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, September 11, 1962, at 10:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Hayes, Vice Chairman

Balderston

Bryan

Deming

Ellis

Fulton

King

Mills

Mitchell

Robertson

Shepardson

Messrs. Bopp, 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. Young, Secretary

Mr. Sherman, Assistant Secretary

Mr. Kenyon, Assistant Secretary

Mr. Hexter, Assistant General Counsel

Mr. Noyes, Economist

Messrs. Brandt, Brill, Furth, Garvy, Hickman,

Holland, Koch, Parsons, and Willis,

Associate Economists

Mr. Stone, Manager, System Open Market Account

Mr. Coombs, Special Manager, System Open Market

Account

Mr. Molony, Assistant to the Board of Governors

Mr. Cardon, Legislative Counsel, 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

Mr. Broida, Economist, Government Finance Section,

Division of Research and Statistics, Board of

Governors

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Mr. Francis, First Vice President, Federal Reserve

Bank of St. Louis

Messrs. Eastburn, Baughman, Tow, and Coldwell,

Vice Presidents of the Federal Reserve Banks

of Philadelphia, Chicago, Kansas City, and

Dallas, respectively

Messrs. Parthemos and Arlt, Assistant Vice Presidents

of the Federal Reserve Banks of Richmond and

St. Louis, respectively

Mr. Sternlight, Manager, Securities Department,

Federal Reserve Bank of New York

Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meeting

of the Federal Open Market Committee held on

August 21, 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 Govern

ment securities covering the period August 21 through September 5, 1962,

and a supplementary report covering the period September 6 through

September 10, 1962.

Copies of both reports have been placed in the files

of the Committee.

In supplementation of the written reports, Mr. Stone commented as

follows:

The money market in the past three weeks has maintained

a moderately firm tone, with Federal funds trading at 2-3/4 and

3 per cent throughout the period. The effective rate was most

often at 3 per cent, although a good volume of funds moved at

2-3/4 per cent even on most of those days when the heaviest

trading was at the 3 per cent level. Member bank borrowing,

meanwhile, has been generally moderate.

Notwithstanding this situation in the money market, three

month bill rates have hovered around 2.80 per cent, while six

month bills have remained under 3 per cent. There was a

substantial corporate demand for bills in the early part of

the period, but this tapered off to some extent around the Labor

Day week end. This demand, however, was vigorously reasserted

after the Treasury announced its advance refunding and corporations

began to switch out of rights and into bills in an effort to

capture the attractive premium to which the rights moved in re

flection of the generous yields offered by the Treasury in the

refunding.

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Developments in the bill market were a factor influencing

the approach to System operations over the period, although

of course the general direction and magnitude of those opera

tions was shaped primarily by the need to offset large seasonal

movements in reserve factors and to preserve a steady market

atmosphere with the advent of the Treasury's operation. Thus,

in the early part of the interval, when reserves were being

supplied to meet month-end and pre-holiday drains, funds were

injected mainly through purchases of short- to intermediate

term coupon issues, through repurchase agreements, and through

purchases of bills directly from foreign accounts. In the last

few days, with market factors providing funds, the System has

absorbed reserves through the termination of repurchase contracts

and sales of bills to foreign accounts. Moreover, we arranged in

yesterday's bill auction to run off $203 million of bills matur

ing this Thursday, thus in effect augmenting the market supply of

bills.

For the next week or so, as indicated in the reserve projec

tions attached to our supplementary report and also to the Board

staff's memorandum on reserves, free reserves are expected to

bulge quite substantially--even after giving effect to the run

off of bills that I just mentioned. This appearance of over-ample

reserve availability may be a bit illusory, however. We are now

experiencing the mid-September bulge in liquidity needs as

corporations seek to acquire cash to pay dividends and taxes;

and superimposed on these seasonally heavy liquidity requirements

is a burgeoning of dealer financing needs as dealers acquire

rights to the Treasury's advance refunding operation. Yesterday,

for example, dealer financing needs were over 1/2 billion dollarsmost unusual for a Monday. All this suggests that if the Committee

should wish to see about the same market conditions maintained, a

somewhat higher level of free reserves may well be necessary, for

the next week or two, to maintain those conditions; to put it the

other way, the maintenance of recent free reserve levels over the

next week or two could well result in substantially tighter market

conditions than we have experienced in some time.

The long-term market has behaved quite steadily in the recent

period, losing some of the buoyancy that carried prices up during

much of August but retaining an underlying tone of confidence.

The market apparently feels that while interest rates will of course

fluctuate in response to day-to-day developments, a decisive move

in rates one way or the other is not a likely prospect. In this

atmosphere, it appears that the Treasury's advance refunding, for

which the subscription books close tomorrow, is being well received.

Highly tentative and preliminary guesses as to the amount of rights

that will be exchanged center around $5 - $7 billion.

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The System holds a little over $7 billion of the rights. I

do not, however, propose to exchange any of those holdings.

I should mention to the Committee that the Account has had to

be reallocated four times since the beginning of July, and three

times in the past three weeks, owing to the reserve ratios of

individual Reserve Banks falling below 30 per cent. With the

seasonal rise in note and deposit liabilities about to get

under way, and with the possibility that we may experience

further gold losses, we may well have to reallocate with in

creasing frequency in the months ahead. I have discussed this

with the Board staff, and we are in agreement that under these

circumstances it may be necessary to suggest to the Committee,

in the relatively near future, that the ratio at which the Ac

count shall be reallocated be reduced from 30 to 28 per cent.

Mr. Mitchell noted that the volume of capital market financing had

been relatively moderate.

He asked the Account Manager whether expectations

of some future easing in the long-term rate might be a factor or whether

the moderate volume of borrowing appeared to reflect primarily a lack of

demand for funds.

Mr. Stone replied that the demand for new capital appeared to be

relatively light.

The level of rates in the past week or two was begin

ning to bring forth some refunding issues, but this had not built up to

any substantial proportions.

Mr. Mills inquired whether any study had been made of the composi

tion of the Open Market Account, particularly whether the holdings of bills

were sufficient for the System's needs looking to the future.

He also in

quired whether the amount of bill holdings was compatible with the total

of outstanding short-term Government securities.

Mr. Stone replied that he was not aware of any formal study as

to what would constitute an ideal maturity structure for the System

portfolio.

However, holdings of bills were about $3 billion, with the

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end-of-year seasonal rise still ahead of us.

Earlier this year, System

holdings of securities maturing within one year amounted, as he recalled,

to between $16 and $18 billion, which meant that it would have been

possible to absorb virtually all of the reserves in the banking system

without selling maturities beyond one year.

In his opinion the Account

was amply liquid.

Mr. Mills then commented that with a growing Federal debt and a.

growing effort to introduce liquidity throughout the economy, he had

been wondering whether holdings of $3 billion in bills were sufficient

to provide a fulcrum for carrying out System policy, particularly where

there was so little inclination, or ability, to divest long-term securi

ties that the System had acquired.

Mr. Stone reiterated that in his opinion short-term holdings of

the System Account, particularly holdings of bills, were quite ample.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, the open

market transactions in Government securi

ties during the period August 21 through

September 10, 1962, were approved, rati

fied,and confirmed.

Mr.

Brill presented the following statement with respect to

economic developments:

It would appear that optimism about economic prospects

engendered by the July statistics may have to be tempered as

the August results come in.

It is too early in the month for

a complete picture, but the fragments in to date don't suggest

any follow-through on the relatively strong performance in July.

In fact, in some areas there were setbacks, with the unemployment

rate up sharply and employment down; in others, such as indus

trial production, retail sales, and private construction expendi

tures, there was a levelling off or some downdrift.

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The unemployment figures have by now been widely reported,

and to a large extent discounted in terms of special factors

operating during the period when the survey was taken--concen

tration of model change-overs in the auto industry, inclusion of

prospective teachers awaiting opening of the school term, and so

forth. Suspect as the increase in the unemployment rate may be,

however, it needs to be borne in mind that more comprehensive

data on employment--the employer reports of the Bureau of Labor

Statistics--showed some decline last month, and the average work

week in manufacturing drifted off again for the fourth consecu

tive month. All in all, perhaps the safest conclusion to draw

from recent labor force and utilization data is that the improve

ment earlier in the summer and the more recent retrogression both

represented rather random jiggles around a plateau.

Similarly, advance reports on August retail sales from the

Department of Commerce show a reaction from the July spurt, con

firming earlier indications of our own department store statistics

and the weekly data on auto sales. July apparently was even

better than the early reports, but in August total sales showed

a small decline. Private construction expenditures were also

down last month.

The up and down movements in the economy this summer have

been characteristic of the uneven pace of the whole recovery

expansion period. Months of rapid advance have alternated with

periods of slow rise, or even of slack, but on net, growth since the

beginning of the year has been modest, particularly in contrast to

the 10 per cent annual rate of rise during 1961.

Previous postwar cycles have also shown a marked slowing in

expansion after four or five quarters of vigorous growth. Thus,

both industrial production and real GNP showed only a slight fur

ther rise in the long interval from late 1955 to the summer of

1957. In the 1958-60 recovery, which was both brief and distorted

by the steel strike, output was little higher at the upper turning

point in the spring of 1960 than it had been the year before.

Looking back to even earlier cycles, shortages of manpower and

of industrial capacity may have been important elements in the slow

downs in expansion after initial run-ups. In recent years, however,

when resources have been ample even at cyclical peaks, it appears

to have been the demand--rather than the supply--side which has

limited expansion in output and declines in unemployment. Currently,

demand forces again appear to be the main constraints on output.

With substantial unused capacity, it is not surprising that business

plant and equipment outlays are not scheduled to increase much fur

ther this year. It is too early, of course, to expect that the

recent liberalization of depreciation rules would produce signifi

cantly higher spending plans, and it is perhaps reassuring that

businessmen, by and large, are not trimming sights as a result of

stock market developments or sluggishness in final demand. Never

theless, the latest survey of businessmen's plans indicates that

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this key area of economic demand will be providing little further

lift to the economy over the balance of the year.

Inventory policies also continue cautious, reflecting the

ample supply and capacity situation. The latest survey of manu

facturers' inventory anticipations suggests a continuation for

some time of only a moderate rate of restocking.

Surveys of consumer buying plans do not hold out the prospect

of substantial lift from this sector either.

Housing starts-

and residential construction activity in general--are already down

from their spring highs. While auto sales have generally been at

advanced levels, the most optimistic of industry forecasts for

1963 is no higher than prospective sales of the 1962 models.

In summary, "sluggish" remains the most apt description of

the economy's recent and prospective performance. Monetary ease

alone may not be a sufficient condition to move the economy from

its apathy, but it is a necessary support to any other stimulative

force. Considering the slack in resource utilization, the sta

bilityof prices in markets for industrial goods and equities,

and the general absence of symptoms of inflationary expectations,

it would appear appropriate to provide a financial climate in which

the banking system is able--indeed anxious--to accommodate the

financing and liquidity needs of business and consumers.

Mr. Koch presented the following statement on credit developments:

Since this is the first opportunity I have had to talk to

this Committee for some time, I shall look at financial develop

ments over a somewhat longer time span than just the three-week

interval since your last meeting.

First, looking at bank credit, this is an area where one who

feels a stimulative monetary policy is appropriate can currently

get some encouragement, at first glance at least. Seasonally ad

justed total loans and investments at all commercial banks increased

about $2-3/4 billion in August, though after a large decline in

July. The seasonally adjusted annual rate of rise in bank credit

thus far this year has been 7-1/2 per cent.

Moreover, in August there was considerable strength in business

and real estate loans, dynamic areas of bank lending that are

usually associated more directly with spending and investing than

some other areas. In business loans, the rise was in heavy industries,

like metal producing and fabricating lines, and public utilities,

and not only in the soft goods and seasonal lines.

Business loan growth in the last two weeks, however, has been

much less vigorous, and it is still too early to say whether the

August strength was a flash in the pan or an early indicator of the

fall trend. Capital market financing, in contrast to bank financing,

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has been weak all summer, and the September calendar of

prospective new issues is particularly light. There is

also the question as to what proportion of the bank credit

growth thus far this year has represented the investment

of savings rather than money creation, and it is this

question to which I should like to turn.

Looking at the liquidity creation function of monetary

policy, a function, it seems to me, that must be given as much

weight as the credit availability function, the news isn't so

good. As a matter of fact, the most current news is quite

disturbing. The narrowly defined money supply may have de

creased about $800 million in the last half of August.

Currently, it is about 1 per cent below the level at the end

of last year.

