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, May 7, 1963, at 9:30 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Hayes, Vice Chairman

Balderston

Bopp

Clay

Irons

Mr. King

Mr.

Mr.

Mr.

Mr.

Mitchell

Robertson

Scanlon

Shepardson

Messrs. Treiber, Hickman, Shuford, and Swan,

Alternate Members of the Federal Open Market

Committee

Messrs. Ellis, Bryan, and Deming, Presidents of

the Federal Reserve Banks of Boston, Atlanta,

and Minneapolis, respectively

Mr. Young, Secretary

Mr. Sherman, Assistant Secretary

Mr. Kenyon, Assistant Secretary

Mr. Hackley, General Counsel

Mr. Noyes, Economist

Messrs. Baughman, Brill, Eastburn, Furth,

Garvy, Green, Holland, Koch, and Tow,

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. Williams, Adviser, Division of Research and

Statistics, Board of Governors

Mr. Yager, Chief, Government Finance Section,

Division of Research and Statistics, Board

of Governors

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Mr. Heflin, First Vice President, Federal Reserve

Bank of Richmond

Messrs. Mann, Ratchford, Rawlings, and Jones,

Vice Presidents of the Federal Reserve Banks

of Cleveland, Richmond, Atlanta, and St. Louis,

respectively

Messrs. Litterer and Lynn, Assistant Vice Presi

dents of the Federal Reserve Banks of

Minneapolis and San Francisco, respectively

Mr. Willis, Economic Adviser, Federal Reserve

Bank of Boston

Mr. Cooper, Manager, Securities Department, Federal

Reserve Bank of New York

Secretary's Note:

Mr. Hickman, who became

President of the Federal Reserve Bank of

Cleveland on May 1, 1963, following the re

tirement of Mr. Fulton, executed on the same

date his oath of office as Alternate Member

of the Federal Open Market Committee.

Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meet

ings of the Federal Open Market Committee

held on March 26 and April 16, 1963, were

approved.

Before this meeting 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 April 16 through May 1,

1963, together with a supplementary report covering the period May 2

through May 6, 1963.

Copies of these reports have been placed in the files

of the Committee.

In comments supplementing the written reports, Mr. Coombs reviewed

current and prospective developments with respect to the U. S. gold stock

and summarized developments in the London gold market, including the

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results of gold pool operations.

He noted that the U. S. dollar had re

cently been under pressure against a widening group of European currencies.

Discussing the Netherlands guilder situation, Mr. Coombs said

that the Federal Reserve had begun to intervene in the market on April 11

in anticipation of an early easing of the tight Netherlands money market

and had since sold approximately $15 million equivalent of guilders in

the Amsterdam and New York markets.

Rather than easing, however, the

Netherlands money market had remained tight, and a forthcoming Dutch

Government bond issue might add to the pressure.

Accordingly, the System

was continuing to supply guilders and thus restrain a rise in official

dollar holdings of the Netherlands Bank.

Had the System operations not

taken place, the Netherlands Bank would have already reached the point of

converting additional dollar holdings into gold.

If the current pressure

should continue, it would probably be desirable for the System to draw

the remaining $25 million equivalent of guilders available under its swap

arrangement with the Netherlands Bank, but at some point it might also be

necessary for the U. S. Treasury to come into the picture.

The New York

Bank hoped shortly, through consultation with a visiting official from the

Netherlands Bank, to be able to obtain a clearer understanding of the

basic reasons for the inflow of dollars into the Netherlands, including

the extent to which the inflow was associated with money market tightness,

along with some indication of the possibility of action by the Netherlands

Bank to relieve the current market tightness.

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Mr. Coombs noted that the foregoing comments outlined the kind of

situation that the System was likely to run into from time to time in the

future, involving the reaction on the exchange rate of a tightening of

money markets in various European countries.

He was not entirely sure as

to the appropriate role for System swap arrangements in such circum

stances, but was inclined to think that there was a good case for using

swap arrangements to offset some temporary tightening in money markets

abroad.

Mr. Coombs went on to say that the German mark problem was

somewhat similar to the guilder situation.

The Federal Reserve began

intervening in the market on April 9 in anticipation that the inflow of

dollars into Germany would be of a temporary nature, selling marks both

for its own account and for the account of the Treasury.

The inflow had

continued, however, despite strike and other developments in Germany that

might have been expected to check it.

Accordingly, after conversations

with the German Federal Bank, the System drew $25 million equivalent of

marks yesterday under its swap arrangement

with the Bank and subsequently

sold $1.8 million equivalent of marks from the proceeds of the drawing.

The New York Bank had also given the German Federal Bank authorization to

intervene today in Frankfurt on behalf of the System up to $10 million

equivalent, and it was expected that the German Federal Bank might supple

ment this action, if necessary, through use of its own resources.

While

efforts were continuing to obtain a clearer picture of the reasons for

persistent inflow of dollars, it was difficult for both the Germans and

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ourselves to ascertain precisely why money was moving.

Turning to the Swiss franc, Mr. Coombs said that efforts to pay

off the System's Swiss franc drawings had been disappointing.

Since

February the System had been able to acquire only $27 million equivalent,

this during a period of seasonal weakness for the Swiss franc.

He felt

increasing concern, therefore, that the drawings of Swiss francs might

remain outstanding for an unduly lengthy period of time.

In this connec

tion, he noted that the U. S. Treasury would shortly be issuing a S23

million bond to the Swiss Confederation to provide an investment outlet

for the continuing budget surplus of the Confederation, and the Treasury

would utilize the proceeds to repay all but $6.5 million of its outstand

ing Swiss franc forward contracts.

This would reduce the Treasury's

cash balance requirements in Swiss francs and it might be possible for

the System to purchase $7 or $8 million of Swiss francs from the

Treasury, which it could apply against its drawings under the swap

arrangement with the Bank for International Settlements.

Beyond that,

the System could pay off its Swiss franc drawings only to the extent

that the market situation permitted the acquisition of francs.

If it

did not, the System might be up against a troublesome problem.

In view

of the desirability of limiting swap operations to short-term credit

needs, it might be desirable within the near future to pay off the

System drawings, in the process placing more dollars in the hands of the

Swiss National Bank that would be convertible into gold.

The Treasury

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could then either settle in gold or undertake to issue bonds or

certificates denominated in Swiss francs.

As to the pound sterling, Mr. Coombs said its position seemed

basically strong; the British had recouped in April part of the reserve

losses sustained in the first quarter of this year.

yesterday, however, sterling was under some pressure.

Last Friday and

Apparently, this

was not because of speculative maneuvering but instead was attributable

principally to some fairly sizable borrowing by Continental commercial

banks in the Euro-dollar market.

In these circumstances, the Account

Management concluded that it would be useful, to purchase for Federal

Reserve account a moderate ammount of pounds sterling at the rate c

$2.7988.

Part of the sterling thus purchased would be placed in a cash

account and the remainder in a "money employed" account.

There had been

some exploration of the possibility of buying commercial bills in London

with System sterling holdings, but the prospect was not encouraging due

to the limited over-all supply of such bills and the strong demand for

them.

In reply to a question, Mr. Coombs also commented on possible

effects of the reduction yesterday by the Bank of Canada of its discount

rate from 4 per cent to 3-1/2 per cent.

Chairman Martin inquired as to the extent of System transac:ions

with the Treasury Stabilization Fund, and Mr.

Coombs recalled that at the

start of the program of Federal Reserve foreign currency operations the

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System had acquired token amounts of four different currencies from the

Stabilization Fund.

Later it also purchased some German marks from the

Stabilization Fund and then resold German marks to the Fund.

actions had been at market rates.

All trans

He hoped that the Committee would not

object to the possible purchase of Swiss francs from the Stabilization

Fund, as previously suggested, for he considered it important to make

further progress in reducing the System's Swiss franc drawings.

After

further comments by Mr. Coombs on the mechanics of the proposed trans

action, Chairman Martin indicated that he would have no objection.

He

considered it important, however, for the System to keep its records

carefully on operations of this kind.

Mr. Coombs repeated that all

System-Treasury transactions had been at market rates and said there

would be no deviation from this rule.

Mr. Balderston suggested that the staff prepare for the Committee

a memorandum dealing with the questions involved in the event of

continuation of drawings under swap arrangements beyond periods longer

than normally associated with the reversal of seasonal or speculative

influences, including the mechanics of repaying such drawings.

There

was general agreement with this suggestion, and Mr. Coombs indicated

that such a memorandum would be prepared.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, the System

Open Market Account transactions in foreign

currencies during the period April 16

through May 6, 1963, were approved, ratified,

and confirmed.

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Mr. Coombs pointed out that the $50 million swap arrangemert

with the Bank of England would mature May 28, 1963, and recommended

its renewal for another three months,

After discussion, renewal of the swap

arrangement, as recommended by Mr. Coombs,

was authorized by unanimous vote.

This concluded the discussion of System foreign currency

operations,

Before this meeting there had been distributed to the members of

the Committee a report covering open market operations in U. S. Govern

ment securities and bankers acceptances for the period April 16 through

May 1, 1963, and a supplementary report covering the period May 2 through

May 6, 1963.

Copies of these reports have been placed in the files of

the Committee.

In supplementation of the written reports, Mr. Stone commented

as follows:

The money market has been steadily firm during the period

since the last meeting. The Federal funds rate was typically

3 per cent with occasional trading at 2-7/8 per cent and, early

in the period, a very temporary softening to around the 2 per

System operations during the period first absorbed

cent level.

and then supplied reserves.

The absorption was achieved largely

through outright sales of Treasury bills in the market and to

Later, reserves were provided through re

foreign accounts.

purchase agreements and through outright acquisitions of both

bills and coupon-bearing issues--the latter being the first

purchases of coupon issues in a month.

Net reserve availability fluctuated rather widely during

the period as the location and intensity of use of reserves

responded to various market forces--particularly the heavy

Treasury redeposits with the "C" banks starting about the

middle of the period and only now beginning to be reversed.

As

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a result of these redeposits, which tended to funnel an

unusually heavy proportion of Treasury cash holdings

into the money centers, the money market was if anything

slightly more comfortable in the statement week ended May 1

compared with the previous week--even though free reserves

were estimated to be about $100 million lower. Starting

yesterday the Treasury began to call back some of the $1.3

billion of special redeposits made between April 25 and

May 1. As this process continues it may tend to produce a

reverse effect on the money market and it may require

somewhat higher levels of net reserve availability to

maintain a steady tone in the money market.

