at

As a result the reserves

more than twice the April figure.

accumulated by the Gold pool have now been drawn down nearly

7/10/62

-52

to zero.

I believe it will be possible, however, to reactivate

the gold sale consortium to which European central banks have

contributed $135 million if the demand for gold should threaten

to create an unduly heavy drain on the U. S. gold stock.

Heavy buying pressure on the Swiss franc has also developed

with the result that the dollar holdings of the Swiss National

Bank had risen by last Friday to a point $210 million in excess

of their informal ceiling of $175 million.

In the light of

this situation my negotions with President Schwegler and Dr.

Ikle of the Swiss National Bank over the past weekend resulted

in agreement on their side to a stand-by swap operation of $200

million incorporating most of the provisions in our swap arrange

ments with other central banks.

Schwegler and Ikle suggested,

however, that it would be preferable from their point of view

if the swap arrangement were broken into two parts: first a

$100 million stand-by swap directly between the Federal and the

Swiss National Bank, and second, another $100 million stand-by

swap between the Federal and the Bank for International Settle

ments. In both cases we would swap dollars against Swiss francs,

with the BIS obtaining Swiss francs through a third swap arrange

ment of its own with the Swiss National Bank. Our swap with

both the Swiss National. Bank and BIS would be initiated on a

stand-by basis with the prospect, however, of an immediate

drawing of $50 million under each one for purposes of mopping

up $100 million of the present surplus dollars held by the

Both swaps would carry an idential

Swiss National Bank.

interest rate on both sides based upon the U. S. Treasury bill

rate; in both cases we would be offered time deposit facilities

at the BIS for investment of any Swiss franc balances we might

hold. The swap arrangement would be for three months but the

Swiss have requested a special provision for liquidation of the

swap on two days' notice at the initiation of either party; this

request apparently arises from the insistence of their lawyers

that the Swiss National Bank must be covered against the contin

gency of an outbreak of war.

Supplementing this swap arrangement I believe that the U. S.

Stabilization Fund would be prepared to undertake further forward

operations up to, say, $25 million while the Swiss National Bank

itself would expect to undertake forward operations on its own.

Finally the Swiss National Bank might be prepared to let its

dollar holdings remain somewhat above the present $175 million

ceiling but would probably wish to purchase gold in moderate

amounts, say $25 million.

I would strongly recommend to the

Committee their approval of these swap arrangements. Unless

we can through such arrangements mop up a sizable proportion

of the dollars recently taken in by the Swiss National Bank we

face the prospect of very large gold losses which might easily

7/10/62

-53

trigger off an avalanche of demand from other quarters.

In this

connection I would like to note that the buying pressure on the

Swiss franc now seems to be spreading to other European currencies,

with the Bank of Italy, the Bank of France, the Netherlands Bank,

the Bundesbank and the Belgian National Bank all reporting sizable

dollar receipts on Thursday and Friday of last week.

Next I should like to report that a Bundesbank official strongly

hinted to me over the weekend that the Bundesbank would like to be

included in our network of swap arrangements, in the usual amount

of $50 million. I think this would be a useful step and would

like to ask the Committee approval in principle of such a swap,

with final approval of the Federal Open Market Committee to be

sought by telegram covering the specific arrangements proposed.

After Mr.

Sanford had completed presentation of Mr.

Coombs'

report

and recommendations, he went on to say that the latter had indicated con

siderable urgency and expressed the hope that the swap arrangements with

the National Bank of Switzerland and the BIS could be completed within

the next few days for announcement July 20.

As to the proposed swap with

the Bundesbank in the amount of $50 million, Mr.

Coombs'

recommendation

was that the Committee give its approval in principle to a swap on the

usual terms with the understanding that the details would be presented to

the Committee for approval before the arrangement was completed.

Chairman Martin noted that at the May 29 meeting the Committee

authorized the Special Manager to pursue negotiations with the National

Bank of Switzerland looking to a dollar-Swiss franc short-term swap in

the amount of $150 million, and he called for comments at this time on

the recommendation now being made for a dollar-Swiss franc swap for a

total of $200 million to be split, $100 million to the National Bank of

Switzerland and $100 million to the BIS, the arrangement to be for a three

month period on generally the same basis as other swap arrangements.

-54

7/10/62

In the course of the discussion of these proposed swaps, Mr.

Bryan

stated that he understood that their purpose was to mop up some of the

excess dollars that were going to Switzerland.

He had approved entering

into such agreements with some reluctance at the outset, on the general

grounds that the central banks were merely attempting to iron out fluctua

tions in the market and not attempting a fundamental correction of a

balance of payments problem with this device.

now weak in relation to practically all

Noting that the dollar was

of the important European currencies,

he posed a question as to the possibility of an avalanche that would over

whelm the central banks.

Mr. Bryan said that he was troubled as to how

long the central banks might go on mopping up these surplus currencies.

Chairman Martin responded that there was no question but that

the purpose of the swap arrangements had been and still

out of temporary fluctuations.

could be an avalanche.

was the ironing

It was possible, of course, that there

As to this particular swap with the Swiss, to

date no such arrangement had been completed.

The Swiss were not in the

International Monetary Fund, he noted, and in his view it

would be a poor

time to withdraw from making this type of arrangement which could help

iron out these temporary movements of funds.

Because there might be

critical problems to deal with between now and the Annual meetings of

the Bank and the Fund in September,

it was his opinion that the completion

of a swap arrangement with the Swiss along the lines proposed would be

desirable.