Also disconcerting in recent weeks, in view of the sluggish

demand deposit performance, has been a marked slowdown in the

rise of time and savings deposits of commercial banks. In the

first half of the year, these deposits had risen at a season

ally adjusted annual rate of about 20 per cent, but recently

In the 18

the rate of rise has fallen to about 10 per cent.

months prior to the revision of Regulation Q, these deposits

had risen at an annual rate of about 14 per cent.

But how could bank credit growth have been quite satis

factory and private deposit growth so disappointing in August?

The answer lies mainly in the continued very large level of

Treasury balances. These balances have been running much

higher than usual all summer. In the last half of August they

averaged over $8 billion, whereas they normally run $2 to $3

billion less.

The question naturally arises as to whether some allowance

should be made for the sharp growth in time and Treasury deposits

since the first of the year in assessing the effectiveness of

our recent money creating job. To state my conclusion before

its support, I believe some allowance should be made in the

case of time deposits but not in the case of Treasury deposits.

My reasoning is as follows:

Consider, first, the excess in the rate of growth in time

deposits thus far this year over the rate prevailing last year

prior to the change in Regulation Q. Making the admittedly

arbitrary, but perhaps as good as any alternative, assumption

that half of this excess came from demand accounts and, there

fore, should still be counted as demand deposits for purposes

of comparability, this year's rate of growth in the money

supply would be increased from about minus 1 to about plus 1

per cent.

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I base my view that no allowance should be made for

the continuing high level of Treasury deposits in assessing

the adequacy of the money supply on two observations. In

the first place, the amount of Government spending is ob

viously not materially affected by the size of its cash

holdings, and secondly, the Government presumably had to

borrow more and hence drain funds from the market to the

extent that it has accumulated any temporarily excess

deposits. We may get some flow back from Treasury to

private deposits in October, in which case it seems to me we

should be careful not to absorb too aggressively the reserves

released by any decline in Treasury balances that may occur.

Thus, I conclude that the effective money supply, using

as comparable concepts as possible at the beginning and end

of the period, could not have gone up more than at about a

1 per cent seasonally adjusted annual rate thus far this year.

Now this rate is somewhat more reassuring than a small negative

rate, but it is still considerably less than the 5 per cent

annual rate of increase in GNP that has occurred over the same

period.

I can be much briefer when it comes to the reserve in

dicators of recent policy, for they show much the same story

as the money supply figures. We have now dropped to over

$200 million below our required reserve guide; that is, the

guide that allows for a 3 per cent growth in required reserves

behind private demand and time deposits.

Free reserves have

fluctuated around $400 million, although they would have

averaged somewhat lower had it not been for a late downward

revision in the required reserves of country banks that affected

the figures for two of the three weeks since the Committee's

last meeting.

So much for the question of what have been the effects of

recent monetary policy. I think enough facts are now in for

us to begin to consider very seriously whether recent monetary

policy may not actually have been something of a damper rather

than a stimulus to economic expansion. Treasury financing

activities in progress and in prospect may preclude our doing

much about it in the immediate future even if we wanted to, but

when the opportunity arises, I feel a somewhat easier monetary

policy would be highly desirable. I say this even though my

own view is that the more basic need for stimulation lies in

the area of longer run fiscal policy rather than shorter run

monetary policy.

The two main objections usually given to increasing monetary

ease even slightly are the adverse balance of payments position

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and the possible impetus it might give to speculative activities

that may be developing in the economy, for example, in the real

estate area. I cannot add to the intelligence on the interna

tional financial situation except to express my own judgment

that the basic balance is improving, albeit not very fast. But

I also feel that a more satisfactory rate of economic growth is

essential to the achievement of a solid and sustainable inter

national balance. As to speculative activities in particular

sectors of the economy, they do not appear to me to be wide

spread.

In any event some loosening of lender standards

probably has to be expected to accompany monetary ease,

particularly prolonged ease. Unless we are willing to see the

whole economy adversely affected, or to adopt selective con

trols, we must expect to see--but guard against as best we cansome excesses in lending on marginal types of economic activity.

Here too, appropriate tax reform may be a more appropriate

response than less credit ease.

Mr. Furth presented the following statement with respect to the

balance of payments and related matters:

The international economic scene has not changed since

mid-August. In August the deficit in our balance of payments

still was probably about $400 million, half of it due to the

continuing reflux of funds to Canada. Preliminary figures for

the last week of August and the first week of September suggest

substantial improvement, but it is too early to judge whether

these figures can be taken as indicating a new trend. In any

case, the position of the dollar in major exchange and gold

markets is on the whole much better than the size of our deficit

would suggest.

The most disappointing aspect of our July deficit was the

fact that it apparently was due to a deterioration in our basic

accounts, including a drop in our exports and in our trade

surplus of about $150 million.

In major exchange markets, the dollar remains weak against

It

the Canadian dollar, the French franc, and the Italian lira.

remains close to par against the pound sterling and the German

mark, and below par but above the bottom against the other

major European currencies. These relations conform to the pay

ments position of the countries involved. Canada, France, and

Italy continue to gain reserves, but other major countries did

not register substantial gains, and in some cases had net losses.

Even for Canada and Italy, the gains might prove temporary: for

Canada, because the reversal of the outflow of funds that had

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occurred during the last quarter of 1961 and the first half

of 1962 is believe to be nearing completion; for Italy, be

cause of the approaching end of the tourist season. In fact,

the last days of the past week have, for the first time in

many months, seen no further rise in Italian dollar holdings.

This would leave France, which in August for the sixth month

in a row increased its reserves by an adjusted sum in excess

of $120 million, as the main chronic surplus country.

In the London gold market, the price continued to move

narrowly around $35.12, but apparently without net sales by

the Bank of England. The net drain on the U.S. gold stock

resulting from the latest flurry in the market, which began

three months ago, has been only $64 million. Of this sum, $14

million was transferred to the Bank of England last week. The

only further gold transaction in prospect is a sale of $30

million to Spain, scheduled for some time this month.

This

will bring the amount of gold sold to Spain since the beginning

of 1960 to $425 million--all of it presumably paid for out of

the financial aid we are giving to that country for defense and

development purposes.

In response to a question, Mr. Furth said there did not seem to

be any substantial outflow of short-term capital at present.

In July

the reflux of funds to Canada seemed to reflect primarily a reversal of

the so-called leads and lags in commercial payments rather than a flow

of short-term capital.

In the past few days the covered interest rate

differential between Canada and the United States had exceeded 1/2 per

cent, the point where significant flows of funds usually start.

Thus

far, however, there seemed to have been no significant covered flows

to Canada, apparently because of the imminence of the September 15

tax date.

Yesterday the covered rate differential was .8 per cent,

and the uncovered differential was much greater, running to 2 per cent

or more.

One reason for the lack of a flow of funds might be the nar

rowness of the Canadian bill market.

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-12Mr. Hayes noted that there was in prospect a sizable flow

of long-term funds to Canada because of the expectation of large

private financing.

This might be in the order of $250 million in

the next three months.

Mr. Stone reported having been informed yesterday that $125

million of that amount would move on the fifteenth of October.

Mr. Hayes then presented the following statement of his views

on the economic outlook and monetary policy:

The domestic business situation continues its modest

upward progress, although this trend is of uncertain strength.

In July industrial production, nonfarm employment, personal

income, retail sales, and new orders for durable goods all

increased; and in our view early signs suggest no basic change

in the over-all economic picture in August. To some extent,

of course, the improvements merely reflect the removal or

lessened influence of special factors that had depressed the

June figures. Private spending plans--those of consumers and

of businessmen--have been maintained despite the steep stock

market decline in May and June and the tendency that one might

have expected to postpone spending and investment decisions

because of the uncertainties in the business and fiscal outlook.

There is little change in the price picture. While the

consumer price index continues its upward drift, there has been

practically no change in industrial wholesale prices or sensi

tive raw material prices.

We still have a good distance to go in our endeavor to make

fuller use of men and machines. The August figures for employ

ment, unemployment, and hours worked are quite discouraging.

The liquidity of the economy remains adequate. While the

private money supply (seasonally adjusted) has shown little

change for several months, in the months to come disbursements

from the unusually high Treasury balances are likely to add to

the supply.

Unfortunately, we still face a serious balance of payments

problem. About halfrof the very large July-August deficit is

due to the sharp improvement in the Canadian payments position

and the resultant return flow of funds to Canada. While for

this reason the two-month deficit is not so alarming as it

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would otherwise be, it is still much too large. On the other

hand, it is encouraging to note that the dollar has been

fairly strong in European exchange markets, except against the

French franc and the Italian lira.

Quite aside from short-term capital outflows, long-term

lending by domestic financial institutions to foreigners, direct

investments abroad, and the purchase of foreign securities on

original issue have been high. For some of the New York banks,

over 70 per cent of their total foreign loan portfolio is in

term loans. Relatively low interest rates here, together with

the greater availability of funds in this country, continue to

place more dollars in the hands of foreign holders.

Federal Reserve policy continues to be one of relative

ease. In my opinion greater ease would not provide a signif

icant stimulus to our domestic economy. While the international

situation might point to the desirability of a less easy policy-

and of course particular attention will be focused on this aspect

at next week's gathering of finance ministers and central bankers

from all over the world--such a move is probably precluded, for

the time being, both by the uncertainties of the domestic economy

and by the current Treasury advance refunding program, i.e., by

the need for maintaining an "even keel."

Thus we should, I

believe, maintain the status quo.

Specifically, it would seem appropriate that both the Fed

eral funds rate and the three-month bill rate continue in the

2-3/4-3 per cent range, with both rates preferably in the upper

part of the range much of the time. With maintenance of the

status quo as a goal, I see no reason for any change in the

directive, nor for considering any change in the discount rate

at this time.

Mr. Ellis reported that New England economic indicators seemed

to reflect no decisive trend.

In July there was some seasonal decline

in factory employment partially offset by growth in nonmanufacturing

employment, and there had been a slight shift in the labor force tending

to greater unemployment, this being in line with the experience nationally.

In New England, counter to the national trend, there was a gain in

average factory hours in July to a level higher than in any previous

month, except one, since 1956.

Should this trend continue, it might

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portend gains in manufacturing employment rather than further gains

in weekly hours.

If the new orders index was indicative, there might

be some broad upturn in production in the next few months because the

index showed some strength.

a 1/2 point decline in July.

However, the manufacturing index registered

The Reserve Bank's recent follow-up

survey of capital expenditure plans indicated a slight upward revision

of 1962 outlays.

Consumer spending in August showed a slightly lesser

rate of gain than previously, and the use of consumer credit had slowed

down.

The consumer credit index in August was below the year-ago level,

with no change from July to August.

First District banks were experiencing a strong and steady busi

ness loan demand.

Weekly reporting banks had had a strong seasonal

runoff in demand deposits; this, coupled with the strength of loan

demand, had caused them to resort heavily to the Federal funds market

during the past several weeks.

Unless loan demand should slacken or

deposits rise, loan-deposit ratios were going to reach a postwar peak.

Turning to policy, Mr. Ellis saw no reason for not maintaining

an even keel during the period of the Treasury advance refunding.

Look

ing further ahead, the Committee continued to face a choice of less ease,

no change, or greater ease.

a case for less ease.

It seemed difficult to him to substantiate

The warning signals were flying for a business

downturn next year; industrial prices were stable and employment was

too low.

Only in the event of an international monetary crisis would

it seem desirable to lessen the prevailing degree of ease.

On the hand,

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-15

he found it hard to accept the view that monetary policy had exerted a

dampening effect on economic growth in recent months, and difficult to

build a good case for a materially greater degree of ease.

While the

arguments made today and at the July 21 meeting were persuasive to a

degree, he could not convince himself that the availability of more

money would stimulate spending.

As he had just reported, while money

was available to consumers in New England, they did not choose to go

further in debt in August.

Business firms reported no difficulty in

securing credit for their operations, and Mr. Stone reported a light

capital financing calendar.

In these circumstances, it was hard to

believe that sufficient credit was not available in the economy, and

a position of no change in System policy was attractive to him.

Such

a policy would, of course, involve considerable activity in meeting

seasonal needs for reserves, and it would be important not to fall

into inadvertent tightness in the next few months.

In fact, he felt

that the System should supply reserves somewhat in advance of seasonal

needs, although with an eye to the impact on short-term rates.

As to free reserves, Mr. Ellis said he would favor a target

of around $400 million, with reserves supplied on a basis that would

accommodate a growth trend at an annual rate of about 3 per cent.

The short-term bill rate should be around 2.80 per cent.

He saw no

reason for a change in the discount rate or the policy directive at

this time.