Treasury bill rates have continued to move in a

narrow range during the past three weeks--with the three

month rate remaining between 2.88 and 2.92 per cent and the

six-month rate between 2.98 and 3.02 per cent. The average

issuing rates in yesterday's auction--,bout 2.90 and 2.99

per cent for the three- and six-mont. issues, respectivelywere within 1 or 2 basis points of the rates three weeks

earlier. This stability has grown ot of a rough counter

balancing of opposite forces in the market. On the one hand

there has been a continuing good demand from investors

(particularly some State funds in the recent period), while

on the other hand the Treasury has been enlarging its weekly

offerings by $100 million, rounding cat the cycle that began

With next Monday's action, however, the

in late March.

reach the end of these $100 million additions

Treasury will

to the weekly bill offerings and accordingly the weight may

be shifted in the recent balance of forces that has tended

to hold bill rates steady.

In the bond markets the atmosphere has improved during

the past few days, although it still remains somewhat

cautious. The current Treasury refunding has proceeded in

a very smooth fashion, with trading activity in the rights

and when-issued securities lighter than normal but still

quite substantial. The conversion into the reopened 3-5/8

per cent notes of February 1966 somewhat exceeded market

expectations, but the larger amount is being taken perfectly

well in stride. The $550 million of attrition was a bit more

than some observers had expected, but it was certainly not

high by past standards. Meanwhile, there has been continuing

interest in the distribution of the new $300 million issue of

4-1/8 per cent Treasury bonds of 1989-94 which were still in

syndicate at. the time of the last meeting.

The syndicate

marketing these bonds terminated on Friday morning, April 26.

Although half of the bonds were still apparently unsold at

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that time, only a small fraction of the unsold bonds (perhaps

$30-$40 million) were placed for immediate disposal

These

were absorbed by the market at prices of around 100-3/8--or

3/8 point below the syndicate reoffering price, which repre

sented a change of only 2 basis points in yield.

Following

this initial movement of bonds, trading in the 4-1/8's turned

very quiet until the last few days of the period when some

moderate buying interest reappeared and dealer quotations

edged up a few 32nds. The issue was quoted at 100-15/32 bid,

17/32 offered at the close yesterday, about the level the

syndicate paid for them.

In the corporate market better progress has been made in

the past few days in distributing some recent slow-moving

issues--particularly following the rather aggressive pricing

of the $25 million A-rated General Telephone of California

issue, which was reoffered to yield 4.39 per cent. While this

issue itself moved slowly, it tended to strengthen investor

interest in some other recent offerings. Currently the market

is focusing attention on today's offering of $250 million

Aaa-rated American Telephone and Telegraph bonds designed to

refund a 5 per cent issue put out several years ago. A week

ago it was expected that this issue might be reoffered in the

neighborhood of 4.45 per cent, but with the recent improvement

in market tone there is now some feeling that it might go below

4.40 per cent and indeed some of the more ebullient people in

If

the market are talking in terms of 4.35 or 4.36 per cent.

this issue moves out well, it could give a lift to the entire

market, possibly stimulating also some greater interest in the

Treasury's 4-1/8's

Current Treasury financing plans are highly indefinite

because of the uncertainties surrounding the debt limit. We

understand that if the current proposals for a $307 billion

limit through the end of June are approved by the Congress,

the Treasury may seek to borrow about $1 billion in the early

part of June--although it will not need the funds until Julyin order to make a start on the heavy borrowing that will be

necessary to meet the cash needs of the second half of the year.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, the open

market transactions in Government securi

ties and bankers'acceptances during the

period April 16 through May 6, 1963, were

approved, ratified, and confirmed.

5/7/63

-11The Chairman then called for the usual staff economic and

financial reports, and Mr.

Noyes presented the following statement

on economic developments:

The problem this morning seems to be to try to

determine whether the dramatic improvement in business

sentiment and expectations in the last few weeks has

just caught up with, or has overrun, the improvement

in economic activity that has actually occurred. The

history of this cycle thus far is one of undulating

and moderate expansion, upon which rather wide shifts

in confidence have been superimposed--up in late '61,

down in mid '62, up again in late '62, down in early

'63, and now up once more. Certainly recent history

would counsel caution in projecting, even a few months

into the future, either rapid increases or declines in

the pace of expansion. On the other hand, it is

obvious that both booms and busts have to start small

and build on themselves. Is there anything in the

facts available that would help to tell us whether

this is the beginning of an upward surge of major pro

portions, or just another zag in the gentle uptrend

that has prevailed for some time?

First of all, we can say with some certaintyalthough the data for the month are fragmentary--that

April did not show the same widespread improvement

that occurred in March. On the basis of weekly data.

we are estimating that seasonally adjusted retail trade

was down a little, despite the continued strength in

In the case of department stores, where we

auto sales.

have had more experience in estimating monthly changes

from weekly figures, it seems fairly certain that there

was a modest drop.

The small rise in unemployment is not large enough

to be statistically significant, but it is fair to say

that there was no further improvement.

On the other hand, the production index, boosted by

a half point gain attributable to increased steel output,

will certainly be up--and may well register a two-point

gain over the rounded index of 120 in March. But even

this favorable development must be discounted to some

extent because it is due in part to inventory building

in anticipation of a steel strike.

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Also, the more optimistic estimates of capital

expenditure plans reported in the McGraw-Hill survey

must be qualified to some extent--in that the improve

ment over the Commerce-SEC survey taken about two months

earlier is probably somewhat less than the raw figures

would suggest, because of differences in sample design.

These and other qualifications--such as a slight

upturn in unemployment compensation claims toward the end

of April--argue that it would be prema:ure to assume that

the current strong performance of the economy will produce

an upward spiral of problem proportions.

But if one thinks in terms of monetary policy, as we

must here, there is also little question that the economy

is now in a better position, both in terms of basic

strength and business psychology, to absorb any negative

impact that might flow from a moderately less easy mone

tary policy. In fact, a shift in the direction of lesser

ease may have already been discounted in financial markets,

and some of the more optimistic business forecasts that

have been widely circulated make explicit mention of the

fact that they "allow for" less ready credit availability.

Obviously, the mere fact that the economy could probably

take a moderately less easy policy in its stride at this

point is not in itself a reason to change, and a

positive

case for change still seems to me to be hard to find in

the domestic scene.

Sensitive material prices have

remained unchanged at below year-ago levels.

Further

study of the details confirms the generalization reported

at the last meeting that the actual effects of the mid

April steel price actions are not large. They amcunt to

about a 1 per cent increase in the BLS index for all steel

mill products, which had actually been drifting down since

1958. Whether there will be significant secondary effects

from .he changes remains to be seen, but the general

atmosphere in the markets remains highly competitive.

Our measures are not sufficiently accurate to gauge

month-to-month shifts in the relation of output to capacity,

but there can be little doubt that the recent advances in

production have made up most, if not all, of the widening

in the gap that had been occurring since early last fall.

Speaking very roughly, as one must with these broad

aggregate measures, in terms of the percentage of the labor

force employed, the use of our industrial capacity, and

prices of goods generally, we are just about where we were

a year ago. If these were the only factors to be considered,

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they would not seem to suggest the need for any action

to retard the rate of advance, for we have made no sig

nificant inroads, as yet, into our unutilized resources,

nor are we confronted with a generalized upward pressure

on prices.

Mr. Holland presented the following statement with respect

to financial developments:

There seems to me to be a certain tendency emerging,

at least temporarily, in a rather wide variety of recent

statistical readings and individual reports. I refer to

a note of moderation that has crept into numerous banking

and financial flows.

It is not, to be sure, an all-pervasive

development. The equity market deserves to be excluded

from this generalization, although even there stock prices

have been climbing more slowly as they have closed in on

their December 1961 peak. I must also stop my generaliza

tion short of the question of the quality of credit, That

subject remains a moot area for judgment; centralized

factual evidence is painfully inadequate regarding the

underlying question of the quality of new credits being

put on the books. But in the markets for debt securities,

and particularly in the banking system, the flow of

statistics now gives a rather more moderate cast to a

number of trends--including some that might previously

have been regarded as a bit on the immoderate side.

To begin with, interest rates have reacted quite

moderately to the substantial improvement in the business

forecasts of recent weeks. Looking back on the year to

date, and taking into account realignments in connection

with Treasury debt lengthening operations, one can observe

a gradual upward drift in yields on U. S. and municipal

government obligations, and also some upward adjustment of

yields on corporate new issues.

These rate movements could

be judged, in retrospect, to have already involved a good

deal of discounting, by dealers and investors, of the

business improvement to date, and also a discounting of

some further lessening of monetary ease as well. While we

have heard some stories of long-term investment funds being

withheld for a time, we have seen few evidences of antici

patory borrowing, and as a consequence markets have not

found it hard to handle 1963 demands, or to work out of the

consequences of occasionally over-aggressive professional

actions.

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Changes in the banking system appear rather striking

when one views April figures in isolation, but upon closer

examination the more extreme of these changes appear as an

unwinding of earlier departures from usual borrowing patterns,

rather than as major new developments. Thus, the concentration

of Treasury cash borrowing in the first quarter of this year

led to a $2-1/2 billion seasonally adjusted build-up of Govern

ment securities in bank hands, but this was entirely wiped out

with the passage of April, as banks redistributed previous

acquisitions and new Treasury financing was atypically low.

Total bank holdings of municipal securities jumped sharply in

April, but chiefly because of a heavy purchase of special New

York State tax anticipation obligations by New York banks;

apart from that, bank net acquisitions of municipals were of

more moderate dimensions than earlier this year or last.

Business loans rose $400 million in commercial banks in April,

according to the new seasonally adjusted statistics, but this

chiefly reflected the modest size of loan paydowns following

the smaller than usual tax date borrowing in March. Averaged

together, March-April business loan increases about equalled

January-February 1963, and were about half the average for the

fourth quarter of 1962. There was no visible sign in the April

loan figures of any resort to bank financing by businesses that

might be building steel inventory.

Bank lending to consumers slowed in March and April. And

security loans at banks declined enough, seasonally adjusted,

to offset the run-up in such credit that occurred during the

heavy financing schedule in February and March. Of all the

major bank loan categories, only real estate loans appeared to

continue to grow at a pace commensurate with that of last fall.

Even in this credit sector, net first-quarter expansion is

estimated to have been slower than last year, but the slowdown

appears to have been concentrated among nonbank lenders,

Adding all these bank earning asset trends together, total

bank credit growth in the first four months of this year averaged

about a $13.5 billion annual rate, one-fourth less than last year

(+$18.5 billion).

On the deposit side, there are also some signs of greater

moderation in the trend of time deposits. Total time and savings

deposits at commercial banks increased only about half as much

in April (10.3 per cent annual rate) as would have been projected

by the 18 per cent annual rate of growth characteristic of the

The slowdown appeared to extend to both

first quarter of 1963.

savings deposits and certificates of deposit, reflecting partly

increased tax date withdrawals, but also, as detailed data from

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the Chicago District suggest, some slowing in the rate of new

deposit inflows. Data for other savings institutions are not

yet available beyond the first quarter, when inflows were very

strong, and so we cannot judge whether this easing trend has

since spread or been offset outside the commercial bank sector.