7/10/62

-55

After Mr. Mitchell had commented that he felt this would

represent an important additional arrangement, Mr. Ellis inquired

whether the Swiss would regard it as a temporary arrangement.

Mr. Sanford stated that the Swiss were obviously interested

in international cooperation.

They were embarrassed by the rise in

their dollar holdings and this proposal was one way of preventing

those dollar holdings from getting converted immediately into goldan arrangement that they believed to be in the interest of the whole

international community.

How soon it could be reversed was a matter

of guess, but in the last analysis it would keep the movements of

gold on a more orderly basis.

At some time, of course, the swap

would have to be liquidated, but if the arrangement worked as

contemplated it would at least have reduced the gold loss by the

United States for the time being.

Mr. Swan noted that if the Swiss

swap arrangement were

authorized, the present limitation of $500 million of foreign cur

rencies that might be held in the System Account under the continuing

authority directive would have to be increased.

Chairman Martin responded that, if the Committee approved the

proposed arrangements, he had in mind increasing the total authorization

to $750 million, an amount that would cover the $200 million swap for

Swiss francs and also the proposal for a swap arrangement with the

Bundesbank in the amount of $50 million.

Mr. Ellis said that his question regarding these proposals

derived from the concept that led the Committee into this operation in

-56

7/10/62

foreign currencies.

He noted that the Committee's discussions at the time

this program was authorized contemplated that the currency operations

would attempt to deal with temporary and reversible movements of funds.

He saw no problem in the proposed arrangements as such, but he felt that

every time one of these proposals came up it

should be subjected to the

original tests that the Committee had in mind in adopting the Authorization

and Guidelines for these operations.

His question was whether the Committee

was developing an additional philosophy to be used in guiding the foreign

currency operations that went beyond the original concept of short-term

temporary adjustments.

Mr. Mitchell said that he did not understand the approach of Mr.

Ellis.

The Committee had been talking about helping the balance of pay

ments situation.

Presumably all

of the members believed the dollar was

not overvalued and that in these circumstances its

convertibility could

be sustained once there was a chance to make a few adjustments.

In terms

of the Committee's authorization, it seemed to him that the Committee was

trying to protect the dollar against a psychological run or the effects

coming from it.

He did not believe that this was a program that could be

put on a three-month basis, rather, it was one the Committee would hope

could be renewed until it

met its

objective.

Chairman Martin remarked that the swap arrangements were obviously

buying time, as Mr. Sanford had suggested earlier.

Mr.

Coombs'

He then noted that

recommendations were for (1) approval of swap arrangements with

the Swiss National Bank and the BIS in the total amount of $200 million to

7/10/62

-57

be split evenly between the two banks, the terms to be on the basis outlined

Coombs'

in Mr.

message to the Committee earlier during this meeting; (2)

approval in principle of a swap arrangement with the Bundesbank in the

amount of $50 million, the details resulting from negotiations to be sub

mitted to the Committee for approval. If these were approved, the Chairman

said, it would be necessary to increase the limitation in the continuing

authority directive, and he proposed an increase from $500 to $750 million.

He then inquired whether the Committee wished to approve these

three proposals.

Mr.

Mills stated that he would approve but that he had strong

reservations along the lines indicated by Messrs.

Bryan and Ellis.

He

felt that there had been some altering of the concept of the Committee's

engagement since the plan for the foreign currency operations originally

had been adopted.

He had reservations about the whole program, but he

would approve the new proposals.

these arrangements with its

The Committee should go into each of

eyes open and not in the belief that it

was

following the same path as when the arrangements were originally discussed.

Chairman Martin said that he agreed that the Committee should go

into each arrangement with its

eyes open.

He then suggested that unless

there was disagreement the Committee:

1.

Approve the completion of a dollar-Swiss franc swap

arrangement with the Swiss National Bank and the Bank

for International Settlements as recommended by

Mr.

2.

Coombs in the total

amount of $200 million;

Authorize the negotiation of a $50 million swap arrange

ment with the Bundesbank, the terms to be submitted to

the Committee for approval; and,

7/10/62

-58

3. Increase the limitation in the continuing authority

directive from $500 to $750 million.

No disagreement with these proposals was indicated.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, the Federal

Open Market Committee approved the following

continuing authority directive on System

foreign currency operations:

The Federal Reserve Bank of New York is

authorized and

directed to purchase and sell through spot transactions any

or all of the following currencies in accordance with the

Guidelines on System Foreign Currency Operations issued by

the Federal Open Market Committee on February 13, 1962:

Pounds sterling

French francs

German marks

Italian lire

Netherlands guilders

Swiss francs

Belgian francs

Canadian dollars

Total foreign currencies held at any one time shall not

exceed $750 million.

Mr.

Sanford stated that he would like to bring one other point to

the attention of the Committee.

The New York Bank has been studying various

methods of accounting for profits (such as the small ones that have resulted

from the recent sales of DM) and possible losses from foreign exchange

transactions, from the point of view of the valuation of the foreign

exchange portfolio and the point of view of settling with the other Reserve

Banks.

This was not a pressing matter, and it was a complicated subject.

In due course, he expected that recommendations would be developed for

7/10/62

-59

discussion with the Board's staff concerned with such matters, and

subsequently with the Federal Open Market Committee.

The date for the next meeting of the Federal Open Market Committee

was set for Tuesday, July 31, 1962.

Assistant Secretary