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-16

Mr. Irons reported that in the past month there had been few

significant economic or financial changes in the Eleventh District.

Most sectors showed rather insignificant pluses or minuses, revolving

around very high or near-record levels.

Banking figures showed small

decreases, although a generally satisfactory demand for loans was

reported by city banks.

be negligible.

Borrowing from the Reserve Bank continued to

Average sales of Federal funds had increased, thus

reducing the margin between purchases and sales.

On the whole, the

District's banking position seemed to have moved toward a little more

ease in the past month.

Mr. Irons said it was his feeling, in the light of developments

in the domestic economy as well as the international situation, that

present policy should be continued.

He would favor open market opera

tions designed to aim for free reserves in the area of $350-$400 million,

a Federal funds rate in the 2-3/4 - 3 per cent range, and a bill rate

around 2-7/8 per cent, give or take a few points.

In summary, his

recommendation would be substantially the same as that of Mr. Ellis.

He saw no reason to change the discount rate or the directive.

Mr. Irons also said he was not inclined to believe that there

was inadequate liquidity or that bank reserves were insufficient to

meet any requirements that might reasonably be expected.

He would

supply reserves for seasonal purposes and perhaps even tend a little

toward the side of ease if doubts should arise.

Essentially, however,

he would favor maintenance of the status quo over the next three weeks.

9/11/62

-17

Mr. Swan said the situation in the Twelfth District reflected

little change from his description at the August 21 meeting. Data for

August were not yet available to any extent, and he would simply make

one or two observations that seemed characteristic of District trends.

Weekly figures on department store sales through August did not seem

to show any particular increase from June and July.

One major labor

market area (Spokane) had been reclassified from substantial to moderate

unemployment, leaving only three major areas in the District in the cate

gory of substantial unemployment.

All of these were in California.

San

Diego was by far the most important, and because of the situation in

aircraft it was the only one showing no improvement.

In fact, the

situation in that area had worsened over the past year.

Even with smaller acreage the prospect was for near-record crops

in the District, close to the 1959 output.

In the canning industry there

was a large carryover as well as a substantial pack this year.

Thus, it

appeared that canned fruits and vegetables would be in near-record supply,

with the expectation that some price weakening might develop.

Mr. Swan also reported that during the three weeks ended August 29

there had been a considerable increase in loans of weekly reporting member

banks, with commercial and industrial loans sharing in the rise to a con

siderably greater extent than earlier. Real estate loans also increased.

The major banks of the District had been substantial net sellers of

9/11/62

-18

Federal funds in

the past three weeks,

and borrowings from the Reserve

Bank had been small.

Turning to the national economic picture, Mr. Swan commented

that developments were still far from decisive.

The August increase

in commercial and industrial loans had not lasted long enough to be

sure whether it was more than a seasonal rise.

In the circumstances,

his views continued to be much the same as he had expressed previously.

In terms of the domestic situation a modest easing of policy would seem

justified, and he felt that this could be done without violence to the

international position of the dollar or even the current Treasury refund

ing.

Therefore, he would recommend a target for free reserves of $400

million or above, a bill rate of 2.80 per cent or slightly less, and a

Federal funds rate of 2-3/4 per cent with more regularity than recently.

It seemed to him, Mr. Swan said, that the System should be care

ful to meet fully the seasonal needs for reserves, not only in the period

immediately ahead but over the next several months.

The System should

not get itself into a position where market forces representing no more

than seasonal factors were allowed to tighten the situation.

He would

recommend no change in the discount rate and no change in the policy

directive.

Mr.

Deming said there was nothing particularly new to report

for the Ninth District; the same trends that had been noted earlier

continued.

As he had mentioned at the August.21 meeting, figures on

9/11/62

-19

bank loans for early August indicated a strong expansion for that month

after some softening of demand in July.

estimate.

The final figures bore out this

City bank loan growth in August was larger than in any other

August since 1955, with business loan growth particularly strong.

At

country banks, loans declined somewhat less than last year, but more

than in other recent years.

With respect to the national economy, Mr. Deming agreed that

the proper adjective to use was "sluggish," but he noted that it still

modified the noun "advance."

He would like a different adjective, but

he saw nothing in the picture at the moment to suggest that there would

be a change.

Neither did he see, however, much likelihood that the

noun would change in the foreseeable future.

Mr. Deming expressed interest in Mr. Koch's analysis.

While he

was not sure that he would weight the time and Government deposit figures

just as Mr. Koch did, the latter's analytical approach did tend to bring

into sharper focus the question of central bank action in relation to

monetary liquidity.

More work should be done on this question.

At the same time, Mr. Deming continued to believe that the general

level of liquidity and of bank liquidity was adequate, and that the cur

rent rate of bank credit expansion was satisfactory.

Total deposit

growth remained impressive and recent interest rate behavior gave no

indication of any particular tightness; in fact, it might be taken to

imply a bit more ease in the markets than was true three or four weeks

ago.

9/11/62

-20

Given the current character of the national economy, Mr. Deming

saw no reason to make monetary policy less easy.

He would not want to

have System actions inhibit in any way a further growth in bank credit,

and particularly in bank loans, which now seemed to be running a bit

better.

Thus, he would agree that seasonal demands for reserves should

be met generously.

Perhaps the System should slightly anticipate those

demands and furnish reserves a bit before they were seasonally needed.

The foregoing, Mr. Deming brought out, was a suggestion for a

policy posture for a somewhat longer period than the next three weeks.

For the period immediately ahead, he believed "status quo" was the

proper policy.

But, as pointed out by Mr. Stone, status quo should be

measured more by tone and color, by short rates and Federal funds and

borrowings, than by free reserve levels during this next three weeks.

Specifically, he would try to keep about the same tone and color, and

he would not be much concerned if free reserves ran significantly

higher than the $350-$400 million level that had been prevailing.

Given this prescription, he saw no reason to change the directive or

the discount rate.

Mr. Scanlon reported that business sentiment in the Seventh

District seemed a little brighter, not so much because of any pro

nounced improvement in the underlying trend but apparently because

there was little evidence of the general deterioration anticipated

in some quarters in July and early August.

9/11/62

-21

However, the area would be seriously affected by the shutdown

of the Chicago North Western Railroad should the strike continue much

longer.

Most of the important manufacturing centers in Wisconsin are

heavily dependent upon this line, as are some localities in Iowa and

Illinois.

Secondary layoffs had already been announced by manufactur

ing and mining firms and grain handlers, and he had been told that

other cutbacks could be expected to follow shortly.

October would be

a crucial month for agricultural areas dependent upon the North Western

because of the large quantities of grain and livestock customarily

moved at that time, so the timing of this strike was significant.

Aside from the effects of this tie-up, employment in the District

appeared to be following seasonal patterns.

All automobile manufacturers were now producing 1963 models,

Mr. Scanlon noted. Dealers were liquidating 1962 models rapidly, and

it was estimated that inventories at the end of September would total

740,000, which would include only 250,000 1962 models.

As a result,

there was a conspicuous absence of vigorous sales promotions to make

way for new models.

This was the time of year for Detroit auto ana

lysts to forecast next year's sales and, as today's Wall Street Journal

indicated, estimates ran from 6.2 million to 7 million.

Home building continued to be slow in most Seventh District areas,

well behind the national pace, and business loan demand at District banks

in recent months had not kept pace with the rest of the nation.

9/11/62

-22

In view of the continuing moderate pace of business activity,

the lack of strong credit demand, and the Treasury financing, Mr. Scanlon

recommended no change in monetary policy at the present time.

Like Mr.

Deming, he would not worry about the free reserve figure in accomplish

ing this end.

He would not change the discount rate or the directive.

Mr. Clay noted that latest information on the domestic economy

indicated that the basic situation remained essentially unchanged.

The

two most important pieces of recent evidence were the reports on unem

ployment and on business capital outlays, both of which underscored the

problem of inadequate resource utilization.

With the unemployment ratio

rising and the projected pattern of business capital spending showing no

improvement, the need for a higher level of economic activity continued

to be quite clear.

So far as domestic economic considerations were concerned, Mr.

Clay said, monetary policy ought to be more expansive, with a moderate

downward movement of interest rates all along the line.

Because of

international balance of payments considerations, however, the Treasury

bill rate probably should be maintained within the range of the past

three weeks.

Whatever Treasury bill rate level might be determined to

be necessary for international purposes, open market operations should

be conducted with a view to producing some further reduction in longer

term interest rates and to providing the reserves necessary for bank

9/11/62

-23

credit expansion on a seasonally adjusted basis.

No change was recommended

in the Reserve Bank discount rate.

Mr. Wayne reported that, as in the past several months, Fifth Dis

trict business activity apparently continued to move along a plateau.

Variations in recent published statistics had been typically small and

inconclusive, and the Reserve Bank's grass roots contacts suggested that

these conditions continued at least through August.

Opinions and expec

tations regarding general business conditions continued to improve, but

manufacturers on the survey panel on balance reported a softening in

their own businesses.

Reports from the textile industry, which employs

over one-fourth of all District factory workers, indicated declining

orders and shipments, larger inventories, reduced employment, shorter

hours, and lower prices.

These reports were submitted prior to the

Tariff Commission's recent rejection of a cotton price-equalization fee

on imports, an action which was likely to have an adverse effect on

expectations.

Returns from durables producers were less consistent but

on balance also showed declines.

Only nondurables manufacturers other

than textiles continued to report increased orders, shipments, employment,

and hours.

Tobacco sales, which usually account for about one-third of

the value of farm marketings, had to date been well below those of 1961.

While prices and volume were improving, tobacco marketings would probably

fall 5-10 per cent short of last year's total.

9/11/62

-24

Mr. Wayne found little reason to expect any strong upward thrust

in the national economy in the weeks ahead.

The fragmentary August evi

dence suggested that the encouraging pace of improvement in July may not

have extended into August.

It was true that automobile prospects con

tinued favorable, and that bank loans to business were showing strength.

But these developments should be considered in the light of reductions

in private construction outlays and heavy construction awards and a

probable drop in retail sales.

While nonagricultural employment was

at an all-time high, the sharp mid-August increase in the unemployment

rate was bound to be a source of concern, although much of it could be

satisfactorily rationalized.

In establishing policy, Mr. Wayne noted, the Committee continued

to be confronted with the dual problem of a less than satisfactory rate

of domestic expansion and persisting external imbalance.

Over the past

several months it had sought to maintain a degree of ease at once condu

cive to a more rapid rate of advance at home and yet in line with liquidity

conditions in foreign money and capital markets.

The fact that neither

the domestic nor the external problem had disappeared did not mean that

the posture of monetary policy had been inappropriate.

It seemed to him

probable that present in both problems were structural elements not

susceptible to solution through purely monetary and credit action and

that the Committee had pursued the best available course while efforts

were being made to devise more basic remedies.

In the present circumstances

9/11/62

-25

vigorous policy measures aimed at either problem could result in serious

aggravation of the other.

the present posture.

doing so.

Accordingly, he would favor maintaining about

The new advance refunding was another argument for

Mr. Stone's views on market prospects for the next several

weeks were persuasive and suggested that some bulge in free reserves

might be appropriate.

He would like, Mr. Wayne said, to see free

reserves in the vicinity of $400 million and bill rates in the 2.80

2.90 per cent range.

left unchanged.

He also believed that the discount rate should be

It might be wise, however, to drop the word "further"

(preceding "monetary expansion") from the opening clause of the direc

tive, since the money supply had actually been declining recently.

Mr. Mills said that, assuming the absence of any event requiring

emergency policy action, he would favor experimenting with a monetary

and credit policy that implied relative ease rather than relative tight

ness and focused on the money supply.

To outline his views more

specifically, he then presented the following statement:

In the interval before its next meeting, the Open Market

Committee would be well advised to aim its objectives at raising

the level of free reserves to a range of $450 million or above.

A higher level of free reserves would serve the purpose both of

facilitating the completion of the Treasury's advance refunding

operations and of nurturing an increase in the faltering money

supply, which latter is a matter of growing importance. While

the increase in the Treasury's balances in Tax and Loan Accounts at

its depositary banks has been a factor in keeping down the growth

in the money supply as conventionally defined, it may also have

had the effect of exerting a generally deflationary economic

influence, in that the funds drawn out of private sectors of

9/11/62

-26-

the economy by Treasury financing, in not having flowed back

into private uses, have deprived the economy of whatever stim

ulous it would have received if these funds had remained for

spending in private hands.

Under these circumstances, the

employment by commercial banks of additional reserves placed

at their disposal by Federal Reserve System policy actions

should help to foster an expansion of credit that, in turn,

would support the money supply.