We do hear, however, of a number of bank management decisions

to go slow on further solicitation of savings deposits and

certificates of deposit. Pressures to reduce rates paid are

evident in the savings and loan field, and may also be sub

stantial if less well advertised among commercial banks.

In the meantime the money supply moved up again in April,

continuing its see-saw upward course of recent months. This

latest advance appeared to draw a bit more support than did the

preceding increases from a rundown of Government deposits and

a reducec diversion of deposits into time form. But this may

also reflect the public's desire for a somewhat greater amount

of money to handle its flow of transactions. At its April level

the money supply was only 2-1/4 per cent above a year earlier,

compared with a first-quarter to first-quarter GNP increase of

5 per cent. With the total of money balances having been under

downward pressure in recent years because of the attractive

interest returns available on near-moneys, it should not be

surprising if substantial further advances in business bring

demands for additional money stock which are more commensurate

with the percentage increases in GNP than they have been in

some past phases of economic expansion.

Given the variety of places in the financial system in which

signs of some moderation are appearing, one is tempted to look

for a general source or sources of tranquilizing influence.

Indeed, a good many tranquilizers may be at work, and I would

not pretend to be able to identify all of them. Some credit

may need to go to the slightly less easy monetary policy pursued

since last December, with its slightly lower free reserves and

slightly higher bank borrowings and short-term rates.

Growing

internal funds of business, not yet utilized to finance inventory

additions or prospective capital investment, are also undoubtedly

moderating current loan pressures on the banking system. But a

substantial measure of the credit for the tendency to moderate

some of the more extreme banking trends of the last year or so

may belong to the ultimate common sense of bankers themselves,

who are finding in their balance sheet ratios, earnings and

expense statements, and credit quality changes some concrete

reasons for reconsidering their previous policies, particularly

with respect to the aggressive bidding for time and savings

deposits, consumer credit, and municipals. Whether such a trend

inside parts of the banking system can persist, and can spread

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to other areas of credit extension, only time will tell. An

observer is entitled to a certain degree of skepticism in these

respects. But the Committee will want to have these current

moderating tendencies in mind, along with the other consider

ations which press in upon it, in reaching its conclusion as to

an appropriate posture for policy at this juncture.

Mr. Furth presented the following statement with regard to the

U.S. balance of payments and related matters:

Transfers of gold, foreign convertible currencies, and

dollars to foreigners in April may be guessed at $500 million,

on the basis of the fragmentary and preliminary weekly data.

This would be twice as much as the monthly average for the

first quarter, and would bring the annual rate for the first

four months of the year back to the 1962 level of $3.6 billion.

Analysis of the increase in the deficit in April must wait for

more complete data. Tentatively, however, it may be assumed that,

apart from some adverse seasonal shifts, the U.S. trade surplus

declined from the high February-March levels which reflected the

settlement of the dock strike; that cessation of the pressure

on sterling put an end to inflows of funds from London; and that

market confidence in the new Canadian government led to increased

outflows of funds to Canada.

U.S. gold holdings declined slightly, with the usual

monthly gold sales to Austria, France, and Spain partly offset

by purchases from Brazil and Turkey. For the first four months,

the annual rate of the decline, $450 million, was much lower

than the annual figures for the last five years. Gold sales

have been kept down, first, by special Treasury borrowing abroad

of $480 million; second, by the pressure on sterling, which

induced the Bank of England not only to sell gold to the U.S.

Treasury but also to refrain from converting into gold the

dollars it received as aid from European central banks; third,

by the current practice of the Bank of France of converting

only a fraction of its dollar accruals into gold, while using

as much as possible of the remainder for paying off dollar

debts (e.g., last month $60 million to the World Bank); and

perhaps fourth, by a possible increase in Euro-dollar trans

actions, which might explain a sharp rise in non-official

British dollar assets. These factors, however, cannot be expected

to remain effective throughout the rest of the year.

Economic developments abroad continue to favor U.S. export

prospects. Europe has resumed its economic upswing, the inter

ruption of which during the winter was apparently caused mainly

5/7/63

by the unusually harsh weather.

Moreover, European wages

continue to rise, as shown by today's settlement of the

German metal workers' strike. Some European governments,

including the French, seem to be resolved to take more

severe measures against the threat of inflation; but these

measures will hardly be fully effective before the end of

the year. Moreover, some others, and especially the

United Kingdom, remain firmly committed to expansionary

policies. Thus, if only U.S. export industries managed

to avoid price increases, the competitiveness of U.S.

industry in world markets should continue to improve.

At the same time, however, further European expansion

will continue to make investment in Europe more attractive

to international capital. Under these circumstances, there

is little hope of further reductions in European interest

and yield levels, or of an increased flow of European

private funds to foreign countries, which would relieve

foreign demands on the U.S. capital market; and the outlook

for the long-term capital balance, both in the fixed-interest

and the equity sector, remains unfavorable. For the first

four months of the year, foreign security issues in New York,

overwhelmingly representing Canadian borrowing, have con

tinued at an annual rate of $1.5 billion.

Recorded outflows of short-term capital seem so far to

have remained modest. Yesterday's reduction in Canada's

discount rate promises a curtailment of flows to Montreal.

But the disappearance of the covered interest-rate advan

tage for U.S. Treasury bills over U.K. Treasury bills may

give impetus to flows to London, Unfortunately, the

United Kingdom seems to welcome such inflows for the sake

of its own payments balance.

At this point the Chairman turned to Mr. Hayes, who commented

informally on his recent trip to Europe during which he visited in

London, Paris, and Rome and attended a monthly meeting of the Bank for

International Settlements in Basle.

With respect to his visit to London, Mr. Hayes observed that

the budget message, which he heard delivered by the Chancellor of the

Exchequer, was well received.

It seemed to be generally agreed that

5/7/63

-18

the United Kingdom was in need of expansionary measures and that the

proposed budget was in the right direction.

There appeared to be no

particular concern from the standpoint of deficit financing or adverse

effect on the British balance of payments.

It was the general view

that the expansionary effects of the budget would be moderate and

gradual, so that there would not be too much effect on imports this

year.

The outlook for the pound sterling was regarded as reasonably

good; invisibles in the balance of payments seemed to be showing

marked improvement.

The talk of devaluation had now died down.

There was a rather general feeling that the British might have to

resort to a drawing from the International Monetary Fund to fund the

temporary borrowings from Continental central banks earlier this year.

However, although it was too early to judge whether the flow of funds

out of Britain that had occasioned those borrowings was going to be

reversed, there was some hope that the British could avoid funding

them.

There was an undercurrent of discussion about possible

liberalization of certain banking practices in England, with some

disposition to favor more flexible rate policies, but this was still

in the talking stage.

In France, Mr. Hayes said, there was much official concern

about wage pressures.

One difficulty lay in nationalized industries,

where productivity was not increasing, being forced to follow the kind

of wage trend being followed in the more productive industries.

5/7/63

-19

Attempts were being made to stimulate the capital market, with the

general objective of promoting long-term lending activity and also

freeing the Treasury bill market.

As to the balance of payments, it

was expected that the surplus in 1963 would be below 1962, but still

quite substantial.

Gold continued to occupy quite an important place

in private investment decisions; some investment trusts were carrying

substantial quantities of gold.

There had apparently not been any

real tightening up on permission for Americans to invest in France,

although there may have been a little increase in the time lag

involved.

There was still a general feeling that American investment

was appropriate, provided it did not result in domination of a major

industry.

There seemed to be a growing awareness of the competitive

ability of American industry, with some concern also about competi

tion from Germany and Britain.

In Italy wage pressures were a popular topic of conversation.

The increase last year averaged 16 per cent, and the figure could go

as high this year.

year.

Retail prices were up about 9 per cent in the past

However, there was no disposition to check credit expansion.

anything was going to be done about the wage-price spiral, apparently

it would have to come primarily from restraint on the part of labor

and management, with Government backing.

The balance of payments had

been in basic deficit in recent months, but this was offset by short

term capital inflows.

This was a season when revenues from tourism

If

5/7/63

-20

were not running as heavy as in the summer, and the payments position

seemed fairly close to equilibrium.

Strong efforts were being made

to improve the capital market, with monetary measures aimed at reduc

ing short-term

term rates.

rates in the hope that this would stimulate lower long

To some extent, this had been effective in recent months;

the capital market was now better than last fall.

The April meeting of the Bank for International Settlements

at Basle was quiet, with no problems of great concern evident at the

moment.

Views on the U.S. dollar seemed to reflect confidence as far

as the immediate outlook was concerned, and this applied also to

general discussion of the dollar on the Continent.

At the same time,

some observers were quite concerned about the continuing U.S. balance

of payments deficit, as evidenced by the Annual Report of the Nether

lands Bank.

Uneasiness was sensed on the part of a number of central

bankers about the position of the dollar in the longer run, a concern

as to whether this country was really getting the balance of payments

problem under control or whether there was a persistent, underlying

problem that had not been dealt with adequately.

Some potential risk

also was indicated of temporary measures being strained too far.

There was always the danger that countries would consult among them

selves and then become less amenable to bilateral arrangements with

the United States unless they saw greater assurance that this country

was making the kind of progress it should be making on its balance

5/7/63

-21-

of payments problem.

In Mr. Hayes'

judgment, monetary policy had an

important part to play in this effort.

Chairman Martin then turned to Mr. Young for a report on the

most recent meeting of Working Party 3 of the Economic Policy Committee

of the Organization of Economic Cooperation and Development, and Mr.

Young commented as follows:

At the most recent Working Party 3 meeting, held in

Paris last week, a review of U.S balance of payments

pclicy was again the principal item of the agenda. We

had been advised in advance that we would confront a

European view that the U.S. had not as yet presented to

the group a comprehensive program for the correction of

its payments deficit. In the light of this advice, the

main task of the U.S. delegation was considered to be a

full explanation of the longer range and shorter term

elements of an integrated U.S. program, together with a

broad indication of the pace at which it was expected to

be achieved. This was done effectively and, we thought,

persuasively by the head of our delegation.

For the longer run, he emphasized adjustment through

the work-out of fundamental competitive forces, supple

mented by redistribution of aid and defense burdens and

by gradual reduction of the capital outflow through

reciprocal credit and capital market adaptation. For the

shorter run, he stressed some further tying of aid, more

stringent control of Governmental expenditures abroad,

additional debt prepayment and defense expenditure offsets,

some intermediate-term borrowing by the Treasury in secu

rities denominated in foreign currencies, some increase in

U.S. liabilities to willing dollar holders, and some

settlement in gold.

This presentation received adverse comment on four

grounds:

(1) The length of the projected period--two to

three years or even longer--to achieve

equilibrium;

(2) the size of the U.S. deficit considered

possible for 1963--$3 billion;

(3) the failure to assign a larger and more

5/7/63

-22-

active role--short-term and longer-term--to

monetary policy: and because of

(4) the inflationary burden that the U.S.

deficit was placing on surplus countries.

The U.S. delegation Has subjected to special question

ing regarding the bilateral use of the new special Treasury

issues denominated in foreign currencies.

It was said that

the specific issue raised by resort to this instrument was

whether the U.S. in fact eas not circumventing the

multilateral disciplinary mechanism of the international

payments system which the International Monetary Fund was

established to provide. And if the U.S. felt that,

because of its special reserve currency status, it could

not draw from the Fund to bridge over a persisting

disequilibrium, was it not then the duty of Working Party

3 to exercise a special srveillance and disciplinary

function with respect to the U.S. payments deficit?

The U.S. response to this line of logic and

questioning was that these special Treasury issues were

merely intended to provide the U.S. a means of encouraging

additional dollar holdings, without exchange risk, by

countries desiring to hold them during a period in which

the U.S. was striving to improve its payments position

without actions that would disturb financial markets or

It was also pointed cut

distort patterns of world trade.

that this new type of Treasury security filled a gap in

available international monetary instruments in that it

provided an instrument, free of exchange risk, falling

between the short-term swap and the longer-term (3-to-5 year)

IMF drawing, and therefore constituted a modest but signi

ficant supplement to the media for international liquidity.

As regards the issue of the use of the new instrument as

a device for circumventing established procedures for

preserving international monetary discipline, it was pointed

out that the U.S. was in no way avoiding these procedures;

that the U.S. was, as other IMF members, subject to regular,

searching review as to its balance of payments policies;

and that the terms of reference of Working Party 3 did not

include the exercise of any special disciplinary function

with regard to any country.

In the Chairman's concluding remarks he noted that,

while U.S. expansion and prosperity were essential to a

that

strong U.S. payments position, Working Party 3 agreed

there was urgent need to supplement such expansion by an

active monetary policy to reduce excessive internal liqidity.

He further stated that the group had agreed that U.S. monetary

5/7/63

-23-

action to raise domestic interest rates should not be

nullified by increases in interest rate levels of the

surplus countries. With regard to U.S. use of special

Treasury issues denominated in foreign currencies, he

said the provisional Working Party 3 view was that their

employment was appropriate only if there were definite

indications of improvement in the U.S. payments position.

Finally, he expressed for the European membership of the

Working Party strong reservations as to the U.S. policy

of tying its foreign aid, saying that this militated

against rather than helped restoration of U.S. competitive

ness.

The Chairman's summary seemed to the entire Working

Party group to carry much further than had its discussion

and to convey explicit agreement among the Europeans on

points not fully or extensively discussed in the meeting,

Since the meeting had at that juncture extended beyond

its scheduled termination, it was agreed that the Chairman

would expcse his summary for group reaction and comment at

the opening of the next meeting of the Working Party to be

held on the 19th and 20th of June. Since time had not

been available for an exposure and discussion of U.S.

domestic liquidity and monetary developments, such a

presentation was placed, as a priority item, on the next

meeting's agenda.

Another part of this last meeting's agenda was a

general discussion of French capital market organization.

This organization contrasts sharply with the free market

type with which U.S, students are familiar since it is

geared to channeling a large part of national savings

through the French Treasury at interest rates that are

determined by Treasury policy rather than by the market.

An official commission has recently been engaged in a

searching examination of the French market's structure,

but the commission's report was not available for this

meeting's discussion. And there were no hints as to

whether the report would include recommendations looking

toward a freer French capital market.

A final section of the meeting was given over to a

round table report of recent economic and balance of pay

ments developments in the major European countries. This

review produced no information with which the Open Market

Committee is not already familiar. However, both the

French and German delegations were mildly chastised in the

discussion for pursuing monetary policies mainly oriented

to their domestic problems but at variance with the

5/7/63

-24-

payments surpluses of their respective countries.

After a brief discussion during which Mr. Young expanded on

certain aspects of his report, Chairman Martin called for the usual

go-around of comments and views on economic conditions and monetary

policy beginning with Mr. Treiber, who presented the following state

ment:

The business atmosphere and business outlook have

improved in recent weeks. Consumer buying has been a

continuing element of strength, and consumer confidence

appears to be high. Housing starts have risen sharply

following the winter slump. The recent McGraw-Hill sur

vey of capital spending plans reinforces earlier

indications that capital spending would move up after

the first quarter. Apparently the new depreciation

schedules and the 7 per cent tax credit are having a

favorable effect on plant and equipment spending.

Because, however, of the part played by temporary

factors, such as the buying stimulus associated with

fears of a steel strike, the magnitude of the prospective

rise in business activity is uncertain.

Prices generally continue to be stable, but there

are some indications of a firming of raw material prices

It is too soon

for both immediate and future delivery.

to tell the effect of the recent selective increases in

steel prices.

Employment has risen, but there is little change in

Indeed, the problen of unemployment is of

unemployment.

about the same magnitude as it was a year ago.

A reduction in commercial bank credit in April

reflected contraseasonal reductions in bank holdings of

Government securities and in total loans, primarily

security loans. In addition, there was a contraction of

loans to sales finance companies. On the other hand,

there was strength in business loans, with modest advances

rather widely based. There was a $1/2 billion rise in the

daily average money supply in April. While bank liquidity

is at about the level of early 1961, it is still adequate.

There continues to be plenty of nonbank liquidity.

Preliminary statistics for April indicate a worsening

of our balance of payments deficit.

The deterioration

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5/7/63

occurred despite a temporary decline in foreign bond issues

in our capital markets and reports of an increase in

purchases of United States corporate stocks by foreign

investors. Imports in March continued at a relatively

high level; it is not clear to what extent this reflects

the deferment of foreign shipments to this country because

of the dock strike. There is no indication of any prospec

tive improvement in our balance of payments. On the

contrary, large foreign borrowings in our capital markets

are in prospect, and the rise in business activity may

stimulate greater imports. Although our monetary gold

stock has remained unchanged since the last meeting of

the Committee, it is clear that there will be substantial

gold losses as the year progresses, and perhaps fairly soon.

Our balance of payments, both actual and prospective, is bad.

The Treasury is in the midst of a refunding operation.

The new issues are to be paid for by the surrender of the

maturing issues a week from tomorrow. Thus, "even keel"

considerations would rule out any major change in Federal

Reserve policy in the next week or so, but "even keel"

considerations should not preclude some moderate movement

toward a firmer money market sometime during the statement

week beginning May 16.

It seems to me that our bad balance of payments calls

for Federal Reserve action, While an immediate rise in

the discount rate would seem premature, a further modest

move through open market operations toward somewhat less

ease would seem advisable. It should be possible to

initiate such a move a few days after May 15 when the

Treasury refunding operation will have been completed.

The objective of such a move would be a Federal funds rate

consistently at the 3 per cent discount rate, and a three

month Treasury bill rate at nearly 3 per cent; such a move

would probably involve a modest reduction in free reserves

and a modest increase in member bank borrowing. Such a

cautious movement toward a bit less ease would call for a

change in the directive to show such a change in policy.

The change in the directive should recognize the improved

domestic outlook, indicate that greater weight is being

placed on balance of payments considerations, and make clear

that no action would be contemplated until the Treasury's

refunding is concluded.

Mr. Ellis said that economic activity in New England continued

at a high level, but without significant signs of appreciable expansion.

5/7/63

-26

Manufacturing output in March was at virtually the same level as in

January of this year and in March 1962, although within the category

of manufacturing there were, of course, various shifts and counter

balancing movements.

In the electronic field, competition from Japan

was a factor in pulling the employment level down 2 per cent below a

year ago.

on imports.

Shoe and cotton goods manufacturers also blamed declines

Shoe production in the first quarter of this year was 6

Total unemployment rose

per cent under the first quarter in 1962.

slightly in March, on a seasonally adjusted basis, to a level virtually

identical with the national average, although insured unemployment

figures were a little less favorable than for the nation.

Retail

demands continued strong, and bank debits had risen to a new peak.

Businessmen reported an increasing volume of new orders.

Figures for First District weekly reporting banks reflected a

seasonal leveling off of business loans since the March tax date,

There was a continued shifting from short-term Government securities

to other securities, primarily municipals.

Turning to the national picture, Mr. Ellis expressed agreement

with the view that it was rather difficult to make a positive case for

a shift to less monetary ease based solely on an analysis of the

domestic economy,

On the other hand, the economy seemed better able

at present to stand a lesser degree of ease; such action may have

already been discounted to some extent.

Therefore, in the formulation

5/7/63

-27

of policy the Committee seemed to have more freedom of choice than

in past months.

On the international side, there had been a worsen

ing of the balance of payments position in April, due partly to

capital flows.

Looking at the impact of credit policy in the past

month, the staff memorandum indicated that free reserves had averaged

a little higher, member bank borrowings a little lower, and the

Federal funds rate a little lower on average.

As Mr. Ellis saw it, the choice between no change in policy

and a shift to slightly less monetary ease involved a matter of

closely balanced alternatives.

He did not feel sufficiently confident

of the strength of the business situation and the future trend to

suggest at this time a definite shift of policy to less ease.

What

did seem feasiole to him was experimentation with short periods of

less ease, allowing some additional firmness in money markets to

develop from market

factors that he thought might appear this spring.

If this experimentation should demonstrate the feasibility of a lesser

degree of ease, with the economy continuing to expand, the Committee

could then decide to consolidate its position.

For this experimenta

tion he would suggest moving toward $250 million as an initial target

for free reserves, with less trading in Federal funds below 3 per cent.

He would expect some modest increase in member bank borrowing and a

tendency for the short-term rate to rise toward the discount rate, but

he would not recommend changing the discount rate at this time.

If a

5/7/63

-28

course such as he had outlined should be decided upon, it would be

necessary to revise the policy directive accordingly.

Mr. Irons said there had been no significant changes in the

Eleventh District in the past three weeks.

It would probably be

accurate to say that there had not been quite as much recent improve

ment in economic activity in the District as

nationally.

seemed to be reflected

It was more a matter of moving along on a high plateau,

with some indicators up slightly and some down.

Industrial production

was holding at the March level, which was down a point, reflecting

largely petroleum production.

Construction activity continued at a

very high level and established a record during the first four months

of the year.

Employment continued to rise slightly, and unemployment

had declined to 5.0 per cent of the labor force on an unadjusted basis.

Department store sales were running about 5 per cent ahead of a year

ago and the agricultural situation looked promising, with rainfall in

a large part of the District improving expectations.

Loans and investments of District reporting banks were both up

in the most recent period, with an increase in investments in both

Government and other securities, while demand deposits were down a bit.

Time and savings deposits growth lagged somewhat during the past three

week period.

The banks seemed to be adequately liquid.

about on balance as to Federal

They were

funds for the past three weeks, and few

banks were borrowing from the Reserve Bank.

5/7/63

-29

Mr. Irons noted that the national picture reflected continuing

improvement, with increased confidence in the business outlook.