Inasmuch as there continues to be a lack of aggressive

demand for commercial, industrial, and securities types of

commercial bank loans, any marked expansion of credit in

that area is unlikely, whereas time and savings deposit

accretions should be sufficient to finance further growth

of real estate mortgage and consumer instalment loans.

Such being the case and as statistical measures indicate

ample unused credit availability, a Treasury financing

operation offers the most desirable expedient through which

the money supply can be stimulated in the near future. It

is, therefore, to be hoped that the Treasury will extend Tax

and Loan Account privileges to commercial banks participating

in its approaching offerings of tax anticipation bills and

that adequate reserves will be supplied by Federal Reserve

System actions to carry this financing. In my opinion, there

is an overriding necessity for the Open Market Committee to

focus its attention on actions backstopping the money supply

so as to forestall any possibility of an accelerating downward

trend in its volume that could lead eventually to liquidating

pressure on commercial bank loans and investments and to an

undermining of the values on which they are based.

Also, in my opinion, attainment of the policy objectives

proposed could better be achieved by a reversion to a "bills

only" policy for supplying and withdrawing reserves which

would allow a free market to set a pattern of interest rates

consistent with both the domestic and foreign financial con

siderations that have been the subject of the Open Market

Committee's discussions for a long while. Moreover, I

believe that an interest rate structure developed out of

free market movements and unimpeded by artificial inter

ference, in being acutely sensitive to Federal Reserve

System policy actions, offers the best means by which any

desired changes in policy can be brought to bear most

promptly and effectively as they are needed.

In conclusion, Mr. Mills commented that his thinking had a great

deal in common with the reasoning expressed by Mr. Koch.

He also said

9/11/62

-27-

that he did not feel the directive needed changing or that there should be

any change in the discount rate.

Mr. Robertson presented the following statement:

I favor a policy of greater monetary ease--introduced as soon

as the pending Treasury financing is past--as the best means avail

able to us of promoting lasting progress toward the two objectives

of domestic prosperity and a viable balance of payments position.

I have not been persuaded of the need for tighter credit policy

at home to reverse short-run capital outflows, and indeed I have

been somewhat critical of the lack of evidence to support such a

policy. On the other hand, it is most important that we all keep

trying to explain our persuasions, as clearly and concretely as

we know how, in order that the Committee collevtively can make

its decisions in the light of all pertinent information.

Accordingly, let me try to set forth, as plainly as I can,

where and how I think an easier monetary policy can contribute

to the national interest. In the first place, I think there is

room for more aggressive loan competition among banks. More

stimulative effects would result if businesses could be encouraged

as much as possible to choose bank rather than nonbank alternatives

for financing assistance, particularly at this time when some signs

of increased business demand for short-term credit are appearing.

While lenders may speak of funds being available, the fact is they

have not been sufficiently available to lower bank lending rates.

Rates on consumer loans appear little changed, mortgage rates are

only slightly lower, and the prime rate for business loans has

stuck at 4-1/2 per cent for two years, following a one-half point

drop from its cyclical peak in 1959 and 1960. Protests might be

made that interest rates make little difference in the lending

field, but I would remind you of the galvanized changes that took

place in another area where interest rates were not supposed to

have much effect--namely, the savings field--following the changes

in bank rates paid on time deposits that were introduced earlier

in this year. Interest rates do affect a fraction of decisions;

they do condition people's choices among financial alternatives;

and I believe our structure of lending rates ought to be on the

side of encouraging expansion at this stage.

Proponents of added monetary ease can draw assurance from

the relative absence of credit abuses prevalent today. Both

business and consumer credit seem to be extended on a fairly

judicious basis; we hear little about competition in easing

terms, and reported delinquencies and loan losses are low.

9/11/62

-28-

Even securities credit, which certainly has been tested more

strenuously than other types of credit in recent months, has

shown no sign of general weakness.

The one area of credit

about which some reservations may be justified is real estate

credit. But here two points should be kept in mind. First,

in the particular geographical and functional areas in which

real estate markets show signs of overextension, more factors

than credit ease have contributed to the condition, and it is

likely to require a good deal more than credit restraint to

remedy the situation. Indeed, to judge from the experience

of other markets, the real estate adjustment, if and when it

comes, is likely to proceed more constructively in an atmos

phere of reasonable credit availability rather than the reverse.

Second, we must remember that we are operating with general

monetary controls, and this compels us to judge their appro

priateness in terms of general credit conditions, not those

of the specific market most exposed. To change policy, or

to refrain from changing it, on the grounds of developments

in a particular market is to try to use our general tools as

instruments of selective credit control. We must either trust

the operations of the private financial system to arrive at

sensible distribution of credit (as we did, by and large

successfully, in the case of the sharp expansion of consumer

credit in the mid-1950's) or retreat to reliance upon some

form of selective control, which I know is an administrative

anathema to all of us.

There was a time, earlier this year and last, when a policy

of less credit availability was advocated in order to reduce the

"leakage" of credit ease abroad in terms of bank loans to foreign

ers and foreign capital issues in this country. Recent months

have seen a sharp falling off of such flows, for reasons which

I believe we all could agree are largely unrelated to conditions

in United States credit markets. Any inhibitions to greater

monetary ease because of such flows should now be correspondingly

reduced.

But the impact of monetary policy does not end at the loaning

officer's desk. The unique aspect of bank credit is that it in

volves deposit creation as well. The economy needs both bank loans

and bank deposits, and it is the responsibility of monetary policy

to see that there is enough of both. On this latter score the

record is most discouraging. The latest figures show the money

supply dropping almost a billion dollars in the last half of

August, to a level 1 per cent below the turn of the year despite

the intervening advance in business activity. Notwithstanding

the fact that the current directive to the Account Manager

explicitly calls for "providing moderate reserve expansion in

9/11/62

-29-

the banking system," we have in the past three months seen the

total of required reserves behind private deposits slide over

$200 million below the moderate seasonal-plus-3 per cent-growth

pattern posited in the staff memorandum. We must not become

complacent about a level of free reserves which is being main

tained in good part by unseasonal shrinkages in required

reserves. A similar misinterpretation of free reserve statistics

threatened us with some serious difficulties in the winter and

spring of 1960; I am sure we all want to avoid that happening

again.

To be sure, the slackness in the privately owned money

supply has been associated with a higher than usual total of

Government deposits, but that level of Government deposits

has averaged in the neighborhood of $7 billion since May and

is likely to continue high for another month; this has been

no temporary and insignificant shift of deposits away from

private hands.

Where once one could take some comfort from the belief

that a good deal of monetary growth was being concealed in

the rapid upsurge in time deposits earlier this year, the

fact must now be faced that time account growth has slackened

to less than its 1961 pace.

I am sure no one in this room wishes to be a slavish

advocate of any particular mechanistic formula for monetary

expansion, but I think we must be equally wary of falling

into the trap of assuming that whatever rate of change in

money supply accompanies our policies is prima facie suffi

cient for the economy. Other forms of privately owned liquid

assets are continuing to mount, but the sum total of privately

owned liquidity, however, defined, does not appear to be ex

panding at a pace commensurate with prosperous levels of

economic activity. Furthermore, the increased importance of

short-term Treasury securities in total financial saving, and

the increased importance of net financial saving in total

savings flows, means that the funds of consumers and businesses

are being funnelled into something less than the most stimula

tive channels. The prevailing interest rate structure is

helping to influence private savings, spending, and investment

decisions in this direction. In brief, that rate structure,

which our current monetary policy is helping to sustain, is

aggravating a significant restraint upon domestic expansion,

namely, the present extraordinary penchant of businesses and

consumers for financial claims rather than goods.

Could we do something about it? It seems to me we could.

If we would provide additional reserves to the banking system

(say, maintain $500 million free reserves, to be overprecise

9/11/62

-30

in order to be concrete), banks without doubt would employ the

added funds.

If they found limits in the amount of loan demand

which they could develop and accommodate within the limits of

prudence, they could again step up their purchase of investment

securities, adding to public liquidity and contributing to lower

interest rates and more buoyant capital markets which might

attract some hesitant long-term borrowers.

All these effects might not, and indeed need not, lead to

more than moderate increases in a fraction of the spending de

cisions being made in our economy. These, after all, are pre

cisely the dimensions in which monetary policy is supposed to

operate at its best. Faith in monetary policy as a useful

countercyclical tool has been built upon its timely marginal

influence. I see no reason for us to lose that faith. By

exercising our powers for greater monetary stimulation now,

when real resources are available to produce and when our

gold stock is still more than sufficient to protect us from

any rumor-spawned speculative raids on the dollar, we can

hope to contribute to a prosperous and more rapidly growing

economy that will command renewed and more deeply rooted

respect for both our economic system and our currency.

With regard to the directive, Mr. Robertson said he could agree

with the wording.

However, the manner in which the directive was being

implemented must mean that his interpretation of the language was

different from that of others.

Therefore, the directive should be changed,

in his opinion, to indicate that the Committee desired greater monetary

ease.

With this in mind, he would drop the part of the final sentence

that called for maintaining a "moderately firm tone in money markets."

Messrs. Young and Coombs joined the meeting at this point.

Mr. Shepardson said that Mr. Wayne had stated his position about

as completely as he could state it himself.

He felt that the Desk should

be prepared to meet seasonal reserve needs, but within the framework of

9/11/62

-31

the present degree of monetary ease and the present tone of the market.

In

view of the current Treasury refunding, it seemed to him that the Committee

would almost automatically want to maintain a position of stability for the

next few weeks.

In summary, he would favor no change in current policy or

in the language of the directive.

Mr. King expressed general agreement with the views stated by

Messrs. Wayne and Shepardson.

He did not believe that a policy of greater

ease would actually solve any current problems.

However, he did not attach

to the bill rate quite the degree of significance that others seemed to

attach to it. Mr. Wayne, as he recalled, had suggested maintaining the

bill rate between 2.80 and 2.90 per cent.

He (Mr. King) would not be

upset if the bill rate slipped a little below the present levels.

Mr. Mitchell said it seemed to him necessary to come back to the

basic question of what could be expected of a private enterprise economy.

If one were satisfied with the current levels of resource utilization, he

should be in favor of continuing the status quo in terms of monetary policy.

For others it seemed to him the questions were whether it was known what

was wrong and whether it was felt that something could be done about the

stiuation.

He was not sure that he knew what was wrong.

healthy in many respects.

The economy was

Inventories were in very good shape and, com

pared with several months ago, the stock market was better adjusted to

the prospects of the economy.

The country was not in an ideal position

as far as the wage-price spiral was concerned, but it was better off in

9/11/62

-32

this respect than it had been for a long time.

Thus, it might appear that

the economy was now in pretty good shape.

Regardless of such an analysis, however, Mr. Mitchell was not fully

prepared to believe that the only way to achieve a better utilization of

resources was through changes in Government spending and taxes.

In any

event, moreover, it would be a matter of six to nine months before any

action in those respects could be anticipated.

There was another factor that had been bothering him for some time,

Mr. Mitchell said.

He felt that the maintenance of the short-term rate was

a road block because it was too profitable for investors to remain liquid.

If an investor was uncertain about the prospects of the economy, he could

afford to stay invested short at the level of current short-term rates.

An effort should be made to cure this situation.

If the System would

release its grip on the short-term rate a little, perhaps debt management

would also release its grip somewhat.

This might provide enough marginal

stimulation and enough incentive to bring about an improved utilization of

resources with a minimum of Governmental interference in the private econ

omy.

The System, he thought, could do a little more in this regard than

it was presently doing.

This was the basis on which he would suggest

letting the short-term rate drop, although not so far as to create a

balance of payments dilemma.

If it were not for that dilemma, he would

advocate a 2 per cent rate, or perhaps an even lower rate.

In the present

9/11/62

-33

circumstances, he would suggest giving the 2-1/2 per cent level a chance

to operate.

Mr. Fulton reported that sentiment among businessmen in the Fourth

District was not quite as gloomy as it had been, perhaps for no other rea

son than that businessmen were becoming inured to the shocks, such as the

stock market decline, that the economy had experienced.

While they expected

no sharp improvement, neither did they seem to expect a sharp and abrupt

downturn.

In the steel industry, production had been rising gently over the

past couple of months, mainly because customers were running out of inven

tory, but there was no substantial upturn in orders.

Thus far the automo

bile industry was not ordering in quantity; one wondered when the companies

would begin to order steel in greater volume for the new-model cars.

Seasonally adjusted unemployment had remained substantially unchanged for

several weeks; despite lay-offs due to auto model changeovers and plant

vacations.

For the District as a whole, building activity turned down

sharply in July, and August reports for Cleveland and Cincinnati showed

a further decline.

The region had made the poorest statistical showing

in construction activity of any area in the nation.

Except for one poor

week, department store sales in August were about comparable to the July

level, and for the year to date they were about 2 per cent ahead of a

year ago. All in all, it might be said that activity in the Fourth

District was sluggish.

9/11/62

-34

Turning to District financial developments, Mr. Fulton said that

the earning assets of reporting banks--both loans and investments--moved

up slightly in August, this having been the first August increase in the

past four years.

Considerable competition for loans was reported.

There

were complaints that lenders from outside the District were offering mort

gages at around 5-1/4 per cent with maturities up to 30 years, and rates

of 5 to 5-1/2 per cent were being offered on instalment loans to encourage

borrowing.

Considerable competition also was reported for term loans.

Thus, it seemed that there was an adequate supply of funds if people

could be induced to borrow.

Mr. Fulton expressed the view that monetary policy had been favor

able to the borrower, and that credit was rather obviously available.

He

felt that a continuation of the present policy pattern was in order rather

than a policy of trying to saturate the banks with money, with the compli

cations that would ensue.

While he did not pretend to know exactly what

was wrong with the economy or the specific cure, the policy that had been

followed seemed to be favorable to the general situation.

He would not

change the discount rate at this time, and he would have no objection to

continuation of the directive in its present form.

Mr. Bopp reported little evidence of vigor in the Third District

economy.

It was true that department store sales were improving and

residential construction awards had moved up recently; but weekly hours

in manufacturing had been dropping since April, the help wanted index had

9/11/62

-35

been dropping since March, and manufacturing employment recently declined

somewhat.

And, of course, the persistent problem of continuing high and

rising unemployment rates in all but a few favored areas was still present.

Loans at District banks had been increasing rapidly, with about

half of the increase in business loans.

Consumer loans, real estate loans,

and loans to sales finance companies and other financial institutions had

also increased significantly.

The increase in loans, together with de

clines in investments and deposits, had produced a decrease in bank

liquidity.

Moreover, bank reserves, particularly at the larger banks,

appeared to be under increasing pressure.

So long as unemployment and prices continued at present levels,

Mr. Bopp felt that System policy should be directed not only toward pro

viding enough reserves to accommodate impending seasonal needs but toward

producing a liberal expansion of money and credit.

ever, he would maintain the status quo.

For the present, how

He would continue the existing

directive and make no change in the discount rate.

Mr. Bryan reported that he could find no developments of real

significance in Sixth District economy, which seemed to be following

about the same pattern as indicated by the national figures.

There seemed to be some debate, Mr. Bryan noted, as to whether

monetary policy could be more stimulative, and as to what the System

might have been expected to do that it had not done.

Part of the

argument centered around the perverse behavior of the conventionally

defined money supply in recent months.

The banking figures had done

9/11/62

-36

precisely what one would have expected them to do in a situation in which

the Federal Reserve supplied reserves.

From November 29, 1961, to June 27,

1962, banks expanded their loans and investments by $10.6 billion, on a

seasonally adjusted basis.

However, since the public had chosen not to

put its funds in demand deposits,

the money supply--as

conventionally

defined--had not behaved in the way that might have been expected.

was always a problem in appraising a situation of that kind.

There

When the gross

national product did not behave according to estimates, there was an incli

nation to blame the economy rather than the estimates.

When the money supply

did not behave as it was thought that it should behave, there was a tendency

to get upset, whereas one ought to question the definition.

Mr. Bryan noted that the volume of total reserves had been kept

mounting fairly well.

The long-run trend line had been exceeded for a

while; and in recent months the figures were fairly close to that line.

Borrowings from the Federal Reserve Banks were low, so there was no

restraint indicated there.

His judgment, Mr. Bryan said, was that the System ought to supply

reserves to meet seasonal needs fully, and to provide a growth factor which,

for want of a better figure, he would put at 3 per cent annual rate.

This,

he thought, could be reconciled with free reserves of $400-$450 million.

However, if temporary tightness should develop in the market because of

factors such as Mr. Stone had mentioned, he would not be upset if free

reserves went above $450 million. This was a time when the tone and feel

9/11/62

-37-

of the market was appropriately a part of the guide that the Account Manager

should use.

As to the discount rate, Mr. Bryan said he would not advocate any

change.

As to the directive, he was not convinced that any change in

language was necessary at this particular time.

He did feel, however, that

a reform in the pattern of the directive was worthy of continued considera

tion.

Mr. Bryan also said that he was not as yet convinced that the economy

was now peaking out and going into a decline.

be the case.

However, that could prove to

If so, the Committee at some point might be confronted with a

"moment of truth," so to speak, with regard to policy.

If it supplied the

reserves necessary for growth in the face of a declining economy, there

were going to be interest rate reductions from the pressure of savings.

Then, if the System tried on account of the international situation to

maintain interest rates, it would in effect be pursuing the economy down

ward and aggravating a deflation.

That would be the moment of truth.

Mr. Francis reported that Eighth District business activity con

tinued to fluctuate in July and August around levels established in the

second quarter of the year.

Employment had increased only slightly since

the beginning of the second quarter and the unemployment rate had leveled

out at just over 5 per cent.

Department store sales in recent months

were near the March levels.

Bank debits had shown a slight increase since April.

Business

loans, after recovering from a first-quarter decline, were unchanged

9/11/62

-38

since June.

An element of strength was found in the continuing advance in

the industrial use of electric power.

Bank deposits were unchanged since

June; they had advanced only slightly since the first quarter.

The con

tinued increase in time deposits during July and August was offset by a

decrease in demand deposits, which had declined in six of the past eight

months.

Cash receipts from farm marketings in the first half of the year

were about 3 per cent above the total for the same period in 1961.

weather had damaged pastures quite severely in some areas.

Dry

Corn, cotton,

and soy beans had been damaged somewhat, but not sufficiently to alter the

over-all prospects greatly.

Mr. Balderston commented that the Committee continued to face a

conflict between domestic and international problems.

At the August 21

meeting he had suggested that the effect of greater liquidity on domestic

activity was uncertain, whereas the impatience of foreign central banks

holding increased amounts of dollars was being made clear increasingly.

Thus, he found himself caught between domestic troubles, about which he

felt somewhat uncertain, and foreign claims being pressed upon this

country, about which he felt certain.

Since the current Treasury refunding implied a continuation of

present policy for the next three weeks, Mr. Balderston said, he would

like to suggest certain limitations that surrounded monetary policy as

a prelude or orientation for the problems that seemed likely to confront

the Committee once the refunding was over.

On the domestic side he saw

9/11/62

-39

two limitations on achieving national goals through monetary policy.

For one thing, of the total flow of credit and equity market instru

ments the part supplied by commercial banks was now running about

one-fourth, whereas in 1959--also the second year after a cyclical

upturn--the percentage was only one-tenth.

Second, monetary policy

seemed unable to improve the profit expectations that were so necessary

to greater investment.

It was able to do little to induce employers

to hire more people at wage rates they considered too high; and this

country did not look as inviting as it once did in the eyes of investors.

Job opportunities were restricted by wage rates that had been raised

unconscionably.

On the international side, meanwhile, it seemed clear that

the patience of this country's creditors was nearing an end.

This

country was being told, not alone through withdrawals of gold, that

its creditors wanted no more dollars.

Suggestions were coming from

abroad in the form of measures that could be contrived to enable the

central banks of other countries to hold dollars despite political

and other pressures to draw gold from the United States.

What monetary

policy could do about that problem was not clear to him.

The basic

cause of the trouble, namely, Government spending and lending abroad

in excess of what this country could afford to pay, constituted some

thing that monetary policy could not solve.

In arriving at the System's policy determinations for the fall,

Mr. Balderston considered it important to do everything possible on

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9/11/62

both of these fronts, but to recognize all the while the severe

limitations.

As to the next three weeks, Mr. Balderston said he would not

change the policy directive.

He called attention, however, to the

format of policy directive that had been suggested by Mr. Knipe with

the thought of casting the directive in more concrete terms and thereby

making it more understandable.

Mr. Balderston expressed the hope that

the bill rate and the Federal funds rate might remain close to three

per cent, but he agreed that seasonal reserve needs should be met fully.

Chairman Martin commented that he found this meeting encouraging.

The presentations indicated that everyone was thinking seriously about

the problems confronting the Committee and the economy, which was all

that could reasonably be asked.

He would like to associate himself

with those who disclaimed their ability to discern precisely the right

thing to do at the present time.

It seemed obvious to him, the Chairman continued, that the

majority position at this meeting favored maintenance of the status

quo for the next three weeks.

Continuing with a personal comment on the broad picture,

Chairman Martin said he would not give up the ship too readily because

of the slowness of economic advance.

He thought it would be necessary

to wait and see what the fourth quarter held.

9/11/62

-41

In another observation, the Chairman noted that statistics are

important.

However, he was distrustful of them when his common sense

told him something different from what the statistics suggested.

At

the present time there was, in his opinion, no inadequacy of funds and

no lack of liquidity.

His inquiries had not produced evidence to such

effect, or situations where parties would have borrowed, or borrowed

more, if money was available at 1/2 per cent less.

He was convinced

that there was a point at which further monetary ease would do harm

instead of good.

He did not know exactly when that point was reached,

nor would he want to say that it had been reached.

Sometimes, however,

shadows can be seen in advance.

The Chairman went on to make the comment that Messrs. Robertson

and Mitchell had performed a service at this and recent meetings by pre

senting so thoroughly the reasoning underlying their positions.

Similarly,

Mr. Mills had rendered a service earlier this year by explaining a position

that was contrary to the view of the majority at the time.

not be disagreement just for disagreement's sake.

There should

However, if the

Committee was going to succeed in its task of formulating appropriate

monetary policy, all ideas should be put on the table, after which the

Committee should try to pull together.

Fortunately, while there had

been questions from time to time within the group, there had also been

a close enough approach to unanimity of opinion to permit a feeling that

the Committee was able to make progress.

Obviously, if there was an

9/11/62

-42

inclination to pursue any particular line of thought as a hobby, that

could be disastrous in the area of monetary policy.

Chairman Martin mentioned that he had observed over a period of

years a tendency on the part of persons outside the System to suggest

that monetary policy should bear an undue share of the burden in achieving

national objectives.

The existence of this general tendency was something

to which the Committee must reconcile itself.

The Chairman said it was his observation that, while the economy

could suffer severely from undue stringency of credit, over the longer

run it was not likely to suffer so severely from a monetary policy that

was too restrictive as from one that was too easy.

his point well:

Mr. Mitchell had made

in a period of uncertainty the holding up of the short

term interest rate might deter some people from taking chances that they

otherwise would take.

At the same time, although a good many years had

passed since the end of World War II, the economy of this country was

still suffering from the inflationary overhang.

It concerned him, the Chairman said, that at some point there

might be a world-wide slowdown.

Further, if there should be a domestic

slowdown in the fourth quarter--something he had not yet conceded in his

own mind--that would be the second occasion in recent times where the

economy of European countries would appear stronger than that of the

United States.

As to the situation abroad, while Europeans were talking

about six or nine months more of expansion, they were beginning to see

strains in their own economies.

9/11/62

-43

One must recognize, Chairman Martin continued, that there were

some fundamental factors in the picture of a structural nature--part of

the heritage of a long period of inflation.

While he was in favor of

doing everything within reason through monetary and credit policy to

assist the necessary adjustments, he was not in favor of creating

money simply to accommodate foolish expenditures, speculation, or

lower credit standards, and thus postpone adjustments of a fundamental

nature that must be made.

He was not saying that this was necessarily

the time at which such results would occur, and he might be wrong in

his judgment.

This summer, however, he felt that monetary policy had

behaved correctly, in terms of both the domestic economy and the

international situation.

He did not believe that monetary policy

had been a damper on the domestic economy in any sense of the word.

It might become a damper, of course, if the economy got into a period

of real decline.

In that event, steps should be taken, perhaps, to

ease money further, but during this past summer stability was the

primary objective; the confidence factor was of paramount importance.

In his opinion, monetary policy would have been put in the role of

tending toward irresponsibility if the Federal Reserve had pursued

an inordinately easy policy during the summer in the aftermath of the

stock market adjustment.

At present, with the annual Fund and Bank

meetings about to occur and the balance of payments situation preca

rious, it would be irresponsible to assume that the Federal Reserve

9/11/62

-44

could ignore the exigencies of world finance, particularly the con

fidence factor.

In further comments, the Chairman spoke favorably of the

complementary nature of debt management and monetary policy at the

present time.