General

attitudes seemed much more favorable, judging from views expressed both

by Government spokesmen and businessmen.

If one could eliminate the

unemployment figure, most of the economic indicators appeared quite

good.

The balance of payments situation continued to be a problem,

apparently of about the same degree of difficulty that had prevailed

for some time.

Mr. Irons went on to say that he was beginning to wonder

whether a problem might not be developing on the domestic side in the

form of deterioration in the quality of credit.

He seemed to be hear

ing more comments about heavily indebted borrowers having difficulty

in maintaining their positions, the tendency toward more questionable

mortgage coverages, the extension of maturities, and about inflation

ary tendencies and speculative movements that were beginning to show

up in noncommodity areas, rather than in the price of goods being sold.

He wondered whether monetary ease might not have reached the stage

where it was stimulating sectors other than basic production, employ

ment, and the distribution of goods.

In the light of developments that raised warning flags, Mr.

Irons raised the question whether it might not be appropriate to move

in the direction of slightly less ease,

The critical point seemed to

be the matter of timing, but in view of some of the warnings that he

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5/7/63

thought he saw in the domestic picture he felt it might be appropriate

to move in that direction.

Accordingly, while he was not firm in his

convictions, he would support a moderate move toward more firmness if

that should be the Committee consensus.

This would contemplate,

according to his analysis, free reserves in the area of $200-$250

million, a Federal funds rate more firmly at 3 per cent, and the bill

rate at or close to 3 per cent, and he would expect some increase in

member bank

borrowing.

rate at this time.

He would not, however, change the discount

If a policy such as he had outlined should be

decided upon by the Committee, it would be necessary to modify the

policy directive.

Mr. Swan reported that the improvement in business conditions

in the Twelfth District appeared to be a little less strong than in

the nation generally, in contrast to the situatin during most of 1962.

The number of nonfarm wage and salary employees was virtually unchanged

in March on a seasonally adjusted basis.

In fact, from January to March

the gains in distribution and service industries were just about offset

by losses in commodity-producing industries.

During the period April 3

to April 24 the loan increase at weekly reporting banks was considerably

less than in the comparable period of 1962, and withdrawals from savings

deposits--primarily for tax payments--were about twice as large.

This

implied that a significant amount of the growth in savings accounts

since the increase in interest rates may have reflected accumulation for

5/7/63

-31

substantial periodic expenditures.

The growth in time and savings

deposits at weekly reporting banks had been somewhat slower this year

than in 1962.

From the first of the year through April 24 the rate

of increase of savings deposits was only about half as large as in

1962.

Mr.

Swan agreed that a shift in monetary policy seemed to be

getting closer and closer to the point of decision.

However, he

believed that the improvement in the business situation did not yet

warrant any change in policy.

Steel production and orders were

affected by hedge buying against the possibility of a strike.

Looking

at over-all measures of unemployment, retail sales, and industrial

production, along with the moderation in financial developments

referred to by Mr. Holland, he did not find indications that a strong

upward surge of economic activity was imminent.

Certainly the month

of April showed no cumulating of the March advances.

Accordingly, Mr. Swan said, he would continue for the next

three weeks the same policy that had prevailed during the past three

weeks.

The economic upturn was still at an early stage, and he would

prefer to give it a good chance to continue.

If credit demands began

to increase substantially in May, and if it were found that the supply

of additional savings had slowed down, some market tightening would

seem probable.

It seemed preferable to him to await such a develop

ment, if it was going to occur, rather than to take deliberate policy

5/7/63

-32

steps in anticipation.

The balance of payments, of course, still

presented a serious problem, but he did not think it was overriding

in importance compared with the domestic situation.

He would

recommend that there be no change in the discount rate at this time,

and no change in the policy directive except for a possible technical

amendment.

Mr. Deming said that the general feeling in the Ninth District

was one of optimism, which to some degree seemed justified.

Crop

prospects were excellent in terms of moisture and an early season.

Retail sales were good, particularly auto sales, and farm implements

were moving very well.

On the other hand, some developments indicated

nothing better than an even keel, and some others were even less

encouraging.

Nonagricultural employment and industrial production

statistics showed at best level activity through March.

The broadest

measure, personal income, showed a declining trend on a seasonally

adjusted basis from the first of the year and no net gain since early

last fall.

Relative to a year ago, however, March personal income in

the District was up more than for the country as a whole, and the wage

and salary and nonfarm proprietor sectors showed more strength than

the total.

The iron ore shipping season opened late on Lake Superior

because of the heavy ice, but ore stocks at steel mills were quite

high and the outlook for ore shipments was not particularly optimistic.

Cattle feeders had been hard hit by recent livestock price declines,

5/7/63

-33

and many had delayed marketings.

hurt.

Some feeders might well be badly

Some decline was seen in mortgage loan quality, with lower

down payments and longer maturities evident since the first of this

year.

Delinquencies, defaults, and foreclosures were still quite

low but showed some tendency to rise.

In sum, the statistical evi

dence indicated no strong upward thrust in activity such as seemed

to be evident at the national level.

Ninth District banking developments continued to show mixed

trends between city and country banks.

Following a very strong

performance in bank credit, loans, and deposits at both classes of

banks in the fourth quarter of 1962, the first quarter of 1963 showed

total bank credit and bank loan growth of greater than seasonal

proportions but weaker than in the fourth quarter of 1962 at both

classes of banks, with relatively stronger expansion at country than

at city banks.

The change in total deposits in the first quarter at

country banks was just as strong as in the fourth quarter of 1962,

but at city banks deposits fell about seasonally in contrast to more

than seasonal growth in the latter part of 1962.

City bank loans,

investments, and deposits exhibited weakness in April after seasonal

adjustment, as did country bank investments and deposits, but the

latter banks continued to show above-average loan strength.

This

atypical behavior in country bank loans probably reflected in large

part the financing of cattle feeders, who had withheld stock from

5/7/63

-34

the market because of price drops.

If the paper losses of the cattle

feeders became real, country bank loans might be expected to stay up,

partly because of the losses and partly because they would have to

carry heavier lines of production credit during the crop-growing

season.

Turning to

credit policy, Mr. Deming observed that

Mr.

Koch's

comment at the April 16 meeting that the emphasis in speaking of

"slightly

less ease" should be put on the word "slightly" rather

than on "less ease" seemed appropriate.

Any difference between the

posture of the System just prior to December 18,

1962, and at present

was not observable to the naked eye, although it probably was true

that the tone of the market was a shade firmer.

In the three weeks

ended December 19, excess reserves averaged $445 million; in the four

weeks ended May 1, they averaged $441 million.

Member bank borrowings

averaged $121 million in the three weeks ended December 19;

averaged $124 million in the four weeks ended May 1.

averaged $324 million in

Free reserves

the three weeks ended December 19; they

averaged $317 million in the four weeks ended May 1.

bill rate was not

they

significantly different.

The three-month

Dealer loan rates were a

bit higher, and Federal funds hit 3 per cent somewhat more often, but

not much more often.

Mr. Deming also observed that the balance of payments problem

loomed about as large as it did six months ago, although comment on it

5/7/63

-35

seemed to have moderated somewhat.

Of course, if the Canadians could

not have borrowed in the U.S. capital market, the U.S. payments posi

tion would have been much closer to balance.

They did borrow,

however, and apparently were going to continue to do so.

Mr. Deming went on to say that he had done some analytical

work on U.S. bank foreign lending.

everyone knew:

In brief, this study showed what

a strong uptrend in both long- and short-term bank

lending to foreigners since 1953 and a sort of plateau series in such

loans, with successive plateaus at progressively higher levels.

When

loans to foreigners were plotted as percentages of weekly reporting

bank total loans, and particularly as percentages of New York City

bank loans, the steps were very apparent.

And when these in turn

were plotted against free reserves, there seemed to be a rough kind

of relationship, lagged a bit to be sure, between high free reserves

and a higher plateau of bank lending to foreigners.

It was Mr. Deming's feeling that a bit too much liquidity may

have been pumped into the banking system and that there had been some

"spillover effect" on foreign lending.

It might be significant that

the slightly lower level of free reserves in the latter part of 1962

was accompanied by a slightly lower level of foreign loans relative

to total loans,

Mr. Deming expressed the view that it might be useful for the

Committee to move a bit toward lesser ease.

While this would not cure

5/7/63

-36

the balance of payments problem, it might be of some assistance.

It

might also curb gently any tendency of the banks to push speculative

and unsound credit extension, if any such tendency existed.

With a

relatively weak private sector demand for loans, it should not choke

off needed and sound credit.

He would take this step via reduced

reserve availability without any particular emphasis on rate harden

ing.

It might be

amount;

much.

that rates would not advance by any appreciable

if there really was spillover, they should not advance very

In any event, he would suggest the use of a lower level of

free reserves as a guide rather than the short-term rate--perhaps a

level of $200 to $250 million of free reserves.

He would not resist

an upward rate movement, but he would not seek it as an end.

This

policy could be begun without much in the way of an overt move--if

the reserve estimates are reasonably accurate--merely by letting

market factors absorb reserves in the next two weeks.

be an economic

period.

If there should

upswing on the way, that should help over the longer

He thought this would be worth doing, and that it could be

done without harm to the domestic economy.

If it was decided upon,

there should be an appropriate change in the policy directive, but

he saw no reason to change the discount rate at this time.

Mr. Scanlon reported that Seventh District business activity

continued to improve in April.

Manufacturers' new orders, especially

for capital equipment and steel, continued strong.

Employment in all

5/7/63

District States was appreciably above last year in March, and reports

from local employment service offices indicated that increases in the

second quarter would be more than seasonal.

Steel orders continued very strong,

but local experts believed

that demand would taper off later in the month.

While most types of

steel products other than structurals had participated in the order

surge, delivery times for sheets and strip had stretched out from

three-four weeks to seven-eight weeks.

steel production was inevitable.

It seemed that a reaction in

The highest estimates for the year

as a whole were around 110 million tons, compared with a current

operating rate of 133 million tons.

Producers of capital goods reported further increases in orders,

with construction machinery especially strong.

Orders for farm

machinery continued excellent despite the prospective drop in net farm

income in the Midwest.

The higher level of new orders had ercouraged many manufac

turers to test their markets by announcing price increases.

This was

true not only in steel and aluminum but also in such varied lines as

electrical equipment, bearings, paper products, and glass.

A stronger

tendency in this direction was thought to be noted than at any time

since the current expansion began two years ago,

As to the auto market,

deliveries to customers in April were the largest on record,

Savings continued to flow to financial institutions at a high

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rate, Mr. Scanlon said, somewhat less rapidly than a year ago at Seventh

District banks and somewhat more rapidly at savings and loan associations.

The volume of time certificates issued by banks was rising much less

rapidly than last year.