During the past two years, the blending of these opera

tions had been particularly effective, as effective as he could remem

ber in his experience.

This had worked toward a stability in monetary

operations, and he believed stability was needed.

In his view the

most effective contribution monetary policy could make was not to

go off half-cocked in either direction at the present time but rather

to lend stability to the economy.

A time might be approaching when

the business picture could be appraised more clearly; that might be

possible by the date of the next Committee meeting.

Chairman Martin forecast a fast decline in interest rates,

regardless of anything the Federal Reserve might do, if business

should decline appreciably.

And he would not want to abet such a

decline in interest rates in advance of a recession.

There were a

lot of problems, he repeated, that were a part of the heritage of

World War II, and he did not pretend to know the answers.

Neither,

as he had said many times on previous occasions, did he pretend to

understand the workings of the money supply.

he felt fairly certain.

Of one thing, however,

When people were not complaining of inability

to obtain money and lenders were trying to seek out borrowers, there

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9/11/62

was something in the picture of a more fundamental character than

lack of growth of the money supply.

Reverting to the consensus of this meeting, the Chairman

repeated that it was his understanding that the majority position

was clearly in favor of maintenance of the status quo.

In discussion of this point, Mr. Mills asked the Account

Manager how he would interpret "status quo."

His feeling, Mr. Mills

said, was that one would have to think in terms of at least the two

most recent meetings of the Committee, which would imply a level of

free reserves of around $350-$400 million.

His impression--and he

thought perhaps the impression of a majority of the Committee--was

that it would be appropriate to raise the level of free reserves to

some degree to obtain the results that were being sought.

This was

consistent with Mr. Stone's suggestion that in the immediate future

there might be a hidden tightness in the reserve position that should

be lubricated by allowing free reserves to increase.

Chairman Martin said he had been going to comment on the

difficulty of using the free reserve figure as a guide in the present

circumstances.

He would go along with the thought of Mr. Deming and

others that reference should be made primarily to the color, tone,

and feel of the market in talking about maintenance of the status quo

at the present time, rather than to a specific level of free reserves.

Mr. Stone said that this coincided with his interpretation.

9/11/62

-46

Mr. Mills then commented that if he were the Account Manager

he would feel rather at loose ends in trying to determine the appropriate

nature of day-to-day operations for the System Account.

Mr. Stone replied that he had interpreted the intent of the

Committee's recent instructions as placing emphasis on maintaining

the color, tone, and feel of the market.

That was what had been sought

by the Desk, and he would like to continue on that basis.

In this connection, the Chairman commented that he did not

know what words might best be used in the policy directives to clarify

the Committee's instructions to the Account Manager.

In a memorandum

distributed yesterday, Mr. Knipe had made a suggestion for a somewhat

different type of directive, and this suggestion deserved thought and

study.

This was a question that had come up repeatedly.

Everyone

should continue to give attention to the possibility of improving the

nature and elements of the directive.

However, he doubted whether the

Committee was going to be able to contrive any method of instruction

that would offset the need for exercise of discretion on the part of

the Account Manager.

This was exemplified by problems that arose at

the Desk one day recently when he and Mr. Deming happened to be present.

He questioned whether it was possible to deal with such things satis

factorily in the policy directive.

The Chairman then inquired as to the members of the Committee

who would like to be recorded as dissenting from a policy of maintaining

9/11/62

-47

the status quo, within the context of the preceding discussion, and

Messrs. Mitchell and Robertson said they would like to be recorded as

dissenting.

Mr. Mills said he would like to make a comment in this regard.

If the Account Manager's interpretation of the color, tone, and feel

of the market should develop to be markedly different from his own

interpretation, and if he (Mr. Mills) felt that adequate reserves had

not been supplied, he would reserve the right to be frankly critical

at the next Committee meeting.

Chairman Martin noted that this right was reserved to each

Committee member at each meeting.

Mr. Hayes commented that in listening to Mr. Mills' earlier

statement he had gotten the impression that the policy favored by

Mr. Mills would be somewhat easier than that favored by a majority of

the Committee.

Therefore, he would expect Mr. Mills to be dissatisfied

if operations for the Account reflected the policy that appeared to be

favored by the majority.

Chairman Martin said this was also his understanding.

Accord

ingly, he wondered whether Mr. Mills would not be well advised to vote

against the majority position.

Mr. Mills then suggested a poll of the Committee to ascertain

whether there was a clear majority in favor of maintenance of the

status quo.

9/11/62

-48

Accordingly, such a poll was taken, with the result that nine

members of the Committee expressed themselves as favoring maintenance

of the status quo while Messrs. Mills, Mitchell, and Robertson dissented.

Mr. Bryan, who had aligned himself with the majority in the

poll,

explained that his suggestion for a free reserve target ($400-$450

million) did not seem to be too far from the view of the majority,

particularly when the status quo was being thought of primarily in

terms of maintaining the color,

In

tone, and feel of the market.

further discussion, Mr. Stone repeated that he had been

interpreting the Committee's position as placing primary emphasis on

the tone, color, and feel of the market.

The Desk had looked at the

Federal funds rate and the bill rate, among others.

In recent weeks,

this had resulted in the prevailing range of free reserves.

weeks,

it

In future

might involve a higher level of free reserves.

Mr. Hayes expressed agreement with Mr.

Stone.

tant to distinguish this approach from Mr. Mills' view,

It

seemed impor

for the latter

had spoken of a higher level of free reserves as an objective.

Under

Mr. Stone's approach, a higher level of free reserves might develop,

but only as the necessary concomitant of an attempt to maintain the

prevailing color,

tone,

and feel of the market.

Mr. Mills commented that if there was reluctance to supply

reserves and they were only supplied under the pressure of other

guides, it was his contention that the Desk would be exerting a

distinctly restrictive policy pressure.

9/11/62

Mr. Hayes replied that he did not think the Account Manager

had indicated any particular reluctance to supply reserves.

He had

indicated complete willingness to attempt to achieve stability.

If

it developed that this attempt involved higher levels of free reserves,

Mr. Hayes assumed the Manager would not be reluctant to supply reserves.

Chairman Martin then inquired whether there were any further

comments, and none were heard.

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 current economic policy direc

tive:

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 redun

dant 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 and the availability of resources to permit

further advance in activity. On the other hand, it gives

recognition to the bank 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 be

conducted with a view to providing moderate reserve expan

sion in the banking system and to fostering a moderately

firm tone in money markets.

Votes for this action:

Messrs. Martin,

Hayes, Balderston, Bryan, Deming, Ellis,

Fulton, King, and Shepardson. Votes against

this action: Messrs. Mills, Mitchell, and

Robertson.

9/11/62

-50

Mr. Broida withdrew from the meeting at this point.

There had been distributed to the Committee a report from the

Special Manager of the System Open Market Account on foreign exchange

market conditions and on Open Market Account and Treasury operations

in foreign currencies for the period August 21 through September 5,

1962, and a supplementary report for the period September 6 through

September 10, 1962.

Copies of these reports have been placed in the

files of the Committee.

In the course of comments supplementing his written reports,

Mr. Coombs noted that an easing had occurred in the exchange rates of

certain European currencies, and the Account Management had been

trying to take advantage of the situation.

Purchases of Netherlands

guilders had reached a total of about $35 million equivalent, against

System drawings of guilders to the extent of $50 million under the

swap arrangement with the Netherlands Bank.

Drawings of $35 million

having been repaid through use of the purchased guilders, that amount

of the swap facility had reverted to a standby basis.

The Treasury

had outstanding $20 million, so the total short position in guilders

was now about $35 million.

Also, Swiss francs to the equivalent of about $10 million had

been picked up in the past week or so, and would be used toward the

repayment of drawings under the swap arrangement with the Bank for

International Settlements.

Further, it appeared that it might be

possible to make some start shortly toward repaying drawings under

9/11/62

-51

the swap arrangement with the National Bank of Belgium.

Mr. Coombs said that the System's efforts to pay off its

drawings under the swap arrangements as fast as possible had made a

good impression on bankers abroad.

These efforts had quieted appre

hensions that the swap facilities might be abused; that short-term

credits could drag on indefinitely.

Therefore, it was fortunate that

there had been a reversal of the flows of funds so quickly after the

drawings were made, and that the System had been able to move so fast

to make repayments.

Purchases of about $15 million of German marks had replenished

the System's mark holdings almost to the level at which they stood

before the intervention operations of June and July.

The Treasury

also had replenished its holdings of marks, and combined Treasury and

Federal Reserve holdings now totaled around $60 million equivalent.

Mr. Coombs noted that the Canadians had received a heavy flow

of money during the past few months; their reserves had been built up

by more than half a billion dollars since the Canadian stabilization

program was inaugurated in the latter part of June.

However, the Bank

of Canada had expressed a desire to have the swap arrangement with

the Federal Reserve, which would expire September 26, 1962, renewed

for another three months on the same terms as the existing arrangement.

Question had been raised whether a standby swap facility might not

serve as well, but the Bank of Canada would prefer actually to have

9/11/62

-52

the U. S. dollars in its reserves.

Hence, it would like to renew

the present arrangement if that was agreeable to the Federal Reserve.

The Bank of Canada had been kept posted on the efforts of the Federal

Reserve to pay off its outstanding drawings under swap arrangements

in advance of maturity, but thus far there had been no indication

that, if the Canadian swap were renewed, the Bank would move to unwind

it before the end of the renewal period.

It would be expected, of

course, that the swap would be unwound at the end of the additional

three months.

In the course of further discussion of the Canadian situation,

it was brought out that the rationale of the original swap was to allow

the Canadians time to introduce constructive measures to improve the

country's basic international payments position.

Although the Canadian

position had already improved markedly, a three-month renewal of the

swap facility could be justified on the basis that there had not yet

been time for adoption of a longer-run program of constructive measures.

Accordingly, a three-month renewal

of the Federal Reserve-Bank of Canada

$250 million swap arrangement on the same

terms and conditions as the original

agreement was authorized.

Turning to the swap arrangement with the Netherlands Bank,

Mr. Coombs noted that it would mature on September 14, 1962.

In his

opinion a three-month renewal would be agreeable to the Netherlands

Bank and of advantage to the Federal Reserve.

However, he believed

9/11/62

-53

the Netherlands Bank might request a shift in the interest rate basis

from an arbitrary 2 per cent rate to one based on the U. S. Treasury

bill rate.

Thereupon, upon recommendation of

Mr. Coombs, the Committee authorized a

renewal for three months of the $50

million swap arrangement with the

Netherlands Bank.

In the case of the $50 million swap with the National Bank of

Belgium, Mr. Coombs noted that this arrangement would not mature until

December 20, 1962.

The possibility of a standby facility had been sug

gested by him to the National Bank of Belgium, but the National Bank

had preferred to have the original swap agreement executed on an out

right basis.

Mr. Coombs next referred to the problem he had mentioned at

the August 21 Committee meeting relative to acquiring guilders through

direct transactions with the Netherlands Bank.

He had recommended,

and the Open Market Committee had concurred, that guilders should

continue to be acquired at the market rate rather than to accept a

proposal from the Netherlands Bank that System purchases be arranged

at a special arbitrary rate at such times as

purchase guilders in substantial quantity.

the System wished to

The problem was that on

some days guilders were available in the market in only limited amounts.

In the circumstances, he had endeavored to think of some compromise

solution that would enable the purchase of larger quantities of guilders

9/11/62

-54

while continuing the market rate principle.

It had occurred to him

that the System might pay a stipulated commission or fee to the

Netherlands Bank for the convenience ofobtaining sizable lots of

guilders through direct transactions with the Netherlands Bank.

He

had mentioned this possibility to the Netherlands Bank, and yesterday

he had received word that the Bank would be agreeable in principle to

such an arrangement.

The Bank had suggested that the commission might

be fixed at the rate of 1/8 per cent.

Such a rate, Mr. Coombs pointed

out, would result in roughly an equal sharing between the Federal

Reserve and the Netherlands Bank of the profits accruing from System

drawings of guilders when the dollar was weak and purchases of guilders

after the dollar had strengthened.

The Treasury also was involved

because it had $20 million of guilder drawings outstanding that it

was anxious to liquidate quickly.

Accordingly, he had inquired whether

such an arrangement would be acceptable to the Treasury, and had found

that the Treasury would be agreeable.

If the Open Market Committee

concurred in such an arrangement, it should be possible to clean up

the guilder operation completely in the course of the next week through

purchases of $15 million of guilders for System account and $20 million

for Treasury account.

If the arrangement was not favored, he feared

that the guilder operation would drag on, with relatively meager

possibilities of acquiring guilders through the market.

9/11/62

-55

In reply to questions, Mr. Coombs confirmed that the Federal Reserve

Bank of New York made no charge when it executed foreign exchange transac

tions on behalf of foreign central banks.

The commission would be unusual

in interbank relationships, but the use of an arbitrary rate that deviated

from the market rate concerned him even more.

He felt that the System

would be on better ground if it continued to adhere to the concept of

executing foreign exchange transactions only at the market rate, but

paid a fee to the Netherlands Bank for the convenience to the Federal

Reserve of the execution of wholesale transactions direct with the

Netherlands Bank.

Mr. Coombs recalled that the current swap arrangement was initiated

with a view to mopping up dollar holdings of the Netherlands Bank in excess

of the traditional $200 million limit of that Bank.

subsequently experienced an outflow of funds.

The Netherlands had

At present its total hold

ings of dollars were down to around $135 million, and another prospective

out-payment appeared likely to reduce the holdings close to the $100

million level.

Thus, repayment of the System's drawings would build up

the dollar holdings of the Netherlands Bank only to a point well below

the traditional dollar conversion point.

In reply to additional questions, Mr. Coombs reiterated that the

effect of the payment of the proposed commission would be to reduce a

windfall profit to the Federal Reserve from its guilder operations.

While

no parallel question had arisen under swap arrangements with other foreign

9/11/62

-56

central banks, conceivably a question of the same nature might arise else

where; the System was just getting into this field.

A similar problem,

incidentally, had arisen in connection with the repayment of drawings from

the International Monetary Fund.

Mr. Coombs further pointed out that the question whether commissions

or fees should be paid on other occasions remained at the initiative of the

Federal Reserve.

In markets the size of the Swiss franc, German mark, or

pound sterling markets, there should not be too much difficulty in buying

in sufficient quantity at market rates.

Hence the question of the size

and depth of the various currency markets was involved.

He had not been

able to think of any absolutely satisfactory solution to the guilder

problem, but he had a feeling that the commission plan was the least dis

advantageous.

In reply to a question regarding the possibility of waiting until

the terminal date of the drawings, Mr. Coombs commented that this would

focus the present point of difficulty more sharply.

He would prefer to

pay off the drawings in advance.

In reply to another question, Mr. Coombs repeated that he saw a

substantial advantage in liquidating the swap with the Netherlands Bank

as fast as possible in order to demonstrate that the System's operations

were designed to deal with reversible flows of funds and that the opera

tions were effective.

One never knew when the tide might move the other

way, and he would like to have this credit facility completely restored

9/11/62

-57

if possible.

The System had to feel its way on this sort of thing.

He

did not think that the arrangement he proposed would necessarily create

a precedent, even in the case of guilders.

Mr. Hayes agreed, noting that the System could always say, even

to the Dutch, that it would not be able to operate the same way again.

In view of factors such as the differences in the size of the various

foreign exchange markets, the System could distinguish among its arrange

ments more or less on an ad hoc basis.

After further discussion, Chairman Martin commented that the Federal

Reserve was engaged in experimental operations.

The Committee might want

later to establish some principles that would apply to swap arrangements

generally.

However, if it seemed desirable for the Federal Reserve to

liquidate the current guilder drawings and the arrangement proposed by

Mr. Coombs seemed to provide the best available mechanism, agreement on

a small fee probably was not too much of a price to pay.

Mr. Mitchell commented that in his view the payment of the fee was

not too important in itself.

parallel treatment.

The important thing was the principle of

So far as he could see, the payment of a fee had no

basis from the standpoint of principles that the System ought to be

following.

Mr. Deming inquired whether there might not be more justification

for paying a premium if the swap arrangement was being unwound at the last

minute then if this were done in advance.

Mr. Coombs replied that the

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United States would be saving interest.

Also, by waiting it might forego

the opportunity to make a sizable profit.

Mr. Deming then commented that

he was not too concerned about the making of a profit or the sharing there

of.

It was the principle of paying a fee that was of more concern to him.

Mr. Furth noted that if the System endeavored to buy 15 million

dollars of guilders through the market, the market price probably would go

up by an amount at least equal to the 1/8 per cent commission.

It was quite

customary, in the case of Fund drawings, to pay a rate close to the market,

taking into consideration the effect of a market transaction on the rate.

Therefore, he was not particularly apprehensive about the establishment of

a precedent.

On a market broader than the guilder market, this simply

would not happen.

Further, if it became known that a swap operation

always was to be reversed on the last day, it would be relatively simple

for a central bank to have the market on that day less favorable to the

System than the rate involved in the payment of a small commission.

Question was raised of Mr. Coombs whether payment of a commission

was actually more desirable than departing from the market rate.

If some

kind of agreement was in effect whereby the market rate was made subject to

a certain adjustment, would this not be better than paying a commission?

Mr. Coombs replied that a rather nebulous area was involved when

one tried to ascertain the effect of a large transaction on the market

rate.

The effect of such a transaction on the market rate might be more

or less than 1/8 per cent.

As he had indicated previously, the payment

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of a commission of 1/8 per cent would come close to splitting between

the Netherlands Bank and the Federal Reserve the benefit of this

particular operation.

This seemed to him better than getting into

the question of what would happen to the market rate if an attempt

was made to execute a large transaction in the market.

Chairman Martin then suggested that the Open Market Committee

approve the plan proposed in this instance by Mr. Coombs, with the

understanding that this was clearly not to be regarded as establish

ing a precedent.

Thereupon, the plan proposed by

Mr. Coombs was approved on the basis

stated by the Chairman.

Mr. Coombs then commented that over the next few months, a

period of the year when there was usually some pressure on the pound

sterling, there might be opportunities to pick up sterling at rates of

par or below.

He thought it might be well, as and when such opportu

nities arose, to acquire sterling up to a total of not more than

$25 million equivalent.

Such holdings might be useful in pilot opera

tions after the turn of the year, when the seasonal flow of funds

to

London might be expected to begin.

Without objection, purchases of

sterling along the lines recommended by

Mr. Coombs were authorized.

Mr. Coombs also noted that last week in London he had mentioned

to British officials that the Federal Reserve System might be prepared to

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consider an increase in the present swap facility to $250 million.

The

reaction, however, was that this might not be the most appropriate time.

It was thought that an enlargement of the swap facility might tend to

disturb the quiet in exchange markets by suggesting that there might be

some apprehension in official quarters about another wave of speculation.

If necessary, the British would be prepared to consider an enlargement

of the swap facility, but they appeared to feel that about as much was

being gained psychologically from the $50 million swap facility as could

be gained from a larger one.

After further comments by Mr. Coombs on matters relating to the

area of System foreign currency operations, Chairman Martin requested

Mr. Coombs to outline a proposal that he had made for the publication

of a report on System and Treasury foreign exchange operations.

In reply, Mr. Coombs recalled that at recent hearings before the

Congressional Joint Economic Committee, at which President Hayes testified,

Congressman Reuss of Wisconsin had pressed again for a report on System

foreign currency operations.

Thereafter, Mr. Coombs said, he dictated a

summary of Treasury and Federal Reserve operations in this field.

On his

recent trip to Europe, he showed the draft to each of the central banks

with which the Federal Reserve had had any sizable operations, and no

objection was indicated to the publication of such a paper.

When it

came to the most appropriate method of publication and the matter of

timing, Mr. Coombs was not sure.

However, Under Secretary of the

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Treasury Roosa had pointed out that a meeting of Working Party 3 of the

Economic Policy Committee of the Organization for Economic Cooperation

and Development was to be held in Washington at the end of this week.

Mr. Roosa suggested that it might be helpful if copies of the paper

could be shown to the members of the Working Party.

Mr. Roosa also

thought that it might be of some use if the paper could be published

during the period of the Fund and Bank meetings, to be held next week.

Chairman Martin suggested that the Open Market Committee authorize

the publication of the paper and leave the details to be worked out by Mr.

Young, with the thought that if it

was

agreeable to the people involved

the paper would be issued as promptly as possible.

If it could be issued

during the Fund and Bank meetings, those attending the meetings would have

available to them something authoritative on what had actually been done in

this field.

In reply to a question, Mr. Young said he would have in mind that

the paper would be sent to the Congressional Committee and released to the

public simultaneously.

Mr. Mills inquired whether this was purely a factual report or a

report aimed at explaining the purposes and objectives of System operations

and whether they had been realized.

In reply, Mr. Coombs said that where

it appeared that the operations had been useful in reversing a flow of

funds, that would be pointed out.

He also mentioned that the larger part

of the document was devoted to a discussion of Treasury operations.

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The issuance of the paper described by

Mr. Coombs was then authorized.

Upon motion duly made and seconded, and

by unanimous vote, the open market transac

tions in foreign currencies during the period

August 21 through September 10, 1962, were

approved, ratified, and confirmed.

At its meeting on August 21,

1962, the Open Market Committee gave

consideration to a letter from Congressman Patman, Chairman of the Joint

Economic Committee, to Chairman Martin dated August 14, 1962, with which

Congressman Patman transmitted in galley form an unpublished Joint Com

mittee Print consisting of a digest based on the minutes of the Federal

Open Market Committee for 1960.

The Committee Print was entitled, "How

Policies of the Federal Reserve System are Determined."

Congressman

Patman cited in his letter a resolution adopted by majority vote of the

Joint Economic Committee that the Committee Print "be submitted in a

letter by the Chairman to the Chairman of the Board of Governors of the

Federal Reserve System with the request that he allow us to make it public."

In reflection of the position taken by the Open Market Committee

following consideration of this matter at the August 21 meeting, there was

sent to Chairman Patman on that date a letter over the signature of Chair

man Martin indicating, for reasons stated, that the Open Market Committee

had concluded it would be desirable to carry over until its next meeting,

to be held on September 11, the question raised concerning general publi

cation of the Joint Committee Print.

The interim reply from Chairman Martin

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also stated that Congressman Patman would be advised of the Open Market

Committee's views promptly following the September 11 meeting.

In addi

tion to citing the need for more time in order to allow careful study by

the members of the Open Market Committee of the question whether it would

be in the public interest to publish the Joint Commnittee Print, Chairman

Martin's interim reply referred to an indication in the galley proof of

the document that the Joint Committee might plan to include a final chap

ter that had not been forwarded with the galley proof.

letter

stated that it

Chairman Martin's

would be helpful to the members of the Open Market

Committee to have an opportunity to review the galley proof of the final

chapter if the Joint Committee intended to include such a chapter.

No reply had been received from Congressman Patman to Chairman

Martin's letter of August 21.

However, there had been distributed to

the members of the Open Market Committee for consideration prior to

discussion at this meeting a draft of a further reply that might be

made to Congressman Patman.

The proposed reply would take the posi

tion that publication of the proposed Joint Committee Print would not

be in the public interest.

The view would be expressed that to publicize

without a substantial time lapse the minutes of the internal discussions

preceding the actions of the Open Market Committee would do public

mischief rather than public good.

Therefore, the Committee would repeat

the request made in Chairman Martin's letter of July 21,

1961, transmitting

the minutes for 1960 to the Joint Committee, that their contents be held

in confidence.

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9/11/62

In the initial phases of the discussion at this meeting, several

members of the Committee indicated that they regarded the draft of pro

posed reply as generally satisfactory and said that their comments, which

already had been sent or could be sent to the Committee Secretary for con

sideration, were of an editorial nature.

Mr. Robertson, on the other hand, indicated that he would not favor

sending the proposed letter in its present form because in his view it would

foreclose the Open Market Committee from publishing minutes of the Committee

in full.

He noted that the Committee had considered from time to time the

possibility of publication of its minutes for some past period, but no

decision had as yet resulted from those discussions.

One question involved

had always been the lapse of time that would be appropriate.

In his view

there was every reason for publishing the minutes, after what might be

concluded to be a suitable lapse of time, so that they would be available

to students of the monetary system.

He felt that the reply to Congressman

Patman should take the position that the publication of a document such as

the Joint Committee Print before the complete minutes were made available

to the public would not be in the public interest, but the form of the

proposed letter gave him concern.

The reactions to Mr. Robertson's interpretation of the draft of

proposed reply varied.

One view expressed was that the language of the

draft, when read carefully, did not preclude the Open Market Committee,

if it so desired, from reaching a decision to publish the minutes of the

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9/11/62

Committee after the lapse of a suitable period of time.

According to

another view, presented by a member of the Committee who did not favor

publication of the Committee's minutes, the sending of a letter in the

form of the draft would, as Mr. Robertson suggested, raise a substantial

question from the standpoint of publication of the minutes.