Many banks had de-emphasized savings promotions

and apparently would like to cut rates paid on savings if competition

would permit them to do so.

Tabulations of new mortgage loans showed

a further easing of terms and interest rates for March.

Moreover,

significant cuts in mortgage rates reportedly had occurred in April in

some areas of the District.

While total credit outstanding at weekly reporting banks rose

strongly in March, both in the nation and in the District, this per

formance did not continue in April.

Some Seventh District bankers

reported business loan demand to be relatively strong, but most of

them indicated that they were vigorously seeking additional outlets for

funds, including greater emphasis on accounts receivable financing and

auto loans.

According to a recent survey, most country bankers expected

the demand for farm loans to be as strong or stronger than a year ago.

Mr. Scanlon said he was worried about some of the things Mr.

Irons had mentioned so far as deterioration of the quality of credit

was concerned.

Like Mr. Irons, he felt that the matter of timing was

important in considering a possible change in monetary policy.

Although

a close question was involved, he would recommend a continuation of

current policy for the next three weeks.

He would construe continuation

5/7/63

-39

of the current posture to imply achievement of moderate reserve

expansion while maintaining, so far as possible, a stable money

market as reflected primarily in short-term interest rates.

Although

business had strengthened further and expectations were more optimis

tic, he saw a distinct possibility of an inventory turn-around that

would have a dampening effect beginning around midyear.

In the mean

time, the inventory buildup appeared to be beyond the reach of any

moderate adjustment of monetary policy.

He was disturbed by the

increasing evidence that prices were being marked up on a lengthening

list of items, and he expected that the System might soon be confronted

with a gradual rise in prices while there were still sizable amounts o

unused resources.

After commenting that he would not change the discount rate

at this time, Mr. Scanlon noted that if the Committee should decide

to move in the direction of lesser ease, it would be necessary to

change the policy directive.

If the directive were changed for any

reason, he would favor deletion from the first paragraph of several

phrases so as to omit the references to recent increases in bank credit,

money supply, and the reserve base, the limited progress of the economy,

and absence of inflationary pressures.

Mr. Clay expressed the view that it would be appropriate to

continue essentially the same monetary policy in view of recent

domestic and international developments.

In fact, it could be said,

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-40

he thought, that apart from Treasury financing the reasons for that

policy remained much the same as earlier.

While the international

balance of payments problem continued to be intractable, it was

clear that the domestic economy was in no sense operating under

forced draft with strong demand pressures on resources, capacity to

produce, and prices

Hence, the economy was not generating the strong

internal pressures normally associated with a balance of payments

deficit problem.

While economic activity was showing some advancement, it had

not given evidence of making much inroad on the economy's resource

utilization problem.

To be sure, the steel industry was operating at

a much higher rate of capacity than earlier, but that development

rested to an important degree on steel strike hedging.

Moreover,

there was the difficult question as to the extent to which the improve

ment in aggregate economic indicators might grow out of the same

factor.

All in all, Mr. Clay concluded that monetary policy should

continue to be a moderately stimulating one.

The degree of improve

ment shown in domestic economic activity thus far was not sufficient,

in his judgment, to warrant any lessening of the expansionary role of

monetary policy.

The discount rate should remain unchanged, and except

for the reference to Treasury financing the substance of the current

directive was in line with the monetary policy that in his opinion

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5/7/63

should be pursued.

Mr. Heflin reported that Fifth District business had continued

to advance following gains in March that lifted the area economy above

its former plateau.

The initial upward movement was particularly

strong in manufacturing, and the March rise in seasonally adjusted fac

tory man-hours was stronger in the District than in the nation as a

whole.

Insured unemployment had decreased since the middle of March at

a distinctly better than seasonal rate, and the Reserve Bank's latest

survey suggested that the decline was continuing.

The survey also

showed business sentiment still buoyant; two-thirds of the panel

expected further gains and most of the others foresaw continuation at

On balance, the respondents rated nonfarm employment,

present levels.

bituminous coal mining, construction, and retail trade stronger than

three weeks earlier,

Manufacturers in general continued to report

rising levels of new orders and shipments as well as increased employ

ment and longer workweeks

Textile firms, however,

were still hampered

by fluctuations in demand stemming from widespread uncertainty as t

how cotton prices would behave if action was taken to alter the two

price system.

Business, consumer, and real estate loans at weekly

reporting banks continued to show somewhat greater strength in the

District than in

th

nation as a whole.

Turning to national conditions, Mr. Heflin noted that the

resurgence in economic activity had now continued long enough to

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indicate that, even after discounting the effects of inventory

accumulation in steel and other temporary factors, there had been a

definite, even though modest, improvement in the economy.

The

improvement seemed to be quite general, and no major decline or

unfavorable development had been announced for more than a month.

In addition to the strength in automobile sales and other retail

sales,

which had been evident for several months, personal income had con

tinued to rise

slowly,and industrial production had broken out of the

narrow range within which it fluctuated during most of 1962.

There was

evidence also that business investment was moving up, including the

most recent estimate that outlays for plant and equipment this year

would be 7 per cent above last year's figure, in contrast with an

estimate of 3 per cent made last fall.

While manufacturers' new orders

showed no significant change in March, the total of unfilled orders

increased nearly

a billion dollars, and the increase for the first

quarter was almost two billion dollars, which offset about two-thirds

of last year's decline.

While it was too early to be sure, these

gains plus the improvement in business sentiment might mean that the

recovery which began in February 1961 had its second wind after last

year's pause.

Mr. Robertson presented the following statement:

The evidence of improving business that is being

I

reported around this table is certainly welcome news.

hope, as all of us must, that the pickup will continue,

firmly but gradually. If it does, then at some point it

5/7/63

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would be necessary to shift to a substantially less easy

monetary policy.

But, in my judgment, that point has not yet been

reached. Strengthening business expectations and investment

plans strike me as still too tender to accept with impunity

any increase in interest rates or restraint upon liquidity

or credit availability. Moreover, current activity is

certainly being bolstered, and third-quarter activity will

probably be dampened, by the effects of anticipatory pur

chases of steel in the current quarter.

It would seem wise

to wait to see how well the economy withstands this possible

third-quarter snapback in steel before trying to test its

ability to grow under tighter monetary conditions.

I say this partly because I think that any movement to

a policy of less ease would have to be a fairly substantial

one in order to be useful to us in the international arena.

In this connection, let me point out that we have apparently

obtained precious little gain in the way of international

financial confidence from the three very modest tightening

or "probing" actions that we have already undertaken in the

Some might argue that such changes in policy

past two years.

have a constructive role to play when sizable capital out

flows are occurring of a type that is responsive to a few

basis points' differential in interest rates.

But such flows

have not bulked large for a number of months.

All this means to me that the appropriate policy prescrip

tion for the next three weeks is to wa t:

watch and wait with

policy targets unchanged for a little while longer, until-

hopefully--domestic business expansion and the balance of

payments could both justify and respond constructively to a

move toward a less easy policy. We have waited this long;

a few more months may now be all it will take to prove the

essential wisdom of the course that we have followed.

Mr. Shepardson noted, with reference to the reports of hedge

buying of steel, that this factor was hardly going to be affected one

way or the other by monetary policy.

on economic activity were encouraging.

In general, he added, the reports

The lack of significant change

in the rate of unemployment was a problem that had persisted for a

long time.

Here again was a factor that involved elements beyond the

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5/7/63

direct impact of monetary policy.

Mr. Shepardson agreed with the view that it was time to begin

experimenting in the

direction of slightly lesser ease.

mentioned at previous

Committee meetings, in his opinion there were

evidences of

movements.

As he had

inflationary pressures outside the normal gauge of price

Also, according to the material furnished by the staff on

reserves, it appeared to him that required reserves against private

deposits were continuing to increase at an annual rate of better than

4 per cent, as against the growth guideline of 3 per cent that had

been discussed for some time.

For all of these reasons, Mr. Shepardson said, he concurred

with the view that a target of somewhat less ease was indicated.

If

this should be the decision of the Committee, a corresponding change

in the policy directive would be required.

Mr. King commented that it was apparent that the domestic

economy was continuing to make some progress.

So far as monetary

policy was concerned, he felt that this was probably a good time to

squeeze some water out of the brakes, although not until the middle

of this month for reasons that had been mentioned earlier during this

meeting.

A very modest move toward less ease would be generally in

accord with the views he had expressed at the April 16 meeting of the

Committee, and he would envisage basic target figures such as outlined

by Mr. Irons.

As to the policy directive, it seemed to him that a

5/7/63

-45

directive somewhat along the lines of the one he had suggested at

the previous Committee meeting would be appropriate for the next

three weeks.

He would not change the discount rate at this time.

Mr. Mitchell suggested that the Committee should consider the

matter fully before any decision was reached to move in the direction

of less monetary ease.

If such a step was taken, he felt that the

Committee should act in no uncertain fashion; action in an unobtrusive

way would not get any benefit from the reaction of foreigners who

presumably would be interested in knowing that the Committee had shifted

policy.

He believed there had been a disposition on the part of

Committee members to watch the domestic economy very closely with the

thought of moving toward a firmer monetary policy as soon as there

were signs of definite improvement.

The economy was now showing

some signs of improvement, but in his opinion it should be given a

chance to move further ahead before there was any shift away from the

present posture.

Mr. Mitchell expressed agreement with the view that in the area

of credit extension there had been some deterioration in terms and

quality.

However, he did not feel that a deterioration in the quality

of credit was necessarily bad if the price was right.

An insurance

company was willing to insure a man against death if the price was

right, and the same principle would seem

to hold true in the field of

5/7/63

credit.

-46

If

the price was right, the credit was good.

There was a flood of savings to be dealt with, Mr. Mitchell

pointed out, and he did not believe that monetary policy could move

strongly, vigorously, and effectively against this flood of savings,

which had been engendered to some degree by rate competition for

savings funds

but basically reflected other factors, including chang

ing aspirations on the part of consumers.

In 1962 total savings in

financial form, including bank deposits, share accounts at savings

and loan associations, and amounts placed with insurance companies,

amounted to $41 billion; meanwhile, direct savings still increased.

The increase of $41 billion compared with a figure of $35 billion in

1961 and an average of $22 billion in the previous five years.

This

was what had put real pressure on capital markets, with a great deal

of focus on the mortgage market where liberalization of terms had

occurred in many places.

In his opinion, the free market remedy was

not higher but lower interest rates

Liberalization of terms occurred

because lenders did not want to break the rate; but if the rate had

declined there would not have been the need to liberalize terms in

order to clear the market.

Accordingly, before a deterioration in the

quality of credit was used as a reason for the Committee to tighten the

monetary screws, he felt that one should think twice.

In his view a

different course of action was indicated.

In conclusion, Mr. Mitchell expressed the view that this was a

5/7/63

-47

a good time not to make any move, and instead just to stand fast.