In this connection, Chairman Martin commented that he did

not agree with the view that the minutes of the Open Market Committee

should not be published even after a suitable lapse of time.

In his

opinion, it would be desirable for the minutes to be published after

some lapse of time on the theory that this was the best way to reveal

to the public the nature of the processes followed in the formulation

of monetary policy.

While individuals could write in terms of their

own impressions, the Committee's minutes were not colored to fit the

views of any particular author.

However, quite apart from any decision

that might be reached later regarding the publication of the Committee's

minutes, it was.his feeling that the points made in the draft of letter

to Congressman Patman were appropriate.

Mr. Ellis said he would like to correct what may have

been an erroneous impression created by his remarks at the Committee

meeting on April 17, 1962.

He had not meant to argue that the Committee

should not ever publish its minutes.

His argument was intended to go

to the point that there should be a suitable time lapse in order to

permit the Committee to have the full benefit of private deliberations.

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The draft of reply, he noted, pointed out the value of private delib

erations to other Governmental bodies in the process of decision-making,

and the Open Market Committee should not do anything that would tend

to inhibit full and free discussion.

As he read the proposed letter,

however, it would not preclude the Open Market Committee from publishing

its minutes after a suitable time lapse if it so desired.

There followed further discussion based on the differing opinions

that had been expressed as to the manner in which the proposed letter

might be interpreted.

In the course of this discussion, Mr. Mitchell

made the comment that the letter should be studied from the standpoint

of being sure that it did not prevent the Open Market Committee from

taking steps to alter the characteristics of the record of open market

policy actions published each year in the Board's Annual Report.

In

his opinion, the published policy record was in need of improvement.

While he had no specific suggestions at this time as to how an improve

ment might be accomplished, nothing should be said in the proposed

letter that would inhibit the Committee from making as full a disclosure

of its policy actions as it might determine to be desirable.

There followed certain relatively minor suggestions for changes

affecting the tone of the proposed reply.

However, since the more basic

issue raised by the comments of Mr. Robertson had not been resolved, the

meeting recessed and reconvened at 2:10 p.m. with the same attendance as

at the conclusion of the morning session except that Messrs. Noyes, Koch,

and Yager were not present.

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At the beginning of the afternoon session, Mr. Wayne indicated

that he would be inclined to favor the letter as drafted, with certain

minor changes.

However, in order to put before the Committee for con

sideration an approach that might meet the point raised by Mr. Robertson,

he outlined possible changes that would result in a considerably shortened

version of the letter.

In the course of a discussion based on the revisions Mr. Wayne

had outlined, Mr. Deming suggested that in any further consideration of

the possibility of publishing the minutes of the Committee, thought

should be given to the material that had been included in the minutes

over the past year or so with regard to System foreign currency opera

tions.

This aspect was not of concern in connection with the minutes

of 1960 or prior years.

However, if it should be the decision of the

Committee to embark on a procedure of publishing its minutes after a

period of time had elapsed, there would ultimately be the question of

releasing minutes containing references to foreign central banks and

Governments in connection with discussions of foreign exchange operations.

Other members of the Committee agreed that this was a point

that should be borne in mind.

In this connection, there was a sugges

tion that exploration of the practices followed by the Department of

State might be helpful.

There followed suggestions for the deletion from the draft of

letter to Congressman Patman of certain sentences or phrases not

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-68

affecting the substance, and there appeared to be general agreement

that these sentences or phrases could appropriately be eliminated.

Mr. Bryan indicated that he favored the general approach

taken in the draft of letter, which he thought would not preclude

the Committee from reaching a subsequent decision, if it saw fit,

publish its minutes for a prior period.

to

He proposed that the Committee

approve the draft as the basis of reply to Congressman Patman, subject

to such editorial changes as Chairman Martin might consider advisable

in the light of today's discussion.

Subsequently, Mr. Ellis offered a proposal to the effect that

the Open Market Committee approve the sending of a letter to Congressman

Patman, as Chairman of the Joint Economic Committee, stating formally

its opposition to the publication of the Joint Committee Print based on

the Open Market Committee's minutes for 1960.

Such action would make

known to Chairman Martin the fundamental position of the Open Market

Committee.

Then, with the benefit of the discussion that had taken

place at this meeting, the Chairman could edit the draft of reply in

such manner as he thought appropriate.

As Mr. Ellis understood it,

the majority view within the Open Market Committee was that the Joint

Comittee document, based on access to the 1960 minutes, should not be

published, that such publication would be against the public interest,

and that the Committee therefore wished to request observance of the

position it had taken in forwarding the 1960 minutes to the Joint

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Committee.

The further question had to do with the manner in which

this position should be presented in the letter to Congressman Patman.

He would propose to leave that question to the discretion of Chairman

Martin against the background of the various views and comments that

had been expressed at this meeting.

Mr. Robertson indicated that he would be willing to accept a

proposal for action by the Open Market Committee along the lines stated

by Mr. Ellis.

As the discussion proceeded, however, several members of the

Committee expressed agreement with the view that the draft of proposed

letter before the Committee constituted, subject to editorial changes,

a suitable form of reply.

This tended in the direction of action by

the Committee along the lines suggested by Mr. Bryan.

At the conclusion

of this phase of the discussion, Mr. Ellis indicated that he would be

prepared to support such a proposal.

Accordingly, it was moved by Mr. Bryan

and seconded by Mr. Shepardson that the Open

Market Committee approve the draft of pro

posed reply to Congressman Patman that had

been distributed prior to this meeting as the

basis of the reply to be made, subject to

such editorial changes as Chairman Martin

might wish to make in the light of the dis

cussion at today's meeting.

A vote was taken on this motion and all

of the members of the Committee voted "aye"

except that Mr. Robertson voted "no" and

Mr.

ills abstained.

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In explanation of his abstention, Mr. Mills said he was con

cerned that the sending of a letter along the lines that had been

agreed upon would cause irritation in the Congress, particularly insofar

as it made comparisons between the Open Market Committee and the Executive

Branch of the Government, the courts, and committees of Congress.

did not feel that these comparisons were germane.

He

In his view the record

of the past three weeks provided an answer to the problem:

there was a

flurry of discussion when the proposed Joint Committee Print was leaked

to the press, but the discussion appeared to have died away subsequently.

If the Open Market Committee had agreed to the publication of the Joint

Committee Print, expressing regret that such action was being taken and

that Congressman Patman had not observed the Committee's request that

the 1960 minutes be held confidential, Mr. Mills felt that the Open

Market Committee would have been in a better position.

If the publica

tion of the Committee Print had produced serious challenges to the

Committee's 1960 actions, which he doubted, the Committee would have

been in a position to answer those challenges on its own ground and

against the record of the minutes.

There follows the text of

Secretary's Note:

the letter that was sent to Congressman Patman

over Chairman Martin's signature under date of

September 11, 1962, pursuant to the action taken

by the Federal Open Market Committee at today's

meeting:

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"This is in further response to your letter of August

14, 1962, in which you informed me that the Joint Economic

Committee is considering publication of a 'condensed report'

evolved from the 1960 minutes of the Federal Open Market

Committee. Your letter asks for my position regarding the

publication of this document. After carefully considering

your letter and the galley-proof version of the report that

you sent with your letter, the Federal Open Market Committee

today concluded that publication of the proposed report

would not be in the public interest, a conclusion with which

I agree, and with which I hope your Committee will agree when

it reaches its final decision as to whether it will publish

this document.

"In weighing the considerations of public policy involved

in your Committee's decision, it should be borne in mind that

a complete record of all policy actions taken by the Federal

Open Market Committee is maintained by the Board of Governors

and is set out in full each year in the Board's Annual Report

to Congress, as required by the Federal Reserve Act. Included

in the report thus made public are: (1) a record, by name, of

all votes cast by each member of the Committee in connection

with the determination of open market policies; (2) summaries

of the economic and financial developments and conditions

taken into account in arriving at policy actions; (3) state

ments of the reasons underlying the actions of the Committee;

and (4) statements of the reasons underlying dissents, when

there are dissents.

"The statute does not, of course, require publication of

the minutes of meetings of the Federal Open Market Committee;

indeed, it does not prescribe the form of such minutes as may

be kept by the Committee. It has been the practice of the

Committee, nevertheless, to maintain full, detailed, often

nearly verbatim minutes of its discussions and debates prior

to final determinations of policy actions. In distinction

from policy actions, for which the complete record has been

published as stated, the discussions covered in the minutes

have never been made public by the Open Market Committee.

In

that respect, the Committee has followed a principle long

established and universally accepted in the public serviceby the Judicial and the Executive branches of the Government,

and by the Committees of Congress as well, including your

Committee, in respect to their own operations.

"Neither the United States Supreme Court nor any other

court, Federal or State, makes public any record of discus

sions in chambers preceding the announcement of a decision,

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although the courts do announce the underlying reasons

therefor and the statements of dissents, if any, as does the

Open Market Committee. The same privacy of pre-decision

discussions extends to the jury room, for reasons that the

late Mr. Justice Benjamin Cardozo of the United States Supreme

Court put this way:

'Freedom of debate might be stifled and

independence of thought checked if jurors were made to feel

that their arguments and ballots were to be freely published

to the world.'

"The Executive Branch of the Government likewise dis

tinguishes in respect to publication between the conversations

taking place at a meeting and the decisions reached at it andin contrast to what the Open Market Committee has done in this

instance--has declined many times, from the days of President

Washington down to the present, to make the records of pre

decision discussions at meetings in the White House or various

departments or agencies available even to the Congress. As it

was explained on one occasion by President Eisenhower, 'It is

essential to effective administration that . . . the broadest

range of individual opinions and advice be available in the

formulation of decisions and policy . . . . The disclosure of

conversations, communications or documents embodying or concern

ing such opinions and advice can accordingly tend to impair or

.'

inhibit essential reporting and decision-making processes ...

"The Congress, itself, in the Legislative Reorganization

Act, recognized the need for privacy in working sessions of

Congressional Committees, by excepting 'executive sessions for

marking up bills or for voting' from the general requirement

that Committee hearings be open to the public. Indeed, the

same Act provides that any committee meeting may be closed to

the public upon a majority vote of the members of the committee,

as in fact they sometimes are. As a matter of practice, minutes

of executive sessions of Congressional Committees are not made

available to the public.

"Thus, throughout the public service, the principle has been

widely recognized that, in the absence of anything approaching

criminal conduct or malfeasance in office--and no question as

to either is involved here--internal deliberations (intra

organizational advisory opinions, recommendations, tentative

plans and proposals, minutes of committee meetings, oral advice,

et cetera), as distinct from official actions, must, in the

public interest, be held confidential for the purpose of

encouraging candor on the part of officials and employees in

speaking their minds freely and uninhibitedly.

"The report that you have had prepared contains over one

hundred quotations excerpted from the Federal Open Market Com

mittee minutes, some of them of considerable length, plus

selective but extensive accounts of conversations in literal

or lightly paraphrased form. These quotations and paraphrasings

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"are clearly inconsistent with our request, made in my letter

of July 21, 1961, turning over the minutes to you, that these

minutes not be disclosed 'in whole or in part.'

Moreover,

your document does not reveal a single policy action by the

Open Market Committee that was not recorded in the Annual

Report of the Board of Governors for 1960, along with the

economic circumstances of the action, the votes of the Committee

members, and the underlying reasons why the action was taken.

"There is no question here of a denial of information to

the Congress:

your request for opportunity to examine the

minutes of the Open Market Committee was granted more than a

year ago. Neither is there question of hostility to criticism

nor of unwillingness to improve upon the presentation of the

Committee's policy record in the Board's Annual Report; the

Committee in fact is earnestly striving now to effectuate

further improvement.

"The decision of your Committee in this instance will

have implications for the Judicial and Executive branches of

the Government, other governmental agencies, and the commit

tees of Congress, including your Committee. It seems to us

that to publicize to the world without a substantial time

lapse the pre-decision discussions and conversations in any

of these meetings would serve to institute a procedure--one

virtually certain to result either in weakening internal de

bate for the sake of the public record or in weakening the

record for the sake of the debate--that would do public mis

chief rather than public good.

"For the reasons stated, the Federal Open Market Committee

believes that to publish at this time the minutes of the

internal discussions preceding its 1960 actions--in whole or

in the form of the proposed report--would be contrary to the

public interest.

We therefore repeat our request, made in

my letter of July 21, 1961, transmitting the 1960 minutes to

your Committee, that you hold their contents in confidence."

It was agreed that the next meeting of the Federal Open Market

Committee would be held on Tuesday, October 2, 1962.

The meeting then adjourned.

Secretary