Mr. Hickman stated that developments in the Fourth District

confirmed the improved tone of business activity reported rather

generally around the table this morning.

The insured unemployment

rate in the Fourth District at the end of April, after seasonal

adjustment, stood at its lowest point in the current recovery, and

for the first time in this recovery did not exceed the national

average.

Steel production had advanced to high levels both locally and

nationally, although the advance had moderated in recent weeks.

Indi

cations from the District suggested some leveling in production and

orders, while shipments were still rising,

Regardless of whether the

labor contract was reopened, industry sources expected a decline in

output in the third quarter, reflecting hedge-buying that had already

taken place.

Countrywide, the average daily rate of new car sales in April

exceeded the 1955 rate for the first time since January, and new car

inventories were in good control.

Auto production was expected to

continue to increase moderately and to approximate 2 million cars for

the second quarter.

Fourth District banks had been under little reserve pressure,

and had expanded earning assets more this year than in other recent

years.

The banks were competing vigorously for the less liquid types

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-48

of assets, including consumer loans, mortgage loans, municipal

securities, and longer term Governments and business loans.

They

seemed to be surrendering liquidity to obtain higher yields.

There was increasing evidence of deterioration in the quality

of credit.

Reports from large national life insurance companies and

the results of a recent survey of mortgage lending in the Fourth

District revealed that loanable funds were in plentiful supply, that

lenders were having difficulty in employing them, that maturities were

being lengthened and downpayments being reduced, and that quality was

being sacrificed, with loans in excess of market values in some cases.

Moreover, the quality of directly placed corporate securities was

reported to be deteriorating.

Rates were being maintained at the

expense of lower quality.

These developments suggested to Mr. Hickman that the deteriora

tion in the quality of credit should be placed alongside the adverse

balance of payments as a major factor to be considered in formulating

monetary policy.

The balance of payments figures for April and the

recent behavior of the foreign exchange markets were disturbing.

Recent monetary ease had encouraged foreign borrowers to enter U.S.

capital markets, with a resulting outflow of long-term funds, and had

also encouraged short-term funds to flow out of this country.

In

particular, financial institutions in the U.S, were placing large

amounts of funds in Canadian long-term issues.

Canadian borrowers,

5/7/63

-49

anticipating these flows, were putting pressure on forward rates,

thus further encouraging the flow of short-term funds to Canada.

The

lowering of the Canadian discount rate yesterday might help to check

the short-term flow, but hardly the long-term flow.

Unemployment remained high after many months of monetary ease,

Mr. Hickman continued, suggesting that further ease was not the solution

to this problem.

It seemed to him appropriate to face up to the possi

bility that further ease might induce structural imbalances, which in

turn could bring about an economic reversal and higher unemployment.

Thus, it was his recommendation that Federal Reserve policy should work

toward reducing monetary ease.

Such a shift, in his opinion, should be

reflected in higher interest rates across the maturity spectrum.

The

Committee should work over the next four to six weeks toward a 91-day

bill rate in the 3-1/4 per cent to 3-1/2 per cent range, permitting

other rates to move to higher levels in response to market forces,

after which the discount rate could be adjusted upward.

Mr. Hickman believed that a change in the current economic

policy directive would be appropriate at this time.

He suggested that

it be revised to indicate that open market operations during the next

three weeks should be conducted with a view to providing progressively

less ease in the money and capital markets.

Mr. Bopp reported that economic activity had increased

moderately in the Third District in recent weeks, but that the improve

ments were gradual and far from universal.

Department store sales in

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5/7/63

the District had turned in the worst performance in the nation so far

in 1963, having actually dropped below the 1962 totals for the first

third of the year.

Manufacturing output and construction awards had

increased a bit, and unemployment rates had moved down in almost every

labor market.

Manufacturing employment had not yet recovered, however.

During the month of April, loans at reporting banks in the

District increased by about the same amount as in the comparable period

last year.

Investments fell, whereas they had risen during the compa

rable period last year, and total bank credit increased by only a little

over one-half of last year's expansion.

Liquidity positions of the

larger banks appeared to be weakening somewhat.

There was little

evidence, however, of any increase in pressure on reserve positions.

In Mr. Bopp's view, the improvement in business had not been so

vigorous as to warrant any less ease in policy.

Recent developments

did not support the views of the more optimistic observers, but even if

these more favorable expectations proved to be right the expansion in

the economy was likely to fall quite short of producing a satisfactory

rate of resource utilization.

Accordingly, he would continue to push

ease as far as it could safely go in order to stimulate the domestic

economy.

The balance of payments still provided a limit to the degree

of ease, Mr. Bopp added, and in view of this continuing problem he

would go no further than to maintain existing policy.

He was glad to

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5/7/63

see that the recent congestion in capital markets had been corrected,

and he would hope that such a development could be prevented in the

future by open market purchases in the longer sector of the market.

He

would not change the discount rate, and he would not change the direc

tive except for technical correction.

Mr. Bryan reported that most recent economic indicators in the

Sixth District were favorable.

Although he could not offer statistical

proof, he sensed a tendency for the economic improvement to accelerate.

The national situation presented a picture of increased underlying

general strength, with improved business prospects and greater confi

dence on the part of the business community.

In the meantime, Mr. Bryan noted, there had been a gradual

trend toward a reduced level of free reserves, on average, but a rising

trend in the active money supply, the total money supply, and other

liquid assets, both in absolute terms and as a ratio of gross national

product.

The growth of required reserves against private deposits had

quickened in the period from December 19 through April 24.

While the

general price level was stable, there had been a mild restlessness in

some prices.

There was an inventory situation that presented some

problem, a prospective large Government deficit, and a serious balance

of payments problem.

Also, there was a good deal of evidence of specu

lation in noncommodity areas.

ease was called for;

It did not seem to him that more monetary

if anything, he believed that a policy of somewhat

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-52

less ease would be appropriate.

Mr. Bryan suggested that at this juncture one should be

careful in following guidelines.

He did not feel that the free

reserve guideline was of much use at this particular time, and he was

not sure that the total reserve guideline was a great deal more useful.

In these circumstances, he found some difficulty in making a sugges

tion in terms of policy.

Nevertheless, required reserves against

private time and demand deposits were well above the so-called 3 per

cent growth guideline, and total reserves were above the long-term

trendline.

Therefore, he saw little choice but to cut back on the

amount of reserves being supplied.

He would propose adjusting for

seasonal movements--insofar as they could be determined--and placing

a limit of 2 per cent, annual rate on the growth factor in required

reserves.

He would not change the discount rate at this time.

In a further comment relating to the balance of payments problem,

Mr. Bryan recalled having made the point several times that he did not

think this problem had been caused by monetary policy.

He had recently

examined the rates of monetary expansion for recent years in various

countries of the world.

Leaving aside certain countries that had

experienced spectacular rates of increase, he found annual rates of

expansion, from 1948 through 1962, such as 54.9 per cent for Japan,

35.2 per cent for France, 27.6 per cent for Germany, 25.5 per cent for

Italy, and 9.9 per cent for Switzerland.

The United States was at the

b ottom of the list with an annual rate of 2.5 per cent.

While this

5/7/63

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did not settle the question by any means, it did give some hint that

perhaps the monetary policy pursued in this country had not been the

cause of the balance of payments problem.

It also suggested

that the

remedy probably should not be sought fundamentally through monetary

policy.

Mr. Shuford reported that during the first quarter of this

year Eighth District. economic activity showed some improvement over

the fourth quarter of 1962, and according to preliminary indications

there was some further gain during April.

Employment had been increas

ing somewhat since December and was slightly higher in the first

quarter of this year than in the fourth quarter of 1962.

Industrial

use of electric power had been increasing since November and registered

a quarter-to-quarter gain.

Department store sales and bank debits,

however, had changed little since the fourth quarter of 1962, and

business loans had declined slightly since late last year.

Turning to the national picture, Mr. Shuford noted that the

strengthening of the economy appeared to have continued since the April

16 meeting of the Committee.

appeared to be rising.

Production, employment, and incomes

Despite these favorable signs, however, the

evidence was not yet conclusive that the upturn would continue.

The

economy had not yet moved to rates of resource utilization higher than

prevailed during most of 1962.

In several respects the events of recent

months resembled those that had occurred in the early part of 1962, at

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5/7/63

which time there was a moderate rise in most of the measures of

business activity.

A portion of the improvement early this year and

early last year could be attributed to the situation in the steel

industry.

The improvement in the early part of 1962 was followed by

a plateau for the remainder of the year, and it seemed that the pattern

thus far this year was quite similar.

Mr. Shuford said that he would not favor any change in monetary

policy at this time.

There had been some moderate increase in reserves.

However, if one measured from December the increases in reserves and in

the money supply both had been in the neighborhood of about 3 per cent,

which perhaps was moderate and desirable.

Personally, he felt that it

would be well if increases continued at about this rate.

The balance

of payments presented a problem, one that had been worked with and

lived with for some time.

Monetary policy, of course, had a role to

play, and under all the circumstances he felt it had played a rather

significant role,

If the Committee should conclude to move toward a

firmer monetary policy out of consideration of the balance of payments

problem, he would be inclined to feel that the move, at such time as it

was made, should be a rather significant one.

The time might come when

it would be necessary to do this.

It did appear, Mr. Shuford added, that in several noncommodity

areas there had been a deterioration in the quality of credit extended.

However, he wondered what effect a firming of monetary policy aimed at

5/7/63

-55

those specific areas might have on the general economic improvement for

which the System had been hoping.

It seemed possible to him that such

a move might have a generally depressing effect.

For the time being,

therefore, he believed the Committee should continue its current policy,

which would call for no substantive change in the directive and no

change in the discount rate.

Mr. Balderston commented that he liked to act decisively in

terms of monetary policy.

However, he did not see grounds clear enough

to justify going further than modest action at this time.

It seemed

necessary to him to study the results of such action for clarity that

he lacked at the present time.

As to timing, he felt that with the

large Treasury needs for funds this fall the Committee should not pass

up any opportunity for experimentation, and one such opportunity would

be available in about a week.

Mr. Balderston said he had also been considering another point

referred to during today's discussion, namely, how the volume of savings

might best be put to work.

In 1959 the net amount of funds used by

nonfinancial irstitutions was around $53 billion, of which bank credit

accounted for only around $5 or $6 billion.

figures were $58 billion and $19 billion.

In 1962 the corresponding

He was unable to disassociate

from the total the portion that represented bank-created credit in

excess of the real needs of the economy.

Mr. Balderston went on to say that, with the assistance of

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members of the staff who, incidentally, might not necessarily share

his philosophy, he had prepared a statement in order to reduce his

thinking to a form containing some identifiable benchmarks.

He then

read the following statement:

This statement setting forth my position deals with

two main points:

(1) A national economic policy appropriate to the

moment calls for "holding the line" on costs

and prices.

(2) The contribution of monetary policy to holding

the line is to insure that excess liquidity

does not lead to:

(a) Leakage abroad,

(b) Speculative excesses,

(c) Imprudent decision making.

What is the case for a national hold-the-line policy?

Clearly the greater the ability of American firms to compete

in foreign markets, the greater will be their exports; the

greater their ability to compete in domestic markets, the

smaller will be imports into this country. This process will

tend to make U.S. firms more competitive and to increase the

foreign exchange available to our country to pay for its

spending, lending, and investing beyond its borders.

The same hold-the-line philosophy is needed to provide

job opportunities. The very mechanization that has permitted

our American firms to remain competitive with respect to

manufactured goods has reduced the number of manufacturing

workers by two million. These, together with the inexperienced

and unskilled, must seek jobs in distribution and other ser

vice industries. But rising salaries have induced both

mechanization and the self-service evident in super markets and

automats. In consequence, it is increasingly difficult for

youngsters to get employment. A hold-the-line policy comes

none too soon to provide jobs in construction, retailing, and

other service industries for the 1-1/3 million for whom

additional jobs must be provided each year.

To help implement a national policy of holding the line

on costs and prices, monetary policy should take into account

the marginal impact of such policy upon liquidity. The System

cannot do the entire national job alone, but such contribution

as it can make is its responsibility alone.

While recognizing the need for liquidity to be sufficient

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to lubricate expansion, and for commercial banks to be

able to meet constructive loan demand (with some of our

resources still unused), there are hidden pitfalls to

which this Committee should be alert. These seem to be

of three kinds:

(1) Liquidity outside the commercial banks so

plentiful as to induce the exporting abroad

of capital funds, whether short or long.

(2) Liquidity so abetted by the creation of

bank credit as to induce speculation in

stocks, land, or inventories rather than

use for constructive purposes.

(3) The creation of bank credit of such an amount

that, when added to savings, it will induce

lending institutions to make imprudent loans

or investments.

how much liquidity is appropriate

The question is:

at present?

This leads to the subordinate question:

what bench

marks can be found to indicate when liquidity is becoming

too little or too great?

The clearest analogy I can think of is the task of

regulating the depth of water when irrigating a field.

Without enough, the crop will not be nourished; with too

much, the field will be overly wet ard excess water may

be lost to neighboring farms.

What benchmarks are usable, even if precise indicators

be unavailable? We need a range with identifiable lower

and upper limits that will signal when policy should be

modified. However important it is, at certain times, to

identify a lower limit, I shall confine myself today to an

effort to define, even crudely, the upper limit of the

liquidity that is now appropriate.

Clearly there is no sharp line of demarcation and so,

as other members of the Committee have done, I propose

experimental action in an effort to identify how much is

too much. The reason for experimentation is to use the

responses of the member banks and of the market place to

assist us in identifying the upper limit.

As soon as appropriate after the conclusion of the

present Treasury financing, I would favor a policy of

somewhat less ease and would reflect it in today's direc

tive.

I would implement this policy by a reduction in free

reserves to a level under $200 million.

If the projections in the staff memorandum prove to

be correct, few if any reserves are likely to be needed until

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the week ending May 29.

In assessing from week to week

the impact of the policy I propose, the following indi

cators are relevant:

(a) A 90-day bill rate and a Federal funds rate

around the discount rate. At times, the bill rate

might well exceed the discount rate.

(b) Total bank deposits expanding at a more

moderate rate than at present so that banks will compete

less aggressively for short-term funds to be invested at

longer term. I would prefer, however, not to bring about

a contraction of the active money supply, nor a sharp

increase in the rate of deposit turnover. Under my pro

posal, the total of required reserves supporting private

deposits, currently projected to expand at a 3 per cent

annual rate, would increase at some lesser rate than at

present, but not at a rate so low as to cause the

These

reserves behind private demand deposits to decline.

reserve indicators can be watched conveniently by reference

to the two charts regularly appended to the reserve projec

tion memorandum.

(c) Expansion of bank earning assets at a more

moderate rate without forcing the net disinvestment by

banks of their securities in order to accommodate legitimate

loan demand but with less incentive to seek out marginal

speculative risks or longer term risks. The expansion rate

would permit a further increase in bank holdings of securities

to the extent that banks acquire real savings and also permit

money supply growth in keeping with the transactions needs

of the economy.

Chairman Martin commented that at a certain point the formulation

of monetary policy necessarily becomes a matter of judgment.

One must

weigh all of the available statistics and then reach conclusions on a

judgment basis.

Over the past several months, he noted, the Committee

had been divided in the area of judgment, and there were evidences in

today's discussion of the part that this factor must play.

It should

also be borne in mind, in appraising the interrelationship of monetary

policy and economic forces, that although at times monetary policy may

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be of crucial importance, it is normally a residual factor.

The Chairman also mentioned that from the time of the Treasury

Federal Reserve accord to the period when the dollar became no longer

invulnerable to outside pressure, which he would place in 1957 or 1958,

there had been a movement toward greater stability of interest rates,

to the benefit of everyone.

Slight movements in either direction had

come to have more impact, and he hoped it would be possible to keep

interest rate moves within a relatively small range.

He happened to think, Chairman Martin continued, that the move

made by the Committee last December toward slightly less ease had been

quite important from the standpoint of the balance of payments and also

the domestic economy.

He knew, for example, that several large

investment trusts bought securities following the Committee action in

December that they would not have touched before that time because

they were apprehensive that the Federal Reserve was going to follow a

policy of ease compounded on ease in attempting to stimulate the

domestic economy.

There is a point, the Chairman observed, at which

further ease will not work toward economic stimulation.

There is also

the practical problem that in a free economy lower interest rates may

help in picking up unsound credits, and in his opinion there had been

a steady deterioration in the quality of credit.

He would be willing

to accept that development if it were necessary in order to foster

economic growth, but in his opinion the point at which easy money would

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further stimulate the economy had long since passed.

critical question:

This was the

Whether easy money was now working in reverse.

At the risk of being repetitious, the Chairman continued, he

remained of the belief that the balance of payments problem and the

domestic economic problem were not separable.

It seemed to him, also,

that it should be recognized that the Federal Reserve was not going to

make the domestic economy--or break it--by taking certain actions.

The System should accept the indicators, as it saw them, and pursue a

flexible course of action.

For a time he had felt that the Open Market

Committee was tending to get frozen into a pattern, although on the

whole he thought monetary policy had been operating well.

Monetary

policy probably could take some credit--how much he did not pretend to

know--for developments during the past several months.

As he saw it, Chairman Martin said, the balance of payments

problem was growing worse.

He had referred frequently to the possi

bility of a crisis, and he still felt that way.

He did not think the

situation was yet at a crisis juncture, but rather that it was tending

in that direction, and in such circumstances the posture of the Federal

Reserve System was most important.

As indicated by Mr.

Young's remarks

and recent reports from other sources, monetary policy was under fire

from observers abroad.

There were criticisms that nothing significant

was being done out of regard to the balance of payments.

From that

standpoint, it would perhaps be desirable if the Committee could make

some decisive move.

In his opinion, however, such a move was not

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feasible unless monetary policy had been trending for some time in a

particular direction.

Chairman Martin then said that on the basis of today's discus

sion it appeared that the period following the conclusion of the

current Treasury activity in the market would be as good a time as any

to move toward slightly less easy monetary conditions.

Here he was

talking just about pulling a little on a rope that was already very

loose.

He was not talking about anything very dramatic.

It might be,

of course, that the Committee would decide later that this was not the

direction in which it should have moved, and it might want to pull back.

If the Committee waited too long, however, it might have to deal with

an active problem of inflationary pressures.

In his opinion, there

was already a good bit of pressure in some areas that could build up

If one waited until after the resulting price movements

rapidly.

actually occurred, he might wonder why he had not done something about

it before.

It would be too late at that juncture.

Far from stimulating

the economy, such inflationary pressures might well undermine the exist

ing level of activity and lead to a decline in employment.

Personally, the Chairman continued, he would

like to see the

Committee move in the direction of slightly less ease, beginning about

May 15.

It was difficult for him to believe that experimentation in

such direction could affect the economy adversely unless the current

improvement that had been discussed at this meeting was so fragile that

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it could not continue in any event.

If this was the case, he doubted

whether monetary policy could turn the tide.

Chairman Martin then proposed placing before the Committee as

a basis for decision a current economic policy directive that would

call for operations with a view to achieving slightly less easy monetary

conditions following the conclusion of the current Treasury refinancing.

There followed certain suggestions as to how such a directive

might appropriately be worded, and it was noted that a draft of direc

tive had been prepared by the staff for the Committee's consideration

in the event the discussion at this meeting suggested the possibility

of a decision to move in the direction of slightly less ease.

The

draft directive was read to the Committee and copies were distributed,

following which certain minor modifications of the language were

suggested.

It was pointed out, in this connection, that the draft directive

was phrased in terms of achieving a slightly greater degree of firmness

in the money market than had prevailed in recent weeks, and question

was raised whether it might not be preferable to refer to a slightly

lesser degree of ease since current monetary policy was characterized

by a condition of ease.

The discussion of this question brought out,

however, that the policy directives issued at recent meetings had

referred to a degree of firmness, as related to the money market,

which suggested that in the interest of consistency and for comparative

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purposes there was something to be said for continuing the same terms

of reference.

It was the consensus that the theory of consistency

recommended itself.

Chairman Martin then suggested that a vote be taken on the

proposed policy directive, in form reflecting the minor modifications

that had been mentioned.

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

execute transactions in the System Open

Market Account in accordance with the

following current economic policy direc

tive:

It is the Committee's current policy to accommodate

moderate growth in bank credit, while putting increased

emphasis on money market conditions that would contribute

to an improvement in the capital account of the U.S. bal

ance of payments. This policy takes into consideration

the continuing adverse balance of payments position and

its cumulative effects and the improved domestic business

outlook, as well as the increases in bank credit, money

supply, and the reserve base in recent months. At the

same time, however, it recognizes the continuing under

utilization of resources.

To implement this policy, System open market operations

following the conclusion of the Treasury refunding operation

shall be conducted with a view to achieving a slightly

greater degree of firmness in the money market than has

prevailed in recent weeks, while accommodating moderate

reserve expansion.

Votes for this action:

Messrs. Martin,

Hayes, Balderston, Irons, King, and Shepardson.

Votes against this action:

Messrs. Bopp, Clay,

Mitchell, Robertson, and Scanlon.

It was agreed that the next meeting of the Open Market Committee

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would be held on Tuesday, May 28,

1963.

Mr. Hayes noted, as a matter of information, that plans were

under way, at the request of the Chairman of the House Banking and

Currency Committee, for a visit to the Federal Reserve Bank of New

York by the members of the Committee in the latter part of June.

The

visit was to include, among other things, an explanation of the type

of operations conducted by the Trading Desk.

The meeting then adjourned.

Secretary